Putnam
OTC &
Emerging
Growth
Fund
ANNUAL REPORT
July 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The environment for small, emerging-growth companies continues to be
strong and their valuations are more attractive now than at any other time
during the past decade. We continue to invest according to the fund's
stated objectives and the portfolio is positioned to benefit greatly when
small-cap stocks come back into favor. At this point, the only missing
ingredient is investor sentiment."
-- Michael J. Mufson, manager
Putnam OTC & Emerging Growth Fund
* Putnam OTC & Emerging Growth Fund's class A shares ranked 22 out of 171
small-cap funds (top 13%) tracked by Lipper Analytical Services for the
5-year period ended July 31, 1998. For the 1-year period, the fund's class
A shares ranked 101 out of 550 (top 19%) and for the 10-year period, 11
out of 59 (top 19%).*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
20 Financial statements
* Past performance is not indicative of future results. Lipper rankings
are based on total return performance, vary over time, and do not
include the effects of sales charges. Performance of other share classes
will vary.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
During periods when the market sectors in which a fund invests fall
temporarily out of favor, it is particularly important for shareholders to
focus on the fund's long-term performance rather than on its results over
the short term. It is also useful to note the fund's standings within its
own peer group. In both respects, we are pleased with Putnam OTC &
Emerging Growth Fund's results and call your attention to the performance
charts that begin on page 9 and the fund's standings within its Lipper
universe, shown on the facing page.
Because of Putnam Management's dedication to adhering firmly to the fund's
stated investment style, we believe it is safe to conclude that given the
current market environment, your fund is performing as it should. During
such times, the fund's management team often seeks out what it sees as
opportunities that may take some time to come to fruition. In the
following report, the managers discuss fiscal 1998 strategy and look at
prospects for fiscal 1999.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
September 16, 1998
Report from the Fund Managers
Michael J. Mufson
Steven L. Kirson
Patience was a virtue during Putnam OTC & Emerging Growth Fund's 1998
fiscal year as we continued to wait for small, emerging-growth stocks to
come back into favor. In the meantime, the fund's returns were
strengthened by strategic stock selection and portfolio positioning that
minimized exposure to troubled Asian markets. For the 12 months ended July
31, 1998, your fund's class A share total returns were 8.30% at net asset
value and 2.06% at public offering price. These are far ahead of the
fund's benchmark, the Russell 2000 Growth Index, which returned -1.32% for
the same 12-month period. For complete performance information, please
refer to the summary that begins on page 9.
Our commentary on fiscal '98 is surprisingly similar to that of a year
ago: large-company stocks were the favorites among investors and delivered
stronger returns than small stocks, which went on a roller-coaster ride.
Emerging-growth companies, in which your fund primarily invests, rebounded
in the second half of the period but still experienced volatility.
The companies we target are market leaders in dynamic new industries or
market share gainers in established industries that have innovative
products or methods of doing business. Often they are smaller, recently
organized companies -- those that investors have been ignoring for some
time in favor of large, well-established blue-chip companies. Throughout
the period, we made the most of this challenging environment by investing
in stocks of fundamentally strong companies at enticingly low valuations.
We have also selected many stocks that have remained strong in spite of
the market's turbulence.
* STRONG U.S. ECONOMY BOOSTS RETAIL, MEDIA, ADVERTISING
Throughout the period, the U.S. economy provided fuel for retail stocks in
the form of low unemployment, low inflation, and a high level of consumer
confidence. In your fund's portfolio were retailers that benefited from
the growing number of consumers who are making purchases for their homes.
These stocks were strong performers and included home-product retailers
aimed at affluent customers, such as Williams-Sonoma and Bed Bath and
Beyond. Another portfolio highlight, Michaels Stores, specializes in craft
supplies and home decor items. The company operates more than 500 stores
and has improved its distribution network, store layouts, and inventory
management systems.
Another consistently strong sector throughout the period was media and,
again, the fund profited from companies that offer specialized services.
Univision Communications, for example, is the leading Spanish-language
television broadcaster in the United States. Its operations include the
Univision Network, a Spanish-language broadcast network; the Univision
Television Group, with stations in 12 of the top 15 Hispanic markets; and
Galavision, the most-watched Spanish-language cable network in the
country. Univision continues to attract new advertisers and dominates the
ratings in Spanish-language television.
Also boosting returns were the stocks of two billboard companies,
Universal Outdoor Holdings, which recently was acquired by Clear Channel
Communications, and Lamar Advertising, which operates in 34 states and
Canada. Lamar announced record revenues and operating cash flow for its
1998 second quarter. 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 of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Computer software 16.6%
Computer services 10.7%
Telecommunications
services 7.6%
Retail 7.5%
Telecommunications
equipment 6.3%
Footnote reads:
* Based on net assets as of 7/31/98. Holdings will vary over time.
