H&Q LIFE SCIENCES INVESTORS
---------------------------------------------------------------------
3 GRAPHICS OF MICROSCOPE, DNA HELIX
AND LAB BEAKERS
Annual Report
1 9 9 7
<PAGE>
To our Shareholders:
[PHOTO OF ALAN G. CARR, PRESIDENT]
At fiscal year-end on September 30, 1997, the net asset value of your Fund
was $18.83 per share. Performance data for the fiscal year, the first nine
months of the calendar year and the quarter ended September 30 compared to the
Dow Jones Industrial Average and the NASDAQ index of stocks traded in the
over-the-counter market is as follows:
NAV DJIA NASDAQ Industrials
------ ------ ------------------
FY +13.3% +35.1% +24.1%
CYTD +19.5% +23.2% +23.9%
Quarter +21.6% +3.6% +16.3%
The most recent quarter produced significantly better net asset value
performance, in both absolute and relative terms, as compared to the prior
several months. There appear to have been several factors resulting in this
improvement. Investors seem to have realized that both the relative values in
this sector have lagged the general market and the likelihood of further
interest rate increases has diminished. Historically, emerging growth company
stocks, especially those in the life sciences sectors, have tended to
outperform the market in periods where investor expectations were for stable to
declining interest rates, usually reflective of reduced fears of inflation for
the general economy.
Also, earlier in the year there were a series of temporarily discouraging
fundamental news items in the industry, particularly in the biotech sector where
there were a few instances of products which had disappointing later stage
clinical trial results or unexpected setbacks in the FDA approval process. In
contrast, in the most recent quarter the news was generally better and,
importantly, greeted favorably by investors.
These are trends that we believe are likely to continue. In the general
economy, productivity seems to be sustaining moderate growth in a
non-inflationary environment. Investment spending over the last several years
appears to have created both capacity that can satisfy additional consumer
demand and a competitive environment that limits the ability to raise
endproduct prices in most sectors of the economy, thereby reducing inflationary
pressures.
1
<PAGE>
In the life sciences industries, new and useful technology continues to
make progress through the regulatory system and we believe that the outlook is
bright. In the biotechnology sector, for example, the industry's product
pipeline is sufficiently robust that it is not unreasonable to expect that,
over the next year or two, the number of products on the market with both
therapeutic and economic importance could double.
Additionally, we are encouraged by favorable trends at the FDA and we
believe that these will be reinforced with the passage of FDA reform
legislation now working its way through the Congress.
While increases in unit prices of existing pharmaceutical products have
been quite restrained, overall consumer spending for drugs has been rising.
This is being driven both by the introduction of innovative new products of
high therapeutic value and the continued aging of the population, which
increases the numbers of people in the higher medical care consuming group. We
believe these trends will continue.
Consolidation in the industry continues. Two of the Fund's portfolio
companies have recently announced their sale to larger companies at premiums to
their market values.
We continue to see exciting new companies for potential addition to the
venture portfolio. In the most recent quarter, we made a follow-on investment
in HealthTech Services and a private placement in a public biotherapeutics
company, Interferon Sciences.
Overall, we are encouraged by recent trends and optimistic that the
improvement in recent absolute and relative perform
ance of your Fund may continue.
/s/ Alan G. Carr
Alan G. Carr
President
Capital Gains Declaration
We hereby designate that the entire amount of the stock distribution
declared on November 11, 1997 with respect to our fiscal year ended September
30, 1997, constituted a capital gain dividend for Federal income tax purposes,
amounting to $.74 per share.
2
<PAGE>
ANNUAL MEETING REPORT
As now required by Rule 30d-1 under the Investment Company Act of 1940, as
amended, below is a summary of the results of the Annual Meeting of
Shareholders of H&Q Life Sciences Investors. The Annual Meeting was held on
Wednesday, May 22, 1997, at 9:00 A.M. There were present in person or by proxy
5,450,542.8136 shares of beneficial interest, or 77.74% of the 7,011,362 shares
eligible to vote on the record date.
