H&Q HEALTHCARE INVESTORS
--------------------------------------------------------------------------------
[GRAPHIC]
SEMIANNUAL REPORT
MARCH 31, 2001
To our Shareholders:
At quarter-end on March 31, 2001, the net asset value of your Fund was
$26.34 per share. Performance data for the fiscal year and the quarter ended
March 31 compared to the indices is as follows:
FISCAL YEAR TO DATE QUARTER ENDED
9/30/00 - 3/31/01 3/31/01
----------------- -------
Net Asset Value -35.2% -20.7%
Dow Jones Industrial Average -7.3% -8.4%
NASDAQ Industrials -39.9% -17.1%
Russell 2000 -13.6% -6.8%
The collateral damage to other over-the-counter stocks from the declines
in electronic and e-trade equities in the quarter ended March 31 is reflected in
these performance data. Of some encouragement is the somewhat improved
performance of healthcare stocks relative to the NASDAQ index toward the end of
the quarter.
The overall state of the economy and the levels of common stock
valuation seem to us to still be fragile. For example, consumer sentiment polls
seem to present a positive outlook. That seems inconsistent with the fact that
almost every announcement of corporate earning disappointment is coupled with a
layoff announcement. Under such conditions, how long are consumers going to
continue to spend beyond their incomes? Corporate and consumer debt are at
record levels.
The Federal Reserve Board appears convinced that the wealth effect of
the level of the stock market has to be sustained by lower interest rates to
assure continued consumer confidence. While consumers are roughly two-thirds of
the economy, it is troubling that the capital expenditure portion of the economy
(and electronic equipment, computers, communications equipment, semi-conductors
etc. are cyclically sensitive capital items) is in apparent recession. Perhaps
we, as a country, have over the last several years added all the productivity
that we can utilize until the next major technology product cycles come along.
We are, therefore, concerned about the general valuation levels of the
market and, from our experience, believe that there is no way even a specialized
portfolio such as your Fund's can be totally immune to the effects of any future
general decline in the
1
overall market. Accordingly, we are maintaining a larger than historic liquid
asset position in anticipation of future opportunities to purchase good
companies at depressed valuations in this sector. We believe the portfolio
companies currently held already represent value at the current price levels of
their stocks, especially in view of our expectations of their fundamental
outlook.
We continue to believe that it is important to keep in mind the
differences in the long-term business models of the companies meeting the
investment objectives of your Fund as compared to other types of "technology".
While the development risks are high and attainment of FDA market approvals are
a challenge, patent positions are generally more enforceable and product life
cycles, especially in therapeutic products, are much longer. Market demand for
approved products that improve the human condition usually is very responsive
soon after introduction.
In the quarter, our venture investment activity included follow-on
commitments in Ceres, CytoLogix, KVM Technologies and Sontra Medical. The Fund
also made new private investments in two public companies, ENDOCARDIAL SOLUTIONS
and ORTHOVITA, at discounts to their public market prices and in one new private
company, Novacept. NOVACEPT has an innovative minimally invasive catheter system
to treat excessive menstrual bleeding that appears to be a dramatic improvement
over currently available therapies for a large patient population.
In no way are our expectations diminished that the future value creation
from the inventions in biotechnology and genomics, instrumentation and devices
and the growth of the healthcare sector will lead to vast improvements in the
span and quality of life and present significant investment opportunities in the
future.
/s/ Alan G. Carr
Alan G. Carr
President
2
H&Q HEALTHCARE INVESTORS
------------------------
PRIVACY NOTICE
If you are a registered shareholder of the Fund, the Fund and Hambrecht
& Quist Capital Management, the Funds' investment adviser, may receive nonpublic
personal information about you from the information collected by the transfer
agent from your transactions in Fund shares. Any nonpublic personal information
is not disclosed to third parties, except as permitted or required by law. In
connection with servicing your account and effecting transactions, the
information received may be shared with the investment adviser and
non-affiliates, including transfer agents, custodians or other service
companies. Access to your nonpublic personal information is restricted to
employees who need to know that information to provide products or services to
you. To maintain the security of your nonpublic personal information, physical,
electronic, and procedural safeguards are in place that comply with federal
standards. The policies and practices described above apply to both current and
former shareholders.
If your Fund shares are held in "street name" at a bank or brokerage, we
do not have access to your personal information and you should refer to your
bank's or broker's privacy policies for a statement of the treatment of your
personal information.
