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FORM N-14
UNDER
THE SECURITIES ACT OF 1933 þ
Post-Effective Amendment No. __ o
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Area Code and Telephone Number)
Highland Credit Strategies Fund
Two Galleria Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
Ropes & Gray LLP
One International Place
Boston, Massachusetts 02110
Proposed Maximum | Proposed Maximum | |||||||||||||||||||||
Title of Securities | Amount Being | Offering Price Per | Aggregate Offering | Amount of | ||||||||||||||||||
Being Registered | Registered (1) | Unit (1) | Price (1) | Registration Fee | ||||||||||||||||||
Common Stock (par value $0.001) | 9,750,000 | $6.83 | (2) | $66,592,500 | $2,617.09 | |||||||||||||||||
(1) | Estimated solely for the purpose of calculating the registration fee. | |
(2) | Net asset value per share for common stock on December 19, 2008. |
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Two Galleria Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
Chairman of the Board
Highland Distressed Opportunities, Inc.
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HIGHLAND DISTRESSED OPPORTUNITIES, INC.
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(the “Acquired Fund”)
TO BE HELD FEBRUARY [ ], 2009
1. | A proposal to approve an Agreement and Plan of Merger and Liquidation among Highland Distressed Opportunities, Inc. (the “Acquired Fund”), Highland Credit Strategies Fund (the “Acquiring Fund”) and HCF Acquisition LLC, a wholly owned subsidiary of the Acquiring Fund (“Merger Sub”), pursuant to which the Acquired Fund will merge with and into Merger Sub (the “Merger”) with Merger Sub being the surviving entity and the common stockholders of Acquired Fund receiving shares of beneficial interest of Acquiring Fund (and cash in lieu of any fractional shares); the Acquired Fund will withdraw its election to be regulated as a business development company; immediately after the Merger, Merger Sub will distribute its assets to Acquiring Fund and Acquiring Fund will assume the liabilities of Merger Sub, in complete liquidation and dissolution of Merger Sub. The Board of Directors of the Acquired Fund unanimously recommends that you vote FOR this proposal. | ||
2. | Any other business that may properly come before the meeting or any adjournment thereof. |
By order of the Boards of Directors, M. Jason Blackburn Secretary | ||||
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Highland Distressed Opportunities, Inc.
(the “Acquired Fund”)
Common Shares of
Highland Credit Strategies Fund
(the “Acquiring Fund”)
§ | The Reorganization, which was structured based on advice of counsel will work as follows. Pursuant to the Reorganization, Acquired Fund will merge with and into HCF Acquisition LLC (“Merger Sub”), a wholly owned subsidiary of the Acquiring Fund (the “Merger”), with Merger Sub being the surviving entity and the separate corporate existence of Acquired Fund shall thereupon cease. Common stockholders of Acquired Fund will receive shares of beneficial interest, with $0.001 par value, of Acquiring Fund (the “Merger Shares”) (and cash in lieu of any fractional shares) having an aggregate net asset value equal to the value of assets of Acquired Fund on the Valuation Date less the value of the liabilities of Acquired Fund on such Valuation Date. | ||
§ | Immediately after the Merger, Merger Sub will distribute its assets to Acquiring Fund, and Acquiring Fund will assume the liabilities of Merger Sub, in complete liquidation and dissolution of Merger Sub. | ||
§ | In connection with the merger, the Acquired Fund will withdraw its election to be regulated as a business development company under the 1940 Act, and by approving the Reorganization shareholder are also approving such withdrawal. | ||
§ | Prior to the Merger, Acquired Fund will declare and pay to its stockholders a dividend or dividends and/or other distribution in an amount such that it will have distributed all of its net investment income and net long-term and short-term capital gains (if any), as described in Section 8(k) of the Agreement. | ||
§ | The Reorganization is conditioned upon the approval of its shareholders. If the Reorganization is not approved by the Acquired Fund’s shareholders, the Fund will continue to exist and its Board of Directors will consider what additional action, if any, to take. | ||
§ | It is intended that the Reorganization will be a tax-free reorganization for U.S. federal income tax purposes. This means that no gain or loss is expected to be recognized by the Acquired Fund or its stockholders directly as a result of the Reorganization, except, however, that stockholders of the Acquired Fund may recognize gain or loss with respect to cash such holders receive pursuant to the Reorganization in lieu of |
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fractional shares of Acquiring Fund. Since the Reorganization will end the tax year of the Acquired Fund, it will accelerate distributions of any dividends from the Acquired Fund to its stockholders. Specifically, the Acquired Fund will recognize any net investment company taxable income and any net capital gains in the short taxable year ending on the date of the Reorganization, and will declare and pay a distribution or distributions of such income and such gains to its shareholders on or before that date. Any such distribution or distributions generally will be taxable to stockholders receiving such distribution or distributions. For more information about the U.S. federal income tax consequences of the Reorganization, see “Federal Income Tax Consequences of the Reorganization.” |
• | Economies of Scale in Expenses. A combined Fund offers economies of scale that may lead to a reduction in operating expenses. Due to the combined Fund’s lower management fee, lower administration fee, no incentive fee, lower interest expense due to lower leverage and elimination of overlapping expenses, the estimated annual operating expenses of the combined Fund are expected to be lower than the current annual operating expenses of the Acquired Fund. Each Fund incurs New York Stock Exchange (“NYSE”) listing fees, costs for legal, auditing, and custodial services, and miscellaneous fees. Additionally, the Acquired Fund incurs expenses related to Sarbanes-Oxley implementation that the Acquiring Fund does not and that the combined Fund would not incur. Many of these expenses overlap and there may be an opportunity to reduce them over time if the Funds are combined. | ||
• | Exchange of Common Shares at Net Asset Value (“NAV”). On its closing date, the Reorganization will result in the Acquired Fund shareholders receiving shares of beneficial interest the Acquiring Fund and cash (in lieu of fractional shares) based on the Acquired Fund’s NAV (i.e., the shareholder of Acquired Fund will receive its common shares of the Acquiring Fund and cash (in lieu of fractional shares) with an aggregate NAV equal to the value of the Acquired Fund shares held immediately before the Valuation Time for the Merger). Because the Acquiring Fund historically has traded at a greater premium or narrower discount than the Acquired Fund since inception of the Acquired Fund, Acquired Fund stockholders would receive shares of the Acquiring Fund, which based on historical trading, may potentially trade at a narrower discount than shares of the Acquired Fund. | ||
• | Enhanced Common Share Liquidity. Following the Reorganization, the substantially larger trading market in the common shares of the Acquiring Fund, as compared to that of the Acquired Fund prior to the Reorganization, may provide Acquired Fund shareholders with enhanced market liquidity. Trading discounts can result from many different factors, however, and there is no assurance that the Acquiring Fund will continue to trade at a smaller discount to NAV. | ||
• | Increased Asset Size. The Acquiring Fund will obtain additional assets without incurring underwriting expenses and other transaction expenses associated with offering new shares. In addition, the Acquiring Fund is obtaining the additional portfolio securities of the Acquired Fund without the commensurate brokerage costs, dealer spreads or other trading expenses. It is also obtaining these securities in a manner that is likely to minimize the market impact of such acquisition on the short-term prices of these securities. However, the increase in Acquiring Fund shares as a result of the Reorganization may also cause Acquiring Fund shares to trade at a larger discount from NAV. Because shareholders of the Acquired Fund will receive Acquiring Fund shares, Acquired Fund shareholders may share in these potential benefits. | ||
• | Portfolio Management Efficiencies. The Reorganization would permit Acquired Fund shareholders to pursue similar investment goals in a larger fund. The greater asset size of the combined Fund may allow the combined Fund, relative to the Acquired Fund, to obtain better net prices on securities trades and achieve greater diversification of portfolio holdings. | ||
• | Shareholders’ Ability to Margin. Stocks that trade below $5.00 are not currently marginable. Since the Acquired Fund currently trades below $5.00 per share, and the Acquiring Fund trades above $5.00 per share, if the Reorganization is approved, Acquired Fund shareholders would receive shares of the Acquiring Fund that would then be marginable (based on current market prices). Additionally, marginable securities may be more liquid that those that are not marginable because many institutional/large investors are believed to avoid stocks that are not marginable. |
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The Acquiring Fund’s annual report to shareholders dated December 31, 2007 Acquired Fund’s annual report to shareholders dated December 31, 2007 | Previously sent to the shareholders of each respective Fund and on file with the SEC or available at no charge by calling our toll free number: 877-247-1888 for the Acquired Fund and 877-665-1287 for the Acquiring Fund or by writing to either Fund at NexBank Tower, 13455 Noel Road, Suite 800, Dallas, TX 75240. | |
A Statement of Additional Information dated [___], 2009, which relates to this Proxy Statement/Prospectus and the Reorganization, has been filed with the SEC and contains additional information about the Acquired Fund and the Acquiring Fund | On file with the SEC or available at no charge by calling our toll free number: 877-247-1888 for the Acquired Fund and 877-665-1287 for the Acquiring Fund. The statement of additional information is incorporated by reference into (and therefore legally part of) this Proxy Statement/Prospectus or by writing to either Fund at NexBank Tower, 13455 Noel Road, Suite 800, Dallas, TX 75240. | |
To ask questions about this Proxy Statement/Prospectus | Call the proxy solicitor at [ ]. |
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• | Deferral. Preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If the Acquiring Fund owns a preferred security that is deferring the payment of its distributions, the Acquiring Fund may be required to report income for U.S. federal income tax purposes to the extent of any such deferred distribution even though the Acquiring Fund has not yet received such income. In order to receive the special treatment accorded to RICs and their shareholders under the Code and to avoid U.S. federal income and/or excise taxes at the Acquiring Fund level, the Acquiring Fund may be required to distribute this reported income to shareholders in the tax year in which the income is reported (without a corresponding receipt of cash). Therefore, the Acquiring Fund may be required to pay out as an income distribution in any such tax year an amount greater than the total amount of income the Acquiring Fund actually received, and to sell portfolio securities to obtain cash needed for these income distributions. | ||
• | Subordination. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than more senior debt instruments. | ||
• | Liquidity. Preferred securities may be substantially less liquid than many other securities, such as common stock or U.S. government securities. | ||
• | Limited Voting Rights. Generally, preferred security holders have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may elect a number of directors to the issuer’s board. Generally, once all the arrearages have been paid, the preferred security holders no longer have voting rights. |
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• | Pursuant to the Reorganization, Acquired Fund will merge with and into HCF Acquisition LLC, a wholly owned subsidiary of Acquiring Fund (the “Merger”), with Merger Sub being the surviving entity and the separate corporate existence of Acquired Fund shall thereupon cease. Common stockholders of Acquired Fund will receive shares of beneficial interest, with $0.001 par value, of Acquiring Fund (the “Merger Shares”) (and cash in lieu of any fractional shares) having an aggregate net asset value equal to the value of assets of Acquired Fund on the Valuation Date less the value of the liabilities of Acquired Fund on such Valuation Date. Immediately after the Merger, Merger Sub will distribute its assets to Acquiring Fund, and Acquiring Fund will assume the liabilities of Merger Sub, in complete liquidation and dissolution of Merger Sub. | ||
• | The Acquiring Fund will issue and cause to be listed on the NYSE newly issued Merger Shares (and cash in lieu of any fractional shares) in an amount equal to the value of the Acquired Fund’s net assets attributable to its common shares (taking into account the Acquired Fund’s proportionate share of the costs of the Reorganization). Common shareholders of record of the Acquired Fund will have their shares of the Acquired Fund converted into Merger Shares in proportion to their holdings of the Acquired Fund’s shares immediately prior to the Merger. Acquired Fund common shareholders will receive cash for any Acquiring Fund fractional shares they otherwise would be entitled to receive other than with respect to shares held in a Dividend Reinvestment Plan account. As a result, common shareholders of the Acquired Fund will end up as common shareholders of the Acquiring Fund. | ||
• | After the Reorganization, the Acquired Fund will then (1) withdraw its election to be regulated as a business development company and de-register with the SEC and (2) de-list from the NYSE. |
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• | the terms and conditions of the Agreement and the Reorganization; | ||
• | the fact that the Reorganization would not result in the dilution of shareholders’ interests; | ||
• | the compatibility of and differences between the Funds’ investment goals, policies, risks and principal investment strategies; | ||
• | the Funds’ relative asset sizes; | ||
• | the fact that the Reorganization is expected to be tax-free for federal income tax purposes; | ||
• | the fact that no gain or loss is expected to be recognized by Acquired Fund stockholders for federal income tax purposes as a result of the Reorganization (except to the extent of cash received in lieu of any fractional share of Acquiring Fund); | ||
• | the respective tax positions of each Fund; | ||
• | the historic operating expenses for each Fund; and | ||
• | the historic performance of each Fund for the past one-year period ended October 31, 2008, the year-to-date period ended October 31, 2008 and for the period February 26, 2007 (inception of the Acquired Fund) through October 31, 2008. | ||
• | Economies of Scale in Expenses. A combined Fund offers economies of scale that may lead to a reduction in operating expenses. Due to the combined Fund’s lower management fee, lower administration fee, no incentive fee, lower interest expense due to lower leverage and elimination of overlapping expenses, the estimated annual operating expenses of the combined Fund are expected to be lower than the current annual operating expenses of the Acquired Fund. Each Fund incurs New York Stock Exchange (“NYSE”) listing fees, costs for legal, auditing, and custodial services, and miscellaneous fees. Additionally, the Acquired Fund incurs expenses related to Sarbanes-Oxley implementation that the Acquiring Fund does not and that the combined Fund would not incur. Many of these expenses overlap and there may be an opportunity to reduce them over time if the Funds are combined. | ||
• | Exchange of Common Shares at Net Asset Value (“NAV”). On its closing date, the Reorganization will result in the Acquired Fund shareholders receiving shares of beneficial interest the Acquiring Fund and cash (in lieu of fractional shares) based on the Acquired Fund’s NAV (i.e., the shareholder of Acquired Fund will receive its common shares of the Acquiring Fund and cash (in lieu of fractional shares) with an aggregate NAV equal to the value of the Acquired Fund shares held immediately before the Valuation Time for the Merger). Because the Acquiring Fund historically has traded at a greater premium or narrower discount than the Acquired Fund since inception of the Acquired Fund, Acquired Fund stockholders would receive shares of the Acquiring Fund, which based on historical trading, may potentially trade at a narrower discount than shares of the Acquired Fund. | ||
• | Enhanced Common Share Liquidity. Following the Reorganization, the substantially larger trading market in the common shares of the Acquiring Fund, as compared to that of the Acquired Fund prior to the Reorganization, may provide Acquired Fund shareholders with enhanced market liquidity. Trading discounts can result from many different factors, however, and there is no assurance that the Acquiring Fund will continue to trade at a smaller discount to NAV. | ||
• | Increased Asset Size. The Acquiring Fund will obtain additional assets without incurring underwriting expenses and other transaction expenses associated with offering new shares. In addition, the Acquiring Fund is obtaining the additional portfolio securities of the Acquired Fund without the commensurate brokerage costs, dealer spreads or other trading expenses. It is also obtaining these securities in a manner that is likely to minimize the market impact of such acquisition on the short-term prices of these securities. However, the increase in Acquiring Fund shares as a result of the Reorganization may also cause Acquiring |
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Fund shares to trade at a larger discount from NAV. Because shareholders of the Acquired Fund will receive Acquiring Fund shares, Acquired Fund shareholders may share in these potential benefits. | |||
• | Portfolio Management Efficiencies. The Reorganization would permit Acquired Fund shareholders to pursue similar investment goals in a larger fund. The greater asset size of the combined Fund may allow the combined Fund, relative to the Acquired Fund, to obtain better net prices on securities trades and achieve greater diversification of portfolio holdings. | ||
• | Shareholders’ Ability to Margin. Stocks that trade below $5.00 are not currently marginable. Since the Acquired Fund currently trades below $5.00 per share, and the Acquiring Fund trades above $5.00 per share, if the Reorganization is approved, Acquired Fund shareholders would receive shares of the Acquiring Fund that would then be marginable (based on current market prices). Additionally, marginable securities may be more liquid that those that are not marginable because many institutional/large investors are believed to avoid stocks that are not marginable. |
PRO FORMA | ||||||||||||
ACTUAL | COMBINED(1) | |||||||||||
Acquired | Acquiring | |||||||||||
Fund | Fund | Acquiring Fund | ||||||||||
Common Shareholder Transaction Expenses | ||||||||||||
Sales Load (as a percentage of offering price) | None(1) | None(1) | None(1) | |||||||||
Dividend Reinvestment Plan Fees (Unaudited) | None(2) | None(3) | None(3) |
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ACTUAL | ||||||||||||
Percentage of Net Assets | ||||||||||||
Attributable to Common | ||||||||||||
Shares (Nine Months ended | PRO FORMA | |||||||||||
September 30, 2008) | COMBINED(1) | |||||||||||
Acquired | Acquiring | |||||||||||
Fund | Fund | Acquiring Fund | ||||||||||
Management Fee (including Administration Fee) | 3.90 | % | 1.67 | % | 1.67 | % | ||||||
Incentive Fee | 1.57 | % | 0.00 | % | 0.00 | % | ||||||
Interest Payments on Borrowed Funds | 2.55 | % | 1.51 | % | 1.51 | % | ||||||
Other Expenses | ||||||||||||
Dividend Expense For Short Positions | 0.00 | % | 0.19 | % | 0.19 | % | ||||||
Other Expenses(4) | 1.10 | % | 0.33 | % | 0.29 | % | ||||||
Total Other Expenses | 1.10 | % | 0.52 | % | 0.48 | % | ||||||
Total Annual Expenses | 9.12 | % | 3.70 | % | 3.66 | % | ||||||
Minus: Management Fee Waivers(5) | 0.00 | % | 0.18 | % | 0.15 | % | ||||||
Minus: Expense Waivers(6) | 0.76 | % | 0.00 | % | 0.00 | % | ||||||
Net Annual Fund Operating Expenses | 8.36 | % | 3.52 | % | 3.51 | % |
* | Management fees are both the investment advisory and administrative services fees paid to Highland. | |
(1) | Shares of the Funds purchased on the secondary market are not subject to sales charges but may be subject to brokerage commissions or other charges. The table does not include an underwriting commission paid by shareholders in the initial offering of each Fund. | |
(2) | Each participant in the Acquired Fund’s dividend reinvestment plan pays a proportionate share of the brokerage commissions incurred with respect to open market purchases in connection with such plan. | |
(3) | Common shareholders will be charged a $2.50 service charge and pay a brokerage commission of $0.05 per share sold if they direct the Plan Agent to sell common shares held in a dividend reinvestment plan account. Each participant in the Acquiring Fund’s Dividend Reinvestment Plan will pay a pro rata share of brokerage commissions incurred when dividend reinvestment occurs in open-market purchases because the NAV per common share is greater than the market value per common share. | |
(4) | In connection with the Reorganization, there are certain other transaction expenses not reflected in “Other Expenses” which include, but are not limited to: costs related to the preparation, printing and distributing of the Proxy Statement/Prospectus to shareholders; costs related to preparation and distribution of materials distributed to each Fund’s Board; expenses incurred in connection with the preparation of each Agreement and the registration statement on Form N-14; SEC filing fees; legal and audit fees; portfolio transfer taxes (if any); and any similar expenses incurred in connection with the Reorganization. | |
(5) | The Adviser has contractually agreed to waive a portion of the Acquiring Fund’s advisory fee and administration fee for two years. In connection with reorganizations of Prospect Street® High Income Portfolio Inc. and Prospect Street® Income Shares Inc. into the Acquiring Fund on July 18, 2008, Highland agreed to waive certain advisory and/or administration fees for a period of two years until July 17, 2010. Highland agreed to waive advisory fees and administration fees received from the Acquiring Fund in an amount equal to $828,224 and $403,801, respectively, each year in connection with the reorganizations. | |
(6) | The Adviser voluntarily agreed to waive the investment income component of the incentive fee payable to it by the Acquired Fund for the second quarter ended June 30, 2008. This waiver applied only to the second quarter ended June 30, 2008. |
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(Unaudited)
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
Acquired Fund | $ | 82 | $ | 238 | $ | 384 | $ | 708 | ||||||||
Acquiring Fund | $ | 35 | $ | 110 | $ | 188 | $ | 395 | ||||||||
Pro Forma Combined — Acquiring Fund (1) | $ | 35 | $ | 109 | $ | 187 | $ | 391 |
(1) | The pro forma combined row shown assumes the Reorganization is completed. |
shareholders vote FOR the proposal to approve the Agreement and Plan of
Merger and Liquidation.
