<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-6565
H&Q Life Sciences Investors (Exact name of registrant as specified in charter)
30 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328
(Address of principal executive offices)
30 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-772-8500
Date of fiscal year end: 09/30/04
Date of reporting period: 09/30/04
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
<Page>
H&Q LIFE SCIENCES INVESTORS
[GRAPHIC]
ANNUAL REPORT
2004
<Page>
To our Shareholders:
At fiscal year-end on September 30, 2004, the net asset value per share of your
Fund was $15.90. During the twelve month period ending September 30, 2004, total
return at net asset value of your Fund was 3.87%. During the most recent six
month period ending September 30, 2004, total return at net asset value of your
Fund was -6.53%. The total investment return at market was 15.52% during the
twelve month period ended September 30, 2004 and was 0.68% during the six month
period ended September 30, 2004. Comparisons to relevant indices are listed
below:
<Table>
<Caption>
SIX MONTHS
ENDED FISCAL YEAR
2004 TOTAL RETURNS 9/30/04 (12 MONTHS)
- -----------------------------------------------------------------------
Investment Return at market +0.68% +15.52%
Net Asset Value -6.53% +3.87%
NASDAQ Biotech Index -8.17% -0.82%
AMEX Biotech Index -0.40% +15.62%
Dow Jones Industrial Average -2.68% +8.68%
S&P 500 -0.25% +13.87%
NASDAQ Industrials -4.00% +14.53%
Russell 2000 -2.94% +17.48%
</Table>
The third calendar quarter exhibited mixed results for the healthcare/biotech
sectors. As the quarter began, both the American Stock Exchange Biotechnology
Index (BTK) and the NASDAQ Biotechnology Index (NBI) were declining, continuing
a trend that had been in place since March. Both indices reached a nadir in
early/mid August and then advanced noticeably as the quarter progressed. This
upward trend continued through the early part of the fourth calendar quarter.
Overall the biotech sector, as measured by these indices continues to be
somewhat volatile. It is our opinion that recent price trends have not been
driven by events within the healthcare or biotechnology sector. Rather we think
that external events, including presidential election dynamics, movement in
energy costs and geopolitical developments have drowned out sector news. It may
also be that rotation of funds into and out of the biotech sector may have also
had an effect. Within the biotech sector, there has been both positive
encouraging and negative discouraging news (in terms of clinical results, FDA
panel meetings and and/or product approvals). In our view, neither the good nor
the bad news has been dominating. And as indicated, we think the sector view has
been overwhelmed by general market factors. We are encouraged that the first few
weeks of the fourth calendar quarter have produced encouraging results. We are
particularly encouraged now that there is a definitive result in the
presidential election.
1
<Page>
We think that there are pending positive events within the biotech sector that
could buoy the biotech market. We are less sanguine about the big pharmaceutical
company space given the negative background impact of pricing uncertainties as
well as Merck's recent difficulties surrounding the withdrawl of Vioxx from the
market. Given recent weakness in the generic group we are cautious about the
prospects of that group. At this point we are more impressed with the prospects
of the biotechnology sector and have established new positions in companies
which we think have interesting products and/or pipelines. We also have a
generally favorable view of the prospects for the medtech sector.
During the quarter, the Fund established positions in Ariad Pharmaceuticals,
Barr Pharmaceuticals, Guilford Pharmaceuticals, Myogen, Seattle Genetics, and
Vicuron Pharmaceuticals. The Fund increased its holdings of Adolor Corporation,
and deCode Genetics. The Fund's position in Amgen increased as a result of
Amgen's acquisition of Tularik which was also held by the Fund. The Fund
decreased its holdings in Celgene, IVAX, and Pozen. The Fund exited its
positions in Durect, Encysive Pharmaceuticals, and United Therapeutics.
Within the venture portfolio, the Fund made follow on investments in Conor
Medsystems, and made an initial investment in Provident Senior Living Trust.
Please note that we have elected to change the principal indices against which
we benchmark performance. During the last several years, we have used a
comparison to the American Stock Exchange's Biotech Index (commonly known at the
BTK) as our principal comparator. This index comprises 17 relatively large
biotechnology companies. As of September 30, 2004 seven of the Fund's 44
publicly traded investments were components of the BTK. One transaction
completed in the quarter ended September 30, 2004 involved a BTK component. In
contrast to the BTK, the NASDAQ Biotech index (commonly known as the NBI) is
comprised of approximately 150 small and large biotech companies including
several companies that are also part of the BTK. As of September 30, 2004, 30 of
the Fund's 44 publicly traded investments were components of the NBI. During the
quarter ended September 30, 2004, 11 of the 16 position changes made by the Fund
involved NBI components. We believe that the NBI is the more appropriate primary
index with which to compare performance. In addition to the primary index, the
Fund has traditionally reported performance of the Dow Jones Industrial Average,
the Russell 2000 index and the NASDAQ Industrials. Going forward, we will not
use these indices as comparators but will compare the Fund's performance (both
NAV and total stock return) to the S&P 500.
2
<Page>
As always, please feel free to call me with any questions or comments you might
have. As you may have noticed, the focus of this shareholder letter has been
changed to emphasize specific developments in the biotech and healthcare sector
and in the portfolio. This change is the result of shareholder input. Several
shareholders have suggested that the macroeconomic views we have presented in
the past are available elsewhere. It was suggested that shareholders would
rather hear more about the sector in which the Fund invests and about specific
events within the Fund's portfolio. We thought that was a good idea. Please let
us know if you agree (or disagree). Also note that the organization and
presentation of information in this portion of the annual report has been
changed to comply with recent regulatory requirement changes. And finally, we
have changed the paper stock on which the report is printed to reduce costs.
/s/ Daniel R. Omstead
Daniel R. Omstead
President
3
<Page>
H&Q LIFE SCIENCES INVESTORS
LARGEST HOLDINGS
AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
% OF NET ASSETS
---------------
Telik 3.45%
Amgen 3.40%
Cubist Pharmaceuticals 3.03%
Gilead Sciences 2.92%
Celgene 2.91%
Genzyme 2.86%
Pfizer 2.84%
MedImmune 2.43%
Impax Laboratories 2.22%
Adolor 2.07%
</Table>
H&Q LIFE SCIENCES INVESTORS
PORTFOLIO
AS OF SEPTEMBER 30, 2004
[CHART]
RESTRICTED NON-RESTRICTED
<Table>
BIOPHARMACEUTICALS 0.00% 31.16%
DRUG DELIVERY 0.00% 1.51%
DRUG DISCOVERY TECHNOLOGIES 5.31% 3.22%
EMERGING BIOPHARM. 7.55% 16.48%
GENERIC PHARMACEUTICALS 0.00% 7.65%
HEALTHCARE SERVICES 5.08% 3.18%
MEDICAL DEVICES AND DIAGNOSTICS 7.89% 4.02%
TEMPORARY INVESTMENTS 0.00% 6.93%
</Table>
4
<Page>
FOR MORE INFORMATION
A description of the Fund's proxy voting policies and procedures and
information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30, is available
(i) without charge, upon request by calling 1-800-451-2597; (ii) by writing
to Hambrecht & Quist Capital Management LLC at 30 Rowes Wharf, Boston, MA
02110-3328; (iii) on the Fund's website at www.hqcm.com; and (iv) on the
Securities and Exchange Commission's website at www.sec.gov.
