Putnam
OTC &
Emerging
Growth Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-99
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "During a tough time for small, emerging-growth companies, Putnam OTC &
Emerging Growth Fund remained fully invested without deviating from its
stated objective and investment strategy. As a result, the fund was
positioned to take advantage of the sector's sharp turnaround during the
semiannual period."
-- Michael J. Mufson, fund manager
* "The same traits that have held Putnam OTC & Emerging Growth Fund back
the past few years make it an intriguing pick now. . . . The reason for
the fund's rough ride lies with Putnam's investment philosophy. The firm
is known for the style-specific nature of its equity offerings, and this
fund is no different. . . . Unlike many of their peers, [fund managers
Michael] Mufson and [Steven] Kirson haven't dabbled in high-flying
large-cap growth stocks. . . . The fund is better positioned than most of
its peers for a broadening in the market. . . Investors who give up on
this fund now may wish they hadn't before long."
-- Morningstar Mutual Funds, January 22, 1999
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:
Investors are likely to remember the latter half of the 1990s as a period
of contrasts, anomalies, and inversions -- sharp upswings followed by
sharp downswings, conservative stocks outpacing more aggressive stocks,
and market behavior running counter to conventional perceptions.
Shareholders of Putnam OTC & Emerging Growth Fund are also likely to view
the period as one of frustration and anxiety. However, those who
understand the importance of the fund's strict adherence to its investment
strategy appreciate fund management's steadfast refusal to follow each
transient, fleeting opportunity in search of quick profits. In the end,
the managers believe the patience of shareholders with long-term
investment horizons will eventually be rewarded.
In the following report, fund managers Michael Mufson and Steven Kirson
discuss performance during the challenging environment that prevailed
throughout the first half of fiscal 1999. Mike and Steve then take a
generally optimistic though somewhat cautious look at prospects for the
second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
March 17, 1999
Report from the Fund Managers
Michael J. Mufson
Steven L. Kirson
Maintaining a firm commitment to an investment strategy can be frustrating
at times, but it does have its rewards. This was clearly demonstrated
during the first half of Putnam OTC & Emerging Growth Fund's fiscal year.
The six months ended January 31, 1999, presented investors with a tough
lesson in stock market volatility as major market indexes hit euphoric
highs, fell to sobering lows, and then rose again. Through it all, your
fund remained true to its stated objective, even in early October, when
the stocks of small emerging-growth companies struggled through some of
their bleakest days. Because we stayed fully invested during those
challenging times, your fund was well positioned to take advantage of a
sharp turnaround in October, reaping early gains even as other investors
were scurrying back to this market sector. Small-cap stocks remained
strong through the end of the period, providing a boost for your fund's
performance.
For the semiannual period ended January 31, 1999, the fund's class A
shares provided a total return of 10.18% at net asset value (NAV) and
3.84% at public offering price (POP). For complete performance
information, including results for other share classes and over longer
time periods, please refer to the summary that begins on page 9.
* INVESTOR SENTIMENT STILL MISSING
Despite their improved performance over the period, small-cap stocks
remained in the shadow of more liquid large-company stocks throughout
1998. While the Dow Jones Industrial Average and the S&P 500(R) Index
ended the calendar year with double-digit returns, the Russell 2000, Wall
Street's broad measure of small-cap stock performance, finished with a
return of -2.55%. Meanwhile, the Nasdaq Composite Index, which gained
39.63% for the calendar year, would have lost more than 17% without its 10
largest companies -- a dramatic illustration of investors' preference for
large-cap stocks. Once again, strategic stock selection proved beneficial
for the fund, especially in strong industry sectors such as technology,
telecommunications, and retail.
* SEEKING QUALITY IN INTERNET STOCKS
In the financial markets, 1998 will be remembered in part for the frenzy
surrounding any stock with .com in its name. Investors' love affair with
the Internet is not unfounded; the potential of this medium is almost
unfathomable. It has been called the single most significant historical
event since the invention of the printing press. Yet most investors have
been astounded by the performance of stocks like bookseller Amazon.com,
which in 1998 saw its shares rise more than 966%, and America Online,
which rose 586% for the year.
When selecting Internet stocks for your fund's portfolio, we are careful
to seek leaders with healthy business models, strong management teams, and
a solid foothold in profitable markets. One such example among your fund's
Internet holdings is Lycos, Inc., one of the fastest-growing Internet
companies. Lycos recently announced a merger agreement with USA Networks,
Inc., which includes the Home Shopping Network (HSN) cable channel and
Ticketmaster Online CitySearch. The merger is expected to increase Lycos's
household reach significantly and improve its online commerce
capabilities. The Lycos Network is a family of Web sites including Lycos,
Tripod, and Angelfire, which together are visited by more than 26 million
people each month. The sites offer Web searching, chat rooms, e-mail,
online shopping, news, and free personal homepages. Lycos also has
e-commerce agreements with companies such as Barnes & Noble and licensing
agreements with partners including Bertelsmann and Microsoft.
