H&Q HEALTHCARE INVESTORS
[LOGO]
SEMIANNUAL REPORT
MARCH 31, 2003
To our Shareholders:
At quarter end on March 31, 2003, the net asset value per share of your Fund was
$16.66. Total return for this quarter at net asset value was (1.9%), a change
that lagged the Amex Biotech and NASDAQ Industrials Indices but which was
favorable to the Dow Jones Industrial Average and the Russell 2000 Index for the
same time period. Total return at market price was 0.21% during the quarter and
10.77% for the semi-annual period. Net asset value performance compared to the
major indices for the quarter and six-month period ended March 31, 2003 was as
follows:
FISCAL YEAR TO DATE QUARTER ENDED
9/30/02 - 3/31/03 3/31/03
------------------- -------------
Net Asset Value +1.0% -1.9%
AMEX Biotech Index +4.2% -1.5%
Dow Jones Industrial Average +5.3% -4.2%
NASDAQ Industrials +9.3% -0.7%
Russell 2000 +0.6% -4.8%
The question, of course, is what can we expect from here. While we obviously
don't know for certain, we believe that the recently completed quarter may
signify a turning point. In the last few years we have been through a great deal
of market turmoil. We saw a tremendous run up in market value in 2000, only to
see a very significant and prolonged subsequent decline. As a benchmark, it is
quite amazing to note that the NASDAQ Composite Index, which reached the 5000
level in 2000, was at 1341 at the close of the most recent quarter. This decline
was punctuated along the way by a series of very tough blows to our collective
psyche, including the September 11 attacks and last year's corporate governance
crisis. During 2002 we detected a great deal of apprehension and even fear of
the unknown in many investors. Entering the first quarter of 2003, geopolitical
concerns were significant. As the quarter progressed, the focus of nearly the
entire country rested on Iraq.
A lot has changed in the last month or two. The scope and cost of loss in Iraq
have been quantified. Importantly, the global and political worst-case scenarios
have not come to pass. We are grateful and relieved about this, of course. And
significantly, it looks to us that we have entered a more normal phase wherein
performance of the economy and of individual companies could have a greater
effect on the stock market and the share prices of individual companies. We
think that there is an increasing likelihood that companies that
1
discover, develop and commercialize quality products will be rewarded with
increased share price. Moreover, it appears to us that healthcare companies will
be at the forefront of such a trend. We believe that all this bodes well for
your Fund as we continue to identify innovative companies that may be able to
cure recalcitrant diseases based on the application of novel scientific
discoveries.
Having said all this, we acknowledge that there are obviously other factors that
could change this equation. As a general positive, we believe there is evidence
that the economy is recovering, albeit slowly and with the creation of
relatively few jobs. In recent months our view has been tempered by high
corporate and household debt levels relative to income, concerns about
employment, low savings rates, and by our sense of general public unease about
the loss of paper wealth that has occurred in the last couple of years. However,
more recently we have sensed a shift in the general mood of the public. It seems
to us that after spending a month or more focused on the events in Iraq, the
public is now looking forward rather than back. Importantly, a number of first
quarter reports have met or exceeded expectations, including reports in the
healthcare sector. This makes us more optimistic about the potential for
progress in the next few quarters. We hope to see some modest improvement in the
economy and particularly in the healthcare sector over the coming months. We are
not sure how sustainable the current trends are - so we are not overly bullish -
but we are certainly optimistic that 2003 will turn out to be a better year than
the last two have proven to be.
In this past quarter, we did not add any new private companies to the portfolio.
We continue to evaluate a number of private investment opportunities, and have
made new public purchases for the Fund. The Fund did, however, make follow-on
investments in the following non-public companies in the portfolio: ACADIA
Pharmaceuticals, CardioNet and Concentric Medical.
As always, we encourage the Fund's shareholders to contact us with any questions
or concerns they may have relating to the Fund, and hope to see you at the
Annual Meeting of Shareholders on June 18th here in Boston.
