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:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-04
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
In recent months we have communicated with you about Putnam's commitment
to establishing high fiduciary standards within the investment
management industry. The firm's efforts took a step forward in January
with a series of initiatives that were outlined in a letter to
shareholders from Putnam President and CEO Ed Haldeman. Among other
things, Putnam is placing voluntary limits on fund expenses and reducing
sales loads. In addition, beginning this spring, shareholder
communications will provide enhanced disclosure, including a comparison
of fund costs with industry averages and a gauge of each fund's relative
risk. They will also disclose the number of shares held by Putnam
employees and discuss how the portfolio management team is compensated.
Another new measure, taking effect April 19, 2004, will impose a 2% fee
on shares that are sold within 5 days of purchase. This redemption fee
demonstrates Putnam's commitment to preventing short-term trading in its
funds, which can be detrimental to shareholders.
These changes serve to advance shareholder interests and provide a
framework to help you make financial decisions. We encourage you to
review the new disclosure as it is implemented and discuss it with your
financial advisor. While we are pleased with this progress, the Trustees
and Putnam are continuing to explore other measures that may provide
greater transparency and enhanced protection for long-term shareholders.
Putnam OTC & Emerging Growth Fund's positive return reflects favorable
market conditions that lifted valuations for many of the fund's
holdings. Though strong on an absolute basis, the fund's returns lagged
those of its two benchmark indexes and its Lipper peer group average.
This was largely due to the fund's emphasis on higher-quality stocks in
a rally that favored lower-quality issues. In the following pages, your
fund's management team discusses fund performance, market trends,
investment strategies, and individual holdings that contributed to
returns. They also discuss their expectations for the months ahead.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
March 17, 2004
Report from Fund Management
Fund highlights
* Putnam OTC & Emerging Growth Fund advanced solidly over the six-month
period ended January 31, 2004, with class A shares posting returns of
13.54% at net asset value (NAV) and 7.08% at public offering price
(POP).
* Due to the high quality of its holdings and corrections among some
major positions in the period's final month, the fund's performance was
below that of its primary benchmark, the Russell 2500 Growth Index,
which returned 20.29% for the period, and its secondary index, the
Russell Midcap Growth Index, which returned 19.88% for the period.
* For the same reasons, the fund's performance was also below the
average of 16.28% for the Lipper Mid-Cap Growth Funds category.
* See the Performance Summary beginning on page 7 for complete fund
performance, comparative performance, and Lipper data.
Performance commentary
Despite giving up some ground in the last month of the period, your fund
delivered solid absolute performance over the past six months. An array
of technology companies and specialty retail holdings led portfolio
returns. However, the fund's relative performance was disappointing,
lagging that of its primary and secondary benchmarks and the average of
other funds in its peer group, primarily because of the fund's
higher-quality focus and setbacks among some of its larger portfolio
positions in the final month of the period. Despite these isolated
difficulties, we remain committed to the fund's strategy of investing in
small and midsize companies with what we consider to be above-average
growth potential.
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
Most of the past six months have seen a strengthening U.S. economy and
increasing confidence among equity investors. Once full-scale military
operations in Iraq concluded in April, investors began to refocus on the
domestic economy, which provided signs of growing strength. By the start
of the semiannual period, an equity rally was fully underway. Throughout
the period, many of the market's top gains went to lower-quality and
more speculative stocks, which had been the hardest hit during the bear
market. The higher-quality companies the fund favored, which had been
less severely affected by the downturn, performed more modestly.
The rally paused slightly in November when the value of the dollar sank
to a record low relative to the euro, but positive economic news,
including robust GDP growth and improving employment data, kept the
market from drifting down for long. By December, the Dow Jones
Industrial Average had broken through the 10,000 mark, while the
technology-laden NASDAQ composite exceeded 2,000. In January, stocks
were either flat or gave up ground as the market became concerned about
just when the Federal Reserve Board might begin to raise interest rates
to keep inflation low in the face of mounting economic strength. In
general, stocks that had performed most strongly over the past five
months were those that corrected most significantly. Technology stocks
in particular were hard hit.
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MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 1/31/04
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Equities
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Russell 2500 Growth Index (growth stocks of small and
midsize companies) 20.29%
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Russell Midcap Growth Index (midsize-company growth stocks) 19.88%
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MSCI EAFE Index (international stocks) 25.35%
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S&P 500 Index (broad stock market) 15.23%
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Bonds
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Lehman Aggregate Bond Index (broad bond market) 4.49%
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Lehman Government Bond Index (U.S. Treasury and agency
securities) 3.88%
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Citigroup World Government Bond Index (global government
bonds) 10.86%
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These indexes provide an overview of performance in different market
sectors for the six months ended 1/31/04.
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Strategy overview
Throughout the semiannual period, the fund remained true to its mandate,
seeking growing, well-managed companies with leading market positions
and strong financials. This focus on individual companies, rather than
sectors, is at the core of the fund's investment strategy. Sometimes, as
in the recent period, this leads to holdings in sectors not
traditionally associated with rapid growth, such as health care and
financial services.
In concert with our focus on bottom-up stock analysis, however, we do
position the fund to take advantage of particular market conditions.
During the recent period, this meant gradually increasing portfolio
positions in areas and companies likely to benefit from an improving
economy. For example, the portfolio has a slight overweight, relative to
its benchmark, in technology stocks. Many of these holdings delivered
superior returns for the period, despite setbacks in January. We believe
that technology will continue to be a major growth trend and the driving
force behind productivity and economic growth. Accordingly, these stocks
continue to represent a significant portion of the portfolio, and we
view the recent correction in tech stocks as an opportunity to
selectively augment current portfolio positions and add well-priced
stocks from fundamentally strong companies.
The portfolio was also slightly overweighted in consumer cyclicals,
especially retail stocks, which performed well. We reduced holdings in
the financial sector, and increased energy holdings to benefit from
rising natural gas prices. The fund's health-care exposure was reduced
somewhat as a few holdings were acquired and we sold others that had
grown beyond the small or midsize range.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY WEIGHTINGS COMPARED]
TOP INDUSTRY WEIGHTINGS COMPARED
as of 7/31/03 as of 1/31/04
Electronics 11.9% 13.1%
Retail 12.7% 11.4%
Health-care services 10.7% 9.6%
Software 6.5% 7.5%
Communications
equipment 2.6% 4.8%
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
Despite correcting sharply in the last month of the period, technology
stocks provided some of the fund's strongest gains over the past six
months. Many of these stocks had suffered large declines over the last
few years. As economic growth improved and investors began to anticipate
an increase in capital spending by businesses, technology stocks were
among the greatest beneficiaries. Leading fund returns for the period
was Juniper Networks, a maker of networking equipment. Though we sold
our position by period-end, the fund also enjoyed superior returns from
its holdings in Documentum, a developer of software for publishing and
document management that was purchased by EMC during the period.
