H&Q HEALTHCARE INVESTORS
------------------------
[Medical Logo]
Annual Report
1 9 9 8
<PAGE>
[Picture of Alan G. Carr]
To our Shareholders:
At fiscal year-end on September 30, 1998, the net asset value of your Fund was
$16.71 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:
<TABLE>
<CAPTION>
CY To-Date Quarter Ended
Fiscal Year (9 months) 9/30/98
------------- ------------ --------------
<S> <C> <C> <C>
Net Asset Value -23.1% -11.5% -15.2%
Dow Jones Industrial Averag -1.3% -0.8% -12.4%
NASDAQ Industrials -25.0% -15.5% -22.7%
</TABLE>
To say that the quarter and the fiscal year just ended were extraordinarily
difficult and disappointing would be an understatement of the obvious. The
performance of small stocks and particularly of healthcare stocks has been
disappointing for an extended period of time. Perhaps about the best that can
be said is that the Fund did no worse than small companies in general as
measured by the NASDAQ Index.
Our view of the worldwide economic situation suggests that there are
significant earnings risks for large industrial companies. Many years of
significantly above-average capital investment has enhanced productivity, and
an overall strong economy has resulted in five years of expanding profit
margins as measured by the earnings of the Standard & Poors 500 Index of
industrial companies. Particularly in the face of declining imports from
Pacific Rim countries, Brazil and Russia, the risk is that the world has
overcapacity in virtually every industrial and commodity sector. Additionally,
those countries that are struggling need to export in order to obtain higher
currencies and rebuild their economies. The ability to raise prices in most
sectors is nonexistent (with the possible exception of pharmaceuticals and
medical products), resulting in virtually nonexistent inflation and an
increasing possibility of absolute price deflation. Estimates for the near- and
intermediate-term future earnings of the companies that make up the Standard &
Poors 500 Index are beginning to come down sharply.
1
<PAGE>
Regardless, as investors sought perceived quality and liquidity, large
capitalization stocks have been bid up to premiums in valuation not seen for
over 25 years. In contrast, small companies, in the aggregate whose earnings
growth has generally been more rapid, have been ignored and, by most
traditional measures, seem as undervalued both relatively and absolutely as
they were in 1974.
If, as we believe, valuations of the stocks of large capitalization companies
need to adjust to something more "normal", it is of course possible that the
capitalizations of small emerging companies would be further negatively
impacted. However, we also believe that the environment is most similar to that
of the second half of the 1970s where the stocks of small emerging companies
were the market leaders for several years on an absolute and relative basis.
Additionally, in the past these stocks have responded very positively in most
periods following the initiation of Federal Reserve Board action to reduce
interest rates, a trend which we believe is likely to continue. We believe that
healthcare companies are largely insulated from the financial problems of the
rest of the world, and while consumers, whose installment debt is at a near
record level, may have to curtail purchasing, they will do so less in
healthcare products and services.
In the meantime, the pace of scientific discovery and development in biologics,
pharmaceuticals, instruments and devices continues at an extraordinary rate. We
agree with an increasing number of other observers that, in the early decades
of the next century, advances in these technologies will impact our lives and
our economy equally as forcefully as electronics and communications have done
in the last two decades. While we are cautiously optimistic over the near-term,
our enthusiasm for the sectors in which your Fund is invested has never been
higher for the longer term.
[Signature of Alan G. Carr]
Alan G. Carr
President
Capital Gains Declaration
We hereby designate that the entire amount of the stock distribution declared
on November 16, 1998 with respect to our fiscal year ended September 30, 1998,
constituted a capital gain dividend for Federal income tax purposes, amounting
to $0.36 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 for H&Q Healthcare Investors. The Annual Meeting was held on May
21, 1998, at 9:00 a.m. There were present in person or by proxy 8,007,260.4899
shares of beneficial interest, or 84.70% of the 9,453,317 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 2001 Annual Meeting of Shareholders. The nominees elected
to serve until the year 2001 Annual Meeting were Patrick J. Allen, Robert P.
