-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EnuuvOywXCes8Zg0zfGw27XrON3xCdTKO/KRNPMrs3gN3gU2IWgTIR3nfP9v7gSu QGbLrrSXAA+aiC4zrsVv1w== 0000950146-98-002018.txt : 19981201 0000950146-98-002018.hdr.sgml : 19981201 ACCESSION NUMBER: 0000950146-98-002018 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: H&Q LIFE SCIENCES INVESTORS CENTRAL INDEX KEY: 0000884121 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 043147016 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-06565 FILM NUMBER: 98761131 BUSINESS ADDRESS: STREET 1: 50 ROWES WHARF STREET 2: HAMBRECHT & QUIST FOURTH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6175740500 MAIL ADDRESS: STREET 1: 50 ROWES WHARF STREET 2: HAMBRECHT & QUIST 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 N-30D 1 H&Q LIFE SCIENCES INVESTORS A/R H&Q LIFE SCIENCES INVESTORS --------------------------- [Telescope Graphic] [Medical Graphic] [Medical Vials Graphic] Annual Report 1 9 9 8 [Alan G. Carr Graphic] To our Shareholders: At fiscal year-end on September 30, 1998, the net asset value of your Fund was $13.71 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:
CY To-Date Quarter Ended Fiscal Year (9 months) 9/30/98 ----------- ---------- ------- Net Asset Value -23.3% -11.3% -15.9% Dow Jones Industrial Average -1.3% -0.8% -12.4% NASDAQ Industrials -25.0% -15.5% -22.7%
To say that the quarter and the fiscal year just ended were extraordinarily difficult and disappointing would be an understatement of the obvious. The performance of small stocks and particularly of life sciences stocks has been disappointing for an extended period of time. Perhaps about the best that can be said is that the Fund did no worse than small companies in general as measured by the NASDAQ Index. Our view of the worldwide economic situation suggests that there are significant earnings risks for large industrial companies. Many years of significantly above-average capital investment has enhanced productivity, and an overall strong economy has resulted in five years of expanding profit margins as measured by the earnings of the Standard & Poors 500 Index of industrial companies. Particularly in the face of declining imports from Pacific Rim countries, Brazil and Russia, the risk is that the world has overcapacity in virtually every industrial and commodity sector. Additionally, those countries that are struggling need to export in order to obtain higher currencies and rebuild their economies. The ability to raise prices in most sectors is nonexistent (with the possible exception of pharmaceuticals and medical products), resulting in virtually nonexistent inflation and an increasing possibility of absolute price deflation. Estimates for the near- and intermediate-term future earnings of the companies that make up the Standard & Poors 500 Index are beginning to come down sharply. Regardless, as investors sought perceived quality and liquidity, large capitalization stocks have been bid up to premiums in valuation not seen for over 25 years. In contrast, small companies, in the aggregate whose earnings growth has generally been more rapid, have been 1 ignored and, by most traditional measures, seem as undervalued both relatively and absolutely as they were in 1974. If, as we believe, valuations of the stocks of large capitalization companies need to adjust to something more "normal", it is of course possible that the capitalizations of small emerging companies would be further negatively impacted. However, we also believe that the environment is most similar to that of the second half of the 1970s where the stocks of small emerging companies were the market leaders for several years on an absolute and relative basis. Additionally, in the past these stocks have responded very positively in most periods following the initiation of Federal Reserve Board action to reduce interest rates, a trend which we believe is likely to continue. We believe that life sciences companies are largely insulated from the financial problems of the rest of the world, and while consumers, whose installment debt is at a near record level, may have to curtail purchasing, they will do so less in healthcare products and