H&Q HEALTHCARE INVESTORS
[H&Q HEALTHCARE INVESTORS LOGO]
SEMIANNUAL REPORT
March 31, 2002
To our Shareholders:
At quarter-end on March 31, 2002 the net asset value of your Fund was $25.61 per
share. Performance data for the six months and the quarter ended March 31
compared to the indices is as follows:
FISCAL YEAR TO DATE QUARTER ENDED
9/30/01 - 3/31/02 3/31/02
----------------- -------
Net Asset Value +1.9% -14.0%
Dow Jones Industrial Average +17.6% +3.8%
NASDAQ Industrials +30.1% +2.1%
Russell 2000 +25.1% +3.1%
The Fund's second fiscal quarter ended March 31, 2002 was particularly
disappointing following the Fund's strong performance during the prior quarter.
During the quarter, the biotechnology sector retrenched due to both
sector-specific and general factors. However, we continue to be confident in the
future of healthcare in general and in emerging biotech and medtech growth
companies in particular. We believe that the companies in this sector will
continue to lead the advancement of knowledge and remain confident this progress
will improve the human condition by providing products and services that will
enhance the quality and duration of life. We have no doubt that Americans will
appreciate the values of these products and will pay a premium price for them.
As such we continue to believe that the investment opportunities in the future
will be abundant. We also believe that as the economy generally improves over
time, the healthcare sector will play a significant role in any advancement.
While the stock prices of public biotechnology companies have declined during
the most recent quarter, we were not aggressive buyers. Rather, we selectively
reduced positions and allowed liquidity, as a percent of total assets, to rise
to its highest level in recent years. We believe the Fund is well positioned to
take advantage of the current situation. Valuations are becoming particularly
attractive for both publicly traded and private companies. We expect that in the
weeks and months ahead we will have opportunities to invest much of this
liquidity at very attractive levels. Many public companies have equity market
values with historically low premiums to their liquid assets creating unusual
values for their technology and product opportunities. In our venture capital
activity, we are now frequently seeing attractive valuations and some
transactions are being done at a very significant discount to previous
investment rounds completed 1-2 years ago. We believe that this also bodes well
for the future.
1
Having made these assertions, it is also true that there are a number of factors
that may have a mitigating impact on the Fund's performance. Certainly, the
heightened scrutiny of accounting practices at a number of individual companies,
as well as other corporate governance issues, is sobering to the general market.
Furthermore, there are a number of issues specific to the pharmaceutical
industry that are unsettling to investors.
The Food and Drug Administration is still without a Commissioner, and seems to
have recently become even more risk averse than usual. With several product
approvals delayed, investors have concerns that product approval cycles are once
again lengthening. This comes at a time when patent expirations are increasing
with the threat of generic competition. These issues come amidst discussion of
the control of drug pricing by government and increasing uncertainty about the
ability of healthcare companies to sustain the ever-increasing cost of drug
development.
While these concerns are most apparent to major pharmaceutical companies, and
less so for the emerging companies, sentiment does affect valuations. Some of
these issues are likely to persist at least through the elections in November
but we continue to believe that new products that cure or mediate the course of
disease will continue to be rewarded.
Two new venture investments were made in the quarter. SENOMYX discovers and
develops novel flavor and fragrance molecules by combining its understanding of
the biology of taste with receptor biology, combinatorial chemistry, high
throughput screening and bioinformatics. AGENSYS develops fully human monoclonal
antibodies to treat solid tumor cancers based on the Company's own proprietary
drug targets. A follow-on investment was made in Sontra Medical in connection
with its merger with ChoiceTel, a publicly traded company.
This was a difficult quarter, but we believe strongly in the future growth of
healthcare and in the entrepreneurial approach of the companies in which we
invest. We continue to believe that attractive investment opportunities in the
future will be abundant.
/s/ Alan G. Carr /s/ Daniel R. Omstead
Alan G. Carr Daniel R. Omstead
President Emeritus 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.
