As filed with the Securities and Exchange Commission on January 3, 1997
FORM N-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. __ [ ]
and/or
Registration Statement under the Investment Company Act of 1940 [X]
Amendment No. 12 [X]
(Check appropriate box or boxes)
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H&Q HEALTHCARE INVESTORS
(Exact Name Of Registrant as Specified In Charter)
50 Rowes Wharf, Fourth Floor, Boston, Massachusetts 02110-3328
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 574-0567
ALAN G. CARR, President,
50 Rowes Wharf, Fourth Floor, Boston, Massachusetts 02110-3328
(Name and Address of Agent for Service)
With Copies To:
SHELDON A. JONES, ESQ. JOHN H. GRADY JR., ESQ.
DECHERT PRICE & RHOADS MORGAN, LEWIS & BOCKIUS LLP
TEN POST OFFICE SQUARE 1800 M STREET, N.W.
BOSTON, MA 02109 WASHINGTON, DC 20036
(617) 728-7100 (202) 467-7087
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Approximate Date of Public Offering: As soon as practicable after the
effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
======================================================================================================================
Title of Proposed Maximum Proposed Maximum Amount of
Securities Proposed Amount Offering Aggregate Offering Registration
Being Registered Being Registered* Price Per Share Price Fee
- ----------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest,
$.01 par value per share 2,644,170 Shares $17.8125 $47,099,278.13 $14,272.52
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
H&Q HEALTHCARE INVESTORS
FORM N-2
CROSS REFERENCE SHEET
PART A
Information Requested in Prospectus Prospectus Caption
----------------------------------- ------------------
Item 1. Outside Front Cover Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover Page Cover Page of Prospectus
Item 3. Fee Table and Synopsis Prospectus Summary; Trust Expenses
Item 4. Financial Highlights Financial Highlights and Investment
Performance
Item 5. Plan of Distribution The Offer; Distribution Arrangements
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds
Item 8. General Description of the Registrant Description of Trust; Investment Adviser;
Share Price and NAV; Investment Objective
and Policies
Item 9. Management Description of Trust; Investment Adviser;
Trustees and Officers; Portfolio
Transactions and Brokerage; Custodian,
Transfer Agent, Dividend Disbursing Agent,
Registrar and Subscription Agent
Item 10. Capital Stock, Long-Term Debt, and Dividend Reinvestment Plan; Taxation;
Other Securities Dividends and Distributions; The Offer
Item 11. Defaults and Arrears on Senior Not Applicable
Securities
Item 12. Legal Proceedings Not Applicable
Item 13. Table of Contents of the Statement of Table of Contents of the Statement of
Additional Information Additional Information
PART B
Information Requested in Statement of Statement of Additional
Additional Information Information Caption
---------------------- -------------------
Item 14. Cover Page Cover Page of Statement of Additional
Information
Item 15. Table of Contents Table of Contents
Item 16. General Information and History The Trust
Item 17. Investment Objective and Policies Additional Information About Investments
and Investment Techniques; Investment
Restrictions
Item 18. Management Trustees and Officers; The Trust;
Investment Advisory Agreement
Item 19. Control Persons and Principal Holders of Trustees and Officers
Securities
Item 20. Investment Advisory and Other Services Investment Adviser; Investment Advisory
Agreement; Trustees and Officers
Item 21. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
Item 22. Tax Status Tax Matters
Item 23. Financial Statements Financial Statements in Prospectus
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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.
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
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997 (THE "EXPIRATION DATE"). For additional information regarding the Offer, please call Shareholder Communications Corporation (the "Information Agent") at (800) 733-8481, extension 352, or call collect at (212) 805-7000.
The Trust is a diversified, closed-end management investment company. The Trust's investment objective is to seek long-term capital appreciation by investing primarily in securities of companies in the health services and medical technology (healthcare) industries ("Healthcare Companies"). The Trust will invest primarily in securities of companies that are believed by the Trust's investment adviser to have significant potential for above-average long-term growth in revenues and earnings. The Trust emphasizes investment in securities of emerging growth Healthcare Companies. The Trust may also invest up to 40% of its net assets in venture capital or other securities subject to legal or contractual restrictions as to resale. Such securities may be acquired in connection with venture capital opportunities, as well as in private placements in public companies. No assurance can be given that the Trust will achieve its investment objective. See "Appendix A--Description of Risk Factors and Investment Techniques".
The Trust's investment adviser is Hambrecht & Quist Capital Management Incorporated, the President and sole Director of which is Alan G. Carr, who is responsible for management of the Trust's portfolio. See "Investment Adviser".
The Trust announced the Offer after the close of trading on the NYSE on , 1997. The NAV at the close of business on , 1997 and , 1997 was $ and $ , respectively, and the last reported sales price of a Share on the NYSE on those dates was $ and $ , respectively.
As a result of the terms of the Offer, Shareholders who do not fully exercise their Rights, including the Over-Subscription Privilege described herein, will, upon the completion of the Offer, own a smaller proportional interest in the Trust than they owned prior to the Offer. The Offer will result in a dilution of NAV for all Shareholders, because the Subscription Price per Share will be less than the then current NAV. Such dilution might be significant. See "The Offer".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Estimated Subscription Price (1) Estimated Sales Load (2) Estimated Proceeds to Trust (3)
Per Share $ $ $
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Total (3) $ $ $
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Footnotes set forth on next page
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Investors are advised to read this Prospectus and retain it for future reference. This Prospectus sets forth concisely the information an investor should know before exercising the Rights. A Statement of Additional Information dated , 1997 (the "SAI") containing additional information about the Trust has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this Prospectus. A copy of the SAI, the table of contents of which appears on page of this Prospectus, may be obtained without charge by contacting the Trust at (617) 574-0567.
Dealer Manager
Prudential Securities Incorporated
-------, 1997
(Notes from cover page)
(1) Estimated on the basis of the average of the last reported sales price of a Share on , 1997 and the four preceding business days. Pursuant to the Over-Subscription Privilege, the Trust may increase the number of Shares subject to subscription by up to 25% of the Shares offered hereby. If the Trust increases the number of Shares subject to subscription by 25%, the total maximum Estimated Subscription Price will be approximately $ , the total maximum Estimated Sales Load will be approximately $ , and the total maximum Estimated Proceeds to the Trust will be approximately $ .
(2) In connection with the Offer, the Trust has agreed to pay the Dealer Manager (as defined herein) a fee for its financial advisory, marketing and solicitation services equal to 3.50% of the aggregate Subscription Price for the Shares issued pursuant to the Offer and to reimburse the Dealer Manager for out-of-pocket expenses up to $150,000. The Dealer Manager will reallow to certain broker-dealers a concession of 2.25% of the Subscription Price per Share for Shares issued pursuant to the Offer. See "Distribution Arrangements". These fees and expense reimbursements will be borne by the Trust and indirectly by all of the Trust's Shareholders, including those who do not exercise their Rights. The Trust and the Investment Adviser have agreed to indemnify the Dealer Manager against certain liabilities under the Securities Act of 1933, as amended.
(3) Before deduction of expenses related to the Offer incurred by the Trust, estimated at approximately $368,000, including up to $150,000 to be paid to the Dealer Manager as reimbursement for its out-of-pocket expenses.
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
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The Offer The Trust is issuing to its shareholders of record
("Shareholders") as of the close of business on ,
1997 (the "Record Date") non- transferable rights ("Rights") to
subscribe for an aggregate of 2,115,336 Shares of the Trust (the
"Offer"). Each Shareholder will be entitled to subscribe for one
Share for each three Rights held (the "Primary Subscription").
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Subscription Price The subscription price per Share (the "Subscription Price") will
be 95% of the lower of (a) the average of the last reported sales
prices of a Share on the New York Stock Exchange ("NYSE") on ,
1997 (the "Pricing Date") and the four preceding business days or
(b) the net asset value per Share (the "NAV") as of the Pricing
Date.
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Subscription Period Rights may be exercised at any time during the subscription period
(the "Subscription Period"), which commences on
, 1997 and ends at 5:00 p.m. New York City
time, on , 1997 (the "Expiration Date").
- ------------------------------------------------------------------------------------------------------------------
Over-Subscription Privilege Shareholders who fully exercise their Rights in the Primary
Subscription may have, subject to certain limitations and subject
to allotment, a privilege to subscribe for additional Shares (the
"Over-Subscription Privilege"). In order to honor
over-subscription requests, the Trust may, at its discretion,
issue up to an additional 25% of the Shares available in the
Offer.
- ------------------------------------------------------------------------------------------------------------------
Purpose of the Offer The Investment Adviser (as defined herein) believes that
increasing the Trust's assets for investment through the Offer
will benefit the Trust and its Shareholders by better positioning
the Trust to more fully take advantage of available investment
opportunities in securities of emerging growth companies in the
health services and medical technology (healthcare) industries
("Healthcare Companies"), particularly venture capital investments
in biotechnology and other innovative medical technology
companies.
While there can be no assurance that such benefits will be
realized, increasing the Trust's investment assets through the
Offer is intended to:
(bullet) allow the Trust to increase its investments at a time
when the Investment Adviser believes that securities of
selected biotechnology and other innovative medical
technology companies are positioned for price
appreciation due to (i) a substantial number of
healthcare products awaiting Food and Drug Administration
("FDA") approval, (ii) recent advances in computer
technology and scientific knowledge which have caused a
proliferation in new healthcare products and which have
reduced the time and cost of research and development of
such new products, and (iii) an improved regulatory
climate;
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THE OFFER (Cont'd)
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(bullet) increase the Trust's average investment size, creating
for the Trust additional negotiating leverage and pricing
influence over venture capital and other private equity
investments;
(bullet) provide the Trust with the ability to make additional
investments without realizing capital gains on current
investments or otherwise selling current investments at
an unfavorable time; and
(bullet) reduce operating costs per Share.
The Offer affords Shareholders the opportunity to purchase additional
Shares of the Trust at a price that will be below market value and NAV at
the Expiration Date. See "The Offer--Purpose of the Offer".
- ------------------------------------------------------------------------------------------------------------------
Use of Proceeds It is expected that the net proceeds of the Offer will be invested
primarily in securities of Healthcare Companies, particularly
venture capital opportunities in biotechnology and other
innovative medical technology companies. See "Use of Proceeds".
- ------------------------------------------------------------------------------------------------------------------
How to Obtain Subscription Contact your broker, bank or trust company.
Information Contact Shareholder Communications Corporation (the "Information
Agent") toll-free at (800) 733-8481, extension 352, or call
collect at (212) 805-7000.
- ------------------------------------------------------------------------------------------------------------------
How to Subscribe Shareholders may subscribe in one of the two following ways:
(bullet) Deliver a completed Exercise Form and payment to State
Street Bank and Trust Company (the "Subscription Agent")
by the Expiration Date.
(bullet) If your Shares are held in a brokerage, bank or trust
account, have your broker, bank or trust company deliver
a Notice of Guaranteed Delivery to the Subscription Agent
by the Expiration Date.
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IMPORTANT DATES TO REMEMBER
Record Date , 19
Subscription Period , 19
, 19
Deadline for delivery of Exercise Form together with payment of Estimated Subscription
Price or for delivery of Notice of Guaranteed Delivery , 19
Expiration Date and Pricing Date , 19
Deadline for payment pursuant to Notice of Guaranteed Delivery , 19
Confirmation Date to Registered Shareholders , 19
For Registered Shareholder Purchases--deadline for payment of unpaid balance if final
Subscription Price is higher than Estimated Subscription Price , 19
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THE TRUST
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The Trust The Trust is a diversified, closed-end management investment
company organized as a Massachusetts business trust. As of
, 1997, the Trust had 6,346,009 Shares
outstanding, which are traded on the NYSE under the symbol "HQH".
As of , 1997, the Trust's NAV and last reported
sales price per Share were $ and $ ,
respectively.
- ------------------------------------------------------------------------------------------------------------------
Investment Adviser Hambrecht & Quist Capital Management Incorporated (the "Investment
Adviser") serves as investment adviser to the Trust. The
Investment Adviser is an indirect wholly-owned subsidiary of
Hambrecht & Quist Group, which through its various related
entities has investment research, investment banking and venture
capital expertise in the healthcare industries. See "Investment
Adviser". The majority of the Trust's Board of Trustees is
unaffiliated with the Investment Adviser; nevertheless, the Trust
may be subject to certain potential conflicts of interest. See
"Portfolio Transactions and Brokerage".
- ------------------------------------------------------------------------------------------------------------------
Portfolio Manager Alan G. Carr is the Trust's President and portfolio manager and is
the President and sole Director of the Investment Adviser. Mr.
Carr has been managing equity portfolios emphasizing investment in
emerging growth companies for over 30 years and portfolios
specializing in publicly traded equity securities of Healthcare
Companies, as well as in venture capital opportunities in the
healthcare industries, for the last 15 years. See "Investment
Adviser" and "Trustees and Officers".
- ------------------------------------------------------------------------------------------------------------------
General Investment Guidelines The Trust's investment objective is to seek long-term capital
appreciation by investing primarily in securities of Healthcare
Companies. Under normal market conditions, the Trust expects to
invest at least 80% of its net assets in securities of Healthcare
Companies and in no event will have less than 25% of its net
assets so invested.
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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".
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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.
==================================================================================================================
Dilution The Offer will result in dilution.
Shareholders who do not fully exercise their Rights will
experience as a result of the Offer: dilution of NAV; dilution of
a proportionate ownership interest in the Trust; and dilution of
voting power.
Also, an immediate dilution of NAV will be experienced by all
Shareholders, regardless of whether they exercise any or all of
their Rights, because the Subscription Price will be less than the
current NAV, and the number of Shares outstanding after the Offer
will increase by a greater percentage than the increase in the
size of the Trust's assets.
- ------------------------------------------------------------------------------------------------------------------
Concentration in the The Trust expects under normal market conditions to invest at
Healthcare Industries least 80% of its net assets in securities of Healthcare Companies
and in no event will have less than 25% of its net assets so
invested. Healthcare Companies have in the past been characterized
by limited product focus, rapidly changing technology and
extensive government regulation. These factors may result in
abrupt advances and declines in the securities prices of
particular companies and, in some cases, may have a broad effect
on the prices of securities of companies in particular healthcare
industries.
Intense competition exists within and among certain healthcare
industries, including competition to obtain and sustain
proprietary technology protection upon which Healthcare Companies
can be highly dependent for maintenance of profit margins and
market exclusivity.
Cost containment measures implemented by the federal government
have adversely affected certain sectors of the healthcare
industries. The implementation of any such further cost
containment measures may have an adverse effect on some companies
in the healthcare industries.
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Investment in Emerging Growth The Trust emphasizes investment in equity securities of emerging
Companies growth Healthcare Companies. While these securities offer the
opportunity for significant capital gains, such investments also
involve a degree of risk that can result in substantial losses.
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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.
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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.
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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.
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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.
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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.
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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.
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%
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(1) In connection with the Offer, the Trust has agreed to pay the Dealer Manager (as defined herein) a fee for its financial advisory, marketing and solicitation services equal to 3.50% of the aggregate Subscription Price for the Shares issued pursuant to the Offer and to reimburse the Dealer Manager for out-of-pocket expenses up to $150,000. The Dealer Manager will reallow to certain broker-dealers a concession of 2.25% of the Subscription Price Per Share for Shares issued pursuant to the Offer. In addition, the Trust has agreed to pay a fee to the Subscription Agent and the Information Agent estimated to be $10,000 and $22,000, respectively, which includes reimbursement for their out-of-pocket expenses related to the Offer. These fees will be borne by the Trust and indirectly by all of the Trust's Shareholders, including those who do not exercise their Rights. See "Distribution Arrangements".
(2) Fees payable under the Advisory Agreement (as defined herein) are calculated on the basis of the Trust's total assets. The advisory fee shown above assumes the maximum allowable advisory fee under the Advisory Agreement. "Other Expenses" has been estimated for the current fiscal year.
(3) The estimated 1.60% expense ratio assumes that the Offer is fully subscribed, yielding estimated net proceeds of approximately $ million (assuming a Subscription Price of $ per Share) and that, as a result, based on the Trust's net assets attributable to Shareholders on , 1997, the average net assets attributable to Shareholders would be $ million.
Hypothetical Example
An investor would directly or indirectly pay the following expense on a $1,000 investment in the Trust, assuming a 5% annual return:
One Year Three Years Five Years Ten Years $16 $50 $85 $186
This Hypothetical Example assumes that all dividends and other
distributions are reinvested at NAV and that the percentage amounts listed
under Annual Expenses above remain the same in the years shown. See also Note
(3) above for assumptions made in calculating the expenses in this
Hypothetical Example. The above tables and the assumption in the Hypothetical
Example of a 5% annual return are required by regulation of the Securities
and Exchange Commission (the "Commission") applicable to all investment
companies; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Trust's Shares. For
more complete descriptions of certain of the Trust's costs and expenses, see
"Investment Adviser".
This Hypothetical Example should not be considered a representation of past or future expenses, and the Trust's actual expenses may be more or less than those shown.
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)
For the years ended September 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- -------------- -------------- --------------
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
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* 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.
FINANCIAL HIGHLIGHTS
(continued)
For the period
April 22, 1987
(commencement
of operation) to
For the years ended September 30, September 30,
1991 1990 1989 1988 1987
--------------- -------------- -------------- -------------- -----------------
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
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* 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.
Portfolio Characteristics
A substantial portion of the Trust's investment portfolio consists of venture capital and private equity investments. As of September 30, 1996, 25.2% of the Trust's assets were invested in Restricted Securities of 31 Healthcare Companies. While at the time of investment by the Trust each of these 31 companies was privately-held, as of September 30, 1996 the securities of 12 companies were publicly-traded. The Trust continues to value these securities below current market prices as they remain restricted as to resale.
From inception, the Trust has made 126 venture capital investments in 55 private companies and 8 private placements in public companies. There have been 30 initial public offerings and 3 acquisitions of restricted portfolio companies as of September 30, 1996.
The following sets forth certain information with respect to the composition of the Trust's investment portfolio as of September 30, 1996.
The Trust's Portfolio
(as of September 30, 1996)
[Tabular representation of bar chart]
RESTRICTED UNRESTRICTED TOTAL
---------- ------------ ------
BIOTECHNOLOGY 0.0946 0.2528 0.3474
MEDICAL SUPPLIES 0.0429 0.0805 0.1234
CRO's 0.0136 0.0944 0.108
MEDICAL SPECIALTY 0.0353 0.0613 0.0966
DIAGNOSTICS 0.0519 0.0239 0.0758
AGRI/ENVIRONMENTAL 0.0079 0.067 0.0749
LIQUID ASSETS 0 0.0677 0.0677
PHARMACEUTICALS 0.0059 0.0598 0.0657
MANAGED CARE 0 0.0406 0.0406
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The following table sets forth the Trust's ten largest holdings as a percentage of net assets.
The Trust's Ten Largest Holdings
(as of September 30, 1996)
% of Net Assets
----------------
Martek Biosciences* 7.48%
Quintiles Transnational 5.22%
Vivus* 4.68%
IBAH* 3.29%
IDEXX Laboratories* 3.13%
Cytyc* 2.72%
Vencor 2.46%
Boston Scientific 2.43%
SEQUUS Pharmaceuticals* 2.35%
Phoenix International Life Sciences 2.29%
Total 36.05%
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*These securities were Restricted Securities when initially purchased by the Trust.
As of September 30, 1996, six of the Trust's ten largest holdings were originally venture capital investments. This portion of the Trust's investment portfolio has historically outperformed the Trust's overall portfolio as measured by NAV total return. Through September 30, 1996, the internal rate of return as calculated by the Investment Adviser for the restricted portfolio has been 19.9% per year before fees and 18.4% per year after allocated advisory fees since inception. The preceding rate of return information represents past performance only, was derived during a period of generally rising securities prices, and is not a guarantee of future performance. Shareholders of the Trust may experience gain or loss as a result of the price performance of Shares of the Trust, which in turn is materially affected by the performance of the entire portfolio, not just the Restricted Securities portion of the portfolio. There can be no guarantee that the Investment Adviser will invest the Trust's assets in successful Restricted Securities investments.
Share Price and NAV
The Trust's Shares are publicly held and have been listed and are trading on the NYSE. The average weekly trading volume of the outstanding Shares of the Trust for the fiscal year ended September 30, 1996 was 56,000. Shares of the Trust have frequently traded at a discount from NAV but have occasionally traded at a premium to NAV. There can be no assurance that Shares will trade at premium to NAV in the future. The following table sets forth for the quarters indicated the high and low closing prices per Share on the NYSE, the corresponding NAV, the percentage premium or discount at such closing prices, and the number of Shares traded. See the cover page of this Prospectus for the NAV and the last reported sales price per Share on the NYSE as of the date of this Prospectus.
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
------- ---- --------- -------- --- -------- -------- ------
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
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(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.
Investment
Performance
Total Return of the Trust. Since the Trust's first full month of operations, the Trust's Share price and NAV have increased at an annualized rate of 10.2% and 12.9%, respectively, through November 30, 1996. The following two charts compare the historical total return of the Trust as measured by changes in Share price and NAV, with changes in the Dow Jones Medical and Biotechnology Index. The charts reflect the reinvestment of dividends and capital gains and do not incorporate shareholder transaction costs.
