Putnam
Health
Sciences
Trust
ANNUAL REPORT
August 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "This offering's investors haven't fared too badly as its asset base
has grown. The portfolio's large-cap focus has produced decent
relative returns, along with risk scores that are below average for a
health-care fund....This fund has been a relatively steady and solid
performer."
-- Morningstar, September 13, 1996*
* "Not many sectors of the economy have the ability to expand unit
growth continuously. The health-care industry is benefiting from
demographic trends such as an aging population and longer life spans
that are creating a burgeoning demand for services. While this bodes
well for the industry as a whole, our extensive in-house research
should be key to selecting the companies within each subsector that
are positioned to benefit most."
-- Joanne Soja, Fund Manager
CONTENTS
4 Report from Putnam Management
10 Fund performance summary
17 Portfolio holdings
21 Financial statements
* Please see pages 10 and 11 for complete performance information.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Health care covers a disparate array of disciplines that range from
cutting-edge pharmacology, biochemistry, and technology to service-
oriented administration and management. The investment possibilities
available in this diverse field are likewise varied.
To seek out the best of these investments, Joanne Soja, Putnam Health
Sciences Trust's manager, must traverse a continually shifting
landscape. As Joanne writes in the following report, during the fiscal
year that ended August 31, 1996, she has watched investor sentiment shift
away from such areas as health maintenance organizations and toward medical
information technology and pharmaceuticals.
The fund's success in taking advantage of the trends in health care over
nearly a decade and a half is documented in the long-term results on
pages 10 and 11. Although past performance is not indicative of future
results, we believe your fund is well positioned to continue this trend
in the fiscal year that has just begun.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
October 16, 1996
Report from the Fund Manager Joanne Soja
With the stock market's sharp correction in July still fresh in the
minds of investors, you may be expecting Putnam Health Sciences Trust's
performance to show a few scars as a result. However, buoyed by the
stock market's spectacular rise over the first half of the fiscal year
and its recovery in August, the fund finished the year relatively
unscathed. In fact, total returns at net asset value for the 12 months
ended August 31, 1996 (24.12% for class A shares, 23.19% for class B
shares, and 23.51% for class M shares) were well ahead of the 18.70%
return of its comparative benchmark, the Standard & Poor's
500(registered trademark) Index. Total returns for the same period at
maximum public offering price for class A and class M shares were 16.97%
and 19.20%, respectively, and for class B shares, 18.19% at the
applicable contingent deferred sales charge. Details can be found in the
performance section on page 10.
The stock market's strength was fueled by solid earnings growth, a
favorable interest rate environment, and an upswing in mergers and
acquisitions. A major presence in several key subsectors --
pharmaceuticals, biotechnology, medical supplies and devices, and
information systems -- largely contributed to the fund's performance.
* FLIGHT TO SAFETY IN SECOND HALF OF YEAR BENEFITS LARGE-CAP STOCKS
Following the record highs set by the Dow Jones Industrial Average and
the S&P 500 in May, the stock market became quite edgy. As July began,
investors were disheartened by disappointing earnings reports in the
technology industry. Negative foreign currency trends, the result of a
strong U.S. dollar, added to their concerns. A slowdown in the amount of
cash flowing into the stock market only compounded the situation. But it
was the announcement of June's surprisingly strong job market data on
July 5 that truly roiled the financial waters. The S&P 500 plunged 14.96
points and the Dow fell 114.88 points on that day, among the largest
one-day drops in history.
In such a reversal of fortunes, stocks of all companies, large and
small, suffered. However, small-capitalization stocks, which had
outperformed the larger-company stocks this spring, lost more ground,
since they had previously experienced a greater run-up in prices.
Because your fund has a significant stake in large-company stocks, its
share price did not undergo the same degree of correction as funds that
focus to a greater extent on small-cap stocks. The greater resiliency of
larger-cap stocks can be attributed, in part, to the fact that
performance for many of these stocks is currently meeting or exceeding
analysts' expectations.
The ability of small- and large-cap stocks to outperform at different
times in the market cycle highlights an important facet of your fund's
diversification strategy. In addition to its diversification across
different levels of market capitalization, the fund is also spread
across a variety of subsectors, further spreading market risk. As of
August 31, 1996, the fund was invested in 6 subsectors and had positions
in a total of 132 stocks. Although their percentage of net assets has
changed somewhat, the portfolio's top 10 holdings remain virtually
unchanged from the start of the fiscal year, with the exception of
American Home Products, a drug company, replacing U.S. Healthcare Corp.,
a health maintenance organization (HMO). Of course, holdings are subject
to change.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: TOP INDUSTRY SECTORS*]
Pharmaceuticals 38.9%
Medical supplies
and devices 31.2%
Biotechnology 7.3%
Managed services 7.2%
Other health-care
services 6.6%
Footnote reads:
* Based on net assets as of 8/31/96. Sector weightings will vary
over time.
The performance of stocks within the cost containment/HMO sector has
been somewhat lackluster because of slow investor demand. When HMO
enrollments began to increase at double-digit rates, the industry had
not yet adequately restrained the growth of costs. However, managements
of HMOs are now attempting to address this issue in order to avoid
sacrificing profit margins for strong unit growth. While we pared back
the fund's HMO position somewhat during the year, we believe the need
for quality health-care delivery at affordable prices will continue into
the future especially as the government attempts to rein in the
spiraling costs of Medicare and Medicaid.
