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)
Daniel R. Omstead, 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: September 30
Date of reporting period: October 1, 2003 to March 31, 2004
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.
H&Q HEALTHCARE INVESTORS
[GRAPHIC]
SEMIANNUAL REPORT
MARCH 31, 2004
To our Shareholders:
At quarter end on March 31, 2004, the net asset value per share of your Fund was
$20.80. During the six month period ending March 31, 2004, total return at net
asset value of your Fund was 11.7%, a change that was equal or unfavorable to
the comparative indices listed below. During the most recent quarter ending
March 31, 2004, total return at net asset value of your Fund was 7.5%, a change
that was favorable to all these same indices. The total return at market was
18.7% during the six month period ended March 31, 2004 and was 9.2% during the
most recent quarter ended March 31, 2004.
FISCAL YEAR TO DATE QUARTER ENDED
(6 MONTHS) 3/31/04
------------------- -------------
Net Asset Value +11.7% +7.5%
AMEX Biotech Index +16.1% +7.4%
Dow Jones Industrial Average +11.7% -0.9%
NASDAQ Industrials +19.3% +4.0%
Russell 2000 +21.0% +6.0%
In the first calendar quarter of 2004, there were several positive signs for the
general economy. Overall economic growth was solid and consumer sales continued
to be strong. Rebates, associated with recent tax reductions, are likely to make
additional resources available to consumers (although we hope that some of this
one time benefit will be allocated to savings). As of May 2004, the Federal
Reserve continues to maintain interest rates at historically low levels. And
after a relatively long period, it appears that there may be an upward trend in
the creation of new jobs. Furthermore, business activity appears to be
increasing. First quarter reports from a number of companies and sectors have
been positive. All these trends are encouraging for the short term. On the other
hand, there are also factors which give us concern. Energy prices are
increasing. We believe there is general concern that interest rates, while low,
will increase if and when the Federal Reserve reacts to the potential for
economic inflation. And, most concerning to us, is the geopolitical situation in
general and the conflict in Iraq, in particular. We are unclear about the exit
strategy in Iraq and worry about the intermediate term impact on the economy.
Overall, we think that the positives outlined above will dominate in the near
term but that there will be some volatility in stock prices. In the intermediate
term we are less certain.
As for the healthcare sector, we continue to be generally upbeat, particularly
in the long term. As we have said several times, demographics favor this sector.
The population is getting older and healthcare spending increases as people age.
Having said this, the first
1
calendar quarter of 2004 was not a good one for large pharmaceutical companies
as they generally lagged the broader market. Apparently, there is concern among
investors about product pipelines, pricing power and generic competition in the
large pharma group. In our view there is some basis for these concerns. However,
we have generally high regard for the management teams of companies in this
group and think, on a select basis, that there is opportunity for upside
appreciation.
In contrast to the large pharma group, the biotechnology sector performed well
in the first quarter. This was likely due to continued evidence of maturation of
the group, as evidenced by product approvals and other positive developments.
Two products in the cancer area, Genentech's Avastin and Imclone's Erbitux have
been recently approved, and are of particular note. Many analysts believe these
will be very successful drugs. We think such approvals are crucial to the
general advancement of the group.
The recent development of the initial public offering market for biotechnology
stocks is also a good sign for the sector. More than a dozen companies have
completed IPOs in recent months after a period of several years in which there
was little or no market for such offerings. Furthermore, the stock price of a
good number of these stocks has risen since their IPO. A number of other
companies are in registration, with the intent to test the public market. We
think that the demand for new public companies is good for the sector and
encouraging for your Fund.
During the first calendar quarter of 2004, your Fund established positions in
Elan, Cyberonics, and Genta and increased its positions in Amgen, Durect,
Genzyme, Teva, United Therapeutics and Vivus. Your Fund also made an initial
investment in restricted securities of I-Trax and follow on investments in
TherOx and Zyomyx. In addition, one of the Fund's venture investments, Novacept,
was acquired by Cytyc. The Fund sold out of positions in EP MedSystems and
Vicuron Pharmaceuticals and decreased its ownership of deCODE Genetics,
Endocardial Solutions and Sontra Medical.
As always, we encourage the Fund's shareholders to contact us with any questions
or concerns you may have relating to the Fund.
