H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
Semiannual Report
March 31, 1997
<PAGE>
To our Shareholders:
At March 31, 1997, the end of the second fiscal quarter, the net asset
value of your Fund was $18.08 per share. Recent performance compared to two
market averages is as follows:
<TABLE>
<CAPTION>
FY To-Date Quarter Ended
(6 months) 3/31/97
------------ --------------
<S> <C> <C>
Net Asset Value -4.0% -1.9%
Dow Jones Industrial Average +11.9% +2.1%
NASDAQ Industrials -8.1% -8.3%
</TABLE>
This most recent quarter continued the pattern of the prior two quarters in
which the healthcare sector underperformed the general market. The economic
background for the general market was quite strong, with investors favoring
large industrial companies thought to be able to benefit from relatively slow
but consistent growth of sales and earnings with relatively little risk that
inflation would be a near-term problem or that interest rates would rise
significantly from current levels, a macro economic view which the Adviser
shares. One effect of this trend has been that the stocks of emerging growth
companies, especially healthcare companies, have experienced relative
underperformance. While stocks such as those making up the Dow Jones Industrial
Average generally seemed to benefit from a continued flow of assets into the
equity markets, clearly many investors seem to be somewhat risk averse and are
more willing to gamble on the trends of the general market rather than on the
stocks of more speculative individual companies.
In March, mindful of Chairman Greenspan's "irrational exuberance" reference
regarding stock market levels in December, both the general market and
especially the valuations of emerging growth stocks declined on the expectation
that at their March 25th meeting the Federal Reserve Board would vote to
increase the federal funds discount rate, which indeed it did. As this is
written, the reaction to the news seems to be that the Fed remains committed to
controlling inflation and, therefore, the outlook for common stocks seems to be
improved.
Moreover, the stocks of companies with a strong international participation
also suffered in valuation, as investors became con-
<PAGE>
cerned about the impact of currency on reported net earnings. This has also been
a period in which a few companies experienced delays in their FDA approval
process and therefore some significant downside volatility in their stock prices
that resulted in a "bystander effect" which depressed the stocks of their peer
companies. However, we believe that the underlying characteristics of the
portfolio companies generally remain very attractive and will ultimately be
recognized by investors.
The relative inability of companies to finance in the public markets (Cell
Therapeutics, having completed its initial public offering during the quarter,
being an exception) has resulted in an accelerated flow of opportunities for
venture capital investment activity at what the Adviser perceives are often
attractive valuations. During the quarter, a follow-on investment was made in
Exelixis Pharmaceuticals and two new companies were added to the venture
portfolio. AbTox manufactures and sells a novel plasma-based sterilization
system, principally for the hospital market, to replace current systems using
highly toxic ethylene oxide. Vectis has developed a point-of-care clinical
information service for office-based physicians built to run on a pen-based
computer that interfaces through a wireless network and represents an exciting
early step towards the ultimate goal of a fully computerized patient record.
In late April, a change in SEC Rule 144 will take effect, which reduces the
restricted holding period from three years to two. On the effective date, six of
the Fund's companies will become unrestricted and therefore trade at full market
value, and that change will also accelerate a similar transition for a number of
other holdings in the coming months. Although it is a bit soon to tell, the
Adviser does not believe that the change will have a material effect on
valuation levels for new investments.
On March 6th, the one-for-three rights offering was successfully completed.
The subscription price was established at $16.53 per share. The issue was 215%
subscribed and, in order to satisfy a portion of the excess demand, the 25%
overallotment option was exercised, resulting in approximately $42 million
realized by the Fund. The Fund has been taking advantage of some of the recent
weakness to add shares of attractive companies and, in addition, the
2
<PAGE>
Adviser believes these liquid assets have served to limit the net asset value
volatility over the last several weeks.
While the recent period has been disappointing, we are generally encouraged
by the fundamental progress of the portfolio companies and believe that current
valuations do not reflect these advancements. The basic forces for growth of
demographics, technology and consumer demand seem firmly in place and we remain
confident about the prospect of rewarding investment performance.
