AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1998.
1933 ACT FILE NO. _______
1940 ACT FILE NO. _______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. __ [_]
POST-EFFECTIVE AMENDMENT NO.__ [_]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. __ [_]
(Check appropriate box or boxes)
Highland Capital Fixed Income Fund
(Exact Name of Registrant as Specified in Charter)
1150 Two Galleria Tower,
13455 Noel Road LB#45,
Dallas, Texas 75240
(Address of Principal Executive Offices)
(972) 233-4300
(Registrant's Telephone Number, including Area Code)
James Dondero, President
c/o Highland Capital Fixed Income Fund
1150 Two Galleria Tower
13455 Noel Road LB#45,
Dallas, Texas 75240
(Name and Address of Agent for Service)
Copy to:
Stuart H. Coleman, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Proposed Proposed Amount
Amount Maximum Maximum of
Title Of Securities Being Offering Aggregate Registration
Being Registered Registered Price Per Offering Fee(1)
Unit(1) Price(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial 1,000,000 $10.00 $10,000,000 $2,780
Interest
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
</TABLE>
SUBJECT TO COMPLETION, DATED DECEMBER __, 1998
[HIGHLAND CAPITAL LOGO]
____________ SHARES
HIGHLAND CAPITAL FIXED INCOME FUND
----------------
Highland Capital Fixed Income Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund's investment
objective is to provide a high level of current income, consistent with the
preservation of capital. The Fund will invest primarily in senior secured
floating rate loans ("Senior Loans"). The Fund may use financial leverage
through borrowings in an effort to increase investors' returns. An investment in
the Fund may not be appropriate for all investors and no assurance can be given
that the Fund will achieve its investment objective. See "INVESTMENT OBJECTIVE,
POLICIES AND RISKS."
Senior Loans generally are made to corporations, partnerships and
other business entities ("Borrowers") which operate in various industries and
geographical regions. Senior Loans, which typically hold the most senior
position in a Borrower's capital structure, pay interest at rates that are
redetermined periodically on the basis of a floating base lending rate plus a
premium. This floating rate feature should help to minimize changes in the
principal value of the Senior Loans and, thus, the Fund's net asset value per
share, resulting from interest rate changes. The Fund will invest primarily in
Senior Loans that are below investment grade quality and are speculative
investments that are subject to credit risk.
The Fund's investment adviser is Highland Capital Management, L.P.
(the "Adviser"), which has considerable experience advising institutional
accounts employing strategies substantially similar to those the Fund intends to
employ.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE FUND'S SHARES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THE DISCLOSURE IN THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Sales Proceeds to
Public Load(1) Fund(2)
<S> <C> <C> <C>
Per Share.............................. $_______ None $_______
Total.................................. $_______ None $_______
Total Assuming Full
Exercise Over- $_______ None $_______
Allotment Option(3) ...................
(FOOTNOTES ON THE FOLLOWING PAGE)
</TABLE>
-----------------
The Shares are offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that delivery
of the Shares will be made in New York City on or about ____________, 1999.
-----------------
[INSERT UNDERWRITERS]
THE DATE OF THIS PROSPECTUS IS ______________, 1999
-----------------
[Left Side Margin on Cover Page]
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
FUND'S SHARES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE FUND'S SHARES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
-----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FUND'S SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE ("NYSE"), IN THE
NASDAQ MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
-----------------
(CONTINUED FROM COVER PAGE)
The Fund is offering shares of beneficial interest, par value $0.001
per share ("Shares"). Before this offering, there has been no market for the
Shares. The Fund intends to apply to list its Shares on the NYSE under the
symbol "___." The shares of closed-end investment companies, such as the Fund,
have frequently traded at a discount to their net asset values. The Shares also
may trade at a discount to net asset value.
-----------------
This Prospectus sets forth concisely information that a prospective
investor should know before investing in the Fund's Shares. Please read and
retain this Prospectus for future reference.
A Statement of Additional Information dated __________, 1999, has been
filed with the Securities and Exchange Commission ("SEC") and can be obtained
without charge by calling 1-800-___-____, or by writing to the Fund. A table of
contents to the Statement of Additional Information is located at page __ of
this Prospectus. This Prospectus incorporates by reference the entire Statement
of Additional Information. The Statement of Additional Information is available
along with other Fund-related materials at the SEC's internet web site
(http://www.sec.gov).
-----------------
The Fund's Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depositary institution,
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
-----------------
- ---------------------
(FOOTNOTES FROM COVER PAGE)
(1) The Adviser or an affiliate (not the Fund) from its own
assets will pay a commission to the Underwriters in the
amount of ____% of the Price to Public per Share in
connection with the sale of the Shares offered hereby.
The Fund and the Adviser have agreed to indemnify the
Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933. See "UNDERWRITING."
(2) Before deducting organizational and offering expenses
payable by the Fund. Offering expenses of $_________
($_________ if the Underwriters' over-allotment option is
exercised in full) will be deducted from net proceeds and
organizational expenses of approximately $_________ will be
capitalized and amortized. Offering expenses include
$_________ payment to the Underwriters in partial
reimbursement of their expenses. The Adviser or an
affiliate will pay all offering expenses that exceed $____
per Share.
(3) Assuming exercise in full of the 45-day option granted by the Fund to
the Underwriters to purchase up to additional Shares, on the same
terms, solely to cover over-allotments. See "UNDERWRITING."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus and the Statement of
Additional Information.
THE FUND............................. Highland Capital Fixed Income
Fund (the "Fund") is a newly organized,
non-diversified, closed-end management
investment company. The Fund offers
investors the opportunity to seek a high
level of current income by investing in
a professionally managed portfolio
comprised primarily of senior secured
floating rate loans ("Senior Loans"). An
investment in the Fund may not be
appropriate for all investors and the
Fund may not achieve its goal.
THE OFFERING......................... The Fund is offering ____________ shares
of beneficial interest, par value $0.001
per share (the "Shares"), through a
group of underwriters (the
"Underwriters") led by [To come]. The
Underwriters have been granted an option
to purchase up to _______ additional
Shares solely to cover over-allotments,
if any. The initial public offering
price is $_____ per Share. The minimum
purchase in this offering is _____
Shares ($_______).
NO SALES CHARGE...................... The Shares will be sold in the
initial public offering without any
sales load or underwriting discounts
payable by investors or the Fund. The
Adviser or an affiliate (not the Fund)
from its own assets will pay a
commission to the Underwriters in
connection with sales of the Shares in
this offering. See "UNDERWRITING."
INVESTMENT OBJECTIVE AND
POLICIES.......................... The Fund's investment objective is to
provide a high level of current income,
consistent with preservation of capital.
The Fund will invest primarily in Senior
Loans. Senior Loans generally are made
to corporations, partnerships and other
business entities ("Borrowers") that
operate in various industries and
geographical regions. Senior Loans pay
interest at rates which are redetermined
periodically by reference to a base
lending rate, such as the London
Inter-bank Offered Rate ("LIBOR"), plus
a premium. In normal market conditions,
at least 70% of the Fund's total assets
will be invested in Senior Loans. The
proceeds of the Senior Loans in which
the Fund will invest are expected to be
used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions
and stock repurchases and, to a lesser
extent, to finance internal growth and
for other corporate purposes of
Borrowers.
The Fund will invest primarily in Senior
Loans that are below investment grade
quality and are speculative investments
that are subject to credit risk. The
Fund attempts to manage these risks
through portfolio diversification and
ongoing analysis and monitoring of
Borrowers. As a result, the Fund is
highly dependent on the Adviser's credit
analysis abilities.
The Fund may invest up to 20%
of its total assets in other
fixed-income securities, including: loan
interests which have lower than a senior
claim on, or are not secured by any,
collateral; investment and
non-investment grade corporate debt
securities, including mortgage-related
securities, and U.S. Government and U.S.
dollar-denominated foreign government
or supranational debt securities.
The average dollar-weighted credit
rating of the fixed-income securities
held by the Fund (including Senior
Loans) will be at least B2 by Moody's
Investors Service, Inc. ("Moody's"), B+
by Standard & Poor's Ratings Group
("S&P") or an equivalent rating by
another nationally recognized rating
agency (each a "Rating Agency") (or the
unrated equivalent). Securities rated
B2/B+ by a Rating Agency are below
investment grade and are considered
speculative. These securities are
commonly known as "junk bonds."
The Fund also may invest up to 10% of
its total assets in equity securities,
including those in the form of
Depositary Receipts, as well as warrants
to purchase such securities.
The Fund also may engage in lending of
its securities, repurchase agreements,
reverse repurchase agreements and, for
hedging and risk management purposes,
certain derivative transactions. See
"INVESTMENT OBJECTIVE, POLICIES AND
RISKS."
LISTING.............................. The Fund intends to apply to list its
Shares on the NYSE under the symbol
"___."
LEVERAGE............................. The Fund expects to use financial
leverage through borrowings, including
the issuance of debt securities or
preferred shares, or through other
transactions, such as reverse repurchase
agreements, which have the effect of
financial leverage. The Fund intends to
utilize financial leverage in an amount
up to 33-1/3% of its total assets
(including the amount obtained through
leverage). The Fund intends to engage in
leverage if it is expected to result in
higher income to Shareholders over time.
Use of financial leverage creates an
opportunity for increased income for
Shareholders but, at the same time,
creates special risks (including the
likelihood of greater volatility of net
asset value and market price of the
Shares), and there can be no assurance
that a leveraging strategy will be
successful during any period in which it
is employed. Because leverage achieved
through borrowings is expected to be
based on a floating rate of interest
that fluctuates similarly to the
floating rate on Senior Loans in the
Fund's portfolio, the Adviser believes
that market interest rate fluctuations
should not adversely affect returns on
the Senior Loans obtained with the
proceeds of such borrowings. See
"INVESTMENT OBJECTIVE, POLICIES AND
RISKS--Use of Leverage and Related
Risks."
INVESTMENT ADVISER.................... Highland Capital Management, L.P. (the
"Adviser") is the Fund's investment
adviser. Formed in 1993, the Adviser and
its affiliates currently serve as the
investment adviser to institutional
clients with combined assets under
management of over $___________,
employing strategies substantially
similar to those which the Fund intends
to employ. See "MANAGEMENT OF THE FUND."
ADMINISTRATOR......................... ______________ (the "Administrator") is
the Fund's administrator. See
"MANAGEMENT OF THE FUND."
DISTRIBUTIONS......................... The Fund's policy will be to make
monthly distributions to Shareholders of
substantially all net investment income
of the Fund. Distributions to
Shareholders cannot be assured, and the
amount of each monthly distribution will
vary. The initial distribution to
Shareholders is expected to be paid
approximately [60 days] after the
completion of this offering. See
"DISTRIBUTIONS AND TAXES," "DIVIDEND
REINVESTMENT PLAN" and "USE OF
PROCEEDS."
DIVIDEND REINVESTMENT PLAN............. The Fund has established a Dividend
Reinvestment Plan (the "Plan"). Under
the Plan, all dividend and capital gain
distributions will be automatically
reinvested in additional Shares either
purchased in the open market, or newly
issued by the Fund if the Shares are
trading at or above their net asset
value, in either case unless a
Shareholder elects to receive cash.
Shareholders who intend to hold their
Shares through a broker or nominee
should contact such broker or nominee to
determine whether or how they may
participate in the Plan. See "DIVIDEND
REINVESTMENT PLAN."
CLOSED-END STRUCTURE................... Closed-end funds differ from open-end
management investment companies
(commonly referred to as mutual funds)
in that closed-end funds generally list
their shares for trading on a securities
exchange and do not redeem their shares
at the option of the shareholder. By
comparison, mutual funds issue
securities redeemable at net asset value
at the option of the shareholder and
typically engage in a continuous
offering of their shares. Mutual funds
are subject to continuous asset in-flows
and out-flows that can complicate
portfolio management, whereas closed-end
funds generally can stay more fully
invested in securities consistent with
the closed-end fund's investment
objective and policies. In addition, in
comparison to open-end funds, closed-end
funds have greater flexibility in the
employment of financial leverage and in
the ability to make certain types of
investments, including investments in
illiquid securities, such as Senior
Loans. However, shares of closed-end
funds frequently trade at a discount
from their net asset value. In
recognition of the possibility that the
Shares might trade at a discount to net
asset value and that any such discount
may not be in the interest of
Shareholders, the Fund's Board of
Trustees (the "Board"), in consultation
with the Adviser, from time to time may
review possible actions to reduce any
such discount. The Board might consider
open market repurchases or tender offers
for Shares at net asset value. No
assurance can be given that the Board
will decide to undertake any of these
actions or that, if undertaken, such
actions would result in the Shares
trading at a price equal to or close to
net asset value per Share. The Board
also might consider the conversion of
the Fund to an open-end investment
company, although, given the Fund's
expected portfolio composition, it is
unlikely that the Board would approve
such conversion. The Board believes that
the closed-end structure is desirable,
given the Fund's investment objective
and policies. See "DESCRIPTION OF
CAPITAL STRUCTURE."
SPECIAL RISK
CONSIDERATIONS........................ OPERATING HISTORY. The Fund is a
closed-end investment company with no
history of operations and is designed
for long-term investors and not as a
trading vehicle. While the Adviser and
its affiliates have extensive experience
managing assets for institutional
clients using the strategy the Fund
intends to employ, they have not advised
a registered management investment
company.
SENIOR LOAN MARKET. Senior Loans in
which the Fund will invest may not be
rated by a nationally recognized
statistical rating organization, will
not be registered with the SEC or any
state securities commission and
generally will not be listed on any
national securities exchange. Therefore,
the amount of public information
available about Senior Loans will be
limited, and the performance of the Fund
is more dependent on the analytical
abilities of the Adviser than would be
the case for an investment company that
invests primarily in more widely rated,
registered or exchange-listed
securities. In evaluating the
creditworthiness of Borrowers, the
Adviser will consider, and may rely in
part, on analyses performed by others.
Moreover, certain Senior Loans will be
subject to contractual restrictions on
resale and, therefore, are illiquid. The
Fund's ability to realize the full value
of its assets in the event of a
voluntary or involuntary liquidation of
such assets may be impaired.
CREDIT RISK. Senior Loans, like other
debt obligations, are subject to the
risk of non-payment of scheduled
interest or principal. Such non-payment
would result in a reduction of income to
the Fund, a reduction in the value of
the Senior Loan experiencing non-payment
and a potential decrease in the net
asset value of the Fund. Although Senior
Loans in which the Fund will invest will
be secured by specific collateral, no
assurance can be given that liquidation
of such collateral would satisfy the
Borrower's obligation in the event of
default or that such collateral could be
readily liquidated. Some Senior Loans
have speculative characteristics, and
the companies obligated by such debt are
more vulnerable in an economic downturn.
In the event of bankruptcy of a
Borrower, the Fund could experience
delays or limitations in its ability to
realize the benefits of any collateral
securing a Senior Loan. The Fund may
purchase interests in Senior Loans from
financial intermediaries whereby the
Fund depends on the intermediary for
payment of principal and interest on the
Senior Loan. A decline in the financial
soundness of such intermediaries,
therefore, may adversely affect the
Fund.
See "INVESTMENT OBJECTIVE, POLICIES AND
RISKS."
INTEREST RATE FLUCTUATIONS. When
interest rates decline, the value of a
portfolio invested in fixed-rate
obligations can be expected to rise.
Conversely, when interest rates rise,
the value of a portfolio invested in
fixed-rate obligations can be expected
to decline. Although the Fund's net
asset value will vary, the Fund's
management expects that the Fund's
policy of acquiring primarily interests
in floating rate Senior Loans should
minimize fluctuations in net asset value
resulting from changes in market
interest rates. However, because
floating or variable rates on Senior
Loans only reset periodically, changes
in prevailing interest rates will cause
some fluctuation in the Fund's net asset
value. Similarly, a rapid and
significant increase in market interest
rates or a change in the relationships
between specific interest rates
(commonly referred to as "spread
widening") may cause a decline in the
Fund's net asset value and reduce
substantially the liquidity of the
securities comprising a substantial
portion of the Fund's portfolio. The
Fund also may invest in fixed-income
securities with fixed rates of interest,
which may lose value in direct response
to market interest rate increases or
spread widening.
EFFECTS OF LEVERAGE. The Fund's use of
leverage creates an opportunity for
increased net income, but, at the same
time, creates special risks. No
assurance can be given that a leveraging
strategy will be successful during any
period in which it is employed. Leverage
creates risks for holders of Shares,
including the likelihood of greater
volatility of net asset value and market
price of the Shares and the risk that
fluctuations in interest rates on
borrowings and debt or in the dividend
rates on any preferred shares may
adversely affect the return to
Shareholders. To the extent the income
derived from securities purchased with
funds received from leverage exceeds the
cost of leverage, the Fund's return will
be greater than if leverage had not been
used. Conversely, if the income from the
securities purchased with such funds is
not sufficient to cover the cost of
leverage, the return to the Fund will be
less than if leverage had not been used,
and therefore the amount available for
distribution to Shareholders as
dividends and other distributions will
be reduced. In this case, the Adviser
nevertheless may determine to maintain
the Fund's leveraged position if it
deems such action to be appropriate in
the circumstances.
As discussed under "MANAGEMENT OF THE
FUND," the fee paid to the Adviser will
be calculated on the basis of the Fund's
total assets, including proceeds from
borrowings for leverage and the issuance
of preferred shares, so the fees will be
higher when leverage is utilized.
Certain types of borrowings by the Fund
may result in the Fund being subject to
covenants in credit agreements,
including those relating to asset
coverage and portfolio composition
requirements. The Fund may be subject to
certain restrictions on investments
imposed by guidelines of one or more
rating agencies, which may issue ratings
for the debt securities or preferred
shares issued by the Fund. These
guidelines may impose asset coverage or
portfolio composition requirements that
are more stringent than those imposed on
the Fund by the Investment Company Act
of 1940, as amended (the "1940 Act").
The Adviser does not anticipate that
these covenants or guidelines will
impede its management of the Fund's
portfolio in accordance with its
investment objective and policies. See
"INVESTMENT OBJECTIVE, POLICIES AND
RISKS--Use of Leverage and Related
Risks."
SPECIAL INVESTMENT PRACTICES. The Fund
may use various investment practices
that involve special considerations,
including lending its portfolio
securities and entering into repurchase
and reverse repurchase agreements. In
addition, the Fund has the authority to
engage in interest rate and other
hedging and risk management
transactions. For a discussion of these
practices, see "INVESTMENT OBJECTIVE,
POLICIES AND RISKS--Special Investment
Practices."
INVESTMENT IN NON-U.S. ISSUERS. The Fund
may invest in Senior Loans and other
income producing securities of issuers
that are organized or located in
countries other than the United States,
provided that such investments are
denominated in U.S. dollars and provide
for the payment of interest and
principal in U.S. dollars. An investment
in non-U.S. issuers involves special
risks, including that non-U.S. issuers
may be subject to less rigorous
accounting and reporting requirements
than U.S. issuers, less rigorous
regulatory requirements, differing legal
systems and laws relating to creditors'
rights, the potential inability to
enforce legal judgments and the
potential for political, social and
economic adversity.
MARKET PRICE OF SHARES. The shares of
closed-end investment companies often
trade at a discount from their net asset
value, and the Shares also may trade at
a discount from net asset value. The
trading price of the Shares may be less
than the public offering price.
NON-DIVERSIFICATION. The Fund has
registered as a "non-diversified"
investment company under the 1940 Act.
Under federal income tax rules
applicable to the Fund, with respect to
50% of its assets, it will be able to
invest more than 5% of the value of its
assets in the obligations of any single
issuer, although it has no current
intention to do so. The Fund will not
invest more than 10% of its assets in
securities (including interests in
Senior Loans) of any single Borrower. If
the Fund invests a relatively high
percentage of its assets in obligations
of a limited number of issuers, the Fund
may be more susceptible than a more
widely diversified investment company to
any single corporate, economic,
political or regulatory occurrence.
ANTI-TAKEOVER PROVISIONS. The Fund's
Declaration of Trust includes provisions
that could have the effect of limiting
the ability of other persons or entities
to acquire control of the Trust or to
change the composition of its Board. See
"DESCRIPTION OF CAPITAL
STRUCTURE--Special Voting and
AntiTakeover Provisions."
FUND EXPENSES
The following tables are intended to assist investors in understanding
the various costs and expenses that an investor in the Fund will bear, directly
or indirectly.
<TABLE>
<CAPTION>
NET ASSETS NET ASSETS
PLUS WITHOUT
LEVERAGE(1) LEVERAGE(2)
------------- -------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load..................................................... None None
Dividend Reinvestment Plan Fees................................ None None
ANNUAL FUND OPERATING EXPENSES (As a
Percentage of Net Assets Attributable to
Shares)(1)
Investment Advisory Fee(2)................................... ____% ____%
Interest Payments on Borrowed Funds.......................... ____% None
Other Expenses (including
administration fee of __%)(3)................................ ____% ____%
Total Annual Fund Operating Expenses......................... ____% ____%
- ---------------
(1) The Fund intends to utilize leverage only if the Adviser
believes that it would result in higher income to Shareholders over
time. See "INVESTMENT OBJECTIVE, POLICIES AND RISKS--Use of Leverage
and Related Risks." Assumes borrowings of 33-1/3% of total assets
(including amount borrowed) at an interest rate of ___%, which is
based upon the Fund's estimation of current market conditions.
(2) Assumes no leverage has been utilized.
(3) Reflects estimated amounts for the Fund's first year of operations.
</TABLE>
EXAMPLE
An investor would pay the following expenses on a $1,000 investment in
the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR(*) THREE YEARS FIVE YEARS TEN YEARS
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Assuming No Leverage........ $__ $__ $__ $__
Assuming 33-1/3% Leverage... $__ $__ $__ $__
</TABLE>
- ---------------
* This Example assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed
under Total Fund Annual Operating Expenses remain the same in the
years shown, except for amounts for the three, five and ten year
periods, which are after completion of organization expense
amortization. The above tables and the assumption in the Example of a
5% annual return and reinvestment at net asset value are required by
regulation of the SEC; the assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual
performance of the Fund's Shares. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AS THE FUND'S ACTUAL
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
THE FUND
Highland Capital Fixed Income Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company which was organized as
a Massachusetts business trust on December __, 1998 and has no operating
history. The Fund's principal office is located at 1150 Two Galleria Tower,
13455 Noel Road LB #45, Dallas, Texas 75240, and its telephone number is
___-___-____.
This Prospectus relates to the initial public offering of the Fund's
shares of beneficial interest, $.001 par value (the "Shares"). The Shares will
be sold during the initial public offering without any sales load or
underwriting discounts payable by investors or the Fund. Highland Capital
Management, L.P. (the "Adviser") or an affiliate (not the Fund) from its own
assets will pay a commission to the Underwriters in connection with sales of the
Shares in this offering. See "UNDERWRITING."
USE OF PROCEEDS
The proceeds of this offering, before deduction of offering expenses,
estimated to be $_____________ (or $_____________ assuming exercise of the
Underwriters' over-allotment option in full), will be invested in accordance
with the Fund's investment objective and policies as soon as practicable, but in
no event, under normal market conditions, later than three months after the
receipt thereof. Pending such investment, the proceeds may be invested in
high-quality, short-term debt securities. The Adviser has agreed to pay all
offering expenses of the Fund that exceed $____ per Share.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
Investment Objective
The Fund's investment objective is to provide a high level of current
income, consistent with preservation of capital. The Fund offers investors the
opportunity to seek a high level of current income by investing in a
professionally managed portfolio comprised primarily of senior secured floating
rate loans ("Senior Loans"), a type of investment typically not available
directly to individual investors. The borrowers of such loans generally will be
corporations, partnerships and other business entities ("Borrowers") which
operate in a variety of industries and geographical regions.
Investment Policies
GENERAL COMPOSITION OF THE FUND. In normal market conditions, at least
70% of the Fund's total assets will be invested in interests in Senior Loans
(either as an original Lender or as a purchaser of an Assignment or
Participation, each as defined below) of domestic or foreign Borrowers (so long
as foreign loans are U.S. dollar-denominated and payments of interest and
repayments of principal are required to be made in U.S. dollars). Senior Loans
in which the Fund will invest generally pay interest at rates which are
redetermined periodically by reference to a base lending rate, plus a premium.