* FUND PROFITS FROM DEMAND FOR OUTSOURCING
Another trend throughout the period was an increasing demand from
corporations for information systems talent. Rather than hiring full-time
employees, more firms are looking to companies that can provide customized
computer consulting, training, and education services. A number of stocks
in the portfolio benefited from this trend, especially as the demand for
technical specialists greatly exceeded the supply.
Whittman-Hart, for example, helps companies improve productivity and
marketplace performance through the strategic use of information
technology. Recently named by Forbes magazine as one of the 200 best small
companies in America, it has 16 branch offices throughout the United
States and in the United Kingdom. Two other computer services companies --
Ciber and Keane -- have also reaped the rewards of strong demand for their
services. Both companies provide comprehensive technical support as well
as tools to help companies fix year 2000 glitches. On the software side of
the equation, Peregrine Systems, Inc. and Platinum Technology provide
tools to automate the management of complex information systems.
* TELECOMMUNICATIONS STOCKS THRIVE ON LOOSENED RESTRICTIONS
For some time now, we have discussed the positive effects of the
Telecommunications Act of 1996 on media and communications stocks. The
legislation, which loosened many industry restrictions, has contributed to
the success of many emerging-growth companies in the fund's portfolio. Of
particular note, once again, are competitive local exchange carriers, or
CLECs. These companies compete with larger providers, such as the Bell
Operating Companies, in local markets. As a result of the
Telecommunications Act, CLECs have been able to enter these markets on a
much wider basis. The number of CLECs entering the market is increasing
rapidly, resulting in a new wave of competition.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Compuware Corp.
Computer software
Keane, Inc.
Computer services
Chancellor Media Corp.
Broadcasting
Williams-Sonoma, Inc.
Retail
Safeskin Corp.
Medical supplies and devices
Electronic Arts, Inc.
Computer software
Outdoor Systems, Inc.
Advertising
Lamar Advertising Co.
Advertising
NEXTLINK Communications, Inc.
Telecommunications services
Uniphase Corp.
Telecommunications equipment
These holdings represent 26.5% of the fund's net assets as of 7/31/98.
Portfolio holdings will vary over time.
McLeodUSA, Inc., a telecommunications services company in the Midwest,
increased its local telephone lines by 145% in the second quarter of 1997
alone. The company continues to capture business from the existing
telephone companies in local markets and is adding miles of new
fiber-optic lines in preparation for more new customers.
Nextlink Communications is another CLEC that is rapidly increasing its
telephone lines to keep up with an onslaught of new customers. Intermedia
Communications, yet another impressive player in the CLEC market, has one
of the best data networks in the United States.
* LOOKING TO FISCAL '99 WITH OPTIMISM
We enter fiscal 1999 prepared for more market turbulence, and yet we are
optimistic about the positioning of the fund's portfolio. We believe
small-cap growth stocks - with their attractive valuations and fundamental
strengths - are poised for a rebound. Of course, the recovery time for
these stocks cannot be predicted. After much practice in patiently waiting
for the emerging-growth sector to deliver more powerful returns, we are
prepared to wait some more. We'll continue to rely on our bottom-up
process of stock selection, in which we carefully analyze individual
stocks rather than investing solely based on overall trends. And finally,
we expect to minimize the fund's exposure to troubled foreign markets
while keeping an eye on the long-term growth potential of the fund's
holdings.
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 7/31/98, 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 7/31/98
Class A Class B Class M
Inception date (11/1/82) (7/15/93) (12/2/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 8.30% 2.06% 7.51% 2.51% 7.73% 3.98%
- ------------------------------------------------------------------------------
5 years 134.06 120.68 125.92 123.92 128.14 120.08
Annual average 18.54 17.15 17.70 17.49 17.93 17.09
- ------------------------------------------------------------------------------
10 years 391.89 363.61 354.33 354.33 365.36 349.07
Annual average 17.27 16.58 16.34 16.34 16.62 16.21
- ------------------------------------------------------------------------------
Life of fund 1539.74 1445.46 1328.53 1328.53 1384.72 1332.76
Annual average 19.43 18.99 18.39 18.39 18.68 18.42
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/98
Russell 2000 Russell Consumer
Growth Index* 2000 Index Price Index
- ----------------------------------------------------------------------------
1 year -1.32% 2.31% 1.68%
- ----------------------------------------------------------------------------
5 years 72.53 90.76 13.02
Annual average 11.53 13.79 2.48
- ----------------------------------------------------------------------------
10 years 179.66 231.64 37.72
Annual average 10.83 12.74 3.25
- ----------------------------------------------------------------------------
Life of fund 373.34 597.29 66.19
Annual average 10.38 13.12 3.28
- ----------------------------------------------------------------------------
Past performance is no assurance of future results. 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. 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.
