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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4889
---------------------------------------------
H&Q HEALTHCARE INVESTORS
-------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
30 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Kimberley L. Carroll, 30 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328
-------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-772-8500
----------------------------
Date of fiscal year end: 09/30/03
--------------------------
Date of reporting period: 09/30/03
-------------------------
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
Include a copy of the report transmitted to stockholders pursuant to
Rule 30e-1 under the Act (17 CFR 270.30e-1).
H&Q HEALTHCARE INVESTORS
[GRAPHIC]
ANNUAL REPORT
2003
To our Shareholders:
At fiscal year-end on September 30, 2003, the net asset value per share of your
Fund was $19.63. The net asset value increased by 2.6% during the recent quarter
and the stock price increased 2.8%, which is on par with the AMEX Biotech Index
and Dow Jones Industrial Average, but lagging the NASDAQ Industrials and Russell
2000. Fiscal year share price performance experienced an increase of 43.5%. Of
the comparable indices, only the NASDAQ Industrials marked higher performance.
Net asset value performance data for the fiscal year and the quarter ended
September 30, 2003, compared to the major indices, are as follows:
QUARTER ENDED
FISCAL YEAR 9/30/03
----------- -------------
Net Asset Value +23.8% +2.6%
AMEX Biotech Index +41.7% +5.0%
Dow Jones Industrial Average +22.2% +3.2%
NASDAQ Industrials +49.4% +11.6%
Russell 2000 +34.6% +8.8%
As was the case for the prior several quarters, during the most recent quarter
there has been a combination of both encouraging and cautionary economic signs.
On balance, we think there have been more ups than downs. Economic growth was
impressive and Wall Street economic analyst estimates for the next few quarters
are within a healthy range. Earnings reports for the third calendar quarter seem
to be exceeding expectations. Employment levels seem to be stabilizing or even
improving. There are few signs of near term interest rate increase by the
Federal Reserve. These kinds of factors, coupled with our entering a
presidential election year, suggest to many that we can be somewhat optimistic
about the near term. We are still worried about debt levels and have renewed
concerns about the potential impact of the geopolitical environment, but in
general we are optimistic about the next few quarters or so.
With respect to the biotechnology and healthcare areas, our thinking has not
changed much from last quarter. These sectors exhibited strong performance in
the second calendar quarter. After a significant run up in the appropriate
indices, we would not have been surprised to see some consolidation during the
summer months. So far that consolidation has been tractable. In the small market
capitalization sub sector, there has been some
1
volatility but we think that is healthy after the considerable gains achieved
earlier in the year. It seems that equity share prices are increasingly moving
based on company specific events rather than on sector based sentiment. There
have been a number of positive news items, including new product approvals,
which give us optimism. We think this is indicative of a biotech sector that is
maturing. The sector is now more than 25 years old. Its largest and best
companies are profitable. A few have larger market capitalization than some of
the traditional large capitalization pharmaceutical companies. This is to the
good and in our view argues for the long-term viability and vitality of the
biotech industry. We know we are repeating ourselves in saying this, but we
think healthcare in general and emerging healthcare/biotech, in particular,
offer very good prospects for the future.
So, while we are optimistic about our sector, we are quite sad about another
development. For our management company, the most notable moment by far in the
recent quarter has been the passing of Alan G. Carr, my friend, partner and
mentor, as well as the founder of your Fund. Alan was instrumental in my joining
Hambrecht & Quist Capital Management in 2000 and in my becoming President of
your Fund not long thereafter. Several of us at Hambrecht & Quist Capital
Management have enjoyed the benefit of Alan's advice and counsel for a
significant portion of the last three years. We have learned much from him that,
in combination with our own skills and experience, we will continue to apply on
behalf of your Fund. We miss him already.
In the last quarter, we did not add new companies to the venture portion of the
portfolio, and we did some minor follow-on investing in existing venture
holdings. Within the public portfolio, we purchased Enzon Pharmaceuticals and
Neurocrine Biosciences, and added to our existing positions in a number of
portfolio companies.
As always, we encourage the Fund's shareholders to contact us with any questions
or concerns they may have relating to the Fund.
/s/ Daniel R. Omstead
Daniel R. Omstead
President
2
H&Q HEALTHCARE INVESTORS
LARGEST HOLDINGS
AS OF SEPTEMBER 30, 2003
% OF NET ASSETS
---------------
Gilead Sciences 4.15%
MedImmune 3.21%
Impax Laboratories 3.17%
IDEXX Laboratories 3.10%
Celgene 3.10%
Cubist Pharmaceuticals 3.02%
Telik 2.87%
Pfizer 2.83%
Vicuron Pharmaceuticals 2.64%
CV Therapeutics 2.40%
SIGNIFICANT PORTFOLIO TRANSACTIONS
QUARTER ENDED SEPTEMBER 30, 2003
UNITS HELD UNITS HELD
6/30/03 9/30/03
---------- ----------
PURCHASES
Cubist Pharmaceuticals 597,056 803,657
Durect 157,360 532,580
Enzon Pharmaceuticals 0 308,400
Genzyme 83,000 120,000
IDEXX Laboratories 152,000 209,000
Kosan Biosciences 442,600 457,600
Lexicon Genetics 342,200 507,200
MedImmune 258,000 279,000
Neurocrine Biosciences 0 93,100
Pfizer 165,000 267,000
PHT (Restricted) Bridge Loan 0 96,605
PHT (Restricted) Series E 0 743,282
Telik 370,237 410,237
Teva Pharmaceutical Industries 27,300 62,100
Therion Biologics (Restricted) C-2 Units 0 33,332
SALES
Eclipsys 305,700 0
Molecular Devices 39,461 0
Millennium Pharmaceuticals 418,500 0
3
PORTFOLIO
AS OF SEPTEMBER 30, 2003
[CHART]
RESTRICTED PUBLIC TOTAL
---------- ------ -----
BIOPHARMACEUTICALS 0.00% 28.42% 28.40%
DRUG DELIVERY 0.15% 3.22% 3.40%
DRUG DISCOVERY 7.21% 2.74% 10.00%
EMERGING BIOPHARM. 4.83% 13.38% 18.20%
GENERICS 0.00% 7.45% 7.50%
HEALTHCARE SERVICES 3.88% 2.32% 6.20%
DEVICES AND DIAGNOSTICS 5.91% 7.15% 13.10%
LIQUID ASSETS 0.00% 13.30% 13.30%
ANNUAL MEETING REPORT
The Annual Meeting was held on June 18, 2003 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
---------- -------- ----------------
Lawrence S. Lewin 12,671,066 211,608 0
Daniel R. Omstead, ENGSCD 12,348,637 534,037 0
Uwe E. Reinhardt, Ph.D. 12,638,418 244,256 0
The nominees were elected to serve until the 2006 Annual Meeting of
Shareholders. The Trustees serving until the 2004 Annual Meeting are Robert
P. Mack, M.D., Eric Oddleifson and Oleg M. Pohotsky. The Trustees serving
until the 2005 Annual Meeting are Alan G. Carr and Henri A. Termeer.