The first item of business was the election of Trustees of the Fund to
serve until the year 2000 Annual Meeting of Shareholders. The nominees elected
to serve until the year 2000 Annual Meeting were Alan G. Carr and Henri A.
Termeer. A total of 5,253,230.3955 shares voted for the election of Mr. Carr and
197,312.4181 shares abstained; 5,171,880.2683 shares voted for the election of
Mr. Termeer and 278,662.5453 shares abstained. The Trustees serving until the
1998 Annual Meeting are Lawrence S. Lewin and Uwe E. Reinhardt, Ph.D. The
Trustees serving until the 1999 Annual Meeting are William R. Hambrecht, Robert
P. Mack, M.D. and Eric Oddleifson.
The next item of business was the ratification of the selection of Arthur
Andersen LLP as independent public accountants of the Fund for the fiscal year
ending September 30, 1997. The selection of Arthur Andersen LLP was ratified by
a vote of 5,397,447.7846 shares for selection, 29,232.7563 shares against
selection and 23,862.2727 shares abstained.
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
PORTFOLIO
As of September 30, 1997
[DESCRIPTION OF BAR CHART]
0.87 4.28 AGRI/ENVIRONMENTAL
5.52 28.75 BIOTECHNOLOGY
0.43 7.47 CROs
0.69 8.84 DIAGNOSTICS
0 3.69 MANAGED CARE
1.69 4.53 MEDICAL SUPPLIES
5.52 7.28 MEDICAL SPECIALTY
1.84 16.31 PHARMACEUTICALS
0 2.29 LIQUID ASSETS
3
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
LARGEST HOLDINGS
As of September 30, 1997
% OF NET ASSETS
----------------
Vivus 7.86%
Quintiles Transnational 6.06%
Gilead Sciences 5.04%
Transkaryotic Therapies 4.33%
Catalytica 3.93%
Martek Biosciences 3.59%
Sepracor 2.86%
Cytyc 2.81%
MedImmune 2.78%
INCYTE Pharmaceuticals 2.51%
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
SIGNIFICANT PORTFOLIO TRANSACTIONS
Quarter Ended September 30, 1997
Units Held Units Held
PURCHASES 6/30/97 9/30/97
- ---------------------- ---------- -----------
Biovail 0 60,000
Cor Therapeutics 126,300 137,300
Cubist Pharmaceuticals 325,376 390,683
HealthTech Services (Restricted) Series B 0 329,671
Interferon Sciences 0 114,286
SALES
- ----------------------
Biomatrix 110,000 65,000
Genta 38,823 0
INCYTE Pharmaceuticals 49,445 39,445
NABI 180,041 0
SEQUUS Pharmaceuticals 176,212 0
4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
of H&Q Life Sciences Investors:
We have audited the accompanying balance sheet of H&Q Life Sciences
Investors (a Massachusetts business trust), including the Schedule of
Investments as of September 30, 1997, and the related statements of operations
and cash flows for the year then ended, and the statements of changes in net
assets and financial highlights for the years presented. 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
September 30, 1997, by correspondence with the custodian. 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 our audits provide a reasonable basis for our opinion.
As discussed in Note 5, the financial statements include investment
securities valued at $21,095,779 (16.0% of net assets) whose values have been
determined by the Board of Trustees in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation, the
Board of Trustees' determination of values may differ significantly from the
values that would have been used had a ready market existed for the securities
and the differences could be material.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
H&Q Life Sciences Investors as of September 30, 1997, the results of its
operations and cash flows for the year then ended, and the changes in its net
assets and financial highlights for the years presented, in conformity with
generally accepted accounting principles.