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Acquired Fund | Acquiring Fund | |||
Business | The Fund non-diversified closed-end company, organized as a Delaware corporation on August 22, 2006, that has elected to be regulated as a business development company under the 1940 Act. | The Fund is a non-diversified, closed-end management investment company organized as a Delaware statutory trust on March 10, 2006. | ||
Net Assets (September 30, 2008) | $118.5 million | $692.3 million | ||
Listing (Common Shares) | NYSE under the ticker symbol “HCD” | NYSE under the ticker symbol “HCF” | ||
Fiscal Year End | 12/31 | 12/31 | ||
Investment Adviser | Highland Capital Management, L.P. | Highland Capital Management, L.P. | ||
Portfolio Managers | Patrick Daugherty Brad Borud Greg Stuecheli | Mark Okada Kurtis Plumer Brad Borud | ||
Investment Objective(s) | The Fund’s investment objective is to provide total return generated by both capital appreciation and current income. The investment objective may be changed without shareholder approval. | The Fund’s investment objective is to provide both current income and capital appreciation. The investment objective may be changed without shareholder approval. | ||
Primary Investment Strategies | The Fund pursues its objectives by investing in senior secured debt, mezzanine debt and unsecured debt, each of which may include an equity component, and in equity investments. The Fund has filed an election to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). While the Fund’s primary focus will be to generate capital appreciation and current income through investments in senior secured debt, mezzanine debt, unsecured debt and equity investments, the Fund may invest up to 30% of the portfolio in opportunistic investments that the research platform of the Investment Adviser identifies during the investment process in order to seek to enhance returns to stockholders. Such investments may include, for example, investments in the senior secured debt, mezzanine debt, unsecured debt, equity investments, other debt obligations, options, structured products and | The Fund pursues its objectives by investing primarily in the following categories of securities and instruments of corporations and other business entities: (i) secured and unsecured floating and fixed rate loans; (ii) bonds and other debt obligations; (iii) debt obligations of stressed, distressed and bankrupt issuers; (iv) structured products, including but not limited to, mortgage-backed and other asset-backed securities and collateralized debt obligations; and (v) equities. Additionally, within the categories of obligations and securities in which the Fund may invest, Highland may employ various trading strategies, including but not limited to, capital structure arbitrage, pair trades, and shorting. The Fund may also invest in these categories of obligations and securities through the use of derivatives. Highland will seek to achieve its capital appreciation objective by investing in category (iii) and (v) obligations and securities, and to a lesser extent, in category (i), (ii), and (iv) |
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Acquired Fund | Acquiring Fund | |||
other derivatives of middle-market or unlisted companies operating in the financial sector or foreign and/or larger, listed companies. The Fund expects that these companies generally will have debt securities that are non-investment grade. | obligations. Under normal market conditions, at least 80% of the Fund’s assets will be invested in one or more of these principal investment categories. Subject only to this general guideline, the Adviser has broad discretion to allocate the Fund’s assets among these investment categories and to change allocations as conditions warrant. The Adviser has full discretion regarding the capital markets from which it can access investment opportunities in accordance with the investment limitations set forth in this prospectus. A significant portion of the Fund’s assets may be invested in securities rated below investment grade, which are commonly referred to as “junk securities.” | |||
Leverage and Borrowing | The Fund employs leverage through borrowings through a credit facility and, as of September 30, 2008, the Fund had borrowings of approximately $49 million. | The Fund employs leverage through borrowings through a credit facility and, as of September 30, 2008, the Fund had borrowings of approximately $315 million. | ||
Diversification | The Fund is non-diversified. | The Fund is non-diversified. | ||
Concentration | There is no limit on the amount of the Fund’s portfolio that can be concentrated in one industry. | The Fund may not invest 25% or more of its assets in the securities of issuers in one industry. | ||
Illiquid Securities | There is no limit on the amount of the Fund’s portfolio that can be invested in illiquid securities. | There is no limit on the amount of the Fund’s portfolio that can be invested in illiquid securities. | ||
Portfolio Turnover | The Fund’s portfolio turnover rate may exceed 100% per year. | The Fund’s portfolio turnover rate may exceed 100% per year. | ||
Senior Loans, Unsecured Loans, Second Lien Loans and Other Secured Loans | There is no limit on the amount of the Fund’s portfolio that can be invested in senior loans, including bank loans, unsecured loans, second lien loans and other secured loans. | There is no limit on the amount of the Fund’s portfolio that can be invested in senior loans, including bank loans, unsecured loans, second lien loans and other secured loans. | ||
Investment Grade Securities | There is no limit on the amount of the Fund’s portfolio that can be invested in investment grade securities, however, a significant portion of the Fund’s assets may be invested in securities rated below investment grade, which are commonly referred to as “junk securities.” | There is no limit on the amount of the Fund’s portfolio that can be invested in investment grade securities, however, a significant portion of the Fund’s assets may be invested in securities rated below investment grade, which are commonly referred to as “junk securities.” | ||
Non-Investment Grade Securities | There is no limit on the amount of the Fund’s portfolio that can be invested in non-investment grade securities and a significant portion of the Fund’s assets may be invested in securities rated below investment grade, which are commonly referred to as “junk securities.” | There is no limit on the amount of the Fund’s portfolio that can be invested in non-investment grade securities and a significant portion of the Fund’s assets may be invested in securities rated below investment grade, which are commonly referred to as “junk securities.” | ||
Asset-Backed Securities and Mortgaged-Backed Securities | The Fund may invest in asset-backed securities and mortgage-backed securities. | The Fund may invest in asset-backed securities and mortgage-backed securities. |
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Acquired Fund | Acquiring Fund | |||
Collateralized Loan Obligations and Bond Obligations | The Fund may invest in collateralized loan obligations and bond obligations. The Fund invests in the lower tranches of collateralized bond obligations. | The Fund may invest in collateralized loan obligations and bond obligations. The Fund invests in the lower tranches of collateralized bond obligations. | ||
Distressed Debt and Stressed Debt | The Fund may invest in the securities and other obligations of stressed, distressed and bankrupt issuers, including debt obligations that are in covenant or payment default. | The Fund may invest in the securities and other obligations of stressed, distressed and bankrupt issuers, including debt obligations that are in covenant or payment default. | ||
Equity Securities | There is no limit on the amount of the Fund’s portfolio that can be invested in equity securities including common and preferred stocks. | There is no limit on the amount of the Fund’s portfolio that can be invested in equity securities including common stock, preferred stocks, convertible securities, warrants and depository receipts. | ||
Money Market Instruments and U.S. Government Securities | The Fund may invest in money market instruments and U.S. government securities. | The Fund may invest in money market instruments and U.S. government securities. | ||
Other Investment Companies | The Fund may invest in the securities of other investment companies (including exchange traded funds (“ETFs”)) to the extent that such investments are consistent with the Fund’s investment objectives and principal investment strategies and permissible under the 1940 Act. | The Fund may invest in the securities of other investment companies (including exchange traded funds (“ETFs”)) to the extent that such investments are consistent with the Fund’s investment objectives and principal investment strategies and permissible under the 1940 Act. | ||
Zero-Coupon Securities and Deferred Payment Obligations | The Fund may invest in zero-coupon bonds and deferred payment obligations and there is no limit on the amount of the Fund’s portfolio that can be invested in these securities. | The Fund may invest in zero-coupon bonds and deferred payment obligations and there is no limit on the amount of the Fund’s portfolio that can be invested in these securities. | ||
Derivatives | The Fund may purchase and sell derivative instruments such as exchange-listed and over-the-counter put and call options on securities, financial futures, equity, fixed-income and interest rate indices, and other financial instruments, purchase and sell financial futures contracts and options thereon, enter into various interest rate transactions such as swaps, caps, floors or collars and enter into various currency transactions such as currency forward contracts, currency futures contracts, currency swaps or options on currency or currency futures or credit transactions and credit default swaps. The Fund also may purchase derivative instruments that combine features of these instruments. Apart from senior loan based derivatives, derivatives are not a significant part of the Fund’s investments. However, the Fund has no limit on the amount of its total assets that may be invested in derivative instruments. | The Fund may purchase and sell derivative instruments such as exchange-listed and over-the-counter put and call options on securities, financial futures, equity, fixed-income and interest rate indices, and other financial instruments, purchase and sell financial futures contracts and options thereon, enter into various interest rate transactions such as swaps, caps, floors or collars and enter into various currency transactions such as currency forward contracts, currency futures contracts, currency swaps or options on currency or currency futures or credit transactions and credit default swaps. The Fund also may purchase derivative instruments that combine features of these instruments. Apart from senior loan based derivatives, derivatives are not a significant part of the Fund’s investments. However, the Fund has no limit on the amount of its total assets that may be invested in derivative instruments. | ||
Senior Loan Based Derivatives | The Fund may obtain exposure to senior loans and baskets of senior loans through the use of derivative instruments. | The Fund may obtain exposure to senior loans and baskets of senior loans through the use of derivative instruments. |
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Acquired Fund | Acquiring Fund | |||
Swaps | The Fund may invest in swaps including credit default swaps, interest rate swaps, total return swaps and currency swaps. The Fund may use swaps for risk management purposes and as a speculative investment. | The Fund may invest in swaps including credit default swaps, interest rate swaps, total return swaps and currency swaps. The Fund may use swaps for risk management purposes and as a speculative investment. | ||
Credit Linked Notes | The Fund may invest in CLNs for risk management purposes and to vary its portfolio. A CLN is a derivative instrument. | The Fund may invest in CLNs for risk management purposes and to vary its portfolio. A CLN is a derivative instrument. | ||
Options | The Fund may purchase and sell put and call options on securities and indices. | The Fund may purchase and sell put and call options on securities and indices. | ||
Futures Contracts and Options on Futures Contracts | The Fund may enter into contracts for the purchase or sale for future delivery (“futures contracts”) of securities, aggregates of securities or indices or prices thereof. The Fund will engage in such transactions only for bona fide risk management and other portfolio management purposes. | The Fund may enter into 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 Fund will engage in such transactions only for bona fide risk management and other portfolio management purposes. | ||
Foreign Currency and Forward Foreign Currency Contracts | The Fund may buy or sell foreign currencies or deal in forward foreign currency contracts for hedging and speculative purposes or to enhance total return, | The Fund may enter into foreign currency transactions in an attempt to enhance total return. The Fund may enter into forward currency contracts to purchase or sell foreign currencies for a fixed amount of U.S. dollars or another foreign currency. | ||
Short Sales | The Fund does not engage in short sales. | The Fund may engage in short sales against the box and not against the box. Subject to the requirements of the 1940 Act and the Code, the Fund will not make a short sale if, after giving effect to such sale, the market value of all securities sold short by the Fund exceeds 25% of the value of its total assets. The Fund may make short sales against the box without respect to such limitations. | ||
Repurchase Agreements | The Fund may enter into repurchase agreements. | The Fund may invest up to 33 1/3% of its assets in repurchase agreements. | ||
Reverse Repurchase Agreements | The Fund does not enter into reverse repurchase agreements. | The Fund may enter into reverse repurchase agreements. Reverse repurchase agreements will be considered borrowings by the Fund and would be subject to any restrictions on borrowing. | ||
Inverse Floaters | The Fund may invest in inverse floaters. | The Fund may invest in inverse floaters. | ||
Pay-in-kind (“PIK”) Bonds | The Fund may invest in PIK bonds. | The Fund may invest in PIK bonds. | ||
When-Issued, Delayed-Delivery and Forward Commitment Purchases | The Fund may purchase securities on a when-issued basis and may purchase or sell securities on a “forward commitment” basis. | The Fund may purchase securities on a when-issued basis and may purchase or sell securities on a “forward commitment” basis. | ||
Securities Loans | The Fund may lend up to 33 1/3% of its assets. | The Fund may lend up to 33 1/3% of its assets. |
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Acquired Fund | Acquiring Fund | |||
Foreign Securities | The Fund may invest up to 20% of its assets in non-U.S. credit or securities market investments. | The Fund may invest up to 20% of its assets in non-U.S. credit or securities market investments. | ||
Temporary Defensive Position | Under certain market conditions, the Fund may adopt a temporary defensive position to invest its assets in cash or cash equivalents. | Under certain market conditions, the Fund may adopt a temporary defensive position to invest its assets in cash or cash equivalents. |
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Title of Class | Amount Authorized | Amount Held by Fund | Amount Outstanding | |||
Common Shares | Unlimited | — | 55,526,190* |
Title of Class | Amount Authorized | Amount Held by Fund | Amount Outstanding | |||
Common Shares | 550,000,000 | — | 17,716,771 |
Premium/(Discount) as a % | ||||||||||||||||||||||||
Market price | Net asset value per share | of net asset value | ||||||||||||||||||||||
Quarter | High | Low | High | Low | High | Low | ||||||||||||||||||
2nd Quarter 2006* | 20.60 | 20.18 | 19.07 | 19.06 | 8.0 | % | 5.9 | % | ||||||||||||||||
3rd Quarter 2006 | 21.30 | 19.82 | 19.13 | 19.12 | 11.3 | % | 3.7 | % | ||||||||||||||||
4th Quarter 2006 | 21.48 | 20.10 | 20.02 | 19.38 | 7.3 | % | 3.7 | % | ||||||||||||||||
1st Quarter 2007 | 21.69 | 20.37 | 20.34 | 20.33 | 6.6 | % | 0.2 | % | ||||||||||||||||
2nd Quarter 2007 | 21.14 | 19.80 | 20.53 | 20.45 | 3.0 | % | -3.2 | % | ||||||||||||||||
3rd Quarter 2007 | 20.17 | 16.25 | 20.63 | 19.18 | -2.2 | % | -15.3 | % | ||||||||||||||||
4th Quarter 2007 | 18.80 | 15.67 | 19.36 | 18.00 | -2.9 | % | -12.9 | % | ||||||||||||||||
1st Quarter 2008 | 15.88 | 12.80 | 17.92 | 14.45 | -11.4 | % | -11.4 | % | ||||||||||||||||
2nd Quarter 2008 | 14.39 | 13.21 | 15.07 | 14.76 | -4.5 | % | -10.5 | % | ||||||||||||||||
3rd Quarter 2008 | 13.40 | 8.79 | 14.47 | 12.53 | -7.4 | % | -29.9 | % |
* | The Acquiring Fund commenced operations on June 29, 2006. |
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Premium/(Discount) as a % | ||||||||||||||||||||
Market price | of net asset value | |||||||||||||||||||
High | Low | High | Low | |||||||||||||||||
Quarter | Net asset value per share(1) | |||||||||||||||||||
1st Quarter 2007* | 15.25 | 14.06 | $ | 14.05 | 8.5 | % | 0.1 | % | ||||||||||||
2nd Quarter 2007 | 15.05 | 13.84 | $ | 14.08 | 6.9 | % | -1.7 | % | ||||||||||||
3rd Quarter 2007 | 14.48 | 9.75 | $ | 12.34 | 17.3 | % | -21.0 | % | ||||||||||||
4th Quarter 2007 | 13.20 | 8.38 | $ | 10.27 | 28.5 | % | -18.4 | % | ||||||||||||
1st Quarter 2008 | 9.26 | 5.96 | $ | 8.26 | 12.1 | % | -27.8 | % | ||||||||||||
2nd Quarter 2008 | 8.15 | 5.74 | $ | 7.24 | 12.6 | % | -20.7 | % | ||||||||||||
3rd Quarter 2008 | 5.98 | 2.97 | $ | 6.69 | -10.6 | % | -55.6 | % |
(1) | Net asset value per share is generally determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset value shown is based on outstanding shares at the end of the applicable period. | |
* | The Acquired Fund commenced operations on January 18, 2007, and began trading on the NYSE on February 27, 2008. |
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Acquired Fund* | Acquiring Fund** | |||||||||||||||
Market | Market | |||||||||||||||
NAV | Price | NAV | Price | |||||||||||||
1 year | -14.4 | % | -31.4 | % | -0.35 | % | -17.05 | % | ||||||||
3 years | N/A | N/A | N/A | N/A | ||||||||||||
5 years | N/A | N/A | N/A | N/A | ||||||||||||
10 years/ Since Inception | -14.4 | % | -31.4 | % | 5.2 | % | -6.4 | % |
* ** | The Acquired Fund commenced investment operations and public trading on February 22, 2007. The Acquiring Fund commenced investment operations on June 29, 2006. |
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Nine Months Ended | Year Ended 12/31/07 | |||||||||||
9/30/08 (Unaudited) | (a) | |||||||||||
Net Asset Value, Beginning of Period | $ 10.27 | $ 14.33 | (b | ) | ||||||||
Income from Investment Operations | ||||||||||||
Net investment income | 0.54 | 0.97 | ||||||||||
Net realized and unrealized gain on investments | -3.44 | -4.43 | ||||||||||
Total from investment operations applicable to common shareholders | -2.90 | -3.46 | ||||||||||
Common Stock Offering Cost | 0.00 | -0.07 | ||||||||||
Capital Contribution | 0.00 | 0.26 | (c | ) | ||||||||
Less Distributions Declared to Common Shareholders | ||||||||||||
From net investment income | -0.68 | -0.79 | ||||||||||
From net realized gains | 0.00 | 0.00 | ||||||||||
Total Distributions Declared | -0.68 | -0.79 | ||||||||||
Net Asset Value, End of Period | $ 6.69 | $ 10.27 | ||||||||||
Market Value, End of Period | $ 2.97 | $ 8.57 | ||||||||||
Market Value Total Return (d)(e) | -60.79 | % | -17.05 | % | ||||||||
Ratios to Average Net Assets/Supplemental Data | ||||||||||||
Common Share Information at End of Period (g): | ||||||||||||
Ratios based on average net assets | ||||||||||||
Net assets, end of period (in 000’s) (f) | $118,540 | $182,015 | ||||||||||
Net operating expenses | 6.55 | % | 5.74 | % | ||||||||
Interest expenses | 2.54 | % | 3.80 | % | ||||||||
Dividend expense from short positions | 0.00 | % | 0.00 | % | ||||||||
Waiver/reimbursement | 0.75 | % | 2.24 | % | ||||||||
Net expenses (h) | 8.34 | % | 7.30 | % | ||||||||
Net investment income | 8.85 | % | 8.77 | % | ||||||||
Portfolio turnover rate (e) | 41 | % | 224 | % |
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. | |
(b) | Net asset value at the beginning of the period reflects the deduction of the one-time initial sales load in connection with the offering. | |
(c) | On February 20, 2007, the Investment Adviser contributed an additional $87,596 in capital to the Company prior to the offering. No additional shares were issued in the transaction. The contribution per share is based on the pre-offering share amount of 333,333.33. | |
(d) | Total investment return based on market value may result in substantially different returns than investment return based on net asset value, because market value can be significantly greater or less than the net asset value. Investment return assumes reinvestment of distributions. | |
(e) | Not annualized. | |
(f) | Dollars in thousands. | |
(g) | Ratios to average net assets are calculated using the net assets of the period starting from the offering on February 27, 2007 through December 31, 2007. | |
(h) | Net expense ratio has been calculated after applying any waiver/reimbursement. |
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Nine Months | ||||||||||||||||||||
Ended 9/30/08 | Year Ended | Year Ended | ||||||||||||||||||
(Unaudited) | 12/31/07 | 12/31/06 (a) | ||||||||||||||||||
Net Asset Value, Beginning of Period | $ 17.99 | $ 20.08 | $ 19.06 | |||||||||||||||||
Income from Investment Operations | ||||||||||||||||||||
Net investment income | 1.06 | 1.71 | 0.71 | |||||||||||||||||
Net realized and unrealized gain on investments | -3.91 | -1.85 | 0.91 | |||||||||||||||||
Total from investment operations applicable to common shareholders | -2.85 | -0.14 | 1.62 | |||||||||||||||||
Less Distributions Declared to Common Shareholders | ||||||||||||||||||||
From net investment income | -1.12 | -1.65 | -0.60 | |||||||||||||||||
From net realized gains | -0.23 | -0.30 | 0.00 | |||||||||||||||||
Total Distributions Declared | -1.35 | -1.95 | -0.60 | |||||||||||||||||
Dilutive impact of rights offering | -1.32 | 0.00 | 0.00 | |||||||||||||||||
Net Asset Value, End of Period | $ 12.47 | $ 17.99 | $ 20.08 | |||||||||||||||||
Market Value, End of Period | $ 9.56 | $ 15.82 | $ 21.66 | |||||||||||||||||
Market Value Total Return (b) | -32.90 | % | (c | ) | -17.05 | % | 9.06 | % | (c | ) | ||||||||||
Ratios to Average Net Assets/Supplemental Data | ||||||||||||||||||||
Common Share Information at End of Period (g): | ||||||||||||||||||||
Ratios based on average net assets | ||||||||||||||||||||
Net assets, end of period (in 000’s) (d) | $692,483 | $621,078 | $692,964 | |||||||||||||||||
Net operating expenses | 2.00 | % | 1.87 | % | 1.53 | % | ||||||||||||||
Interest expenses | 1.53 | % | 2.16 | % | 1.03 | % | ||||||||||||||
Dividend expense from short positions | 0.19 | % | 0.03 | % | 0.00 | % | ||||||||||||||
Waiver/reimbursement | 0.05 | % | 0.00 | % | 0.00 | % | ||||||||||||||
Net expenses | 3.67 | % | 4.06 | % | 2.56 | % | ||||||||||||||
Net investment income | 11.00 | % | 8.64 | % | 7.37 | % | ||||||||||||||
Portfolio turnover rate | 55.37 | % | (c | ) (e) | 66 | % | 46 | % | (c | ) |
(a) | Highland Credit Strategies Fund commenced operations on June 29, 2006. | |
(b) | Total investment return based on market value may result in substantially different returns than investment return based on net asset value, because market value can be significantly greater or less than the net asset value. Investment return assumes reinvestment of distributions. | |
(c) | Not annualized. | |
(d) | Dollars in thousands. | |
(e) | Portfolio turnover rate excludes securities received from processing in the subscriptions from reorganizations. |
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Period Ended December 31, 2007 (a) | ||||
Total investment income | $ | 31,329,721 | ||
Net expenses | $ | 14,240,203 | ||
Net investment income | $ | 17,089,518 | ||
Net realized and unrealized gain/(loss) on investments | $ | (74,340,032 | ) | |
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | $ | (57,250,514 | ) | |
Balance Sheet Data: | ||||
Total assets | $ | 346,923,924 | ||
Borrowings outstanding | $ | 142,000,000 | ||
Stockholders’ equity (net assets) | $ | 182,015,052 |
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. |
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OPERATIONS OF ACQUIRED FUND
o | our future operating results; | |
o | our business prospects and the prospects of our portfolio companies; | |
o | the impact of investments that we expect to make; | |
o | our contractual arrangements and relationships with third parties; | |
o | the dependence of our future success on the general economy and its impact on the industries in which we invest; | |
o | our expected financings and investments; | |
o | the adequacy of our cash resources and working capital; | |
o | the timing of cash flows, if any from the operations of our portfolio companies; and | |
o | the ability of our Adviser to locate suitable investments for us and to monitor and administer our investments. |
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Corporate | ||||||||||||||||
Senior Loans | Notes and Bonds | Claims | Equity Interests | |||||||||||||
September 30, 2008 | 60.5 | % | 24.9 | % | 0.7 | % | 13.9 | % | ||||||||
June 30, 2008 | 68.1 | % | 27.0 | % | 0.2 | % | 4.7 | % | ||||||||
March 31, 2008 | 49.7 | % | 40.4 | % | 0.5 | % | 9.4 | % | ||||||||
December 31, 2007 | 48.4 | % | 34.8 | % | 0.5 | % | 16.3 | % | ||||||||
September 30, 2007 | 50.3 | % | 34.4 | % | 1.2 | % | 14.1 | % | ||||||||
June 30, 2007 | 45.9 | % | 35.4 | % | 0.8 | % | 17.9 | % | ||||||||
March 31, 2007 | 76.7 | % | 21.1 | % | 0.8 | % | 1.4 | % |
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For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Total investment income | $ | 4,086,448 | $ | 9,521,216 | $ | 18,458,396 | $ | 20,751,585 | ||||||||
Net expenses | $ | (2,113,994 | ) | $ | (5,255,267 | ) | $ | (8,954,579 | ) | $ | (9,023,284 | ) | ||||
Net investment income | $ | 1,972,454 | $ | 4,265,949 | $ | 9,503,817 | $ | 11,728,301 | ||||||||
Net realized and unrealized gain/(loss) on investments | $ | (9,075,613 | ) | $ | (30,386,390 | ) | $ | (61,019,714 | ) | $ | (37,049,465 | ) | ||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | $ | (7,103,159 | ) | $ | (26,120,441 | ) | $ | (51,515,897 | ) | $ | (25,321,164 | ) |
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Percentage | ||||||||||||||||||||||||
Percentage | of Total | |||||||||||||||||||||||
of Class of | Portfolio | |||||||||||||||||||||||
Nature of Issuer’s | Securities | Investment | Type of Securities Held in | Spread / | Cost of | Value of | ||||||||||||||||||
Name of Issuer | Principal Business | Held | Value | Portfolio | Coupon (a) | Maturity | Investment | Investment | ||||||||||||||||
Applied Biosystems | Healthcare | 0.20% | 1.09% | Term Loan (e) | 3.00 | % | 9/30/2015 | $ | 1,960,000 | $ | 1,895,000 | |||||||||||||
301 Merritt 7 Norwalk, CT 06851 | ||||||||||||||||||||||||
Argatroban Royalty Sub LLC (Pharma XII) | Healthcare | 6.54% | 2.26% | 18.50% Senior Secured Fixed Bond (h) | 18.50 | % | 9/21/2014 | 3,921,541 | 3,941,149 | |||||||||||||||
4848 Loop Central Drive, 7th Fl. Huston, TX 77081 | ||||||||||||||||||||||||
Aveta Inc. | Healthcare | 0.38% | 0.93% | MMM Original Term Loan | 9.21 | % | 8/22/2011 | 1,654,277 | 1,612,616 | |||||||||||||||
411 Hackensack Avenue, 7th Fl. Hackensack, NJ 07601 | ||||||||||||||||||||||||
Aveta Inc. | Healthcare | 0.06% | 0.14% | NAMM New Term Loan | 9.21 | % | 8/22/2011 | 245,751 | 239,562 | |||||||||||||||
411 Hackensack Avenue, 7th Fl. Hackensack, NJ 07601 | ||||||||||||||||||||||||
Aveta Inc. | Healthcare | 0.10% | 0.25% | NAMM Original Term Loan | 9.21 | % | 8/22/2011 | 442,832 | 431,679 | |||||||||||||||
411 Hackensack Avenue, 7th Fl. Hackensack, NJ 07601 | ||||||||||||||||||||||||
Aveta Inc. | Healthcare | 0.32% | 0.76% | PHMC Acquisition Term Loan | 9.21 | % | 8/22/2011 | 1,355,722 | 1,321,576 | |||||||||||||||
411 Hackensack Avenue, 7th Fl. Hackensack, NJ 07601 | ||||||||||||||||||||||||
Azithromycin Royalty Sub, LLC | Healthcare | 7.69% | 2.88% | 16.00% Senior Unsecured Fixed Bond (h) | 16.00 | % | 5/15/2019 | 4,975,230 | 5,025,000 | |||||||||||||||
4848 Loop Central Drive, 7th Fl. Houston, TX 77081 | ||||||||||||||||||||||||
Baker & Taylor, Inc. | Diversified Media | 5.03% | 3.74% | 11.50% Senior Secured Fixed Bond (h) | 11.50 | % | 7/1/2013 | 8,751,839 | 6,515,500 | |||||||||||||||
2550 W. Tyvola Rd., Ste. 300 Charlotte, NC 28217 | ||||||||||||||||||||||||
BST Safety Textiles Acquisition GMBH | Transportation-Automotive | 0.43% | 0.23% | Second Lien Facility (USD) | 12.10 | % | 6/30/2009 | 666,191 | 395,972 | |||||||||||||||
2711 Centerville Road, Suite 400 Wilmington, DE 19808 | ||||||||||||||||||||||||
Celtic Pharma Phinco B.V. (Pharma VII) | Healthcare | 5.03% | 5.54% | 17.00% Senior Unsecured Fixed Bond, | 17.00 | % | 6/15/2012 | 9,295,195 | 9,647,334 | |||||||||||||||
4848 Loop Central Drive, 7th Fl. | PIK (h) | |||||||||||||||||||||||
Houston, TX 77081 | ||||||||||||||||||||||||
Cinacalcet Royalty Sub, LLC | Healthcare | 1.04% | 0.59% | 15.50% Senior Secured Fixed Bond, PIK (h) | 15.50 | % | 3/30/2017 | 988,390 | 1,028,362 | |||||||||||||||
550 Hills Drive, 3rd Fl. | ||||||||||||||||||||||||
Bedminister, NJ 07921 | ||||||||||||||||||||||||