services. In the meantime, the pace of scientific discovery and development in biologics, pharmaceuticals, instruments and devices continues at an extraordinary rate. We agree with an increasing number of other observers that, in the early decades of the next century, advances in these technologies will impact our lives and our economy equally as forcefully as electronics and communications have done in the last two decades. While we are cautiously optimistic over the near-term, our enthusiasm for the sectors in which your Fund is invested has never been higher for the longer term. [/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 16, 1998 with respect to our fiscal year ended September 30, 1998, constituted a capital gain dividend for Federal income tax purposes, amounting to $0.28 per share. 2 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 for H&Q Life Sciences Investors. The Annual Meeting was held on May 21, 1998, at 9:00 a.m. There were present in person or by proxy 5,853,944.7056 shares of beneficial interest, or 80.25% of the 7,294,722 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 2001 Annual Meeting of Shareholders. The nominees elected to serve until the year 2001 Annual Meeting were Lawrence S. Lewin and Uwe E. Reinhardt, Ph.D. A total of 5,778,813.5215 shares voted for the election of Mr. Lewin and 75,131.0841 shares abstained; 5,779,991.6215 shares voted for the election of Dr. Reinhardt and 73,953.0841 shares abstained. The Trustees serving until the 1999 Annual Meeting are Patrick J. Allen, 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, 1998. The selection of Arthur Andersen LLP was ratified by a vote of 5,797,490.3858 shares for selection. H&Q LIFE SCIENCES INVESTORS --------------------------- PORTFOLIO As of September 30, 1998 [Horizontal Bar Graphic] [PLOTPOINTS BEGIN] VC Dif Total 0.27% 7.52% 7.79 10.73 20.61 31.34 0 5.36 5.36 2.70 5.46 8.16 1.00 5.00 6.00 2.22 4.76 6.98 6.88 8.91 15.79 0 12.15 12.15 0 6.43 6.43
[PLOTPOINTS END] 3 H&Q LIFE SCIENCES INVESTORS --------------------------- LARGEST HOLDINGS As of September 30, 1998
% of Net Assets --------------- Sepracor 7.56% Catalytica 7.30% Quintiles Transnational 5.36% Transkaryotic Therapies 3.72% Gilead Sciences 3.24% Martek Biosciences 2.79% CareMonitor (Restricted) 2.58% Biomatrix 2.53% IDEXX Laboratories 2.34% Omnicare 2.11%
H&Q LIFE SCIENCES INVESTORS --------------------------- SIGNIFICANT PORTFOLIO TRANSACTIONS Quarter Ended September 30, 1998
Units Held Units Held PURCHASES 6/30/98 9/30/98 - ------------------------------------- ------------ ----------- Centocor 0 25,000 Coulter Pharmaceutical 0 80,000 Cubist Pharmaceuticals 390,683 404,783 Cubist Pharmaceuticals (Restricted) 0 266,666 Dyax (Restricted) Class A Series 5 0 66,055 Emisphere Technologies 0 59,500 INCYTE Pharmaceuticals 0 37,000 Sontra Medical (Restricted) 0 1,149,425 SALES - ------------------------------------- Cell Therapeutics 28,572 0 Dura Pharmaceuticals 36,024 0 Elan Pharmaceuticals 50,000 0 Guidant 17,184 0 Human Genome Sciences 62,000 0 ImmuLogic Pharmaceutical 210,000 0 Omnicare 64,106 59,837 Voxel 113,000 0
4 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, 1998, 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, 1998, 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 $23,817,525 (23.8% 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, 1998, 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 November 9, 1998 5 H&Q LIFE SCIENCES INVESTORS --------------------------- SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998
