PROSPECTUS
2,115,336 Shares
H&Q HEALTHCARE INVESTORS
Issuable upon Exercise of Non-Transferable Rights to Subscribe for Such Shares
New York Stock Exchange Symbol: HQH
H&Q Healthcare Investors (the "Trust") is issuing to its shareholders of
record ("Shareholders") as of the close of business on February 7, 1997 (the
"Record Date"), non-transferable rights (the "Rights") entitling the holders
thereof to subscribe for an aggregate of 2,115,336 shares of beneficial
interest of the Trust (the "Shares"), at the rate of one Share for each three
Rights held (the "Offer"). Shareholders will receive one non-transferable
Right for each Share held. Shareholders who have fully exercised their Rights
will have an over-subscription privilege (the "Over-Subscription Privilege")
to subscribe for additional shares subject to certain limitations and subject
to allotment, for any Shares not acquired by exercise of primary subscription
rights. Fractional shares will not be issued upon the exercise of Rights. The
Rights are non-transferable and will not be admitted for trading on the New
York Stock Exchange (the "NYSE") or any other exchange. Shares of the Trust
trade on the NYSE under the symbol "HQH." See "The Offer." THE SUBSCRIPTION
PRICE PER SHARE WILL BE 95% OF THE LOWER OF (a) THE AVERAGE OF THE LAST
REPORTED SALES PRICE OF A SHARE ON THE NYSE ON MARCH 5, 1997 (THE "PRICING
DATE") AND THE FOUR PRECEDING BUSINESS DAYS OR (b) THE NET ASSET VALUE PER
SHARE (THE "NAV") AS OF THE PRICING DATE.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 5, 1997 (THE
"EXPIRATION DATE"). For additional information regarding the Offer, please
call Shareholder Communications Corporation (the "Information Agent") at
(800) 733-8481, extension 352, or call collect at (212) 805-7000.
The Trust is a diversified, closed-end management investment company. The
Trust's investment objective is to seek long-term capital appreciation by
investing primarily in securities of companies in the health services and
medical technology (healthcare) industries ("Healthcare Companies"). The
Trust will invest primarily in securities of companies that are believed by
the Trust's investment adviser to have significant potential for
above-average long-term growth in revenues and earnings. The Trust emphasizes
investment in securities of emerging growth Healthcare Companies. The Trust
may also invest up to 40% of its net assets in venture capital or other
securities subject to legal or contractual restrictions as to resale. Such
securities may be acquired in connection with venture capital opportunities,
as well as in private placements in public companies. No assurance can be
given that the Trust will achieve its investment objective. See "Appendix A--
Description of Risk Factors and Investment Techniques."
The Trust's investment adviser is Hambrecht & Quist Capital Management
Incorporated, the President and sole Director of which is Alan G. Carr, who
is responsible for management of the Trust's portfolio. See "Investment
Adviser."
The Trust announced the Offer after the close of trading on the NYSE on
January 3, 1997. The NAV at the close of business on January 3, 1997 and
February 7, 1997 was $20.46 and $22.50, respectively, and the last reported
sales price of a Share on the NYSE on those dates was $17.375 and $18.00,
respectively.
As a result of the terms of the Offer, Shareholders who do not fully exercise
their Rights, including the Over-Subscription Privilege described herein,
will, upon the completion of the Offer, own a smaller proportional interest
in the Trust than they owned prior to the Offer. The Offer will result in a
dilution of NAV for all Shareholders, irrespective of whether they exercise
all or any portion of their rights, because the Subscription Price per Share
will be less than the then current NAV. Such dilution might be significant.
See "The Offer."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
Estimated Estimated Estimated Proceeds
Subscription Price (1) Sales Load (2) to Trust (3)
Per Share $17.67 $0.618 $17.052
Total Maximum (3) $37,377,987 $1,307,278 $36,070,709
- -------------------------------------------------------------------------------
Footnotes set forth on next page
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference. A Statement of Additional Information dated February 7, 1997 (the
"SAI") containing additional information about the Trust has been filed with
the Securities and Exchange Commission and is incorporated by reference in
its entirety into this Prospectus. A copy of the SAI, the table of contents
of which appears on page 32 of this Prospectus, may be obtained without
charge by contacting the Information Agent at (800) 733-8481, extension 352.
Dealer Manager
Prudential Securities Incorporated
February 7, 1997
<PAGE>
(Notes from cover page)
(1) Estimated on the basis of the average of the last reported sales price of
a Share on the NYSE on February 7, 1997 and the four preceding business
days. Pursuant to the Over-Subscription Privilege, the Trust may increase
the number of Shares subject to subscription by up to 25% of the Shares
offered hereby. If the Trust increases the number of Shares subject to
subscription by 25%, the total maximum Estimated Subscription Price will
be approximately $46,722,484, the total maximum Estimated Sales Load
will be approximately $1,634,098, and the total maximum Estimated
Proceeds to the Trust will be approximately $45,088,386.
(2) In connection with the Offer, the Trust has agreed to pay the Dealer
Manager (as defined herein) a fee for its financial advisory, marketing
and solicitation services equal to 3.50% of the aggregate Subscription
Price for the Shares issued pursuant to the Offer and to reimburse the
Dealer Manager for out-of-pocket expenses up to $150,000. The Dealer
Manager will reallow to certain broker-dealers a concession of 2.25% of
the Subscription Price per Share for Shares issued pursuant to the Offer.
See "Distribution Arrangements." These fees and expense reimbursements
will be borne by the Trust and indirectly by all of the Trust's
Shareholders, including those who do not exercise their Rights. The Trust
and the Investment Adviser have agreed to indemnify the Dealer Manager
against certain liabilities under the Securities Act of 1933, as amended.
(3) Before deduction of expenses related to the Offer incurred by the Trust,
estimated at approximately $368,000, including up to $150,000 to be paid
to the Dealer Manager as reimbursement for its out-of-pocket expenses.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus assumes that the
allowable increase of 25% of the shares of beneficial interest (the "Shares")
of H&Q Healthcare Investors (the "Trust") offered hereby pursuant to the
Over-Subscription Privilege (as defined herein) will not occur.
THE OFFER
<TABLE>
<CAPTION>
<S> <C>
The Offer The Trust is issuing to its shareholders of record
("Shareholders") as of the close of business on February 7, 1997
(the "Record Date") non- transferable rights ("Rights") to
subscribe for an aggregate of 2,115,336 Shares of the Trust (the
"Offer"). Each Shareholder will be entitled to subscribe for one
Share for each three Rights held (the "Primary Subscription").
Subscription Price The subscription price per Share (the "Subscription Price") will
be 95% of the lower of (a) the average of the last reported sales
prices of a Share on the New York Stock Exchange ("NYSE") on March
5, 1997 (the "Pricing Date") and the four preceding business days
or (b) the net asset value per Share (the "NAV") as of the Pricing
Date.
Subscription Period Rights may be exercised at any time during the subscription period
(the "Subscription Period"), which commences on February 10, 1997
and ends at 5:00 p.m. New York City time, on March 5, 1997 (the
"Expiration Date").
Over-Subscription Privilege Shareholders who fully exercise their Rights in the Primary
Subscription may have, subject to certain limitations and subject
to allotment, a privilege to subscribe for additional Shares (the
"Over-Subscription Privilege"). In order to honor
over-subscription requests, the Trust may, at its discretion,
issue up to an additional 25% of the Shares available in the
Offer.
Purpose of the Offer The Investment Adviser (as defined herein) believes that
increasing the Trust's assets for investment through the Offer
will benefit the Trust and its Shareholders by better positioning
the Trust to more fully take advantage of available investment
opportunities in securities of emerging growth companies in the
health services and medical technology (healthcare) industries
("Healthcare Companies"), particularly venture capital investments
in biotechnology and other innovative medical technology
companies.
While there can be no assurance that such benefits will be
realized, increasing the Trust's investment assets through the
Offer is intended to:
(bullet) allow the Trust to increase its investments at a time
when the Investment Adviser believes that securities of
selected biotechnology and other innovative medical
technology companies are positioned for price
appreciation due to (i) a substantial number of
healthcare products awaiting Food and Drug Administration
("FDA") approval, (ii) recent advances in computer
technology and scientific knowledge which have caused a
proliferation of new healthcare products and which have
reduced the time and cost of research and development of
such new products, and (iii) an improved regulatory
climate;
</TABLE>
3
<PAGE>
THE OFFER (Cont'd)
<TABLE>
<CAPTION>
<S> <C>
Purpose of the Offer (bullet) increase the Trust's average investment size, creating for
(Cont'd) the Trust additional negotiating leverage and pricing
influence over venture capital and other private equity
investments;
(bullet) provide the Trust with the ability to make additional
investments without realizing capital gains on current
investments or otherwise selling current investments at an
unfavorable time; and
(bullet) reduce operating costs per Share.
The Offer affords Shareholders the opportunity to purchase
additional Shares of the Trust at a price that will be below market
value or NAV at the Expiration Date. See "The Offer--Purpose of
the Offer."
Use of Proceeds It is expected that the net proceeds of the Offer will be invested
primarily in securities of Healthcare Companies, particularly
venture capital opportunities in biotechnology and other innovative
medical technology companies. See "Use of Proceeds."
How to Obtain Subscription Contact your broker, bank or trust company.
Information Contact Shareholder Communications Corporation (the "Information
Agent") toll-free at (800) 733-8481, extension 352, or call collect
at (212) 805-7000.
How to Subscribe Shareholders may subscribe in one of the two following ways:
(bullet) Deliver a completed Exercise Form and payment to State
Street Bank and Trust Company (the "Subscription Agent")
by the Expiration Date.
(bullet) If your Shares are held in a brokerage, bank or trust
account, have your broker, bank or trust company deliver a
Notice of Guaranteed Delivery to the Subscription Agent by
the Expiration Date.
</TABLE>
IMPORTANT DATES TO REMEMBER
<TABLE>
<S> <C>
Record Date February 7, 1997
Subscription Period February 10, 1997-
March 5, 1997
Deadline for delivery of Exercise Form together with payment of
Estimated Subscription Price or for delivery of Notice of
Guaranteed Delivery March 5, 1997
Expiration Date and Pricing Date March 5, 1997
Deadline for payment of final Subscription Price pursuant to
Notice of Guaranteed Delivery March 10, 1997
Confirmation Date to Registered Shareholders March 18, 1997
For Registered Shareholder Purchases--deadline for payment of
unpaid balance if final Subscription Price is higher than
Estimated Subscription Price April 4, 1997
</TABLE>
4
<PAGE>
THE TRUST
<TABLE>
<CAPTION>
<S> <C>
The Trust The Trust is a diversified, closed-end management investment
company organized as a Massachusetts business trust. As of
February 7, 1997, the Trust had 6,346,009 Shares outstanding,
which are traded on the NYSE under the symbol "HQH." As of
February 7, 1997, the Trust's NAV and last reported sales price
per Share were $22.50 and $18.00, respectively.
Investment Adviser Hambrecht & Quist Capital Management Incorporated (the "Investment
Adviser") serves as investment adviser to the Trust. The
Investment Adviser is an indirect wholly-owned subsidiary of
Hambrecht & Quist Group, which through its various related
entities has investment research, investment banking and venture
capital expertise in the healthcare industries. See "Investment
Adviser." The majority of the Trust's Board of Trustees is
unaffiliated with the Investment Adviser; nevertheless, the Trust
may be subject to certain potential conflicts of interest. See
"Portfolio Transactions and Brokerage."
Portfolio Manager Alan G. Carr is the Trust's President and portfolio manager and is
the President and sole Director of the Investment Adviser. Mr.
Carr has been managing equity portfolios emphasizing investment in
emerging growth companies for over 30 years and portfolios
specializing in publicly traded equity securities of Healthcare
Companies, as well as in venture capital opportunities in the
healthcare industries, for the last 15 years. See "Investment
Adviser" and "Trustees and Officers."
General Investment Guidelines The Trust's investment objective is to seek long-term capital
appreciation by investing primarily in securities of Healthcare
Companies. Under normal market conditions, the Trust expects to
invest at least 80% of its net assets in securities of Healthcare
Companies and in no event will have less than 25% of its net
assets so invested.
Venture Capital The Trust emphasizes investment in securities of emerging growth
Investments Healthcare Companies. The Trust may invest up to 40% of its net
assets in securities subject to legal or contractual restrictions
as to resale ("Restricted Securities"). The Trust's investments in
Restricted Securities may include "start-up," early and later
stage financings of privately held companies and private
placements in public companies. See "Investment Objective and
Policies."
</TABLE>
5
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
This Prospectus contains certain statements that may be deemed to be
"forward-looking statements." Actual results could differ materially from
those projected in the forward-looking statements as a result of
uncertainties set forth below and elsewhere in the Prospectus. See "Appendix
A--Description of Risk Factors and Investment Techniques" for a more complete
description of risks that may be associated with an investment in the Trust.
<TABLE>
<CAPTION>
<S> <C>
Dilution The Offer will result in dilution.
As a result of the Offer, Shareholders who do not fully exercise
their Rights will experience dilution of NAV, dilution of a
proportionate ownership interest in the Trust, and dilution of
voting power.
Also, an immediate dilution of NAV will be experienced by all
Shareholders, regardless of whether they exercise any or all of
their Rights, because the Subscription Price will be less than the
current NAV, and the number of Shares outstanding after the Offer
will increase by a greater percentage than the increase in the
size of the Trust's assets. For example, if the assumed
Subscription Price is $19.10, representing a market price which is
only 90% of NAV, assuming that all Rights are exercised, the
Trust's NAV would be reduced by approximately $0.81 per Share or
approximately 3.6% of NAV. However, the actual Subscription Price
may be greater or less than such assumed Subscription Price. The
foregoing example assumes an NAV of $22.33 per Share, based on the
Trust's NAV after the close of trading on Monday, February 3,
1997.
Concentration in the The Trust expects under normal market conditions to invest at
Healthcare Industries least 80% of its net assets in securities of Healthcare Companies
and in no event will have less than 25% of its net assets so
invested. Healthcare Companies have in the past been characterized
by limited product focus, rapidly changing technology and
extensive government regulation. These factors may result in
abrupt advances and declines in the securities prices of
particular companies and, in some cases, may have a broad effect
on the prices of securities of companies in particular healthcare
industries.
Intense competition exists within and among certain healthcare
industries, including competition to obtain and sustain
proprietary technology protection upon which Healthcare Companies
can be highly dependent for maintenance of profit margins and
market exclusivity.
Cost containment measures implemented by the federal government
have adversely affected certain sectors of the healthcare
industries. The implementation of any such further cost
containment measures may have an adverse effect on some companies
in the healthcare industries.
Investment in Emerging The Trust emphasizes investment in equity securities of emerging
Growth Companies growth Healthcare Companies. While these securities offer the
opportunity for significant capital gains, such investments also
involve a degree of risk that can result in substantial losses.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Key Personnel There may be only a limited number of securities professionals who
have comparable investment experience to Mr. Carr, the Trust's
portfolio manager, in the area of Healthcare Companies. In the
event of his death, resignation, retirement or inability to act on
behalf of the Investment Adviser, there can be no assurance that a
suitable replacement for Mr. Carr could be found immediately.
Liquidity of Portfolio The Trust may invest substantially all of its net assets in
Investments securities of emerging growth Healthcare Companies, including
venture capital and other private equity investments. Some of
these securities are traded in the over-the-counter market or on
regional stock exchanges where the low trading volume of a
particular security may result in abrupt and erratic price
movements. An investment in such securities may have limited
liquidity, and the Trust may find it necessary to sell at a
discount from recent prices or to sell over extended periods of
time when disposing of such securities. Restricted Securities in
which the Trust may invest cannot be sold except in a public
offering registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to an exemption thereunder or in
compliance with applicable regulations of the Securities and
Exchange Commission.
Foreign Securities The Trust may invest up to 20% of its net assets in securities of
foreign issuers, expected to be located primarily in Western
Europe, Canada and Japan, and securities of United States ("U.S.")
issuers traded in foreign markets ("Foreign Securities"). Foreign
Securities may be less liquid and have prices that are more
volatile than securities of comparable U.S. companies. An
investment in Foreign Securities may also involve currency risk.
Discount from NAV The Trust's Shares may trade at a discount to NAV. This is a risk
separate and distinct from the risk that the Trust's NAV will
decrease.
Declaration of Trust Certain provisions of the Trust's Declaration of Trust may be
regarded as "anti-takeover" provisions because they could have the
effect of limiting the ability of other entities or persons to
acquire control of the Trust.
</TABLE>
7
<PAGE>
TRUST EXPENSES
The following estimated table is intended to assist Trust investors in
understanding the various costs and expenses associated with investing in the
Trust through the exercise of Rights.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription
Price) (1) 3.50 %
Dividend Reinvestment Plan Fees None
Annual Expenses (as a percentage of average net
assets attributable to Shares) (2)
Advisory Fee 1.375%
Other Operating Expenses .225%
-----
Total Annual Expenses (3) 1.600%
=====
</TABLE>
- -------------
(1) In connection with the Offer, the Trust has agreed to pay the Dealer
Manager (as defined herein) a fee for its financial advisory, marketing
and solicitation services equal to 3.50% of the aggregate Subscription
Price for the Shares issued pursuant to the Offer and to reimburse the
Dealer Manager for out-of-pocket expenses up to $150,000. The Dealer
Manager will reallow to certain broker-dealers a concession of 2.25% of
the Subscription Price Per Share for Shares issued pursuant to the Offer.