Strongly positive returns were also contributed by LTX Corporation, a
producer of semiconductor testing equipment; electronics companies
Integrated Device Technology and Marvell Technology Group; and Brooks
Automation, a producer of semiconductor equipment.
Several holdings in the consumer cyclical sector also provided strong
performance over the period. Specialty retailers, including Chico's and
Pacific Sunwear, posted solid returns, as did Advanced Auto Parts, a
chain for do-it-yourself auto-repair buffs. These stocks did slip in the
final months of the period, however, as investors worried about the
potential strength of the Christmas shopping season. In the restaurant
sector, fund holding Applebee's benefited from the improving economy
that enabled consumers to upgrade from fast-food establishments to this
chain of slightly more expensive, casual restaurants.
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TOP HOLDINGS
1 Marvell Technology Group, Ltd.
(Bermuda)
Electronics
2 Michaels Stores, Inc.
Retail
3 Westwood One, Inc.
Broadcasting
4 TCF Financial Corp.
Banking
5 Intersil Corp. Class A
Electronics
6 Brooks Automation, Inc.
Electronics
7 Skyworks Solutions, Inc.
Electronics
8 Harrah's Entertainment, Inc.
Gaming and lottery
9 Health Management Associates, Inc.
Health-care services
10 Chico's FAS, Inc.
Retail
Footnote reads:
These holdings represent 15.7% of the fund's net assets as of 1/31/04.
The fund's holdings will change over time.
Despite overall solid returns from the portfolio, some holdings had a
negative impact on performance. In the media sector, radio network
company Westwood One again detracted from returns due to a continued lag
in advertising spending. Unfortunately, management had anticipated a
pickup in advertising that did not materialize over the period. However,
Westwood One is an industry leader well positioned to benefit as the
economy continues to recover and companies move away from cost-cutting
and back into advertising in order to build business and retain
customers. Another consumer stock, discount chain Family Dollar Stores,
also detracted from returns when its stock price corrected sharply
following an earnings disappointment. We sold our position in the
company by period-end. Two biotechnology holdings also detracted from
performance. Gilead Sciences, which specializes in products for patients
with life-threatening diseases, missed its fourth quarter revenue
expectations due to inventory difficulties with its important HIV drug,
Viread. Amylin Pharmaceuticals, an early stage biotechnology firm
focused on diabetes treatment, also experienced difficulties as
investors worried about the progress of drug trials. We sold our
position in Gilead Sciences by period-end, but we continue to believe in
the long-term potential of Amylin Pharmaceuticals, and this stock
remains in the portfolio.
In the transportation sector, longtime holding Ryanair suffered a sharp
valuation correction after pre-releasing disappointing quarterly
earnings due to weakness in traffic and yields throughout their system.
This discount airline flies in Europe, and its stock had provided
healthy returns over many years. The stock did recover somewhat by the
end of the period. 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), Anthony Sellitto, and Richard Weed.
OF SPECIAL INTEREST
Putnam introduces a new redemption fee to protect long-term investors in
the funds. For shares purchased on or after April 19, 2004, a 2%
redemption fee will be applied to shares exchanged or sold within 5
calendar days of purchase. The fee applies to all Putnam funds except
money market funds, variable annuity funds, and closed-end funds.
Beginning on April 19, 2004, the 1% redemption fee currently applicable
to international, global, and taxable high-yield funds will be imposed
on shares that are exchanged or redeemed within 6 to 90 days of
purchase. Please see your fund's prospectus for additional information
or talk to your financial advisor.
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.
In our opinion, the overall environment for stocks remains supportive,
with inflation and interest rates still low, corporate earnings and
productivity strong, and government fiscal and monetary policies
constructive. Of course, as in every recovery, the positive impact of a
growing economy on corporate earnings must be balanced against the
possibility of higher interest rates. In fact, we believe that, in
response to the Fed's last meeting, equity valuations have already begun
to reflect a rise in interest rates sometime over the next 12 months.
Other factors that could produce market volatility in the months ahead
include a rise in energy prices, currency fluctuations, and the inherent
instability of a presidential election year, against a backdrop of
global terrorism. In this environment, fund performance depends on
astute portfolio positioning -- investing in the companies and market
sectors with the best potential for higher returns in a growing economy.
With its concentrations in the economy's more cyclical sectors and focus
on a diversified array of companies with solid growth prospects, we
consider your fund well positioned to take advantage of opportunities as
they arise.
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 shows your fund's performance during the first half of its
fiscal year, which ended January 31, 2004. 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. Data represent past performance. Past
performance does not guarantee 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. For the most recent month-end performance, please visit
www.putnaminvestments.com.
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TOTAL RETURN FOR PERIODS ENDED 1/31/04
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Class A Class B Class C Class M Class R
(inception dates) (11/1/82) (7/15/93) (7/26/99) (12/9/94) (12/1/03)
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NAV POP NAV CDSC NAV CDSC NAV POP NAV
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6 months 13.54% 7.08% 13.07% 8.07% 13.13% 12.13% 13.32% 9.35% 13.36%
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1 year 38.92 30.83 37.83 32.83 37.99 36.99 38.48 33.67 38.65
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5 years -48.28 -51.24 -50.20 -50.91 -50.09 -50.09 -49.51 -51.27 -48.90
Annual average -12.35 -13.38 -13.02 -13.27 -12.98 -12.98 -12.78 -13.39 -12.57
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10 years 10.10 3.73 2.23 2.23 2.34 2.34 4.72 1.03 7.49
Annual average 0.97 0.37 0.22 0.22 0.23 0.23 0.46 0.10 0.72
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Annual average
(life of fund) 11.09 10.78 10.16 10.16 10.28 10.28 10.43 10.25 10.80
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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 (which
for class A shares does not reflect a reduction in sales charges that
went into effect on January 28, 2004; if this reduction had been in
place for all periods indicated, returns would have been higher). 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. Class R share returns have no
initial sales charge or CDSC. Performance for class B, C, M, and R
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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TOTAL RETURN FOR PERIODS ENDED 12/31/03 (MOST RECENT CALENDAR QUARTER)
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Class A Class B Class C Class M Class R
(inception dates) (11/1/82) (7/15/93) (7/26/99) (12/9/94) (12/1/03)
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NAV POP NAV CDSC NAV CDSC NAV POP NAV
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6 months 15.23% 8.61% 14.69% 9.69% 14.86% 13.86% 14.90% 10.92% 15.03%
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1 year 35.12 27.29 33.85 28.85 33.81 32.81 34.17 29.56 34.85
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5 years -45.90 -49.01 -47.98 -48.72 -47.86 -47.86 -47.27 -49.11 -46.55
Annual average -11.56 -12.60 -12.25 -12.50 -12.21 -12.21 -12.01 -12.64 -11.77
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10 years 10.36 4.00 2.39 2.39 2.41 2.41 4.81 1.12 7.59
Annual average 0.99 0.39 0.24 0.24 0.24 0.24 0.47 0.11 0.73
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Annual average
(life of fund) 11.02 10.71 10.08 10.08 10.20 10.20 10.35 10.17 10.73
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/04
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Lipper
Russell Midcap Mid-Cap
Russell 2500 Growth Growth Funds
Growth Index* Index* category average+
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6 months 20.29% 19.88% 16.28%
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1 year 55.81 48.89 41.74
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5 years 22.18 10.78 15.19
Annual average 4.09 2.07 2.30
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10 years 119.31 147.40 124.59
Annual average 8.17 9.48 8.00
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Annual average
(life of fund) -- -- 10.76
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Index and Lipper results should be compared to fund performance at net
asset value.
