As filed with the Securities and Exchange Commission on February 7, 1997
Securities Act No. 333-19247
Investment Company Act File No. 811-4889
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
[X]
Pre-Effective Amendment No. 1
[X]
Post-Effective Amendment No. __
[ ]
and/or
Registration Statement under the Investment Company Act of 1940
[X]
Amendment No. 13
[X]
(Check appropriate box or boxes)
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H&Q HEALTHCARE INVESTORS
(Exact Name Of Registrant as Specified In Charter)
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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.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
======================================================================================================
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 (1) $47,099,278.13 (1) $14,272.52 (2)
======================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(c) on the basis of market price per Share
on December 30, 1996.
(2) Previously paid.
-------------
This Registration Statement shall hereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933.
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<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 Securities Not Applicable
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 February 7, 1997 (the
"Record Date"), non-transferable rights (the "Rights") entitling the holders
thereof to subscribe for an aggregate of 2,115,336 shares of beneficial
interest of the Trust (the "Shares"), at the rate of one Share for each three
Rights held (the "Offer"). Shareholders will receive one non-transferable
Right for each Share held. Shareholders who have fully exercised their Rights
will have an over-subscription privilege (the "Over-Subscription Privilege")
to subscribe for additional shares subject to certain limitations and subject
to allotment, for any Shares not acquired by exercise of primary subscription
rights. Fractional shares will not be issued upon the exercise of Rights. The
Rights are non-transferable and will not be admitted for trading on the New
York Stock Exchange (the "NYSE") or any other exchange. Shares of the Trust
trade on the NYSE under the symbol "HQH." See "The Offer." THE SUBSCRIPTION
PRICE PER SHARE WILL BE 95% OF THE LOWER OF (a) THE AVERAGE OF THE LAST
REPORTED SALES PRICE OF A SHARE ON THE NYSE ON MARCH 5, 1997 (THE "PRICING
DATE") AND THE FOUR PRECEDING BUSINESS DAYS OR (b) THE NET ASSET VALUE PER
SHARE (THE "NAV") AS OF THE PRICING DATE.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 5, 1997 (THE
"EXPIRATION DATE"). For additional information regarding the Offer, please
call Shareholder Communications Corporation (the "Information Agent") at
(800) 733-8481, extension 352, or call collect at (212) 805-7000.
The Trust is a diversified, closed-end management investment company. The
Trust's investment objective is to seek long- term capital appreciation by
investing primarily in securities of companies in the health services and
medical technology (healthcare) industries ("Healthcare Companies"). The
Trust will invest primarily in securities of companies that are believed by
the Trust's investment adviser to have significant potential for
above-average long-term growth in revenues and earnings. The Trust emphasizes
investment in securities of emerging growth Healthcare Companies. The Trust
may also invest up to 40% of its net assets in venture capital or other
securities subject to legal or contractual restrictions as to resale. Such
securities may be acquired in connection with venture capital opportunities,
as well as in private placements in public companies. No assurance can be
given that the Trust will achieve its investment objective. See "Appendix A--
Description of Risk Factors and Investment Techniques."
The Trust's investment adviser is Hambrecht & Quist Capital Management
Incorporated, the President and sole Director of which is Alan G. Carr, who
is responsible for management of the Trust's portfolio. See "Investment
Adviser."
The Trust announced the Offer after the close of trading on the NYSE on
January 3, 1997. The NAV at the close of business on January 3, 1997 and
February 7, 1997 was $20.46 and $ , respectively, and the last reported
sales price of a Share on the NYSE on those dates was $17.375 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, irrespective of whether they exercise
all or any portion of their rights, because the Subscription Price per Share
will be less than the then current NAV. Such dilution might be significant.
See "The Offer."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
Estimated Estimated Estimated Proceeds
Subscription Price (1) Sales Load (2) to Trust (3)
Per Share $ $ $
Total Maximum (3) $ $ $
- -------------------------------------------------------------------------------
Footnotes set forth on next page
- --------------------------------------------------------------------------------
<PAGE>
Investors are advised to read this Prospectus and retain it for future
reference. A Statement of Additional Information dated February 7, 1997 (the
"SAI") containing additional information about the Trust has been filed with
the Securities and Exchange Commission and is incorporated by reference in
its entirety into this Prospectus. A copy of the SAI, the table of contents
of which appears on page 32 of this Prospectus, may be obtained without
charge by contacting the Trust at (617) 574-0567.
Dealer Manager
Prudential Securities Incorporated
February 7, 1997
(Notes from cover page)
(1) Estimated on the basis of the average of the last reported sales price of
a Share on the NYSE on February 7, 1997 and the four preceding business
days. Pursuant to the Over-Subscription Privilege, the Trust may increase
the number of Shares subject to subscription by up to 25% of the Shares
offered hereby. If the Trust increases the number of Shares subject to
subscription by 25%, the total maximum Estimated Subscription Price will
be approximately $ , 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 February 7, 1997
(the "Record Date") non- transferable rights ("Rights") to
subscribe for an aggregate of 2,115,336 Shares of the Trust (the
"Offer"). Each Shareholder will be entitled to subscribe for one
Share for each three Rights held (the "Primary Subscription").
Subscription Price The subscription price per Share (the "Subscription Price") will
be 95% of the lower of (a) the average of the last reported sales
prices of a Share on the New York Stock Exchange ("NYSE") on March
5, 1997 (the "Pricing Date") and the four preceding business days
or (b) the net asset value per Share (the "NAV") as of the Pricing
Date.
Subscription Period Rights may be exercised at any time during the subscription period
(the "Subscription Period"), which commences on February 10, 1997
and ends at 5:00 p.m. New York City time, on March 5, 1997 (the
"Expiration Date").
Over-Subscription Privilege Shareholders who fully exercise their Rights in the Primary
Subscription may have, subject to certain limitations and subject
to allotment, a privilege to subscribe for additional Shares (the
"Over-Subscription Privilege"). In order to honor
over-subscription requests, the Trust may, at its discretion,
issue up to an additional 25% of the Shares available in the
Offer.
Purpose of the Offer The Investment Adviser (as defined herein) believes that
increasing the Trust's assets for investment through the Offer
will benefit the Trust and its Shareholders by better positioning
the Trust to more fully take advantage of available investment
opportunities in securities of emerging growth companies in the
health services and medical technology (healthcare) industries
("Healthcare Companies"), particularly venture capital investments
in biotechnology and other innovative medical technology
companies.
While there can be no assurance that such benefits will be
realized, increasing the Trust's investment assets through the
Offer is intended to:
(bullet) allow the Trust to increase its investments at a time
when the Investment Adviser believes that securities of
selected biotechnology and other innovative medical
technology companies are positioned for price
appreciation due to (i) a substantial number of
healthcare products awaiting Food and Drug Administration
("FDA") approval, (ii) recent advances in computer
technology and scientific knowledge which have caused a
proliferation of new healthcare products and which have
reduced the time and cost of research and development of
such new products, and (iii) an improved regulatory
climate;
</TABLE>
3
<PAGE>
THE OFFER (Cont'd)
<TABLE>
<CAPTION>
<S> <C>
Purpose of the Offer (bullet) increase the Trust's average investment size, creating for
(Cont'd) the Trust additional negotiating leverage and pricing
influence over venture capital and other private equity
investments;
(bullet) provide the Trust with the ability to make additional
investments without realizing capital gains on current
investments or otherwise selling current investments at an
unfavorable time; and
(bullet) reduce operating costs per Share.
The Offer affords Shareholders the opportunity to purchase
additional Shares of the Trust at a price that will be below market
value 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>
<S> <C>
Record Date February 7, 1997
Subscription Period February 10, 1997-
March 5, 1997
Deadline for delivery of Exercise Form together with payment of
Estimated Subscription Price or for delivery of Notice of
Guaranteed Delivery March 5, 1997
Expiration Date and Pricing Date March 5, 1997
Deadline for payment of final Subscription Price pursuant to
Notice of Guaranteed Delivery March 10, 1997
Confirmation Date to Registered Shareholders March 18, 1997
For Registered Shareholder Purchases--deadline for payment of
unpaid balance if final Subscription Price is higher than
Estimated Subscription Price April 4, 1997
</TABLE>
4
<PAGE>
THE TRUST
<TABLE>
<CAPTION>
<S> <C>
The Trust The Trust is a diversified, closed-end management investment
company organized as a Massachusetts business trust. As of
February 7, 1997, the Trust had 6,346,009 Shares outstanding,
which are traded on the NYSE under the symbol "HQH." As of
February 7, 1997, the Trust's NAV and last reported sales price
per Share were $ 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.
As a result of the Offer, Shareholders who do not fully exercise
their Rights will experience dilution of NAV, dilution of a
proportionate ownership interest in the Trust, and dilution of
voting power.
Also, an immediate dilution of NAV will be experienced by all
Shareholders, regardless of whether they exercise any or all of
their Rights, because the Subscription Price will be less than the
current NAV, and the number of Shares outstanding after the Offer
will increase by a greater percentage than the increase in the
size of the Trust's assets. For example, if the assumed
Subscription Price is $19.10, representing a market price which is
only 90% of NAV, assuming that all Rights are exercised, the
Trust's NAV would be reduced by approximately $.81 per Share or
approximately 3.6% of NAV. However, the actual Subscription Price
may be greater or less than such assumed Subscription Price. The
foregoing example assumes an NAV of $22.33 per Share, based on the
Trust's NAV after the close of trading on Monday, February 3,
1997.
Concentration in the The Trust expects under normal market conditions to invest at
Healthcare Industries least 80% of its net assets in securities of Healthcare Companies
and in no event will have less than 25% of its net assets so
invested. Healthcare Companies have in the past been characterized
by limited product focus, rapidly changing technology and
extensive government regulation. These factors may result in
abrupt advances and declines in the securities prices of
particular companies and, in some cases, may have a broad effect
on the prices of securities of companies in particular healthcare
industries.
Intense competition exists within and among certain healthcare
industries, including competition to obtain and sustain
proprietary technology protection upon which Healthcare Companies
can be highly dependent for maintenance of profit margins and
market exclusivity.
Cost containment measures implemented by the federal government
have adversely affected certain sectors of the healthcare
industries. The implementation of any such further cost
containment measures may have an adverse effect on some companies
in the healthcare industries.
Investment in Emerging The Trust emphasizes investment in equity securities of emerging
Growth Companies growth Healthcare Companies. While these securities offer the
opportunity for significant capital gains, such investments also
involve a degree of risk that can result in substantial losses.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Key Personnel There may be only a limited number of securities professionals who
have comparable investment experience to Mr. Carr, the Trust's
portfolio manager, in the area of Healthcare Companies. In the
event of his death, resignation, retirement or inability to act on
behalf of the Investment Adviser, there can be no assurance that a
suitable replacement for Mr. Carr could be found immediately.
Liquidity of Portfolio The Trust may invest substantially all of its net assets in
Investments securities of emerging growth Healthcare Companies, including
venture capital and other private equity investments. Some of
these securities are traded in the over-the-counter market or on
regional stock exchanges where the low trading volume of a
particular security may result in abrupt and erratic price
movements. An investment in such securities may have limited
liquidity, and the Trust may find it necessary to sell at a
discount from recent prices or to sell over extended periods of
time when disposing of such securities. Restricted Securities in
which the Trust may invest cannot be sold except in a public
offering registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to an exemption thereunder or in
compliance with applicable regulations of the Securities and
Exchange Commission.
Foreign Securities The Trust may invest up to 20% of its net assets in securities of
foreign issuers, expected to be located primarily in Western
Europe, Canada and Japan, and securities of United States ("U.S.")
issuers traded in foreign markets ("Foreign Securities"). Foreign
Securities may be less liquid and have prices that are more
volatile than securities of comparable U.S. companies. An
investment in Foreign Securities may also involve currency risk.
Discount from NAV The Trust's Shares may trade at a discount to NAV. This is a risk
separate and distinct from the risk that the Trust's NAV will
decrease.
Declaration of Trust Certain provisions of the Trust's Declaration of Trust may be
regarded as "anti-takeover" provisions because they could have the
effect of limiting the ability of other entities or persons to
acquire control of the Trust.
</TABLE>
7
<PAGE>
TRUST EXPENSES
The following estimated table is intended to assist Trust investors in
understanding the various costs and expenses associated with investing in the
Trust through the exercise of Rights.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription
Price) (1) 3.50 %
Dividend Reinvestment Plan Fees None
Annual Expenses (as a percentage of average net
assets attributable to Shares) (2)
Advisory Fee 1.375%
Other Operating Expenses .225%
-----
Total Annual Expenses (3) 1.600%
=====
</TABLE>
- -------------
(1) In connection with the Offer, the Trust has agreed to pay the Dealer
Manager (as defined herein) a fee for its financial advisory, marketing
and solicitation services equal to 3.50% of the aggregate Subscription
Price for the Shares issued pursuant to the Offer and to reimburse the
Dealer Manager for out-of-pocket expenses up to $150,000. The Dealer
Manager will reallow to certain broker-dealers a concession of 2.25% of
the Subscription Price Per Share for Shares issued pursuant to the Offer.
In addition, the Trust has agreed to pay a fee to the Subscription Agent
and the Information Agent estimated to be $10,000 and $22,000,
respectively, which includes reimbursement for their out-of-pocket
expenses related to the Offer. These fees and expenses will be borne by
the Trust and indirectly by all of the Trust's Shareholders, including
those who do not exercise their Rights. See "Distribution Arrangements."
(2) Fees payable under the Advisory Agreement (as defined herein) are
calculated on the basis of the Trust's total assets. The advisory fee
shown above assumes the maximum allowable advisory fee under the Advisory
Agreement. "Other Expenses" has been estimated for the current fiscal
year.
(3) The estimated 1.60% expense ratio assumes that the Offer is fully
subscribed, yielding estimated net proceeds of approximately $
million (assuming a Subscription Price of $ per Share) and that, as a
result, based on the Trust's net assets attributable to Shareholders on
February 7, 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>
Net asset value per share:
Beginning of period $11.313 $10.647 $8.036 $9.450 $9.250
Net investment income (loss) ($0.014) $0.014 $0.003 ($0.019) $0.030
Net realized and unrealized gain (loss) on
investments 8.743 0.652 2.608 (1.375) 0.170
Federal income taxes on retained long-term
capital gains -- -- -- -- --
-------- -------- -------- -------- --------
Total increase (decrease) from investment
operations $8.729 $0.666 $2.611 ($1.394) $0.200
-------- -------- -------- -------- --------
Distribution to shareholders
Short-term capital gains ($0.055) -- -- -- --
Long-term capital gains (0.780) -- -- ($0.020) --
-------- -------- -------- -------- --------
Total distributions ($0.835) -- -- ($0.020) --
-------- -------- -------- -------- --------
Net asset value per share:
End of period $19.207 $11.313 $10.647 $8.036 $9.450
=========== ========= ========= =========== ===============
Per share market value:
End of period $18.375 $9.250 $9.750 $6.375 $5.625
Total investment return (a) 113.06% 1.37% N/A N/A N/A
Net assets:
End of period $106,396,527 $62,661,275 $58,974,336 $44,515,399 $52,366,673
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses to average net
assets 1.73% 1.74% 1.89% 1.98% 1.83%*
Ratio of net investment (loss) to average net
assets (0.10%) 0.12% 0.02% (0.25%) 0.74%*
Portfolio turnover rate 23.04% 47.02% 46.90% 57.42% 17.34%*
Average commission rate paid per listed share
purchased (a) N/A N/A N/A N/A N/A
Number of shares outstanding at end of period 5,539,450 5,539,450 5,539,450 5,539,450 5,539,450
</TABLE>
- -------------
* Annualized.
(a) Average commission rate per share required for fiscal years that began
September 1, 1995, or later; total investment return information not
required for fiscal years 1987 through 1989.
10
<PAGE>
Portfolio Characteristics
A substantial portion of the Trust's investment portfolio consists of
venture capital and private equity investments. As of December 31, 1996,
30.7% of the Trust's assets were invested in Restricted Securities of 31
Healthcare Companies, 16 of which were publicly-traded. The Trust continues
to value these securities below current market prices as they remain
restricted as to resale.
From inception, the Trust has made 131 venture capital investments in 56
private companies and 9 private placements in public companies. There have
been 34 initial public offerings and 3 acquisitions of restricted portfolio
companies as of December 31, 1996.
The following sets forth certain information with respect to the
composition of the Trust's investment portfolio.
The Trust's Portfolio
(as of December 31, 1996)
The following table sets forth the Trust's ten largest holdings as a
percentage of net assets.
The Trust's Portfolio
(as of December 31, 1996)
[Tabular representation of bar chart]
Restricted Unrestricted
LIQUID ASSETS 0.00% 1.16%
MANAGED CARE 0.00% 4.24%
AGRI/ENVIRO 0.78% 5.46%
PHARMACEUTICALS 0.46% 7.20%
CROs 1.67% 7.77%
DIAGNOSTICS 6.72% 3.62%
MEDICAL SPECIALTY 5.36% 5.82%
MEDICAL SUPPLIES 4.54% 7.61%
BIOTECHNOLOGY 11.14% 26.45%
The following table sets forth the Trust's ten largest holdings as a
percentage of net assets.
The Trust's Ten Largest Holdings
(as of December 31, 1996)
<TABLE>
<CAPTION>
% of Net Assets
----------------
<S> <C>
Martek Biosciences* 6.91%
Quintiles Transnational 5.46%
Vivus* 5.16%
IBAH* 3.98%
Cytyc* 3.54%
IDEXX Laboratories* 2.88%
Vencor 2.79%
SEQUUS Pharmaceuticals* 2.76%
INCYTE Pharmaceuticals 2.57%
Spiros Development* 2.54%
------
Total 38.59%
</TABLE>
*These securities were Restricted Securities when initially purchased by the
Trust.
11
<PAGE>
As of December 31, 1996, seven of the Trust's ten largest holdings were
originally venture capital investments. This portion of the Trust's
investment portfolio has historically outperformed the Trust's overall
portfolio as measured by NAV total return. Through December 31, 1996, the
internal rate of return as calculated by the Investment Adviser for the
restricted portfolio has been 20.3% per year before fees and 18.9% per year
after allocated advisory fees since inception. The preceding rate of return
information represents past performance only, was derived during a period of
generally rising securities prices, and is not a guarantee of future
performance. Shareholders of the Trust may experience gain or loss as a
result of the price performance of Shares of the Trust, which in turn is
materially affected by the performance of the entire portfolio, not just the
Restricted Securities portion of the portfolio. There can be no guarantee
that the Investment Adviser will invest the Trust's assets in successful
Restricted Securities investments.
Share Price and NAV
The Trust's Shares are publicly held and have been listed and are trading
on the NYSE. The average weekly trading volume of the outstanding Shares of
the Trust for the calendar year ended December 31, 1996 was 77,985. Shares of
the Trust have frequently traded at a discount 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 (3) 21.13 26.35 (19.83) 15.88 18.85 (15.78) 1,765,800
</TABLE>
- -------------
(1) As reported by the NYSE.
(2) Based on the Trust's computations, on the day that the high or low market
price was recorded.
(3) Not adjusted for long-term capital gains distribution of $4.49 per share.
12
<PAGE>
Investment
Performance
Total Return of the Trust. Since the Trust's first full month of
operations, the Trust's Share price and NAV have increased at an annualized
rate of 10.7% and 13.0%, respectively, through December 31, 1996. The
following two charts compare the historical total return of the Trust as
measured by changes in Share price and NAV, with changes in the Dow Jones
Medical and Biotechnology Index. The charts reflect the reinvestment of
dividends and capital gains and do not incorporate shareholder transaction
costs.
H&Q Healthcare Investors Stock Price
v. Dow Jones Medical and Biotechnology Index
(from April 30, 1987 to December 31, 1996)
[HQH Stock Price Line Chart]
"HQH Stock "Dow Jones Medical and
Price(1)" Biotechnology Index(2)"
30-Apr-87 100 100
84.6 102.9
84.6 99.6
89.7 99.1
84.6 100.1
30-Sep-87 79.5 98.2
61.5 69.9
51.3 65.3
57.9 77.1
63 79.9
29-Feb-88 68.2 81.8
70.7 79.9
66.9 70.5
65.6 66.9
68.2 69.4
31-Jul-88 68.2 65.8
64.3 63.3
66.9 62.5
66.9 61.1
60.4 59.2
31-Dec-88 65.6 62.1
68.2 66.8
65.6 68.1
72 72.9
77.2 76.2
31-May-89 79.7 79.3
75.9 77.1
82.3 83.8
82.3 82.9
93.9 88.3
31-Oct-89 88.7 92.4
96.4 95.7
100.3 92
95.2 88.1
92.6 94
31-Mar-90 97.7 98.3
93.9 99.5
105.4 114.8
118.3 123.4
117 108.3
31-Aug-90 101.6 101.9
95.2 94
96.4 91.5
111.9 110.2
121.3 109.6
31-Jan-91 126.8 125
151.7 150.3
177.9 168.7
169.6 156.9
175.1 170.2
30-Jun-91 166.8 162
173.7 178
188.9 183.5
201.3 197.7
224.7 211.3
30-Nov-91 228.9 207.5
294.8 246.8
309.1 222.5
293.3 195.9
270.4 181.6
30-Apr-92 227.5 152.8
237.5 167.2
226.1 165.6
257.6 170.2
236.1 157.7
30-Sep-92 217.5 151.5
224.6 158.1
236.1 176.8
217.5 178
206 149.6
28-Feb-93 207.5 127.2
197.5 127.6
200.3 124.1
206 128.1
197.5 132.7
31-Jul-93 193.2 131.6
201.8 131.8
210.3 141
217.5 153.6
198.9 153.6
31-Dec-93 200.3 155.8
218.9 165.4
204.6 150.6
193.2 142.2
180.3 140.9
31-May-94 180.3 148.5
163.1 141.6
160.3 149.9
178.9 168.6
173.1 176.4
31-Oct-94 156 174.5
160.3 176.9
157.4 179.4
164.5 185.1
163.1 184.6
31-Mar-95 158.8 186.8
166 185.2
164.5 183
176 193.7
190.3 199
31-Aug-95 206 208.6
208.9 216.2
207.5 213.1
207.6 227
248.8 254.2
31-Jan-96 276.3 267.6
274.8 264.2
259.5 259
270.2 264.3
283.9 263.7
30-Jun-96 264.1 245.6
232 236.8
247.3 249.2
254.9 273.5
235.1 271.2
30-Nov-96 252.6 277.1
31-Dec-96 267.8% 281.9%
H&Q Healthcare Investors Net Asset Value
v. Dow Jones Medical and Biotechnology Index
(from April 30, 1987 to December 31, 1996)
[HQH Net Asset Value Line Chart]
"HQH Net Asset "Dow Jones Medical and
Value(1)" Biotechnology Index(2)"
30-Apr-87 100 100
99.5 102.9
103 99.6
103.1 99.1
104.1 100.1
30-Sep-87 100.8 98.2
76 69.9
74.7 65.3
78.9 77.1
84.3 79.9
29-Feb-88 87.2 81.8
89.1 79.9
87.7 70.5
83.8 66.9
88.4 69.4
31-Jul-88 87.1 65.8
83.7 63.3
87.2 62.5
86.6 61.1
80.2 59.2
31-Dec-88 85.1 62.1
88.5 66.8
87.9 68.1
93.7 72.9
97.8 76.2
31-May-89 102.1 79.3
95.9 77.1
106.2 83.8
109.2 82.9
115.5 88.3
31-Oct-89 113.5 92.4
119.6 95.7
121.7 92
113.1 88.1
113.5 94
31-Mar-90 118 98.3
115.9 99.5
129.6 114.8
138.5 123.4
140.9 108.3
31-Aug-90 128.8 101.9
122.6 94
122.4 91.5
134.8 110.2
142.9 109.6
31-Jan-91 146.3 125
174.6 150.3
191 168.7
186.4 156.9
194.6 170.2
30-Jun-91 182.7 162
195.8 178
213.6 183.5
221.5 197.7
230.3 211.3
30-Nov-91 236.2 207.5
276.7 246.8
285 222.5
260 195.9
245.2 181.6
30-Apr-92 212.7 152.8
230.2 167.2
211.4 165.6
241.4 170.2
224.5 157.7
30-Sep-92 223 151.5
216.3 158.1
235.3 176.8
245.8 178
235.5 149.6
28-Feb-93 206.6 127.2
200.8 127.6
201.7 124.1
211.1 128.1
207.5 132.7
31-Jul-93 205.7 131.6
207.5 131.8
212.2 141
224.5 153.6
224.4 153.6
31-Dec-93 226.2 155.8
239.1 165.4
225.9 150.6
209.2 142.2
205.4 140.9
31-May-94 204.5 148.5
195.3 141.6
190.6 149.9
210.1 168.6
200.4 176.4
31-Oct-94 195.6 174.5
190 176.9
189.9 179.4
199.4 185.1
203.5 184.6
31-Mar-95 206.3 186.8
202.6 185.2
205.1 183
216.7 193.7
235.8 199
31-Aug-95 254.6 208.6
263.3 216.2
263.3 213.1
268.4 227
303.1 254.2
31-Jan-96 336.7 267.6
338.2 264.2
339.8 259
351.9 264.3
368.8 263.7
30-Jun-96 338.8 245.6
300.4 236.8
315.9 249.2
331.5 273.5
303.1 271.2
30-Nov-96 318.9 277.1
31-Dec-96 324.5% 281.9%
- -------------
- -------------
(1) Source: CDA/Weisenberger, reflects reinvestment of dividends.
(2) Source: IDD Information Services/Tradeline, reflects reinvestment of
dividends.
The preceding tables represent past performance only, were derived during
a period of generally rising securities prices, and are not a guarantee of
future performance.
13
<PAGE>
THE OFFER
Terms of the Offer
The Trust is issuing to its Shareholders non-transferable Rights to
subscribe for an aggregate of 2,115,336 Shares, at the rate of one Share for
each three Rights held. Shareholders will receive one non-transferable Right
for each Share held. Rights may be exercised at any time during the
Subscription Period, which commences on February 10, 1997 and ends at 5:00
p.m. New York City time, on March 5, 1997. Fractional Shares will not be
issued upon the exercise of Rights. The Rights are non-transferable.
Therefore, only the underlying Shares will be listed for trading on the NYSE
or any other exchange.
In addition, any Shareholder who fully exercises all Rights issued to him
or her is entitled to subscribe for Shares which were not otherwise
subscribed for by others on the Primary Subscription. For purposes of
determining the number of Shares a Shareholder may acquire pursuant to the
Offer, broker-dealers whose Shares are held of record by Cede & Co., Inc.
("Cede"), nominee for the Depository Trust Company, or by any other
depository or nominee, will be deemed to be the holders of the Rights that
are issued to Cede or such other depository or nominee on their behalf.
Shares acquired pursuant to the Over-Subscription Privilege are subject to
allotment, which is more fully discussed under "The Offer--Over-Subscription
Privilege."
The Rights will be evidenced by Exercise Forms which will be mailed to
Shareholders. Rights may be exercised by completing an Exercise Form and
delivering it, together with payment by means of (i) a check or money order
or (ii) a Notice of Guaranteed Delivery to the Subscription Agent during the
Subscription Period. The method by which Rights may be exercised and Shares
paid for is set forth below in "Exercise of Rights" and "Payment for Shares."
Purpose of the Offer
The Board of Trustees of the Trust (the "Board") has determined that it is
in the best interests of the Trust and its Shareholders to increase the
assets of the Trust available for investment through the Offer, so that the
Trust will be in a better position to more fully take advantage of available
investment opportunities in Healthcare Companies, particularly venture
capital investments in biotechnology and other innovative medical technology
companies. The Board was informed by the Investment Adviser that many high
quality venture capital investment opportunities were becoming available, and
that Shareholders could potentially realize significant benefits from
increased investment in venture capital securities, as well as other
investments in Healthcare Companies. The Board also reviewed data suggesting
that increased asset size would favorably affect the Trust's expense ratio.
The Board unanimously approved the Offer and concluded that increasing the
assets of the Trust through the Offer would be beneficial to the Trust and
its Shareholders. However, there can be no assurance that the anticipated
benefits discussed herein will occur as a result of increasing the assets of
the Trust through the Offer. In determining that the initiation of the Offer
and the proposed terms of the Offer were in the best interest of
Shareholders, the Board considered a variety of factors, including those set
forth below:
Recent Developments in Certain Healthcare Sectors. While the healthcare
industries as a whole have undergone substantial transformation during the
past decade thereby creating a degree of investment uncertainty, the
Investment Adviser believes that recent events in specific industries,
particularly in the biotechnology and medical technology industries, provide
the Trust with a significant investment opportunity. Recent advances in
computer technologies have provided researchers with an ability to
substantially reduce product research and development costs, thereby
providing a more efficient means of evaluating the feasibility of a new
therapeutic product or device. Increased development in the biotechnology and
medical technology industries has, in part, resulted in an increase in the
current pipeline of new healthcare products. The Investment Adviser estimates
that more than 15 therapeutic products for a variety of diseases have
completed human clinical trials and are awaiting FDA marketing approval, that
there are approximately 140 products in late stage (Phase III) human clinical
trials and that over 1,000 products are in earlier stage trials and
pre-clinical development. Although extensive cost containment measures
proposed by the U.S. Executive Branch in 1994 failed to win Legislative
support, cost containment measures remain an active part of both national and
local legislative agendas. The Investment Adviser believes that Healthcare
Companies which provide products and services of comparable quality to, but
at a lower cost than, existing products and services provide favorable
investment opportunities. The Investment Adviser believes that biotechnology
and other innovative medical technology companies may be currently valued at
prices
14
<PAGE>
which do not reflect the prospects for such companies. The Trust will use the
net proceeds from the Offer to capitalize on such investment opportunities.
Increased Investment Size. The Investment Adviser believes that larger
investments by the Trust provide additional negotiating leverage and pricing
influence over venture capital and other private equity investments. With an
increased asset base through the Offer, the Trust will be able to make
investments of the size necessary to achieve more favorable investment terms.
Additional Investments. In order to take advantage of new investment
opportunities in the healthcare industries without the Offer, the Trust would
be required to sell a portion of its existing investments which would incur
transaction costs and may result in a realization of significant capital
gains or otherwise take place at a time when the investment sold may not have
fully achieved the Trust's investment objective for it. The Offer provides
the Trust with the ability to both capitalize on new investment opportunities
and maintain its investment in existing assets.
Opportunity to Purchase Below Market Price and NAV. The Offer affords
existing Shareholders the opportunity to purchase additional Shares at a
price that will be below market value and NAV at the Expiration Date.
However, Shareholders who do not fully exercise their Rights will own, upon
completion of the Offer, a smaller proportional interest in the Trust than
they owned prior to the Offer.
Reduction in Operating Costs Per Share. The Board was advised by the
Investment Adviser that the Trust could potentially achieve additional
economies of scale as a result of an increase in total assets. The Investment
Adviser believes that the increase in assets from the Offer will reduce the
Trust's expenses as a percentage of average net assets per Share.
Over-Subscription Privilege
If some Shareholders do not exercise all of the Rights initially issued to
them in the Primary Subscription, such Shares which have not been subscribed
for will be offered, by means of the Over-Subscription Privilege, to
Shareholders who have exercised all the Rights initially issued to them and
who wish to acquire more than the number of Shares for which the Rights
issued to them are exercisable. Shareholders who exercise all the Rights
initially issued to them will be asked to indicate, on the Exercise Form
which they submit with respect to the exercise of the Rights, how many Shares
they are willing to acquire pursuant to the Over-Subscription Privilege. The
Trust may, at its discretion, issue up to an additional 25% of the Shares in
the Offer to honor over-subscription requests if sufficient Shares are not
available from the Primary Subscription to honor all over-subscriptions. If
sufficient Shares remain, all over-subscriptions will be honored in full. If
sufficient Shares are not available to honor all over- subscriptions, the
available Shares will be allocated among those who over-subscribe based on
the number of Rights originally issued to them by the Trust, so that the
number of Shares issued to Shareholders who subscribe pursuant to the
Over-Subscription Privilege will generally be in proportion to the number of
Shares owned by them in the Trust on the Record Date. The allocation process
may involve a series of allocations in order to assure that the total number
of Shares available for over-subscriptions is distributed on a pro-rata
basis.
The Subscription Price
The Subscription Price per Share will be 95% of the lower of (a) the
average of the last reported sales price of a Share on the NYSE on March 5,
1997 and the four preceding business days OR (b) the NAV as of the Pricing
Date.
The Trust announced the Offer after the close of trading on the NYSE on
January 3, 1997. The NAV at the close of business on January 3, 1997 and
February 7, 1997 was $20.46 and $ , respectively, and the last reported
sales price of a Share on such Exchange on those dates was $17.375 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.
15
<PAGE>
Expiration of the Offer
Rights will expire on the Expiration Date and thereafter may not be
exercised, unless the Offer is extended.
Any extension, termination, or amendment will be followed as promptly as
practical by announcement thereof, such announcement in the case of an
extension to be issued no later than 9:00 a.m., New York City time, on the
next business day following the previously scheduled Expiration Date. The
Trust will not, unless otherwise obligated by law, have any obligation to
publish, advertise, or otherwise communicate any such announcement other than
by making a release to the Dow Jones News Service or such other means of
announcement as the Trust deems appropriate.
Subscription Agent
The Subscription Agent is State Street Bank and Trust Company, 225
Franklin Street, Concourse Level, Boston, MA 02110, which will receive, for
its administrative, processing, invoicing and other services as Subscription
Agent, a fee estimated to be $10,000, which includes reimbursement for all
out-of-pocket expenses related to the Offer. The Subscription Agent is also
the Trust's Custodian, Dividend Paying Agent, Transfer Agent and Registrar
with respect to the Shares. Shareholder questions or inquiries should be
directed to State Street Bank and Trust Company, P.O. Box 8200, Boston, MA
02266-8200, telephone (800) 426-5523. SIGNED EXERCISE FORMS SHOULD BE SENT TO
STATE STREET BANK AND TRUST COMPANY, by one of the methods described below:
<TABLE>
<CAPTION>
Exercise Form
Delivery Method Address/Number
- ------------------------------- ----------------------------------------------------------
<S> <C>
By Mail State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, MA 02205-8686
By Hand State Street Bank and Trust Company
225 Franklin Street, Concourse Level
Boston, MA 02110
or
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 Shareholders whose Shares are held in a brokerage, bank or trust
Nominee account may contact their broker or other nominee and instruct
(Notice of Guaranteed them to submit a Notice of Guaranteed Delivery and Payment on
Delivery) their behalf.
</TABLE>
Delivery to an address other than as set forth above does not constitute a
valid delivery.
Information Agent
Any questions or requests for assistance may be directed to the
Information Agent at its telephone number and address listed below:
Shareholder Communications Corporation
17 State Street
New York, NY 10004
Call Toll Free: (800) 733-8481, Ext. 352
or
Call Collect: (212) 807-7000
16
<PAGE>
The Information Agent will receive a fee estimated to be approximately
$22,000, which includes reimbursement for all out-of-pocket expenses related
to the Offer.
Exercise of Rights
Rights may be exercised by completing and signing the reverse side of the
Exercise Form which accompanies this Prospectus and mailing it in the
envelope provided, or otherwise delivering the completed and signed Exercise
Form to the Subscription Agent, together with payment for the Shares as
described below under "Payment for Shares." Completed Exercise Forms and
related payments must be received by the Subscription Agent prior to 5:00
p.m. New York City time on or before the Expiration Date (unless payment is
effected by means of a Notice of Guaranteed Delivery as described below under
"Payment for Shares") at the offices of the Subscription Agent at the address
set forth above. A Shareholder who exercises Rights pursuant to the Primary
Subscription is hereinafter referred to as an "Exercising Shareholder."
Rights may also be exercised through an Exercising Shareholder's broker, who
may charge such Exercising Shareholder a servicing fee.
Shareholders who are issued fewer than three Rights or Exercising
Shareholders who hold fewer than three Rights or who, upon exercising their
Rights, are left with fewer than three Rights will not be able to exercise
such Rights to purchase an additional Share, respectively, as described under
"The Offer--Terms of the Offer and Over-Subscription." In addition,
Shareholders who are issued fewer than three Rights or for whom there is not
a current address ("stop mail" accounts) will not be mailed this Prospectus
or other subscription materials.
Exercising Shareholders Who Are Record Owners. Exercising Shareholders may
choose between either option set forth under "Payment for Shares" below. If
time is of the essence, option (2) will permit delivery of the Exercise Form
and payment after the Expiration Date.