Mack, M.D. and Eric Oddleifson. A total of 7,856,452.6729 shares voted for the
election of Mr. Allen and 150,807.8170 shares abstained; 7,888,941.0382 shares
voted for the election of Dr. Mack and 118,319.4517 shares abstained;
7,888,727.0054 shares voted for the election of Mr. Oddleifson and 118,533.4845
shares abstained. 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, 1998. The selection of Arthur Andersen LLP was ratified by
a vote of 7,873,918.6027 shares for selection.
H&Q HEALTHCARE INVESTORS
------------------------
PORTFOLIO
As of September 30, 1998
[Horizontal Bar Graphic]
[PLOTPOINTS BEGIN]
<TABLE>
<S> <C> <C>
VC Dif Total
0.21% 6.17% 6.38
9.95 21.56 31.51
0 5.00 5.00
2.3 5.31 7.68
0.95 5.99 6.94
2.14 4.59 6.73
5.74 6.80 12.54
0 11.07 11.07
0 12.16 12.16
</TABLE>
[PLOTPOINTS END]
3
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------
LARGEST HOLDINGS
As of September 30, 1998
<TABLE>
<CAPTION>
% of Net Assets
---------------
<S> <C>
Sepracor 6.60%
Catalytica 6.17%
Transkaryotic Therapies 5.12%
Quintiles Transnational 5.00%
Gilead Sciences 2.83%
Martek Biosciences 2.31%
IDEXX Laboratories 2.30%
Orthodontic Centers of America 2.28%
CareMonitor (Restricted) 2.10%
Omnicare 2.06%
</TABLE>
H&Q HEALTHCARE INVESTORS
------------------------
SIGNIFICANT PORTFOLIO TRANSACTIONS
Quarter Ended September 30, 1998
<TABLE>
<CAPTION>
Units Held Units Held
PURCHASES 6/30/98 9/30/98
- -------------------- ------------ -----------
<S> <C> <C>
Centocor 0 50,000
Coulter Pharmaceutical 0 120,000
Cubist Pharmaceuticals 528,055 549,055
Cubist Pharmaceuticals (Restricted) 0 400,001
Dyax (Restricted) Class A Series 5 0 99,083
Emisphere Technologies 0 91,500
INCYTE Pharmaceuticals 0 67,000
Sontra Medical (Restricted) 0 1,724,138
SALES
- --------------------
Biofield 546,242 543,242
Cell Therapeutics 57,142 0
Dura Pharmaceuticals 94,029 0
Elan Pharmaceuticals 75,000 0
Guidant 47,773 0
Human Genome Sciences 93,000 0
ImmuLogic Pharmaceutical 205,000 0
Omnicare 103,234 92,157
Voxel 137,000 0
</TABLE>
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, 1998, 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, 1998, 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 5, the financial statements include investment
securities valued at $33,765,929 (21.4% 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, 1998, 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
November 9, 1998
5
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Convertible Securities - 15.5% of Net Assets
SHARES Convertible Preferred - 15.4% VALUE
- ---------- -----------
<S> <C> <C>
Agricultural/Environmental Technologies - 0.2%
222,222 EPR (Restricted) Series A* $333,333
Biotechnology - 5.5%
1,100,000 Exelixis Pharmaceuticals (Restricted) Series B* 2,200,000
150,000 Exelixis Pharmaceuticals (Restricted) Series C* 300,000
27,500 Telik (Restricted) Series G* 1,375,000
3,600 Telik (Restricted) Series I* 180,000
47,407 Therion Biologics (Restricted) Series A* 189,628
36,092 Therion Biologics (Restricted) Sinking Fund* 1,083
270,270 Tularik (Restricted) Series C* 2,702,700
360,000 Versicor (Restricted) Series C* 1,800,000
Diagnostics - 2.4%
222,651 CytoLogix (Restricted) Series A* 1,070,038
160,000 Masimo (Restricted) Series D* 1,440,000
1,724,138 Sontra Medical (Restricted) Series A* 1,200,000
Managed Care - 1.0%
338,983 KVM Technologies (Restricted) Series B (w/wts.)* 1,500,000
Medical Supplies - 2.1%
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 - 4.2%
636,364 AbTox (Restricted) Series F* 6,364
1,330,645 CareMonitor (Restricted) Series A* 2,421,774
494,505 CareMonitor (Restricted) Series B* 900,001
80,201 Dyax (Restricted) Class A Series 1* 437,095
55,000 Dyax (Restricted) Class A Series 3* 299,750
157,765 Dyax (Restricted) Class A Series 4* 859,819
99,083 Dyax (Restricted) Class A Series 5* 540,002
255,319 Vectis (Restricted) Series B* 1,199,999
