Putnam
OTC
Emerging
Growth Fund
ANNUAL REPORT
July 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar, an independent rating agency, awarded Putnam OTC Emerging
Growth Fund its highest rating of five stars for 3-year risk-adjusted
performance as of July 31, 1996. This put the fund among 10% of all
1,607 equity funds rated.*
* As of July 31, 1996, the fund's class A shares ranked in the top 9%
(8 out of 91) of small-company growth funds tracked by Lipper
Analytical Services for 5-year performance.+
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
21 Financial statements
* Morningstar rates funds in relation to other funds with similar
investment objectives, based on the fund's 3-, 5-, and 10-year average
annual returns, adjusted for risk factors and sales charges. The five-
star rating for the 5-year period ended 7/31/96 puts the fund among 10%
of all 1,007 equity funds rated. The four-star rating for the 10-year
period ended 7/31/96 puts the fund among 22.5% of all 541 equity funds
rated. For the one-year period the fund received 3 stars and was rated
among 2882 equity funds. Ratings are updated monthly. Past performance
is not indicative of future results. Performance for other share classes
will vary.
+Lipper is an industry research firm whose 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 71 out of 338 (top 21%)
and 4 out of 43 (top 10%) small-company growth funds for 1- and 10-year
performance, respectively, as of 7/31/96 Class B shares ranked 79 out of
338 (top 24%) for one-year performance. Performance for other share
class will vary. Past performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
When the stock market is on the rise, small-company growth stocks are
often in the forefront. When the market slows, these stocks tend to cool
more rapidly. That, in a nutshell, describes Putnam OTC Emerging Growth
Fund's extraordinary results for fiscal 1995 and its more subdued -- but
still strong -- results for the fiscal year ended July 31, 1996.
During its most recent fiscal year, your fund remained competitive
within its universe, as the accolades on the facing page reveal. Its
performance over the long term demonstrates its ability to compete
strongly within the entire equity fund universe, as shown by the data on
pages 9-10.
Your fund's new management team moved seamlessly into place during the
second half of fiscal '96. Steven Kirson and Michael Mufson bring to the
assignment their talent and experience as analysts in the equity
research group. Steve has seven years of investment experience, all with
Putnam. Mike joined Putnam in 1993 from Stein Roe & Farnham, where he
was a portfolio manager and analyst. He has eight years of investment
experience. Their inaugural report follows.
Respectfully yours,
/S/ George Putnam
George Putnam
Chairman of the Trustees
September 18, 1996
Report from the Fund Managers
Michael J. Mufson
Steven L. Kirson
The equity market's sharp declines and subsequent rebounds this summer
have been striking. But they should not overshadow the remarkable
resiliency of stocks over the past five years. For half a decade,
equities have been moving relentlessly upward, with only the occasional
setback. Investors should understand that recent market volatility is
more in keeping with historical norms.
Consequently, it is reassuring to note that despite the summer's abrupt
market fluctuations Putnam OTC Emerging Growth Fund enjoyed a successful
annual period. For the 12 months through July 31, 1996, the fund's class
A shares gained 17.12% at net asset value, and 10.41% at the maximum
public offering price. For class B and class M share performance, please
turn to page 9. Your fund substantially outpaced the Russell 2000 Index,
a measure of smaller-stock performance, which rose 6.91% over the same
period.
* HOST OF EXPLANATIONS FOR MARKET SHIFTS
A number of explanations have been offered for this summer's sudden
market selloffs. Inflation fears, concerns over corporate earnings,
overvalued stocks, and rising bond yields were all blamed for taking the
Russell 2000 down nearly 13% from its year-to-date high. These factors
may indeed have contributed to the declines. Earlier in 1996, a low-
inflation environment coupled with strong corporate earnings and
relatively low bond yields, had helped to fuel the dramatic upswing in
stock prices. Once these favorable conditions were perceived as having
given way, a correction was certainly to be expected.
Whatever the causes, we believe that July's correction was not entirely
destructive. Some stocks trading at unjustifiable valuations were
deflated, as was excessive speculative fervor, each unsustainable over
the long term. We believe the currently prevailing investing
environment, dominated by a gently slowing economy and mild inflation,
will allow strong, innovative companies to thrive in the months ahead,
with potentially positive effects on stock prices.
* TECHNOLOGY STOCKS LEAD ADVANCES, THEN PACE DECLINES
Earlier in your fund's fiscal year, investor demand for technology
stocks was seemingly boundless. Earnings were robust and corporate
innovation widespread. In retrospect, the unbroken upward moves of stock
prices now appear untenable; the market was poised for a fall. When
several bellwether technology companies released poor earnings reports
in July, investors sold shares. As other, more profitable companies
reported stronger earnings, investor concerns were assuaged somewhat and
the market was able to recoup much of its lost ground.
All this activity has injected a note of what we consider healthy
skepticism into the market for technology shares. Accordingly we remain
positive about several areas within the sector, which as of this report
accounts for nearly 30% of the fund's assets. We are particularly upbeat
about the prospects for software companies. Some of the fund's holdings
include PeopleSoft, a human resource management software developer;
Vantive, a maker of customer service programs; and Baan, whose software
runs client/server applications. While these securities, along with
others discussed in this report, were viewed favorably at the end of the
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.