/s/ Alan G. Carr
------------------------
Alan G. Carr
President
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
PORTFOLIO - As of March 31, 1997
[Tabular representation of bar chart]
Restricted Unrestricted
AGRI/ENVIRONMENTAL 0.62% 4.51%
BIOTECHNOLOGY 9.13% 24.48%
CROs 0.75% 5.95%
DIAGNOSTICS 2.74% 3.37%
MANAGED CARE 0.00% 4.87%
MEDICAL SUPPLIES 2.78% 6.95%
MEDICAL SPECIALTY 5.07% 5.99%
PHARMACEUTICALS 0.47% 6.11%
LIQUID ASSETS 0.00% 16.21%
3
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
LARGEST HOLDINGS - As of March 31, 1997
<TABLE>
<CAPTION>
% of Net Assets
----------------
<S> <C>
Martek Biosciences 4.75%
Vivus 4.35%
Quintiles Transnational 3.49%
IBAH 3.22%
Genzyme 2.77%
Catalytica 2.70%
Transkaryotic Therapies 2.67%
Vencor 2.62%
Cytyc 1.93%
Human Genome Sciences 1.86%
</TABLE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
SIGNIFICANT PORTFOLIO TRANSACTIONS
Quarter Ended March 31, 1997
<TABLE>
<CAPTION>
Units Held Units Held
PURCHASES 12/31/96 3/31/97
- -------------------------------- ------------ -----------
<S> <C> <C>
AbTox (Restricted) 0 636,364
Biofield 127,315 227,315
BioTransplant 261,000 341,000
Cubist Pharmaceuticals 55,000 67,000
Dura Pharmaceuticals 0 50,000
EndoVascular Technologies 108,968 151,468
Exelixis (Restricted) Series C 0 150,000
Genzyme 0 200,000
Gilead Sciences 71,659 106,659
HPR 0 65,500
Human Genome Sciences 0 93,000
IDEXX Laboratories 102,000 152,000
Landec 210,040 285,040
Orthodontic Centers of America 116,000 216,000
Perclose 88,000 118,000
Transkaryotic Therapies 0 50,000
Vectis (Restricted) 0 255,319
SALES
- -------------------------------
Ariad Pharmaceuticals 265,600 210,600
Calgene 63,000 0
INCYTE Pharmaceuticals 63,755 50,755
Vivus 181,667 176,667
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
SHARES CONVERTIBLE SECURITIES - 12.3% VALUE
- ----------- -------------
<S> <C> <C>
Convertible Preferred - 12.2%
636,364 AbTox, Series F* $ 1,400,001
80,201 Dyax, Class A Series 1* 160,402
55,000 Dyax, Class A Series 3* 110,000
157,765 Dyax, Class A Series 4* 493,804
222,222 EPR, Series A* 999,999
1,100,000 Exelixis Pharmaceuticals, Series B* 2,200,000
150,000 Exelixis Pharmaceuticals, Series C* 300,000
308,707 Focal, Series D* 537,150
116,106 Focal, Series E* 202,024
1,330,645 HealthTech Services, Series A* 1,650,000
99,955 IBAH, Series A** 1,912,139
400,000 InterVentional Technologies, Series E* 1,000,000
87,500 InterVentional Technologies, Series F* 875,000
15,000 InterVentional Technologies, Series G* 150,000
343,750 LocalMed, Series D* 1,375,000
160,000 Masimo, Series D* 1,120,000
27,500 Terrapin Technologies, Series G* 1,375,000
36,092 Therion Biologics, Sinking Fund* 1,083
270,270 Tularik, Series C* 2,702,700
255,319 Vectis, Series B* 1,199,999
------------
$19,764,301
------------
PRINCIPAL
AMOUNT Convertible Bonds and Notes - 0.1% VALUE
--------- ------------
$ 440,718 Therion Biologics, 6.25% Secured Notes
due 1999 $ 222,585
------------
$ 222,585
------------
TOTAL CONVERTIBLE SECURITIES
(Cost $15,814,504) $19,986,886
------------
SHARES COMMON STOCKS - 71.5% VALUE
--------- ------------
Agricultural/Environmental Technology - 4.5%
467,500 Catalytica** $ 4,382,813
152,000 IDEXX Laboratories** 2,128,000
94,697 Molten Metal Technology** 828,599
------------
$ 7,339,412
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(continued)
<TABLE>
<CAPTION>
SHARES Biotechnology - 29.4% VALUE
- ---------- -------------
<S> <C> <C>
210,600 Ariad Pharmaceuticals** $ 1,276,763
58,000 BioChem Pharma** 2,494,000
341,000 BioTransplant** 2,344,375
88,898 BioTransplant* 458,714
2,760 BioTransplant Warrants* 4,775
6,300 BioTransplant Warrants* 10,899
1,150 BioTransplant Warrants* 4,715
