N-30D 1 a2050042zn-30d.txt N-30D H&Q LIFE SCIENCES INVESTORS --------------------------- [GRAPHIC] [GRAPHIC] [GRAPHIC] SEMIANNUAL REPORT MARCH 31, 2001 To our Shareholders: At quarter-end on March 31, 2001, the net asset value of your Fund was $22.43 per share. Performance data for the fiscal year and the quarter ended March 31 compared to the indices is as follows:
FISCAL YEAR TO DATE QUARTER ENDED 9/30/00 - 3/31/01 3/31/01 ----------------- ------- Net Asset Value -35.6% -20.5% Dow Jones Industrial Average -7.3% -8.4% NASDAQ Industrials -39.9% -17.1% Russell 2000 -13.6% -6.8%
The collateral damage to other over-the-counter stocks from the declines in electronic and e-trade equities in the quarter ended March 31 is reflected in these performance data. Of some encouragement is the somewhat improved performance of life sciences stocks relative to the NASDAQ index toward the end of the quarter. The overall state of the economy and the levels of common stock valuation seem to us to still be fragile. For example, consumer sentiment polls seem to present a positive outlook. That seems inconsistent with the fact that almost every announcement of corporate earning disappointment is coupled with a layoff announcement. Under such conditions, how long are consumers going to continue to spend beyond their incomes? Corporate and consumer debt are at record levels. The Federal Reserve Board appears convinced that the wealth effect of the level of the stock market has to be sustained by lower interest rates to assure continued consumer confidence. While consumers are roughly two-thirds of the economy, it is troubling that the capital expenditure portion of the economy (and electronic equipment, computers, communications equipment, semi-conductors etc. are cyclically sensitive capital items) is in apparent recession. Perhaps we, as a country, have over the last several years added all the productivity that we can utilize until the next major technology product cycles come along. We are, therefore, concerned about the general valuation levels of the market and, from our experience, believe that there is no way 1 even a specialized portfolio such as your Fund's can be totally immune to the effects of any future general decline in the overall market. Accordingly, we are maintaining a larger than historic liquid asset position in anticipation of future opportunities to purchase good companies at depressed valuations in this sector. We believe the portfolio companies currently held already represent value at the current price levels of their stocks, especially in view of our expectations of their fundamental outlook. We continue to believe that it is important to keep in mind the differences in the long-term business models of the companies meeting the investment objectives of your Fund as compared to other types of "technology". While the development risks are high and attainment of FDA market approvals are a challenge, patent positions are generally more enforceable and product life cycles, especially in therapeutic products, are much longer. Market demand for approved products that improve the human condition usually is very responsive soon after introduction. In the quarter, our venture investment activity included follow-on commitments in Ceres, CytoLogix, KVM Technologies and Sontra Medical. The Fund also made new private investments in two public companies, ENDOCARDIAL SOLUTIONS and Orthovita, at discounts to their public market prices and in one new private company, Novacept. NOVACEPT has an innovative minimally