[GRAPHIC OMITTED: ARTWORK]
Putnam
OTC
Emerging
Growth
Fund
SEMIANNUAL REPORT
January 31, 1996
[LOGO: BOSTON * LONDON *TOKYO]
Fund highlights
*Lipper Analytical Services, an independent research
organization, ranked the fund's class A shares 13 out of 314 (top 5%)
small company growth funds for one-year performance, 6 out of 83 (top
8%) for 5-year performance, and 2 of 38 funds (top 6%) for 10-year
performance, as of January 31, 1996.
*Morningstar gave the fund's class A shares its highest
ranking of five stars for overall performance as of January 31, 1996.
Only 10% of the 1,412 equity funds rated receive five-star ratings.
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
14 Portfolio holdings
21 Financial statements
Lipper rankings are based on total return performance, vary over
time, and do not reflect the effects of sales charges. The fund's class
A shares ranked 13 out of 314, 6 out of 83, and 2 out of 38 for 1-, 5-,
and 10-year performance, respectively, through 1/31/96. Performance for
other share classes will vary.
Morningstar, an independent rating organization, rates a fund
relative to funds with similar investment objectives, based on the
fund's 3-, 5-, and 10-year performance, adjusted for risk factors and
sales charges. Ratings are updated monthly. 10% of funds receive 5
stars, 22.5% receive 4 stars, and 35% receive 3 stars. For the 3-, 5-,
and 10-year periods ended 1/31/96, there were 1,412, 948, and 510 funds
in the equity fund category, and the fund received 5 stars for each
period. Performance of other share classes will vary.
Past performance is not indicative of future results. See page 8
for total return performance of the fund.
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright)*Karsh, Ottawa
From the Chairman
Dear Shareholder:
Putnam OTC Emerging Growth Fund enjoyed one of the strongest markets for
stocks of smaller companies in recent memory. The extent of the rise in
the over-the-counter market, along with management's adept positioning,
is clearly reflected in your fund's performance during the six months
ended January 31, 1996.
Quite naturally, we are pleased with the results. However, as recent
events have demonstrated, favorable conditions like these do not last
indefinitely without disruption. It would be a realistic expectation to
see some moderation in the pace of the advance and further corrections
from time to time during the second half of fiscal 1996. Putnam
Management believes the prospect of a slower economy still has the
potential to cool equity investors' ardor a bit.
As a result, the market may be in for some additional volatility.
Nevertheless, Fund Manager James Callinan believes that equities,
especially the over-the-counter stocks in which your fund invests, may
continue their upward course in 1996, though at a more subdued pace than
they enjoyed in 1995.
Respectfully yours,
/s/George Putnam
George Putnam
Chairman of the Trustees
March 20, 1996
Report from the Fund Manager
James L. Callinan
Putnam OTC Emerging Growth Fund, shrugging off some bouts of market
volatility, ended its semiannual period on January 31, 1996, with more
of the strong returns that characterized its performance for fiscal
1995. Declining interest rates, low inflation, and expanding corporate
earnings all combined to boost fund holdings -- and may help maintain
the generally positive environment for over-the-counter stocks of
smaller companies in the months ahead.
You may be aware that over the long term, your fund has substantially
outperformed the Russell 2000, an index of smaller-company stocks
comparable to those in the fund's portfolio. However, it is a pleasure
to report that, over the six-month period just ended, fund performance
for all three share classes was also ahead of the Russell 2000 at both
net asset value and public offering price. For complete details, see the
performance tables immediately following this report.
*INTERNET-RELATED HOLDINGS TRIMMED AFTER REGISTERING
SUBSTANTIAL GAINS
Enthusiasm about investing in Internet-related companies has become
somewhat excessive. Nevertheless, companies involved with the Internet
when carefully selected, may still represent excellent growth
opportunities. Over the period, several such companies held by the fund
proved dynamic performers. Stocks of America Online, NETCOM, and the
high-flying Netscape all rose dramatically in price.(While these stocks,
along with others discussed in this report, were viewed favorably at
the end of the fiscal period, all portfolio holdings are subject to review
and adjustment in accordance with the fund's investment strategy and may
well vary in the future.) After such pronounced gains, we have trimmed the
portfolio's weighting in Internet-related stocks, taking profits as
warranted. America Online -- a popular on-line content provider --
remains a major fund holding, though, as we believe it can consistently
expand revenues and earnings well into the future.
In recent months, we have focused increasingly on telecommunications
companies, building up the fund's holdings in this sector. We believe
that the just-passed bill deregulating telecommunications may provide a
potent stimulus for the industry. Additionally, the enormous popularity
of the Internet has highlighted a pressing need for communications
infrastructure improvements. Regional Bell operating companies, in
particular, are investing heavily in technological upgrades, which allow
faster Internet access and provide for the transmission of greater
volumes of data. The ongoing capital spending by both long-distance and
local telephone operators has benefited a number of telecommunications
equipment manufacturers in the fund's portfolio, including U.S.
Robotics, Cascade, Glenayre, and Stratacom. We believe these companies
currently are exceptionally well positioned to continue their rapid
growth in the months ahead.
Broadcasting companies, currently representing 4.2% of the fund's net
assets, may also benefit from the long-awaited congressional approval of
the telecommunications bill. Radio operators could gain as the bill
loosens restrictions on ownership of stations. This could potentially
transform radio from a relatively fragmented local industry into a
concentrated national one. Fund holdings presently in this area include
such radio station operators as Clear Channel Communication, Infinity
Broadcasting, and Emmis Broadcasting.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS* showing:
Applied/advanced technology 31.1%
Medical Technology/cost containment 19.8%
Value-oriented consuming 16.5%
Media/entertainment 8.5%
Personal communication 5.6%
*Based on net assets as of 1/31/96. Holdings and top industry sectors
will vary over time.