[CHART]
H&Q HEALTHCARE INVESTORS
------------------------
PORTFOLIO
AS OF MARCH 31, 2001
AGRI/ENVIRONMENTAL 1.46% 2.00%
BIOTECHNOLOGY 9.61% 48.50%
CROs 0.00% 0.60%
DIAGNOSTICS 2.07% 5.90%
INFORMATION SERVICES 0.56% 0.60%
MANAGED CARE 0.85% 0.90%
MEDICAL SPECIALTY 5.20% 10.50%
MEDICAL SUPPLIES 1.15% 2.00%
PHARMACEUTICALS 2.24% 16.00%
LIQUID ASSETS 0.00% 13.30%
3
H&Q HEALTHCARE INVESTORS
------------------------
LARGEST HOLDINGS
AS OF MARCH 31, 2001
% OF NET ASSETS
---------------
Biovail 6.70%
Cubist Pharmaceuticals 5.76%
Gilead Sciences 4.48%
ImClone Systems 3.68%
Genzyme 3.51%
CV Therapeutics 3.44%
Celgene 3.42%
Molecular Devices 2.65%
Scios 2.57%
MedImmune 2.51%
H&Q HEALTHCARE INVESTORS
------------------------
SIGNIFICANT PORTFOLIO TRANSACTIONS
QUARTER ENDED MARCH 31, 2001
UNITS HELD UNITS HELD
PURCHASES 12/31/00 3/31/01
--------- -------- -------
Ceres (Restricted) Promissory Note $0 $108,000
Ceres (Restricted) Series D 0 277,967
Endocardial Solutions (Restricted) 0 1,000,000
KVM Technologies (Restricted) Cvt. Note $915,000 $1,050,000
Novacept (Restricted) 0 631,580
Orthovita (Restricted) 0 1,020,000
Sontra Medical (Restricted) Promissory Note $0 $180,000
Transkaryotic Therapies 169,812 264,912
SALES
--------
Amgen 100,000 0
Cytyc 592,830 324,330
Gene Logic 135,000 0
Genzyme Biosurgery 104,470 55,841
Interpore Cross 180,000 178,300
4
H&Q HEALTHCARE INVESTORS
------------------------
SCHEDULE OF INVESTMENTS
March 31, 2001
(UNAUDITED)
CONVERTIBLE SECURITIES - 17.2% OF NET ASSETS
SHARES CONVERTIBLE PREFERRED - 15.1% VALUE
--------- ----------
AGRICULTURAL/ENVIRONMENTAL TECHNOLOGIES - 1.4%
375,000 Ceres (Restricted) Series C* $ 2,250,000
277,967 Ceres (Restricted) Series D* 1,667,802
222,222 EPR (Restricted) Series A* 333,333
BIOTECHNOLOGY - 5.9%
400,000 ACADIA Pharmaceuticals (Restricted) Series E* 3,000,000
1,818,182 Raven biotechnologies (Restricted) Series B* 3,000,000
47,407 Therion Biologics (Restricted) Series A* 177,776
36,092 Therion Biologics (Restricted) Sinking Fund* 135,345
1,750,000 Triad Therapeutics (Restricted) Series A* 3,500,000
825,000 Triad Therapeutics (Restricted) Series B* 1,650,000
923,077 Zyomyx (Restricted) Series B* 3,692,308
600,000 Zyomyx (Restricted) Series C* 2,400,000
DIAGNOSTICS - 1.9%
484,829 CytoLogix (Restricted) Series A* 2,448,386
227,130 CytoLogix (Restricted) Series B* 1,147,007
160,000 Masimo (Restricted) Series D* 1,760,000
1,724,138 Sontra Medical (Restricted) Series A* 465,517
MANAGED CARE - 0.5%
338,983 KVM Technologies (Restricted) Series B* 1,500,000
MEDICAL SPECIALTY - 2.0%
636,364 AbTox (Restricted) Series F* 6,364
1,066,667 Novatrix (Restricted) Series D* 10,667
639,659 Songbird Hearing (Restricted) Series B* 3,000,001
652,173 TherOx (Restricted) Series H* 2,999,996
MEDICAL SUPPLIES - 1.2%
400,000 InterVentional Technologies (Restricted) Series E* 200,000
87,500 InterVentional Technologies (Restricted) Series F* 218,750
15,000 InterVentional Technologies (Restricted) Series G* 37,500
343,750 LocalMed (Restricted) Series D* 3,438
631,580 Novacept (Restricted) Series D* 3,000,005
PHARMACEUTICALS/DRUG DELIVERY - 2.2%
211,765 Advanced Medicine (Restricted) Series C* 1,905,885
200,000 Advanced Medicine (Restricted) Series D-1* 1,800,000
1,398,732 Galileo Laboratories (Restricted) Series F* 3,000,000
-----------
$45,310,080
-----------
The accompanying notes are an integral part of these financial statements.