invasive catheter system to treat excessive menstrual bleeding that appears to be a dramatic improvement over currently available therapies for a large patient population. In no way are our expectations diminished that the future value creation from the inventions in biotechnology and genomics, instrumentation and devices and the growth of the life sciences sector will lead to vast improvements in the span and quality of life and present significant investment opportunities in the future. /s/ Alan G. Carr Alan G. Carr President 2 H&Q LIFE SCIENCES INVESTORS --------------------------- PRIVACY NOTICE If you are a registered shareholder of the Fund, the Fund and Hambrecht & Quist Capital Management, the Funds' investment adviser, may receive nonpublic personal information about you from the information collected by the transfer agent from your transactions in Fund shares. Any nonpublic personal information is not disclosed to third parties, except as permitted or required by law. In connection with servicing your account and effecting transactions, the information received may be shared with the investment adviser and non-affiliates, including transfer agents, custodians or other service companies. Access to your nonpublic personal information is restricted to employees who need to know that information to provide products or services to you. To maintain the security of your nonpublic personal information, physical, electronic, and procedural safeguards are in place that comply with federal standards. The policies and practices described above apply to both current and former shareholders. If your Fund shares are held in "street name" at a bank or brokerage, we do not have access to your personal information and you should refer to your bank's or broker's privacy policies for a statement of the treatment of your personal information. H&Q LIFE SCIENCES INVESTORS --------------------------- PORTFOLIO AS OF MARCH 31, 2001 [CHART]
RESTRICTED AGRI/ENVIRONMENTAL 1.47% 2.10% BIOTECHNOLOGY 9.66% 49.30% CROs 0.00% 0.60% DIAGNOSTICS 2.23% 5.20% INFORMATION SERVICES 0.59% 0.60% MANAGED CARE 0.87% 0.90% MEDICAL SPECIALTY 5.29% 11.40% MEDICAL SUPPLIES 1.16% 2.10% PHARMACEUTICALS 2.28% 15.50% LIQUID ASSETS 0.00% 12.40%
3 H&Q LIFE SCIENCES INVESTORS --------------------------- LARGEST HOLDINGS AS OF MARCH 31, 2001
% of Net Assets --------------- Biovail 6.72% Cubist Pharmaceuticals 6.36% Gilead Sciences 4.96% CV Therapeutics 3.92% ImClone Systems 3.58% Celgene 3.56% Genzyme 3.49% Molecular Devices 2.69% Martek Biosciences 2.67% Scios 2.61%
H&Q LIFE SCIENCES INVESTORS --------------------------- SIGNIFICANT PORTFOLIO TRANSACTIONS QUARTER ENDED MARCH 31, 2001
UNITS HELD UNITS HELD PURCHASES 12/31/00 3/31/01 ---------------------- -------- ------- Ceres (Restricted) Promissory Note $0 $72,000 Ceres (Restricted) Series D 0 174,200 Endocardial Solutions (Restricted) 0 666,666 KVM Technologies (Restricted) Cvt. Note $610,000 $700,000 Novacept (Restricted) 0 421,052 Orthovita (Restricted) 0 680,000 Sontra Medical (Restricted) Promissory Note $0 $120,000 Transkaryotic Therapies 54,238 117,638 SALES ---------------------- Amgen 50,000 0 Cytyc 291,456 109,956 Gene Logic 90,000 0 Genzyme Biosurgery 91,247 59,706 Interpore Cross 200,000 198,800
4 H&Q LIFE SCIENCES INVESTORS --------------------------- SCHEDULE OF INVESTMENTS March 31, 2001 (UNAUDITED)
