Putnam
OTC Emerging
Growth Fund
Semiannual
Report
January 31, 1994
For investors
aggressively seeking
capital appreciation
through "emerging
growth" stocks traded
in the over-the-counter
(OTC) market
A member
of the Putnam
Family of Funds
Contents
2 How your fund performed
3 From the chairman
4 Report from Putnam Management
Semiannual Report
6 Portfolio of investments owned
9 Financial statements
18 Fund performance supplement
19 Your Trustees
<PAGE>
How your
fund performed
For periods ended January 31, 1994
<TABLE>
<CAPTION>
Total return* Fund NASDAQ S&P
Class A Class B Industrial 500
NAV POP NAV CDSC Index Index
<S> <C> <C> <C> <C> <C> <C>
6 months 21.15% 14.22% 20.81% 15.81% 16.80% 8.94%
1 year 33.20 25.60 -- -- 12.78 12.79
5 years 135.30 121.77 -- -- 111.32 89.75
annualized 18.67 17.27 -- -- 16.14 13.67
10 years 434.19 403.78 -- -- 173.24 316.74
annualized 18.24 17.55 -- -- 10.57 15.34
Life-of-class+
(class B shares) -- -- 19.70 14.70 14.88 8.70
</TABLE>
<TABLE>
<CAPTION>
Class
Class A B
<S> <C> <C> <C>
Share data NAV POP NAV
July 31, 1993 $10.72 $11.37 $10.70
January 31, 1994 $11.73 $12.45 $11.67
</TABLE>
<TABLE>
<CAPTION>
Investment Capital
Distributions(a) Number Income Gains Total
<S> <C> <C> <C> <C>
Class A 1 -- $1.20 $1.20
Class B 1 -- $1.20 $1.20
</TABLE>
Total return at end of most recent calendar quarter
Periods ended December 31, 1993
<TABLE>
<CAPTION>
Class A Class B
NAV POP NAV CDSC
<S> <C> <C> <C> <C>
1 year 32.05% 24.40% -- --
5 years 143.86 129.93 -- --
annualized 19.52 18.12 -- --
10 years 392.97 364.18 -- --
annualized 17.30 16.59 -- --
Life-of-class+
(class B shares) -- -- 16.82% 11.82%
</TABLE>
* Performance data represent past results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
+ The fund began operations on November 1, 1992, offering shares now known as
class A. Effective July 15, 1993, the fund began offering class B shares.
Performance for each share class will differ.
Terms you need to know
Total return is the change in value of an investment from the beginning to
the end of a period, assuming the reinvestment of all distributions. It may
be shown at net asset value or at public offering price.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not reflecting any
sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of shares rather than the time of purchase. It generally
declines and eventually disappears over a stated period.
Class A shares are the shares of your fund offered subject to an initial
sales charge. Your fund's POP includes the maximum 5.75% sales charge.
Class B shares are the shares of your fund offered with no initial sales
charge. Within the first six years of purchase, they are subject to a CDSC
declining from 5% to 1%. After the sixth year, the CDSC no longer applies.
Please see the fund performance supplement on page 18 for additional
information about performance comparisons.
<PAGE>
From the
Chairman
[George Putnam photo]
George Putnam
Chairman of the Trustees
(C) Karsh, Ottawa
Dear Shareholder:
Investors seeking growth of their assets through common stocks have enjoyed
consistent increases in the value of their holdings over the past several
months, thanks to a general rise in the stock market. Those with experience
extending over many years also realize that such uptrends do not proceed in
straight lines. Inevitably, there will be periods of interruption as the
market responds to various forces, with occasional declines, or
"corrections."
Rather than view these interruptions with dismay, experienced investors take
them in stride. Some portfolio managers, in fact, regard them as
opportunities to exchange holdings that are no longer appropriate in the
portfolio for those with brighter prospects, or to lower the average cost of
holdings by acquiring additional shares at bargain prices.
Daniel L. Miller, who recently assumed the reins of Putnam OTC Emerging
Growth Fund, is well acquainted with this philosophy. As he notes in the
Report from Putnam Management that follows, the over-the-counter market in
which the fund shops for emerging growth stocks has been in a three-year
uptrend. Consequently, he is prepared to use any corrections as an
opportunity to upgrade the fund's portfolio.
Dan is no newcomer to Putnam; he joined us in 1983 as a securities analyst,
working his way up to portfolio manager in the Specialty Growth Equities
Group. He is a seasoned participant in Putnam's team approach to investment
management. We look forward to the continued success of your fund under his
guiding hand.
Respectfully yours,
(Signature of George Putnam)
George Putnam
March 16, 1994
<PAGE>
Report from
Putnam Management
During the six months ended January 31, 1994, we took full advantage of the
continuing recovery in the stocks of small to medium-sized growth companies
to produce particularly strong performance for Putnam OTC Emerging Growth
Fund. The result was a total return at net asset value for both the fund's
class A and class B shares well above that of the average growth stock, as
measured by the NASDAQ Industrial Index, and the stock market in general, as
measured by the Standard & Poor's(R) 500 Index.