The Fund's complete Schedule of Investments for the first and third quarters of
its fiscal year will be filed quarterly with the Securities and Exchange
Commission ("SEC") on Form N-Q. This Schedule of Investments will also be
available on the Fund's website at www.hqcm.com, or the SEC's website at
www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or by calling 1-800-SEC-0330.
ANNUAL MEETING REPORT
An Annual Meeting of Shareholders was held on June 24, 2004 at 9:00 a.m. The
Shareholders voted 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.
<Table>
<Caption>
FOR WITHHELD BROKER NON VOTES
--- -------- ----------------
Lawrence S. Lewin 10,381,625 222,827 0
Uwe E. Reinhardt, Ph.D. 10,381,680 222,772 0
</Table>
These nominees were elected to serve until the 2007 Annual Meeting of
Shareholders. Robert P. Mack, M.D., Eric Oddleifson and Oleg M. Pohotsky will
serve until the 2005 Annual Meeting. Trustees serving until the 2006 Annual
Meeting are Daniel R. Omstead, EngScD and Henri A. Termeer.
5
<Page>
H&Q LIFE SCIENCES INVESTORS
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SHARES VALUE
- --------------- ----------------
CONVERTIBLE SECURITIES - 19.6% OF NET ASSETS
CONVERTIBLE PREFERRED (RESTRICTED) - 19.5%
DRUG DISCOVERY TECHNOLOGIES - 3.3%
1,587,302 Agilix Series B*^ $ 380,952
566,958 Avalon Pharmaceuticals Series B* 680,350
250,000 Ceres Series C* 1,500,000
18,296 Ceres Series C-1*# 109,776
174,200 Ceres Series D*# 1,045,200
932,488 Galileo Laboratories Series F-1* 326,371
808,473 Idun Pharmaceuticals Series A-1* 1,657,370
308,642 Idun Pharmaceuticals Series B-1* 493,827
1,150,000 Triad Therapeutics Series A* 1,150
350,000 Triad Therapeutics Series B* 350
800,000 Triad Therapeutics Series C* 120,000
200,000 Zyomyx Series A New* 20,000
200 Zyomyx Series B New* 20
EMERGING BIOPHARMACEUTICALS - 4.6%
634,921 Agensys Series C* 2,000,001
1,724,138 Corus Pharmaceutical Series C* 2,000,000
1,212,121 Raven biotechnologies Series B* 1,006,060
1,872,772 Raven biotechnologies Series C* 1,554,401
30,920 Therion Biologics Series A* 55,656
160,000 Therion Biologics Series B*# 288,000
271,808 Therion Biologics Series C* 489,254
28,991 Therion Biologics Sinking Fund* 290
1,400,000 Xanthus Life Sciences Series B* 1,400,000
HEALTHCARE SERVICES - 3.8%
1,051,429 CardioNet Series C* 3,680,002
322,168 CytoLogix Series A* 265,789
151,420 CytoLogix Series B*# 124,922
3,589,744 PHT Series D*^ 2,800,000
604,173 PHT Series E*^ 471,255
MEDICAL DEVICES AND DIAGNOSTICS - 7.8%
3,235,293 Concentric Medical Series B*^ 2,782,352
1,162,790 Concentric Medical Series C*^ 999,999
1,333,333 Conor Medsystems Series D* 3,333,333
140,000 Conor Medsystems Series E* 350,000
177,778 EPR Series A* 1,778
130,000 Masimo Series D* 1,430,000
1,088,436 OmniSonics Medical Technologies Series B* 1,454,150
1,031,992 OmniSonics Medical Technologies Series C* 1,200,000
434,782 TherOx Series H* 643,477
546,875 VNUS Medical Technologies Series E* 2,800,000
----------------
$ 37,466,085
----------------
</Table>
The accompanying notes are an integral part of these financial statements.
6
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
- --------------- ----------------
CONVERTIBLE SECURITIES - CONTINUED
CONVERTIBLE BONDS AND NOTES (RESTRICTED) - 0.1%
HEALTHCARE SERVICES - 0.06%
$ 112,224 CytoLogix 6.75% Cvt. Note,+ $ 112,224
MEDICAL DEVICES AND DIAGNOSTICS - 0.07%
133,515 TherOx 6.0% Bridge Note, due 2006# 133,515
----------------
$ 245,739
----------------
TOTAL CONVERTIBLE SECURITIES
(Cost $48,973,667) $ 37,711,824
----------------
<Caption>
SHARES
- ---------------
COMMON STOCKS - 73.4%
BIOPHARMACEUTICALS - 31.2%
114,945 Amgen* $ 6,515,084
95,900 Celgene* 5,584,257
275,126 Corixa*# 1,144,524
588,182 Cubist Pharmaceuticals* 5,811,238
233,484 CV Therapeutics* 2,918,550
205,600 Enzon Pharmaceuticals* 3,279,320
101,000 Genzyme* 5,495,410
150,000 Gilead Sciences* 5,607,000
59,000 Imclone Systems* 3,118,150
197,000 MedImmune* 4,668,900
240,000 Millennium Pharmaceuticals* 3,290,400
72,200 Neurocrine Biosciences* 3,404,952
178,000 Pfizer 5,446,800
174,500 Pozen* 1,525,130
437,200 Vivus* 1,967,400
----------------
59,777,115
----------------
DRUG DELIVERY - 1.5%
555,555 DepoMed* 2,899,997
----------------
DRUG DISCOVERY TECHNOLOGIES - 5.2%
525,400 deCODE Genetics* 3,956,262
337,800 Lexicon Genetics* 2,226,102
571,428 Senomyx (Restricted)* 3,857,139
200,000 Zyomyx (Restricted)* 2,000
----------------
10,041,503
----------------
EMERGING BIOPHARMACEUTICALS - 19.4%
40,000 ACADIA Pharmaceuticals, Inc.* 311,600
243,868 ACADIA Pharmaceuticals, Inc. (Restricted)* 1,426,628
353,000 Adolor* 3,971,250
144,147 Ariad* 964,343
306,463 Dyax* 2,341,377
489,400 Exelixis* 3,944,564
</Table>
The accompanying notes are an integral part of these financial statements.