CONVERTIBLE SECURITIES - 17.6% OF NET ASSETS SHARES CONVERTIBLE PREFERRED - 15.5% VALUE -------- ---------- AGRICULTURAL/ENVIRONMENTAL TECHNOLOGIES - 1.4% 250,000 Ceres (Restricted) Series C* $1,500,000 174,200 Ceres (Restricted) Series D* 1,045,200 177,778 EPR (Restricted) Series A* 266,667 BIOTECHNOLOGY - 6.0% 266,667 ACADIA Pharmaceuticals (Restricted) Series E* 2,000,003 1,212,121 Raven biotechnologies (Restricted) Series B* 2,000,000 30,920 Therion Biologics (Restricted) Series A* 115,950 28,991 Therion Biologics (Restricted) Sinking Fund* 108,716 1,150,000 Triad Therapeutics (Restricted) Series A* 2,300,000 550,000 Triad Therapeutics (Restricted) Series B* 1,100,000 615,385 Zyomyx (Restricted) Series B* 2,461,540 400,000 Zyomyx (Restricted) Series C* 1,600,000 DIAGNOSTICS - 2.1% 322,168 CytoLogix (Restricted) Series A* 1,626,948 151,420 CytoLogix (Restricted) Series B* 764,671 130,000 Masimo (Restricted) Series D* 1,430,000 1,149,425 Sontra Medical (Restricted) Series A* 310,345 MANAGED CARE - 0.5% 225,989 KVM Technologies (Restricted) Series B* 1,000,001 MEDICAL SPECIALTY - 2.0% 500,000 AbTox (Restricted) Series F* 5,000 711,111 Novatrix (Restricted) Series D* 7,111 426,439 Songbird Hearing (Restricted) Series D* 1,999,999 434,782 TherOx (Restricted) Series H* 1,999,997 MEDICAL SUPPLIES - 1.2% 75,000 InterVentional Technologies (Restricted) Series F* 187,500 35,000 InterVentional Technologies (Restricted) Series G* 87,500 281,250 LocalMed (Restricted) Series D* 2,813 421,052 Novacept (Restricted) Series D* 1,999,997 PHARMACEUTICALS/DRUG DELIVERY - 2.3% 141,177 Advanced Medicine (Restricted) Series C* 1,270,593 133,334 Advanced Medicine (Restricted) Series D-1* 1,200,006 932,488 Galileo Laboratories (Restricted) Series F* 2,000,000 ----------- $30,390,557 -----------
The accompanying notes are an integral part of these financial statements. 5 H&Q LIFE SCIENCES INVESTORS --------------------------- SCHEDULE OF INVESTMENTS March 31, 2001 (continued)
PRINCIPAL CONVERTIBLE SECURITIES - CONTINUED AMOUNT CONVERTIBLE BONDS AND NOTES - 2.1% VALUE --------- ----------- AGRICULTURAL/ENVIRONMENTAL TECHNOLOGIES - 0.0% $72,000 Ceres (Restricted) 7% Prom. Note due 2001 $72,000 BIOTECHNOLOGY - 1.5% 4,200,000 CuraGen (Restricted) 6% Cvt. Deb. due 2007 2,877,000 DIAGNOSTICS - 0.1% 120,000 Sontra (Restricted) 8% Prom. Note due 2002 120,000 INFORMATION SERVICES - 0.0% 1,053,262 FitForAll.com (Restricted) 10% Prom. Note due 2003 105 MANAGED CARE - 0.4% 700,000 KVM Technologies (Restricted) Adj. Cvt. Note due 2001 700,000 MEDICAL SPECIALTY - 0.1% 120,000 AbTox (Restricted) 12% Prom. Note due 2001 120,000 ----------- $3,889,105 ----------- TOTAL CONVERTIBLE SECURITIES (Cost $37,372,011) $34,279,662 -----------
SHARES COMMON STOCKS - 70.2% -------- AGRICULTURAL/ENVIRONMENTAL TECHNOLOGIES - 0.6% 57,032 Catalytica Energy Systems* $1,194,108 20,833 Envirogen* 22,135 38,000 Verdant Brands* 950 ----------- $1,217,193 ----------- BIOTECHNOLOGY - 42.0% BIOPHARMACEUTICALS - 35.7% 282,620 BioTransplant* $1,501,419 925 BioTransplant (Restricted) Warrants* 2,926 3,297 BioTransplant (Restricted) Warrants* 2,596 13,500 BioTransplant (Restricted) Warrants* 10,631 279,600 Celgene* 6,990,000 106,600 Cor Therapeutics* 2,398,500 145,071 Corixa* 1,160,568 407,449 Cubist Pharmaceuticals* 9,982,501 133,333 Cubist Pharmaceuticals (Restricted) Warrants* 2,521,660 233,484 CV Therapeutics* 7,704,972 76,000 Genzyme* 6,865,080 300,000 Gilead Sciences* 9,750,000 212,000 ImClone Systems* 7,035,750 120,000 MedImmune* 4,305,000 126,315 Pharming Group* 943,582 146,982 Therion Biologics (Restricted)* 551,183
The accompanying notes are an integral part of these financial statements. 6 H&Q LIFE SCIENCES INVESTORS --------------------------- SCHEDULE OF INVESTMENTS March 31, 2001 (continued)