5
H&Q HEALTHCARE INVESTORS
------------------------
SCHEDULE OF INVESTMENTS
March 31, 2001
(CONTINUED)
PRINCIPAL
AMOUNT CONVERTIBLE BONDS AND NOTES - 2.1% VALUE
--------- ---------
AGRICULTURAL/ENVIRONMENTAL TECHNOLOGY - 0.0%
$108,000 Ceres (Restricted) 7% Prom. Note due 2001 $108,000
BIOTECHNOLOGY - 1.6%
6,800,000 CuraGen (Restricted) 6% Cvt. Deb. due 2007 4,658,000
DIAGNOSTICS - 0.1%
180,000 Sontra (Restricted) 8% Prom. Note due 2002 180,000
INFORMATION SERVICES - 0.0%
1,577,366 FitForAll.com (Restricted) 10% Prom. Note due 2003 158
MANAGED CARE - 0.4%
1,050,000 KVM Technologies (Restricted) Adj. Cvt.
Note due 2001 1,050,000
MEDICAL SPECIALTY - 0.1%
180,000 AbTox (Restricted) 12% Prom. Note due 2001 180,000
----------
$6,176,158
----------
TOTAL CONVERTIBLE SECURITIES
(Cost $55,383,443) $51,486,238
-----------
SHARES COMMON STOCKS - 69.6%
------
AGRICULTURAL/ENVIRONMENTAL TECHNOLOGY - 0.5%
71,483 Catalytica Energy Systems* $1,496,675
----------
$1,496,675
----------
BIOTECHNOLOGY - 41.1%
BIOPHARMACEUTICALS - 35.5%
429,898 BioTransplant* $2,283,833
1,150 BioTransplant (Restricted) Warrants* 3,638
2,760 BioTransplant (Restricted) Warrants* 2,174
6,300 BioTransplant (Restricted) Warrants* 4,961
410,400 Celgene* 10,260,000
193,400 Cor Therapeutics* 4,351,500
246,389 Corixa* 1,971,112
550,556 Cubist Pharmaceuticals* 13,488,622
200,001 Cubist Pharmaceuticals (Restricted) Warrants* 3,782,519
312,823 CV Therapeutics* 10,323,159
116,500 Genzyme* 10,523,445
413,318 Gilead Sciences* 13,432,835
333,000 ImClone Systems* 11,051,438
210,000 MedImmune* 7,533,750
161,253 Pharming Group* 1,204,571
226,760 Therion Biologics (Restricted)* 850,350
240,000 Therion Biologics (Restricted) Units* 900,000
The accompanying notes are an integral part of these financial statements.
6
H&Q HEALTHCARE INVESTORS
------------------------
SCHEDULE OF INVESTMENTS
March 31, 2001
(CONTINUED)
SHARES BIOTECHNOLOGY - CONTINUED VALUE
------ -------------
264,912 Transkaryotic Therapies* 4,652,517
270,270 Tularik* 5,135,130
450,000 Versicor* 3,628,125
178,165 Versicor (Restricted)* 1,077,346
GENOMICS/DRUG DISCOVERY - 5.6%
60,000 Affymetrix* 1,668,750
299,302 Dyax* 2,394,416
98,000 Exelixis* 851,375
225,000 Lynx Therapeutics* 1,894,922
174,461 Molecular Devices* 7,937,976
370,237 Telik* 1,920,604
------------
$123,129,068
------------
CONTRACT RESEARCH ORGANIZATIONS - 0.6%
91,400 Quintiles Transnational* $1,725,175
------------
$1,725,175
------------
DIAGNOSTICS - 3.9%
522,517 Biofield* $193,331
600,000 Biofield (Restricted)* 177,600
657,576 Calypte Biomedical* 420,849
324,330 Cytyc* 5,354,216
140,000 Digene* 2,135,000
152,000 IDEXX Laboratories* 3,334,500
160,000 Masimo Labs (Restricted)* 1,600
------------
$11,617,096
------------
INFORMATION SERVICES - 0.5%
4,366,920 Codman Group (Restricted)* $436,692
306,208 Physician WebLink (Restricted)* 1,200,473
188,096 Physician WebLink (Restricted) Warrants* 18,810
------------
$1,655,975
------------
MEDICAL SPECIALTY - 8.4%
381,818 ATS Medical* $3,674,998
130,900 Bioject Medical Technologies* 1,431,719
101,848 Biopure* 1,355,852
8,333 Biopure (Restricted) Warrants* 9,844
205,310 Curis* 760,289
1,000,000 Endocardial Solutions (Restricted)* 3,375,000
153,386 Focal* 95,866
55,841 Genzyme Biosurgery* 307,126
178,300 Interpore Cross* 746,631
441,409 Martek Biosciences* 6,841,840
The accompanying notes are an integral part of these financial statements.