[GRAPHIC OMITTED: Horizontal bar chart TOP INDUSTRY SECTORS*]
Computer software 17.5%
Business services 11.2%
Telecommunications
equipment 6.8%
Computer services 6.3%
Medical supplies and
devices 5.8%
Footnote reads:
*Based on net assets as of 7/31/96. Sector allocations will vary over
time.
Elsewhere within technology, we have focused on companies involved in
wide area networking systems, which facilitate communications between
computers. Your fund's holdings include such rapidly growing networking
companies as Shiva, Cascade, Ascend, Cisco, and Premisys. Currently, we
believe the growth potential for networking companies is strong and
stock valuations look reasonable, considering 1997 and 1998 earnings
forecasts.
* SELECTED HEALTH-CARE HOLDINGS CONTINUE TO EXHIBIT STRONG GROWTH
As of the end of the fiscal year, nearly 20% of your fund's holdings
were in the health-care sector. One area of focus is on companies that
are consolidating physicians' practices in search of economies of scale.
Among such concerns in the portfolio are Phycor, Orthodontic Centers of
America, Physician Reliance Network, and Phymatrix. Your fund also owns
shares of companies that supply doctors and hospitals with billing and
medical information databases, including HBO & Co. and HCIA Inc. These
companies allow health-care providers to trim costs, essential in
today's budget-conscious environment.
Many medical device manufacturers are also experiencing strong earnings
growth. Thermo Cardiosystems Inc. makes a device that supports the heart
ventricles; Target Therapeutics sells devices for minimally invasive
procedures; Neuromedical Systems develops technology for early cancer
detection. Finally, within the health-care sector, the fund owns shares
of companies that support ill outpatients, including Renal Treatment
Centers for kidney patients and National Surgery Centers for surgical
procedures.
* DEREGULATION BOOSTS RADIO, TELECOMMUNICATIONS SHARES
Earlier in 1996, Congress approved a bill substantially deregulating the
communications industry. Among the major beneficiaries are radio
broadcasting companies, which can now own multiple stations within
single markets and thus more easily set advertising rates. Several major
buyouts of station operators have occurred since passage of the
legislation. Your fund owns stocks of such radio companies as Emmis
Broadcasting, Clear Channel Communications, and SFX Broadcasting.
Telecommunications companies also enjoyed a boost from the legislation.
Local telephone service in particular became instantly more competitive
as the hold of regional Bell operating companies was relaxed. The
current situation may be compared to the increased competition in the
long-distance market in the 1980s, when companies such as MCI and Sprint
took market share from AT&T. Your fund owns shares of local telephone
companies such as MFS Communications, McLeod, Intermedia, and Brooks
Fiber Properties.
[GRAPHIC OMITTED: TOP 10 HOLDINGS (7/31/96)*]
Cascade Communications Corp.
Networking equipment
Shiva Corp.
Networking equipment
Concord EFS, Inc.
Business services
Pairgain Technologies, Inc.
Telecommunication equipment
PeopleSoft, Inc.
Computer software
First Data Corp.
Computer services
Bed Bath & Beyond, Inc.
Retail
Citrix Systems, Inc.
Computer software
HFS, Inc.
Lodging
Tellabs, Inc.
Telecommunication equipment
Footnote reads:
These holdings represent 15.6% of the fund's assets as of 7/31/96.
Portfolio holdings will vary over time.
Elsewhere in its portfolio, the fund owns shares of credit card
processing companies such as First USA, First Data Corp., and Concord
EFS. It also owns shares of such specialty retail companies as Bed Bath
& Beyond, luxury-goods purveyor Gucci, Rainforest Cafe, and two quality
restaurant chains, Landry's and Apple South. Finally, your fund owns
shares of several office-supply companies, including Corporate Express,
BT Office, and Viking Office Products.
* LONG-TERM OUTLOOK FOR SMALLER COMPANIES APPEARS POSITIVE
We believe the current economic environment is conducive to growth,
particularly for stocks of smaller companies. A gently slowing economy
may help to ease inflationary pressures and thus allow interest rates to
remain stable. Meanwhile many of the companies in which your fund
invests continue to develop and sell innovative goods and services --
products that have become essential to the American economy. Ultimately,
day-to-day volatility means far less than the ability of such companies
to maintain their current pace of innovation.
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 7/31/96, there is no guarantee the fund will
continue to hold these securities in the future. This fund invests all
or a portion of its assets in small to medium-sized companies. Such
investments increase the risk of greater price fluctuations.
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 in small- and
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 7/31/96
Class A Class B Class M
(inception date) (11/1/82) (7/15/93) (12/2/94)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 17.12% 10.41% 16.37% 11.37% 16.58% 12.51%
- -----------------------------------------------------------------------
5 years 170.49 154.92 -- -- -- --
Annual average 22.02 20.58 -- -- -- --
- -----------------------------------------------------------------------
10 years 363.72 337.07 -- -- -- --
Annual average 16.58 15.89 -- -- -- --
- -----------------------------------------------------------------------
Life of class -- -- 80.27 78.27 60.63 55.05
Annual average -- -- 21.31 20.87 33.04 30.24
- -----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/96
Russell 2000 Standard & Poor's
Index 500 Index
- -----------------------------------------------------------------------
1 year 6.91% 16.47%
- -----------------------------------------------------------------------
5 years 97.58 89.22
Annual average 14.58 13.60
- -----------------------------------------------------------------------
10 years 171.48 268.20
Annual average 10.50 13.92
- -----------------------------------------------------------------------
Life of class B 39.24 53.57
Annual average 11.49 15.10
- -----------------------------------------------------------------------
Life of class M 33.63 47.21
Annual average 19.06 26.23
- -----------------------------------------------------------------------
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 net asset
value will fluctuate so that an investor's shares, when sold, may be
worth more or less than their original cost. POP assumes 5.75% maximum
sales charge for class A shares and 3.50% for class M shares. CDSC for
class B shares assumes the applicable sales charge, with the maximum
being 5%.