SHARES BIOTECHNOLOGY - CONTINUED VALUE -------- ------------ 160,000 Therion Biologics (Restricted) Units* 600,000 117,638 Transkaryotic Therapies* 2,066,017 135,135 Tularik* 2,567,565 300,000 Versicor* 2,418,750 118,776 Versicor (Restricted)* 718,227 GENOMICS/DRUG DISCOVERY - 6.3% 40,000 Affymetrix* 1,112,500 247,463 Dyax* 1,979,704 126,000 Exelixis* 1,094,625 150,000 Lynx Therapeutics* 1,263,281 116,307 Molecular Devices* 5,291,969 296,428 Telik* 1,537,720 ------------ $82,376,726 ------------ CONTRACT RESEARCH ORGANIZATIONS - 0.6% 61,500 Quintiles Transnational* $1,160,813 ------------ $1,160,813 ------------ DIAGNOSTICS - 3.0% 356,249 Biofield* $131,812 400,000 Biofield (Restricted)* 118,400 436,417 Calypte Biomedical* 279,307 109,956 Cytyc* 1,814,274 90,000 Digene* 1,372,500 98,000 IDEXX Laboratories* 2,149,875 130,000 Masimo Labs (Restricted)* 1,300 ------------ $5,867,468 ------------ INFORMATION SERVICES - 0.6% 3,339,409 Codman Group (Restricted)* $333,941 204,139 Physician WebLink (Restricted)* 800,317 101,283 Physician WebLink (Restricted) Warrants* 10,128 ------------ $1,144,386 ------------ MEDICAL SPECIALTY - 9.3% 254,546 ATS Medical* $2,450,005 107,100 Bioject Medical Technologies* 1,171,406 67,898 Biopure* 903,892 5,555 Biopure (Restricted) Warrants* 6,562 135,373 Curis* 501,303 666,666 Endocardial Solutions (Restricted)* 2,249,998 118,591 Focal* 74,119 59,706 Genzyme Biosurgery* 328,383
The accompanying notes are an integral part of these financial statements. 7 H&Q LIFE SCIENCES INVESTORS --------------------------- SCHEDULE OF INVESTMENTS March 31, 2001 (continued)
SHARES MEDICAL SPECIALTY - CONTINUED VALUE -------- ------------ 198,800 Interpore Cross* 832,475 338,815 Martek Biosciences* 5,251,633 680,000 Orthovita (Restricted)* 4,016,284 132,000 Radiance Medical Systems* 474,375 ------------ $18,260,435 ------------ MEDICAL SUPPLIES - 0.9% 430,000 EP MedSystems* $967,500 68,728 KeraVision* 3,780 215,043 Landec* 779,531 ------------ $1,750,811 ------------ PHARMACEUTICALS/DRUG DELIVERY - 13.2% 125,000 Aradigm* $718,750 365,424 Biovail* 13,205,040 59,500 Emisphere Technologies* 851,594 223,000 Scios* 5,129,000 140,000 Sepracor* 4,480,000 30,000 Teva Pharmaceutical Industries 1,638,750 ------------ $26,023,134 ------------ TOTAL COMMON STOCKS (Cost $71,853,267) $137,800,966 ------------ TOTAL INVESTMENTS IN SECURITIES (Cost $109,225,278) $172,080,628 ============
PRINCIPAL AMOUNT TEMPORARY CASH INVESTMENTS - 13.7% VALUE -------- ----------- $3,300,000 American Express Credit, 5.00%, due 4/10/01 $3,295,875 8,700,000 Ford Motor Credit Corp., 4.79%, due 4/12/01 8,687,266 5,000,000 General Electric Capital Corp., 4.94%, due 4/2/01 4,999,314 10,000,000 General Motors Acceptance Corp., 4.80%, due 4/16/01 9,980,000 ----------- TOTAL TEMPORARY CASH INVESTMENTS $26,962,455 ===========
----------------- * Non income-producing security (see Notes 1 and 5). The accompanying notes are an integral part of these financial statements. 