7
H&Q HEALTHCARE INVESTORS
------------------------
SCHEDULE OF INVESTMENTS
March 31, 2001
(CONTINUED)
SHARES MEDICAL SPECIALTY - CONTINUED VALUE
--------- -----------
1,020,000 Orthovita (Restricted)* 6,024,426
198,000 Radiance Medical Systems* 711,563
------------
$25,335,154
------------
MEDICAL SUPPLIES - 0.9%
645,000 EP MedSystems* $1,451,250
137,457 KeraVision* 7,560
311,449 Landec* 1,129,003
------------
$2,587,813
------------
PHARMACEUTICALS/DRUG DELIVERY - 13.7%
225,000 Aradigm* $1,293,750
555,924 Biovail* 20,085,534
91,500 Emisphere Technologies* 1,309,594
334,500 Scios* 7,693,500
217,138 Sepracor* 6,948,416
70,000 Teva Pharmaceutical Industries 3,823,750
------------
$41,154,544
------------
TOTAL COMMON STOCKS
(Cost $101,283,279) $208,701,500
------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $156,666,722) $260,187,738
============
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENTS - 14.8% VALUE
--------- -----------
$5,500,000 American Express Credit, 5.17%, due 4/6/01 $5,496,050
2,000,000 American Express Credit, 5.09%, due 4/11/01 1,997,172
3,000,000 American Express Credit, 4.90%, due 4/23/01 2,991,017
13,000,000 Ford Motor Credit Corp., 4.84%, due 4/18/01 12,970,288
3,000,000 Ford Motor Credit Corp., 4.83%, due 4/25/01 2,990,340
5,000,000 General Electric Capital Corp., 4.94%, due 4/2/01 4,999,314
13,000,000 General Motors Acceptance Corp., 4.80%,
due 4/16/01 12,974,000
------------
TOTAL TEMPORARY CASH INVESTMENTS $44,418,181
============
-----------
* Non income-producing security (see Notes 1 and 5).
The accompanying notes are an integral part of these financial statements.
8
H&Q HEALTHCARE INVESTORS
------------------------
BALANCE SHEET
March 31, 2001
(UNAUDITED)
ASSETS:
Investments in securities, at value (identified cost
$156,666,722; see Schedule of Investments)
(Notes 1, 3 and 5) $260,187,738
Temporary cash investments, at amortized cost
which approximates value (see Schedule of
Investments) (Note 1) 44,418,181
------------
Total investments $304,605,919
Cash 776,473
Dividends and interest receivable 71,345
Prepaid expenses and other assets 168,869
------------
Total assets $305,622,606
------------
LIABILITIES:
Capital gains distribution payable $5,233,003
Accrued advisory fees (Note 4) 379,472
Other accrued expenses 95,480
------------
Total liabilities $5,707,955
------------
NET ASSETS:
Shares of beneficial interest, par value $.01 per
share, unlimited number of shares authorized,
amount paid in on 11,385,069 shares issued and
outstanding (Note 1) $177,296,535
Accumulated undistributed net investment (loss) (747,635)
Accumulated net realized gain on investments 19,844,735
Net unrealized gain on investments (Note 3) 103,521,016
------------
Total net assets (equivalent to $26.34 per share
based on 11,385,069 shares outstanding) $299,914,651
============
The accompanying notes are an integral part of these financial statements.