H&Q Healthcare Investors Stock Price
v. Dow Jones Medical and Biotechnology Index
(from April 30, 1987 to November 30, 1996)
[Tabular representation of Line Chart]
Date Market DJMB - ---- ------ ---- 30-Apr-87 100.0% 100.0% 31-May-87 84.6% 102.9% 30-Jun-87 84.6% 99.6% 31-Jul-87 89.7% 99.1% 31-Aug-87 84.6% 100.1% 30-Sep-87 79.5% 98.2% 31-Oct-87 61.5% 69.9% 30-Nov-87 51.3% 65.3% 31-Dec-87 57.9% 77.1% 31-Jan-88 63.0% 79.9% 29-Feb-88 68.2% 81.8% 31-Mar-88 70.7% 79.95 30-Apr-88 66.9% 70.5% 31-May-88 65.6% 66.9% 30-Jun-88 68.2% 69.4% 31-Jul-88 68.2% 65.5% 31-Aug-88 64.3% 63.3% 30-Sep-88 66.9% 62.5% 31-Oct-88 66.9% 61.1% 30-Nov-88 60.4% 59.2% 31-Dec-88 65.6% 62.1% 31-Jan-89 68.2% 66.8% 28-Feb-89 65.6% 68.1% 31-Mar-89 72.0% 72.9% 30-Apr-89 79.7% 76.2% 31-May-89 75.9% 77.1% 30-Jun-89 75.9% 77.1% 31-Jul-89 82.3% 83.8% 31-Aug-89 82.3% 82.9% 30-Sep-89 93.9% 88.3% 31-Oct-89 88.7% 92.4% 30-Nov-89 96.4% 95.7% 31-Dec-89 100.3% 92.0% 31-Jan-90 95.2% 88.1% 28-Feb-90 92.6% 94.0% 31-Mar-90 97.7% 98.3% 30-Apr-90 93.9% 99.5% 31-May-90 105.4% 114.0% 30-Jun-90 118.3% 123.4% 31-Jul-90 117.0% 108.3% 31-Aug-90 101.6% 101.9% 30-Sep-90 95.2% 94.0% 31-Oct-90 96.4% 91.5% 30-Nov-90 111.9% 110.2% 31-Dec-90 121.3% 109.5% 31-Jan-91 126.8% 125.0% 28-Feb-91 151.7% 150.3% 31-Mar-91 177.9% 168.7% 30-Apr-91 169.6% 156.9% 31-May-91 175.1% 170.2% 30-Jun-91 166.8% 162.0% 31-Jul-91 173.7% 178.0% 31-Aug-91 188.9% 183.6% 30-Sep-91 201.3% 197.7% 31-Oct-91 224.7% 211.3% 30-Nov-91 228.9% 207.5% 31-Dec-91 294.8% 246.5% 31-Jan-92 309.1% 222.5% 28-Feb-93 207.5% 127.2% 31-Mar-93 197.5% 127.6% 30-Apr-93 200.3% 124.1% 31-May-93 206.0% 128.1% 30-Jun-93 197.5% 132.7% 31-Jul-93 193.2% 131.5% 31-Aug-93 201.8% 131.8% 30-Sep-93 210.3% 141.05 31-Oct-93 217.5% 153.5% 30-Nov-93 198.9% 153.5% 31-Dec-93 200.3% 155.3% 31-Jan-94 218.9% 165.4% 28-Feb-94 204.6% 150.65 31-Mar-94 193.2% 142.2% 30-Apr-94 180.3% 140.9% 31-May-94 180.3% 148.5% 30-Jun-94 163.1% 141.6% 31-Jul-94 160.3% 149.9% 31-Aug-94 178.95 168.3% 30-Sep-94 173.1% 176.4% 31-Oct-94 156.05 174.5% 30-Nov-94 160.3% 176.9% 31-Dec-94 157.4% 179.4% 31-Jan-95 164.5% 185.1% 28-Feb-95 163.1% 184.3% 31-Mar-95 158.8% 186.3% 30-Apr-95 166.05 185.2% 31-May-95 164.5% 183.0% 30-Jun-95 176.0% 193.7% 31-Jul-95 190.3% 199.05 31-Aug-95 206.0% 208.3% 30-Sep-95 208.9% 216.2% 31-Oct-95 207.5% 213.1% 30-Nov-95 207.6% 227.0% 31-Dec-95 248.8% 254.2% 31-Jan-96 276.3% 267.6% 29-Feb-96 274.8% 264.2% 31-Mar-96 259.5% 259.0% 30-Apr-96 270.2% 264.3% 31-May-96 283.9% 263.7% 30-Jun-96 264.1% 245.6% 31-Jul-96 232.0% 236.8% 31-Aug-96 247.3% 249.2% 30-Sep-96 254.9% 273.5% 31-Oct-96 235.1% 271.2% 30-Nov-96 252.6% 277.1% |
HQH Stock Price (1) Dow Jones Medical and Biotechnology Index (2)
(1) Source: CDA/Weisenberger
(2) Source: IDD Information Services/Tradeline
H&Q Healthcare Investors Net Asset Value
v. Dow Jones Medical and Biotechnology Index
[Tabular representation of Line Chart]
Date NAV DJMB - ---- --- ---- 30-Apr-87 100.0% 100.0% 31-May-87 99.5% 102.9% 30-Jun-87 103.0% 99.6% 31-Jul-87 103.1% 99.1% 31-Aug-87 104.1% 100.1% 30-Sep-87 100.8% 98.2% 31-Oct-87 76.0% 69.9% 30-Nov-87 74.7% 65.3% 31-Dec-87 78.9% 77.1% 31-Jan-88 84.3% 79.9% 29-Feb-88 87.2% 81.8% 31-Mar-88 89.1% 79.9% 30-Apr-88 87.7% 70.5% 31-May-88 83.8% 66.9% 30-Jun-88 88.4% 69.4% 31-Jul-88 87.1% 65.8% 31-Aug-88 83.7% 63.3% 30-Sep-88 87.2% 62.6% 31-Oct-88 86.6% 61.1% 30-Nov-88 80.2% 59.2% 31-Dec-88 85.1% 62.1% 31-Jan-89 88.5% 66.8% 28-Feb-89 87.9% 68.1% 31-Mar-89 93.7% 72.9% 30-Apr-89 97.8% 76.2% 31-May-89 102.1% 79.3% 30-Jun-89 95.9% 77.1% 31-Jul-89 106.2% 83.8% 31-Aug-89 109.2% 82.9% 30-Sep-89 115.5% 88.3% 31-Oct-89 113.5% 92.4% 30-Nov-89 119.6% 95.7% 31-Dec-89 121.7% 92.05 31-Jan-90 113.1% 88.1% 28-Feb-90 113.5% 94.0% 31-Mar-90 118.0% 98.3% 30-Apr-90 115.9% 99.5% 31-May-90 129.6% 114.0% 30-Jun-90 138.5% 123.4% 31-Jul-90 140.9% 108.3% 31-Aug-90 128.8% 101.9% 30-Sep-90 122.6% 94.0% 31-Oct-90 122.4% 91.8% 30-Nov-90 134.8% 110.2% 31-Dec-90 142.9% 109.6% 31-Jan-91 146.3% 125.05 28-Feb-91 174.6% 150.3% 31-Mar-91 191.0% 168.7% 30-Apr-91 186.4% 156.95 31-May-91 194.6% 170.25 30-Jun-91 182.7% 162.05 31-Jul-91 195.8% 178.05 31-Aug-91 213.6% 183.6% 30-Sep-91 221.5% 197.7% 31-Oct-91 230.3% 211.3% 30-Nov-91 236.2% 207.5% 31-Dec-91 276.7% 246.8% 31-Jan-92 285.0% 222.6% 29-Feb-92 260.05 195.9% 31-Mar-92 245.2% 181.8% 30-Apr-92 212.7% 152.85 31-May-92 230.2% 167.25 30-Jun-92 211.4% 165.65 31-Jul-92 241.4% 170.2% 31-Aug-92 224.5% 157.75 30-Sep-92 223.0% 151.6% 31-Oct-92 216.3% 158.1% 30-Nov-92 235.3% 176.8% 31-Dec-92 245.8% 178.05 31-Jan-93 235.5% 149.6% 28-Feb-93 206.6% 127.2% 31-Mar-93 200.85 127.6% 30-Apr-93 201.7% 124.1% 31-May-93 211.1% 128.1% 30-Jun-93 207.5% 132.7% 31-Jul-93 205.7% 131.65 31-Aug-93 207.5% 131.8% 30-Sep-93 212.2% 141.0% 31-Oct-93 224.5% 153.5% 30-Nov-93 224.4% 153.5% 31-Dec-93 226.2% 155.3% 31-Jan-94 239.1% 165.4% 28-Feb-94 225.9% 150.65 31-Mar-94 209.2% 142.2% 30-Apr-94 205.4% 140.9% 31-May-94 204.5% 148.5% 30-Jun-94 195.3% 141.6% 31-Jul-94 190.6% 149.9% 31-Aug-94 210.1% 168.3% 30-Sep-94 200.4% 176.4% 31-Oct-94 195.6% 174.5% 30-Nov-94 190.0% 176.9% 31-Dec-94 189.9% 179.4% 31-Jan-95 199.4% 185.1% 28-Feb-95 203.5% 184.8% 31-Mar-95 206.3% 186.35 30-Apr-95 202.6% 185.2% 31-May-95 205.1% 183.0% 30-Jun-95 216.7% 193.7% 31-Jul-95 235.8% 199.0% 31-Aug-95 254.6% 208.8% 30-Sep-95 263.3% 216.2% 31-Oct-95 263.3% 213.1% 30-Nov-95 268.4% 227.05 31-Dec-95 303.1% 254.2% 31-Jan-96 336.7% 267.6% 29-Feb-96 338.2% 264.2% 31-Mar-96 339.8% 259.0% 30-Apr-96 351.9% 264.3% 31-May-96 368.8% 263.7% 30-Jun-96 338.8% 245.6% 31-Jul-96 300.4% 236.8% 31-Aug-96 315.9% 249.2% 30-Sep-96 331.5% 273.5% 31-Oct-96 303.1% 271.2% 30-Nov-96 318.9% 277.1% |
HQH Net Asset Value (1) Dow Jones Medical and Biotechnology Index (2)
(1) Source: CDA/Weisenberger
(2) Source: IDD Information Services/Tradeline
The preceding tables represent past performance only, were derived during a period of generally rising securities prices, and are not a guarantee of future performance.
Comparison of Expense Ratios. The chart below compares the latest reported annual total expense ratios of the Trust with a composite of other closed-end and open-end investment companies of varying asset size, including several with significantly less assets than the Trust, whose investment objectives are comparable to those of the Trust.
[Tabular representation of bar chart] The Trust 1.59% Composite of Healthcare Funds (1) 1.72% |
(1) The Composite represents an unweighted average for investment companies included in Lipper Analytical Services Inc.'s Healthcare/Biotechnology category of closed-end and open-end funds as reported on January 2, 1997.
THE OFFER
Terms of the Offer
The Trust is issuing to its Shareholders non-transferable Rights to subscribe for an aggregate of 2,115,336 Shares, at the rate of one Share for each three Rights held. Shareholders will receive one non-transferable Right for each Share held. Rights may be exercised at any time during the Subscription Period, which commences on , 1997 and ends at 5:00 p.m. New York City time, on , 1997. Fractional Shares will not be issued upon the exercise of Rights. The Rights are non-transferable. Therefore, only the underlying Shares will be listed for trading on the NYSE or any other exchange.
In addition, any Shareholder who fully exercises all Rights issued to him or her is entitled to subscribe for Shares which were not otherwise subscribed for by others on the Primary Subscription. For purposes of determining the number of Shares a Shareholder may acquire pursuant to the Offer, broker-dealers whose Shares are held of record by Cede & Co., Inc. ("Cede"), nominee for the Depository Trust Company, or by any other depository or nominee, will be deemed to be the holders of the Rights that are issued to Cede or such other depository or nominee on their behalf. Shares acquired pursuant to the Over-Subscription Privilege are subject to allotment, which is more fully discussed under "The Offer--Over-Subscription Privilege".
The Rights will be evidenced by Exercise Forms which will be mailed to Shareholders. Rights may be exercised by completing an Exercise Form and delivering it, together with payment by means of (i) a check or money order or (ii) a Notice of Guaranteed Delivery to the Subscription Agent during the Subscription Period. The method by which Rights may be exercised and Shares paid for is set forth below in "Exercise of Rights" and "Payment for Shares".
Purpose of the Offer
The Board of Trustees of the Trust (the "Board") has determined that it is in the best interests of the Trust and its Shareholders to increase the assets of the Trust available for investment through the Offer, so that the Trust will be in a better position to more fully take advantage of available investment opportunities in Healthcare Companies, particularly venture capital investments in biotechnology and other innovative medical technology companies. The Board was informed by the Investment Adviser that many high quality venture capital investment opportunities were becoming available, and that Shareholders could potentially realize significant benefits from increased investment in venture capital securities, as well as other investments in Healthcare Companies. The Board also reviewed data suggesting that increased asset size would favorably affect the Trust's expense ratio. The Board unanimously approved the Offer and concluded that increasing the assets of the Trust through the Offer would be beneficial to the Trust and its Shareholders. However, there can be no assurance that the anticipated benefits discussed herein will occur as a result of increasing the assets of the Trust through the Offer. In determining that the initiation of the Offer and the proposed terms of the Offer were in the best interest of Shareholders, the Board considered a variety of factors including those set forth below:
Recent Developments in Certain Healthcare Sectors. While the healthcare industries as a whole have undergone substantial transformation during the past decade thereby creating a degree of investment uncertainty, the Investment Adviser believes that recent events in specific industries, particularly in the biotechnology and medical technology industries, provide the Trust with a significant investment opportunity. Recent advances in computer technologies have provided researchers with an ability to substantially reduce product research and development costs, thereby providing a more efficient means of evaluating the feasibility of a new therapeutic product or device. Increased development in the biotechnology and medical technology industries has, in part, resulted in an increase in the current pipeline of new healthcare products. The Investment Adviser estimates that more than 15 therapeutic products for a variety of diseases have completed human clinical trials and are awaiting FDA marketing approval, that there are approximately 140 products in late stage (Phase III) human clinical trials and that over 1,000 products are in earlier stage trials and pre-clinical development. Although extensive cost containment measures proposed by the U.S. Executive Branch in 1994 failed to win Legislative support, cost containment measures remain an active part of both national and local legislative agendas. The Investment Adviser believes that Healthcare Companies which provide products and services of comparable quality to, but at a lower cost than, existing products and services provide favorable investment opportunities. The Investment Adviser believes that biotechnology and other innovative medical technology companies may be currently valued at prices
which do not reflect the prospects for such companies. The Trust will use the net proceeds from the Offer to capitalize on such investment opportunities.
Increased Investment Size. The Investment Adviser believes that larger investments by the Trust provide additional negotiating leverage and pricing influence over venture capital and other private equity investments. With an increased asset base through the Offer, the Trust will be able to make investments of the size necessary to achieve more favorable investment terms.
Additional Investments. In order to take advantage of new investment opportunities in the healthcare industries without the Offer, the Trust would be required to sell a portion of its existing investments which would incur transaction costs and may result in a realization of significant capital gains or otherwise take place at a time when the investment sold may not have fully achieved the Trust's investment objective for it. The Offer provides the Trust with the ability to both capitalize on new investment opportunities and maintain its investment in existing assets.
Opportunity to Purchase Below Market Price and NAV. The Offer affords existing Shareholders the opportunity to purchase additional Shares at a price that will be below market value and NAV at the Expiration Date. However, Shareholders who do not fully exercise their Rights will own, upon completion of the Offer, a smaller proportional interest in the Trust than they owned prior to the Offer.
Reduction in Operating Costs Per Share. The Board was advised by the Investment Adviser that the Trust could potentially achieve additional economies of scale as a result of an increase in total assets. The Investment Adviser believes that the increase in assets from the Offer will reduce the Trust's expenses as a percentage of average net assets per Share.
Over-Subscription Privilege
If some Shareholders do not exercise all of the Rights initially issued to them in the Primary Subscription, such Shares which have not been subscribed for will be offered, by means of the Over-Subscription Privilege, to Shareholders who have exercised all the Rights initially issued to them and who wish to acquire more than the number of Shares for which the Rights issued to them are exercisable. Shareholders who exercise all the Rights initially issued to them will be asked to indicate, on the Exercise Form which they submit with respect to the exercise of the Rights, how many Shares they are willing to acquire pursuant to the Over-Subscription Privilege. The Trust may, at its discretion, issue up to an additional 25% of the Shares in the Offer to honor over-subscription requests if sufficient Shares are not available from the Primary Subscription to honor all over-subscriptions. If sufficient Shares remain, all over-subscriptions will be honored in full. If sufficient Shares are not available to honor all over- subscriptions, the available Shares will be allocated among those who over-subscribe based on the number of Rights originally issued to them by the Trust, so that the number of Shares issued to Shareholders who subscribe pursuant to the Over-Subscription Privilege will generally be in proportion to the number of Shares owned by them in the Trust on the Record Date. The allocation process may involve a series of allocations in order to assure that the total number of Shares available for over-subscriptions is distributed on a pro-rata basis.
The Subscription Price
The Subscription Price per Share will be 95% of the lower of (a) the average of the last reported sales price of a Share on the NYSE on , 1997 and the four preceding business days or (b) the NAV as of the Pricing Date.
The Trust announced the Offer after the close of trading on the NYSE on , 1997. The NAV at the close of business on , 1997 and , 1997 was $ and $ , respectively, and the last reported sales price of a Share on such Exchange on those dates was $ and $ , respectively. Since the Expiration Date is the same day as the Pricing Date, Shareholders who decide to acquire Shares on the Primary Subscription or pursuant to the Over-Subscription Privilege will not know the purchase price for such Shares when they make such decision. Information about the Trust's NAV may be obtained by calling (800) 451-2597.
Expiration of the Offer
Rights will expire on the Expiration Date and thereafter may not be exercised, unless the Offer is extended.
Any extension, termination, or amendment will be followed as promptly as practical by announcement thereof, such announcement in the case of an extension to be issued no later than 9:00 a.m., New York City time, on the
next business day following the previously scheduled Expiration Date. The Trust will not, unless otherwise obligated by law, have any obligation to publish, advertise, or otherwise communicate any such announcement other than by making a release to the Dow Jones News Service or such other means of announcement as the Trust deems appropriate.
Subscription Agent
The Subscription Agent is State Street Bank and Trust Company, 225 Franklin Street, Concourse Level, Boston, Massachusetts 02110, which will receive, for its administrative, processing, invoicing and other services as Subscription Agent, a fee estimated to be $10,000, which includes reimbursement for all out-of-pocket expenses related to the Offer. The Subscription Agent is also the Trust's Custodian, Dividend Paying Agent, Transfer Agent and Registrar with respect to the Shares. Shareholder questions or inquiries should be directed to State Street Bank and Trust Company, P.O. Box 8200, Boston, Massachusetts 02266-8200, telephone (800) 426-5523. SIGNED EXERCISE FORMS SHOULD BE SENT TO STATE STREET BANK AND TRUST COMPANY, by one of the methods described below:
Exercise Form
Delivery Method Address/Number
--------------- --------------
By Mail State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, Massachusetts 02205-8686
By Hand State Street Bank and Trust Company
225 Franklin Street, Concourse Level
Boston, Massachusetts 02110
or
State Street Bank and Trust Company
61 Broadway, Concourse Level
New York, NY 10006
By Overnight Courier State Street Bank and Trust Company
or Express Mail 2 Heritage Drive
North Quincy, MA 02171
Attn: Corp. Reorg.
By Broker-Dealer or other Nominee Shareholders whose Shares are held in a brokerage, bank or
(Notice of Guaranteed Delivery) trust account may contact their broker or other nominee
and instruct them to submit a Notice of Guaranteed
Delivery and Payment on their behalf.
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Delivery to an address other than as set forth above does not constitute a valid delivery.
Information Agent
Any questions or requests for assistance may be directed to the Information Agent at its telephone number and address listed below:
Shareholder Communications Corporation 17 State Street New York, New York 10004 Toll Free: (800) 733-8481, Ext. 352 or Call Collect: (212) 807-7000
The Information Agent will receive a fee estimated to be approximately $22,000, which includes reimbursement for all out-of-pocket expenses related to the Offer.
Exercise of Rights
Rights may be exercised by completing and signing the reverse side of the
Exercise Form which accompanies this Prospectus and mailing it in the
envelope provided, or otherwise delivering the completed and signed Exercise
Form to the Subscription Agent, together with payment for the Shares as
described below under "Payment for Shares". Completed Exercise Forms and
related payments must be received by the Subscription Agent prior to 5:00
p.m. New York City time on or before the Expiration Date (unless payment is
effected by means of a Notice of Guaranteed Delivery as described below under
"Payment for Shares") at the offices of the Subscription Agent at the address
set forth above. A Shareholder who exercises Rights pursuant to the Primary
Subscription is hereinafter referred to as an "Exercising Shareholder".
Rights may also be exercised through an Exercising Shareholder's broker, who
may charge such Exercising Shareholder a servicing fee.
Shareholders who are issued fewer than three Rights or Exercising Shareholders who hold fewer than three Rights or who, upon exercising their Rights, are left with fewer than three Rights will not be able to exercise such Rights to purchase a Share or one additional Share, respectively, as described under "The Offer--Terms of the Offer and Over-Subscription". In addition, Shareholders who are issued fewer than three Rights or for whom there is not a current address ("stop mail" accounts) will not be mailed this Prospectus or other subscription materials.
Exercising Shareholders Who Are Record Owners. Exercising Shareholders may choose between either option set forth under "Payment for Shares" below. If time is of the essence, option (2) will permit delivery of the Exercise Form and payment after the Expiration Date.
Investors Whose Shares are Held By A Broker-Dealer or Other Nominee. Exercising Shareholders whose Shares are held by a nominee such as a broker-dealer, bank or trust company must contact the nominee to exercise their Rights. In that case, the nominee will complete the Exercise Form on behalf of the Exercising Shareholder and arrange for proper payment by one of the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold Shares for the account of others should notify the respective beneficial owners of such Shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to exercising the Rights. If the beneficial owner so instructs, the nominee should complete the Exercise Form and submit it to the Subscription Agent with the proper payment described under "Payment for Shares" below.
All questions as to the validity, form, eligibility (including times of receipt and matters pertaining to beneficial ownership) and the acceptance of subscription forms and the Subscription Price will be determined by the Trust, which determinations will be final and binding. No alternative, conditional or contingent subscriptions will be accepted. The Trust reserves the absolute right to reject any or all subscriptions not properly submitted or the acceptance of which would, in the opinion of the Trust's counsel, be unlawful. The Trust also reserves the right to waive any irregularities or conditions, and the Trust's interpretations of the terms and conditions of the Offer shall be final and binding. Any irregularities in connection with subscriptions must be cured within such time as the Trust shall determine unless waived. Neither the Trust nor the Subscription Agent shall be under any duty to give notification of defects in such subscriptions or incur any liability for failure to give such notification. Subscriptions will not be deemed to have been made until such irregularities have been cured or waived.
Payment for Shares
Exercising Shareholders may exercise their Rights and pay for Shares subscribed for pursuant to the Primary Subscription and Over-Subscription Privilege in one of the following ways:
(1) Deliver Exercise Form and Payment to the Subscription Agent by the Expiration Date:
Exercising Shareholders may deliver to the Subscription Agent at any of the offices set forth above on pages and (i) a completed and executed Exercise Form indicating the number of Rights they have been issued and the number of Shares they are acquiring pursuant to the Primary Subscription, as well as the number of any additional Shares they would like to subscribe for under the Over-Subscription Privilege and (ii) payment for all such ordered Shares based on the Estimated Subscription Price of $ per Share, both no later than 5:00 p.m., New York City time, on the Expiration Date.
The Subscription Agent will deposit all checks received by it for the purchase of Shares into a segregated interest bearing account of the Trust (the interest from which will belong to the Trust) pending proration and distribution of Shares.
A PAYMENT PURSUANT TO THIS METHOD (1) MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE U.S., (2) MUST BE PAYABLE TO "H&Q HEALTHCARE INVESTORS" AND (3) MUST ACCOMPANY AN EXECUTED EXERCISE FORM FOR SUCH SUBSCRIPTION TO BE ACCEPTED. THIRD (OR MULTIPLE) PARTY CHECKS WILL NOT BE ACCEPTED.
(2) Contact Your Broker, Bank or Trust Company to Deliver Notice of Guaranteed Delivery to the Subscription Agent by the Expiration Date:
Exercising Shareholders may request a NYSE or National Association of Securities Dealers, Inc. member, bank or trust company (each a "nominee") to execute a Notice of Guaranteed Delivery (or equivalent electronic information) and deliver it, by facsimile or otherwise, to the Subscription Agent by 5:00 p.m., New York City time, on the Expiration Date indicating (i) the number of Rights they wish to exercise, the number of Primary Subscription Shares they wish to acquire, and the number of Over-Subscription Privilege Shares for which they wish to subscribe and (ii) guaranteeing delivery of payment and a completed Exercise Form from such Exercising Shareholder by , 1997. Exercising Shareholders must arrange for payment to the nominee, who will in turn submit the Exercise Form and payment on their behalf by , 1997. The Subscription Agent will not honor a Notice of Guaranteed Delivery unless the completed Exercise Form and full payment are received by , 1997.
On , 1997 (the "Confirmation Date"), the Subscription Agent will send a confirmation to each Exercising Shareholder (or, if the Shares are held by a depository or other nominee, to such depository or other nominee), showing (i) the number of Shares acquired pursuant to the Primary Subscription, (ii) the number of Shares, if any, acquired pursuant to the Over-Subscription Privilege, (iii) the per Share and total purchase price for the Shares, and (iv) any additional amount payable by such Exercising Shareholder to the Trust or any excess to be refunded by the Trust to such Exercising Shareholder in each case based upon the final Subscription Price. Any additional payment required from an Exercising Shareholder must be received by the Subscription Agent by , 1997 (the "Final Payment Date"). Any excess payment to be refunded by the Trust to an Exercising Shareholder will be mailed by the Subscription Agent to the holder as promptly as practicable after the Final Payment Date.
Issuance and delivery of certificates for the Shares purchased are subject to actual collection of checks and actual payment pursuant to any Notice of Guaranteed Delivery.
If an Exercising Shareholder does not make payment of any additional amounts due, the Trust reserves the right to take any or all of the following actions: (i) apply any payment received by it toward the purchase of the greatest whole number of Shares which could be acquired by such Exercising Shareholder upon exercise of the Primary Subscription and/or Over-Subscription Privilege based on the amount of such payment; (ii) allocate the Shares subject to subscription rights to one or more other Shareholders; (iii) sell all or a portion of the Shares deliverable upon exercise of subscription rights on the open market and apply the proceeds thereof to the amount owed; and/or (iv) exercise any and all other rights or remedies to which it may be entitled, including, without limitation, the right to set-off against payments actually received by it with respect to such subscribed Shares.
An Exercising Shareholder will have no right to cancel the exercise of Rights or rescind a purchase after the Subscription Agent has received payment, either by means of a Notice of Guaranteed Delivery or a check or money order, except as described under "The Offer--Notice of NAV Decline".
The risk of delivery of subscription forms and payments to the Subscription Agent will be borne by the Exercising Shareholder and not the Trust, the Dealer Manager, the Subscription Agent, the Information Agent or broker-dealers designated by the Dealer Manager. If the mail is used to exercise Rights, insured registered mail is recommended.
Notice of NAV Decline
The Trust will suspend the Offer until it amends this Prospectus if, subsequent to the effective date of this Prospectus, the Trust's NAV declines more than 10% from its NAV as of that date. In such event, the Trust will notify Shareholders of any such decline and thereby permit them to cancel their exercise of their Rights.
Delivery of Stock Certificates
Registered Shareholders who are participants in the Trust's Dividend Reinvestment Plan (the "Plan") will have any Shares that they acquire pursuant to the Offer credited to their Shareholder dividend reinvestment accounts
in the Plan. Shareholders whose Shares are held of record by Cede or by any other depository or nominee on their behalf or their broker-dealers' behalf will have any Shares that they acquire pursuant to the Offer credited to the account of Cede or such other depository or nominee. With respect to all other Shareholders, stock certificates for all Shares acquired pursuant to the Offer will be mailed after payment for all the Shares subscribed for has cleared, which clearance may take up to fifteen days from the date of receipt of the payment.
Employee Plan Considerations
Shareholders that are employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (including corporate savings and 401(k) plans), profit sharing/retirement plans for self- employed individuals and Individual Retirement Accounts (collectively, "Retirement Plans") should be aware that additional contributions of cash to the Retirement Plan (other than rollover contributions or trustee-to-trustee transfers from other Retirement Plans) in order to exercise Rights would be treated as Retirement Plan contributions and therefore, when taken together with contributions previously made, may be treated as excess or nondeductible contributions subject to excise taxes. In the case of Retirement Plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), additional cash contributions could cause violations of the maximum contribution limitations of Section 415 of the Code or other qualification rules. Retirement Plans in which contributions are so limited should consider whether there is an additional source of funds available within the Retirement Plan, including the liquidation of assets, with which to exercise the Rights. Because the rules governing Retirement Plans are extensive and complex, Retirement Plans contemplating the exercise of Rights should consult with their counsel prior to such exercise.
Retirement Plans and other tax exempt entities, including governmental plans, should also be aware that if they borrow in order to finance their exercise of Rights, they may become subject to the tax on unrelated business taxable income under Section 511 of the Code. If any portion of an Individual Retirement Account ("IRA") is used as security for a loan, the portion so used is treated as a distribution to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the Code contain prohibited transactions rules that may affect the exercise of Rights. Due to the complexity of these rules and the penalties for noncompliance, Retirement Plans should consult with their counsel regarding the consequences of their exercise of Rights under ERISA and the Code.
