-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FYdafsCUw62oPR7jalpgb+7U6VzWmZQNa8b/XMbkOTAcUT6xsSsGorTdrgOOELBm kyW0y6NSzl4kf0xJgBfe9A== 0000928816-98-000269.txt : 19981014 0000928816-98-000269.hdr.sgml : 19981014 ACCESSION NUMBER: 0000928816-98-000269 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981013 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM HEALTH SCIENCES TRUST CENTRAL INDEX KEY: 0000357295 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046471950 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03386 FILM NUMBER: 98724276 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQ STREET 2: MAILSTOP A 14 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 8002251581 N-30D 1 PUTNAM HEALTH SCIENCES TRUST Putnam Health Sciences Trust ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 8-31-98 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * "[T]he health-care industry . . . has remained one of the most prosperous sectors in the American economy. Funds that specialize in health-care stocks have also fared well. . . . Comprising businesses such as pharmaceuticals, medical instruments, medical delivery services, and hospitals and HMOs, the health-care sector seems like a good long-term bet as the aging of America progresses and new innovations in medicine continue." -- Morningstar.Net, September 18, 1998 CONTENTS 4 Report from Putnam Management 9 Fund performance summary 14 Portfolio holdings 18 Financial statements From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] [copyright] Karsh, Ottawa Dear Shareholder: The companies in which Putnam Health Sciences Trust invests did not escape the volatility that disrupted the world's securities markets as your fund closed its 16th fiscal year on August 31, 1998. Some sectors and some stocks did better than others, of course; finding the most favorable investments became more challenging than ever for your fund's management team. Large pharmaceutical companies remained the fund's best performers as new drugs and talk of mergers buoyed their stock prices. Small-company health-care stocks languished along with the rest of the small-cap universe but some strong performers were in your fund's portfolio. As the fund's managers perceived ongoing weakness in health maintenance organizations, they continued to reduce the portfolio's allocation to HMOs. Since continued market volatility seems a strong prospect in the months ahead, your fund should remain sufficiently challenged. However, as the managers point out in the accompanying report, they believe the fund is well positioned to meet these challenges. Respectfully yours, /S/GEORGE PUTNAM George Putnam Chairman of the Trustees October 21, 1998 Report from the Fund Managers Richard B. England David G. Carlson Putnam Health Sciences Trust concluded its fiscal year on August 31, 1998, at a trying time for the world's financial markets. During the second half of the period, troubles in many international economies finally began to take their toll in the United States. In fact, on the final day of your fund's fiscal year, the Dow Jones Industrial Average plummeted more than 512 points, or 6.3%, following several weeks of declines. The event wiped out the Dow's gains for the calendar year as well as those for most major market indexes. Since its high on July 17, 1998, the S&P 500 Index, your fund's primary benchmark, had fallen 19.3% by fiscal year's end. This difficult period is evident in the fund's returns, which we consider indicative of the overall market correction rather than any particular problem within the health-care sector. For the 12 months ended August 31, 1998, the fund's class A shares provided a total return of 7.48% at net asset value and 1.29% at public offering price. This compares with the S&P 500's return of 8.09% for the same 12-month period. For complete performance information, please refer to the summary that begins on page 9. During the steep selloff, holdings such as the fund's large-company pharmaceuticals were affected as investors sought to cash in these larger, more liquid stocks. While market turbulence may continue for some time, we remain confident that the types of stocks in which your fund invests will weather volatility better than most, as health-care products and services tend to stay in demand regardless of economic conditions. * DRUG COMPANIES STILL STARS OF SHOW Throughout the period, the best news continued to be generated from large U.S. pharmaceutical companies. At the fiscal year's midpoint, we mentioned that merger discussions between several major drug companies were boosting returns for the sector as a whole. During the second half of the fiscal year, however, the buzz about mergers had waned significantly as some anticipated deals fell apart. Your fund, however, profited from one pending merger: that of Monsanto Co. and American Home Products Corp., the latter being a fund holding throughout the period. The merger is expected to close in late 1998 or early 1999. American Home Products develops and sells drugs and agricultural products such as herbicides and insecticides for crop protection. Monsanto develops nutritional, pharmaceutical, and agricultural products. The combined company is expected to benefit from several exciting new drugs currently in development as well as from the strength of Monsanto's agricultural product line, which includes genetically engineered seeds. The pharmaceutical stock that received the most worldwide attention during the period was that of Pfizer, developer of the male impotence drug Viagra. The FDA approval of Viagra resulted in nearly 280,000 new prescriptions within 4 weeks, the largest new-drug launch in history. At the same time, Pfizer's stock price soared to levels that we recognized as unsustainable. In fact, as the stock rocketed ahead, we began trimming your fund's position in order to take some profits and to prepare for the post-hype price decline that eventually occurred. Once Pfizer's price reached more reasonable levels, we began rebuilding its position in the portfolio. [GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS] TOP INDUSTRY SECTORS* Pharmaceuticals 49.0% Medical supplies and devices 23.9% Biotechnology 6.9% Health-care services 6.9% Retail 3.8% Footnote reads: *Based on net assets as of 