H&Q HEALTHCARE INVESTORS
------------------------
[GRAPHIC]
ANNUAL REPORT
2 0 0 1
To our Shareholders:
At fiscal year-end on September 30, 2001, the net asset value of your Fund
was $27.35 per share. Performance data for the fiscal year and the quarter ended
September 30, 2001, compared to the indices, are as follows:
QUARTER ENDED
FISCAL YEAR 9/30/01
Net Asset Value -28.2% -14.3%
Dow Jones Industrial Average -16.9% -15.8%
NASDAQ Industrials -46.7% -28.1%
Russell 2000 -22.4% -21.0%
Performance of the Fund has, not surprisingly, been negatively affected by
the general trends in the popular market averages. Some encouragement can be
found in the more recent data suggesting that, particularly relative to the
over-the-counter market where most of the securities in the portfolio trade,
recent periods showed relative performance improvement.
In our fiscal mid-year report for the period ended March 31, 2001, we
noted, "The overall state of the economy and the levels of common stock
valuation seem to us to still be fragile". We continue to believe that this is
true. For the economy, the horrifying events of September 11 seem to have
accelerated the recessionary trends already in place. The reductions in interest
rates and an expectation that record levels of money market funds may soon
return to the stock market may be sustaining equity valuations. However, the
fundamental economic benefits from declining rates are not yet apparent. Indeed,
as lenders increase their credit worthiness standards, many companies are
finding their borrowing capacity constrained. The consensus that the U.S.
economy is in recession is spreading, but the view that the economy will rebound
in a quarter or two seems to us to be a bit optimistic.
We also appear to be in the first synchronous worldwide decline in economic
activity in twenty-five years, and most of the elements that have concerned us
for some time remain uncorrected. Consumer and business debt remains high. A
near-term rebound in capital spending seems unlikely as capacity utilization
continues to appear to be declining. We also believe that the current trend
toward higher unemployment, as businesses in almost all sectors attempt to
control costs through layoffs, has not yet been fully reflected in economic
activity. Among the bright spots, inflation is not an immediate concern as the
ability of companies to raise prices throughout the economy is virtually
non-existent, the decline in energy prices has the effect of a tax cut, and
mortgage refinancings are providing consumers with increased cash flow.
Thus far, the long-term economic effect of the events of September 11 on
consumption patterns and equity valuations are unknown, but the apparent rebound
in both seems somewhat encouraging. A decline in economic activity and the cost
of pursuing the war against terrorism has resulted in declining state and
federal fiscal surpluses, but the prospect of federal government tax cuts may
mitigate the extent of any recession.
As noted, stock prices in the healthcare industries are not immune from
general stock market activity, but on a fundamental basis, the progress of the
companies in the Fund continues to be largely unaffected. Additionally, a very
large number of companies in the sector took advantage of the previous financing
cycle and balance sheets in most cases are strong. New products continue to be
approved and come to the market and will create improving
1
cash flows. The number of emerging companies reporting profits for the first
time continues to expand. It is our experience that emerging growth companies
with these characteristics tend to outperform the overall stock market when
investors anticipating the end of a recession and begin to reinvest. In contrast
to technologies such as electronics and communications, the technologies
represented by your Fund's portfolio companies are generally unaffected by
capital expenditure cycles. Particularly in biotechnology, we believe that the
long-term outlook is excellent as new discoveries work their way through
clinical development to commercialization.
In the most recent quarter, two new companies were added to the venture
capital portion of the portfolio. PHT CORPORATION provides biopharmaceutical
companies, contract research organizations (CRO's) and medical device companies
with web-based software and services to support clinical trial research of new
products. VNUS MEDICAL TECHNOLOGIES has an FDA approved system using radio
frequency heat with a disposable single-use catheter to collapse varicose veins,
a significant improvement over surgically-based, more invasive procedures.
On a near-term basis, the macro environment presents some uncertainties.
Our longer-term expectation that the unique characteristics of the companies in
the portfolio, focused on the improvement of the span and quality of life, will
generate above average investment returns, remains undiminished.