8 H&Q LIFE SCIENCES INVESTORS --------------------------- BALANCE SHEET March 31, 2001 (UNAUDITED) ASSETS: Investments in securities, at value (identified cost $109,225,278; see Schedule of Investments) (Notes 1, 3 and 5) $172,080,628 Temporary cash investments, at amortized cost which approximates value (see Schedule of Investments) (Note 1) 26,962,455 ------------ Total investments $199,043,083 ------------ Cash 1,203,019 Dividends and interest receivable 43,225 Prepaid expenses 306,465 ------------ Total assets $200,595,792 ------------ LIABILITIES: Capital gains distribution payable $3,747,853 Accrued advisory fees (Note 4) 248,931 Other accrued expenses 91,439 ------------ Total liabilities $4,088,223 ------------ NET ASSETS: Shares of beneficial interest, par value $.01 per share, unlimited number of shares authorized, amount paid in on 8,760,898 shares issued and outstanding (Note 1) $118,429,890 Accumulated undistributed net investment (loss) (629,852) Accumulated net realized gain on investments 15,852,181 Net unrealized gain on investments (Note 3) 62,855,350 ------------ Total net assets (equivalent to $22.43 per share based on 8,760,898 shares outstanding) $196,507,569 ============
The accompanying notes are an integral part of these financial statements. 9 H&Q LIFE SCIENCES INVESTORS --------------------------- STATEMENT OF OPERATIONS For the Six Months Ended March 31, 2001 (UNAUDITED) INVESTMENT INCOME (Note 1): Dividend income $3,536 Interest income 937,507 ---------- Total investment income $941,043 EXPENSES: Advisory fees (Note 4) $1,405,847 Trustees' fees and expenses 47,491 Shareholder reporting 26,290 Custodian fees 22,550 Legal fees 19,469 Transfer agent fees 13,291 Accounting and auditing fees 11,082 Other 24,875 ---------- Total expenses 1,570,895 ------------ Net investment (loss) ($629,852) ------------ NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investments (Note 1) $33,780,625 Net (decrease) in unrealized gain on investments (145,288,275) ------------ Net (loss) on investments ($111,507,650) ------------ Net (decrease) in net assets resulting from operations ($112,137,502) ============
The accompanying notes are an integral part of these financial statements. 10 H&Q LIFE SCIENCES INVESTORS --------------------------- STATEMENTS OF CHANGES IN NET ASSETS
For the six For the months ended year ended March 31, 2001 September 30, (Unaudited) 2000 -------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment (loss) ($629,852) ($2,425,648) Net realized gain on investments 33,780,625 22,495,993 Net increase (decrease) in unrealized gain on investments (145,288,275) 171,484,854 ------------ ------------ Net increase (decrease) in net assets resulting from operations ($112,137,502) $191,555,199 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized capital gains ($23,892,408) ($22,222,642) ------------ ------------ CAPITAL SHARE TRANSACTIONS: Value of shares issued in reinvestment of distributions $14,266,123 $17,375,995 ------------ ------------ Net increase (decrease) in net assets ($121,763,787) $186,708,552 NET ASSETS: Beginning of period 318,271,356 131,562,804 ------------ ------------ End of period $196,507,569 $318,271,356 ============ ============
The accompanying notes are an integral part of these financial statements. 11 H&Q LIFE SCIENCES INVESTORS --------------------------------------------------- STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2001 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $975,386 Dividends received 1,628 Operating expenses paid (1,891,182) ------------ Net cash used for operating activities ($914,168) ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Sales and maturities of portfolio securities $371,129,371 Purchases of portfolio securities (363,229,611) ------------ Net cash provided by investing activities $7,899,760 ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Cash distributions paid, net ($5,878,432) ------------ Net cash used for financing activities ($5,878,432) ------------ NET INCREASE IN CASH $1,107,160 CASH AT BEGINNING OF PERIOD 95,859 ------------ CASH AT END OF PERIOD $1,203,019 ============ 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 ($112,137,502) Net realized (gain) on investments (33,780,625) Net decrease in unrealized gain on investments 145,288,275 Net decrease in interest and dividends receivable 35,971 Net (decrease) in accrued advisory fees and accrued other expenses (74,515) Net (increase) in prepaid expenses and other assets (245,772) ------------ Net cash used for operating activities ($914,168) ============