*MEDICAL DEVICES A ROBUST SECTOR
Holding across the entire health-care industry represent a substantial
portion of your fund's portfolio, at 24.3% of net assets. Over the
period, we have seen substantial gains from many of
the fund's medical devices holdings. An important positive factor may be
the apparent policy shift at the Food and Drug Administration to
expedite the approval of life-saving medical devices. In turn, this
could boost the profitability of companies in the industry by shortening
product-development cycles and leading to higher price/earnings
multiples. Current holdings in this area include Endosonics Corporation,
which manufactures heart-care devices and diagnostic-imaging systems; I-
Stat, which supplies hospitals with a monitoring device for speedy blood
analysis; and Target Therapeutics, which makes instruments for treating
vascular diseases and strokes.
Within the fund's health-care services holdings, we have upgraded our
stocks, emphasizing management quality and earnings stability. We
recently bought shares of Genesis Health Care Ventures as well as Health
Care and Retirement, two companies with established market shares.
Elsewhere, we have purchased stocks in health-care information systems
companies, whose products are increasingly important as cost-structure
changes transform hospital and managed care practices. HBO & Co., Shared
Medical, and ABR Information Services all provide data processing for
the medical industry.
*SEVERAL OTHER NICHE INDUSTRIES RAPIDLY GROWING
Your fund currently owns shares of companies that aid in the processing
of transactions, particularly credit-card charges. Indeed, the
profitability of the credit-card transaction business has exploded, as
computing speed has increased while telecommunication costs have fallen.
These two factors have stimulated the merchant acceptance and consumer
usage of credit cards. Credit-card use in grocery stores has risen from
almost nothing to nearly 25% of all transactions, according to Putnam
research; the trend is now replicating itself at gas station pumps. Fund
holdings capitalizing on this transition include First Data Corp,
Transaction Network Services, Concord EFS, Inc., and PMT Services.
TOP TEN HOLDING (1/31/96)*
U.S. ROBOTICS CORP.
Computer modems
MBNA CORP.
Financial Services
HBO & CO.
Hospital information services
AMERICAN ONLINE INC.
On-line services
VENCOR INC.
Health care
FIRST DATA CORP.
Credit-card processing
BED BATH & BEYOND
Specialty retailer
INFINITY BROADCASTING CORP.
Radio station operator
ANALOG DEVICES, INC.
Semiconductors
HEALTH MANAGEMENT & ASSOCIATES, INC.
Health-care services
Footnote read:
*These holdings represent 15.5% of the fund's assets. Portfolio holdings
will vary over time.
In response to declining interest rates, we have increased the fund's
financial services weighting to some 4% of the fund's net assets, buying
stocks of specialty companies. Amerin, one new holding, sells mortgage
insurance through lenders. Financial Federal lends to companies for
spending in capital equipment, which has been on a long-term upswing.
Finally, there are several employment companies in the portfolio,
including Robert Half International and Interim Services Inc., which
specialize in high-tech staffers.
*AN OPTIMISTIC OUTLOOK
Even as we enter a period of slowing economic growth, we believe
conditions remain generally positive for the types of companies in which
your fund invests. The relatively stable interest rates and low inflation that
may prevail in the months ahead are particularly beneficial for smaller
companies. Additionally, we are still seeing evidence of persistently
strong earnings growth in many of our holdings, which may well continue
during the second half of your fund's fiscal year.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 1/31/96, there is no guarantee the fund will
continue to hold these securities in the future. The fund invests in
smaller and midsize companies whose stocks fluctuate in price more than
those of larger companies.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam OTC Emerging Growth Fund is designed for investors
seeking above-average growth potential through investments primarily in
common stocks of small- to medium-sized emerging growth companies.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 1/31/96
Class A Class B Class M
Inception date (11/1/82) (7/15/93) (12/2/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
6 months 15.85% 9.22% 15.48% 10.48% 15.55% 11.52%
- ------------------------------------------------------------------------
1 year 53.85 45.02 52.66 47.66 52.80 47.41
- ------------------------------------------------------------------------
5 years 200.29 183.16 -- -- -- --
Annual average 24.60 23.14 -- -- -- --
- -------------------------------------------------------------------------
10 years 439.27 408.30 -- -- -- --
Annual average 18.35 17.66 -- -- -- --
- ------------------------------------------------------------------------
Life of class -- -- 78.89 75.89 59.21 53.67
Annual average -- -- 25.62 24.79 48.81 44.37
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/96
Standard & Poor's Russell 2000
500 Index Index
- ------------------------------------------------------------------------
6 months 14.49% 6.03%
- ------------------------------------------------------------------------
1 year 38.56 29.95
- ------------------------------------------------------------------------
5 years 113.15 137.49
Annual average 16.34 18.89
- ------------------------------------------------------------------------
10 years 310.40 187.58
Annual average 15.16 11.14
- ------------------------------------------------------------------------
Life of class B 50.97 38.09
Annual average 17.53 13.51
- ------------------------------------------------------------------------
Life of class M 44.72 32.53
Annual average 37.15 27.39
- ------------------------------------------------------------------------
POP assumes 5.75% maximum sales charge for class A shares and 3.50%
for class M shares. CDSC for class B shares assumes the applicable
sales charge, with the maximum being 5%.
