pos8c
As
filed with the Securities and Exchange Commission on December 17, 2007
1933 Act File No. 333-147121
1940 Act File No. 811-21869
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
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Registration Statement under the Securities Act of 1933
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Pre-Effective Amendment No. |
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Post-Effective Amendment
No. 1 |
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Registration Statement under the Investment Company Act of 1940
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Amendment No. 13 |
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Highland Credit Strategies Fund
(Exact Name of Registrant as Specified in the Declaration of Trust)
Two Galleria Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Address of Principal Executive Offices)
(877) 665-1287
(Registrants telephone number, including area code)
James D. Dondero, President
Highland Credit Strategies Fund
Two Galleria Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Name and Address of Agent for Service)
Copies to:
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Charles B. Taylor
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Leonard B. Mackey, Jr. |
Skadden Arps Slate Meagher & Flom LLP
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Clifford Chance US LLP |
333 West Wacker Drive
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31 West 52nd Street |
Chicago, Illinois 60606
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New York, New York 10019 |
Approximate date of proposed public offering:
As soon as practicable after the effective date of this Registration Statement
It is proposed that this filing will become effective:
þ when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed |
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Proposed |
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Maximum |
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Maximum |
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Amount Being |
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Offering |
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Aggregate |
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Amount of |
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Title of Securities Being Registered |
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Registered(1) |
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Price per Unit(1) |
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Offering Price(1) |
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Registration Fee(2) |
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Common Shares, $0.001
par value |
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11,535,615 shares |
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$16.30 |
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$188,030,690 |
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$5772.54 |
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(1) |
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Estimated solely for the purpose of calculating the registration fee as required by Rule
457(c) under the Securities Act of 1933, as amended, based upon the average of the high and low
sales prices reported on the New York Stock Exchange consolidated reporting system of $16.30 on
December 12, 2007. |
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(2) |
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Previously paid. |
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Part A
Prospectus
Incorporated by reference from Pre-Effective Amendment No. 2 to the Trusts Registration
Statement on Form N-2 (File Nos. 333-147121 and 811-21869), as filed with the Securities and Exchange Commission on December 14, 2007.
Highland Credit Strategies Fund
Statement of Additional Information
Highland Credit
Strategies Fund (the Trust) is a non-diversified, closed-end
management investment company registered under the Investment Company Act with limited operating
history. This Statement of Additional Information registered under the Investment Company Act does
not constitute a prospectus, but should be read in conjunction with the prospectus relating thereto
dated December 17, 2007. This Statement of Additional Information does not include all information
that a prospective investor should consider before purchasing common shares, and investors should
obtain and read the prospectus prior to purchasing such shares. A copy of the prospectus may be
obtained without charge by calling 1-877-665-1287. You may also obtain a copy of the prospectus on
the Securities and Exchange Commissions web site (http://www.sec.gov). Capitalized terms used but
not defined in this Statement of Additional Information have the meanings ascribed to them in the
prospectus.
TABLE OF CONTENTS
This
Statement of Additional Information is dated December 17, 2007
B-1
USE OF PROCEEDS
Pending investment in securities that meet the Trusts investment objectives and policies, the
net proceeds of the Offer will be invested in short-term debt securities of the type described
under Investment Policies and Techniques Short-Term Debt Securities. We currently
anticipate that the Trust will be able to invest primarily in securities that meet the Trusts
investment objectives and policies within approximately one to three months after the completion of
the Offer.
INVESTMENT RESTRICTIONS
Except as described below, the Trust, as a fundamental policy, may not, without the approval
of the holders of a majority of the outstanding(1) common shares and any preferred shares, if
any, voting together as a single class, and of the holders of a majority of the outstanding
preferred shares, if any, voting as a separate class:
(1) invest 25% or more of the value of its total assets in any single industry or
group of industries;
(2) issue senior securities or borrow money other than as permitted by the Investment
Company Act or pledge its assets other than to secure such issuances or in connection with
hedging transactions, short sales, securities lending, when issued and forward commitment
transactions and similar investment strategies;
(3) make loans of money or property to any person, except through loans of portfolio
securities up to a maximum of 33 1/3% of the Trusts total assets, the purchase of debt
securities, including bank loans (senior loans) and participations therein, or the entry
into repurchase agreements up to a maximum of 33 1/3% of the Trusts total assets;
(4) underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities or the sale of its own securities,
the Trust may be deemed to be an underwriter;
(5) purchase or sell real estate, except that the Trust may invest in securities of
companies that deal in real estate or are engaged in the real estate business, including
real estate investment trusts and real estate operating companies, and instruments secured
by real estate or interests therein and the Trust may acquire, hold and sell real estate
acquired through default, liquidation, or other distributions of an interest in real estate
as a result of the Trusts ownership of such other assets; or
(6) purchase or sell commodities or commodity contracts for any purposes except as,
and to the extent, permitted by applicable law without the Trust becoming subject to
registration with the Commodity Futures Trading Commission (the CFTC) as a
commodity pool.
As currently relevant to the Trust, the Investment Company Act requires an asset coverage of
200% for a closed-end fund issuing preferred shares and 300% for a closed-end fund issuing
borrowings exceeding 5% of the Trusts assets (excluding temporary borrowings).
The Trust will not engage in any activities described under investment restriction number 2
pursuant to which the lenders would be able to foreclose on more than 33 1/3% of the Trusts total
assets.
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When used with respect to shares of the Trust, majority of the outstanding shares means (i)
67% or more of the shares present at a meeting, if the holders of more than 50% of the shares
are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less. |
The Trust is also subject to the following non-fundamental restrictions and policies, which
may be changed by the board of trustees and without shareholder approval. The Trust may not:
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make any short sale of securities except in conformity with applicable
laws, rules and regulations and unless after giving effect to such sale, the market
value of all securities sold short does not exceed 25% of the value of the Trusts
total assets and the Trusts aggregate short sales of a particular class of
securities of an issuer does not exceed 25% of the then outstanding securities of
that class. The Trust may also make short sales against the box without respect
to such limitations. In this type of short sale, at the time of the sale, the Trust
owns or has the immediate and unconditional right to acquire at no additional cost
the identical security; and |
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purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act or any exemptive relief
obtained thereunder. Under the Investment Company Act, the Trust may invest up to
10% of its total assets in the aggregate in shares of other investment companies
and up to 5% of its total assets in any one investment company, provided the
investment does not represent more than 3% of the voting stock of the acquired
investment company at the time such shares are purchased. As a shareholder in any
investment company, the Trust will bear its ratable share of that investment
companys expenses, and will remain subject to payment of the Advisory Fees and
other expenses with respect to assets so invested. Holders of common shares will
therefore be subject to duplicative expenses to the extent the Trust invests in
other investment companies. In addition, the securities of other investment
companies may be leveraged and will therefore be subject to the risks of leverage.
The net asset value and market value of leveraged shares will be more volatile and
the yield to shareholders will tend to fluctuate more than the yield generated by
unleveraged shares. |
In addition, to comply with the federal tax requirements for qualification as a registered
investment company, the Trusts investments must meet certain diversification requirements. See
Tax Matters.
The percentage limitations applicable to the Trusts portfolio described in the prospectus and
this Statement of Additional Information apply only at the time of investment, except that the
percentage limitation with respect to borrowing applies at all times, and the Trust will not be
required to sell securities due to subsequent changes in the value of securities it owns.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Trusts investment objectives,
policies and techniques that are described in the prospectus.
Short-Term Debt Securities
(1) For temporary defensive purposes or to keep cash on hand, the Trust may invest up to 100% of
its total assets in cash equivalents and short-term debt securities. Short-term debt investments
are defined to include, without limitation, the following: U.S. Government securities, including
bills, notes and bonds differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by
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U.S. Government agencies or instrumentalities. U.S.
Government securities include securities issued by (a) the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business Administration, and
Government National Mortgage Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks,
and Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow
from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. Government to purchase certain obligations of
the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are
supported only by its credit. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given that it always will
do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities
do not guarantee the market value of their securities. Consequently, the value of such securities
may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan
association. Such certificates are for a definite period of time, earn a specified rate of return,
and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount
deposited plus interest to the bearer of the certificate on the date specified thereon.
Certificates of deposit purchased by the Trust may not be fully insured by the Federal Deposit
Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the Trust
purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and
redeliver such securities to the seller, who also simultaneously agrees to buy back the securities
at a fixed price and time. This assures a predetermined yield for the Trust during its holding
period, since the resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for the Trust to invest temporarily
available cash. The Trust may enter into repurchase agreements only with respect to obligations of
the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers
acceptances in which the Trust may invest. Repurchase agreements may be considered loans to the
seller, collateralized by the underlying securities. The risk to the Trust is limited to the
ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default,
the repurchase agreement provides that the Trust is entitled to sell the underlying collateral. If
the value of the collateral declines after the agreement is entered into, and if the seller
defaults under a repurchase agreement when the value of the underlying collateral is less than the
repurchase price, the Trust could incur a loss of both principal and interest. Highland monitors
the value of the collateral at the time the action is entered into and at all times during the term
of the repurchase agreement. Highland does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Trust. If
the seller were to be subject to a federal bankruptcy proceeding, the ability of the Trust to
liquidate the collateral could be delayed or impaired because of certain provisions of the
bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable
rate master demand notes issued by corporations to finance their current operations. Master demand
notes are direct lending arrangements between the Trust and a corporation. There is no secondary
market for such notes. However, they are redeemable by the Trust at any time. Highland will
consider the financial condition of the corporation (e.g., earning power, cash flow and other
liquidity ratios) and will continually monitor the corporations ability to meet all of its
financial obligations, because the Trusts liquidity might be impaired if the corporation were
unable to pay principal and interest on demand. Investments in commercial paper will be limited to
commercial paper rated in the highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate of interest.
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Equity Securities
The Trust may invest in equity securities including preferred stocks, convertible securities,
warrants and depository receipts.
Preferred Stock. Preferred stock has a preference over common stock in liquidation (and
generally dividends as well) but is subordinated to the liabilities of the issuer in all respects.
As a general rule, the market value of preferred stock with a fixed dividend rate and no conversion
element varies inversely with interest rates and perceived credit risk, while the market price of
convertible preferred stock generally also reflects some element of conversion value. Because
preferred stock is junior to debt securities and other obligations of the issuer, deterioration in
the credit quality of the issuer will cause greater changes in the value of a preferred stock than
in a more senior debt security with similar stated yield characteristics. Unlike interest payments
on debt securities, preferred stock dividends are payable only if declared by the issuers board of
directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
Convertible Securities. A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount of common stock or
other equity security of the same or a different issuer within a particular period of time at a
specified price or formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible security matures or
is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible income securities in that they ordinarily provide a stable stream of
income with generally higher yields than those of common stocks of the same or similar issuers, but
lower yields than comparable nonconvertible securities. The value of a convertible security is
influenced by changes in interest rates, with investment value declining as interest rates increase
and increasing as interest rates decline. The credit standing of the issuer and other factors also
may have an effect on the convertible securitys investment value. Convertible securities rank
senior to common stock in a corporations capital structure but are usually subordinated to
comparable nonconvertible securities. Convertible securities may be subject to redemption at the
option of the issuer at a price established in the convertible securitys governing instrument.
Warrants. Warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a specified price
during a specified period of time. Subscription rights normally have a short life span to
expiration. The purchase of warrants involves the risk that the Trust could lose the purchase value
of a right or warrant if the right to subscribe to additional shares is not exercised prior to the
warrants expiration. Also, the purchase of warrants involves the risk that the effective price
paid for the warrant added to the subscription price of the related security may exceed the value
of the subscribed securitys market price such as when there is no movement in the level of the
underlying security.
Depository Receipts. The Trust may invest in both sponsored and unsponsored American
Depository Receipts (ADRs), European Depository Receipts (EDRs), Global
Depository Receipts (GDRs) and other similar global instruments. ADRs typically are
issued by an American bank or trust company and evidence ownership of underlying securities issued
by a non-U.S. corporation. EDRs, which are sometimes referred to as Continental Depository
Receipts, are receipts issued in Europe, typically by non-U.S. banks and trust companies, that
evidence ownership of either non-U.S. or U.S. underlying securities. GDRs are depository receipts
structured like global debt issues to facilitate trading on an international basis. Unsponsored
ADR, EDR and GDR programs are organized independently and without the
cooperation of the issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of
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unsponsored ADRs, EDRs and
GDRs may be more volatile than if such instruments were sponsored by the
issuer. Investments in ADRs, EDRs and GDRs may present additional investment considerations of
non-U.S. securities.
Variable and Floating Rate Instruments
The Trust may purchase rated and unrated variable and floating rate instruments. These
instruments may include variable amount master demand notes that permit the indebtedness thereunder
to vary in addition to providing for periodic adjustments in the interest rate. The Trust may
invest in leveraged inverse floating rate debt instruments (Inverse Floaters). The
interest rate of an Inverse Floater resets in the opposite direction from the market rate of
interest to which it is indexed. An Inverse Floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index
rate of interest. The higher degree of leverage inherent in Inverse Floaters is associated with
greater volatility in their market values. Issuers of unrated variable and floating rate
instruments must satisfy the same criteria as set forth above for the Trust. The absence of an
active secondary market with respect to particular variable and floating rate instruments, however,
could make it difficult for the Trust to dispose of a variable or floating rate instrument if the
issuer defaulted on its payment obligation or during periods when the Trust is not entitled to
exercise its demand rights.
With respect to purchasable variable and floating rate instruments, Highland will consider the
earning power, cash flows and liquidity ratios of the issuers and guarantors of such instruments
and, if the instruments are subject to a demand feature, will monitor their financial status to
meet payment on demand. Such instruments may include variable amount master demand notes that
permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the
interest rate. The absence of an active secondary market with respect to particular variable and
floating rate instruments could make it difficult for the Trust to dispose of a variable or
floating rate note if the issuer defaulted on its payment obligation or during periods that the
Trust is not entitled to exercise its demand rights, and the Trust could, for these or other
reasons, suffer a loss, with respect to such instruments. In determining average-weighted portfolio
maturity, an instrument will be deemed to have a maturity equal to either the period remaining
until the next interest rate adjustment or the time the Trust involved can recover payment of
principal as specified in the instrument, depending on the type of instrument involved.