Results for the 12 months ending on the same date were even more impressive.
Comparisons against the NASDAQ and S&P 500 indexes for those and other
periods are shown in the table on page 2.
Industry recognition We are also pleased to note that the fund's performance
has attracted the favorable attention of several independent mutual fund
watchers.
**Morningstar Mutual Funds maintained the fund's above-average four-star
rating relative to funds with similar objectives as of January 31, 1994.
Morningstar's risk-adjusted rankings are based on medium- and long-range
performance results, and are subject to revision every two weeks.
**Lipper Analytical Services ranked the fund seventh of 173 small-company
growth funds for the 12 months ended January 31, 1994. This mutual fund
tracking service also ranked the fund third of 32 funds in existence for 10
years as of the same date.
**CDA/Wiesenberger Funds Update ranked the fund in the top 8% of 119
small-company growth funds for 12 months and in the top 20% of 25 funds for
10 years, also for periods ended January 31, 1994.
Tried-and-true strategy During the period, we continued to pursue the fund's
long-standing and successful strategy: to seek out relatively new small to
midsized companies characterized by high growth rates, profitable market
niches, strong balance sheets, and superior management. We have positioned
the fund's holdings to benefit from an improving economy in the short term
and from changing demographic trends over the longer term, particularly as
the baby boomers proceed through their highest earning and saving years.
Your management team builds the portfolio one stock at a time, selecting only
those companies we believe meet our strict selection criteria. It is not
entirely coincidental, however, that many companies we choose fall into
industry groupings that, by their nature, define emerging growth. We were
closely watching interactive media and the companies positioned along the
information
<PAGE>
superhighway, for example, long before these terms became buzz words.
Portfolio changes In recent months, in fact, our focus on technology has
included interactive media. We're also looking at software companies and
companies involved in computer networking, like Wellfleet, Sybase, and
PeopleSoft, all in the portfolio as of January 31, 1994.
In the consumer area, we're looking at companies that, by offering their
customers more value, strengthen their position within their markets. Among
these are Buffets, Inc., in restaurants, Office Depot in office supplies, and
Bed, Bath & Beyond in retailing.
Not surprisingly, we have also been actively looking for ways the fund can
benefit from the coming changes in the country's health care delivery system.
A particular focus is on operators of managed care facilities like Coventry
Corp. and Healthsource, which are likely to come into wider use, regardless
of the outcome of the health care debate.
Outlook The present slow but steady economic recovery is ideal for emerging
growth stocks. It's the type of environment that tends to keep interest rates
and inflation in check. It fosters earnings growth as sales pick up faster
than overhead, and makes expansion affordable for the healthy, well-managed,
and growing companies we seek for your fund's portfolio.
Broadcasting 14.6%
Healthcare Services 13.5%
Computer Software 10.8%
Retail 9.2%
Restaurants 6.5%
That said, we should explain that stock price trends of emerging growth
companies have historically run in relatively long cycles: typically, about
seven years of rising prices, followed by about seven years of level or
declining prices. The current cycle of rising prices has been in place for
about three years.
We expect both the favorable, slow-growth, low-inflation economic climate and
the general uptrend in emerging growth stocks to remain in place for the
foreseeable future. However, we would not be surprised to see a brief, mild
downturn in the stock market at some point, given its exuberant rise in
recent months. We would use any such correction to upgrade the quality of the
portfolio by adding to current holdings or acquiring new ones at attractive
prices.
The views expressed throughout the report are exclusively those of Putnam
Management. They are not meant as investment advice. Although the described
holdings are viewed favorably as January 31, 1994, there is no guarantee the
fund will continue to hold these securities in the future.
<PAGE>
Portfolio of
investments owned
January 31, 1994 (Unaudited)
Common Stocks (95.5%)(a)
Number of Shares Value
Broadcasting (14.6%)
200,000 Century Communications Corp. Class A $ 2,125,000
153,300 Clear Channel Communications, Inc.(b) 6,112,838
291,525 Comcast Corp. Special Class A 9,255,919
320,850 Infinity Broadcasting Corp.
