Putnam
OTC &
Emerging
Growth Fund
SEMIANNUAL REPORT
January 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Troubled markets often bring compelling opportunities, and we've
been pleased with the results of our efforts to add more attractively
priced stocks to the fund's portfolio. As we enter the second half of
fiscal '98, we will continue to focus on innovative emerging-growth
companies with above-average growth potential while minimizing the
fund's exposure to the volatile Asian markets."
-- Michael J. Mufson, manager
Putnam OTC & Emerging Growth Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
18 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
In speaking of the current market environment, Thomas Paine might have been
moved to write that "these are the times that try investors' patience." Summer
switchers and sunshine traders will eventually be left behind, he might have
added, concluding that it is the staunch and resolute investor with vision and
persistence who will eventually carry the day.
This paraphrase of the early patriot's sentiments is a message that has long
been heeded by successful investors -- and it bears repetition in today's
uncertain environment, as Putnam OTC & Emerging Growth Fund's performance
during the first half of fiscal 1998 demonstrates. However, as your fund's
managers point out in the following report, the fund's results mirror those of
the market sector in which it invests.
Troubled markets frequently generate attractive investment opportunities and
the current market should prove no exception. Your fund's managers are
positioning the portfolio to take maximum advantage of opportunities that
present themselves. Their outlook for the months ahead is generally positive,
and their focus is clearly on the longer term.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
March 18, 1998
Report from the Fund Managers
Michael J. Mufson
Steven L. Kirson
During the first half of fiscal 1998, as small and emerging-growth companies
faced a difficult environment, Putnam OTC & Emerging Growth Fund sought
opportunities amid the challenges. While small-company stocks experienced some
rebound during the period, escalating problems in Asian economies took their
toll on markets around the world and dampened the performance of many fund
holdings. Troubled markets, however, often bring compelling opportunities, and
for this reason we have been able to take advantage of attractive stock prices
in many industry sectors.
For the six months ended January 31, 1998, your fund's class A share total
returns were 0.25% at net asset value and - 5.53% at public offering price.
To some degree, these results reflect near-term volatility, and as such they
are not surprising, given the current market environment and the fund's
aggressive investment style. Over the long term, however, volatility becomes
less of an issue. For the 10-year period ended January 31, 1998, for example,
your fund's annualized return for class A shares was 17.80% at net asset value
and 17.10% at public offering price. For complete performance information,
please refer to the summary that begins on page 9.
* TECHNOLOGY SECTOR DAMPENED BY MARKET VOLATILITY
Technology stocks were among the hardest hit by the recent market turbulence,
especially those of companies that provide their products to Asian markets.
Although we reduced the fund's overall technology weighting, it is still one
of the portfolio's largest sectors, with many companies that have performed
well in spite of market turbulence. We have focused on companies that we
believe are leading the charge in the next generation of technology. When
dramatic price declines hit the entire sector, including these fundamentally
strong companies, we took advantage of their enticingly low stock prices and
added to existing positions.
Technology companies specializing in computer software and mainframes,
especially those that target Year 2000, or Y2K, issues were some of the
sector's strongest performers. Micro Focus, a developer of software, has
introduced a number of successful new products and services, including Y2K
solutions. The Y2K problem has companies around the world struggling to
prevent the loss of essential data within computer systems that are not
programmed to recognize 00 as the year 2000 and will mistake it for the year
1900. Compuware, another fund holding providing Y2K solutions, develops
software products and offers professional services for information technology
professionals.
It is important to note that these companies are expected to retain their
extraordinary growth potential well beyond 2000. In most cases, their ability
to develop Y2K solutions has allowed them to get their feet in the doors of
new client companies. These software and service companies are often less
expensive and more responsive than their larger competitors and therefore are
the most likely candidates to provide these new clients with more products and
services into the next century.
While these holdings, along with others discussed in this report, were viewed
favorably at the end of the fiscal period, all are subject to review and
adjustment in accordance with the fund's investment strategy and may vary in
the future.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Computer software 12.5%
Computer services 10.0%
Retail 8.0%
Medical supplies and devices 6.5%
Telecommunications equipment 5.6%
Footnote reads:
*Based on net assets as of 1/31/98. Holdings will vary over time.
* CONSUMER TRENDS OFFER EMERGING-GROWTH OPPORTUNITIES
During the period, your fund continued to benefit from companies that are on
the cutting edge of trends, profiting from their ability to meet distinct
consumer needs and preferences. Examples include home product retailers that
appeal to a more affluent customer base, such as Williams Sonoma, Linens 'N
Things, and Coldwater Creek, a direct-mail retailer of clothing, jewelry, and
home furnishings targeted to well-educated, middle- to upper-income
households.
Other fund holdings are reaping the rewards of the fitness and back-to-nature
interests of consumers. Examples include Timberland, a company best known for
its boots, but also a producer of clothes and accessories designed to
withstand the elements. Timberland's new Web site, which allows customers to
evaluate their personal footwear and clothing needs, is one example of the
company's ability to market its products effectively. The North Face, another
fund holding, produces technically sophisticated sportswear, skiwear, and
outdoor gear and has capitalized on the growing consumer interest in extreme
sports.
* STOCK SELECTION KEY IN HEALTH-CARE SECTOR
Even within the portfolio's health-care sector, consumer trends are boosting
the performance of some holdings. Wesley Jesson VisionCare and Cooper
Companies, for example, both offer specialized products for contact lens
users, including lenses that can change eye color and custom-fitted lenses
designed to correct astigmatism.