Derivative Transactions and Risk Management
Consistent with its investment objectives and policies set forth in the prospectus and in
addition to its option strategy, the Trust may also enter into certain risk management
transactions. In particular, the Trust may purchase and sell futures contracts, exchange listed and
over-the-counter put and call options on securities, equity and other indices and futures
contracts, forward foreign currency contracts, and may enter into various interest rate
transactions. Derivative Transactions may be used to attempt to protect against possible changes in
the market value of the Trusts portfolio resulting from fluctuations in the securities markets and
changes in interest rates, to protect the Trusts unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes and to establish a
position in the securities markets as a temporary substitute for purchasing particular securities.
Any or all of these Derivative Transactions may be used at any time. There is no particular
strategy that requires use of one technique rather than another. Use of any Derivative Transaction
is a function of market conditions. The ability of the Trust to manage them successfully will
depend on Highlands
ability to predict pertinent market movements as well as sufficient correlation among the
instruments, which cannot be assured. The Derivative Transactions that the Trust may use are
described below. Although the Trust recognizes it is not likely that it will use certain of these
strategies in light of its investment policies, it
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nevertheless describes them here because the
Trust may seek to use these strategies in certain circumstances.
Futures Contracts and Options on Futures Contracts. In connection with its Derivative
Transactions and other risk management strategies, the Trust may also enter into contracts for the
purchase or sale for future delivery (futures contracts) of securities, aggregates of securities
or indices or prices thereof, other financial indices and U.S. government debt securities or
options on the above. The Trust will engage in such transactions only for bona fide risk management
and other portfolio management purposes.
Forward Foreign Currency Contracts. The Trust may enter into forward currency contracts to
purchase or sell foreign currencies for a fixed amount of U.S. dollars or another foreign currency.
A forward currency contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the forward currency contract
agreed upon by the parties, at a price set at the time the forward currency contract is entered
into. Forward currency contracts are traded directly between currency traders (usually large
commercial banks) and their customers.
The Trust may engage in various forward currency contract strategies:
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The Trust may purchase a forward currency contract to lock in the U.S. dollar price
of a security denominated in a foreign currency that the Trust intends to acquire. The
Trust may sell a forward currency contract to lock in the U.S. dollar equivalent of
the proceeds from the anticipated sale of a security or a dividend or interest payment
denominated in a foreign currency. |
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The Trust may also use forward currency contracts to shift the Trusts exposure to
foreign currency exchange rate changes from one currency to another. For example, if
the Trust owns securities denominated in a foreign currency and Highland believes that
currency will decline relative to another currency, the Trust might enter into a
forward currency contract to sell the appropriate amount of the first foreign currency
with payment to be made in the second currency. |
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The Trust may also purchase forward currency contracts to enhance income when
Highland anticipates that the foreign currency will appreciate in value but securities
denominated in that currency do not present attractive investment opportunities. |
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The Trust may also use forward currency contracts to offset against a decline in
the value of existing investments denominated in a foreign currency. Such a
transaction would tend to offset both positive and negative currency fluctuations, but
would not offset changes in security values caused by other factors. |
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The Trust could also enter into a forward currency contract to sell another
currency expected to perform similarly to the currency in which the Trusts existing
investments are denominated. This type of transaction could offer advantages in terms
of cost, yield or efficiency, but may not offset currency exposure as effectively as a
simple forward currency transaction to sell U.S. dollars. This type of transaction
may result in losses if the currency sold does not perform similarly to the currency in
which the Trusts existing investments are denominated. |
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The Trust may also use forward currency contracts in one currency or a basket of
currencies to attempt to offset against fluctuations in the value of securities
denominated in a different currency if Highland anticipates that there will be a
correlation between the two currencies. |
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The cost to the Trust of engaging in forward currency contracts varies with factors
such as the currency involved, the length of the contract period and the market
conditions then prevailing. Because forward currency contracts are usually entered
into on a principal basis, no fees or commissions are involved. |
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When the Trust enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity of
the contract. Failure by the counterparty to do so would result in the loss of some or
all of any expected benefit of the transaction. Secondary markets generally do not
exist for forward currency contracts, with the result that closing transactions
generally can be made for forward currency contracts only by negotiating directly with
the counterparty. Thus, there can be no assurance that the Trust will in fact be able
to close out a forward currency contract at a favorable price prior to maturity. In
addition, in the event of insolvency of the counterparty, the Trust might be unable to
close out a forward currency contract. In either event, the Trust would continue to be
subject to market risk with respect to the position, and would continue to be required
to maintain a position in securities denominated in the foreign currency or to
maintain cash or liquid assets in a segregated account. The precise matching of
forward currency contract amounts and the value of the securities involved generally
will not be possible because the value of such securities, measured in the foreign
currency, will change after the forward currency contract has been established. Thus,
the Trust might need to purchase or sell foreign currencies in the spot (cash) market
to the extent such foreign currencies are not covered by forward currency contracts.
The projection of short-term currency market movements is extremely difficult, and the
successful execution of a short-term strategy is highly uncertain. |
Calls on Securities, Indices and Futures Contracts. In addition to its option strategy, in
order to enhance income or reduce fluctuations on net asset value, the Trust may sell or purchase
call options (calls) on securities and indices based upon the prices of futures contracts and
debt or equity securities that are traded on U.S. and non-U.S. securities exchanges and in the
over-the-counter markets. A call option gives the purchaser of the option the right to buy, and
obligates the seller to sell, the underlying security, futures contract or index at the exercise
price at any time or at a specified time during the option period. All such calls sold by the Trust
must be covered as long as the call is outstanding (i.e., the Trust must own the instrument
subject to the call or other securities or assets acceptable for applicable segregation and
coverage requirements). A call sold by the Trust exposes the Trust during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the underlying
security, index or futures contract and may require the Trust to hold an instrument which it might
otherwise have sold. The purchase of a call gives the Trust the right to buy a security, futures
contract or index at a fixed price. Calls on futures on securities must also be covered by assets
or instruments acceptable under applicable segregation and coverage requirements.
Puts on Securities, Indices and Futures Contracts. In addition to its option strategy, the
Trust may purchase put options (puts) that relate to securities (whether or not it holds such
securities in its portfolio), indices or futures contracts. For the same purposes, the Trust may
also sell puts on securities, indices or futures contracts on such securities if the Trusts
contingent obligations on such puts are secured by segregated assets consisting of cash or liquid
debt securities having a value not less than the exercise price. In selling puts, there is a risk
that the Trust may be required to buy the underlying security at a price higher than the current
market price.
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Interest Rate Transactions. Among the Derivative Transactions in which the Trust may enter
into are interest rate swaps and the purchase or sale of interest rate caps and floors. The Trust
expects to enter into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio as a duration management technique or to protect against any
increase in the price of securities the Trust anticipates purchasing at a later date. The Trust
intends to use these transactions for risk management purposes and not as a speculative investment.
The Trust will not sell interest rate caps or floors that it does not own. Interest rate swaps
involve the exchange by the Trust with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest rate cap. The purchase
of an interest rate floor entitles the purchaser, to the extent that a specified index falls below
a predetermined interest rate, to receive payments of interest on a notional principal amount from
the party selling such interest rate floor.
The Trust may enter into interest rate swaps, caps and floors on either an asset based or
liability-based basis, depending on whether it is offsetting volatility with respect to its assets
or liabilities, and will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Trust receiving or paying, as the case may be, only the
net amount of the two payments on the payment dates. Inasmuch as these Derivative Transactions are
incurred into for good faith risk management purposes. Highland and the Trust believe such
obligations do not constitute senior securities, and, accordingly will not treat them as being
subject to its borrowing restrictions. The Trust will accrue the net amount of the excess, if any,
of the Trusts obligations over its entitlements with respect to each interest rate swap on a daily
basis and will designate on its books and records with a custodian an amount of cash or liquid high
grade securities having an aggregate net asset value at all times at least equal to the accrued
excess. The Trust will not enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims paying ability of the other party thereto is rated in the
highest rating category of at least one nationally recognized statistical rating organization at
the time of entering into such transaction. If there is a default by the other party to such a
transaction, the Trust 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. Caps and floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps.
Credit Derivatives. The Trust may engage in credit derivative transactions. There are two
broad categories of credit derivatives: default price risk derivatives and market spread
derivatives. 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 Highland is incorrect in its forecasts of default risks, market spreads or other
applicable factors, the investment performance of the Trust would diminish compared with what it
would have been if these techniques were not used. Moreover, even if Highland 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 purchased. There is no limit on the amount of credit
derivative transactions that may be entered into by the Trust. The Trusts risk of loss in a credit
derivative transaction varies with the form of the transaction. For example, if the Trust purchases
a default option on a security, and if no default occurs with respect to the security, the Trusts
loss is limited
B-9
to the premium it paid for the default option. In contrast, if there is a default
by the grantor of a default option, the Trusts loss will include both the premium that it paid for
the option and the decline in value of the underlying security that the default option protects.
Below under General Characteristics of Risks of Derivative Transactions is further
information about the characteristics, risks and possible benefits of Derivative Transactions and
the Trusts other policies and limitations (which are not fundamental policies) relating to
investment in futures contracts and options. The principal risks relating to the use of futures
contracts and other Derivative Transactions are: (i) less than perfect correlation between the
prices of the instrument and the market value of the securities in the Trusts portfolio; (ii)
possible lack of a liquid secondary market for closing out a position in such instruments; (iii)
losses resulting from interest rate or other market movements not anticipated by Highland; and (iv)
the obligation to meet additional variation margin or other payment requirements, all of which
could result in the Trust being in a worse position than if such techniques had not been used.
Certain provisions of the Code may restrict or affect the ability of the Trust to engage in
Derivative Transactions. See Tax Matters.
General Characteristics and Risks of Derivative Transactions
In order to manage the risk of its securities portfolio, or to enhance income or gain as
described in the prospectus, the Trust will engage in Derivative Transactions. The Trust will
engage in such activities in the Investment Advisers discretion, and may not necessarily be
engaging in such activities when movements in interest rates that could affect the value of the
assets of the Trust occur. The Trusts ability to pursue certain of these strategies may be limited
by applicable regulations of the CFTC. Certain Derivative Transactions may give rise to taxable
income.
Put and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on securities and indices. A put option
gives the purchaser of the option the right to sell and the writer the obligation to buy the
underlying security at the exercise price during the option period. The Trust may also purchase and
sell options on securities indices (index options). Index options are similar to options on
securities except that, rather than taking or making delivery of securities underlying the option
at a specified price upon exercise, an index option gives the holder the right to receive cash upon
exercise of the option if the level of the securities index upon which the option is based is
greater,
in the case of a call, or less, in the case of a put, than the exercise price of the option.
The purchase of a put option on a security could protect the Trusts holdings in a security or a
number of securities against a substantial decline in the market value. A call option gives the
purchaser of the option the right to buy and the seller the obligation to sell the underlying
security or index at the exercise price during the option period or for a specified period prior to
a fixed date. The purchase of a call option on a security could protect the Trust against an
increase in the price of a security that it intended to purchase in the future. In the case of
either put or call options that it has purchased, if the option expires without being sold or
exercised, the Trust will experience a loss in the amount of the option premium plus any related
commissions. When the Trust sells put and call options, it receives a premium as the seller of the
option. The premium that the Trust receives for selling the option will serve as a partial offset,
in the amount of the option premium, against changes in the value of the securities in its
portfolio. During the term of the option, however, a covered call seller has, in return for the
premium on the option, given up the opportunity for capital appreciation above the exercise price
of the option if the value of the underlying security increases, but has retained the risk of loss
should the price of the underlying security decline. Conversely, a secured put seller retains the
risk of loss should the market value of the underlying security decline below the exercise price of
the option, less the premium received on the sale of the option. The Trust is authorized to
purchase and sell exchange listed options and over-
B-10
the-counter options (OTC Options)
which are privately negotiated with the counterparty. Listed options are issued by the Options
Clearing Corporation (OCC) which guarantees the performance of the obligations of the
parties to such options.
The Trusts ability to close out its position as a purchaser or seller of an exchange listed
put or call option is dependent upon the existence of a liquid secondary market on option
exchanges. Among the possible reasons for the absence of a liquid secondary market on an exchange
are: (i) insufficient trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect
to particular classes or series of options or underlying securities; (iv) interruption of the
normal operations on an exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to discontinue the trading of
options (or a particular class or series of options), in which event the secondary market on that
exchange (or in that class or series of options) would cease to exist, although outstanding options
on that exchange that had been listed by the OCC as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms. OTC Options are purchased from
or sold to dealers, financial institutions or other counterparties which have entered into direct
agreements with the Trust. With OTC Options, such variables as expiration date, exercise price and
premium will be agreed upon between the Trust and the counterparty, without the intermediation of a
third party such as the OCC. If the counterparty fails to make or take delivery of the securities
underlying an option it has written, or otherwise settle the transaction in accordance with the
terms of that option as written, the Trust would lose the premium paid for the option as well as
any anticipated benefit of the transaction.
The hours of trading for options on securities may not conform to the hours during which the
underlying securities are traded. To the extent that the option markets close before the markets
for the underlying securities, significant price movements can take place in the underlying markets
that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Trust may sell financial futures contracts or purchase put and call
options on such futures as an offset against anticipated market movements. The sale of a futures
contract creates an obligation by the Trust, as seller, to deliver the specific type of
financial instrument called for in the contract at a specified future time for a specified price.
Options on futures contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to assume a position
in a futures contract (a long position if the option is a call and a short position if the option
is a put).