7
<Page>
<Table>
<Caption>
SHARES VALUE
- --------------- ----------------
EMERGING BIOPHARMACEUTICALS - CONTINUED
225,600 Guilford Pharmaceuticals* $ 1,128,000
380,700 Kosan Biosciences* 2,192,832
255,400 Myogen (Restricted)*#@ 1,758,429
152,000 Pharmacyclics* 1,567,120
66,317 Rigel Pharmaceuticals* 1,677,820
232,600 Sangamo Biosciences* 1,132,762
220,200 Seattle Genetics* 1,446,714
676,924 Sirna Therapeutics* 2,071,387
296,428 Telik* 6,610,344
177,103 Theravance (Restricted)* 2,470,599
22,224 Therion Biologics (Restricted) C-2 Units*# 40,003
146,982 Therion Biologics (Restricted)* 1,470
153,000 Vicuron Pharmaceuticals* 2,246,040
----------------
37,303,282
----------------
GENERIC PHARMACEUTICALS - 7.7%
59,500 Barr Pharmaceuticals* 2,465,085
277,131 Impax Laboratories* 4,256,732
172,250 IVAX* 3,298,588
70,000 Par Pharmaceutical Companies* 2,515,100
82,800 Teva Pharmaceutical Industries ADR 2,148,660
----------------
14,684,165
----------------
HEALTHCARE SERVICES - 4.4%
56,900 Charles River Laboratories* 2,606,020
17,416 Dakocytomation (Restricted)*< 181,301
140,000 Provident Senior Living (Restricted)@++ 2,100,000
204,139 Syntiro Healthcare Weblink (Restricted)*# 2,041
503,000 WebMD* 3,500,880
----------------
8,390,242
----------------
MEDICAL DEVICES AND DIAGNOSTICS - 4.0%
583,929 Biofield*@ 29,196
244,200 CTI Molecular Imaging* 1,970,694
52,700 IDEXX Laboratories* 2,673,998
130,000 Masimo Laboratories (Restricted)* 1,300
680,000 Orthovita* 3,043,000
139,019 Songbird Hearing (Restricted)* 1,390
----------------
7,719,578
----------------
TOTAL COMMON STOCKS
(Cost $112,641,841) $ 140,815,882
----------------
</Table>
The accompanying notes are an integral part of these financial statements.
8
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
- --------------- ----------------
TEMPORARY INVESTMENTS - 6.9%
$ 7,000,000 American Express Credit Corp.; 1.65%,
due 10/1/04 $ 7,000,000
6,300,000 United Parcel Service; 1.63%,
due 10/15/04 6,296,007
----------------
TOTAL TEMPORARY INVESTMENTS
(Cost $13,296,007) $ 13,296,007
----------------
TOTAL INVESTMENTS
(Cost $174,911,515) $ 191,823,713
================
</Table>
- ----------
* Non income-producing security.
# With warrants attached.
< Foreign security.
+ Variable maturity.
@ Exchange traded security fair valued by the Valuation Committee of the
Board of Trustees.
^ Affiliated issuers in which the Fund holds 5% or more of the voting
securities (Total Market Value of $7,434,558).
++ Real Estate Investment Trust.
The accompanying notes are an integral part of these financial statements.
9
<Page>
H&Q LIFE SCIENCES INVESTORS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2004
<Table>
ASSETS:
Investments in non affiliated issuers, at value
(identified cost $166,406,970; see Schedule of
Investments) $ 184,389,155
Investments in affiliated issuers, at value
(identified cost $8,504,545; see Schedule of
Investments) 7,434,558
Cash 731,171
Interest receivable 23,082
Receivable for investments sold 468,000
Prepaid expenses 49,479
----------------
Total assets $ 193,095,445
----------------
LIABILITIES:
Payable for investments purchased $ 888,934
Accrued advisory fee 231,737
Accrued audit fee 52,500
Accrued shareholder reporting fees 32,828
Accrued other 51,462
----------------
Total liabilities $ 1,257,461
----------------
NET ASSETS $ 191,837,984
================
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per share, unlimited number of
shares authorized, amount paid in on 12,066,409 shares issued and
outstanding $ 169,010,011
Accumulated net realized gain on investments 5,915,775
Net unrealized gain on investments 16,912,198
----------------
Total net assets (equivalent to $15.90 per
share based on 12,066,409 shares outstanding) $ 191,837,984
================
</Table>
The accompanying notes are an integral part of these financial statements.
10
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2004
<Table>
INVESTMENT INCOME:
Dividend income (net of foreign tax
of $3,068) $ 129,643
Interest income from non affiliated issuers 186,062
Interest income from affiliated issuers 7,575
----------------
Total investment income $ 323,280
EXPENSES:
Advisory fees $ 2,651,448
Trustees' fees and expenses 169,268
Legal fees 136,806
Custodian fees 75,775
Shareholder reporting 115,095
Accounting and auditing fees 75,077
Transfer agent fees 47,652
Stock exchange listing fee 32,142
Other 90,164
----------------
Total expenses 3,393,427
----------------
Net investment loss $ (3,070,147)
----------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments $ 22,434,597
Decrease in net unrealized gain on
investments (12,204,850)
----------------
Net realized and unrealized gain
on investments $ 10,229,747
----------------
Net increase in net assets
resulting from operations $ 7,159,600
================
</Table>
The accompanying notes are an integral part of these financial statements.
11
<Page>
STATEMENTS OF CHANGE IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
---------------- ----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS:
Net investment loss $ (3,070,147) $ (2,339,987)
Net realized gain on investments 22,434,597 14,087,914
Decrease (increase) in net
unrealized gain on investments (12,204,850) 26,876,120
---------------- ----------------
Net increase in net assets
resulting from operations $ 7,159,600 $ 38,624,047
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized capital gains $ (16,063,421) $ (19,370,711)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in
reinvestment of distributions
(653,934 and 1,002,853 shares,
respectively) $ 10,389,334 $ 13,513,685
---------------- ----------------
Net increase in net assets $ 1,485,513 $ 32,767,021
NET ASSETS:
Beginning of year 190,352,471 157,585,450
---------------- ----------------
End of year $ 191,837,984 $ 190,352,471
================ ================
Accumulated net investment
loss included in net assets at
end of year -- --
================ ================
</Table>
The accompanying notes are an integral part of these financial statements.