/s/ Alan G. Carr /s/ Daniel R. Omstead
Alan G. Carr Daniel R. Omstead
President Emeritus President
2
H&Q HEALTHCARE INVESTORS
PRIVACY NOTICE
If you are a registered shareholder of the Fund, the Fund and
Hambrecht & Quist Capital Management, the Funds' investment adviser, may receive
nonpublic personal information about you from the information collected by the
transfer agent from your transactions in Fund shares. Any nonpublic personal
information is not disclosed to third parties, except as permitted or required
by law. In connection with servicing your account and effecting transactions,
the information received may be shared with the investment adviser and
non-affiliates, including transfer agents, custodians or other service
companies. Access to your nonpublic personal information is restricted to
employees who need to know that information to provide products or services to
you. To maintain the security of your nonpublic personal information, physical,
electronic, and procedural safeguards are in place that comply with federal
standards. The policies and practices described above apply to both current and
former shareholders.
If your Fund shares are held in "street name" at a bank or brokerage, we do
not have access to your personal information and you should refer to your bank's
or broker's privacy policies for a statement of the treatment of your personal
information.
H&Q HEALTHCARE INVESTORS
[CHART]
PORTFOLIO
AS OF MARCH 31, 2003
TOTAL VENTURE DIFFERENCE
AGRI/ENVIRO 2% 2% 0%
BIOTECHNOLOGY 48% 12% 36%
CROs 1% 0% 1%
DIAGNOSTICS 6% 4% 2%
HEALTHCARE INFO SERVICES 4% 2% 2%
MEDICAL SPECIALTY 14% 6% 8%
MEDICAL SUPPLIES 2% 1% 0%
PHARMACEUTICALS 5% 2% 3%
LIQUID ASSETS 18% 0% 18%
3
H&Q HEALTHCARE INVESTORS
LARGEST HOLDINGS
AS OF MARCH 31, 2003
% OF NET ASSETS
---------------
Martek Biosciences 5.31%
Celgene 4.51%
Gilead Sciences 3.77%
MedImmune 3.57%
CV Therapeutics 2.38%
CardioNet (Restricted) 2.33%
Cubist Pharmaceuticals 2.27%
IDEXX Laboratories 2.24%
Telik 2.10%
Exelixis 2.06%
H&Q HEALTHCARE INVESTORS
SIGNIFICANT PORTFOLIO TRANSACTIONS
QUARTER ENDED MARCH 31, 2003
UNITS HELD UNITS HELD
12/31/02 3/31/03
---------- ----------
PURCHASES
ACADIA Pharmaceuticals (Restricted) Series F 0 277,778
CardioNet (Restricted) 1,457,144 1,577,144
Charles River Labs 0 85,200
Concentric Medical (Restricted) 4,411,764 4,852,940
Eclipsys 0 142,200
IMPAX Laboratories 231,600 486,100
Kosan Biosciences 263,300 442,600
Lexicon Genetics 208,400 342,200
Millennium Pharmaceuticals 0 418,500
SALES
Cytyc 324,330 0
Digene 18,500 0
Endologix 198,000 0
Gilead Sciences 426,636 213,000
4
H&Q HEALTHCARE INVESTORS
SCHEDULE OF INVESTMENTS
March 31, 2003
(UNAUDITED)
SHARES VALUE
--------- ------------
CONVERTIBLE SECURITIES - 29.8% OF NET ASSETS
CONVERTIBLE PREFERRED (RESTRICTED) - 27.7%
AGRICULTURAL/ENVIRONMENTAL TECHNOLOGIES - 1.7%
375,000 Ceres Series C* $ 2,250,000
27,443 Ceres Series C-1*# 164,658
277,967 Ceres Series D*# 1,667,801
222,222 EPR Series A* 22,222
BIOTECHNOLOGY - 11.4%
460,000 ACADIA Pharmaceuticals Series E* 1,242,000
277,778 ACADIA Pharmaceuticals Series F* 750,001
952,381 Agensys Series C* 3,000,000
2,380,953 Agilix Series B* 3,000,001
850,436 Avalon Pharmaceuticals Series B* 2,999,998
1,212,709 IDUN Pharmaceuticals Series A-1* 3,000,000
1,818,182 Raven biotechnologies Series B*^ 1,509,091
2,809,157 Raven biotechnologies Series C*^ 2,331,600
47,407 Therion Biologics Series A* 89,125
240,000 Therion Biologics Series B*# 451,200
407,712 Therion Biologics Series C*# 766,499
36,092 Therion Biologics Sinking Fund* 67,853
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* 1,846,153
600,000 Zyomyx Series C* 1,200,000
600,000 Zyomyx Series E* 1,200,000
DIAGNOSTICS - 3.3%
1,577,144 CardioNet Series C*^ 5,520,004
484,829 CytoLogix Series A*^ 400,178
227,130 CytoLogix Series B*#^ 187,472
160,000 Masimo Series D* 1,760,000
HEALTHCARE INFORMATION SERVICES - 1.8%
5,384,615 PHT Series D*^ 4,200,000
MEDICAL SPECIALTY - 6.3%
636,364 AbTox Series F*+ 6,364
4,852,940 Concentric Medical Series B* 3,299,999
1,632,653 OmniSonics Medical Technologies Series B*^ 2,400,000
1,034,519 Senomyx Series E* 3,000,002
639,659 Songbird Hearing Series D* 6,397
652,173 TherOx Series H* 1,976,084
820,313 VNUS Medical Technologies Series E*^ 4,200,003
MEDICAL SUPPLIES - 1.4%
343,750 LocalMed Series D* 3,438
631,580 Novacept Series G*# 2,178,951
347,826 Novacept Series H* 1,200,000
The accompanying notes are an integral part of these financial statements.