* WARNER-LAMBERT: MONITORING A PROFILE OF CHANGING FORTUNES
One of the fund's more successful strategies has been its emphasis on
inexpensive stocks of product-oriented companies within the
pharmaceutical industry. However, in this highly competitive business, a
lack of new products near-term can make a company with attractive stock
valuations a takeover candidate.
At the start of the fiscal year, competitive pressures and longer
product development schedules had cast a cloud over Warner-Lambert's
fortunes. These problems proved temporary, however. Warner-Lambert has
since completed an extensive research and development effort,
culminating in the development of two drugs that each have the potential
to generate well in excess of $500 million in sales by the year 2000.
The two drugs, Atorvastatin (a potent cholesterol-lowering drug) and
Troglitazone (an oral antidiabetic), are both slated for FDA filing in
1996. We had seen the potential of Warner-Lambert early on and had
positioned the fund to benefit. Our assessment of this holding has
proved correct as it has continued to contribute to the fund.
While these new products may not make a positive contribution to the
company's near-term earnings, it is a company's long-term potential that
we consider most important as we monitor your fund's portfolio. Indeed,
when we initially purchased Warner-Lambert stock, the value per share
was less than $60. More recently, we have seen its share price rise to
$100. As of this writing, Warner-Lambert is a strong performer among the
fund's top 10 holdings and we believe the stock's long-term performance
potential remains attractive. While this stock, along with others
discussed in this report, was viewed favorably at the end of the fiscal
period, all portfolio holdings are subject to review and adjustment in
accordance with the fund's investment strategy and may well vary in the
future.
[GRAPHIC OMITTED: TOP 10 HOLDINGS (8/31/96)]
Johnson & Johnson
Medical supplies and devices
Abbot Laboratories
Medical supplies and devices
SmithKline Beecham PLCADR (United Kingdom)
Pharmaceuticals
Merck & Co., Inc.
Pharmaceuticals
Pfizer, Inc.
Pharmaceuticals
Eli Lilly & Co.
Pharmaceuticals
American Home Products Corp.
Pharmaceuticals
Medtronic, Inc.
Medical supplies and devices
Warner-Lambert Co.
Pharmaceuticals
Schering-Plough Corp.
Pharmaceuticals
Footnote reads:
These holdings represent 43.3% of the fund's net assets. Portfolio
holdings will vary over time.
* SELECTING THE COMPANIES WITH THE MOST PROMISING IDEAS
The fund's growth strategy is anchored by careful stock selection,
patience, and dedication to long-term results. We assess the prospects
of each company's stock as well as the overall economic, demographic,
and political landscape.
With this approach, we may select a group of companies with promising
opportunities in the same subsector in the hopes that several -- if not
all -- will come to fruition. Information systems is a timely example.
Health care is still predominantly paper-based, making it the last major
industry to embrace the benefits of technology. Information systems
companies are now making it possible for the medical community to
expeditiously access and integrate the vast amounts of data that exist
and turn the data into useful information that can be used to make
knowledgeable decisions.
Since the health-care industry has significantly underinvested in
information technology (approximately 2% historically compared with 7%
and 10% for the insurance and banking industries, respectively), we
believe a great opportunity exists as the industry becomes more
automated. Summit Medical Systems, Physicians Computer Network, Shared
Medical Systems, and Apache Medical Systems are just a few of the
companies we believe are positioned to benefit.
The biotechnology and pharmaceutical fields also offer myriad
opportunities for outperformance as many companies compete in the
development of new products. For example, medical treatments for obesity
are currently the focus of much attention because of their implications
not only for weight loss but also for correlated diseases such as
diabetes. Several portfolio companies are currently at work on new
treatments for weight loss: Amgen, Synaptic Pharmaceutical, and Neurogen
through its relationship with Pfizer.
* HEALTH-CARE TRENDS BODE WELL FOR NEW FISCAL YEAR AND BEYOND
The future of health care is being shaped by many trends that could bode
well for the industry's future. First, new medical technologies and the
aging population, particularly the baby-boom generation, are
contributing to the growth of health-care spending. After decades of
double-digit growth, health-care spending in 1995 was estimated to be
just over $1 trillion, approximately 14% of gross domestic product.
Meanwhile, we've seen a heightened emphasis on cost containment, which
is forcing the industry to monitor the costs of medical care more
closely. With the advent of managed care, each medical test or
additional service is thought of less as a revenue generator than as a
cost. Furthermore, in an effort to compete with HMOs, providers of all
types (physicians, hospitals, nursing homes, home-care services, and
rehabilitation companies) are consolidating to cut costs. The result is
the industrialization of a highly fragmented health-care delivery system
and the potential for further cost controls.
The outlook for the health-care industry has also been favorably
impacted by the FDA's efforts to speed up its approval process. By the
close of the fiscal year, the year-to-date total of 23 new drug
approvals was more than twice the number of approvals for the same time
last year. A more noteworthy product pending approval as of this writing
was Eli Lilly's Zyprexa, a drug for the treatment of schizophrenia that
causes fewer side effects than other therapies. American Home Products'
Redux, the first pharmaceutical developed and offered for the treatment
of obesity, has been FDA approved.