Boston, Massachusetts Arthur Andersen LLP
October 31, 1997
5
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
CONVERTIBLE SECURITIES - 12.1% of Net Assets
SHARES VALUE
---------- Convertible Preferred - 11.9% -----------
Agricultural/Environmental Technologies - 0.2%
177,778 EPR (Restricted) Series A* $ 266,667
Biotechnology (4.0%)
900,000 Exelixis Pharmaceuticals (Restricted) Series B* 1,800,000
100,000 Exelixis Pharmaceuticals (Restricted) Series C* 200,000
615,385 LJL Biosystems (Restricted) Series A* 800,000
22,500 Terrapin Technologies (Restricted) Series G* 1,125,000
28,991 Therion Biologics (Restricted) Sinking Fund* 870
135,135 Tularik (Restricted) Series C* 1,351,350
Contract Research Organizations - 0.8%
78,536 IBAH Series A* 1,119,138
Diagnostics - 0.7%
130,000 Masimo (Restricted) Series D* 910,000
Medical Supplies - 1.7%
75,000 InterVentional Technologies (Restricted) Series F* 750,000
35,000 InterVentional Technologies (Restricted) Series G* 350,000
281,250 LocalMed (Restricted) Series D* 1,125,000
Medical Specialty - 4.5%
500,000 AbTox (Restricted) Series F* 1,100,000
104,152 Dyax (Restricted) Class A Series 1* 325,996
45,000 Dyax (Restricted) Class A Series 3* 140,850
129,080 Dyax (Restricted) Class A Series 4* 404,020
240,843 Focal (Restricted) Series D* 419,067
87,081 Focal (Restricted) Series E* 151,521
1,088,710 HealthTech Services (Restricted) Series A* 1,981,452
329,671 HealthTech Services (Restricted) Series B* 600,001
170,213 Vectis (Restricted) Series B* 800,001
------------
$15,720,933
------------
PRINCIPAL
AMOUNT Convertible Bonds and Notes - 0.2%
- -----------
Biotechnology - 0.2%
$ 287,447 Therion Biologics (Restricted) 10%
Secured Notes due 1999 $ 287,447
------------
$ 287,447
------------
TOTAL CONVERTIBLE SECURITIES
(Cost $14,387,627) $16,008,380
------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(continued)
SHARES VALUE
- ----------- COMMON STOCKS - 85.6% -----------
Agricultural/Environmental Technologies - 5.0%
387,500 Catalytica* $4,310,938
129,167 Catalytica Warrants* 879,950
200,000 Consep* 400,000
75,000 Envirogen* 240,234
50,000 Envirogen Units* 168,750
97,349 Molten Metal Technology* 535,420
-----------
$6,535,292
-----------
Biotechnology - 29.4%
Biopharmaceuticals - 24.9%
201,400 Ariad Pharmaceuticals* $1,183,225
243,245 BioTransplant* 1,368,253
39,376 BioTransplant (Restricted)* 166,167
3,297 BioTransplant (Restricted) Warrants* 3,231
13,500 BioTransplant (Restricted) Warrants* 13,230
925 BioTransplant (Restricted) Warrants* 3,099
28,571 Cell Therapeutics* 424,994
137,300 Cor Therapeutics* 2,282,613
80,000 Cortex Pharmaceuticals* 238,750
390,683 Cubist Pharmaceuticals* 2,295,263
117,250 CV Therapeutics* 1,113,875
40,625 CV Therapeutics (Restricted)* 270,156
100,000 Genzyme* 2,975,000
3,000 Genzyme Tissue Repair* 29,250
150,000 Gilead Sciences* 6,656,250
210,000 ImmuLogic Pharmaceutical* 695,625
114,286 Interferon Sciences* 985,717
100,000 MedImmune* 3,675,000