Certain Federal Income Tax Consequences of the Offer
The following discussion summarizes the principal federal income tax consequences of the Offer to Shareholders and Exercising Shareholders. It is based upon the Code, U.S. Treasury regulations, Internal Revenue Service rulings and policies and judicial decisions in effect on the date of this Prospectus. This discussion does not address all federal income tax aspects of the Offer that may be relevant to a particular Shareholder in light of his individual circumstances or to Shareholders subject to special treatment under the Code (such as insurance companies, financial institutions, tax-exempt entities, dealers in securities, foreign corporations, and persons who are not citizens or residents of the U.S.), and it does not address any state, local or foreign tax consequences. Accordingly, each Shareholder should consult his or her own tax advisor as to the specific tax consequences of the Offer to him or her. Each Shareholder should also review the discussion of certain tax considerations affecting the Trust and Shareholders set forth under "Taxation" below.
For federal income tax purposes, neither the receipt nor the exercise of the Rights by Shareholders will result in taxable income to those Shareholders, and no loss will be realized if the Rights expire without exercise.
A Shareholder's holding period for a Share acquired upon exercise of a Right begins with the date of exercise. A Shareholder's basis for determining gain or loss upon the sale of a Share acquired upon the exercise of a Right will be equal to the sum of the Shareholder's basis in the Right, if any, and the Subscription Price per Share. The Shareholder's basis in the Right will be zero unless either (i) the fair market value of the Right on the date of distribution is 15% or more of the fair market value on such date of the Shares with respect to which the Right was distributed, or (ii) the Shareholder elects, on its federal income tax return for the taxable year in which the Right is received, to allocate part of the basis of such Shares to the Right. If either of clauses (i) and (ii) is applicable, then if the Right is exercised, the Exercising Shareholder will allocate its basis in the Shares with respect to which the Right was distributed between such Shares and the Right in proportion to the fair market values of each on the date of distribution. A Shareholder's gain or loss recognized upon a sale of a Share acquired upon the exercise
of a Right will be a capital gain or loss (assuming the Share was held as a capital asset at the time of sale) and will be a long-term capital gain or loss if the Share was held at the time of sale for more than one year.
The foregoing is only a summary of the applicable federal income tax laws presently in effect and does not include any state or local tax consequences of the Offer. Shareholders should consult their own tax advisers concerning the tax consequences of this transaction.
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at an estimated Subscription Price (the "Estimated Subscription Price") of $ per Share, the net proceeds of the Offer will be approximately $ , after deducting commissions and expenses payable by the Trust estimated at approximately $ . The net proceeds of the Offer will be invested in accordance with the Trust's investment objective and policies. See "Investment Objective and Policies". Various factors affect investments in emerging growth companies that are different from factors affecting investments in large well-known companies, including the additional research required to investigate a large number of small companies and the volatility and illiquidity of securities of those companies. Accordingly, initial investment of the proceeds in publicly traded securities may take place during a period of up to six months following completion of the Offer, depending on market conditions and the availability of appropriate securities. Restricted Securities will be purchased as appropriate opportunities arise, which could take up to one year or longer, and the Trust may choose to be more fully invested in publicly traded securities during such period. Pending investment in the securities described above, the proceeds will be held in obligations of the U.S. Government, its agencies or instrumentalities ("U.S. Government Securities"), highly rated money market instruments or mutual funds that invest in such instruments.
DESCRIPTION OF TRUST
The Trust is a diversified, closed-end management investment company. The Trust was organized as a Massachusetts business trust on October 31, 1986 pursuant to a Declaration of Trust governed by Massachusetts law and commenced operations on April 22, 1987. The Trust's principal offices are located at 50 Rowes Wharf, Fourth Floor, Boston, Massachusetts 02110-3328.
The Trust's capitalization consists of an unlimited number of shares of beneficial interest, $.01 par value. Each Share represents an equal proportionate beneficial interest in the Trust and, when issued and outstanding, will be fully paid and non-assessable by the Trust. Upon any liquidation of the Trust, Shareholders will be entitled to share pro rata in the net assets of the Trust available for distribution. The Trust will send annual and semi-annual financial statements to Shareholders and may also issue more abbreviated interim reports to update Shareholders on a quarterly basis. The Trust will hold annual meetings of its Shareholders in accordance with the provisions of the Trust's By-laws and the rules of the NYSE.
Shareholders are entitled to one vote for each Share held. The Trust's Shares do not have cumulative voting rights, which means that the holders of more than 50% of the Shares of the Trust voting for the election of Trustees can elect all of the Trustees, and, in such event, the holders of the remaining Shares will not be able to elect any Trustees. The Trust has a staggered Board, whereby one class of Trustees is elected each year.
The number of Shares outstanding as of the date of this Prospectus is 6,346,009. Assuming that all Rights are exercised, an additional 2,115,336 Shares will be issued. The Trust may, at its discretion, issue up to an additional 25% of the Shares in the Offer to honor over-subscription requests if sufficient Shares are not available from the Primary Subscription to honor all over-subscriptions.
For information regarding risk factors pertaining to the Trust, see "Appendix A--Risk Factors and Investment Techniques".
INVESTMENT ADVISER
Hambrecht & Quist Capital Management Incorporated, an investment adviser registered under the Investment Advisers Act of 1940, has served as Investment Adviser to the Trust since its inception in 1987. The Investment Adviser has, since 1992, also provided investment advisory services to another closed-end investment company, H&Q Life Sciences Investors ("HQL"), which invests in companies in the healthcare industries and related
industries such as agricultural and environmental technology. Alan G. Carr, the President and a Trustee of the Trust, the President and sole Director of the Investment Adviser, as well as the President and a Trustee of HQL, is responsible for managing the Trust's portfolio. Mr. Carr is currently the portfolio manager for the Trust and HQL, which have aggregate net assets of approximately $ million. Prior to joining the Investment Adviser at its inception in 1986, Mr. Carr was portfolio manager for three mutual funds, with aggregate net assets in excess of $300 million, sponsored by Putnam Companies and dedicated to investment in the healthcare industries. Mr. Carr has been managing equity portfolios emphasizing investment in emerging growth companies for over 30 years and portfolios specializing in publicly traded equity securities of Healthcare Companies, as well as in venture capital opportunities in the healthcare industries, for the last 15 years.
The Investment Adviser is an indirect wholly-owned subsidiary of Hambrecht & Quist Group ("Group"), which through various related entities has broad investment experience in the healthcare industries. Hambrecht & Quist LLC ("H&Q"), an indirect wholly-owned subsidiary of Group, is a registered broker-dealer that specializes in providing investment research on and securities brokerage and investment banking services to emerging growth companies. H&Q has a respected research team dedicated solely to healthcare industries investment research. Since 1982, H&Q has sponsored a healthcare conference, which is dedicated to companies in the healthcare industries. At the 1997 Conference, over 240 such companies made presentations to approximately 3,000 participants. H&Q has major domestic offices in San Francisco, California; New York, New York; and Boston, Massachusetts and its affiliates have offices in several foreign countries. Venture capital entities associated with Group have managed venture capital funds from domestic and international sources since 1970. Group intends to purchase for its own account or for distribution to employees of its affiliates Shares of the Trust prior to the Record Date and may exercise its Rights pursuant to the Offer.
While the Investment Adviser has benefited from the information available to it because of its relationship with Group, the staff of the Investment Adviser remains responsible for obtaining all necessary information in the exercise of its due diligence obligations and making independent judgments with respect to investment decisions. The Investment Adviser is responsible for the day-to-day operations of the Trust, including selection of the Trust's portfolio investments.
The Investment Advisory Agreement between the Investment Adviser and the Trust (the "Advisory Agreement") provides that, subject to the supervision and direction of the Board, the Investment Adviser is responsible for the actual management of the Trust's portfolio. The Investment Adviser is also obligated to supervise or perform certain administrative and management services for the Trust and is obligated to provide the office space, facilities, equipment and personnel necessary to perform its duties under the Advisory Agreement.
For the services provided by the Investment Adviser under the Advisory Agreement, the Trust will pay a fee, computed and payable monthly, equal when annualized to (i) 2.5% of the average net assets for such month of its Restricted Securities (as defined) up to 25% of net assets; and (ii) 1.0% of the average net assets for such month of all other assets. The aggregate monthly fee paid to the Investment Adviser may not exceed, when annualized, 1.375% of the Trust's average total net assets for such month (approximately .115% per month). Because the advisory fee is based on the net assets of the Trust, and since the Offer is expected to result in an increase in net assets, the Investment Adviser should benefit from the Offer by an increase in the dollar amount of its fee.
TRUSTEES AND OFFICERS
The names, addresses and ages of the Trustees and Officers of the Trust are set forth below, together with their position and their principal occupations during the past five years, and, in the case of the Trustees, their positions with certain other organizations and publicly held companies.
Principal Occupation
Names, Ages and Addresses Position with the Trust and Other Affiliations
- ------------------------- ----------------------- ----------------------
Alan G. Carr* (62) President and Trustee President and Trustee, H&Q Life Sciences
50 Rowes Wharf (since 1986) Investors ("HQL") (since 1992); President
Boston, MA 02110 (since 1992), Senior Vice President
(1986-1992) and sole Director (since 1986),
Hambrecht & Quist Capital Management
Incorporated ("HQCM"); and Managing Director,
Hambrecht & Quist Group ("Group") (since
1992).
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Principal Occupation
Names, Ages and Addresses Position with the Trust and Other Affiliations
- ------------------------- ----------------------- ----------------------
William R. Hambrecht* (61) Trustee Chairman (since 1992), President (1982-1992),
One Bush Street (since 1994) Chief Executive Officer (1982-1987) and
San Francisco, CA 94104 Co-Chief Executive Officer (1987-1994),
Group; Director (since 1982) of Adobe Systems
Inc.; and Trustee, HQL (since 1994).
Beneficial owner of approximately 13% of the
voting securities of Group.
Lawrence S. Lewin** (58) Trustee Chairman and Chief Executive Officer (since
9300 Lee Highway (since 1987) 1970), The Lewin Group (a healthcare public
Fairfax, VA 22031 policy and management consulting firm), a
subsidiary of Quintiles Transnational Corp.;
Director, Apache Medical Systems (since
1989); and Trustee, HQL (since 1992).
Robert P. Mack, M.D. (61) Trustee Orthopedic Surgeon, Steadman-Hawkins
Box 7030 (since 1991) Orthopedic Clinic (since 1996); Orthopedic
Avon, CO 81620 Surgeon, Denver Orthopedic Clinic
(1977-1996); and Trustee, HQL (since 1992).
Eric Oddleifson** (61) Trustee Managing Director, UBS Resource Investments
50 South Street (since 1992) (forest and agriculture properties
Hingham, MA 02043 investments) (since 1995); President,
Director and Chief Executive Officer,
Resource Investments, Inc. (forest and
agriculture properties investments)
(1984-1995); and Trustee, HQL (since 1992).
Uwe E. Reinhardt, Ph.D. (59) Trustee Professor of Economics, Princeton University
Woodrow Wilson School (since 1988) (since 1968); and Trustee, HQL (since 1992).
Princeton University
Princeton, NJ 08544
Henri A. Termeer** (50) Trustee Chairman (since 1988), Chief Executive
Genzyme Corporation (since 1989) Officer (since 1985) and President (since
One Kendall Square 1983), Genzyme Corporation (human healthcare
Cambridge, MA 02139 products company); Director, ABIOMED,
Inc.(since 1987); Director, Geltex
Pharmaceutical, Inc. (since 1994); Director,
AutoImmune, Inc. (since 1992); Director of
Genzyme Transgenics (since 1993); and
Trustee, HQL (since 1992).
Kerri A. Bisner (34) Secretary Vice President (since 1994), Assistant Vice
50 Rowes Wharf (since 1992) President (1991-1994), Research Associate
Boston, MA 02110 (1989-1991), HQCM; and Secretary, HQL (since
1992).
Kimberley L. Carroll (40) Treasurer and Chief Financial Vice President (since 1991) and Assistant
50 Rowes Wharf Officer (since 1987) and Vice President (1987-1991), HQCM; and
Boston, MA 02110 Assistant Secretary Treasurer and Chief Financial Officer, HQL
(1987-1992) (since 1992).
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* 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.
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
instruments. See "Investment Techniques--Money Market Instruments" in Appendix A for a description of money market instruments in which the Trust may invest.
In addition, the Trust may, to a limited degree, enter into when-issued and delayed delivery transactions, forward foreign currency contracts and repurchase agreements, and lend its portfolio securities. Under normal market conditions the Trust does not intend to engage in such practices. See "Appendix A--Description of Risk Factors and Investment Techniques".
The Trust also has adopted certain other investment restrictions in an effort to achieve its investment objective. See "Investment Restrictions" in the Trust's SAI.
Healthcare Industries
Investments in the healthcare industries are likely to continue to be the principal component of the Trust's portfolio and, except when the Trust assumes a temporary defensive position, will represent at least 25% of the Trust's net assets. This predominance reflects the size and diversity of the healthcare industries.
The healthcare industries constitute a large segment of the U.S. economy. The U.S. Department of Health and Human Services ("HHS") estimates that national healthcare expenditures in 1996 will be 14.3% of U.S. gross domestic product ("GDP"), or $1,008 billion (in current dollars). This constitutes a 6.2% increase over U.S. healthcare expenditures in 1995. U.S. GDP is a measure of the total value of all goods and services produced in the U.S. over the course of a year. HHS expects that the healthcare industries will continue to grow both in absolute dollars and as a percentage of GDP. HHS estimates that healthcare expenditures in the U.S. could increase to as much as 16.1% of GDP in 2000. The Investment Adviser believes that, while the healthcare industries are undergoing significant change, they serve market sectors that are generally large and fragmented and growing at above-average rates, thereby providing potential investment opportunities for the Trust.
Market Forces in Healthcare
Markets for healthcare products and services have undergone significant growth over the last 25 years. Factors contributing to this growth include demographic shifts tending to a more elderly population and technological advances which may lead to therapy, or possibly cures, for the many disease states for which there are no currently effective treatments. In addition, the Investment Adviser believes that worldwide consumer awareness and acceptance of new and innovative healthcare products continues to rise, stimulating demand, and that the rate of demographic and technological change may accelerate in the future, causing certain segments of the business to decline and others to experience growth. Investments in the companies developing products that benefit from these market forces may present potentially profitable opportunities.
Demographics. In the United States, persons age 65 and older consume three to four times more healthcare goods and services than do the rest of the population. The U.S. Social Security Administration ("SSA") estimates that in 1996, 34 million Americans, or 12.8% of the population, were over age 65 compared to 12.5% in 1990. By 2000, this segment is projected by SSA to grow to 40 million people in the U.S., or 13.3% of the population.
Technology. Advances in the fields of healthcare, particularly in biotechnology, diagnostics and electronics, are enhancing medical applications in existing markets and creating new markets. These advances have contributed to longevity as well as to an improved quality of life. In particular, the Investment Adviser believes that diagnostic techniques and therapeutic products have significantly changed the practice of medicine and will continue to do so for the foreseeable future. Diagnostic techniques have become more sophisticated and accurate, as well as less traumatic to the patient. Therapeutic products have become more effective, can be tailored to more specialized uses and, as a result of improved diagnostics, can be employed at an earlier stage of treatment for many diseases Increasingly, new therapeutic products are being developed for previously diagnosable diseases for which no therapy was available, and diagnostics for patients for which therapy was available, but where patients that might benefit were not easily identifiable. Scientific discovery has, in recent years, been materially enhanced by advances in knowledge in the broad field of genomics, which has in turn been made possible by the ability of enhanced computer power to handle vast amounts of data and which also permits the characterization of molecular structure and the design of potentially active new drugs.
Demand. Both lengthened lifespan and improved technologies have contributed to the significant increases in demand for healthcare products and services in recent years. Consumers have become accustomed to access to
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.
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
subsectors, have benefitted from overall market growth and have been able to generate above-average investment returns.
Managed Healthcare. Many varieties of companies are engaged directly or indirectly in the delivery of healthcare to patients, including hospitals, nursing homes, inpatient and outpatient rehabilitation services and therapeutic services delivered to the home. The Investment Adviser believes that healthcare cost containment efforts will continue to reduce revenues to acute care hospitals and promote the delivery of therapy in other more efficient settings. These trends should enhance the delivery of increasingly sophisticated care at home, and the potential of outpatient surgery and rehabilitation and of specialized free-standing facilities, such as cancer chemotherapy treatment centers. The Investment Adviser also believes that cost pressures will, however, increasingly negatively impact many of such providers, and investment in these sectors is currently relatively underweighted in the portfolio. However, some sectors may benefit from these trends. In general, such companies are able simultaneously to improve quality and reduce the cost of care. For example, emerging is a new industry, Physician Practice Management, as medical practices, either general or specialist, combine in an attempt to become more efficient and to strengthen their negotiating position with providers in an environment of increased capitation. Key to success in the coming period of funding reduction will be the management of information, particularly such areas as claims processing, patient management direct costs and quality control, and ultimately automation of patient records. The Adviser expects that these areas will receive increased emphasis in the portfolio in the future.
Other
The Trust may also invest in companies and industries that are benefitting from the growth of healthcare industries. These companies may include real estate investment trusts that derive their income from ownership, leasing or financing of healthcare facilities, manufacturers of nutritional products, and key suppliers of services or equipment.
Significant declines in the stock prices of many companies in the healthcare industries have constrained the ability of companies to raise capital to finance their growth and fund research. The Investment Adviser continues to believe that this presents opportunities, especially in its venture capital investing, as valuations continue to be attractive in comparison to the depressed stock prices of publicly traded companies. Shares of many publicly traded Healthcare Companies also appear to be trading at attractive valuations when compared to the stocks of companies in many other industries, especially those industries that have historically been sensitive to economic cycles.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board, the Investment Adviser is primarily responsible for the execution of the Trust's portfolio transactions and the allocation of brokerage. In executing such transactions, the Investment Adviser will seek to obtain the best price and execution for the Trust, taking into account such factors as price, size of order, difficulty of execution, operational facilities of the firm involved, the firm's risk in positioning a block of securities, and research, market and statistical information provided by such firm. While the Investment Adviser generally seeks reasonably competitive commission rates, the Trust will not necessarily pay the lowest commission available.
The Trust intends to purchase and hold securities for long-term capital appreciation and it is not anticipated that frequent portfolio changes will be made for short-term trading purposes or to take advantage of short-term swings in the market. However, changes may be made in the portfolio consistent with the investment objective and policies of the Trust whenever changes are believed by the Investment Adviser to be in the best interest of the Trust and its Shareholders. Risk factors, particularly those relating to a specific security investment or to the market and economic conditions, may also affect the rate at which the Trust buys and sells its portfolio holdings. The Trust has no fixed policy with respect to portfolio turnover rate; however, it is anticipated that the annual turnover rate after the initial investment period normally will not exceed 50%. The portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities by the average monthly value of the Trust's portfolio securities. The Trust's portfolio turnover rate for the fiscal years ended September 30, 1996 and September 30, 1995 was 22.41% and 22.81%, respectively.
NET ASSET VALUE
The NAV is computed based on the value as discussed below of the securities held by the Trust and is determined as of the close of the NYSE on the last business day of each month or on a more frequent basis as required
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
automatically reinvested by State Street Bank and Trust Company (the "Plan Agent"), in whole or fractional Shares of the Trust, as the case may be, for the accounts of the participating shareholders. Shareholders who specifically elect not to participate in the Plan will receive all distributions of dividends and capital gains in cash paid by check in U.S. dollars mailed directly to the shareholders (or if the Shares are held in street or other nominee name, then to the nominee) by the Custodian, as Dividend Disbursing Agent. Shareholders may receive more detailed information regarding the Plan from the Trust or the Plan Agent. Shareholders whose Shares are held in the name of a broker or nominee should contact such broker or nominee to determine whether or how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the Plan. Participants in the Plan will receive Shares valued on the valuation date, generally at the lower of market price or NAV, except as specified below. The valuation date will be the dividend or distribution payment date or, if that date is not a trading day on the NYSE, the next trading day. Whenever the market price per Share is equal to or exceeds NAV on the valuation date, participants will be issued Shares at the greater of (i) NAV or (ii) 95% of the then current market price of the Shares. If the NAV of the Shares on the valuation date exceeds the market price of the Shares at that time, participants will receive Shares from the Trust valued at the market price.
Experience under the Plan may indicate that changes are desirable. Accordingly, the terms and conditions of the Plan may be amended or supplemented by the Plan Agent or the Trust at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Commission or any other regulatory authority, only by mailing to the shareholders appropriate written notice at least 90 days prior to the record date for the dividend or distribution. All correspondence concerning the Plan should be directed to the Plan Agent, State Street Bank and Trust Company, at P.O. Box 8200, Boston, Massachusetts 02266-8200.
TAXATION
The following discussion is based upon the advice of Dechert Price & Rhoads, counsel for the Trust, and is a general summary of the principal U.S. federal income tax considerations regarding an investment in the Trust. The discussion is based on laws, regulations, rulings and decisions currently in effect, all of which are subject to change (possibly with retroactive effect) or different interpretations. The discussion below does not purport to deal with all of the federal income tax consequences applicable to the Trust, or to all categories of investors, some of which may be subject to special rules. Each prospective shareholder is urged to consult with his or her own tax adviser with respect to the specific federal, state, local, foreign and other tax consequences of investing in Shares of the Trust.
Taxation of the Trust
The Trust intends to qualify and elect to be treated each taxable year as a regulated investment company ("RIC") under the Code. The principal federal income tax benefits of qualifying as a RIC, as compared to an ordinary taxable corporation, are that a RIC generally is not itself subject to federal income tax on ordinary investment income and net capital gains that are currently distributed to its shareholders, and that the character of long-term capital gains which are recognized and properly designated by a RIC flows through to its shareholders, who receive (or are deemed to receive) distributions of such income. However, the Trust would be subject to corporate income tax (currently at a maximum marginal rate of 35%) on any undistributed income.
Distributions
Dividends paid from investment company taxable income will be taxable to shareholders as ordinary income whether paid in cash or reinvested in the Trust's Shares. The Trust intends to distribute to its shareholders substantially all of its investment company taxable income, if any, for each year. It is anticipated that the Trust's income distributions will be paid annually in additional Shares unless the shareholder elects payment in cash. If a portion of the Trust's income consists of dividends paid by U.S. corporations, a portion of the dividends paid by the Trust may be eligible for the corporate dividends-received deduction. Distributions of the excess, if any, of net long-term capital gains over net short-term capital losses designated by the Trust as capital gain dividends will be taxable to shareholders as long-term capital gains, whether paid in cash or reinvested in the Trust's Shares, regardless of how long the shareholders have held the Trust's Shares, and will not be eligible for the dividends received deduction for corporations. Each year, shareholders will be notified as to the amount and federal tax status of all dividends and capital gains paid during the prior year. Such dividends and capital gains may also be subject
to state or local taxes. Dividends declared in October, November, or December with a record date in such month and paid during the following January will be treated as having been paid by the Trust and received by shareholders on December 31 of the calendar year in which declared, rather than the calendar year in which the dividends are actually received.
Gain or loss realized upon the sale or exchange of Shares will be a capital gain or loss if the Shares are capital assets in the shareholder's hands and generally will be long-term or short-term, depending upon the shareholder's holding period for the Shares. Investors should be aware that any loss realized upon the sale or exchange of Shares held for six months or less will be treated as a long-term capital loss to the extent of any distributions or deemed distributions of long-term capital gain to the shareholder with respect to such Shares. In addition, any loss realized on a sale or exchange of Shares will be disallowed to the extent the Shares disposed of are replaced within a period of 61 days beginning 30 days before and ending 30 days after the Shares are disposed of, such as pursuant to the Plan. In such case, the basis of Shares acquired will be adjusted to reflect the disallowed loss.
If a shareholder has not furnished a certified correct taxpayer identification number (generally a Social Security number) and has not certified that withholding does not apply, or if the Internal Revenue Service has notified the Trust that the taxpayer identification number listed on the account is incorrect according to their records or that the shareholder is subject to backup withholding, federal law generally requires the Trust to withhold 31% from any dividends and/or redemptions (including exchange redemptions). Amounts withheld are applied to federal tax liability; a refund may be obtained from the Service if withholding results in overpayment of taxes. Federal law also requires the Trust to withhold up to 30% or the applicable tax treaty rate from ordinary dividends paid to certain nonresident alien and other non-U.S. shareholder accounts.
This is a brief summary of some of the tax laws that affect an investment in the Trust. Please see the SAI and a tax adviser for further information.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT, REGISTRAR, AND SUBSCRIPTION AGENT
The Trust's securities and cash are held under a custodian contract by State Street Bank and Trust Company (the "Custodian"), whose principal business address is 225 Franklin Street, Boston, Massachusetts 02110.
The Custodian also serves as Dividend Disbursing Agent, Transfer Agent and Registrar for Shares of the Trust and Subscription Agent in connection with the Offer.
DISTRIBUTION ARRANGEMENTS
Prudential Securities Incorporated, One New York Plaza, New York, New York 10292, will act as dealer manager for the Offer. Under the terms of and subject to the conditions contained in a Dealer Manager Agreement dated the date of this Prospectus, the Dealer Manager will provide financial advisory, marketing and solicitation services in connection with the Offer. The Trust has agreed to pay the Dealer Manager a fee for its financial, advisory, marketing and solicitation services equal to 3.50% of the aggregate Subscription Price for the Shares issued pursuant to the Offer. The Dealer Manager will reallow to the broker-dealer designated on the related Exercise Form a concession of 2.25% of the Subscription Price per Share for each Share issued pursuant to the Offer, provided that the designated broker-dealer has executed a confirmation accepting the terms of the Dealer Manager Agreement relating to the Offer. These fees will be borne by the Trust and indirectly by all of its Shareholders, including those who do not exercise their Rights.