CONVERTIBLE SECURITIES - 17.5% OF NET ASSETS SHARES VALUE - ----------------- Convertible Preferred - 17.4% ---------------- Agricultural/Environmental Technologies - 0.3% 177,778 EPR (Restricted) Series A* $266,667 Biotechnology - 5.9% 900,000 Exelixis Pharmaceuticals (Restricted) Series B* 1,800,000 100,000 Exelixis Pharmaceuticals (Restricted) Series C* 200,000 22,500 Telik (Restricted) Series G* 1,125,000 2,400 Telik (Restricted) Series I* 120,000 30,920 Therion Biologics (Restricted) Series A* 123,680 28,991 Therion Biologics (Restricted) Sinking Fund* 870 135,135 Tularik (Restricted) Series C* 1,351,350 240,000 Versicor (Restricted) Series C* 1,200,000 Diagnostics - 2.7% 148,423 CytoLogix (Restricted) Series A* 713,306 130,000 Masimo (Restricted) Series D* 1,170,000 1,149,425 Sontra Medical (Restricted) Series A* 800,000 Managed Care - 1.0% 225,989 KVM Technologies (Restricted) Series B (w/wts.)* 1,000,001 Medical Supplies - 2.2% 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 - 5.3% 500,000 AbTox (Restricted) Series F* 5,000 1,088,710 CareMonitor (Restricted) Series A* 1,981,452 329,670 CareMonitor (Restricted) Series B* 599,999 104,152 Dyax (Restricted) Class A Series 1* 567,628 45,000 Dyax (Restricted) Class A Series 3* 245,250 129,080 Dyax (Restricted) Class A Series 4* 703,486 66,055 Dyax (Restricted) Class A Series 5* 360,000 170,213 Vectis (Restricted) Series B* 800,001 ----------- $17,358,690 ----------- PRINCIPAL AMOUNT Convertible Bonds and Notes - 0.1% VALUE ---------- ----------- Medical Specialty - 0.1% $ 120,000 AbTox (Restricted) 12% Promissory Note due 1998 $120,000 ----------- $120,000 ----------- TOTAL CONVERTIBLE SECURITIES (Cost $16,343,435) $17,478,690 -----------
The accompanying notes are an integral part of these financial statements. 6 H&Q LIFE SCIENCES INVESTORS --------------------------- SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998 (continued)
SHARES VALUE - ----------- COMMON STOCKS - 76.1% ------------- Agricultural/Environmental Technologies - 7.5% 516,666 Catalytica* $7,297,907 200,000 Consep* 162,500 75,000 Envirogen* 32,813 50,000 Envirogen Units* 34,375 ---------- $7,527,595 ---------- Biotechnology - 25.4% Biopharmaceuticals - 22.1% 282,621 BioTransplant* $424,100 925 BioTransplant (Restricted) Warrants* 814 25,000 Centocor* 990,625 107,300 Cor Therapeutics* 831,575 80,000 Coulter Pharmaceutical* 1,990,000 404,783 Cubist Pharmaceuticals* 986,659 266,666 Cubist Pharmaceuticals (Restricted) Common* 551,999 133,333 Cubist Pharmaceuticals (Restricted) Warrants* 21,333 163,500 CV Therapeutics* 940,125 24,375 CV Therapeutics (Restricted)* 98,231 150,000 Gilead Sciences* 3,243,750 20,000 MedImmune* 1,295,000 80,000 Neurogen* 1,320,000 30,000 Neuralab (Restricted) Units* 1,200,000 80,000 Oxford GlycoSciences (Restricted)* 148,000 126,315 Pharming Group (Restricted)* 1,592,832 230,000 Ribi ImmunoChem Research* 704,375 60,624 SEQUUS Pharmaceuticals* 583,506 62,500 Synaptic Pharmaceutical* 921,875 146,982 Therion Biologics (Restricted)* 587,928 151,703 Transkaryotic Therapies* 3,640,872 8,035 Transkaryotic Therapies (Restricted) Warrants* 78,181
The accompanying notes are an integral part of these financial statements. 7 H&Q LIFE SCIENCES INVESTORS --------------------------- SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998 (continued)
SHARES VALUE - ----------- Biotechnology - continued -------------- Genomics/Drug Discovery - 3.3% 140,000 Gene Logic* 551,250 37,000 INCYTE Pharmaceuticals* 786,250 80,000 LJL BioSystems* 200,000 307,693 LJL BioSystems (Restricted)* 538,463 150,000 Lynx Therapeutics* 1,200,000 --------- $25,427,743 ----------- Contract Research Organizations - 5.4% 122,500 Quintiles Transnational* $5,359,375 ----------- $5,359,375 ----------- Diagnostics - 5.5% 373,252 Biofield* $699,848 12,500 Biofield (Restricted)* 19,875 332,417 Calypte Biomedical* 560,954 123,576 Cytyc* 1,251,207 98,000 IDEXX Laboratories* 2,339,750 130,000 Masimo Labs (Restricted)* 1,300 123,077 NeoPath* 607,693 ----------- $5,480,627 ----------- Managed Care - 5.0% 40,200 HBO $1,160,775 59,837 Omnicare* 2,109,254 104,000 Orthodontic Centers of America* 1,735,500 ----------- $5,005,529 ----------- Medical Supplies - 4.8% 430,000 EP Med Systems* $1,316,875 130,750 Exogen* 392,250 68,728 KeraVision* 292,094 231,043 Landec* 909,732 10,000 Novoste* 128,750 104,000 Perclose* 1,716,000 ----------- $4,755,701 -----------
The accompanying notes are an integral part of these financial statements. 8 H&Q LIFE SCIENCES INVESTORS --------------------------- SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998 (continued)
