As filed with the Securities and Exchange Commission on January 3, 1997
Securities Act No. 33-
Investment Company Act File No. 811-4889
-----------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM N-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. __ [ ]
and/or
Registration Statement under the Investment Company Act of 1940 [X]
Amendment No. 12 [X]
(Check appropriate box or boxes)
-------------
H&Q HEALTHCARE INVESTORS
(Exact Name Of Registrant as Specified In Charter)
-------------
50 Rowes Wharf, Fourth Floor, Boston, Massachusetts 02110-3328
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 574-0567
ALAN G. CARR, President,
50 Rowes Wharf, Fourth Floor, Boston, Massachusetts 02110-3328
(Name and Address of Agent for Service)
-------------
With Copies To:
SHELDON A. JONES, ESQ. JOHN H. GRADY JR., ESQ.
DECHERT PRICE & RHOADS MORGAN, LEWIS & BOCKIUS LLP
TEN POST OFFICE SQUARE 1800 M STREET, N.W.
BOSTON, MA 02109 WASHINGTON, DC 20036
(617) 728-7100 (202) 467-7087
Approximate Date of Public Offering: As soon as practicable after the
effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
======================================================================================================================
Title of Proposed Maximum Proposed Maximum Amount of
Securities Proposed Amount Offering Aggregate Offering Registration
Being Registered Being Registered* Price Per Share Price Fee
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of beneficial interest,
$.01 par value per share 2,644,170 Shares $17.8125 $47,099,278.13 $14,272.52
======================================================================================================================
</TABLE>
*Estimated pursuant to Rule 457(c) on the basis of market price per Share on
December 30, 1996.
-------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
===============================================================================
<PAGE>
H&Q HEALTHCARE INVESTORS
FORM N-2
CROSS REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
Information Requested in Prospectus Prospectus Caption
----------------------------------- ------------------
<S> <C> <C>
Item 1. Outside Front Cover Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover Page Cover Page of Prospectus
Item 3. Fee Table and Synopsis Prospectus Summary; Trust Expenses
Item 4. Financial Highlights Financial Highlights and Investment
Performance
Item 5. Plan of Distribution The Offer; Distribution Arrangements
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds
Item 8. General Description of the Registrant Description of Trust; Investment Adviser;
Share Price and NAV; Investment Objective
and Policies
Item 9. Management Description of Trust; Investment Adviser;
Trustees and Officers; Portfolio
Transactions and Brokerage; Custodian,
Transfer Agent, Dividend Disbursing Agent,
Registrar and Subscription Agent
Item 10. Capital Stock, Long-Term Debt, and Dividend Reinvestment Plan; Taxation;
Other Securities Dividends and Distributions; The Offer
Item 11. Defaults and Arrears on Senior Not Applicable
Securities
Item 12. Legal Proceedings Not Applicable
Item 13. Table of Contents of the Statement of Table of Contents of the Statement of
Additional Information Additional Information
PART B
Information Requested in Statement of Statement of Additional
Additional Information Information Caption
---------------------- -------------------
Item 14. Cover Page Cover Page of Statement of Additional
Information
Item 15. Table of Contents Table of Contents
Item 16. General Information and History The Trust
Item 17. Investment Objective and Policies Additional Information About Investments
and Investment Techniques; Investment
Restrictions
Item 18. Management Trustees and Officers; The Trust;
Investment Advisory Agreement
Item 19. Control Persons and Principal Holders of Trustees and Officers
Securities
Item 20. Investment Advisory and Other Services Investment Adviser; Investment Advisory
Agreement; Trustees and Officers
Item 21. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
Item 22. Tax Status Tax Matters
Item 23. Financial Statements Financial Statements in Prospectus
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C to this Registration Statement.
<PAGE>
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 , 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
, 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 , 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
, 1997. The NAV at the close of business on , 1997 and
, 1997 was $ and $ , respectively, and the last
reported sales price of a Share on the NYSE on those dates was $ and
$ , 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, 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.
<TABLE>
<CAPTION>
====================================================================================================================
Estimated Subscription Price (1) Estimated Sales Load (2) Estimated Proceeds to Trust (3)
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total (3) $ $ $
====================================================================================================================
Footnotes set forth on next page
</TABLE>
Investors are advised to read this Prospectus and retain it for future
reference. This Prospectus sets forth concisely the information an investor
should know before exercising the Rights. A Statement of Additional
Information dated , 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
of this Prospectus, may be obtained without charge by contacting the
Trust at (617) 574-0567.
Dealer Manager
Prudential Securities Incorporated
-------, 1997
<PAGE>
(Notes from cover page)
(1) Estimated on the basis of the average of the last reported sales price of
a Share on , 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 $ , the total maximum Estimated Sales Load
will be approximately $ , and the total maximum Estimated
Proceeds to the Trust will be approximately $ .
(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 ,
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 ,
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
, 1997 and ends at 5:00 p.m. New York City
time, on , 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 in 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;
==================================================================================================================
3
<PAGE>
THE OFFER (Cont'd)
==================================================================================================================
(bullet) increase the Trust's average investment size, creating
for 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 and 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>
<CAPTION>
<S> <C>
Record Date , 19
Subscription Period , 19
, 19
Deadline for delivery of Exercise Form together with payment of Estimated Subscription
Price or for delivery of Notice of Guaranteed Delivery , 19
Expiration Date and Pricing Date , 19
Deadline for payment pursuant to Notice of Guaranteed Delivery , 19
Confirmation Date to Registered Shareholders , 19
For Registered Shareholder Purchases--deadline for payment of unpaid balance if final
Subscription Price is higher than Estimated Subscription Price , 19
</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
, 1997, the Trust had 6,346,009 Shares
outstanding, which are traded on the NYSE under the symbol "HQH".
As of , 1997, the Trust's NAV and last reported
sales price per Share were $ and $ ,
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.
Shareholders who do not fully exercise their Rights will
experience as a result of the Offer: 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.
- ------------------------------------------------------------------------------------------------------------------
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 Growth The Trust emphasizes investment in equity securities of emerging
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.
- ------------------------------------------------------------------------------------------------------------------
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.
==================================================================================================================
6
<PAGE>
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>
<CAPTION>
<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 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 $
million (assuming a Subscription Price of $ per Share) and that, as a
result, based on the Trust's net assets attributable to Shareholders on
, 1997, the average net assets attributable to Shareholders would
be $ million.
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> <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 September 30, 1996,
25.2% of the Trust's assets were invested in Restricted Securities of 31
Healthcare Companies. While at the time of investment by the Trust each of
these 31 companies was privately-held, as of September 30, 1996 the
securities of 12 companies 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 126 venture capital investments in 55
private companies and 8 private placements in public companies. There have
been 30 initial public offerings and 3 acquisitions of restricted portfolio
companies as of September 30, 1996.
The following sets forth certain information with respect to the
composition of the Trust's investment portfolio as of September 30, 1996.
The Trust's Portfolio
(as of September 30, 1996)
[Tabular representation of bar chart]
RESTRICTED UNRESTRICTED TOTAL
---------- ------------ ------
BIOTECHNOLOGY 0.0946 0.2528 0.3474
MEDICAL SUPPLIES 0.0429 0.0805 0.1234
CRO's 0.0136 0.0944 0.108
MEDICAL SPECIALTY 0.0353 0.0613 0.0966
DIAGNOSTICS 0.0519 0.0239 0.0758
AGRI/ENVIRONMENTAL 0.0079 0.067 0.0749
LIQUID ASSETS 0 0.0677 0.0677
PHARMACEUTICALS 0.0059 0.0598 0.0657
MANAGED CARE 0 0.0406 0.0406
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 September 30, 1996)
<TABLE>
<CAPTION>
% of Net Assets
----------------
<S> <C>
Martek Biosciences* 7.48%
Quintiles Transnational 5.22%
Vivus* 4.68%
IBAH* 3.29%
IDEXX Laboratories* 3.13%
Cytyc* 2.72%
Vencor 2.46%
Boston Scientific 2.43%
SEQUUS Pharmaceuticals* 2.35%
Phoenix International Life Sciences 2.29%
Total 36.05%
</TABLE>
*These securities were Restricted Securities when initially purchased by the
Trust.
11
<PAGE>
As of September 30, 1996, six 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 September 30, 1996, the
internal rate of return as calculated by the Investment Adviser for the
restricted portfolio has been 19.9% per year before fees and 18.4% 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 fiscal year ended September 30, 1996 was 56,000. Shares of
the Trust have frequently traded at a discount from 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
</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.
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 10.2%
and 12.9%, respectively, through November 30, 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 November 30, 1996)
[Tabular representation of Line Chart]
Date Market DJMB
- ---- ------ ----
30-Apr-87 100.0% 100.0%
31-May-87 84.6% 102.9%
30-Jun-87 84.6% 99.6%
31-Jul-87 89.7% 99.1%
31-Aug-87 84.6% 100.1%
30-Sep-87 79.5% 98.2%
31-Oct-87 61.5% 69.9%
30-Nov-87 51.3% 65.3%
31-Dec-87 57.9% 77.1%
31-Jan-88 63.0% 79.9%
29-Feb-88 68.2% 81.8%
31-Mar-88 70.7% 79.95
30-Apr-88 66.9% 70.5%
31-May-88 65.6% 66.9%
30-Jun-88 68.2% 69.4%
31-Jul-88 68.2% 65.5%
31-Aug-88 64.3% 63.3%
30-Sep-88 66.9% 62.5%
31-Oct-88 66.9% 61.1%
30-Nov-88 60.4% 59.2%
31-Dec-88 65.6% 62.1%
31-Jan-89 68.2% 66.8%
28-Feb-89 65.6% 68.1%
31-Mar-89 72.0% 72.9%
30-Apr-89 79.7% 76.2%
31-May-89 75.9% 77.1%
30-Jun-89 75.9% 77.1%
31-Jul-89 82.3% 83.8%
31-Aug-89 82.3% 82.9%
30-Sep-89 93.9% 88.3%
31-Oct-89 88.7% 92.4%
30-Nov-89 96.4% 95.7%
31-Dec-89 100.3% 92.0%
31-Jan-90 95.2% 88.1%
28-Feb-90 92.6% 94.0%
31-Mar-90 97.7% 98.3%
30-Apr-90 93.9% 99.5%
31-May-90 105.4% 114.0%
30-Jun-90 118.3% 123.4%
31-Jul-90 117.0% 108.3%
31-Aug-90 101.6% 101.9%
30-Sep-90 95.2% 94.0%
31-Oct-90 96.4% 91.5%
30-Nov-90 111.9% 110.2%
31-Dec-90 121.3% 109.5%
31-Jan-91 126.8% 125.0%
28-Feb-91 151.7% 150.3%
31-Mar-91 177.9% 168.7%
30-Apr-91 169.6% 156.9%
31-May-91 175.1% 170.2%
30-Jun-91 166.8% 162.0%
31-Jul-91 173.7% 178.0%
31-Aug-91 188.9% 183.6%
30-Sep-91 201.3% 197.7%
31-Oct-91 224.7% 211.3%
30-Nov-91 228.9% 207.5%
31-Dec-91 294.8% 246.5%
31-Jan-92 309.1% 222.5%
28-Feb-93 207.5% 127.2%
31-Mar-93 197.5% 127.6%
30-Apr-93 200.3% 124.1%
31-May-93 206.0% 128.1%
30-Jun-93 197.5% 132.7%
31-Jul-93 193.2% 131.5%
31-Aug-93 201.8% 131.8%
30-Sep-93 210.3% 141.05
31-Oct-93 217.5% 153.5%
30-Nov-93 198.9% 153.5%
31-Dec-93 200.3% 155.3%
31-Jan-94 218.9% 165.4%
28-Feb-94 204.6% 150.65
31-Mar-94 193.2% 142.2%
30-Apr-94 180.3% 140.9%
31-May-94 180.3% 148.5%
30-Jun-94 163.1% 141.6%
31-Jul-94 160.3% 149.9%
31-Aug-94 178.95 168.3%
30-Sep-94 173.1% 176.4%
31-Oct-94 156.05 174.5%
30-Nov-94 160.3% 176.9%
31-Dec-94 157.4% 179.4%
31-Jan-95 164.5% 185.1%
28-Feb-95 163.1% 184.3%
31-Mar-95 158.8% 186.3%
30-Apr-95 166.05 185.2%
31-May-95 164.5% 183.0%
30-Jun-95 176.0% 193.7%
31-Jul-95 190.3% 199.05
31-Aug-95 206.0% 208.3%
30-Sep-95 208.9% 216.2%
31-Oct-95 207.5% 213.1%
30-Nov-95 207.6% 227.0%
31-Dec-95 248.8% 254.2%
31-Jan-96 276.3% 267.6%
29-Feb-96 274.8% 264.2%
31-Mar-96 259.5% 259.0%
30-Apr-96 270.2% 264.3%
31-May-96 283.9% 263.7%
30-Jun-96 264.1% 245.6%
31-Jul-96 232.0% 236.8%
31-Aug-96 247.3% 249.2%
30-Sep-96 254.9% 273.5%
31-Oct-96 235.1% 271.2%
30-Nov-96 252.6% 277.1%
HQH Stock Price (1) Dow Jones Medical and Biotechnology Index (2)
- -------------
(1) Source: CDA/Weisenberger
(2) Source: IDD Information Services/Tradeline
13
<PAGE>
H&Q Healthcare Investors Net Asset Value
v. Dow Jones Medical and Biotechnology Index
[Tabular representation of Line Chart]
Date NAV DJMB
- ---- --- ----
30-Apr-87 100.0% 100.0%
31-May-87 99.5% 102.9%
30-Jun-87 103.0% 99.6%
31-Jul-87 103.1% 99.1%
31-Aug-87 104.1% 100.1%
30-Sep-87 100.8% 98.2%
31-Oct-87 76.0% 69.9%
30-Nov-87 74.7% 65.3%
31-Dec-87 78.9% 77.1%
31-Jan-88 84.3% 79.9%
29-Feb-88 87.2% 81.8%
31-Mar-88 89.1% 79.9%
30-Apr-88 87.7% 70.5%
31-May-88 83.8% 66.9%
30-Jun-88 88.4% 69.4%
31-Jul-88 87.1% 65.8%
31-Aug-88 83.7% 63.3%
30-Sep-88 87.2% 62.6%
31-Oct-88 86.6% 61.1%
30-Nov-88 80.2% 59.2%
31-Dec-88 85.1% 62.1%
31-Jan-89 88.5% 66.8%
28-Feb-89 87.9% 68.1%
31-Mar-89 93.7% 72.9%
30-Apr-89 97.8% 76.2%
31-May-89 102.1% 79.3%
30-Jun-89 95.9% 77.1%
31-Jul-89 106.2% 83.8%
31-Aug-89 109.2% 82.9%
30-Sep-89 115.5% 88.3%
31-Oct-89 113.5% 92.4%
30-Nov-89 119.6% 95.7%
31-Dec-89 121.7% 92.05
31-Jan-90 113.1% 88.1%
28-Feb-90 113.5% 94.0%
31-Mar-90 118.0% 98.3%
30-Apr-90 115.9% 99.5%
31-May-90 129.6% 114.0%
30-Jun-90 138.5% 123.4%
31-Jul-90 140.9% 108.3%
31-Aug-90 128.8% 101.9%
30-Sep-90 122.6% 94.0%
31-Oct-90 122.4% 91.8%
30-Nov-90 134.8% 110.2%
31-Dec-90 142.9% 109.6%
31-Jan-91 146.3% 125.05
28-Feb-91 174.6% 150.3%
31-Mar-91 191.0% 168.7%
30-Apr-91 186.4% 156.95
31-May-91 194.6% 170.25
30-Jun-91 182.7% 162.05
31-Jul-91 195.8% 178.05
31-Aug-91 213.6% 183.6%
30-Sep-91 221.5% 197.7%
31-Oct-91 230.3% 211.3%
30-Nov-91 236.2% 207.5%
31-Dec-91 276.7% 246.8%
31-Jan-92 285.0% 222.6%
29-Feb-92 260.05 195.9%
31-Mar-92 245.2% 181.8%
30-Apr-92 212.7% 152.85
31-May-92 230.2% 167.25
30-Jun-92 211.4% 165.65
31-Jul-92 241.4% 170.2%
31-Aug-92 224.5% 157.75
30-Sep-92 223.0% 151.6%
31-Oct-92 216.3% 158.1%
30-Nov-92 235.3% 176.8%
31-Dec-92 245.8% 178.05
31-Jan-93 235.5% 149.6%
28-Feb-93 206.6% 127.2%
31-Mar-93 200.85 127.6%
30-Apr-93 201.7% 124.1%
31-May-93 211.1% 128.1%
30-Jun-93 207.5% 132.7%
31-Jul-93 205.7% 131.65
31-Aug-93 207.5% 131.8%
30-Sep-93 212.2% 141.0%
31-Oct-93 224.5% 153.5%
30-Nov-93 224.4% 153.5%
31-Dec-93 226.2% 155.3%
31-Jan-94 239.1% 165.4%
28-Feb-94 225.9% 150.65
31-Mar-94 209.2% 142.2%
30-Apr-94 205.4% 140.9%
31-May-94 204.5% 148.5%
30-Jun-94 195.3% 141.6%
31-Jul-94 190.6% 149.9%
31-Aug-94 210.1% 168.3%
30-Sep-94 200.4% 176.4%
31-Oct-94 195.6% 174.5%
30-Nov-94 190.0% 176.9%
31-Dec-94 189.9% 179.4%
31-Jan-95 199.4% 185.1%
28-Feb-95 203.5% 184.8%
31-Mar-95 206.3% 186.35
30-Apr-95 202.6% 185.2%
31-May-95 205.1% 183.0%
30-Jun-95 216.7% 193.7%
31-Jul-95 235.8% 199.0%
31-Aug-95 254.6% 208.8%
30-Sep-95 263.3% 216.2%
31-Oct-95 263.3% 213.1%
30-Nov-95 268.4% 227.05
31-Dec-95 303.1% 254.2%
31-Jan-96 336.7% 267.6%
29-Feb-96 338.2% 264.2%
31-Mar-96 339.8% 259.0%
30-Apr-96 351.9% 264.3%
31-May-96 368.8% 263.7%
30-Jun-96 338.8% 245.6%
31-Jul-96 300.4% 236.8%
31-Aug-96 315.9% 249.2%
30-Sep-96 331.5% 273.5%
31-Oct-96 303.1% 271.2%
30-Nov-96 318.9% 277.1%
HQH Net Asset Value (1) Dow Jones Medical and Biotechnology Index (2)
- -------------
(1) Source: CDA/Weisenberger
(2) Source: IDD Information Services/Tradeline
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.
Comparison of Expense Ratios. The chart below compares the latest reported
annual total expense ratios of the Trust with a composite of other closed-end
and open-end investment companies of varying asset size, including several
with significantly less assets than the Trust, whose investment objectives
are comparable to those of the Trust.
[Tabular representation of bar chart]
The Trust 1.59%
Composite of Healthcare Funds (1) 1.72%
- -------------
(1) The Composite represents an unweighted average for investment companies
included in Lipper Analytical Services Inc.'s Healthcare/Biotechnology
category of closed-end and open-end funds as reported on January 2, 1997.
14
<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 , 1997 and ends at 5:00 p.m.
New York City time, on , 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
15
<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
, 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
, 1997. The NAV at the close of business on , 1997 and
, 1997 was $ and $ , respectively, and the last
reported sales price of a Share on such Exchange on those dates was $ and
$ , 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.
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
16
<PAGE>
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, Massachusetts 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, Massachusetts 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, Massachusetts 02205-8686
By Hand State Street Bank and Trust Company
225 Franklin Street, Concourse Level
Boston, Massachusetts 02110
or
State Street Bank and Trust Company
61 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 Nominee Shareholders whose Shares are held in a brokerage, bank or
(Notice of Guaranteed Delivery) trust account may contact their broker or other nominee
and instruct them to submit a Notice of Guaranteed
Delivery and Payment on 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, New York 10004
Toll Free: (800) 733-8481, Ext. 352
or
Call Collect: (212) 807-7000
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.
17
<PAGE>
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 a Share or one 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 pages and (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 $ per Share,
both no later than 5:00 p.m., New York City time, on the Expiration Date.
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.
18
<PAGE>
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 , 1997. Exercising Shareholders must arrange for
payment to the nominee, who will in turn submit the Exercise Form and payment
on their behalf by , 1997. The Subscription Agent will not
honor a Notice of Guaranteed Delivery unless the completed Exercise Form and
full payment are received by , 1997.
On , 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 , 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 have no 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.
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
19
<PAGE>
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, 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
20
<PAGE>
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 $ per Share, the net
proceeds of the Offer will be approximately $ , after deducting
commissions and expenses payable by the Trust estimated at approximately
$ . 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, Massachusetts 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".
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
21
<PAGE>
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 $ million. 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 investment research. 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, California; New York, New York; and Boston, Massachusetts 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. Group intends to purchase for its
own account or for distribution to employees of its affiliates Shares of the
Trust prior to the Record Date and may exercise its Rights pursuant to the
Offer.
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.
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
50 Rowes Wharf (since 1986) Investors ("HQL") (since 1992); President
Boston, MA 02110 (since 1992), Senior Vice President
(1986-1992) and sole Director (since 1986),
Hambrecht & Quist Capital Management
Incorporated ("HQCM"); and Managing Director,
Hambrecht & Quist Group ("Group") (since
1992).
