H&Q HEALTHCARE INVESTORS
------------------------------------------------------------------
[GRAPHIC OF CADUCEOUS]
Annual Report
1 9 9 7
<PAGE>
To our Shareholders:
[PHOTO OF ALAN G. CARR, PRESIDENT]
At fiscal year-end on September 30, 1997, the net asset value of your Fund
was $23.11 per share. Performance data for the fiscal year, the first nine
months of the calendar year and the quarter ended September 30 compared to the
Dow Jones Industrial Average and the NASDAQ index of stocks traded in the
over-the-counter market is as follows:
NAV DJIA NASDAQ Industrials
-------- ----------- -------------------
FY +20.8% +35.1% +24.1%
CYTD +25.4% +23.2% +23.9%
Quarter +20.4% +3.6% +16.3%
The most recent quarter produced significantly better net asset value
performance, in both absolute and relative terms, as compared to the prior
several months. There appear to have been several factors resulting in this
improvement. Investors seem to have realized that both the relative values in
this sector have lagged the general market and the likelihood of further
interest rate increases has diminished. Historically, emerging growth company
stocks, especially those in the healthcare sectors, have tended to outperform
the market in periods where investor expectations were for stable to declining
interest rates, usually reflective of reduced fears of inflation for the
general economy.
Also, earlier in the year there were a series of temporarily discouraging
fundamental news items in the industry, particularly in the biotech sector where
there were a few instances of products which had disappointing later stage
clinical trial results or unexpected setbacks in the FDA approval process. In
contrast, in the most recent quarter the news was generally better and,
importantly, greeted favorably by investors.
These are trends that we believe are likely to continue. In the general
economy, productivity seems to be sustaining moderate growth in a
non-inflationary environment. Investment spending over the last several years
appears to have created both capacity that can satisfy additional consumer
demand and a competitive environ-
1
<PAGE>
ment that limits the ability to raise endproduct prices in most sectors of the
economy, thereby reducing inflationary pressures.
In the healthcare industries, new and useful technology continues to make
progress through the regulatory system and we believe that the outlook is
bright. In the biotechnology sector, for example, the industry's product
pipeline is sufficiently robust that it is not unreasonable to expect that,
over the next year or two, the number of products on the market with both
therapeutic and economic importance could double.
Additionally, we are encouraged by favorable trends at the FDA and we
believe that these will be reinforced with the passage of FDA reform
legislation now working its way through the Congress.
While increases in unit prices of existing pharmaceutical products have
been quite restrained, overall consumer spending for drugs has been rising.
This is being driven both by the introduction of innovative new products of
high therapeutic value and the continued aging of the population, which
increases the numbers of people in the higher medical care consuming group. We
believe these trends will continue.
Consolidation in the industry continues. Two of the Fund's portfolio
companies have recently announced their sale to larger companies at premiums to
their market values.
We continue to see exciting new companies for potential addition to the
venture portfolio. In the most recent quarter, we made a follow-on investment
in HealthTech Services and a private placement in a public biotherapeutics
company, Interferon Sciences.
Overall, we are encouraged by recent trends and optimistic that the
improvement in recent absolute and relative performance of your Fund may
continue.
/s/ Alan G. Carr
Alan G. Carr
President
Capital Gains Declaration
We hereby designate that the entire amount of the stock distribution
declared on November 11, 1997 with respect to our fiscal year ended September
30, 1997, constituted a capital gain dividend for Federal income tax purposes,
amounting to $1.07 per share.
2
<PAGE>
ANNUAL MEETING REPORT
As now required by Rule 30d-1 under the Investment Company Act of 1940, as
amended, below is a summary of the results of the Annual Meeting of
Shareholders of H&Q Healthcare Investors. The Annual Meeting was held on
Wednesday, May 22, 1997, at 9:00 A.M. There were present in person or by proxy
7,196,536.7161 shares of beneficial interest, or 80.05% of the 8,990,179 shares
eligible to vote on the record date.
The first item of business was the election of Trustees of the Fund to
serve until the year 2000 Annual Meeting of Shareholders. The nominees elected
to serve until the year 2000 Annual Meeting were Lawrence S. Lewin and Uwe E.