-----------
$24,356,586
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
(continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT Convertible Bonds and Notes - 0.1% VALUE
------- -----------
Medical Specialty (0.1%)
<S> <C> <C>
$180,000 AbTox (Restricted) 12% Promissory Note
due 1998 $180,000
-----------
$180,000
-----------
TOTAL CONVERTIBLE SECURITIES
(Cost $22,157,428) $24,536,586
-----------
SHARES COMMON STOCKS - 72.3%
- ---------
Agricultural/Environmental Technology - 6.1%
690,000 Catalytica* $9,746,250
-----------
$9,746,250
-----------
Biotechnology - 26.0%
Biopharmaceuticals - 22.7%
429,898 BioTransplant* $644,938
1,150 BioTransplant (Restricted) Warrants* 1,012
50,000 Centocor* 1,981,250
177,700 Cor Therapeutics* 1,377,175
120,000 Coulter Pharmaceutical* 2,985,000
549,055 Cubist Pharmaceuticals* 1,338,322
400,001 Cubist Pharmaceuticals (Restricted)* 828,002
200,001 Cubist Pharmaceuticals (Restricted) Warrants* 32,000
214,000 CV Therapeutics* 1,230,500
31,875 CV Therapeutics (Restricted)* 128,456
206,659 Gilead Sciences* 4,469,001
35,000 MedImmune* 2,266,250
45,000 Neuralab (Restricted) Units* 1,800,000
80,000 Neurogen* 1,320,000
160,000 Oxford GlycoSciences (Restricted)* 296,000
161,253 Pharming Group (Restricted)* 2,033,400
515,832 Ribi ImmunoChem Research* 1,579,736
74,096 SEQUUS Pharmaceuticals* 713,174
125,000 Synaptic Pharmaceutical* 1,843,750
226,760 Therion Biologics (Restricted)* 907,040
330,741 Transkaryotic Therapies* 7,937,784
16,071 Transkaryotic Therapies (Restricted) Warrants* 156,371
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
(continued)
<TABLE>
<CAPTION>
SHARES Biotechnology - (continued) VALUE
------- -----------
Genomics/Drug Discovery - 3.3%
<S> <C> <C>
210,000 Gene Logic* $826,875
67,000 INCYTE Pharmaceuticals* 1,423,750
120,000 LJL BioSystems* 300,000
461,539 LJL BioSystems (Restricted)* 807,693
225,000 Lynx Therapeutics* 1,800,000
-----------
$41,027,388
-----------
Contract Research Organizations - 5.0%
180,400 Quintiles Transnational* $7,892,500
-----------
$7,892,500
-----------
Diagnostics - 5.3%
543,242 Biofield* $1,018,579
15,280 Biofield (Restricted)* 24,295
501,576 Calypte Biomedical* 846,410
211,304 Cytyc* 2,139,453
152,000 IDEXX Laboratories* 3,629,000
160,000 Masimo Labs (Restricted)* 1,600
153,846 NeoPath* 759,615
-----------
$8,418,952
-----------
Managed Care - 6.0%
90,600 HBO $2,616,075
92,157 Omnicare* 3,248,534
216,000 Orthodontic Centers of America* 3,604,500
-----------
$9,469,109
-----------
Medical Supplies - 4.6%
645,000 EP Med Systems* $1,975,313
155,750 Exogen* 467,250
137,457 KeraVision* 584,192
335,449 Landec* 1,320,830
15,000 Novoste* 193,125
163,000 Perclose* 2,689,500
-----------
$7,230,210
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
(continued)
<TABLE>
<CAPTION>
SHARES Medical Specialty - 8.2% VALUE
-------- ----------
<S> <C> <C>
1,200,500 Bioject Medical Technologies* $1,875,781
654,500 Bioject Medical Technologies (Restricted)
Warrants* 366,520
74,420 Biomatrix* 2,902,380
14,120 Dyax (Restricted)* 76,954
153,386 Focal* 1,572,207
180,000 Interpore Cross* 731,250
441,409 Martek Biosciences* 3,641,624
810,811 Reprogenesis (Restricted)* 1,800,000
------------
$2,966,716
------------
Pharmaceuticals/Drug Delivery - 11.1%
66,000 Biovail* $1,778,425
91,500 Emisphere Technologies* 720,563
399,000 Fuisz Technologies* 3,192,000
158,569 Sepracor* 10,425,912
393,334 Vivus* 1,364,377
------------
$17,481,277
------------
TOTAL COMMON STOCKS
(Cost $91,542,169) $114,232,402
------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $113,699,597) $138,769,079
============
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENTS - 12.1% VALUE
-------- ------------
$5,000,000 Ford Motor Credit Corp., 5.25%,
due 10/21/98 $4,985,417
6,800,000 General Electric Capital Corp., 5.51%,
due 10/16/98 6,784,388
7,300,000 General Motors Acceptance Corp., 5.52%,