TOTAL RETURN FOR PERIODS ENDED 12/31/95
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
6 months 33.45% 25.78% 33.08% 28.08% 33.08% 28.38%
- -----------------------------------------------------------------------
1 year 55.94 46.96 54.80 49.80 55.16 49.74
- -----------------------------------------------------------------------
5 years 234.13 214.86 -- -- -- --
Annual average 27.29 25.78 -- -- -- --
- -----------------------------------------------------------------------
10 years 460.55 428.41 -- -- -- --
Annual average 18.81 18.11 -- -- -- --
- -----------------------------------------------------------------------
Life of class -- -- 83.64 80.64 63.48 57.80
Annual average -- -- 28.03 27.18 57.64 52.55
- -----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take
into account any adjustment for taxes payable on reinvested
distributions or, for class A shares, distribution fees prior to
implementation of the class A distribution plan in 1990. Investment
returns and principal value will fluctuate so that an investor's
shares, when sold, may be worth more or less than their
original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 1/31/96
Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 1 1 1
- ------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------
Long-term $1.392 $1.392 $1.392
- ------------------------------------------------------------------------
Short-term 0.317 0.317 0.317
- ------------------------------------------------------------------------
Total 1.709 1.709 1.709
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
7/31/95 $14.17 $15.03 $13.92 $14.11 $14.62
- ------------------------------------------------------------------------
1/31/96 14.64 15.53 14.30 14.53 15.06
- ------------------------------------------------------------------------
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 5.75% sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's CDSC declines from a 5% maximum during the first
year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies.
COMPARATIVE BENCHMARKS
Standard & Poor's 500 Index is an unmanaged list of common stocks that
is frequently used as a general measure of stock market performance.
Russell 2000 Index is an unmanaged list of common stocks that is
frequently used as a measure of the performance of small company
stocks.
Both indexes assume reinvestment of all distributions and do not take
into account brokerage commissions or other costs. The fund's portfolio
contains securities that do not match those in the indexes. It is not
possible to invest directly in an index.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
International New Opportunities Fund
Investors Fund
Natural Resources Fund
New Opportunities Fund
OTC Emerging Growth Fund
Overseas Growth Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund
American Government Income Fund
Diversified Income Trust
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds*
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
LIFESTAGESSM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments to help maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio
MOST CONSERVATIVE INVESTMENT+
Putnam money market funds:
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts++
* Not available in all states.
+ Relative to above.
++ Not offered by Putnam Investments. Certificates of deposit offer a
fixed rate of return and may be insured up to certain limits by
federal/state agencies. Savings accounts may also be insured up to
certain limits. Please call your financial advisor or Putnam at 1-800-
225-1581 to obtain a prospectus for any Putnam fund. It contains more
complete information, including charges and expenses. Please read it
carefully before you invest or send money.
A Putnam perspective on risk and reward
You've probably been told how important it is to understand the
relationship between an investment's potential rewards and its
accompanying risks. Given the cautionary nature of such
instructions, it may take most investors a while to realize that risk
has a positive side.
Every risk signals a potential reward. Selecting only those investments
that offer the greatest degree of security generally leads to only
modest rewards. Furthermore, even insured or guaranteed investments may
be subject to changes in their rates of return or, in some cases, in
their principal values. Experienced investors know that no investment is
truly risk free and are therefore willing to take on some measure of
risk in order to increase their potential gains.
The greater the risk, the greater the potential reward. Accepting an
appropriate level of investment risk can give you a better chance of
outpacing inflation over time and seeking to
*A RUNDOWN OF RISK TYPES
MARKET RISK Most important for stock funds, but relevant to all funds,
this is a measure of how sensitive a fund's holdings are to changes in
general market conditions. Remember, though, that securities that lose
value quickly in market declines may also show the strongest gains in
more favorable environments.
INTEREST-RATE RISK Since bond prices fall as interest rates rise, this
type of risk is a particular concern for fixed-income inves-
tors. However, interest-rate increases can also have a substantial
negative effect on the stock market.
INFLATION RISK If your investments cannot keep pace with inflation, your
money will begin to lose its purchasing power. Stock investments are
generally considered among the best ways of addressing inflation risk
over the long term.
maximize your investment's return. How much risk? Your
financial advisor's feedback and your time horizon can make all the
difference in determining how much risk is compatible with your
investment goals and your peace of mind.
* FITTING YOUR FUND SELECTION TO YOUR
RISK TOLERANCE
How do you find the right balance between investment risks and their
potential rewards? It's helpful to understand the types of risks that
can apply to different types of investments, and to look at your own
portfolio with this perspective.
For short-term goals, your first priority may be managing market risk.
Longer-term investors may be more concerned with inflation risk. And all
income-oriented investors should consider interest-rate, credit, and
prepayment risks carefully. Within each of Putnam's four investment
categories, you can select funds with differing levels of risk and
reward potential to customize your portfolio.
CREDIT AND PREPAYMENT RISK Credit risk is the concern that the
security's issuer will not be able to meet its payment, while prepayment
risk involves the premature payoff of a loan, with a resulting loss of
interest income. Professional management and in-depth research are
invaluable in managing both these risks.
LIQUIDITY RISK Not all investments can be readily converted into cash at
their perceived market values. Liquidity risk can affect the price of
securities held in the fund's portfolio and, thus, the fund's share
prices.
This list covers only the most general types of risks; however, each
investment will also have its own specific risks. You will find a more
detailed discussion of these risk consideration in each fund's
prospectus.