*Putnam Management has recently undertaken a review of benchmarks for
various funds. This index will replace the Russell 2000 Index as a
benchmark for this fund because Putnam Management has determined that the
securities tracked by this index more accurately reflect the types of
securities generally held by the fund.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
7/31/88
Funds class A Russell 2000 Russell 2000 Consumer Price
Date shares at POP Growth Index Index Index
7/31/88 9,425 10,000 10,000 10,000
7/31/89 11,909 11,761 11,829 10,498
7/31/90 12,786 11,660 11,210 11,004
7/31/91 13,604 12,842 12,299 11,494
7/31/92 14,901 13,741 14,083 11,857
7/31/93 19,807 16,209 17,386 12,187
7/31/94 20,764 16,416 18,187 12,524
7/31/95 31,420 21,960 22,731 12,870
7/31/96 36,798 22,624 24,301 13,249
7/31/97 42,807 28,336 32,416 13,545
7/31/98 $46,361 $27,966 $33,164 $13,772
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $45,433 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $46,536 ($44,907 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 7/31/98
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
- ------------------------------------------------------------------------------
7/31/98 17.35 18.41 16.61 17.00 17.62
- ------------------------------------------------------------------------------
* The fund did not make any distributions during this fiscal period.
TOTAL RETURN FOR PERIODS ENDED 6/30/98
(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 25.48% 18.30% 24.62% 19.62% 24.78% 20.38%
- ------------------------------------------------------------------------------
5 years 157.60 142.88 148.34 146.34 151.01 142.24
Annual average 20.83 19.42 19.95 19.76 20.21 19.36
- ------------------------------------------------------------------------------
10 years 403.59 374.64 364.93 364.93 376.01 359.35
Annual average 17.55 16.85 16.61 16.61 16.89 16.47
- ------------------------------------------------------------------------------
Life of fund 1677.73 1575.51 1449.80 1449.80 1509.61 1453.28
Annual average 20.17 19.72 19.13 19.13 19.41 19.14
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. See first page of
performance section for performance calculation method.
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 5.75% maximum 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.
Russell 2000 Growth Index* is composed of those Russell 2000 securities
with a greater-than-average growth orientation.
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.
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Report of independent accountants
For the fiscal year ended July 31, 1998
To the Trustees and Shareholders of
Putnam OTC & Emerging Growth Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
OTC & Emerging Growth Fund (the "fund") at July 31, 1998, and the results
of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of investments owned at July 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 10, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
July 31, 1998
COMMON STOCKS (97.7%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Advertising (4.0%)
- --------------------------------------------------------------------------------------------------------------------------
2,073,194 Lamar Advertising Co. (NON) $ 78,910,947
3,289,882 Outdoor Systems, Inc. (NON) 83,891,991
--------------
162,802,938
Apparel (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
261,800 Bebe Stores, Inc. (NON) 4,941,475
502,978 North Face, Inc. (The) (NON) 8,487,754
952,300 Stage Stores, Inc. (NON) 24,224,131
985,999 Timberland Co. (The) Class A (NON)(AFF) 63,596,936
--------------
101,250,296
Beverages (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
87,650 Celestial Seasonings, Inc. (NON) 3,933,294
Broadcasting (5.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,392,604 Chancellor Media Corp. (NON) 115,443,143
592,900 Citadel Communications Corp. (NON) 13,043,800
532,866 Clear Channel Communications, Inc. (NON) 29,940,408
432,900 Heftel Broadcasting Corp. Class A (NON) 17,640,675
748,000 Sinclair Broadcast Group, Inc. Class A (NON) 19,588,250
746,664 Univision Communications Inc. Class A (NON) 27,253,236
--------------
222,909,512
Business Services (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
119,568 Abacus Direct Corp. (NON) 5,141,424
792,500 Data Dimensions, Inc. (NON)(AFF) 11,540,781
914,550 Renaissance Worldwide, Inc. 13,832,569
39,600 Rental Service Corp. (NON) 1,252,350
589,000 Robert Half International, Inc. (NON) 31,364,250
--------------
63,131,374
Computer Equipment (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Pinnacle Systems, Inc. (NON) 6,175,000