[GRAPHIC OF WORM CHART OMITTED: GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 7/31/86
Starting value (Insert ending Total)
$9,525 or 9,425 Fund's class A shares at POP $43,707
$10,000 Index $36,820
$10,000 Consumer Price Index $14,338
(plot points for 10-year total return mountain chart)
Date/year Fund at POP Index CPI
7/31/86 9,425 10,000 10,000
7/31/87 12,407 13,936 10,393
7/31/88 11,195 12,304 10,822
7/31/89 14,145 16,216 11,361
7/31/90 15,186 17,251 11,909
7/31/91 16,159 19,458 12,438
7/31/92 17,698 21,941 12,831
7/31/93 23,527 23,848 13,187
7/31/94 24,662 25,085 13,553
7/31/95 37,320 31,614 13,927
7/31/96 43,707 36,820 14,338
Footnote reads:
Past performance is no assurance of future results. A $10,000
investment in the fund's class B shares at inception on 7/15/93
would have been valued at $18,027 on 7/31/96 ($17,827 with a
redemption at the end of the period). A $10,000 investment in
the fund's class M shares at inception on 12/2/94 would have
been valued at $16,063 at net asset value on 7/31/96, $15,505
at public offering price.
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (11/1/82) (7/15/93) (12/2/94)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 55.13% 46.21% 54.20% 49.20% 54.31% 48.86%
- -----------------------------------------------------------------------
5 years 236.85 217.58 -- -- -- --
Annual average 27.49 26.00 -- -- -- --
- -----------------------------------------------------------------------
10 years 384.96 357.02 -- -- -- --
Annual average 17.10 16.41 -- -- -- --
- -----------------------------------------------------------------------
Life of class -- -- 112.79 109.79 89.56 82.97
Annual average -- -- 29.06 28.44 49.90 46.58
- -----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns
and net asset value will fluctuate so that an investor's shares, when
sold, may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 7/31/96
Class A Class B Class M
- -----------------------------------------------------------------------
Distributions (number) 1 1 1
- -----------------------------------------------------------------------
Capital gains
- -----------------------------------------------------------------------
Long-term $ 1.663 $ 1.663 $ 1.663
- -----------------------------------------------------------------------
Short-term 0.046 0.046 0.046
- -----------------------------------------------------------------------
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
- -----------------------------------------------------------------------
7/31/96 14.80 15.70 14.41 14.66 15.19
- -----------------------------------------------------------------------
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
Russell 2000 Index* is an unmanaged list of common stocks that is
frequently used as a general measure of stock market performance.
Standard & Poor's 500 Price Index* is an unmanaged list of common stocks
that is frequently used as a general measure of stock market performance.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and
interest payments and do not take into account brokerage fees or taxes.
Securities in the fund do not match those in the indexes and performance
of the fund will differ. It is not possible to invest directly in an
index.
Report of independent accountants
For the fiscal year ended July 31, 1996
To the Trustees and Shareholders of
Putnam OTC Emerging Growth Fund
We have audited the accompanying statement of assets and liabilities of
Putnam OTC Emerging Growth Fund, including the portfolio of investments
owned, as of July 31, 1996, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the fund's management.
Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of July 31, 1996, by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam OTC Emerging Growth Fund as of July 31,
1996, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended and
the financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 12, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
July 31, 1996
<S> <C> <C> <C>
Common Stocks (93.5%) *
NUMBER OF SHARES VALUE
Advertising (0.7%)
- ------------------------------------------------------------------------------------------------------------------
230,000 CKS Group, Inc. + $ 6,152,500
191,850 Outdoor Systems, Inc. + 5,251,880
168,500 Universal Outdoor Holdings, Inc. + 3,538,500
--------------
14,942,880
Broadcasting (2.9%)
- ------------------------------------------------------------------------------------------------------------------
328,300 American Radio Systems Corp. + 12,475,400
238,250 Clear Channel Communications, Inc. + 18,970,656
330,700 Emmis Broadcasting Corp. Class A + 13,724,050
241,783 Infinity Broadcasting Corp. Class A + 6,649,033
200,000 SFX Broadcasting, Inc. Class A + 8,075,000
214,700 Westwood One, Inc. + 3,005,800