8/31/98. Holdings will vary over time. We believe Pfizer is one of the strongest of the large drug companies, with an impressive line of new products in development. In addition to its strong product line, Pfizer also enhances its profitability through cross-licensing, in which it markets and sells drugs developed by other companies and shares in the resulting profits. While these holdings, along with others discussed in this report, were viewed favorably at the end of the fiscal period, all are subject to review and adjustment in accordance with the fund's investment strategy and may vary in the future. * SMALL-COMPANY DOLDRUMS DAMPEN RETURNS Beyond the volatile markets in fiscal '98, our biggest challenge was the sharp contrast in the performance of small- and large-company stocks. In fact, during the fiscal period, the S&P 500 Index, which is weighted in favor of large-capitalization stocks, gained 8.09%, while the Russell 2000 Index, a measure of small-capitalization stocks, declined dramatically, with a return of -19.40%. Because your fund invests a portion of its assets in small-company stocks, its performance was dampened, especially in comparison to funds in its peer group that do not invest in smaller companies. The fund's commitment to small-cap stocks, however, remains a fundamental part of its strategy. We believe these stocks, with their attractive valuations and fundamental strengths, may be poised for a rebound and offer strong long-term growth potential. We are also pleased to note some small-company highlights in the fund's portfolio despite the sector's recent troubles. Sepracor, for example, is a specialty pharmaceutical company that develops potentially improved versions of widely prescribed drugs. The company recently received FDA approval for Xopenex, an inhalation solution for asthma sufferers. Another success was Sepracor's agreement to license to Johnson & Johnson the rights to develop a potentially safer form of Propulsid, the popular heartburn medicine that federal regulators recently warned may cause deadly heart-rhythm problems. The stock of MedImmune, Inc., a small biotechnology company, was also a strong performer in fiscal '98. MedImmune develops and markets products for the prevention and treatment of infectious diseases and for use in transplantation medicine. One notable product is Synagis, an antibody for the prevention of RSV, a serious lower respiratory tract disease that is a common cause of pneumonia and bronchial problems in infants and young children. [GRAPHIC OMITTED: TOP 10 HOLDINGS] TOP 10 HOLDINGS Pfizer, Inc. Pharmaceuticals Schering-Plough Corp. Pharmaceuticals Warner-Lambert Co. Pharmaceuticals American Home Products Corp. Pharmaceuticals Eli Lilly & Co. Pharmaceuticals Merck & Co., Inc. Pharmaceuticals Glaxo Wellcome (United Kingdom) Pharmaceuticals Bristol-Myers Squibb Co. Pharmaceuticals Cardinal Health, Inc. Medical supplies and devices SmithKline Beecham (United Kingdom) Pharmaceuticals These holdings represent 43.5% of the fund's net assets as of 8/31/98. Portfolio holdings will vary over time. * MEDICAL DEVICE STOCKS ADDED; HMO HOLDINGS SCALED BACK During the period, we added to the portfolio a trio of medical device companies -- Guidant Corp., Boston Scientific, and Arterial Vascular Engineering. All three companies offer great potential, attributable in part to an increasing demand for their coronary stent products. A stent is a device, such as a metal tube or coil, that holds open arteries that are in danger of closing. Shortly after their products were introduced, these three companies controlled about 95% of the stent market in the United States. They also control a significant share of the stent market in Europe. Also during the period, we significantly reduced the fund's health maintenance organization (HMO) holdings. HMOs have been faced with an extremely difficult regulatory environment, since state legislatures and Congress are seeking passage of laws that will make it more expensive for them to do business. This atmosphere, combined with rising health-care costs, has put tremendous pressure on HMOs, and we do not anticipate that the situation will improve at any time soon. * RESILIENT HEALTH-CARE STOCKS SHOULD WEATHER VOLATILITY While fiscal '98 closed on a turbulent note, the market was already rebounding days after the dramatic August 31 selloff. We believe, however, that the steep ups and downs of late summer may continue well into fiscal '99. But we remain optimistic about the health-care sector, which tends to weather economic turmoil better than most other industries. We also believe the fund will continue to be buoyed by its effective strategy and the many promising industry trends that bring strong growth potential to health-care stocks. The views expressed here are exclusively those of Putnam Management. They are not meant as investment advice. Although the described holdings were viewed favorably as of 8/31/98, there is no guarantee the fund will continue to hold these securities in the future. Funds investing in a single sector may be subject to more volatility than funds investing in a diverse group of sectors. Performance summary This section provides information about your fund's performance, which should always be considered in light of its investment strategy. Putnam Health Sciences Trust is designed for investors seeking capital appreciation through investments in the health sciences industry. TOTAL RETURN FOR PERIODS ENDED 8/31/98 Class A Class B Class M (Inception date) (5/28/82) (3/1/93) (7/3/95) NAV POP NAV CDSC NAV POP - ------------------------------------------------------------------------------ 1 year 7.48% 1.29% 6.67% 1.92% 6.94% 3.20% - ------------------------------------------------------------------------------ 5 years 172.07 156.42 162.01 160.01 165.27 156.01 Annual average 22.16 20.72 21.24 21.06 21.55 20.68 - ------------------------------------------------------------------------------ 10 years 451.29 419.63 408.51 408.51 422.12 403.86 Annual average 18.61 17.92 17.66 17.66 17.97 17.55 - ------------------------------------------------------------------------------ Life of fund 1149.11 1077.07 981.71 981.71 1028.00 988.88 Annual average 16.80 16.37 15.77 15.77 16.07 15.82 - ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 8/31/98 Standard & Poor's Consumer 500 Index Price Index - ------------------------------------------------------------------------------ 1 year 8.09% 1.62% - ------------------------------------------------------------------------------ 5 years 131.21 12.85 Annual average 18.25 2.45 - ------------------------------------------------------------------------------ 10 years 382.68 37.31 Annual average 17.05 3.22 - ------------------------------------------------------------------------------ Life of fund 1357.51 70.56 Annual average 17.92 3.34 - ------------------------------------------------------------------------------ Past performance is no assurance of future results. Returns for class A and class M shares reflect the current maximum initial sales charges of 5.75% and 3.50%, respectively. Class B share returns for the 1-, 5-, and 10-year (where available) and life-of-fund periods reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declines to 1% in the sixth year, and is eliminated thereafter. Returns shown for class B and class M shares for periods prior to their inception are derived from the historical performance of class A shares, adjusted to reflect both the initial sales charge or CDSC if any, currently applicable to each class and in the case of class B and class M shares, the higher operating expenses applicable to such shares. All returns assume reinvestment of distributions at NAV. Investment return and principal value will fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost. [GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT] GROWTH OF A $10,000 INVESTMENT Cumulative total return of a $10,000 investment since 8/31/88 Funds class A S&P 500 Consumer Price Date shares at POP Index Index 8/31/88 9,425 10,000 10,000 8/31/89 12,654 13,924 10,471 8/31/90 14,543 13,231 11,059 8/31/91 20,648 16,790 11,480 8/31/92 20,417 18,119 11,841 8/31/93 19,099 20,875 12,169 8/31/94 23,564 22,017 12,522 8/31/95 29,410 26,740 12,850 8/31/96 36,501 31,748 13,220 8/31/97 48,346 44,654 13,515 8/31/98 $51,963 $48,268 $13,731 Past performance is no assurance of future results. At the end of the same time period, a $10,000 investment in the fund's class B shares would have been valued at $50,851 and no contingent deferred sales charges would apply; a $10,000 investment in the fund's class M shares would have been valued at $52,212 ($50,386 at public offering price). PRICE AND DISTRIBUTION INFORMATION 12 months ended 8/31/98 Class A Class B Class M - ------------------------------------------------------------------------------ Distributions (number) 1 1 1 - ------------------------------------------------------------------------------ Income $0.024 $0.000 $0.000 - ------------------------------------------------------------------------------ Capital gains - ------------------------------------------------------------------------------ Long-term 5.689 5.689 5.689 - ------------------------------------------------------------------------------ Short-term 0.734 0.734 0.734 - ------------------------------------------------------------------------------ Total $6.447 $6.423 $6.423 - ------------------------------------------------------------------------------ Share value: NAV POP NAV NAV POP - ------------------------------------------------------------------------------ 8/31/97 $55.82 $59.23 $54.54 $55.47 $57.48 - ------------------------------------------------------------------------------ 8/31/98 53.50 56.76 51.74 52.87 54.79 - ------------------------------------------------------------------------------ TOTAL RETURN FOR PERIODS ENDED 9/30/98 (most recent calendar quarter) Class A Class B Class M NAV POP NAV CDSC NAV POP - ------------------------------------------------------------------------------ 1 year 11.10% 4.71% 10.27% 5.37% 10.54% 6.67% - ------------------------------------------------------------------------------ 5 years 200.87 183.54 189.70 187.70 193.39 183.10 Annual average 24.65 23.18 23.71 23.53 24.02 23.14 - ------------------------------------------------------------------------------ 10 years 491.63 457.72 446.00 446.00 460.39 440.67 Annual average 19.46 18.75 18.50 18.50 18.81 18.38 - ------------------------------------------------------------------------------ Life of fund 1290.37 1210.18 1103.39 1103.39 1155.16 1111.63 Annual average 17.48 17.05 16.44 16.44 16.75 16.49 - ------------------------------------------------------------------------------ Performance data represent past results, do not reflect future performance, and will differ for each share class. Investment returns and principal value will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. See first page of performance section for performance calculation method. This performance information does not reflect any market volatility that may have occurred since the date of the information. As a result, more recent returns may be more or less than those shown. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Class A shares are generally subject to an initial sales charge. Class B shares may be subject to a sales charge upon redemption. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding shares, not including any initial or contingent deferred sales charge. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 5.75% maximum sales charge for class A shares and 3.50% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B shares and assumes redemption at the end of the period. Your fund's CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. COMPARATIVE BENCHMARKS Standard & Poor's 500 Index is an unmanaged list of common stocks that is frequently used as a measure of the performance of small company stocks. The index assumes reinvestment of all distributions and interest payments and does not take into account brokerage fees or taxes. Securities in the fund do not match those in the index and performance of the fund will differ. It is not possible to invest directly in an index. Consumer Price Index (CPI) is a commonly used measure of inflation; it does not represent an investment return. Report of independent accountants For the fiscal year ended August 31, 1998 To the Trustees and Shareholders of Putnam Health Sciences Trust In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments owned, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Putnam Health Sciences Trust (the "fund") at August 31, 1998, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at August 31, 1998 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts October 8, 1998