22
<PAGE>
Principal Occupation
Names, Ages and Addresses Position with the Trust and Other Affiliations
- ------------------------- ----------------------- ----------------------
William R. Hambrecht* (61) Trustee Chairman (since 1992), President (1982-1992),
One Bush Street (since 1994) Chief Executive Officer (1982-1987) and
San Francisco, CA 94104 Co-Chief 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
9300 Lee Highway (since 1987) 1970), The Lewin Group (a healthcare public
Fairfax, VA 22031 policy and 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
Box 7030 (since 1991) Orthopedic Clinic (since 1996); Orthopedic
Avon, CO 81620 Surgeon, Denver Orthopedic Clinic
(1977-1996); and Trustee, HQL (since 1992).
Eric Oddleifson** (61) Trustee Managing Director, UBS Resource Investments
50 South Street (since 1992) (forest and agriculture properties
Hingham, MA 02043 investments) (since 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
Woodrow Wilson School (since 1988) (since 1968); and Trustee, HQL (since 1992).
Princeton University
Princeton, NJ 08544
Henri A. Termeer** (50) Trustee Chairman (since 1988), Chief Executive
Genzyme Corporation (since 1989) Officer (since 1985) and President (since
One Kendall Square 1983), Genzyme Corporation (human healthcare
Cambridge, MA 02139 products company); 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 Financial Vice President (since 1991) and Assistant
50 Rowes Wharf Officer (since 1987) and Vice President (1987-1991), HQCM; and
Boston, MA 02110 Assistant Secretary Treasurer and Chief Financial Officer, HQL
(1987-1992) (since 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.
23
<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
24
<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 that
national healthcare expenditures in 1996 will be 14.3% of U.S. gross domestic
product ("GDP"), or $1,008 billion (in current dollars). This constitutes a
6.2% increase over U.S. healthcare expenditures in 1995. 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 16.1% 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
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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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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
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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 companies in the
healthcare industries have constrained the ability of companies to raise
capital to finance their growth and fund research. The Investment Adviser
continues to believe that this presents opportunities, especially in its
venture capital investing, as valuations continue to be attractive in
comparison to the depressed stock prices of publicly traded 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
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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
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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, Massachusetts 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
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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, Massachusetts 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, New York
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, Massachusetts
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.
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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, New York 10048 and Chicago Regional Office, 230 South
Dearborn Street, Chicago, Illinois 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, New York 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
Investment Restrictions
Trustees and Officers
The Trust
Investment Advisory Agreement
Net Asset Value
Portfolio Transactions and Brokerage
Dividend Reinvestment Plan
Tax Matters
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar
</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>
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 consider carefully 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. 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.
A-2
<PAGE>
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 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. 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 from 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
A-3
<PAGE>
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 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
A-4
<PAGE>
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 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
A-5
<PAGE>
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.
A-6
<PAGE>
================================================================================
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.
-------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
---------
<S> <C>
Prospectus Summary 3
Trust Expenses 7
Financial Highlights and Investment Performance 9
The Offer 15
Use of Proceeds 21
Description of Trust 21
Investment Adviser 22
Trustees and Officers 23
Investment Objective and Policies 25
Portfolio Transactions and Brokerage 29
Net Asset Value 29
Dividends and Distributions 30
Dividend Reinvestment Plan 30
Taxation 31
Custodian, Transfer Agent, Dividend Disbursing Agent, Registrar
and Subscription Agent 32
Distribution Arrangements 32
Legal Matters 32
Experts 33
Reports to Shareholders 33
Additional Information 33
Table of Contents of Statement of Additional Information 33
Report of Independent Public Accountants F-1
Financial Statements F-2
Appendix A--Description of Risk Factors and Investment Tech-
niques A-1
</TABLE>
2,115,336 Shares
H&Q HEALTHCARE INVESTORS
Issuable
Upon Exercise of
Non-Transferable
Rights to
Subscribe for Such Shares
-------------
PROSPECTUS
-------------
Dealer Manager
Prudential Securities Incorporated
------, 1997
================================================================================
<PAGE>
H&Q HEALTHCARE INVESTORS
STATEMENT OF ADDITIONAL INFORMATION
H&Q Healthcare Investors (the "Trust") is a diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"). 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, most of which are expected to be traded in the
over-the-counter market. 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 ("Restricted Securities"). 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. The Trust's investment adviser is Hambrecht &
Quist Capital Management Incorporated (the "Investment Adviser"), the President
and sole Director of which is Alan G. Carr, who is responsible for management of
the Trust's portfolio.
This Statement of Additional Information ("SAI") is not a prospectus, but
should be read in conjunction with the Prospectus for the Trust dated
___________, 1996 (the "Prospectus"). This SAI does not include all information
that a prospective investor should consider before purchasing shares of
beneficial interest ("Shares") of the Trust, and investors should obtain and
read the Prospectus prior to purchasing Shares. A copy of the Prospectus may be
obtained without charge, by calling (617) 574-0567. This SAI incorporates by
reference the entire Prospectus.
TABLE OF CONTENTS
PAGE
Additional Information About Investments and Investment Techniques.............
Investment Restrictions........................................................
Trustees and Officers..........................................................
The Trust......................................................................
Investment Advisory Agreement..................................................
Net Asset Value................................................................
Portfolio Transactions and Brokerage...........................................
Dividend Reinvestment Plan.....................................................
Tax Matters....................................................................
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar.............
The Prospectus and this SAI omit certain of the information contained in
the registration statement filed with the Securities and Exchange Commission
(the "Commission"), Washington, D.C. The registration statement may be obtained
from the Commission upon payment of the fee prescribed, or inspected at the
Commission's office at no charge.
This SAI is dated __________, 1996.
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENTS
AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Trust may invest,
subject to its investment objective, policies and restrictions, are described in
the Prospectus under "Investment Objectives and Policies" and "Appendix A -
Description of Risk Factors and Investment Techniques". Additional information
concerning certain of the Trust's investments and investment techniques is set
forth below.
When-Issued and Delayed Delivery Transactions
The Trust may purchase securities on a "when issued" basis or a "delayed
delivery" basis. "When-issued" securities are securities whose terms are
available and for which a market exists, but which are not available for
immediate delivery. "Delayed delivery" transactions are those in which the Trust
purchases a security but settlement of the transaction is to occur after the
customary settlement date. The Trust will enter into such transactions for the
purpose of acquiring securities that it wishes to purchase but that are not
currently available for purchase. The Trust may dispose of a commitment to
purchase prior to settlement. However, the Trust does not intend to make such
purchases for speculative purposes. When such transactions are negotiated, the
purchase price is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. During the period between
commitment and settlement, no payment is made for the securities purchased, and
no interest or dividends accrue to the Trust. However, the securities are
subject to market fluctuation, and the value at settlement may be less than the
purchase price. While awaiting settlement, the Trust will maintain with its
custodian a segregated account consisting of liquid securities, which may
include cash, obligations of the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities"), debt obligations or equity
securities having a value at least equal to its purchase commitments. The
commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security and involves a risk of loss if the
security declines prior to the settlement date, which risk is in addition to the
risk of decline of the Trust's other assets.
Repurchase Agreements
A repurchase agreement is an agreement under which the Trust acquires a
security subject to the obligation of the seller to repurchase and the Trust to
resell such security at a fixed time and price (representing the Trust's cost
and interest). 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. Repurchase agreements
may also be viewed as loans made by the Trust, which are collateralized by the
securities subject to repurchase. The Trust intends to take possession of
collateral, and the Investment Adviser will monitor repurchase
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transactions to ensure that the value of the underlying securities will at all
times be at least equal to the total amount of the repurchase obligation,
including the interest factor. If the seller defaults the Trust could realize a
loss on the sale of the underlying security to the extent that the proceeds of
sale, including accrued interest, are less than the resale price provided in the
agreement, including interest. In addition, if the seller should be involved in
bankruptcy or insolvency proceedings, the Trust may incur delay and costs in
selling the underlying security or may suffer a loss of principal and interest
if the Trust is treated as an unsecured creditor and required to return the
underlying collateral to the seller. The Trust may not enter into repurchase
agreements with respect to more than 10% of its net assets.
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. Under applicable regulatory
requirements (which are subject to change), the loan collateral must, on each
business day, be at least equal to the value of the loaned securities and must
consist of cash, bank letters of credit or U.S. Government Securities. To be
acceptable as collateral, letters of credit must obligate a bank to pay amounts
demanded by the Trust if the demand meets the terms of the letter. Such terms
and the issuing bank must be satisfactory to the Trust. When the Trust lends a
security, it continues to be entitled to receive any dividends or interest on
the loaned security and also receives one or more of: (i) a negotiated loan fee;
(ii) interest on securities used as collateral for the loan; or (iii) interest
on short-term debt securities purchased with the loan collateral. Either type of
interest may be shared with the borrower of the security. The Trust may also pay
reasonable finder's, custodian and administrative fees. The terms of the Trust's
loans of securities must meet certain requirements under the Internal Revenue
Code of 1986, as amended, (the "Code") such as providing that the Trust may
terminate the loan upon no more than five days' notice, and must permit the
Trust to reacquire loaned securities in time to vote on any important matter.
The Trust will make such loans only to banks and dealers with which it may enter
into repurchase agreements. If the borrower fails to return the loaned security,
the Trust's risks include: (1) any costs in disposing of the collateral; (2)
loss from a decline in value of the collateral to an amount less than 100% of
the securities loaned; (3) being unable to exercise its voting or consent rights
with respect to the security; (4) any loss arising from the Trust being unable
to settle a sale of such securities in a timely manner; and (5) the inability of
the Trust to reacquire the loaned securities.
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.
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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. The
Trust's ability to pursue certain of these strategies may be limited by
applicable regulations of the Commodity Futures Trading Commission ("CFTC") and
the federal income tax requirements applicable to regulated investment
companies.
Although the Trust believes that use of such strategies will benefit the
Trust, if the Investment Adviser's judgment about the general direction of
securities market movements, foreign exchange rates or interest rates is
incorrect the Trust's overall performance could be poorer than if it had not
pursued those strategies. Moreover, changes in the value of the instruments that
the Trust purchases to hedge its portfolio securities may not correlate
precisely with changes in the value of the portfolio securities the Trust is
attempting to hedge. In addition, in situations where the Trust has insufficient
cash, it may have to sell assets from its portfolio to meet margin requirements
at a time when it may be disadvantageous to do so. The Trust's hedging
activities may also result in a higher portfolio turnover rate and additional
brokerage costs.
Futures Contracts
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.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time.
Margin Requirements. At the time a futures contract is purchased or sold, the
Trust must allocate cash or securities as a deposit payment ("initial margin").
It is expected that the initial margin on U.S. exchanges may range from
approximately 3% to approximately 15% of the value of the securities or
commodities underlying the contract. Under certain circumstances, however, such
as periods of high volatility, the Trust may be required by an exchange to
increase the level of its initial margin payment. Additionally, initial margin
requirements may be increased generally in the future by regulatory action. An
outstanding futures contract is valued daily and the payment in cash of
"variation margin" may be required, a process known as "mark to the market".
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Regulatory Limitations on the Use of Futures Contracts. Regulations of the CFTC
applicable to the Trust currently require that all of the Trust's futures
transactions constitute bona fide hedging transactions or be undertaken
incidental to the Trust's activities in the securities markets. In accordance
with CFTC regulations, the Trust may not purchase or sell futures contracts if
immediately thereafter the sum of the amounts of initial margin deposits on the
Trust's existing futures positions would exceed 5% of the fair market value of
the Trust's total assets. The Investment Adviser reserves the right to comply
with such different standard as may be established by CFTC rules and regulations
with respect to the purchase or sale of futures contracts.
Considerations Concerning Futures Contracts and Options on Futures Contracts.
Futures contracts entail special risks. The ordinary spreads between values in
the cash and futures markets, due to differences in the character of these
markets, are subject to distortions relating to (1) investor's obligations to
meet additional variation margin requirements, (2) decisions to make or take
delivery, rather than entering into offsetting transactions and (3) the
difference between margin requirements in the securities markets and margin
deposit requirements in the futures markets. The possibility of such distortion
means that a correct forecast of general market, foreign exchange rate or
interest rate trends by the Investment Adviser may still not result in a
successful transaction. The Trust's ability to establish and close out positions
in futures contracts and options on futures contracts will be subject to the
development and maintenance of a liquid market. Although the Trust generally
will purchase or sell only those futures contracts and options thereon for which
there appears to be a liquid market, there is no assurance that a liquid market
on an exchange will exist for any particular futures contract or option thereon
at any particular time.
Under certain circumstances, exchanges may establish daily limits in the
amount that the price of a futures contract may vary either up or down from the
previous day's settlement price. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit.
Exchange Rate Risk
The Trust may enter into forward foreign currency exchange contracts
("forward 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. The accurate
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Forward Contracts. A forward contract obligates one party to purchase and the
other party to sell a definite amount of a given foreign currency at some
specified future date.
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In some circumstances the purchase or sale of appropriate forward contracts may
help offset declines in the U.S. Dollar equivalent value of the Trust's foreign
currency denominated assets and income available for distribution to the Trust's
shareholders of record that result from adverse changes in the exchange rate
between the U.S. Dollar and the various foreign currencies in which the Trust's
assets or income may be denominated. The U.S. Dollar equivalent value of the
principal of and rate of return on foreign currency denominated securities will
decline if the exchange rate of the U.S. Dollar rises in relation to that
currency. Such declines could be partially or completely offset by an increase
in the value of a forward contract on that foreign currency.
While the use of foreign currency forward contracts may protect the Trust
against declines in the U.S. Dollar equivalent value of its assets, their use
will reduce the possible gain from advantageous changes in the value of the U.S.
Dollar against particular currencies in which their assets are denominated.
Moreover, the use of foreign currency forward contracts will not eliminate
fluctuations in the underlying U.S. Dollar equivalent value of the prices of or
rates of return on the assets held in the portfolio and the use of such
techniques will subject the Trust to certain risks.
The foreign exchange markets can be highly volatile, subject to sharp price
fluctuations. In addition, trading forward contracts can involve a degree of
leverage. As a result, relatively small movements in the rates of exchange
between the currencies underlying a contract could result in immediate and
substantial losses to the Trust. Trading losses that are not offset by
corresponding gains in assets being hedged could sharply reduce the value of the
Trust's portfolio.
Futures Contracts on Foreign Currencies. Buyers and sellers of foreign currency
futures contracts are subject to the same risks that apply to the use of futures
generally. In addition, there are risks associated with foreign currency futures
contracts and their use as hedging devices similar to those associated with
options on foreign currencies described above. Further, settlement of a foreign
currency futures contract must occur within the country issuing the underlying
currency. Thus, the Trust must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
may be required to pay any fees, taxes or charges associated with such delivery
that are assessed in the country of the underlying currency.
Coverage Requirements
All futures and forward currency contracts purchased or sold by the Trust
are required to be covered. When the Trust purchases a futures or forward
currency contract, this means that the Trust will maintain with the Trust's
custodian in a segregated account an amount of liquid securities, including
cash, U.S. Government Securities, debt obligations or equity securities, so that
the amount so segregated, plus
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the amount of initial and variation margin held in the account of its broker, if
applicable, equals the market value of the futures or forward currency contract.
When the Trust sells a futures or forward currency contract, this means
that during the life of the futures or forward currency contract the Trust will
own or have the contractual right to acquire the securities or foreign currency
subject to the futures or forward currency contract, or will maintain with the
Trust's custodian in a segregated account liquid securities, including cash,
U.S. Government Securities, debt obligations or equity securities, in an amount
at least equal to the market value of the securities or foreign currency
underlying the futures or forward currency contract.
If the market value of the contract moves adversely to the Trust, or if
the value of the securities in the segregated account declines, the Trust will
be required to deposit additional cash or securities in the segregated account
at a time when it may be disadvantageous to do so.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental restrictions, which, like its
investment objective, may not be changed without the affirmative vote of the
holders of a majority of the Trust's outstanding Shares. As used in this SAI, a
"majority of the Trust's outstanding Shares" means the lesser of (i) 67% of the
Shares represented at a meeting at which more than 50% of the outstanding Shares
are represented or (ii) more than 50% of the outstanding Shares. The Trust may
not:
1. With respect to 75% of its total assets, invest in securities of
any one issuer if immediately after and as a result of such investment more
than 5% of the total assets of the Trust, taken at market value, would be
invested in the securities of such issuer. This restriction does not apply
to investments in U.S. Government Securities.
2. Purchase more than 10% of the outstanding voting securities of any
one issuer.
3. Purchase or sell commodities or commodities contracts.
4. Purchase or sell real estate; provided that the Trust may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
5. Purchase any securities on margin or make short sales of
securities, except for short-term credit necessary for the clearance of
portfolio transactions.
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6. Underwrite securities of other issuers, except to the extent that,
in connection with the disposition of its portfolio securities, the Trust
may be deemed an underwriter under federal or state securities law. See
"Portfolio Transactions and Brokerage".
7. Invest less than 25% of its net assets in securities of companies
in the healthcare industries.
8. Invest more than 40% of the Trust's net assets in venture capital
or other Restricted Securities.
9. Issue senior securities or borrow amounts in excess of 10% of its
net assets at the time of borrowing, and then only from banks as a
temporary measure for extraordinary or emergency purposes or for the
repurchase of its securities. The Trust will not repurchase its securities
during periods when it has outstanding borrowings in excess of 5% of its
net assets. The Trust will not borrow for investment purposes.
10. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Trust,
except as may be necessary in connection with permitted borrowings under 9.
above.
11. Make loans of money, except by the purchase of debt obligations in
which the Trust may invest consistent with its investment objective and
policies. The Trust reserves the authority to enter into repurchase
agreements and to make loans of its portfolio securities to qualified
institutional investors, brokers, dealers, banks or other financial
institutions, so long as the terms of the loans are not inconsistent with
the requirements of the Investment Company Act. Such loans may not exceed
an aggregate amount of 20% of the Trust's net assets. Repurchase agreements
are subject to the percentage limitation described in investment policy 5.
below.
12. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization, if
(a) more than 10% of its total assets would be invested in securities of
other investment companies, (b) more than 5% of its total assets would be
invested in the securities of any one investment company, or (c) the Trust
would own more than 3% of any other investment company's securities.
For purposes of restriction 3. above, the prohibition on the purchase or
sale of commodities applies to the purchase or sale of "physical" commodities.
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In addition, the Trust has adopted the following investment policies, which
may be changed by the action of the Board of Trustees (the "Board") without
shareholder approval:
1. The Trust under normal circumstances will have at least 80% of its
net assets invested in securities of companies in the healthcare
industries.
2. To the extent not invested in the healthcare industries, assets of
the Trust will be invested in cash, U.S. Government Securities, money
market instruments or money market mutual funds for liquidity. When, in the
opinion of the Investment Adviser, adverse market conditions or industry
expectations support such action, the Trust may temporarily take a
defensive position of up to 75% of net assets in such liquid investments.
The 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
and commercial paper and high and upper medium grade corporate debt
securities rated, as of the date of purchase, among the highest rating
categories of Moody's Investors Service Inc. (Aaa, Aa or A for bonds;
MIG-1, MIG-2 or MIG-3 for notes; P-1 for commercial paper) or Standard &
Poor's Corporation (AAA, AA or A for bonds; SP-1+ to SP-2 for notes; A-1
for commercial paper). 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 the limitations set
forth in 12. above. 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 payment
of fees to the Investment Adviser.
3. Investments will not be made in any company with the objective of
exercising control over that company's management, and the Trust generally
will not provide managerial assistance to any such company as is normally
the case with venture capital funds. The Trust, however, may make
investments as a co-investor with other venture capital groups that may
provide issuers with significant managerial assistance.
4. The Trust may invest up to 5% of its net assets in warrants, valued
at market value. Warrants acquired in units or attached to other securities
are not subject to this restriction.
5. The Trust may not enter into repurchase agreements with respect to
more than 10% of its net assets. 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
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respect to U.S. Government Securities and money market instruments. The
Trust does not intend to enter into repurchase agreements with Hambrecht &
Quist LLC ("H&Q"). Repurchase agreements may also be viewed as loans made
by the Trust which are collateralized by the securities subject to
repurchase. The Trust intends to take possession of collateral, and the
Investment Adviser will monitor repurchase transactions to ensure that the
value of the underlying securities will be at least equal at all times to
the total amount of the repurchase obligation, including the interest
factor.
6. The Trust may not invest more than 20% of its net assets at the
time of purchase in securities of foreign issuers. Such issuers are
expected to be companies domiciled in Canada, Western Europe and Japan.
The Trust may buy and sell foreign currencies for the purpose of settlement
of transactions in foreign securities, but presently does not intend to
engage in hedging operations such as buying contracts for purchase in the
future of foreign currencies. Any such hedging operations would be limited
to 5% of net assets.
7. The Trust may not invest in put or call options.
Except as otherwise noted, all percentage limitations set forth above apply
immediately after a purchase and a subsequent change in the applicable
percentage resulting from market fluctuations does not require elimination of
any security from the portfolio.
TRUSTEES AND OFFICERS
Board of Trustees
For the names and addresses of the Trust's Trustees and Officers, a
description of their positions with the Trust and their principal occupations
during the last 5 years, see "Trustees and Officers" in the Trust's Prospectus.
Compensation of Trustees
The Trust pays each of the Trustees not affiliated with the Investment
Adviser a fee of $6,000 annually and $900 for each meeting of the Board
attended, together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. For the fiscal years ended September 30, 1996 and
September 30, 1995 the Trust paid such fees and reimbursed such expenses
amounting to $56,663 and $49,109, respectively, in the aggregate.
