-----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, NVpPuhfapACIFJBu/l3uPYrW35dbXm40feoBoyvzAJfdIxAD+VB2g38D8/jYfnxb 0Z/JHkly136yb2wdfNmBfQ== 0001047469-02-005235.txt : 20021129 0001047469-02-005235.hdr.sgml : 20021128 20021129130253 ACCESSION NUMBER: 0001047469-02-005235 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021129 EFFECTIVENESS DATE: 20021129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: H&Q LIFE SCIENCES INVESTORS CENTRAL INDEX KEY: 0000884121 IRS NUMBER: 043147016 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06565 FILM NUMBER: 02844819 BUSINESS ADDRESS: STREET 1: 30 ROWES WHARF STREET 2: HAMBRECHT & QUIST FOURTH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6175740500 MAIL ADDRESS: STREET 1: 30 ROWES WHARF STREET 2: HAMBRECHT & QUIST 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 N-30D 1 a2095133zn-30d.txt N-30D H&Q LIFE SCIENCES INVESTORS [GRAPHIC] [GRAPHIC] [GRAPHIC] ANNUAL REPORT 2 0 0 2 To our Shareholders: At fiscal year-end on September 30, 2002, the net asset value of your Fund was $15.14 per share. Performance data for the fiscal year and the quarter ended September 30, 2002, compared to the indices, are as follows:
QUARTER ENDED FISCAL YEAR 9/30/02 ----------- ------- Net Asset Value -23.9% -9.7% AMEX Biotech Index -29.0% -8.3% Dow Jones Industrial Average -14.2% -17.9% NASDAQ Industrials -14.2% -21.8% Russell 2000 -10.5% -21.7%
The final quarter of your Fund's fiscal year was one of the worst on record for the general market averages. Your Fund's decline was significant, but overall less severe on a relative basis. We believe we are in a period of no widely held consensus. Some may believe a return to recession is highly likely in an economy of excess capacity worldwide, nervous and indebted consumers, a possible real estate bubble, war risk, and potential deflation, an outlook not fully reflected in security prices. Others look at the correction in equity prices of the last few years, including those of companies leading the world's strongest economy, no meaningful inflation, and historically low interest rates and wonder why stocks shouldn't be bought. They may believe the U.S. economy has always rebounded in the past and will again. We espouse neither of these extremes, but we do believe moderation of this polarization of sentiment may be required to set the foundation of the next bull market. We are encouraged, however, that within the context of the overall market, a positive consensus does seem to be developing toward life sciences companies. Through all the recent turmoil, these companies have, in our judgment, continued to invent and develop new innovative products with exciting potential to enhance diagnosis and therapy. The number and therapeutic potential of products heading for FDA approval in 1 the next year or so is inspiring. In our view, many of the sponsoring companies have reasonable business plans (unlike some of the "dotcoms" of a few years ago). Further, we believe that there are no telecom-like over capacity issues here. In our view, these new products, intended to improve the human condition, will largely generate their own demand. We believe that recognition of these developments is reflected in the better relative performance of the sector in the third quarter of 2002 and is likely to continue. We are cautiously adding to or initiating positions in the stocks of the more attractive of these companies, which may, over time, reduce our cash position. Many large investment firms have announced significant layoffs and staff reductions. In the first quarter, we made a significant addition of a very experienced staff member as we continue to build for the future. As a private company owned by its management, Hambrecht & Quist Capital Management LLC, your Fund's adviser, has the ability to take a longer-term view and build its most important asset, its people. The corporate governance, accounting and security analysts controversies have clearly had depressing affects on stock prices. We wonder if good analysis might have uncovered a lot of these controversies earlier; perhaps not as to the accounting issues, which, in our view are largely rooted in the tax code. As portfolio managers, we have long believed that one of our foremost duties was the analysis of analysts, including our own, and especially those who work for sell-side brokers and investment bankers. Perhaps the recent long bull market made investors feel "entitled" to stock profits, and able to blame others for their losses. We do not believe we are "entitled" to anything more than the opportunity to use our energy and talent to find investments likely to yield long-term profit growth. /s/ Alan G. Carr /s/ Daniel R. Omstead Alan G. Carr Daniel R. Omstead President Emeritus President 2 H&Q LIFE SCIENCES INVESTORS LARGEST HOLDINGS AS OF SEPTEMBER 30, 2002