Portfolio of investments owned August 31, 1998 COMMON STOCKS (96.4%) (a) NUMBER OF SHARES VALUE Biotechnology (6.9%) - -------------------------------------------------------------------------------------------------------------------------- 300,000 Agouron Pharmaceuticals, Inc. (NON) $ 5,775,000 1,607,600 Biochem Pharmaceutical, Inc. (NON) 24,616,375 1,782,200 Centocor, Inc. (NON) 57,921,500 572,900 Coulter Pharmaceutical, Inc. (NON) 8,020,600 400,000 Digene Corp. (NON) 3,050,000 324,800 GelTex Pharmaceuticals, Inc. (NON) 5,521,600 539,400 Genentech, Inc. (NON) 35,600,400 590,000 Guilford Pharmaceuticals, Inc. (NON) 7,006,250 1,437,400 ICN Pharmaceuticals, Inc. 22,100,025 214,200 IDEC Pharmaceuticals Corp. (NON) 3,855,600 436,950 Incyte Pharmaceuticals, Inc. (NON) 8,465,906 345,000 La Jolla Pharmaceutical Co. (NON) 797,813 306,000 Ligand Pharmaceuticals, Inc. Class B (NON) 1,759,500 329,700 MedImmune, Inc. (NON) 15,908,025 679,800 Millennium Pharmaceuticals, Inc. (NON) 7,817,700 591,600 NPS Pharmaceuticals, Inc. (NON) 3,845,400 404,000 Pharmacylics, Inc. 5,933,750 302,100 Protein Design Labs, Inc. (NON) 5,135,700 627,300 Scios, Inc. (NON) 2,979,675 698,700 SEQUUS Pharmaceuticals, Inc. (NON) 4,279,538 271,700 Transkaryotic Therapies, Inc. (Malaysia) (NON) 5,467,963 396,300 Trimeris, Inc. (NON) 2,179,650 204,446 Vertex Pharmaceuticals, Inc. (NON) 3,117,802 418,200 ViroPharma Inc. (NON) 7,213,950 -------------- 248,369,722 Health Care Services (6.9%) - -------------------------------------------------------------------------------------------------------------------------- 599,900 ABR Information Services, Inc. (NON) 8,698,550 73,500 Access Health, Inc. (NON) 1,759,406 641,400 Applied Analytical Industries, Inc. (NON) 6,173,475 698,600 Centennial HealthCare Corp. (NON)(AFF) 5,938,100 1,942,000 Columbia/HCA Healthcare Corp. 43,816,375 558,200 Concentra Managed Care, Inc. (NON) 7,151,938 339,900 Genesis Health Ventures, Inc. (NON) 4,036,313 3,026,800 HEALTHSOUTH Corp. (NON) 57,320,025 369,300 Lincare Holdings, Inc. (NON) 12,533,119 780,700 Omnicare, Inc. 24,348,081 485,700 On Assignment, Inc. (NON) 15,663,825 635,110 Pharmaceutical Product Development, Inc. (NON) 12,940,366 1,067,100 Quintiles Transnational Corp. (NON) 38,148,825 494,933 Total Renal Care Holdings, Inc. (NON) 9,403,727 -------------- 247,932,125 Healthcare Information Systems (3.5%) - -------------------------------------------------------------------------------------------------------------------------- 200,000 ADAC Laboratories (NON) 4,487,500 493,200 Cerner Corp. (NON) 10,881,225 525,900 DAOU Systems, Inc. (NON) 4,075,725 2,461,800 HBO & Co. 52,313,250 588,600 Imnet Systems, Inc. (NON)(AFF) 10,410,863 517,500 IMS Health Inc. 28,462,500 660,100 Medquist, Inc. (NON) 13,862,100 -------------- 124,493,163 Managed Services (2.4%) - -------------------------------------------------------------------------------------------------------------------------- 810,000 American Oncology Resources, Inc. (NON) 6,885,000 575,700 Compdent Corp. (NON)(AFF) 8,563,538 85,600 Express Scripts, Inc. Class A (NON) 5,756,600 212,000 Pediatrix Medical Group, Inc. (NON) 8,254,750 1,198,800 Phycor, Inc. (NON) 8,316,675 778,200 Physician Reliance Network, Inc. (NON) 6,176,963 510,900 ProMedCo Management Co. (NON) 2,586,431 742,200 Specialty Care Network, Inc. (NON) 1,716,338 307,700 Trigon Healthcare, Inc. (NON) 8,500,213 253,500 United Wisconsin Services, Inc. 3,802,500 628,300 Universal Health Services, Inc. (NON) 24,346,625 -------------- 84,905,633 Medical Supplies and Devices (23.9%) - -------------------------------------------------------------------------------------------------------------------------- 173,400 Arrow International, Inc. 4,703,475 587,700 Arterial Vascular Engineering, Inc. (NON) 20,569,500 921,500 Ballard Medical Products 17,105,344 1,013,850 Baxter International, Inc. 53,987,513 548,000 Bergen Brunswig Corp. Class A 18,700,500 693,900 Biomet, Inc. 18,648,563 561,000 Biosite Diagnostics Inc. (NON) 2,103,750 1,171,245 Boston Scientific Corp. (NON) 81,108,716 1,052,185 Cardinal Health, Inc. 92,066,188 389,000 CN Biosciences, Inc. (NON)(AFF) 7,925,875 356,900 Cyberonics, Inc. (NON) 2,074,481 477,400 Cytyc Corp. (NON) 3,819,200 160,000 Del Global Technologies Corp. (NON) 1,280,000 467,100 Guidant Corp. 28,843,425 832,500 Henry Schein, Inc. (NON) 32,051,250 1,059,300 IDEXX Laboratories, Inc. (NON) 18,537,750 670,800 Johnson & Johnson 46,285,200 562,500 Lifecore Biomedical, Inc. (NON) 4,359,375 485,400 McKesson Corp. 36,405,000 818,400 Medtronic, Inc. 42,045,300 621,200 Mentor Corp. 9,085,050 384,900 Minimed, Inc. (NON) 19,629,900 572,500 Molecular Devices Corp. (NON)(AFF) 6,941,563 325,000 Novoste Corp. (NON) 4,225,000 683,050 Perclose, Inc. (NON)(AFF) 11,739,922 1,439,300 PSS World Medical, Inc. (NON) 22,129,238 178,000 ResMed Inc. (NON) 6,586,000 555,900 Sabratek Corp. (NON)(AFF) 10,214,663 206,000 Safeskin, Corp. (NON) 6,952,500 283,500 Sofamor Danek Group, Inc. (NON) 23,654,531 965,800 STERIS Corp. (NON) 23,058,475 1,342,700 Sybron International Corp. (NON) 24,420,356 692,000 Theragenics Corp. (NON) 8,736,500 839,855 Trex Medical Corp. (NON) 10,813,133 752,200 Tyco International Ltd. 41,747,100 1,141,900 U.S. Surgical Corp. 45,604,631 423,400 Ventana Medical Systems, Inc. (NON) 8,468,000 366,600 Waters Corp. (NON) 19,750,575 675,300 Wesley Jessen VisionCare, Inc. (NON) 11,480,100 340,480 Xomed Surgical Products Inc. (NON) 10,129,280 -------------- 857,986,922 Pharmaceuticals (49.0%) - -------------------------------------------------------------------------------------------------------------------------- 626,400 Alpharma, Inc. Class A 14,877,000 3,555,500 American Home Products Corp. 178,219,438 1,358,500 Bristol-Myers Squibb Co. 132,963,188 439,230 ChiRex Inc. (NON) 6,149,220 666 CliniChem Development Inc. (Canada) (NON) 2,581 661,000 Dura Pharmaceuticals, Inc. (NON) 10,906,500 615,720 Elan Corp. PLC ADR (Ireland) (NON) 36,173,550 2,410,200 Glaxo Wellcome PLC ADR (United Kingdom) 133,916,738 570,800 Inhale Therapeutic Systems (NON) 12,414,900 2,553,000 Lilly (Eli) & Co. 167,221,500 