310,000 Calypte Biomedical** 2,053,750
50,400 Calypte Biomedical* 242,424
57,142 Cell Therapeutics* 485,707
148,700 Cor Therapeutics** 1,412,650
67,000 Cubist Pharmaceuticals** 703,500
238,095 Cubist Pharmaceuticals* 1,876,189
494,117 Genta** 131,250
200,000 Genzyme** 4,500,000
106,659 Gilead Sciences** 2,439,825
93,000 Human Genome Sciences** 3,022,500
205,000 ImmuLogic Pharmaceutical** 896,875
50,755 INCYTE Pharmaceuticals** 2,639,260
441,409 Martek Biosciences** 7,724,658
73,000 MedImmune** 1,003,750
207,059 NABI** 1,410,589
60,000 Neurogen** 1,140,000
400,000 Oxford GlycoSystems Group* 320,000
13,867 Pharming B.V.* 1,105,247
349,166 Ribi ImmunoChem Research** 1,549,424
166,666 Ribi ImmunoChem Research Warrants* 168,333
180,648 SEQUUS Pharmaceuticals** 1,377,441
74,096 SEQUUS Pharmaceuticals Warrants* 14,819
112,500 Somatogen** 689,063
226,760 Therion Biologics* 4,535
50,000 Transkaryotic Therapies** 975,000
225,241 Transkaryotic Therapies* 3,295,276
16,071 Transkaryotic Therapies Warrants* 62,998
------------
$47,839,304
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(continued)
<TABLE>
<CAPTION>
SHARES Contract Research Organizations - 5.5% VALUE
- ---------- -------------
<S> <C> <C>
330,386 IBAH** $ 2,106,211
299,865 IBAH Warrants* 1,211,455
105,200 Quintiles Transnational** 5,667,650
------------
$ 8,985,316
------------
Diagnostics - 5.4%
227,315 Biofield** $ 1,278,647
61,784 Biofield* 260,728
22,467 Biofield Warrants* 225
14,978 Biofield Warrants* 150
35,907 Cytyc** 673,256
175,397 Cytyc* 2,466,082
20,000 Integ** 120,000
133,333 Integ* 599,999
153,846 NeoPath** 2,115,383
333,334 Quidel** 1,291,669
------------
$ 8,806,139
------------
Managed Care - 4.9%
65,500 HPR** $ 736,875
216,000 Orthodontic Centers of America** 2,916,000
112,500 Vencor** 4,260,938
------------
$ 7,913,813
------------
Medical Supplies - 7.7%
47,456 Boston Scientific** $ 2,930,408
151,468 EndoVascular Technologies** 2,082,685
155,750 Exogen** 895,563
114,286 Heartstream* 910,859
137,457 KeraVision** 1,391,752
285,040 Landec** 1,496,460
50,409 Landec* 198,611
118,000 Perclose** 2,507,500
------------
$12,413,838
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(continued)
<TABLE>
<CAPTION>
SHARES Medical Specialty - 7.5% VALUE
- ------------ -------------
<S> <C> <C>
1,200,500 Bioject Medical** $ 937,891
129,420 Biomatrix** 1,730,993
50,000 Dura Pharmaceuticals** 1,787,500
14,120 Dyax* 28,240
2,528 Dyax Warrants* 25
239,000 Fuisz Technologies** 1,404,125
180,000 Interpore** 922,500
113,569 Sepracor** 2,619,185
91,666 Spiros Development Units* 2,449,316
137,000 Voxel** 338,219
-------------
$ 12,217,994
-------------
Pharmaceuticals - 6.6%
160,000 Cortex Pharmaceuticals** $ 445,000
77,000 CV Therapeutics** 673,750
123,875 CV Therapeutics* 759,354
125,000 Synaptic Pharmaceutical** 1,750,000
176,667 Vivus** 7,066,680
-------------
$ 10,694,784
-------------
TOTAL COMMON STOCKS
(Cost $89,990,596) $116,210,600
-------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $105,805,100) $136,197,486
-------------
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENTS - 18.1% VALUE
---------- -------------
$2,800,000 Ford Motor Credit Corp., 5.45%, due 4/2/97 $ 2,799,576
6,500,000 General Motors Acceptance Corp., 5.40%,
due 4/1/97 6,500,000
20,075,000 U.S. Treasury Bills, 4.85%, due 4/10/97 20,050,659
-------------
TOTAL TEMPORARY CASH INVESTMENTS $ 29,350,235
-------------
</TABLE>
* Non-income producing restricted security, valued by the Board of Trustees
(see Notes 1 and 6).
** Non-income producing publicly traded security (see Note 1).
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
BALANCE SHEET
MARCH 31, 1997
(Unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost
$105,805,100; see Schedule of Investments)
(Notes 1, 3 and 6) $136,197,486
Temporary cash investments, at amortized cost
which approximates value (see Schedule of
Investments) (Note 1) 29,350,235
------------
Total investments $165,547,721
Cash 96,694
Prepaid expenses and other assets 40,316
------------
Total assets $165,684,731
------------
LIABILITIES:
Payable for investments purchased $ 3,112,780
Accrued expenses, net (Note 4) 32,637
------------
Total liabilities $ 3,145,417
------------
NET ASSETS:
Shares of beneficial interest, par value $.01 per
share, unlimited number of shares authorized,
amount paid in on 8,990,179 shares issued and
outstanding (Note 1) $125,057,250
Accumulated net investment (loss) (840,687)
Accumulated net realized gain on investments 7,930,365
Net unrealized gain on investments (Note 3) 30,392,386
------------
Total net assets (equivalent to $18.08 per share
based on 8,990,179 shares outstanding) $162,539,314
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (Note 1):
Interest $215,545
---------
Total investment income $ 215,545
EXPENSES:
Advisory fees (Note 4) $885,027
Shareholder reporting 38,639
Custodian fees 27,651
Trustees' fees and expenses 24,326
Accounting and auditing fees 21,902
Insurance expense 12,623
Legal fees 12,043
Transfer agent fees 7,968
Other 26,053
---------
Total expenses 1,056,232
-------------
Net investment (loss) ($840,687)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments (Note 1) $ 8,103,446
Net (decrease) in unrealized gain on
investments (19,679,446)
-------------
Net (loss) on investments ($11,576,000)
-------------
Net (decrease) in net assets resulting
from operations ($12,416,687)
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the six For the
months ended year ended
March 31, 1997 September 30,
(Unaudited) 1996
---------------- --------------
<S> <C> <C>
NET (DECREASE) INCREASE IN
NET ASSETS FROM OPERATIONS:
Net investment (loss) ($840,687) ($2,021,797)
Net realized gain on investments 8,103,446 26,774,551
Net (decrease) increase in
unrealized gain on investments (19,679,446) 5,212,708
------------- ------------
Net (decrease) increase in
net assets resulting from
operations ($12,416,687) $29,965,462
------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized long-term capital gains ($25,723,928) ($6,769,939)
------------- ------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of common
stock issued in March 1997 rights
offering (Note 5) $42,178,346 --
Value of shares issued in
reinvestment of distributions 10,949,078 3,284,307
------------ ------------
Net increase in net assets
resulting from capital share
transactions $53,127,424 $3,284,307
------------ ------------
Net increase in net assets $14,986,809 $26,479,830
------------ ------------
NET ASSETS:
Beginning of period 147,552,505 121,072,675
------------ ------------
End of period $162,539,314 $147,552,505
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(Unaudited)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $215,545
Operating expenses paid (1,271,385)
-------------
Net cash used for operating activities ($1,055,840)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of portfolio securities $131,517,733
Purchases of portfolio securities (158,069,744)
-------------
Net cash used for investing activities ($26,552,011)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock through
rights offering $42,178,346
Cash distributions paid (25,723,928)
Distributions reinvested 10,949,078
-------------
Net cash provided by financing activities $27,403,496
NET (DECREASE) IN CASH (204,355)
CASH AT BEGINNING OF PERIOD 301,049
-------------
CASH AT END OF PERIOD $96,694
=============