These base lending rates generally are the prime rate offered by one or more
major United States banks (the "Prime Rate"), the London Inter-bank Offered Rate
("LIBOR"), the certificate of deposit ("CD") rate or other base lending rates
used by commercial lenders. It is anticipated that the proceeds of the Senior
Loans in which the Fund will acquire interests primarily will be used to finance
leveraged buyouts, recapitalizations, mergers, acquisitions, stock repurchases,
and, to a lesser extent, to finance internal growth and for other corporate
purposes of Borrowers.
The Fund may invest up to 20% of its total assets in other fixed-income
securities, including: loan interests that have a lower than senior claim on, or
are not secured by any, collateral, investment and non-investment grade
corporate debt securities, mortgage-related securities, and U.S. Government and
U.S. dollar-denominated foreign government or supranational debt securities.
The average dollar-weighted credit rating of the fixed-income
securities held by the Fund will be at least B2 by Moody's, B+ by S&P or an
equivalent rating by another Rating Agency (or the unrated equivalent). The
average dollar-weighted portfolio credit rating will be measured on the basis of
the dollar value of the fixed-income securities purchased and their credit
rating without reference to rating subcategories. Long-term debt rated B by
Moody's is considered by Moody's generally to lack characteristics of a
desirable investment. Moody's applies the numerical modifiers 1, 2 and 3 to show
relative standing within many of the major rating categories. The modifier "2"
indicates a mid-range ranking. Long-term debt rated B by S&P is considered by
S&P to be vulnerable to default but currently to have the capacity to meet
interest and principal payments. The "+" or equivalent designation indicates a
ranking for the security in the higher end of the rating category. A description
of the corporate bond ratings of Moody's and S&P is included as Appendix A to
the Statement of Additional Information.
The Fund may invest up to 10% of its total assets in equity securities,
including those in the form of Depositary Receipts, as well as warrants to
purchase securities. If the Adviser determines that market conditions
temporarily warrant a defensive investment policy, the Fund may invest without
limitation in cash and high quality, short-term debt securities.
The Fund has adopted certain fundamental investment restrictions set
forth in the Statement of Additional Information which may not be changed
without a Shareholder vote. Except for such restrictions, the investment
objective and policies of the Fund may be changed by the Board without
Shareholder action.
CERTAIN CHARACTERISTICS OF SENIOR LOANS. A Senior Loan typically is
originated, negotiated and structured by a U.S. or foreign commercial bank,
insurance company, finance company or other financial institution (the "Agent")
for a lending syndicate of financial institutions ("Lenders"). The Agent
typically administers and enforces the Senior Loan on behalf of the other
Lenders in the syndicate. In addition, an institution, typically but not always
the Agent, holds any collateral on behalf of the Lenders.
Senior Loans include senior secured floating rate loans and
institutionally traded senior secured floating rate debt obligations issued by
an asset-backed pool, and interests therein. Loan interests generally take the
form of direct interests acquired during a primary distribution and also may
take the form of participation interests in, assignments of, or novations of a
Senior Loan acquired in secondary markets. Such loan interests may be acquired
from U.S. or foreign commercial banks, insurance companies, finance companies or
other financial institutions who have made loans or are members of a lending
syndicate or from other holders of loan interests.
The Fund may purchase "Assignments" from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the Loan
Agreement of the assigning Lender and becomes a Lender under the Loan Agreement
with the same rights and obligations as the assigning Lender. Assignments,
however, may be arranged through private negotiations between potential
assignees and potential assignors, and the rights and obligations acquired by
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning Lender.
The Fund also may invest without limit in "Participations."
Participations by the Fund in a Lender's portion of a Senior Loan typically will
result in the Fund having a contractual relationship only with such Lender, not
with the Borrower. As a result, the Fund may have the right to receive payments
of principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by such Lender of such payments
from the Borrower. In connection with purchasing Participations, the Fund
generally will have no right to enforce compliance by the Borrower with the
terms of the loan agreement, nor any rights with respect to any funds acquired
by other Lenders through set-off against the Borrower and the Fund may not
directly benefit from the collateral supporting the Senior Loan in which it has
purchased the Participation. As a result, the Fund may assume the credit risk of
both the Borrower and the Lender selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of such Lender. The selling Lenders and other persons
interpositioned between such Lenders and the Fund with respect to such
Participations likely will conduct their principal business activities in the
banking, finance and financial services industries. Persons engaged in such
industries may be more susceptible to, among other things, fluctuations in
interest rates, changes in the Federal Open Market Committee's monetary policy,
governmental regulations concerning such industries and concerning capital
raising activities generally and fluctuations in the financial markets
generally.
The Fund will acquire Participations only if the Lender selling the
Participation, and any other persons interpositioned between the Fund and the
Lender, at the time of investment has outstanding debt or deposit obligations
rated investment grade (BBB- or A-3 or higher by S&P or Baa3 or P-3 or higher by
Moody's or comparably rated by another Rating Agency) or determined by the
Adviser to be of comparable quality. Similarly, the Fund will purchase an
Assignment or Participation or act as a Lender with respect to a syndicated
Senior Loan only where the Agent with respect to such Senior Loan at the time of
investment has outstanding debt or deposit obligations rated investment grade by
a Rating Agency or determined by the Adviser to be of comparable quality.
Long-term debt rated BBB- by S&P is regarded by S&P as having adequate capacity
to pay interest and repay principal and debt rated Baa3 by Moody's is regarded
by Moody's as a medium grade obligation that is neither highly protected nor
poorly secured. Commercial paper rated A-3 by S&P indicates that S&P believes
such obligations exhibit adequate protection parameters but that adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation and issues of commercial paper rated P-3 by Moody's are considered by
Moody's to have an acceptable ability for repayment of short-term debt
obligations but the effect of industry characteristics and market conditions may
be more pronounced.
Senior Loans typically have the most senior position in a Borrower's
capital structure, although some Senior Loans may hold an equal ranking with
other senior securities of the Borrower. The capital structure of a Borrower may
include Senior Loans, senior and junior subordinated debt, preferred stock and
common stock issued by the Borrower, typically in descending order of seniority
with respect to claims on the Borrower's assets (described below). Senior Loans
are secured by specific collateral.
To borrow money pursuant to a Senior Loan, a Borrower frequently will
pledge, for the term of the Senior Loan, collateral, including: (i) working
capital assets, such as accounts receivable and inventory; (ii) tangible fixed
assets, such as real property, buildings and equipment; (iii) intangible assets,
such as trademarks and patent rights (but excluding goodwill); and (iv) security
interests in shares of stock of subsidiaries or affiliates. In the case of
Senior Loans made to non-public companies, the company's shareholders or owners
may provide collateral in the form of secured guarantees and/or security
interests in assets that they own. In certain instances, a Senior Loan may be
secured only by stock in the Borrower or its subsidiaries. Collateral may
consist of assets that may not be readily liquidated, and no assurance can be
given that the liquidation of such assets would satisfy fully a Borrower's
obligations under a Senior Loan. The Fund will not invest in a Senior Loan
unless, at the time of investment, the Adviser determines that the value of the
collateral equals or exceeds the aggregate outstanding principal amount of the
Senior Loan.
The Fund is not subject to any restrictions with respect to the
maturity of Senior Loans held in its portfolio. Senior Loans typically have a
stated term of between five and nine years, and have rates of interest which
typically are redetermined either daily, monthly, quarterly or semi-annually.
Longer interest rate reset periods generally increase fluctuations in the Fund's
net asset value as a result of changes in market interest rates. The Senior
Loans in the Fund's portfolio will have a dollar-weighted average period until
the next interest rate adjustment of approximately 90 days or less. As a result,
as short-term interest rates increase, interest payable to the Fund from its
investments in Senior Loans should increase, and as short-term interest rates
decrease, interest payable to the Fund from its investments in Senior Loans
should decrease. The Fund may use certain investment practices to, among other
things, shorten the effective interest rate redetermination period of Senior
Loans in its portfolio. Because of prepayments, the average life of Senior Loans
generally has been two to three years.
A Lender may have certain obligations pursuant to a loan agreement
relating to Senior Loans, which may include the obligation to make additional
loans in certain circumstances. The Fund generally will reserve against such
contingent obligations by segregating a sufficient amount of permissible liquid
assets, subject to the Fund's borrowing limitations. The Fund will not purchase
interests in Senior Loans that would require the Fund to make any such
additional loans if such additional loan commitments in the aggregate would
exceed 20% of the Fund's total assets or would cause the Fund to fail to meet
its federal tax diversification requirements.
The Fund may purchase and retain in its portfolio a Senior Loan where
the Borrower has experienced, or may be perceived to be likely to experience,
credit problems, including involvement in or recent emergence from bankruptcy
reorganization proceedings or other forms of debt restructuring. Such
investments may provide opportunities for enhanced income as well as capital
appreciation. At times, in connection with the restructuring of a Senior Loan
either outside of bankruptcy court or in the context of bankruptcy court
proceedings, the Fund may determine or be required to accept equity securities
or junior debt securities in exchange for all or a portion of a Senior Loan.
The Fund also may invest up to 5% of its total assets in structured
notes with rates of return determined by reference to the total rate of return
on one or more Senior Loans referenced in such notes. The rate of return on the
structured note may be determined by applying a multiplier to the rate of total
return on the referenced Senior Loan or Loans. Application of a multiplier is
comparable to the use of financial leverage, a speculative technique. Leverage
magnifies the potential for gain and the risk of loss; as a result, a relatively
small decline in the value of a referenced Senior Loan could result in a
relatively large loss in the value of a structured note. See "Use of Leverage
and Related Risks" below. Structured notes will be treated as Senior Loans for
purposes of the Fund's policy of normally investing at least 70% of its assets
in Senior Loans, and may be subject to the Fund's leverage limitations.
OTHER FIXED-INCOME SECURITIES. The Fund may invest up to 20% of its
total assets in a variety of U.S. and foreign corporate and government debt
obligations that are U.S. dollar-denominated. The Adviser may consider capital
appreciation potential when investing in such income producing debt securities,
which may have fixed, variable or floating rates of interest. These securities
may include interests in loans from Borrowers that have lower than senior claim
on, or are not secured by any, collateral, and other income producing securities
such as investment and non-investment grade corporate debt securities,
mortgage-related securities, zero coupon, pay-in-kind or deferred payment
securities, and U.S. Government and U.S. dollar-denominated foreign government
or supranational debt securities.
EQUITY SECURITIES. The Fund may invest up to 10% of its total assets in
equity securities, such as common stocks and certain preferred stocks, including
those in the form of Depositary Receipts, as well as warrants to purchase
securities.
Use of Leverage and Related Risks
The Fund expects to use leverage through borrowings, including the
issuance of debt securities, or the issuance of preferred shares or through
other transactions, such as reverse repurchase agreements, which have the effect
of financial leverage. The Fund intends to use leverage in an amount up to
approximately 33-1/3% of its total assets (including the amount obtained from
leverage). The Fund generally will not use leverage if the Adviser anticipates
that it would result in a lower return to Shareholders for any significant
amount of time. The Fund also may borrow money as a temporary measure for
extraordinary or emergency purposes, including the payment of dividends and the
settlement of securities transactions which otherwise might require untimely
dispositions of Fund securities.
Leverage creates risks for holders of the Shares, including the
likelihood of greater volatility of net asset value and market price of the
Shares. Although fluctuations in interest rates on borrowings and short-term
debt or in the dividend rates on any preferred shares may adversely affect the
return to the holders of the Shares, the Adviser believes the effect of these
fluctuations should be mitigated when the Fund uses leverage with floating rate
costs, because the Fund's costs of leverage and its portfolio of Senior Loans
ordinarily will have similar floating rates of interest. If the income from the
securities purchased with such funds is not sufficient to cover the cost of
leverage, the return on the Fund will be less than if leverage had not been
used, and therefore the amount available for distribution to Shareholders as
dividends and other distributions will be reduced. The Adviser nevertheless may
determine to maintain the Fund's leveraged position if it deems such action to
be appropriate in the circumstances. During periods when the Fund is using
leverage, the fees paid to the Adviser for investment advisory services will be
higher than if the Fund did not use leverage because the fees paid will be
calculated on the basis of the Fund's total assets, including proceeds from
borrowings for leverage and the issuance of any preferred shares.
Capital raised through leverage will be subject to interest costs or
dividend payments which may exceed the income and appreciation on the assets
purchased. The Fund also may be required to maintain, among other things,
minimum average balances in connection with borrowings or to pay a commitment or
other fee to maintain a line of credit; any such requirements will increase the
cost of borrowing over the stated interest rate. The issuance of preferred
shares involves offering expenses and other costs and may limit the Fund's
freedom to pay dividends on Shares or to engage in other activities. Borrowings
and the issuance of a class of preferred shares having priority over the Shares
create an opportunity for greater return per Share, but at the same time such
leveraging is a speculative technique that will increase the Fund's exposure to
capital risk. Unless the income and appreciation, if any, on assets acquired
with borrowed funds or offering proceeds exceed the cost of borrowing or issuing
additional classes of securities (and other Fund expenses), the use of leverage
will diminish the investment performance of the Shares compared with what it
would have been without leverage.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset coverage and
portfolio composition requirements. The Fund may be subject to certain
restrictions on investments imposed by guidelines of one or more Rating Agencies
which may issue ratings for any corporate debt securities or preferred shares
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed on the Fund
by the 1940 Act. The Adviser does not anticipate that these covenants or
guidelines will impede it from managing the Fund's portfolio in accordance with
the Fund's investment objective and policies.
Under the 1940 Act, the Fund is not permitted to incur indebtedness
unless immediately after such incurrence the Fund has an asset coverage of at
least 300% of the aggregate outstanding principal balance of indebtedness (i.e.,
such indebtedness may not exceed 33-1/3% of the Fund's total assets).
Additionally, under the 1940 Act, the Fund may not declare any dividend or other
distribution upon any class of its capital shares (including the Shares), or
purchase any such capital shares, unless the aggregate indebtedness of the Fund
has, at the time of the declaration of any such dividend or distribution or at
the time of any such purchase, an asset coverage of at least 300% after
deducting the amount of such dividend, distribution, or purchase price, as the
case may be. Under the 1940 Act, the Fund is not permitted to issue preferred
shares unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
shares (i.e., such liquidation value may not exceed 50% of the Fund's total
assets). In addition, the Fund is not permitted to declare any cash dividend or
other distribution on its Shares unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or other distribution) is at least 200% of such liquidation
value. If preferred shares are issued, the Fund intends, to the extent possible,
to purchase or redeem preferred shares from time to time to maintain coverage of
any preferred shares of at least 200%.
The Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount the Fund will borrow or issue, will depend
on many factors, the most important of which are market conditions and interest
rates. Successful use of a leveraging strategy depends on the Adviser's ability
to predict correctly interest rates and market movements, and no assurance can
be given that a leveraging strategy will be successful during any period in
which it is employed.
Assuming the use of leverage in the amount of approximately 33-1/3% of
the Fund's total assets and an annual interest rate on borrowings of ___%
payable on such leverage based on market rates as of the approximate date of
this Prospectus, the annual return that the total assets in the Fund's portfolio
must experience (net of expenses) in order to cover such interest payments would
be ____%. The Fund's actual cost of leverage will be based on market rates at
the time the Fund undertakes a leveraging strategy, and such actual cost of
leverage may be higher or lower than that assumed in the previous example.
The following table is designed to illustrate the effect on the return
to a holder of the Shares of leverage in the amount of approximately 33-1/3% of
the Fund's total assets, assuming hypothetical annual returns of the Fund's
portfolio of minus 10% to plus 10%. As the table shows, leverage generally
increases the return to Shareholders when portfolio return is positive and
greater than the cost of leverage and decreases the return when the portfolio
return is negative or less than the cost of leverage. The figures appearing in
the table are hypothetical and actual returns may be greater or less than those
appearing in the table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Assuming Portfolio Return
(net of expenses)........................ (10)% (5)% 0% 5% 10%
Corresponding Share Return
Assuming 33-1/3% Leverage................ (__)% (__)% (__)% __% __%
</TABLE>
Until the Fund borrows or issues preferred shares, the Shares will not
be leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the Shares
cannot be achieved until the proceeds resulting from the use of leverage have
been invested in accordance with the Fund's investment objective and policies.
Additional Risk Considerations
INTEREST RATE RISK. When interest rates decline, the value of a
portfolio invested in fixed-rate obligations can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed-rate obligations can be expected to decline. Although the Fund's net asset
value will vary, the Fund's management expects the Fund's policy of acquiring
primarily interests in floating rate Senior Loans to minimize fluctuations in
net asset value as a result of changes in market interest rates. However,
because floating rates on Senior Loans only reset periodically, changes in
prevailing interest rates will cause some fluctuation in the Fund's net asset
value. Similarly, a rapid and significant increase in market interest rates or a
change in the relationships between specific interest rates (commonly referred
to as "spread widening") may cause a decline in the Fund's net asset value and
reduce substantially the liquidity of the securities comprising a substantial
portion of the Fund's portfolio. The Fund also may invest in fixed-income
securities with fixed rates of interest, which may lose value in direct response
to market interest rate increases or spread widening.
CREDIT RISK. Senior Loans, like other corporate debt obligations, are
subject to the risk of non-payment of scheduled interest or principal. Such
non-payment would result in a reduction of income to the Fund, a reduction in
the value of the Senior Loan experiencing non-payment and a potential decrease
in the net asset value of the Fund. Although, with respect to Senior Loans, the
Fund generally will invest only in Senior Loans that the Adviser believes are
secured by specific collateral the value of which equals or exceeds the
principal amount of the Senior Loan at the time of initial investment, no
assurance can be given that the liquidation of any such collateral would satisfy
the Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of bankruptcy of a Borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the Borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of the Borrower's bankruptcy.
The Agent generally is responsible for determining that the Lenders have
obtained a perfected security interest in the collateral securing the Senior
Loan. Some Senior Loans in which the Fund may invest are subject to the risk
that a court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such Senior Loans to presently existing or future indebtedness of
the Borrower or take other action detrimental to the holders of Senior Loans,
such as the Fund, including, in certain circumstances, invalidating such Senior
Loans.
Senior Loans in which the Fund will invest may not be rated by a Rating
Agency, will not be registered with the SEC or any state securities commission
and will not be listed on any national securities exchange. Although the Fund
will have access to financial and other information made available to the
Lenders in connection with Senior Loans, the amount of public information
available with respect to Senior Loans generally will be less extensive than
that available for rated, registered or exchange listed securities. Borrowers
may have outstanding debt obligations that are rated below investment grade by a
Rating Agency. Recently, Rating Agencies have begun rating Senior Loans, with
certain Senior Loans being assigned a rating below investment grade. The Fund
will invest in such Senior Loans. Debt securities which are unsecured and rated
below investment grade are viewed by the Rating Agencies as having speculative
characteristics and are commonly known as "junk bonds." Securities rated below
investment grade or unrated securities of comparable quality ("lower quality
securities") are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations (credit risk) and also may be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). The prices of lower quality securities also are more likely to
react to real or perceived developments affecting market and credit risk than
are prices of investment grade quality securities ("higher quality securities"),
which react primarily to movements in the general level of interest rates. A
substantial portion of the Fund's portfolio of Senior Loans and other debt
securities may be lower quality securities issued in connection with mergers,
acquisitions, leveraged buy-outs, recapitalizations and other highly leveraged
transactions, which pose a higher risk of default or bankruptcy of the issuer
than other higher quality securities, particularly during periods of
deteriorating economic conditions and contraction in the credit markets. A
description of the ratings of corporate bonds by Moody's and S&P is included as
Appendix A to the Statement of Additional Information.
Because of the protective features of Senior Loans (typically being
senior and secured by specific collateral), the Adviser believes, based on its
experience, that these ratings do not necessarily reflect the true risk of loss
of principal or interest on a Senior Loan. For example, the Adviser believes
that Senior Loans tend to have more favorable loss recovery rates as compared to
most other types of below investment grade debt obligations. Accordingly, the
Adviser generally does not view ratings of Senior Loans as a determinative
factor in its investment decisions. Investing in Senior Loans, however, does
involve investment risk, and some Borrowers default on their Senior Loan
payments. The Fund will attempt to manage these risks through portfolio
diversification and ongoing analysis and monitoring of Borrowers. As a result,
the Fund will be more dependent on the Adviser's credit analysis abilities than
a fund that invests in other types of debt securities.
EQUITY SECURITIES. Equity securities fluctuate in value, often based on
factors unrelated to the value of the issuer of the securities, and such
fluctuations can be pronounced. Changes in the value of the Fund's investments
will result in changes in the value of its shares and thus the Fund's total
return to investors.
The Fund may invest in the securities of companies that issue lower
quality securities. These securities may be subject to more abrupt or erratic
market movements than the securities of companies that issue higher quality
securities, because the issuers typically are more subject to changes in
earnings and prospects, which in turn are more likely to affect the value of
their securities.
FOREIGN SECURITIES. Although the Fund will only invest in U.S.
dollar-denominated income securities, the Fund may invest in Senior Loans and
other debt securities of non-U.S. issuers. Investment in securities of non-U.S.
issuers involves special risks, including that non-U.S. issuers may be subject
to less rigorous accounting and reporting requirements than U.S. issuers, less
rigorous regulatory requirements, differing legal systems and laws relating to
creditors' rights, the potential inability to enforce legal judgments and the
potential for political, social and economic adversity. The willingness and
ability of sovereign issuers to pay principal and interest on government
securities depends on various economic factors, including among others the
issuer's balance of payments, overall debt level, and cash flow considerations
related to the availability of tax or other revenues to satisfy the issuer's
obligations. Supranational organizations do not have taxing powers, so they are
dependent upon their members' continued support in order to meet interest and
principal payments. The securities of some foreign issuers are less liquid and
at times more volatile than securities of comparable U.S. issuers. Foreign
settlement procedures and trade regulations may involve certain risks (such as
delay in the payment or delivery of securities and interest or in the recovery
of assets held abroad) and expenses not present in the settlement of domestic
investments. Investments may include securities issued by the governments of
lesser-developed countries, which are sometimes referred to as "emerging
markets." There may be a possibility of nationalization or expropriation of
assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, armed conflict and diplomatic developments
which could affect the value of the Fund's investments in certain foreign
countries.
LIQUIDITY RISK. Senior Loans, at present, generally are not readily
marketable and are subject to restrictions on resale. Interests in Senior Loans
generally are not listed on any national securities exchange or automated
quotation system and no active trading market may exist for many of the Senior
Loans in which the Fund will invest. Where a secondary market exists, the market
may be subject to irregular trading activity, wide bid/ask spreads and extended
trade settlement periods. Senior Loans thus are relatively illiquid, which
illiquidity may impair the Fund's ability to realize the full value of its
assets in the event of a voluntary or involuntary liquidation of such assets.
The Fund has no limitation on the amount of its assets which may be invested in
securities which are not readily marketable or are subject to restrictions on
resale. The substantial portion of the Fund's assets invested in Senior Loan
interests may restrict the ability of the Fund to dispose of its investments in
a timely fashion and at a fair price, and could result in capital losses to the
Fund and holders of Shares. The risks associated with illiquidity are
particularly acute in situations where the Fund's operations require cash, such
as if the Fund tenders for its Shares, and may result in the Fund borrowing to
meet short-term cash requirements.
REGULATORY CHANGES. To the extent legislation or state or federal
regulators that regulate certain financial institutions impose additional
requirements or restrictions with respect to the ability of such institutions to
make loans, particularly in connection with highly leveraged transactions, the
availability of Senior Loans for investment by the Fund may be adversely
affected. Further, such legislation or regulation could depress the market value
of Senior Loans held by the Fund.
CLOSED-END FUNDS. The Fund is a closed-end investment company with no
history of operations. It is designed primarily for long-term investors and not
as a trading vehicle. The shares of closed-end investment companies often trade
at a discount from their net asset value, and the Shares also may trade at a
discount from net asset value. The trading price of the Shares may be less than
the initial public offering price, creating a risk of loss for investors
purchasing in the initial public offering of the Shares.