200,000 Oxford GlycoSystems Group (Restricted)* 160,000
11,335 Pharming B.V. (Restricted)* 903,480
230,000 Ribi ImmunoChem Research* 977,500
60,624 SEQUUS Pharmaceuticals (Restricted) Warrants* 72,749
90,000 Somatogen* 624,375
146,982 Therion Biologics (Restricted)* 2,940
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(continued)
SHARES VALUE
- ---------- Biotechnology - continued -------------
141,703 Transkaryotic Therapies* 5,561,843
8,035 Transkaryotic Therapies (Restricted) Warrants* 151,701
Genomics/Drug Discovery - 4.5%
62,000 Human Genome Sciences* 2,673,750
39,445 INCYTE Pharmaceuticals* 3,313,380
2,528 Dyax (Restricted) Warrants* 25
------------
$38,821,441
------------
Contract Research Organizations - 7.1%
155,764 IBAH* $ 739,879
235,608 IBAH (Restricted) Warrants* 570,171
95,000 Quintiles Transnational* 8,003,750
------------
$ 9,313,800
------------
Diagnostics - 8.8%
201,823 Biofield* $ 958,659
18,382 Biofield (Restricted) Warrants* 184
12,255 Biofield (Restricted) Warrants* 123
218,300 Calypte Biomedical* 1,500,813
20,000 Calypte Biomedical (Restricted)* 98,000
148,576 Cytyc* 3,714,400
98,000 IDEXX Laboratories* 1,641,500
133,666 Integ* 768,580
123,077 NeoPath* 2,400,002
113,000 Voxel* 586,188
------------
$11,668,449
------------
Managed Care - 3.7%
33,500 HPR* $ 732,813
104,000 Orthodontic Centers of America* 2,080,000
50,000 Vencor* 2,062,500
------------
$ 4,875,313
------------
Medical Supplies - 4.5%
54,484 EndoVascular Technologies* $ 933,039
130,750 Exogen* 604,719
100,000 Heartstream* 1,000,000
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(continued)
SHARES VALUE
- ------------ Medical Supplies - continued -------------
68,728 KeraVision* 575,597
231,043 Landec* 1,241,856
74,000 Perclose* 1,628,000
-------------
$ 5,983,211
-------------
Medical Specialty - 8.3%
992,900 Bioject Medical Technologies* $ 992,900
65,000 Biomatrix* 2,307,500
200,000 Interpore* 1,737,500
304,703 Martek Biosciences* 4,570,545
34,112 Martek Biosciences (Restricted) Warrants* 162,032
540,540 Reprogenesis (Restricted)* 1,199,999
-------------
$ 10,970,476
-------------
Pharmaceuticals/Drug Delivery - 18.8%
60,000 Biovail* $ 1,743,750
37,500 Dura Pharmaceuticals (Restricted) Series S
Warrants* 1,304,250
50,000 Elan Pharmaceuticals* 2,503,125
221,000 Fuisz Technologies* 3,121,625
62,500 Synaptic Pharmaceutical* 843,750
115,000 Sepracor* 3,780,625
37,500 Spiros Development (Restricted)* 1,125,000
276,666 Vivus* 10,374,975
-------------
$ 24,797,100
-------------
TOTAL COMMON STOCKS
(Cost $70,611,913) $112,965,082
-------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $84,999,540) $128,973,462
=============
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENT - 2.4%
- -----------
$3,100,000 Ford Motor Credit Corp., 6.15%, due 10/1/97 $ 3,099,470
-------------
TOTAL TEMPORARY CASH INVESTMENTS $ 3,099,470
=============
- ------------------
* Non income-producing security (see Notes 1 and 5).
