As filed with the Securities and Exchange Commission on October 16, 1996
File Nos. ________
________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
THE HIGHLAND FAMILY OF FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
1248 POST ROAD, FAIRFIELD, CT 06430
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 203-319-3310
CATHERINE C. LAWSON, 1248 POST ROAD, FAIRFIELD, CT 06430
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH, BINGHAM, DANA & GOULD LLP, 150 FEDERAL STREET,
BOSTON, MA 02110
Approximate Date of Proposed Public Offering: As soon as practicable after
the effectiveness of the registration under the Securities Act of 1933.
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 Section 8(a), may
determine.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended, Registrant hereby elects to register an indefinite number of shares of
Registrant and any series thereof hereinafter created.
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<PAGE>
THE HIGHLAND FAMILY OF FUNDS
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. N-1A ITEM LOCATION
PART A PROSPECTUS
<S> <C> <C>
Item 1. Cover Page................................... Cover Page
Item 2. Synopsis..................................... Expense Summary
Item 3. Condensed Financial Information.............. Not Applicable
Item 4. General Description of Registrant............ Investment Objectives, Policies
and Risk Considerations; General
Information
Item 5. Management of the Fund....................... Management of the Funds;
Expense Summary
Item 5A. Management's Discussion of Fund Performance.. Not Applicable
Item 6. Capital Stock and Other Securities........... General Information
Item 7. Purchase of Securities Being Offered......... Pricing of Fund Shares; How to
Purchase Shares
Item 8. Redemption or Repurchase..................... How to Redeem Shares
Item 9. Pending Legal Proceedings.................... Not Applicable
STATEMENT OF
ADDITIONAL
PART B INFORMATION
Item 10. Cover Page................................... Cover Page
Item 11. Table of Contents............................ Cover Page
Item 12. General Information and History.............. Additional Company Information
Item 13. Investment Objectives and Policies........... Additional Investment
Information
Item 14. Management of the Fund....................... Additional Company Information
Item 15. Control Persons and Principal Holders of
Securities................................... Additional Company Information
Item 16. Investment Advisory and Other Services....... Additional Company Information
Item 17. Brokerage Allocation and Other Practices..... Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities........... Description of Shares
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered..................... Description of Shares;
Determination of Net Asset Value
Item 20. Tax Status................................... Taxes
Item 21. Underwriters................................. Additional Company Information
Item 22. Calculation of Performance Data.............. Performance Information
Item 23. Financial Statements......................... Not applicable
</TABLE>
PART C Information required to be included in Part C is
set forth under the appropriate Item, so
numbered, in Part C to this Registration
Statement.
<PAGE>
PROSPECTUS
____________, 1997
THE HIGHLAND FAMILY OF FUNDS (the "Company") is a no-load, open-end management
investment company, commonly known as a mutual fund. The Company presently
consists of two diversified investment portfolios, HIGHLAND GROWTH FUND and
HIGHLAND AGGRESSIVE GROWTH FUND, designed to offer investors equity-oriented
investment opportunities. Each investment portfolio is individually referred to
as a "Fund" and collectively as the "Funds."
HIGHLAND GROWTH FUND seeks long-term capital appreciation. The Growth Fund
invests primarily in equity securities of companies believed by the Fund's
investment adviser to have the potential for above-average long-term growth.
The Growth Fund invests in companies of all sizes. HIGHLAND AGGRESSIVE GROWTH
FUND seeks capital appreciation. The Aggressive Growth Fund invests primarily
in equity securities of companies believed by the Fund's investment adviser to
have the potential for above-average growth in market value. The Aggressive
Growth Fund emphasizes companies with market capitalizations of less than $1
billion.
Highland Investment Group L.P. serves as the investment adviser to the Funds.
Catherine C. Lawson, co-founder and Chief Investment Officer of Highland
Investment Group L.P., manages the investment program of the Funds and is
primarily responsible for the day-to-day management of each Fund's portfolio.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK OR INSURED DEPOSITARY INSTITUTION, NOR ARE THEY INSURED
OR OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER AGENCY. INVESTMENTS IN MUTUAL FUNDS INVOLVE INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Funds that you
should know before investing. You are advised to read this Prospectus carefully
and keep it for future reference.
A Statement of Additional Information, dated ________, 1997, which is
incorporated herein by reference, has been filed with the Securities and
Exchange Commission. The Statement of Additional Information, which may be
revised from time to time, contains further information about the Funds and is
available, without charge, by writing to the Funds at Two Portland Square,
Portland, Maine 04101, or calling 1-800-________.
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.
<PAGE>
TABLE OF CONTENTS
PAGE
Expense Summary
The Highland Family of Funds
Investment Objectives, Policies and Risk Considerations
Investment Limitations
Management of the Funds
Pricing of Fund Shares
How to Purchase Shares
How to Exchange Shares
How to Redeem Shares
Dividends and Distributions
Shareholder Reports and Information
Taxes
General Information
Fund Performance
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Funds. This Prospectus does not constitute an offering by the
Funds in any jurisdiction in which such offering may not lawfully be made.
<PAGE>
EXPENSE SUMMARY
The following table is designed to assist you in understanding the expenses you
will bear directly or indirectly as a shareholder of a Fund. Shareholder
Transaction Expenses are charges that you pay when buying or selling shares of
a Fund. Annual Fund Operating Expenses are paid out of a Fund's assets and
include fees for portfolio management, general Fund administration, shareholder
servicing, accounting and other services. Annual Fund Operating Expenses are
the expenses expected to be incurred by each Fund during the current fiscal
year. Actual total operating expenses may be higher or lower than those
indicated. An example based on the summary is shown below.
Highland Highland Aggressive
Growth Fund Growth Fund
Shareholder Transaction Expenses
Maximum Sales Load Imposed
on Purchases None None
Maximum Sales Load Imposed
on Reinvested Dividends None None
Deferred Sales Load Imposed
on Redemptions None None
Redemption Fees* None None
Exchange Fees None None
*There is a $10 service fee for each wire redemption.
Annual Operating Expenses
(as a percentage of average net assets)
Management Fees(1) 1.15% 1.35%
12b-1 Fees(2) None None
Other Expenses (net of reimbursement)(1) 0.80% 0.60%
Total Operating Expenses (net of
reimbursement)(1) 1.95% 1.95%
(1)The Funds' investment adviser has voluntarily agreed to limit the total
operating expenses of each Fund (excluding interest, taxes, brokerage and
extraordinary expenses) to an annual rate of 1.95% of each Fund's average net
assets until January 1, 1998. After such date, the expense limitation may be
terminated or revised at any time. The Funds estimate that absent the
limitation, Other Expenses of the Growth and Aggressive Growth Funds would be
approximately .85%, and .65%, respectively, and Total Annual Operating
Expenses would be approximately 2.00%, and 2.00%, respectively.
(2)The Funds' Distribution Plan permits the imposition of a 12b-1 fee not to
exceed 0.25% of each Fund's net assets. There is no current intention to impose
this fee with respect to either Fund, and shareholders of a Fund will be given
at least 60 days written notice before any such fee is imposed by that Fund.
<PAGE>
Example
Based on the foregoing table, you would pay the following expenses on a $1,000
investment, assuming (i) a 5% annual return and (ii) redemption at the end of
each time period:
Aggressive
Growth Fund Growth Fund
One Year $20 $20
Three Years $60 $60
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. THE FUNDS ARE NEWLY ORGANIZED, AND ACTUAL
OPERATING EXPENSES AND INVESTMENT RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
Information about the actual performance of the Funds will be contained in the
Funds' Annual Report to shareholders, which may be obtained without charge when
available.
THE HIGHLAND FAMILY OF FUNDS
The Highland Family of Funds (the "Company") is a no-load, open-end management
investment company, commonly known as a mutual fund, which is registered under
the Investment Company Act of 1940 (the "1940 Act"). The Company presently
consists of two diversified investment portfolios: Highland Growth Fund and
Highland Aggressive Growth Fund (each investment portfolio is individually
referred to as a "Fund" and collectively as the "Funds"). The Funds offer
investors equity-oriented investment opportunities.
Each Fund continuously sells its shares to the public. Proceeds from such sales
are invested by the Fund in securities of other companies. The resources of
many investors are thus combined and each individual investor has an interest
in every one of the securities owned, thereby providing diversification in a
variety of industries. Highland Investment Group L.P. (the "Adviser") serves as
the Funds' investment adviser, selecting and managing the Funds' investments.
As portfolios of an open-end investment company, the Funds will redeem their
outstanding shares on demand of the owner at the next determined net asset
value, subject to certain limitations. Registration of the Funds under the 1940
Act does not involve supervision of the Funds' management or policies by the
Securities and Exchange Commission.
INVESTMENT OBJECTIVES, POLICIES
AND RISK CONSIDERATIONS
General
The investment objective of Highland Growth Fund is long-term capital
appreciation. The investment objective of Highland Aggressive Growth Fund is
capital appreciation. Each Fund pursues its investment objective by investing
primarily in equity securities subject to certain separate investment policies
described below. Equity securities are common stocks, preferred stocks,
warrants to purchase common stocks or preferred stocks, and securities
convertible into common or preferred stocks. When selecting securities, the
Adviser will consider certain criteria including, but not limited to, (1) the
prospects for a company's product, (2) the potential for the company's
industry, (3) management ability, (4) the relationship of the price of the
security to its estimated value, and (5) relevant market, economic and
<PAGE>
political considerations. The Funds may invest in securities of issuers still
in the development stage, older issuers that appear to be entering a new era of
growth due to management changes, development of new technology or other
events, or issuers with high growth rates.
Because shares of each Fund represent an investment in securities with
fluctuating market prices, you should understand that the net asset value per
share of each Fund will vary as the aggregate value of a Fund's portfolio
securities increases or decreases. An investment in the Funds should be
considered a long-term investment. The Funds are not designed to meet
investors' short-term financial needs, nor is any single Fund or a combination
of the Funds intended to provide a complete or balanced investment program.
The investment objectives, policies and practices of each Fund, unless
otherwise specifically stated, are not fundamental and may be changed by the
Funds' Trustees without shareholder approval. See "Investment Limitations."
Because of the risks inherent in all investments, there can be no assurance
that the objectives of the Funds will be met. The descriptions that follow are
designed to help you choose the Fund that best fits your investment goals.
HIGHLAND GROWTH FUND. The investment objective of the Highland Growth Fund is
long-term capital appreciation. The Fund seeks to achieve this objective by
investing in companies that the Adviser believes to have the potential for
above-average long-term growth in market value. The Adviser will focus
generally on investments in companies that have innovative new products and
services, strong management teams and strong financial condition. The Adviser
will also focus on companies which have a unique capability, whether it be new
product development, research and development expertise or marketing advantage,
which the Adviser believes should provide the potential for the company to
sustain its growth rate over several years. In selecting investments for the
Highland Growth Fund, the Adviser may select companies of all sizes. See "Other
Investment Policies and Risks."
HIGHLAND AGGRESSIVE GROWTH FUND. The investment objective of the Highland
Aggressive Growth Fund is capital appreciation. The Fund seeks to achieve this
objective by investing in companies that the Adviser believes to have the
potential for above-average growth in market value. The Adviser will focus
generally on investments in companies that have strong management teams and
that the Adviser perceives to have characteristics that could allow for rapid
growth over the next few years. These companies may still be in the
developmental stage and may have limited product lines. Although the Fund may
invest in companies of all sizes, the Fund, under normal market conditions,
emphasizes equity securities of companies that, at the time of the Fund's
purchase, have market capitalizations of less than $1 billion. See "Other
Investment Policies and Risks."
Other Investment Policies and Risks
In addition to the investment policies described above (and subject to certain
restrictions described below), each of the Funds may invest in the following
securities and may employ some or all of the following investment techniques,
some of which may present special risks as described below. A more complete
discussion of certain of these securities and investment techniques and the
associated risks is contained in the Statement of Additional Information.
<PAGE>
Smaller Capitalization Companies. Each Fund may invest a substantial portion of
its assets in companies with modest capitalization, as well as start-up
companies. While the Adviser believes that small- and medium-sized companies,
as well as start-up companies, often can provide greater growth potential than
larger, more mature companies, investing in the securities of such companies
also involves greater risk, potential price volatility and cost. These
companies often involve higher risks because they lack the management
experience, financial resources, product diversification, markets, distribution
channels and competitive strengths of larger companies. In addition, in many
instances, the frequency and volume of trading of their securities is
substantially less than is typical of larger companies. Therefore, the
securities of smaller companies as well as start-up companies may be subject to
wider price fluctuations. The spreads between the bid and asked prices of the
securities of these companies in the U.S. over-the-counter market typically are
larger than the spreads for more actively traded securities. As a result, a
Fund could incur a loss if it determined to sell such a security shortly after
its acquisition. When making large sales, a Fund may have to sell portfolio
holdings at discounts from quoted prices or may have to make a series of small
sales over an extended period of time due to the trading volume of smaller
company securities.
Investors should be aware that, based on the foregoing factors, an investment
in the Funds may be subject to greater price fluctuations than an investment in
a fund that invests primarily in larger, more established companies. The
Adviser's research efforts may also play a greater role in selecting securities
for the Funds than in a fund that invests in larger, more established
companies.
Foreign Securities. Each Fund may invest without limitation in foreign
securities, including sponsored and unsponsored depository receipts.
Investments in foreign securities involve special risks and costs which are in
addition to those inherent in domestic investments. Political, economic or
social instability of the issuer or the country of issue, the possibility of
expropriation or confiscatory taxation, limitations on the removal of assets or
diplomatic developments, and the possibility of adverse changes in investment
or exchange control regulations are among the inherent risks. Enforcing legal
rights may be difficult, costly and slow in non-U.S. countries, and there may
be special problems enforcing claims against non-U.S. governments. Foreign
companies are not subject to the regulatory requirements of U.S. companies and,
as such, there may be less publicly available information about such companies.
Moreover, foreign companies are not subject to uniform accounting, auditing and
financial reporting standards and requirements comparable to those applicable
to U.S. companies. Non-U.S. markets may be less liquid and more volatile than
U.S. markets, and may offer less protection to investors such as the Funds.
Dividends and interest payable on a Fund's foreign portfolio securities may be
subject to foreign withholding taxes. To the extent such taxes are not offset
by credits or deductions allowed to investors under U.S. federal income tax
law, such taxes may reduce the net return to shareholders. See "Taxes" in the
Statement of Additional Information.
Because non-U.S. securities often are denominated in currencies other than the
U.S. dollar, changes in currency exchange rates will affect a Fund's net asset
value, the value of dividends and interest earned on gains and losses realized
on the sale of securities. In addition, some non-U.S. currency values may be
volatile and there is the possibility of governmental controls on currency
exchanges or governmental intervention in currency markets. Because of these
and other factors, securities of foreign companies acquired by the Funds may be
subject to greater fluctuation than securities of domestic companies.
<PAGE>
The costs attributable to non-U.S. investing, such as the costs of maintaining
custody of securities in non-U.S. countries, frequently are higher than those
attributable to U.S. investing. As a result, the operating expense ratios of
the Funds may be higher than those of investment companies investing
exclusively in U.S. securities.
American Depository Receipts ("ADRs") typically are issued by a U.S. bank or
trust company and evidence ownership of underlying securities issued by a
foreign corporation. Unsponsored ADRs differ from sponsored ADRs in that the
establishment of unsponsored ADRs are not approved by the issuer of the
underlying securities. As a result, available information concerning the issuer
may not be as current or reliable as the information for sponsored ADRs, and
the price of unsponsored ADRs may be more volatile.
Each Fund may invest in securities of issuers in developing countries, and all
of these risks are increased for investments in issuers in developing
countries.
Hedging Strategies. The Funds may use various hedging strategies to attempt to
reduce the overall level of risk for an individual security, or group of
securities, or to reduce the investment risk of the Funds. There can be no
assurance that such efforts will succeed. Each Fund may write (i.e., sell)
covered call and secured put options, and buy put or call options, which are
sometimes referred to as derivatives, for hedging purposes. These options may
relate to particular securities or stock indices, and may or may not be listed
on a securities exchange and may or may not be issued by the Options Clearing
Corporation. Each Fund will not purchase put and call options where the
aggregate premiums on its outstanding options exceed 5% of its net assets at
the time of purchase, and will not write options on more than 25% of the value
of its net assets (measured at the time an option is written). Options trading
is a highly specialized activity that entails greater than ordinary investment
risks. Unlisted options are not subject to the protections afforded purchasers
of listed options issued by the Options Clearing Corporation, which performs
the obligations of its members if they default. The primary risks associated
with the use of options are: (1) the imperfect correlation between the change
in market value of the instruments held by a Fund and the price of the option;
(2) possible lack of a liquid secondary market; (3) losses caused by
unanticipated market movements; and (4) the Adviser's ability to predict
correctly the direction of securities prices and economic factors. For further
discussion of risks involved with the use of options, see "Additional
Investment Information - Hedging Strategies" in the Statement of Additional
Information.
Currency Exchange Contracts. Each Fund may enter into forward foreign currency
exchange contracts for the purchase or sale of non-U.S. currency for hedging
purposes against adverse rate changes or otherwise to achieve the Fund's
investment objective. A currency exchange contract allows a definite price in
dollars to be fixed for securities of non-U.S. issuers that have been purchased
or sold (but not settled) for the Fund. Entering into such exchange contracts
may result in the loss of all or a portion of the benefits which otherwise
could have been obtained from favorable movements in exchange rates. In
addition, entering into such contracts means incurring certain transaction
costs and bearing the risk of incurring losses if rates do not move in the
direction anticipated.
Warrants and Rights. Each Fund may invest up to 5% of its net assets in
warrants or rights, valued at the lower of cost or market, which entitle the
holder to buy equity securities during a specific period of time. A Fund will
make such investments only if the underlying equity securities are deemed
<PAGE>
appropriate by the Adviser for inclusion in a Fund's portfolio. Included in the
5% amount, but not to exceed 2% of net assets, are warrants and rights whose
underlying securities are not traded on principal domestic or foreign
exchanges. Warrants and rights acquired by a Fund in units or attached to
securities are not subject to these restrictions.
Convertible Securities. Each Fund may invest in securities which may be
converted, either at a stated price or rate within a specified period of time,
into a specified number of shares of common stock. By investing in convertible
securities, a Fund seeks the opportunity, through the conversion feature, to
participate in a portion of the capital appreciation of the common stock into
which the securities are convertible, while earning higher current income than
is available from the common stock. Typically, the convertible debt securities
in which the Funds will invest will be of a quality less than investment grade
(so-called "junk bonds"). The Funds will not acquire convertible debt
securities rated below B by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P"), or securities deemed by the Adviser to
be of comparable quality. Subsequent to its purchase by a Fund, a rated
security may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by a Fund. The Adviser will consider such an event
in determining whether the Fund should continue to hold the security. The
Adviser expects, however, to sell promptly any convertible debt securities that
fall below a B rating quality as a result of these events. See the Statement of
Additional Information for a description of applicable debt ratings.
Investments in fixed income securities offering higher current income,
while generally providing greater income and opportunity for gain than
investments in higher rated securities, usually entail greater risk of
principal and income (including the possibility of default or bankruptcy of the
issuers of such securities), and involve greater volatility of price
(especially during periods of economic uncertainty or change) than investments
in higher rated securities and because yields may vary over time, no specific
level of income can ever be assured. In particular, securities rated lower than
Baa by Moody's or BBB by S&P or comparable securities (commonly known as "junk
bonds") are considered speculative. These lower rated high yielding fixed
income securities generally tend to reflect economic changes (and the outlook
for economic growth), short-term corporate and industry developments and the
market's perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in interest
rates have under certain circumstances caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on
the Funds' lower rated fixed income securities are paid primarily because of
the increased risk of loss of principal and income, arising from such factors
as the heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, the Funds may
continue to earn the same level of interest income while their net asset value
declines due to portfolio losses. The prices for these securities may be
<PAGE>
affected by legislative and regulatory developments. Changes in the value of
securities subsequent to their acquisition will not affect cash income to a
Fund but will be reflected in the net asset value of shares of the Fund. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities at their fair value to meet redemption requests or to respond to
changes in the market.
Money Market Instruments. In times when the Adviser believes that adverse
economic or market conditions justify such actions, each Fund may invest
temporarily up to 100% of its assets in cash and high quality short-term and
money market instruments. The Funds may also invest in such instruments pending
investment, to meet anticipated redemption requests, and/or to retain the
flexibility to respond promptly to changes in market and economic conditions.
It is impossible to predict when or for how long the Adviser may employ these
strategies.
Each of the Funds may invest in commercial paper and other cash equivalents
rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, commercial paper
master notes (which are demand instruments bearing interest at rates which are
fixed to known lending rates and automatically adjusted when such lending rates
change) of issuers whose commercial paper is rated A-1 or A-2 by S&P or Prime-1
or Prime-2 by Moody's, and debt securities which are deemed by the Adviser to
be of comparable quality. Each of the Funds may also invest in United States
Treasury Bills and Notes, instruments issued by U.S. government agencies or
instrumentalities, certificates of deposit of domestic branches of U.S. and
foreign banks and corporate bonds with remaining maturities of 13 months or
less. For debt obligations other than commercial paper, these securities are
limited to those rated at least Aa by Moody's or AA by S&P, or deemed by the
Adviser to be of comparable quality.
Each Fund's investment in money market instruments may also include securities
issued by other investment companies that invest in high quality, short-term
debt securities (i.e., money market instruments). In addition to the advisory
fees and other expenses a Fund bears directly in connection with its own
operations, as a shareholder of another investment company, a Fund would bear
its pro rata portion of the other investment company's advisory fees and other
<PAGE>
expenses, and such fees and other expenses will be borne indirectly by the
Fund's shareholders.