Athena Bioscience, recently taken over by Elan, a mid-cap drug delivery
company, is going to market with a new test for certain types of
Alzheimer's disease. Pfizer, another portfolio company, has a new drug
that fights Alzheimer's. In addition to companies with new products
currently under FDA review, our portfolio selections included companies
that have already secured approvals for breakthrough treatments. Two
more examples were Merck and Biochem Pharmaceutical, whose drugs
Crixivan and 3TC, respectively, have substantially lengthened the lives
of HIV-positive patients. Products such as these offer hope that AIDS
may soon become a chronic disease instead of a terminal illness.
While the FDA's speedup of approvals for important therapies has
benefited health care, events unfolding in Washington will impact the
industry in the months ahead. In particular, we will continue to closely
monitor the health-care debate in Washington. The outcome of the
presidential election is likely to have implications for the direction
and pace of reform. With continued signs that the economy is growing
steadily without significant inflation, we believe several factors,
including strong consumer confidence, an improving job outlook, and
continued earnings growth, all bode well for the fund's new fiscal year.
Footnote reads:
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 8/31/96, 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
Performance should always be considered in light of a fund's investment
strategy. Putnam Health Sciences Trust is designed for investors seeking
capital appreciation through investments in the health sciences
industries.
This section provides, at a glance, information about your fund's
performance. 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.
TOTAL RETURN FOR PERIODS ENDED 8/31/96
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 24.12% 16.97% 23.19% 18.19% 23.51% 19.20%
- ----------------------------------------------------------------------
5 years 76.78 66.60 -- -- -- --
Annual average 12.07 10.75 -- -- -- --
- ----------------------------------------------------------------------
10 years 301.55 278.45 -- -- -- --
Annual average 14.91 14.24 -- -- -- --
- ----------------------------------------------------------------------
Life of class -- -- 88.87 85.87 31.55 26.95
Annual average -- -- 19.92 19.38 26.41 22.62
- ----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 8/31/96
Standard & Poor's Consumer Price
500 Index Index
- ----------------------------------------------------------------------
1 year 18.70% 2.88%
- ----------------------------------------------------------------------
5 years 89.07 15.15
Annual average 13.59 2.86
- ----------------------------------------------------------------------
10 years 250.20 43.39
Annual average 13.35 3.67
- ----------------------------------------------------------------------
Life of class B 61.21 9.92
Annual average 14.62 2.74
- ----------------------------------------------------------------------
Life of class M 22.43 3.15
Annual average 18.88 2.68
- ----------------------------------------------------------------------
Footnote reads:
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions or,
for class A shares, distribution fees prior to implementation of the
class A distribution plan in 1990. Investment returns and net asset
value will fluctuate so that an investor's shares, when sold, may be
worth more or less than their original cost. POP assumes 5.75% maximum
sales charge for class A shares and 3.50% for class M shares. CDSC for
class B shares assumes the applicable sales charge, with the maximum
being 5%.
[GRAPHIC WORM CHART OMITTED: GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 8/31/86
Starting value (Insert ending Total)
$9,425 Fund's class A shares at POP $37,845
$10,000 S&P 500 Index $35,020
$10,000 Consumer Price Index $14,339
(plot points for 10-year total return mountain chart)
Date/year Fund at POP S&P 500 Index CPI
- --------- ------------ -------------- ------
8/31/86 9,425 10,000 10,000
8/31/87 12,034 13,464 10,428
8/31/88 9,773 11,043 10,848
8/31/89 13,110 15,373 11,358
8/31/90 15,078 14,585 11,996
8/31/91 21,409 18,522 12,452
8/31/92 21,169 19,922 12,844
8/31/93 19,803 23,029 13,200
8/31/94 24,432 24,298 13,582
8/31/95 30,493 29,508 13,938
8/31/96 37,845 35,020 14,339
Footnote reads:
Past performance is no assurance of future results. A
$10,000 investment in the fund's class B shares at
inception on 3/1/93 would have been valued at $18,887
on 8/31/96 ($18,587 with a redemption at the end of
the period). A $10,000 investment in the fund's class
M shares at inception on 7/3/95 would have been valued
at $13,155 at net asset value on 8/31/96 ($12,695 at
public offering price).