Class A (b) 10,427,625
600,000 Liberty Media Corp. Class A(b) 15,600,000
118,500 QVC Network, Inc.(c) 5,214,000
100,000 SFX Broadcasting, Inc. Class A(b) 1,225,000
181,600 TCA Cable TV, Inc. 4,698,900
380,000 Westcott Communications, Inc.(b) 8,692,500
504,900 Westwood One, Inc.(b) 4,291,650
67,643,432
Health Care Services (13.5%)
75,000 Careline, Inc.(b) 918,750
48,100 Clinicom, Inc. 1,130,350
180,000 Coventry Corp.(b) 9,180,000
225,000 Health Management Assoc., Inc.(b) 7,284,375
104,700 Healthsource, Inc.(b) 6,295,088
200,000 Homecare Management, Inc.(b) 3,250,000
130,000 Homedco Group, Inc.(b) 4,647,500
155,000 Horizon Healthcare Corp.(b) 3,410,000
288,000 Lincare Holdings, Inc.(b) 6,336,000
66,000 Medaphis Corp.(b) 2,392,500
160,000 Oxford Health Plan(b) 10,560,000
50,000 Physician Corp. of America(c) 1,475,000
170,000 Vencor Inc.(b) 5,525,000
62,404,563
Computer Software (10.8%)
70,000 FTP Software, Inc.(b) 1,960,000
139,800 Parametric Technology Corp. 4,665,825
174,800 PeopleSoft, Inc.(c) 5,549,900
6,300 Powersoft Corp.(b) 352,800
280,000 Sybase, Inc.(b) 12,880,000
100,000 Synopsys, Inc.(b) 4,512,500
54,000 Wall Data, Inc.(b) 2,835,000
230,000 Wellfleet Communications, Inc.(b) 17,077,500
49,833,525
Retail (9.2%)
51,000 Autozone Inc.(b) $ 2,875,125
300,000 Bed Bath & Beyond, Inc.(b) 9,075,000
103,400 Gymboree Corp.(b) 3,993,825
255,000 Heilig-Meyers Co. 8,988,750
187,500 Office Depot, Inc.(b) 6,820,313
100,000 Petsmart, Inc.(c) 3,375,000
255,000 Stein Mart, Inc.(b) 4,398,750
93,400 Sun Television & Appliances, Inc. 1,669,525
100,000 Today's Man, Inc. 1,400,000
42,596,288
Restaurants (6.5%)
229,100 Apple South, Inc. 5,040,200
15,200 Au Bon Pain Co., Inc.(b) 383,800
168,100 Bertucci's Inc. 3,025,800
4,000 Boston Chicken, Inc.(b) 190,000
194,600 Buffets, Inc.(b) 5,156,900
111,900 DF&R Restaurants, Inc.(b) 3,105,225
66,000 Fresh Choice, Inc.(b) 1,823,250
115,200 Landry's Seafood Restaurants, Inc. (b) 2,937,600
145,000 Outback Steakhouse, Inc.(b) 5,727,500
89,200 Papa Johns International, Inc. 2,575,650
29,965,925
Business Services (5.1%)
80,000 Danka Business Systems ADR(c) 3,300,000
85,700 Interim Svcs., Inc. 2,153,213
85,000 Kelly Services, Inc. Class A 2,528,750
165,000 Olsten Corp.(The) 5,156,250
104,675 Paychex, Inc. 4,187,000
10,500 Pharmaceutical Marketing Services,
Inc.(c) 168,000
199,900 Robert Half International, Inc.(b) 6,296,850
23,790,063
Recreation (5.0%)
308,000 Boomtown, Inc.(b) 5,621,000
155,300 Casino America, Inc.(b) 4,270,750
350,000 Mirage Resorts, Inc.(b) 8,706,250
177,400 Players International Inc. 4,568,050
23,166,050
<PAGE>
Insurance (4.4%)
95,000 Berkley (W.R.) Corp. $ 3,396,250
110,000 Gallagher (Arthur J.) & Co. 3,410,000
142,700 National Re Corp. 4,138,300
70,000 SunAmerica, Inc. 2,861,250
57,500 Transatlantic Holdings Inc. 3,061,875
100,000 Trenwick Group Inc. 3,675,000
20,542,675
Computer Services (3.9%)
200,000 America Online, Inc.(b) 12,750,000
7,000 Cambridge Tech Partners 126,000
274,562 Fiserv Inc.(b) 5,285,319
18,161,319
Telephone Services (3.3%)
185,000 Central Communications, Inc. 2,636,250
50,000 Century Telephone Enterprises, Inc. 1,362,500
100,000 Davel Communications Group,
Inc. (b) 1,550,000
130,000 MFS Communications Company, Inc.(b) 5,005,000
100,000 Telephone & Data Systems, Inc. 4,937,500
15,491,250
Consumer Services (3.3%)
135,000 CUC International, Inc.(b) 4,320,000
125,000 Educational Alternatives 4,500,000
145,000 Loewen Group, Inc. 3,860,625
100,000 Stewart Enterprises, Inc. Class A 2,700,000
15,380,625
Pharmaceuticals and Biotechnology (3.1%)
97,500 Amylin Pharmaceuticals, Inc.(b) 1,401,563
87,400 Cellpro, Inc.(b) 2,884,200
130,000 Cephalon, Inc.(b) 2,372,500
120,000 Cor Therapeutics, Inc.(b) 1,890,000
150,000 Immulogic Pharmaceutical Corp.(b) 1,987,500
170,000 Magainin Pharmaceuticals, Inc. 3,017,500
61,200 Penederm, Inc.(c) 856,800
14,410,063
Medical Equipment and Supplies (2.8%)
50,400 $
Ballard Medical Products 762,300
86,900 Bioject Medical Technologies(b) 407,344
75,000 Haemonetics Corp.(b) 1,743,750
99,000 Protocol Systems, Inc. 915,750
92,500 Sofamor/Danek Group, Inc.(b) 3,283,750
156,300 Zoll Medical Corp.(b) 5,626,800
12,739,694
Lodging (2.4%)
202,500 Hospitality Franchise Systems,
Inc. (b) 11,213,438
Paging (1.6%)
111,106 A+ Communications, Inc.(b) 1,555,400
204,750 Paging Network, Inc.(b) 5,886,563
7,441,963
Consumer Non-Durables (1.4%)
119,900 Tommy Hilfiger(b) 4,241,463
85,000 Authentic Fitness Corp.(b) 2,348,125
6,589,588
Semiconductors (1.2%)
107,600 Maxim Integrated Products Inc.(b) 5,353,100
Cellular Broadcasting (1.1%)
7,300 Cellular Communications, Inc.