[GRAPHIC OMITTED: TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Computer
software 26.4%
Retail 8.5%
Telecommunications 7.7%
Computer
services 6.9%
Broadcasting 6.0%
Footnote reads:
*Based on net assets as of 1/31/99. Holdings will vary over time.
Earthlink Network, Inc., another notable fund holding, is an Internet
service provider with more than 800,000 subscribers throughout the United
States and Canada. Its services include e-mail, business and personal Web
sites, and an Internet shopping mall and gaming service. Earthlink focuses
on forming promotion partnerships with media and consumer products
companies.
* SPECIALTY STORES HIGHLIGHT RETAIL SECTOR
Worth noting in the fund's retail sector is Linens 'N Things, a chain of
nearly 200 stores in 38 states selling bedding, towels, housewares, and
other home accessories. The company is expanding its inventory, closing
its smaller stores, and opening stores in new markets. Also boosting
performance in the portfolio's retail sector was Guitar Center, Inc., the
number-one retailer of guitars, amplifiers, drums, keyboards, and
professional audio equipment. The company's superstores also sell computer
hardware and software and used instruments and equipment. Guitar Center
opened 12 new stores during 1998 and now operates 48 stores in 24 major
markets.
An electric utility stock, Independent Energy Holdings, was also a
standout in your fund's portfolio. This company generates and markets
electricity, primarily to light industrial, commercial, and public sector
markets in the United Kingdom. The company has doubled its generating
plant capacity and opened a service center with the ability to serve up to
one million customers. It has also increased its marketing campaigns in
the small-business and domestic sectors. Independent Energy's continued
growth prospects are strong as it works to become an established brand.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Metromedia Fiber Network, Inc., class A
Telecommunications
Peregrine Systems, Inc.
Computer software
New Era of Networks, Inc.
Computer software
Williams-Sonoma, Inc.
Retail
Chancellor Media Corp.
Broadcasting
NEXTLINK Communications, Inc., class A
Telephone services
Outdoor Systems, Inc.
Advertising
Education Management Corp.
Education
McLeod, Inc., class A
Telephone services
Visual Networks, Inc.
Computer software
Footnote reads:
These holdings represent 26.6% of the fund's net assets as of 1/31/99.
Portfolio holdings will vary over time.
* CUTTING-EDGE TELECOM COMPANIES HELP BOOST RETURNS
As demand increases for Internet applications with more complex data,
text, and images, companies like Metromedia Fiber Network, Inc. are
flourishing. This telecommunications company provides the advanced
infrastructure to support high-capacity, high-speed transmission of data
through the Internet. Its networks offer a technologically advanced
alternative to traditional copper-based lines. Metromedia recently
announced it will lease a local distribution network in the Washington,
DC, metropolitan area to America Online. Another strong telecommunications
stock was that of Global TeleSystems Group, which provides
telecommunications services to businesses, consumers, and other
telecommunications service providers in Europe, Russia, India, and China.
* CAUTIOUS OPTIMISM FOR FISCAL YEAR'S SECOND HALF
As the fund enters the second half of fiscal 1999, we are optimistic about
the state of the U.S. economy, with its low interest-rate environment and
few signs of inflation on the horizon. As always, we will continue to
manage the fund with a long-term perspective, seeking opportunities that
may take some time to come to fruition. As the semiannual period
concludes, we believe the fundamentals of the companies in which the fund
invests remain strong, valuations appear attractive relative to large
companies, and investor sentiment seems neutral -- a view that makes us
cautiously optimistic about the fund's prospects for the remainder of the
fiscal year.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 1/31/99, 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 1/31/99
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 10.18% 3.84% 9.79% 4.79% 9.86% 5.99%
- ------------------------------------------------------------------------------
1 year 19.03 12.18 18.18 13.18 18.43 14.30
- ------------------------------------------------------------------------------
5 years 112.87 100.56 105.30 103.30 107.41 100.11
Annual average 16.31 14.93 15.47 15.25 15.71 14.88
- ------------------------------------------------------------------------------
10 years 400.89 372.09 363.32 363.32 374.21 357.60
Annual average 17.48 16.79 16.57 16.57 16.84 16.43
- ------------------------------------------------------------------------------
Life of fund 1706.68 1602.80 1468.35 1468.35 1531.10 1474.01