Except for companies that provide unique products or specialized services,
however, the health-care sector has been difficult. Therefore, our bottom-up
process of stock selection -- carefully analyzing individual stocks rather
than investing based solely on overall trends -- has been essential. Many
health-care providers are struggling in their attempts to deliver quality care
and still turn a healthy profit by controlling costs. Until we feel more
optimistic about health-care costs and legislation, the fund's weighting in
stocks of managed care companies will likely remain minimal. We intend to
focus instead on businesses that have low reimbursement risk. Examples include
Safeskin Corporation, which is the dominant company offering powder-free latex
gloves for medical professionals, and Total Renal Care, which provides
specialized dialysis services to patients with kidney disease.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Compuware Corp.
Computer software
Keane, Inc.
Computer services
Premisys Communications, Inc.
Telecommunications equipment
Cooper Companies, Inc.
Medical supplies and devices
Chancellor Broadcasting Corp., Class A
Broadcasting
Advanced Fibre Communications
Telecommunications equipment
The Timberland Co.
Apparel
Bed Bath & Beyond, Inc.
Retail
Linens 'N Things, Inc.
Retail
Electronic Arts, Inc.
Computer software
Footnote reads:
These holdings represent 22.0% of the fund's net assets as of 1/31/98.
Portfolio holdings will vary over time.
* MERGER ACTIVITY BOOSTS COMMUNICATIONS STOCKS
Heavy merger and acquisition activity, such as we have seen in the
communications services sector, often signifies to investors a healthy,
thriving industry. The rising stock prices of long-distance communications
companies and competitive local exchange carriers (CLECs) provide additional
evidence that this sector is flourishing. CLECs are the smaller telephone
companies that compete in local markets with such larger providers as the
Regional Bell Operating Companies. As a result of the Telecommunications Act
of 1996, CLECs are allowed to enter local markets on a much wider basis. CLEC
stocks that boosted the fund's portfolio during the period include Brooks
Fiber, Intermedia Communications, and Teleport Communications, which was
recently acquired by AT&T.
* LONG-TERM OUTLOOK ESSENTIAL
As we enter the second half of fiscal '98, we look forward to improved
conditions for the types of stocks in which your fund invests while realizing
that the turmoil in Asian economies may continue to affect markets around the
world for some time. We are minimizing the fund's exposure to Asian markets,
and we expect the fund will benefit from our addition of attractively priced
stocks to the portfolio. As always, the fund will maintain its focus on
innovative, emerging-growth companies with above-average long-term growth
potential.
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 1/31/98, there is no guarantee the fund will continue to hold
these securities in the future. This fund invests a portion of its assets in
small to midsize companies. Such investments increase the risk of greater
price fluctuations.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
OTC & Emerging Growth Fund is designed for investors seeking above-average
growth potential through investments in common stocks of small- to
medium-sized emerging growth companies.
TOTAL RETURN FOR PERIODS ENDED 1/31/98
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 0.25% -5.53% -0.13% -5.12% -0.06% -3.55%
- ------------------------------------------------------------------------------
1 year 6.78 0.63 5.98 0.98 6.20 2.47
- ------------------------------------------------------------------------------
5 years 138.21 124.62 129.61 127.61 132.04 123.94
Annual average 18.96 17.57 18.09 17.88 18.33 17.50
- ------------------------------------------------------------------------------
10 years 414.59 385 374.46 374.46 385.96 368.95
Annual average 17.80 17.10 16.85 16.85 17.13 16.71
- ------------------------------------------------------------------------------
Life of fund 1417.83 1330.56 1 227.05 1227.05 1277.30 1229.09
Annual average 19.52 19.06 18.48 18.48 18.77 18.49
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/98
Russell 2000 Consumer
Index Price Index
- ------------------------------------------------------------------------------
6 months 4.42% 0.69%
- ------------------------------------------------------------------------------
1 year 18.07 1.57
- ------------------------------------------------------------------------------
5 years 103.44 13.32
Annual average 15.26 2.53
- ------------------------------------------------------------------------------
10 years 307.90 39.67
Annual average 15.09 3.40
- ------------------------------------------------------------------------------
Life of fund 611.67 64.56
Annual average 13.73 3.32
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 5.75% and 3.50%, respectively. Class B share returns for
the 1-, 5-, and 10-year (where available) and life-of-fund periods reflect
the applicable contingent deferred sales charge (CDSC), which is 5% in the
first year, declines to 1% in the sixth year, and is eliminated
thereafter. Returns shown for class B and class M shares for periods prior
to their inception are derived from the historical performance of class A
shares, adjusted to reflect both the initial sales charge or CDSC, if any,
currently applicable to each class and, in the case of class B and class M
shares, the higher operating expenses applicable to such shares. All
returns assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 1/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number)*
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
7/31/97 $16.02 $17.00 $15.45 $15.78 $16.35
- ------------------------------------------------------------------------------
1/31/98 16.06 17.04 15.43 15.77 16.34
- ------------------------------------------------------------------------------
*The fund did not make any distributions during this fiscal period.