Computer Services (10.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,658,300 Ciber, Inc. (NON) 55,967,625
2,358,951 Complete Business Solutions, Inc. (NON)(AFF) 65,166,021
1,295,957 Computer Management Sciences (NON)(AFF) 31,426,957
777,700 ECsoft Group PLC ADR (United Kingdom) (NON)(AFF) 26,344,588
2,152,775 Information Management Resources, Inc. (NON)(AFF) 57,048,538
58,000 Intelligroup 1,195,044
2,206,511 Keane, Inc. (NON) 118,875,780
438,000 Pegasus Systems, Inc. (NON) 8,513,625
990,900 Romac International, Inc. (NON) 25,515,675
796,100 SPR Inc. (NON)(AFF) 26,470,325
378,300 Whittman-Hart, Inc. (NON) 17,425,444
--------------
433,949,622
Computer Software (16.6%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 Advent Software, Inc. 10,950,000
851,378 Aspect Development, Inc. (NON)(AFF) 51,934,058
536,500 Citrix Systems, Inc. (NON) 34,168,344
4,313,346 Compuware Corp. (NON) 232,111,932
381,608 Concord Communications, Inc. 13,165,476
1,724,066 Electronic Arts, Inc. (NON) 87,334,718
10,100 ISS Group, Inc. (NON) 469,650
815,300 Legato Systems, Inc. (NON) 35,465,550
883,471 Midway Games Inc. (NON) 13,086,414
550,600 New Era of Networks, Inc. (NON) 20,096,900
1,292,000 Peregrine Systems, Inc. (NON)(AFF) 43,928,000
1,024,100 Platinum Technology Inc. 32,355,159
248,160 Remedy Corp. (NON) 2,962,410
1,046,400 TSI International Software, Ltd. (NON)(AFF) 24,067,200
1,866,318 Viasoft, Inc. (NON)(AFF) 24,028,844
1,312,037 Visual Networks, Inc. (NON)(AFF) 35,096,990
796,000 Walker Interactive Systems, Inc. (NON)(AFF) 8,457,500
--------------
669,679,145
Consumer Services (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
310,126 Central Parking Corp. 15,564,449
299,454 MemberWorks Inc. (NON) 8,908,757
--------------
24,473,206
Education Services (4.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,088,000 CBT Group PLC ADR (Ireland) (NON) 63,104,000
1,180,000 Computer Learning Centers, Inc. (NON)(AFF) 32,892,500
1,667,103 Education Management Corp. (NON)(AFF) 61,682,811
805,840 Strayer Education, Inc. (AFF) 23,570,820
--------------
181,250,131
Electric Utilities (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,840,500 Independent Energy Holdings PLC (United Kingdom) (NON) 14,033,813
Energy-Related (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
321,000 CalEnergy, Inc. (NON) 8,727,188
420,000 KTI, Inc. (NON) 10,080,000
--------------
18,807,188
Entertainment (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
235,000 Coach USA, Inc. (NON) 8,768,438
Environmental Control (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
425,200 American Disposal Services, Inc. (NON) 16,317,050
500,000 Eastern Environmental Services, Inc. (NON) 16,906,250
--------------
33,223,300
Financial Services (4.2%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Finova Group, Inc. (The) 9,140,625
1,210,700 FIRSTPLUS Financial Group, Inc. (NON) 47,217,300
1,133,600 Franchise Mortgage Acceptance Co. (NON) 28,198,300
255,800 HealthCare Financial Partners, Inc. (NON) 12,790,000
991,900 Resource America, Inc. (AFF) 36,328,338
2,147,542 Sirrom Capital Corp. (AFF) 33,421,122
45,500 TeleBanc Financial Corp. (NON) 944,125
--------------
168,039,810
Food and Beverages (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
721,000 Hain Food Group, Inc. (The) (NON)(AFF) 14,510,125
70,100 Natrol, Inc. (NON) 1,156,650
936,200 Twinlab Corp. (NON) 38,852,300
269,602 Whole Foods Market, Inc. (NON) 14,625,909
--------------
69,144,984
Health Care (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,834,978 Concentra Managed Care, Inc. 42,204,494
372,000 SteriGenics International, Inc. (NON) 7,719,000
--------------
49,923,494
Health Care Information Services (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
285,000 DAOU Systems, Inc. (NON) 5,913,750
639,654 First Consulting Group, Inc. (NON) 17,750,399
--------------
23,664,149
Information Systems (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,282,700 Mastech Corp. (NON) 30,624,463
Insurance (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
420,000 Inspire Insurance Solutions, Inc. (NON) 14,700,000
Lodging (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,228,854 Extended Stay America, Inc. (NON) 12,211,737
500,450 Four Seasons Hotels, Inc. (Canada) 15,138,613
686,729 Prime Hospitality Corp. (NON) 9,742,968
194,900 Promus Hotel Corp. (NON) 7,333,113
--------------
44,426,431
Medical Management Services (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
494,350 Pediatrix Medical Group, Inc. (NON) 18,970,681
841,010 Renal Care Group, Inc. (NON) 34,481,410