NON-DIVERSIFICATION. The Fund has registered as a "non-diversified"
investment company under the 1940 Act. As a non-diversified investment company,
the Fund, subject to its investment restrictions and federal income tax rules
applicable to the Fund, may invest, with respect to 50% of its total assets,
more than 5% of the value of its assets in the obligations of any single issuer,
including Senior Loans of a single Borrower or single Lender. The Fund, however,
will not invest more than 10% of the value of its assets in securities
(including interests in Senior Loans) of any single Borrower. Moreover, the Fund
may invest more than 10% (but not more than 25%) of its total assets in Senior
Loan interests for which the same intermediate participant is interposed between
the Fund and the Borrower. To the extent the Fund invests a relatively high
percentage of its assets in obligations of a limited number of issuers, the Fund
will be more susceptible than a more widely diversified investment company to
any single corporate, economic, political or regulatory occurrence.
YEAR 2000 COMPLIANCE. The Fund could be adversely affected if the
computer systems used by the Adviser and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The Adviser is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Fund's other major
service providers. At this time, no assurance can be given that these steps will
be sufficient to avoid any adverse impact to the Fund.
In addition, the markets for Senior Loans and other securities in which
the Fund invests may be detrimentally affected by computer failures throughout
the financial services industry beginning on or before January 1, 2000.
Improperly functioning trading systems may result in settlement problems and
liquidity issues. In addition, corporate and governmental data processing errors
may result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.
Special Investment Practices
The Fund may engage in the following investment practices to seek to
enhance income or reduce investment risk, but has no current intention to do so.
INTEREST RATE AND OTHER HEDGING TRANSACTIONS. The Fund may purchase or
sell derivative instruments (which are instruments that derive their value from
another instrument, security or index) to seek to hedge against fluctuations in
securities prices or interest rates. The Fund's transactions in derivative
instruments may include the purchase or sale of futures contracts on securities,
securities indices or other indices, other financial instruments; options on
futures contracts; exchange-traded and over-the-counter options on securities or
indices; index-linked securities; and interest rate swaps. The Fund's
transactions in derivative instruments involve a risk of loss or depreciation
due to: unanticipated adverse changes in securities prices, interest rates, the
other financial instruments' prices; the inability to close out a position;
default by the counterparty; imperfect correlation between a position and the
desired hedge; tax constraints on closing out positions; and portfolio
management constraints on securities subject to such transactions. The loss on
derivative instruments (other than purchased options) may substantially exceed
the Fund's initial investment in these instruments. In addition, the Fund may
lose the entire premium paid for purchased options that expire before they can
be profitably exercised by the Fund. Transaction costs will be incurred in
opening and closing positions in derivative instruments. No assurance can be
given that the Adviser's use of derivative instruments will be advantageous to
the Fund.
The Fund may use interest rate swaps for risk management purposes and
not as a speculative investment and typically would use interest rate swaps to
shorten the average time to interest rate reset of the Fund. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, for example, an exchange of fixed rate
payments for floating rate payments. The use of interest rate swaps is highly
specialized and involves risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and other applicable factors, the investment
performance of the Fund would be less favorable than what it would have been if
this investment technique were never used.
SECURITIES LENDING. The Fund may seek to increase its income by lending
portfolio securities to broker-dealers or other institutional borrowers. During
the existence of a loan, the Fund will continue to receive the equivalent of the
interest paid by the issuer on the securities loaned and will receive a fee, or
all or a portion of the interest on investment of the collateral, if any.
However, the Fund may pay lending fees to such borrowers. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the securities loaned if the borrower of the securities fails
financially. However, the loans will be made only to organizations deemed by the
Adviser to be of good standing and when, in the judgment of the Adviser, the
consideration which can be earned from securities loans of this type, net of
administrative expenses and any finders or other fees, justifies the attendant
risk. The financial condition of the borrower will be monitored by the Adviser
on an ongoing basis. The value of the securities loaned will not exceed 33-1/3%
of the Fund's total assets.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with member banks of the Federal Reserve System or primary dealers in U.S.
Government securities. Under a repurchase agreement, the Fund buys securities at
one price and simultaneously promises to sell back those securities at a higher
price. The Fund's repurchase agreements will provide that the value of the
collateral underlying the repurchase agreement always will be at least equal to
the repurchase price, including any accrued interest earned on the repurchase
agreement, and will be marked to market daily. The repurchase date is usually
within seven days of the original purchase date. In all cases, the Adviser must
be satisfied with the creditworthiness of the other party to the agreement
before entering into a repurchase agreement. In the event of the bankruptcy of
the other party to a repurchase agreement, the Fund might experience delays in
recovering its cash. To the extent that, in the meantime, the value of the
securities the Fund purchased may have declined, the Fund could experience a
loss.
REVERSE REPURCHASE AGREEMENTS. The Fund also may enter into "reverse"
repurchase agreements which involve the sale of securities held and an agreement
to repurchase the securities at an agreed-upon price, date, and interest
payment. Reverse repurchase agreements involve risks similar to those described
above under "--Use of Leverage" and expose the Fund to the credit risk of the
counterparty.
MANAGEMENT OF THE FUND
Board of Trustees
The management of the Fund, including general supervision of the duties
performed by the Adviser, is the responsibility of the Fund's Board under the
laws of The Commonwealth of Massachusetts.
The Adviser
Highland Capital Management, L.P. acts as the Fund's investment adviser
under an Investment Advisory Agreement (the "Advisory Agreement"). The Adviser's
principal office is located at 1150 Two Galleria Tower, 13455 Noel Road LB #45,
Dallas, Texas 75240. Formed in 1993, the Adviser and its affiliates currently
serve as the investment adviser to institutional clients with combined assets
under management of over $_____________, employing strategies substantially
similar to those which the Fund intends to employ.
Under the general supervision of the Fund's Board, the Adviser will
carry out the investment and reinvestment of the assets of the Fund, will
furnish continuously an investment program with respect to the Fund, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. The Adviser will furnish to the Fund investment
advice and office facilities, equipment and personnel for servicing the
investments of the Fund. The Adviser will compensate all Trustees and officers
of the Fund who are members of the Adviser's organization and who render
investment services to the Fund, and will compensate all other Adviser personnel
who provide research and investment services to the Fund. In return for these
services, facilities and payments, the Fund has agreed to pay the Adviser as
compensation under the Advisory Agreement a fee in the amount of ___% of the
average weekly gross assets of the Fund. Gross assets of the Fund will be
calculated by deducting accrued liabilities of the Fund not including the
principal amount of any indebtedness constituting financial leverage.
James Dondero, Mark Okada and Todd Travers are the Fund's principal
portfolio managers and are responsible for day-to-day management of the Fund's
investments. In addition, eight other members of the Adviser's professional
staff of portfolio managers and securities analysts contribute to the investment
management services provided to the Fund. Mr. Dondero may be deemed a "control
person" of the Adviser as such term is defined in the 1940 Act.
Mr. Dondero has been President and Chief Investment Officer of the
Adviser since March 1993. Mr. Dondero graduated from the University of Virginia
(Beta Gamma Sigma) with a B.S. in Accounting and a B.S. in Finance. He is a
Certified Public Accountant, Certified Managerial Accountant and Chartered
Financial Analyst, and is a full member of the New York Society of Security
Analysts.
Mr. Okada has been Executive Vice President of the Adviser since March
1993. He specializes in bank loan and high yield bond investments. He graduated
with honors from UCLA with a B.S. in Economics and B.S. in Psychology. Mr. Okada
is a Chartered Financial Analyst, and is a member of the Dallas Society of
Security Analysts.
Mr. Travers has been a Portfolio Manager of the Adviser since January
1995. He specializes in bank loan, leverage loan and high yield and aviation
asset investments. Before January 1995, he was Senior Financial Analyst at
American Airlines, where he assisted in the development and maintenance of the
company's jet fleet plan. Mr. Travers graduated from Iowa State University with
a B.S. in Industrial Engineering and from Southern Methodist University with an
M.B.A. in Finance. Mr. Travers is a Chartered Financial Analyst, and is a member
of the Dallas Society of Security Analysts.
Investment decisions for the Fund are made independently from those of
other investment vehicles or accounts advised by the Adviser. If, however, such
other investment vehicles or accounts desire to invest in, or dispose of, the
same securities as the Fund, available investments or opportunities for sale
will be allocated equitably to each of them. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Fund or the price paid or received by the Fund.
In addition, the Adviser or one of its affiliates may, in connection
with its activities on behalf of other investment vehicles or accounts, acquire
confidential information concerning an obligor on a Senior Loan; the Adviser may
be prohibited from using this information for the Fund's benefit.
The Fund and the Adviser have adopted Codes of Ethics relating to
personal securities transactions. The Codes permit Adviser personnel to invest
in securities (including securities that may be purchased or held by the Fund)
for their own accounts, subject to certain pre-clearance, reporting and other
restrictions and procedures contained in such Codes.
The Administrator
The Fund has engaged _________ to act as its administrator under an
Administration Agreement (the "Administration Agreement"). Under the
Administration Agreement, the Administrator is responsible for managing the
business affairs of the Fund, subject to the supervision of the Fund's Board.
The Administrator will furnish to the Fund all office facilities, equipment and
personnel for administering the affairs of the Fund. The Administrator's
administrative services include recordkeeping, preparation and filing of
documents required to comply with federal and state securities laws, supervising
the activities of the Fund's custodian and transfer agent, providing assistance
in connection with the Trustees' and shareholders' meetings, providing service
in connection with any repurchase offers and other administrative services
necessary to conduct the Fund's business. In return for these services,
facilities and payments, the Fund is authorized to pay the Administrator as
compensation under the Administration Agreement a fee in the amount of __% of
the average weekly gross assets of the Fund.
DISTRIBUTIONS AND TAXES
The Fund intends to make monthly distributions of net investment
income, after payment of interest on any outstanding borrowings or dividends on
any outstanding preferred shares. The Fund will distribute annually any net
short-term capital gain and any net capital gain (which is the excess of net
long-term capital gain over net short-term capital loss). Distributions to
Shareholders cannot be assured, and the amount of each monthly distribution is
likely to vary. Initial distributions to Shareholders are expected to be paid
approximately [60 days] after the completion of this offering. While there are
any borrowings or preferred shares outstanding, the Fund may not be permitted to
declare any cash dividend or other distribution on its Shares in certain
circumstances. See "DESCRIPTION OF CAPITAL STRUCTURE."
Distributions of the Fund's investment company taxable income
(consisting generally of net investment income and net short-term capital gain)
are taxable to Shareholders as ordinary income, whether paid in cash or
reinvested in additional Shares. Distributions of the Fund's net capital gain
("capital gain dividends"), if any, are taxable to Shareholders at the rates
applicable to long-term capital gains, regardless of the length of time Shares
have been held by Shareholders. Distributions, if any, in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
Shares and, after such adjusted tax basis has been reduced to zero, will
constitute capital gains to such holder (assuming such Shares are held as a
capital asset). See below for a summary of the maximum tax rates applicable to
capital gains (including capital gain dividends).
The Fund will inform Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The Fund's
distributions will not qualify for the dividends-received deduction for
corporations.
Selling Shareholders generally will recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the Shares
and the amount received. If such Shares are held as a capital asset, the gain or
loss will be a capital gain or loss. The maximum tax rate applicable to net
capital gains recognized by individuals and other non-corporate taxpayers is (i)
the same as the maximum ordinary income tax rate for capital assets held for one
year or less or (ii) 20% for capital assets held for more than one year. Any
loss recognized upon a taxable disposition of Shares held for six months or less
will be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such Shares. For purposes of determining
whether Shares have been held for six months or less, the holding period is
suspended for any periods during which the Shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. Any loss
realized on a sale or exchange of Shares will be disallowed to the extent those
Shares are replaced by other Shares within a period of 61 days beginning 30 days
before and ending 30 days after the date of disposition of the Shares (which
could occur, for example, if the Shareholder is a participant in the Plan (as
defined below)). In that event, the basis of the replacement Shares will be
adjusted to reflect the disallowed loss.
An investor should be aware that if Shares are purchased in the open
market shortly before the record date for any dividend (including a capital gain
dividend), the purchase price likely will reflect the value of the distribution
and the investor then would receive a taxable distribution likely to reduce the
trading value of such Shares, in effect resulting in a taxable return of some of
the purchase price. Shareholders that are not liable for tax on their income and
whose Shares are not debt-financed are not required to pay tax on dividends they
receive from the Fund. Taxable distributions to individuals and certain other
non-corporate Shareholders, including those who have not provided their correct
taxpayer identification number and other required certifications, may be subject
to "backup" federal income tax withholding of 31%.
The foregoing briefly summarizes some of the important federal income
tax consequences to Shareholders of investing in Shares and does not address
special tax rules applicable to certain types of investors, such as corporate
and foreign investors, individual retirement accounts and other retirement
plans. There may be other federal, state, local or foreign tax considerations
applicable to a particular investor. Investors should consult their tax
advisers.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), unless
a Shareholder otherwise elects, all distributions of dividends (including all
capital gain dividends) will be automatically reinvested in Shares.
___________________ (the "Plan Agent") serves as agent for the
Shareholders in administering the Plan. Shareholders who elect not to
participate in the Plan will receive all distributions of dividends in cash paid
by check mailed directly to the Shareholder of record (or if the Shares are held
in street or other nominee name, then to the nominee) by _______________ as
disbursing agent. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if received
by the Plan Agent not less than ten days prior to any dividend record date.
Shares will be acquired by the Plan Agent or an independent
broker-dealer for the participants' accounts, depending upon the circumstances
described below, either (i) through receipt of additional previously authorized
but unissued Shares from the Fund ("newly issued shares") or (ii) by purchase of
outstanding Shares on the open market ("open-market purchases") on the
___________________ or elsewhere. If on the payment date for the dividend, the
net asset value per Share is equal to or less than the market price per Share
plus estimated brokerage commissions (such condition being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued Shares on behalf of the participants. The number of newly issued Shares
to be credited to each participant's account will be determined by dividing the
dollar amount of the dividend by the net asset value per Share on the date the
Shares are issued, provided that the maximum discount from the then current
market price per Share on the date of issuance may not exceed 5%. If on the
dividend payment date the net asset value per Share is greater than the market
value plus estimated brokerage commissions (such condition being referred to
herein as "market discount"), the Plan Agent will invest the dividend amount in
Shares acquired on behalf of the participants in open-market purchases.
In the event of a market discount on the dividend payment date, the
Plan Agent will have up to 30 days after the dividend payment date to invest the
dividend amount in Shares acquired in open-market purchases. If, before the Plan
Agent has completed its open-market purchases, the market price of a Share
exceeds the net asset value per Share, the average per Share purchase price paid
by the Plan Agent may exceed the net asset value of the Shares, resulting in the
acquisition of fewer Shares than if the dividend had been paid in newly issued
Shares on the dividend payment date. Therefore, the Plan provides that if the
Plan Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period or if the market discount shifts to a market premium
during the purchase period, the Plan Agent will cease making open-market
purchases and will invest the uninvested portion of the dividend amount in newly
issued Shares.
The Plan Agent maintains all Shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by Shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent on behalf of the Plan
participant, and each Shareholder proxy will include those Shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for Shares held pursuant
to the Plan in accordance with the instructions of the participants.
In the case of Shareholders such as banks, brokers or nominees that
hold Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Shares certified from time to
time by the record Shareholder's name and held for the account of beneficial
owners who participate in the Plan.
No brokerage charges will be incurred with respect to Shares issued
directly by the Fund as a result of dividends payable either in Shares or in
cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open-market purchases in
connection with the reinvestment of dividends.
Shareholders participating in the Plan may receive benefits not
available to Shareholders not participating in the Plan. If the market price
(plus commissions) of the Shares is above their net asset value, participants in
the Plan will receive Shares at less than they could otherwise purchase them and
will have Shares with a cash value greater than the value of any cash
distribution they would have received on their Shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions in Shares with a net asset value greater than the per Share value
of any cash distribution they would have received on their Shares. However,
there may be insufficient Shares available in the market to make distributions
in Shares at prices below the net asset value. Also, since the Fund does not
redeem its Shares, the price on resale may be more or less than the net asset
value.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. Plan
participants do not incur service charges directly; however, the Fund reserves
the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan
Agent at _______________________. Please call 1-800-___-____ between the hours
of 9:00 a.m. and 5:00 p.m. Eastern Standard Time if you have questions regarding
the Plan.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is an unincorporated business trust established under the
laws of The Commonwealth of Massachusetts by an Agreement and Declaration of
Trust dated ______________, 1998 (the "Declaration of Trust"). The Declaration
of Trust provides that the Board may authorize separate classes of shares of
beneficial interest. The Board has authorized an unlimited number of Shares. The
Declaration of Trust also authorizes the Fund to borrow money or otherwise
obtain credit and in this connection issue notes or other evidence of
indebtedness. The Fund intends to hold annual shareholder meetings to the extent
required by the NYSE.
SHARES. The Declaration of Trust permits the Fund to issue an
unlimited number of full and fractional Shares of beneficial interest, $0.001
par value per Share. Each Share represents an equal proportionate interest in
the assets of the Fund with each other Share in the Fund. Holders of Shares will
be entitled to the payment of dividends when, as and if declared by the Board.
The 1940 Act or the terms of any borrowings or preferred shares may limit the
payment of dividends to the holders of Shares. Each whole Share shall be
entitled to one vote as to matters on which it is entitled to vote pursuant to
the terms of the Declaration of Trust on file with the SEC. Upon liquidation of
the Fund, after paying or adequately providing for the payment of all
liabilities of the Fund and the liquidation preference with respect to any
outstanding preferred shares, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the Board may
distribute the remaining assets of the Fund among the holders of the Shares.
While any borrowings or preferred shares are outstanding, the Fund may not be
permitted to declare any cash dividend or other distribution on the Shares,
unless at the time of such declaration, (i) all accrued dividends on preferred
shares or accrued interest on borrowings has been paid and (ii) the value of the
Fund's total assets (determined after deducting the amount of such dividend or
other distribution), less all liabilities and indebtedness of the Fund not
represented by senior securities, is at least 300% of the aggregate amount of
such securities representing indebtedness and at least 200% of the aggregate
amount of securities representing indebtedness plus the aggregate liquidation
value of the outstanding preferred shares (expected to equal the aggregate
original purchase price of the outstanding preferred shares plus redemption
premium, if any, together with any accrued and unpaid dividends thereon, whether
or not earned or declared and on a cumulative basis). In addition to the
requirements of the 1940 Act, the Fund may be required to comply with other
asset coverage requirements as a condition of the Fund obtaining a rating of the
preferred shares from a Rating Agency or as a condition to borrowing money.
These requirements may include an asset coverage test more stringent than under
the 1940 Act. This limitation on the Fund's ability to make distributions on its
Shares could in certain circumstances impair the ability of the Fund to maintain
its qualification for taxation as a regulated investment company. The Fund
intends, however, to the extent possible to purchase or redeem preferred shares
or to repay borrowings from time to time to maintain compliance with such asset
coverage requirements and may pay special dividends to the holders of the
preferred shares in certain circumstances in connection with any such impairment
of the Fund's status as a regulated investment company. See "INVESTMENT
OBJECTIVE, POLICIES AND RISKS" and "DISTRIBUTIONS AND TAXES." Depending on the
timing of any such redemption or repayment, the Fund may be required to pay a
premium in addition to the liquidation preference of the preferred shares or the
principal amount of the borrowings to the holders thereof. See "-- Borrowings"
below.
The Fund may offer additional Shares in the future. Other offerings of
Shares, if made, will require approval of the Board. Any additional offering
will not be sold at a price per Share below the then current net asset value
(exclusive of underwriting discounts and commissions), except in connection with
an offering to existing Shareholders or with the consent of a majority of the
Fund's outstanding Shares. Shares have no preemptive rights.
The Fund generally will not issue share certificates. However, upon
written request to the Fund's transfer agent, a share certificate will be issued
for any or all of the full Shares credited to an investor's account. Share
certificates which have been issued to an investor may be returned at any time.
REPURCHASE OF SHARES AND OTHER DISCOUNT CORRECTIVE Measures. Because
shares of closed-end management investment companies frequently trade at a
discount to their net asset values, the Board has determined that from time to
time it may be in the interest of Shareholders for the Fund to take corrective
actions. The Board, in consultation with the Adviser, will review at least
annually the possibility of open market repurchases and/or tender offers for the
Shares and will consider such factors as the market price of the Shares, the net
asset value of the Shares, the liquidity of the assets of the Fund, effect on
the Fund's expenses, whether such transactions would impair the Fund's status as
a regulated investment company or result in a failure to comply with applicable
asset coverage requirements, general economic conditions and such other events
or conditions which may have a material effect on the Fund's ability to
consummate such transactions. No assurances can be given that the Board, in
fact, will decide to undertake either of these actions or if undertaken, that
such actions will result in the Shares trading at a price which is equal to or
approximates their net asset value. In recognition of the possibility that the
Shares might trade at a discount to net asset value and that any such discount
may not be in the interest of Shareholders, the Board, in consultation with the
Adviser, from time to time may review possible actions to reduce any such
discount.
BORROWINGS. The Declaration of Trust authorizes the Fund, without
prior approval of the Shareholders, to borrow money in an amount up to 33-1/3%
of the Fund's total assets (including the amount borrowed). In this regard, the
Fund may issue notes or other evidence of indebtedness (including bank
borrowings or commercial paper) and may secure any such borrowings by
mortgaging, pledging or otherwise subjecting as security the Fund's assets. In
connection with such borrowing, the Fund may be required to maintain minimum
average balances with the lender or to pay a commitment or other fee to maintain
a line of credit. Any such requirements will increase the cost of borrowing over
the stated interest rate. Under the requirements of the 1940 Act, the Fund,
immediately after any such borrowings, must have an "asset coverage" of at least
300%. With respect to any such borrowing, asset coverage means the ratio which
the value of the total assets of the Fund, less all liabilities and indebtedness
not represented by senior securities (as defined in the 1940 Act), bears to the
aggregate amount of such borrowing represented by senior securities by the Fund.
Certain types of borrowing may result in the Fund being subject to covenants in
credit agreements relating to asset coverages or portfolio composition or
otherwise. Such restrictions may be more stringent than those imposed by the
1940 Act. The rights of lenders to the Fund to receive interest on and repayment
of principal of any such borrowings will be senior to those of the Shareholders,
and the terms of any such borrowings may contain provisions which limit certain
activities of the Fund, including the payment of dividends to Shareholders in
certain circumstances. Further, the terms of any such borrowing may and the 1940
Act does (in certain circumstances) grant to the lenders to the Fund certain
voting rights in the event of default in the payment of interest on or repayment
of principal. In the event that such provisions would impair the Fund's status
as a regulated investment company, the Fund, subject to its ability to liquidate
its relatively illiquid portfolio, intends to repay the borrowings. Any
borrowing will likely rank senior to or pari passu (on the same level as) with
all other existing and future borrowings of the Fund. See "INVESTMENT OBJECTIVE,
POLICIES AND RISKS--Use of Leverage and Related Risks.
PREFERRED SHARES. The Declaration of Trust authorizes the issuance of
an unlimited number of shares of beneficial interest with preference rights,
including preferred shares (the "Preferred Shares"), having a par value of
$0.001 per share, in one or more series, with rights as determined by the Board,
by action of the Board without the approval of the Shareholders.