* The inception date of the Russell 2500 Growth Index and the Russell
Midcap Growth Index was December 31, 1985.
+ Over the 6-month and 1-, 5-, and 10-year periods ended 1/31/04, there
were 509, 485, 237, and 84 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION* INFORMATION 6 MONTHS ENDED 1/31/04
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Class A Class B Class C Class M Class R
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Share value: NAV POP NAV NAV NAV POP NAV
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7/31/03 $6.13 $6.50 $5.51 $5.94 $5.78 $5.99 --
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12/1/03++ -- -- -- -- -- -- $6.97
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1/31/04 6.96 7.35+ 6.23 6.72 6.55 6.79 6.96
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* The fund made no distributions during the period.
+ Reflects a reduction in sales charges that took effect on January 28, 2004.
++ Inception date of class R shares.
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 (since reduced to 5.25%) 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).
Class R shares are not subject to an initial sales charge or CDSC and
are available only to certain defined contribution plans.
Comparative indexes
Citigroup World Government Bond Index is an unmanaged index of
government bonds from 14 countries.
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.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of international stocks from Europe, Australasia, and the Far
East.
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.
S&P 500 Index is an unmanaged index of common stock performance.
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.
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. Our proxy voting guidelines and policies are
available on the Putnam Individual Investor Web site,
www.putnaminvestments.com, by calling Putnam's Shareholder Services at
1-800-225-1581, or on the SEC's Web site, www.sec.gov.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
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 period.
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.
The fund's portfolio
January 31, 2004 (Unaudited)
Common stocks (98.8%) (a)
Number of shares Value
Advertising and Marketing Services (0.6%)
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292,939 Lamar Advertising Co. (NON) $11,272,293
Airlines (1.1%)
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517,019 JetBlue Airways Corp. (NON) 11,751,842
195,200 Ryanair Holdings PLC ADR (Ireland)
(NON) 6,832,000
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18,583,842
Automotive (1.5%)
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131,300 Donaldson Co., Inc. 7,092,826
468,400 Gentex Corp. 20,483,132
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27,575,958
Banking (2.6%)
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181,400 Investors Financial Services Corp. 7,517,216
300,900 New York Community Bancorp, Inc. 12,412,125
580,900 TCF Financial Corp. 29,079,854
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49,009,195
Biotechnology (4.2%)
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1,008,883 Amylin Pharmaceuticals, Inc. (NON) 19,491,620
348,400 Celgene Corp. (NON) 14,078,844
554,300 Medicines Co. (NON) 16,839,634
217,750 Neurocrine Biosciences, Inc. (NON) 12,322,473
200,000 Onyx Pharmaceuticals, Inc. (NON) 6,736,000
281,200 OSI Pharmaceuticals, Inc. (NON) 9,785,760
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79,254,331
Broadcasting (3.7%)
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207,000 Citadel Broadcasting Corp. (NON) 3,922,650
792,751 Cumulus Media, Inc. Class A (NON) 16,203,830
428,300 Entercom Communications Corp. (NON) 20,391,363
982,700 Westwood One, Inc. (NON) 30,021,485
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70,539,328
Commercial and Consumer Services (2.1%)
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242,600 CDW Corp. 16,482,244
200,166 Choicepoint, Inc. (NON) 7,706,391
671,400 Robert Half International, Inc.
(NON) 15,771,186
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39,959,821
Communications Equipment (4.8%)
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64,100 ADTRAN, Inc. 2,206,322
53,792 Alcatel SA ADR (France) (NON) 901,016
253,950 Aspect Communications Corp. (NON) 4,431,428
330,000 Comverse Technology, Inc. (NON) 5,808,000
191,000 F5 Networks, Inc. (NON) 6,495,910
478,087 Foundry Networks, Inc. (NON) 11,392,813
744,600 Juniper Networks, Inc. (NON) 21,511,494
413,020 Redback Networks, Inc. (NON) 3,576,753
135,000 SafeNet, Inc. (NON) 5,332,500
1,426,085 Sonus Networks, Inc. (NON) 12,078,940
1,634,900 Tellabs, Inc. (NON) 16,185,510
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89,920,686
Computers (2.2%)
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596,900 Emulex Corp. (NON) 16,193,897
574,000 Network Appliance, Inc. (NON) 12,834,640
85,000 Research in Motion, Ltd. (Canada)
(NON) 7,400,950
306,200 Symbol Technologies, Inc. 5,297,260
--------------
41,726,747
Consumer Goods (0.8%)
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595,700 Yankee Candle Co., Inc. (The) (NON) 15,631,168
Consumer Services (0.2%)
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141,600 Alliance Data Systems Corp. (NON) 4,502,880
Electronics (13.1%)
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6,148,900 Agere Systems, Inc. Class A (NON) 23,673,265
495,000 Broadcom Corp. Class A (NON) 20,092,050
1,084,200 Brooks Automation, Inc. (NON) 27,105,000
518,700 Cypress Semiconductor Corp. (NON) 10,996,440
706,700 Exar Corp. (NON) 14,289,474
4,025 HI/FN, Inc. (NON) 64,199
1,300,000 Integrated Device Technology, Inc.