TOTAL RETURN FOR PERIODS ENDED 12/31/97
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 7.47% 1.32% 7.12% 2.12% 7.18% 3.40%
- ------------------------------------------------------------------------------
1 year 10.19 3.87 9.39 4.39 9.63 5.82
- ------------------------------------------------------------------------------
5 years 142.69 128.63 133.85 131.85 136.48 128.11
Annual average 19.40 17.98 18.52 18.32 18.78 17.93
- ------------------------------------------------------------------------------
10 years 420.33 390.41 379.85 379.85 391.44 374.24
Annual average 17.93 17.23 16.98 16.98 17.26 16.84
- ------------------------------------------------------------------------------
Life of class 1422.55 1335.01 1232.21 1232.21 1282.54 1234.15
Annual average 19.68 19.21 18.63 18.63 18.92 18.64
- ------------------------------------------------------------------------------
All returns assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost. Please see the
preceding page for the method of performance calculation.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
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 measure of the performance of small company stocks.
It assumes reinvestment of all distributions and interest payments and do
not take in 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.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Portfolio of investments owned
January 31,1998 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (93.8%) *
NUMBER OF SHARES VALUE
Advertising (2.5%)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
775,763 Lamar Advertising Co. + $ 31,854,768
2,131,256 Outdoor Systems, Inc. + 51,150,132
200,000 Universal Outdoor Holdings, Inc. + 10,125,000
--------------
93,129,900
Agriculture (0.4%)
- ------------------------------------------------------------------------------------------------------------
513,732 Delta & Pine Land Co. 15,411,975
Apparel (3.2%)
- ------------------------------------------------------------------------------------------------------------
823,700 Stage Stores, Inc. + 31,944,116
1,065,478 North Face, Inc. (The) + [SECTION MARK] 26,770,135
1,041,599 Timberland Co. (The) [SECTION MARK] 60,673,142
--------------
119,387,393
Automotive (3.5%)
- ------------------------------------------------------------------------------------------------------------
1,292,900 Avis Rent A Car, Inc. 46,301,981
1,385,323 Budget Group, Inc. + [SECTION MARK] 48,399,722
1,581,200 Dollar Thrifty Automotive Group, Inc. + [SECTION MARK] 35,082,875
--------------
129,784,578
Basic Industrial Products (0.4%)
- ------------------------------------------------------------------------------------------------------------
587,000 Asyst Technologies, Inc. 13,427,625
Broadcasting (4.4%)
- ------------------------------------------------------------------------------------------------------------
1,955,754 Chancellor Broadcasting Corp. Class A + 67,229,044
648,433 Clear Channel Communications, Inc. + 49,929,341
41,850 Emmis Broadcasting Corp. Class A + 2,003,569
221,300 Sinclair Broadcast Group, Inc. Class A + 10,456,425
890,296 Univision Communications Inc. Class A + 33,942,535
--------------
163,560,914
Business Services (4.2%)
- ------------------------------------------------------------------------------------------------------------
1,015,913 Accustaff, Inc. + 26,159,760
736,800 Caribiner International., Inc. + 23,209,200
175,000 Forrester Research, Inc. + 3,478,125
899,000 Interim Services Inc. + 21,463,625
855,278 Renaissance Worldwide, Inc. 41,748,257
1,052,900 Robert Half International, Inc. + 40,668,263
--------------
156,727,230
Computer Equipment (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,105,800 Discreet Logic, Inc. + 24,327,600
425,000 Pinnacle Systems, Inc. + 10,837,500
--------------
35,165,100
Computer Services (10.0%)
- ------------------------------------------------------------------------------------------------------------
341,461 America Online, Inc. + 32,673,549
273,300 Ciber, Inc. + 15,338,963
816,700 Complete Business Solutions, Inc. + [SECTION MARK] 37,721,331
1,295,957 Computer Management Sciences + [SECTION MARK] 26,891,108
1,070,850 Information Management Resources, Inc. + [SECTION MARK] 39,086,025
3,157,672 Keane, Inc. + 128,280,425
1,204,900 Romac International, Inc. + 26,959,638
1,820,300 Technology Solutions Co. + [SECTION MARK] 47,896,644
505,300 Whittman-Hart, Inc. + 14,653,700
--------------
369,501,383
Computer Software (12.5%)
- ------------------------------------------------------------------------------------------------------------
752,600 Activision, Inc. 10,724,550
29,700 Advantage Learning Systems, Inc. 790,763
15,000 Arbor Software Corp. + 568,125
726,467 Aspect Development, Inc. + [SECTION MARK] 32,554,802
297,451 Citrix Systems, Inc. + 20,449,756
4,313,346 Compuware Corp. + 168,220,494
1,474,366 Electronic Arts, Inc. + 52,985,028
473,102 Legato Systems, Inc. + 21,733,123