Repurchase Agreements. Each Fund may enter into repurchase agreements. In a
repurchase agreement, a Fund buys an interest-bearing security at one price and
simultaneously agrees to sell it back at a mutually agreed upon time and price.
The repurchase price reflects an agreed-upon interest rate during the time the
Fund's money is invested in the security. Since the security purchased
constitutes security for the repurchase obligation, a repurchase agreement can
be considered as a loan collateralized by the security purchased. The Fund's
risk is the ability of the seller to pay the agreed-upon price on the delivery
date. If the seller defaults, the Fund may incur costs in disposing of the
collateral, which would reduce the amount realized thereon. If the seller seeks
relief under the bankruptcy laws, the disposition of the collateral may be
delayed or limited. To the extent the value of the security decreases, the Fund
could experience a loss. Repurchase agreements will be acquired in accordance
with procedures established by the Funds' Trustees which are designed to
evaluate the creditworthiness of the other parties to the repurchase
agreements.
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held
by the Fund and the agreement by the Fund to repurchase the securities at an
agreed-upon price, date and interest payment. When a Fund enters into reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. The segregation of assets could impair the Fund's
ability to meet its current obligations or impede investment management if a
large portion of the Fund's assets are involved.
Rule 144A Securities. Each Fund may purchase restricted securities that are not
registered for sale to the general public if it is determined that there is a
dealer or institutional market in the securities. In that case, the securities
will not be treated as illiquid for purposes of the Fund's investment
limitations. The Trustees will review these determinations. These securities
are known as "Rule 144A securities," because they are traded under SEC Rule
144A among qualified institutional buyers. Institutional treading in Rule 144A
securities is relatively new, and the liquidity of these investments could be
impaired if trading in Rule 144A securities does not develop or if qualified
institutional buyers become, for a time, uninterested in purchasing Rule 144A
securities.
Private Placements and Illiquid Investments. Each Fund may invest up to 15% of
its net assets in securities for which there is no readily available market.
These illiquid securities may include privately placed restricted securities
for which no institutional market exists. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments may involve time consuming negotiation and
legal expenses, and it may be difficult or impossible for a Fund to sell them
promptly at an acceptable price.
"When-Issued" Securities. In order to ensure the availability of suitable
securities, each Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund takes delivery of the securities. In general, the Fund
does not pay for the securities until received and does not start earning
interest until the contractual settlement date. While awaiting delivery of the
securities, the Fund establishes a segregated account consisting of cash, cash
<PAGE>
equivalents or high quality debt securities equal to the amount of the Fund's
commitments to purchase "when-issued" securities. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a "when-issued"
basis may increase the volatility of its net asset value.
Short Sales Against the Box. If a Fund anticipates that a price of a security
will decline, it may engage in short sales if, at the time of the short sale,
the Fund owns or has the right to acquire an equal amount of the security being
sold short at no additional cost (so-called "short sales against the box").
Portfolio Turnover. The Adviser will generally purchase and sell securities
without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover for each
Fund may be substantial. The Adviser intends to purchase a given security
whenever it believes it will contribute to the stated objective of a Fund, even
if the same security has only recently been sold. In selling a given security,
the Adviser keeps in mind that profits from sales of securities held less than
three months must be limited in order to meet the requirements of Subchapter M
of the Internal Revenue Code. The amount of brokerage commissions and
realization of taxable capital gains will tend to increase as the level of
portfolio activity increases. For the fiscal year ending December 31, 1997, the
Growth Fund's portfolio turnover rate is not expected to exceed 200% and the
Aggressive Growth Fund's portfolio turnover rate is not expected to exceed
400%.
Brokerage Transactions. In connection with the selection of brokers or dealers
for securities transactions for the Funds and the placing of such orders,
brokers or dealers may be selected who also provide brokerage and research
services to the Funds or the other accounts over which the Adviser exercises
investment discretion. The Adviser is authorized to pay a broker or dealer who
provides such brokerage and research services a commission for executing a
portfolio transaction for a Fund which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction if
the Adviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment restrictions that may be
changed only with the approval by a majority of the Fund's outstanding shares
(as defined in the 1940 Act). The following description summarizes several of
the Funds' fundamental restrictions which have been adopted to maintain
portfolio diversification and attempt to reduce risk.
No Fund may:
1. purchase the securities of any issuer if the purchase would cause more than
5% of the value of the Fund's total assets to be invested in securities of any
one issuer (except securities of the U.S. government or any agency or
instrumentality thereof), or purchase more than 10% of the outstanding voting
securities of any one issuer, except that up to 25% of the Fund's total assets
may be invested without regard to these limitations;
2. invest 25% or more of its total assets at the time of purchase in
securities of issuers whose principal business activities are in the same
industry; and
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3. borrow money except for temporary purposes in amounts up to 33 1/3% of the
value of its total assets at the time of borrowing.
A list of the Funds' investment policies and restrictions, both fundamental and
non-fundamental, is set forth in the Statement of Additional Information. In
order to provide a degree of flexibility, the Funds' investment objectives, as
well as other policies which are not deemed fundamental, may be modified by the
Funds' Trustees without shareholder approval. Any change in a Fund's investment
objective may result in the Fund having investment objectives different from
the objectives which the shareholder considered appropriate at the time of
investment in the Fund. However, each Fund will not change its investment
objective without written notice to shareholders sent at least 30 days in
advance of any such change.
MANAGEMENT OF THE FUNDS
The Funds are supervised by their Board of Trustees. A majority of the Trustees
are not affiliated with the Adviser. More information on the Trustees and
officers of the Funds appears under "Additional Company Information" in the
Statement of Additional Information.
Investment Adviser
The Adviser was organized on May 19, 1995 as a Delaware limited partnership.
The Adviser's principal business address is 1248 Post Road, Fairfield, CT
06430. Catherine C. Lawson, the Chairman and Chief Investment Officer of the
Adviser, has been the portfolio manager for each of the Funds since their
inception. Ms. Lawson, a Chartered Financial Analyst, has more than 25 years of
experience as a securities analyst and portfolio manager. She served as the
portfolio manager of the Dreyfus Convertible Securities Fund from 1990 to 1993.
From 1984 to 1989, she was a Vice President of Nationar, Inc. (formerly Savings
Bank Trust Company), where she was the portfolio manager of the MSB Fund and
the Institutional Family of Funds. The Adviser has no prior experience managing
mutual funds.
The Company, on behalf of each of the Funds, has entered into an investment
advisory agreement with the Adviser (the "Investment Advisory Agreement").
Pursuant to such Investment Advisory Agreement, the Adviser supervises and
manages the investment portfolios of the Funds, and subject to such policies as
the Board of Trustees of the Company may determine, directs the purchase or
sale of investment securities in the day-to-day management of the Funds'
investment portfolios. Under the Investment Advisory Agreement, the Adviser, at
its own expense and without reimbursement from the Funds, furnishes office
space and all necessary office facilities, equipment and executive personnel
for making the investment decisions necessary for managing the Funds, and pays
the salaries and fees of all Trustees and officers of the Funds (except the
fees paid to disinterested Trustees). For the foregoing, the Adviser receives a
fee, which is accrued daily and paid monthly, 1.15% of the average daily net
assets of the Highland Growth Fund and 1.35% of the average daily net assets of
the Highland Aggressive Growth Fund, in each case on an annualized basis for
the Funds' then-current fiscal year. These advisory fees are higher than those
paid by most mutual funds.
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Administration
Pursuant to an Administration Agreement, Forum Administrative Services, LLC
(the "Administrator") acts as administrator for the Funds. The Administrator,
at its own expense and without reimbursement from the Funds, furnishes office
facilities, equipment, supplies and clerical and executive personnel for
performing the services required to be performed by it under the Administration
Agreement. For its administrative services (which include clerical, compliance,
regulatory and other services), the Administrator receives from each Fund a
fee, computed daily and payable monthly, at an annual rate of 10 basis points
(0.10%) on the first $100 million of each Fund's average net assets and 5 basis
points (0.05%) on the balance of each Fund's average net assets, subject to a
minimum annual fee of $40,000.
Forum Financial Corp., an affiliate of the Administrator, acts as the transfer
agent and dividend disbursing agent for the Funds. Forum Financial Corp. also
provides fund accounting services and calculates each Fund's net asset value
per share. The principal business address of Forum Financial Corp. is Two
Portland Square, Portland, Maine 04101.
The First National Bank of Boston is the custodian of the Funds' securities.
Securities may be held by a sub-custodian bank approved by the Trustees.
[Coopers & Lybrand L.L.P.] serves as independent auditors for the Funds.
Distribution Arrangements
Forum Financial Services, Inc. (the "Distributor"), Two Portland Square,
Portland, Maine 04101, (207) 879-1900, acts as distributor for the Funds
pursuant to a Distribution Agreement. Shares also may be sold by authorized
dealers who have entered into dealer agreements with the Distributor. The Funds
have adopted a Distribution Plan in accordance with Rule 12b-1 under the 1940
Act. The Distribution Plan authorizes payments by the Funds in connection with
the distribution of their shares at an annual rate of up to 0.25% of each
Fund's average daily net assets. The Trustees do not currently intend to
authorize the payment of any such fee from either Fund, although they have the
authority under the Distribution Plan to do so in the future. Shareholders of a
Fund will be given at least 60 days written notice before any 12b-1 fee is
impose by that Fund.
Any payments made under the Distribution Plan may be used for the purpose of
financing any activity primarily intended to result in the sales of shares of
the Fund as determined by the Trustees. Such activities include advertising,
compensation to the Distributor, compensation for sales and sales marketing
activities of financial institutions and others, such as dealers or other
distributors, shareholder account servicing, production and dissemination of
prospectuses and sales and marketing materials, and capital or other expenses
of associated equipment, rent, salaries, bonuses, interest and other overhead.
To the extent any activity is one which a Fund may finance without a
distribution plan, the Fund may also make payments to finance such activity
outside of the Distribution Plan and not subject to its limitations. Payments
under the Distribution Plan are not tied exclusively to actual distribution and
service expenses, and the payments may exceed distribution and service expenses
actually incurred.
The Funds and the Distributor provide to the Trustees quarterly a written
report of amounts expended under the Distribution Plan and the purposes for
which the expenditures were made.
<PAGE>
Expenses
The Funds pay all of their own expenses, including without limitation, the cost
of securities transactions, government fees, taxes, accounting and legal fees,
expenses of communicating with shareholders, interest expense, insurance
premiums and fees paid to trustees who are not interested persons of the
Adviser. The organizational expenses of the Funds were advanced by the Adviser
and will be reimbursed by the Funds over a period of not more than sixty
months.
PRICING OF FUND SHARES
The price you pay when buying a Fund's shares, and the price you receive when
selling (redeeming) a Fund's shares, is the net asset value of the shares next
determined after receipt by the Funds of a purchase or redemption request in
proper form. No front end sales charge or commission of any kind is added by
the Fund upon a purchase and no charge is deducted upon a redemption. The Funds
currently charge a $10 fee for each redemption made by wire. See "How to Redeem
Shares."
The per share net asset value of a Fund is determined by dividing the total
value of its net assets (meaning its assets less its liabilities) by the total
number of its shares outstanding at that time. The net asset value is
determined as of the close of regular trading (normally 4:00 p.m. Eastern time)
on the New York Stock Exchange on each day the New York Stock Exchange is open
for trading. This determination is applicable to all transactions in shares of
a Fund prior to that time and after the previous time as of which the net asset
value was determined. Accordingly, investments accepted or redemption requests
received in proper form prior to the close of regular trading on a day the New
York Stock Exchange is open for trading will be valued as of the close of
trading, and investments accepted or redemption requests received in proper
form after that time will be valued as of the close of the next trading day.
Investments are considered received only when your check, wired funds or
electronically transferred funds are received by the Funds. Investments by
telephone pursuant to your prior authorization to the Funds to draw on your
bank account are considered received when the proceeds from the bank account
are received by the Funds, which generally takes two to three banking days.
Securities which are traded on a recognized stock exchange are valued at the
last sale price on the securities exchange on which such securities are
primarily traded or at last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
closing over-the-counter bid prices. Securities for which there were no
transactions are valued at the closing bid prices. Debt securities (other than
short-term instruments) are valued at prices furnished by a pricing service,
subject to review and possible revision by the Adviser. Any modification of the
price of a debt security furnished by a pricing service is made pursuant to
procedures adopted by the Funds' Trustees. Debt instruments maturing within 60
days are valued by the amortized cost method. Any securities for which market
quotations are not readily available are valued at their fair value as
determined in good faith by the Adviser pursuant to guidelines established by
the Funds' Trustees.
<PAGE>
HOW TO PURCHASE SHARES
All of the Funds are no-load, so you may purchase, redeem or exchange shares
directly at net asset value without paying a sales charge. Because the Funds'
net asset value changes daily, your purchase price will be the next net asset
value determined after the Funds receive and accept your purchase order. See
"Pricing of Fund Shares." The following minimum investment amounts apply:
Additional
Initial Minimum Minimum
Type of Account Investment Investment
Regular $1000 $50
Automatic Investment Plan $500 $50
Individual Retirement Account $500 $50
Gift to Minors $100 $50
Each Fund reserves the right to reject any order for the purchase of its shares
or to limit or suspend, without prior notice, the offering of its shares. The
required minimum investments may be waived in the case of qualified retirement
plans.
How to Open Your Account by Mail. Please complete the Purchase Application. You
can obtain additional copies of the Purchase Application and a copy of the IRA
Purchase Application from the Funds by calling 1-800-________. (Please note
that you must use a different form for an IRA.)
Your completed Purchase Application should be mailed directly to:
The Highland Family of Funds
Two Portland Square
Portland, Maine 04101
All applications must be accompanied by payment in the form of a check made
payable to the Fund in which you are investing. All purchases must be made in
U.S. dollars and checks must be drawn on U.S. banks. No cash, credit cards or
third party checks will be accepted. When a purchase is made by check and a
redemption is made shortly thereafter, the Funds will delay the mailing of a
redemption check until the purchase check has cleared your bank, which may take
up to 10 calendar days from the purchase date. If you contemplate needing
access to your investment shortly after purchase, you should purchase the
shares by wire as discussed below.
How to Open Your Account by Wire. You may make purchases by direct wire
transfers. To ensure proper credit to your account, please call the Funds at
1-800-____ for instructions prior to wiring funds. Funds should be wired
through the Federal Reserve System as follows:
[Bank]
A.B.A. Number _______
For the account of The Highland Family of Funds
Account Number _______
For further credit to:
(investor account number)
(name or account registration)
<PAGE>
(Social Security or Tax Identification Number)
(identify which Fund to purchase)
You must promptly complete a Purchase Application and mail it or send it via
overnight delivery to the Funds at the applicable address above. Shares will
not be redeemed until the Funds receive a properly completed and executed
Purchase Application.
If you have any questions, call the Funds at 1-800-________.
How to Add to Your Account. You may make additional investments by mail or by
wire in the minimums listed above. When adding to an account by mail, you
should send the Funds your check, together with the additional investment form
from a recent statement. If this form is unavailable, you should send a signed
note giving the full name of the account and the account number. Purchases made
by check will not be available for exchange or redemption for up to 10 calendar
days. This delay allows the Funds to verify that proceeds used to purchase Fund
shares will not be returned due to insufficient funds and is intended to
protect the remaining investors from loss. For additional investments made by
wire transfer, you should use the wiring instructions listed above. Be sure to
include your account number. Wired funds are considered received in good order
on the day they are deposited in the Funds' account if they reach the Funds'
bank account by the Funds' cut-off time for purchases and all required
information is provided in the wire instructions. The wire instructions will
determine the terms of the purchase transaction.
Automatic Investment Plan. You may make purchases of shares of each Fund
automatically on a regular basis ($50 minimum per transaction). You must meet
the Automatic Investment Plan's minimum initial investment of $500 before the
Plan may be established. Under the Plan, your designated bank or other
financial institution debits a preauthorized amount on your account each month
and applies the amount to the purchase of Fund shares. The Plan can be
implemented with any financial institution that is a member of the Automated
Clearing House. No service fee is currently charged by the Funds for
participation in the Plan. You will receive a statement on a quarterly basis
showing the purchases made under the Plan. A $15 fee will be imposed by the
Funds if sufficient funds are not available in your account or your account has
been closed at the time of the automatic transaction. You may adopt the Plan at
the time an account is opened by completing the appropriate section of the
Purchase Application. You may obtain an application to establish the Plan after
an account is opened by calling the Funds at 1-800-________. In the event you
discontinue participation in the Plan, the Funds reserve the right to redeem
your Fund account involuntarily, upon sixty days' written notice, if the
account's net asset value is $1,000 or less. Call 1-800-______ for more
information.
Purchasing Shares Through Other Institutions. If you purchase shares through a
program of services offered or administered by a broker-dealer, financial
institution or other service provider, you should read the program materials,
including information relating to fees, in addition to the Funds' Prospectus.
Certain services of a Fund may not be available or may be modified in
connection with the program of services provided. The Funds may only accept
requests to purchase additional shares into a broker-dealer street name account
from the broker-dealer.
Certain broker-dealers, financial institutions or other service providers that
have entered into an agreement with the Company may enter purchase orders on
behalf of their customers by phone, with payment to follow within several days
<PAGE>
as specified in the agreement. The Funds may effect such purchase orders at the
net asset value next determined after receipt of the telephone purchase order.
It is the responsibility of the broker-dealer, financial institution or other
service provider to place the order with the Funds on a timely basis. If
payment is not received within the time specified in the agreement, the
broker-dealer, financial institution or other service provider could be held
liable for any resulting fees or losses. The Funds reserve the right to refuse
a telephone transaction if they believe it advisable to do so.
Retirement Plans. The Funds have a program under which you may establish an
Individual Retirement Account ("IRA") with the Funds and purchase shares
through such account. The minimum initial investment in each Fund for an IRA is
$500. You may obtain additional information regarding establishing such an
account by calling the Funds at 1-800-________.
The Funds also may be used as investment vehicles for established defined
contribution plans, including simplified employee (including SAR-SEPs), 401(k),
profit-sharing and money purchase pension plans. For details, please call
1-800-______.
Miscellaneous. The Funds will charge a $15 service fee against your account for
any check that is returned unpaid. You will also be responsible for any losses
suffered by the Funds as a result.
HOW TO EXCHANGE SHARES
Shares of any Fund may be exchanged for shares of another Fund at any time.
This exchange offer is available only in states where shares of such other Fund
may be legally sold. Each exchange is subject to the minimum initial investment
required for each Fund. You may make exchanges for $50 or more. You may open a
new account or purchase additional shares by making an exchange from an
existing Highland Fund account. New accounts will have the same registration as
the existing accounts. Exchanges may be made either in writing or by telephone.
To exchange by telephone, you must follow the instructions below under "How to
Redeem by Telephone."
For exchanges between Highland Funds, the value to be exchanged and the price
of the shares being purchased will be the net asset value next determined by
the Funds after receipt and acceptance of proper instructions for the exchange.
An exchange from one Fund to another is treated the same as an ordinary sale
and purchase for federal income tax purposes.
If you buy shares by check, you may not exchange those shares for up to 10
calendar days to ensure your check has cleared. If you intend to exchange
shares soon after their purchase, you should purchase the shares by wire or
contact the Funds at 1-800-________ for further information.
Because of the risks associated with common stock investments, the Funds are
intended to be long-term investment vehicles and not designed to provide
investors with a means of speculating on short-term stock market movements. In
addition, because excessive trading can hurt the Funds' performance and
shareholders, the Funds reserve the right to temporarily or permanently
terminate, with or without advance notice, the exchange privilege of any
investor who makes excessive use of the exchange privilege (e.g., more than
five exchanges per calendar year). Your exchanges may be restricted or refused
if a Fund receives or anticipates simultaneous orders affecting significant
<PAGE>
portions of a Fund's assets. In particular, a pattern of exchanges with a
"market timer" strategy may be disruptive to the Funds.
Additional documentation may be required for exchange requests if shares are
registered in the name of a corporation, partnership or fiduciary. Contact the
Funds for additional information concerning the exchange privilege.
HOW TO REDEEM SHARES
You may redeem shares of the Funds at any time. The price at which the shares
will be redeemed is the net asset value per share next determined after proper
redemption instructions are received by the Funds. See "Pricing of Fund
Shares." There are no charges for the redemption of shares except that a fee of
$10 is charged for each wire redemption. Depending upon the redemption price
you receive, you may realize a capital gain or loss for federal income tax
purposes.
How to Redeem by Mail. To redeem shares by mail, simply send an unconditional
written request to the Funds specifying the number of shares or dollar amount
to be redeemed, the name of the Fund, the name(s) on the account registration
and the account number. A request for redemption must be signed exactly as the
shares are registered. If the amount requested is greater than $25,000, the
proceeds are to be sent to a person other than the shareholder of record or to
a location other than the address of record, each signature must be guaranteed
by a commercial bank or trust company in the United States, a member firm of
the National Association of Securities Dealers, Inc. or other eligible
guarantor institution. A notary public is not an acceptable guarantor.
Guarantees must be signed by an authorized signatory of the bank, trust
company, or member firm and "Signature Guaranteed" must appear with the
signature. Additional documentation may be required for the redemption of
shares held in corporate, partnership or fiduciary accounts. In case of any
questions, contact the Funds in advance.
The Funds will mail payment for redemption within seven days after it receives
proper instructions for redemption. However, the Funds will delay payment for
up to 10 calendar days on redemptions of recent purchases made by check. This
allows the Funds to verify that the check used to purchase Fund shares will not
be returned due to insufficient funds and is intended to protect the remaining
investors from loss.
How to Redeem by Telephone. To redeem shares by telephone, you must select this
option on the Purchase Application. Once this feature has been requested,
shares may be redeemed by calling the Funds at 1-800-________. Proceeds
redeemed by telephone will be mailed to your address, or wired or credited to
your preauthorized bank account as shown on the records of the Funds. Telephone
redemptions must be in the amounts of $50 or more.