Margin Requirements. At the time a futures contract is purchased or sold, the Trust must
allocate cash or securities as a deposit payment (initial margin). It is expected that the
initial margin that the Trust will pay may range from approximately 1% to approximately 5% of the
value of the securities or commodities underlying the contract. In certain circumstances, however,
such as periods of high volatility, the Trust may be required by an exchange to increase the level
of its initial margin payment. Additionally, initial margin requirements may be increased generally
in the future by regulatory action. An outstanding futures contract is valued daily and the payment
in case of variation margin may be required, a process known as marking to the market.
Transactions in listed options and futures are usually settled by entering into an offsetting
transaction, and are subject to the risk that the position may not be able to be closed if no
offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Trusts use of futures and options
on futures will in all cases be consistent with applicable regulatory requirements and in
particular the
B-11
rules and regulations of the CFTC. The Trust currently may enter into such
transactions without limit for bona fide strategic purposes, including risk management and duration
management and other portfolio strategies. The Trust may also engage in transactions in futures
contracts or related options for non-strategic purposes to enhance income or gain provided that the
Trust will not enter into a futures contract or related option (except for closing transactions)
for purposes other than bona fide strategic purposes, or risk management including duration
management if, immediately thereafter, the sum of the amount of its initial deposits and premiums
on open contracts and options would exceed 5% of the Trusts liquidation value, i.e., net assets
(taken at current value); provided, however, that in the case of an option that is in-the-money at
the time of the purchase, the in-the-money amount may be excluded in calculating the 5% limitation.
The above policies are non-fundamental and may be changed by the Trusts board of trustees at any
time. Also, when required, an account of cash equivalents designated on the books and records will
be maintained and marked to market on a daily basis in an amount equal to the market value of the
contract.
Segregation and Cover Requirements. Futures contracts, interest rate swaps, caps, floors and
collars, short sales, reverse repurchase agreements and dollar rolls, and listed or OTC options on
securities, indices and futures contracts sold by the Trust are generally subject to earmarking and
coverage requirements of either the CFTC or the SEC, with the result that, if the Trust does not
hold the security or futures contract underlying the instrument, the Trust will be required to
designate on its books and records an ongoing basis, cash, U.S. government securities, or other
liquid high grade debt obligations in an amount at least equal to the Trusts obligations with
respect to such instruments.
Such Amounts Fluctuate as the Obligations Increase or Decrease. The earmarking requirement
can result in the Trust maintaining securities positions it would otherwise liquidate, segregating
assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio
management.
Derivative Transactions Present Certain Risks. With respect to Derivative Transactions and
risk management, the variable degree of correlation between price movements of strategic
instruments and price movements in the position being offset create the possibility that
losses using the strategy may be greater than gains in the value of the Trusts position. The same
is true for such instruments entered into for income or gain. In addition, certain instruments and
markets may not be liquid in all circumstances. As a result, in volatile markets, the Trust may not
be able to close out a transaction without incurring losses substantially greater than the initial
deposit. Although the contemplated use of these instruments predominantly for Derivative
Transactions should tend to minimize the risk of loss due to a decline in the value of the
position, at the same time they tend to limit any potential gain which might result from an
increase in the value of such position. The ability of the Trust to successfully utilize Derivative
Transactions will depend on the Investment Advisers and the sub-advisers ability to predict
pertinent market movements and sufficient correlations, which cannot be assured. Finally, the daily
deposit requirements in futures contracts that the Trust has sold create an on going greater
potential financial risk than do options transactions, where the exposure is limited to the cost of
the initial premium. Losses due to the use of Derivative Transactions will reduce net asset value.
Regulatory Considerations. The Trust has claimed an exclusion from the term commodity pool
operator under the Commodity Exchange Act and, therefore, is not subject to registration or
regulation as a commodity pool operator under the Commodity Exchange Act.
B-12
OTHER INVESTMENT POLICIES AND TECHNIQUES
Restricted and Illiquid Securities
Certain of the Trusts investments may be illiquid. Illiquid securities are subject to legal
or contractual restrictions on disposition or lack an established secondary trading market. The
sale of restricted and illiquid securities often requires more time and results in higher brokerage
charges or dealer discounts and other selling expenses than does the sale of securities eligible
for trading on national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not subject to restrictions
on resale.
When-Issued and Forward Commitment Securities
The Trust may purchase securities on a when-issued basis and may purchase or sell securities
on a forward commitment basis in order to acquire the security or to offset against anticipated
changes in interest rates and prices. When such transactions are negotiated, the price, which is
generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Trust will enter into when-issued and
forward commitments only with the intention of actually receiving or delivering the securities, as
the case may be. If the Trust disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward commitment, it might
incur a gain or loss. At the time the Trust enters into a transaction on a when-issued or forward
commitment basis, it will designate on its books and records cash or liquid debt securities equal
to at least the value of the when-issued or forward commitment securities. The value of these
assets will be monitored daily to ensure that their marked to market value will at all times equal
or exceed the corresponding obligations of the Trust. There is always a risk that the securities
may not be delivered and that the Trust may incur a loss. Settlements in the ordinary course, which
may take substantially more than five business days, are not treated by the Trust as when-issued or
forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Pay-In-Kind Bonds
The Trust may invest in Pay-in-kind, or PIK bonds. PIK bonds are bonds which pay interest
through the issuance of additional debt or equity securities. Similar to zero coupon obligations,
PIK bonds also carry additional risk as holders of these types of securities realize no cash until
the cash payment date unless a portion of such securities is sold and, if the issuer defaults, the
Trust may obtain no return at all on its investment. The market price of PIK bonds is affected by
interest rate changes to a greater extent, and therefore tends to be more volatile, than that of
securities which pay interest in cash. Additionally, current federal tax law requires the holder of
certain PIK bonds to accrue income with respect to these securities prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and avoid liability for
federal income and excise taxes, the Trust may be required to distribute income accrued with
respect to these securities and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution requirements.
Brady Bonds
The Trusts emerging market debt securities may include emerging market governmental debt
obligations commonly referred to as Brady Bonds. Brady Bonds are debt securities, generally
denominated in U.S. dollars, issued under the framework of the Brady Plan, an initiative announced
by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations (primarily
emerging market countries) to restructure their outstanding external indebtedness (generally,
commercial
B-13
bank debt). Brady Bonds are created through the exchange of existing commercial bank
loans to foreign entities for new obligations in connection with debt restructuring. A significant
amount of the Brady Bonds that the Trust may purchase have no or limited collateralization, and the
Trust will be relying for payment of interest and (except in the case of principal collateralized
Brady Bonds) principal primarily on the willingness and ability of the foreign government to make
payment in accordance with the terms of the Brady Bonds. A substantial portion of the Brady Bonds
and other sovereign debt securities in which the Trust may invest are likely to be acquired at a
discount.
Mezzanine Investments
The Trust may invest in certain high yield securities known as mezzanine investments, which
are subordinated debt securities which are generally issued in private placements in connection
with an equity security (e.g., with attached warrants). Such mezzanine investments may be issued
with or without registration rights. Similar to other high yield securities, maturities of
mezzanine investments are typically seven to ten years, but the expected average life is
significantly shorter at three to five years. Mezzanine investments are usually unsecured and
subordinate to other obligations of the issuer.
Loan Participations and Assignments
The Trust may invest in fixed and floating rate loans (Loans) arranged through private
negotiations between a corporation or foreign government and one or more financial institutions
(Lenders). The Trusts investments in Loans are expected in most instances to be in the form of
participations in Loans (Participations) and assignments of all or a portion of Loans
(Assignments) from third parties. Participations typically will result in the Trust having a
contractual relationship only with the Lender not the borrower. The Trust will 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 the Trust and only upon receipt by the Lender of the payments by the
borrower. In connection with purchasing Participations, the Trust generally has no direct right to
enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, nor
any rights of set-off against the borrower, and the Trust may not directly benefit from any
collateral supporting the Loan in which is has purchased the Participation. As a result the Trust
will assume the credit risk of both the borrower and the Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a Participation, the Trust may be treated as a
general creditor of the Lender and may not benefit from any set-off between the Lender and the
borrower. The Trust will acquire Participations only if the Lender interpositioned between the
Trust and the borrower is determined by Highland to be creditworthy. When the Trust purchases
Assignments from Lenders, the Trust will acquire direct rights against the borrower on the Loan.
However, since Assignments are arranged through private negotiations between potential assignees
and assignors, the rights and obligations acquired by the Trust as the purchaser of an Assignment
may differ from, and be more limited than, those held by the assigning Lender.
The Trust may have difficulty disposing of Assignments and Participations. Because there is no
liquid market for such securities, the Trust anticipates that such securities could be sold only to
a limited number of institutional investors. The lack of a liquid secondary market will have an
adverse impact on the value of such securities and on the Trusts ability to dispose of particular
Assignments or Participations when necessary to meet the Trusts liquidity needs or in response to
a specific economic event, such as a deterioration in the creditworthiness of the borrower. The
lack of a liquid secondary market for Assignments and Participations also may make it more
difficult for the Trust to assign a value to those securities for purposes of valuing the Trusts
portfolio and calculating its net asset value.
B-14
Structured Investments
The Trust may invest a portion of its assets in interests in entities organized and operated
solely for the purpose of restructuring the investment characteristics of securities. This type of
restructuring involves the deposit with or purchase by an entity, such as a corporation or a trust,
of specified instruments and the issuance by that entity of one or more classes of securities
(Structured Investments) backed by, or representing interests in the underlying instruments. The
cash flow on the underlying instruments may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Investments is dependent on the extent of the cash flow on the
underlying instruments. Because Structured Investments of the type in which the Trust anticipates
it will invest typically involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments.
The Trust is permitted to invest in a class of Structured Investments that is either
subordinated or not subordinated to the right of payment of another class. Subordinated Structured
Investments typically have higher yields and present greater risks than unsubordinated Structured
Investments.
Certain issuers of Structured Investments may be deemed to be investment companies as
defined in the Investment Company Act. As a result, the Trusts investment in these Structured
Investments may be limited by the restrictions contained in the Investment Company Act. Structured
Investments are typically sold in private placement transaction, and there currently is no active
trading market for Structured Investments.
Project Loans
The Trust may invest in project loans, which are fixed income securities of issuers whose
revenues are primarily derived from mortgage loans to multi-family, nursing home and other real
estate development projects. The principal payments on these mortgage loans will be insured by
agencies and authorities of the U.S. Government.
Zero Coupons and Deferred Payment Obligations
The Trust may invest in zero-coupon bonds, which are normally issued at a significant discount
from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience
greater volatility in market value than similar maturity debt obligations which provide for regular
interest payments. Additionally, current federal tax law requires the holder of certain zero-coupon
bonds to accrue income with respect to these securities prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and to potentially avoid liability for
federal income and excise taxes, the Trust may be required to distribute income accrued with
respect to these securities and may have to dispose of Trust securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution requirements.
The Trust may invest in Deferred Payment 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. Deferred Payment
Securities are subject to greater fluctuations in value and may have lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash interest at regular
interest payment periods.
B-15
MANAGEMENT OF THE TRUST
Trustees
The board
of trustees provides broad oversight over the operations and affairs of the Trust
and protects the interests of shareholders. The board of trustees has overall responsibility to
manage and control the business affairs of the Trust, including the complete and exclusive
authority to establish policies regarding the management, conduct and operation of the Trusts
business. The names and ages of the trustees and officers of the Trust, the year each was first
elected or appointed to office, their principal business occupations during the last five years,
the number of funds overseen by each trustee and other directorships or trusteeships they hold are
shown below. The business address of the Trust, Highland and their board members and officers is
Two Galleria Tower, 13455 Noel Road, Suite 800, Dallas, Texas 75240, unless otherwise specified
below.
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Term of Office and |
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Highland Fund Complex |
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Other |
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Position |
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Length of Time |
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Principal Occupation(s) |
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Overseen by |
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Directorships/ |
Name and Age |
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with Trust |
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Served(1) |
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During Past Five Years |
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Trustee(2) |
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Trusteeships Held |
INDEPENDENT TRUSTEES
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Timothy Hui
(Age 59) |
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Trustee |
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3 years and Trustee since May 19, 2006 |
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Dean of Educational Resources since July 2006; Assistant
Provost for Graduate Education from July 2004 to June 2006, and Assistant Provost for
Educational Resources from July 2001 to June 2004, Philadelphia Biblical University. |
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10 |
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None |
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Scott Kavanaugh
(Age 46) |
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Trustee |
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3 years and Trustee since May 19, 2006 |
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Private Investor since February 2004. Sales Representative at Round Hill Securities from
March 2003 to January 2004; Executive at Provident Funding Mortgage Corporation, February 2003 to July 2003;
Executive Vice President. Director and CAO, Commercial Capital Bank, January 2000to February 2003; Managing
Principal and Chief Operating Officer, Financial Institutional Partners Mortgage Company and the Managing Principal and
President of Financial Institutional Partners, LLC (an investment banking firm), April 1998 to February 2003. |
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10 |
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None |
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James F. Leary
(Age 77) |
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Trustee |
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3 years and Trustee since May 19, 2006 |
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Managing Director, Benefit Capital Southwest, Inc. (a financial consulting firm) since January 1999. |
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10 |
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Board Member of Capstone Group of Funds (7 portfolios). |
B-16
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Term of Office and |
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Highland Fund Complex |
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Other |
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Position |
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Length of Time |
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Principal Occupation(s) |
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Overseen by |
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Directorships/ |
Name and Age |
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with Trust |
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Served(1) |
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During Past Five Years |
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Trustee(2) |
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Trusteeships Held |
Bryan A. Ward
(Age 52) |
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Trustee |
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3 years and Trustee since May 19, 2006 |
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Senior Manager since January 2002 and Special Projects Advisor, Accenture, LLP
(consulting firm) with focus on the oil and gas industry, from September 1998 to December 2001. |
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10 |
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None |
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INTERESTED TRUSTEE
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R. Joseph Dougherty (Age 37) |
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Trustee and Chairman of the Board |
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3 years and Trustee since March 10, 2006 |
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Senior Portfolio Manager of the Investment Adviser since 2000.