The accompanying notes are an integral part of these financial statements. 12 H&Q LIFE SCIENCES INVESTORS --------------------------- FINANCIAL HIGHLIGHTS (SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
For the six months ended For the years ended September 30, March 31, 2001 --------------------------------------------------------------------------- (Unaudited) 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- ------- Net asset value per share: Beginning of period $39.365 $17.804 $13.713 $18.825 $18.445 $15.179 ------- ------- ------- ------- ------- ------- Net investment (loss) ($0.072) ($0.300) ($0.205) ($0.239) ($0.072) ($0.220) Net realized and unrealized gain (loss) on investments (13.953) 24.756 4.576 (4.133) 2.092 3.486 ------- ------- ------- ------- ------- ------- Total increase (decrease) from investment operations ($14.025) $24.456 $4.371 ($4.372) $2.020 $3.266 -------- ------- ------- ------- ------- ------- Long-term capital gains distribution to shareholders ($2.910) ($2.895) ($0.280) ($0.740) ($1.640) -- ------- ------- ------- ------- ------- ------- Net asset value per share: End of period $22.430 $39.365 $17.804 $13.713 $18.825 $18.445 ======= ======= ======= ======= ======= ======= Per share market value: End of period $17.500 $31.313 $14.125 $10.875 $15.125 $15.000 Total investment return (35.77%) 155.36% 32.90% (23.89%) 12.86% 16.50% Net assets: End of period $196,507,569 $318,271,356 $131,562,804 $100,030,321 $131,987,733 $123,146,793 RATIOS AND SUPPLEMENTAL DATA: Ratio of operating expenses to average net assets 1.27% * 1.51% 1.60% 1.62% 1.67% 1.61% Ratio of net investment (loss) to average net assets (0.51%) * (1.06%) (1.30%) (1.50%) (1.38%) (1.25%) Portfolio turnover rate 8.26% 12.70% 23.49% 18.21% 18.94% 19.51% Number of shares outstanding at end of period 8,760,898 8,085,152 7,389,487 7,294,722 7,011,362 6,676,420
*Annualized The accompanying notes are an integral part of these financial statements. 13 H&Q LIFE SCIENCES INVESTORS --------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 2001 (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 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. 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. DISTRIBUTION POLICY The current distribution policy is to declare distributions in stock. Stock distributions will automatically be paid in newly issued shares of the Fund unless otherwise instructed by the shareholder. The shares will be valued at the lower of net asset value or market price on the pricing date. The Fund has implemented a fixed distribution policy that permits the Fund to make quarterly distributions at a rate of 2% of the Fund's net assets to shareholders of record. The Fund intends to use net realized capital gains when making quarterly distributions. This 14 H&Q LIFE SCIENCES INVESTORS --------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 2001 (continued) could result in a return of capital to shareholders if the amount of the distribution exceeds the Fund's net