% OF NET ASSETS --------------- Gilead Sciences 6.38% Martek Biosciences 3.52% CV Therapeutics 3.10% Celgene 2.99% Transkaryotic Therapies 2.42% Telik 2.33% Triad Therapeutics (Restricted) 2.16% CardioNet (Restricted) 2.03% IDEXX Laboratories 1.92% Adolor 1.84%
H&Q LIFE SCIENCES INVESTORS SIGNIFICANT PORTFOLIO TRANSACTIONS QUARTER ENDED SEPTEMBER 30, 2002
UNITS HELD UNITS HELD PURCHASES 6/30/02 9/30/02 - --------- ---------- ---------- Adolor 155,320 206,800 Corixa 145,071 275,126 Exelixis 311,400 489,400 IVAX 103,200 143,200 Lexicon Genetics 52,000 74,000 WebMD 269,000 303,000 Zyomyx (Restricted) Series E 0 400,000 SALES - ----- ATS Medical 254,546 0 Bioject Medical Technologies 107,100 0 Curis 59,000 0
3 H&Q LIFE SCIENCES INVESTORS PORTFOLIO AS OF SEPTEMBER 30, 2002 [CHART]
TOTAL VENTURE DIFFERENCE ----- ------- ---------- AGRICULTURE/ENVIRONMENTAL 2.00% 1.90% 0.10% BIOTECHNOLOGY 47.00% 11.60% 35.40% CROs 0.40% 0.00% 0.40% DIAGNOSTICS 7.00% 4.30% 2.80% HC INFORMATION SERVICES 3.30% 2.30% 0.90% MEDICAL SPECIALTY 13.00% 6.70% 6.30% MEDICAL SUPPLIES 2.00% 1.40% 0.60% PHARMACEUTICALS 5.40% 2.80% 2.60% LIQUID ASSETS 19.90% 0.00% 19.90%
RESTRICTED ANNUAL MEETING REPORT The Annual Meeting was held on June 25, 2002 at 9:00 a.m. The shareholders voted on the following items and the resulting votes are presented below. (1) To elect two Trustees of the Fund to hold office for a term of three years or until their respective successors shall have been duly elected and qualified.
FOR WITHHELD BROKER NON-VOTES --- -------- ---------------- Robert P. Mack, M.D. 8,568,583 126,887 0 Eric Oddleifson 8,574,178 121,292 0 Oleg M. Pohotsky 8,507,255 188,215 0
The nominees were elected to serve until the 2005 Annual Meeting of Shareholders. The Trustees serving until the 2003 Annual Meeting are Alan G. Carr and Henri A. Termeer. The Trustees serving until the 2004 Annual Meeting are Lawrence S. Lewin and Uwe E. Reinhardt, Ph.D. (2) To approve a new investment advisory agreement between the Fund and Hambrecht & Quist Capital Management LLC. Shareholders overwhelmingly approved the new investment advisory agreement.
FOR AGAINST ABSTAIN BROKER NON-VOTES --- ------- ------- ---------------- 8,481,355 121,786 92,329 0
(3) To ratify the selection of PricewaterhouseCoopers LLP as the Fund's independent accountants for the fiscal year ended September 30, 2002. Shareholders overwhelmingly ratified the selection of the Independent Public Accountants.
FOR AGAINST ABSTAIN BROKER NON-VOTES --- ------- ------- ---------------- 8,592,240 49,084 54,146 0
4 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES AND SHAREHOLDERS OF H&Q LIFE SCIENCES INVESTORS: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations, of changes in net assets and of cash flows and the financial highlights present fairly, in all material respects, the financial position of H&Q Life Sciences Investors (the OFundO) at September 30, 2002, and the results of its operations, the changes in its net assets, its cash flows and the financial highlights for the two years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 2002 by correspondence with the custodian, provide a reasonable basis for our opinion. The financial statements of the Fund as of September 30, 2000 and for the three years then ended were audited by other independent accountants whose report dated November 3, 2000 expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP Boston, Massachusetts November 19, 2002 5 H&Q LIFE SCIENCES INVESTORS SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2002