TOTAL RETURN FOR PERIODS ENDED 9/30/96
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ----------------------------------------------------------------------
1 year 23.20% 16.12% 22.30% 17.30% 22.56% 18.27%
- ----------------------------------------------------------------------
5 years 89.96 79.06 -- -- -- --
Annual average 13.69 12.36 -- -- -- --
- ----------------------------------------------------------------------
10 years 398.43 369.71 -- -- -- --
Annual average 17.42 16.73 -- -- -- --
- ----------------------------------------------------------------------
Life of class -- -- 101.36 98.36 40.25 35.35
Annual average -- -- 21.53 21.02 31.08 27.40
- ----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions or,
for class A shares, distribution fees prior to implementation of the
class A distribution plan in 1990. Investment returns and net asset
value will fluctuate so that an investor's shares, when sold, may be
worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 8/31/96
Class A Class B Class M
- ----------------------------------------------------------------------
Distributions (number) 1 1 1
- ----------------------------------------------------------------------
Income $0.27 $0.08 $0.145
- ----------------------------------------------------------------------
Capital gains
- ----------------------------------------------------------------------
Long-term 0.909 0.909 0.909
- ----------------------------------------------------------------------
Short-term 0.013 0.013 0.013
- ----------------------------------------------------------------------
Total $1.192 $1.002 $1.067
- ----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ----------------------------------------------------------------------
8/31/95 $36.21 $38.42 $35.72 $36.17 $37.48
- ----------------------------------------------------------------------
8/31/96 43.67 46.33 42.94 43.54 45.12
- ----------------------------------------------------------------------
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 5.75% sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's CDSC declines from a 5% maximum during the first
year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies.
COMPARATIVE BENCHMARKS
Standard & Poor's 500 Index* is an unmanaged list of common stocks that
is frequently used as a general measure of stock market performance.
Dow Jones Industrial Average* is an unmanaged list of 30 common stocks
frequently used as a general measure of stock market performance. Its
performance figures reflect changes of market prices and reinvestment of
all distributions but are not adjusted for commissions or other costs.
Because the fund is a managed portfolio investing in common stocks and
fixed-income securities, the securities it owns will not match those in
the index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*The indexes assume reinvestment of all distributions and do not take
into account brokerage commissions or other costs. The fund's portfolio
contains securities that do not match those in the indexes. It is not
possible to invest in an index.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
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Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
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Health Sciences Trust
International Growth Fund +
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OTC Emerging Growth Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
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Income Fund
Preferred Income Fund
U.S. Government Income Trust
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INCOME FUNDS
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State tax-free income funds ++
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Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments to help maximize your return and reduce your risk.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS [SECTION MARK]
Putnam money market funds: **
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts ++
* Formerly Natural Resources Fund
+ Formerly Overseas Growth Fund
++ Not available in all states.
[SECTION MARK] Relative to above.
** 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.
++ Not offered by Putnam Investments. Certificates of deposit offer
a fixed rate of return and may be insured up to certain limits
by federal/state agencies. Savings accounts may also be
insured up to certain limits. 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.
Our commitment to quality service
* CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal
for the past six years. In 1995, over 146,000 tests of 56 shareholder
service components demonstrated that Putnam outperformed the industry
standard in every category.
* HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month
from a Putnam money market fund or from your checking or savings
account.*
* SWITCH FUNDS EASILY
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
* ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at
the then-current net asset value, which may be more or less than the
original cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a
helpful Putnam representative.
To make an additional investment in this or any other Putnam fund,
contact your financial advisor or call our toll-free number: 1-800-225-
1581.
* Regular investing of course, does not guarantee a profit or protect
against a loss in a declining market.
Report of independent accountants
For the fiscal year ended August 31, 1996
To the Trustees and Shareholders of
Putnam Health Sciences Trust
We have audited the accompanying statement of assets and liabilities of
Putnam Health Sciences Trust, including the portfolio of investments
owned, as of August 31, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of August 31, 1996, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Health Sciences Trust as of August 31,
1996, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods indicated therein,
in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
October 16, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
August 31, 1996
<S> <C> <C> <C>
COMMON STOCKS (94.2%) *
NUMBER OF SHARES VALUE
Biotechnology (7.3%)
- -----------------------------------------------------------------------------------------------------------------------
70,000 Affymetrix, Inc. + $ 988,750
500,000 Amgen, Inc. + 29,125,000
256,500 Amylin Pharmaceuticals, Inc. + 2,725,313
250,000 Biochem Pharmaceutical, Inc. + 8,687,500
140,000 Biogen, Inc. + 9,765,000
250,000 CytoTherapeutics, Inc. + 2,875,000
294,000 Ergo Science Corp. + 4,226,250
212,500 Genentech, Inc.-Special Common + 11,156,250
150,000 Genome Therapeutics Corp. + 1,368,750
80,000 Guilford Pharmaceuticals, Inc. + 2,220,000
100,000 IDEC Pharmaceuticals Corp. + 2,337,500
300,000 Immulogic Pharmaceutical Corp. + 2,437,500
460,000 La Jolla Pharmaceutical Co. + 2,472,500
100,000 Magainin Pharmaceuticals, Inc. + 1,131,250
197,200 Martek Biosciences Corp. + 5,989,950
170,000 Medimmune, Inc. + 2,380,000
100,000 Millennium Pharmaceuticals, Inc. + 1,825,000