Reinhardt, Ph.D. A total of 6,982,488.8020 shares voted for the election of Mr.
Lewin and 214,047.9141 shares abstained; 6,977,481.8020 shares voted for the
election of Dr. Reinhardt and 219,054.9141 shares abstained. The Trustees
serving until the 1998 Annual Meeting are William R. Hambrecht, Robert P. Mack,
M.D. and Eric Oddleifson. The Trustees serving until the 1999 Annual Meeting
are Alan G. Carr and Henri A. Termeer. The next item of business was the
ratification of the selection of Arthur Andersen LLP as independent public
accountants of the Fund for the fiscal year ending September 30, 1997. The
selection of Arthur Andersen LLP was ratified by a vote of 7,109,366.3729
shares for selection, 37,880.5299 shares against selection and 49,289.8133
shares abstained.
H&Q HEALTHCARE INVESTORS
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PORTFOLIO
As of September 30, 1997
[DESCRIPTION OF BAR CHART]
0.17 3.87 AGRI/ENVIRONMENTAL
6.10 33.61 BIOTECHNOLOGY
0.36 6.26 CROs
0.61 8.22 DIAGNOSTICS
0 5.28 MANAGED CARE
1.69 6.67 MEDICAL SUPPLIES
4.71 10.67 MEDICAL SPECIALTY
1.47 18.80 PHARMACEUTICALS
0 6.61 LIQUID ASSETS
3
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
LARGEST HOLDINGS
As of September 30, 1997
% OF NET ASSETS
----------------
Vivus 8.09%
Transkaryotic Therapies 6.61%
Quintiles Transnational 4.41%
Catalytica 3.45%
Martek Biosciences 3.29%
Gilead Sciences 2.84%
Genzyme 2.76%
Cytyc 2.63%
Sepracor 2.59%
INCYTE Pharmaceuticals 2.54%
H&Q HEALTHCARE INVESTORS
-------------------------------------------------------------
SIGNIFICANT PORTFOLIO TRANSACTIONS
Quarter Ended September 30, 1997
Units Held Units Held
PURCHASES 6/30/97 9/30/97
- ------------------------------------------- ------------ -----------
Biovail 0 90,000
Cor Therapeutics 148,700 177,700
Cubist Pharmaceuticals 430,095 528,055
HealthTech Services (Restricted) Series B 0 494,505
Interferon Sciences 0 171,429
SALES
- -----------------------------------------
Biomatrix 129,420 74,420
Genta 49,411 0
INCYTE Pharmaceuticals 70,755 60,755
NABI 207,059 0
SEQUUS Pharmaceuticals 180,648 0
4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
of H&Q Healthcare Investors:
We have audited the accompanying balance sheet of H&Q Healthcare Investors
(a Massachusetts business trust), including the Schedule of Investments as of
September 30, 1997, and the related statements of operations and cash flows for
the year then ended, and the statements of changes in net assets and financial
highlights for the years presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1997, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
As discussed in Note 6, the financial statements include investment
securities valued at $28,679,363 (13.8% of net assets) whose values have been
determined by the Board of Trustees in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation, the
Board of Trustees' determination of values may differ significantly from the
values that would have been used had a ready market existed for the securities
and the differences could be material.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
H&Q Healthcare Investors as of September 30, 1997, the results of its
operations and its cash flows for the year then ended, and the changes in its
net assets and financial highlights for the years presented, in conformity with
generally accepted accounting principles.