(NON) 23,686,000
1,097,900 Intersil Corp. Class A 28,808,896
313,800 Jabil Circuit, Inc. (NON) 9,288,480
947,529 Marvell Technology Group, Ltd.
(Bermuda) (NON) 39,417,206
295,200 NVIDIA Corp. (NON) 6,568,200
382,245 QLogic Corp. (NON) 17,185,735
2,513,400 Skyworks Solutions, Inc. (NON) 26,868,246
--------------
248,043,191
Energy (3.3%)
- -------------------------------------------------------------------------------
335,000 BJ Services Co. (NON) 13,111,900
255,000 CAL Dive International, Inc. (NON) 5,859,900
640,000 Key Energy Services, Inc. (NON) 7,155,200
377,300 Nabors Industries, Ltd. (Bermuda)
(NON) 16,601,200
572,800 Patterson-UTI Energy, Inc. (NON) 19,807,424
--------------
62,535,624
Engineering & Construction (0.3%)
- -------------------------------------------------------------------------------
143,400 Jacobs Engineering Group, Inc. (NON) 6,435,792
Financial (0.3%)
- -------------------------------------------------------------------------------
260,000 eSpeed, Inc. Class A (NON) 5,850,000
Gaming & Lottery (2.1%)
- -------------------------------------------------------------------------------
465,300 Alliance Gaming Corp. (NON) 11,213,730
503,500 Harrah's Entertainment, Inc. 26,685,500
--------------
37,899,230
Health Care Services (9.6%)
- -------------------------------------------------------------------------------
140,000 AMERIGROUP Corp. (NON) 5,712,000
810,600 Community Health Systems, Inc. (NON) 22,907,556
211,700 Coventry Health Care, Inc. (NON) 14,035,710
1,024,400 Health Management Associates, Inc. 25,108,044
314,800 Henry Schein, Inc. (NON) 22,080,072
353,800 Manor Care, Inc. 12,630,660
265,100 Odyssey Healthcare, Inc. (NON) 7,836,356
329,300 Omnicare, Inc. 14,499,079
338,000 Pediatrix Medical Group, Inc. (NON) 19,874,400
340,700 Universal Health Services, Inc.
Class B 18,711,244
206,700 VCA Antech, Inc. (NON) 5,890,950
316,800 WellChoice, Inc. (NON) 11,594,880
--------------
180,880,951
Homebuilding (0.7%)
- -------------------------------------------------------------------------------
289,000 Lennar Corp. 12,744,900
Investment Banking/Brokerage (1.9%)
- -------------------------------------------------------------------------------
781,200 Ameritrade Holding Corp. Class A
(NON) 12,382,020
452,900 T. Rowe Price Group, Inc. 23,609,677
--------------
35,991,697
Leisure (0.4%)
- -------------------------------------------------------------------------------
187,100 Multimedia Games, Inc. (NON) 7,992,912
Lodging/Tourism (2.2%)
- -------------------------------------------------------------------------------
1,421,900 Hilton Hotels Corp. 22,750,400
1,817,300 La Quinta Corp. (NON) 13,684,269
330,900 Scientific Games Corp. Class A (NON) 4,960,191
--------------
41,394,860
Manufacturing (1.0%)
- -------------------------------------------------------------------------------
180,500 IDEX Corp. 7,526,850
251,350 Roper Industries, Inc. 12,187,962
--------------
19,714,812
Medical Technology (1.8%)
- -------------------------------------------------------------------------------
168,600 Respironics, Inc. (NON) 8,301,864
416,900 Thoratec Corp. (NON) 6,420,260
227,000 Varian Medical Systems, Inc. (NON) 18,827,380
--------------
33,549,504
Oil & Gas (1.5%)
- -------------------------------------------------------------------------------
600,000 Chesapeake Energy Corp. 7,476,000
185,000 Pioneer Natural Resources Co. (NON) 5,905,200
546,300 XTO Energy, Inc. 14,329,449
--------------
27,710,649
Pharmaceuticals (2.6%)
- -------------------------------------------------------------------------------
148,050 Barr Pharmaceuticals, Inc. (NON) 11,146,685
299,300 Cephalon, Inc. (NON) 16,407,626
370,000 IVAX Corp. (NON) 9,250,000
252,300 Watson Pharmaceuticals, Inc. (NON) 11,734,473
--------------
48,538,784
Restaurants (2.5%)
- -------------------------------------------------------------------------------
589,400 Applebee's International, Inc. 22,467,928
188,000 CBRL Group, Inc. 7,055,640
363,700 P.F. Chang's China Bistro, Inc.
(NON) 16,839,310
--------------
46,362,878
Retail (11.4%)
- -------------------------------------------------------------------------------
560,900 Advance Auto Parts, Inc. (NON) 21,830,228
331,200 BJ's Wholesale Club, Inc. (NON) 7,170,480
658,200 Chico's FAS, Inc. (NON) 24,248,088
286,400 Dick's Sporting Goods, Inc. (NON) 14,248,400
346,500 Linens 'N Things, Inc. (NON) 9,999,990
856,900 Michaels Stores, Inc. 38,363,413
594,400 Pacific Sunwear of California, Inc.
(NON) 13,629,592
311,800 PETCO Animal Supplies, Inc. (NON) 9,887,178
588,700 PETsMART, Inc. 13,816,789
826,200 Ross Stores, Inc. 23,092,290
346,200 Tractor Supply Co. (NON) 14,661,570
293,300 Tuesday Morning Corp. (NON) 9,271,213
490,900 Williams-Sonoma, Inc. (NON) 15,762,799
--------------
215,982,030
Schools (2.8%)
- -------------------------------------------------------------------------------
405,700 Career Education Corp. (NON) 20,431,052
300,900 Corinthian Colleges, Inc. (NON) 18,743,061
382,400 Education Management Corp. (NON) 12,837,168
125,000 UNEXT.com, LLC (acquired 4/14/00,
cost $10,451,238) (Private) (RES) 1,250
--------------
52,012,531
Semiconductor (2.6%)
- -------------------------------------------------------------------------------
195,000 Cognex Corp. 6,249,750
109,052 Cymer, Inc. (NON) 4,799,379
789,000 Lam Research Corp. (NON) 21,105,750
1,022,400 LTX Corp. (NON) 17,810,208
--------------
49,965,087
Shipping (1.6%)
- -------------------------------------------------------------------------------
314,000 Expeditors International of
Washington, Inc. 11,746,740
236,500 Heartland Express, Inc. 5,165,160
490,900 J. B. Hunt Transport Services, Inc.