/s/ Alan G. Carr /s/ Daniel R. Omstead
Alan G. Carr Daniel R. Omstead
President Emeritus President
H&Q HEALTHCARE INVESTORS
------------------------
PORTFOLIO
AS OF SEPTEMBER 30, 2001
Total Venture Difference
AGRI/ENVIRONMENTAL 1.50% 1.34% 0.17%
BIOTECHNOLOGY 47.90% 8.20% 39.69%
CROs 0.40% 0.00% 0.41%
DIAGNOSTICS 8.30% 3.48% 4.84%
INFORMATION SERVICES 1.70% 1.65% 0.00%
MANAGED CARE 0.90% 0.87% 0.00%
MEDICAL SPECIALTY 9.50% 3.44% 6.02%
MEDICAL SUPPLIES 1.90% 1.60% 0.31%
PHARMACEUTICALS 13.00% 2.04% 10.99%
LIQUID ASSETS 15.00% 0.00% 14.95%
2
H&Q HEALTHCARE INVESTORS
------------------------
LARGEST HOLDINGS
AS OF SEPTEMBER 30, 2001
% OF NET ASSETS
---------------
Cubist Pharmaceuticals 7.05%
Gilead Sciences 7.05%
Biovail 4.87%
CV Therapeutics 3.69%
Celgene 3.29%
Cytyc 2.64%
Versicor 2.51%
Martek Biosciences 2.44%
Sepracor 2.37%
MedImmune 2.27%
H&Q HEALTHCARE INVESTORS
------------------------
SIGNIFICANT PORTFOLIO TRANSACTIONS
QUARTER ENDED SEPTEMBER 30, 2001
UNITS HELD UNITS HELD
PURCHASES 6/30/01 9/30/01
Abgenix 0 150,000
Cephalon 0 54,000
KVM Technologies (Restricted) Cvt. Note $1,170,000 $1,350,000
Lexicon Genetics 0 78,500
PHT (Restricted) 0 5,384,616
Sontra Medical (Restricted) Series B 0 536,459
Therion Biologics (Restricted) Series C 0 80,000
VNUS Medical Technologies (Restricted) 0 820,313
SALES
Calypte Biomedical 657,576 0
Genzyme Biosurgery 79,539 0
ImClone Systems 57,000 0
KeraVision 137,457 0
Pharming Group 161,253 0
3
ANNUAL MEETING REPORT
The Annual Meeting was held on June 8, 2001, at 9:00 a.m. The shareholders
voted on the following items and the resulting votes are presented below.
(1) To elect three Trustees of the Fund to hold office for a term of three
years or until their respective successors shall have been duly elected and
qualified.
FOR WITHHELD BROKER NON-VOTES
Robert P. Mack, M.D. 9,298,466 82,736 0
Eric Oddleifson 9,294,399 86,803 0
Oleg M. Pohotsky 9,236,670 144,532 0
The nominees were elected to serve until the 2004 Annual Meeting of
Shareholders. The Trustees serving until the 2002 Annual Meeting are Alan
G. Carr and Henri A. Termeer. The Trustees serving until the 2003 Annual
Meeting are Lawrence S. Lewin and Uwe E. Reinhardt, Ph.D.
(2) To ratify the selection of Arthur Andersen as the Fund's independent
accountants for the fiscal year ended September 30, 2002.
Shareholders overwhelmingly ratified the selection of the Independent
Public Accountants.
FOR AGAINST ABSTAIN BROKER NON-VOTES
9,302,347 40,545 38,310 0
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP resigned as the Fund's independent accountants as of
September 27, 2001. The resignation was prompted by recent revisions to the
SEC's auditor independence requirements. As a result of those revisions, Arthur
Andersen LLP may no longer be considered "independent" with respect to the Fund
because of its commercial banking relationship with JP Morgan Chase, the parent
company of Hambrecht & Quist Capital Management. The Trustees voted to appoint
PricewaterhouseCoopers LLP as the Fund's independent accountants for the Fund's
fiscal year ended September 30, 2001. During the two previous years, Arthur
Andersen LLP's audit reports contained no adverse opinion or disclaimer of
opinion; nor were its reports qualified or modified as to uncertainty, audit
scope, or accounting principle. Further, in connection with its audits for the
two previous fiscal years and through September 27, 2001, there were no
disagreements between the Fund and Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which if not resolved to the satisfaction of Arthur Andersen
LLP would have caused it to make reference to the disagreements in its report on
the financial statements for such years.