CONVERTIBLE SECURITIES - 30.6% OF NET ASSETS SHARES CONVERTIBLE PREFERRED (RESTRICTED) - 28.7% VALUE - ------------ ---------- AGRICULTURAL/ENVIRONMENTAL TECHNOLOGIES - 1.8% 250,000 Ceres Series C* $1,500,000 18,296 Ceres Series C-1*# 109,776 174,200 Ceres Series D*# 1,045,200 177,778 EPR Series A* 266,667 BIOTECHNOLOGY - 11.1% 266,667 ACADIA Pharmaceuticals Series E* 1,333,335 634,921 Agensys Series C* 2,000,001 1,587,302 Agilix Series B* 2,000,001 566,958 Avalon Pharmaceuticals Series B* 2,000,001 1,212,121 Raven biotechnologies Series B*^ 2,000,000 30,920 Therion Biologics Series A* 115,950 160,000 Therion Biologics Series B*# 600,000 271,808 Therion Biologics Series C*# 1,019,280 28,991 Therion Biologics Sinking Fund* 108,716 1,150,000 Triad Therapeutics Series A* 2,300,000 550,000 Triad Therapeutics Series B* 1,100,000 615,385 Zyomyx Series B* 1,230,770 400,000 Zyomyx Series C* 800,000 400,000 Zyomyx Series E* 800,000 DIAGNOSTICS - 3.2% 914,286 CardioNet Series C*^ 3,200,001 322,168 CytoLogix Series A*^ 265,917 151,420 CytoLogix Series B*#^ 124,982 130,000 Masimo Series D* 1,430,000 HEALTHCARE INFORMATION SERVICES - 1.8% 225,989 KVM Technologies Series B*# 2,260 3,589,744 PHT Series D*^ 2,800,000 MEDICAL SPECIALTY - 6.6% 500,000 AbTox Series F* 5,000 2,941,176 Concentric Medical Series B* 2,000,000 1,088,436 Omnisonics Medical Technologies Series B* 1,600,001 689,679 Senomyx Series E* 2,000,000 426,439 Songbird Hearing Series D* 4,264 434,782 TherOx Series H* 1,999,997 546,875 VNUS Medical Technologies Series E* 2,800,000 MEDICAL SUPPLIES - 1.4% 281,250 LocalMed Series D* 2,812 421,052 Novacept Series G*# 1,452,629 231,884 Novacept Series H* 800,000 PHARMACEUTICALS/DRUG DELIVERY - 2.8% 932,488 Galileo Laboratories Series F* 1,999,991
The accompanying notes are an integral part of these financial statements. 6
SHARES CONVERTIBLE SECURITIES - CONTINUED VALUE - ------------ ----------- 141,177 Theravance Series C* $1,270,593 133,334 Theravance Series D-1* 1,200,006 ----------- $45,288,150 ----------- PRINCIPAL AMOUNT CONVERTIBLE BONDS AND NOTES - 1.9% - ------------ BIOTECHNOLOGY - 1.7% $4,200,000 CuraGen 6% Cvt. Deb. due 2007ii $2,677,500 DIAGNOSTICS - 0.1% 141,757 CytoLogix (Restricted) 6.75% Cvt. Note, due 2003*^ 141,757 HEALTHCARE INFORMATION SERVICES - 0.0% 1,053,262 FitForAll.com (Restricted) 10% Prom. Note*# 105 950,654 KVM Technologies (Restricted) Adj. Cvt. Demand Note*# 9,507 MEDICAL SPECIALTY - 0.1% 120,000 AbTox (Restricted) 12% Prom. Note* 120,000 ----------- $2,948,869 ----------- TOTAL CONVERTIBLE SECURITIES (Cost $58,429,234) $48,237,019 ----------- SHARES COMMON STOCKS - 49.5% - ------------ AGRICULTURAL/ENVIRONMENTAL TECHNOLOGIES - 0.1% 57,032 Catalytica Energy Systems* $197,901 20,833 Envirogen* 10,833 ----------- 208,734 ----------- BIOTECHNOLOGY - 34.3% BIOPHARMACEUTICALS - 27.0% 206,800 Adolor* 2,899,336 282,620 BioTransplant* 491,759 3,297 BioTransplant (Restricted) Warrants (expire 8/12/04)* 0 13,500 BioTransplant (Restricted) Warrants (expire 10/31/04)* 0 925 BioTransplant (Restricted) Warrants (expire 8/15/05)* 944 279,600 Celgene* 4,708,464 36,000 Cephalon* 1,469,520 275,126 Corixa* 1,741,548 22,109 Corixa Warrants (expire 8/14/07)* 0 407,449 Cubist Pharmaceuticals* 2,082,064 133,333 Cubist Pharmaceuticals (Restricted) Warrants (expire 9/23/03)* 324,133 233,484 CV Therapeutics* 4,882,150 106,000 Genzyme* 2,184,660 300,000 Gilead Sciences* 10,059,000
The accompanying notes are an integral part of these financial statements. 7
SHARES BIOTECHNOLOGY - CONTINUED VALUE - ------------ ---------- 120,000 MedImmune* $2,510,400 146,982 Therion Biologics (Restricted)* 551,182 117,638 Transkaryotic Therapies* 3,812,648 135,135 Tularik* 925,675 278,776 Versicor* 2,375,172 12,464 Versicor (Restricted) Warrants (expire 8/3/05)* 37,891 76,000 Vertex Pharmaceuticals* 1,405,240 GENOMICS/DRUG DISCOVERY - 7.3% 198,000 Abgenix* 1,285,020 298,000 deCODE Genetics* 655,600 306,463 Dyax* 594,538 489,400 Exelixis* 2,422,530 74,000 Lexicon Genetics* 296,740 794,000 Lynx Therapeutics* 539,920 257,600 Lynx Therapeutics Warrants (expire 4/29/07)* 0 116,307 Molecular Devices* 1,455,001 411,400 Rigel Pharmaceuticals* 658,240 296,428 Telik* 3,669,779 ---------- 54,039,154 ---------- CONTRACT RESEARCH ORGANIZATIONS - 0.4% 61,500 Quintiles Transnational* 584,865 ---------- 584,865 ---------- DIAGNOSTICS - 3.8% 356,249 Biofield* 142,500 400,000 Biofield (Restricted)* 128,000 109,956 Cytyc* 1,178,728 9,000 Digene* 71,100 98,000 IDEXX Laboratories* 3,032,904 130,000 Masimo Labs (Restricted)* 1,300 457,081 Sontra Medical (Restricted)* 1,426,093 ---------- 5,980,625 ---------- HEALTHCARE INFORMATION SERVICES - 1.5% 204,139 Syntiro Healthcare Services (Restricted)* 800,317 101,283 Syntiro Healthcare Services (Restricted) Warrants (expire 10/15/04)* 10,128 303,000 WebMD* 1,530,150 ---------- 2,340,595 ----------
The accompanying notes are an integral part of these financial statements. 8