35,000 Myriad Genetics, Inc. + 770,000
90,000 Neurocrine Biosciences, Inc. + 765,000
25,000 Neurogen Corp. + 575,000
265,000 NPS Pharmaceuticals, Inc. + 3,213,125
105,000 SangStat Medical Corp. + 2,060,625
125,000 SIBIA Neurosciences, Inc. + 828,125
135,000 Synaptic Pharmaceutical Corp. + 1,400,625
133,400 Vertex Pharmaceuticals, Inc. + 4,235,450
51,000 Virus Research Institute, Inc. + 331,500
--------------
105,890,963
Healthcare Information Systems (3.0%)
- -----------------------------------------------------------------------------------------------------------------------
116,000 Apache Medical Systems, Inc. + 1,493,500
75,000 Enterprise Systems, Inc. + 1,837,500
220,000 GMIS, Inc. + 3,217,500
50,000 HCIA, Inc. + 2,831,250
31,100 LanVision Systems, Inc. + 392,638
600,000 Physicians Computer Network + 6,562,500
230,000 Shared Medical Systems Corp. 12,563,750
35,900 Sunquest Information Systems, Inc. + 560,938
480,000 Vivra, Inc. + 14,460,000
--------------
43,919,576
Managed Services (7.2%)
- -----------------------------------------------------------------------------------------------------------------------
100,000 Coventry Corp. + 1,318,750
84,000 Express Scripts, Inc. Class A + 2,730,000
255,000 FHP Intl. Corp. + 9,243,750
180,000 Foundation Health Corp. + 5,400,000
560,000 Humana, Inc. + 10,500,000
410,000 Mid Atlantic Medical Services, Inc. 5,535,000
109,000 Oxford Health Plans Inc. + 4,986,750
282,000 Pacificare Health Systems, Inc. Class B + 22,701,000
158,000 Physicians Health Services, Inc. Class A + 3,258,750
208,200 Rightchoice Managed Care, Inc. Class A + 2,316,225
810,000 United Healthcare Corp. 31,286,250
335,900 Value Health, Inc. + 5,332,413
--------------
104,608,888
Medical Supplies & Devices (31.2%)
- -----------------------------------------------------------------------------------------------------------------------
1,640,000 Abbott Laboratories 74,005,000
100,000 Acuson Corp. + 1,362,500
630,000 Allergan Inc. 24,491,250
270,000 Arrow International, Inc. 7,222,500
300,000 ArthroCare Corp. + 3,375,000
200,000 ATS Medical, Inc. + 1,750,000
221,600 AVECOR Cardiovascular, Inc. + 3,351,700
530,000 Bard (C.R.), Inc. 16,430,000
403,750 Baxter International, Inc. 18,017,344
230,000 Biomet, Inc. + 3,593,750
123,000 Biopsys Medical, Inc. + 1,752,750
340,145 Boston Scientific Corp. + 15,604,152
24,300 Cardiothoracic Systems, Inc. + 388,800
180,000 Chad Therapeutics, Inc. + 3,150,000
36,700 Conceptus. Inc. + 380,763
206,000 Delaware Global Technologies Corp. + 1,802,500
132,500 Fischer Imaging Corp. + 1,755,625
200,000 Guidant Corp. 10,150,000
320,000 Haemonetics Corp. + 6,560,000
300,000 Heartstream, Inc. + 3,525,000
28,000 Imagyn Medical, Inc. + 238,000
2,010,364 Johnson & Johnson 99,010,427
990,629 Medtronic, Inc. 51,512,708
350,000 Mentor Corp. 11,068,750
250,000 Metra Biosystems, Inc. + 1,281,250
150,000 Molecular Devices Corp. + 1,350,000
520,800 Nellcor Puritan Bennett, Inc. + 13,410,600
200,000 Neuromedical Systems, Inc. + 3,300,000
220,000 Orthofix International N.V. + 2,227,500
86,800 Orthologic Corp. + 824,600
100,000 Perkin-Elmer Corp. 5,187,500
75,000 Rochester Medial Corp. + 1,200,000
300,000 St. Jude Medical Inc. + 10,762,500
956,000 Stryker Corp. 23,362,250
100,000 Target Therapeutics, Inc. + 3,250,000
127,800 Trex Medical Corp. + 2,939,400
320,000 U.S. Surgical Corp. 11,680,000
220,000 Ventritex, Inc. + 2,997,500
75,000 Vivus, Inc. + 2,625,000
150,000 Waters Corp. + 4,706,250
--------------
451,602,869
Other Health Care Services (6.6%)
- -----------------------------------------------------------------------------------------------------------------------
200,000 American Oncology Resources, Inc. + 2,025,000
102,000 Amerisource Health Corp. Class A + 3,888,750
150,000 Applied Bioscience International, Inc. + 1,462,500
100,700 ARV Assisted Living, Inc. + 1,460,150
620,000 Beverly Enterprises, Inc. + 6,355,000
60,900 Cardinal Health, Inc. 4,468,538
75,500 Collaborative Clinical Research, Inc. + 1,094,750
330,000 Health Care & Retirement Corp. + 8,167,500
145,575 Health Management Systems, Inc. + 4,021,509
300,000 IBAH, Inc. + 1,725,000
200,000 Manor Care, Inc. 6,875,000
320,000 Medaphis Corp. + 4,040,000
35,850 National Surgery Centers, Inc. + 950,025
208,200 OccuSystems, Inc. + 5,777,550
665,000 Owens & Minor, Inc. Holding Co. 6,982,500
21,600 Pharmaceutical Product Development, Inc. + 604,800
190,200 Quintiles Transnational Corp. + 14,383,875
213,900 Quorum Health Group, Inc. + 5,400,975
141,000 Summit Medical Systems, Inc. + 2,397,000
120,000 Sunrise Assisted Living, Inc. + 3,180,000
233,100 Tenet Healthcare Corp. + 4,895,100
135,600 Total Renal Care Holdings, Inc. + 5,576,550
23,200 Transition Systems, Inc. + 524,900
--------------
96,256,972
Pharmaceuticals (38.9%)
- -----------------------------------------------------------------------------------------------------------------------
210,000 Alza Corp. + 5,748,750
893,000 American Home Products Corp. 52,910,250
230,000 Aradigm Corp. + 1,897,500
300,000 Astra AB (Sweden) 12,675,992
230,000 Bayer AG ADR (Germany) 8,209,852
220,000 Bristol-Myers Squibb Co. 19,305,000
19,000 Ciba-Geigy AG (Switzerland) 23,955,555
321,800 Eckerd Corp. + 7,884,100
506,920 Elan Corp. PLC ADR (Ireland) + 15,904,615
144,100 Forest Laboratories, Inc. Class A + 5,926,113
125,000 GelTex Pharmaceuticals, Inc. + 1,796,875
1,050,000 Lilly (Eli) & Co. 60,112,500
1,067,200 Merck & Co., Inc. 70,035,000
230,000 Mylan Laboratories, Inc. 3,766,250
985,000 Pfizer, Inc. 69,935,000
725,000 Pharmacia & Upjohn, Inc. 30,450,000
120,000 R.P. Scherer Corp. + 5,775,000
7,000 Sandoz AG (Switzerland) 8,318,908
690,000 Schering-Plough Corp. 38,553,750
1,210,000 Smithkline Beecham PLC ADR (United Kingdom) 70,482,500
100,200 Synthelabo (France) 8,537,415
700,000 Warner-Lambert Co. 41,650,000
--------------
563,830,925
--------------
Total Common Stocks (cost $792,173,465) $1,366,110,193
CONVERTIBLE BONDS AND NOTES (0.3%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
$1,400,000 North American Vaccine 144A cv. 6 1/2s, 2003 $ 1,480,500
2,200,000 Ventritex Inc. cv. 5 3/4s, 2001 2,200,000
--------------
Total Convertible Bonds and Notes (cost $3,625,000) $ 3,680,500
SHORT-TERM INVESTMENTS (5.6%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
$30,000,000 Federal Home Loan Bank effective yield of 5.10%, September 6, 1996 $ 29,978,750
20,000,000 Federal Home Loan Mortgage Corp. effective yield of 5.26%, September 6, 1996 19,985,389
30,947,000 Interest in $445,006,000 joint repurchase agreement dated August 30, 1996 with
Morgan (J.P.) & Co., Inc. due September 3,1996 with respect to various U.S. Treasury
obligations -- maturity value of $30,964,984 for an effective yield of 5.23%. 30,955,992
--------------
Total Short-Term Investments (cost $80,920,131) $ 80,920,131
- -----------------------------------------------------------------------------------------------------------------------
Total Investments (cost $876,718,596) *** $ 1,450,710,824
- -----------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,449,768,443.