--------------
62,899,939
Building Products (0.3%)
- ------------------------------------------------------------------------------------------------------------------
250,000 Barnett, Inc. + 5,812,500
Business Services (11.2%)
- ------------------------------------------------------------------------------------------------------------------
373,900 Affiliated Computer Services, Inc. Class A + 20,564,500
444,000 Alternative Resources Corp. + 12,765,000
533,700 Apollo Group, Inc. Class A + 14,676,750
452,400 BT Office Products International, Inc. + 5,711,550
1,464,550 Concord EFS, Inc. + 37,346,025
45,800 Corestaff, Inc. + 1,843,450
313,761 Corporate Express, Inc. + 11,726,817
331,500 First USA Paymentech, Inc. + 13,550,063
280,000 Global DirectMail Corp. + 11,410,000
336,000 Interim Services, Inc. + 12,432,000
120,350 Labor Ready, Inc. + 3,700,763
115,000 National Data Corp. 4,571,250
126,750 NOVA Corp. + 3,945,094
250,296 Paychex, Inc. 11,451,042
700,950 PMT Services, Inc. + 19,451,363
174,500 Primark Corp. + 4,711,500
661,200 Robert Half International, Inc. + 18,678,900
397,700 Romac International, Inc. + 10,240,775
150,900 Strayer Education, Inc. + 1,641,038
30,000 Teletech Holdings, Inc. + 435,000
307,900 The Registry, Inc. + 8,313,300
394,800 Viking Office Products, Inc. + 11,646,600
171,400 Vincam Group, Inc. + 4,113,600
--------------
244,926,380
Computer Services (6.3%)
- ------------------------------------------------------------------------------------------------------------------
300,300 America Online, Inc. + 9,159,150
872,800 Cambridge Technology Partners, Inc. + 22,911,000
501,600 CBT Group PLC ADR (Ireland) + 21,945,000
86,000 Claremont Technology Group, Inc. + 1,451,250
206,700 CMG Information Services, Inc. + 3,307,200
345,000 Computer Horizons Corp. + 6,986,250
522,500 Computer Management Sciences + 10,058,125
451,500 First Data Corp. 35,047,688
94,600 Integrated Systems Consulting Group, Inc. + 1,395,350
348,700 Renaissance Solutions, Inc. + 10,068,713
98,500 Sterling Commerce, Inc. + 3,115,063
446,400 Transaction Network Services, Inc. + 6,361,200
178,800 Whittman-Hart, Inc. + 5,274,600
--------------
137,080,589
Computer Software (17.5%)
- ------------------------------------------------------------------------------------------------------------------
241,900 Arbor Software Corp. + 9,192,200
300,000 Aspect Development, Inc. + 6,300,000
895,400 Baan Co., N.V. (Netherlands) + 26,638,150
750,715 Business Objects SA ADR (France) + 14,451,264
189,500 CNET, Inc. + 2,463,500
814,600 Citrix Systems, Inc. + 30,751,150
242,450 Clarify, Inc. + 9,637,388
169,600 Comshare, Inc. + 2,946,800
250,800 Documentum, Inc. + 6,081,900
304,700 Edify Corp. + 6,551,050
120,000 Electronic Arts, Inc. + 3,600,000
250,000 Electronics for Imaging, Inc. + 14,562,500
426,300 Forte Software, Inc. + 13,748,175
233,400 Gensym Corp. + 4,726,350
300,201 GT Interactive Software Corp. + 5,816,394
379,300 I2 Technologies, Inc. + 9,482,500
393,700 Imnet Systems, Inc. + 10,236,200
147,900 Inso Corp. + 6,359,700
250,000 Legato Systems, Inc. + 8,187,500
15,700 Lycos, Inc. + 93,219
303,500 McAfee Associates, Inc. + 15,250,875
312,600 Netscape Communications Corp. + 12,347,700
403,100 Objective Systems Integrators, Inc. + 7,860,450
642,600 Onewave, Inc. + 9,639,000
524,600 PeopleSoft, Inc. + 35,443,288
35,100 Planning Sciences International PLC ADR (United Kingdom) + 447,525
175,500 Project Software & Development, Inc. + 5,177,250
350,000 Raptor Systems, Inc. + 6,606,250
394,950 Rational Software Corp. + 17,525,906
40,000 Red Brick Systems, Inc. + 1,010,000
298,100 Remedy Corp. + 14,383,325
100,000 Sapient Corp. + 3,900,000
278,600 Security Dynamics Technologies, Inc. + 16,994,600
63,100 Siebel Systems, Inc. + 1,877,225
290,100 Softkey International, Inc. + 5,366,850
149,900 Transaction Systems Architects, Inc. Class A + 4,721,850
148,250 Unison Software, Inc. + 2,594,375
219,500 Vantive Corp. + 9,493,375
261,500 Viasoft, Inc. + 9,937,000
642,300 Workgroup Technology Corp. + 8,992,200
--------------
381,394,984
Electric Utilities (0.5%)
- ------------------------------------------------------------------------------------------------------------------
431,800 Calenergy, Inc. + 11,334,750
Environmental Control (0.6%)
- ------------------------------------------------------------------------------------------------------------------
375,000 American Disposal Services + 3,656,250
350,000 Memtec Ltd. ADR (Australia) 10,412,500
--------------
14,068,750
Financial Services (4.2%)
- ------------------------------------------------------------------------------------------------------------------
367,700 Aames Financial Corp. 14,432,225
347,800 Advanta Corp. Class A 16,520,500
310,000 Amerin Corp. + 6,897,500