/s/ Daniel R. Omstead
Daniel R. Omstead
President
2
H&Q HEALTHCARE INVESTORS
PRIVACY NOTICE
If you are a registered shareholder of the Fund, the Fund and Hambrecht &
Quist Capital Management LLC, the Fund's 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.
CHANGE IN INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP ("PwC") had been selected as the independent
accountants of the Fund for its fiscal year ending September 30, 2004. On May 7,
2004, PwC resigned as the Fund's independent accountants for its fiscal year
ending September 30, 2004 effective upon the completion of services related to
the Fund's semi-annual financial statements. The reports provided by PwC for the
fiscal years ending September 30, 2002 and September 30, 2003 were unqualified
and contained no adverse opinion or disclaimer of opinion, nor were the reports
modified as to uncertainty, audit scope, or accounting principle. Further, in
connection with its audits for the two previous fiscal years and through May 31,
2004, there have been no disagreements between PwC and the Fund on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to their satisfaction,
would have caused PwC to reference the subject matter of the disagreements in
its report on the financial statements for such years. The Fund is currently
seeking to retain new independent auditors for its fiscal year ending September
30, 2004.
3
H&Q HEALTHCARE INVESTORS
[CHART]
PORTFOLIO
AS OF MARCH 31, 2004
RESTRICTED PUBLIC TOTAL
BIOPHARMACEUTICALS 0.0% 31.4% 31.4%
DRUG DELIVERY 0.0% 3.3% 3.3%
DRUG DISCOVERY TECH. 4.3% 3.2% 7.5%
EMERGING BIOPHARM. 5.1% 14.1% 19.2%
GENERICS 0.0% 8.6% 8.6%
HEALTHCARE SERVICES 4.8% 3.3% 8.1%
DEVICES AND DIAGNOSTICS 5.6% 6.8% 12.4%
LIQUID ASSETS 0.0% 9.5% 9.5%
H&Q HEALTHCARE INVESTORS
LARGEST HOLDINGS
AS OF MARCH 31, 2004
% OF NET ASSETS
---------------
Impax Laboratories 3.87%
Telik 3.68%
Celgene 3.11%
Genzyme 3.10%
Pfizer 2.98%
Amgen 2.63%
Elan 2.53%
Cubist Pharmaceuticals 2.41%
IVAX 2.37%
Teva Pharmaceutical Industries ADR 2.36%
4
H&Q HEALTHCARE INVESTORS
SIGNIFICANT PORTFOLIO TRANSACTIONS
QUARTER ENDED MARCH 31, 2004
UNITS HELD UNITS HELD
12/31/03 3/31/04
-------- -------
PURCHASES
Amgen 81,000 142,000
Cyberonics 0 115,260
Durect 738,080 918,080
Elan 0 385,000
Genta 0 127,000
Genzyme 120,000 207,000
I-Trax (Restricted) Series A 0 160,000
Teva Pharmaceutical Industries ADR 62,100 117,100
TherOx (Restricted) Bridge Note $ 0 $ 200,272
United Therapeutics 60,600 132,000
Vivus 574,500 652,400
Zyomyx (Restricted) Series A New 0 299,700
Zyomyx (Restricted) Series B New 0 300
SALES
deCODE Genetics 697,800 634,800
Endocardial Solutions 754,900 320,034
EP MedSystems 103,880 0
Sontra Medical 282,571 97,020
Vicuron Pharmaceuticals 103,665 0
5
H&Q HEALTHCARE INVESTORS
SCHEDULE OF INVESTMENTS
March 31, 2004
(UNAUDITED)
SHARES VALUE
------------ --------------
CONVERTIBLE SECURITIES - 20.0% OF NET ASSETS
CONVERTIBLE PREFERRED (RESTRICTED) - 19.9%
DRUG DISCOVERY TECHNOLOGIES - 4.4%
2,380,953 Agilix Series B* $ 571,429
850,436 Avalon Pharmaceuticals Series B* 1,998,525
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
525,000 Triad Therapeutics Series B*^ 525
1,200,000 Triad Therapeutics Series C*^ 180,000
299,700 Zyomyx Series A New* 299,700
300 Zyomyx Series B New* 300
EMERGING BIOPHARMACEUTICALS - 5.1%
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
2,100,000 Xanthus Life Sciences Series B* 2,100,000
HEALTHCARE SERVICES - 4.8%
1,577,144 CardioNet Series C*^ 5,520,004
484,829 CytoLogix Series A*^ 399,984
227,130 CytoLogix Series B*#^ 187,382
160,000 I-Trax Series A* 4,000,000
5,384,615 PHT Series D*^ 4,200,000
906,261 PHT Series E*^ 706,883
MEDICAL DEVICES AND DIAGNOSTICS - 5.6%
4,852,940 Concentric Medical Series B*^ 3,105,882
1,744,186 Concentric Medical Series C*^ 1,116,279
2,000,000 Conor MedSystems Series D* 2,400,000
222,222 EPR Series A* 2,222
160,000 Masimo Series D* 1,760,000
1,632,653 OmniSonics Medical Technologies Series B* 2,181,224
1,547,988 OmniSonics Medical Technologies Series C* 1,800,000
The accompanying notes are an integral part of these financial statements.