(2) To ratify the selection of PricewaterhouseCoopers LLP as the Fund's
independent accountants for the fiscal year ended September 30, 2003.
Shareholders overwhelmingly ratified the selection of the Independent
Public Accountants.
FOR AGAINST ABSTAIN BROKER NON-VOTES
---------- ------- ------- ----------------
12,700,659 91,627 90,385 3
4
INDEPENDENT AUDITORS' REPORT
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, 2003, the results of its operations and
its cash flows for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the three years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at September 30, 2003 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
The financial statements of the Fund as of September 30, 2000 and for the two
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 25, 2003
5
H&Q HEALTHCARE INVESTORS
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2003
SHARES VALUE
------------ -------------
CONVERTIBLE SECURITIES - 21.8% OF NET ASSETS
CONVERTIBLE PREFERRED (RESTRICTED) - 21.7%
DRUG DISCOVERY TECHNOLOGIES - 7.2%
2,380,953 Agilix Series B* $ 1,500,001
850,436 Avalon Pharmaceuticals Series B* 2,999,964
375,000 Ceres Series C* 2,250,000
27,443 Ceres Series C-1* 164,658
277,967 Ceres Series D* 1,667,802
139,873 Galileo Laboratories Series F* 489,555
1,212,709 Idun Pharmaceuticals Series A-1*^ 3,000,000
1,034,519 Senomyx Series E* 3,000,002
1,750,000 Triad Therapeutics Series A*^ 1,750,000
525,000 Triad Therapeutics Series B*^ 525,000
1,200,000 Triad Therapeutics Series C*^ 1,200,000
923,077 Zyomyx Series B* 923,077
600,000 Zyomyx Series C* 600,000
600,000 Zyomyx Series E* 600,000
EMERGING BIOPHARMACEUTICALS - 4.8%
453,828 ACADIA Pharmaceuticals Series E* 1,225,336
277,778 ACADIA Pharmaceuticals Series F* 750,001
952,381 Agensys Series C* 3,000,000
1,818,182 Raven biotechnologies Series B*^ 1,509,091
2,809,157 Raven biotechnologies Series C*^ 2,331,600
211,765 Theravance Series C* 1,905,885
200,000 Theravance Series D-1* 1,800,000
47,407 Therion Biologics Series A* 85,333
240,000 Therion Biologics Series B*# 432,000
407,712 Therion Biologics Series C*# 733,882
36,092 Therion Biologics Sinking Fund* 361
HEALTHCARE SERVICES - 3.8%
1,577,144 CardioNet Series C*^ 5,520,004
484,829 CytoLogix Series A*^ 399,984
227,130 CytoLogix Series B*#^ 187,382
5,384,615 PHT Series D*^ 4,200,000
743,282 PHT Series E*^ 579,760
MEDICAL DEVICES AND DIAGNOSTICS - 5.9%
636,364 AbTox Series F*+ 6,364
4,852,940 Concentric Medical Series B*^ 3,299,999
222,222 EPR Series A* 2,222
343,750 LocalMed Series D* 3,437
160,000 Masimo Series D* 1,760,000
631,580 Novacept Series G*# 2,178,951
347,826 Novacept Series H* 1,200,000
1,632,653 OmniSonics Medical Technologies Series B*^ 2,180,898
The accompanying notes are an integral part of these financial statements.
6
SHARES VALUE
------------ -------------
CONVERTIBLE SECURITIES - CONTINUED
639,659 Songbird Hearing Series D* $ 6,397
652,173 TherOx Series H* 1,976,084
820,313 VNUS Medical Technologies Series E*^ 4,200,003
-------------
$ 62,145,033
-------------
PRINCIPAL
AMOUNT
------------
CONVERTIBLE BONDS AND NOTES (RESTRICTED) - 0.1%
HEALTHCARE SERVICES - 0.1%
$ 168,337 CytoLogix 6.75% Cvt. Note, due 2003^ $ 168,337
1,577,366 FitForAll.com 10% Prom. Note*+ 158
96,605 PHT Bridge Loan, due 2004*^ 96,605
MEDICAL DEVICES AND DIAGNOSTICS - 0.0%
180,000 AbTox 12% Prom. Note*+ 84,000
-------------
$ 349,100
-------------
TOTAL CONVERTIBLE SECURITIES
(Cost $86,203,104) $ 62,494,133
-------------
SHARES
------------
COMMON STOCKS - 64.9%
BIOPHARMACEUTICALS - 28.4%
81,000 Amgen* $ 5,230,170
101,848 Biopure Class A* 658,956
204,900 Celgene* 8,878,317
441,471 Corixa* 3,514,109
33,164 Corixa Warrants (expire 8/14/07)* 60,690
803,657 Cubist Pharmaceuticals* 8,671,459
312,823 CV Therapeutics* 6,882,106
308,400 Enzon Pharmaceuticals* 3,589,776
120,000 Genzyme* 5,550,000
213,000 Gilead Sciences* 11,913,090
279,000 MedImmune* 9,209,790
93,100 Neurocrine Biosciences* 4,610,312
267,000 Pfizer 8,111,460
180,000 Pozen* 3,200,400
113,700 Vertex Pharmaceuticals* 1,398,510
-------------
81,479,145
-------------
DRUG DELIVERY - 3.4%
225,000 Aradigm* 402,750
833,333 DepoMed* 5,291,664
291,667 DepoMed Warrants (expire 4/21/08)* 1,222,085
532,580 Durect* 1,789,469
338,892 Sontra Medical*^ 518,505
346,729 Sontra Medical (Restricted)*^ 424,396
-------------
9,648,869
-------------
The accompanying notes are an integral part of these financial statements.
7
SHARES VALUE
------------ -------------
DRUG DISCOVERY TECHNOLOGIES - 2.7%
933,000 deCODE Genetics* $ 4,394,430
507,200 Lexicon Genetics* 2,617,152
170,142 Lynx Therapeutics* 867,724
386,400 Lynx Therapeutics Warrants (expire 4/29/07)* 0
-------------
7,879,306
-------------
EMERGING BIOPHARMACEUTICALS - 13.4%
311,300 Adolor* 5,712,355
2,760 BioTransplant (Restricted) Warrants
(expire 8/12/04)* 0
6,300 BioTransplant (Restricted) Warrants
(expire 10/31/04)* 0
1,150 BioTransplant (Restricted) Warrants
(expire 8/15/05)* 69
387,802 Dyax* 2,381,104
243,100 Encysive Pharmaceuticals* 1,533,961
732,600 Exelixis* 5,230,764
457,600 Kosan Biosciences* 3,642,496
99,314 Rigel Pharmaceuticals* 1,430,122
410,237 Telik* 8,225,252
33,332 Therion Biologics (Restricted) C-2 Units*# 59,998
226,760 Therion Biologics (Restricted)* 2,268
270,270 Tularik* 2,664,862
418,165 Vicuron Pharmaceuticals* 7,401,520
14,947 Vicuron Pharmaceuticals Warrants
(expire 8/25/05)* 176,492
-------------
38,461,263
-------------
GENERIC PHARMACEUTICALS - 7.5%
135,000 aaiPharma* 2,309,850
705,770 Impax Laboratories* 8,829,183
43,934 Impax Laboratories Warrants (expire 6/30/05)* 263,035
326,600 IVAX* 6,401,360
62,100 Teva Pharmaceutical Industries ADR 3,549,015
-------------
21,352,443
-------------
HEALTHCARE SERVICES - 2.3%
85,200 Charles River Labs* 2,614,788
454,500 WebMD* 4,054,140
306,208 Syntiro Healthcare Services (Restricted)* 3,062
188,096 Syntiro Healthcare Services (Restricted) Warrants
(expire 10/15/04)* 0
-------------
6,671,990
-------------
The accompanying notes are an integral part of these financial statements.