H&Q HEALTHCARE INVESTORS
PORTFOLIO
AS OF MARCH 31, 2002
[CHART]
TOTAL VENTURE DIFFERENCE
----- ------- ----------
AGRI/ENVIRONMENTAL 1.4% 1.3% 0.1%
BIOTECHNOLOGY 45.2% 10.0% 35.3%
CROs 0.5% 0.0% 0.5%
DIAGNOSTICS 6.8% 2.7% 4.2%
HEALTHCARE INFO SERVICES 3.5% 2.5% 0.9%
MEDICAL SPECIALTY 12.2% 3.9% 8.3%
MEDICAL SUPPLIES 1.4% 0.9% 0.5%
PHARMACEUTICALS 6.5% 2.0% 4.5%
LIQUID ASSETS 22.5% 0.0% 22.5%
RESTRICTED
3
H&Q HEALTHCARE INVESTORS
LARGEST HOLDINGS
AS OF MARCH 31, 2002
% OF NET ASSETS
---------------
Gilead Sciences 4.67%
Martek Biosciences 4.23%
Cubist Pharmaceuticals 3.94%
Transkaryotic Therapies 3.47%
CV Therapeutics 3.45%
Celgene 3.09%
Cytyc 2.66%
Biovail 2.52%
MedImmune 2.51%
Endocardial Solutions 2.47%
H&Q HEALTHCARE INVESTORS
SIGNIFICANT PORTFOLIO TRANSACTIONS
QUARTER ENDED MARCH 31, 2002
UNITS HELD UNITS HELD
PURCHASES 12/31/01 3/31/02
--------- -------- -------
Agensys (Restricted) 0 952,381
Exelixis 98,000 226,500
Rigel Pharmaceuticals 0 508,500
Senomyx (Restricted) 0 1,034,519
Sontra (Restricted) Series B 536,460 933,837
WebMD 283,500 403,500
SALES
Affymetrix 60,000 0
Biovail 345,924 165,924
Curis 205,311 92,500
Gilead Sciences 413,318 426,636
Scios 109,500 0
Sepracor 217,138 0
Versicor 628,165 418,165
4
H&Q HEALTHCARE INVESTORS
SCHEDULE OF INVESTMENTS
March 31, 2002
(UNAUDITED)
CONVERTIBLE SECURITIES - 23.3% OF NET ASSETS
SHARES CONVERTIBLE PREFERRED (RESTRICTED) - 21.3% 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 - 8.8%
400,000 ACADIA Pharmaceuticals Series E* 3,000,000
952,381 Agensys Series C* 3,000,000
2,380,953 Agilix Series B* 3,000,001
850,436 Avalon Pharmaceuticals Series B* 2,999,998
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*# 1,528,920
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 - 2.6%
1,371,429 CardioNet Series C*^ 4,800,002
484,829 CytoLogix Series A*^ 400,178
227,130 CytoLogix Series B*#^ 187,473
160,000 Masimo Series D* 1,760,000
1,724,138 Sontra Medical Series A*^ 867,759
933,837 Sontra Medical Series B*^ 470,000
HEALTHCARE INFORMATION SERVICES - 1.8%
338,983 KVM Technologies Series B*#^ 1,500,000
5,384,616 PHT Series D*^ 4,200,000
MEDICAL SPECIALTY - 3.9%
636,364 AbTox Series F* 6,364
1,632,653 OmniSonics Medical Technologies Series B*^ 2,400,000
1,034,519 Senomyx Series E* 3,000,002
639,659 Songbird Hearing Series D* 6,397
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
The accompanying notes are an integral part of these financial statements.
5
CONVERTIBLE SECURITIES - CONTINUED
SHARES CONVERTIBLE PREFERRED (RESTRICTED) - 21.3% VALUE
------ -----
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
-----------
$69,907,643
-----------
PRINCIPAL
AMOUNT CONVERTIBLE BONDS AND NOTES - 2.0%
------
BIOTECHNOLOGY - 1.5%
$6,800,000 CuraGen 6% Cvt. Deb. due 2007 ii $5,049,000
HEALTHCARE INFORMATION SERVICES - 0.4%
1,577,366 FitForAll.com (Restricted) 10% Prom. Note*#+ 158
1,350,000 KVM Technologies (Restricted)
Adj. Cvt. Demand Note*#^ 1,350,000
MEDICAL SPECIALTY - 0.1%
180,000 AbTox (Restricted) 12% Prom. Note*+ 180,000
-----------
$6,579,158
-----------
TOTAL CONVERTIBLE SECURITIES
(Cost $82,888,416) $76,486,801
-----------
SHARES COMMON STOCKS - 54.3%
------
AGRICULTURAL/ENVIRONMENTAL TECHNOLOGY - 0.1%
71,483 Catalytica Energy Systems* $240,898
-----------
240,898
-----------
BIOTECHNOLOGY - 34.9%
BIOPHARMACEUTICALS - 29.5%
429,898 BioTransplant* 2,256,964
2,760 BioTransplant (Restricted) Wts. (expire 8/12/04)* 2,070
6,300 BioTransplant (Restricted) Wts. (expire 10/31/04)* 4,725
1,150 BioTransplant (Restricted) Wts. (expire 8/15/05)* 3,595
410,400 Celgene* 10,157,400
54,000 Cephalon* 3,402,000
246,389 Corixa* 1,520,220
550,556 Cubist Pharmaceuticals* 10,174,275
200,001 Cubist Pharmaceuticals (Restricted) Wts.
