<PAGE>
Annual Report
Health
Sciences
Fund
----------------------
December 31, 1998
----------------------
[ARTWORK APPEARS HERE]
T. Rowe Price
<PAGE>
REPORT HIGHLIGHTS
- ----------------------------------
Health Sciences Fund
. Despite significant volatility, the broad market and health care stocks
posted strong performances in 1998.
. Your fund posted competitive results during the six-month period; 12-month
returns, while trailing the benchmark, were also strong.
. We continued to shift assets toward larger, more-liquid companies with
reliable earnings growth prospects.
. We increased holdings in pharmaceuticals and biotechnology firms while
trimming services and products and devices stocks.
. The sector should benefit from major product launches and merger and
acquisition activity in 1999, though we are concerned about high
valuations.
<PAGE>
Fellow Shareholders
The domestic equity markets had a remarkable performance in 1998, posting
double-digit gains despite numerous crises in foreign markets and sometimes
extreme volatility. Health sciences stocks advanced strongly for the year,
particularly in the second half, aided by larger pharmaceutical companies and
selected biotechnology firms.
During the six months ended December 31, 1998, the fund produced an 11.15% gain,
outpacing the general market as represented by the Standard & Poor's 500 Stock
Index. For the full year, the fund's results were strong but trailed both the
S&P 500, which surged in the first half, and the Lipper Health/Biotechnology
Fund Index.
- ----------------------
Performance Comparison
- --------------------------------------------------------------
Periods Ended 12/31/98 6 Months 12 Months
- --------------------------------------------------------------
Health Sciences Fund 11.15% 22.37%
..............................................................
S&P 500 9.22 28.57
..............................................................
Lipper Health/Biotechnology
Fund Index 11.94 26.00
..............................................................
YEAR-END DISTRIBUTIONS
On December 15, 1998, your Board of Directors declared a long-term capital gain
distribution of $0.44 per share and a short-term capital gain distribution of
$0.22 to shareholders of record on that date. The distribution was paid on
December 17. You should already have received your check or statement reflecting
this distribution, as well as Form 1099-DIV summarizing this information for
1998 tax purposes.
MARKET ENVIRONMENT
The past year was simply amazing. The Dow Jones Industrials and the S&P 500 both
soared to double-digit gains, with the S&P notching its fourth consecutive year
of returns in excess of 20%. These performances were unprecedented, and came in
spite of such adverse geo-political events as the impeachment of the U.S.
President, financial default by the Russian government, and the end of Baltimore
Oriole Cal Ripken's consecutive game streak at 2,632. Although corporate profit
growth slowed, the U.S. financial markets remained robust,
1
<PAGE>
- -------------------------------------------------
Preparing For The Year 2000
- -------------------------------------------------------------------------------
The Year 2000 draws closer every day, and it holds special meaning beyond the
arrival of a new millennium. The issue for investors is that many computer
programs throughout the world use two digits instead of four to identify the
year and may assume the next century starts with 1900. If these programs are not
modified, they will not be able to correctly handle the century change when the
year changes from "99" to "00" on January 1, 2000, and they will no longer be
able to perform necessary functions. The Year 2000 issue affects all companies
and organizations.
T. Rowe Price has been taking steps to assure that its computer systems and
processes are capable of functioning in the Year 2000. Detailed plans for
remediation efforts have been developed and are currently being executed.
OUR PLAN OF ACTION
We began to address these issues several years ago by requiring that all new
systems process and store four-digit years. All critical systems have been
reprogrammed (including business applications required to service our customers
and processing infrastructure necessary to ensure the integrity of customer data
and investments), and they are currently being tested. Because we exchange data
electronically with customers and vendors, we are working with them to assess
the adequacy of their own compliance efforts. Our goal is to ensure the
continuation of the same level of service to all our mutual fund shareholders
and clients after December 31, 1999.
We are asking all vendors and companies we do business with for a Year 2000
compliance status, with the expectation that some organizations will not be able
to modify their interface files prior to December 31, 1999. In addition, we are
scheduling tests for critical vendors and companies that claim Year 2000
compliance to ensure that time-related data and calculations function properly
as we move into the next century.
SMOOTH TRANSITION PLANNED
We believe our programs and initiatives will provide a smooth transition into
the next millennium. We are assessing all systems providing products or services
to our retail mutual fund shareholders, retirement plan sponsors, and
participants, and we have modified them where necessary for the Year 2000.