2,180,535 Total Renal Care Holdings, Inc. (NON) 66,370,034
--------------
119,822,125
Medical Supplies and Devices (6.2%)
- --------------------------------------------------------------------------------------------------------------------------
369,000 Arterial Vascular Engineering, Inc. (NON) 14,575,500
426,600 Cooper Companies, Inc. (NON) 13,571,213
700,000 Cyberonics, Inc. (NON) 9,712,500
178,052 Henry Schein, Inc. (NON) 8,568,753
1,067,100 NCS HealthCare, Inc. Class A (NON)(AFF) 30,879,206
581,100 Perclose, Inc. (NON)(AFF) 13,873,763
500,000 Sabratek Corp. (NON) 10,812,500
2,585,400 Safeskin, Corp. (NON) 97,114,088
200,000 Sofamor Danek Group, Inc. (NON) 17,025,000
400,000 Steris Corp. (NON) 24,400,000
420,000 Ventana Medical Systems, Inc. (NON) 10,211,250
--------------
250,743,773
Networking (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
534,300 Exodus Communications, Inc. (NON) 17,832,263
Oil and Gas (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
448,800 Cal Dive International, Inc. 9,565,050
1,500,600 Newpark Resources, Inc. (NON) 13,880,550
574,600 Varco International, Inc. (NON) 9,121,775
--------------
32,567,375
Pharmaceuticals and Biotechnology (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
968,800 Coulter Pharmaceutical, Inc. (AFF) 25,309,900
369,500 Medicis Pharmaceutical Corp. Class A (NON) 13,209,625
164,900 Medimmune, Inc. (NON) 9,693,028
1,093,200 NBTY, Inc. (NON) 18,106,125
375,000 Serologicals Corp. 11,531,250
--------------
77,849,928
Publishing (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
352,800 Peterson Companies, Inc. Class A (NON) 11,289,600
Recreation (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
274,455 International Speedway Corp. Class A (NON) 8,782,560
Restaurants (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
762,000 Dave & Buster's, Inc. (NON)(AFF) 16,764,000
395,347 Papa Johns International, Inc. (NON) 13,688,890
--------------
30,452,890
Retail (7.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,372,834 Bed Bath & Beyond, Inc. (NON) 59,203,466
2,541,000 Linens 'N Things, Inc. (AFF) 71,465,625
1,569,500 Michaels Stores, Inc. (AFF) 51,401,125
500,000 Rent-Way, Inc. 13,687,500
3,292,800 Williams-Sonoma, Inc. (NON)(AFF) 108,868,200
--------------
304,625,916
Semiconductors (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
803,900 Galileo Technology Ltd. (Israel) (NON) 8,692,169
292,273 QLogic Corp. (NON) 16,915,300
--------------
25,607,469
Specialty Consumer Products (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,157,620 Central Garden and Pet Co. (NON) 26,769,963
2,103,647 Guitar Center, Inc. (NON)(AFF) 55,483,690
494,300 Rexall Sundown, Inc. (NON) 14,921,681
--------------
97,175,334
Telecommunication Equipment (6.3%)
- --------------------------------------------------------------------------------------------------------------------------
3,138,466 Advanced Fibre Communications (NON) 62,573,166
738,430 Geo Tel Communications Corp. (NON)(AFF) 32,860,169
2,751,933 Premisys Communications, Inc. (NON)(AFF) 47,470,844
1,915,000 Tekelec (NON) 38,300,000
1,454,594 Uniphase Corp. (NON) 72,729,700
--------------
253,933,879
Telecommunication Services (7.6%)
- --------------------------------------------------------------------------------------------------------------------------
2,392,200 E. Spire Communications, Inc. (NON)(AFF) 47,844,000
1,926,182 Intermedia Communications, Inc. (NON) 71,268,736
1,457,527 McLeodUSA, Inc. Class A (NON) 54,475,072
1,068,500 Metromedia Fiber Network, Inc. Class A (NON) 59,969,563
2,008,100 NEXTLINK Communications, Inc. Class A (NON) 74,550,713
--------------
308,108,084
Telephone Services (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
803,600 RSL Communications, Ltd. Class A (NON) 31,742,200
Wireless Communications (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
713,400 American Tower Corp. Class A 17,121,600
483,000 ICG Communications, Inc. (NON) 14,248,500
--------------
31,370,100
--------------
Total Common Stocks (cost $3,149,826,522) $3,946,814,084
SHORT-TERM INVESTMENTS (2.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$50,000,000 Diageo Capital Plc for an effective yield of 5.67%,
August 3, 1998 $ 49,984,250
25,000,000 Federal Home Loan Mortgage Corp. for an effective yield
of 5.44%, August 27, 1998 24,901,778
25,000,000 Scotiabanc, Inc. for an effective yield of 5.52%, August 4, 1998 24,988,499
--------------
Total Short-Term Investments (cost $99,874,527) $ 99,874,527
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $3,249,701,049) (b) $4,046,688,611
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $4,040,552,687.
