H&Q LIFE SCIENCES INVESTORS
[H&Q ILLUSTRATIONS]
Semiannual Report
March 31, 1997
<PAGE>
To our Shareholders:
At March 31, 1997, the end of the second fiscal quarter, the net asset
value of your Fund was $14.81 per share. Recent performance compared to two
market averages is as follows:
FY To-Date Quarter Ended
(6 months) 3/31/97
- ------------------------------------------------------------------
Net Asset Value -10.8% -6.4%
Dow Jones Industrial Average +11.9% +2.1%
NASDAQ Industrials -8.1% -8.3%
This most recent quarter continued the pattern of the prior two quarters in
which the life sciences sector underperformed the general market. The economic
background for the general market was quite strong, with investors favoring
large industrial companies thought to be able to benefit from relatively slow
but consistent growth of sales and earnings with relatively little risk that
inflation would be a near-term problem or that interest rates would rise
significantly from current levels, a macro economic view which the Adviser
shares. One effect of this trend has been that the stocks of emerging growth
companies, especially life sciences companies, have experienced relative
underperformance. While stocks such as those making up the Dow Jones Industrial
Average generally seemed to benefit from a continued flow of assets into the
equity markets, clearly many investors seem to be somewhat risk averse and are
more willing to gamble on the trends of the general market rather than on the
stocks of more speculative individual companies.
In March, mindful of Chairman Greenspan's "irrational exuberance" reference
regarding stock market levels in December, both the general market and
especially the valuations of emerging growth stocks declined on the expectation
that at their March 25th meeting the Federal Reserve Board would vote to
increase the federal funds discount rate, which indeed it did. As this is
written, the reaction to the news seems to be that the Fed remains committed to
controlling inflation and, therefore, the outlook for common stocks seems to be
improved.
<PAGE>
Moreover, the stocks of companies with a strong international participation
also suffered in valuation, as investors became concerned about the impact of
currency on reported net earnings. This has also been a period in which a few
companies experienced delays in their FDA approval process and therefore some
significant downside volatility in their stock prices that resulted in a
"bystander effect" which depressed the stocks of their peer companies. However,
we believe that the underlying characteristics of the portfolio companies
generally remain very attractive and will ultimately be recognized by investors.
The relative inability of companies to finance in the public markets (Cell
Therapeutics, having completed its initial public offering during the quarter,
being an exception) has resulted in an accelerated flow of opportunities for
venture capital investment activity at what the Adviser perceives are often
attractive valuations. During the quarter, a follow-on investment was made in
Exelixis Pharmaceuticals and two new companies were added to the venture
portfolio. AbTox manufactures and sells a novel plasma-based sterilization
system, principally for the hospital market, to replace current systems using
highly toxic ethylene oxide. Vectis has developed a point-of-care clinical
information service for office-based physicians built to run on a pen-based
computer that interfaces through a wireless network and represents an exciting
early step towards the ultimate goal of a fully computerized patient record.
In late April, a change in SEC Rule 144 will take effect, which reduces the
restricted holding period from three years to two. On the effective date, six of
the Fund's companies will become unrestricted and therefore trade at full market
value, and that change will also accelerate a similar transition for a number of
other holdings in the coming months. Although it is a bit soon to tell, the
Adviser does not believe that the change will have a material effect on
valuation levels for new investments.
2
<PAGE>
While the recent period has been disappointing, we are generally encouraged
by the fundamental progress of the portfolio companies and believe that current
valuations do not reflect these advancements. The basic forces for growth of
demographics, technology and consumer demand seem firmly in place and we remain
confident about the prospect of rewarding investment performance.