*** The aggregate identified cost on a tax basis is $876,718,596, resulting in gross unrealized appreciation and
depreciation of $638,779,688 and $64,787,460, respectively, or net unrealized appreciation of $573,992,228.
+ Non-income-producing security.
114A after the name of a security represents those exempt from registration under Rule 114A of the Securites Act
of 1933. These securites may be resold in transactions exempt from registration, normally to quallified institutional
buyers.
ADR after the name of a foreign holding stands for American Depository Receipts representing ownership of foreign
securities on deposit with a domestic custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
August 31, 1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $876,718,596) (Note 1) $1,450,710,824
- -----------------------------------------------------------------------------------------------------------------------
Cash 731
- -----------------------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 2,268,158
- -----------------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,970,342
- -----------------------------------------------------------------------------------------------------------------------
Total assets 1,455,950,055
Liabilities
- -----------------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,694,940
- -----------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,260,852
- -----------------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 290,900
- -----------------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,927
- -----------------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,045
- -----------------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 731,976
- -----------------------------------------------------------------------------------------------------------------------
Other accrued expenses 191,972
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 6,181,612
- -----------------------------------------------------------------------------------------------------------------------
Net assets $1,449,768,443
Represented by
- -----------------------------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $840,705,635
- -----------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,331,694
- -----------------------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 33,738,886
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 573,992,228
- -----------------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $1,449,768,443
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares ($1,166,793,516 divided by 26,720,028 shares) $43.67
- -----------------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $43.67)* $46.33
- -----------------------------------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares ($273,242,676 divided by 6,363,760 shares)** $42.94
- -----------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares ($9,732,251 divided by 223,543 shares) $43.54
- -----------------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $43.54)* $45.12
- -----------------------------------------------------------------------------------------------------------------------
* 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.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended August 31, 1996
<S> <C>
Investment Income:
- -----------------------------------------------------------------------------------------
Dividends (net of foreign tax of $129,332) $16,134,045
- -----------------------------------------------------------------------------------------
Interest 4,029,541
- -----------------------------------------------------------------------------------------
Total investment income 20,163,586
Expenses:
- -----------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 8,393,400
- -----------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,245,901
- -----------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 42,933
- -----------------------------------------------------------------------------------------
Administrative services (Note 2) 26,579
- -----------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,838,472
- -----------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 2,052,165
- -----------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 35,239
- -----------------------------------------------------------------------------------------
Reports to shareholders 91,700
- -----------------------------------------------------------------------------------------
Registration fees 72,480
- -----------------------------------------------------------------------------------------
Auditing 38,071
- -----------------------------------------------------------------------------------------
Legal 32,063
- -----------------------------------------------------------------------------------------
Postage 226,502
- -----------------------------------------------------------------------------------------
Other 206,001
- -----------------------------------------------------------------------------------------
Total expenses 16,301,506
- -----------------------------------------------------------------------------------------
Expense reduction (Note 2) (382,041)
- -----------------------------------------------------------------------------------------
Net expenses 15,919,465
- -----------------------------------------------------------------------------------------
Net investment income 4,244,121
- -----------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 37,691,811
- -----------------------------------------------------------------------------------------
Net unrealized appreciation on investments during the year 209,775,087
- -----------------------------------------------------------------------------------------
Net gain on investments 247,466,898
- -----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $251,711,019
- -----------------------------------------------------------------------------------------
The accompnying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended August 31
---------------------------------
1996 1995
---------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
Increase in net assets
- --------------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------------
Net investment income $4,244,121 $5,819,982
- --------------------------------------------------------------------------------------------------------
Net realized gain on investments 37,691,811 23,154,465
- --------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 209,775,087 177,658,264
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 251,711,019 206,632,711
- --------------------------------------------------------------------------------------------------------
Distributions to shareholders
- --------------------------------------------------------------------------------------------------------
From net investment income:
Class A (6,939,764) (6,665,340)
- --------------------------------------------------------------------------------------------------------
Class B (305,285) (276,702)