4
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF H&Q HEALTHCARE INVESTORS:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of H&Q Healthcare
Investors (the "Fund") at September 30, 2001, and the results of its operations,
the changes in its net assets, its cash flows and the financial highlights for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit, which included confirmation of securities at September
30, 2001 by correspondence with the custodian, provides a reasonable basis for
our opinion.
As explained in Note 4, the financial statements include securities valued at
$72,245,747 (22% of net assets), whose values have been estimated by the
Trustees in the absence of readily ascertainable market values. Those 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 financial statements of the Fund as of September 30, 2000 and for the four
years then ended were audited by other independent accountants whose report
dated November 3, 2000 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 20, 2001
5
H&Q HEALTHCARE INVESTORS
------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2001
CONVERTIBLE SECURITIES - 20.9% OF NET ASSETS
SHARES CONVERTIBLE PREFERRED (RESTRICTED) - 18.9% VALUE
AGRICULTURAL/ENVIRONMENTAL TECHNOLOGIES - 1.3%
375,000 Ceres Series C* $2,250,000
27,443 Ceres Series C-1*# 164,658
277,967 Ceres Series D*# 1,667,802
222,222 EPR Series A* 333,333
BIOTECHNOLOGY - 6.1%
400,000 ACADIA Pharmaceuticals Series E* 3,000,000
1,818,182 Raven biotechnologies Series B*^ 3,000,000
47,407 Therion Biologics Series A* 177,776
240,000 Therion Biologics Series B*# 900,000
407,712 Therion Biologics Series C*# 1,528,922
36,092 Therion Biologics Sinking Fund* 135,345
1,750,000 Triad Therapeutics Series A* 3,500,000
825,000 Triad Therapeutics Series B* 1,650,000
923,077 Zyomyx Series B* 3,692,308
600,000 Zyomyx Series C* 2,400,000
DIAGNOSTICS - 3.4%
1,371,429 CardioNet Series C*^ 4,800,002
484,829 CytoLogix Series A*^ 2,448,386
227,130 CytoLogix Series B*#^ 1,147,007
160,000 Masimo Series D* 1,760,000
1,724,138 Sontra Medical Series A*^ 867,759
536,459 Sontra Medical Series B*^ 270,000
INFORMATION SERVICES - 1.3%
5,384,616 PHT Series D*^ 4,200,000
MANAGED CARE - 0.5%
338,983 KVM Technologies Series B*#^ 1,500,000
MEDICAL SPECIALTY - 3.4%
636,364 AbTox Series F* 6,364
1,632,653 Omnisonics Series B*^ 2,400,000
639,659 Songbird Hearing Series D* 1,496,802
652,173 TherOx Series H* 2,999,996
820,313 VNUS Medical Technologies Series E*^ 4,200,003
MEDICAL SUPPLIES - 0.9%
343,750 LocalMed Series D* 3,438
631,580 Novacept Series G*# 3,000,005
PHARMACEUTICALS/DRUG DELIVERY - 2.0%
211,765 Advanced Medicine Series C* 1,905,885
200,000 Advanced Medicine Series D-1* 1,800,000
1,398,732 Galileo Laboratories Series F* 3,000,000
-----------
$62,205,791
-----------
The accompanying notes are an integral part of these financial statements.
6
PRINCIPAL CONVERTIBLE SECURITIES - CONTINUED
AMOUNT CONVERTIBLE BONDS AND NOTES - 2.0% VALUE
BIOTECHNOLOGY - 1.6%
$6,800,000 CuraGen 6% Cvt. Deb. due 2007~ $ 5,168,000
INFORMATION SERVICES - 0.0%
1,577,366 FitForAll.com (Restricted) 10% Prom. Note*#+ 158
MANAGED CARE - 0.4%
1,350,000 KVM Technologies (Restricted) Adj. Cvt.