The following table sets forth information regarding compensation of
Trustees by the Trust and other funds managed by the Investment Adviser for the
fiscal year ended
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September 30, 1996. Officers of the Trust and Trustees who are interested
persons of the Trust do not receive any compensation from the Trust or any other
funds managed by the Investment Adviser.
Compensation Table
For the Fiscal Year ended September 30, 1996
Aggregate Accrued Pension Total
Disinterested Compensation or Retirement Compensation
Trustee from the Trust Benefits from Fund Complex
(2 funds)
- -------------------------------------------------------------------------------
Lawrence S. Lewin $9,600 None $19,200
Robert P. Mack, M.D. $9,600 None $19,200
Eric Oddleifson $9,600 None $19,200
Uwe E. Reinhardt, Ph.D. $9,600 None $19,200
Henri A. Termeer $8,700 None $17,400
To the knowledge of the Trust, as of January 2, 1997, there are no
control persons of the Trust. On January 2, 1997, the Trustees and
officers of the Trust owned as a group beneficially and of record less than 1%
of the Trust's outstanding Shares.
THE TRUST
The Trust's capitalization consists of an unlimited number of Shares, $.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 Declaration of
Trust and By-laws and the rules of the New York Stock Exchange ("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 Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a trust under
certain circumstances may be determined to be personally liable as partners for
the Trust's obligations. However, the Trust's Declaration of Trust contains an
express disclaimer of shareholder
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liability for the acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for the obligations of the Trust. Thus,
the risk of a shareholder incurring financial loss on account of a Trust
liability is limited to circumstances in which the Trust is unable to meet its
obligations from the liquidation of its portfolio investments.
The overall management of the Trust is vested in the Board. The Board
approves all significant agreements between the Trust and persons or companies
furnishing services to it, including the Trust's agreements with its Investment
Adviser, Custodian, any foreign sub-custodians, Registrar and Transfer Agent.
The management of the day-to-day operations of the Trust is delegated to its
officers and to the Investment Adviser, subject always to the investment
objective and policies of the Trust and to general supervision by the Board.
In addition, the Declaration of Trust requires the affirmative vote or
consent of the holders of 75% of the Shares of the Trust to authorize certain
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. These provisions will make it more difficult to change the management of
the Trust and could have the effect of depriving Shareholders of an opportunity
to sell their Shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Trust in a tender offer or
similar transaction. See "The Trust" in the Fund's Prospectus.
Repurchases of Shares and Tender Offers
The Trust is a closed-end management investment company and as such its
shareholders do not, and will not, have the right to redeem their Shares of the
Trust. The Trustees, however, intend to consider, from time to time, but not
less frequently than annually, the desirability of open market purchases or
tender offers. Any such repurchases will be made in accordance with the
applicable provisions of the Investment Company Act and Massachusetts law in
open market transactions. Shares repurchased by the Trust will be held in its
treasury. Although the Trust has no present intention of doing so, it reserves
the right to incur debt to finance such repurchases or tender offers, provided
that it will not repurchase securities during the periods when it has
outstanding borrowings in excess of 5% of its net assets. See "Investment
Restrictions". Interest on any borrowings to finance Share repurchase
transactions will increase the Trust's expenses and will reduce the Trust's net
income. There can be no assurance that Share repurchases, if any, will cause the
Shares to trade at a price equal to or in excess of their net asset value.
Nevertheless, the possibility that a portion of the Trust's outstanding Shares
may be the subject of repurchases may reduce the spread between market price and
net asset value that might otherwise exist. The Trust may not repurchase Shares
except (i) on a securities exchange and after notification to shareholders of
its intent to
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purchase Shares within the six months preceding the purchase, (ii) pursuant to a
tender offer to all shareholders or (iii) as otherwise permitted by the
Commission.
The Shares of the Trust will trade in the open market at a price which will
be a function of several factors, including their supply, demand, investment
performance and yield. The shares of closed-end investment companies generally
sell at market prices varying from their net asset values and such shares
frequently trade at a discount to net asset value, but in some cases trade at a
premium. The market price of the Shares will be determined by factors including
trading volume of such Shares, general market and economic conditions and other
factors beyond the control of the Trust. Therefore, the Trust cannot predict
whether its Shares will trade at, below or above net asset value. When the Trust
repurchases its Shares for a price below their net asset value, the net asset
value of those Shares that remain outstanding will be enhanced, but this does
not necessarily mean that the market price of those outstanding Shares will be
affected, either positively or negatively.
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Conversion to Open-End Investment Company Status
Finally, the conversion of the Trust from a closed-end to an open-end
investment company would require an amendment to the Declaration of Trust. Such
an amendment would require the favorable vote of the holders of a majority of
the Shares of the Trust entitled to vote on the matter. Such a vote would also
satisfy a separate requirement in the Investment Company Act that the change be
approved by the Shareholders. The amendment would have to be approved by the
Board prior to its submission to Shareholders. The Board is required under the
Declaration of Trust to consider and vote annually upon the proposal to convert
to open-end status. A proposal to convert the Trust to an open-end company might
be supported or opposed by the Board depending on the Board's judgment as to its
advisability in light of circumstances prevailing at the time. Shareholders of
an open-end investment company may require the company to redeem their shares at
any time (except in certain circumstances as authorized by or under the
Investment Company Act) at their net asset value, less such redemption charge,
if any, as might be in effect at the time of a redemption. Conversion to an
open-end investment company could require the disposal of illiquid investments
to meet current requirements of the Commission that no more than 15% of an
open-end investment company's assets consist of illiquid securities, and would
likely require involuntary liquidation of portfolio securities, and the inherent
realization of net long-term capital gains in connection therewith, to meet
periodic requests for redemption. Moreover, Shares of the Trust would no longer
be listed on the NYSE.
INVESTMENT ADVISORY AGREEMENT
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
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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. The responsibility
for making decisions to buy, sell or hold a particular security rests with the
Investment Adviser. However, the Investment Adviser may consider investment
analysis from various sources, including broker-dealers with which the Trust
does business. See "Portfolio Transactions and Brokerage".
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 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).
The Investment Adviser will not participate directly in the capital
appreciation of Restricted Securities or generally provide managerial assistance
to portfolio companies, as is normally the case with venture capital funds. For
purposes of calculation of the investment advisory fee, "average net assets" for
any month shall be equal to the average of the net asset value of such assets as
of the last business day of such month and the net asset value of the
appropriate assets as of the last business day of the preceding month. The
investment advisory fee paid by the Trust exceeds that paid by most registered
investment companies to their investment advisers. The Trust believes that the
fee is commensurate with the nature and quality of the services required for
identifying, evaluating and monitoring the Trust's Restricted Securities
investments.
The Advisory Agreement also provides that the Investment Adviser shall not
be liable for any error of judgment or for any loss suffered by the Trust in
connection with matters to which the Advisory Agreement relates, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from wilful misfeasance, bad faith
or gross negligence on the part of the Investment Adviser in the performance of
its duties or from reckless disregard by the Investment Adviser of its
obligations and duties under the Advisory Agreement.
For the fiscal years ended September 30, 1996, September 30, 1995 and
September 30, 1994, the Trust paid the Adviser $1,961,266, $1,336,950 and
$1,348,897, respectively, in advisory fees.
The services of the Investment Adviser to the Trust are not deemed to be
exclusive, and nothing in the Advisory Agreement prevents the Investment
Adviser, or any affiliate thereof, from providing similar services to other
companies and other clients or from engaging in other activities.
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The Advisory Agreement obligates the Investment Adviser to pay all
compensation for officers and employees of the Trust connected with investment
and economic research, trading and investment management for the Trust. Under
the Advisory Agreement, the Trust is responsible for all other expenses incurred
in its organization and operation including, among other things, expenses
related to the offer of Shares, expenses for legal and auditing services; costs
of printing proxies, prospectuses, stock certificates and shareholder reports;
charges of the custodian, any sub-custodian and transfer agent; expenses in
connection with the Plan; Commission and National Association of Securities
Dealers, Inc. fees; fees and expenses of unaffiliated Trustees; accounting and
valuation costs; membership fees in trade associations; fidelity bond coverage
for the Trust's officers and employees; errors and omissions insurance coverage
for Trustees and officers; interest; brokerage costs; taxes; stock exchange
listing fees and expenses; expenses of qualifying the Trust's Shares for sale in
various states; expenses associated with personnel performing exclusively
shareholder servicing functions; litigation and other extraordinary or
non-recurring expenses and other expenses properly payable by the Trust. The
Trust may enter into arrangements to have third parties assume any expenses for
which it is responsible.
The Advisory Agreement was initially approved by the Trustees of the Trust,
including a majority of Trustees who are not parties to the agreement or
interested persons (as defined in the Investment Company Act) of any such party,
on April 21, 1987 and last approved by the Trustees of the Trust, including a
majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party, on February 12, 1996. Unless earlier
terminated as described below, the Advisory Agreement will remain in effect from
year to year if approved annually (i) by the Board or by the holders of a
majority of the Trust's outstanding Shares and (ii) by the majority of the
Trustees who are not parties to the Advisory Agreement or interested persons of
any such party. The Advisory Agreement may be terminated by (i) the Trust or the
Investment Adviser at any time without penalty upon not less than 30 and no more
than 60 days' written notice or (ii) a vote of the holders of a majority of the
Trust's outstanding Shares, and will automatically terminate in the event of its
assignment or any bankruptcy or similar proceeding involving any person who
controls the Investment Adviser.
The Advisory Agreement provides that the Trust may use "H&Q" or "Hambrecht
& Quist" as part of its name for so long as the Investment Adviser serves as
investment adviser to the Trust. The Trust has also acknowledged that the names
"H&Q" or "Hambrecht & Quist" are a property right of the Investment Adviser and
in the event that the investment advisory relationship terminates, the Trust
thereafter will not use such names. The Investment Adviser may at any time
permit others to use such names.
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NET ASSET VALUE
The net asset value per Share ("NAV") of the Trust's 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 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 Hambrecht & Quist Group ("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
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primarily include accrued expenses, sums owed for securities purchased and
dividends payable.
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 has no obligation to deal with any broker or group of brokers,
including H&Q, a wholly-owned subsidiary of Group, in executing transactions in
portfolio securities. Brokers, including H&Q, who provide supplemental research,
market and statistical information to the Investment Adviser may receive orders
for transactions by the Trust. The term "research, market and statistical
information" includes advice as to the value of securities, the advisability of
purchasing or selling securities and the availability of securities or
purchasers or sellers of securities, and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Information so received will
be in addition to and not in lieu of the services required to be performed by
the Investment Adviser under the Advisory Agreement and the expenses of the
Investment Adviser will not necessarily be reduced as a result of the receipt of
such supplemental information. Such information may be useful to the Investment
Adviser in providing services to clients other than the Trust, and not all such
information may be used by the Investment Adviser in connection with the Trust.
Conversely, such information provided to the Investment Adviser by brokers and
dealers through whom other clients of the Investment Adviser in the future may
effect securities transactions may be useful to the Investment Adviser in
providing services to the Trust. To the extent the Investment Adviser receives
valuable research, market and statistical information from a broker-dealer,
including H&Q, the Investment Adviser intends to direct orders for Trust
transactions to that broker-dealer, subject to the foregoing policies,
regulatory constraints and the ability of broker dealers, including H&Q, to
provide competitive prices and commission rates. For the fiscal year ended
September 30, 1996, the amount of transactions for which the Investment Adviser
directed brokerage because of research services aggregated $9,712,286 and the
related commissions aggregated $35,000.
The Investment Company Act restricts transactions involving the Trust and
its "affiliates", including among others, the Trust's Trustees, officers and
employees, the Investment Adviser and H&Q, and any "affiliates" of such
affiliates. Subject to any such restrictions, investment companies advised by
the Investment Adviser and venture capital funds managed by entities associated
with Group may concurrently invest with the Trust in Restricted Securities, and
the Trust may also invest in companies in which directors of
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the Investment Adviser or Trustees of the Trust have invested or for which they
serve as directors or executive officers. A substantial portion of the
securities in which the Trust may invest are traded in the over-the-counter
markets, and the Trust intends to deal directly with the dealers who make
markets in the securities involved, except as limited by applicable law and in
those circumstances where better prices and execution are available elsewhere.
Under the Investment Company Act, persons affiliated with the Trust are
generally prohibited from dealing as principal with the Trust in the purchase
and sale of securities. Under certain circumstances, affiliated persons of the
Trust are permitted to serve as its broker in over-the-counter transactions
conducted on an agency basis.
Subject to the foregoing policies of the Trust and provisions of law, the
Trust may use H&Q to execute portfolio transactions for the Trust on an agency
basis. The Trust's Board has adopted procedures in conformity with Rule 17e-1
under the Investment Company Act designed to ensure that all brokerage
commissions paid to H&Q are reasonable and fair as compared to the commissions
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on securities exchanges during a
comparable period of time. In addition, pursuant to Section 11(a) of the
Securities Exchange Act of 1934 (the "Securities Act") and Rule 11a2-2(T)
thereunder, H&Q may not execute transactions for the Trust on the floor of any
national securities exchange, but may effect such transactions through
transmitting orders for execution, providing for clearance and settlement, and
arranging for the performance of such functions. As permitted by this Rule, the
Trust has entered into an agreement with H&Q that permits H&Q to retain
compensation for effecting transactions for the Trust on national securities
exchanges. The agreement provides, among other things, that H&Q must furnish the
Trust at least annually with a statement setting forth the total amount of all
compensation retained by H&Q under the agreement.
The Trust will not make venture capital investments in a company that has
retained H&Q to act as placement agent of such securities for a fee. It is
likely, however, that, subject to applicable law, the Trust may invest in
securities concurrently being purchased by other investment companies advised by
the Investment Adviser or by venture capital funds managed by entities
associated with Group. Such purchases would be made on terms no less favorable
than those under which such investment companies and venture capital funds would
be acquiring the Shares. In the case of concurrent purchases by the Trust and
another investment company or companies or accounts managed by the Investment
Adviser, such purchases would be made where the Investment Adviser has made an
independent decision on behalf of the Trust and such other company or companies
that the purchase is appropriate in light of the investment objectives,
policies, restrictions, current holdings, available cash and portfolio structure
of and other factors affecting each. Such investments will be allocated among
clients in a manner believed by the Investment Adviser to be equitable to each.
The Trust may also from time to time invest in securities of companies in which
affiliated persons of the
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Trust have invested, subject to the provisions of the Investment Company Act and
the rules and regulations promulgated thereunder.
The Trust's portfolio transactions in Restricted Securities are generally
subject to Rule 144 under the Securities Act. In general, under Rule 144 as
currently in effect, if the Trust has beneficially owned Restricted Securities
of a publicly held issuer for more than two but less than three years, it will
be entitled to sell in any three-month period that number of such securities
that will not exceed the greater of 1% of the then outstanding securities of
that class or the average weekly trading volume in securities of that class in
any national securities exchange and/or in the over-the-counter market during
the four calendar weeks immediately preceding the date on which notice of the
sale is filed with the Commission. These volume limitations also apply to sales
by the Trust of the securities of any issuer as to which it is deemed an
affiliate, regardless of whether securities of such issuer are publicly traded.
The above-described sales under Rule 144 are subject to certain requirements
relating to manner of sale, notice and availability of current public
information about the issuer. If the Trust is not deemed to have been an
affiliate of the issuer at any time during the 90 days immediately preceding the
sale and has beneficially owned Restricted Securities for at least three years,
it is entitled to sell such securities under Rule 144(k) without regard to
whether the issuer is publicly-held or to the volume limitations or other
requirements described above. When Restricted Securities are sold to the public
other than pursuant to Rule 144 or 144A, the Trust may be deemed an
"underwriter" with respect thereto for purposes of the Securities Act and
subject to liability as such thereunder.
Certain investments may be appropriate for the Trust and also for other
clients advised by the Investment Adviser. Investment decisions for the Trust
and for such other clients are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment and the size of their investments
generally. Frequently, a particular security may be bought or sold only for the
Trust or for another client or in different amounts and at different times for
more than one but less than all clients, including the Trust. Likewise, a
particular security may be bought for the Trust or one or more clients when one
or more other clients or the Trust are selling the security. In addition,
purchases or sales of the same security may be made for two or more clients,
including the Trust, on the same date. In such event, such transactions will be
allocated among the Trust and client(s) in a manner believed by the Investment
Adviser to be equitable to each. Purchase and sale orders for the Trust may be
combined with those of other clients of the Investment Adviser in the interest
of obtaining the most favorable net results to the Trust. In effecting
transactions, it may not always be possible, or consistent with the investment
objectives of the various persons described above and of the Trust, to take or
liquidate the same investment positions at the same time or at the same prices.
For the fiscal years ended September 30, 1996, September 30, 1995 and
September 30, 1994, $36,000, $16,100 and $21,000, respectively, of brokerage
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commissions were paid by the Trust. For the fiscal years ended September 30,
1996, September 30, 1995 and September 30, 1994, the Trust paid a total of $0,
$1,000 and $0, respectively in commissions to H&Q. For the fiscal years ended
September 30, 1996, September 30, 1995 and September 30, 1994, the percentage
of aggregate commissions paid for such fiscal years to H&Q Group was 0%, .62%,
and 0%, respectively.
For a description of the Trust's portfolio turnover policies and the
portfolio turnover rates for the last two fiscal years, see "Portfolio
Transactions and Brokerage" in the Trust's Prospectus.
DIVIDEND REINVESTMENT PLAN
Each shareholder holding Shares of the Trust will automatically be a
participant in the Trust's Dividend Reinvestment Plan (the "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 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 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.
Each shareholder may terminate his or her account under the Plan, or may
withdraw from the Plan upon written notice to the Plan Agent at the address
shown below received at least ten days prior to the record date for a dividend
or distribution, which notice will be effective for that and all subsequent
dividends or distributions. When a participant withdraws from the Plan or upon
termination of the Plan as provided below, certificates for whole Shares
credited to his or her account under the Plan will be issued and a cash payment
will be made for any fraction of a Share credited to such account. There is no
penalty for non-participation in or withdrawal from the Plan;
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Shareholders who have withdrawn from the Plan may rejoin it at any time by
furnishing to the Plan Agent an authorization in the required form.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes written confirmations of all transactions in the accounts, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in
non-certificated form in the name of the participant, and each shareholder's
proxy will include those shares issued pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees that hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
record shareholder as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are
participants in the Plan. Brokers and nominees of banks and financial
institutions are advised to contact the Plan Agent to determine whether the
beneficial owners of Shares held in their names may participate in the Plan.
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal or other income tax that may be payable or required
to be withheld on such dividends or distributions.
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, Massachusetts 02266-8200.
TAX MATTERS
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Trust and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Trust or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Trust.
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Taxation of the Trust
The Trust intends to qualify and elect to be treated each taxable year as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). The principal federal income tax benefits of qualifying as a
regulated investment company ("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.
To qualify as a RIC, the Trust must, among other things, (a) derive in each
taxable year at least 90% of its gross income from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stock, securities or foreign currencies, and other income derived with respect
to its business of investing in such stock, securities or currencies (the
"Qualifying Income Requirement"); (b) derive in each taxable year less than 30%
of its gross income from the sale or other disposition of certain assets
(namely, (i) stock or securities, (ii) options, futures, or forward contracts
(other than those on foreign currencies), or (iii) foreign currencies (including
options, futures, and forward contracts on such currencies) not directly related
to the Trust's principal business of investing in stocks or securities (or
options and futures with respect to stocks or securities)), held less than three
months (the "30% Limitation"); (c) diversify its holdings so that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of the
Trust's assets is represented by cash and cash items, U.S. Government
Securities, the securities of other RICs and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Trust's total assets and not
greater than 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its total assets is invested in the securities
of any one issuer (other than U.S. Government Securities or the securities of
other RICs); and (d) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) each taxable
year. The U.S. Treasury Department has authority to promulgate regulations
pursuant to which gains from foreign currency (and options, futures and forward
contracts on foreign currency) not directly related to a RIC's business of
investing in stocks and securities would not be treated as qualifying income for
purposes of the Qualifying Income Requirement. To date, such regulations have
not been promulgated.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
avoid the excise tax, the Trust must distribute during each calendar year an
amount equal to the
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sum of (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the one-year period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, the Trust intends to
make its distributions in accordance with the calendar year distribution
requirement. A dividend will be treated as paid on December 31 of the calendar
year if it is declared by the Trust in October, November or December of the
year, payable to shareholders of record on a date in such a month and paid by
the Trust during January of the following year. Such dividends will be taxable
to shareholders as of December 31 of the calendar year in which the dividends
are declared, rather than during the calendar year in which the dividends are
received. If the Trust elects to retain net capital gains and treat such gains
as having been distributed, all or a portion of such gains may not be treated as
having been timely distributed for purposes of satisfying the excise tax
calendar year distribution requirement.
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.