(b) The aggregate identified cost on a tax basis is $3,271,607,328, resulting in gross unrealized appreciation and
depreciation of $1,031,644,368 and $256,563,085, respectively, or net unrealized appreciation of $775,081,283.
(NON) Non-income-producing security.
(AFF) 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
July 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $3,249,701,049) (Note 1) $4,046,688,611
- -----------------------------------------------------------------------------------------------
Cash 9,740,062
- -----------------------------------------------------------------------------------------------
Dividends and other receivables 34,655
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 9,803,693
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 45,142,833
- -----------------------------------------------------------------------------------------------
Total assets 4,111,409,854
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 43,011,350
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 23,133,794
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,987,856
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 528,159
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 64,801
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,885
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,844,301
- -----------------------------------------------------------------------------------------------
Other accrued expenses 284,021
- -----------------------------------------------------------------------------------------------
Total liabilities 70,857,167
- -----------------------------------------------------------------------------------------------
Net assets $4,040,552,687
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,131,403,825
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investment (Note 1) 112,161,300
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 796,987,562
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $4,040,552,687
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($2,478,339,873 divided by 142,860,010 shares) $17.35
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $17.35)* $18.41
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,231,504,316 divided by 74,161,277 shares)** $16.61
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($231,452,423 divided by 13,618,308 shares) $17.00
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $17.00)* $17.62
- -----------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($99,256,075 divided by 5,685,130 shares) $17.46
- -----------------------------------------------------------------------------------------------
* On single retail sale 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, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (including dividend income of $2,201,301
from investments in affiliated issuers)(Note 5) $ 2,357,819
- -----------------------------------------------------------------------------------------------
Interest 7,925,466
- -----------------------------------------------------------------------------------------------
Total investment income 10,283,285
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 21,485,223
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 7,189,841
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 95,571
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 35,092
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 6,040,503
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 12,195,990
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,573,106
- -----------------------------------------------------------------------------------------------
Reports to shareholders 133,894
- -----------------------------------------------------------------------------------------------
Auditing 107,432
- -----------------------------------------------------------------------------------------------
Legal 34,181
- -----------------------------------------------------------------------------------------------
Postage 209,096
- -----------------------------------------------------------------------------------------------
Other 313,761
- -----------------------------------------------------------------------------------------------
Total expenses 49,413,690
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (1,358,313)
- -----------------------------------------------------------------------------------------------
Net expenses 48,055,377
- -----------------------------------------------------------------------------------------------
Net investment loss (37,772,092)
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1, 3, and 5) (including realized
gain of $32,926,330 on sales of investments in affiliated issuers) 416,773,342
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (81,123,514)
- -----------------------------------------------------------------------------------------------
Net gain on investments 335,649,828
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $297,877,736
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended July 31
-------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment loss $ (37,772,092) $ (30,033,138)
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 416,773,342 (297,209,612)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (81,123,514) 775,855,044
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 297,877,736 448,612,294
- ---------------------------------------------------------------------------------------------------------------
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) 74,433,423 1,239,292,050
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 372,311,159 1,486,313,826
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 3,668,241,528 2,181,927,702
- ---------------------------------------------------------------------------------------------------------------
End of year (accumulated net investment loss
of $-- and $6,175, respectively) $4,040,552,687 $3,668,241,528
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $16.02 $14.80 $14.17 $10.15 $10.72
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.12) (.12)(c) (.08)(c) (.07) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.45 2.42 2.42 4.95 .69
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.33 2.30 2.34 4.88 .63
- ------------------------------------------------------------------------------------------------------------------------------------
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 $17.35 $16.02 $14.80 $14.17 $10.15
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment
return at net asset value (%)(a) 8.30 16.33 17.12 51.32 4.83
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,478,340 $2,271,206 $1,479,770 $730,188 $412,706
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) 1.00 1.16 1.11 1.14 1.16
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.70) (.79) (.53) (.62) (.97)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 106.29 112.84 199.52 116.10 76.66
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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) 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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.45 $14.41 $13.92 $10.06 $10.70
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.24) (.22)(c) (.20)(c) (.10) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.40 2.34 2.40 4.82 .63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.16 2.12 2.20 4.72 .56
- ------------------------------------------------------------------------------------------------------------------------------------
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 $16.61 $15.45 $14.41 $13.92 $10.06
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment
return at net asset value (%)(a) 7.51 15.49 16.37 50.13 4.15
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,231,504 $1,116,849 $641,576 $160,197 $42,115
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) 1.75 1.91 1.89 1.90 1.94
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (1.45) (1.55) (1.29) (1.37) (1.71)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 106.29 112.84 199.52 116.10 76.66
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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) 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Dec. 2, 1994+
operating performance 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 (.20)(c) (.19)(c) (.16)(c) (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.42 2.39 2.42 3.92
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.22 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 $17.00 $15.78 $14.66 $14.11
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment
return at net asset value (%)(a) 7.73 15.78 16.58 37.79*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $231,452 $177,325 $60,432 $3,111
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) 1.50 1.66 1.68 1.10*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (1.20) (1.30) (1.06) (.66)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 106.29 112.84 199.52 116.10
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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) 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 12, 1996+
operating performance Year ended 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 (.08) (.09)(c) --(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.46 2.44 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.38 2.35 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments -- (1.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (1.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $17.46 $16.08 $14.81
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment
return at net asset value (%)(a) 8.58 16.67 (5.37)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $99,256 $102,862 $150
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) .75 .91 .07*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.46) (.53) (.02)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 106.29 112.84 199.52
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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) 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
July 31, 1998
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, class B 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 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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. 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 year ended July
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.