6
SHARES VALUE
------------ --------------
CONVERTIBLE PREFERRED (RESTRICTED) - CONTINUED
639,659 Songbird Hearing Series D* $ 6,397
652,173 TherOx Series H* 965,216
820,313 VNUS Medical Technologies Series E* 4,200,003
--------------
$ 62,049,211
--------------
PRINCIPAL
AMOUNT
------------
CONVERTIBLE BONDS AND NOTES (RESTRICTED) - 0.1%
HEALTHCARE SERVICES - 0.0%
$ 168,337 CytoLogix 6.75% Cvt. Note, due 2004*^ $ 168,337
MEDICAL DEVICES AND DIAGNOSTICS - 0.1%
200,272 TherOx 6% Bridge Note, due 2004# 200,272
--------------
$ 368,609
--------------
TOTAL CONVERTIBLE SECURITIES
(Cost $86,089,770) $ 62,417,820
--------------
SHARES
------------
COMMON STOCKS - 70.9%
BIOPHARMACEUTICALS - 31.5%
142,000 Amgen* $ 8,260,140
101,848 Biopure Class A* 160,920
204,900 Celgene* 9,763,485
441,471 Corixa* 2,826,650
33,164 Corixa Warrants (expire 8/14/07)* 6,268
821,657 Cubist Pharmaceuticals* 7,559,244
312,823 CV Therapeutics* 4,733,012
385,000 Elan* 7,938,700
308,400 Enzon Pharmaceuticals* 4,758,612
127,000 Genta* 1,333,500
207,000 Genzyme* 9,737,280
107,000 Gilead Sciences* 5,967,390
279,000 MedImmune* 6,439,320
108,100 Neurocrine Biosciences* 6,388,710
267,000 Pfizer 9,358,350
51,000 Pharmion* 1,154,640
290,400 Pozen* 4,013,328
132,000 United Therapeutics* 3,145,560
113,700 Vertex Pharmaceuticals* 1,071,054
652,400 Vivus* 3,960,068
--------------
98,576,231
--------------
DRUG DELIVERY - 3.3%
225,000 Aradigm* 522,000
833,333 DepoMed* 6,524,997
The accompanying notes are an integral part of these financial statements.
7
SHARES VALUE
------------ --------------
DRUG DELIVERY - CONTINUED
918,080 Durect* $ 3,121,472
97,020 Sontra Medical* 192,100
--------------
10,360,569
--------------
DRUG DISCOVERY TECHNOLOGIES - 3.2%
634,800 deCODE Genetics* 6,728,880
507,200 Lexicon Genetics* 3,180,144
386,400 Lynx Therapeutics Warrants (expire 4/29/07)* 0
300,001 Zyomyx (Restricted) Common* 3,000
--------------
9,912,024
--------------
EMERGING BIOPHARMACEUTICALS - 14.2%
311,300 Adolor* 4,678,839
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)* 0
387,802 Dyax* 3,990,482
303,100 Encysive Pharmaceuticals* 3,115,868
732,600 Exelixis* 6,263,730
568,600 Kosan Biosciences* 6,010,102
99,314 Rigel Pharmaceuticals* 2,197,819
431,237 Telik* 11,574,401
33,332 Therion Biologics (Restricted) C-2 Units*# 59,998
226,760 Therion Biologics (Restricted)* 2,268
270,270 Tularik* 6,635,128
--------------
44,528,635
--------------
GENERIC PHARMACEUTICALS - 8.6%
543,067 Impax Laboratories* 12,148,409
326,600 IVAX* 7,436,682
117,100 Teva Pharmaceutical Industries ADR 7,425,311
--------------
27,010,402
--------------
HEALTHCARE SERVICES - 3.3%
85,200 Charles River Labs* 3,650,820
754,500 WebMD* 6,707,505
306,208 Syntiro Healthcare Services (Restricted)* 3,062
188,096 Syntiro Healthcare Services (Restricted)
Warrants (expire 10/15/04)* 0
--------------
10,361,387
--------------
The accompanying notes are an integral part of these financial statements.