The Securities Industry Association (SIA) is coordinating Year 2000 testing to
assure that securities markets, clearing corporations, depositories, and third
party service providers can send, receive, and process files and transactions
accurately. In late July 1998, the SIA completed a beta test of Year 2000
readiness. The test was considered successful in terms of transactions completed
and will serve as the basis for the SIA's industry-wide approach. During October
1998, T. Rowe Price completed its beta test of Year 2000 readiness with the SIA
and is ready for the industry-wide test that is scheduled for March and April
1999.
For a more detailed discussion of our Year 2000 effort, as well as continuing
updates on our progress, please check our Web site (www.troweprice.com).
2
<PAGE>
fueled by a record $1.6 trillion in proposed mergers and acquisitions and an
accommodative Federal Reserve. Large-capitalization stocks once again outpaced
their smaller counterparts: the S&P gained close to 29% compared with a nearly
3% decline in the small-cap Russell 2000 Index.
HEALTH CARE STOCKS EXPERIENCED THE FULL SPECTRUM OF INVESTOR SENTIMENT IN
1998...
The market's gains did not come without volatility, however, especially during
the mid-July to early October period. After the market crossed the midyear mark
on a positive note, domestic political concerns and heightened emerging market
instability raised questions about the U.S. economy and weakened global
financial markets. Anticipation of a slowing economy hurt economically sensitive
stocks, and tepid financial markets cooled a heated mergers and acquisition
environment. This period of extreme pessimism abated halfway through the third
quarter: Alan Greenspan became the financial markets' own "Mr. October" by
leading the Federal Reserve to three interest rate cuts within seven weeks. A
powerful rebound led by technology stocks and turbocharged by Internet mania
soon followed. The reignition of merger and acquisition activity added fuel to
the fire and included such gargantuan deals as Exxon/Mobil and Bell
Atlantic/GTE.
Health care stocks experienced the full spectrum of investor sentiment in 1998,
gaining on broad market rallies and struggling during the correction. The market
for health care stocks was especially favorable toward the end of the second
half. Pharmaceutical stocks were once again solid performers as investors sought
to capitalize on their consistent, superior earnings growth. Biotechnology
stocks rebounded off their summer lows as investors rewarded companies with the
most visible growth prospects. Product and device company performance varied
with their prospects for profitable new products, and also their likelihood of
participating in the heated merger environment. Services firms once again posted
mixed results, with the key variable being the ability of individual companies
to meet investor expectations.
PORTFOLIO REVIEW
During the second half of 1998, we continued our efforts to increase the fund's
exposure to companies with more tangible growth prospects and to raise the
overall market capitalization and trading liquidity of
3
<PAGE>
its holdings. These efforts are reflected in our decision to increase exposure
to larger-cap pharmaceuticals and established biotechnology stocks. We also
increased the average position size in an effort to concentrate the portfolio
more on our best investment ideas.
The pharmaceutical position grew from 40% six months ago to 48% at period's end
as a result of both additional investments and the solid performance across the
sector. We added to positions in industry leaders Pfizer, Warner-Lambert,
Schering-Plough, and Eli Lilly, each of which was a significant contributor to
second half performance. We also beefed up several mid-size pharmaceutical
holdings, such as Elan and Shire Pharmaceuticals. We initiated positions in
European-based pharmaceutical companies Glaxo Wellcome and Pharmacia & Upjohn to
further broaden our participation in this sector.
- -----------------------
Sector Diversification
- ---------------------------------------------------------
6/30/98 12/31/98
- ---------------------------------------------------------
Pharmaceuticals 40% 48%
.........................................................
Health Care Services 25 21
.........................................................
Products and Devices 17 9
.........................................................
Biotechnology 11 17
.........................................................
Reserves 7 5
- ---------------------------------------------------------
Total 100% 100%
Assets invested in the services sector fell from 25% to 21% during the six-month
period. Performance generally lagged, especially among health care providers
such as Concentra Managed Care, PhyCor, and Quorum Health Group. We reduced
holdings in companies we thought had weakening fundamental outlooks. Positions
in PhyCor and Tenet Healthcare were eliminated, as was a stake in the
distribution firm Omnicare. At the same time, we increased our holdings in the
information sector with additional investments in National Data and a new
position in IMS Health, the leading supplier of market data to the
pharmaceutical industry. We also added to positions in managed care providers
Aetna and United HealthCare. We felt investor sentiment toward this sector had
turned overly negative and that prospects for an improved pricing environment
were increasing. Notable contributions in an otherwise difficult sector came
from Cardinal Health and IMS Health.