12
<Page>
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 2004
<Table>
CASH FLOWS USED FOR OPERATING ACTIVITIES:
Interest income received $ 28,231
Dividends received 129,643
Operating expenses paid (3,398,567)
----------------
Net cash used for operating activities $ (3,240,693)
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities $ (65,714,612)
Net purchases of temporary investments 11,771,899
Sales and maturities of portfolio securities 62,450,677
----------------
Net cash provided from investing activities $ 8,507,964
----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Cash distributions paid, net $ (5,674,087)
----------------
Net cash used for financing activities $ (5,674,087)
----------------
NET DECREASE IN CASH $ (406,816)
CASH AT BEGINNING OF YEAR 1,137,987
----------------
CASH AT END OF YEAR $ 731,171
================
RECONCILIATION OF NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS TO NET CASH
USED FOR OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 7,159,600
Accretion of discount (178,824)
Net realized gain on investments (22,434,597)
Decrease in net unrealized gain on investments 12,204,850
Decrease in interest receivable 13,418
Increase in accrued expenses 5,899
Increase in prepaid expenses (11,039)
----------------
Net cash used for operating activities $ (3,240,693)
================
</Table>
Noncash financing activities not included herein consist of reinvested
distributions of $10,389,334.
Noncash investing activities not included herein consist of the conversion of
restricted preferred stock with a cost of $9,306,973 to restricted common stock
and a merger of an issuer with a cost of $500,059.
The accompanying notes are an integral part of these financial statements.
13
<Page>
H&Q LIFE SCIENCES INVESTORS
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD INDICATED)
<Table>
<Caption>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
2004 2003 2002 (1) 2001 2000
------------- ------------- ------------- ------------- -------------
Net asset value per share:
Beginning of year $ 16.68 $ 15.14 $ 23.09 $ 39.37 $ 17.80
------------- ------------- ------------- ------------- -------------
Net investment loss $ (0.26)(2) $ (0.21)(2) $ (0.26)(2) $ (0.22)(2) $ (0.30)
Net realized and unrealized
gain (loss) on investments 0.86 3.55 (4.84) (12.13) 24.76
------------- ------------- ------------- ------------- -------------
Total increase (decrease)
from investment operations $ 0.60 $ 3.34 $ (5.09) $ (12.36) $ 24.46
------------- ------------- ------------- ------------- -------------
Capital gain distributions
to shareholders $ (1.38) $ (1.80) $ (2.86) $ (3.92) $ (2.90)
------------- ------------- ------------- ------------- -------------
Net asset value per share:
End of year $ 15.90 $ 16.68 $ 15.14 $ 23.09 $ 39.37
============= ============= ============= ============= =============
Per share market value:
End of year $ 16.20 $ 15.28 $ 11.79 $ 18.45 $ 31.31
Total investment return
at market value 15.52% 47.65% (25.82%) (29.07%) 155.36%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year $ 191,837,984 $ 190,352,471 $ 157,585,450 $ 215,162,600 $ 318,271,356
Ratio of operating expenses
to average net assets 1.73% 1.74% 1.71% 1.58% 1.51%
Ratio of net investment loss
to average net assets (1.56%) (1.38%) (1.25%) (0.83%) (1.06%)
Portfolio turnover rate 34.93% 32.36% 17.36% 16.49% 12.70%
Number of shares outstanding
at end of period 12,066,409 11,412,475 10,409,622 9,318,998 8,085,152
</Table>
(1) In 2002, 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
<Page>
H&Q LIFE SCIENCES INVESTORS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(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 healthcare 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 Fund has adopted investment policies (non-fundamental investment
policies) which may be changed by action of the Board of Trustees without
shareholder approval. In June 2004, the Board of Trustees took action to
make the following change (as indicated by the strikethrough) to one of the
Fund's non fundamental investment policies:
"Investments will not be made in any company with the objective of
exercising control over that company's management, [STRIKETHROUGH] AND
THE FUND GENERALLY WILL NOT PROVIDE MANAGERIAL ASSISTANCE TO ANY SUCH
COMPANY AS IS NORMALLY THE CASE WITH VENTURE CAPITAL
FUNDS.[/STRIKETHROUGH] The Fund, however, may make investments as a
co-investor with other venture capital groups that may provide issuers
with significant managerial assistance."
In June and September, 2004, the Board of Trustees amended the Fund's
by-laws to provide for the office of Chief Compliance Officer and to require
that all matters put to a vote of shareholders shall be decided by a vote of
the majority of all votes validly cast at a meeting at which a quorum is
present, unless otherwise specifically required by the Fund's Declaration of
Trust or By-Laws.
The preparation of these financial statements requires the use of certain
estimates by management in determining the Fund'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 accounting principles
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. Exchange traded 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. The value of venture capital and
other restricted securities is determined in good faith by the Trustees.
However, because of the uncertainty of venture capital and other restricted
security valuations, these estimated values may differ significantly from
the values that would have been used had a ready market for these securities
existed, and the differences could be material. See note 4 below. Temporary
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, adjusted for
amortization of premiums and accretion of discounts. Dividend income is
recorded on the ex-dividend date.
REPURCHASE AGREEMENTS
In connection with transactions in repurchase agreements, the Fund's
custodian takes possession of the underlying collateral securities, the
market value of which is at least equal to the principal, including accrued
interest, of the repurchase transaction at all times. In the event of
default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral by the Fund may be delayed or limited.
15
<Page>
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. 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
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.
Pursuant to Section 852 of the Internal Revenue Code, the Fund has
designated $16,063,421 as a long-term capital gain distribution for its
taxable year ended September 30, 2004.
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, 2004.
INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and Trustees may
be indemnified against certain liabilities and expenses arising out of the
performance of their duties to the Fund. Additionally, in the normal course
of business, the Fund enters into agreements with service providers that may
contain indemnification clauses. The Fund's maximum exposure under these
agreements is unknown as this would involve future claims that may be made
against the fund that have not yet occurred. However, based on experience,
the Fund expects the risk of loss to be remote.
(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, 2004 totaled $64,306,635 and $62,449,141 respectively.
At September 30, 2004, the total cost of securities for Federal income
tax purposes was $174,911,515. The net unrealized gain on securities held by
the Fund was $16,912,198, including gross unrealized gain of $50,002,742 and
gross unrealized loss of $33,090,544.
16
<Page>
At September 30, 2004, the Fund was committed to participate in a round
of financing to purchase additional shares of restricted preferred stock for
approximately $706,172.
(3) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
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%. 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
$20,000 plus $500 for each Committee on which they serve and $1,000 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 25.89% of the Fund's net assets at
September 30, 2004.
The Fund maintains an investment restriction that prohibits the Fund from
purchasing more than 10% of the outstanding voting securities of any issuer.