175,900 Lernout & Hausple Speech Products N.V. (Belgium) + 10,356,113
1,081,600 Micro Focus Group PLC ADR (United Kingdom) + 49,212,800
565,000 Peregrine Systems, Inc. + 7,062,500
355,299 Peritus Software Services, Inc. + 6,439,794
448,760 Remedy Corp. + 7,011,875
275,000 Saville Systems Ireland PLC ADR (Ireland) + 11,206,250
175,342 Security Dynamics Technologies, Inc. + 6,180,806
675,000 Simulation Sciences Inc. + 8,437,500
328,700 Vantive Corp. + 8,094,238
161,000 VeriSign, Inc. 4,105,500
1,314,918 Viasoft, Inc. + [SECTION MARK] 39,694,087
--------------
465,828,104
Consumer Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
128,600 Applied Graphics Technologies, Inc. 6,880,100
Correctional Facilities (0.5%)
- ------------------------------------------------------------------------------------------------------------
373,000 Corrections Corp. + 13,754,375
208,000 Wackenhut Corrections Corp. + 5,304,000
--------------
19,058,375
Education Services (5.1%)
- ------------------------------------------------------------------------------------------------------------
544,000 CBT Group PLC ADR (Ireland) + 49,436,000
1,100,000 Computer Learning Centers, Inc. + [SECTION MARK] 37,468,750
1,468,803 Education Management Corp. + [SECTION MARK] 47,368,897
1,301,250 Strayer Education, Inc. [SECTION MARK] 46,845,000
200,000 Sylvan Learning Systems, Inc. + 7,900,000
--------------
189,018,647
Electronics and Electrical Equipment (1.7%)
- ------------------------------------------------------------------------------------------------------------
462,500 Advanced Lighting Technologies, Inc. + 10,810,938
1,215,165 Flextronics International Ltd. + [SECTION MARK] 43,290,253
130,000 Sanmina Corp. + 8,742,500
--------------
62,843,691
Energy-Related (0.8%)
- ------------------------------------------------------------------------------------------------------------
378,500 AES Corp. + 16,204,531
376,200 CalEnergy, Inc. + 9,663,638
250,000 KTI, Inc. + 4,031,250
--------------
29,899,419
Environmental Control (0.6%)
- ------------------------------------------------------------------------------------------------------------
380,500 American Disposal Services, Inc. + 12,604,063
997,100 Philip Services Corp. (Canada) + 8,226,075
--------------
20,830,138
Financial Services (3.0%)
- ------------------------------------------------------------------------------------------------------------
412,000 Finova Group, Inc. 21,063,500
1,220,400 FIRSTPLUS Financial Group, Inc. + 37,069,650
859,600 Franchise Mortgage Acceptance Co. L.L.C. + 14,505,750
808,121 Sirrom Capital Corp. [SECTION MARK] 37,981,687
--------------
110,620,587
Health Care Services (2.1%)
- ------------------------------------------------------------------------------------------------------------
1,269,713 Concentra Managed Care, Inc. 40,789,530
21,180 Coram Healthcare Corp. + 56,921
57,000 Curative Health Services, Inc. 1,966,500
280,000 Healthcare Recoveries, Inc. 5,985,000
103,590 FPA Medical Management, Inc. 1,748,081
1,107,701 National Surgery Centers, Inc. + [SECTION MARK] 27,138,675
--------------
77,684,707
Health Care Information Systems (1.1%)
- ------------------------------------------------------------------------------------------------------------
527,116 HBO & Co. 27,574,756
400,000 Medquist, Inc. + 12,200,000
--------------
39,774,756
Lodging (1.7%)
- ------------------------------------------------------------------------------------------------------------
1,550,354 Extended Stay America, Inc. + 19,185,631
530,100 Fine Host Corp. + [SECTION MARK] 2,650,500
200,350 Four Seasons Hotels, Inc. (Canada) 5,897,803
1,518,532 Signature Resorts, Inc. + 37,014,218
--------------
64,748,152
Medical Management Services (2.2%)
- ------------------------------------------------------------------------------------------------------------
569,750 Pediatrix Medical Group, Inc. + 21,294,406
841,010 Renal Care Group, Inc. + 28,489,214
521,000 Renal Treatment Centers, Inc. + 16,704,563
642,699 Total Renal Care Holdings, Inc. + 15,625,619
--------------
82,113,802
Medical Supplies and Devices (6.5%)
- ------------------------------------------------------------------------------------------------------------
306,823 Arterial Vascular Enginerring, Inc. + 22,551,491
1,517,043 Cooper Companies, Inc. + [SECTION MARK] 75,283,259
685,400 Cyberonics, Inc. 13,665,163
555,000 Cytyc Corp. + 12,001,875
272,120 Henry Schein, Inc. + 8,979,960
200,000 Molecular Devices Corp. 3,600,000
427,500 NCS HealthCare, Inc. Class A + 11,061,563
325,000 Sabratek Corp. + 9,587,500
826,296 Safeskin, Corp. 46,737,368
40,700 Theragenics Corp. 1,968,851
952,000 Wesley Jessen VisionCare, Inc. + [SECTION MARK] 36,176,000
--------------
241,613,030
Oil and Gas (1.4%)
- ------------------------------------------------------------------------------------------------------------
400,000 Cal Dive International, Inc. 9,800,000
550,000 Global Industries, Ltd. 8,112,500