8
SHARES VALUE
------------ --------------
MEDICAL DEVICES AND DIAGNOSTICS - 6.8%
1,122,517 Biofield* $ 594,934
365,000 CTI Molecular Imaging* 5,325,350
115,260 Cyberonics* 2,761,629
320,034 Endocardial Solutions* 2,777,895
101,000 IDEXX Laboratories* 5,743,870
160,000 Masimo Labs (Restricted)* 1,600
1,020,000 Orthovita* 4,100,400
--------------
21,305,678
--------------
TOTAL COMMON STOCKS
(Cost $144,885,684) $ 222,054,926
--------------
PRINCIPAL
AMOUNT
------------
TEMPORARY CASH INVESTMENTS - 9.1%
$ 9,500,000 American Express Credit Corp.; .97%, due 4/1/04 $ 9,500,000
6,400,000 General Electric Capital Corp.; .95%, due 4/7/04 6,398,986
12,445,000 State Street Bank Repurchase Agreement;
.15%, dtd 3/31/04 due 4/1/04
Collateralized by US Treasury Note,
1.5% due 7/31/05 with a market value
of $12,694,767, (repurchase proceeds
of $12,445,052) 12,445,000
--------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $28,343,986) $ 28,343,986
--------------
TOTAL INVESTMENTS
(Cost $259,319,440) $ 312,816,732
==============
----------
* 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 $22,427,717).
The accompanying notes are an integral part of these financial statements.
9
H&Q HEALTHCARE INVESTORS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2004
(UNAUDITED)
ASSETS:
Investments, at value (identified cost
$259,319,440; see Schedule of Investments) $ 312,816,732
Cash 765,493
Interest receivable 17,305
Receivable for investments sold 1,859,092
Prepaid expenses 16,292
--------------
Total assets $ 315,474,914
--------------
LIABILITIES:
Payable for investments purchased $ 643,548
Accrued advisory fee 330,024
Accrued other 243,184
--------------
Total liabilities $ 1,216,756
--------------
NET ASSETS $ 314,258,158
==============
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per
share, unlimited number of shares authorized,
amount paid in on 15,108,429 shares issued and
outstanding $ 244,537,756
Accumulated net investment loss (2,163,903)
Accumulated net realized gain on investments 18,387,013
Net unrealized gain on investments 53,497,292
--------------
Total net assets (equivalent to $20.80 per
share based on 15,108,429 shares outstanding) $ 314,258,158
==============
The accompanying notes are an integral part of these financial statements.
10
H&Q HEALTHCARE INVESTORS
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 2004
(UNAUDITED)
INVESTMENT INCOME:
Dividend income (net of foreign
tax of $3,348) $ 98,231
Interest income 141,021
------------
Total investment income $ 239,252
EXPENSES:
Advisory fees $ 1,978,232
Legal fees 79,665
Trustees' fees and expenses 69,741
Shareholder reporting 61,930
Custodian fees 47,830
Accounting and auditing fees 40,577
Transfer agent fees 29,267
Stock exchange listing fee 17,268
Other 78,645
------------
Total expenses 2,403,155
------------
Net investment loss $ (2,163,903)
------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments $ 23,793,037
Increase in net unrealized gain on investments 11,218,434
------------
Net gain on investments $ 35,011,471
------------
Net increase in net assets
resulting from operations $ 32,847,568
============
The accompanying notes are an integral part of these financial statements.