Boston, Massachusetts Arthur Andersen LLP
October 31, 1997
5
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
CONVERTIBLE SECURITIES - 10.6% of Net Assets
SHARES Convertible Preferred - 10.4% VALUE
- ------------ -----------
Agricultural/Environmental Technologies - 0.2%
222,222 EPR (Restricted) Series A* $ 333,333
Biotechnology - 3.7%
1,100,000 Exelixis Pharmaceuticals (Restricted) Series B* 2,200,000
150,000 Exelixis Pharmaceuticals (Restricted) Series C* 300,000
923,077 LJL Biosystems (Restricted) Series A* 1,200,000
27,500 Terrapin Technologies (Restricted) Series G* 1,375,000
36,092 Therion Biologics (Restricted) Sinking Fund* 1,083
270,270 Tularik (Restricted) Series C* 2,702,700
Contract Research Organizations - 0.7%
99,955 IBAH Series A* 1,424,359
Diagnostics - 0.5%
160,000 Masimo (Restricted) Series D* 1,120,000
Medical Supplies - 1.6%
400,000 InterVentional Technologies (Restricted) Series E* 1,000,000
87,500 InterVentional Technologies (Restricted) Series F* 875,000
15,000 InterVentional Technologies (Restricted) Series G* 150,000
343,750 LocalMed (Restricted) Series D* 1,375,000
Medical Specialty - 3.7%
636,364 AbTox (Restricted) Series F* 1,400,001
80,201 Dyax (Restricted) Class A Series 1* 251,029
55,000 Dyax (Restricted) Class A Series 3* 172,150
157,765 Dyax (Restricted) Class A Series 4* 493,804
308,707 Focal (Restricted) Series D* 537,150
116,106 Focal (Restricted) Series E* 202,024
1,330,645 HealthTech Services (Restricted) Series A* 2,421,774
494,505 HealthTech Services (Restricted) Series B* 899,999
255,319 Vectis (Restricted) Series B* 1,199,999
-----------
$21,634,405
-----------
PRINCIPAL
AMOUNT Convertible Bonds and Notes - 0.2%
- ------------
Biotechnology - 0.2%
$ 440,718 Therion Biologics (Restricted), 6.25%
Secured Notes due 1999 $ 440,718
-----------
$ 440,718
-----------
TOTAL CONVERTIBLE SECURITIES
(Cost $18,917,426) $22,075,123
-----------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(continued)
SHARES VALUE
- ----------- ------------
COMMON STOCKS - 83.0%
Agricultural/Environmental Technology - 3.6%
517,500 Catalytica* $5,757,188
172,500 Catalytica Warrants* 1,175,156
94,697 Molten Metal Technology* 520,834
------------
$ 7,453,178
------------
Biotechnology - 31.4%
Biopharmaceuticals - 27.0%
210,600 Ariad Pharmaceuticals* $ 1,237,275
381,773 BioTransplant* 2,147,473
48,125 BioTransplant (Restricted)* 203,088
2,760 BioTransplant (Restricted) Warrants* 2,705
6,300 BioTransplant (Restricted) Warrants* 6,174
1,150 BioTransplant (Restricted) Warrants* 3,853
57,142 Cell Therapeutics* 849,987
177,700 Cor Therapeutics* 2,954,263
160,000 Cortex Pharmaceuticals* 477,500
528,055 Cubist Pharmaceuticals* 3,102,323
147,750 CV Therapeutics* 1,403,625
53,125 CV Therapeutics (Restricted)* 353,281
200,000 Genzyme* 5,950,000
6,000 Genzyme Tissue Repair* 58,500
206,659 Gilead Sciences* 9,170,493
205,000 ImmuLogic Pharmaceutical* 679,063
171,429 Interferon Sciences* 1,478,575
136,000 MedImmune* 4,998,000
60,000 Neurogen* 1,620,000
400,000 Oxford GlycoSystems Group (Restricted)* 320,000
13,867 Pharming B.V. (Restricted)* 1,105,297
515,832 Ribi ImmunoChem Research* 2,192,286
74,096 SEQUUS Pharmaceuticals (Restricted) Warrants* 88,915
112,500 Somatogen* 780,469
125,000 Synaptic Pharmaceutical* 1,687,500
226,760 Therion Biologics (Restricted)* 4,535
330,741 Transkaryotic Therapies* 12,981,584
16,071 Transkaryotic Therapies (Restricted) Warrants* 303,420
Genomics/Drug Discovery - 4.4%
93,000 Human Genome Sciences* 4,010,625
60,755 INCYTE Pharmaceuticals* 5,103,420
14,120 Dyax (Restricted)* 44,196
2,528 Dyax (Restricted) Warrants* 25
------------
$65,318,450
------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(continued)
SHARES VALUE
- ----------- -------------
Contract Research Organizations - 5.4%
330,386 IBAH* $ 1,569,334
299,865 IBAH (Restricted) Warrants* 725,673
105,200 Quintiles Transnational* 8,863,100
------------
$11,158,107
------------
Diagnostics - 7.8%
289,099 Biofield* $ 1,373,220
22,467 Biofield (Restricted) Warrants* 225
14,978 Biofield (Restricted) Warrants* 150
340,400 Calypte Biomedical* 2,340,250