Under the requirements of the 1940 Act, the Fund must have an "asset
coverage" of at least 200% immediately after the issuance of any Preferred
Shares. Asset coverage means the ratio which the value of the total assets of
the Fund, less all liabilities and indebtedness not represented by senior
securities (as defined in the 1940 Act), bears to the aggregate amount of senior
securities representing indebtedness of the Fund, if any, plus the aggregate
liquidation preference of the Preferred Shares. If the Fund seeks a rating of
the Preferred Shares, asset coverage requirements, in addition to those set
forth in the 1940 Act, may be imposed. The liquidation value of the Preferred
Shares is expected to equal their aggregate original purchase price plus
redemption premium, if any, together with any accrued and unpaid dividends
thereon (on a cumulative basis), whether or not earned or declared. The terms of
the Preferred Shares, including their dividend rate, voting rights, liquidation
preference and redemption provisions, will be determined by the Board (subject
to applicable law and the Declaration of Trust) if and when it authorizes the
Preferred Shares. The Fund may issue Preferred Shares that provide for the
periodic redetermination of the dividend rate at relatively short intervals
through an auction or remarketing procedure, although the terms of the Preferred
Shares also may enable the Fund to lengthen such intervals. At times, the
dividend rate as redetermined on the Fund's Preferred Shares may approach or
exceed the Fund's return after expenses on the investment of proceeds from the
Preferred Shares and the Fund's leverage structure would result in a lower rate
of return to Shareholders than if the Fund were not so structured. However, the
Fund believes that the floating rate nature of Senior Loans in which the Fund
invests helps mitigate against the risks of increased dividend costs as a result
of redetermined market rates adversely impacting the return to Shareholders.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Fund, the terms of any Preferred Shares may entitle the
holders of Preferred Shares to receive a preferential liquidating distribution
(expected to equal the original purchase price per Share plus redemption
premium, if any, together with accrued and unpaid dividends, whether or not
earned or declared and on a cumulative basis) before any distribution of assets
is made to holders of Shares. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of Preferred
Shares would not be entitled to any further participation in any distribution of
assets by the Fund.
SPECIAL VOTING AND ANTI-TAKEOVER PROVISIONS. The Declaration of Trust
includes provisions that could have the effect of limiting the ability of other
entities or persons to acquire control of the Fund, change the composition of
the Board, cause the Fund to engage in certain transactions or induce the Fund
to modify its structure or status under the 1940 Act as a closed-end investment
company. These provisions could have the effect of depriving Shareholders of an
opportunity to sell their Shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Fund. These
provisions may have the effect of discouraging attempts to acquire control of
the Fund, which attempts could have the effect of increasing the expenses of the
Fund and interfering with the normal operation of the Fund. They also promote
continuity and stability and they enhance the Fund's ability to pursue long-term
strategies that are consistent with its investment objective.
The Board is divided into three classes, with the term of one class
expiring at each annual meeting of Shareholders. At each annual meeting, one
class of Trustees is elected to a three-year term. This provision could delay
for up to two years the replacement of a majority of the Board. A Trustee may be
removed from office only for cause by a written instrument signed by the
remaining Trustees or by a vote of the holders of at least two-thirds of the
class of shares of the Fund that elected such Trustee and is entitled to vote on
the matter.
The affirmative vote of at least 75% of the entire Board is required to
authorize the conversion of the Fund from a closed-end to an open-end investment
company. Such conversion also requires the affirmative vote of the holders of at
least 75% of the votes entitled to be cast thereon by Shareholders of the Fund,
unless it is approved by a vote of at least 75% of the Continuing Trustees (as
defined below) in which event such conversion requires the approval of the
holders of a majority of the votes entitled to be cast thereon by the
Shareholders of the Fund. A "Continuing Trustee" is any member of the Board who:
(i) is not a person or affiliate of a person who enters or proposes to enter
into a Business Combination (as defined below) with the Fund (an "Interested
Party") and (ii) who has been a member of the Board for a period of at least 12
months, or has been a member of the Board since ____________, 1999, or is a
successor of a Continuing Trustee who is unaffiliated with an Interested Party
and who was recommended to succeed a Continuing Trustee by a majority of the
Continuing Trustees then on the Board. The affirmative vote of at least 75% of
the votes entitled to be cast thereon by Shareholders of the Fund and the
affirmative vote of at least 75% of the Continuing Trustees will be required to
amend the Declaration of Trust to change any of the provisions in this paragraph
and certain other provisions described in this section.
If approved in the foregoing manner, conversion of the Fund could not
occur until 90 days after the Shareholders' meeting at which such conversion was
approved and also would require at least 30 days' prior notice to all
Shareholders. The composition of the Fund's portfolio as currently contemplated
likely would prohibit the Fund from complying with regulations of the SEC
applicable to open-end investment companies. Accordingly, conversion likely
would require significant changes in the Fund's investment policies and
liquidation of a substantial portion of its relatively illiquid portfolio.
Conversion of the Fund to an open-end investment company also would require the
redemption of any outstanding Preferred Shares and could require the repayment
of borrowings, which would eliminate the leveraged capital structure of the Fund
with respect to the Shares. In the event of conversion, the Shares would cease
to be listed on the NYSE or other national securities exchange or market system.
Shareholders of an open-end investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less such redemption charge, if
any, as might be in effect at the time of a redemption. The Fund expects to pay
all such redemption requests in cash, but intends to reserve the right to pay
redemption requests in a combination of cash or securities. If such partial
payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Fund were converted to an open-end
fund, it is likely that new Shares would be sold at net asset value plus a sales
load.
The Board believes that the closed-end structure is desirable, given
the Fund's investment objective and policies. Investors should assume,
therefore, that it is unlikely that the Board would vote to convert the Fund to
an open-end investment company.
The affirmative vote of at least 75% of the entire Board and the
holders of at least (a) 80% of the votes entitled to be cast thereon by the
Shareholders of the Fund in the case of (iv) and (v) below and (b) in the case
of a Business Combination (as defined below), 662/3% of the votes entitled to be
cast thereon by the Shareholders of the Fund, including at least 662/3% of the
votes entitled to be cast thereon other than votes held by an Interested Party
who is (or whose affiliate is) a party to a Business Combination (as defined
below) or an affiliate or associate of the Interested Party, are required to
authorize any of the following transactions:
(i) merger, consolidation or statutory share exchange of the Fund with
or into any other person;
(ii) issuance or transfer by the Fund (in one or a series of
transactions in any 12-month period) of any securities of the Fund to any person
or entity for cash, securities or other property (or combination thereof) having
an aggregate fair market value of $1,000,000 or more, excluding sales of debt
securities of the Fund in a public or private offering, sales of other
securities of the Fund in connection with a public offering, issuances of
securities of the Fund pursuant to a dividend reinvestment plan adopted by the
Fund, issuances of securities of the Fund upon the exercise of any stock
subscription rights distributed by the Fund and portfolio transactions effected
by the Fund in the ordinary course of business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund (in one or a series of transactions in any 12-month
period) to or with any person or entity of any assets of the Fund having an
aggregate fair market value of $1,000,000 or more except for portfolio
transactions (including pledges of portfolio assets in connection with
borrowings and debt securities) effected by the Fund in the ordinary course of
its business (transactions within clauses (i), (ii) and (iii) above being known
individually as a "Business Combination");
(iv) any voluntary liquidation or dissolution of the Fund or an
amendment to the Fund's Declaration of Trust to terminate the Fund's existence;
or
(v) unless the 1940 Act or federal law requires a lesser vote, any
shareholder proposal as to specific investment decisions made or to be made with
respect to the Fund's assets as to which shareholder approval is required under
federal or Massachusetts law, including a change in investment objective.
However, the voting requirements described above will not be required
with respect to a Business Combination if it is approved by a vote of at least
75% of the Continuing Trustees, or certain pricing and other conditions
specified in the Declaration of Trust are met. In such cases, depending upon
whether a shareholder vote would be required under Massachusetts law without
regard to the provisions of the Declaration of Trust, either (i) a majority of
the votes entitled to be cast by the shareholders will be sufficient to
authorize the transaction, or (ii) no shareholder vote will be required.
Further, with respect to a transaction described in (iv) above, if it is
approved by a vote of least 75% of the Continuing Trustees, a majority of the
votes entitled to be cast by the shareholders will be sufficient to authorize
the transaction.
The Fund's By-Laws contain provisions the effect of which is to prevent
matters initiated by shareholders, including nominations of Trustees, from being
considered at a shareholders' meeting where the Fund has not received notice of
the matters generally at least 60 but no more than 90 days prior to the date of
the meeting. Further, in order for the shareholders of the Fund to call a
special meeting, the By-Laws require that shareholders holding at least a
majority of the votes required to be cast at the meeting make a request in
writing to the Secretary of the Fund. Shareholders also would be responsible for
certain costs associated with any such meeting.
The Board of Directors has determined that the foregoing voting
requirements, which are generally greater than the minimum requirements under
Massachusetts law and the 1940 Act, are in the best interest of the Fund's
shareholders generally. Reference should be made to the Declaration of Trust on
file with the SEC for the full text of these provisions.
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through as
their representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions of an Underwriting Agreement with the Fund and the
Adviser (the "Underwriting Agreement"), to purchase from the Fund the number of
Shares set forth opposite their respective names. The Underwriters are committed
to purchase all of such Shares if any are purchased.
UNDERWRITER NUMBER OF SHARES
[To Come]
The Fund has granted to the Underwriters an option, exercisable for __
days from the date of this Prospectus to purchase up to an additional
____________ Shares to cover over-allotments, if any, at the initial offering
price. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the Shares offered hereby. To
the extent that the Underwriters exercise this option, each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase an
additional number of Shares proportionate to such Underwriter's initial
commitment.
As set forth in the notes to the table on the cover page of this
Prospectus, the Adviser or an affiliate (not the Fund) from its own assets has
agreed to pay a commission to the Underwriters in the amount of $____ per Share
(____% of the public offering price per Share) or an aggregate amount of
$________ ($________ assuming full exercise of the over-allotment option) for
all Shares covered by this Prospectus. Such payment will be the legal obligation
of the Adviser or an affiliate and made out of its own assets and will not in
any way represent an obligation of the Fund or its Shareholders. The
Representatives have advised the Fund that the Underwriters may pay up to $___
per Share from such payment received from the Adviser to selected dealers who
sell the Shares and that the Underwriters and such dealers may reallow a
concession of up to $___ per Share to certain other dealers who sell Shares. The
Adviser (or an affiliate) has agreed to pay all offering expenses of the Fund
that exceed $___ per share. Offering expenses include $____________ payment to
the Underwriters in partial reimbursement of their expenses.
Prior to this offering, there has been no public market for the Shares
or any other securities of the Fund. The Fund intends to apply to list its
Shares on the NYSE under the symbol "___." To meet the requirements for listing
the Shares on the NYSE, the Underwriters have undertaken to sell lots of 100 or
more Shares to a minimum of 2,000 beneficial holders. The minimum investment
requirement is 100 Shares ($1,000).
The Fund and the Adviser have each agreed to indemnify the several
Underwriters for or to contribute to the losses arising out of certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Underwriters may take certain actions to discourage short-term
trading of Shares during a period of time following the initial offering date.
Included in these actions is the withholding of the concession and other
payments to dealers in connection with Shares which were sold by such dealers
and which are repurchased for the account of the Underwriters during such
period. In addition, physical delivery of certificates representing Shares is
required to transfer ownership of Shares for a certain period. Until the
distribution of Shares is completed, rules of the SEC may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Shares. As an exception to these rules, the Underwriters are permitted to engage
in certain transactions that stabilize the price of the Shares. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Shares. If the Underwriters create a short position
in the Shares in connection with the offering, i.e., if they sell more Shares
than are set forth on the cover page of this Prospectus, then the Underwriters
may reduce that short position by purchasing Shares in the open market. The
Underwriters may also elect to reduce any short position by exercising all or a
part of the over-allotment option described above. In general, purchases of a
security for the purpose of stabilization or to reduce a short position could
cause the price of the security to be higher than it might be in the absence of
such purchases. In addition, the Underwriters may impose "penalty bids" under
contractual arrangements with dealers participating in the offering whereby it
may reclaim the selling concession with respect to Shares distributed in the
offering but subsequently purchased for the account of the Underwriters in the
open market. Neither the Fund nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Shares. In addition, neither the
Fund nor the Underwriters make any representation that the Underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Under the terms of and subject to the conditions of the Underwriting
Agreement, the Underwriters are committed to purchase and pay for all Shares
offered hereby if any are purchased. The Underwriting Agreement provides that it
may be terminated at or prior to the closing date for the purchase of the Shares
if, in the judgment of the Representatives, payment for the delivery of the
Shares is rendered impracticable or inadvisable because (1) trading in the
equity securities of the Fund is suspended by the SEC, by an exchange that lists
the Shares, or by the Nasdaq National Market ("Nasdaq"), (2) trading in
securities generally on the New York Stock Exchange or Nasdaq shall have been
suspended or limited or minimum or maximum prices shall have been generally
established on such exchange or over-the-counter market, (3) additional material
governmental restrictions, not in force on the date of the Underwriting
Agreement, have been imposed upon trading in securities generally or trading in
securities generally has been suspended on any U.S. securities exchange, (4) a
general banking moratorium has been established by Federal or New York
authorities, or (5) any material adverse change in the financial or securities
markets in the United States or in political, financial or economic conditions
in the United States or any outbreak or material escalation of hostilities or
other calamity or crisis occurs, the effect of which is such as to make it
impracticable to market any or all of the Shares. The Underwriting Agreement
also may be terminated if any of the conditions specified in the Underwriting
Agreement have not been fulfilled when and as required by such agreement.
The Fund anticipates that the Representatives and certain other
Underwriters from time to time may act as brokers or dealers in connection with
the execution of its portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as such brokers while
they are Underwriters.
[SHAREHOLDER SERVICING AGENT,] CUSTODIAN AND TRANSFER AGENT
[Pursuant to a Shareholder Servicing Agreement between _______________
(the "Shareholder Servicing Agent") and the Adviser, the Shareholder Servicing
Agent will (i) undertake to make public information pertaining to the Fund on an
ongoing basis and to communicate to investors and prospective investors the
Fund's features and benefits (including periodic seminars or conference calls,
responses to questions from current or prospective shareholders and specific
shareholder contact where appropriate); (ii) make available to investors and
prospective investors market price, net asset value, yield and other information
regarding the Fund, if reasonably obtainable, for the purpose of maintaining the
visibility of the Fund in the investor community; (iii) at the request of the
Adviser, provide certain economic research and statistical information and
reports, if reasonably obtainable, on behalf of the Fund, and consult with
representatives and Trustees of the Fund in connection therewith, which
information and reports shall include: (a) statistical and financial market
information with respect to the Fund's market performance and (b) comparative
information regarding the Fund and other closed-end management investment
companies with respect to (1) the net asset value of their respective shares,
(2) the respective market performance of the Fund and such other companies and
(3) other relevant performance indicators; and (iv) at the request of the
Adviser, provide information to and consult with the Board with respect to
applicable modifications to dividend policies or capital structure,
repositioning or restructuring of the Fund, conversion of the Fund to an open-
end investment company, liquidation or merger; provided, however, that under the
terms of the Shareholder Servicing Agreement, the Shareholder Servicing Agent is
not obligated to render any opinions, valuations or recommendations of any kind
or to perform any such similar services.
For these services, the Adviser will pay the Shareholder Servicing
Agent a fee equal on an annual basis to __% of the Fund's average weekly gross
assets, payable in arrears at the end of each calendar month. Under the terms of
the Shareholder Servicing Agreement, the Shareholder Servicing Agent is relieved
from liability to the Adviser for any act or omission in the course of its
performances under the Shareholder Servicing Agreement in the absence of gross
negligence or willful misconduct by the Shareholder Servicing Agent. The
Shareholder Servicing Agreement will continue for an initial term of two years
and thereafter for successive one-year periods unless terminated by either party
upon 60 days' written notice.]
_________________ (the "Custodian"), located at ___________________, is
the Fund's custodian and will maintain custody of the securities and cash of the
Fund. The Custodian maintains the Fund's general ledger and computes net asset
value per share at least weekly. The Custodian also attends to details in
connection with the sale, exchange, substitution, transfer and other dealings
with the Fund's investments, and receives and disburses all funds. The Custodian
also assists in preparation of shareholder reports and the electronic filing of
such reports with the SEC.
_____________________, located at _______________________, is the
Fund's transfer agent and dividend disbursing agent.
LEGAL OPINIONS
It is expected that certain legal matters in connection with the
Shares offered hereby will be passed upon for the Fund by Stroock & Stroock &
Lavan LLP, and for the Underwriters by ----------------------.
ADDITIONAL INFORMATION
The Prospectus and the Statement of Additional Information do not
contain all of the information set forth in the Registration Statement that the
Fund has filed with the SEC. The complete Registration Statement may be obtained
from the SEC upon payment of the fee prescribed by its rules and regulations.
The Statement of Additional Information can be obtained without charge by
calling 1-800-___-____.
Statements contained in this Prospectus 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 this Prospectus forms
a part, each such statement being qualified in all respects by such reference.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
------
Additional Investment Information and Restrictions................... B-
Trustees and Officers................................................ B-
Investment Advisory and Other Services............................... B-
Determination of Net Asset Value..................................... B-
Portfolio Trading.................................................... B-
Taxes................................................................ B-
Other Information.................................................... B-
Auditors............................................................. B-
Independent Auditors Report.......................................... B-
Statement of Assets and Liabilities.................................. B-
Appendix A: Ratings of Corporate Bonds............................... B-
===========================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED IN THIS PROSPECTUS OR
INCORPORATED BY REFERENCE HEREIN. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH DIFFERENT INFORMATION. THE FUND IS NOT OFFERING ITS SHARES IN ANY STATE
WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN
THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT
COVER.
----------------
Prospectus Summary..............................................
Fund Expenses...................................................
The Fund........................................................
Use of Proceeds.................................................
Investment Objective, Policies and Risks........................
Management of the Fund..........................................
Distributions and Taxes.........................................
Dividend Reinvestment Plan......................................
Description of Capital Structure................................
Underwriting....................................................
[Shareholder Servicing Agent,] Custodian
and Transfer Agent............................................
Legal Opinions..................................................
Additional Information..........................................
Table of Contents of the Statement of
Additional Information........................................
UNTIL ____________, 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===========================================================================
[HIGHLAND CAPITAL LOGO]
HIGHLAND CAPITAL
FIXED INCOME FUND
-----------------------------
PROSPECTUS
-----------------------------
[List of Underwriters To Come]
---------------------------
-----------------, 1999
===========================================================================
SUBJECT TO COMPLETION, DATED DECEMBER ___, 1998
STATEMENT OF ADDITIONAL INFORMATION
______________, 1999
HIGHLAND CAPITAL FIXED INCOME FUND
1150 Two Galleria Tower
13455 Noel Road LB #45
Dallas, TX 75240
(___) ___-____
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS.........................B-2
TRUSTEES AND OFFICERS......................................................B-9
INVESTMENT ADVISORY AND OTHER SERVICES.....................................B-11
DETERMINATION OF NET ASSET VALUE...........................................B-12
PORTFOLIO TRADING..........................................................B-13
TAXES......................................................................B-15
OTHER INFORMATION..........................................................B-16
AUDITORS...................................................................B-17
INDEPENDENT AUDITORS' REPORT...............................................B-18
STATEMENT OF ASSETS AND LIABILITIES........................................B-19
APPENDIX A: RATINGS OF CORPORATE BONDS....................................B-20
- ------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY THE
PROSPECTUS OF HIGHLAND CAPITAL FIXED INCOME FUND (THE "FUND") DATED
______________, 1999, AS SUPPLEMENTED FROM TIME TO TIME, WHICH IS INCORPORATED
HEREIN BY REFERENCE. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR CALLING THE FUND AT 1-800-___-___.
Capitalized terms used in this Statement of Additional Information and
not otherwise defined have the meanings given them in the Fund's Prospectus.
[Left Side Margin on Cover Page]
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THE FUND'S SHARES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE FUND'S SHARES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
LENDING FEES. In the process of buying, selling and holding Senior
Loans, the Fund may receive and/or pay certain fees. These fees are in addition
to interest payments received and may include facility fees, commitment fees,
commissions and prepayment penalty fees. When the Fund buys a Senior Loan, it
may receive a facility fee and, when it sells a Senior Loan, it may pay a
facility fee. On an ongoing basis, the Fund may receive a commitment fee based
on the undrawn portion of the underlying line of credit portion of a Senior
Loan. In certain circumstances, the Fund may receive a prepayment penalty fee
upon the prepayment of a Senior Loan by a Borrower. Other fees received by the
Fund may include covenant waiver fees and covenant modification fees.
BORROWER COVENANTS. A Borrower must comply with various restrictive
covenants contained in a loan agreement or note purchase agreement between the
Borrower and the Lender or lending syndicate (the "Loan Agreement"). In addition
to requiring the scheduled payment of interest and principal, these covenants
may include restrictions on dividend payments and other distributions to
stockholders, provisions requiring the Borrower to maintain specific minimum
financial ratios, and limits on total debt. In addition, the Loan Agreement may
contain a covenant requiring the Borrower to prepay the Senior Loan with any
free cash flow. Free cash flow is generally defined as net cash flow after
scheduled debt service payments and permitted capital expenditures, and includes
the proceeds from asset dispositions or sales of securities. A breach of a
covenant which is not waived by the Agent, or by the lenders directly, as the
case may be, is normally an event of acceleration; that is, the Agent, or the
lenders directly, as the case may be, has the right to call the outstanding
Senior Loan. The typical practice of an Agent or a Lender in relying exclusively
or primarily on reports from the Borrower may involve a risk of fraud by the
Borrower. In the case of a Senior Loan in the form of a Participation, the
agreement between the buyer and seller may limit the rights of the holder of a
Senior Loan to vote on certain changes which may be made to the Loan Agreement,
such as waiving a breach of a covenant. However, the holder of the
Participation, in almost all cases, will have the right to vote on certain
fundamental issues such as changes in principal amount, payment dates and
interest rate.
ADMINISTRATION OF LOANS. In a typical Senior Loan, the Agent
administers the terms of the Loan Agreement. In such cases, the Agent is
normally responsible for the collection of principal and interest payments from
the Borrower and the apportionment of these payments to the credit of all
institutions which are parties to the Loan Agreement. The Fund generally will
rely upon the Agent or an intermediate participant to receive and forward to the
Fund its portion of the principal and interest payments on the Senior Loan.
Furthermore, unless under the terms of a Participation Agreement the Fund has
direct recourse against the Borrower, the Fund will rely on the Agent and the
other members of the lending syndicate to use appropriate credit remedies
against the Borrower. The Agent typically is responsible for monitoring
compliance with covenants contained in the Loan Agreement based upon reports
prepared by the Borrower. The seller of the Senior Loan usually does, but is
often not obligated to, notify holders of Senior Loans of any failures of
compliance. The Agent may monitor the value of the collateral and, if the value
of the collateral declines, it may accelerate the Senior Loan, give the Borrower
an opportunity to provide additional collateral or seek other protection for the
benefit of the participants in the Senior Loan. The Agent is compensated by the
Borrower for providing these services under a Loan Agreement, and such
compensation may include special fees paid upon structuring and funding the
Senior Loan and other fees paid on a continuing basis. With respect to Senior
Loans for which the Agent does not perform such administrative and enforcement
functions, the Fund will perform such tasks on its own behalf, although a
collateral bank typically will hold any collateral on behalf of the Fund and the
other lenders pursuant to the applicable Loan Agreement.
A financial institution's appointment as Agent usually may be
terminated in the event that it fails to observe the requisite standard of care
or becomes insolvent, enters Federal Deposit Insurance Corporation ("FDIC")
receivership, or, if not FDIC insured, enters into bankruptcy proceedings. A
successor Agent would generally be appointed to replace the terminated Agent,
and assets held by the Agent under the Loan Agreement should remain available to
holders of Senior Loans. However, if assets held by the Agent for the benefit of
the Fund were determined to be subject to the claims of the Agent's general
creditors, the Fund might incur certain costs and delays in realizing payment on
a Senior Loan, or suffer a loss of principal and/or interest. In situations
involving other intermediate participants similar risks may arise.
PREPAYMENTS. Senior Loans usually require, in addition to scheduled
payments of interest and principal, the prepayment of the Senior Loan from free
cash flow, as defined above. The degree to which Borrowers prepay Senior Loans,
whether as a contractual requirement or at their election, may be affected by
general business conditions, the financial condition of the Borrower and
competitive conditions among lenders, among others. As such, prepayments cannot
be predicted with accuracy. Upon any prepayment, the actual outstanding debt on
which the Fund derives interest income will be reduced. However, the Fund may
receive both a prepayment penalty fee from the prepaying Borrower and a facility
fee upon the purchase of a new Senior Loan with the proceeds from the prepayment
of the former. Prepayments generally should not materially affect the Fund's
performance because the Fund should be able to reinvest prepayments in other
Senior Loans that have similar or identical yields and because receipt of such
fees may mitigate any adverse impact on the Fund's yield.