11
H&Q HEALTHCARE INVESTORS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
MARCH 31, 2004 SEPTEMBER 30,
(UNAUDITED) 2003
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS:
Net investment loss $ (2,163,903) $ (3,244,087)
Net realized gain on investments 23,793,037 26,376,623
Increase in net unrealized
gain on investments 11,218,434 31,417,229
-------------- --------------
Net increase (decrease) in net
assets resulting from operations $ 32,847,568 $ 54,549,765
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized capital gains $ (14,733,429) $ (29,863,899)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in
reinvestment of distributions
(499,477 and 1,285,469 shares,
respectively) $ 9,389,165 $ 20,063,210
-------------- --------------
Net increase (decrease) in
net assets $ 27,503,304 $ 44,749,076
NET ASSETS:
Beginning of period 286,754,854 242,005,778
-------------- --------------
End of period $ 314,258,158 $ 286,754,854
============== ==============
ACCUMULATED NET INVESTMENT
LOSS INCLUDED IN NET ASSETS AT
END OF PERIOD $ (2,163,903) $ 0
============== ==============
The accompanying notes are an integral part of these financial statements.
12
H&Q HEALTHCARE INVESTORS
STATEMENT OF CASH FLOWS
For the Six Months Ended March 31, 2004
(UNAUDITED)
CASH FLOWS USED FOR OPERATING ACTIVITIES:
Interest income received $ 178,466
Dividends received 98,231
Operating expenses paid (2,275,619)
-----------------
Net cash used for operating activities $ (1,998,922)
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities $ (55,414,126)
Net sales of temporary cash investments 12,341,258
Sales and maturities of portfolio securities 49,182,576
-----------------
Net cash provided from investing activities $ 6,109,708
-----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Cash distributions paid, net $ (5,344,264)
-----------------
Net cash used for financing activities $ (5,344,264)
-----------------
NET DECREASE IN CASH $ (1,233,478)
CASH AT BEGINNING OF PERIOD 1,998,971
-----------------
CASH AT END OF PERIOD $ 765,493
=================
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 $ 32,847,568
Net realized gain on investments (23,793,037)
Increase in net unrealized gain on investments (11,218,434)
Decrease in dividends and interest receivable 37,445
Increase in accrued expenses 92,609
Decrease in prepaid expenses 34,927
-----------------
Net cash used for operating activities $ (1,998,922)
=================
Noncash financing activities not included herein consist of stock distributions
of $9,389,165. Noncash investing activities not included herein consist of the
conversion of restricted preferred stock with a cost of $3,601,240 to restricted
common stock of the same issuer.
The accompanying notes are an integral part of these financial statements.
13
H&Q HEALTHCARE INVESTORS
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD INDICATED)
FOR THE SIX
MONTHS ENDED FOR THE YEAR ENDED SEPTEMBER 30,
MARCH 31, 2004 --------------------------------------------------------------------------------------
(UNAUDITED) 2003(3) 2002(1) 2001 2000 1999
-------------- ------------- ------------- ------------- ------------- -------------
Net asset value per
share:
Beginning of period $ 19.630 $ 18.160 $ 27.350 $ 46.147 $ 21.771 $ 16.711
-------------- ------------- ------------- ------------- ------------- -------------
Net investment loss $ (0.146)(2) $ (0.231)(2) $ (0.283)(2) $ (0.195)(2) $ (0.290) $ (0.176)
Net realized and
unrealized gain
(loss) on
investments 2.316 3.871 (5.727) (13.822) 28.131 5.596
-------------- ------------- ------------- ------------- ------------- -------------
Total increase
(decrease) from
investment
operations $ 2.170 $ 3.640 $ (6.010) $ (14.017) $ 27.841 $ 5.420
-------------- ------------- ------------- ------------- ------------- -------------
Capital gains
distributions to
shareholders $ (1.000) $ (2.170) $ (3.180) $ (4.780) $ (3.465) $ (0.360)
-------------- ------------- ------------- ------------- ------------- -------------
Net asset value per
share:
End of period $ 20.800 $ 19.630 $ 18.160 $ 27.350 $ 46.147 $ 21.771
============== ============= ============= ============= ============= =============
Per share market value:
End of period $ 19.89 $ 17.66 $ 14.10 $ 21.74 $ 36.19 $ 16.31
Total investment
return at market
value 18.69% 43.49% (25.24%) (27.23%) 151.66% 27.39%
RATIOS AND
SUPPLEMENTAL DATA:
Net assets at end
of period $ 314,258,158 $ 286,754,854 $ 242,005,778 $ 329,373,206 $ 485,582,570 $ 209,519,627
Ratio of operating
expenses to average
net assets 1.62%* 1.65% 1.64% 1.42% 1.45% 1.46%
Ratio of net
investment loss to
average net assets (1.46%)* (1.27%) (1.16%) (0.62%) (0.86%) (0.91%)
Portfolio turnover rate 19.07% 32.80% 17.40% 16.17% 12.90% 24.88%
Number of shares
outstanding at end
of period 15,108,429 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.