In order to arrange for telephone redemptions after your account has been
opened or to change the bank account or address designated to receive
redemption proceeds, you must send a written request to the Funds. The request
must be signed by each registered holder of the account with the signatures
guaranteed by a commercial bank or trust company in the United States, a member
firm of the National Association of Securities Dealers, Inc. or other eligible
guarantor institution. A notary public is not an acceptable guarantor. Further
documentation may be requested from corporations, executors, administrators,
trustees and guardians.
<PAGE>
Payment of the redemption proceeds for Fund shares redeemed by telephone where
you request wire payment will normally be made in federal funds on the next
business day. The Funds reserve the right to delay payment for a period of up
to seven days after receipt of the redemption request. There is currently a $10
fee for each wire redemption. It will be deducted from your account.
The Funds reserve the right to refuse a telephone redemption or exchange
transaction if they believe it is advisable to do so. Procedures for redeeming
or exchanging shares of the Funds by telephone may be modified or terminated by
the Funds at any time. In an effort to prevent unauthorized or fraudulent
redemption or exchange requests by telephone, the Funds have implemented
procedures designed to reasonably assure that telephone instructions are
genuine. These procedures include: requesting verification of certain personal
information; recording telephone transactions; confirming transactions in
writing; and restricting transmittal of redemption proceeds to preauthorized
designations. Other procedures may be implemented from time to time. If
reasonable procedures are not implemented, the Funds may be liable for any loss
due to unauthorized or fraudulent transactions. In all other cases, you are
liable for any loss for unauthorized transactions.
You should be aware that during periods of substantial economic or market
change, telephone or wire redemptions may be difficult to implement. If you are
unable to contact the Funds by telephone, you may also redeem shares by
delivering or mailing the redemption request to: The Highland Family of Funds,
Two Portland Square, Portland, Maine 04101.
The Funds reserve the right to suspend or postpone redemptions during any
period when: trading on the New York Stock Exchange is restricted, as
determined by the Securities and Exchange Commission ("SEC"), or that the
Exchange is closed for other than customary weekend and holiday closing; the
SEC has by order permitted such suspension; or an emergency, as determined by
the SEC, exists, making disposal of portfolio securities or valuation of net
assets of a Fund not reasonably practicable.
Due to the relatively high cost of maintaining small accounts, if your account
balance falls below the $1,000 or $500 minimum, as applicable, as a result of a
redemption or exchange or if you discontinue the Automatic Investment Plan
before your account balance reaches the required minimum, you will be given a
60-day notice to reestablish the minimum balance or activate an Automatic
Investment Plan. If this requirement is not met, your account may be closed and
the proceeds sent to you.
DIVIDENDS AND DISTRIBUTIONS
The Funds intend to pay dividends from net investment income annually and
distribute substantially all net realized capital gains at least annually. Each
Fund may make additional distributions if necessary to avoid imposition of a 4%
excise tax or other tax on undistributed income and gains. You may elect to
reinvest all income dividends and capital gains distributions in shares of a
Fund or receive cash as designated on the Purchase Application. You may change
your election at any time by sending written notification to the Funds. The
election is effective for distributions with a dividend record date on or after
the date that the Funds receive notice of the election. If you do not specify
an election, all income dividends and capital gains distributions will
automatically be reinvested in full and fractional shares of the Fund. Shares
will be purchased at the net asset value in effect on the business day after
the dividend record date and will be credited to your account on such date.
Reinvested dividends and distributions receive the same tax treatment as those
<PAGE>
paid in cash. Dividends and capital gains distributions, if any, will reduce
the net asset value of a Fund by the amount of the dividend or capital gains
distribution.
SHAREHOLDER REPORTS AND INFORMATION
The Funds will provide the following statements and reports:
Confirmation Statements. Except for Automatic Investment Plans, after each
transaction that affects the account balance or account registration, you will
receive a confirmation statement. Participants in the Automatic Investment Plan
will receive quarterly confirmations of all automatic transactions.
Account Statements. All shareholders will receive quarterly account
statements.
Financial Reports. Financial reports are provided to shareholders
semi-annually. Annual reports will include audited financial statements. To
reduce Fund expenses, one copy of each report will be mailed to each Taxpayer
Identification Number even though the investor may have more than one account
in a Fund.
If you need additional copies of previous statements, you may order statements
for the current and preceding year at no charge. Statements for earlier years
are available for $5 each. Call 1-800-_______ to order past statements. If you
need information on your account with the Funds or if you wish to submit any
applications, redemption requests, inquiries or notifications, you should
contact the Administrator at Two Portland Square, Portland, Maine 04101 or call
1-800-________.
TAXES
Each Fund intends to qualify for treatment as a regulated investment company
under the Code. In each taxable year that a Fund so qualifies, such Fund (but
not its shareholders) will be relieved of federal income tax on that part of
its investment company taxable income and net capital gain that is distributed
to shareholders.
Dividends from a Fund's investment company taxable income (whether paid in cash
or reinvested in additional shares) are taxable to its shareholders as ordinary
income to the extent of the Fund's earnings and profits. Distributions of a
Fund's net capital gain, when designated as such, are taxable to its
shareholders as long-term capital gain, regardless of how long they have held
their Fund shares and whether such distributions are paid in cash or reinvested
in additional Fund shares. Each Fund provides federal tax information to its
shareholders annually, including information about dividends and other
distributions paid during the preceding year.
The Funds will be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividend payments and redemption and exchange
proceeds if you fail to complete the Purchase Application.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders. See "Taxes"
in the Statement of Additional Information for further discussion. There may be
other federal, state or local tax considerations applicable to you as an
investor. You therefore are urged to consult your tax adviser regarding any
tax-related issues.
<PAGE>
GENERAL INFORMATION
Organization. The Funds are series of The Highland Family of Funds (the
"Company"), which was organized as a business trust on October 7, 1996. Each
Fund is a diversified mutual fund. Under the 1940 Act, a diversified series or
mutual fund must invest at least 75% of its assets in cash and cash items, U.S.
Government securities, investment company securities and other securities
limited as to any one issuer to not more than 5% of the total assets of the
mutual fund and not more than 10% of the voting securities of the issuer.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
Voting and Other Rights. The Company may issue an unlimited number of shares,
may create new series of shares and may divide shares in each series into
classes. Each share of each Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All shares of
each series of the Company have equal voting rights except that, in matters
affecting only a particular Fund or class, only shares of that particular Fund
or class are entitled to vote.
As series of a Massachusetts business trust, the Funds are not required to hold
annual shareholder meetings. Shareholder approval will usually be sought only
for changes in a Fund's fundamental investment restrictions and for the
election of Trustees under certain circumstances. Trustees may be removed by
shareholders under certain circumstances. Each share of each Fund is entitled
to participate equally in dividends and other distributions and the proceeds of
any liquidation of that Fund.
Shares of the Funds are redeemable, but not transferable. All shares issued and
sold by the Funds will be fully paid and nonassessable, except as provided
above.
Share Certificates. The Funds will not issue share certificates. Instead, your
account will be credited with the number of shares purchased, relieving you of
responsibility for safekeeping of certificates and the need to deliver them
upon redemption. The Transfer Agent will maintain a share register for all
shareholders of record.
FUND PERFORMANCE
From time to time, the Funds may advertise their "average annual total return"
over various periods of time. An average annual total return refers to the rate
of return which, if applied to an initial investment at the beginning of a
stated period and compounded over the period, would result in the redeemable
value of the investment at the end of the stated period assuming reinvestment
of all dividends and distributions and reflecting the effect of all recurring
fees. An investor's investment in a Fund and the Fund's return are not
guaranteed and will fluctuate according to market conditions. When considering
"average" total return figures for periods longer than one year, you should
note that a Fund's annual total return for any one year in the period might
have been greater or less than the average for the entire period. Each Fund
also may use "aggregate" total return figures for various periods, representing
the cumulative change in value of an investment in the Fund for a specific
period (again reflecting changes in the Fund's share price and assuming
reinvestment of dividends and distributions).
<PAGE>
Each Fund may quote the Fund's average annual total and/or aggregate total
return for various time periods in advertisements or communications to
shareholders. Each Fund may also compare its performance to that of other
mutual funds and to stock and other relevant indices or to rankings prepared by
independent services or industry publications. For example, a Fund's total
return may be compared to data prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc., Value Line Mutual Fund Survey and CDA Investment
Technologies, Inc. Total return data as reported in such national financial
publications as The Wall Street Journal, The New York Times, Investor's
Business Daily, USA Today, Barron's, Money and Forbes as well as in
publications of a local or regional nature, may be used in comparing Fund
performance.
Each Fund's total return may also be compared to such indices as the Dow Jones
Industrial Average, Standard & Poor's 500 Composite Stock Price Index, Nasdaq
Composite OTC Index or Nasdaq Industrials Index, Consumer Price Index and
Russell 2000 Index.
Performance quotations of a Fund represent the Fund's past performance and
should not be considered as representative of future results. The investment
return and principal value of an investment in a Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The methods used to compute a Fund's total return are described in more
detail in the Statement of Additional Information.
<PAGE>
PROSPECTUS
_________________, 1997
The Highland Family of Funds
Highland Growth Fund
Highland Aggressive Growth Fund
Highland Investment Group L.P.
Investment Adviser
<PAGE>
THE HIGHLAND FAMILY OF FUNDS
Statement of Additional Information
_________________, 1997
This Statement of Additional Information dated ____________, 1997 is meant to
be read in conjunction with the Prospectus dated ____________, 1997, for the
Highland Growth Fund and the Highland Aggressive Growth Fund (collectively
referred to as the "Funds") and is incorporated by reference in its entirety
into the Prospectus. Because this Statement of Additional Information is not
itself a prospectus, no investment in shares of these Funds should be made
solely upon the information contained herein. Copies of the Prospectus for the
Funds may be obtained by calling 1-800-________. Capitalized terms used but not
defined herein have the same meanings as in the Prospectus.
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT INFORMATION
INVESTMENT RESTRICTIONS
ADDITIONAL COMPANY INFORMATION
Trustees and Officers
Investment Adviser
Administrator
Custodian, Transfer Agent and Dividend Paying Agent
Legal Counsel
Independent Accountants
DISTRIBUTION OF SHARES
PORTFOLIO TRANSACTIONS AND BROKERAGE
TAXES
DESCRIPTION OF SHARES
INDIVIDUAL RETIREMENT ACCOUNTS
PERFORMANCE INFORMATION
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE
OTHER INFORMATION
FINANCIAL STATEMENTS
APPENDIX A (Description of Securities Ratings)
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Funds. The Prospectus does not constitute an
offering by the Funds in any jurisdiction in which such offering may not
lawfully be made.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The following supplements the investment objectives and policies of the Funds
as set forth in the Prospectus.
Highland Growth Fund seeks long-term capital appreciation. The Highland Growth
Fund invests primarily in equity securities of companies believed by the
Adviser to have the potential for above-average growth in market value. The
Highland Growth Fund may invest in companies of all sizes.
Highland Aggressive Growth Fund seeks capital appreciation. The Highland
Aggressive Growth Fund invests primarily in equity securities of companies
believed by the Adviser to have the potential for above-average growth in
market value. Although the Highland Aggressive Growth Fund may invest in
companies of all sizes, the Fund, under normal market conditions, emphasizes
equity securities of companies with market capitalizations of less than $1
billion.
Money Market Instruments. Each Fund may invest in a variety of money market
instruments for temporary defensive purposes, pending investment, to meet
anticipated redemption requests and/or to retain the flexibility to respond
promptly to changes in market and economic conditions. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or bank holding companies, corporations and finance companies. Certificates of
deposit are generally negotiable certificates issued against funds deposited in
a commercial bank for a definite period of time and earning a specified return.
Bankers acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Fixed time deposits are
bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties that vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are classified as "other borrowings" on a bank's
balance sheet, while deposit notes and certificates of deposit are classified
as deposits. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Mortgage-Backed Securities. Each of the Funds may invest in mortgage-backed
securities, which are securities representing interests in pools of mortgage
loans. Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying property,
net of fees or costs which may be incurred. The market value and interest yield
<PAGE>
of these instruments can vary due to market interest rate fluctuations and
early prepayments of underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed securities
are the Government National Mortgage Association ("GNMA"), Federal National
Mortgage Association ("FNMA"), and Federal Home Loan Mortgage Corporation
("FHLMC"). Obligations of GNMA are backed by the full faith and credit of the
United States Government while obligations of FNMA and FHLMC are supported by
the respective agency only. Although GNMA certificates may offer yields higher
than those available from other types of U.S. Government securities, GNMA
certificates may be less effective than other types of securities as a means of
"locking in" attractive long-term rates because of the prepayment feature. For
instance, when interest rates decline, the value of a GNMA certificate likely
will not rise as much as comparable debt securities due to the prepayment
feature. In addition, these prepayments can cause the price of a GNMA
certificate originally purchased at a premium to decline in price to its par
value, which may result in a loss.
Each Fund may also invest a portion of its assets in collateralized mortgage
obligations or "CMOs," a type of mortgage-backed security. CMOs are securities
collateralized by mortgages, mortgage pass-through certificates, mortgage
pay-through bonds (bonds representing an interest in a pool of mortgages where
the cash flow generated from the mortgage collateral pool is dedicated to bond
repayment), and mortgage-backed bonds (general obligations of the issuers
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of single family detached properties). Many CMOs are issued with
a number of classes or series which have different maturities and are retired
in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligations is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-through certificates to be prepaid prior
to their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-through certificates issued or guaranteed
by U.S. Government agencies or instrumentalities, the CMOs themselves are not
generally guaranteed.
Repurchase Agreements. Each Fund may agree to purchase portfolio securities
from financial institutions subject to the seller's agreement to repurchase
them at a mutually agreed upon date and price ("repurchase agreements").
Although the securities subject to a repurchase agreement may bear maturities
exceeding one year, settlement for the repurchase agreement will never be more
than one year after a Fund's acquisition of the securities and normally will be
within a shorter period of time. Securities subject to repurchase agreements
are held either by the Funds' custodian or subcustodian (if any), or in the
Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to maintain the value of the securities subject to
the agreement in an amount exceeding the repurchase price (including accrued
interest). Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to a Fund is limited to
the ability of the seller to pay the agreed upon sum on the repurchase date; in
the event of default, the repurchase agreement provides that a Fund is entitled
to sell the underlying collateral. If the value of the collateral declines
after the agreement is entered into, however, and if the seller defaults under
<PAGE>
a repurchase agreement when the value of the underlying collateral is less than
the repurchase price, a Fund could incur a loss of both principal and interest.
The Adviser monitors the value of the collateral at the time the agreement is
entered into and at all times during the term of the repurchase agreement in an
effort to determine that the value of the collateral always equals or exceeds
the agreed upon repurchase price to be paid to a Fund. If the seller were to be
subject to a federal bankruptcy proceeding, the ability of a Fund to liquidate
the collateral could be delayed or impaired because of certain provisions of
the bankruptcy laws.
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held
by the Fund and the agreement by the Fund to repurchase the securities at an
agreed upon price, date and interest payment. When the Fund enters into reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. The segregation of assets could impair the Fund's
ability to meet its current obligations or impede investment management if a
large portion of the Fund's assets are involved. Reverse repurchase agreements
are considered to be a form of borrowing.
United States Government Obligations. Each of the Funds may invest in Treasury
securities which differ only in their interest rates, maturities and times of
issuance. Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds generally
have initial maturities of greater than ten years. The Funds also may invest in
instruments issued by U.S. government agencies or instrumentalities. Some
obligations of U.S. Government agencies and instrumentalities are supported by
the "full faith and credit" of the United States, others by the right of the
issuer to borrow from the U.S. Treasury and others only by the credit of the
agency or instrumentality.
Illiquid Securities. Each of the Funds may invest up to 15% of its net assets
in illiquid securities (i.e., securities that cannot be disposed of within
seven days in the normal course of business at approximately the amount at
which the Fund has valued the securities). The Board of Trustees or its
delegate has the ultimate authority to determine which securities are liquid or
illiquid for purposes of this limitation. Certain securities exempt from
registration or issued in transactions exempt from registration ("restricted
securities") under the Securities Act of 1933, as amended ("Securities Act")
that may be resold pursuant to Rule 144A or Regulation S under the Securities
Act, may be considered liquid. The Board has delegated to the Adviser the
day-to-day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations. Certain
securities are deemed illiquid by the Securities and Exchange Commission
including repurchase agreements maturing in greater than seven days and options
not listed on a securities exchange or not issued by the Options Clearing
Corporation. These securities will be treated as illiquid and subject to the
Funds limitation on illiquid securities.
Restricted securities may be sold in privately negotiated or other exempt
transactions, qualified non-U.S. transactions, such as under Regulation S, or
in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, a Fund may be
obligated to pay all or part of the registration expenses and a considerable
time may elapse between the decision to sell and the sale date. If, during such
period, adverse market conditions were to develop, a Fund might obtain a less
<PAGE>
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in good faith by the Board.
If through the appreciation of illiquid securities or the depreciation of
illiquid securities, a Fund should be in a position where more than 15% of the
value of its net assets are invested in illiquid assets, including restricted
securities which are not readily marketable, the Fund will take such steps as
it deems advisable, if any, to reduce the percentage of such securities to 15%
or less of the value of its net assets.
Hedging Strategies. The Funds may engage in hedging activities. They may
utilize a variety of financial instruments, including options, in an attempt to
reduce the investment risks of the Funds.
Hedging instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Fund owns or
intends to acquire. Hedging instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which a Fund has invested or expects to invest. The use of hedging
instruments is subject to applicable regulations of the Securities and Exchange
Commission, the several options exchanges upon which they are traded and
various state regulatory authorities. In addition, a Fund's ability to use
hedging instruments will be limited by certain tax considerations.
Foreign Currency Exchange Transactions. Because each of the Funds may buy and
sell securities denominated in currencies other than the U.S. dollar, and
receive interest, dividends and sale proceeds in currencies other than the U.S.
dollar, the Funds may enter into foreign currency exchange transactions to
convert United States currency to foreign currency and foreign currency to
United States currency, as well as convert foreign currency to other foreign
currencies. A Fund either enters into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
uses forward contracts to purchase or sell foreign currencies. The Funds may
also enter into foreign currency hedging transactions in an attempt to protect
the value of the assets of the respective Fund as measured in U.S. dollars from
unfavorable changes in currency exchange rates and control regulations.
(Although each Fund's assets are valued daily in terms of U.S. dollars, the
Funds do not intend to convert their respective holdings of other currencies
into U.S. dollars on a daily basis.)
The Funds may convert currency on a spot basis from time to time, and investors
should be aware of the costs of currency conversion. Although currency exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a currency at one
rate, while offering a lesser rate of exchange should the Fund desire to resell
that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no fees or
commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a non-U.S. currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
<PAGE>
sale, for a fixed amount of U.S. dollars, of the amount of non-U.S. currency
involved in the underlying security transaction, the Fund will be able to
protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the non-U.S. currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received.
When the Adviser believes that the currency of a particular country may suffer
a substantial decline against the U.S. dollar, a Fund may enter into a forward
contract to sell, for a fixed amount of U.S. dollars, the amount of non-U.S.
currency approximating the value of some or all of the Fund's securities
denominated in such non-U.S. currency. The precise matching of the forward
contract amounts and the value of the securities involved is not generally
possible since the future value of such securities in non-U.S. currencies
changes as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
The projection of a short-term hedging strategy is highly uncertain. The Funds
do not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts obligates a Fund to deliver
an amount of non-U.S. currency in excess of the value of the Fund's securities
or other assets denominated in that currency. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated in the
investment decisions made with regard to overall diversification strategies.
However, the Adviser believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Fund will be served.
The Funds generally would not enter into a forward contract with a term greater
than one year. At the maturity of a forward contract, a Fund will either sell
the security and make delivery of the non-U.S. currency, or retain the security
and terminate its contractual obligation to deliver the non-U.S. currency by
purchasing an "offsetting" contract with the same currency trader obligating it
to purchase, on the same maturity date, the same amount of the non-U.S.
currency. If a Fund retains the security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the non-U.S. currency. Should forward prices decline
during the period between the date a Fund enters into a forward contract for
the sale of the non-U.S. currency and the date it enters into an offsetting
contract for the purchase of such currency, the Fund will realize a gain to the
extent the selling price of the currency exceeds the purchase price of the
currency. Should forward prices increase, the Fund will suffer a loss to the
extent that the purchase price of the currency exceeds the selling price of the
currency.
It is impossible to forecast with precision the market value of Fund securities
at the expiration of the contract. Accordingly, it may be necessary for a Fund
to purchase additional non-U.S. currency on the spot market if the market value
of the security is less than the amount of non-U.S. currency the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of such currency. Conversely, it may be necessary to sell on the spot
market some of the non-U.S. currency received upon the sale of the security if
its market value exceeds the amount of such currency the Fund is obligated to
deliver.
Each of the Funds may also purchase put options on a non-U.S. currency in
order to protect against currency rate fluctuations. If a Fund purchases a put
option on a non-U.S. currency and the value of the U.S. currency declines, the
<PAGE>
Fund will have the right to sell the non-U.S. currency for a fixed amount in
U.S. dollars and will thereby offset, in whole or in part, the adverse effect
on the Fund which otherwise would have resulted. Conversely, where a rise in
the U.S. dollar value of another currency is projected, and where the Fund
anticipates investing in securities traded in such currency, the Fund may
purchase call options on the non-U.S. currency.
The purchase of such options could offset, at least partially, the effects of
the adverse movements in exchange rates. However, the benefit to the Fund from
purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options which would require
it to forgo a portion or all of the benefits of advantageous changes in such
rates.