(expire 9/23/03)* 2,759,114
312,823 CV Therapeutics* 11,324,193
163,000 Genzyme* 7,118,210
426,636 Gilead Sciences* 15,354,630
The accompanying notes are an integral part of these financial statements.
6
SHARES BIOTECHNOLOGY - CONTINUED VALUE
------ -----
210,000 MedImmune* $8,259,300
226,760 Therion Biologics (Restricted)* 850,350
264,912 Transkaryotic Therapies* 11,404,462
270,270 Tularik* 4,443,239
418,165 Versicor* 7,560,423
18,696 Versicor (Restricted) Wts. (expire 8/3/05)* 199,823
GENOMICS/DRUG DISCOVERY - 5.4%
150,000 Abgenix* 2,833,500
299,302 Dyax* 1,101,431
226,500 Exelixis* 3,123,435
78,500 Lexicon Genetics* 741,825
225,000 Lynx Therapeutics* 490,500
174,461 Molecular Devices* 3,169,956
508,500 Rigel Pharmaceuticals* 1,805,175
370,237 Telik* 4,487,272
-----------
114,548,087
-----------
CONTRACT RESEARCH ORGANIZATIONS - 0.5%
91,400 Quintiles Transnational* 1,622,350
-----------
1,622,350
-----------
DIAGNOSTICS - 4.2%
522,617 Biofield* 237,791
600,000 Biofield (Restricted)* 218,400
324,330 Cytyc* 8,730,963
18,500 Digene* 661,375
152,000 IDEXX Laboratories* 4,079,680
160,000 Masimo Labs (Restricted)* 1,600
900,000 Sontra Medical (Restricted)*^ 9,000
-----------
13,938,809
-----------
HEALTHCARE INFORMATION SERVICES - 1.3%
4,366,920 Codman Group (Restricted)* 10,917
306,208 Physician WebLink (Restricted)* 1,200,473
188,096 Physician WebLink (Restricted) Wts.
(expire 10/15/04)* 18,810
403,500 WebMD* 3,098,880
-----------
4,329,080
-----------
MEDICAL SPECIALTY - 8.3%
381,818 ATS Medical* 763,636
130,900 Bioject Medical Technologies* 503,965
101,848 Biopure* 1,079,589
8,333 Biopure (Restricted) Wts. (expire 8/4/03)* 0
The accompanying notes are an integral part of these financial statements.
7
SHARES MEDICAL SPECIALTY - CONTINUED VALUE
------ -----
92,500 Curis* $197,025
1,000,000 Endocardial Solutions* 8,110,000
441,409 Martek Biosciences* 13,895,114
1,020,000 Orthovita*^ 2,499,000
198,000 Radiance Medical Systems* 247,500
------------
27,295,829
------------
MEDICAL SUPPLIES - 0.5%
645,000 EP MedSystems*^ 1,631,850
------------
1,631,850
------------
PHARMACEUTICALS/DRUG DELIVERY - 4.5%
225,000 Aradigm* 1,057,500
165,924 Biovail* 8,292,881
91,500 Emisphere Technologies* 1,556,415
70,000 Teva Pharmaceutical Industries ADR 3,826,900
------------
14,733,696
------------
TOTAL COMMON STOCKS
(Cost $82,321,214) $178,340,599
------------
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENTS - 22.0%
------
$7,000,000 American Express Credit, 1.45%, due 4/2/02 $6,999,718
16,500,000 American Express Credit, 1.80%, due 4/29/02 16,476,900
16,000,000 General Electric Capital Corp., 1.82%, due 5/8/02 15,970,071
8,000,000 U.S. Treasury Bill, 1.69%, due 4/11/02 7,996,244
5,900,000 U.S. Treasury Bill, 1.73%, due 4/25/02 5,893,195
19,000,000 U.S. Treasury Bill, 1.71%, due 5/2/02 18,972,023
------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $72,308,151) $72,308,151
------------
TOTAL INVESTMENTS
(Cost $237,517,781) $327,135,551
============
--------------
* 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 $27,515,265).
ii Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Issuer filed for bankruptcy.