Annual average 19.49 19.06 18.46 18.46 18.74 18.48
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/99
Russell 2000 Consumer
Growth Index Price Index
- ------------------------------------------------------------------------------
6 months 9.45% 0.86%
- ------------------------------------------------------------------------------
1 year 7.21 1.86
- ------------------------------------------------------------------------------
5 years 65.56 12.59
Annual average 10.61 2.40
- ------------------------------------------------------------------------------
10 years 198.85 35.92
Annual average 11.57 3.12
- ------------------------------------------------------------------------------
Life of fund 418.07 67.62
Annual average 10.65 3.23
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 1/31/99
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 1 1 1
- ------------------------------------------------------------------------------
Income -- -- --
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term 0.563 0.563 0.563
- ------------------------------------------------------------------------------
Short-term -- -- --
- ------------------------------------------------------------------------------
Total $0.563 $0.563 $0.563
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
7/31/98 $17.35 $18.41 $16.61 $17.00 $17.62
- ------------------------------------------------------------------------------
1/31/99 18.44 19.56 17.56 18.00 18.65
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 12/31/98
(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
- ------------------------------------------------------------------------------
6 months -4.93% -10.41% -5.32% -9.88% -5.20% -8.52%
- ------------------------------------------------------------------------------
1 year 11.00 4.64 10.15 5.15 10.38 6.54
- ------------------------------------------------------------------------------
5 years 104.01 92.25 96.81 94.81 98.77 91.77
Annual average 15.33 13.97 14.50 14.27 14.73 13.91
- ------------------------------------------------------------------------------
10 years 397.47 368.87 359.82 359.82 370.73 354.26
Annual average 17.40 16.71 16.48 16.48 16.76 16.34
- ------------------------------------------------------------------------------
Life of fund 1590.09 1492.91 1367.43 1367.43 1425.99 1372.58
Annual average 19.12 18.68 18.08 18.08 18.37 18.11
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. 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 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 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.
<TABLE>
<CAPTION>
Portfolio of investments owned
January 31, 1999 (Unaudited)
COMMON STOCKS (96.7%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Advertising (3.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,824,194 Lamar Advertising Co. (NON) $ 71,599,615
3,144,882 Outdoor Systems, Inc. (NON) 90,415,358
112,100 TMP Worldwide Inc. (NON) 6,726,000
--------------
168,740,973
Airlines (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
593,000 Atlantic Coast Airlines Holdings (NON) 18,012,375
664,246 SkyWest, Inc. 23,954,371
--------------
41,966,746
Apparel (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
282,750 Bebe Stores, Inc. (NON) 10,214,344
Basic Industrial Products (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
789,970 Asyst Technologies, Inc. (NON)(AFF) 21,032,951
Broadcasting (6.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,972,604 Chancellor Media Corp. (NON) 113,424,730
1,137,800 Citadel Communications Corp. (NON) 28,587,325
179,866 Clear Channel Communications, Inc. (NON) 11,129,209
463,500 Entercom Communications Corp. (NON) 14,368,500
459,000 Gemstar International Group Ltd. (NON) 26,564,265
432,900 Heftel Broadcasting Corp. Class A (NON) 19,751,063
653,000 Sinclair Broadcast Group, Inc. Class A (NON) 12,325,375
778,664 Univision Communications Inc. Class A (NON) 34,942,547
--------------
261,093,014
Business Services (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
151,000 Affiliated Computer Services, Inc. Class A (NON) 7,285,750
369,800 Lason Holdings, Inc. (NON) 23,759,650
160,500 NOVA Corp./Georgia (NON) 5,125,969
716,800 Robert Half International, Inc. (NON) 27,104,000
1,038,800 Romac International, Inc. (NON) 17,140,200
694,094 Snyder Communications, Inc. (NON) 27,763,760
--------------
108,179,329
Computer Equipment (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
708,000 Insight Enterprises, Inc. (NON) 35,400,000
446,900 NeoMagic Corp. (NON) 6,284,531
--------------
41,684,531
Computer Services (6.9%)
- --------------------------------------------------------------------------------------------------------------------------
900,100 Ciber, Inc. (NON) 24,752,750
190,600 CMG Information Services, Inc. (NON) 23,253,200