<TABLE>
<CAPTION>
Portfolio of investments owned
January 31, 1996 (Unaudited)
COMMON STOCKS (85.3%)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Brewing (0%)
100,000 Pete's Brewing Company + $ 1,850,000
Broadcasting (4.2%)
- ------------------------------------------------------------------------------------------------
158,000 American Radio Systems Corp. + 4,424,000
141,250 Clear Channel Communications, Inc. + 6,497,500
265,700 Emmis Broadcasting Corp. Class A + 10,163,025
389,550 Infinity Broadcasting Corp. Class A + 15,484,613
175,300 LIN Television Corp. + 5,434,300
224,100 Renaissance Communications Corp. + 4,425,975
170,000 SFX Broadcasting, Inc. Class A + 4,377,500
429,900 Westwood One, Inc. + 6,905,269
------------------
57,712,182
Business Services (4.2%)
- ------------------------------------------------------------------------------------------------
149,600 Accustaff, Inc. + 6,881,600
314,000 Alternative Resources Corp. + 9,027,500
171,000 Computer Management Sciences + 2,971,125
283,500 Interim Services Inc. + 10,560,375
110,000 Mecon, Inc. + 1,925,000
227,300 Paychex, Inc. 11,791,188
330,600 Robert Half International, Inc. + 13,926,525
50,000 SOS Staffing Services, Inc. + 481,250
------------------
57,564,563
Cable Television (0.5%)
- ------------------------------------------------------------------------------------------------
354,325 Century Communications Corp. Class A + 2,701,728
200,000 Tele-Communications, Inc. Class A + 4,225,000
------------------
6,926,728
Computer Equipment (0.2%)
- ------------------------------------------------------------------------------------------------
165,000 PRI Automation, Inc. + 4,702,500
Computer Services (4.7%)
- ------------------------------------------------------------------------------------------------
81,200 Broadway & Seymour, Inc. + 1,055,600
182,750 CMG Information Services, Inc. + 10,827,938
93,300 Cambridge Technology Partners, Inc. + 4,618,350
495,000 Computer Horizons Corp. + 12,560,625
256,500 First Data Corp. 18,147,375
110,000 IDX Systems Corp. + 3,602,500
230,300 NETCOM On-Line Communication Services, Inc. + 7,024,150
52,100 PsiNet, Inc. + 690,325
80,800 Secure Computing Corp. + 3,141,100
40,006 Tivoli Systems, Inc. + 1,881,532
------------------
63,549,495
Computer Software (12.5%)
- ------------------------------------------------------------------------------------------------
18,600 Arbor Software Corp. + 762,600
40,000 Ariel Corporation + 350,000
127,900 Baan Co., N.V. (Netherlands) + 5,547,663
185,200 Business Objects S.A., ADR (France) + 8,519,200
250,800 CBT Group PLC ADR (Ireland)+ 13,605,900
100,000 Datalogix International, Inc. + 1,175,000
289,400 Discreet Logic, Inc. (Canada) + 7,596,750
213,700 Electronic Arts, Inc. + 5,128,800
514,200 GT Interactive Software Corp. + 5,399,100
145,900 HNC Software, Inc. + 8,462,200
18,600 HPR, Inc. + 651,000
283,200 INSO Corporation + 10,903,200
18,800 Legato Systems, Inc. + 601,600
200,000 Logic Works, Inc. + 3,050,000
227,600 Macromedia, Inc. + 9,104,000
62,500 Maxis, Inc. + 1,671,875
387,100 Mercury Interactive Corp. + 8,032,325
50,000 Metatools, Inc. + 1,093,750
55,000 Netscape Communications Corp. + 9,033,750
100,000 Novadigm, Inc. + 2,575,000
156,300 Objective Systems Integrators, Inc. + 6,252,000
300,000 Pairgain Technologies, Inc. + 14,175,000
289,600 PeopleSoft, Inc. + 13,756,000
25,000 Pinnacle Systems Inc. + 450,000
75,000 Scopus Technology, Inc. + 1,725,000
233,600 Security Dynamics Technologies, Inc. + 13,373,600
301,240 Sierra On-Line, Inc. + 7,493,345
491,100 Softkey International, Inc. + 6,814,013
3,300 Sync Research, Inc. + 93,225
15,500 Unison Software, Inc. + 259,625
105,000 Vantive Corp. + 2,467,500
24,300 VideoServer, Inc. + 583,200
------------------
170,706,221
Consumer Services (1.6%)
- ------------------------------------------------------------------------------------------------
475,600 America Online, Inc. + 21,283,100
30,700 Loewen Group, Inc. 863,438
------------------
22,146,538
Data Communications (1.1%)
- ------------------------------------------------------------------------------------------------
235,000 MFS Communications Inc. + 14,217,500
10,800 Omnipoint Corp. + 221,400
------------------
14,438,900
Electronics and Electrical Equipment (2.7%)
- ------------------------------------------------------------------------------------------------
106,400 Adtran, Inc. + 2,926,000
60,000 Gemstar International Group Ltd. + 1,965,000
264,200 Maxim Integrated Products Inc. 9,379,100
375,000 Xilinx, Inc. + 14,484,375
210,000 Zebra Technologies Corp. + 6,510,000
------------------
35,264,475
Financial Services (4%)
- ------------------------------------------------------------------------------------------------
181,200 Concord EFS, Inc. + 4,620,600
40,000 Envoy Corporation + 810,000
243,000 Financial Federal Corp. + 4,009,500
130,000 First USA, Inc. 6,776,250
574,400 MBNA Corp. 23,406,800
145,000 Schwab (Charles) Corp. 3,625,000
350,300 TCF Financial Corp. 11,516,113
------------------
54,764,263
Health Care Information Services (3.1%)
- ------------------------------------------------------------------------------------------------
163,900 ABR Information Services, Inc. + 7,867,200
201,600 CyCare Systems, Inc. + 5,670,000
261,600 HBO & Co. 21,974,400
289,950 Health Management Systems, Inc. + 7,284,994
------------------
42,796,594
Health Care Services (5.7%)
- ------------------------------------------------------------------------------------------------
90,000 Access Health, Inc. + 4,477,500
150,000 Apria Healthcare Group, Inc. + 3,937,500
237,900 Coram Healthcare Corp. + 1,427,400
308,500 Emcare Holdings, Inc. + 9,023,625
275,000 Genesis Health Ventures, Inc. + 11,584,375
87,300 HealthPlan Services Corp. + 2,215,238
170,000 Healthsouth Rehabilitation Corp. + 5,482,500
84,400 Medaphis Corp. + 3,376,000
265,000 Omnicare, Inc. 12,322,500
226,600 Renal Treatment Centers, Inc. + 10,366,950
240,000 Target Therapeutics, Inc. + 13,140,000
------------------
77,353,588
Health Care and HMOs (6%)
- ------------------------------------------------------------------------------------------------
490,000 Health Management Assoc., Inc. + 14,761,250
340,000 Healthsource, Inc. + 11,390,000
329,900 Lincare Holdings, Inc. + 8,742,350
106,800 Oxford Health Plans Inc. + 7,369,200
299,200 Rotech Medical Corp. 9,013,400
510,500 Vencor, Inc. + 19,462,813
408,950 Vivra, Inc. + 10,325,988
------------------
81,065,001
Health Insurance (1.2%)
- ------------------------------------------------------------------------------------------------
290,000 Compdent Corp. + 10,222,500
150,000 United Dental Care, Inc. + 6,037,500
------------------
16,260,000
Hospital Management (1.3%)
- ------------------------------------------------------------------------------------------------
68,900 Emeritus Corp. + 1,240,200
450,100 Horizon/CMS Healthcare Corp. + 12,321,488
150,000 Owen Healthcare, Inc. + 3,112,500
32,000 Total Renal Care Holdings, Inc. + 888,000
------------------
17,562,188
Household Products (0%)
- ------------------------------------------------------------------------------------------------
1,025 Windmere Corp. 7,303
Insurance (1.3%)