20,000 Calypte Biomedical (Restricted)* 98,000
211,304 Cytyc* 5,282,600
152,000 IDEXX Laboratories* 2,546,000
153,333 Integ* 881,665
153,846 NeoPath* 2,999,997
137,000 Voxel* 710,688
------------
$16,232,795
------------
Managed Care - 5.1%
75,500 HPR* $ 1,651,563
216,000 Orthodontic Centers of America* 4,320,000
112,500 Vencor* 4,640,625
------------
$10,612,188
------------
Medical Supplies - 4.8%
151,468 EndoVascular Technologies* $ 2,593,890
155,750 Exogen* 720,344
114,286 Heartstream* 1,142,860
137,457 KeraVision* 1,151,202
335,449 Landec* 1,803,038
118,000 Perclose* 2,596,000
------------
$10,007,334
------------
Medical Specialty - 6.7%
1,200,500 Bioject Medical Technologies* $ 1,200,500
74,420 Biomatrix* 2,641,910
180,000 Interpore* 1,563,750
441,409 Martek Biosciences* 6,621,135
810,811 Reprogenesis (Restricted)* 1,800,000
------------
$13,827,295
------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(continued)
SHARES VALUE
- ---------- -------------
Pharmaceuticals/Drug Delivery - 18.2%
90,000 Biovail* $ 2,615,625
50,000 Dura Pharmaceuticals* 2,181,250
45,833 Dura Pharmaceuticals (Restricted) Series S
Warrants* 1,594,072
75,000 Elan Pharmaceuticals* 3,754,688
339,000 Fuisz Technologies* 4,788,375
158,569 Sepracor* 5,212,956
45,833 Spiros Development (Restricted)* 1,374,990
433,334 Vivus* 16,250,025
-------------
$ 37,771,981
-------------
TOTAL COMMON STOCKS
(Cost $99,803,436) $172,381,328
-------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $118,720,862) $194,456,451
=============
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENTS - 6.5% VALUE
- ----------- ------------
$6,000,000 Ford Motor Credit Corp., 6.15%, due 10/1/97 $ 6,000,000
1,100,000 Ford Motor Credit Corp., 5.52%, due 10/14/97 1,097,807
4,100,000 General Motors Acceptance Corp., 5.54%,
due 10/3/97 4,098,738
2,300,000 General Motors Acceptance Corp., 5.58%,
due 10/10/97 2,296,792
------------
TOTAL TEMPORARY CASH INVESTMENTS $13,493,337
============
- ------------------
* Non income-producing security (see Notes 1 and 6).
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS:
Investments in securities, at value (identified cost
$118,720,862; see Schedule of Investments)
(Notes 1, 3 and 6) $194,456,451
Temporary cash investments, at amortized cost
which approximates value (see Schedule of
Investments) (Note 1) 13,493,337
-------------
Total investments $207,949,788
Cash 47,429
Prepaid expenses and other assets 25,930
-------------
Total assets $208,023,147
-------------
LIABILITIES:
Accrued advisory fees (Note 4) $ 228,778
Other accrued expenses 65,703
-------------
Total liabilities $ 294,481
-------------
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) $122,931,698
Accumulated net realized gain on investments 9,061,379
Net unrealized gain on investments (Note 3) 75,735,589
-------------
Total net assets (equivalent to $23.11 per
share based on 8,990,179 shares
outstanding) $207,728,666
=============
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
INVESTMENT INCOME (Note 1):
Interest $ 674,621
-----------
Total investment income $ 674,621
EXPENSES:
Advisory fees (Note 4) $2,061,573
Shareholder reporting 79,631
Custodian fees 60,733
Accounting and auditing fees 47,108
Trustees' fees and expenses 45,830
Insurance expense 25,278
Legal fees 25,178
Transfer agent fees 19,233
Other 41,088
-----------
Total expenses 2,405,652
------------
Net investment (loss) ($ 1,731,031)
------------
NET REALIZED AND UNREALIZED GAINS ON
INVESTMENTS:
Net realized gain on investments (Note 1) $ 9,234,460
Net increase in unrealized gain on
investments 25,663,757
------------
Net gain on investments $34,898,217
------------
Net increase in net assets
resulting from operations $33,167,186
============
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $674,621
Operating expenses paid (2,348,532)
-------------
Net cash used for operating activities ($1,673,911)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of portfolio securities $401,407,685
Purchases of portfolio securities (426,996,369)
-------------
Net cash used for investing activities ($25,588,684)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock through