Investors Whose Shares are Held By A Broker-Dealer or Other Nominee.
Exercising Shareholders whose Shares are held by a nominee such as a
broker-dealer, bank or trust company must contact the nominee to exercise
their Rights. In that case, the nominee will complete the Exercise Form on
behalf of the Exercising Shareholder and arrange for proper payment by one of
the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold Shares for the account of others should notify
the respective beneficial owners of such Shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to exercising the Rights. If the beneficial owner so instructs, the
nominee should complete the Exercise Form and submit it to the Subscription
Agent with the proper payment described under "Payment for Shares" below.
All questions as to the validity, form, eligibility (including times of
receipt and matters pertaining to beneficial ownership) and the acceptance of
subscription forms and the Subscription Price will be determined by the
Trust, which determinations will be final and binding. No alternative,
conditional or contingent subscriptions will be accepted. The Trust reserves
the absolute right to reject any or all subscriptions not properly submitted
or the acceptance of which would, in the opinion of the Trust's counsel, be
unlawful. The Trust also reserves the right to waive any irregularities or
conditions, and the Trust's interpretations of the terms and conditions of
the Offer shall be final and binding. Any irregularities in connection with
subscriptions must be cured within such time as the Trust shall determine
unless waived. Neither the Trust nor the Subscription Agent shall be under
any duty to give notification of defects in such subscriptions or incur any
liability for failure to give such notification. Subscriptions will not be
deemed to have been made until such irregularities have been cured or waived.
Payment for Shares
Exercising Shareholders may exercise their Rights and pay for Shares
subscribed for pursuant to the Primary Subscription and Over-Subscription
Privilege in one of the following ways:
(1) Deliver Exercise Form and Payment to the Subscription Agent by the
Expiration Date:
Exercising Shareholders may deliver to the Subscription Agent at any of
the offices set forth above on page 16 (i) a completed and executed Exercise
Form indicating the number of Rights they have been issued and the number of
Shares they are acquiring pursuant to the Primary Subscription, as well as
the number of any additional Shares they would like to subscribe for under
the Over-Subscription Privilege and (ii) payment for all such ordered Shares
based on the Estimated Subscription Price of $ per Share, both no
later than 5:00 p.m., New York City time, on the Expiration Date.
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The Subscription Agent will deposit all checks received by it for the
purchase of Shares into a segregated interest bearing account of the Trust
(the interest from which will belong to the Trust) pending proration and
distribution of Shares.
A PAYMENT PURSUANT TO THIS METHOD (1) MUST BE IN U.S. DOLLARS BY MONEY
ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE U.S., (2) MUST BE PAYABLE TO
"H&Q HEALTHCARE INVESTORS" AND (3) MUST ACCOMPANY AN EXECUTED EXERCISE FORM
FOR SUCH SUBSCRIPTION TO BE ACCEPTED. THIRD (OR MULTIPLE) PARTY CHECKS WILL
NOT BE ACCEPTED.
(2) Contact Your Broker, Bank or Trust Company to Deliver Notice of
Guaranteed Delivery to the Subscription Agent by the Expiration Date:
Exercising Shareholders may request a NYSE or National Association of
Securities Dealers, Inc. member, bank or trust company (each a "nominee") to
execute a Notice of Guaranteed Delivery (or equivalent electronic
information) and deliver it, by facsimile or otherwise, to the Subscription
Agent by 5:00 p.m., New York City time, on the Expiration Date indicating (i)
the number of Rights they wish to exercise, the number of Primary
Subscription Shares they wish to acquire, and the number of Over-Subscription
Privilege Shares for which they wish to subscribe and (ii) guaranteeing
delivery of payment and a completed Exercise Form from such Exercising
Shareholder by March 10, 1997. Exercising Shareholders must arrange for
payment to the nominee, who will in turn submit the Exercise Form and payment
on their behalf by March 5, 1997. The Subscription Agent will not honor a
Notice of Guaranteed Delivery unless the completed Exercise Form and full
payment are received by March 10, 1997.
On March 18, 1997 (the "Confirmation Date"), the Subscription Agent will
send a confirmation to each Exercising Shareholder (or, if the Shares are
held by a depository or other nominee, to such depository or other nominee),
showing (i) the number of Shares acquired pursuant to the Primary
Subscription, (ii) the number of Shares, if any, acquired pursuant to the
Over-Subscription Privilege, (iii) the per Share and total purchase price for
the Shares, and (iv) any additional amount payable by such Exercising
Shareholder to the Trust or any excess to be refunded by the Trust to such
Exercising Shareholder in each case based upon the final Subscription Price.
Any additional payment required from an Exercising Shareholder must be
received by the Subscription Agent by April 4, 1997 (the "Final Payment
Date"). Any excess payment to be refunded by the Trust to an Exercising
Shareholder will be mailed by the Subscription Agent to the holder as
promptly as practicable after the Final Payment Date.
Issuance and delivery of certificates for the Shares purchased are subject
to actual collection of checks and actual payment pursuant to any Notice of
Guaranteed Delivery.
If an Exercising Shareholder does not make payment of any additional
amounts due, the Trust reserves the right to take any or all of the following
actions: (i) apply any payment received by it toward the purchase of the
greatest whole number of Shares which could be acquired by such Exercising
Shareholder upon exercise of the Primary Subscription and/or
Over-Subscription Privilege based on the amount of such payment; (ii)
allocate the Shares subject to subscription rights to one or more other
Shareholders; (iii) sell all or a portion of the Shares deliverable upon
exercise of subscription rights on the open market and apply the proceeds
thereof to the amount owed; and/or (iv) exercise any and all other rights or
remedies to which it may be entitled, including, without limitation, the
right to set-off against payments actually received by it with respect to
such subscribed Shares.
An Exercising Shareholder will not have the right to cancel the exercise
of Rights or rescind a purchase after the Subscription Agent has received
payment, either by means of a Notice of Guaranteed Delivery or a check or
money order, except as described under "The Offer--Notice of NAV Decline."
The risk of delivery of subscription forms and payments to the
Subscription Agent will be borne by the Exercising Shareholder and not the
Trust, the Dealer Manager, the Subscription Agent, the Information Agent or
broker-dealers designated by the Dealer Manager. If the mail is used to
exercise Rights, insured registered mail is recommended.
Notice of NAV Decline
The Trust will suspend the Offer until it amends this Prospectus if,
subsequent to the effective date of this Prospectus, the Trust's NAV declines
more than 10% from its NAV as of that date. In such event, the Trust will
notify Shareholders of any such decline and thereby permit them to cancel
their exercise of their Rights.
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Delivery of Stock Certificates
Registered Shareholders who are participants in the Trust's Dividend
Reinvestment Plan (the "Plan") will have any Shares that they acquire
pursuant to the Offer credited to their Shareholder dividend reinvestment
accounts in the Plan. Shareholders whose Shares are held of record by Cede or
by any other depository or nominee on their behalf or their broker-dealers'
behalf will have any Shares that they acquire pursuant to the Offer credited
to the account of Cede or such other depository or nominee. With respect to
all other Shareholders, stock certificates for all Shares acquired pursuant
to the Offer will be mailed after payment for all the Shares subscribed for
has cleared, which clearance may take up to fifteen days from the date of
receipt of the payment.
Employee Plan Considerations
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), profit sharing/retirement plans for
self-employed individuals and Individual Retirement Accounts (collectively,
"Retirement Plans") should be aware that additional contributions of cash to
the Retirement Plan (other than rollover contributions or trustee-to-trustee
transfers from other Retirement Plans) in order to exercise Rights would be
treated as Retirement Plan contributions and therefore, when taken together
with contributions previously made, may be treated as excess or nondeductible
contributions subject to excise taxes. In the case of Retirement Plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), additional cash contributions could cause violations of
the maximum contribution limitations of Section 415 of the Code or other
qualification rules. Retirement Plans in which contributions are so limited
should consider whether there is an additional source of funds available
within the Retirement Plan, including the liquidation of assets, with which
to exercise the Rights. Because the rules governing Retirement Plans are
extensive and complex, Retirement Plans contemplating the exercise of Rights
should consult with their counsel prior to such exercise.
Retirement Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income under Section 511 of the Code. If any portion of an Individual
Retirement Account ("IRA") is used as security for a loan, the portion so
used is treated as a distribution to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the
Code contain prohibited transactions rules that may affect the exercise of
Rights. Due to the complexity of these rules and the penalties for
noncompliance, Retirement Plans should consult with their counsel regarding
the consequences of their exercise of Rights under ERISA and the Code.
Certain Federal Income Tax Consequences of the Offer
The following discussion summarizes the principal federal income tax
consequences of the Offer to Shareholders and Exercising Shareholders. It is
based upon the Code, U.S. Treasury regulations, Internal Revenue Service
rulings and policies and judicial decisions in effect on the date of this
Prospectus. This discussion does not address all federal income tax aspects
of the Offer that may be relevant to a particular Shareholder in light of his
individual circumstances or to Shareholders subject to special treatment
under the Code (such as insurance companies, financial institutions,
tax-exempt entities, dealers in securities, foreign corporations, and persons
who are not citizens or residents of the U.S.), and it does not address any
state, local or foreign tax consequences. Accordingly, each Shareholder
should consult his or her own tax advisor as to the specific tax consequences
of the Offer to him or her. Each Shareholder should also review the
discussion of certain tax considerations affecting the Trust and Shareholders
set forth under "Taxation" below.
For federal income tax purposes, neither the receipt nor the exercise of
the Rights by Shareholders will result in taxable income to those
Shareholders, and no loss will be realized if the Rights expire without
exercise.
A Shareholder's holding period for a Share acquired upon exercise of a
Right begins with the date of exercise. A Shareholder's basis for determining
gain or loss upon the sale of a Share acquired upon the exercise of a Right
will be equal to the sum of the Shareholder's basis in the Right, if any, and
the Subscription Price per Share. The Shareholder's basis in the Right will
be zero unless either (i) the fair market value of the Right on the date of
distribution is 15% or more of the fair market value on such date of the
Shares with respect to which the Right was distributed, or (ii) the
Shareholder elects, on its federal income tax return for the taxable year in
which the Right is received, to allocate part of the basis of such Shares to
the Right. If either of clauses (i) and (ii) is applicable,
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<PAGE>
then if the Right is exercised, the Exercising Shareholder will allocate its
basis in the Shares with respect to which the Right was distributed between
such Shares and the Right in proportion to the fair market values of each on
the date of distribution. A Shareholder's gain or loss recognized upon a sale
of a Share acquired upon the exercise of a Right will be a capital gain or
loss (assuming the Share was held as a capital asset at the time of sale) and
will be a long-term capital gain or loss if the Share was held at the time of
sale for more than one year.
The foregoing is only a summary of the applicable federal income tax laws
presently in effect and does not include any state or local tax consequences
of the Offer. Shareholders should consult their own tax advisers concerning
the tax consequences of this transaction.
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at an estimated Subscription
Price (the "Estimated Subscription Price") of $ per Share, the net
proceeds of the Offer will be approximately $ , after deducting
commissions and expenses payable by the Trust estimated at approximately
$368,000. The net proceeds of the Offer will be invested in accordance with
the Trust's investment objective and policies. See "Investment Objective and
Policies." Various factors affect investments in emerging growth companies
that are different from factors affecting investments in large well-known
companies, including the additional research required to investigate a large
number of small companies and the volatility and illiquidity of securities of
those companies. Accordingly, initial investment of the proceeds in publicly
traded securities may take place during a period of up to six months
following completion of the Offer, depending on market conditions and the
availability of appropriate securities. Restricted Securities will be
purchased as appropriate opportunities arise, which could take up to one year
or longer, and the Trust may choose to be more fully invested in publicly
traded securities during such period. Pending investment in the securities
described above, the proceeds will be held in obligations of the U.S.
Government, its agencies or instrumentalities ("U.S. Government Securities"),
highly rated money market instruments or mutual funds that invest in such
instruments.
DESCRIPTION OF TRUST
The Trust is a diversified, closed-end management investment company. The
Trust was organized as a Massachusetts business trust on October 31, 1986
pursuant to a Declaration of Trust governed by Massachusetts law and
commenced operations on April 22, 1987. The Trust's principal offices are
located at 50 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328.
The Trust's capitalization consists of an unlimited number of shares of
beneficial interest, $.01 par value. Each Share represents an equal
proportionate beneficial interest in the Trust and, when issued and
outstanding, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Trust, Shareholders will be entitled to share pro rata in
the net assets of the Trust available for distribution. The Trust will send
annual and semi-annual financial statements to Shareholders and may also
issue more abbreviated interim reports to update Shareholders on a quarterly
basis. The Trust will hold annual meetings of its Shareholders in accordance
with the provisions of the Trust's By-laws and the rules of the NYSE.
Shareholders are entitled to one vote for each Share held. The Trust's
Shares do not have cumulative voting rights, which means that the holders of
more than 50% of the Shares of the Trust voting for the election of Trustees
can elect all of the Trustees, and, in such event, the holders of the
remaining Shares will not be able to elect any Trustees. The Trust has a
staggered Board, whereby one class of Trustees is elected each year.
The number of Shares outstanding as of the date of this Prospectus is
6,346,009. Assuming that all Rights are exercised, an additional 2,115,336
Shares will be issued. The Trust may, at its discretion, issue up to an
additional 25% of the Shares in the Offer to honor over-subscription requests
if sufficient Shares are not available from the Primary Subscription to honor
all over-subscriptions.
For information regarding risk factors pertaining to the Trust, see
"Appendix A--Risk Factors and Investment Techniques."
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,
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H&Q Life Sciences Investors ("HQL"), which invests in companies in the
healthcare industries and related industries such as agricultural and
environmental technology. Alan G. Carr, the President and a Trustee of the
Trust, the President and sole Director of the Investment Adviser, as well as
the President and a Trustee of HQL, is responsible for managing the Trust's
portfolio. Mr. Carr is currently the portfolio manager for the Trust and HQL,
which have aggregate net assets of approximately $ million as of the
date of this Prospectus. Prior to joining the Investment Adviser at its
inception in 1986, Mr. Carr was portfolio manager for three mutual funds,
with aggregate net assets in excess of $300 million, sponsored by Putnam
Companies and dedicated to investment in the healthcare industries. Mr. Carr
has been managing equity portfolios emphasizing investment in emerging growth
companies for over 30 years and portfolios specializing in publicly traded
equity securities of Healthcare Companies, as well as in venture capital
opportunities in the healthcare industries, for the last 15 years.
The Investment Adviser is an indirect wholly-owned subsidiary of Hambrecht
& Quist Group ("Group"), which through various related entities has broad
investment experience in the healthcare industries. Hambrecht & Quist LLC
("H&Q"), an indirect wholly-owned subsidiary of Group, is a registered
broker-dealer that specializes in providing investment research on and
securities brokerage and investment banking services to emerging growth
companies. H&Q has a respected research team dedicated solely to healthcare
industries. Since 1982, H&Q has sponsored a healthcare conference, which is
dedicated to companies in the healthcare industries. At the 1997 Conference,
over 240 such companies made presentations to approximately 3,000
participants. H&Q has major domestic offices in San Francisco, CA; New York,
NY; and Boston, MA and its affiliates have offices in several foreign
countries. Venture capital entities associated with Group have managed
venture capital funds from domestic and international sources since 1970.
While the Investment Adviser has benefited from the information available
to it because of its relationship with Group, the staff of the Investment
Adviser remains responsible for obtaining all necessary information in the
exercise of its due diligence obligations and making independent judgments
with respect to investment decisions. The Investment Adviser is responsible
for the day-to-day operations of the Trust, including selection of the
Trust's portfolio investments.
The Investment Advisory Agreement between the Investment Adviser and the
Trust (the "Advisory Agreement") provides that, subject to the supervision
and direction of the Board, the Investment Adviser is responsible for the
actual management of the Trust's portfolio. The Investment Adviser is also
obligated to supervise or perform certain administrative and management
services for the Trust and is obligated to provide the office space,
facilities, equipment and personnel necessary to perform its duties under the
Advisory Agreement.
For the services provided by the Investment Adviser under the Advisory
Agreement, the Trust will pay a fee, computed and payable monthly, equal when
annualized to (i) 2.5% of the average net assets for such month of its
Restricted Securities (as defined) up to 25% of net assets; and (ii) 1.0% of
the average net assets for such month of all other assets. The aggregate
monthly fee paid to the Investment Adviser may not exceed, when annualized,
1.375% of the Trust's average total net assets for such month (approximately
.115% per month). Because the advisory fee is based on the net assets of the
Trust and since the Offer is expected to result in an increase in net assets,
the Investment Adviser should benefit from the Offer by an increase in the
dollar amount of its fee.
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TRUSTEES AND OFFICERS
The names, addresses and ages of the Trustees and Officers of the Trust
are set forth below, together with their position and their principal
occupations during the past five years, and, in the case of the Trustees,
their positions with certain other organizations and publicly held companies.
<TABLE>
<CAPTION>
Principal Occupation
Names, Ages and Addresses Position with the Trust and Other Affiliations
- ------------------------- ----------------------- ----------------------
<S> <C> <C>
Alan G. Carr* (62) President and Trustee President and Trustee, H&Q Life Sciences Investors
50 Rowes Wharf (since 1986) ("HQL") (since 1992); President (since 1992), Senior
Boston, MA 02110 Vice President (1986-1992) and sole Director (since
1986), Hambrecht & Quist Capital Management
Incorporated ("HQCM"); and Managing Director,
Hambrecht & Quist Group ("Group") (since 1992).
William R. Hambrecht* (61) Trustee Chairman (since 1992), President (1982-1992), Chief
One Bush Street (since 1994) Executive Officer (1982-1987) and Co-Chief
San Francisco, CA 94104 Executive Officer (1987-1994), Group; Director
(since 1982) of Adobe Systems Inc.; and Trustee,
HQL (since 1994). Beneficial owner of approximately
13% of the voting securities of Group.
Lawrence S. Lewin** (58) Trustee Chairman and Chief Executive Officer (since 1970),
9300 Lee Highway (since 1987) The Lewin Group (a healthcare public policy and
Fairfax, VA 22031 management consulting firm), a subsidiary of
Quintiles Transnational Corp.; Director, Apache
Medical Systems (since 1989); and Trustee, HQL (since
1992).
Robert P. Mack, M.D. (61) Trustee Orthopedic Surgeon, Steadman-Hawkins Orthopedic
Box 7030 (since 1991) Clinic (since 1996); Orthopedic Surgeon, Denver
Avon, CO 81620 Orthopedic Clinic (1977-1996); and Trustee, HQL
(since 1992).
Eric Oddleifson** (61) Trustee Managing Director, UBS Resource Investments (forest
50 South Street (since 1992) and agriculture properties investments) (since
Hingham, MA 02043 1995); President, Director and Chief Executive
Officer, Resource Investments, Inc. (forest and
agriculture properties investments) (1984-1995);
and Trustee, HQL (since 1992).
Uwe E. Reinhardt, Ph.D. (59) Trustee Professor of Economics, Princeton University (since
Woodrow Wilson School (since 1988) 1968); and Trustee, HQL (since 1992).
Princeton University
Princeton, NJ 08544
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<PAGE>
Principal Occupation
Names, Ages and Addresses Position with the Trust and Other Affiliations
- ------------------------- ----------------------- ----------------------
Henri A. Termeer** (50) Trustee Chairman (since 1988), Chief Executive Officer
Genzyme Corporation (since 1989) (since 1985) and President (since 1983), Genzyme
One Kendall Square Corporation (human healthcare products company);
Cambridge, MA 02139 Director, ABIOMED, Inc.(since 1987); Director,
Geltex Pharmaceutical, Inc. (since 1994); Director,
AutoImmune, Inc. (since 1992); Director of Genzyme
Transgenics (since 1993); and Trustee, HQL (since
1992).
Kerri A. Bisner (34) Secretary Vice President (since 1994), Assistant Vice
50 Rowes Wharf (since 1992) President (1991-1994), Research Associate
Boston, MA 02110 (1989-1991), HQCM; and Secretary, HQL (since 1992).
Kimberley L. Carroll (40) Treasurer and Chief Vice President (since 1991) and Assistant Vice
50 Rowes Wharf Financial Officer President (1987-1991), HQCM; and Treasurer and Chief
Boston, MA 02110 (since 1987) and Financial Officer, HQL (since 1992).
</TABLE>
Assistant Secretary
(1987-1992)
- -------------
* Trustee considered to be an "interested person" as defined in Section
2(a)(19) of the Investment Company Act of 1940, as amended, (the
"Investment Company Act") because of his position or affiliation with the
Trust's Investment Adviser or its parent, Group.
** Member of the Trust's Audit Committee.
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
General
The Trust's investment objective is to seek long-term capital appreciation
by investing primarily in Healthcare Companies. The Trust's investment
objective is a fundamental policy and may not be changed without the
affirmative vote of the holders of a majority of the Trust's outstanding
Shares (as defined). For a more detailed description of the Trust's
investment objective and policies see "Additional Information about
Investments and Investment Techniques" and "Investment Restrictions" in the
SAI. For a description of the risks that may be associated with an investment
in the Trust see "Appendix A--Description of Risk Factors and Investment
Techniques."
In an effort to achieve its investment objective, the Trust will invest
primarily in securities of U.S. and foreign companies that are believed by
the Investment Adviser to have significant potential for above-average
long-term growth in revenues and earnings. The Investment Adviser expects
that such companies generally will, in its judgment, possess most of the
following characteristics: current or anticipated strong market position for
their services or products, experienced business management, recognized
technological expertise and the ability either to generate funds internally
to finance growth or to secure outside sources of capital. The Investment
Adviser will attempt to invest in securities that sell at price-earnings
ratios or at multiples of underlying asset values which, relative to other
comparable securities or to the company's growth expectations, do not fully
reflect the company's potential.
The Trust emphasizes investment in securities of emerging growth
Healthcare Companies, some of which may offer limited products or services or
which are at the research and development stage with no marketable or
approved products or technologies. The securities of most emerging growth
Healthcare Companies in which the Trust will invest are expected to be traded
in the over-the-counter market or restricted as to public resale. The Trust
may invest up to 40% of its net assets in Restricted Securities. The Trust
may invest in securities of large, well-known companies with existing
products in the healthcare industries that are believed by the Investment
Adviser to be undervalued in relation to their long-term growth potential or
asset value.
The Trust may invest up to 20% of its net assets in Foreign Securities.
The Trust may buy and sell currencies for the purpose of settlement of
transactions in Foreign Securities, but presently does not intend to engage
in hedging operations.
Under normal market conditions, the Trust will invest at least 80% of its
net assets in securities of companies in the healthcare industries and in no
event will have less than 25% of its net assets so invested. For purposes of
satisfying the foregoing requirements, a company will be deemed to be a
Healthcare Company if, at the time the Trust makes an investment therein, 50%
or more of such company's sales, earnings or assets arise from or are
dedicated to health services or medical technology activities. The Trust may
also invest in companies that do not satisfy the above criteria but that are
expected by the Investment Adviser to have 25% or more of sales, earnings or
assets arising from or dedicated to such activities, but investments in such
companies will not at the time of investment exceed 20% of the Trust's net
assets. Determinations as to whether a company is a Healthcare Company will
be made by the Investment Adviser in its discretion.
The equity and related securities in which the Trust may invest consist of
common stock of Healthcare Companies and, to a lesser extent, of preferred
stock, convertible debt, and warrants or other rights to acquire common or
preferred stocks of such companies. The Trust's investments in venture
capital opportunities will be made primarily in convertible preferred stock.
The Trust may also purchase non-convertible debt securities in connection
with its venture capital investments, and otherwise when the Investment
Adviser believes that such investments would be consistent with the Trust's
investment objective. Because of the risk characteristics associated with
venture capital investments for emerging growth companies, such investments
may be regarded as highly speculative.
Investments will not be made in any company with the objective of
exercising control over that company's management. The Trust may make
investments contemporaneously with other venture capital groups that may
provide issuers with significant managerial assistance.
When, in the opinion of the Investment Adviser, adverse market conditions
or industry expectations support such action, the Trust may, for temporary
defensive purposes, invest up to 75% of its net assets in money market
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<PAGE>
instruments. See "Investment Techniques--Money Market Instruments" in
Appendix A for a description of money market instruments in which the Trust
may invest.
In addition, the Trust may, to a limited degree, enter into when-issued
and delayed delivery transactions, forward foreign currency contracts and
repurchase agreements, and lend its portfolio securities. Under normal market
conditions the Trust does not intend to engage in such practices. See
"Appendix A--Description of Risk Factors and Investment Techniques."
The Trust also has adopted certain other investment restrictions in an
effort to achieve its investment objective. See "Investment Restrictions" in
the Trust's SAI.
Healthcare Industries
Investments in the healthcare industries are likely to continue to be the
principal component of the Trust's portfolio and, except when the Trust
assumes a temporary defensive position, will represent at least 25% of the
Trust's net assets. This predominance reflects the size and diversity of the
healthcare industries.
The healthcare industries constitute a large segment of the U.S. economy.
The U.S. Department of Health and Human Services ("HHS") estimates national
healthcare expenditures in 1995 at 14.2% of U.S. gross domestic product
("GDP"), or $1,008 billion (in current dollars). This constitutes a 7.4%
increase over U.S. healthcare expenditures in 1994. U.S. GDP is a measure of
the total value of all goods and services produced in the U.S. over the
course of a year. HHS expects that the healthcare industries will continue to
grow both in absolute dollars and as a percentage of GDP. HHS estimates that
healthcare expenditures in the U.S. could increase to as much as 15.9% of GDP
in 2000. The Investment Adviser believes that, while the healthcare
industries are undergoing significant change, they serve market sectors that
are generally large and fragmented and growing at above-average rates,
thereby providing potential investment opportunities for the Trust.
Market Forces in Healthcare
Markets for healthcare products and services have undergone significant
growth over the last 25 years. Factors contributing to this growth include
demographic shifts tending to a more elderly population and technological
advances which may lead to therapy, or possibly cures, for the many disease
states for which there are no currently effective treatments. In addition,
the Investment Adviser believes that worldwide consumer awareness and
acceptance of new and innovative healthcare products continues to rise,
stimulating demand, and that the rate of demographic and technological change
may accelerate in the future, causing certain segments of the business to
decline and others to experience growth. Investments in the companies
developing products that benefit from these market forces may present
potentially profitable opportunities.
Demographics. In the United States, persons age 65 and older consume three
to four times more healthcare goods and services than do the rest of the
population. The U.S. Social Security Administration ("SSA") estimates that in
1996, 34 million Americans, or 12.8% of the population, were over age 65
compared to 12.5% in 1990. By 2000, this segment is projected by SSA to grow
to 40 million people in the U.S., or 13.3% of the population.
Technology. Advances in the fields of healthcare, particularly in
biotechnology, diagnostics and electronics, are enhancing medical
applications in existing markets and creating new markets. These advances
have contributed to longevity as well as to an improved quality of life. In
particular, the Investment Adviser believes that diagnostic techniques and
therapeutic products have significantly changed the practice of medicine and
will continue to do so for the foreseeable future. Diagnostic techniques have
become more sophisticated and accurate, as well as less traumatic to the
patient. Therapeutic products have become more effective, can be tailored to
more specialized uses and, as a result of improved diagnostics, can be
employed at an earlier stage of treatment for many diseases. Increasingly,
new therapeutic products are being developed for previously diagnosable
diseases for which no therapy was available, and diagnostics for patients for
which therapy was available, but where patients that might benefit were not
easily identifiable. Scientific discovery has, in recent years, been
materially enhanced by advances in knowledge in the broad field of genomics,
which has in turn been made possible by the ability of enhanced computer
power to handle vast amounts of data and which also permits the
characterization of molecular structure and the design of potentially active
new drugs.
Demand. Both lengthened lifespan and improved technologies have
contributed to the significant increases in demand for healthcare products
and services in recent years. Consumers have become accustomed to access to
25
<PAGE>
a variety of healthcare products and services, and their awareness of the
availability of innovations has increased through broadcast and print media
and through internet disease-specific support groups and web pages. This
suggests, in the opinion of the Investment Adviser, that the demand for such
healthcare products and services should remain strong.
Cost Containment. The growing cost of providing healthcare has placed
financial strains on government, employers and individuals. Government and
so-called managed health programs increasingly operate by reimbursing
healthcare providers at fixed rates or by transferring financial risk to
providers under capitation contracts where the provider of services receives
a fixed annual amount to provide specified services. The goal of containing
cost increases may continue to adversely affect certain segments of the
healthcare industries, particularly traditional providers such as hospitals,
while creating significant opportunities for new products and services that
permit care to be delivered more effectively in other settings. The
increasing financial pressure caused by the constraints of paying for the
rising demand for healthcare with limited financial resources is a trend that
is expected to continue, and perhaps accelerate. For these reasons, the
Investment Adviser favors investments in Healthcare Companies that the
Investment Adviser believes can provide products and services of comparable
quality to, but at a lower cost than, existing products and services, or that
can develop more cost effective technologies, products and services. Cost
containment can be achieved in numerous ways, including the development of
products and procedures that may reduce or avoid hospitalizations or the time
it takes to recover from an illness or injury, products and services that
result in fewer side effects than existing treatments, and healthcare
delivery facilities and services that provide treatment or therapy in a less
costly environment.
Regulation. The FDA requires that approvals be obtained prior to marketing
new products. The approval process can be lengthy, expensive and uncertain as
to outcome and, when successful, can create barriers to competition not
generally present in other industries. For companies with established
approved products, these barriers tend to result in longer and more
profitable product cycles than might otherwise exist. While appointment of a
new FDA Commissioner may generate some uncertainty, in the opinion of the
Investment Adviser, the trend of recent years toward more rapid approvals
may, if anything, accelerate. For example, a record number of new chemical
entities were approved for marketing by the FDA in 1996.
Patents. Many companies in the healthcare industries are developing
innovative technologies for commercial products which may receive patent
protection. The granting of a patent may result in an extensive period of
market exclusivity and protection against competition, allowing the patent
holder to realize several years of high returns from product sales or royalty
revenues. Such proprietary intellectual property positions may act as
barriers to competition and may also increase the possibility that any
acquisition of such a company would be at a premium over its public or
private valuation.
Industry Fragmentation. Approximately 1,400 publicly traded companies, as
well as many private companies, compete in the worldwide healthcare markets
today. The Investment Adviser believes that none of the industries within
these markets are considered to be dominated by any one company or small
group of companies, although certain companies may dominate a particular
product segment. This industry fragmentation enhances the growth
opportunities for both publicly and privately held companies and increases
the number and diversity of investment opportunities available to the Trust.
The Investment Adviser also believes that the growth, size and fragmentation
of the healthcare industries will continue to encourage entrepreneurial
activity in spite of cost containment trends and thereby provide a broad
range of attractive venture capital investment opportunities. In addition,
mergers and acquisitions for access to technology or to gain perceived
critical size may also provide opportunities for capital gains.
Internationalization. The healthcare industries have become increasingly
internationalized. U.S. companies compete on a large scale in the markets of
Western Europe and Japan, which are the two principal non-U.S. healthcare
markets. To a lesser extent, Western European and Japanese companies have
increased their competition for U.S. markets. The Investment Adviser intends
to continue to consider making public and private investments in Foreign
Securities of Healthcare Companies, subject to the Trust's investment
policies.
Sectors Within Healthcare
The following categories illustrate some of the sectors in which
Healthcare Companies operate, and some of the services and products that may
be of investment interest to the Trust.
26
<PAGE>
Biotechnology. Biotechnology firms employ new techniques, such as
monoclonal antibodies, recombinant DNA, molecular structure analysis, and
genomics to produce novel therapeutic and diagnostic products. Advances in
molecular biology and the screening of compounds of possible utility have the
potential to materially enhance the process of discovering useful new
therapeutic products and to shorten the development period for, and reduce
the cost of developing, such products. As biotechnology evolves from a
research and development stage to a commercial stage, these techniques and
products will have the potential to expand existing markets and to create new
ones. The Investment Adviser believes that over 45 therapeutic products
developed using these techniques have already received FDA market approval,
as have several monoclonal antibody diagnostic tests. The Investment Adviser
believes that most of these innovative approved products have achieved rapid
commercial acceptance and that many are currently generating annual revenues
in excess of $100 million.
It is estimated that more than 15 therapeutic products for a variety of
diseases have completed human clinical trials and are awaiting FDA approval,
that there are approximately 140 products in late stage (Phase III) human
clinical trials and that over 1,000 products are in earlier stage trials and
pre-clinical development.
Recently, public equity markets have provided substantial capital to the
biotechnology industry, and a large number of major corporations have
provided capital through significant acquisitions, equity investments and in
connection with product license agreements. Federal government support of
biotechnology research has contributed significantly to the invention and
development of "break-through" products. It is estimated that in fiscal year
1996, federal agencies provided over $5 billion of funding for biotechnology
related research and development.
Pharmaceuticals. Investments in the securities of pharmaceutical companies
may provide above-average investment returns where such companies benefit
from prescription or over-the-counter drugs that enjoy unique market position
due to superior therapeutic benefits, reduced side effects, patent protection
or convenient dosage form. New drug delivery systems, including oral and
transdermal sustained release systems, can supersede intravenous or
injectable systems and have the potential to improve therapy not only through
easier patient compliance with prescription directions but also by improved
administration of consistently efficacious quantities of the compound. In
addition to providing new clinical benefits, the delivery system may also
extend market exclusivity with the accompanying future investment returns to
the developer of a drug nearing patent expiration. Most of the large
pharmaceutical companies are also investing heavily in the effort to produce
future revenues and earnings through greater research and development
expenditures, joint ventures with emerging growth Healthcare Companies and
acquisitions of such companies. Cost containment measures by both the private
and public sectors have impinged on the ability of many pharmaceutical
companies to raise product prices as they had done in the past and have, in
some instances, resulted in reduced product prices. The Investment Adviser
believes that this has been a negative influence on stock prices of these
companies in the last few years, and may continue to increase the risk of
investing in this industry in the future, but may also present selective
investment opportunities. A more favorable factor, however, is the gradual
trend of more rapid FDA approvals of new drugs, especially for the treatment
of AIDS and cancer. More new drugs were approved in 1996 than in any prior
year.
Diagnostics. The accuracy, sophistication and cost effectiveness of
diagnosis has improved dramatically through imaging systems, such as
ultrasound and magnetic resonance imaging (MRI), as well as through improved
chemical and biological tests. Many of the new systems and supplies are or
will be available to the patient directly or at a physician's office, as well
as in the hospital or independent laboratory. These innovations generally
increase the likelihood of earlier diagnosis and more efficacious and cost
effective treatment. Under development are new contrast agents to enhance the
output from virtually all imaging modalities, which are being further
improved by innovative computer programs that prepare the data for display.
Advances in genetic testing are expected to improve the ability to treat
diseases at earlier stages and to identify those people that may have a
greater than average chance of contracting certain diseases. Advances in the
ability to extract and test fetal cells from maternal blood may avoid the
risky procedure of obtaining fetal cells by biopsy for such analysis. The
Investment Adviser believes these current and potential advances may increase
demand for diagnostic products.
Medical Equipment, Devices and Supplies. In addition to developing the
surgical equipment that permits the dramatic increase in the number of
procedures that can be performed on an out-patient basis, companies in this
field continue to enhance their growth through improving techniques for joint
replacement, monitors for physiological function and management of disease,
and new generations of catheters and implantable devices to control and treat
heart malfunction. The Investment Adviser believes that many of these
companies dominate their
27
<PAGE>
subsectors, have benefitted from overall market growth and have been able to
generate above-average investment returns.
Managed Healthcare. Many varieties of companies are engaged directly or
indirectly in the delivery of healthcare to patients, including hospitals,
nursing homes, inpatient and outpatient rehabilitation services and
therapeutic services delivered to the home. The Investment Adviser believes
that healthcare cost containment efforts will continue to reduce revenues to
acute care hospitals and promote the delivery of therapy in other more
efficient settings. These trends should enhance the delivery of increasingly
sophisticated care at home, and the potential of outpatient surgery and
rehabilitation and of specialized free-standing facilities, such as cancer
chemotherapy treatment centers. The Investment Adviser also believes that
cost pressures will, however, increasingly negatively impact many of such
providers, and investment in these sectors is currently relatively
underweighted in the portfolio. However, some sectors may benefit from these
trends. In general, such companies are able simultaneously to improve quality
and reduce the cost of care. For example, emerging is a new industry,
Physician Practice Management, as medical practices, either general or
specialist, combine in an attempt to become more efficient and to strengthen
their negotiating position with providers in an environment of increased
capitation. Key to success in the coming period of funding reduction will be
the management of information, particularly such areas as claims processing,
patient management direct costs and quality control, and ultimately
automation of patient records. The Adviser expects that these areas will
receive increased emphasis in the portfolio in the future.
