Putnam
OTC & Emerging
Growth Fund
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-03
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
After one of the most trying investment periods in recent history, it is
with distinct pleasure that we bring you this report of Putnam OTC &
Emerging Growth Fund's strong positive performance at net asset value
and public offering price for the fiscal year ended July 31, 2003.
Although your fund's results lagged those of both of its benchmark
indexes, they came in ahead of its Lipper category average. You will
find the details on the facing page.
For the most part, the cause of the underperformance relative to the
benchmarks lies in the fact that many of the strong performers in the
indexes did not meet the fund's selection criteria. Of more
significance, in our view, is the decision by the management team to
position the portfolio not only with existing market conditions in mind
but also to take advantage of what we view as a gathering economic
recovery. In the following pages, the managers discuss their strategy in
detail and offer their view of prospects for the fund in the months
ahead.
While no one can make assurances in such matters, market conditions
suggest that better days may lie ahead for equity investors. What we
told you at the midpoint of this fiscal year bears repeating here. We
deeply appreciate your continued confidence in Putnam and we firmly
believe that over the long haul your patience will be rewarded.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
September 17, 2003
Report from Fund Management
Fund highlights
* Putnam OTC & Emerging Growth Fund's class A shares posted returns of
16.32% at net asset value and 9.66% at public offering price for the
12-month period ended July 31, 2003.
* The fund's performance was below that of its primary benchmark, the
Russell 2500 Growth Index, which returned 26.79% for the period, and its
secondary benchmark, the Russell Midcap Growth Index, which returned
23.15%. This was due in part to the fact that many strong-performing
stocks in the indexes didn't meet our selection criteria.
* However, the fund's performance at net asset value was above the average
return for the Lipper Mid-Cap Growth category, which was 15.98%.
* See the Performance Summary that begins on page 7 for complete fund
performance, comparative performance, and Lipper data.
Performance commentary
Your fund delivered a solid positive return during a volatile time for
the financial markets, which included a struggling U.S. economy, the war
with Iraq, and a significant stock market rebound in the second half of
the period. The fund's performance lagged that of its primary and
secondary benchmarks primarily because many of the stocks that performed
well were those companies that did not meet our quality criteria and
therefore were not in your fund's portfolio. We believe the indexes may
have had greater exposure to lower-quality stocks, which had the
strongest upswings during the period. It is important to note that the
results for the annual period do not highlight the strong performance
gains made for the 2003 year-to-date period. From the start of the
calendar year through July 31, 2003, your fund's class A shares
delivered a total return of 21.63% at net asset value.
FUND PROFILE
Putnam OTC & Emerging Growth Fund seeks capital appreciation by investing
in stocks of U.S. companies traded in the over-the-counter market and in
emerging growth companies listed on securities exchanges. The fund targets
small and midsize companies whose earnings management expects to grow
rapidly. The fund may be appropriate for investors who are seeking
above-average growth potential and are willing to assume above-average
risk in pursuit of this goal.
Market overview
Much of the 12-month period ended July 31, 2003, was characterized by
volatility in the financial markets, fueled by declining consumer
spending and sluggish prospects for business profits. Investors were
discouraged by almost three years of market losses and either sold
stocks or avoided getting back into the market. Despite an 8-week rally
in late 2002, the market generally declined through the early months of
2003 as the prospect of war with Iraq loomed, worried consumers spent
less, and the earnings outlook worsened for many businesses.
In the last five months of the period, however, a brighter picture began
to emerge. In the second quarter of 2003, the Dow Jones Industrial
Average delivered its strongest quarterly gain since the fourth quarter
of 2001. The market upswing began in April 2003, when the end of
full-scale military conflict in Iraq eased investor concerns about the
economic impact of a long war. In addition, a series of earnings
announcements from businesses exceeded expectations and boosted investor
confidence. In May, the market continued its upward climb, breaking
through its January peak. Investor optimism continued to build with
federal tax cuts, positive economic data, and another interest-rate cut
by the Federal Reserve Board in June. In July, the Dow marked its fifth
consecutive monthly gain -- a winning streak that hadn't occurred since
early 1999.
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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 7/31/03
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Equities
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Russell 2500 Growth Index (small-company growth stocks) 26.79%
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Russell Midcap Growth Index (small- and midsize-company growth stocks) 23.15%
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MSCI EAFE Index (international stocks) 6.30%
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S&P 500 Index (broad stock market) 10.64%
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Bonds
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Lehman Aggregate Bond Index (broad bond market) 5.42%
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Lehman Government Bond Index (U.S. government bonds) 4.45%
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Citigroup World Government Bond Index (global bonds) 11.95%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 7/31/03.
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Strategy overview
While market conditions changed considerably from the start of the
period to its close, your fund remained true to its mandate, seeking
growing, well-managed companies with leading market positions and strong
financials. We looked for companies across a broad range of industries,
and gradually increased the portfolio's focus in areas that we believe
will benefit from an improving economy. A number of stocks we avoided
during the period posted strong performance; however, they appeared
unattractive to us because we believed expectations for these companies
were too high -- as were their stock prices.
During the period, we began to see evidence of a recovery in the
battered technology sector. The severe market downturn that began in
2000 taught investors that technology stocks are cyclical; like any
market sector with strong growth potential, they do not appreciate
without interruption. However, we believe technology will continue to be
a major growth trend and the driving force behind productivity and
economic growth. In addition, because of the downturn, stocks of many
small and midsize technology companies are now trading at attractive
prices. For these reasons, technology stocks continued to represent a
significant portion of your fund's assets.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY WEIGHTINGS COMPARED]
TOP INDUSTRY WEIGHTINGS COMPARED
as of as of
1/31/03 7/31/03
Retail 12.1% 12.7%
Electronics 9.5% 11.9%
Health-care services 12.6% 10.7%
Software 7.6% 6.5%
Semiconductor 3.2% 5.3%
Footnote reads:
This chart shows how the fund's top weightings have changed over the
last six months. Weightings are shown as a percentage of net assets.
Holdings will vary over time.
How fund holdings affected performance
Among the stocks that made a positive contribution to performance was
Marvell Technology Group, Inc., a semiconductor company. Marvell's
computer chips are used in computer storage and broadband communications
equipment. The biggest contributor to fund performance during the
period, Marvell saw strong demand for its products, despite a difficult
economic environment. In the health-care portion of your fund's
portfolio, the stock of Gilead Sciences, Inc. performed well. Gilead is
a biotechnology company that specializes in products for patients with
life-threatening diseases. Gilead stock climbed when sales of Viread, an
HIV drug, exceeded expectations. On the services side of the health-care
sector, Caremark Rx, Inc. helped fund performance. The company
distributes prescription drugs through retail and mail-order pharmacies
and benefited from Medicaid drug program proposals. Another strong
performer in your fund's portfolio was Career Education Corp., a
post-secondary education company. The company, which offers day and
evening classes through 51 campuses worldwide, benefited from increased
demand in the weak economy, and delivered earnings that exceeded
expectations.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
1 Marvell Technology Group, Ltd.
(Bermuda)
Electronics
2 Gilead Sciences, Inc.
Biotechnology
3 AutoZone, Inc.
Retail
4 Caremark Rx, Inc.
Health-care services
5 Michaels Stores, Inc.
Retail
6 Westwood One, Inc.
Broadcasting
7 Family Dollar Stores, Inc.
Retail
8 Advance Auto Parts, Inc.
Retail
9 QLogic Corp.
Electronics
10 TCF Financial Corp.
Banking
Footnote reads:
These holdings represent 16.5% of the fund's net assets as of 7/31/03 The
fund's holdings will change over time
Despite overall solid returns for your fund, some holdings had a
negative effect on performance during the period. The stock of Westwood
One, Inc., a radio network company, performed poorly due to continued
weakness in radio advertising spending. The stock remained in the
portfolio at the close of the period; we believe it is a leader in its
industry and is a good long-term prospect. Also delivering disappointing
results was the stock of InterMune, Inc., a biotechnology firm. The
stock's decline was due to negative test results for the company's drug
Actimmune, which treats a disorder of the immune system. By the close of
the period, we had sold this stock from the portfolio. Other weak
holdings during the period were Corning Incorporated, a technology and
telecommunications business that produces optical fiber and cable, and
Exar Corporation, an electronics company.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
The fund's management team
The fund is managed by the Putnam Specialty Growth Team. The members of
the team are Roland Gillis (Portfolio Leader), Daniel Miller (Portfolio
Member), Kenneth Doerr, Anthony Sellitto, and Richard Weed.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
As we enter a new fiscal year, we are optimistic about the outlook for
the economy and the long-term growth prospects for stocks in the fund's
portfolio. We are beginning to see signs of stability -- and perhaps
recovery -- in the U.S. economy, prompted by low interest rates,
changing tax laws, tremendous cost control efforts by corporations, and
early signs of improvement in corporate earnings.