Demand Note*#^ 1,350,000
MEDICAL SPECIALTY - 0.0%
180,000 AbTox (Restricted) 12% Prom. Note*+ 180,000
-----------
$ 6,698,158
-----------
TOTAL CONVERTIBLE SECURITIES
(Cost $70,478,155) $68,903,949
-----------
SHARES COMMON STOCKS - 63.6%
AGRICULTURAL/ENVIRONMENTAL TECHNOLOGY - 0.2%
71,483 Catalytica Energy Systems* $547,560
-----------
547,560
-----------
BIOTECHNOLOGY - 40.4%
BIOPHARMACEUTICALS - 35.8%
429,898 BioTransplant* 2,364,439
1,150 BioTransplant (Restricted) Warrants (expire 8/15/05)* 3,767
2,760 BioTransplant (Restricted) Warrants (expire 8/12/04)* 2,484
6,300 BioTransplant (Restricted) Warrants (expire 10/31/04)* 5,670
410,400 Celgene* 10,846,872
54,000 Cephalon* 2,693,520
193,400 Cor Therapeutics* 4,376,642
246,389 Corixa* 2,586,863
550,556 Cubist Pharmaceuticals* 18,041,720
200,001 Cubist Pharmaceuticals (Restricted) Warrants
(expire 9/23/03)* 5,188,426
312,823 CV Therapeutics* 12,156,302
163,000 Genzyme* 7,403,460
413,318 Gilead Sciences* 23,216,072
210,000 MedImmune* 7,482,300
226,760 Therion Biologics (Restricted)* 850,350
264,912 Transkaryotic Therapies* 7,189,712
270,270 Tularik* 4,978,373
540,508 Versicor* 7,242,807
87,657 Versicor (Restricted)* 880,953
18,696 Versicor (Restricted) Warrants (expire 8/3/05)* 129,825
The accompanying notes are an integral part of these financial statements.
7
SHARES BIOTECHNOLOGY - CONTINUED VALUE
GENOMICS/DRUG DISCOVERY - 4.6%
150,000 Abgenix* $3,405,000
60,000 Affymetrix* 963,000
299,302 Dyax* 2,879,285
98,000 Exelixis* 1,123,080
78,500 Lexicon Genetics* 596,600
225,000 Lynx Therapeutics* 535,500
174,461 Molecular Devices* 3,251,953
370,237 Telik* 2,406,541
-----------
132,801,516
-----------
CONTRACT RESEARCH ORGANIZATIONS - 0.4%
91,400 Quintiles Transnational* 1,334,440
-----------
1,334,440
-----------
DIAGNOSTICS - 4.9%
522,617 Biofield* 172,464
600,000 Biofield (Restricted)* 158,400
324,330 Cytyc* 8,695,287
140,000 Digene* 3,500,000
152,000 IDEXX Laboratories* 3,552,240
160,000 Masimo Labs (Restricted)* 1,600
900,000 Sontra Medical (Restricted)*^ 9,000
-----------
16,088,991
-----------
INFORMATION SERVICES - 0.4%
4,366,920 Codman Group (Restricted)* 10,917
306,208 Physician WebLink (Restricted)* 1,200,473
188,096 Physician WebLink (Restricted) Warrants*
(expire 10/15/04) 18,810
-----------
1,230,200
-----------
MEDICAL SPECIALTY - 6.0%
381,818 ATS Medical* 1,527,272
130,900 Bioject Medical Technologies* 1,340,416
101,848 Biopure* 1,889,280
8,333 Biopure (Restricted) Warrants (expire 8/4/03)* 49,123
205,310 Curis* 718,585
1,000,000 Endocardial Solutions* 4,230,000
441,409 Martek Biosciences* 8,033,644
1,020,000 Orthovita*^ 1,785,000
198,000 Radiance Medical Systems* 267,300
-----------
19,840,620
-----------
The accompanying notes are an integral part of these financial statements.
8
SHARES VALUE
MEDICAL SUPPLIES - 0.3%
645,000 EP MedSystems*^ $1,031,355
-----------
1,031,355
PHARMACEUTICALS/DRUG DELIVERY - 11.0%
225,000 Aradigm* 751,500
345,924 Biovail* 16,050,880
91,500 Emisphere Technologies* 1,747,650
334,500 Scios* 5,592,840
217,138 Sepracor* 7,795,254
70,000 Teva Pharmaceutical Industries ADR 4,231,500
-----------
36,169,624
-----------
TOTAL COMMON STOCKS
(Cost $90,234,381) $209,044,306
------------
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENTS - 15.0%
$11,000,000 American Express Credit, 3.14%, due 10/1/01 $11,000,000
11,000,000 Ford Motor Credit Corp., 2.60%, due 10/2/01 10,999,206
12,500,000 General Electric Capital Corp., 2.75%,
due 10/4/01 12,497,135
15,000,000 General Motors Acceptance Corp., 2.85%,
due 10/9/01 14,990,500
-----------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $49,486,841) $49,486,841
-----------
TOTAL INVESTMENTS
(Cost $210,199,377) $327,435,096
------------
-------------------------
* Non income-producing security.