RECONCILIATION OF NET (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS TO NET CASH USED
FOR OPERATING ACTIVITIES:
Net (decrease) in net assets resulting from operations ($12,416,687)
Net realized (gain) on investments (8,103,446)
Net decrease in unrealized gain on investments 19,679,446
(Decrease) in accrued advisory fees and accrued other
expenses (194,266)
(Increase) in prepaid expenses and other assets (20,887)
-------------
Net cash used for operating activities ($1,055,840)
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
H&Q HEALTHCARE INVESTORS
-----------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Selected data for each share of beneficial interest outstanding throughout the
period indicated)
<TABLE>
<CAPTION>
For the
six months For the
ended years ended
March 31, 1997 September 30,
----------------------------------
<S> <C> <C>
(Unaudited) 1996
----------------------------------
Net asset value per share:
Beginning of period $25.754 $21.818
---------- ----------
Net investment (loss) $0.133)# ($0.331)
Net realized and
unrealized gain
(loss) on
investments (1.834)# 5.487
Federal income taxes
on retained long-
term capital gains -- --
---------- ---------
Total increase (decrease)
from investment
operations ($1.967) $5.156
---------- ---------
Dilutive effect of
sale of common
stock and related
expenses from rights
offering (1.217) --
Distribution to shareholders
Short-term capital
gains -- --
Long-term capital
gains ($4.490) ($1.220)
---------- ---------
Total distributions ($4.490) ($1.220)
---------- ---------
Net asset value per share:
End of period $18.080 $25.754
========== ==========
Per share market value:
End of period $15.750 $20.875
Total investment return (5.49%) 22.03%
Net assets:
End of period $162,539,314 $147,552,505
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating
expenses to average
net assets 1.56%* 1.62%
Ratio of net investment
(loss) to average
net assets (1.24%)* (1.44%)
Portfolio turnover rate 12.30% 22.41%
Average commission
rate paid per listed
share purchased $.04 $ .07
Number of shares
outstanding at
end of period 8,990,179 5,729,160
<CAPTION>
For the years ended September 30,
-----------------------------------------------------------
<S> <C> <C> <C> <C>
1995 1994 1993 1992
-----------------------------------------------------------
Net asset value per share:
Beginning of period $16.609 $17.604 $17.340 $19.207
-------- ---------- ---------- --------
Net investment (loss) ($0.228) ($0.199) ($0.190) ($0.076)
Net realized and
unrealized gain
(loss) on
investments 5.437 (0.230) 0.970 0.247
Federal income taxes
on retained long-
term capital gains -- (0.566) (0.516) (1.078)
-------- ---------- ---------- --------
Total increase (decrease)
from investment
operations $5.209 ($0.995) $ 0.264 ($0.907)
-------- ---------- ---------- ---------
Dilutive effect of
sale of common
stock and related
expenses from rights
offering -- -- -- --
Distribution to shareholders
Short-term capital
gains -- -- -- ($0.040)
Long-term capital
gains -- -- -- (0.920)
-------- ---------- ---------- ----------
Total distributions -- -- -- ($0.960)
-------- ---------- ---------- ----------
Net asset value per share:
End of period $21.818 $16.609 $17.604 $17.340
======== ========== ========== ==========
Per share market value:
End of period $18.250 $15.125 $18.375 $19.375
Total investment return 20.66% (17.69%) (5.16%) 9.43%
Net assets:
End of period $121,072,675 $92,169,061 $97,690,739 $96,222,175
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating
expenses to average
net assets 1.76% 1.74% 1.84% 1.72%
Ratio of net investment
(loss) to average
net assets (1.31%) (1.13%) (1.06%) (0.38%)