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.
These differences include permanent differences of net operating loss and
losses on wash sale transactions. 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, 1998, the fund reclassified $37,778,267 to
decrease accumulated net investment loss and $37,778,267 to decrease
paid-in-capital. 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, 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 year ended July 31, 1998, fund expenses were reduced by $1,358,313
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 $3,500
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 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, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $1,166,732 and $48,261 from the
sale of class A and class M shares, respectively and received $2,687,613
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, 1998, Putnam Mutual Funds
Corp., acting as underwriter received $79,981 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $4,033,618,500 and
$4,038,249,787 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 July 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 143,892,543 $2,407,650,178
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- -----------------------------------------------------------------------------
143,892,543 2,407,650,178
Shares
repurchased (142,804,696) (2,391,464,794)
- -----------------------------------------------------------------------------
Net increase 1,087,847 $ 16,185,384
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 41,295,474 $669,049,473
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- -----------------------------------------------------------------------------
41,295,474 669,049,473
Shares
repurchased (39,437,588) (638,068,530)
- -----------------------------------------------------------------------------
Net increase 1,857,886 $ 30,980,943
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 13,427,257 $222,524,852
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- -----------------------------------------------------------------------------
13,427,257 222,524,852
Shares
repurchased (11,049,177) (183,251,875)
- -----------------------------------------------------------------------------
Net increase 2,378,080 $ 39,272,977
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,752,755 $30,130,138
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- -----------------------------------------------------------------------------
1,752,755 30,130,138
Shares
repurchased (2,463,763) (42,136,019)
- -----------------------------------------------------------------------------
Net decrease (711,008) $(12,005,881)
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Note 5
<TABLE>
<CAPTION>
Transactions with Affiliated Issuers
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
Name cost cost Income Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advanced Health Corp. $ 18,858,986 $ 18,858,986 $-- $--
Advanced Lighting
Technologies, Inc. -- 22,497,750 -- --
Aetrium, Inc. 4,160,963 11,736,019 -- --
Aspect Development, Inc. 13,997,775 -- -- 51,934,058
Assisted Living Concepts, Inc. -- 7,946,933 -- --
Asyst Technologies, Inc. 53,858,927 53,858,927 -- --
Benchmarq Micro
Electronics, Inc. 8,185,442 19,028,026 -- --
Brooks Automation, Inc. 24,372,059 24,372,059 -- --
Budget Group Inc. 13,110,202 37,644,710 -- --
Caribiner International., Inc. 5,071,972 39,431,012 -- --
Central Garden & Pet Co. 12,936,944 8,577,846 -- 26,769,963
Citrix Systems 36,213,889 58,924,514 -- 34,168,344
Claremont Technology Group -- 12,678,620 -- --
Coldwater Creek, Inc. 3,685,001 15,488,761 -- --
Complete Business Solutions, Inc. 48,588,138 5,214,375 -- 65,166,021
Computer Learning
Centers, Inc. 10,876,446 1,820,754 -- 32,892,500
Computer Management
Sciences -- -- -- 31,426,957
Cooper Companies, Inc. 26,980,006 35,894,973 -- 13,571,213
Cotelligent Group, Inc. -- 14,596,407 --
Coulter Pharmaceuticals, Inc. 23,568,149 -- -- 25,309,900
Creedence Systems Corp. 27,684,661 43,146,555 -- --