The Funds may write options on non-U.S. currencies for hedging purposes or
otherwise to achieve their investment objectives. For example, where a Fund
anticipates a decline in the value of the U.S. dollar value of a foreign
security due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of the security held by the Fund will be offset by the
amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the cost of a foreign security to be acquired because of an
increase in the U.S. dollar value of the currency in which the underlying
security is primarily traded, a Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will expire unexercised
and allow the Fund to hedge such increased cost up to the amount of the
premium. However, the writing of a currency option will constitute only a
partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on currencies, a Fund also may be required to forgo all or a portion of
the benefits which might otherwise have been obtained from favorable movements
in exchange rates.
Put and call options on non-U.S. currencies written by a Fund will be covered
by segregation of cash, short-term money market instruments or high quality
debt securities in an account with the custodian in an amount sufficient to
discharge the Fund's obligations with respect to the option, by acquisition of
the non-U.S. currency or of a right to acquire such currency (in the case of a
call option) or the acquisition of a right to dispose of the currency (in the
case of a put option), or in such other manner as may be in accordance with the
requirements of any exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
Investing in ADRs and other depositary receipts presents many of the same risks
regarding currency exchange rates as investing directly in securities traded in
currencies other than the U.S. dollar. Because the securities underlying ADRs
are traded primarily in non-U.S. currencies, changes in currency exchange rates
will affect the value of these receipts. For example, decline in the U.S.
dollar value of another currency in which securities are primarily traded will
reduce the U.S. dollar value of such securities, even if their value in the
other non-U.S. currency remains constant, and thus will reduce the value of the
receipts covering such securities. A Fund may employ any of the above described
<PAGE>
foreign currency hedging techniques to protect the value of its assets invested
in depositary receipts.
Of course, a Fund is not required to enter into the transactions described
above and does not do so unless deemed appropriate by the Adviser. It should
also be realized that this method of protecting the value of a Fund's
securities against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, they also tend to limit any potential gain which might
result should the value of such currency increase.
Each Fund has established procedures consistent with policies of the Securities
and Exchange Commission concerning forward contracts. Since those policies
currently recommend that an amount of a Fund's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment,
each Fund expects to always have cash, cash equivalents or high quality debt
securities available sufficient to cover any commitments under these contracts
or to limit any potential risk.
Options - General. Each Fund may purchase and write (i.e. sell) put and call
options. Such options may relate to particular securities or stock indices, and
may or may not be listed on a domestic or foreign securities exchange and may
or may not be issued by the Options Clearing Corporation. Options trading is a
highly specialized activity that entails greater than ordinary investment risk.
Options may be more volatile than the underlying instruments, and therefore, on
a percentage basis, an investment in options may be subject to greater
fluctuation than an investment in the underlying instruments themselves.
A call option for a particular security gives the purchaser of the option the
right to buy, and the writer (seller) the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of
the option, regardless of the market price of the security. The premium paid to
the writer is in consideration for undertaking the obligation under the option
contract. A put option for a particular security gives the purchaser the right
to sell the security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
Stock index options are put options and call options on various stock indexes.
In most respects, they are identical to listed options on common stocks. The
primary difference between stock options and index options occurs when index
options are exercised. In the case of stock options, the underlying security,
common stock, is delivered. However, upon the exercise of an index option,
settlement does not occur by delivery of the securities comprising the index.
The option holder who exercises the index option receives an amount of cash if
the closing level of the stock index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the stock index and the exercise price of the option expressed
in dollars times a specified multiple. A stock index fluctuates with changes in
the market value of the stocks included in the index. For example, some stock
index options are based on a broad market index, such as the Standard & Poor's
500 or the Value Line Composite Index or a narrower market index, such as the
Standard & Poor's 100. Indexes may also be based on an industry or market
segment, such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on stock indexes are currently traded on the following
exchanges: the Chicago Board Options Exchange, the New York Stock Exchange, the
<PAGE>
American Stock Exchange, the Pacific Stock Exchange, and the Philadelphia Stock
Exchange.
A Fund's obligation to sell an instrument subject to a call option written by
it, or to purchase an instrument subject to a put option written by it, may be
terminated prior to the expiration date of the option by the Fund's execution
of a closing purchase transaction, which is effected by purchasing on an
exchange an option of the same series (i.e., same underlying instrument,
exercise price and expiration date) as the option previously written. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new
option containing different terms on such underlying instrument. The cost of
such a liquidation purchase plus transactions costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying instrument or liquidate the assets held in the segregated account
until the option expires or the optioned instrument is delivered upon exercise
with the result that the writer in such circumstances will be subject to the
risk of market decline or appreciation in the instrument during such period.
If an option purchased by a Fund expires unexercised, the Fund realizes a loss
equal to the premium paid. If a Fund enters into a closing sale transaction on
an option purchased by it, the Fund will realize a gain if the premium received
by the Fund on the closing transaction is more than the premium paid to
purchase the option, or a loss if it is less. If an option written by a Fund
expires on the stipulated expiration date or if a Fund enters into a closing
purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold).
If an option written by a Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
Federal Tax Treatment of Options. Certain option transactions have
special tax results for the Funds. Expiration of a call option written by a
Fund will result in short-term capital gain. If the call option is exercised,
the Fund will realize a gain or loss from the sale of the security covering the
call option and, in determining such gain or loss, the option premium will be
included in the proceeds of the sale.
If a Fund writes options other than "qualified covered call options," as
defined in Section 1092 of the Internal Revenue Code of 1986, as amended (the
"Code"), or purchases puts, any losses on such options transactions, to the
extent they do not exceed the unrealized gains on the securities covering the
options, may be subject to deferral until the securities covering the options
have been sold.
In the case of transactions involving "nonequity options," as defined in Code
Section 1256, the Funds will treat any gain or loss arising from the lapse,
closing out or exercise of such positions as 60% long-term and 40% short-term
capital gain or loss as required by Section 1256 of the Code. In addition, such
positions must be marked-to-market as of the last business day of the year, and
gain or loss must be recognized for federal income tax purposes in accordance
with the 60%/40% rule discussed above even though the position has not been
terminated. A "nonequity option" includes options involving stock indexes such
as the Standard & Poor's 500 and 100 indexes.
<PAGE>
Certain Risks Regarding Options. There are risks associated with
transactions in options. For example, there are significant differences between
the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on an exchange, may be absent for reasons
which include the following: there may be insufficient trading interest in
certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the Options Clearing Corporation may not at all times be
adequate to handle current trading value; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Successful use by the Funds of options on stock indexes will be subject to the
ability of the Adviser to correctly predict movements in the directions of the
stock market. This requires different skills and techniques than predicting
changes in the prices of individual securities. In addition, a Fund's ability
to effectively hedge all or a portion of the securities in its portfolio, in
anticipation of or during a market decline, through transactions in put options
on stock indexes, depends on the degree to which price movements in the
underlying index correlate with the price movements of the securities held by a
Fund. Inasmuch as a Fund's securities will not duplicate the components of an
index, the correlation will not be perfect. Consequently, each Fund will bear
the risk that the prices of its securities being hedged will not move in the
same amount as the prices of its put options on the stock indexes. It is also
possible that there may be a negative correlation between the index and a
Fund's securities which would result in a loss on both such securities and the
options on stock indexes acquired by the Fund.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the options markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying markets that cannot be reflected in
the options markets. The purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The purchase of stock index
options involves the risk that the premium and transaction costs paid by a Fund
in purchasing an option will be lost as a result of unanticipated movements in
prices of the securities comprising the stock index on which the option is
based.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time, and for some
options no secondary market on an exchange or elsewhere may exist. If a Fund is
unable to close out a call option on securities that it has written before the
option is exercised, the Fund may be required to purchase the optioned
securities in order to satisfy its obligation under the option to deliver such
securities. If a Fund is unable to effect a closing sale transaction with
respect to options on securities that is has purchased, it would have to
exercise the option in order to realize any profit and would incur transaction
costs upon the purchase and sale of the underlying securities.
<PAGE>
Cover for Options Positions. Transactions using options (other than
options that a Fund has purchased) expose a Fund to an obligation to another
party. A Fund will not enter into any such transactions unless it owns either
(1) an offsetting ("covered") position in securities or other options or (2)
cash, receivables and short-term debt securities with a value sufficient at all
times to cover its potential obligations not covered as provided in (1) above.
Each Fund will comply with Securities and Exchange Commission guidelines
regarding cover for these instruments and, if the guidelines so require, set
aside cash, U.S. government securities or other liquid, high-grade debt
securities in a segregated account with its Custodian in the prescribed amount.
Under current SEC guidelines, the Funds will segregate assets to cover
transactions in which the Funds write or sell options.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding futures contract or option is open, unless they
are replaced with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Investment Companies. Each Fund currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (a) not more than 5%
of the value of the Fund's total assets will be invested in the securities of
any one investment company; (b) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; and (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund.
Warrants. The Funds may purchase warrants and similar rights, which are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specific period of time. The purchase of warrants involves the risk
that a Fund could lose the purchase value of a warrant if the right to
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. A Fund will
not invest more than 5% of its total assets, taken at market value, in
warrants, or more than 2% of its total assets, taken at market value, in
warrants not listed on the New York or American Stock Exchanges or a major
foreign exchange. Warrants attached to other securities acquired by a Fund are
not subject to this restriction.
Convertible Securities. Convertible securities entitle the holder to receive
interest paid or accrued on debt or the dividend paid on preferred stock until
the convertible securities mature or are redeemed, converted and exchanged.
Prior to conversion, convertible securities have characteristics similar to
ordinary debt securities or preferred stock in that they normally provide a
stable stream of income with generally higher yields than those of common stock
of the same or similar issuers. Convertible securities rank senior to common
stock in a corporation's capital structure and therefore generally entail less
risk of loss of principal than the corporation's common stock.
In selecting convertible securities for the Funds, the Adviser will consider
among other factors, its evaluation of the creditworthiness of the issuers of
the securities; the interest or dividend income generated by the securities;
<PAGE>
the potential for capital appreciation of the securities and the underlying
common stocks; the prices of the securities relative to other comparable
securities and to the underlying common stocks; whether the securities are
entitled to the benefits of sinking funds or other protective conditions;
diversification of the Funds portfolio as to issuers; and whether the
securities are rated by a rating agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment value
(determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for a Fund may result from an improvement in the credit
standing of an issuer whose securities are held in the Fund or from a general
lowering of interest rates, or a combination of both. Conversely, a reduction
in the credit standing of an issuer whose securities are held by a Fund or a
general increase in interest rates may be expected to result in capital
depreciation to the Fund.
Typically, the convertible debt securities in which the Funds will invest will
be of a quality less than investment grade (so-called "junk bonds"). The Funds
will, however, limit their investment in non- investment grade convertible debt
securities to no more than 5% of the respective net assets at the time of
purchase and will not acquire convertible debt securities rated below B by
Moody's or S&P, or securities deemed by the Adviser to be of comparable
quality. Junk bonds, while generally offering higher yields than investment
grade securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. The special risk considerations in connection with investments in
these securities are discussed below. Refer to Appendix A of this Statement of
Additional Information for a discussion of securities ratings.
Effect on Interest Rates and Economic Changes. The junk bond market is
relatively new and its growth has paralleled a long economic expansion. As a
result, it is not clear how this market may withstand a prolonged recession or
economic downturn. Such an economic downturn could severely disrupt the market
for and adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
junk bond securities tend to reflect individual corporate developments to a
greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Junk bond securities also
tend to be more sensitive to economic conditions than are higher-rated
<PAGE>
categories. During an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of junk bond securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The risk of loss due to default by an issuer of these securities
is significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a junk bond security defaulted, a Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in a Fund's net asset value.
As previously stated, the value of a junk bond security will generally decrease
in a rising interest rate market, and accordingly so will a Fund's net asset
value. If a Fund experiences unexpected net redemptions in such a market, it
may be forced to liquidate a portion of its portfolio securities without regard
to their investment merits. Due to the limited liquidity of junk bond
securities, a Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce a Fund's asset base over which
expenses could be allocated and could result in a reduced rate of return for
the Fund.
Payment Expectations. Junk bond securities typically contain redemption,
call or prepayment provisions which permit the issuer of such securities
containing such provisions to redeem the securities at its discretion. During
periods of falling interest rates, issuers of these securities are likely to
redeem or prepay the securities and refinance them with debt securities with a
lower interest rate. To the extent an issuer is able to refinance the
securities, or otherwise redeem them, a Fund may have to replace the securities
with a lower yielding security, which could result in a lower return for the
Fund.
Credit Ratings. Credit ratings issued by credit-rating agencies evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of junk bond securities and, therefore
may not fully reflect the true risks of an investment. In addition, credit
rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in junk bond
securities will be more dependent on the Adviser's credit analysis than would
be the case with investments in investment grade debt securities. The Adviser
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Adviser continually monitors each Fund's
investments and carefully evaluates whether to dispose of or to retain junk
bond securities whose credit ratings or credit quality may have changed.
Liquidity and Valuation. A Fund may have difficulty disposing of certain
junk bond securities because there may be a thin trading market for such
securities. Because not all dealers maintain markets in all junk bond
securities there is no established retail secondary market for many of these
securities. The Funds anticipate that such securities could be sold only to a
limited number of dealers or institutional investors. To the extent a secondary
trading market does exist, it is generally not as liquid as the secondary
market for higher-rated securities. The lack of a liquid secondary market may
have an adverse impact on the market price of the security. The lack of a
liquid secondary market for certain securities may also make it more difficult
for a Fund to obtain accurate market quotations for purposes of valuing the
<PAGE>
Fund. Market quotations are generally available on many junk bond issues only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales. During periods of thin trading, the
spread between bid and asked prices is likely to increase significantly. In
addition, adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of junk bond
securities, especially in a thinly traded market.
New and Proposed Legislation. Recent legislation has been adopted, and
from time to time, proposals have been discussed, regarding new legislation
designed to limit the use of certain junk bond securities by certain issuers.
It is not currently possible to determine the impact of the recent legislation
or the proposed legislation on the junk bond securities market. However, it is
anticipated that if additional legislation is enacted or proposed, it could
have a material affect on the value of these securities and the existence of a
secondary trading market for the securities.
In general, investments in non-investment grade convertible securities are
subject to a significant risk of a change in the credit rating or financial
condition of the issuing entity. Investments in convertible securities of
medium or lower quality are also likely to be subject to greater market
fluctuations and to greater risk of loss of income and principal due to default
than investments of higher-rated fixed income securities. Such lower-rated
securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities, which react more
to fluctuations in the general level of interest rates. A Fund will generally
reduce risk to the investor by diversification, credit analysis and attention
to current developments in trends of both the economy and financial markets.
However, while diversification reduces the effect on a Fund of any single
investment, it does not reduce the overall risk of investing in lower- rated
securities.
Calculation of Portfolio Turnover Rate. The portfolio turnover rate for the
Funds is calculated by dividing the lesser of purchases or sales of portfolio
investments for the reporting period by the monthly average value of the
portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements
which enable the Funds to receive favorable tax treatment. The Funds are not
restricted by policy with regard to portfolio turnover and will make changes in
their investment portfolios from time to time as business and economic
conditions as well as market prices may dictate. It is anticipated the
portfolio turnover rate for the Highland Growth and Highland Aggressive Growth
Funds will not exceed 200% and 400% annually, respectively. However, this rate
should not be considered as a limiting factor to the Funds.
INVESTMENT RESTRICTIONS
Consistent with each Fund's investment objective, each Fund has adopted certain
investment restrictions. The following restrictions supplement those set forth
in the Prospectus. Unless otherwise noted, whenever an investment restriction
states a maximum percentage of a Fund's assets that may be invested in any
security or other asset, such percentage restriction will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset. Accordingly, any subsequent change in values, net assets, or other
<PAGE>
circumstances will not be considered when determining whether the investment
complies with the Fund's investment limitations except with respect to the
Fund's restrictions on borrowings as set forth in restriction 8 below.
A Fund's fundamental restrictions cannot be changed without the approval of the
holders of the lesser of: (i) 67% of the Fund's voting shares present or
represented at a shareholders meeting at which the holders of more than 50% of
such shares are present or represented; or (ii) more than 50% of the
outstanding voting shares of the Fund.
The following are the Funds' fundamental investment restrictions.
Each Fund may not:
1. Issue senior securities, except as permitted under the Investment Company
Act of 1940 (the "1940 Act"); provided, however, a Fund may engage in
transactions involving options, futures and options on futures contracts.
2. Lend money or securities (except by purchasing debt securities or entering
into repurchase agreements or lending portfolio securities).
3. With respect to 75% of its total assets, purchase (a) the securities of any
issuer (except securities of the U.S. government or any agency or
instrumentality thereof), if such purchase would cause more than 5% of the
value of the Fund's total assets to be invested in securities of any one issuer
or (b) more than 10% percent of the outstanding voting securities of any one
issuer.
4. Purchase the securities of any issuer if, as a result, 25% or more of the
value of its total assets, determined at the time an investment is made,
exclusive of U.S. government securities, are in securities issued by companies
primarily engaged in the same industry.
5. Act as an underwriter or distributor of securities other than shares of the
Funds except to the extent that a Fund's participation as part of a group in
bidding or by bidding alone, for the purchase or permissible investments
directly from an issuer or selling shareholders for the Fund's own portfolio
may be deemed to be an underwriting, and except to the extent that a Fund may
be deemed an underwriter under the Securities Act, by virtue of disposing of
portfolio securities.
6. Purchase or sell real estate (but this shall not prevent the Fund from
investing in securities that are backed by real estate or issued by companies
that invest or deal in real estate or in participation interests in pools of
real estate mortgage loans exclusive of investments in real estate limited
partnerships).
7. Borrow money, except that a Fund may borrow money from a bank for temporary
or emergency purposes (not for leveraging) in an amount not exceeding 331/3% of
the value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 331/3% of the Fund's total
assets by reason of a decline in net asset value will be reduced within three
days to the extent necessary to comply with the 331/3% limitation. Transactions
involving options, futures and options on futures, will not be deemed to be
borrowings if properly covered by a segregated account where appropriate.
<PAGE>
8. Purchase or sell physical commodities or commodities contracts unless
acquired as a result of ownership of securities or other instruments (but this
shall not prevent the Fund from engaging in transactions involving foreign
currencies, futures contracts, options on futures contracts or options, or from
investing in securities or other instruments backed by physical commodities).
In determining industry classification with respect to the Funds, the Adviser
intends to use the industry classification titles in the Standard Industrial
Classification Manual.
ADDITIONAL COMPANY INFORMATION
Trustees and Officers. Information regarding the Trustees and officers of the
Funds, including their principal business occupations during at least the last
five years, is set forth below. Each Trustee who is an "interested person," as
defined in the 1940 Act, is indicated by an asterisk. Except where otherwise
indicated, each of the individuals below has served in his or her present
capacity with the Company since its organization. The address of each of the
officers and trustees is _______________________.
* Catherine C. Lawson, President, Treasurer, Chief Financial and Accounting
Officer, and Trustee. Catherine C. Lawson is the President, Treasurer and
Trustee of the Funds and is a general partner and co-founder and the Chairman
and Chief Investment Officer of the Adviser. Ms. Lawson, a Chartered Financial
Analyst, has served as the Chairman and Chief Investment Officer of the Adviser
since its organization in May 1995. She served as the portfolio manager of the
Dreyfus Convertible Securities Fund from 1990 to 1993. From 1984 to 1989, she
was a Vice President of Nationar, Inc., where she was the portfolio manager of
the MSB Fund and the Institutional Family of Funds.
* Robert Lamb III, Vice President, Secretary and Trustee. Robert Lamb III is
the Vice President, Secretary and Trustee of the Funds and is a general
partner and co-founder and the President and Chief Executive Officer of the
Adviser. Mr. Lamb has served as the President and Chief Executive Officer of
the Adviser since its organization in May 1995. [Bio to be provided by
Highland.]
[Other Trustees.]
[Other Officers.]
The Trustees of the Company (with the exception of the Trustees who are
officers of the Adviser and receive no remuneration from the Funds) are
expected to receive the following remuneration from the Company during its
fiscal year ending December 31, 1997:
TOTAL
COMPENSATION
PENSION OR FROM REGISTRANT
AGGREGATE RETIREMENT ESTIMATED AND FUND
NAME OF COMPENSATION BENEFITS ACCRUED ANNUAL COMPLEX PAID
PERSON, FROM AS PART OF FUND BENEFITS UPON TO TRUSTEES
POSITION REGISTRANT(1) EXPENSE(1) RETIREMENT(1) (1)(2)
[NAME OF $______ $______ $______ $______
TRUSTEE]
[NAME OF $______ $______ $______ $______
TRUSTEE]
[NAME OF $______ $______ $______ $______
TRUSTEE]
<PAGE>
[NAME OF $______ $______ $______ $______
TRUSTEE]
(1)Information is estimated for the period from ________ __, 199__
(commencement of operations of the Funds) to December 31, 1997. Each of
the Trustees is paid a fee of $500 for each meeting attended and is
reimbursed for the expenses of attending meetings.
(2)Each Trustee serves with respect to the Highland Growth Fund and the
Highland Aggressive Growth Fund.
To provide the initial capital of the Company, on __________ __, 199_, Robert
Lamb III purchased an aggregate of ____ shares of each of the Funds at the net
asset value of $___ per share for an aggregate purchase price of $100,000. As
of the date hereof, there was no other holder of shares of any of the Funds.