We reduced our products and devices investments from 17% of assets at the end of
June to 9% at the end of December due to selective profit taking and our
continued efforts to improve the overall fundamentals of the portfolio. We cut
positions in Boston Scientific, Ventana Medical
4
<PAGE>
Systems, and Collagen, which we felt lacked the potential for consistent
earnings growth. We initiated a position in Sofamor/Danek Group, the leader in
spinal implants, and added to our stake in Arterial Vascular Engineering. Both
of these companies are being acquired by Medtronic, a leader in cardiovascular
devices and another holding in the fund. Arterial Vascular Engineering and
Guidant posted some of the better returns in this sector, while notable laggards
included Boston Scientific and Ventana Medical Systems.
Biotechnology holdings increased from 11% to 17% of assets in six months, the
result of both appreciation and additional purchases. Our strategy of shifting
assets to biotechnology companies with either established products or products
in the later stages of development and approval paid great dividends in the
year's final quarter. Holdings in Biogen, Agouron Pharmaceuticals, and Gilead
Sciences represented three of the five top contributors in the second half of
1998. We firmly believe that the biotechnology field is fertile with
wealth-building opportunities for those able to tolerate its inevitable
volatility.
INVESTMENT OUTLOOK
We believe that the health sciences sector will continue to be a dynamic growth
area driven by demographic changes, scientific advancements, and the willingness
of both wealthy and developing nations to finance health care expenditures. Our
primary goal is to create a portfolio of companies that will capitalize on
secular trends to produce a predictable stream of earnings and drive long-term
value creation. We view pharmaceuticals, products and devices companies, and
selected biotechnology companies as most able to meet these requirements.
In the health care sector, 1998 was marked by major product launches (such as
Viagra) and torrid merger and acquisition activity. We expect more of the same
in 1999. Pain management should capture headlines, highlighted by medicines
based on Cox-2 inhibitors from Monsanto/Pfizer and Merck. Mergers and
acquisitions should also continue as companies seek to improve their strategic
positioning and enhance long-term growth prospects.
Our greatest concerns at the moment are the divergent performances of, and
valuation discrepancies between, large- and small-capitalization stocks, as well
as the historically high valuations being accorded to fundamentally attractive
sectors such as pharmaceuticals and devices.
5
<PAGE>
We are also mindful that the next presidential election cycle will soon be upon
us and could lead to increased rhetoric about health care legislation. We are
maintaining a measured approach and will seek to benefit from secular growth
opportunities and the ebb and flow of investor sentiment. Our underlying belief
is that stocks follow earnings over the long term, but we caution investors to
moderate their short-term expectations for both the health care field and the
general market indexes.
We would like to thank our fellow shareholders for their continued support and
reaffirm our commitment to seizing wealth building opportunities on your behalf.
Respectfully submitted,
/s/ Brian D. Stansky
Brian D. Stansky
Chairman of the Investment Advisory Committee
January 20, 1999
6
<PAGE>
T. Rowe Price Health Sciences Fund
- -------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- -------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/98
- -------------------------------------------------------------------------
Pfizer 5.0%
.........................................................................
Eli Lilly 4.4
.........................................................................
Schering-Plough 4.3
.........................................................................
Warner-Lambert 3.8
.........................................................................
Bristol-Myers Squibb 3.6
- -------------------------------------------------------------------------
Merck 3.3
.........................................................................
American Home Products 3.1
.........................................................................
Cardinal Health 3.1
.........................................................................
Johnson & Johnson 2.9
.........................................................................
Gilead Sciences 2.4
- -------------------------------------------------------------------------
National Data 2.4
.........................................................................
Arterial Vascular Engineering 2.1
.........................................................................
United HealthCare 2.0
.........................................................................
IDX Systems 2.0
.........................................................................
Biogen 2.0
- -------------------------------------------------------------------------
Medtronic 1.9
.........................................................................
Elan 1.9
.........................................................................
Alkermes 1.8
.........................................................................