The accompanying notes are an integral part of these financial statements.
8
H&Q HEALTHCARE INVESTORS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2002
(UNAUDITED)
ASSETS:
Investments, at value (identified cost
$237,517,781; see Schedule of Investments) $327,135,551
Cash 656,175
Interest receivable 66,867
Receivable for investments sold 2,103,347
Prepaid expenses 36,391
------------
Total assets $329,998,331
------------
LIABILITIES:
Payable for investments purchased $866,988
Accrued advisory fee 393,595
Accrued other 74,448
------------
Total liabilities $1,335,031
------------
NET ASSETS $328,663,300
============
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per
share, unlimited number of shares authorized,
amount paid in on 12,833,980 shares issued and
outstanding $210,436,463
Accumulated net investment loss (1,802,602)
Accumulated net realized gain on investments 30,411,669
Net unrealized gain on investments 89,617,770
------------
Total net assets (equivalent to $25.61 per
share based on 12,833,980 shares outstanding) $328,663,300
============
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, 2002
(UNAUDITED)
INVESTMENT INCOME:
Dividend income (net of foreign
tax of $1,736) $9,121
Interest income 752,373
----------
Total investment income $761,494
EXPENSES:
Advisory fees $2,339,010
Legal fees 89,182
Trustees' fees and expenses 85,716
Shareholder reporting 49,725
Accounting and auditing fees 44,348
Custodian fees 42,205
Stock exchange listing fee 30,922
Transfer agent fees 23,969
Other 13,059
----------
Total expenses 2,718,136
-----------
Net investment loss ($1,956,642)
-----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments $36,438,345
Decrease in net unrealized gain on investments (27,463,909)
-----------
Net gain on investments $8,974,436
-----------
Net increase in net assets
resulting from operations $7,017,794
===========
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, 2002 SEPTEMBER 30,
(UNAUDITED) 2001
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS:
Net investment loss ($1,956,642) ($2,222,151)
Net realized gain on investments 36,438,345 63,501,379
Increase (decrease) in net
unrealized gain on investments (27,463,909) (201,564,026)
------------ ------------
Net increase (decrease) in net
assets resulting from operations $7,017,794 ($140,284,798)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized capital gains ($27,561,544) ($52,289,670)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in
reinvestment of distributions
(791,916 and 1,519,574 shares,
respectively) $19,833,844 $36,365,104
------------ ------------
Net increase (decrease) in
net assets ($709,906) ($156,209,364)
NET ASSETS:
Beginning of year 329,373,206 485,582,570
------------ ------------
End of year $328,663,300 $329,373,206
============ ============
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, 2002
(UNAUDITED)
CASH FLOWS USED FOR OPERATING ACTIVITIES:
Interest income received $696,153
Dividends received 9,121
Operating expenses paid (2,788,312)
-----------
Net cash used for operating activities ($2,083,038)
-----------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Purchases of portfolio securities ($19,127,650)
Net purchases of temporary cash investments (22,821,310)
Sales and maturities of portfolio securities 51,859,628
-----------
Net cash provided from investing activities $9,910,668
-----------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Cash distributions paid, net ($7,727,700)
-----------
Net cash used for financing activities ($7,727,700)
-----------
NET INCREASE IN CASH $99,930
CASH AT BEGINNING OF PERIOD 556,245
-----------
CASH AT END OF PERIOD $656,175
===========
RECONCILIATION OF NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS TO NET CASH USED
FOR OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations $7,017,794
Accretion of discount (56,220)
Net realized gain on investments (36,438,345)
Net decrease in unrealized gain on investments 27,463,909
Increase in prepaid expenses (19,741)
Decrease in accrued expenses (50,435)
-----------
Net cash used for operating activities ($2,083,038)
===========
Noncash financing activities not included herein consist of stock distributions
of $19,833,844.