8
SHARES VALUE
------------ -------------
MEDICAL DEVICES AND DIAGNOSTICS - 7.2%
522,617 Biofield* $ 99,297
600,000 Biofield (Restricted)* 96,000
1,000,000 Endocardial Solutions*^ 5,000,000
645,000 EP MedSystems* 2,560,650
209,000 IDEXX Laboratories* 8,880,410
160,000 Masimo Labs (Restricted)* 1,600
1,020,000 Orthovita*^ 3,978,000
-------------
20,615,957
-------------
TOTAL COMMON STOCKS
(Cost $120,121,144) $ 186,108,973
-------------
PRINCIPAL
AMOUNT
------------
TEMPORARY CASH INVESTMENTS - 14.2%
$ 14,500,000 American Express Credit Corp.; 1.03%,
due 10/10/03 $ 14,496,266
7,800,000 Exxon Proj. Yrs. 3 & 4; 0.97%,
due 10/17/03 7,796,637
1,300,000 General Electric Capital Corp.; 1.03%
due 10/1/03 1,300,000
3,100,000 General Electric Capital Corp.; 1.03%
due 10/15/03 3,098,758
14,000,000 U.S. Treasury Bill; 0.75%, due 10/23/03 13,993,583
-------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $40,685,244) $ 40,685,244
-------------
TOTAL INVESTMENTS
(Cost $247,009,492) $ 289,288,350
=============
----------
* 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 $41,069,564.
+ Issuer filed for bankruptcy.
The accompanying notes are an integral part of these financial statements.
9
H&Q HEALTHCARE INVESTORS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2003
ASSETS:
Investments, at value (identified cost
$247,009,492; see Schedule of Investments) $ 289,288,350
Cash 1,998,971
Receivable for investments sold 60,000
Interest receivable 54,750
Prepaid expenses 51,219
--------------
Total assets $ 291,453,290
--------------
LIABILITIES:
Payable for investments purchased $ 4,217,837
Accrued advisory fee 325,731
Accrued audit fee 68,525
Accrued other 86,343
--------------
Total liabilities $ 4,698,436
--------------
NET ASSETS $ 286,754,854
==============
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per share,
unlimited number of shares authorized, amount paid in
on 14,608,952 shares issued and outstanding $ 235,148,591
Accumulated net realized gain on investments 9,327,405
Net unrealized gain on investments 42,278,858
--------------
Total net assets (equivalent to $19.63 per
share based on 14,608,952 shares outstanding) $ 286,754,854
==============
The accompanying notes are an integral part of these financial statements.
10
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2003
INVESTMENT INCOME:
Dividend income (net of foreign tax
of $1,366) $ 45,869
Interest income 937,637
--------------
Total investment income $ 983,506
EXPENSES:
Advisory fees $ 3,503,127
Trustees' fees and expenses 136,980
Legal fees 121,806
Shareholder reporting 116,680
Accounting and auditing fees 92,435
Custodian fees 73,725
Transfer agent fees 59,289
Stock exchange listing fee 40,312
Other 83,239
--------------
Total expenses 4,227,593
--------------
Net investment loss $ (3,244,087)
--------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments $ 26,376,623
Increase in net unrealized gain on investments 31,417,229
--------------
Net gain on investments $ 57,793,852
--------------
Net increase in net assets
resulting from operations $ 54,549,765
==============
The accompanying notes are an integral part of these financial statements.
11
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
-------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS:
Net investment loss $ (3,244,087) $ (3,593,224)
Net realized gain on investments 26,376,623 33,875,011
Increase (decrease) in net unrealized
gain on investments 31,417,229 (106,220,050)
-------------- -------------
Net increase (decrease) in
net assets resulting from
operations $ 54,549,765 $ (75,938,263)
-------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized capital gains $ (29,863,899) $ (39,468,231)
-------------- -------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in
reinvestment of distributions
(1,285,469 and 1,281,419 shares,
respectively) $ 20,063,210 $ 28,039,066
-------------- -------------
Net increase (decrease) in
net assets $ 44,749,076 $ (87,367,428)
NET ASSETS:
Beginning of year 242,005,778 329,373,206
-------------- -------------
End of year $ 286,754,854 $ 242,005,778
============== =============
The accompanying notes are an integral part of these financial statements.
12
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 2003
CASH FLOWS USED FOR OPERATING ACTIVITIES:
Interest and other income received $ 872,218
Dividends received 45,869
Operating expenses paid (4,236,900)
--------------
Net cash used for operating activities $ (3,318,813)
--------------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Purchases of portfolio securities $ (66,416,016)
Net sales of temporary cash investments 6,989,549
Sales and maturities of portfolio securities 74,502,121
--------------
Net cash provided from investing activities $ 15,075,654
--------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Cash distributions paid, net $ (9,800,689)
--------------
Net cash used for financing activities $ (9,800,689)
--------------
NET DECREASE IN CASH $ 1,956,152
CASH AT BEGINNING OF YEAR 42,819
--------------
CASH AT END OF YEAR $ 1,998,971
==============
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS TO NET CASH USED FOR OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 54,549,765
Accretion of discount (77,536)
Net realized gain on investments (26,376,623)
Increase in net unrealized gain on investments (31,417,229)
Decrease in dividends and interest receivable 12,117
Increase in accrued expenses 12,497
Increase in prepaid expenses (21,804)
--------------
Net cash used for operating activities $ (3,318,813)
==============
Noncash financing activities not included herein consist of stock distributions
of $20,063,210.
The accompanying notes are an integral part of these financial statements.