335,000 Medicis Pharmaceutical Corp. Class A (NON) 10,971,250 1,298,300 Merck & Co., Inc. 150,521,656 51,566 Novartis AG ADR (Switzerland) 80,369,178 357,000 PathoGenesis Corp. (NON) 8,032,500 2,241,600 Pfizer, Inc. 208,468,800 1,574,400 Pharmacia & Upjohn, Inc. 65,436,000 119,300 Schein Pharmaceutical, Inc. (NON) 2,960,131 2,370,900 Schering-Plough Corp. 203,897,400 569,300 Sepracor, Inc. (NON) 27,112,913 1,559,200 Smithkline Beecham PLC ADR (United Kingdom) 88,679,500 420,700 Sonus Pharmaceuticals, Inc. (NON) 3,786,300 320,000 Twinlab Corp. (NON) 9,320,000 408,000 VIVUS, Inc. (NON) 1,224,000 3,121,500 Warner-Lambert Co. 203,677,875 -------------- 1,757,302,118 Retail (3.8%) - -------------------------------------------------------------------------------------------------------------------------- 1,385,000 CVS Corp. 50,379,375 256,500 General Nutrition Companies, Inc. (NON) 3,414,656 2,297,800 Rite Aid Corp. 83,151,638 -------------- 136,945,669 -------------- Total Common Stocks (cost $3,031,335,961) $3,457,935,352 CONVERTIBLE PREFERRED STOCKS (0.2%) (a) (cost $4,000,000) NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------- 4,000 Igen International, Inc., $7.75 cv. pfd. $ 6,620,000 SHORT-TERM INVESTMENTS (5.5%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $25,000,000 Credit Suisse First Boston effective yield of 5.51%, October 5, 1998 $ 24,873,729 25,000,000 Delaware Funding Corp. effective yield of 5.52%, October 15, 1998 24,835,167 25,000,000 Federal Home Loan Mortgage Corp. effective yield of 5.425%, September 18, 1998 24,939,722 25,000,000 Federal Home Loan Banks effective yield of 5.46%, September 23, 1998 24,920,375 25,000,000 General Electric Capital Corp. effective yield of 5.53%, September 9, 1998 24,973,118 72,000,000 Interest in $535,007,000 joint repurchase agreement dated August 31, 1998 with Merrill Lynch, Pierce, Fenner & Smith, Inc. due September 1, 1998 with respect to various U. S. Treasury obligations -- maturity value of $535,092,750 for an effective yield of 5.77% 72,011,540 -------------- Total Short-Term Investments (cost $196,553,651) $ 196,553,651 - -------------------------------------------------------------------------------------------------------------------------- Total Investments (cost $3,231,889,612) (b) $3,661,109,003 - -------------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $3,585,548,635. (b) The aggregate identified cost on a tax basis is $3,234,854,338, resulting in gross unrealized appreciation and depreciation of $867,340,763 and $441,086,098, respectively, or net unrealized appreciation of $426,254,665. (NON) Non-income-producing security. (AFF) Affiliated Companies (Note 5). ADR after the name of a foreign holding stands for American Depository Receipts representing ownership of foreign securities on deposit with a domestic custodian bank. The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities August 31, 1998 Assets - ----------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $3,231,889,612) (Note 1) $3,661,109,003 - ----------------------------------------------------------------------------------------------- Cash 71,968 - ----------------------------------------------------------------------------------------------- Dividends and interest receivable 4,077,831 - ----------------------------------------------------------------------------------------------- Receivable for shares of the fund sold 19,867,991 - ----------------------------------------------------------------------------------------------- Receivable for securities sold 10,990,454 - ----------------------------------------------------------------------------------------------- Total assets 3,696,117,247 Liabilities - ----------------------------------------------------------------------------------------------- Payable for securities purchased 88,692,056 - ----------------------------------------------------------------------------------------------- Payable for shares of the fund repurchased 13,352,539 - ----------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 5,443,538 - ----------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 119,107 - ----------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 46,691 - ----------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 5,648 - ----------------------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 2,296,641 - ----------------------------------------------------------------------------------------------- Other accrued expenses 612,392 - ----------------------------------------------------------------------------------------------- Total liabilities 110,568,612 - ----------------------------------------------------------------------------------------------- Net assets $3,585,548,635 Represented by - ----------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $2,800,742,176 - ----------------------------------------------------------------------------------------------- Accumulated net realized gain on investment (Note 1) 355,587,068 - ----------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 429,219,391 - ----------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $3,585,548,635 Computation of net asset value and offering price - ----------------------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($2,236,468,505 divided by 41,806,807 shares) $53.50 - ----------------------------------------------------------------------------------------------- Offering price per class A share (100/94.25 of $53.50)* $56.76 - ----------------------------------------------------------------------------------------------- Net asset value and offering price per class B share ($1,292,418,383 divided by 24,977,809 shares)** $51.74 - ----------------------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($56,661,747 divided by 1,071,675 shares) $52.87 - ----------------------------------------------------------------------------------------------- Offering price per class M share (100/96.50 of $52.87)* $54.79 - ----------------------------------------------------------------------------------------------- * On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales, the offering price is reduced. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. The accompanying notes are an integral part of these financial statements.