In addition, the Trust has agreed to pay a fee to the Subscription Agent
and the Information Agent estimated to be $10,000 and $22,000,
respectively, which includes reimbursement for their out-of-pocket
expenses related to the Offer. These fees and expenses will be borne by
the Trust and indirectly by all of the Trust's Shareholders, including
those who do not exercise their Rights. See "Distribution Arrangements."
(2) Fees payable under the Advisory Agreement (as defined herein) are
calculated on the basis of the Trust's total assets. The advisory fee
shown above assumes the maximum allowable advisory fee under the Advisory
Agreement. "Other Expenses" has been estimated for the current fiscal
year.
(3) The estimated 1.60% expense ratio assumes that the Offer is fully
subscribed, yielding estimated net proceeds of approximately $36,070,709
(assuming a Subscription Price of $17.67 per Share) and that, as a
result, based on the Trust's net assets attributable to Shareholders on
February 7, 1997 of $142,789,123, the net assets attributable to
Shareholders would be $178,859,832.
Hypothetical Example
An investor would directly or indirectly pay the following expense on a
$1,000 investment in the Trust, assuming a 5% annual return:
One Year Three Years Five Years Ten Years
$16 $50 $85 $186
This hypothetical example assumes that all dividends and other
distributions are reinvested at NAV and that the percentage amounts listed
under Annual Expenses above remain the same in the years shown. See also Note
(3) above for assumptions made in calculating the expenses in this
hypothetical example. The above tables and the assumption in the hypothetical
example of a 5% annual return are required by regulation of the Securities
and Exchange Commission (the "Commission") applicable to all investment
companies; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Trust's Shares. For
more complete descriptions of certain of the Trust's costs and expenses, see
"Investment Adviser."
This hypothetical example should not be considered a representation of
past or future expenses, and the Trust's actual expenses may be more or less
than those shown.
8
<PAGE>
FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE
Financial Highlights
The following information has been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report included elsewhere
in this Prospectus and should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus.
H&Q HEALTHCARE INVESTORS
FINANCIAL HIGHLIGHTS
(Selected data for each Share outstanding throughout the period indicated)
<TABLE>
<CAPTION>
For the years ended September 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value per share:
Beginning of period $21.818 $ 16.609 $ 17.604 $ 17.340 $ 19.207
Net investment income (loss) ($0.331) ($0.228) ($0.199) ($0.190) ($0.076)
Net realized and unrealized gain (loss)
on investments 5.487 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 $5.156 $5.209 ($0.995) $0.264 ($0.907)
------- ------- ------- ------- -------
Distribution to shareholders
Short-term capital gains -- -- -- -- ($0.040)
Long-term capital gains ($1.220) -- -- -- (0.920)
------- ------- ------- ------- -------
Total distributions ($1.220) -- -- -- ($0.960)
------- ------- ------- ------- -------
Net asset value per share:
End of period $25.754 $21.818 $16.609 $17.604 $17.340
======== =========== =========== =========== ===========
Per share market value:
End of period $20.875 $18.250 $15.125 $18.375 $19.375
Total investment return (a) 22.03% 20.66% (17.69%) (5.16%) 9.43%
Net assets:
End of period $147,552,505 $121,072,675 $92,169,061 $97,690,739 $96,222,175
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses to average
net assets 1.62% 1.76% 1.74% 1.84% 1.72%
Ratio of net investment (loss) to
average net assets (1.44%) (1.31%) (1.13%) (1.06%) (0.38%)
Portfolio turnover rate 22.41% 22.81% 28.10% 28.36% 35.45%
Average commission rate paid per listed
share purchased (a) $.07 N/A N/A N/A N/A
Number of shares outstanding at end of
period 5,729,160 5,549,198 5,549,198 5,549,198 5,539,450
</TABLE>
- -------------
* Annualized.
(a) Average commission rate per share required for fiscal years that began
September 1, 1995, or later; total investment return information not
required for fiscal years 1987 through 1989.
9
<PAGE>
FINANCIAL HIGHLIGHTS
(continued)
<TABLE>
<CAPTION>
For the period
April 22, 1987
(commencement
of operation)
to
For the years ended September 30, September 30,
--------------------------------------------
1991 1990 1989 1988 1987
----------- --------- --------- ----------- ---------------
<S> <C> <C> <C> <C>
Net asset value per share:
Beginning of period $11.313 $10.647 $8.036 $9.450 $9.250
Net investment income (loss) ($0.014) $0.014 $0.003 ($0.019) $0.030
Net realized and unrealized gain (loss) on
investments 8.743 0.652 2.608 (1.375) 0.170
Federal income taxes on retained long-term
capital gains -- -- -- -- --
-------- -------- -------- -------- --------
Total increase (decrease) from investment
operations $8.729 $0.666 $2.611 ($1.394) $0.200
-------- -------- -------- -------- --------
Distribution to shareholders
Short-term capital gains ($0.055) -- -- -- --
Long-term capital gains (0.780) -- -- ($0.020) --
-------- -------- -------- -------- --------
Total distributions ($0.835) -- -- ($0.020) --
-------- -------- -------- -------- --------
Net asset value per share:
End of period $19.207 $11.313 $10.647 $8.036 $9.450
=========== ========= ========= =========== ===============
Per share market value:
End of period $18.375 $9.250 $9.750 $6.375 $5.625
Total investment return (a) 113.06% 1.37% N/A N/A N/A
Net assets:
End of period $106,396,527 $62,661,275 $58,974,336 $44,515,399 $52,366,673
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses to average net
assets 1.73% 1.74% 1.89% 1.98% 1.83%*
Ratio of net investment (loss) to average net
assets (0.10%) 0.12% 0.02% (0.25%) 0.74%*
Portfolio turnover rate 23.04% 47.02% 46.90% 57.42% 17.34%*
Average commission rate paid per listed share
purchased (a) N/A N/A N/A N/A N/A
Number of shares outstanding at end of period 5,539,450 5,539,450 5,539,450 5,539,450 5,539,450
</TABLE>
- -------------
* Annualized.
(a) Average commission rate per share required for fiscal years that began
September 1, 1995, or later; total investment return information not
required for fiscal years 1987 through 1989.
10
<PAGE>
Portfolio Characteristics
A substantial portion of the Trust's investment portfolio consists of
venture capital and private equity investments. As of December 31, 1996,
30.7% of the Trust's assets were invested in Restricted Securities of 31
Healthcare Companies, 16 of which were publicly-traded. The Trust continues
to value these securities below current market prices as they remain
restricted as to resale.
From inception, the Trust has made 131 venture capital investments in 56
private companies and 9 private placements in public companies. There have
been 34 initial public offerings and 3 acquisitions of restricted portfolio
companies as of December 31, 1996.
The following sets forth certain information with respect to the
composition of the Trust's investment portfolio.
The Trust's Portfolio
(as of December 31, 1996)
The following table sets forth the Trust's ten largest holdings as a
percentage of net assets.
The Trust's Portfolio
(as of December 31, 1996)
[Tabular representation of bar chart]
Restricted Unrestricted
LIQUID ASSETS 0.00% 1.16%
MANAGED CARE 0.00% 4.24%
AGRI/ENVIRO 0.78% 5.46%
PHARMACEUTICALS 0.46% 7.20%
CROs 1.67% 7.77%
DIAGNOSTICS 6.72% 3.62%
MEDICAL SPECIALTY 5.36% 5.82%
MEDICAL SUPPLIES 4.54% 7.61%
BIOTECHNOLOGY 11.14% 26.45%
The following table sets forth the Trust's ten largest holdings as a
percentage of net assets.
The Trust's Ten Largest Holdings
(as of December 31, 1996)
<TABLE>
<CAPTION>
% of Net Assets
----------------
<S> <C>
Martek Biosciences* 6.91%
Quintiles Transnational 5.46%
Vivus* 5.16%
IBAH* 3.98%
Cytyc* 3.54%
IDEXX Laboratories* 2.88%
Vencor 2.79%
SEQUUS Pharmaceuticals* 2.76%
INCYTE Pharmaceuticals 2.57%
Spiros Development* 2.54%
------
Total 38.59%
</TABLE>
*These securities were Restricted Securities when initially purchased by the
Trust.
11
<PAGE>
As of December 31, 1996, seven of the Trust's ten largest holdings were
originally venture capital investments. This portion of the Trust's
investment portfolio has historically outperformed the Trust's overall
portfolio as measured by NAV total return. Through December 31, 1996, the
internal rate of return as calculated by the Investment Adviser for the
restricted portfolio has been 20.3% per year before fees and 18.9% per year
after allocated advisory fees since inception. The preceding rate of return
information represents past performance only, was derived during a period of
generally rising securities prices, and is not a guarantee of future
performance. Shareholders of the Trust may experience gain or loss as a
result of the price performance of Shares of the Trust, which in turn is
materially affected by the performance of the entire portfolio, not just the
Restricted Securities portion of the portfolio. There can be no guarantee
that the Investment Adviser will invest the Trust's assets in successful
Restricted Securities investments.
Share Price and NAV
The Trust's Shares are publicly held and have been listed and are trading
on the NYSE. The average weekly trading volume of the outstanding Shares of
the Trust for the calendar year ended December 31, 1996 was 77,985. Shares of
the Trust have frequently traded at a discount to NAV but have occasionally
traded at a premium to NAV. There can be no assurance that Shares will trade
at premium to NAV in the future. The following table sets forth for the
quarters indicated the high and low closing prices per Share on the NYSE, the
corresponding NAV, the percentage premium or discount at such closing prices,
and the number of Shares traded. See the cover page of this Prospectus for
the NAV and the last reported sales price per Share on the NYSE as of the
date of this Prospectus.
<TABLE>
<CAPTION>
Market Market
Price Corresponding Premium/ Price Corresponding Premium/
Fiscal (Sept.) (1) Net Asset (Discount) (1) Net Asset (Discount) Trading
Quarter High Value (2) (2) Low Value (2) (2) Volume
------------------ ----------------------- ------------ -------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
First Quarter $15.25 $16.55 (7.85)% $12.88 $15.47 (16.77)% 672,800
Second Quarter 15.00 16.84 (10.93) 13.38 15.98 (16.30) 561,500
Third Quarter 15.63 17.38 (10.10) 13.88 17.01 (18.43) 592,600
Fourth Quarter 18.88 21.62 (12.70) 15.25 18.50 (17.57) 674,000
1996
First Quarter 20.50 23.10 (11.26) 16.88 20.37 (17.16) 622,600
Second Quarter 23.88 26.24 (9.01) 20.00 23.39 (14.49) 796,600
Third Quarter 23.63 28.84 (18.08) 20.25 24.98 (18.94) 711,900
Fourth Quarter 21.75 26.77 (18.75) 17.63 21.77 (19.04) 780,900
1997
First Quarter (3) 21.13 26.35 (19.83) 15.88 18.85 (15.78) 1,765,800
</TABLE>
- -------------
(1) As reported by the NYSE.
(2) Based on the Trust's computations, on the day that the high or low market
price was recorded.
(3) Not adjusted for long-term capital gains distribution of $4.49 per share.
12
<PAGE>
Investment
Performance
Total Return of the Trust. Since the Trust's first full month of
operations, the Trust's Share price and NAV have increased at an annualized
rate of 10.7% and 13.0%, respectively, through December 31, 1996. The
following two charts compare the historical total return of the Trust as
measured by changes in Share price and NAV, with changes in the Dow Jones
Medical and Biotechnology Index. The charts reflect the reinvestment of
dividends and capital gains and do not incorporate shareholder transaction
costs.
H&Q Healthcare Investors Stock Price
v. Dow Jones Medical and Biotechnology Index
(from April 30, 1987 to December 31, 1996)
[HQH Stock Price Line Chart]
"HQH Stock "Dow Jones Medical and
Price(1)" Biotechnology Index(2)"
30-Apr-87 100 100
84.6 102.9
84.6 99.6
89.7 99.1
84.6 100.1
30-Sep-87 79.5 98.2
61.5 69.9
51.3 65.3
57.9 77.1
63 79.9
29-Feb-88 68.2 81.8
70.7 79.9
66.9 70.5
65.6 66.9
68.2 69.4
31-Jul-88 68.2 65.8
64.3 63.3
66.9 62.5
66.9 61.1
60.4 59.2
31-Dec-88 65.6 62.1
68.2 66.8
65.6 68.1
72 72.9
77.2 76.2
31-May-89 79.7 79.3
75.9 77.1
82.3 83.8
82.3 82.9
93.9 88.3
31-Oct-89 88.7 92.4
96.4 95.7
100.3 92
95.2 88.1
92.6 94
31-Mar-90 97.7 98.3
93.9 99.5
105.4 114.8
118.3 123.4
117 108.3
31-Aug-90 101.6 101.9
95.2 94
96.4 91.5
111.9 110.2
121.3 109.6
31-Jan-91 126.8 125
151.7 150.3
177.9 168.7
169.6 156.9
175.1 170.2
30-Jun-91 166.8 162
173.7 178
188.9 183.5
201.3 197.7
224.7 211.3
30-Nov-91 228.9 207.5
294.8 246.8
309.1 222.5
293.3 195.9
270.4 181.6
30-Apr-92 227.5 152.8
237.5 167.2
226.1 165.6
257.6 170.2
236.1 157.7
30-Sep-92 217.5 151.5
224.6 158.1
236.1 176.8
217.5 178
206 149.6
28-Feb-93 207.5 127.2
197.5 127.6
200.3 124.1
206 128.1
197.5 132.7
31-Jul-93 193.2 131.6
201.8 131.8
210.3 141
217.5 153.6
198.9 153.6
31-Dec-93 200.3 155.8
218.9 165.4
204.6 150.6
193.2 142.2
180.3 140.9
31-May-94 180.3 148.5
163.1 141.6
160.3 149.9
178.9 168.6
173.1 176.4
31-Oct-94 156 174.5
160.3 176.9
157.4 179.4
164.5 185.1
163.1 184.6
31-Mar-95 158.8 186.8
166 185.2
164.5 183
176 193.7
190.3 199
31-Aug-95 206 208.6
208.9 216.2
207.5 213.1
207.6 227
248.8 254.2
31-Jan-96 276.3 267.6
274.8 264.2
259.5 259
270.2 264.3
283.9 263.7
30-Jun-96 264.1 245.6
232 236.8
247.3 249.2
254.9 273.5
235.1 271.2
30-Nov-96 252.6 277.1
31-Dec-96 267.8% 281.9%
H&Q Healthcare Investors Net Asset Value
v. Dow Jones Medical and Biotechnology Index
(from April 30, 1987 to December 31, 1996)
[HQH Net Asset Value Line Chart]
"HQH Net Asset "Dow Jones Medical and
Value(1)" Biotechnology Index(2)"
30-Apr-87 100 100
99.5 102.9
103 99.6
103.1 99.1
104.1 100.1
30-Sep-87 100.8 98.2
76 69.9
74.7 65.3
78.9 77.1
84.3 79.9
29-Feb-88 87.2 81.8
89.1 79.9
87.7 70.5
83.8 66.9
88.4 69.4
31-Jul-88 87.1 65.8
83.7 63.3
87.2 62.5
86.6 61.1
80.2 59.2
31-Dec-88 85.1 62.1
88.5 66.8
87.9 68.1
93.7 72.9
97.8 76.2
31-May-89 102.1 79.3
95.9 77.1
106.2 83.8
109.2 82.9
115.5 88.3
31-Oct-89 113.5 92.4
119.6 95.7
121.7 92
113.1 88.1
113.5 94
31-Mar-90 118 98.3
115.9 99.5
129.6 114.8
138.5 123.4
140.9 108.3
31-Aug-90 128.8 101.9
122.6 94
122.4 91.5
134.8 110.2
142.9 109.6
31-Jan-91 146.3 125
174.6 150.3
191 168.7
186.4 156.9
194.6 170.2
30-Jun-91 182.7 162
195.8 178
213.6 183.5
221.5 197.7
230.3 211.3
30-Nov-91 236.2 207.5
276.7 246.8
285 222.5
260 195.9
245.2 181.6
30-Apr-92 212.7 152.8
230.2 167.2
211.4 165.6
241.4 170.2
224.5 157.7
30-Sep-92 223 151.5
216.3 158.1
235.3 176.8
245.8 178
235.5 149.6
28-Feb-93 206.6 127.2
200.8 127.6
201.7 124.1
211.1 128.1
207.5 132.7
31-Jul-93 205.7 131.6
207.5 131.8
212.2 141
224.5 153.6
224.4 153.6
31-Dec-93 226.2 155.8
239.1 165.4
225.9 150.6
209.2 142.2
205.4 140.9
31-May-94 204.5 148.5
195.3 141.6
190.6 149.9
210.1 168.6
200.4 176.4
31-Oct-94 195.6 174.5
190 176.9
189.9 179.4
199.4 185.1
203.5 184.6
31-Mar-95 206.3 186.8
202.6 185.2
205.1 183
216.7 193.7
235.8 199
31-Aug-95 254.6 208.6
263.3 216.2
263.3 213.1
268.4 227
303.1 254.2
31-Jan-96 336.7 267.6
338.2 264.2
339.8 259
351.9 264.3
368.8 263.7
30-Jun-96 338.8 245.6
300.4 236.8
315.9 249.2
331.5 273.5
303.1 271.2
30-Nov-96 318.9 277.1
31-Dec-96 324.5% 281.9%
- -------------
- -------------
(1) Source: CDA/Weisenberger, reflects reinvestment of dividends.