Claire’s Stores Inc. | Retail | 0.24% | 1.39% | Term B Loan (e) | 8.07 | % | 5/29/2014 | 3,213,728 | 2,416,644 | |||||||||||||||
3 SW 129th Ave. Pembroke Pines, FL 33027 | ||||||||||||||||||||||||
Comcorp Broadcasting, Inc. | Broadcasting | 1.09% | 0.89% | Revolving Loan (b) (c) (d) | 8.15 | % | 4/3/2013 | 1,800,821 | 1,546,905 | |||||||||||||||
700 St. John Street, Suite 300 Lafayette, LA 70501 | ||||||||||||||||||||||||
Comcorp Broadcasting, Inc. | Broadcasting | 11.42% | 9.29% | Term Loan (b) (d) | 8.31 | % | 4/3/2013 | 18,508,999 | 16,191,739 | |||||||||||||||
700 St. John Street, Suite 300 Lafayette, LA 70501 |
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Percentage | ||||||||||||||||||||||||
Percentage | of Total | |||||||||||||||||||||||
of Class of | Portfolio | |||||||||||||||||||||||
Nature of Issuer’s | Securities | Investment | Type of Securities Held in | Spread / | Cost of | Value of | ||||||||||||||||||
Name of Issuer | Principal Business | Held | Value | Portfolio | Coupon (a) | Maturity | Investment | Investment | ||||||||||||||||
Communications Corporation of America | Telecommunications | 12.57% | 3.78% | Common (b) (d) (j) | N/A | N/A | 7,187,203 | 6,584,767 | ||||||||||||||||
700 St. John Street, Suite 300 Lafayette, LA 70501 | ||||||||||||||||||||||||
Delphi Corporation | Transportation-Automotive | 0.53% | 0.20% | 6.50% Senior Secured Fixed Bond (f) | 6.50 | % | 8/15/2013 | 1,861,483 | 346,710 | |||||||||||||||
5725 Delphi Drive Troy, MI 48098 | ||||||||||||||||||||||||
Delphi Corporation | Transportation-Automotive | 0.50% | 0.18% | 6.50% Senior Unsecured Fixed Bond (f) | 6.50 | % | 5/1/2009 | 1,850,000 | 312,500 | |||||||||||||||
5725 Delphi Drive Troy, MI 48098 | ||||||||||||||||||||||||
Delphi Corporation | Transportation-Automotive | 0.30% | 0.11% | 6.55% Senior Unsecured Fixed Bond (f) | 6.55 | % | 6/15/2006 | 1,151,250 | 187,500 | |||||||||||||||
5725 Delphi Drive Troy, MI 48098 | ||||||||||||||||||||||||
Delphi Corporation | Transportation-Automotive | 0.70% | 0.25% | 7.13% Senior Unsecured Fixed Bond (f) | 7.13 | % | 5/1/2029 | 2,565,250 | 437,500 | |||||||||||||||
5725 Delphi Drive Troy, MI 48098 | ||||||||||||||||||||||||
Emerson Reinsurance Ltd. | Financial | 0.30% | 0.74% | Series C Loan | 8.07 | % | 12/15/2011 | 1,494,621 | 1,282,500 | |||||||||||||||
90 North Church Street Grand Cayman, KY1-1102 Cayman Islands | ||||||||||||||||||||||||
Flatiron Re Ltd. | Financial | 0.02% | 0.03% | Closing Date Term Loan | 8.02 | % | 12/29/2010 | 64,673 | 59,685 | |||||||||||||||
45 Reid Street Hamilton, HM 12 Bermuda | ||||||||||||||||||||||||
Flatiron Re Ltd. | Financial | 0.01% | 0.02% | Delayed Draw Term Loan | 8.02 | % | 12/29/2010 | 31,326 | 28,910 | |||||||||||||||
45 Reid Street Hamilton, HM 12 Bermuda | ||||||||||||||||||||||||
Fontainebleu Florida Hotel, LLC | Gaming/Leisure | 2.73% | 3.13% | Tranche C Term Loan | 8.82 | % | 6/6/2012 | 6,000,000 | 5,460,000 | |||||||||||||||
19501 Biscayne Blvd., Suite 400 Aventura, FL 33180 | ||||||||||||||||||||||||
Freescale Semiconductor, Inc. | Information Technology | 0.20% | 1.18% | 10.13% Senior Unsecured Fixed Bond | 10.13 | % | 12/15/2016 | 3,200,000 | 2,064,000 | |||||||||||||||
6501 William Cannon Dr. West Austin, TX 78735 | ||||||||||||||||||||||||
Freescale Semiconductor, Inc. | Information Technology | 0.05% | 0.29% | 9.13% Senior Unsecured Step Up Bond (h) | 9.13 | % | 12/15/2014 | 548,547 | 508,000 | |||||||||||||||
6501 William Cannon Dr. West | ||||||||||||||||||||||||
Austin, TX 78735 | ||||||||||||||||||||||||
Genesys Limited | Healthcare | 57.14% | 9.99% | Common (b) (d) (j) | N/A | N/A | 12,000,000 | 17,412,000 | ||||||||||||||||
200 Front Street West, Ste 3004 Toronto, ON M5V 3K2 Canada | ||||||||||||||||||||||||
Harrah’s Operating Co., Inc. | Gaming/Leisure | 0.05% | 2.35% | Term B-2 Loan | 5.80 | % | 1/28/2015 | 4,680,813 | 4,089,848 | |||||||||||||||
1 Caesars Palace Dr. Las Vegas, NV 89109 | ||||||||||||||||||||||||
HUB International Limited | Financial | 0.51% | 0.91% | 10.25% Senior Subordinated Fixed Bond (h) | 10.25 | % | 6/15/2015 | 1,560,702 | 1,590,000 | |||||||||||||||
55 E. Jackson Blvd. | ||||||||||||||||||||||||
Chicago, IL 60604 | ||||||||||||||||||||||||
IAP Worldwide Services, Inc. | Aerospace | 0.93% | 2.03% | First-Lien Term Loan, PIK | 8.06 | % | 12/30/2012 | 4,570,745 | 3,534,358 | |||||||||||||||
7315 N. Atlantic Ave. Cape Canaveral, FL 32920 | ||||||||||||||||||||||||
ICO Global Communications | Broadcasting | 0.09% | 0.09% | Common (j) | N/A | N/A | 500,000 | 151,109 | ||||||||||||||||
11700 Plaza America Drive Reston, VA 20190 | ||||||||||||||||||||||||
Kepler Holdings Limited | Financial | 2.50% | 2.58% | Term Loan | 9.31 | % | 6/30/2009 | 5,010,515 | 4,500,000 | |||||||||||||||
41A Cedar Avenue Hamilton, HM 12 Bermuda |
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Percentage | ||||||||||||||||||||||||
Percentage | of Total | |||||||||||||||||||||||
of Class of | Portfolio | |||||||||||||||||||||||
Nature of Issuer’s | Securities | Investment | Type of Securities Held in | Spread / | Cost of | Value of | ||||||||||||||||||
Name of Issuer | Principal Business | Held | Value | Portfolio | Coupon (a) | Maturity | Investment | Investment | ||||||||||||||||
Lake at Las Vegas Joint Venture | Gaming/Leisure | 0.67% | 0.46% | Revolving Loan Credit-Linked Deposit | 16.10 | % | 6/20/2012 | 3,611,111 | 794,444 | |||||||||||||||
/ LLV-1, L.L.C. | Account (f) | |||||||||||||||||||||||
1605 Lake Las Vegas Parkway Henderson, NV 89011 | ||||||||||||||||||||||||
Lake at Las Vegas Joint Venture | Gaming/Leisure | 6.00% | 3.57% | Term Loan, PIK (f) | 15.60 | % | 6/20/2012 | 28,269,771 | 6,219,350 | |||||||||||||||
/ LLV-1, L.L.C. 1605 Lake Las Vegas Parkway Henderson, NV 89011 | ||||||||||||||||||||||||
Ledgemont Royalty Sub, LLC | Healthcare | 2.38% | 1.44% | 16.00% Senior Unsecured Fixed Bond (h) | 16.00 | % | 11/5/2024 | 2,500,000 | 2,512,500 | |||||||||||||||
One Federal Street, Floor 10 Boston, MA 02110 | ||||||||||||||||||||||||
LifeCare Holdings (Rainier | Healthcare | 0.30% | 0.47% | Term Loan | 7.96 | % | 8/11/2012 | 962,926 | 820,202 | |||||||||||||||
Acquisition Corp) 5560 Tennyson Parkway Plano, TX 75024 | ||||||||||||||||||||||||
LVI Services, Inc. | Service | 5.08% | 3.98% | Tranche B Term Loan | 8.06 | % | 11/16/2011 | 9,336,653 | 6,933,618 | |||||||||||||||
80 Broad St., 3rd Fl. New York, NY 10004 | ||||||||||||||||||||||||
MetroFlag BP, LLC / MetroFlag | Gaming/Leisure | 2.56% | 2.11% | Second Lien Term Loan | 12.43 | % | 1/6/2009 | 5,000,000 | 3,675,000 | |||||||||||||||
Cable, LLC 3753 Hwd Hgs Pkwy, Suite 101 Las Vegas, NV 89109 | ||||||||||||||||||||||||
Molecular Insight Pharmaceuticals, Inc. | Healthcare | 0.67% | 0.59% | Floating Senior Unsecured Bond (h) (i) | 11.10 | % | 11/1/2012 | 1,014,950 | 1,022,500 | |||||||||||||||
160 Second Street Cambridge, MA 02142 | ||||||||||||||||||||||||
Motor Coach Industries International, Inc. | Transportation-Automotive | 7.88% | 0.03% | 11.25% Senior Unsecured Fixed Bond (f) | 11.25 | % | 5/1/2009 | 10,999,042 | 60,000 | |||||||||||||||
1700 E. Golf Rd. Schaumburg, IL 60173 | ||||||||||||||||||||||||
MPH Mezzanine II, LLC | Housing | 0.67% | 0.00% | Mezzanine 2B (b) (f) | 8.28 | % | 2/9/2008 | 10,000,000 | — | |||||||||||||||
767 5th Ave., #64 New York, NY 10153 | ||||||||||||||||||||||||
MPH Mezzanine III, LLC | Housing | 0.27% | 0.00% | Mezzanine 3 (b) (f) | 9.28 | % | 2/9/2008 | 4,000,000 | — | |||||||||||||||
767 5th Ave., #64 New York, NY 10153 | ||||||||||||||||||||||||
NES Rentals Holdings, Inc. | Service | 0.50% | 0.84% | Permanent Term Loan (Second-Lien) | 9.50 | % | 7/20/2013 | 2,029,400 | 1,460,000 | |||||||||||||||
8770 W. Bryn Mawr, 4th Fl. Chicago, IL 60631 | ||||||||||||||||||||||||
Northwest Airlines, Inc. | Aerospace | 0.24% | 0.07% | ALPA Trade Claim (j) | N/A | 8/21/2013 | 458,969 | 120,000 | ||||||||||||||||
2700 Lone Oak Pkwy. Eagan, MN 55121 | ||||||||||||||||||||||||
Northwest Airlines, Inc. | Aerospace | 0.20% | 0.06% | Bell Atlantic Trade Claim (j) | N/A | 8/21/2013 | 457,052 | 100,000 | ||||||||||||||||
2700 Lone Oak Pkwy. Eagan, MN 55121 | ||||||||||||||||||||||||
Northwest Airlines, Inc. | Aerospace | 0.20% | 0.06% | EDC Trade Claims (j) | N/A | 8/21/2013 | 470,351 | 100,000 | ||||||||||||||||
2700 Lone Oak Pkwy. Eagan, MN 55121 | ||||||||||||||||||||||||
Northwest Airlines, Inc. | Aerospace | 0.43% | 0.12% | Flight Attendant Claim (j) | N/A | 8/21/2013 | 788,491 | 213,060 | ||||||||||||||||
2700 Lone Oak Pkwy. Eagan, MN 55121 | ||||||||||||||||||||||||
Northwest Airlines, Inc. | Aerospace | 0.12% | 0.03% | GE Trade Claim (j) | N/A | 8/21/2013 | 288,981 | 60,000 | ||||||||||||||||
2700 Lone Oak Pkwy. Eagan, MN 55121 | ||||||||||||||||||||||||
Northwest Airlines, Inc. | Aerospace | 0.39% | 0.11% | IAM Trade Claim (j) | N/A | 8/21/2013 | 772,421 | 189,125 | ||||||||||||||||
2700 Lone Oak Pkwy. Eagan, MN 55121 |
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Percentage | ||||||||||||||||||||||||
Percentage | of Total | |||||||||||||||||||||||
of Class of | Portfolio | |||||||||||||||||||||||
Nature of Issuer’s | Securities | Investment | Type of Securities Held in | Spread / | Cost of | Value of | ||||||||||||||||||
Name of Issuer | Principal Business | Held | Value | Portfolio | Coupon (a) | Maturity | Investment | Investment | ||||||||||||||||
Northwest Airlines, Inc. | Aerospace | 0.69% | 0.19% | Pinnacle Trade Claim (j) | N/A | 8/21/2013 | 1,606,633 | 337,325 | ||||||||||||||||
2700 Lone Oak Pkwy. Eagan, MN 55121 | ||||||||||||||||||||||||
Northwest Airlines, Inc. | Aerospace | 0.14% | 0.08% | Retiree Claim (j) | N/A | 8/21/2013 | 519,924 | 140,490 | ||||||||||||||||
2700 Lone Oak Pkwy. Eagan, MN 55121 | ||||||||||||||||||||||||
Pacific Clarion, LLC | Gaming/Leisure | 10.76% | 2.72% | Term Loan (b) (g) | 15.00 | % | 1/23/2009 | 4,925,214 | 4,731,263 | |||||||||||||||
3993 Howard Hughes Parkway Suite 450 Las Vegas, NV 89109 | ||||||||||||||||||||||||
Penhall Holding Company | Service | 9.09% | 2.04% | Term Loan, PIK | 10.13 | % | 4/1/2012 | 5,392,908 | 3,546,830 | |||||||||||||||
1801 Penhall Way Anaheim, CA 92801 | ||||||||||||||||||||||||
Penton Media, Inc. | Diversified Media | 0.75% | 0.77% | Second Lien Term Loan | 7.80 | % | 2/1/2014 | 2,037,420 | 1,350,000 | |||||||||||||||
1300 E. 9th St. Cleveland, OH 44114 | ||||||||||||||||||||||||
Pinnacle Foods Group Inc. | Food/Tobacco | 1.60% | 1.73% | 10.63% Senior Subordinated Fixed Bond | 10.63 | % | 4/1/2017 | 4,036,250 | 3,020,000 | |||||||||||||||
6 Executive Campus, Ste. 100 Cherry Hill, NJ 08002 | ||||||||||||||||||||||||
Realogy Corporation | Housing | 0.29% | 1.28% | 10.50% Senior Unsecured Fixed Bond | 10.50 | % | 4/15/2014 | 4,962,982 | 2,225,000 | |||||||||||||||
1 Campus Dr. Parsippany, NJ 07054 | ||||||||||||||||||||||||
Realogy Corporation | Housing | 0.86% | 1.48% | 12.375% Senior Subordinated Fixed Bond | 12.38 | % | 4/15/2015 | 4,103,669 | 2,587,500 | |||||||||||||||
1 Campus Dr. Parsippany, NJ 07054 | ||||||||||||||||||||||||
Resolute Aneth, LLC | Energy | 1.78% | 2.02% | Second Lien Term Loan | 7.30 | % | 6/26/2013 | 4,000,000 | 3,520,000 | |||||||||||||||
80 E. Sir Francis Drake Blvd., Suite 2C Larkspur, CA 94939 | ||||||||||||||||||||||||
SunGard Data Systems Inc (Solar | Information Technology | 1.00% | 2.77% | Incremental Term Loan Facility (e) | 6.75 | % | 2/28/2014 | 4,950,000 | 4,820,850 | |||||||||||||||
Capital Corp) 680 E. Swedesford Rd. Wayne, PA 19087 | ||||||||||||||||||||||||
TARH E&P Holdings, L.P. | Energy | 3.13% | 2.79% | First Lien Term Loan | 7.30 | % | 6/29/2012 | 5,000,000 | 4,862,500 | |||||||||||||||
San Jacinto Center, 90 San Jacinto Boulevard Austin, TX 78701 | ||||||||||||||||||||||||
Tegrant Corp. (SCA Packaging) | Forest Prod/Containers | 1.33% | 0.11% | Second Lien Term Loan | 9.27 | % | 3/8/2015 | 1,000,000 | 200,000 | |||||||||||||||
800 Fifth Avenue New Brighton, PA 15066 | ||||||||||||||||||||||||
Texas Competitive Electric | Utility | 0.02% | 1.93% | Initial Tranche B-2 Term Loan | 6.23 | % | 10/10/2014 | 3,817,672 | 3,363,015 | |||||||||||||||
Holdings Company, LLC (TXU) Energy Plaza 1601 Bryan Street Dallas, TX 75201 | ||||||||||||||||||||||||
Totes Isotoner Corporation | Consumer Non-Durables | 6.14% | 1.60% | Second Lien Term Loan | 9.88 | % | 1/31/2014 | 3,401,668 | 2,786,213 | |||||||||||||||
9655 International Blvd. Cincinnati, OH 45246 | ||||||||||||||||||||||||
WideOpenWest Finance , LLC | Cable/Wireless Video | 2.22% | 2.32% | Second Lien Term Loan, PIK | 9.49 | % | 6/29/2015 | 5,129,063 | 4,040,534 | |||||||||||||||
7807 E. Peakview Ave., Ste. 400 Englewood, CO 80111 | ||||||||||||||||||||||||
Wm Wrigley Jr. Company | Food/Tobacco | 0.15% | 4.24% | Tranche B (e) | 3.50 | % | 7/25/2014 | 7,275,000 | 7,384,875 | |||||||||||||||
Estover Plymouth PL6 7 PR United Kingdom | ||||||||||||||||||||||||
Young Broadcasting, Inc. | Broadcasting | 0.40% | 0.17% | 10.00% Senior Subordinated Fixed Bond | 10.00 | % | 3/1/2011 | 1,993,563 | 300,000 | |||||||||||||||
599 Lexington Avenue New York, NY 10022 |
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(a) | Senior loans in which the Acquired Fund invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium (unless otherwise identified by footnote (f), all senior loans carry a variable rate interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at September 30, 2008. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown. | |
(b) | Represents fair value as determined by the Acquired Fund’s investment adviser, in good faith, pursuant to the policies and procedures approved by the Acquired Fund’s Board of Directors. Securities with a total aggregate market value of $46,466,674 or 39.2% of net assets were fair valued as of September 30, 2008. | |
(c) | Senior loan asset has additional unfunded loan commitments. See Note 6 to the Financial Statements for the period ended September 30, 2008 in Appendix E. | |
(d) | Affiliated issuer. Under Section 2(a)(3) of the Investment Company Act of 1940, a portfolio company is defined as “affiliated” if a company owns five percent or more of its voting stock. The Company held at least five percent of the outstanding voting stock of these portfolio companies as of September 30, 2008. | |
(e) | All or a portion of this position has not settled. Contract rates do not take effect until settlement date. | |
(f) | The issuer is in default of certain debt covenants. Income is not being accrued. | |
(g) | Fixed rate senior loan. | |
(h) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At September 30, 2008, these securities amounted to $31,790,345 or 26.8% of net assets. | |
(i) | Floating rate note. The interest rate shown reflects the rate in effect at September 30, 3008. | |
(j) | Non-income producing security. | |
PIK Payment-in-Kind. All or a portion of the stated interest rate may be PIK interest. |
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• | The Reorganization will qualify as a “reorganization” (as defined in section 368(a) of the Code), and each of the Acquired Fund and Acquiring Fund will be a “party to a reorganization” (within the meaning of section 368(b) of the Code); | ||
• | Under Section 1032 of the Code, no gain or loss will be recognized by the Acquiring Fund upon the Merger or upon Acquiring Fund’s subsequent receipt of Merger Sub’s assets and its assumption of all liabilities of Merger Sub in complete liquidation of Merger Sub; | ||
• | Under Section 362(b) of the Code, the tax basis of the Acquired Fund’s assets in the hands of the Acquiring Fund will be the same as the basis of such assets in the hands of the Acquired Fund immediately prior to the Reorganization; | ||
• | Under Section 1223(2) of the Code, the holding periods of such assets in the hands of the Acquiring Fund will include the periods during which such assets were held by the Acquired Fund; | ||
• | Under Section 361 of the Code, no gain or loss will be recognized by the Acquired Fund upon the Merger or upon Acquiring Fund’s subsequent receipt of Merger Sub’s assets and its assumption of all liabilities of Merger Sub in complete liquidation of Merger Sub; | ||
• | Under Section 354 of the Code, no gain or loss will be recognized by Acquired Fund stockholders on the conversion of shares of Acquired Common Stock into Merger Shares, except to the extent such stockholders are paid cash in lieu of fractional Merger Shares in the Reorganization; | ||
• | Under Section 358 of the Code, the aggregate tax basis of Merger Shares received by Acquired Fund stockholders will be the same as the aggregate tax basis of shares of Acquired Fund converted into Merger Shares reduced by the portion of the adjusted basis in Acquired Fund common shares that is allocable to any fractional Merger Shares for which cash is received; | ||
• | Under Section 1223(1) of the Code, the holding periods of Merger Shares received by Acquired Fund stockholders will include the holding periods of shares of Acquired Fund converted into such Merger Shares, provided that shares of Acquired Fund are held by such shareholders as capital assets at the closing date of the Reorganization; and | ||
• | The Acquiring Fund will succeed to and take into account the items of the Acquired Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383, and 384 of the Code and the regulations thereunder. |
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• | you must hold your shares of Acquired Fund common stock as of the date you make your demand for appraisal rights and continue to hold your shares of Acquired Fund common stock through the effective time of the Merger; | ||
• | you must deliver to the Acquired Fund a written notice of your demand for appraisal of your shares of Acquired Fund common stock before the taking of the vote at the Meeting; | ||
• | you must not have voted in favor of adoption of the Agreement and Plan of Merger and Liquidation; if you vote by proxy and wish to exercise appraisal rights, you must vote against the adoption of the Agreement and Plan of Merger and Liquidation or mark your proxy card to indicate that you abstain from voting on the adoption of the Agreement and Plan of Merger and Liquidation; and | ||
• | you must file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares within 120 days after the effective time of the Merger. |
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PRO FORMA | ||||||||||||||||
ACTUAL | ADJUSTMENT | COMBINED | ||||||||||||||
(Unaudited) | Acquired Fund | Acquiring Fund | Acquiring Fund | |||||||||||||
Shares Outstanding | ||||||||||||||||
Common Shares | 17,716,771 | 55,526,190 | 65,032,231 | |||||||||||||
Net Assets | ||||||||||||||||
Common Shares | $ | 118,540,335 | $ | 692,301,444 | $ | (500,000) | * | $ | 810,341,779 | |||||||
Net asset value per common share | $ | 6.69 | $ | 12.47 | $ | 12.46 |
* | Reflects the estimated reorganization expenses |
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Shares | Quorum | Voting for the Proposal | ||
In General | All shares “present” in person or by proxy are counted towards a quorum. | Shares “present” in person will be voted in person at the Meeting. Shares present by proxy will be voted in accordance with instructions. | ||
Proxy with no Voting Instruction (other than Broker Non-Vote) | Considered “present” at Meeting. | Voted “for” the Proposal. | ||
Broker Non-Vote | Considered “present” at Meeting. | Not voted. Same effect as a vote “against” the Proposal. | ||
Vote to Abstain | Considered “present” at Meeting. | Not voted. Same effect as a vote “against” the Proposal. |
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AGREEMENT AND PLAN OF MERGER AND LIQUIDATION
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1. | Merger and Liquidation. |
(a) | Subject to the requisite approval of the stockholders of Acquired Fund and to the other terms and conditions contained herein (including Acquired Fund’s obligation to distribute to its stockholders (i) the sum of (a) its net investment income and (b) the excess of its net short-term capital gains over net long-term capital losses, and (ii) net capital gains, all as described in Section 8(l) hereof), at the Effective Time (as defined below in Section 3) Acquired Fund shall be merged with and into Merger Sub and the separate corporate existence of Acquired Fund shall thereupon cease. Merger Sub shall be the surviving company in the Merger (sometimes hereinafter referred to as the “Surviving Company”) in accordance with Section 18-209 of the LLC Act and Section 264 of the DGCL, and the separate limited liability company existence of Merger Sub with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. The Merger shall have the effects specified in the LLC Act and the DGCL. | ||
(b) | At the Effective Time (as defined in Section 3 below), as a result of the Merger and without any action on the part of the holder of any stock of Acquired Fund: |
(i) | Each share of common stock of Acquired Fund (the “Acquired Common Stock”) issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into, and become exchangeable for, the right to receive the number of Merger Shares (and cash in lieu of fractional Merger Shares) provided for in Section 2. | ||
(ii) | Certificates representing interests in shares of Acquired Common Stock will represent the right to receive a number of Merger Shares (and cash in lieu of fractional Merger Shares) after the Effective Time, as determined in accordance with Section 2. Acquiring Fund shall not issue certificates representing Merger Shares in connection with such exchange. | ||
(iii) | The membership interests in Merger Sub issued and outstanding immediately prior to the Effective Time shall remain unchanged as a result of the Merger and shall remain as the issued and outstanding membership interests of the Surviving Company. |
(c) | The certificate of formation of Merger Sub as in effect immediately prior to the Effective Time shall be the certificate of formation of the Surviving Company (the “Certificate of Formation”), unless and until amended in accordance with its terms and applicable law. The limited liability company agreement of the Merger Sub in effect immediately prior to the Effective Time shall be the limited liability company agreement of the Surviving Company (the “LLC Agreement”), unless and until amended in accordance with its terms and applicable law. | ||
(d) | At the Effective Time, Merger Sub shall continue in existence as the Surviving Company, and without further transfer, succeed to and possess all of the rights, privileges and powers of Acquired Fund, and all of the assets and property of whatever kind and character of Acquired Fund shall vest in Merger Sub without further act or deed; thereafter, Merger Sub, as the Surviving Company, shall be liable for all of the liabilities and obligations of Acquired Fund, and any claim or judgment against Acquired Fund may be enforced against Merger Sub, as the Surviving Company, in accordance with Section 18-209 of the LLC Act and Section 259 of the DGCL. | ||
(e) | [All Merger Shares to be issued pursuant to the Merger shall be deemed issued and outstanding as of the Effective Time and, whenever a dividend or other distribution is declared by Acquiring Fund in respect of the Merger Shares, the record date for which is at or after the Effective Time, that declaration shall include dividends or other distributions in respect of all Merger Shares issuable pursuant to this Agreement. |
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(f) | From and after the Effective Time, there shall be no transfers on the stock transfer books of the Acquired Fund of the shares of Acquired Common Stock that were outstanding immediately prior to the Effective Time.] | ||
(g) | In accordance with Section 262 of the DGCL, appraisal rights shall be available to holders of shares of Acquired Common Stock in connection with the Merger. | ||
(h) | As soon as is reasonably practicable after the Effective Time, Merger Sub shall be dissolved and Acquiring Fund will assume all of Merger Sub’s liabilities and obligations, known and unknown, contingent or otherwise, whether or not determinable, and Merger Sub will distribute to Acquiring Fund, which will be the sole member of Merger Sub at such time, all of the assets of Merger Sub in complete liquidation of its interest in Merger Sub. As soon as reasonably practicable after such assumption by Acquiring Fund of Merger Sub’s liabilities and obligations and such distribution of Merger Sub’s assets to Acquiring Fund, and after the taking of all other actions required under the laws of the State of Delaware and the Certificate of Formation and LLC Agreement of Merger Sub in connection with the dissolution and termination of Merger Sub, Merger Sub shall prepare, execute and file a Certificate of Cancellation with the Secretary of State of the State of Delaware, and elsewhere as may be necessary or appropriate, and such other documents as may be required to dissolve and terminate Merger Sub. | ||
(i) | As soon as practicable following the requisite approval of the stockholders of Acquired Fund, Acquired Fund will, at its expense, liquidate such of its portfolio securities as Acquiring Fund indicates it does not wish to acquire. Such liquidation will be substantially completed before the Closing Date, unless otherwise agreed by Acquired Fund and Acquiring Fund. Notwithstanding the foregoing, nothing in this paragraph (i) will require Acquired Fund to dispose of or purchase any assets if, in the reasonable judgment of the Acquired Fund, such disposition or purchase would adversely affect the tax-free nature of the Merger and Liquidation (collectively, a reorganization under the Code) or would violate Acquired Fund’s fiduciary duty to its shareholders. |
2. | Closing Date; Valuation Date. |
(a) | The net asset value of the Merger Shares (and cash paid in lieu of fractional Merger Shares), the value of the assets of Acquired Fund and the value of the liabilities of Acquired Fund will in each case be determined as of the Valuation Date. | ||
(b) | The net asset value of the Merger Shares (and cash paid in lieu of fractional Merger Shares) and the value of the assets and liabilities of Acquired Fund will be determined by Acquiring Fund, in cooperation with Acquired Fund, pursuant to valuation procedures customarily used by Acquiring Fund in determining the fair market value of Acquiring Fund’s assets and liabilities. | ||
(c) | The Acquired Common Stock will be converted into, and become exchangeable for, the right to receive the number of Merger Shares (as described in Section 1(b) above) determined by dividing the net assets per share of Acquired Fund, computed in the manner and as of the time and date set forth in this Section 2, by the net asset value of one Merger Share, computed in the manner and as of the time and date set forth in this Section 2. If based on this calculation, a stockholder of Acquired Common Stock would be entitled to receive fractional Merger Shares, that stockholder will instead receive cash in lieu of those fractional Merger Shares equal to the product of the number of fractional Merger Shares (rounded to the nearest ten thousandths) to which the stockholder is entitled and the net asset value of one Merger Share as described in the immediately preceding sentence. | ||
(d) | [The investment restrictions of Acquired Fund will be temporarily amended to the extent necessary to effect the transactions contemplated by this Agreement.] |
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(e) | [Acquiring Fund will issue the Merger Shares to Acquired Fund in a certificate registered in the name of Acquired Fund. Acquired Fund will distribute the Merger Shares to its stockholders by redelivering the certificate to Acquiring Fund’s transfer agent, which will as soon as practicable set up open accounts for the Acquired Fund stockholder in accordance with written instructions furnished by Acquired Fund.] With respect to any Acquired Fund stockholder holding Acquired Fund share certificates as of the Closing Date, Acquiring Fund will not permit such stockholder to receive dividends and other distributions on the Merger Shares (although such dividends and other distributions will be credited to the account of such stockholder), receive certificates representing the Merger Shares or pledge such Merger Shares until such stockholder has surrendered his or her outstanding Acquired Fund certificates or, in the event of lost, stolen or destroyed certificates, posted adequate bond. In the event that a stockholder is not permitted to receive dividends and other distributions on the Merger Shares as provided in the preceding sentence, Acquiring Fund will pay any such dividends or distributions in additional shares, notwithstanding any election that the stockholder made previously with respect to the payment, in cash or otherwise, of dividends and distributions on shares of Acquired Fund. Acquired Fund will, at its expense, request the stockholders of Acquired Fund to surrender their outstanding Acquired Fund certificates, or post adequate bond, as the case may be. | ||
(f) | The Valuation Date will be 4:00 p.m. New York time on the Closing Date (the “Valuation Date”). |
3. | Closing and Closing Date. |