5
SHARES VALUE
---------- ------------
CONVERTIBLE SECURITIES - CONTINUED
CONVERTIBLE PREFERRED (RESTRICTED) - 27.7%
PHARMACEUTICALS/DRUG DELIVERY - 1.8%
139,873 Galileo Laboratories Series F* $ 489,555
211,765 Theravance Series C* 1,905,885
200,000 Theravance Series D-1* 1,800,000
------------
$ 65,567,534
------------
PRINCIPAL
AMOUNT
----------
CONVERTIBLE BONDS AND NOTES - 2.1%
BIOTECHNOLOGY - 1.9%
$6,800,000 CuraGen 6% Cvt. Deb. due 2007~ $ 4,624,000
DIAGNOSTICS - 0.1%
168,336 CytoLogix (Restricted) 6.75% Cvt. Note,
due 2003*^ 168,337
HEALTHCARE INFORMATION SERVICES - 0.0%
1,577,366 FitForAll.com (Restricted) 10% Prom. Note*#+ 158
MEDICAL SPECIALTY - 0.1%
180,000 AbTox (Restricted) 12% Prom. Note*+ 180,000
------------
$ 4,972,495
------------
TOTAL CONVERTIBLE SECURITIES
(Cost $91,868,175) $ 70,540,029
------------
SHARES
----------
COMMON STOCKS - 52.0%
AGRICULTURAL/ENVIRONMENTAL TECHNOLOGY - 0.1%
71,483 Catalytica Energy Systems* $ 182,282
------------
182,282
------------
BIOTECHNOLOGY - 34.5%
BIOPHARMACEUTICALS - 25.1%
311,300 Adolor* 3,084,983
429,898 BioTransplant* 64,485
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)* 76
410,400 Celgene* 10,703,232
441,471 Corixa* 3,019,662
33,164 Corixa Warrants (expire 8/14/07)* 16,482
The accompanying notes are an integral part of these financial statements.
6
SHARES VALUE
---------- ------------
BIOTECHNOLOGY - CONTINUED
550,556 Cubist Pharmaceuticals* $ 4,409,954
200,001 Cubist Pharmaceuticals (Restricted) Warrants
(expire 9/23/03)* 979,205
312,823 CV Therapeutics* 5,640,199
83,000 Genzyme* 3,025,350
213,000 Gilead Sciences* 8,943,870
442,600 Kosan Biosciences* 1,973,996
258,000 MedImmune* 8,470,140
226,760 Therion Biologics (Restricted)* 426,309
264,912 Transkaryotic Therapies* 1,568,279
270,270 Tularik* 1,364,863
113,700 Vertex Pharmaceuticals* 1,264,344
418,165 Vicuron Pharmaceuticals* 4,528,727
18,696 Vicuron Pharmaceuticals (Restricted) Warrants
(expire 8/3/05)* 91,386
GENOMICS/DRUG DISCOVERY - 9.4%
297,000 Abgenix* 2,583,900
933,000 deCODE Genetics* 1,726,050
387,802 Dyax* 674,775
732,600 Exelixis* 4,879,116
342,200 Lexicon Genetics* 1,365,378
170,142 Lynx Therapeutics* 304,554
386,400 Lynx Therapeutics Warrants (expire 4/29/07)* 0
418,500 Millennium Pharmaceuticals* 3,289,410
174,461 Molecular Devices* 2,110,978
616,100 Rigel Pharmaceuticals* 455,914
370,237 Telik* 4,975,985
------------
81,941,602
------------
CONTRACT RESEARCH ORGANIZATIONS - 1.4%
85,200 Charles River Labs* 2,174,304
91,400 Quintiles Transnational* 1,111,424
------------
3,285,728
------------
DIAGNOSTICS - 2.7%
522,617 Biofield* 141,107
600,000 Biofield (Restricted)* 129,600
152,000 IDEXX Laboratories* 5,315,440
160,000 Masimo Labs (Restricted)* 1,600
685,621 Sontra Medical (Restricted)*^ 795,320
------------
6,383,067
------------
The accompanying notes are an integral part of these financial statements.