In light of this environment, we have positioned the portfolio to take
advantage of an economic recovery. As a brighter picture emerges, we
anticipate that investors will begin moving out of more conservative
investments in order to capture growth opportunities. For this reason,
we have reduced the fund's exposure to more defensive stocks in favor of
those that are more economically sensitive, such as technology, consumer
cyclicals, and biotechnology. As always, your fund will remain broadly
diversified and we will continue to identify companies with strong
management teams, healthy balance sheets, and the potential to reward
investors with capital appreciation over time.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. The fund invests
all or 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 during
its fiscal year, which ended July 31, 2003. In accordance with
regulatory requirements, we also include performance for the most
current calendar quarter-end. Performance should always be considered in
light of a fund's investment strategy. Past performance does not
indicate future results. More recent returns may be less or more than
those shown. Investment return and principal value will fluctuate and
you may have a gain or a loss when you sell your shares. A profile of
your fund's strategy appears on the first page of this report. See page
9 for definitions of some terms used in this section.
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TOTAL RETURN FOR PERIODS ENDED 7/31/03
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Class A Class B Class C Class M
(inception dates) (11/1/82) (7/15/93) (7/26/99) (12/9/94)
NAV POP NAV CDSC NAV CDSC NAV POP
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1 year 16.32% 9.66% 15.51% 10.51% 15.56% 14.56% 15.83% 11.80%
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5 years -49.81 -52.70 -51.65 -52.31 -51.58 -51.58 -51.06 -52.78
Annual average -12.88 -13.91 -13.53 -13.77 -13.50 -13.50 -13.32 -13.93
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10 years 17.48 10.76 9.23 9.23 9.19 9.19 11.66 7.72
Annual average 1.62 1.03 0.89 0.89 0.88 0.88 1.11 0.75
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Annual average
(life of fund) 10.69 10.38 9.76 9.76 9.88 9.88 10.03 9.84
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 5.75% and 3.50%, respectively. Class B
share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Performance for class B, C,
and M shares before their inception is derived from the historical
performance of class A shares, adjusted for the applicable sales charge
(or CDSC) and higher operating expenses for such shares.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/03
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Lipper
Russell Midcap Mid-Cap
Russell 2500 Growth Growth Funds
Growth Index Index category average*
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1 year 26.79% 23.15% 15.98%
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5 years 10.12 4.77 8.37
Annual average 1.95 0.94 1.01
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10 years 107.78 134.00 117.75
Annual average 7.59 8.87 7.44
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Annual average
(life of fund) --+ --+ 9.65
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* Index and Lipper results should be compared to fund performance at net
asset value. Over the 1-, 5-, and 10-year periods ended 7/31/03, there
were 507, 224, and 75 funds, respectively, in this Lipper category.
+ The inception date of the index was December 31, 1985, after the
fund's inception.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment, 7/31/93 to 7/31/03
Fund's class A Russell 2500 Russell Midcap
Date/year shares at POP Growth Index Growth Index
7/31/93 9,425 10,000 10,000
7/31/94 9,884 10,275 10,524
7/31/95 14,956 13,936 13,761
7/31/96 17,516 14,791 14,758
7/31/97 20,376 19,113 20,616
7/31/98 22,068 18,869 22,334
7/31/99 26,108 22,510 27,179
7/31/00 41,780 30,420 39,073
7/31/01 15,394 23,332 26,643
7/31/02 9,522 16,387 19,001
7/31/03 $11,076 $20,778 $23,400
Footnote reads:
Past performance does not indicate future results. At the end of the same
time period, a $10,000 investment in the fund's class B and class C shares
would have been valued at $10,923 and $10,919, respectively, and no
contingent deferred sales charges would apply; a $10,000 investment in the
fund's class M shares would have been valued at $11,166 ($10,772 at public
offering price).
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PRICE AND DISTRIBUTION* INFORMATION 12 MONTHS ENDED 7/31/03
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Class A Class B Class C Class M
Share value: NAV POP NAV NAV NAV POP
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7/31/02 $5.27 $5.59 $4.77 $5.14 $4.99 $5.17
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7/31/03 6.13 6.50 5.51 5.94 5.78 5.99
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* The fund did not make any distributions during the period.
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TOTAL RETURN FOR PERIODS ENDED 6/30/03 (MOST RECENT CALENDAR QUARTER)
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Class A Class B Class C Class M
(inception dates) (11/1/82) (7/15/93) (7/26/99) (12/9/94)
NAV POP NAV CDSC NAV CDSC NAV POP
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1 year 0.34% -5.44% -0.56% -5.53% -0.52% -1.52% -0.36% -3.80%
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5 years -55.37 -57.94 -57.05 -57.64 -57.02 -57.02 -56.49 -58.02
Annual average -14.90 -15.90 -15.55 -15.78 -15.54 -15.54 -15.33 -15.94
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10 years 14.98 8.41 6.67 6.67 6.59 6.59 9.21 5.39
Annual average 1.41 0.81 0.65 0.65 0.64 0.64 0.88 0.53
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Annual average
(life of fund) 10.54 10.23 9.61 9.61 9.72 9.72 9.88 9.69
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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.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. The
NAV is calculated by dividing the net value of all the fund's assets by
the number of outstanding shares.
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 or C shares and assumes redemption at the
end of the period. Your fund's class B 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. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
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 (except on certain
redemptions of shares bought without an initial sales charge).
Comparative indexes
Russell 2500 Growth Index is an unmanaged index of the smallest 2,500
companies in the Russell 3000 Index chosen for their growth orientation.
Russell Midcap Growth Index is an unmanaged index of all medium and
medium/small companies in the Russell 1000 Index chosen for their
growth orientation.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of international stocks from Europe, Australasia, and the Far
East.
S&P 500 Index is an unmanaged index of common stock performance.
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.
Citigroup (formerly Salomon Smith Barney) World Government Bond Index is
an unmanaged index of government bonds from 14 countries.
Nasdaq Composite Index is an unmanaged index that tracks broad market
performance of those securities traded on the Nasdaq exchange. Since
this index includes many companies in the technology sector, where
market trends change quickly, this index can be volatile.
Dow Jones Industrial Average is an unmanaged index of "blue chip" U.S.
stocks often quoted as a market indicator.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
Putnam's policy on confidentiality
In order to conduct business with our shareholders, we must obtain certain
personal information such as account holders' addresses, telephone
numbers, Social Security numbers, and the names of their financial
advisors. We use this information to assign an account number and to help
us maintain accurate records of transactions and account balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.
Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Independent Auditors' Report, constitute the fund's
financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal year.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios, and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
Independent auditors' report
To the Trustees and Shareholders of
Putnam OTC & Emerging Growth Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, 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, 2003, and the results of
its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with accounting
principles generally accepted in the United States of America. 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 auditing standards generally
accepted in the United States of America, 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,
2003, by correspondence with the custodian, provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 11, 2003
The fund's portfolio
July 31, 2003
Common stocks (96.3%) (a)
Number of shares Value
Advertising and Marketing Services (0.8%)
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451,200 Lamar Advertising Co. (NON) $15,480,672
Airlines (1.9%)
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453,213 JetBlue Airways Corp. (NON) 20,648,384
434,153 Ryanair Holdings PLC ADR (Ireland) (NON) 18,620,822
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39,269,206
Automotive (1.1%)
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96,800 Donaldson Co., Inc. 4,719,000
487,500 Gentex Corp. (NON) 17,325,750
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22,044,750
Banking (1.9%)
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349,300 New York Community Bancorp, Inc. 10,444,070
618,100 TCF Financial Corp. 28,216,265
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38,660,335
Biotechnology (4.2%)
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674,283 Amylin Pharmaceuticals, Inc. (NON) 16,162,564
512,800 Celgene Corp. (NON) 18,773,608
531,400 Gilead Sciences, Inc. (NON) 36,268,050
304,200 Trimeris, Inc. (NON) 13,491,270
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84,695,492
Broadcasting (3.2%)
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99,900 Citadel Broadcasting Corp. (NON) 1,898,100
843,551 Cumulus Media, Inc. Class A (NON) 14,753,707
339,300 Entercom Communications Corp. (NON) 16,079,427
1,045,600 Westwood One, Inc. (NON) 31,932,624
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64,663,858
Commercial and Consumer Services (2.0%)
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310,500 CDW Corp 14,866,740
457,666 Choicepoint, Inc. (NON) 17,455,381
351,300 Robert Half International, Inc. (NON) 7,626,723
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39,948,844
Communications Equipment (2.6%)
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53,792 Alcatel SA ADR (France) (NON) 530,389
1,892,800 CIENA Corp. (NON) 10,997,168
1,299,000 Corning, Inc. (NON) 10,573,860
1,398,000 Juniper Networks, Inc. (NON) 20,173,140
1,691,600 Tellabs, Inc. (NON) 11,384,468
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53,659,025
Computers (1.4%)
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238,200 Magma Design Automation, Inc. (NON) 4,752,090
917,923 McDATA Corp. Class A (NON) 9,922,748
928,200 Network Appliance, Inc. (NON) 14,832,636
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29,507,474
Consumer Goods (0.8%)
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122,000 Weight Watchers International, Inc. (NON) 5,477,800
483,900 Yankee Candle Co., Inc. (The) (NON) 11,623,278
-------------
17,101,078
Distribution (0.7%)
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400,700 Performance Food Group Co. (NON) 15,138,446
Electronics (11.9%)
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6,264,300 Agere Systems, Inc. Class A (NON) 17,602,683
990,800 Brooks Automation, Inc. (NON) 19,072,900
765,900 Cypress Semiconductor Corp. (NON) 10,707,282
1,304,700 Exar Corp. (NON) 18,657,210
1,290,900 Integrated Device Technology, Inc. (NON) 14,858,259
1,063,300 Intersil Corp. Class A (NON) 26,220,978
927,400 Jabil Circuit, Inc. (NON) 21,376,570
1,419,779 Marvell Technology Group, Ltd. (Bermuda) (NON) 49,919,430
692,245 QLogic Corp. (NON) 29,178,127
413,700 Silicon Laboratories, Inc. (NON) 15,186,927
2,237,900 Skyworks Solutions, Inc. (NON) 19,044,529
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241,824,895
Energy (3.6%)
- -------------------------------------------------------------------------------------------------------------------
428,000 BJ Services Co. (NON) 14,659,000
157,500 Cooper Cameron Corp. (NON) 7,530,075
413,300 Nabors Industries, Ltd. (NON) 14,796,140
478,700 Patterson-UTI Energy, Inc. (NON) 13,212,120
689,500 Varco International, Inc. (NON) 11,914,560
322,000 Weatherford International, Ltd. (Bermuda) (NON) 11,678,940
-------------
73,790,835
Engineering & Construction (0.3%)
- -------------------------------------------------------------------------------------------------------------------
152,600 Jacobs Engineering Group, Inc. (NON) 6,689,984
Gaming & Lottery (1.9%)
- -------------------------------------------------------------------------------------------------------------------
389,500 Alliance Gaming Corp. (NON) 8,308,035
486,600 Harrah's Entertainment, Inc. 21,240,090
331,000 Station Casinos, Inc. 9,599,000
-------------
39,147,125
Health Care Services (10.7%)
- -------------------------------------------------------------------------------------------------------------------
449,100 AdvancePCS (NON) 17,016,399
1,325,336 Caremark Rx, Inc. (NON) 33,159,907
787,800 Community Health Systems, Inc. (NON) 17,489,160
276,800 Coventry Health Care, Inc. (NON) 14,911,216
235,800 Express Scripts, Inc. Class A (NON) 15,562,800
120,700 Fisher Scientific International, Inc. (NON) 4,562,460
971,400 Health Management Associates, Inc. 19,398,858
278,700 Henry Schein, Inc. (NON) 16,287,228
476,400 Manor Care, Inc. 13,577,400
385,300 Mid Atlantic Medical Services, Inc. (NON) 20,952,614
241,900 Pediatrix Medical Group, Inc. (NON) 9,852,587
699,200 Steris Corp. (NON) 16,067,616
851,900 WebMD Corp. (NON) 10,290,952
290,600 WellChoice, Inc. (NON) 9,037,660
-------------
218,166,857
Insurance (0.5%)
- -------------------------------------------------------------------------------------------------------------------
349,200 Willis Group Holdings, Ltd. (Bermuda) 10,510,920
Investment Banking/Brokerage (0.9%)
- -------------------------------------------------------------------------------------------------------------------
461,500 T. Rowe Price Group, Inc. 18,732,285
Lodging/Tourism (1.9%)
- -------------------------------------------------------------------------------------------------------------------
241,600 Extended Stay America, Inc. (NON) 3,614,336
1,450,300 Hilton Hotels Corp. 21,174,380
398,200 Starwood Hotels & Resorts Worldwide, Inc. 12,981,320
-------------
37,770,036
Manufacturing (0.5%)
- -------------------------------------------------------------------------------------------------------------------
160,500 IDEX Corp. 5,938,500
100,600 Roper Industries, Inc. 4,013,940
-------------
9,952,440
Medical Technology (3.1%)
- -------------------------------------------------------------------------------------------------------------------
221,000 Charles River Laboratories International, Inc. (NON) 8,212,360
154,600 ResMed, Inc. (NON) 6,137,620
313,300 Respironics, Inc. (NON) 12,525,734
443,500 Thoratec Corp. (NON) 6,674,675
241,600 Varian Medical Systems, Inc. (NON) 14,824,576
315,600 Zimmer Holdings, Inc. (NON) 15,088,836
-------------
63,463,801
Natural Gas Utilities (0.3%)
- -------------------------------------------------------------------------------------------------------------------