/s/ Alan G. Carr
Alan G. Carr
President
H&Q LIFE SCIENCES INVESTORS
---------------------------
PORTFOLIO-As of March 31, 1997
[Tabular representation of bar chart]
Restricted Unrestricted
AGRI/ENVIRONMENTAL 0.77% 7.18%
BIOTECHNOLOGY 9.74% 27.43%
CROs 0.92% 7.33%
DIAGNOSTICS 2.88% 3.51%
MANAGED CARE 0.00% 3.50%
MEDICAL SUPPLIES 3.39% 9.12%
MEDICAL SPECIALTY 6.29% 7.05%
PHARMACEUTICALS 0.58% 6.89%
LIQUID ASSETS 0.00% 1.62%
3
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
LARGEST HOLDINGS - As of March 31, 1997
% of Net Assets
----------------
Martek Biosciences 5.37%
Vivus 5.33%
Boston Scientific 4.96%
Quintiles Transnational 4.93%
Catalytica 3.50%
IBAH 3.32%
Gilead Sciences 3.31%
Sepracor 2.55%
Cytyc 2.31%
Genzyme 2.17%
H&Q LIFE SCIENCES INVESTORS
---------------------------
SIGNIFICANT PORTFOLIO TRANSACTIONS
Quarter Ended March 31, 1997
Units Held Units Held
PURCHASES 12/31/96 3/31/97
- --------- ----------- ----------
AbTox (Restricted) 0 500,000
Biofield 63,658 113,658
Catalytica 382,500 387,500
Cubist Pharmaceuticals 45,000 53,000
Exelixis (Restricted) Series C 0 100,000
Genzyme 0 100,000
HPR 0 30,000
Human Genome Sciences 0 62,000
Vectis (Restricted) 0 170,213
SALES
- -----
Ariad Pharmaceuticals 216,400 201,400
INCYTE Pharmaceuticals 51,445 39,445
InSite Vision 82,305 0
Ventritex 115,000 0
4
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(Unaudited)
SHARES CONVERTIBLE SECURITIES - 14.0% VALUE
------ -----
Convertible Preferred - 13.9%
500,000 AbTox, Series F* $1,100,000
104,154 Dyax, Class A Series 1* 208,304
45,000 Dyax, Class A Series 3* 90,000
129,080 Dyax, Class A Series 4* 404,020
177,778 EPR, Series A* 800,001
900,000 Exelixis Pharmaceuticals, Series B* 1,800,000
100,000 Exelixis Pharmaceuticals, Series C* 200,000
240,843 Focal, Series D* 419,067
87,081 Focal, Series E* 151,521
1,088,710 HealthTech Services, Series A* 1,350,000
78,536 IBAH, Series A** 1,502,394
75,000 InterVentional Technologies, Series F* 750,000
35,000 InterVentional Technologies, Series G* 350,000
281,250 LocalMed, Series D* 1,125,000
130,000 Masimo, Series D* 910,000
22,500 Terrapin Technologies, Series G* 1,125,000
28,991 Therion Biologics, Sinking Fund* 870
135,135 Tularik, Series C* 1,351,350
170,213 Vectis, Series B* 800,001
-------------
$14,437,528
-------------
PRINCIPAL
AMOUNT Convertible Bonds and Notes - 0.1% VALUE
- ---------- -------------
$287,447 Therion Biologics, 10% Secured Notes,
due 1999 $145,175
-------------
$145,175
-------------
TOTAL CONVERTIBLE SECURITIES
(Cost $12,985,264) $14,582,703
-------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(continued)
SHARES COMMON STOCKS - 84.3% VALUE
------ -----
Agricultural/Environmental Technologies - 7.2%
87,000 Calgene** $657,938
387,500 Catalytica** 3,632,813
200,000 Consep** 600,000
75,000 Envirogen** 196,875
50,000 Envirogen Units** 140,625
98,000 IDEXX Laboratories** 1,372,000
97,349 Molten Metal Technology** 851,804
------------
$7,452,055
------------
Biotechnology - 32.7%
201,400 Ariad Pharmaceuticals** $1,220,988
47,000 BioChem Pharma** 2,021,000
164,000 BioTransplant** 1,127,500
118,621 BioTransplant* 612,084
3,297 BioTransplant Warrants* 5,704
13,500 BioTransplant Warrants* 23,355
925 BioTransplant Warrants* 3,793
190,000 Calypte Biomedical** 1,258,750
48,300 Calypte Biomedical* 232,323
28,571 Cell Therapeutics* 242,854
126,300 Cor Therapeutics** 1,199,850
53,000 Cubist Pharmaceuticals** 556,500
190,476 Cubist Pharmaceuticals* 1,500,951
388,235 Genta** 103,125
100,000 Genzyme** 2,250,000
150,000 Gilead Sciences** 3,431,250
62,000 Human Genome Sciences** 2,015,000
210,000 ImmuLogic Pharmaceutical** 918,750
39,445 INCYTE Pharmaceuticals** 2,051,140
304,703 Martek Biosciences** 5,332,303
34,112 Martek Biosciences Warrants* 247,312
60,000 MedImmune** 825,000
180,041 NABI** 1,226,529
200,000 Oxford GlycoSystems Group* 160,000
11,335 Pharming B.V.* 903,480
230,000 Ribi ImmunoChem Research** 1,020,625
176,212 SEQUUS Pharmaceuticals** 1,343,617
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(continued)
SHARES Biotechnology - continued VALUE
------ -----
60,624 SEQUUS Pharmaceuticals Warrants* 12,125
90,000 Somatogen** 551,250
146,982 Therion Biologics* 2,940
104,703 Transkaryotic Therapies* 1,531,805
8,035 Transkaryotic Therapies Warrants* 31,497
------------
$33,963,400
------------
Contract Research Organizations - 6.8%
155,764 IBAH** $992,996
235,608 IBAH Warrants* 951,856
95,000 Quintiles Transnational** 5,118,125