(a) | The Closing Date shall be such date as the parties may agree to in writing. All acts taking place at the Closing shall be deemed to take place simultaneously as of the time immediately after the close of business on the Closing Date unless otherwise agreed to by the parties. The close of business on the Closing Date shall be as of 4:00 p.m. New York Time. The Closing shall be held at the offices of or at such other time and/or place as the parties may agree. As soon as practicable following the Closing, Acquired Fund and Acquiring Fund will cause the Certificate of Merger (the “Certificate of Merger”) to be executed, acknowledged and filed with the Secretary of State of the State of Delaware as required by the DGCL and the LLC Act. The Merger shall become effective upon the filing of the Certificate of Merger with the Secretary of State of the State of Delaware or such later time as may be provided for in the Certificate of Merger (the “Effective Time”). | ||
(b) | In the event that on the Valuation Date (i) the primary trading market for portfolio securities of the Acquiring Fund or Acquired Fund shall be closed to trading or trading thereupon shall be restricted or (ii) trading or the reporting of trading shall be disrupted so that, in the judgment of the Board of Directors of the Acquired Fund or the Board of Trustees of the Acquiring Fund, accurate appraisal of the value of the net assets of the Acquiring Fund or Acquired Fund is impracticable, the Closing Date shall be postponed until the first business day after the day when trading shall have been fully resumed and reporting shall have been restored. |
4. | Expenses, fees, etc. |
(a) | All fees and expenses, including legal and accounting expenses, proxy materials and proxy solicitation with respect to Acquired Fund, the costs of liquidating before the Closing Date portfolio securities of Acquired Fund to the extent required under Section 3(b), portfolio transfer taxes (if any) or other similar expenses incurred in connection with the consummation by Acquired Fund, Merger Sub and Acquiring Fund of the transactions contemplated by this Agreement (together with the SEC registration fee specified below, “Expenses”) will be borne by Acquired Fund and Acquiring Fund (for itself and Merger Sub) in proportion to their respective net assets determined at the Valuation Date; provided, however, that such Expenses will in any event be paid by the party directly incurring such Expenses if and to the extent that the payment by the other party of such Expenses would result in the disqualification of Acquiring Fund or Acquired Fund, as the case may be, as a “regulated investment company” within the meaning of Section 851 of the Code or would prevent the transactions from qualifying as a tax-free reorganization under the Code. |
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(b) | In the event the transactions contemplated by this Agreement are not consummated by reason of (i) Acquiring Fund’s being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Acquiring Fund’s or Merger Sub’s obligations referred to in Section 7) or (ii) the non-fulfillment or failure of any condition to Acquired Fund’s obligations referred to in Section 8, Acquiring Fund will pay directly all reasonable fees and expenses incurred by Acquired Fund in connection with such transactions, including, without limitation, legal, accounting and filing fees. | ||
(c) | In the event the transactions contemplated by this Agreement are not consummated by reason of (i) Acquired Fund’s being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Acquired Fund’s obligations referred to in Section 8) or (ii) the non-fulfillment or failure of any condition to Acquiring Fund’s or Merger Sub’s obligations referred to in Section 7, Acquired Fund will pay directly all reasonable fees and expenses incurred by Acquiring Fund and/or Merger Sub in connection with such transactions, including without limitation legal, accounting and filing fees. | ||
(d) | In the event the transactions contemplated by this Agreement are not consummated for any reason other than (i) Acquiring Fund’s or Acquired Fund’s being either unwilling or unable to go forward or (ii) the non-fulfillment or failure of any condition to Acquiring Fund’s, Merger Sub’s or Acquired Fund’s obligations referred to in Section 7 or Section 8 of this Agreement, then each of Acquiring Fund (for itself and Merger Sub) and Acquired Fund will bear all of its own expenses incurred in connection with such transactions. | ||
(e) | Notwithstanding any other provisions of this Agreement, if for any reason the transactions contemplated by this Agreement are not consummated, no party will be liable to the other party for any damages resulting therefrom, including without limitation consequential damages, except as specifically set forth above. |
5. | Representations and warranties of Acquiring Fund and Merger Sub. | |
Acquiring Fund and Merger Sub represent and warrant to and agree with Acquired Fund as follows; provided that with respect to the representations and warranties made by and concerning Merger Sub, such representations and warranties will be deemed to have been made as of the date Merger Sub becomes a party to this Agreement: |
(a) | Acquiring Fund is a statutory trust duly established, validly existing and in good standing under the laws of the State of Delaware and has power to own all of its properties and assets and to carry out its obligations under this Agreement. Acquiring Fund is not required to qualify as a foreign association in any jurisdiction. Acquiring Fund has all necessary federal, state and local authorizations to carry on its business as now being conducted and to carry out this Agreement. | ||
(b) | Merger Sub is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware, and has all the requisite power and authority to own, lease and operate its properties and assets and to carry on its business as it is now being conducted. | ||
(c) | Acquiring Fund is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a closed-end management investment company, and such registration has not been revoked or rescinded and is in full force and effect. | ||
(d) | Merger Sub has filed an election under the 1940 Act to be treated as a business development company, and such election has not been revoked or rescinded and is in full force and effect. |
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(e) | A statement of assets and liabilities, statement of operations, statement of changes in net assets and schedule of investments (indicating their market values) of Acquiring Fund as of and for the fiscal year ended December 31, 2008, audited by PricewaterhouseCoopers LLP, the Acquiring Fund’s independent registered public accounting firm, will be furnished to Acquired Fund prior to the Closing Date. The statements of assets and liabilities and the schedules of investments will fairly present the financial position of Acquiring Fund as of such date, and the statements of operations and changes in net assets will fairly reflect the results of its operations and changes in net assets for the periods covered thereby in conformity with U.S. generally accepted accounting principles. | ||
(f) | There are no material legal, administrative or other proceedings pending or, to the knowledge of Acquiring Fund or Merger Sub, threatened against Acquiring Fund or Merger Sub which assert liability or which may, if successfully prosecuted to their conclusion, result in liability on the part of Acquiring Fund or Merger Sub, other than as have been disclosed in the Prospectuses (as defined below) or otherwise disclosed in writing to Acquired Fund. | ||
(g) | Acquiring Fund has no known liabilities of a material nature, contingent or otherwise, other than those shown as belonging to it on its statement of assets and liabilities as of December 31, 2008 and those incurred in the ordinary course of Acquiring Fund’s business as an investment company since that date. | ||
(h) | No consent, approval, authorization or order of any court or governmental authority is required for the consummation by Acquiring Fund or Merger Sub of the transactions contemplated by this Agreement, except such as may be required under the Securities Act of 1933, as amended (the “1933 Act”), the Securities Exchange Act of 1934, as amended (the “1934 Act”), the 1940 Act, state securities or blue sky laws (which term as used herein will include the laws of the District of Columbia and of Puerto Rico) or the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “H-S-R Act”). | ||
(i) | The registration statement and any amendment thereto (including any post-effective amendment) (the “Registration Statement”) filed with the Securities and Exchange Commission (the “Commission”) by Acquiring Fund on Form N-14 relating to the Merger Shares issuable hereunder and the proxy statement of Acquired Fund included therein (the “Proxy Statement”), on the effective date of the Registration Statement, (i) comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at the time of the stockholders’ meeting referred to in Section 7(a) and at the Closing Date, the prospectus contained in the Registration Statement (the “Prospectus”), as amended or supplemented by any amendments or supplements filed or requested to be filed with the Commission, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that none of the representations and warranties in this subsection will apply to statements in or omissions from the Registration Statement, the Prospectus or the Proxy Statement made in reliance upon and in conformity with information furnished by Acquired Fund for use in the Registration Statement, the Prospectus or the Proxy Statement. | ||
(j) | There are no material contracts outstanding to which Acquiring Fund or Merger Sub is a party, other than as will be disclosed in the Registration Statement. | ||
(k) | All of the issued and outstanding shares of beneficial interest of Acquiring Fund have been offered for sale and sold in conformity with all applicable federal securities laws. | ||
(l) | For each taxable year of its operation, the Acquiring Fund has met the requirements of Subchapter M of the Code for qualification and treatment as a “regulated investment company”, has elected to be treated as such, and has computed its U.S. federal income tax under Section 852 of the Code. |
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(m) | As of the Closing Date and the Effective Time, Acquiring Fund will have filed all federal, state, and other tax returns and reports which will have been required to be filed by Acquiring Fund and will have paid or will pay all federal, state and other taxes shown to be due on said returns or on any assessments received by Acquiring Fund, will have adequately provided for all tax liabilities on its books, and to the knowledge of Acquiring Fund, will not have had any tax deficiency or liability asserted against it or question with respect thereto raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. As of the Closing Date and the Effective Time, Acquiring Fund will not be under audit by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. | ||
(n) | The issuance of the Merger Shares pursuant to this Agreement will be in compliance with all applicable federal securities laws. | ||
(o) | The Merger Shares have been duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable by Acquiring Fund (except as set forth in the Registration Statement), and no shareholder of Acquiring Fund will have any preemptive right of subscription or purchase in respect thereof. | ||
(p) | All of the issued and outstanding membership interests in Merger Sub are, and at the Effective Time will be, owned by the Acquiring Fund, as sole member (the “Member”), and there are (i) no other membership interests or voting securities of Merger Sub, (ii) no securities of Merger Sub convertible into or exchangeable for membership interests or voting securities of Merger Sub and (iii) no options or other rights to acquire from Merger Sub, and no obligations of Merger Sub to issue, any membership interests, voting securities or securities convertible into or exchangeable for capital membership interests or voting securities of Merger Sub. Merger Sub has not conducted any business prior to the date hereof and has no, and prior to the Effective Time will have no, assets, liabilities or obligations of any nature other than those incident to its formation and pursuant to this Agreement and the Merger and the other transactions contemplated by this Agreement. |
6. | Representations and warranties of Acquired Fund. | |
Acquired Fund represents and warrants to and agrees with Acquiring Fund and Merger Sub that: |
(a) | Acquired Fund is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has power to own all of its properties and assets and to carry out its obligations under this Agreement. [Acquired Fund is duly qualified or licensed to do business as a foreign corporation and is in good standing under the laws of any other jurisdiction in which the character of the properties owned, leased or operated by it therein or in which the transaction of its business makes such qualification or licensing necessary.] Acquired Fund has all necessary federal, state and local authorizations to carry on its business as now being conducted and to carry out this Agreement. | ||
(b) | Acquired Fund is registered under the 1940 Act as a closed-end management investment company and has filed an election under the 1940 Act to be treated as a business development company, and such registration and election have not been revoked or rescinded and are in full force and effect. | ||
(c) | A statement of assets and liabilities, statement of operations, statement of changes in net assets and schedule of investments (indicating their market values) of Acquired Fund as of and for the fiscal year ended December 31, 2008, audited by PricewaterhouseCoopers LLP, the Acquired Fund’s independent registered public accounting firm, will be furnished to Acquiring Fund prior to the Closing Date. The statements of assets and liabilities and schedules of investments will fairly present the financial position of Acquired Fund as of such date, and the statements of operations and changes in net assets will fairly reflect the results of its operations and changes in net assets for the periods covered thereby in conformity with U.S. generally accepted accounting principles. |
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(d) | There are no material legal, administrative or other proceedings pending or, to the knowledge of Acquired Fund, threatened against Acquired Fund which assert liability or which may, if successfully prosecuted to their conclusion, result in liability on the part of Acquired Fund, other than as have been disclosed in the Registration Statement or otherwise disclosed in writing to the Acquiring Fund. | ||
(e) | Acquired Fund has no known liabilities of a material nature, contingent or otherwise, other than those shown as belonging to it on its statement of assets and liabilities as of December 31, 2008 and those incurred in the ordinary course of Acquired Fund’s business as an investment company since such date. Before the Closing Date, Acquired Fund will advise Acquiring Fund of all material liabilities, contingent or otherwise, incurred by it subsequent to December 31, 2008, whether or not incurred in the ordinary course of business. | ||
(f) | No consent, approval, authorization or order of any court or governmental authority is required for the consummation by Acquired Fund of the transactions contemplated by this Agreement, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act, state securities or blue sky laws or the H-S-R Act. | ||
(g) | The Registration Statement, the Prospectus and the Proxy Statement, on the Effective Date of the Registration Statement and insofar as they do not relate to Acquiring Fund (i) comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at the time of the stockholders’ meeting referred to in Section 7(a) below and on the Closing Date, the Prospectus, as amended or supplemented by any amendments or supplements filed or requested to be filed with the Commission, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the representations and warranties in this subsection will apply only to statements of fact or omissions of statements of fact relating to Acquired Fund contained in the Registration Statement, the Prospectus or the Proxy Statement, as such Registration Statement, Prospectus and Proxy Statement will be furnished to Acquired Fund in definitive form as soon as practicable following effectiveness of the Registration Statement and before any public distribution of the Prospectus or Proxy Statement. | ||
(h) | All of the issued and outstanding shares of beneficial interest of Acquired Fund have been offered for sale and sold in conformity with all applicable federal securities laws. | ||
(i) | For each taxable year of its operation (including the taxable year ending on the Effective Date), the Acquired Fund has met the requirements of Subchapter M of the Code for qualification and treatment as a “regulated investment company”, has elected to be treated as such, and has computed its U.S. federal income tax under Section 852 of the Code. | ||
(j) | As of the Closing Date and the Effective Time, Acquired Fund has filed or will file all federal, state and other tax returns and reports which will have been required to be filed by Acquired Fund and will have paid or will pay all federal, state or other taxes shown to be due on said returns or on any assessments received by Acquired Fund, will have adequately provided for all tax liabilities on its books, and to the knowledge of Acquired Fund, will not have had any tax deficiency or liability asserted against it or any question with respect thereto raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. As of the Closing Date and the Effective Time, Acquired Fund will not be under audit by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. | ||
(k) | On the Closing Date, the Acquired Fund will have good and marketable title to all of its Investments (as defined below) and other assets to be held immediately prior to the Effective Time and Merger Sub will acquire good and marketable title thereto, subject to no encumbrances, liens |
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or security interests whatsoever and without any restrictions on the full transfer thereof, including such restrictions as might arise under the 1933 Act, other than as previously disclosed to Acquiring Fund. As used in this Agreement, the term “Investments” means Acquired Fund’s investments shown on the schedule of its investments as of December 31, 2008, as supplemented with such changes as Acquired Fund makes and changes resulting from stock dividends, stock splits, mergers and similar corporate actions. | |||
(l) | [No registration under the 1933 Act of any of the Investments would be required if they were, as of the time of such transfer, the subject of a public distribution by either of Acquiring Fund or Acquired Fund, except as previously disclosed to Acquiring Fund by Acquired Fund.] |
7. | Covenants of the Acquired Fund and Acquiring Fund. |
(a) | Acquired Fund agrees to call a meeting of its stockholders as soon as is practicable after the effective date of the Registration Statement for, among other things, the purpose of considering the matters contemplated by this Agreement. | ||
(b) | Acquiring Fund has filed the Registration Statement with the Commission. Each of Acquired Fund and Acquiring Fund will cooperate with the other, and each will furnish to the other the information relating to itself required by the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder to be set forth in the Registration Statement, including the Prospectus and the Proxy Statement. | ||
(c) | As soon as reasonably practicable after the Effective Time, the Acquiring Fund will assume all of Merger Sub’s liabilities and obligations, known and unknown, contingent or otherwise, whether or not determinable, and Merger Sub will make a liquidating distribution of all of its assets to the Acquiring Fund, which will be Merger Sub’s sole member at such time. | ||
(d) | Acquired Fund covenants that it will, from time to time, as and when reasonably requested by the Acquiring Fund, execute and deliver or cause to be executed and delivered all such assignments and other instruments, and will take or cause to be taken such further action as the Acquiring Fund or Merger Sub may reasonably deem necessary or desirable in order to ultimately vest and confirm Merger Sub’s and, following the liquidating distribution referred to in paragraph (c) above, the Acquiring Fund’s title to and possession of all of the assets of the Acquired Fund and to otherwise carry out the intent and purpose of this Agreement. | ||
(e) | Prior to the Effective Time, the Acquiring Fund shall cause Merger Sub to be organized and shall cause Merger Sub to duly adopt and execute and become a party to this Agreement and cause Merger Sub to take all necessary action to be taken by Merger Sub to implement the provisions of this Agreement. | ||
(f) | With respect to covenants and representations made by and concerning Merger Sub, such representations and covenants will be deemed to have been made as of the date Merger Sub becomes a party to this Agreement. |
8. | Conditions to Acquiring Fund’s and Merger Sub’s obligations. | |
The obligations of Acquiring Fund and Merger Sub hereunder are subject to the following conditions: |
(a) | That this Agreement will have been adopted and the transactions contemplated hereby will have been approved by the affirmative vote of (i) at least a majority of the Directors of Acquired Fund (including a majority of those Directors who are not “interested persons” of Acquired Fund, as defined in Section 2(a)(19) of the 1940 Act), (ii) holders of a majority of the outstanding common shares of Acquired Fund, (iii) a majority of the Trustees of Acquiring Fund (including a majority |
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of those Trustees who are not “interested persons” of Acquiring Fund, as defined in Section 2(a)(19) of the 1940 Act), and (iv) Acquiring Fund, as the sole Member of Merger Sub. | |||
(b) | No demands for appraisal shall have been, or none may still be, made in accordance with DGCL Section 262 or if such demands for appraisal have been made or may still be made in accordance with Delaware law the Boards of the Acquired Fund and Acquiring Fund have determined to continue the Reorganization. | ||
(c) | That Acquired Fund will have furnished to Acquiring Fund a statement of Acquired Fund’s assets and liabilities, with values determined as provided in Section 2 of this Agreement, together with a list of Investments with their respective tax costs, all as of the Valuation Date, certified on Acquired Fund’s behalf by Acquired Fund’s President (or any Vice President) and Treasurer and a certificate of both such officers, dated the Closing Date, to the effect that as of the Valuation Date and as of the Closing Date there has been no material adverse change in the financial position of Acquired Fund since December 31, 2008 other than changes in the Investments and other assets and properties since that date or changes in the market value of the Investments and other assets of Acquired Fund or changes due to dividends paid or losses from operations. | ||
(d) | That Acquired Fund will have furnished to Acquiring Fund a statement, dated the Closing Date, signed on behalf of Acquired Fund by Acquired Fund’s President (or any Vice President) and Treasurer certifying that as of the Valuation Date and as of the Closing Date all representations and warranties of Acquired Fund made in this Agreement are true and correct in all material respects as if made at and as of such dates, and that Acquired Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or before each of such dates. | ||
(e) | That there will not be any material litigation pending with respect to the matters contemplated by this Agreement. | ||
(f) | That Acquiring Fund will have received an opinion of Ropes & Gray LLP dated the Closing Date, in form satisfactory to Acquiring Fund, to the effect that (i) Acquired Fund is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and, to the knowledge of such counsel, is not required to qualify to do business as a foreign corporation in any jurisdiction except as may be required by state securities or blue sky laws, (ii) this Agreement has been duly authorized, executed, and delivered by Acquired Fund and, assuming that the Registration Statement, the Prospectus and the Proxy Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and assuming due authorization, execution and delivery of this Agreement by Acquiring Fund and Merger Sub, is a valid and binding obligation of Acquired Fund, (iii) Acquired Fund has power to sell, assign, convey, transfer and deliver the assets contemplated hereby and, upon consummation of the transactions contemplated hereby in accordance with the terms of this Agreement, Acquired Fund will have duly sold, assigned, conveyed, transferred and delivered such assets to Acquiring Fund, (iv) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate Acquired Fund’s Amended and Restated Certificate or By-laws or any provision of any agreement known to such counsel to which Acquired Fund is a party or by which it is bound, it being understood that with respect to investment restrictions as contained in Acquired Fund’s Amended and Restated Certificate, By-laws, then-current prospectus or the Registration Statement, such counsel may rely upon a certificate of an officer of Acquired Fund’s whose responsibility it is to advise Acquired Fund with respect to such matters, (v) no consent, approval, authorization or order of any court or governmental authority is required for the consummation by Acquired Fund of the transactions contemplated hereby, except such as have been obtained under the 1933 Act, the 1934 Act, the 1940 Act and such as may be required under state securities or blue sky laws and the H-S-R Act, and (vi) such other matters as Acquiring Fund may reasonably deem necessary or desirable. |
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(g) | That Acquiring Fund will have received an opinion of Ropes & Gray LLP dated as of the Closing Date (which opinion will be based upon certain factual representations and subject to certain qualifications) reasonably satisfactory to the Acquiring Fund and substantially to the effect that, on the basis of the existing provisions of the Code, current administrative rules and court decisions, generally for federal income tax purposes: (i) the transactions contemplated by this Agreement will constitute a reorganization within the meaning of Section 368(a) of the Code and Acquired Fund and Acquiring Fund will each be a “party to a reorganization” within the meaning of the Code; (ii) no gain or loss will be recognized by the Acquiring Fund upon the Merger or Liquidation; (iii) the basis of the Assets (defined as all Investments and other assets of the Acquired Fund) in the hands of Acquiring Fund will be the same as the basis of such Assets in the hands of the Acquired Fund immediately prior to the Merger; (iv) the holding periods of the Assets in the hands of Acquiring Fund will include the periods during which such Assets were held by the Acquired Fund; (v) no gain or loss will be recognized by the Acquired Fund upon the Merger or Liquidation; (vi) no gain or loss will be recognized by Acquired Fund stockholders on the conversion of shares of Acquired Common Stock into Merger Shares (except to the extent an Acquired Fund stockholder receives cash in lieu of fractional Merger Shares); (vii) the aggregate basis of Merger Shares received by Acquired Fund stockholders will be the same as the aggregate basis of shares of Acquired Common Stock converted into such Merger Shares (except to the extent reduced by the portion of the adjusted basis in shares of Acquired Common Stock that is allocable to any fractional Merger Shares for which ash in lieu of such fractional Merger Shares is received); (viii) the holding periods of Merger Shares received by Acquired Fund stockholders will include the holding periods of shares of Acquired Common Stock converted into such Merger Shares, provided that at the time of the Merger, shares of Acquired Common Stock are held by such stockholders as capital assets; and (ix) the Acquiring Fund will succeed to and take into account the items of the Acquired Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383, and 384 of the Code and the regulations thereunder (the “Tax Opinion”). The Tax Opinion will not express any view with respect to the effect of the transactions contemplated by this Agreement on any transferred asset as to which any unrealized gain or loss is required to be recognized under U.S. federal income tax principles (1) at the end of a taxable year or (ii) on the termination or transfer thereof without reference to whether such a termination or transfer would otherwise be a taxable transaction. The Tax Opinion may state that it is not a guarantee that the tax consequences of the transactions contemplated by this Agreement will be as described in such opinion. Notwithstanding anything herein to the contrary, neither Acquiring Fund nor Acquired Fund may waive the condition set forth in this subsection 8(g). | ||
(h) | That the assets of Acquired Fund to be acquired by Acquiring Fund will include no assets which Acquiring Fund, by reason of charter limitations or of investment restrictions disclosed in the Registration Statement in effect on the Closing Date, may not properly acquire. | ||
(i) | That the Registration Statement will have become effective under the 1933 Act, and no stop order suspending such effectiveness will have been instituted or, to the knowledge of Acquiring Fund, threatened by the Commission. | ||