Statement of operations Year ended August 31, 1998 Investment income: - ----------------------------------------------------------------------------------------------- Dividends (net of foreign tax of $195,999) $23,003,449 - ----------------------------------------------------------------------------------------------- Interest 7,596,232 - ----------------------------------------------------------------------------------------------- Total investment income 30,599,681 Expenses: - ----------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 17,688,445 - ----------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 4,367,783 - ----------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 47,641 - ----------------------------------------------------------------------------------------------- Administrative services (Note 2) 32,359 - ----------------------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 5,395,882 - ----------------------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 9,753,716 - ----------------------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 324,587 - ----------------------------------------------------------------------------------------------- Reports to shareholders 165,468 - ----------------------------------------------------------------------------------------------- Registration fees 417,006 - ----------------------------------------------------------------------------------------------- Auditing 66,743 - ----------------------------------------------------------------------------------------------- Legal 23,871 - ----------------------------------------------------------------------------------------------- Postage 323,175 - ----------------------------------------------------------------------------------------------- Other 744,792 - ----------------------------------------------------------------------------------------------- Total expenses 39,351,468 - ----------------------------------------------------------------------------------------------- Expense reduction (Note 2) (735,068) - ----------------------------------------------------------------------------------------------- Net expenses 38,616,400 - ----------------------------------------------------------------------------------------------- Net investment loss (8,016,719) - ----------------------------------------------------------------------------------------------- Net realized gain on investments (Notes 1, 3 and 5) (including realized loss of $6,584,503 on sales of investments in affiliated users) 425,904,020 - ----------------------------------------------------------------------------------------------- Net unrealized depreciation of investments during the year (400,458,158) - ----------------------------------------------------------------------------------------------- Net gain on investments 25,445,862 - ----------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $17,429,143 - ----------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets Year ended August 31 ------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------------- Increase in net assets - --------------------------------------------------------------------------------------------------------------- Operations: - --------------------------------------------------------------------------------------------------------------- Net investment income (loss) $ (8,016,719) $ 1,665,463 - --------------------------------------------------------------------------------------------------------------- Net realized gain on investments 425,904,020 239,209,019 - --------------------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments (400,458,158) 255,685,321 - --------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 17,429,143 496,559,803 - --------------------------------------------------------------------------------------------------------------- Distributions to shareholders: - --------------------------------------------------------------------------------------------------------------- From net investment income Class A (749,082) (2,287,254) - --------------------------------------------------------------------------------------------------------------- From net realized gain on investments Class A (200,473,089) (43,054,189) - --------------------------------------------------------------------------------------------------------------- Class B (76,861,512) (11,235,464) - --------------------------------------------------------------------------------------------------------------- Class M (3,230,099) (360,240) - --------------------------------------------------------------------------------------------------------------- Increase from capital share transactions (Note 4) 1,576,643,486 383,398,689 - --------------------------------------------------------------------------------------------------------------- Total increase in net assets 1,312,758,847 823,021,345 Net assets - --------------------------------------------------------------------------------------------------------------- Beginning of year 2,272,789,788 1,449,768,443 - --------------------------------------------------------------------------------------------------------------- End of year (including undistributed net investment income of $- and $709,903, respectively) $3,585,548,635 $2,272,789,788 - --------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Financial highlights (For a share outstanding throughout the period) CLASS A - ------------------------------------------------------------------------------------------------------------------------------------ Per-share operating performance Year ended August 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $55.82 $43.67 $36.21 $29.77 $24.40 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income (loss) (.01)(c) .13(c) .19 .23 .30 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain on investments 4.13 13.71 8.46 6.99 5.36 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 4.12 13.84 8.65 7.22 5.66 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.02) (.09) (.27) (.26) (.24) - ------------------------------------------------------------------------------------------------------------------------------------ From net realized gain on investments (6.42) (1.60) (.92) (.52) (.05) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (6.44) (1.69) (1.19) (.78) (.29) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $53.50 $55.82 $43.67 $36.21 $29.77 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%) (a) 7.48 32.46 24.12 24.81 23.38 - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $2,236,469 $1,681,187 $1,166,794 $929,484 $789,598 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%) (b) 1.00 1.08 1.10 1.12 1.12 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets (%) (.02) .26 .43 .70 .96 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 40.45 44.54 10.55 19.51 23.18 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended August 31, 1996 and thereafter, include amounts paid through expense offset arrangements and brokerage service arrangements. Prior period ratios exclude these amounts. (Note 2) (c) Per share net investment income (loss) has been determined on the basis of weighted average number of shares outstanding during the period.
Financial highlights (For a share outstanding throughout the period) CLASS B - ------------------------------------------------------------------------------------------------------------------------------------ Per-share operating performance Year ended August 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $54.54 $42.94 $35.72 $29.47 $24.28 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income (loss) (.44)(c) (.24)(c) (.13)(c) .11 .10 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain on investments 4.06 13.44 8.35 6.78 5.33 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 3.62 13.20 8.22 6.89 5.43 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income -- -- (.08) (.12) (.19) - ------------------------------------------------------------------------------------------------------------------------------------ From net realized gain on investments (6.42) (1.60) (.92) (.52) (.05) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (6.42) (1.60) (1.00) (.64) (.24) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $51.74 $54.54 $42.94 $35.72 $29.47 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%) (a) 6.67 31.46 23.19 23.83 22.49 - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $1,292,418 $567,928 $273,243 $113,329 $55,424 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%) (b) 1.75 1.83 1.85 1.88 1.87 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets (%) (.76) (.49) (.31) (.05) .24 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 40.45 44.54 10.55 19.51 23.18 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended August 31, 1996 and thereafter, include amounts paid through expense offset arrangements and brokerage service arrangements. Prior period ratios exclude these amounts. (Note 2) (c) Per share net investment income (loss) has been determined on the basis of weighted average number of shares outstanding during the period.