rights offering $41,783,825
Cash distributions paid, net (14,774,850)
-------------
Net cash provided by financing activities $27,008,975
-------------
NET (DECREASE) IN CASH ($253,620)
CASH AT BEGINNING OF YEAR 301,049
-------------
CASH AT END OF YEAR $47,429
=============
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 $33,167,186
Net realized (gain) on investments (9,234,460)
Net (increase) in unrealized gain on investments (25,663,757)
Increase in accrued advisory fees and accrued other
expenses 63,596
(Increase) in prepaid expenses and other assets (6,476)
-------------
Net cash used for operating activities ($1,673,911)
=============
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended
September 30, September 30,
1997 1996
---------------- ---------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment (loss) ($1,731,031) ($2,021,797)
Net realized gain on investments 9,234,460 26,774,551
Net increase in unrealized gain on
investments 25,663,757 5,212,708
------------- -------------
Net increase in net assets
resulting from operations $33,167,186 $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) $41,783,825 --
Value of shares issued in
reinvestment of distributions 10,949,078 3,284,307
------------- -------------
Net increase in net assets
resulting from capital share
transactions $52,732,903 $3,284,307
------------- -------------
Net increase in net assets $60,176,161 $26,479,830
NET ASSETS:
Beginning of year 147,552,505 121,072,675
------------- -------------
End of year $207,728,666 $147,552,505
============= =============
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Selected data for each share of beneficial interest outstanding throughout the
period indicated)
<TABLE>
<CAPTION>
For the years ended September 30,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value per share:
Beginning of period $25.754 $21.818 $16.609 $17.604 $17.340
------------ ------------ ------------ ----------- -----------
Net investment (loss) ($0.224)# ($0.331) ($0.228) ($0.199) ($0.190)
Net realized and unrealized
gain (loss) on investments 4.524# 5.487 5.437 (0.230) 0.970
Federal income taxes on
retained long-term capital
gains -- -- -- (0.566) (0.516)
------------ ------------ ------------ ----------- -----------
Total increase (decrease)
from investment operations $4.300 $5.156 $5.209 ($0.995) $0.264
------------ ------------ ------------ ----------- -----------
Dilutive effect of sale of
common stock and related
expenses from rights offering (2.458) -- -- -- --
Long-term capital gains
distribution to shareholders ($4.490) ($1.220) -- -- --
------------ ------------ ------------ ----------- -----------
Net asset value per share:
End of period $23.106 $25.754 $21.818 $16.609 $17.604
============ ============ ============ =========== ===========
Per share market value:
End of period $19.000 $20.875 $18.250 $15.125 $18.375
Total investment return 14.01% 22.03% 20.66% (17.69%) (5.16%)
Net assets:
End of period $207,728,666 $147,552,505 $121,072,675 $92,169,061 $97,690,739
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses
to average net assets 1.57% 1.62% 1.76% 1.74% 1.84%
Ratio of net investment (loss)
to average net assets (1.13%) (1.44%) (1.31%) (1.13%) (1.06%)
Portfolio turnover rate 17.47% 22.41% 22.81% 28.10% 28.36%
Average commission rate paid
per listed share purchased $0.06 $0.07 $0.06 $0.06 $0.07
Number of shares outstanding
at end of period 8,990,179 5,729,160 5,549,198 5,549,198 5,549,198
</TABLE>
# Calculation is based on the weighted average shares outstanding during the
indicated period.
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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. The Fund has
adjusted for the effect of certain permanent book/tax differences by
reclassifying such differences against capital, in the amount of
$1,731,031 for the year ended September 30, 1997. This adjustment has no
effect on the Fund's net assets, net investment loss or net realized gain
and is designed to present the Fund's capital accounts on a tax basis.