122,800 Kinder Morgan, Inc. 6,569,800
Oil & Gas (1.4%)
- -------------------------------------------------------------------------------------------------------------------
533,600 Noble Corp. (Cayman Islands) (NON) 17,539,432
612,700 XTO Energy, Inc. 11,825,110
-------------
29,364,542
Pharmaceuticals (2.3%)
- -------------------------------------------------------------------------------------------------------------------
171,750 Barr Laboratories, Inc. (NON) 11,601,713
88,600 Cephalon, Inc. (NON) 4,428,228
461,400 Mylan Laboratories, Inc. 15,581,478
380,700 Watson Pharmaceuticals, Inc. (NON) 15,205,158
-------------
46,816,577
Restaurants (3.8%)
- -------------------------------------------------------------------------------------------------------------------
877,500 Applebee's International, Inc. 27,992,250
253,400 Brinker International, Inc. (NON) 8,869,000
636,300 CBRL Group, Inc. 22,423,212
161,600 Outback Steakhouse, Inc. 6,035,760
258,300 P.F. Chang's China Bistro, Inc. (NON) 12,496,554
-------------
77,816,776
Retail (12.7%)
- -------------------------------------------------------------------------------------------------------------------
404,699 99 Cents Only Stores (NON) 13,840,706
439,800 Advance Auto Parts, Inc. (NON) 29,875,614
399,900 AutoZone, Inc. (NON) 33,295,674
352,400 BJ's Wholesale Club, Inc. (NON) 6,871,800
680,700 Chico's FAS, Inc. (NON) 18,481,005
529,000 Dollar Tree Stores, Inc. (NON) 19,403,720
841,200 Family Dollar Stores, Inc. 31,553,412
217,500 Linens 'N Things, Inc. (NON) 5,818,125
833,000 Michaels Stores, Inc. 32,162,130
382,200 Pacific Sunwear of California, Inc. (NON) 11,599,770
312,800 PETCO Animal Supplies, Inc. (NON) 7,848,152
743,600 PETsMART, Inc. 14,745,588
350,500 Ross Stores, Inc. 16,017,850
155,400 Tuesday Morning Corp. (NON) 4,410,252
451,300 Williams-Sonoma, Inc. (NON) 12,749,225
-------------
258,673,023
Schools (2.6%)
- -------------------------------------------------------------------------------------------------------------------
389,300 Apollo Group, Inc. Class A (NON) 25,211,068
226,986 Career Education Corp. (NON) 18,930,632
162,000 Education Management Corp. (NON) 9,407,340
125,000 UNEXT.com, LLC (acquired 4/14/00, cost $10,451,238) (Private) (RES) 100,000
-------------
53,649,040
Semiconductor (5.3%)
- -------------------------------------------------------------------------------------------------------------------
307,200 Cymer, Inc. (NON) 12,426,240
390,500 KLA-Tencor Corp. (NON) 20,169,325
1,122,400 LAM Research Corp. (NON) 24,423,424
1,096,700 LTX Corp. (NON) 10,868,297
758,900 Novellus Systems, Inc. (NON) 27,176,209
743,500 Teradyne, Inc. (NON) 12,230,575
-------------
107,294,070
Shipping (1.3%)
- -------------------------------------------------------------------------------------------------------------------
273,400 Expeditors International of Washington, Inc. 9,178,038
251,600 Heartland Express, Inc. (NON) 6,390,640
213,600 Hunt (JB) Transport Services, Inc. (NON) 10,005,024
-------------
25,573,702
Software (6.5%)
- -------------------------------------------------------------------------------------------------------------------
281,200 Avid Technology, Inc. (NON) 13,064,552
1,060,700 BEA Systems, Inc. (NON) 14,001,240
698,900 Cognos, Inc. (Canada) (NON) 18,912,234
933,400 Documentum, Inc. (NON) 16,007,810
873,300 Internet Security Systems, Inc. (NON) 10,313,673
494,200 Macromedia, Inc. (NON) 10,140,984
754,600 Manhattan Associates, Inc. (NON) 20,781,684
362,400 Mercury Interactive Corp. (NON) 14,264,064
2,017,400 webMethods, Inc. (NON) 15,735,720
-------------
133,221,961
Technology Services (1.1%)
- -------------------------------------------------------------------------------------------------------------------
284,900 Cognizant Technology Solutions Corp. (NON) 8,769,222
181,400 Fair, Isaac and Co., Inc. 9,802,856
281,200 VeriSign, Inc. (NON) 3,754,020
-------------
22,326,098
Telecommunications (1.6%)
- -------------------------------------------------------------------------------------------------------------------
1,470,500 American Tower Corp. Class A (NON) 13,381,550
695,080 Citizens Communications Co. (NON) 8,236,698
1,703,400 Sprint Corp. (PCS Group) (NON) 10,475,910
-------------
32,094,158
Transportation (0.4%)
- -------------------------------------------------------------------------------------------------------------------
207,400 UTI Worldwide, Inc. 7,318,109
Waste Management (1.1%)
- -------------------------------------------------------------------------------------------------------------------
375,700 Stericycle, Inc. (NON) 16,955,341
181,700 Waste Connections, Inc. (NON) 6,168,714
-------------
23,124,055
-------------
Total Common stocks (cost $1,807,557,706) $1,964,060,269
Convertible preferred stocks (1.3%) (a) (NON)
Number of shares Value
- -------------------------------------------------------------------------------------------------------------------
1,020,280 Asymptote Ser. D, zero % cv. pfd. (acquired
9/19/00, cost $13,554,496) (Private) (RES) $311,185
496,666 Bowstreet, Inc. Ser. D, $7.00 cum. cv. pfd.
(acquired 10/25/00, cost $5,959,992) (Private) (RES) 372,500
224,820 Capella Education Co., Inc. Class F, zero % cv. pfd.
(acquired 2/14/02, cost $224,820) (Private) (RES) 2,697,845
105,556 CiDRA Corp. Ser. D, $7.70 cv. pfd. (acquired
6/15/00, cost $9,500,040) (Private) (RES) (AFF) 3,694,460
1,277,547 CommVault Systems, zero % cv. pfd. (acquired
1/30/02, cost $4,000,000) (Private) (RES) 3,794,315
3,799,710 eStudio LIVE, Inc. (acquired various dates from
2/23/00 to 1/14/03, cost $6,157,009) (Private) (RES) (AFF) 3,799,710
16,000 eStudio LIVE, Inc. (acquired 6/20/02, cost $40,000) (Private) (RES) 16,000
10,627,800 Hyperchip, Inc. Ser. C, 8.00% cv. pfd. (acquired
9/5/00, cost $9,352,464) (Private) (RES) 2,338,116
425,000 Lightwave Microsystems Corp. Ser. G, $0.80 cv. pfd.
(acquired 10/19/00, cost $4,250,000) (Private) (RES) 4,250
1,690,574 MarketSoft Software Corp. Ser. D, zero % cv. pfd.
(acquired 12/7/00, cost $8,250,001) (Private) (RES) (AFF) 3,296,619
555,882 NuTool, Inc. Ser. C, $0.27 cv. pfd. (acquired
11/15/00, cost $1,889,999) (Private) (RES) 1,940,028
202,937 NuTool, Inc. Ser. D, zero % cv. pfd. (acquired
11/1/01, cost $793,484) (Private) (RES) 708,250
878,186 Totality Corp. Ser. D, $0.346 cum. cv. pfd.
(acquired 6/26/00, cost $3,799,999) (Private) (RES) 351,274
459,362 Vivace Networks, Inc. Ser. C, $0.583 cv. pfd.
(acquired 9/7/00, cost $4,464,999) (Private) (RES) 3,679,490
-------------
Total Convertible preferred stocks (cost $74,512,486) $27,004,042
Convertible bonds and notes (--%) (a) (cost $250,000)
Principal amount Value
- -------------------------------------------------------------------------------------------------------------------
$250,000 eStudio LIVE, Inc. cv. bonds 12s, 2013 (acquired
1/14/03, cost $250,000) (Private) (NON) (RES) $250,000
Short-term investments (3.7%) (a) (cost $75,705,179)
Principal amount Value
- -------------------------------------------------------------------------------------------------------------------
$75,705,179 Short-term investments held in Putnam commingled
cash account with yields ranging from 1.00%
to 1.24% and due dates ranging from August 1, 2003
to September 25, 2003 (d) $75,705,179
- -------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,958,025,371) $2,067,019,490
- -------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $2,039,858,301.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at July 31, 2003 was $27,354,042 or 1.3% of net assets.
(AFF) Affiliated Companies (Note 5).
(d) See Note 1 to the financial statements.
ADR after the name of a foreign holding stands for American Depositary Receipts representing
ownership of foreign securities on deposit with a custodian bank.