- ------------------------------------------------------------------------------------------------
100,000 Amerin Corp. + 2,587,500
290,000 Progressive Corp Ohio 14,681,250
------------------
17,268,750
Lodging (1.6%)
- ------------------------------------------------------------------------------------------------
125,000 HFS, Inc. + 10,375,000
353,500 La Quinta Inns, Inc. 9,456,125
93,700 Renaissance Hotel Group N.V. (Hong Kong) + 2,354,213
------------------
22,185,338
Medical Management Services (1%)
- ------------------------------------------------------------------------------------------------
150,000 American Oncology Resources, Inc. + 7,087,500
125,000 Pediatrix Medical Group, Inc. + 4,187,500
125,000 Phymatrix Inc.+ 2,687,500
------------------
13,962,500
Medical Supplies and Devices (5.4%)
- ------------------------------------------------------------------------------------------------
100,000 Angeion Corp. + 918,750
700,000 Endosonics Corp. + 9,625,000
5,300 ESC Medical Systems Ltd. + 134,488
310,000 Exogen Inc. + 6,587,500
49,000 Hologic Inc. + 2,364,250
300,000 I-Stat Corp. + 9,900,000
297,600 Instent, Inc. + 5,877,600
98,500 Kinetic Concepts Inc. 1,218,938
260,000 Lifecore Biomedical, Inc. + 4,647,500
19,000 Medisense Inc. + 505,876
118,100 Neuromedical Systems, Inc. + 2,819,638
118,100 OncorMed, Inc. + 959,563
229,700 Orthologic Corp. + 4,751,919
133,900 Perclose Inc. + 3,146,650
207,400 Shared Medical Systems Corp. 11,821,800
155,000 Spine-Tech, Inc. + 4,107,500
297,800 Uromed Corp. + 3,983,075
------------------
73,370,047
Networking Equipment (1.5%)
- ------------------------------------------------------------------------------------------------
132,500 Cascade Communications Corp. + 10,368,125
108,400 Premisys Communications, Inc. + 4,769,600
75,400 Shiva Corp. + 5,409,950
------------------
20,547,675
Nursing Homes (0.6%)
- ------------------------------------------------------------------------------------------------
230,000 Health Care & Retirement Corp. + 8,423,750
Pharmaceuticals and Biotechnology (4.1%)
- ------------------------------------------------------------------------------------------------
315,000 Ariad Pharmaceuticals Inc. + 1,850,625
100,000 Biochem Pharmaceutical, Inc. + 4,400,000
334,000 Bio-Vascular, Inc. + 2,713,750
141,100 Cephalon Inc. + 3,474,588
200,000 CytoTherapeutics, Inc. + 3,400,000
160,000 Gilead Sciences, Inc. + 5,720,000
244,800 IDEXX Laboratories, Inc. + 12,301,200
115,600 Immulogic Pharmaceutical Corp. + 2,268,650
134,000 La Jolla Pharmaceutical Co. + 1,021,750
50,000 Liposome Company Inc. + 1,200,000
110,000 Martek Biosciences Corp. + 3,850,000
210,000 Neurogen Corp. + 6,352,500
125,600 Theratech, Inc. + 2,103,800
225,000 Vical, Inc. + 3,825,000
65,000 Oravax Inc. + 942,500
------------------
55,424,363
Publishing (0.3%)
- ------------------------------------------------------------------------------------------------
330,000 Mecklermedia Corp. + 4,300,313
Recreation and Gaming (0.2%)
- ------------------------------------------------------------------------------------------------
178,650 Rio Hotel & Casino, Inc. + 2,322,450
Restaurants (1.6%)
- ------------------------------------------------------------------------------------------------
412,800 Apple South, Inc. 7,275,600
225,500 Outback Steakhouse, Inc. + 6,849,563
147,600 Papa Johns International, Inc. + 6,162,300
59,600 Rainforest Cafe Inc. + 1,668,800
------------------
21,956,263
Retail (1.7%)
- ------------------------------------------------------------------------------------------------
420,000 Bed Bath & Beyond, Inc. + 16,668,750
318,200 PMT Svcs., Inc. + 6,364,000
------------------
23,032,750
Semiconductors (3.9%)
- ------------------------------------------------------------------------------------------------
669,500 Analog Devices Inc. + 15,063,750
539,900 Atmel Corp. + 15,387,150
180,400 Credence Systems Corp. + 4,442,350
275,000 KLA Instruments Corp. + 8,112,500
412,200 S3, Inc. + 4,997,925
330,000 Sierra Semiconductor Corp. + 5,527,500
------------------
53,531,175
Telecommunication Equipment (5.2%)
- ------------------------------------------------------------------------------------------------
104,000 Ascend Communications, Inc. + 4,043,000
197,000 Glenayre Technologies, Inc. + 7,880,000
160,000 Stratacom, Inc. + 12,000,000
513,060 U.S. Robotics Corp. + 45,277,534
604,000 US Satellite Broadcasting Co. + 1,630,800
------------------
70,831,334
Telephone Services (1.7%)
- ------------------------------------------------------------------------------------------------
375,000 LCI International, Inc. + 8,906,250
31,500 MIDCOM Communications, Inc. + 417,375
235,000 Natural Microsystems Corp. + 5,992,500
287,600 Transaction Network Services Inc. + 7,765,200
------------------
23,081,325
Wireless Communications (2.2%)
- ------------------------------------------------------------------------------------------------
190,000 CAI Wireless Systems, Inc. + 1,900,000
311,375 Centennial Cellular Corp. Class A + 5,020,922
337,100 P-Com, Inc. + 4,719,400
550,800 Paging Network, Inc. + 14,045,400
180,650 Vanguard Cellular Systems, Inc. + 3,793,650
------------------
29,479,372
------------------
Total Common Stocks (cost $870,252,543) $1,164,387,944
CONVERTIBLE BONDS AND NOTES (0.1%) (cost $1,100,000)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
$ 1,100,000 Theratx Inc.144A cv. sub., 8s, 2002 $ 973,500
WARRANTS (0%)(cost $-) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
33,500 ATS Medical, Inc. + 8/2/97 $ 41,875
- ------------------------------------------------------------------------------------------------
Short-Term Investments (13.1%)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
$30,000,000 Federal Home Loan Bank Discounted Commercial
Paper, effective yield of 4.97%, July 18, 1996 $ 29,304,200
14,240,000 Federal Home Loan Mortgage Corp. Discounted
Commercial Paper, effective yield of 5.48%,
March 7, 1996 14,164,132
3,000,000 Federal National Mortgage Association Discount Notes,
effective yield of 5.55%, February 9, 1996 2,996,299
30,000,000 Federal National Mortgage Association Discount Notes,
effective yield of 5.36%, February 27, 1996 29,883,867
20,000,000 Federal National Mortgage Association Discount Notes,
effective yield of 5.36%, February 23, 1996 19,934,489
5,000,000 National Rural Utilities Discounted Commercial Paper,
effective yield of 5.42%, February 26, 1996 14,943,542
5,000,000 USA Capital Corp. Discounted Commercial Paper,
effective yield of 5.64%, February 14, 1996 4,989,817
15,000,000 USA Capital Corp. Discounted Commercial Paper,
effective yield of 5.63%, February 8, 1996 14,983,579
47,273,000 Interest in $942,854,000 joint repurchase agreement
dated January 31, 1996 with Morgan Stanley & Co. Inc.
due February 1, 1996 with respect to various
U.S. Treasury obligations -- maturity value
of $47,280,682 for an effective yield of 5.85% 47,280,682
------------------
Total Short-Term Investments (cost $178,480,607) 178,480,607
- ------------------------------------------------------------------------------------------------
Total Investments (cost $1,049,833,150)*** $1,343,883,926