13
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE PERIOD INDICATED)
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------
2003 2002 (1) 2001 2000 1999
-------------- -------------- -------------- -------------- --------------
Net asset value per share:
Beginning of year $ 18.160 $ 27.350 $ 46.147 $ 21.771 $ 16.711
-------------- -------------- -------------- -------------- --------------
Net investment loss $ (0.231)(2) $ (0.283)(2) $ (0.195)(2) $ (0.290) $ (0.176)
Net realized and unrealized
gain (loss) on investments 3.871 (5.727) (13.822) 28.131 5.596
-------------- -------------- -------------- -------------- --------------
Total increase (decrease)
from investment operations $ 3.640 $ (6.010) $ (14.017) $ 27.841 $ 5.420
-------------- -------------- -------------- -------------- --------------
Capital gains distributions
to shareholders $ (2.170) $ (3.180) $ (4.780) $ (3.465) $ (0.360)
-------------- -------------- -------------- -------------- --------------
Net asset value per share:
End of year $ 19.630 $ 18.160 $ 27.350 $ 46.147 $ 21.771
============== ============== ============== ============== ==============
Per share market value:
End of year $ 17.66 $ 14.10 $ 21.74 $ 36.19 $ 16.31
Total investment return
at market value 43.49% (25.24)% (27.23)% 151.66% 27.39%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year $ 286,754,854 $ 242,005,778 $ 329,373,206 $ 485,582,570 $ 209,519,627
Ratio of operating expenses
to average net assets 1.65% 1.64% 1.42% 1.45% 1.46%
Ratio of net investment loss
to average net assets (1.27%) (1.16%) (0.62%) (0.86%) (0.91%)
Portfolio turnover rate 32.80% 17.40% 16.17% 12.90% 24.88%
Number of shares outstanding
at end of year 14,608,952 13,323,483 12,042,064 10,522,490 9,623,524
(1) The Fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began accreting discounts and amortizing premiums
on all debt securities. The effect of this change for the year ended
September 30, 2002 was a decrease in net investment loss per share of
$.009, an increase in net realized and unrealized loss on investments per
share of $.009 and a decrease in the ratio of net investment loss to
average net assets from (1.20%) to (1.16%). Per share data and ratios for
the periods prior to October 1, 2001 have not been restated to reflect this
change in presentation.
(2) Net investment loss per share has been computed using average shares
outstanding.
The accompanying notes are an integral part of these financial statements.
14
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(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, adjusted for
amortization of premiums and accretion of discounts. Dividend income is
recorded on the ex-dividend date.
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,
which primarily related to net operating losses, short-term capital gains
and market discount for the year ended September 30, 2003. This adjustment
has no effect on the Fund's net assets, net investment loss or net realized
gain. The calculation of net investment loss per share in the financial
highlights excluded this adjustment. At September 30, 2003, the Fund's
undistributed net realized gain on a tax basis was the same as accumulated
net realized gain on investments.
Pursuant to Section 852 of the Internal Revenue Code, the Fund has
designated $29,863,899 as a long-term capital gain distribution for its
taxable year ended September 30, 2003.
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, 2003.
(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, 2003 totaled $70,633,853 and $72,888,497, respectively.
At September 30, 2003, the total cost of securities for Federal income
tax purposes was $247,009,492. The net unrealized gain on securities held by
the Fund was $42,278,858, including gross unrealized gain of $86,279,493 and
gross unrealized loss of $44,000,635.
At September 30, 2003, the Fund was committed to participate in a round
of financing to purchase additional shares of restricted preferred stock for
approximately $122,000. The Fund expects to satisfy this commitment in part
through the conversion of a loan.
(3) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund has entered into an Investment Advisory Agreement (the Advisory
Agreement) with Hambrecht & Quist Capital Management LLC (the Adviser).
Pursuant to the terms of the Advisory Agreement, the Fund pays the Adviser a
monthly fee at the rate when annualized of (i) 2.5% of the average net
assets for the month of its venture capital and other restricted securities
up to 25% of net assets and (ii) for the month, for all other assets, 1.0%
of the average net assets up to $250 million, 0.9% of the average net assets
for the next $250 million, 0.8% of the average net assets for the next $500
million and 0.7% of the average net assets thereafter. The aggregate fee may
not exceed a rate when annualized of 1.375%. Certain officers and Trustees
of the Fund are also officers of the Adviser.
Trustees who are not affiliates of the Adviser receive an annual fee of
$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, 2003.
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.
16
During the year ended September 30, 2003, the Fund sold restricted
securities for cash and a pro portionate interest in a 5% interest-bearing
promissory note due October 31, 2004. The Fund's interest in the note has a
par value of $121,200 whose estimated value of $60,000 at September 30, 2003
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 September 30, 2003, 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 $ 1,485,126 $ 0.010 $ 6,364
12% Promissory Note 2/26/98 - 3/26/98 180,000 0.467 84,000
ACADIA Pharmaceuticals
Series E Cvt. Pfd. 5/2/00 - 3/24/03 3,000,594 2.700 1,225,336
Series F Cvt. Pfd. 3/19/03 750,363 2.700 750,001
Agensys
Series C Cvt. Pfd. 2/14/02 3,005,073 3.150 3,000,000
Agilix
Series B Cvt. Pfd. 11/8/01 3,014,260 0.630 1,500,001
Avalon Pharmaceuticals
Series B Cvt. Pfd. 10/22/01 3,008,325 3.528 2,999,964
Biofield
Common 12/15/00 302,984 0.160 96,000
BioTransplant
Common Warrants (expire 8/12/04) 8/12/94 0 0.000 0
Common Warrants (expire 10/31/04) 10/31/94 0 0.000 0
Common Warrants (expire 8/15/05) 8/18/95 0 0.060 69
CardioNet^
Series C Cvt. Pfd. 5/3/01 - 3/25/03 5,546,931 3.500 5,520,004
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 1,668,122 6.000 1,667,802
Concentric Medical
Series B Cvt. Pfd. 5/7/02 - 1/24/03 3,328,055 0.680 3,299,999
CytoLogix^
Series A Cvt. Pfd. 1/13/98 - 7/21/99 2,332,441 0.825 399,984
Series B Cvt. Pfd.* 1/11/01 1,153,658 0.825 187,382
Cvt. Note 5/29/02 168,337 1.000 168,337
EPR
Series A Cvt. Pfd. 3/9/94 1,000,409 0.010 2,222
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 3,002,682 3.500 489,555
Idun Pharmaceuticals
Series A-1 Cvt. Pfd. 11/26/02 3,001,966 2.474 3,000,000
LocalMed
Series D Cvt. Pfd. 2/9/96 1,376,970 0.010 3,437
Masimo
Series D Cvt. Pfd. 8/14/96 1,120,040 11.000 1,760,000
17
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
----------------------------------- ----------- ------------- -------------- -------------
Masimo Labs
Common 8/14/96 $ 0 $ 0.010 $ 1,600
Novacept
Series G Cvt. Pfd.* 3/27/01 3,001,927 3.450 2,178,951
Series H Cvt. Pfd. 4/25/02 1,200,000 3.450 1,200,000
OmniSonics Medical Technologies^
Series B Cvt. Pfd. 5/24/01 2,404,898 1.336 2,180,898
PHT^
Series D Cvt. Pfd. 7/23/01 4,202,025 0.780 4,200,000
Series E Cvt. Pfd. 9/12/03 579,760 0.780 579,760
Bridge Loan 7/15/03 96,605 1.000 96,605
Raven biotechnologies^
Series B Cvt. Pfd. 12/12/00 3,001,725 0.830 1,509,091
Series C Cvt. Pfd. 11/26/02 2,331,600 0.830 2,331,600
Senomyx
Series E Cvt. Pfd. 2/19/02 3,003,903 2.900 3,000,002
Songbird Hearing
Series D Cvt. Pfd. 12/14/00 3,004,861 0.010 6,397
Sontra Medical^
Common 9/9/98 - 6/24/02 852,367 1.224 424,396
Syntiro Heathcare Services
Common 2/5/97 1,200,325 0.010 3,062
Warrants (expire 10/15/04) 10/15/98 0 0.000 0
Theravance
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
Therion Biologics
C-2 Units* 8/13/03 59,998 1.800 59,998
Common 7/12/90 - 10/16/96 511,365 0.010 2,268
Series A Cvt. Pfd. 8/20/96 - 10/16/96 444,850 1.800 85,333
Series B Cvt. Pfd.* 2/24/99 - 6/22/99 900,914 1.800 432,000
Series C Cvt. Pfd.* 9/26/01 1,529,348 1.800 733,882
Sinking Fund Cvt. Pfd. 10/17/94 - 4/3/96 721,291 0.010 361
TherOx
Series H Cvt. Pfd. 9/11/00 3,001,873 3.030 1,976,084
Triad Therapeutics
Series A Cvt. Pfd. 6/8/99 1,751,170 1.000 1,750,000
Series B Cvt. Pfd. 12/20/00 1,053,135 1.000 525,000
Series C Cvt. Pfd. 11/25/02 1,200,000 1.000 1,200,000
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 1.000 923,077
Series C Cvt. Pfd. 3/2/00 1,200,690 1.000 600,000
Series E Cvt. Pfd. 7/22/02 1,200,000 1.000 600,000
------------- -------------
$ 89,130,143 $ 63,081,526
============= =============
* With warrants attached.