2,573,951 Complete Business Solutions, Inc. (NON)(AFF) 77,218,530
240,100 Covad Communications Group 144A 12,665,275
586,700 EarthLink Network, Inc. (NON) 46,862,663
585,304 Intelligroup, Inc. (NON) 10,096,494
778,650 Keane, Inc. (NON) 25,111,463
44,100 Network Solutions, Inc. (NON) 10,628,100
478,000 USWeb Corp. (NON) 14,579,000
195,310 VeriSign, Inc. 18,603,278
756,600 Whittman-Hart, Inc. (NON) 25,346,100
212,442 Xoom.com, Inc. (NON) 12,321,636
--------------
301,438,489
Computer Software (26.4%)
- --------------------------------------------------------------------------------------------------------------------------
22,500 Allaire Corp. (NON) 1,155,938
1,623,756 Aspect Development, Inc. (NON)(AFF) 46,885,955
884,025 Beyond.com Corp. (NON) 24,642,197
243,600 Brio Technology, Inc. (NON) 6,120,450
771,000 CBT Group PLC ADR (Ireland) (NON) 13,781,625
600,600 Citrix Systems, Inc. (NON) 54,429,375
895,246 Compuware Corp. (NON) 59,310,048
164,437 Computer Management Sciences 2,559,051
1,118,200 Concord Communications, Inc. (NON)(AFF) 58,076,513
1,724,066 Electronic Arts, Inc. (NON) 72,680,157
1,873,460 GeoTel Communications Corp. (NON)(AFF) 73,182,031
230,000 I2 Technologies, Inc. (NON) 8,021,250
1,386,000 IMRglobal Corp. (NON) 35,169,750
384,400 Information Advantage, Inc. (NON) 4,564,750
676,700 Infoseek Corp. (NON) 52,951,775
383,200 Intuit, Inc. (NON) 34,871,200
433,200 ISS Group, Inc. (NON) 26,858,400
947,050 Legato Systems, Inc. (NON) 57,178,144
571,000 Lycos, Inc. (NON) 78,227,000
358,500 Macromedia, Inc. (NON) 12,569,906
257,900 Micromuse, Inc. (NON) 7,882,069
2,118,800 New Era of Networks, Inc. (NON)(AFF) 127,260,425
2,059,200 Peregrine Systems, Inc. (NON)(AFF) 128,185,200
123,300 Pervasive Software Inc. (NON) 2,242,519
466,000 Pinnacle Systems, Inc. (NON) 18,640,000
90,300 Rational Software Corp. (NON) 2,985,544
1,239,000 TSI International Software, Ltd. (NON)(AFF) 68,609,625
1,975,337 Visual Networks, Inc. (NON)(AFF) 79,260,397
--------------
1,158,301,294
Consumer Services (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
13,200 MarketWatch.com, Inc. (NON) 917,400
434,227 MemberWorks Inc. (NON) 13,895,264
723,800 SportsLine USA, Inc. (NON) 25,966,325
212,300 Ticketmaster Online-CitySearch (NON) 13,321,825
--------------
54,100,814
Education (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
248,800 Apollo Group, Inc. Class A (NON) 6,810,900
2,890,206 Education Management Corp. (NON)(AFF) 87,248,094
--------------
94,058,994
Electric Utilities (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,860,500 Independent Energy Holdings PLC
(United Kingdom) (NON)(AFF) 22,442,281
Electronic Components (5.2%)
- --------------------------------------------------------------------------------------------------------------------------
373,500 Applied Micro Circuits Corp. (NON) 15,687,000
300 ASM Lithography Holding N.V. (Netherlands) (NON) 13,950
121,000 Broadcom Corp. (NON) 16,108,125
682,600 Celestica Inc. (Canada) (NON) 22,867,100
641,600 Jabil Circuit, Inc. (NON) 45,834,300
920,200 Micrel, Inc. (NON) 45,319,850
315,300 MIPS Technologies, Inc. (NON) 12,336,113
413,600 Power Integrations, Inc. (NON) 13,183,500
414,000 Sipex Corp. (NON) 11,074,500
361,694 Uniphase Corp. (NON) 32,959,366
280,000 Veeco Instruments, Inc. (NON) 15,365,000
--------------
230,748,804
Energy-related (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
611,010 Advanced Energy Industries, Inc. (NON) 17,795,666
436,000 CalEnergy, Inc. (NON) 13,897,500
--------------
31,693,166
Entertainment (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
464,000 SFX Entertainment, Inc. Class A (NON) 28,652,000
407,700 Sotheby's Holdings, Inc. Class A 14,142,094
--------------
42,794,094
Financial Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
90,100 Net.Bank, Inc. (NON) 4,978,025
341,000 Concord EFS, Inc. (NON) 13,853,125
--------------
18,831,150
Health Care (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
230,610 SteriGenics International, Inc. (NON) 4,381,590
Health Care Information Systems (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
172,000 Incyte Pharmaceuticals, Inc. (NON) 5,160,000
Health Care Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
297,000 CareMatrix Corp. (NON) 7,406,438
131,200 Superior Consultant Holdings Corp. (NON) 5,461,200
--------------
12,867,638
Home Furnishings (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
1,285,172 Select Comfort Corp. (NON)(AFF) 37,430,635
Hospital Management and Medical Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
268,590 Advance Paradigm, Inc. (NON) 8,527,733
Information Systems (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,187,000 Mastech Corp. (NON) 28,858,938
Lodging (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,225,600 Extended Stay America, Inc. (NON) 11,413,400