# With warrants attached.
^ Affiliated issuers in which the Fund holds 5% or more of the voting
securities (Total Market Value of $29,008,512).
~ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Issuer filed for bankruptcy.
The accompanying notes are an integral part of these financial statements.
9
H&Q HEALTHCARE INVESTORS
------------------------
STATMENT OF ASSETS & LIABILITIES
SEPTEMBER 30, 2001
ASSETS:
Investments, at value (identified cost
$210,199,377; see Schedule of Investments) $327,435,096
Cash 556,245
Interest receivable 66,867
Receivable for investments sold 2,339,053
Prepaid expenses 16,650
------------
Total assets $330,413,911
------------
LIABILITIES:
Payable for investments purchased $522,227
Accrued advisory fee 380,000
Accrued trustees' fees 22,500
Accrued other 115,978
------------
Total liabilities $1,040,705
------------
NET ASSETS $329,373,206
============
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per share,
unlimited number of shares authorized, amount paid in on
12,042,064 shares issued and outstanding $190,602,619
Accumulated net realized gain on investments 21,534,868
Net unrealized gain on investments 117,235,719
------------
Total net assets (equivalent to $27.35 per
share based on 12,042,064 shares outstanding) $329,373,206
============
The accompanying notes are an integral part of these financial statements.
10
H&Q HEALTHCARE INVESTORS
------------------------
STATMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
INVESTMENT INCOME:
Dividend income (net of foreign
tax of $4,127) $13,076
Interest income 2,818,657
Other income 23,862
----------
Total investment income $2,855,595
EXPENSES:
Advisory fees $4,411,094
Legal fees 47,932
Shareholder reporting 132,548
Trustees' fees and expenses 136,639
Custodian fees 88,984
Transfer agent fees 41,247
Accounting and auditing fees 59,929
Other 159,373
----------
Total expenses 5,077,746
------------
Net investment income (loss) ($2,222,151)
------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments $63,501,379
Decrease in net unrealized gain on investments (201,564,026)
------------
Net loss on investments ($138,062,647)
------------
Net decrease in net assets resulting
from operations ($140,284,798)
============
The accompanying notes are an integral part of these financial statements.
11
H&Q HEALTHCARE INVESTORS
------------------------
STATMENT OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
---------------- ---------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS:
Net investment income (loss) ($2,222,151) ($3,056,159)
Net realized gain on investments 63,501,379 35,694,901
Increase (decrease) in net
unrealized gain on investments (201,564,026) 253,975,089
------------- ------------
Net increase (decrease) in net
assets resulting from operations ($140,284,798) $286,613,831
------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized capital gains ($52,289,670) ($34,646,099)
------------- ------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in
reinvestment of distributions
(1,519,574 and 898,966 shares,
respectively) $36,365,104 $24,095,211
------------- ------------
Net increase (decrease) in
net assets ($156,209,364) $276,062,943
NET ASSETS:
Beginning of year 485,582,570 209,519,627
------------- ------------
End of year $329,373,206 $485,582,570
============= ============
The accompanying notes are an integral part of these financial statements.