1,049,600 Newpark Resources, Inc. + 17,056,000
435,000 Varco International, Inc. + 8,917,500
200,000 Veritas DGC Inc. + 7,387,500
--------------
51,273,500
Pharmaceuticals and Biotechnology (2.6%)
- ------------------------------------------------------------------------------------------------------------
300,000 Coulter Pharmaceutical, Inc. 6,000,000
200,000 Dura Pharmaceuticals, Inc. + 7,937,500
200,000 Incyte Pharmaceuticals 8,675,000
325,000 Medicis Pharmaceutical Corp. Class A + 15,112,500
250,000 Medimmune, Inc. + 11,468,750
425,500 Parexel International Corp. + 14,679,750
218,500 Quintiles Transnational Corp. + 8,316,656
357,000 Serologicals Corp. 9,951,375
184,900 Sonus Pharmaceuticals, Inc. + 6,240,375
193,400 Vertex Pharmaceuticals, Inc. + 7,590,950
--------------
95,972,856
Recreation (--%)
- ------------------------------------------------------------------------------------------------------------
21,000 WMS Industries, Inc. 513,188
Restaurants (1.2%)
- ------------------------------------------------------------------------------------------------------------
825,000 Dave & Buster's, Inc. + [SECTION MARK] 17,479,688
494,829 Landry's Seafood Restaurants, Inc. + 10,948,092
502,747 Papa Johns International, Inc. + 17,407,615
--------------
45,835,395
Retail (8.0%)
- ------------------------------------------------------------------------------------------------------------
1,524,534 Bed Bath & Beyond, Inc. + 60,409,660
809,600 Coldwater Creek Inc. + [SECTION MARK] 30,537,100
450,000 CompUSA, Inc. + 13,921,875
422,419 Dollar Tree Stores, Inc. 17,979,209
1,108,347 Guitar Center, Inc. + [SECTION MARK] 24,383,634
1,307,500 Linens 'N Things, Inc. + [SECTION MARK] 57,775,156
373,900 Michaels Stores, Inc. 11,497,425
900,000 Petco Animal Supplies, Inc. + 22,162,500
1,170,000 Williams-Sonoma, Inc. + 49,798,125
295,000 Wolverine World Wide, Inc. 7,965,000
--------------
296,429,684
Semiconductors (3.8%)
- ------------------------------------------------------------------------------------------------------------
640,999 Aetrium, Inc. + [SECTION MARK] 10,175,859
438,600 Applied Micro Circuits Corp. + 8,388,225
1,044,783 Credence Systems Corp. + 26,511,369
125,000 Etec Systems, Inc. 5,187,500
745,497 Galileo Technology Ltd. (Israel) + 27,769,763
1,240,000 Integrated Process Equipment Corp. + [SECTION MARK] 18,135,000
1,410,512 Photronics, Inc. + [SECTION MARK] 32,441,776
597,800 SpeedFam International, Inc. 14,235,113
--------------
142,844,605
Specialty Consumer Products (1.6%)
- ------------------------------------------------------------------------------------------------------------
1,174,200 Central Garden and Pet Co. + 36,106,650
695,800 Rexall Sundown, Inc. + 24,048,588
--------------
60,155,238
Telecommunication Equipment (5.6%)
- ------------------------------------------------------------------------------------------------------------
2,244,866 Advanced Fibre Communications + 66,784,764
2,751,933 Premisys Communications, Inc. + [SECTION MARK] 78,602,086
806,300 Tekelec + 26,154,356
989,594 Uniphase Corp. + 36,367,580
--------------
207,908,786
Telecommunication Services (2.1%)
- ------------------------------------------------------------------------------------------------------------
247,000 Intermedia Communications, Inc. + 15,190,500
970,200 NEXTLINK Communications, Inc. Class A + 24,133,725
251,227 McLeod, Inc. Class A + 8,651,630
205,500 Metromedia Fiber Network, Inc. Class A + 5,111,813
394,426 RSL Communications, Inc. 8,775,979
659,300 Tel-Save Holdings, Inc. + 15,658,375
--------------
77,522,022
--------------
Total Common Stocks (cost $2,771,970,965) $3,485,464,880
SHORT-TERM INVESTMENTS (5.0%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$25,000,000 Federal National Mortgage Association for an effective
yield of 5.61%, March 3, 1998 $ 24,875,334
50,000,000 Federal National Mortgage Association for an effective
yield of 5.595%, March 20, 1998 49,634,771
25,000,000 Heinz H J Co. for an effective yield of 5.77%,
February 6, 1998 24,979,965
25,000,000 JP Morgan & Co Inc for an effective yield of 5.77%,
February 10, 1998 24,963,937
25,000,000 Sheffield Receivables Corp. for an effective yield of
February 12, 1998 24,987,813
36,867,000 Interest in $36,867,000 joint repurchase agreement
dated January 30, 1998 with Goldman Sachs Co.
due February 2, 1998 with respect to various
U.S. Treasury obligations -- maturity value of
$36,884,174 for an effective yield of 5.59% 36,878,449
--------------
Total Short-Term Investments (cost $186,320,269) $ 186,320,269
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,958,291,234) *** $3,671,785,149
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $3,714,760,355.
*** The aggregate identified cost on a tax basis is $2,983,768,616, resulting in gross unrealized appreciation
and depreciation of $866,152,589 and $178,136,056, respectively, or net unrealized appreciation of $688,016,533.
+ Non-income-producing security.