Distributions of the excess, if any, of net long-term capital gains over
net short-term capital losses ("net capital gains") 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. The Trust may elect to
retain net capital gains. In such event, the Trust will be required to pay
federal income taxes on the undistributed net capital gains, but intends to
elect to treat such capital gains as having been distributed to shareholders. As
a result, such amounts will be included in the gross income of the shareholders
as long-term capital gains and shareholders will be able to claim their
proportionate share of federal income taxes paid by the Trust on such gains as a
credit against their own federal income tax liabilities, and will be entitled to
increase the adjusted tax basis of their Shares of the Trust by an amount equal
to 65% of the amount of the undistributed capital gains included in their gross
income. Organizations or persons not subject to federal income tax on such
capital gains (such as, generally, qualified pension and profit-sharing funds,
including Individual Retirement Accounts and Keogh plans, and certain trusts,
nonresident aliens and foreign corporations) will be entitled to a refund of
their pro rata share of such taxes paid by the Trust upon filing appropriate
returns or claims for refund with the Internal Revenue Service ("IRS"). Even if
the Trust makes such an
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election, it is possible that the Trust may incur an excise tax as a result of
not having distributed sufficient net capital gains.
If the value of the Trust's Shares is reduced below a Shareholder's cost as
a result of a distribution of investment company taxable income or net capital
gains by the Trust, such distribution will be taxable to the shareholder. The
price of Shares purchased at this time may reflect the amount of the forthcoming
distribution. Those purchasing just prior to a distribution of investment
company taxable income or net capital gains will receive a distribution which
will nevertheless be taxable to them.
Dividends (not including capital gain dividends) received by corporate
shareholders from the Trust qualify for the dividends received deduction for
corporate shareholders to the extent the Trust designates the amount distributed
as eligible for the deduction. The aggregate amount designated by the Trust
cannot exceed the aggregate amount of dividends received by the Trust from
domestic corporations for the taxable year, and the designation of dividend
income must generally be the same for all Shares. Thus, unless 100% of the
Trust's gross income constitutes qualified dividends, a portion of the dividends
paid to corporate shareholders will not qualify for the dividends received
deduction. The dividends received deduction for corporate shareholders may be
further reduced if the Shares with respect to which dividends are received are
treated as debt-financed or if either those Shares or the Shares of the Trust
are deemed to have been held by the Trust or its shareholders, respectively, for
less than 46 days.
In addition to furnishing any other required tax statements, the Trust
intends to send not later than 60 days after September 30 (the end of the tax
and fiscal year of the Trust) written notices to shareholders regarding the tax
status of all distributions made during such taxable year, the amount qualifying
for the dividends received deduction for corporations and the amount of
undistributed net capital gains and related tax credits.
Sale of Shares
Generally, gain or loss realized upon the sale or exchange of Shares will
be 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.
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Currency Fluctuations--"Section 988" Gains or Losses
Under the Code, the gains or losses attributable to fluctuations in
exchange rates which occur between the time the Trust accrues receivables or
liabilities denominated in a foreign currency and the time the Trust actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of foreign currency
or debt securities denominated in a foreign currency and on disposition of
certain futures and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the currency, security or contract and the date of disposition also are treated
as ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the
Trust's investment company taxable income to be distributed to its Shareholders
as ordinary income.
Certain futures and foreign currency contracts in which the Trust may
invest are "section 1256 contracts". While gains or losses on section 1256
contracts are considered 60% long-term and 40% short-term capital gains or
losses, certain foreign currency futures and foreign currency contracts may give
rise to ordinary income or loss, as described below. Also, section 1256
contracts held by the Trust at the end of each taxable year (and, generally, for
purposes if the 4% excise tax, on October 31 of each year) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized.
Foreign Withholding Taxes
Income received by the Trust from non-U.S. sources may be subject to
withholding and other taxes imposed by other countries. Because it is not
expected that more than 50% of the value of the Trust's total assets at the
close of its taxable year will consist of stock and securities of non-U.S.
corporations, it is not expected that the Trust will be eligible to elect to
"pass-through" to the Trust's shareholders the amount of foreign income and
similar taxes paid by the Trust. In the absence of such an election, the foreign
taxes paid by the Trust will reduce its investment company taxable income, and
distributions of investment company taxable income received by the Trust from
non- U.S. sources will be treated as U.S. source income.
Backup Withholding
The Trust may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to provide
the Trust with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against a shareholder's U.S. federal income tax
liability. Certain persons are exempt from the
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<PAGE>
backup withholding requirements. Questions relating to backup withholding should
be directed to your tax adviser.
Foreign Shareholders
U.S. taxation of a shareholder who, as to the U.S., is a non-resident alien
individual, a foreign trust or estate, a foreign corporation or foreign
partnership ("foreign shareholder") depends on whether the income from the Trust
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
Income Not Effectively Connected. If the income from the Trust is not
"effectively connected" with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate, except in the case of any excess
inclusion income allocated to the shareholder (see "Taxation--Investments in
Real Estate Investment Trusts"), which tax is generally withheld from such
distributions.
Distributions of capital gain dividends and amounts retained by the Trust
which are designated as undistributed capital gains will not be subject to U.S.
tax at the rate of 30% (or lower treaty rate) unless the foreign shareholder is
a non-resident alien individual and is physically present in the U.S. for more
than 182 days during the taxable year and meets certain other requirements.
However, this 30% tax on capital gains of non-resident alien individuals who are
physically present in the U.S. for more than the 182-day period only applies in
exceptional cases, because any individual present in the U.S. for more than 182
days during the taxable year is generally treated as a resident for U.S. federal
income tax purposes; in that case, he or she would be subject to U.S. federal
income tax on his or her worldwide income at the graduated rates applicable to
U.S. citizens, rather than the 30% U.S. tax. In the case of a foreign
shareholder who is a non-resident alien individual, the Trust may be required to
withhold U.S. federal income tax at a rate of 31% of distributions of net
capital gains unless the foreign shareholder certifies his or her non-U.S status
under penalties of perjury or otherwise establishes an exemption. See "Backup
Withholding" above. If a foreign shareholder is a non-resident alien individual,
any gain such shareholder realizes upon the sale or exchange of such
shareholder's Shares of the Trust in the U.S. will ordinarily be exempt from
U.S. tax unless such shareholder is physically present in the U.S. for more than
182 days during the taxable year and meets certain other requirements.
Income Effectively Connected. If the income from the Trust is "effectively
connected" with a U.S. trade or business carried on by a foreign shareholder,
then distributions of investment company taxable income and capital gain
dividends, amounts retained by the Trust which are designated as undistributed
capital gains and any gains realized upon the sale or exchange of Shares of the
Trust will be subject to U.S. federal income tax at the graduated rates
applicable to U.S. citizens, residents and domestic
- 27 -
<PAGE>
corporations. Such foreign shareholders that are corporations may also be
subject to the branch profits tax imposed by the Code.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Trust.
Other Taxes
Distributions may also be subject to state, local and foreign taxes
depending on each shareholder's particular situation. Shareholders should
consult their own tax advisers with respect to their particular situation.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR
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, Massachusetts 02110. Rules adopted under
the Investment Company Act permit the Trust to maintain its securities and cash
in the custody of certain eligible banks and securities depositories. Pursuant
to those Rules, the Trust's portfolio of securities and cash, when invested in
Foreign Securities, will be held by sub-custodians who have been approved by the
Board in accordance with the Rules of the Commission following consideration of
a number of factors, including, but not limited to, the relationship of the
institution with the Custodian, the reliability and financial stability of the
institution, the ability of the institution to perform capably custodial
services for the Trust, the reputation of the institution in its national
market, the political and economic stability of the countries in which the
sub-custodians will be located and the risks of potential nationalization or
expropriation of Trust assets.
The Custodian also serves as Dividend Disbursing Agent, Transfer Agent and
Registrar for Shares of the Trust.
- 28 -
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
1. Financial Statements:
(i) Report of Independent Public Accountants dated November 1, 1996
(ii) Schedule of Investments as of September 30, 1996
(iii) Balance Sheet as of September 30, 1996
(iv) Statement of Operations as of September 30, 1996
(v) Statement of Cash Flows as of September 30, 1996
(vi) Statement of Changes in Net Assets as of September 30, 1996
All other financial statements, schedules and historical financial
information have been omitted as the subject matter is not required, not
present, or not present in amounts sufficient to require submission.
2. Exhibits:
a.--Declaration of Trust, as amended.
b.--By-Laws, as revised.
c.--Not Applicable.
d.--Specimen certificate for Shares of Beneficial Interest.*
e.--Dividend Reinvestment Plan.
f.--Not Applicable.
g.--Investment Advisory Agreement.
h.--Dealer Manager Agreement with respect to the offer by Registrant of
the Rights to Shareholders.*
i.--Not Applicable.
j.--Custodian Agreement between the Registrant and State Street Bank
and Trust Company.*
k.-- (i) Transfer Agency Agreement between the Registrant and State
Street Bank and Trust Company.*
(ii) Information Agent Agreement.*
(iii) Subscription Agent Agreement.*
l.--Opinion and Consent of Dechert Price & Rhoads.*
m.--Not Applicable.
n.--Consent of Arthur Andersen LLP
o.--Not Applicable.
p.--Not Applicable.
q.--Not Applicable.
27.--Financial Data Schedule.
*To be filed by amendment.
Item 25. Marketing Arrangements.
See the form of Dealer Manager Agreement to be filed by amendment as
Exhibit h to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement:
<TABLE>
<CAPTION>
<S> <C>
Registration fees $ 15,000
New York Stock Exchange listing fees $ 15,000
Printing $ 37,000
Fees and expenses of qualification under state securities laws
(including fees of counsel) $ 3,000
Accounting fees and expenses $ 18,000
Legal fees and expenses $128,000
NASD Fees $ 7,000
Reimbursement of Dealer Manager's Expenses $ 94,000
Information Agent Fees $ 22,000
Subscription Agent Fees $ 10,000
Miscellaneous $ 19,000
--------
Total $368,000
========
</TABLE>
<PAGE>
Item 27. Persons Controlled by or under Common Control with Registrant.
Hambrecht & Quist Capital Management Incorporated, a California
corporation ("HQCM"), owns 100% of the capital stock of Atlantic Investment
Advisors, Inc., a Massachusetts corporation, and is a wholly-owned subsidiary
of Hambrecht & Quist California, a California corporation. Hambrecht & Quist
California is a wholly-owned subsidiary of Hambrecht & Quest Group. Although
Hambrecht & Quist California by virtue of its greater than 25% ownership of
the capital stock of HQCM might be deemed to be a control person of the
Registrant, Hambrecht & Quist California is precluded from exercising any
influence over the investment advisory services provided by HQCM to the
Registrant and therefore specifically disclaims any such control
relationship. Each of the following other entities might be deemed to be
controlled by Hambrecht & Quist California:
<TABLE>
<CAPTION>
Place of
Entity Basis of Common Control Organization
------ ----------------------- ------------
<S> <C> <C>
H&Q Adobe Ventures 100% ownership California
Management Corp.
H&Q London Ventures 100% ownership California
Management Corp.
Hambrecht & Quist Asset Management Ltd. 100% ownership United Kingdom
Hambrecht & Quist B/D 100% ownership California
Subsidiary Corp.
Hambrecht & Quist International 100% ownership California
Hambrecht & Quist 100% ownership California
Investment Advisors, Inc.
Hambrecht & Quist Management 100% ownership California
Corporation
Hambrecht & Quist Saint Dominique, Inc. 100% ownership California
HMP Secured Lenders, Inc. 100% ownership California
IEC Communications, Inc. 100% ownership California
RvR Securities Corp. 100% ownership California
VT Investors Inc. 100% ownership California
Hambrecht & Quist Guaranty Finance, LLC Greater than 25% ownership California
Hambrecht & Quist L.L.C. Greater than 25% ownership Delaware
Hambrecht & Quist Transition Capital, Greater than 25% ownership California
LLC
OptionsLink LLC Greater than 25% ownership California
Hambrecht & Quist Saint Dominique Greater than 25% ownership France
(owned 50% by Hambrecht & Quist
Saint Dominique, Inc.)
H&Q AEI Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q AFC Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Alliance Fund Sole General Partner California
H&Q Avail Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Investment Partners Managing General Partner California
H&Q Investors General Partner is Hambrecht & California
Quist Management Corporation
H&Q London Ventures General Partner is H&Q Venture United Kingdom
Partners
H&Q Peerless Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Preview Media Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Promega Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Qualix Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q TGI Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Venture Partners One of General Partners California
H&Q Ventures III General Partner is H&Q Investment California
Partners
<PAGE>
Place of
Entity Basis of Common Control Organization
------ ----------------------- ------------
H&Q Ventures International C.V. General Partner is H&Q Venture Netherland
Partners Antilles
H&Q Ventures IV General Partner is H&Q Venture California
Partners
Hamist '82 General Partner California
Hamquist General Partner California
</TABLE>
Item 28. Number of Holders of Securities.
As of September 30, 1996, the number of record holders of each class of
securities of Registrant was as follows:
Number of
Title of Class Record Holders
-------------- --------------
Shares of beneficial interest, $.01 par value 873
Item 29. Indemnification.
Under Article V of the Registrant's Declaration of Trust, any past or
present Trustee or officer of Registrant will be indemnified against
liability and all expenses reasonably incurred by him in connection with any
action, suit or proceeding to which he may be a party or otherwise involved
by reason of his being or having been a Trustee or officer of Registrant.
This provision does not authorize indemnification when it is determined, in
the manner specified in the Declaration, that the Trustee or officer would
otherwise be liable to Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
Expenses of a Trustee or officer may be paid by Registrant in advance of the
final disposition of any action, suit or proceeding upon receipt of an
undertaking by the Trustee or officer to repay the expenses to Registrant in
the event that it is ultimately determined that indemnification of the
Trustee or officer is not authorized under the Declaration.
The Registrant will purchase insurance insuring its Trustees and officers
against certain liabilities incurred in their capacity as such, and insuring
the Registrant against any payments which it is obligated to make to such
persons under the foregoing indemnification provisions.
Reference is made to the Dealer-Manager Agreement to be filed by amendment
as Exhibit h to this Registration Statement for provisions relating to
indemnification of the Dealer-Managers.
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to Trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that, in the opinion of the Securities and
Exchange Commission (the "Commission") such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Trustee,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser.
Hambrecht & Quist Capital Management Incorporated was organized in
September, 1986 for the purpose of providing investment advisory services to
H&Q Healthcare Investors (File Nos. 33-9880, 811-4889, 1-9294). Reference is
made to "Trustees and Officers" in the Prospectus and to Schedule D of Part
II of Form ADV, Uniform Application for Investment Adviser Registration, as
amended from time to time, (File No. 801-28531) filed with the Commission for
information concerning the business and other connections of Alan G. Carr,
Director and President of the Investment Adviser.
<PAGE>
Item 31. Location of Accounts and Records.
Records are located at:
1. Hambrecht & Quist Capital Management
50 Rowes Wharf, Fourth Floor
Boston, Massachusetts 02110-3328
(Registrant's corporate records and records relating to
its function as Investment Adviser to Registrant)
2. State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
(Records relating to its function as Custodian, Registrar,
Transfer Agent and Dividend Disbursing Agent to Registrant;
and most of Registrant's accounting and all records relating
to its function as Registrant's accounting agent)
Item 32. Management Service.
Not Applicable.
Item 33. Undertakings.
1. Registrant hereby undertakes to suspend offering of the shares covered
hereby until it amends its prospectus contained herein if (1) subsequent to
the effective date of this Registration Statement, its net asset value per
share declines more than 10 percent from its net asset value per share as of
the effective date of this Registration Statement, or (2) its net asset value
increases to an amount greater than its net proceeds as stated in such
prospectus.
2. Not Applicable.
3. Not Applicable.
4. Not Applicable.
5. Registrant hereby undertakes that for the purposes of determining any
liability under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
6. Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and
Commonwealth of Massachusetts on the 3rd day of January, 1997.
H&Q HEALTHCARE INVESTORS
(Registrant)
By: /s/ Alan G. Carr
---------------------------------------
President
Each person whose signature appears below hereby makes, constitutes and
appoints Sheldon A. Jones, Joseph R. Fleming, Caroline Pearson and David C.
Virnelli, and each of them, with full power in each to act without the other,
his true and lawful attorneys-in-fact and agents, in his name, place and
stead to execute on his behalf, as a Trustee and/or Officer of H&Q Healthcare
Investors, any and all amendments and post-effective amendments to the
Registration Statement on Form N-2 relating to shares of beneficial interest
of H&Q Healthcare Investors, to be filed with the Securities and Exchange
Commission ("SEC") pursuant to the Securities Act of 1933, as amended, (the
"Act") the Investment Company Act of 1940, as amended, (the "1940 Act") and
any and all other instruments which said attorneys, or any of them, deem
necessary or advisable to enable H&Q Healthcare Investors to comply with the
Act, the 1940 Act, the rules, regulations and requirements of the SEC in
respect of the registration under the Act of such shares, the registration of
H&Q Healthcare Investors under the 1940 Act, and the securities or laws of
any State or other governmental subdivision, giving and granting to each of
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing whatsoever necessary or appropriate to be done
in furtherance of such purposes as fully as he or she might or could do if
personally present at the doing thereof, with full power of substitution and
revocation, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, their or his or her substitute or substitutes may
or shall lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Act, this Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
/s/ Alan G. Carr Trustee and President January 3, 1997
--------------------------------
Alan G. Carr
/s/ William R. Hambrecht
-------------------------------- Trustee January 3, 1997
William R. Hambrecht
/s/ Lawrence S. Lewin
-------------------------------- Trustee January 3, 1997
Lawrence S. Lewin
/s/ Robert P. Mack, M.D.
-------------------------------- Trustee January 3, 1997
Robert P. Mack, M.D.
/s/ Eric Oddleifson
-------------------------------- Trustee January 3, 1997
Eric Oddleifson
/s/ Uwe E. Reinhardt, Ph.D.
-------------------------------- Trustee January 3, 1997
Uwe E. Reinhardt, Ph.D.
/s/ Henri A. Termeer
-------------------------------- Trustee January 3, 1997
Henri A. Termeer
/s/ Kimberley L. Carroll
-------------------------------- Treasurer and Chief January 3, 1997
Kimberley L. Carroll Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
99.2a --Declaration of Trust, as amended
99.2b --By-Laws, as revised.
99.2c --Not Applicable
99.2d --Specimen certificate for Shares of Beneficial Interest*
99.2e --Dividend Reinvestment Plan
99.2f --Not Applicable
99.2g --Investment Advisory Agreement
99.2h --Dealer Manager Agreement with respect to the offer by Registrant of the
Rights
to Shareholders*
99.2i --Not Applicable
99.2j --Custodian Agreement between the Registrant and State Street Bank and
Trust Company*
99.2k (i) --Transfer Agency Agreement between the Registrant and State Street Bank
and Trust Company*
(ii) --Information Agent Agreement.*
(iii) --Subscription Agent Agreement.*
99.2l --Opinion and Consent of Dechert Price & Rhoads*
99.2m --Not Applicable
99.2n --Consent of Arthur Andersen LLP
99.2o --Not Applicable
99.2p --Not Applicable
99.2q --Not Applicable
27. --Financial Data Schedule
</TABLE>
- -------------
*To be filed by amendment.
AMENDED AND RESTATED
--------------------
DECLARATION OF TRUST
--------------------
OF
--
H&Q HEALTHCARE INVESTORS
------------------------
THIS AMENDED AND RESTATED DECLARATION OF TRUST, made April 21,
1987 by the Trustees hereunder (together with all other persons from time to
time duly elected, qualified and serving as Trustees in accordance with the
provisions of Article II hereof, the "Trustees");
Whereas the Trustees desire to establish a trust for the
investment and reinvestment of funds contributed thereto; and
Whereas the Trustees desire that the beneficial interest in
the trust assets be divided into transferable shares of beneficial interest, as
hereinafter provided;
N o w, T h e r e f o r e, the Trustees hereby declare that all
money and property contributed to the trust established hereunder shall be held
and managed in trust for the benefit of holders, from time to time, of the
shares of beneficial interest issued hereunder and subject to the provisions
hereof.
ARTICLE I
Name and Definitions
Section 1.1 Name. The name of the trust created hereby is
the "H&Q Healthcare Investors."
Section 1.2 Definitions. Wherever they are used herein,
the following terms have the following respective meanings:
(a) "By-Laws" means the By-laws referred to in Section 3.8
hereof, as from time to time amended.
(b) The terms "Commission," "Interested Person," and "Majority
Shareholder Vote" (the 67% or 50% requirement of the third sentence of section
2(a) (42) of the 1940 Act, whichever may be applicable) have the meanings given
them in the 1940 Act.
<PAGE>
(c) "Custodian" means any person other than the Trust who has
custody of any Trust Property as required by Section 17(f) of the 1940 Act, but
does not include a system for the central handling of securities described in
Section 17(f).
(d) "Declaration" means this Declaration of Trust as amended
from time to time. Reference in this Declaration of Trust to "Declaration,"
"hereof," "herein" and "hereunder" shall be deemed to refer to this Declaration
rather than the article or section in which such words appear.
(e) "Distributor" means the party or parties, other than the
Trust, to the contract described in Section 4.2 hereof.
(f) "Investment Adviser" means a party furnishing services to
the Trust pursuant to the contract described in Section 4.1 hereof.
(g) The "1940 Act" means the Investment Company Act of 1940 and
the Rules and Regulations thereunder, as amended from time to time.
(h) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof, whether domestic or foreign.
(i) "Shareholder" means a record owner of outstanding Shares.
(j) "Shares" means the units of interest into which the
beneficial interest in the Trust shall be divided from time to time and includes
fractions of Shares as well as whole Shares.
(k) "Transfer Agent" means a party furnishing services to the
Trust pursuant to the contract described in Section 4.3 hereof.
(l) The "Trust" means the trust created hereby.