Data Dimensions, Inc. 12,681,990 -- -- 11,540,781
Dave & Buster's, Inc. 11,986,252 1,670,949 -- 16,764,000
Discreet Logic, Inc. 3,305,061 30,519,525 -- --
Dollar Thrifty Automotive
Group 33,259,284 33,259,284 -- --
ECsoft Group PLC ADR 17,597,434 -- -- 26,344,588
Education Management Corp. 21,335,019 -- -- 61,682,811
Encad, Inc. -- 25,484,764 -- --
E. Spire Communications, Inc. 29,653,010 -- -- 47,844,000
Evolving Systems 23,169,610 23,169,610 -- --
Fine Host Corp. -- 19,949,659 -- --
First Consulting Group, Inc 16,800,600 5,171,453 -- 17,750,399
FIRSTPLUS Financial
Group, Inc. 26,554,745 27,358,263 -- 42,217,300
Flextronics Intl Ltd. 41,993,797 54,508,040 -- --
Forrester Research, Inc. -- 9,840,428 -- --
Gallileo Technologies, Ltd. 42,282,224 17,961,316 -- 8,692,169
Geo Tel Communications
Corp. 24,894,427 -- -- 32,860,169
Guitar Center, Inc. 34,367,726 -- -- 55,483,690
Hain Food Group, Inc. (The) 13,420,395 -- -- 14,510,125
Helix Technology Corp. 33,496,581 33,496,581 231,546 --
Information Management
Resources, Inc. 26,314,170 3,737,500 -- 57,048,538
Integrated Process
Equipment Corp. 50,485,912 50,485,912 -- --
Linens 'N Things, Inc. 42,896,430 10,496,030 -- 71,465,625
Metzler Group, Inc. -- 22,185,100 -- --
Michaels Stores, Inc. 51,647,284 -- -- 51,401,125
Micrel, Inc. -- 18,993,831 -- --
Micro Focus ADR 38,945,109 48,993,804 -- --
National Surgery Centers, Inc. 14,832,003 32,391,023 -- --
NCS Healthcare Inc. Class A 34,479,030 20,301,643 -- 30,879,206
North Face, Inc. (The) 8,683,437 11,819,832 -- 8,487,754
Perclose 16,021,882 -- -- 13,873,763
Peregrine Systems, Inc. 27,635,775 -- -- 43,928,000
Photronics, Inc. 41,111,383 43,842,633 -- --
Pinnacle Systems, Inc. 2,066,400 5,918,192 -- 6,175,000
Premisys Communications,
Inc. 46,201,146 4,296,077 -- 47,470,844
Renaissance Solutions, Inc. -- 18,359,559 -- --
Resource America, Inc. 23,328,237 -- 16,930 36,328,338
Safeskin, Corp. 75,802,982 3,586,688 -- 97,114,088
Simulation Sciences 14,514,923 14,514,923 -- -
Sirrom Capital Corp. 26,231,746 -- 1,752,347 33,421,122
Southern Pacific
Funding Corp. -- 23,709,226 -- --
SPR Inc 22,743,223 -- -- 26,470,325
Spine-Tech, Inc. 34,002,232 34,002,232 -- --
Strayer Education, Inc. 2,786,875 7,644,237 200,478 23,570,820
Technology Solutions, Inc. -- 52,682,945 -- --
Timberland Co. (The) Class A 84,004,014 21,624,069 -- 63,596,936
Triquint Semiconductor, Inc. 20,533,758 20,533,758 -- --
TSI International
Software, Ltd. 21,433,481 -- -- 24,067,200
Viasoft, Inc. 41,657,810 26,675,035 -- 24,028,844
Visual Networks, Inc. 29,729,339 -- -- 35,096,990
Walker Interactive
Systems, Inc. 20,167,244 4,433,417 -- 8,457,500
Wesley Jessen
VisionCare, Inc. 29,047,481 29,047,481 -- --
Whittman-Hart, Inc. 2,022,500 15,502,704 -- 17,425,444
Williams-Sonoma, Inc. 59,530,863 3,625,007 -- 108,868,200
- ------------------------------------------------------------------------------------------------------------------
Totals $1,627,804,384 $1,263,509,957 $2,201,301 $1,446,104,650
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $134,067,578 as a 20% capital gain, for its taxable year
ended July 31, 1998.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
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
PricewaterhouseCoopers LLP
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
- ---------------
AN014-45523 024/227/673/2BB 9/98
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ---------------------------------------------------------------------------
Putnam OTC & Emerging Growth Fund
Supplement to annual Report dated 7/31/98
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 annual report.
ANNUAL RESULTS AT A GLANCE
- ---------------------------------------------------------------------------
Total return
for periods ended 7/31/98: NAV
1 year 8.58%
5 years 135.51
Annual average 18.69
10 years 394.94
Annual average 17.34
Life of fund (since class A inception, 11/1/82) 1549.49
Annual average 19.48
Share value: NAV
7/31/97 $16.08
7/31/98 $17.46
- ---------------------------------------------------------------------------
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.