7
SHARES VALUE
---------- ------------
HEALTHCARE INFORMATION SERVICES - 2.2%
142,200 Eclipsys* $ 1,133,476
454,500 WebMD* 4,099,590
306,208 Syntiro Healthcare Services (Restricted)* 3,062
188,096 Syntiro Healthcare Services (Restricted)
Warrants (expire 10/15/04)* 0
------------
5,236,128
------------
MEDICAL SPECIALTY - 7.9%
101,848 Biopure Class A* 340,172
8,333 Biopure (Restricted) Warrants (expire 8/4/03)* 0
1,000,000 Endocardial Solutions*^ 2,770,000
441,409 Martek Biosciences* 12,588,985
1,020,000 Orthovita*^ 3,060,000
------------
18,759,157
------------
MEDICAL SUPPLIES - 0.5%
645,000 EP MedSystems* 1,070,700
------------
1,070,700
------------
PHARMACEUTICALS/DRUG DELIVERY - 2.7%
225,000 Aradigm* 281,250
486,100 IMPAX Laboratories* 2,182,589
326,600 IVAX* 4,000,850
------------
6,464,689
------------
TOTAL COMMON STOCKS
(Cost $101,988,449) $123,323,353
------------
PRINCIPAL
AMOUNT
----------
TEMPORARY CASH INVESTMENTS - 13.2%
$ 9,800,000 General Electric Capital Corp., 1.24%, due 4/16/03 $ 9,794,937
21,500,000 U.S. Treasury Bill, 1.10%, due 4/10/03 21,494,087
------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $31,289,024) $ 31,289,024
------------
TOTAL INVESTMENTS
(Cost $225,145,648) $225,152,406
============
----------
* Non income-producing security.
# With warrants attached.
^ Affiliated issuers in which the Fund holds 5% or more of the voting
securities (Total Value of $27,542,005).
~ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Issuer filed for bankruptcy.
The accompanying notes are an integral part of these financial statements.
8
H&Q HEALTHCARE INVESTORS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2003
(UNAUDITED)
ASSETS:
Investments, at value (identified cost
$225,145,648; see Schedule of Investments) $ 225,152,406
Cash 2,066,024
Interest receivable 76,367
Receivable for investments sold 10,153,863
Prepaid expenses 36,390
-------------
Total assets $ 237,485,050
-------------
LIABILITIES:
Accrued advisory fee $ 261,532
Accrued other 151,200
-------------
Total liabilities $ 412,732
-------------
NET ASSETS $ 237,072,318
=============
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per share,
unlimited number of shares authorized, amount paid in on
14,227,676 shares issued and outstanding $ 228,358,122
Accumulated net investment loss (1,413,618)
Accumulated net realized gain on investments 10,121,056
Net unrealized gain on investments 6,758
-------------
Total net assets (equivalent to $16.66 per
share based on 14,227,676 shares outstanding) $ 237,072,318
=============
The accompanying notes are an integral part of these financial statements.
9
H&Q HEALTHCARE INVESTORS
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 2003
(UNAUDITED)
INVESTMENT INCOME:
Dividend income (net of foreign
tax of $606) $ 2,583
Interest income 521,948
-----------
Total investment income $ 524,531
EXPENSES:
Advisory fees $ 1,612,744
Legal fees 37,953
Shareholder reporting 40,847
Trustees' fees and expenses 72,123
Custodian fees 49,775
Transfer agent fees 26,903
Stock exchange listing fee 29,831
Accounting and auditing fees 39,550
Other 28,423
-----------
Total expenses 1,938,149
------------
Net investment loss $ (1,413,618)
------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments $ 13,732,359
Decrease in net unrealized gain on
investments (10,854,871)
------------
Net gain on investments $ 2,877,488
------------
Net increase in net assets
resulting from operations $ 1,463,870
============
The accompanying notes are an integral part of these financial statements.
