As filed with the Securities and Exchange Commission on March 31, 1997
File Nos. 333-14263
811-7867
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 1
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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THE HIGHLAND FAMILY OF FUNDS
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
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<CAPTION>
N-1A
ITEM NO. N-1A ITEM LOCATION
PROSPECTUS
PART A
<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.............. Additional Company Information
Item 17. Brokerage Allocation and Other Portfolio Transactions and
Practices.................................. 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....................... Financial Statements
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PART C Information required to be included in Part C is
set forth under the appropriate Item, so
numbered, in Part C to this Registration
Statement.
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PROSPECTUS
____________, 1997
THE HIGHLAND FAMILY OF FUNDS (the "Company") is a registered, 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, Chief Executive Officer 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 ("SAI"), dated ________, 1997, which is
incorporated herein by reference, has been filed with the Securities and
Exchange Commission. The SAI, 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,
toll free, 1-888-557-3200. The SAI, together with other related materials, is
also available at the Securities and Exchange Commission's Web Site
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
PAGE
Expense Summary 2
The Highland Family of Funds 3
Investment Objectives, Policies and Risk Considerations 3
Investment Limitations 7
Management of the Funds 8
Pricing of Fund Shares 10
How to Purchase Shares 11
How to Exchange Shares 13
How to Redeem Shares 14
Dividends and Distributions 16
Shareholder Reports and Information 16
Taxes 16
General Information 17
Fund Performance 18
Appendix A - Permitted Investments and Investment Practices A-1
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.
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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.
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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 $61 $61
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION 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
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security to its estimated value, and (5) relevant market, economic and
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' Board of 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 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 SAI.
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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.
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
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.
Cash and Temporary Defensive Positions. 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
<PAGE>
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
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.
Rule 144A Securities. Pursuant to guidelines adopted by the Trustees, 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 Funds' 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 trading 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.
Other Permitted Investments. For more information regarding the Funds'
permitted investments and investment practices, see Appendix A. The Funds will
not necessarily invest or engage in each of the investments and investment
practices in Appendix A, but reserve the right to do so.
Other Investment Companies. Each Fund may invest substantially all of its
assets in a mutual fund having the same investment objective and policies as
the Fund. This structure is known as a master/feeder investment structure.
Shareholders will be given at least 30 days' notice before a Fund converts to
<PAGE>
this structure. Each Fund may also invest in shares of other investment
companies to the extent permitted by the 1940 Act. To the extent a Fund invests
in shares of an investment company, it will bear its pro rata share of the
other investment company's expenses, such as investment advisory and
distribution fees, and operating expenses.
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
3. borrow money, except that a Fund may borrow money from a bank and may enter
into reverse repurchase agreements for temporary or emergency purposes (not for
leveraging) in an amount not exceeding 331/3% of the value of its total assets
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at the time of borrowing. In addition, no Fund may purchase any securities at
any time at which borrowings exceed 5% of the total assets of the Fund, taken
at market value.
A list of the Funds' investment policies and restrictions, both fundamental and
non-fundamental, is set forth in the SAI. 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' Board of 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
SAI.
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 Chief Executive Officer 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, of 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.
BancBoston Ventures, Inc., the sole limited partner of the Adviser, may
transfer its partnership interest to Value Asset Management, a registered
investment adviser. In order to ensure that the Adviser will continue to
provide investment management services to the Funds even if such transfer
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occurs, the Funds' Board of Trustees and shareholders have approved an
Investment Advisory Agreement with the Adviser which is identical to the
existing Investment Advisory Agreement (except for the effective date and
termination date) and which will become effective upon the transfer of the
interest in the Adviser described above.
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 daily 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 accountants 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
imposed 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.
<PAGE>
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.
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 may be reimbursed in full by the Funds as soon as they have sufficient
assets.
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 (including the
National Association of Securities Dealers' Automated Quotation System, NASDAQ)
are valued at the last quoted sale price on the securities exchange on which
such securities are primarily traded. Securities traded on only
over-the-counter markets are valued at the mean of the current bid and asked
prices. Securities for which there were no transactions are valued at the mean
of the last bid and asked 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 may be
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 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, toll free, 1-888-557-3200.
(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, toll
free, at 1-888-557-3200 for instructions prior to wiring funds. Funds should be
wired through the Federal Reserve System as follows:
<PAGE>
The First National Bank of Boston
A.B.A. Number 011000390
For the account of The Highland Family of Funds
Account Number 541-54171
For further credit to:
(investor account number)
(name or account registration)
(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, toll free, at 1-888-557-3200.
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, toll free, at 1-888-557-3200. 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, toll free, 1-888-557-3200
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.
<PAGE>
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
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, toll free, at 1-888-557-3200.
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, toll
free, 1-888-557-3200.
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 or for shares of
the Daily Assets Treasury Fund, a money market fund managed by Forum Advisors,
Inc. and a series of Forum Funds, a registered investment company, at any time.
This exchange offer is available only in states where shares of such other Fund
or of the Daily Assets Treasury Fund, as applicable, may be legally sold. You
may receive a copy of the Daily Assets Treasury Fund prospectus by writing to
the Funds at Two Portland Square, Portland, Maine 04101, or calling, toll free,
1-888-557-3200. Each exchange is subject to the minimum initial investment
required for each Fund (see "How to Purchase Shares" page 11) or for the Daily
Assets Treasury Fund ($2,500), as applicable. You may make further 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 and between a Highland Fund and the Daily
Assets Treasury Fund, the value to be exchanged and the price of the shares
being purchased will be the net asset value next determined by the applicable
funds after receipt and acceptance of proper instructions for the exchange. An
exchange from one Fund to another and from a Fund to the Daily Assets Treasury
Fund is treated the same as an ordinary sale and purchase for federal income
tax purposes.
<PAGE>
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, toll free, at 1-888-557-3200 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 or the Daily Assets Treasury Fund receives or anticipates
simultaneous orders affecting significant portions of such fund's assets. In
particular, a pattern of exchanges with a "market timer" strategy may be
disruptive to the Funds or to the Daily Assets Treasury Fund.
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,
<PAGE>
shares may be redeemed by calling the Funds, toll free, at 1-888-557-3200.
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.
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 $100 (for gift to minors accounts) or $1000 (for all
other accounts) 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.
<PAGE>
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
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, toll free, 1-888-557-3200 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, toll free, 1-888-557-3200.
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
<PAGE>
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 SAI 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.
GENERAL INFORMATION
Organization. The Funds are series of The Highland Family of Funds, 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.
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.
<PAGE>
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).
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 Index, NASDAQ Composite OTC Index or
NASDAQ Industrials Index, Consumer Price Index and Russell 2000 Index or other
appropriate indices.
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 SAI.
<PAGE>
PROSPECTUS
_________________, 1997
The Highland Family of Funds
Highland Growth Fund
Highland Aggressive Growth Fund
Highland Investment Group L.P.
Investment Adviser
<PAGE>
APPENDIX A
PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
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 SAI 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
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
<PAGE>
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.
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
SAI.
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 similar domestic companies.
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 issuers located in developing countries, which are
generally defined as countries in the initial stages of their industrialization
cycles with low per capita income. All of the risks of investing in non-U.S.
securities are heightened by investing in developing countries. Shareholders
should be aware that investing in the equity and fixed income markets of
<PAGE>
developing countries involves exposure to economic structures that are
generally less diverse and mature, and to political systems which can be
expected to have less stability, than those of developed countries. Historical
experience indicates that the markets of developing countries have been more
volatile than the markets of developed countries with more mature economies;
such markets often have provided higher rates of return, and greater risks, to
investors. These heightened risks include (i) greater risks of expropriation,
confiscatory taxation and nationalization, and less social, political and
economic stability; (ii) the small current size of markets for securities of
issuers based in developing countries and the currently low or non-existent
volume of trading, resulting in a lack of liquidity and in price volatility;
(iii) certain national policies which may restrict a Fund's investment
opportunities including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests; and (iv) the absence of
developed legal structures. Such characteristics can be expected to continue in
the future.
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.
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 SAI.
"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
<PAGE>
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
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").
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.
<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, toll free, 1-888-557-3200. Capitalized terms
used but not defined herein have the same meanings as in the Prospectus.
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT INFORMATION 2
INVESTMENT RESTRICTIONS 15
ADDITIONAL COMPANY INFORMATION 17
Trustees and Officers 17
Investment Adviser 19
Administrator 20
Custodian, Transfer Agent and Dividend Paying Agent 20
Legal Counsel 20
Independent Accountants 21
DISTRIBUTION OF SHARES 21
PORTFOLIO TRANSACTIONS AND BROKERAGE 21
TAXES 23
DESCRIPTION OF SHARES 24
INDIVIDUAL RETIREMENT ACCOUNTS 26
PERFORMANCE INFORMATION 26
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE 28
OTHER INFORMATION 28
FINANCIAL STATEMENTS 29
APPENDIX A (Description of Securities Ratings) A-1
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,
<PAGE>
net of fees or costs which may be incurred. The market value and interest yield
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
<PAGE>
after the agreement is entered into, however, and if the seller defaults under
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
<PAGE>
period, adverse market conditions were to develop, a Fund might obtain a less
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 Fund
<PAGE>
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
<PAGE>
exchanges: the Chicago Board Options Exchange, the New York Stock Exchange, the
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
<PAGE>
for a Fund to obtain accurate market quotations for purposes of valuing the
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 Structure. Although the Funds have no current intention of doing so,
each of the Funds reserves the right to invest all or a portion of its
investable assets in a diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as the
Fund (a "Qualifying Portfolio"). A Qualifying Portfolio may then, in turn, buy,
hold and sell securities in accordance with these objectives and policies. Of
course, there is no assurance that the Funds or any Qualifying Portfolio will
achieve their objectives. A Fund will invest in a Qualifying Portfolio only if
the Trustees of the Funds find that the aggregate per share expenses of that
<PAGE>
Fund and its corresponding Qualifying Portfolio would be less than or
approximately equal to the expenses that the Fund would incur if the assets of
the Fund were invested directly in the types of securities held by its
Qualifying Portfolio. Each Fund would be able to withdraw its investment in a
Qualifying Portfolio at any time, and would do so if the Fund's Trustees
believe it to be in the best interest of the Fund's shareholders. If a Fund
were to withdraw its investment in its Qualifying Portfolio, the Fund could
either invest directly in securities in accordance with the investment policies
described above or invest in another mutual fund or pooled investment vehicle
having the same investment objectives and policies. If a Fund were to withdraw,
the Fund could receive securities from the Qualifying Portfolio instead of
cash, causing the Fund to incur brokerage, tax and other charges or leaving it
with securities which may or may not be readily marketable or widely
diversified.
A Qualifying Portfolio would be able to change its investment objective and
certain of its investment policies and restrictions without approval by its
investors, but the Qualifying Portfolio would notify its corresponding Fund
(which in turn would notify its shareholders) and its other investors at least
30 days before implementing any change in its investment objective. A change in
investment objective, policies or restrictions may cause a Fund to withdraw its
investment in its Qualifying Portfolio.
Certain investment restrictions of a Qualifying Portfolio could not be changed
without approval by the investors in that Qualifying Portfolio. These policies
would be described in the Statement of Additional Information for the
corresponding Fund. If a Fund was asked to vote on matters concerning its
Qualifying Portfolio, the Fund would hold a shareholder meeting and vote in
accordance with shareholder instructions. Of course, the Fund could be
outvoted, or otherwise adversely affected, by other investors in its Qualifying
Portfolio.
A Qualifying Portfolio would be able to sell interests to investors in addition
to the Funds. These investors may be mutual funds which offer shares to their
shareholders with different costs and expenses than the Funds. Therefore, the
investment returns for all investors in funds investing in a Qualifying
Portfolio may not be the same. These differences in returns are also present in
other mutual fund structures.
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
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.
<PAGE>
Each Fund may not:
1. Issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended (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, except that the Fund may invest all or a portion of its assets in a
Qualifying Portfolio.
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 (a) the Fund may invest all or a portion of its assets in a
Qualifying Portfolio, (b) 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 (c) 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 and may enter
into reverse repurchase agreements for temporary or emergency purposes (not for
leveraging) in an amount not exceeding 331/3% of the value of its total assets
at the time of borrowing. In addition, no Fund may purchase any securities at
any time at which borrowings exceed 5% of the total assets of the Fund, taken
at market value. 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.
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.
<PAGE>
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. Unless otherwise indicated
below, the address of each of the officers and trustees is 1248 Post Road,
Fairfield, Connecticut 06430.
* Catherine C. Lawson (age 48), Chairman and Trustee. Catherine C. Lawson, the
Chairman of the Board of Trustees and a Trustee of the Funds, is a general
partner and co-founder of the Adviser. Ms. Lawson, a Chartered Financial
Analyst, has served as the Chief Executive Officer and Chief Investment Officer
of the Adviser since its organization on May 19, 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 (age 36), President and Trustee. Robert Lamb III is the
President and a Trustee of the Funds and is a general partner and co-founder of
the Adviser. Mr. Lamb has served as the President of the Adviser since its
organization on May 19, 1995. Prior to that he served as Vice President at S.G.
Warburg, a broker-dealer (September, 1992 to June, 1994), and as Vice President
of Dillon Read, a broker-dealer (June, 1982 to September, 1992).
Douglass M. Barnes (age 55), Trustee. Douglass M. Barnes, a Trustee of the
Funds, is a private investor and serves as Director of The Green Paint Co.,
Inc., a paint recycling business (since 1994), as Director of Liquid Motion,
Inc., a water-massage bed manufacturer (since 1994), and as Clerk and Director
of Chatham Athletic Club, Inc., a non-profit organization (since 1996). His
address is P.O. Box 305 North Chatham, Massachusetts 02650.
Tarrant Cutler (age 70), Trustee. Tarrant Cutler, a Trustee of the Funds,
also serves as Trustee of the 1784 Funds, a registered investment company, and
as Secretary and Trustee of Beverly Hospital. Mr. Cutler served as Senior
Executive Vice President of Massachusetts Financial Services from 1950 to June,
1991. His address is 5 Masconomo St., Manchester, Massachusetts 01944.
Diana R. Harrington (age 57), Trustee. Diana R. Harrington, a Trustee of the
Funds, is a Professor at Babson College (since September, 1993) and serves as a
Trustee of certain funds in the Landmark Family of Funds (since 1992). Ms.
Harrington has also served as a Visiting Professor at Kellogg Graduate School
of Management, Northwestern University (September, 1992 to September, 1993) and
as a Professor at Darden Graduate School of Business, University of Virginia
(September, 1978 to September, 1993). Her address is 120 Goulding Street,
Holliston, Massachusetts 01746.
Stephen J. Barrett (age 28), Vice President and Secretary. Manager of Client
Services, Forum Financial Services, Inc., with which he has been associated
since September, 1996. Prior to joining Forum, Mr. Barrett spent two and a half
years at Fidelity Investments where he served as a Senior Product Manager.
Prior to that Mr. Barrett was a Securities Analyst for two and a half years
<PAGE>
with Bingham, Dana & Gould LLP in Boston, Massachusetts. Mr. Barrett is also an
officer of various registered investment companies for which Forum Financial
Services, Inc. serves as manager, administrator and/or distributor. His address
is Two Portland Square, Portland, Maine 04101.
Max Berueffy (age 45), Assistant Secretary. Counsel, Forum Financial Services,
Inc., with which he has been associated since 1994. Prior thereto, Mr. Berueffy
was on the staff of the U.S. Securities and Exchange Commission for seven
years, first in the appellate branch of the Office of the General Counsel, then
as a counsel to Commissioner Grundfest and finally as a senior special counsel
in the Division of Investment Management. His address is Two Portland Square,
Portland, Maine 04101.
Traci E. Block (age 40), Assistant Secretary. Fund Administrator, Forum
Financial Services, Inc., with which she has been associated since 1995. Prior
thereto, Ms. Block was a legal assistant with the law firm of Pierce, Atwood in
Portland, Maine. Ms. Block is also an officer of various registered investment
companies for which Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square, Portland,
Maine 04101.
Richard C. Butt (age 41), Treasurer, Principal Financial Officer and
Principal Accounting Officer. Managing Director, Forum Financial Services,
Inc., with which he has been associated since May, 1996. Prior thereto, Mr.
Butt was a Director of the Financial Services Consulting Practice, KPMG Peat
Marwick LLP (December, 1994 to April, 1996). From November, 1993 to August,
1994, Mr. Butt was President of 440 Financial Distributors, Inc. a mutual fund
administrator and distributor, and prior thereto was Senior Vice President of
440 Financial Group, Inc. Mr. Butt is also an officer of various registered
investment companies for which Forum Financial Services, Inc. serves as
manager, administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
Stacey Hong (age 30), Assistant Treasurer. Manager of Pricing and Bookkeeping,
Forum Financial Corp., with which he has been associated since April, 1992.
Prior to his appointment as Manager of Pricing and Bookkeeping, Mr. Hong was a
Fund Accounting Manager with Forum Financial Corp. Prior thereto, Mr. Hong was
a Senior Auditor with Ernst & Young (August, 1988 to April, 1992). His address
is Two Portland Square, Portland, Maine 04101.
Michael J. McKeen (age 25), Assistant Treasurer. Fund Accounting Manager,
Forum Financial Corp., with which he has been associated since June, 1993.
Prior to that, Mr. McKeen was attending the University of Maine, from which he
obtained a B.S. degree in Finance in May, 1993. Mr. McKeen also serves as an
officer for various registered investment companies for which Forum Financial
Corp. serves as fund accountant and/or transfer agent. His address is Two
Portland Square, Portland, Maine 04101.
Cheryl O. Tumlin (age 30), Assistant Secretary. Assistant Counsel, Forum
Financial Services, Inc., with which she has been associated since July, 1996.
Prior thereto, Ms. Tumlin was on the staff of the U.S. Securities and Exchange
Commission as an attorney in the Division of Market Regulation and prior
thereto Ms. Tumlin was an associate with the law firm of Robinson Silverman
Pearce Aronsohn & Berman in New York, New York. Her address is Two Portland
Square, Portland, Maine.
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
<PAGE>
expected to receive the following remuneration from the Company during its
fiscal year ending December 31, 1997:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
Douglasss
M. Barnes $8,500 $0 $0 $8,500
Tarrant
Cutler $8,500 $0 $0 $8,500
Diana R.
Harrington $8,500 $0 $0 $8,500
(1)Information is estimated for the period from ________ __, 1997
(commencement of operations of the Funds) to December 31, 1997. Each of
the Trustees is paid $6,000 annually and a fee of $1,000 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 March 26, 1997 Robert Lamb
III purchased an aggregate of 10,000 shares of Highland Growth Fund at the net
asset value of $10.00 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 a co-founder and general
partner, and the Chief Executive Officer and Chief Investment Officer of the
Adviser. Robert Lamb, III is a co-founder and general partner and the President
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
March 14, 1997. 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.
<PAGE>
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
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
continues in effect for twelve months after the date on which the Funds'
initial registration statement becomes effective with the SEC and thereafter
shall be in effect indefinitely. Notwithstanding the foregoing, the
Administration Agreement may be terminated by the Board of Trustees or by the
Administrator on not less than 60 days' written notice and is not assignable by
either party thereto except by the specific written consent of the other party.
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.
<PAGE>
Independent Accountants. Coopers & Lybrand L.L.P., One Post Office Square,
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. Unless otherwise terminated, the Distribution Agreement
remains in effect from year to year upon annual approval by the Board of
Trustees, or by the vote of a majority of the outstanding voting securities of
the respective Company and by the vote of a majority of the Board of Trustees
who are not parties to the Agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement will terminate in the event of its assignment, as
defined in the 1940 Act and may be terminated on not less than 60 days' written
notice.
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
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
<PAGE>
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
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
<PAGE>
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.
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.
<PAGE>
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
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 ($0.0001
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.
<PAGE>
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
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.
<PAGE>
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 by calling, toll free, 1-888-557-3200. 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
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.
<PAGE>
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
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
<PAGE>
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.
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
<PAGE>
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
See below.