- ------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,365,464,502.
+ Non-income-producing security.
*** The aggregate identified cost on a tax cost basis is $1,063,763,073 resulting in
gross unrealized appreciation and depreciation of $313,657,433 and $33,536,580, respectively,
or net unrealized appreciation of $280,120,853.
144A after the name of a security represents those securities exempt from registration under Rule
144A of the Securities Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
ADR after the name of a holding stands for American Depository Receipt, representing ownership
of foreign securities on deposit with a domestic custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
January 31, 1996 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,049,833,150) (Note 1) $1,343,883,926
- ---------------------------------------------------------------------------------------------------
Cash 424
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 78,057
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 19,898,187
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 75,051,436
- ---------------------------------------------------------------------------------------------------
Total assets 1,438,912,030
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 69,988,917
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,921,752
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 672,412
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,199
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,121
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 450,516
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 167,560
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 243,051
- ---------------------------------------------------------------------------------------------------
Total liabilities 73,447,528
- ---------------------------------------------------------------------------------------------------
Net assets $1,365,464,502
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in-capital (Note 4) 990,015,629
- ---------------------------------------------------------------------------------------------------
Accumulated net investment loss (Note 1) (3,666,909)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments
(Notes 1 and 3) 85,065,006
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 294,050,776
- ---------------------------------------------------------------------------------------------------
Total - Representing net assets applicable to
capital shares outstanding $1,365,464,502
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($1,041,172,390 divided by 71,115,989 shares) $14.64
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $14.64)* $15.53
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($309,314,112 divided by 21,625,270 shares)** $14.30
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($14,978,000 divided by 1,030,538 shares) $14.53
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $14.53)* $15.06
- ---------------------------------------------------------------------------------------------------
* 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.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended January 31, 1996 (Unaudited)
<S> <C>
Investment Income:
- ---------------------------------------------------------------------------------------------------
Dividends $ 637,168
- ---------------------------------------------------------------------------------------------------
Interest 2,409,201
- ---------------------------------------------------------------------------------------------------
Total investment income 3,046,369
Expenses:
- ---------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,549,740
- ---------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 762,732
- ---------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 14,605
- ---------------------------------------------------------------------------------------------------
Reports to shareholders 35,387
- ---------------------------------------------------------------------------------------------------
Auditing 48,600
- ---------------------------------------------------------------------------------------------------
Legal 8,668
- ---------------------------------------------------------------------------------------------------
Postage 61,789
- ---------------------------------------------------------------------------------------------------
Administrative services (Note 2) 13,654
- ---------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,095,528
- ---------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,133,195
- ---------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 28,717
- ---------------------------------------------------------------------------------------------------
Other 48,544
- ---------------------------------------------------------------------------------------------------
Total expenses 6,801,159
- ---------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (87,881)
- ---------------------------------------------------------------------------------------------------
Net expenses 6,713,278
- ---------------------------------------------------------------------------------------------------
Net investment loss (3,666,909)
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 151,326,156
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 11,863,691
- ---------------------------------------------------------------------------------------------------
Net gain on investments 163,189,847
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $159,522,938
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
January 31 July 31
1996* 1995
<S> <C> <C>
- --------------------------------------------------------------------------------------------------- -------------------
Increase in net assets
- --------------------------------------------------------------------------------------------------- -------------------
Operations:
- --------------------------------------------------------------------------------------------------- -------------------
Net investment loss $ (3,666,909) $ (4,550,825)
- --------------------------------------------------------------------------------------------------- -------------------
Net realized gain on investments 151,326,156 75,352,910
- --------------------------------------------------------------------------------------------------- -------------------
Net unrealized appreciation of investments 11,863,691 209,197,569
- --------------------------------------------------------------------------------------------------- -------------------
Net increase in net assets resulting from operations 159,522,938 279,999,654
- --------------------------------------------------------------------------------------------------- -------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------- -------------------
From net realized gain on investments:
Class A (100,534,840) (36,734,356)
- --------------------------------------------------------------------------------------------------- -------------------
Class B (28,176,086) (5,130,340)