Portfolio turnover rate 22.81% 28.10% 28.36% 35.45%
Average commission
rate paid per listed
share purchased $.06 $.06 $.07 $.07
Number of shares
outstanding at
end of period 5,549,198 5,549,198 5,549,198 5,549,198
</TABLE>
*Annualized
#Calculation is based on the weighted average shares outstanding during the
indicated period.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(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 investment company industry.
Investment Securities
Transactions related to the investments of the Fund are recorded on the
date the securities are purchased or sold. 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 6, investments for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board
of Trustees of the Fund. Temporary cash investments with maturities of 60
days or less are valued at amortized cost.
Gains and losses from sales of investments are recorded using the
"identified cost" method for both financial reporting and Federal income tax
purposes. Investment income and expenses are recorded on the accrual basis.
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 tax provision
is required.
Distributions
The Fund records all distributions to shareholders from net investment
income 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.
Dividend Reinvestment Plan
Under the Dividend Reinvestment Plan, net realized capital gains will
automatically be paid in additional shares of the Fund, unless the Plan
Agent (State Street Bank and Trust Company) is otherwise instructed by the
shareholder. It is expected that dividends, if any, will be declared after
fiscal year-end and will be payable for that year before the end of January.
14
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(continued)
A description of the automatic Dividend Reinvestment Plan may be
obtained by calling State Street Bank. Shareholders may request to be paid
in cash instead of shares by contacting the bank, brokerage or nominee who
holds the shares if the shares are held in "street name" or by filling out
an Authorization Card obtained by calling State Street Bank if the shares
are in registered form.
(2) Purchases and Sales of Investment Securities
The aggregate cost of purchases and proceeds from sales of investment
securities (other than temporary cash investments) for the period from
October 1, 1996 through March 31, 1997 totaled $26,529,609 and $16,330,311,
respectively.
(3) Tax Basis of Securities
At March 31, 1997, the total cost of securities for Federal income tax
purposes was $105,805,100. The aggregate gross unrealized gain on securities
for which there was an excess of market value over cost was $49,926,124. The
aggregate gross unrealized loss on securities for which there was an excess
of cost over market value was $19,533,738. The net unrealized gain on
securities held by the Fund was $30,392,386.
(4) Advisory Agreement
The Fund has entered into an Investment Advisory Agreement (the Advisory
Agreement) with Hambrecht & Quist Capital Management Incorporated (the
Adviser). Pursuant to the terms of the Advisory Agreement, the Fund pays the
Adviser a monthly fee at the rate when annualized of (i) 2.5% of the average
net assets for the month of its venture capital and other restricted
securities up to 25% of net assets and (ii) 1% of the average net assets for
the month of all other assets. The aggregate fee may not exceed a rate when
annualized of 1.375%. At March 31, 1997 the Fund had accrued advisory fees
totaling $132,673, included in accrued expenses, net on the balance sheet.
The Adviser is an indirect wholly-owned subsidiary of Hambrecht & Quist
Group. Certain officers and trustees of the Fund are also officers of the
Adviser.