Other
The Trust may also invest in companies and industries that are benefitting
from the growth of healthcare industries. These companies may include real
estate investment trusts that derive their income from ownership, leasing or
financing of healthcare facilities, manufacturers of nutritional products,
and key suppliers of services or equipment.
Significant declines in the stock prices of many public companies in the
healthcare industries have constrained the ability of some private companies
to raise capital to finance their growth and fund research. The Investment
Adviser also continues to believe that this presents opportunities,
especially in its venture capital investing, as valuations seem attractive in
comparison to the depressed stock prices of some publicly traded Healthcare
Companies. Shares of many publicly traded Healthcare Companies also appear to
be trading at attractive valuations when compared to the stocks of companies
in many other industries, especially those industries that have historically
been sensitive to economic cycles.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board, the Investment Adviser is
primarily responsible for the execution of the Trust's portfolio transactions
and the allocation of brokerage. In executing such transactions, the
Investment Adviser will seek to obtain the best price and execution for the
Trust, taking into account such factors as price, size of order, difficulty
of execution, operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and research, market and statistical
information provided by such firm. While the Investment Adviser generally
seeks reasonably competitive commission rates, the Trust will not necessarily
pay the lowest commission available.
The Trust intends to purchase and hold securities for long-term capital
appreciation and it is not anticipated that frequent portfolio changes will
be made for short-term trading purposes or to take advantage of short-term
swings in the market. However, changes may be made in the portfolio
consistent with the investment objective and policies of the Trust whenever
changes are believed by the Investment Adviser to be in the best interest of
the Trust and its Shareholders. Risk factors, particularly those relating to
a specific security investment or to the market and economic conditions, may
also affect the rate at which the Trust buys and sells its portfolio
holdings. The Trust has no fixed policy with respect to portfolio turnover
rate; however, it is anticipated that the annual turnover rate after the
initial investment period normally will not exceed 50%. The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities by the average monthly value of the Trust's portfolio
securities. The Trust's portfolio turnover rate for the fiscal years ended
September 30, 1996 and September 30, 1995 was 22.41% and 22.81%,
respectively.
NET ASSET VALUE
The NAV is computed based on the value as discussed below of the
securities held by the Trust and is determined as of the close of the NYSE on
the last business day of each month or on a more frequent basis as required
28
<PAGE>
by the Trustees. NAV is calculated by dividing the value of the securities
held by the Trust plus any cash or other assets minus all liabilities,
including accrued expenses, by the total number of Shares outstanding at such
time.
Portfolio securities that are traded only on national securities exchanges
are valued at the last sale price or, lacking any sales, at the mean between
last bid and asked prices. Securities traded in the over-the-counter market
which are National Market System securities are valued at the last sale
price. Other over-the-counter securities are valued at the most recent bid
prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities that are traded both in the over-the-counter
market and on a national securities exchange are valued according to the
broadest and most representative market, as determined by the Investment
Adviser. Short- term investments that mature in 60 days or less are valued at
amortized cost, unless the Board determines that such valuation does not
constitute fair value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board
in accordance with the procedures hereinafter described. Such valuations and
procedures will be reviewed periodically by the Board. The fair value of
investments for which no market exists cannot be precisely determined. With
respect to securities of a company in its early stages of development,
valuation will typically be based upon their original cost to the Trust (the
"cost method"). The cost method will be utilized until significant
developments affecting the portfolio company provide a basis for use of an
appraisal valuation (the "appraisal method"). The appraisal method will be
based upon such factors as earnings and net worth and will also consider the
market price for similar securities of comparable publicly traded companies.
In the case of unsuccessful operations, the appraisal may be based upon
liquidation value. Valuations based on the appraisal are necessarily
subjective. The Trust also will use third party transactions in the portfolio
company's securities as the basis of valuation (the "private market method").
The private market method will be used only with respect to actual
transactions or actual firm offers by sophisticated, independent investors
unaffiliated with the Investment Adviser or Group. Legal or contractual
restrictions on the sale of portfolio securities by the Trust will be
considered in the valuation of such securities.
Other assets, which include cash, prepaid and accrued items, accounts
receivable and income on investments and from the sale of portfolio
securities, are carried in accordance with generally accepted accounting
principles, as are all liabilities. Liabilities primarily include accrued
expenses, sums owed for securities purchased and dividends payable.
DIVIDENDS AND DISTRIBUTIONS
The Trust expects to distribute to shareholders annually dividends of all
or a portion of its investment company taxable income, if any. For federal
income tax purposes, the Trust is required to distribute substantially all of
its investment company taxable income for each year. Net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss),
if any, may be distributed or may be retained at the discretion of the Board.
"Investment company taxable income," as used herein, includes all interest
and other ordinary income earned by the Trust on its portfolio holdings and
net short-term capital gains in excess of net long-term capital losses, less
the Trust's expenses. See "Taxation--Distributions."
The Trust's most recent distribution of net capital gains of $4.49 per
share was payable to Shareholders of record on November 18, 1996.
Various factors will affect the level of the Trust's income, including the
asset mix, the performance of the companies represented in the Trust's
portfolio, and the Trust's use of hedging and fluctuations in the rate of
exchange between foreign currencies and the U.S. dollar to the extent the
Trust has invested in Foreign Securities. Each shareholder will have all
dividends and distributions reinvested in Shares of the Trust issued pursuant
to the Trust's Plan, unless the shareholder elects not to participate in the
Plan. Shareholders who elect not to participate in the Plan will receive
their dividends and distributions in cash. See "Dividend Reinvestment Plan."
Notices will be provided in accordance with Section 19(a) of the Investment
Company Act.
DIVIDEND REINVESTMENT PLAN
Each shareholder holding Shares of the Trust will automatically be a
participant in the Trust's Plan, unless the shareholder elects not to
participate in the Plan. Under the Plan, whenever the Trust declares a
distribution of dividends and capital gains payable in Shares or cash, the
distribution of dividends and capital gains will be
29
<PAGE>
automatically reinvested by State Street Bank and Trust Company (the "Plan
Agent"), in whole or fractional Shares of the Trust, as the case may be, for
the accounts of the participating shareholders. Shareholders who specifically
elect not to participate in the Plan will receive all distributions of
dividends and capital gains in cash paid by check in U.S. dollars mailed
directly to the shareholders (or if the Shares are held in street or other
nominee name, then to the nominee) by the Custodian, as Dividend Disbursing
Agent. Shareholders may receive more detailed information regarding the Plan
from the Trust or the Plan Agent. Shareholders whose Shares are held in the
name of a broker or nominee should contact such broker or nominee to
determine whether or how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. Participants in the Plan will receive Shares valued on the valuation
date, generally at the lower of market price or NAV, except as specified
below. The valuation date will be the dividend or distribution payment date
or, if that date is not a trading day on the NYSE, the next trading day.
Whenever the market price per Share is equal to or exceeds NAV on the
valuation date, participants will be issued Shares at the greater of (i) NAV
or (ii) 95% of the then current market price of the Shares. If the NAV of the
Shares on the valuation date exceeds the market price of the Shares at that
time, participants will receive Shares from the Trust valued at the market
price.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the terms and conditions of the Plan may be amended or
supplemented by the Plan Agent or the Trust at any time or times but, except
when necessary or appropriate to comply with applicable law or the rules or
policies of the Commission or any other regulatory authority, only by mailing
to the shareholders appropriate written notice at least 90 days prior to the
record date for the dividend or distribution. All correspondence concerning
the Plan should be directed to the Plan Agent, State Street Bank and Trust
Company, at P.O. Box 8200, Boston, MA 02266-8200.
TAXATION
The following discussion is based upon the advice of Dechert Price &
Rhoads, counsel for the Trust, and is a general summary of the principal U.S.
federal income tax considerations regarding an investment in the Trust. The
discussion is based on laws, regulations, rulings and decisions currently in
effect, all of which are subject to change (possibly with retroactive effect)
or different interpretations. The discussion below does not purport to deal
with all of the federal income tax consequences applicable to the Trust, or
to all categories of investors, some of which may be subject to special
rules. Each prospective shareholder is urged to consult with his or her own
tax adviser with respect to the specific federal, state, local, foreign and
other tax consequences of investing in Shares of the Trust.
Taxation of the Trust
The Trust intends to qualify and elect to be treated each taxable year as
a regulated investment company ("RIC") under the Code. The principal federal
income tax benefits of qualifying as a RIC, as compared to an ordinary
taxable corporation, are that a RIC generally is not itself subject to
federal income tax on ordinary investment income and net capital gains that
are currently distributed to its shareholders, and that the character of
long-term capital gains which are recognized and properly designated by a RIC
flows through to its shareholders, who receive (or are deemed to receive)
distributions of such income. However, the Trust would be subject to
corporate income tax (currently at a maximum marginal rate of 35%) on any
undistributed income.
Distributions
Dividends paid from investment company taxable income will be taxable to
shareholders as ordinary income whether paid in cash or reinvested in the
Trust's Shares. The Trust intends to distribute to its shareholders
substantially all of its investment company taxable income, if any, for each
year. It is anticipated that the Trust's income distributions will be paid
annually in additional Shares unless the shareholder elects payment in cash.
If a portion of the Trust's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Trust may be eligible
for the corporate dividends-received deduction. Distributions of the excess,
if any, of net long-term capital gains over net short-term capital losses
designated by the Trust as capital gain dividends will be taxable to
shareholders as long-term capital gains, whether paid in cash or reinvested
in the Trust's Shares, regardless of how long the shareholders have held the
Trust's Shares, and will not be eligible for the dividends received deduction
for corporations. Each year, shareholders will be notified as to the amount
and federal tax status of all dividends and capital gains paid during the
prior year. Such dividends and capital gains may also be subject
30
<PAGE>
to state or local taxes. Dividends declared in October, November, or December
with a record date in such month and paid during the following January will
be treated as having been paid by the Trust and received by shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
Gain or loss realized upon the sale or exchange of Shares will be a
capital gain or loss if the Shares are capital assets in the shareholder's
hands and generally will be long-term or short-term, depending upon the
shareholder's holding period for the Shares. Investors should be aware that
any loss realized upon the sale or exchange of Shares held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gain to the
shareholder with respect to such Shares. In addition, any loss realized on a
sale or exchange of Shares will be disallowed to the extent the Shares
disposed of are replaced within a period of 61 days beginning 30 days before
and ending 30 days after the Shares are disposed of, such as pursuant to the
Plan. In such case, the basis of Shares acquired will be adjusted to reflect
the disallowed loss.
If a shareholder has not furnished a certified correct taxpayer
identification number (generally a Social Security number) and has not
certified that withholding does not apply, or if the Internal Revenue Service
has notified the Trust that the taxpayer identification number listed on the
account is incorrect according to their records or that the shareholder is
subject to backup withholding, federal law generally requires the Trust to
withhold 31% from any dividends and/or redemptions (including exchange
redemptions). Amounts withheld are applied to federal tax liability; a refund
may be obtained from the Service if withholding results in overpayment of
taxes. Federal law also requires the Trust to withhold up to 30% or the
applicable tax treaty rate from ordinary dividends paid to certain
nonresident alien and other non-U.S. shareholder accounts.
This is a brief summary of some of the tax laws that affect an investment
in the Trust. Please see the SAI and a tax adviser for further information.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT, REGISTRAR, AND SUBSCRIPTION AGENT
The Trust's securities and cash are held under a custodian contract by
State Street Bank and Trust Company (the "Custodian"), whose principal
business address is 225 Franklin Street, Boston, MA 02110.
The Custodian also serves as Dividend Disbursing Agent, Transfer Agent and
Registrar for Shares of the Trust and Subscription Agent in connection with
the Offer.
DISTRIBUTION ARRANGEMENTS
Prudential Securities Incorporated, One New York Plaza, New York, NY
10292, will act as dealer manager for the Offer. Under the terms of and
subject to the conditions contained in a Dealer Manager Agreement dated the
date of this Prospectus, the Dealer Manager will provide financial advisory,
marketing and solicitation services in connection with the Offer. The Trust
has agreed to pay the Dealer Manager a fee for its financial, advisory,
marketing and solicitation services equal to 3.50% of the aggregate
Subscription Price for the Shares issued pursuant to the Offer. The Dealer
Manager will reallow to the broker-dealer designated on the related Exercise
Form a concession of 2.25% of the Subscription Price per Share for each Share
issued pursuant to the Offer, provided that the designated broker-dealer has
executed a confirmation accepting the terms of the Dealer Manager Agreement
relating to the Offer. These fees will be borne by the Trust and indirectly
by all of its Shareholders, including those who do not exercise their Rights.
In addition, the Trust has agreed to reimburse the Dealer Manager for its
out-of-pocket expenses incurred in connection with the Offer up to a maximum
of $150,000. The Trust and the Investment Adviser have also agreed to
indemnify the Dealer Manager or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Trust
by Dechert Price & Rhoads, Ten Post Office Square, Boston, MA 02109 and
certain other legal matters will be passed on for the Dealer Manager by
Morgan, Lewis & Bockius LLP, 1800 M Street, N.W., Washington, D.C., 20036.
31
<PAGE>
EXPERTS
The financial statements of the Trust included herein has been so included
in reliance upon the report of Arthur Andersen LLP, independent public
accountants, and on their authority as experts in accounting and auditing.
The services it provides include auditing the financial statements of the
Trust, services related to filings by the Trust with the Commission and
consultation on matters related to the preparation and filing of tax returns.
REPORTS TO SHAREHOLDERS
The Trust will send unaudited semiannual reports and audited annual
reports, including a list of investments held, to shareholders. The Trust has
in the past also issued more abbreviated interim reports to registered
shareholders and those requesting them.
ADDITIONAL INFORMATION
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act and in accordance
therewith is required to file reports, proxy statements and other information
with the Commission. Any such reports, proxy statements and other information
can be inspected and copied at the public reference facilities of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's New York Regional Office, 7 World Trade Center, Suite
1300, New York, NY 10048 and Chicago Regional Office, 230 South Dearborn
Street, Chicago, IL 60604. Copies of such materials can be obtained from the
public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Reports, proxy statements and
other information concerning the Trust can also be inspected at the offices
of the NYSE, 20 Broad Street, New York, NY 10005.
A Registration Statement on Form N-2 relating to the Shares has been filed
by the Trust with the Commission. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any exhibits
and schedules thereto. For further information with respect to the Trust and
the Shares offered hereby, reference is made to the SAI and the Trust's
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of all or any
part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
Additional Information About Investments and Investment Techniques 2
Investment Restrictions 7
Trustees and Officers 10
The Trust 11
Investment Advisory Agreement 14
Net Asset Value 17
Portfolio Transactions and Brokerage 18
Dividend Reinvestment Plan 21
Tax Matters 22
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar 28
</TABLE>
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
of H&Q Healthcare Investors:
We have audited the accompanying balance sheet of H&Q Healthcare Investors
(a Massachusetts business trust), including the Schedule of Investments as of
September 30, 1996, and the related statements of operations and cash flows
for the year then ended, and the statements of changes in net assets and
financial highlights for the years presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned, as of September 30, 1996, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe our audits provide a
reasonable basis for our opinion.
As discussed in Note 5, the financial statements include investment
securities valued at $37,189,359 (25.2% of net assets) whose values have been
determined by the Board of Trustees in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation, the
Board of Trustees' determination of values may differ significantly from the
values that would have been used had a ready market existed for the
securities and the difference could be material.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
H&Q Healthcare Investors as of September 30, 1996, the results of its
operations and its cash flows for the year then ended, and the changes in its
net assets and financial highlights for the years presented, in conformity
with generally accepted accounting principles.
Boston, Massachusetts Arthur Andersen LLP
November 1, 1996
F-1
<PAGE>
H&Q HEALTHCARE INVESTORS
SCHEDULE OF INVESTMENTS--September 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
- ------------ --------------
<S> <C> <C>
CONVERTIBLE SECURITIES--13.1%
Convertible Preferred--12.6%
1,666,667 Cubist Pharmaceuticals, Series C* $ 1,000,000
500,000 CV Therapeutics, Series D* 475,000
207,500 CV Therapeutics, Series E (w/wts.)* 197,125
212,500 CV Therapeutics, Series G (w/wts.)* 201,875
80,202 Dyax, Class A Series 1* 160,402
55,000 Dyax, Class A Series 3* 110,000
222,222 EPR, Series A* 999,999
1,100,000 Exelixis Pharmaceuticals, Series B* 1,100,000
308,707 Focal, Series D* 537,150
116,106 Focal, Series E* 202,025
1,330,645 HealthTech Services, Series A* 1,650,000
99,955 IBAH, Series A** 1,949,123
400,000 InterVentional Technologies, Series E* 1,000,000
87,500 InterVentional Technologies, Series F* 875,000
15,000 InterVentional Technologies, Series G* 150,000
343,750 LocalMed, Series D* 1,375,000
160,000 Masimo, Series D* 1,120,000
135,000 PGS International, Escrow* 162,000
27,500 Terrapin Technologies, Series G* 1,375,000
187,969 Therion Biologics, Series B (w/wts.)* 499,998
3,268 Transkaryotic Therapies, Series B* 2,098,056
25,000 Transkaryotic Therapies, Series C* 350,000
270,270 Tularik, Series C* 999,999
-----------
$18,587,752
-----------
PRINCIPAL
AMOUNT Convertible Bonds and Notes--0.5%
- -----------
$801,500 Therion Biologics, 10% Note due 1996 (w/wts.) $ 801,500
-----------
$ 801,500
-----------
TOTAL CONVERTIBLE SECURITIES (Cost $17,917,021) $19,389,252
-----------
SHARES
- ---------
COMMON STOCKS--80.1%
Agricultural/Environmental Technology--6.7%
63,000 Calgene** $ 315,000
467,500 Catalytica** 1,928,438
102,000 IDEXX Laboratories** 4,615,500
94,697 Molten Metal Technology** 3,030,304
-----------
$ 9,889,242
-----------
Biotechnology--29.2%
100,000 Alkermes** $ 1,562,500
265,600 Ariad Pharmaceuticals** 1,012,600
58,000 BioChem Pharma** 2,327,250
111,000 BioTransplant** 777,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- --------------
<S> <C> <C>
Biotechnology--continued
238,898 BioTransplant* 1,254,215
2,760 BioTransplant Warrants* 4,968
6,300 BioTransplant Warrants* 11,340
1,150 BioTransplant Warrants* 4,807
110,000 Calypte Biomedical** 948,750
250,400 Calypte Biomedical* 1,534,952
200,000 Cell Therapeutics* 670,000
148,700 Cor Therapeutics** 1,487,000
494,117 Genta** 725,734
71,659 Gilead Sciences** 2,024,367
205,000 ImmuLogic Pharmaceutical** 1,665,625
63,755 INCYTE Pharmaceuticals** 3,155,873
441,409 Martek Biosciences** 11,035,225
73,000 MedImmune** 1,040,250
207,059 NABI** 2,458,826
60,000 Neurogen** 1,515,000
400,000 Oxford GlycoSystems Group* 320,000
13,867 Pharming B.V.* 1,105,247
349,166 Ribi ImmunoChem Research** 1,440,310
166,666 Ribi ImmunoChem Research Warrants* 131,666
180,648 SEQUUS Pharmaceuticals** 2,845,206
74,096 SEQUUS Pharmaceuticals Warrants* 617,220
112,500 Somatogen** 1,279,688
29,162 Therion Biologics* 77,571
12,500 Transkaryotic Therapies Warrants* 125
-----------
$43,033,315
-----------
Contract Research Organizations--9.5%
136,781 IBAH** $ 889,077
299,865 IBAH Warrants* 1,250,437
193,605 IBAH Warrants* 758,932
330,000 Phoenix International Life Sciences** 3,382,500
105,200 Quintiles Transnational** 7,705,900
-----------
$13,986,846
-----------
Diagnostics--6.8%
189,099 Biofield* $ 1,293,437
14,977 Biofield Warrants* 150
14,977 Biofield Warrants* 150
135,907 Cytyc** 2,038,605
175,397 Cytyc* 1,973,216
20,000 Integ** 207,500
133,333 Integ* 1,037,331
153,846 NeoPath* 2,221,536
333,334 Quidel** 1,291,669
-----------
$10,063,594
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
SHARES VALUE
------------- ---------------
<S> <C> <C>
Managed Care--4.1%
116,000 Orthodontic Centers of America** $ 2,363,500
112,500 Vencor** 3,628,125
------------
$ 5,991,625
------------
Medical Supplies--10.0%
62,456 Boston Scientific** $ 3,591,220
108,968 EndoVascular Technologies** 1,307,616
155,750 Exogen** 623,000
114,286 Heartstream* 1,221,717
176,534 Innotech* 1,339,893
137,457 KeraVision** 2,061,855
210,040 Landec** 2,047,890
50,409 Landec* 368,490
22,000 Perclose** 489,500
100,002 Ventritex** 1,750,035
------------
$ 14,801,216
------------
Medical Specialty--7.8%
546,000 Bioject Medical** $ 546,000
129,420 Biomatrix** 2,167,785
14,120 Dyax* 28,240
2,528 Dyax Warrants* 25
239,000 Fuisz Technologies** 3,107,000
180,000 Interpore** 933,750
113,569 Sepracor** 1,604,162
91,666 Spiros Development Units* 2,523,565
137,000 Voxel** 685,000
------------
$ 11,595,527
------------
Pharmaceuticals--6.0%
160,000 Cortex Pharmaceuticals** $ 490,000
125,000 Synaptic Pharmaceutical** 1,421,875
181,667 Vivus** 6,903,346
------------
$ 8,815,221
------------
TOTAL COMMON STOCKS (Cost $69,576,985) $118,176,586
------------
TOTAL INVESTMENTS IN SECURITIES (Cost $87,494,006) $137,565,838
============
PRINCIPAL
AMOUNT TEMPORARY CASH INVESTMENTS--7.0%
$5,200,000 Ford Motor Credit Corp., 5.28%, due 10/11/96 $ 5,192,350
5,200,000 General Motors Acceptance Corp., 5.30%, due 10/3/96 5,198,492
------------
TOTAL TEMPORARY CASH INVESTMENTS $ 10,390,842
============
</TABLE>
- -------------
* Non income-producing restricted security, valued by the Board of Trustees
(see Note 5).
** Non income-producing publicly traded security (see Note 1).
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
H&Q HEALTHCARE INVESTORS
BALANCE SHEET--September 30, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments in securities, at value (identified cost $87,494,006; see
Schedule of Investments) (Notes 1, 3 and 5) $137,565,838
Temporary cash investments, at amortized cost which approximates value
(see Schedule of Investments) (Note 1) 10,390,842
------------
Total investments $147,956,680
Cash 301,049
Prepaid expenses and other assets 19,429
------------
Total assets $148,277,158
------------
Liabilities
Payable for investments purchased $497,750
Accrued advisory fee (Note 4) 158,524
Other accrued expenses 68,379
------------
Total liabilities $724,653
------------
Net Assets
Shares of beneficial interest, par value $.01 per share, unlimited number
of shares authorized, amount paid in on 5,729,160 shares issued and
outstanding (Note 1) $71,929,826
Accumulated net realized gain on investments 25,550,847
Net unrealized gain on investments (Note 3) 50,071,832
------------
Total net assets (equivalent to $25.75 per share based on 5,729,160
shares outstanding) $147,552,505
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
H&Q HEALTHCARE INVESTORS
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME (Note 1):
Dividends $9,900
Interest 242,253
------------
Total investment income $252,153
EXPENSES:
Advisory fees (Note 4) $1,961,266
Shareholder reporting 62,336
Custodian fees 58,063
Trustees' fees and expenses 56,663
Insurance expense 30,455
Accounting and auditing fees 27,971
Transfer agent fees 16,911
Legal fees 14,742
Other 45,543
------------
Total expenses 2,273,950
------------
Net investment (loss) $(2,021,797)
------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gain on investments (Note 1) $26,774,551
Net increase in unrealized gain on investments 5,212,708
------------
Net gain on investments $31,987,259
------------
Net increase in net assets resulting from operations $29,965,462
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
H&Q HEALTHCARE INVESTORS
STATEMENT OF CASH FLOWS
For the Year Ended September 30, 1996
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Dividends received $9,900
Interest received 254,949
Operating expenses paid (2,282,567)
-----------
Net cash used for operating activities $(2,017,718)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of portfolio securities $234,104,327
Purchases of portfolio securities (228,684,370)
-----------
Net cash provided by investing activities $5,419,957
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid $(6,769,939)
Distributions reinvested 3,284,307
-----------
Net cash used for financing activities $(3,485,632)
-----------
NET (DECREASE) IN CASH $(83,393)
CASH AT BEGINNING OF YEAR 384,442
-----------
CASH AT END OF YEAR $301,049
===========
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH USED FOR OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $29,965,462
Net realized (gain) on investments (26,774,551)
Net (increase) in unrealized gain on investments (5,212,708)
Net decrease in interest and dividends receivables 12,696
(Decrease) in accrued advisory fees and accrued other expenses (7,032)
(Increase) in prepaid expenses and other assets (1,585)
-----------
Net cash used for operating activities $(2,017,718)
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
H&Q HEALTHCARE INVESTORS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the years ended
September 30, September 30,
1996 1995
---- ----
<S> <C> <C>
NET INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment (loss) $(2,021,797) $(1,267,141)
Net realized gain on investments 26,774,551 5,912,514
Net increase in unrealized gain on investments 5,212,708 24,258,241
------------ -------------
Net increase in net assets resulting from operations $29,965,462 $28,903,614
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized long-term capital gains $(6,769,939) --
------------ -------------
Net (decrease) in net assets resulting from distributions $(6,769,939) --
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in reinvestment of distributions $3,284,307 --
------------ -------------
Total increase in net assets $26,479,830 $28,903,614
------------ -------------
NET ASSETS:
Beginning of year 121,072,675 92,169,061
------------ -------------
End of year $147,552,505 $121,072,675
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
H&Q HEALTHCARE INVESTORS
FINANCIAL HIGHLIGHTS
(Selected data for each Share outstanding throughout the period indicated)
<TABLE>
<CAPTION>
For the years ended September 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value per share:
Beginning of period $21.818 $16.609 $17.604 $17.340 $19.207
------------ ------------ ------------ ------------ ------------
Net investment income
(loss) $(0.331) $(0.228) $(0.199) $(0.190) $(0.076)
Net realized and
unrealized gain (loss) on
investments 5.487 5.437 (0.230) 0.970 0.247
Federal income taxes on
retained long-term
capital gains -- -- (0.566) (0.516) (1.078)
------------ ------------ ------------ ------------ ------------
Total increase
(decrease) from
investment operations $5.156 $5.209 $(0.995) $0.264 $(0.907)
------------ ------------ ------------ ------------ ------------
Distribution to
shareholders
Short-term capital gains -- -- -- -- $(0.040)
Long-term capital gains $(1.220) -- -- -- (0.920)
------------ ------------ ------------ ------------ ------------
Total distributions $(1.220) -- -- -- $(0.960)
------------ ------------ ------------ ------------ ------------
Net asset value per share:
End of period $25.754 $21.818 $16.609 $17.604 $17.340
============ ============ ============ ============ ============
Per share market value:
End of period $20.875 $18.250 $15.125 $18.375 $19.375
Total investment return
(a) 22.03% 20.66% (17.69)% (5.16)% 9.43%
Net assets:
End of period $147,552,505 $121,072,675 $92,169,061 $97,690,739 $96,222,175
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating
expenses to average net
assets 1.62% 1.76% 1.74% 1.84% 1.72%
Ratio of net investment
(loss) to average net
assets (1.44)% (1.31)% (1.13)% (1.06)% (0.38)%
Portfolio turnover rate 22.41% 22.81% 28.10% 28.36% 35.45%
Average commission rate
paid per listed share
purchased (a) $.07 N/A N/A N/A N/A
Number of shares
outstanding at end of
period 5,729,160 5,549,198 5,549,198 5,549,198 5,539,450
</TABLE>
- -------------
* Annualized
(a) Average commission rate per share required for fiscal years that began
September 1, 1995, or later; total investment return information not
required for fiscal years 1987 through 1989.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
H&Q HEALTHCARE INVESTORS
FINANCIAL HIGHLIGHTS--(Continued)
<TABLE>
<CAPTION>
For the period
April 22, 1987
(commencement
For the years ended September 30, of operation)
to September 30,
1991 1990 1989 1988 1987
--------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value per
share:
Beginning of period $11.313 $10.647 $8.036 $9.450 $9.250
------------ ------------ ------------ ------------ ------------
Net investment income
(loss) $(0.014) $0.014 $0.003 $(0.019) $0.030
Net realized and
unrealized gain (loss)
on investments 8.743 0.652 2.608 (1.375) 0.170
Federal income taxes on
retained long-term
capital gains -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total increase
(decrease) from
investment operations $8.729 $0.666 $2.611 $(1.394) $0.200
------------ ------------ ------------ ------------ ------------
Distribution to
shareholders
Short-term capital gains $(0.055) -- -- -- --
Long-term capital gains (0.780) -- -- $(0.020) --
------------ ------------ ------------ ------------ ------------
Total distributions $(0.835) -- -- $(0.020) --
------------ ------------ ------------ ------------ ------------
Net asset value per
share:
End of period $19.207 $11.313 $10.647 $8.036 $9.450
============ ============ ============ ============ ============
Per share market value:
End of period $18.375 $9.250 $9.750 $6.375 $5.625
Total investment return
(a) 113.06% 1.37% N/A N/A N/A
Net assets:
End of period $106,396,527 $62,661,275 $58,974,336 $44,515,399 $52,366,673
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating
expenses to average net
assets 1.73% 1.74% 1.89% 1.98% 1.83%*
Ratio of net investment
(loss) to average net
assets (0.10)% 0.12% 0.02% (0.25)% 0.74%*
Portfolio turnover rate 23.04% 47.02% 46.90% 57.42% 17.34%*
Average commission rate
paid per listed share
purchased (a) N/A N/A N/A N/A N/A
Number of shares
outstanding at end of
period 5,539,450 5,539,450 5,539,450 5,539,450 5,539,450
</TABLE>
- -------------
* Annualized.
(a) Average commission rate per share required for fiscal years that began
September 1, 1995, or later; total investment return information not
required for fiscal years 1987 through 1989.
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(1) ORGANIZATION
H&Q Healthcare Investors (the Fund) is a Massachusetts business trust
registered under the Investment Company Act of 1940 as a diversified
closed-end management investment company. The Fund's investment objective is
long-term capital appreciation through investment in securities of companies
in the healthcare industries. The Fund invests primarily in securities of
public and private companies that are believed to have significant potential
for above-average growth. The Fund was organized on October 31, 1986 and
commenced operations on April 22, 1987.
The preparation of these financial statements requires the use of certain
estimates by management in determining the entity's assets, liabilities,
revenues and expenses. Actual results could differ from these estimates. The
following is a summary of significant accounting policies consistently
followed by the Fund, which are in conformity with those generally accepted
in the investment company industry.
Investment Securities
Transactions related to the investments of the Fund are recorded on the
date the securities are purchased or sold. Investments traded on national
securities exchanges or in the over-the-counter market that are National
Market System securities are valued at the last sale price or, lacking any
sales, at the mean between the last bid and asked prices. Other
over-the-counter securities are valued at the most recent bid prices as
obtained from one or more dealers that make markets in the securities. As
indicated in Note 5, investments for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board
of Trustees of the Fund. Temporary cash investments with a maturity of 60
days or less are valued at amortized cost.
Gains and losses from sales of investments are recorded using the
"identified cost" method for both financial reporting and Federal income tax
purposes. Investment income and expenses are recorded on the accrual basis.
Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
to its shareholders substantially all of its taxable income and its net
realized capital gains, if any. Therefore, no Federal income tax provision is
required.
Distributions
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations. The Fund has adjusted
for the effect of certain permanent book/tax differences. Of the $2,021,797
net operating loss, $366,279 was available to offset certain realized capital
gains and the balance was reclassified against capital. This adjustment has
no effect on the Fund's net assets, net investment loss or net realized gain
and is designed to present the Fund's capital accounts on a tax basis.
Dividend Reinvestment Plan
Under the Dividend Reinvestment Plan, net realized capital gains will
automatically be paid in additional shares of the Fund, unless the Plan Agent
(State Street Bank and Trust Company) is otherwise instructed by the
shareholder. It is expected that dividends, if any, will be declared after
fiscal year-end and will be payable for that year before the end of January.
A description of the automatic Dividend Reinvestment Plan may be obtained
by calling State Street Bank. Shareholders may request to be paid in cash
instead of shares by contacting the bank, brokerage or nominee who holds the
shares if the shares are held in "street name" or by filling out an
Authorization Card obtained by calling State Street Bank if the shares are in
registered form.
F-11
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 1996
(2) PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investment
securities (other than temporary cash investments) for the period from
October 1, 1995 through September 30, 1996 totaled $31,022,848 and
$45,401,195, respectively.
(3) TAX BASIS OF SECURITIES
At September 30, 1996, the total cost of securities for Federal income tax
purposes was $87,494,006. The aggregate gross unrealized gain on securities
in which there was an excess of market value over cost was $63,873,734. The
aggregate gross unrealized loss on securities in which there was an excess of
cost over market value was $13,801,902. The net unrealized gain on securities
held by the Fund was $50,071,832.
(4) ADVISORY AGREEMENT
The Fund has entered into an Investment Advisory Agreement (the Advisory
Agreement) with Hambrecht & Quist Capital Management Incorporated (the
Adviser). Pursuant to the terms of the Advisory Agreement, the Fund pays the
Adviser a monthly fee at the rate when annualized of (i) 2.5% of the average
net assets for the month of its venture capital and other restricted
securities and (ii) 1% of the average net assets for the month of all other
assets. The aggregate fee may not exceed a rate when annualized of 1.375%.
The Adviser is a wholly owned subsidiary of Hambrecht & Quist Group. Certain
officers and trustees of the Fund are also officers of the Adviser.
(5) VENTURE CAPITAL AND OTHER RESTRICTED SECURITIES
The Fund may invest in venture capital or other restricted securities if
these securities would currently comprise 40% or less of net assets. The
value of these securities represents 25.2% of the Fund's net assets at
September 30, 1996.
The value of the venture capital or other restricted securities are valued
at fair value as determined in good faith by the Board of Trustees. However,
because of the inherent uncertainty of valuations, these estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material. The
following table details the acquisition date, cost, carrying value per unit,
and value of the Fund's venture capital or other restricted securities at
September 30, 1996, as determined by the Board of Trustees of the Fund.