12
H&Q HEALTHCARE INVESTORS
------------------------
STATMENT OF CASH FLOWS
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
CASH FLOWS USED FOR OPERATING ACTIVITIES:
Interest and other income received $2,899,268
Dividends received 13,076
Operating expenses paid (5,362,363)
-----------
Net cash used for operating activities ($2,450,019)
-----------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Purchases of portfolio securities ($51,629,150)
Net purchases of temporary cash investments (24,817,800)
Sales and maturities of portfolio securities 95,123,166
-----------
Net cash provided from investing activities $18,676,216
-----------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Cash distributions paid, net ($15,924,566)
-----------
Net cash used for financing activities ($15,924,566)
-----------
NET INCREASE IN CASH $301,631
CASH AT BEGINNING OF YEAR 254,614
-----------
CASH AT END OF YEAR $556,245
===========
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 ($140,284,798)
Net realized gain on investments (63,501,379)
Net increase in unrealized gain on investments 201,564,026
Decrease in dividends and interest receivable 56,749
Decrease in prepaid expenses 41,339
Decrease in accrued expenses (325,956)
------------
Net cash used for operating activities ($2,450,019)
============
Noncash investing activities not included herein consist of conversions of
promissory notes to equity investments of $2,599,054. Noncash financing
activities not included herein consist of stock distributions of $36,365,104.
The accompanying notes are an integral part of these financial statements.
13
H&Q HEALTHCARE INVESTORS
------------------------
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD INDICATED)
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- --------- --------- --------- --------
Net asset value per share:
Beginning of period $46.147 $21.771 $16.711 $23.106 $25.754
-------- --------- --------- --------- --------
Net investment income (loss) ($0.195)* ($0.290) ($0.176) ($0.217) ($0.224)
Net realized and unrealized
gain (loss) on investments (13.822) 28.131 5.596 (5.108) 4.524
-------- --------- --------- --------- --------
Total increase (decrease)
from investment operations ($14.017) $27.841 $5.420 ($5.325) $4.300
-------- --------- --------- --------- --------
Dilutive effect of sale of common
stock and related expenses from
rights offering -- -- -- -- (2.458)
Capital gains distributions
to shareholders ($4.780) ($3.465) ($0.360) ($1.070) ($4.490)
-------- --------- --------- --------- --------
Net asset value per share:
End of period $27.350 $46.147 $21.771 $16.711 $23.106
======== ========= ========= ========= ========
Per share market value:
End of period $21.740 $36.188 $16.313 $13.125 $19.000
Total investment return
at market value (27.23%) 151.66% 27.39% (26.05%) 14.01%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period $329,373,206 $485,582,570 $209,519,627 $157,976,073 $207,728,666
Ratio of operating expenses
to average net assets 1.42% 1.45% 1.46% 1.46% 1.57%
Ratio of net investment loss
to average net assets (0.62%) (0.86%) (0.91%) (1.11%) (1.13%)
Portfolio turnover rate 16.17% 12.90% 24.88% 17.15% 17.47%
Number of shares outstanding
at end of period 12,042,064 10,522,490 9,623,524 9,453,317 8,990,179
* Net investment loss per share has been computed using average shares
outstanding.
The accompanying notes are an integral part of these financial statements.
14
H&Q HEALTHCARE INVESTORS
------------------------
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(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 United States of America.
INVESTMENT SECURITIES
Investments traded on national securities exchanges or in the
over-the-counter market that are National Market System securities are
valued at the last sale price or, lacking any sales, at the mean between
the last bid and asked prices. Other over-the-counter securities are valued
at the most recent bid prices as obtained from one or more dealers that
make markets in the securities. As indicated in Note 4, investments for
which market quotations are not readily available are valued at fair value
as determined in good faith by the Trustees of the Fund. Temporary cash
investments with maturity of 60 days or less are valued at amortized cost.
Investment transactions are recorded on a trade date basis. Gains and
losses from sales of investments are recorded using the "identified cost"
method. Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date.
The Fund will adopt the provisions of the AICPA Audit and Accounting
Guide for Investment Companies, as revised, effective for fiscal years
beginning after December 15, 2000. As required, the Fund will begin
accreting discounts and amortizing premiums on all debt securities
effective October 1, 2001. Prior to this date, the Fund did not accrete
discounts or amortize premiums on long-term debt securities. The cumulative
effect of this accounting change will have no impact on the total net
assets of the Fund. The impact of this accounting change will result in an
increase to cost of securities and a corresponding decrease in net
unrealized appreciation of approximately $155,000 based on securities held
as of September 30, 2001.
FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to its shareholders substantially all of its taxable income and
its net realized capital gains, if any. Therefore, no Federal income or
excise tax provision is required.