9
H&Q HEALTHCARE INVESTORS
------------------------
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 2001
(UNAUDITED)
INVESTMENT INCOME (Note 1):
Dividend income $8,251
Interest income 1,544,752
----------
Total investment income $1,553,003
EXPENSES:
Advisory fees (Note 4) $2,150,649
Trustees' fees and expenses 36,315
Shareholder reporting 29,532
Custodian fees 19,458
Legal fees 18,067
Transfer agent fees 11,688
Accounting and auditing fees 8,357
Other 26,572
----------
Total expenses 2,300,638
-------------
Net investment (loss) ($747,635)
-------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments (Note 1) $47,460,750
Net (decrease) in unrealized gain on
investments (215,278,729)
-------------
Net (loss) on investments ($167,817,979)
-------------
Net (decrease) in net assets
resulting from operations ($168,565,614)
=============
The accompanying notes are an integral part of these financial statements.
10
H&Q HEALTHCARE INVESTORS
------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the six For the
months ended year ended
March 31, 2001 September 30,
(Unaudited) 2000
------------- ------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM OPERATIONS:
Net investment (loss) ($747,635) ($3,056,159)
Net realized gain on investments 47,460,750 35,694,901
Net increase (decrease) in unrealized
gain on investments (215,278,729) 253,975,089
------------- ------------
Net increase (decrease) in net
assets resulting from
operations ($168,565,614) $286,613,831
------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized capital gains ($38,327,331) ($34,646,099)
------------- ------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in
reinvestment of distributions $21,225,026 $24,095,211
------------- ------------
Net increase (decrease)
in net assets ($185,667,919) $276,062,943
NET ASSETS:
Beginning of period 485,582,570 209,519,627
------------- ------------
End of period $299,914,651 $485,582,570
============= ============
The accompanying notes are an integral part of these financial statements.
11
H&Q HEALTHCARE INVESTORS
------------------------
STATEMENT OF CASH FLOWS
For the Six Months Ended March 31, 2001
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $1,597,023
Dividends received 8,251
Operating expenses paid (2,780,999)
------------
Net cash used for operating activities ($1,175,725)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of portfolio securities $595,696,337
Purchases of portfolio securities (582,129,451)
------------
Net cash provided by investing activities $13,566,886
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid, net ($11,869,302)
------------
Net cash used for financing activities ($11,869,302)
NET INCREASE IN CASH $521,859
CASH AT BEGINNING OF PERIOD 254,614
------------
CASH AT END OF PERIOD $776,473
============
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 ($168,565,614)
Net realized (gain) on investments (47,460,750)
Net decrease in unrealized gain on investments 215,278,729
Net decrease in interest and dividends receivable 52,271
Net (decrease) in accrued advisory fees and accrued
other expenses (369,482)
Net (increase) in prepaid expenses and other assets (110,879)
------------
Net cash used for operating activities ($1,175,725)
============
The accompanying notes are an integral part of these financial statements.
12
H&Q HEALTHCARE INVESTORS
------------------------
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD INDICATED)
For the six
months ended For the years ended September 30,
March 31, 2001 ------------------------------------------------------------------
(Unaudited) 2000 1999 1998 1997 1996
----------- ---- ---- ---- ---- ----
Net asset value per share:
Beginning of period $46.147 $21.771 $16.711 $23.106 $25.754 $21.818
------- ------- ------- ------- ------- -------
Net investment (loss) ($0.066) ($0.290) ($0.176) ($0.217) ($0.224) ($0.331)
Net realized and unrealized
gain (loss) on
investments (16.150) 28.131 5.596 (5.108) 4.524 5.487
Total increase (decrease)
from investment
operations ($16.216) $27.841 $5.420 ($5.325) $4.300 $5.156
------- ------- ------- ------- ------- -------
Dilutive effect of sale of
common stock and
related expenses from
rights offering -- -- -- -- (2.458) --
Long-term capital gains
distribution to
shareholders ($3.589) ($3.465) ($0.360) ($1.070) ($4.490) ($1.220)
------- ------- ------- ------- ------- -------
Net asset value per share:
End of period $26.342 $46.147 $21.771 $16.711 $23.106 $25.754
======= ======= ======= ======= ======= =======
Per share market value:
End of period $20.790 $36.188 $16.313 $13.125 $19.000 $20.875
Total investment return (33.67%) 151.66% 27.39% (26.05%) 14.01% 22.03%
Net assets:
End of period $299,914,651 $485,582,570 $209,519,627 $157,976,073 $207,728,666 $147,552,505
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses
to average net assets 1.21%* 1.45% 1.46% 1.46% 1.57% 1.62%
Ratio of net investment (loss)
to average net assets (0.39%)* (0.86%) (0.91%) (1.11%) (1.13%) (1.44%)
Portfolio turnover rate 8.06% 12.90% 24.88% 7.15% 17.47% 22.41%
Number of shares
outstanding at end
of period 11,385,069 10,522,490 9,623,524 9,453,317 8,990,179 5,729,160
*Annualized
The accompanying notes are an integral part of these financial statements.