In order to clarify that restriction, the Board of Trusttes (effective
September 30, 2004), has determined that for purposes of that restriction,
the Fund will consider outstanding voting securities of an issuer to include
any security of the issuer that entitles the owner or holder to vote for the
election of directors of the issuer (a "voting security") and any other
outstanding security of the issuer that is exercisable for or convertible
into a voting security within 60 days from the date of calculation.
During the year ended September 30, 2004, certain restricted securities
were exchanged for cash in connection with a corporate action, a portion of
which has been retained by the issuer in an escrow account pending
resolution of certain contingencies and whose estimated value of $388,000 at
September 30, 2004 has been determined by the Trustees. On September 30,
2004, the Fund has a 5% interest bearing promissory note due October 31,
2004 from the sale of restricted securities, with a par value of $80,800 and
an estimated value of $80,000 as determined by the Trustees. The value of
the escrow account and note are included in the Receivable for Investments
Sold in the Statement of Assets and Liabilities.
17
<Page>
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, 2004, whose value has been determined by the
Trustees of the Fund.
<Table>
<Caption>
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
- ---------------------------------------------------------------------------------------------------------------------
ACADIA Pharmaceuticals?
Common 5/2/00 - 3/19/03 $ 2,500,449 $ 5.85 $ 1,426,628
Agensys
Series C Cvt. Pfd. 2/14/02 2,003,383 3.15 2,000,001
Agilix^
Series B Cvt. Pfd. 11/8/01 2,009,507 0.24 380,952
Avalon Pharmaceuticals
Series B Cvt. Pfd. 10/22/01 2,005,767 1.20 680,350
CardioNet
Series C Cvt. Pfd. 5/3/01 - 3/25/03 3,699,455 3.50 3,680,002
Ceres
Series C Cvt. Pfd. 12/23/98 1,000,875 6.00 1,500,000
Series C-1 Cvt. Pfd.# 3/31/01 74,325 6.00 109,776
Series D Cvt. Pfd.# 3/14/01 1,046,778 6.00 1,045,200
Concentric Medical^
Series B Cvt. Pfd. 5/7/02 - 1/24/03 2,219,473 0.86 2,782,352
Series C Cvt. Pfd. 12/19/03 999,999 0.86 999,999
Conor MedSystems
Series D Cvt. Pfd. 10/23/03 1,602,441 2.50 3,333,333
Series E Cvt. Pfd. 7/29/04 - 8/6/04 350,756 2.50 350,000
Corus Pharma
Series C Cvt. Pfd. 4/8/04 2,001,464 1.16 2,000,000
CytoLogix
Series A Cvt. Pfd. 1/13/98 - 7/21/99 1,077,913 0.83 265,789
Series B Cvt. Pfd.# 1/11/01 506,622 0.83 124,922
Cvt. Note# 5/29/02 112,224 1.00 112,224
DakoCytomation
Common 6/14/04 734,913 10.41 181,301
EPR
Series A Cvt. Pfd. 3/9/94 800,331 0.01 1,778
Galileo Laboratories
Series F-1 Cvt. Pfd. 8/18/00 2,001,929 0.35 326,371
IDUN Pharmaceuticals
Series A-1 Cvt. Pfd. 11/26/02 2,001,311 2.05 1,657,370
Series B-1 Cvt. Pfd. 5/24/04 494,479 1.60 493,827
Masimo
Series D Cvt. Pfd. 8/14/96 910,027 11.00 $ 1,430,000
Masimo Labs
Common 3/31/98 0 0.01 1,300
Myogen#
Common 9/24/04 1,660,100 6.89 1,758,429
Omnisonics Medical Technologies
Series B Cvt. Pfd. 5/24/01 1,606,312 1.34 1,454,150
Series C Cvt. Pfd. 10/1/03 1,200,224 1.16 1,200,000
PHT^
Series D Cvt. Pfd. 7/23/01 2,803,841 0.78 2,800,000
Series E Cvt. Pfd. 9/12/03 - 12/17/03 471,725 0.78 471,255
Provident Senior Living
Common 7/26/04 2,100,469 15.00 2,100,000
</Table>
18
<Page>
<Table>
<Caption>
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
- ---------------------------------------------------------------------------------------------------------------------
Raven biotechnologies
Series B Cvt. Pfd. 12/12/00 2,001,150 0.83 1,006,060
Series C Cvt. Pfd. 11/26/02 1,554,400 0.83 1,554,401
Senomyx
Common 2/19/02 2,003,275 6.75 3,857,139
Songbird Hearing
Common 12/14/00 $ 2,003,239 $ 0.01 $ 1,390
Syntiro Heathcare Services
Common# 2/5/97 800,325 0.01 2,041
Theravance
Common 10/4/04 2,402,185 13.95 2,470,599
Therion Biologics
Series C-2 Cvt. Pfd.# 8/13/03 40,003 1.80 40,003
Common 6/30/93 251,642 0.01 1,470
Series A Cvt. Pfd. 8/20/96 - 10/16/96 289,847 1.80 55,656
Series B Cvt. Pfd.# 6/22/99 600,609 1.80 288,000
Series C Cvt. Pfd. 9/26/01 - 10/15/01 1,019,568 1.80 489,254
Sinking Fund Cvt. Pfd 10/18/94 - 4/3/96 582,505 0.01 290
TherOx
Series H Cvt. Pfd. 9/11/00 2,001,473 1.48 643,477
Bridge Note# 1/28/04 133,515 1.00 133,515
Triad Therapeutics
Series A Cvt. Pfd. 6/8/99 1,151,067 0.00 1,150
Series B Cvt. Pfd. 1/10/03 702,090 0.00 350
Series C Cvt. Pfd. 12/20/00 - 11/25/02 800,000 0.15 120,000
VNUS Medical Technologies
Series E Cvt. Pfd. 8/20/01 2,800,000 5.12 2,800,000
Xanthus Life Sciences
Series B Cvt. Pfd. 12/5/03 1,400,880 1.00 1,400,000
Zyomyx
New Common 2/19/99 - 7/22/02 2,401,101 0.01 2,000
Series A New Cvt. Pfd. 2/19/99 - 1/12/04 199,800 0.10 20,000
Series B New Cvt. Pfd. 3/31/04 112 0.10 20
--------------- ---------------
$ 65,135,877 $ 49,554,124
=============== ===============
</Table>
# With warrants attached.
^ Affiliated issuers.
? On May 26, 2004 the Fund purchased non-restricted common of the same issuer at
a price of $7.01 per share.
19
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
TO THE TRUSTEES AND SHAREHOLDERS OF H&Q LIFE SCIENCES INVESTORS:
We have audited the accompanying statement of assets and liabilities of H&Q Life
Sciences Investors (the "Fund"), including the schedule of investments, as of
September 30, 2004, and the related statements of operations, changes in net
assets, and cash flows and the financial highlights for the year then ended.