COMPARISON OF LENDING RATES. The following table is intended to
provide investors with a comparison of short-term money market rates, a
representative base commercial lending rate, and a representative indicator of
the premium over such base lending rate for Senior Loans. The representative
indicator shown below is derived from the DLJ Leveraged Loan Index (the
"Index"), which was designed in January 1992 to mirror the investible universe
of the market for Senior Loans. The Index includes approximately $58 billion of
Senior Loans and new Senior Loan issues are added when they meet certain
criteria. The Index is an unmanaged index and, although Highland Capital
Management, L.P. (the "Adviser") believes that the spreads over LIBOR reported
in connection with the determination of the Index (which are an average of the
contractual spreads set forth in the loan agreements relating to the Senior
Loans included in the Index) are representative of the historical average
spreads in the overall market for Senior Loans, the Fund will have no direct
investment in, nor will its performance be indicative of, the Index. The
following comparison should not be considered a representation of future money
market rates, spreads of Senior Loans over base reference rates nor what an
investment in the Fund may earn or what an investor's yield or total return may
be in the future.
COMPARISON OF MONEY MARKET RATE,
LIBOR AND SENIOR LOANS
<TABLE>
<CAPTION>
Jan. July Jan. July Jan. July Jan. July Jan. July Jan. July Jan. July
1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3-Month Treasury
Bill(1)................ 3.91% 3.28% 3.07% 3.11% 3.04% 4.46% 5.90% 5.59% 5.15% 5.30% 5.18% 5.19% 5.18% 5.09%
3-Month
LIBOR(2)............... 4.19 3.44 3.25 3.31 3.25 4.88 6.31 5.88 5.38 5.69 5.56 5.75 5.65 5.69
Average Senior Loan
Spreads Plus 3-Month
LIBOR(3)............... 6.34 5.68 5.72 5.77 5.69 7.19 8.65 8.15 7.69 8.07 8.03 8.10 8.02 8.02
- ---------------
(1) U.S. Treasury bills offer a U.S. Government guarantee as to the timely
payment of interest and repayment of principal at maturity. Source:
Bloomberg.
(2) The LIBOR is used worldwide as a base for loans to large commercial
and industrial companies. Source: Bloomberg.
(3) Derived from reported average Senior Loan spreads in the Index. The
data do not reflect fluctuations in the principal value of Senior
Loans included in the Index. Source: Donaldson, Lufkin & Jenrette.
</TABLE>
OTHER INFORMATION REGARDING SENIOR LOANS. From time to time, the
Adviser and its affiliates may borrow money from various banks in connection
with their business activities. These banks also may sell Senior Loans to or
acquire them from the Fund or may be intermediate participants with respect to
Senior Loans in which the Fund owns interests. Such banks also may act as Agents
for Senior Loans held by the Fund.
The Fund may acquire interests in Senior Loans which are designed to
provide temporary or "bridge" financing to a Borrower pending the sale of
identified assets or the arrangement of longer-term loans or the issuance and
sale of debt obligations. The Fund also may invest in Senior Loans of Borrowers
who have obtained bridge loans from other parties. A Borrower's use of bridge
loans involves a risk that the Borrower may be unable to locate permanent
financing to replace the bridge loan, which may impair the Borrower's perceived
creditworthiness.
To the extent that collateral consists of the stock of the Borrower's
subsidiaries or other affiliates, the Fund will be subject to the risk that this
stock will decline in value. Such a decline, whether as a result of bankruptcy
proceedings or otherwise, could cause the Senior Loan to be undercollateralized
or unsecured. Most credit agreements do not contain any formal requirement to
pledge additional collateral. In addition, the Fund may invest in Senior Loans
guaranteed by, or fully secured by assets of, shareholders or owners, even if
the Senior Loans are not otherwise collateralized by assets of the Borrower;
provided, however, that such guarantees are fully secured. There may be periods
when the principal asset held by a Borrower is the stock of a related company,
which may not legally be pledged to secure a Senior Loan. On occasions when such
stock cannot be pledged, the Senior Loan will be unsecured until the stock can
be pledged or is exchanged for or replaced by other assets, which will be
pledged as security for the Senior Loan. However, the Borrower's ability to
dispose of such securities, other than in connection with such pledge or
replacement, will be strictly limited for the protection of the holders of
Senior Loans. During any such period in which the Senior Loan is unsecured, such
Senior Loans will not be treated as secured Senior Loans for purposes of the
Fund's policy of investing in normal market conditions at least 70% of its total
assets in Senior Loans.
If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Fund's security interest in the loan collateral or subordinate
the Fund's rights under the Senior Loan to the interests of the Borrower's
unsecured creditors. Such action by a court could be based, for example, on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the loan collateral to
the Fund. For Senior Loans made in connection with a highly leveraged
transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Loan were not received or retained by the
Borrower, but were instead paid to other persons (such as shareholders of the
Borrower) in an amount which left the Borrower insolvent or without sufficient
working capital. There also are other events, such as the failure to perfect a
security interest due to faulty documentation or faulty official filings, which
could lead to the invalidation of the Fund's security interest in loan
collateral. If the Fund's security interest in loan collateral is invalidated or
the Senior Loan is subordinated to other debt of a Borrower in bankruptcy or
other proceedings, it is unlikely that the Fund would be able to recover the
full amount of the principal and interest due on the Loan.
INTEREST RATE SWAPS. The Fund may enter into interest rate swaps on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities. For example, if the Fund holds a Senior
Loan with an interest rate that is reset only once each year, it may swap the
right to receive interest at this fixed rate for the right to receive interest
at a rate that is reset daily. Such a swap position would offset changes in the
value of the Senior Loan because of subsequent changes in interest rates. It
also would protect the Fund from a decline in the value of the Senior Loan due
to rising interest rates, but would limit its ability to benefit from falling
interest rates.
The Fund will enter into interest rate swaps only on a net basis; that
is, the two payment streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. Inasmuch as these
transactions are entered into for good faith hedging and risk management
purposes and because a segregated account will be used, the Fund will not treat
them as being subject to the Fund's borrowing restrictions. The net amount of
the excess, if any, of the Fund's obligations over its entitlements with respect
to each interest rate swap will be accrued on a daily basis and an amount of
cash or liquid securities having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by the Fund's
custodian. The Fund will not enter into any interest rate swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the other
party thereto is considered to be investment grade by the Adviser. If the other
party to such a transaction defaults, the Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with the markets for other similar instruments which are traded in
the interbank market.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make or receive. Since interest rate swaps
are individually negotiated, the Fund expects to achieve an acceptable degree of
correlation between its rights to receive interest on Senior Loans and its
rights and obligations to receive and pay interest pursuant to interest rate
swaps.
CREDIT DERIVATIVES. The Fund may engage in credit derivative
transactions. Default price risk derivatives are linked to the price of
reference securities or loans after a default by the issuer or borrower,
respectively. Market spread derivatives are based on the risk that changes in
market factors, such as credit spreads, can cause a decline in the value of a
security, loan or index. There are three basic transactional forms for credit
derivatives; swaps, options and structured instruments. The use of credit
derivatives is a highly specialized activity which involves strategies and risks
different from those associated with ordinary portfolio security transactions.
If the Adviser is incorrect in its forecasts of default risks, market spreads or
other applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these techniques were not used.
Moreover, even if the Adviser is correct in its forecasts, there is a risk that
a credit derivative position may correlate imperfectly with the price of the
asset or liability being hedged.
CORPORATE DEBT SECURITIES. The Fund may invest in corporate debt
securities, which include corporate bonds, debentures, notes and other similar
instruments, including convertible securities. Debt securities may be acquired
with warrants attached. Corporate income-producing securities also may include
forms of preferred or preference stock. The rate of interest on a corporate debt
security may be fixed, floating or variable, and may vary inversely with respect
to a reference rate. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities,
which may be converted at either a stated price or stated rate into underlying
shares of common stock. Convertible securities have characteristics similar to
both fixed-income and equity securities. Convertible securities generally are
subordinated to other similar but non-convertible securities of the same issuer,
although convertible bonds, as corporate debt obligations, enjoy seniority in
right of payment to all equity securities, and convertible preferred stock is
senior to common stock, of the same issuer. Because of the subordination
feature, however, convertible securities typically have lower ratings than
similar non-convertible securities.
ZERO COUPON, PAY-IN-KIND OR DEFERRED PAYMENT SECURITIES. The Fund may
invest in zero coupon, pay-in-kind or deferred payment securities. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. While interest
payments are not made on such securities, holders of such securities are deemed
annually to have received "phantom income." Because the Fund will distribute
this "phantom income" to Shareholders, to the extent that Shareholders elect to
receive dividends in cash rather than reinvesting such dividends in additional
Shares, the Fund will have fewer assets with which to purchase income-producing
securities. The Fund accrues income with respect to these securities prior to
the receipt of cash payments. Pay-in-kind securities are securities that have
interest payable by delivery of additional securities. Upon maturity, the holder
is entitled to receive the aggregate par value of the securities. Deferred
payment securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
deferred payment securities are subject to greater fluctuation in value and may
have less liquidity in the event of adverse market conditions than comparably
rated securities paying cash interest at regular interest payment periods.
MORTGAGE-RELATED SECURITIES. The Fund may invest in mortgage-related
securities, including (i) collateralized mortgage obligations, (ii) subordinated
mortgage backed securities, (iii) commercial mortgage backed securities, (iv)
agency securities, such as those issued or guaranteed as to principal or
interest by the Government National Mortgage Association, Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation, (v)
mortgage pass-through securities, (vi) whole loans and (vii) interest only and
principal only securities. These securities may have fixed, floating or variable
interest rates, including interest rates that change inversely to changes in
interest rates and interest rates that move directly or inversely to a multiple
of a specific index, which may result in a form of leverage. Mortgage-related
securities frequently are complex derivative securities that are subject to
credit risk, interest rate risk and prepayment risk, which may result in the
Fund suffering a loss on these securities.
BANK OBLIGATIONS. The Fund may purchase certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks, foreign subsidiaries or foreign branches of domestic banks,
domestic and foreign branches of foreign banks, domestic savings and loan
associations and other banking institutions. With respect to such securities
issued by foreign subsidiaries or foreign branches of domestic banks, and
domestic and foreign branches of foreign banks, the Fund may be subject to
additional investment risks that are different in some respects from those
incurred by a fund which invests only in debt obligations of U.S. domestic
issuers.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate.
Bankers' acceptances are credit instruments evidencing the obligation
of a bank to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and the drawer to pay the fact amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
INVESTMENT RESTRICTIONS. The following investment restrictions of the
Fund are designated as fundamental policies and as such cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, which as used in this Statement of Additional Information
means the lesser of (a) 67% of the shares of the Fund present or represented by
proxy at a meeting if the holders of more than 50% of the shares are present or
represented at the meeting or (b) more than 50% of the shares of the Fund. As a
matter of fundamental policy, the Fund may not:
(1) Borrow money, except as permitted by the 1940
Act;
(2) Issue senior securities, as defined in the 1940
Act, other than (i) preferred shares which
immediately after issuance will have asset
coverage of at least 200%, (ii) indebtedness
which immediately after issuance will have asset
coverage of at least 300%, or (iii) the
borrowings permitted by investment restriction
(1) above;
(3) Purchase securities on margin (but the Fund may
obtain such short-term credits as may be
necessary for the clearance of purchases and
sales of securities). The purchase of loan
interests, securities or other investment assets
with the proceeds of a permitted borrowing or
securities offering will not be deemed to be the
purchase of securities on margin;
(4) Underwrite securities issued by other persons, except
insofar as it technically may be deemed to be an
underwriter under the Securities Act of 1933 in
selling or disposing of a portfolio investment;
(5) Make loans to other persons, except by (a) the
acquisition of loan interests, debt securities
and other obligations in which the Fund is
authorized to invest in accordance with its
investment objective and policies, (b) entering
into repurchase agreements, and (c) lending its
portfolio securities;
(6) Purchase any security if, as a result of such
purchase, 25% or more of the Fund's total assets
(taken at current value) would be invested in the
securities of borrowers and other issuers having
their principal business activities in the same
industry (the electric, gas, water and telephone
utility industries, commercial banks, thrift
institutions and finance companies being treated as
separate industries for the purpose of this
restriction); provided that there is no limitation
with respect to obligations issued or guaranteed by
the U.S. Government or any of its agencies or
instrumentalities;
(7) Purchase or sell real estate, although it may
purchase and sell securities which are secured by
interests in real estate and securities of issuers
which invest or deal in real estate, and the Fund may
hold and sell real estate acquired as a result of the
ownership of securities; or
(8) Purchase or sell physical commodities or contracts
for the purchase or sale of physical commodities.
Physical commodities do not include futures contracts
with respect to securities, securities indices or
other financial instruments.
For the purpose of investment restriction (6), the Fund will consider
all relevant factors in determining who is the issuer of the loan interest,
including: the credit quality of the Borrower, the amount and quality of the
collateral, the terms of the Loan Agreement and other relevant agreements
(including inter-creditor agreements), the degree to which the credit of such
interpositioned person was deemed material to the decision to purchase the
Senior Loan, the interest rate environment, and general economic conditions
applicable to the Borrower and such interpositioned person.
In addition, as a non-fundamental policy which may be changed at any
time by the Board, the Fund may invest its investable assets in one or more
other management investment companies to the extent permitted by the 1940 Act
and rules thereunder.
Whenever an investment policy or investment restriction set forth in
the Prospectus or this Statement of Additional Information states a maximum
percentage of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage limitation or
standard will be determined immediately after and as a result of the Fund's
acquisition of such security or asset. Accordingly, any later increase or
decrease resulting from a change in values, assets or other circumstances will
not compel the Fund to dispose of such security or other asset. Notwithstanding
the foregoing, the Fund must always be in compliance with the borrowing policies
set forth above.
TRUSTEES AND OFFICERS
The Fund's Trustees and officers are listed below. Except as indicated,
each individual has held the office shown or other offices in the same company
for the last five years. Unless otherwise noted, the business address of each
Trustee and officer is 1150 Two Galleria Tower, 13455 Noel Road LB #45, Dallas,
Texas 75240. Those Trustees who are "interested persons" of the Fund as defined
in the 1940 Act by virtue of their affiliation with the Adviser [or _______],
are indicated by an asterisk (*).
[To Come]
- ----------
(1) Class I Trustee whose term expires in 2000.
(2) Class II Trustee whose term expires in 2001.
(3) Class III Trustee whose term expires in 2002.
The Nominating Committee of the Board is comprised of ____ Trustees who
are not "interested persons," as that term is defined under the 1940 Act
("non-interested Trustees"). The Committee has four-year staggered terms, with
one member rotating off the Committee to be replaced by another non-interested
Trustee. The purpose of the Committee is to recommend to the Board nominees for
the position of non-interested Trustee and to assure that at least a majority of
the Board is independent of the Adviser and its affiliates.
Messrs. __________ (Chairman) and __________ are members of the Audit
Committee of the Board. The Audit Committee's functions include making
recommendations to the Trustees regarding the selection of the independent
certified public accountants, and reviewing matters relative to trading and
brokerage policies and practices, accounting and auditing practices and
procedures, accounting records, internal accounting controls, and the functions
performed by the custodian, transfer agent and dividend disbursing agent of the
Fund.
The Fund pays the fees and expenses of its non-interested Trustees.
Trustees who are affiliates (as defined in the 1940 Act) of the Adviser receive
no compensation from the Fund. The Fund does not have a retirement plan for its
Trustees. It is estimated that the non-interested Trustees will receive from the
Fund the amounts set forth below for the fiscal year ending _______, 1999.
ESTIMATED
COMPENSATION
NAME FROM FUND(1)
----- --------------
$----
$----
$----
$----
$----
- -------------------
(1) As of January 1, 1999, the Fund was the only registered investment
company or series thereof that the Adviser managed.
INVESTMENT ADVISORY AND OTHER SERVICES
Highland Capital Management, L.P. acts as the Fund's investment adviser
under an Investment Advisory Agreement (the "Advisory Agreement"). The Adviser's
principal office is located at 1150 Two Galleria Tower, 13455 Noel Road LB #45,
Dallas, Texas 75240. Formed in 1993, the Adviser and its affiliates currently
serve as the investment adviser to institutional clients with combined assets
under management of over $_________, employing strategies substantially similar
to those which the Fund intends to employ. [Additional information about the
Adviser and its affiliates--to come]. James Dondero may be deemed a "control
person" of the Adviser as such term is defined in the 1940 Act.
The Fund will be responsible for all of its costs and expenses not
expressly stated to be payable by the Adviser under the Advisory Agreement or
__________ (the "Administrator") under the Administration Agreement. Such costs
and expenses to be borne by the Fund include, without limitation: custody and
transfer agency fees and expenses, including those incurred for determining net
asset value and keeping accounting books and records; expenses of pricing and
valuation services; the cost of share certificates; membership dues in
investment company organizations; expenses of acquiring, holding and disposing
of securities and other investments; fees and expenses of registering under the
securities laws, stock exchange listing fees and governmental fees; expenses of
reports to shareholders, proxy statements and other expenses of shareholders'
meetings; insurance premiums; printing and mailing expenses; interest, taxes and
fees to maintain the Fund's existence; legal and accounting expenses;
compensation and expenses of Trustees not affiliated with the Adviser; expenses
of conducting repurchase offers for the purpose of repurchasing Fund shares; and
investment advisory and administration fees. The Fund also will bear expenses
incurred in connection with any litigation in which the Fund is a party and any
legal obligation to indemnify its officers and Trustees with respect thereto, to
the extent not covered by insurance.
The Advisory Agreement with the Adviser continues in effect to
____________, 2001 and from year to year thereafter so long as such continuance
is approved at least annually (i) by the vote of a majority of the
non-interested Trustees cast in person at a meeting specifically called for the
purpose of voting on such approval and (ii) by the Board of the Fund or by vote
of a majority of the outstanding interests of the Fund. The Advisory Agreement
may be terminated at any time without penalty on 60 days' written notice by the
Trustees of the Fund or the Adviser, as applicable, or by vote of the majority
of the outstanding shares of the Fund. The Advisory Agreement will terminate
automatically in the event of its assignment. The Advisory Agreement provides
that, in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of the Adviser's obligations or duties to the Fund under such
agreement, the Adviser will not be liable to the Fund for any loss incurred.
The Fund's Administration Agreement with the Administrator continues in
effect from year to year so long as such continuance is approved at least
annually by the vote of a majority of the Fund's Trustees. The Administration
Agreement may be terminated at any time without penalty on 60 days' written
notice by the Trustees of the Fund or the Administrator, as applicable. The
Administration Agreement will terminate automatically in the event of its
assignment. The Administration Agreement provides that, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
Administrator's obligations or duties to the Fund under such agreement, the
Administrator will not be liable to the Fund for any loss incurred.
The Adviser and its affiliates and their officers and employees from
time to time have transactions with various banks, including the Fund's
custodian (the "Custodian"). The Adviser believes that the terms and conditions
of such transactions were not and will not be influenced by existing or
potential custodial or other relationships between the Fund and such banks.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Shares is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities and the liquidation value of the Fund's preferred shares (without
giving effect to any potential redemption premium with respect to such preferred
shares), and dividing the result by the number of Shares outstanding. The net
asset value will be computed no less frequently than weekly, generally on the
last business day of the week. The Fund reserves the right to calculate the net
asset value more frequently if deemed desirable.
The value of the Fund's portfolio will be determined by the Adviser,
following guidelines established and periodically reviewed by the Trustees.
Interests in Senior Loans will be valued by the Adviser on behalf of the Fund on
the basis of market quotations and transactions in instruments which the Adviser
believes may be comparable to Senior Loan interests with respect to the
following characteristics: credit quality, interest rate, interest rate
redetermination period and maturity. Such instruments may include commercial
paper, negotiable certificates of deposit and short-term variable rate
securities which have adjustment periods comparable to the Senior Loan interests
in the Fund's portfolio. In determining the relationship between such
instruments and the Senior Loan interests in the Fund's portfolio, the Adviser
will consider on an ongoing basis, among other factors, (i) the creditworthiness
of the Borrower and (ii) the current interest rate, the period until the next
interest rate redetermination and maturity of such Senior Loan interests. The
Fund's net asset value is expected to fluctuate as a function of interest rate
and credit factors. Because of the short-term nature of such instruments,
however, the Fund's net asset value is expected to fluctuate less in response to
changes in interest rates than the net asset values of investment companies with
portfolios consisting primarily of fixed-income or longer term securities. The
Adviser believes that Lenders selling Senior Loan interests or otherwise
involved in a Senior Loan transaction may tend, in valuing Senior Loan interests
for their own account, to be less sensitive to interest rate and credit quality
changes and, accordingly, the Adviser does not intend to rely solely on such
valuations in valuing the Senior Loan interests for the Fund's account. In
addition, because a secondary trading market in Senior Loans has not yet fully
developed, in valuing Senior Loans, the Adviser may not rely solely on but may
consider, to the extent the Adviser believes such information to be reliable,
prices or quotations provided by banks, dealers or pricing services with respect
to secondary market transactions in Senior Loans. To the extent that an active
secondary market in Senior Loan interests develops to a reliable degree, the
Adviser may rely to an increasing extent on such market prices and quotations in
valuing the Senior Loan interests in the Fund's portfolio. In light of the
senior nature of Senior Loan interests that may be included in the Fund's
portfolio and taking into account the Fund's access to non-public information
with respect to Borrowers relating to such Senior Loan interests, the Adviser
currently does not believe that consideration on a systematic basis of ratings
provided by any nationally recognized statistical rating organization or price
fluctuations with respect to long- or short-term debt of such Borrowers
subordinate to the Senior Loans of such Borrowers is necessary for the
determination of the value of such Senior Loan interests. Accordingly, the
Adviser generally will not systematically consider (but may consider in certain
instances) and, in any event, will not rely upon such ratings or price
fluctuations in determining the value of Senior Loan interests in the Fund's
portfolio. For example, in certain circumstances where market disruptions create
significant fluctuations (which the Adviser believes to be temporary) in values
calculated as described above, the Adviser may determine the value of the Senior
Loan based on its view of the security's ultimate realizable value, which
represents the Adviser's judgment of the aggregate value that the Fund would
realize in respect of the security were it to hold the security to maturity
taking into account, among other things, the time remaining to maturity and
anticipated costs of collection.
Other portfolio securities (other than short-term obligations, but
including listed issues) may be valued on the basis of prices furnished by one
or more pricing services which determine prices for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders. In certain circumstances,
portfolio securities will be valued at the last sale price on the exchange that
is the primary market for such securities, or the last quoted bid price for
those securities for which the over-the-counter market is the primary market or
for listed securities in which there were no sales during the day. The value of
interest rate swaps will be determined in accordance with a discounted present
value formula and then confirmed by obtaining a bank quotation.
Short-term obligations which mature in 60 days or less will be valued
at amortized cost, if their original term to maturity when acquired by the Fund
was 60 days or less, or will be valued at amortized cost using their value on
the 61st day prior to maturity, if their original term to maturity when acquired
by the Fund was more than 60 days, unless in each case this is determined not to
represent fair value. Repurchase agreements will be valued at cost plus accrued
interest. Securities for which there exist no price quotations or valuations and
all other assets will be valued at fair value as determined in good faith by or
on behalf of the Trustees.
PORTFOLIO TRADING
Specific decisions to purchase or sell securities for the Fund are
made by employees of the Adviser who are appointed and supervised by its senior
officers. Such employees may serve other clients of the Adviser in a similar
capacity. The Fund's investments are reviewed by the Board periodically.
The Fund will acquire Senior Loans from major international banks,
selected domestic regional banks, insurance companies, finance companies and
other financial institutions. In selecting financial institutions from which
Senior Loans may be acquired, the Adviser will consider, among other factors,
the financial strength, professional ability, level of service and research
capability of the institution. While these financial institutions are generally
not required to repurchase Senior Loans which they have sold, they may act as
principal or on an agency basis in connection with their sale by the Fund.