Class A(b) 330,325
45,000 Centennial Cellular Corp. Class A 967,500
135,000 United States Cellular Corp.(b) 3,915,000
5,212,825
Business Equipment (1.0%)
135,000 Antec Corp.(b) 3,510,000
73,000 Star Sight Telecast, Inc.(b) 1,113,250
4,623,250
Publishing (0.8%)
123,544 Marvel Entertainment Group, Inc.(b) 3,598,219
Specialty Consumer Products (0.4%)
86,100 Valence Technology, Inc.(b) 1,700,475
<PAGE>
Number of Shares Value
Environmental Services (0.2%)
35,000 Molten Metal Technology, Inc.(b) $ 883,750
Total Common Stocks
(cost $294,888,159) $442,742,080
Convertible Preferred Stocks (0.8%)(a) (cost $1,983,203)
Number of Shares Value
86,800 Cellular Communications, Inc.
$0.01, cv. pfd. $ 3,927,700
Warrants (--%)(a) (cost $ -- )
Expiration
Number of Warrants Date Value
1,025 Windmere Corp. 1/19/98 $636
Short-Term Investments (3.3%)(a) (cost $15,465,362)
Principal Amount Value
$15,464,000 Interest in $15,464,000
repurchase agreement dated
January 31, 1994 with Kidder
Peabody & Co., Inc. due February
1, 1994 with respect to various
U.S. Treasury obligations--
maturity value of $15,465,362 for
an effective yield of 3.17% $ 15,465,362
Total Investments
(cost $312,336,724)(d) $462,135,778
Notes
(a) Percentages indicated are based on total net assets of $463,521,106,
which correspond to a net asset value per class A and class B shareholders of
$11.73 and $11.67, respectively.
(b) Non-income-producing security.
(c) Securities whose value is determined or significantly influenced by
trading on exchanges not in the United States or Canada.
ADR after the name of a foreign holding stands for American Depository
Receipt representing foreign securities on deposit with a domestic custodian
bank.
(d) The aggregate identified cost on a tax basis is $312,267,182, resulting
in gross unrealized appreciation and depreciation of $156,053,563 and
$6,184,967, respectively, or net unrealized appreciation of $149,868,596.
<PAGE>
Statement of
assets and liabilities
January 31, 1994 (Unaudited)
<TABLE>
<S> <S> <C> <C>
Assets Investments in securities, at value (identified cost $312,336,724) (Note 1) $462,135,777
Cash 397
Dividends, interest and other receivables 31,456
Receivable for shares of the Fund sold 4,632,195
Receivable for securities sold 27,923,733
Total assets 494,723,558
Liabilities Payable for securities purchased $29,738,459
Payable for shares of the Fund repurchased 824,425
Payable for compensation of Manager (Note 2) 271,002
Payable for compensation of Trustees (Note 324
Payable for administrative services (Note 2) 3,015
Payable for distribution fees (Note 2) 104,763
Payable for investor servicing and custodian fees (Note 2) 165,485
Other accrued expenses 94,979
Total liabilities 31,202,452
Net assets $463,521,106
Represented by Paid-in capital (Note 4) $294,696,813
Accumulated net realized gain on investment transactions 21,152,819
Accumulated net investment loss (2,127,579)
Net unrealized appreciation of investments 149,799,053
Total--Representing net assets applicable to capital shares outstanding $463,521,106
Computation of Net asset value and redemption price of Class A shares
net asset value ($447,020,548 divided by 38,096,702 shares)
and offering
price $11.73
Offering price per Class A share (100/94.25 of $11.73)* $ 12.45
Net asset value and offering price of Class B shares
($16,500,558 divided by 1,414,408 shares)** $ 11.67
</TABLE>
*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.