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 audit. The financial
highlights of the Fund for the year ended September 30, 2000 were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial highlights in their report dated November
3, 2000. The statement of changes in net assets of the Fund for the year ended
September 30, 2003 and the financial highlights for the years ended September
30, 2003, 2002 and 2001 were audited by other auditors whose report, dated
November 25, 2003, expressed an unqualified opinion on that statement and
financial highlights.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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, 2004, by correspondence with the custodian
and brokers. 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 that our audit provides a
reasonable basis for our opinion.
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, 2004, and the results of its
operations, its cash flows, the changes in its net assets, and the financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 22, 2004
20
<Page>
H&Q LIFE SCIENCES INVESTORS
TRUSTEES
H & Q LIFE SCIENCES INVESTORS
30 ROWES WHARF, SUITE 430
BOSTON, MASSACHUSETTS 02110
(617) 772-8500
<Table>
<Caption>
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 DATE OF BIRTH LENGTH OF TIME SERVED OTHER DIRECTORSHIPS HELD BY TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
Lawrence S. Lewin Trustee (since 1992) and Executive Consultant. Formerly Chief 2
4/1938 Chairman (since 2000) Executive Officer (from 1970-1999) of
The Lewin Group (healthcare Public
policy and management consulting), a
subsidiary of Quintiles Transnational
Corp.; and Director (since 2003) of
Medco Health Solutions, Inc.
Robert P. Mack Trustee (since 1992) Consultant in Orthopedic Surgery to 2
8/1935 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
4/1935 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
3/1947 (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).
</Table>
21
<Page>
<Table>
<Caption>
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 DATE OF BIRTH LENGTH OF TIME SERVED OTHER DIRECTORSHIPS HELD BY TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES: (continued)
Uwe E. Reinhardt, Trustee (since 1992) Professor of Economics (since 1968) at 2
Ph.D. Princeton University.
9/1937
Henri A. Termeer Trustee (since 1992) Chairman (since 1988), Chief Executive 2
2/1946 Officer (since 1985) and President
(since 1983) of Genzyme Corporation
(human healthcare products); Director
(since 1987) of ABIOMED, Inc.; Director
(from 1992-2003) of AutoImmune, Inc.;
Director (from 1993-2002) of Genzyme
Transgenics; and Director (from 1996-
2002) of Diacrin, Inc.
INTERESTED TRUSTEES:
Daniel R. Omstead, President (since 2001) President & Chief Executive Officer 2
ENGSCD (since July 2002) of Hambrecht & Quist
7/1953 Capital Management LLC; President 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.
</Table>
(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.
22
<Page>
H&Q LIFE SCIENCES INVESTORS
OFFICERS
<Table>
<Caption>
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:
Daniel R. Omstead, President (since 2001) President & Chief Executive Officer (since July 2002) of
ENGSCD Hambrecht & Quist Capital Management LLC; President of
7/1953 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 (since 1987) of
1/1956 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.
Kathleen Eckert Chief Compliance Chief Compliance Officer of Hambrecht & Quist Capital
12/1966 Officer (since 2004) Management LLC (since October 2004); Chief Compliance
Officer of HQH and of HQL (since October 2004); Senior
Vice President of Ivy Mackenzie Services Corp., from
June 2002 to January 2004. Chief Compliance Officer of
Mackenzie Investment Management, Inc. from June 2002 to
June 2003. Director of Fund Administration of Mackenzie
Investment Management Inc. from 1999 to June 2003.
</Table>
(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.
The Fund's Statement of Additional Information includes additional
information about the fund Directors and is available without charge, upon
request by calling (617) 772-8500 or writing to Hambrecht & Quist Capital
Management LLC at 30 Rowes Wharf, Boston, MA 02110-3328.
23
<Page>
This page has been intentionally left blank.
<Page>
H&Q LIFE SCIENCES INVESTORS
New York Stock Exchange Symbol: HQL
30 Rowes Wharf, 4th Floor
Boston, Massachusetts 02110-3328
(617) 772-8500
www.hqcm.com
OFFICERS
Daniel R. Omstead, ENGSCD, President
Kimberley L. Carroll, Treasurer and Secretary
Kathleen Eckert, Chief Compliance Officer
TRUSTEES
Lawrence S. Lewin
Robert P. Mack, M.D.
Eric Oddleifson
Daniel R. Omstead, ENGSCD
Oleg M. Pohotsky
Uwe E. Reinhardt, Ph.D.
Henri A. Termeer
INVESTMENT ADVISER
Hambrecht & Quist Capital Management LLC
CUSTODIAN
State Street Bank and Trust Company
TRANSFER AGENT
EquiServe Trust Company, N.A.
LEGAL COUNSEL
Dechert LLP
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, EquiServe Trust Company, N.A.
P.O. Box 43010, Providence, RI 02940-3010
Telephone: 1-800-426-5523
<Page>
HAMBRECHT & QUIST CAPITAL MANAGEMENT LLC
30 Rowes Wharf
Boston, MA 02110-3328
HQHLS-AR-04
<Page>
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the registrant has
adopted a code of ethics that applies to the registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of whether
these individuals are employed by the registrant or a third party. The code
of ethics is attached hereto as Exhibit 11(a)(1). During the period covered
by this report, the registrant did not (i) make any substantive amendment to
the code of ethics or (ii) grant any waiver, including any implicit waiver,
from any provision of the code of ethics.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Registrant's Board of Trustees has determined that the registrant has at
least one audit committee financial expert serving on its audit committee. The
audit committee financial expert is Oleg M. Pohotsky. He is "independent" for
purposes of Item 3.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees. The aggregate fees each of the last two fiscal years for
professional services rendered by the principal accountant for the
audit of the Registrant's financial statements or services that are
normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years were
$59,660 for the fiscal year ended September 30, 2004 and $54,500
for the fiscal year ended September 30, 2003.
(b) Audit Related Fees. The registrant was not billed any fees by the
principal accountant for the last two fiscal years ended December
31 for the Funds for assurance and related services that were
reasonably related to the performance of the audit of the
registrant's financial statements and not otherwise included above.
(c) Tax Fees. The aggregate fees billed in each of the last two fiscal
years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning were $5,000 for
the fiscal year ended September 30, 2004 and $7,392 for the fiscal
year ended September 30, 2003. The nature of the services comprising
the fees disclosed under this category was tax compliance.
(d) All Other Fees. The aggregate fees billed in each of the last two
fiscal years for products and services provided by the principal
accountant, other
<Page>
than the services reported in paragraphs (a) through (c) of this Item
were $12,631 for the fiscal year ended September 30, 2004 and $0 for
the fiscal year ended September 30, 2003. The nature of the services
comprising the fees disclosed was review of fund administration.