<PAGE>
THE HIGHLAND FAMILY OF FUNDS
HIGHLAND GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 26, 1997
ASSETS:
Cash............................................ $100,000
Deferred organization expenses (Note 1B)........ 47,473
------
Total assets............................... 147,473
LIABILITIES:
Accrued organization expenses (Note 1B)......... 47,473
------
NET ASSETS ........................................... $100,000
--------
Shares Outstanding 10,000
------
Net Asset Value, offering and redemption price per share
($100,000/10,000 shares outstanding) $10.00
------
The accompanying notes are an integral part of this statement.
<PAGE>
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
Note 1 - Significant Accounting Policies:
(A) General: The Highland Family of Funds (the "Company") is a diversified,
open end management investment company registered under the Investment Company
Act of 1940, as amended. The Company was established as a Massachusetts
business trust organized pursuant to a Declaration of Trust dated October 7,
1996. The Highland Growth Fund (the "Fund") is a separate series of the
Company. As of March 26, 1997, the Fund had no operations other than
organizational matters and the issuance and sale of initial shares to Robert
Lamb III, President of Highland Investment Group L.P., the Fund's investment
adviser, on March 26, 1997.
(B) Organizational Expenses: Costs incurred by the Fund in connection with its
organization and the initial offering of its shares have been deferred and will
be amortized on a straight-line basis from the date upon which the Fund will
commence its investment activities, over a period of five years. In the event
that any of the initial shares of the Fund are redeemed during the amortization
period, the redemption proceeds will be reduced by any unamortized organization
and registration expenses in the same proportion as the number of shares being
redeemed bears to the number of initial shares outstanding at the time of such
redemption.
(C) Federal Taxes: The Fund intends to qualify for treatment as a regulated
investment company under the Internal Revenue Code and distribute all its
taxable income. In addition, by distributing in each calendar year
substantially all its net investment income, capital gains and certain other
amounts, if any, the Fund will not be subject to Federal excise tax. Therefore,
no Federal income or excise tax provision will be required.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Trustees of
The Highland Family of Funds:
We have audited the accompanying statement of assets and liabilities of
the Highland Growth Fund (the "Fund") (one of the funds constituting The
Highland Family of Funds) as of March 26, 1997. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion
In our opinion, such statement of assets and liabilities presents fairly,
in all material respects, the financial position of the Highland Growth Fund of
The Highland Family of Funds, as of March 26, 1997, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 27, 1997
<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,
<PAGE>
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.
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
<PAGE>
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
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
<PAGE>
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.
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
<PAGE>
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.
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,
<PAGE>
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.
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.
<PAGE>
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.
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:
Statements of Assets and Liabilities at March 27, 1997
Notes to Financial Statements
Report of Independent Auditors - March 27, 1997
(b) Exhibits:
* 1 Declaration of Trust of Registrant
* 2 By-Laws of Registrant
5 Investment Advisory Agreements between the Registrant and
Highland Investment Group L.P.
6 Distribution Agreement between the Registrant and Forum
Financial Services, Inc.
8 Custodian Agreement between the Registrant and The First
National Bank of Boston, as custodian
9(a) Administration Agreement between the Registrant and
Forum Administrative Services, LLC, as administrator
9(b) Transfer Agency Agreement between the Registrant and
Forum Financial Corp., as transfer agent
9(c) Fund Accounting Agreement between the Registrant and
Forum Financial Corp., as fund accountant
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
27 Financial Data Schedule
- ---------------------
*Incorporated by reference to the Registrant's Initial Registration
Statement on Form N-1A (File No. 333-14263) as filed with the
Securities and Exchange Commission on October 16, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
<PAGE>
Item 26. Number of Holders of Securities.
Title of Class Number of Record Holders
Shares of Beneficial Interest As of March 28, 1997
(par value $0.0001 per share)
Highland Growth Fund 1
Highland Aggressive Growth Fund 0
Item 27. Indemnification.
Reference is hereby made to Article V of the Registrant's Declaration of
Trust, filed as Exhibit 1 to the Registrant's Initial Registration Statement.
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 Advisers Act of 1940, manages the assets of the
Highland Growth Fund and the Highland Aggressive Growth Fund. Catherine C.
Lawson and Robert Lamb, III are general partners and co-founders of the
Adviser. Ms. Lawson has served as the Chief Executive Officer and Chief
Investment Officer and Mr. Lamb has served as the President of the Adviser
since its organization on May 19, 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 Core Trust (Delaware), The CRM Funds, The Cutler
Trust, Forum Funds, Monarch Funds, Norwest Advantage Funds, Norwest
Select Funds, Sound Shore Fund, 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.
<PAGE>
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
Forum Financial Services, Inc. Square
(administrator, dividend disbursing and transfer Portland, Maine 04101
agent)
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
effective date of this Registration Statement.
(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 Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boston and Commonwealth of Massachusetts on the
28th day of March, 1997.
THE HIGHLAND FAMILY OF FUNDS
By: Robert Lamb III
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 March 28, 1997.
Signature Title
Robert Lamb III President and Trustee
- ----------------------------
Robert Lamb III
Richard Butt Treasurer, Principal Financial Officer and
- ---------------------------- Principal Accounting Officer
Richard Butt
Catherine C. Lawson* Chairman and Trustee
- ----------------------------
Catherine C. Lawson
Douglass M. Barnes* Trustee
- ----------------------------
Douglass M. Barnes
Tarrant Cutler* Trustee
- ----------------------------
Tarrant Cutler
Diana R. Harrington* Trustee
- ----------------------------
Diana R. Harrington
By: Robert Lamb III
------------------------
Robert Lamb III
Executed by Robert Lamb III on behalf
of those indicated pursuant to Powers
of Attorney filed herewith.
<PAGE>
EXHIBIT INDEX
Exhibit Name
5 Investment Advisory Agreements between the
Registrant and Highland Investment Group L.P., as
adviser
6 Distribution Agreement between the Registrant and
Forum Financial Services, Inc.
8 Custodian Agreement between the Registrant and The
First National Bank of Boston, as custodian
9(a) Administration Agreement between the Registrant and
Forum Administrative Services, LLC, as administrator
9(b) Transfer Agency Agreement between the Registrant
and Forum Financial Corp., as transfer agent
9(c) Fund Accounting Agreement between the Registrant
and Forum Financial Corp., as fund accountant
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
27 Financial Data Schedule
</TABLE>
Exhibit 5
INVESTMENT ADVISORY AGREEMENT
The Highland Family of Funds
Highland Growth Fund
INVESTMENT ADVISORY AGREEMENT, dated as of March 14, 1997, by and between
The Highland Family of Funds, a Massachusetts business trust (the "Trust"), and
Highland Investment Group L.P., a Delaware limited partnership (the "Adviser").
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act"), and
WHEREAS, the Trust wishes to engage the Adviser to provide certain
investment advisory services for the series of the Trust designated as Highland
Growth Fund (the "Fund"), and the Adviser is willing to provide such investment
advisory services for the Fund on the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of the Adviser. The Adviser shall provide the Fund with such
investment advice and supervision as the Trust may from time to time consider
necessary for the proper supervision of the Fund's investment assets. Highland
Investment Group L.P. shall act as the investment adviser for the Fund and as
such shall furnish continuously an investment program and shall determine from
time to time what securities shall be purchased, sold or exchanged and what
portion of the assets of the Fund shall be held uninvested, subject always to
the restrictions of the Trust's Declaration of Trust, dated October 7, 1996,
and By-laws, as each may be amended from time to time (respectively, the
"Declaration" and the "By-Laws"), to the provisions of the 1940 Act, and to the
then-current Registration Statement of the Trust with respect to the Fund. The
Adviser shall also make recommendations as to the manner in which voting
rights, rights to consent to corporate action and any other rights pertaining
to the Fund's securities shall be exercised. Should the Board of Trustees of
the Trust at any time, however, make any definite determination as to
<PAGE>
investment policy applicable to the Fund and notify the Adviser thereof in
writing, the Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination has been revoked. The Adviser shall take, on behalf of the Fund,
all actions which it deems necessary to implement the investment policies
determined as provided above, and in particular to place all orders for the
purchase or sale of securities for the Fund's account with the brokers or
dealers selected by it, and to that end the Adviser is authorized as the agent
of the Trust to give instructions to the custodian of the Fund as to deliveries
of securities and payments of cash for the account of the Fund. In connection
with the selection of such brokers or dealers and the placing of such orders,
the Adviser is directed to seek for the Fund, in its best judgment, prompt
execution in an effective manner at the most favorable price. Subject to this
requirement of seeking the most favorable price, securities may be bought from
or sold to broker-dealers who have furnished statistical, research and other
information or services to the Adviser or the Fund, subject to any applicable
laws, rules and regulations. In making purchases or sales of securities or
other property for the account of the Fund, the Adviser may deal with itself or
with the Trustees of the Trust or the Trust's underwriter or distributor, to
the extent such actions are permitted by the 1940 Act.
2. Allocation of Charges and Expenses. The Adviser shall furnish at its
own expense all necessary services, facilities and personnel in connection with
its responsibilities under Section 1 above. It is understood that the Trust
will pay from the assets of the Fund all of its own expenses allocable to the
Fund including, without limitation, compensation of Trustees not "affiliated"
with the Adviser; governmental fees; interest charges; taxes; membership dues
in the Investment Company Institute; fees and expenses of independent auditors,
of legal counsel and of any transfer agent, administrator, distributor,
shareholder servicing agent, registrar or dividend disbursing agent of the
Trust; expenses of issuing and redeeming shares and servicing shareholder
accounts; expenses of preparing, printing and mailing notices, proxy statements
and reports to governmental officers and commissions and to shareholders in the
Fund; expenses connected with the execution, recording and settlement of
security transactions; insurance premiums; fees and expenses of the custodian
for all services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of the Fund; and expenses of meetings of the Fund's shareholders.
<PAGE>
3. Compensation of the Adviser. For the services to be rendered, the
Trust shall pay to the Adviser from the assets of the Fund an investment
advisory fee computed daily and paid monthly at an annual rate equal to 1.15%
of the Fund's average daily net assets for the Fund's then-current fiscal year.
If Highland Investment Group L.P. serves as Adviser for less than the whole of
any period specified in this Section 3, the compensation to Highland Investment
Group L.P., as Adviser, shall be prorated. The Adviser will not be compensated
on the basis of a share of capital gains upon or capital appreciation of the
Fund.
4. Covenants of the Adviser. The Adviser agrees that it will not deal
with itself, or with the Trustees of the Trust or the Trust's principal
underwriter or distributor, as principals in making purchases or sales of
securities or other property for the account of the Fund, except as permitted
by the 1940 Act, will not take a long or short position in shares of the Fund
except as permitted by the Declaration, and will comply with all other
provisions of the Declaration and By-Laws and the then-current Registration
Statement applicable to the Fund relative to the Adviser and its Trustees and
officers.
5. Limitation of Liability of the Adviser. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of securities
transactions for the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Section 5, the term
"Adviser" shall include officers and employees of the Adviser as well as the
Adviser itself.
6. Activities of the Adviser. The services of the Adviser to the Fund are
not to be deemed to be exclusive, the Adviser being free to render investment
advisory and/or other services to others. It is understood that Trustees,
officers, and investors of the Trust are or may be or may become interested in
the Adviser, as officers, employees, or otherwise and that officers and
employees of the Adviser are or may become similarly interested in the Trust
and that the Adviser may be or may become interested in the Trust as an
investor or otherwise.
7. Name. The Trust hereby acknowledges that any and all rights in or to
the names "Highland" and "The Highland Family of Funds" which exist on the date
of this Agreement or which may arise hereafter are, and under any and all
circumstances shall continue to be, the sole property of the Adviser; that the
Adviser may assign any or all of such rights to another party or parties
without the consent of the Trust; and that the Adviser may permit other
<PAGE>
parties, including other investment companies, to use the word "Highland" or
the words "The Highland Family of Funds" in their names. If the Adviser, or its
assignee as the case may be, ceases to serve as the Adviser of the Trust, the
Trust hereby agrees to take promptly any and all actions which are necessary or
desirable to change its name and the name of the Fund so as to delete the word
"Highland" or the words "The Highland Family of Funds."
8. Duration, Termination and Amendments of this Agreement. This Agreement
shall become effective as of the day and year first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until March 14, 1999 on which date it will terminate unless its
continuance after March 14, 1999 is "specifically approved at least annually"
(a) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or of the Adviser at a meeting specifically
called for the purpose of voting on such approval, and (b) by the Board of
Trustees of the Trust or by "vote of a majority of the outstanding voting
securities" of the Fund.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by the "vote of a majority of the outstanding voting
securities" of the Fund, or by the Adviser, in each case on not more than 60
days' nor less than 30 days' written notice to the other party. This Agreement
shall automatically terminate in the event of its "assignment."
Subject to the provisions of the 1940 Act and such exemptions or
exceptions as may be granted or permitted by the Securities and Exchange
Commission thereunder, this Agreement may be amended only if such amendment is
approved by the "vote of a majority of the outstanding voting securities" of
the Fund.
The terms "specifically approved at least annually", "vote of a majority
of the outstanding voting securities", "assignment", "affiliated person", and
"interested persons", when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
Each party acknowledges and agrees that all obligations of the Trust
under this Agreement are binding only with respect to the Fund; that any
liability of the Trust under this Agreement with respect to the Fund, or in
connection with the transactions contemplated herein with respect to the Fund,
shall be discharged only out of the assets of the Fund; and that no other
<PAGE>
series of the Trust shall be liable with respect to this Agreement or in
connection with the transactions contemplated herein.
The undersigned Trustee or officer of the Trust has executed this
Agreement not individually, but as Trustee or officer under the Trust's
Declaration, and the obligations of this Agreement are not binding upon any of
the Trustees or officers of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
The Highland Family of Funds Highland Investment Group L.P.
TREGARGUS HOLDINGS LTD.
General Partner
By: Stephen J. Barrett By: Catherine C. Lawson
Title: Secretary Title: President
<PAGE>
INVESTMENT ADVISORY AGREEMENT
The Highland Family of Funds
Highland Aggressive Growth Fund
INVESTMENT ADVISORY AGREEMENT, dated as of March 14, 1997, by and between
The Highland Family of Funds, a Massachusetts business trust (the "Trust"), and
Highland Investment Group L.P., a Delaware limited partnership (the "Adviser").
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act"), and
WHEREAS, the Trust wishes to engage the Adviser to provide certain
investment advisory services for the series of the Trust designated as Highland
Aggressive Growth Fund (the "Fund"), and the Adviser is willing to provide such
investment advisory services for the Fund on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of the Adviser. The Adviser shall provide the Fund with such
investment advice and supervision as the Trust may from time to time consider
necessary for the proper supervision of the Fund's investment assets. Highland
Investment Group L.P. shall act as the investment adviser for the Fund and as
such shall furnish continuously an investment program and shall determine from
time to time what securities shall be purchased, sold or exchanged and what
portion of the assets of the Fund shall be held uninvested, subject always to
the restrictions of the Trust's Declaration of Trust, dated October 7, 1996,
and By-laws, as each may be amended from time to time (respectively, the
"Declaration" and the "By-Laws"), to the provisions of the 1940 Act, and to the
then-current Registration Statement of the Trust with respect to the Fund. The
Adviser shall also make recommendations as to the manner in which voting
rights, rights to consent to corporate action and any other rights pertaining
to the Fund's securities shall be exercised. Should the Board of Trustees of
the Trust at any time, however, make any definite determination as to
<PAGE>
investment policy applicable to the Fund and notify the Adviser thereof in
writing, the Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination has been revoked. The Adviser shall take, on behalf of the Fund,
all actions which it deems necessary to implement the investment policies
determined as provided above, and in particular to place all orders for the
purchase or sale of securities for the Fund's account with the brokers or
dealers selected by it, and to that end the Adviser is authorized as the agent
of the Trust to give instructions to the custodian of the Fund as to deliveries
of securities and payments of cash for the account of the Fund. In connection
with the selection of such brokers or dealers and the placing of such orders,
the Adviser is directed to seek for the Fund, in its best judgment, prompt
execution in an effective manner at the most favorable price. Subject to this
requirement of seeking the most favorable price, securities may be bought from
or sold to broker-dealers who have furnished statistical, research and other
information or services to the Adviser or the Fund, subject to any applicable
laws, rules and regulations. In making purchases or sales of securities or
other property for the account of the Fund, the Adviser may deal with itself or
with the Trustees of the Trust or the Trust's underwriter or distributor, to
the extent such actions are permitted by the 1940 Act.
2. Allocation of Charges and Expenses. The Adviser shall furnish at its
own expense all necessary services, facilities and personnel in connection with
its responsibilities under Section 1 above. It is understood that the Trust
will pay from the assets of the Fund all of its own expenses allocable to the
Fund including, without limitation, compensation of Trustees not "affiliated"
with the Adviser; governmental fees; interest charges; taxes; membership dues
in the Investment Company Institute; fees and expenses of independent auditors,
of legal counsel and of any transfer agent, administrator, distributor,
shareholder servicing agent, registrar or dividend disbursing agent of the
Trust; expenses of issuing and redeeming shares and servicing shareholder
accounts; expenses of preparing, printing and mailing notices, proxy statements
and reports to governmental officers and commissions and to shareholders in the
Fund; expenses connected with the execution, recording and settlement of
security transactions; insurance premiums; fees and expenses of the custodian
for all services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of the Fund; and expenses of meetings of the Fund's shareholders.
<PAGE>
3. Compensation of the Adviser. For the services to be rendered, the
Trust shall pay to the Adviser from the assets of the Fund an investment
advisory fee computed daily and paid monthly at an annual rate equal to 1.35%
of the Fund's average daily net assets for the Fund's then-current fiscal year.
If Highland Investment Group L.P. serves as Adviser for less than the whole of
any period specified in this Section 3, the compensation to Highland Investment
Group L.P., as Adviser, shall be prorated. The Adviser will not be compensated
on the basis of a share of capital gains upon or capital appreciation of the
Fund.
4. Covenants of the Adviser. The Adviser agrees that it will not deal
with itself, or with the Trustees of the Trust or the Trust's principal
underwriter or distributor, as principals in making purchases or sales of
securities or other property for the account of the Fund, except as permitted
by the 1940 Act, will not take a long or short position in shares of the Fund
except as permitted by the Declaration, and will comply with all other
provisions of the Declaration and By-Laws and the then-current Registration
Statement applicable to the Fund relative to the Adviser and its Trustees and
officers.
5. Limitation of Liability of the Adviser. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of securities
transactions for the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Section 5, the term
"Adviser" shall include officers and employees of the Adviser as well as the
Adviser itself.
6. Activities of the Adviser. The services of the Adviser to the Fund are
not to be deemed to be exclusive, the Adviser being free to render investment
advisory and/or other services to others. It is understood that Trustees,
officers, and investors of the Trust are or may be or may become interested in
the Adviser, as officers, employees, or otherwise and that officers and
employees of the Adviser are or may become similarly interested in the Trust
and that the Adviser may be or may become interested in the Trust as an
investor or otherwise.
7. Name. The Trust hereby acknowledges that any and all rights in or to
the names "Highland" and "The Highland Family of Funds" which exist on the date
of this Agreement or which may arise hereafter are, and under any and all
circumstances shall continue to be, the sole property of the Adviser; that the
Adviser may assign any or all of such rights to another party or parties
without the consent of the Trust; and that the Adviser may permit other
<PAGE>
parties, including other investment companies, to use the word "Highland" or
the words "The Highland Family of Funds" in their names. If the Adviser, or its
assignee as the case may be, ceases to serve as the Adviser of the Trust, the
Trust hereby agrees to take promptly any and all actions which are necessary or
desirable to change its name and the name of the Fund so as to delete the word
"Highland" or the words "The Highland Family of Funds".
8. Duration, Termination and Amendments of this Agreement. This Agreement
shall become effective as of the day and year first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until March 14, 1999 on which date it will terminate unless its
continuance after March 14, 1999 is "specifically approved at least annually"
(a) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or of the Adviser at a meeting specifically
called for the purpose of voting on such approval, and (b) by the Board of
Trustees of the Trust or by "vote of a majority of the outstanding voting
securities" of the Fund.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by the "vote of a majority of the outstanding voting
securities" of the Fund, or by the Adviser, in each case on not more than 60
days' nor less than 30 days' written notice to the other party. This Agreement
shall automatically terminate in the event of its "assignment."