<PAGE>
Statement of
operations
Six months ended January 31, 1994 (Unaudited)
<TABLE>
<S> <C> <C>
Investment income:
Dividends (net of foreign tax of $1,258) $ 331,692
Interest 16,476
Total investment income 348,168
Expenses:
Compensation of Manager (Note 2) $1,460,077
Investor servicing and custodian fees (Note 2) 325,394
Compensation of Trustees (Note 2) 9,974
Reports to shareholders 43,594
Auditing 10,052
Legal 12,161
Postage 42,839
Registration fees 1,952
Administrative services (Note 2) 4,017
Distribution fees--Class A (Note 2) 511,449
Distribution fees--Class B (Note 2) 28,373
Other 25,673
Total expenses 2,475,555
Net investment loss (2,127,387)
Net realized gain on investments (Notes 1 and 3) 34,957,408
Net unrealized appreciation of investments during the
period 45,316,632
Net gain on investments 80,274,040
Net increase in net assets resulting from operations $78,146,653
</TABLE>
<PAGE>
Statement of
changes in net assets
<TABLE>
<CAPTION>
Six months Year ended
ended January 31 July 31
1994 1993
<S> <C> <C>
Increase in net assets
Operations:
Net investment loss $ (2,127,387) $ (2,815,418)
Net realized gain on investments 34,957,408 28,164,696
Net unrealized appreciation of investments 45,316,632 64,246,684
Net increase in net assets resulting from operations 78,146,653 89,595,962
Distributions to shareholders from net realized gain on
investments:
Class A (40,826,743) (34,268,397)
Class B (867,413) --
Increase from capital share transactions (Note 4) 62,214,046 42,189,208
Total increase in net assets 98,666,543 97,516,773
Net assets
Beginning of period 364,854,563 267,337,790
End of period (including accumulated net investment loss
of $2,127,579 and $8,612,015, respectively) $463,521,106 $364,854,563
</TABLE>
*Unaudited.
<PAGE>
Financial Highlights*
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Six Eleven
months months Year
ended ended ended
January July August
31 Year ended July 31 31 31
1994** 1993 1992 1991 1990 1989 1988 1987*** 1986 1985 1984
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period $10.72 $9.05 $8.35 $8.20 $8.09 $6.40 $7.84 $6.56 $5.10 $4.17 $4.22
Investment
Operations
Net Investment
Gain (Loss) (.03) (.06) (.04) (.01) (.03) (.03) (.04)(a) (.02)(a) (.02) (.03) .04(a)
Net Realized and
Unrealized Gain
(Loss) on
Investments 2.24 2.87 .83 .46 .60 1.72 (.77) 1.87 1.57 .99 .10
Total from
Investment
Operations 2.21 2.81 .79 .45 .57 1.69 (.81) 1.85 1.55 .96 .14
Less Distributions
from:
Net Investment
Income -- -- -- -- -- -- -- -- -- (.03) --
Net Realized Gain
on Investments (1.20) (1.14) (.09) (.30) (.46) -- (.63) (.57) (.09) -- (.19)
Total
Distributions (1.20) (1.14) (.09) (.30) (.46) -- (.63) (.57) (.09) (.03) (.19)
Net Asset Value,
End of Period $11.73 $10.72 $9.05 $8.35 $8.20 $8.09 $6.40 $7.84 $6.56 $5.10 $4.17
Total Investment
Return at Net
Asset Value (%)
(b) 42.30(c) 32.93 9.53 6.40 7.36 26.36 (9.77) 31.64 31.09 25.05(c) 3.05
Net Assets, End of
Period (in
thousands) $447,021 $364,400 $267,338 $234,055 $195,802 $180,775 $143,506 $157,094 $41,014 $20,248 $13,222
Ratio of Expenses
to Average Net
Assets (%) 1.18(c) 1.26 1.39 1.48 1.50 1.63 1.59(a) 1.49(a) 1.46 1.69(c) 1.72(a)
Ratio of Net
Investment
Income (Loss) to
Average Net
Assets (%) (1.02)(c) (.90) (.59) (.46) (.47) (.41) (.74)(a) (.62)(a) (.63) (.94)(c) 1.16(a)
Portfolio Turnover
(%) 40.15(d) 108.20 66.75 54.06 42.66 73.58 76.91 92.76 91.92 55.17(d) 104.33
</TABLE>
See page 13 for notes to financial highlights.