DISTRIBUTIONS
The Fund records all distributions to shareholders from net investment
income, if any, and realized gains on the ex-dividend date. Such
distributions are determined in conformity with income tax regulations. The
Fund has adjusted for the effect of certain permanent book/tax differences
by reclassifying the net operating loss against accumulated net realized
gains and capital, in the amount of $388,157 and $1,833,994, respectively,
for the year ended September 30, 2001. This adjustment has no effect on the
Fund's net assets, net investment loss or net realized gain and is designed
to present the Fund's capital accounts on a tax basis. The calculation of
net investment loss per share in the financial highlights excludes this
adjustment.
15
DISTRIBUTION POLICY
The current distribution policy is to declare distributions in stock.
Stock distributions will automatically be paid in newly issued shares of
the Fund unless otherwise instructed by the shareholder. Pursuant to an SEC
exemptive order, the Fund has implemented a fixed distribution policy that
permits the Fund to make quarterly distributions at a rate of 2% of the
Fund's net assets to shareholders of record. The Fund intends to use net
realized capital gains when making quarterly distributions. This could
result in a return of capital to shareholders if the amount of the
distribution exceeds the Fund's net investment income and realized capital
gains. It is anticipated that net realized capital gains in excess of the
total distributed under this policy would be included in the December
distribution.
STATEMENT OF CASH FLOWS
The cash amount shown in the Statement of Cash Flows is the amount
included in the Fund's Statement of Assets and Liabilities and represents
cash on hand at its custodian and does not include temporary cash
investments at September 30, 2001.
(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, 2001 totaled $52,151,377 and $96,681,496, respectively.
At September 30, 2001, the total cost of securities for Federal
income tax purposes was $210,199,377. The net unrealized gain on
securities held by the Fund was $117,235,719, including gross unrealized
gain of $120,138,764 and gross unrealized loss of $2,903,045.
(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 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.
Trustees who are not affiliates of the Adviser receive an annual fee
of $15,000 plus $1,500 for each meeting attended.
(4) VENTURE CAPITAL AND OTHER RESTRICTED SECURITIES
The Fund may invest in venture capital and other restricted securities
if these securities would currently comprise 40% or less of net assets. The
value of these securities represents 22% of the Fund's net assets at
September 30, 2001.
The value of the venture capital and other restricted securities is
determined in good faith by the Trustees. However, because of the inherent
uncertainty of valuations, these estimated values may differ significantly
from the values that would have been used had a ready market for the
securities existed, and the differences could be material. In fiscal 2001,
the Fund sold a restricted security subject to future contingent payments
whose estimated value of $2,260,605 has also been determined by the
Trustees and which is included in the Receivable for Investments Sold in
the Statement of Assets and Liabilities.
16
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, 2001, as determined by the Trustees of the
Fund.
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
----------------------------------- ----------------- ---------- -------------- ---------
AbTox
Series F Cvt. Pfd. 3/7/97 $1,415,569 $0.01 $6,364
12% Promissory Note 2/26/98 - 3/26/98 180,000 1.00 180,000
ACADIA Pharmaceuticals
Series E Cvt. Pfd. 5/2/00 3,000,273 7.50 3,000,000
Advanced Medicine