due 10/7/98 7,293,284
------------
TOTAL TEMPORARY CASH INVESTMENTS $19,063,089
============
</TABLE>
- ------------------
* Non income-producing security (see Notes 1 and 5).
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------
BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value (identified cost
$113,699,597; see Schedule of Investments)
(Notes 1, 3 and 5) $138,769,079
Temporary cash investments, at amortized cost
which approximates value (see Schedule of
Investments) (Note 1) 19,063,089
------------
Total investments $157,832,168
Cash 181,583
Dividends and interest receivable 3,335
Receivable for investments sold 185,062
Prepaid expenses 12,437
------------
Total assets $158,214,585
------------
LIABILITIES:
Accrued advisory fee $164,721
Accrued other 73,791
------------
Total liabilities $238,512
------------
NET ASSETS:
Shares of beneficial interest, par value $.01 per
share, unlimited number of shares authorized,
amount paid in on 9,453,317 shares issued and
outstanding (Note 1) $129,517,867
Accumulated net realized gain on investments 3,388,724
Net unrealized gain on investments (Note 3) 25,069,482
------------
Total net assets (equivalent to $16.71 per share
based on 9,453,317 shares outstanding) $157,976,073
============
</TABLE>
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, 1998
<TABLE>
<CAPTION>
INVESTMENT INCOME (Note 1):
<S> <C> <C>
Dividend income $9,833
Interest income 634,275
----------
Total investment income $644,108
EXPENSES:
Advisory fees (Note 4) $2,313,509
Shareholder reporting 94,653
Custodian fees 66,873
Accounting and auditing fees 47,446
Trustees' fees and expenses 46,217
Transfer agent fees 30,016
Insurance expense 23,468
Legal fees 20,835
N.Y.S.E. fees 19,662
Other 32,294
----------
Total expenses 2,694,973
------------
Net investment (loss) ($2,050,865)
------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments (Note 1) $5,519,462
Net (decrease) in unrealized gain on
investments (50,666,107)
------------
Net (loss) on investments ($45,146,645)
------------
Net (decrease) in net assets
resulting from operations ($47,197,510)
============
</TABLE>
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, 1998
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Interest received $634,275
Dividends received 6,498
Operating expenses paid (2,737,468)
------------
Net cash used for operating activities ($2,096,695)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of portfolio securities $388,795,027
Purchases of portfolio securities (384,009,095)
------------
Net cash provided by investing activities $4,785,932
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid, net ($2,555,083)
------------
Net cash used for financing activities ($2,555,083)
------------
NET INCREASE IN CASH $134,154
CASH AT BEGINNING OF YEAR 47,429
------------
CASH AT END OF YEAR $181,583
============
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 ($47,197,510)
Net realized (gain) on investments (5,519,462)
Net decrease in unrealized gain on investments 50,666,107
Net (increase) in interest and dividend receivables (3,335)
Net (decrease) in accrued advisory fees and accrued
expenses (55,969)
Net decrease in prepaid expenses and other assets 13,474
------------
Net cash used for operating activities ($2,096,695)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the years ended
September 30, September 30,
1998 1997
----------------- ----------------
<S> <C> <C>
NET INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS:
Net investment (loss) ($2,050,865) ($1,731,031)
Net realized gain on investments 5,519,462 9,234,460
Net increase (decrease) in net
unrealized gain on investments (50,666,107) 25,663,757
------------ ------------
Net increase (decrease) in net
assets resulting from operations ($47,197,510) $33,167,186
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized long-term capital gains (9,619,055) ($25,723,928)