<PAGE>
Financial Highlights*
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
July 15, 1993
Six months (commencement
ended of operations)
January 31 to July 31
1994** 1993
Class B
<S> <C> <C>
Net Asset Value, Beginning of Period $ 10.70 $ 10.80
Investment Operations
Net Investment Loss (.03) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 2.20 (.09)
Total from Investment Operations 2.17 (.10)
Less Distributions from:
Net Investment Income -- --
Net Realized Gain on Investments (1.20) --
Total Distributions (1.20) --
Net Asset Value, End of Period $ 11.67 $ 10.70
Total Investment Return at Net Asset Value (%) (b) 41.62(c) (22.32)(c)
Net Assets, End of Period (in thousands) $16,501 $454,840
Ratio of Expenses to Average Net Assets (%) 1.93(c) 1.93(c)
Ratio of Net Investment Income (Loss) to Average Net Assets (%) (1.77)(c) (1.93)(c)
Portfolio Turnover (%) 40.15(d) 108.20
</TABLE>
*Table has been restated to reflect a 4-for-1 share split, class A only,
declared by the Fund to shareholders of record on October 27, 1989, payable
on October 28, 1989. Financial highlights for periods ended through
July 31, 1992 have been restated to conform with requirements issued
by the SEC in April 1993.
**Unaudited
***Per share investment income, expenses and net investment income
for the year ended July 31, 1987 have been determined on the basis of
the weighted average number of shares outstanding during the
year.
(a) Reflects an expense limitation applicable during the period. As
a result of such limitation, the net investment loss of the Fund for
the fiscal year ended July 31, 1988, and July 31, 1987 reflects per
share expense reductions of less than $0.01. Expenses for the fiscal
year ended August 31, 1984 reflects per share expense reductions of
$0.01.
(b) Total investment return assumes dividend reinvestment an does
not reflect the effect of sales charges.
(c) Annualized
(d) Not annualized Putnam OTC Emerging Growth Fund
<PAGE>
Notes to
financial statements
January 31, 1994 (Unaudited)
Note 1 Significant accounting policies
The Fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund seeks
capital appreciation through investments in emerging growth stocks traded in
the over-the-counter (OTC) market.
The Fund offers both Class A and Class B shares. The Fund commenced its
public offering of Class B shares on July 15, 1993. Class A shares are sold
with a maximum front-end sales charge of 5.75%. Class B shares do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than Class
A shares, and may be subject to a contingent deferred sales charge, if those
shares are redeemed within six years of purchase. Expenses of the Fund are
borne pro-rata by the holders of both classes of shares, except that each
class bears expenses unique to that class including the distribution fees
applicable to such class and votes as a class only with respect to its own
distribution plan or other matters on which a class vote is required by law
or determined by the Trustees. Shares of each class would receive their
pro-rata share of the net assets of the Fund, if the Fund were liquidated. In
addition, the Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported--as in the case of some
securities traded over-the-counter--the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the last
reported bid and asked prices. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost which approximates
market, and other investments are stated at fair value following procedures
approved by the Trustees. (See Section E of Note 1 with respect to valuation
of options.)
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund may transfer uninvested cash
balances into a joint trading account, along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc., the Fund's Manager, a wholly-owned subsidiary of Putnam Investments,
Inc., and certain other accounts. These balances may be invested in one or
more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The Fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value
of which at the time of purchase is required to be in an amount at least
equal to the resale price, including accrued interest. The Fund's Manager is
responsible for determining that the value of these underlying securities is
at all times at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis and dividend
income is recorded on the ex-dividend date, except that certain dividends
from foreign securities are recorded as soon as the Fund is informed of the
ex-dividend date.
E) Option accounting principles The premium paid by the Fund for the purchase
of a call or put option is included in the Fund's Statement of Assets and
Liabilities as an investment and subsequently marked-to-market to reflect the
current market value of the option. If an option which the Fund has purchased
expires on the stipulated expiration date, the Fund realizes a loss in the
amount of the cost of the option. If the Fund enters into a closing sale
transaction, the Fund realizes a gain or loss, depending on whether proceeds
from the closing sale transaction are greater or less than the cost of the
option. If the Fund exercises a call option, the cost of the securities
acquired by exercising the call is increased by the premium paid to buy the
call. If the Fund exercises a put option, it realizes a gain or loss from the
sale of the underlying security and the proceeds from such sale are decreased
by the premium originally paid.
Stock index options Stock index options are similar to options on individual
securities in that the purchaser of an index option acquires the right to
buy, and the writer undertakes the obligation to sell, an index at a stated
exercise price during the term of the option. Instead of giving the right to
take or make actual delivery of securities, the holder of a stock index
option has the right to
<PAGE>
receive a cash "exercise settlement amount." This amount is equal to the
amount by which the fixed exercise price of the option exceeds (in the case
of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of the exercise, multiplied by a fixed "index
multiplier." The Fund writes options on stocks indices only to the extent
that it holds in its portfolio underlying securities which, in the judgment
of Putnam Management, correlate closely with the stock index.
