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