(e) (1) Pre-approval Policies and Procedures
Pursuant to the registrant's Audit Committee Charter ("Charter"), the Audit
Committee is responsible for approving in advance the firm to be employed as
the registrant's independent auditor. In addition, the Charter provides that
the Audit Committee is responsible for approving any and all proposals by the
registrant, its investment adviser or their affiliated persons or any entity
controlling, controlled by, or under common control with the adviser that
provides services to the registrant to employ the independent auditor to
render permissible non-audit services to such entity, provided those
permissible non-audit services relate directly to the operations and
financial reporting of the registrant. In determining whether to pre-approve
non-audit services, the Audit Committee considers whether such services are
consistent with the independent auditor's independence. The Charter further
permits the Audit Committee to delegate to one or more of its members
authority to pre-approve permissible non-audit services to the registrant,
provided that any pre-approval determination of a delegate is for services
with an estimated budget of less than $15,000.
Pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X, pre-approval is required
for non-audit services billed by the principal accountant to the registrant's
investment adviser, or any other entity controlling, controlled by, or under
common control with the investment adviser that provides ongoing services to
the registrant if the services relate directly to the operations and
financial reporting of the registrant. As disclosed above in Items 4(b)
through (d), there were no fees for such services during the applicable
periods.
(e)(2) All of the services described in each of Items 4(b) through (d) were
approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X.
(f) None
(g) None
(h) Not applicable
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The Registrant has separately-designated standing Audit Committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The
members of the Audit Committee are Eric Oddleifson, Oleg M. Pohotsky, and Uwe E.
Reinhardt.
ITEM 6. SCHEDULE OF INVESTMENTS.
The Registrant's Schedule of Investments is included as part of the Report to
Shareholders filed under Item 1 of this form.
<Page>
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Registrant has adopted the following proxy voting policies and procedures:
PROXY VOTING POLICIES AND PROCEDURES
POLICY
The following are the policies and procedures adopted and implemented by
Hambrecht & Quist Capital Mangement LLC (the "Adviser") for voting proxies with
respect to portfolio securities held by H&Q Healthcare Investors and H&Q Life
Sciences Investors (each a "Fund" and collectively the "Funds"). The policies
and procedures are reasonably designed to ensure that proxies are voted in the
best interest of the Funds and the Funds' shareholders, in accordance with the
Adviser's fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act
of 1940 (the "Investment Advisers Act"). The Adviser considers the "best
interests" of the Funds and their shareholders to mean their best long-term
economic interests.
The Adviser shall vote proxies for the exclusive benefit, and in the best
economic interest, of the Funds and their shareholders. Such exercise of voting
rights shall be subject to the same standard of care as is generally applicable
to the Adviser's performance of its duties, as set forth in the advisory
agreements with the Funds. The policies and procedures contained herein are
designed to be guidelines, however each vote is ultimately cast on a
case-by-case basis, taking into consideration the relevant facts and
circumstances at the time of the vote. Any material conflicts that may arise
will be resolved in the best interests of the Funds and their shareholders.
A proxy committee has been designated and is responsible for administering
and overseeing the proxy voting process. The committee consists of the President
of the Adviser, the Treasurer of the Adviser, and the analyst responsible for
oversight of the company that is the subject of the proxy. The committee
considers proxy questions and determines the vote on behalf of the Funds.
PROCEDURES
LOGISTICS
The Treasurer shall be responsible for maintaining the proxy log,
monitoring corporate actions and confirming the timely voting of proxies. The
proxy log shall contain the following information, in accordance with Form N-PX:
- the name of the issuer;
- the exchange ticker symbol, if available;
- the CUSIP number, if available;
- the shareholder meeting date;
- a brief identification of the matter voted on;
- whether the matter was proposed by the issuer or a security holder;
- whether the Adviser cast its vote on the matter;
- how the Adviser cast its vote on the matter (for, against, abstain; for or
withhold regarding the election of directors); and
- whether the Adviser cast its vote for or against management;
The Treasurer shall also record whether any conflicts of interest have been
identified and, if so, what action was taken to resolve the conflict with
respect to each vote cast and each abstention.
SUBSTANTIVE VOTING DECISIONS
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The Adviser's substantive voting decisions turn on the particular facts and
circumstances of each proxy vote. The following is a list of common proxy vote
issues and the Adviser's standard considerations when determining how to vote
such proxies.
Routine Matters/Corporate Administrative Items. After an initial review,
the Adviser generally votes with management on routine matters related to the
operation of the issuer that are not expected to have a significant economic
impact on the issuer and/or its shareholders.
Potential for Major Economic Impact. The Adviser reviews and analyzes on a
case-by-case basis, non-routine proposals that are more likely to affect the
structure and operation of the issuer and to have a greater impact on the value
of the investment.
Corporate Governance. The Adviser reviews and considers corporate
governance issues related to proxy matters and generally supports proposals that
foster good corporate governance practices.
Special Interest Issues. The Adviser considers: (i) the long-term benefit
to shareholders of promoting corporate accountability and responsibility on
social issues; (ii) management's responsibility with respect to special interest
issues; (iii) any economic costs and restrictions on management; and (iv) the
responsibility of the Adviser to vote proxies for the greatest long-term
shareholder value.
Limitations on Director Tenure and Retirement. The Adviser considers: (i) a
reasonable retirement age for directors, E.G. 70 or 72; (ii) the introduction of
new perspectives on the board; and (iii) the arbitrary nature of such
limitations and the possibility of detracting from the board's stability and
continuity.
Directors' Minimum Stock Ownership. The Adviser considers: (i) the benefits
of additional vested interest; (ii) the ability of a director to serve a company
well regardless of the extent of his or her share ownership; and (iii) the
impact of limiting the number of persons qualified to be directors.
D&O Indemnification and Liability Protection. The Adviser considers: (i)
indemnifying directors for acts conducted in the normal course of business; (ii)
limiting liability for monetary damages for violating the duty of care; (iii)
expanding coverage beyond legal expenses to acts that represent more serious
violations of fiduciary obligation than carelessness (E.G. negligence); and (iv)
providing expanded coverage in cases when a director's legal defense was
unsuccessful if the director was found to have acted in good faith and in a
manner that he or she reasonably believed was in the best interests of the
issuer.
Director Nominations in Contested Elections. The Adviser considers: (i)
long-term financial performance of the issuer relative to its industry; (ii)
management's track record; (iii) background to proxy contest; (iv)
qualifications of both slates of nominees; (v) evaluations of what each side is
offering shareholders as well as the likelihood that the proposed objectives and
goals can be met; and (vi) stock ownership positions.