10
H&Q HEALTHCARE INVESTORS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
MARCH 31, 2003 SEPTEMBER 30,
(UNAUDITED) 2002
-------------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS:
Net investment loss $ (1,413,618) $ (3,593,224)
Net realized gain on investments 13,732,359 33,875,011
Decrease in net unrealized
gain on investments (10,854,871) (106,220,050)
-------------- -------------
Net increase (decrease) in net
assets resulting from operations $ 1,463,870 $ (75,938,263)
-------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized capital gains $ (19,552,950) $ (39,468,231)
-------------- -------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in
reinvestment of distributions
(904,193 and 1,281,419 shares,
respectively) $ 13,155,620 $ 28,039,066
-------------- -------------
Net decrease in net assets $ (4,933,460) $ (87,367,428)
NET ASSETS:
Beginning of period 242,005,778 329,373,206
-------------- -------------
End of period $ 237,072,318 $ 242,005,778
============== =============
The accompanying notes are an integral part of these financial statements.
11
H&Q HEALTHCARE INVESTORS
STATEMENT OF CASH FLOWS
For the Six Months Ended March 31, 2003
(UNAUDITED)
CASH FLOWS USED FOR OPERATING ACTIVITIES:
Interest income received $ 456,227
Dividends received 2,583
Operating expenses paid (2,000,494)
-------------
Net cash used for operating activities $ (1,541,684)
-------------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Purchases of portfolio securities $ (23,811,686)
Net maturities of temporary cash investments 16,385,769
Sales and maturities of portfolio securities 17,388,136
-------------
Net cash provided from investing activities $ 9,962,219
-------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Cash distributions paid, net $ (6,397,330)
-------------
Net cash used for financing activities $ (6,397,330)
-------------
NET INCREASE IN CASH $ 2,023,205
CASH AT BEGINNING OF PERIOD 42,819
-------------
CASH AT END OF PERIOD $ 2,066,024
=============
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 $ 1,463,870
Accretion of discount (56,221)
Net realized gain on investments (13,732,359)
Net decrease in unrealized gain on investments 10,854,871
Increase in interest receivable (9,500)
Increase in prepaid expenses (6,975)
Decrease in accrued expenses (55,370)
-------------
Net cash used for operating activities $ (1,541,684)
=============
Noncash financing activities not included herein consist of stock distributions
of $13,155,620.
The accompanying notes are an integral part of these financial statements.
12
H&Q HEALTHCARE INVESTORS
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD INDICATED)
FOR THE SIX
MONTHS ENDED FOR THE YEARS ENDED SEPTEMBER 30,
MARCH 31, 2003 -------------------------------------------------------------------------------
(UNAUDITED) 2002(1) 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
Net asset value per share:
Beginning of period $ 18.160 $ 27.350 $ 46.147 $ 21.771 $ 16.711 $ 23.106
------------ ------------ ------------ ------------ ------------ ------------
Net investment loss $ (0.103)(2) $ (0.283)(2) $ (0.195)(2) $ (0.290) $ (0.176) $ (0.217)
Net realized and unrealized
gain (loss) on investments 0.053 (5.727) (13.822) 28.131 5.596 (5.108)
------------ ------------ ------------ ------------ ------------ ------------
Total increase (decrease)
from investment
operations $ (0.050) $ (6.010) $ (14.017) $ 27.841 $ 5.420 $ (5.325)
------------ ------------ ------------ ------------ ------------ ------------
Capital gains distributions
to shareholders $ (1.450) $ (3.180) $ (4.780) $ (3.465) $ (0.360) $ (1.070)
------------ ------------ ------------ ------------ ------------ ------------
Net asset value per share:
End of period $ 16.660 $ 18.160 $ 27.350 $ 46.147 $ 21.771 $ 16.711
============ ============ ============ ============ ============ ============
Per share market value:
End of period $ 14.180 $ 14.100 $ 21.740 $ 36.188 $ 16.313 $ 13.125
Total investment return
at market value 10.77% (25.24%) (27.23%) 151.66% 27.39% (26.05%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end
of period $237,072,318 $242,005,778 $329,373,206 $485,582,570 $209,519,627 $157,976,073
Ratio of operating expenses
to average net assets 1.63%* 1.64% 1.42% 1.45% 1.46% 1.46%
Ratio of net investment loss
to average net assets (1.19%)* (1.16%) (0.62%) (0.86%) (0.91%) (1.11%)
Portfolio turnover rate 11.90% 17.40% 16.17% 12.90% 24.88% 17.15%
Number of shares outstanding
at end of period 14,227,676 13,323,483 12,042,064 10,522,490 9,623,524 9,453,317
(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.