536,450 Four Seasons Hotels, Inc. (Canada) 16,764,063
--------------
28,177,463
Medical Management Services (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
775,300 NCS HealthCare, Inc. Class A (NON) 16,959,688
424,350 Pediatrix Medical Group, Inc. (NON) 27,397,097
1,261,516 Renal Care Group, Inc. (NON) 39,106,965
1,952,932 Total Renal Care Holdings, Inc. (NON) 45,527,727
--------------
128,991,477
Medical Supplies and Devices (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
257,400 Henry Schein, Inc. (NON) 10,826,888
415,000 Omnicare, Inc. 12,709,375
400,898 Perclose, Inc. (NON) 16,537,043
547,000 Sabratek Corp. (NON)(AFF) 11,247,688
--------------
51,320,994
Motion Picture Distribution (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
607,300 Cinar Films, Inc. Class B, (Canada) (NON) 12,146,000
Networking (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
248,900 Digital River, Inc. (NON) 14,125,075
470,500 Entrust Technologies Inc. (NON) 16,585,125
213,600 Exodus Communications, Inc. (NON) 22,321,200
--------------
53,031,400
Networking Equipment (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
339,800 Apex PC Solutions, Inc. (NON) 11,723,100
320,775 Concur Technologies, Inc. (NON) 10,104,413
320,500 E-Tek Dynamics, Inc. (NON) 9,615,000
--------------
31,442,513
Pharmaceuticals and Biotechnology (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
154,500 Alkermes, Inc. (NON) 4,808,813
968,800 Coulter Pharmaceutical, Inc. (NON)(AFF) 24,280,550
313,300 Inhale Therapeutic Systems (NON) 10,456,388
165,233 Medicis Pharmaceutical Corp. Class A (NON) 11,752,197
19,900 Medimmune, Inc. (NON) 985,050
89,600 Parexel International Corp. (NON) 2,329,600
300,000 PathoGenesis Corp. (NON) 14,662,500
306,000 Sepracor, Inc. (NON) 35,113,500
700,000 Serologicals Corp. 18,462,500
60,900 Transkaryotic Therapies, Inc. (Malaysia) (NON) 1,827,000
--------------
124,678,098
Recreation (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
311,200 International Speedway Corp. Class A (NON) 13,226,000
Restaurants (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
237,347 Papa Johns International, Inc. (NON) 9,671,890
Retail (8.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,661,668 Bed Bath & Beyond, Inc. (NON) 53,173,376
2,304,247 Guitar Center, Inc. (NON)(AFF) 61,062,546
1,968,500 Linens 'N Things, Inc. (NON)(AFF) 72,588,438
1,478,000 Micro Warehouse, Inc. (NON) 57,642,000
486,640 Rent-Way, Inc. 12,470,150
3,318,600 Williams-Sonoma, Inc. (NON)(AFF) 115,113,938
--------------
372,050,448
Semiconductors (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
560,000 Photronics, Inc. (NON) 14,420,000
141,200 QLogic Corp. 19,467,950
--------------
33,887,950
Telecommunication Equipment (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,109,400 Tekelec (NON) 22,188,000
253,800 Tut Systems, Inc. (NON) 14,593,500
--------------
36,781,500
Telecommunications (7.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,264,700 E. Spire Communications, Inc. (NON) 6,560,632
175,000 Energis PLC, ADR (NON) 22,662,500
763,000 Global TeleSystems Group, Inc. (NON) 47,782,875
5,139,900 Metromedia Fiber Network, Inc. Class A (NON)(AFF) 235,471,669
297,000 NTL Inc. (NON) 24,688,125
--------------
337,165,801
Telephone Services (5.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,308,386 Intermedia Communications, Inc. (NON) 18,153,856
1,981,107 McLeod, Inc. Class A (NON) 82,339,760
2,501,400 NEXTLINK Communications, Inc. Class A (NON) 110,530,859
1,737,000 RSL Communications, Ltd. Class A (NON) 44,510,625
--------------
255,535,100
Wireless Communications (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
912,500 American Tower Corp. Class A 23,496,875
431,000 RF Micro Devices, Inc. (NON) 31,193,625
--------------
54,690,500
--------------
Total Common Stocks (cost $2,690,591,650) $4,247,344,642
SHORT-TERM INVESTMENTS (3.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$50,000,000 Federal Home Loan Mortgage Corp. for an effective
yield of 4.75%, March 31,1999 $ 49,600,111
91,775,000 Interest in $500,000,000 Bulk Tri-party repurchase
agreement dated January 29, 1999 with Lehman
Brothers, due February 1, 1999 with respect to
various U.S. Treasury obligations -- maturity value
of $91,810,945 for an effective yield of 4.70% 91,775,000
29,047,000 Interest in $407,512,000 joint repurchase agreement
dated January 29, 1999 with Warburg Securities
due February 1, 1999 with respect to various
U.S. Treasury obligations -- maturity value of
$29,058,377 for an effective yield of 4.70% 29,047,000
--------------
Total Short-Term Investments (cost $170,422,111) $ 170,422,111
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,861,013,761) (b) $4,417,766,753
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $4,390,843,022.