* Annualized.
The accompanying notes are an integral part of these financial statements.
14
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(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, adjusted for
amortization of premiums and accretion of discounts. Dividend income is
recorded on the ex-dividend date.
REPURCHASE AGREEMENTS
In connection with transactions in repurchase agreements, the Fund's
custodian takes possession of the underlying collateral securities, the
market value of which is at least equal to the principal, including accrued
interest, of the repurchase transaction at all times. In the event of
default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral by the Fund may be delayed or limited.
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.
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 March 31, 2004.
INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and Trustees may
be indemnified against certain liabilities and expenses arising out of the
performance of their duties to the Fund. Additionally, in the normal course
of business, the Fund enters into agreements with service providers that may
contain indemnification clauses. The Fund's maximum exposure under these
agreements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. However, based on experience,
the Fund expects the risk of loss to be remote.
(2) SECURITIES TRANSACTIONS
The aggregate cost of purchases and proceeds from sales of investment
securities (other than temporary cash investments) for the six months ended
March 31, 2004 totaled $51,839,837 and $50,981,668, respectively.
At March 31, 2004, the total cost of securities for Federal income tax
purposes was $259,319,440. The net unrealized gain on securities held by the
Fund was $53,497,292, including gross unrealized gain of $96,363,048 and
gross unrealized loss of $42,865,756.
(3) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund has entered into an Investment Advisory Agreement (the Advisory
Agreement) with Hambrecht & Quist Capital Management LLC (the Adviser).
Pursuant to the terms of the Advisory Agreement, the Fund pays the Adviser a
monthly fee at the rate when annualized of (i) 2.5% of the average net
assets for the month of its venture capital and other restricted securities
up to 25% of net assets and (ii) for the month, for all other assets, 1.0%
of the average net assets up to $250 million, 0.9% of the average net assets
for the next $250 million, 0.8% of the average net assets for the next $500
million and 0.7% of the average net assets thereafter. The aggregate fee may
not exceed a rate when annualized of 1.375%. Certain officers and Trustees
of the Fund are also officers of the Adviser.
Trustees who are not affiliates of the Adviser receive an annual fee of
$20,000 plus $500 for each Committee on which they serve and $1,000 for each
meeting attended.
16
(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 20% of the Fund's net assets at March
31, 2004.
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.
During the six-month period ended March 31, 2004, certain restricted
securities were exchanged for cash in connection with a corporate action, a
portion of which has been retained by the issuer in an escrow account
pending resolution of certain contingencies and whose estimated value of
$582,000 at March 31, 2004 has also been determined by the Trustees. At
March 31, 2004, the Fund has a proportionate interest in a 5% interest
bearing promissory note due October 31, 2004 from the sale of restricted
securities, with a par value o f $121,200 and an estimated value of $120,000
as determined by the Trustees. The value of the escrow account and note are
included in the Receivable for Investments Sold in the Statement of Assets
and Liabilities.
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, 2004, as determined by the Trustees of the Fund.