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS:
Investments in securities, at value (identified
cost $84,999,540; see Schedule of
Investments) (Notes 1, 3 and 5) $128,973,462
Temporary cash investment, at amortized cost
which approximates value (see Schedule of
Investments) (Note 1) 3,099,470
-------------
Total investments $132,072,932
Cash 77,525
Dividends and interest receivable 530
Prepaid expenses 22,279
-------------
Total assets $132,173,266
-------------
LIABILITIES:
Accrued advisory fees (Note 4) $ 126,123
Other accrued expenses 59,410
-------------
Total liabilities $ 185,533
-------------
NET ASSETS:
Shares of beneficial interest, par value $.01
per share, unlimited number of shares
authorized, amount paid in on 7,011,362
shares issued and outstanding (Note 1) $ 83,597,931
Accumulated net realized gain on investments 4,415,880
Net unrealized gain on investments (Note 3) 43,973,922
-------------
Total net assets (equivalent to $18.83
per share based on 7,011,362
shares outstanding) $131,987,733
=============
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
INVESTMENT INCOME (Note 1):
Dividends $ 70,500
Interest 253,531
-----------
Total investment income $ 324,031
EXPENSES:
Advisory fees (Note 4) $1,562,256
Shareholder reporting 60,885
Custodian fees 52,448
Trustees' fees and expenses 48,978
Accounting and auditing fees 43,997
Legal fees 20,694
Insurance expense 20,230
Transfer agent fees 15,011
Amortization of deferred organization
costs (Note 1) 4,766
Other 29,683
-----------
Total expenses 1,858,948
------------
Net investment (loss) ($ 1,534,917)
------------
NET REALIZED AND UNREALIZED GAINS
ON INVESTMENTS:
Net realized gain on investments (Note 1) $ 5,271,705
Net increase in unrealized gain on investments 11,448,022
------------
Net gain on investments $16,719,727
------------
Net increase in net assets resulting
from operations $15,184,810
============
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Dividends received $ 70,500
Interest received 250,751
Operating expenses paid (1,804,257)
--------------
Net cash used for operating activities ($ 1,483,006)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of portfolio securities $ 229,013,140
Purchases of portfolio securities (221,262,954)
--------------
Net cash provided by investing activities $ 7,750,186
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid, net ($ 6,343,870)
--------------
Net cash used for financing activities ($ 6,343,870)
--------------
NET (DECREASE) IN CASH ($ 76,690)
CASH AT BEGINNING OF YEAR 154,215
--------------
CASH AT END OF YEAR $ 77,525
==============
RECONCILIATION OF NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS TO NET CASH
USED FOR OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 15,184,810
Net realized (gain) on investments (5,271,705)
Net (increase) in unrealized gain on investments (11,448,022)
Net decrease in interest and dividends receivable 909
Increase in accrued advisory fees and accrued other
expenses 29,376
Decrease in prepaid expenses and other assets 21,626
--------------
Net cash used for operating activities ($ 1,483,006)
==============
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended
September 30, September 30,
1997 1996
------------- -------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment (loss) ($1,534,917) ($1,468,245)
Net realized gain on investments 5,271,705 11,562,205
Net increase in unrealized
gain on investments 11,448,022 11,714,277
------------ ------------
Net increase in net assets
resulting from operations $15,184,810 $21,808,237
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized long-term capital
gains ($10,949,328) --
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in
reinvestment of distributions $4,605,458 --
------------ ------------
Net increase in net assets $8,840,940 $21,808,237
NET ASSETS:
Beginning of year 123,146,793 101,338,556
------------ ------------
End of year $131,987,733 $123,146,793
============ ============
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Selected data for each share of beneficial interest outstanding throughout the
period indicated)
<TABLE>
<CAPTION>
For the years ended September 30,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value per share:
Beginning of period $18.445 $15.179 $11.007 $13.090 $13.296
------------ ------------ ------------ ----------- -----------
Net investment (loss) ($0.072) ($0.220) ($0.184) ($0.144) ($0.197)
Net realized and
unrealized gain
(loss) on
investments 2.092 3.486 4.356 (1.304) (0.009)
------------ ------------ ------------ ----------- -----------
Total increase
(decrease) from
investment
operations $2.020 $3.266 $4.172 ($1.448) ($0.206)
------------ ------------ ------------ ----------- -----------
Dilutive effect of sale
of common stock
and related
expenses from
rights offering -- -- -- (0.635) --
------------ ------------ ------------ ----------- -----------
Long-term capital