F) Federal taxes It is the policy of the Fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the Fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation of securities held, and excise tax
on income and capital gains.
G) Distributions to shareholders Distributions to shareholders are recorded
by the Fund on the ex-dividend date.
Note 2 Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management, Inc. (Putnam Management), the
Fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., for
management and investment advisory services is paid monthly based on the
average net assets of the Fund for the month at an annual rate of 0.70% of
the first $500 million of average net assets, 0.60% of the next $500 million,
0.55% of the next $500 million, and 0.50% of any amount over $1.5 billion,
subject to reduction in any year to the extent that expenses (exclusive of
brokerage commissions, taxes, interest, distribution-related expenses and
extraordinary expenses) of the Fund exceed 2.5% of the first $30 million of
average net assets, 2.0% of the next $70 million and 1.5% of any excess over
$100 million, and by the amount of certain brokerage commissions and fees
(less expenses) received by the affiliates of the Manager on the Fund's
portfolio transactions.
The Fund also reimburses the Manager 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. For the six months
ended January 31, 1994, the Fund incurred $4,017 for these services.
Trustees of the Fund receive an annual Trustee's fee of $1,120 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the Fund's assets are being provided by Putnam
Fiduciary Trust Company (PFTC) a subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services,
a division of PFTC. Fees paid for these investor servicing and custodial
functions for the six months ended January 31, 1994, amounted to $325,394.
Investor service and custodian fees reported in the Statement of operations
for the six months ended January 31, 1994 have been reduced by credits
allowed by PFTC.
The Fund has adopted a distribution plan with respect to its Class A shares
(the "Class A Plan") pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The purpose of the Class A Plan is to compensate Putnam Mutual Funds
Corp., a wholly-owned subsidiary of Putnam Investments Inc., for services
provided and expenses incurred by it in distributing class A shares. The
Trustees have approved payment by the Fund to Putnam Mutual Funds Corp. at an
annual rate of 0.25% of the average net assets attributable to class A
shares. For the six months ended January 31, 1994, the Fund paid $511,449 in
distribution fees for class A shares.
During the six months ended January 31, 1994, Putnam Mutual Funds Corp.,
acting as an underwriter, received net commissions of $144,774 from the sale
of Class A shares of the Fund.
A deferred sales charge of up to 1.00% is assessed on certain redemptions of
Class A shares repurchased as part of an investment of $1 million or more.
For the six months ended January 31, 1994, Putnam Mutual Funds Corp., acting
as an underwriter, received $12 on such redemptions.
The Fund has adopted a distribution plan with respect to its Class B shares
(the "Class B Plan") pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The purpose of the Class B Plan is to compensate Putnam Mutual Funds
Corp. for services provided
<PAGE>
and expenses incurred by it in distributing Class B shares. The Class B Plan
provides for payments by the Fund to Putnam Mutual Funds Corp. at an annual
rate of up to 1.00% of the Fund's average net assets attributable to Class B
shares. For the six months ended January 31, 1994, the Fund paid Putnam
Mutual Funds Corp. distribution fees of $28,373 for Class B shares.
Putnam Mutual Funds Corp., acting as an underwriter, also receives the
proceeds of the contingent deferred sales charges levied on Class B share
redemptions within six years of purchase. The charge is based on declining
rates, which begin at 5.0% of the net asset value of the redeemed shares.
Putnam Mutual Funds Corp., received $4,320 in contingent deferred sales
charges from such redemptions for the six months ended January 31, 1994.
Note 3 Purchases and sales of securities
During the six months ended January 31, 1994, purchases and sales of
investment securities other than short-term investments aggregated
$170,703,400 and $164,198,364 respectively. There were no purchases or sales
of U.S. government obligations during the year. In determining the net gain
or loss on securities sold, the cost of securities has been determined on the
identified cost basis.
<PAGE>
Note 4 Capital shares
At January 31, 1994, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
January 31 July 31
1994 1993
<S> <C> <C> <C> <C>
Class A Shares Amount Shares Amount
Shares sold 15,133,205 $ 177,531,787 20,810,332 $ 202,860,662
Shares issued in connection with reinvestment
of distributions 3,401,479 38,096,479 3,401,605 31,845,075
18,534,684 215,628,266 24,211,937 234,705,737
Shares repurchased (14,442,463) (169,409,516) (19,732,401) (192,968,623)
Net increase 4,092,221 $ 46,218,750 4,479,536 $ 41,737,114
</TABLE>
<TABLE>
<CAPTION>
July 15, 1993
(commencement
Six months ended of operations) to
January 31 July 31
1994 1993
<S> <C> <C> <C> <C>
Class B Shares Amount Shares Amount
Shares sold 1,455,726 $17,022,427 42,496 $452,094
Shares issued in connection with reinvestment
of distributions 70,397 784,226 -- --
1,526,123 17,806,653 42,496 452,094
Shares repurchased (154,211) (1,811,357) -- --
Net increase 1,371,912 $15,995,296 42,496 $452,094
</TABLE>
Note 5 Reclassification of Capital Account
Effective August 1, 1993, Putnam OTC Emerging Growth Fund has adopted the
provisions of Statement of Position 93-2 "Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of
Capital Distributions by Investment Companies (SOP)." The purpose of this SOP
is to report the accumulated net investment income (loss) and accumulated net
realized gain (loss) accounts in such manner as to approximate amounts
available for future distributions (or to offset future realized capital
gains) and to achieve uniformity in the presentation of distributions by
investment companies.