460,200 Financial Federal Corp. + 5,982,600
109,400 First USA, Inc. 5,346,925
50,000 Insignia Financial Group International, Inc. Class A + 1,012,500
630,500 MBNA Corp. 17,575,188
388,500 Olympic Financial Ltd. + 6,216,000
215,000 Schwab (Charles) Corp. 5,186,875
370,785 TCF Financial Corp. 12,792,083
--------------
91,962,396
Funeral/Cemetery Services (0.8%)
- ------------------------------------------------------------------------------------------------------------------
78,700 Equity Corporation International + 2,233,113
436,800 Loewen Group, Inc. 11,711,700
154,000 Stewart Enterprises, Inc. Class A 4,081,000
--------------
18,025,813
Health Care Information Systems (2.8%)
- ------------------------------------------------------------------------------------------------------------------
247,650 ABR Information Services, Inc. + 12,568,238
67,900 Enterprise Systems, Inc. + 1,374,975
303,200 HBO & Co. 18,571,000
114,700 HCIA, Inc. + 6,566,575
103,700 Mecon, Inc. + 1,581,425
156,000 Medic Computer Systems, Inc. + 6,240,000
252,400 Shared Medical Systems Corp. 13,882,000
--------------
60,784,213
Health Care and HMOs (5.4%)
- ------------------------------------------------------------------------------------------------------------------
175,000 Access Health, Inc. + 7,393,750
336,000 Compdent Corp. + 12,600,000
338,500 Emcare Holdings, Inc. + 7,193,125
988,100 Health Management Assoc., Inc. + 19,885,513
429,900 Lincare Holdings, Inc. + 16,766,100
149,359 Oxford Health Plans, Inc. + 5,152,886
463,200 Renal Treatment Centers, Inc. + 12,969,600
690,800 Rotech Medical Corp. + 12,089,000
106,300 Total Renal Care Holdings, Inc. + 3,800,225
220,000 United Dental Care, Inc. + 7,562,500
448,950 Vivra, Inc. + 13,075,669
--------------
118,488,368
Hospital Management (0.5%)
- ------------------------------------------------------------------------------------------------------------------
399,000 National Surgery Centers, Inc. + 10,224,375
21,700 Owen Healthcare, Inc. + 284,813
--------------
10,509,188
Lodging (2.9%)
- ------------------------------------------------------------------------------------------------------------------
150,000 Doubletree Corp. + 4,912,500
434,754 Extended Stay America, Inc. + 6,521,310
461,000 HFS, Inc. + 27,660,000
534,800 Prime Hospitality Corp. + 9,492,700
150,000 Promus Hotel Corp. + 4,087,500
370,600 Renaissance Hotel Group N.V. (Hong Kong) + 7,736,275
121,200 Studio Plus Hotels, Inc. + 2,393,700
--------------
62,803,985
Medical Management Services (3.8%)
- ------------------------------------------------------------------------------------------------------------------
180,000 American Medical Response + 5,962,500
100,300 OccuSystems, Inc. + 2,858,550
675,700 Orthodontic Centers of America, Inc. + 20,862,238
306,050 Pediatrix Medical Group, Inc. + 12,318,513
404,700 Phycor, Inc. + 12,444,525
638,000 Phymatrix, Inc. + 13,796,750
931,400 Physician Reliance Network, Inc. + 12,573,900
95,900 Physicians Resource Group, Inc. + 1,918,000
--------------
82,734,976
Medical Supplies and Devices (5.8%)
- ------------------------------------------------------------------------------------------------------------------
364,650 American HomePatient, Inc. + 8,842,763
285,900 Arthrocare Corp. + 4,574,400
650,000 Endosonics Corp. + 8,125,000
216,100 Exogen, Inc. + 1,323,613
280,000 I-Stat Corp. + 3,640,000
400,000 IDEXX Laboratories, Inc. + 15,500,000
270,000 Lifecore Biomedical, Inc. + 4,387,500
245,500 NCS HealthCare, Inc. Class A + 6,567,125
318,100 Neuromedical Systems, Inc. + 4,572,688
381,000 Omnicare, Inc. 8,905,875
342,200 Orthologic Corp. + 2,994,250
193,900 Perclose, Inc. + 3,829,525
485,500 Sabratek Corp. + 4,066,063
450,000 Spine-Tech, Inc. + 11,531,250
565,800 Target Therapeutics, Inc. + 17,964,150
150,000 Thermo Cardiosystems, Inc. + 4,800,000
447,600 Trex Medical Corp. + 9,119,850
515,800 Uromed Corp. + 6,576,450
--------------
127,320,502
Networking Equipment (4.9%)
- ------------------------------------------------------------------------------------------------------------------
360,000 Ascend Communications, Inc. + 17,460,000
650,500 Cascade Communications Corp. + 40,005,750
225,000 Cisco Systems, Inc. + 11,643,750
738,700 Shiva Corp. + 38,227,725
--------------
107,337,225
Nursing Homes (0.8%)
- ------------------------------------------------------------------------------------------------------------------
52,200 Assisted Living Concepts, Inc. + 978,750
412,500 Genesis Health Ventures, Inc. + 10,364,063
248,000 Health Care & Retirement Corp. + 5,890,000
--------------
17,232,813
Pharmaceuticals and Biotechnology (1.1%)
- ------------------------------------------------------------------------------------------------------------------
825,000 Bio-Vascular, Inc. + 5,156,250