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
July 31, 2003
Assets
- -------------------------------------------------------------------------------------------
Investments in securities, at value (identified
cost $1,958,025,371) (Note 1) $2,067,019,490
- -------------------------------------------------------------------------------------------
Cash 1,950
- -------------------------------------------------------------------------------------------
Dividends, interest and other receivables 411,769
- -------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 3,565,623
- -------------------------------------------------------------------------------------------
Receivable for securities sold 8,453,251
- -------------------------------------------------------------------------------------------
Total assets 2,079,452,083
Liabilities
- -------------------------------------------------------------------------------------------
Payable for securities purchased 27,212,782
- -------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 8,965,993
- -------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,013,947
- -------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 1,087,392
- -------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 240,769
- -------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,801
- -------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 739,973
- -------------------------------------------------------------------------------------------
Other accrued expenses 331,125
- -------------------------------------------------------------------------------------------
Total liabilities 39,593,782
Net assets $2,039,858,301
Represented by
- -------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $7,821,157,354
- -------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (5,890,293,172)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 108,994,119
- -------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares
outstanding $2,039,858,301
Computation of net asset value and offering price
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,120,364,282 divided by 182,634,487 shares) $6.13
- -------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $6.13)* $6.50
- -------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($399,188,885 divided by 72,461,493 shares)** $5.51
- -------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($25,779,247 divided by 4,340,243 shares)** $5.94
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($220,722,621 divided by 38,181,499 shares) $5.78
- -------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $5.78)* $5.99
- -------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($273,803,266 divided by 43,521,260 shares) $6.29
- -------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on
group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
Statement of operations
Year ended July 31, 2003
Investment income:
- ---------------------------------------------------------------------------------
Dividends (net of foreign tax of $6,090) $2,627,900
- ---------------------------------------------------------------------------------
Interest 681,307
- ---------------------------------------------------------------------------------
Total investment income 3,309,207
Expenses:
- ---------------------------------------------------------------------------------
Compensation of Manager (Note 2) 11,028,103
- ---------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 6,392,282
- ---------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 58,669
- ---------------------------------------------------------------------------------
Administrative services (Note 2) 29,689
- ---------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,597,513
- ---------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 3,702,163
- ---------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 241,232
- ---------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,414,615
- ---------------------------------------------------------------------------------
Other 3,462,441
- ---------------------------------------------------------------------------------
Total expenses 28,926,707
- ---------------------------------------------------------------------------------
Expense reduction (Note 2) (442,949)
- ---------------------------------------------------------------------------------
Net expenses 28,483,758
- ---------------------------------------------------------------------------------
Net investment loss (25,174,551)
- ---------------------------------------------------------------------------------
Net realized loss on investments (including net realized loss of
$42,613,582 on sales of investments in affiliated issuers)
(Notes 1, 3 and 5) (440,816,216)
- ---------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 547,513
- ---------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 736,683,162
- ---------------------------------------------------------------------------------
Net gain on investments 296,414,459
- ---------------------------------------------------------------------------------
Net increase in net assets resulting from operations $271,239,908
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Year ended July 31
Increase (decrease) in net assets 2003 2002
- --------------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------------
Net investment loss $(25,174,551) $(37,187,766)
- --------------------------------------------------------------------------------------------------------
Net realized loss on investments (440,268,703) (1,662,947,698)
- --------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 736,683,162 315,618,661
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 271,239,908 (1,384,516,803)
- --------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (267,426,387) (398,597,310)
- --------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 3,813,521 (1,783,114,113)
Net assets
- --------------------------------------------------------------------------------------------------------
Beginning of year 2,036,044,780 3,819,158,893
- --------------------------------------------------------------------------------------------------------
End of year $2,039,858,301 $2,036,044,780
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $5.27 $8.52 $29.96 $19.80 $17.35
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment loss (a) (.06) (.07) (.13) (.24) (.14)
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .92 (3.18) (16.72) 12.33 3.15
- ------------------------------------------------------------------------------------------------
Total from
investment operations .86 (3.25) (16.85) 12.09 3.01
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net realized
gain on investments -- -- (4.59) (1.93) (.56)
- ------------------------------------------------------------------------------------------------
Total distributions -- -- (4.59) (1.93) (.56)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.13 $5.27 $8.52 $29.96 $19.80
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 16.32 (38.15) (63.15) 60.03 18.31
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,120,364 $1,166,011 $2,207,311 $5,739,645 $2,804,929
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.38 1.24 1.04 .93 .98
- ------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (1.18) (1.09) (.84) (.75) (.85)
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.11 79.54 99.14 104.11 139.84
- ------------------------------------------------------------------------------------------------
(a) Per share net investment loss has been determined on the basis of the weighted average
number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of
sales charges.
(c) Includes amounts paid through expense offset and brokerage service arrangements
(Note 2).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $4.77 $7.77 $28.10 $18.78 $16.61
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment loss (a) (.09) (.11) (.23) (.45) (.26)
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .83 (2.89) (15.51) 11.70 2.99
- ------------------------------------------------------------------------------------------------
Total from
investment operations .74 (3.00) (15.74) 11.25 2.73
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net realized
gain on investments -- -- (4.59) (1.93) (.56)
- ------------------------------------------------------------------------------------------------
Total distributions -- -- (4.59) (1.93) (.56)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $5.51 $4.77 $7.77 $28.10 $18.78
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 15.51 (38.61) (63.43) 58.77 17.42
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $399,189 $411,843 $872,627 $2,619,509 $1,328,681
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 2.13 1.99 1.79 1.68 1.73
- ------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (1.93) (1.84) (1.58) (1.50) (1.60)
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.11 79.54 99.14 104.11 139.84
- ------------------------------------------------------------------------------------------------
(a) Per share net investment loss has been determined on the basis of the weighted average
number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect
of sales charges.
(c) Includes amounts paid through expense offset and brokerage service arrangements
(Note 2).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ---------------------------------------------------------------------------------------------------
For the
period
July 26,1999+
Per-share Year ended July 31 to July 31
operating performance 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $5.14 $8.37 $29.75 $19.80 $20.65
- ---------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------
Net investment loss (a) (.10) (.12) (.24) (.47) --(d)
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .90 (3.11) (16.55) 12.35 (.85)
- ---------------------------------------------------------------------------------------------------
Total from
investment operations .80 (3.23) (16.79) 11.88 (.85)
- ---------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------
From net realized
gain on investments -- -- (4.59) (1.93) --
- ---------------------------------------------------------------------------------------------------
Total distributions -- -- (4.59) (1.93) --
- ---------------------------------------------------------------------------------------------------
Net asset value,
end of period $5.94 $5.14 $8.37 $29.75 $19.80
- ---------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 15.56 (38.59) (63.44) 58.94 (4.12)*
- ---------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $25,779 $26,540 $51,023 $110,916 $75
- ---------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 2.13 1.99 1.79 1.68 .03*
- ---------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (1.93) (1.84) (1.59) (1.46) (.03)*
- ---------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.11 79.54 99.14 104.11 139.84
- ---------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment loss has been determined on the basis of the weighted average
number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of
sales charges.
(c) Includes amounts paid through expense offset and brokerage service arrangements
(Note 2).
(d) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $4.99 $8.11 $28.98 $19.27 $17.00
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment loss (a) (.08) (.10) (.19) (.39) (.22)
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .87 (3.02) (16.09) 12.03 3.05
- ------------------------------------------------------------------------------------------------
Total from
investment operations .79 (3.12) (16.28) 11.64 2.83
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net realized
gain on investments -- -- (4.59) (1.93) (.56)
- ------------------------------------------------------------------------------------------------
Total distributions -- -- (4.59) (1.93) (.56)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $5.78 $4.99 $8.11 $28.98 $19.27
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 15.83 (38.47) (63.35) 59.32 17.61
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $220,723 $190,171 $289,934 $632,154 $303,677
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.88 1.74 1.54 1.43 1.48
- ------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (1.68) (1.59) (1.34) (1.25) (1.35)
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.11 79.54 99.14 104.11 139.84
- ------------------------------------------------------------------------------------------------
(a) Per share net investment loss has been determined on the basis of the weighted average
number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of
sales charges.
(c) Includes amounts paid through expense offset and brokerage service arrangements
(Note 2).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS Y
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $5.39 $8.69 $30.35 $19.98 $17.46
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment loss (a) (.05) (.06) (.09) (.16) (.10)
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .95 (3.24) (16.98) 12.46 3.18
- ------------------------------------------------------------------------------------------------
Total from
investment operations .90 (3.30) (17.07) 12.30 3.08
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net realized
gain on investments -- -- (4.59) (1.93) (.56)
- ------------------------------------------------------------------------------------------------
Total distributions -- -- (4.59) (1.93) (.56)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.29 $5.39 $8.69 $30.35 $19.98
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 16.70 (37.97) (63.05) 60.56 18.60
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $273,803 $241,480 $398,264 $804,773 $129,334
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.13 .99 .79 .68 .73
- ------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.93) (.84) (.59) (.48) (.60)
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.11 79.54 99.14 104.11 139.84
- ------------------------------------------------------------------------------------------------
(a) Per share net investment loss has been determined on the basis of the weighted average
number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of
sales charges.
(c) Includes amounts paid through expense offset and brokerage service arrangements
(Note 2).
The accompanying notes are an integral part of these financial statements.
Notes to financial statements
July 31, 2003
Note 1
Significant accounting policies
Putnam OTC & Emerging Growth Fund (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 C, 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 and class M shares, and are
subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class C shares are subject to the
same fees and expenses as class B shares, except that class C shares
have a one-year 1.00% contingent deferred sales charge and do not
convert to class A shares. 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 and class C shares.
Class Y shares, which are sold at net asset value, are generally subject
to the same expenses as class A, class B, class C and class M shares,
but do not bear a distribution fee. Class Y shares are sold to certain
eligible purchasers including certain defined contribution plans
(including corporate IRAs), bank trust departments and trust companies.