^ Affiliated issuers.
On November 24, 2003, the Fund upon approval of the Valuation Committee, made a
change in the value of its Zyomyx holdings to approximately $21,000 to reflect
the then current fair market value.
18
TRUSTEES
H & Q HEALTHCARE INVESTORS
30 ROWES WHARF, SUITE 430
BOSTON, MASSACHUSETTS 02110
(617) 772-8500
NUMBER OF
POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S) PORTFOLIOS IN FUND
NAME, ADDRESS(1) FUND, TERM OF OFFICE(2) AND DURING PAST 5 YEARS AND COMPLEX OVERSEEN
AND AGE LENGTH OF TIME SERVED OTHER DIRECTORSHIPS HELD BY TRUSTEE
---------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
Lawrence S. Lewin Trustee (since 1987) and ExecutiveConsultant. Formerly Chief 2
65 Chairman (since 2000) Executive Officer (from 1970-1999) of
The Lewin Group (healthcare public
policy and management consulting), a
subsidiary of Quintiles Transnational
Corp.; and Director (since 2003) of
Medco Health Solutions, Inc.
Robert P. Mack Trustee (since 1991) Consultant in Orthopedic Surgery to 2
68 Orthopedic Associates of Aspen (since
2001). Formerly Orthopedic Surgeon
(from 1996-1998) at the
Steadman-Hawkins Orthopedic Clinic and
(from 1977-1996) at the Denver
Orthopedic Clinic; and Director of the
Department of Orthopedic Surgery at
Metropolitan General Hospital and
Assistant Professor of Orthopedics at
Case Western Reserve University,
Cleveland, OH (from 1968-1977).
Eric Oddleifson Trustee (since 1992) Partner (since 2001) and Managing 2
68 Director (from 1997-2000) of Renewable
Resources LLC (forest properties
investment). Formerly Managing Director
(from 1995-1997) of UBS Asset
Management (forest properties
investment); and President, Director
and Chief Investment Officer (from
1984-1995) of Resource Investments,
Inc. (forest properties investment).
Oleg M. Pohotsky Trustee (since 2000) Most recently, Senior Vice President 2
56 (from 1991-2001) of FAC/Equities, a
division of First Albany Corporation
(investment bank). Formerly General
Partner (from 1989-1991) of Strategic
Capital Associates (financial advisory
firm); and General Partner (from
1986-1989) of Capital Growth Partners
(private mezzanine capital
institutional investment partnership).
19
NUMBER OF
POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S) PORTFOLIOS IN FUND
NAME, ADDRESS(1) FUND, TERM OF OFFICE(2) AND DURING PAST 5 YEARS AND COMPLEX OVERSEEN
AND AGE LENGTH OF TIME SERVED OTHER DIRECTORSHIPS HELD BY TRUSTEE
---------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES: (continued)
Uwe E. Reinhardt, Trustee (since 1988) Professor of Economics (since 1968) 2
65 at Princeton University. Director (from
2000) of Triad Hospitals; Boston
Scientific (since 2002): Amerigroup
(since 2002); Duke University (since
2001); The Duke University Health
System (since 2001) and the National
Bureau of Economic Research (since
2002).
Henri A. Termeer Trustee (since 1989) Chairman (since 1988), Chief Executive 2
56 Officer (since 1985) and President
(since 1983) of Genzyme Corporation
(human healthcare products); Director
(since 1987) of ABIOMED, Inc.; Director
(from 1992-2003) of AutoImmune, Inc.;
Director (from 1993-2002) of Genzyme
Transgenics; and Director (from
1996-2002) of Diacrin, Inc.
INTERESTED TRUSTEES:
Alan G. Carr(3) President Emeritus Chairman (since July 2002) of 2
69 (since 2001), President Hambrecht & Quist Capital Management
(from 1987-2001) and LLC; Chairman (from 2001-July 2002),
Trustee (since 1987) President (from 1992-2001), Director
(from 1986 to July 2002) and Senior
Vice President (from 1986-1992) of
Hambrecht & Quist Capital Management,
Inc.; and Managing Director (from 1992-
1999) of Hambrecht & Quist Group.
Daniel R. Omstead,(3) President (since 2001) President & Chief Executive Officer 2
ENGSCD (since July 2002) of Hambrecht & Quist
50 Capital Management LLC; President of
HQH and of HQL (since 2001); President,
Chief Executive Officer (from 2001 to
July 2002) and Managing Director (from
2000 to July 2002) of Hambrecht & Quist
Capital Management Inc.; formerly
President and Chief Executive Officer
(from 1997-2000) and Chief Operating
Officer (1997) of Reprogenesis, Inc.
(1) The address for each Trustee is c/o the Fund at the Fund's address as set
forth above.
(2) Each Trustee currently is serving a three year term.
(3) Trustee considered to be an "interested person" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act") through position
or affiliation with Hambrecht & Quist Capital Management LLC, the Fund's
investment adviser.