(2) Source: IDD Information Services/Tradeline, reflects reinvestment of
dividends.
The preceding tables represent past performance only, were derived during
a period of generally rising securities prices, and are not a guarantee of
future performance.
13
<PAGE>
THE OFFER
Terms of the Offer
The Trust is issuing to its Shareholders non-transferable Rights to
subscribe for an aggregate of 2,115,336 Shares, at the rate of one Share for
each three Rights held. Shareholders will receive one non-transferable Right
for each Share held. Rights may be exercised at any time during the
Subscription Period, which commences on February 10, 1997 and ends at 5:00
p.m. New York City time, on March 5, 1997. Fractional Shares will not be
issued upon the exercise of Rights. The Rights are non-transferable.
Therefore, only the underlying Shares will be listed for trading on the NYSE
or any other exchange.
In addition, any Shareholder who fully exercises all Rights issued to him
or her is entitled to subscribe for Shares which were not otherwise
subscribed for by others on the Primary Subscription. For purposes of
determining the number of Shares a Shareholder may acquire pursuant to the
Offer, broker-dealers whose Shares are held of record by Cede & Co., Inc.
("Cede"), nominee for the Depository Trust Company, or by any other
depository or nominee, will be deemed to be the holders of the Rights that
are issued to Cede or such other depository or nominee on their behalf.
Shares acquired pursuant to the Over-Subscription Privilege are subject to
allotment, which is more fully discussed under "The Offer--Over-Subscription
Privilege."
The Rights will be evidenced by Exercise Forms which will be mailed to
Shareholders. Rights may be exercised by completing an Exercise Form and
delivering it, together with payment by means of (i) a check or money order
or (ii) a Notice of Guaranteed Delivery to the Subscription Agent during the
Subscription Period. The method by which Rights may be exercised and Shares
paid for is set forth below in "Exercise of Rights" and "Payment for Shares."
Purpose of the Offer
The Board of Trustees of the Trust (the "Board") has determined that it is
in the best interests of the Trust and its Shareholders to increase the
assets of the Trust available for investment through the Offer, so that the
Trust will be in a better position to more fully take advantage of available
investment opportunities in Healthcare Companies, particularly venture
capital investments in biotechnology and other innovative medical technology
companies. The Board was informed by the Investment Adviser that many high
quality venture capital investment opportunities were becoming available, and
that Shareholders could potentially realize significant benefits from
increased investment in venture capital securities, as well as other
investments in Healthcare Companies. The Board also reviewed data suggesting
that increased asset size would favorably affect the Trust's expense ratio.
The Board unanimously approved the Offer and concluded that increasing the
assets of the Trust through the Offer would be beneficial to the Trust and
its Shareholders. However, there can be no assurance that the anticipated
benefits discussed herein will occur as a result of increasing the assets of
the Trust through the Offer. In determining that the initiation of the Offer
and the proposed terms of the Offer were in the best interest of
Shareholders, the Board considered a variety of factors, including those set
forth below:
Recent Developments in Certain Healthcare Sectors. While the healthcare
industries as a whole have undergone substantial transformation during the
past decade thereby creating a degree of investment uncertainty, the
Investment Adviser believes that recent events in specific industries,
particularly in the biotechnology and medical technology industries, provide
the Trust with a significant investment opportunity. Recent advances in
computer technologies have provided researchers with an ability to
substantially reduce product research and development costs, thereby
providing a more efficient means of evaluating the feasibility of a new
therapeutic product or device. Increased development in the biotechnology and
medical technology industries has, in part, resulted in an increase in the
current pipeline of new healthcare products. The Investment Adviser estimates
that more than 15 therapeutic products for a variety of diseases have
completed human clinical trials and are awaiting FDA marketing approval, that
there are approximately 140 products in late stage (Phase III) human clinical
trials and that over 1,000 products are in earlier stage trials and
pre-clinical development. Although extensive cost containment measures
proposed by the U.S. Executive Branch in 1994 failed to win Legislative
support, cost containment measures remain an active part of both national and
local legislative agendas. The Investment Adviser believes that Healthcare
Companies which provide products and services of comparable quality to, but
at a lower cost than, existing products and services provide favorable
investment opportunities. The Investment Adviser believes that biotechnology
and other innovative medical technology companies may be currently valued at
prices
14
<PAGE>
which do not reflect the prospects for such companies. The Trust will use the
net proceeds from the Offer to capitalize on such investment opportunities.
Increased Investment Size. The Investment Adviser believes that larger
investments by the Trust provide additional negotiating leverage and pricing
influence over venture capital and other private equity investments. With an
increased asset base through the Offer, the Trust will be able to make
investments of the size necessary to achieve more favorable investment terms.
Additional Investments. In order to take advantage of new investment
opportunities in the healthcare industries without the Offer, the Trust would
be required to sell a portion of its existing investments which would incur
transaction costs and may result in a realization of significant capital
gains or otherwise take place at a time when the investment sold may not have
fully achieved the Trust's investment objective for it. The Offer provides
the Trust with the ability to both capitalize on new investment opportunities
and maintain its investment in existing assets.
Opportunity to Purchase Below Market Price and NAV. The Offer affords
existing Shareholders the opportunity to purchase additional Shares at a
price that will be below market value and NAV at the Expiration Date.
However, Shareholders who do not fully exercise their Rights will own, upon
completion of the Offer, a smaller proportional interest in the Trust than
they owned prior to the Offer.
Reduction in Operating Costs Per Share. The Board was advised by the
Investment Adviser that the Trust could potentially achieve additional
economies of scale as a result of an increase in total assets. The Investment
Adviser believes that the increase in assets from the Offer will reduce the
Trust's expenses as a percentage of average net assets per Share.
Over-Subscription Privilege
If some Shareholders do not exercise all of the Rights initially issued to
them in the Primary Subscription, such Shares which have not been subscribed
for will be offered, by means of the Over-Subscription Privilege, to
Shareholders who have exercised all the Rights initially issued to them and
who wish to acquire more than the number of Shares for which the Rights
issued to them are exercisable. Shareholders who exercise all the Rights
initially issued to them will be asked to indicate, on the Exercise Form
which they submit with respect to the exercise of the Rights, how many Shares
they are willing to acquire pursuant to the Over-Subscription Privilege. The
Trust may, at its discretion, issue up to an additional 25% of the Shares in
the Offer to honor over-subscription requests if sufficient Shares are not
available from the Primary Subscription to honor all over-subscriptions. If
sufficient Shares remain, all over-subscriptions will be honored in full. If
sufficient Shares are not available to honor all over- subscriptions, the
available Shares will be allocated among those who over-subscribe based on
the number of Rights originally issued to them by the Trust, so that the
number of Shares issued to Shareholders who subscribe pursuant to the
Over-Subscription Privilege will generally be in proportion to the number of
Shares owned by them in the Trust on the Record Date. The allocation process
may involve a series of allocations in order to assure that the total number
of Shares available for over-subscriptions is distributed on a pro-rata
basis.
The Subscription Price
The Subscription Price per Share will be 95% of the lower of (a) the
average of the last reported sales price of a Share on the NYSE on March 5,
1997 and the four preceding business days OR (b) the NAV as of the Pricing
Date.
The Trust announced the Offer after the close of trading on the NYSE on
January 3, 1997. The NAV at the close of business on January 3, 1997 and
February 7, 1997 was $20.46 and $22.50, respectively, and the last reported
sales price of a Share on such Exchange on those dates was $17.375 and $18.00,
respectively. Since the Expiration Date is the same day as the Pricing Date,
Shareholders who decide to acquire Shares on the Primary Subscription or
pursuant to the Over-Subscription Privilege will not know the purchase price
for such Shares when they make such decision. Information about the Trust's
NAV may be obtained by calling (800) 451-2597.
15
<PAGE>
Expiration of the Offer
Rights will expire on the Expiration Date and thereafter may not be
exercised, unless the Offer is extended.
Any extension, termination, or amendment will be followed as promptly as
practical by announcement thereof, such announcement in the case of an
extension to be issued no later than 9:00 a.m., New York City time, on the
next business day following the previously scheduled Expiration Date. The
Trust will not, unless otherwise obligated by law, have any obligation to
publish, advertise, or otherwise communicate any such announcement other than
by making a release to the Dow Jones News Service or such other means of
announcement as the Trust deems appropriate.
Subscription Agent
The Subscription Agent is State Street Bank and Trust Company, 225
Franklin Street, Concourse Level, Boston, MA 02110, which will receive, for
its administrative, processing, invoicing and other services as Subscription
Agent, a fee estimated to be $10,000, which includes reimbursement for all
out-of-pocket expenses related to the Offer. The Subscription Agent is also
the Trust's Custodian, Dividend Paying Agent, Transfer Agent and Registrar
with respect to the Shares. Shareholder questions or inquiries should be
directed to State Street Bank and Trust Company, P.O. Box 8200, Boston, MA
02266-8200, telephone (800) 426-5523. SIGNED EXERCISE FORMS SHOULD BE SENT TO
STATE STREET BANK AND TRUST COMPANY, by one of the methods described below:
<TABLE>
<CAPTION>
Exercise Form
Delivery Method Address/Number
- ------------------------------- ----------------------------------------------------------
<S> <C>
By Mail State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, MA 02205-8686
By Hand State Street Bank and Trust Company
225 Franklin Street, Concourse Level
Boston, MA 02110
or
Securities Transfer and Reporting Services
55 Broadway, Concourse Level
New York, NY 10006
By Overnight Courier State Street Bank and Trust Company
or Express Mail 2 Heritage Drive
North Quincy, MA 02171
Attn: Corp. Reorg.
By Broker-Dealer or other Shareholders whose Shares are held in a brokerage, bank or trust
Nominee account may contact their broker or other nominee and instruct
(Notice of Guaranteed them to submit a Notice of Guaranteed Delivery and Payment on
Delivery) their behalf.
</TABLE>
Delivery to an address other than as set forth above does not constitute a
valid delivery.
Information Agent
Any questions or requests for assistance may be directed to the
Information Agent at its telephone number and address listed below:
Shareholder Communications Corporation
17 State Street
New York, NY 10004
Call Toll Free: (800) 733-8481, Ext. 352
or
Call Collect: (212) 805-7000
16
<PAGE>
The Information Agent will receive a fee estimated to be approximately
$22,000, which includes reimbursement for all out-of-pocket expenses related
to the Offer.
Exercise of Rights
Rights may be exercised by completing and signing the reverse side of the
Exercise Form which accompanies this Prospectus and mailing it in the
envelope provided, or otherwise delivering the completed and signed Exercise
Form to the Subscription Agent, together with payment for the Shares as
described below under "Payment for Shares." Completed Exercise Forms and
related payments must be received by the Subscription Agent prior to 5:00
p.m. New York City time on or before the Expiration Date (unless payment is
effected by means of a Notice of Guaranteed Delivery as described below under
"Payment for Shares") at the offices of the Subscription Agent at the address
set forth above. A Shareholder who exercises Rights pursuant to the Primary
Subscription is hereinafter referred to as an "Exercising Shareholder."
Rights may also be exercised through an Exercising Shareholder's broker, who
may charge such Exercising Shareholder a servicing fee.
Shareholders who are issued fewer than three Rights or Exercising
Shareholders who hold fewer than three Rights or who, upon exercising their
Rights, are left with fewer than three Rights will not be able to exercise
such Rights to purchase an additional Share, respectively, as described under
"The Offer--Terms of the Offer and Over-Subscription." In addition,
Shareholders who are issued fewer than three Rights or for whom there is not
a current address ("stop mail" accounts) will not be mailed this Prospectus
or other subscription materials.
Exercising Shareholders Who Are Record Owners. Exercising Shareholders may
choose between either option set forth under "Payment for Shares" below. If
time is of the essence, option (2) will permit delivery of the Exercise Form
and payment after the Expiration Date.
Investors Whose Shares are Held By A Broker-Dealer or Other Nominee.
Exercising Shareholders whose Shares are held by a nominee such as a
broker-dealer, bank or trust company must contact the nominee to exercise
their Rights. In that case, the nominee will complete the Exercise Form on
behalf of the Exercising Shareholder and arrange for proper payment by one of
the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold Shares for the account of others should notify
the respective beneficial owners of such Shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to exercising the Rights. If the beneficial owner so instructs, the
nominee should complete the Exercise Form and submit it to the Subscription
Agent with the proper payment described under "Payment for Shares" below.
All questions as to the validity, form, eligibility (including times of
receipt and matters pertaining to beneficial ownership) and the acceptance of
subscription forms and the Subscription Price will be determined by the
Trust, which determinations will be final and binding. No alternative,
conditional or contingent subscriptions will be accepted. The Trust reserves
the absolute right to reject any or all subscriptions not properly submitted
or the acceptance of which would, in the opinion of the Trust's counsel, be
unlawful. The Trust also reserves the right to waive any irregularities or
conditions, and the Trust's interpretations of the terms and conditions of
the Offer shall be final and binding. Any irregularities in connection with
subscriptions must be cured within such time as the Trust shall determine
unless waived. Neither the Trust nor the Subscription Agent shall be under
any duty to give notification of defects in such subscriptions or incur any
liability for failure to give such notification. Subscriptions will not be
deemed to have been made until such irregularities have been cured or waived.
Payment for Shares
Exercising Shareholders may exercise their Rights and pay for Shares
subscribed for pursuant to the Primary Subscription and Over-Subscription
Privilege in one of the following ways:
(1) Deliver Exercise Form and Payment to the Subscription Agent by the
Expiration Date:
Exercising Shareholders may deliver to the Subscription Agent at any of
the offices set forth above on page 16 (i) a completed and executed Exercise
Form indicating the number of Rights they have been issued and the number of
Shares they are acquiring pursuant to the Primary Subscription, as well as
the number of any additional Shares they would like to subscribe for under
the Over-Subscription Privilege and (ii) payment for all such ordered Shares
based on the Estimated Subscription Price of $17.67 per Share, both no
later than 5:00 p.m., New York City time, on the Expiration Date.
17
<PAGE>
The Subscription Agent will deposit all checks received by it for the
purchase of Shares into a segregated interest bearing account of the Trust
(the interest from which will belong to the Trust) pending proration and
distribution of Shares.
A PAYMENT PURSUANT TO THIS METHOD (1) MUST BE IN U.S. DOLLARS BY MONEY
ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE U.S., (2) MUST BE PAYABLE TO
"H&Q HEALTHCARE INVESTORS" AND (3) MUST ACCOMPANY AN EXECUTED EXERCISE FORM
FOR SUCH SUBSCRIPTION TO BE ACCEPTED. THIRD (OR MULTIPLE) PARTY CHECKS WILL
NOT BE ACCEPTED.
(2) Contact Your Broker, Bank or Trust Company to Deliver Notice of
Guaranteed Delivery to the Subscription Agent by the Expiration Date:
Exercising Shareholders may request a NYSE or National Association of
Securities Dealers, Inc. member, bank or trust company (each a "nominee") to
execute a Notice of Guaranteed Delivery (or equivalent electronic
information) and deliver it, by facsimile or otherwise, to the Subscription
Agent by 5:00 p.m., New York City time, on the Expiration Date indicating (i)
the number of Rights they wish to exercise, the number of Primary
Subscription Shares they wish to acquire, and the number of Over-Subscription
Privilege Shares for which they wish to subscribe and (ii) guaranteeing
delivery of payment and a completed Exercise Form from such Exercising
Shareholder by March 10, 1997. Exercising Shareholders must arrange for
payment to the nominee, who will in turn submit the Exercise Form and payment
on their behalf by March 5, 1997. The Subscription Agent will not honor a
Notice of Guaranteed Delivery unless the completed Exercise Form and full
payment are received by March 10, 1997.
On March 18, 1997 (the "Confirmation Date"), the Subscription Agent will
send a confirmation to each Exercising Shareholder (or, if the Shares are
held by a depository or other nominee, to such depository or other nominee),
showing (i) the number of Shares acquired pursuant to the Primary
Subscription, (ii) the number of Shares, if any, acquired pursuant to the
Over-Subscription Privilege, (iii) the per Share and total purchase price for
the Shares, and (iv) any additional amount payable by such Exercising
Shareholder to the Trust or any excess to be refunded by the Trust to such
Exercising Shareholder in each case based upon the final Subscription Price.
Any additional payment required from an Exercising Shareholder must be
received by the Subscription Agent by April 4, 1997 (the "Final Payment
Date"). Any excess payment to be refunded by the Trust to an Exercising
Shareholder will be mailed by the Subscription Agent to the holder as
promptly as practicable after the Final Payment Date.