SHARES MEDICAL SPECIALTY - 6.3% VALUE - ------------ ------------ 67,898 Biopure Class A* $ 237,643 5,555 Biopure (Restricted) Warrants (expire 8/4/03)* 0 666,666 Endocardial Solutions* 2,153,331 132,000 Endologix* 132,000 338,815 Martek Biosciences* 5,549,790 680,000 Orthovita* 1,870,000 ------------ 9,942,764 ------------ MEDICAL SUPPLIES - 0.5% 430,000 EP MedSystems* 860,000 ------------ 860,000 ------------ PHARMACEUTICALS/DRUG DELIVERY - 2.6% 125,000 Aradigm* 262,500 143,200 IVAX* 1,757,064 30,000 Teva Pharmaceutical Industries ADR 2,010,000 ------------ 4,029,564 ------------ TOTAL COMMON STOCKS (Cost $65,553,158) $77,986,301 ------------ PRINCIPAL AMOUNT - ------------ TEMPORARY CASH INVESTMENTS - 19.4% $7,000,000 American Express Credit, 1.74%, due 10/18/02 $6,994,248 8,000,000 General Electric Capital Corp., 1.75%, due 10/21/02 7,992,222 4,600,000 U.S. Treasury Bill, 1.60%, due 10/17/02 4,596,729 11,000,000 U.S. Treasury Bill, 1.64%, due 10/3/02 10,998,998 ------------ TOTAL TEMPORARY CASH INVESTMENTS (Cost $30,582,197) $30,582,197 ------------ TOTAL INVESTMENTS IN SECURITIES (Cost $154,564,589) $156,805,517 ============
- ---------- * Non income-producing security. # With warrants attached. ^ Affiliated issuers in which the Fund holds 5% or more of the voting securities (Total Market Value of $8,532,657). ii Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. + Issuer filed for bankruptcy. ADR - American Depository Receipt. The accompanying notes are an integral part of these financial statements. 9 H&Q LIFE SCIENCES INVESTORS STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 2002 ASSETS: Investments, at value (identified cost $154,564,589; see Schedule of Investments) $156,805,517 Cash 115,305 Receivable for investments sold 953,064 Interest receivable 41,300 Prepaid expenses 18,966 ------------ Total assets $157,934,152 ------------ LIABILITIES: Accrued advisory fee $195,174 Accrued trustees' fees 22,500 Accrued other 131,028 ------------ Total liabilities $348,702 ------------ NET ASSETS $157,585,450 ============ SOURCES OF NET ASSETS: Shares of beneficial interest, par value $.01 per share, unlimited number of shares authorized, amount paid in on 10,409,622 shares issued and outstanding $145,332,696 Accumulated net realized gain on investments 10,011,826 Net unrealized gain on investments 2,240,928 ------------ Total net assets (equivalent to $15.14 per share based on 10,409,622 shares outstanding) $157,585,450 ============
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, 2002 INVESTMENT INCOME: Dividend income (net of foreign taxes of $1,758) $8,226 Interest income 924,479 Other income 2,226 ---------- Total investment income $934,931 EXPENSES: Advisory fees $2,739,974 Legal fees 159,184 Trustees' fees and expenses 140,024 Shareholder reporting 99,760 Accounting and auditing fees 68,232 Custodian fees 66,833 Transfer agent fees 50,011 Other 127,495 ---------- Total expenses 3,451,513 ------------ Net investment loss ($2,516,582) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments $21,763,821 Decrease in net unrealized gain on investments (69,655,392) ------------ Net loss on investments ($47,891,571) ------------ Net decrease in net assets resulting from operations ($50,408,153) ============
The accompanying notes are an integral part of these financial statements. 11 H&Q LIFE SCIENCES INVESTORS STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS: Net investment loss ($2,516,582) ($1,942,140) Net realized gain on investments 21,763,821 43,069,447 Decrease in net unrealized gain on investments (69,655,392) (136,156,505) ------------ ------------ Net decrease in net assets resulting from operations ($50,408,153) ($95,029,198) ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized capital gains ($27,512,988) ($33,130,936) ------------ ------------ CAPITAL SHARE TRANSACTIONS: Value of shares issued in reinvestment of distributions (1,090,624 and 1,233,846 shares, respectively) $20,343,991 $25,051,378 ------------ ------------ Total decrease in net assets ($57,577,150) ($103,108,756) NET ASSETS: Beginning of year 215,162,600 318,271,356 ------------ ------------ End of year $157,585,450 $215,162,600 ============ ============