(NON) 12,915,579
--------------
29,827,479
Software (7.5%)
- -------------------------------------------------------------------------------
718,700 Amdocs, Ltd. (Guernsey) (NON) 20,389,519
348,300 Avid Technology, Inc. (NON) 16,492,005
460,000 Check Point Software Technologies,
Ltd. (Israel) (NON) 9,430,000
450,000 Citrix Systems, Inc. (NON) 9,049,500
618,200 Cognos, Inc. (Canada) (NON) 18,682,004
658,900 Macromedia, Inc. (NON) 11,893,145
811,300 Manhattan Associates, Inc. (NON) 22,797,530
841,300 Micromuse, Inc. (NON) 6,764,052
671,900 Siebel Systems, Inc. (NON) 8,956,427
1,666,200 webMethods, Inc. (NON) 17,894,988
--------------
142,349,170
Technology Services (1.8%)
- -------------------------------------------------------------------------------
267,700 Cognizant Technology Solutions Corp.
(NON) 14,463,829
382,000 Digital River, Inc. (NON) 9,045,760
264,300 VeriSign, Inc. (NON) 4,619,964
440,400 Wireless Facilities, Inc. (NON) 6,302,124
--------------
34,431,677
Telecommunications (1.9%)
- -------------------------------------------------------------------------------
1,951,500 American Tower Corp. Class A (NON) 21,446,985
1,126,400 Crown Castle International Corp.
(NON) 13,967,360
--------------
35,414,345
Transportation (0.6%)
- -------------------------------------------------------------------------------
296,900 UTI Worldwide, Inc. 12,235,249
Waste Management (1.5%)
- -------------------------------------------------------------------------------
366,100 Stericycle, Inc. (NON) 16,181,620
345,500 Waste Connections, Inc. (NON) 12,852,600
--------------
29,034,220
--------------
Total Common stocks
(cost $1,707,899,988) $1,864,873,821
Convertible preferred stocks (1.0%) (a)
Number of shares Value
- -------------------------------------------------------------------------------
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. Ser. F,
zero % cv. pfd. (acquired
2/14/02, cost $2,500,003) (Private)
(RES) 3,372,306
40,384 CiDRA Corp. Ser. D, $7.70 cv. pfd.
(acquired 6/15/00, cost $3,168,171)
(Private) (RES) 1,165,078
16,408 CiDRA Corp. cv. pfd. (acquired
6/15/00, cost $335) (Private) (RES) 123
229,701 CiDRA Corp. cv. pfd. (acquired
6/15/00, cost $6,246) (Private)
(RES) 2,297
4,345 CiDRA Corp. Ser. D, cv. pfd.
(acquired 6/15/00, cost $610,642)
(Private) (RES) 224,560
6,776 CiDRA Corp. zero % cv. pfd.
(acquired 6/15/00, cost 14,826)
(RES) 6,776
484 CiDRA Corp. zero % cv. pfd.
(acquired 6/15/00, cost 987) (RES) 363
1,517,087 CommVault Systems zero % cv. pfd.
(acquired various dates from
1/30/02 to 9/4/03, cost $4,749,999)
(Private) (RES) 5,461,513
81,199 Cyvera cv. pfd. (acquired 6/15/00,
cost $220,803) (Private) (RES) 81,199
1,020,280 Convergent Networks, Inc. Ser. D,
zero % cv. pfd. (acquired 9/19/00,
cost $13,554,496) (Private) (RES) 459,126
3,799,710 eStudio LIVE, Inc. cv. pfd.
(acquired various dates from
2/23/00 to 1/14/03, cost $6,157,009)
(Private) (RES) (AFF) 2,849,783
16,000 eStudio LIVE, Inc. cv. pfd.(acquired
6/20/02, cost $40,000) (Private)
(RES) 160
10,627,800 Hyperchip, Inc. Ser. C, 8.00% cv.
pfd. (acquired 9/5/00, cost
$9,352,464) (Private) (RES) 106,278
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) 2,535,861
555,882 NuTool, Inc. Ser. C, $0.27 cv. pfd.
(acquired 11/15/00, cost $1,889,999)
(Private) (RES) 972,794
202,937 NuTool, Inc. Ser. D, zero % cv. pfd.
(acquired 11/1/01, cost $793,484)
(Private) (RES) 355,140
878,186 Totality Corp. Ser. D, $0.3 351,274
459,362 Vivace Networks, Inc. Ser. C, $0.583
cv. pfd. (acquired 9/7/00, cost
$938,496) (Private) (RES) 156,183
--------------
Total Convertible preferred stocks
(cost $66,261,553) $18,477,564
Short-term investments (0.2%) (a) (cost $4,686,419)
Principal amount Value
- -------------------------------------------------------------------------------
$4,686,419 Short-term investments held in
Putnam commingled cash account with
yields ranging from 0.85% to 1.13%
and due dates ranging from February
2, 2004 to March 30, 2004 (d) $4,686,419
- -------------------------------------------------------------------------------
Total Investments (cost $1,778,847,960) $1,888,037,804
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,887,672,534.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at January 31, 2004 was
$18,478,814 or 1.0% 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.