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.
15
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(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 September 30, 1997 totaled $47,492,675 and
$25,500,278, respectively.
(3) Tax Basis of Securities
At September 30, 1997, the total cost of securities for Federal income
tax purposes was $118,720,862. The aggregate gross unrealized gain on
securities in which there was an excess of market value over cost was
$89,443,656. The aggregate gross unrealized loss on securities in which
there was an excess of cost over market value was $13,708,067. The net
unrealized gain on securities held by the Fund was $75,735,589.
(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 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%. The Adviser is a 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 $41,783,825, net of offering expenses of
$1,924,305.
(6) 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 13.8% of the Fund's net assets at
September 30, 1997.
The value of the venture capital and 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 and other restricted
securities at September 30, 1997, as determined by the Board of Trustees
of the Fund.
16
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(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 $1,400,501 $ 2.200 $1,400,001
Biofield
Common Warrants 3/3/95 0
6/29/95 0
9/26/96 0
-----------
0 0.010 225
Common Warrants 3/3/95 0
6/29/95 0
-----------
0 0.010 150
BioTransplant
Common* 1/16/96 385,385 4.220 203,088
Common Warrants### 8/12/94 0 0.980 2,705
Common Warrants### 10/31/94 0 0.980 6,174
Common Warrants### 8/18/95 0 3.350 3,853
Calypte Biomedical**
Common 2/29/96 150,000 4.900 98,000
CV Therapeutics**
Common 3/29/96 425,425
11/12/96 79,688
-----------
505,113 6.650 353,281
Dura Pharmaceuticals###
Series S Warrants 12/28/95 0 34.780 1,594,072
Dyax
Common 5/16/91 1,001,480 3.130 44,196
Class A Series 1 Cvt. Pfd. 6/1/92 155,065
9/11/92 51,712
12/31/92 111,812
-----------
318,589 3.130 251,029
Class A Series 3 Cvt. Pfd. 10/26/95 110,280 3.130 172,150
Class A Series 4 Cvt. Pfd. 10/30/96 494,063 3.130 493,804
Common Warrants 12/31/92 187 0.010 25
EPR
Series A Cvt. Pfd. 3/9/94 1,000,409 1.500 333,333
Exelixis Pharmaceuticals
Series B Cvt. Pfd. 3/28/96 1,101,325 2.000 2,200,000
Series C Cvt. Pfd. 3/31/97 300,720 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 1.820 2,421,774
Series B Cvt. Pfd. 8/21/97 899,999 1.820 899,999
IBAH#
Common Warrants 8/11/95 192,500 2.420 725,673
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
LJL Biosystems
Series A Cvt. Pfd. 6/17/97 1,200,000 1.300 1,200,000
LocalMed
Series D Cvt. Pfd. 2/9/96 1,376,745 4.000 1,375,000
Masimo
Series D Cvt. Pfd. 8/14/96 1,120,000 7.000 1,120,000
</TABLE>
17
<PAGE>
H&Q HEALTHCARE INVESTORS
---------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(continued)
<TABLE>
<CAPTION>
Carrying
Acquisition Value
Security Date Cost per Unit Value
- ---------------------------------- ------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
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 79.707 1,105,297
Reprogenesis
Common (w/wts.) 4/25/97 1,800,100 2.220 1,800,000
SEQUUS Pharmaceuticals#
Common Warrants 3/30/95 0 1.200 88,915
Spiros Development
Common 12/28/95 1,375,780 30.000 1,374,990
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 3,623
------------
514,671 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
10/16/96 358,631
------------
439,613 1.000 440,718
Transkaryotic Therapies###
Common Warrants 11/5/93 245 18.880 303,420
Tularik
Series C Cvt. Pfd. 4/16/93 1,000,119 10.000 2,702,700
Vectis
Series B Cvt. Pfd. 2/5/97 1,200,089 4.700 1,199,999
------------ ------------
$26,214,048 $28,679,363
============ ============
</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 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
Independent Public Accountant
Arthur Andersen LLP
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
http://www.hamquist.com/hqcm/about.html
---------
Out of concern for the environment and in an effort to reduce
Fund expenses, this report is printed on recycled paper.
HQHCM-AR-97