The accompanying notes are an integral part of these financial statements. 12 H&Q LIFE SCIENCES INVESTORS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30, 2002 CASH FLOWS USED FOR OPERATING ACTIVITIES: Interest and other income received $859,501 Dividends received 8,226 Operating expenses paid (3,511,845) ------------ Net cash used for operating activities ($2,644,118) ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of portfolio securities ($29,777,878) Net sales of temporary cash investments 308,774 Sales and maturities of portfolio securities 39,045,419 ------------ Net cash provided from investing activities $9,576,315 ------------ CASH FLOWS USED FOR FINANCING ACTIVITIES: Cash distributions paid, net ($7,168,997) ------------ Net cash used for financing activities ($7,168,997) ------------ NET DECREASE IN CASH ($236,800) CASH AT BEGINNING OF YEAR 352,105 ------------ CASH AT END OF YEAR $115,305 ============ 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 ($50,408,153) Accretion of discount (67,204) Net realized gain on investments (21,763,821) Decrease in net unrealized gain on investments 69,655,392 Decrease in accrued expenses (58,467) Increase in prepaid expenses (1,865) ------------ Net cash used for operating activities ($2,644,118) ============
Noncash financing activities not included herein consist of stock distributions of $20,343,991. 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 YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------------------------------- 2002 (1) 2001 2000 1999 1998 -------- -------- -------- -------- -------- Net asset value per share: Beginning of year $23.090 $39.365 $17.804 $13.713 $18.825 ------- ------- ------- ------- ------- Net investment loss ($0.255)(2) ($0.221)(2) ($0.300) ($0.205) ($0.239) Net realized and unrealized gain (loss) on investments (4.835) (12.134) 24.756 4.576 (4.133) ------- ------- ------- ------- ------- Total increase (decrease) from investment operations ($5.090) ($12.355) $24.456 $4.371 ($4.372) ------- ------- ------- ------- ------- Capital gains distributions to shareholders ($2.860) ($3.920) ($2.895) ($0.280) ($0.740) ------- ------- ------- ------- ------- Net asset value per share: End of year $15.140 $23.090 $39.365 $17.804 $13.713 ======= ======= ======= ======= ======= Per share market value: End of year $11.790 $18.450 $31.313 $14.125 $10.875 Total investment return at market value (25.82%) (29.07%) 155.36% 32.90% (23.89%) RATIOS AND SUPPLEMENTAL DATA: Net assets at end of year $157,585,450 $215,162,600 $318,271,356 $131,562,804 $100,030,321 Ratio of operating expenses to average net assets 1.71% 1.58% 1.51% 1.60% 1.62% Ratio of net investment loss to average net assets (1.25%) (0.83%) (1.06%) (1.30%) (1.50%) Portfolio turnover rate 17.36% 16.49% 12.70% 23.49% 18.21% Number of shares outstanding at end of year 10,409,622 9,318,998 8,085,152 7,389,487 7,294,722
(1) The Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discounts and amortizing premiums on all debt securities. The effect of this change for the year ended September 30, 2002 was a decrease in net investment loss per share of $.006, an increase in net realized and unrealized loss on investments per share of $.006 and a decrease in the ratio of net investment loss to average net assets from (1.28%) to (1.25%). Per share data and ratios for the periods prior to October 1, 2001 have not been restated to reflect this change in presentation. (2) Net investment loss per share has been computed using average shares outstanding. The accompanying notes are an integral part of these financial statements. 14 H&Q LIFE SCIENCES INVESTORS NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (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 United States of America. INVESTMENT SECURITIES 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 the 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 4, investments for which market quotations are not readily available are valued at fair value as determined in good faith by the Trustees of the Fund. Temporary cash investments with maturity of 60 days or less are valued at amortized cost. Investment transactions are recorded on a trade date basis. Gains and losses from sales of investments are recorded using the "identified cost" method. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, effective October 1, 2001 and began accreting discounts and amortizing premiums on all debt securities. Prior to this date, the Fund did not accrete discounts or amortize premiums on long-term debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Fund, but resulted in an increase in cost of securities and a corresponding decrease in net unrealized appreciation of $90,800 based on securities held at September 30, 2001. The effect of this change for the fiscal year ended September 30, 2002 was to decrease net investment loss by $67,204 with a corresponding decrease in the change in net unrealized gain on investments of $67,204. 