PathoGenesis 1.8
.........................................................................
Teva Pharmaceutical Industries 1.8
- -------------------------------------------------------------------------
Amgen 1.8
.........................................................................
Glaxo Wellcome 1.6
.........................................................................
Aetna 1.6
.........................................................................
Zeneca Group 1.6
.........................................................................
Inhale Therapeutic Systems 1.6
- -------------------------------------------------------------------------
Total 63.8%
7
<PAGE>
T. Rowe Price Health Sciences Fund
- -------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- -------------------------------------------------------------------------
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended December 31, 1998
Ten Best Contributors
- --------------------------------------------------------------------------
PathoGenesis 20(cents)
..........................................................................
Biogen 20
..........................................................................
Eli Lilly 19
.........................................................................
Agouron Pharmaceuticals 17
.........................................................................
Gilead Sciences 14
.........................................................................
Arterial Vascular Engineering 10
.........................................................................
Pfizer 10
.........................................................................
Schering-Plough 9
.........................................................................
MedImmune 9
.........................................................................
Centocor ** 9
- --------------------------------------------------------------------------
Total 137(cents)
Ten Worst Contributors
- --------------------------------------------------------------------------
Concentra Managed Care - 15(cents)
.........................................................................
Oxford Health Plans ** 11
.........................................................................
PhyCor ** 11
.........................................................................
Quorum Health Group 11
.........................................................................
Monsanto 11
.........................................................................
United HealthCare 8
.........................................................................
Global Pharmaceutical ** 5
.........................................................................
Boston Scientific ** 5
.........................................................................
Ventana Medical Systems 4
.........................................................................
Xenova Group 4
- --------------------------------------------------------------------------
Total - 85(cents)
12 Months Ended December 31, 1998
Ten Best Contributors
- --------------------------------------------------------------------------
Biogen 28(cents)
.........................................................................
Pfizer 27
.........................................................................
Warner-Lambert 20
.........................................................................
Eli Lilly * 19
.........................................................................
Agouron Pharmaceuticals 17
.........................................................................
R.P. Scherer *** 15
.........................................................................
PathoGenesis 15
.........................................................................
Bristol-Myers Squibb 14
.........................................................................
Gilead Sciences * 13
.........................................................................
Merck 13
- --------------------------------------------------------------------------
Total 181(cents)
Ten Worst Contributors
- --------------------------------------------------------------------------
PhyCor ** - 24(cents)
.........................................................................
Concentra Managed Care * 18
.........................................................................
Oxford Health Plans ** 13
.........................................................................
Quorum Health Group 11
.........................................................................
Dura Pharmaceuticals ** 10
.........................................................................
COR Therapeutics 6
.........................................................................
Global Pharmaceutical ** 5
.........................................................................
Xenova Group 5
.........................................................................
Dentsply International ** 5
.........................................................................
Guilford Pharmaceuticals 3
- --------------------------------------------------------------------------
Total - 100(cents)
* Position added
** Position eliminated
*** Acquired by another company
8
<PAGE>
T. Rowe Price Health Sciences Fund
- ----------------------------------------------------------------------------
- -----------------------
Performance Comparison
- ----------------------------------------------------------------------------
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
HEALTH SCIENCES FUND
- ----------------------------------------------------------------------------
[LINE GRAPH APPEAR HERE]
Date S&P 500 Stock Index Health Science Fund
----------- ------------------- -------------------
12/29/95 $10,000 $10,000
12/31/96 $12,296 $12,675
12/31/97 $16,398 $15,136
12/31/98 $21,083 $18,522
- ------------------------------------
Average Annual Compound Total Return
- ----------------------------------------------------------------------------
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Since Inception
Periods Ended 12/31/98 1 Year 3 Years Inception Date
- ----------------------------------------------------------------------------
Health Sciences Fund 22.37% 22.81% 22.76% 12/29/95
............................................................................
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
9
<PAGE>
T. Rowe Price Health Sciences Fund
- --------------------------------------------------------------------------------
- ------------------------
Financial Highlights For a share outstanding throughout each period
- --------------------------------------------------------------------------------
Year 12/29/95
Ended Through
12/31/98 12/31/97 12/31/96
NET ASSET VALUE
Beginning of period $ 13.66 $ 12.27 $ 10.00
...........................................