13
H&Q HEALTHCARE INVESTORS
------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
(UNAUDITED)
(1) ORGANIZATION
H&Q Healthcare 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 October 31, 1986 and
commenced operations on April 22, 1987.
The preparation of these financial statements requires the use of certain
estimates by management in determining the entity's assets, liabilities,
revenues and expenses. Actual results could differ from these estimates. The
following is a summary of significant accounting policies consistently
followed by the Fund, which are in conformity with those generally accepted
in the investment company industry.
INVESTMENT SECURITIES
Transactions related to the investments of the Fund are recorded on the
date the securities are purchased or sold. Investments traded on national
securities exchanges or in the over-the-counter market that are National
Market System securities are valued at the last sale price or, lacking any
sales, at the mean between 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 5, investments for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board
of Trustees of the Fund. Temporary cash investments with maturities of 60
days or less are valued at amortized cost.
Gains and losses from sales of investments are recorded using the
"identified cost" method for both financial reporting and Federal income tax
purposes. Investment income and expenses are recorded on the accrual basis.
FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
to its shareholders substantially all of its taxable income and its net
realized capital gains, if any. Therefore, no Federal income tax provision
is required.
DISTRIBUTIONS
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations. Due to permanent
book/tax differences in accounting for certain transactions, certain
distributions may be treated as distributions from capital as opposed to
distributions of net investment income or realized capital gains.
DISTRIBUTION POLICY
The current distribution policy is to declare distributions in stock.
Stock distributions will automatically be paid in newly issued shares of the
Fund unless otherwise instructed by the shareholder. The shares will be
valued at the lower of net asset value or market price on the pricing date.
The Fund has implemented a fixed distribution policy that permits the Fund
to make quarterly distributions at a rate of 2% of the Fund's net assets to
shareholders of record. The Fund intends to use net realized capital gains
when making quarterly distributions. This
14
H&Q HEALTHCARE INVESTORS
------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
(continued)
could result in a return of capital to shareholders if the amount of the
distribution exceeds the Fund's net investment income and realized capital
gains. It is anticipated that net realized capital gains in excess of the
total distributed under this policy would be included in the December
distribution.
If a distribution were to be declared in cash, it would then
be subject to the Dividend Reinvestment Plan. Under the Dividend
Reinvestment Plan, distributions will automatically be paid in additional
shares of the Fund, unless State Street Bank is otherwise instructed.
Shareholders may request to be paid in cash instead of shares by
responding to the bank, brokerage or nominee who holds the shares if the
shares are in "street name" or by filling out a form received from State
Street Bank if the shares are in registered form.
(2) PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investment
securities (other than temporary cash investments) for the period from
October 1, 2000 through March 31, 2001 totaled $27,684,259 and $60,508,953,
respectively.
(3) TAX BASIS OF SECURITIES
At March 31, 2001, the total cost of securities for Federal income tax
purposes was $156,666,722. The aggregate gross unrealized gain on securities
in which there was an excess of market value over cost was $132,416,394. The
aggregate gross unrealized loss on securities in which there was an excess
of cost over market value was $28,895,378. The net unrealized gain on
securities held by the Fund was $103,521,016.
(4) ADVISORY AGREEMENT
The Fund has entered into an Investment Advisory Agreement (the Advisory
Agreement) with Hambrecht & Quist Capital Management Incorporated (the
Adviser). Pursuant to the terms of the Advisory Agreement, the Fund pays the
Adviser a monthly fee at the rate when annualized of (i) 2.5% of the average
net assets for the month of its venture capital and other restricted
securities up to 25% of net assets and (ii) for the month, for all other
assets, 1.0% of the average net assets up to $250 million, 0.9% of the
average net assets for the next $250 million, 0.8% of the average net assets
for the next $500 million and 0.7% of the average net assets thereafter. The
aggregate fee may not exceed a rate when annualized of 1.375%. Certain
officers and Trustees of the Fund are also officers of the Adviser. The
Adviser is an indirect wholly owned subsidiary of J.P. Morgan Chase & Co.