(m) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust or the Trustees.
(n) The "Trustees" means the persons who have signed the
Declaration, so long as they shall continue in office in accordance with the
terms hereof, and all other persons who may from time to time be duly elected,
qualified and serving as Trustees in accordance with the provisions hereof, and
reference herein to a Trustee or the Trustees shall refer to such person or
persons in their capacity as trustees hereunder.
<PAGE>
ARTICLE II
Trustees
--------
Section 2.1 Number of Trustees. The number of Trustees shall
initially be one (1), provided that at or such time as a registration statement
under the Securities Act of 1933, as amended, covering the first public offering
of securities of the Trust shall have become effective, the number of Trustees
shall be such number as shall be fixed from time to time by a written instrument
signed by a majority of the Trustees, provided, however, that the number of
Trustees shall in no event be less than three (3) nor more than fifteen (15). No
reduction in the number of Trustees shall have the effect of removing any
Trustee from office prior to the expiration of his term unless the Trustee is
specifically removed pursuant to Section 2.2 of this Article II at the time of
the decrease.
Section 2.2 Term of Office of Trustees. At such time as the
number of Trustees shall initially be fixed by written instrument as provided in
Section 2.1 of this Article II, the Board of Trustees shall be divided into
three classes, with the number of Trustees in each class being determined by
written instrument of the Board of Trustees. The term of office of the first
class shall expire on the date of the first annual meeting of Shareholders. The
term of office of the second class shall expire one year thereafter. The term of
office of the third class shall expire two years thereafter. Upon expiration of
the term of office of each class as set forth above, the number of Trustees in
such class, as determined from time to time by the Board of Trustees in
accordance with this Article II, shall be elected for a term of three years to
succeed the Trustees whose terms of office expire. The Trustees shall be elected
by the Shareholders owning of record a plurality of the Shares voting at an
annual meeting of the Shareholders or special meeting in lieu thereof called for
that purpose, except as provided in Section 2.3 of this Article, and each
Trustee elected shall hold office until his successor shall have been elected
and shall have qualified; except that (a) any Trustee may resign his trust
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees, which shall take effect upon
such delivery or upon such later date as is specified therein; (b) that any
Trustee may be removed (provided the aggregate number of Trustees after such
removal shall not be less than the number required by Section 2.1 hereof) with
cause, at any time by written instrument, signed by at least two-thirds of the
remaining Trustees, specifying the date when such removal shall become
effective; (c) that any Trustee who requests in writing to be retired or who has
become incapacitated by illness or injury may be retired by written instrument
signed by a majority of the other Trustees, specifying the date of his
retirement; and (d) a Trustee may be removed at any meeting of Shareholders by a
vote of two-thirds of the outstanding Shares. Upon the resignation or removal of
a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust Property held in
the name of the resigning or removed Trustee.
- 3 -
<PAGE>
Upon the incapacity or death of any Trustee, his legal representative shall
execute and deliver on his behalf such documents as the remaining Trustees shall
require as provided in the preceding sentence.
Section 2.3 Resignation and Appointment of Trustees. The term
of office of a Trustee shall terminate and a vacancy shall occur in the event of
the death, declination, resignation, removal, retirement, bankruptcy,
adjudicated incompetence or other incapacity to perform the duties of the office
of a Trustee. In the case of an existing vacancy, including a vacancy existing
by reason of an increase in the number of Trustees, the remaining Trustees shall
fill such vacancy by appointing such other person as they in their discretion
shall see fit. Such appointment shall be evidenced by a written instrument
signed by a majority of the Trustees then in office. Any such appointment shall
not become effective, however, until the person named in the written instrument
of appointment shall have accepted in writing such appointment and agreed in
writing to be bound by the terms of the Declaration. An appointment of a Trustee
may be made by the Trustees then in office and notice thereof mailed to
Shareholders as aforesaid in anticipation of a vacancy to occur by reason of
retirement, resignation or increase in number of Trustees effective at a later
date, provided that said appointment shall become effective only at or after the
effective date of said retirement, resignation or increase in number of
Trustees.
Section 2.4 Vacancies. The death, declination, resignation,
retirement, removal, bankruptcy, adjudicated incompetence or incapacity to
perform the duties of a Trustee, or any one of them, shall not operate to annul
the Trust or to revoke any existing agency created pursuant to the terms of this
Declaration. Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in Section 2.3, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by the Declaration.
A written instrument certifying the existence of such vacancy signed by a
majority of the Trustees shall be conclusive evidence of the existence of such
vacancy.
Section 2.5 Delegation of Power to Other Trustees. Any Trustee
may, by power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall less than two (2) Trustees personally exercise the powers granted to
the Trustees under the Declaration except as herein otherwise expressly
provided.
- 4 -
<PAGE>
ARTICLE III
Powers of Trustees
------------------
Section 3.1 General. The Trustees shall have exclusive and
absolute control over the Trust Property and over the business of the Trust to
the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by the Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without the Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments and to do all such other things and execute all such
instruments as the Trustees deem necessary, proper or desirable in order to
promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of the Declaration, the presumption shall be in favor of a grant of
power to the Trustees.
The enumeration of any specific power herein shall not be
construed as limiting the aforesaid power. Such powers of the Trustees may be
exercised without order of or resort to any court.
Section 3.2 Investments.
(a) The Trustees shall have the power to:
(i) operate as and carry on the business of an investment
company, and exercise all of the powers necessary or appropriate to
the conduct of such operations;
(ii) invest and reinvest cash, and hold cash uninvested;
(iii) invest in, hold for investment, or reinvest in,
securities, including common and preferred stocks; warrants; bonds,
debentures, bills, time notes and all other evidences of indebtedness;
negotiable or non-negotiable instruments; general and limited
partnership interests, government securities, including securities of
any state, municipality or other political subdivision thereof, or any
governmental or quasi-governmental agency or instrumentality; and money
market instruments including bank certificates of deposit, finance
paper, commercial paper, bankers acceptances, interests in bank sweep
accounts and all kinds of repurchase agreements, of any corporation,
company, trust, association, firm or other business organization
however established, and of any country, state,
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municipality or other political subdivision, or any governmental or
quasi-governmental agency or instrumentality;
(iv) acquire (by purchase, subscription or otherwise), to
hold, to trade in and deal in, to acquire any rights or options to
purchase or sell, to sell or otherwise dispose of, to lend and to
pledge any such securities, to enter into repurchase agreements and
forward foreign currency exchange contracts, to purchase and sell
futures contracts and options on futures contracts of all descriptions,
and to engage in all types of hedging and risk management transactions;
(v) exercise all rights, powers and privileges of ownership or
interest in all securities and property included in the Trust Property,
including the right to vote thereon and otherwise act with respect
thereto and to do all acts for the preservation, protection,
improvement and enhancement in value of all such securities and
property;
(vi) acquire (by purchase, lease or otherwise) and to hold,
use, maintain, develop and dispose of (by sale or otherwise) any
property, real or personal; provided that the Trustees shall not
purchase or sell real estate, except that the Trustees may purchase or
sell securities secured by real estate or interests therein or issued
by companies which invest in real estate or interest therein;
(vii) borrow money or otherwise obtain credit and in this
connection issue notes or other evidence of indebtedness; secure
borrowings by mortgaging, pledging or otherwise subjecting as security
the Trust Property; endorse, guarantee, or undertake the performance of
any obligation, contract or engagement of any other Person and to lend
Trust Property;
(viii) aid by further investment any corporation, company,
trust, association, general or limited partnership or firm, any
obligation of or interest in which is included in the Trust Property or
in the affairs of which the Trustees have any direct or indirect
interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest; to
guarantee or become surety on any or all of the contracts, stocks,
bonds, notes, debentures and other obligations of or interests in any
such corporation, company, trust, association, general or limited
partnership or firm; and
(ix) carry on any other business in connection with or
incidental to any of the foregoing powers, do everything necessary,
suitable or proper for the accomplishment of any purpose or the
attainment of any object or the furtherance of any power hereinbefore
set forth, and do every other act or thing incidental or appurtenant to
or connected with the aforesaid purposes, objects or powers.
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The foregoing clauses shall be construed both as objects and
powers, and the foregoing enumeration of specific powers shall not be held to
limit or restrict in any manner the general powers of the Trustees.
(b) The Trustees shall not be limited to investing in
obligations maturing before the possible termination of the Trust, nor shall the
Trustees be limited by any law limiting the investments which may be made by
fiduciaries.
Section 3.3 Legal Title. Legal title to all the Trust Property
shall be vested in the Trustees as joint tenants except that the Trustees shall
have power to cause legal title to any Trust Property to be held by or in the
name of one or more of the Trustees, or in the name of the Trust, or in the name
of any other Person as nominee, on such terms as the Trustees may determine. The
right, title and interest of the Trustees in the Trust Property shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
termination of the term of office, resignation, removal or death of a Trustee he
shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 3.4 Issuance and Purchase of Shares. The Trustees
shall have the power to issue, sell, purchase, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer, and otherwise deal in Shares and, subject
to the provisions set forth in Articles VII and VIII hereof, to apply to any
such repurchase, retirement, cancellation or acquisition of Shares any funds or
property of the Trust whether capital or surplus or otherwise, to the full
extent now or hereafter permitted by the 1940 Act and the laws of the
Commonwealth of Massachusetts governing business corporations; provided,
however, that any repurchase of Shares may be made only if Shares are trading at
a purchase price that is 10% or more below net asset value per Share and the
Fund may purchase the Shares only at a purchase price that is 10% or more below
net asset value per Share.
Section 3.5 Delegation; Committees. The Trustees shall have
power to delegate from time to time to such of their number or to officers,
employees or agents of the Trust the doing of such things and the execution of
such instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient, to the same extent as such
delegation is not prohibited by the 1940 Act.
Section 3.6 Collection and Payment. The Trustees shall have
power to collect all property due to the Trust; to pay all claims, including
taxes, against the Trust Property; to prosecute, defend, compromise or abandon
any claims relating to the Trust Property; to foreclose any security interest
securing any obligations by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
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Section 3.7 Expenses. The Trustees shall have the power to
incur and pay any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of the Declaration, and to pay
reasonable compensation form the funds of the Trust to themselves as Trustees.
The Trustees shall fix the compensation of all officers, employees and Trustees.
Section 3.8 Manner of Acting; By-laws. Except as otherwise
provided herein or in the By-laws, any action to be taken by the Trustees may be
taken by a majority of the Trustees present at a meeting of Trustees (a quorum
being present), including any meeting held by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, or by written consents of all the Trustees. The
Trustees may adopt By-laws not inconsistent with this Declaration to provide for
the conduct of the business of the Trust and may amend or repeal such By-laws to
the extent such power is not reserved to the Shareholders.
Section 3.9 Miscellaneous Powers. The Trustees shall have the
power to: (a) employ or contract with such persons as the Trustees may deem
desirable for the transaction of the business of the Trust; (b) enter into joint
ventures, partnerships and any other combinations or associations; (c) remove
Trustees or fill vacancies in or add to their number, elect and remove such
officers and appoint and terminate such agents or employees as they consider
appropriate, and appoint from their own number, and terminate, any one or more
committees which may exercise some or all of the power and authority of the
Trustees as the Trustees may determine; (d) purchase, and pay for out of Trust
Property, insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers, distributors, selected dealers or
independent contractors of the Trust against all claims arising by reason of
holding any such position or by reason of any action taken or omitted by any
such person in such capacity, whether or not constituting negligence, or whether
or not the Trust would have the power to indemnify such person against such
liability; (e) establish pension, profit sharing, share purchase and other
retirement, incentive and benefit plans for any Trustees, officers, employees or
agents of the Trust; (f) to the extent permitted by law, and in addition to the
mandatory indemnification required by Section 5.3, indemnify any person with
whom the Trust has dealings, including the Distributor, Transfer Agent and
selected dealers to such extent as the Trustees shall determine; (g) guarantee
indebtedness or contractual obligations of others; (h) determine and change the
fiscal year of the Trust and the method by which its accounts shall be kept; and
(i) adopt a seal for the Trust but the absence of such seal shall not impair the
validity of any instrument executed on behalf of the Trust.
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ARTICLE IV
Investment Adviser, Distributor, and Transfer Agent
---------------------------------------------------
Section 4.1 Investment Adviser. Subject to a Majority
Shareholder Vote, the Trustees may in their discretion from time to time enter
into one or more investment advisory or management contracts whereby a party to
such contract shall undertake to furnish the Trust such administrative,
management, investment advisory, statistical and research facilities and
services, and such other facilities and services, if any, as the Trustees shall
from time to time consider desirable and all upon such terms and conditions as
the Trustees may in their discretion determine. Notwithstanding any provisions
of the Declaration, the Trustees may delegate to the Investment Adviser
authority (subject to such general or specific instructions as the Trustees may
from time to time adopt) to effect purchases, sales, loans or exchanges of
assets of the Trust on behalf of the Trustees or may authorize any officer,
employee or Trustee to effect such purchases, sales, loans or exchanges pursuant
to recommendations of the Investment Adviser (and all without further action by
the Trustees). Any such purchases, sales, loans and exchanges shall be deemed to
have been authorized by all of the Trustees.
Section 4.2 Distributor. The Trustees may in their discretion
from time to time enter into a contract providing for the sale of Shares whereby
the Trust may either agree to sell the Shares to the other party to the contract
or appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Article IV or
the By-laws; and such contract may also provide for the sale of Shares by such
other party as principal or as agent of the Trust and may provide that such
other party may enter into selected dealer agreements with registered securities
dealers to further the purpose of the distribution of the Shares.
Section 4.3 Transfer Agent. The Trustees may in their
discretion from time to time enter into a transfer agency and shareholder
service contract whereby the other party to such contract shall undertake to
furnish transfer agency and shareholder service to the Trust. The contract shall
have such terms and conditions as the Trustees may in their discretion determine
not inconsistent with the Declaration or the By-laws.
Such services may be provided by one or more persons.
Section 4.4 Parties to Contract. Any contract of the character
described in Section 4.1, 4.2, or 4.3 of this Article IV or any Custodian
contract, as described in the By-laws, may be entered into with any Person,
although one or more of the Trustees or officers of the Trust may be an officer,
partner, director, trustee, shareholder or member of such other party to the
contract, and no such contract shall be invalidated or rendered voidable by
reason of the existence of any such relationship; nor shall any Person holding
such relationship be disqualified from upon or executing any such contract; nor
shall any
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Person holding such relationship be liable merely by reason of such relationship
for any loss or expense to the Trust under or by reason of said contract or
accountable for any profit realized directly or indirectly therefrom, provided
that the contract when entered into was not inconsistent with the provisions of
this Article IV or the By-laws. The same Person may be the other party to
contracts entered into pursuant to Section 4.1, 4.2, and 4.3 above or Custodian
contracts, and any Person may be financially interested or otherwise affiliated
with Persons who are parties to any or all of the contracts mentioned in this
Section 4.4.
Section 4.5 Compliance with 1940 Act. Any contract entered
into pursuant to Sections 4.1 or 4.2 shall be consistent with and subject to the
requirements of Section 15 of the Investment Company Act of 1940 (including any
amendment thereof or other applicable Act of Congress hereafter enacted) with
respect to its continuance in effect, its termination and the method of
authorization and approval of such contract or renewal thereof.
ARTICLE V
Limitations of Liability of Shareholders,
-----------------------------------------
Trustees and Others
-------------------
Section 5.1 No Personal Liability of Shareholders, Trustees, etc.
-----------------------------------------------------------------
(a) No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or the acts,
obligations or affairs of the Trust solely by reason of his being or having been
a Shareholder and not because of his or her acts or omissions in any other
capacity. The Trust shall indemnify and hold each Shareholder harmless from and
against all claims and liabilities to which such Shareholder may become subject
by reason of his being or having been a Shareholder, and shall reimburse such
Shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability. The rights accruing to a
Shareholder under this Section 5.1 shall not exclude any other right to which
such Shareholder may be lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
(b) Any Person extending credit to, contracting with or having
any claim against the Trust shall look only to the Trust Property for payment
under such credit, contract or claim; and neither the Shareholders nor the
Trustees, nor any of the Trust's officers, employees or agents, whether past,
present or future, shall be personally liable therefor. Nothing in this
Declaration of Trust shall protect any former or acting Trustee or officer
against any liability to which such Trustee or officer would otherwise be
subject
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by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Section 5.2 Non-Liability of Trustees, etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the Trust, its
Shareholders, or to any Shareholder, Trustee, officer, investment adviser,
employee, or agent thereof for any action or failure to act (including without
limitation the failure to compel in any way any former or acting Trustee to
redress any breach of trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of his duties involved in the conduct of
his office.
Section 5.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained
in paragraph (b) below:
(i) every person who is or has been a Trustee or officer of
the Trust shall be indemnified by the Trust to the fullest extent
permitted by law against all liability and against all expenses
reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer,
and against amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal, administrative or other, including appeals), actual or
threatened; and the words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to the Trust or the Shareholders by
reason of a final adjudication by the court or other body before which
the proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in
the conduct of his office or agency;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) or
(b)(ii) resulting in payment by a Trustee or officer, unless there has
been either a determination that such Trustee or officer did not engage
in willful misfeasance, bad faith, gross negligence or
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reckless disregard of the duties involved in the conduct of his office
or agency by the court or other body approving the settlement or other
disposition or a reasonable determination, based upon a review of
readily available facts (as opposed to a full trial-type inquiry) that
he did not engage in such conduct;
(A) by vote of a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested Trustees
then in office act on the matter); or
(B) by written opinion of independent legal counsel.
(c) Expenses of preparation and presentation of a defense to
any claim, action, suit, or proceeding of the character described in paragraph
(a) of this Section 5.3 shall be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 5.3; provided that either
(i) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses
arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then in
office act on the matter) or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available
facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the recipient ultimately will be found entitled to
indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one
(i) who is not an "Interested Person" of the Trust (including anyone who has
been exempted from being an "Interested Person" by any rule, regulation or order
of the Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceedings on the same or similar
grounds is then or had been pending.
Section 5.4 Permissive Indemnification. The Board of Trustees
may authorize or ratify, either by contract or resolution, indemnification of
employees and agents of the Fund, including the investment adviser or
underwriters of the Shares, to the full extent permitted under applicable law.
Section 5.5 Insurance; Rights to Continue. The rights of
indemnification and advancement of expenses provided in this Declaration of
Trust may be insured against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any Trustee, officer,
investment adviser, Shareholder, employee or agent
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may now or hereafter be entitled, shall continue as to a Person who has ceased
to be such Trustee, officer, Shareholder, investment adviser, employee or agent
and shall inure to the benefit of the heirs, executors, administrators, and
assigns of such Person. Nothing contained herein shall affect any rights to
indemnification to which any Person may be otherwise entitled under law.
Section 5.6 No Bond Required of Trustees. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
Section 5.7 Execution of Trust Instruments, etc. Every
obligation, contract, instrument, certificate, Share, other security of the
Trust or undertaking, and every other act or thing whatsoever executed in
connection with the Trust shall be conclusively presumed to have been executed
or done by the executors thereof only in their capacity as Trustees under the
Declaration or in their capacity as officers, employees or agents of the Trust.
Section 5.8 Reliance on Experts, etc. Each Trustee and officer
or employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of its officers or employees or by the Investment Adviser, the Distributor,
Transfer Agent, selected dealers, accountants, appraisers or other experts or
consultants selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
ARTICLE VI
Shares of Beneficial Interest
-----------------------------
Section 6.1 Beneficial Interest. The interest of the
beneficiaries hereunder shall be divided into transferable shares of beneficial
interest, all of one class, with a par value of $.01 per share. The number of
shares of beneficial interest authorized hereunder is unlimited. All Shares
issued hereunder including, without limitation, Shares issued in connection with
a dividend in Shares or a split of Shares, shall be fully paid and
nonassessable.
Section 6.2 Rights of Shareholders. The ownership of the Trust
Property of every description and the right to conduct any business hereinbefore
described are vested exclusively in the Trustees, and the Shareholders shall
have no interest therein other than the beneficial interest conferred by their
Shares, and they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can they be called
upon to assume any losses of the Trust or suffer any assessment of
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any kind by virtue of their ownership of Shares. The Shares shall be personal
property giving only the rights in the Declaration specifically set forth. The
Shares shall not entitle the holder to preference, preemptive, appraisal,
conversion or exchange rights, except as the Trustees may determine with respect
to any series of Shares.
Section 6.3 Trust Only. It is the intention of the Trustees to
create only the relationship of Trustee and beneficiary between the Trustees and
each Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in the Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners and members of a joint stock
association.
Section 6.4 Issuance of Shares. The Trustees in their
discretion may, from time to time without vote of the Shareholders, issue
Shares, in addition to the then issued and outstanding Shares and Shares held in
the treasury, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times, and on such
terms as the Trustees may deem best, and may in such manner acquire other assets
(including the acquisition of assets subject to liabilities and in connection
with the assumption of liabilities) and businesses. In connection with any
issuance of Shares, the Trustees may issue fractional Shares and Shares held in
the treasury. The Trustees may from time to time divide or combine the Shares
into a grater or lesser number without thereby changing the proportionate
beneficial interests in the Trust. Contributions to the Trust may be accepted
for whole Shares and/or 1-1,000ths of a Share or integral multiples thereof.