Subject to the provisions of the 1940 Act and such exemptions or
exceptions as may be granted or permitted by the Securities and Exchange
Commission thereunder, this Agreement may be amended only if such amendment is
approved by the "vote of a majority of the outstanding voting securities" of
the Fund.
The terms "specifically approved at least annually", "vote of a majority
of the outstanding voting securities", "assignment", "affiliated person", and
"interested persons", when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
Each party acknowledges and agrees that all obligations of the Trust
under this Agreement are binding only with respect to the Fund; that any
liability of the Trust under this Agreement with respect to the Fund, or in
connection with the transactions contemplated herein with respect to the Fund,
shall be discharged only out of the assets of the Fund; and that no other
<PAGE>
series of the Trust shall be liable with respect to this Agreement or in
connection with the transactions contemplated herein.
The undersigned Trustee or officer of the Trust has executed this
Agreement not individually, but as Trustee or officer under the Trust's
Declaration, and the obligations of this Agreement are not binding upon any of
the Trustees or officers of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
The Highland Family of Funds Highland Investment Group L.P.
TREGARGUS HOLDINGS LTD.
General Partner
By: Stephen J. Barrett By: Catherine C. Lawson
Title: Secretary Title: President
<PAGE>
Highland Investment Group L.P.
March 14, 1997
The Highland Family of Funds
Two Portland Square
Portland, Maine 04101
Ladies and Gentlemen:
This letter will confirm the agreement of the undersigned, Highland
Investment Group, L.P. ("Highland"), to pay all of the operating expenses
(excluding interest, taxes, brokerage commissions, litigation costs or other
extraordinary costs or expenses and excluding organization expenses) of each of
Highland Growth Fund and Highland Aggressive Growth Fund (the "Funds")
described in the Prospectus or Statement of Additional Information with respect
to the Funds included as part of the Registration Statement on Form N-1A of The
Highland Family of Funds (the "Trust") filed with the Securities and Exchange
Commission on October 16, 1996, as amended from time to time, to the extent
that such operating expenses of each Fund on a per annum basis exceed 1.95% of
the Fund's average daily net assets, calculated monthly. Payment of these
expenses shall be made no less frequently than quarterly.
This agreement shall terminate on the first anniversary of the date
hereof unless sooner terminated by either party upon not less than 90 days
written notice.
If the foregoing correctly sets forth our agreement, kindly so confirm by
signing this letter in the space indicated for signature on behalf of the Trust
below.
Very truly yours.
Highland Investment Group L.P.
By: TREGARGUS HOLDINGS LTD.
General Partner
By: Catherine C. Lawson
Name: Catherine C. Lawson
Title: President, Tregargus Holdings Ltd.
Agreed:
The Highland Family of Funds
By: Stephen J. Barrett
____________________________
Name: Stephen J. Barrett
Title: Secretary
Exhibit 6
THE HIGHLAND FAMILY OF FUNDS
DISTRIBUTION AGREEMENT
AGREEMENT made the 14th day of March 1997, between The Highland Family of
Funds (the "Trust"), a business trust organized under the laws of the
Commonwealth of Massachusetts with its principal place of business at Two
Portland Square, Portland, Maine 04101, and Forum Financial Services, Inc. (the
"Distributor"), a corporation organized under the laws of the State of Delaware
with its principal place of business at Two Portland Square, Portland, Maine
04101.
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act") as an open-end management investment company
and may issue its shares of beneficial interest, par value $0.0001 per share
(the "Shares"), in separate series and classes; and
WHEREAS, the Trust desires that the Distributor, as principal
underwriter, offer the Shares of the Trust representing interests in each of
the classes now existing or in the future created in each of the separate
investment portfolios of the Trust as listed from time to time on Schedule A
hereto (each a "Fund" and, collectively, the "Funds") and the Distributor is
willing to act as principal underwriter on the terms and conditions set forth
in this Agreement;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, the Trust and the Distributor do hereby agree as
follows:
SECTION 1. APPOINTMENT.
The Trust hereby appoints the Distributor, and the Distributor hereby
agrees, to act as distributor of the Shares for the period and on the terms set
forth in this Agreement. In connection therewith, the Trust has delivered to
the Distributor copies of its Declaration of Trust and Bylaws, the Trust's
Registration Statement and all amendments thereto filed pursuant to the
Securities Act of 1933, as amended (the "Securities Act") or the Act (the
"Registration Statement") and the current prospectus and Statement of
Additional Information of each Fund (collectively, as currently in effect and
as amended or supplemented, the "Prospectus") and shall promptly furnish the
Distributor with all amendments of or supplements to the foregoing.
<PAGE>
SECTION 2. DISTRIBUTION SERVICES.
Subject to the direction and control of the Trust's Board of Trustees
(the "Board"), the Distributor shall serve as distributor of the Shares.
(a) As agent of and sole distributor for the Trust, the Distributor shall
offer, and solicit offers to subscribe to, the unsold balance of Shares as
shall then be effectively registered under the Securities Act and applicable
state securities laws. All subscriptions for Shares obtained by the Distributor
shall be directed to the Trust for acceptance and shall not be binding on the
Trust until accepted by it. The Distributor shall have no authority to make
binding subscriptions on behalf of the Trust. The Trust reserves the right to
sell Shares directly to investors through subscriptions received by the Trust.
The Distributor's rights under this Agreement shall not apply to Shares issued
in connection with (i) the merger or consolidation of the Trust or its series
or classes with any other investment company or series or class thereof, (ii)
the Trust's acquisition by purchase or otherwise of all or substantially all of
the assets or stock of any other investment company, or (iii) the reinvestment
in Shares by the Trust's shareholders of distributions from the Trust or any
other offering by the Trust of securities to its shareholders.
(b) The Distributor shall use its best efforts to obtain subscriptions to
Shares upon the terms and conditions contained herein and in the Prospectus,
including the offering price. The Distributor shall send to the Trust promptly
all subscriptions placed with the Distributor. The Trust shall advise the
Distributor in its capacity as distributor of the approximate net asset value
per Share determined at a net asset value determination time disclosed in the
Prospectus, upon the request of the Distributor and at such other times as it
shall have been determined. The Trust shall furnish to the Distributor from
time to time, for use in connection with the offering of Shares, such other
information with respect to the Trust and Shares as the Distributor may
reasonably request. The Trust shall supply the Distributor with such copies of
the Prospectus as the Distributor may request. The Distributor may use its
employees, agents and other persons who need not be its employees, at its cost
and expense, to assist it in carrying out its obligations under this Agreement,
but no such employee, agent or other person shall be deemed to be an agent of
the Trust or have any rights under this Agreement.
(c) The Trust reserves the right to suspend the offering of Shares at any
time and to reject any particular subscription for Shares, in the absolute
discretion of the Board, and upon notice of such suspension the Distributor
shall cease to offer Shares.
(d) The Trust and the Distributor will cooperate with each other in
taking such action as may be necessary to qualify Shares for sale under the
<PAGE>
securities laws of such states as the Trust may designate, provided that the
Distributor shall not be required by this Agreement to register as a
broker-dealer or file a consent to service of process in any such state. Any
such qualification may be withheld, terminated or withdrawn by the Trust at any
time in its discretion. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be required by the
Trust in connection with such qualification. The Distributor shall monitor
sales of Shares, ensure compliance with any state laws relating to the issue or
sale of such Shares, and register, or prepare applicable filings with respect
to the Shares with the various state and other securities commissions. The
Trust shall pay all fees and expenses of registering Shares under the
Securities Act and of registering or qualifying Shares and the Trust's
qualification under applicable state securities laws. The Distributor shall pay
all expenses relating to its broker-dealer qualification.
(e) The Trust represents that its Registration Statement and Prospectus
under the Securities Act have been or will be, as the case may be, prepared in
conformity with the requirements of the Securities Act and the rules and
regulations of the Securities and Exchange Commission (the "Commission")
thereunder. The Trust represents and warrants that its Registration Statement
and Prospectus contain or will contain all statements required to be stated
therein in accordance with the Securities Act and the rules and regulations of
the Commission thereunder, and that all statements of fact contained or to be
contained therein are or will be true and correct at the time indicated or on
the effective date as the case may be; and that the Trust's Registration
Statement and Prospectus, when they shall become effective or be authorized for
use, will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading to a purchaser of Shares. The Trust will from time to
time file such amendment or amendments to its Registration Statement and
Prospectus as, in the light of future developments, shall, in the opinion of
the Trust's counsel, be necessary in order to have such Registration Statement
and Prospectus at all times contain all material facts required to be stated
therein or necessary to make any statements therein not misleading to a
purchaser of Shares, but, if the Trust shall not file such amendment or
amendments within fifteen days after receipt of a written request from the
Distributor to do so, the Distributor may, at its option, terminate this
Agreement effective immediately. The Trust shall not file any amendment to its
Registration Statement and Prospectus without giving the Distributor reasonable
notice thereof; provided, however, that nothing in this Agreement contained
shall in any way limit the Trust's right to file at any time such amendments to
its Registration Statement and Prospectus, of whatever character, as it deems
advisable, such right being in all respects absolute and unconditional. The
Trust represents and warrants that any amendment to its Registration Statement
and Prospectus hereafter filed will, when it becomes effective, contain all
<PAGE>
statements required to be stated therein in accordance with the 1940 Act and
the rules and regulations of the Commission thereunder, that all statements of
fact contained therein will, when the same shall become effective, be true and
correct and that no such amendment, when it becomes effective, will include an
untrue statement of a material fact or will omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading to a purchaser of Shares.
SECTION 3. STANDARD OF CARE.
The Distributor shall use its best judgment and efforts in rendering
services to the Trust under this Agreement. The Distributor shall not be liable
to the Trust for any error of judgment or mistake of law, for any loss arising
out of any investment, or for any action or inaction of the Distributor in the
absence of bad faith, willful misconduct, gross negligence or reckless
disregard of its obligations and duties under this Agreement or based upon
information, instructions or requests with respect to a Fund made to the
Distributor by a duly authorized officer of the Trust who is not also an
officer or employee of the Distributor or its affiliates. The Distributor shall
not be responsible or liable for any failure or delay in performance of its
obligations under this Agreement caused by circumstances beyond its reasonable
control.
SECTION 4. INDEMNIFICATION
(a) The Trust will indemnify, defend and hold the Distributor, its
several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the Securities Act (collectively, the
"Distributor Indemnitees"), free and harmless from and against any and all
claims, demands, liabilities and expenses incurred (including the cost of
investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) resulting from any
alleged untrue statement of a material fact contained in the Trust's
Prospectus, Statement of Additional Information or Registration Statement, or
exhibit to such Registration Statement, or any alleged omission of a material
fact required to be stated or necessary to make the statements therein not
misleading, unless such statement or omission was made in reliance upon, and in
conformity with, information furnished in writing to the Trust in connection
with the preparation of the Registration Statement or exhibits to the
Registration Statement by or on behalf of the Distributor.
(b) Nothing contained in this section shall be construed to protect the
Distributor against any liability to the Trust or its security holders to which
the Distributor would otherwise be subject by reason of its failure to satisfy
the standard of care set forth in Section 3 of this agreement.
<PAGE>
(c) (i) The Trust may assume the defense of any suit brought to enforce
any claim described in paragraph (a), and retain counsel of good standing
chosen by it and approved by the Distributor, which approval shall not be
withheld unreasonably. The Trust shall advise the Distributor that it will
assume the defense of the claim and retain counsel within ten days of receiving
receipt of notice of the claim.
(ii) If the Trust assumes the defense of any such suit and retains
counsel, the defendants shall bear the fees and expenses of any additional
counsel that they retain. If the Trust does not assume the defense of any such
suit, or if Distributor does not approve of counsel chosen by the Trust or has
been advised that it may have available defenses or claims that are not
available to or conflict with those available to the Trust, the Trust will
reimburse any Distributor Indemnitee named as defendant in such suit for the
reasonable fees and expenses of any counsel that person retains.
(iii)A Distributor Indemnitee shall not settle or confess any claim
without the prior written consent of the Trust, which consent shall not be
unreasonably withheld or delayed.
(d) The Distributor will indemnify, defend and hold the Trust, its
several officers and trustees, and any person who controls the Trust within the
meaning of Section 15 of the Securities Act (collectively, the "Trust
Indemnitees"), free and harmless from and against any and all claims, demands,
liabilities and expenses incurred (including the cost of investigating or
defending such claims, demands or liabilities and any reasonable counsel fees
incurred in connection therewith) resulting from:
(i) any alleged untrue statement of a material fact contained in the
Trust's prospectus, statement of additional information, Registration
Statement, or exhibit to such Registration Statement or any alleged omission of
a material fact required to be stated or necessary to make the statements
therein not misleading, if such statement or omission was made in reliance
upon, and in conformity with, information furnished to the Trust in writing in
connection with the preparation of the Registration Statement or the exhibits
to the Registration Statement by or on behalf of the Distributor; and,
(ii) any act of, or omission by, Distributor or its sales
representatives that does not conform to the standard of care set forth in
Section 3 of this Agreement.
(e) (i) The Distributor may assume the defense of any suit brought to
enforce any claim described in paragraph (d), and retain counsel of good
standing chosen by it and approved by the Trust, which approval shall not be
withheld unreasonably. The Distributor shall advise the Trust that it will
<PAGE>
assume the defense of the claim and retain counsel within ten days of receiving
receipt of notice of the claim.
(ii) If the Distributor assumes the defense of any such suit and
retains counsel, the defendants shall bear the fees and expenses of any
additional counsel that they retain. If the Distributor does not assume the
defense of any such suit, or if Trust does not approve of counsel chosen by the
Distributor or has been advised that it may have available defenses or claims
that are not available to or conflict with those available to the Distributor,
the Distributor will reimburse any Trust Indemnitee named as defendant in such
suit for the reasonable fees and expenses of any counsel that person retains.
(iii)A Trust Indemnitee shall not settle or confess any claim
without the prior written consent of the Distributor, which consent shall not
be unreasonably withheld or delayed.
(f) Each party's obligation to provide indemnification under this Section
is conditioned upon its receiving notice of any action brought against its
respective Indemnitees by letter, facsimile transmission or telegram to within
ten days after the summons or other first legal process shall have been served
on the other party. Such notice shall refer to the person or persons against
whom such action is brought. The failure to provide such notice shall not
relieve the party entitled to such notice of any liability that it may have to
its respective Indemnitees other than on account of the indemnification
provisions in this Section.
(g) The provisions of this Section and the parties' representations and
warranties in this Agreement shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Indemnitees
and shall survive the sale of any Shares made pursuant to subscriptions
obtained by the Distributor. The indemnification provisions of this Section
will inure exclusively to the benefit of the Indemnitees and their respective
successors and assigns.
(h) Each party agrees promptly to notify the other party of the
commencement of any litigation or proceeding of which it becomes aware arising
out of the issuance or sale of Shares.
(i) Nothing contained herein shall require the Trust to take any action
contrary to any provision of its Declaration of Trust or any applicable statute
or regulation.
<PAGE>
SECTION 5. NOTIFICATION BY THE TRUST
The Trust shall advise the Distributor immediately: (i) of any request by
the Commission for amendments to the Trust's Registration Statement or
Prospectus or for additional information; (ii) in the event of the issuance by
the Commission of any stop order suspending the effectiveness of the Trust's
Registration Statement or Prospectus or the initiation of any proceedings for
that purpose; (iii) of the happening of any material event which makes untrue
any statement made in the Trust's Registration Statement or Prospectus or which
requires the making of a change in either thereof in order to make the
statements therein not misleading; and (iv) of all action of the Commission
with respect to any amendments to the Trust's Registration Statement or
Prospectus which may from time to time be filed with the Commission under the
1940 Act or the Securities Act.
SECTION 6. EXPENSES
(a) The Trust shall be responsible and assumes the obligation for payment
of all the expenses of the Funds, including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of its
Registration Statement and Prospectuses and SAIs and all amendments and
supplements thereto and the preparing and mailing of annual and interim reports
and proxy materials to shareholders (including but not limited to the expense
of setting in type any registration statements, prospectuses, annual or interim
reports or proxy materials).
(b) The Trust shall bear the cost and expenses of the qualification of
Shares of the Funds for sale, and, if necessary or advisable in connection
therewith, of qualifying the Trust (but not Forum) as an issuer or as a broker
or dealer, in such states of the United States or other jurisdictions as shall
be selected by the Trust and Forum pursuant to Section 2(d) hereof and the
costs and expenses payable to each state or jurisdiction for continuing
qualification therein until the Trust decides to discontinue qualification
pursuant to Section 2(d) hereof.
SECTION 7. COMPENSATION
(a) The Distributor shall be entitled to no compensation or reimbursement
of expenses for the services provided by the Distributor pursuant to this
Agreement, except to the extent such compensation or reimbursement is provided,
with respect to any Fund or any class of a Fund, pursuant to a plan of
distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
(b) Notwithstanding anything in this Agreement to the contrary, the
Distributor and person that is affiliated with the Distributor may receive
<PAGE>
compensation or reimbursement from the Trust with respect to (i) the provision
of distribution and service activities on behalf of the Funds in accordance
with any distribution plan adopted by the Trust pursuant to Rule 12b-1 under
the 1940 Act, (ii) the provision of shareholder support or other services,
(iii) the provision of administrative services or (iv) service as a Trustee or
officer of the Trust.
SECTION 8. EFFECTIVENESS, DURATION AND TERMINATION
(a) This Agreement shall become effective with respect to each Fund on
the date on which the Trust's Registration Statement relating to the Shares of
that Fund becomes effective.
(b) This Agreement shall continue in effect with respect to each Fund for
one year and, thereafter, with respect to such Fund, shall continue in effect
for successive one year periods, provided that such continuance is specifically
approved at least annually (i) by the Board or by a vote of a majority of the
outstanding voting securities of the Fund and (ii) by a vote of a majority of
the Trustees of the Trust (A) who are not parties to this Agreement or
interested persons of any such party and (B) who do not have any direct or
indirect financial interest in any plan of distribution adopted pursuant to
Rule 12b-1 under the 1940 Act applicable to any class of Shares of the Fund or
in any agreements related to such plan, cast in person at a meeting called for
the purpose of voting on such approval. If the continuation of this Agreement
is not approved with respect to any Fund, the Distributor may continue to
render the services described herein in the manner and to the extent permitted
by the 1940 Act.
(c) This Agreement may be terminated at any time with respect to any
Fund, without the payment of any penalty, (i) by the Board or by a vote of a
majority of the outstanding voting securities of the Fund or, with respect to
each class of a Fund for which there is an effective plan of distribution
adopted pursuant to Rule 12b-1 under the 1940 Act, a majority of Trustees of
the Trust who do not have any direct or indirect financial interest in any such
plan or in any agreements related to such plan, on not less than 60 days'
written notice to the Distributor or (ii) by the Distributor on not less than
60 days' written notice to the Trust. This Agreement shall automatically
terminate in the event of its assignment.
SECTION 9. ACTIVITIES OF DISTRIBUTOR. Except to the extent necessary to
perform its obligations under this Agreement, nothing herein shall be deemed to
limit or restrict the Distributor's right, or the right of any of its officers,
directors or employees (whether or not they are a Trustee, officer, employee or
other affiliated person of the Trust) to engage in any other business or to
devote time and attention to the management or other aspects of any other
<PAGE>
business, whether of a similar or dissimilar nature, or to render services of
any kind to any other company, Trust, firm, individual or association.
SECTION 10. CONFIDENTIALITY. The Distributor agrees to treat all records
and other information related to the Trust as proprietary information of the
Trust and, on behalf of itself and its employees, to keep confidential all such
information, except that the Distributor may
(a) prepare or assist in the preparation of periodic reports to
shareholders and regulatory bodies such as the Commission;
(b) provide information typically supplied in the investment company
industry to companies that track or report price, performance or other
information regarding investment companies; and
(c) release such other information as approved in writing by the Trust,
which approval shall not be unreasonably withheld; provided, however, that the
Distributor may release any information regarding the Trust without the consent
of the Trust if the Distributor reasonably believes that it may be exposed to
civil or criminal legal proceedings for failure to comply, when requested to
release any information by duly constituted authorities or when so requested by
the Trust.