Financial highlights (For a share outstanding throughout the period) CLASS M - ------------------------------------------------------------------------------------------------------------------------------------ For the period Per-share July 3, 1995+ operating performance Year ended August 31 to August 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $55.47 $43.54 $36.17 $33.96 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income (loss) (.31)(c) (.12)(c) (.02)(c) (.02) - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain on investments 4.13 13.65 8.46 2.23 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 3.82 13.53 8.44 2.21 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income -- -- (.15) -- - ------------------------------------------------------------------------------------------------------------------------------------ From net realized gain on investments (6.42) (1.60) (.92) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (6.42) (1.60) (1.07) -- - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $52.87 $55.47 $43.54 $36.17 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%) (a) 6.94 31.79 23.51 6.51* - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $56,662 $23,675 $9,732 $321 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%) (b) 1.50 1.58 1.61 .30* - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets (%) (.51) (.24) (.05) (.02)* - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 40.45 44.54 10.55 19.51 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended August 31, 1996 and thereafter, include amounts paid through expense offset arrangements and brokerage service arrangements. Prior period ratios exclude these amounts. (Note 2) (c) Per share net investment income (loss) has been determined on the basis of weighted average number of shares outstanding during the period.
Notes to financial statements August 31, 1998 Note 1 Significant accounting policies Putnam Health Sciences Trust ("the fund") is registered under the Investment Company Act of 1940, as amended, as a non-diversified, open-end management investment company. The investment objective of the fund is to seek capital appreciation by investing primarily in the common stocks of companies in the health sciences industries. The fund offers class A, class B and class M shares. Class A shares are sold with a maximum front-end sales charge of 5.75%. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge, but pay a higher ongoing distribution fee than class A shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class M shares are sold with a maximum front-end sales charge of 3.50% and pay an ongoing distribution fee that is lower than class B shares and higher than class A shares. Expenses of the fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with generally accepted accounting principles and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are stated at market value, which is determined using the last reported sale price, or if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value, and other investments are stated at fair value following procedures approved by the Trustees. Foreign securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. B) Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the fund and the counterparty. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recorded as soon as the fund is informed of the ex-dividend date. E) Line of credit The fund has entered into a committed line of credit with certain banks. This line of credit agreement includes restrictions that the fund maintain an asset coverage ratio of at least 300% and borrowings must not exceed prospectus limitations. For the year ended August 31, 1998, the fund had no borrowings against the line of credit. F) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. G) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Capital gain distributions, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of losses on wash sale transactions and net operating losses. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended August 31, 1998, the fund reclassified $8,055,898 to increase distributions in excess of net investment income and $5,634 to decrease paid-in-capital, with a decrease to accumulated net realized gains of $8,050,264. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.70% of the first $500 million of average net assets, 0.60% of the next $500 million, 0.55% of the next $500 million, 0.50% of the next $5 billion, 0.475% of the next $5 billion, 0.455% of the next $5 billion, 0.44% of the next $5 billion and 0.43% thereafter. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the year ended August, 31, 1998, fund expenses were reduced by $735,068 under expense offset arrangements with PFTC and brokerage service arrangements. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if it had not entered into such arrangements. Each Trustee of the fund receives an annual Trustee fee, of which $3,190 has been allocated to the fund, and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of Trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B and class M shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments Inc., for services provided and expenses incurred by it in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets attributable to class A, class B and class M shares, respectively. The Trustees have approved payment by the fund to an annual rate of 0.25%, 1.00% and 0.75% of the average net assets attributable to class A, class B and class M shares respectively. For year ended August 31, 1998, Putnam Mutual Funds Corp., acting as underwriter received net commissions of $3,062,273 and $155,442 from the sale of class A and class M shares, respectively and $1,095,991 in contingent deferred sales charges from redemptions of class B shares. A deferred sales charge of up to 1% is assessed on certain redemptions of class A shares. For the year ended August 31, 1998 Putnam Mutual Funds Corp., acting as underwriter received $20,235 on class A redemptions. Note 3 Purchase and sales of securities During the year ended August 31, 1998, purchases and sales of investment securities other than short-term investments aggregated $2,482,827,393 and $1,219,056,440, respectively. There were no purchases and sales of U.S. government obligations. In determining the net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. Note 4 Capital shares At August 31, 1998, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended August 31, 1998 - ----------------------------------------------------------------------------- Class A Shares Amount - ----------------------------------------------------------------------------- Shares sold 15,247,680 $918,890,572 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 2,947,902 156,533,485 - ----------------------------------------------------------------------------- 18,195,582 1,075,424,057 Shares repurchased (6,506,650) (389,241,553) - ----------------------------------------------------------------------------- Net increase 11,688,932 $686,182,504 - ----------------------------------------------------------------------------- Year ended August 31, 1997 - ----------------------------------------------------------------------------- Class A Shares Amount - ----------------------------------------------------------------------------- Shares sold 17,235,544 $861,557,693 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 784,043 36,473,739 - ----------------------------------------------------------------------------- 18,019,587 898,031,432 Shares repurchased (14,621,740) (728,618,530) - ----------------------------------------------------------------------------- Net increase 3,397,847 $169,412,902 - ----------------------------------------------------------------------------- Year ended August 31, 1998 - ----------------------------------------------------------------------------- Class B Shares Amount - ----------------------------------------------------------------------------- Shares sold 16,902,149 $997,063,120 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 1,208,801 62,422,542 - ----------------------------------------------------------------------------- 18,110,950 1,059,485,662 Shares repurchased (3,545,706) (207,355,651) - ----------------------------------------------------------------------------- Net increase 14,565,244 $852,130,011 - ----------------------------------------------------------------------------- Year ended August 31, 1997 - ----------------------------------------------------------------------------- Class B Shares Amount - ----------------------------------------------------------------------------- Shares sold 6,452,852 $322,027,608 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 197,008 9,001,277 - ----------------------------------------------------------------------------- 6,649,860 331,028,885 Shares repurchased (2,601,055) (127,578,073) - ----------------------------------------------------------------------------- Net increase 4,048,805 $203,450,812 - ----------------------------------------------------------------------------- Year ended August 31, 1998 - ----------------------------------------------------------------------------- Class M Shares Amount - ----------------------------------------------------------------------------- Shares sold 861,855 $51,630,828 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 54,171 2,853,160 - ----------------------------------------------------------------------------- 916,026 54,483,988 Shares repurchased (271,117) (16,153,017) - ----------------------------------------------------------------------------- Net increase 644,909 $38,330,971 - ----------------------------------------------------------------------------- Year ended August 31, 1997 - ----------------------------------------------------------------------------- Class M Shares Amount - ----------------------------------------------------------------------------- Shares sold 379,404 $19,325,876 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 6,638 307,944 - ----------------------------------------------------------------------------- 386,042 19,633,820 Shares repurchased (182,819) (9,098,845) - ----------------------------------------------------------------------------- Net increase 203,223 $10,534,975 - ----------------------------------------------------------------------------- Note 5 Transactions with Affiliated Issuers Transactions during the year with companies in which the fund owns at least 5% of the voting securities were as follows:
Purchase Sales Dividend Market Affiliates cost cost Income Value - ----------------------------------------------------------------------------------- Advanced Health Corp. $ 2,332,862 $ 7,309,307 $ -- $ -- CN Biosciences, Inc. 126,875 -- -- 7,925,875 Centennial HealthCare Corp. 2,730,769 -- -- 5,938,100 Compdent Corp. 722,925 885,000 -- 8,563,538 Imnet Systems, Inc. 11,229,930 4,763,585 -- 10,410,863 Molecular Devices Corp. 6,105,782 -- -- 6,941,563 Perclose Inc. 8,456,184 130,000 -- 11,739,922 Sabratek Corp. 6,681,900 -- -- 10,214,663 - ---------------------------------------------------------------------------------- Totals $38,387,227 $13,087,892 $ -- $61,734,524 - ----------------------------------------------------------------------------------
Federal tax information (Unaudited) Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund hereby designates $415,775,635 as capital gain, which includes $394,627,071 as 20% capital gain, for its taxable year ended August 31, 1998. The fund has designated 100% of the distributions from net investment income as qualifying for the dividends received deduction for corporations. The Form 1099 you receive in January 1999 will show the tax status of all distributions paid to your account in calendar 1998. PUTNAM GROWTH FUNDS Asia Pacific Growth Fund Capital Appreciation Fund [DBL. DAGGER] Capital Opportunities Fund Diversified Equity Trust Europe Growth Fund Global Growth Fund Global Natural Resources Fund Growth Opportunities Fund Health Sciences Trust International Growth Fund International New Opportunities Fund Investors Fund New Opportunities Fund [DBL. DAGGER] OTC & Emerging Growth Fund Research Fund Vista Fund Voyager Fund Voyager Fund II PUTNAM GROWTH AND INCOME FUNDS Balanced Retirement Fund Convertible Income-Growth Trust Equity Income Fund The George Putnam Fund of Boston Global Growth and Income Fund The Putnam Fund for Growth and Income Growth and Income Fund II International Growth and Income Fund New Value Fund Utilities Growth and Income Fund PUTNAM INCOME FUNDS American Government Income Fund Diversified Income Trust Strategic Income Fund * High Quality Bond Fund + Global Governmental Income Trust High Yield Advantage Fund [DBL. DAGGER] High Yield Total Return Fund High Yield Trust [DBL. DAGGER] High Yield Trust II Income Fund Money Market Fund ** Intermediate U.S. Government Income Fund Preferred Income Fund U.S. Government Income Trust PUTNAM 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 [SECTION MARK] Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio and Pennsylvania State tax-free money market funds [SECTION MARK] California, New York LIFESTAGE SM 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 * Formerly Putnam Diversified Income Trust II + Formerly Putnam Federal Income Trust [DBL. DAGGER] Closed to new investors. Some exceptions may apply. Contact Putnam for details. [SECTION MARK] Not available in all states. ** An investment in a money market fund is neither insured nor guaranteed by the U.S. government. These funds are managed to maintain a price of $1.00 per share, although there is no assurance that this price will be maintained in the future. Please call your financial advisor or Putnam at 1-800-225-1581 to obtain a prospectus for any Putnam fund.It contains more complete information, including charges and expenses. Please read it carefully before you invest or send money. Fund information INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman John A. Hill, Vice Chairman Jameson Adkins Baxter Hans H. Estin Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson Donald S. Perkins George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President Brett C. Browchuk Vice President John J. Morgan, Jr. Vice President C. Beth Cotner Vice President Richard B. England Vice President and Fund Manager David G. Carlson Vice President and Fund Manager William N. Shiebler Vice President John R. Verani Vice President Beverly Marcus Clerk and Assistant Treasurer This report is for the information of shareholders of Putnam Health Sciences Trust. It may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details of sales charges, investment objectives, and operating policies of the fund, and the most recent copy of Putnam's Quarterly Performance Summary. For more information or to request a prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam Investments' website: http://www.putnaminv.com. Shares of mutual funds are not deposits or obligations of, or guaranteed or endorsed by, any financial institution; are not insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency; and involve risk, including the possible loss of the principal amount invested. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - --------------- Bulk Rate U.S. Postage PAID Putnam Investments - --------------- AN008 45968 021/335/2AB 10/98 -----END PRIVACY-ENHANCED MESSAGE-----