Section 6.5 Register of Shares. A register shall be kept at
the principal office of the Trust or at an office of the Transfer Agent which
shall contain the names and addresses of the Shareholders and the number of
Shares held by them respectively and a record of all transfers thereof. Such
register shall be conclusive as to who are the holders of the Shares and who
shall be entitled to receive dividends or distributions or otherwise to exercise
or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive
payment of any dividend or distribution, nor to have notice given to him as
herein or in the By-laws provided, until he has given his address to the
Transfer Agent or such other officer or agent of the Trustees as shall keep the
said register for entry thereon. The Trustees, in their discretion, may
authorize the issuance of Share certificates and promulgate appropriate rules
and regulations as to their use.
Section 6.6 Transfer of Shares. Shares shall be transferable
on the records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing, upon delivery to the Trustees or the
Transfer Agent of a duly executed instrument of transfer, together with any
certificate or certificates (if issued) for such Shares and such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon such delivery the transfer
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shall be recorded on the register of the Trust. Until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereunder and neither the Trustees nor any Transfer Agent or register
nor any officer, employee or agent of the Trust shall be affected by any notice
of the proposed transfer.
Any person becoming entitled to any Shares in consequence of
the death, bankruptcy or incompetence of any Shareholder, or otherwise by
operation of law, shall be recorded on the register of Shares as the holder of
such Shares upon production of the proper evidence thereof to the Trustees or
the Transfer Agent; but until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any Transfer Agent or registrar nor any officer or
agent of the Trust shall be affected by any notice of such death, bankruptcy or
incompetence, or other operation of law.
Section 6.7 Notices. Any and all notices to which any
Shareholder may be entitled and any and all communications shall be deemed duly
served or given if mailed, postage prepaid, addressed to any Shareholder of
record at his last known address as recorded on the register of the Trust;
provided, however, that annual reports and proxy statements need not be sent to
a Shareholder if:
(i) an annual report and a proxy statement for two
consecutive annual meetings, or
(ii) all, and at least two, checks (if sent by first class
mail) in payment of dividends on Shares during a twelve-month period
have been mailed to such Shareholder's address and have been returned
undelivered. However, delivery of such annual reports and proxy statements shall
resume once the Shareholder's current address is determined.
Section 6.8 Treasury Shares. Shares held in the treasury
shall, until reissued pursuant to Section 6.4, not confer any voting rights on
the Trustees, nor shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.
Section 6.9 Voting Powers. The Shareholders shall have power
to vote only (i) for the election of Trustees as provided in Section 2.2 hereof,
(ii) with respect to any investment advisory or management contract as provided
in Section 4.1, (iii) with respect to termination of the Trust as provided in
Section 8.2, (iv) with respect to any amendment of the Declaration to the extent
and as provided in Section 8.3, (v) with respect to any merger, consolidation,
conversion or sale of assets as provided in Section 8.4, 8.5, 8.6 and 8.7, (vi)
with respect to incorporation of the Trust to the extent and as provided in
Section 8.5, (vii) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or
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should not be brought or maintained derivatively or as a class action on behalf
of the Trust or the Shareholders, and (viii) with respect to such additional
matters relating to the Trust as may be required by the Declaration, the By-laws
or any registration of the Trust as an investment company under the 1940 Act
with the Commission (or any successor agency) or any state, or as the Trustees
may consider necessary or desirable. Each whole Share shall be entitled to one
vote as to any matter on which it is entitled to vote and each fractional Share
shall be entitled to a proportionate fractional vote. There shall be no
cumulative voting in the election of Trustees. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any action
required by law, the Declaration or the By-laws to be taken by Shareholders. The
By-laws may include further provisions for Shareholders' votes and meetings and
related matters.
ARTICLE VII
Determination of Net Asset, Value,
----------------------------------
Net Income and Distributions
----------------------------
The Trustees, in their absolute discretion, may prescribe and
shall set forth in the By-laws or in a duly adopted vote of the Trustees such
bases and times for determining the per Share net asset value of the Shares or
net income, or the declaration and payment of dividends and distributions, as
they may deem necessary or desirable.
ARTICLE VIII
Duration; Termination of Trust;
-------------------------------
Amendment; Mergers, etc.
-----------------------
Section 8.1 Duration. The Trust shall continue without
limitation of time but subject to the provisions of this Article VIII.
Section 8.2 Termination of Trust.
(a) The Trust may be terminated (i) by the affirmative vote of
the holders of not less than seventy-five percent (75%) of the Shares
outstanding and entitled to vote at any meeting of Shareholders, or (ii) by an
instrument in writing, without a meeting, signed by a majority of the Trustees
and consented to by the holders of not less than seventy-five percent (75%) of
such Shares. Upon termination of the Trust:
(i) The Trust shall carry on no business except for the
purpose of winding up its affairs;
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(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust shall have been wound up,
including the power to fulfill or discharge the contracts of the Trust,
collect its assets, sell, convey, assign, exchange, transfer or
otherwise dispose of all or any part of the remaining Trust Property to
one or more persons at public or private sale for consideration which
may consist in whole or in part of cash, securities or other property
of any kind, discharge or pay its liabilities, and to do all other acts
appropriate to liquidate its business; provided, that any sale,
conveyance, assignment, exchange, transfer or other disposition of all
or substantially all of the Trust Property shall require Shareholder
approval in accordance with Section 8.4 hereof; and
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the
Trustees may distribute the remaining Trust Property, in cash or in
kind or partly in cash and partly in kind among the Shareholders
according to their respective rights.
(b) After termination of the Trust and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute and
place in the records of the Trust an instrument in writing setting forth the
fact of such termination, and the Trustees shall thereupon be discharged from
all further liabilities and duties hereunder, and the rights and interests of
all Shareholders shall thereupon cease.
Section 8.3 Amendment Procedure.
(a) Except as provided in paragraph (c) of this Section 8.3,
this Declaration may be amended by a Majority Shareholder Vote or by an
instrument in writing, without a meeting, signed by a majority of the Trustees
and consented to by the holders of not less than a majority of the Shares
outstanding and entitled to vote. The Trustees may also amend this Declaration
without the vote or consent of Shareholders to change the name of the Trust, to
supply any omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, or if they deem it necessary to conform this
Declaration to the requirements of applicable federal laws or regulations or the
requirements of the regulated investment company provisions of the Internal
Revenue Code, but the Trustees shall not be liable for failing so to do.
(b) No amendment may be made under this Section 8.3 which
would change any rights with respect to any Shares by reducing the amount
payable thereon upon liquidation of the Trust or by diminishing or eliminating
any voting rights pertaining thereto, except with the vote or consent of the
holders of two-thirds of the Shares outstanding and entitled to vote. Nothing
contained in this Declaration shall permit the amendment of this Declaration to
impair the exemption from personal liability of the
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Shareholders, Trustees, officers, employees and agents of the Trust or to permit
assessment upon Shareholders.
(c) No amendment may be made under this Section 8.3 which
shall amend, alter, change or repeal any of the provisions of Sections 8.3, 8.4,
8.6 and 8.7 unless the amendment effecting such amendment, alteration, change or
repeal shall receive the affirmative vote or consent of seventy-five percent
(75%) of the Shares outstanding and entitled to vote. Such affirmative vote or
consent shall be in addition to the vote or consent of the holders of Shares
otherwise required by law or by the terms of any class or series of preferred
stock, whether now or hereafter authorized, or any agreement between the Trust
and any national securities exchange.
(d) A certificate signed by a majority of the Trustees setting
forth an amendment and reciting that it was duly adopted by the Shareholders or
by the Trustees as aforesaid or a copy of the Declaration, as amended, and
executed by a majority of the Trustees, shall be conclusive evidence of such
amendment when placed in the records of the Trust.
Notwithstanding any other provision hereof, until such time as
a Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust shall have become
effective, this Declaration may be terminated or amended in any respect by the
affirmative vote of a majority of the Trustees or by an instrument signed by a
majority of the Trustees.
Section 8.4 Merger, Consolidation and Sale of Assets. Subject
to the provisions of Section 8.7 hereof, the Trust may merge or consolidate with
any other corporation, association, trust or other organization or may sell,
lease or exchange all or substantially all of the Trust Property, including its
good will, upon such terms and conditions and for such consideration when and as
authorized at any meeting of Shareholders called for the purpose by the
affirmative vote of the holders of not less than two-thirds of such Shares,
provided, however, that if such merger, consolidation, sale, lease or exchange
is recommended by the Trustees, the vote or written consent of the holders of a
majority of Shares outstanding and entitled to vote, shall be sufficient
authorization; and any such merger, consolidation, sale, lease or exchange shall
be deemed for all purposes to have been accomplished under and pursuant to the
statutes of the Commonwealth of Massachusetts.
Section 8.5 Incorporation and Reorganization. With the
approval of the holders of a majority of the Shares outstanding and entitled to
vote, the Trustees may cause to be organized or assist in organizing a
corporation or corporations under the laws of any jurisdiction, or any other
trust, partnership, association or other organization to take over all of the
Trust Property or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer the Trust
Property to any such corporation, trust, partnership, association or
organization in exchange for
- 18 -
<PAGE>
the shares or securities thereof or otherwise and to lend money to, subscribe
for the shares or securities of, and enter into any contracts with any such
corporation, trust, partnership, association or organization or any corporation,
partnership, association, trust, or organization in which the Trust holds or is
about to acquire shares or any other interest. The Trustees may also cause a
merger or consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling, conveying
or transferring a portion of the Trust Property to such organization or
entities.
Section 8.6 Conversion.
Notwithstanding any other provision of this Declaration, the conversion
of the Trust from a "closed-end company" to an "open-end company," as those
terms are defined in Section 5(a)(2) and 5(a)(1), respectively, of the 1940 Act
as in effect on the date hereof, shall require (i) the approval of the Board of
Trustees and (ii) the affirmative vote or consent of the holders of seventy-five
and percent (75%) of the Shares outstanding and entitled to vote; provided,
however, that on or after May 1, 1992, such conversion shall require the
affirmative vote or consent of the holders of a majority of the Shares
outstanding and entitled to vote. At the first meeting of the Board of Trustees
subsequent to May 1, 1992 and at least annually thereafter, the Board shall
consider and vote upon such conversion. Such affirmative vote or consent shall
be in addition to the vote or consent of the holders of the Shares otherwise
required by law or by the terms of any class or series of preferred stock,
whether now or hereafter authorized, or any agreement between the Trust and any
national securities exchange.
Section 8.7
(a) Notwithstanding any other provision of this Declaration
and subject to the exceptions provided in paragraph (d) of this Section, the
types of transactions described in paragraph (c) of this Section shall require
the affirmative vote or consent of the holders of seventy-five percent (75%) of
the Shares outstanding and entitled to vote, when a Principal Shareholder (as
defined in paragraph (b) of this Section) is a party to the transaction. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of Shares otherwise required by law or by the terms of any class or
series of preferred stock, whether now or hereafter authorized, or any agreement
between the Trust and any national securities exchange.
(b) The term "Principal Shareholder" shall mean any
corporation, person or other entity which is the beneficial owner, directly or
indirectly, of more than five percent (5%) of the outstanding Shares and shall
include any affiliate or associate, as such terms are defined in clause (ii)
below, of a Principal Shareholder. For the purposes
- 19 -
<PAGE>
of this Section, in addition to the Shares which a corporation, person or other
entity beneficially owns directly, (a) any corporation, person or other entity
shall be deemed to be the beneficial owner of any Shares (i) which it has the
right to acquire pursuant to any agreement or upon exercise of the conversion
rights or warrants, or otherwise (but excluding share options granted by the
Trust) or (ii) which are beneficially owned, directly or indirectly (including
Shares deemed owned through application of clause (i) above), by any other
corporation, person or entity with which it or its "affiliate" or "associate"
(as defined below) has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of Shares, or which is its
"affiliate", or "associate" as those terms are defined in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934 as in
effect on the date hereof, and (b) the outstanding Shares shall include Shares
deemed owned through application of clauses (i) and (ii) above but shall not
include any other Shares which may be issuable pursuant to any agreement, or
upon exercise of conversion rights or warrant, or otherwise.
(c) This Section shall apply to the following transactions:
(i) The merger or consolidation of the Trust or any subsidiary
of the Trust with or into any Principal Shareholder.
(ii) The issuance of any securities of the Trust to any
Principal Shareholder for cash (except pursuant to any cash dividend
reinvestment program available to all Shareholders and approved by the
Trustees).
(iii) The sale, lease or exchange of all or any substantial
part of the assets of the Trust to or with any Principal Shareholder
(except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purpose of such computation all assets
sold, leased or exchanged in any series of similar transactions within
a twelve-month period).
(iv) The sale or lease to the Trust or any subsidiary thereof,
in exchange for securities of the Trust, of any assets of any Principal
Shareholder (except assets having an aggregate fair market value of
less than $1,000,000, aggregating for the purposes of such computation
all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period).
(d) The provisions of this Section shall not be applicable to
(i) any of the transactions described in paragraph (c) of this Section if the
Board of Trustees of the Trust shall by resolution have approved a memorandum of
understanding with such Principal Shareholder with respect to and substantially
consistent with such transaction, or (ii) any such transaction with any
corporation of which a majority of the outstanding shares of all classes of
stock normally entitled to vote in elections of directors is owned of record or
beneficially by the Trust and its subsidiaries.
- 20 -
<PAGE>
(e) The Board of Trustees shall have the power and duty to
determine for the purposes of this Section on the basis of information known to
the Trust, whether (i) a corporation, person or entity beneficially owns more
than five percent (5%) of the outstanding Shares, (ii) a corporation, person or
entity is an "affiliate" or "associate" (as defined above) of another, (iii) the
assets being acquired or leased to or by the Trust or any subsidiary thereof,
constitute a substantial part of the assets of the Trust and have an aggregate
fair market value of $1,000,000 or more, and (iv) the memorandum of
understanding referred to in paragraph (d) hereof is substantially consistent
with the transaction covered thereby. Any such determination shall be conclusive
and binding for all purposes of this Section.
ARTICLE IX
Reports to Shareholders
-----------------------
The Trustees shall at least annually, or as required by the
1940 Act, submit to the Shareholders a written financial report of the Trust,
including financial statements which shall at least annually be certified by
independent public accountants.
ARTICLE X
Miscellaneous
-------------
Section 10.1 Filing. This Declaration and any amendment hereto
shall be filed in the office of the Secretary of the Commonwealth of
Massachusetts and in such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of such amendment,
such amendment shall be effective upon its filing. A restated Declaration,
integrating into a single instrument all of the provisions of the Declaration
which are then in effect and operative, may be executed from time to time by a
majority of the Trustees and shall upon filing with the Secretary of the
Commonwealth of Massachusetts, be conclusive evidence of all amendments
contained therein and may thereafter be referred to in lieu of the original
Declaration and the various amendments thereto.
Section 10.2 Governing Law. This Declaration is executed by
the Trustees and delivered in The Commonwealth of Massachusetts and with
reference to the laws thereof, and the rights of all parties and the validity
and construction of every provision hereof shall be subject to and construed
according to the laws of said Commonwealth.
- 21 -
<PAGE>
Section 10.3 Counterparts. This Declaration may be
simultaneously executed in several counterparts, each of which shall be deemed
to be an original, and such counterparts, together, shall constitute one and the
same instrument, which shall be sufficiently evidenced by any such original
counterpart.
Section 10.4 Reliance by Third Parties. Any certificate
executed by an individual who, according to the records of the Trust appears to
be a Trustee hereunder, certifying: (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any instrument or
writing, (c) the form of any vote passed at a meeting of Trustees or
Shareholders, (d) the fact that the number of Trustees or Shareholders present
at any meeting or executing any written instrument satisfies the requirements of
this Declaration, (e) the form of any By-laws adopted by or the identity of any
officers elected by the Trustees, or (f) the existence of any fact or facts
which in any manner relate to the affairs of the Trust, shall be conclusive
evidence as to the matters so certified in favor of any Person dealing with the
Trustees and their successors.
Section 10.5 Provisions in Conflict With Law or Regulations.
(a) The provisions of the Declaration are severable, and if
the Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code of 1954, as amended, or with other
applicable laws and regulations, the conflicting provision shall be deemed not
to constitute and never to have constituted a part of the Declaration; provided,
however, that such determination shall not affect any of the remaining
provisions of the Declaration or render invalid or improper any action taken or
omitted prior to such determination.
(b) If any provision of the Declaration shall be held invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
affect only such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.
Section 10.6 Appointment of Resident Agent.
Alan G. Carr, 45 Milk Street, Boston, Massachusetts 02109, is
hereby appointed the resident agent of the Trust in the Commonwealth of
Massachusetts upon whom may be served any notice, process or pleading in any
action or proceeding against the Trust or the Trustees as such.
- 22 -
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this
instrument this 21st day of April, 1987.
/s/ ALAN G. CARR
---------------------------------------
Alan G. Carr
/s/ RICHARD A. CRAMER
---------------------------------------
Richard A. Cramer
/s/ LAWRENCE S. LEWIN
---------------------------------------
Lawrence S. Lewin
/s/ J. PATTERSON MCBAINE
---------------------------------------
J. Patterson McBaine
/s/ LEWIS THOMAS
---------------------------------------
Lewis Thomas
/s/ MICHAEL A. WALL
---------------------------------------
Micheal A. Wall
-23-
BY-LAWS
-------
OF
--
H&Q HEALTHCARE INVESTORS
------------------------
ARTICLE I
---------
Definitions
-----------
The terms "Commission," "Custodian," "Declaration," "Distributor,"
"Investment Adviser," "Majority Shareholder Vote," "1940 Act," "Shareholder,"
"Shares," "Transfer Agent," "Trust," "Trust Property" and "Trustees" have the
respective meanings given them in the Declaration of Trust of H&Q Healthcare
Fund dated October 31, 1986 as amended from time to time.
ARTICLE II
----------
Offices
-------
Section 1. Principal Office. Until changed by the Trustees, the
principal office of the Trust in The Commonwealth of Massachusetts shall be in
the City of Boston, County of Suffolk.
Section 2. Other Offices. The Trust may have offices in such other
places within or without the Commonwealth as the Trustees may from time to time
determine.
ARTICLE III
-----------
Shareholders
------------
Section 1. Meetings. An annual meeting of the Shareholders shall be
held at such place within or without the Commonwealth of Massachusetts on such
day and at such time as the Trustees shall designate. The initial annual meeting
of Shareholders shall take place within 15 months of such time as a registration
statement under the Securities Act of 1933, as amended, covering the first
public offering of securities of the Trust shall have become effective. Special
meetings of the Shareholders may be called at any time by a majority of the
Trustees and shall be called by any Trustee upon written request of Shareholders
holding in the aggregate not less than ten percent (10%) of the outstanding
Shares having voting rights, such request specifying the purpose or purposes for
which such meeting is to be called. Any such meeting shall be held within or
without the Commonwealth of Massachusetts on such day and at such time as the
Trustees shall designate. The holders of a majority of outstanding Shares
present in person or by proxy shall constitute a quorum at any meeting of the
Shareholders.
Section 2. Notice of Meetings. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder at his address as recorded on
the register of the Trust, mailed not less than ten (10) days and not more than
sixty (60) days before the meeting. Only the business stated in the notice of
the meeting shall be considered at such meeting. Any adjourned meeting may be
held as adjourned without further notice. No notice need be given to any
Shareholder who shall have failed to inform the Trust of his current address or
if a written waiver of notice, executed before or after the meeting by the
Shareholder or his attorney thereunto authorized, is filed with the records of
the meeting.
Section 3. Record Date for Meetings. For the purpose of determining the
Shareholders who are entitled to notice of and to vote at any meeting, or to
participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding thirty (30) days, as the Trustees may determine; or without closing
the transfer books the Trustees may fix a date not more than sixty (60) days
prior to the date of any meeting of Shareholders or distribution or other action
as a record date for the determination of the persons to be treated as
Shareholders of record for such purposes.
<PAGE>
Section 4. Proxies. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by proxy, provided that no proxy shall
be voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Pursuant to a resolution of a majority of the Trustees, proxies may be solicited
in the name of one or more Trustees or one or more of the officers of the Trust.
Only Shareholders of record shall be entitled to vote. Each full Share shall be
entitled to one vote and fractional Shares shall be entitled to a vote of such
fraction. When any Share is held jointly by several persons, any one of them may
vote at any meeting in person or by proxy in respect to such Share, but if more
than one of them shall be present at such meeting in person or by proxy, and
such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person as regards the charge or management of such Share,
he may vote by his guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy.
Section 5. Inspection of Records. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
shareholders of a Massachusetts business corporation.
Section 6. Action without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by law, the Declaration or these By-laws for approval of such matter)
consent to the action in writing and the written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
ARTICLE IV
----------
Trustees
--------
Section 1. Meetings of the Trustees. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need not be given. Meetings of the Trustees other
than regular or stated meetings shall be held whenever called by the President,
or by anyone of the Trustees, at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary or by the officer or Trustee calling
the meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, or cabled to each Trustee at his business
address, or personally delivered to him at least one day before the meeting.
Such notice may, however, be waived by any Trustee. Notice of a meeting need not
be given to any Trustee if a written waiver of notice, executed by him before or
after the meeting, is filed with the records of the meeting, or to any Trustee
who attends the meeting without protesting prior thereto or at its commencement
the lack of notice to him. A notice or waiver of notice need not specify the
purpose of any meeting. The Trustees may meet by means of a telephone conference
circuit or similar communications equipment by means of which all persons
participating in the meeting can hear each other, which telephone conference
meeting shall be deemed to have been held at a place designated by the Trustees
at the meeting. Participation in a telephone conference meeting shall constitute
presence in person at such meeting. Any action required or permitted to be taken
at any meeting of the Trustees may be taken by the Trustees without a meeting if
all the Trustees consent to the action in writing and the written consents are
filed with the records of the Trustees' meetings. Such consents shall be treated
as a vote for all purposes.