SECTION 11. LIMITATION OF SHAREHOLDER AND TRUSTEE LIABILITY. The Trustees
of the Trust and the shareholders of each Fund shall not be liable for any
obligations of the Trust or of the Funds under this Agreement, and the
Distributor agrees that, in asserting any rights or claims under this
Agreement, it shall look only to the assets and property of the Trust or the
Fund to which the Distributor's rights or claims relate in settlement of such
rights or claims, and not to the Trustees of the Trust, the shareholders of the
Funds, or any other Fund.
SECTION 12. MISCELLANEOUS
(a) Except for Schedule A, no provisions of this Agreement may be amended
or modified in any manner except by a written agreement properly authorized and
executed by both parties hereto and, if required by the Act, by a vote of a
majority of the outstanding voting securities of the Funds.
(b) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid, the remaining portion
or portions shall be considered severable and not be affected, and the rights
and obligations of the parties shall be construed and enforced as if the
Agreement did not contain the particular part, term or provision held to be
illegal or invalid.
<PAGE>
(c) Section headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
(d) Notices, requests, instructions and communications received by the
parties at their respective principal places of business, or at such other
address as a party may have designated in writing, shall be deemed to have been
properly given.
(e) This Agreement shall be governed by and shall be construed in
accordance with the laws of the State of New York and the provisions of the
1940 Act.
(f) This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
(g) This Agreement may be executed by the parties hereto on any number of
counterparts, and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
(h) Notwithstanding any other provision of this Agreement, the parties
agree that the assets and liabilities of each Fund of the Trust are separate
and distinct from the assets and liabilities of each other Fund and that no
Fund shall be liable or shall be charged for any debt, obligation or liability
of any other Fund, whether arising under this Agreement or otherwise.
(i) The terms "vote of a majority of the outstanding voting securities,"
"interested person," "affiliated person" and "assignment" shall have the
meanings ascribed thereto in the Act.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
THE HIGHLAND FAMILY OF FUNDS
Robert Lamb III
_______________________________
Robert Lamb III
President
FORUM FINANCIAL SERVICES, INC.
John Y. Keffer
_______________________________
John Y. Keffer
President
<PAGE>
DISTRIBUTION AGREEMENT
SCHEDULE A
FUNDS
AS OF MARCH 14, 1997
Highland Growth Fund
Highland Aggressive Growth Fund
EXHIBIT 8
THE HIGHLAND FAMILY OF FUNDS
CUSTODIAN AGREEMENT
Agreement dated as of March 14, 1997, between The Highland Family of
Funds (the "Fund", on behalf of its portfolios listed in Exhibit A hereto, a
Massachusetts business trust operating as an open-end investment company under
the Investment Company Act of 1940, and The First National Bank of Boston, a
national banking association having its principal office at 100 Federal Street,
Boston, Massachusetts 02110 (the "Custodian").
WHEREAS, the Fund desires that its Securities and cash shall be
hereafter held and administered by Custodian as the Fund's agent pursuant to
the terms of this Agreement; and
WHEREAS, the Custodian provides services in the ordinary course of its
business which will meet the Fund's needs as provided for hereinafter;
NOW, THEREFORE, in consideration of the mutual promises herein made,
the Fund and the Custodian agree as follows:
Section 1. Definitions.
"Bank" shall mean a bank as defined in Sec. 2(a)(5) of the Investment Company
Act of 1940.
"Securities" shall mean and include stocks, shares, bonds, debentures, notes,
money market instruments or other obligations and any certificates, receipts,
warrants or other instruments representing rights to receive, purchase, or
subscribe for the same, or evidencing or representing any other rights or
interests therein, or in any property or assets. Unless otherwise indicated
herein, "Securities" shall mean both U. S. and "foreign securities", as that
term is defined in Sec. 17(f) of the Investment Company Act of 1940.
"Officers" Certificate" shall mean a request or directions in writing or
confirmation of oral requests or directions in writing signed in the name of
the Fund by any two of the Chairman of the Executive Committee, the President,
a Vice President, the Secretary, the Clerk or the Treasurer of the Fund or any
<PAGE>
other persons duly authorized to sign by the Board of Trustees or the Executive
Committee of the Fund.
"Account" shall mean a separate account for each of the portfolios listed in
Exhibit A.
Section 2. Custodian as Agent.
The Custodian is authorized to act under the terms of this Agreement as the
Fund's agent and shall be representing the Fund whenever acting within the
scope of the Agreement.
Section 3. Names, Titles and Signature of Fund's Officers.
An Officer of the Fund will certify to the Custodian the names, titles, and
signatures of those persons authorized to sign the Officers' Certificates, as
well as names of the Board of Trustees and the Executive Committee, if any.
Said Officer, or his or her successor, will provide the Custodian with any
changes which may occur from time to time.
The Custodian is authorized to rely and act upon written and manually signed
instructions of any person or persons (if more than one, so indicated) named in
a separate list specifying those persons who may authorize the withdrawal of
any portion of the cash or Securities which will be furnished from time to time
signed by Officers of the Fund and certified by its Secretary or an Assistant
Secretary, ("Authorized Persons"). The Fund will provide the Custodian with
authenticated specimen signatures of Authorized Persons.
The Custodian is further authorized to rely upon any instructions received by
any other means and identified as having been given or authorized by any
Authorized Person, regardless of whether such instructions shall in fact have
been authorized or given by any such persons; provided, that,
(a) the Custodian and the Fund shall have previously agreed in writing upon the
means of transmission and the method of identification for such instructions,
(b) the Custodian has not been notified by the Fund to cease to recognize
such means and methods, and
(c) such means and methods have in fact been used.
<PAGE>
If the Fund should so choose to have dial-up or other means of direct access to
the Custodian's accounting system for Securities in custodial accounts, the
Custodian is also authorized to rely and act upon any instructions received by
the Custodian through the terminal device, regardless of whether such
instructions shall in fact have been given or authorized by the Fund provided
that such instructions are accompanied by passwords which have been mutually
agreed to in writing by the Custodian and the Fund and the Custodian has not
been notified by the Fund to cease recognizing such passwords.
Where dial-up or other direct means of access to the Custodian's accounting
system for cash or Securities is utilized, the Fund agrees to indemnify the
Custodian and hold it harmless from and against any and all liabilities,
losses, damages, costs, reasonable counsel fees, and other reasonable expenses
of every nature suffered or incurred by the Custodian by reason of or in
connection with the improper use, unauthorized use and misuse by the Fund or
its employees of any terminal device with access to the Custodian's accounting
system for Securities in Custodial Accounts, unless such losses, damages, etc.,
result from negligent or wrongful acts of the Custodian, its employees or
agents.
Section 4. Receipt and Disbursement of Money.
A. The Custodian shall open and maintain the Account, subject to debit only by
a draft or order by the Custodian acting pursuant to the terms of this
Agreement. The Custodian shall hold in the Account, subject to the provisions
hereof, all cash received by it from or for the account of the Fund.
1. The Custodian shall make payment of cash to the Account or shall debit the
Account only
(a) for the purchase of Securities for the portfolio of the Fund upon the
delivery of such Securities to the Custodian, registered in the name of the
Fund or of the nominee of the Custodian referred to in Section 9 below;
(b) for payments in connection with the conversion, exchange or surrender
of Securities owned or subscribed to by the Fund held by or to be delivered
to the Custodian;
(c) for payments in connection with the return of the cash collateral
received in connection with Securities loaned by the Fund;
(d) for payments in connection with futures contracts positions held by
the Fund;
<PAGE>
(e) for payments of interest, dividends, taxes and in connection with rights
offerings; or
(f) for other proper Fund purposes.
All Securities accepted in connection with the purchase of such Securities, if
(a) usual in the course of local market practice or (b) specifically required
in instructions from the Fund, shall be accompanied by payment of, or a "due
bill" for, any dividends, interest or other distributions of the issue due the
purchaser.
2. Except as hereinafter provided, the Custodian shall make any payment for
which it receives direction from an Authorized Person so long as such direction
(i) is (a) in writing (or is a facsimile transmission of a written direction),
(b) electronically transmitted to the Custodian as provided in Section 3 or (c)
when written or electronic directions cannot reasonably be given within the
relevant time period, orally when the person giving such direction assures the
Custodian that the directions will be confirmed in writing by an Authorized
Persons within twenty-four (24) hours and (ii) states that such payment is for
a purpose permitted under the terms of this subsection.
3. All funds received by the Custodian in connection with the sale, transfer,
exchange or loan of Securities will be credited to the Account in immediately
available funds as soon as reasonably possible on the date such received funds
are immediately available. Payments for purchase of Securities for the Account
made in immediately available funds will be charged against the Account on the
day of delivery of such Securities and all other payments will be charged on
the business day after the day of delivery.
A. The Custodian is hereby authorized and required to (a) collect on a timely
basis all income and other payments with respect to Securities held hereunder
to which the Fund shall be entitled either by law or pursuant to custom in the
securities business, and to credit such income to the Account, (b) detach and
present for payment all coupons and other income items requiring presentation
as and when they become due, (c) collect interest when due on Securities held
hereunder, and (d) endorse and collect all checks, drafts or other orders for
the payment of money received by the Custodian for the account of the Fund.
B. If the Custodian agrees to advance cash or Securities of the Custodian for
delivery on behalf of the Fund to a third party, any property received by the
<PAGE>
Custodian on behalf of the Fund in respect of such delivery shall serve as
security for the Fund's obligation to repay such advance until such time as
such advance is repaid, and, in the case where such advance is extended for the
purchase of Securities which constitute "margin stock" under Regulation U of
the Board of Governors of the Federal Reserve System, such additional
Securities of the Fund, as shall be necessary for the Custodian, in the
Custodian's reasonable determination, to be in compliance with such Regulation
U also shall constitute security for the Fund's obligation to repay such
advance. The Fund hereby grants the Custodian a security interest in such
property of the Fund to secure such advance and agrees to repay such advance
promptly without demand from the Custodian (and in any event, as soon as
reasonably practicable following any demand by the Custodian), unless otherwise
agreed by both parties. Should the Fund fail to repay such advance as required,
the Custodian shall be entitled immediately to apply such security to the
extent necessary to obtain repayment of the advance, subject, in the case of
Fund failure to make prompt repayment without demand, to prior notice to the
Fund.
Section 5. Receipt of Securities.
The Custodian shall hold in the Account, segregated at all times from those of
any other persons, firms or corporations, pursuant to the provisions hereof,
all Securities received by it from or for the account of the Fund. All such
Securities are to be held or disposed of by the Custodian for, and subject at
all times to the instructions of, the Fund pursuant to the terms of this
Agreement. The Custodian shall have no power or authority to assign,
hypothecate, pledge or otherwise dispose of any of the Securities and cash,
except pursuant to the directive of the Fund and only for the account of the
Fund as set forth in Section 7 of this Agreement.
The Custodian and its agents (including foreign subcustodians) may make
arrangements with Depository Trust Fund ("DTC") and other foreign or domestic
depositories or clearing agencies, including the Federal Reserve Bank and any
foreign depository or clearing agency, whereby certain Securities may be
deposited for the purpose of allowing transactions to be made by bookkeeping
entry without physical delivery of such Securities, subject to such
restrictions as may be agreed upon by the Custodian and the Fund. The Custodian
shall immediately commence procedures to replace Securities lost due to
robbery, burglary or theft while such Securities are within its control or that
of its agents or employees upon discovery of such loss.
<PAGE>
Section 6. Foreign Subcustodians and Other Agents.
(a) In the event the Custodian places Securities, pursuant to this Agreement,
with any foreign subcustodian, the Custodian agrees that it shall place such
Securities only with those foreign subcustodians which either satisfy the
requirements of "eligible foreign custodian" under Section 17(f) of the U. S.
Investment Company Act of 1940, or with respect to which exemptive relief has
been granted by the U. S. Securities and Exchange Commission from the
requirements of Section 17(f).
(b) With respect to any Securities to be placed with foreign subcustodians
pursuant to this section, the Custodian represents and warrants that during the
term of this Agreement it will carry Bankers Blanket Bond or similar insurance
for losses incurred as a result of such subcustodial arrangements.
(c) The Fund authorizes the Custodian to release any and all information
regarding Securities placed with foreign subcustodians hereunder as may be
required by court order of a court of competent jurisdiction.
(d) Custodian further agrees that:
1. it will provide foreign custody arrangements only through entities
approved by the Fund's Board of Trustees (the "Board") and only
through written custody agreements complying with Section 17(f) of the
Investment Company Act of 1940 and the rules and regulations
thereunder;
2. it will (A) monitor compliance by each foreign subcustodian under
any agreement between the Custodian or subcustodian and each foreign
subcustodian (a "Custody Agreement") and report to the Board promptly
any noncompliance with a material term (as defined below) of any such
agreement; (B) monitor the status of the foreign subcustodians as
"eligible foreign subcustodians" and report to the Board promptly any
failure to meet that status; and (C) report to the Board annually
concerning the continuing eligibility status of the foreign
subcustodians;
3. it will, upon the Board's request, provide the Board such
information relating to foreign subcustodians and specific foreign
custody issues as the Board may reasonably request in connection with
the approval and continuance of any foreign custody arrangement.
<PAGE>
As used herein, a Material Term of a Custody Agreement shall mean a term which
provides that (i) the Custodian will be adequately indemnified and the
Securities so placed adequately insured in the event of loss; (ii) the
Securities will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of the foreign subcustodian or its creditors (except
any claim for payment for the services provided by such subcustodian and any
related expenses; provided, however that the Custodian shall use its best
efforts promptly to release any such right, charge, security interest, lien or
claim on the assets, except to the extent such right, charge, security
interest, lien or claim arises with respect to a special request or requirement
by the Fund for services the cost of which and the expenses incurred in
connection with which the Fund has not paid or has declined to pay, it being
agreed and understood that, in the ordinary course, all payments for usual and
routine services rendered and expenses incurred by a subcustodian shall be the
obligation of the Custodian); (iii) beneficial ownership of the Securities will
be freely transferable without payment of money or value other than for safe
custody or administration; (iv) adequate records will be maintained identifying
the Securities as belonging to the Fund; (v) the Custodian's independent public
accountants will be given access to those records or the confirmation of the
contents of those records; and (vi) the Custodian will receive periodic reports
with respect to the safekeeping of the Securities, including, but not
necessarily limited to, notification of any transfer to or from the Account.
Section 7. Transfer, Exchange and Redelivery of Securities.
The Custodian (or a subcustodian or any other agent of the Custodian) shall
have sole power to release or deliver any Securities of the Fund held by the
Custodian (or such subcustodian or agent) pursuant to this Agreement. The
Custodian agrees (and will obtain an undertaking from each subcustodian or
other agent) that Securities held by the Custodian (or by a subcustodian or
other agent of the Custodian) will be transferred, exchanged or delivered only
(a) for sales of Securities for the account of the Fund in accordance with (i)
"New York Street Practice", (ii) predominant established practice in the
relevant local market, or (iii) specific instructions from the Fund; or
(b) when Securities are called, redeemed or retired or otherwise become
payable;
<PAGE>
(c) for examination by any broker selling any such Securities in accordance
with "street delivery" custom or other relevant local market practice;
(d) in exchange for or upon conversion into other Securities whether pursuant
to any plan of merger, consolidation, reorganization, recapitalization or
readjustment, or otherwise;
(e) upon conversion of such Securities pursuant to their terms into other
Securities;
(f) upon exercise of subscription, purchase or other similar rights
represented by such Securities pursuant to their terms;
(g) for the purpose of exchanging interim receipts or temporary
Securities for definitive Securities;
(h) for the purpose of tendering Securities;
(i) for the purpose of delivering Securities lent by the Fund;
(j) for purposes of delivering collateral upon redelivery of Securities
lent or for purposes of delivering excess collateral; or
(k) for other proper Fund purposes.
As to any deliveries made by Custodian pursuant to items (b), (d), (e), (f),
(g), (i), (j) and (k), Securities in exchange therefor shall be deliverable to
the Custodian (or a subcustodian or other agent of the Custodian). The
Custodian may rely upon any written, electronic or oral instructions or an
Officers' Certificate relating thereto as provided for in Sections 3 and 4
above.
Section 8. The Custodian's Acts Without Instructions.
Unless and until the Custodian receives instructions to the contrary, the
Custodian (or a subcustodian or other agent of the Custodian) shall:
(a) present for payment all coupons and other income items held by it for the
account of the Fund which call for payment upon presentation and hold the cash
received by it upon such payment in the Account;
(b) collect interest and cash dividends and other distributions, provide
notice to the Fund of receipts, and deposit to the Account;
<PAGE>
(c) hold for the account of the Fund all stock dividends, rights and similar
Securities issued with respect to any Securities held by the Custodian under
the terms of this Agreement;
(d) execute as agent on behalf of the Fund all necessary ownership certificates
required by the Internal Revenue Code or the Income Tax Regulations of the
United States Treasury Department, the laws of any State or territory of the
United States, or, in the case of Securities held through foreign
subcustodians, the laws of the jurisdiction in which such Securities are held,
now or hereafter in effect, inserting the Fund's name on such certificates as
the owner of the Securities covered thereby, to the extent it may lawfully do
so;
(e) use its best efforts, in cooperation with the Fund, to file such forms,
certificates and other documents as may be required to comply with all
applicable laws and regulations relating to withholding taxation applicable to
the Securities; and
(f) use its best efforts to assist the Fund in obtaining any refund of local
taxes to which the Fund may have a reasonable claim.
The Fund agrees to furnish to the Custodian such information and to execute
such forms and other documents as the Custodian may reasonably request or as
otherwise may be reasonably necessary in connection with the Custodian's
performance of its obligations under clauses (e) and (f).
Section 9. Registration of Securities.
Except as otherwise directed by an Officers' Certificate, the Custodian shall
register all Securities, except such as are in bearer form, in the name of the
Fund or a registered nominee of the Fund or a registered nominee of the
Custodian or a subcustodian. Securities deposited with DTC or a foreign
securities depository permitted under Section 5 may be registered in the
nominee name of DTC or such foreign securities depository. The Custodian shall
execute and deliver all such certificates in connection therewith as may be
required by the applicable provisions of the Internal Revenue Code, the laws of
any State or territory of the United States, or, in the case of Securities
placed with foreign subcustodians, the laws of the jurisdiction in which such
Securities are held. The Custodian shall maintain such books and records as may
be necessary to identify the specific Securities held by it hereunder at all
times.
<PAGE>
The Fund shall from time to time furnish the Custodian appropriate instruments
to enable the Custodian to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee, any Securities which it may
hold for the account of the Fund and which may from time to time be registered
in the name of the Fund.
Section 10. Voting and Other Action.
Neither the Custodian nor any nominee of the Custodian or of DTC shall vote any
of the Securities held hereunder by or for the account of the Fund except in
accordance with the instructions contained in an Officers' Certificate.
The Custodian shall deliver or have delivered to the Fund all notices,
including notices of voluntary and nonvoluntary corporate actions, proxies and
proxy soliciting materials with relation to such Securities in a timely fashion
in accordance with industry standards. Such proxies are to be executed by the
registered holder of such Securities (if registered otherwise than in the name
of the Fund), but without indicating the manner in which such proxies are to be
voted.
With respect to Securities deposited with DTC or any other depository,
including a foreign subcustodian, as provided for in Section 6 hereof, where
such Securities may be registered in the nominee name of DTC, or other such
depository the Custodian shall request that the nominee shall not vote any of
such deposited Securities or execute any proxy to vote thereon or give any
consent or take any other action with respect thereto unless instructed to do
so by the Custodian following receipt by the Custodian of an Officers'
Certificate.
Section 11. Transfer Tax and Other Disbursements.
The Fund shall pay or reimburse the Custodian from time to time for any
transfer taxes payable upon transfers of Securities made hereunder and for all
other necessary and proper disbursements and expenses made or incurred by the
Custodian in the performance of this Agreement, as required by U.S. law or the
laws of the jurisdiction in which the Securities are held, as the case may be.
The Custodian shall execute and deliver such certificates in connection with
Securities delivered to it or by it under this Agreement as may be required
under the laws of any jurisdiction to exempt from taxation any exemptible
transfers and/or deliveries of any such Securities.
<PAGE>
Section 12. Compensation and the Custodian's Expenses.