[SECTIONMARK] Affiliated Companies (Note 5)
ADR after the name of a foreign holding stands for American Depository Receipts 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, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $2,958,291,234) (Note 1) $3,671,785,149
- ---------------------------------------------------------------------------------------------------
Cash 727,982
- ---------------------------------------------------------------------------------------------------
Dividends receivable 5,419
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 9,744,777
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 87,724,367
- ---------------------------------------------------------------------------------------------------
Total assets 3,769,987,694
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 36,680,017
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 13,225,232
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,708,073
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 1,156,612
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 37,933
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,909
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,564,882
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 851,681
- ---------------------------------------------------------------------------------------------------
Total liabilities 55,227,339
- ---------------------------------------------------------------------------------------------------
Net assets $3,714,760,355
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,133,963,487
- ---------------------------------------------------------------------------------------------------
Accumulated net investment loss (Note 1) (18,033,583)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments
(Note 1) (114,663,464)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 713,493,915
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $3,714,760,355
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($2,267,903,570 divided by 141,222,334 shares) $16.06
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $16.06)* $17.04
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,151,587,877 divided by 74,641,862 shares)** $15.43
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($199,463,857 divided by 12,649,243 shares) $15.77
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $15.77)* $16.34
- ---------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($95,805,051 divided by 5,935,597 shares) $16.14
- ---------------------------------------------------------------------------------------------------
* 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, 1998 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (including dividend income of $1,235,166
from investments in affiliated issuers) (Note 5) $ 1,239,888
- --------------------------------------------------------------------------------------------------
Interest 3,901,321
- --------------------------------------------------------------------------------------------------
Total investment income 5,141,209
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 10,264,619
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 3,316,962
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 32,601
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 17,766
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,870,036
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 5,830,695
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 714,495
- --------------------------------------------------------------------------------------------------
Reports to shareholders 74,290
- --------------------------------------------------------------------------------------------------
Registration fees 11,810
- --------------------------------------------------------------------------------------------------
Auditing 36,509
- --------------------------------------------------------------------------------------------------
Legal 17,586
- --------------------------------------------------------------------------------------------------
Postage 339,230
- --------------------------------------------------------------------------------------------------
Other 262,613
- --------------------------------------------------------------------------------------------------
Total expenses 23,789,212
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (620,595)
- --------------------------------------------------------------------------------------------------
Net expenses 23,168,617
- --------------------------------------------------------------------------------------------------
Net investment loss (18,027,408)
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1, 3 and 5) (including realized
gain of $28,783,741 on sales of investments in affiliated issuers) 189,948,578
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (164,617,161)
- --------------------------------------------------------------------------------------------------
Net gain on investments 25,331,417
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 7,304,009
- --------------------------------------------------------------------------------------------------
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
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment loss $ (18,027,408) $ (30,033,138)
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 189,948,578 (297,209,612)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (164,617,161) 775,855,044
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 7,304,009 448,612,294
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (126,228,370)
- ----------------------------------------------------------------------------------------------------------------------
Class B -- (62,425,045)
- ----------------------------------------------------------------------------------------------------------------------
Class M -- (7,461,879)
- ----------------------------------------------------------------------------------------------------------------------
Class Y -- (5,475,224)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 39,214,818 1,239,292,050
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 46,518,827 1,486,313,826
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 3,668,241,528 2,181,927,702
- ----------------------------------------------------------------------------------------------------------------------
End of period (including accumulated net investment
loss of $18,033,583 and $6,175, respectively) $3,714,760,355 $3,668,241,528
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share January 31
operating performance (Unaudited) Year ended July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $16.02 $14.80 $14.17 $10.15 $10.72 $9.05
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.06) (.12)(d) (.08)(d) (.07) (.06) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .10 2.42 2.42 4.95 .69 2.87
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .04 2.30 2.34 4.88 .63 2.81
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments -- (1.08) (1.71) (.86) (1.20) (1.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (1.08) (1.71) (.86) (1.20) (1.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $16.06 $16.02 $14.80 $14.17 $10.15 $10.72
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment
return at net asset value (%)(a) 0.25* 16.33 17.12 51.32 4.83 32.93
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,267,904 $2,271,206 $1,479,770 $730,188 $412,706 $364,400
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .51* 1.16 1.11 1.14 1.16 1.26
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.36)* (.79) (.53) (.62) (.97) (.90)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 54.87* 112.84 199.52 116.10 76.66 108.20
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (c) $.0468 $.0461
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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, and thereafter
include amounts paid through brokerage service and expense offset arrangements. Prior period
ratios exclude these amounts (Note 2).
(c) Average commission rate paid on security trades is required for fiscal periods beginning on or after
September 1, 1995.
(d) Per share net investment income (loss) has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share January 31 July 15, 1993+
operating performance (Unaudited) Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.45 $14.41 $13.92 $10.06 $10.70 $10.80
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.11) (.22)(d) (.20)(d) (.10) (.07) (.01)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .09 2.34 2.40 4.82 .63 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.02) 2.12 2.20 4.72 .56 (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments -- (1.08) (1.71) (.86) (1.20) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (1.08) (1.71) (.86) (1.20) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.43 $15.45 $14.41 $13.92 $10.06 $10.70
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment
return at net asset value (%)(a) (0.13)* 15.49 16.37 50.13 4.15 (.92)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,151,588 $1,116,849 $641,576 $160,197 $42,115 $455
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .89* 1.91 1.89 1.90 1.94 .09*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.73)* (1.55) (1.29) (1.37) (1.71) (.09)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 54.87* 112.84 199.52 116.10 76.66 108.20
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (c) $.0468 $.0461
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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, and thereafter
include amounts paid through brokerage service and expense offset arrangements. Prior period
ratios exclude these amounts (Note 2).
(c) Average commission rate paid on security trades is required for fiscal periods beginning on or after
September 1, 1995.
(d) Per share net investment income (loss) has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- -------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share January 31 Dec. 2, 1994+
operating performance (Unaudited) Year ended July 31 to July 31
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $15.78 $14.66 $14.11 $11.10
- -------------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.10)(d) (.19)(d) (.16)(d) (.05)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .09 2.39 2.42 3.92
- -------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.01) 2.20 2.26 3.87
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments -- (1.08) (1.71) (.86)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (1.08) (1.71) (.86)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.77 $15.78 $14.66 $14.11
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Total investment
return at net asset value (%)(a) (0.06)* 15.78 16.58 37.79*
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $199,464 $177,325 $60,432 $3,111
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .76* 1.66 1.68 1.10*
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.60)* (1.30) (1.06) (.66)*
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 54.87* 112.84 199.52 116.10
- -------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (c) $.0468 $.0461
- -------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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, and thereafter
include amounts paid through brokerage service and expense offset arrangements. Prior period
ratios exclude these amounts (Note 2).