20
OFFICERS
POSITION(S) HELD WITH
NAME, ADDRESS(1) FUND, TERM OF OFFICE(2) AND
AND AGE LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------
OFFICERS:
Alan G. Carr President Emeritus (since 2001) Chairman (since July 2002) of Hambrecht & Quist
69 Capital Management LLC; Chairman (from 2001-
July 2002), President (from 1992-2001), Director
(From 1986 to July 2002) and Senior Vice
President (from 1986-1992) of Hambrecht & Quist
Capital Management, Inc.; Managing Director
(from 1992-1999) of Hambrecht & Quist Group; and
President Emeritus (since 2001), President (from
1987-2001) and Trustee (since 1987) of HQH and
(since 1992) of HQL.
Daniel R. Omstead, President (since 2001) President & Chief Executive Officer (since
ENGSCD July 2002) of Hambrecht & Quist Capital
50 Management LLC; President of HQH and of HQL
(since 2001); President, Chief Executive Officer
(from 2001 to July 2002) and Managing Director
(from 2000 to July 2002) of Hambrecht & Quist
Capital Management Inc.; formerly President and
Chief Executive Officer (from 1997-2000) and
Chief Operating Officer (1997) of Reprogenesis,
Inc.
Kimberley L. Carroll Treasurer (since 1987) Treasurer and Chief Financial Officer (since 1987)
47 of HQH and (since 1992) of HQL; and Vice
President (from 1991-July 2002) and Treasurer
(from 2000-July 2002) of Hambrecht & Quist
Capital Management Inc.
Jennifer L. Morris Secretary (since 2001) Secretary (since 2001) of HQH and of HQL; and
35 Assistant Vice President (from 1999-July 2002)
and Manager, Corporate Communications (from
1996-1999) of Hambrecht & Quist Capital
Management Inc.
(1) The address for each officer is c/o the Fund at the Fund's address as set
forth above.
(2) Each officer serves in such capacity for an indefinite period of time at the
pleasure of the Trustees.
21
H&Q HEALTHCARE INVESTORS
New York Stock Exchange Symbol: HQH
30 Rowes Wharf, 4th Floor
Boston, Massachusetts 02110-3328
(617) 772-8500
www.hqcm.com
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
Daniel R. Omstead, ENGSCD
Oleg M. Pohotsky
Uwe E. Reinhardt, Ph.D.
Henri A. Termeer
INVESTMENT ADVISER
Hambrecht & Quist Capital Management LLC
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
LEGAL COUNSEL
Dechert LLP
Shareholders with questions regarding share transfers may call
1-800-426-5523
Interim daily net asset value may be obtained from
our website (www.hqcm.com) or by calling
1-800-451-2597
For copies of the Fund's
DIVIDEND REINVESTMENT PLAN,
please contact the Plan Agent, State Street Bank & Trust Co.
P.O. Box 8200, Boston, MA 02266-8200
Telephone: 1-800-426-5523
HQHCM-AR-03
ITEM 2. CODE OF ETHICS.
Disclose whether, as of the end of the period covered by the report, the
registrant has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or a
third party. If the registrant has not adopted such a code of ethics,
explain why it has not done so.
THE REGISTRANT HAS ADOPTED A CODE OF ETHICS THAT APPLIES TO THE REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICER, PRINCIPAL FINANCIAL OFFICER, PRINCIPAL ACCOUNTING
OFFICER OR CONTROLLER, OR PERSONS PERFORMING SIMILAR FUNCTIONS. THIS CODE OF
ETHICS IS INCLUDED AS EXHIBIT 10 (a)(1).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a) (1) Disclose that the registrant's board of directors has
determined that the registrant either:
(i) Has at least one audit committee financial expert serving
on its audit committee; or
(ii) Does not have an audit committee financial expert serving
on its audit committee.
(2) If the registrant provides the disclosure required by
paragraph (a)(1)(i) of this Item, it must disclose the name of the audit
committee financial expert and whether that person is "independent." In order to
be considered "independent" for purposes of this Item, a member of an audit
committee may not, other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board committee:
(i) Accept directly or indirectly any consulting, advisory, or
other compensatory fee from the issuer; or
(ii) Be an "interested person" of the investment company as
defined in Section 2(a)(19) of the Act (15 U.S.C.
80a-2(a)(19)).
(3) If the registrant provides the disclosure required by paragraph
(a)(1)(ii) of this Item, it must explain why it does not have an
audit committee financial expert.
3(a)(1) THE REGISTRANT'S BOARD OF TRUSTEES HAS DETERMINED THAT THE REGISTRANT
HAS AT LEAST ONE AUDIT COMMITTEE FINANCIAL EXPERT SERVING ON ITS AUDIT
COMMITTEE.
3(a)(2) THE AUDIT COMMITTEE FINANCIAL EXPERT IS OLEG M. POHOTSKY. HE IS
INDEPENDENT FOR PURPOSES OF ITEM 3(a)(2).
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Disclose, under the caption Audit Fees, the aggregate fees billed
for each of the last two fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years.
(b) Disclose, under the caption Audit-Related Fees, the aggregate fees
billed in each of the last two fiscal years for assurance and related services
by the principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported under
paragraph (a) of this Item. Registrants shall describe the nature of the
services comprising the fees disclosed under this category.
(c) Disclose, under the caption Tax Fees, the aggregate fees billed in
each of the last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax planning.
Registrants shall describe the nature of the services comprising the fees
disclosed under this category.
(d) Disclose, under the caption All Other Fees, the aggregate fees
billed in each of the last two fiscal years for products and services provided
by the principal accountant, other than the services reported in paragraphs (a)
through (c) of this Item. Registrants shall describe the nature of the services
comprising the fees disclosed under this category.
(e) (1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
(2) Disclose the percentage of services described in each of
paragraphs (b) through (d) of this Item that were approved by the audit
committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) If greater than 50 percent, disclose the percentage of hours
expended on the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were attributed to
work performed by persons other than the principal accountant's full-time,
permanent employees.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the registrant for
each of the last two fiscal years of the registrant.
(h) Disclose whether the registrant's audit committee of the board of
directors has considered whether the provision of nonaudit services that were
rendered to the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling, controlled
by, or under common control with the investment adviser that provides ongoing
services to the registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the
principal accountant's independence.
ONLY EFFECTIVE FOR ANNUAL REPORTS WITH PERIODS ENDING AFTER DECEMBER 15, 2003.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(1) If the registrant is a listed issuer as defined in Rule 10A-3 under the
Exchange Act (17 CFR 240.10A-3), state whether or not the registrant has a
separately-designated standing audit committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)). If the
registrant has such a committee, however designated, identify each committee
member. If the entire board of directors is acting as the registrant's audit
committee as specified in Section 3(a)(58)(B) of the Exchange Act (15 U.S.C.
78c(a)(58)(B)), so state.
(2) If applicable, provide the disclosure required by Rule 10A-3(d) under the
Exchange Act (17 CFR 240.10A-3(d)) regarding an exemption from the listing
standards for audit committees.