The Custodian shall be paid as compensation for its services pursuant to this
Agreement such compensation as may from time to time be agreed upon in writing
between the two parties.
Section 13. Indemnification.
The Fund agrees to indemnify and hold harmless the Custodian and its employees,
agents and nominee from all taxes, charges, expenses, assessments, claims and
liabilities (including reasonable attorneys' fees) incurred or assessed against
them in connection with the performance of the Agreement, except such as may
arise from their own negligent action, negligent failure to act or willful
misconduct. The Custodian agrees to indemnify and hold harmless the Fund and
its trustees, officers, employees, and agents from all taxes, charges,
expenses, assessments, claims and liabilities (including attorneys fees)
incurred or assessed against the Fund in connection with the performance of the
Agreement, which may arise from negligent action, negligent failure to act or
willful misconduct on the part of the Custodian, the Custodian's nominee,
depository or other agents (including foreign subcustodians) or any of their
respective officers, employees, agents or nominees. In the event of any advance
of cash for any purpose made by the Custodian resulting from orders or
instructions of the Fund, or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Agreement, except such
as may arise from its or its nominee's own negligent action, negligent failure
to act or willful misconduct, any property at any time held for the account of
the Fund shall be security therefor.
Within a reasonable time after receipt by an indemnified party of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party, notify in writing the
indemnifying party of the commencement thereof; and the omission so to notify
the indemnifying party will not relieve it from any liability hereunder as to
the particular item for which indemnification is then being sought, unless such
omission is a result of the failure to exercise reasonable care on the part of
the indemnified party. In case any such action is brought against an
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein, and to
assume the defense thereof, with counsel who shall be to the reasonable
satisfaction of such indemnified party, and after notice from the indemnifying
<PAGE>
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation. Any such indemnifying party shall not be liable to any such
indemnified party on account of any settlement of any claim or action effected
without the consent of such indemnifying party.
Section 14. Reports by the Custodian.
The Custodian shall furnish the Fund daily with a statement of all transactions
and entries for the Account of the Fund. The Custodian shall furnish the Fund
with such reports covering Securities held by it or under its control as may be
agreed upon from time to time. The books and records of the Custodian
pertaining to its actions under this Agreement shall be open to inspection and
audit at reasonable times and upon reasonable notice to the Fund. All such
books and records shall be the property of the Fund (and such other persons as
the Fund may designate from time to time) and the Custodian shall forthwith
upon the Fund's request, turn over to the Fund and cease to retain in its
files, records and documents created and maintained by the Custodian pursuant
to this Agreement, which are no longer needed by the Custodian in performance
of its services or for its protection.
Section 15. Access to Records
Custodian shall give the Fund and its independent auditors reasonable access to
the records of the Custodian and/or the foreign subcustodians holding Fund
assets with respect to the Fund's transactions or confirmation with respect to
the content of such records.
Section 16. Termination and Assignment.
This agreement may be terminated by the Fund or the Custodian, immediately upon
written notice from the Fund or the Custodian, as applicable, to the other
party, if the other party fails materially to perform its obligations
hereunder, and may otherwise be terminated by the Fund or by the Custodian on
not less than ninety (90) days' notice, given in writing and sent by registered
mail to the Custodian or the Fund as the case may be. Upon termination of this
Agreement, the Custodian shall deliver the Securities and cash in the account
of the Fund to such entity as is designated in writing by the Fund and in the
absence of such a designation may, but shall not be obligated to, deliver them
<PAGE>
to a bank or trust company of the Custodian's own selection having an aggregate
capital, surplus and undivided profits as shown by its last published report of
not less than 50 million dollars ($50,000,000), the Securities and cash to be
held by such bank or trust company for the benefit of the Fund under terms
similar to those of this Agreement and the Fund to be obligated to pay to such
transferee the then current rates of such transferee for services rendered by
it; provided, however, that the Custodian may decline to transfer such amount of
such Securities equivalent to all fees and other sums owing by the Fund to the
Custodian, and the Custodian shall have a charge against and security interest
in such amount until all moneys owing to it have been paid, or escrowed to its
satisfaction.
This Agreement may not be assigned by the Custodian without the consent of the
Fund, authorized or approved by a resolution of the Fund's Board of Trustees.
Section 17. Force Majeure.
The Custodian shall not be liable or accountable for any loss or damage
resulting from any condition or event beyond its reasonable control; provided,
however, that the Custodian shall promptly use its best efforts to mitigate any
such loss or damage to the Fund as a result of any such condition or event. For
the purposes of the foregoing, the actions or inactions of the Custodian's
subcustodians and other agents shall not be deemed to be beyond the reasonable
control of the Custodian. In connection with the foregoing, the Custodian
agrees (and agrees that it will use its best efforts to obtain the undertaking
of its subcustodians and other agents to the effect) that the Custodian (and/or
such subcustodian or agent) shall maintain such alternate power sources for
computer and related systems and alternate channels for electronic
communication with such computers and related systems that the failure of the
primary power source and/or communications channel of the Custodian (and/or its
subcustodians or other agents) will not foreseeable result in any loss or
damage to the Fund.
Section 18. Third Parties.
This Agreement shall be binding upon and the benefits hereof shall inure to the
parties hereto and their respective successors and assigns. However, nothing in
this Agreement shall give or be construed to give or confer upon any third
party any rights hereunder.
<PAGE>
Section 19. Amendments.
The terms of this Agreement shall not be waived, altered, modified, amended,
supplemented or terminated in any manner whatsoever, except by written
instrument signed by both of the parties hereto.
Section 20. Governing Law.
This Agreement shall be governed and construed in accordance with the laws of
The Commonwealth of Massachusetts.
Section 21. Counterparts.
This agreement may be executed in several counterparts, each of which is an
original.
Section 22. Notices.
All notices provided for herein shall be in writing and shall become effective
when deposited in the United States mail, postage prepaid and certified,
addressed
(a) if to the Custodian, at 150 Royall Street
Canton, MA 02021
Attention: Worldwide Custody-MS: 45-02-90
(b) if to the Fund, at Forum Financial Group
2 Portland Square
Portland, ME 04101
Attention: John Y. Keffer, President
or to such other address as either party may notify the other in writing.
Notice is hereby given that this instrument is executed on behalf of the
Trustees of the Fund as Trustees, and the obligations of this instrument are
not binding upon any of the Trustees, officers, or shareholders of any
portfolio of the Fund individually but binding only upon assets and property of
the Fund. No portfolio of the Fund shall be charged with the obligations of any
other portfolio of the Fund hereunder.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
THE HIGHLAND FAMILY OF
FUNDS
Robert Lamb III
Robert Lamb III
Title: President
THE FIRST NATIONAL BANK OF
BOSTON
Juan C. Alvarez
Juan C. Alvarez
Title: Administrative Manager
<PAGE>
EXHIBIT A TO
THE HIGHLAND FAMILY OF FUNDS
CUSTODY AGREEMENT DATED MARCH 14, 1997
Highland Growth Fund
Highland Aggressive Growth Fund
Exhibit 9(a)
THE HIGHLAND FAMILY OF FUNDS
ADMINISTRATION AGREEMENT
AGREEMENT made the 14th day of March, 1997, between The Highland Family
of Funds (the "Trust"), a business trust organized under the laws of the
Commonwealth of Massachusetts with its principal place of business at Two
Portland Square, Portland, Maine 04101 and Forum Administrative Services, LLC
(the "Administrator"), a limited liability corporation organized under the laws
of the State of Delaware with its principal place of business at Two Portland
Square, Portland, Maine 04101.
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end management investment company and
may issue its shares of beneficial interest, par value $0.0001 per share (the
"Shares"), in separate series and classes; and
WHEREAS, the Trust desires that the Administrator perform administrative
services for series of the Trust now existing or that in the future may be
created, and for classes that may in the future be created in each of the
separate investment portfolios of the Trust as listed on Schedule A hereto, as
it may be amended from time to time (each a "Fund" and, collectively, the
"Funds"), and the Administrator is willing to provide those services on the
terms and conditions set forth in this Agreement;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, the Trust and the Administrator do hereby agree as
follows:
SECTION 1. APPOINTMENT
The Trust hereby appoints the Administrator, and the Administrator hereby
agrees, to act as administrator of the Trust for the period and on the terms
set forth in this Agreement. In connection therewith, the Trust has delivered
to the Administrator copies of its Declaration of Trust and Bylaws, the Trust's
Registration Statement and all amendments thereto filed with the Securities and
Exchange Commission ("SEC") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), or the Act (the "Registration Statement") and the
current Prospectus and Statement of Additional Information of each Fund
<PAGE>
(collectively, as currently in effect and as amended or supplemented, the
"Prospectus") and shall promptly furnish the Administrator with all amendments
of or supplements to the foregoing.
SECTION 2. ADMINISTRATIVE DUTIES
(a) Subject to the direction and control of the board of trustees of the
Trust (the "Board"), the Administrator shall manage all aspects of the Trust's
operations with respect to the Funds except those which are the responsibility
of Highland Investment Group L.P., or any other investment adviser to a Fund or
the Funds (the "Adviser").
(b) With respect to the Trust or each Fund, as applicable, the
Administrator shall:
(i) at the Trust's expense, provide the Trust with, or arrange for the
provision of, the services of persons competent to perform such
legal, administrative and clerical functions not otherwise described
in this Section 2(b) as are necessary to provide effective operation
of the Trust;
(ii) oversee (A) the preparation and maintenance by the Adviser and the
Trust's custodian, transfer agent, dividend disbursing agent and
fund accountant (or if appropriate, prepare and maintain) in such
form, for such periods and in such locations as may be required by
applicable law, of all documents and records relating to the
operation of the Trust required to be prepared or maintained by
the Trust or its agents pursuant to applicable law; (B) the
reconciliation of account information and balances among the
Adviser and the Trust's custodian, transfer agent, dividend
disbursing agent and fund accountant; (C) the transmission of
purchase and redemption orders for Shares; (D) the notification to
the Adviser of available funds for investment; and (E) the
performance of fund accounting, including the calculation of the net
asset value of the Shares;
(iii) oversee the performance of administrative and professional services
rendered to the Trust by others, including its custodian, transfer
agent and dividend disbursing agent as well as legal, auditing,
shareholder servicing and other services performed for the Funds;
(iv) file or oversee the filing of each document required to be filed by
the Trust in electronic format with the SEC;
<PAGE>
(v) be responsible for and assist in the preparation and the printing of
the periodic updating of the Registration Statement and Prospectus;
(vi) prepare and file or oversee the preparation and filing of the
Trust's tax returns;
(vii) oversee the preparation of financial statements and related reports
to the Trust's shareholders, the SEC and state and other securities
administrators;
(viii) be responsible for and assist in the preparation of proxy and
information statements and any other communications to shareholders;
(ix) at the request of the Board, provide the Trust with adequate general
office space and facilities and provide persons suitable to the
Board to serve as officers of the Trust;
(x) assist the Adviser in monitoring Fund holdings for compliance with
Prospectus investment restrictions and assist in preparation of
compliance reports;
(xi) prepare, file and maintain the Trust's governing documents,
including the Declaration of Trust, the Bylaws and minutes of
meetings of trustees and shareholders;
(xii) with the cooperation of the Trust's counsel, the Adviser, the
officers of the Trust and other relevant parties, prepare and
disseminate materials for meetings of the Board;
(xiii) maintain the Trust's existence in good standing under applicable
state law;
(xiv) ensure that such Shares are properly and duly registered with the
SEC and oversee the registration, or preparation of applicable
filings with respect to the Shares with the various state and other
securities commissions and the monitoring of sales of Shares;
(xv) oversee the calculation of performance data for dissemination to
information services covering the investment company industry, for
sales literature of the Trust and other appropriate purposes;
<PAGE>
(xvi) oversee the determination of the amount of and supervise the
declaration of dividends and other distributions to shareholders as
necessary to, among other things, maintain the qualification of
each Fund as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"), and satisfy the
diversification requirements applicable to insurance products under
the Code, and prepare and distribute to appropriate parties notices
announcing the declaration of dividends and other distributions to
shareholders;
(xvii) advise the Trust and the Board on matters concerning the Trust and
its affairs;
(xviii) calculate, review and account for Fund expenses, report on Fund
expenses on a periodic basis and pay all Fund bills;
(xix) prepare Fund budgets, pro-forma financial statements, expense and
profit/loss projections and fee waiver/expense reimbursement
projections on a periodic basis;
(xx) prepare financial statement expense information; and
(xxi) perform the recordkeeping, reporting and other tasks required to be
performed by the Trust's administrator as specified in the various
procedures adopted by the Board; provided, that Forum need not
perform any such task except upon 60 days notice.
(c) Forum shall provide such other services and assistance relating to
the affairs of the Trust as the Trust or an Adviser may, from time to time,
reasonably request.
(d) Forum shall maintain records relating to its services, such as
journals, ledger accounts and other records, as are required to be maintained
under the Act and Rule 31a-1 thereunder. The books and records pertaining to
the Trust that are in possession of the Administrator shall be the property of
the Trust. The Trust, or the Trust's authorized representatives, shall have
access to such books and records at all times during the Administrator's normal
business hours. Upon the reasonable request of the Trust, copies of any such
<PAGE>
books and records shall be provided promptly by the Administrator to the Trust
or the Trust's authorized representatives. In the event the Trust designates a
successor to any of the Administrator's obligations under this Agreement, the
Administrator shall, at the expense and direction of the Trust, transfer to
such successor all relevant books, records and other data established or
maintained by the Administrator under this Agreement.
SECTION 3. STANDARD OF CARE
The Administrator shall give the Trust the benefit of its best judgment
and efforts in rendering its services to the Trust and shall not be liable for
error of judgment or mistake of law, for any loss arising out of any
investment, or in any event whatsoever, provided that nothing herein shall be
deemed to protect, or purport to protect, the Administrator against any
liability to the Trust or to the security holders of the Trust to which it
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties hereunder, or by reason of reckless
disregard of its obligations and duties under this Agreement.
SECTION 4. EXPENSES
The Trust shall be responsible for and assumes the obligation for payment
of all of its other expenses, including: (a) the fee payable under Section 5
hereof; (b) the fees payable to the Adviser under an agreement between the
Adviser and the Trust; (c) expenses of issue, repurchase and redemption of
Shares; (d) interest charges, taxes and brokerage fees and commissions,
including the fees and commissions of introducing brokers; (e) premiums of
insurance for the Trust, its trustees and officers and fidelity bond premiums;
(f) fees, interest charges and expenses of third parties, including the Trust's
custodian, transfer agent, dividend disbursing agent and fund accountant; (g)
fees of pricing, interest, dividend, credit and other reporting services; (h)
costs of membership in trade associations; (i) telecommunications expenses; (j)
funds transmission expenses; (k) auditing, legal and compliance expenses; (l)
costs of forming the Trust and maintaining its existence; (m) costs of
preparing and printing Trust's Prospectuses, subscription application forms and
shareholder reports and delivering them to existing shareholders; (n) expenses
of meetings of shareholders and proxy solicitations therefor; (o) costs of
maintaining books of original entry for portfolio and fund accounting and other
required books and accounts, of calculating the net asset value of Shares of
the Trust and of preparing tax returns; (p) costs of reproduction, stationary
and supplies and postage; (q) fees and expenses of the Trust's trustees; (r)
<PAGE>
compensation of the Trust's officers and employees who are not employees of the
Adviser or the Administrator or their respective affiliated persons and costs
of other personnel (who may be employees of the Adviser, Forum or their
respective affiliated persons) performing services for the Trust; (s) costs of
Board, Board committee, shareholder and other corporate meetings; (t) SEC
registration fees and related expenses; (u) state or foreign securities laws
registration fees and related expenses; and (v) all fees and expenses paid by
the Trust in accordance with any distribution plan adopted pursuant to Rule
12b-1 under the Act or under any shareholder service plan or agreement.
SECTION 5. COMPENSATION
(a) For the administrative services provided by the Administrator
pursuant to this Agreement, the Trust shall pay the Administrator, with respect
to each of the Funds, a fee at an annual rate equal to the amount set forth in
Schedule B hereto. Such fees shall be accrued by the Trust daily and shall be
payable monthly in arrears on the first day of each calendar month for services
performed under this Agreement during the prior calendar month. Upon the
termination of this Agreement, the Trust shall pay to the Administrator such
compensation as shall be payable prior to the effective date of such
termination. Fees will begin to accrue for each Fund on the latter of the
effective date of this agreement or the date of commencement of operations of
the Fund.
(b) Notwithstanding anything in this Agreement to the contrary, the
Administrator and its affiliated persons may receive compensation or
reimbursement from the Trust with respect to (i) the provision of services on
behalf of the Funds in accordance with any distribution plan adopted by the
Trust pursuant to Rule 12b-1 under the Act, (ii) the provision of shareholder
support or other services or (iii) service as a trustee or officer of the
Trust.
SECTION 6. EFFECTIVENESS, DURATION AND TERMINATION
(a) This Agreement shall become effective with respect to each Fund on
the date on which the Trust's Registration Statement relating to the Shares of
the Fund become effective.
(b) This Agreement shall continue in effect for twelve months and,
thereafter, shall be in effect indefinitely.
(c) Nothwithstanding the provisions of the foregoing paragraph (b), this
Agreement may be terminated with respect to a Fund at any time, without the
payment of any penalty (i) by the Board on not less than 60 days' written
<PAGE>
notice to the Administrator or (ii) by the Administrator on not less than 60
days' written notice to the Trust. The obligations of sections 3, 4, and 5
shall survive this Agreement.
(d) This Agreement and the rights and duties under this Agreement shall
not be assignable by either the Administrator or the Trust except by the
specific written consent of the other party. All terms and provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the respective successors and assigns of the parties hereto.
SECTION 7. ACTIVITIES OF ADMINISTRATOR
Except to the extent necessary to perform its obligations under this
Agreement, nothing herein shall be deemed to limit or restrict the
Administrator's right, or the right of any of its officers, directors or
employees (whether or not they are a trustee, officer, employee or other
affiliated person of the Trust) to engage in any other business or to devote
time and attention to the Administration or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to any other corporation, trust, firm, individual or association.
SECTION 8. LIMITATION OF SHAREHOLDER AND TRUSTEE LIABILITY
The trustees of the Trust and the shareholders of each Fund shall not be
liable for any obligations of the Trust or of the Funds under this Agreement,
and the Administrator agrees that, in asserting any rights or claims under this
Agreement, it shall look only to the assets and property of the Trust or the
Fund to which the Administrator's rights or claims relate in settlement of such
rights or claims, and not to the trustees of the Trust, the shareholders of the
Funds, or any Fund other than the Fund to which the Administrator's rights or
claims relate.
SECTION 9. MISCELLANEOUS
(a) Except for the Schedules, no provisions of this Agreement may be
amended or modified in any manner except by a written agreement properly
authorized and executed by both parties hereto and, if required by the Act, by
a vote of a majority of the outstanding voting securities of the Trust.
(b) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid, the remaining portion
<PAGE>
or portions shall be considered severable and not be affected, and the rights
and obligations of the parties shall be construed and enforced as if the
Agreement did not contain the particular part, term or provision held to be
illegal or invalid.
(c) Section headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
(d) Notices, requests, instructions and communications received by the
parties at their respective principal places of business, or at such other
address as a party may have designated in writing, shall be deemed to have been
properly given.
(e) This Agreement shall be governed by and shall be construed in
accordance with the laws of the State of New York.
(f) The terms "vote of a majority of the outstanding voting securities,"
"interested person," and "affiliated person" shall have the meanings ascribed
thereto in the Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
THE HIGHLAND FAMILY OF FUNDS
Robert Lamb III
_______________________________
Robert Lamb III
President
FORUM ADMINISTRATIVE
SERVICES, LLC
John Y. Keffer
_______________________________
John Y. Keffer
President
<PAGE>
THE HIGHLAND FAMILY OF FUNDS
ADMINISTRATION AGREEMENT
SCHEDULE A
FUNDS OF THE TRUST
AS OF MARCH 14, 1997
Highland Growth Fund
Highland Aggressive Growth Fund
<PAGE>
SCHEDULE B
FEES AND EXPENSES
(I) ADMINISTRATION SERVICE FEES
Fee as a % of the Annual
Fund Average
Daily Net Assets of the Fund
Highland Growth Fund 0.10% on the first $100 million
Highland Aggressive Growth Fund of each Fund's average daily net
assets
plus
0.05% on the balance of each
Fund's average daily net assets
Note 1. Notwithstanding the table above, the minimum fee per Fund shall
be $3,334 per month subject to the accrual provisions set forth in
Section 5(a).