------------
$7,062,977
------------
Diagnostics - 5.5%
113,658 Biofield** $639,326
88,165 Biofield* 372,056
18,382 Biofield Warrants* 184
12,255 Biofield Warrants* 123
64,864 Cytyc** 1,216,200
83,712 Cytyc* 1,176,991
17,000 Integ** 102,000
116,666 Integ* 524,997
123,077 NeoPath** 1,692,309
------------
$5,724,186
------------
Managed Care - 3.5%
30,000 HPR** $337,500
104,000 Orthodontic Centers of America** 1,404,000
50,000 Vencor** 1,893,750
------------
$3,635,250
------------
Medical Supplies - 10.3%
83,304 Boston Scientific** $5,144,022
54,484 EndoVascular Technologies** 749,155
130,750 Exogen** 751,813
100,000 Heartstream* 797,000
68,728 KeraVision** 695,871
105,020 Landec** 551,355
126,023 Landec* 496,531
74,000 Perclose** 1,572,500
------------
$10,758,247
------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(continued)
SHARES Medical Specialty - 9.0% VALUE
------ -----
992,900 Bioject Medical** $775,703
110,000 Biomatrix** 1,471,250
2,528 Dyax Warrants* 25
191,000 Fuisz Technologies** 1,122,125
200,000 Interpore** 1,025,000
115,000 Sepracor** 2,652,188
75,000 Spiros Development Units* 2,004,000
113,000 Voxel** 278,969
------------
$9,329,260
------------
Pharmaceuticals - 7.5%
80,000 Cortex Pharmaceuticals** $222,500
60,500 CV Therapeutics** 529,375
97,375 CV Therapeutics* 596,909
62,500 Synaptic Pharmaceutical** 875,000
138,333 Vivus** 5,533,320
------------
$7,757,104
------------
REITs - 1.8%
50,000 Meditrust $1,862,500
------------
$1,862,500
------------
TOTAL COMMON STOCKS
(Cost $72,060,352) $87,544,979
------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $85,045,616) $102,127,682
------------
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENTS - 2.0% VALUE
---------- -----
$2,100,000 Ford Motor Credit Corp., 5.85%, due 4/2/97 $2,099,318
------------
TOTAL TEMPORARY CASH INVESTMENTS $2,099,318
------------
* Non income-producing restricted security, valued by the Board of Trustees
(see Notes 1 and 5).
** Non income-producing publicly traded security (see Note 1).
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
BALANCE SHEET
MARCH 31, 1997
(Unaudited)
ASSETS:
Investments in securities, at value (identified cost
$85,045,616; see Schedule of Investments) (Notes 1,
3 and 5) $102,127,682
Temporary cash investment, at amortized cost which
approximates value (see Schedule of Investments)
(Note 1) 2,099,318
---------------
Total investments $104,227,000
Cash 213,565
Interest receivable 341
Receivable for investments sold 188,730
Deferred organization costs, net (Note 1) 2,024
Prepaid expenses and other assets 30,231
---------------
Total assets $104,661,891
---------------
LIABILITIES:
Payable for investments purchased $692,223
Accrued advisory fees (Note 4) 96,997
Other accrued expenses 69,456
---------------
Total liabilities $858,676
---------------
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) $85,132,848
Accumulated net investment (loss) (719,215)
Accumulated net realized gain on investments 2,307,516
Net unrealized gain on investments (Note 3) 17,082,066
---------------
Total net assets (equivalent to $14.81
per share based on 7,011,362 shares
outstanding) $103,803,215
===============
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(Unaudited)
INVESTMENT INCOME (Note 1):
Interest $183,605
Dividends 70,500
-----------
Total investment income $254,105
EXPENSES:
Advisory fees (Note 4) $816,075
Shareholder reporting 26,587
Custodian fees 26,206
Trustees' fees and expenses 24,252
Accounting and auditing fees 21,938
Insurance expense 12,351
Legal fees 10,983
Transfer agent fees 6,985
Amortization of deferred
organization costs (Note 1) 3,613
Other 24,330
-----------
Total expenses 973,320
-------------
Net investment (loss) ($719,215)
-------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments (Note 1) $3,163,341
Net (decrease) in unrealized gain on
investments (15,443,834)
-------------
Net (loss) on investments ($12,280,493)
-------------
Net (decrease) in net assets
resulting from operations ($12,999,708)
==============
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the six For the
months ended year ended
March 31, 1997 September 30,
(Unaudited) 1996
-------------- -------------
NET (DECREASE) INCREASE IN
NET ASSETS FROM OPERATIONS:
Net investment (loss) ($719,215) ($1,468,245)
Net realized gain on investments 3,163,341 11,562,205
Net (decrease) increase in unrealized
gain on investments (15,443,834) 11,714,277