investment income and realized capital gains. It is anticipated that net realized capital gains in excess of the total distributed under this policy would be included in the December distribution. If a distribution were to be declared in cash, it would then be subject to the Dividend Reinvestment Plan. Under the Dividend Reinvestment Plan, distributions will automatically be paid in additional shares of the Fund, unless State Street Bank is otherwise instructed. Shareholders may request to be paid in cash instead of shares by responding to the bank, brokerage or nominee who holds the shares if the shares are in "street name" or by filling out a form received from 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, 2000 through March 31, 2001 totaled $18,751,923 and $42,404,142, respectively. (3) TAX BASIS OF SECURITIES At March 31, 2001, the total cost of securities for Federal income tax purposes was $109,225,278. The aggregate gross unrealized gain on securities in which there was an excess of market value over cost was $85,936,124. The aggregate gross unrealized loss on securities in which there was an excess of cost over market value was $23,280,774. The net unrealized gain on securities held by the Fund was $62,855,350. (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) for the month, for all other assets, 1.0% of the average net assets up to $250 million, 0.9% of the average net assets for the next $250 million, 0.8% of the average net assets for the next $500 million and 0.7% of the average net assets thereafter. The aggregate fee may not exceed a rate when annualized of 1.375%. Certain officers and Trustees of the Fund are also officers of the Adviser. The Adviser is an indirect wholly owned subsidiary of J.P. Morgan Chase & Co. (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 23.5% of the Fund's net assets at March 31, 2001. 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 March 31, 2001, as determined by the Board of Trustees of the Fund. 15 H&Q LIFE SCIENCES INVESTORS --------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 2001 (continued)
Acquisition Carrying Value Security Date Cost per Unit Value ---------------------------------- ----------- ---------- -------------- ---------- AbTox Series F Cvt. Pfd. 3/7/97 $1,100,500 $0.010 $5,000 12% Promissory Note due 2001 2/26/98 43,952 3/11/98 40,000 3/26/98 40,000 ---------- 123,952 1.000 120,000 ACADIA Pharmaceuticals Series E Cvt. Pfd. 5/2/00 2,000,177 7.500 2,000,003 Advanced Medicine Series C Cvt. Pfd. 2/5/99 1,200,124 9.000 1,270,593 Series D-1 Cvt. Pfd. 8/28/00 1,200,006 9.000 1,200,006 Biofield # Common 12/15/00 200,000 0.296 118,400 Biopure ^ Common Warrants 5/13/99 0 1.181 6,562 BioTransplant * Common Warrants 8/12/94 0 0.787 2,596 Common Warrants 10/31/94 0 0.787 10,631 Common Warrants 8/18/95 0 3.163 2,926 Ceres Series C Cvt. Pfd. 12/23/98 1,000,875 6.000 1,500,000 Series D Cvt. Pfd. 3/14/01 1,045,200 6.000 1,045,200 7% Promissory Note due 2001 1/4/01 72,000 1.000 72,000 Codman Group Common 1/26/96 1,352,603 8/24/97 600,154 ---------- 1,952,757 0.100 333,941 Cubist Pharmaceuticals ## Warrants 9/23/98 0 18.912 2,521,660 CuraGen 6% Cvt. Debenture due 2007 1/28/00 1,983,000 3/30/00 847,003 6/27/00 309,867 6/28/00 650,633 ---------- 3,790,503 68.500 2,877,000 CytoLogix Series A Cvt. Pfd. 1/13/98 713,306 11/10/98 600,002 7/21/99 235,000 ---------- 1,548,308 5.050 1,626,948 Series B Cvt. Pfd. 1/11/01 764,670 5.050 764,671 Endocardial Solutions # Common 3/21/01 1,999,998 3.375 2,249,998 EPR Series A Cvt. Pfd. 3/9/94 800,331 1.500 266,667 FitForAll.com 10% Promissory Note due 2003 2/22/00 300,000 4/3/00 48,214 4/20/00 201,235 5/15/00 305,214 7/27/00 106,444 9/18/00 100,000 ---------- 1,061,107 0.000 105 Galileo Laboratories Series F Cvt. Pfd. 8/18/00 2,000,000 2.145 2,000,000 InterVentional Technologies Series F Cvt. Pfd. 8/21/92 600,185 2.500 187,500 Series G Cvt. Pfd. 3/8/95 350,431 2.500 87,500