In addition, the Trust has agreed to reimburse the Dealer Manager for its out-of-pocket expenses incurred in connection with the Offer up to a maximum of $150,000. The Trust and the Investment Adviser have also agreed to indemnify the Dealer Manager or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Trust by Dechert Price & Rhoads, Ten Post Office Square, Boston, Massachusetts 02109 and certain other legal matters will be passed on for the Dealer Manager by Morgan, Lewis & Bockius LLP, 1800 M Street, N.W., Washington, D.C., 20036.
EXPERTS
The financial statements of the Trust included herein has been so included in reliance upon the report of Arthur Andersen LLP, independent public accountants, and on their authority as experts in accounting and auditing. The services it provides include auditing the financial statements of the Trust, services related to filings by the Trust with the Commission and consultation on matters related to the preparation and filing of tax returns.
REPORTS TO SHAREHOLDERS
The Trust will send unaudited semiannual reports and audited annual reports, including a list of investments held, to shareholders. The Trust has in the past also issued more abbreviated interim reports to registered shareholders and those requesting them.
ADDITIONAL INFORMATION
The Trust is subject to the informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act and in accordance therewith is required to file reports, proxy statements and other information with the Commission. Any such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048 and Chicago Regional Office, 230 South Dearborn Street, Chicago, Illinois 60604. Copies of such materials can be obtained from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Reports, proxy statements and other information concerning the Trust can also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
A Registration Statement on Form N-2 relating to the Shares has been filed by the Trust with the Commission. This Prospectus does not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Trust and the Shares offered hereby, reference is made to the SAI and the Trust's Registration Statement. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission.
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
Page
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Additional Information About Investments and Investment Techniques
Investment Restrictions
Trustees and Officers
The Trust
Investment Advisory Agreement
Net Asset Value
Portfolio Transactions and Brokerage
Dividend Reinvestment Plan
Tax Matters
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar
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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
H&Q HEALTHCARE INVESTORS
SCHEDULE OF INVESTMENTS--September 30, 1996
SHARES VALUE
- ------------ --------------
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
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The accompanying notes are an integral part of these consolidated financial statements.
SCHEDULE OF INVESTMENTS--(Continued)
SHARES VALUE
- ---------- --------------
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
-----------
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The accompanying notes are an integral part of these consolidated financial statements.
SCHEDULE OF INVESTMENTS--(Continued)
SHARES VALUE
------------- ---------------
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
============
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* 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.
H&Q HEALTHCARE INVESTORS
BALANCE SHEET--September 30, 1996
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
============
|
The accompanying notes are an integral part of these consolidated financial statements.
H&Q HEALTHCARE INVESTORS
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1996
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
============
|
The accompanying notes are an integral part of these consolidated financial statements.
H&Q HEALTHCARE INVESTORS
STATEMENT OF CASH FLOWS
For the Year Ended September 30, 1996
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)
===========
|
The accompanying notes are an integral part of these consolidated financial statements.
H&Q HEALTHCARE INVESTORS
STATEMENT OF CHANGES IN NET ASSETS
For the years ended
September 30, September 30,
1996 1995
---- ----
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
============ =============
|
The accompanying notes are an integral part of these consolidated financial statements.
H&Q HEALTHCARE INVESTORS
FINANCIAL HIGHLIGHTS
(Selected data for each Share outstanding throughout the period indicated)
For the years ended September 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- -------------- -------------- --------------
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
|
* 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.
H&Q HEALTHCARE INVESTORS
FINANCIAL HIGHLIGHTS--
(Continued)
For the period
April 22, 1987
(commencement
For the years ended September 30, of operation)
to September 30,
1991 1990 1989 1988 1987
--------------- -------------- -------------- -------------- ----------------
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
|
* 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.
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.
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.
Carrying
Acquisition Value
Security Date Cost per Unit Value
- -------- ---- ---- -------- -----
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
|
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
|
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
|
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
=========== =============
|
* 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.
APPENDIX A
DESCRIPTION OF RISK FACTORS AND INVESTMENT TECHNIQUES
RISK FACTORS
An investment in the Shares of the Trust involves a high degree of risk. Prospective investors should consider carefully the following risk factors in addition to the other information set forth in this Prospectus. For additional information of the risks that may be associated with an investment in the Trust see "Additional Information About Investments and Investment Techniques" in the SAI.
Because the Trust intends to invest substantially all of its assets in equity securities of Healthcare Companies, an investor should be aware of certain special considerations and risk factors relating to investments in such companies. No assurance can be given that Healthcare Companies will grow, that a sufficient number of appropriate investments will be available or that the Trust's particular investment choices will be successful. Investors should also be aware of considerations and risks relating to the Trust's investment practices. An investment in the Trust should not itself be considered a balanced investment program and is intended to provide diversification as part of a more complete investment program. The Trust is intended for long-term investors not seeking current income.
Dilution of NAV and Effect of Non-Participation in the Offer
As a result of the terms of the Offer, Shareholders who do not fully exercise their Rights, including the Over- Subscription Privilege, will, at the completion of the Offer, own a smaller proportional interest in the Trust than they owned prior to the Offer and will experience a dilution of NAV. In addition, an immediate dilution of NAV will be experienced by all Shareholders as a result of the Offer whether or not they exercise all or a portion of their Rights, because the Subscription Price will be less than the then current NAV. Although it is not possible to state precisely the amount of such a decrease in value, because it is not known at this time how many Shares will be subscribed for or what the Subscription Price will be, such dilution could be significant. Since April 22, 1987 (commencement of operations), Shares of the Trust have traded at various times at both a discount and a premium to net asset value.
Concentration in the Healthcare Industries
The Trust expects under normal market conditions to invest primarily in securities of Healthcare Companies representing a finite number of industries and to invest at least 25% of its net assets in securities of companies in the healthcare industries. The Trust's portfolio may therefore be more sensitive to, and possibly more adversely affected by, regulatory, economic or political factors or trends relating to the healthcare, agricultural and environmental technology industries than a portfolio of companies representing a larger number of industries. This risk is in addition to the risks normally associated with any strategy seeking capital appreciation by investing in a portfolio of equity securities.
Healthcare industries have in the past been characterized by limited product focus, rapidly changing technology and extensive government regulation. In particular, technological advances can render an existing product, which may account for a disproportionate share of a company's revenue, obsolete. Obtaining governmental approval from agencies such as the FDA for new products can be lengthy, expensive and uncertain as to outcome. Such delays in product development may result in the need to seek additional capital, potentially diluting the interests of existing investors such as the Trust. In addition, governmental agencies may, for a variety of reasons, restrict the release of certain innovative technologies of commercial significance, such as genetically altered material. These various factors may result in abrupt advances and declines in the securities prices of particular companies and, in some cases, may have a broad effect on the prices of securities of companies in particular healthcare industries.
While a concentration of investments in any healthcare industry or in Healthcare Companies generally may increase the risk and volatility of an investment company's portfolio, the Trust will endeavor to reduce risk by having a portfolio of investments that is diversified within its stated objective and policies. Such volatility is not limited
to the biotechnology industry, and companies in other industries may be subject to similar abrupt movements in the market prices of their securities. No assurance can be given that future declines in the market prices of securities of companies in the industries in which the Trust may invest will not occur, or that such declines will not adversely affect the NAV or the price of the Shares.
Intense competition exists within and among certain healthcare industries, including competition to obtain and sustain proprietary technology protection. Healthcare Companies can be highly dependent on the strength of patents for maintenance of profit margins and market exclusivity. The complex nature of the technologies involved can lead to patent disputes, including litigation that could result in a company losing an exclusive right to a patent. Competitors of Healthcare Companies, particularly of the emerging growth Healthcare Companies that the Trust emphasizes, may have substantially greater financial resources, more extensive development, manufacturing, marketing and service capabilities, and a larger number of qualified managerial and technical personnel. Such competitors may succeed in developing technologies and products that are more effective or less costly than any that may be developed by Healthcare Companies in which the Trust invests and may also prove to be more successful in production and marketing. Competition may increase further as a result of potential advances in health services and medical technology and greater availability of capital for investment in these fields.
With respect to healthcare, cost containment measures already implemented by the federal government, state governments and the private sector have adversely affected certain sectors of these industries. There is increasing discussion at all levels of government, as to how to extend health insurance coverage to the millions of people in the U.S. who are currently uninsured while also restraining the growth of total healthcare expenditures. The implementation of any of the measures under discussion may create increased demand for healthcare products and services but also may have an adverse effect on some companies in the healthcare industries. No assurance can be given that healthcare reform legislation will be enacted or, if enacted, as to its ultimate form.
Certain Healthcare Companies in which the Trust may invest may be exposed to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of pharmaceutical and medical device products. There can be no assurance that a product liability claim would not have a material adverse effect on the business, financial condition or securities prices of a company in which the Trust has invested.
Investment in Emerging Growth Companies
The Trust emphasizes investment in equity securities of emerging growth Healthcare Companies. While these securities offer the opportunity for significant capital gains, such investments also involve a degree of risk that can result in substantial losses. Some of the Healthcare Companies in which the Trust may invest are expected to be companies that are in a "start-up" stage of development, have little or no operating history, operate at a loss or with substantial variations in operating results from period to period, have limited products, markets, financial resources or management depth, or have the need for substantial additional "follow-up" capital to support expansion or to achieve or maintain a competitive position. Some of these Healthcare Companies may be emerging companies at the research and development stage with no marketable or approved products or technology. There can be no assurance that securities of start-up or emerging growth companies will, in the future, yield returns commensurate with their associated risks.
Key Personnel
Alan G. Carr, the President and a Trustee of the Trust and President and sole Director of the Investment Adviser, is responsible for managing the Trust's portfolio. Mr. Carr has been managing equity portfolios emphasizing investment in emerging growth companies for over 30 years and portfolios specializing in publicly traded equity securities of Healthcare Companies, as well as in venture capital opportunities in the healthcare industries, for the last 15 years. There may be only a limited number of securities professionals who have comparable investment experience to Mr. Carr. In the event of his death, resignation, retirement or inability to act on behalf of the Investment Adviser, there can be no assurance that a suitable replacement for Mr. Carr could be found immediately.
Liquidity of Portfolio Investments
The Trust may invest substantially all of its net assets in securities of emerging growth Healthcare Companies that are traded in the over-the-counter market or on regional stock exchanges where the low trading volume of a particular security may result in abrupt and erratic price movements. An investment in such securities may have limited liquidity, and the Trust may find it necessary to sell at a discount from recent prices or to sell over extended periods of time when disposing of such securities. In addition, the Trust may invest up to 40% of its net assets in Restricted Securities, which by their terms are illiquid because they are subject to legal or contractual restrictions on resale. The Trust cannot sell Restricted Securities except in a public offering registered under the Securities Act or pursuant to an exemption from registration under the Securities Act, including a transaction in compliance with Rule 144 under the Securities Act, which permits only limited sales under specified conditions unless the Trust has held the securities for at least three years and is unaffiliated with the issuer. Moreover, Restricted Securities are expected to include venture capital investments that may take many years from the date of initial investment to reach a state of maturity when public disposition can be considered. Adverse conditions in the securities markets at certain times may preclude a public offering of an issuer's unregistered securities. Lack of an active secondary market and resale restrictions may result in the inability of the Trust to sell a security at a fair price and may substantially delay the sale of a security that the Trust seeks to sell. Companies whose securities are not publicly traded are also not subject to the same disclosure and other legal requirements as are applicable to companies with publicly traded securities. Restricted Securities eligible for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act are subject to the 40% limitation described above.
Foreign Securities
The Trust may invest up to 20% of its net assets in Foreign Securities, many of which may be less liquid and have prices that are more volatile than securities of comparable U.S. companies. Foreign stock exchanges and brokers are generally subject to less governmental supervision and regulation than U.S. exchanges and brokers, and commissions on foreign stock exchanges are generally higher than negotiated commissions in the U.S. There may in certain instances be delays in the settlement of transactions effected in foreign markets. Certain countries restrict foreign investments in their securities markets. These restrictions may limit or preclude investment in certain countries or in certain industries or market sectors, or may increase the cost of investing in securities of particular companies.
Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements comparable to those applicable to U.S. companies. Thus, there may be less available information concerning non-U.S. issuers of securities held by the Trust than is available concerning U.S. companies. In addition, with respect to some foreign countries, there is the possibility of nationalization, expropriation, confiscatory taxation or establishment of exchange controls. Income earned in a foreign nation may be subject to taxation (including withholding taxes on interest and dividends), or other taxes may be imposed with respect to investments in foreign securities. Other risks associated with investments in foreign securities include difficulties in pursuing legal remedies and obtaining judgments in foreign courts, political or social instability and diplomatic developments that could adversely affect the Trust's investments in companies located in foreign countries. An investment in Foreign Securities may also involve a degree of currency risk.
Market for Shares
The Shares are listed on the NYSE under the symbol "HQH". The shares of closed-end investment companies frequently trade at a discount from NAV but may trade at a premium. This is characteristic of shares of a closed-end fund and is a risk separate and distinct from the risk of a decline in the NAV as a result of a fund's investment activities. Because of this factor as well as the Trust's investment objective and policies, the Trust is designed primarily for long-term investors and should not be considered a vehicle for trading purposes. Since its initial public offering in April 1987, Shares have traded at various times at both a discount and a premium to NAV. The risk
that the Shares may trade at a discount to NAV may be greater for investors expecting to sell their Shares in a relatively short period of time. The Trust cannot predict whether the Shares will trade in the future at, above or below NAV.
Declaration of Trust
The Trust's Declaration of Trust presently has provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Trust, cause it to engage in certain transactions or modify its structure. The Board is divided into three classes, each having a term of three years. Each year the term of office of one class will expire: Alan G. Carr and Henri A. Termeer will continue in office until 1999, William R. Hambrecht, Robert P. Mack M.D., and Eric Oddleifson will continue in office until 1998, and Lawrence S. Lewin and Uwe E. Reinhardt, Ph.D. will continue in office until 1997. This provision could delay for up to two years the replacement of a majority of the Board. A Trustee may be removed from office only by vote of the holders of 66-2/3% of the Shares of the Trust.
In addition, the affirmative vote or consent of the holders of 75% of the Trust's Shares will be required generally to authorize any of the following transactions with a person or entity that is directly, or indirectly through affiliates, the beneficial owner of 5% or more of the outstanding Shares of the Trust:
(i)the Trust's merger or consolidation with or into any other entity;
(ii)the issuance of any securities of the Trust to any person or entity for cash (except pursuant to the Plan);
(iii) the sale, lease or exchange of all or substantially all of the Trust's assets to or with any entity or person (except assets having an aggregate fair market value of less than $1,000,000); or
(iv) the sale, lease or exchange to or with the Trust in consideration for securities of the Trust of any assets of any entity or person (except assets having an aggregate fair market value of less than $1,000,000).
However, such 75% vote or consent will not be required with respect to the foregoing transactions where the Board under certain conditions approves the transaction. These provisions could have the effect of depriving shareholders of an opportunity to sell their Shares at a premium over prevailing market price by discouraging a third party from seeking to obtain control of the Trust in a tender offer or similar transaction. The Board has determined that the 75% voting requirements described above, which are greater than the minimum requirements under state law or the Investment Company Act, are in the best interests of the shareholders.
Related Party Transactions
The Investment Adviser is an indirect wholly-owned subsidiary of Group, which through its various related entities has developed investment research, investment banking and venture capital expertise in the healthcare industries. The majority of the Board will be unaffiliated with the Investment Adviser; nevertheless, the Trust may be subject to certain potential conflicts of interest. H&Q, an indirect wholly-owned subsidiary of Group, may make a market in or underwrite new issues of securities of companies in which the Trust has invested. Although the Trust has no obligation to do so, it may place brokerage orders with brokers, including H&Q, who provide supplemental investment research and market and statistical information about the healthcare industries. In addition, investment companies advised by the Investment Adviser or venture capital funds managed by entities associated with Group may concurrently invest with the Trust in Restricted Securities under certain conditions, or provide managerial assistance to the issuers thereof. The Trust also may invest, subject to applicable law, in companies in which directors of the Investment Adviser or Trustees of the Trust have invested, or for which they serve as directors or executive officers. See "Portfolio Transactions and Brokerage". The Investment Company Act prohibits the Trust from engaging in certain transactions involving its "affiliates", including, among others, the Trust's Trustees, officers and employees, the Investment Adviser, H&Q and any "affiliates" of such affiliates except pursuant to an exemptive order or the provisions of certain rules under the Investment Company Act. In the view of the staff of the
Commission, other investment companies advised by the Investment Adviser may, in some instances, be viewed to be affiliates of the Trust. Such legal restrictions and delays and costs involved in obtaining necessary regulatory approvals may preclude or discourage the Trust from making certain investments and no assurance can be given that any exemptive order sought by the Trust will be granted.
INVESTMENT TECHNIQUES
In addition to the investment practices described above, the Trust may utilize the following investment practices:
Money Market Instruments
When, in the opinion of the Investment Adviser, adverse market conditions or industry expectations support such action, the Trust may, for temporary defensive purposes, invest up to 75% of its net assets in money market instruments.
Money market instruments in which the Trust may invest include certificates of deposit and bankers' acceptances issued by domestic branches of federally-insured U.S. banks and savings and loan associations and commercial paper and high and upper medium grade corporate debt securities rated, as of the date of purchase, among the following rating categories of the indicated rating service: bonds--Moody's Aaa, Aa or A; S&P AAA, AA or A; notes--Moody's MIG-1, MIG-2 or MIG-3; S&P SP-1+ or SP-2; commercial paper--Moody's P-1; S&P A-1. The Trust also may invest in shares of money market mutual funds that invest in money market instruments and U.S. Government Securities. Money market mutual funds are investment companies and the Trust's investments in those companies are subject to certain limitations. As a shareholder in money market mutual funds, the Trust will bear its ratable share of such companies' expenses, including investment adviser or management fees, and will remain subject to the payment of fees to the Investment Adviser. To the extent that the Trust assumes a temporary defensive position for the purpose of avoiding losses, it will not participate in the capital appreciation, if any, of securities in which the Trust would normally invest.
When-Issued and Delayed Delivery Transactions
The Trust may purchase securities on a "when issued" basis or a "delayed delivery" basis.
Repurchase Agreements
It is the Trust's present intention to enter into repurchase agreements for a relatively short period (usually not more than one week) only with commercial banks and registered broker-dealers and only with respect to U.S. Government Securities and money market instruments.
Loans of Portfolio Securities
In an attempt to make productive use of its assets, the Trust may lend its portfolio securities, subject to the limitation that the Trust will not lend a security if, as a result of such loan, all securities then subject to loans would exceed 20% of the Trust's net assets.
Hedging
In order to hedge against changes in the value of its portfolio securities, the Trust may from time to time engage in certain hedging strategies. The Trust will engage in hedging activities from time to time in the Investment Adviser's discretion, and may not necessarily be engaging in such activities when movements in the securities markets, foreign exchange rates, or interest rates that could affect the value of the assets of the Trust occur.
Futures Contracts
The Trust may enter into contracts for the purchase or sale for future delivery (a "futures contract") of baskets of securities, financial indices, financial instruments or foreign currencies. The Trust would purchase or sell futures
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.
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 OF CONTENTS Page
---------
Prospectus Summary 3
Trust Expenses 7
Financial Highlights and Investment Performance 9
The Offer 15
Use of Proceeds 21
Description of Trust 21
Investment Adviser 22
Trustees and Officers 23
Investment Objective and Policies 25
Portfolio Transactions and Brokerage 29
Net Asset Value 29
Dividends and Distributions 30
Dividend Reinvestment Plan 30
Taxation 31
Custodian, Transfer Agent, Dividend Disbursing Agent, Registrar
and Subscription Agent 32
Distribution Arrangements 32
Legal Matters 32
Experts 33
Reports to Shareholders 33
Additional Information 33
Table of Contents of Statement of Additional Information 33
Report of Independent Public Accountants F-1
Financial Statements F-2
Appendix A--Description of Risk Factors and Investment Tech-
niques A-1
|
2,115,336 Shares
H&Q HEALTHCARE INVESTORS
Issuable
Upon Exercise of
Non-Transferable
Rights to
Subscribe for Such Shares
Dealer Manager Prudential Securities Incorporated
------, 1997
H&Q HEALTHCARE INVESTORS
STATEMENT OF ADDITIONAL INFORMATION
H&Q Healthcare Investors (the "Trust") is a diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Trust's investment objective is to seek long-term capital appreciation by investing primarily in securities of companies in the health services and medical technology (healthcare) industries ("Healthcare Companies"). The Trust will invest primarily in securities of companies that are believed by the Trust's investment adviser to have significant potential for above-average, long-term growth in revenues and earnings. The Trust emphasizes investment in securities of emerging growth Healthcare Companies, most of which are expected to be traded in the over-the-counter market. The Trust may also invest up to 40% of its net assets in venture capital or other securities subject to legal or contractual restrictions as to resale ("Restricted Securities"). Such securities may be acquired in connection with venture capital opportunities, as well as in private placements in public companies. No assurance can be given that the Trust will achieve its investment objective. The Trust's investment adviser is Hambrecht & Quist Capital Management Incorporated (the "Investment Adviser"), the President and sole Director of which is Alan G. Carr, who is responsible for management of the Trust's portfolio.
This Statement of Additional Information ("SAI") is not a prospectus, but should be read in conjunction with the Prospectus for the Trust dated ___________, 1996 (the "Prospectus"). This SAI does not include all information that a prospective investor should consider before purchasing shares of beneficial interest ("Shares") of the Trust, and investors should obtain and read the Prospectus prior to purchasing Shares. A copy of the Prospectus may be obtained without charge, by calling (617) 574-0567. This SAI incorporates by reference the entire Prospectus.
TABLE OF CONTENTS
PAGE
Additional Information About Investments and Investment Techniques............. Investment Restrictions........................................................ Trustees and Officers.......................................................... The Trust...................................................................... Investment Advisory Agreement.................................................. Net Asset Value................................................................ Portfolio Transactions and Brokerage........................................... Dividend Reinvestment Plan..................................................... Tax Matters.................................................................... Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar.............
The Prospectus and this SAI omit certain of the information contained in the registration statement filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. The registration statement may be obtained from the Commission upon payment of the fee prescribed, or inspected at the Commission's office at no charge.
This SAI is dated __________, 1996.
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
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.
The Trust will engage in hedging activities from time to time in the Investment Adviser's discretion, and may not necessarily be engaging in such activities when movements in the securities markets, foreign exchange rates, or interest rates that could affect the value of the assets of the Trust occur. The Trust's ability to pursue certain of these strategies may be limited by applicable regulations of the Commodity Futures Trading Commission ("CFTC") and the federal income tax requirements applicable to regulated investment companies.
Although the Trust believes that use of such strategies will benefit the Trust, if the Investment Adviser's judgment about the general direction of securities market movements, foreign exchange rates or interest rates is incorrect the Trust's overall performance could be poorer than if it had not pursued those strategies. Moreover, changes in the value of the instruments that the Trust purchases to hedge its portfolio securities may not correlate precisely with changes in the value of the portfolio securities the Trust is attempting to hedge. In addition, in situations where the Trust has insufficient cash, it may have to sell assets from its portfolio to meet margin requirements at a time when it may be disadvantageous to do so. The Trust's hedging activities may also result in a higher portfolio turnover rate and additional brokerage costs.
Futures Contracts
Futures Contracts. The Trust may enter into contracts for the purchase or sale for future delivery (a "futures contract") of baskets of securities, financial indices, financial instruments or foreign currencies. The Trust would purchase or sell futures contracts to attempt to protect the value of its securities from market-wide price movements and fluctuations in interest or foreign exchange rates without actually buying or selling securities or foreign currency.
A "sale" of a futures contract (or a "short" futures position) means the assumption of a contractual obligation to deliver the securities or currency underlying the contract at a specified price at a specified future time. A "purchase" of a futures contract (or a "long" futures position) means the assumption of a contractual obligation to acquire the securities or currency underlying the contract at a specified price at a specified future time.
Margin Requirements. At the time a futures contract is purchased or sold, the Trust must allocate cash or securities as a deposit payment ("initial margin"). It is expected that the initial margin on U.S. exchanges may range from approximately 3% to approximately 15% of the value of the securities or commodities underlying the contract. Under certain circumstances, however, such as periods of high volatility, the Trust may be required by an exchange to increase the level of its initial margin payment. Additionally, initial margin requirements may be increased generally in the future by regulatory action. An outstanding futures contract is valued daily and the payment in cash of "variation margin" may be required, a process known as "mark to the market".
Regulatory Limitations on the Use of Futures Contracts. Regulations of the CFTC applicable to the Trust currently require that all of the Trust's futures transactions constitute bona fide hedging transactions or be undertaken incidental to the Trust's activities in the securities markets. In accordance with CFTC regulations, the Trust may not purchase or sell futures contracts if immediately thereafter the sum of the amounts of initial margin deposits on the Trust's existing futures positions would exceed 5% of the fair market value of the Trust's total assets. The Investment Adviser reserves the right to comply with such different standard as may be established by CFTC rules and regulations with respect to the purchase or sale of futures contracts.
Considerations Concerning Futures Contracts and Options on Futures Contracts. Futures contracts entail special risks. The ordinary spreads between values in the cash and futures markets, due to differences in the character of these markets, are subject to distortions relating to (1) investor's obligations to meet additional variation margin requirements, (2) decisions to make or take delivery, rather than entering into offsetting transactions and (3) the difference between margin requirements in the securities markets and margin deposit requirements in the futures markets. The possibility of such distortion means that a correct forecast of general market, foreign exchange rate or interest rate trends by the Investment Adviser may still not result in a successful transaction. The Trust's ability to establish and close out positions in futures contracts and options on futures contracts will be subject to the development and maintenance of a liquid market. Although the Trust generally will purchase or sell only those futures contracts and options thereon for which there appears to be a liquid market, there is no assurance that a liquid market on an exchange will exist for any particular futures contract or option thereon at any particular time.