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 or excise tax provision is required. DISTRIBUTIONS The Fund records all distributions to shareholders from net investment income, if any, 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 the net operating loss against capital, in the amount of $2,425,782, for the year ended September 30, 2002. This adjustment has no effect on the Fund's net assets, net investment loss or net realized gain. The calculation of net investment loss per share in the financial highlights excludes this adjustment. At September 30, 2002, the Fund's 15 undistributed net realized gain on a tax basis was $9,358,250 and differs from accumulated net realized gain on investments due to the timing of recording certain gains. Pursuant to Section 852 of the Internal Revenue Code, the Fund has designated $27,512,988 as a long-term capital gain distribution for its taxable year ended September 30, 2002. 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. Pursuant to an SEC exemptive order, 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 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. STATEMENT OF CASH FLOWS The cash amount shown in the Statement of Cash Flows is the amount included in the Fund's Statement of Assets and Liabilities and represents cash on hand at its custodian and does not include temporary cash investments at September 30, 2002. (2) SECURITIES TRANSACTIONS The aggregate cost of purchases and proceeds from sales of investment securities (other than temporary cash investments) for the year ended September 30, 2002 totaled $29,339,443 and $38,513,548, respectively. At September 30, 2002, the total cost of securities for Federal income tax purposes was $154,564,589. The net unrealized gain on securities held by the Fund was $2,240,928, including gross unrealized gain of $36,342,720 and gross unrealized loss of $34,101,792. (3) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Effective July 1, 2002, the Fund has entered into an Investment Advisory Agreement (the Advisory Agreement) with Hambrecht & Quist Capital Management LLC (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%. The terms of the agreement prior to July 1, 2002 with the former advisor, Hambrecht & Quist Capital Management Incorporated, an indirect wholly-owned subsidiary of J.P. Morgan Chase & Co., were substantially identical to those in the current Advisory Agreement. Certain officers and Trustees of the Fund are also officers of the Adviser. Trustees who are not affiliates of the Adviser receive an annual fee of $15,000 plus $1,500 for each meeting attended. (4) 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 31% of the Fund's net assets at September 30, 2002. 16 The value of the venture capital and other restricted securities is determined in good faith by the 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. In fiscal 2001, the Fund sold a restricted security subject to future contingent payments whose estimated value of $932,746 at September 30, 2002 has also been determined by the Trustees and which is included in Receivable for Investments Sold in the Statement of Assets and Liabilities. 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, 2002, as determined by the Trustees of the Fund.
ACQUISITION CARRYING VALUE SECURITY DATE COST PER UNIT VALUE - ------------------------------------ ------------------ ----------- -------------- ---------- AbTox Series F Cvt. Pfd.* 3/7/97 $1,140,920 $0.010 $5,000 12% Promissory Note 2/26/98 - 3/26/98 120,000 1.000 120,000 ACADIA Pharmaceuticals Series E Cvt. Pfd. 5/2/00 2,000,208 5.000 1,333,335 Agensys Series C Cvt. Pfd.* 2/14/02 2,003,383 3.150 2,000,001 Agilix Series B Cvt. Pfd. 11/8/01 2,009,507 1.260 2,000,001 Avalon Pharmaceuticals Series B Cvt. Pfd. 10/22/01 2,005,767 3.528 2,000,001 Biofield Common 12/15/00 201,989 0.320 128,000 Biopure Common Warrants (expire 8/4/03) 5/13/99 0 0.000 0 BioTransplant Common Warrants (expire 8/12/04) 8/12/94 0 0.000 0 Common Warrants (expire 10/31/04) 10/31/94 0 0.000 0 Common Warrants (expire 8/15/05) 8/18/95 0 1.021 944 CardioNet^ Series C Cvt. Pfd. 5/3/01 3,215,883 3.500 3,200,001 Ceres Series C Cvt. Pfd. 12/23/98 1,000,875 6.000 1,500,000 Series C-1 Cvt. Pfd.* 1/4/01 74,325 6.000 109,776 Series D Cvt. Pfd.* 3/14/01 1,046,778 6.000 1,045,200 Concentric Medical Series B Cvt. Pfd.* 5/7/02 2,018,704 0.680 2,000,000 Cubist Pharmaceuticals Common Warrants (expire 9/23/03) 9/23/98 235 2.431 324,133 CytoLogix^ Series A Cvt. Pfd. 1/13/98 - 7/21/99 1,552,564 0.825 265,917 Series B Cvt. Pfd.* 1/11/01 766,748 0.825 124,982 Cvt. Note 5/29/02 141,757 1.000 141,757 EPR Series A Cvt. Pfd. 3/9/94 800,331 1.500 266,667 FitForAll.com 10% Promissory Note* 2/22/00 - 9/18/00 1,073,999 0.000 105 Galileo Laboratories Series F Cvt. Pfd. 8/18/00 2,001,546 2.145 1,999,991 KVM Technologies^ Series B Cvt. Pfd.* 2/19/98 1,001,321 0.010 2,260 Adj. Cvt. Demand Note* 6/21/99 - 7/31/01 951,279 0.010 9,507