Other fixed-income obligations which may be purchased and sold by the
Fund generally are traded in the over-the-counter market on a net basis (i.e.,
without commission) through broker-dealers or banks acting for their own account
rather than as brokers, or otherwise involve transactions directly with the
issuers of such obligations. The Fund also may purchase fixed-income and other
securities from underwriters, the cost of which may include undisclosed fees and
concessions to the underwriters. While it is anticipated that the Fund will not
pay significant brokerage commissions, on occasion it may be necessary or
desirable to purchase or sell a security through a broker on an agency basis, in
which case the Fund will incur a brokerage commission. Although spreads or
commissions on portfolio transactions, in the judgment of the Adviser, will be
reasonable in relation to the value of the services provided, spreads or
commissions exceeding those which another firm might charge may be paid to firms
who were selected to execute transactions on behalf of the Fund and the
Adviser's other clients for providing brokerage and research services to the
Adviser.
The frequency of portfolio purchases and sales, known as the "turnover
rate," will vary from year to year. The Fund expects that is portfolio turnover
rate for the current fiscal year will be less than 100%.
Securities considered as investments for the Fund also may be
appropriate for other investment accounts managed by the Adviser or its
affiliates. Whenever decisions are made to buy or sell securities by the Fund
and one or more of such other accounts simultaneously, the Adviser will allocate
the security transactions (including "hot" issues) in a manner which it believes
to be equitable under the circumstances. As a result of such allocations, there
may be instances where the Fund will not participate in a transaction that is
allocated among other accounts. If an aggregated order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
the Adviser reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Trustees of the Fund that the
benefits from the Adviser's organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions.
TAXES
The following discussion is for general information purposes only.
Prospective investors should consult their tax advisors regarding the specific
federal income tax consequences of purchasing, holding and disposing of Shares,
as well as the effects of state, local and foreign tax laws and any proposed tax
law changes.
The Fund intends to qualify each year for treatment as a regulated
investment company ("RIC"), under the Internal Revenue Code of 1986, as amended
(the "Code"), to reduce or eliminate federal income tax. Accordingly, the Fund
intends to satisfy certain requirements relating to sources of its income and
diversification of its assets and to distribute a sufficient amount of its
investment company taxable income so as to effect such qualification.
Dividends and other distributions declared by the Fund in October,
November or December of any year and payable to Shareholders of record on a date
in any of those months will be deemed to have been paid by the Fund and received
by the Shareholders on December 31st of that year if the distributions are paid
by the Fund during January of the following year. Accordingly, those
distributions will be taxed to Shareholders for the year in which that December
31st falls.
To avoid a non-deductible 4% federal excise tax, the Fund must
distribute to its Shareholders by the end of each calendar year substantially
all of its ordinary income and capital gain net income, plus certain other
amounts. Under current law, provided that the Fund qualifies as a RIC, it should
not be liable for any income, corporate excise or franchise tax in The
Commonwealth of Massachusetts.
Income and gains from investments in securities of foreign issuers may
be subject to foreign income, withholding or other taxes, which may reduce the
Fund's yield and/or total return. Tax conventions between certain countries and
the United States may reduce or eliminate these foreign taxes. Shareholders will
not be able to claim any foreign tax credit or deduction with respect to these
foreign taxes.
Certain investments of the Fund may bear original issue discount or
market discount for tax purposes. The Fund will be required to include in income
each year a portion of such original issue discount and may elect to include in
income each year a portion of such market discount. In addition, the Fund may be
required to include in income each year, for federal income tax purposes, income
with respect to these or other investments even though the collectibility by the
Fund of cash payments corresponding to such income is doubtful. The Fund may
have to dispose of investments that it would otherwise have continued to hold to
provide cash to enable it to satisfy its distribution requirements with respect
to such income.
Some of the Fund's investment practices (including those involving
certain risk management transactions) may be subject to special provisions of
the Code that, among other things, may defer the Fund's deduction of certain
losses and affect the holding period of certain securities it holds and the
character of certain gains or losses it realizes. These provisions also may
require the Fund to recognize income or gain without receiving cash with which
to make distributions in the amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions and may make certain tax elections to mitigate the effect of these
rules and prevent its disqualification as a RIC.
OTHER INFORMATION
The Fund is an organization of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, Shareholders of such a
trust may, in certain circumstances, be held personally liable as partners for
the obligations of the trust. The Declaration of Trust contains an express
disclaimer of Shareholder liability in connection with Fund property or the
acts, obligations or affairs of the Fund. The Declaration of Trust also provides
for indemnification out of Fund property of any Shareholder held personally
liable for the claims and liabilities to which a Shareholder may become subject
by reason of being or having been a Shareholder. Thus, the risk of a Shareholder
incurring financial loss on account of Shareholder liability is limited to
circumstances in which the Fund itself is unable to meet its obligations. The
Fund believes the risk of any Shareholder incurring any liability for the
obligations of the Fund is remote.
The Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law; but nothing in the
Declaration of Trust protects a Trustee against any liability to the Fund or its
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. Voting rights are not cumulative, which
means that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees and, in such event, the holders of the
remaining less than 50% of the shares voting on the matter will not be able to
elect any Trustees.
The Declaration of Trust provides that no person may serve as a Trustee
if shareholders holding two-thirds of the outstanding shares have removed him or
her from that office either by a written declaration filed with the Fund's
custodian or by votes cast at a meeting called for that purpose. The Declaration
of Trust further provides that the Trustees of the Fund promptly call a meeting
of the shareholders for the purpose of voting upon a question of removal of any
such Trustee or Trustees when requested in writing so to do by the record
holders of not less than 10% of the Trust's outstanding shares.
The Fund's Prospectus and Statement of Additional Information do not
contain all of the information set forth in the Registration Statement that the
Fund has filed with the SEC. The complete Registration Statement may be obtained
from the SEC upon payment of the fee prescribed by its Rules and Regulations.
AUDITORS
___________________________________, are the independent accountants
for the Fund, providing audit services, tax return preparation, and assistance
and consultation with respect to the preparation of filings with the SEC.
INDEPENDENT AUDITORS' REPORT
[To Come]
HIGHLAND CAPITAL FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
_______________, 1999
ASSETS:
Cash........................................... $_______
Deferred initial offering expenses............. _______
Deferred organization expenses................. _______
-------
Total assets................................... $_______
-------
LIABILITIES:
Organization expenses accrued.................. $_______
Initial offering expenses accrued.............. _______
-------
Total liabilities.............................. $_______
-------
Net assets applicable to ________ shares of $_______
beneficial nterest issued and outstanding...... =======
NET ASSET VALUE AND OFFERING PRICE $_______
PER SHARE =======
NOTE TO FINANCIAL STATEMENT
Highland Capital Fixed Income Fund (the "Fund") was formed under a
Declaration of Trust dated __________, 1999 and has been inactive since that
date except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the sale of
________ shares of its beneficial interest to ____________________. [The
deferred organization expenses are estimated to amount to $_________. These
expenses will be deferred and amortized over the period from the commencement of
operations to _______________. The initial offering expenses, including federal
and state registration and qualification fees, will be deducted from net
proceeds, and will not exceed $____ per share, as Highland Capital Management,
L.P. or an affiliate will pay any such expenses in excess of $____ per share.
The initial offering expenses reflected above assume the initial sale of
______________ shares. The amount paid by the Fund on any repurchase during the
amortization period of any of the initial __________ common shares will be
reduced by a pro rata portion of any unamortized organization expenses. Such
proration is to be calculated by dividing the number of initial shares
repurchased by the number of initial shares outstanding at the time of
purchase.]
APPENDIX A
RATINGS OF CORPORATE BONDS
DESCRIPTION OF CORPORATE BOND RATINGS OF STANDARD & POOR'S RATINGS GROUP:
AAA -- Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit 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 bonds in this category than for bonds in higher rated categories.
BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative grade debt. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B -- Bonds rated B have a greater vulnerability to default but
presently have the capacity to meeting interest payments and principal
repayments. Adverse business, financial or economic conditions would likely
impair capacity or willingness to pay interest and repay principal.
CCC -- Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, they are not
likely to have the capacity to pay interest and repay principal.
CC -- The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC -- debt rating.
D -- Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or a minus
(-) sign designation, which is used to show relative standing within the major
rating categories, except in the AAA (Prime Grade) category.
DESCRIPTION OF BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and generally are referred to
as "gilt edge." 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 generally are 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 risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime 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,
therefore, 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 present 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.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
the categories below B. The modifier 1 indicates a ranking for the security in
the higher end of a rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of a rating
category.
HIGHLAND CAPITAL FIXED INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
_________________, 1999
- ------------------------------------------------------------------------------
INVESTMENT ADVISER
Highland Capital Management, L.P.
1150 Two Galleria Tower
13455 Noel Road LB #45
Dallas, Texas 75240
ADMINISTRATOR
[To Come]
CUSTODIAN
[To Come]
TRANSFER AGENT
[To Come]
INDEPENDENT ACCOUNTANTS
[To Come]
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A:*
Included in Part B:*
(2) Exhibits:
(a) Agreement and Declaration of Trust dated December
23, 1998 filed herewith.
(b) By-Laws. *
(c) Not applicable.
(d) Specimen Certificate of Shares of Beneficial
Interest.*
(e) Dividend Reinvestment Plan. *
(f) Not applicable.
(g) Investment Advisory Agreement. *
(h) Underwriting Agreement. *
(i) Not applicable.
(j) Custodian Agreement.*
(k) (1) Transfer Agency and Services Agreement.*
(2) Administration Agreement. *
- ----------------
* To be filed by amendment.
<PAGE>
(3) Shareholder Servicing Agreement. *
(l) Opinion and Consent of Counsel. *
(m) Not applicable.
(n) Consent of Independent Auditors. *
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Not applicable.
ITEM 25. MARKETING ARRANGEMENTS
See the Underwriting Agreement to be filed by amendment.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the approximate expenses
incurred in connection with the offerings of Registrant*:
Registration Fees. ....................................................$
Federal Taxes..........................................................$
State Taxes and Fees...................................................$
Transfer Agents' Fees..................................................$
Costs of Printing and Engraving .......................................$
Accounting Fees........................................................$
Legal Fees.............................................................$
Total.................................................. $
Item 27. Persons Controlled by or Under Common Control
None.
- ----------------
* To be filed by amendment.
<PAGE>
Item 28. Number of Holders of Securities
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of beneficial interest, 0
par value $0.001 per share as of
December 23, 1998
ITEM 29. INDEMNIFICATION
To be filed by amendment.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Reference is made to: (i) the information set forth under the
caption "Investment Advisory and Other Services" in the Statement of Additional
Information and (ii) the Form ADV of Highland Capital Management, L.P. (formerly
Ranger Asset Management, L.P. d/b/a Protective Asset Management Company) (File
No. 801-54874) filed with the Commission, each of which are incorporated herein
by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
To be filed by amendment.
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
(1) Registrant undertakes to suspend offering of its Shares until it
amends its prospectus if (a) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(b) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) (a) For purpose of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
497(h) under the Securities Act of 1933, shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) The registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, its Statement of Additional Information.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas and State of Texas, on the 23rd day of
December, 1998.
HIGHLAND CAPITAL FIXED INCOME FUND
By: /s/ JAMES DONDERO
------------------------------
James Dondero, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ JAMES DONDERO Trustee, Chief Executive December 23, 1998
- ------------------------- Officer and Chief Financial
James Dondero Officer
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- ------------
(a) Agreement and Declaration of Trust dated December 23, 1998
EXHIBIT (a)
HIGHLAND CAPITAL FIXED INCOME FUND
------------------------
AGREEMENT AND DECLARATION OF TRUST
Dated December 23, 1998
TABLE OF CONTENTS
ARTICLE I - NAME AND DEFINITIONS.............................................1
Section 1.1 Name..............................................1
Section 1.2. Definitions.......................................1
ARTICLE II - TRUSTEES........................................................3
Section 2.1. Management of the Trust...........................3
Section 2.2. Number of Trustees................................3
Section 2.3. Term of office of trustees........................4
Section 2.4. Resignation and Appointment of Trustees...........4
Section 2.5. Vacancies.........................................4
Section 2.6. Delegation of Power to Other Trustees.............5
Section 2.7. Removal of Trustees...............................5
Section 2.8. General Powers....................................5
Section 2.9. Investments.......................................6
Section 2.10. Legal Title.......................................8
Section 2.11. By-Laws...........................................8
Section 2.12. Distribution and Repurchase of Shares.............8
Section 2.13. Delegation........................................8
Section 2.14. Collection and Payment............................8
Section 2.15. Expenses..........................................8
Section 2.16. Committees........................................9
Section 2.17. Miscellaneous Powers..............................9
Section 2.18. Litigation.......................................10
ARTICLE III - CONTRACTS.....................................................10
Section 3.1. Principal Underwriter............................10
Section 3.2. Investment Adviser...............................10
Section 3.3. Administrator....................................11
Section 3.4. Other Service Providers..........................11
Section 3.5. Transfer Agents..................................11
Section 3.6. Custodian........................................11
Section 3.7. Affiliations.....................................11
ARTICLE IV - LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND
OTHERS.........................................................12
Section 4.1. No Personal Liability of Shareholders, Trustees,
Officers and Employees..........................12
Section 4.2. Trustee's Good Faith Action; Advice to Others;
No Bond or Surety..............................12
Section 4.3. Indemnification..................................13
Section 4.4. No Duty of Investigation.........................13
Section 4.5. Reliance on Records and Experts..................13
ARTICLE V - SHARES OF BENEFICIAL INTEREST...................................13
Section 5.1. Shares of Beneficial Interest....................14
Section 5.2. Voting Powers....................................14
Section 5.3. Rights of Shareholders...........................15
Section 5.4. Trust Only.......................................15
Section 5.5. Issuance of Shares...............................15
ARTICLE VI - REDEMPTIONS AND REPURCHASES....................................16
Section 6.1. Redemptions and Repurchases of Shares............16
Section 6.2. Manner of Payment................................16
Section 6.3. Involuntary Redemption...........................16
ARTICLE VII - DETERMINATION OF NET ASSET VALUE, NET INCOME AND
DISTRIBUTIONS............................................17
Section 7.1. Net Asset Value..................................17
Section 7.2. Dividends and Distributions......................18
Section 7.3. Power to Modify Foregoing Procedures.............18
ARTICLE VIII - DURATION; AMENDMENTS; TERMINATION OF TRUST OR A
CLASS OR SERIES; MERGERS; CERTAIN TRANSACTIONS...........19
Section 8.1. Duration.........................................19
Section 8.2. Amendments.......................................19
Section 8.3. Certain Transactions.............................20
ARTICLE IX - MISCELLANEOUS..................................................24
Section 9.1. Use of the Words "Highland Capital"..............24
Section 9.2. Notices..........................................24
Section 9.3. Filing of Copies, References, Headings
and Counterparts................................24
Section 9.4. Applicable Law...................................25
Section 9.5. Provisions in Conflict with Law or Regulations...25
AGREEMENT AND DECLARATION OF TRUST, made December 23, 1998 by the
Trustees hereunder and by the holders of beneficial interest to be issued
hereunder as hereinafter provided and
W I T N E S S E T H:
WHEREAS, the Trust has been formed to carry on the business
of an investment company; and
WHEREAS, the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts voluntary association with
transferable shares in accordance with the provisions hereinafter set forth;
NOW, THEREFORE, the Trustees declare that all money and property
contributed to the trust established hereunder shall be held and managed under
this Agreement and Declaration of Trust for the benefit of the holders, from
time to time, of the shares of beneficial interest to be issued hereunder and
subject to the provisions set forth below.
ARTICLE I
NAME AND DEFINITIONS
SECTION 1.1. NAME. The name of the trust created hereby is Highland
Capital Fixed Income Fund.
SECTION 1.2. DEFINITIONS. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to a
contract described in Section 3.3 hereof.
(b) "By-Laws" means the By-Laws referred to in Section 2.11 hereof, as
from time to time amended.
(c) "Class" means any class of Shares designated by the Trustees as
such following any division of Shares of the Trust into two or more Classes as
provided in Section 5.1 hereof.
(d) "Commission" shall have the meaning provided in the 1940 Act.
(e) "Custodian" means any Person other than the Trust who has custody
of any Trust Property as required by Section 17(f) of the 1940 Act, but does not
include a system for the central handling of securities described in Section
17(f).
(f) "Declaration" means this Agreement and Declaration of Trust, as
amended from time to time.
(g) "His" shall include the feminine and neuter, as well as the
masculine, genders.
(h) "Interested Person" has the meaning specified in the 1940 Act
subject, however, to such exceptions and exemptions as may be granted by the
Commission in any rule, regulation or order.
(i) "Internal Revenue Code" means the United States Internal Revenue
Code of 1986, as amended from time to time, or any successor law.
(j) "Investment Adviser" means the party, other than the Trust, to an
agreement described in Section 3.2 hereof.
(k) "1933 Act" means the Securities Act of 1933 and rules, regulations
and orders thereunder, as amended from time to time, or any successor law.
(l) "1934 Act" means the Securities and Exchange Act of 1934 and
rules, regulations and orders thereunder, as amended from time to time, or any
successor law.
(m) "1940 Act" means the Investment Company Act of 1940 and the rules,
regulations and orders thereunder, as amended from time to time, or any
successor law. (n) "Outstanding Shares" means those Shares shown from time to
time on the books of the Trust or its Transfer Agent as then issued and
outstanding.
(n) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, firms, joint ventures and other entities,
whether or not legal entities, as well as governments, instrumentalities, and
agencies and political subdivisions thereof, and quasi- governmental agencies
and instrumentalities.
(o) "Principal Underwriter" means a party, other than the Trust, to a
contract described in Section 3.1 hereof.
(p) "Prospectus" means the Prospectus and Statement of Additional
Information, if any, included in the Registration Statement of the Trust under
the 1933 Act, as such Prospectus and Statement of Additional Information, if
any, may be amended or supplemented and filed with the Commission from time to
time.
(q) "Registration Statement" means the Registration Statement of the
Trust under the 1933 Act, as such Registration Statement may be amended and
filed with the Commission from time to time.
(r) "Series" means any series of Shares designated by the Trustees as
such following the division of Shares of any Class into two or more Series as
provided in Section 5.1 hereof.
(s) "Shareholder" means a record owner of Outstanding Shares.
(t) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest in the Trust shall be divided from
time to time, or, if more than one Class or Series is authorized by the
Trustees, the equal proportionate transferable units into which each Class or
Series shall be divided from time to time.
(u) "Transfer Agent" means any Person other than the Trust who
maintains the Shareholder records of the Trust, such as the list of
Shareholders, the number of Shares credited to each account.
(v) "Trust" means the Trust named in Section 1.1.
(w) The "Trustees" means the persons who have signed this Declaration,
so long as they shall continue in office in accordance with the terms hereof,
and all other persons who now serve or from time to time may be duly elected,
qualified and serving as Trustees in accordance with the provisions of Article
II hereof and the By-Laws of the Trust, and reference herein to a Trustee or the
Trustees shall refer to such person or persons in his capacity or their
capacities as trustees hereunder.
(x) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees, including any and all assets of or allocated to any Class
or Series, as the context may require.
(y) Except as such term may be otherwise defined by the Trustees in
connection with any meeting or other action of Shareholders or in conjunction
with the establishment of any Class or Series, the term "vote" when used in
connection with an action of Shareholders shall include a vote taken at a
meeting of Shareholders or the consent or consents of Shareholders taken without
such a meeting.
ARTICLE II
TRUSTEES
SECTION 2.1. MANAGEMENT OF THE TRUST. The business and affairs of the
Trust shall be managed by the Trustees and they shall have all powers and
authority necessary, appropriate or desirable to perform that function.
SECTION 2.2. NUMBER OF TRUSTEES. The number of Trustees shall be such
number as shall be fixed from time to time by the Trustees, provided, however,
that following the effective date of the Registration Statement, the number of
Trustees in no event shall be less than three (3) nor more than twelve (12). No
reduction in the number of Trustees shall have the effect of removing any
Trustee from office prior to the expiration of his term unless the Trustee is
specifically removed pursuant to Section 2.7 of this Article II at the time of
decrease.
SECTION 2.3. TERM OF OFFICE OF TRUSTEES. The Board of Trustees shall
be divided into three classes. Within the limits above specified, the number of
the Trustees in each class and the class which each Trustee is assigned shall be
determined by resolution of the Board of Trustees. The term of office of the
first class shall expire on the date of the first annual meeting of Shareholders
or special meeting in lieu thereof following the effective date of the
Registration Statement. The term of office of the second class shall expire on
the date of the second annual meeting of Shareholders or special meeting in lieu
thereof following the effective date of the Registration Statement. The term of
office of the third class shall expire on the date of the third annual meeting
of Shareholders or special meeting in lieu thereof following the effective date
of the Registration Statement. Upon expiration of the term of office of each
class as set forth above, the number of Trustees in such class, as determined by
the Board of Trustees, shall be elected for a term expiring on the date of the
third annual meeting of Shareholders or special meeting in lieu thereof
following such expiration to succeed the Trustees whose terms of office expire.
The Trustees shall be elected at an annual meeting of Shareholders or special
meeting in lieu thereof called for that purpose, except as provided in Section
2.4 of this Article, and each Trustee elected shall hold office until his
successor shall have been elected and shall have qualified, except (a) that any
Trustee may resign his trust (without need for prior or subsequent accounting)
by an instrument in writing signed by him and delivered to the other Trustees,
which shall take effect upon such delivery or upon such later date as is
specified therein; (b) that any Trustee may be removed (provided the aggregate
number of Trustees after such removal shall not be less than the number required
by Section 2.1 hereof) for cause, at any time by written instrument, signed by
the remaining Trustees, specifying the date when such removal shall become
effective; and (c) that any Trustee who requests in writing to be retired or who
has become incapacitated by illness or injury may be retired by written
instrument signed by a majority of the other Trustees, and he shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Fund or the remaining Trustees any Fund property held in the
name of the resigning or removed Trustee. Upon the incapacity or death of any
Trustee, his legal representative shall execute and deliver on his behalf such
document as the remaining Trustees shall require as provided in the preceding
sentence.
SECTION 2.4. RESIGNATION AND APPOINTMENT OF TRUSTEES. In case of the
declination, death, resignation, retirement, removal or inability of any of the
Trustees, or in case a vacancy shall exist, by reason of any increase in number,
or for any other reason, the remaining Trustees or, prior to the effective date
of the Registration Statement, if only one Trustee shall then remain in office,
the remaining Trustee, shall fill such vacancy by appointing such other person
as they, or any one of them, in their discretion, shall see fit. The power of
appointment is subject to the provisions of Section 16(a) of the 1940 Act.
SECTION 2.5. VACANCIES. The death, declination, resignation,
retirement, removal or incapacity of the Trustees, or any one of them, shall not
operate to annul the Trust or to remove any existing agency created pursuant to
the terms of this Declaration. Whenever a vacancy in the number of Trustees
shall occur, until such vacancy is filled as provided in Section 2.4, the
Trustees in office, regardless of their number, shall have all the duties
imposed upon the Trustees by the Declaration.
SECTION 2.6. DELEGATION OF POWER TO OTHER TRUSTEES. Subject to the
provisions of the 1940 Act, any Trustee may, by power of attorney, delegate his
power for a period not exceeding six (6) months at any one time to any other
Trustee or Trustees; provided that in no case shall less than two (2) Trustees
personally exercise the powers granted to the Trustees under the Declaration,
except as herein otherwise expressly provided.
SECTION 2.7. REMOVAL OF TRUSTEES. A Trustee may be removed from office
only for cause by a written instrument signed by the remaining Trustees or by a
vote of the holders of at least 66-2/3% of the Class of Shares of the Trust that
elected such Trustee and is entitled to vote on the matter.