Under certain circumstances, exchanges may establish daily limits in the amount that the price of a futures contract may vary either up or down from the previous day's settlement price. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit.
Exchange Rate Risk
The Trust may enter into forward foreign currency exchange contracts ("forward contracts") and may purchase and sell foreign currency futures contracts to protect against a decline in the U.S. Dollar equivalent value of its foreign currency portfolio securities or the payments thereon that may result from an adverse change in foreign currency exchange rates. The accurate projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain.
Forward Contracts. A forward contract obligates one party to purchase and the other party to sell a definite amount of a given foreign currency at some specified future date.
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
the amount of initial and variation margin held in the account of its broker, if applicable, equals the market value of the futures or forward currency contract.
When the Trust sells a futures or forward currency contract, this means that during the life of the futures or forward currency contract the Trust will own or have the contractual right to acquire the securities or foreign currency subject to the futures or forward currency contract, or will maintain with the Trust's custodian in a segregated account liquid securities, including cash, U.S. Government Securities, debt obligations or equity securities, in an amount at least equal to the market value of the securities or foreign currency underlying the futures or forward currency contract.
If the market value of the contract moves adversely to the Trust, or if the value of the securities in the segregated account declines, the Trust will be required to deposit additional cash or securities in the segregated account at a time when it may be disadvantageous to do so.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental restrictions, which, like its investment objective, may not be changed without the affirmative vote of the holders of a majority of the Trust's outstanding Shares. As used in this SAI, a "majority of the Trust's outstanding Shares" means the lesser of (i) 67% of the Shares represented at a meeting at which more than 50% of the outstanding Shares are represented or (ii) more than 50% of the outstanding Shares. The Trust may not:
1. With respect to 75% of its total assets, invest in securities of any one issuer if immediately after and as a result of such investment more than 5% of the total assets of the Trust, taken at market value, would be invested in the securities of such issuer. This restriction does not apply to investments in U.S. Government Securities.
2. Purchase more than 10% of the outstanding voting securities of any one issuer.
3. Purchase or sell commodities or commodities contracts.
4. Purchase or sell real estate; provided that the Trust may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein.
5. Purchase any securities on margin or make short sales of securities, except for short-term credit necessary for the clearance of portfolio transactions.
6. Underwrite securities of other issuers, except to the extent that, in connection with the disposition of its portfolio securities, the Trust may be deemed an underwriter under federal or state securities law. See "Portfolio Transactions and Brokerage".
7. Invest less than 25% of its net assets in securities of companies in the healthcare industries.
8. Invest more than 40% of the Trust's net assets in venture capital or other Restricted Securities.
9. Issue senior securities or borrow amounts in excess of 10% of its net assets at the time of borrowing, and then only from banks as a temporary measure for extraordinary or emergency purposes or for the repurchase of its securities. The Trust will not repurchase its securities during periods when it has outstanding borrowings in excess of 5% of its net assets. The Trust will not borrow for investment purposes.
10. Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by the Trust, except as may be necessary in connection with permitted borrowings under 9. above.
11. Make loans of money, except by the purchase of debt obligations in which the Trust may invest consistent with its investment objective and policies. The Trust reserves the authority to enter into repurchase agreements and to make loans of its portfolio securities to qualified institutional investors, brokers, dealers, banks or other financial institutions, so long as the terms of the loans are not inconsistent with the requirements of the Investment Company Act. Such loans may not exceed an aggregate amount of 20% of the Trust's net assets. Repurchase agreements are subject to the percentage limitation described in investment policy 5. below.
12. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization, if
(a) more than 10% of its total assets would be invested in securities of
other investment companies, (b) more than 5% of its total assets would be
invested in the securities of any one investment company, or (c) the Trust
would own more than 3% of any other investment company's securities.
For purposes of restriction 3. above, the prohibition on the purchase or sale of commodities applies to the purchase or sale of "physical" commodities.
In addition, the Trust has adopted the following investment policies, which may be changed by the action of the Board of Trustees (the "Board") without shareholder approval:
1. The Trust under normal circumstances will have at least 80% of its net assets invested in securities of companies in the healthcare industries.
2. To the extent not invested in the healthcare industries, assets of the Trust will be invested in cash, U.S. Government Securities, money market instruments or money market mutual funds for liquidity. When, in the opinion of the Investment Adviser, adverse market conditions or industry expectations support such action, the Trust may temporarily take a defensive position of up to 75% of net assets in such liquid investments. The money market instruments in which the Trust may invest include certificates of deposit and bankers' acceptances issued by domestic branches of federally-insured U.S. banks and savings and loan associations and commercial paper and high and upper medium grade corporate debt securities rated, as of the date of purchase, among the highest rating categories of Moody's Investors Service Inc. (Aaa, Aa or A for bonds; MIG-1, MIG-2 or MIG-3 for notes; P-1 for commercial paper) or Standard & Poor's Corporation (AAA, AA or A for bonds; SP-1+ to SP-2 for notes; A-1 for commercial paper). The Trust also may invest in shares of money market mutual funds that invest in money market instruments and U.S. Government Securities. Money market mutual funds are investment companies and the Trust's investments in those companies are subject to the limitations set forth in 12. above. As a shareholder in money market mutual funds, the Trust will bear its ratable share of such companies' expenses, including investment adviser or management fees, and will remain subject to payment of fees to the Investment Adviser.
3. Investments will not be made in any company with the objective of exercising control over that company's management, and the Trust generally will not provide managerial assistance to any such company as is normally the case with venture capital funds. The Trust, however, may make investments as a co-investor with other venture capital groups that may provide issuers with significant managerial assistance.
4. The Trust may invest up to 5% of its net assets in warrants, valued at market value. Warrants acquired in units or attached to other securities are not subject to this restriction.
5. The Trust may not enter into repurchase agreements with respect to more than 10% of its net assets. It is the Trust's present intention to enter into repurchase agreements for a relatively short period (usually not more than one week) only with commercial banks and registered broker-dealers and only with
respect to U.S. Government Securities and money market instruments. The Trust does not intend to enter into repurchase agreements with Hambrecht & Quist LLC ("H&Q"). Repurchase agreements may also be viewed as loans made by the Trust which are collateralized by the securities subject to repurchase. The Trust intends to take possession of collateral, and the Investment Adviser will monitor repurchase transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor.
6. The Trust may not invest more than 20% of its net assets at the time of purchase in securities of foreign issuers. Such issuers are expected to be companies domiciled in Canada, Western Europe and Japan. The Trust may buy and sell foreign currencies for the purpose of settlement of transactions in foreign securities, but presently does not intend to engage in hedging operations such as buying contracts for purchase in the future of foreign currencies. Any such hedging operations would be limited to 5% of net assets.
7. The Trust may not invest in put or call options.
Except as otherwise noted, all percentage limitations set forth above apply immediately after a purchase and a subsequent change in the applicable percentage resulting from market fluctuations does not require elimination of any security from the portfolio.
TRUSTEES AND OFFICERS
Board of Trustees
For the names and addresses of the Trust's Trustees and Officers, a description of their positions with the Trust and their principal occupations during the last 5 years, see "Trustees and Officers" in the Trust's Prospectus.
Compensation of Trustees
The Trust pays each of the Trustees not affiliated with the Investment Adviser a fee of $6,000 annually and $900 for each meeting of the Board attended, together with such Trustee's actual out-of-pocket expenses relating to attendance at meetings. For the fiscal years ended September 30, 1996 and September 30, 1995 the Trust paid such fees and reimbursed such expenses amounting to $56,663 and $49,109, respectively, in the aggregate.
The following table sets forth information regarding compensation of Trustees by the Trust and other funds managed by the Investment Adviser for the fiscal year ended
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)
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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
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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
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
purchase Shares within the six months preceding the purchase, (ii) pursuant to a tender offer to all shareholders or (iii) as otherwise permitted by the Commission.
The Shares of the Trust will trade in the open market at a price which will be a function of several factors, including their supply, demand, investment performance and yield. The shares of closed-end investment companies generally sell at market prices varying from their net asset values and such shares frequently trade at a discount to net asset value, but in some cases trade at a premium. The market price of the Shares will be determined by factors including trading volume of such Shares, general market and economic conditions and other factors beyond the control of the Trust. Therefore, the Trust cannot predict whether its Shares will trade at, below or above net asset value. When the Trust repurchases its Shares for a price below their net asset value, the net asset value of those Shares that remain outstanding will be enhanced, but this does not necessarily mean that the market price of those outstanding Shares will be affected, either positively or negatively.
Conversion to Open-End Investment Company Status
Finally, the conversion of the Trust from a closed-end to an open-end investment company would require an amendment to the Declaration of Trust. Such an amendment would require the favorable vote of the holders of a majority of the Shares of the Trust entitled to vote on the matter. Such a vote would also satisfy a separate requirement in the Investment Company Act that the change be approved by the Shareholders. The amendment would have to be approved by the Board prior to its submission to Shareholders. The Board is required under the Declaration of Trust to consider and vote annually upon the proposal to convert to open-end status. A proposal to convert the Trust to an open-end company might be supported or opposed by the Board depending on the Board's judgment as to its advisability in light of circumstances prevailing at the time. Shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the Investment Company Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. Conversion to an open-end investment company could require the disposal of illiquid investments to meet current requirements of the Commission that no more than 15% of an open-end investment company's assets consist of illiquid securities, and would likely require involuntary liquidation of portfolio securities, and the inherent realization of net long-term capital gains in connection therewith, to meet periodic requests for redemption. Moreover, Shares of the Trust would no longer be listed on the NYSE.
INVESTMENT ADVISORY AGREEMENT
The Investment Advisory Agreement between the Investment Adviser and the Trust (the "Advisory Agreement") provides that, subject to the supervision and direction of the Board, the Investment Adviser is responsible for the actual management of the
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.
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.
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
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
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
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
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;
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.
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
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
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.
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
backup withholding requirements. Questions relating to backup withholding should be directed to your tax adviser.
Foreign Shareholders
U.S. taxation of a shareholder who, as to the U.S., is a non-resident alien individual, a foreign trust or estate, a foreign corporation or foreign partnership ("foreign shareholder") depends on whether the income from the Trust is "effectively connected" with a U.S. trade or business carried on by such shareholder.
Income Not Effectively Connected. If the income from the Trust is not "effectively connected" with a U.S. trade or business carried on by the foreign shareholder, distributions of investment company taxable income will be subject to a U.S. tax of 30% (or lower treaty rate, except in the case of any excess inclusion income allocated to the shareholder (see "Taxation--Investments in Real Estate Investment Trusts"), which tax is generally withheld from such distributions.
Distributions of capital gain dividends and amounts retained by the Trust which are designated as undistributed capital gains will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless the foreign shareholder is a non-resident alien individual and is physically present in the U.S. for more than 182 days during the taxable year and meets certain other requirements. However, this 30% tax on capital gains of non-resident alien individuals who are physically present in the U.S. for more than the 182-day period only applies in exceptional cases, because any individual present in the U.S. for more than 182 days during the taxable year is generally treated as a resident for U.S. federal income tax purposes; in that case, he or she would be subject to U.S. federal income tax on his or her worldwide income at the graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a foreign shareholder who is a non-resident alien individual, the Trust may be required to withhold U.S. federal income tax at a rate of 31% of distributions of net capital gains unless the foreign shareholder certifies his or her non-U.S status under penalties of perjury or otherwise establishes an exemption. See "Backup Withholding" above. If a foreign shareholder is a non-resident alien individual, any gain such shareholder realizes upon the sale or exchange of such shareholder's Shares of the Trust in the U.S. will ordinarily be exempt from U.S. tax unless such shareholder is physically present in the U.S. for more than 182 days during the taxable year and meets certain other requirements.
Income Effectively Connected. If the income from the Trust is "effectively connected" with a U.S. trade or business carried on by a foreign shareholder, then distributions of investment company taxable income and capital gain dividends, amounts retained by the Trust which are designated as undistributed capital gains and any gains realized upon the sale or exchange of Shares of the Trust will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens, residents and domestic
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.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
1. Financial Statements:
(i) Report of Independent Public Accountants dated November 1, 1996
(ii) Schedule of Investments as of September 30, 1996
(iii) Balance Sheet as of September 30, 1996
(iv) Statement of Operations as of September 30, 1996
(v) Statement of Cash Flows as of September 30, 1996
(vi) Statement of Changes in Net Assets as of September 30, 1996
All other financial statements, schedules and historical financial information have been omitted as the subject matter is not required, not present, or not present in amounts sufficient to require submission.
2. Exhibits:
a.--Declaration of Trust, as amended.
b.--By-Laws, as revised.
c.--Not Applicable.
d.--Specimen certificate for Shares of Beneficial Interest.*
e.--Dividend Reinvestment Plan.
f.--Not Applicable.
g.--Investment Advisory Agreement.
h.--Dealer Manager Agreement with respect to the offer by Registrant of
the Rights to Shareholders.*
i.--Not Applicable.
j.--Custodian Agreement between the Registrant and State Street Bank
and Trust Company.*
k.-- (i) Transfer Agency Agreement between the Registrant and State
Street Bank and Trust Company.*
(ii) Information Agent Agreement.*
(iii) Subscription Agent Agreement.*
l.--Opinion and Consent of Dechert Price & Rhoads.*
m.--Not Applicable.
n.--Consent of Arthur Andersen LLP
o.--Not Applicable.
p.--Not Applicable.
q.--Not Applicable.
27.--Financial Data Schedule.
*To be filed by amendment.
Item 25. Marketing Arrangements.
See the form of Dealer Manager Agreement to be filed by amendment as Exhibit h to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses expected to be incurred in connection with the offering described in this Registration Statement:
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
========
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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:
Place of
Entity Basis of Common Control Organization
------ ----------------------- ------------
H&Q Adobe Ventures 100% ownership California
Management Corp.
H&Q London Ventures 100% ownership California
Management Corp.
Hambrecht & Quist Asset Management Ltd. 100% ownership United Kingdom
Hambrecht & Quist B/D 100% ownership California
Subsidiary Corp.
Hambrecht & Quist International 100% ownership California
Hambrecht & Quist 100% ownership California
Investment Advisors, Inc.
Hambrecht & Quist Management 100% ownership California
Corporation
Hambrecht & Quist Saint Dominique, Inc. 100% ownership California
HMP Secured Lenders, Inc. 100% ownership California
IEC Communications, Inc. 100% ownership California
RvR Securities Corp. 100% ownership California
VT Investors Inc. 100% ownership California
Hambrecht & Quist Guaranty Finance, LLC Greater than 25% ownership California
Hambrecht & Quist L.L.C. Greater than 25% ownership Delaware
Hambrecht & Quist Transition Capital, Greater than 25% ownership California
LLC
OptionsLink LLC Greater than 25% ownership California
Hambrecht & Quist Saint Dominique Greater than 25% ownership France
(owned 50% by Hambrecht & Quist
Saint Dominique, Inc.)
H&Q AEI Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q AFC Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Alliance Fund Sole General Partner California
H&Q Avail Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Investment Partners Managing General Partner California
H&Q Investors General Partner is Hambrecht & California
Quist Management Corporation
H&Q London Ventures General Partner is H&Q Venture United Kingdom
Partners
H&Q Peerless Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Preview Media Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Promega Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Qualix Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q TGI Investors, L.P. General Partner is Hambrecht & California
Quist Management Corporation
H&Q Venture Partners One of General Partners California
H&Q Ventures III General Partner is H&Q Investment California
Partners
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Place of
Entity Basis of Common Control Organization
------ ----------------------- ------------
H&Q Ventures International C.V. General Partner is H&Q Venture Netherland
Partners Antilles
H&Q Ventures IV General Partner is H&Q Venture California
Partners
Hamist '82 General Partner California
Hamquist General Partner California
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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
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Item 29. Indemnification.
Under Article V of the Registrant's Declaration of Trust, any past or present Trustee or officer of Registrant will be indemnified against liability and all expenses reasonably incurred by him in connection with any action, suit or proceeding to which he may be a party or otherwise involved by reason of his being or having been a Trustee or officer of Registrant. This provision does not authorize indemnification when it is determined, in the manner specified in the Declaration, that the Trustee or officer would otherwise be liable to Registrant or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of his duties. Expenses of a Trustee or officer may be paid by Registrant in advance of the final disposition of any action, suit or proceeding upon receipt of an undertaking by the Trustee or officer to repay the expenses to Registrant in the event that it is ultimately determined that indemnification of the Trustee or officer is not authorized under the Declaration.
The Registrant will purchase insurance insuring its Trustees and officers against certain liabilities incurred in their capacity as such, and insuring the Registrant against any payments which it is obligated to make to such persons under the foregoing indemnification provisions.
Reference is made to the Dealer-Manager Agreement to be filed by amendment as Exhibit h to this Registration Statement for provisions relating to indemnification of the Dealer-Managers.
Insofar as indemnification for liability arising under the Securities Act of 1933 (the "Act") may be permitted to Trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission (the "Commission") such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser.
Hambrecht & Quist Capital Management Incorporated was organized in September, 1986 for the purpose of providing investment advisory services to H&Q Healthcare Investors (File Nos. 33-9880, 811-4889, 1-9294). Reference is made to "Trustees and Officers" in the Prospectus and to Schedule D of Part II of Form ADV, Uniform Application for Investment Adviser Registration, as amended from time to time, (File No. 801-28531) filed with the Commission for information concerning the business and other connections of Alan G. Carr, Director and President of the Investment Adviser.
Item 31. Location of Accounts and Records.
Records are located at:
1. Hambrecht & Quist Capital Management 50 Rowes Wharf, Fourth Floor Boston, Massachusetts 02110-3328 (Registrant's corporate records and records relating to its function as Investment Adviser to Registrant)
2. State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02101 (Records relating to its function as Custodian, Registrar, Transfer Agent and Dividend Disbursing Agent to Registrant; and most of Registrant's accounting and all records relating to its function as Registrant's accounting agent)
Item 32. Management Service.
Not Applicable.
Item 33. Undertakings.
1. Registrant hereby undertakes to suspend offering of the shares covered hereby until it amends its prospectus contained herein if (1) subsequent to the effective date of this Registration Statement, its net asset value per share declines more than 10 percent from its net asset value per share as of the effective date of this Registration Statement, or (2) its net asset value increases to an amount greater than its net proceeds as stated in such prospectus.
2. Not Applicable.
3. Not Applicable.
4. Not Applicable.
5. Registrant hereby undertakes that for the purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
6. Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement on Form N-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston and Commonwealth of Massachusetts on the 3rd day of January, 1997.
H&Q HEALTHCARE INVESTORS
(Registrant)
By: /s/ Alan G. Carr
---------------------------------------
President
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Each person whose signature appears below hereby makes, constitutes and appoints Sheldon A. Jones, Joseph R. Fleming, Caroline Pearson and David C. Virnelli, and each of them, with full power in each to act without the other, his true and lawful attorneys-in-fact and agents, in his name, place and stead to execute on his behalf, as a Trustee and/or Officer of H&Q Healthcare Investors, any and all amendments and post-effective amendments to the Registration Statement on Form N-2 relating to shares of beneficial interest of H&Q Healthcare Investors, to be filed with the Securities and Exchange Commission ("SEC") pursuant to the Securities Act of 1933, as amended, (the "Act") the Investment Company Act of 1940, as amended, (the "1940 Act") and any and all other instruments which said attorneys, or any of them, deem necessary or advisable to enable H&Q Healthcare Investors to comply with the Act, the 1940 Act, the rules, regulations and requirements of the SEC in respect of the registration under the Act of such shares, the registration of H&Q Healthcare Investors under the 1940 Act, and the securities or laws of any State or other governmental subdivision, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in furtherance of such purposes as fully as he or she might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, their or his or her substitute or substitutes may or shall lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Act, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
/s/ Alan G. Carr Trustee and President January 3, 1997 -------------------------------- Alan G. Carr /s/ William R. Hambrecht -------------------------------- Trustee January 3, 1997 William R. Hambrecht /s/ Lawrence S. Lewin -------------------------------- Trustee January 3, 1997 Lawrence S. Lewin /s/ Robert P. Mack, M.D. -------------------------------- Trustee January 3, 1997 Robert P. Mack, M.D. /s/ Eric Oddleifson -------------------------------- Trustee January 3, 1997 Eric Oddleifson /s/ Uwe E. Reinhardt, Ph.D. -------------------------------- Trustee January 3, 1997 Uwe E. Reinhardt, Ph.D. /s/ Henri A. Termeer -------------------------------- Trustee January 3, 1997 Henri A. Termeer /s/ Kimberley L. Carroll -------------------------------- Treasurer and Chief January 3, 1997 Kimberley L. Carroll Financial Officer |
EXHIBIT INDEX
Exhibit
-------
99.2a --Declaration of Trust, as amended
99.2b --By-Laws, as revised.
99.2c --Not Applicable
99.2d --Specimen certificate for Shares of Beneficial Interest*
99.2e --Dividend Reinvestment Plan
99.2f --Not Applicable
99.2g --Investment Advisory Agreement
99.2h --Dealer Manager Agreement with respect to the offer by Registrant of the
Rights
to Shareholders*
99.2i --Not Applicable
99.2j --Custodian Agreement between the Registrant and State Street Bank and
Trust Company*
99.2k (i) --Transfer Agency Agreement between the Registrant and State Street Bank
and Trust Company*
(ii) --Information Agent Agreement.*
(iii) --Subscription Agent Agreement.*
99.2l --Opinion and Consent of Dechert Price & Rhoads*
99.2m --Not Applicable
99.2n --Consent of Arthur Andersen LLP
99.2o --Not Applicable
99.2p --Not Applicable
99.2q --Not Applicable
27. --Financial Data Schedule
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*To be filed by amendment.
THIS AMENDED AND RESTATED DECLARATION OF TRUST, made April 21, 1987 by the Trustees hereunder (together with all other persons from time to time duly elected, qualified and serving as Trustees in accordance with the provisions of Article II hereof, the "Trustees");
Whereas the Trustees desire to establish a trust for the investment and reinvestment of funds contributed thereto; and
Whereas the Trustees desire that the beneficial interest in the trust assets be divided into transferable shares of beneficial interest, as hereinafter provided;
N o w, T h e r e f o r e, the Trustees hereby declare that all money and property contributed to the trust established hereunder shall be held and managed in trust for the benefit of holders, from time to time, of the shares of beneficial interest issued hereunder and subject to the provisions hereof.
ARTICLE I
Name and Definitions
Section 1.1 Name. The name of the trust created hereby is the "H&Q Healthcare Investors."
Section 1.2 Definitions. Wherever they are used herein, the following terms have the following respective meanings:
(a) "By-Laws" means the By-laws referred to in Section 3.8 hereof, as from time to time amended.
(b) The terms "Commission," "Interested Person," and "Majority
Shareholder Vote" (the 67% or 50% requirement of the third sentence of section
2(a) (42) of the 1940 Act, whichever may be applicable) have the meanings given
them in the 1940 Act.
(c) "Custodian" means any person other than the Trust who has
custody of any Trust Property as required by Section 17(f) of the 1940 Act, but
does not include a system for the central handling of securities described in
Section 17(f).
(d) "Declaration" means this Declaration of Trust as amended from time to time. Reference in this Declaration of Trust to "Declaration," "hereof," "herein" and "hereunder" shall be deemed to refer to this Declaration rather than the article or section in which such words appear.
(e) "Distributor" means the party or parties, other than the Trust, to the contract described in Section 4.2 hereof.
(f) "Investment Adviser" means a party furnishing services to the Trust pursuant to the contract described in Section 4.1 hereof.
(g) The "1940 Act" means the Investment Company Act of 1940 and the Rules and Regulations thereunder, as amended from time to time.
(h) "Person" means and includes individuals, corporations, partnerships, trusts, associations, joint ventures and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof, whether domestic or foreign.
(i) "Shareholder" means a record owner of outstanding Shares.
(j) "Shares" means the units of interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole Shares.
(k) "Transfer Agent" means a party furnishing services to the Trust pursuant to the contract described in Section 4.3 hereof.
(l) The "Trust" means the trust created hereby.
(m) The "Trust Property" means any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust or the Trustees.
(n) The "Trustees" means the persons who have signed the Declaration, so long as they shall continue in office in accordance with the terms hereof, and all other persons who may from time to time be duly elected, qualified and serving as Trustees in accordance with the provisions hereof, and reference herein to a Trustee or the Trustees shall refer to such person or persons in their capacity as trustees hereunder.
ARTICLE II
Section 2.1 Number of Trustees. The number of Trustees shall initially be one (1), provided that at or such time as a registration statement under the Securities Act of 1933, as amended, covering the first public offering of securities of the Trust shall have become effective, the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by a majority of the Trustees, provided, however, that the number of Trustees shall in no event be less than three (3) nor more than fifteen (15). No reduction in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of his term unless the Trustee is specifically removed pursuant to Section 2.2 of this Article II at the time of the decrease.