Director and Senior Vice President of the funds in the Highland Fund Complex. |
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10 |
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None |
OFFICERS
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Term of Office and |
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Principal Occupation(s) During |
Name and Age |
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Position with Trust |
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Length of Time Served |
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Past Five Years |
James D. Dondero
(Age 45)
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Chief Executive
Officer and
President
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Indefinite Term and
Officer since May
19, 2006
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President and
Director of Strand
Advisors, Inc.
(Strand), the
General Partner of
the Investment
Adviser. President of
the funds in the
Highland Fund
Complex. |
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Mark Okada
(Age 45)
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Executive Vice
President
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Indefinite Term and
Officer since May
19, 2006
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Executive Vice
President of Strand
and the funds in the
Highland Fund
Complex. |
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M. Jason Blackburn
(Age 31)
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Chief Financial
Officer (Principal
Accounting
Officer), Treasurer
and Secretary
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Indefinite Term and
Officer since May
19, 2006
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Assistant Controller
of the Investment
Adviser since
November 2001.
Treasurer and
Secretary of the
funds in the Highland
Fund Complex. |
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Michael Colvin
(Age 38)
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Chief Compliance
Officer
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Indefinite Term and
Officer since May
19, 2006
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General Counsel and
Chief Compliance
Officer of the
Investment Adviser
since June 2007 and
Chief Compliance
Officer of the funds
in the
Highland Fund Complex
since July 2007.
Shareholder in the
Corporate and
Securities Group at
Greenberg Traurig,
LLP, from January
2007 to June 2007.
Partner from January
2003 to
January 2007 and
Associate from 1995
to 2002 in the
Private Equity
Practice Group at
Weil,
Gotshal & Manges, LLP. |
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(1) |
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After a Trustees initial term, each Trustee is expected to serve a three-year term
concurrent with the class of Trustees with which he serves. Messrs. Leary and Ward, as Class I
Trustees, were re-elected in 2007; Messrs. Hui and Kavanaugh, as Class II Trustees, are
expected to stand for re-election in 2008; and Mr. Dougherty, the sole Class III Trustee, is
expected to stand for re-election in 2009. |
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(2) |
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The Highland Fund Complex consists of all of the registered investment companies advised by
Highland as of the date of this Statement of Additional Information. In addition, each
of the Trustees oversees Highland Distressed Opportunities Fund, Inc., a closed-end company that has
filed an election to be regulated as a business development company under the Investment Company Act. |
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Compensation of Trustees
The fees
and expenses of the Independent Trustees of the Trust are paid by the Trust. The
trustees who are members of the Highland organization receive no compensation from the Trust. It is
estimated that the Independent Trustees will receive from the Trust the amounts set forth below for
the Trusts calendar year ending December 31, 2007.
B-17
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Total Compensation from |
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the Trust |
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Compensation |
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and Highland Fund |
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from the Trust |
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Complex(1) |
Name of Independent Trustees |
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|
|
|
|
Timothy K. Hui |
|
$ |
7,500 |
|
|
$ |
97,500 |
|
Scott F. Kavanaugh |
|
$ |
7,500 |
|
|
$ |
97,500 |
|
James F. Leary |
|
$ |
7,500 |
|
|
$ |
97,500 |
|
Bryan A. Ward |
|
$ |
7,500 |
|
|
$ |
97,500 |
|
|
|
|
(1) |
|
Estimates the total compensation to be earned by that person during the calendar year ending
December 31, 2007 from the registered investment companies advised by Highland. |
Share Ownership
The following
table shows the dollar range of equity securities beneficially owned by the
Trusts trustees in the Trust and the aggregate dollar range of equity securities owned by the
Trusts trustees in all funds overseen by the trustee in the Highland Fund Complex as of December
31, 2006.
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|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range |
|
|
|
|
|
|
of Equity Securities |
|
|
|
|
|
|
Overseen by Trustees |
|
|
Dollar Range of Equity |
|
in the Family of |
|
|
Securities in the |
|
Registered Investment |
|
|
Trust |
|
Companies |
Name of Trustee |
|
|
|
|
|
|
|
|
Interested Trustee |
|
|
|
|
|
|
|
|
R. Joseph Dougherty |
|
$ |
0 |
|
|
|
$100,001 500,000 |
|
Independent Trustees |
|
|
|
|
|
|
|
|
Timothy K. Hui |
|
$ |
0 |
|
|
|
$1 10,0000 |
|
Scott F. Kavanaugh |
|
$ |
0 |
|
|
|
$50,001 100,000 |
|
James F. Leary |
|
$ |
0 |
|
|
|
$10,001 50,000 |
|
Bryan A. Ward |
|
$ |
0 |
|
|
|
$1 10,000 |
|
Committees
In connection
with the board of trustees responsibility for the overall management and
supervision of the Trusts affairs, the trustees meet periodically throughout the year to oversee
the Trusts activities, review contractual arrangements with service providers for the Trust and
review the Trusts performance. To fulfill these duties, the Trust has four committees: an Audit
Committee, a Nominating Committee, a Litigation Committee and a Qualified Legal Compliance
Committee.
The Audit
Committee consists of Timothy Hui, Scott Kavanaugh, James Leary and Bryan Ward. The
Audit Committee acts according to the Audit Committee charter. Scott Kavanaugh has been appointed
as Chairman of the Audit Committee. The Audit Committee is responsible for (i) oversight of the
Trusts accounting and financial reporting processes and the audits of the Trusts financial
statements and (ii) providing assistance to the board of trustees of the Trust in connection with
its oversight of the integrity of the Trusts financial statements, the Trusts compliance with
legal and regulatory requirements and the independent registered public accounting firms
qualifications, independence and performance. The board of trustees of the Trust has determined
that the Trust has one audit committee financial expert serving on its Audit Committee, Mr. Leary,
who is independent for the purpose of the definition of audit committee financial expert as
applicable to the Trust. The Audit Committee met three times during the last fiscal year.
The Nominating
Committees function is to canvass, recruit, interview, solicit and nominate
trustees. The Nominating Committee considers recommendations for nominees from shareholders sent to
the Secretary of the Trust, Two Galleria Tower, 13455 Noel Road, Suite 800, Dallas, Texas 75240. A
nomination submission must include all information relating to the recommended nominee that is
B-18
required to be disclosed in solicitations or proxy statements for the election of trustees, as well
as information sufficient to evaluate the factors listed above. Nomination submissions must be
accompanied by a written consent of the individual to stand for election if nominated by the Board
of trustees and to serve if elected by the shareholders, and such additional information must be
provided regarding the recommended nominee as reasonably requested by the Nominating Committee. The
Nominating Committee is comprised of Messrs. Hui, Kavanaugh, Leary and Ward. The Nominating
Committee did not meet during its first full fiscal year of operation.
The Litigation Committees function is to seek to address any potential conflicts of interest
between or among the Trust and the Investment Adviser in connection with any potential or existing
litigation or other legal proceeding relating to securities held by the Trust and the Investment
Adviser or another client of the Investment Adviser. The Litigation Committee is comprised of
Messrs. Hui, Kavanaugh, Leary and Ward. The Litigation Committee did not meet during its first
full fiscal year of operation.
The Qualified Legal Compliance Committee (the QLCC) is charged with compliance with Rules
205.2(k) and 205.3(c) of the Code of Federal Regulations regarding alternative reporting procedures
for attorneys representing the Trust who appear and practice before the Commission on behalf of the
Trust. The QLCC is comprised of Messrs. Hui, Kavanaugh, Leary and Ward. The QLCC did not meet during its first full fiscal year of operation.
Proxy Voting Policies and Procedures
The board of trustees of the Trust has delegated the voting of proxies for Trust securities to
Highland pursuant to Highlands proxy voting policies and procedures. Under these policies and
procedures, Highland will vote proxies related to Trust securities in the best interests of the
Trust and its shareholders. A copy of Highlands proxy voting policies and procedures is attached
as Appendix B to this Statement of Additional Information. The Trusts proxy voting record for the
most recent 12-month period ending June 30 is available (i) without charge, upon request, by
calling 1-877-665-1287 and (ii) on the Commissions web site (http://www.sec.gov).
Codes of Ethics
The Trust and the Investment Adviser have adopted codes of ethics under Rule 17j-1 of the
Investment Company Act. These codes permit personnel subject to the codes to invest in securities,
including securities that may be purchased or held by the Trust. These codes can be reviewed and
copied at the Commissions Public Reference Room in Washington, D.C. Information on the operation
of the Public Reference Room may be obtained by calling the Commission at 1-202-551-8090. The codes
of ethics are available on the EDGAR Database on the Commissions web site (http://www.sec.gov),
and copies of these codes may be obtained, after paying a duplicating fee, by electronic request at
the following e-mail address: publicinfo@sec.gov, or by writing the Commissions Public Reference
Section, Washington, D.C. 20549-0102.
Administration Services
Pursuant to the Trusts administration services agreement, Highland performs the following
services: (i) prepare monthly security transaction listings; (ii) supply various normal and
customary Trust statistical data as requested on an ongoing basis; (iii) prepare for execution and
file the Trusts federal and state tax returns; prepare a fiscal tax provision in coordination with
the annual audit; prepare an excise tax provision; and prepare all relevant 1099 calculations; (iv)
coordinate contractual relationships and communications between the Trust and its contractual
service providers; (v) coordinate printing of the
B-19
Trusts annual and semi-annual shareholder reports; (vi) prepare income and capital gain
distributions; (vii) prepare the semiannual and annual financial statements; (viii) monitor the
Trusts compliance with Internal Revenue Code, Commission and prospectus requirements; (ix)
prepare, coordinate with the Trusts counsel and coordinate the filing with the Commission:
semi-annual reports on Form N-SAR and Form N-CSR; Form N-Q; and Form N-PX based upon information
provided by the Trust, assist in the preparation of Forms 3, 4 and 5 pursuant to Section 16 of the
Securities Exchange Act of 1934, as amended, and Section 30(f) of the Investment Company Act for
the officers and trustees of the Trust, such filings to be based on information provided by those
persons; (x) assist in the preparation of notices of meetings of shareholders; (xi) assist in
obtaining the fidelity bond and trustees and officers/errors and omissions insurance policies for
the Trust in accordance with the requirements of Rule 17g-1 and 17d-1(d)(7) under the Investment
Company Act as such bond and policies are approved by the Trusts board of trustees; (xii) monitor
the Trusts assets to assure adequate fidelity bond coverage is maintained; (xiii) draft agendas
and resolutions for quarterly and special board meetings; (xiv) coordinate the preparation,
assembly and distribution of board materials; (xv) attend board meetings and draft minutes thereof;
(xvi) maintain the Trusts calendar to assure compliance with various filing and board approval
deadlines; (xvii) furnish the Trust office space in the offices of Highland, or in such other place
or places as may be agreed upon from time to time, and all necessary office facilities, simple
business equipment, supplies, utilities and telephone service for managing the affairs and
investments of the Trust; (xviii) assist the Trust in the handling of SEC examinations and
responses thereto; (xix) perform clerical, bookkeeping and all other administrative services not
provided by the Trusts other service providers; (xx) determine or oversee the determination and
publication of the Trusts net asset value in accordance with the Trusts policy as adopted from
time to time by the Board of Trustees; (xxi) oversee the maintenance by the Trusts custodian and
transfer agent and dividend disbursing agent of certain books and records of the Trust as required
under Rule 31a-1(b)(2)(iv) of the Investment Company Act and maintain (or oversee maintenance by
such other persons as approved by the board of trustees) such other books and records required by
law or for the proper operation of the Trust; (xxii) prepare such information and reports as may be
required by any stock exchange or exchanges on which the Trusts shares are listed; (xxiii)
determine the amounts available for distribution as dividends and distributions to be paid by the
Trust to its shareholders; prepare and arrange for the printing of dividend notices to
shareholders; and provide the Trusts dividend disbursing agent and custodian with such information
as is required for such parties to effect the payment of dividends and distributions and to
implement the Trusts dividend reinvestment plan; (xxiv) serve as liaison between the Trust and
each of its service providers; and (xxv) perform such additional administrative duties relating to
the administration of the Trust as may subsequently be agreed upon in writing between the Trust and
Highland. Highland shall have the authority to engage a sub-administrator in connection with the
administrative services of the Trust, which sub-administrator may be an affiliate of Highland;
provided, however, that Highland shall remain responsible to the Trust with respect to its duties
and obligations set forth in the administration services agreement.
Portfolio Managers
The portfolio managers of the Trust are Kurtis Plumer, James Dondero and Mark Okada.