------------ ------------
Net (decrease) in net assets
resulting from distributions ($9,619,055) ($25,723,928)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of common
stock issued in March 1997 rights
offering -- $41,783,825
Value of shares issued in
reinvestment of distributions 7,063,972 10,949,078
------------ ------------
Net increase in net assets
resulting from capital share
transactions $7,063,972 $52,732,903
------------ ------------
Net increase (decrease)in
net assets ($49,752,593) $60,176,161
NET ASSETS:
Beginning of year 207,728,666 147,552,505
------------ ------------
End of year $157,976,073 $207,728,666
============ ============
</TABLE>
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,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value per share:
Beginning of period $23.106 $25.754 $21.818 $16.609 $17.604
------- ------- ------- ------- -------
Net investment (loss) ($0.217) ($0.224) ($0.331) ($0.228) ($0.199)
Net realized and unrealized
gain (loss) on investments (5.108) 4.524 5.487 5.437 (0.230)
Federal income taxes on
retained long-term capital
gains - - - - (0.566)
------- ------- ------- ------- -------
Total increase (decrease)
from investment operations ($5.325) $4.300 $5.156 $5.209 ($0.995)
------- ------- ------- ------- -------
Dilutive effect of sale of
common stock and related
expenses from rights
offering - (2.458) - - -
------- ------- ------- ------- -------
Long-term capital gains
distribution to shareholders ($1.070) ($4.490) ($1.220) - -
------- ------- ------- ------- -------
Net asset value per share:
End of period $16.711 $23.106 $25.754 $21.818 $16.609
======= ======= ======= ======= =======
Per share market value:
End of period $13.125 $19.000 $20.875 $18.250 $15.125
Total investment return (26.05%) 14.01% 22.03% 20.66% (17.69%)
Net assets:
End of period $157,976,073 $207,728,666 $147,552,505 $121,072,675 $92,169,061
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses
to average net assets 1.46% 1.57% 1.62% 1.76% 1.74%
Ratio of net investment (loss)
to average net assets (1.11%) (1.13%) (1.44%) (1.31%) (1.13%)
Portfolio turnover rate 17.15% 17.47% 22.41% 22.81% 28.10%
Average commission rate paid
per listed share purchased $0.05 $0.06 $0.07 $0.06 $0.06
Number of shares outstanding
at end of period 9,453,317 8,990,179 5,729,160 5,549,198 5,549,198
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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 5, 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 $477,803
for the year ended September 30, 1998. 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.
Dividends
The current dividend policy is to declare dividends in stock. Stock
distributions will automatically be paid in newly issued shares of the
Fund unless otherwise instructed by the shareholder. The shares will be
valued at the lower of net asset value or market price on the payable
date. If a distribution were to be declared in cash, it would then be
subject to the Dividend Reinvestment Plan. Under the Dividend Reinvestment
Plan, distributions will automatically be paid
15
<PAGE>
H&Q HEALTHCARE INVESTORS
------------------------
NOTES TO FINANCIAL STATEMENTS
(continued)
in additional shares of the Fund, unless State Street Bank is otherwise
instructed. Shareholders may request to be paid in cash instead of shares
by responding to the bank, brokerage or nominee who holds the shares if
the shares are in "street name" or by filling out a form received from
State Street Bank if the shares are in registered form. A description of
the automatic Dividend Reinvestment Plan may be obtained by calling State
Street Bank. 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.
(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, 1997 through September 30, 1998 totaled $29,373,571 and
$39,794,688, respectively.