200,000 CytoTherapeutics, Inc. + 1,600,000
235,000 Gilead Sciences, Inc. + 4,465,000
149,400 La Jolla Pharmaceutical Co. + 690,975
173,600 Martek Biosciences Corp. + 4,361,700
210,000 Neurogen Corp. + 3,727,500
82,200 Parexel International Corp. + 3,329,100
--------------
23,330,525
Publishing (0.1%)
- ------------------------------------------------------------------------------------------------------------------
180,700 Mecklermedia Corp. + 3,026,725
Recreation and Gaming (0.5%)
- ------------------------------------------------------------------------------------------------------------------
40,000 Anchor Gaming + 2,340,000
379,100 Family Golf Centers, Inc. + 8,624,525
72,000 Silicon Gaming + 756,000
--------------
11,720,525
Restaurants (2.0%)
- ------------------------------------------------------------------------------------------------------------------
442,800 Apple South, Inc. 9,022,050
250,000 Landry's Seafood Restaurants, Inc. + 5,562,500
100,000 Lone Star Steakhouse & Saloon + 3,125,000
95,100 Outback Steakhouse, Inc. + 2,448,825
221,400 Papa Johns International, Inc. + 9,520,200
164,400 Rainforest Cafe, Inc. + 4,274,400
367,600 Starbucks Corp. + 9,557,600
--------------
43,510,575
Retail (2.5%)
- ------------------------------------------------------------------------------------------------------------------
1,527,700 Bed Bath & Beyond, Inc. + 33,609,400
284,400 Cost Plus, Inc. + 6,399,000
217,400 Party City Corp. + 4,456,700
437,100 Petco Animal Supplies, Inc. + 9,725,475
--------------
54,190,575
Specialty Consumer Products (3.2%)
- ------------------------------------------------------------------------------------------------------------------
398,900 Blyth Industries, Inc. + 18,000,363
189,300 Central Garden and Pet Co. + 3,975,300
379,200 Gucci Group N.V. (Italy) 21,519,600
505,500 Nautica Enterprises, Inc. + 13,901,250
300,000 St. John Knits, Inc. 11,850,000
--------------
69,246,513
Telecommunication Equipment (6.8%)
- ------------------------------------------------------------------------------------------------------------------
233,200 Adtran, Inc. + 14,166,900
302,800 Boston Communications Group, Inc. + 4,239,200
125,000 Diana Corp. + 3,218,750
549,600 Glenayre Technologies, Inc. + 20,266,500
193,500 Natural Microsystems Corp. + 6,312,938
307,400 Octel Communications Corp. + 7,223,900
240,300 P-Com, Inc. + 5,767,200
640,000 Pairgain Technologies, Inc. + 35,520,000
229,600 Picturetel Corp. + 8,150,800
180,400 Premiere Technologies, Inc. + 3,968,800
150,000 Premisys Communications, Inc. + 4,537,500
450,000 Tellabs, Inc. + 26,887,500
335,900 Verilink Corp. + 8,733,400
--------------
148,993,388
Telephone Services (4.3%)
- ------------------------------------------------------------------------------------------------------------------
306,000 Brooks Fiber Properties, Inc. + 9,581,625
200,000 Intelcom Group, Inc. + 3,850,000
161,800 Intermedia Communications, Inc. + 4,085,450
392,400 IXC Communications, Inc. + 5,101,200
520,000 LCI International, Inc. + 15,730,000
277,650 McLeod, Inc. Class A + 7,010,663
729,300 MFS Communications, Inc. + 22,972,950
767,700 MIDCOM Communications, Inc. + 8,444,700
433,200 Tel-Save Holdings, Inc. + 10,396,800
245,900 U.S. Long Distance Corp. + 5,993,813
--------------
93,167,201
Wireless Communications (1.1%)
- ------------------------------------------------------------------------------------------------------------------
1,023,100 Paging Network, Inc. + $ 19,694,675
227,700 Wireless One, Inc. + 3,529,350
--------------
23,224,025
--------------
Total Common Stocks (cost $1,937,814,271) $ 2,040,070,303
Short-Term Investments (6.3%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
$20,000,000 Federal Home Loan Mortgage Corp. effective yield of 5.21%, 8/12/96 $19,968,161
20,000,000 Federal National Mortgage Association effective yield of 5.22%, 8/29/96 19,918,800
20,000,000 Fleet Financial Group effective yield of 5.32%, 8/1/96 20,000,000
30,000,000 Morgan (J.P.) & Co., Inc. effective yield of 5.32%, 9/4/96 29,849,267
48,558,000 Interest in $ 500,000,000 joint repurchase agreement dated July 31, 1996 with
Lehman Brothers Inc. due August 1, 1996 with respect to various U.S. Treasury
obligations - maturity value of $48,565,621 for an effective yield of 5.65%. 48,565,621
--------------
Total Short-Term Investments (cost $138,301,849) 138,301,849
- ------------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,076,116,120) *** $2,178,372,152
- ------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $2,181,927,702.
*** The aggregate identified cost on a tax basis is $2,083,518,550, resulting in gross unrealized appreciation and
depreciation of $330,138,521 and $235,284,919, respectively, or net unrealized appreciation of $94,853,602.
+ Non-income-producing security.