gains distribution to
shareholders ($1.640) -- -- -- --
------------ ------------ ------------ ----------- -----------
Net asset value per share:
End of period $18.825 $18.445 $15.179 $11.007 $13.090
============ ============ ============ =========== ===========
Per share market value:
End of period $15.125 $15.000 $12.875 $10.125 $12.875
Total investment return 12.86% 16.50% 27.16% (21.36%) 0.98%
Net assets:
End of period $131,987,733 $123,146,793 $101,338,556 $73,484,287 $50,510,845
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating
expenses to
average net assets 1.67% 1.61% 1.83% 1.87% 2.17%
Ratio of net
investment (loss) to
average net assets (1.38%) (1.25%) (1.57%) (1.23%) (1.49%)
Portfolio turnover rate 18.94% 19.51% 29.48% 10.59% 32.89%
Average commission
rate paid per listed
share purchased $0.06 $0.07 $0.06 $0.07 $0.06
Number of shares
outstanding at end
of period 7,011,362 6,676,420 6,676,420 6,676,420 3,858,600
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) Organization
H&Q Life Sciences Investors (the Fund) is a Massachusetts business
trust registered under the Investment Company Act of 1940 as a diversified
closed-end management investment company. The Fund's investment objective
is long-term capital appreciation through investment in securities of
companies in the life sciences industries. The Fund invests primarily in
securities of public and private companies that are believed to have
significant potential for above-average growth. The Fund was organized on
February 20, 1992 and commenced operations on May 8, 1992.
The preparation of these financial statements requires the use of
certain estimates by management in determining the entity's assets,
liabilities, revenues and expenses. Actual results could differ from these
estimates. The following is a summary of significant accounting policies
consistently followed by the Fund, which are in conformity with those
generally accepted in the investment company industry.
Investment Securities
Transactions related to the investments of the Fund are recorded on the
date the securities are purchased or sold. Investments traded on national
securities exchanges or in the over-the-counter market that are National
Market System securities are valued at the last sale price or, lacking any
sales, at the mean between last bid and asked prices. Other
over-the-counter securities are valued at the most recent bid prices as
obtained from one or more dealers that make markets in the securities. As
indicated in Note 5, investments for which market quotations are not
readily available are valued at fair value as determined in good faith by
the Board of Trustees of the Fund. Temporary cash investments with a
maturity of 60 days or less are valued at amortized cost.
Gains and losses from sales of investments are recorded using the
"identified cost" method for both financial reporting and Federal income
tax purposes. Investment income and expenses are recorded on the accrual
basis.
Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute to its shareholders substantially all of its taxable income and
its net realized capital gains, if any. Therefore, no Federal income tax
provision is required.
Organization Costs
Costs incurred by the Fund in connection with its organization are
being amortized on a straight-line basis, over a period of five years.
Distributions
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations. The Fund has
adjusted for the effect of certain permanent book/tax differences by
reclassifying such differences against capital, in the amount of
$1,534,917 for the year ended September 30, 1997. This adjustment has no
effect on the Fund's net assets, net investment loss or net realized gain
and is designed to present the Fund's capital accounts on a tax basis.
15
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(continued)
Dividend Reinvestment Plan
Under the Dividend Reinvestment Plan, net realized capital gains will
automatically be paid in additional shares of the Fund, unless the Plan
Agent (State Street Bank and Trust Company) is otherwise instructed by the
shareholder. It is expected that dividends, if any, will be declared after
fiscal year-end and will be payable for that year before the end of
January.
A description of the automatic Dividend Reinvestment Plan may be
obtained by calling State Street Bank. Shareholders may request to be paid
in cash instead of shares by contacting the bank, brokerage or nominee who
holds the shares if the shares are held in "street name" or by filling out
an Authorization Card obtained by calling State Street Bank if the shares
are in registered form.
(2) Purchases and Sales of Investment Securities
The aggregate cost of purchases and proceeds from sales of investment
securities (other than temporary cash investments) for the period from
October 1, 1996 through September 30, 1997 totaled $20,678,656 and
$22,143,074, respectively.