(II) OTHER FEES
Preparation of Federal income tax return, $1,800
including any extenstions or amendments.
Preparation and execution of excise tax return, $1,000
including any extensions or amendments
Preparation and filing of a document with the $200 plus (i) $5/text page
SEC in electronic format and
(ii) $15/tabular page
Exhibit 9(b)
THE HIGHLAND FAMILY OF FUNDS
TRANSFER AGENCY AND SERVICES AGREEMENT
AGREEMENT made as of the 14th day of March, 1997, by and between The
Highland Family of Funds, a business trust organized under the laws of the
Commonwealth of Massachusetts, with its principal office and place of business
at Two Portland Square, Portland, Maine 04101 (the "Trust"), and Forum Financial
Corp., a Delaware corporation with its principal office and place of business at
Two Portland Square, Portland, Maine 04101 ("Forum").
WHEREAS, the Trust is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets, and is authorized to divide those series into
separate classes;
WHEREAS, the Trust intends initially to offer shares in two series as
listed in Appendix A hereto (each such series, together with all other series
subsequently established by the Trust and made subject to this Agreement in
accordance with Section 13, being herein referred to as a "Fund", and
collectively as the "Funds") and the Trust may subsequently establish various
classes in each Fund (each such class being referred to herein as a "Class,"
and collectively as the "Classes"); and
WHEREAS, the Trust on behalf of the Funds desires to appoint Forum as
its transfer agent and dividend disbursing agent and Forum desires to accept
such appointment;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, the Trust and Forum hereby agree as follows:
SECTION 1. APPOINTMENT
(a) Appointment. The Trust, on behalf of the Funds, hereby appoints
Forum to act as, and Forum agrees to act as, (i) transfer agent for the
authorized and issued shares of beneficial interest of the Trust representing
interests in each of the respective Funds and Classes thereof ("Shares"), (ii)
dividend disbursing agent and (iii) agent in connection with any accumulation,
open-account or similar plans provided to the registered owners of shares of
any of the Funds ("Shareholders") and set out in the currently effective
prospectuses and statements of additional information (collectively
"prospectus") of the applicable Fund, including, without limitation, any
periodic investment plan or periodic withdrawal program.
<PAGE>
(b) Document Delivery. The Trust shall on behalf of each Fund promptly
furnish to Forum (i) a certified copy of the resolution of the Board of Trustees
of the Trust authorizing the appointment of Forum and the execution and delivery
of this Agreement and (ii) a copy of the Declaration of Trust and By-Laws
(collectively, as amended from time to time, "Organic Documents") of the Trust.
For as long as this Agreement is effective, the Trust shall on behalf of each
Fund furnish to Forum any and all amendments to its Organic Documents and
prospectuses.
SECTION 2. DUTIES OF FORUM
(a) Services. Forum agrees that in accordance with procedures
established from time to time by agreement between the Trust on behalf of each
of the Funds, as applicable, and Forum, Forum will perform the following
services:
(i) The services of a transfer agent, dividend disbursing agent and,
as relevant, agent in connection with accumulation, open-account or
similar plans (including without limitation any periodic investment
plan or periodic withdrawal program) that are customary for open-end
management investment companies including: (A) maintaining all
Shareholder accounts, (B) preparing Shareholder meeting lists, (C)
mailing proxies to Shareholders, (D) mailing Shareholder reports and
prospectuses to current Shareholders, (E) withholding taxes on U.S.
resident and non-resident alien accounts, (F) preparing and filing U.S.
Treasury Department Forms 1099 and other appropriate forms required by
federal authorities with respect to distributions for Shareholders, (G)
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other
confirmable transactions in Shareholder accounts, (H) preparing and
mailing activity statements for Shareholders, and (I) providing
Shareholder account information;
(ii) Receive for acceptance orders for the purchase of Shares and
promptly deliver payment and appropriate documentation therefor to the
custodian of the applicable Fund (the "Custodian") or, in the case of
Fund's operating in a master-feeder or fund of funds structure, to the
transfer agent or interestholder recordkeeper for the master
portfolios in which the Fund invests;
(iii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder account;
(iv) Receive for acceptance redemption requests and deliver the
appropriate documentation therefor to the Custodian or, in the case of
fund's operating in a master-feeder or fund of funds structure, to the
<PAGE>
transfer agent or interestholder recordkeeper for the master portfolios
in which the Fund invests;
(v) As and when it receives monies paid to it by the Custodian with
respect to any redemption, pay the redemption proceeds as required by
the prospectus pursuant to which the redeemed Shares were offered and
as instructed by the redeeming Shareholders;
(vi) Effect transfers of Shares upon receipt of appropriate
instructions from Shareholders;
(vii) Prepare and transmit to Shareholders (or credit the appropriate
Shareholder accounts) payments for all distributions declared by the
Trust with respect to Shares;
(viii) Issue share certificates and replacement share certificates for
those share certificates alleged to have been lost, stolen, or
destroyed upon receipt by Forum of indemnification satisfactory to
Forum and protective Forum and the Trust and, at the option of Forum,
issue replacement certificates in place of mutilated share certificates
upon presentation thereof without requiring indemnification;
(ix) Receive from Shareholders or debit Shareholder accounts for
sales commissions, including contingent deferred, deferred and other
sales charges, and service fees (i.e., wire redemption charges) and
prepare and transmit payments to underwriters, selected dealers and
others for commissions and service fees received;
(x) Prepare and transmit payments to underwriters, selected dealers
and others for trail commissions, Rule 12b-1 fees, shareholder service
fees and other payments based on the amount of assets in Shareholder
accounts;
(xi) Maintain records of account for and provide reports
and statements to the Trust and Shareholders as to the foregoing;
(xii) Record the issuance of Shares of the Trust and maintain pursuant
to Rule 17Ad-10(e) under the Securities Exchange Act of 1934, as
amended ("1934 Act") a record of the total number of Shares of the
Trust, each Fund and each Class thereof, that are authorized, based
upon data provided to it by the Trust, and are issued and outstanding
and provide the Trust on a regular basis a report of the total number
of Shares that are authorized and the total number of Shares which are
issued and outstanding;
<PAGE>
(xiii) Record the total number of Shares of each Fund and Class
thereof sold in each State.
(b) Other Services. Forum shall make available the following
additional services on behalf of the Trust and such other services at terms
agreed to in writing by the Trust and Forum:
(i) Monitor and make appropriate filings with respect to the
escheatment laws of the various states and territories of the
United States;
(ii) Act as a "Fund/SERV" and "Networking" processing agent
for the Trust or various Funds as requested by the Trust;
(iii) Receive and tabulate proxy votes;
(iv) Provide a methodology wherein a Shareholder or financial
intermediary has direct access to the information contained in the
Shareholder records of that Shareholder or the Shareholders serviced
by that financial intermediary; and
(v) Provide a methodology wherein a Shareholder or financial
intermediary has the ability to enter purchase, redemption and other
transactions with respect to that Shareholder's Shareholder account or
the Shareholder accounts of Shareholders serviced by that financial
intermediary.
(c) Blue Sky Matters. The Trust or its administrator or other agent (i)
shall identify to Forum in writing those transactions and assets to be treated
as exempt from reporting for each state and territory of the United States and
for each foreign jurisdiction (collectively "States") and (ii) shall record the
sales activity with respect to Shareholders domiciled or resident in each State.
The responsibility of Forum for the Trust's State registration status is solely
limited to the reporting of transactions to the Trust and the distributor of
the Trust's shares.
(d) Safekeeping. Forum shall establish and maintain facilities and
procedures reasonably acceptable to the Trust for the safekeeping, control,
preparation and use of share certificates, check forms, and facsimile signature
imprinting devices. Forum shall establish and maintain facilities and procedures
reasonable acceptable to the Trust for safekeeping of all records maintained by
Forum pursuant to this Agreement.
(e) Cooperation With Accountants. Forum shall cooperate with
each Fund's independent public accountants and shall take reasonable
<PAGE>
action to make all necessary information available to the accountants for
the performance of the accountants' duties.
SECTION 3. RECORDKEEPING
(a) Predecessor Records. Prior to the commencement of Forum's
responsibilities under this Agreement, if applicable, the Trust shall deliver or
cause to be delivered over to Forum (i) an accurate list of Shareholders of the
Trust, showing each Shareholder's address of record, number of Shares owned and
whether such Shares are represented by outstanding share certificates and (ii)
all Shareholder record, files, and other materials necessary or appropriate for
proper performance of the functions assumed by Forum under this Agreement
(collectively referred to as the "Materials'). The Trust shall on behalf of each
applicable Fund or Class indemnify and hold Forum harmless from and against any
and all losses, damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to any error, omission, inaccuracy or
other deficiency of the Materials, or out of the failure of the Trust to provide
any portion of the Materials or to provide any information in the Trust's
possession or control reasonably needed by Forum to perform the services
described in this Agreement.
(b) Recordkeeping. Forum shall keep records relating to the services
to be performed under this Agreement, in the form and manner as it may deem
advisable and as required by applicable law. To the extent required by Section
31 of the 1940 Act, and the rules thereunder, Forum agrees that all such records
prepared or maintained by Forum relating to the services to be performed by
Forum under this Agreement are the property of the Trust and will be preserved,
maintained and made available in accordance with Section 31 of the 1940 Act and
the rules thereunder, and will be surrendered promptly to the Trust on and in
accordance with the Trust's request. The Trust and the Trust's authorized
representatives shall have access to Forum's records relating to the services
to be performed under this Agreement at all times during Forum's normal business
hours. Upon the reasonable request of the Trust, copies of any such records
shall be provided promptly by Forum to the Trust or the Trust's authorized
representatives.
(c) Confidentiality of Records. Forum and the Trust agree that all
books, records, information, and data pertaining to the business of the other
party which are exchanged or received pursuant to the negotiation or the
carrying out of this Agreement shall remain confidential, and shall not be
voluntarily disclosed to any other person, except as may be required by law.
(d) Inspection of Records by Others. In case of any requests or demands
for the inspection of the Shareholder records of the Trust, Forum will endeavor
to notify the Trust and to secure instructions from an authorized officer of the
<PAGE>
Trust as to such inspection. Forum shall abide by the Trust's instructions for
granting or denying the inspection; provided, however, that Forum may grant the
inspection without instructions if Forum is advised by counsel to Forum that
failure to do so will result in liability to Forum.
SECTION 4. ISSUANCE AND TRANSFER OF SHARES
(a) Issuance of Shares. Forum shall make original issues of Shares of
each Fund and Class thereof in accordance with the Trust's then current
prospectus only upon receipt of (i) instructions requesting the issuance, (ii)
a certified copy of a resolution of the Board authorizing the issuance, (iii)
necessary funds for the payment of any original issue tax applicable to such
Shares, and (iv) an opinion of the Trust's counsel as to the legality and
validity of the issuance, which opinion may provide that it is contingent upon
the filing by the Trust of an appropriate notice with the Securities and
Exchange Commission, as required by Section 24 of the Act or the rules
thereunder. If the opinion described in (iv) above is contingent upon a filing
under Section 24 of the Act, the Trust shall indemnify Forum for any liability
arising from the failure of the Trust to comply with that section or the rules
thereunder.
(b) Transfer of Shares. Transfers of Shares of each Fund and Class
thereof shall be registered on the Shareholder records maintained by Forum. In
registering transfer of Shares, Forum may rely upon the Uniform Commercial Code
as in effect in the State of [Delaware] or any other statutes that, in the
opinion of Forum's counsel, protect Forum and the Trust from liability arising
from (i) not requiring complete documentation, (ii) registering a transfer
without an adverse claim inquiry, (iii) delaying registration for purposes of
such inquiry or (iv) refusing registration whenever an adverse claim requires
such refusal. As Transfer Agent, Forum will be responsible for delivery to the
transferor and transferee of such documentation as is required by the Uniform
Commercial Code.
SECTION 5. SHARE CERTIFICATES
(a) Certificates. The Trust shall furnish to Forum a supply of blank
share certificates of each Fund and Class thereof and, from time to time, will
renew such supply upon Forum's request. Blank share certificates shall be signed
manually or by facsimile signatures of officers of the Trust authorized to sign
by the Organic Documents of the Trust and, if required by the Organic Documents,
shall bear the Trust's seal or a facsimile thereof. Unless otherwise directed by
the Trust, Forum may issue or register Share certificates reflecting the manual
or facsimile signature of an officer who has died, resigned or been removed by
the Trust. The Trust shall file promptly with Forum approval, adoption or
ratification of such action as may be required by law or Forum.
<PAGE>
(b) Endorsement; Transportation. New Share certificates shall be issued
by Forum upon surrender of outstanding Share certificates in the form deemed by
Forum to be properly endorsed for transfer and satisfactory evidence of
compliance with all applicable laws relating to the payment or collection of
taxes. Forum shall forward Share certificates in "non-negotiable" form by
first-class or registered mail, or by whatever means Forum deems equally
reliable and expeditious. Forum shall not mail Share certificates in
"negotiable" form unless requested in writing by the Trust and fully
indemnified by the Trust to Forum's satisfaction.
(c) Non-Issuance of Certificates. In the event that the Trust informs
Forum that any Fund or Class thereof does not issue share certificates, Forum
shall not issue any such share certificates and the provisions of this Agreement
relating to share certificates shall not be applicable with respect to those
Funds or Classes thereof.
SECTION 6. SHARE PURCHASES; ELIGIBILITY TO RECEIVE DISTRIBUTIONS
(a) Purchase Orders. Shares shall be issued to investors in a Fund at
the net asset value per share next determined after Forum receives a completed
purchase order. A purchase order shall be complete at the time specified in the
prospectus pursuant to which the Shares are offered and when Forum or its agent
receives either:
(i) (A) an instruction directing investment in a Fund or Class, (B) a
check (other than a third party check) or a wire or other electronic
payment in the amount designated in the instruction and (C), in the
case of an initial purchase, a completed account application; or
(ii) the information required for purchases pursuant to a selected
dealer agreement, processing organization agreement, or a similar
contract with a financial intermediary.
(b) Distribution Eligibility. Shares issued in a Fund after
receipt of a completed purchase order shall be eligible to receive
distributions of the Fund at the time specified in the prospectus pursuant to
which the Shares are offered.
(c) Determination of Federal Funds. Shareholder payments shall be
considered Federal Funds no later than on the day indicated below unless such
other times are noted in the prospectus of the applicable Class or Fund:
(i) for a wire received, at the time of the receipt of the wire;
<PAGE>
(ii) for a check drawn on a member bank of the Federal Reserve System,
on the second Fund Business Day following receipt of the check; and
(iii) for a check drawn on an institution that is not a member of the
Federal Reserve System, at such time as Forum is credited with Federal
Funds with respect to that check.
SECTION 7. FEES AND EXPENSES
(a) Fees. For the services provided by Forum pursuant to this
Agreement, the Trust, on behalf of each Fund, agrees to pay Forum the fees set
forth in Appendix B hereto. Such fees shall be accrued by the Trust daily and
shall be payable monthly in arrears on the first day of each calendar month for
services performed under this Agreement during the prior calendar month. Upon
the termination of this Agreement, the Trust shall pay to the Administrator
such compensation as shall be payable prior to the effective date of such
termination. Fees will begin to accrue for each Fund on the latter of the date
of this Agreement or the date of commencement of operations of the Fund.
(b) Expenses. In connection with the services provided by Forum
pursuant to this Agreement, the Trust, on behalf of each fund agrees to
reimburse Forum for the expenses set forth in Appendix B hereto. In addition,
the Trust, on behalf of the applicable Fund, shall reimburse Forum for all
expenses and employee time attributable to any review of the Trust's accounts
and records by the Trust's independent public accountants or any regulatory body
outside of routine and normal periodic reviews. Should the Trust exercise its
right to terminate this Agreement, all out-of-pocket expenses associated with
the copying and movement of records and material to the successor transfer agent
shall be borne by the Trust on behalf of the applicable Funds and Forum may, in
its discretion, charge for any other reasonable expenses associated with such
termination.
SECTION 8. REPRESENTATIONS AND WARRANTIES
(a) Representations and Warranties of Forum. Forum represents and
warrants to the Trust that:
(i) It is a corporation duly organized and existing and in
good standing under the laws of the State of Delaware.
(ii) It is duly qualified to carry on its business in the State of
Maine.
<PAGE>
(iii) It is empowered under applicable laws and by its Article of
Incorporation and By-Laws to enter into this Agreement and perform its
duties under this Agreement.
(iv) All requisite corporate proceedings have been taken to authorize
it to enter into this Agreement and perform its duties under this
Agreement.
(v) It has access to the necessary facilities, equipment, and
personnel to perform its duties and obligations under this Agreement.
(vi) It is registered as a transfer agent under Section 17A of the
1934 Act.
(b) Representations and Warranties of the Trust. The Trust represents
and warrants to Forum that:
(i) It is a business trust duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
(ii) It is empowered under applicable laws and by its Organic
Documents to enter into this Agreement and perform its duties under
this Agreement.
(iii) All requisite proceedings have been taken to authorize it to
enter into this Agreement and perform its duties under this Agreement.
(iv) It is an open-end management investment company registered under
the Investment Company Act of 1940, as amended ("1940 Act").
(v) A registration statement under the Securities Act of 1933, as
amended, will be effective and will remain effective, and appropriate
State securities law filings will be made and will continue to be made,
with respect to all Shares of the Funds and Classes of the Trust being
offered for sale.
SECTION 9. PROPRIETARY INFORMATION.
(a) Proprietary Information of Forum. The Trust acknowledges that
the databases, computer programs, screen formats, report formats, interactive
design techniques, and documentation manuals furnished to the Trust by Forum as
part of the Trust's ability to access certain Trust-related data
("Customer Data") maintained by Forum on databases under the control and
ownership of Forum or other third party ("Data Access Services") constitute
copyrighted, trade secret, or other proprietary information (collectively,
"Proprietary Information") of substantial value to Forum or other third party.
<PAGE>
In no event shall Proprietary Information be deemed Customer Data. The Trust
agrees to treat all Proprietary Information as proprietary to Forum and further
agrees that it shall not divulge any Proprietary Information to any person or
organization except as may be provided under this Agreement.
(b) Proprietary Information of the Trust. Forum acknowledges that the
Shareholder list and all information related to Shareholders furnished to Forum
by the Trust or by a Shareholder maintained by Forum in connection with this
Agreement constitute proprietary information (collectively, "Proprietary
Information") of substantial value to the Trust. Forum agrees to treat all
Proprietary Information as proprietary to the Trust and further agrees that it
shall not divulge any Proprietary Information to any person or organization
except as may be provided under this Agreement.
SECTION 10. INSTRUCTIONS. The Trust shall file with Forum (i) a
certified copy of the operative resolutions of the Board authorizing the
execution of written instructions or the transmittal of oral instructions and
authorizing the issuance of Shares of each Fund and Class thereof, (ii) samples
of signatures of those persons authorized by the Trust to deliver written and
oral instructions to Forum and (iii) a written description of the authority of
each person so authorized.
SECTION 11. INDEMNIFICATION
(a) Indemnification of Forum. Forum shall not be responsible for, and
the Trust shall on behalf of each applicable Fund or Class thereof indemnify
and hold Forum harmless from and against, any and all losses, damages, costs,
charges, reasonable counsel fees, payments, expenses and liability arising out
of or attributable to:
(i) All actions of Forum or its agents or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without gross negligence or willful misconduct.
(ii) The Trust's lack of good faith, gross negligence or willful
misconduct which arise out of the breach of any provision of this
Agreement.
(iii) The reliance on or use by Forum or its agents or subcontractors
of information, records, documents or services which have been
prepared, maintained or performed by the Trust or any other person or
firm on behalf of the Trust, including but not limited to any previous
transfer agent or registrar.
<PAGE>
(iv) The reasonable reliance on, or the carrying out by Forum or its
agents or subcontractors of, any instructions or requests of the Trust
on behalf of the applicable Fund.