SECTION 2.8. GENERAL POWERS. The Trustees in all instances shall act
as principals for and on behalf of the Trust and their acts shall bind the
Trust. The business and affairs of the Trust shall be managed by the Trustees
and they shall have full power and authority to do any and all acts and to make
and execute any and all contracts and instruments that they may consider
necessary, appropriate or desirable in connection with the management of the
Trust. The Trustees shall not be bound or limited in any way by present or
future laws, practices or customs in regard to Trust investments or to other
investments which may be made by fiduciaries, but shall have full authority and
power to make any and all investments which they, in their uncontrolled
discretion, shall deem proper to promote, implement or accomplish the various
objectives and interests of the Trust and of its Classes and Series. The
Trustees shall have full power and authority to adopt such accounting and tax
accounting practices as they consider appropriate for the Trust and for any
Class or Series. The Trustees shall have exclusive and absolute control over the
Trust Property and over the business of the Trust to the same extent as if the
Trustees were the sole owners of the Trust Property and business in their own
right, and with such full powers of delegation as the Trustees may exercise from
time to time. The Trustees shall have power to conduct the business of the Trust
and carry on its operations in any and all of its branches and to maintain
offices both within and without The Commonwealth of Massachusetts, in any and
all states of the United States of America, in the District of Columbia, and in
any and all commonwealths, territories, dependencies, colonies, possessions,
agencies, and instrumentalities of the United States of America and of foreign
governments, and to do all such other things as they deem necessary, appropriate
or desirable in order to promote or implement the interests of the Trust or of
any Class or Series although such things are not herein specifically mentioned.
Any determination as to what is in the interests of the Trust or of any Class or
Series made by the Trustees in good faith shall be conclusive and binding upon
all Shareholders. In construing the provisions of this Declaration, there shall
be a presumption in favor of a grant of plenary power and authority to the
Trustees.
The enumeration of any specific power in this Declaration shall not be
construed as limiting the aforesaid general and plenary powers.
SECTION 2.9. INVESTMENTS. The Trustees shall have full power and
authority:
(a) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of such
operations.
(b) To acquire or buy, and invest Trust Property in, own, hold for
investment or otherwise, and to sell or otherwise dispose of, all types and
kinds of securities and investments of any kind including, but not limited to,
stocks, profit-sharing interests or participations and all other contracts for
or evidences of equity interests, bonds, debentures, warrants and rights to
purchase securities, and interests in loans, certificates of beneficial
interest, bills, notes and all other contracts for or evidences of indebtedness,
money market instruments including bank certificates of deposit, finance paper,
commercial paper, bankers' acceptances and other obligations, and all other
negotiable and non-negotiable securities and instruments, however named or
described, issued by corporations, trusts, associations or any other Persons,
domestic or foreign, or issued or guaranteed by the United States of America or
any agency or instrumentality thereof, by the government of any foreign country,
by any State, territory or possession of the United States of America, by any
political subdivision or agency or instrumentality of any state or foreign
country, or by any other government or other governmental or quasi-governmental
agency or instrumentality, domestic or foreign; to acquire and dispose of
interests in domestic or foreign loans made by banks and other financial
institutions; to deposit any assets of the Trust in any bank, trust company or
banking institution or retain any such assets in domestic or foreign cash or
currency; to purchase and sell gold and silver bullion, precious or strategic
metals, and coins and currency of all countries; to engage in "when issued" and
delayed delivery transactions; to enter into repurchase agreements, reverse
repurchase agreements and firm commitment agreements; to employ all types and
kinds of hedging techniques and investment management strategies; and to change
the investments of the Trust and of each Class or Series.
(c) To acquire (by purchase, subscription or otherwise), to hold, to
trade in and deal in, to acquire any rights or options to purchase or sell, to
sell or otherwise dispose of, to lend and to pledge any Trust Property or any of
the foregoing securities, instruments or investments; to purchase and sell
options on securities, currency, precious metals and other commodities, indices,
futures contracts and other financial instruments and assets and enter into
closing and other transactions in connection therewith; to enter into all types
of commodities contracts, including without limitation the purchase and sale of
futures contracts on securities, currency, precious metals and other
commodities, indices and other financial instruments and assets; to enter into
forward foreign currency exchange contracts and other foreign exchange and
currency transactions of all types and kinds; to enter into interest rate,
currency and other swap transactions; and to engage in all types and kinds of
hedging and risk management transactions.
(d) To exercise all rights, powers and privileges of ownership or
interest in all securities and other assets included in the Trust Property,
including without limitation the right to vote thereon and otherwise act with
respect thereto; and to do all acts and things for the preservation, protection,
improvement and enhancement in value of all such securities and assets.
(e) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, lease, develop and dispose of (by sale or otherwise) any type or kind
of property, real or personal, including domestic or foreign currency, and any
right or interest therein.
(f) To borrow money and in this connection issue notes, commercial
paper or other evidence of indebtedness; to secure borrowings by mortgaging,
pledging or otherwise subjecting as security all or any part of the Trust
Property; to endorse, guarantee, or undertake the performance of any obligation
or engagement of any other Person; to lend all or any part of the Trust Property
to other Persons; and to issue general unsecured or other obligations of the
Trust, and enter into indentures or agreements relating thereto.
(g) To aid, support or assist by further investment or other action
any Person any obligation of or interest which is included in the Trust Property
or in the affairs of which the Trust or any Class or Series has any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest; and to guarantee or
become surety on any or all of the contracts, securities and other obligations
of any such Person.
(h) To join other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper.
(i) To carry on any other business in connection with or incidental to
any of the foregoing powers referred to in this Declaration, to do everything
necessary, appropriate or desirable for the accomplishment of any purpose or the
attainment of any object or the furtherance of any power referred to in this
Declaration, either alone or in association with others, and to do every other
act or thing incidental or appurtenant to or arising out of or connected with
such business or purposes, objects or powers.
(j) To the extent necessary or appropriate, to give effect to the
preferences, special or relative rights and privileges of any Class or Series,
to allocate assets, liabilities, income and expenses of the Trust to particular
Classes or Series or to apportion the same among two or more Classes or Series.
The foregoing clauses shall be construed both as objects and powers,
and shall not be held to limit or restrict in any manner the general and plenary
powers of the Trustees.
Notwithstanding any other provision herein, the Trustees shall have
full power in their discretion, without any requirement of approval by
Shareholders, to invest part or all of the Trust Property (or part or all of the
assets of any Class or Series), or to dispose of part or all of the Trust
Property (or part or all of the assets of any Class or Series) and invest the
proceeds of such disposition, in securities issued by one or more other
investment companies registered under the 1940 Act.
SECTION 2.10. LEGAL TITLE. Legal title to all the Trust Property shall
be vested in the Trustees who from time to time shall be in office. The right,
title and interest of the Trustees in the Trust Property shall vest
automatically in each Person who hereafter may become a Trustee. Upon the
termination of the term of office, resignation, removal or death of a Trustee,
he shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees.
SECTION 2.11. BY-LAWS. The Trustees shall have full power and
authority to adopt By-Laws providing for the conduct of the business of the
Trust and containing such other provisions as they deem necessary, appropriate
or desirable, and, subject to the voting powers of one or more Classes or
Series, to amend and repeal such By-Laws. Unless the By-Laws specifically
require that Shareholders authorize or approve the amendment or repeal of a
particular provision of the By-Laws, any provision of the By-Laws may be amended
or repealed by the Trustees without Shareholder authorization or approval.
SECTION 2.12. DISTRIBUTION AND REPURCHASE OF SHARES. The Trustees
shall have full power and authority to issue, sell, repurchase, redeem, retire,
cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal
in Shares. Shares may be sold for cash or property or other consideration
whenever and in such amounts and manner as the Trustees deem desirable. The
Trustees shall have full power to provide for the distribution of Shares either
through one or more principal underwriters or by the Trust itself, or both.
SECTION 2.13. DELEGATION. The Trustees shall have full power and
authority to delegate from time to time to such of their number or to officers,
employees or agents of the Trust or to other Persons the doing of such things
and execution of such agreements or other instruments either in the name of the
Trust or any Class or Series of the Trust or the names of the Trustees or
otherwise as the Trustees may deem desirable or expedient.
SECTION 2.14. COLLECTION AND PAYMENT. The Trustees shall have full
power and authority to collect all property due to the Trust; to pay all claims,
including taxes, against the Trust or Trust Property; to prosecute, defend,
compromise, settle or abandon any claims relating to the Trust or Trust
Property; to foreclose any security interest securing any obligations, by virtue
of which any property is owed to the Trust; and to enter into releases,
agreements and other instruments.
SECTION 2.15. EXPENSES. The Trustees shall have full power and
authority to incur on behalf of the Trust or any Class or Series and pay any
costs or expenses which the Trustees deem necessary, appropriate, desirable or
incidental to carry out, implement or enhance the business or operations of the
Trust or any Class or Series thereof, and to pay compensation from the funds of
the Trust to themselves as Trustees. The Trustees shall determine the
compensation of all officers, employees and Trustees of the Trust. The Trustees
shall have full power and authority to cause the Trust to charge all or any part
of any cost, expense or expenditure (including without limitation any expense of
selling or distributing Shares) or tax against the principal or capital of the
Trust or any Class or Series, and to credit all or any part of the profit,
income or receipt to the principal or capital of the Trust or any Class or
Series.
SECTION 2.16. COMMITTEES. The Trustees may appoint from their own
number, and terminate, any one or more committees consisting of two or more
Trustees, including an executive committee which may, when the Trustees are not
in session, exercise some or all of the power and authority of the Trustees as
the Trustees may determine.
SECTION 2.17. MISCELLANEOUS POWERS. The Trustees shall have full power
and authority to: (a) distribute to Shareholders all or any part of the earnings
or profits, surplus (including paid-in surplus), capital (including paid-in
capital) or assets of the Trust or of any Class or Series, the amount of such
distributions and the manner of payment thereof to be solely at the discretion
of the Trustees; (b) employ, engage or contract with such Persons as the
Trustees may deem desirable for the transaction of the business or operations of
the Trust or any Class or Series thereof; (c) enter into or cause the Trust or
any Class or Series thereof to enter into joint ventures, partnerships (whether
as general partner, limited partner or otherwise) and any other combinations or
associations; (d) purchase and pay for entirely out of Trust Property such
insurance as they may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the assets
of the Trust and payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers or managers, principal
underwriters, or independent contractors of the Trust individually against all
claims and liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action alleged to
have been taken or omitted by any such person as Shareholder, Trustee, officer,
employee, agent, investment adviser or manager, principal underwriter, or
independent contractor, including any action taken or omitted that may be
determined to constitute negligence, whether or not the Trust would have the
power to indemnify such person against such liability; (e) establish pension,
profit-sharing, share purchase, and other retirement, incentive and benefit
plans for any Trustees, officers, employees and agents of the Trust; (f)
indemnify or reimburse any Person with whom the Trust or any Class or Series
thereof has dealings, including without limitation the Investment Adviser,
Administrator, Principal Underwriter, Transfer Agent, financial service firms
and other agents, to such extent as the Trustees shall determine; (g) guarantee
the indebtedness or contractual obligations of other Persons; (h) determine and
change the fiscal year of the Trust and the methods by which its books, accounts
and records shall be kept; and (i) adopt a seal for the Trust, but the absence
of such seal shall not impair the validity of any instrument executed on behalf
of the Trust.
SECTION 2.18. LITIGATION. The Trustees shall have full power and
authority, in the name and on behalf of the Trust, to engage in and to
prosecute, defend, compromise, settle, abandon, or adjust by arbitration or
otherwise, any actions, suits, proceedings, disputes, claims and demands
relating to the Trust, and out of the assets of the Trust or any Class or Series
thereof to pay or to satisfy any liabilities, losses, debts, claims or expenses
(including without limitation attorneys' fees) incurred in connection therewith,
including those of litigation, and such power shall include without limitation
the power of the Trustees or any committee thereof, in the exercise of their or
its good faith business judgment, to dismiss or terminate any action, suit,
proceeding, dispute, claim or demand, derivative or otherwise, brought by any
Person, including a Shareholder in his own name or in the name of the Trust or
any Class or Series thereof, whether or not the Trust or any Class or Series
thereof or any of the Trustees may be named individually therein or the subject
matter arises by reason of business for or on behalf of the Trust or any Class
or Series thereof.
ARTICLE III
CONTRACTS
SECTION 3.1. PRINCIPAL UNDERWRITER. The Trustees in their discretion
from time to time may authorize the Trust to enter into one or more contracts
providing for the sale of Shares. Pursuant to any such contract, the Trust may
agree either to sell Shares to the other party to the contract or appoint such
other party its sales agent for such Shares. In either case, any such contract
shall be on such terms and conditions as the Trustees in their discretion may
determine; and any such contract also may provide for the sale of Shares by such
other party as principal or as agent of the Trust.
SECTION 3.2. INVESTMENT ADVISER. The Trustees, subject to any
approvals by Shareholders required by applicable law, in their discretion from
time to time, may authorize the Trust to enter into one or more investment
advisory agreements whereby the other party or parties to any such agreements
shall undertake to furnish the Trust investment advisory and research facilities
and services and such other facilities and services, if any, as the Trustees
shall consider desirable and all upon such terms and conditions as the Trustees
in their discretion may determine. Notwithstanding any provisions of this
Declaration, the Trustees may authorize the Investment Adviser, in its
discretion and without any prior consultation with the Trust, to buy, sell, lend
and otherwise trade and deal in any and all securities, commodity contracts and
other investments and assets of the Trust and to engage in and employ all types
of transactions and strategies in connection therewith. Any such action taken
pursuant to such agreement shall be deemed to have been authorized by all of the
Trustees.
The Trustees also may authorize the Trust to employ, or authorize the
Investment Adviser to employ, one or more sub-investment advisers from time to
time to perform some or all of the acts and services of the Investment Adviser
and upon such terms and conditions as may be agreed upon between the Investment
Adviser and such sub-investment adviser and approved by the Trustees.
SECTION 3.3. ADMINISTRATOR. The Trustees, in their discretion from
time to time, may authorize the Trust to enter into one or more administration
agreements, whereby the other party to such agreement shall undertake to furnish
to the Trust or a Series or a Class thereof such administrative facilities and
services and such other facilities and services, if any, as the Trustees
consider desirable and all upon such terms and conditions as the Trustees in
their discretion may determine.
The Trustees also may authorize the Trust to employ or authorize the
Administrator to employ one or more sub-administrators from time to time to
perform some or all of the acts and services of the Administrator and upon such
terms and conditions as may be agreed upon between the Administrator and such
sub-administrator and approved by the Trustees.
SECTION 3.4. OTHER SERVICE PROVIDERS. The Trustees, in their
discretion from time to time, may authorize the Trust to enter into one or more
agreements whereby the other party or parties to any such agreements will
undertake to provide to the Trust or any Class or Series or Shareholders or
beneficial owners of Shares such services as the Trustees consider desirable and
all upon such terms and conditions as the Trustees in their discretion may
determine.
SECTION 3.5. TRANSFER AGENTS. The Trustees, in their discretion from
time to time, may appoint one or more transfer agents for the Trust or any Class
or Series thereof. Any contract with a transfer agent shall be on such terms and
conditions as the Trustees in their discretion may determine.
SECTION 3.6. CUSTODIAN. The Trustees may appoint a bank or trust
company, subject to applicable law, as a custodian of the Trust or any Class or
Series with authority as its agent to hold cash and securities owned by the
Trust or the Class or Series and to release and deliver the same and otherwise
to perform such duties as the Trustees may specify, all upon such terms and
conditions as may be agreed upon between the Trust and the Custodian.
SECTION 3.7. AFFILIATIONS. The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, creditor, director, officer, partner, trustee or employee of or has
any interest in any Person or any parent or affiliate of any such Person, with
which a contract or agreement of the character described in this Article III has
been or will be made, or that any such Person, or any parent or affiliate
thereof, is a Shareholder of or has an interest in the Trust, or that
(ii) any such Person also has similar contracts, agreements or plans
with other investment companies (including, without limitation, the investment
companies referred to in the last paragraph of Section 2.9) or Persons, or has
other business activities or interests shall not affect in any way the validity
of any such contract, agreement or plan or disqualify any Shareholder, Trustee
or officer of the Trust from authorizing, voting upon or executing the same or
create any liability or accountability to the Trust or its Shareholders.
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS
SECTION 4.1. NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS
AND EMPLOYEES. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or the acts,
obligations or affairs of the Trust or any Class or Series thereof. All Persons
dealing or contracting with the Trustees as such or with the Trust or any Class
or Series thereof or having any claim against the Trust or any Class or Series
thereof shall have recourse only to the Trust or such Class or Series for the
payment of their claims or for the payment or satisfaction of claims,
obligations or liabilities arising out of such dealings or contracts. No
Trustee, officer or employee of the Trust, whether past, present or future,
shall be subject to any personal liability whatsoever to any such Person, and
all such Persons shall look solely to the Trust Property, or to the assets of
one or more specific Class or Series of the Trust if the claim arises from the
act, omission or other conduct of such Trustee, officer or employee with respect
to only such Class or Series, for satisfaction of claims of any nature arising
in connection with the affairs of the Trust or such Class or Series. If any
Shareholder, Trustee, officer or employee, as such, of the Trust is made a party
to any suit or proceeding to enforce any such liability of the Trust or any
Class or Series thereof, he shall not, on account thereof, be held to any
personal liability.
SECTION 4.2. TRUSTEE'S GOOD FAITH ACTION; ADVICE TO OTHERS; NO BOND OR
SURETY. The exercise by the Trustees of their powers and discretions hereunder
shall be binding upon all Interested Persons. A Trustee shall not be liable for
errors of judgment or mistakes of fact or law. The Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing of them or of
any officer, agent, employee, consultant, investment adviser or other adviser,
administrator, distributor or principal underwriter, custodian or transfer,
dividend disbursing, shareholder servicing or accounting agent of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee.
The Trustees may take advice of counsel or other experts with respect to the
meaning and operation of this Declaration and their duties as Trustees, and
shall be under no liability for any act or omission in accordance with such
advice or for failing to follow such advice. In discharging their duties, the
Trustees, when acting in good faith, shall be entitled to rely upon the records,
books and accounts of the Trust and upon reports made to the Trustees by any
officer, employee, agent, consultant, accountant, attorney, investment adviser
or other adviser, principal underwriter, expert, professional firm or
independent contractor. The Trustees, as such, shall not be required to give any
bond or surety or any other security for the performance of their duties. No
provision of this Declaration shall protect any Trustee or officer of the Trust
against any liability to the Trust or its Shareholders to which he would
otherwise be subject by reason of his own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
SECTION 4.3. INDEMNIFICATION. The Trustees may provide for the
indemnification by the Trust or by any Class or Series thereof of the
Shareholders, Trustees, officers and employees of the Trust and of such other
Persons as the Trustees in the exercise of their discretion may deem appropriate
or desirable in the By-Laws or by contract, vote or other action. Any such
indemnification may be mandatory or permissive, and may be insured against by
policies maintained by the Trust.
SECTION 4.4. NO DUTY OF INVESTIGATION. No purchaser, lender or other
Person dealing with the Trustees or any officer, employee or agent of the Trust
or a Class or Series thereof shall be bound to make any inquiry concerning the
validity of any transaction purporting to be made by the Trustees or by said
officer, employee or agent or be liable for the application of money or property
paid, loaned, or delivered to or on the order of the Trustees or of said
officer, employee or agent. Every obligation, contract, instrument, certificate,
Share, other security or undertaking of the Trust or a Class or Series, and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively presumed to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their capacity
as officers, employees or agents of the Trust. Every written obligation,
contract, instrument, certificate, Share, other security or undertaking of the
Trust or a Class or Series made or issued by the Trustees may recite that the
same is executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of the Trust or a Class or Series thereof
under any such instrument are not binding upon any of the Trustees or
Shareholders individually, but bind only the Trust Property or the Trust
Property of the applicable Class or Series, and may contain any further recital
which they may deem appropriate, but the omission of any such recital shall not
operate to bind the Trustees or Shareholders individually.
SECTION 4.5. RELIANCE ON RECORDS AND EXPERTS. Each Trustee, officer or
employee of the Trust, in the performance of his duties, shall be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the records, books and accounts of
the Trust or a Class or Series thereof, upon an opinion or other advice of legal
counsel, or upon reports made or advice given to the Trust or a Class or Series
thereof by any Trustee or any of the Trust's officers or employees or by the
Investment Adviser, the Administrator, the Custodian, a Principal Underwriter,
Transfer Agent, accountants, appraisers or other experts, advisers, consultants
or professionals selected with reasonable care by the Trustees or officers of
the Trust, regardless of whether the person rendering such report or advice also
may be a Trustee, officer or employee of the Trust.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
SECTION 5.1. SHARES OF BENEFICIAL INTEREST. The interest of the
beneficiaries of the Trust initially shall be divided into common shares of
beneficial interest of $0.001 par value. The number of common shares authorized
hereunder is unlimited. All shares issued, including, without limitation, those
issued in connection with a dividend or distribution or a share split, shall be
fully paid and nonassessable. The Trustees, without Shareholder approval, may
authorize one or more Classes of Shares (which Classes, without Shareholder
approval, may be divided by the Trustees into two or more Series), Shares of
each such Class or Series having such preferences, voting powers and special or
relative rights or privileges (including conversion rights, if any) as the
Trustees may determine and as shall be set forth in a resolution adopted in
accordance with the By-Laws. The number of Shares of each Class or Series
authorized shall be unlimited except as the By-Laws otherwise may provide. The
Trustees from time to time may divide or combine the Shares of any Class or
Series into a greater or lesser number without thereby changing the
proportionate beneficial interest in the Class or Series.
The ownership of Shares shall be recorded on the books of the Trust or
the Transfer Agent. No certificates certifying the ownership of Shares shall be
issued except as the Trustees otherwise may determine from time to time. The
Trustees may make such rules as they consider appropriate for the issuance of
Share certificates, the transfer of Shares and similar matters. The record books
of the Trust as kept by the Trust or the Transfer Agent, as the case may be,
shall be conclusive as to who are the Shareholders of each Class or Series and
as to the number of Shares of each Class or Series held from time to time by
each Shareholder. The Trustees at any time may discontinue the issuance of Share
certificates and may, by written notice to each Shareholder, require the
surrender of Share certificates to the Trust for cancellation. Such surrender
and cancellation shall not affect the ownership of Shares in the Trust.
SECTION 5.2. VOTING POWERS. Subject to the voting powers of one or
more Classes or Series, the Shareholders shall have power to vote only (i) with
respect to the election of Trustees, (ii) for the removal of Trustees as
provided for herein, (iii) with respect to any Investment Adviser as required by
applicable law, (iv) with respect to any termination or amendment of this Trust,
or with respect to certain transactions, to the extent and as provided in
Article VIII, (v) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or should not be brought or maintained derivatively or as a class action
on behalf of the Trust or the Shareholders, and (vi) with respect to such
additional matters relating to the Trust as may be required by law, this
Declaration, the By-Laws or any registration of the Trust with the Securities
and Exchange Commission (or any successor agency) or any state, or as the
Trustees may consider necessary or desirable. Each whole Share shall be entitled
to one vote as to any matter on which it is entitled to vote and each fractional
Share shall be entitled to a proportionate fractional vote. Notwithstanding any
other provision of this Declaration, on any matter submitted to a vote of
Shareholders, all Shares of the Trust then entitled to vote shall be voted in
the aggregate as a single Class without regard to Classes or Series, except as
otherwise provided in the By-Laws or required by applicable law. There shall be
no cumulative voting in the election of Trustees.
SECTION 5.3. RIGHTS OF SHAREHOLDERS. The ownership of the Trust
Property of every description and the right to conduct any business of the Trust
are vested exclusively in the Trustees, and the Shareholders shall have no
interest therein other than the beneficial interest conferred by their Shares,
and they shall have no right to call for any partition or division of any
property, profits, rights or interests of the Trust or of any Class or Series,
nor can they be called upon to share or assume any losses of the Trust or of any
Class or Series or suffer an assessment of any kind by virtue of their ownership
of Shares. The Shares shall be personal property giving only the rights
specifically set forth in this Declaration. The Shares shall not entitle the
holder to preference, preemptive, appraisal, conversion or exchange rights,
except as the Trustees may specifically determine with respect to any Class or
Series.
Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms of this Declaration and
the Bylaws and to have become a party hereto and thereto. The death of a
Shareholder during the continuance of the Trust shall not operate to terminate
the same nor entitle the representative of any deceased Shareholder to an
accounting or to take any action in court or elsewhere against the Trust or the
Trustees, but only to the rights of said decedent under this Trust.