(b) The aggregate identified cost on a tax basis is $2,882,921,601, resulting in gross unrealized appreciation and
depreciation of $1,636,931,325 and $102,086,173, respectively, or net unrealized appreciation of $1,534,845,152.
(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
January 31, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $2,861,013,761) (Note 1) $4,417,766,753
- -----------------------------------------------------------------------------------------------
Cash 400,556
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 10,047,478
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 88,401,026
- -----------------------------------------------------------------------------------------------
Total assets 4,516,615,813
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 106,026,144
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 15,324,413
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,953,094
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 473,257
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 52,033
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,738
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,815,717
- -----------------------------------------------------------------------------------------------
Other accrued expenses 125,395
- -----------------------------------------------------------------------------------------------
Total liabilities 125,772,791
- -----------------------------------------------------------------------------------------------
Net assets $4,390,843,022
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,197,894,002
- -----------------------------------------------------------------------------------------------
Accumulated net investment loss (Note 1) (19,249,247)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (344,554,725)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,556,752,992
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $4,390,843,022
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($2,677,778,005 divided by 145,189,245 shares) $18.44
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $18.44)* $19.56
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,336,551,135 divided by 76,105,987 shares)** $17.56
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($270,883,712 divided by 15,048,498 shares) $18.00
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $18.00)* $18.65
- -----------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($105,630,170 divided by 5,682,681 shares) $18.59
- -----------------------------------------------------------------------------------------------
* 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
Six months ended January 31, 1999 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (including dividend income of $547,391 from
investments in affiliated issuers) (Note 5) $ 620,801
- -----------------------------------------------------------------------------------------------
Interest 2,541,154
- -----------------------------------------------------------------------------------------------
Total investment income 3,161,955
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,949,691
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,756,112
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 45,121
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 16,501
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,778,945
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 5,495,220
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 816,758
- -----------------------------------------------------------------------------------------------
Reports to shareholders 120,751
- -----------------------------------------------------------------------------------------------
Auditing 55,670
- -----------------------------------------------------------------------------------------------
Legal 7,183
- -----------------------------------------------------------------------------------------------
Postage 302,425
- -----------------------------------------------------------------------------------------------
Other 357,731
- -----------------------------------------------------------------------------------------------
Total expenses 22,702,108
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (290,906)
- -----------------------------------------------------------------------------------------------
Net expenses 22,411,202
- -----------------------------------------------------------------------------------------------
Net investment loss (19,249,247)
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1, 3, and 5)(including realized
loss of $202,337,441 on sales of investments in affiliated issuers) (322,288,243)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 759,765,430
- -----------------------------------------------------------------------------------------------
Net gain on investments 437,477,187
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $418,227,940
- -----------------------------------------------------------------------------------------------
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
1999* 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment loss $ (19,249,247) $ (37,772,092)
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (322,288,243) 416,773,342
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 759,765,430 (81,123,514)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 418,227,940 297,877,736
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (81,200,131) --
- ---------------------------------------------------------------------------------------------------------------
Class B (41,772,635) --
- ---------------------------------------------------------------------------------------------------------------
Class M (8,354,655) --
- ---------------------------------------------------------------------------------------------------------------
Class Y (3,100,361) --
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 66,490,177 74,433,423
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 350,290,335 372,311,159
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 4,040,552,687 3,668,241,528
- ---------------------------------------------------------------------------------------------------------------