SHARES VALUE - ----------- Medical Specialty - 10.4% ------------- 992,900 Bioject Medical Technologies* $1,551,406 65,000 Biomatrix* 2,535,000 118,591 Focal* 1,215,558 200,000 Interpore Cross* 812,500 338,815 Martek Biosciences* 2,795,221 535,500 Bioject Medical Technologies (Restricted) Warrants* 299,880 540,540 Reprogenesis (Restricted)* 1,199,999 ----------- $10,409,564 ----------- Pharmaceuticals/Drug Delivery - 12.1% 43,000 Biovail* $1,158,763 59,500 Emisphere Technologies* 468,563 261,000 Fuisz Technologies* 2,088,000 115,000 Sepracor* 7,561,250 251,666 Vivus* 872,966 ----------- $12,149,542 ----------- TOTAL COMMON STOCKS (Cost $64,923,660) $76,115,676 ----------- TOTAL INVESTMENTS IN SECURITIES (Cost $81,267,095) $93,594,366 =========== PRINCIPAL AMOUNT VALUE - -------------- TEMPORARY CASH INVESTMENTS - 7.7% ----------- $ 3,600,000 Ford Motor Credit Corp., 5.25%, due 10/16/98 $3,591,600 4,100,000 General Electric Capital Corp., 5.51%, due 10/7/98 4,087,449 ---------- TOTAL TEMPORARY CASH INVESTMENTS $7,679,049 ==========
- ------------------ * Non income-producing security (see Notes 1 and 5). The accompanying notes are an integral part of these financial statements. 9 H&Q LIFE SCIENCES INVESTORS --------------------------- BALANCE SHEET SEPTEMBER 30, 1998 ASSETS: Investments in securities, at value (identified cost $81,267,095; see Schedule of Investments) (Notes 1, 3 and 5) $93,594,366 Temporary cash investments, at amortized cost which approximates value (see Schedule of Investments) (Note 1) 7,679,049 ------------ Total investments $101,273,415 Dividends and interest receivable 11,311 Receivable for investments sold 120,000 Prepaid expenses 8,533 ------------ Total assets $101,413,259 ------------ LIABILITIES: Accrued advisory fee $106,703 Accrued other 80,937 Bank payable 1,195,298 ------------ Total liabilities $1,382,938 ------------ NET ASSETS: Shares of beneficial interest, par value $.01 per share, unlimited number of shares authorized, amount paid in on 7,294,722 shares issued and outstanding (Note 1) $85,715,744 Accumulated net realized gain on investments 1,987,306 Net unrealized gain on investments (Note 3) 12,327,271 ------------ Total net assets (equivalent to $13.71 per share based on 7,294,722 shares outstanding) $100,030,321 ============
The accompanying notes are an integral part of these financial statements. 10 H&Q LIFE SCIENCES INVESTORS --------------------------- STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME (Note 1): Dividends $4,764 Interest 131,694 ---------- Total investment income $136,458 EXPENSES: Advisory fees (Note 4) $1,553,695 Shareholder reporting 70,803 Custodian fees 64,493 Accounting and auditing fees 48,308 Trustees' fees and expenses 45,056 Legal fees 24,889 N.Y.S.E. fees 20,548 Transfer agent fees 17,915 Insurance expense 17,148 Other 20,527 ---------- Total expenses 1,883,382 ------------ Net investment (loss) ($1,746,924) ------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investments (Note 1) $3,011,272 Net (decrease) in unrealized gain on investments (31,646,651) ------------- Net (loss) on investments ($28,635,379) ------------- Net (decrease) in net assets resulting from operations ($30,382,303) =============
The accompanying notes are an integral part of these financial statements. 11 H&Q LIFE SCIENCES INVESTORS --------------------------- STATEMENT OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30, 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $120,489 Dividends received 2,763 Operating expenses paid (1,869,318) ------------ Net cash used for operating activities ($1,746,066) ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Sales and maturities of portfolio securities $117,454,807 Purchases of portfolio securities (115,406,455) ------------ Net cash provided by investing activities $2,048,352 ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Cash distributions paid, net ($1,575,109) ------------- Net cash used for financing activities ($1,575,109) ------------- NET (DECREASE) IN CASH ($1,272,823) CASH AT BEGINNING OF YEAR 77,525 ------------- CASH AT END OF YEAR ($1,195,298) ============= 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 ($30,382,303) Net realized (gain) on investments (3,011,272) Net decrease in unrealized gain on investments 31,646,651 Net (increase) in interest and dividends receivable (10,781) Net decrease in prepaids and other receivables 13,746 Net (decrease) in accrued advisory fees and accrued expenses (2,107) ------------- Net cash used for operating activities ($1,746,066) =============