(c) Average commission rate paid on security trades is required for fiscal periods beginning on or after
September 1, 1995.
(d) Per share net investment income (loss) has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS Y
- -----------------------------------------------------------------------------------------------------------------------------
Six months
ended Year For the period
Per-share January 31 ended July 12, 1996+
operating performance (Unaudited) July 31 to July 31
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $16.08 $14.81 $15.65
- -----------------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (.04) (.09)(d) --(d)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .10 2.44 (.84)
- -----------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .06 2.35 (.84)
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments -- (1.08) --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions -- (1.08) --
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $16.14 $16.08 $14.81
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------
Total investment
return at net asset value (%)(a) 0.37* 16.67 (5.37)*
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $95,805 $102,862 $150
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .39* .91 .07*
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.23)* (.53) (.02)*
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 54.87* 112.84 199.52
- -----------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (c) $.0468 $.0461
- -----------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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, and thereafter
include amounts paid through brokerage service and expense offset arrangements. Prior period
ratios exclude these amounts (Note 2).
(c) Average commission rate paid on security trades is required for fiscal periods beginning on or after
September 1, 1995.
(d) Per share net investment income (loss) has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
Notes to financial statements
January 31, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam OTC Emerging Growth (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 and common stocks of emerging growth companies
listed on securities exchanges.
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 and class B shares, but do not bear a distribution
fee. Class Y shares are sold to defined contribution plans that invest at
least $250 million in a combination of Putnam Funds and other certain accounts
managed by affiliates of Putnam Investment Management, Inc. ("Putnam
Management"), the fund's Manager, a wholly-owned subsidiary of Putnam
Investments, Inc.
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 and certain other accounts managed by Putnam Management.
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) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the period ended January 31, 1998, the fund
had no borrowings against the line of credit.
F) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains. At July 31, 1997, the fund had a
capital loss carryover of approximately $35,394,000 available to offset future
net capital gain, if any, which will expire on July 31, 2005.
G) 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 at
least annually. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. 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.
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, 0.50% of the next $5 billion, 0.475% of the next $5 billion, 0.455%
of the next $5 billion, 0.44% of the next $5 billion, and 0.43% thereafter.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the six months ended January 31, 1998, fund expenses were reduced by
$620,595 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.
Each Trustee of the fund receives an annual Trustee fee, of which $3,300 has
been allocated to the fund, 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 has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
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 currently limit payment by the fund to 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, 1998, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $609,171 and $27,256 from the sale
of class A and class M shares, respectively and received $1,295,628 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, 1998, Putnam Mutual Funds
Corp., acting as underwriter received $62,218 on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended January 31, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$1,968,834,556 and $2,124,562,028, respectively. There were no purchases and
sales of U.S. government obligations. 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, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
January 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 97,250,119 $1,567,420,842
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- ------------------------------------------------------------
97,250,119 1,567,420,842
Shares
repurchased (97,799,948) (1,580,935,474)
- ------------------------------------------------------------
Net decrease (549,829) $(13,514,632)
- ------------------------------------------------------------
Year ended
July 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 274,298,211 $4,041,789,135
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,111,312 117,046,198
- ------------------------------------------------------------
282,409,523 4,158,835,333
Shares
repurchased (240,605,584) (3,529,210,130)
- ------------------------------------------------------------
Net increase 41,803,939 $629,625,203
- ------------------------------------------------------------
Six months ended
January 31, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 26,459,599 $412,856,616
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- ------------------------------------------------------------
26,459,599 412,856,616
Shares
repurchased (24,121,128) (374,510,741)
- ------------------------------------------------------------
Net increase 2,338,471 $38,345,875
- ------------------------------------------------------------
Year ended
July 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 58,586,365 $846,936,133
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,972,999 55,502,794
- ------------------------------------------------------------
62,559,364 902,438,927
Shares
repurchased (34,785,967) (495,363,581)
- ------------------------------------------------------------
Net increase 27,773,397 $407,075,346
- ------------------------------------------------------------
Six months ended
January 31, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 8,305,290 $132,319,127