<TABLE>
<CAPTION>
Carrying
Acquisition Value
Security Date Cost per Unit Value
- -------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
Biofield
Common* 11/4/93 $1,000,229
9/16/94 250,002
3/3/95 172,125
6/29/95 103,122
1,525,478 $6.840 $1,293,437
Common Warrants 3/3/95 0
6/29/95 0
-----------
0 0.010 150
Common Warrants 3/3/95 0
6/29/95 0
-----------
0 0.010 150
F-12
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 1996
Carrying
Acquisition Value
Security Date Cost per Unit Value
- -------- ---- ---- -------- -----
BioTransplant
Common* 11/1/93 1,200,696
10/31/94 277,857
8/18/95 48,757
1/16/96 385,385
-----------
1,912,695 5.250 1,254,215
Common Warrants 8/12/94 0 1.800 4,968
Common Warrants 10/31/94 0 1.800 11,340
Common Warrants 8/18/95 0 4.180 4,807
Calypte Biomedical
Common* 12/22/92 1,000,476
11/18/94 52,000
6/15/95 100,000
2/29/96 150,000
-----------
1,302,476 6.130 1,534,952
Cell Therapeutics
Common 8/3/92 1,000,280 3.350 670,000
Cubist Pharmaceuticals
Series C Cvt. Pfd. 5/17/95 1,000,809 0.600 1,000,000
CV Therapeutics
Series D Cvt. Pfd. 3/23/94 1,000,330 0.950 475,000
Series E Cvt. Pfd. (w/wts.) 9/8/95 415,613 0.950 197,125
Series G Cvt. Pfd. (w/wts.) 3/29/96 425,425 0.950 201,875
Cytyc*
Common 5/17/94 151,447
10/14/94 149,608
6/13/95 84,460
-----------
385,515 11.250 1,973,216
Dyax
Common 5/16/91 1,001,480 2.000 28,240
Class A Series 1 Cvt. Pfd. 6/1/92 155,065
9/11/92 51,712
12/31/92 111,812
-----------
318,589 2.000 160,402
Class A Series 3 Cvt. Pfd. 10/26/95 110,280 2.000 110,000
Common Warrants 12/31/92 187 0.010 25
EPR
Series A Cvt. Pfd. 3/9/94 1,000,409 4.500 999,999
Exelixis Pharmaceuticals
Series B Cvt. Pfd. 3/28/96 1,101,325 1.000 1,100,000
F-13
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 1996
Carrying
Acquisition Value
Security Date Cost per Unit Value
- -------- ---- ---- -------- -----
Focal
Series D Cvt. Pfd. 9/17/93 922,564
8/5/94 220,382
-----------
1,142,946 1.405 537,150
Series E Cvt. Pfd. 10/17/95 202,466 1.740 202,025
HealthTech Services
Series A Cvt. Pfd. 1/26/96 1,652,603 1.240 1,650,000
Heartstream*
Common 3/15/95 800,433 10.690 1,221,717
IBAH#
Common Warrants 2/22/93 0 3.920 758,932
Common Warrants 8/11/95 192,500 4.170 1,250,437
Innotech*
Common 8/23/95 1,100,677 7.590 1,339,893
Integ*
Common 6/16/95 800,126 7.780 1,037,331
InterVentional Technologies
Series E Cvt. Pfd. 4/2/91 500,667 2.500 1,000,000
Series F Cvt. Pfd. 8/21/92 700,399 10.000 875,000
Series G Cvt. Pfd. 3/8/95 150,431 10.000 150,000
Landec*
Common 3/27/95 200,294 7.310 368,490
LocalMed
Series D Cvt. Pfd. 2/9/96 1,376,301 4.000 1,375,000
Masimo
Series D Cvt. Pfd. 8/14/96 1,120,000 7.000 1,120,000
NeoPath*
Common 3/15/94 1,000,209 14.440 2,221,536
Oxford GlycoSystems Group
Ordinary Shares 5/26/93 773,830 0.800 320,000
PGS International
Escrow 9/27/93 0 1.200 162,000
Pharming B.V.
Class B Shares 8/28/95 1,105,430 79.703 1,105,247
Ribi ImmunoChem Research**
Common Warrants 7/31/91 0 0.790 131,666
SEQUUS Pharmaceuticals#
Common Warrants 3/30/95 0 8.330 617,220
Spiros Development
Units 12/28/95 1,375,780 27.530 2,523,565
Terrapin Technologies
Series G Cvt. Pfd. 11/7/95 1,375,548 50.000 1,375,000
F-14
<PAGE>
H&Q HEALTHCARE INVESTORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 1996
Carrying
Acquisition Value
Security Date Cost per Unit Value
- -------- ---- ---- -------- -----
Therion Biologics
Common 7/12/90 7,582 2.660 77,571
Series B Cvt. Pfd. (w/wts.) 6/30/93 502,648 2.660 499,998
10% Note due 1996 (w/wts.) 10/17/94 251,260
4/19/95 97,116
7/12/95 97,063
10/17/95 97,000
1/25/96 89,176
4/3/96 90,200
8/20/96 81,800
-----------
803,615 1.000 801,500
Transkaryotic Therapies
Series B Cvt. Pfd. 10/15/91 1,000,840
2/13/92 24,000
4/16/93 283,420
-----------
1,308,260 642.000 2,098,056
Series C Cvt. Pfd. 11/5/93 200,000 14.000 350,000
Common Warrants 11/5/93 245 0.010 125
Tularik
Series C Cvt. Pfd. 4/16/93 1,000,119 3.700 999,999
----------- -------------
$31,317,880 $37,189,359
=========== =============
</TABLE>
- -------------
* Represents 75% of equivalent current market value of the issuer's
registered securities.
** Represents 70% of equivalent current market value of the issuer's
registered securities.
# Represents 100% of equivalent current market value of the issuer's
registered securities.
F-15
<PAGE>
APPENDIX A
DESCRIPTION OF RISK FACTORS AND INVESTMENT TECHNIQUES
RISK FACTORS
An investment in the Shares of the Trust involves a high degree of risk.
Prospective investors should carefully consider the following risk factors in
addition to the other information set forth in this Prospectus. For
additional information of the risks that may be associated with an investment
in the Trust see "Additional Information About Investments and Investment
Techniques" in the SAI.
Because the Trust intends to invest substantially all of its assets in
equity securities of Healthcare Companies, an investor should be aware of
certain special considerations and risk factors relating to investments in
such companies. No assurance can be given that Healthcare Companies will
grow, that a sufficient number of appropriate investments will be available
or that the Trust's particular investment choices will be successful.
Investors should also be aware of considerations and risks relating to the
Trust's investment practices. An investment in the Trust should not itself be
considered a balanced investment program and is intended to provide
diversification as part of a more complete investment program. The Trust is
intended for long-term investors not seeking current income.
Dilution of NAV and Effect of Non-Participation in the Offer
As a result of the terms of the Offer, Shareholders who do not fully
exercise their Rights, including the Over- Subscription Privilege, will, at
the completion of the Offer, own a smaller proportional interest in the Trust
than they owned prior to the Offer and will experience a dilution of NAV. In
addition, an immediate dilution of NAV will be experienced by all
Shareholders as a result of the Offer whether or not they exercise all or a
portion of their Rights, because the Subscription Price will be less than the
then current NAV. Although it is not possible to state precisely the amount
of such a decrease in value, because it is not known at this time how many
Shares will be subscribed for or what the Subscription Price will be, such
dilution could be significant. For example, if the assumed Subscription Price
is $19.10, representing a market price which is only 90% of NAV, assuming
that all Rights are exercised, the Trust's NAV would be reduced by
approximately $.81 per Share or approximately 3.6% of NAV. However, the
actual Subscription Price may be greater or less than such assumed
Subscription Price. The foregoing example assumes an NAV of $22.33 per Share
based on the Trust's NAV after the close of trading on Monday, February 3,
1997. Since April 22, 1987 (commencement of operations), Shares of the Trust
have traded at various times at both a discount and a premium to net asset
value.
Concentration in the Healthcare Industries
The Trust expects under normal market conditions to invest primarily in
securities of Healthcare Companies representing a finite number of industries
and to invest at least 25% of its net assets in securities of companies in
the healthcare industries. The Trust's portfolio may therefore be more
sensitive to, and possibly more adversely affected by, regulatory, economic
or political factors or trends relating to the healthcare, agricultural and
environmental technology industries than a portfolio of companies
representing a larger number of industries. This risk is in addition to the
risks normally associated with any strategy seeking capital appreciation by
investing in a portfolio of equity securities.
Healthcare industries have in the past been characterized by limited
product focus, rapidly changing technology and extensive government
regulation. In particular, technological advances can render an existing
product, which may account for a disproportionate share of a company's
revenue, obsolete. Obtaining governmental approval from agencies such as the
FDA for new products can be lengthy, expensive and uncertain as to outcome.
Such delays in product development may result in the need to seek additional
capital, potentially diluting the interests of existing investors such as the
Trust. In addition, governmental agencies may, for a variety of reasons,
restrict the release
A-1
<PAGE>
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 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.
A-2
<PAGE>
Key Personnel
Alan G. Carr, the President and a Trustee of the Trust and President and
sole Director of the Investment Adviser, is responsible for managing the
Trust's portfolio. Mr. Carr has been managing equity portfolios emphasizing
investment in emerging growth companies for over 30 years and portfolios
specializing in publicly traded equity securities of Healthcare Companies, as
well as in venture capital opportunities in the healthcare industries, for
the last 15 years. There may be only a limited number of securities
professionals who have comparable investment experience to Mr. Carr. In the
event of his death, resignation, retirement or inability to act on behalf of
the Investment Adviser, there can be no assurance that a suitable replacement
for Mr. Carr could be found immediately.
Liquidity of Portfolio Investments
The Trust may invest substantially all of its net assets in securities of
emerging growth Healthcare Companies that are traded in the over-the-counter
market or on regional stock exchanges where the low trading volume of a
particular security may result in abrupt and erratic price movements. An
investment in such securities may have limited liquidity, and the Trust may
find it necessary to sell at a discount from recent prices or to sell over
extended periods of time when disposing of such securities. In addition, the
Trust may invest up to 40% of its net assets in Restricted Securities, which
by their terms are illiquid because they are subject to legal or contractual
restrictions on resale. The Trust cannot sell Restricted Securities except in
a public offering registered under the Securities Act or pursuant to an
exemption from registration under the Securities Act, including a transaction
in compliance with Rule 144 under the Securities Act, which permits only
limited sales under specified conditions unless the Trust has held the
securities for at least three years and is unaffiliated with the issuer.
Moreover, Restricted Securities are expected to include venture capital
investments that may take many years from the date of initial investment to
reach a state of maturity when public disposition can be considered. Adverse
conditions in the securities markets at certain times may preclude a public
offering of an issuer's unregistered securities. The lack of an active
secondary market and resale restrictions may result in the inability of the
Trust to sell a security at a fair price and may substantially delay the sale
of a security that the Trust seeks to sell. Companies whose securities are
not publicly traded are also not subject to the same disclosure and other
legal requirements as are applicable to companies with publicly traded
securities. Restricted Securities eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Securities Act are
subject to the 40% limitation described above.
Foreign Securities
The Trust may invest up to 20% of its net assets in Foreign Securities,
many of which may be less liquid and have prices that are more volatile than
securities of comparable U.S. companies. Foreign stock exchanges and brokers
are generally subject to less governmental supervision and regulation than
U.S. exchanges and brokers, and commissions on foreign stock exchanges are
generally higher than negotiated commissions in the U.S. There may in certain
instances be delays in the settlement of transactions effected in foreign
markets. Certain countries restrict foreign investments in their securities
markets. These restrictions may limit or preclude investment in certain
countries or in certain industries or market sectors, or may increase the
cost of investing in securities of particular companies.
Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory
requirements comparable to those applicable to U.S. companies. Thus, there
may be less available information concerning non-U.S. issuers of securities
held by the Trust than is available concerning U.S. companies. In addition,
with respect to some foreign countries, there is the possibility of
nationalization, expropriation, confiscatory taxation or establishment of
exchange controls. Income earned in a foreign nation may be subject to
taxation (including withholding taxes on interest and dividends), or other
taxes may be imposed with respect to investments in foreign securities. Other
risks associated with investments in foreign securities include difficulties
in pursuing legal remedies and obtaining judgments in foreign courts,
political or social instability and diplomatic developments that could
adversely affect the Trust's investments in companies located in foreign
countries. An investment in Foreign Securities may also involve a degree of
currency risk.
A-3
<PAGE>
Market for Shares
The Shares are listed on the NYSE under the symbol "HQH." The shares of
closed-end investment companies frequently trade at a discount to NAV but may
trade at a premium. This is characteristic of shares of a closed-end fund and
is a risk separate and distinct from the risk of a decline in the NAV as a
result of a fund's investment activities. Because of this factor as well as
the Trust's investment objective and policies, the Trust is designed
primarily for long-term investors and should not be considered a vehicle for
trading purposes. Since its initial public offering in April 1987, Shares
have traded at various times at both a discount and a premium to NAV. The
risk that the Shares may trade at a discount to NAV may be greater for
investors expecting to sell their Shares in a relatively short period of
time. The Trust cannot predict whether the Shares will trade in the future
at, above or below NAV.
Declaration of Trust
The Trust's Declaration of Trust presently has provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Trust, cause it to engage in certain transactions or modify
its structure. The Board is divided into three classes, each having a term of
three years. Each year the term of office of one class will expire: Alan G.
Carr and Henri A. Termeer will continue in office until 1999, William R.
Hambrecht, Robert P. Mack M.D., and Eric Oddleifson will continue in office
until 1998, and Lawrence S. Lewin and Uwe 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
A-4
<PAGE>
assistance to the issuers thereof. The Trust also may invest, subject to
applicable law, in companies in which directors of the Investment Adviser or
Trustees of the Trust have invested, or for which they serve as directors or
executive officers. See "Portfolio Transactions and Brokerage." The
Investment Company Act prohibits the Trust from engaging in certain
transactions involving its "affiliates," including, among others, the Trust's
Trustees, officers and employees, the Investment Adviser, H&Q and any
"affiliates" of such affiliates except pursuant to an exemptive order or the
provisions of certain rules under the Investment Company Act. In the view of
the staff of the Commission, other investment companies advised by the
Investment Adviser may, in some instances, be viewed to be affiliates of the
Trust. Such legal restrictions and delays and costs involved in obtaining
necessary regulatory approvals may preclude or discourage the Trust from
making certain investments and no assurance can be given that any exemptive
order sought by the Trust will be granted.
INVESTMENT TECHNIQUES
In addition to the investment practices described above, the Trust may
utilize the following investment practices:
Money Market Instruments
When, in the opinion of the Investment Adviser, adverse market conditions
or industry expectations support such action, the Trust may, for temporary
defensive purposes, invest up to 75% of its net assets in money market
instruments.
Money market instruments in which the Trust may invest include
certificates of deposit and bankers' acceptances issued by domestic branches
of federally-insured U.S. banks and savings and loan associations 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
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<PAGE>
Adviser's discretion, and may not necessarily be engaging in such activities
when movements in the securities markets, foreign exchange rates, or interest
rates that could affect the value of the assets of the Trust occur.
Futures Contracts
The Trust may enter into contracts for the purchase or sale for future
delivery (a "futures contract") of baskets of securities, financial indices,
financial instruments or foreign currencies. The Trust would purchase or sell
futures contracts to attempt to protect the value of its securities from
market-wide price movements and fluctuations in interest or foreign exchange
rates without actually buying or selling securities or foreign currency.
Foreign Currency Transactions
The Trust may enter into forward foreign currency exchange contracts and
may purchase and sell foreign currency futures contracts to protect against a
decline in the U.S. Dollar equivalent value of its foreign currency portfolio
securities or the payments thereon that may result from an adverse change in
foreign currency exchange rates.
Under normal market conditions, the Trust currently does not intend to
engage in the foregoing practices or investments with the exception of
investments in money market instruments.
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
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<S> <C>
Prospectus Summary 3
Trust Expenses 8
Financial Highlights and Investment Performance 9
The Offer 14
Use of Proceeds 20
Description of Trust 20
Investment Adviser 20
Trustees and Officers 22
Investment Objective and Policies 24
Portfolio Transactions and Brokerage 28
Net Asset Value 28
Dividends and Distributions 29
Dividend Reinvestment Plan 29
Taxation 30
Custodian, Transfer Agent, Dividend Disbursing
Agent, Registrar and Subscription Agent 31
Distribution Arrangements 31
Legal Matters 31
Experts 32
Reports to Shareholders 32
Additional Information 32
Table of Contents of Statement of Additional
Information 32
Report of Independent Public Accountants F-1
Financial Statements F-2
Appendix A--Description of Risk Factors and
Investment Techniques A-1
</TABLE>
2,115,336 Shares
H&Q HEALTHCARE INVESTORS
Issuable Upon Exercise of
Non-Transferable Rights to
Subscribe for Such
Shares
-------------
PROSPECTUS
-------------
Dealer Manager
Prudential Securities Incorporated
February 7, 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
February 7, 1997 (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 the Trust (617) 574-0567. This SAI
incorporates by reference the entire Prospectus.
TABLE OF CONTENTS
PAGE
Additional Information About Investments and Investment Techniques........ 2
Investment Restrictions................................................... 7
Trustees and Officers..................................................... 10
The Trust................................................................. 11
Investment Advisory Agreement............................................. 14
Net Asset Value........................................................... 17
Portfolio Transactions and Brokerage...................................... 18
Dividend Reinvestment Plan................................................ 21
Tax Matters............................................................... 22
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar........ 28
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 February 7, 1997.
<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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<PAGE>
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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<PAGE>
The Trust will engage in hedging activities from time to time at 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 may 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 and 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 and 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 standards 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 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
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. The
prohibition on the purchase or sale of commodities applies to the purchase
or sale of "physical" commodities.
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. See also "Repurchase Agreement."
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.
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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 Healthcare Companies.
2. To the extent not invested in the Healthcare Company 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 under "Investment Restrictions." 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. See also "Repurchase Agreements."
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 value ("NAV") and such shares
frequently trade at a discount to NAV, 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 NAV. When the Trust repurchases its Shares
for a price below their NAV, the NAV 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
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 NAV, 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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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), 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
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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.
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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.-- (i) Specimen certificate for Shares of Beneficial Interest.
(ii) Form of Notice of Guaranteed Delivery.
(iii) Form of Exercise Form.
(iv) Form of Beneficial Owner Certification.
e.--Dividend Reinvestment Plan.*
f.--Not Applicable.
g.--Investment Advisory Agreement.*
h.-- (i) Form of Dealer Manager Agreement with respect to the offer by
Registrant of the Rights to Shareholders.
(ii) Form of Soliciting Dealer Agreement.
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.
*Incorporated herein by reference to Registrant's registration
statement on Form N-2 (File No. 333-19247), filed January 3, 1997.
Item 25. Marketing Arrangements.
See the form of Dealer Manager Agreement filed as Exhibit h to this
Registration Statement.
<PAGE>
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>
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>
Entity Basis of Common Control Place of 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 Corporation 100% ownership California
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, LLC Greater than 25% ownership California
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
<PAGE>
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 California
Investment Partners
H&Q Ventures International C.V. General Partner is H&Q Venture Netherland Antilles
Partners
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
<PAGE>
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.
Item 31. Location of Accounts and Records.
Records are located at:
1. Hambrecht & Quist Capital Management
50 Rowes Wharf, Fourth Floor
Boston, MA 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, MA 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. (a) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective; and (b) 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. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
<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
7th day of February, 1997.
H&Q HEALTHCARE INVESTORS
(Registrant)
By: /s/ Alan G. Carr
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Alan G. Carr Trustee and President February 7, 1997
- ----------------------------
Alan G. Carr
/s/ Kimberley L. Carroll Treasurer and Chief February 7, 1997
- ---------------------------- Financial Officer
Kimberley L. Carroll
/s/ William R. Hambrecht* Trustee February 7, 1997
- ----------------------------
William R. Hambrecht
/s/ Lawrence S. Lewin* Trustee February 7, 1997
- ----------------------------
Lawrence S. Lewin
/s/ Robert P. Mack, M.D.* Trustee February 7, 1997
- ----------------------------
Robert P. Mack, M.D.
/s/ Eric Oddleifson* Trustee February 7, 1997
- ----------------------------
Eric Oddleifson
/s/ Uwe E. Reinhardt, Ph.D.* Trustee February 7, 1997
- ----------------------------
Uwe E. Reinhardt, Ph.D.
/s/ Henri A. Termeer* Trustee February 7, 1997
- ----------------------------
Henri A. Termeer
*By:/s/ Sheldon A. Jones
- ----------------------------
Sheldon A. Jones
Attorney-in-fact
</TABLE>
<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 (i) --Specimen certificate for Shares of Beneficial Interest
(ii) --Form of Notice of Guaranteed Delivery
(iii) --Form of Exercise Form
(iv) --Form of Beneficial Owner Certification
99.2e --Dividend Reinvestment Plan*
99.2f --Not Applicable
99.2g --Investment Advisory Agreement*
99.2h (i) --Form of Dealer Manager Agreement with respect to the
offer by Registrant of the Rights to Shareholders
(ii) --Form of Soliciting Dealer Agreement
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>
- -------------
*Incorporated herein by reference to Registrant's registration statement on
Form N-2 (File No. 333-19247), filed February 7, 1997.
The Commonwealth of Massachusetts
NUMBER SHARES
H&Q Healthcare Investors (Par Value $0.01)
This certifies that ________________________of _________________ is the owner of
___________________________________Shares in the H&Q Healthcare Investors trust
created by Declaration of Trust dated _______ and recorded with _______________
which shares are fully paid and non-assessable, and subject to the provisions of
this trust, are transferable by assignment endorsed thereon, and, the surrender
of this certificate.
IN WITNESS WHEREOF, the Trustees hereunto set their hands and have caused their
seal to be affixed hereto this
_____________day of _______________A.D 19____
<PAGE>
CERTIFICATE
FOR
-------------------
ISSUED TO
-------------------
DATED
-------------------
For Value Received,_______________hereby sell, assign and transfer
unto ____________________________________________
___________________________________________________Shares of the Capital
represented by the within Certificate, and do hereby irrevocably constitute and
appoint_____________ _____________________Attorney to transfer the said Shares
on the books of the within named Organization with full power of substitution in
the premises.
Dated__________________________19______
In presence of
--------------------------
- ------------------------------
NOTICE OF GUARANTEED DELIVERY
H&Q HEALTHCARE INVESTORS
Non-Transferable Rights Offering
TO BE DELIVERED PRIOR TO MARCH 5, 1997
5:00 P.M., NEW YORK CITY TIME
- --------------------------------------------------------------------------------
As set forth in the Prospectus under "The Offer-Payment for Shares," this
form or a substantially equivalent form may be used by a New York Stock
Exchange ("NYSE") or National Association of Securities Dealers, Inc.
("NASD") member or by a bank or trust company with an office or correspondent
in the U.S. as a means of effecting a subscription on behalf of a shareholder
pursuant to the rights offering (the "Offer") of shares of beneficial
interest of H&Q Healthcare Investors. The form may be delivered by hand or
sent by facsimile transmission, express mail or overnight courier or first
class mail to the Subscription Agent prior to 5:00 p.m., New York City time,
on Wednesday, March 5, 1997 (the "Expiration Date"). If sent by facsimile,
the original executed form must also be sent promptly thereafter by hand or
mail delivery.
- --------------------------------------------------------------------------------
The Subscription Agent is State Street Bank and Trust Company.
- --------------------------------------------------------------------------------
BY EXPRESS MAIL OR BY FIRST CLASS MAIL: BY HAND DELIVERY TO:
OVERNIGHT COURIER: H&Q Healthcare Investors H&Q Healthcare Investors
H&Q Healthcare Investors c/o State Street Bank and c/o State Street Bank
c/o State Street Bank Trust Co. and Trust Co.
and Trust Co. P.O. Box 9061 225 Franklin Street,
2 Heritage Drive Boston, MA 02205 Concourse Level
North Quincy, MA 02171 Boston, MA 02110
Attn: Corp. Reorg.
or
H&Q Healthcare Investors
BY FACSIMILE: c/o State Street Bank
(617) 794-6399 and Trust Co.
61 Broadway, Concourse
FACSIMILE DELIVERY MAY BE Level
CONFIRMED BY TELEPHONE TO: New York, NY 10006
(617) 794-6333
- --------------------------------------------------------------------------------
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS
VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT
CONSTITUTE A VALID DELIVERY.
This notice specifies the number of shares subscribed for under both the
Primary Subscription and the Over- Subscription Privilege, and guarantees
payment for all subscribed shares and delivery of confirmed exercise
instructions electronically or by a form of the enclosed Beneficial Owner
Certificate, no later than the close of business on Monday, March 10, 1997.
Failure to deliver such exercise instructions and payment will result in a
shareholder's forfeiture of the Rights. In the event the final Subscription
Price exceeds the Estimated Subscription Price, an invoice for any additional
amounts due will be sent by Tuesday, March 18, 1997 (the "Confirmation
Date"). Payment for such additional amounts, if any, must be made by Friday,
April 4, 1997. In the event the final Subscription Price is less than the
Estimated Subscription Price, the Subscription Agent will mail a refund to
exercising shareholders.
Any questions regarding this form or the Offer may be directed to the
Information Agent, Shareholder Communications Corporation, at
(800) 733-8481, extension 352.
<PAGE>
NOTICE OF GUARANTEED DELIVERY
Guarantee
The undersigned, a member firm of the NYSE or the NASD or a bank or trust
company having an office or correspondent in the U.S., guarantees delivery to
the Subscription Agent of (a) payment of the Estimated Subscription Price of
$ per share for the total number of Shares subscribed for pursuant to the
Primary Subscription and for any additional Shares subscribed for pursuant to
the Over-Subscription Privilege, as indicated herein, together with confirmed
exercise instructions by the close of business on March 10, 1997, and (b)
payment of any additional invoice amounts, as described above, by the close
of business on April 4, 1997.
Broker Assigned Control Number
Please assign a unique control number to each guarantee submitted. This
number needs to be referenced on any direct delivery of Rights or any
delivery through DTC.
Broker Assigned Control Number _________
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Primary Subscription Number of Rights Number of Primary Shares Payment amount based on
to be exercised: requested for which you are estimated Subscription
guaranteeing delivery of Rights Price of $ per share.
and payment:
------------------ ------------- x $ ------------ $-----------------
(Rights / 3 Ignore fractions)
2. Over-Subscription Number of Over-Subscription Payment amount based on
Privilege Shares requested for which you Estimated Subscription
are guaranteeing payment: Price of $ per share.
------------- x $ ------------ $-----------------
3. Totals Total Number of Rights Total Payment:
Subscribed For:
------------- x $ ------------ $-----------------
</TABLE>
Method of Delivery (Check one)
[ ] Through DTC [ ] Directly to State Street Bank and Trust Company, as
Subscription Agent
If providing for guaranteed delivery on behalf of a registered shareholder(s),
please list the control number(s) below.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------- ---------------------------------
Name of Firm Officer/Authorized Signature
- ---------------------------- ---------------------------------
DTC Participant Number Title
- ---------------------------- ---------------------------------
Address Name (Please Type or Print)
- ---------------------------- ---------------------------------
City State Zip Code Phone Number Facsimile Number
- ---------------------------- ---------------------------------
Contact Name Date
Control No.:________________________ Number of Rights Issued:_______________
EXERCISE FORM
H&Q HEALTHCARE INVESTORS
Non-Transferable Rights Offering
OFFER EXPIRES IF NOT RECEIVED BY THE SUBSCRIPTION AGENT BEFORE 5:00 P.M.
NEW YORK CITY TIME ON MARCH 5, 1997
As the registered holder of this Exercise Form, you are entitled to exercise
the Rights granted to you based on the number of H&Q Healthcare Investors
(the "Trust") Shares that you owned on February 7, 1997.
Under the Trust's Primary Subscription, you may purchase one Share for
each three Rights held, at the Estimated Subscription Price of $ and on the
terms and conditions set forth in the Trust's Prospectus. Under the
Over-Subscription Privilege, you may apply for any number of additional
Shares, provided that you have subscribed for the maximum number of Shares for
which you are eligible under the Primary Subscription. The price of the
Shares, $ , is an Estimated Subscription Price only. The final Subscription
Price will be determined on March 5, 1997 (the "Expiration Date"), and could
be higher or lower than the Estimated Subscription Price. You will receive a
refund or be required to pay an additional amount equal to the difference
between the Estimated Subscription Price and the final Subscription Price.
The following is a sample calculation showing how you can exercise your
Rights:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
A. Primary Subscription 1,200 / 3 = 400 400 x $ = $
------------- --------------------- ---------------- -------------
(Number of (Number of Shares (Number of (Estimated
Rights Issued/ Available in Primary Shares Requested) Subscription
Shares Held) Subscription, Ignore Price)
Fractions)
B. Over-Subscription 250 x $ --------------- = $
Privilege (Number of (Estimated
Additional Shares Subscription
Requested, No Price)
Maximum)
C. Total Purchase Price 650 x $ --------------- = $
(Total A+B) (Estimated
Subscription
Price)
</TABLE>
To exercise your Rights and subscribe for Shares of the Trust, complete the
reverse side of this Exercise Form, enclose your payment for the Shares, and
deliver this Exercise Form and payment to the Subscription Agent at one of the
addresses shown below by 5:00 p.m., New York City time, on March 5, 1997. A
postage pre-paid envelope is enclosed.
BY EXPRESS MAIL OR OVERNIGHT COURIER: BY HAND DELIVERY TO:
H&Q Healthcare Investors H&Q Healthcare Investors
c/o State Street Bank and Trust Company c/o State Street Bank and Trust
2 Heritage Drive Company
North Quincy, MA 02171 225 Franklin Street, Concourse
Attn: Corp. Reorg. Level
Boston, MA 02110
or
BY FIRST CLASS MAIL:
H&Q Healthcare Investors H&Q Healthcare Investors
c/o State Street Bank and Trust Company c/o State Street Bank and Trust
P.O. Box 9061 Company
Boston, MA 02205 61 Broadway, Concourse Level
New York, NY 10006
Any questions regarding this form or the Offer may be directed to the
Information Agent,Shareholder Communications Corporation, at
(800) 733-8481, extension 352.
<PAGE>
EXERCISE FORM
SECTION 1: TO SUBSCRIBE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
A. Primary Subscription / 3 = x$ *=$
-------------- --------------------- ----------------- -------------- -------------
I wish to exercise the (Number of (Number of Shares (Number of (Estimated
following number of Rights Issued/ Available in Primary Shares Requested) Subscription
Rights to purchase Shares Held) Subscription - Ignore Price)
Shares of the Trust: Fractions)
B. Over-Subscription
Privilege** x$ *=$
----------------- -------------- ------------
I wish to purchase additional (Number of (Estimated
Shares pursuant to the Additional Shares Subscription
Over-Subscription Privilege, Requested, No Price)
NO MAXIMUM Maximum)
C. Total Purchase Price x$ *=$
----------------- -------------- ------------
(Total A+B) (Estimated
Subscription
Price)
</TABLE>
Make Check or Money Order payable to "H&Q Healthcare Investors" and enclose.
* The final Subscription Price will be calculated on March 5, 1997, and you
will receive a refund or be required to pay an additional amount equal to
the difference between the Estimated Subscription Price and the final
Subscription Price.
** You may request to purchase any number of additional Shares, if available,
pursuant to the Over-Subscription Privilege, provided you have fully
exercised all your Rights in the Primary Subscription.
SECTION 2: CERTIFICATION
CERTIFICATION: I acknowledge that I have received the Prospectus for this
Offer and I hereby irrevocably subscribe for the number of Shares indicated
above on the terms and conditions set forth in the Prospectus. I understand
and agree that I will be obligated to pay any additional amounts to the Trust
if the final Subscription Price of the Shares, as determined on the
Expiration Date, is in excess of the $ Estimated Subscription Price.
I hereby agree that if I fail to pay the full Subscription Price for the
Shares I request, the Trust may exercise any of its remedies, as described in
the Prospectus.
Signature of Shareholder(s)-(Please sign exactly as
your account is registered.)
----------------------------
----------------------------
Please provide your daytime telephone number: (___) ----------------------------
CHANGE OF ADDRESS
If you wish to have your Shares and refund check (if any) delivered to an
address other than the address of record listed on the front of this form,
you must have your signature guaranteed by a member/broker of the New York
Stock Exchange or by a bank or trust company. Please provide the delivery
address below and check the box below if this change is permanent.
Delivery Address:
- -------------------------------------- Change my address of record
- -------------------------------------- to such delivery address [ ]
- --------------------------------------
SECTION 3: DESIGNATION OF BROKER/DEALER
The following Broker/ Dealer is hereby designated as having been
instrumental in my exercise of the Rights:
Name of Financial Professional:
------------------------------------------------
Name of Brokerage Firm: Account Number:
---------------------------- -------------
Beneficial Owner Certification
H&Q HEALTHCARE INVESTORS
Non-Transferable Rights Offering
The undersigned, a bank, broker or other nominee holder of Rights to purchase
shares of beneficial interest of H&Q Healthcare Investors, pursuant to the
Rights Offering (the "Offer") described and provided for in the Trust's
Prospectus, dated February 7, 1997 (the "Prospectus"), hereby certifies to
H&Q Healthcare Investors and to State Street Bank and Trust Company, as
Subscription Agent of the Rights Offering, that for each numbered line filled
in below, the undersigned has purchased, on behalf of the beneficial owner
thereof (which may be the undersigned), the number of shares specified on
such line pursuant to the Primary Subscription (as defined in the Prospectus)
and such beneficial owner wishes to subscribe for the purchase of additional
shares of beneficial interest, pursuant to the Over-Subscription Privilege
(as defined in the Prospectus), in the amount set forth in the third column
of such line:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
I II III
- --------------------------------------------------------------------------------------------------------
Number of Shares Purchased Number of Shares Requested Pursuant
Record Date Shares Pursuant to Primary Subscription to Over-Subscription Privilege
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Total Total Total
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Name of Nominee Holder
- ----------------------------------- ---------------------------------
By: (Name) Title Date
- -------------------------------------------------------------------------------
Provide the following information if applicable.
- ------------------------------------------------- ----------------------
Depository Trust Company (DTC) Participant Number DTC Basic Subscription
Confirmation Number
- ---------------------------------- ------------ ----------------------
Contact Name Phone Number Facsimile Number
Any questions regarding this form or the Offer may be directed to the
Information Agent, Shareholder Communications Corporation, at
(800) 733-8481, extension 352.
H&Q Healthcare Investors
(a Massachusetts business trust)
2,115,336* Shares of Beneficial Interest Issuable Upon
Exercise of Non-Transferable Rights to Subscribe for
Such Shares of Beneficial Interests
(Shares of Beneficial Interest)
DEALER MANAGER AGREEMENT
[ , 1997]
PRUDENTIAL SECURITIES INCORPORATED
One New York Plaza, 18th Floor
New York, NY 10292
Ladies and Gentlemen:
H&Q Healthcare Investors, a Massachusetts business trust (the "Trust"), and
Hambrecht & Quist Capital Management Incorporated (the "Investment Adviser"), a
California corporation and an indirect wholly-owned subsidiary of Hambrecht &
Quist Group, each confirms its agreement with and appointment of Prudential
Securities Incorporated ("Prudential") to act as dealer manager (the "Dealer
Manager") in connection with the issuance by the Trust, to the holders of record
(the "Holders") of shares of beneficial interest of the Trust (the "Shares"), of
non-transferable rights (each a "Right" and collectively, the "Rights")
entitling such Holders to subscribe for an aggregate of 2,115,336 Shares at the
rate of one Share for each three Rights held and, for Holders who have fully
exercised their Rights, an 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 (the
"Offer"). Pursuant to the terms of the Offer, the Trust is issuing to each
Holder one Right for each Share held on the Record Date (as defined herein and
as set forth in the Prospectus). Such Rights entitle Holders to acquire during
the subscription period set forth in the Prospectus (the "Subscription Period"),
at the price set forth in the Prospectus (the "Subscription Price"), one Share
for each three Rights exercised on the terms and conditions set forth in the
Prospectus. Pursuant to the terms of the Offer, such Rights also entitle Holders
to acquire during the Subscription Period at the Subscription Price certain
additional Shares on the terms and conditions of the over-subscription privilege
as set forth in the Prospectus.
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* Pursuant to the over-subscription privilege in connection with the Offer,
the Trust may, at its discretion, increase the number of Shares subject to
subscription by up to 25%.
<PAGE>
The Trust has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form N-2 (No. 333-19247) and a related
preliminary prospectus for the registration of the Shares under the Securities
Act of 1933 (the "1933 Act") and has filed such amendments to such registration
statement on Form N-2, if any, and such amended preliminary prospectuses as may
have been required to the date hereof. The Trust will prepare and file such
additional amendments thereto and such amended prospectuses as may hereafter be
required. The Trust previously filed a notification on Form N-8A of registration
of the Trust as an investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"), and the rules and regulations of the Commission
under the 1940 Act (together with the rules and regulations under the 1933 Act,
the "Rules and Regulations"). The registration statement, and the prospectus
constituting a part thereof, each as from time to time amended or supplemented
pursuant to the 1933 Act, are herein referred to as the "Registration Statement"
and the "Prospectus," respectively, except that if any revised prospectus shall
be provided to the Dealer Manager by the Trust for use in connection with the
Offer that differs from the Prospectus on file at the Commission at the time the
Registration Statement becomes effective (whether such revised prospectus is
required to be filed by the Trust pursuant to Rule 497(b) or Rule 497(h) of the
Rules and Regulations), the term "Prospectus" shall refer to each such revised
prospectus from and after the time it is first provided to the Dealer Manager
for such use. The Prospectus and letters to beneficial owners of the Shares,
forms used to exercise rights, any letters from the Trust to securities dealers,
commercial banks, trust companies and other nominees and any newspaper
announcements, press releases and other offering materials and information that
the Trust may use, approve, prepare or authorize for use in connection with the
Offer, are collectively referred to hereinafter as the "Offering Materials."