17
ACQUISITION CARRYING VALUE SECURITY DATE COST PER UNIT VALUE - ------------------------------------ ------------------ ----------- -------------- ----------- LocalMed Series D Cvt. Pfd. 2/9/96 $1,126,970 $0.010 $2,812 Masimo Series D Cvt. Pfd. 8/14/96 910,027 11.000 1,430,000 Masimo Labs Common 8/14/96 0 0.010 1,300 Novacept Series G Cvt. Pfd.* 3/27/01 2,001,065 3.450 1,452,629 Series H Cvt. Pfd. 4/25/02 800,000 3.450 800,000 Omnisonics Medical Technologies^ Series B Cvt. Pfd. 5/24/01 1,602,982 1.470 1,600,001 PHT^ Series D Cvt. Pfd. 7/23/01 2,800,003 0.780 2,800,000 Raven biotechnologies^ Series B Cvt. Pfd. 12/12/00 2,000,555 1.650 2,000,000 Senomyx Series E Cvt. Pfd. 2/19/02 2,002,601 2.900 2,000,000 Songbird Hearing Series D Cvt. Pfd. 12/14/00 2,003,239 0.010 4,264 Sontra Medical^ Common 6/24/02 1,119,803 3.120 1,426,093 Syntiro Healthcare Services Common 2/5/97 800,325 3.920 800,317 Warrants (expire 10/15/04) 10/15/98 0 0.100 10,128 Theravance Series C Cvt. Pfd. 2/5/99 1,200,124 9.000 1,270,593 Series D-1 Cvt. Pfd. 8/28/00 1,200,606 9.000 1,200,006 Therion Biologics Common 6/30/93 - 10/16/96 251,642 3.750 551,182 Series A Cvt. Pfd. 8/20/96 - 10/16/96 289,847 3.750 115,950 Series B Cvt. Pfd.* 2/24/99 - 6/22/99 600,609 3.750 600,000 Series C Cvt. Pfd.* 9/26/01 1,019,284 3.750 1,019,280 Sinking Fund Cvt. Pfd 10/17/94 - 4/3/96 582,505 3.750 108,716 TherOx Series H Cvt. Pfd. 9/11/00 2,001,249 4.600 1,999,997 Triad Therapeutics Series A Cvt. Pfd. 6/8/99 1,150,860 2.000 2,300,000 Series B Cvt. Pfd. 12/20/00 1,102,090 2.000 1,100,000 Versicor Warrants (expire 8/3/05) 6/28/99 905 3.040 37,891 VNUS Medical Technologies Series E Cvt. Pfd. 8/20/01 2,800,000 5.120 2,800,000 Zyomyx Series B Cvt. Pfd. 2/19/99 800,550 2.000 1,230,770 Series C Cvt. Pfd. 3/2/00 800,000 2.000 800,000 Series E Cvt. Pfd. 7/22/02 800,000 2.000 800,000 ----------- ----------- $56,895,960 $48,839,507 =========== ===========
* With warrants attached. ^ Affiliated issuers. 18 H&Q LIFE SCIENCES INVESTORS TRUSTEES H & Q LIFE SCIENCES INVESTORS 30 ROWES WHARF, SUITE 430 BOSTON, MASSACHUSETTS 02110 (617) 772-8500
NUMBER OF POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S) PORTFOLIOS IN FUND NAME, ADDRESS(1) FUND, TERM OF OFFICE(2) AND DURING PAST 5 YEARS AND COMPLEX OVERSEEN AND AGE LENGTH OF TIME SERVED OTHER DIRECTORSHIPS HELD BY TRUSTEE - ----------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES: Lawrence S. Lewin Trustee (since 1992) and Executive Consultant. Formerly Chief 2 63 Chairman (since 2000) Executive Officer (from 1970-1999) of The Lewin Group (healthcare public policy and management consulting), a subsidiary of Quintiles Transnational Corp. Robert P. Mack Trustee (since 1992) Consultant in Orthopedic Surgery to 2 67 Orthopedic Associates of Aspen (since 2001). Formerly Orthopedic Surgeon (from 1996-1998) at the Steadman- Hawkins Orthopedic Clinic and (from 1977-1996) at the Denver Orthopedic Clinic; and Director of the Department of Orthopedic Surgery at Metropolitan General Hospital and Assistant Professor of Orthopedics at Case Western Reserve University, Cleveland, OH (from 1968-1977). Eric Oddleifson Trustee (since 1992) Partner (since 2001) and Managing 2 67 Director (from 1997-2000) of Renewable Resources LLC (forest properties investment). Formerly Managing Director (from 1995-1997) of UBS Asset Management (forest properties investment); and President, Director and Chief Investment Officer (from 1984-1995) of Resource Investments, Inc. (forest properties investment). Oleg M. Pohotsky Trustee (since 2000) Most recently, Senior Vice President 2 55 (from 1991-2001) of FAC/Equities, a division of First Albany Corporation (investment bank). Formerly General Partner (from 1989-1991) of Strategic Capital Associates (financial advisory firm); and General Partner (from 1986-1989) of Capital Growth Partners (private mezzanine capital institutional investment partnership).