-------------- -------------
Net (decrease) increase in net
assets resulting from operations ($12,999,708) $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 (decrease) increase in net
assets ($19,343,578) $21,808,237
-------------- -------------
NET ASSETS:
Beginning of period 123,146,793 101,338,556
-------------- -------------
End of period $103,803,215 $123,146,793
============== =============
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $184,418
Dividends received 70,500
Operating expenses paid (947,829)
----------------
Net cash used for operating activities ($692,911)
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of portfolio securities $139,684,060
Purchases of portfolio securities (132,587,929)
----------------
Net cash provided by investing activities $7,096,131
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid ($10,949,328)
Distributions reinvested 4,605,458
----------------
Net cash used for financing activities ($6,343,870)
----------------
NET INCREASE IN CASH $59,350
CASH AT BEGINNING OF PERIOD 154,215
----------------
CASH AT END OF PERIOD $213,565
================
RECONCILIATION OF NET (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS TO NET CASH USED
FOR OPERATING ACTIVITIES:
Net (decrease) in net assets resulting from operations ($12,999,708)
Net realized (gain) on investments (3,163,341)
Net decrease in unrealized gain on investments 15,443,834
Net decrease in interest receivable 1,098
Increase in accrued advisory fees and accrued other
expenses 13,556
Decrease in prepaid expenses, other assets and deferred
organization costs, net 11,650
----------------
Net cash used for operating activities ($692,911)
================
The accompanying notes are an integral part of these financial statements.
12
<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 six
months ended
March 31, 1997
(Unaudited)
--------------
For the years ended September 30,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992**
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value per share:
Beginning of period $18.445 $15.179 $11.007 $13.090 $13.296 $13.950
-------------- -------------- -------------- -------------- -------------- --------------
Net investment (loss) ($0.071) ($0.220) ($0.184) ($0.144) ($0.197) ($0.015)
Net realized and unrealized gain
(loss) on investments (1.929) 3.486 4.356 (1.304) (0.009) (0.511)
-------------- -------------- -------------- -------------- -------------- --------------
Total increase (decrease) from
investment operations ($2.000) $3.266 $4.172 ($1.448) ($0.206) ($0.526)
-------------- -------------- -------------- -------------- -------------- --------------
Dilutive effect of sale of
common stock and related
expenses from rights offering -- -- -- (0.635) -- (0.128)
Distribution to shareholders
Long-term capital gains ($1.64) -- -- -- -- --
-------------- -------------- -------------- -------------- -------------- --------------
Net asset value per share:
End of period $14.805 $18.445 $15.179 $11.007 $13.090 $13.296
============== ============== ============== ============== ============== ==============
Per share market value:
End of period $12.625 $15.000 $12.875 $10.125 $12.875 $12.750
Total investment return (5.79%) 16.50% 27.16% (21.36%) 0.98% (15.00%)
Net assets:
End of period $103,803,215 $123,146,793 $101,338,556 $73,484,287 $50,510,845 $51,304,296
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses to
average net assets 1.71%* 1.61% 1.83% 1.87% 2.17% 1.97%*
Ratio of net investment (loss)
to average net assets (1.27%)* (1.25%) (1.57%) (1.23%) (1.49%) (0.28%)*
Portfolio turnover rate 8.66% 19.51% 29.48% 10.59% 32.89% 0.00%
Average commission rate paid per
listed share purchased $.04 $.07 $.06 $.07 $.06 $.07
Number of shares outstanding at
end of period 7,011,362 6,676,420 6,676,420 6,676,420 3,858,600 3,858,600
</TABLE>
* Annualized
** For the period from May 8, 1992 (commencement of operations)
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
(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 maturities 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. Due to permanent book/tax
differences in accounting for certain transactions, certain distributions may be
treated as distributions from capital as opposed to distributions of net
investment income or realized capital gains.
14
<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 March 31, 1997 totaled $11,437,488 and $10,754,783,
respectively.