(v) The offer or sale of Shares in violation of any requirement under
the Federal securities laws or regulations or the securities laws or
regulations of any State that such Shares be registered in such State
or in violation of any stop order or other determination or ruling by
any federal agency or any State with respect to the offer or sale of
such Shares in such State.
(b) Indemnification of Trust. Forum shall indemnify and hold the Trust
and each Fund or class thereof harmless from and against any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributed to any action or failure or omission to act by Forum as a
result of Forum's lack of good faith, gross negligence or willful misconduct
with respect to the services performed under or in connection with this
Agreement.
(c) Reliance. At any time Forum may apply to any officer of the Trust
for instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by Forum under this
Agreement, and Forum and its agents or subcontractors shall not be liable and
shall be indemnified by the Trust on behalf of the applicable Fund for any
action taken or omitted by it in reasonable reliance upon such instructions or
upon the opinion of such counsel. Forum, its agents and subcontractors shall be
protected and indemnified in acting upon (i) any paper or document furnished by
or on behalf of the Trust, reasonable believed by Forum to be genuine and to
have been signed by the proper person or persons, (ii) any instruction,
information, data, records or documents provided Forum or its agents or
subcontractors by machine readable input, telex, CRT at entry or other similar
means authorized by the Trust, and (iii) any authorization, instruction,
approval, item or set of data, or information of any kind transmitted to Forum
in person or by telephone, vocal telegram or other electronic means, reasonably
believed by Forum to be genuine and to have been given by the proper person or
persons. Forum shall not be held to have notice of any change of authority of
any person, until receipt of written notice thereof from the Trust. Forum, its
agents and subcontractors shall also be protected and indemnified in recognizing
share certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Trust, and the proper
countersignature of any former transfer agent or former registrar or of a
co-transfer agent or co-registrar of the Trust.
<PAGE>
(d) Reliance on Electronic Instructions. If the Trust has the ability
to originate electronic instructions to Forum in order to (i) effect the
transfer or movement of cash or Shares or (ii) transmit Shareholder information
or other information, then in such event Forum shall be entitled to rely on the
validity and authenticity of such instruction without undertaking any further
inquiry as long as such instruction is undertaken in conformity with security
procedures established by Forum from time to time.
(e) Use of Fund/SERV and Networking. The Trust may authorize Forum to
act as a "Fund/SERV" and "Networking" processing agent for the Trust or various
Funds. Fund/SERV and Networking are services sponsored by National Securities
Clearing Corporation ("NSCC") and as used herein have the meanings as set forth
in the then current edition of the Rules and Procedures published by NSCC or
such other similar publication as may currently exist. The Trust shall indemnify
and hold Forum harmless from and against any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributed to any action or failure or omission to act by NSCC.
(f) Notification of Claims. In order that the indemnification
provisions contained in this Section shall apply, upon the assertion of a claim
for which either party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such assertion, and
shall keep the other party advised with respect to all developments concerning
such claim. The party who may be required to indemnify shall have the option to
participate with the party seeking indemnification in the defense of such claim
or to defend against said claim in its own name or in the name of the other
party. The party seeking indemnification shall in no case confess any claim or
make any compromise in any case in which the other party may be required to
indemnify it except with the other party's prior written consent.
SECTION 12. EFFECTIVENESS, DURATION AND TERMINATION
(a) Effectiveness. This Agreement shall become effective as of the
date first above written and shall relate to every additional Fund and Class
that becomes subject to this Agreement as of the earlier of (i) the date on
which the Trust's Registration Statement relating to the shares of such Fund or
Class becomes effective or (ii) such Fund or Class commences operations.
(b) Duration. This Agreement shall remain in effect indefinitely.
(c) Termination. This Agreement may be terminated with respect to any
Fund without the payment of any penalty by either party upon one hundred twenty
(120) days written notice to the other. Any termination shall be effective as
of the date specified in the notice. Upon notice of termination of this
Agreement by either party, Forum shall promptly transfer to the successor
<PAGE>
transfer agent the original or copies of all books and records maintained on
computer systems, copies of such records in machine-readable form, and shall
cooperate with, and provide reasonable assistance to, the successor transfer
agent in the establishment of the books and records necessary to carry out the
successor transfer agent's responsibilities.
(d) Survival. The obligations of Sections 7 (as to such amounts
accrued prior to such termination), 9 and 11 shall survive any termination of
this Agreement.
SECTION 13. ADDITIONAL FUNDS AND CLASSES. In the event that the Trust
establishes one or more series of Shares or one or more classes of Shares after
the effectiveness of this Agreement, each such series of Shares and classes of
Shares, as the case may be, shall become Funds and Classes under this Agreement
unless the Trust notifies Forum that the Trust elects not to have Forum, or
Forum notifies the trust that Forum elects not to, provide the services
described in this Agreement to any such series or class.
SECTION 14. ASSIGNMENT. Except as otherwise provided in this Agreement,
neither this Agreement nor any rights or obligations under this Agreement may be
assigned by either party without the written consent of the other party. This
Agreement shall inure to the benefit of and be binding upon the parties and
their respective successors and assigns. Forum may, without further consent on
the part of the Trust, subcontract for the performance hereof with any entity,
including affiliates of Forum; provided however, that Forum shall be as fully
responsible to the Trust for the acts and omissions of any subcontractor as
Forum is for its own acts and omissions.
SECTION 15. FORCE MAJEURE. Forum shall not be responsible or liable
for any failure or delay in performance of its obligations under this Agreement
arising out of or caused, directly or indirectly, by circumstances beyond its
reasonable control including, without limitation, acts of civil or military
authority, national emergencies, labor difficulties, fire, mechanical
breakdowns, flood or catastrophe, acts of God, insurrection, war, riots or
failure of the mails or any transportation medium, communication system or
power supply.
SECTION 16. LIMITATIONS OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS,
OFFICERS, EMPLOYEES AND AGENTS. A copy of the Declaration of Trust of the Trust
is on file with the Secretary of the State of Massachusetts. The parties agree
that neither the Shareholders, Trustees, officers, employees, nor any agent of
the Trust shall be liable under this Agreement and that the parties to this
Agreement other than the Trust shall look solely to the Trust property for the
performance of this Agreement or payment of any claim under this Agreement.
<PAGE>
SECTION 17. TAXES. Forum shall not be liable for any taxes, assessments
or governmental charges that may be levied or assessed on any basis whatsoever
in connection with the Trust or any Shareholder or any purchase of Shares,
excluding taxes assessed against Forum for compensation received by it under
this Agreement.
SECTION 18. MISCELLANEOUS
(a) No Consequential Damages. Neither party to this Agreement
shall be liable to the other party for consequential damages under any
provision of this Agreement.
(b) Amendments. No provisions of this Agreement may be amended or
modified in any manner except by a written agreement properly authorized and
executed by both parties hereto.
(c) Choice of Law. This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with the laws of the
Commonwealth of Massachusetts.
(d) Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto and supersedes any prior agreement with
respect to the subject matter hereof whether oral or written.
(e) Counterparts. This Agreement may be executed by the
parties hereto on any number of counterparts, and all of the counterparts
taken together shall be deemed to constitute one and the same
instrument.
(f) Severability. If any part, term or provision of this Agreement
is held to be illegal, in conflict with any law or otherwise invalid, the
remaining portion or portions shall be considered severable and not be affected,
and the rights and obligations of the parties shall be construed and enforced
as if the Agreement did not contain the particular part, term or provision held
to be illegal or invalid.
(g) Headings. Section and paragraph headings in this Agreement are
included for convenience only and are not to be used to construe or interpret
this Agreement.
(h) Notices. Notices, requests, instructions and communications
received by the parties at their respective principal addresses, or at such
other address as a party may have designated in writing, shall be deemed to
have been properly given.
(i) Business Days. Nothing contained in this Agreement is intended to
or shall require Forum, in any capacity hereunder, to perform any functions or
<PAGE>
duties on any day other than a Fund Business Day. Functions or duties normally
scheduled to be performed on any day which is not a Fund Business Day shall be
performed on, and as of, the next Fund Business Day, unless otherwise required
by law.
(j) Distinction of Funds. Notwithstanding any other provision of
this Agreement, the parties agree that the assets and liabilities of each Fund
of the Trust are separate and distinct from the assets and liabilities of each
other Fund and that no Fund shall be liable or shall be charged for any debt,
obligation or liability of any other Fund, whether arising under this Agreement
or otherwise.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
THE HIGHLAND FAMILY OF FUNDS
By: Robert Lamb III
_______________________________
Robert Lamb III, President
ATTEST:
Stephen J. Barrett
- --------------------------------
Stephen J. Barrett, Vice President
and Secretary
FORUM FINANCIAL CORP.
By: John Y. Keffer
_______________________________
John Y. Keffer, President
ATTEST:
Richard Butt
- --------------------------------
Richard Butt, Managing Director
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
APPENDIX A
FUNDS OF THE TRUST
AS OF MARCH 14, 1997
Highland Growth Fund
Highland Aggressive Growth Fund
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
APPENDIX B
FEES AND EXPENSES
BASE FEE:
Fee per Fund: $24,000/year plus $6,000/year for each Class over one.
The rates set forth shall remain fixed through December 31, 1997. On
January 1, 1998, and on each successive January 1, the rates may be
adjusted by Forum, at the discretion of Forum, to reflect changes in
the Consumer Price Index for the preceding calendar year, as published
by the U.S. Department of Labor, Bureau of Labor Statistics.
SHAREHOLDER ACCOUNT FEES:
$25.00 per year for each retail shareholder account and $120 per year
for each institutional account. Shareholder account fees are based
upon the number of Shareholder accounts as of the last Fund Business
Day of the prior month.
OUT-OF-POCKET AND RELATED EXPENSES:
In addition to the fees listed above, the Trust, on behalf of the
applicable Fund, shall reimburse Forum for all out-of-pocket and
ancillary expenses in providing the services described in this
Agreement, including but not limited to the cost of (or appropriate
share of the cost of ): (i) statement, confirmation, envelope and
stationary stock, (ii) share certificates, (iii) printing of checks
and drafts, (iv) postage, (v) telecommunications, (vi) banking services
(DDA account, wire and ACH, check and draft clearing and lock box fees
and charges, (vii) NSCC Fund/SERV and Networking fees, (viii) outside
proxy solicitors and tabulators and (ix) microfilm and microfiche. In
addition, any other expenses incurred by Forum at the request or with
the consent of the Trust, will be reimbursed by the Trust on behalf of
the applicable Fund.
Exhibit 9(c)
THE HIGHLAND FAMILY OF FUNDS
FUND ACCOUNTING AGREEMENT
AGREEMENT made the 14th day of March 1997, between The Highland Family of
Funds (the "Trust"), a business trust organized under the laws of the
Commonwealth of Massachusetts with its principal place of business at Two
Portland Square, Portland, Maine 04101, and Forum Financial Corp. ("FFC"), a
corporation organized under the laws of the State of Delaware with its
principal place of business at Two Portland Square, Portland, Maine 04101.
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end management investment company and
may issue its shares of beneficial interest, par value $0.0001 per share (the
"Shares"), in separate series and classes; and
WHEREAS, the Trust intends initially to offer shares in two (2) series as
listed in Appendix A hereto (each such series, together with all other series
subsequently established by the Trust and made subject to this Agreement, being
herein referred to as a "Fund," and collectively as the "Funds");
WHEREAS, the Trust desires that FFC perform certain fund accounting
services for each Fund and for any class of shares thereof that may be
subsequently established by the Trust (a "Class"), and FFC is willing to
provide those services on the terms and conditions set forth in this Agreement;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, the Trust and FFC do hereby agree as follows:
SECTION 1. APPOINTMENT
The Trust hereby appoints FFC, and FFC hereby agrees, to act as fund
accountant of the Trust for the period and on the terms set forth in this
Agreement. In connection therewith, the Trust has delivered to FFC copies of
its Declaration of Trust and Bylaws, the Trust's Registration Statement and all
amendments thereto filed with the U.S. Securities and Exchange Commission
("SEC") pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), (the "Registration Statement") and the current Prospectus and Statement
of Additional Information of each Fund (collectively, as currently in effect
and as amended or supplemented, the "Prospectus") and shall promptly furnish
FFC with all amendments of or supplements to the foregoing.
<PAGE>
SECTION 2. SERVICES TO BE PERFORMED
For each Fund, FFC shall perform the services listed in this Section. FFC
and the Trust's administrator, Forum Administrative Services LLC (the
"Administrator"), may from time to time adopt such procedures as they agree
upon to implement the terms of this Section.
(a) Books and Records. FFC shall prepare and maintain on behalf of the
Trust the following books and records of each Fund, and each Class thereof,
pursuant to Rule 31a-1 under the Act (the "Rule"):
(i) Journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements of
cash and all other debits and credits, as required by subsection
(b)(1) of the Rule;
(ii) Journals and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, as required by
subsection (b)(2) of the Rule (but not including the ledgers
required by subsection (b)(2)(iv);
(iii)A record of each brokerage order given by or on behalf of the
Trust for, or in connection with, the purchase or sale of
securities, and all other portfolio purchases or sales, as required
by subsections (b)(5) and (b)(6) of the Rule;
(iv) A record of all options, if any, in which the Trust has any
direct or indirect interest or which the Trust has granted or
guaranteed and a record of any contractual commitments to purchase,
sell, receive or deliver any property as required by subsection
(b)(7) of the Rule;
(v) A monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8) of the Rule;
(vi) Other records required by the Rule or any successor rule or
pursuant to interpretations thereof to be kept by open-end
management investment companies, but limited to these provisions of
the Rule applicable to portfolio transactions; and
(vii)Other records as agreed upon between the parties hereto.
The forgoing books and records shall be prepared and maintained in such
form, for such periods and in such locations as may be required by applicable
regulation and shall be the property of the Trust. FFC agrees to make such
<PAGE>
books and records available for inspection by the Trust or by the SEC at
reasonable times and as otherwise directed by the Administrator.
(b) Accounting Services. FFC shall:
(i) Calculate the net asset value per share with the frequency
prescribed in each Fund's then-current Prospectus;
(ii) Calculate each item of income, expense, deduction, credit, gain
and loss, if any, as required by the Trust and in conformance with
generally accepted accounting practice ("GAAP"), the SEC's
Regulation S-X (or any successor regulation) and the Internal
Revenue Code of 1986, as amended (the "Code");
(iii)Calculate the yield, effective yield, tax equivalent yield and
total return for each Fund, and each Class thereof, as applicable,
and such other measure of performance as may be agreed upon between
the parties hereto;
(iv) Provide the Trust and such other persons as the Administrator
may direct with the following reports:
(A) a current security position report,
(B) a summary report of transactions and pending maturities
(including the principal, cost, and accrued interest on each
portfolio security in maturity date order), and
(C) a current cash position and projection report;
(v) Prepare and record, as of each time when the net asset value of
a Fund is calculated or as otherwise directed by the Administrator,
either
(A) a valuation of the assets in the Fund (based upon the use
of outside services normally used and contracted for this
purpose by FFC in the case of securities for which information
and market price or yield quotations are readily available and
based upon evaluations conducted in accordance with the
Administrator's instructions in the case of all other assets)
or
(B) a calculation confirming that the market value of the
Fund's assets does not deviate from the amortized cost value of
<PAGE>
those assets by more than a specified percentage agreed to from
time to time by FFC and the Administrator;
(vi) Make such adjustments over such periods as FFC deems necessary
to reflect over-accruals or under-accruals of estimated expenses or
income; and
(vii)Obtain necessary information from the Administrator and the
Trust's transfer agent in order to prepare, and prepare and file or
cause to be filed, the Trust's Form N-SAR.
(c) Other Services. FFC shall:
(i) Assist the Trust's independent accountants and, upon approval of
the Trust or the Administrator, any regulatory body in any requested
review of the Trust's books and records maintained by FFC; and
(ii) Prepare and produce or oversee the production of semi-annual
financial statements and the related reports to shareholders and the
SEC;
(iii)provide information typically supplied in the investment
company industry to companies that track or report price,
performance or other information with respect to investment
companies;
(iv) provide the Administrator with the data requested by the
Administrator that is required to update the Trust's registration
statement;
(v) provide the Administrator or auditor with all information
required to prepare the Trust's income, excise and other tax
returns;
(vi) produce quarterly compliance reports for investment advisers to
the Trust and the Trust's Board of Trustees (the Board") and provide
information to the Administrator, investment advisers to the Trust
and other appropriate persons with respect to questions of Fund
compliance;
(vii)determine the amount of distributions to shareholders as
necessary to, among other things, maintain the qualification of each
Fund as a regulated investment company under the Code, and prepare
and distribute to appropriate parties notices announcing the
declaration of dividends and other distributions to shareholders;
(viii) transmit appropriate data to each Fund's transfer agent on a
daily basis and daily reconcile net asset value per share and other
data with the transfer agent;
<PAGE>
(ix) periodically reconcile all appropriate data with each Fund's
custodian; and
(x) perform the recordkeeping, reporting and other tasks required to
be performed by the Funds' fund accountant as specified in the
various procedures adopted by the Board; provided, that Forum need
not perform any such task except upon 60 days notice.
SECTION 3. COMPENSATION AND EXPENSES
(a) Fee. In consideration of the services provided by FFC pursuant to
this Agreement, the Trust shall pay FFC, with respect to each Fund, the fees
set forth in Clause (i) of Appendix B hereto. These fees shall be accrued by
the Trust daily and shall be payable monthly in advance on the first day of
each calendar month for services performed under this Agreement during the
prior calendar month. Fees will begin to accrue for each Fund on the latter of
the effective date of this Agreement or the date of commencement of operations
of the Fund. If fees begin to accrue before the end of any month or if this
Agreement terminates before the end of any month, all fees for the period from
that date to the end of that month or from the beginning of that month to the
date of termination, as the case may be, shall be prorated according to the
proportion that the period bears to the full month in which the effectiveness
or termination occurs. Upon the termination of this Agreement with respect to a
Fund, the Trust shall pay to FFC such compensation as shall be payable prior to
the effective date of termination.
(b) Reimbursement of Expenses. In connection with the services provided
by FFC pursuant to this Agreement, the Trust, on behalf of each Fund, agrees to
reimburse FFC for the expenses set forth in Clause (ii) of Appendix B hereto.
In addition, the Trust, on behalf of the applicable Fund, shall reimburse FFC
for all expenses and employee time attributable to any review of the Trust's
accounts and records by the Trust's independent public accountants or any
regulatory body outside of routine and normal periodic reviews. Should the
Trust exercise its right to terminate this Agreement, all out-of-pocket
expenses associated with the copying and movement of records and material to
any successor person shall be borne by the Trust on behalf of the applicable
<PAGE>
Funds and FFC may, in its discretion, charge for any other reasonable expenses
associated with such termination, including the employee time to copy and move
records and material and in cooperating with, and providing assistance to,
FFC's successor in the establishment of the accounts and records necessary to
carry out the successor's responsibilities.
SECTION 4. EFFECTIVENESS, DURATION AND TERMINATION
This Agreement shall become effective as of the date first above written
and shall remain in effect indefinitely. Notwithstanding the foregoing, this
Agreement may be terminated at any time with respect to any Fund, or Class
thereof, without the payment of any penalty, (i) by a vote of a majority of the
Trust's Board of Trustees on not less than 60 days' written notice to FFC or
(ii) by FFC on not less than 60 days' written notice to the Trust. For so long
as FFC continues to perform any of the services contemplated by this Agreement
after termination of this Agreement (as agreed to by the Trust and FFC), the
provisions of Sections 3 and 5 hereof shall continue in full force and effect.
SECTION 5. STANDARD OF CARE; LIMITATION OF LIABILITY
(a) FFC shall use its best judgment and efforts in rendering the services
described in this Agreement. FFC shall not be liable to the Trust for any
action or inaction of FFC in the absence of bad faith, willful misconduct or
gross negligence or based upon information, instructions or requests made to
FFC by a duly authorized officer of the Trust who is not an officer or employee
of FFC or its affiliates. FFC shall not be responsible or liable for any
failure or delay in performance of its obligations under this Agreement caused
by circumstances beyond its reasonable control.