- --------------------------------------------------------------------------------------------------------
Class M (6,787) --
- --------------------------------------------------------------------------------------------------------
From net realized gain on investments:
Class A (23,696,924) (13,402,834)
- --------------------------------------------------------------------------------------------------------
Class B (3,517,887) (1,193,139)
- --------------------------------------------------------------------------------------------------------
Class M (43,157) --
- --------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 189,432,991 13,017,671
- --------------------------------------------------------------------------------------------------------
Total increase in net assets 406,634,206 198,112,367
- --------------------------------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------------------------------
Beginning of year 1,043,134,237 845,021,870
- --------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income of
$1,331,694 and $4,339,409, respectively) $1,449,768,443 $1,043,134,237
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
July 3, 1995
Year (commencement
ended of operations) to Year ended
August 31 August 31 August 31
1996+ 1995 1996+
--------------------------------------------------------
Class M Class B
--------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $36.17 $33.96 $35.72
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (.02) (.02) (.13)
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 8.46 2.23 8.35
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 8.44 2.21 8.22
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (.15) -- (.08)
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments (.92) -- (.92)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (1.07) -- (1.00)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $43.54 $36.17 $42.94
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 23.51 6.51(d) 23.19
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $9,732 $321 $273,243
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.61 .30(d) 1.85
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) (.05) (.02)(d) (.31)
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 10.55 19.51 10.55
- ----------------------------------------------------------------------------------------------------------------------------
Average commission rate paid (c) $.0718 $.0718
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
March 1, 1993
(commencement
Year ended Year ended of operations) to
August 31 August 31 August 31
--------------------------------------------------------
1995 1994 1993+
--------------------------------------------------------
Class B Class B
--------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $29.47 $24.28 $24.02
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income .11 .10 .05
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 6.78 5.33 .21
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 6.89 5.43 .26
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (.12) (.19) --
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments (.52) (.05) --
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (.64) (.24) --
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $35.72 $29.47 $24.28
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 23.83 22.49 (1.08)(d)
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $113,329 $55,424 $18,455
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.88 1.87 .96(d)
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) (.05) .24 .21(d)
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 19.51 23.18 45.46
- ----------------------------------------------------------------------------------------------------------------------------
Average commission rate paid (c)
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial Highlights (continued)
(For a share outstanding throughout the period)
Year ended August 31
--------------------------------------------------------
1996 1995 1994
--------------------------------------------------------
Class A
--------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $36.21 $29.77 $24.40
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income .19 .23 .30
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 8.46 6.99 5.36
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 8.65 7.22 5.66
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (.27) (.26) (.24)
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments (.92) (.52) (.05)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (1.19) (.78) (.29)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $43.67 $36.21 $29.77
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 24.12 24.81 23.38
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,166,794 $929,484 $789,598
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.10 1.12 1.12
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) .43 .70 .96
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 10.55 19.51 23.18
- ----------------------------------------------------------------------------------------------------------------------------
Average commission rate paid (c) $.0718
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial Highlights (continued)
(For a share outstanding throughout the period)
----------------------------------
1993 1992
----------------------------------
----------------------------------
<S> <C> <C>
Net asset value, beginning of period $28.31 $31.29
- ------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------
Net investment income .26 .12
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.82) (.35)
- ------------------------------------------------------------------------------------------------------
Total from investment operations (1.56) (.23)
- ------------------------------------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------------------------------------
Net investment income (.13) (.27)
- ------------------------------------------------------------------------------------------------------
Net realized gain on investments (2.22) (2.48)
- ------------------------------------------------------------------------------------------------------
Total distributions (2.35) (2.75)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $24.40 $28.31
- ------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) (6.45) (1.12)
- ------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $764,443 $970,412
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) (b) 1.13 1.20
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) .91 .61
- ------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 45.46 42.12
- ------------------------------------------------------------------------------------------------------
Average commission rate paid (c)
- ------------------------------------------------------------------------------------------------------
+ Per share net investment income has been determined on the basis of weighted average number of
shares outstanding during the period.