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- ------------------------------------------------------------
8,305,290 132,319,127
Shares
repurchased (6,896,275) (110,524,461)
- ------------------------------------------------------------
Net increase 1,409,015 $21,794,666
- ------------------------------------------------------------
Year ended
July 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 15,669,638 $227,790,748
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 503,305 7,172,101
- ------------------------------------------------------------
16,172,943 234,962,849
Shares
repurchased (9,054,630) (130,538,624)
- ------------------------------------------------------------
Net increase 7,118,313 $104,424,225
- ------------------------------------------------------------
Six months ended
January 31, 1998
- ------------------------------------------------------------
Class Y Shares Amount
- ------------------------------------------------------------
Shares sold 844,861 $13,760,485
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- ------------------------------------------------------------
844,861 13,760,485
Shares
repurchased (1,305,402) (21,171,576)
- ------------------------------------------------------------
Net decrease (460,541) $(7,411,091)
- ------------------------------------------------------------
Year ended
July 31, 1997
- ------------------------------------------------------------
Class Y Shares Amount
- ------------------------------------------------------------
Shares sold 7,763,874 $116,857,479
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 378,646 5,475,224
- ------------------------------------------------------------
8,142,520 122,332,703
Shares
repurchased (1,756,477) (24,165,427)
- ------------------------------------------------------------
Net increase 6,386,043 $98,167,276
- ------------------------------------------------------------
<TABLE>
<CAPTION>
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 cost Income Value
- ----------------------------------------------------------------------------------------------
Name of affiliate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advanced Health Corp. $ 18,858,986 $18,858,986 $ -- $ --
Advanced Lighting
Technologies, Inc. -- 11,050,875 -- 10,810,938
Aetrium, Inc. 4,160,963 -- -- 10,175,859
Aspect Development, Inc. 7,364,648 -- -- 32,554,802
Assisted Living Concepts, Inc. -- 7,946,933 -- --
Asyst Technologies, Inc. 53,858,927 30,314,396 -- 13,427,625
Benchmarq MicroElectronics, Inc. 8,185,442 19,028,026 -- --
Brooks Automation, Inc. 24,372,059 24,372,059 -- --
Budget Group Inc. 13,110,202 -- -- 48,399,722
Caribiner International, Inc. 5,071,972 20,912,673 -- 23,209,200
Central Garden & Pet Co. 3,691,251 -- -- 36,106,650
Citrix Systems 1,012,065 52,529,429 -- 20,449,756
Claremont Technology Group -- 12,678,620 -- --
Coldwater Creek, Inc. 3,685,001 -- -- 30,537,100
Complete Business Solutions 24,699,288 3,398,030 -- 37,721,331
Computer Learning Centers, Inc. 6,171,444 918,654 -- 37,468,750
Computer Management Services -- -- -- 26,891,108
Cooper Companies, Inc. 26,980,006 -- -- 75,283,259
Cotelligent Group, Inc. -- 14,596,407 -- --
Creedence Systems Corp. 27,684,661 8,066,967 -- --
Dave & Buster's, Inc. 11,986,252 -- -- 17,479,688
Discreet Logic, Inc. 3,305,061 15,305,630 -- 24,327,600
Dollar Thrifty Automotive Group 33,259,284 -- -- 35,082,875
Education Management Corp. 14,653,975 -- -- 47,368,897
Encad, Inc. -- 25,484,764 -- --
Fine Host Corp. -- 7,337,291 -- 2,650,500
FIRSTPLUS Financial Group, Inc. 5,959,059 16,413,062 -- 37,069,650
Flextronics Intl Ltd. 41,993,797 6,538,208 -- 43,290,253
Forrester Research, Inc. -- 6,237,998 -- 3,478,125
Guitar Center, Inc. 6,053,407 -- -- 24,383,634
Helix Technology Corp. 33,496,581 33,496,581 231,546 --
Information Management
Resources, Inc. 12,615,909 3,737,500 -- 39,086,025
Integrated Process Equipment
Corp. 46,041,243 5,379,540 -- 18,135,000
Linens 'N Things, Inc. 30,846,652 -- -- 57,775,156
Metzler Group, Inc. -- 22,185,100 -- --
Micrel, Inc. -- 18,993,831 -- --
National Surgery Centers, Inc. 3,873,811 1,630,444 -- 27,138,675
NCS Healthcare Inc. Class A 12,479,520 17,212,773 -- 11,061,563
Photronics, Inc. 41,111,383 6,033,489 -- 32,441,776
Pinnacle Systems, Inc. 2,066,400 -- -- 10,837,500
Premisys Communications, Inc. 46,201,146 4,296,077 -- 78,602,086
Renaissance Solutions, Inc. -- 18,359,559 -- --
Sirrom Capital Corp. 12,659,380 -- 892,820 37,981,687
Southern Pacific Funding Corp. -- 23,709,226 -- --
Spine-Tech, Inc. 34,002,232 34,002,232 -- --
Strayer Education, Inc. 2,786,875 739,900 110,800 46,845,000
Technology Solutions, Inc. -- 10,426,785 -- 47,896,644
The North Face, Inc. 8,683,437 -- -- 26,770,135
The Timberland Co. 68,187,023 -- -- 60,673,142
Triquint Semiconductor, Inc. 20,533,758 20,533,758 -- --
Viasoft, Inc. 15,388,212 -- -- 39,694,087
Wesley Jessen VisionCare, Inc. 29,047,481 -- -- 36,176,000
Whittman-Hart, Inc. 2,022,500 13,001,823 -- 14,653,700
- -----------------------------------------------------------------------------------------------
Totals $768,161,293 $535,727,626 $1,235,166 $1,223,935,498
- -----------------------------------------------------------------------------------------------
</TABLE>
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
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
John J. Morgan, Jr.
Vice President
Daniel L. Miller
Vice President
Michael J. Mufson
Vice President and Fund Manager
Steven L. Kirson
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
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. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
SA014 40530-024/227/673 3/98
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ------------------------------------------------------------------------
Putnam OTC & Emerging Growth Fund
Supplement to Semiannual Report dated 1/31/98
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 semiannual report.
SEMIANNUAL RESULTS AT A GLANCE
- ------------------------------------------------------------------------
Total return for periods ended 1/31/98: NAV
6 months 0.37%
1 year 7.03
Five years 139.36
Annual average 19.07
10 years 417.08
Annual average 17.86
Life of fund (since class A inception, 11/01/82) 1425.17
Annual average 19.56
- ------------------------------------------------------------------------
Share value: NAV
7/31/97 $16.08
1/31/98 $16.14
- ------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
0 $0.0000 $0.0000 $0.0000
- ------------------------------------------------------------------------
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.