Written options outstanding at January 31, 2004 (Unaudited)
(premium received $91,276)
Contract Expiration date/ Market
amount strike price value
- -------------------------------------------------------------------------------
125,534 Juniper Networks, Inc.+ (Call) Feb 04/$25.64 $457,571
- -------------------------------------------------------------------------------
Statement of assets and liabilities
January 31, 2004 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$1,778,847,960) (Note 1) $1,888,037,804
- -------------------------------------------------------------------------------
Cash 1,624,348
- -------------------------------------------------------------------------------
Dividends, interest and other receivables 273,558
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,642,759
- -------------------------------------------------------------------------------
Receivable for securities sold 25,992,558
- -------------------------------------------------------------------------------
Total assets 1,917,571,027
Liabilities
- -------------------------------------------------------------------------------
Payable for securities purchased 9,101,534
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 16,788,442
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 976,129
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 1,176,357
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 266,943
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,823
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 751,855
- -------------------------------------------------------------------------------
Written options outstanding, at value (premiums received
$91,276) (Note 1) 457,571
- -------------------------------------------------------------------------------
Other accrued expenses 377,839
- -------------------------------------------------------------------------------
Total liabilities 29,898,493
- -------------------------------------------------------------------------------
Net assets $1,887,672,534
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $7,404,078,214
- -------------------------------------------------------------------------------
Accumulated net investment loss (Note 1) (12,501,145)
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (5,612,728,084)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 108,823,549
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $1,887,672,534
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,109,987,179 divided by 159,397,645 shares) $6.96
- -------------------------------------------------------------------------------
Offering price per class A share (100/94.75 of $6.96)* $7.35
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($383,505,693 divided by 61,558,038 shares)** $6.23
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($22,969,475 divided by 3,419,600 shares)** $6.72
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($231,216,460 divided by 35,324,589 shares) $6.55
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $6.55)* $6.79
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class R share ($999 divided by 143 shares) $6.96
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class Y share ($139,992,728 divided by 19,577,121 shares) $7.15
- -------------------------------------------------------------------------------
* 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
Six months ended January 31, 2004 (Unaudited)
Investment income:
- -------------------------------------------------------------------------------
Dividends $2,308,327
- -------------------------------------------------------------------------------
Interest 191,187
- -------------------------------------------------------------------------------
Total investment income 2,499,514
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 6,134,373
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,483,511
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 33,802
- -------------------------------------------------------------------------------
Administrative services (Note 2) 12,455
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,473,346
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 2,056,437
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 130,423
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 902,006
- -------------------------------------------------------------------------------
Distribution fees -- Class R (Note 2) 1
- -------------------------------------------------------------------------------
Other 596,915
- -------------------------------------------------------------------------------
Non-recurring costs (Note 6) 64,379
- -------------------------------------------------------------------------------
Costs assumed by Manager (Note 6) (64,379)
- -------------------------------------------------------------------------------
Total expenses 15,823,269
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (822,610)
- -------------------------------------------------------------------------------
Net expenses 15,000,659
- -------------------------------------------------------------------------------
Net investment loss (12,501,145)
- -------------------------------------------------------------------------------
Net realized gain on investments (including net realized
loss of $1,282,825 on sales of investments in affiliated
issuers) (Notes 1, 3 and 5) 277,385,233
- -------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 179,855
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments and written
options during the period (170,570)
- -------------------------------------------------------------------------------
Net gain on investments 277,394,518
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $264,893,373
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
January 31 July 31
Increase (decrease) in net assets 2004* 2003
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment loss $(12,501,145) $(25,174,551)
- -------------------------------------------------------------------------------
Net realized gain (loss) on investments 277,565,088 (440,268,703)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (170,570) 736,683,162
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 264,893,373 271,239,908
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (417,079,140) (267,426,387)
- -------------------------------------------------------------------------------
Total increase (decrease) in net assets (152,185,767) 3,813,521
Net assets
- -------------------------------------------------------------------------------
Beginning of period 2,039,858,301 2,036,044,780
- -------------------------------------------------------------------------------
End of period (including accumulated net
investment loss of $12,501,145 and $--,
respectively) $1,887,672,534 $2,039,858,301
- -------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.13 $5.27 $8.52 $29.96 $19.80 $17.35
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment loss (a) (.03) (.06) (.07) (.13) (.24) (.14)
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .86 .92 (3.18) (16.72) 12.33 3.15
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .83 .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 $6.96 $6.13 $5.27 $8.52 $29.96 $19.80
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 13.54* 16.32 (38.15) (63.15) 60.03 18.31
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,109,987 $1,120,364 $1,166,011 $2,207,311 $5,739,645 $2,804,929
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .66* 1.38 1.24 1.04 .93 .98
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.51)* (1.18) (1.09) (.84) (.75) (.85)
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.65* 55.11 79.54 99.14 104.11 139.84
- ---------------------------------------------------------------------------------------------------------------------------------
* 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).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $5.51 $4.77 $7.77 $28.10 $18.78 $16.61
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment loss (a) (.05) (.09) (.11) (.23) (.45) (.26)
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .77 .83 (2.89) (15.51) 11.70 2.99
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .72 .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 $6.23 $5.51 $4.77 $7.77 $28.10 $18.78
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 13.07* 15.51 (38.61) (63.43) 58.77 17.42
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $383,506 $399,189 $411,843 $872,627 $2,619,509 $1,328,681
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.04* 2.13 1.99 1.79 1.68 1.73
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.88)* (1.93) (1.84) (1.58) (1.50) (1.60)
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.65* 55.11 79.54 99.14 104.11 139.84
- ---------------------------------------------------------------------------------------------------------------------------------
* 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).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------
Six months For the
ended period
January 31 July 26,1999+
Per-share (Unaudited) Year ended July to July 31
operating performance 2004 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $5.94 $5.14 $8.37 $29.75 $19.80 $20.65
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ----------------------------------------------------------------------------------------------------------------------------
Net investment loss (a) (.06) (.10) (.12) (.24) (.47) -- (d)
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .84 .90 (3.11) (16.55) 12.35 (.85)
- ----------------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .78 .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 $6.72 $5.94 $5.14 $8.37 $29.75 $19.80
- ----------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 13.13* 15.56 (38.59) (63.44) 58.94 (4.12)*
- ----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $22,969 $25,779 $26,540 $51,023 $110,916 $75
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.04* 2.13 1.99 1.79 1.68 .03*
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.88)* (1.93) (1.84) (1.59) (1.46) (.03)*
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.65* 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
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $5.78 $4.99 $8.11 $28.98 $19.27 $17.00
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment loss (a) (.05) (.08) (.10) (.19) (.39) (.22)
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .82 .87 (3.02) (16.09) 12.03 3.05
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .77 .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 $6.55 $5.78 $4.99 $8.11 $28.98 $19.27
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 13.32* 15.83 (38.47) (63.35) 59.32 17.61
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $231,216 $220,723 $190,171 $289,934 $632,154 $303,677
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .91* 1.88 1.74 1.54 1.43 1.48
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.76)* (1.68) (1.59) (1.34) (1.25) (1.35)
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.65* 55.11 79.54 99.14 104.11 139.84
- ---------------------------------------------------------------------------------------------------------------------------------
* 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).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS R
- ----------------------------------------------------------------------------------------------------------------------
For the period
December 1, 2003+
Per-share to January 31,
operating performance 2004
- ----------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.97
- ----------------------------------------------------------------------------------------------------------------------
Investment operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income (a) (.02) (d)
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments .01
- ----------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.01)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.96
- ----------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) (0.14)*
- ----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .27*
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.21)*
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.65*
- ----------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income 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 broker 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 Y
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.29 $5.39 $8.69 $30.35 $19.98 $17.46
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment loss (a) (.03) (.05) (.06) (.09) (.16) (.10)
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .89 .95 (3.24) (16.98) 12.46 3.18
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .86 .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 $7.15 $6.29 $5.39 $8.69 $30.35 $19.98
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 13.67* 16.70 (37.97) (63.05) 60.56 18.60
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $139,993 $273,803 $241,480 $398,264 $804,773 $129,334
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .54* 1.13 .99 .79 .68 .73
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.38)* (.93) (.84) (.59) (.48) (.60)
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.65* 55.11 79.54 99.14 104.11 139.84
- ---------------------------------------------------------------------------------------------------------------------------------
* 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).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
January 31, 2004 (Unaudited)
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, class R and class Y
shares. The fund began offering class R shares on December 1, 2003.