- --------------------------------------------------------------------------------------------------- -------------------
Class M (1,163,622) (2,324)
- --------------------------------------------------------------------------------------------------- -------------------
Increase from capital share transactions (Note 4) 442,319,828 200,542,706
- --------------------------------------------------------------------------------------------------- -------------------
Total increase in net assets 471,968,218 438,675,340
- --------------------------------------------------------------------------------------------------- -------------------
Net assets
- --------------------------------------------------------------------------------------------------- -------------------
Beginning of period 893,496,284 454,820,944
- --------------------------------------------------------------------------------------------------- -------------------
End of period (including accumulated net investment
loss of $3,666,909 and $0, respectively) $1,365,464,502 $893,496,284
- --------------------------------------------------------------------------------------------------- -------------------
* Unaudited.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
(For a share outstanding throughout the period)
- -----------------------------------------------------------------------------------------------
For the Period
Six December 2, 1994 Six
months (commencement months
ended operations) to ended Year ended
January 31* July 31 January 31* July 31
- -----------------------------------------------------------------------------------------------
1996** 1995 1996** 1995
- -----------------------------------------------------------------------------------------------
Class M Class B
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $14.11 $11.10 $13.92 $10.06
- -----------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------
Net investment loss (.07) (.05) (.09) (.10)
- -----------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 2.20 3.92 2.18 4.82
- -----------------------------------------------------------------------------------------------
Total from investment operations 2.13 3.87 2.09 4.72
- -----------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------
From net realized gain on
investments (1.71) (.86) (1.71) (.86)
- -----------------------------------------------------------------------------------------------
Total distributions (1.71) (.86) (1.71) (.86)
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $14.53 $14.11 $14.30 $13.92
- -----------------------------------------------------------------------------------------------
Total investment return at
net asset value (%)(a) 15.55(b) 37.79(b) 15.48(b) 50.13
- -----------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $14,978 $3,111 $309,314 $160,197
- -----------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) (c) .80(b) 1.10(b) .92(b) 1.90
- -----------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.50)(b) (.66)(b) (.64)(b) (1.37)
- -----------------------------------------------------------------------------------------------
Portfolio turnover (%) 83.59(b) 116.10 83.59(b) 116.10
- -----------------------------------------------------------------------------------------------
<CAPTION>
Financial Highlights (Continued)
- -------------------------------------------------------------------------------------------
For the Period
July 15, 1993 Six
(commencement months
Year ended operations) to ended
July 31 July 31 July 31
- -------------------------------------------------------------------------------------------
1994 1993*** 1996** 1995
- -------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $10.70 $10.80 $14.17 $10.15
- -------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------
Net investment loss (.07) (.01) (.04) (.07)
- -------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .63 (.09) 2.22 4.95
- -------------------------------------------------------------------------------------------
Total from investment operations .56 (.10) 2.18 4.88
- -------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------
From net realized gain on
investments (1.20) -- (1.71) (.86)
- -------------------------------------------------------------------------------------------
Total distributions (1.20) -- (1.71) (.86)
- -------------------------------------------------------------------------------------------
Net asset value, end of period $10.06 $10.70 $14.64 $14.17
- -------------------------------------------------------------------------------------------
Total investment return
net asset value (%)(a) 4.15 (.92)(b) 15.85(b) 51.32
- -------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $42,115 $455 $1,041,172 $730,188
- -------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) (c) 1.94 .09(b) .54(b) 1.14
- -------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (1.71) (.09)(b) (.26)(b) (.62)
- -------------------------------------------------------------------------------------------
Portfolio turnover (%) 76.66 108.20 83.59(b) 116.10
- -------------------------------------------------------------------------------------------
<CAPTION>
Financial Highlights (Continued)
- -------------------------------------------------------------------------------------------
Year ended July 31
- -------------------------------------------------------------------------------------------
1994 1993*** 1996** 1995
- -------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $10.72 $9.05 $8.35 $8.20
- -------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------
Net investment loss (.06) (.06) (.04) (.01)
- -------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .69 2.87 .83 .46
- -------------------------------------------------------------------------------------------
Total from investment operations .63 2.81 .79 .45
- -------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------
From net realized gain on
investments (1.20) (1.14) (.09) (.30)
- -------------------------------------------------------------------------------------------
Total distributions (1.20) (1.14) (.09) (.30)
- -------------------------------------------------------------------------------------------
Net asset value, end of period $10.15 $10.72 $9.05 $8.35
- -------------------------------------------------------------------------------------------
Total investment return at
net asset value (%)(a) 4.83 32.93 9.53 6.40
- -------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $412,706 $364,400 $267,338 $234,055
- -------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) (c) 1.16 1.26 1.39 1.48
- -------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.97) (.90) (.59) (.46)
- -------------------------------------------------------------------------------------------
Portfolio turnover (%) 76.66 108.20 66.75 54.06
- -------------------------------------------------------------------------------------------
* Unaudited
** Per share net investment income for the period ended January 31, 1996 for class A, class B
and class M has been determined on the basis of the weighted average number of shares
outstanding during the period.