Issuance and delivery of certificates for the Shares purchased are subject
to actual collection of checks and actual payment pursuant to any Notice of
Guaranteed Delivery.
If an Exercising Shareholder does not make payment of any additional
amounts due, the Trust reserves the right to take any or all of the following
actions: (i) apply any payment received by it toward the purchase of the
greatest whole number of Shares which could be acquired by such Exercising
Shareholder upon exercise of the Primary Subscription and/or
Over-Subscription Privilege based on the amount of such payment; (ii)
allocate the Shares subject to subscription rights to one or more other
Shareholders; (iii) sell all or a portion of the Shares deliverable upon
exercise of subscription rights on the open market and apply the proceeds
thereof to the amount owed; and/or (iv) exercise any and all other rights or
remedies to which it may be entitled, including, without limitation, the
right to set-off against payments actually received by it with respect to
such subscribed Shares.
An Exercising Shareholder will not have the right to cancel the exercise
of Rights or rescind a purchase after the Subscription Agent has received
payment, either by means of a Notice of Guaranteed Delivery or a check or
money order, except as described under "The Offer--Notice of NAV Decline."
The risk of delivery of subscription forms and payments to the
Subscription Agent will be borne by the Exercising Shareholder and not the
Trust, the Dealer Manager, the Subscription Agent, the Information Agent or
broker-dealers designated by the Dealer Manager. If the mail is used to
exercise Rights, insured registered mail is recommended.
Notice of NAV Decline
The Trust will suspend the Offer until it amends this Prospectus if,
subsequent to the effective date of this Prospectus, the Trust's NAV declines
more than 10% from its NAV as of that date. In such event, the Trust will
notify Shareholders of any such decline and thereby permit them to cancel
their exercise of their Rights.
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Delivery of Stock Certificates
Registered Shareholders who are participants in the Trust's Dividend
Reinvestment Plan (the "Plan") will have any Shares that they acquire
pursuant to the Offer credited to their Shareholder dividend reinvestment
accounts in the Plan. Shareholders whose Shares are held of record by Cede or
by any other depository or nominee on their behalf or their broker-dealers'
behalf will have any Shares that they acquire pursuant to the Offer credited
to the account of Cede or such other depository or nominee. With respect to
all other Shareholders, stock certificates for all Shares acquired pursuant
to the Offer will be mailed after payment for all the Shares subscribed for
has cleared, which clearance may take up to fifteen days from the date of
receipt of the payment.
Employee Plan Considerations
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), profit sharing/retirement plans for
self-employed individuals and Individual Retirement Accounts (collectively,
"Retirement Plans") should be aware that additional contributions of cash to
the Retirement Plan (other than rollover contributions or trustee-to-trustee
transfers from other Retirement Plans) in order to exercise Rights would be
treated as Retirement Plan contributions and therefore, when taken together
with contributions previously made, may be treated as excess or nondeductible
contributions subject to excise taxes. In the case of Retirement Plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), additional cash contributions could cause violations of
the maximum contribution limitations of Section 415 of the Code or other
qualification rules. Retirement Plans in which contributions are so limited
should consider whether there is an additional source of funds available
within the Retirement Plan, including the liquidation of assets, with which
to exercise the Rights. Because the rules governing Retirement Plans are
extensive and complex, Retirement Plans contemplating the exercise of Rights
should consult with their counsel prior to such exercise.
Retirement Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income under Section 511 of the Code. If any portion of an Individual
Retirement Account ("IRA") is used as security for a loan, the portion so
used is treated as a distribution to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the
Code contain prohibited transactions rules that may affect the exercise of
Rights. Due to the complexity of these rules and the penalties for
noncompliance, Retirement Plans should consult with their counsel regarding
the consequences of their exercise of Rights under ERISA and the Code.
Certain Federal Income Tax Consequences of the Offer
The following discussion summarizes the principal federal income tax
consequences of the Offer to Shareholders and Exercising Shareholders. It is
based upon the Code, U.S. Treasury regulations, Internal Revenue Service
rulings and policies and judicial decisions in effect on the date of this
Prospectus. This discussion does not address all federal income tax aspects
of the Offer that may be relevant to a particular Shareholder in light of his
individual circumstances or to Shareholders subject to special treatment
under the Code (such as insurance companies, financial institutions,
tax-exempt entities, dealers in securities, foreign corporations, and persons
who are not citizens or residents of the U.S.), and it does not address any
state, local or foreign tax consequences. Accordingly, each Shareholder
should consult his or her own tax advisor as to the specific tax consequences
of the Offer to him or her. Each Shareholder should also review the
discussion of certain tax considerations affecting the Trust and Shareholders
set forth under "Taxation" below.
For federal income tax purposes, neither the receipt nor the exercise of
the Rights by Shareholders will result in taxable income to those
Shareholders, and no loss will be realized if the Rights expire without
exercise.
A Shareholder's holding period for a Share acquired upon exercise of a
Right begins with the date of exercise. A Shareholder's basis for determining
gain or loss upon the sale of a Share acquired upon the exercise of a Right
will be equal to the sum of the Shareholder's basis in the Right, if any, and
the Subscription Price per Share. The Shareholder's basis in the Right will
be zero unless either (i) the fair market value of the Right on the date of
distribution is 15% or more of the fair market value on such date of the
Shares with respect to which the Right was distributed, or (ii) the
Shareholder elects, on its federal income tax return for the taxable year in
which the Right is received, to allocate part of the basis of such Shares to
the Right. If either of clauses (i) and (ii) is applicable,
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<PAGE>
then if the Right is exercised, the Exercising Shareholder will allocate its
basis in the Shares with respect to which the Right was distributed between
such Shares and the Right in proportion to the fair market values of each on
the date of distribution. A Shareholder's gain or loss recognized upon a sale
of a Share acquired upon the exercise of a Right will be a capital gain or
loss (assuming the Share was held as a capital asset at the time of sale) and
will be a long-term capital gain or loss if the Share was held at the time of
sale for more than one year.
The foregoing is only a summary of the applicable federal income tax laws
presently in effect and does not include any state or local tax consequences
of the Offer. Shareholders should consult their own tax advisers concerning
the tax consequences of this transaction.
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at an estimated Subscription
Price (the "Estimated Subscription Price") of $17.67 per Share, the net
proceeds of the Offer will be approximately $35,702,709, after deducting
commissions and expenses payable by the Trust estimated at approximately
$368,000. The net proceeds of the Offer will be invested in accordance with
the Trust's investment objective and policies. See "Investment Objective and
Policies." Various factors affect investments in emerging growth companies
that are different from factors affecting investments in large well-known
companies, including the additional research required to investigate a large
number of small companies and the volatility and illiquidity of securities of
those companies. Accordingly, initial investment of the proceeds in publicly
traded securities may take place during a period of up to six months
following completion of the Offer, depending on market conditions and the
availability of appropriate securities. Restricted Securities will be
purchased as appropriate opportunities arise, which could take up to one year
or longer, and the Trust may choose to be more fully invested in publicly
traded securities during such period. Pending investment in the securities
described above, the proceeds will be held in obligations of the U.S.
Government, its agencies or instrumentalities ("U.S. Government Securities"),
highly rated money market instruments or mutual funds that invest in such
instruments.
DESCRIPTION OF TRUST
The Trust is a diversified, closed-end management investment company. The
Trust was organized as a Massachusetts business trust on October 31, 1986
pursuant to a Declaration of Trust governed by Massachusetts law and
commenced operations on April 22, 1987. The Trust's principal offices are
located at 50 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328.
The Trust's capitalization consists of an unlimited number of shares of
beneficial interest, $.01 par value. Each Share represents an equal
proportionate beneficial interest in the Trust and, when issued and
outstanding, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Trust, Shareholders will be entitled to share pro rata in
the net assets of the Trust available for distribution. The Trust will send
annual and semi-annual financial statements to Shareholders and may also
issue more abbreviated interim reports to update Shareholders on a quarterly
basis. The Trust will hold annual meetings of its Shareholders in accordance
with the provisions of the Trust's By-laws and the rules of the NYSE.
Shareholders are entitled to one vote for each Share held. The Trust's
Shares do not have cumulative voting rights, which means that the holders of
more than 50% of the Shares of the Trust voting for the election of Trustees
can elect all of the Trustees, and, in such event, the holders of the
remaining Shares will not be able to elect any Trustees. The Trust has a
staggered Board, whereby one class of Trustees is elected each year.
The number of Shares outstanding as of the date of this Prospectus is
6,346,009. Assuming that all Rights are exercised, an additional 2,115,336
Shares will be issued. The Trust may, at its discretion, issue up to an
additional 25% of the Shares in the Offer to honor over-subscription requests
if sufficient Shares are not available from the Primary Subscription to honor
all over-subscriptions.
For information regarding risk factors pertaining to the Trust, see
"Appendix A--Risk Factors and Investment Techniques."
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<PAGE>
INVESTMENT ADVISER
Hambrecht & Quist Capital Management Incorporated, an investment adviser
registered under the Investment Advisers Act of 1940, has served as Investment
Adviser to the Trust since its inception in 1987. The Investment Adviser has,
since 1992, also provided investment advisory services to another closed-end
investment company, H&Q Life Sciences Investors ("HQL"), which invests in
companies in the healthcare industries and related industries such as
agricultural and environmental technology. Alan G. Carr, the President and a
Trustee of the Trust, the President and sole Director of the Investment Adviser,
as well as the President and a Trustee of HQL, is responsible for managing the
Trust's portfolio. Mr. Carr is currently the portfolio manager for the Trust and
HQL, which have aggregate net assets of approximately $265.4 million as of the
date of this Prospectus. Prior to joining the Investment Adviser at its
inception in 1986, Mr. Carr was portfolio manager for three mutual funds, with
aggregate net assets in excess of $300 million, sponsored by Putnam Companies
and dedicated to investment in the healthcare industries. Mr. Carr has been
managing equity portfolios emphasizing investment in emerging growth companies
for over 30 years and portfolios specializing in publicly traded equity
securities of Healthcare Companies, as well as in venture capital opportunities
in the healthcare industries, for the last 15 years.
The Investment Adviser is an indirect wholly-owned subsidiary of Hambrecht
& Quist Group ("Group"), which through various related entities has broad
investment experience in the healthcare industries. Hambrecht & Quist LLC
("H&Q"), an indirect wholly-owned subsidiary of Group, is a registered
broker-dealer that specializes in providing investment research on and
securities brokerage and investment banking services to emerging growth
companies. H&Q has a respected research team dedicated solely to healthcare
industries. Since 1982, H&Q has sponsored a healthcare conference, which is
dedicated to companies in the healthcare industries. At the 1997 Conference,
over 240 such companies made presentations to approximately 3,000
participants. H&Q has major domestic offices in San Francisco, CA; New York,
NY; and Boston, MA and its affiliates have offices in several foreign
countries. Venture capital entities associated with Group have managed
venture capital funds from domestic and international sources since 1970.
While the Investment Adviser has benefited from the information available
to it because of its relationship with Group, the staff of the Investment
Adviser remains responsible for obtaining all necessary information in the
exercise of its due diligence obligations and making independent judgments
with respect to investment decisions. The Investment Adviser is responsible
for the day-to-day operations of the Trust, including selection of the
Trust's portfolio investments.
The Investment Advisory Agreement between the Investment Adviser and the
Trust (the "Advisory Agreement") provides that, subject to the supervision
and direction of the Board, the Investment Adviser is responsible for the
actual management of the Trust's portfolio. The Investment Adviser is also
obligated to supervise or perform certain administrative and management
services for the Trust and is obligated to provide the office space,
facilities, equipment and personnel necessary to perform its duties under the
Advisory Agreement.
For the services provided by the Investment Adviser under the Advisory
Agreement, the Trust will pay a fee, computed and payable monthly, equal when
annualized to (i) 2.5% of the average net assets for such month of its
Restricted Securities (as defined) up to 25% of net assets; and (ii) 1.0% of
the average net assets for such month of all other assets. The aggregate
monthly fee paid to the Investment Adviser may not exceed, when annualized,
1.375% of the Trust's average total net assets for such month (approximately
.115% per month). Because the advisory fee is based on the net assets of the
Trust and since the Offer is expected to result in an increase in net assets,
the Investment Adviser should benefit from the Offer by an increase in the
dollar amount of its fee.
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<PAGE>
TRUSTEES AND OFFICERS
The names, addresses and ages of the Trustees and Officers of the Trust
are set forth below, together with their position and their principal
occupations during the past five years, and, in the case of the Trustees,
their positions with certain other organizations and publicly held companies.
<TABLE>
<CAPTION>
Principal Occupation
Names, Ages and Addresses Position with the Trust and Other Affiliations
- ------------------------- ----------------------- ----------------------
<S> <C> <C>
Alan G. Carr* (62) President and Trustee President and Trustee, H&Q Life Sciences Investors
50 Rowes Wharf (since 1986) ("HQL") (since 1992); President (since 1992), Senior
Boston, MA 02110 Vice President (1986-1992) and sole Director (since
1986), Hambrecht & Quist Capital Management
Incorporated ("HQCM"); and Managing Director,
Hambrecht & Quist Group ("Group") (since 1992).
William R. Hambrecht* (61) Trustee Chairman (since 1992), President (1982-1992), Chief
One Bush Street (since 1994) Executive Officer (1982-1987) and Co-Chief
San Francisco, CA 94104 Executive Officer (1987-1994), Group; Director
(since 1982) of Adobe Systems Inc.; and Trustee,
HQL (since 1994). Beneficial owner of approximately
13% of the voting securities of Group.
Lawrence S. Lewin** (58) Trustee Chairman and Chief Executive Officer (since 1970),
9300 Lee Highway (since 1987) The Lewin Group (a healthcare public policy and
Fairfax, VA 22031 management consulting firm), a subsidiary of
Quintiles Transnational Corp.; Director, Apache
Medical Systems (since 1989); and Trustee, HQL (since
1992).
Robert P. Mack, M.D. (61) Trustee Orthopedic Surgeon, Steadman-Hawkins Orthopedic
Box 7030 (since 1991) Clinic (since 1996); Orthopedic Surgeon, Denver
Avon, CO 81620 Orthopedic Clinic (1977-1996); and Trustee, HQL
(since 1992).
Eric Oddleifson** (61) Trustee Managing Director, UBS Resource Investments (forest
50 South Street (since 1992) and agriculture properties investments) (since
Hingham, MA 02043 1995); President, Director and Chief Executive
Officer, Resource Investments, Inc. (forest and
agriculture properties investments) (1984-1995);
and Trustee, HQL (since 1992).
Uwe E. Reinhardt, Ph.D. (59) Trustee Professor of Economics, Princeton University (since
Woodrow Wilson School (since 1988) 1968); and Trustee, HQL (since 1992).
Princeton University
Princeton, NJ 08544
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<PAGE>
Principal Occupation
Names, Ages and Addresses Position with the Trust and Other Affiliations
- ------------------------- ----------------------- ----------------------
Henri A. Termeer** (50) Trustee Chairman (since 1988), Chief Executive Officer
Genzyme Corporation (since 1989) (since 1985) and President (since 1983), Genzyme
One Kendall Square Corporation (human healthcare products company);
Cambridge, MA 02139 Director, ABIOMED, Inc.(since 1987); Director,
Geltex Pharmaceutical, Inc. (since 1994); Director,
AutoImmune, Inc. (since 1992); Director of Genzyme
Transgenics (since 1993); and Trustee, HQL (since
1992).
Kerri A. Bisner (34) Secretary Vice President (since 1994), Assistant Vice
50 Rowes Wharf (since 1992) President (1991-1994), Research Associate
Boston, MA 02110 (1989-1991), HQCM; and Secretary, HQL (since 1992).
Kimberley L. Carroll (40) Treasurer and Chief Vice President (since 1991) and Assistant Vice
50 Rowes Wharf Financial Officer President (1987-1991), HQCM; and Treasurer and Chief
Boston, MA 02110 (since 1987) and Financial Officer, HQL (since 1992).
Assistant Secretary
(1987-1992)
</TABLE>
- -------------
* Trustee considered to be an "interested person" as defined in Section
2(a)(19) of the Investment Company Act of 1940, as amended, (the
"Investment Company Act") because of his position or affiliation with the
Trust's Investment Adviser or its parent, Group.
** Member of the Trust's Audit Committee.
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
General
The Trust's investment objective is to seek long-term capital appreciation
by investing primarily in Healthcare Companies. The Trust's investment
objective is a fundamental policy and may not be changed without the
affirmative vote of the holders of a majority of the Trust's outstanding
Shares (as defined). For a more detailed description of the Trust's
investment objective and policies see "Additional Information about
Investments and Investment Techniques" and "Investment Restrictions" in the
SAI. For a description of the risks that may be associated with an investment
in the Trust see "Appendix A--Description of Risk Factors and Investment
Techniques."
In an effort to achieve its investment objective, the Trust will invest
primarily in securities of U.S. and foreign companies that are believed by
the Investment Adviser to have significant potential for above-average
long-term growth in revenues and earnings. The Investment Adviser expects
that such companies generally will, in its judgment, possess most of the
following characteristics: current or anticipated strong market position for
their services or products, experienced business management, recognized
technological expertise and the ability either to generate funds internally
to finance growth or to secure outside sources of capital. The Investment
Adviser will attempt to invest in securities that sell at price-earnings
ratios or at multiples of underlying asset values which, relative to other
comparable securities or to the company's growth expectations, do not fully
reflect the company's potential.