(3) Tax Basis of Securities
At March 31, 1997, the total cost of securities for Federal income tax
purposes was $85,045,616. The aggregate gross unrealized gain on securities for
which there was an excess of market value over cost was $35,375,398. The
aggregate gross unrealized loss on securities for which there was an excess of
cost over market value was $18,293,332. The net unrealized gain on securities
held by the Fund was $17,082,066.
(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 an indirect 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 or other restricted securities if
these securities would currently comprise 40% or less of net assets. The value
of these securities represents 24.6% of the Fund's net assets at March 31, 1997.
The value of the venture capital or 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 or other restricted securities at March 31, 1997, as
determined by the Board of Trustees of the Fund.
15
<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 $1,100,000 $ 2.200 $1,100,000
Biofield
Common* 9/16/94 500,000
3/3/95 140,877
6/29/95 84,375
------------
725,252 4.220 372,056
Common Warrants 3/3/95 0
6/29/95 0
------------
0 0.010 184
Common Warrants 3/3/95 0
6/29/95 0
------------
0 0.010 123
BioTransplant
Common* 10/31/94 595,305
8/18/95 39,255
1/16/96 315,385
------------
949,945 5.160 612,084
Common Warrants### 8/12/94 0 1.730 5,704
Common Warrants### 10/31/94 0 1.730 23,355
Common Warrants### 8/18/95 0 4.101 3,793
Calypte Biomedical*
Common 11/18/94 41,500
6/15/95 100,000
2/29/96 150,000
------------
291,500 4.810 232,323
Cell Therapeutics##
Common 8/3/92 500,140 8.500 242,854
Cubist Pharmaceuticals*
Common 5/17/95 800,809 7.880 1,500,951
CV Therapeutics**
Common 3/23/94 800,260
9/8/95 335,613
3/29/96 325,425
11/12/96 60,938
------------
1,522,236 6.130 596,909
Cytyc*
Common 5/17/94 72,883
10/14/94 71,404
6/13/95 40,347
------------
184,634 14.060 1,176,991
16
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
NOTES TO FINANCIAL STATEMENTS
(continued)
Carrying
Acquisition Value
Security Date Cost per Unit Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dyax
Class A Series 1 Cvt. Pfd. 6/1/92 250,035
9/11/92 83,293
12/31/92 79,932
------------
413,260 2.000 208,304
Class A Series 3 Cvt. Pfd. 10/26/95 90,280 2.000 90,000
Class A Series 4 Cvt. Pfd. 10/30/96 404,020 3.130 404,020
Common Warrants 12/31/92 187 0.010 25
EPR
Series A Cvt. Pfd. 3/9/94 800,331 4.500 800,001
Exelixis Pharmaceuticals
Series B Cvt. Pfd. 3/28/96 901,325 2.000 1,800,000
Series C Cvt. Pfd. 3/31/97 200,000 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 1.240 1,350,000
Heartstream*
Common 3/15/95 700,431 7.970 797,000
IBAH#
Common Warrants 8/11/95 151,250 4.040 951,856
Integ*
Common 6/16/95 700,126 4.500 524,997
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
Landec*
Common 3/27/95 500,294 3.940 496,531
LocalMed
Series D Cvt. Pfd. 2/9/96 1,126,745 4.000 1,125,000
Martek Biosciences#
Common Warrants 6/6/95 0 7.250 247,312
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
SEQUUS Pharmaceuticals#
Common Warrants 3/30/95 0 0.200 12,125
Spiros Development
Units 12/28/95 1,125,790 26.720 2,004,000
Terrapin Technologies
Series G Cvt. Pfd. 11/7/95 1,125,548 50.000 1,125,000
17
<PAGE>
H&Q LIFE SCIENCES INVESTORS
---------------------------
NOTES TO FINANCIAL STATEMENTS
(continued)
Carrying
Acquisition Value
Security Date Cost per Unit Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Therion Biologics
Common 6/30/93 251,307
8/20/96 669
10/16/96 2,219
------------
254,195 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
10/16/96 219,664
------------
285,895 0.505 145,175
Transkaryotic Therapies
Common* 4/16/93 600,110
11/5/93 100,000
------------
700,110 14.630 1,531,805
Common Warrants### 11/5/93 200 3.920 31,497
Tularik
Series C Cvt. Pfd. 4/16/93 500,060 10.000 1,351,350
Vectis
Series B Cvt. Pfd. 2/5/97 800,001 4.700 800,001
------------ -------------
$22,983,591 $25,511,204
============ =============
</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 85% 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
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
-----------------------
Out of concern for the environment and in an effort to reduce
Fund expenses, this report is printed on recycled paper.