(b) The Trust agrees to indemnify and hold harmless FFC, its employees,
agents, officers and directors against and from any and all claims, demands,
actions, suits, judgments, losses, charges (including attorneys' fees) and
other reasonable expenses arising out of FFC's actions or omissions that are
consistent with the standard of care set forth in paragraph (a) of this
section.
(c) FFC agrees to indemnify and hold harmless the Trust, its employees,
agents, officers and directors against and from any and all claims, demands,
actions, suits, judgments, losses, charges (including attorneys' fees) and
other reasonable expenses arising out of FFC's actions or omissions that are
not consistent with the standard of care set forth in paragraph (a) of this
section.
(d) Neither party shall be required to indemnify the other if, prior to
confessing any claim against it which may be subject to indemnification, the
indemnified party does not give the indemnifying party written notice of, and
reasonable opportunity to defend against, the claim.
<PAGE>
SECTION 6. ASSIGNMENT
This Agreement and the rights and duties hereunder shall not be
assignable by either of the parties hereto except by the specific written
consent of the other party. All terms and provisions of this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto.
SECTION 7. FORCE MAJEURE
FFC shall not be responsible or liable for any failure or delay in
performance of its obligations under this Agreement arising out of or caused,
directly or indirectly, by circumstances beyond its reasonable control
including, without limitation, acts of civil or military authority, national
emergencies, labor difficulties, fire, mechanical breakdowns, flood or
catastrophe, acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply. In addition, to the extent FFC's
obligations hereunder are to oversee or monitor the activities of third
parties, FFC shall not be liable for any failure or delay in the performance of
FFC's duties caused, directly or indirectly, by the failure or delay of such
third parties in performing their respective duties or cooperating reasonably
and in a timely manner with FFC.
SECTION 8. ACTIVITIES OF FFC
(a) Except to the extent necessary to perform FFC's obligations under
this Agreement, nothing herein shall be deemed to limit or restrict FFC's
right, or the right of any of FFC's managers, officers or employees who also
may be a trustee, officer or employee of the Trust, or persons who are
otherwise affiliated persons of the Trust to engage in any other business or to
devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to any other corporation, trust, firm, individual or association.
(b) FFC may subcontract any or all of its functions or responsibilities
pursuant to this Agreement to one or more corporations, trusts, firms,
individuals or associations, which may be affiliates of FFC, who agree to
comply with the terms of this Agreement. FFC may pay those persons for their
services, but no such payment will increase FFC's compensation from the Trust.
Any subcontract by FFC of its functions or responsibilities hereunder does not
affect FFC's obligations or rights under this agreement.
<PAGE>
SECTION 9. COOPERATION WITH INDEPENDENT ACCOUNTANTS
FFC shall cooperate, if applicable, with each Fund's independent public
accountants and shall take reasonable action to make all necessary information
available to the accountants for the performance of the accountants' duties.
SECTION 10. SERVICE DAYS
Nothing contained in this Agreement is intended to or shall require FFC,
in any capacity under this Agreement, to perform any functions or duties on any
day other than a business day of the Trust or of a Fund. Functions or duties
normally scheduled to be performed on any day which is not a business day of
the Trust or of a Fund shall be performed on, and as of, the next business day,
unless otherwise required by law.
SECTION 11. LIMITATION OF SHAREHOLDER AND TRUSTEE LIABILITY
The trustees of the Trust and the shareholders of each Fund shall not be
liable for any obligations of the Trust or of the Funds under this Agreement,
and FFC agrees that, in asserting any rights or claims under this Agreement, it
shall look only to the assets and property of the Trust or the Fund to which
FFC's rights or claims relate in settlement of such rights or claims, and not
to the trustees of the Trust, the shareholders of the Funds or any Fund other
than the Fund to which FFC's rights or claims relate.
SECTION 12. MISCELLANEOUS
(a) Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement.
(b) Except for Appendix A to add new Funds and Classes in accordance with
Section 4, no provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties hereto and, if required, by the Act, by a vote of a majority of the
outstanding voting securities of the Trust or Fund, as applicable.
(c) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid, the remaining portion
or portions shall be considered severable and not be affected, and the rights
and obligations of the parties shall be construed and enforced as if the
Agreement did not contain the particular part, term or provision held to be
illegal or invalid.
<PAGE>
(d) Section and Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this
Agreement.
(e) Notices, requests, instructions and communications received by the
parties at their respective principal addresses, or at such other address as a
party may have designated in writing, shall be deemed to have been properly
given.
(f) This Agreement shall be governed by and shall be construed in
accordance with the laws of the State of New York.
(g) This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof, whether oral or written.
(h) This Agreement may be executed by the parties hereto on any number of
counterparts, and all of the counterparts taken together shall be deemed to
constitute one and the same instrument.
(i) Notwithstanding any other provision of this Agreement, the parties
agree that the assets and liabilities of each Fund of the Trust are separate
and distinct from the assets and liabilities of each other Fund and that no
Fund shall be liable or shall be charged for any debt, obligation or liability
of any other Fund, whether arising under this Agreement or otherwise.
(j) The terms "vote of a majority of the outstanding voting securities"
and "interested person" shall have the meanings ascribed thereto in the Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
THE HIGHLAND FAMILY OF FUNDS
Robert Lamb III
______________________________________
Robert Lamb III
President
FORUM FINANCIAL CORP.
John Y. Keffer
______________________________________
John Y. Keffer
Manager
<PAGE>
THE HIGHLAND FAMILY OF FUNDS
FUND ACCOUNTING AGREEMENT
SCHEDULE A
FUNDS OF THE TRUST
AS OF MARCH 14, 1997
Highland Growth Fund
Highland Aggressive Growth Fund
<PAGE>
THE HIGHLAND FAMILY OF FUNDS
FUND ACCOUNTING AGREEMENT
SCHEDULE B
FEES
(i) BASE FEE
Standard Fee per Fund with one Class $36,000/year
Fee for each additional Class $12,000/year
Plus additional surcharges for each of:
for portfolios with asset levels exceeding:
$100 million $6,000/year
$250 million $6,000/year
$500 million $6,000/year
$1 billion $6,000/year
Portfolios requiring international custody,
or holding futures, options, forward
contracts, foreign currencies, or other
hedge instruments $12,000/year
Portfolios with more than 30
international positions $12,000/year
Tax Free Money Market Portfolios $12,000/year
Series with more than 25% of net assets
invested in assetbacked securities $12,000/year
Series with more than 50% of net assets
invested in asset backed securities $12,000/year
Series with more than 100 security positions $12,000/year
Series with a monthly portfolio turnover
rate of 10% or greater $12,000/year
Standard Fee per Gateway Fund (a Fund
operating pursuant to Section 12(d)(1)(E)
of the Act) $12,000/year
Fee for each additional Class of a Gateway
Fund above one $12,000/year
Note 1. Surcharges are paid on a monthly basis, and are determined based
upon the total assets or security positions as of the end of the prior
month and on the portfolio turnover rate for the prior month. Portfolio
turnover rate shall have the meaning ascribed thereto in Securities and
Exchange Commission Form N-1A.
<PAGE>
Note 2: The rates set forth above shall remain fixed through December 31,
1997. On January 1, 1998, and on each successive January 1, the rates
shall be adjusted to reflect changes in the Consumer Price Index for the
preceding calendar year, as published by the U.S. Department of Labor,
Bureau of Labor Statistics. Forum shall notify the Trust each year of the
new rates.
(II) OUT-OF-POCKET AND RELATED EXPENSES
The Trust, on behalf of the applicable Fund, shall reimburse FFC for all
out-of-pocket and ancillary expenses in providing the services described
in this Agreement, including but not limited to the cost of (or
appropriate share of the cost of): (i) pricing, paydown, corporate
action, credit and other reporting services, (ii) taxes, (iii) postage
and delivery services, (iv) telephone services, (v) electronic or
facsimile transmission services, (vi) reproduction, (vii) printing and
distributing financial statements and (xiii) microfilm and microfiche. In
addition, any other expenses incurred by FFC at the request or with the
consent of the Trust, will be reimbursed by the Trust on behalf of the
applicable Fund.
Exhibit 10
BINGHAM, DANA & GOULD LLP
150 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110-1726
March 31, 1997
The Highland Family of Funds
Two Portland Square
Portland, Maine 04101
Ladies and Gentlemen:
We have acted as counsel to The Highland Family of Funds, a
Massachusetts business trust (the "Trust"), in connection with the preparation
and filing of the Trust's initial Registration Statement on Form N-1A and
Pre-Effective Amendment No. 1 thereto, filed with the Securities and Exchange
Commission on October 16, 1996 and March 31, 1997, respectively (as amended,
the "Registration Statement"), with respect to an indefinite number of Shares
of Beneficial Interest ($0.0001 par value) (the "Shares") of the separate
series of the Trust designated as Highland Growth Fund and Highland Aggressive
Growth Fund (collectively, the "Funds").
In connection with this opinion, we have examined the following
described documents:
(a) the Registration Statement;
(b) a certificate of the Secretary of State of the Commonwealth of
Massachusetts as to the existence of the Trust;
(c) copies, certified by the Secretary of State of the Commonwealth
of Massachusetts, of the Trust's Declaration of Trust and of all amendments
thereto on file in the office of the Secretary of State; and
(d) a Certificate executed by Robert Lamb III, President of the
Trust, certifying as to, and attaching copies of, the Trust's By-Laws and
certain votes of the Trustees of the Trust authorizing the issuance of the
Shares.
<PAGE>
In such examination, we have assumed the genuineness of all
signatures, the conformity to the originals of all of the documents reviewed by
us as copies, the authenticity and completeness of all documents reviewed by us
in original or copy form and the legal competence of each individual executing
any document.
This opinion is based entirely on our review of the documents listed
above. We have made no other review or investigation of any kind whatsoever,
and we have assumed, without independent inquiry, the accuracy of the
information set forth in such documents.
This opinion is limited solely to the laws of the Commonwealth of
Massachusetts (other than the Massachusetts Uniform Securities Act, as to which
we express no opinion) as applied by courts in such Commonwealth to the extent
such laws may apply to or govern the matters covered by this opinion.
We understand that all of the foregoing assumptions and limitations
are acceptable to you.
Based upon and subject to the foregoing, please be advised that it is
our opinion that the Shares, when issued and sold in accordance with the
Registration Statement and the Trust's Declaration of Trust and By-laws, will
be legally issued, fully paid and non-assessable, except that, as set forth in
the Registration Statement, shareholders of the Funds may under certain
circumstances be held personally liable for the Trust's obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
Bingham, Dana & Gould LLP
BINGHAM, DANA & GOULD LLP
EXHIBIT 13
March 14, 1997
Board of Trustees
The Highland Family of Funds
Two Portland Square
Portland, Maine 04101
Ladies and Gentlemen:
In connection with my purchase of 10,000 shares of the Highland Growth
Fund, a separate series of The Highland Family of Funds (the "Seed Capital
Shares"), and for the consideration of cash of $10.00 per share, this letter
will confirm that I am purchasing the Seed Capital Shares for my own account for
investment purposes only and not with a view to reselling or otherwise
distributing those shares.
I agree and hereby undertake that, in the event any of the Seed Capital
Shares are redeemed during the period of amortization of the Highland Growth
Fund's organizational expenses, the redemption proceeds will be reduced by any
unamortized organizational expenses in the same proportion as the number of Seed
Capital Shares being redeemed bears to the number of Seed Capital Shares
outstanding at the time of redemption.
Sincerely,
Robert Lamb III
Robert Lamb III
Exhibit 15
THE HIGHLAND FAMILY OF FUNDS
DISTRIBUTION PLAN
as of March 14, 1997
Distribution Plan (the "Plan") in accordance with the provisions of Rule
12b-1 under the Investment Company Act of 1940, as amended (the "Act") (the
"Plan") of the Highland Family of Funds (the "Trust") is made with respect to
each of the separate series of the Trust listed in Appendix A as the same may
be amended from time to time (individually a "Fund" and collectively the
"Funds").
SECTION 1. DISTRIBUTOR; ADVISER
The Trust has entered into a Distribution Agreement with Forum Financial
Services, Inc. (the "Distributor") whereby the Distributor acts as principal
underwriter of the Fund's shares (the "Shares"), and has entered into an
investment advisory agreement with Highland Investment Group L.P. (the
"Adviser") whereby the Adviser acts as investment adviser to the Funds, each in
a form satisfactory to the Trust's Board of Trustees (the "Board").
SECTION 2. DISTRIBUTION EXPENSES
The Trust may reimburse the Distributor for the distribution expenses
incurred by the Distributor on behalf of the Fund of up to 0.25% per annum of
the Fund's average daily net assets in accordance with the following:
(a) On behalf of the Fund, the Distributor may incur expenses for any
distribution related purpose it deems necessary or appropriate, including: (i)
the incremental costs of printing (excluding typesetting) prospectuses,
statements of additional information, annual reports and other periodic reports
for use in connection with the offering or sale of Shares, to any prospective
investor, (ii) preparing, printing and distributing any other literature used
by the Distributor in connection with the offering of Shares for sale to the
public and the cost of administering the program, compensation to and expenses
(including overhead and telephone) of employees of the Distributor who engage
in sales support and distribution activities, (iii) compensating other persons
for providing assistance in distributing the Shares and (iv) reimbursement to
the Adviser of the Adviser's distribution-related expenses, including expenses
<PAGE>
of employees of the Adviser who train or educate others with respect to the
Fund and the investment techniques employed to achieve the Fund's investment
objective.
(b) The schedule of such reimbursements and the basis upon which they
will be paid shall be determined from time to time by the Board. Unreimbursed
distribution-related expenses of the Distributor incurred during a fiscal year
of the Trust may not be reimbursed by the Trust in subsequent fiscal years.
SECTION 3. REVIEW AND RECORDS
(a) The Trust and the Distributor shall prepare and furnish to the Board,
and the Board shall review at least quarterly, written reports setting forth
all amounts expended under the Plan by the Trust and the Distributor and
identifying the activities for which the expenditures were made.
(b) The Trust shall preserve copies of the Plan, each agreement related
to the Plan and each report prepared and furnished pursuant to this Section in
accordance with Rule 12b-1 under the Act.
SECTION 4. EFFECTIVENESS; DURATION; AND TERMINATION
(a) The Plan shall become effective upon approval by (i) a vote of at
least a majority of the outstanding voting securities of the Fund and (ii) the
Board, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan (the "Qualified
Trustees"), pursuant to a vote cast in person at a meeting called for the
purpose of voting on approval of the Plan.
(b) The Plan shall remain in effect for a period of one year from the
date of its effectiveness, unless earlier terminated in accordance with this
Section, and thereafter shall continue in effect for successive twelve-month
periods, provided that such continuance is specifically approved at least
annually by the Board and a majority of the Qualified Trustees pursuant to a
vote cast in person at a meeting called for the purpose of voting on
continuance of the Plan.
(c) The Plan may be terminated without penalty at any time by a vote of
(i) a majority of the Qualified Trustees or (ii) a vote of a majority of the
outstanding voting securities of the Fund.
<PAGE>
SECTION 5. AMENDMENT
The Plan may be amended at any time by the Board, provided that (i) any
material amendments to the Plan shall be effective only upon approval of the
Board and a majority of the Qualified Trustees pursuant to a vote cast in
person at a meeting called for the purpose of voting on the amendment to the
Plan, and (ii) any amendment which increases materially the amount which may be
spent by the Trust pursuant to the Plan shall be effective only upon the
additional approval a majority of the outstanding voting securities of the
Fund.
SECTION 6. NOMINATION OF DISINTERESTED TRUSTEES
While the Plan is in effect, the selection and nomination of the Trustees
of the Trust who are not interested persons of the Trust shall be committed to
the discretion of the Trustees of the Trust who are not interested persons of
the Trust.
SECTION 7. MISCELLANEOUS
(a) The terms "majority of the outstanding voting securities" and
"interested person" shall have the meanings ascribed thereto in the Act.
(b) If any provision of the Plan shall be held invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.
Exhibit 25
THE HIGHLAND FAMILY OF FUNDS
The undersigned hereby constitutes and appoints Catherine C. Lawson and Robert
B. Lamb III, and each of them, with full powers of substitution as her true and
lawful attorneys and agents to execute in her name and on her behalf in any and
all capacities the Registration Statements on Form N-1A, and any and all
amendments thereto, filed by The Highland Family of Funds (on behalf of its
series, Highland Growth Fund and Highland Aggressive Growth Fund) (the
"Registrant") with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and under the Investment Company Act of 1940, as
amended, and any and all other instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable the Registrant to comply
with the Securities Act of 1933, as amended and the Investment Company Act of
1940, as amended, the rules, regulations and requirements of the Securities and
Exchange Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as her own act
and deed any and all that such attorneys and agents, or any of them, shall do
or cause to be done by virtue hereof. Any one of such attorneys and agents
shall have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 14th day of
March, 1997.
Diana R. Harrington
_________________________
Diana R. Harrington
<PAGE>
THE HIGHLAND FAMILY OF FUNDS
The undersigned hereby constitutes and appoints Catherine C. Lawson and Robert
B. Lamb III, and each of them, with full powers of substitution as his true and
lawful attorneys and agents to execute in his name and on his behalf in any and
all capacities the Registration Statements on Form N-1A, and any and all
amendments thereto, filed by The Highland Family of Funds (on behalf of its
series, Highland Growth Fund and Highland Aggressive Growth Fund) (the
"Registrant") with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and under the Investment Company Act of 1940, as
amended, and any and all other instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable the Registrant to comply
with the Securities Act of 1933, as amended and the Investment Company Act of
1940, as amended, the rules, regulations and requirements of the Securities and
Exchange Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorneys and agents, or any of them, shall do
or cause to be done by virtue hereof. Any one of such attorneys and agents
shall have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 14th day of
March, 1997.
Tarrant Cutler
_________________________
Tarrant Cutler
<PAGE>
THE HIGHLAND FAMILY OF FUNDS
The undersigned hereby constitutes and appoints Catherine C. Lawson and Robert
B. Lamb III, and each of them, with full powers of substitution as his true and
lawful attorneys and agents to execute in his name and on his behalf in any and
all capacities the Registration Statements on Form N-1A, and any and all
amendments thereto, filed by The Highland Family of Funds (on behalf of its
series, Highland Growth Fund and Highland Aggressive Growth Fund) (the
"Registrant") with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and under the Investment Company Act of 1940, as
amended, and any and all other instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable the Registrant to comply
with the Securities Act of 1933, as amended and the Investment Company Act of
1940, as amended, the rules, regulations and requirements of the Securities and
Exchange Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorneys and agents, or any of them, shall do
or cause to be done by virtue hereof. Any one of such attorneys and agents
shall have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 14th day of
March, 1997.
Douglass M. Barnes
_________________________
Douglass M. Barnes
<PAGE>
THE HIGHLAND FAMILY OF FUNDS
The undersigned hereby constitutes and appoints Robert B. Lamb III with full
powers of substitution as her true and lawful attorney and agent to execute in
her name and on her behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by The
Highland Family of Funds (on behalf of its series, Highland Growth Fund and
Highland Aggressive Growth Fund) (the "Registrant") with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, and any and all other instruments
which such attorney and agent deems necessary or advisable to enable the
Registrant to comply with the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as her own act and deed any and all that such attorney
and agent shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 14th day of
March, 1997.
Catherine C. Lawson
_________________________
Catherine C. Lawson
<PAGE>
THE HIGHLAND FAMILY OF FUNDS
The undersigned hereby constitutes and appoints Catherine C. Lawson with full
powers of substitution as his true and lawful attorney and agent to execute in
his name and on his behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by The
Highland Family of Funds (on behalf of its series, Highland Growth Fund and
Highland Aggressive Growth Fund) (the "Registrant") with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, and any and all other instruments
which such attorney and agent deems necessary or advisable to enable the
Registrant to comply with the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorney
and agent shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 14th day of
March, 1997.
Robert Lamb III
_________________________
Robert Lamb III
[ARTICLE] 6
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-END] MAR-26-1997
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 147,473
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 147,473
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 47,473
[TOTAL-LIABILITIES] 47,473
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 100,000
[SHARES-COMMON-STOCK] 10,000
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 100,000
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 0
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 10,000
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 100,000
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 0
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.00
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