Investment activities
Net investment income (0.04) (0.03) (0.03)*
Net realized and
unrealized gain (loss) 3.05 2.39 2.70
...........................................
Total from
investment activities 3.01 2.36 2.67
...........................................
Distributions
Net realized gain (0.66) (0.97) (0.40)
...........................................
NET ASSET VALUE
End of period $ 16.01 $ 13.66 $ 12.27
-------------------------------------------
Ratios/Supplemental Data
Total return(+) 22.37% 19.41% 26.75%*
................................................................................
Ratio of expenses to
average net assets 1.16% 1.18% 1.35%*
................................................................................
Ratio of net investment
income to average
net assets (0.25)% (0.21)% (0.32)%*
................................................................................
Portfolio turnover rate 85.7% 104.4% 133.1%
................................................................................
Net assets, end of period
(in thousands) $316,573 $271,351 $193,958
................................................................................
(+) Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
* Excludes expenses in excess of a 1.35% voluntary expense limitation in
effect through 12/31/97.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
T. Rowe Price Health Sciences Fund
- --------------------------------------------------------------------------------
December 31, 1998
- ---------------------------
Statement of Net Assets Shares Value
- --------------------------------------------------------------------------------
In thousands
Common Stocks 95.1%
SERVICES 21.3%
Payors 5.0%
Aetna 65,000 $ 5,111
..............................................................................
United HealthCare 150,000 6,459
..............................................................................
Wellpoint Health Networks * 50,000 4,350
..............................................................................
15,920
...........
Providers 5.4%
American Oncology Resources * 320,000 4,680
..............................................................................
Columbia/HCA Healthcare 175,000 4,331
..............................................................................
Quorum Health Group * 250,000 3,226
..............................................................................
Total Renal Care Holdings * 165,000 4,878
..............................................................................
17,115
...........
Information 5.8%
IDX Systems * 141,500 6,235
..............................................................................
IMS Health 60,000 4,526
..............................................................................
National Data 155,000 7,547
..............................................................................
18,308
...........
Distribution 3.1%
Cardinal Health 128,250 9,731
..............................................................................
9,731
...........
Other Services 2.0%
Concentra Managed Care * 190,500 2,018
..............................................................................
Covance * 150,000 4,369
..............................................................................
6,387
...........
Total Services 67,461
...........
PRODUCTS & DEVICES 8.7%
Supply 1.1%
Analogic 96,800 3,642
..............................................................................
3,642
...........
Implants 7.6%
Arterial Vascular Engineering * 125,000 6,551
..............................................................................
Guidant 40,000 4,410
..............................................................................
Medtronic 80,000 5,940
..............................................................................
11
<PAGE>
T. Rowe Price Health Sciences Fund
- --------------------------------------------------------------------------------
Shares Value
- ------------------------------------------------------------------------------
In thousands
Mentor 200,000 $ 4,681
..............................................................................
Sofamor/Danek Group * 19,700 2,399
..............................................................................
23,981
..........
Total Products & Devices 27,623
..........
PHARMACEUTICALS 48.0%
U.S. Major - Pharmaceuticals 31.3%
American Home Products 175,000 9,855
..............................................................................
Bristol-Myers Squibb 85,000 11,374
..............................................................................
Eli Lilly 155,000 13,776
..............................................................................
Johnson & Johnson 110,000 9,226
..............................................................................
Merck 70,000 10,338
..............................................................................
Monsanto 60,000 2,886
..............................................................................
Pfizer 127,000 15,930
..............................................................................
Schering-Plough 245,000 13,536
..............................................................................
Warner-Lambert 160,000 12,030
..............................................................................
98,951
..........
European Major - Pharmaceuticals 4.6%
Glaxo Wellcome ADR 75,000 5,212
..............................................................................
Pharmacia & Upjohn 75,000 4,247
..............................................................................
Zeneca Group (GBP) 50,000 2,178
..............................................................................
Zeneca Group ADR 64,200 2,881
..............................................................................
14,518
..........
Generic & Drug Delivery 12.1%
Alkermes * 261,200 5,779
..............................................................................
Elan ADR * 85,000 5,913
..............................................................................
Forest Laboratories * 30,000 1,596
..............................................................................
Inhale Therapeutic Systems *++ 151,750 5,003
..............................................................................
PathoGenesis * 100,000 5,744
..............................................................................