SECTION 1. Representations and Warranties.
(a) The Trust and the Investment Adviser each severally represents and
warrants to the Dealer Manager as of the date hereof and as of the date of the
commencement of the Offer (such later date being hereinafter referred to as the
"Representation Date") as follows:
(i) At the time the Registration Statement becomes effective and at
the Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act, the 1940 Act and
the Rules and Regulations and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. From
the time the Registration Statement becomes effective through the
expiration date of the Offer set forth in the Prospectus (the "Expiration
Date"), the Prospectus (unless the term "Prospectus" refers to a prospectus
that has been provided to the Dealer Manager by the Trust for use in
connection with the Offer but which differs from the Prospectus on file
with the Commission at the time the Registration Statement becomes
effective, in which case at the time such prospectus is first provided to
the Dealer Manager for such use) and the other Offering Materials will not
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which
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<PAGE>
they were made, not misleading; provided, however, that the representations
and warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in reliance
upon and in conformity with information furnished to the Trust in writing
by the Dealer Manager expressly for use in the Registration Statement or
Prospectus.
(ii) The accountants who certified the financial statements included
in the Registration Statement, to the knowledge of the Trust and the
Investment Adviser, are independent public accountants as required by the
1933 Act, the 1940 Act and the Rules and Regulations.
(iii) The financial statements included in the Registration Statement
present fairly the financial position of the Trust as at the date indicated
and the results of its operations for the period specified; such financial
statements have been prepared in conformity with generally accepted
accounting principles; and the information in the Prospectus under the
heading "Financial Highlights and Investment Performance" sets forth the
composition of the investment portfolio of the Trust as of its date.
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein, (A) there has been no material adverse change, or any development
involving a prospective material adverse change, in the condition
(financial or otherwise) or management of the Trust, or in the earnings,
business affairs or business prospects of the Trust, whether or not arising
in the ordinary course of business, (B) there have been no transactions
entered into by the Trust that are material to the Trust, other than those
in the ordinary course of business, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Trust on any class
of its capital stock.
(v) The Trust has been duly organized and is validly existing as a
business trust in good standing under the laws of the Commonwealth of
Massachusetts with trust power and authority to own, lease and operate its
properties and conduct its business as described in the Registration
Statement and the Prospectus; the Trust is duly qualified as a foreign
trust to transact business and is in good standing in each jurisdiction in
which the failure to so qualify, either individually or in the aggregate,
would have a material adverse effect upon the operations or financial
condition of the Trust, and the Trust has no subsidiaries.
(vi) The Trust is registered with the Commission under the 1940 Act as
a diversified, closed-end management investment company, and no order of
suspension or revocation of such registration has been issued or
proceedings therefor initiated or threatened by the Commission.
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<PAGE>
(vii) The number of authorized, issued and outstanding shares of
beneficial interest of the Trust as of the date hereof is as set forth in
the Prospectus under the caption "Description of Trust"; the outstanding
Shares have been duly authorized by all requisite corporate action on the
part of the Trust and are validly issued and fully paid and non-assessable
by the Trust; the Rights and the Shares have been duly authorized by all
requisite corporate action on the part of the Trust for issuance pursuant
to the Offer; and, when issued and delivered by the Trust pursuant to the
terms of the Offer against payment of the consideration set forth in the
Prospectus, will be validly issued and fully paid and non-assessable by the
Trust; the Rights and the Shares conform in all material respects to the
descriptions thereof set forth in the Prospectus under the captions
"Description of Trust" and "The Offer"; and the issuance of each of the
Rights and the Shares is not subject to preemptive rights.
(viii) (A) The Trust is not in any material violation of its Amended
and Restated Agreement and Declaration of Trust (the "Declaration"), or as
supplemented by its by-laws (the "By-Laws") or in default in the
performance or observance of any material obligation, agreement, covenant
or condition contained in any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which it is a party or by
which it or its properties may be bound; (B)(i) the execution and delivery
of each of this Agreement, the Investment Advisory Agreement between the
Trust and the Investment Adviser (the "Advisory Agreement"), the Custodian
Contract between the Trust and State Street Bank and Trust Company and the
Subscription Rights Agency Agreement between the Trust and State Street
Bank and Trust Company and the consummation of the transactions
contemplated herein and therein have been duly authorized by all necessary
trustee action of the Trust and will not conflict with or constitute a
breach of, or, with or without giving notice or the lapse of time or both,
a default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Trust pursuant to
any material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Trust is a party or by which it may be bound
or to which any of the property or assets of the Trust is subject, nor will
such action result in any violation of the provisions of the Declaration or
By-laws or, to the best knowledge of the Trust and the Investment Adviser,
any law, administrative regulation or administrative or court decree
applicable to the Trust, and no consent, approval, authorization or order
of any court or governmental authority or agency is required for the
consummation by the Trust of the transactions contemplated by this
Agreement and the Subscription Rights Agency Agreement except such as has
been obtained under the 1940 Act or as may be required under the 1933 Act,
state securities or Blue Sky laws or foreign securities laws in connection
with the Offer, (ii) each complies with all applicable provisions of the
1940 Act, except that with respect to this Agreement, no representation is
made as to compliance with Section 17(i) of the 1940 Act, and (iii) each is
in full force and effect and constitutes a valid and binding obligation of
the Trust, enforceable in accordance with its terms, except that with
respect to this Agreement, no representation is made as to compliance with
Section 17(i) of the 1940 Act,
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<PAGE>
and subject, as to enforcement, to bankruptcy, insolvency, reorganization,
or other similar laws relating to or affecting creditors' rights generally
and to general principles of equity.
(ix) The Trust owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated in
the Prospectus, and the Trust has not received any notice of proceedings
relating to the revocation or modification of any such licenses, permits,
consents, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Trust or the Investment Adviser, threatened against or
affecting the Trust, which might result in any material adverse change in
the condition, financial or otherwise, business affairs or business
prospects of the Trust or materially and adversely affect the properties or
assets of the Trust; and there are no material contracts or documents of
the Trust that are required to be filed as exhibits to the Registration
Statement by the 1933 Act, the 1940 Act or the Rules and Regulations that
have not been so filed.
(xi) The Trust owns or possesses, or can acquire on reasonable terms,
adequate trademarks, service marks and trade names necessary to conduct its
business as described in the Registration Statement, and the Trust has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any trademarks, service marks or trade names that,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the conduct of the
business, operations, financial condition or income of the Trust.
(xii) Since the date of its organization, the Trust has qualified as a
regulated investment company that is entitled to the benefits of Subchapter
M of the Internal Revenue Code of 1986, as amended ("Subchapter M of the
Code") and intends to continue so to qualify. In addition, the Trust
intends to direct the investment of the proceeds of the Offer in such a
manner as to comply with the requirements of Subchapter M of the Code.
(xiii) The Shares shall have been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange by the
Expiration Date.
(xiv) The Trust has not, directly or indirectly, (i) taken any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any security of the Trust to facilitate the sale or resale of the Shares
or (ii) since the filing of the Registration Statement, (A) sold, bid for,
purchased, or paid anyone any compensation for soliciting purchases of, the
Shares or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase
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<PAGE>
any other securities of the Trust (except for the solicitation of exercises
of Rights pursuant to this Agreement).
(b) The Investment Adviser represents and warrants to the Dealer Manager as
of the date hereof and as of the Representation Date as follows:
(i) The Investment Adviser has been duly organized as a corporation
under the laws of the State of California with corporate power and
authority to conduct its business as described in the Prospectus; the
Investment Adviser is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which the failure
to so qualify, either individually or in the aggregate, would have a
material adverse effect upon the operations or financial condition of the
Investment Adviser.
(ii) The Investment Adviser is duly registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and is not prohibited by the Advisers Act or the 1940 Act,
or the rules and regulations under such acts, from acting as Investment
Adviser to the Trust under the terms of the Advisory Agreement as
contemplated by the Prospectus.
(iii) The description of the Investment Adviser in the Prospectus is
true and correct in all material respects and does not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading; and there are no pending legal proceedings that would be
required to be described under Item 12 of Form N-2.
(iv) Each of this Agreement and the Advisory Agreement has been duly
authorized, executed and delivered by the Investment Adviser; each of this
Agreement and the Advisory Agreement is in full force and effect and
constitutes a valid and binding obligation of the Investment Adviser,
enforceable in accordance with its terms, except that no representation is
made as to compliance with Section 17(i) of the 1940 Act and subject, as to
enforcement, to bankruptcy, insolvency, reorganization or other similar
laws relating to or affecting creditors' rights generally and to general
principles of equity; and neither the execution and delivery of this
Agreement nor the performance by the Investment Adviser of its obligations
hereunder or under the Advisory Agreement will conflict with, or result in
a breach of, any of the terms and provisions of, or constitute, with or
without giving notice or lapse of time or both, a material default under
any agreement or instrument to which the Investment Adviser is a party or
by which the Investment Adviser is bound, or any law, order, rule or
regulation applicable to it of any jurisdiction, court, federal or state
regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Investment
Adviser or its properties or operations.
(v) The Investment Adviser has the financial resources available to it
necessary for the performance of its services and obligations as
contemplated in the Prospectus.
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<PAGE>
(vi) The Investment Adviser has not, directly or indirectly, (i) taken
any action designed to cause or result in, or that has constituted or
reasonably might be expected to constitute, the stabilization or
manipulation of the price of any security of the Trust to facilitate the
sale or resale of the Shares or (ii) since the filing of the Registration
Statement, (A) sold, bid for, purchased, or paid anyone any compensation
for soliciting purchases of the Shares or (B) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other
securities of the Trust (except for the solicitation of exercises of Rights
pursuant to this Agreement).
(vii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein, there has been no material adverse change, or any development
involving a prospective material adverse change, in the condition
(financial or otherwise) or management of the Investment Adviser, or in the
earnings, business affairs or business prospects of the Investment Adviser,
whether or not arising in the ordinary course of business.
(viii) There is no action, suit or proceeding before or by any court
or governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Investment Adviser, threatened against or affecting
the Investment Adviser, which might result in any material adverse change
in the condition, financial or otherwise, business affairs or business
prospects of the Investment Adviser or materially and adversely affect the
properties or assets of the Investment Adviser; and there are no material
contracts or documents of the Investment Adviser that are required to be
disclosed in the Registration Statement by the 1933 Act, the 1940 Act or by
the Rules and Regulations that have not been so disclosed therein.
(c) Any certificate signed by any officer of the Trust or the Investment
Adviser and delivered to the Dealer Manager or counsel for the Dealer Manager
shall be deemed a representation and warranty by the Trust or the Investment
Adviser, as the case may be, to the Dealer Manager, as to the matters covered
thereby.
SECTION 2. Agreement to Act as Dealer Manager.
(a) On the basis of the representations and warranties contained herein,
and subject to the terms and conditions of this Agreement and the Offer:
(i) The Trust hereby appoints the Dealer Manager and other soliciting
dealers entering into a Soliciting Dealer Agreement with the Dealer Manager
(together, the "Soliciting Dealers") in the form attached hereto as Exhibit
A (the "Soliciting Dealer Agreement") to solicit, in accordance with the
1933 Act, the 1940 Act, the Securities Exchange Act of 1934 (the "Exchange
Act"), and the Conduct Rules of the National Association of Securities
Dealers, Inc. (the "NASD"), and their customary practice, the exercise of
the Rights, sub-
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<PAGE>
ject to the terms and conditions of this Agreement and the procedures
described in the Registration Statement; and
(ii) The Trust agrees to furnish, or cause to be furnished, to the
Dealer Manager, lists, or copies of those lists, showing the names and
addresses of, and number of Shares held by, Holders as of the Record Date,
and the Dealer Manager agrees to use such information only in connection
with the Offer, and not to furnish the information to any other person
except for securities brokers and dealers that the Dealer Manager has
requested to solicit exercises of Rights and then subject to agreement to
use such information in connection with the offer.
(b) The Dealer Manager agrees to provide to the Trust, in addition to the
services described in paragraph (a) of this Section 2, financial, advisory and
marketing services in connection with the Offer.
(c) The Trust and the Dealer Manager agree that the Dealer Manager is an
independent contractor with respect to the solicitation of the exercise of
Rights and the performance of financial, advisory and marketing services to the
Trust contemplated by this Agreement.
(d) In rendering the services contemplated by this Agreement, the Dealer
Manager will be subject to any liability to the Trust and the Investment
Adviser, or to any of their respective affiliates, for any act or omission on
the part of any securities broker or dealer (except with respect to the Dealer
Manager acting in such capacity) or any other person, and the Dealer Manager
will be liable for any of its respective acts or omissions in performing any of
its respective obligations under this Agreement, except for any losses, claims,
damages, liabilities and expenses determined in a final judgment by a court of
competent jurisdiction to have resulted from the Dealer Manager's reckless
disregard of its obligations and duties under this Agreement or the Dealer
Manager's bad faith, gross negligence or willful misconduct in such acts or
omissions.
SECTION 3. The Dealer Manager Fee and Reallowance. In full payment for
services rendered and to be rendered hereunder by the Dealer Manager, the Trust
agrees to pay the Dealer Manager a fee for its financial advisory, marketing and
soliciting services equal to 3.50% of the aggregate Subscription Price for the
Shares issued pursuant to the Offer (the "Dealer Manager Fee"). The Dealer
Manager agrees with the Trust that the Dealer Manager will reallow a concession
of 2.25% of the Subscription Price per Share for each Share issued pursuant to
the Offer (a "Reallowance") to the broker-dealer designated on the Exercise Form
used by the Holder of such Share to exercise Rights, provided, however, that the
Dealer Manager will pay such Reallowance only if the designated broker-dealer
has executed a confirmation accepting the terms and conditions of, and subject
to the conditions and restrictions in, the Soliciting Dealer Agreement. Payment
to the Dealer Manager by the Trust will be by wire transfer of same day funds to
an account or accounts identified by the Dealer Manager. Such payment will be
made on the day after the final payment for Shares is due as set forth in the
Prospectus. Payment of the Reallowance to Soliciting Dealers that executed a
confirmation will be made by the Dealer Manager or its agent directly to such
Soliciting Dealers,
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<PAGE>
as the case may be, by U.S. dollar checks drawn upon an account at a bank in New
York. Such payments to such Soliciting Dealers shall be made as soon as
practicable after payment of the Dealer Manager Fee is made to the Dealer
Manager.
In addition, the Trust has agreed to reimburse the Dealer Manager for its
out-of-pocket expenses incurred as provided in Section 5(b) hereof.
SECTION 4. Covenants of the Trust and the Dealer Manager. The Trust
covenants with the Dealer Manager as follows:
(a) The Trust will use its best efforts (i) to cause the Registration
Statement to become effective under the 1933 Act, and (ii) if required, to cause
the issuance of any orders exempting the Trust from any provisions of the 1940
Act and will advise the Dealer Manager promptly as to the time at which any such
orders are granted.
(b) The Trust will orally notify the Dealer Manager promptly, and confirm
the notice in writing, of the (i) effectiveness of the Registration Statement
and any amendment thereto (including any post-effective amendment), (ii) receipt
of any comments from the Commission, (iii) request by the Commission for any
amendment to the Registration Statement, any amendment or supplement to the
Prospectus or additional information, (iv) issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, (v) issuance by the Commission
of an order of suspension or revocation of the notification on Form N-8A of
registration of the Trust as an investment company under the 1940 Act or the
initiation of any proceeding for that purpose and (vi) suspension of the
qualification of the Shares or the Rights for offering or sale in any
jurisdiction. The Trust will make every reasonable effort to prevent the
issuance of any stop order described in subsection (iv) hereunder or any order
of suspension or revocation described in subsection (v) or subsection (vi)
hereunder and, if any such stop order or order of suspension or revocation is
issued, to obtain the lifting thereof at the earliest possible moment.
(c) The Trust will give the Dealer Manager notice of its intention to file
any amendment to the Registration Statement (including any post-effective
amendment) or any amendment or supplement to the Prospectus (including any
revised prospectus that the Trust proposes for use by the Dealer Manager in
connection with the Offer, which differs from the prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether
such revised prospectus is required to be filed pursuant to Rule 497(c) or Rule
497(h) of the Rules and Regulations), whether pursuant to the 1940 Act, the 1933
Act, or otherwise, and will furnish the Dealer Manager with copies of any such
amendment or supplement within a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such amendment
or supplement to which the Dealer Manager or counsel for the Dealer Manager
reasonably shall object.
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<PAGE>
(d) The Trust will deliver to the Dealer Manager, as soon as practicable,
two copies of the Registration Statement as originally filed and of each
amendment thereto, in each case with two sets of the exhibits filed therewith.
(e) The Trust will furnish to the Dealer Manager, from time to time during
the period when the Prospectus is required to be delivered under the 1933 Act,
such number of copies of the Prospectus (as amended or supplemented) as the
Dealer Manager reasonably may request for the purposes contemplated by the 1933
Act or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary, in the
reasonable opinion of counsel for the Dealer Manager, to amend or supplement the
Registration Statement or the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it is
delivered to a Holder, the Trust will forthwith amend or supplement the
Prospectus by preparing and filing with the Commission (and furnishing to the
Dealer Manager a reasonable number of copies of) an amendment or amendments of
the Registration Statement or an amendment or amendments of, or a supplement or
supplements to, the Prospectus (in form and substance satisfactory to counsel
for the Dealer Manager) that will amend or supplement the Registration Statement
or the Prospectus so that the Prospectus will not contain an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a Holder, not misleading.
(g) The Trust will endeavor, in cooperation with the Dealer Manager, to
qualify the Rights and the Shares for offering and sale under the applicable
securities laws of such states and other jurisdictions of the United States as
the Dealer Manager may designate, and will maintain such qualifications in
effect for as long as may be necessary to complete the distribution of the
Shares. The Trust will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(h) The Trust will make generally available to its Holders as soon as
practicable, but no later than 60 days after the close of the period covered
thereby, an earnings statement (in form complying with the provisions of Rule
158 of the Rules and Regulations) covering a twelve-month period beginning not
later than the first day of the Trust's fiscal quarter next following the
"effective" date (as defined in said Rule 158) of the Registration Statement.
(i) For a period of 180 days from the date of this Agreement, the Trust
will not, without your prior consent, offer or sell, or enter into any agreement
to sell, any equity or equity-related securities of the Trust other than the
Shares issued in reinvestment of dividends or distributions or the related
Dividend Reinvestment Plan (including distributions that give Holders the option
either to reinvest their distributions or receive such distributions in cash).
(j) The Trust will use its best efforts to maintain its qualification as a
regulated investment company entitled to the benefits of Subchapter M of the
Code.
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(k) The Trust will advise or cause the subscription agent for the Offer
(the "Subscription Agent") to advise the Dealer Manager and each Soliciting
Dealer from day to day during the period of, and promptly after the termination
of, the Offer, as to all names and addresses of Holders exercising Rights, the
total number of Rights exercised by each Holder during the immediately preceding
day, indicating the total number of Rights verified to be in proper form for
exercise, rejected for exercise and being processed and, for the Dealer Manager
and each Soliciting Dealer, the number of Rights exercised for Shares on
exercise forms indicating the Dealer Manager or such Soliciting Dealer as the
broker-dealer with respect to such exercise, and as to such other information as
the Dealer Manager may reasonably request. The Trust also will notify the Dealer
Manager and each Soliciting Dealer, not later than 5:00 P.M., New York City
time, on the first business day following the Expiration Date, of the total
number of Rights exercised and Shares related thereto, the total number of
Rights verified to be in proper form for exercise, rejected for exercise and
being processed and, for the Dealer Manager and each Soliciting Dealer, the
number of Rights exercised for Shares on exercise forms indicating the Dealer
Manager or such Soliciting Dealer as the broker-dealer with respect to such
exercise, and as to such other information as the Dealer Manager may reasonably
request.
(l) The Trust and the Investment Adviser will not, directly or indirectly,
(i) take any action designed to cause or result in, or that has constituted or
might reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Trust to facilitate the sale or resale of the
Shares or (ii) sell, bid for, purchase, or pay anyone any compensation for
soliciting purchases of the Shares or pay or agree to pay any person any
compensation for soliciting another to purchase any other securities of the
Trust (except for the sale of Shares under this Agreement)
(m) The Dealer Manager is and will remain during the period of the Offer
registered as a broker dealer under the Exchange Act and is and will remain
during the period of the Offer a member in good standing of the NASD.
SECTION 5. Payment of Expenses.
(a) The Trust will pay all expenses incident to the performance of its
obligations under this Agreement, including, but not limited to, expenses
relating to (i) the printing and filing of the registration statement as
originally filed and of each amendment thereto, (ii) the preparation, issuance
and delivery of the certificates for the Shares, (iii) the reasonable fees and
disbursements of the Trust's counsel and accountants, the Information Agent and
the Subscription Agent, (iv) the qualification of the Rights and the Shares
under securities laws in accordance with the provisions of Section 4(g) of this
Agreement, including filing fees and any reasonable fees or disbursements of
counsel for the Dealer Manager in connection therewith and in connection with
the preparation of the Blue Sky Survey, (v) the printing and delivery to the
Dealer Manager of copies of the registration statement as originally filed and
of each amendment thereto, of the preliminary prospectus, of the Prospectus and
any amendments or supplements thereto, of this Agreement and of the Soliciting
Dealer Agreement, (vi) the printing and delivery of copies of the Blue Sky
Survey,
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(vii) the fees and expenses incurred in connection with the listing of the
Shares on the New York Stock Exchange, (viii) the filing fees of the Commission
and the NASD, (ix) the printing, mailing and delivery expenses incurred in
connection with the Offering Materials and (x) the out-of-pocket expenses
incurred by the Officers of the Trust in connection with the Offer.
(b) In addition to any fees that may be payable to the Dealer Manager under
this Agreement, the Trust agrees to reimburse the Dealer Manager upon request
made from time to time for its reasonable expenses incurred in connection with
its activities under this Agreement, in an aggregate amount not to exceed
$150,000, including the fees and disbursements of its legal counsel.
(c) If this Agreement is terminated by the Dealer Manager in accordance
with the provisions of Section 6 or Section 9(a)(i) or 9(a)(ii), the Trust shall
reimburse the Dealer Manager for all of its reasonable out-of-pocket expenses,
including the fees and disbursements of counsel for The Dealer Manager. In the
event the transactions contemplated hereunder are not consummated, the Trust
agrees to pay all of the costs and expenses set forth in paragraphs (a) and (b)
of this Section 5 that the Trust would have paid if such transactions had been
consummated.
(d) The Investment Adviser agrees that, to the extent the Trust fails to
fulfill its obligations in paragraphs (b) and (c) of this Section 5, the
Investment Adviser will pay all the costs and expenses set forth in this Section
5. The Investment Adviser hereby abandons and waives any right that the
Investment Adviser may have at any time under any applicable laws, existing or
future, to require that recourse be made to the assets of the Trust before any
claim is enforced against the Investment Adviser in respect of the Investment
Adviser's obligations under this paragraph (d) of this Section 5. The Investment
Adviser agrees that if at any time the Investment Adviser is sued in respect of
its obligations under this paragraph (d) of this Section 5 and the Trust is not
also sued in respect of its obligations under this Section 5, the Investment
Adviser shall not claim that the Trust be made a party to such proceedings
against the Investment Adviser.
SECTION 6. Conditions of Dealer Manager's Obligations. The obligations of
the Dealer Manager hereunder are subject to the accuracy of the respective
representations and warranties of each of the Trust and the Investment Adviser,
herein contained, to the performance by each of them of each of their respective
obligations hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective not later than
5:30 P.M., New York City time, on the date of this Agreement, or at a later time
and date not later, however, than 5:30 P.M. on the first business day following
the date hereof, or at such later time and date as may be approved by the Dealer
Manager, and, at the commencement of the Offer, no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission.
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(b) On the date of this Agreement, the Dealer Manager shall have received:
(1) The favorable opinion, dated as of the date of this Agreement, of
Dechert Price & Rhoads, general counsel for the Trust, in form and substance
satisfactory to counsel for the Dealer Manager, which opinion may rely, in part,
as to matters of California law, upon an opinion from other counsel to the Trust
or the Investment Adviser subject to the approval of such counsel by the Dealer
Manager, to the effect that:
(i) The Trust has been duly established and is validly existing as a
business trust in good standing under the laws of the Commonwealth of
Massachusetts, and the Investment Adviser has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Massachusetts.
(ii) Each of the Trust and the Investment Adviser has the trust and
corporate power and authority, respectively, to own, lease and operate its
respective properties and conduct its respective business as described in
the Registration Statement and the Prospectus.
(iii) Each of the Trust and the Investment Adviser is duly qualified
as a foreign trust and corporation, respectively, to transact business and
is in good standing in the jurisdiction of its principal place of business.
(iv) The Trust has an authorized, issued and outstanding
capitalization as set forth in the Prospectus. All of the outstanding
Shares have been duly authorized by requisite corporate action on the part
of the Trust and validly issued, are fully paid and non-assessable by the
Trust and conform to the description thereof in the Prospectus.
(v) The Rights and the Shares have been duly authorized for issuance
pursuant to the Offer; the Shares have been duly authorized for sale
pursuant to the Offer and, when the Shares are issued and delivered by the
Trust pursuant to the Offer against payment of the consideration set forth
in the Prospectus, the Shares will be validly issued and fully paid and
non-assessable by the Trust; the issuance of the Rights and the Shares is
not subject to any preemptive or other rights to subscribe for any of the
Shares under any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which the Trust is a party or by which the Trust
or any of its properties are bound, or under the Declaration or By-Laws of
the Trust, or under Massachusetts General Laws; the statements set forth in
the Prospectus under the headings "Description of the Trust" and "The Offer
-- Employee Plan Considerations", insofar as such statements constitute a
summary of legal matters or documents referred to therein, are accurate and
provide a fair summary of such legal matters or documents.
(vi) This Agreement has been duly authorized, executed and delivered
by the Trust and the Investment Adviser, complies with all applicable
provisions of the 1940 Act, the Advisers Act and the rules and regulations
under such acts and constitutes a valid
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and binding agreement of the Trust and the Investment Adviser, enforceable
in accordance with its terms (except that with respect to this Agreement,
no representation is made as to compliance with Section 17(i) of the 1940
Act), subject, as to enforcement, to bankruptcy, insolvency, reorganization
and other laws of general applicability relating to or affecting creditors'
rights and to general equity principles.
(vii) The Advisory Agreement has been duly authorized, executed and
delivered by the Trust and the Investment Adviser, complies as to form in
all material respects with all applicable provisions of the 1940 Act, the
Advisers Act and the rules and regulations under such acts and constitutes
the valid and binding obligation of each of the Trust and the Investment
Adviser, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
(viii) Each of the Subscription Rights Agency Agreement and the
Custodial Agreement has been duly authorized, executed and delivered by the
Trust and complies as to form in all material respects with all applicable
provisions of the 1940 Act and the rules and regulations thereunder, and
each constitutes the valid and binding obligation of the Trust, enforceable
in accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating
to or affecting creditors' rights and to general equity principles.
(ix) The Registration Statement is effective under the 1933 Act and,
to the best of such counsel's knowledge and information, no stop order
suspending the effectiveness of the Registration Statement has been issued
under the 1933 Act and no proceedings therefor have been initiated or
threatened by the Commission.
(x) The Registration Statement and the Prospectus (other than the
financial statements and other financial information included therein, as
to which no opinion need be rendered) comply as to form in all material
respects with the requirements of the 1933 Act and the 1940 Act and the
Rules and Regulations.
(xi) To the best of such counsel's knowledge and information, there
are no legal or governmental proceedings pending or threatened against the
Trust or the Investment Adviser that are required to be disclosed in the
Registration Statement and the Prospectus, other than those disclosed
therein.
(xii) To the best of such counsel's knowledge and information, there
are no contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments of the Trust or the Investment Adviser that are required
to be described or referred to in the Registration Statement or to be filed
as exhibits thereto other than those respectively described or referred to
therein or filed as exhibits thereto, the descriptions thereof and
references thereto are correct in all material respects, and no default
exists in the due performance or
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observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, loan agreement, note or lease so
described, referred to or filed.
(xiii) No consent, approval, authorization or order of any court or
governmental authority or agency is required in connection with the sale of
the Shares pursuant to the Offer, except such as has been obtained under
the 1933 Act, the 1940 Act or the Rules and Regulations or such as may be
required under state securities laws; and to the best of such counsel's
knowledge and information, the execution, delivery and performance of, and
the consummation of the transactions contemplated by, (x) this Agreement by
the Trust and the Investment Adviser, (y) the Advisory Agreement by the
Trust and the Investment Adviser or (z) the Custodial Agreement by the
Trust, will not conflict with, or constitute or result in a breach or
violation by the Trust or the Investment Adviser of or a default under, any
of the terms or provisions of, (i) any contract, indenture, mortgage, loan
agreement, note, lease or other instrument known to such counsel to which
the Trust or the Investment Adviser is a party or by which any of them is
bound or to which any of their property or assets are subject, (ii) the
provisions of the Declaration or By-Laws of the Trust and the charter and
by-laws of the Investment Adviser or (iii) any statute or any order, rule
or regulation known to such counsel of any court or governmental agency or
body applicable to the Trust or the Investment Adviser or any of their
properties.
(xiv) The Trust is registered with the Commission under the 1940 Act
as a closed-end diversified management investment company, and all required
action has been taken by the Trust under the 1933 Act, the 1940 Act and the
Rules and Regulations to make and consummate the Offer; the provisions of
the Declaration and By-Laws of the Trust comply in all material respects
with the requirements of the 1940 Act and the rules and regulations
thereunder; and, to the best of such counsel's knowledge and information,
no order of suspension or revocation of such registration under the 1940
Act, pursuant to Section 8(e) of the 1940 Act, has been issued or
proceedings there for initiated or threatened by the Commission.
(xv) The information in the Prospectus under the captions "The Offer
-Certain Federal Income Tax Consequences of the Offer" and "Taxation", to
the extent that it constitutes matters of law or legal conclusions
thereunder, has been reviewed by such counsel and is accurate and correct
in all material respects.
(2) The opinion, dated as of the date of this Agreement, of Steven
Machtinger, Esq., counsel to the Investment Adviser, in form and substance
satisfactory to counsel for the Dealer Manager, to the effect that:
(i) The Investment Adviser is duly registered as an investment adviser
under the Advisers Act and is not prohibited by the Advisers Act or the
1940 Act, or the rules and regulations under such acts, from acting under
the Advisory Agreement for the Trust as contemplated by the Registration
Statement and the Prospectus.
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(3) In giving their opinions required by subsection (b)(1) and (2) of this
Section, Dechert Price & Rhoads and Steven Machtinger shall additionally state
that nothing has come to such counsel's attention that would lead them to
believe that the Registration Statement (other than the financial statements and
other financial information included therein, as to which no belief need be
stated), at the date of this Agreement, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or that the
Prospectus (other than the financial statements and other financial information
included therein, as to which no belief need be stated), at the date of this
Agreement, included an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(4) The favorable opinion, dated as of the date of this Agreement, of
Morgan, Lewis & Bockius LLP, counsel for the Dealer Manager, with respect to the
issuance and sale of the Shares, and such other related matters as the Dealer
Manager may reasonably require.
(c) At the date of this Agreement, (i) the Registration Statement and the
Prospectus shall contain all statements that are required to be stated therein
in accordance with the 1933 Act, the 1940 Act and the Rules and Regulations and
in all material respects shall conform to the requirements of the 1933 Act, the
1940 Act and the Rules and Regulations and the Registration Statement and the
Prospectus shall not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and no action,
suit or proceeding at law or in equity shall be pending or, to the knowledge of
the Trust or the Investment Adviser, threatened against the Trust or the
Investment Adviser, that would be required to be set forth in the Registration
Statement and the Prospectus other than as set forth therein, (ii) there shall
not have been, since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse change in
the condition, financial or otherwise, of the Trust or in its earnings, business
affairs or business prospects, whether or not arising in the ordinary course of
business, from that set forth in the Registration Statement and Prospectus,
(iii) the Investment Adviser shall have the financial resources available to it
necessary for the performance of its services and obligations as contemplated in
the Registration Statement and the Prospectus and (iv) no proceedings shall be
pending or, to the knowledge of the Trust or the Investment Adviser, threatened
against the Trust or the Investment Adviser, before or by any federal, state or
other commission, board or administrative agency wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, financial condition or income of either the Trust or the Investment
Adviser, other than as set forth in the Registration Statement and the
Prospectus; and the Dealer Manager shall have received, at the commencement date
of the Offer, a certificate of the President or Treasurer of each of the Trust
and the Investment Adviser, dated as of such date, confirming the respective
representations and warranties contained in Section 1 of this Agreement and
evidencing, to the best of his or her respective knowledge and belief, after
reasonable investigation, compliance with the appropriate provisions of this
subsection (c).
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(d) At the time of execution of this Agreement, the Dealer Manager shall
have received from Arthur Andersen LLP, a letter dated such date in form and
substance satisfactory to the Dealer Manager, to the effect that:
(i) They are independent public accountants with respect to the Trust
within the meaning of the 1933 Act, the 1940 Act and the Rules and
Regulations;
(ii) In their opinion, the audited financial statements examined by
them and included in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the 1933
Act and the 1940 Act and the Rules and Regulations;
(iii) They have performed specified procedures, not constituting an
audit, including a reading of the latest available interim financial
statements of the Trust, a reading of the minute books of the Trust,
inquiries of officials of the Trust responsible for financial accounting
matters and such other inquiries and procedures as may be specified in such
letter, and on the basis of such inquiries and procedures nothing came to
their attention that caused them to believe that (A) the unaudited
financial statements as of December 31, 1996 included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations applicable to unaudited interim financial statements included
in registration statements or are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements included in the Registration Statement
and (B) at the date of the latest available financial statements read by
such accountants, or at a subsequent specified date not more than three
days prior to the date of this Agreement, there was any change in the
capital stock or net assets of the Trust as compared with amounts shown on
the statement of net assets included in the Prospectus; and
(iv) In addition to the procedures referred to in clause (iii) above,
they have performed other specified procedures, not constituting an audit,
with respect to certain amounts, percentages, numerical data, financial
information and financial statements appearing in the Registration
Statement, which have previously been specified by you and which shall be
specified in such letter, and have compared certain of such items with, and
have found such items to be in agreement with, the accounting and financial
records of the Trust.
(e) On (i) the date of this Agreement and (ii) the day immediately
preceding the commencement of the Offer, the Trust, the Investment Adviser, and
any other party affiliated to the Investment Adviser that the Trust and the
Dealer Manager may agree to include, shall have furnished to the Dealer Manager
such further information, certificates and documents, dated as of the date of
this Agreement, as the Dealer Manager reasonably may request to evidence the
fulfillment of any of the agreements contained in Section 7 hereof.
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(f) On (i) the date of this Agreement and (ii) the day immediately
preceding the commencement date of the Offer, the Trust, the Investment Adviser
and Dechert Price & Rhoads shall have furnished to the Dealer Manager such
information, certificates, documents and opinions, dated as of, respectively,
(i) the date of this Agreement and (ii) the day immediately preceding the
commencement date of the Offer, as the Dealer Manager reasonably may require for
the purpose of enabling counsel for the Dealer Manager to pass upon the issuance
of the Rights and the Shares and the sale of the Shares as contemplated herein
and in the Registration Statement and the Prospectus and to pass upon related
proceedings, or in order to evidence the accuracy of any of the representations
or warranties, or the fulfillment of any of the conditions, herein contained;
and all proceedings taken by the Trust and the Investment Adviser in connection
with the issuance of the Rights and the Shares and sale of the Shares as
contemplated herein and in the Registration Statement shall be satisfactory in
form and substance to the Dealer Manager and counsel for the Dealer Manager.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Dealer Manager by notice to the Trust at any time at or prior to the termination
of the Offer, and such termination shall be without liability of any party to
any other party except as provided in Section 5.
SECTION 7. Indemnification and Contribution.