As of October 31, 2007, Kurtis Plumer managed the following client accounts:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Assets |
|
|
|
|
|
|
|
|
|
|
Accounts |
|
Subject to a |
|
|
|
|
|
|
Assets of |
|
Subject to a |
|
Performance |
|
|
Number of |
|
Accounts |
|
Performance |
|
Fee |
Type of Account |
|
Accounts |
|
(in millions) |
|
Fee |
|
(in millions) |
Registered Investment Companies |
|
|
2 |
|
|
$ |
978 |
|
|
|
1 |
|
|
$ |
87 |
|
Other Pooled Investment Vehicles |
|
|
5 |
|
|
$ |
2,532 |
|
|
|
3 |
|
|
$ |
1,947 |
|
Other Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B-20
As of October 31, 2007, James Dondero managed the following client accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Assets |
|
|
|
|
|
|
|
|
|
|
Accounts |
|
Subject to a |
|
|
|
|
|
|
Assets of |
|
Subject to a |
|
Performance |
|
|
Number of |
|
Accounts |
|
Performance |
|
Fee |
Type of Account |
|
Accounts |
|
(in millions) |
|
Fee |
|
(in millions) |
Registered Investment Companies |
|
|
4 |
|
|
$ |
1,387 |
|
|
|
2 |
|
|
$ |
463 |
|
Other Pooled Investment Vehicles |
|
|
10 |
|
|
$ |
6,282 |
|
|
|
9 |
|
|
$ |
6,277 |
|
Other Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2007, Mark Okada managed the following client accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Assets |
|
|
|
|
|
|
|
|
|
|
Accounts |
|
Subject to a |
|
|
|
|
|
|
Assets of |
|
Subject to a |
|
Performance |
|
|
Number of |
|
Accounts |
|
Performance |
|
Fee |
Type of Account |
|
Accounts |
|
(in millions) |
|
Fee |
|
(in millions) |
Registered Investment Companies |
|
|
14 |
|
|
$ |
9,107 |
|
|
|
|
|
|
|
|
|
Other Pooled Investment Vehicles |
|
|
28 |
|
|
$ |
18,058 |
|
|
|
23 |
|
|
$ |
16,457 |
|
Other Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Investment Adviser has built a professional working environment, a firm-wide compliance
culture and compliance procedures and systems designed to protect against potential incentives that
may favor one account over another. The Investment Adviser has adopted policies and procedures that
address the allocation of investment opportunities, execution of portfolio transactions, personal
trading by employees and other potential conflicts of interest that are designed to ensure that all
client accounts are treated equitably over time. Nevertheless, the Investment Adviser furnishes
advisory services to numerous clients in addition to the Trust, and the Investment Adviser may,
consistent with applicable law, make investment recommendations to other clients or accounts
(including accounts which are hedge funds or have performance or higher fees paid to the Investment
Adviser, or in which portfolio managers have a personal interest in the receipt of such fees),
which may be the same as or different from those made to the Trust. In addition, the Investment
Adviser, its affiliates and any officer, director, stockholder or employee may or may not have an
interest in the securities whose purchase and sale the Investment Adviser recommends to the Trust.
Actions with respect to securities of the same kind may be the same as or different from the action
which the Investment Adviser, or any of its affiliates, or any officer, director, stockholder,
employee or any member of their families may take with respect to the same securities. Moreover,
the Investment Adviser may refrain from rendering any advice or services concerning securities of
companies of which any of the Investment Advisers (or its affiliates) officers, directors or
employees are directors or officers, or companies as to which the Investment Adviser or any of its
affiliates or the officers, directors and employees of any of them has any substantial economic
interest or possesses material non-public information. In addition to its various policies and
procedures designed to address these issues, the Investment Adviser includes disclosure regarding
these matters to its clients in both its Form ADV and investment advisory agreements.
The Investment Adviser, its affiliates or their officers and employees serve or may serve as
officers, directors or principals of entities that operate in the same or related lines of business
or of investment funds managed by affiliates of the Investment Adviser. Accordingly, these
individuals may have obligations to investors in those entities or funds or to other clients, the
fulfillment of which might not be in the best interests of the Trust. As a result, the Investment
Adviser will face conflicts in the allocation of investment opportunities to the Trust and other
funds and clients. In order to enable such affiliates to fulfill their fiduciary duties to each of
the clients for which they have responsibility, the Investment Adviser will endeavor to allocate
investment opportunities in a fair and equitable manner
B-21
which may, subject to applicable regulatory constraints, involve pro rata co-investment by the
Trust and such other clients or may involve a rotation of opportunities among the Trust and such
other clients.
While the Investment Adviser does not believe there will be frequent conflicts of interest, if
any, the Investment Adviser and its affiliates have both subjective and objective procedures and
policies in place designed to manage the potential conflicts of interest between the Investment
Advisers fiduciary obligations to the Trust and their similar fiduciary obligations to other
clients so that, for example, investment opportunities are allocated in a fair and equitable manner
among the Trust and such other clients. An investment opportunity that is suitable for multiple
clients of the Investment Adviser and its affiliates may not be capable of being shared among some
or all of such clients due to the limited scale of the opportunity or other factors, including
regulatory restrictions imposed by the Investment Company Act. There can be no assurance that the
Investment Advisers or its affiliates efforts to allocate any particular investment opportunity
fairly among all clients for whom such opportunity is appropriate will result in an allocation of
all or part of such opportunity to the Trust. Not all conflicts of interest can be expected to be
resolved in favor of the Trust.
Under current Commission regulations, the Trust may be prohibited from co-investing with any
unregistered fund managed now or in the future by the Investment Adviser in certain private
placements in which the Investment Adviser negotiates non-pricing terms. The Trust intends to file
for exemptive relief from the Commission to enable it to co-invest with other unregistered funds
managed by the Investment Adviser.
Compensation
The Investment Advisers financial arrangements with its portfolio managers, its competitive
compensation and its career path emphasis at all levels reflect the value senior management places
on key resources. Compensation may include a variety of components and may vary from year to year
based on a number of factors including the relative performance of a portfolio managers underlying
account, the combined performance of the portfolio managers underlying accounts, and the relative
performance of the portfolio managers underlying accounts measured against other employees. The
principal components of compensation include a base salary, a discretionary bonus, various
retirement benefits and one or more of the incentive compensation programs established by the
Investment Adviser such as Option It Plan and the Long-Term Incentive Plan.
Base Compensation. Generally, portfolio managers receive base compensation based on their
seniority and/or their position with the firm, which may include the amount of assets supervised
and other management roles within the firm.
Discretionary Compensation. In addition to base compensation, portfolio managers may receive
discretionary compensation, which can be a substantial portion of total compensation. Discretionary
compensation can include a discretionary cash bonus as well as one or more of the following:
|
|
|
Option It Plan. The purpose of this plan is to attract and retain the
highest quality employees for positions of substantial responsibility, and to
provide additional incentives to a select group of management or highly
compensated employees of Highland so as to promote the success of the Highland. |
|
|
|
|
Long Term Incentive Plan. The purpose of this plan is to create positive
morale and teamwork, to attract and retain key talent, and to encourage the
achievement of common goals. This plan seeks to reward participating employees
based on the increased value of Highland through the use of Long-Term Incentive
Units. |
B-22
Senior portfolio managers who perform additional management functions may receive additional
compensation in these other capacities. Compensation is structured such that key professionals
benefit from remaining with the firm.
Securities Ownership of Portfolio Managers
As of October 31, 2007, Mr. Dondero and Mr. Okada
owned between $50,001 - $100,000 and over $100,000 of the Trusts common shares, respectively.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In placing portfolio transactions for the Trust, the Investment Adviser will give primary
consideration to securing the most favorable price and efficient execution. Consistent with this
policy, the Investment Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers or dealers who may effect or be a party to any
such transaction or other transactions to which other clients of the Investment Adviser may be a
party. Neither the Trust nor the Investment Adviser has adopted a formula for allocation of the
Trusts investment transaction business. The Investment Adviser has access to supplemental
investment and market research and security and economic analysis provided by brokers who may
execute brokerage transactions at a higher cost to the Trust than would otherwise result when
allocating brokerage transactions to other brokers on the basis of seeking the most favorable price
and efficient execution. The Investment Adviser, therefore, is authorized to place orders for the
purchase and sale of securities for the Trust with such brokers, subject to review by the Trusts
board of trustees from time to time with respect to the extent and continuation of this practice.
The services provided by such brokers may be useful or beneficial to the Investment Adviser in
connection with its services to other clients.
On occasions when the Investment Adviser deems the purchase or sale of a security to be in the
best interest of the Trust as well as other clients, the Investment Adviser, to the extent
permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate
the securities to be so sold or purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be made by the
Investment Adviser in the manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Trust and to such other clients.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end management investment company and as such its shareholders will not
have the right to cause the Trust to redeem their shares. Instead, the Trusts common shares will
trade in the open market at a price that will be a function of several factors, including dividend
levels (which are in turn affected by expenses), net asset value, call protection, dividend
stability, relative demand for and supply of such shares in the market, general market and economic
conditions and other factors. Because shares of a closed-end investment company may frequently
trade at prices lower than net asset value, the Trusts board of trustees may consider action that
might be taken to reduce or eliminate any material discount from net asset value in respect of
common shares, which may include the repurchase of such shares in the open market or in private
transactions, the making of a tender offer for such shares, or the conversion of the Trust to an
open-end investment company. The board of trustees may decide not to take any of these actions. In
addition, there can be no assurance that share repurchases or tender offers, if undertaken, will
reduce market discount.
Notwithstanding the foregoing, at any time when there are outstanding borrowings, the Trust
may not purchase, redeem or otherwise acquire any of its common shares unless (i) all accrued
preferred shares dividends have been paid and (ii) at the time of such purchase, redemption or
acquisition, the net
B-23
asset value of the Trusts portfolio (determined after deducting the acquisition price of the
common shares) is at least 200% of the liquidation value of the outstanding borrowings. Any service
fees incurred in connection with any tender offer made by the Trust will be borne by the Trust and
will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to finance the repurchase of
shares or to make a tender offer. Interest on any borrowings to finance share repurchase
transactions or the accumulation of cash by the Trust in anticipation of share repurchases or
tenders will reduce the Trusts net income. Any share repurchase, tender offer or borrowing that
might be approved by the Trusts board of trustees would have to comply with the Securities
Exchange Act of 1934, as amended, the Investment Company Act and the rules and regulations
thereunder.
Although the decision to take action in response to a discount from net asset value will be
made by the board of trustees at the time it considers such issue, it is the boards present
policy, which may be changed by the board of trustees, not to authorize repurchases of common
shares or a tender offer for such shares if: (1) such transactions, if consummated, would (a)
result in the delisting of the common shares from the New York Stock Exchange, or (b) impair the
Trusts status as a regulated investment company under the Code (which would make the Trust a
taxable entity, causing the Trusts income to be taxed at the corporate level in addition to the
taxation of shareholders who receive dividends from the Trust), or as a registered closed-end
investment company under the Investment Company Act; (2) the Trust would not be able to liquidate
portfolio securities in an orderly manner and consistent with the Trusts investment objectives and
policies in order to repurchase shares; or (3) there is, in the boards judgment, any (a) material
legal action or proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Trust, (b) general suspension of or limitation on prices for
trading securities on the New York Stock Exchange, (c) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by U.S. or New York banks, (d) material
limitation affecting the Trust or the issuers of its portfolio securities by federal or state
authorities on the extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or national calamity
directly or indirectly involving the United States or (f) other event or condition which would have
a material adverse effect (including any adverse tax effect) on the Trust or its shareholders if
shares were repurchased. The board of trustees may in the future modify these conditions in light
of experience.
The repurchase by the Trust of its shares at prices below net asset value will result in an
increase in the net asset value of those shares that remain outstanding. However, there can be no
assurance that share repurchases or tender offers at or below net asset value will result in the
Trusts shares trading at a price equal to their net asset value. Nevertheless, the fact that the
Trusts shares may be the subject of repurchase or tender offers from time to time, or that the
Trust may be converted to an open-end investment company, may reduce any spread between market
price and net asset value that might otherwise exist.
Before deciding whether to take any action if the common shares trade below net asset value,
the Trusts board of trustees would likely consider all relevant factors, including the extent and
duration of the discount, the liquidity of the Trusts portfolio, the impact of any action that
might be taken on the Trust or its shareholders and market considerations. Based on these
considerations, even if the Trusts shares should trade at a discount, the board of trustees may
determine that, in the interest of the Trust and its shareholders, no action should be taken.
B-24
TAX MATTERS
The following discussion summarizes certain U.S. federal income tax considerations affecting
the Trust and the purchase, ownership and disposition of the Trusts common and preferred shares by
shareholders that are U.S. persons, as defined for U.S. federal income tax purposes. This
discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended (the
Code), the regulations promulgated thereunder and judicial and administrative authorities, all of
which are subject to change or differing interpretations by the courts or the Internal Revenue
Service (the IRS), possibly with retroactive effect. No attempt is made to present a detailed
explanation of all U.S. federal tax concerns affecting the Trust and its shareholders (including
non-U.S. Shareholders owning large positions in the Trust and others subject to special treatment
under U.S. federal income tax law).
The discussions set forth herein and in the prospectus do not constitute tax advice, and you
are urged to consult with your own tax advisor to determine the specific U.S. federal, state, local
and foreign tax consequences to you of investing in the Trust.
Taxation of the Trust
The Trust intends to elect to be treated and to qualify annually as a regulated investment
company under Subchapter M of the Code. Accordingly, the Trust must, among other things, meet the
following requirements regarding the source of its income and the diversification of its assets:
(i) The Trust must derive in each taxable year at least 90% of its gross income from the
following sources: (a) dividends, interest (including tax-exempt interest), payments with respect
to certain securities loans, gains from the sale or other disposition of stock, securities or
foreign currencies, or other income (including but not limited to gains from options, futures and
forward contracts) derived with respect to its business of investing in such stock, securities or
foreign currencies; and (b) interests in qualified publicly traded partnerships (as defined in
the Code).
(ii) The Trust must diversify its holdings so that, at the end of each quarter of each taxable
year: (a) at least 50% of the value of the Trusts total assets is represented by cash and cash
items, U.S. government securities, the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one issuer, to an amount not
greater than 5% of the value of the Trusts total assets and not more than 10% of the outstanding
voting securities of such issuer and (b) not more than 25% of the value of the Trusts total assets
is invested in the securities (other than U.S. government securities and the securities of other
regulated investment companies) of: (I) any one issuer, (II) any two or more issuers that the Trust
controls (by owning 20% or more of their voting power) and that are determined to be engaged in the
same business or similar or related trades or businesses or (III) any one or more qualified
publicly traded partnerships (as defined in the Code).
As a regulated investment company, the Trust generally will not be subject to U.S. federal
income tax on income and gains that the Trust distributes to its shareholders, provided that it
distributes each taxable year at least the sum of: (i) 90% of the Trusts investment company
taxable income (which includes, among other items, dividends, interest and the excess of any net
short-term capital gain over net long-term capital loss and other taxable income, other than any
net long-term capital gain, reduced by deductible expenses) determined without regard to the
deduction for dividends paid and (ii) 90% of the Trusts net tax-exempt interest (the excess of its
gross tax-exempt interest over certain disallowed deductions). The Trust intends to distribute
substantially all of such income each year. The Trust will be subject to U.S. federal income tax at
regular corporate rates on any taxable income or gains that it does not distribute to its
shareholders.