(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. Prior period ratios exclude these amounts.
(Note 2)
(c) Average commission rate paid is required for fiscal periods beginning on or after September 1, 1995.
(d) Not annualized.
</TABLE>
Notes to financial statements
August 31, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a 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. The fair
value of restricted securities is determined by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's manager, a wholly-
owned subsidiary of Putnam Investments, Inc., following procedures
approved by the Trustees, and such valuations and procedures are
reviewed periodically by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Management. These balances may be invested in one or more
repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
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) 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. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
F) 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 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 treatment of gain on sale of partnership interest.
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,
1996, the fund reclassified $637,700 to decrease paid-in-capital, with
an increase to accumulated net realized gain on investments of $637,700.
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, and 0.50% of any excess over
$1.5 billion subject, under current law, to reduction in any year by the
amount of certain brokerage commissions and fees (less expenses)
received by affiliates of Putnam Management on the fund's portfolio
transactions.
The fund reimburses Putnam Management 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 wholly-owned 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, 1996, fund expenses were reduced by
$382,041 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $2,590 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 adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after August 31, 1996. The deferred fees remain in the
fund and are invested in certain Putnam funds until distribution in
accordance with the Plan.
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 at an annual rate of 0.25%, 1.00% and 0.75% of the average
net assets attributable to class A, class B and class M shares,
respectively.
For the year ended August 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $825,885 and $28,596 from the
sale of class A and class M shares, respectively and $382,216 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, 1996, Putnam Mutual Funds
Corp., acting as underwriter received $3,690 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended August 31, 1996 purchases and sales of investment
securities other than short-term investments aggregated $255,437,015 and
$133,480,066, 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, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended August 31
1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 13,918,363 $599,209,089
- ----------------------------------------------------
Shares reinvested 595,488 24,385,358
- ----------------------------------------------------
14,513,851 623,594,447
Shares
repurchased (13,463,980) (579,395,669)
- ----------------------------------------------------
Net increase 1,049,871 $44,198,778
- ----------------------------------------------------
Year ended August 31
1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 8,052,125 $258,073,342
- ----------------------------------------------------
Shares reinvested 535,035 15,853,096
- ----------------------------------------------------
8,587,160 273,926,438
Shares
repurchased (9,437,527) (302,016,572)
- ----------------------------------------------------
Net decrease (850,367) $(28,090,134)
- ----------------------------------------------------
Year ended August 31
1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 5,867,835 $249,843,040
- ----------------------------------------------------
Shares reinvested 77,198 3,124,835
- ----------------------------------------------------
5,945,033 252,967,875
Shares
repurchased (2,754,090) (117,038,817)
- ----------------------------------------------------
Net increase 3,190,943 $135,929,058
- ----------------------------------------------------
Year ended August 31
1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 2,716,923 $85,990,448
- ----------------------------------------------------
Shares reinvested 41,252 1,212,410
- ----------------------------------------------------
2,758,175 87,202,858
Shares
repurchased (1,465,953) (46,403,109)
- ----------------------------------------------------
Net increase 1,292,222 $40,799,749
- ----------------------------------------------------
Year ended August 31
1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 317,824 $13,735,757
- ----------------------------------------------------
Shares reinvested 1,093 44,781
- ----------------------------------------------------
318,917 13,780,356
Shares
repurchased (104,244) (4,475,201)
- ----------------------------------------------------
Net increase 214,673 $9,305,155
- ----------------------------------------------------
July 3, 1995
(commencement of
operations) to
August 31, 1995
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 8,913 $309,595
- ----------------------------------------------------
Shares reinvested -- --
- ----------------------------------------------------
8,913 309,595
Shares
repurchased (43) (1,539)
- ----------------------------------------------------
Net increase 8,870 $308,056
- ----------------------------------------------------
Note 5
Transactions with Affiliated Companies
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 proceeds income Value
- ----------------------------------------------------------------------
Name of affiliate
- ----------------------------------------------------------------------
Rightchoice
Managed Care,
Inc. $2,433,544 $ -- $ -- $2,316,225
- ----------------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the fund hereby
designates $.909 per share (or if different, the amount necessary to
offset net capital gain earned by the Fund) for all classes of shares as
capital gain dividends for its taxable year ended August 31, 1996.
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 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
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
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
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
Peter Carman
Vice President
Brett C. Browchuk
Vice President
John J. Morgan, Jr.
Vice President
Carol McMullen
Vice President
Joanne Soja
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
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.
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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- -------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- -------------------
27618-021/335/2AB 10/96