THE REGISTRANT HAS A SEPARATELY-DESIGNATED STANDING AUDIT COMMITTEE ESTABLISHED
IN ACCORDANCE WITH SECTION 3(A)(58)(A) OF THE EXCHANGE ACT. THE MEMBERS OF THE
AUDIT COMMITTEE ARE ERIC ODDLEIFSON, OLEG M. POHOTSKY AND UWE E. REINHARDT.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
A closed-end management investment company that is filing an annual
report on this Form N-CSR must, unless it invests exclusively in non-voting
securities, describe the policies and procedures that it uses to determine how
to vote proxies relating to portfolio securities, including the procedures that
the company uses when a vote presents a conflict between the interests of its
shareholders, on the one hand, and those of the company's investment adviser;
principal underwriter; or any affiliated person (as defined in Section 2(a)(3)
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(3)) and the rules
thereunder) of the company, its investment adviser, or its principal
underwriter, on the other. Include any policies and procedures of the company's
investment adviser, or any other third party, that the company uses, or that are
used on the company's behalf, to determine how to vote proxies relating to
portfolio securities.
THE REGISTRANT HAS ADOPTED THE FOLLOWING PROXY VOTING POLICIES AND PROCEDURES:
HAMBRECHT & QUIST CAPITAL MANAGEMENT LLC
PROXY VOTING POLICIES AND PROCEDURES
April, 2003
The following are the policies and procedures adopted and implemented by
Hambrecht & Quist Capital Mangement LLC (the "Adviser") for voting proxies with
respect to portfolio securities held by H&Q Healthcare Investors and H&Q Life
Sciences Investors (each a "Fund" and collectively the "Funds"). The policies
and procedures are reasonably designed to ensure that proxies are voted in the
best interest of the Funds and the Funds' shareholders, in accordance with the
Adviser's fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act
of 1940 (the "Investment Advisers Act"). The Adviser considers the "best
interests" of the Funds and their shareholders to mean their best long-term
economic interests.
I. General Statement of Policies and Procedures.
The Adviser shall vote proxies for the exclusive benefit, and in the best
economic interest, of the Funds and their shareholders. Such exercise of voting
rights shall be subject to the same standard of care as is generally applicable
to the Adviser's performance of its duties, as set forth in the advisory
agreements with the Funds. The policies and procedures contained herein are
designed to be guidelines, however each vote is ultimately cast on a
case-by-case basis, taking into consideration the relevant facts and
circumstances at the time of the vote. Any material conflicts that may arise
will be resolved in the best interests of the Funds and their shareholders.
II. Responsibility and Oversight.
A proxy committee is hereby designated and shall be responsible for
administering and overseeing the proxy voting process. The committee shall
consist of the President of the Adviser, the Treasurer of the Adviser, and the
analyst responsible for oversight of the company which is the subject of the
proxy.
III. Proxy Voting Procedures.
A. Logistics. The Treasurer shall be responsible for maintaining
the proxy log, monitoring corporate actions and confirming the timely voting of
proxies. The proxy log shall contain the following information, in accordance
with Form N-PX:
1. the name of the issuer;
2. the exchange ticker symbol, if available;
3. the CUSIP number, if available;
4. the shareholder meeting date;
5. a brief identification of the matter voted on;
6. whether the matter was proposed by the issuer or a
security holder;
7. whether the Adviser cast its vote on the matter;
8. how the Adviser cast its vote on the matter (for,
against, abstain; for or withhold regarding the election
of directors); and
9. whether the Adviser cast its vote for or against
management.
B. Substantive Voting Decisions.
The Adviser's substantive voting decisions turn on the particular facts and
circumstances of each proxy vote. The following is a list of common proxy vote
issues and the Adviser's standard considerations when determining how to vote
such proxies.
1. ROUTINE MATTERS/CORPORATE ADMINISTRATIVE ITEMS. After an
initial review, the Adviser generally votes with
management on routine matters related to the operation
of the issuer that are not expected to have a
significant economic impact on the issuer and/or its
shareholders.
2. POTENTIAL FOR MAJOR ECONOMIC IMPACT. The Adviser reviews
and analyzes on a case-by-case basis, non-routine
proposals that are more likely to affect the structure
and operation of the issuer and to have a greater impact
on the value of the investment.
3. CORPORATE GOVERNANCE. The Adviser reviews and considers
corporate governance issues related to proxy matters and
generally supports proposals that foster good corporate
governance practices.
4. SPECIAL INTEREST ISSUES. The Adviser considers: (i) the
long-term benefit to shareholders of promoting corporate
accountability and responsibility on social issues; (ii)
management's responsibility with respect to special
interest issues; (iii) any economic costs and
restrictions on management; and (iv) the responsibility
of the Adviser to vote proxies for the greatest
long-term shareholder value.
5. LIMITATIONS ON DIRECTOR TENURE AND RETIREMENT. The
Adviser considers: (i) a reasonable retirement age for
directors, E.G. 70 or 72; (ii) the introduction of new
perspectives on the board; and (iii) the arbitrary
nature of such limitations and the possibility of
detracting from the board's stability and continuity.
6. DIRECTORS' MINIMUM STOCK OWNERSHIP. The Adviser
considers: (i) the benefits of additional vested
interest; (ii) the ability of a director to serve a
company well regardless of the extent of his or her
share ownership; and (iii) the impact of limiting the
number of persons qualified to be directors.
7. D&O INDEMNIFICATION AND LIABILITY PROTECTION. The
Adviser considers: (i) indemnifying directors for acts
conducted in the normal course of business; (ii)
limiting liability for monetary damages for violating
the duty of care; (iii) expanding coverage beyond legal
expenses to acts that represent more serious violations
of fiduciary obligation than carelessness (E.G.
negligence); and (iv) providing expanded coverage in
cases when a director's legal defense was
unsuccessful if the director was found to have acted in
good faith and in a manner that he or she reasonably
believed was in the best interests of the issuer.
8. DIRECTOR NOMINATIONS IN CONTESTED ELECTIONS. The Adviser
considers: (i) long-term financial performance of the
issuer relative to its industry; (ii) management's track
record; (iii) background to proxy contest; (iv)
qualifications of both slates of nominees; (v)
evaluations of what each side is offering shareholders
as well as the likelihood that the proposed objectives
and goals can be met; and (vi) stock ownership
positions.
9. CUMULATIVE VOTING. The Adviser considers: (i) the
ability of significant stockholders to elect a director
of their choosing; (ii) the ability of minority
shareholders to concentrate their support in favor of a
director or directors of their choosing; and (iii) the
potential to limit the ability of directors to work for
all shareholders.
10. CLASSIFIED BOARDS. The Adviser considers: (i) providing
continuity; (ii) promoting long-term planning; and (iii)
guarding against unwanted takeovers.
11. POISON PILLS. The Adviser considers: (i) the Adviser's
position on supporting proposals to require a
shareholder vote on other shareholder rights plans; (ii)
ratifying or redeeming a poison pill in the interest of
protecting the value of the issuer; and (iii) other
alternatives to prevent a takeover at a price
demonstrably below the true value of the issuer.