Investment Adviser. The investment adviser to the Funds is Highland Investment
Group L.P. (the "Adviser"). Catherine C. Lawson is the co-founder and Chief
Investment Officer, and a general partner, of the Adviser. Robert Lamb, III is
a co-founder and President and Chief Executive Officer, and a general partner,
of the Adviser. As such, they control the Adviser. Pursuant to an Investment
Advisory Agreement entered into between the Company on behalf of each of the
Funds and the Adviser (the "Investment Advisory Agreement"), the Adviser
provides continuous investment advisory services to the Funds. The Adviser also
provides the Funds with office space, equipment and personnel necessary to
manage the Funds' assets. The Investment Advisory Agreement is dated as of
________________. The Investment Advisory Agreement has an initial term of 2
years and thereafter is required to be approved annually by the Board of
Trustees of the Company or by vote of a majority of the respective Fund's
outstanding voting securities (as defined in the 1940 Act). The Investment
Advisory Agreement is terminable without penalty with respect to a Fund, on 60
days' written notice by the Trustees, by vote of a majority of a Fund's
outstanding voting securities, or by the Adviser, and will terminate
automatically in the event of its assignment.
As compensation for its services, each Fund pays to the Adviser a monthly
advisory fee at the annual rate specified in the Prospectus. From time to time,
the Adviser may voluntarily waive all or a portion of its fee for one or more
Funds. The organizational expenses of the Funds were advanced by the Adviser
and will be reimbursed by each Fund over a period of not more than sixty
months.
The Investment Advisory Agreement requires the Adviser to reimburse a Fund in
the event that the expenses and charges payable by the Fund in any fiscal year,
including the advisory fee but excluding taxes, interest, brokerage
commissions, and similar fees, exceed a percentage of the average net asset
value of the Fund for such year which is the most restrictive percentage
provided by the state laws of the various states in which the Funds' common
stock is qualified for sale. Additionally, the Adviser voluntarily agreed to
reimburse each Fund to the extent aggregate annual operating expenses as
described above exceed 1.95% of the average daily net assets of each Fund, for
each Fund's first twelve months of operation. The Adviser may voluntarily
continue to waive all or a portion of the advisory fees otherwise payable by
the Funds. Such a waiver may be terminated at any time in the Adviser's
discretion. Reimbursement of expenses in excess of the applicable limitation
will be made on a monthly basis and will be paid to each Fund by reducing the
Adviser's fee, subject to later adjustment, month by month, for the remainder
of each Fund's fiscal year. The Adviser may from time to time voluntarily
<PAGE>
absorb expenses for one or more Funds in addition to the reimbursement of
expenses in excess of the foregoing.
The Investment Advisory Agreement provides that the Adviser shall not be liable
to the respective Fund or its shareholders for any error of judgment or mistake
of law or for anything other than willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties. The Investment
Advisory Agreement also provides that nothing therein shall limit the freedom
of the Adviser and its affiliates to render investment supervisory and
corporate administrative services to other investment companies, to act as
investment adviser or investment counselor to other persons, firms or
corporations, or to engage in other business activities.
Administrator. Forum Administrative Services, LLC (the "Administrator")
provides various administrative services to the Funds (which include clerical,
compliance, regulatory and other services) pursuant to an Administration
Agreement with the Company on behalf of the Funds. The Administration Agreement
will remain in effect for [insert terms]. Forum Financial Corp., an affiliate
of Forum Administrative Services, LLC, provides fund accounting services to the
Funds.
Custodian, Transfer Agent and Dividend Paying Agent. The First National Bank of
Boston serves as the custodian and Forum Financial Corp. serves as the transfer
and dividend paying agent for the Funds. Under the terms of the respective
agreements, The First National Bank of Boston, is responsible for the receipt
and delivery of each Fund's securities and cash, and Forum Financial Corp. is
responsible for processing purchase and redemption requests for the securities
of each Fund as well as the recordkeeping of ownership of each Fund's
securities, payment of dividends and the issuance of confirmations of
transactions and annual statements to shareholders. The First National Bank of
Boston and Forum Financial Corp. do not exercise any supervisory functions over
the management of the Funds or the purchase and sale of securities.
Legal Counsel. Bingham, Dana & Gould LLP, with offices at 150 Federal Street,
Boston, MA 02110, serves as counsel to the Funds.
Independent Accountants. [Coopers & Lybrand L.L.P., One Financial Center,
Boston, MA 02109] are the independent accountants for the Funds. They are
responsible for performing an audit of each Fund's year-end financial
statements as well as providing accounting and tax advice to the management of
the Funds.
DISTRIBUTION OF SHARES
Forum Financial Services, Inc. acts as distributor for the Funds pursuant to a
Distribution Agreement. The Distribution Agreement [insert terms.]
As set forth in the Prospectus, the Funds have adopted a Service and
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. The
Plan authorizes payments by the Funds in connection with the distribution of
their shares at an annual rate, as determined from time to time by the Board of
Trustees, of up to .25% of each Fund's average daily net assets.
The Plan was adopted in anticipation that the Funds will benefit from the Plan
through increased sales of shares of each Fund, thereby reducing each Fund's
expense ratio and providing an asset size that allows the Adviser greater
<PAGE>
flexibility in management. The Plan may be terminated at any time as to any
Fund by a vote of the Trustees of the Funds who are not interested persons of
the Funds and who have no direct or indirect financial interest in the Plan or
any agreement related thereto (the "Rule 12b-1 Trustees") or by a vote of a
majority of the outstanding shares of that Fund. Any change in the Plan that
would materially increase the distribution expenses of any Fund provided for in
the Plan requires approval of the shareholders of that Fund and the Board of
Trustees, including the Rule 12b-1 Trustees.
While the Plan is in effect, the selection and nomination of directors who are
not interested persons of the Funds will be committed to the discretion of the
Trustees of the Funds who are not interested persons of the Funds. The Board of
Trustees must review the amount and purposes of expenditures pursuant to the
Plan quarterly as reported to it by the officers of the Company. Unless
otherwise terminated, the Plan will continue in effect for as long as its
continuance is specifically approved at least annually by the Board of
Trustees, including the Rule 12b-1 Trustees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for each
Fund, for the placement of its portfolio business and the negotiation of the
commissions to be paid on such transactions, subject to the supervision of the
Company's Board of Trustees. It is the policy of the Adviser to seek the best
execution at the best security price available with respect to each
transaction, in light of the overall quality of brokerage and research services
provided to the Adviser.
The Adviser will place orders pursuant to its investment determination for the
Funds either directly with the issuer or with any broker or dealer. In
executing portfolio transactions and selecting brokers or dealers, the Adviser
will use its best effort to seek on behalf of a Fund the best overall terms
available. In selecting brokers and assessing the best overall terms available
for any transaction, the Adviser shall consider all factors that it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. The most favorable price to a Fund means
the best net price without regard to the mix between purchase or sale price and
commission, if any. Over-the-counter securities are generally purchased or sold
directly with principal market makers who retain the difference in their cost
in the security and its selling price. In some instances, the Adviser may
determine that better prices are available from non-principal market makers who
are paid commissions directly.
In evaluating the best overall terms available, and in selecting the
broker-dealer to execute a particular transaction, the Adviser may also
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Funds
and/or other accounts over which the Adviser or an affiliate of the Adviser
exercises investment discretion. While the Adviser believes these services have
substantial value, they are considered supplemental to its own efforts in the
performance of its duties. Other clients of the Adviser may indirectly benefit
from the availability of these services to the Adviser, and the Funds may
indirectly benefit from services available to the Adviser as a result of
transactions for other clients. The Adviser is authorized to pay to a broker or
dealer who provides such brokerage and research services a commission for
executing a portfolio transaction for a Fund which is in excess of the amount
of commission another broker or dealer would have charged for effecting that
transaction if, but only if, the Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and
<PAGE>
research services provided by such broker or dealer - viewed in terms of that
particular transaction or in terms of the overall responsibilities the Adviser
has to the Funds. In no instance, however, will portfolio securities be
purchased from or sold to the Adviser, or any affiliated person of either the
Company or the Adviser, acting as principal in the transaction, except to the
extent permitted by the Securities and Exchange Commission through rules,
regulations, decisions and no-action letters.
The Adviser may retain advisory clients in addition to the Funds and place
portfolio transactions for these accounts. Research services furnished by firms
through which the Funds effect their securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Funds. In the opinion of the Adviser, it
will not be possible to separately measure the benefits from research services
to each of the accounts (including the Funds) to be managed by the Adviser.
Because the volume and nature of the trading activities of the accounts will
not be uniform, the amount of commissions in excess of those charged by another
broker paid by each account for brokerage and research services will vary.
However, such costs to the Funds will not, in the opinion of the Adviser, be
disproportionate to the benefits to be received by the Funds on a continuing
basis.
The Adviser intends to seek to allocate portfolio transactions equitably among
its accounts whenever concurrent decisions are made to purchase or sell
securities by a Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to a Fund. In making such allocations between a Fund and other
advisory accounts, if any, the main factors to be considered by the Adviser
will be the respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment, the size of investment commitments generally held, and the opinions
of the persons responsible for recommending the investment.
TAXES
General. In order to qualify for treatment as a regulated investment company
("RIC") under the Code, each Fund must distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income (consisting
generally of net investment income, net short-term capital gain and net gains
from certain foreign currency transactions) and must meet several additional
requirements.
Dividends and other distributions declared by a Fund in, and payable to
shareholders of record as of a date in, October, November or December of any
year will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from a Fund's investment company taxable income
(whether paid in cash or reinvested in additional Fund shares) may be eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the aggregate dividends received by a Fund from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject to the
alternative minimum tax.
<PAGE>
If shares of a Fund are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any distribution, the shareholder will pay full price for the
shares and receive some portion of the price back as a taxable dividend or
capital gain distribution.
Foreign Taxes. Dividends and interest received by the Funds may be subject to
income, withholding, or other taxes imposed by foreign countries that would
reduce the yield on each Fund's portfolio securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and many foreign countries do not impose taxes on capital gains
in respect of investments by foreign investors. If more than 50% of the value
of a Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible to, and may, file
an election with the Internal Revenue Service that will enable its
shareholders, in effect, to receive the benefit of the foreign tax credit with
respect to any foreign income taxes paid by it. Pursuant to the election, the
Fund will treat those taxes as dividends paid to its shareholders and each
shareholder will be required to (1) include in gross income, and treat as paid
by him, his proportionate share of those taxes, (2) treat his share of those
taxes and of any dividend paid by the Fund that represents income from foreign
sources as his own income from those sources, and (3) either deduct the taxes
deemed paid by him in computing his taxable income or, alternatively, use the
foregoing information in calculating the foreign tax credit against his federal
income tax. Each Fund will report to its shareholders shortly after each
taxable year their respective shares of the Fund's income from sources within,
and taxes paid to, foreign countries if it makes this election.
Passive Foreign Investment Companies. If a Fund acquires stock in certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as sources that produce interest, dividends, rental,
royalty or capital gain income) or hold at least 50% of their assets in such
passive sources ("passive foreign investment companies"), the Fund could be
subject to federal income tax and additional interest charges on "excess
distributions" received from such companies or gains from the sale of stock in
such companies, even if all income or gain actually received by the Fund is
timely distributed to its shareholders. The Fund would not be able to pass
through to its shareholders any credit or deduction for such tax. In some
cases, elections may be available that would ameliorate these adverse tax
consequences, but such elections would require the Fund to include certain
amounts as income or gain (subject to the distribution requirements described
above) without a concurrent receipt of cash and could result in the conversion
of capital gain to ordinary income. A Fund may limit its investments in passive
foreign investment companies or dispose of such investments if potential
adverse tax consequences are deemed material in particular situations.
Non U.S. Shareholders. Distributions of net investment income by a Fund to a
shareholder who, as to the United States, is a nonresident alien individual,
nonresident alien fiduciary of a trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder") will be subject to U.S. withholding
tax at a rate of 30% (or lower treaty rate). Withholding will not apply if a
dividend paid by a Fund to a foreign shareholder is "effectively connected with
the conduct of a U.S. trade or business," in which case the reporting and
withholding requirements applicable to domestic taxpayers will apply.
Distributions of net capital gain are not subject to withholding, but in the
case of a foreign shareholder who is a nonresident alien individual, such
distributions ordinarily will be subject to U.S. income tax at a rate of 30%
(or lower treaty rate) if the individual is physically present in the United
<PAGE>
States for more than 182 days during the taxable year and the distributions are
attributable to a fixed place of business maintained by an individual in the
United States.
The foregoing is a general and abbreviated summary of certain U.S. federal
income tax considerations affecting such Fund and its shareholders. Investors
are urged to consult their own tax advisers for more detailed information and
for information regarding any foreign, state and local taxes applicable to
distributions received from a Fund.
DESCRIPTION OF SHARES
The Company's Declaration of Trust permits the Board of Trustees to issue an
unlimited number of full and fractional Shares of Beneficial Interest ($0.00001
par value) of each series and to divide or combine the shares of any series
into a greater or lesser number of shares of that series without thereby
changing the proportionate beneficial interests in that series. Currently, the
Funds are the only two series of shares of the Company. Each share represents
an equal proportionate interest in a Fund with each other share. Upon
liquidation or dissolution of a Fund, the Fund's shareholders are entitled to
share pro rata in the Fund's net assets available for distribution to its
shareholders. The Company reserves the right to create and issue additional
series of shares. Shares of each series participate equally in the earnings,
dividends and distribution of net assets of the particular series upon the
liquidation or dissolution of the series. Shares of each series are entitled to
vote separately to approve advisory agreements or changes in investment policy,
but shares of all series may vote together in the election or selection of
Trustees and accountants for the Company. In matters affecting only a
particular Fund, only shares of that Fund are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on which
they are entitled to vote. Shareholders in the Company do not have cumulative
voting rights, and shareholders owning more than 50% of the outstanding shares
of the Company may elect all of the Trustees of the Company if they choose to
do so and in such event the other shareholders in the Company would not be able
to elect any Trustee. The Company is not required and has no present intention
of holding annual meetings of shareholders but the Company will hold special
meetings of a Fund's shareholders when in the judgment of the Company's
Trustees it is necessary or desirable to submit matters for a shareholder vote.
Shareholders have under certain circumstances (e.g., upon application and
submission of certain specified documents to the Trustees by a specified number
of shareholders) the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees. Shareholders also have the right to remove one or more Trustees
without a meeting by a declaration in writing by a specified number of
shareholders. No material amendment may be made to the Company's Declaration of
Trust without the affirmative vote of the holders of a majority of its
outstanding shares.
The Company may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Company), if approved by the vote of the holders
of two-thirds of the Company's outstanding shares voting as a single class, or
of the affected series of the Company, as the case may be, except that if the
Trustees of the Company recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Company's or the
affected series' outstanding shares would be sufficient. The Company or any
series of the Company, as the case may be, may be terminated (i) by a vote of a
majority of the outstanding voting securities of the Company or the affected
series or (ii) by the Trustees by written notice to the shareholders of the
<PAGE>
Company or the affected series. If not so terminated, the Company will continue
indefinitely.
Share certificates will not be issued.
The Company is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the
Company and provides for indemnification and reimbursement of expenses out of
Company property for any shareholder held personally liable for the obligations
of the Company. The Declaration of Trust also provides that the Company may
maintain appropriate insurance (e.g., fidelity bonding and errors and omissions
insurance) for the protection of the Company, its shareholders, Trustees,
officers, employees and agents covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Company itself was unable to meet its obligations.
The Company's Declaration of Trust further provides that obligations of the
Company are not binding upon the Trustees individually but only upon the
property of the Company and that the Trustees will not be liable for any action
or failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he or she 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 or her office.
INDIVIDUAL RETIREMENT ACCOUNTS
Individuals who receive compensation or earned income, even if they are active
participants in a qualified retirement plan (or certain similar retirement
plans), may establish their own tax-sheltered Individual Retirement Account
("IRA"). The Funds offer a prototype IRA plan which may be adopted by
individuals. There is currently no charge for establishing an account, although
there is an annual maintenance fee.
Earnings on amounts held in an IRA are not taxed until withdrawal. However, the
amount of deduction, if any, allowed for IRA contributions is limited for
individuals who are active participants in an employer-maintained retirement
plan and whose incomes exceed specific limits.
A description of applicable service fees and certain limitations on
contributions and withdrawals, as well as application forms, are available from
the transfer agent upon request at 1-800-________. The IRA documents contain a
disclosure statement which the Internal Revenue Service requires to be
furnished to individuals who are considering adopting the IRA. Because a
retirement program involves commitments covering future years, it is important
that the investment objective of the Funds be consistent with the participant's
retirement objectives. Premature withdrawals from a retirement plan will result
in adverse tax consequences. Consultation with a competent financial and tax
adviser regarding the foregoing retirement plans is recommended.
PERFORMANCE INFORMATION
The Funds may from time to time advertise performance data such as "average
annual total return" and "total return." To facilitate the comparability of
<PAGE>
historical performance data from one mutual fund to another, the SEC has
developed guidelines for the calculation of average annual total return.
The average annual total return for a Fund for a specific period is found by
first taking a hypothetical $1,000 investment ("initial investment") in the
Fund's shares on the first day of the period and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is
then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted
from the result, which is then expressed as a percentage. The calculation
assumes that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period. This
calculation can be expressed as follows:
P(1 + T)N = ERV
Where: T = average annual total return.
ERV = ending redeemable value at the
end of the period covered by the
computation of a hypothetical
$1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
N = number of years.
Total return performance for a specific period is calculated by first taking an
investment ("initial investment") in a Fund's shares on the first day of the
period and computing the "ending value" of that investment at the end of the
period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The calculation
assumes that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Total return may also be shown as the increased dollar value of the investment
over the period or as a cumulative total return which represents the change in
value of an investment over a stated period and may be quoted as a percentage
or as a dollar amount.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value is determined
by assuming complete redemption of the hypothetical investment and the
deduction of all nonrecurring charges at the end of the period covered by the
computations.
The Funds' performance figures will be based upon historical results and will
not necessarily be indicative of future performance. The Funds' returns and net
asset value will fluctuate and the net asset value of shares when sold may be
more or less than their original cost. Any additional fees charged by a dealer
or other financial services firm would reduce the returns described in this
section.
From time to time, in marketing and other literature, the Funds' performance
may be compared to the performance of other mutual funds in general or to the
<PAGE>
performance of particular types of mutual funds with similar investment goals,
as tracked by independent organizations. Among these organizations, Lipper
Analytical Services, Inc. ("Lipper"), a widely used independent research firm
which ranks mutual funds by overall performance, investment objective and
assets, may be cited. Lipper performance figures are based on changes in net
asset value, with all income and capital gains dividends reinvested. Such
calculations do not include the effect of any sales charges imposed by other
funds. The Funds will be compared to Lipper's appropriate fund category, that
is, by fund objective and portfolio holdings.
The Funds' performance may also be compared to the performance of other mutual
funds by Morningstar, Inc., which ranks funds on the basis of historical risk
and total return. Morningstar's rankings range from five stars (highest) to one
star (lowest) and represent Morningstar's assessment of the historical risk
level and total return of a fund as a weighted average for 3, 5, and 10 year
periods. Ranking are not absolute or necessarily predictive of future
performance.
Evaluations of Fund performance made by independent sources may also be used in
advertisements concerning the Funds, including reprints of or selections from,
editorials or articles about the Funds. Sources for Fund performance and
articles about the Funds may include publications such as Money, Forbes,
Kiplinger's, Financial World, Business Week, U.S. News and World Report, the
Wall Street Journal, Barron's and a variety of investment newsletters.
The Funds may compare their performance to a wide variety of indices and
measures of inflation including the Standard & Poor's Index of 500 Stocks and
the NASDAQ Over-the-Counter Composite Index. There are differences and
similarities between the investments that the Funds may purchase for their
respective portfolios and the investments measured by these indices.
Occasionally statistics may be used to specify a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market as
represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability
of net asset value or total return around an average, over a specified period
of time. The premise is that greater volatility connotes greater risk
undertaken in achieving performance.
Marketing and other Company literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares a Fund to other
Highland Funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Risk/return spectrums
also may depict funds that invest in both domestic and foreign securities or a
combination of bond and equity securities. Money market funds are designed to
maintain a constant $1.00 share price and have a fluctuating yield. Share
price, yield and total return of a bond fund will fluctuate. The share price
and return of an equity fund also will fluctuate. The description may also
compare a Fund to bank products, such as certificates of deposit. Unlike mutual
funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
<PAGE>
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus, the net asset value of the Funds will be
determined as of the close of trading on each day the New York Stock Exchange
is open for trading. The New York Stock Exchange is open for trading Monday
through Friday except New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday, the
New York Stock Exchange will not be open for trading on the preceding Friday,
and when any such holiday falls on a Sunday, the New York Stock Exchange will
not be open for trading on the following Monday unless unusual business
conditions exist, such as the ending of a monthly or the yearly accounting
period.
OTHER INFORMATION
It is possible that conditions may exist in the future which would, in the
opinion of the Board of Directors, make it undesirable for a Fund to pay for
redemptions in cash. In such cases the Board may authorize payment to be made
in portfolio securities of a Fund. Securities delivered in payment of
redemptions are valued at the same value assigned to them in computing the net
asset value per share. Shareholders receiving such securities generally will
incur brokerage costs when selling such securities.
The Prospectus and this Statement of Additional Information do not contain all
the information included in the Registration Statement filed with the
Commission under the Securities Act with respect to the securities offered by
the Funds' Prospectus. Certain portions of the Registration Statement have been
omitted from the Prospectus and this Statement of Additional Information,
pursuant to the rules and regulations of the Commission. The Registration
Statement including the exhibits filed therewith may be examined at the office
of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other documents 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 of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
FINANCIAL STATEMENTS
To be filed by amendment.