Shire Pharmaceuticals ADR * 200,000 4,012
..............................................................................
Teva Pharmaceutical Industries ADR 140,000 5,709
..............................................................................
Watson Pharmaceuticals * 75,000 4,716
..............................................................................
38,472
..........
Total Pharmaceuticals 151,941
..........
12
<PAGE>
T. Rowe Price Health Sciences Fund
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
BIOTECHNOLOGY 14.5%
U.S. Major - Biotechnology 10.6%
................................................................................
Agouron Pharmaceuticals * 59,022 $ 3,466
................................................................................
Amgen * 54,400 5,685
................................................................................
BioChem Pharma * 82,100 2,355
................................................................................
Biogen * 74,800 6,204
................................................................................
Chiron * 100,800 2,636
................................................................................
Gilead Sciences * 187,500 7,693
................................................................................
MedImmune * 41,000 4,087
................................................................................
Sepracor * 17,000 1,498
................................................................................
33,624
..........
Other Biotechnology 3.9%
COR Therapeutics * 175,900 2,347
................................................................................
Guilford Pharmaceuticals * 120,000 1,721
................................................................................
Magainin Pharmaceuticals, Warrants, 8/6/01 *++ 84,325 0
................................................................................
Millennium Pharmaceuticals * 100,000 2,582
................................................................................
Neurocrine Biosciences * 288,600 1,930
................................................................................
Xenova Group (GBP) * 363,000 211
................................................................................
Zonagen * 175,000 3,314
................................................................................
12,105
..........
Total Biotechnology 45,729
..........
Miscellaneous Common Stocks 2.6% 8,198
..........
Total Common Stocks (Cost $235,845) 300,952
..........
Short-Term Investments 8.2%
Money Market Funds 8.2%
Reserve Investment Fund, 5.42% # 26,051,789 26,052
................................................................................
Total Short-Term Investments (Cost $26,052) 26,052
..........
13
<PAGE>
T. Rowe Price Health Sciences Fund
- --------------------------------------------------------------------------------
Value
- --------------------------------------------------------------------------------
In thousands
Total Investments in Securities
103.3% of Net Assets (Cost $261,897) $ 327,004
Other Assets Less Liabilities (10,431)
.............
NET ASSETS $ 316,573
-------------
Net Assets Consist of:
Accumulated net realized gain/loss - net of distributions $9,307
Net unrealized gain (loss) 65,107
Paid-in-capital applicable to 19,771,215 shares of $0.0001 par
value capital stock outstanding; 1,000,000,000 shares authorized 242,159
.............
NET ASSETS $ 316,573
-------------
NET ASSET VALUE PER SHARE $ 16.01
-------------
# Seven-day yield
* Non-income producing
++ Securities contain some restrictions as to public resale--total of such
securities at period-end amounts to 1.58% of net assets.
ADR American Depository Receipt
GBP British sterling
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
T. Rowe Price Health Sciences Fund
- --------------------------------------------------------------------------------
- -----------------------
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/98
Investment Income
Income
Dividend $ 1,392
Interest 1,218
..........
Total income 2,610
..........
Expenses
Investment management 1,926
Shareholder servicing 1,039
Prospectus and shareholder reports 119
Custody and accounting 99
Registration 89
Legal and audit 13
Directors 7
Miscellaneous 41
..........
Total expenses 3,333
..........
Net investment income (723)
..........
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 15,042
Foreign currency transactions (111)
..........
Net realized gain (loss) 14,931
..........
Change in net unrealized gain or loss
Securities 43,904
Other assets and liabilities
denominated in foreign currencies 3
..........
Change in net unrealized gain or loss 43,907
..........
Net realized and unrealized gain (loss) 58,838
..........
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 58,115
----------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
T. Rowe Price Health Sciences Fund
- --------------------------------------------------------------------------------
- ----------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ (723) $ (533)
Net realized gain (loss) 14,931 25,668
Change in net unrealized gain or loss 43,907 16,196
.........................
Increase (decrease) in net assets from operations 58,115 41,331
.........................
Distributions to shareholders
Net realized gain (12,484) (18,004)
.........................
Capital share transactions *
Shares sold 103,398 164,002
Distributions reinvested 12,130 17,508
Shares redeemed (115,937) (127,444)
Increase (decrease) in net assets from capital
share transactions (409) 54,066
.........................