12. FAIR PRICE PROVISIONS. The Adviser considers: (i) the
vote required to approve the proposed acquisition; (ii)
the vote required to repeal the fair price provision;
(iii) the mechanism for determining fair price; and (iv)
whether these provisions are bundled with other
anti-takeover measures (E.G., supermajority voting
requirements) that may entrench management and
discourage attractive tender offers.
13. EQUAL ACCESS. The Adviser considers: (i) the opportunity
for significant shareholders of the issuer to evaluate
and propose voting recommendations on proxy proposals
and director nominees, and to nominate candidates to the
board; and (ii) the added complexity and burden.
14. CHARITABLE CONTRIBUTIONS. The Adviser considers: (i) the
potential benefits to shareholders; (ii) the potential
to detract the issuer's resources from more direct uses
of increasing shareholder value; and (iii) the
responsibility of shareholders to make individual
contributions.
15. STOCK AUTHORIZATIONS: The Adviser considers: (i) the
need for the increase; (ii) the percentage increase with
respect to the existing authorization; (iii) voting
rights of the stock; and (iv) overall capitalization
structures.
16. PREFERRED STOCK. The Adviser considers: (i) whether the
new class of preferred stock has unspecified voting,
conversion, dividend distribution, and other rights;
(ii) whether the issuer expressly states that the stock
will not be used as a takeover defense or carry superior
voting rights; (iii) whether the issuer specifies the
voting, dividend, conversion, and other rights of such
stock and the terms of the preferred stock appear
reasonable; and (iv) whether the stated purpose is to
raise capital or make acquisitions in the normal course
of business.
17. DIRECTOR COMPENSATION. The Adviser considers: (i)
whether director shares are at the same market risk as
those of the shareholders; and (ii) how option programs
for outside directors compare with the standards of
internal programs.
18. GOLDEN AND TIN PARACHUTES. The Adviser considers: (i)
whether they will be submitted for shareholder approval;
and (ii) the employees covered by the plan and the
quality of management.
IV. Limitations.
The Adviser may abstain from voting a proxy if it concludes that the effect on
shareholders' economic interests or the value of the portfolio holding is
indeterminable or insignificant. The Adviser may abstain from voting a proxy if
it concludes that the cost of voting is disproportionate to the economic impact
the vote would have on the portfolio holdings.
V. Conflicts of Interest.
Where conflicts of interest arise between clients and the Adviser which cannot
be fully addressed by the process outlined above, the Adviser may convene an
ad-hoc committee which will meet to debate the conflict and to give a ruling on
a preferred course of action. The ad-hoc committee will be charged with
resolving the issue in a manner which will be in the best interests of the Funds
and their shareholders.
Alternatively, the Adviser may cause the proxies to be voted in accordance with
the recommendations of an independent third party service provider that the
Adviser may use to assist in voting proxies.
VI. Disclosure.
The following disclosure shall be provided in connection with these policies and
procedures:
1. The Adviser shall provide a description or a copy of
these policies and procedures to the Boards of Trustees
of the Funds annually and upon request.
2. The Adviser shall make available to the Funds its proxy
voting records, for inclusion on the Funds' Form N-PX.
3. The Adviser shall include its proxy voting policies and
procedures in its annual filing on Form N-CSR.
4. The Adviser shall cause the Funds' shareholder reports
to include a statement that a copy of these policies and
procedures is available upon request (i) by
calling a toll-free number; (ii) on the Funds' website,
(if the Funds choose); and (iii) on the SEC's website.
5. The Adviser shall cause the Funds' annual and
semi-annual reports to include a statement that
information is available regarding how the Funds voted
proxies during the most recent twelve-month period (i)
without charge, upon request, either by calling a
toll-free number or on or through the Funds' website, or
both; and (ii) on the SEC's website.
VII. Recordkeeping.
The Adviser shall maintain records of proxies voted in accordance with Section
204-2 of the Advisers Act, including proxy statements, a record of each vote
cast, and a copy of any document created by the Adviser that was material to
making a decision of how to vote the proxy, or that memorializes the basis for
the Adviser's decision on how to vote the proxy. The Adviser shall also maintain
a copy of its policies and procedures and each written request from a client for
proxy voting records and the Adviser's written response to any client request,
either written or oral, for such records. Proxy statements that are filed on
EDGAR shall be considered maintained by the Adviser. All such records shall be
maintained for a period of five years in an easily accessible place, the first
two year in the offices of the Adviser.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Disclose the conclusions of the registrant's principal executive
and principal financial officers, or persons performing similar functions,
regarding the effectiveness of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Act (17 CFR 270.30a-3(c))) as
of a date within 90 days of the filing date of the report that includes the
disclosure required by this paragraph, based on the evaluation of these controls
and procedures required by Rule 30a-3(b) under the Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Exchange Act (17 CFR 240.13a-15(b) or
240.15d-15(b)).
IN THE OPINION OF THE PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER, BASED ON THEIR EVALUATION, THE REGISTRANT'S DISCLOSURE CONTROLS AND
PROCEDURES ARE ADEQUATELY DESIGNED AND ARE OPERATING EFFECTIVELY TO ENSURE (i)
THAT MATERIAL INFORMATION RELATING TO THE REGISTRANT, INCLUDING ITS CONSOLIDATED
SUBSIDIARIES, IS MADE KNOWN TO THEM BY OTHERS WITHIN THOSE ENTITIES,
PARTICULARLY DURING THE PERIOD IN WHICH THIS REPORT IS BEING PREPARED; AND (ii)
THAT INFORMATION REQUIRED TO BE DISCLOSED BY THE REGISTRANT ON FORM N-CSR IS
RECORDED, PROCESSED, SUMMARIZED AND REPORTED WITHIN THE TIME PERIODS SPECIFIED
IN THE SECURITIES AND EXCHANGE COMMISSION'S RULES AND FORMS.
(b) Disclose any change in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d)) that
occurred during the registrant's last fiscal half-year (the registrant's second
fiscal half-year in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control
over financial reporting.
THERE WERE NO CHANGES IN THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL
REPORTING THAT OCCURRED DURING THE REGISTRANT'S MOST RECENT FISCAL HALF-YEAR
THAT HAVE MATERIALLY AFFECTED OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, THE
REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING.
ITEM 10. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or
number the exhibits in the sequence indicated.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of
the disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit.
THE CODE OF ETHICS THAT IS THE SUBJECT OF THE DISCLOSURE REQUIRED BY ITEM 2 IS
ATTACHED HERETO.
(a)(2) A separate certification for each principal executive officer
and principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2).
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 ARE
ATTACHED HERETO.
(b) A separate or combined certification for each principal executive
officer and principal officer of the registrant as required by Rule 30a-2(b)
under the Act of 1940.
CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 ARE
ATTACHED HERETO.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) H&Q HEALTHCARE INVESTORS
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By (Signature and Title)* Daniel R. Omstead, President
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Date: 12/8/03
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* Kimberley L. Carroll, Treasurer
-------------------------------------------------------
Date: 12/8/03
By (Signature and Title)* Daniel R. Omstead, President
-------------------------------------------------------
Date: 12/8/03
* Print the name and title of each signing officer under his or her signature.