(3) Tax Basis of Securities
At September 30, 1997, the total cost of securities for Federal income
tax purposes was $84,999,540. The aggregate gross unrealized gain on
securities in which there was an excess of market value over cost was
$57,695,039. The aggregate gross unrealized loss on securities in which
there was an excess of cost over market value was $13,721,117. The net
unrealized gain on securities held by the Fund was $43,973,922.
(4) Advisory Agreement
The Fund has entered into an Investment Advisory Agreement (the
Advisory Agreement) with Hambrecht & Quist Capital Management Incorporated
(the Adviser). Pursuant to the terms of the Advisory Agreement, the Fund
pays the Adviser a monthly fee at the rate when annualized of (i) 2.5% of
the average net assets for the month of its venture capital and other
restricted securities up to 25% of net assets and (ii) 1% of the average
net assets for the month of all other assets. The aggregate fee may not
exceed a rate when annualized of 1.375%. The Adviser is a wholly owned
subsidiary of Hambrecht & Quist Group. Certain officers and trustees of
the Fund are also officers of the Adviser.
(5) Venture Capital and Other Restricted Securities
The Fund may invest in venture capital and other restricted securities
if these securities would currently comprise 40% or less of net assets.
The value of these securities represents 16.0% of the Fund's net assets at
September 30, 1997.
The value of the venture capital and other restricted securities is
determined in good faith by the Board of Trustees. However, because of the
inherent uncertainty of valuations, these estimated values may differ
significantly from the values that would have been used had a ready market
for the securities existed, and the differences could be material. The
following table details the acquisition date, cost, carrying value per
unit, and value of the Fund's venture capital and other restricted
securities at September 30, 1997, as determined by the Board of Trustees
of the Fund.
16
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(continued)
<TABLE>
<CAPTION>
Carrying
Acquisition Value
Security Date Cost per Unit Value
- ----------------------------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
AbTox
Series F Cvt. Pfd. 3/7/97 $1,100,500 $ 2.200 $1,100,000
Biofield
Common Warrants 3/3/95 0
6/29/95 0
9/26/96 0
-----------
0 0.010 184
Common Warrants 3/3/95 0
6/29/95 0
-----------
0 0.010 123
BioTransplant
Common* 1/16/96 315,385 4.220 166,167
Common Warrants### 8/12/94 0 0.980 3,231
Common Warrants### 10/31/94 0 0.980 13,230
Common Warrants### 8/18/95 0 3.350 3,099
Calypte Biomedical**
Common 2/29/96 150,000 4.900 98,000
CV Therapeutics**
Common 3/29/96 325,425
11/12/96 60,938
-----------
386,363 6.650 270,156
Dura Pharmaceuticals###
Series S Warrants 12/28/95 0 34.780 1,304,250
Dyax
Class A Series 1 Cvt. Pfd. 6/1/92 250,035
9/11/92 83,293
12/31/92 79,932
-----------
413,260 3.130 325,996
Class A Series 3 Cvt. Pfd. 10/26/95 90,280 3.130 140,850
Class A Series 4 Cvt. Pfd. 10/30/96 404,279 3.130 404,020
Common Warrants 12/31/92 187 0.010 25
EPR
Series A Cvt. Pfd. 3/9/94 800,331 1.500 266,667
Exelixis Pharmaceuticals
Series B Cvt. Pfd. 3/28/96 901,325 2.000 1,800,000
Series C Cvt. Pfd. 3/31/97 200,720 2.000 200,000
Focal
Series D Cvt. Pfd. 9/17/93 461,295
8/5/94 430,189
-----------
891,484 1.740 419,067
Series E Cvt. Pfd. 10/17/95 151,962 1.740 151,521
HealthTech Services
Series A Cvt. Pfd. 1/26/96 1,352,603 1.820 1,981,452
Series B Cvt. Pfd. 8/21/97 600,001 1.820 600,001
IBAH#
Common Warrants 8/11/95 151,250 2.420 570,171
InterVentional Technologies
Series F Cvt. Pfd. 8/21/92 600,185 10.000 750,000
Series G Cvt. Pfd. 3/8/95 350,431 10.000 350,000
LJL Biosystems
Series A Cvt. Pfd. 6/17/97 800,001 1.300 800,000
LocalMed
Series D Cvt. Pfd. 2/9/96 1,126,745 4.000 1,125,000
</TABLE>
17
<PAGE>
H&Q LIFE SCIENCES INVESTORS
------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(continued)
<TABLE>
<CAPTION>
Carrying
Acquisition Value
Security Date Cost per Unit Value
- ---------------------------------- ------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Martek Biosciences#
Common Warrants 6/6/95 0 4.750 162,032
Masimo
Series D Cvt. Pfd. 8/14/96 910,000 7.000 910,000
Oxford GlycoSystems Group
Ordinary Shares 5/26/93 386,915 0.800 160,000
Pharming B.V.