(5) VENTURE CAPITAL AND OTHER RESTRICTED SECURITIES
The Fund may invest in venture capital and other restricted securities if
these securities would currently comprise 40% or less of net assets. The
value of these securities represents 23.1% of the Fund's net assets at March
31, 2001.
The value of the venture capital and other restricted securities is
determined in good faith by the Board of Trustees. However, because of the
inherent uncertainty of valuations, these estimated values may differ
significantly from the values that would have been used had a ready market
for the securities existed, and the differences could be material. The
following table details the acquisition date, cost, carrying value per unit,
and value of the Fund's venture capital and other restricted securities at
March 31, 2001, as determined by the Board of Trustees of the Fund.
15
H&Q HEALTHCARE INVESTORS
------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
(continued)
Acquisition Carrying Value
Security Date Cost per Unit Value
---------------------------------------- ----------- ---------- --------------- ---------
AbTox
Series F Cvt. Pfd. 3/7/97 $1,401,341 $0.010 $6,364
12% Promissory Note due 2001 2/26/98 65,929
3/11/98 60,000
3/26/98 60,000
----------
185,929 1.000 180,000
ACADIA Pharmaceuticals
Series E Cvt. Pfd. 5/2/00 3,000,273 7.500 3,000,000
Advanced Medicine
Series C Cvt. Pfd. 2/5/99 1,800,123 9.000 1,905,885
Series D-1 Cvt. Pfd. 8/28/00 1,800,000 9.000 1,800,000
Biofield #
Common 12/15/00 300,000 0.296 177,600
Biopure ^
Common Warrants 5/13/99 0 1.181 9,844
BioTransplant *
Common Warrants 8/12/94 0 0.787 2,174
Common Warrants 10/31/94 0 0.787 4,961
Common Warrants 8/18/95 0 3.163 3,638
Ceres
Series C Cvt. Pfd. 12/23/98 1,500,875 6.000 2,250,000
Series D Cvt. Pfd. 3/14/01 1,667,802 6.000 1,667,802
7% Promissory Note due 2001 1/4/01 108,000 1.000 108,000
Codman Group
Common 1/26/96 1,652,603
8/24/97 900,155
----------
2,552,758 0.100 436,692
Cubist Pharmaceuticals ##
Common Warrants 9/23/98 235 18.913 3,782,519
CuraGen
6% Cvt. Debenture due 2007 1/28/00 2,974,500
3/30/00 1,694,007
6/27/00 464,800
6/28/00 975,950
----------
6,109,257 68.500 4,658,000
CytoLogix
Series A Cvt. Pfd. 1/13/98 1,070,898
11/10/98 900,281
7/21/99 360,160
----------
2,331,339 5.050 2,448,386
Series B Cvt. Pfd. 1/11/01 1,147,005 5.050 1,147,005
Endocardial Solutions #
Common 3/21/01 3,000,000 3.000 3,375,000
EPR
Series A Cvt. Pfd. 3/9/94 1,000,409 1.500 333,333
FitForAll.com
10% Promissory Note due 2003 2/22/00 450,000
4/3/00 69,821
4/20/00 301,852
5/15/00 457,821
7/27/00 159,666
9/18/00 150,000
----------
1,589,160 0.000 158
16
H&Q HEALTHCARE INVESTORS
------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
(continued)
Acquisition Carrying Value
Security Date Cost per Unit Value
---------------------------------------- ----------- ---------- --------------- ---------
Galileo Laboratories
Series F Cvt. Pfd. 8/18/00 3,000,000 2.145 3,000,000
InterVentional Technologies
Series E Cvt. Pfd. 4/2/91 500,667 0.500 200,000
Series F Cvt. Pfd. 8/21/92 700,399 2.500 218,750
Series G Cvt. Pfd. 3/8/95 150,431 2.500 37,500
KVM Technologies
Series B Cvt. Pfd. 2/19/98 1,501,320 4.425 1,500,000
Adj. Cvt. Promissory Note due 2001 6/21/99 150,625
10/19/99 120,000
12/15/99 30,000
1/20/00 45,000
3/16/00 60,000
4/13/00 90,000
5/24/00 60,000
7/10/00 60,000
7/31/00 90,000