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 accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are valued at the last reported sales price on their
principal exchange, or official closing price for certain markets. If no
sales are reported -- as in the case of some securities traded
over-the-counter -- a security is valued at its last reported bid price.
For foreign investments, if trading or events occurring in other markets
after the close of the principal exchange in which the foreign
investments are traded are expected to materially affect the value of
the investments, then those investments are valued, taking into
consideration these events, at their fair value following procedures
approved by the Trustees. Short-term investments having remaining
maturities of 60 days or less are valued at amortized cost, which
approximates fair value.
Other investments, including restricted securities, are valued at fair
value following procedures approved by the Trustees. Such valuations
and procedures are reviewed periodically by
the Trustees.
B) Joint trading account The fund may transfer uninvested cash balances,
including cash collateral received under security lending arrangements,
into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam
Investment Management, LLC ("Putnam Management"), the fund's manager, an
indirect wholly-owned subsidiary of Putnam, LLC. These balances may be
invested in issuers of high-grade short-term investments having
maturities of up to 397 days for collateral received under security
lending arrangements and up to 90 days for other cash investments.
C) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income is
recognized on the ex-dividend date except that certain dividends from
foreign securities are recognized as soon as the fund is informed of the
ex-dividend date. Non-cash dividends, if any, are recorded at the fair
market value of the securities received.
D) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. The fund and the broker
agree to exchange an amount of cash equal to the daily fluctuation in
the value of the futures contract. Such receipts or payments are known
as "variation margin." Exchange traded options are valued at the last
sale price, or if no sales are reported, the last bid price for
purchased options and the last ask price for written options.
Options traded over-the-counter are valued using prices supplied by
dealers. Futures and written option contracts outstanding at period end
are listed after The fund's portfolio.
E) Line of credit During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund maintain an asset coverage
ratio of at least 300% and borrowings must not exceed prospectus
limitations. For the period ended July 31, 2003, the fund had no
borrowings against the line of credit. Effective August 6, 2003, the
fund will no longer participate in a committed line of credit.
F) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At July 31, 2003, the fund had a capital loss carryover of $5,598,658,175
available to the extent allowed by tax law to offset future capital gains,
if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------
$246,465,953 July 31, 2009
4,367,146,683 July 31, 2010
985,045,539 July 31, 2011
Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending July 31, 2004, $172,543,092 of losses recognized during the
period November 1, 2002 to July 31, 2003.
G) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Distributions from capital gains, 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 temporary and permanent
differences of losses on wash sale transactions, post-October loss
deferrals and net operating loss. 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, 2003, the fund reclassified
$25,174,551 to increase undistributed net investment income and
$25,174,551 to decrease paid-in-capital.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $288,027,091
Unrealized depreciation (298,124,877)
--------------
Net unrealized depreciation (10,097,786)
Capital loss carryforward (5,598,658,175)
Post October loss (172,543,092)
Cost for federal income
tax purposes $2,077,117,276
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services 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, LLC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. The fund also reduced expenses through
brokerage service arrangements. For the year ended July 31, 2003, the
fund's expenses were reduced by $442,949 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $2,629 has been allocated to the fund, and an additional fee for
each Trustees meeting attended. 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
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 a 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, class C 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 Retail Management, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, 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 Retail Management at an
annual rate of up to 0.35%, 1.00%, 1.00% and 1.00% of the average net
assets attributable to class A, class B, class C and class M shares,
respectively. The Trustees have approved payment by the fund at the
annual rates of 0.25%, 1.00%, 1.00% and 0.75% of the average net assets
attributable to class A, class B, class C and class M shares,
respectively.
For the year ended July 31, 2003, Putnam Retail Management, acting as
underwriter, received net commissions of $151,350 and $3,635 from the
sale of class A and class M shares, respectively, and received $667,090
and $3,976 in contingent deferred sales charges from redemptions of
class B and class C shares, respectively.
A deferred sales charge of up to 1.00% and 0.65% is assessed on certain
redemptions of class A and class M shares, respectively. For the year
ended July 31, 2003, Putnam Retail Management, acting as underwriter,
received $13,240 and no monies on class A and class M redemptions,
respectively.
Note 3
Purchases and sales of securities
During the year ended July 31, 2003, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $1,002,036,672 and $1,299,437,599, respectively. There were
no purchases and sales of U.S. government obligations.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ---------------------------------------------------------------------------
Written options
outstanding at
beginning of year -- $--
- ---------------------------------------------------------------------------
Options opened 531,509 715,521
Options exercised (200,785) (168,008)
Options expired (330,724) (547,513)
- ---------------------------------------------------------------------------
Written options
outstanding at
end of year -- $--
- ---------------------------------------------------------------------------
Note 4
Capital shares
At July 31, 2003, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 73,186,303 $383,865,220
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
73,186,303 383,865,220
Shares repurchased (111,791,907) (579,453,807)
- ---------------------------------------------------------------------------
Net decrease (38,605,604) $(195,588,587)
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 141,085,621 $975,721,229
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
141,085,621 975,721,229
Shares repurchased (178,904,309) (1,217,260,764)
- ---------------------------------------------------------------------------
Net decrease (37,818,688) $(241,539,535)
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 9,941,791 $47,354,848
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
9,941,791 47,354,848
Shares repurchased (23,843,016) (111,182,134)
- ---------------------------------------------------------------------------
Net decrease (13,901,225) $(63,827,286)
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 14,477,849 $89,995,211
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
14,477,849 89,995,211
Shares repurchased (40,461,318) (248,091,504)
- ---------------------------------------------------------------------------
Net decrease (25,983,469) $(158,096,293)
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class C Shares Amount
- ---------------------------------------------------------------------------
Shares sold 1,821,275 $9,425,623
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
1,821,275 9,425,623
Shares repurchased (2,642,607) (13,432,847)
- ---------------------------------------------------------------------------
Net decrease (821,332) $(4,007,224)
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class C Shares Amount
- ---------------------------------------------------------------------------
Shares sold 2,858,358 $19,533,781
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
2,858,358 19,533,781
Shares repurchased (3,789,693) (25,285,588)
- ---------------------------------------------------------------------------
Net decrease (931,335) $(5,751,807)
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 10,903,409 $54,219,935
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
10,903,409 54,219,935
Shares repurchased (10,814,070) (53,411,982)
- ---------------------------------------------------------------------------
Net increase 89,339 $807,953
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 19,229,014 $124,683,502
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
19,229,014 124,683,502
Shares repurchased (16,889,758) (107,955,274)
- ---------------------------------------------------------------------------
Net increase 2,339,256 $16,728,228
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class Y Shares Amount
- ---------------------------------------------------------------------------
Shares sold 28,337,348 $152,477,753
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
28,337,348 152,477,753
Shares repurchased (29,614,665) (157,288,996)
- ---------------------------------------------------------------------------
Net decrease (1,277,317) $(4,811,243)
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class Y Shares Amount
- ---------------------------------------------------------------------------
Shares sold 41,940,537 $289,058,780
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ---------------------------------------------------------------------------
41,940,537 289,058,780
Shares repurchased (42,958,893) (298,996,683)
- ---------------------------------------------------------------------------
Net decrease (1,018,356) $(9,937,903)
- ---------------------------------------------------------------------------
Note 5
Transactions with affiliated issuers
Transactions during the year with companies in which the fund owned at
least 5% of the voting securities were as follows:
Name of Purchase Sales Dividend Market
Affiliate Cost Cost Income Value
- ------------------------------------------------------------------------------
Celox Networks, Inc. $-- $14,195,566 $-- $--
Centerpoint Broadband
Technologies, Inc. -- 21,740,004 -- --
CiDRA Corp. -- -- -- 3,694,460
Epicentric, Inc. Ser. C -- 2,249,997 -- --
Epicentric, Inc. Ser. D -- 6,399,287 -- --
Estudio LIVE, Inc. (Private) 457,602 -- -- 3,799,710
MarketSoft Software Corp. -- -- -- 3,296,619
- ------------------------------------------------------------------------------
Totals $457,602 $44,584,854 $-- $10,790,789
- ------------------------------------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 2004 will show the tax status of
all distributions paid to your account in calendar 2003.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
President, Baxter Associates, Inc. (a consulting and private investments
firm)
Director of ASHTA Chemicals, Inc., Banta Corporation (a printing and
digital imaging firm), Ryerson Tull, Inc. (a steel service corporation),
Advocate Health Care, and the National Center for Nonprofit Boards.