Section 2. Quorum and Manner of Acting. A majority of the Trustees
shall be present in person at any regular or special meeting of the Trustees in
order to constitute a quorum for the transaction of business at such meeting and
(except as otherwise required by law, the Declaration or these By-laws) the act
of a majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time until
a quorum shall be present. Notice of an adjourned meeting need not be given.
- 2 -
<PAGE>
ARTICLE V
---------
Committees and Advisory Board
-----------------------------
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees [to hold office at the
pleasure of the Trustees,] which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities and such other powers of the Trustees as the
Trustees may, from time to time, delegate to them except those powers which by
law, the Declaration or these By-laws they are prohibited from delegating. The
Trustees may also elect from their own number other Committees from time to time
(including an Audit Committee), the number composing such Committees, the powers
conferred upon the same (subject to the same limitations as with respect to the
Executive Committee) and the term of membership on such Committees to be
determined by the Trustees.
Section 2. Meeting, Quorum and Manner of Acting. The Trustees may (1)
provide for stated meetings of any Committees, (2) specify the manner of calling
and notice required for special meetings of any Committee, (3) specify the
number of members of a Committee required to constitute a quorum and the number
of members of a Committee required to exercise specified powers delegated to
such Committee, (4) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a Committee
without a meeting, and (5) authorize the members of a Committee to meet by means
of a telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the office of the Trust.
Section 3. Advisory Board. The Trustees may appoint an Advisory Board
to consist in the first instance of not less than three (3) members. Members of
such Advisory Board shall not be Trustees or officers and need not be
Shareholders. Members of this Board shall hold office for such period as the
Trustees may by resolution provide. Any member of such Board may resign
therefrom by a written instrument signed by him which shall take effect upon
delivery to the Trustees. The Advisory Board shall have no legal powers and
shall not perform the functions of Trustees in any manner, said Board being
intended merely to act in an advisory capacity. Such Advisory Board shall meet
at such times and upon such notice as the Trustees may by resolution provide.
ARTICLE VI
----------
Officers
--------
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise
provided by law, the Declaration or these By-laws all officers of the Trust
shall hold office at the pleasure of the Trustees. The Secretary and Treasurer
may be the same person. A Vice President and the Treasurer or a Vice President
and the Secretary may be the same person, but the offices of Vice President,
Secretary and Treasurer shall not be held by the same person. The President
shall hold no other office; provided, however, that the President may hold any
other office until such time as a Registration Statement under the Securities
Act of 1933, as amended, covering the first public offering of securities of the
Trust, shall have become effective. Except as above provided, any two offices
may be held by the same person. Any officer may be but none need be a Trustee or
Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer with or without cause by a vote of a
majority of the Trustees. Any officer or agent appointed by any officer or
committee may be removed with or without cause by such appointing officer or
committee.
- 3 -
<PAGE>
Section 4. Powers and Duties of the President. The President may call
meetings of the Trustees and of any Committee thereof when he deems it necessary
and shall preside at all meetings of the Shareholders. The President shall be
the principal executive officer of the Trust, and subject to the control of the
Trustees and any Committees of the Trustees, within their respective spheres, as
provided by the Trustees, he shall at all times exercise a general supervision
and direction over the affairs of the Trust. He shall have the power to employ
attorneys and counsel for the Trust and to employ such subordinate officers,
agents, clerks and employees as he may find necessary to transact the business
of the Trust. He shall also have the power to grant, issue, execute or sign such
powers of attorney, proxies or other documents as may be deemed advisable or
necessary in furtherance of the interests of the Trust. The President shall have
such other powers and duties as, from time to time, may be conferred upon or
assigned to him by the Trustees.
Section 5. Powers and Duties of Vice Presidents. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him from time to time by the Trustees or the President.
Section 6. Powers and Duties of the Treasurer. The Treasurer shall be
the principal financial and accounting officer of the Trust. He shall deliver
all funds of the Trust which may come into his hands to such Custodian as the
Trustees may employ pursuant to Article X of these By-laws. He shall render a
statement of condition of the finances of the Trust to the Trustees as often as
they shall require the same and he shall in general perform all the duties
incident to the office of Treasurer and such other duties as from time to time
may be assigned to him by the Trustees. The Treasurer shall give a bond for the
faithful discharge of his duties, if required so to do by the Trustees, in such
sum and with such surety or sureties as the Trustees shall require.
Section 7. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Trustees and of all meetings of the
Shareholders in proper books provided for that purpose; he shall have custody of
the seal of the Trust; he shall have charge of the Share transfer books, lists
and records unless the same are in the charge of the Transfer Agent. He shall
attend to the giving and serving of all notices by the Trust in accordance with
the provisions of these By-laws and as required by law; and subject to these
By-laws, he shall in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Trustees.
Section 8. Powers and Duties of Assistant Treasurer. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. The Assistant Treasurers shall perform such other duties as from time
to time may be assigned to them by the Trustees. Each Assistant Treasurer shall
give a bond for the faithful discharge of his duties, if required so to do by
the Trustees, in such sum and with such surety or sureties as the Trustees shall
require.
Section 9. Powers and Duties of Assistant Secretaries. In the absence
or disability of the Secretary, any Assistant Secretary designated by the
Trustees shall perform all of the duties, and may exercise any of the powers, of
the Secretary. The Assistant Secretaries shall perform such other duties as from
time to time may be assigned to them by the Trustees.
Section 10. Compensation of Officers and Trustees and Members of the
Advisory Board. Subject to any applicable provisions of the Declaration, the
compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he is also a Trustee.
ARTICLE VII
-----------
Fiscal Year
-----------
The fiscal year of the Trust shall begin on the first day of October 1
in each year and shall end on the last day of September 30, in each year,
provided, however, that the Trustees may from time to time change the fiscal
year.
- 4 -
<PAGE>
ARTICLE VIII
------------
Seal
----
The Trustees shall adopt a seal which shall be in such form and shall
have such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
----------
Waivers of Notice
-----------------
Whenever any notice whatever is required to be given by law, the
Declaration or these By-laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed or cabled for the purpose of these By-laws when it has been
delivered to a representative of any telegraph or cable company with instruction
that it be telegraphed or cabled.
ARTICLE X
---------
Custodian
---------
Section 1. Appointment and Duties. The Trustees shall at all times
employ a bank or trust company having a capital, surplus and undivided profits
of at least five million dollars ($5,000,000) as Custodian with authority as its
agent, but subject to such restrictions, limitations and other requirements, if
any, as may be contained in the Declaration, these By-laws and the 1940 Act:
(1) to hold the securities owned by the Trust and deliver the
same upon written order;
(2) to receive and receipt for any monies due to the Trust and deposit
the same in its own banking department or elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts of
the Trust and furnish clerical and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net income
of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees
and the Custodian. If so directed by a Majority Shareholder Vote, the Custodian
shall deliver and pay over all property of the Trust held by it as specified in
such vote.
The Trustees may also authorize the Custodian to employ one or more
sub-Custodians from time to time to perform such of the acts and services of the
Custodian and upon such terms and conditions, as may be agreed upon between the
Custodian and such sub-Custodian and approved by the Trustees, provided that in
every case such sub- Custodian shall be a bank or trust company organized under
the laws of the United States or one of the states thereof and having capital,
surplus and undivided profits of at least five million dollars ($5,000,000).
Section 2. Central Certificate System. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by
- 5 -
<PAGE>
the Commission, or otherwise in accordance with the 1940 Act, pursuant to which
system all securities of any particular class or series of any issuer deposited
within the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities, provided that
all such deposits shall be subject to withdrawal only upon the order of the
Trust or its Custodian.
Section 3. Acceptance of Receipts in Lieu of Certificates. Subject to
such rules, regulations and orders as the Commission may adopt, the Trustees may
direct the Custodian to accept written receipts or other written evidence
indicating purchases of securities held in book-entry form in the Federal
Reserve System in accordance with regulations promulgated by the Board of
Governors of the Federal Reserve System and the local Federal Reserve Banks in
lieu of receipt of certificates representing such securities.
Section 4. Provisions of Custodian Contract. The following provisions
shall apply to the employment of a Custodian pursuant to this Article X and to
any contract entered into with the Custodian so employed:
(a) The Trustees shall cause to be delivered to the Custodian
all securities owned by the Trust or to which it may become entitled,
and shall order the same to be delivered by the Custodian only upon
completion of a sale, exchange, transfer, pledge, loan of portfolio
securities to another person or other disposition thereof, and upon
receipt by the Custodian of the consideration therefor or a certificate
of deposit or a receipt of an issuer or of its Transfer Agent, all as
the Trustees may generally or from time to time require or approve, or
to a successor Custodian; and the Trustees shall cause all funds owned
by the Trust or to which it may become entitled to be paid to the
Custodian, and shall order the same disbursed only for investment
against delivery of the securities acquired, or the return of cash held
as collateral for loans of portfolio securities, or in payment of
expenses, including management compensation, and liabilities of the
Trust, including distributions to Shareholders, or to a successor
Custodian; provided, however, that nothing herein shall prevent
delivery of securities for examination to the broker selling the same
in accord with the "street delivery" custom whereby such securities are
delivered to such broker in exchange for a delivery receipt exchanged
on the same day for an uncertified check of such broker to be presented
on the same day for certification. Notwithstanding anything to the
contrary in these By-laws, upon receipt of proper instructions, which
may be standing instructions, the Custodian may delivery funds in the
following cases. In connection with repurchase agreements, the
Custodian may transmit, prior to receipt on behalf of the Fund of any
securities or other property, funds from the Fund's custodian account
to a special custodian approved by the Trustees of the Fund, which
funds shall be used to pay for securities to be purchased by the Fund
subject to the Fund's obligation to sell and the seller's obligation to
repurchase such securities. In such case, the securities shall be held
in the custody of the special custodian. In connection with the Trust's
purchase or sale of financial futures contracts, the Custodian shall
transmit, prior to receipt on behalf of the Fund of any securities or
other property, funds from the Trust's custodian account in order to
furnish to any maintain funds with brokers as margin to guarantee the
performance of the Trust's futures obligations in accordance with the
applicable requirements of commodities exchanges and brokers.
(b) In case of the resignation, removal or inability to serve
of any such Custodian, the Trust shall promptly appoint another bank or
trust company meeting the requirements of this Article X as successor
Custodian. The agreement with the Custodian shall provide that the
retiring Custodian shall, upon receipt of notice of such appointment,
deliver the funds and property of the Trust in its possession to and
only to such successor, and that pending appointment of a successor
Custodian, or a vote of the Shareholders to function without a
Custodian, the Custodian shall not deliver funds and property of the
Trust to the Trust, but may delivery them to a bank or trust company of
its own selection, having an aggregate capital, surplus and undivided
profits (as shown in its last published report) of at least five
million dollars ($5,000,000), as the property of the Trust to be held
under terms similar to those on which they were held by the retiring
Custodian.
- 6 -
<PAGE>
ARTICLE XI
----------
Sale of Shares of the Trust
---------------------------
The Trustees may from time to time issue and sell or cause to be issued
and sold Shares for cash or other property, which shall in every case be paid or
delivered to the Custodian as agent of the Trust before the delivery of any
certificate for such shares. The Shares, including additional Shares which may
have been purchased by the Trust (herein sometimes referred to as "treasury
shares"), may not be sold at less than the net asset value thereof determined by
or on behalf of the Trustees as of a time within forty-eight (48) hours,
excluding Sundays and holidays, next preceding the time of such determination,
except (1) in connection with an offering to the holders of Shares; (2) with the
consent of a majority of the holders of Shares; (3) upon conversion of a
convertible security in accordance with its terms; (4) upon the exercise of any
warrant issued in accordance with the provisions of Section 18(d) of the 1940
Act; or (5) under such other circumstances as the Commission may permit by rules
and regulations or orders for the protection of investors.
No Shares need be offered to existing Shareholders before being offered
to others. No Shares shall be sold by the Trust (although Shares previously
contracted to be sold may be issued upon payment therefor) during any period
when the determination of net asset value is suspended by declaration of the
Trustees. In connection with the acquisition by merger or otherwise of all or
substantially all the assets of an investment company (whether a regulated or
private investment company or a personal holding company), the Trustees may
issue or cause to be issued Shares and accept in payment therefor such assets at
not more than market value in lieu of cash, notwithstanding that the federal
income tax basis to the Trust of any assets so acquired may be less than the
market value, provided that such assets are of the character in which the
Trustees are permitted to invest the funds of the Trust.
ARTICLE XII
-----------
Dividends and Distributions
---------------------------
Section 1. Distributions to Shareholders. The Trustees shall from time
to time distribute ratably among the Shareholders such proportion of the net
profits, surplus (including paid-in surplus), capital, or assets held by the
Trustees as they may deem proper. Such distributions may be made in cash or
property (including without limitation any type of obligations of the Trust or
any assets thereof), and the Trustees may distribute ratably among the
Shareholders additional Shares issuable hereunder in such manner, at such times,
and on such terms as the Trustees may deem proper. Such distributions may be
among the Shareholders of record at the time of declaring a distribution or
among the Shareholders of record at such other date or time or dates or times as
the Trustees shall determine. The Trustees may always retain from the net
profits such amount as they may deem necessary to pay the debts or expenses of
the Trust or to meet obligations of the Trust, or as theY may deem desirable to
use in the conduct of its affairs or to retain for future requirements or
extensions of the business. The decision of the Trustees as to what, in
accordance with generally accepted accounting principles, is net profits,
surplus, capital or assets shall be final, and except as specifically provided
herein the decision of the Trustees as to what expenses and charges of the Trust
shall be charged against assets and what against income shall be final, all
subject to any applicable provisions of the 1940 Act and rules, regulations and
orders of the Commission promulgated thereunder.
Inasmuch as the computation of net income and gains for federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give to the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
Section 2. Dividend Reinvestment Plans. The Trustees may adopt and
offer to Shareholders such dividend reinvestment plans, cash dividend payout
plans or related plans as the Trustees shall deem appropriate.
Section 3. Stock Dividends. Anything in these By-laws to the contrary
notwithstanding, the Trustees may at any time declare and distribute pro rata
among the Shareholders a "stock dividend" out of either authorized but unissued
Shares or treasury shares of the Trust or both.
- 7 -
<PAGE>
ARTICLE XIII
------------
Amendments
----------
These By-laws, or any of them, may be altered, amended or repealed, or
new By-laws may be adopted (a) by Majority Shareholder Vote, or (b) by the
Trustees, provided, however, that no By-law may be amended, adopted or repealed
by the Trustees if such amendment, adoption or repeal requires, pursuant to law,
the Declaration or these By-laws, a vote of the Shareholders or if such
amendment, adoption or repeal changes or affects the provisions of Sections 1
and 4 of Article X or the provisions of this Article XIII.
ARTICLE XIV
-----------
Miscellaneous
-------------
The Trust shall not impose any restrictions upon the transfer of the
Shares of the Trust except as provided in the Declaration, but this requirement
shall not prevent the charging of customary transfer agent fees.
The Trust shall not permit any officer or Trustee of the Trust, or any
partner, officer or director of the Investment Adviser or underwriters of the
Trust to deal for or on behalf of the Trust with himself as principal or agent,
or with any partnership, association or corporation in which he has a financial
interest; provided that the foregoing provisions shall not prevent (a) officers
and Trustees of the Trust or partners, officers or directors of the Investment
Adviser or underwriter of the Trust from buying, holding or selling shares in
the Trust, or from being partners, officers or directors or otherwise
financially interested in the Investment Adviser or underwriter of the Trust;
(b) purchases or sales of securities or other property by the Trust from or to
an affiliated person or to the Investment Adviser or underwriters of the Trust
if such transaction is exempt from the applicable provisions of the 1940 Act;
(c) purchases of investments for the portfolio of the Trust or sales of
investments owned by the Trust through a security dealer who is, or one or more
of whose partners, shareholders, officers or directors is, an officer or Trustee
of the Trust, or a partner, officer or director of the Investment Adviser or
underwriter of the Trust, if such transactions are handled in the capacity of
broker only and commissions charged do not exceed customary brokerage charges
for such services; (d) employment of legal counsel, registrar, Transfer Agent,
dividend disbursing agent or Custodian who is, or has a partner, shareholder,
officer, or director who is, an officer or Trustee of the Trust, or a partner,
officer of director of the Investment Adviser or underwriter of the Trust, if
only customary fees are charged for services to the Trust; (e) sharing
statistical research, legal and management expenses and office hire and expenses
with any other investment company in which an officer or Trustee of the Trust,
or a partner, officer or director of the Investment Adviser or underwriter of
the Trust, is an officer or director or otherwise financially interested.
* * *
- 8 -
H&Q HEALTHCARE
INVESTORS
H&Q LIFE SCIENCES
INVESTORS
DIVIDEND
REINVESTMENT
PLAN
<PAGE>
Dear Shareholder,
This brochure summarizes the Automatic Dividend Reinvestment Plans (each
referred to as the "Plan") for shareholders of H&Q Healthcare Investors and of
H&Q Life Sciences Investors (each referred to as the "Fund"). Under the Plan,
your income dividends and capital gains distributions (collectively "Dividend")
will be automatically paid to you in the form of additional shares of beneficial
interest of the Fund, thereby providing you with a convenient way of acquiring
additional shares of the Fund. State Street Bank & Trust Company serves as the
Plan Agent.
The summary which follows is qualified to reference to the Terms and
Conditions of the Plan. We hope this brochure will prove helpful in answering
your questions about the Plan.
Sincerely,
/s/ Alan G. Carr
Alan G. Carr
President
The Fund and/or the Plan Agent may amend or terminate the Plan with at least
90 days written notice prior to the record date before such change becomes
effective.
<PAGE>
HOW DO I ENROLL IN THE PLAN?
No enrollment is necessary. Each registered shareholder is automatically
enrolled in the Plan (unless the shareholder elects otherwise). Whenever the
Fund declares a Dividend payable in shares, the Dividend will be automatically
reinvested by the Plan Agent, in whole or fractional shares of the Fund, as the
case may be.
WHAT IF MY SHARES ARE HELD BY A BROKER, BANK OR NOMINEE?
If your shares are held in the name of a broker, bank or nominee and such
institution will not participate in the Plan, your account will be credited
with a cash Dividend. In order to participate in the Plan through such an
institution, it may be necessary for you to have your shares taken out of
"street name" and re-registered in your own name. Once registered in your own
name, your Dividend will be automatically reinvested.
HOW DOES THE DIVIDEND REINVESTMENT PLAN WORK?
When a Dividend is declared, participants in the Plan will receive the
equivalent in shares of the Fund valued at the lower of the net asset value
or market price as described below:
(1) If at the time of reinvestment, the market price of the Fund shares is
equal to or exceeds net asset value, participants are issued shares
valued at the greater of (i) the net asset value as most recently
determined or (ii) 95% of the then current market price of the Fund
shares.
-or-
(2) If at the time of reinvestment, the market price of the Fund shares is
lower than net
<PAGE>
asset value, participants will receive shares from the Fund valued at
market price.
Non-participants in the Plan will receive cash.
WILL THE ENTIRE AMOUNT OF MY DIVIDEND BE REINVESTED?
Yes. For any balance that is insufficient to purchase a whole share, the
Plan Agent will credit your account with a fractional share interest computed
to four decimal places. The fractional share interest is included for the
payment of all subsequent Dividends, and you have voting rights on all full
and fractional shares acquired under the Plan. However, if your shares are
held by a broker, bank or nominee that participates in the Plan on your
behalf, any amounts not sufficient to purchase a whole share may be credited
to your account in cash in lieu of the fractional share interest.
WILL I BE ISSUED STOCK CERTIFICATES FOR TRANSACTIONS IN THE PLAN?
No. Shares issued under the Plan will automatically be held for
safekeeping by the Plan Agent. Each transaction will be fully detailed in a
comprehensive statement which will provide immediate confirmation of the
current status of your account. All of the paperwork is done for you by the
Plan Agent's computers, simplifying your recordkeeping. If a stock
certificate is desired, it must be requested in writing for each transaction.
Certificates will be issued only for whole shares.
<PAGE>
ARE DIVIDENDS THAT ARE REINVESTED SUBJECT TO INCOME TAXES?
Yes. The automatic reinvestment of Dividends will not relieve participants of
any income tax which may be payable on such Dividends and you will receive Form
1099 concerning the Federal tax status of Dividends paid during the year.
IS THERE ANY DIRECT CHARGE TO PARTICIPATE IN THE PLAN?
No. The Plan Agent's fees for handling the reinvestment of dividends will be
paid for by the Fund.
HOW DO I REQUEST A CASH DIVIDEND OR DISCONTINUE PARTICIPATION IN THE PLAN?
If your shares are held in registered form, you must obtain an Authorization
Card from the Plan Agent. If your shares are held by a broker, bank or nominee,
you should contact the institution. Should you wish to discontinue your
participation in the Plan, you must choose one of two options as indicated on
the Authorization Card.
(1) You may request to receive a certificate for the number of full shares
then held in your Plan account along with a check in payment for any
fractional share interest you may have. The payment for the fractional
share interest will be valued at the closing price of the Fund on the
Friday previous to the date your discontinuance is effective.