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
---------------------------------------- ---------------- ------------- --------------- -------------
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 0.240 571,429
Avalon Pharmaceuticals
Series B Cvt. Pfd. 10/22/01 3,008,325 2.350 1,998,525
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 0.000 0
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 0.640 3,105,882
Series C Cvt. Pfd. 12/19/03 1,501,155 0.640 1,116,279
Conor MedSystems
Series D Cvt. Pfd. 10/23/03 2,403,660 1.200 2,400,000
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
Galileo Laboratories
Series F Cvt. Pfd. 8/18/00 3,002,895 3.500 489,555
17
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
---------------------------------------- ---------------- ------------- --------------- -------------
Idun Pharmaceuticals^
Series A-1 Cvt. Pfd. 11/26/02 $ 3,001,966 $ 2.474 $ 3,000,000
I-Trax
Series A Cvt. Pfd. 3/18/04 4,000,000 25.000 4,000,000
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
OmniSonics Medical Technologies
Series B Cvt. Pfd. 5/24/01 2,404,898 1.336 2,181,224
Series C Cvt. Pfd. 10/2/03 1,804,125 1.163 1,800,000
PHT^
Series D Cvt. Pfd. 7/23/01 4,202,025 0.780 4,200,000
Series E Cvt. Pfd. 7/15/03-12/17/03 710,613 0.780 706,883
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
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 1,801,329 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 1.480 965,216
Bridge Note* 1/28/04 200,272 1.000 200,272
Triad Therapeutics^
Series A Cvt. Pfd. 6/8/99 1,751,170 0.001 1,750
Series B Cvt. Pfd. 12/20/00 1,053,135 0.001 525
Series C Cvt. Pfd. 11/25/02 1,200,000 0.150 180,000
VNUS Medical Technologies
Series E Cvt. Pfd. 8/20/01 4,200,003 5.120 4,200,003
Xanthus Life Sciences
Series B Cvt. Pfd. 12/5/03 2,101,320 1.000 2,100,000
Zyomyx
Common 2/19/99-2/6/04 3,602,065 0.010 3,000
Series A New Cvt. Pfd. 1/12/04 299,700 1.000 299,700
Series B New Cvt. Pfd. 1/12/04 300 1.000 300
------------- -------------
$ 91,463,523 $ 62,487,748
============= =============
* With warrants attached.
^ Affiliated issuers.
(5) RIGHTS OFFERING
On March 15, 2004, the Trustees of the Fund approved a rights offering to
increase the Fund's assets available for investment. Pending approval by the
SEC, it is anticipated that rights will be offered to shareholders of record
as of the close of business on May 26, 2004 and that the subscription period
will end in June 2004.
18
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
Kimberley L. Carroll, Treasurer and Secretary
TRUSTEES
Lawrence S. Lewin
Robert P. Mack, M.D.
Eric Oddleifson
Daniel R. Omstead, ENGSCD
Oleg M. Pohotsky
Uwe E. Reinhardt, Ph.D.
Henri A. Termeer
INVESTMENT ADVISER
Hambrecht & Quist Capital Management LLC
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
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 and Trust Company
P.O. Box 8200, Boston, MA 02266-8200
Telephone: 1-800-426-5523
HQHCM-SAR-04
ITEM 2. CODE OF ETHICS.
Not applicable to this semi-annual filing.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable to this semi-annual filing.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable to this semi-annual filing.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to this semi-annual filing.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable to this semi-annual filing.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to this semi-annual filing.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to this semi-annual filing.
ITEM 9. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to the procedures by which shareholders may
recommend nominees to the registrant's board of directors, where those changes
were implemented after the registrant last provided disclosure in response to
the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A, or this Item.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Chief Executive and Financial Officers concluded that the
registrant's Disclosure Controls and Procedures are effective based on the
evaluation of the Disclosure Controls and Procedures as of a date within 90 days
of the filing date of this report.
(b) During the filing period of the report, management identified steps in
the processing of the registrant's portfolio securities transactions and in the
procedures for monitoring the percentage of voting securities of certain issuers
held by the registrant that warranted enhancements to the internal control
procedures. Management has instituted additional procedures, and is in the
process of implementing them, to enhance its internal controls.
ITEM 11. EXHIBITS.
(a)(1) Not applicable to this semi-annual filing.
(a)(2) Filed as an attachment to this filing.
(a)(3) Not applicable.
(b) Filed as an attachment to this filing.
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.
H&Q HEALTHCARE INVESTORS
By: /s/ Daniel R. Omstead
-----------------------------
Daniel R. Omstead
President
Date: June 7, 2004
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Daniel R. Omstead
-----------------------------
Daniel R. Omstead
President
Date: June 7, 2004
------------------
By: /s/ Kimberly L. Carroll
-----------------------------
Kimberly L. Carroll
Treasurer
Date: June 7, 2004
------------------