*** Per share net investment income for the period ended July 31, 1993 for class B
has been determined on the basis of the weighted average number of shares
outstanding during the period.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of
sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the period ended January 31, 1996 include
amounts paid through brokerage service and expense offset arrangements. Prior period ratios
exclude these amounts. (Note 2).
</TABLE>
Notes to financial statements
January 31, 1996 (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 primarily through investments in common
stocks of small to medium-sized emerging growth companies traded in the
over-the-counter (OTC) market.
The fund offers class A, class B, class M and class Y shares. Class A
shares are sold with a maximum front-end sales charge of 5.75%. Class B
shares, which convert to class A shares after eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and may subject to a contingent deferred sales charge,
if those shares are redeemed within approximately six years of purchase.
Class M shares are sold with a maximum front-end sales charge of 3.50%
and pay an ongoing distribution fee that is higher than class A shares
but lower than class B shares. The fund began offering class Y shares on
December 1, 1995. No class Y shares were outstanding on January 31,
1996.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported--as in the
case of some securities traded over-the-counter -- the last reported bid
price. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost which approximates market value, and
other investments are stated at fair value following procedures approved
by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account, along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc. ("Putnam Management") 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 102% of the resale price, including accrued
interest. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to
102% of 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) 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 on securities held and for excise tax on income and capital
gains.
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid semiannually. 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.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, 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 under
current law, 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 Putnam Management on the fund's portfolio transactions.
The fund reimburses Putnam Management 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 wholly owned subsidiary of Putnam
Investments, Inc.. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the six months ended January 31, 1996, fund expenses were reduced by
$87,881 under expense offset arrangements with PFTC and brokerage
service arrangements. Investor servicing and custodian fees reported in
the Statement of operations exclude these credits. The fund could have
invested the assets utilized in connection with the expense offset
arrangements in an income producing asset if it had not entered into
such arrangements.
Trustees of the fund receive an annual Trustees fee of $2,510 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in the fund or in other Putnam funds until distribution
in accordance with the Plan.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments, Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%,
1.00% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of 0.25%, 1.00% and 0.75% of the average
net assets attributable to class A, class B and class M shares
respectively.
For the six months ended January 31, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $637,233 and $17,852
from the sale of class A and class M shares, respectively and received
$121,321 in contingent deferred sales charges from redemptions of class
B shares. A deferred sales charge of up to 1% is assessed on certain
redemptions of class A shares. For the six months ended January 31,
1996, Putnam Mutual Funds Corp., acting as underwriter received $4,369
on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended January 31, 1996, purchases and sales of
investment securities other than short-term investments aggregated
$1,030,104,622 and $869,424,668 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.
Note 4
Capital shares
At January 31, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended
January 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 62,612,979 $937,761,820
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,674,221 94,039,713
- ----------------------------------------------------
69,287,200 1,031,801,533
Shares
repurchased (49,698,522) (748,337,400)
- ----------------------------------------------------
Net increase 19,588,678 $283,464,133
- ----------------------------------------------------
Year ended
July 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 62,802,583 $720,693,980
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,374,263 34,451,229
- ----------------------------------------------------
66,176,846 755,145,209
Shares
repurchased (55,314,256) (640,833,768)
- ----------------------------------------------------
Net increase 10,862,590 $114,311,441
- ----------------------------------------------------
Six months ended
January 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 13,893,010 $204,475,651
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,859,792 25,608,936
- ----------------------------------------------------
15,752,802 230,084,587
Shares
repurchased (5,638,916) (83,357,272)
- ----------------------------------------------------
Net increase 10,113,886 $146,727,315
- ----------------------------------------------------
Year ended
July 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 12,005,769 $137,390,437
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 470,958 4,757,351
- ----------------------------------------------------
12,476,727 142,147,788
Shares
repurchased (5,152,541) (58,329,878)
- ----------------------------------------------------
Net increase 7,324,186 $83,817,910
- ----------------------------------------------------
Six months ended
January 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 1,110,186 $16,609,547
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 80,826 1,155,720
- ----------------------------------------------------
1,191,012 17,765,267
Shares
repurchased (380,919) (5,636,887)
- ----------------------------------------------------
Net increase 810,093 $12,128,380
- ----------------------------------------------------
For the period
December 2, 1994
(commencement of
operations) to July 31, 1995
- ------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------
Shares sold 440,064 $5,188,635
- ------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 228 2,324
- ------------------------------------------------------
440,292 5,190,959
Shares
repurchased (219,847) (2,777,604)
- ------------------------------------------------------
Net increase 220,445 $2,413,355
- ------------------------------------------------------
Our commitment to quality service
*CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal
for the past six years. In 1995, over 146,000 tests of 56 shareholder
service components demonstrated that Putnam outperformed the industry
standard in every category.
*HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month
from a Putnam money market fund or from your checking or savings
account.*
*SWITCH FUNDS EASILY
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
*ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at
the then-current net asset value, which may be more or less than the
original cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a
helpful Putnam representative.
To make an additional investment in this or any other Putnam fund,
contact your financial advisor or call our toll-free number: 1-800-225-
1581.
* Regular investing of course, does not guarantee a profit or
protect against a loss in a declining market.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Daniel L. Miller
Vice President
James L. Callinan
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. 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, and the most recent copy of Putnam's Quarterly Performance
Summary. For more information, or to request a prospectus, call toll
free: 1-800-225-1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution, are not insured by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
or any other agency, and involve risk, including the possible loss of
principal amount invested.
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The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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