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, 2002 --------------------------------------------------------------------
(UNAUDITED)(1) 2001 2000 1999 1998 1997
-------------- ------------ ------------ ------------ ------------ ------------
Net asset value per share:
Beginning of period $27.350 $46.147 $21.771 $16.711 $23.106 $25.754
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss) ($0.158)* ($0.195)* ($0.290) ($0.176) ($0.217) ($0.224)
Net realized and unrealized
gain (loss) on investments 0.678 (13.822) 28.131 5.596 (5.108) 4.524
------------ ------------ ------------ ------------ ------------ ------------
Total increase (decrease)
from investment
operations $0.520 ($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 ($2.260) ($4.780) ($3.465) ($0.360) ($1.070) ($4.490)
------------ ------------ ------------ ------------ ------------ ------------
Net asset value per share:
End of period $25.610 $27.350 $46.147 $21.771 $16.711 $23.106
============ ============ ============ ============ ============ ============
Per share market value:
End of period $22.200 $21.740 $36.188 $16.313 $13.125 $19.000
Total investment return
at market value 11.50% (27.23%) 151.66% 27.39% (26.05%) 14.01%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end
of period $328,663,300 $329,373,206 $485,582,570 $209,519,627 $157,976,073 $207,728,666
Ratio of operating expenses
to average net assets** 1.55% 1.42% 1.45% 1.46% 1.46% 1.57%
Ratio of net investment loss
to average net assets** (1.12%) (0.62%) (0.86%) (0.91%) (1.11%) (1.13%)
Portfolio turnover rate 6.54% 16.17% 12.90% 24.88% 17.15% 17.47%
Number of shares
outstanding at end
of period 12,833,980 12,042,064 10,522,490 9,623,524 9,453,317 8,990,179
(1) The Fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began accreting discounts and amortizing premiums on
all debt securities. The effect of this change for the six months ended March
31, 2002 was a decrease in net investment loss per share of $.004, a decrease in
net realized and unrealized gain (loss) per share of $.004, and a decrease in
the ratio of net investment loss to average net assets from (1.15%) to (1.12%).
Per share data and ratios for the periods prior to October 1, 2001 have not been
restated to reflect this change in presentation.
* Net investment loss per share has been computed using average shares
outstanding.
** Annualized.
The accompanying notes are an integral part of these financial statements.
13
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS
March 31, 2002
(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 United States of America.
INVESTMENT SECURITIES
Investments traded on national securities exchanges or in the
over-the-counter market that are National Market System securities are
valued at the last sale price or, lacking any sales, at the mean between
the last bid and asked prices. Other over-the-counter securities are valued
at the most recent bid prices as obtained from one or more dealers that
make markets in the securities. As indicated in Note 4, investments for
which market quotations are not readily available are valued at fair value
as determined in good faith by the Trustees of the Fund. Temporary cash
investments with maturity of 60 days or less are valued at amortized cost.
Investment transactions are recorded on a trade date basis. Gains and
losses from sales of investments are recorded using the "identified cost"
method. Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date.
The Fund adopted the provisions of the AICPA Audit and Accounting
Guide for Investment Companies, as revised, effective October 1, 2001 and
began accreting discounts and amortizing premiums on all debt securities.
Prior to this date, the Fund did not accrete discounts or amortize premiums
on long-term debt securities. The cumulative effect of this accounting
change had no impact on the total net assets of the Fund, but resulted in
an increase in cost of securities and a corresponding decrease in net
unrealized appreciation of $154,000 based on securities held at September
30, 2001. The effect of this change for the six months ended March 31, 2002
was to decrease net investment loss by $56,220 with a corresponding
decrease in the change in net unrealized appreciation of $56,220.
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.
14
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 March 31, 2002.
(2) SECURITIES TRANSACTIONS
The aggregate cost of purchases and proceeds from sales of investment
securities (other than temporary cash investments) for the six months ended
March 31, 2002 totaled $19,472,411 and $51,623,922, respectively.
At March 31, 2002, the total cost of securities for Federal income tax
purposes was $237,492,781. The net unrealized gain on securities held by
the Fund was $89,617,770, including gross unrealized gain of $126,920,790
and gross unrealized loss of $37,303,020.
(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.
On March 22, 2002, the Trustees of the Fund approved a new investment
advisory agreement with Hambrecht & Quist Capital Management LLC, subject
to certain conditions, including approval by the Fund's shareholders. The
terms of the new agreement are substantially identical to those in the
current Advisory Agreement.