Class A shares are sold with a maximum front-end sales charge of 5.25%.
Prior to January 28, 2004, the maximum front-end sales charge for class
A shares was 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, class M and class R
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 and Class R shares but lower than class
B and class C shares. Class R shares are sold without a front end sales
charge and pay an ongoing distribution fee that is higher than class A
shares, but lower than class B, class C and class M shares. Class R
shares are offered to qualified employee-benefit plans. Class Y shares,
which are sold at net asset value, are generally subject to the same
expenses as class A, class B, class C, class M and class R 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.
Effective April 19, 2004, a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchanging into another fund)
within 5 days of purchase.
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.
Many securities markets and exchanges outside the U.S. close prior to
the close of the New York Stock Exchange and therefore the closing
prices for securities in such markets or on such exchanges may not fully
reflect events that occur after such close but before the close of the
New York Stock Exchange. Accordingly, on certain days, the fund will
fair value foreign securities taking into account multiple factors,
including movements in the U.S. securities markets. The number of days
on which fair value prices will be used will depend on market activity
and it is possible that fair value prices will be used by the fund to a
significant extent.
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, if any,
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 would maintain an asset
coverage ratio of at least 300% and that borrowings would not exceed
prospectus limitations. For the period ended August 6, 2003, the fund
had no borrowings against the line of credit. Effective August 6, 2003,
the fund no longer participated 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.
The aggregate identified cost on a tax basis is $1,897,939,864,
resulting in gross unrealized appreciation and depreciation of
$242,167,534 and $252,069,594, respectively, or net unrealized
depreciation of $9,902,060.
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. Reclassifications are made to the fund's capital
accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations.
Note 2
Management fee, administrative
services and other transactions
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.
Effective January 28, 2004, Putnam Management has agreed to limit its
compensation (and, to the extent necessary, bear other expenses) through
December 31, 2004 to the extent that the fund's net expenses as a
percentage of average net assets exceed the average expense ratio for
the fund's Lipper peer group of front-end load funds.
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. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the six months ended January 31, 2004 the
fund paid PFTC $3,296,817 for these services.
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. For the six months ended January 31,
2004, the fund's expenses were reduced by $822,610 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $2,719 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 Trustee compensation and expenses in the
Statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses 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, class M and class R 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 up to 0.35%, 1.00%, 1.00%, 1.00% and 1.00%
of the average net assets attributable to class A, class B, class C,
class M and class R shares, respectively. The Trustees have approved
payment by the fund at an annual rate of 0.25%, 1.00%, 1.00%, 0.75% and
0.50% of the average net assets attributable to class A, class B, class
C, class M and class R shares, respectively.
For the six months ended January 31, 2004, Putnam Retail Management,
acting as underwriter, received net commissions of $62,511 and $1,367
from the sale of class A and class M shares, respectively, and received
$616,881 and $3,070 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 six months ended
January 31, 2004, Putnam Retail Management, acting as underwriter,
received $1,281 and no monies on class A and class M redemptions,
respectively.
Note 3
Purchases and sales of securities
During the six months ended January 31, 2004, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $675,797,674 and $1,061,341,558, respectively.
There were no purchases and sales of U.S. government securities.
Written option transactions during the period are summarized as follows:
Contract Premiums
Amounts Received
- ----------------------------------------------------------------
Written options
outstanding at
beginning of period -- $--
- ----------------------------------------------------------------
Options opened 319,346 271,696
Options closed (56,492) (61,638)
Options exercised -- --
Options expired (137,320) (118,782)
- ----------------------------------------------------------------
Written options
outstanding at
end of period 125,534 $91,276
- ----------------------------------------------------------------
Note 4
Capital shares
At January 31, 2004, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 22,497,595 $150,419,139
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
22,497,595 150,419,139
Shares repurchased (45,734,437) (308,647,939)
- ----------------------------------------------------------------
Net decrease (23,236,842) $(158,228,800)
- ----------------------------------------------------------------
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)
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 4,348,083 $25,951,688
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
4,348,083 25,951,688
Shares repurchased (15,251,538) (92,343,421)
- ----------------------------------------------------------------
Net decrease (10,903,455) $(66,391,733)
- ----------------------------------------------------------------
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)
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 537,561 $3,464,545
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
537,561 3,464,545
Shares repurchased (1,458,204) (9,518,621)
- ----------------------------------------------------------------
Net decrease (920,643) $(6,054,076)
- ----------------------------------------------------------------
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)
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 3,567,045 $22,302,894
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
3,567,045 22,302,894
Shares repurchased (6,423,955) (40,986,491)
- ----------------------------------------------------------------
Net decrease (2,856,910) $(18,683,597)
- ----------------------------------------------------------------
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
- ----------------------------------------------------------------
For the period December 1, 2003
(commencement of operations) to
January 31, 2004
- ----------------------------------------------------------------
Class R Shares Amount
- ----------------------------------------------------------------
Shares sold 143 $1,000
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
143 1,000
Shares repurchased -- --
- ----------------------------------------------------------------
Net increase 143 $1,000
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------------------
Shares sold 8,768,825 $59,888,565
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
8,768,825 59,888,565
Shares repurchased (32,712,964) (227,610,499)
- ----------------------------------------------------------------
Net decrease (23,944,139) $(167,721,934)
- ----------------------------------------------------------------
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)
- ----------------------------------------------------------------
Note 5
Transactions with affiliated issuers
Transactions during the period 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
- ------------------------------------------------------------------------------
CiDRA Corp. $-- $5,474,430 $-- $--
estudio LIVE, Inc. (Private) -- -- -- 2,849,783
MarketSoft Software Corp. -- -- -- 2,535,861
- ------------------------------------------------------------------------------
Totals $-- $5,474,430 $-- $5,385,644
- ------------------------------------------------------------------------------
Market values are shown for those securities affiliated at period end.