(a) Each of the Trust and the Investment Adviser (together, the
"Indemnifying Parties") jointly and severally, agree to indemnify and hold
harmless the Dealer Manager and each of their affiliates, directors, officers,
employees, agents and controlling persons (the Dealer Manager and each of such
persons being an "Indemnified Party") as follows:
(i) from and against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, joint or several, to which such
Indemnified Party may become subject under any applicable federal or state
law, or otherwise, and related to or arising out of (A) an untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto) and the Prospectus or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, (B) an untrue statement or alleged untrue statement of a
material fact contained in the Offering Materials (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, (C) any breach by any of the Indemnifying Parties of
any of their respective representations, warranties and agreements
contained in this Agreement or in any certificate or document furnished
pursuant to Section 6(c), 6(e) and 6(f) hereof, (D) the Trust's failure to
make the Offer, or its withdrawal, termination or extension of the Offer or
any other failure on its part to comply with the terms and conditions
specified in the Registration Statement or the Offering Materials, or (E)
the Offer, the engagement of the Dealer Manager pursuant to, and the
performance by the Dealer Manager of the services contemplated by, this
Agreement;
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(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon the occurrence of any matter described in clause (i)
above, if such settlement is effected with the written consent of any of
the Indemnifying Parties; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by the Dealer Manager),
reasonably incurred in investigating, preparing or defending against any
litigation, or investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon the
occurrence of any matter described in clause (i) above, whether or not such
Indemnified Party is a party and whether or not such claim, action or
proceeding is initiated or brought by or on behalf of any of the
Indemnifying Parties, to the extent that any such expense is not paid under
clause (i) or (ii) above.
This indemnity agreement will be in addition to any liability that any of the
Indemnifying Parties may otherwise have.
The Indemnifying Parties shall not, however, be liable to an Indemnified
Party for any loss, liability, claim, settlement, damage or expense under (A)
clauses(i)(A) and (B) of this subsection 7(a) to the extent arising out of an
untrue statement or omission or alleged untrue statement or omission made in the
Registration Statement or the Offering Materials in reliance upon and in
conformity with written information furnished to the Trust by or on behalf of
the Dealer Manager expressly for use in the Registration Statement (or any
amendment thereto) or any Offering Materials (or any amendment or supplement
thereto) and (B) clause (i)(E) of this subsection 7(a) that is found in a final
judgment by a court of competent jurisdiction to have resulted from the bad
faith, willful misconduct or gross negligence of the Dealer Manager or the
reckless disregard by the Dealer Manager of its obligations and duties
hereunder.
Each of the Indemnifying Parties also agrees that no Indemnified Party
shall have any liability (whether direct or indirect, in contract or tort or
otherwise) to any of the Indemnifying Parties or their respective security
holders or creditors related to or arising out of the Offer or the engagement of
the Dealer Manager pursuant to, or the performance by the Dealer Manager of the
services contemplated by, this Agreement except to the extent that any loss,
liability, claim, damage or expense is found in a final judgment by a court of
competent jurisdiction to have resulted from the bad faith, willful misconduct
or gross negligence of such Indemnified Party or the reckless disregard by the
Indemnified Party of its obligations and duties under the Dealer Manager
Agreement.
Each of the Indemnifying Parties agrees that, without the Dealer Manager's
prior written consent, it will not settle, compromise or consent to the entry of
any judgment in any pending or threatened claim, action or proceeding in respect
of which indemnification could be sought under
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the indemnification provisions of this Section 7 (whether or not the Dealer
Manager or any other Indemnified Party is an actual or potential party to such
claim, action or proceeding), unless such settlement, compromise or consent
includes an unconditional release of each Indemnified Party from all liability
arising out of such claim, action or proceeding.
(b) In circumstances in which the indemnity agreement provided for in the
preceding paragraphs of this Section 7 is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each Indemnifying Party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the Offer or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the one hand
and the indemnified party on the other in connection with the statements or
omissions or alleged statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Indemnifying Parties on the one hand and the Dealer Manager on the other shall
be deemed to be in the same proportion as the total proceeds from the Offer
(before deducting expenses) received by the Trust bear to the total compensation
received by the Dealer Manager. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Trust or the Dealer
Manager, the parties' relative intents, knowledge, access to information and
opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances. The Indemnifying
Parties and the Dealer Manager agree that it would not be equitable if the
amount of such contribution were determined by pro rata or per capita allocation
or by any other method of allocation that does not take into account the
equitable considerations referred to above in this paragraph (b).
Notwithstanding any other provision of this paragraph (b), the Dealer Manager
shall be obligated to make contributions hereunder that in the aggregate exceed
the respective amount of the compensation paid to it under this Agreement, less
the aggregate amount of any damages that it has otherwise been required to pay
in respect of the same or any substantially similar claim and the aggregate
amount of any Reallowance paid by the Dealer Manager to the Soliciting Dealers,
and no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
paragraph (b), each person, if any, who controls any of the Indemnifying Parties
or the Dealer Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the Exchange Act shall have the same rights to contribution as the
Indemnifying Parties or the Dealer Manager, as the case may be.
(c) In the event that an Indemnified Party is requested or required to
appear as a witness in any action brought by or on behalf of or against the
Trust in which such Indemnified Party is not named as a defendant, each of the
Indemnifying Parties, jointly and severally, agrees to
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reimburse the Dealer Manager for all reasonable expenses incurred by it in
connection with such Indemnified Party's appearing and preparing to appear as a
witness, including, without limitation, the reasonable fees and disbursements of
its legal counsel, and to compensate the Dealer Manager in an amount to be
mutually agreed upon.
(d) Each of the Indemnifying Parties agrees to notify the Dealer Manager
promptly of the assertion against any of them or any other person of any claim
or the commencement of any action or proceeding relating to a transaction
contemplated by this Agreement. Promptly after receipt by an Indemnified Party
of written notice of any claim or commencement of any action or proceeding with
respect to which indemnification is being sought hereunder, such Indemnified
Party will notify the Trust and the Investment Adviser in writing of such claim
or of the commencement of such action or proceeding, but failure so to notify
the Trust will not relieve any of the Indemnifying Parties from any liability
that they may have to such Indemnified Party under this indemnification
agreement except to the extent that any of the Indemnifying Parties are
materially prejudiced by such failure, and will not relieve any of the
Indemnifying Parties from any other liability that they may have to such
Indemnified Party.
(e) Each of the Indemnifying Parties, jointly and severally, agrees to
indemnify each Soliciting Dealer and its affiliates and their respective
directors, officers, employees, agents and controlling persons to the same
extent and subject to the same conditions and to the same agreements, including
with respect to contribution, provided for in subsections (a), (b) and (c) of
this Section 7. This indemnity agreement will be in addition to any liability
that any of the Indemnifying Parties may otherwise have.
SECTION 8. Representations. Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement, or
contained in certificates of officers of the Trust or the Investment Adviser
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of the Dealer Manager or
any controlling person, or by or on behalf of the Trust or the Investment
Adviser and shall survive delivery of the Shares pursuant to the Offer.
SECTION 9. Termination of Agreement.
(a) This Agreement may be terminated in the sole discretion of the Dealer
Manager by notice to the Trust given at or prior to the termination of the Offer
in the event that the Trust and the Investment Adviser shall have failed,
refused or been unable to perform all material obligations and satisfy all
material conditions on its part to be performed or satisfied hereunder at or
prior thereto or, if at or prior to the termination of the Offer,
(i) the Trust or the Investment Adviser shall have sustained any
material loss or interference with its business or properties from fire,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding or there shall
have been any material adverse change or any development involv-
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ing a prospective material adverse change (including without limitation a
change in management or control of the Trust or the Investment Adviser, as
the case may be), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Trust or the
Investment Adviser except in each case as described in or contemplated by
the Registration Statement and the Prospectus (exclusive of any amendment
or supplement thereto) and except for changes in the Trust's net asset
value due to its normal investment operations,
(ii) trading in the Shares shall have been suspended by the Commission
or the New York Stock Exchange,
(iii) there has occurred any material adverse change in the existing
political or economic conditions or in the financial markets in the United
States or elsewhere or any outbreak of hostilities or other calamity or
crisis or any escalation of existing hostilities the effect of which is
such as to make it, in the Dealer Manager's judgment, impracticable to
market the Shares or enforce contracts for the sale of the Shares, or
(iv) trading generally on the New York Stock Exchange or the National
Association of Securities Dealers Automated Quotations System shall have
been suspended, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices for securities have been required, by any of
said exchanges or by order of the Commission or any other governmental
authority, or if a banking moratorium shall have been declared by United
States or New York authorities.
(b) This Agreement may be terminated in the sole discretion of the Trust or
the Investment Adviser by notice to the Dealer Manager given at or prior to the
termination of the Offer in the event that the Dealer Manager shall have failed,
refused or been unable to perform all material obligations and satisfy all
material considerations on its part to be performed or satisfied hereunder at or
prior thereto.
(c) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 5.
SECTION 10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of written telecommunications. Notices to the
Dealer Manager shall be directed to Prudential Securities Incorporated -
Investment Banking, One New York Plaza, 18th Floor New York, NY 10292; notices
to the Trust and the Investment Adviser shall be sent to each of them at 50
Rowes Wharf, 4th Floor, Boston, MA 02110-3328.
SECTION 11. Parties. This Agreement shall inure to the benefit of and be
binding upon the Dealer Manager, the Trust and the Investment Adviser and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the parties hereto and their respective successors and the controlling
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persons and officers and directors referred to in Section 7 and their heirs and
legal representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the parties hereto and thereto and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation.
As required by the Trust's Declaration, a copy of the Trust's Declaration
is on file with the Secretary of the Commonwealth of Massachusetts, and notice
is hereby given that this Agreement has been executed on behalf of the Trust by
officers and/or trustees of the Trust in their capacity as such and not
individually. The obligations of this Agreement shall be binding upon the assets
and property of the Trust and shall not be binding upon any trustee, officer or
shareholder of the Trust individually.
SECTION 12. Governing Law and Time. This Agreement shall be governed by the
laws of the Commonwealth of Massachusetts applicable to agreements made and to
be performed in said State. Specified times of day refer to New York City time.
-23-
<PAGE>
If the foregoing is in accordance with your understanding of our Agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a single binding agreement among the
Dealer Manager, the Trust and the Investment Adviser in accordance with its
terms.
Very truly yours,
H&Q HEALTHCARE INVESTORS
By:
-------------------------------
Name:
--------------------------
Title:
-------------------------
HAMBRECHT & QUIST CAPITAL
MANAGEMENT
INCORPORATED
By:
-------------------------------
Name:
--------------------------
Title:
-------------------------
Confirmed and Accepted, as of the
date first above written:
PRUDENTIAL SECURITIES INCORPORATED
By:
----------------------------------
Name:
Title:
-24-
SOLICITING DEALER AGREEMENT
Ladies and Gentlemen:
H&Q Healthcare Investors, a Massachusetts business trust (the "Trust"),
proposes to issue to holders of record (the "Holders") of its outstanding shares
of beneficial interests (the "Shares"), non-transferable rights (the "Rights")
entitling such Holders to subscribe for Shares at the rate of one Share for each
three Rights held and, subject to certain conditions, additional Shares pursuant
to an over-subscription privilege (the "Offer"). Pursuant to the terms of the
Offer, the Trust is issuing each Holder one non-transferable right for each
Share held on the Record Date as defined in the accompanying Prospectus (the
"Prospectus"). Such Rights entitle Holders to acquire during the subscription
period set forth in the Prospectus (the "Subscription Period"), at the
subscription price set forth in the Prospectus (the "Subscription Price"), one
Share for each three Rights held on the terms and subject to the conditions set
forth in the Prospectus. Pursuant to the terms of the Offer, such Rights also
entitle Holders to acquire during the Subscription Period at the Subscription
Price certain additional Shares on the terms and conditions of the
over-subscription privilege as set forth in such Prospectus.
The undersigned, as the dealer manager (the "Dealer Manager") named in the
Prospectus, has entered into a Dealer Manager Agreement dated [ ] with the Trust
and Hambrecht & Quist Capital Management Incorporated, a California corporation
(the "Investment Adviser"), pursuant to which the undersigned has agreed to form
and manage, for purposes of soliciting exercises of Rights pursuant to the
Offer, a group of soliciting dealers, including the undersigned, consisting of
brokers and dealers who shall be members in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") or brokers or dealers not
registered under the Securities Exchange Act of 1934 with their principal place
of business located outside the United States, its territories or possession who
agree to solicit exercises of Rights only in accordance with the laws applicable
to such activities and agree to solicit no exercises of Rights within the United
States, its territories or its possessions or from persons who are nationals
thereof or residents therein and who agree, although not members of the NASD, to
conform to the Conduct Rules of the NASD, in soliciting exercises of Rights
outside the United States, its territories and possessions, to the same extent
as though they were members thereof (the members of such group being hereinafter
called the "Soliciting Dealers"). You are invited to become one of the
Soliciting Dealers and by your confirmation hereof you agree to act in such
capacity, in accordance with the terms and conditions herein and in your
confirmation hereof, to obtain exercises of Rights pursuant to the Offer.
1. Solicitation and Solicitation Material. Solicitation and other
activities by you hereunder shall be undertaken only in accordance with this
Agreement, the Securities Act of 1933 (the "Securities Act"), the Securities
Exchange Act of 1934 (the "Exchange Act"), and the applicable rules and
regulations of the Securities and Exchange Commission. Accompanying this
Agreement
<PAGE>
are copies of the following documents: the Prospectus describing the terms of
the Offer, an exercise form for the exercise of the Rights (an "Exercise Form")
and letters to stockholders. Additional copies of these documents will be
supplied in reasonable quantities upon your request. You agree that during the
period of the Offer you will not use any solicitation material other than that
referred to above and such as may hereafter be furnished to you by the Trust
through us.
2. Compensation of Soliciting Dealers. As compensation for the services of
the Soliciting Dealers hereunder, the Dealer Manager will reallow to each
Soliciting Dealer a concession of 2.25% of the subscription price per Share
purchased pursuant to the Offer through such Soliciting Dealer's efforts,
(excluding the exercise of Rights by a Soliciting Dealer for its own account or
for the account of any affiliate, other than a natural person, pursuant to the
Offer) (a "Reallowance"). A Soliciting Dealer, other than Prudential Securities
Incorporated acting in such capacity, shall be entitled to a Reallowance only
where the insertion of such Soliciting Dealer's name has been made on the
Exercise Form in the place so provided and where the Dealer Manager shall have
received from such Soliciting Dealer an executed copy of this Agreement in the
form hereof. Payment of such Reallowance will be made by the Dealer Manager or
its agent directly to such Soliciting Dealer by U.S. Dollar check drawn upon an
account at a bank in New York City. Such payments to Soliciting Dealers shall be
made as soon as practicable after payment of the Dealer Manager Fee is made to
the Dealer Manager.
No Reallowance shall be payable in respect of any particular exercise of
Rights if, in the opinion of counsel for the Dealer Manager, such Reallowance
cannot legally by paid in respect of such exercise of Rights because of the
provisions of applicable state law or for any other reason. In case of any
dispute or disagreement as to the amount of Reallowance payable to any
Soliciting Dealer hereunder or as to the proper recipient of any such
Reallowance, the decision of the Dealer Manager shall be conclusive. The payment
of any Reallowance to Soliciting Dealers shall be solely the responsibility of
the Dealer Manager, but the Dealer Manager shall have no obligation or liability
to any Soliciting Dealer for any obligation of the Trust hereunder.
For the purpose of this Section 2, the Offer will expire on the expiration
date set forth in the Prospectus. No Reallowance will be payable to Soliciting
Dealers with respect to Rights exercised after expiration of the Offer.
3. Trading. You represent to the Trust and the Dealer Manager that you have
not engaged, and agree that you will not engage, in any activity in respect of
the Rights or the Shares in violation of the Exchange Act, including the rules
or regulations adopted thereunder. Your acceptance of a Reallowance will
constitute a representation that you are eligible to receive such Reallowance
and that you have complied with the preceding sentence and your other agreements
hereunder.
4. Unauthorized Information and Representations. Neither you nor any other
person is authorized by the Trust or the Dealer Manager to give any information
or make any representations in connection with this Agreement or the Offer other
than those contained in the Pros-
A-2
<PAGE>
pectus and other authorized solicitation material furnished by the Trust through
the Dealer Manager, and you hereby agree not to use any solicitation material
other than material referred to in this Section 4 and not to give any
unauthorized information or make any unauthorized representations. Without
limiting the generality of the foregoing, you agree for the benefit of the Trust
and the Dealer Manager not to publish, circulate or otherwise use any other
advertisement or solicitation material without the prior approval of the Trust
and the Dealer Manager. You are not authorized to act as agent of the Trust or
the Dealer Manager in any respect, and you agree not to act as such agent and
not to purport to act as such agent. On becoming a Soliciting Dealer and in
soliciting exercises of Rights, you agree for the benefit of the Trust and the
Dealer Manager to comply with any applicable requirements of the Securities Act,
the Exchange Act, the rules and regulations thereunder, any applicable
securities laws of any state or jurisdiction where such solicitations may
lawfully be made, and the applicable rules and regulations of any
self-regulatory organization or registered national securities exchange, and to
perform and comply with the agreements set forth in your confirmation of your
acceptance of this Agreement, a copy of the form of which is appended hereto.
5. Blue Sky and Securities Laws. The Dealer Manager assumes no obligation
or responsibility in respect of the qualification of the Shares issuable
pursuant to the Offer or the right to solicit Rights under the laws of any
jurisdiction. The enclosed Blue Sky Memorandum indicates the states in which it
is believed that acceptances of the Offer may be solicited under the applicable
Blue Sky or securities laws. Under no circumstances will you as a Soliciting
Dealer engage in any activities hereunder in any state (a) that is not listed in
said enclosed Blue Sky Memorandum as a state in which acceptances of the Offer
may be solicited under the Blue Sky or securities law of such state or (b) in
which you may not lawfully so engage. The Blue Sky Memorandum shall not be
considered solicitation material as that term is herein used. You agree that you
will not engage in any activities hereunder outside the United States except in
jurisdictions where such solicitations and other activities may lawfully be
undertaken and in accordance with the laws thereof.
6. Termination. This Agreement may be terminated by written or telegraphic
notice to you from the Dealer Manager, or to the Dealer Manager from you, and in
any case it will terminate upon the expiration or termination of the Offer;
provided, however, that such termination shall not relieve the Dealer Manager of
the obligation to pay when due any Reallowance payable to you hereunder with
respect to Shares acquired pursuant to the exercise of Rights through the close
of business on the date of such termination that are thereafter exercised
pursuant to the Offer or relieve the Trust or the Investment Adviser of each of
their obligations referred to under Section 8 hereof, and shall not relieve you
of any obligation or liability under Sections 3, 4, 9 and 10 hereof.
7. Liability of the Dealer Manager. Nothing herein contained shall
constitute the Soliciting Dealers as partners with the Dealer Manager or with
one another, or agents of the Dealer Manager or the Trust, or shall render the
Trust liable for the obligations of the Dealer Manager or the obligations of any
Soliciting Dealers, or shall render the Dealer Manager liable for the
obligations of any Soliciting Dealers other than each of themselves nor
constitute the Trust or the Dealer Manager as the agent of any Soliciting
Dealer. The Trust, the Investment Adviser and
A-3
<PAGE>
the Dealer Manager shall be under no liability to any Soliciting Dealer or any
other person for any act or omission or any matter connected with this Agreement
or the Offer, except that the Trust and the Investment Adviser shall be liable
on the basis set forth in Section 8 hereof to indemnify certain persons. You
represent that you have not purported, and agree that you will not purport, to
act as agent of the Trust or the Dealer Manager in any connection or transaction
relating to the Offer.
8. Indemnification. Under the Dealer Manager Agreement, each of the Trust
and the Investment Adviser has agreed to indemnify and hold harmless the Dealer
Manager, each Soliciting Dealer and each person, if any, controlling the Dealer
Manager or any Soliciting Dealer within the meaning of Section 15 of the
Securities Act against certain liabilities, including liabilities under the
Securities Act and the Exchange Act. By returning an executed copy of this
Agreement, you agree to indemnify the Trust, the Investment Adviser and the
Dealer Manager (the "Indemnified Persons") against losses, claims, damages and
liabilities to which the Indemnified Persons may become subject (a) as a result
of your breach of your representations or agreements made herein or (b) if you
(as custodian, trustee or fiduciary or in any other capacity) are acting on
behalf of another entity that is soliciting exercises of Rights pursuant to the
Offer (a "Soliciting Entity"), as a result of any breach by any such Soliciting
Entity of the representations or agreements made herein by the Soliciting
Dealers to the same extent as if such Soliciting Entity had executed the
confirmation referred to in Section 13 hereof and was therefore a Soliciting
Dealer that had directly made such representations and agreements. This
indemnity agreement will be in addition to any liability that you may otherwise
have.
9. Delivery of Prospectus. You agree for the benefit of the Trust and the
Dealer Manager to deliver to each person who owns beneficially Shares registered
in your name, and who exercises Rights on an Exercise Form on which your name,
to your knowledge, has been inserted, a Prospectus prior to the exercise of such
person's Rights.
10. Status of Soliciting Dealer. Your acceptance of a Reallowance will
constitute a representation to the Trust and the Dealer Manager that you (i)
have not purported to act as agent of the Trust or the Dealer Manager in any
connection or in any transaction relating to the Offer, (ii) except to the
extent that you have given the Dealer Manager prior written notification, are
not affiliated with the Trust, (iii) will not accept a Reallowance from the
Dealer Manager pursuant to the terms hereof with respect to Shares purchased by
you pursuant to an exercise of Rights for your own account or the account of any
affiliate, other than a natural person, (iv) will not remit, directly or
indirectly, any part of any Reallowance to any beneficial owner of Shares
purchased pursuant to the Offer, (v) agree to the amount of the Reallowance and
the terms and conditions set forth herein with respect to receiving such
Reallowance, (vi) have read and reviewed the Prospectus, and (vii) are (a) a
member in good standing of the NASD and will comply with Rules 2730, 2740 and
2750 of the Conduct Rules of the NASD or (b) a broker or dealer with your
principal place of business located outside the United States, its territories
or its possessions and not registered under the Exchange Act, and you agree for
the benefit of the Trust and the Dealer Manager (1) to solicit exercises of
Rights only in accordance with the laws applicable to such activities and to
solicit no exercises of Rights within the United States, its territories or
possessions or from persons who are nationals thereof or
A-4
<PAGE>
residents therein, and (2) that, although not a member of the NASD, including
Rules 2420, 2730, 2740, and 2750 thereof, in soliciting exercises of Rights
outside the United States, its territories and possessions to the same extent as
though you were a member thereof.
11. Notices. Any notice hereunder shall be in writing or by telegram and if
to you as a Soliciting Dealer shall be deemed to have been duly given if mailed
or telegraphed to you at the address to which this letter is addressed, and if
to the Dealer Manager, if delivered or sent to Prudential Securities
Incorporated at One New York Plaza, 18th Floor, New York, NY 10292, Attention:
Investment Banking.
12. Parties in Interest. The Agreement herein set forth is intended for the
benefit of the Dealer Manager, the Soliciting Dealers, the Trust, and the
Investment Adviser.
13. Confirmation. Please confirm your agreement to become one of the
Soliciting Dealers under the terms and conditions set forth herein and in the
attached confirmation by complet- ing and executing the confirmation and sending
it via facsimile (212) 778-3194 to Prudential Securities Incorporated,
Attention: Investment Banking.
14. Governing Law and Time. This Agreement shall be governed by the laws of
the Commonwealth of Massachusetts applicable to agreements made and to be
performed in said Commonwealth.
NOTICE: IF A COPY OF THE CONFIRMATION REFERRED TO IN SECTION 13 HEREOF IS NOT
SIGNED, DATED AND RETURNED TO THE DEALER MANAGER PRIOR TO THE EXPIRATION OF THE
OFFER, NO REALLOWANCE WILL BE PAYABLE HEREUNDER.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
As Dealer Manager
By:
----------------------------------------
A-5
<PAGE>
CONFIRMATION
PRUDENTIAL SECURITIES INCORPORATED
One New York Plaza, 18th Floor
New York, NY 10292
Attention:
Ladies and Gentlemen:
We hereby confirm our acceptance of the terms and conditions of the letter
captioned "Soliciting Dealer Agreement" which was attached hereto upon our
receipt hereof (this "Agreement") with reference to the Offer of H&Q Healthcare
Investors (the "Trust") described therein. We hereby acknowledge that we (i)
have received, read and reviewed the Prospectus and other solicitation material
referred to in this Agreement, and confirm that in executing this confirmation
we have relied upon such Prospectus and other solicitation materials authorized
by the Trust or Hambrecht & Quist Capital Management Incorporated (the
"Investment Adviser") and upon no other representations whatsoever, written or
oral, (ii) have not purported to act as agent of the Trust or the Dealer Manager
in any connection or in any transaction relating to the Offer, (iii) are not
affiliated with the Trust, (iv) are not purchasing Shares for our own account or
the account of any of our affiliates, other than a natural person, (v) will not
remit, directly or indirectly, any part of any Reallowance to any beneficial
owner of Shares purchased pursuant to the Offer, and (vi) agree to the amount of
the Reallowance and the terms and conditions set forth in this Agreement with
respect to receiving such Reallowance. We also confirm that we are a broker or
dealer who is a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") and will comply with Rules 2730, 2740 and
2750 of the Conduct Rules of the NASD or a broker or dealer not registered under
the Securities Exchange Act of 1934 with its principal place of business located
outside the United States, its territories or possessions who by signing below
also (a) agrees to solicit exercises of Rights only in accordance with the laws
applicable to such activities and to solicit no exercises of Rights within the
United States, its territories or its possessions, or from persons who are
nationals thereof or resident therein and (b) agrees, although not a member of
the NASD, to conform to the Conduct Rules of the NASD, including Rules 2420,
2730, 2740, and 2750 thereof, in acting under this Agreement in soliciting
exercises of Rights outside the United States, its territories and possessions,
to the same extent as though we were a member thereof. In connection with the
Offer, we represent that we have
A-6
<PAGE>
complied, and agree that we will comply, with any applicable requirements of the
Securities Act of 1933, the Securities Exchange Act of 1934, any applicable
securities or Blue Sky laws, and the rules and regulations under the Securities
Act of 1933, the Securities Exchange Act of 1934 and any applicable securities
or Blue Sky laws.
-----------------------------------
Firm Name
Address:
-----------------------------------
-----------------------------------
Telephone:
-------------------------
Facsimile:
-------------------------
By:
-------------------------------
Officer/Authorized Signature
Name:
-------------------------------
Title:
-------------------------------
DTC Number:
--------------------------
Nominee Name:
-----------------------------------
-----------------------------------
-----------------------------------
Dated: _____________, 1997
NOTICE: IF A COPY OF THIS CONFIRMATION IS NOT SIGNED, DATED AND RETURNED TO THE
DEALER MANAGER PRIOR TO THE EXPIRATION OF THE OFFER, NO REALLOWANCE WILL BE
PAYABLE HEREUNDER.
A-7
CUSTODIAN CONTRACT
between
H&Q HEALTHCARE INVESTORS
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held By It ............ 1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States............... 2
2.1 Holding Securities ...................................... 2
2.2 Delivery of Securities .................................. 2
2.3 Registration of Securities .............................. 3
2.4 Bank Accounts ........................................... 3
2.5 Investment and Availability of Federal Funds ............ 4
2.6 Collection of Income .................................... 4
2.7 Payment of Fund Moneys .................................. 4
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased .................................. 5
2.9 Appointment of Agents ................................... 5
2.10 Deposit of Securities in Securities System .............. 5
2.11 Segregated Account ...................................... 6
2.12 Ownership Certificates for Tax Purposes ................. 7
2.13 Proxies ................................................. 7
2.14 Communications Relating to Fund Portfolio Securities .... 7
2.15 Reports to Fund by Independent Public Accountants ....... 7
2.16 Unauthorized Payments ................................... 7
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States ....................... 7
3.1 Appointment of Foreign Sub-Custodians ................... 7
3.2 Assets to be Held ....................................... 8
3.3 Foreign Securities Depositories ......................... 8
3.4 Segregation of Securities ............................... 8
3.5 Agreements with Foreign Banking Institutions ............ 8
3.6 Access of Independent Accountants of the Fund ........... 8
3.7 Reports by Custodian .................................... 8
3.8 Transactions in Foreign Custody Account ................. 9
3.9 Liability of Foreign Sub-Custodians ..................... 9
3.10 Monitoring Responsibilities ............................. 9
3.11 Branches of U.S. Banks .................................. 9
4. Proper Instructions .............................................. 10
5. Actions Permitted Without Express Authority ...................... 10
6. Evidence of Authority ............................................ 10
<PAGE>
7. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income ...................................................... 10
8. Records ......................................................... 11
9. Opinion of Fund's Independent Accountant;
Accountants Reports ............................................. 11
10. Compensation of Custodian ....................................... 11
11. Responsibility of Custodian ..................................... 11
12. Effective Period, Termination and Amendment ..................... 12
13. Successor Custodian ............................................. 13
14. Interpretive and Additional Provisions .......................... 13
15. Massachusetts Law to Apply ...................................... 13
16. Prior Contracts ................................................. 14
CUSTODIAN CONTRACT
This Contract between H&Q Healthcare Investors, a Massachusetts
business trust organized and existing under the laws of Massachusetts, having
its principal place of business at 50 Rowes Wharf, Fourth Floor, Boston,
Massachusetts 02110-3328, hereinafter called the "Fund", and State Street Bank
and Trust Company, a Massachusetts corporation, having its principal place of
business at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter
called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Declaration of
Trust. The Fund agrees to deliver to the Custodian all securities and cash owned
by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of beneficial interest, $.01 par value ("Shares"), of the Fund
as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held or received by the Fund and not
delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
4), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the Board of Trustees of the Fund, and provided that the Custodian shall have no
more or less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other
1
<PAGE>
assets the foreign banking institutions and foreign securities depositories
designated in Schedule "A" hereto but only in accordance with the provisions of
Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property, to
be held by it in the United States, including all domestic
securities owned by the Fund, other than securities which are
maintained pursuant to Section 2.10 in a clearing agency which
acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury, collectively
referred to herein as "Securities System."
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or
in a Securities System account of the Custodian only upon
receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, and only in
the following cases:
1) Upon sale of such securities for the account of the Fund
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered
into by the Fund;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or
nominees of the Custodian or into the name or nominee name
of any agent appointed pursuant to Section 2.9 or into the
name or nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence
representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities
are to be delivered to the Custodian;
7) To the broker selling the same for examination in
accordance with the "street delivery" custom;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts
or temporary securities for definitive securities;
provided that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities
made by the Fund, but only against receipt of adequate
collateral as agreed upon from time to time by the
Custodian and the Fund, which may be in the form of cash
or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection
with any loans for which collateral is to be credited to
the Custodian's account in the book-entry system
authorized by the U.S.
2
<PAGE>
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned
by the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but
only against receipt of amounts borrowed except that in
cases where additional collateral is required to secure a
borrowing already made, and such fact is made to appear in
Proper Instructions from the Fund to the Custodian,
further securities may be released for that purpose
without any such payment; and similarly upon receipt of
such Proper Instructions, the Custodian shall repay any
such loan upon redelivery to it of the securities pledged
or hypothecated therefor and upon surrender of documents
evidencing the loan;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a
broker-dealer registered under the Securities Exchange Act
of 1934 (the "Exchange Act") and a member of The National
Association of Securities Dealers, Inc. ("NASD"), relating
to compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations,
regarding account deposits in connection with transactions
by the Fund;
14) For any other proper trust purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy
of a resolution of the Board of Trustees or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth
the purpose for which such delivery is to be made,
declaring such purpose to be a proper trust purpose, and
naming the person or persons to whom delivery of such
securities shall be made.
2.3 Registration of Securities. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in
the name of the Fund or in the name of any nominee of the Fund
or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Fund, unless the Fund has authorized
in writing the appointment of a nominee to be used in common
with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name
of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article
1. All securities accepted by the Custodian on behalf of the
Fund under the terms of this Contract shall be in "street name"
or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts in the United States in the name of the
Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such
account or accounts, subject to the provisions hereof, all cash
received by it from or for the account of the Fund, other than
cash maintained by the Fund in a bank account established and
used in accordance with Rule 17f-3 under the Investment Company
Act of 1940. Funds held by the Custodian for the Fund may be
deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust
company shall be qualified to act as
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a custodian under the Investment Company Act of 1940 and that
each such bank or trust company and the funds to be deposited
with each such bank or trust company shall be approved by vote
of a majority of the Board of Trustees of the Fund. Such funds
shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in
that capacity.
2.5 Availability of Federal Funds. The Custodian shall, upon the
receipt of Proper Instructions, make federal funds available to
the Fund as of specified times agreed upon from time to time by
the Fund and the Custodian in the amount of checks received in
payment for Shares of the Fund which are deposited into the
Fund's account.
2.6 Collection of Income. The Custodian shall collect on a timely
basis all income and other payments with respect to United
States registered securities held hereunder to which the Fund
shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all
income and other payments with respect to United States bearer
securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof and
shall credit such income, as collected, to the Fund's custodial
account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they
become due and shall collect interest when due on securities
held hereunder. Income due the Fund on United States securities
loaned pursuant to the provisions of Section 2.2 (10) shall be
the responsibility of the Fund. The Custodian will have no duty
or responsibility in connection therewith, other than to provide
the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Fund is properly entitled.
2.7 Payment of Fund Moneys. Upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out moneys of the Fund in
the following cases only:
1) Upon the purchase of domestic securities, futures
contracts or options on futures contracts for the account
of the Fund but only (a) against the delivery of such
securities, or evidence of title to futures contracts or
options on futures contracts, to the Custodian (or any
bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Fund
or in the name of a nominee of the Custodian referred to
in Section 2.3 hereof or in proper form for transfer; (b)
in the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in
Section 2.10 hereof (c) in the case of repurchase
agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities
either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with
such securities (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund
or (d) in the case of investments in companies that do not
issue certificates, the delivery to the Custodian of other
evidence of ownership, or investments in securities that
require payment to an escrow account pending closing of
the purchase, deposit to such escrow against future
delivery of such securities;
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2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the payment of any expense or liability incurred by
the Fund, including but not limited to the following
payments for the account of the Fund: interest, taxes,
management, accounting, transfer agent and legal fees, and
operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated
as deferred expenses;
4) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
5) For payment of the amount of dividends received in respect
of securities sold short;
6) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Trustees or of the Executive
Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring
such purpose to be a proper purpose, and naming the person
or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. In any and every case where payment for purchase of
domestic securities for the account of the Fund is made by the
Custodian in advance of receipt of the securities purchased in
the absence of specific written instructions from the Fund to so
pay in advance, the Custodian shall be absolutely liable to the
Fund for such securities to the same extent as if the securities
had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other
bank or trust company which is itself qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian, as its agent to carry out such of the provisions of
this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities
hereunder nor permit it to delegate substantially all of its
duties.
2.10 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain domestic securities, owned by the Fund
in a clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of
1934, which acts as a securities depository, or in the
book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to
herein as "Securities System", in accordance-with applicable
Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep domestic securities of the Fund in
a Securities System provided that such securities are
represented in an account ("Account") of the Custodian in
the Securities System which shall not include any assets
of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a
Securities System shall identify by book-entry those
securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased
for the account of the Fund upon (i) receipt of advice
from the Securities System that such securities have been
transferred to the Account, and (ii) the making of an
entry on the
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<PAGE>
records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of the
Fund upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred to
the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices
from the Securities System of transfers of domestic
securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund in the form of
a written advice or notice and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of
the Fund;
4) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and
procedures for safeguarding domestic securities deposited
in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 12
hereof;
6) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Securities
System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any
of its or their employees or from failure of the Custodian
or any such agent to enforce effectively such rights as it
may have against the Securities System; at the election of
the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim against
the Securities System or any other person which the
Custodian may have as a consequence of any such loss or
damage if and to the extent that the Fund has not been
made whole for any such loss or damage.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of
any agreement among the Fund, the Custodian and a broker-dealer
registered under the Exchange Act and a member of the NASD (or
any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission
or any registered contract market), or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii)
for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or
sold by the Fund, (iii) for the purposes of compliance by the
Fund with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance
of segregated accounts by registered investment companies and
(iv) for other proper trust purposes, but only, in the case of
clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of
the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such
segregated account and declaring such purposes to be proper
trust purposes.
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<PAGE>
2.12 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all
federal and state tax purposes in connection with receipt of
income or other payments with respect to domestic securities of
the Fund held by it and in connection with transfers of such
securities.