Class B Shares 8/28/95 864,932
4/25/96 38,730
------------
903,662 79.707 903,480
Reprogenesis
Common (w/wts.) 4/25/97 1,199,999 2.220 1,199,999
SEQUUS Pharmaceuticals#
Common Warrants 3/30/95 0 1.200 72,749
Spiros Development
Common 12/28/95 1,125,790 30.000 1,125,000
Terrapin Technologies
Series G Cvt. Pfd. 11/7/95 1,125,548 50.000 1,125,000
Therion Biologics
Common 6/30/93 251,307
8/20/96 669
10/16/96 2,227
------------
254,203 0.020 2,940
Sinking Fund Cvt. Pfd. (w/wts.) 10/17/94 200,630
4/19/95 78,179
7/12/95 78,000
10/17/95 78,000
1/25/96 73,176
4/3/96 73,800
------------
581,785 0.030 870
6.25% Secured Notes due 1999 8/20/96 66,231
10/16/96 220,456
------------
286,687 1.000 287,447
Transkaryotic Therapies###
Common Warrants 11/5/93 200 18.880 151,701
Tularik
Series C Cvt. Pfd. 4/16/93 500,060 10.000 1,351,350
Vectis
Series B Cvt. Pfd. 2/5/97 800,091 4.700 800,001
------------ ------------
$18,862,232 $21,095,779
============ ============
</TABLE>
* Represents 75% of equivalent current market value of the issuer's registered
securities.
** Represents 70% of equivalent current market value of the issuer's
registered securities.
# Represents 100% of equivalent current market value of the issuer's
registered securities.
### Represents 60% of equivalent current market value of the issuer's
registered securities.
18
<PAGE>
H&Q Life Sciences Investors
50 Rowes Wharf, 4th Floor
Boston, Massachusetts 02110-3328
(617) 574-0567
Officers
Alan G. Carr, President
Kimberley L. Carroll, Treasurer
Kerri A. Bisner, Secretary
Sheldon A. Jones, Assistant Secretary
Trustees
Alan G. Carr
William R. Hambrecht
Lawrence S. Lewin
Robert P. Mack, M.D.
Eric Oddleifson
Uwe E. Reinhardt, Ph.D.
Henri A. Termeer
Investment Adviser
Hambrecht & Quist Capital Management Incorporated
Custodian and Transfer Agent
State Street Bank and Trust Company
Independent Public Accountant
Arthur Andersen LLP
Legal Counsel
Dechert Price & Rhoads
----------------------------------------
Shareholders with questions regarding share transfers may call
1-800-426-5523
Interim daily net asset value may be obtained by calling
1-800-451-2597
For copies of the Fund's
Dividend Reinvestment Plan,
please contact the Plan Agent, State Street Bank & Trust Co.
P.O. Box 8200, Boston, MA 02266-8200
Telephone: 1-800-426-5523
H&Q LIFE SCIENCES INVESTORS
-----------------------------------------------------
New York Stock Exchange Symbol: HQL
http://www.hamquist.com/hqcm/about.html
---------
Out of concern for the environment and in an effort to reduce
Fund expenses, this report is printed on recycled paper.
HQHLS-AR-97