(3) Tax Basis of Securities
At September 30, 1998, the total cost of securities for Federal income
tax purposes was $113,699,597. The aggregate gross unrealized gain on
securities in which there was an excess of market value over cost was
$52,543,746. The aggregate gross unrealized loss on securities in which
there was an excess of cost over market value was $27,474,264. The net
unrealized gain on securities held by the Fund was $25,069,482.
(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) 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 21.4% of the Fund's net assets at
September 30, 1998.
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, 1998, 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 $0.010 $6,364
12% Promissory Note due 1998 2/26/98 60,000
3/11/98 60,000
3/26/98 60,000
----------
180,000 1.000 180,000
Biofield***
Common 3/3/95 0
6/29/95 0
----------
0 1.590 24,295
Bioject Medical Technologies#
Common Warrants 12/9/96 0 0.560 366,520
BioTransplant###
Common Warrants 8/18/95 0 0.880 1,012
CareMonitor
Series A Cvt. Pfd. 1/26/96 1,652,603 1.820 2,421,774
Series B Cvt. Pfd. 8/21/97 899,999 1.820 900,001
Cubist Pharmaceuticals***
Common 9/23/98 900,002 2.070 828,002
Common Warrants 9/23/98 0 0.160 32,000
CV Therapeutics**
Common 11/12/96 79,688 4.030 128,456
CytoLogix
Series A Cvt. Pfd. 1/13/98 1,070,038 4.806 1,070,038
Dyax
Common 5/16/91 1,001,480 5.450 76,954
Class A Series 1 Cvt. Pfd. 6/1/92 155,065
9/11/92 51,712
12/31/92 111,812
----------
318,589 5.450 437,095
Class A Series 3 Cvt. Pfd. 10/26/95 110,280 5.450 299,750
Class A Series 4 Cvt. Pfd. 10/30/96 494,063 5.450 859,819
Class A Series 5 Cvt. Pfd. 9/10/98 540,002 5.450 540,002
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
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
KVM Technologies
Series B Cvt. Pfd. (w/wts.) 2/19/98 1,500,000 4.425 1,500,000
LJL BioSystems**
Common 6/17/97 1,200,000 1.750 807,693
LocalMed
Series D Cvt. Pfd. 2/9/96 1,376,745 4.000 1,375,000
Masimo
Series D Cvt. Pfd. 8/14/96 1,118,400 9.000 1,440,000
Masimo Labs
Common 8/14/96 1,600 0.010 1,600
Neuralab
Units 1/14/98 1,800,000 40.000 1,800,000
</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 GlycoSciences***
Ordinary Shares 5/26/93 773,830 1.850 296,000
Pharming Group***
Common 8/28/95 1,057,037
4/25/96 48,393
10/15/97 454,153
-----------
1,559,583 12.424 2,003,400
Reprogenesis
Common (w/wts.) 4/25/97 1,800,100 2.220 1,800,000
Sontra Medical
Series A Cvt. Pfd. 9/9/98 1,200,000 0.696 1,200,000
Telik
Series G Cvt. Pfd. 11/7/95 1,375,548 50.000 1,375,000
Series I Cvt. Pfd. 11/12/97 180,000 50.000 180,000
Therion Biologics
Common 7/12/90 7,582
6/30/93 502,648
8/20/96 818
10/16/96 3,623
-----------
514,671 4.000 907,040
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
Series A Cvt. Pfd. 8/20/96 80,982
10/16/96 358,631
-----------
439,613 4.000 189,628
Transkaryotic Therapies###
Common Warrants 11/5/93 245 9.730 156,371
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
Versicor
Series C Cvt. Pfd. 12/2/97 1,800,000 5.000 1,800,000
----------- -----------
$31,963,554 $33,765,929
=========== ===========
</TABLE>
** Represents 70% 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 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) 310-0567
Officers
Alan G. Carr, President
Kimberley L. Carroll, Treasurer
Kerri A. Bisner, Secretary
Sheldon A. Jones, Assistant Secretary
Trustees
Patrick J. Allen
Alan G. Carr
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
www.hamquist.com/capital/hqcm
---------
Out of concern for the environment and in an effort to reduce
Fund expenses, this report is printed on recycled paper.
HQHCM-AR-98