End of period (accumulated net investment loss of
$19,249,247 and $--, respectively) $4,390,843,022 $4,040,552,687
- ---------------------------------------------------------------------------------------------------------------
* 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
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $17.35 $16.02 $14.80 $14.17 $10.15 $10.72
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.06)(c) (.12) (.12)(c) (.08)(c) (.07) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.71 1.45 2.42 2.42 4.95 .69
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.65 1.33 2.30 2.34 4.88 .63
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments (.56) -- (1.08) (1.71) (.86) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.56) -- (1.08) (1.71) (.86) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $18.44 $17.35 $16.02 $14.80 $14.17 $10.15
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 10.18* 8.30 16.33 17.12 51.32 4.83
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,677,778 $2,478,340 $2,271,206 $1,479,770 $730,188 $412,706
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .51* 1.00 1.16 1.11 1.14 1.16
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.41)* (.70) (.79) (.53) (.62) (.97)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 54.58* 106.29 112.84 199.52 116.10 76.66
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share January 31
operating performance (Unaudited) Year ended July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $16.61 $15.45 $14.41 $13.92 $10.06 $10.70
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.11)(c) (.24) (.22)(c) (.20)(c) (.10) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.62 1.40 2.34 2.40 4.82 .63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.51 1.16 2.12 2.20 4.72 .56
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments (.56) -- (1.08) (1.71) (.86) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.56) -- (1.08) (1.71) (.86) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $17.56 $16.61 $15.45 $14.41 $13.92 $10.06
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 9.79* 7.51 15.49 16.37 50.13 4.15
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,336,551 $1,231,504 $1,116,849 $641,576 $160,197 $42,115
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .88* 1.75 1.91 1.89 1.90 1.94
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.78)* (1.45) (1.55) (1.29) (1.37) (1.71)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 54.58* 106.29 112.84 199.52 116.10 76.66
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share January 31 Dec. 2, 1994+
operating performance (Unaudited) Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $17.00 $15.78 $14.66 $14.11 $11.10
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.10)(c) (.20)(c) (.19)(c) (.16)(c) (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.66 1.42 2.39 2.42 3.92
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.56 1.22 2.20 2.26 3.87
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments (.56) -- (1.08) (1.71) (.86)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.56) -- (1.08) (1.71) (.86)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $18.00 $17.00 $15.78 $14.66 $14.11
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 9.86* 7.73 15.78 16.58 37.79*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $270,884 $231,452 $177,325 $60,432 $3,111
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .76* 1.50 1.66 1.68 1.10*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.67)* (1.20) (1.30) (1.06) (.66)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 54.58* 106.29 112.84 199.52 116.10
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share January 31 July 12, 1996+
operating performance (Unaudited) Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $17.46 $16.08 $14.81 $15.65
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.04)(c) (.08) (.09)(c) --(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.73 1.46 2.44 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.69 1.38 2.35 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments (.56) -- (1.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.56) -- (1.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $18.59 $17.46 $16.08 $14.81
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 10.35* 8.58 16.67 (5.37)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $105,630 $99,256 $102,862 $150
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .38* .75 .91 .07*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.28)* (.46) (.53) (.02)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 54.58* 106.29 112.84 199.52
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
January 31, 1999 (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 $150 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 six months
ended January 31, 1999, 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.
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, 1999, fund expenses were reduced by
$290,906 under expense offset arrangements with PFTC. 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 $3,270
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, 1999, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $371,412 and $15,181
from the sale of class A and class M shares, respectively and received
$1,376,939 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, 1999,
Putnam Mutual Funds Corp., acting as underwriter received $42,651 on class
A redemptions.
Note 3
Purchases and sales of securities
During the six months ended January 31, 1999, purchases and sales of
investment securities other than short-term investments aggregated
$1,956,708,587 and $2,093,655,216 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, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
January 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 58,017,359 $ 880,662,016
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,044,935 77,439,756
- -----------------------------------------------------------------------------
63,062,294 958,101,772
Shares
repurchased (60,733,059) (936,024,279)
- -----------------------------------------------------------------------------
Net increase 2,329,235 $ 22,077,493