(5) Rights Offering
On March 13, 1997, the Fund completed a non-transferable rights offering
to its shareholders. The shareholders were able to purchase one additional
share of beneficial interest for every three rights held, at a price of
$16.53 per share. Rights were exercised for 2,644,170 new shares. Proceeds
to the Fund amounted to $42,178,346, net of offering expenses of $1,529,784.
(6) Venture Capital and Other Restricted Securities
The Fund may invest in venture capital or other restricted securities if
these securities would currently comprise 40% or less of net assets. The
value of these securities represents 21.5% of the Fund's net assets at March
31, 1997.
The value of the venture capital or other restricted securities is
determined in good faith by the Board of 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. The
following table details the acquisition date, cost, carrying value per unit,
and value of the Fund's venture capital or other restricted securities at
March 31, 1997, as determined by the Board of Trustees of the Fund.
15
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(continued)
<TABLE>
<CAPTION>
Carrying
Acquisition Value
Security Date Cost per Unit Value
- ------------------------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
AbTox
Series F Cvt. Pfd. 3/7/97 $1,400,001 $2.200 $1,400,001
Biofield
Common* 9/16/94 250,002
3/3/95 172,125
6/29/95 103,122
-----------
525,249 4.220 260,728
Common Warrants 3/3/95 0
6/29/95 0
-----------
0 0.010 225
Common Warrants 3/3/95 0
6/29/95 0
-----------
0 0.010 150
BioTransplant
Common* 10/31/94 277,857
8/18/95 48,757
1/16/96 385,385
-----------
711,999 5.160 458,714
Common Warrants### 8/12/94 0 1.730 4,775
Common Warrants### 10/31/94 0 1.730 10,899
Common Warrants### 8/18/95 0 4.100 4,715
Calypte Biomedical*
Common 11/18/94 52,000
6/15/95 100,000
2/29/96 150,000
-----------
302,000 4.810 242,424
Cell Therapeutics##
Common 8/3/92 1,000,280 8.500 485,707
Cubist Pharmaceuticals*
Common 5/17/95 1,000,809 7.880 1,876,189
CV Therapeutics**
Common 3/23/94 1,000,330
9/8/95 415,613
3/29/96 425,425
11/12/96 79,688
-----------
1,921,055 6.130 759,354
Cytyc*
Common 5/17/94 151,447
10/14/94 149,608
6/13/95 84,460
-----------
385,515 14.060 2,466,082
</TABLE>
16
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(continued)
<TABLE>
<CAPTION>
Carrying
Acquisition Value
Security Date Cost per Unit Value
- ----------------------------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Dyax
Common 5/16/91 1,001,480 2.000 28,240
Class A Series 1 Cvt. Pfd. 6/1/92 155,065
9/11/92 51,712
12/31/92 111,812
----------
318,589 2.000 160,402
Class A Series 3 Cvt. Pfd. 10/26/95 110,280 2.000 110,000
Class A Series 4 Cvt. Pfd. 10/30/96 493,804 3.130 493,804
Common Warrants 12/31/92 187 0.010 25
EPR
Series A Cvt. Pfd. 3/9/94 1,000,409 4.500 999,999
Exelixis Pharmaceuticals
Series B Cvt. Pfd. 3/28/96 1,101,325 2.000 2,200,000
Series C Cvt. Pfd. 3/31/97 300,000 2.000 300,000
Focal
Series D Cvt. Pfd. 9/17/93 922,564
8/5/94 220,382
----------
1,142,946 1.740 537,150
Series E Cvt. Pfd. 10/17/95 202,466 1.740 202,024
HealthTech Services
Series A Cvt. Pfd. 1/26/96 1,652,603 1.240 1,650,000
Heartstream*
Common 3/15/95 800,433 7.970 910,859
IBAH#
Common Warrants 8/11/95 192,500 4.040 1,211,455
Integ*
Common 6/16/95 800,126 4.500 599,999
InterVentional Technologies
Series E Cvt. Pfd. 4/2/91 500,667 2.500 1,000,000
Series F Cvt. Pfd. 8/21/92 700,399 10.000 875,000
Series G Cvt. Pfd. 3/8/95 150,431 10.000 150,000
Landec*
Common 3/27/95 200,294 3.940 198,611
LocalMed
Series D Cvt. Pfd. 2/9/96 1,376,301 4.000 1,375,000
Masimo
Series D Cvt. Pfd. 8/14/96 1,120,000 7.000 1,120,000
Oxford GlycoSystems Group
Ordinary Shares 5/26/93 773,830 0.800 320,000
Pharming B.V.