The Trust emphasizes investment in securities of emerging growth
Healthcare Companies, some of which may offer limited products or services or
which are at the research and development stage with no marketable or
approved products or technologies. The securities of most emerging growth
Healthcare Companies in which the Trust will invest are expected to be traded
in the over-the-counter market or restricted as to public resale. The Trust
may invest up to 40% of its net assets in Restricted Securities. The Trust
may invest in securities of large, well-known companies with existing
products in the healthcare industries that are believed by the Investment
Adviser to be undervalued in relation to their long-term growth potential or
asset value.
The Trust may invest up to 20% of its net assets in Foreign Securities.
The Trust may buy and sell currencies for the purpose of settlement of
transactions in Foreign Securities, but presently does not intend to engage
in hedging operations.
Under normal market conditions, the Trust will invest at least 80% of its
net assets in securities of companies in the healthcare industries and in no
event will have less than 25% of its net assets so invested. For purposes of
satisfying the foregoing requirements, a company will be deemed to be a
Healthcare Company if, at the time the Trust makes an investment therein, 50%
or more of such company's sales, earnings or assets arise from or are
dedicated to health services or medical technology activities. The Trust may
also invest in companies that do not satisfy the above criteria but that are
expected by the Investment Adviser to have 25% or more of sales, earnings or
assets arising from or dedicated to such activities, but investments in such
companies will not at the time of investment exceed 20% of the Trust's net
assets. Determinations as to whether a company is a Healthcare Company will
be made by the Investment Adviser in its discretion.
The equity and related securities in which the Trust may invest consist of
common stock of Healthcare Companies and, to a lesser extent, of preferred
stock, convertible debt, and warrants or other rights to acquire common or
preferred stocks of such companies. The Trust's investments in venture
capital opportunities will be made primarily in convertible preferred stock.
The Trust may also purchase non-convertible debt securities in connection
with its venture capital investments, and otherwise when the Investment
Adviser believes that such investments would be consistent with the Trust's
investment objective. Because of the risk characteristics associated with
venture capital investments for emerging growth companies, such investments
may be regarded as highly speculative.
Investments will not be made in any company with the objective of
exercising control over that company's management. The Trust may make
investments contemporaneously with other venture capital groups that may
provide issuers with significant managerial assistance.
When, in the opinion of the Investment Adviser, adverse market conditions
or industry expectations support such action, the Trust may, for temporary
defensive purposes, invest up to 75% of its net assets in money market
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<PAGE>
instruments. See "Investment Techniques--Money Market Instruments" in
Appendix A for a description of money market instruments in which the Trust
may invest.
In addition, the Trust may, to a limited degree, enter into when-issued
and delayed delivery transactions, forward foreign currency contracts and
repurchase agreements, and lend its portfolio securities. Under normal market
conditions the Trust does not intend to engage in such practices. See
"Appendix A--Description of Risk Factors and Investment Techniques."
The Trust also has adopted certain other investment restrictions in an
effort to achieve its investment objective. See "Investment Restrictions" in
the Trust's SAI.
Healthcare Industries
Investments in the healthcare industries are likely to continue to be the
principal component of the Trust's portfolio and, except when the Trust
assumes a temporary defensive position, will represent at least 25% of the
Trust's net assets. This predominance reflects the size and diversity of the
healthcare industries.
The healthcare industries constitute a large segment of the U.S. economy.
The U.S. Department of Health and Human Services ("HHS") estimates national
healthcare expenditures in 1995 at 14.2% of U.S. gross domestic product
("GDP"), or $1,008 billion (in current dollars). This constitutes a 7.4%
increase over U.S. healthcare expenditures in 1994. U.S. GDP is a measure of
the total value of all goods and services produced in the U.S. over the
course of a year. HHS expects that the healthcare industries will continue to
grow both in absolute dollars and as a percentage of GDP. HHS estimates that
healthcare expenditures in the U.S. could increase to as much as 15.9% of GDP
in 2000. The Investment Adviser believes that, while the healthcare
industries are undergoing significant change, they serve market sectors that
are generally large and fragmented and growing at above-average rates,
thereby providing potential investment opportunities for the Trust.
Market Forces in Healthcare
Markets for healthcare products and services have undergone significant
growth over the last 25 years. Factors contributing to this growth include
demographic shifts tending to a more elderly population and technological
advances which may lead to therapy, or possibly cures, for the many disease
states for which there are no currently effective treatments. In addition,
the Investment Adviser believes that worldwide consumer awareness and
acceptance of new and innovative healthcare products continues to rise,
stimulating demand, and that the rate of demographic and technological change
may accelerate in the future, causing certain segments of the business to
decline and others to experience growth. Investments in the companies
developing products that benefit from these market forces may present
potentially profitable opportunities.
Demographics. In the United States, persons age 65 and older consume three
to four times more healthcare goods and services than do the rest of the
population. The U.S. Social Security Administration ("SSA") estimates that in
1996, 34 million Americans, or 12.8% of the population, were over age 65
compared to 12.5% in 1990. By 2000, this segment is projected by SSA to grow
to 40 million people in the U.S., or 13.3% of the population.
Technology. Advances in the fields of healthcare, particularly in
biotechnology, diagnostics and electronics, are enhancing medical
applications in existing markets and creating new markets. These advances
have contributed to longevity as well as to an improved quality of life. In
particular, the Investment Adviser believes that diagnostic techniques and
therapeutic products have significantly changed the practice of medicine and
will continue to do so for the foreseeable future. Diagnostic techniques have
become more sophisticated and accurate, as well as less traumatic to the
patient. Therapeutic products have become more effective, can be tailored to
more specialized uses and, as a result of improved diagnostics, can be
employed at an earlier stage of treatment for many diseases. Increasingly,
new therapeutic products are being developed for previously diagnosable
diseases for which no therapy was available, and diagnostics for patients for
which therapy was available, but where patients that might benefit were not
easily identifiable. Scientific discovery has, in recent years, been
materially enhanced by advances in knowledge in the broad field of genomics,
which has in turn been made possible by the ability of enhanced computer
power to handle vast amounts of data and which also permits the
characterization of molecular structure and the design of potentially active
new drugs.
Demand. Both lengthened lifespan and improved technologies have
contributed to the significant increases in demand for healthcare products
and services in recent years. Consumers have become accustomed to access to
25
<PAGE>
a variety of healthcare products and services, and their awareness of the
availability of innovations has increased through broadcast and print media
and through internet disease-specific support groups and web pages. This
suggests, in the opinion of the Investment Adviser, that the demand for such
healthcare products and services should remain strong.
Cost Containment. The growing cost of providing healthcare has placed
financial strains on government, employers and individuals. Government and
so-called managed health programs increasingly operate by reimbursing
healthcare providers at fixed rates or by transferring financial risk to
providers under capitation contracts where the provider of services receives
a fixed annual amount to provide specified services. The goal of containing
cost increases may continue to adversely affect certain segments of the
healthcare industries, particularly traditional providers such as hospitals,
while creating significant opportunities for new products and services that
permit care to be delivered more effectively in other settings. The
increasing financial pressure caused by the constraints of paying for the
rising demand for healthcare with limited financial resources is a trend that
is expected to continue, and perhaps accelerate. For these reasons, the
Investment Adviser favors investments in Healthcare Companies that the
Investment Adviser believes can provide products and services of comparable
quality to, but at a lower cost than, existing products and services, or that
can develop more cost effective technologies, products and services. Cost
containment can be achieved in numerous ways, including the development of
products and procedures that may reduce or avoid hospitalizations or the time
it takes to recover from an illness or injury, products and services that
result in fewer side effects than existing treatments, and healthcare
delivery facilities and services that provide treatment or therapy in a less
costly environment.
Regulation. The FDA requires that approvals be obtained prior to marketing
new products. The approval process can be lengthy, expensive and uncertain as
to outcome and, when successful, can create barriers to competition not
generally present in other industries. For companies with established
approved products, these barriers tend to result in longer and more
profitable product cycles than might otherwise exist. While appointment of a
new FDA Commissioner may generate some uncertainty, in the opinion of the
Investment Adviser, the trend of recent years toward more rapid approvals
may, if anything, accelerate. For example, a record number of new chemical
entities were approved for marketing by the FDA in 1996.
Patents. Many companies in the healthcare industries are developing
innovative technologies for commercial products which may receive patent
protection. The granting of a patent may result in an extensive period of
market exclusivity and protection against competition, allowing the patent
holder to realize several years of high returns from product sales or royalty
revenues. Such proprietary intellectual property positions may act as
barriers to competition and may also increase the possibility that any
acquisition of such a company would be at a premium over its public or
private valuation.
Industry Fragmentation. Approximately 1,400 publicly traded companies, as
well as many private companies, compete in the worldwide healthcare markets
today. The Investment Adviser believes that none of the industries within
these markets are considered to be dominated by any one company or small
group of companies, although certain companies may dominate a particular
product segment. This industry fragmentation enhances the growth
opportunities for both publicly and privately held companies and increases
the number and diversity of investment opportunities available to the Trust.
The Investment Adviser also believes that the growth, size and fragmentation
of the healthcare industries will continue to encourage entrepreneurial
activity in spite of cost containment trends and thereby provide a broad
range of attractive venture capital investment opportunities. In addition,
mergers and acquisitions for access to technology or to gain perceived
critical size may also provide opportunities for capital gains.
Internationalization. The healthcare industries have become increasingly
internationalized. U.S. companies compete on a large scale in the markets of
Western Europe and Japan, which are the two principal non-U.S. healthcare
markets. To a lesser extent, Western European and Japanese companies have
increased their competition for U.S. markets. The Investment Adviser intends
to continue to consider making public and private investments in Foreign
Securities of Healthcare Companies, subject to the Trust's investment
policies.
Sectors Within Healthcare
The following categories illustrate some of the sectors in which
Healthcare Companies operate, and some of the services and products that may
be of investment interest to the Trust.
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<PAGE>
Biotechnology. Biotechnology firms employ new techniques, such as
monoclonal antibodies, recombinant DNA, molecular structure analysis, and
genomics to produce novel therapeutic and diagnostic products. Advances in
molecular biology and the screening of compounds of possible utility have the
potential to materially enhance the process of discovering useful new
therapeutic products and to shorten the development period for, and reduce
the cost of developing, such products. As biotechnology evolves from a
research and development stage to a commercial stage, these techniques and
products will have the potential to expand existing markets and to create new
ones. The Investment Adviser believes that over 45 therapeutic products
developed using these techniques have already received FDA market approval,
as have several monoclonal antibody diagnostic tests. The Investment Adviser
believes that most of these innovative approved products have achieved rapid
commercial acceptance and that many are currently generating annual revenues
in excess of $100 million.
It is estimated that more than 15 therapeutic products for a variety of
diseases have completed human clinical trials and are awaiting FDA approval,
that there are approximately 140 products in late stage (Phase III) human
clinical trials and that over 1,000 products are in earlier stage trials and
pre-clinical development.
Recently, public equity markets have provided substantial capital to the
biotechnology industry, and a large number of major corporations have
provided capital through significant acquisitions, equity investments and in
connection with product license agreements. Federal government support of
biotechnology research has contributed significantly to the invention and
development of "break-through" products. It is estimated that in fiscal year
1996, federal agencies provided over $5 billion of funding for biotechnology
related research and development.
Pharmaceuticals. Investments in the securities of pharmaceutical companies
may provide above-average investment returns where such companies benefit
from prescription or over-the-counter drugs that enjoy unique market position
due to superior therapeutic benefits, reduced side effects, patent protection
or convenient dosage form. New drug delivery systems, including oral and
transdermal sustained release systems, can supersede intravenous or
injectable systems and have the potential to improve therapy not only through
easier patient compliance with prescription directions but also by improved
administration of consistently efficacious quantities of the compound. In
addition to providing new clinical benefits, the delivery system may also
extend market exclusivity with the accompanying future investment returns to
the developer of a drug nearing patent expiration. Most of the large
pharmaceutical companies are also investing heavily in the effort to produce
future revenues and earnings through greater research and development
expenditures, joint ventures with emerging growth Healthcare Companies and
acquisitions of such companies. Cost containment measures by both the private
and public sectors have impinged on the ability of many pharmaceutical
companies to raise product prices as they had done in the past and have, in
some instances, resulted in reduced product prices. The Investment Adviser
believes that this has been a negative influence on stock prices of these
companies in the last few years, and may continue to increase the risk of
investing in this industry in the future, but may also present selective
investment opportunities. A more favorable factor, however, is the gradual
trend of more rapid FDA approvals of new drugs, especially for the treatment
of AIDS and cancer. More new drugs were approved in 1996 than in any prior
year.
Diagnostics. The accuracy, sophistication and cost effectiveness of
diagnosis has improved dramatically through imaging systems, such as
ultrasound and magnetic resonance imaging (MRI), as well as through improved
chemical and biological tests. Many of the new systems and supplies are or
will be available to the patient directly or at a physician's office, as well
as in the hospital or independent laboratory. These innovations generally
increase the likelihood of earlier diagnosis and more efficacious and cost
effective treatment. Under development are new contrast agents to enhance the
output from virtually all imaging modalities, which are being further
improved by innovative computer programs that prepare the data for display.
Advances in genetic testing are expected to improve the ability to treat
diseases at earlier stages and to identify those people that may have a
greater than average chance of contracting certain diseases. Advances in the
ability to extract and test fetal cells from maternal blood may avoid the
risky procedure of obtaining fetal cells by biopsy for such analysis. The
Investment Adviser believes these current and potential advances may increase
demand for diagnostic products.
Medical Equipment, Devices and Supplies. In addition to developing the
surgical equipment that permits the dramatic increase in the number of
procedures that can be performed on an out-patient basis, companies in this
field continue to enhance their growth through improving techniques for joint
replacement, monitors for physiological function and management of disease,
and new generations of catheters and implantable devices to control and treat
heart malfunction. The Investment Adviser believes that many of these
companies dominate their
27
<PAGE>
subsectors, have benefitted from overall market growth and have been able to
generate above-average investment returns.
Managed Healthcare. Many varieties of companies are engaged directly or
indirectly in the delivery of healthcare to patients, including hospitals,
nursing homes, inpatient and outpatient rehabilitation services and
therapeutic services delivered to the home. The Investment Adviser believes
that healthcare cost containment efforts will continue to reduce revenues to
acute care hospitals and promote the delivery of therapy in other more
efficient settings. These trends should enhance the delivery of increasingly
sophisticated care at home, and the potential of outpatient surgery and
rehabilitation and of specialized free-standing facilities, such as cancer
chemotherapy treatment centers. The Investment Adviser also believes that
cost pressures will, however, increasingly negatively impact many of such
providers, and investment in these sectors is currently relatively
underweighted in the portfolio. However, some sectors may benefit from these
trends. In general, such companies are able simultaneously to improve quality
and reduce the cost of care. For example, emerging is a new industry,
Physician Practice Management, as medical practices, either general or
specialist, combine in an attempt to become more efficient and to strengthen
their negotiating position with providers in an environment of increased
capitation. Key to success in the coming period of funding reduction will be
the management of information, particularly such areas as claims processing,
patient management direct costs and quality control, and ultimately
automation of patient records. The Adviser expects that these areas will
receive increased emphasis in the portfolio in the future.
Other
The Trust may also invest in companies and industries that are benefitting
from the growth of healthcare industries. These companies may include real
estate investment trusts that derive their income from ownership, leasing or
financing of healthcare facilities, manufacturers of nutritional products,
and key suppliers of services or equipment.
Significant declines in the stock prices of many public companies in the
healthcare industries have constrained the ability of some private companies
to raise capital to finance their growth and fund research. The Investment
Adviser also continues to believe that this presents opportunities,
especially in its venture capital investing, as valuations seem attractive in
comparison to the depressed stock prices of some publicly traded Healthcare
Companies. Shares of many publicly traded Healthcare Companies also appear to
be trading at attractive valuations when compared to the stocks of companies
in many other industries, especially those industries that have historically
been sensitive to economic cycles.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board, the Investment Adviser is
primarily responsible for the execution of the Trust's portfolio transactions
and the allocation of brokerage. In executing such transactions, the
Investment Adviser will seek to obtain the best price and execution for the
Trust, taking into account such factors as price, size of order, difficulty
of execution, operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and research, market and statistical
information provided by such firm. While the Investment Adviser generally
seeks reasonably competitive commission rates, the Trust will not necessarily
pay the lowest commission available.
The Trust intends to purchase and hold securities for long-term capital
appreciation and it is not anticipated that frequent portfolio changes will
be made for short-term trading purposes or to take advantage of short-term
swings in the market. However, changes may be made in the portfolio
consistent with the investment objective and policies of the Trust whenever
changes are believed by the Investment Adviser to be in the best interest of
the Trust and its Shareholders. Risk factors, particularly those relating to
a specific security investment or to the market and economic conditions, may
also affect the rate at which the Trust buys and sells its portfolio
holdings. The Trust has no fixed policy with respect to portfolio turnover
rate; however, it is anticipated that the annual turnover rate after the
initial investment period normally will not exceed 50%. The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities by the average monthly value of the Trust's portfolio
securities. The Trust's portfolio turnover rate for the fiscal years ended
September 30, 1996 and September 30, 1995 was 22.41% and 22.81%,
respectively.