As a result of the SOP, the Fund has reclassified $8,612,015 to increase
accumulated net investment loss and increased accumulated net realized gain
by $1,361,537, with a decrease of $9,973,552 to additional paid-in capital.
These adjustments represent the cumulative amounts necessary to report these
balances through July 31, 1993, the close of the Fund's most recent fiscal
year-end, for financial reporting and tax purposes.
<PAGE>
Fund
Performance
Supplement
Putnam OTC Emerging Growth Fund is a portfolio of small-to-medium
capitalization common stocks traded in the over-the-counter market managed
for capital appreciation. The NASDAQ Industrial Index is an unmanaged index
of common stocks traded in the over-the-counter market. The Standard & Poor's
500 Index is an unmanaged list of large-capitalization common stocks; it
assumes reinvestment of all distributions. The indexes do not take into
account brokerage commissions other costs. The fund's portfolio contains
securities that do not match those in the indexes. Fund performance data do
not take into account any adjustment for taxes that may have been payable.
Morningstar Mutual Funds, Lipper Analytical Services, and CDA/Wiesenberger
Funds Update are independent research firms that monitor mutual fund
performance. Morningstar rates funds relative to those with similar
objectives, based on risk-adjusted medium- and long-term performance, as
applicable and adjusted for sales charges. Ratings are updated every two
weeks. Lipper and CDA/Wiesenberger distribute mutual fund rankings monthly,
classifying funds by investment objective and asset category. The rankings
are based on total return performance; i.e., the change in net asset value
adjusted for reinvestment of capital gains and income dividends. Lipper
rankings cover a variety of performance periods, for example, year-to-date,
1-year, 5-year, and 10-year performance. Lipper and CDA/Wiesenberger rankings
do not account for any sales charges or fees.
The fund performance supplement has been prepared by Putnam Management to
provide additional information about the fund and the indexes used for
performance comparisons. The information is not part of the portfolio of
investments owned or the financial statements.
<PAGE>
Your
Trustees
George Putnam
Chairman
Chairman and President,
The Putnam Funds
William F. Pounds
Vice Chairman
Professor of Management,
Alfred P. Sloan
School of Management,
Massachusetts Institute of
Technology
Jameson Adkins Baxter
President,
Baxter Associates, Inc.
Hans H. Estin
Vice Chairman,
North American
Management Corporation
John A. Hill
Principal and
Managing Director,
First Reserve Corp.
Elizabeth T. Kennan
President,
Mount Holyoke College
Lawrence J. Lasser
President and
Chief Executive Officer,
Putnam Investments, Inc.
Robert E. Patterson
Executive Vice President,
Cabot Partners
Limited Partnership
Donald S. Perkins
Director of various
corporations
George Putnam, III
President, New Generation
Research, Inc.
A.J.C. Smith
Chairman of the Board
and Chief Executive Officer,
Marsh & McLennan
Companies, Inc.
W. Nicholas Thorndike
Director of various
corporations
<PAGE>
Putnam
OTC Emerging
Growth Fund
Fund information
Investment manager
Putnam Investment
Management
One Post Office Square
Boston, MA 02109
Marketing services
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
Investor servicing agent
Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203
1-800-225-1581
Custodian
Putnam Fiduciary
Trust Company
Legal counsel
Ropes & Gray
(DALBAR LOGO)
Putnam Investor
Services has
received the DALBAR award
each year since
the award's 1990 inception.
In more than 10,000 tests
of 38 shareholder
service components,
Putnam outperformed
the industry standard
in every category.
19/BO1-11144
Officers
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Daniel L. Miller
Vice President
and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
John D. Hughes
Vice President
and Treasurer
Paul O'Neil
Vice President
Beverly Marcus
Clerk and
Assistant Treasurer
This report is for the information of shareholders of Putnam OTC Emerging
Growth Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
Paid
Boston, MA
Permit No. 53749
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) and footers (e.g., page
numbers and "The accompanying notes are an integral part of these
financial statements") are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Dagger footnote symbol replaced with plus sign (+).