2.13 Proxies. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the
registered holder of such securities, if the securities are
registered otherwise than in the name of the Fund or a nominee
of the Fund, all proxies, without indication of the manner in
which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all
notices relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to the Fund all written
information (including, without limitation, pendency of calls
and maturities of domestic securities and expirations of rights
in connection therewith and notices of exercise of call and put
options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the
Custodian from issuers of the domestic securities being held for
the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the
domestic securities whose tender or exchange is sought and from
the party (or his agents) making the tender or exchange offer.
If the Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund
shall notify the Custodian at least three business days prior to
the date on which the Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian
shall provide the Fund, at such times as the Fund may reasonably
require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures
for safeguarding securities, futures contracts and options on
futures contracts, including domestic securities deposited
and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such
reports shall be of sufficient scope and in sufficient detail,
as may reasonably be required by the Fund, to provide reasonable
assurance that any material inadequacies would be disclosed by
such examination, and, if there are no such inadequacies, the
reports shall so state.
2.16 Unauthorized Payments. The Custodian shall not deliver to any
trustee, officer or employee of the Fund any portfolio
securities or cash of the Fund which it holds as Custodian. This
provision shall not be deemed to apply to dividend payments or
proceeds of redemption or repurchase of the Fund shares held by
him in any capacity to such trustee, officer or employee in his
capacity as shareholder nor to payments made as compensation or
as reimbursement for expenses incurred on behalf of the Fund.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Custodian is
authorized and instructed to employ as sub-custodians for the
Fund's securities and other assets maintained outside of the
United States the foreign banking institutions and foreign
securities depositories designated on Schedule A
hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", together with a certified resolution of the
Fund's Board of Trustees, the Custodian and the Fund may agree
to amend Schedule A
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<PAGE>
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodians. Upon receipt of Proper Instructions from the Fund
the Custodian shall cease the employment of any one or more of
such sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of the foreign
sub-custodians to: (a) "foreign securities", as defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act
of 1940, and (b) cash and cash equivalents in such amounts as
the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be
agreed upon in writing by the Custodian and the Fund, assets of
the Fund shall be maintained in foreign securities depositories
only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms
hereof.
3.4 Segregation of Securities. The Custodian shall identify on its
books as belonging to the Fund, the foreign securities of the
Fund held by each foreign sub-custodian. Each agreement pursuant
to which the Custodian employs a foreign banking institution
shall require that such institution establish a custody account
for the Custodian on behalf of the Fund and physically segregate
in that account securities and other assets of the Fund, and, in
the event that such institution deposits the Fund's securities
in a foreign securities depository, that it shall identify on
its books as belonging to the Custodian, as agent for the Fund,
the securities so deposited (all collectively referred to as the
"Account").
3.5 Agreements with Foreign Banking Institutions. Each agreement
with a foreign banking institution shall be substantially in the
form set forth in Exhibit 1 hereto and shall provide that: (a)
the Fund's assets will not be subject to any right, charge,
security interest, lien or claim of any kind in favor of the
foreign banking institution or its creditors, except a claim of
payment for their safe custody or administration; (b) beneficial
ownership for the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained
identifying the assets as belonging to the Fund; (d) officers of
or auditors employed by, or other representatives of the
Custodian, including to the extent permitted under applicable
law the independent public accountants for the Fund, will be
given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign
sub-custodian will be subject only to the instructions of the
Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of
the Fund, the Custodian will use its best efforts to arrange for
the independent accountants of the Fund to be afforded access to
the books and records of any foreign banking institution
employed as a foreign sub-custodian insofar as such books and
records relate to the performance of such foreign banking
institutions under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of
the securities and other assets of the Fund held by foreign
sub-custodians, including but not limited to an identification
of entities having possession of the Fund's securities and other
assets and advices or notifications of any transfers of
securities to or from each custodial account
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<PAGE>
maintained by a foreign banking institution for the Custodian on
behalf of the Fund indicating, as to securities acquired for the
Fund, the identity of the entity having physical possession of
such securities.
3.8 Transactions in Foreign Custody Account.
(a) Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the
parties, the Custodian shall make or cause its foreign
sub-custodian to transfer, exchange or deliver foreign
securities owned by the Fund, but except to the extent
explicitly provided herein only in any of the cases
specified in Section 2.2.
(b) Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the
parties the Custodian shall pay out or cause its foreign
sub-custodians to pay out monies of the Fund, but except
to the extent explicitly provided herein only in any of
the cases specified in Section 2.7.
(c) Notwithstanding any provision of this Contract to the
contrary, settlement and payment for securities received
for the account of the Fund and delivery of securities
maintained for the account of the Fund may be effected in
accordance with the customary or established securities
trading or securities processing practices and procedures
in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer)
against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(d) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such
entity's nominee to the same extent as set forth in
Section 2.3 of this Contract and the Fund agrees to hold
any such nominee harmless from any liability as a holder
of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a
foreign sub-custodian shall require the institution to exercise
reasonable care in the performance of its duties and to
indemnify, and hold harmless, the Custodian and Fund from and
against any loss, damage, cost, expense, liability or claim
arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund
has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.10 Monitoring Responsibilities. The Custodian shall furnish
annually to the Fund, during the month of June, information
concerning the foreign sub-custodians employed by the Custodian.
Such information shall be similar in kind and scope to that
furnished to the Fund in connection with the initial approval of
this Contract. In addition, the Custodian will promptly inform
the Fund in the event that the Custodian learns of a material
adverse change in the financial condition of a foreign
sub-custodian or is notified by a foreign banking institution
employed as a foreign sub-custodian that there appears to be a
substantial likelihood that its shareholders' equity will
decline below $200 million (U.S. dollars or the equivalent
thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally
accepted U.S. accounting principles).
3.11 Branches of U.S. Banks. Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the
custody of the Fund assets is maintained in a foreign branch of
a banking institution which is a "bank" as defined by Section
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2(a)(5) of the Investment Company Act of 1940 which meets the
qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be
governed by Article I of this Contract.
4. Proper Instructions
Proper Instructions as used herein means a writing signed or initialed
by one or more person or persons as the Board of Trustees shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of transaction involved, including a specific statement of the purpose
for which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Upon receipt of a certificate of the Secretary or an Assistant Secretary as to
the authorization by the Board of Trustees of the Fund accompanied by a detailed
description of procedures approved by the Board of Trustees, Proper Instructions
may include communications effected directly between electromechanical or
electronic devices provided that the Board of Trustees and the Custodian are
satisfied that such procedures afford adequate safeguards for the Fund's assets.
5. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses not to
exceed $500 per quarter of handling securities or other similar
items relating to its duties under this Contract, provided that
all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments; and
4) In general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property of
the Fund except as otherwise directed by the Board of Trustees
of the Fund.
6. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper reasonably
believed by it in good faith to be genuine and to have been properly executed by
or on behalf of the Fund or its Investment Adviser. The Custodian may receive
and accept a certified copy of a vote of the Board of Trustees of the Fund as
conclusive evidence (a) of the authority of any person to act in accordance with
such vote or (b) of any determination or of any action by the Board of Trustees
pursuant to the Declaration of Trust as described in such vote, and such vote
may be considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
7. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of the Fund and/or compute the net asset value per share of
the outstanding shares of the Fund or, if directed in writing to do so by the
Fund, shall itself keep such books of account and/or compute such net asset
value per share. The Custodian shall also calculate weekly and at the last
business day of each month the net income of the Fund as described in the Fund's
currently effective prospectus and
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<PAGE>
shall advise the Fund and the Transfer Agent weekly of the total amounts of such
net income and, if instructed in writing by an officer of the Fund to do so,
shall advise the Transfer Agent periodically of the division of such net income
among its various components. The calculations of the net asset value per share
and the weekly and month-end income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
8. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 3la-1 and 3la-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All such records shall be the
property of the Fund and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Fund and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by the Fund and held by the Custodian and shall,
when requested to do so by the Fund and for such compensation as shall be agreed
upon between the Fund and the Custodian, include certificate numbers in such
tabulations.
9. Opinion of Fund's Independent Accountant; Accountants Reports
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-2, and Form N-SAR or other
annual reports to the Securities and Exchange Commission and with respect to any
other requirements of such Commission.
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent accountants with regard to its
own, or with regard to its agent's through which securities are deposited with a
Securities System, accounting system, internal accounting control and procedures
for safeguarding securities, including securities deposited and/or maintained in
a Securities System, relating to the services provided by the Custodian under
this Agreement; such reports shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund, to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, shall so state.
10. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
11. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
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<PAGE>
It is understood that if in any case the Fund may be asked to indemnify
or save the Custodian harmless, the Fund shall be fully and promptly advised of
all pertinent facts concerning the situation in question, and it is further
understood that the Custodian will indemnify and notify the Fund promptly
concerning any situation which presents or appears likely to present the
probability of such a claim for indemnification against the Fund. In the event
of the Custodian's failure to advise the Fund as required above, however, the
Custodian shall lose its right to indemnification hereunder only to the extent
that the Fund's interests are actually prejudiced thereby. The Fund shall have
the option to defend the Custodian against any claim which may be the subject of
this indemnification, and in the event that the Fund so elects it will so notify
the Custodian, and thereupon the Fund shall take over complete defense of the
claim, and the Custodian shall in such situations initiate no further legal or
other expenses for which it shall seek indemnification under this Article 11.
The Custodian shall in no case confess any claim or make any compromise in any
case in which the Fund will be asked to indemnify the Custodian except with the
Fund's prior written consent.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from, or caused by, the direction of or authorization by the Fund to
maintain custody or any securities or cash of the Fund in a foreign country
including, but not limited to, losses resulting from nationalization,
expropriation, currency restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for
any purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement.
12. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Trustees of the Fund have approved the initial use
of a particular Securities System and the receipt of an annual certificate of
the Secretary or an Assistant Secretary that the Board of Trustees have reviewed
the use by the Fund of such Securities System, as required in each case by Rule
17f-4 under the Investment Company Act of 1940, as amended; provided further,
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Declaration of Trust, and further provided, that the Fund may at any time
by action of its Board of Trustees (i) substitute another bank or trust company
for the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the
12
<PAGE>
happening of a like event at the direction of an appropriate regulatory agency
or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
13. Successor Custodian
If a successor custodian shall be appointed by the Board of Trustees of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it or its agents hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
14. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Declaration of Trust of the Fund. No interpretive or additional provisions
made as provided in the preceding sentence shall be deemed to be an amendment of
this Contract.
15. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
13
<PAGE>
16. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
IN WITNESS WHEREOF, each of the parties has caused this
instrument to be executed in its name and behalf by its duly authorized
representative and its seal to be hereunder affixed as of the 21st day of April,
1987.
ATTEST H&Q HEALTHCARE INVESTORS
/s/ Kimberley L. Carroll By /s/ Alan G. Carr
- ------------------------ -------------------------------
Assistant Secretary President
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ K.M. Kulin By /s/ Patricia A. Noonan
- ------------------------ -------------------------------
Assistant Secretary Vice President
14
<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of H&Q Healthcare
Investors for use as sub-custodians for the Fund's securities and other assets:
[insert banks and securities depositories]
<PAGE>
Exhibit 1
CUSTODIAN AGREEMENT
To:
Gentlemen:
The undersigned ("State Street") hereby requests that you (the "Bank")
establish a custody account and a cash account for each custodian/employee
benefit plan identified in the Schedule attached to this Agreement and each
additional account which is identified to this Agreement. Each such custody or
cash account as applicable will be referred to herein as the "Account" and will
be subject to the followings terms and conditions:
1. The Bank shall hold as agent for State Street and shall physically
segregate in the Account such cash, bullion, coin, stocks, shares,
bonds, debentures, notes and other securities and other property which
is delivered to the Bank for that State Street Account (the
"Property").
2. a. Without the prior approval of State Street it will not deposit
securities in any securities depository or utilize a clearing
agency, incorporated or organized under the laws of a country
other than the United States, unless such depository or clearing
house operates the central system for handling of securities or
equivalent book-entries in that country or operates a
transnational system for the central handling of securities or
equivalent book-entries;
b. When securities held for an Account are deposited in a securities
depository or clearing agency by the Bank, the Bank shall
identify on its books as belonging to State Street as agent for
such Account, the securities so deposited.
3. The Bank represents that either:
a. It currently has stockholders' equity in excess of $200 million
(U.S. dollars or the equivalent of U.S. dollars computed in
accordance with generally accepted U.S. accounting principles)
and will promptly inform State Street in the event that there
appears to be a substantial likelihood that its stockholders'
equity will decline below $200 million, or in any event, at such
time as its stockholders' equity in fact declines below $200
million; or
b. It is the subject of an exemptive order issued by the United
States Securities and Exchange Commission, which such order
permits State Street to employ the Bank as a sub-custodian,
notwithstanding the fact that the Bank's stockholders' equity is
currently below $200 million or may in the future decline below
$200 million due to currency fluctuation.
4. Upon the written instructions of State Street, as permitted by
Paragraph 8, the Bank is authorized to pay cash from the Account and
to sell, assign, transfer, deliver or exchange, or to purchase for the
Account, any and all stocks, shares, bonds, debentures, notes and
other securities ("Securities"), bullion, coin and any other property,
but only as provided in such written instructions. The Bank shall not
be
<PAGE>
held liable for any act or omission to act on instructions
given or purported to be given should there be any error in
such instructions.
5. Unless the Bank receives written instructions of State Street
to the contrary, the Bank is authorized:
a. To promptly receive and collect all income and principal
with respect to the Property and to credit cash receipts
to the Account;
b. To promptly exchange securities where the exchange is
purely ministerial (including, without limitation, the
exchange of temporary securities for those in definitive
form and the exchange of warrants, or other documents of
entitlement to securities, for the securities themselves);
c. To promptly surrender securities at maturity or when
called or redemption upon receiving payment therefor;
d. Whenever notification of a rights entitlement or a
fractional interest resulting from a rights issue, stock
dividend or stock split is received for the Account and
such rights entitlement or fractional interest bears an
expiration date, the Bank will endeavor to obtain State
Street Bank's instructions, but should these not be
received in time for the Bank to take timely action, the
Bank is authorized to sell such rights entitlement or
fractional interest and to credit the Account;
e. To hold registered in the name of the nominee of the Bank
or its agents such Securities as are ordinarily held in
registered form;
f. To execute in State Street's name for the Account,
whenever the Bank deems it appropriate, such ownership and
other certificates as may be required to obtain the
payment of income from the Property; and
g. To pay or cause to be paid, from the Account any and all
taxes and levies in the nature of taxes imposed on such
assets by any governmental authority and shall use
reasonable efforts, to promptly reclaim any foreign
withholding tax relating to the Account.
6. If the Bank shall receive any proxies, notices, reports or
other communications relative to any of the Securities of the
Account in connection with tender offers, reorganization,
mergers, consolidations, or similar events which may have an
impact upon the issuer thereof, the Bank shall promptly
transmit any such communication to State Street Bank by means
as will permit State Street Bank to take timely action with
respect thereto.
7. The Bank is authorized in its discretion to appoint brokers
and agents in connection with the Bank's handling of
transactions relating to the Property provided that any such
appointment shall not relieve the Bank of any of its
responsibilities or liabilities hereunder.
8. Written instructions shall include (i) instructions in writing
signed by such persons as are designated in writing by State
Street; (ii) telex or tested telex instructions of State
Street; (iii) other forms of instruction in computer readable
form as shall be customarily utilized for the transmission of
like information; and (iv) such other forms of communication
as from time to time shall be agreed upon by State Street and
the Bank.
<PAGE>
9. The Bank shall supply periodic reports with respect to the
safekeeping of assets held by it under this agreement. The
content of such reports shall include but not be limited to
any transfer to or from any account held by the Bank hereunder
and such other information as State Street may reasonably
request.
10. In addition to its obligations under Section 2B hereof, the
Bank shall maintain such other records as may be necessary to
identify the assets hereunder as belonging to each
custodian/employee benefit plan identified in our Schedule
attached to this agreement and each additional account which
is identified to this agreement.
11. The Bank agrees that its books and records relating to its
actions under this Agreement shall be opened to the physical,
on-premises inspection and audit at reasonable times by
officers of, auditors employed by or other representatives
of State Street (including to the extent permitted under
____________________________ law the independent public
accountants for any entity whose Property is being held
hereunder) and shall be retained for such period as shall be
agreed by State Street and the Bank.
12. The Bank shall be entitled to reasonable compensation for its
services and expenses as custodian under this Agreement, as
agreed upon from time to time by the Bank and State Street.
13. The Bank shall exercise reasonable care in the performance of
its duties, as are set forth or contemplated herein or
contained in instructions given to the Bank which are not
contrary to this Agreement, shall maintain adequate insurance
and agrees to indemnify and hold harmless, State Street and
each Account from and against a loss, damage, cost, expense,
liability or claim arising out of or in connection with the
Bank's performance of its obligations hereunder.
14. The bank agrees (i) the Property held hereunder is not subject
to any right, charge, security interest, lien or claim of any
kind in favor of the Bank or any of its agents or its
creditors except a claim of payment for their safe custody and
administration and (ii) the beneficial ownership of the
Property shall be freely transferable without the payment of
money or other value other than for safe custody or
administration.
15. The Bank agrees to meet State Street Operating Requirements
(See Exhibit A).
16. This Agreement may be terminated by the Bank or State Street
by 60 days' written notice to the other, sent by registered
mail or express courier. The Bank, upon the date this
Agreement terminates pursuant to notice which has been given
in a timely fashion, shall deliver the Property to the
beneficial owner unless the Bank has received from the
beneficial owner 60 days, prior to the date on which this
Agreement is to be terminated written instructions of State
Street specifying the name(s) of the person(s) to whom the
Property shall be delivered.
17. The Bank and State Street shall each use its best efforts to
maintain the confidentiality of the Property in each Account,
subject, however, to the provisions of any laws requiring the
disclosure of the Property.
<PAGE>
18. Unless otherwise specified in this Agreement, all notices with
respect to matters contemplated by this Agreement shall be
deemed duly given when received in writing or by confirmed
telex by the Bank or State Street at their respective
addresses set forth below, or at such other address as be
specified in each case in a notice similarly given:
To State Street Master Trust Division, Global Custody
STATE STREET BANK AND TRUST COMPANY
P.O. Box 1713
Boston, Massachusetts 02105
U.S.A.
To the Bank
19. This Agreement shall be governed by and construed in
accordance with the laws of ______________________________
except to the extent that such laws are preempted by the laws
of the United States of America.
Please acknowledge your agreement to the foregoing by executing a copy
of this letter.
Very truly yours,
STATE STREET BANK AND TRUST COMPANY
By: ______________________________
Vice President
Date: ____________________________
Agreed to by:
By: _________________________________
Date: _______________________________
<PAGE>
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
I. Administration
A. Custody Service - Maintain custody of fund assets. Settle
portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements
and report cash transactions.
B. Custody and Portfolio Accounting Service - Maintain custody of
fund assets. Settle portfolio purchases and sales. Report buy and
sell fails. Determine and collect portfolio income. Make cash
disbursements and report cash transactions. Maintain investment
ledgers, provide selected portfolio transaction, position and
income reports.
C. Custody, Portfolio and Fund Accounting Service - Maintain custody
of fund assets. Settle portfolio purchases and sales. Report buy
and sell fails. Determine and collect portfolio income. Make cash
disbursements and report cash transactions. Maintain investment
ledgers, provide selected portfolio transactions, position and
income reports. Maintain general ledger and capital stock
accounts. Prepare daily trial balance. Calculate net asset value
daily. Provide selected general ledger reports. Securities yield
or market value quotation will be provided to State Street by the
fund.
The administration fee shown below is an annual charge, billed and
payable monthly, based on average monthly net assets.
ANNUAL FEES PER PORTFOLIO
B. Custody and C. Custody, Portfolio
Fund Net Assets A. Custody Portfolio Acct. & Fund Accounting
First $20 million 1/ 30 of 1% 1/ 20 of 1% 1/ 15 of 1%
Next $80 million 1/ 60 of 1% 1/ 40 of 1% 1/ 30 of 1%
Excess 1/100 of 1% 1/100 of 1% 1/100 of 1%
Minimum Monthly
Charges $1,500 $2,000 $2,500
<PAGE>
II. Global Custody
Services provided include: Cash Movements, Foreign Communication,
Foreign Exchange (local currency settlements).
Fund Net Assets (global only) Annual Fees
First $50 million 18 Basis Points
Next $50 million 15 Basis Points
Over $100 million 12 Basis Points
Minimum Per Client $5,000.00 Annually
III. Portfolio Trades - For each line item processed
State Street Bank Repos $7.00
DTC or Fed Book Entry $12.00
New York Physical Settlements $25.00
All other trades $16.00
IV. Options
Option charge for each option written or
closing contract, per issue, per broker $25.00
Option expiration charge, per issue, per broker $15.00
Option exercised charge, per issue, per broker $15.00
V. Lending of Securities
Deliver loaned securities versus cash
collateral $20.00
Deliver loaned securities versus
securities collateral $30.00
Receive/deliver additional cash collateral $6.00
Substitutions of securities collateral $30.00
Deliver cash collateral versus receipt of
loaned securities $15.00
Deliver securities collateral versus receipt
of loaned securities $25.00
Loan administration -- mark-to-market
per day, per loan $3.00
VI. Interest Rate Futures
Transactions -- no security movement $8.00
VII. Coupon Bonds
Monitoring for calls and processing coupons --
for each coupon issue held -- monthly charge $5.00
<PAGE>
VIII. Holdings Charge
For each issue maintained -- monthly charge $5.00
IX. Paydown of Government Securities
Per paydown $10.00
X. Dividend Charges
For items held at the Request of Traders
over record date in street form $50.00
XI. Special Services
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security shipments and
the preparation of special reports will be subject to negotiation.
Fees for tax accounting/recordkeeping for options, financial futures,
and other special items will be negotiated separately.
XII. Out-of-Pocket Expenses
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but
are not limited to the following:
Telephone
Wire Charges ($5.25 per wire in and $5.00 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer -- $8.00 Each
Transfer Fees
Sub-custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 --$4.25
GNMA Transfer -- $l5.00 each
XIII. Payment
The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed to the fund's
offices.
<PAGE>
AMENDMENT
The Custodian Contract dated April 21, 1987, as amended, between H&Q
Healthcare Investors (the "Fund") and State Street Bank and Trust Company (the
"Custodian") is hereby further amended as follows:
I. Section 2.1 is amended to read as follows:
"Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property, including all
securities owned by the Fund, other than (a) securities which are
maintained pursuant to Section 2.10 in a clearing agency which acts as
a securities depository or in a book-entry system authorized by the
U.S. Department of the Treasury, collectively referred to herein as
"Securities System" and (b) commercial paper of an issuer for which
State Street Bank and Trust Company acts as issuing and paying agent
("Direct Paper") which is deposited and/or maintained in the Direct
Paper System of the Custodian pursuant to Section 2.10.A."
II. Section 2.2 is amended to read, in relevant part as follows:
"Delivery of Securities. The Custodian shall release and deliver
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") only upon receipt
of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:"
III. Section 2.2 4) through 13) are renumbers 5) through 14) and the
following is added as subparagraph 4):
"4) In the case of a sale effected through the Direct Paper
System, in accordance with the provisions of Section 2.10.A
hereof."
IV. Section 2.7(l) is amended to read in relevant part as follows:
"Payment and Fund Monies. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties,
the Custodian shall pay out monies of the Fund in the following cases
only:
1) Upon the purchase of securities, options, futures contracts or
options on futures contracts for the account of the Fund but
only (a) against the delivery of such securities or evidence
of title to such options, futures contracts or options on
futures contracts, to the Custodian (or any bank, banking firm
or trust company doing business in the United States or abroad
which is qualified under the Investment Company Act of 1940,
as amended, to act as a custodian and has been designated by
the Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth
in Section 2.10 hereof or (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10.A; or (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-
1
<PAGE>
dealer which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) in the case of purchase by the
Fund of securities owned by State Street Bank and Trust
Company ("State Street") for its own account, against (A)
delivery of the receipt evidencing purchase by the Fund, (B)
earmarking certificates for such securities to show ownership
by the Fund or transfer of such securities from State Street's
proprietary account at the Federal Reserve Bank to its account
described in (i) above, unless the securities are already held
in the latter account, (C) the entry on the records of State
Street showing that such securities are held by the Fund, and
(D) delivery of written evidence of the agreement of State
Street to repurchase such securities from the Fund; provided
that, upon receipt of Proper Instructions, the Custodian shall
transfer to another bank or trust company qualified to act as
a custodian under the Investment Company Act of 1940, as
amended, securities held in a Securities System and purchased
from State Street subject to State Street's agreement to
repurchase such securities; or (e) in the case of investments
in companies that do not issue certificates, the delivery to
the Custodian of other evidence of ownership, or investments
in securities that require payment to an escrow account
pending closing of the purchase, deposit to such escrow
against future delivery of such securities;"
V. Following Section 2.10, there is inserted a new Section 2.10.A to read
as follows:
2.10.A "Fund Assets Held in the Custodian's Direct Paper System.
The Custodian may deposit and/or maintain securities owned
by the Fund for which the Custodian acts as issuing and
paying agent for the direct issue of commercial paper by and
for issuers through the Custodian's book-entry system,
referred to herein as the "Direct Paper System," subject to
the following provisions:
1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of
Proper Instructions;
2) The Custodian may keep securities of the Fund in
the Direct Paper System only if such securities are
represented in an account ("Account") of the
Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to
securities of the Fund which are maintained in the
Direct Paper System shall identify by book-entry
those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased
for the account of the Fund upon the making of an
entry on the records of the Custodian to reflect
such payment and transfer of securities to the
account of the Fund. The Custodian shall transfer
securities sold for the account of the Fund upon
the making of an entry on the records of the
Custodian to reflect such transfer and receipt of
payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation
of each transfer to or from the account of the
Fund, in the form of a written advice or notice, of
Direct Paper on the next business day following
such transfer and shall furnish to the Fund copies
of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the
account of the Fund;
6) The Custodian shall provide the Fund with any
report on its system of internal accounting control
as the Fund may reasonably request from time to
time."
2
<PAGE>
VI. Section 12 is hereby amended to read as follows:
"Effective Period, Termination and Amendment. This Contract shall
become effective as of its execution, shall continue in full force and
effect until terminated as hereinafter provided, may be amended at any
time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage
prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing;
provided, however that the Custodian shall not act under Section 2.10
hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Directors of the
Fund has approved the initial use of a particular Securities System and
the receipt of an annual certificate of the Secretary or an Assistant
Secretary that the Board of Directors has reviewed the use by the Fund
of such Securities System, as required in each case by Rule 17f-4 under
the Investment Company Act of 1940, as amended and that the Custodian
shall not act under Section 2.10.A hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary that
the Board of Directors has approved the initial use of the Direct Paper
System and the receipt of an annual certificate of the Secretary or an
Assistant Secretary that the Board of Directors has reviewed the use by
the Fund of the Direct Paper System; provided further, however, that
the Fund shall not amend or terminate this Contract in contravention of
any applicable federal or state regulations, or any provision of the
Declaration of Trust, and further provided, that the Fund may at any
time by action of its Board of Trustees (i) substitute another bank or
trust company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency, the Federal Deposit Insurance
Corporation or the Commissioner of Banks for the Commonwealth of
Massachusetts or upon the happening of a like event at the direction of
an appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and
shall likewise reimburse the Custodian for its costs, expenses and
disbursements."
Except as otherwise expressly amended and modified herein, the
provisions of the Custodian Contract shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed in its name and on its behalf by its duly authorized
representatives and its Seal to be hereto affixed as of the 21st day of July,
1989.
ATTEST H&Q HEALTHCARE INVESTORS
/s/ Kimberley L. Carroll By /s/ Alan G. Carr
- ------------------------ -------------------------------------
Assistant Secretary President
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ By /s/
- ------------------------ -------------------------------------
Assistant Secretary Vice President
3
EXHIBIT 99.2k(i)
REGISTRAR,
TRANSFER AGENCY AND SERVICE AGREEMENT
between
H&Q HEALTHCARE INVESTORS
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
Page
Article 1 Terms of Appointment; Duties of the Bank . . . . . . . . . 1
Article 2 Fees and Expenses . . . . . . . . . . . . . . . . . . . . 2
Article 3 Representations and Warranties of the Bank . . . . . . . . 2
Article 4 Representations and Warranties of the Fund . . . . . . . . 2
Article 5 Indemnification . . . . . . . . . . . . . . . . . . . . . 3
Article 6 Covenants of the Fund and the Bank . . . . . . . . . . . . 5
Article 7 Termination of Agreement . . . . . . . . . . . . . . . . . 5
Article 8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . 5
Article 9 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . 6
Article 10 Massachusetts Law to Apply . . . . . . . . . . . . . . . . 6
Article 11 Merger of Agreement . . . . . . . . . . . . . . . . . . . 6
<PAGE>
REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 21st day of April 1987, by and between H&Q
HEALTHCARE INVESTORS, a Massachusetts business trust, having its principal
office and place of business at 50 Rowes Wharf, Fourth Floor, Boston,
Massachusetts 02110-3328, (the "Fund"), and STATE STREET BANK AND TRUST COMPANY,
a Massachusetts corporation having its principal office and place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its registrar,
transfer agent, dividend disbursing agent and agent in connection with certain
other activities and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of the Bank
1.01 Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints the Bank to act as, and the Bank agrees to
act as registrar, transfer agent for the Fund's authorized and issued shares of
beneficial interest ("Shares"), dividend disbursing agent and agent in
connection with any dividend reinvestment as set out in the prospectus of the
Fund, corresponding to the date of this Agreement.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to
time by agreement between the Fund and the Bank, the
Bank shall:
(i) issue and record the appropriate number of Shares
and hold such Shares in the appropriate
Shareholder account, or in the case of
certificated Shares, provide for delivery and
authentication of such Shares;
(ii) effect transfers of Shares by the registered
owners thereof upon receipt of appropriate
documentation;
(iii) prepare and transmit payments for dividends and
distributions declared by the Fund; and
(iv) act as agent for Shareholders pursuant to the
dividend reinvestment plan as amended from time
to time in accordance with the terms of the
agreement to be entered into between the
Shareholders and the Bank in substantially the
form attached as Exhibit A hereto.
(b) In addition to and not in lieu of the services set
forth in the above paragraph (a), the Bank shall: (i)
perform all of the customary services of a registrar,
transfer agent, dividend disbursing agent and agent of
the dividend reinvestment and cash purchase plan as
described in Article 1 consistent with those procedures
in effect as at the date of this Agreement. The
detailed definition, frequency, limitations and
associated costs (if any) set out in the attached fee
schedule, include but are not limited to: maintaining
all Shareholder accounts, preparing Shareholder meeting
lists, mailing proxies,
1
<PAGE>
receiving and tabulating proxies and mailing
Shareholder reports to current Shareholders,
withholding taxes on U.S. resident and non-resident
U.S. and alien accounts where applicable, preparing
and filing U.S. Treasury Department Forms 1099 and
other appropriate forms required with respect to
dividends and distributions by federal authorities for
all registered Shareholders, preparing and mailing
confirmation forms and statements of account to
Shareholders for all confirmable transactions in
Shareholder accounts, and providing Shareholder
account information.
Article 2 Fees and Expenses
2.01 For the performance by the Bank pursuant to this Agreement, the
Fund agrees to pay the Bank an annual maintenance fee as set out in the initial
fee schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the Fund
agrees to reimburse the Bank for out-of-pocket expenses or advances reasonably
incurred by the Bank for the items set out in the fee schedule attached hereto.
In addition, any other expenses reasonably incurred by the Bank at the request
or with the consent of the Fund, will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within
five days following the mailing of the respective billing notice. Postage and
the cost of materials for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to the Bank by the Fund
at least seven (7) days prior to the mailing date of such materials.
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the Commonwealth
of Massachusetts.
3.03 It is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.01 It is a Massachusetts business trust duly organized and existing
and in good standing under the laws of The Commonwealth of Massachusetts.
2
<PAGE>
4.02 It is empowered under applicable laws and by its Declaration of
Trust and By-Laws to enter into and perform this Agreement.
4.03 All trust proceedings required by said Declaration of Trust and
By-laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is a closed-end, diversified investment company registered
under the Investment Company Act of 1940.
4.05 A registration statement under the Securities Act of 1933 is
currently effective and appropriate state securities law filings have been made
with respect to all Shares of the Fund being offered for sale; information to
the contrary will result in immediate notification to the Bank.
4.06 It shall make all required filings under federal and state
securities laws.
Article 5 Indemnification
5.01 The Bank shall not be responsible for, and the Fund to the full
extent permitted by law shall indemnify and hold the Bank harmless from and
against, any and all losses, damages, costs, charges, reasonable counsel fees,
payments, expenses and liability arising out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement,
provided that such actions are taken in good faith and
without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the
terms of this Agreement, or which arise out of the
Fund's lack of good faith, negligence or willful
misconduct or which arise out of the breach of any
representation or warranty of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records and documents
which (i) are received by the Bank or its agents or
subcontractors and furnished to it by or on behalf of
the Fund, and (ii) have been prepared and/or maintained
by the Fund or any other person or firm on behalf of
the Fund.
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or
requests of the Fund's representative.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or
regulations or the securities laws or regulations of
any state that such Shares be registered in such state
or in violation of any stop order or other
determination or ruling by any federal agency or any
state with respect to the offer or sale of such Shares
in such state.
5.02 The Bank shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, reasonable counsel fees,
payments, expenses and liability arising out of or attributable to any action or
failure or omission to act by the Bank as a result of the Bank's lack of good
faith, negligence or willful misconduct.
3
<PAGE>
5.03 At any time the Bank may apply to any authorized officer of the
Fund for instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the Bank under
this Agreement, and the Bank and its agents or subcontractors shall not be
liable and shall be indemnified by the Fund for any action taken or omitted by
it in reliance upon such instructions or upon the opinion of such counsel. The
Bank, its agents and subcontractors shall be protected and indemnified (unless
the loss has been contributed to by the Bank's lack of good faith or willful
misconduct) in acting upon any paper or document furnished by or on behalf of
the Fund, reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information, data, records or
documents provided the Bank or its agents or subcontractors by telephone, in
person, machine readable input, telex, CRT data entry or other similar means
authorized by the Fund, and shall not be held to have notice of any change of
authority of any person, until receipt of written notice thereof from the Fund.
The Bank, its agents and subcontractors shall also be protected and indemnified
in recognizing Share certificates which are reasonably believed to bear the
proper manual or facsimile signatures of the officers of the Fund, and the
proper countersignature of any former transfer agent or former registrar, or of
a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any act
or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
It is understood that if in any case the Fund may be asked to indemnify
or save the Bank harmless, the Fund shall be fully and promptly advised of all
pertinent facts concerning the situation in question, and it is further
understood that the Bank will identify and notify the Fund promptly concerning
any situation which presents or appears likely to present the probability of
such a claim for indemnification against the Fund. In the event of the Bank's
failure to advise the Fund as required above, however, the Bank shall lose its
right to indemnification hereunder only to the extent that the Fund's interests
are actually prejudiced thereby. The Fund shall have the option to defend the
Bank against any claim which may be the subject of this indemnification, and in
the event that the Fund so elects it will so notify the Bank, and thereupon the
Fund shall take over complete defense of the claim, and the Bank shall in such
situations initiate no further legal or other expenses for which it shall seek
indemnification under this Article 5. The Bank shall in no case confess any
claim or make any compromise in any case in which the Fund will be asked to
indemnify the Bank except with the Fund's prior written consent.
5.07 The indemnification provisions of this Agreement shall survive any
termination of this Agreement.
4
<PAGE>
Article 6 Covenants of the Fund and the Bank
6.01 The Fund shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of
Trustees of the Fund authorizing the appointment of the
Bank and the execution and delivery of this Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the
Fund and all amendments thereto.
6.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of Share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
6.04 The Bank and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be disclosed to any other person, except as
may be required by law.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Fund. Additionally, the Bank reserves the right to charge for any other
reasonable expenses associated with such termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
5
<PAGE>
8.03 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston EquiServe LP, a
Massachusetts corporation which is duly registered as a transfer agent pursuant
to Section 17A(c)(1) of the Securities Exchange Act of 1934 ("Section
17A(c)(1)"), or (ii) a Boston EquiServe subsidiary duly registered as a
transfer agent pursuant to Section 17A(c)(1); provided, however, that the Bank
shall be as fully responsible to the Fund for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
Article 9 Amendment
9.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Trustees of the Fund.