10/11/00 60,000
11/13/00 150,000
1/30/01 135,000
----------
1,050,625 1.000 1,050,000
LocalMed
Series D Cvt. Pfd. 2/9/96 1,376,970 0.010 3,438
MASIMO
Series D Cvt. Pfd. 8/14/96 1,120,000 11.000 1,760,000
Masimo Labs
Common 8/14/96 1,600 0.010 1,600
Novacept
Series D Cvt. Pfd. 3/27/01 3,000,005 4.750 3,000,005
Novatrix
Series D Cvt. Pfd. 5/25/00 2,400,691 0.010 10,667
Orthovita ^
Common 3/16/01 4,080,000 4.000 6,024,426
Physician WebLink
Common 2/5/97 1,200,325 3.920 1,200,473
Common Warrants 10/15/98 0 0.100 18,810
Raven biotechnologies
Series B Cvt. Pfd. 12/12/00 3,000,000 1.650 3,000,000
Songbird Hearing
Series D Cvt. Pfd. 12/14/00 3,000,001 4.690 3,000,001
Sontra Medical
Series A Cvt. Pfd. 9/9/98 1,200,420 0.270 465,517
8% Promissory Note due 2002 3/26/01 180,000 1.000 180,000
Therion Biologics
Common 7/12/90 7,582
6/30/93 502,648
8/20/96 818
10/16/96 3,623
----------
514,671 3.750 850,350
Sinking Fund Cvt. Pfd. 10/17/94 251,260
4/19/95 97,116
7/12/95 97,063
10/17/95 97,000
1/25/96 89,176
4/3/96 90,200
----------
721,815 3.750 135,345
17
H&Q HEALTHCARE INVESTORS
------------------------
FINANCIAL HIGHLIGHTS
March 31, 2001
(continued)
Acquisition Carrying Value
Security Date Cost per Unit Value
---------------------------------------- ----------- ---------- --------------- ---------
Therion Biologics (cont.)
Series A Cvt. Pfd. 8/20/96 80,982
10/16/96 358,631
----------
439,613 3.750 177,776
Units 2/24/99 68,989
6/3/99 68,989
6/22/99 762,022
----------
900,000 3.750 900,000
TherOx
Series H Cvt. Pfd. 9/11/00 2,999,996 4.600 2,999,996
Triad Therapeutics
Series A Cvt. Pfd. 6/8/99 1,750,860 2.000 3,500,000
Series B Cvt. Pfd. 12/20/00 1,650,000 2.000 1,650,000
Versicor **
Common 6/28/99 427,365
10/29/99 414,733
----------
842,098 6.047 1,077,346
Zyomyx
Series B Cvt. Pfd. 2/19/99 1,200,550 4.000 3,692,308
Series C Cvt. Pfd. 3/2/00 1,200,690 4.000 2,400,000
---------- -----------
$68,998,253 $69,351,671
========== ===========
* Represents 60% of equivalent current market value.
** Represents 75% of equivalent current market value.
# Represents 80% of equivalent current market value.
## Represents 85% of equivalent current market value.
^ Represents 90% of equivalent current market value.
These accompanying notes are an integral part of these financial statements.
18
H&Q HEALTHCARE INVESTORS
30 Rowes Wharf, 4th Floor
Boston, Massachusetts 02110-3328
(617) 310-0567
OFFICERS
Alan G. Carr, President
Kimberley L. Carroll, Treasurer
Kerri A. Bisner, Secretary
TRUSTEES
Alan G. Carr
Lawrence S. Lewin
Robert P. Mack, M.D.
Eric Oddleifson
Oleg M. Pohotsky
Uwe E. Reinhardt, Ph.D.
Henri A. Termeer
INVESTMENT ADVISER
Hambrecht & Quist Capital Management Incorporated
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
LEGAL COUNSEL
Dechert Price & Rhoads
------------------------------------
Shareholders with questions regarding share transfers may call
1-800-426-5523
Interim daily net asset value may be obtained by calling
1-800-451-2597
For copies of the Fund's
DIVIDEND REINVESTMENT PLAN,
please contact the Plan Agent, State Street Bank & Trust Co.
P.O. Box 8200, Boston, MA 02266-8200
Telephone: 1-800-426-5523
H&Q HEALTHCARE INVESTORS
------------------------
New York Stock Exchange Symbol: HQH
www.hqcm.com
---------
Out of concern for the environment and in an effort to reduce
Fund expenses, this report is printed on recycled paper.
HQHCM-SAR-01