Chairman Emeritus of the Board of Trustees, Mount Holyoke College. Until
2002, Mrs. Baxter was a director of Intermatic Corporation, a manufacturer
of energy control products. Also held various positions in investment
banking and corporate finance, including Vice President and principal of
the Regency Group and Vice President and consultant to First Boston Corp.
Charles B. Curtis (4/27/40), Trustee since 2001
President and Chief Operating Officer, Nuclear Threat Initiative (a
private foundation dealing with national security issues), also serves as
Senior Advisor to the United Nations Foundation
Member of the Council on Foreign Relations and the Trustee Advisory
Council of the Applied Physics Laboratory at Johns Hopkins University.
Until 2003, Mr. Curtis was a member of the Electric Power Research
Institute Advisory Council, and the University of Chicago Board of
Governors for Argonne National Laboratory. Prior to 2002, Mr. Curtis was a
member of the Board of Directors of the Gas Technology Institute and the
Board of Directors of the Environment and Natural Resources Program
Steering Committee, John F. Kennedy School of Government, Harvard
University. Until 2001, Mr. Curtis was a Member of the Department of
Defense's Policy Board and Director of EG&G Technical Services, Inc.
(fossil energy research and development support). Prior to May 1997, Mr.
Curtis was Deputy Secretary of Energy. He served as Chairman of the
Federal Energy Regulatory Commission from 1977 to 1987 and has held
positions on the staff of the U.S. House of Representatives, the U.S.
Treasury Department, and the Securities and Exchange Commission. Mr.
Curtis is also a lawyer with over 15 years of experience.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Vice-Chairman and Managing Director, First Reserve Corporation (a
registered investment advisor investing in companies in the world-wide
energy industry on behalf of institutional investors)
Director of Devon Energy Corporation (formerly known as Snyder Oil
Corporation), TransMontaigne Oil Company, Continuum Health Partners of New
York, Sarah Lawrence College, and various private compa nies owned by
First Reserve Corporation. Trustee of TH Lee, Putnam Investment Trust (a
closed-end investment company). Prior to acquiring First Reserve in 1983,
Mr. Hill held executive positions with several advisory firms and various
positions with the federal government, including Associate Director of the
Office of Manage ment and Budget and Deputy Director of the Federal Energy
Administration.
Ronald J. Jackson (12/17/43), Trustee since 1996
Private investor
Former Chairman, President, and Chief Executive Officer of Fisher-Price,
Inc. (a toy manufacturer). Previously served as President and Chief
Executive Officer of Stride-Rite, Inc. and Kenner Parker Toys. Also held
financial and marketing positions with General Mills, Parker Brothers, and
Talbots. President of the Kathleen and Ronald J. Jackson Foundation
(charitable trust). Member of the Board of Overseers of WGBH (public
television and radio). Member of the Board of Overseers of the Peabody
Essex Museum.
Paul L. Joskow (6/30/47), Trustee since 1997
Elizabeth and James Killian Professor of Economics and Management and
Director of the Center for Energy and Environmental Policy Research,
Massachusetts Institute of Technology
Director, National Grid Transco (formerly National Grid Group, a UK-based
holding company with interests in electric and gas transmission and
distribution and telecommunications infrastructure), and the Whitehead
Institute for Biomedical Research (a non-profit research institution).
President of the Yale University Council. Prior to February 2002, March
2000, and September 1998, Dr. Joskow was a Director of State Farm
Indemnity Company (an automobile insurance company), Director of New
England Electric System (a public utility holding company) and a
consultant to National Economic Research Associates, respectively.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Chairman, Cambus-Kenneth Bloodstock (a limited liability company involved
in thoroughbred horse breeding and farming), President Emeritus of Mount
Holyoke College
Director, Northeast Utilities, and Talbots (a distributor of women's
apparel). Trustee of Centre College. Prior to 2001, Dr. Kennan was a
member of the Oversight Committee of Folger Shakespeare Library. Prior to
September 2000, June 2000, and November 1999, Dr. Kennan was a Director of
Chastain Real Estate, Bell Atlantic, and Kentucky Home Life Insurance,
respectively. Prior to 1995, Dr. Kennan was a Trustee of Notre Dame
University. For 12 years, she was on the faculty of Catholic University.
John H. Mullin, III (6/15/41), Trustee since 1997
Chairman and CEO of Ridgeway Farm (a limited liability company engaged in
timber and farming)
Director Alex. Brown Realty, Inc., Sonoco Products, Inc. (a packaging
company), The Liberty Corporation (a company engaged in the broadcasting
industry), and Progress Energy, Inc. (a utility company, formerly known as
Carolina Power & Light). Trustee Emeritus of Washington & Lee University.
Prior to October 1997, January 1998, and May 2001, Mr. Mullin was a
Director of Dillon, Read & Co. Inc., The Ryland Group, Inc., and Graphic
Packaging International Corp., respectively.
Robert E. Patterson (3/15/45), Trustee since 1984
Senior Partner of Cabot Properties, L.P. and Chairman of Cabot Properties,
Inc.
Chairman of the Joslin Diabetes Center, Trustee of SEA Education
Association, and Director of Brandywine Trust Company (a trust company).
Prior to February 1998, Mr. Patterson was Executive Vice President and
Director of Acquisitions of Cabot Partners Limited Partnership. Prior to
December 2001, Mr. Patterson was President and Trustee of Cabot Industrial
Trust (publicly traded real estate investment trust). Prior to 1990, Mr.
Patterson was Executive Vice President of Cabot, Cabot & Forbes Realty
Advisors, the predecessor of Cabot Partners, and prior to that was Senior
Vice President of the Beal Companies.
W. Thomas Stephens (9/2/42), Trustee since 1997
Corporate Director
Director of Xcel Energy Incorporated (public utility company), TransCanada
Pipelines, Norske Canada, Inc. (paper manufacturer), and Qwest
Communications (communications company). Until 2003, Mr. Stephens was a
Director of Mail-Well, a printing and envelope company. Prior to July 2001
and October 1999, Mr. Stephens was Chairman of Mail-Well and
MacMillan-Bloedel (forest products company). Prior to 1996, Mr. Stephens
was Chairman and Chief Executive Officer of Johns Manville.
W. Nicholas Thorndike (3/28/33), Trustee since 1992
Director of various corporations and charitable organizations, including
Courier Corporation (a book manufacturer and publisher) and Providence
Journal Co. (a newspaper publisher)
Trustee of Northeastern University and Honorary Trustee of Massachusetts
General Hospital. Prior to September 2000, April 2000, and December 2001,
Mr. Thorndike was a Director of Bradley Real Estate, Inc., a Trustee of
Eastern Utilities Associates, and a Trustee of Cabot Industrial Trust,
respec tively. Previously served as Chairman of the Board and managing
partner of Wellington Management/Thorndike Doran Paine & Lewis, and
Chairman and Director of Ivest Fund.
Lawrence J. Lasser* (11/1/42), Trustee since 1992 and Vice President since 1981
President and Chief Executive Officer of Putnam Investments and Putnam
Management
Director of Marsh & McLennan Companies, Inc. and the United Way of
Massachusetts Bay. Member of the Board of Governors of the Investment
Company Institute, Trustee of the Museum of Fine Arts, Boston, a Trustee
and Member of the Finance and Executive Committees of Beth Israel
Deaconess Medical Center, Boston, and a Member of the CareGroup Board of
Managers Investment Committee, the Council on Foreign Relations, and the
Commercial Club of Boston.
George Putnam, III* (8/10/51), Trustee since 1984 and President since 2000
President, New Generation Research, Inc. (a publisher of financial
advisory and other research services relating to bankrupt and distressed
companies) and New Generation Advisers, Inc. (a registered investment
adviser)
Director of The Boston Family Office, L.L.C. (registered investment
advisor), Trustee of St. Mark's School, and Trustee of Shore Country Day
School. Until 2002, Mr. Putnam was a Trustee of the SEA Education
Association. Previously, Mr. Putnam was an attorney with the firm of
Dechert Price & Rhoads.