Article 10 Massachusetts Law to Apply
10.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Article 11 Merger of Agreement
11.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
H&Q HEALTHCARE INVESTORS
BY: /s/ Alan G. Carr
----------------------------------------
President
ATTEST:
/s/ Kimberley L. Carroll
- ---------------------------------
Assistant Secretary
STATE STREET BANK AND TRUST COMPANY
BY: /s/ Patricia A. Noonan
----------------------------------------
Vice President
ATTEST:
/s/ K.M. Kulin
- ---------------------------------
Assistant Secretary
6
<PAGE>
EXHIBIT 1
DIVIDEND REINVESTMENT PLAN
Incorporated herein by reference to Exhibit 2(e) to Registrant's
registration statement on Form N-2 (File No. 333-19247), January 3, 1997.
7
<PAGE>
STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT and REGISTRAR SERVICES
CLOSED-END FUND FEE AGREEMENT
for
H&Q HEALTHCARE INVESTORS
ONGOING TRANSFER AGENT FEES
$7.00 per shareholder account per annum. Includes the issuance and registration
of the first 5,000 credit certificates in a calendar year. Excess credits beyond
5,000 to be billed at $1.25 each within a calendar year.
For each dividend reinvestment per participant $.75
For each optional cash infusion $.75
ACCOUNT MAINTENANCE SERVICES
o Establishing new accounts
o Preparation and mailing of W-9 solicitation to new accounts without T.I.N.'s
o Address changes
o Processing T.I.N. changes
o Processing routine and non-routine transfers of ownership
o Issuance of credit certificates (see limits)
o Posting debit and credit transactions
o Providing a daily transfer journal of ownership changes
o Responding to written shareholder communications
o Responding to shareholder telephone inquiries; toll-free number
o Placing and releasing stop transfers
o Replacing lost certificates
o Registration of credit certificates (see limits)
<PAGE>
Fee Agreement
Page 2
DIVIDEND DISBURSEMENT SERVICES
o Generate and mail twelve dividend checks per annum with one enclosure
o Replace lost dividend checks
o Processing of backup withholding and remittance
0 Preparation and filing of Federal Tax Forms 1099 and 1042
o Preparation and filing of State Tax information as directed
DIVIDEND REINVESTMENT SERVICES PROVIDED
o Processing optional cash investments and acknowledging same
o The reinvestment of dividend proceeds for participants
o Participant withdrawal or sell requests
o Preparation, mailing and filing of Federal Tax Form 1099B for sales
o Preparation and mailing of monthly reinvestment statements
ANNUAL MEETING SERVICES
o Coordination of mailing of proxies, proxy statement, annual report
and business reply envelope (out-of-pocket expenses billed as incurred)
o Providing one set of labels of banks, brokers and nominees for broker search
o Providing an Annual Meeting Record Date list
o Same day tabulation of returned proxies
o Daily reporting of tabulation results
o Interface support during solicitation effort
o Providing one Inspector of Election at Annual Meeting (out-of-pocket travel
expenses billed as cost as incurred)
o Providing an Annual Meeting Final Voted list
ADDRESSING AND MAILING SERVICES
o Preparation for the mailing of three (3) quarterly reports
o Addressing and mailing dividend reinvestment brochures to new shareholders
on a monthly basis, or as agreed
<PAGE>
Fee Agreement
Page 3
INFORMATIONAL SERVICES PROVIDED
o One complete statistical report per calendar year
- Shareholders by state
- Shareholders by classification code
- Shareholders by share grouping
TERMS OF FEE AGREEMENT
o Two years from date of execution
o Minimum $1,000. per month
o Escalation Clause - The per account annual fee upon renewal shall be equal
to the current fee increased by the lesser of (i) 6% or, (ii) the percentage
increase in the U.S. Department of Labor nation index of "Cost of Services
Less Rent" for the period current at renewal.
MISCELLANEOUS
o All out-of-pocket expenses such as postage, stationery, etc. will be billed
as incurred.
ADDITIONAL SERVICES
o Services over and above this Fee Schedule will be invoiced in accordance
with our current Schedule of Services or priced by appraisal.
<PAGE>
STATE STREET BANK AND TRUST COMPANY
STOCK TRANSFER AGENT FEE AGREEMENT
FOR
H&Q HEALTHCARE INVESTORS
FEE AGREEMENT EFFECTIVE DATES: FROM: 3/01/93 TO: 3/01/95
LENGTH OF FEE AGREEMENT: Two Years
REQUIRED SIGNATURES:
/s/ Charles Rossi April 5, 1993
- ----------------------------------- --------------------------
State Street Bank and Trust Company Date
Name: Charles V. Rossi
Title: Vice President
/s/ Alan G. Carr March 30, 1993
- ----------------------------------- ---------------------------
H&Q Healthcare Investors Date
Name: Alan G. Carr
Title: President
AGREEMENT
This document will constitute the agreement between H&Q HEALTHCARE
INVESTORS (the "FUND"), with its principal executive offices at 50 Rowes Wharf,
Boston MA 02110 and SHAREHOLDER COMMUNICATIONS CORPORATION ("SCC"), with its
principal executive offices at 17 State Street, New York, NY 10004, relating to
a Rights Offering (the "OFFER") of the Fund.
The services to be provided by SCC will be as follows:
(1) INDIVIDUAL HOLDERS OF RECORD AND BENEFICIAL OWNERS
--------------------------------------------------
Target Group. SCC estimates that it may call between 2,400 to 3,300 of
the approximately 11,000 outstanding beneficial and record
shareholders. The estimate number is subject to adjustment and SCC may
actually call more or less shareholders depending on the response to
the OFFER or at the FUND's direction.
Telephone Number Lookups. SCC will obtain the needed telephone numbers
from various types of telephone directories.
Initial Telephone Calls to Provide Information. SCC will begin
telephone calls to the target group as soon as practicable. Most calls
will be made during 10:00 A.M. to 9:00 P.M. on business days and only
during 10:00 A.M. to 5:00 P.M. on Saturdays. No calls will be received
by any shareholder after 9:00 P.M. on any day, in any time zone,
unless specifically requested by the shareholder. SCC will maintain
"800" lines for shareholders to call with questions about the OFFER.
The "800" lines will be staffed Monday through Friday between 9:00
a.m. and 9:00 p.m.
Remails. SCC will coordinate remails of offering materials to the
shareholders who advise us that they have discarded or misplaced the
originally mailed materials.
Reminder/Extension Mailing. SCC will help to coordinate any targeted
or broad-based reminder mailing at the request of the FUND. SCC will
mail only materials supplied by the FUND or approved by the Fund in
advance in writing.
Subscription Reports. SCC will rely upon the transfer agent for
accurate and timely information as to participation in the OFFER.
<PAGE>
(2) BANK/BROKER SERVICING
---------------------
SCC will contact all banks, brokers and other nominee shareholders
("intermediaries") holding stock as shown on appropriate portions of
the shareholder lists to ascertain quantities of offering materials
needed for forwarding to beneficial owners.
SCC will deliver offering materials by messenger to New York City
based intermediaries and by Federal Express or other means to non-New
York City based intermediaries. SCC will also follow-up by telephone
with each intermediary to insure receipt of the offering materials and
to confirm timely remailing of materials to the beneficial owners.
SCC will maintain frequent contact with intermediaries to monitor
shareholder response and to insure that all liaison procedures are
proceeding satisfactorily. In addition, SCC will contact beneficial
holders directly, if possible, and do whatever may be appropriate or
necessary to provide information regarding the OFFER to this group.
SCC will, as frequently as practicable, report to the Fund with
response from intermediaries.
(3) PROJECT FEE
-----------
In consideration for acting as Information Agent SCC will receive a
project fee of $10,000.
(4) ESTIMATED EXPENSES
------------------
SCC will be reimbursed by the FUND for its reasonable out-of-pocket
expenses incurred provided that SCC submits to the FUND an expense
report, itemizing such expenses and providing copies of all supporting
bills in respect of such expenses. If the actual expenses incurred are
less than the portion of the estimated high range expenses paid in
advance by the FUND, the FUND will receive from SCC a check payable in
the amount of the difference at the time that SCC sends its final
invoice for the second half of the project fee.
SCC's expenses are estimated as set forth below and the estimates are
based largely on data provided to SCC by the FUND. In the course of
the OFFER the expenses and expense categories may change due to
changes in the OFFER schedule or due to events beyond SCC's control,
such as delays in receiving offering material and related items. In
the event of significant change or new expenses not originally
contemplated, SCC will notify the FUND by phone and/or by letter for
approval of such expenses.
<PAGE>
Estimated Expenses Low Range High Range
------------------ --------- ----------
Distribution Expenses $ 2,500 $ 3,500
Telephone # look up
7,800 @ $.45 3,510 3,510
Outgoing telephone
2,500 to 3,400 @ $3.75 9,375 12,750
Incoming "800" calls
750 to 1,150 @ $3.75 2,812 4,312
Miscellaneous, data
processing, postage,
deliveries Federal
Express and mailgrams 500 750
------- -------
Total Estimated
Expenses $18,697 $24,822
======= =======
(5) PERFORMANCE
-----------
SCC will use its best efforts to achieve the goals of the FUND but SCC
is not guaranteeing a minimum success rate. SCC's Project Fee as
outlined in Section 3 or Expenses as outlined in Section 4 are not
contingent on success or failure of the OFFER.
SCC's strategies revolve around a telephone information campaign. The
purpose of the telephone information campaign is to raise the overall
awareness among shareholders of the OFFER and help shareholders better
understand the transaction. This in turn may result in higher overall
response.
(6) COMPLIANCE
----------
The FUND will be responsible for compliance with any regulations
required by the Securities and Exchange Commission, National
Association of Securities Dealers or any applicable federal or state
agencies.
In rendering the services contemplated by this Agreement, SCC agrees
not to make any representations, oral or written, to any shareholders
or prospective shareholders of the FUND that are not contained in the
FUND's Prospectus, unless previously authorized to do so in writing by
the FUND.
(7) PAYMENT
-------
Payment for one half the project fee ($5,000) and one half the
estimated high range expenses ($9,348) for a total of $14,348 will be
made at the signing of this contract. The balance, if any, will be
paid by the FUND due thirty days after SCC sends its final invoice.
<PAGE>
(8) MISCELLANEOUS
-------------
SCC will hold in confidence and will not use nor disclose to third
parties information we receive from the FUND, or information developed
by SCC based upon such information we receive, except for information
which was public at the time of disclosure or becomes part of the
public domain without disclosure by SCC or information which we learn
from a third party which does not have an obligation of
confidentiality to the FUND.
In the event the project is canceled for an indefinite period of time
after the signing of this contract and before the expiration of the
OFFER, SCC will be reimbursed by the FUND for any expenses incurred
and not less than 100% of the project fee.
The FUND agrees to indemnify, hold harmless, reimburse and defend SCC,
and its officers, agents and employees, against all claims or
threatened claims, costs, expenses, liabilities, obligations, losses
or damages (including reasonable legal fees and expenses) of any
nature, incurred by or imposed upon SCC, or any of its officers,
agents or employees, which results, arises out of or is based upon
services rendered to the FUND in accordance with the provisions of
this AGREEMENT, provided that such services are rendered to the FUND
without any negligence, willful misconduct, bad faith or reckless
disregard on the part of SCC, or its officers, agents and employees.
This agreement will be governed by and construed in accordance with the
laws of the State of New York. This AGREEMENT sets forth the entire AGREEMENT
between SCC and the FUND with respect to the agreement herein and cannot be
modified except in writing by both parties.
IN WITNESS WHEREOF, the parties have signed this AGREEMENT this 22nd day
of January, 1997.
H&Q HEALTHCARE INVESTORS SHAREHOLDER COMMUNICATIONS
CORPORATION
By /s/ Kimberley Carroll By
--------------------------- ---------------------------
Kimberley Carroll Robert S. Brennan
Treasurer Vice President
Exhibit 99.2k(iii)
SUBSCRIPTION RIGHTS AGENCY AGREEMENT
This Subscription Rights Agency Agreement (the "Agreement") is made as of this
day of , by and between H & Q Healthcare Investors, a Massachusetts business
trust (the "Fund"); and State Street Bank and Trust Company, a national banking
association, as subscription and distribution agent ("Agent").
WHEREAS, the Fund proposes to make a subscription offer by issuing certificates
or other evidences of subscription rights, in the form designated by the Fund
(the "Subscription Certificates") to shareholders of record (the "Shareholders")
of its Common Stock, par value $.01 per share (the "Common Stock"), as of a
record date specified by the Fund (the "Record Date"), pursuant to which each
Shareholder will have certain rights (the "Rights") to subscribe for shares of
Common Stock, as described in and upon such terms as are set forth in the final
prospectus (the "Prospectus") included in the Form N-2 Registration Statement
originally filed by the Fund with the Securities and Exchange Commission on
January 3, 1997, as amended (as amended, the "Registration Statement"), in
accordance with the applicable requirements of the Securities Act of 1933, as
amended (the "Act");
WHEREAS, the Fund wishes the Agent to perform certain acts on its behalf and the
Agent is willing to so act, in connection with the distribution of the
Subscription Certificates and the issuance and exercise of the Rights to
subscribe therein set forth, all upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements
set forth herein, the parties agree as follows:
1. Pursuant to resolution of its Board of Trustees, the Fund hereby appoints
and authorizes the Agent to act on its behalf in accordance with the
provisions hereof, and the Agent hereby accepts such appointment and agrees
to so act.
2. (a) Each Subscription Certificate shall evidence the Rights of the
Shareholder therein named to purchase Common Stock upon the terms and
conditions therein and herein set forth.
(b) Upon the written advice of the Fund signed by its Chairman, President,
Secretary or Assistant Secretary, as to the Record Date, the agent
shall, from a list of Shareholders as of the Record Date to be
prepared by the Agent in its capacity as Transfer Agent of the Fund,
prepare and record Subscription Certificates in the names of the
Shareholders, setting forth the number of Rights to subscribe to
Common Stock calculated on the basis of one Right for each share of
Common Stock recorded on the books of the Fund in the name of each
such Shareholder as of the Record Date.
(c) Each Subscription Certificate shall be dated as of the Record Date and
shall be executed manually or by facsimiles signature of a duly
authorized Officer of H & Q Healthcare Investors. Upon the written
advice, signed as aforesaid, as to the effective date of the
Registration Statement, the Agent shall as promptly as practicable
countersign and deliver the Subscription Certificates, together with a
copy of the Prospectus, to all Record Date Shareholders. No
Subscription Certificate shall be valid for any purpose unless so
executed. Should any Officer whose signature has been placed upon a
Subscription Certificate cease to hold such office at any time
thereafter, such event shall have no effect on the validity of such
Subscription Certificate.
3. Rights and Issuance of Subscription Certificates.
(a) Each Subscription Certificate shall not be transferable and shall,
unless exercised by the holder thereof in the manner set forth in the
Prospectus, expire upon the expiration of the offer. The Agent shall,
in its capacity as transfer agent for the Fund, maintain a register of
Subscription Certificates and the holders of record thereof (each of
whom shall be deemed a "Shareholder" hereunder for purposes of
determining the rights of holders of Subscription Certificates). Each
Subscription Certificate shall, subject to the provisions thereof,
entitle the Shareholder in whose name it is recorded to the following:
<PAGE>
(1) The right (the "Basic Subscription Right") to purchase a number
of shares of Common Stock equal to one share of Common Stock for
every three Rights; provided, however, that no fractional shares
of Common Stock shall be issued; and
(2) The right (the "Oversubscription Right") to purchase additional
shares of Common Stock, subject to the availability of such
shares and to allotment of such shares as may be available among
Shareholders who exercise Oversubscription Rights on the basis
specified in the Prospectus; provided, however, that a
Shareholder who has not exercised his Basic Subscription Right
with respect to me full number of shares that such Shareholder is
entitled to purchase by virtue of his Basic Subscription Right as
of the Expiration Date, if any, shall not be entitled to any
Oversubscription Right.
(b) A Shareholder may exercise his Basic Subscription Right and
Oversubscription Right by delivery to the Agent at its corporate
office specified in the Prospectus of (i) the Subscription Certificate
with respect thereto, duly executed by such Shareholder in accordance
with and as provided by the terms and conditions of the Subscription
Certificate, together with (ii) the estimated subscription price for
each share of Common Stock subscribed for by exercise of such Rights,
in United States dollars by money order or check drawn on a bank
located in the U.S. and in each case payable to the order of H & Q
Healthcare Investors.
(c) Rights may be exercised at any time after the date of issuance of the
Subscription Certificates with respect thereto but no later than 5:00
P.M. New York City Time on such date as the Fund shall designate to
the Agent in writing (the "Expiration Date"). For the purpose of
determining the time of the exercise of any Rights, delivery of any
material to the Agent shall be deemed to occur when such materials are
received at the corporate office of the Agent specified in the
Prospectus.
(d) Not withstanding the provisions of Section 3(b) and 3(c) above
regarding delivery of an executed Subscription Certificate to the
Agent prior to 5:00 P.M. New York City Time on the Expiration Date, if
prior to such time the Agent receives a properly completed and
executed notice of guaranteed delivery in the form accompanying the
Prospectus by facsimile (telecopier) or otherwise from a financial
institution that is a member of the Securities Transfer Agents
Medallion Program, the Stock Exchange Medallion Program or the New
York Stock Exchange Medallion Signature Program, guaranteeing delivery
of (i) payment of the full subscription price for shares purchased and
subscribed for by virtue of a Subscription Certificate, and (ii) a
properly completed and executed Subscription Certificate, then such
exercise of Basic Subscription Rights and Oversubscription Rights
shall be regarded as timely, subject, however, to receipt of the duly-
executed Subscription Certificate by the Agent within five business
days after the Expiration Date and receipt of full payment within ten
business days after the Confirmation Date (as defined below).
(e) On a date (the "Confirmation Date") that is no later than ten business
days after the Pricing Date (as defined in the Prospectus), the Agent
shall send a confirmation to each Shareholder (or, for shares of
Common Stock on the Record Date held by Cede & Co. or any other
depository or nominee, to Cede & Co. or such other depository or
nominee), showing (i) the number of shares acquired pursuant to the
Basic Subscription Rights, (ii) the number of shares, if any, acquired
pursuant to the Oversubscription Rights, (iii) the per share and total
purchase price for the shares, (iv) any amount payable to the
Shareholder pursuant to Section 8 below, and (v) any additional amount
payable by the Shareholder to the Fund or any excess to be refunded by
the Fund to the Shareholder, on the Pricing Date. Any additional
payment required from a Shareholder must be received by the Agent
within ten business days after the Confirmation Date. Any excess
payment to be refunded by the Fund to a Shareholder shall be mailed by
the Agent to the Shareholder as provided in Section 6 below.
4. Pursuant to the terms of the Prospectus, the Fund reserves the right to
increase the number of shares of common Stock subject to subscription by up
to 25% (any such, an Increased Allocation"). The Agent shall confer with
the Fund concerning the Fund's decision as to whether or not to undertake
an Increased Allocation. If, after allocation of shares of Common Capital
Stock to persons exercising Basic
<PAGE>
Subscription Rights, there remain unexercised Rights (taking into account
any Increased Allocation elected by the Fund), then the Agent shall allot
the shares issuable upon exercise of such unexercised Rights (the
"Remaining Shares") to persons exercising Oversubscription Rights, in the
amounts of such oversubscriptions. If the number of shares for which
Oversubscription Rights have been exercised is greater than the Remaining
Shares, the Agent shall allot the Remaining Shares to the persons
exercising Oversubscription Rights pro rata based solely on the number of
shares of Common Stock held on the Record Date.
5. All proceeds from the exercise of Rights shall be held by the Agent in a
segregated, interest-bearing account in the name of the Fund. The Agent
shall advise the Fund immediately upon the completion of the allocation set
forth above as to the total number of shares subscribed and distributable.
6. (a) The Agent shall mail to the Shareholders as soon as practicable after
the Confirmation Date and after full payment for the shares subscribed
for has cleared: (i) certificates representing those shares purchased
pursuant to exercise of Basic Subscription Rights and those shares
purchased pursuant to the exercise of Oversubscription Rights; and
(ii) in the case of each Shareholder who subscribed and paid for
shares at an estimated Subscription Price greater than the actual
Subscription Price, a refund in the amount of the difference between
the estimated Subscription Price and the actual Subscription Price.
(b) The Agent shall deliver the proceeds of the exercise of Rights to the
Fund as promptly as practicable, but in no event later than 20
business days after the Confirmation Date.
7. (a) The Agent shall account promptly to the Fund with respect to Rights
exercised and concurrently account for all monies received and
returned by the Agent with respect to the purchase of shares of Common
Stock upon the exercise of Rights.
(b) The Agent will advise the Fund and Prudential Securities Incorporated
(the "Dealer Manager") from day to day during the period of, and
promptly after the termination of, the Offer as to all the names and
addresses of Rightsholders exercising Rights, the total number of
Rights exercised by each Rightsholders during the immediately
preceding day (indicating the total number of Rights verified to be
proper form for exercise, rejected for exercise and being processed)
and the number of Rights exercised on Subscription Certificates
indicating the Dealer Manager or such soliciting broker as the
broker-dealer with respect to such exercise and such other information
as the Fund or the Dealer Manager may reasonably request.
(c) The Agent shall notify the Fund and the Dealer Manager no later than
5:00 p.m., New York time, on the first business day following the
Expiration Date, of the number of Rights exercised, the total number
of Rights verified to be in proper form for exercise, rejected for
exercised and being and being processed, and the number of Rights
exercised on Subscription Certificates indicating the Dealer Manager
or such soliciting broker as the broker-dealer with respect to such
exercise and such other information as the Fund or the Dealer Manager
may reasonably request.
(d) Upon request of the Fund after the Confirmation Date, the Agent shall
notify the Fund, and at the Fund's request the Dealer Manager of any
Right with respect of which the full amount due upon the exercise
thereof has not been received and the soliciting broker, if any,
specified as the broker-dealer with respect to such right.
8. In the event the Agent does not receive, within ten business days after the
Confirmation Date, any amount due from a Shareholder as specified in
Section 3 (e), then it shall take such action with respect to such
Shareholder's Rights as may be instructed in writing by the Fund, including
without limitation (i) applying any payment actually received by it toward
the purchase of the greatest whole number of shares of Common Stock which
could be acquired with such payment, (ii) allocating the shares subject to
such Subscription Rights to one or more other Shareholders, and (iii)
selling all or a portion of the shares of Common Stock deliverable upon
exercise of such Rights on the open market, and applying the proceeds
thereof to the amount owed.
<PAGE>
9. No Subscription Certificate shall entitle a Shareholder to vote or receive
dividends or be deemed the holder of shares of Common Stock for any
purpose, nor shall anything contained in any Subscription Certificate be
construed to confer upon any Shareholder any of the rights of a shareholder
of the Fund or any right to vote, give or withhold consent to any action by
the Fund (whether upon any recapitalization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings or other action affecting shareholders or
receive dividends or otherwise, until the Rights evidenced thereby shall
have been exercised and the shares of Common Capital Stock purchasable upon
the exercise thereof shall have become deliverable as provided in this
Agreement and in the Prospectus.
10. If there shall be delivered to the Agent (i) evidence to the Agent's and
the Fund's satisfaction of the destruction, loss or theft of any
Subscription Rights and (ii) such security or indemnity as may be required
by the Agent or the Fund to save each of them harmless, then, in the
absence of notice to the Agent that the Rights evidenced by such
Subscription Rights have been acquired by a bona fide purchaser, the Agent
may issue a new Subscription Certificate for a like number of Rights in
substitution for the Subscription Certificate so lost, stolen or mutilated
or destroyed.
11. (a) The Fund covenants that all shares of Common Stock issued on exercise
of Rights will be validly issued, fully paid, non-assessable and free
of preemptive rights.
(b) Upon request, the Fund shall furnish to the Agent an opinion of
counsel or other evidence satisfactory to the Agent to the effect that
a registration statement is then in effect with respect to its shares
of Common Stock issuable upon exercise of the Rights set forth in the
Subscription Rights. Upon written advice to the Agent that the
Securities and Exchange Commission shall have issued or threatened to
have issued any order preventing or suspending the use of the
Prospectus, or if for any reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Act, the Agent
shall cease acting hereunder until receipt of written instructions
from the Fund and such assurances as it may reasonably request that it
may comply with such instruction without violations of the Act.
12. (a) Any corporation into which the Agent may be merged or converted or
with which it may be consolidated, or any corporation resulting from
any merger, conversion or consolidation to which the Agent shall be a
party, or any corporation succeeding to the corporate trust business
of the Agent, shall be the successor to the Agent hereunder without
the execution or filing of any document by any of the parties hereto,
provided that such corporation would be eligible for appointment as a
successor to the Agent. In case at the time such successor to the
Agent shall succeed to the agency created by this Agreement, any of
the Subscription Certificates shall have been countersigned but not
delivered, any such successor to the Agent may adopt the
countersignature of the Agent and deliver such Subscription
Certificates as countersigned, and in case at that time any of the
Subscription Certificates shall not have been countersigned, the
successor to the Agent may countersign such Subscription Certificates
either in the name of the Agent or in the name of the successor Agent,
and in all such cases such Subscription Certificates shall have the
full force and legal effect provided in the Subscription Certificates
and in this Agreement.
(b) If, at any time, the name of the Agent shall be changed and at such
time any of the Subscription Certificates shall have been
countersigned but not delivered, the Agent may adopt the
countersignature under its prior name and deliver Subscription
Certificates so countersigned, and in case at that time any of the
Subscription Certificates shall not have been countersigned, the Agent
may countersign such Subscription Certificates either in its prior
name or in its changed name, and in all such cases such Subscription
Certificates shall have the full force provided in the Subscription
Certificates and in this Agreement.
13. The Fund agrees to pay to the Agent at the completion of the offering, on
demand of the Agent, reasonable compensation for all services rendered by
it hereunder and also its reasonable out-of-pocket expenses and other
disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder as set
forth in Schedule A (attached).
<PAGE>
14. The Agent undertakes the duties and obligations imposed by this Agreement
upon the following terms and conditions:
(a) Whenever in the performance of its duties under this Agreement the
Agent shall deem it necessary or desirable that any fact or matter be
proved or established, prior to taking or suffering any action
hereunder, such fact or matter (unless prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the
Chairman of the Board or President or a Vice President or the
Secretary or Assistant Secretary or the Treasurer of the Fund
delivered to the Agent, and such certificate shall be full
authorization to the Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon
such certificate.
(b) The Agent shall not be responsible for and the Fund shall indemnify
and hold the Agent harmless from and against, any and all losses,
damages, costs, charges, counsel feels, payments, expenses and
liability arising out of or attributable to all actions of the Agent
or its agents or subcontractors required to be taken pursuant to this
Agreement, provided that such actions are taken in good faith and
without negligence or willful misconduct.
(c) The Agent shall be liable hereunder only for its own negligence or
misconduct, and for the negligence or misconduct of its agents or
subcontractors.
(d) Nothing herein shall preclude the Agent from acting in any other
capacity for the Fund or for any other legal entity;
(e) The Agent is hereby authorized and directed to accept instructions
with respect to the performance of its duties hereunder from any
officer or assistant office of the Fund and to apply to any such
officer or assistant officer of the Fund and to apply to any such
officer of the Fund for advice or instructions in connection with its
duties, and shall be indemnified and not be liable for any action
taken or suffered by it in good faith in accordance with instructions
of any officer or assistant officer of the Fund; and
(f) The Agent shall be indemnified and shall incur no liability for or in
respect of any action taken, suffered, or omitted by it in reliance
upon any Subscription Certificate or Certificate for Common Stock,
instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement
or other paper or document that it reasonably believes to be genuine
and to be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons.
15. The Agent may, without the consent or concurrence of the Shareholders in
whose names Subscription Certificates are registered, by supplemental
agreement or otherwise, concur with the Fund in making any changes or
corrections in a Subscription Certificate that it shall have been advised
by counsel (who may be counsel for the Fund) is appropriate to cure any
ambiguity or to correct any defective or inconsistent provision or clerical
omission or mistake or manifest error therein or herein contained, and
which shall not be inconsistent with the provisions of the Subscription
Certificate or the Prospectus except insofar as any such change may confer
additional rights upon the Shareholders.
16. All the covenants and provisions of this Agreement by or for the benefit of
the Fund or the Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
17. The validity, interpretation and performance of this Agreement shall be
governed by the law of the Commonwealth of Massachusetts.
18. All capitalized terms used herein and not defined herein shall have the
meaning specified in the Prospectus.
19. The name H & Q Healthcare Investors is the designation of the Trustees for
the time being under a Declaration of Trust dated October 31, 1986, as
amended, and all persons dealing with H & Q Healthcare
<PAGE>
Investors must look solely to the trust property for the enforcement of any
claim against H & Q Healthcare Investors, as neither the Trustees, officers
nor shareholders assume any personal liability for obligations entered into
on behalf of H & Q Healthcare Investors
STATE STREET BANK AND TRUST COMPANY H & Q HEALTHCARE INVESTORS
- -------------------------------------- -------------------------------
Signature Signature
- -------------------------------------- -------------------------------
Title Title
<PAGE>
BOSTON
EQUISERVE
AGREEMENT
FOR SUBSCRIPTION/ESCROW AGENT SERVICES
between
H&Q HEALTHCARE INVESTORS
and
STATE STREET BANK & TRUST COMPANY
This Agreement sets forth the terms and conditions under which State Street Bank
& Trust Company ("State Street Bank") will serve as Subscription/Escrow Agent,
pursuant to the terms and conditions set forth in the Prospectus of H&Q
Healthcare Investors with respect to the Rights Offering, as the same may be
amended or supplemented.
A. TERM
The term of this Agreement shall be for a period of six (6) months, commencing
from the effective date of this Agreement December 1, 1996.
B. FEES FOR SERVICES
For the services stated in Section C provided by State Street Bank under this
Agreement, H&Q Healthcare Investors:
$5,000.00 Administrative Fee
$.60 Per Subscription Certificate Issued and Mailed (if Machine
Enclosed)
$9.00 Per Subscription Certificate Received and Processed for each
Beneficial Holder and Registered Holder
$12.00 Per Defective Subscription Certificate Received and
Processed (Telephone Calls if Necessary)
$15.00 Per Notice of Guaranteed Delivery Received
$1.00 Per Account, for Proration
$1.25 Per Refund Check Issued
$1.00 Per Broker Split Certificate Issued
$3.00 Per Withdrawal of Subscription Certificate, If Applicable
$1,000.00 New York Window Fee Upon Expiration
$3,000.00 Per Offer Extension
$4,000.00 Escrow Agent Fee to Handle Daily Investment of Funds
Received (Optional)
<PAGE>
H&Q HEALTHCARE INVESTORS
Page 2
C. STANDARD SERVICES
State Street Bank & Trust agrees to provide the following services to H&Q
Healthcare Investors in accordance with the standard fees set forth in Section B
hereinabove.
1. Designation of an operational Task Force
2. Design of Subscription Certificate
3. Calculating Rights to be distributed to each shareholder according to the
formula approved by H&Q Healthcare Investors
4. Issuance and mailing of Subscription Certificates to registered
shareholders
5. Preparation of a daily exercise journal
6. Tally of Rights received and exercised or sold
7. Receipt summation and investment of checks received
8. Affixing legends to appropriate stock certificates, where applicable
9. Issuance and mailing of stock certificates or checks
10. Handling of shareholder inquiries related to the rights offerings as
referred by the Information Agent
11. Reminder calls to shareholders who have not exercised their Subscription
Certificates as determined by State Street Bank and H&Q Healthcare
Investors
12. Calculation, issuance and mailing of proration and/or over-subscription
checks if applicable
D. LIMITATIONS*
Fees effective for a period of one (1) year following the effective date of the
Agreement.
E. ITEMS NOT COVERED
Items not included in the fees set forth in this Agreement for "Standard
Services" or in Section B hereinabove are to be billed separately, on an
appraisal basis.
Services required by legislation or regulatory fiat which become effective
after the date of this Agreement shall not be a part of the Standard
Services and shall be billed by appraisal.
All out-of-pocket expenses such as postage, insurance, stationery,
facsimile charges, cost of disposal of excess material, etc. will be billed
as incurred.
Funds to cover postage expenses in excess of $5,000 for shareholder
mailings must be received by State Street Bank one business day prior to
the scheduled mailing date. Postage expenses less than $5,000 will be
billed as incurred.
Overtime charges will be assessed in the event of late delivery of material
for mailings to shareholders unless the mail date is rescheduled. Such
material includes, but is not limited to: Subscription Certificate, Notice
of Guaranteed Delivery, Return Envelope, Shareholder Letter, W-9 Guideline
Form, and Prospectus. Receipt of material for mailing to shareholders by
State Street Bank Mail Unit must be in accordance with Shareholder
Services' Schedule of Required Material Delivery Time Frames.
F. MINIMUM FEE
$10,000.00 (should the Offer be canceled for any reason after a period of
active involvement)
<PAGE>
H&Q HEALTHCARE INVESTORS
Page 3
G. PAYMENT FOR SERVICES
It is agreed that the Administrative Fee of $3,000.00 will be paid in
advance and the remaining fees for services rendered will be paid on a
monthly basis.
H. ASSIGNABILITY
State Street Bank and Trust may, with the consent of the Company,
subcontract for the performance hereof with (i) Boston EquiServe, L.P., a
Delaware limited partnership which is duly registered as a transfer agent
pursuant to Section 17A(c)(2) of the Securities Exchange Act of 1934
("Section 17A(c)(2)"), (ii) a subsidiary duly registered as a transfer
agent pursuant to Section 17A(c)(2), (iii) an affiliate, or (iv) other
subcontractors, which consent will not be unreasonably withheld; provided,
however, that State Street Bank and Trust shall be as fully responsible to
the Company for the acts or omissions of any subcontractor as it is for its
own acts or omissions.
I. CONFIDENTIALITY
The pricing information contained in this Agreement is confidential and
proprietary in nature. By receiving this Agreement, H&Q Healthcare
Investors agrees that none of its directors, officers, employees, or agents
without the prior written consent of State Street Bank, will divulge,
furnish or make accessible to any third party, except as permitted by the
next sentence, any part of this Agreement or information in connection
therewith which has been or may be made available to it. In this
connection, H&Q Healthcare Investors agrees that it will limit access to
the Agreement and such information to only those officers or employees with
responsibilities for analyzing the Agreement and to such independent
consultants hired expressly for the purpose of assisting in such analysis.
In addition, H&Q Healthcare Investors agrees that any persons to whom such
information is properly disclosed shall be informed of the confidential
nature of the Agreement and the information relating thereto, and shall be
directed to treat the same appropriately.
J. CONTRACT ACCEPTANCE
In witness whereof, the parties hereto have caused this Agreement to be
executed by their respective officers, hereunto duly agreed and authorized,
as of the effective date of this Agreement.
STATE STREET BANK & TRUST COMPANY H&Q HEALTHCARE INVESTORS
By: By:
----------------------------- ---------------------------
Title: Administration Manager Title:
----------------------------- ---------------------------
Date: December 5, 1996 Date:
----------------------------- ---------------------------
Exhibit 2(l)
[DECHERT PRICE & RHOADS LETTERHEAD]
February 7, 1997
H&Q Healthcare Investors
50 Rowes Wharf, Fourth Floor
Boston, Massachusetts 02110-3328
Re: H&Q Healthcare Investors
(File Nos. 333-19247 and 811-4889)
Dear Sir or Madam:
We have acted as counsel for H&Q Healthcare Investors (the "Trust") in
connection with the above-captioned registration statement (the "Registration
Statement"). In our capacity as counsel, we have examined the Trust's Agreement
and Declaration of Trust and its By-laws, and are familiar with the Trust's
proceedings in connection with the authorization of the issuance by the Trust to
the holders (the "Holders") of the Trust's shares of beneficial interest, $0.01
par value (the "Shares"), and of non-transferable rights entitling the Holders
to subscribe for Shares as contemplated by the Registration Statement. In
rendering this opinion, we have also made such examination of law and of fact
reasonably available to us as we have deemed necessary in connection with the
opinion hereafter set forth.
Based upon such examination, we are of the opinion that the Shares have
been duly authorized and, when issued and sold in the manner contemplated by the
Registration Statement, will be legally issued, fully paid and non-assessable by
the Trust.
We hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement and to all references to our firm under the caption
"Legal Matters."
Very truly yours,
/s/ Dechert Price & Rhoads
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.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 7, 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>