The accompanying notes are an integral part of these financial statements. 12 H&Q LIFE SCIENCES INVESTORS --------------------------- STATEMENTS OF CHANGES IN NET ASSETS
For the years ended September 30, September 30, 1998 1997 ----------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment (loss) $1,746,924) ($1,534,917) Net realized gain on investments 3,011,272 5,271,705 Net increase (decrease) in unrealized gain on investments (31,646,651) 11,448,022 ------------- ------------ Net increase (decrease) in net assets resulting from operations ($30,382,303) $15,184,810 ------------- ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized long-term capital gains ($5,188,917) ($10,949,328) ------------- ------------ CAPITAL SHARE TRANSACTIONS: Value of shares issued in reinvestment of distributions $3,613,808 $4,605,458 ------------- ------------ Total increase (decrease) in net assets ($31,957,412) $8,840,940 NET ASSETS: Beginning of year 131,987,733 123,146,793 ------------- ------------ End of year $100,030,321 $131,987,733 ============= ============
The accompanying notes are an integral part of these financial statements. 13 H&Q LIFE SCIENCES INVESTORS ------------------------------------------------------------------ FINANCIAL HIGHLIGHTS (Selected data for each share of beneficial interest outstanding throughout the period indicated)
For the years ended September 30, -------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Net asset value per share: Beginning of period $18.825 $18.445 $15.179 $11.007 $13.090 ------- ------- ------- ------- ------- Net investment (loss) ($0.239) ($0.072) ($0.220) ($0.184) ($0.144) Net realized and unrealized gain (loss) on investments (4.133) 2.092 3.486 4.356 (1.304) ------- ------- ------- ------- ------- Total increase (decrease) from investment operations ($4.372) $2.020 $3.266 $4.172 ($1.448) ------- ------- ------- ------- ------- Dilutive effect of sale of common stock and related expenses from rights offering -- -- -- -- ( 0.635) ------- ------- ------- ------- ------- Long-term capital gains distribution to shareholders ($0.740) ($1.640) -- -- -- ------- ------- ------- ------- ------- Net asset value per share: End of period $13.713 $18.825 $18.445 $15.179 $11.007 ======= ======= ======= ======= ========== Per share market value: End of period $10.875 $15.125 $15.000 $12.875 $10.125 Total investment return (23.89%) 12.86% 16.50% 27.16% (21.36%) Net assets: End of period $100,030,321 $131,987,733 $123,146,793 $101,338,556 $73,484,287 RATIOS AND SUPPLEMENTAL DATA: Ratio of operating expenses to average net assets 1.62% 1.67% 1.61% 1.83% 1.87% Ratio of net investment (loss) to average net assets (1.50%) (1.38%) (1.25%) (1.57%) (1.23%) Portfolio turnover rate 18.21% 18.94% 19.51% 29.48% 10.59% Average commission rate paid per listed share purchased $0.05 $0.06 $0.07 $0.06 $0.07 Number of shares outstanding at end of period 7,294,722 7,011,362 6,676,420 6,676,420 6,676,420
The accompanying notes are an integral part of these financial statements. 14 H&Q LIFE SCIENCES INVESTORS --------------------------- NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (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. The Fund has adjusted for the effect of certain permanent book/tax differences by reclassifying such differences against capital, in the amount of $1,495,995 for the year ended September 30, 1998. 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. Dividends The current dividend policy is to declare dividends in stock. Stock distributions will automatically be paid in newly issued shares of the Fund unless otherwise instructed 15 H&Q LIFE SCIENCES INVESTORS --------------------------- NOTES TO FINANCIAL STATEMENTS (continued) by the shareholder. The shares will be valued at the lower of net asset value or market price on the payable date. 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. A description of the automatic Dividend Reinvestment Plan may be obtained by calling State Street Bank. 