SECTION 5.4. TRUST ONLY. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a
Massachusetts business trust. Nothing in this Declaration shall be construed to
make the Shareholders, either by themselves or with the Trustees, partners or
members of a joint stock association.
SECTION 5.5. ISSUANCE OF SHARES. The Trustees in their discretion may
issue, from time to time and without any authorization or vote of the
Shareholders, Shares of any Class or Series, in addition to the then issued and
Outstanding Shares, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times and on such
terms as the Trustees may deem appropriate or desirable, and may in such manner
acquire other assets (including the acquisition of assets subject to, and in
connection with the assumption of, liabilities) and businesses. In connection
with any issuance of Shares, the Trustees may issue fractional Shares and
reissue and resell full and fractional Shares held in the treasury. The Trustees
may authorize the issuance of certificates of beneficial interest to evidence
the ownership of Shares. Shares held in the treasury shall not be voted nor
shall such Shares be entitled to any dividends or other distributions declared
with respect thereto. The Trustees, in their discretion from time to time and
without any authorization or vote of the Shareholders, also may issue to the
extent consistent with applicable law securities of the Trust convertible into
Shares of the Trust and warrants to purchase securities of the Trust, in each
case pursuant to such terms and under such conditions as the Trustees may
specify in their discretion. Shares of any Class or Series, in addition to the
then issued and outstanding Shares, and such warrants or convertible securities,
may be issued to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times and on such
terms as the Trustees may deem appropriate or desirable, and may in such manner
acquire other assets (including the acquisition of assets subject to, and in
connection with the assumption of, liabilities) and businesses. The officers of
the Trust are severally authorized to take all such actions as may be necessary
or desirable to carry out this Section 5.5.
ARTICLE VI
REDEMPTIONS AND REPURCHASES
SECTION 6.1. REDEMPTIONS AND REPURCHASES OF SHARES. From time to time,
the Trust may redeem or repurchase its Shares, all upon such terms and
conditions as may be determined by the Trustees and subject to any applicable
provisions of the 1940 Act. The Trust may require Shareholders to pay a
withdrawal charge, a sales charge, or any other form of charge to the Trust, to
the underwriter or to any other person designated by the Trustees upon
redemption or repurchase of Shares in such amount as shall be determined from
time to time by the Trustees. The Trust also may charge a redemption or
repurchase fee in such amount as may be determined from time to time by the
Trustees.
SECTION 6.2. MANNER OF PAYMENT. Payment of Shares redeemed or
repurchased, at the option of the Trustees or such officer or officers as they
may duly authorize for the purpose, in their complete discretion, may be made in
cash, or in kind, or partially in cash and partially in kind. If payment is made
in kind, the Trustees, or their delegate, shall have absolute discretion as to
what security or securities shall be distributed in kind and the amount of the
same, and the securities shall be valued for purposes of distribution at the
figure at which they were appraised in computing the net asset value of the
Shares, provided that any Shareholder who cannot legally acquire securities so
distributed in kind by reason of the prohibitions of the 1940 Act shall receive
cash.
SECTION 6.3. INVOLUNTARY REDEMPTION. If the Trustees shall be of the
opinion at any time and in good faith, that direct or indirect ownership of
Shares of any Class or Series or other securities of the Trust has or may become
concentrated in any person to an extent which would disqualify the Trust as a
regulated investment company under the Internal Revenue Code, then the Trustees
shall have the power by lot or other means deemed equitable by them (i) to call
for redemption by any such person a number, or principal amount, of Shares or
other securities of the Trust sufficient to maintain or bring the direct or
indirect ownership of Shares or other securities of the Trust into conformity
with the requirements for such qualification and (ii) to refuse to transfer or
issue Shares or other securities of the Trust to any person whose acquisition of
the Shares or other securities of the Trust in question would result in such
disqualification. The redemption shall be effected upon such terms and
conditions as shall be determined by the Trustees.
The holders of Shares or other securities of the Trust shall upon
demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares or other securities of the Trust as the
Trustees deem necessary to comply with the provisions of the Internal Revenue
Code, or to comply with the requirements of any other taxing authority.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
SECTION 7.1. NET ASSET VALUE. The net asset value of each outstanding
Share of the Trust or of any Class or Series thereof shall be determined on such
days and at or as of such time or times as the Trustees may determine. Any
reference in this Declaration to the time at which a determination of net asset
value is made shall mean the time as of which the determination is made. The
power and duty to determine and method of determination of net asset value may
be delegated by the Trustees from time to time to the Investment Adviser, the
Administrator, the Custodian, the Transfer Agent or such other Person or Persons
as the Trustees may determine. The value of the assets of the Trust or any Class
or Series thereof shall be determined in a manner authorized by the Trustees.
From the total value of said assets, there shall be deducted all indebtedness,
interest, taxes, payable or accrued, including estimated taxes on unrealized
book profits, expenses and management charges accrued to the appraisal date, and
all other items in the nature of liabilities which shall be deemed appropriate
by the Trustees, as incurred by or allocated to the Trust or any Class or Series
thereof. The resulting amount, which shall represent the total net assets of the
Trust or Class or Series thereof, shall be divided by the number of Outstanding
Shares of the Trust or Class or Series thereof at that time and the quotient so
obtained shall be deemed to be the net asset value of the Shares of the Trust or
Class or Series thereof. The Trust may declare a suspension of the determination
of net asset value to the extent permitted by the 1940 Act. It shall not be a
violation of any provision of this Declaration if Shares are sold, redeemed or
repurchased by the Trust at a price other than one based on net asset value,
subject to the provisions of the 1940 Act. No provision of this Declaration
shall be construed to restrict or affect the right or ability of the Trust to
employ or authorize the use of pricing services, appraisers or any other means,
methods, procedures, or techniques in valuing the assets or calculating the
liabilities of the Trust or any Class or Series thereof.
SECTION 7.2. DIVIDENDS AND DISTRIBUTIONS.
(a) The Trustees from time to time may distribute ratably among the
Shareholders of the Trust or of a Class or Series thereof such portion of the
net earnings or profits, surplus (including paid-in surplus), capital (including
paid-in capital), or assets of the Trust or such Class or Series held by the
Trustees as they may deem appropriate or desirable. Such distributions may be
made in cash, additional Shares or property (including without limitation any
type of obligations of the Trust or Class or Series or any assets thereof), and
the Trustees may distribute ratably among the Shareholders of the Trust or Class
or Series thereof additional Shares of the Trust or Class or Series thereof
issuable hereunder in such manner, at such times, and on such terms as the
Trustees may deem appropriate or desirable. Such distributions may be among the
Shareholders of the Trust or Class or Series thereof at the time of declaring a
distribution or among the Shareholders of the Trust or Class or Series thereof
at such other date or time or dates or times as the Trustees shall determine.
The Trustees always may retain from the earnings or profits such amounts as they
may deem appropriate or desirable to pay the expenses and liabilities of the
Trust or a Class or Series thereof or to meet obligations of the Trust or a
Class or Series thereof, together with such amounts as they may deem desirable
to use in the conduct of its affairs or to retain for future requirements or
extensions of the business or operations of the Trust or such Class or Series.
The Trust may adopt and offer to Shareholders such dividend reinvestment plans,
cash dividend payout plans or other distribution plans as the Trustees may deem
appropriate or desirable. The Trustees in their discretion may determine that an
account administration fee or other similar charge may be deducted directly from
the income and other distributions paid on Shares to a Shareholder's account in
any Class or Series.
(b) The Trustees may prescribe in their absolute discretion such bases
and times for determining the amounts for the declaration and payment of
dividends and distributions as they may deem necessary, appropriate or
desirable.
(c) Inasmuch as the computation of net income and gains for Federal
income tax purposes may vary from the computation thereof on the books of
account, the above provisions shall be interpreted to give the Trustees full
power and authority in their absolute discretion to distribute for any fiscal
year as dividends and as capital gains distributions, respectively, additional
amounts sufficient to enable the Trust or a Class or Series thereof to avoid or
reduce liability for taxes.
SECTION 7.3. POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding any
provision contained in this Declaration, the Trustees may prescribe in their
absolute discretion such other means, methods, procedures or techniques for
determining the per Share net asset value of a Class or Series thereof or the
income of the Class or Series thereof, or for the declaration and payment of
dividends and distributions on any Class or Series.
ARTICLE VIII
DURATION; AMENDMENTS; TERMINATION OF TRUST OR A
CLASS OR SERIES; MERGERS; CERTAIN TRANSACTIONS
SECTION 8.1. DURATION. The Trust shall continue without limitation of
time, but subject to the provisions of this Article VIII. The death,
declination, resignation, retirement, removal or incapacity of the Trustees, or
any one of them, shall not operate to terminate or annul the Trust or to revoke
any existing agency or delegation or authority pursuant to the terms of this
Declaration or of the By-Laws.
SECTION 8.2. AMENDMENTS. The execution of an instrument setting forth
the establishment and designation and the relative rights of any Class or Series
of Shares in accordance with Section 5.1 hereof shall, without any
authorization, consent or vote of the Shareholders, effect an amendment of this
Declaration. Except as otherwise provided in Section 8.3 hereof, if authorized
by a majority of the Trustees and by vote of a majority of the outstanding
voting securities of the Trust affected by the amendment (which voting
securities shall, unless otherwise provided by the Trustees, vote together on
such amendment as a single class), or by any larger vote which may be required
by applicable law or this Declaration in any particular case, the Trustees may
amend or otherwise supplement this Declaration. The Trustees may also amend this
Declaration without the vote or consent of Shareholders to change the name of
the Trust or to make such other changes as do not have a materially adverse
effect on the rights or interests of Shareholders hereunder or if they deem it
necessary to conform this Declaration to the requirements of applicable Federal
laws or regulations or the requirements of the regulated investment company
provisions of the Internal Revenue Code, but the Trustees shall not be liable
for failing so to do.
No amendment may be made under this Section which shall amend, alter,
change or repeal any of the provisions of Article VIII unless the amendment
effecting such amendment, alteration, change or repeal shall receive the
affirmative vote or consent of the holders of 66-2/3% of each Class and Series
of Shares outstanding and entitled to vote (with each such Class and Series
separately voting thereon on consenting thereto as a separate Class or Series).
Such affirmative vote or consent shall be in addition to the vote or consent of
the holders of Shares otherwise required by law or by any agreement between the
Trust and any national securities exchange.
Nothing contained in this Declaration shall permit the amendment of
this Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to permit
assessments upon Shareholders.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the 1933 Act, covering the first public offering of
securities of the Trust shall have become effective, this Declaration may be
terminated or amended in any respect by the affirmative vote of a majority of
the Trustees or by an instrument signed by a majority of the Trustees.
SECTION 8.3. CERTAIN TRANSACTIONS.
(a) Except as otherwise provided in this Section 8.3, at least 75% of
the votes entitled to be cast by Shareholders, in addition to the affirmative
vote of at least 75% of the Trustees, shall be necessary to effect an amendment
to this Declaration to make the Shares "redeemable securities" or to convert the
Trust from a "closed-end company" to an "open-end company" (as such terms are
defined in Section 5(a)(2) and Section 5(a)(1), respectively, of the 1940 Act)
unless the Continuing Trustees (as hereinafter defined), by a vote of at least
75% of such Continuing Trustees, approve such amendments in which case the
affirmative vote of a majority of the votes entitled to be cast by Shareholders
shall be required to approve such transaction.
(b) The affirmative votes of at least 75% of the Trustees and of at
least 80% of the votes entitled to be cast thereon by Shareholders are required
to authorize any of the following transactions:
(i) unless the 1940 Act or any other Federal or state law or
regulation requires a lesser vote, any Shareholder proposal as to specific
investment decisions made or to be made with respect to the Trust's assets as to
which Shareholder approval is required under Federal or Massachusetts law; or
(ii) any proposal as to the voluntary liquidation or
dissolution of the Trust or any amendment to this Declaration to terminate the
existence of the Trust, unless the Continuing Trustees, by a vote of at least
75% of such Continuing Trustees, approve such proposals, in which case the
affirmative vote of a majority of the votes entitled to be cast by Shareholders
shall be required to approve such transaction.
(c) The affirmative vote of at least 75% of the of Trustees and the
holders of at least 66-2/3% of the votes entitled to be cast thereon by
Shareholders, including at least 66-2/3% of the votes entitled to be cast
thereon other than votes held by an Interested Party (or its Affiliate) (as
hereinafter defined) who is a party to a Business Combination (as hereinafter
defined) or an Affiliate or Associate (as hereinafter defined) of the Interested
Party, are required to authorize any Business Combination unless either the
condition in clause (i) below is satisfied, or all of the conditions in clauses
(ii), (iii), (iv), (v) and (vi) below are satisfied, in either which case
paragraph (e) below shall apply.
(i) The Business Combination shall have been approved by a
vote of at least 75% of the Continuing Trustees.
(ii) The aggregate amount of cash and the Fair Market Value
(as hereinafter defined), as of the date of the consummation of the Business
Combination, of consideration other than cash to be received per Share by
holders of any Class of outstanding Shares in such Business Combination shall
be at least equal to the higher of the following:
(A) the highest per Share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by an
Interested Party (as hereinafter defined) for any Shares acquired by it (i)
within the two-year period immediately prior to the first public announcement of
the proposal of the Business Combination (the "Announcement Date"), or (ii) (a)
in the Threshold Transaction (as hereinafter defined), or (b) in any period
between the Threshold Transaction and the consummation of the Business
Combination, whichever is higher; and
(B) the net asset value per Share of such Shares
on the Announcement Date or on the date of the Threshold
Transaction, whichever is higher.
(iii) The consideration to be received by holders of the
particular Class of outstanding Shares shall be in cash or in the same form as
the Interested Party has previously paid for Shares of any Class. If the
Interested Party has paid for Shares of any Class with varying forms of
consideration, the form of consideration for such Class of Shares shall be
either cash or the form used to acquire the largest number of Shares of such
Class of Shares previously acquired by it.
(iv) After the occurrence of the Threshold Transaction, and
prior to the consummation of such Business Combination, such Interested Party
shall not have become the beneficial owner of any additional Shares except by
virtue of the Threshold Transaction.
(v) After the occurrence of the Threshold Transaction, such
Interested Party shall not have received the benefit, directly or indirectly
(except proportionately as a Shareholder), of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax advantages
provided by the Trust, whether in anticipation of or in connection with such
Business Combination or otherwise.
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the 1934 Act and
1940 Act shall be prepared and mailed by the Interested Party, at such
Interested Party's expense, to Shareholders at least 30 days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to the 1934 Act or 1940
Act.
(d) For the purposes of this Section 8.3 only:
(i) "Business Combination" shall mean any of the transactions
described or referred to in any one or more of the following subparagraphs:
(A) any merger, consolidation or share exchange
of the Trust with or into any other Person;
(B) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series of transactions in
any 12-month period) to or with any other person of any assets of the Trust
having an aggregate Fair Market Value of $1,000,000 or more except for portfolio
transactions of the Trust (including, without limitation, pledges of portfolio
securities in connection with borrowings and debt securities and default
provisions with respect thereto, reverse repurchase agreements and security loan
transactions) affected in the ordinary course of the Trust's business;
(C) the issuance or transfer by the Trust (in
one transaction or a series of transactions in any 12-month period) of any
securities of the Trust to any other person in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market Value
of $1,000,000 or more excluding (i) sales of debt securities of the Trust in a
public or private offering, (ii) sales of any securities of the Trust in
connection with a public offering thereof, (iii) issuances of any securities of
the Trust pursuant to a dividend reinvestment plan adopted by the Trust or
pursuant to a share dividend and (iv) issuances of any securities of the Trust
upon the exercise of any share subscription rights distributed by the Trust;
(ii) "Continuing Trustee" means any Trustee who is not an
Interested Party or an Affiliate of an Interested Party and has been a Trustee
for a period of at least 12 months (or since the Trust's commencement of
operations, if that period is less than 12 months), or is a successor of a
Continuing Trustee who is unaffiliated with an Interested Party and is
recommended to succeed a Continuing Trustee by a majority of the Continuing
Trustees then on the Board of Trustees.
(iii) "Interested Party" shall mean any person, other than an
investment company advised by the Trust's initial investment adviser or any of
its Affiliates, which enters, or proposes to enter, into a Business Combination
with the Trust.
(iv) A person shall be a "beneficial owner" of any Share:
(A) which such person or any of its Affiliates
or Associates beneficially owns, directly or indirectly; or
(B) which such person or any of its Affiliates
or Associates has the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or
(C) which is beneficially owned, directly or
indirectly, by any other person with which such person or any of its Affiliates
or Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any Shares.
(v) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the 1934 Act.
(vi) "Fair Market Value" means:
(A) in the case of Shares, the highest closing
sale price during the 30- day period immediately preceding the relevant date of
a Share on the New York Stock Exchange, or if such Share is not listed on such
Exchange, on the principal United States securities exchange registered under
the 1934 Act on which such Share is listed, or, if such Share is not listed on
any such exchange, the highest closing sale price (if such Share is a National
Market System security) or the highest closing bid quotation (if such Share is
not a National Market System security) with respect to a Share during the 30-day
period preceding the relevant date on the National Association of Securities
Dealers, Inc. Automated Quotation Systems (NASDAQ) or any system then in use,
or if no such quotations are available, the fair market value on the relevant
date of the Share as determined by at least 75% of the Continuing Trustees in
good faith, and
(B) in the case of property other than cash or
stock, the fair market value of such property on the relevant date as determined
by at least 75% of the Continuing Trustees in good faith.
(vii) "Threshold Transaction" means the transaction by or as a
result of which an Interested Party first becomes the beneficial owner of
Shares.
(viii) If any Business Combination occurs in which the Trust
survives, the phrase "consideration other than cash to be received" as used in
subparagraph (c) (ii) shall include the Shares retained by the holders of such
Shares.
(ix) Continuing Trustees, acting by a vote of at least 75%,
shall have the power and duty to determine, on the basis of information known to
them after reasonable inquiry, all facts necessary to determine (a) the number
of Shares beneficially owned by any Person, (b) whether a Person is an Affiliate
or Associate or another, (c) whether the requirements of subparagraph (c) above
have been met with respect to any Business Combination, and (d) whether the
assets which are the subject of any Business Combination have, or the
consideration to be received for the issuance or transfer of securities by the
Trust in any Business Combination has, an aggregate Fair Market Value of
$1,000,000 or more.
(e) If any Business Combination described in paragraph (d) (i) (A) or
(B) (if the merger, consolidation, share exchange or transfer or other
disposition constitutes a merger, consolidation, share exchange or transfer of
all or substantially all of the assets of the Trust with respect to which
shareholder approval is required under Massachusetts Law) is approved by a vote
of 75% of the Continuing Trustees or all of the conditions in paragraph (c)
(ii), (iii), (iv), (v) and (vi) are satisfied, a majority of the votes entitled
to be cast by Shareholders shall be required to approve such transaction. If any
other Business Combination is approved by a vote of 75% of the Continuing
Trustees or all of the conditions in paragraph (c) (ii), (iii), (iv), (v) and
(vi) are satisfied, no shareholder vote shall be required to approve such
transaction unless otherwise provided in this Declaration or required by
applicable law.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. USE OF THE WORDS "HIGHLAND CAPITAL." Highland Capital
Management, L.P. (hereinafter referred to as Highland Capital) has consented to
the use by the Trust of the identifying words "Highland Capital" in the name of
the Trust. Such consent is conditioned upon the continued employment of Highland
Capital or a subsidiary or affiliate of Highland Capital as Investment Adviser
of the Trust or as the investment adviser of each of the investment companies
referred to in the last paragraph of Section 2.9. As between the Trust and
itself, Highland Capital shall control the use of the name of the Trust insofar
as such name contains the identifying words "Highland Capital. " Highland
Capital from time to time may use the identifying words "Highland Capital" in
other connections and for other purposes, including, without limitation, the
names of other investment companies, trusts, corporations or businesses which it
may manage, advise, sponsor or own or in which it may have a financial interest.
Highland Capital may require the Trust to cease using the identifying words
"Highland Capital" in the name of the Trust if Highland Capital or a subsidiary
or affiliate of Highland Capital ceases to act as investment adviser of the
Trust or as the investment adviser of each of the investment companies referred
to in the last paragraph of Section 2.9.
SECTION 9.2. NOTICES. Notwithstanding any other provision of this
Declaration, any and all notices to which any Shareholder may be entitled and
any and all communications shall be deemed duly served or given if mailed,
postage prepaid, addressed to any Shareholder of record at his last known
address as recorded on the register of the Trust. If and to the extent
consistent with applicable law, a notice of a meeting, an annual report, and any
other communication to Shareholders need not be sent to a Shareholder (i) if an
annual report and a proxy statement for two consecutive shareholder meetings
have been mailed to such Shareholder's address and have been returned as
undeliverable, (ii) if all, and at least two, checks (if sent by first class
mail) in payment of distributions on Shares during a twelve-month period have
been mailed to such Shareholder's address and have been returned as
undeliverable or (iii) in any other case in which a proxy statement concerning a
meeting of security holders is not required to be given pursuant to the
Commission's proxy rules as from time to time in effect under the 1934 Act.
However, delivery of such proxy statements, annual reports and other
communications shall resume if and when such Shareholder delivers or causes to
be delivered to the Trust written notice setting forth such Shareholder's then
current address.
SECTION 9.3. FILING OF COPIES, REFERENCES, HEADINGS AND COUNTERPARTS.
The original or a copy of this instrument, any amendment hereto and each
declaration of trust supplemental hereto, shall be kept at the office of the
Trust. Anyone dealing with the Trust may rely on a certificate by a Trustee or
an officer of the Trust as to whether or not any such amendments or supplemental
declarations of trust have been made and as to any matters in connection with
the Trust hereunder, and, with the same effect as if it were the original, may
rely on a copy certified by a Trustee or an officer of the Trust to be a copy of
this instrument or of any such amendment hereto or supplemental declaration of
trust.
In this instrument or in any such amendment or supplemental
declaration of trust, references to this instrument, and all expressions such as
"herein," "hereof," and "hereunder," shall be deemed to refer to this instrument
as amended or affected by any such supplemental declaration of trust. Headings
are placed herein for convenience of reference only and in case of any conflict,
the text of this instrument, rather than the headings, shall control. This
instrument may be executed in any number of counterparts each of which shall be
deemed an original, but such counterparts shall constitute one instrument. A
restated Declaration, integrating into a single instrument all of the provisions
of the Declaration which are then in effect and operative, may be executed from
time to time by a majority of the Trustees then in office and filed with the
Secretary of State of the Commonwealth of Massachusetts. A restated Declaration,
upon execution, shall be conclusive evidence of all amendments and supplemental
declarations contained therein and thereafter may be referred to in lieu of the
original Declaration and the various amendments and supplements thereto.
SECTION 9.4. APPLICABLE LAW. The Trust set forth in this instrument is
made in The Commonwealth of Massachusetts, and it is created under and is to be
governed by and construed and administered according to the laws of said
Commonwealth. The Trust shall be of the type commonly called a Massachusetts
business trust, and without limiting the provisions hereof, the Trust may
exercise all powers which are ordinarily exercised by such a trust.
SECTION 9.5. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of this Declaration are severable, and if the
Trustees shall determine, with the advice of legal counsel, that any of such
provisions is in conflict with the 1940 Act, the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall be
construed in such a manner consistent with such law as may most closely reflect
the intention of the offending provision; provided, however, that such
determination shall not affect any of the remaining provisions of this
Declaration or render invalid or improper any action taken or omitted prior to
such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not affect in any
manner such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned Trustee has hereunto set his hand
and seal for himself and his assigns as of the day and year first above written.
/s/ James Dondero, Trustee
--------------------------
Name: James Dondero
Address: 1150 Two Galleria Tower
13455 Noel Road LB #45
Dallas, TX 75240
ADDRESS OF TRUST:
- ------------------
1150 Two Galleria Tower
13455 Noel Road LB #45
Dallas, TX 75240
ADDRESS OF RESIDENT AGENT:
- --------------------------
CT Corporation System
2 Oliver Street
Boston, MA 02109
The names and addresses of all the Trustees of the Trust are as follows:
James Dondero
c/o Highland Capital Fixed Income Fund
1150 Two Galleria Tower
13455 Noel Road LB #45
Dallas, Texas 75240