16 H&Q LIFE SCIENCES INVESTORS --------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 2001 (continued)
Acquisition Carrying Value Security Date Cost per Unit Value ---------------------------------- ----------- ---------- -------------- ---------- KVM Technologies Series B Cvt. Pfd. 2/19/98 1,000,001 4.425 1,000,001 Adj. Cvt. Promissory Note due 2001 6/21/99 100,625 10/19/99 80,000 12/15/99 20,000 1/20/00 30,000 3/16/00 40,000 4/13/00 60,000 5/24/00 40,000 7/10/00 40,000 7/31/00 60,000 10/11/01 40,000 11/13/01 100,000 1/30/01 90,000 ---------- 700,625 1.000 700,000 LocalMed Series D Cvt. Pfd. 2/9/96 1,126,970 0.010 2,813 Masimo Series D Cvt. Pfd. 8/14/96 908,700 11.000 1,430,000 Masimo Labs Common 8/14/96 1,300 0.010 1,300 Novacept Series D Cvt. Pfd. 3/27/01 1,999,997 4.750 1,999,997 Novatrix Series D Cvt. Pfd. 5/25/00 1,600,460 0.010 7,111 Orthovita ^ Common 3/16/01 2,720,000 5.906 4,016,284 Physician WebLink Common 2/5/97 800,325 3.920 800,317 Common Warrants 10/15/98 0 0.100 10,128 Raven biotechnologies Series D Cvt. Pfd. 12/12/01 2,000,000 1.650 2,000,000 Songbird Hearing Series D Cvt. Pfd. 12/14/01 1,999,999 4.690 1,999,999 Sontra Medical Series A Cvt. Pfd. 9/9/98 800,000 0.270 310,345 8% Promissory Note due 2002 3/26/01 120,000 1.000 120,000 Therion Biologics Common 6/30/93 251,307 8/20/96 669 10/16/96 2,227 ---------- 254,203 3.750 551,183 Sinking Fund Cvt. Pfd 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 3.750 108,716 Series A Cvt. Pfd. 8/20/96 66,231 10/16/96 220,456 ---------- 286,687 3.750 115,950 Units 2/24/99 45,959 6/3/99 45,959 6/22/99 508,082 ---------- 600,000 3.750 600,000
17 H&Q LIFE SCIENCES INVESTORS --------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 2001 (continued)
Acquisition Carrying Value Security Date Cost per Unit Value ---------------------------------- ----------- ---------- -------------- ---------- TherOx Series H Cvt. Pfd. 9/11/00 1,999,997 4.600 1,999,997 Triad Therapeutics Series A Cvt. Pfd. 6/8/99 1,150,000 2.000 2,300,000 Series B Cvt. Pfd. 12/20/00 1,100,000 2.000 1,100,000 Versicor ** Common 6/28/99 284,912 10/29/99 276,872 ----------- 561,784 6.047 718,227 Zyomyx Series B Cvt. Pfd. 2/19/99 800,001 4.000 2,461,540 Series C Cvt. Pfd. 2/19/99 800,000 4.000 1,600,000 ----------- ----------- $46,723,958 $46,223,815 =========== ===========
* Represents 60% of equivalent current market value. ** Represents 75% of equivalent current market value. # Represents 80% of equivalent current market value. ## Represents 85% of equivalent current market value. ^ Represents 90% of equivalent current market value. These accompanying notes are an integral part of these financial statements. 18 H&Q LIFE SCIENCES INVESTORS 30 Rowes Wharf, 4th Floor Boston, Massachusetts 02110-3328 (617) 310-0567 OFFICERS Alan G. Carr, President Kimberley L. Carroll, Treasurer Kerri A. Bisner, Secretary TRUSTEES Alan G. Carr Lawrence S. Lewin Robert P. Mack, M.D. Eric Oddleifson Oleg M. Pohotsky 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 www.hqcm.com -------- Out of concern for the environment and in an effort to reduce Fund expenses, this report is printed on recycled paper. HQHLS-SAR-01