(j) | That Acquiring Fund and Merger Sub will have received from the Commission, any relevant state securities administrator, the Federal Trade Commission (the “FTC”) and the Department of Justice (the “Department”) such order or orders as Ropes & Gray LLP deems reasonably necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act, any applicable state securities or blue sky laws and the H-S-R Act in connection with the transactions contemplated hereby and that all such orders will be in full force and effect. | ||
(k) | That all actions taken by or on behalf of Acquired Fund and Merger Sub in connection with the transactions contemplated by this Agreement and all documents incidental thereto will be satisfactory in form and substance to Acquiring Fund, Merger Sub and Ropes & Gray LLP. |
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(l) | That, before the Closing Date, Acquired Fund will have declared a dividend or dividends which, together with all previous such dividends, will have the effect of distributing to the shareholders of Acquired Fund (i) all of the excess of (X) Acquired Fund’s investment interest excludable from gross income under Section 103(a) of the Code over (Y) Acquired Fund’s deductions disallowed under Sections 265 and 171(a)(2) of the Code, (ii) all of Acquired Fund’s investment company taxable income (as defined in Section 852 of the Code) (computed in each case without regard to any deduction for dividends paid), and (iii) all of its net capital gain (as defined in Section 1222 of the Code) realized (after reduction by any capital loss carryover), in each case for both the current taxable year of the Acquired Fund (which will end at the Effective Time) and immediately preceding taxable year of the Acquired Fund. | ||
(m) | That Acquired Fund’s custodian will have delivered to Acquiring Fund a certificate identifying all of the assets of Acquired Fund held by such custodian as of the Valuation Date. | ||
(n) | That Acquired Fund’s transfer agent will have provided to Acquiring Fund (i) the originals or true copies of all of the records of Acquired Fund in the possession of such transfer agent as of the Closing Date, (ii) a certificate setting forth the number of shares of Acquired Fund outstanding as of the Valuation Date, and (iii) the name and address of each holder of record of any such shares and the number of shares held of record by each such stockholder. | ||
(o) | If at any time the Acquiring Fund and Merger Sub shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, perfect or confirm of record in the Surviving Company the title to any property or right of the Acquired Fund, or otherwise to carry out the provisions hereof, the proper representatives of the Acquired Fund as of the Effective Time shall execute and deliver any and all proper deeds, assignments and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right in the Surviving Company, and otherwise to carry out the provisions hereof. | ||
(p) | That the Merger Shares shall have been accepted for listing by the New York Stock Exchange. | ||
(r) | The Acquiring Fund will have received an opinion of Mortis, Nichols, Arsht & Tunnell LLP in such form and addressing such mattes as the Funds may mutually agree. |
9. | Conditions to Acquired Fund’s obligations. | |
The obligations of Acquired Fund hereunder will be subject to the following conditions: |
(a) | That this Agreement will have been adopted and the transactions contemplated hereby will have been approved by the affirmative vote of (i) at least a majority of the Directors of Acquired Fund (including a majority of those Directors who are not “interested persons” of Acquired Fund, as defined in Section 2(a)(19) of the 1940 Act), (ii) holders of a majority of the outstanding shares of Acquired Fund, (iii) a majority of the Trustees of Acquiring Fund (including a majority of those Trustees who are not “interested persons” of Acquiring Fund, as defined in Section 2(a)(19) of the 1940 Act), and (iv) Acquiring Fund, as the sole Member of Merger Sub. | ||
(b) | No demands for appraisal shall have been, or none may still be, made in accordance with DGCL Section 262 or if such demands for appraisal have been made or may still be made in accordance with Delaware law the Boards of the Acquired Fund and Acquiring Fund have determined to waive this condition and continue the Reorganization. | ||
(c) | That Acquiring Fund will have furnished to Acquired Fund a statement of Acquiring Fund’s assets and liabilities, together with a list of portfolio holdings with values determined as provided in Section 2 of this Agreement, all as of the Valuation Date, certified on behalf of Acquiring Fund by Acquiring Fund’s President (or any Vice President) and Treasurer and a certificate of both such officers, dated the Closing Date, to the effect that as of the Valuation Date and as of the Closing Date there has been no material adverse change in the financial position of Acquiring Fund since December 31, 2008, other than changes in its portfolio securities since that date, changes in the market value of its portfolio securities or changes due to dividends paid or losses from operations. |
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(d) | That Acquiring Fund will have furnished to Acquired Fund a statement, dated the Closing Date, signed on behalf of Acquiring Fund by Acquiring Fund’s President (or any Vice President) and Treasurer certifying that as of the Valuation Date and as of the Closing Date all representations and warranties of Acquiring Fund made in this Agreement are true and correct in all material respects as if made at and as of such dates, and that Acquiring Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to each of such dates. | ||
(e) | That there will not be any material litigation pending or threatened with respect to the matters contemplated by this Agreement. | ||
(f) | That Acquired Fund will have received an opinion of Ropes & Gray LLP, in form satisfactory to Acquired Fund and dated the Closing Date, to the effect that (i) Acquiring Fund is a statutory trust duly established, validly existing and in good standing in conformity with the laws of the State of Delaware and, to the knowledge of such counsel, is not required to qualify to do business as a foreign association in any jurisdiction except as may be required by state securities or blue sky laws, (ii) Merger Sub is a limited liability company duly formed, validly existing and in good standing in conformity with the laws of the State of Delaware, and, to the knowledge of such counsel, is not required to qualify to do business as a foreign association in any jurisdiction except as may be required by state securities or blue sky laws, (iii) this Agreement has been duly authorized, executed and delivered by Acquiring Fund and by the Member on behalf of Merger Sub, and, assuming that the Prospectus, the Registration Statement and the Proxy Statements comply with the 1933 Act, the 1934 Act and the 1940 Act and assuming due authorization, execution and delivery of this Agreement by Acquired Fund, is a valid and binding obligation of Acquiring Fund and Merger Sub, (iv) the Merger Shares to be delivered to Acquired Fund as provided for by this Agreement are duly authorized and upon such delivery will be validly issued and will be fully paid and nonassessable (except as set forth in the Registration Statement) by Acquiring Fund and no shareholder of Acquiring Fund has any preemptive right to subscription or purchase in respect thereof, (v) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate Acquiring Fund’s Agreement and Declaration of Trust, as amended, or By-laws, or Merger Sub’s Certificate of Formation or LLC Agreement, or any provision of any agreement known to such counsel to which Acquiring Fund and/or Merger Sub is a party or by which it is bound, it being understood that with respect to investment restrictions as contained in Acquiring Fund’s Agreement and Declaration of Trust, as amended, By-laws, or the Registration Statement, or Merger Sub’s Certificate of Formation or LLC Agreement, such counsel may rely upon a certificate of an officer of Acquiring Fund and Merger Sub whose responsibility it is to advise Acquiring Fund and Merger Sub with respect to such matters, (vi) no consent, approval, authorization or order of any court or governmental authority is required for the consummation by Acquiring Fund or Merger Sub of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities or blue sky laws and the H-S-R Act, and (vii) the Registration Statement has become effective under the 1933 Act, and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act. | ||
(g) | That Acquired Fund will have received a Tax Opinion of Ropes & Gray LLP dated as of the Closing Date (the substance of which is described above in Section 8(g)) and reasonably satisfactory to the Acquired Fund. The Tax Opinion will not express any view with respect to the effect of the transactions contemplated by this Agreement on any transferred asset as to which any unrealized gain or loss is required to be recognized under U.S. federal income tax principles (1) at the end of a taxable year or (ii) on the termination or transfer thereof without reference to whether such a termination or transfer would otherwise be a taxable transaction. The Tax Opinion may state that it is based on certain factual representations and subject to certain qualifications. The Tax Opinion may also state that it is not a guarantee that the tax consequences of the transactions contemplated by this Agreement will be as described in such opinion. Notwithstanding anything herein to the contrary, neither Acquiring Fund nor Acquired Fund may waive the condition set forth in this subsection 9(g). |
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(h) | That all proceedings taken by or on behalf of Acquiring Fund and Merger Sub in connection with the transactions contemplated by this Agreement and all documents incidental thereto will be satisfactory in form and substance to Acquired Fund and Ropes & Gray LLP. | ||
(i) | That the Registration Statement will have become effective under the 1933 Act and no stop order suspending such effectiveness will have been instituted or, to the knowledge of Acquiring Fund, threatened by the Commission. | ||
(j) | That Acquired Fund will have received from the Commission, any relevant state securities administrator, the FTC and the Department such order or orders as Ropes & Gray LLP deems reasonably necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act, any applicable state securities or blue sky laws and the H-S-R Act in connection with the transactions contemplated hereby and that all such orders will be in full force and effect. | ||
(k) | That the Merger Shares shall have been accepted for listing by the New York Stock Exchange. | ||
(l) | The Acquired Fund will have received an opinion of Morris, Nichols, Arsht & Tunnell LLP in such form and addressing such matters as the Funds may mutually agree. |
10. | Indemnification. |
(a) | Acquired Fund will indemnify and hold harmless, out of the assets of Acquired Fund but no other assets, Acquiring Fund, its trustees and its officers (for purposes of this subparagraph, the “Indemnified Parties”) against any and all expenses, losses, claims, damages and liabilities at any time imposed upon or reasonably incurred by any one or more of the Indemnified Parties in connection with, arising out of, or resulting from any claim, action, suit or proceeding in which any one or more of the Indemnified Parties may be involved or with which any one or more of the Indemnified Parties may be threatened by reason of any untrue statement or alleged untrue statement of a material fact relating to Acquired Fund contained in the Registration Statement, the Prospectus, the Proxy Statement or any amendment or supplement to any of the foregoing, or arising out of or based upon the omission or alleged omission to state in any of the foregoing a material fact relating to Acquired Fund required to be stated therein or necessary to make the statements relating to Acquired Fund therein not misleading, including, without limitation, any amounts paid by any one or more of the Indemnified Parties in a reasonable compromise or settlement of any such claim, action, suit or proceeding, or threatened claim, action, suit or proceeding made with the consent of Acquired Fund. The Indemnified Parties will notify Acquired Fund in writing within ten days after the receipt by any one or more of the Indemnified Parties of any notice of legal process or any suit brought against or claim made against such Indemnified Party as to any matters covered by this Section 10(a). Acquired Fund will be entitled to participate at its own expense in the defense of any claim, action, suit or proceeding covered by this Section 10(a), or, if it so elects, to assume at its expense by counsel satisfactory to the Indemnified Parties the defense of any such claim, action, suit or proceeding, and if Acquired Fund elects to assume such defense, the Indemnified Parties will be entitled to participate in the defense of any such claim, action, suit or proceeding at their expense. Acquired Fund’s obligation under this Section 10(a) to indemnify and hold harmless the Indemnified Parties will constitute a guarantee of payment so that Acquired Fund will pay in the first instance any expenses, losses, claims, damages and liabilities required to be paid by it under this Section 10(a) without the necessity of the Indemnified Parties’ first paying the same. | ||
(b) | Acquiring Fund will indemnify and hold harmless, out of the assets of Acquiring Fund but no other assets, Acquired Fund, its directors and its officers (for purposes of this subparagraph, the “Indemnified Parties”) against any and all expenses, losses, claims, damages and liabilities at any time imposed upon or reasonably incurred by any one or more of the Indemnified Parties in connection with, arising out of, or resulting from any claim, action, suit or proceeding in which any one or more of the Indemnified Parties may be involved or with which any one or more of the Indemnified Parties may be threatened by reason of any untrue statement or alleged untrue |
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statement of a material fact relating to Acquiring Fund contained in the Registration Statement, the Prospectuses, the Proxy Statement, or any amendment or supplement to any thereof, or arising out of, or based upon, the omission or alleged omission to state in any of the foregoing a material fact relating to Acquiring Fund required to be stated therein or necessary to make the statements relating to Acquiring Fund therein not misleading, including without limitation any amounts paid by any one or more of the Indemnified Parties in a reasonable compromise or settlement of any such claim, action, suit or proceeding, or threatened claim, action, suit or proceeding made with the consent of Acquiring Fund. The Indemnified Parties will notify Acquiring Fund in writing within ten days after the receipt by any one or more of the Indemnified Parties of any notice of legal process or any suit brought against or claim made against such Indemnified Party as to any matters covered by this Section 10(b). Acquiring Fund will be entitled to participate at its own expense in the defense of any claim, action, suit or proceeding covered by this Section 10(b), or, if it so elects, to assume at its expense by counsel satisfactory to the Indemnified Parties the defense of any such claim, action, suit or proceeding, and, if Acquiring Fund elects to assume such defense, the Indemnified Parties will be entitled to participate in the defense of any such claim, action, suit or proceeding at their own expense. Acquiring Fund’s obligation under this Section 10(b) to indemnify and hold harmless the Indemnified Parties will constitute a guarantee of payment so that Acquiring Fund will pay in the first instance any expenses, losses, claims, damages and liabilities required to be paid by it under this Section 10(b) without the necessity of the Indemnified Parties’ first paying the same. |
11. | No broker, etc. | |
Each of Acquired Fund and Acquiring Fund represents that there is no person who has dealt with it who by reason of such dealings is entitled to any broker’s or finder’s or other similar fee or commission arising out of the transactions contemplated by this Agreement. | ||
12. | Rule 145. | |
Pursuant to Rule 145 under the 1933 Act, Acquiring Fund will, in connection with the issuance of any Merger Shares to any person who at the time of the transaction contemplated hereby is deemed to be an affiliate of a party to the transaction pursuant to Rule 145(c), cause to be affixed upon the certificates issued to such person a legend as follows: | ||
“THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO HIGHLAND CREDIT STRATEGIES FUND [OR ITS PRINCIPAL UNDERWRITER] UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO HIGHLAND CREDIT STRATEGIES FUND SUCH REGISTRATION IS NOT REQUIRED.” | ||
and, further, Acquiring Fund will issue stop transfer instructions to Acquiring Fund’s transfer agent with respect to such shares. Acquired Fund will provide Acquiring Fund on the Closing Date with the name of any Acquired Fund shareholder who is to the knowledge of Acquired Fund an affiliate of Acquired Fund on such date. | ||
13. | Covenants, etc. deemed material. | |
All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement will be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf. |
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14. | Sole agreement. | |
This Agreement supersedes all previous correspondence and oral communications between the parties regarding the subject matter hereof, constitutes the only understanding with respect to such subject matter, and will be construed in accordance with and governed by the laws of the State of Delaware. | ||
15. | Agreement and declaration of trust of Acquiring Fund. | |
Notice is hereby given that this instrument is adopted on behalf of Acquiring Fund’s trustees solely in their capacities as trustees, and not individually, and that Acquiring Fund’s obligations under this instrument are not binding on or enforceable against any of its trustees, officers, or shareholders but are only binding on and enforceable against its property. Acquired Fund, in asserting any rights or claims under this Agreement, shall look only to Acquiring Fund’s property in settlement of such rights or claims and not to such trustees, officers, or shareholders. | ||
16. | Amendment. | |
The parties hereto by mutual consent of their respective Boards of Directors/Trustees may amend, modify or supplement this Agreement in such manner as may be agreed upon by them in writing, at any time prior to the Effective Time, including after it is approved by stockholders of the Acquired Fund, to the extent permitted by applicable law. | ||
17. | Termination. | |
This Agreement may be terminated and the transactions herein provided for abandoned at any time, whether before or after approval of this Agreement by the stockholders of the Acquired Fund, by action of the Board of Directors/Trustees of either Fund, if the applicable Board for such Fund determines for any reason that the consummation of the transactions provided for herein would for any reason be inadvisable or not in the best interests of such Fund or its shareholders or if demands for appraisal have been made or may still be made in accordance with Delaware law. | ||
18. | Miscellaneous. | |
This Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. |
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HIGHLAND CREDIT STRATEGIES FUND | ||
By: | ||
Name: | ||
Title: | ||
HIGHLAND DISTRESSED OPPORTUNITIES, INC. | ||
By: | ||
Name: | ||
Title: |
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HCF ACQUISITION LLC | ||||
By: | HIGHLAND CREDIT STRATEGIES FUND, the sole member of HCF Acquisition LLC | |||
By: | ||||
Name: | ||||
Title: |
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Illiquid Securities | Certain of a Fund’s 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. | |
Senior Loans | Senior loans hold the most senior position in the capital structure of a business entity, are typically secured with specific collateral and have a claim on the general assets of the borrower that is senior to that held by subordinated debtholders and stockholders of the borrower. The proceeds of senior loans primarily are used to finance leveraged buyouts, recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser extent, to finance internal growth and for other corporate purposes. Senior loans typically have rates of interest which are redetermined either daily, monthly, quarterly or semi-annually by reference to a base lending rate, plus a premium. These base lending rates generally are LIBOR, the prime rate offered by one or more major United States banks (Prime Rate) or the certificate of deposit (CD) rate or other base lending rates used by commercial lenders. | |
Loans and other corporate debt obligations are subject to the risk of non-payment of scheduled interest or principal. Such non-payment would result in a reduction of income to a Fund, a reduction in the value of the investment and a potential decrease in the NAV of a Fund. There can be no assurance that the liquidation of any collateral securing a senior loan would satisfy a borrower’s obligation in the event of non-payment of scheduled interest or principal payments, or that such collateral could be readily liquidated. In the event of bankruptcy of a borrower, a Fund could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing a senior loan. To the extent that a senior loan is collateralized by stock in the borrower or its subsidiaries, such stock may lose all or substantially all of its value in the event of the bankruptcy of a borrower. Some senior loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate senior loans to presently existing or future indebtedness of the borrower or take other action detrimental to the holders of senior loans including, in certain circumstances, invalidating such senior loans or causing interest previously paid to be refunded to the borrower. If interest were required to be refunded, it could negatively affect a Fund’s performance. To the extent a senior loan is subordinated in the capital structure, it will have characteristics similar to other subordinated debtholders, including a greater risk of nonpayment of interest or principal. | ||
Many loans in which the Fund may invest, and the issuers of such loans, may not be rated by a rating agency, will not be registered with the SEC or any state securities commission and will not be listed on any national securities exchange. The amount of public information available with respect to issuers of senior loans will generally be less extensive than that available for issuers of registered or exchange listed securities. In evaluating the creditworthiness of borrowers, the Adviser will consider, and may rely in part, on analyses performed by others. The Adviser does not view ratings as the determinative factor in its investment decisions and relies more upon its credit analysis abilities than upon ratings. Borrowers may have outstanding debt obligations that are rated below investment grade by a rating agency. A high percentage of senior loans held by a Fund may be rated, if at all, below investment grade by independent rating agencies. In the event senior loans are not rated, they are likely to be the equivalent of below investment grade quality. Debt securities which are unsecured and rated below investment grade (i.e., Ba and below by Moody’s or BB and below by S&P) and comparable unrated bonds, are viewed by the rating agencies as having speculative characteristics and are commonly known as “junk bonds.” A description of the ratings of corporate bonds by Moody’s and S&P included as Appendix A to the Statement of Additional Information. Because senior loans are senior in a borrower’s capital structure and are often secured by specific collateral, the Adviser believes that senior loans have more favorable loss recovery rates as compared to most other types of below investment grade debt obligations. However, there can be no assurance that a |
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Fund’s actual loss recovery experience will be consistent with the Adviser’s prior experience or that a Fund’s senior loans will achieve any specific loss recovery rates. | ||
No active trading market may exist for many senior loans, and some senior loans may be subject to restrictions on resale. A secondary market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may impair the ability to realize full value on the disposition of an illiquid senior loan, and cause a material decline in a Fund’s NAV. | ||
Use of Agents. Senior loans generally are arranged through private negotiations between a borrower and a group of financial institutions initially represented by an agent who is usually one of the originating lenders. In larger transactions, it is common to have several agents. Generally, however, only one such agent has primary responsibility for ongoing administration of a senior loan. Agents are typically paid fees by the borrower for their services. The agent is primarily responsible for negotiating the credit agreement which establishes the terms and conditions of the senior loan and the rights of the borrower and the lenders. The agent is also responsible for monitoring collateral and for exercising remedies available to the lenders such as foreclosure upon collateral. | ||
Credit agreements may provide for the termination of the agent’s status in the event that it fails to act as required under the relevant credit agreement, becomes insolvent, enters FDIC receivership or, if not FDIC insured, enters into bankruptcy. Should such an agent, lender or assignor with respect to an assignment inter-positioned between a Fund and the borrower become insolvent or enter FDIC receivership or bankruptcy, any interest in the senior loan of such person and any loan payment held by such person for the benefit of a Fund should not be included in such person’s or entity’s bankruptcy estate. If, however, any such amount were included in such person’s or entity’s bankruptcy estate, a Fund would incur certain costs and delays in realizing payment or could suffer a loss of principal or interest. In this event, a Fund could experience a decrease in NAV. | ||
Form of Investment. A Fund’s investments in senior loans may take one of several forms, including acting as one of the group of lenders originating a senior loan, purchasing an assignment of a portion of a senior loan from a third party or acquiring a participation in a senior loan. When a Fund is a member of the originating syndicate for a senior loan, it may share in a fee paid to the syndicate. When a Fund acquires a participation in, or an assignment of, a senior loan, it may pay a fee to, or forego a portion of interest payments from, the lender selling the participation or assignment. A Fund will act as lender, or purchase an assignment or participation, with respect to a senior loan only if the agent is determined by the Adviser to be creditworthy. | ||
Original Lender. When a Fund is one of the original lenders, it will have a direct contractual relationship with the borrower and can enforce compliance by the borrower with terms of the credit agreement. It also may have negotiated rights with respect to any funds acquired by other lenders through set-off. Original lenders also negotiate voting and consent rights under the credit agreement. Actions subject to lender vote or consent generally require the vote or consent of the majority of the holders of some specified percentage of the outstanding principal amount of the senior loan. Certain decisions, such as reducing the interest rate, or extending the maturity of a senior loan, or releasing collateral securing a senior loan, among others, frequently require the unanimous vote or consent of all lenders affected. | ||
Assignments. When a Fund is a purchaser of an assignment, it typically succeeds to all the rights and obligations under the credit agreement of the assigning lender and becomes a lender under the credit agreement with the same rights and obligations as the assigning lender. Assignments are, however, arranged through private negotiations between potential assignees and potential assignors, and the rights and obligations acquired by the purchaser of an assignment may be more limited than those held by the assigning lender. | ||
Participations. A Fund may also invest in participations in senior loans. The rights of a Fund when it acquires a participation are likely to be more limited than the rights of an original lender or an |
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investor who acquired an assignment. Participation by a Fund in a lender’s portion of a senior loan typically means that the Fund has only a contractual relationship with the lender, not with the borrower. This means that the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the participation and only upon receipt by the lender of payments from the borrower. | ||
With a participation, a Fund will have no rights to enforce compliance by the borrower with the terms of the credit agreement or any rights with respect to any funds acquired by other lenders through setoff against the borrower. In addition, a Fund may not directly benefit from the collateral supporting the senior loan because it may be treated as a general creditor of the lender instead of a senior secured creditor of the borrower. As a result, the Fund may be subject to delays, expenses and risks that are greater than those that exist when the Fund is the original lender or holds an assignment. This means the Fund must assume the credit risk of both the borrower and the lender selling the participation. A Fund will consider a purchase of participations only in those situations where the Adviser considers the participating lender to be creditworthy. | ||