B-25
The Code imposes a 4% nondeductible excise tax on the Trust to the extent the Trust does not
distribute by the end of any calendar year at least the sum of: (i) 98% of its ordinary income (not
taking into account any capital gain or loss) for the calendar year and (ii) 98% of its capital
gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period
generally ending on October 31 of the calendar year (unless an election is made to use the Trusts
fiscal year). In addition, the minimum amounts that must be distributed in any year to avoid the
excise tax will be increased or decreased to reflect any under-distribution or over-distribution,
as the case may be, from the previous year. While the Trust intends to distribute any income and
capital gain in the manner necessary to minimize imposition of the 4% excise tax, there can be no
assurance that sufficient amounts of the Trusts taxable income and capital gain will be
distributed to avoid entirely the imposition of the excise tax. In that event, the Trust will be
liable for the excise tax only on the amount by which it does not meet the foregoing distribution
requirement.
If, for any taxable year, the Trust does not qualify as a regulated investment company, all of
its taxable income (including its net capital gain) will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the Trusts current or
accumulated earnings and profits. Provided that shareholders satisfy certain holding period and
other requirements with respect to their common shares, such dividends would be eligible (i) to be
treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for
the dividends received deduction in the case of shareholders taxed as corporations. The Trust may
be required to recognize unrealized gains, pay taxes and make distributions (which may be subject
to interest charges) before requalifying for taxation as a regulated investment company. If the
Trust fails to qualify as a regulated investment company in any year, it must pay out its earnings
and profits accumulated in that year in order to qualify again as a regulated investment company.
If the Trust fails to qualify as a regulated investment company for a period greater than one
taxable year, the Trust may be required to recognize and pay tax on any net built-in gains with
respect to certain of its assets (i.e., the excess of the aggregate gains, including items of
income, over aggregate losses that would have been realized with respect to such assets if the
Trust had been liquidated) or, alternatively, to elect to be subject to taxation on such built-in
gain recognized for a period of ten years, in order to qualify as a regulated investment company in
a subsequent year.
Taxation of the Trusts Investments
Certain of the Trusts investment practices are subject to special and complex U.S. federal
income tax provisions that may, among other things: (i) treat dividends that would otherwise
constitute qualified dividend income as non-qualified dividend income, (ii) treat dividends that
would otherwise be eligible for the corporate dividends received deduction as ineligible for such
treatment, (iii) disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (iv) convert lower-taxed, long-term capital gain into higher-taxed, short-term capital
gain or ordinary income, (v) convert an ordinary loss or deduction into a capital loss (the
deductibility of which is more limited), (vi) cause the Trust to recognize income or gain without a
corresponding receipt of cash, (vii) adversely affect the time as to when a purchase or sale of
stocks or securities is deemed to occur, (viii) adversely alter the characterization of certain
complex financial transactions or (ix) produce income that will not qualify as good income for
purposes of the 90% annual gross income requirement described above. These U.S. federal income tax
provisions could therefore affect the amount, timing and character of distributions to
shareholders. The Trust intends to monitor its transactions and may make certain tax elections and
may be required to dispose of securities or borrow money to mitigate the effect of these provisions
and prevent disqualification of the Trust as a regulated investment company.
If the Trust purchases shares in certain foreign investment entities, called passive foreign
investment companies (PFICs), the Trust may be subject to U.S. federal income tax on a portion of
any
B-26
excess distribution or gain from the disposition of such shares. Additional charges in the
nature of interest may be imposed on the Trust in respect of deferred taxes arising from such
distributions or gains. Elections may be available to the Trust to mitigate the effect of this tax,
but such elections generally accelerate the recognition of income without the receipt of cash.
Dividends paid by PFICs will not be qualified dividend income.
If the Trust invests in the shares of a PFIC, or any other investment that produces income
that is not matched by a corresponding cash distribution to the Trust, such as investments in debt
securities that have original issue discount, the Trust could be required to recognize income that
it has not yet received. Any such income would be treated as income earned by the Trust and
therefore would be subject to the distribution requirements of the Code. This might prevent the
Trust from distributing 90% of its net investment income as is required in order to avoid
Trust-level U.S. federal income taxation on all of its income, or might prevent the Trust from
distributing enough ordinary income and capital gain net income to avoid completely the imposition
of the excise tax. To avoid this result, the Trust may be required to borrow money or dispose of
securities to be able to make required distributions to the shareholders.
Dividend, interest and other income received by the Trust from investments outside the United
States may be subject to withholding and other taxes imposed by foreign countries. Tax treaties
between the United States and other countries may reduce or eliminate such taxes. The Trust does
not expect that it will be eligible to elect to treat any foreign taxes it pays as paid by its
shareholders, who therefore will not be entitled to credits for such taxes on their own tax
returns. Foreign taxes paid by a Trust will reduce the return from the Trusts investments.
Taxation of Shareholders
The Trust will determine either to distribute or to retain for reinvestment all or part of its
net capital gain. If any such gain is retained, the Trust will be subject to corporate income tax
(currently at a maximum rate of 35%) on such retained amount. In that event, the Trust expects to
designate the retained amount as undistributed capital gain in a notice to its shareholders, each
of whom: (i) will be required to include in income for U.S. federal income tax purposes as
long-term capital gain its share of such undistributed amounts, (ii) will be entitled to credit its
proportionate share of the tax paid by the Trust against its U.S. federal income tax liability and
to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its
basis in its common shares of the Trust by an amount equal to 65% of the amount of undistributed
capital gain included in such shareholders gross income.
Distributions paid to you by the Trust from its net realized long-term capital gains, if any,
that the Trust designates as capital gains dividends (capital gain dividends) are taxable as
long-term capital gains, regardless of how long you have held your common shares. All other
dividends paid to you by the Trust (including dividends from short-term capital gains) from its
current or accumulated earnings and profits (ordinary income dividends) are generally subject to
tax as ordinary income. The Trust does not expect that a corporate shareholder will be able to
claim a dividends received deduction with respect to any significant portion of the Trust
distributions.
Special rules apply, however, to ordinary income dividends paid to individuals with
respect to taxable years beginning on or before December 31, 2010. If you are an individual,
any such ordinary income dividend that you receive from the Trust generally will be eligible
for taxation at the rates applicable to long-term capital gains to the extent that: (i) the
ordinary income dividend is attributable to qualified dividend income (i.e., generally
dividends paid by U.S. corporations and certain foreign corporations) received by the Trust,
(ii) the Trust satisfies certain holding period and other requirements with respect to the
stock on which such qualified dividend income was paid and (iii) you satisfy certain holding
period and other requirements with respect to your common shares. Ordinary income dividends
B-27
subject to these special rules are not actually treated as capital gains, however, and thus will
not be included in the computation of your net capital gain and generally cannot be used to offset
any capital losses. In general, you may include as qualified dividend income only that portion of
the dividends that may be and are so designated by the Trust as qualified dividend income; however,
the Trust does not expect that a significant portion of its ordinary income dividends will be
treated as qualified dividend income.
Any distributions that you receive that are in excess of the Trusts current or accumulated
earnings and profits will be treated as a tax-free return of capital to the extent of your adjusted
tax basis in your common shares, and thereafter as capital gain from the sale of common shares. The
amount of any Trust distribution that is treated as a tax-free return of capital will reduce your
adjusted tax basis in your common shares, thereby increasing your potential gain or reducing your
potential loss on any subsequent sale or other disposition of your common shares.
For holders of common shares that participate in the Trusts Automatic Dividend Reinvestment
Plan, dividends and other taxable distributions are taxable to you even if they are reinvested in
additional common shares of the Trust. Dividends and other distributions paid by the Trust are
generally treated under the Code as received by you at the time the dividend or distribution is
made. If, however, the Trust pays you a dividend in January that was declared in the previous
October, November or December and you were the shareholder of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid by the Trust and
received by you on December 31 of the year in which the dividend was declared.
The price of common shares purchased at any time may reflect the amount of a forthcoming
distribution. If you purchase common shares just prior to a distribution, you will receive a
distribution that will be taxable to you even though it represents in part a return of your
invested capital.
The Trust will send you information after the end of each year setting forth the amount and
tax status of any distributions paid to you by the Trust. Ordinary income dividends and capital
gain dividends may also be subject to state and local taxes.
If you sell or otherwise dispose of common shares of the Trust, you will generally recognize a
gain or loss in an amount equal to the difference between your adjusted tax basis in such common
shares of the Trust and the amount you receive upon disposition of such common shares. If you hold
your common shares as capital assets, any such gain or loss will be long-term capital gain or loss
if you have held such common shares for more than one year at the time of sale. Any loss upon the
sale or exchange of common shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received (including amounts credited as an
undistributed capital gain dividend) by you with respect to such common shares. Any loss you
realize on a sale or exchange of common shares will be disallowed if you acquire other common
shares (whether through the automatic reinvestment of dividends or otherwise) within a 61-day
period beginning 30 days before and ending 30 days after your sale or exchange of the common
shares. In such case, your tax basis in the common shares acquired will be adjusted to reflect the
disallowed loss.
Current U.S. federal income tax laws tax both long-term and short-term capital gain of
corporations at the rates applicable to ordinary income. For non-corporate taxpayers, short-term
capital gain is currently taxed at rates applicable to ordinary income (currently at a maximum of
35%) while long-term capital gain generally is taxed at a maximum rate of 15% with respect to
taxable years beginning on or before December 31, 2010 (20% thereafter, unless changed by future
legislation).
B-28
Shareholders
may be entitled to offset their capital gain dividends with capital loss. The
Code contains a number of statutory provisions affecting the circumstances under which capital loss
may be offset against capital gain and limiting the use of loss from certain investments and
activities. Accordingly, shareholders that have capital losses are urged to consult their tax
advisors.
The Trust
may be required to withhold, for U.S. federal backup withholding tax purposes, a
portion of the dividends, distributions and redemption proceeds payable to a shareholder who fails
to provide the Trust (or its agent) with the shareholders correct taxpayer identification number
(in the case of an individual, generally, such individuals social security number) or to make the
required certification, or who has been notified by the IRS that such shareholder is subject to
backup withholding. Corporate shareholders and certain other shareholders are exempt from backup
withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or
credited against your U.S. federal income tax liability, if any, provided that you furnish the
required information to the IRS.
EXPERTS
PricewaterhouseCoopers LLP, located at 2001 Ross Avenue, Suite 1800, Dallas, Texas
75201, provides accounting and auditing services to the Trust.
ADDITIONAL INFORMATION
A Registration
Statement on Form N-2, including amendments thereto, relating to the shares
offered hereby, has been filed by the Trust with the Commission, Washington, D.C. The prospectus
and this Statement of Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For further information with
respect to the Trust and the Shares offered hereby, reference is made to the Registration
Statement. Statements contained in the prospectus and this Statement of Additional Information as
to the contents of any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document filed as an exhibit
to the Registration Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge at the Commissions
principal office in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
FINANCIAL STATEMENTS
The
Trusts financial statements appearing in the Trusts
annual shareholder report for the period ended December 31, 2006
are incorporated by reference in this Statement of Additional
Information and have been so incorporated in reliance upon the report
of PricewaterhouseCoopers LLP, independent registered public
accounting firm for the Trust. The
Trusts unaudited financial statements appearing in the Trusts semi-annual shareholder
report for the period ended June 30, 2007 are incorporated by reference in this Statement of
Additional Information. The annual and semi-annual (unaudited) shareholder reports are available
upon request and without charge by writing to the Trust at Two Galleria Tower, 13455 Noel Road,
Suite 800, Dallas, Texas 75240 or by calling (877) 665-1287.
B-29
APPENDIX A
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of financial obligations,
or a specific financial program (including ratings on medium-term note programs and commercial
paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation and takes into account the currency in which the
obligation is denominated. The issue credit rating is not a recommendation to purchase, sell, or
hold a financial obligation, inasmuch as it does not comment as to market price or suitability for
a particular investor.
Issue credit ratings are based on current information furnished by the obligors or obtained by
Standard & Poors from other sources it considers reliable. Standard & Poors does not perform an
audit in connection with any credit rating and may, on occasion, rely on unaudited financial
information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally
assigned to those obligations considered short-term in the relevant market. In the U.S., for
example, that means obligations with an original maturity of no more than 365 days, including
commercial paper, are considered short-term. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term obligations. The result is
a dual rating, in which the short-term rating addresses the put feature, in addition to the usual
long-term rating. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following considerations:
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Likelihood of paymentcapacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the obligation; |
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Nature of and provisions of the obligation; and |
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Protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other
laws affecting creditors rights. |
The issue rating definitions are expressed in terms of default risk. As such, they pertain to
senior obligations of an entity. Junior obligations are typically rated lower than senior
obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation
applies when an entity has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA
An obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors
capacity to meet its financial commitment on the obligation is extremely strong.
A-1
AA
An obligation rated AA differs from the highest-rated obligations only to a small degree.
The obligors capacity to meet its financial commitment on the obligation is very strong.
A
An obligation rated A is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher-rated categories. However, the
obligors capacity to meet its financial commitment on the obligation is still strong.
BBB
An obligation rated BBB exhibits adequate protection parameters. However, 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.
BB, B, CCC, CC, and C
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C the highest.
While such obligations will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
An obligation rated BB is less vulnerable to nonpayment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligors inadequate capacity to meet its financial
commitment on the obligation.
B
An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial commitment on the obligation. Adverse
business, financial, or economic conditions will likely impair the obligors capacity or
willingness to meet its financial commitment on the obligation.
CCC
An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC
An obligation rated CC is currently highly vulnerable to nonpayment.
C
A subordinated debt or preferred stock obligation rated C is currently highly vulnerable to
nonpayment. The C rating may be used to cover a situation where a bankruptcy petition has been
filed or similar action taken, but payments on this obligation are being continued. A C also will
be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
A-2
D
An obligation rated D is in payment default. The D rating category is used when payments
on an obligation are not made on the date due even if the applicable grace period has not expired,
unless Standard & Poors believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus ()
The ratings from AA to CCC may be modified by the addition of a plus (+) or minus ()
sign to show relative standing within the major rating categories.