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. (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, 1997 through September 30, 1998 totaled $20,690,877 and $27,440,351, respectively. (3) Tax Basis of Securities At September 30, 1998, the total cost of securities for Federal income tax purposes was $81,267,095. The aggregate gross unrealized gain on securities in which there was an excess of market value over cost was $34,317,304. The aggregate gross unrealized loss on securities in which there was an excess of cost over market value was $21,990,033. The net unrealized gain on securities held by the Fund was $12,327,271. (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 23.8% of the Fund's net assets at September 30, 1998. 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, 1998, as determined by the Board of Trustees of the Fund. 16 H&Q LIFE SCIENCES INVESTORS --------------------------- NOTES TO FINANCIAL STATEMENTS (continued)
Carrying Acquisition 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 1998 2/26/98 40,000 3/11/98 40,000 3/26/98 40,000 ---------- 120,000 1.000 120,000 Biofield*** Common 3/3/95 0 6/29/95 0 ---------- 0 1.590 19,875 Bioject Medical Technologies# Common Warrants 12/9/96 0 0.560 299,880 BioTransplant### Common Warrants 8/18/95 0 0.880 814 CareMonitor Series A Cvt. Pfd. 1/26/96 1,352,603 1.820 1,981,452 Series B Cvt. Pfd. 8/21/97 599,999 1.820 599,999 Cubist Pharmaceuticals*** Common 9/23/98 599,999 2.070 551,999 Warrants 9/23/98 0 0.160 21,333 CV Therapeutics** Common 11/12/96 60,938 4.030 98,231 CytoLogix Series A Cvt. Pfd. 1/13/98 713,306 4.806 713,306 Dyax Class A Series 1 Cvt. Pfd. 6/1/92 250,035 9/11/92 83,293 12/31/92 79,932 ---------- 413,260 5.450 567,628 Class A Series 3 Cvt. Pfd. 10/26/95 90,280 5.450 245,250 Class A Series 4 Cvt. Pfd. 10/30/96 404,279 5.450 703,486 Class A Series 5 Cvt. Pfd. 9/10/98 360,000 5.450 360,000 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 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 KVM Technologies Series B Cvt. Pfd. (w/wts.) 2/19/98 1,000,001 4.425 1,000,001 LJL BioSystems** Common 6/17/97 800,001 1.750 538,463 LocalMed Series D Cvt. Pfd. 2/9/96 1,126,745 4.000 1,125,000 Masimo Series D Cvt. Pfd. 8/14/96 908,700 9.000 1,170,000
17 H&Q LIFE SCIENCES INVESTORS --------------------------- NOTES TO FINANCIAL STATEMENTS (continued)
Carrying Acquisition Value Security Date Cost per Unit Value - ----------------------------------- ------------- -------------- ---------- --------- Masimo Labs Common 8/14/96 1,300 0.010 1,300 Neuralab Units 1/14/98 1,200,000 40.000 1,200,000 Oxford GlycoSciences*** Ordinary Shares 5/26/93 386,915 1.850 148,000 Pharming Group*** Common 8/28/95 864,932 4/25/96 38,730 10/15/97 302,777 --------- 1,206,439 12.610 1,592,832 Reprogenesis Common (w/wts.) 4/25/97 1,199,999 2.220 1,199,999 Sontra Medical Series A Cvt. Pfd. 9/9/98 800,000 0.696 800,000 Telik Series G Cvt. Pfd. 11/7/95 1,125,548 50.000 1,125,000 Series I Cvt. Pfd. 11/12/97 120,000 50.000 120,000 Therion Biologics Common 6/30/93 251,307 8/20/96 669 10/16/96 2,227 --------- 254,203 4.000 587,928 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 Series A Cvt. Pfd. 8/20/96 66,231 10/16/96 220,456 --------- 286,687 4.000 123,680 Transkaryotic Therapies### Common Warrants 11/5/93 200 9.730 78,181 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 Versicor Series C Cvt. Pfd. 12/2/97 1,200,000 5.000 1,200,000 --------- $22,166,830 $23,817,525 =========== =========== ** Represents 70% 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 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 H&Q Life Sciences Investors 50 Rowes Wharf, 4th Floor Boston, Massachusetts 02110-3328 (617) 310-0567 Officers Alan G. Carr, President Kimberley L. Carroll, Treasurer Kerri A. Bisner, Secretary Sheldon A. Jones, Assistant Secretary Trustees Patrick J. Allen Alan G. Carr 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 www.hamquist.com/capital/hqcm --------- Out of concern for the environment and in an effort to reduce Fund expenses, this report is printed on recycled paper. HQHLS-AR-98 -----END PRIVACY-ENHANCED MESSAGE-----