In the event of a bankruptcy or insolvency of a borrower, the obligation of the borrower to repay the senior loan may be subject to certain defenses that can be asserted by such borrower against a Fund as a result of improper conduct of the lender selling the participation. A participation in a senior loan will be deemed to be a senior loan for the purposes of a Fund’s investment objectives and policies. | ||
Investing in senior loans involves investment risk. Some borrowers default on their senior loan payments. A Fund attempts to manage this credit risk through multiple different investments within the portfolio and ongoing analysis and monitoring of borrowers. A Fund also is subject to market, liquidity, interest rate and other risks. | ||
Second Lien Loans | Second lien loans are loans made by public and private corporations and other non-governmental entities and issuers for a variety of purposes. Second lien loans are second in right of payment to one or more senior loans of the related borrower. Second lien loans typically are secured by a second priority security interest or lien to or on specified collateral securing the borrower’s obligation under the loan and typically have similar protections and rights as senior loans. Second lien loans are not (and by their terms cannot) become subordinate in right of payment to any obligation of the related borrower other than senior loans of such borrower. Second lien loans, like senior loans, typically have adjustable floating rate interest payments. Because second lien loans are second to senior loans, they present a greater degree of investment risk but often pay interest at higher rates reflecting this additional risk. Such investments generally are of below investment grade quality. Other than their subordinated status, second lien loans have many characteristics and risks similar to senior loans discussed above. In addition, second lien loans of below investment grade quality share many of the risk characteristics of non-investment grade securities. As in the case of senior loans, a Fund may purchase interests in second lien loans through assignments or participations. | |
Second lien loans are subject to the same risks associated with investment in senior loans and non-investment grade securities. Because second lien loans are second in right of payment to one or more senior loans of the related borrower, they therefore are subject to additional risk that the cash flow of the borrower and any property securing the loan may be insufficient to meet scheduled payments after giving effect to the senior secured obligations of the borrower. Second lien loans are also expected to have greater price volatility than senior loans and may be less liquid. There is also a possibility that originators will not be able to sell participations in second lien loans, which would create greater credit risk exposure. | ||
The risks associated with second lien loans are higher than the risks of loans with first priority over the collateral. In the event of default on a second lien loan, the first priority lien holder has first claim to the underlying collateral of the loan. It is possible that no collateral value would remain for the second priority lien holder, resulting in a loss to a Fund. |
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Other Secured Loans | Secured loans other than senior loans and second lien loans are made by public and private corporations and other non-governmental entities and issuers for a variety of purposes. Such secured loans may rank lower in right of payment to one or more senior loans and second lien loans of the borrower. Such secured loans typically are secured by a lower priority security interest or lien to or on specified collateral securing the borrower’s obligation under the loan, and typically have more subordinated protections and rights than senior loans and second lien loans. Secured loans may become subordinated in right of payment to more senior obligations of the borrower issued in the future. Such secured loans may have fixed or adjustable floating rate interest payments. Because such secured loans may rank lower as to right of payment than senior loans and second lien loans of the borrower, they may present a greater degree of investment risk than senior loans and second lien loans but often pay interest at higher rates reflecting this additional risk. Such investments generally are of below investment grade quality. Other than their more subordinated status, such investments have many characteristics and risks similar to senior loans and second lien loans discussed above. In addition, secured loans of below investment grade quality share many of the risk characteristics of non-investment grade securities. As in the case of senior loans and second lien loans, a Fund may purchase interests in other secured loans through assignments or participations. Other secured loans are subject to the same risks associated with investment in senior loans, second lien loans and non-investment grade securities. Because such loans, however, may rank lower in right of payment to senior loans and second lien loans of the borrower, they may be subject to additional risk that the cash flow of the borrower and any property securing the loan may be insufficient to repay the scheduled payments after giving effect to more senior secured obligations of the borrower. Such secured loans are also expected to have greater price volatility than senior loans and second lien loans and may be less liquid. There is also a possibility that originators will not be able to sell participations in other secured loans, which would create greater credit risk exposure. | |
Unsecured Loans | Unsecured loans are loans made by public and private corporations and other non-governmental entities and issuers for a variety of purposes. Unsecured loans generally have lower priority in right of payment compared to holders of secured debt of the borrower. Unsecured loans are not secured by a security interest or lien to or on specified collateral securing the borrower’s obligation under the loan. Unsecured loans by their terms may be or may become subordinate in right of payment to other obligations of the borrower, including senior loans, second lien loans and other secured loans. Unsecured loans may have fixed or adjustable floating rate interest payments. Because unsecured loans are subordinate to the secured debt of the borrower, they present a greater degree of investment risk but often pay interest at higher rates reflecting this additional risk. Such investments generally are of non-investment grade quality. Other than their subordinated and unsecured status, such investments have many characteristics and risks similar to senior loans, second lien loans and other secured loans discussed above. In addition, unsecured loans of non-investment grade quality share many of the risk characteristics of non-investment grade securities. As in the case of secured loans, a Fund may purchase interests in unsecured loans through assignments or participations. | |
Unsecured loans are subject to the same risks associated with investment in senior loans, second lien loans, other secured loans and non-investment grade securities. However, because unsecured loans rank lower in right of payment to any secured obligations of the borrower, they may be subject to additional risk that the cash flow of the borrower and available assets may be insufficient to meet scheduled payments after giving effect to the secured obligations of the borrower. Unsecured loans are also expected to have greater price volatility than secured loans and may be less liquid. There is also a possibility that loan originators will not be able to sell participations in unsecured loans, which would create greater credit risk exposure. | ||
Investment Grade Securities | A Fund may invest in a wide variety of bonds that are rated or determined by the Adviser to be of investment grade quality of varying maturities issued by U.S. corporations and other business entities. Bonds are fixed or variable rate debt obligations, including bills, notes, debentures, money market instruments and similar instruments and securities. Bonds generally are used by corporations and other issuers to borrow money from investors for a variety of business purposes. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain bonds are “perpetual” in that they have no maturity date. Some investment |
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grade securities, such as zero coupon bonds, do not pay current interest, but are sold at a discount from their face values. Although more creditworthy and generally less risky than non-investment grade securities, investment grade securities are still subject to market and credit risk. Market risk relates to changes in a security’s value as a result of interest rate changes generally. Investment grade securities have varying levels of sensitivity to changes in interest rates and varying degrees of credit quality. In general, bond prices rise when interest rates fall, and fall when interest rates rise. Longer-term bonds and zero coupon bonds are generally more sensitive to interest rate changes. Credit risk relates to the ability of the issuer to make payments of principal and interest. The values of investment grade securities like those of other debt securities may be affected by changes in the credit rating or financial condition of an issuer. Investment grade securities are generally considered medium-and high-quality securities. Some, however, may possess speculative characteristics, and may be more sensitive to economic changes and to changes in the financial condition of issuers. The market prices of investment grade securities in the lowest investment grade categories may fluctuate more than higher-quality securities and may decline significantly in periods of general or regional economic difficulty. Like non-investment grade securities, such investment grade securities in the lowest investment grade categories may be thinly traded, making them difficult to sell promptly at an acceptable price. | ||
Non-Investment Grade Securities | A Fund may invest in securities rated below investment grade, such as those rated Ba or lower by Moody’s and BB or lower by S&P or securities comparably rated by other rating agencies or in unrated securities determined by Highland to be of comparable quality. Securities rated Ba by Moody’s are judged to have speculative elements, their future cannot be considered as well assured and often the protection of interest and principal payments may be very moderate. Securities rated BB by S&P are regarded as having predominantly speculative characteristics and, while such obligations have less near-term vulnerability to default than other speculative grade debt, they face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. Securities rated C are regarded as having extremely poor prospects of ever attaining any real investment standing. Securities rated D are in default and the payment of interest and/or repayment of principal is in arrears. The Acquiring Fund may purchase securities rated as low as D. When Highland believes it to be in the best interests of a Fund’s shareholders, a Fund will reduce its investment in lower grade securities. | |
Lower grade securities, though high yielding, are characterized by high risk. They may be subject to certain risks with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated securities. The secondary market for lower grade securities may be less liquid than that of higher rated securities. Adverse conditions could make it difficult at times for a Fund to sell certain securities or could result in lower prices than those used in calculating the Fund’s NAV. | ||
The prices of debt securities generally are inversely related to interest rate changes; however, the price volatility caused by fluctuating interest rates of securities also is inversely related to the coupon of such securities. Accordingly, lower grade securities may be relatively less sensitive to interest rate changes than higher quality securities of comparable maturity, because of their higher coupon. This higher coupon is what the investor receives in return for bearing greater credit risk. The higher credit risk associated with lower grade securities potentially can have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity, and will be a substantial factor in a Fund’s relative share price volatility. | ||
Lower grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could disrupt severely the market for such securities and may have an adverse impact on the value of such securities. In addition, it is likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon and increase the incidence of default for such securities. | ||
The ratings of Moody’s and S&P and the other rating agencies represent their opinions as to the quality of the obligations which they undertake to rate. Ratings are relative and subjective and, |
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although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Although these ratings may be an initial criterion for selection of portfolio investments, Highland also will independently evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that a Fund invests in lower grade securities that have not been rated by a rating agency, the Fund’s ability to achieve its investment objectives will be more dependent on Highland’s credit analysis than would be the case when the Fund invests in rated securities. | ||
Asset-Backed Securities | Asset-backed securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in an underlying pool of assets, or as debt instruments, which are also known as collateralized obligations, and are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. Credit card receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and federal consumer credit laws which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. Therefore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities. | |
Royalty Securitizations | Companies holding rights to intellectual property may create bankruptcy remote special purpose entities whose underlying assets are royalty license agreements and intellectual property rights related to a product. The Acquiring Fund will invest in these types of investments that are related to pharmaceutical royalties that are secured by rights related to one or more drugs. The Acquiring Fund may, however, invest in royalty streams related to other industries. | |
In a typical structure in the pharmaceutical industry, a small pharmaceutical company has developed a molecule and licensed the commercial opportunity to a large-cap pharmaceutical company in exchange for payments upon completion of certain milestones (for example, FDA approval) and a percentage royalty upon commercialization of the product. After completion of the milestone, the small pharmaceutical company sells a senior secured financing against the royalty stream, which is non-recourse to either of the pharmaceutical companies. | ||
Collateralized Loan Obligations and Bond Obligations | A Fund may invest in certain asset-backed securities that are securitizing certain financial assets by issuing securities in the form of negotiable paper that are issued by a financing company (generally called a Special Purpose Vehicle or “SPV”). These securitized assets are, as a rule, corporate financial assets brought into a pool according to specific diversification rules. The SPV is a company founded solely for the purpose of securitizing these claims and its only asset is the diversified asset pool. On this basis, marketable securities are issued which, due to the diversification of the underlying risk, generally represent a lower level of risk than the original assets. The redemption of the securities issued by the SPV takes place at maturity out of the cash flow generated by the collected claims. | |
A collateralized loan obligation (“CLO”) is a structured debt security issued by an SPV that was created to reapportion the risk and return characteristics of a pool of assets. The assets, typically senior loans, are used as collateral supporting the various debt tranches issued by the SPV. The key feature of the CLO structure is the prioritization of the cash flows from a pool of debt securities among the several classes of securities issued by a CLO. | ||
A Fund may also invest in collateralized bond obligations (“CBOs”), which are structured debt securities backed by a diversified pool of high yield, public or private fixed income securities. These may be fixed pools or may be “market value” (or managed) pools of collateral. The CBO issues debt securities that are typically separated into tranches representing different degrees of credit quality. |
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The top tranche of securities has the greatest collateralization and pays the lowest interest rate. Lower CBO tranches have a lesser degree of collateralization quality and pay higher interest rates intended to compensate for the attendant risks. The bottom tranche specifically receives the residual interest payments (i.e., money that is left over after the higher tranches have been paid) rather than a fixed interest rate. The return on the lower tranches of CBOs/CLOs is especially sensitive to the rate of defaults in the collateral pool and lower tranches of CBOs/CLOs typically present the highest risk of loss of entire investment and are required to bear losses before the higher tranches. Under normal market conditions, a Fund expects to invest in the lower tranches of CBOs/CLOs. | ||
Distressed Debt | A Fund may invest in the securities and other obligations of distressed and bankrupt issuers, including debt obligations that are in covenant or payment default. Such investments generally trade significantly below par and are considered speculative. The repayment of defaulted obligations is subject to significant uncertainties. Defaulted obligations might be repaid only after lengthy workout or bankruptcy proceedings, during which the issuer might not make any interest or other payments. Typically such workout or bankruptcy proceedings result in only partial recovery of cash payments or an exchange of the defaulted obligation for other debt or equity securities of the issuer or its affiliates, which may in turn be illiquid or speculative. A Fund may invest in securities of a company for purposes of gaining control. | |
Stressed Debt | A Fund may invest in securities and other obligations of stressed issuers. Stressed issuers are issuers that are not yet deemed distressed or bankrupt and whose debt securities are trading at a discount to par, but not yet at distressed levels. An example would be an issuer that is in technical default of its credit agreement, or undergoing strategic or operational changes, which results in market pricing uncertainty. | |
Mezzanine Debt | Structurally, mezzanine loans usually rank subordinate in priority of payment to senior debt, such as senior bank debt, and are often unsecured. However, mezzanine loans rank senior to common and preferred equity in a borrower’s capital structure. Mezzanine debt is often used in leveraged buyout and real estate finance transactions. Typically, mezzanine loans have elements of both debt and equity instruments, offering the fixed returns in the form of interest payments associated with senior debt, while providing lenders an opportunity to participate in the capital appreciation of a borrower, if any, through an equity interest. This equity interest typically takes the form of warrants. Due to their higher risk profile and often less restrictive covenants as compared to senior loans, mezzanine loans generally earn a higher return than senior secured loans. The warrants associated with mezzanine loans are typically detachable, which allows lenders to receive repayment of their principal on an agreed amortization schedule while retaining their equity interest in the borrower. | |
Mezzanine loans also may include a “put” feature, which permits the holder to sell its equity interest back to the borrower at a price determined through an agreed-upon formula. The Company believes that mezzanine loans offer an alternative investment opportunity based upon their historical returns and resilience during economic downturns. | ||
High-Yield Bonds | High-yield bonds are income securities that are typically lower grade securities of distressed issuers. Such bonds may have fixed or variable principal payments and all types of interest rate and dividend payment and reset terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred, payment in kind and auction rate features as well as a broad range of maturities. | |
Lower grade securities, though high-yielding, are characterized by high risk. They may be subject to certain risks with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated securities. The retail secondary market for lower grade securities may be less liquid than that of higher rated securities. Adverse conditions could make it difficult at times for a Fund to sell certain securities or could result in lower prices than those used in calculating a Fund’s net asset value. | ||
The prices of debt securities generally are inversely related to interest rate changes; however, the price volatility caused by fluctuating interest rates of securities also is inversely related to the coupon of such securities. Accordingly, below investment grade securities may be relatively less sensitive to |
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interest rate changes than higher quality securities of comparable maturity, because of their higher coupon. This higher coupon is what the investor receives in return for bearing greater credit risk. The higher credit risk associated with below investment grade securities potentially can have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity, and will be a substantial factor in a Fund’s relative Share price volatility. Distressed debt securities often are priced based on estimated recovery value and are less sensitive to interest rate movement. | ||
Lower grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could severely disrupt the market for such securities and may have an adverse impact on the value of such securities. In addition, it is likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon and increase the incidence of default for such securities. | ||
The ratings of Moody’s, S&P and any other rating agencies represent their opinions as to the quality of the obligations which they undertake to rate. Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. | ||
Common Stocks | Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits, if any, of the corporation without preference over any other shareholder or class of shareholders, including holders of such entity’s preferred stock and other senior equity securities. Common stock usually carries with it the right to vote and frequently an exclusive right to do so. In selecting common stocks for investment, a Fund generally expects to focus primarily on the security’s dividend paying capacity rather than on its potential for capital appreciation. A Fund may acquire an interest in common stocks in various ways, including upon the default of a senior loan secured by such common stock or by acquiring common stock for investment. A Fund may also acquire warrants or other rights to purchase a borrower’s common stock in connection with the making of a senior loan. | |
Preferred Securities | Preferred securities are equity securities, but they have many characteristics of fixed income securities, such as a fixed dividend payment rate and/or a liquidity preference over the issuer’s common shares. However, because preferred securities are equity securities, they may be more susceptible to risks traditionally associated with equity investments than a Fund’s fixed income securities. | |
The market value of preferred securities may be affected by favorable and unfavorable changes impacting companies in the utilities and financial services sectors, which are prominent issuers of preferred securities, and by actual and anticipated changes in tax laws, such as changes in U.S. federal corporate income tax rates or the dividends-received deduction. Because the claim on an issuer’s earnings represented by traditional preferred securities may become onerous when interest rates fall below the rate payable on such securities, the issuer may redeem the securities. Thus, in declining interest rate environments in particular, a Fund’s holdings of higher rate-paying fixed rate preferred securities may be reduced and a Fund would be unable to acquire securities of comparable credit quality paying comparable rates with the redemption proceeds. | ||
Fixed rate preferred stocks have fixed dividend rates. They can be perpetual, with no mandatory redemption date, or issued with a fixed mandatory redemption date. Certain issues of preferred stock are convertible into other equity securities. Perpetual preferred stocks provide a fixed dividend throughout the life of the issue, with no mandatory retirement provisions, but may be callable. Sinking fund preferred stocks provide for the redemption of a portion of the issue on a regularly scheduled basis with, in most cases, the entire issue being retired at a future date. The value of fixed rate preferred stocks can be expected to vary inversely with interest rates. |
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Adjustable rate preferred stocks have a variable dividend rate which is determined periodically, typically quarterly, according to a formula based on a specified premium or discount to the yield on particular U.S. Treasury securities, typically the highest base-rate yield of one of three U.S. Treasury securities: the 90-day Treasury bill; the 10-year Treasury note; and either the 20-year or 30-year Treasury bond or other index. The premium or discount to be added to or subtracted from this base-rate yield is fixed at the time of issuance and cannot be changed without the approval of the holders of the adjustable rate preferred stock. Some adjustable rate preferred stocks have a maximum and a minimum rate and in some cases are convertible into common stock. | ||
Auction rate preferred stocks pay dividends that adjust based on periodic auctions. Such preferred stocks are similar to short-term corporate money market instruments in that an auction rate preferred stockholder has the opportunity to sell the preferred stock at par in an auction, normally conducted at least every 49 days, through which buyers set the dividend rate in a bidding process for the next period. The dividend rate set in the auction depends on market conditions and the credit quality of the particular issuer. Typically, the auction rate preferred stock’s dividend rate is limited to a specified maximum percentage of an external commercial paper index as of the auction date. Further, the terms of the auction rate preferred stocks generally provide that they are redeemable by the issuer at certain times or under certain conditions. | ||
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 security’s investment value. Convertible securities rank senior to common stock in a corporation’s 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 security’s governing instrument. | ||
Money Market Instruments | Money market instruments include short-term U.S. government securities, U.S. dollar-denominated, high quality commercial paper (unsecured promissory notes issued by corporations to finance their short-term credit needs), certificates of deposit, bankers’ acceptances and repurchase agreements relating to any of the foregoing. U.S. government securities include Treasury notes, bonds and bills, which are direct obligations of the U.S. government backed by the full faith and credit of the United States and securities issued by agencies and instrumentalities of the U.S. government, which may be guaranteed by the U.S. Treasury, may be supported by the issuer’s right to borrow from the U.S. Treasury or may be backed only by the credit of the federal agency or instrumentality itself. | |
U.S. Government Securities | U.S. government securities may include debt obligations of varying maturities issued by the U.S. Treasury or issued or guaranteed by an agency or instrumentality of the U.S. government, including the Federal Housing Administration, Federal Financing Bank, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Government National Mortgage Association (GNMA), General Services Administration, Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Maritime Administration, Tennessee Valley Authority, District of Columbia Armory Board, Student Loan Marketing Association, Resolution Trust Corporation and various institutions that previously were or currently are part of the Farm Credit System (which has been undergoing reorganization since 1987). Some U.S. government securities, such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in their |