<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The following summarizes the rating categories used by Standard
& Poor's for commercial paper in which the Funds may invest:
"A-1" - Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper in which the Funds may invest:
"Prime-1" - Issuer or related supporting institutions are considered to have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following capacities:
leading market positions in well-established industries; high rates of return
on funds employed; conservative capitalization structures with moderate
reliance on debt and ample asset protection; broad margins in earning coverage
of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
The three rating categories of Duff & Phelps for investment grade commercial
paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs three
designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper in which the Funds may invest:
"Duff 1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
<PAGE>
"Duff 2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding need may enlarge
total financing requirements, access to capital markets is good.
Fitch short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years. The highest rating category
of Fitch for short-term obligations is "F-1." Fitch employs two designations,
"F-1+" and "F-1," within the highest category. The following summarizes the
rating categories used by Fitch for short-term obligations in which the Funds
may invest:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely or
incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by a bank holding
company or an entity within the holding company structure. The following
summarizes the ratings used by Thomson BankWatch in which the Funds may invest:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - this designation indicates that while the degree of safety regarding
timely payment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings in which the Funds may
invest:
"A1" - Obligations are supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating of A1+ is
assigned.
"A2" - Obligations are supported by a good capacity for timely repayment.
Corporate Long-Term Debt Ratings
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees. The debt rating is not a recommendation to purchase,
sell, or hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
<PAGE>
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
Investment Grade
AAA - Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative Grade
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. 'BB' indicates the least degree of speculation and 'C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
<PAGE>
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC - Debt rated 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such period. The 'D' rating also will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
<PAGE>
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes Bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Fitch Investors Service, Inc. Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in determining
the credit risk associated with a particular security. The ratings represent
Fitch's assessment of the issuer's ability to meet the obligations of a
specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature of taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
<PAGE>
AA Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA.' Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of the issuers is generally rated 'F-1+.'
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories cannot fully reflect the differences
in the degrees of credit risk. Moreover, the character of the risk factor
varies from industry to industry and between corporate, health care and
municipal obligations.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
<PAGE>
C Bonds are in imminent default in payment of interest or principal.
DDD, DD and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
which may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security (e.g., first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter (more
frequently, if necessary). Ratings of BBB- and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
Rating Scale Definition
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S.
Treasury debt.
AA+ High credit quality. Protection factors are AA strong.
Risk is modest, but may vary slightly from AA- time to
time because of economic conditions.
A+ Protection factors are average but adequate. A However,
risk factors are more variable and greater A- in periods
of economic areas.
BBB+ Below average protection factors but still BBB considered
sufficient for prudent investment. BBB- Considerable
variability in risk during economic cycles.
BB+ Below investment grade but deemed likely
to meet BB obligations when due.
Present or prospective BB- financial
protection factors fluctuate according
to industry conditions or company
fortunes. Overall quality may move up
or down frequently within this category.
<PAGE>
B+ Below investment grade and possessing risk that B
obligations will not be met when due. Financial B-
protection factors will fluctuate widely according to
economic cycles.
CCC Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors
are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable
company developments.
DD Default debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
<PAGE>
PART C
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Financial Statements Included in Part A:
Not applicable.
Financial Statements Included in Part B:
To be filed by amendment.
(b) Exhibits Filed Herewith:
1 Declaration of Trust of Registrant
2 By-Laws of Registrant
* 5 Investment Advisory Agreement between the Registrant and
Highland Investment Group L.P.
* 6 Form of Distribution Agreement between the Registrant and
Forum Financial Services, Inc.
* 8 Form of Custodian Agreement between the Registrant and
The First National Bank of Boston, as custodian
* 9 Administration Agreement between the Registrant and
Forum Administrative Services, LLC, as administrator
* 10 Opinion and consent of Bingham, Dana & Gould LLP, counsel
to the Registrant
* 11 Consent of [Coopers & Lybrand L.L.P.], independent auditors
of the Registrant
* 13 Initial Share Purchase Agreement
* 15 Distribution Plan of the Registrant
* 25 Powers of Attorney for the Registrant
- ---------------------
*To be filed by amendment.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities.
Title of Class Number of Record Holders
Shares of Beneficial Interest As of October 15, 1996
(par value $0.0001 per share)
Highland Growth Fund 0
Highland Aggressive Growth Fund 0
<PAGE>
Item 27. Indemnification.
Reference is hereby made to Article V of the Registrant's Declaration of
Trust, filed as Exhibit 1 herein.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
Item 28. Business and Other Connections of Investment Adviser.
Highland Investment Group L.P. (the "Adviser"), a registered investment
adviser under the Investment Advisors Act of 1940, manages the assets of the
Highland Growth Fund and the Highland Aggressive Growth Fund. Catherine C.
Lawson is a general partner and co-founder and the Chairman and Chief
Investment Officer of the Adviser. Robert Lamb III is a general partner and
co-founder and the President and Chief Executive Officer of the Adviser. Mr.
Lamb has served as the President and Chief Executive Officer and Ms. Lawson has
served as the Chairman and Chief Investment Officer of the Adviser since its
organization in May 1995. The principal business address of the Adviser is 1248
Post Road, Fairfield Connecticut 06430.
Item 29. Principal Underwriters.
(a) Forum Financial Services, Inc. the Registrant's distributor, serves
as underwriter to Avalon Capital, Inc., Core Trust (Delaware), The
CRM Funds, The Cutler Trust, Forum Funds, Monarch Funds, Norwest
Advantage Funds, Norwest Select Funds, Sound Shore Fund, Inc., Stone
Bridge Funds, Inc. and Trans Adviser Funds, Inc.
(b) John Y. Keffer is the President and Secretary of Forum Financial
Services, Inc. David R. Keffer is the Vice President and Treasurer
of Forum Financial Services, Inc. Their business address is Two
Portland Square, Portland, Maine.
(c) Not applicable.
Item 30. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
Forum Administrative Services, LLC Two Portland Square
Forum Financial Services, Inc. Portland, Maine 04101
(administrator, dividend
disbursing and transfer agent)
<PAGE>
The First National Bank of Boston 100 Federal Street
(custodian) Boston, MA 02110
Highland Investment Group L.P. 1248 Post Road
(investment adviser) Fairfield, CT 06430
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) The Registrant hereby undertakes to file a post-effective amendment
to this Registration Statement, containing reasonably current financial
statements that need not be certified, within four to six months following the
commencement of operations of the Funds.
(b) The Registrant hereby undertakes to call a meeting of shareholders
for the purpose of voting upon the question of removal of one or more of the
Trust's Trustees when requested in writing to do so by the holders of at least
10% of the Registrant's outstanding shares, and in connection therewith to
comply with the provisions of Section 16(c) of the Investment Company Act of
1940 relating to shareholder communication.
(c) The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
NOTICE
A copy of the Declaration of Trust for The Highland Family of Funds (the
"Trust") is on file with the Secretary of State of The Commonwealth of
Massachusetts and notice is hereby given that this Registration Statement has
been executed on behalf of the Trust by an officer of the Trust as an officer
and by its Trustees as trustees and not individually and the obligations of or
arising out of this Registration Statement are not binding upon any of the
Trustees, officers, or Shareholders individually but are binding only upon the
assets and property of the Trust.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Fairfield and State of Connecticut on the 16th day of October,
1996.
THE HIGHLAND FAMILY OF FUNDS
By:Catherine C. Lawson
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated below on October 16, 1996.
Signature Title
Catherine C. Lawson President, Treasurer, Chief
Catherine C. Lawson Financial and Accounting
Officer and Trustee
Robert Lamb III Vice President, Secretary
Robert Lamb III and Trustee
<PAGE>
EXHIBIT INDEX
Exhibit Name
1 Declaration of Trust of Registration
2 By-Laws of Registrant
* 5 Investment Advisory Agreement between the
Registrant and Highland Investment Group L.P., as
adviser
* 6 Form of Distribution Agreement between the
Registrant and Forum Financial Services, Inc.
* 8 Form of Custodian Agreement between the Registrant
and The First National Bank of Boston, as custodian
* 9 Administration Agreement between the Registrant and
Forum Administrative Services, LLC, as administrator
*10 Opinion and consent of Bingham, Dana & Gould LLP,
counsel to the Registrant
*11 Consent of [Coopers & Lybrand L.L.P.], independent
auditors of the Registrant
*13 Initial Share Purchase Agreement
*15 Distribution Plan of the Registrant
*25 Powers of Attorney for the Registrant
____________________
*To be filed by amendment
Exhibit 1
THE HIGHLAND FAMILY OF FUNDS
----------------------------------
DECLARATION OF TRUST
Dated as of October 7, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I--Name and Definitions 1
Section 1.1 Name 1
Section 1.2 Definitions 1
ARTICLE II--Trustees 3
Section 2.1 Number of Trustees 3
Section 2.2 Term of Office of Trustees 3
Section 2.3 Resignation and Appointment of Trustees 4
Section 2.4 Vacancies 4
Section 2.5 Delegation of Power to Other Trustees 5
ARTICLE III--Powers of Trustees 5
Section 3.1 General 5
Section 3.2 Investments 6
Section 3.3 Legal Title 7
Section 3.4 Issuance and Repurchase of Securities 8
Section 3.5 Borrowing Money; Lending Trust Property 8
Section 3.6 Delegation; Committees 8
Section 3.7 Collection and Payment 8
Section 3.8 Expenses 8
Section 3.9 Manner of Acting; By-Laws 9
Section 3.10 Miscellaneous Powers 9
Section 3.11 Principal Transactions 10
Section 3.12 Trustees and Officers as Shareholders 10
ARTICLE IV--Investment Adviser, Distributor, Administrator,
Transfer Agent and Shareholder Servicing Agents 11
Section 4.1 Investment Adviser 11
Section 4.2 Distributor 12
Section 4.3 Administrator 12
Section 4.4 Transfer Agent and Shareholder
Servicing Agents 12
Section 4.5 Parties to Contract 12
<PAGE>
ARTICLE V--Limitations of Liability of Shareholders, Trustees and
Others 13
Section 5.1 No Personal Liability of Shareholders,
Trustees, etc. 13
Section 5.2 Non-Liability of Trustees, etc. 14
Section 5.3 Mandatory Indemnification; Insurance 14
Section 5.4 No Bond Required of Trustees 16
Section 5.5 No Duty of Investigation; Notice in Trust
Instruments, etc. 16
Section 5.6 Reliance on Experts, etc. 16
ARTICLE VI--Shares of Beneficial Interest 17
Section 6.1 Beneficial Interest 17
Section 6.2 Rights of Shareholders 17
Section 6.3 Trust Only 18
Section 6.4 Issuance of Shares 18
Section 6.5 Register of Shares 18
Section 6.6 Transfer of Shares 19
Section 6.7 Notices 19
Section 6.8 Voting Powers 19
Section 6.9 Series Designation 20
ARTICLE VII--Redemptions 23
Section 7.1 Redemptions 23
Section 7.2 Suspension of Right of Redemption 23
Section 7.3 Disclosure of Holding 24
Section 7.4 Redemptions of Accounts of Less than
Minimum Amount 24
ARTICLE VIII--Determination of Net Asset Value, Net Income and
Distributions 25
ARTICLE IX--Duration; Termination of Trust; Amendment;
Mergers, etc. 25
Section 9.1 Duration 25
Section 9.2 Termination of Trust 25
Section 9.3 Amendment Procedure 26
Section 9.4 Merger, Consolidation and Sale of Assets 27
Section 9.5 Incorporation, Reorganization 28
Section 9.6 Incorporation or Reorganization of Series 28
ARTICLE X--Reports to Shareholders and Shareholder
Communications 29
ARTICLE XI--Miscellaneous 29
Section 11.1 Filing 29
Section 11.2 References and Headings 29
Section 11.3 Governing Law 30
Section 11.4 Counterparts 30
Section 11.5 Reliance by Third Parties 30
Section 11.6 Provisions in Conflict with Law or Regulations 30
Section 11.7 Principal Office and Registered Agent 31
APPENDIX I--Series Designation 33
<PAGE>
DECLARATION OF TRUST
OF
THE HIGHLAND FAMILY OF FUNDS
----------------------------------
Dated as of October 7, 1996
----------------------------------
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 (par value
$0.0001 per share) ("Shares") issued in one or more series as hereinafter
provided; and
NOW THEREFORE, the Trustees and any successor Trustees elected or
appointed in accordance with this Declaration of Trust 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 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 Highland
Family of Funds."
Section 1.2. Definitions. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means a party furnishing services to the Trust
pursuant to any contract described in Section 4.3 hereof.
(b) "By-Laws" means the By-laws referred to in Section 3.9 hereof, as
amended from time to time.
(c) "Commission" has the meaning given that term in the 1940 Act.
<PAGE>
(d) "Custodian" means a party employed by the Trust to furnish services
as described in Article X of the By-Laws.
(e) "Declaration" means this Declaration of Trust as amended or restated
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.
(f) "Distributor" means a party furnishing services to the Trust pursuant
to any contract described in Section 4.2 hereof.
(g) "Interested Person" has the meaning given that term in the 1940 Act.
(h) "Investment Adviser" means a party furnishing services to the Trust
pursuant to any contract described in Section 4.1 hereof.
(i) "Majority Shareholder Vote" has the same meaning as the phrase "vote
of a majority of the outstanding voting securities" as defined in the 1940 Act,
except that such term may be used herein with respect to the Shares of the
Trust as a whole or the Shares of any particular series, as the context may
require.
(j) "1940 Act" means the Investment Company Act of 1940 (and any
successor statute) and the Rules and Regulations thereunder, as amended from
time to time.
(k) "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.
(l) "Shareholder" means a record owner of outstanding Shares.
(m) "Shares" means the Shares of Beneficial Interest into which the
beneficial interest in the Trust shall be divided from time to time or, when
used in relation to any particular series of Shares established by the Trustees
pursuant to Section 6.9 hereof, equal proportionate transferable units into
which such series of Shares shall be divided from time to time. The term
"Shares" includes fractions of Shares as well as whole Shares.
<PAGE>
(n) "Shareholder Servicing Agent" means a party furnishing services to
the Trust pursuant to any shareholder servicing contract described in Section
4.4 hereof.
(o) "Transfer Agent" means a party furnishing services to the Trust
pursuant to any transfer agency contract described in Section 4.4 hereof.
(p) "Trust" refers to the Massachusetts voluntary association established
by this Declaration.
(q) "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, including, without limitation, any and all property
allocated or belonging to any series of Shares pursuant to Section 6.9 hereof.
(r) "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 or appointed, 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
TRUSTEES
Section 2.1. Number of Trustees. The number of Trustees shall be such
number as shall be fixed from time to time by a majority of the Trustees,
provided, however, that (after the initial organizational Trustees) the number
of Trustees shall in no event be less than three nor more than 15. Except as
determined from time to time by resolution of the Trustees, no decrease in the
number of Trustees shall have the effect of removing any Trustee from office
prior to the expiration of his term, but the number of Trustees may be
decreased in conjunction with the removal of a Trustee pursuant to Section 2.2
hereof.
Section 2.2. Term of Office of Trustees. Subject to the provisions of
Section 16(a) of the 1940 Act, the Trustees shall hold office during the
lifetime of this Trust and until its termination as hereinafter provided;
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
<PAGE>
later date as is specified therein; (b) any Trustee may be removed 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) any Trustee who has attained a mandatory retirement age
established pursuant to any written policy adopted from time to time by at
least two-thirds of the Trustees shall, automatically and without action of
such Trustee or the remaining Trustees, be deemed to have retired in accordance
with the terms of such policy, effective as of the date determined in
accordance with such policy; (d) any Trustee who has become incapacitated by
illness or injury as determined by a majority of the other Trustees, may be
retired by written instrument signed by a majority of the other Trustees,
specifying the date of his retirement; and (e) a Trustee may be removed at any
meeting of Shareholders by a vote of two-thirds of the outstanding Shares. For
purposes of the foregoing clause (b), the term "cause" shall include, but not
be limited to, willful misconduct, dishonesty, fraud, a felony conviction, or
failure to comply with such written policies as may from time to time be
adopted by at least two-thirds of the Trustees with respect to the conduct of
Trustees and attendance at meetings. Upon the resignation, retirement 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, retiring 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. In case of the
declination, death, resignation, retirement, removal or inability of any of the
Trustees, or in case a vacancy shall, by reason of an increase in number, or
for any other reason, exist, a majority of the remaining Trustees shall fill
such vacancy by appointing such other individual as they in their discretion
shall see fit. 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. The power of appointment is subject to the provisions of
Section 16(a) of the 1940 Act.
Section 2.4. Vacancies. The death, declination, resignation, retirement,
removal or incapacity of the Trustees, 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, or the number of
<PAGE>
Trustees as fixed is reduced, 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.
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 months at
any one time to any other Trustee or Trustees; provided that in no case shall
fewer than two Trustees personally exercise the powers granted to the Trustees
under the Declaration except as herein otherwise expressly provided.
ARTICLE III
POWERS OF TRUSTEES
Section 3.1. General. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by the Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its
branches and maintain offices both within and without the Commonwealth of
Massachusetts, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the
United States of America and of foreign governments, and to do all such other
things and execute all such instruments as the Trustees deem necessary, proper
or desirable in order to promote the interests of the Trust although such
things are not herein specifically mentioned. Any determination as to what is
in the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of the Declaration, the presumption
shall be in favor of a grant of power to the Trustees.
The Trustees in all instances shall act as principals, and are and shall
be free from the control of the Shareholders. The Trustees shall have full
power and authority to do any and all acts and to make and execute any and all
contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The Trustees shall not in any way
be bound or limited by present or future laws or customs in regard to Trust
investments, but shall have full authority and power to make any and all
investments which they, in their uncontrolled discretion, shall deem proper to
accomplish the purposes of this Trust.
<PAGE>
The Trust shall be of the type commonly called a Massachusetts business
trust, and, without limiting the provisions hereof, the Trust may exercise all
powers which are ordinarily exercised by such a trust.
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:
(i) to conduct, operate and carry on the business of an investment
company;
(ii) to subscribe for, invest in, reinvest in, purchase or otherwise
acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, lend
or otherwise deal in or dispose of U.S. and foreign currencies, any form of
gold or other precious metal, commodity contracts, any form of option contract,
contracts for the future acquisition or delivery of fixed income or other
securities, shares of, or any other interest in, any investment company as
defined in the Investment Company Act of 1940, and securities and related
derivatives of every nature and kind, including, without limitation, all types
of bonds, debentures, stocks, negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or
indebtedness, commercial paper, repurchase agreements, bankers acceptances, and
other securities of any kind, issued, created, guaranteed or sponsored by any
and all Persons, including, without limitation,
(A) states, territories and possessions of the United States and the
District of Columbia and any political subdivision, agency or instrumentality
of any such Person,
(B) the U.S. Government, any foreign government, any political
subdivision or any agency or instrumentality of the U.S. Government, any
foreign government or any political subdivision of the U.S. Government or any
foreign government,
(C) any international or supranational instrumentality,
(D) any bank or savings institution, or
(E) any corporation, trust, partnership or other organization organized
under the laws of the United States or of any state, territory or possession
thereof, or under any foreign law;
<PAGE>
or in "when issued" contracts for any such securities, to retain Trust assets
in cash and from time to time to change the securities or obligations in which
the assets of the Trust are invested; and to exercise any and all rights,
powers and privileges of ownership or interest in respect of any and all such
investments of every kind and description, including, without limitation, the
right to consent and otherwise act with respect thereto, with power to
designate one or more Persons to exercise any of said rights, powers and
privileges in respect of any of said investments;
(iii) to hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form; or either in
its own name or in the name of a custodian or a nominee or nominees, subject in
either case to proper safeguards according to the usual practice of
Massachusetts trust companies or investment companies;
(iv) to definitively interpret the investment objectives, policies and
limitations of the Trust or any series; and
(v) to carry on any other business in connection with or incidental to
any of the foregoing powers, to do everything necessary, proper or desirable
for the accomplishment of any purpose or the attainment of any object or the
furtherance of any power herein before set forth, and to do every other act or
thing incidental or appurtenant to or connected with the aforesaid purposes,
objects or powers.
(b) The Trustees shall not be limited to investing in securities or
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.
(c) Notwithstanding any other provision of this Declaration to the
contrary, the Trustees shall have the power in their discretion without any
requirement of approval by Shareholders to either invest all or a portion of
the Trust Property, or sell all or a portion of the Trust Property and invest
the proceeds of such sales, in another investment company that is registered
under the 1940 Act.
Section 3.3. Legal Title. Legal title to all 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 or nominee, on such terms as the Trustees may determine. The
right, title and interest of the Trustees in the Trust Property shall vest
<PAGE>
automatically in each Person who may hereafter become a Trustee. Upon the
resignation, removal or death of a Trustee, such Trustee 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 Repurchase of Securities. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares and,
subject to the provisions set forth in Articles VII, VIII and IX and Section
6.9 hereof, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds of the Trust or other Trust
Property whether capital or surplus or otherwise, to the full extent now or
hereafter permitted by the laws of the Commonwealth of Massachusetts governing
business corporations.
Section 3.5. Borrowing Money; Lending Trust Property. The Trustees shall
have power to borrow money or otherwise obtain credit and to secure the same by
mortgaging, pledging or otherwise subjecting as security the Trust Property, to
endorse, guarantee, or undertake the performance of any obligation, contract or
engagement of any other Person and to lend Trust Property.
Section 3.6. Delegation; Committees. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees,
independent contractors 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.
Section 3.7. Collection and Payment. Subject to Section 6.9 hereof, 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, arbitrate,
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 3.8. Expenses. Subject to Section 6.9 hereof, 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 from the funds of the Trust to
themselves as Trustees. The Trustees shall fix the compensation of all
<PAGE>
officers, employees and Trustees. The Trustees shall be reimbursed from the
Trust estate or the assets belonging to the appropriate series for their
expenses and disbursements and for all losses and liabilities by them incurred
in administering the Trust; and for the payment of such expenses,
disbursements, losses and liabilities, the Trustees shall have a lien on the
assets belonging to the appropriate series prior to any rights of interests of
the Shareholders thereto.