ADR after the name of a foreign 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
July 31, 1996
<S> <C>
Assets
Investments in securities, at value (identified cost $2,076,116,120) (Note 1) $2,178,372,152
- ---------------------------------------------------------------------------------------------------------------------------------
Cash 35,646
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 43,602
- ---------------------------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 33,259,674
- ---------------------------------------------------------------------------------------------------------------------------------
Receivable for securities sold 20,320,414
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets 2,232,031,488
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for securities purchased 39,150,667
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 7,229,805
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,098,283
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 993,982
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,624
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,232
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 917,485
- ---------------------------------------------------------------------------------------------------------------------------------
Other accrued expenses 707,708
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 50,103,786
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets $2,181,927,702
Represented by
- ---------------------------------------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $1,892,152,832
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 187,518,838
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 102,256,032
- ---------------------------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $2,181,927,702
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share ($1,479,770,013 divided by 99,968,224 shares) $14.80
- ---------------------------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $14.80) * $15.70
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share ($641,576,444 divided by 44,529,994 shares) ** $14.41
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share ($60,431,731 divided by 4,121,915 shares) $14.66
- ---------------------------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.5 of $14.66) * $15.19
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share ($149,514 divided by 10,095 shares) $14.81
- ---------------------------------------------------------------------------------------------------------------------------------
* 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
Year ended July 31, 1996
<S> <C>
Investment Income:
- ---------------------------------------------------------------------------------------------------------------------------------
Interest $6,666,810
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends 1,563,801
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment income 8,230,611
Expenses:
- ---------------------------------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,295,548
- ---------------------------------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 3,065,384
- ---------------------------------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 39,110
- ---------------------------------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 26,971
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,831,994
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 3,735,530
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 175,911
- ---------------------------------------------------------------------------------------------------------------------------------
Reports to shareholders 108,575
- ---------------------------------------------------------------------------------------------------------------------------------
Registration fees 467,564
- ---------------------------------------------------------------------------------------------------------------------------------
Auditing 79,944
- ---------------------------------------------------------------------------------------------------------------------------------
Legal 31,824
- ---------------------------------------------------------------------------------------------------------------------------------
Postage 184,259
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 20,042,614
- ---------------------------------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (759,842)
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses 19,282,772
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment loss (11,052,161)
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 256,975,799
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments during the year (179,931,053)
- ---------------------------------------------------------------------------------------------------------------------------------
Net gain on investments 77,044,746
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $65,992,585
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended July 31
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ------------------------------------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss $(11,052,161) $(4,550,825)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 256,975,799 75,352,910
- ------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (179,931,053) 209,197,569
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 65,992,585 279,999,654
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ------------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (100,559,484) (36,734,356)
- ------------------------------------------------------------------------------------------------------------------------------
Class B (28,189,713) (5,130,340)
- ------------------------------------------------------------------------------------------------------------------------------
Class M (1,163,623) (2,324)
- ------------------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 1,352,351,653 200,542,706
- ------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 1,288,431,418 438,675,340
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year 893,496,284 454,820,944
- ------------------------------------------------------------------------------------------------------------------------------
End of year $2,181,927,702 $893,496,284
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
(For a share outstanding throughout the period)
For the period For the period
July 12, 1996 December 2, 1994
(commencement Year (commencement
of operations) to ended of operations) to
July 31 July 31 July 31
-----------------------------------------------------------
1996 1996 1995
-----------------------------------------------------------
Class Y Class M
-----------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $15.65 $14.11 $11.10
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment loss -- (c) (.16)(c) (.05)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.84) 2.42 3.92
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.84) 2.26 3.87
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments -- (1.71) (.86)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions -- (1.71) (.86)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.81 $14.66 $14.11
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) (5.37)(d) 16.58 37.79 (d)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $150 $60,432 $3,111
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .07 (d) 1.68 1.10 (d)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average net assets (%) (.02)(d) (1.06) (.66)(d)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 199.52 199.52 116.10
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial Highlights (continued)
(For a share outstanding throughout the period)
Year ended July 31
-----------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------
Class B
-----------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $13.92 $10.06 $10.70
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment loss (.20)(c) (.10) (.07)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 2.40 4.82 .63
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.20 4.72 .56
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments (1.71) (.86) (1.20)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.71) (.86) (1.20)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.41 $13.92 $10.06
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 16.37 50.13 4.15
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $641,576 $160,197 $42,115
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.89 1.90 1.94
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average net assets (%) (1.29) (1.37) (1.71)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 199.52 116.10 76.66
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial Highlights (continued)
(For a share outstanding throughout the period)
For the period
July 15, 1993
(commencement
of operations) to
July 31 Year ended July 31
-----------------------------------------------------------
1993 1996 1995
-----------------------------------------------------------
Class B
-----------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.80 $14.17 $10.15
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment loss (.01)(c) (.08)(c) (.07)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.09) 2.42 4.95
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.10) 2.34 4.88
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments -- (1.71) (.86)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions -- (1.71) (.86)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.70 $14.80 $14.17
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) (.92)(d) 17.12 51.32
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $455 $1,479,770 $730,188
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .09 (d) 1.11 1.14
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average net assets (%) (.09)(d) (.53) (.62)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 108.20 199.52 116.10
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial Highlights (continued)
(For a share outstanding throughout the period)
Year ended July 31
-----------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------
Class A
-----------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.72 $9.05 $8.35
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment loss (.06) (.06) (.04)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .69 2.87 .83
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .63 2.81 .79
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments (1.20) (1.14) (.09)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.20) (1.14) (.09)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.15 $10.72 $9.05
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 4.83 32.93 9.53
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $412,706 $364,400 $267,338
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.16 1.26 1.39
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average net assets (%) (.97) (.90) (.59)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 76.66 108.20 66.75
- ---------------------------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended July 31, 1996 include amounts paid through brokerage
service and expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
(c) Per share net investment income (loss) has been determined on the basis of the weighted average number of shares
outstanding during the period.