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interest rates, maturities and times of issuance, are supported by the full faith and credit of the United States government. Others are supported by (i) the right of the issuer to borrow from the U.S. Treasury, such as securities of the Federal Home Loan Banks; (ii) the discretionary authority of the U.S. government to purchase the agency’s obligations, such as securities of the FNMA; or (iii) only the credit of the issuer. No assurance can be given that the U.S. government will provide financial support in the future to U.S. government agencies, authorities or instrumentalities that are not supported by the full faith and credit of the United States. Securities guaranteed as to principal and interest by the U.S. government, its agencies, authorities or instrumentalities include (i) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. government or any of its agencies, authorities or instrumentalities; and (ii) participations in loans made to non-U.S. governments or other entities that are so guaranteed. The secondary market for certain of these participations is limited and therefore may be regarded as illiquid. | ||
FNMA and FHLMC hold or guarantee approximately $5 trillion worth of mortgages. The value of the companies’ securities fell sharply in 2008 due to concerns that the firms did not have sufficient capital to offset losses resulting from the mortgage crisis. In mid-2008, the U.S. Treasury Department was authorized to increase the size of home loans in certain residential areas FNMA and FHLMC could buy, and until 2009, to lend FNMA and FHLMC emergency funds and to purchase the entities’ stock. More recently, in September 2008, the U.S. Treasury Department announced that the government would be taking over FNMA and FHLMC and placing the companies into a conservatorship. The effect that this conservatorship will have on the companies’ debt and equity securities is unclear. | ||
Other Investment Companies | A Fund may invest in the securities of other investment companies to the extent that such investments are consistent with the Fund’s investment objectives and principal investment strategies and permissible under the 1940 Act. Under one provision of the 1940 Act, a Fund may not acquire the securities of other investment companies if, as a result, (i) more than 10% of the Fund’s total assets would be invested in securities of other investment companies, (ii) such purchase would result in more than 3% of the total outstanding voting securities of any one investment company being held by the Fund or (iii) more than 5% of the Fund’s total assets would be invested in any one investment company. Other provisions of the 1940 Act are less restrictive provided that a Fund is able to meet certain conditions. These limitations do not apply to the acquisition of shares of any investment company in connection with a merger, consolidation, reorganization or acquisition of substantially all of the assets of another investment company. | |
A Fund, as a holder of the securities of other investment companies, will bear its pro rata portion of the other investment companies’ expenses, including advisory fees. These expenses will be in addition to the direct expenses incurred by a Fund. | ||
Exchange Traded Funds | Subject to the limitations on investment in other investment companies, a Fund may invest in exchange traded funds (“ETFs”). ETFs, such as SPDRs, NASDAQ 100 Index Trading Stock (QQQs), iShares and various country index funds, are funds whose shares are traded on a national exchange or the National Association of Securities Dealers’ Automatic Quotation System (NASDAQ). ETFs may be based on underlying equity or fixed income securities. SPDRs, for example, seek to provide investment results that generally correspond to the performance of the component common stocks of the S&P 500. ETFs do not sell individual shares directly to investors and only issue their shares in large blocks known as “creation units.” The investor purchasing a creation unit may sell the individual shares on a secondary market. Therefore, the liquidity of ETFs depends on the adequacy of the secondary market. There can be no assurance that an ETF’s investment objective will be achieved. ETFs based on an index may not replicate and maintain exactly the composition and relative weightings of securities in the index. ETFs are subject to the risks of investing in the underlying securities. A Fund, as a holder of the securities of the ETF, will bear its pro rata portion of the ETF’s expenses, including advisory fees. These expenses are in addition to the direct expenses of the Fund’s own operations. | |
Structured Investments | The Acquiring Fund 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 |
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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 Acquiring Fund anticipates it will invest typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. | ||
The Acquiring Fund 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 Acquiring Fund’s 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 transactions, and there currently is no active trading market for Structured Investments. | ||
Zero Coupon Securities | Zero coupon securities are debt obligations that are issued or purchased at a significant discount from face value. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity or the particular interest payment date at a rate of interest reflecting the market rate of the security at the time of issuance. Zero coupon securities do not require the periodic payment of interest. These investments benefit the issuer by mitigating its need for cash to meet debt service, but generally require a higher rate of return to attract investors who are willing to defer receipt of cash. These investments may experience greater volatility in market value than securities that make regular payments of interest. A Fund accrues income on these investments for tax and accounting purposes, which is distributable to shareholders and which, because no cash is received at the time of accrual, may require the liquidation of other portfolio securities to satisfy the Fund’s distribution obligations, in which case the Fund will forego the purchase of additional income producing assets with these funds. | |
Deferred Payment Obligations | 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. | |
Derivative Transactions | A Fund may purchase and sell derivative instruments such as exchange-listed and over-the-counter put and call options on securities, financial futures, equity, fixed-income and interest rate indices, and other financial instruments, purchase and sell financial futures contracts and options thereon, enter into various interest rate transactions such as swaps, caps, floors or collars and enter into various currency transactions such as currency forward contracts, currency futures contracts, currency swaps or options on currency or currency futures or credit transactions and credit default swaps. A Fund also may purchase derivative instruments that combine features of these instruments. A Fund may use Derivative Transactions as a portfolio management or hedging technique to seek to protect against possible adverse changes in the market value of senior loans or other securities held in or to be purchased for the Fund’s portfolio, protect the value of the Fund’s portfolio, facilitate the sale of certain securities for investment purposes, manage the effective interest rate exposure of the Fund, protect against changes in currency exchange rates, manage the effective maturity or duration of the Fund’s portfolio, or establish positions in the derivatives markets as a temporary substitute for purchasing or selling particular securities. | |
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Derivative Transactions have risks, including the imperfect correlation between the value of such instruments and the underlying assets, the possible default of the other party to the transaction or illiquidity of the derivative instruments. Furthermore, the ability to use successfully Derivative Transactions depends on the Adviser’s ability to predict pertinent market movements, which cannot be assured. Thus, the use of Derivative Transactions may result in losses greater than if they had not been used, may require a Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation a Fund can realize on an investment, or may cause a Fund to hold a security that it might otherwise sell. The use of currency transactions can result in a Fund incurring losses as a result of the imposition of exchange controls, suspension of settlements or the inability of a Fund to deliver or receive a specified currency. Additionally, amounts paid by a Fund as premiums and cash or other assets held in margin accounts with respect to Derivative Transactions are not otherwise available to the Fund for investment purposes. | ||
Senior Loan Based Derivatives | A Fund may obtain exposure to senior loans and baskets of senior loans through the use of derivative instruments. For example, a Fund may invest in a derivative instrument known as the Loan-Only Credit Default Swap Index (“LCDX”), a tradeable index with 100 equally-weighted underlying single-name long-only credit default swaps (“LCDS”). Each underlying LCDS references an issuer whose loans trade in the secondary leveraged loan market. A Fund can either buy the Index (take on credit exposure) or sell the Index (pass credit exposure to a counterparty). In either case, the Fund is in essence taking a macro view of the market as a whole rather than on a particular issuer. To compensate investors for the change in the value of the Index over time, an upfront payment is made at the time of a trade to account for the change in the present value of the Index since inception. The payment is the difference between par (or 100) and the amount of the purchase price, plus or minus (depending on whether the Fund is a buyer or seller of the Index) accrued interest. Each version of the Index launches with a fixed coupon which the seller of the Index pays quarterly (and the buyer of the Index receives quarterly). The amount of payments received or paid is the coupon times the notional amount. Investments in the Index may involve greater risks than if the Fund had invested in the reference obligation directly. A Fund will not engage in these transactions for speculative purposes and will use them only as a means to hedge or manage the risks associated with assets held in, or anticipated to be purchased for, the investment portfolio or obligations incurred by the Fund. | |
Investment in the LCDX Index involves many of the risks associated with investments in derivative instruments discussed generally above, including counterparty risk, the risk of loss due to unanticipated adverse changes in securities prices and interest rates, the inability to close out a position, imperfect correlation between a position and the desired hedge, uncertainty regarding the tax rules applicable to these transactions, and portfolio management constraints on securities subject to such transactions. The potential loss on these instruments may be substantially greater than the initial investment therein. | ||
Credit Default Swaps | To the extent consistent with Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), a Fund may enter into credit default swap agreements. The “buyer” in a credit default contract is obligated to pay the “seller” a periodic stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the “par value” (full notional value) of the reference obligation in exchange for the reference obligation. A Fund may be either the buyer or seller in the transaction. If a Fund is a buyer and no event of default occurs, the Fund loses its investment and recovers nothing. However, if an event of default occurs, the buyer receives full notional value for a reference obligation that may have little or no value. As a seller, a Fund receives income throughout the term of the contract, which typically is between six months and three years, provided that there is no default event. | |
Credit default swaps involve greater risks than if a Fund had invested in the reference obligation directly. In addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. A Fund will enter into swap agreements only with counterparties that are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the |
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Adviser to be equivalent to such rating. A buyer also will lose its investment and recover nothing should no event of default occur. If an event of default were to occur, the value of the reference obligation received by the seller, coupled with the periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. When a Fund acts as a seller of a credit default swap agreement it is exposed to many of the same risks of leverage described under “Risk Factors And Special Considerations—Leverage Risk” since if an event of default occurs the seller must pay the buyer the full notional value of the reference obligation. | ||
Swaps | Swap contracts may be purchased or sold to obtain investment exposure and/or to hedge against fluctuations in securities prices, currencies, interest rates or market conditions, to change the duration of the overall portfolio or to mitigate default risk. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) on different currencies, securities, baskets of currencies or securities, indices or other instruments, which returns are calculated with respect to a “notional value,” i.e., the designated reference amount of exposure to the underlying instruments. A Fund intends to enter into swaps primarily on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. If the other party to a swap contract defaults, the Fund’s risk of loss will consist of the net amount of payments that the Fund is contractually entitled to receive. The net amount of the excess, if any, of the Fund’s obligations over its entitlements will be maintained in a segregated account by the Fund’s custodian. A Fund will not enter into a swap agreement unless the claims-paying ability of the other party thereto is considered to be investment grade by the Adviser. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. Swap instruments are not exchange-listed securities and may be traded only in the over-the-counter market. | |
Interest Rate Swaps | Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest (e.g., an exchange of fixed rate payments for floating rate payments). The Acquiring Fund may use interest rate swaps for risk management purposes and as a speculative investment. | |
Total Return Swaps | Total return swaps are contracts in which one party agrees to make payments of the total return from the designated underlying asset(s), which may include securities, baskets of securities, or securities indices, during the specified period, in return for receiving payments equal to a fixed or floating rate of interest or the total return from the other designated underlying asset(s). The Acquiring Fund may use total return swaps for risk management purposes and as a speculative investment. | |
Currency Swaps | Currency swaps involve the exchange of the two parties’ respective commitments to pay or receive fluctuations with respect to a notional amount of two different currencies (e.g., an exchange of payments with respect to fluctuations in the value of the U.S. dollar relative to the Japanese yen). The Acquiring Fund may enter into currency swap contracts and baskets thereof for risk management purposes and as a speculative investment. | |
Credit-Linked Notes | A credit-linked note (“CLNs”) is a derivative instrument. It is a synthetic obligation between two or more parties where the payment of principal and/or interest is based on the performance of some obligation (a reference obligation). In addition to credit risk of the reference obligations and interest rate risk, the buyer/seller of the CLN is subject to counterparty risk. | |
Options | An option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option at a specified exercise or “strike” price. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. Certain options, known as “American style” options may be exercised at any time during the term of the option. Other options, known as “European style” options, may be exercised only on the expiration date of the option. | |
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If an option written by a Fund expires unexercised, the Fund realizes on the expiration date a capital gain equal to the premium received by the Fund at the time the option was written. If an option purchased by a Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, underlying security, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when a Fund desires. A Fund may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option when purchased. A Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, a Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. | ||
Futures Contracts and Options on Futures Contracts | The sale of a futures contract creates an obligation by a Fund, 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). | |
At the time a futures contract is purchased or sold, a Fund must allocate cash or securities as a deposit payment (“initial margin”). It is expected that the initial margin that a Fund 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, a Fund 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. | ||
Forward Foreign Currency Contracts | A Fund 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 | |
Short Sales | The Acquiring Fund may attempt to limit exposure to a possible market decline in the value of its portfolio securities through short sales of securities that Highland believes possess volatility characteristics similar to those being hedged. In addition, the Acquiring Fund intends to use short sales for non-hedging purposes to pursue its investment objectives. | |
A short sale is a transaction in which a Fund sells a security it does not own in anticipation that the market price of that security will decline. When a Fund makes a short sale, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the sale. A Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities. | ||
A Fund’s obligation to replace the borrowed security will be secured by collateral deposited with the broker-dealer, usually cash, U.S. government securities or other liquid securities. A Fund will also be required to designate on its books and records similar collateral with its custodian to the extent, if any, necessary so that the aggregate collateral value is at all times at least equal to the current market value of the security sold short. Depending on arrangements made with the broker-dealer from which it borrowed the security regarding payment over of any payments received by a Fund on such security, the Fund may not receive any payments (including interest) on its collateral deposited with such broker-dealer. |
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If the price of the security sold short increases between the time of the short sale and the time a Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although a Fund’s gain is limited to the price at which it sold the security short, its potential loss is unlimited. | ||
A Fund may also sell a security short if it owns at least an equal amount of the security sold short or another security convertible or exchangeable for an equal amount of the security sold short without payment of further compensation (a short sale against-the-box). In a short sale against-the-box, the short seller is exposed to the risk of being forced to deliver stock that it holds to close the position if the borrowed stock is called in by the lender, which would cause gain or loss to be recognized on the delivered stock. | ||
Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss. Short-selling exposes a Fund to unlimited risk with respect to that security due to the lack of an upper limit on the price to which an instrument can rise. | ||
Capital Structure Arbitrage | Capital structure arbitrage typically involves establishing long and short positions in securities (or their derivatives) at different tiers within an issuer’s capital structure in ratios designed to maintain a generally neutral overall exposure to the issuer while exploiting a pricing inefficiency. Some issuers may also have more than one class of shares or an equivalent vehicle that trades in a different market (e.g., European equities and their American Depositary Receipt counterparts). This strategy seeks to profit from the disparity in prices between the various related securities in anticipation that over time all tiers and classes will become more efficiently priced relative to one another. | |
Pair Trades | Pair trades involve the establishment of a long position in one security and a short position in another security at the same time. A pair trade attempts to minimize the effect of larger market trends and emphasizes the performance of one security relative to another. | |
Repurchase Agreements | Repurchase agreements are loans or arrangements under which a Fund purchases securities and the seller agrees to repurchase the securities within a specific time and at a specific price. The repurchase price is generally higher than the Fund’s purchase price, with the difference being income to the Fund. Under the direction of the Board, the Adviser reviews and monitors the creditworthiness of any institution which enters into a repurchase agreement with a Fund. The counterparty’s obligations under the repurchase agreement are collateralized with U.S. Treasury and/or agency obligations with a market value of not less than 100% of the obligations, valued daily. Collateral is held by a Fund’s custodian in a segregated, safekeeping account for the benefit of the Fund. Repurchase agreements afford a Fund an opportunity to earn income on temporarily available cash at low risk. In the event of commencement of bankruptcy or insolvency proceedings with respect to the seller of the security before repurchase of the security under a repurchase agreement, a Fund may encounter delay and incur costs before being able to sell the security. Such a delay may involve loss of interest or a decline in price of the security. If the court characterizes the transaction as a loan and a Fund has not perfected a security interest in the security, the Fund may be required to return the security to the seller’s estate and be treated as an unsecured creditor of the seller. As an unsecured creditor, a Fund would be at risk of losing some or all of the principal and interest involved in the transaction. | |
Reverse Repurchase Agreements | A reverse repurchase agreement is an instrument under which a Fund sells an underlying debt security and simultaneously obtains the commitment of the purchaser (generally, a commercial bank or a broker or dealer) to sell the security back to the Fund at an agreed upon price on an agreed upon date. Reverse repurchase agreements could involve certain risks in the event of default or insolvency of the other party, including possible delays or restrictions upon a Fund’s ability to dispose of the underlying securities. An additional risk is that the market value of securities sold by a Fund under a reverse repurchase agreement could decline below the price at which the Fund is obligated to repurchase them. Reverse repurchase agreements will be considered borrowings by a Fund and as such would be subject to any restrictions on borrowing. |
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Reverse repurchase agreements are also generally subject to earmarking and coverage requirements, with the result that, the Fund will designate on its books and records on an ongoing basis, cash, U.S. government securities, or other liquid high grade debt obligations in an amount at least equal to the Fund’s obligations under the reverse repurchase agreement. | ||
Pay-in-kind Bonds | Pay-in-kind, or “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, a Fund 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, a Fund 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. | |
When-Issued, Delayed-Delivery and Forward Commitment Purchases | A Fund 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 a Fund 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 a Fund 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 a Fund 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 a Fund. There is always a risk that the securities may not be delivered and that a Fund may incur a loss. Settlements in the ordinary course, which may take substantially more than five business days, are not treated by a Fund as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions. | |
Lending of Assets | A Fund may lend assets to registered broker-dealers or other institutional investors deemed by the Adviser to be of good standing under agreements which require that the loans be secured continuously by collateral in cash, cash equivalents or U.S. Treasury bills maintained on a current basis at an amount at least equal to the market value of the securities loaned. A Fund continues to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned as well as the benefit of an increase and the detriment of any decrease in the market value of the securities loaned and would also receive compensation based on investment of the collateral. A Fund would not, however, have the right to vote any securities having voting rights during the existence of the loan, but would call the loan in anticipation of an important vote to be taken among holders of the securities or of the giving or withholding of consent on a material matter affecting the investment. | |
As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. In addition, any income or gains and losses from investing and reinvesting any cash collateral delivered by a borrower pursuant to a loan are generally at a Fund’s risk, and to the extent any such losses reduce the amount of cash below the amount required to be returned to the borrower upon the termination of any loan, a Fund may be required to pay or cause to be paid to such borrower or another entity an amount equal to such shortfall in cash. A Fund will lend portfolio securities only to firms that are judged by the Investment Adviser to present acceptable credit risk. |
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Non-U.S. Securities | A Fund may invest in non-U.S. securities, which may include securities denominated in U.S. dollars or in non-U.S. currencies or multinational currency units. A Fund may invest in non-U.S. securities of so-called emerging market issuers. For purposes of the Acquiring Fund, a company is deemed to be a non-U.S. company if it meets the following tests: (i) such company was not organized in the United States; (ii) such company’s primary business office is not in the United States; (iii) the principal trading market for such company’s securities is not located in the United States; (iv) less than 50% of such company’s assets are located in the United States; or (v) 50% or more of such issuer’s revenues are derived from outside the United States. Non-U.S. securities markets generally are not as developed or efficient as those in the United States. Securities of some non-U.S. issuers are less liquid and more volatile than securities of comparable U.S. issuers. Similarly, volume and liquidity in most non-U.S. securities markets are less than in the United States and, at times, volatility of price can be greater than in the United States. | |
Because evidences of ownership of such securities usually are held outside the United States, A Fund would be subject to additional risks if it invested in non-U.S. securities, which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect or restrict the payment of principal and interest on the non-U.S. securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. | ||
Since non-U.S. securities may be purchased with and payable in foreign currencies, the value of these assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. | ||
Temporary Defensive Position | During periods in which Highland determines that it is temporarily unable to follow a Fund’s investment strategy or that it is impractical to do so or pending re-investment of proceeds received in connection with the sale of a security, the Fund may deviate from its investment strategy and invest all or any portion of its assets in cash or cash equivalents. Highland’s determination that it is temporarily unable to follow a Fund’s investment strategy or that it is impractical to do so will generally occur only in situations in which a market disruption event has occurred and where trading in the securities selected through application of the Fund’s investment strategy is extremely limited or absent. In such a case, shares of a Fund may be adversely affected and the Fund may not pursue or achieve its investment objectives. |
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Aggregate Dollar | ||||||
Range of Equity | ||||||
Securities in All | ||||||
Registered | ||||||
Investment | ||||||
Companies | ||||||
Overseen by | ||||||
Board Member in | ||||||
Dollar Range of | Dollar Range of | Highland Family | ||||
Name of Board | Shares of the | Shares of the | of Investment | |||
Member | Acquired Fund* | Acquiring Fund* | Companies** | |||
INTERESTED DIRECTOR | ||||||
R. Joseph Dougherty | [ ] | [ ] | [ ] | |||
NON-INTERESTED DIRECTORS | ||||||
Timothy K. Hui | [ ] | [ ] | [ ] | |||
Scott F. Kavanaugh | [ ] | [ ] | [ ] | |||
James F. Leary | [ ] | [ ] | [ ] | |||
Bryan A. Ward | [ ] | [ ] | [ ] |
* | Valued as of September 30, 2008. | |