Section 3.9. 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 at which a
quorum (as determined in the By-Laws) is present, including any meeting held by
means of a conference telephone circuit or similar communications equipment by
means of which all persons participating in the meeting can hear each other, or
by written consents of a majority of 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 3.10. 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, the Administrator, Trustees,
officers, employees, agents, the Investment Adviser, the Distributor, 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, indemnify
any person with whom the Trust has dealings, including any Investment Adviser,
Administrator, Custodian, Distributor, Transfer Agent, Shareholder Servicing
Agent, any dealer, or any other agent or independent contractor, to such extent
<PAGE>
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; (i) adopt a seal for the
Trust, provided, that the absence of such seal shall not impair the validity of
any instrument executed on behalf of the Trust; (j) set record dates for any
purpose; (k) subject to Section 9.4 and Section 9.6, merge or consolidate the
Trust with any other corporation, association, trust or other organization and
sell, convey, transfer, or lease all or substantially all of the assets of the
Trust; and (l) set apart, from time to time, out of any funds of the Trust a
reserve or reserves for any proper purpose, and abolish any such reserve.
Section 3.11. Principal Transactions. Except in transactions permitted by
the 1940 Act, or any order of exemption issued by the Commission, the Trustees
shall not, on behalf of the Trust, buy any securities (other than Shares) from
or sell any securities (other than Shares) to, or lend any assets of the Trust
to, any Trustee or officer of the Trust or any firm of which any such Trustee
or officer is a member acting as principal, or have any such dealings with any
Investment Adviser, Administrator, Shareholder Servicing Agent, Custodian
(other than repurchase agreements), Distributor or Transfer Agent or with any
Interested Person of such Person; but the Trust may, upon customary terms,
employ any such Person, or firm or company in which such Person is an
Interested Person, as broker, legal counsel, registrar, transfer agent,
dividend disbursing agent or custodian.
Section 3.12. Trustees and Officers as Shareholders. Except as
hereinafter provided, no officer, Trustee or member of any advisory board of
the Trust, and no member, partner, officer, director or trustee of the
Investment Adviser, Administrator or of the Distributor, and no Investment
Adviser, Administrator or Distributor of the Trust, shall take long or short
positions in the securities issued by the Trust. The foregoing provision shall
not prevent:
(a) The Distributor from purchasing Shares from the Trust if such
purchases are limited (except for reasonable allowances for clerical errors,
delays and errors of transmission and cancellation of orders) to purchases for
the purpose of filling orders for Shares received by the Distributor and
provided that orders to purchase from the Trust are entered with the Trust or
the Custodian promptly upon receipt by the Distributor of purchase orders for
Shares, unless the Distributor is otherwise instructed by its customer;
(b) The Distributor from purchasing Shares as agent for the account of the
Trust;
<PAGE>
(c) The purchase from the Trust or from the Distributor of Shares by any
officer, Trustee or member of any advisory board of the Trust or by any member,
partner, officer, director or trustee of the Investment Adviser or of the
Distributor at a price not lower than the net asset value of the Shares at the
moment of such purchase, provided that any such sales are only to be made
pursuant to a uniform offer described in the current prospectus or statement of
additional information for the Shares being purchased; or
(d) The Investment Adviser, the Distributor, the Administrator, or any of
their officers, partners, directors or trustees from purchasing Shares prior to
the effective date of the Trust's Registration Statement under the Securities
Act of 1933, as amended, relating to the Shares.
ARTICLE IV
INVESTMENT ADVISER, DISTRIBUTOR, ADMINISTRATOR, TRANSFER
AGENT AND SHAREHOLDER SERVICING AGENTS
Section 4.1. Investment Adviser. Subject to a Majority Shareholder Vote
of the Shares of each series affected thereby, the Trustees may in their
discretion from time to time enter into one or more investment advisory or
management contracts whereby the other party to each such contract shall
undertake to furnish the Trust such management, investment advisory,
statistical and research facilities and services, promotional activities, and
such other facilities and services, if any, with respect to one or more series
of Shares, 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 provision 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 of
such purchases, sales, loans or exchanges shall be deemed to have been
authorized by all the Trustees. Such services may be provided by one or more
Persons.
Upon termination of any contract with Highland Investment Group, L.P., or
any corporation affiliated therewith, acting as investment adviser or manager,
the Trustees will promptly change the name of the Trust (and any series thereof
of which Highland Investment Group, L.P. or any corporation affiliated
<PAGE>
therewith is not then acting as investment adviser or manager) to a name which
does not include "Highland" or any approximation or abbreviation thereof.
Section 4.2. Distributor. The Trustees may in their discretion from time
to time enter into one or more distribution contracts providing for the sale of
Shares whereby the Trust may either agree to sell the Shares to the other party
to any such contract or appoint any such other party its sales agent for such
Shares. In either case, any such contract shall be on such terms and conditions
as the Trustees may in their discretion determine, provided that such terms and
conditions are not inconsistent with the provisions of the Declaration or the
By-Laws; and such contract may also provide for the repurchase or 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 and sales
agreements with registered securities dealers and depository institutions to
further the purpose of the distribution or repurchase of the Shares. Such
services may be provided by one or more Persons.
Section 4.3. Administrator. The Trustees may in their discretion from
time to time enter into one or more administrative services contracts whereby
the other party to each such contract shall undertake to furnish such
administrative services to the Trust 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, provided that such terms and conditions are not
inconsistent with the provisions of this Declaration or the By-Laws. Such
services may be provided by one or more Persons.
Section 4.4. Transfer Agent and Shareholder Servicing Agents. The
Trustees may in their discretion from time to time enter into one or more
transfer agency and shareholder servicing contracts whereby the other party to
each such contract shall undertake to furnish such transfer agency and/or
shareholder services to the Trust or to Shareholders of the Trust 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, provided that
such terms and conditions are not inconsistent with the provisions of this
Declaration or the By-Laws. Such services may be provided by one or more
Persons. Except as otherwise provided in the applicable shareholder servicing
contract, a Shareholder Servicing Agent shall be deemed to be the record owner
of outstanding Shares beneficially owned by customers of such Shareholder
Servicing Agent for whom it is acting pursuant to such shareholder servicing
contract.
Section 4.5. Parties to Contract. Any contract of the character described
in Section 4.1, 4.2, 4.3 or 4.4 of this Article IV or any Custodian contract as
described in Article X of the By-Laws may be entered into with any Person,
<PAGE>
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, or otherwise interested in such 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 liable
merely by reason of such relationship for any loss or expense to the Trust
under or by reason of any such 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
Sections 4.1, 4.2, 4.3 and 4.4 above or any Custodian contract as described in
Article X of the By-Laws, and any individual may be financially interested or
otherwise affiliated with Persons who are parties to any or all of the
contracts mentioned in this Section 4.5.
ARTICLE V
LIMITATIONS ON LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 5.1. No Personal Liability of Shareholders, Trustees, etc. 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. No Trustee, officer or employee of the Trust shall be subject to any
personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust and
all such Persons shall look solely to the Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If
any Shareholder, Trustee, officer or employee, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability, he shall not, on
account thereof, be held to any personal liability. 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. Notwithstanding any other provision of this
Declaration to the contrary, no Trust Property shall be used to indemnify or
reimburse any Shareholder of any Shares of any series other than Trust Property
allocated or belonging to that series.
<PAGE>
Section 5.2. Non-Liability of Trustees, etc. No Trustee, officer or
employee of the Trust shall be liable to the Trust or to any Shareholder,
Trustee, officer, 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), or for any error of judgment or
mistake of fact or law, except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of his duties.
Section 5.3. Mandatory Indemnification; Insurance. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is or has been a Trustee, officer or employee of the
Trust shall be indemnified by the Trust, to the fullest extent permitted by law
(including the 1940 Act) as currently in effect or as hereafter amended,
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, officer or employee 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, officer
or employee:
(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;
(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; or
(iii)in the event of a settlement involving a payment by a Trustee,
officer or employee or other disposition not involving a final adjudication as
provided in paragraph (b) (i) or (b) (ii) above resulting in a payment by a
Trustee, officer or employee, unless there has been either a determination that
<PAGE>
such Trustee, officer or employee did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the settlement or
other disposition or by 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) Subject to the provisions of the 1940 Act, the Trust may maintain
insurance for the protection of the Trust Property, its present or former
Shareholders, Trustees, officers, employees, independent contractors and agents
in such amount as the Trustees shall deem adequate to cover possible tort
liability (whether or not the Trust would have the power to indemnify such
Persons against such liability), and such other insurance as the Trustees in
their sole judgment shall deem advisable.
(d) The rights of indemnification herein provided shall be severable,
shall not affect any other rights to which any Trustee, officer or employee may
now or hereafter be entitled, shall continue as to a Person who has ceased to
be such a Trustee, officer or employee and shall inure to the benefit of the
heirs, executors and administrators of such Person. Nothing contained herein
shall affect any rights to indemnification to which personnel other than
Trustees, officers and employees may be entitled by contract or otherwise under
law.
(e) 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
<PAGE>
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 proceeding on the same or similar
grounds is then or had been pending.
Section 5.4. 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 5.5. No Duty of Investigation; Notice in Trust Instruments, etc.
No purchaser, lender, Shareholder Servicing Agent, Transfer Agent or other
Person dealing with the Trustees or any officer, employee or agent of the Trust
shall be bound to make any inquiry concerning the validity of any transaction
purporting to be made by the Trustees or by said officer, employee or agent or
be liable for the application of money or property paid, loaned, or delivered
to or on the order of the Trustees or of said officer, employee or agent. 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.
Every written obligation, contract, instrument, certificate, Share, other
security of the Trust or undertaking made or issued by the Trustees shall
recite that the same is executed or made by them not individually, but as
Trustees under the Declaration, and that the obligations of any such instrument
are not binding upon any of the Trustees or Shareholders individually, but bind
only the trust estate, and may contain any further recital which they or he may
deem appropriate, but the omission of such recital shall not operate to bind
any of the Trustees or Shareholders individually. The Trustees shall at all
times maintain insurance for the protection of the Trust Property,
Shareholders, Trustees, officers, employees and agents in such amount as the
Trustees shall deem adequate to cover possible tort liability, and such other
insurance as the Trustees in their sole judgment shall deem advisable.
Section 5.6. Reliance on Experts, etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
<PAGE>
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, any Shareholder Servicing Agent, selected dealers,
accountants, appraisers or other experts or consultants selected with
reasonable care by the Trustees, officers or employees of the Trust, regardless
of whether such counsel or expert may also be a Trustee.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 6.1. Beneficial Interest. The interest of the beneficiaries
hereunder may be divided into transferable Shares, which may be divided into
one or more series as provided in Section 6.9 hereof. Each such series shall
have such class or classes of Shares as the Trustees may from time to time
determine. The number of Shares authorized hereunder is unlimited. The Trustees
may divide or combine the Shares into a greater or lesser number, and may
classify or reclassify any unissued Shares into one or more series or classes
of Shares. 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 non-assessable.
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 an assessment of any kind by
virtue of their ownership of Shares. The Shares shall be personal property
giving only the rights specifically set forth in the Declaration. 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. Every Shareholder by virtue of having become a Shareholder
shall be held expressly to have assented and agreed to the terms of this
Declaration and to have become a party hereto. The death of a Shareholder
during the continuance of the Trust shall not operate to terminate the Trust
nor entitle the representative of any deceased Shareholder to an accounting or
to take any action in court or elsewhere against the Trust or the Trustees, but
only to the rights of said decedent under this Trust.
<PAGE>
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 the
Shareholders. 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 or 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, 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, and in connection, with the assumption of liabilities) and businesses. In
connection with any issuance of Shares, the Trustees may issue fractional
Shares. The Trustees may from time to time divide or combine the Shares of any
series into a greater or lesser number without thereby changing their
proportionate beneficial interests in Trust Property allocated or belonging to
such series. Contributions to the Trust may be accepted for, and Shares shall
be redeemed as, whole Shares and/or fractions of a Share.
Section 6.5. Register of Shares. A register or registers shall be kept at
the principal office of the Trust or at an office of the Transfer Agent (and/or
any sub-transfer agent which may be a Shareholder Servicing Agent) which
register or registers, taken together, 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 or registers 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, a
sub-transfer agent, or such other officer or agent of the Trustees as shall
keep the said register for entry thereon. It is not contemplated that
certificates will be issued for the Shares; however, the Trustees, in their
discretion, may authorize the issuance of Share certificates and promulgate
appropriate rules and regulations as to their use.
The Trust shall be entitled to treat the holder of record of any Share or
Shares as the holder in fact thereof, and shall not be bound to recognize any
<PAGE>
equitable or other claim of interest in such Share or Shares on the part of any
other person except as may be otherwise expressly provided by law.
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 authorized in writing, upon delivery to the Trustees, the Transfer
Agent or a sub-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, a
sub-transfer agent or registrar 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, the Transfer
Agent or a sub-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, sub-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.
Section 6.8. Voting Powers. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Section 16 of the 1940
Act, (or any other applicable current or successor provision), (ii) for the
removal of Trustees as provided in Section 2.2 hereof, (iii) with respect to
any investment advisory or management contract as provided in Section 4.1
hereof, (iv) with respect to termination of the Trust as provided in Section
9.2 hereof, (v) with respect to any amendment of this Declaration to the extent
and as provided in Section 9.3 hereof, (vi) with respect to any merger,
consolidation or sale of assets as provided in Sections 9.4 and 9.6 hereof,
(vii) with respect to incorporation of the Trust or any series to the extent
and as provided in Sections 9.5 and 9.6 hereof, (viii) to the same extent as
<PAGE>
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 (ix) 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
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, except that Shares held
in the treasury of the Trust shall not be voted. Shares shall be voted by
individual series on any matter submitted to a vote of the Shareholders of the
Trust except as provided in Section 6.9(g) hereof. 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 Shareholder votes and meetings and related
matters.
Section 6.9. Series Designation. As set forth in Appendix I hereto, the
Trustees have authorized the division of Shares into series, as designated and
established pursuant to the provisions of Appendix I and this Section 6.9. The
Trustees, in their discretion, may authorize the division of Shares into one or
more additional series, and the different series shall be established and
designated, and the variations in the relative rights, privileges and
preferences as between the different series shall be fixed and determined by
the Trustees upon and subject to the following provisions:
(a) All Shares shall be identical except that there may be such
variations as shall be fixed and determined by the Trustees between different
series as to purchase price, right of redemption and the price, terms and
manner of redemption, and special and relative rights as to dividends and on
liquidation.
(b) The number of authorized Shares and the number of Shares of each
series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and reacquired
of any series into one or more series that may be established and designated
from time to time. The Trustees may hold as treasury shares (of the same or
some other series), reissue for such consideration and on such terms as they
may determine, or cancel any Shares of any series reacquired by the Trust at
their discretion from time to time.
<PAGE>
(c) All consideration received by the Trust for the issuance or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income and earnings thereon,
profits therefrom, and proceeds thereof, including any proceeds derived from
the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may
be, shall irrevocably belong to that series for all purposes, subject only to
the rights of creditors of such series, and shall be so recorded upon the books
of account of the Trust. In the event that there are any assets, income,
earnings, profits, proceeds, funds or payments which are not readily
identifiable as belonging to any particular series, the Trustees shall allocate
them to and among any one or more of the series established and designated from
time to time in such manner and on such basis as the Trustees, in their sole
discretion, deem fair and equitable. Each such allocation by the Trustees shall
be conclusive and binding upon the Shareholders of all series for all purposes.
No Shareholder of any particular series shall have any claim on or right to any
assets allocated or belonging to any other series of Shares.
(d) The assets belonging to each particular series shall be charged with
the liabilities of the Trust in respect of that series and all expenses, costs,
charges and reserves attributable to that series, and any general liabilities,
expenses, costs, charges or reserves of the Trust which are not readily
identifiable as belonging to any particular series shall be allocated and
charged by the Trustees to and among any one or more of the series established
and designated from time to time in such manner and on such basis as the
Trustees, in their sole discretion, deem fair and equitable. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all series for all purposes.
The Trustees shall have full discretion, to the extent not inconsistent with
the 1940 Act, to determine which items shall be treated as income and which
items as capital; and each such determination and allocation shall be
conclusive and binding upon the Shareholders. Under no circumstances shall the
assets allocated or belonging to any particular series be charged with
liabilities, expenses, costs, charges or reserves attributable to any other
series. All Persons who have extended credit which has been allocated to a
particular series, or who have a claim or contract which has been allocated to
any particular series, shall look only to the assets of that particular series
for payment of such credit, claim or contract.
(e) The power of the Trustees to invest and reinvest the Trust Property
allocated or belonging to any particular series shall be governed by Section
3.2 hereof unless otherwise provided in the instrument of the Trustees
establishing such series which is hereinafter described.
<PAGE>
(f) Each Share of a series shall represent a beneficial interest in the
net assets allocated or belonging to such series only, and such interest shall
not extend to the assets of the Trust generally. Dividends and distributions on
Shares of a particular series may be paid with such frequency as the Trustees
may determine, which may be monthly or otherwise, pursuant to a standing vote
or votes adopted only once or with such frequency as the Trustees may
determine, to the Shareholders of that series only, from such of the income and
capital gains, accrued or realized, from the assets belonging to that series,
as the Trustees may determine, after providing for actual and accrued
liabilities belonging to that series. All dividends and distributions on Shares
of a particular series shall be distributed pro rata to the Shareholders of
that series in proportion to the number of Shares of that series held by such
Shareholders at the date and time of record established for the payment of such
dividends or distributions. Shares of any particular series of the Trust may be
redeemed solely out of Trust Property allocated or belonging to that series.
Upon liquidation or termination of a series of the Trust, Shareholders of such
series shall be entitled to receive a pro rata share of the net assets of such
series only.
(g) Notwithstanding any provision hereof to the contrary, on any matter
submitted to a vote of the Shareholders of the Trust, all Shares then entitled
to vote shall be voted by individual series, except that (i) when required by
the 1940 Act to be voted in the aggregate, Shares shall not be voted by
individual series, and (ii) when the Trustees have determined that the matter
affects only the interests of Shareholders of one or more series or classes of
Shares of a series, only Shareholders of such series or class shall be entitled
to vote thereon.
(h) The establishment and designation of any series of Shares shall be
effective upon the execution by a majority of the Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such series (in the case of the series designated as set forth
in Appendix I, such instrument being this Declaration including such Appendix
I), or as otherwise provided in such instrument, or upon a resolution adopted
by a majority of the Trustees and the execution by an officer of the Trust on
behalf of the Trustees of an instrument setting forth such establishment and
designation and the relative rights and preferences of such series, or as
otherwise provided in such instrument. At any time that there are no Shares
outstanding of any particular series previously established and designated, the
Trustees may by an instrument executed by a majority of their number abolish
that series and the establishment and designation thereof. Each instrument
<PAGE>
referred to in this paragraph shall have the status of an amendment to this
Declaration.
(i) Notwithstanding anything in this Declaration to the contrary, the
Trustees may, in their discretion, authorize the division of Shares of any
series into Shares of one or more classes or subseries of such series. All
Shares of a class or a subseries shall be identical with each other and with
the Shares of each other class or subseries of the same series except for such
variations between classes or subseries as may be approved by the Board of
Trustees and be permitted under the 1940 Act or pursuant to any exemptive order
issued by the Commission.
ARTICLE VII
REDEMPTIONS
Section 7.1 Redemptions. In case any Shareholder at any time desires to
dispose of his Shares, he may deposit his certificate or certificates therefor,
duly endorsed in blank or accompanied by an instrument of transfer executed in
blank, or if the Shares are not represented by any certificate, a written
request or other such form of request as the Trustees may from time to time
authorize, at the office of the Transfer Agent or a sub-transfer agent keeping
the register of Shares with respect to such Shareholders, or at the office of
any bank or trust company, either in or outside of the Commonwealth of
Massachusetts, which is a member of the Federal Reserve System and which the
said Transfer Agent or the said sub-transfer agent has designated in writing
for that purpose, together with an irrevocable offer in writing in a form
acceptable to the Trustees to sell the Shares represented thereby to the Trust
at the net asset value per Share thereof (less any applicable redemption fee or
sales charge), next determined after such deposit as provided in Article VIII
hereof. Payment (which may be in cash or in kind) for said Shares shall be made
to the Shareholder within seven days after the date on which the deposit is
made, unless (i) the date of payment is postponed pursuant to Section 7.2
hereof, or (ii) the receipt, or verification of receipt, of the purchase price
for the Shares to be redeemed is delayed, in either of which events payment may
be delayed beyond seven days.
Section 7.2 Suspension of Right of Redemption. The Trust may declare a
suspension of the right of redemption or postpone the date of payment of the
redemption proceeds for the whole or any part of any period (i) during which
the New York Stock Exchange is closed other than customary week-end and holiday
closings, (ii) during which trading on the New York Stock Exchange is
restricted, (iii) during which an emergency exists as a result of which
disposal by the Trust of securities owned by it is not reasonably practicable
<PAGE>
or it is not reasonably practicable for the Trust fairly to determine the value
of its net assets, or (iv) during which the Commission for the protection of
Shareholders by order permits the suspension of the right of redemption or
postponement of the date of payment of the redemption proceeds; provided that
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (ii), (iii) or (iv) exist. Such suspension shall
take effect at such time as the Trust shall specify but not later than the
close of business on the business day next following the declaration of
suspension, and thereafter there shall be no right of redemption or payment of
the redemption proceeds until the Trust shall declare the suspension at an end,
except that the suspension shall terminate in any event on the first day on
which said stock exchange shall have reopened or the period specified in (ii)
or (iii) shall have expired (as to which, in the absence of an official ruling
by the Commission, the determination of the Trust shall be conclusive). In the
case of a suspension of the right of redemption, a Shareholder may either
withdraw his request for redemption or receive payment based on the net asset
value existing after the termination of the suspension.