Net Assets
Increase (decrease) during period 45,222 77,393
Beginning of period 271,351 193,958
.........................
End of period $ 316,573 $ 271,351
* Share information -------------------------
Shares sold 7,046 12,409
Distributions reinvested 811 1,311
Shares redeemed (7,954) (9,662)
.........................
Increase (decrease) in shares outstanding (97) 4,058
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
T. Rowe Price Health Sciences Fund
- --------------------------------------------------------------------------------
December 31, 1998
- -----------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Health Sciences Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company and commenced operations on December 29, 1995.
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles for the investment company industry; these
principles may require the use of estimates by fund management.
Valuation Equity securities listed or regularly traded on a securities exchange
are valued at the last quoted sales price on the day the valuations are made. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such security.
Listed securities not traded on a particular day and securities regularly traded
in the over-the-counter market are valued at the mean of the latest bid and
asked prices. Other equity securities are valued at a price within the limits of
the latest bid and asked prices deemed by the Board of Directors, or by persons
delegated by the Board, best to reflect fair value.
Investments in mutual funds are valued at the closing net asset value per share
of the mutual fund on the day of valuation.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S. dollars at
the prevailing exchange rate at the end of the reporting period. Purchases and
sales of securities and income and expenses are translated into U.S. dollars at
the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
Premiums and Discounts Premiums and discounts on debt securities are amortized
for both financial reporting and tax purposes.
17
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T. Rowe Price Health Sciences Fund
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Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Dividend income and distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income tax
regulations and may differ from those determined in accordance with generally
accepted accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $230,701,000 and $248,335,000, respectively, for the year ended
December 31, 1998.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income.
In order for the fund's capital accounts and distributions to shareholders to
reflect the tax character of certain transactions, the following
reclassifications were made during the year ended December 31, 1998. The results
of operations and net assets were not affected by the increases/(decreases) to
these accounts.
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Undistributed net investment income $ 723,000
Undistributed net realized gain (689,000)
Paid-in-capital (34,000)
At December 31, 1998, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled $261,897,000.
Net unrealized gain aggregated $65,107,000 at period end, of which $73,717,000
related to appreciated investments and $8,610,000 to depreciated investments.
18
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T. Rowe Price Health Sciences Fund
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NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management fee,
of which $171,000 was payable at December 31, 1998. The fee is computed daily
and paid monthly, and consists of an individual fund fee equal to 0.35% of
average daily net assets and a group fee. The group fee is based on the combined
assets of certain mutual funds sponsored by the manager or Rowe Price-Fleming
International, Inc. (the group). The group fee rate ranges from 0.48% for the
first $1 billion of assets to 0.30% for assets in excess of $80 billion. At
December 31, 1998, and for the year then ended, the effective annual group fee
rate was 0.32%. The fund pays a pro-rata share of the group fee based on the
ratio of its net assets to those of the group.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc. is the fund's
transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc. provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. The fund incurred expenses pursuant to these
related party agreements totaling approximately $874,000 for the year ended
December 31, 1998, of which $95,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds
are offered as cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not available to the public.
The Reserve Funds pay no investment management fees. Distributions from the
Reserve Funds to the fund for the year ended December 31, 1998, totaled
$1,015,000 and are reflected as interest income in the accompanying Statement of
Operations.
19
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T. Rowe Price Health Sciences Fund
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- ---------------------------------
Report of Independent Accountants
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To the Board of Directors and Shareholders of
T. Rowe Price Health Sciences Fund, Inc.
In our opinion, the accompanying statement of net assets 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
T. Rowe Price Health Sciences Fund, Inc. (the "Fund") at December 31, 1998, and
the results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, 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 securities at December 31, 1998 by
correspondence with custodians, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 21, 1999
20
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T. Rowe Price Health Sciences Fund
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- -----------------------------------------------------------
Tax Information (Unaudited) for the Tax Year Ended 12/31/98
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We are providing this information as required by the Internal Revenue Service.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included:
. $4,162,000 from short-term capital gains,
. $8,322,000 from long-term capital gains, all of which is subject to the 20%
rate gains category.
For corporate shareholders, $1,072,000 of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
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<PAGE>
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a brokerage account
or obtain information, call:
1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Health Sciences Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor. F10-050 12/31/98