NR
This indicates that no rating has been requested, that there is insufficient information on
which to base a rating, or that Standard & Poors does not rate a particular obligation as a matter
of policy.
Short-Term Issue Credit Ratings
A-1
A short-term obligation rated A-1 is rated in the highest category by Standard & Poors. The
obligors capacity to meet its financial commitment on the obligation is strong. Within this
category, certain obligations are designated with a plus sign (+). This indicates that the
obligors capacity to meet its financial commitment on these obligations is extremely strong.
A-2
A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher rating categories.
However, the obligors capacity to meet its financial commitment on the obligation is satisfactory.
A-3
A short-term obligation rated A-3 exhibits adequate protection parameters. However, 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.
B
A short-term obligation rated B is regarded as having significant speculative
characteristics. Ratings of B-1, B-2, and B-3 may be assigned to indicate finer distinctions
within the B category. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the
obligors inadequate capacity to meet its financial commitment on the obligation.
B-1
A short-term obligation rated B-1 is regarded as having significant speculative
characteristics, but the obligor has a relatively stronger capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
A-3
B-2
A short-term obligation rated B-2 is regarded as having significant speculative
characteristics, and the obligor has an average speculative-grade capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
B-3
A short-term obligation rated B-3 is regarded as having significant speculative
characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments
over the short-term compared to other speculative-grade obligors.
C
A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet its financial
commitment on the obligation.
D
A short-term obligation rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poors believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of
a similar action if payments on an obligation are jeopardized.
Active Qualifiers (Currently applied and/or outstanding)
i
This subscript is used for issues in which the credit factors, terms, or both, that determine
the likelihood of receipt of payment of interest are different from the credit factors, terms or
both that determine the likelihood of receipt of principal on the obligation. The i subscript
indicates that the rating addresses the interest portion of the obligation only. The i subscript
will always be used in conjunction with the p subscript, which addresses likelihood of
receipt of principal. For example, a rated obligation could be assigned ratings of AAAp NRi
indicating that the principal portion is rated AAA and the interest portion of the obligation is
not rated.
L
Ratings qualified with L apply only to amounts invested up to federal deposit insurance
limits.
A-4
P
This subscript is used for issues in which the credit factors, the terms, or both, that
determine the likelihood of receipt of payment of principal are different from the credit factors,
terms or both that determine the likelihood of receipt of interest on the obligation. The p
subscript indicates that the rating addresses the principal portion of the obligation only. The p
subscript will always be used in conjunction with the i subscript, which addresses likelihood of
receipt of interest. For example, a rated obligation could be assigned ratings of AAAp N.R.i
indicating that the principal portion is rated AAA and the interest portion of the obligation is
not rated.
pi
Ratings with a pi subscript are based on an analysis of an issuers published financial
information, as well as additional information in the public domain. They do not, however, reflect
in-depth meetings with an issuers management and are therefore based on less comprehensive
information than ratings without a pi subscript. Ratings with a pi subscript are reviewed
annually based on a new years financial statements, but may be reviewed on an interim basis if a
major event occurs that may affect the issuers credit quality.
pr
The letters pr indicate that the rating is provisional. A provisional rating assumes the
successful completion of the project financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful, timely completion
of the project. This rating, however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with respect to such likelihood and risk.
Preliminary
Preliminary ratings are assigned to issues, including financial programs, in the following
circumstances.
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Preliminary ratings may be assigned to obligations, most commonly structured and
project finance issues, pending receipt of final documentation and legal opinions.
Assignment of a final rating is conditional on the receipt and approval by Standard &
Poors of appropriate documentation. Changes in the information provided to Standard &
Poors could result in the assignment of a different rating. In addition, Standard &
Poor s reserves the right not to issue a final rating. |
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Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific
issues, with defined terms, are offered from the master registration, a final rating
may be assigned to them in accordance with Standard & Poors policies. The final rating
may differ from the preliminary rating. |
t
This symbol indicates termination structures that are designed to honor their contracts to
full maturity or, should certain events occur, to terminate and cash settle all their contracts
before their final maturity date.
A-5
Inactive Qualifiers (No longer applied or outstanding)
*
This symbol indicated continuance of the ratings is contingent upon Standard & Poor s receipt
of an executed copy of the escrow agreement or closing documentation confirming investments and
cash flows. Discontinued use in August 1998.
c
This qualifier was used to provide additional information to investors that the bank may
terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer is
below an investment-grade level and/or the issuers bonds are deemed taxable. Discontinued use in
January 2001.
q
A q subscript indicates that the rating is based solely on quantitative analysis of publicly
available information. Discontinued use in April 2001.
r
The r modifier was assigned to securities containing extraordinary risks, particularly
market risks, that are not covered in the credit rating. The absence of an r modifier should not
be taken as an indication that an obligation will not exhibit extraordinary non-credit related
risks. Standard & Poors discontinued the use of the r modifier for most obligations in June 2000
and for the balance of obligations (mainly structured finance transactions) in November 2002.
Moodys Investors Service, Inc.A brief description of the applicable Moodys Investors
Service, Inc. (Moodys) rating symbols and their meanings (as published by Moodys) follows:
Long-Term Obligation Ratings
Moodys long-term obligation ratings are opinions of the relative credit risk of a fixed
income obligations with an original maturity of one year or more. They address the possibility that
a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of
default and any financial loss suffered in the event of default.
Moodys Long-Term Rating Definitions:
Aaa
Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.
Aa
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
Obligations rated A are considered upper medium-grade and are subject to low credit risk.
A-6
Baa
Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade
and as such may possess certain speculative characteristics.
Ba
Obligations rated Ba are judged to have speculative elements and are subject to substantial
credit risk.
B
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
Obligations rated Caa are judged to be of poor standing and are subject to very high credit
risk.
Ca
Obligations rated Ca are highly speculative and are likely in, or very near, default, with
some prospect of recovery of principal and interest.
C
Obligations rated C are the lowest rated class of bonds and are typically in default, with
little prospect for recovery of principal or interest.
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
Medium-Term Note Ratings
Moodys assigns long-term ratings to individual debt securities issued from medium-term note
(MTN) programs, in addition to indicating ratings to MTN programs themselves. Notes issued under
MTN programs with such indicated ratings are rated at issuance at the rating applicable to all parí
passu notes issued under the same program, at the programs relevant indicated rating, provided
such notes do not exhibit any of the characteristics listed below:
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Notes containing features that link interest or principal to the credit performance
of any third party or parties (i.e., credit-linked notes); |
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Notes allowing for negative coupons, or negative principal |
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Notes containing any provision that could obligate the investor to make any
additional payments |
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Notes containing provisions that subordinate the claim. |
A-7
For notes with any of these characteristics, the rating of the individual note may differ from
the indicated rating of the program.
For credit-linked securities, Moodys policy is to look through to the credit risk of the
underlying obligor. Moodys policy with respect to non-credit linked obligations is to rate the
issuers ability to meet the contract as stated, regardless of potential losses to investors as a
result of non-credit developments. In other words, as long as the obligation has debt standing in
the event of bankruptcy, we will assign the appropriate debt class level rating to the instrument.
Market participants must determine whether any particular note is rated, and if so, at what
rating level. Moodys encourages market participants to contact Moodys Ratings Desks or visit
www.moodys.com directly if they have questions regarding ratings for specific notes issued under a
medium-term note program. Unrated notes issued under an MTN program may be assigned an NR (not
rated) symbol.
Short-Term Ratings:
Moodys short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term programs or to individual
short-term debt instruments. Such obligations generally have an original maturity not exceeding
thirteen months, unless explicitly noted.
Moodys employs the following designations to indicate the relative repayment ability of rated
issuers:
P-1
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term
debt obligations.
P-2
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term
debt obligations.
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay
short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime
rating categories.
Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior
most long-term rating of the issuer, its guarantor or support provider.
A-8
APPENDIX B
PROXY VOTING POLICIES AND PROCEDURES
B-1
HIGHLAND CAPITAL MANAGEMENT, L.P.
PROXY VOTING POLICY
1. Application; General Principles
1.1 This proxy voting policy (the Policy) applies to securities held in Client accounts as
to which the above-captioned investment adviser (the Company) has voting authority, directly or
indirectly. Indirect voting authority exists where the Companys voting authority is implied by a
general delegation of investment authority without reservation of proxy voting authority.
1.2 The Company shall vote proxies in respect of securities owned by or on behalf of a Client
in the Clients best economic interests and without regard to the interests of the Company or any
other Client of the Company.
2. Voting; Procedures
2.1 Monitoring. A settlement designee of the Company shall have responsibility for
monitoring portfolios managed by the Company for securities subject to a proxy vote. Upon the
receipt of a proxy notice related to a security held in a portfolio managed by the Company, the
settlement designee shall forward all relevant information to the portfolio manager(s) with
responsibility for the security.
2.2 Voting.
2.2.1. Upon receipt of notice from the settlement designee, the portfolio manager(s) with
responsibility for purchasing the security subject to a proxy vote shall evaluate the subject
matter of the proxy and cause the proxy to be voted on behalf of the Client. In determining how to
vote a particular proxy, the portfolio manager (s) shall consider, among other things, the
interests of each Client account as it relates to the subject matter of the proxy, any potential
conflict of interest the Company may have in voting the proxy on behalf of the Client and the
procedures set forth in this Policy.
2.2.2 If a proxy relates to a security held in a registered investment company or business
development company (Retail Fund) portfolio, the portfolio manager(s) shall notify the Compliance
Department and a designee from the Retail Funds group. Proxies for securities held in the Retail
Funds will be voted by the designee from the Retail Funds group in a manner consistent with the
best interests of the applicable Retail Fund and a record of each vote will be reported to the
Retail Funds Board of Directors in accordance with the procedures set forth in Section 4 of this
Policy.
2.3 Conflicts of Interest. If the portfolio manager(s) determine that the Company may
have a potential material conflict of interest (as defined in Section 3 of this Policy) in voting a
particular proxy, the portfolio manager(s) shall contact the Companys Compliance Department prior
to causing the proxy to be voted.
2.3.1. For a security held by a Retail Fund, the Company shall disclose the conflict
and the determination of the manner in which it proposes to vote to the Retail Funds Board
of Directors. The Companys determination shall take into account only the interests of the
Retail Fund, and the Compliance Department shall document the basis for the decision and
furnish the documentation to the Board of Directors.
B-2
2.3.2. For a security held by an unregistered investment company, such as a hedge fund
and structured products (Non-Retail Funds), where a material conflict of interest has been
identified the Company may resolve the conflict by following the recommendation of a
disinterested third party or by abstaining from voting.
2.4 Non-Votes. The Company may determine not to vote proxies in respect of securities
of any issuer if it determines it would be in its Clients overall best interests not to vote.
Such determination may apply in respect of all Client holdings of the securities or only certain
specified Clients, as the Company deems appropriate under the circumstances. As examples, the
portfolio manager(s) may determine: (a) not to recall securities on loan if, in its judgment, the
negative consequences to Clients of disrupting the securities lending program would outweigh the
benefits of voting in the particular instance or (b) not to vote certain foreign securities
positions if, in its judgment, the expense and administrative inconvenience outweighs the benefits
to Clients of voting the securities.
2.5 Recordkeeping. Following the submission of a proxy vote, the applicable portfolio
manager(s) shall submit a report of the vote to a settlement designee of the Company. Records of
proxy votes by the Company shall be maintained in accordance with Section 4 of this Policy.
2.6 Certification. On a quarterly basis, each portfolio manager shall certify to the
Compliance Department that they have complied with this Policy in connection with proxy votes
during the period.
3. Conflicts of Interest
3.1 Voting the securities of an issuer where the following relationships or circumstances
exist are deemed to give rise to a material conflict of interest for purposes of this Policy:
3.1.1 The issuer is a Client of the Company accounting for more than 5% of the
Companys annual revenues.
3.1.2 The issuer is an entity that reasonably could be expected to pay the Company more
than $1 million through the end of the Companys next two full fiscal years.
3.1.3 The issuer is an entity in which a Covered Person (as defined in the Retail
Funds and the Companys Policies and Procedures Designed to Detect and Prevent Insider
Trading and to Comply with Rule 17j-1 of the Investment Company Act of 1940, as amended
(each, a Code of Ethics)) has a beneficial interest contrary to the position held by the
Company on behalf of Clients.
3.1.4 The issuer is an entity in which an officer or partner of the Company or a
relative1 of any such person is or was an officer, director or employee, or such
person or relative otherwise has received more than $150,000 in fees, compensation and other
payment from the issuer during the Companys last three fiscal years; provided,
however, that the Compliance Department may deem such a relationship not to be a
material conflict of interest if the Company representative serves as an officer or director
of the issuer at the direction of the Company for purposes of seeking control over the
issuer.
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1 |
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For the purposes of this Policy, relative includes
the following family members: spouse, minor children or stepchildren or
children or stepchildren sharing the persons home. |
B-3
3.1.5 The matter under consideration could reasonably be expected to result in a
material financial benefit to the Company through the end of the Companys next two full
fiscal years (for example, a vote to increase an investment advisory fee for a Retail Fund
advised by the Company or an affiliate).
3.1.6 Another Client or prospective Client of the Company, directly or indirectly,
conditions future engagement of the Company on voting proxies in respect of any Clients
securities on a particular matter in a particular way.
3.1.7 The Company holds various classes and types of equity and debt securities of the
same issuer contemporaneously in different Client portfolios.
3.1.8 Any other circumstance where the Companys duty to serve its Clients interests,
typically referred to as its duty of loyalty, could be compromised.