13
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(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.
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.
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.
14
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, 2003.
(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, 2003 totaled $23,811,686 and $25,868,376, respectively.
At March 31, 2003, the total cost of securities for Federal income tax
purposes was $225,145,648. The net unrealized gain on securities held by
the Fund was $6,758, including gross unrealized gain of $59,417,969 and
gross unrealized loss of $59,411,211.
(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 29% of the Fund's net assets at
March 31, 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.
During the six-month period ended March 31, 2003, the Fund sold
restricted securities for cash and a proportionate 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
March 31, 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.
15
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, 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 $ 1,463,562 $ 0.010 $ 6,364
12% Promissory Note 2/26/98-3/26/98 180,000 1.000 180,000
ACADIA Pharmaceuticals
Series E Cvt. Pfd. 5/2/00-3/24/03 3,000,594 2.700 1,242,000
Series F Cvt. Pfd. 3/19/03 750,001 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 1.260 3,000,001
Avalon Pharmaceuticals
Series B Cvt. Pfd. 10/22/01 3,008,325 3.528 2,999,998
Biofield
Common 12/15/00 302,984 0.216 129,600
Biopure
Common Warrants (expire 8/4/03) 5/13/99 0 0.000 0
BioTransplant
Common Warrants (expire 8/12/04) 8/12/94 0 0.000 0
Common Warrants (expire 10/31/04) 10/31/94 0 0.000 0
Common Warrants (expire 8/15/05) 8/18/95 0 0.066 76
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 1,667,801
Concentric Medical
Series B Cvt. Pfd. 5/7/02-1/24/03 3,328,055 0.680 3,299,999
Cubist Pharmaceuticals
Common Warrants (expire 9/23/03) 9/23/98 235 4.896 979,205
CytoLogix^
Series A Cvt. Pfd. 1/13/98-7/21/99 2,332,441 0.825 400,178
Series B Cvt. Pfd.* 1/11/01 1,153,658 0.825 187,472
Cvt. Note 5/29/02 168,337 1.000 168,337
EPR
Series A Cvt. Pfd. 3/9/94 1,000,409 0.100 22,222
FitForAll.com
10% Promissory Note* 2/22/00-9/18/00 1,613,493 0.010 158
Galileo Laboratories
Series F Cvt. Pfd. 8/18/00 3,002,319 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 3,438
16
ACQUISITION CARRYING VALUE
SECURITY DATE COST PER UNIT VALUE
------------------------------------ ---------------- ------------ -------------- ------------
Masimo
Series D Cvt. Pfd. 8/14/96 $ 1,120,040 $ 11.000 $ 1,760,000
Masimo Labs
Common 8/14/96 0 0.010 1,600
Novacept
Series G Cvt. Pfd.* 3/27/01 3,001,927 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 2,404,472 1.470 2,400,000
PHT^
Series D Cvt. Pfd. 7/23/01 4,200,000 0.780 4,200,000
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 6/24/02 1,679,749 1.160 795,320
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
Common 7/12/90-10/16/96 511,365 1.880 426,309
Series A Cvt. Pfd. 8/20/96-10/16/96 444,850 1.880 89,125
Series B Cvt. Pfd.* 2/24/99-6/22/99 900,914 1.880 451,200
Series C Cvt. Pfd.* 9/26/01 1,528,922 1.880 766,499
Sinking Fund Cvt. Pfd. 10/17/94-4/3/96 721,291 1.880 67,853
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
Vicuron Pharmaceuticals
Warrants (expire 8/3/05) 6/28/99 905 4.888 91,386
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 2.000 1,846,153
Series C Cvt. Pfd. 3/2/00 1,200,690 2.000 1,200,000
Series E Cvt. Pfd. 7/22/02 1,200,000 2.000 1,200,000
------------ ------------
$ 89,197,136 $ 68,342,587
============ ============
* With warrants attached.
^ Affiliated issuers.
17
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
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
----------
Out of concern for the environment and in an effort to reduce
Fund expenses, this report is printed on recycled paper.
HQHCM-SAR-03