Section 2.2 Term of Office of Trustees. At such time as the
number of Trustees shall initially be fixed by written instrument as provided in
Section 2.1 of this Article II, the Board of Trustees shall be divided into
three classes, with the number of Trustees in each class being determined by
written instrument of the Board of Trustees. The term of office of the first
class shall expire on the date of the first annual meeting of Shareholders. The
term of office of the second class shall expire one year thereafter. The term of
office of the third class shall expire two years thereafter. Upon expiration of
the term of office of each class as set forth above, the number of Trustees in
such class, as determined from time to time by the Board of Trustees in
accordance with this Article II, shall be elected for a term of three years to
succeed the Trustees whose terms of office expire. The Trustees shall be elected
by the Shareholders owning of record a plurality of the Shares voting at an
annual meeting of the Shareholders or special meeting in lieu thereof called for
that purpose, except as provided in Section 2.3 of this Article, and each
Trustee elected shall hold office until his successor shall have been elected
and shall have qualified; except that (a) any Trustee may resign his trust
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees, which shall take effect upon
such delivery or upon such later date as is specified therein; (b) that any
Trustee may be removed (provided the aggregate number of Trustees after such
removal shall not be less than the number required by Section 2.1 hereof) with
cause, at any time by written instrument, signed by at least two-thirds of the
remaining Trustees, specifying the date when such removal shall become
effective; (c) that any Trustee who requests in writing to be retired or who has
become incapacitated by illness or injury may be retired by written instrument
signed by a majority of the other Trustees, specifying the date of his
retirement; and (d) a Trustee may be removed at any meeting of Shareholders by a
vote of two-thirds of the outstanding Shares. Upon the resignation or removal of
a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust Property held in
the name of the resigning or removed Trustee.
Upon the incapacity or death of any Trustee, his legal representative shall execute and deliver on his behalf such documents as the remaining Trustees shall require as provided in the preceding sentence.
Section 2.3 Resignation and Appointment of Trustees. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of the death, declination, resignation, removal, retirement, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office of a Trustee. In the case of an existing vacancy, including a vacancy existing by reason of an increase in the number of Trustees, the remaining Trustees shall fill such vacancy by appointing such other person as they in their discretion shall see fit. Such appointment shall be evidenced by a written instrument signed by a majority of the Trustees then in office. Any such appointment shall not become effective, however, until the person named in the written instrument of appointment shall have accepted in writing such appointment and agreed in writing to be bound by the terms of the Declaration. An appointment of a Trustee may be made by the Trustees then in office and notice thereof mailed to Shareholders as aforesaid in anticipation of a vacancy to occur by reason of retirement, resignation or increase in number of Trustees effective at a later date, provided that said appointment shall become effective only at or after the effective date of said retirement, resignation or increase in number of Trustees.
Section 2.4 Vacancies. The death, declination, resignation, retirement, removal, bankruptcy, adjudicated incompetence or incapacity to perform the duties of a Trustee, or any one of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in Section 2.3, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by the Declaration. A written instrument certifying the existence of such vacancy signed by a majority of the Trustees shall be conclusive evidence of the existence of such vacancy.
Section 2.5 Delegation of Power to Other Trustees. Any Trustee may, by power of attorney, delegate his power for a period not exceeding six (6) months at any one time to any other Trustee or Trustees; provided that in no case shall less than two (2) Trustees personally exercise the powers granted to the Trustees under the Declaration except as herein otherwise expressly provided.
ARTICLE III
Section 3.1 General. The Trustees shall have exclusive and absolute control over the Trust Property and over the business of the Trust to the same extent as if the Trustees were the sole owners of the Trust Property and business in their own right, but with such powers of delegation as may be permitted by the Declaration. The Trustees shall have power to conduct the business of the Trust and carry on its operations in any and all of its branches and maintain offices both within and without the Commonwealth of Massachusetts, in any and all states of the United States of America, in the District of Columbia, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments and to do all such other things and execute all such instruments as the Trustees deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of the Declaration, the presumption shall be in favor of a grant of power to the Trustees.
The enumeration of any specific power herein shall not be construed as limiting the aforesaid power. Such powers of the Trustees may be exercised without order of or resort to any court.
Section 3.2 Investments.
(a) The Trustees shall have the power to:
(i) operate as and carry on the business of an investment company, and exercise all of the powers necessary or appropriate to the conduct of such operations;
(ii) invest and reinvest cash, and hold cash uninvested;
(iii) invest in, hold for investment, or reinvest in, securities, including common and preferred stocks; warrants; bonds, debentures, bills, time notes and all other evidences of indebtedness; negotiable or non-negotiable instruments; general and limited partnership interests, government securities, including securities of any state, municipality or other political subdivision thereof, or any governmental or quasi-governmental agency or instrumentality; and money market instruments including bank certificates of deposit, finance paper, commercial paper, bankers acceptances, interests in bank sweep accounts and all kinds of repurchase agreements, of any corporation, company, trust, association, firm or other business organization however established, and of any country, state,
municipality or other political subdivision, or any governmental or quasi-governmental agency or instrumentality;
(iv) acquire (by purchase, subscription or otherwise), to hold, to trade in and deal in, to acquire any rights or options to purchase or sell, to sell or otherwise dispose of, to lend and to pledge any such securities, to enter into repurchase agreements and forward foreign currency exchange contracts, to purchase and sell futures contracts and options on futures contracts of all descriptions, and to engage in all types of hedging and risk management transactions;
(v) exercise all rights, powers and privileges of ownership or interest in all securities and property included in the Trust Property, including the right to vote thereon and otherwise act with respect thereto and to do all acts for the preservation, protection, improvement and enhancement in value of all such securities and property;
(vi) acquire (by purchase, lease or otherwise) and to hold, use, maintain, develop and dispose of (by sale or otherwise) any property, real or personal; provided that the Trustees shall not purchase or sell real estate, except that the Trustees may purchase or sell securities secured by real estate or interests therein or issued by companies which invest in real estate or interest therein;
(vii) borrow money or otherwise obtain credit and in this connection issue notes or other evidence of indebtedness; secure borrowings by mortgaging, pledging or otherwise subjecting as security the Trust Property; endorse, guarantee, or undertake the performance of any obligation, contract or engagement of any other Person and to lend Trust Property;
(viii) aid by further investment any corporation, company, trust, association, general or limited partnership or firm, any obligation of or interest in which is included in the Trust Property or in the affairs of which the Trustees have any direct or indirect interest; to do all acts and things designed to protect, preserve, improve or enhance the value of such obligation or interest; to guarantee or become surety on any or all of the contracts, stocks, bonds, notes, debentures and other obligations of or interests in any such corporation, company, trust, association, general or limited partnership or firm; and
(ix) carry on any other business in connection with or incidental to any of the foregoing powers, do everything necessary, suitable or proper for the accomplishment of any purpose or the attainment of any object or the furtherance of any power hereinbefore set forth, and do every other act or thing incidental or appurtenant to or connected with the aforesaid purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers, and the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the general powers of the Trustees.
(b) The Trustees shall not be limited to investing in obligations maturing before the possible termination of the Trust, nor shall the Trustees be limited by any law limiting the investments which may be made by fiduciaries.
Section 3.3 Legal Title. Legal title to all the Trust Property shall be vested in the Trustees as joint tenants except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine. The right, title and interest of the Trustees in the Trust Property shall vest automatically in each Person who may hereafter become a Trustee. Upon the termination of the term of office, resignation, removal or death of a Trustee he shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered.
Section 3.4 Issuance and Purchase of Shares. The Trustees shall have the power to issue, sell, purchase, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares and, subject to the provisions set forth in Articles VII and VIII hereof, to apply to any such repurchase, retirement, cancellation or acquisition of Shares any funds or property of the Trust whether capital or surplus or otherwise, to the full extent now or hereafter permitted by the 1940 Act and the laws of the Commonwealth of Massachusetts governing business corporations; provided, however, that any repurchase of Shares may be made only if Shares are trading at a purchase price that is 10% or more below net asset value per Share and the Fund may purchase the Shares only at a purchase price that is 10% or more below net asset value per Share.
Section 3.5 Delegation; Committees. The Trustees shall have power to delegate from time to time to such of their number or to officers, employees or agents of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Trustees or otherwise as the Trustees may deem expedient, to the same extent as such delegation is not prohibited by the 1940 Act.
Section 3.6 Collection and Payment. The Trustees shall have power to collect all property due to the Trust; to pay all claims, including taxes, against the Trust Property; to prosecute, defend, compromise or abandon any claims relating to the Trust Property; to foreclose any security interest securing any obligations by virtue of which any property is owed to the Trust; and to enter into releases, agreements and other instruments.
Section 3.7 Expenses. The Trustees shall have the power to incur and pay any expenses which in the opinion of the Trustees are necessary or incidental to carry out any of the purposes of the Declaration, and to pay reasonable compensation form the funds of the Trust to themselves as Trustees. The Trustees shall fix the compensation of all officers, employees and Trustees.
Section 3.8 Manner of Acting; By-laws. Except as otherwise provided herein or in the By-laws, any action to be taken by the Trustees may be taken by a majority of the Trustees present at a meeting of Trustees (a quorum being present), including any meeting held by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, or by written consents of all the Trustees. The Trustees may adopt By-laws not inconsistent with this Declaration to provide for the conduct of the business of the Trust and may amend or repeal such By-laws to the extent such power is not reserved to the Shareholders.
Section 3.9 Miscellaneous Powers. The Trustees shall have the
power to: (a) employ or contract with such persons as the Trustees may deem
desirable for the transaction of the business of the Trust; (b) enter into joint
ventures, partnerships and any other combinations or associations; (c) remove
Trustees or fill vacancies in or add to their number, elect and remove such
officers and appoint and terminate such agents or employees as they consider
appropriate, and appoint from their own number, and terminate, any one or more
committees which may exercise some or all of the power and authority of the
Trustees as the Trustees may determine; (d) purchase, and pay for out of Trust
Property, insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers, distributors, selected dealers or
independent contractors of the Trust against all claims arising by reason of
holding any such position or by reason of any action taken or omitted by any
such person in such capacity, whether or not constituting negligence, or whether
or not the Trust would have the power to indemnify such person against such
liability; (e) establish pension, profit sharing, share purchase and other
retirement, incentive and benefit plans for any Trustees, officers, employees or
agents of the Trust; (f) to the extent permitted by law, and in addition to the
mandatory indemnification required by Section 5.3, indemnify any person with
whom the Trust has dealings, including the Distributor, Transfer Agent and
selected dealers to such extent as the Trustees shall determine; (g) guarantee
indebtedness or contractual obligations of others; (h) determine and change the
fiscal year of the Trust and the method by which its accounts shall be kept; and
(i) adopt a seal for the Trust but the absence of such seal shall not impair the
validity of any instrument executed on behalf of the Trust.
ARTICLE IV
Section 4.1 Investment Adviser. Subject to a Majority Shareholder Vote, the Trustees may in their discretion from time to time enter into one or more investment advisory or management contracts whereby a party to such contract shall undertake to furnish the Trust such administrative, management, investment advisory, statistical and research facilities and services, and such other facilities and services, if any, as the Trustees shall from time to time consider desirable and all upon such terms and conditions as the Trustees may in their discretion determine. Notwithstanding any provisions of the Declaration, the Trustees may delegate to the Investment Adviser authority (subject to such general or specific instructions as the Trustees may from time to time adopt) to effect purchases, sales, loans or exchanges of assets of the Trust on behalf of the Trustees or may authorize any officer, employee or Trustee to effect such purchases, sales, loans or exchanges pursuant to recommendations of the Investment Adviser (and all without further action by the Trustees). Any such purchases, sales, loans and exchanges shall be deemed to have been authorized by all of the Trustees.
Section 4.2 Distributor. The Trustees may in their discretion from time to time enter into a contract providing for the sale of Shares whereby the Trust may either agree to sell the Shares to the other party to the contract or appoint such other party its sales agent for such Shares. In either case, the contract shall be on such terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article IV or the By-laws; and such contract may also provide for the sale of Shares by such other party as principal or as agent of the Trust and may provide that such other party may enter into selected dealer agreements with registered securities dealers to further the purpose of the distribution of the Shares.
Section 4.3 Transfer Agent. The Trustees may in their discretion from time to time enter into a transfer agency and shareholder service contract whereby the other party to such contract shall undertake to furnish transfer agency and shareholder service to the Trust. The contract shall have such terms and conditions as the Trustees may in their discretion determine not inconsistent with the Declaration or the By-laws. Such services may be provided by one or more persons.
Section 4.4 Parties to Contract. Any contract of the character described in Section 4.1, 4.2, or 4.3 of this Article IV or any Custodian contract, as described in the By-laws, may be entered into with any Person, although one or more of the Trustees or officers of the Trust may be an officer, partner, director, trustee, shareholder or member of such other party to the contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any such relationship; nor shall any Person holding such relationship be disqualified from upon or executing any such contract; nor shall any
Person holding such relationship be liable merely by reason of such relationship
for any loss or expense to the Trust under or by reason of said contract or
accountable for any profit realized directly or indirectly therefrom, provided
that the contract when entered into was not inconsistent with the provisions of
this Article IV or the By-laws. The same Person may be the other party to
contracts entered into pursuant to Section 4.1, 4.2, and 4.3 above or Custodian
contracts, and any Person may be financially interested or otherwise affiliated
with Persons who are parties to any or all of the contracts mentioned in this
Section 4.4.
Section 4.5 Compliance with 1940 Act. Any contract entered into pursuant to Sections 4.1 or 4.2 shall be consistent with and subject to the requirements of Section 15 of the Investment Company Act of 1940 (including any amendment thereof or other applicable Act of Congress hereafter enacted) with respect to its continuance in effect, its termination and the method of authorization and approval of such contract or renewal thereof.
ARTICLE V
(a) No Shareholder shall be subject to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust solely by reason of his being or having been a Shareholder and not because of his or her acts or omissions in any other capacity. The Trust shall indemnify and hold each Shareholder harmless from and against all claims and liabilities to which such Shareholder may become subject by reason of his being or having been a Shareholder, and shall reimburse such Shareholder for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. The rights accruing to a Shareholder under this Section 5.1 shall not exclude any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein.
(b) Any Person extending credit to, contracting with or having any claim against the Trust shall look only to the Trust Property for payment under such credit, contract or claim; and neither the Shareholders nor the Trustees, nor any of the Trust's officers, employees or agents, whether past, present or future, shall be personally liable therefor. Nothing in this Declaration of Trust shall protect any former or acting Trustee or officer against any liability to which such Trustee or officer would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
Section 5.2 Non-Liability of Trustees, etc. No Trustee, officer, employee or agent of the Trust shall be liable to the Trust, its Shareholders, or to any Shareholder, Trustee, officer, investment adviser, employee, or agent thereof for any action or failure to act (including without limitation the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties involved in the conduct of his office.
Section 5.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph (b) below:
(i) every person who is or has been a Trustee or officer of the Trust shall be indemnified by the Trust to the fullest extent permitted by law against all liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer, and against amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal, administrative or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or officer:
(i) against any liability to the Trust or the Shareholders by reason of a final adjudication by the court or other body before which the proceeding was brought that he engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or agency;
(ii) with respect to any matter as to which he shall have been finally adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) or
(b)(ii) resulting in payment by a Trustee or officer, unless there has
been either a determination that such Trustee or officer did not engage
in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office or agency by the court or other body approving the settlement or other disposition or a reasonable determination, based upon a review of readily available facts (as opposed to a full trial-type inquiry) that he did not engage in such conduct;
(A) by vote of a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter); or
(B) by written opinion of independent legal counsel.
(c) Expenses of preparation and presentation of a defense to
any claim, action, suit, or proceeding of the character described in paragraph
(a) of this Section 5.3 shall be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 5.3; provided that either
(i) such undertaking is secured by a surety bond or some other appropriate security or the Trust shall be insured against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter) or an independent legal counsel in a written opinion, shall determine, based upon a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the recipient ultimately will be found entitled to indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one
(i) who is not an "Interested Person" of the Trust (including anyone who has
been exempted from being an "Interested Person" by any rule, regulation or order
of the Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceedings on the same or similar
grounds is then or had been pending.
Section 5.4 Permissive Indemnification. The Board of Trustees may authorize or ratify, either by contract or resolution, indemnification of employees and agents of the Fund, including the investment adviser or underwriters of the Shares, to the full extent permitted under applicable law.
Section 5.5 Insurance; Rights to Continue. The rights of indemnification and advancement of expenses provided in this Declaration of Trust may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Trustee, officer, investment adviser, Shareholder, employee or agent
may now or hereafter be entitled, shall continue as to a Person who has ceased to be such Trustee, officer, Shareholder, investment adviser, employee or agent and shall inure to the benefit of the heirs, executors, administrators, and assigns of such Person. Nothing contained herein shall affect any rights to indemnification to which any Person may be otherwise entitled under law.
Section 5.6 No Bond Required of Trustees. No Trustee shall be obligated to give any bond or other security for the performance of any of his duties hereunder.
Section 5.7 Execution of Trust Instruments, etc. Every obligation, contract, instrument, certificate, Share, other security of the Trust or undertaking, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively presumed to have been executed or done by the executors thereof only in their capacity as Trustees under the Declaration or in their capacity as officers, employees or agents of the Trust.
Section 5.8 Reliance on Experts, etc. Each Trustee and officer or employee of the Trust shall, in the performance of his duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of its officers or employees or by the Investment Adviser, the Distributor, Transfer Agent, selected dealers, accountants, appraisers or other experts or consultants selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee.
ARTICLE VI
Section 6.1 Beneficial Interest. The interest of the beneficiaries hereunder shall be divided into transferable shares of beneficial interest, all of one class, with a par value of $.01 per share. The number of shares of beneficial interest authorized hereunder is unlimited. All Shares issued hereunder including, without limitation, Shares issued in connection with a dividend in Shares or a split of Shares, shall be fully paid and nonassessable.
Section 6.2 Rights of Shareholders. The ownership of the Trust Property of every description and the right to conduct any business hereinbefore described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to assume any losses of the Trust or suffer any assessment of
any kind by virtue of their ownership of Shares. The Shares shall be personal property giving only the rights in the Declaration specifically set forth. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights, except as the Trustees may determine with respect to any series of Shares.
Section 6.3 Trust Only. It is the intention of the Trustees to create only the relationship of Trustee and beneficiary between the Trustees and each Shareholder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form of legal relationship other than a trust. Nothing in the Declaration shall be construed to make the Shareholders, either by themselves or with the Trustees, partners and members of a joint stock association.
Section 6.4 Issuance of Shares. The Trustees in their discretion may, from time to time without vote of the Shareholders, issue Shares, in addition to the then issued and outstanding Shares and Shares held in the treasury, to such party or parties and for such amount and type of consideration, including cash or property, at such time or times, and on such terms as the Trustees may deem best, and may in such manner acquire other assets (including the acquisition of assets subject to liabilities and in connection with the assumption of liabilities) and businesses. In connection with any issuance of Shares, the Trustees may issue fractional Shares and Shares held in the treasury. The Trustees may from time to time divide or combine the Shares into a grater or lesser number without thereby changing the proportionate beneficial interests in the Trust. Contributions to the Trust may be accepted for whole Shares and/or 1-1,000ths of a Share or integral multiples thereof.
Section 6.5 Register of Shares. A register shall be kept at the principal office of the Trust or at an office of the Transfer Agent which shall contain the names and addresses of the Shareholders and the number of Shares held by them respectively and a record of all transfers thereof. Such register shall be conclusive as to who are the holders of the Shares and who shall be entitled to receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have notice given to him as herein or in the By-laws provided, until he has given his address to the Transfer Agent or such other officer or agent of the Trustees as shall keep the said register for entry thereon. The Trustees, in their discretion, may authorize the issuance of Share certificates and promulgate appropriate rules and regulations as to their use.
Section 6.6 Transfer of Shares. Shares shall be transferable on the records of the Trust only by the record holder thereof or by his agent thereunto duly authorized in writing, upon delivery to the Trustees or the Transfer Agent of a duly executed instrument of transfer, together with any certificate or certificates (if issued) for such Shares and such evidence of the genuineness of each such execution and authorization and of other matters as may reasonably be required. Upon such delivery the transfer
shall be recorded on the register of the Trust. Until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereunder and neither the Trustees nor any Transfer Agent or register nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death, bankruptcy or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the register of Shares as the holder of such Shares upon production of the proper evidence thereof to the Trustees or the Transfer Agent; but until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereunder and neither the Trustees nor any Transfer Agent or registrar nor any officer or agent of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of law.
Section 6.7 Notices. Any and all notices to which any Shareholder may be entitled and any and all communications shall be deemed duly served or given if mailed, postage prepaid, addressed to any Shareholder of record at his last known address as recorded on the register of the Trust; provided, however, that annual reports and proxy statements need not be sent to a Shareholder if:
(i) an annual report and a proxy statement for two consecutive annual meetings, or
(ii) all, and at least two, checks (if sent by first class mail) in payment of dividends on Shares during a twelve-month period
have been mailed to such Shareholder's address and have been returned undelivered. However, delivery of such annual reports and proxy statements shall resume once the Shareholder's current address is determined.
Section 6.8 Treasury Shares. Shares held in the treasury shall, until reissued pursuant to Section 6.4, not confer any voting rights on the Trustees, nor shall such Shares be entitled to any dividends or other distributions declared with respect to the Shares.
Section 6.9 Voting Powers. The Shareholders shall have power
to vote only (i) for the election of Trustees as provided in Section 2.2 hereof,
(ii) with respect to any investment advisory or management contract as provided
in Section 4.1, (iii) with respect to termination of the Trust as provided in
Section 8.2, (iv) with respect to any amendment of the Declaration to the extent
and as provided in Section 8.3, (v) with respect to any merger, consolidation,
conversion or sale of assets as provided in Section 8.4, 8.5, 8.6 and 8.7, (vi)
with respect to incorporation of the Trust to the extent and as provided in
Section 8.5, (vii) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or
should not be brought or maintained derivatively or as a class action on behalf of the Trust or the Shareholders, and (viii) with respect to such additional matters relating to the Trust as may be required by the Declaration, the By-laws or any registration of the Trust as an investment company under the 1940 Act with the Commission (or any successor agency) or any state, or as the Trustees may consider necessary or desirable. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote. There shall be no cumulative voting in the election of Trustees. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, the Declaration or the By-laws to be taken by Shareholders. The By-laws may include further provisions for Shareholders' votes and meetings and related matters.
ARTICLE VII
The Trustees, in their absolute discretion, may prescribe and shall set forth in the By-laws or in a duly adopted vote of the Trustees such bases and times for determining the per Share net asset value of the Shares or net income, or the declaration and payment of dividends and distributions, as they may deem necessary or desirable.
ARTICLE VIII
Section 8.1 Duration. The Trust shall continue without limitation of time but subject to the provisions of this Article VIII.
Section 8.2 Termination of Trust.
(a) The Trust may be terminated (i) by the affirmative vote of the holders of not less than seventy-five percent (75%) of the Shares outstanding and entitled to vote at any meeting of Shareholders, or (ii) by an instrument in writing, without a meeting, signed by a majority of the Trustees and consented to by the holders of not less than seventy-five percent (75%) of such Shares. Upon termination of the Trust:
(i) The Trust shall carry on no business except for the purpose of winding up its affairs;
(ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Property to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and to do all other acts appropriate to liquidate its business; provided, that any sale, conveyance, assignment, exchange, transfer or other disposition of all or substantially all of the Trust Property shall require Shareholder approval in accordance with Section 8.4 hereof; and
(iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly in cash and partly in kind among the Shareholders according to their respective rights.
(b) After termination of the Trust and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and place in the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease.
Section 8.3 Amendment Procedure.
(a) Except as provided in paragraph (c) of this Section 8.3, this Declaration may be amended by a Majority Shareholder Vote or by an instrument in writing, without a meeting, signed by a majority of the Trustees and consented to by the holders of not less than a majority of the Shares outstanding and entitled to vote. The Trustees may also amend this Declaration without the vote or consent of Shareholders to change the name of the Trust, to supply any omission, to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof, or if they deem it necessary to conform this Declaration to the requirements of applicable federal laws or regulations or the requirements of the regulated investment company provisions of the Internal Revenue Code, but the Trustees shall not be liable for failing so to do.
(b) No amendment may be made under this Section 8.3 which would change any rights with respect to any Shares by reducing the amount payable thereon upon liquidation of the Trust or by diminishing or eliminating any voting rights pertaining thereto, except with the vote or consent of the holders of two-thirds of the Shares outstanding and entitled to vote. Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessment upon Shareholders.
(c) No amendment may be made under this Section 8.3 which shall amend, alter, change or repeal any of the provisions of Sections 8.3, 8.4, 8.6 and 8.7 unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote or consent of seventy-five percent (75%) of the Shares outstanding and entitled to vote. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of Shares otherwise required by law or by the terms of any class or series of preferred stock, whether now or hereafter authorized, or any agreement between the Trust and any national securities exchange.
(d) A certificate signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted by the Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as amended, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when placed in the records of the Trust.
Notwithstanding any other provision hereof, until such time as a Registration Statement under the Securities Act of 1933, as amended, covering the first public offering of securities of the Trust shall have become effective, this Declaration may be terminated or amended in any respect by the affirmative vote of a majority of the Trustees or by an instrument signed by a majority of the Trustees.
Section 8.4 Merger, Consolidation and Sale of Assets. Subject to the provisions of Section 8.7 hereof, the Trust may merge or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of the Trust Property, including its good will, upon such terms and conditions and for such consideration when and as authorized at any meeting of Shareholders called for the purpose by the affirmative vote of the holders of not less than two-thirds of such Shares, provided, however, that if such merger, consolidation, sale, lease or exchange is recommended by the Trustees, the vote or written consent of the holders of a majority of Shares outstanding and entitled to vote, shall be sufficient authorization; and any such merger, consolidation, sale, lease or exchange shall be deemed for all purposes to have been accomplished under and pursuant to the statutes of the Commonwealth of Massachusetts.
Section 8.5 Incorporation and Reorganization. With the approval of the holders of a majority of the Shares outstanding and entitled to vote, the Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction, or any other trust, partnership, association or other organization to take over all of the Trust Property or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust Property to any such corporation, trust, partnership, association or organization in exchange for
the shares or securities thereof or otherwise and to lend money to, subscribe for the shares or securities of, and enter into any contracts with any such corporation, trust, partnership, association or organization or any corporation, partnership, association, trust, or organization in which the Trust holds or is about to acquire shares or any other interest. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, partnership, association or other organization if and to the extent permitted by law, as provided under the law then in effect. Nothing contained herein shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring a portion of the Trust Property to such organization or entities.