3.2 Notwithstanding the foregoing, a conflict of interest described in Section 3.1 shall not
be considered material for the purposes of this Policy in respect of a specific vote or
circumstance if:
3.2.1 The securities in respect of which the Company has the power to vote account for
less than 1% of the issuers outstanding voting securities, but only if: (i) such
securities do not represent one of the 10 largest holdings of such issuers outstanding
voting securities and (ii) such securities do not represent more than 2% of the Clients
holdings with the Company.
3.2.2 The matter to be voted on relates to a restructuring of the terms of existing
securities or the issuance of new securities or a similar matter arising out of the holding
of securities, other than common equity, in the context of a bankruptcy or threatened
bankruptcy of the issuer.
4. Recordkeeping and Retention
4.1 The Company shall retain records relating to the voting of proxies, including:
4.1.1 Copies of this Policy and any amendments thereto.
4.1.2 A copy of each proxy statement that the Company receives regarding Client
securities.
4.1.3 Records of each vote cast by the Company on behalf of Clients.
4.1.4 A copy of any documents created by the Company that were material to making a
decision how to vote or that memorializes the basis for that decision.
4.1.5 A copy of each written request for information on how the Company voted proxies
on behalf of the Client, and a copy of any written response by the Company to any (oral or
written) request for information on how the Company voted.
4.2 These records shall be maintained and preserved in an easily accessible place for a period
of not less than five years from the end of the Companys fiscal year during which the last entry
was made in the records, the first two years in an appropriate office of the Company.
B-4
4.3 The Company may rely on proxy statements filed on the SECs EDGAR system or on proxy
statements and records of votes cast by the Company maintained by a third party, such as a proxy
voting service (provided the Company had obtained an undertaking from the third party to provide a
copy of the proxy statement or record promptly on request).
4.4 Records relating to the voting of proxies for securities held by the Retail Funds will be
reported periodically to the Retail Funds Boards of Directors and, with respect to Retail Funds
other than business development companies, to the SEC on an annual basis pursuant to Form N-PX.
B-5
Part C
Other Information
Item 25. Financial Statements and Exhibits
1. Financial Statements
Part A Financial Highlights.
Part B Unaudited financial statements for the period ended June 30,
2007 are incorporated by reference herein to the Trusts semi-annual report for the period ended June 30,
2007. Financial
statements for the period ended December 31, 2006 are
incorporated by reference herein to the Trusts annual report
for the period ended December 31, 2006.
2. Exhibits
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(a)
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Agreement and Declaration of Trust(1) |
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(b)
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By-Laws(1) |
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(c)
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Not applicable |
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(d) |
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Form of Subscription Certificate(3) |
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(e)
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Form of Dividend Reinvestment Plan(1) |
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(f)
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Not applicable |
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(g)
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Form of Investment Advisory Agreement(1) |
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(h)
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Form of Dealer Manager Agreement(3) |
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(i)
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Not applicable |
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(j)
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Form of Custodian Services Agreement(1) |
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(k)(1)
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Form of Transfer Agency Services Agreement(1) |
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(k)(2)
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Form of Administration Services Agreement(1) |
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(k)(3)
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Form of Sub-Administration Services Agreement(1) |
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(k)(4)
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Form of Accounting Services Agreement(1) |
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(k)(5)
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Form of Marketing and Structuring Fee Agreement(1) |
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(l)
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Opinion and Consent of Counsel to the Trust(4) |
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(m)
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Not applicable |
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(n)
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Consent of Independent Registered Public Accounting Firm(4) |
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(o)
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Not applicable |
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(p)
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Subscription Agreement(1) |
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(q)
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Not applicable |
C-1
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(r)(1) |
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Code of Ethics of the Trust(1) |
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(r)(2) |
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Code of Ethics of the Investment Adviser(1) |
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(s) |
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Power of Attorney(2) |
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(1) |
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Incorporated by reference from Pre-Effective Amendment No. 6 to the Trusts Registration
Statement on Form N-2 (File No. 333-132436), filed on June 21, 2006. |
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(2) |
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Incorporated by reference from the Trusts Registration Statement on Form N-2 (File No.
333-147121), filed on November 2, 2007. |
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(3) |
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Incorporated by reference from Pre-Effective Amendment
No. 2 to the Trusts Registration Statement on
Form N-2 (File No. 333-147121), filed on December 14,
2007. |
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(4) |
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Filed herewith. |
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Item 26. Marketing Arrangements
Not applicable.
Item 27. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in connection with the offer
described in this Registration Statement:
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Legal |
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$ |
250,000 |
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Subscription Agent |
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51,273 |
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Information Agent |
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18,000 |
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Printing and Mailing |
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42,211 |
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NYSE Listing Fee |
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40,274 |
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SEC Registration Fee |
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5,836 |
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FINRA Fee |
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19,509 |
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Other |
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5,000 |
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Total |
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$ |
432,103 |
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Item 28. Persons Controlled by or Under Common Control with the Registrant
None.
C-2
Item 29. Number of Holders of Shares
As of November 30, 2007:
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Number of |
Title of Class |
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Record Holders |
Common Shares of Beneficial Interest |
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15 |
Item 30. Indemnification
Article V of the Registrants Agreement and Declaration of Trust provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder of the
Trust shall be subject in such capacity to any personal liability whatsoever to
any Person in connection with Trust Property or the acts, obligations or
affairs of the Trust. Shareholders shall have the same limitation of personal
liability as is extended to stockholders of a private corporation for profit
incorporated under the Delaware General Corporation Law. No trustee or officer
of the Trust shall be subject in such capacity to any personal liability
whatsoever to any Person, save only liability to the Trust or its Shareholders
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard for his duty to such Person; and, subject to the foregoing exception,
all such Persons shall look solely to the Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If
any Shareholder, trustee or officer, as such, of the Trust, is made a party to
any suit or proceeding to enforce any such liability, subject to the foregoing
exception, he shall not, on account thereof, be held to any personal liability.
Any repeal or modification of this Section 5.1 shall not adversely affect any
right or protection of a trustee or officer of the Trust existing at the time
of such repeal or modification with respect to acts or omissions occurring
prior to such repeal or modification.
5.2 Mandatory Indemnification. (a) The Trust hereby agrees to indemnify each
person who at any time serves as a trustee or officer of the Trust (each such
person being an indemnitee) against any liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and reasonable counsel fees reasonably incurred by such indemnitee
in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
investigative body in which he may be or may have been involved as a party or
otherwise or with which he may be or may have been threatened, while acting in
any capacity set forth in this Article V by reason of his having acted in any
such capacity, except with respect to any matter as to which he shall not have
acted in good faith in the reasonable belief that his action was in the best
interest of the Trust or, in the case of any criminal proceeding, as to which
he shall have had reasonable cause to believe that the conduct was unlawful,
provided, however, that no indemnitee shall be indemnified hereunder against
any liability to any person or any expense of such indemnitee arising by reason
of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv)
reckless disregard of the duties involved in the conduct of his position (the
conduct referred to in such clauses (i) through (iv) being sometimes referred
to herein as disabling conduct). Notwithstanding the foregoing, with respect
to any action, suit or other proceeding voluntarily prosecuted by any
indemnitee as plaintiff, indemnification shall be mandatory only if the
prosecution of such action, suit or other proceeding by such indemnitee (1) was
authorized by a majority of the trustees or (2) was instituted by the
indemnitee to enforce his or her rights to indemnification hereunder in a case
in which the indemnitee is found to be entitled to such indemnification. The
rights to indemnification set forth in this Declaration shall continue as to a
person who has ceased to be a trustee or officer of the Trust and shall inure
to the benefit of his or her heirs, executors and personal and legal
representatives. No
C-3
amendment or restatement of this Declaration or repeal of
any of its provisions shall limit or eliminate any of the benefits provided to
any person who at any time is or was a trustee or officer of the Trust or
otherwise entitled to indemnification hereunder in respect of any act or
omission that occurred prior to such amendment, restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made hereunder
unless there has been a determination (i) by a final decision on the merits by
a court or other body of competent jurisdiction before whom the issue of
entitlement to indemnification hereunder was brought that such indemnitee is
entitled to indemnification hereunder or, (ii) in the absence of such a
decision, by (1) a majority vote of a quorum of those trustees who are neither
interested persons of the Trust (as defined in Section 2(a)(19) of the
Investment Company Act) nor parties to the proceeding (Disinterested Non-Party
Trustees), that the indemnitee is entitled to indemnification hereunder, or
(2) if such quorum is not obtainable or even if obtainable, if such majority so
directs, independent legal counsel in a written opinion concludes that the
indemnitee should be entitled to indemnification hereunder. All determinations
to make advance payments in connection with the expense of defending any
proceeding shall be authorized and made in accordance with the immediately
succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the expenses of
defending any action with respect to which indemnification might be sought
hereunder if the Trust receives a written affirmation by the indemnitee of the
indemnitees good faith belief that the standards of conduct necessary for
indemnification have been met and a written undertaking to reimburse the Trust
unless it is subsequently determined that the indemnitee is entitled to such
indemnification and if a majority of the trustees determine that the applicable
standards of conduct necessary for indemnification appear to have been met. In
addition, at least one of the following conditions must be met: (i) the
indemnitee shall provide adequate security for his undertaking, (ii) the Trust
shall be insured against losses arising by reason of any lawful advances, or
(iii) a majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a written
opinion, shall conclude, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these provisions shall not
exclude any other right which any person may have or hereafter acquire under
this Declaration, the By-Laws of the Trust, any statute, agreement, vote of
stockholders or trustees who are disinterested persons (as defined in Section
2(a)(19) of the Investment Company Act) or any other right to which he or she
may be lawfully entitled.
(e) Subject to any limitations provided by the Investment Company Act and this
Declaration, the Trust shall have the power and authority to indemnify and
provide for the advance payment of expenses to employees, agents and other
Persons providing services to the Trust or serving in any capacity at the
request of the Trust to the full extent corporations organized under the
Delaware General Corporation Law may indemnify or provide for the advance
payment of expenses for such Persons, provided that such indemnification has
been approved by a majority of the trustees.
5.3 No Bond Required of Trustees. No trustee shall, as such, be obligated to
give any bond or other security for the performance of any of his duties
hereunder.
5.4 No Duty of Investigation; Notice in Trust Instruments, etc. No purchaser,
lender, transfer agent or other person dealing with the trustees or with any
officer, employee or agent of the Trust shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made by the
trustees or by said officer, employee or agent or be liable for the application
of money or property
C-4
paid, loaned, or delivered to or on the order of the
trustees or of said officer, employee or agent. Every obligation, contract,
undertaking, instrument, certificate, Share, other security of the Trust, and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively taken 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. The trustees may maintain
insurance for the protection of the Trust Property, its Shareholders, trustees,
officers, employees and agents in such amount as the trustees shall deem
adequate to cover possible tort liability, and such other insurance as the
trustees in their sole judgment shall deem advisable or is required by the
Investment Company Act.
5.5 Reliance on Experts, etc. Each trustee and officer or employee of the Trust
shall, in the performance of its duties, be fully and completely justified and
protected with regard to any act or any failure to act resulting from reliance
in good faith upon the books of account or other records of the Trust, upon an
opinion of counsel, or upon reports made to the Trust by any of the Trusts
officers or employees or by any advisor, administrator, manager, distributor,
selected dealer, accountant, appraiser or other expert or consultant selected
with reasonable care by the trustees, officers or employees of the Trust,
regardless of whether such counsel or expert may also be a trustee.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, may be permitted to trustees, officers and controlling persons of the
Trust, pursuant to the foregoing provisions or otherwise, the Trust has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Trust of expenses incurred or paid
by a trustee, officer or controlling person of the Trust in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered, the
Trust will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue. Reference is made to Section 8 of the underwriting
agreement attached as Exhibit (h), which is incorporated herein by reference
and discusses the rights, responsibilities and limitations with respect to
indemnity and contribution.
Item 31. Business and Other Connections of Investment Advisor
Highland Capital Management, L.P. has not engaged in any other substantial business since January
1, 2003 other than that disclosed under Management of the Trust in each of the prospectus
and the Statement of Additional Information. Information as to other businesses, professions,
vocations or employment of a substantial nature engaged in by each partner and executive officer of
Highland Capital Management, L.P. is set forth in its Form ADV, as filed on the Commissions
website (File No. 801-54874) and is incorporated herein by reference.
Item 32. Location of Accounts and Records
The Trusts accounts, books and other documents are currently located at the offices of the
Registrant, c/o Highland Capital Management, L.P., Two Galleria Tower, 13455 Noel Road, Suite 800,
Dallas, Texas 75240 and at the offices of the Registrants Custodian, Sub-Administrator and Transfer Agent.
C-5
Item 33. Management Services
Not Applicable.
Item 34. Undertakings
(1) The Registrant hereby undertakes to suspend the 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 the purposes of determining any liability under the Securities Act of 1933, 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 under Rule
497 (h) under the Securities Act of 1933 shall be deemed to be part of the Registration Statement
as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail or other means designed to ensure equally
prompt delivery within two business days of receipt of a written or oral request, any Statement of
Additional Information.
C-6
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
17th day of December, 2007.
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/s/ James D. Dondero* |
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James D. Dondero |
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Chief Executive Officer and President |
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Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940,
this Registration Statement has been signed by the following persons in the capacities set forth
below on the 17th day of December, 2007.
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Name |
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Title |
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/s/ R. Joseph Dougherty*
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Trustee
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/s/ Timothy Hui*
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Trustee |
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/s/ Scott Kavanaugh*
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Trustee |
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/s/ James Leary*
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Trustee |
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/s/ Bryan Ward*
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Trustee |
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/s/ James D. Dondero*
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Chief Executive Officer and President |
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/s/ M. Jason Blackburn
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Chief Financial Officer |
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(Principal
Accounting Officer),
Treasurer and Secretary |
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*By:
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/s/ M. Jason Blackburn |
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M. Jason Blackburn
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Attorney-in-Fact |
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December 17, 2007 |
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C-7
Exhibits
None
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(l) |
|
Opinion and Consent of Counsel to
the Trust |
(n) |
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Consent of Independent Registered
Public Accounting Firm |