NET ASSET VALUE
The NAV is computed based on the value as discussed below of the
securities held by the Trust and is determined as of the close of the NYSE on
the last business day of each month or on a more frequent basis as required
28
<PAGE>
by the Trustees. NAV is calculated by dividing the value of the securities
held by the Trust plus any cash or other assets minus all liabilities,
including accrued expenses, by the total number of Shares outstanding at such
time.
Portfolio securities that are traded only on national securities exchanges
are valued at the last sale price or, lacking any sales, at the mean between
last bid and asked prices. Securities traded in the over-the-counter market
which are National Market System securities are valued at the last sale
price. 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. Portfolio securities that are traded both in the over-the-counter
market and on a national securities exchange are valued according to the
broadest and most representative market, as determined by the Investment
Adviser. Short- term investments that mature in 60 days or less are valued at
amortized cost, unless the Board determines that such valuation does not
constitute fair value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board
in accordance with the procedures hereinafter described. Such valuations and
procedures will be reviewed periodically by the Board. The fair value of
investments for which no market exists cannot be precisely determined. With
respect to securities of a company in its early stages of development,
valuation will typically be based upon their original cost to the Trust (the
"cost method"). The cost method will be utilized until significant
developments affecting the portfolio company provide a basis for use of an
appraisal valuation (the "appraisal method"). The appraisal method will be
based upon such factors as earnings and net worth and will also consider the
market price for similar securities of comparable publicly traded companies.
In the case of unsuccessful operations, the appraisal may be based upon
liquidation value. Valuations based on the appraisal are necessarily
subjective. The Trust also will use third party transactions in the portfolio
company's securities as the basis of valuation (the "private market method").
The private market method will be used only with respect to actual
transactions or actual firm offers by sophisticated, independent investors
unaffiliated with the Investment Adviser or Group. Legal or contractual
restrictions on the sale of portfolio securities by the Trust will be
considered in the valuation of such securities.
Other assets, which include cash, prepaid and accrued items, accounts
receivable and income on investments and from the sale of portfolio
securities, are carried in accordance with generally accepted accounting
principles, as are all liabilities. Liabilities primarily include accrued
expenses, sums owed for securities purchased and dividends payable.
DIVIDENDS AND DISTRIBUTIONS
The Trust expects to distribute to shareholders annually dividends of all
or a portion of its investment company taxable income, if any. For federal
income tax purposes, the Trust is required to distribute substantially all of
its investment company taxable income for each year. Net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss),
if any, may be distributed or may be retained at the discretion of the Board.
"Investment company taxable income," as used herein, includes all interest
and other ordinary income earned by the Trust on its portfolio holdings and
net short-term capital gains in excess of net long-term capital losses, less
the Trust's expenses. See "Taxation--Distributions."
The Trust's most recent distribution of net capital gains of $4.49 per
share was payable to Shareholders of record on November 18, 1996.
Various factors will affect the level of the Trust's income, including the
asset mix, the performance of the companies represented in the Trust's
portfolio, and the Trust's use of hedging and fluctuations in the rate of
exchange between foreign currencies and the U.S. dollar to the extent the
Trust has invested in Foreign Securities. Each shareholder will have all
dividends and distributions reinvested in Shares of the Trust issued pursuant
to the Trust's Plan, unless the shareholder elects not to participate in the
Plan. Shareholders who elect not to participate in the Plan will receive
their dividends and distributions in cash. See "Dividend Reinvestment Plan."
Notices will be provided in accordance with Section 19(a) of the Investment
Company Act.
DIVIDEND REINVESTMENT PLAN
Each shareholder holding Shares of the Trust will automatically be a
participant in the Trust's Plan, unless the shareholder elects not to
participate in the Plan. Under the Plan, whenever the Trust declares a
distribution of dividends and capital gains payable in Shares or cash, the
distribution of dividends and capital gains will be
29
<PAGE>
automatically reinvested by State Street Bank and Trust Company (the "Plan
Agent"), in whole or fractional Shares of the Trust, as the case may be, for
the accounts of the participating shareholders. Shareholders who specifically
elect not to participate in the Plan will receive all distributions of
dividends and capital gains in cash paid by check in U.S. dollars mailed
directly to the shareholders (or if the Shares are held in street or other
nominee name, then to the nominee) by the Custodian, as Dividend Disbursing
Agent. Shareholders may receive more detailed information regarding the Plan
from the Trust or the Plan Agent. Shareholders whose Shares are held in the
name of a broker or nominee should contact such broker or nominee to
determine whether or how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. Participants in the Plan will receive Shares valued on the valuation
date, generally at the lower of market price or NAV, except as specified
below. The valuation date will be the dividend or distribution payment date
or, if that date is not a trading day on the NYSE, the next trading day.
Whenever the market price per Share is equal to or exceeds NAV on the
valuation date, participants will be issued Shares at the greater of (i) NAV
or (ii) 95% of the then current market price of the Shares. If the NAV of the
Shares on the valuation date exceeds the market price of the Shares at that
time, participants will receive Shares from the Trust valued at the market
price.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the terms and conditions of the Plan may be amended or
supplemented by the Plan Agent or the Trust at any time or times but, except
when necessary or appropriate to comply with applicable law or the rules or
policies of the Commission or any other regulatory authority, only by mailing
to the shareholders appropriate written notice at least 90 days prior to the
record date for the dividend or distribution. All correspondence concerning
the Plan should be directed to the Plan Agent, State Street Bank and Trust
Company, at P.O. Box 8200, Boston, MA 02266-8200.
TAXATION
The following discussion is based upon the advice of Dechert Price &
Rhoads, counsel for the Trust, and is a general summary of the principal U.S.
federal income tax considerations regarding an investment in the Trust. The
discussion is based on laws, regulations, rulings and decisions currently in
effect, all of which are subject to change (possibly with retroactive effect)
or different interpretations. The discussion below does not purport to deal
with all of the federal income tax consequences applicable to the Trust, or
to all categories of investors, some of which may be subject to special
rules. Each prospective shareholder is urged to consult with his or her own
tax adviser with respect to the specific federal, state, local, foreign and
other tax consequences of investing in Shares of the Trust.
Taxation of the Trust
The Trust intends to qualify and elect to be treated each taxable year as
a regulated investment company ("RIC") under the Code. The principal federal
income tax benefits of qualifying as a RIC, as compared to an ordinary
taxable corporation, are that a RIC generally is not itself subject to
federal income tax on ordinary investment income and net capital gains that
are currently distributed to its shareholders, and that the character of
long-term capital gains which are recognized and properly designated by a RIC
flows through to its shareholders, who receive (or are deemed to receive)
distributions of such income. However, the Trust would be subject to
corporate income tax (currently at a maximum marginal rate of 35%) on any
undistributed income.
Distributions
Dividends paid from investment company taxable income will be taxable to
shareholders as ordinary income whether paid in cash or reinvested in the
Trust's Shares. The Trust intends to distribute to its shareholders
substantially all of its investment company taxable income, if any, for each
year. It is anticipated that the Trust's income distributions will be paid
annually in additional Shares unless the shareholder elects payment in cash.
If a portion of the Trust's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Trust may be eligible
for the corporate dividends-received deduction. Distributions of the excess,
if any, of net long-term capital gains over net short-term capital losses
designated by the Trust as capital gain dividends will be taxable to
shareholders as long-term capital gains, whether paid in cash or reinvested
in the Trust's Shares, regardless of how long the shareholders have held the
Trust's Shares, and will not be eligible for the dividends received deduction
for corporations. Each year, shareholders will be notified as to the amount
and federal tax status of all dividends and capital gains paid during the
prior year. Such dividends and capital gains may also be subject
30
<PAGE>
to state or local taxes. Dividends declared in October, November, or December
with a record date in such month and paid during the following January will
be treated as having been paid by the Trust and received by shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
Gain or loss realized upon the sale or exchange of Shares will be a
capital gain or loss if the Shares are capital assets in the shareholder's
hands and generally will be long-term or short-term, depending upon the
shareholder's holding period for the Shares. Investors should be aware that
any loss realized upon the sale or exchange of Shares held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gain to the
shareholder with respect to such Shares. In addition, any loss realized on a
sale or exchange of Shares will be disallowed to the extent the Shares
disposed of are replaced within a period of 61 days beginning 30 days before
and ending 30 days after the Shares are disposed of, such as pursuant to the
Plan. In such case, the basis of Shares acquired will be adjusted to reflect
the disallowed loss.
If a shareholder has not furnished a certified correct taxpayer
identification number (generally a Social Security number) and has not
certified that withholding does not apply, or if the Internal Revenue Service
has notified the Trust that the taxpayer identification number listed on the
account is incorrect according to their records or that the shareholder is
subject to backup withholding, federal law generally requires the Trust to
withhold 31% from any dividends and/or redemptions (including exchange
redemptions). Amounts withheld are applied to federal tax liability; a refund
may be obtained from the Service if withholding results in overpayment of
taxes. Federal law also requires the Trust to withhold up to 30% or the
applicable tax treaty rate from ordinary dividends paid to certain
nonresident alien and other non-U.S. shareholder accounts.
This is a brief summary of some of the tax laws that affect an investment
in the Trust. Please see the SAI and a tax adviser for further information.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT, REGISTRAR, AND SUBSCRIPTION AGENT
The Trust's securities and cash are held under a custodian contract by
State Street Bank and Trust Company (the "Custodian"), whose principal
business address is 225 Franklin Street, Boston, MA 02110.
The Custodian also serves as Dividend Disbursing Agent, Transfer Agent and
Registrar for Shares of the Trust and Subscription Agent in connection with
the Offer.
DISTRIBUTION ARRANGEMENTS
Prudential Securities Incorporated, One New York Plaza, New York, NY
10292, will act as dealer manager for the Offer. Under the terms of and
subject to the conditions contained in a Dealer Manager Agreement dated the
date of this Prospectus, the Dealer Manager will provide financial advisory,
marketing and solicitation services in connection with the Offer. The Trust
has agreed to pay the Dealer Manager a fee for its financial, advisory,
marketing and solicitation services equal to 3.50% of the aggregate
Subscription Price for the Shares issued pursuant to the Offer. The Dealer
Manager will reallow to the broker-dealer designated on the related Exercise
Form a concession of 2.25% of the Subscription Price per Share for each Share
issued pursuant to the Offer, provided that the designated broker-dealer has
executed a confirmation accepting the terms of the Dealer Manager Agreement
relating to the Offer. These fees will be borne by the Trust and indirectly
by all of its Shareholders, including those who do not exercise their Rights.
In addition, the Trust has agreed to reimburse the Dealer Manager for its
out-of-pocket expenses incurred in connection with the Offer up to a maximum
of $150,000. The Trust and the Investment Adviser have also agreed to
indemnify the Dealer Manager or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Trust
by Dechert Price & Rhoads, Ten Post Office Square, Boston, MA 02109 and
certain other legal matters will be passed on for the Dealer Manager by
Morgan, Lewis & Bockius LLP, 1800 M Street, N.W., Washington, D.C., 20036.
31
<PAGE>
EXPERTS
The financial statements of the Trust included herein has been so included
in reliance upon the report of Arthur Andersen LLP, independent public
accountants, and on their authority as experts in accounting and auditing.
The services it provides include auditing the financial statements of the
Trust, services related to filings by the Trust with the Commission and
consultation on matters related to the preparation and filing of tax returns.
REPORTS TO SHAREHOLDERS
The Trust will send unaudited semiannual reports and audited annual
reports, including a list of investments held, to shareholders. The Trust has
in the past also issued more abbreviated interim reports to registered
shareholders and those requesting them.
ADDITIONAL INFORMATION
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act and in accordance
therewith is required to file reports, proxy statements and other information
with the Commission. Any such reports, proxy statements and other information
can be inspected and copied at the public reference facilities of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's New York Regional Office, 7 World Trade Center, Suite
1300, New York, NY 10048 and Chicago Regional Office, 230 South Dearborn
Street, Chicago, IL 60604. Copies of such materials can be obtained from the
public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Reports, proxy statements and
other information concerning the Trust can also be inspected at the offices
of the NYSE, 20 Broad Street, New York, NY 10005.
A Registration Statement on Form N-2 relating to the Shares has been filed
by the Trust with the Commission. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any exhibits
and schedules thereto. For further information with respect to the Trust and
the Shares offered hereby, reference is made to the SAI and the Trust's
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of all or any
part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Additional Information About Investments and Investment Techniques 2
Investment Restrictions 7
Trustees and Officers 10
The Trust 11
Investment Advisory Agreement 14
Net Asset Value 17
Portfolio Transactions and Brokerage 18
Dividend Reinvestment Plan 21
Tax Matters 22
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar 28
</TABLE>
32
<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, 1996, 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, 1996, 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 $37,189,359 (25.2% 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 difference 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, 1996, 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 1, 1996
F-1
<PAGE>
H&Q HEALTHCARE INVESTORS
SCHEDULE OF INVESTMENTS--September 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
- ------------ --------------
<S> <C> <C>
CONVERTIBLE SECURITIES--13.1%
Convertible Preferred--12.6%
1,666,667 Cubist Pharmaceuticals, Series C* $ 1,000,000
500,000 CV Therapeutics, Series D* 475,000
207,500 CV Therapeutics, Series E (w/wts.)* 197,125
212,500 CV Therapeutics, Series G (w/wts.)* 201,875
80,202 Dyax, Class A Series 1* 160,402
55,000 Dyax, Class A Series 3* 110,000
222,222 EPR, Series A* 999,999
1,100,000 Exelixis Pharmaceuticals, Series B* 1,100,000
308,707 Focal, Series D* 537,150
116,106 Focal, Series E* 202,025
1,330,645 HealthTech Services, Series A* 1,650,000
99,955 IBAH, Series A** 1,949,123
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
135,000 PGS International, Escrow* 162,000
27,500 Terrapin Technologies, Series G* 1,375,000
187,969 Therion Biologics, Series B (w/wts.)* 499,998
3,268 Transkaryotic Therapies, Series B* 2,098,056
25,000 Transkaryotic Therapies, Series C* 350,000
270,270 Tularik, Series C* 999,999
-----------
$18,587,752
-----------
PRINCIPAL
AMOUNT Convertible Bonds and Notes--0.5%
- -----------
$801,500 Therion Biologics, 10% Note due 1996 (w/wts.) $ 801,500
-----------
$ 801,500
-----------
TOTAL CONVERTIBLE SECURITIES (Cost $17,917,021) $19,389,252
-----------
SHARES
- ---------
COMMON STOCKS--80.1%
Agricultural/Environmental Technology--6.7%
63,000 Calgene** $ 315,000
467,500 Catalytica** 1,928,438
102,000 IDEXX Laboratories** 4,615,500
94,697 Molten Metal Technology** 3,030,304
-----------
$ 9,889,242
-----------
Biotechnology--29.2%
100,000 Alkermes** $ 1,562,500
265,600 Ariad Pharmaceuticals** 1,012,600
58,000 BioChem Pharma** 2,327,250
111,000 BioTransplant** 777,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- --------------
<S> <C> <C>
Biotechnology--continued
238,898 BioTransplant* 1,254,215
2,760 BioTransplant Warrants* 4,968
6,300 BioTransplant Warrants* 11,340
1,150 BioTransplant Warrants* 4,807
110,000 Calypte Biomedical** 948,750
250,400 Calypte Biomedical* 1,534,952
200,000 Cell Therapeutics* 670,000
148,700 Cor Therapeutics** 1,487,000
494,117 Genta** 725,734
71,659 Gilead Sciences** 2,024,367
205,000 ImmuLogic Pharmaceutical** 1,665,625
63,755 INCYTE Pharmaceuticals** 3,155,873
441,409 Martek Biosciences** 11,035,225
73,000 MedImmune** 1,040,250
207,059 NABI** 2,458,826
60,000 Neurogen** 1,515,000
400,000 Oxford GlycoSystems Group* 320,000
13,867 Pharming B.V.* 1,105,247
349,166 Ribi ImmunoChem Research** 1,440,310
166,666 Ribi ImmunoChem Research Warrants* 131,666
180,648 SEQUUS Pharmaceuticals** 2,845,206
74,096 SEQUUS Pharmaceuticals Warrants* 617,220
112,500 Somatogen** 1,279,688
29,162 Therion Biologics* 77,571
12,500 Transkaryotic Therapies Warrants* 125
-----------
$43,033,315
-----------
Contract Research Organizations--9.5%
136,781 IBAH** $ 889,077
299,865 IBAH Warrants* 1,250,437
193,605 IBAH Warrants* 758,932
330,000 Phoenix International Life Sciences** 3,382,500
105,200 Quintiles Transnational** 7,705,900
-----------
$13,986,846
-----------
Diagnostics--6.8%
189,099 Biofield* $ 1,293,437
14,977 Biofield Warrants* 150
14,977 Biofield Warrants* 150
135,907 Cytyc** 2,038,605
175,397 Cytyc* 1,973,216
20,000 Integ** 207,500
133,333 Integ* 1,037,331
153,846 NeoPath* 2,221,536
333,334 Quidel** 1,291,669
-----------
$10,063,594
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
SHARES VALUE
------------- ---------------
<S> <C> <C>
Managed Care--4.1%
116,000 Orthodontic Centers of America** $ 2,363,500
112,500 Vencor** 3,628,125
------------
$ 5,991,625
------------
Medical Supplies--10.0%
62,456 Boston Scientific** $ 3,591,220
108,968 EndoVascular Technologies** 1,307,616
155,750 Exogen** 623,000
114,286 Heartstream* 1,221,717
176,534 Innotech* 1,339,893
137,457 KeraVision** 2,061,855
210,040 Landec** 2,047,890
50,409 Landec* 368,490
22,000 Perclose** 489,500
100,002 Ventritex** 1,750,035
------------
$ 14,801,216
------------
Medical Specialty--7.8%
546,000 Bioject Medical** $ 546,000
129,420 Biomatrix** 2,167,785
14,120 Dyax* 28,240
2,528 Dyax Warrants* 25
239,000 Fuisz Technologies** 3,107,000
180,000 Interpore** 933,750
113,569 Sepracor** 1,604,162
91,666 Spiros Development Units* 2,523,565
137,000 Voxel** 685,000
------------
$ 11,595,527
------------
Pharmaceuticals--6.0%
160,000 Cortex Pharmaceuticals** $ 490,000
125,000 Synaptic Pharmaceutical** 1,421,875
181,667 Vivus** 6,903,346
------------
$ 8,815,221
------------
TOTAL COMMON STOCKS (Cost $69,576,985) $118,176,586
------------
TOTAL INVESTMENTS IN SECURITIES (Cost $87,494,006) $137,565,838
============
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENTS--7.0%
$5,200,000 Ford Motor Credit Corp., 5.28%, due 10/11/96 $ 5,192,350
5,200,000 General Motors Acceptance Corp., 5.30%, due 10/3/96 5,198,492
------------
TOTAL TEMPORARY CASH INVESTMENTS $ 10,390,842
============
</TABLE>
- -------------
* Non income-producing restricted security, valued by the Board of Trustees
(see Note 5).