(d) Not annualized.
</TABLE>
Notes to financial statements
July 31, 1996
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 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 approximately eight years,
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. 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. Class Y shares, which are sold at
net asset value, are generally subject to the same expenses as class A
shares, class B shares and class M shares, but do not bear a
distribution fee. Class Y shares are sold to defined contribution plans
that initially invest at least $250 million in a combination of Putnam
Funds. The fund began offering class Y shares on July 1, 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 that fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies 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 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 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.
Dividend income is recorded on the ex-dividend date.
E) Federal income 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 annually. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences include treatment of losses on wash sale transactions and
net operating losses. Reclassifications are made to the fund's capital
accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations. For the
year ended July 31, 1996, the fund reclassified $11,052,161 to decrease
accumulated net investment loss and $7,894,622 to decrease paid-in-
capital, with a decrease to accumulated net realized gain on investments
of $3,157,539. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.70% 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 by the
amount of certain brokerage commissions and fees (less expenses)
received by 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 year ended July 31, 1996, fund expenses were reduced by $759,842
under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Trustees of the fund receive an annual Trustees fee of $3,040 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 year ended July 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $2,819,207 and $95,491 from the
sale of class A and class M shares, respectively and $414,227 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the year ended July 31, 1996, Putnam Mutual Funds
Corp., acting as underwriter received $8,929 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $4,036,683,971
and $2,915,222,285, 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 July 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
July 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 152,200,446 $2,417,089,147
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,674,236 94,039,901
- ----------------------------------------------------
158,874,682 2,511,129,048
Shares
repurchased (110,433,769) (1,747,181,385)
- ----------------------------------------------------
Net increase 48,440,913 $763,947,663
- ----------------------------------------------------
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 10,862,592 $114,311,441
- ----------------------------------------------------
Year ended
July 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 47,342,283 $751,027,251
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,860,338 25,616,447
- ----------------------------------------------------
49,202,621 776,643,698
Shares
repurchased (16,184,011) (251,940,378)
- ----------------------------------------------------
Net increase 33,018,610 $524,703,320
- ----------------------------------------------------
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 (5,125,541) (58,329,878)
- ----------------------------------------------------
Net increase 7,324,186 $83,817,910
- ----------------------------------------------------
Year ended
July 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 5,762,407 $93,574,709
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 80,826 1,155,720
- ----------------------------------------------------
5,843,233 94,730,429
Shares
repurchased (1,941,763) (31,178,096)
- ----------------------------------------------------
Net increase 3,901,470 $63,552,333
- ----------------------------------------------------
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
- ----------------------------------------------------
For the period
July 12, 1996
(commencement of
operations) to
July 31, 1996
- ----------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------
Shares sold 10,100 $148,418
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- ----------------------------------------------------
10,100 148,655
Shares
repurchased (5) (81)
- ----------------------------------------------------
Net increase 10,095 $148,337
- ----------------------------------------------------
Note 5
Transactions with affiliated companies
Transactions during the year with companies in which the fund owns at
least 5% of the voting securities were as follows:
Purchase Sales Dividend Market
Affiliates Cost Proceeds Income Value
- -----------------------------------------------------------------------
Bio-Vascular, Inc. $ 9,102,743 $ 641,260 $ -- $ 5,156,250
- -----------------------------------------------------------------------
Computer
Management
Sciences 9,320,854 3,039,430 -- 10,058,125
- -----------------------------------------------------------------------
Natural
Microsystems Corp. 5,306,563 7,683,745 -- 6,312,938
- -----------------------------------------------------------------------
NCS Healthcare,
Inc. Class A 6,168,155 -- -- 6,567,125
- -----------------------------------------------------------------------
Workgroup
Technology Corp. 15,348,959 -- -- 8,992,200
- -----------------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the fund hereby
designates $1.663 per share as capital gain dividends for its taxable
year ended July 31, 1996.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
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
Peter Carman
Vice President
John J. Morgan, Jr.
Vice President
Brett C. Browchuck
Vice President
Daniel L. Miller
Vice President
Michael J. Mufson
Vice President and Fund Manager
Steve L. Kirson
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
the principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ------------------
27076-024/277/673 9/96
PUTNAM INVESTMENTS [LOGO]
- --------------------------------------------------------------------------
Putnam OTC Emerging Growth Fund
Supplement to Annual Report dated July 31, 1996
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans investing $250 million or
more in one or more of Putnam's funds or private accounts. Performance of
class Y shares, which incur neither a front-end load, distribution fee, nor
contingent deferred sales charge, will differ from performance of class A,
B, and M shares, which are discussed more extensively in the annual report.
ANNUAL RESULTS AT A GLANCE
- --------------------------------------------------------------------------
Total return: NAV
Life of class (since 7/12/96) -5.37%
- --------------------------------------------------------------------------
Share value: NAV
7/12/96 $15.65
7/31/96 14.81
- --------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
- --------------------------------------------------------------------------
Please note that past performance does not indicate future results.
Investment return and principal value will fluctuate so your shares, when
redeemed, may be worth more or less than their original cost. See full report
for information on comparative benchmarks. If you have questions, please
consult your fund prospectus or call Putnam toll free at 1-800-752-9894.