A.J.C. Smith* (4/13/34), Trustee since 1986
Director of Marsh & McLennan Companies, Inc.
Director of Trident Corp. (a limited partnership with over 30
institutional investors). Trustee of the Carnegie Hall Society, the
Educational Broadcasting Corporation and the National Museums of Scotland.
Chairman of the Central Park Conservancy. Member of the Board of Overseers
of the Joan and Sanford I. Weill Graduate School of Medical Sciences of
Cornell University. Fellow of the Faculty of Actuaries in Edinburgh, the
Canadian Institute of Actuaries, and the Conference of Actuaries.
Associate of the Society of Actuaries. Member of the American Actuaries,
the International Actuarial Association and the International Association
of Consulting Actuaries. Prior to May 2000 and November 1999, Mr. Smith
was Chairman and CEO, respectively, of Marsh & McLennan Companies, Inc.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of July 31, 2003, there were 104 Putnam Funds.
Each Trustee serves for an indefinite term, until his or her resignation,
death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as defined
in the Investment Company Act of 1940) of the fund, Putnam Management,
Putnam Retail Management or Marsh & McLennan Companies, Inc., the parent
company of Putnam, LLC and its affiliated companies. Messrs. Putnam, III,
Lasser and Smith are deemed "interested persons" by virtue of their
positions as officers or shareholders of the fund or Putnam Management,
Putnam Retail Management or Marsh & McLennan Companies, Inc. George
Putnam, III is the President of your fund and each of the other Putnam
funds. Lawrence J. Lasser is the President and Chief Executive Officer of
Putnam Investments and Putnam Management. Mr. Lasser and Mr. Smith serve
as Directors of Marsh & McLennan Companies, Inc.
Officers
In addition to George Putnam, III, the other officers of the
fund are shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Treasurer and
Principal Financial Officer
Since 1989
Managing Director, Putnam Investments
and Putnam Management
Patricia C. Flaherty (12/1/46)
Senior Vice President
Since 1993
Senior Vice President, Putnam Investments and
Putnam Management
Karnig H. Durgarian (1/13/56)
Vice President and Principal Executive Officer
Since 2002
Senior Managing Director, Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Managing Director, Putnam Investments. Prior to
July 2001, Partner, PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Gordon H. Silver (7/3/47)
Vice President
Since 1990
Senior Managing Director, Putnam Investments,
Putnam Management and Putnam Retail
Management
Mark C. Trenchard (6/5/62)
Vice President
Since 2002
Senior Vice President, Putnam Investments
William H. Woolverton (1/17/51)
Vice President and Chief Legal Officer
Since 2003
Managing Director, Putnam Investments,
Putnam Management and Putnam Retail
Management
Judith Cohen (6/7/45)
Clerk and Assistant Treasurer
Since 1993
Clerk and Assistant Treasurer, The Putnam Funds
The address of each Officer is One Post Office Square,
Boston, MA 02109.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds. Please
call your financial advisor or Putnam at 1-800-225-1581 to obtain a
prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you invest
or send money.
Growth Funds
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund
Vista Fund
Voyager Fund
Blend Funds
Capital Appreciation Fund
Capital Opportunities Fund
Europe Equity Fund
Global Equity Fund
Global Natural Resources Fund
International Capital Opportunities Fund
International Equity Fund
Investors Fund
Research Fund
Tax Smart Equity Fund
Utilities Growth and Income Fund
Value Funds
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
International Growth and Income Fund
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund*
Income Funds
American Government Income Fund
Diversified Income Trust
Global Income Trust
High Yield Advantage Fund*
High Yield Trust
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund+
U.S. Government Income Trust
Tax-free Income Funds
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund+
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds
Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York,
Ohio and Pennsylvania
State tax-free money market funds+
California, New York
Asset Allocation Funds
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Closed to new investors.
+ An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at
www.putnaminvestments.com.
Services for shareholders
Investor services
Help your investment grow Set up a program for systematic investing
with as little as $25 a month from a Putnam fund or from your own
savings or checking account. (Regular investing does not guarantee a
profit or protect against loss in a declining market.)
Switch funds easily You can move money from one Putnam fund to another
within the same class of shares without a service charge. (This
privilege is subject to change or termination.)
Access your money easily You can have checks sent regularly or redeem
shares any business day at the then-current net asset value, which may
be more or less than the original cost of the shares. Class B and class
C shares carry a sales charge that is applied to certain withdrawals.
How to buy additional shares You may buy shares through your financial
advisor or directly from Putnam. To open an account by mail, send a
check made payable to the name of the fund along with a completed fund
application. To add to an existing account, complete the investment
slip found at the top of your Confirmation of Activity statement and
return it with a check payable to your fund.
For more information
Visit www.putnaminvestments.com A secure section of our Web site
contains complete information on your account, including balances and
transactions, updated daily. You may also conduct transactions, such as
exchanges, additional investments, and address changes. Log on today to
get your password.
Use our toll-free number 1-800-225-1581 Ask a helpful Putnam
representative or your financial advisor for details about any of these
or other services, or see your prospectus.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition and
practice since 1830. Founded over 65 years ago, Putnam Investments was
built around the concept that a balance between risk and reward is the
hallmark of a well-rounded financial program. We presently manage over 100
mutual funds in growth, value, blend, fixed income, and international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Independent Auditors
PricewaterhouseCoopers LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Treasurer and Principal
Financial Officer
Patricia C. Flaherty
Senior Vice President
Karnig H. Durgarian
Vice President and
Principal Executive Officer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President
William H. Woolverton
Vice President and
Chief Legal Officer
Judith Cohen
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
and Putnam's Quarterly Ranking Summary. For more information or to
request a prospectus, call toll free: 1-800-225-1581. The fund's
Statement of Additional Information contains additional information
about the fund's Trustees and is available without charge upon request
by calling 1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com.
AN014-203377 024/227/673/2BB 9/03
Not FDIC Insured, May Lose Value, No Bank Guarantee
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam OTC & Emerging Growth Fund
Supplement to Annual Report dated 7/31/03
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 clients that meet the eligibility
requirements specified in the fund's prospectus for such shares.
Performance of class Y shares, which do not incur a front-end load, a
distribution fee, or a contingent deferred sales charge, will differ from
the performance of class A, B, C, and M shares, which are discussed more
extensively in the annual report.
RESULTS AT A GLANCE
- ----------------------------------------------------------------------------
Total return for periods ended 7/31/03
NAV
1 year 16.70%
5 years -49.07
Annual average -12.62
10 years 19.93
Annual average 1.83
Life of fund (since class A inception, 11/1/82)
Annual average 10.80
Share value: NAV
7/31/02 $5.39
7/31/03 $6.29
- ----------------------------------------------------------------------------
Distributions: The fund did not make any distributions during this period.
- ----------------------------------------------------------------------------
Please note that past performance is not indicative of future results.
More recent returns may be more or less than those shown. Returns shown
for class Y shares for periods prior to their inception are derived from
the historical performance of class A shares, and are not 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, typically are lower than the operating
expenses applicable to class A shares. All returns assume reinvestment of
distributions at net asset value. 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.
Item 2. Code of Ethics:
- -----------------------
All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson and Mr. Stephens qualify as "audit committee
financial experts" (as such term has been defined by the Regulations)
based on their review of their pertinent experience and education.
Certain other Trustees, although not on the Audit and Pricing Committee,
would also qualify as "audit committee financial experts." The SEC has
stated that the designation or identification of a person as an audit
committee financial expert pursuant to this Item 3 of Form N-CSR does
not impose on such person any duties, obligations or liability that are
greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Items 5-6. [Reserved]
- ---------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
- ------------------
Item 9. Controls and Procedures:
- --------------------------------
(a) The registrant's principal executive officer and principal financial
officers have concluded, based on their evaluation of the effectiveness
of the design and operation of the registrant's disclosure controls and
procedures as of a date within 90 days of the filing date of this report
on Form N-CSR, that the design and operation of such procedures are
effective to provide reasonable assurance that information required to
be disclosed by the investment company in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
the Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 10. Exhibits:
- ------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: September 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Karnig H. Durgarian
---------------------------
Karnig H. Durgarian
Principal Executive Officer
Date: September 26, 2003
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Financial Officer
Date: September 26, 2003
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: September 26, 2003