Class B Shares 8/28/95 1,057,037
4/25/96 48,393
----------
1,105,430 79.703 1,105,247
Ribi ImmunoChem Research**
Common Warrants 7/31/91 0 1.010 168,333
SEQUUS Pharmaceuticals#
Common Warrants 3/30/95 0 0.200 14,819
Spiros Development
Units 12/28/95 1,375,780 26.720 2,449,316
</TABLE>
17
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(continued)
<TABLE>
<CAPTION>
Carrying
Acquisition Value
Security Date Cost per Unit Value
- ---------------------------------- ------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Terrapin Technologies
Series G Cvt. Pfd. 11/7/95 1,375,548 50.000 1,375,000
Therion Biologics
Common 7/12/90 7,582
6/30/93 502,648
8/20/96 818
10/16/96 3,634
------------
514,682 0.020 4,535
Sinking Fund Cvt. Pfd. (w/wts.) 10/17/94 251,260
4/19/95 97,116
7/12/95 97,063
10/17/95 97,000
1/25/96 89,176
4/3/96 90,200
------------
721,815 0.030 1,083
6.25% Secured Notes due 1999 8/20/96 80,982
10/16/96 357,839
------------
438,821 0.505 222,585
Transkaryotic Therapies
Common* 10/15/91 1,000,840
2/13/92 24,000
4/16/93 283,420
11/5/93 200,000
------------
1,508,260 14.630 3,295,276
Common Warrants### 11/5/93 245 3.920 62,998
Tularik
Series C Cvt. Pfd. 4/16/93 1,000,119 10.000 2,702,700
Vectis
Series B Cvt. Pfd. 2/5/97 1,200,000 4.700 1,199,999
------------ ------------
$30,426,678 $35,014,422
============ ============
</TABLE>
* Represents 75% of equivalent current market value of the issuer's
registered securities.
** Represents 70% of equivalent current market value of the issuer's
registered securities.
# Represents 100% of equivalent current market value of the issuer's
registered securities.
## Represents 85% of equivalent current market value of the issuer's
registered securities.
### Represents 60% of equivalent current market value of the issuer's
registered securities.
18
<PAGE>
H&Q Healthcare Investors
50 Rowes Wharf, 4th Floor
Boston, Massachusetts 02110-3328
(617) 574-0567
Officers
Alan G. Carr, President
Kimberley L. Carroll, Treasurer
Kerri A. Bisner, Secretary
Sheldon A. Jones, Assistant Secretary
Trustees
Alan G. Carr
William R. Hambrecht
Lawrence S. Lewin
Robert P. Mack, M.D.
Eric Oddleifson
Uwe E. Reinhardt, Ph.D.
Henri A. Termeer
Investment Adviser
Hambrecht & Quist Capital Management Incorporated
Custodian and Transfer Agent
State Street Bank and Trust Company
Legal Counsel
Dechert Price & Rhoads
----------------------------------------
Shareholders with questions regarding share transfers may call
1-800-426-5523
Interim daily net asset value may be obtained by calling
1-800-451-2597
For copies of the Fund's
Dividend Reinvestment Plan,
please contact the Plan Agent, State Street Bank & Trust Co.
P.O. Box 8200, Boston, MA 02266-8200
Telephone: 1-800-426-5523
H&Q HEALTHCARE INVESTORS
-----------------------------------------------------
New York Stock Exchange Symbol: HQH
---------
Out of concern for the environment and in an effort to reduce
Fund expenses, this report is printed on recycled paper.