Series C Cvt. Pfd. 2/5/99 1,800,123 9.00 1,905,885
Series D-1 Cvt. Pfd. 8/28/00 1,800,900 9.00 1,800,000
Biofield
Common 12/15/00 302,984 0.26 158,400
Biopure
Common Warrants (expire 8/4/03) 5/13/99 0 5.89 49,123
BioTransplant
Common Warrants (expire 8/12/04) 8/12/94 0 0.90 2,484
Common Warrants (expire 10/31/04) 10/31/94 0 0.90 5,670
Common Warrants (expire 8/15/05) 8/18/95 0 3.27 3,767
CardioNet^
Series C Cvt. Pfd. 5/3/01 4,823,275 3.50 4,800,002
Ceres
Series C Cvt. Pfd. 12/23/98 1,502,620 6.00 2,250,000
Series C-1 Cvt. Pfd.* 1/4/01 111,488 6.00 164,658
Series D Cvt. Pfd.* 3/14/01 1,667,802 6.00 1,667,802
Codman Group
Common 1/26/96 - 8/24/97 2,552,759 0.00 10,917
Cubist Pharmaceuticals
Common Warrants (expire 9/23/03) 9/23/98 235 25.94 5,188,426
CytoLogix^
Series A Cvt. Pfd. 1/13/98 - 7/21/99 2,331,986 5.05 2,448,386
Series B Cvt. Pfd.* 1/11/01 1,150,335 5.05 1,147,007
EPR
Series A Cvt. Pfd. 3/9/94 1,000,409 1.50 333,333
FitForAll.com
10% Promissory Note* 2/22/00 - 9/18/00 1,613,493 0.00 158
Galileo Laboratories
Series F Cvt. Pfd. 8/18/00 3,001,764 2.14 3,000,000
KVM Technologies^
Series B Cvt. Pfd.* 2/19/98 1,501,320 4.42 1,500,000
Adj. Cvt. Demand Note* 6/21/99 - 7/31/01 1,350,625 1.00 1,350,000
LocalMed
Series D Cvt. Pfd. 2/9/96 1,376,970 0.01 3,438
Masimo
Series D Cvt. Pfd. 8/14/96 1,120,040 11.00 1,760,000
Masimo Labs
Common 8/14/96 0 0.01 1,600
Novacept
Series G Cvt. Pfd.* 3/27/01 3,000,005 4.75 3,000,005
Omnisonics^
Series B Cvt. Pfd. 5/24/01 2,404,472 1.47 2,400,000
PHT^
Series D Cvt. Pfd. 7/23/01 4,200,000 0.78 4,200,000
17
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
------------------------------- ------------------ -------------- -------------- -----------
Physician WebLink
Common 2/5/97 $ 1,200,325 $ 3.920 $ 1,200,473
Warrants (expire 10/15/04) 10/15/98 0 0.100 18,810
Raven biotechnologies^
Series B Cvt. Pfd. 12/12/00 3,000,833 1.650 3,000,000
Songbird Hearing
Series D Cvt. Pfd. 12/14/00 3,002,086 2.340 1,496,802
Sontra Medical^
Series A Cvt. Pfd. 9/9/98 1,205,089 0.503 867,759
Series B Cvt. Pfd. 3/26/01 - 7/11/01 270,000 0.503 270,000
Common 3/26/01 0 0.010 9,000
Therion Biologics
Common 7/12/90 - 10/16/96 511,365 3.750 850,350
Series A Cvt. Pfd. 8/20/96 - 10/16/96 444,850 3.750 177,776
Series B Cvt. Pfd.* 2/24/99 - 6/22/99 900,914 3.750 900,000
Series C Cvt. Pfd.* 9/26/01 1,528,922 3.750 1,528,922
Sinking Fund Cvt. Pfd. 10/17/94 - 4/3/96 721,291 3.750 135,345
TherOx
Series H Cvt. Pfd. 9/11/00 3,001,873 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 1,653,135 2.000 1,650,000
Versicor
Common 10/29/99 414,898 10.050 880,953
Warrants (expire 8/3/05) 6/28/99 905 6.944 129,825
VNUS Medical Technologies^
Series E Cvt. Pfd. 8/20/01 4,200,003 5.120 4,200,003
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
----------- -----------
$69,418,036 $72,245,747
=========== ===========
* With warrants attached.
^ Affiliated issuers.
FEDERAL TAX INFORMATION (UNAUDITED)
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$52,290,000 as long-term capital gain dividends for the fiscal year ended
September 30, 2001.
18
H&Q HEALTHCARE INVESTORS
30 Rowes Wharf, 4th Floor
Boston, Massachusetts 02110-3328
(617) 310-0567
OFFICERS
Daniel R. Omstead, ENGSCD, President
Alan G. Carr, President Emeritus
Kimberley L. Carroll, Treasurer
Jennifer L. Morris, Secretary
TRUSTEES
Alan G. Carr
Lawrence S. Lewin
Robert P. Mack, M.D.
Eric Oddleifson
Oleg M. Pohotsky
Uwe E. Reinhardt, Ph.D.
Henri A. Termeer
INVESTMENT ADVISER
Hambrecht & Quist Capital Management Incorporated
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
LEGAL COUNSEL
Dechert Price & Rhoads
==============================
Shareholders with questions regarding share transfers may call
1-800-426-5523
Interim daily net asset value may be obtained 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-AR-01