Section 7.3. Disclosure of Holding. The Shareholders of the Trust shall
upon demand disclose to the Trustees in writing such information with respect
to direct and indirect ownership of Shares of the Trust as the Trustees deem
necessary to comply with the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), or to comply with the requirements of any other
authority. Upon the failure of a Shareholder to disclose such information and
to comply with such demand of the Trustees, the Trust shall have the power to
redeem such Shares at a redemption price determined in accordance with Section
7.1 hereof.
Section 7.4 Redemptions of Accounts of Less than Minimum Amount. The
Trustees shall have the power at any time to redeem Shares of any Shareholder
at a redemption price determined in accordance with Section 7.1 hereof if at
such time the aggregate net asset value of the Shares owned by such Shareholder
is less than a minimum amount as determined from time to time and disclosed in
a prospectus of the Trust. A Shareholder shall be notified that the aggregate
value of his Shares is less than such minimum amount and allowed 60 days to
make an additional investment before redemption is processed.
<PAGE>
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
(a) The Trustees may from time to time declare and pay dividends and
other distributions. The Trustees, in their absolute discretion, may prescribe
and shall set forth in the By-Laws or in a duly adopted vote or votes 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.
(b) Dividends and other distributions may be declared pursuant to a
standing resolution or resolutions adopted only once or with such frequency as
the Trustees may determine, and may be payable in Shares of that series or
class thereof, as appropriate, at the election of each Shareholder of that
series or class. All dividends and distributions on Shares of a particular
series shall be distributed pro rata to the holders of that series in
proportion to the number of Shares of that series held by such payment of such
dividends or distributions, except that such dividends and distributions shall
approximately reflect expenses allocated to a particular class of such series.
(c) Anything in this instrument to the contrary notwithstanding, the
Trustees may at any time declare and distribute a "stock dividend" pro rata
among the Shareholders of a particular series or of a class thereof as of the
record date of that series.
ARTICLE IX
DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC.
Section 9.1. Duration. The Trust shall continue without limitation of
time but subject to the provisions of this Article IX.
Section 9.2. Termination of Trust. (a) The Trust may be terminated (i) by
a Majority Shareholder Vote of its Shareholders, or (ii) by the Trustees by
written notice to the Shareholders. Any series of the Trust may be terminated
(i) by a Majority Shareholder Vote of the Shareholders of that series, or (ii)
by the Trustees by written notice to the Shareholders of that series. Upon the
termination of the Trust or any series of the Trust:
<PAGE>
(i) The Trust or series of 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 or
series of the Trust and all the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust or series of the Trust shall have
been wound up, including the power to fulfill or discharge the contracts of the
Trust, collect the assets of the Trust or series of the Trust, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any part of the
remaining Trust Property of the Trust or series of the Trust 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
the liabilities of the Trust or series of the Trust, and to do all other acts
appropriate to liquidate the business of the Trust or series of the Trust;
provided, that any sale, conveyance, assignment, exchange, transfer or other
disposition of all or substantially all of the Trust Property of the Trust or
series of the Trust shall require Shareholder approval in accordance with
Section 9.4 or 9.6 hereof, respectively; 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 of the Trust or series of the Trust, in
cash or in kind or partly in cash and partly in kind, among the Shareholders of
the Trust or series of the Trust according to their respective rights.
(b) After termination of the Trust or series of the Trust and
distribution to the Shareholders of the Trust or series of the Trust as herein
provided, a majority of the Trustees shall execute and lodge among 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 with respect to the Trust or series of the
Trust, and the rights and interests of all Shareholders of the Trust or series
of the Trust shall thereupon cease.
Section 9.3. Amendment Procedure. All rights granted to Shareholders
hereunder are granted subject to a right to amend this Declaration, except as
otherwise provided.
(a) This Declaration may be amended by a Majority Shareholder Vote of the
Shareholders or by any 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 of the Trust. The Trustees may also amend this
<PAGE>
Declaration without the vote or consent of Shareholders to designate series in
accordance with Section 6.9 hereof, to change the name of the Trust, to change
the registered agent and/or address of any registered agent specified in
Section 11.7 hereof, to change the principal office of the Trust, to supply any
omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, or to conform this Declaration to the
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the Code, but the Trustees shall
not be liable for failing so to do.
(b) No amendment which the Trustees have determined would affect the
rights, privileges or interests of holders of a particular series of Shares,
but not the rights, privileges or interests of holders of all series of Shares
generally, and which would otherwise require a Majority Shareholder Vote under
paragraph (a) of this Section 9.3, may be made except with the vote or consent
by a Majority Shareholder Vote of Shareholders of such series.
(c) Notwithstanding any other provision hereof, no amendment may be made
under this Section 9.3 which would change any rights with respect to the
Shares, or any series of 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 Majority Shareholder Vote of the Shares or
that series of Shares. 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 assessments upon Shareholders.
(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, and executed by a majority of the Trustees, shall be
conclusive evidence of such amendment when lodged among the records of the
Trust.
(e) 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 Shares of a particular series of the Trust shall
have become effective, this Declaration may be amended in any respect as to
that series by the affirmative vote of a majority of the Trustees or by an
instrument signed by a majority of the Trustees.
Section 9.4. Merger, Consolidation and Sale of Assets. The Trust may
merge or consolidate with any other corporation, association, trust or other
<PAGE>
organization or may sell, lease or exchange all or substantially all of the
Trust Property (or all or substantially all of the Trust Property allocated or
belonging to a particular series of the Trust) including its good will, upon
such terms and conditions and for such consideration when and as authorized at
any meeting of Shareholders called for such purpose by the vote of the holders
of two-thirds of the outstanding Shares of all series of the Trust voting as a
single class, or of the affected series of the Trust, as the case may be, or by
an instrument or instruments in writing without a meeting, consented to by the
vote of the holders of two-thirds of the outstanding Shares of all series of
the Trust voting as a single class, or of the affected series of the Trust, as
the case may be; provided, however, that if such merger, consolidation, sale,
lease or exchange is recommended by the Trustees, the vote or written consent
by Majority Shareholder 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. Nothing contained herein shall be construed as
requiring approval of Shareholders for any sale of assets in the ordinary
course of the business of the Trust.
Section 9.5. Incorporation, 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, unit
investment 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 in which the Trust holds or is about to acquire shares or any
other interest. Subject to Section 9.4 hereof, 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. Nothing contained in this Section 9.5 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 9.6. Incorporation or Reorganization of Series. With the approval
of a Majority Shareholder Vote of any series, the Trustees may sell, lease or
<PAGE>
exchange all of the Trust Property allocated or belonging to that series, or
cause to be organized or assist in organizing a corporation or corporations
under the laws of any other jurisdiction, or any other trust, unit investment
trust, partnership, association or other organization, to take over all of the
Trust Property allocated or belonging to that series and to sell, convey and
transfer such Trust Property to any such corporation, trust, unit investment
trust, partnership, association, or other organization in exchange for the
shares or securities thereof or otherwise.
ARTICLE X
REPORTS TO SHAREHOLDERS AND SHAREHOLDER COMMUNICATIONS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust, including financial
statements which shall at least annually be certified by independent public
accountants.
ARTICLE XI
MISCELLANEOUS
Section 11.1. 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 place or places as may be required under the laws of the
Commonwealth of Massachusetts and may also be filed or recorded in such other
places as the Trustees deem appropriate. Each amendment shall be signed a
majority of the Trustees or shall be accompanied by a certificate of an
appropriate officer of the Trust stating that such amendment was properly
approved. Unless such amendment or certificate sets forth a later date on which
it shall take effect, any amendment shall take effect as of its approval. 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 be
conclusive evidence of all amendments contained therein and may thereafter be
referred to in lieu of this original Declaration and the various amendments
thereto.
Section 11.2. References and Headings. Masculine pronouns shall be deemed
to include the feminine and the neuter, as the context shall require. Headings
are placed herein for convenience of reference only, and in case of any
conflict, the text of this instrument, rather than the headings, shall control.
<PAGE>
Section 11.3. 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 11.4. 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 11.5. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust, is a Trustee hereunder
certifying to: (i) the number or identity of Trustees or Shareholders, (ii) the
due authorization of the execution of any instrument or writing, (iii) the form
of any vote passed at a meeting of Trustees or Shareholders, (iv) the fact that
the number of Trustees or Shareholders present at any meeting or executing any
written instrument satisfies the requirements of this Declaration, (v) the form
of any By-Laws adopted by or the identity of any officers elected by the
Trustees, or (vi) the existence of any fact or facts which in any manner
relates 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 11.6. Provisions in Conflict with Law or Regulations.
(a) The provisions of this Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any such provision is in
conflict with the 1940 Act, the regulated investment company provisions of the
Code or with other applicable laws and regulations, the conflicting provision
shall be deemed never to have constituted a part of this Declaration; provided
however, that such determination shall not affect any of the remaining
provisions of this Declaration or render invalid or improper any action taken
or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to 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.
<PAGE>
Section 11.7. Principal Office and Registered Agent. The name of the
registered agent of the Trust is CT Corporation System at 2 Oliver Street,
Boston, Massachusetts. The principal office of the Trust is 1248 Post Road,
Fairfield, Connecticut 06430.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this instrument as of
the 7th day of October, 1996.
Catherine C. Lawson
Catherine C. Lawson
as Trustee
and not individually
1248 Post Road
Fairfield, Connecticut 06430
Signed at Boston, Massachusetts
Robert Lamb III
Robert Lamb III
as Trustee
and not individually
1248 Post Road
Fairfield, Connecticut 06430
Signed at Boston, Massachusetts
<PAGE>
Appendix I
THE HIGHLAND FAMILY OF FUNDS
Establishment and Designation of Series of Shares of
Beneficial Interest (par value $0.0001 per share)
Dated as of October 7, 1996
Pursuant to Section 6.9 of the Declaration of Trust, dated as of October
7, 1996 (the "Declaration of Trust"), of The Highland Family of Funds (the
"Trust"), the Trustees of the Trust hereby establish and designate two initial
series of Shares (as defined in the Declaration of Trust) but reserve the right
to create additional series from time to time (each such series a "Fund" and
collectively the "Funds") to have the following special and relative rights:
1. The Funds shall be designated as follows:
Highland Growth Fund
Highland Aggressive Growth Fund
2. Each Share of each Fund shall be redeemable, shall be entitled to
one vote (or fraction thereof in respect of a fractional share) on
matters on which Shares of the Fund shall be entitled to vote, shall
represent a pro rata beneficial interest in the assets allocated or
belonging to each Fund, and shall be entitled to receive its pro
rata share of the net assets of each Fund upon liquidation of each
Fund, all as provided in Section 6.9 of the Declaration of Trust.
The proceeds of sales of Shares of each Fund, together with any
income and gain thereon, less any diminution or expenses thereof,
shall irrevocably belong to each Fund, unless otherwise required by
law.
3. Shareholders of each Fund shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to
have been effectively acted upon with respect to such Fund as
provided in, Rule 18f-2, as from time to time in effect, under the
Investment Company Act of 1940, as amended, or any successor rule,
and by the Declaration of Trust.
<PAGE>
4. The assets, income, earnings, profits, proceeds, funds or payments
which are not readily identifiable as belonging to any particular
Fund and the liabilities of the Trust shall be allocated among the
Funds as set forth in Section 6.9 of the Declaration of Trust.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor
Trustees) shall have the right at any time and from time to time to
reallocate assets and expenses, to change the designation of any
Fund now or hereafter created, or otherwise to change the special
and relative rights of any Fund.
Exhibit 2
BY-LAWS OF
THE HIGHLAND FAMILY OF FUNDS
ARTICLE I
DEFINITIONS
The terms "Commission," "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 The Highland Family of Funds
dated as of October 7, 1996.
ARTICLE II
OFFICES
Section 1. Principal Office. The Trust may have offices in such places
without as well as within the Commonwealth as the Trustees may from time to
time determine.
ARTICLE III
SHAREHOLDERS
Section 1. Meetings. A meeting of Shareholders may be called at any time
by a majority of the Trustees. A meeting shall be called by any Trustee upon
written request, which shall specify the purpose or purposes for which such
meeting is to be called, of Shareholders holding in the aggregate not less than
10% of the outstanding Shares entitled to vote on the matters specified in such
written request. 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 thirty percent (30%) of outstanding Shares
entitled to vote present in person or by proxy shall constitute a quorum at any
meeting of the Shareholders. In the absence of a quorum, a majority of
outstanding Shares entitled to vote present in person or by proxy may adjourn
the meeting from time to time until a quorum shall be present.
Whenever a matter is required to be voted by Shareholders of the Trust in
the aggregate under Section 6.8 and Section 6.9 and Section 6.9(g) of the
<PAGE>
Declaration, the Trust may either hold a meeting of Shareholders of all series,
as defined in Section 6.9 of the Declaration, to vote on such matter, or hold
separate meetings of Shareholders of each of the individual series to vote on
such matter, provided that (i) such separate meetings shall be held within one
year of each other, (ii) a quorum consisting of the holders of thirty percent
(30%) of outstanding Shares of the individual series entitled to vote present
in person or by proxy shall be present at each such separate meeting and (iii)
a quorum consisting of the holders of thirty percent (30%) of all Shares of the
Trust entitled to vote present in person or by proxy shall be present in the
aggregate at such separate meetings, and the votes of Shareholders at all such
separate meetings shall be aggregated in order to determine if sufficient votes
have been cast for such matter to be voted.
Section 2. Notice of Meetings. Notice of all meetings of Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder entitled to vote at such meeting at his
address as recorded on the register of the Trust, mailed at least 10 days and
not more than 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 meeting. Where separate meetings are held for Shareholders of
each of the individual series to vote on a matter required to be voted on by
Shareholders of the Trust in the aggregate, as provided in Article III, Section
1 above, notice of each such separate meeting shall be provided in the manner
described above in this Section 2.
Section 3. Record Date. The Trustees may fix a date not more than 60 days
prior to the date of any meeting of Shareholders or distribution or other
action as a record date for the purpose of determining the Shareholders who are
entitled to notice of and to vote at such meeting or any adjournment thereof or
to participate in such distribution or for the purpose of such other action; or
without fixing such record date the Trustees may for any of such purposes from
time to time close the transfer books for such period, not exceeding 30 days,
as the Trustees may determine. Where separate meetings are held for
Shareholders of each of the individual series to vote on a matter required to
be voted on by Shareholders of the Trust in the aggregate, as provided in
Article III, Section 1 above, the record date of each such separate meeting,
for purposes of determining the Shareholders who are entitled to notice of and
to vote at such meeting or any adjournment thereof, shall be determined in the
manner described above in this Section 3.
<PAGE>
Section 4. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary
may direct, for verification prior to the time at which such vote shall be
taken. Pursuant to a vote of a majority of the Trustees, proxies may be
solicited in the name of the Trust or one or more Trustees or 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 of 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, such Share may be voted by such guardian or such other person
appointed or having such control, and such vote may be given in person or by
proxy. Unless otherwise specifically limited by their terms, proxies shall
entitle the holder thereof to vote at any adjournment of a meeting.
Section 5. Inspection of Records. The records of the Trust
shall be open to inspection by Shareholders to the same extent as
is permitted shareholders of a Massachusetts business corporation.
Section 6. Action without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by law, the Declaration or these By-Laws for approval of such matter)
consent to the action in writing and the written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
ARTICLE IV
TRUSTEES
Section 1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the Chairman or by any
Trustee. 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
<PAGE>
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, cabled, or
wirelessed to each Trustee at his business address, or personally delivered to
him at least one day before the meeting. 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. 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
constitute a quorum for the transaction of business at any regular or special
meeting of the Trustees 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.
ARTICLE V
COMMITTEES AND ADVISORY BOARD
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than two Trustees to hold office at the
pleasure of the Trustees. While the Trustees are not in session, the Executive
Committee shall have the power to conduct the current and ordinary business of
the Trust, including the purchase and sale of securities and the designation of
securities to be delivered upon redemption of Shares of the Trust, and such
other powers of the Trustees as the Trustees may, from time to time, delegate
to the Executive Committee except those powers which by law, the Declaration or
these By-Laws the Trustees are prohibited from so delegating. The Trustees may
also elect from their own number other Committees from time to time, 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. The Trustees
<PAGE>
may designate a chairman of any such Committee. In the absence of such
designation a Committee may elect its own chairman. The Trustees may abolish
any Committee at any time. The Trustees shall have power to rescind any action
of any Committee, but no such rescission shall have retroactive effect.
Section 2. Meeting. Quorum and Manner of Acting. The Trustees may (i)
provide for stated meetings of any Committee, (ii) specify the manner of
calling and notice required for special meetings of any Committee, (iii)
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, (iv) 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 (v) authorize the members of a Committee to
meet by means of a telephone conference circuit. Unless the Trustees so
provide, all the Committees shall be governed by the same rules as the full
Board is.
Each Committee may, but is not required to, 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 two members. Members of such
Advisory Board shall not be Trustees or officers and need not be Shareholders.
A member of such Advisory Board shall hold office for such period as the
Trustees may by vote provide and may resign therefrom by a written instrument
signed by him which shall take effect upon its delivery to the Trustees. The
Advisory Board shall have no legal powers and shall not perform the functions
of Trustees in any manner, such Advisory 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 vote provide.
Section 4. Chairman. The Trustees may, by a majority vote of all the
Trustees, elect from their own number a Chairman, to hold office until his
successor shall have been duly elected and qualified. The Chairman shall not
hold any other office. The Chairman may be, but need not be, a Shareholder. The
Chairman shall preside at all meetings of the Trustees and shall have such
other duties as from time to time may be assigned to him by the Trustees.
ARTICLE VI
OFFICERS
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, each of whom shall be elected by the
<PAGE>
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 Treasurers, and one or more Assistant Secretaries. 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, the President, the Treasurer
and the Secretary shall hold office until his respective successor shall have
been duly elected and qualified, and all other officers 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. Except as above provided,
any two offices may be held by the same person. Any officer may be, but need
not 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, unless the
Chairman, if any, is so appointed by the Trustees, shall be the principal
executive officer of the Trust. Subject to the control of the Trustees and any
committee of the Trustees, the President shall at all times exercise a general
supervision and direction over the affairs of the Trust. The President 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. The President 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 the 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 are 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. The Treasurer shall
<PAGE>
deliver all funds of the Trust which may come into his hands to such custodian
as the Trustees may employ pursuant to Article X hereof. The Treasurer shall
render a statement of condition of the finances of the Trust to the Trustees as
often as they shall require the same and 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 to do so by the Trustees,
in such sum and with such surety or sureties as the Trustees shall require. The
Treasurer shall be responsible for the general supervision of the Trust's funds
and property and for the general supervision of the Trust's custodian.
Section 7. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Shareholders in proper books provided for
that purpose; shall keep the minutes of all meetings of the Trustees; shall
have custody of the seal of the Trust; and shall have charge of the Share
transfer books, lists and records unless the same are in the charge of the
Transfer Agent. The Secretary 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, shall in general perform all the
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 Treasurers. 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. Each Assistant Treasurer shall perform such other duties as from
time to time may be assigned to him by the Trustees. Each Assistant Treasurer
shall give a bond for the faithful discharge of his duties, if required to do
so 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. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.
Section 10. Compensation of Officers and Trustees and Members of the
Advisory Board. Subject to any applicable law or provision 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 of officers 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.
<PAGE>
Section 11. Execution of Papers. Except as the Trustees may generally or
in particular cases authorize, all deeds, leases, transfers, contracts, bonds,
notes, checks, drafts and other obligations made, accepted or endorsed by the
Trust shall be executed by the President, any Vice President, or the Treasurer,
or by whomever else shall be designated for that purpose by the Trustees, and
need not bear the seal of the Trust.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall be determined by the Trustees,
provided, however, that the Trustees may from time to time change the fiscal
year.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice 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 such notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. A notice shall be deemed to have been
telegraphed, cabled or wirelessed for the purposes of these By-Laws when it has
been delivered to a representative of any telegraph, cable or wireless company
with instruction that it be telegraphed, cabled or wirelessed. Any notice shall
be deemed to be given at the time when the same shall be mailed, telegraphed,
cabled or wirelessed.
ARTICLE X
CUSTODIAN
Section 1. Appointment and Duties. The Trustees shall at all times employ
a bank or trust company having a capital, surplus and undivided profits of at
least $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:
<PAGE>
(i) to hold the securities owned by the Trust and deliver the same
upon written order;
(ii) 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;
(iii) to disburse such funds upon orders or vouchers;
(iv) if authorized by the Trustees, to keep the books and accounts
of the Trust and furnish clerical and accounting services; and
(v) if authorized by the Trustees, to compute the net income of
the Trust and the net asset value of Shares;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian.
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. Subject to
the approval of the Trustees, the custodian may enter into arrangements with
securities depositories. All such custodial, sub-custodial and depository
arrangements shall be subject to, and comply with, the provisions of the 1940
Act and the rules and regulations promulgated thereunder.
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 (1) 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, 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; or (2) with such other person as may be permitted by the Commission,
or otherwise in accordance with the 1940 Act.
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 evidences
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.
<PAGE>
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, 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 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 purchasing 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.
(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 all Trust Property 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 any Trust Property to the Trust, but
may deliver all or any part of the Trust Property to a bank or trust company
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus and undivided profits (as shown in its last
published report) of at least $5,000,000; provided that arrangements are made
for the Trust Property to be held under terms similar to those on which they
were held by the retiring custodian.
ARTICLE XI
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or
new By-Laws may be adopted (a) by the Shareholders by a 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.