Cumulative Voting. The Adviser considers: (i) the ability of significant
stockholders to elect a director of their choosing; (ii) the ability of minority
shareholders to concentrate their support in favor of a director or directors of
their choosing; and (iii) the potential to limit the ability of directors to
work for all shareholders.
Classified Boards. The Adviser considers: (i) providing continuity; (ii)
promoting long-term planning; and (iii) guarding against unwanted takeovers.
Poison Pills. The Adviser considers: (i) the Adviser's position on
supporting proposals to require a shareholder vote on other shareholder rights
plans; (ii) ratifying or redeeming a poison pill in the interest of protecting
the value of the issuer; and (iii) other alternatives to prevent a takeover at a
price demonstrably below the true value of the issuer.
Fair Price Provisions. The Adviser considers: (i) the vote required to
approve the proposed acquisition; (ii) the vote required to repeal the fair
price provision; (iii) the mechanism for determining fair price; and (iv)
whether these provisions are bundled with other anti-takeover measures (E.G.,
supermajority voting requirements) that may entrench management and discourage
attractive tender offers.
Equal Access. The Adviser considers: (i) the opportunity for significant
shareholders of the issuer to evaluate and propose voting recommendations on
proxy proposals and director nominees, and to nominate candidates to the board;
and (ii) the added complexity and burden.
Charitable Contributions. The Adviser considers: (i) the potential benefits
to shareholders; (ii) the potential to detract the issuer's resources from more
direct uses of increasing shareholder value; and (iii) the responsibility of
shareholders to make individual contributions.
Stock Authorizations: The Adviser considers: (i) the need for the increase;
(ii) the percentage increase with respect to the existing authorization; (iii)
voting rights of the stock; and (iv) overall capitalization structures.
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Preferred Stock. The Adviser considers: (i) whether the new class of
preferred stock has unspecified voting, conversion, dividend distribution, and
other rights; (ii) whether the issuer expressly states that the stock will not
be used as a takeover defense or carry superior voting rights; (iii) whether the
issuer specifies the voting, dividend, conversion, and other rights of such
stock and the terms of the preferred stock appear reasonable; and (iv) whether
the stated purpose is to raise capital or make acquisitions in the normal course
of business.
Director Compensation. The Adviser considers: (i) whether director shares
are at the same market risk as those of the shareholders; and (ii) how option
programs for outside directors compare with the standards of internal programs.
Golden and Tin Parachutes. The Adviser considers: (i) whether they will be
submitted for shareholder approval; and (ii) the employees covered by the plan
and the quality of management.
LIMITATIONS
The Adviser may abstain from voting a proxy if it concludes that the effect
on shareholders' economic interests or the value of the portfolio holding is
indeterminable or insignificant. The Adviser may abstain from voting a proxy if
it concludes that the cost of voting is disproportionate to the economic impact
the vote would have on the portfolio holdings.
CONFLICTS OF INTEREST
The Proxy Committee identifies any potential conflicts of interest. Each
potential conflict must be addressed in a manner which will be in the best
interest of the Funds and their shareholders. If any potential conflict is
identified the Proxy Committee consults with the Adviser's CCO. Where conflicts
of interest arise between clients and the Adviser, the Adviser may convene an
ad-hoc committee to debate the conflict and to give a ruling on a preferred
course of action. If the ad-hoc committee determines that the Adviser has a
conflict of interest in any instance, the Adviser's CCO shall disclose the
conflict to the Board and seek voting instructions.
The Adviser may cause the proxies to be voted in accordance with the
recommendations of an independent third party service provider that the Adviser
may use to assist in voting proxies.
DISCLOSURE
The following disclosure shall be provided in connection with these
policies and procedures:
- The Adviser shall provide a description or a copy of these
policies and procedures to the Boards of Trustees of the Funds
annually and upon request.
- The Adviser shall make available to the Funds its proxy voting
records, for inclusion on the Funds' Form N-PX.
- The Adviser shall include its proxy voting policies and
procedures in its annual filing on Form N-CSR.
- The Adviser shall cause the Funds' shareholder reports to include
a statement that a copy of these policies and procedures is
available upon request (i) by calling a toll-free number; (ii) on
the Funds' website, (if the Funds choose); and (iii) on the SEC's
website.
- The Adviser shall cause the Funds' annual and semi-annual reports
to include a statement that information is available regarding
how the Funds voted proxies during the most recent twelve-month
period (i) without charge, upon request, either by calling a
toll-free number or on or through the Funds' website, or both;
and (ii) on the SEC's website.
RECORDKEEPING
The Adviser shall maintain records of proxies voted in accordance with
Section 204-2 of the Advisers Act, including proxy statements, a record of each
vote cast, and a copy of any document created by the Adviser that was material
to making a decision of how to vote the proxy, or that memorializes the basis
for the Adviser's decision on how to vote the proxy. The Adviser shall also
maintain a copy of its policies and procedures and each written request from a
client for proxy voting records and the Adviser's written response to any client
request, either written or oral, for such records. Proxy statements that are
filed on
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EDGAR shall be considered maintained by the Adviser. All such records shall be
maintained for a period of five years in an easily accessible place, the first
two year in the offices of the Adviser.
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ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
None
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's Board of Trustees, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 10. CONTROLS AND PROCEDURES.
(a) In the opinion of the principal executive officer and principal
financial officer, based on their evaluation which took place
within 90 days of this filing, the Registrant's disclosure controls
and procedures are adequately designed and are operating
effectively to ensure (i) that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to them by others within those entities, particularly during the
period in which this report is being prepared; and (ii) that
information required to be disclosed by the registrant on Form
N-CSR is recorded, processed, summarized and reported within the
time period specified in the Securities and Exchange Commission's
rules and forms.
(b) There were no changes in the Registrant's internal control over
financial reporting that occurred during the Registrant's most recent
fiscal half-year that have materially affected or are reasonably
likely to materially affect, the Registrant's internal control.
ITEM 11. EXHIBITS.
(a)(1) The Code of Ethics that is the subject of the disclosure required by
Item 2 is attached hereto (Exhibit 1).
(a)(2) Separate certifications of Principal Executive and Financial Officers
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 attached hereto
(Exhibit 2).
(b) Certifications pursuant to Section 906 of the Sarbanes Oxley Act of 2002
are attached hereto (Exhibit 3).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) H&Q LIFE SCIENCES INVESTORS
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By (Signature and Title)* /s/ Daniel R. Omstead
-------------------------------------------------------
Daniel R. Omstead, President
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Date: December 9, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Kimberley L. Carroll
-------------------------------------------------------
Kimberley L. Carroll, Treasurer
Date: December 9, 2004
* Print the name and title of each signing officer under his or her signature.