-or-
(2) You may liquidate your reinvestment shares. If you wish to liquidate your
reinvestment shares, the cost is $2.50
<PAGE>
per transaction as well as the brokerage commission incurred. Brokerage
charges are expected to be less than the usual brokerage charge for such
transactions.
HOW DO PARTICIPATING SHAREHOLDERS BENEFIT?
[BULLET] You will build holdings in the Fund easily and automatically, at
no brokerage cost.
[BULLET] If your shares are held in registered form, you will receive a
detailed account statement from the Plan Agent showing total
Dividends, shares acquired and price per share, and total shares
of record held by you and by the Plan Agent for you.
[BULLET] As long as you participate in the Plan, the Plan Agent will hold
the shares it has for you in safekeeping in book entry form. This
convenience provides added protection against loss, theft, or
inadvertent destruction of certificates.
OTHER QUESTIONS?
Other questions and correspondence concerning the Plan should be directed
to the Plan Agent:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
Telephone: 1-800-426-5523
If your shares are not held registered in your name, you should contact your
broker, bank or nominee for further assistance.
<PAGE>
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND
REINVESTMENT
1. Each shareholder ("Shareholder") holding shares of beneficial interest
("Shares") of H&Q Healthcare Investors or of H&Q Life Sciences Investors (each
referred to as the "Fund") will automatically be participants in the Dividend
Reinvestment Plan (the "Plan"), unless the Shareholder specifically elects to
receive all income dividends and capital gains distributions (collectively
"Dividend") in cash paid by check mailed directly to the Shareholder by State
Street Bank and Trust Company as Agent under the Plan (the "Agent"). The Agent
will open an account for each Shareholder under the Plan in the same name in
which such Shareholder's Shares are registered.
2. Whenever the Fund declares a Dividend payable in Shares or cash,
participating Shareholders will take the Dividend entirely in Shares and the
Agent will automatically receive the Shares, including fractions, for the
Shareholder's account.
3. Whenever the market price per Share is equal to or exceeds net asset value at
the time Shares are valued for the purpose for determining the number of Shares
equivalent to the cash Dividend (the "Valuation Date"), participants will be
issued Shares at the greater of (i) net asset value or (ii) 95% of the then
current market price of the Shares. The Valuation Date is the Dividend payment
date or, if that date is not a New York Stock Exchange (the "Exchange") trading
day, the next trading day. If the net asset value of the Shares on the Valuation
Date exceeds the market price of the Shares at that time, participants will
receive shares from the Fund valued at market price.
4. For all purposes of the Plan: (a) the market price of the Shares on a
particular date shall be the last sales price on the Exchange on that date or,
if no sale occurred on the Exchange on that date, then the mean between the
closing bid and asked quotations for the Shares on the Exchange
<PAGE>
on such date and (b) net asset value per Share on a particular date shall be
as determined by or on behalf of the Fund.
5. The Agent will hold Shares acquired pursuant to the Plan in book entry form
in the Agent's name or that of its nominee. At no additional cost, as a
participant in the Plan, you may send to the Agent for deposit into your Plan
account those certificate Shares of the Fund now in your possession. These
Shares will be combined with those book entry full and fractional Shares
acquired under the Plan and held by the Agent. Shortly thereafter, you will
receive a statement showing your combined holdings. The Agent will forward to
the Shareholder any proxy solicitation material and will vote any Shares so held
for the Shareholder only in accordance with the proxy returned by her or him to
the Fund. [Upon the Shareholder's written request, the Agent will deliver to her
or him, without charge, a certificate or certificates for the full Shares.]
6. The Agency will confirm to the Shareholder each transaction made for her or
his account as soon as practicable but not later than 60 days after the date
thereof. Although the Shareholder may, from time to time, have an individual
fractional interest (computed to four decimal places) in a Share of the Fund, no
certificates for a fractional Share will be issued. However, Dividends on
fractional Shares will be credited to the Shareholder's account under the Plan.
7. Any stock dividends or split Shares distributed by the Fund on Shares held by
the Agent for the Shareholder will be credited to the Shareholder's account. In
the event that the Fund makes available to the Shareholder rights to purchase
additional Shares or other securities, the Shares held for a shareholder under
the Plan will be added to other Shares held by the Shareholder in calculating
the number of rights to be issued to such Shareholder.
8. The Agent's service fee for handling Dividends will be paid by the Fund.
9. The Shareholder may terminate her or his account under the Plan by notifying
the Agent in
<PAGE>
writing. The Shareholder may rejoin the Plan at any time by notifying the
Plan Agent by telephone. A termination will be effective immediately if
notice is received by the Agent not less than 10 days prior to any Dividend
record date; otherwise such termination or reinstatement will be effective,
with respect to any subsequent Dividend, on the first trading day after a
Dividend paid for the record date has been credited to the Shareholder's
account. Upon any termination, the Agent will cause a certificate or
certificates for the full Shares held for the Shareholder under the Plan and
cash adjustment for any fraction to be delivered to her or him. If, the
Shareholder elects by notice to the Agent in writing in advance of such
termination to have the Agent sell part or all of her or his shares and remit
the proceeds to her or him, the Agent is authorized to deduct $2.50 per
transaction plus brokerage commissions for this transaction from the
proceeds.
10. These terms and conditions may be amended or supplemented by the Agent or
the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to the
Shareholder appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by the
Shareholder unless, prior to the effective date thereof, the Agent receives
written notice of the termination of the Shareholder account under the Plan. Any
such amendment may include an appointment by the Fund of a successor agent in
its place and stead under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Agent. Upon
any such appointment of any agent for the purpose of receiving Dividends, the
Fund will be authorized to pay to such successor agent, for Shareholders'
accounts, all Dividends payable on Shares held in the Shareholder's name or
under the Plan for retention or application by such successor agent as provided
in these terms and conditions.
11. In the case of Shareholders such as banks,
<PAGE>
brokers or nominees which hold Shares for others who are the beneficial
owners, the Agent will administer the Plan on the basis of the number of
Shares certified from time to time by the Shareholders as representing the
total amount registered in the Shareholder's name and held for the account of
beneficial owners who are to participate in the Plan.
12. The Agent shall at all times act in good faith and agree to use its best
efforts within reasonable limits to insure the accuracy of all services
performed under this agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
the errors are caused by its negligence, bad faith or willful misconduct or that
of its employees.
13. These terms and conditions shall be governed by the laws of the Commonwealth
of Massachusetts.
(5/95)
<PAGE>
H&Q HEALTHCARE
INVESTORS
H&Q LIFE SCIENCES
INVESTORS
Shareholder Inquiries to:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
Telephone: 1-800-426-5523
Investment Adviser:
Hambrecht & Quist Capital
Management Inc.
50 Rowes Wharf, 4th Floor
Boston, MA 02110-3328
H&Q HEALTHCARE INVESTORS
INVESTMENT ADVISORY AGREEMENT
-----------------------------
THIS INVESTMENT ADVISORY AGREEMENT, dated as of April 21, 1987 between
H & Q HEALTHCARE INVESTORS, a Massachusetts business trust (the "Fund"), and
HAMBRECHT & QUIST CAPITAL MANAGEMENT INCORPORATED, a California corporation (the
"Investment Adviser"),
W I T N E S S E T H:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. Services To Be Rendered by Investment Adviser to Fund.
-----------------------------------------------------
Subject to the supervision and direction of the Board of Trustees of
the Fund, the Investment Adviser will
a. act in strict conformity with the Fund's Declaration of
Trust, the Investment Company Act of 1940 (the "1940 Act") and the
Investment Advisers Act of 1940, as the same may from time to time be
amended;
b. manage the portfolio in accordance with the Fund's
investment objective and policies as stated in the Fund's Prospectus;
c. make investment decisions for the Fund;
d. place purchase and sale orders for portfolio transactions
for the Fund;
e. supply the Fund with office facilities (which may be in the
Investment Adviser's own offices), statistical and research data, data
processing services, clerical, internal executive and administrative
services, and stationery and office supplies;
f. supply or direct and supervise a third party administrator
or custodian in the provision to the Fund of accounting and bookkeeping
services, the calculation of the net asset value of shares of the Fund,
internal auditing services, and other clerical services in connection
therewith; and
g. prepare or supervise and direct a third party administrator
or custodian in the preparation of reports to shareholders of the Fund,
tax returns and reports to and filings with the Securities and Exchange
Commission and state Blue Sky authorities.
<PAGE>
In providing these services, the Investment Adviser will provide investment
research and supervision of the Fund's investment and conduct a continual
program of investment, evaluation and, if appropriate, sale and reinvestment of
the Fund's assets. In addition, the Investment Adviser will furnish the Fund
with whatever statistical information the Fund may reasonably request with
respect to the securities that the fund may hold or contemplate purchasing.
2. Brokerage.
---------
In executing transactions for the portfolio and selecting brokers or
dealers (which brokers or dealers may include any affiliate of the Investment
Adviser to the extent permitted by the 1940 Act) the Investment Adviser will use
its best efforts to obtain the best price and execution for the Fund. In
assessing the best price and execution available for any portfolio transaction,
the Investment Adviser will consider all factors it deems relevant including,
but not limited to, price (including any applicable brokerage commission or
dealer spread), size of order, difficulty of execution, and operational
facilities of the firm involved and the firm's risk in positioning a block of
securities. In selecting brokers or dealers to execute a particular transaction
and in evaluating the best price and execution available, the Investment Adviser
may consider the brokerage and research services (as those terms of are defined
in Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund
and/or other accounts over which the Investment Adviser exercises investment
discretion. It is understood that such services may be useful to the Investment
Adviser in connection with its services to other clients.
On occasions when the Investment Adviser deems the purchase or sale of
a security to be in the best interest of the Fund as well as other clients, the
Investment Adviser, to the extent permitted by applicable laws and regulations,
may, but shall be under no obligation to, aggregate the securities to be sold or
purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Investment Adviser in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Fund and to such
other clients.
3. Other Agreements; Use of Name, Etc.
----------------------------------
It is understood that any of the shareholders, Trustees, officers,
agents and employees of the Fund may be a shareholder, director, officer, agent
or employee of or be otherwise interested in the Investment Adviser and in any
affiliate thereof with the Investment Adviser and that the Investment Adviser
and any affiliate thereof with the Investment Adviser may have an interest in
the Fund. It is also understood that the Investment Adviser and persons
affiliated with the Investment Adviser have and may have advisory, management
service or other contracts with other organizations and persons, and may have
other interests and businesses and that the Fund shall have no
- 2 -
<PAGE>
interest in the profits or opportunities derived from the same, that the
Investment Adviser may give advice and take action in the performance of its
duties with respect to such other clients that may differ from advice given on
the timing or nature of action taken with respect to the Fund. Nothing in this
Agreement shall be deemed to confer upon the Investment Adviser any obligation
to acquire for the account of the Fund a position in any security that the
Investment Adviser or any affiliate thereof may acquire for its own account or
for the account of any other client, if in the sole and absolute discretion of
the Investment Adviser it is not for any reason practical or desirable to
acquire a position in such security for the Fund's account.
The Investment Adviser shall authorize and permit any of its officers,
directors and employees who may be elected as Trustees or officers of the Fund
to serve in the capacities in which they are elected. Services to be furnished
by the Investment Adviser under this Agreement may be furnished through the
medium of any of such officers, directors or employees.
The Fund acknowledges that the terms "Hambrecht & Quist" and "H&Q" are
property rights of the Investment Adviser and its affiliates and that such
entities may permit other entities to use such terms as part of their names. The
Fund agrees that, if the Investment Adviser ceases to act as investment adviser
to the Fund, the Fund's license to use the terms "Hambrecht & Quist" or "H&Q" as
part of its name will terminate and the Fund will take all necessary actions to
change its name to a name not including such terms.
4. Compensation.
------------
The Fund will pay to the Investment Adviser as compensation for the
Investment Adviser's services rendered a fee, computed monthly, equal when
annualized to (1) 1.0% of the average net asset value for such month of all
assets of the Fund other than venture capital and other restricted securities
which do not exceed 25% of total net assets and (2) 2.5% of the average net
asset value for such month of venture capital and other restricted securities of
the Fund that constitute up to 25% of total net assets; provided that in no
event shall such monthly fee when annualized exceed 1.375% of the average total
net asset value for such month of the Fund. For purposes of this section,
"average net asset value" and "average total net asset value" for any month
shall be equal to the average of the net asset value of the appropriate assets
at the last business day of such month and the net asset value of the
appropriate assets at the last business day of the prior month. In determining
average net asset value for purposes of clauses (1) and (2) above, liabilities
and expenses of the Fund shall be allocated pro rata based on the ratio that the
assets referred to in each clause bear to the total assets of the Fund. Such fee
shall be payable for each month within five business days after the end of the
such month.
- 3 -
<PAGE>
For purposes of this Section 4, "venture capital and other restricted
securities" shall be securities of issuers for which no market quotations are
readily available and securities of companies for which market quotations are
readily available but which are subject to legal or contractual restrictions on
resale. Securities of companies for which public information is available but as
to sale of which the safe harbor provided by Rule 144(k) is not available shall
be considered to be subject to legal or contractual restrictions on resale.
In the event that expenses of the Fund for any fiscal year should
exceed the expense limitation on investment company expenses imposed by any
statute or regulatory authority of any jurisdiction in which shares of the Fund
are qualified for offer and sale, the compensation due the Investment Adviser
for such fiscal year shall be reduced by the amount of such excess by a
reduction or refund thereof. In the event that the expenses of the Fund exceed
any expense limitation which the Investment Adviser may, by written notice to
the Fund, voluntarily declare to be effective subject to such terms and
conditions as the Investment Adviser may prescribe in such notice, the
compensation due the Investment Adviser shall be reduced and if necessary the
Investment Adviser shall assume expenses of the Fund, to the extent required by
such expense limitation. In no event shall the provisions of this Section 4
require the Investment Adviser to reduce its fee if not so required by an
applicable statute or regulatory authority.
If the Investment Adviser shall serve for less than the whole of a
month, the foregoing compensation shall be prorated.
5. Expenses.
--------
The Investment Adviser will bear all expenses in connection with the
performance of its services under this Agreement, including compensation of and
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the fees of all Trustees of the Fund who are "affiliated persons" of the
Investment Adviser, as that term is defined in the 1940 Act, or any of its
"affiliated persons."
The Fund shall pay (or, in the event that such expenses are paid by the
Investment Adviser, shall reimburse the Investment Adviser for) all other
expenses incurred in the organization and operation of the Fund including, among
other things, expenses for legal and auditing services, costs of printing proxy
statements, prospectuses, stock certificates and shareholder reports, charges of
the custodian, any sub-custodian and transfer agent, expenses in connection with
the Dividend Reinvestment and Cash Purchase plan, Securities and Exchange
Commission and National Association of Securities Dealers, Inc. fees, fees and
expenses of Trustees of the Trust who are not "affiliated persons" of the
Investment Adviser or any of its "affiliated persons," accounting and valuation
costs, administrator's fees membership fees in trade associations, fidelity bond
coverage for the Fund's officers and employees, errors and omissions insurance
- 4 -
<PAGE>
coverage for Trustees and officers, interest, brokerage costs, taxes, stock
exchange listing fees and expenses, expenses of qualifying the Fund's shares for
sale in various states, expenses associated with personnel performing
exclusively shareholder servicing functions, certain other organization expenses
and litigation and other extraordinary or non-recurring expenses, and other
expenses properly payable by the Fund.
6. Assignment Terminates This Agreement; Amendments of This Agreement.
------------------------------------------------------------------
This Agreement shall automatically terminate, without the payment of
any penalty in the event of its assignment, and this Agreement shall not be
amended unless such amendment is approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Fund, and by the vote cast in
person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Fund who are not interested persons of the Fund
or of the Investment Adviser.
7. Effective Period and Termination of This Agreement.
--------------------------------------------------
This Agreement shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 6) until terminated as follows:
a. Either party hereto may at any time terminate this
Agreement by not less than thirty days' nor more than sixty days'
written notice delivered or mailed by registered mail, postage prepaid,
to the other party; or
b. If (i) the Trustees of the Fund or the shareholders by the
affirmative vote of a majority of the outstanding shares of the Fund
and (ii) a majority of the Trustees of the Fund who are not interested
persons of the Fund or of the Investment Adviser, by vote cast in
person at a meeting called for the purpose of voting on such approval,
do not specifically approve at least annually the continuance of this
Agreement, then this Agreement shall automatically terminate at the
close of business on April 21, 1988 or the expiration of one year from
the effective date of the last such continuance, whichever is later.
Action by the Fund under (a) above may be taken either by (i) vote of a
majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund.
Termination of this Agreement pursuant to this Section 7 shall be
without the payment of any penalty.
- 5 -
<PAGE>
8. Certain Definitions.
-------------------
For the purposes of this Agreement, the "affirmative vote of a majority
of outstanding shares of the Fund" means the affirmative vote, at a duly called
and held meeting of shareholders of the Fund, (a) of the holders of 67% or more
of the shares of the Fund present (in person or by proxy) and entitled to vote
at such meeting, if the holders of more than 50% of the outstanding shares of
the Fund entitled to vote at such meeting are present in person or by proxy, or
(b) of the holders of more than 50% of the outstanding shares of the Fund
entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person,"
"control," "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the Rules and
Regulations thereunder, subject, however to such exemptions as may be granted by
the Securities and Exchange Commission under said Act; the term "specifically
approve at least annually" shall be construed in a manner consistent with the
Investment Company Act of 1940 and the Rules and Regulations thereunder; and the
term "brokerage and research services" shall have the meaning given in the
Securities and Exchange Act of 1934 and the Rules and Regulations thereunder.
9. Nonliability of Investment Adviser.
----------------------------------
The Investment Adviser shall not be held responsible for any loss
incurred by any act or omission of any broker. The Investment Adviser also shall
not be liable to the Fund or to any shareholder of the Fund for any error or
judgment or for any loss suffered by the Fund in connection with rendering
services hereunder except (a) a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services (in which case any
award of damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act) or (b) a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment
Adviser, or reckless disregard of its obligations and duties hereunder. Subject
to the foregoing, the Fund also shall indemnify the Investment Adviser, and any
officer, director and employee thereof to the maximum extent permitted by
Article V of the Fund's Declaration of Trust.
10. Limitation of Liability of the Trustees and Shareholders.
--------------------------------------------------------
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of the Commonwealth of Massachusetts, and notice is hereby given that
this instrument is executed on behalf of the Trustees of the Fund as Trustees
and not individually and that the obligations of this instrument are not binding
upon any of the Trustees or shareholders individually but are binding only upon
the assets and property of the Fund.
- 6 -
<PAGE>
11. Furnishing of Materials.
-----------------------
During the term of this Agreement, the Fund agrees to furnish the
Investment Adviser at its principal executive office all prospectuses, proxy
statements, report to shareholders, sales literature, or other material prepared
for distribution to shareholders of the Fund or the public, which refer to the
Investment Adviser in any way, prior to use thereof and not to use such material
if the Investment Adviser reasonably objects in writing within five business
days (or such other time as may be mutually agreed) after receipt thereof. In
the event of termination of this Agreement, the Fund will continue to furnish to
the Investment Adviser copies of any of the above-mentioned materials which
refer in any way to the Investment Adviser. The Fund shall furnish or otherwise
make available to the Investment Adviser such other information relating to the
business affairs of the Fund as the Investment Adviser at any time, or from time
to time, reasonably requests in order to discharge its obligations hereunder.
12. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, H&Q Healthcare Investors and Hambrecht & Quist
Capital Management Incorporated have each caused this instrument to be signed in
duplicate in its behalf by its President or a Vice President thereunto duly
authorized, all as of the date first hereinabove written.
H&Q HEALTHCARE INVESTORS
By:
---------------------------------
Title:
-------------------------
HAMBRECHT & QUIST CAPITAL
MANAGEMENT INCORPORATED
By:
---------------------------------
Title:
-------------------------
- 7 -
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our firm) included in or made a part of this
registration statement.
Boston, Massachusetts
January 3, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Annual
Report for the fiscal year ended September 30, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> H&Q HEALTHCARE INVESTORS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 97,884,848
<INVESTMENTS-AT-VALUE> 147,956,680
<RECEIVABLES> 0
<ASSETS-OTHER> 320,478
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 148,277,158
<PAYABLE-FOR-SECURITIES> 497,750
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 226,903
<TOTAL-LIABILITIES> 724,653
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 71,929,826
<SHARES-COMMON-STOCK> 5,729,160
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 25,550,847
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50,017,832
<NET-ASSETS> 147,552,505
<DIVIDEND-INCOME> 9,900
<INTEREST-INCOME> 242,253
<OTHER-INCOME> 0
<EXPENSES-NET> 2,273,950
<NET-INVESTMENT-INCOME> (2,021,797)
<REALIZED-GAINS-CURRENT> 26,774,551
<APPREC-INCREASE-CURRENT> 5,212,708
<NET-CHANGE-FROM-OPS> 29,965,462
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 6,769,939
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 26,479,830
<ACCUMULATED-NII-PRIOR> 5,912,514
<ACCUMULATED-GAINS-PRIOR> 44,859,124
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,961,266
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,273,950
<AVERAGE-NET-ASSETS> 140,375,000
<PER-SHARE-NAV-BEGIN> 21.818
<PER-SHARE-NII> (.33)
<PER-SHARE-GAIN-APPREC> 3.487
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.22
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 25.754
<EXPENSE-RATIO> 1.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