** Non income-producing publicly traded security (see Note 1).
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
H&Q HEALTHCARE INVESTORS
BALANCE SHEET--September 30, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments in securities, at value (identified cost $87,494,006; see
Schedule of Investments) (Notes 1, 3 and 5) $137,565,838
Temporary cash investments, at amortized cost which approximates value
(see Schedule of Investments) (Note 1) 10,390,842
------------
Total investments $147,956,680
Cash 301,049
Prepaid expenses and other assets 19,429
------------
Total assets $148,277,158
------------
Liabilities
Payable for investments purchased $497,750
Accrued advisory fee (Note 4) 158,524
Other accrued expenses 68,379
------------
Total liabilities $724,653
------------
Net Assets
Shares of beneficial interest, par value $.01 per share, unlimited number
of shares authorized, amount paid in on 5,729,160 shares issued and
outstanding (Note 1) $71,929,826
Accumulated net realized gain on investments 25,550,847
Net unrealized gain on investments (Note 3) 50,071,832
------------
Total net assets (equivalent to $25.75 per share based on 5,729,160
shares outstanding) $147,552,505
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
H&Q HEALTHCARE INVESTORS
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME (Note 1):
Dividends $9,900
Interest 242,253
------------
Total investment income $252,153
EXPENSES:
Advisory fees (Note 4) $1,961,266
Shareholder reporting 62,336
Custodian fees 58,063
Trustees' fees and expenses 56,663
Insurance expense 30,455
Accounting and auditing fees 27,971
Transfer agent fees 16,911
Legal fees 14,742
Other 45,543
------------
Total expenses 2,273,950
------------
Net investment (loss) $(2,021,797)
------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gain on investments (Note 1) $26,774,551
Net increase in unrealized gain on investments 5,212,708
------------
Net gain on investments $31,987,259
------------
Net increase in net assets resulting from operations $29,965,462
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
H&Q HEALTHCARE INVESTORS
STATEMENT OF CASH FLOWS
For the Year Ended September 30, 1996
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Dividends received $9,900
Interest received 254,949
Operating expenses paid (2,282,567)
-----------
Net cash used for operating activities $(2,017,718)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of portfolio securities $234,104,327
Purchases of portfolio securities (228,684,370)
-----------
Net cash provided by investing activities $5,419,957
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid $(6,769,939)
Distributions reinvested 3,284,307
-----------
Net cash used for financing activities $(3,485,632)
-----------
NET (DECREASE) IN CASH $(83,393)
CASH AT BEGINNING OF YEAR 384,442
-----------
CASH AT END OF YEAR $301,049
===========
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 $29,965,462
Net realized (gain) on investments (26,774,551)
Net (increase) in unrealized gain on investments (5,212,708)
Net decrease in interest and dividends receivables 12,696
(Decrease) in accrued advisory fees and accrued other expenses (7,032)
(Increase) in prepaid expenses and other assets (1,585)
-----------
Net cash used for operating activities $(2,017,718)
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
H&Q HEALTHCARE INVESTORS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the years ended
September 30, September 30,
1996 1995
---- ----
<S> <C> <C>
NET INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment (loss) $(2,021,797) $(1,267,141)
Net realized gain on investments 26,774,551 5,912,514
Net increase in unrealized gain on investments 5,212,708 24,258,241
------------ -------------
Net increase in net assets resulting from operations $29,965,462 $28,903,614
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized long-term capital gains $(6,769,939) --
------------ -------------
Net (decrease) in net assets resulting from distributions $(6,769,939) --
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in reinvestment of distributions $3,284,307 --
------------ -------------
Total increase in net assets $26,479,830 $28,903,614
------------ -------------
NET ASSETS:
Beginning of year 121,072,675 92,169,061
------------ -------------
End of year $147,552,505 $121,072,675
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
H&Q HEALTHCARE INVESTORS
FINANCIAL HIGHLIGHTS
(Selected data for each Share outstanding throughout the period indicated)
<TABLE>
<CAPTION>
For the years ended September 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share:
Beginning of period $21.818 $16.609 $17.604 $17.340 $19.207
------------ ------------ ------------ ------------ ------------
Net investment income
(loss) $(0.331) $(0.228) $(0.199) $(0.190) $(0.076)
Net realized and
unrealized gain (loss) on
investments 5.487 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 $5.156 $5.209 $(0.995) $0.264 $(0.907)
------------ ------------ ------------ ------------ ------------
Distribution to
shareholders
Short-term capital gains -- -- -- -- $(0.040)
Long-term capital gains $(1.220) -- -- -- (0.920)
------------ ------------ ------------ ------------ ------------
Total distributions $(1.220) -- -- -- $(0.960)
------------ ------------ ------------ ------------ ------------
Net asset value per share:
End of period $25.754 $21.818 $16.609 $17.604 $17.340
============ ============ ============ ============ ============
Per share market value:
End of period $20.875 $18.250 $15.125 $18.375 $19.375
Total investment return
(a) 22.03% 20.66% (17.69)% (5.16)% 9.43%
Net assets:
End of period $147,552,505 $121,072,675 $92,169,061 $97,690,739 $96,222,175
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating
expenses to average net
assets 1.62% 1.76% 1.74% 1.84% 1.72%
Ratio of net investment
(loss) to average net
assets (1.44)% (1.31)% (1.13)% (1.06)% (0.38)%
Portfolio turnover rate 22.41% 22.81% 28.10% 28.36% 35.45%
Average commission rate
paid per listed share
purchased (a) $.07 N/A N/A N/A N/A
Number of shares
outstanding at end of
period 5,729,160 5,549,198 5,549,198 5,549,198 5,539,450
</TABLE>
- -------------
* Annualized
(a) Average commission rate per share required for fiscal years that began
September 1, 1995, or later; total investment return information not
required for fiscal years 1987 through 1989.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
H&Q HEALTHCARE INVESTORS
FINANCIAL HIGHLIGHTS--(Continued)
<TABLE>
<CAPTION>
For the period
April 22, 1987
(commencement
For the years ended September 30, of operation)
to September 30,
1991 1990 1989 1988 1987
--------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value per
share:
Beginning of period $11.313 $10.647 $8.036 $9.450 $9.250
------------ ------------ ------------ ------------ ------------
Net investment income
(loss) $(0.014) $0.014 $0.003 $(0.019) $0.030
Net realized and
unrealized gain (loss)
on investments 8.743 0.652 2.608 (1.375) 0.170
Federal income taxes on
retained long-term
capital gains -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total increase
(decrease) from
investment operations $8.729 $0.666 $2.611 $(1.394) $0.200
------------ ------------ ------------ ------------ ------------
Distribution to
shareholders
Short-term capital gains $(0.055) -- -- -- --
Long-term capital gains (0.780) -- -- $(0.020) --
------------ ------------ ------------ ------------ ------------
Total distributions $(0.835) -- -- $(0.020) --
------------ ------------ ------------ ------------ ------------
Net asset value per
share:
End of period $19.207 $11.313 $10.647 $8.036 $9.450
============ ============ ============ ============ ============
Per share market value:
End of period $18.375 $9.250 $9.750 $6.375 $5.625
Total investment return
(a) 113.06% 1.37% N/A N/A N/A
Net assets:
End of period $106,396,527 $62,661,275 $58,974,336 $44,515,399 $52,366,673
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating
expenses to average net
assets 1.73% 1.74% 1.89% 1.98% 1.83%*
Ratio of net investment
(loss) to average net
assets (0.10)% 0.12% 0.02% (0.25)% 0.74%*
Portfolio turnover rate 23.04% 47.02% 46.90% 57.42% 17.34%*
Average commission rate
paid per listed share
purchased (a) N/A N/A N/A N/A N/A
Number of shares
outstanding at end of
period 5,539,450 5,539,450 5,539,450 5,539,450 5,539,450
</TABLE>
- -------------
* Annualized.
(a) Average commission rate per share required for fiscal years that began
September 1, 1995, or later; total investment return information not
required for fiscal years 1987 through 1989.
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(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 a maturity 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. Of the $2,021,797
net operating loss, $366,279 was available to offset certain realized capital
gains and the balance was reclassified against capital. 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.
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.
F-11
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 1996
(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, 1995 through September 30, 1996 totaled $31,022,848 and
$45,401,195, respectively.
(3) TAX BASIS OF SECURITIES
At September 30, 1996, the total cost of securities for Federal income tax
purposes was $87,494,006. The aggregate gross unrealized gain on securities
in which there was an excess of market value over cost was $63,873,734. The
aggregate gross unrealized loss on securities in which there was an excess of
cost over market value was $13,801,902. The net unrealized gain on securities
held by the Fund was $50,071,832.
(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 or other restricted securities if
these securities would currently comprise 40% or less of net assets. The
value of these securities represents 25.2% of the Fund's net assets at
September 30, 1996.
The value of the venture capital or other restricted securities are valued
at fair value as 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
September 30, 1996, as determined by the Board of Trustees of the Fund.
<TABLE>
<CAPTION>
Carrying
Acquisition Value
Security Date Cost per Unit Value
- -------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
Biofield
Common* 11/4/93 $1,000,229
9/16/94 250,002
3/3/95 172,125
6/29/95 103,122
1,525,478 $6.840 $1,293,437
Common Warrants 3/3/95 0
6/29/95 0
-----------
0 0.010 150
Common Warrants 3/3/95 0
6/29/95 0
-----------
0 0.010 150
F-12
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 1996
Carrying
Acquisition Value
Security Date Cost per Unit Value
- -------- ---- ---- -------- -----
BioTransplant
Common* 11/1/93 1,200,696
10/31/94 277,857
8/18/95 48,757
1/16/96 385,385
-----------
1,912,695 5.250 1,254,215
Common Warrants 8/12/94 0 1.800 4,968
Common Warrants 10/31/94 0 1.800 11,340
Common Warrants 8/18/95 0 4.180 4,807
Calypte Biomedical
Common* 12/22/92 1,000,476
11/18/94 52,000
6/15/95 100,000
2/29/96 150,000
-----------
1,302,476 6.130 1,534,952
Cell Therapeutics
Common 8/3/92 1,000,280 3.350 670,000
Cubist Pharmaceuticals
Series C Cvt. Pfd. 5/17/95 1,000,809 0.600 1,000,000
CV Therapeutics
Series D Cvt. Pfd. 3/23/94 1,000,330 0.950 475,000
Series E Cvt. Pfd. (w/wts.) 9/8/95 415,613 0.950 197,125
Series G Cvt. Pfd. (w/wts.) 3/29/96 425,425 0.950 201,875
Cytyc*
Common 5/17/94 151,447
10/14/94 149,608
6/13/95 84,460
-----------
385,515 11.250 1,973,216
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
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 1.000 1,100,000
F-13
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 1996
Carrying
Acquisition Value
Security Date Cost per Unit Value
- -------- ---- ---- -------- -----
Focal
Series D Cvt. Pfd. 9/17/93 922,564
8/5/94 220,382
-----------
1,142,946 1.405 537,150
Series E Cvt. Pfd. 10/17/95 202,466 1.740 202,025
HealthTech Services
Series A Cvt. Pfd. 1/26/96 1,652,603 1.240 1,650,000
Heartstream*
Common 3/15/95 800,433 10.690 1,221,717
IBAH#
Common Warrants 2/22/93 0 3.920 758,932
Common Warrants 8/11/95 192,500 4.170 1,250,437
Innotech*
Common 8/23/95 1,100,677 7.590 1,339,893
Integ*
Common 6/16/95 800,126 7.780 1,037,331
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 7.310 368,490
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
NeoPath*
Common 3/15/94 1,000,209 14.440 2,221,536
Oxford GlycoSystems Group
Ordinary Shares 5/26/93 773,830 0.800 320,000
PGS International
Escrow 9/27/93 0 1.200 162,000
Pharming B.V.
Class B Shares 8/28/95 1,105,430 79.703 1,105,247
Ribi ImmunoChem Research**
Common Warrants 7/31/91 0 0.790 131,666
SEQUUS Pharmaceuticals#
Common Warrants 3/30/95 0 8.330 617,220
Spiros Development
Units 12/28/95 1,375,780 27.530 2,523,565
Terrapin Technologies
Series G Cvt. Pfd. 11/7/95 1,375,548 50.000 1,375,000
F-14
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 1996
Carrying
Acquisition Value
Security Date Cost per Unit Value
- -------- ---- ---- -------- -----
Therion Biologics
Common 7/12/90 7,582 2.660 77,571
Series B Cvt. Pfd. (w/wts.) 6/30/93 502,648 2.660 499,998
10% Note due 1996 (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
8/20/96 81,800
-----------
803,615 1.000 801,500
Transkaryotic Therapies
Series B Cvt. Pfd. 10/15/91 1,000,840
2/13/92 24,000
4/16/93 283,420
-----------
1,308,260 642.000 2,098,056
Series C Cvt. Pfd. 11/5/93 200,000 14.000 350,000
Common Warrants 11/5/93 245 0.010 125
Tularik
Series C Cvt. Pfd. 4/16/93 1,000,119 3.700 999,999
----------- -------------
$31,317,880 $37,189,359
=========== =============
</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.
F-15
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX A
DESCRIPTION OF RISK FACTORS AND INVESTMENT TECHNIQUES
RISK FACTORS
An investment in the Shares of the Trust involves a high degree of risk.
Prospective investors should carefully consider the following risk factors in
addition to the other information set forth in this Prospectus. For
additional information of the risks that may be associated with an investment
in the Trust see "Additional Information About Investments and Investment
Techniques" in the SAI.
Because the Trust intends to invest substantially all of its assets in
equity securities of Healthcare Companies, an investor should be aware of
certain special considerations and risk factors relating to investments in
such companies. No assurance can be given that Healthcare Companies will
grow, that a sufficient number of appropriate investments will be available
or that the Trust's particular investment choices will be successful.
Investors should also be aware of considerations and risks relating to the
Trust's investment practices. An investment in the Trust should not itself be
considered a balanced investment program and is intended to provide
diversification as part of a more complete investment program. The Trust is
intended for long-term investors not seeking current income.
Dilution of NAV and Effect of Non-Participation in the Offer
As a result of the terms of the Offer, Shareholders who do not fully
exercise their Rights, including the Over- Subscription Privilege, will, at
the completion of the Offer, own a smaller proportional interest in the Trust
than they owned prior to the Offer and will experience a dilution of NAV. In
addition, an immediate dilution of NAV will be experienced by all
Shareholders as a result of the Offer whether or not they exercise all or a
portion of their Rights, because the Subscription Price will be less than the
then current NAV. Although it is not possible to state precisely the amount
of such a decrease in value, because it is not known at this time how many
Shares will be subscribed for or what the Subscription Price will be, such
dilution could be significant. For example, if the assumed Subscription Price
is $19.10, representing a market price which is only 90% of NAV, assuming
that all Rights are exercised, the Trust's NAV would be reduced by
approximately $.81 per Share or approximately 3.6% of NAV. However, the
actual Subscription Price may be greater or less than such assumed
Subscription Price. The foregoing example assumes an NAV of $22.33 per Share
based on the Trust's NAV after the close of trading on Monday, February 3,
1997. Since April 22, 1987 (commencement of operations), Shares of the Trust
have traded at various times at both a discount and a premium to net asset
value.