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 23% of the Fund's net assets at March
31, 2002.
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
15
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 $1,647,054 has also
been determined by the Trustees and which is included in the Receivable for
Investments Sold in the Statement of Assets and Liabilities.
The following table details the acquisition date, cost, carrying value
per unit, and value of the Fund's venture capital and other restricted
securities at March 31, 2002, as determined by the Trustees of the Fund.
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
------------------------------------ --------------- ---------- -------------- ----------
AbTox
Series F Cvt. Pfd. 3/7/97 $1,415,569 $0.010 $6,364
12% Promissory Note 2/26/98-3/26/98 180,000 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 1,800,900 9.000 1,800,000
Agensys
Series C Cvt. Pfd. 2/14/02 3,000,000 3.150 3,000,000
Agilix
Series B Cvt. Pfd. 11/18/01 3,000,001 1.260 3,000,001
Avalon Pharmaceuticals
Series B Cvt. Pfd. 10/22/01 2,999,998 3.528 2,999,998
Biofield
Common 12/15/00 302,984 0.364 218,400
Biopure
Common Warrants (expire 8/4/03) 5/13/99 0 0.000 0
BioTransplant
Common Warrants (expire 8/12/04) 8/12/94 0 0.750 2,070
Common Warrants (expire 10/31/04) 10/31/94 0 0.750 4,725
Common Warrants (expire 8/15/05) 8/18/95 0 3.126 3,595
CardioNet^
Series C Cvt. Pfd. 5/3/01 4,823,275 3.500 4,800,002
Ceres
Series C Cvt. Pfd. 12/23/98 1,502,620 6.000 2,250,000
Series C-1 Cvt. Pfd.* 1/4/01 111,488 6.000 164,658
Series D Cvt. Pfd.* 3/14/01 1,667,802 6.000 1,667,802
Codman Group
Common 1/26/96-8/24/97 2,552,759 0.002 10,917
Cubist Pharmaceuticals
Common Warrants (expire 9/23/03) 9/23/98 235 13.796 2,759,114
CytoLogix^
Series A Cvt. Pfd. 1/13/98-7/21/99 2,331,986 0.825 400,178
Series B Cvt. Pfd.* 1/11/01 1,150,335 0.825 187,473
EPR
Series A Cvt. Pfd. 3/9/94 1,000,409 1.500 333,333
FitForAll.com
10% Promissory Note* 2/22/00-9/18/00 1,613,493 0.000 158
Galileo Laboratories
Series F Cvt. Pfd. 8/18/00 3,001,764 2.145 3,000,000
16
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
------------------------------------ --------------- ---------- -------------- ----------
KVM Technologies^
Series B Cvt. Pfd.* 2/19/98 $1,501,320 $4.425 $1,500,000
Adj. Cvt. Demand Note* 6/21/99-7/31/01 1,350,625 1.000 1,350,000
LocalMed
Series D Cvt. Pfd. 2/9/96 1,376,970 0.010 3,438
Masimo
Series D Cvt. Pfd. 8/14/96 1,120,040 11.000 1,760,000
Masimo Labs
Common 8/14/96 0 0.010 1,600
Novacept
Series G Cvt. Pfd.* 3/27/01 3,000,005 4.750 3,000,005
OmniSonics Medical Technologies^
Series B Cvt. Pfd. 5/24/01 2,404,472 1.470 2,400,000
PHT^
Series D Cvt. Pfd. 7/23/01 4,200,000 0.780 4,200,000
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
Senomyx
Series E Cvt. Pfd. 2/19/02 3,000,002 2.900 3,000,002
Songbird Hearing
Series D Cvt. Pfd. 12/14/00 3,002,086 0.010 6,397
Sontra Medical^
Common 3/26/01 0 0.010 9,000
Series A Cvt. Pfd. 9/9/98 1,205,089 0.503 867,759
Series B Cvt. Pfd. 3/26/01-2/28/02 470,000 0.503 470,000
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 1,528,920 3.750 1,528,920
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
Warrants (expire 8/3/05) 6/28/99 905 10.688 199,823
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
----------- -----------
$81,203,137 $76,716,678
=========== ===========
* With warrants attached.
^ Affiliated issuers.
17
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
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-02