Section 8.6 Conversion.
Notwithstanding any other provision of this Declaration, the conversion of the Trust from a "closed-end company" to an "open-end company," as those terms are defined in Section 5(a)(2) and 5(a)(1), respectively, of the 1940 Act as in effect on the date hereof, shall require (i) the approval of the Board of Trustees and (ii) the affirmative vote or consent of the holders of seventy-five and percent (75%) of the Shares outstanding and entitled to vote; provided, however, that on or after May 1, 1992, such conversion shall require the affirmative vote or consent of the holders of a majority of the Shares outstanding and entitled to vote. At the first meeting of the Board of Trustees subsequent to May 1, 1992 and at least annually thereafter, the Board shall consider and vote upon such conversion. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the Shares otherwise required by law or by the terms of any class or series of preferred stock, whether now or hereafter authorized, or any agreement between the Trust and any national securities exchange.
Section 8.7
(a) Notwithstanding any other provision of this Declaration and subject to the exceptions provided in paragraph (d) of this Section, the types of transactions described in paragraph (c) of this Section shall require the affirmative vote or consent of the holders of seventy-five percent (75%) of the Shares outstanding and entitled to vote, when a Principal Shareholder (as defined in paragraph (b) of this Section) is a party to the transaction. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of Shares otherwise required by law or by the terms of any class or series of preferred stock, whether now or hereafter authorized, or any agreement between the Trust and any national securities exchange.
(b) The term "Principal Shareholder" shall mean any corporation, person or other entity which is the beneficial owner, directly or indirectly, of more than five percent (5%) of the outstanding Shares and shall include any affiliate or associate, as such terms are defined in clause (ii) below, of a Principal Shareholder. For the purposes
of this Section, in addition to the Shares which a corporation, person or other entity beneficially owns directly, (a) any corporation, person or other entity shall be deemed to be the beneficial owner of any Shares (i) which it has the right to acquire pursuant to any agreement or upon exercise of the conversion rights or warrants, or otherwise (but excluding share options granted by the Trust) or (ii) which are beneficially owned, directly or indirectly (including Shares deemed owned through application of clause (i) above), by any other corporation, person or entity with which it or its "affiliate" or "associate" (as defined below) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of Shares, or which is its "affiliate", or "associate" as those terms are defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on the date hereof, and (b) the outstanding Shares shall include Shares deemed owned through application of clauses (i) and (ii) above but shall not include any other Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights or warrant, or otherwise.
(c) This Section shall apply to the following transactions:
(i) The merger or consolidation of the Trust or any subsidiary of the Trust with or into any Principal Shareholder.
(ii) The issuance of any securities of the Trust to any Principal Shareholder for cash (except pursuant to any cash dividend reinvestment program available to all Shareholders and approved by the Trustees).
(iii) The sale, lease or exchange of all or any substantial part of the assets of the Trust to or with any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period).
(iv) The sale or lease to the Trust or any subsidiary thereof, in exchange for securities of the Trust, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period).
(d) The provisions of this Section shall not be applicable to
(i) any of the transactions described in paragraph (c) of this Section if the
Board of Trustees of the Trust shall by resolution have approved a memorandum of
understanding with such Principal Shareholder with respect to and substantially
consistent with such transaction, or (ii) any such transaction with any
corporation of which a majority of the outstanding shares of all classes of
stock normally entitled to vote in elections of directors is owned of record or
beneficially by the Trust and its subsidiaries.
(e) The Board of Trustees shall have the power and duty to determine for the purposes of this Section on the basis of information known to the Trust, whether (i) a corporation, person or entity beneficially owns more than five percent (5%) of the outstanding Shares, (ii) a corporation, person or entity is an "affiliate" or "associate" (as defined above) of another, (iii) the assets being acquired or leased to or by the Trust or any subsidiary thereof, constitute a substantial part of the assets of the Trust and have an aggregate fair market value of $1,000,000 or more, and (iv) the memorandum of understanding referred to in paragraph (d) hereof is substantially consistent with the transaction covered thereby. Any such determination shall be conclusive and binding for all purposes of this Section.
ARTICLE IX
The Trustees shall at least annually, or as required by the 1940 Act, submit to the Shareholders a written financial report of the Trust, including financial statements which shall at least annually be certified by independent public accountants.
ARTICLE X
Section 10.1 Filing. This Declaration and any amendment hereto shall be filed in the office of the Secretary of the Commonwealth of Massachusetts and in such other places as may be required under the laws of Massachusetts and may also be filed or recorded in such other places as the Trustees deem appropriate. Each amendment so filed shall be accompanied by a certificate signed and acknowledged by a Trustee stating that such action was duly taken in a manner provided herein, and unless such amendment or such certificate sets forth some later time for the effectiveness of such amendment, such amendment shall be effective upon its filing. A restated Declaration, integrating into a single instrument all of the provisions of the Declaration which are then in effect and operative, may be executed from time to time by a majority of the Trustees and shall upon filing with the Secretary of the Commonwealth of Massachusetts, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto.
Section 10.2 Governing Law. This Declaration is executed by the Trustees and delivered in The Commonwealth of Massachusetts and with reference to the laws thereof, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to the laws of said Commonwealth.
Section 10.3 Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart.
Section 10.4 Reliance by Third Parties. Any certificate executed by an individual who, according to the records of the Trust appears to be a Trustee hereunder, certifying: (a) the number or identity of Trustees or Shareholders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or Shareholders present at any meeting or executing any written instrument satisfies the requirements of this Declaration, (e) the form of any By-laws adopted by or the identity of any officers elected by the Trustees, or (f) the existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any Person dealing with the Trustees and their successors.
Section 10.5 Provisions in Conflict With Law or Regulations.
(a) The provisions of the Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code of 1954, as amended, or with other applicable laws and regulations, the conflicting provision shall be deemed not to constitute and never to have constituted a part of the Declaration; provided, however, that such determination shall not affect any of the remaining provisions of the Declaration or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of the Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall affect only such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of the Declaration in any jurisdiction.
Section 10.6 Appointment of Resident Agent.
Alan G. Carr, 45 Milk Street, Boston, Massachusetts 02109, is hereby appointed the resident agent of the Trust in the Commonwealth of Massachusetts upon whom may be served any notice, process or pleading in any action or proceeding against the Trust or the Trustees as such.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 21st day of April, 1987.
/s/ ALAN G. CARR
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Alan G. Carr
/s/ RICHARD A. CRAMER
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Richard A. Cramer
/s/ LAWRENCE S. LEWIN
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Lawrence S. Lewin
/s/ J. PATTERSON MCBAINE
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J. Patterson McBaine
/s/ LEWIS THOMAS
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Lewis Thomas
/s/ MICHAEL A. WALL
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Micheal A. Wall
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The terms "Commission," "Custodian," "Declaration," "Distributor," "Investment Adviser," "Majority Shareholder Vote," "1940 Act," "Shareholder," "Shares," "Transfer Agent," "Trust," "Trust Property" and "Trustees" have the respective meanings given them in the Declaration of Trust of H&Q Healthcare Fund dated October 31, 1986 as amended from time to time.
Section 1. Principal Office. Until changed by the Trustees, the principal office of the Trust in The Commonwealth of Massachusetts shall be in the City of Boston, County of Suffolk.
Section 2. Other Offices. The Trust may have offices in such other places within or without the Commonwealth as the Trustees may from time to time determine.
Section 1. Meetings. An annual meeting of the Shareholders shall be held at such place within or without the Commonwealth of Massachusetts on such day and at such time as the Trustees shall designate. The initial annual meeting of Shareholders shall take place within 15 months of such time as a registration statement under the Securities Act of 1933, as amended, covering the first public offering of securities of the Trust shall have become effective. Special meetings of the Shareholders may be called at any time by a majority of the Trustees and shall be called by any Trustee upon written request of Shareholders holding in the aggregate not less than ten percent (10%) of the outstanding Shares having voting rights, such request specifying the purpose or purposes for which such meeting is to be called. Any such meeting shall be held within or without the Commonwealth of Massachusetts on such day and at such time as the Trustees shall designate. The holders of a majority of outstanding Shares present in person or by proxy shall constitute a quorum at any meeting of the Shareholders.
Section 2. Notice of Meetings. Notice of all meetings of the Shareholders, stating the time, place and purposes of the meeting, shall be given by the Trustees by mail to each Shareholder at his address as recorded on the register of the Trust, mailed not less than ten (10) days and not more than sixty (60) days before the meeting. Only the business stated in the notice of the meeting shall be considered at such meeting. Any adjourned meeting may be held as adjourned without further notice. No notice need be given to any Shareholder who shall have failed to inform the Trust of his current address or if a written waiver of notice, executed before or after the meeting by the Shareholder or his attorney thereunto authorized, is filed with the records of the meeting.
Section 3. Record Date for Meetings. For the purpose of determining the Shareholders who are entitled to notice of and to vote at any meeting, or to participate in any distribution, or for the purpose of any other action, the Trustees may from time to time close the transfer books for such period, not exceeding thirty (30) days, as the Trustees may determine; or without closing the transfer books the Trustees may fix a date not more than sixty (60) days prior to the date of any meeting of Shareholders or distribution or other action as a record date for the determination of the persons to be treated as Shareholders of record for such purposes.
Section 4. Proxies. At any meeting of Shareholders, any holder of Shares entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Secretary, or with such other officer or agent of the Trust as the Secretary may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a resolution of a majority of the Trustees, proxies may be solicited in the name of one or more Trustees or one or more of the officers of the Trust. Only Shareholders of record shall be entitled to vote. Each full Share shall be entitled to one vote and fractional Shares shall be entitled to a vote of such fraction. When any Share is held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect to such Share, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Share. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. If the holder of any such Share is a minor or a person of unsound mind, and subject to guardianship or to the legal control of any other person as regards the charge or management of such Share, he may vote by his guardian or such other person appointed or having such control, and such vote may be given in person or by proxy.
Section 5. Inspection of Records. The records of the Trust shall be open to inspection by Shareholders to the same extent as is permitted shareholders of a Massachusetts business corporation.
Section 6. Action without Meeting. Any action which may be taken by Shareholders may be taken without a meeting if a majority of Shareholders entitled to vote on the matter (or such larger proportion thereof as shall be required by law, the Declaration or these By-laws for approval of such matter) consent to the action in writing and the written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders.
Section 1. Meetings of the Trustees. The Trustees may in their discretion provide for regular or stated meetings of the Trustees. Notice of regular or stated meetings need not be given. Meetings of the Trustees other than regular or stated meetings shall be held whenever called by the President, or by anyone of the Trustees, at the time being in office. Notice of the time and place of each meeting other than regular or stated meetings shall be given by the Secretary or an Assistant Secretary or by the officer or Trustee calling the meeting and shall be mailed to each Trustee at least two days before the meeting, or shall be telegraphed, or cabled to each Trustee at his business address, or personally delivered to him at least one day before the meeting. Such notice may, however, be waived by any Trustee. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Trustee who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. A notice or waiver of notice need not specify the purpose of any meeting. The Trustees may meet by means of a telephone conference circuit or similar communications equipment by means of which all persons participating in the meeting can hear each other, which telephone conference meeting shall be deemed to have been held at a place designated by the Trustees at the meeting. Participation in a telephone conference meeting shall constitute presence in person at such meeting. Any action required or permitted to be taken at any meeting of the Trustees may be taken by the Trustees without a meeting if all the Trustees consent to the action in writing and the written consents are filed with the records of the Trustees' meetings. Such consents shall be treated as a vote for all purposes.
Section 2. Quorum and Manner of Acting. A majority of the Trustees shall be present in person at any regular or special meeting of the Trustees in order to constitute a quorum for the transaction of business at such meeting and (except as otherwise required by law, the Declaration or these By-laws) the act of a majority of the Trustees present at any such meeting, at which a quorum is present, shall be the act of the Trustees. In the absence of a quorum, a majority of the Trustees present may adjourn the meeting from time to time until a quorum shall be present. Notice of an adjourned meeting need not be given.
Section 1. Executive and Other Committees. The Trustees by vote of a majority of all the Trustees may elect from their own number an Executive Committee to consist of not less than three (3) Trustees [to hold office at the pleasure of the Trustees,] which shall have the power to conduct the current and ordinary business of the Trust while the Trustees are not in session, including the purchase and sale of securities and such other powers of the Trustees as the Trustees may, from time to time, delegate to them except those powers which by law, the Declaration or these By-laws they are prohibited from delegating. The Trustees may also elect from their own number other Committees from time to time (including an Audit Committee), the number composing such Committees, the powers conferred upon the same (subject to the same limitations as with respect to the Executive Committee) and the term of membership on such Committees to be determined by the Trustees.
Section 2. Meeting, Quorum and Manner of Acting. The Trustees may (1) provide for stated meetings of any Committees, (2) specify the manner of calling and notice required for special meetings of any Committee, (3) specify the number of members of a Committee required to constitute a quorum and the number of members of a Committee required to exercise specified powers delegated to such Committee, (4) authorize the making of decisions to exercise specified powers by written assent of the requisite number of members of a Committee without a meeting, and (5) authorize the members of a Committee to meet by means of a telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and records of decisions taken without a meeting and cause them to be recorded in a book designated for that purpose and kept in the office of the Trust.
Section 3. Advisory Board. The Trustees may appoint an Advisory Board to consist in the first instance of not less than three (3) members. Members of such Advisory Board shall not be Trustees or officers and need not be Shareholders. Members of this Board shall hold office for such period as the Trustees may by resolution provide. Any member of such Board may resign therefrom by a written instrument signed by him which shall take effect upon delivery to the Trustees. The Advisory Board shall have no legal powers and shall not perform the functions of Trustees in any manner, said Board being intended merely to act in an advisory capacity. Such Advisory Board shall meet at such times and upon such notice as the Trustees may by resolution provide.
Section 1. General Provisions. The officers of the Trust shall be a President, a Treasurer and a Secretary, who shall be elected by the Trustees. The Trustees may elect or appoint such other officers or agents as the business of the Trust may require, including one or more Vice Presidents, one or more Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may delegate to any officer or committee the power to appoint any subordinate officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise provided by law, the Declaration or these By-laws all officers of the Trust shall hold office at the pleasure of the Trustees. The Secretary and Treasurer may be the same person. A Vice President and the Treasurer or a Vice President and the Secretary may be the same person, but the offices of Vice President, Secretary and Treasurer shall not be held by the same person. The President shall hold no other office; provided, however, that the President may hold any other office until such time as a Registration Statement under the Securities Act of 1933, as amended, covering the first public offering of securities of the Trust, shall have become effective. Except as above provided, any two offices may be held by the same person. Any officer may be but none need be a Trustee or Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of the Trustees, may remove any officer with or without cause by a vote of a majority of the Trustees. Any officer or agent appointed by any officer or committee may be removed with or without cause by such appointing officer or committee.
Section 4. Powers and Duties of the President. The President may call meetings of the Trustees and of any Committee thereof when he deems it necessary and shall preside at all meetings of the Shareholders. The President shall be the principal executive officer of the Trust, and subject to the control of the Trustees and any Committees of the Trustees, within their respective spheres, as provided by the Trustees, he shall at all times exercise a general supervision and direction over the affairs of the Trust. He shall have the power to employ attorneys and counsel for the Trust and to employ such subordinate officers, agents, clerks and employees as he may find necessary to transact the business of the Trust. He shall also have the power to grant, issue, execute or sign such powers of attorney, proxies or other documents as may be deemed advisable or necessary in furtherance of the interests of the Trust. The President shall have such other powers and duties as, from time to time, may be conferred upon or assigned to him by the Trustees.
Section 5. Powers and Duties of Vice Presidents. In the absence or disability of the President, the Vice President or, if there be more than one Vice President, any Vice President designated by the Trustees shall perform all the duties and may exercise any of the powers of the President, subject to the control of the Trustees. Each Vice President shall perform such other duties as may be assigned to him from time to time by the Trustees or the President.
Section 6. Powers and Duties of the Treasurer. The Treasurer shall be the principal financial and accounting officer of the Trust. He shall deliver all funds of the Trust which may come into his hands to such Custodian as the Trustees may employ pursuant to Article X of these By-laws. He shall render a statement of condition of the finances of the Trust to the Trustees as often as they shall require the same and he shall in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Trustees. The Treasurer shall give a bond for the faithful discharge of his duties, if required so to do by the Trustees, in such sum and with such surety or sureties as the Trustees shall require.
Section 7. Powers and Duties of the Secretary. The Secretary shall keep the minutes of all meetings of the Trustees and of all meetings of the Shareholders in proper books provided for that purpose; he shall have custody of the seal of the Trust; he shall have charge of the Share transfer books, lists and records unless the same are in the charge of the Transfer Agent. He shall attend to the giving and serving of all notices by the Trust in accordance with the provisions of these By-laws and as required by law; and subject to these By-laws, he shall in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Trustees.
Section 8. Powers and Duties of Assistant Treasurer. In the absence or disability of the Treasurer, any Assistant Treasurer designated by the Trustees shall perform all the duties, and may exercise any of the powers, of the Treasurer. The Assistant Treasurers shall perform such other duties as from time to time may be assigned to them by the Trustees. Each Assistant Treasurer shall give a bond for the faithful discharge of his duties, if required so to do by the Trustees, in such sum and with such surety or sureties as the Trustees shall require.
Section 9. Powers and Duties of Assistant Secretaries. In the absence or disability of the Secretary, any Assistant Secretary designated by the Trustees shall perform all of the duties, and may exercise any of the powers, of the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be assigned to them by the Trustees.
Section 10. Compensation of Officers and Trustees and Members of the Advisory Board. Subject to any applicable provisions of the Declaration, the compensation of the officers and Trustees and members of the Advisory Board shall be fixed from time to time by the Trustees or, in the case of officers, by any Committee or officer upon whom such power may be conferred by the Trustees. No officer shall be prevented from receiving such compensation as such officer by reason of the fact that he is also a Trustee.
The fiscal year of the Trust shall begin on the first day of October 1 in each year and shall end on the last day of September 30, in each year, provided, however, that the Trustees may from time to time change the fiscal year.
The Trustees shall adopt a seal which shall be in such form and shall have such inscription thereon as the Trustees may from time to time prescribe.
Whenever any notice whatever is required to be given by law, the Declaration or these By-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. A notice shall be deemed to have been telegraphed or cabled for the purpose of these By-laws when it has been delivered to a representative of any telegraph or cable company with instruction that it be telegraphed or cabled.
Section 1. Appointment and Duties. The Trustees shall at all times employ a bank or trust company having a capital, surplus and undivided profits of at least five million dollars ($5,000,000) as Custodian with authority as its agent, but subject to such restrictions, limitations and other requirements, if any, as may be contained in the Declaration, these By-laws and the 1940 Act:
(1) to hold the securities owned by the Trust and deliver the same upon written order;
(2) to receive and receipt for any monies due to the Trust and deposit the same in its own banking department or elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts of the Trust and furnish clerical and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net income of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees and the Custodian. If so directed by a Majority Shareholder Vote, the Custodian shall deliver and pay over all property of the Trust held by it as specified in such vote.
The Trustees may also authorize the Custodian to employ one or more sub-Custodians from time to time to perform such of the acts and services of the Custodian and upon such terms and conditions, as may be agreed upon between the Custodian and such sub-Custodian and approved by the Trustees, provided that in every case such sub- Custodian shall be a bank or trust company organized under the laws of the United States or one of the states thereof and having capital, surplus and undivided profits of at least five million dollars ($5,000,000).
Section 2. Central Certificate System. Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the Custodian to deposit all or any part of the securities owned by the Trust in a system for the central handling of securities established by a national securities exchange or a national securities association registered with the Commission under the Securities Exchange Act of 1934, or such other person as may be permitted by
the Commission, or otherwise in accordance with the 1940 Act, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Trust or its Custodian.
Section 3. Acceptance of Receipts in Lieu of Certificates. Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the Custodian to accept written receipts or other written evidence indicating purchases of securities held in book-entry form in the Federal Reserve System in accordance with regulations promulgated by the Board of Governors of the Federal Reserve System and the local Federal Reserve Banks in lieu of receipt of certificates representing such securities.
Section 4. Provisions of Custodian Contract. The following provisions shall apply to the employment of a Custodian pursuant to this Article X and to any contract entered into with the Custodian so employed:
(a) The Trustees shall cause to be delivered to the Custodian all securities owned by the Trust or to which it may become entitled, and shall order the same to be delivered by the Custodian only upon completion of a sale, exchange, transfer, pledge, loan of portfolio securities to another person or other disposition thereof, and upon receipt by the Custodian of the consideration therefor or a certificate of deposit or a receipt of an issuer or of its Transfer Agent, all as the Trustees may generally or from time to time require or approve, or to a successor Custodian; and the Trustees shall cause all funds owned by the Trust or to which it may become entitled to be paid to the Custodian, and shall order the same disbursed only for investment against delivery of the securities acquired, or the return of cash held as collateral for loans of portfolio securities, or in payment of expenses, including management compensation, and liabilities of the Trust, including distributions to Shareholders, or to a successor Custodian; provided, however, that nothing herein shall prevent delivery of securities for examination to the broker selling the same in accord with the "street delivery" custom whereby such securities are delivered to such broker in exchange for a delivery receipt exchanged on the same day for an uncertified check of such broker to be presented on the same day for certification. Notwithstanding anything to the contrary in these By-laws, upon receipt of proper instructions, which may be standing instructions, the Custodian may delivery funds in the following cases. In connection with repurchase agreements, the Custodian may transmit, prior to receipt on behalf of the Fund of any securities or other property, funds from the Fund's custodian account to a special custodian approved by the Trustees of the Fund, which funds shall be used to pay for securities to be purchased by the Fund subject to the Fund's obligation to sell and the seller's obligation to repurchase such securities. In such case, the securities shall be held in the custody of the special custodian. In connection with the Trust's purchase or sale of financial futures contracts, the Custodian shall transmit, prior to receipt on behalf of the Fund of any securities or other property, funds from the Trust's custodian account in order to furnish to any maintain funds with brokers as margin to guarantee the performance of the Trust's futures obligations in accordance with the applicable requirements of commodities exchanges and brokers.
(b) In case of the resignation, removal or inability to serve of any such Custodian, the Trust shall promptly appoint another bank or trust company meeting the requirements of this Article X as successor Custodian. The agreement with the Custodian shall provide that the retiring Custodian shall, upon receipt of notice of such appointment, deliver the funds and property of the Trust in its possession to and only to such successor, and that pending appointment of a successor Custodian, or a vote of the Shareholders to function without a Custodian, the Custodian shall not deliver funds and property of the Trust to the Trust, but may delivery them to a bank or trust company of its own selection, having an aggregate capital, surplus and undivided profits (as shown in its last published report) of at least five million dollars ($5,000,000), as the property of the Trust to be held under terms similar to those on which they were held by the retiring Custodian.
The Trustees may from time to time issue and sell or cause to be issued and sold Shares for cash or other property, which shall in every case be paid or delivered to the Custodian as agent of the Trust before the delivery of any certificate for such shares. The Shares, including additional Shares which may have been purchased by the Trust (herein sometimes referred to as "treasury shares"), may not be sold at less than the net asset value thereof determined by or on behalf of the Trustees as of a time within forty-eight (48) hours, excluding Sundays and holidays, next preceding the time of such determination, except (1) in connection with an offering to the holders of Shares; (2) with the consent of a majority of the holders of Shares; (3) upon conversion of a convertible security in accordance with its terms; (4) upon the exercise of any warrant issued in accordance with the provisions of Section 18(d) of the 1940 Act; or (5) under such other circumstances as the Commission may permit by rules and regulations or orders for the protection of investors.
No Shares need be offered to existing Shareholders before being offered to others. No Shares shall be sold by the Trust (although Shares previously contracted to be sold may be issued upon payment therefor) during any period when the determination of net asset value is suspended by declaration of the Trustees. In connection with the acquisition by merger or otherwise of all or substantially all the assets of an investment company (whether a regulated or private investment company or a personal holding company), the Trustees may issue or cause to be issued Shares and accept in payment therefor such assets at not more than market value in lieu of cash, notwithstanding that the federal income tax basis to the Trust of any assets so acquired may be less than the market value, provided that such assets are of the character in which the Trustees are permitted to invest the funds of the Trust.
Section 1. Distributions to Shareholders. The Trustees shall from time to time distribute ratably among the Shareholders such proportion of the net profits, surplus (including paid-in surplus), capital, or assets held by the Trustees as they may deem proper. Such distributions may be made in cash or property (including without limitation any type of obligations of the Trust or any assets thereof), and the Trustees may distribute ratably among the Shareholders additional Shares issuable hereunder in such manner, at such times, and on such terms as the Trustees may deem proper. Such distributions may be among the Shareholders of record at the time of declaring a distribution or among the Shareholders of record at such other date or time or dates or times as the Trustees shall determine. The Trustees may always retain from the net profits such amount as they may deem necessary to pay the debts or expenses of the Trust or to meet obligations of the Trust, or as theY may deem desirable to use in the conduct of its affairs or to retain for future requirements or extensions of the business. The decision of the Trustees as to what, in accordance with generally accepted accounting principles, is net profits, surplus, capital or assets shall be final, and except as specifically provided herein the decision of the Trustees as to what expenses and charges of the Trust shall be charged against assets and what against income shall be final, all subject to any applicable provisions of the 1940 Act and rules, regulations and orders of the Commission promulgated thereunder.