19
NUMBER OF POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S) PORTFOLIOS IN FUND NAME, ADDRESS(1) FUND, TERM OF OFFICE(2) AND DURING PAST 5 YEARS AND COMPLEX OVERSEEN AND AGE LENGTH OF TIME SERVED OTHER DIRECTORSHIPS HELD BY TRUSTEE - ----------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES: (CONTINUED) Uwe E. Reinhardt, Trustee (since 1992) Professor of Economics (since 1968) 2 Ph.D. at Princeton University. Director (from 64 2000) of Triad Hospitals; Boston Scientific (since 2002); Amerigroup since (2002); Duke University (since 2001); The Duke University Health System (since 2001) and the National Bureau of Economic Research (since 2002). Henri A. Termeer Trustee (since 1992) Chairman (since 1988), Chief 2 55 Executive Officer (since 1985) and President (since 1983) of Genzyme Corporation (human healthcare products); Director (since 1987) of ABIOMED, Inc.; Director (since 1992) of AutoImmune, Inc.; Director (from 1993-2002) of Genzyme Transgenics; and Director (since 1996) of Diacrin, Inc. INTERESTED TRUSTEES: Alan G. Carr(3) President Emeritus Chairman (since July 2002) of 2 68 (since 2001), President Hambrecht & Quist Capital (from 1987-2001) and Management LLC; Chairman Trustee (since 1992) (from 2001-July 2002), President (from 1992-2001), Director (from 1986 to July 2002) and Senior Vice President (from 1986-1992) of Hambrecht & Quist Capital Management, Inc.; and Managing Director (from 1992-1999) of Hambrecht & Quist Group.
(1) The address for each Trustee is c/o the Fund at the Fund's address as set forth above. (2) Each Trustee currently is serving a three year term. (3) Trustee considered to be an "interested person" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act") through position or affiliation with Hambrecht & Quist Capital Management LLC, the Fund's investment adviser. 20 H&Q LIFE SCIENCES INVESTORS OFFICERS
POSITION(S) HELD WITH NAME, ADDRESS(1) FUND, TERM OF OFFICE(2) AND AND AGE LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS - ----------------------------------------------------------------------------------------------------------------- OFFICERS: Alan G. Carr President Emeritus (since 2001) Manager (since July 2002) of Hambrecht & 68 Quist Capital Management LLC; Chairman (from 2001-July 2002), President (from 1992-2001), Director (From 1986 to July 2002) and Senior Vice President (from 1986-1992) of Hambrecht & Quist Capital Management, Inc.; Managing Director (from 1992-1999) of Hambrecht & Quist Group; and President Emeritus (since 2001), President (from 1987-2001) and Trustee (since 1987) of H&Q Healthcare Investors (HQH) and (since 1992) of H&Q Life Sciences Investors (HQL). Daniel R. Omstead, President (since 2001) Manager (since July 2002) of Hambrecht & ENGSCD Quist Capital Management LLC; President 49 of HQH and of HQL (since 2001); President, Chief Executive Officer (from 2001 to July 2002) and Managing Director (from 2000 to July 2002) of Hambrecht & Quist Capital Management Inc.; formerly President and Chief Executive Officer (from 1997-2000) and Chief Operating Officer (1997) of Reprogenesis, Inc. Kimberley L. Carroll Treasurer (since 1992) Treasurer and Chief Financial Officer 46 (since 1987) of HQH and (since 1992) of HQL; and Vice President (from 1991-July 2002) and Treasurer (from 2000-July 2002) of Hambrecht & Quist Capital Management Inc. Jennifer L. Morris Secretary (since 2001) Secretary (since 2001) of HQH and of 34 HQL; and Assistant Vice President (from 1999-July 2002) and Manager, Corporate Communications (from 1996-1999) of Hambrecht & Quist Capital Management Inc.
(1) The address for each officer is c/o the Fund at the Fund's address as set forth above. (2) Each officer serves in such capacity for an indefinite period of time at the pleasure of the Trustees. 21 H&Q LIFE SCIENCES INVESTORS New York Stock Exchange Symbol: HQL 30 Rowes Wharf, 4th Floor Boston, Massachusetts 02110-3328 www.hqcm.com PLEASE NOTE OUR NEW PHONE NUMBER: (617) 772-8500 OFFICERS Daniel R. Omstead, ENGSCD, President Alan G. Carr, President Emeritus Kimberley L. Carroll, Treasurer Jennifer L. Morris, 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 LLC CUSTODIAN AND TRANSFER AGENT State Street Bank and Trust Company INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers 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 from our website (www.hqcm.com) or 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 Out of concern for the environment and in an effort to reduce Fund expenses, this report is printed on recycled paper. HQHLS-AR-02 -----END PRIVACY-ENHANCED MESSAGE-----