Concentration in the Healthcare Industries
The Trust expects under normal market conditions to invest primarily in
securities of Healthcare Companies representing a finite number of industries
and to invest at least 25% of its net assets in securities of companies in
the healthcare industries. The Trust's portfolio may therefore be more
sensitive to, and possibly more adversely affected by, regulatory, economic
or political factors or trends relating to the healthcare, agricultural and
environmental technology industries than a portfolio of companies
representing a larger number of industries. This risk is in addition to the
risks normally associated with any strategy seeking capital appreciation by
investing in a portfolio of equity securities.
Healthcare industries have in the past been characterized by limited
product focus, rapidly changing technology and extensive government
regulation. In particular, technological advances can render an existing
product, which may account for a disproportionate share of a company's
revenue, obsolete. Obtaining governmental approval from agencies such as the
FDA for new products can be lengthy, expensive and uncertain as to outcome.
Such delays in product development may result in the need to seek additional
capital, potentially diluting the interests of existing investors such as the
Trust. In addition, governmental agencies may, for a variety of reasons,
restrict the release of certain innovative technologies of commercial
significance, such as genetically altered material. These various factors may
result in abrupt advances and declines in the securities prices of particular
companies and, in some cases, may have a broad effect on the prices of
securities of companies in particular healthcare industries.
While a concentration of investments in any healthcare industry or in
Healthcare Companies generally may increase the risk and volatility of an
investment company's portfolio, the Trust will endeavor to reduce risk by
having a portfolio of investments that is diversified within its stated
objective and policies. Such volatility is not limited
A-1
<PAGE>
to the biotechnology industry, and companies in other industries may be subject
to similar abrupt movements in the market prices of their securities. No
assurance can be given that future declines in the market prices of securities
of companies in the industries in which the Trust may invest will not occur, or
that such declines will not adversely affect the NAV or the price of the Shares.
Intense competition exists within and among certain healthcare industries,
including competition to obtain and sustain proprietary technology
protection. Healthcare Companies can be highly dependent on the strength of
patents for maintenance of profit margins and market exclusivity. The complex
nature of the technologies involved can lead to patent disputes, including
litigation that could result in a company losing an exclusive right to a
patent. Competitors of Healthcare Companies, particularly of the emerging
growth Healthcare Companies that the Trust emphasizes, may have substantially
greater financial resources, more extensive development, manufacturing,
marketing and service capabilities, and a larger number of qualified
managerial and technical personnel. Such competitors may succeed in
developing technologies and products that are more effective or less costly
than any that may be developed by Healthcare Companies in which the Trust
invests and may also prove to be more successful in production and marketing.
Competition may increase further as a result of potential advances in health
services and medical technology and greater availability of capital for
investment in these fields.
With respect to healthcare, cost containment measures already implemented
by the federal government, state governments and the private sector have
adversely affected certain sectors of these industries. There is increasing
discussion at all levels of government, as to how to extend health insurance
coverage to the millions of people in the U.S. who are currently uninsured
while also restraining the growth of total healthcare expenditures. The
implementation of any of the measures under discussion may create increased
demand for healthcare products and services but also may have an adverse
effect on some companies in the healthcare industries. No assurance can be
given that healthcare reform legislation will be enacted or, if enacted, as
to its ultimate form.
Certain Healthcare Companies in which the Trust may invest may be exposed
to potential product liability risks that are inherent in the testing,
manufacturing, marketing and sale of pharmaceutical and medical device
products. There can be no assurance that a product liability claim would not
have a material adverse effect on the business, financial condition or
securities prices of a company in which the Trust has invested.
Investment in Emerging Growth Companies
The Trust emphasizes investment in equity securities of emerging growth
Healthcare Companies. While these securities offer the opportunity for
significant capital gains, such investments also involve a degree of risk
that can result in substantial losses. Some of the Healthcare Companies in
which the Trust may invest are expected to be companies that are in a
"start-up" stage of development, have little or no operating history, operate
at a loss or with substantial variations in operating results from period to
period, have limited products, markets, financial resources or management
depth, or have the need for substantial additional "follow-up" capital to
support expansion or to achieve or maintain a competitive position. Some of
these Healthcare Companies may be emerging companies at the research and
development stage with no marketable or approved products or technology.
There can be no assurance that securities of start-up or emerging growth
companies will, in the future, yield returns commensurate with their
associated risks.
Key Personnel
Alan G. Carr, the President and a Trustee of the Trust and President and
sole Director of the Investment Adviser, is responsible for managing the
Trust's portfolio. Mr. Carr has been managing equity portfolios emphasizing
investment in emerging growth companies for over 30 years and portfolios
specializing in publicly traded equity securities of Healthcare Companies, as
well as in venture capital opportunities in the healthcare industries, for
the last 15 years. There may be only a limited number of securities
professionals who have comparable investment experience to Mr. Carr. In the
event of his death, resignation, retirement or inability to act on behalf of
the Investment Adviser, there can be no assurance that a suitable replacement
for Mr. Carr could be found immediately.
Liquidity of Portfolio Investments
The Trust may invest substantially all of its net assets in securities of
emerging growth Healthcare Companies that are traded in the over-the-counter
market or on regional stock exchanges where the low trading volume of a
particular security may result in abrupt and erratic price movements. An
investment in such securities may have
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<PAGE>
limited liquidity, and the Trust may find it necessary to sell at a discount
from recent prices or to sell over extended periods of time when disposing of
such securities. In addition, the Trust may invest up to 40% of its net assets
in Restricted Securities, which by their terms are illiquid because they are
subject to legal or contractual restrictions on resale. The Trust cannot sell
Restricted Securities except in a public offering registered under the
Securities Act or pursuant to an exemption from registration under the
Securities Act, including a transaction in compliance with Rule 144 under the
Securities Act, which permits only limited sales under specified conditions
unless the Trust has held the securities for at least three years and is
unaffiliated with the issuer. Moreover, Restricted Securities are expected to
include venture capital investments that may take many years from the date of
initial investment to reach a state of maturity when public disposition can be
considered. Adverse conditions in the securities markets at certain times may
preclude a public offering of an issuer's unregistered securities. The lack of
an active secondary market and resale restrictions may result in the inability
of the Trust to sell a security at a fair price and may substantially delay the
sale of a security that the Trust seeks to sell. Companies whose securities are
not publicly traded are also not subject to the same disclosure and other legal
requirements as are applicable to companies with publicly traded securities.
Restricted Securities eligible for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act are subject to the 40% limitation
described above.
Foreign Securities
The Trust may invest up to 20% of its net assets in Foreign Securities,
many of which may be less liquid and have prices that are more volatile than
securities of comparable U.S. companies. Foreign stock exchanges and brokers
are generally subject to less governmental supervision and regulation than
U.S. exchanges and brokers, and commissions on foreign stock exchanges are
generally higher than negotiated commissions in the U.S. There may in certain
instances be delays in the settlement of transactions effected in foreign
markets. Certain countries restrict foreign investments in their securities
markets. These restrictions may limit or preclude investment in certain
countries or in certain industries or market sectors, or may increase the
cost of investing in securities of particular companies.
Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory
requirements comparable to those applicable to U.S. companies. Thus, there
may be less available information concerning non-U.S. issuers of securities
held by the Trust than is available concerning U.S. companies. In addition,
with respect to some foreign countries, there is the possibility of
nationalization, expropriation, confiscatory taxation or establishment of
exchange controls. Income earned in a foreign nation may be subject to
taxation (including withholding taxes on interest and dividends), or other
taxes may be imposed with respect to investments in foreign securities. Other
risks associated with investments in foreign securities include difficulties
in pursuing legal remedies and obtaining judgments in foreign courts,
political or social instability and diplomatic developments that could
adversely affect the Trust's investments in companies located in foreign
countries. An investment in Foreign Securities may also involve a degree of
currency risk.
Market for Shares
The Shares are listed on the NYSE under the symbol "HQH." The shares of
closed-end investment companies frequently trade at a discount to NAV but may
trade at a premium. This is characteristic of shares of a closed-end fund and
is a risk separate and distinct from the risk of a decline in the NAV as a
result of a fund's investment activities. Because of this factor as well as
the Trust's investment objective and policies, the Trust is designed
primarily for long-term investors and should not be considered a vehicle for
trading purposes. Since its initial public offering in April 1987, Shares
have traded at various times at both a discount and a premium to NAV. The
risk that the Shares may trade at a discount to NAV may be greater for
investors expecting to sell their Shares in a relatively short period of
time. The Trust cannot predict whether the Shares will trade in the future
at, above or below NAV.
Declaration of Trust
The Trust's Declaration of Trust presently has provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Trust, cause it to engage in certain transactions or modify
its structure. The Board is divided into three classes, each having a term of
three years. Each year the term of office of one class will expire: Alan G.
Carr and Henri A. Termeer will continue in office until 1999, William R.
Hambrecht, Robert P. Mack M.D., and Eric Oddleifson will continue in office
until 1998, and Lawrence S. Lewin and Uwe
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<PAGE>
E. Reinhardt, Ph.D. will continue in office until 1997. This provision could
delay for up to two years the replacement of a majority of the Board. A Trustee
may be removed from office only by vote of the holders of 66-2/3% of the Shares
of the Trust.
In addition, the affirmative vote or consent of the holders of 75% of the
Trust's Shares will be required generally to authorize any of the following
transactions with a person or entity that is directly, or indirectly through
affiliates, the beneficial owner of 5% or more of the outstanding Shares of
the Trust:
(i) the Trust's merger or consolidation with or into any other entity;
(ii) the issuance of any securities of the Trust to any person or entity
for cash (except pursuant to the Plan);
(iii) the sale, lease or exchange of all or substantially all of the
Trust's assets to or with any entity or person (except assets having
an aggregate fair market value of less than $1,000,000); or
(iv) the sale, lease or exchange to or with the Trust in consideration for
securities of the Trust of any assets of any entity or person (except
assets having an aggregate fair market value of less than $1,000,000).
However, such 75% vote or consent will not be required with respect to the
foregoing transactions where the Board under certain conditions approves the
transaction. These provisions could have the effect of depriving shareholders
of an opportunity to sell their Shares at a premium over prevailing market
price by discouraging a third party from seeking to obtain control of the
Trust in a tender offer or similar transaction. The Board has determined that
the 75% voting requirements described above, which are greater than the
minimum requirements under state law or the Investment Company Act, are in
the best interests of the shareholders.
Related Party Transactions
The Investment Adviser is an indirect wholly-owned subsidiary of Group,
which through its various related entities has developed investment research,
investment banking and venture capital expertise in the healthcare
industries. The majority of the Board will be unaffiliated with the
Investment Adviser; nevertheless, the Trust may be subject to certain
potential conflicts of interest. H&Q, an indirect wholly-owned subsidiary of
Group, may make a market in or underwrite new issues of securities of
companies in which the Trust has invested. Although the Trust has no
obligation to do so, it may place brokerage orders with brokers, including
H&Q, who provide supplemental investment research and market and statistical
information about the healthcare industries. In addition, investment
companies advised by the Investment Adviser or venture capital funds managed
by entities associated with Group may concurrently invest with the Trust in
Restricted Securities under certain conditions, or provide managerial
assistance to the issuers thereof. The Trust also may invest, subject to
applicable law, in companies in which directors of the Investment Adviser or
Trustees of the Trust have invested, or for which they serve as directors or
executive officers. See "Portfolio Transactions and Brokerage." The
Investment Company Act prohibits the Trust from engaging in certain
transactions involving its "affiliates," including, among others, the Trust's
Trustees, officers and employees, the Investment Adviser, H&Q and any
"affiliates" of such affiliates except pursuant to an exemptive order or the
provisions of certain rules under the Investment Company Act. In the view of
the staff of the Commission, other investment companies advised by the
Investment Adviser may, in some instances, be viewed to be affiliates of the
Trust. Such legal restrictions and delays and costs involved in obtaining
necessary regulatory approvals may preclude or discourage the Trust from
making certain investments and no assurance can be given that any exemptive
order sought by the Trust will be granted.
INVESTMENT TECHNIQUES
In addition to the investment practices described above, the Trust may
utilize the following investment practices:
Money Market Instruments
When, in the opinion of the Investment Adviser, adverse market conditions
or industry expectations support such action, the Trust may, for temporary
defensive purposes, invest up to 75% of its net assets in money market
instruments.
Money market instruments in which the Trust may invest include
certificates of deposit and bankers' acceptances issued by domestic branches
of federally-insured U.S. banks and savings and loan associations
A-4
<PAGE>
and commercial paper and high and upper medium grade corporate debt securities
rated, as of the date of purchase, among the following rating categories of the
indicated rating service: bonds--Moody's Aaa, Aa or A; S&P AAA, AA or A;
notes--Moody's MIG-1, MIG-2 or MIG-3; S&P SP-1+ or SP-2; commercial
paper--Moody's P-1; S&P A-1. The Trust also may invest in shares of money market
mutual funds that invest in money market instruments and U.S. Government
Securities. Money market mutual funds are investment companies and the Trust's
investments in those companies are subject to certain limitations. As a
shareholder in money market mutual funds, the Trust will bear its ratable share
of such companies' expenses, including investment adviser or management fees,
and will remain subject to the payment of fees to the Investment Adviser. To the
extent that the Trust assumes a temporary defensive position for the purpose of
avoiding losses, it will not participate in the capital appreciation, if any, of
securities in which the Trust would normally invest.
When-Issued and Delayed Delivery Transactions
The Trust may purchase securities on a "when issued" basis or a "delayed
delivery" basis.
Repurchase Agreements
It is the Trust's present intention to enter into repurchase agreements
for a relatively short period (usually not more than one week) only with
commercial banks and registered broker-dealers and only with respect to U.S.
Government Securities and money market instruments.
Loans of Portfolio Securities
In an attempt to make productive use of its assets, the Trust may lend its
portfolio securities, subject to the limitation that the Trust will not lend
a security if, as a result of such loan, all securities then subject to loans
would exceed 20% of the Trust's net assets.
Hedging
In order to hedge against changes in the value of its portfolio securities,
the Trust may from time to time engage in certain hedging strategies. The Trust
will engage in hedging activities from time to time in the Investment Adviser's
discretion, and may not necessarily be engaging in such activities when
movements in the securities markets, foreign exchange rates, or interest rates
that could affect the value of the assets of the Trust occur.
Futures Contracts
The Trust may enter into contracts for the purchase or sale for future
delivery (a "futures contract") of baskets of securities, financial indices,
financial instruments or foreign currencies. The Trust would purchase or sell
futures contracts to attempt to protect the value of its securities from
market-wide price movements and fluctuations in interest or foreign exchange
rates without actually buying or selling securities or foreign currency.
Foreign Currency Transactions
The Trust may enter into forward foreign currency exchange contracts and
may purchase and sell foreign currency futures contracts to protect against a
decline in the U.S. Dollar equivalent value of its foreign currency portfolio
securities or the payments thereon that may result from an adverse change in
foreign currency exchange rates.
Under normal market conditions, the Trust currently does not intend to
engage in the foregoing practices or investments with the exception of
investments in money market instruments.
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given
or made, such information or representations must not be relied upon as
having been authorized by the Trust, the Trust's Investment Adviser or the
Dealer Manager. This Prospectus does not constitute an offer to sell or the
solicitation of any offer to buy any security other than the shares of
beneficial interest offered by this Prospectus, nor does it constitute an
offer to sell or a solicitation of any offer to buy the shares of beneficial
interest by anyone in any jurisdiction in which such offer or solicitation is
not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any such person to whom it is unlawful to make
such offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that information contained herein is correct as of any time subsequent to the
date hereof. However, if any material change occurs while this Prospectus is
required by law to be delivered, the Prospectus will be amended or
supplemented accordingly.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C>
Prospectus Summary 3
Trust Expenses 8
Financial Highlights and Investment Performance 9
The Offer 14
Use of Proceeds 20
Description of Trust 20
Investment Adviser 21
Trustees and Officers 22
Investment Objective and Policies 24
Portfolio Transactions and Brokerage 28
Net Asset Value 28
Dividends and Distributions 29
Dividend Reinvestment Plan 29
Taxation 30
Custodian, Transfer Agent, Dividend Disbursing
Agent, Registrar and Subscription Agent 31
Distribution Arrangements 31
Legal Matters 31
Experts 32
Reports to Shareholders 32
Additional Information 32
Table of Contents of Statement of Additional
Information 32
Report of Independent Public Accountants F-1
Financial Statements F-2
Appendix A--Description of Risk Factors and
Investment Techniques A-1
</TABLE>
2,115,336 Shares
H&Q HEALTHCARE INVESTORS
Issuable Upon Exercise of
Non-Transferable Rights to
Subscribe for Such
Shares
-------------
PROSPECTUS
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Dealer Manager
Prudential Securities Incorporated
February 7, 1997
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