Inasmuch as the computation of net income and gains for federal income tax purposes may vary from the computation thereof on the books, the above provisions shall be interpreted to give to the Trustees the power in their discretion to distribute for any fiscal year as ordinary dividends and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust to avoid or reduce liability for taxes.
Section 2. Dividend Reinvestment Plans. The Trustees may adopt and offer to Shareholders such dividend reinvestment plans, cash dividend payout plans or related plans as the Trustees shall deem appropriate.
Section 3. Stock Dividends. Anything in these By-laws to the contrary notwithstanding, the Trustees may at any time declare and distribute pro rata among the Shareholders a "stock dividend" out of either authorized but unissued Shares or treasury shares of the Trust or both.
These By-laws, or any of them, may be altered, amended or repealed, or new By-laws may be adopted (a) by Majority Shareholder Vote, or (b) by the Trustees, provided, however, that no By-law may be amended, adopted or repealed by the Trustees if such amendment, adoption or repeal requires, pursuant to law, the Declaration or these By-laws, a vote of the Shareholders or if such amendment, adoption or repeal changes or affects the provisions of Sections 1 and 4 of Article X or the provisions of this Article XIII.
The Trust shall not impose any restrictions upon the transfer of the Shares of the Trust except as provided in the Declaration, but this requirement shall not prevent the charging of customary transfer agent fees.
The Trust shall not permit any officer or Trustee of the Trust, or any
partner, officer or director of the Investment Adviser or underwriters of the
Trust to deal for or on behalf of the Trust with himself as principal or agent,
or with any partnership, association or corporation in which he has a financial
interest; provided that the foregoing provisions shall not prevent (a) officers
and Trustees of the Trust or partners, officers or directors of the Investment
Adviser or underwriter of the Trust from buying, holding or selling shares in
the Trust, or from being partners, officers or directors or otherwise
financially interested in the Investment Adviser or underwriter of the Trust;
(b) purchases or sales of securities or other property by the Trust from or to
an affiliated person or to the Investment Adviser or underwriters of the Trust
if such transaction is exempt from the applicable provisions of the 1940 Act;
(c) purchases of investments for the portfolio of the Trust or sales of
investments owned by the Trust through a security dealer who is, or one or more
of whose partners, shareholders, officers or directors is, an officer or Trustee
of the Trust, or a partner, officer or director of the Investment Adviser or
underwriter of the Trust, if such transactions are handled in the capacity of
broker only and commissions charged do not exceed customary brokerage charges
for such services; (d) employment of legal counsel, registrar, Transfer Agent,
dividend disbursing agent or Custodian who is, or has a partner, shareholder,
officer, or director who is, an officer or Trustee of the Trust, or a partner,
officer of director of the Investment Adviser or underwriter of the Trust, if
only customary fees are charged for services to the Trust; (e) sharing
statistical research, legal and management expenses and office hire and expenses
with any other investment company in which an officer or Trustee of the Trust,
or a partner, officer or director of the Investment Adviser or underwriter of
the Trust, is an officer or director or otherwise financially interested.
* * *
H&Q HEALTHCARE
INVESTORS
H&Q LIFE SCIENCES
INVESTORS
DIVIDEND
REINVESTMENT
PLAN
Dear Shareholder,
This brochure summarizes the Automatic Dividend Reinvestment Plans (each referred to as the "Plan") for shareholders of H&Q Healthcare Investors and of H&Q Life Sciences Investors (each referred to as the "Fund"). Under the Plan, your income dividends and capital gains distributions (collectively "Dividend") will be automatically paid to you in the form of additional shares of beneficial interest of the Fund, thereby providing you with a convenient way of acquiring additional shares of the Fund. State Street Bank & Trust Company serves as the Plan Agent.
The summary which follows is qualified to reference to the Terms and Conditions of the Plan. We hope this brochure will prove helpful in answering your questions about the Plan.
Sincerely,
/s/ Alan G. Carr
Alan G. Carr
President
|
The Fund and/or the Plan Agent may amend or terminate the Plan with at least 90 days written notice prior to the record date before such change becomes effective.
HOW DO I ENROLL IN THE PLAN?
No enrollment is necessary. Each registered shareholder is automatically enrolled in the Plan (unless the shareholder elects otherwise). Whenever the Fund declares a Dividend payable in shares, the Dividend will be automatically reinvested by the Plan Agent, in whole or fractional shares of the Fund, as the case may be.
WHAT IF MY SHARES ARE HELD BY A BROKER, BANK OR NOMINEE?
If your shares are held in the name of a broker, bank or nominee and such institution will not participate in the Plan, your account will be credited with a cash Dividend. In order to participate in the Plan through such an institution, it may be necessary for you to have your shares taken out of "street name" and re-registered in your own name. Once registered in your own name, your Dividend will be automatically reinvested.
HOW DOES THE DIVIDEND REINVESTMENT PLAN WORK?
When a Dividend is declared, participants in the Plan will receive the equivalent in shares of the Fund valued at the lower of the net asset value or market price as described below:
(1) If at the time of reinvestment, the market price of the Fund shares is equal to or exceeds net asset value, participants are issued shares valued at the greater of (i) the net asset value as most recently determined or (ii) 95% of the then current market price of the Fund shares. -or-
(2) If at the time of reinvestment, the market price of the Fund shares is lower than net
asset value, participants will receive shares from the Fund valued at market price.
Non-participants in the Plan will receive cash.
WILL THE ENTIRE AMOUNT OF MY DIVIDEND BE REINVESTED?
Yes. For any balance that is insufficient to purchase a whole share, the Plan Agent will credit your account with a fractional share interest computed to four decimal places. The fractional share interest is included for the payment of all subsequent Dividends, and you have voting rights on all full and fractional shares acquired under the Plan. However, if your shares are held by a broker, bank or nominee that participates in the Plan on your behalf, any amounts not sufficient to purchase a whole share may be credited to your account in cash in lieu of the fractional share interest.
WILL I BE ISSUED STOCK CERTIFICATES FOR TRANSACTIONS IN THE PLAN?
No. Shares issued under the Plan will automatically be held for safekeeping by the Plan Agent. Each transaction will be fully detailed in a comprehensive statement which will provide immediate confirmation of the current status of your account. All of the paperwork is done for you by the Plan Agent's computers, simplifying your recordkeeping. If a stock certificate is desired, it must be requested in writing for each transaction. Certificates will be issued only for whole shares.
ARE DIVIDENDS THAT ARE REINVESTED SUBJECT TO INCOME TAXES?
Yes. The automatic reinvestment of Dividends will not relieve participants of any income tax which may be payable on such Dividends and you will receive Form 1099 concerning the Federal tax status of Dividends paid during the year.
IS THERE ANY DIRECT CHARGE TO PARTICIPATE IN THE PLAN?
No. The Plan Agent's fees for handling the reinvestment of dividends will be paid for by the Fund.
HOW DO I REQUEST A CASH DIVIDEND OR DISCONTINUE PARTICIPATION IN THE PLAN?
If your shares are held in registered form, you must obtain an Authorization Card from the Plan Agent. If your shares are held by a broker, bank or nominee, you should contact the institution. Should you wish to discontinue your participation in the Plan, you must choose one of two options as indicated on the Authorization Card.
(1) You may request to receive a certificate for the number of full shares then held in your Plan account along with a check in payment for any fractional share interest you may have. The payment for the fractional share interest will be valued at the closing price of the Fund on the Friday previous to the date your discontinuance is effective.
-or-
(2) You may liquidate your reinvestment shares. If you wish to liquidate your reinvestment shares, the cost is $2.50
per transaction as well as the brokerage commission incurred. Brokerage charges are expected to be less than the usual brokerage charge for such transactions.
HOW DO PARTICIPATING SHAREHOLDERS BENEFIT?
[BULLET] You will build holdings in the Fund easily and automatically, at no brokerage cost.
[BULLET] If your shares are held in registered form, you will receive a detailed account statement from the Plan Agent showing total Dividends, shares acquired and price per share, and total shares of record held by you and by the Plan Agent for you.
[BULLET] As long as you participate in the Plan, the Plan Agent will hold the shares it has for you in safekeeping in book entry form. This convenience provides added protection against loss, theft, or inadvertent destruction of certificates.
OTHER QUESTIONS?
Other questions and correspondence concerning the Plan should be directed to the Plan Agent:
State Street Bank and Trust Company P.O. Box 8200 Boston, MA 02266-8200 Telephone: 1-800-426-5523
If your shares are not held registered in your name, you should contact your broker, bank or nominee for further assistance.
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND
REINVESTMENT
1. Each shareholder ("Shareholder") holding shares of beneficial interest ("Shares") of H&Q Healthcare Investors or of H&Q Life Sciences Investors (each referred to as the "Fund") will automatically be participants in the Dividend Reinvestment Plan (the "Plan"), unless the Shareholder specifically elects to receive all income dividends and capital gains distributions (collectively "Dividend") in cash paid by check mailed directly to the Shareholder by State Street Bank and Trust Company as Agent under the Plan (the "Agent"). The Agent will open an account for each Shareholder under the Plan in the same name in which such Shareholder's Shares are registered.
2. Whenever the Fund declares a Dividend payable in Shares or cash, participating Shareholders will take the Dividend entirely in Shares and the Agent will automatically receive the Shares, including fractions, for the Shareholder's account.
3. Whenever the market price per Share is equal to or exceeds net asset value at the time Shares are valued for the purpose for determining the number of Shares equivalent to the cash Dividend (the "Valuation Date"), participants will be issued Shares at the greater of (i) net asset value or (ii) 95% of the then current market price of the Shares. The Valuation Date is the Dividend payment date or, if that date is not a New York Stock Exchange (the "Exchange") trading day, the next trading day. If the net asset value of the Shares on the Valuation Date exceeds the market price of the Shares at that time, participants will receive shares from the Fund valued at market price.
4. For all purposes of the Plan: (a) the market price of the Shares on a particular date shall be the last sales price on the Exchange on that date or, if no sale occurred on the Exchange on that date, then the mean between the closing bid and asked quotations for the Shares on the Exchange
on such date and (b) net asset value per Share on a particular date shall be as determined by or on behalf of the Fund.
5. The Agent will hold Shares acquired pursuant to the Plan in book entry form in the Agent's name or that of its nominee. At no additional cost, as a participant in the Plan, you may send to the Agent for deposit into your Plan account those certificate Shares of the Fund now in your possession. These Shares will be combined with those book entry full and fractional Shares acquired under the Plan and held by the Agent. Shortly thereafter, you will receive a statement showing your combined holdings. The Agent will forward to the Shareholder any proxy solicitation material and will vote any Shares so held for the Shareholder only in accordance with the proxy returned by her or him to the Fund. [Upon the Shareholder's written request, the Agent will deliver to her or him, without charge, a certificate or certificates for the full Shares.]
6. The Agency will confirm to the Shareholder each transaction made for her or his account as soon as practicable but not later than 60 days after the date thereof. Although the Shareholder may, from time to time, have an individual fractional interest (computed to four decimal places) in a Share of the Fund, no certificates for a fractional Share will be issued. However, Dividends on fractional Shares will be credited to the Shareholder's account under the Plan.
7. Any stock dividends or split Shares distributed by the Fund on Shares held by the Agent for the Shareholder will be credited to the Shareholder's account. In the event that the Fund makes available to the Shareholder rights to purchase additional Shares or other securities, the Shares held for a shareholder under the Plan will be added to other Shares held by the Shareholder in calculating the number of rights to be issued to such Shareholder.
8. The Agent's service fee for handling Dividends will be paid by the Fund.
9. The Shareholder may terminate her or his account under the Plan by notifying the Agent in
writing. The Shareholder may rejoin the Plan at any time by notifying the Plan Agent by telephone. A termination will be effective immediately if notice is received by the Agent not less than 10 days prior to any Dividend record date; otherwise such termination or reinstatement will be effective, with respect to any subsequent Dividend, on the first trading day after a Dividend paid for the record date has been credited to the Shareholder's account. Upon any termination, the Agent will cause a certificate or certificates for the full Shares held for the Shareholder under the Plan and cash adjustment for any fraction to be delivered to her or him. If, the Shareholder elects by notice to the Agent in writing in advance of such termination to have the Agent sell part or all of her or his shares and remit the proceeds to her or him, the Agent is authorized to deduct $2.50 per transaction plus brokerage commissions for this transaction from the proceeds.
10. These terms and conditions may be amended or supplemented by the Agent or the Fund at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to the Shareholder appropriate written notice at least 90 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by the Shareholder unless, prior to the effective date thereof, the Agent receives written notice of the termination of the Shareholder account under the Plan. Any such amendment may include an appointment by the Fund of a successor agent in its place and stead under these terms and conditions, with full power and authority to perform all or any of the acts to be performed by the Agent. Upon any such appointment of any agent for the purpose of receiving Dividends, the Fund will be authorized to pay to such successor agent, for Shareholders' accounts, all Dividends payable on Shares held in the Shareholder's name or under the Plan for retention or application by such successor agent as provided in these terms and conditions.
11. In the case of Shareholders such as banks,
brokers or nominees which hold Shares for others who are the beneficial owners, the Agent will administer the Plan on the basis of the number of Shares certified from time to time by the Shareholders as representing the total amount registered in the Shareholder's name and held for the account of beneficial owners who are to participate in the Plan.
12. The Agent shall at all times act in good faith and agree to use its best efforts within reasonable limits to insure the accuracy of all services performed under this agreement and to comply with applicable law, but assumes no responsibility and shall not be liable for loss or damage due to errors unless the errors are caused by its negligence, bad faith or willful misconduct or that of its employees.
13. These terms and conditions shall be governed by the laws of the Commonwealth of Massachusetts.
(5/95)
H&Q HEALTHCARE
INVESTORS
H&Q LIFE SCIENCES
INVESTORS
Shareholder Inquiries to:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
Telephone: 1-800-426-5523
Investment Adviser:
Hambrecht & Quist Capital
Management Inc.
50 Rowes Wharf, 4th Floor
Boston, MA 02110-3328
H&Q HEALTHCARE INVESTORS
THIS INVESTMENT ADVISORY AGREEMENT, dated as of April 21, 1987 between H & Q HEALTHCARE INVESTORS, a Massachusetts business trust (the "Fund"), and HAMBRECHT & QUIST CAPITAL MANAGEMENT INCORPORATED, a California corporation (the "Investment Adviser"),
W I T N E S S E T H:
That in consideration of the mutual covenants herein contained, it is agreed as follows:
Subject to the supervision and direction of the Board of Trustees of the Fund, the Investment Adviser will
a. act in strict conformity with the Fund's Declaration of Trust, the Investment Company Act of 1940 (the "1940 Act") and the Investment Advisers Act of 1940, as the same may from time to time be amended;
b. manage the portfolio in accordance with the Fund's investment objective and policies as stated in the Fund's Prospectus;
c. make investment decisions for the Fund;
d. place purchase and sale orders for portfolio transactions for the Fund;
e. supply the Fund with office facilities (which may be in the Investment Adviser's own offices), statistical and research data, data processing services, clerical, internal executive and administrative services, and stationery and office supplies;
f. supply or direct and supervise a third party administrator or custodian in the provision to the Fund of accounting and bookkeeping services, the calculation of the net asset value of shares of the Fund, internal auditing services, and other clerical services in connection therewith; and
g. prepare or supervise and direct a third party administrator or custodian in the preparation of reports to shareholders of the Fund, tax returns and reports to and filings with the Securities and Exchange Commission and state Blue Sky authorities.
In providing these services, the Investment Adviser will provide investment research and supervision of the Fund's investment and conduct a continual program of investment, evaluation and, if appropriate, sale and reinvestment of the Fund's assets. In addition, the Investment Adviser will furnish the Fund with whatever statistical information the Fund may reasonably request with respect to the securities that the fund may hold or contemplate purchasing.
In executing transactions for the portfolio and selecting brokers or dealers (which brokers or dealers may include any affiliate of the Investment Adviser to the extent permitted by the 1940 Act) the Investment Adviser will use its best efforts to obtain the best price and execution for the Fund. In assessing the best price and execution available for any portfolio transaction, the Investment Adviser will consider all factors it deems relevant including, but not limited to, price (including any applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm involved and the firm's risk in positioning a block of securities. In selecting brokers or dealers to execute a particular transaction and in evaluating the best price and execution available, the Investment Adviser may consider the brokerage and research services (as those terms of are defined in Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund and/or other accounts over which the Investment Adviser exercises investment discretion. It is understood that such services may be useful to the Investment Adviser in connection with its services to other clients.
On occasions when the Investment Adviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients, the Investment Adviser, to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities to be sold or purchased in order to obtain the most favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Investment Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such other clients.
It is understood that any of the shareholders, Trustees, officers, agents and employees of the Fund may be a shareholder, director, officer, agent or employee of or be otherwise interested in the Investment Adviser and in any affiliate thereof with the Investment Adviser and that the Investment Adviser and any affiliate thereof with the Investment Adviser may have an interest in the Fund. It is also understood that the Investment Adviser and persons affiliated with the Investment Adviser have and may have advisory, management service or other contracts with other organizations and persons, and may have other interests and businesses and that the Fund shall have no
interest in the profits or opportunities derived from the same, that the Investment Adviser may give advice and take action in the performance of its duties with respect to such other clients that may differ from advice given on the timing or nature of action taken with respect to the Fund. Nothing in this Agreement shall be deemed to confer upon the Investment Adviser any obligation to acquire for the account of the Fund a position in any security that the Investment Adviser or any affiliate thereof may acquire for its own account or for the account of any other client, if in the sole and absolute discretion of the Investment Adviser it is not for any reason practical or desirable to acquire a position in such security for the Fund's account.
The Investment Adviser shall authorize and permit any of its officers, directors and employees who may be elected as Trustees or officers of the Fund to serve in the capacities in which they are elected. Services to be furnished by the Investment Adviser under this Agreement may be furnished through the medium of any of such officers, directors or employees.
The Fund acknowledges that the terms "Hambrecht & Quist" and "H&Q" are property rights of the Investment Adviser and its affiliates and that such entities may permit other entities to use such terms as part of their names. The Fund agrees that, if the Investment Adviser ceases to act as investment adviser to the Fund, the Fund's license to use the terms "Hambrecht & Quist" or "H&Q" as part of its name will terminate and the Fund will take all necessary actions to change its name to a name not including such terms.
The Fund will pay to the Investment Adviser as compensation for the Investment Adviser's services rendered a fee, computed monthly, equal when annualized to (1) 1.0% of the average net asset value for such month of all assets of the Fund other than venture capital and other restricted securities which do not exceed 25% of total net assets and (2) 2.5% of the average net asset value for such month of venture capital and other restricted securities of the Fund that constitute up to 25% of total net assets; provided that in no event shall such monthly fee when annualized exceed 1.375% of the average total net asset value for such month of the Fund. For purposes of this section, "average net asset value" and "average total net asset value" for any month shall be equal to the average of the net asset value of the appropriate assets at the last business day of such month and the net asset value of the appropriate assets at the last business day of the prior month. In determining average net asset value for purposes of clauses (1) and (2) above, liabilities and expenses of the Fund shall be allocated pro rata based on the ratio that the assets referred to in each clause bear to the total assets of the Fund. Such fee shall be payable for each month within five business days after the end of the such month.
For purposes of this Section 4, "venture capital and other restricted securities" shall be securities of issuers for which no market quotations are readily available and securities of companies for which market quotations are readily available but which are subject to legal or contractual restrictions on resale. Securities of companies for which public information is available but as to sale of which the safe harbor provided by Rule 144(k) is not available shall be considered to be subject to legal or contractual restrictions on resale.
In the event that expenses of the Fund for any fiscal year should exceed the expense limitation on investment company expenses imposed by any statute or regulatory authority of any jurisdiction in which shares of the Fund are qualified for offer and sale, the compensation due the Investment Adviser for such fiscal year shall be reduced by the amount of such excess by a reduction or refund thereof. In the event that the expenses of the Fund exceed any expense limitation which the Investment Adviser may, by written notice to the Fund, voluntarily declare to be effective subject to such terms and conditions as the Investment Adviser may prescribe in such notice, the compensation due the Investment Adviser shall be reduced and if necessary the Investment Adviser shall assume expenses of the Fund, to the extent required by such expense limitation. In no event shall the provisions of this Section 4 require the Investment Adviser to reduce its fee if not so required by an applicable statute or regulatory authority.
If the Investment Adviser shall serve for less than the whole of a month, the foregoing compensation shall be prorated.
The Investment Adviser will bear all expenses in connection with the performance of its services under this Agreement, including compensation of and office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as the fees of all Trustees of the Fund who are "affiliated persons" of the Investment Adviser, as that term is defined in the 1940 Act, or any of its "affiliated persons."
The Fund shall pay (or, in the event that such expenses are paid by the Investment Adviser, shall reimburse the Investment Adviser for) all other expenses incurred in the organization and operation of the Fund including, among other things, expenses for legal and auditing services, costs of printing proxy statements, prospectuses, stock certificates and shareholder reports, charges of the custodian, any sub-custodian and transfer agent, expenses in connection with the Dividend Reinvestment and Cash Purchase plan, Securities and Exchange Commission and National Association of Securities Dealers, Inc. fees, fees and expenses of Trustees of the Trust who are not "affiliated persons" of the Investment Adviser or any of its "affiliated persons," accounting and valuation costs, administrator's fees membership fees in trade associations, fidelity bond coverage for the Fund's officers and employees, errors and omissions insurance
coverage for Trustees and officers, interest, brokerage costs, taxes, stock exchange listing fees and expenses, expenses of qualifying the Fund's shares for sale in various states, expenses associated with personnel performing exclusively shareholder servicing functions, certain other organization expenses and litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Fund.
This Agreement shall automatically terminate, without the payment of any penalty in the event of its assignment, and this Agreement shall not be amended unless such amendment is approved at a meeting by the affirmative vote of a majority of the outstanding shares of the Fund, and by the vote cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Trustees of the Fund who are not interested persons of the Fund or of the Investment Adviser.
This Agreement shall become effective upon its execution, and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 6) until terminated as follows:
a. Either party hereto may at any time terminate this Agreement by not less than thirty days' nor more than sixty days' written notice delivered or mailed by registered mail, postage prepaid, to the other party; or
b. If (i) the Trustees of the Fund or the shareholders by the affirmative vote of a majority of the outstanding shares of the Fund and (ii) a majority of the Trustees of the Fund who are not interested persons of the Fund or of the Investment Adviser, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on April 21, 1988 or the expiration of one year from the effective date of the last such continuance, whichever is later.
Action by the Fund under (a) above may be taken either by (i) vote of a majority of its Trustees, or (ii) by the affirmative vote of a majority of the outstanding shares of the Fund.
Termination of this Agreement pursuant to this Section 7 shall be without the payment of any penalty.
For the purposes of this Agreement, the "affirmative vote of a majority
of outstanding shares of the Fund" means the affirmative vote, at a duly called
and held meeting of shareholders of the Fund, (a) of the holders of 67% or more
of the shares of the Fund present (in person or by proxy) and entitled to vote
at such meeting, if the holders of more than 50% of the outstanding shares of
the Fund entitled to vote at such meeting are present in person or by proxy, or
(b) of the holders of more than 50% of the outstanding shares of the Fund
entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person," "control," "interested person" and "assignment" shall have their respective meanings defined in the Investment Company Act of 1940 and the Rules and Regulations thereunder, subject, however to such exemptions as may be granted by the Securities and Exchange Commission under said Act; the term "specifically approve at least annually" shall be construed in a manner consistent with the Investment Company Act of 1940 and the Rules and Regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities and Exchange Act of 1934 and the Rules and Regulations thereunder.
The Investment Adviser shall not be held responsible for any loss
incurred by any act or omission of any broker. The Investment Adviser also shall
not be liable to the Fund or to any shareholder of the Fund for any error or
judgment or for any loss suffered by the Fund in connection with rendering
services hereunder except (a) a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services (in which case any
award of damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act) or (b) a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment
Adviser, or reckless disregard of its obligations and duties hereunder. Subject
to the foregoing, the Fund also shall indemnify the Investment Adviser, and any
officer, director and employee thereof to the maximum extent permitted by
Article V of the Fund's Declaration of Trust.
A copy of the Declaration of Trust of the Fund is on file with the Secretary of the Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Trustees of the Fund as Trustees and not individually and that the obligations of this instrument are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of the Fund.
During the term of this Agreement, the Fund agrees to furnish the Investment Adviser at its principal executive office all prospectuses, proxy statements, report to shareholders, sales literature, or other material prepared for distribution to shareholders of the Fund or the public, which refer to the Investment Adviser in any way, prior to use thereof and not to use such material if the Investment Adviser reasonably objects in writing within five business days (or such other time as may be mutually agreed) after receipt thereof. In the event of termination of this Agreement, the Fund will continue to furnish to the Investment Adviser copies of any of the above-mentioned materials which refer in any way to the Investment Adviser. The Fund shall furnish or otherwise make available to the Investment Adviser such other information relating to the business affairs of the Fund as the Investment Adviser at any time, or from time to time, reasonably requests in order to discharge its obligations hereunder.
This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, H&Q Healthcare Investors and Hambrecht & Quist Capital Management Incorporated have each caused this instrument to be signed in duplicate in its behalf by its President or a Vice President thereunto duly authorized, all as of the date first hereinabove written.
H&Q HEALTHCARE INVESTORS
HAMBRECHT & QUIST CAPITAL
MANAGEMENT INCORPORATED
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report (and to all references to our firm) included in or made a part of this registration statement.
Boston, Massachusetts
January 3, 1997
| ARTICLE 6 |
| 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. |
| SERIES: |
| NUMBER: 1 |
| NAME: H&Q HEALTHCARE INVESTORS |
| 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 |