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended
January 31, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 16,253,531 $ 234,895,303
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,584,108 37,805,501
- -----------------------------------------------------------------------------
18,837,639 272,700,804
Shares
repurchased (16,892,929) (247,072,453)
- -----------------------------------------------------------------------------
Net increase 1,944,710 $ 25,628,351
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended
January 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 7,575,640 $ 112,089,054
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 546,764 8,195,989
- -----------------------------------------------------------------------------
8,122,404 120,285,043
Shares
repurchased (6,692,214) (101,753,787)
- -----------------------------------------------------------------------------
Net increase 1,430,190 $ 18,531,256
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended
January 31, 1999
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,540,504 $ 24,151,671
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 200,411 3,100,361
- -----------------------------------------------------------------------------
1,740,915 27,252,032
Shares
repurchased (1,743,364) (26,998,955)
- -----------------------------------------------------------------------------
Net increase
(decrease) (2,449) $ 253,077
- -----------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------
Note 5
Transactions with Affiliated Companies
Transactions during the period with companies in the fund owned at least
5% of the voting securities were as follows:
<TABLE>
<CAPTION>
Purchase Sales Dividend Market
Name cost cost Income Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aspect Development, Inc. $ 11,768,288 $ 11,096,374 $ -- $ 46,885,955
Asyst Technologies, Inc. 15,143,963 -- -- 21,032,951
Cinar Films, Inc. Class B 13,331,835 -- -- 12,146,000
Citadel Communications Corp. 12,954,907 -- -- 28,587,325
Complete Business Solutions 7,120,290 -- -- 77,218,530
Computer Learning Centers, Inc. -- 17,286,498 -- --
Computer Management Sciences -- 17,704,576 -- 2,559,051
Concord Communications, Inc. 29,244,362 -- -- 58,076,513
Coulter Pharmaceuticals, Inc. -- -- -- 24,280,550
Data Dimensions -- 12,681,990 -- --
Dave & Buster's, Inc. -- 16,555,867 -- --
ECsoft Group PLC ADR -- 17,597,434 -- --
Education Management Corp. 1,840,053 9,216,247 -- 87,248,094
E. Spire Communications, Inc. -- 21,768,200 -- 6,560,632
Geo Tel Communications Corp. 22,273,044 11,479,571 -- 73,182,031
Guitar Center, Inc. 4,597,279 -- -- 61,062,546
Hain Food Group, Inc. (The) -- 13,420,395 -- --
Independent Energy Holdings
PLC ADR 180,000 -- -- 22,442,281
Inspire Insurance Solutions 25,498,817 38,960,429 -- --
Intelligroup Inc. 24,007,086 14,487,201 -- 10,096,494
Linens 'N Things, Inc. 7,174,107 21,528,238 -- 72,588,438
Metromedia Fiber Network, Inc.
Class A 15,658,107 3,675,422 -- 235,471,669
Michaels Stores, Inc. 9,915,481 61,562,766 -- --
Micrel, Inc. 32,209,234 4,417,448 -- 45,319,850
NCS Healthcare Inc. Class A 9,777,280 19,080,079 -- 16,959,688
New Era of Networks, Inc. 32,410,182 15,217,403 -- 127,260,425
Perclose, Inc. -- 5,359,319 -- 16,537,043
Peregrine Systems, Inc. 45,349,168 17,129,974 -- 128,185,200
Premisys Communications, Inc. -- 63,101,007 -- --
Resource America, Inc. -- 23,328,237 33,030 --
Sabratek Corp. 796,843 -- -- 11,247,688
Select Comfort Corp. 30,087,206 -- -- 37,430,635
Sirrom Capital Corp. -- 46,618,453 514,361 --
SPR Inc 670,000 23,413,223 -- --
Strayer Education, Inc. -- 10,806,463 -- --
Theragenics Corp, 25,309,311 25,309,311 -- --
Timberland Co. (The) Class A -- 62,359,691 -- --
TSI International Software, Ltd. 5,971,401 -- -- 68,609,625
Viasoft, Inc. -- 52,125,915 -- --
Visual Networks, Inc. 25,417,880 9,068,148 -- 79,260,397
Walker Interactive Systems, Inc. -- 15,733,827 -- --
Williams-Sonoma, Inc. 6,068,287 6,553,730 -- 115,113,938
- -------------------------------------------------------------------------------------------------------------------
Totals $414,774,411 $688,643,436 $547,391 $1,485,363,549
- -------------------------------------------------------------------------------------------------------------------
</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
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
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
Richard A. Monaghan
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
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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SA014-49951-024/227/673 3/99
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- --------------------------------------------------------------------------
Putnam OTC & Emerging Growth Fund
Supplement to Semiannual Report dated 1/31/99
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
$150 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.
SEMIANNUAL RESULTS AT A GLANCE
- --------------------------------------------------------------------------
Total return
for periods ended 1/31/99 NAV
6 months 10.35%
1 year 19.37
5 years 114.51
Annual average 16.49
10 years 404.76
Annual average 17.58
Life of fund (since class A inception, 11/1/82) 1720.16
Annual average 19.55
- --------------------------------------------------------------------------
Share value: NAV
7/31/98 $17.46
1/31/99 $18.59
- --------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
1 $0.000 $0.563 $0.563
- --------------------------------------------------------------------------
Please note that past performance does not indicate future results.
Returns shown for class Y shares for periods prior to their inception are
derived from the historical performance of class A shares, adjusted to
reflect the initial sales charge currently applicable to class A shares.
These returns have not been adjusted to reflect differences in operating
expenses which, for class Y shares, are lower than the operating expenses
applicable to class A shares. All returns assume reinvestment of
distributions at net asset value. Performance data reflects an expense
limitation previously in effect. Without the expense limitation, total
returns would have been lower. 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.