Note 6
Regulatory matters and litigation
On November 13, 2003, Putnam Management agreed to entry of an order by
the Securities and Exchange Commission in partial resolution of
administrative and cease-and-desist proceedings initiated by the SEC on
October 28, 2003 in connection with alleged excessive short-term trading
by at least six Putnam Management investment professionals. The SEC's
findings reflect that four of those employees engaged in such trading in
funds over which they had investment decision-making responsibility and
had access to non-public information regarding, among other things,
current portfolio holdings and valuations. The six individuals are no
longer employed by Putnam Management. Under the order, Putnam Management
will make restitution for losses attributable to excessive short-term
trading by Putnam employees, institute new employee trading restrictions
and enhanced employee trading compliance, retain an independent
compliance consultant, and take other remedial actions. Putnam
Management neither admitted nor denied the order's findings, which
included findings that Putnam Management willfully violated provisions
of the federal securities laws. A civil monetary penalty and other
monetary relief, if any, will be determined at a later date. If a
hearing is necessary to determine the amounts of such penalty or other
relief, Putnam Management will be precluded from arguing that it did not
violate the federal securities laws in the manner described in the SEC
order, the findings set forth in the SEC order will be accepted as true
by the hearing officer and additional evidence may be presented. Putnam
Management, and not the investors in any Putnam fund, will bear all
costs, including restitution, civil penalties and associated legal fees.
Administrative proceedings instituted by the Commonwealth of
Massachusetts on October 28, 2003 against Putnam Management in
connection with alleged market timing activities by Putnam employees and
by participants in some Putnam-administered 401(k) plans are pending.
Putnam Management has committed to make complete restitution for any
losses suffered by Putnam shareholders as a result of any improper
market-timing activities by Putnam employees or within
Putnam-administered 401(k) plans.
The SEC's and Commonwealth's allegations and related matters also serve
as the general basis for numerous lawsuits, including purported class
action lawsuits filed against Putnam Management and certain related
parties, including certain Putnam funds. Putnam Management has agreed to
bear any costs incurred by Putnam funds in connection with these
lawsuits. Based on currently available information, Putnam Management
believes that the likelihood that the pending private lawsuits and
purported class action lawsuits will have a material adverse financial
impact on the fund is remote, and the pending actions are not likely to
materially affect its ability to provide investment management services
to its clients, including the Putnam funds.
For the period ended January 31, 2004, Putnam Management has assumed
$64,379 of legal, shareholder servicing and communication, audit, and
Trustee fees incurred by the Fund in connection with these matters.
Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees
is continuing. In addition, Marsh & McLennan Companies, Inc., Putnam
Management's parent company, has engaged counsel to conduct a separate
review of Putnam Management's policies and controls related to
short-term trading. The fund may experience increased redemptions as a
result of these matters, which could result in increased transaction
costs and operating expenses.
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.
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.
* This privilege is subject to change or termination. An exchange of
funds may result in a taxable event. Certain funds have imposed a 1%
redemption fee on total assets redeemed or exchanged within 90 days of
purchase. See a prospectus for details. For shares purchased on or after
April 19, 2004, a 2% redemption fee will be applied to shares exchanged
or sold within 5 days of purchase.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds.
Investors should consider the investment objective, risks, charges, and
expenses of a fund before investing. For a prospectus containing this
and other information for any Putnam fund or product, call your
financial advisor at 1-800-225-1581 and ask for a prospectus. Please
read the prospectus carefully before investing.
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
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
* A 1% redemption fee on total assets redeemed or exchanged within 90
days of purchase may be imposed for all share classes of these funds.
+ 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.
For shares purchased on or after April 19, 2004, a 2% redemption fee
will be applied to shares exchanged or sold within 5 days of purchase.
Check your account balances and the most recent month-end performance at
www.putnaminvestments.com.
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
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
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 Executive Officer
Patricia C. Flaherty
Senior Vice President
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 and BSA Compliance Officer
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, the most recent copy
of Putnam's Quarterly Performance Summary, and Putnam's Quarterly
Ranking Summary. For more recent performance, please visit
www.putnaminvestments.com. Investors should consider the investment
objective, risks, charges, and expenses of a fund, which are described
in its prospectus. For more information or to request a prospectus, call
1-800-225-1581 toll free. Please read the prospectus carefully before
investing. 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.
SA014-211464 024/227/673 3/04
Not FDIC Insured May Lose Value No Bank Guarantee
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam OTC & Emerging Growth Fund
Supplement to Semiannual Report dated 1/31/04
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, M, and R shares, which are
discussed more extensively in the semiannual report.
RESULTS AT A GLANCE
- ----------------------------------------------------------------------------
Total return for periods ended 1/31/04
NAV
6 months 13.67%
1 year 39.38
5 years -47.54
Annual average -12.10
10 years 12.54
Annual average 1.19
Life of fund (since class A inception, 11/1/82)
Annual average 11.20
Share value: NAV
7/31/03 $6.29
1/31/04 $7.15
- ----------------------------------------------------------------------------
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:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
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. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- ---------------------------------
(a) The registrant's principal executive officer and principal financial
officer 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 generally 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.
Although such officers reached the conclusion expressed in the
preceding paragraph, they are aware of matters that raise concerns
with respect to controls, each of which arose in connection with the
administration of 401(k) plans by Putnam Fiduciary Trust Company.
The first matter, which occurred in early 2001, involved the willful
circumvention of controls by certain Putnam employees in connection
with the correction of operational errors with respect to a 401(k)
client's investment in certain Putnam Funds, which led to losses in
five Putnam Funds (not including the registrant). Such officers
became aware of this matter in February 2004. The second matter,
which occurred in 2002, involved the willful circumvention by
certain Putnam employees of policies and procedures in connection
with the payment of Putnam corporate expenses. Such officers did
not learn that this matter involved a Putnam Fund until January
2004. Putnam has made restitution to the affected Funds,
implemented a number of personnel changes, including senior
personnel, begun to implement changes in procedures to address these
items and informed the SEC, the Funds' Trustees and independent
auditors. An internal investigation and review of procedures and
controls are currently ongoing.
In reaching the conclusion expressed herein, the registrant's
principal executive officer and principal financial officer
considered a number of factors, including the nature of the matters
described above, when the matters occurred, the individuals
involved, personnel changes that have occurred since these matters
occurred, the results to date of the current ongoing investigation
and the overall quality of controls at Putnam at this time.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
- ------------------
(a) Not applicable
(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: April 1, 2004
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/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: April 1, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: April 1, 2004