** | Valued as of December 31, 2008. “Family of Investment Companies” consists of twelve registered investment companies as of December 31, 2008 that share the Adviser as their investment adviser and that hold themselves out to the investors as related companies for purposes of investment and investor services. |
(3) Amount and | ||||||||
(2) Name of | Nature of Beneficial | (4) Value of | ||||||
(1) Title of Class | Beneficial Owner | Ownership* | Securities | (5) Percent of Class | ||||
Common Stock | R. Joseph Dougherty | [___] shares | $[___] | [___]% | ||||
Common Stock | Timothy K. Hui | [___] shares | $[___] | [___]% | ||||
Common Stock | Scott F. Kavanaugh | [___] shares | $[___] | [___]% | ||||
Common Stock | James F. Leary | [___] shares | $[___] | [___]% | ||||
Common Stock | Bryan A. Ward | [___] shares | $[___] | [___]% | ||||
Common Stock | Brad Borud | [___] shares | $[___] | [___]% | ||||
Common Stock | M. Jason Blackburn | [___] shares | $[___] | [___]% | ||||
Common Stock | Michael Colvin | [___] shares | $[___] | [___]% |
* | Valued as of December 31, 2008. Except as otherwise indicated, each person has sole voting and investment power. |
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(2) Name of | (3) Amount and Nature of Beneficial | (4) Value of | ||||||
(1) Title of Class | Beneficial Owner | Ownership* | Securities | (5) Percent of Class | ||||
Common Stock | R. Joseph Dougherty | [___] shares | $[___] | [___]% | ||||
Common Stock | Timothy K. Hui | [___] shares | $[___] | [___]% | ||||
Common Stock | Scott F. Kavanaugh | [___] shares | $[___] | [___]% | ||||
Common Stock | James F. Leary | [___] shares | $[___] | [___]% | ||||
Common Stock | Bryan A. Ward | [___] shares | $[___] | [___]% | ||||
Common Stock | Brad Borud | [___] shares | $[___] | [___]% | ||||
Common Stock | M. Jason Blackburn | [___] shares | $[___] | [___]% | ||||
Common Stock | Michael Colvin | [___] shares | $[___] | [___]% |
* | Valued as of December 31, 2008. Except as otherwise indicated, each person has sole voting and investment power. |
(3) Amount and | ||||||
Nature of Beneficial | (4) Percent of | |||||
(1) Title of Class | (2) Name of Beneficial Owner | Ownership | Class | |||
Common Stock | Highland Capital Management, L.P. (a) NexBank Tower 13455 Noel Road, Suite 800 Dallas, TX 75240 | 996,489.17 shares | 5.6% | |||
Common Stock | Goldman Sachs Asset Management, L.P. (b) 32 Old Slip New York, NY 10005 | 1,057,453 shares | 6.0% | |||
Common Stock | Kensington Investment Group, Inc. 4 Orinda Way, Suite 200C Orinda, CA 94563 | 1,128,722 | 6.371% |
(a) | Based on information contained in a Schedule 13D filed jointly by Highland Capital Management, L.P., Strand Advisors, Inc. and James D. Dondero on April 14, 2008. Reflects sole voting power and sole dispositive power with respect to all shares. | |
(b) | Based on information contained in a Schedule 13G filed by Goldman Sachs Asset Management, L.P. on February 1, 2008. Reflects sole voting power with respect to 952,847 shares and sole dispositive power with respect to 1,057,453 shares. | |
(c) | Based on information contained in a Schedule 13G filed by Kensington Investment Group, Inc. on January 14, 2008. Reflects sole voting power and sole dispositive power with respect to all shares. |
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D-2
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D-3
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D-4
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Index to Financial Statements
Page | ||||
UNAUDITED FINANCIAL STATEMENTS FOR SEPTEMBER 30, 2008 | ||||
Schedule of Investments—As of September 30, 2008 (unaudited) | E-2 | |||
Statement of Assets and Liabilities—As of September 30, 2008 (unaudited) and December 31, 2007 | E-6 | |||
Statement of Operations—For the three and nine months ended September 30, 2008 (unaudited) and September 30, 2007 (unaudited) | E-7 | |||
Statement of Changes in Stockholders’ Equity (Net Assets)—For the nine months ended September 30, 2008 (unaudited) | E-8 | |||
Statement of Cash Flows—For the nine months ended September 30, 2008 (unaudited) and September 30, 2007 (unaudited) | E-9 | |||
Notes to Financial Statements (unaudited) | E-10 | |||
UNAUDITED FINANCIAL STATEMENTS FOR JUNE 30, 2008 | ||||
Schedule of Investments—As of June 30, 2008 (unaudited) | E-20 | |||
Statement of Assets and Liabilities—As of June 30, 2008 (unaudited) and December 31, 2007 | E-25 | |||
Statement of Operations—For the three and six months ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited) | E-26 | |||
Statement of Changes in Stockholders’ Equity (Net Assets)—For the six months ended June 30, 2008 (unaudited) | E-27 | |||
Statement of Cash Flows—For the six months ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited) | E-28 | |||
Notes to Financial Statements (unaudited) | E-29 | |||
UNAUDITED FINANCIAL STATEMENTS FOR MARCH 31, 2008 | ||||
Schedule of Investments—As of March 31, 2008 (unaudited) | E-38 | |||
Statement of Assets and Liabilities—As of March 31, 2008 (unaudited) and December 31, 2007 | E-44 | |||
Statement of Operations (unaudited)—For the quarter ended March 31, 2008 and for the period January 18, 2007* through March 31, 2007 | E-45 | |||
Statement of Changes in Stockholders’ Equity (Net Assets) (unaudited)—For the quarter ended March 31, 2008 and for the period January 18, 2007* through December 31, 2007 | E-46 | |||
Statement of Cash Flows (unaudited)—For the quarter ended March 31, 2008 and for the period January 18, 2007* through March 31, 2007 | E-47 | |||
Notes to Financial Statements (unaudited) | E-48 | |||
AUDITED FINANCIAL STATEMENTS | ||||
Report of Independent Registered Public Accounting Firm | E-56 | |||
Schedule of Investments—As of December 31, 2007 | E-57 | |||
Statement of Assets and Liabilities—As of December 31, 2007 | E-63 | |||
Statement of Operations—For the period January 18, 2007* through December 31, 2007 | E-64 | |||
Statement of Changes in Stockholders’ Equity (Net Assets)—For the period January 18, 2007* through December 31, 2007 | E-65 | |||
Statement of Cash Flows—For the period January 18, 2007* through December 31, 2007 | E-66 | |||
Notes to Financial Statements | E-67 |
* | Commencement of operations. |
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As of September 30, 2008
Principal ($) | Cost ($) | Value ($) | ||||||||||
Senior Loans (a) - 89.0% | ||||||||||||
AEROSPACE - 3.0% | ||||||||||||
IAP Worldwide Services, Inc. | ||||||||||||
First Lien Term Loan, 8.06%, 12/30/12, PIK | 4,560,462 | 4,570,745 | 3,534,358 | |||||||||
BROADCASTING - 15.0% | ||||||||||||
Comcorp Broadcasting, Inc. | ||||||||||||
Revolving Loan, 8.15%, 04/03/13 (b) (c) (d) | 1,800,821 | 1,800,821 | 1,546,905 | |||||||||
Term Loan, 8.31%, 04/03/13 (b) (d) | 18,849,521 | 18,508,999 | 16,191,739 | |||||||||
20,309,820 | 17,738,644 | |||||||||||
CABLE/WIRELESS VIDEO - 3.4% | ||||||||||||
WideOpen West Finance, LLC | ||||||||||||
Second Lien Term Loan, 9.49%, 06/29/15, PIK | 5,213,592 | 5,129,063 | 4,040,534 | |||||||||
CONSUMER NON-DURABLES - 2.3% | ||||||||||||
Totes Isotoner Corp. | ||||||||||||
Second Lien Term Loan, 9.88%, 01/31/14 | 3,377,228 | 3,401,668 | 2,786,213 | |||||||||
DIVERSIFIED MEDIA - 1.1% | ||||||||||||
Penton Media, Inc. | ||||||||||||
Second Lien Term Loan, 7.80%, 02/01/14 | 2,000,000 | 2,037,420 | 1,350,000 | |||||||||
ENERGY - 7.1% | ||||||||||||
Resolute Aneth, LLC | ||||||||||||
Second Lien Term Loan, 7.30%, 06/26/13 | 4,000,000 | 4,000,000 | 3,520,000 | |||||||||
TARH E&P Holdings, L.P. | ||||||||||||
First Lien Term Loan, 7.30%, 06/29/12 | 5,000,000 | 5,000,000 | 4,862,500 | |||||||||
9,000,000 | 8,382,500 | |||||||||||
FINANCIAL - 5.0% | ||||||||||||
Emerson Reinsurance Ltd. | ||||||||||||
Tranche C Term Loan, 8.07%, 12/15/11 (k) | 1,500,000 | 1,494,621 | 1,282,500 | |||||||||
Flatiron Re Ltd. | ||||||||||||
Closing Date Term Loan, 8.02%, 12/29/10 (k) | 64,177 | 64,673 | 59,685 | |||||||||
Delayed Draw Term Loan, 8.02%, 12/29/10 (k) | 31,086 | 31,326 | 28,910 | |||||||||
Kepler Holdings Ltd. | ||||||||||||
Term Loan, 9.31%, 06/30/09 (k) | 5,000,000 | 5,010,515 | 4,500,000 | |||||||||
6,601,135 | 5,871,095 | |||||||||||
FOOD/TOBACCO - 6.2% | ||||||||||||
Wm. Wrigley Jr. Company | ||||||||||||
Tranche B, 07/25/14 (e) (k) | 7,500,000 | 7,275,000 | 7,384,875 | |||||||||
FOREST PRODUCTS/CONTAINERS - 0.2% | ||||||||||||
Tegrant Corp. | ||||||||||||
Second Lien Term Loan, 9.27%, 03/08/15 | 1,000,000 | 1,000,000 | 200,000 | |||||||||
GAMING/LEISURE - 14.0% | ||||||||||||
Fontainebleau Florida Hotel, LLC | ||||||||||||
Tranche C Term Loan, 8.82%, 06/06/12 | 6,000,000 | 6,000,000 | 5,460,000 | |||||||||
Harrah’s Operating Co. | ||||||||||||
Term B-2 Loan, 5.80%, 01/28/15 | 4,975,000 | 4,680,813 | 4,089,848 | |||||||||
Lake at Las Vegas Joint Venture/ LLV-1,LLC | ||||||||||||
Term Loan, 15.60%, 06/20/12, PIK (f) | 32,377,252 | 28,269,771 | 6,219,350 | |||||||||
Revolving Loan Credit-Linked Deposit, 16.10%, 06/20/12 (f) | 3,611,111 | 3,611,111 | 794,444 | |||||||||
42,561,695 | 16,563,642 | |||||||||||
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Table of Contents
Principal ($) | Cost ($) | Value ($) | ||||||||||
Senior Loans (continued) | ||||||||||||
HEALTHCARE - 5.3% | ||||||||||||
Applied Biosystems | ||||||||||||
Term Loan, 09/30/15 (e) (k) | 2,000,000 | 1,960,000 | 1,895,000 | |||||||||
Aveta Inc. | ||||||||||||
MMM Original Term Loan, 9.21%, 08/22/11 | 1,864,296 | 1,654,277 | 1,612,616 | |||||||||
NAMM New Term Loan, 9.21%, 08/22/11 | 276,950 | 245,751 | 239,562 | |||||||||
NAMM Original Term Loan, 9.21%, 08/22/11 | 499,051 | 442,832 | 431,679 | |||||||||
PHMC Acquisition Term Loan, 9.21%, 08/22/11 | 1,527,833 | 1,355,722 | 1,321,576 | |||||||||
LifeCare Holdings, Inc. | ||||||||||||
Term Loan, 7.96%, 08/11/12 | 982,278 | 962,926 | 820,202 | |||||||||
6,621,508 | 6,320,635 | |||||||||||
HOUSING - 7.1% | ||||||||||||
MetroFlag BP, LLC / Metroflag Cable, LLC | ||||||||||||
Second Lien Term Loan, 12.43%, 01/06/09 | 5,000,000 | 5,000,000 | 3,675,000 | |||||||||
MPH Mezzanine II, LLC | ||||||||||||
Mezzanine 2B, 8.28%, 02/09/08 (b) (f) | 10,000,000 | 10,000,000 | — | |||||||||
MPH Mezzanine III, LLC | ||||||||||||
Mezzanine 3, 9.28%, 02/09/08 (b) (f) | 4,000,000 | 4,000,000 | — | |||||||||
Pacific Clarion, LLC | ||||||||||||
Term Loan, 15.00%, 01/23/09 (b) (g) | 4,950,573 | 4,925,214 | 4,731,263 | |||||||||
23,925,214 | 8,406,263 | |||||||||||
INFORMATION TECHNOLOGY - 4.1% | ||||||||||||
Sungard Data Systems Inc. | ||||||||||||
Incremental Term Loan Facility, 02/28/14 (e) | 5,000,000 | 4,950,000 | 4,820,850 | |||||||||
RETAIL - 2.0% | ||||||||||||
Claire’s Stores, Inc. | ||||||||||||
Term B Loan, 05/29/14 (e) | 3,979,849 | 3,213,728 | 2,416,644 | |||||||||
SERVICE - 10.1% | ||||||||||||
LVI Services, Inc. | ||||||||||||
Tranche B Term Loan, 8.06%, 11/16/11 | 9,401,516 | 9,336,653 | 6,933,618 | |||||||||
NES Rentals Holdings, Inc. | ||||||||||||
Permanent Second Lien Term Loan, 9.50%, 07/20/13 (k) | 2,000,000 | 2,029,400 | 1,460,000 | |||||||||
Penhall International Co. | ||||||||||||
Term Loan, 10.13%, 04/01/12, PIK | 5,456,661 | 5,392,908 | 3,546,830 | |||||||||
16,758,961 | 11,940,448 | |||||||||||
TRANSPORTATION — AUTOMOTIVE - 0.3% | ||||||||||||
BST Safety Textiles Acquisition GmbH | ||||||||||||
Second Lien Facility, 12.10%, 06/30/09 (k) | 665,500 | 666,191 | 395,972 | |||||||||
UTILITY - 2.8% | ||||||||||||
Texas Competitive Electric Holdings Co., LLC | ||||||||||||
Initial Tranche B-2 Term Loan, 6.21%, 10/10/14 | 3,979,900 | 3,817,672 | 3,363,015 | |||||||||
Total Senior Loans | 161,839,820 | 105,515,688 | ||||||||||
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Principal ($) | Cost ($) | Value ($) | ||||||||||
Corporate Notes and Bonds - 36.5% | ||||||||||||
BROADCASTING - 0.3% | ||||||||||||
Young Broadcasting, Inc. | ||||||||||||
10.00%, 03/01/11 | 2,000,000 | 1,993,563 | 300,000 | |||||||||
DIVERSIFIED MEDIA - 5.5% | ||||||||||||
Baker & Taylor, Inc. 11.50%, | ||||||||||||
07/01/13 (h) | 8,300,000 | 8,751,839 | 6,515,500 | |||||||||
FINANCIAL - 1.3% | ||||||||||||
HUB International Holdings, Inc. | ||||||||||||
10.25%, 06/15/15 (h) | 2,000,000 | 1,560,702 | 1,590,000 | |||||||||
FOOD/TOBACCO - 2.5% | ||||||||||||
Pinnacle Foods Group, Inc. | ||||||||||||
10.63%, 04/01/17 | 4,000,000 | 4,036,250 | 3,020,000 | |||||||||
HEALTHCARE - 19.5% | ||||||||||||
Argatroban Royalty Sub, LLC | ||||||||||||
18.50%, 09/21/14 (h) | 3,921,541 | 3,921,541 | 3,941,149 | |||||||||
Azithromycin Royalty Sub, LLC | ||||||||||||
16.00%, 05/15/19 (h) | 5,000,000 | 4,975,230 | 5,025,000 | |||||||||
Celtic Pharma Phinco B.V. | ||||||||||||
17.00%, 06/15/12, PIK (h) | 9,744,782 | 9,295,195 | 9,647,334 | |||||||||
Cinacalcet Royalty Sub, LLC | ||||||||||||
15.50%, 03/30/17, PIK (h) | 1,038,750 | 988,390 | 1,028,362 | |||||||||
Ledgemont Royalty Sub, LLC | ||||||||||||
16.00%, 11/05/24 (h) | 2,500,000 | 2,500,000 | 2,512,500 | |||||||||
Molecular Insight Pharmaceuticals, Inc. | ||||||||||||
11.10%, 11/01/12 (h) (i) | 1,000,000 | 1,014,950 | 1,022,500 | |||||||||
22,695,306 | 23,176,845 | |||||||||||
HOUSING - 4.1% | ||||||||||||
Realogy Corp. | ||||||||||||
10.50%, 04/15/14 | 5,000,000 | 4,962,982 | 2,225,000 | |||||||||
12.38%, 04/15/15 | 7,500,000 | 4,103,669 | 2,587,500 | |||||||||
9,066,651 | 4,812,500 | |||||||||||
INFORMATION TECHNOLOGY - 2.2% | ||||||||||||
Freescale Semiconductor, Inc. | ||||||||||||
9.13%, 12/15/14 (h) | 800,000 | 548,547 | 508,000 | |||||||||
10.13%, 12/15/16 | 3,200,000 | 3,200,000 | 2,064,000 | |||||||||
3,748,547 | 2,572,000 | |||||||||||
TRANSPORTATION — AUTOMOTIVE - 1.1% | ||||||||||||
Delphi Corp. | ||||||||||||
6.55%, 06/15/06 (f) | 1,500,000 | 1,151,250 | 187,500 | |||||||||
6.50%, 05/01/09 (f) | 2,500,000 | 1,850,000 | 312,500 | |||||||||
6.50%, 08/15/13 (f) | 2,667,000 | 1,861,483 | 346,710 | |||||||||
7.13%, 05/01/29 (f) | 3,500,000 | 2,565,250 | 437,500 | |||||||||
Motor Coach Industries International, Inc. | ||||||||||||
11.25%, 05/01/09 (f) | 12,000,000 | 10,999,042 | 60,000 | |||||||||
18,427,025 | 1,344,210 | |||||||||||
Total Corporate Notes and Bonds | 70,279,883 | 43,331,055 | ||||||||||
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Shares | Cost ($) | Value ($) | ||||||||||
Claims - 1.1% | ||||||||||||
AEROSPACE - 1.1% | ||||||||||||
Northwest Airlines, Inc. | ||||||||||||
ALPA Trade Claim, 08/21/13 | 3,000,000 | 458,969 | 120,000 | |||||||||
Bell Atlantic Trade Claim, 08/21/13 | 2,500,000 | 457,052 | 100,000 | |||||||||
EDC Trade Claims, 08/21/13 | 2,500,000 | 470,351 | 100,000 | |||||||||
Flight Attendant Claim, 08/21/13 | 5,326,500 | 788,491 | 213,060 | |||||||||
GE Trade Claim, 08/21/13 | 1,500,000 | 288,981 | 60,000 | |||||||||
IAM Trade Claim, 08/21/13 | 4,728,134 | 772,421 | 189,125 | |||||||||
Pinnacle Trade Claim, 08/21/13 | 8,433,116 | 1,606,633 | 337,325 | |||||||||
Retiree Claim, 08/21/13 | 3,512,250 | 519,924 | 140,490 | |||||||||
Total Claims | 5,362,822 | 1,260,000 | ||||||||||
Common Stocks - 20.4% | ||||||||||||
BROADCASTING - 5.6% | ||||||||||||
Communications Corp. of America (b) (d) (j) | 1,256,635 | 7,187,203 | 6,584,767 | |||||||||
HEALTHCARE - 14.7% | ||||||||||||
Genesys Ventures IA, LP (b) (d) (j) | 12,000,000 | 12,000,000 | 17,412,000 | |||||||||
WIRELESS COMMUNICATIONS - 0.1% | ||||||||||||
ICO Global Communications (j) (k) | 138,632 | 500,000 | 151,109 | |||||||||
Total Common Stocks | 19,687,203 | 24,147,876 | ||||||||||
Total Investments - 147.0% | 257,169,728 | 174,254,619 | ||||||||||
Other Assets & Liabilities, Net — (47.0)% | (55,714,284 | ) | ||||||||||
Net Assets - 100.0% | 118,540,335 | |||||||||||
(a) | Senior loans in which Highland Distressed Opportunities, Inc. (the “Company”) invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium (unless otherwise identified by footnote (f), all senior loans carry a variable rate interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at September 30, 2008. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown. | |
(b) | Represents fair value as determined by the Company’s investment adviser, in good faith, pursuant to the policies and procedures approved by the Company’s Board of Directors (the “Board”). Securities with a total aggregate market value of $46,466,674 or 39.2% of net assets were fair valued as of September 30, 2008. | |
(c) | Senior loan asset has additional unfunded loan commitments. See Note 6. | |
(d) | Affiliated issuer. See Note 7. | |
(e) | All or a portion of this position has not settled. Contract rates do not take effect until settlement date. | |
(f) | The issuer is in default of certain debt covenants. Income is not being accrued. | |
(g) | Fixed rate senior loan. | |
(h) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At September 30, 2008, these securities amounted to $31,790,345 or 26.8% of net assets. | |
(i) | Floating rate note. The interest rate shown reflects the rate in effect at September 30, 3008. | |
(j) | Non-income producing security. | |
(k) | Non-qualifying asset — Investment is a not security of a eligible portfolio company as defined in the 1940 Act and in Rule 2a-46. The Company must invest at least 70% of its total assets in qualify assets. Securities with a total aggregate market value of $157,096,568 or 79.89% of total assets were qualifying as of September 30, 2008. | |
PIK | Payment-in-Kind. All or a portion of the stated interest rate may be PIK interest. |
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As of September 30, 2008
As of | ||||||||
September 30, 2008 | As of | |||||||
(unaudited) | December 31, 2007 | |||||||
($) | ($) | |||||||
Assets: | ||||||||
Investments in: | ||||||||
Unaffiliated issuers, at value (cost $217,672,705 and $345,348,887, respectively) | 132,519,208 | 284,085,088 | ||||||
Affiliated issuers, at value (cost $39,497,023 and $26,677,127, respectively) | 41,735,411 | 27,901,063 | ||||||
Total investments, at value (cost $257,169,728 and $372,026,014, respectively) | 174,254,619 | 311,986,151 | ||||||
Cash and cash equivalents | — | 4,291,098 | ||||||
Foreign currency (cost $3,176 and $0, respectively) | 3,102 | — | ||||||
Receivable for: | ||||||||
Investments sold | 17,716,081 | 24,628,173 | ||||||
Dividend and interest | 4,506,802 | 5,951,790 | ||||||
Other assets | 154,586 | 66,712 | ||||||
Total assets | 196,635,190 | 346,923,924 | ||||||
Liabilities: | ||||||||
Due to Custodian | 3,224,095 | — | ||||||
Notes payable (Note 4) | 49,000,000 | 142,000,000 | ||||||
Net discount and unrealized depreciation on unfunded transactions | 11,863 | 16,228 | ||||||
Payables for: | ||||||||
Investments purchased | 24,299,665 | 19,387,884 | ||||||
Investment advisory fee (Note 3) | 919,733 | 1,812,285 | ||||||
Administration fee (Note 3) | 160,953 | 317,150 | ||||||
Incentive fee (Note 3) | — | 383,951 | ||||||
Interest expense (Note 4) | 195,259 | 759,465 | ||||||
Directors’ fees (Note 3) | 2,006 | 592 | ||||||
Accrued expenses and other liabilities | 281,281 | 231,317 | ||||||
Total liabilities | 78,094,855 | 164,908,872 | ||||||
Stockholders’ equity (net assets) | 118,540,335 | 182,015,052 | ||||||
Composition of stockholders’ equity (net assets): | ||||||||
Common Stock, par value $.001 per share: 550,000,000 common stock authorized, 17,716,771 common stock outstanding | 17,717 | 17,717 | ||||||
Paid-in capital | 253,163,644 | 253,163,644 | ||||||
Undistributed net investment income | 965,144 | 3,420,147 | ||||||
Accumulated net realized gain/(loss) on unaffiliated investments, total return swaps and foreign currency transactions | (52,679,469 | ) | (14,547,689 | ) | ||||
Net unrealized appreciation/(depreciation) on investments, unfunded transactions and translation of assets and liabilities denominated in foreign currency | (82,926,701 | ) | (60,038,767 | ) | ||||
Stockholders’ equity (net assets) | 118,540,335 | 182,015,052 | ||||||
Net Asset Value Per Share (Net Assets/Common Stock Outstanding) | 6.69 | 10.27 | ||||||
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As of September 30, 2008
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2008 | September 30, 2007 | September 30, 2008 | September 30, 2007(a) | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
($) | ($) | ($) | ($) | |||||||||||||
Investment Income: | ||||||||||||||||
Interest income from unaffiliated issuers | 2,758,382 | 9,345,514 | 17,089,645 | 19,796,684 | ||||||||||||
Interest income from affiliated issuers (Note 7) | 1,328,066 | — | 1,328,066 | — | ||||||||||||
Unaffiliated dividends (net of foreign taxes withheld) | — | 175,702 | 40,685 | 954,901 | ||||||||||||
Total investment income | 4,086,448 | 9,521,216 | 18,458,396 | 20,751,585 | ||||||||||||
Expenses: | ||||||||||||||||
Investment advisory fees (Note 3) | 919,733 | 2,207,594 | 3,566,640 | 4,493,525 | ||||||||||||
Incentive fees (Note 3) | — | — | 1,680,346 | 1,326,507 | ||||||||||||
Administration fees (Note 3) | 160,953 | 386,356 | 624,162 | 786,367 | ||||||||||||
Accounting service fees | 41,777 | 37,934 | 119,027 | 89,063 | ||||||||||||
Transfer agent fees | 8,241 | 8,192 | 23,367 | 19,233 | ||||||||||||
Professional fees | 243,867 | 133,266 | 582,386 | 234,356 | ||||||||||||
Directors’ fees | 4,927 | 10,334 | 16,788 | 24,263 | ||||||||||||
Custody fees | 6,427 | 15,450 | 28,573 | 38,673 | ||||||||||||
Registration fees | 6,032 | 8,072 | 18,065 | 8,072 | ||||||||||||
Reports to stockholders | 20,583 | 10,982 | 41,554 | 49,371 | ||||||||||||
Delaware franchise tax expense | 9,115 | 27,357 | 38,951 | 48,455 | ||||||||||||
Organization expense (Note 3) | — | — | — | 170,383 | ||||||||||||
Rating agency fees | 10,386 | 24,506 | 40,148 | 32,497 | ||||||||||||
Interest expense (Note 4) | 615,401 | 3,083,273 | 2,726,479 | 5,216,061 | ||||||||||||
Other expense | 66,552 | 46,785 | 258,070 | 80,954 | ||||||||||||
Total operating expenses | 2,113,994 | 6,000,101 | 9,764,556 | 12,617,780 | ||||||||||||
Fees and expenses waived or reimbursed by Investment Adviser (Note 3) | — | (744,834 | ) | (809,977 | ) | (3,594,496 | ) | |||||||||
Net expenses | 2,113,994 | 5,255,267 | 8,954,579 | 9,023,284 | ||||||||||||
Net investment income | 1,972,454 | 4,265,949 | 9,503,817 | 11,728,301 | ||||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||||||||||||||
Net realized gain/(loss) on unaffiliated investments | (5,099,876 | ) | (7,645,111 | ) | (38,131,772 | ) | (7,401,030 | ) | ||||||||
Net realized gain/(loss) on total return swaps | — | 137,821 | — | 172,955 | ||||||||||||
Net realized gain/(loss) on foreign currency transactions | (3 | ) | 18,914 | (8 | ) | (26,660 | ) | |||||||||
Net change in unrealized appreciation/(depreciation) on investments | (3,971,133 | ) | (22,906,625 | ) | (22,875,246 | ) | (29,833,092 | ) | ||||||||
Net change in unrealized appreciation/(depreciation) on unfunded transactions | (1,807 | ) | — | (11,863 | ) | — | ||||||||||
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency | (2,794 | ) | 8,611 | (825 | ) | 38,362 | ||||||||||
Net realized and unrealized gain/(loss) on investments | (9,075,613 | ) | (30,386,390 | ) | (61,019,714 | ) | (37,049,465 | ) | ||||||||
Net decrease in stockholders’ equity (net assets) resulting from operations | (7,103,159 | ) | (26,120,441 | ) | (51,515,897 | ) | (25,321,164 | ) | ||||||||
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. |
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For the Nine Months Ended September 30, 2008 (unaudited)
Total | ||||||||||||||||||||||||||||
Undistributed | Undistributed | Net Unrealized | Stockholders’ | |||||||||||||||||||||||||
Common Stock | Paid-in Capital | Net Investment | Net Realized | Appreciation/ | Equity | |||||||||||||||||||||||
Shares | Amount | in Excess of Par | Income | Gain/(Loss) | (Depreciation) | (Net Assets) | ||||||||||||||||||||||
Balance at December 31, 2007 | 17,716,771 | $ | 17,717 | $ | 253,163,644 | $ | 3,420,147 | $ | (14,547,689 | ) | $ | (60,038,767 | ) | $ | 182,015,052 | |||||||||||||
Distributions declared | — | — | — | (11,958,820 | ) | — | — | (11,958,820 | ) | |||||||||||||||||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | — | — | — | 9,503,817 | (38,131,780 | ) | (22,887,934 | ) | (51,515,897 | ) | ||||||||||||||||||
Balance at September 30, 2008 | 17,716,771 | $ | 17,717 | $ | 253,163,644 | $ | 965,144 | $ | (52,679,469 | ) | $ | (82,926,701 | ) | $ | 118,540,335 | |||||||||||||
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For the | For the | |||||||
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2008 | September 30, 2007(a) | |||||||
(unaudited) | (unaudited) | |||||||
($) | ($) | |||||||
Cash Flow Provided by (Used in) Operating Activities: | ||||||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | (51,515,897 | ) | (25,321,164 | ) | ||||
Adjustments to reconcile net increase/(decrease) in stockholders’ equity (net assets) resulting from operations: | ||||||||
Net realized (gain)/loss on investments, total return swaps and foreign currency transactions | 38,131,780 | 7,254,735 | ||||||
Net change in unrealized (appreciation)/depreciation on investments, unfunded transactions and translation of assets and liabilities denominated in foreign currency | 22,887,934 | 29,794,730 | ||||||
Purchase of investments securities | (95,806,986 | ) | (1,078,148,157 | ) | ||||
Proceeds from disposition of investment securities, total return swaps and foreign currency transactions | 173,428,162 | 672,568,075 | ||||||
Net amortization /(accretion) of premium/(discount) | (896,662 | ) | (804,006 | ) | ||||
Net realized and change in unrealized gain/(loss) on foreign currency | (833 | ) | 38,362 | |||||
(Increase)/Decrease in dividends, interest and fees receivable | 1,444,988 | (6,643,588 | ) | |||||
(Increase)/Decrease in receivable for investments sold | 6,912,092 | (45,153,853 | ) | |||||
(Increase)/Decrease in other assets | (87,874 | ) | (278,297 | ) | ||||
Increase/(Decrease) in payable for investments purchased | 4,911,781 | 46,630,844 | ||||||
Increase/(Decrease) in payables to related parties | (1,439,928 | ) | 1,848,427 | |||||
Increase/(Decrease) in interest payable | (564,206 | ) | 868,643 | |||||
Increase/(Decrease) in other liabilities | 42,378 | 154,468 | ||||||
Net Cash Flow Provided by (Used in) Operating Activities | 97,446,729 | (397,190,781 | ) | |||||
Cash Flows Provided by (Used in) Financing Activities: | ||||||||
Net proceeds from issuance of common stock | — | 251,852,704 | ||||||
Increase/(Decrease) in notes payable | (93,000,000 | ) | 165,000,000 | (b) | ||||
Increase in due to custodian | 3,224,095 | — | ||||||
Increase in accrued offering cost | — | 50,240 | ||||||
Distributions paid in cash | (11,958,820 | ) | (7,936,487 | ) | ||||
Net Cash Flow Provided by (Used in) Financing Activities | (101,734,725 | ) | 408,966,457 | |||||
Net Increase (Decrease) in Cash, Cash Equivalents and Foreign Currency | (4,287,996 | ) | 11,775,676 | |||||
Cash, Cash Equivalents and Foreign Currency: | ||||||||
Beginning of the period | 4,291,098 | — | ||||||
End of the period | 3,102 | 11,775,676 | ||||||
Supplemental Information: | ||||||||
Interest paid during the period | 3,290,685 | 4,347,418 | ||||||
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. | |
(b) | On January 18, 2007, $4 million was borrowed from affiliate and repaid in March 2007. See Note 9 for details. |
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(a) | Investments in financial instruments | |
Investment transactions are recorded on the trade date. | ||
The Company will use the following valuation methods to determine either current market value for investments for which market quotations are available, or if not available, then fair value, as determined in good faith pursuant to policies and procedures approved by the Company’s Board of Directors (the “Board”): | ||
Market Quotations Available | ||
The market value of each security listed or traded on any recognized securities exchange or automated quotation system will be the last reported sale price at the relevant valuation date on the composite tape or on the principal exchange on which such security is traded. If no sale is reported on that date, the Company utilizes, when |
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available, pricing quotations from principal market makers. Such quotations may be obtained from third-party pricing services or directly from investment brokers and dealers in the secondary market. Generally, the Company’s loan and bond positions are not traded on exchanges and consequently are valued based on market prices received from third-party pricing services or broker-dealer sources. The valuation of certain securities for which there is no market may take into account appraisal reports from independent valuation firms. Short-term debt securities having a remaining maturity of 60 days or less when purchased and debt securities originally purchased with maturities in excess of 60 days but which currently have maturities of 60 days or less may be valued at cost adjusted for amortization of premiums and accretion of discounts. | ||
Market Quotations Not Available | ||
The Company will take the following steps each time it determines its net asset value in order to determine the value of its securities for which market quotations are not readily available, as determined in good faith pursuant to policies and procedures approved by the Board: |
1. | The valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment. | ||
2. | Preliminary valuation conclusions will then be documented and discussed with Highland Capital Management, L.P.’s (the “Investment Adviser”) senior management. | ||
3. | The valuation committee, comprised of the Investment Adviser’s investment professionals and other senior management, will then review these preliminary valuations. An independent valuation firm engaged by the Company’s Board will review all of these preliminary valuations each quarter. | ||
4. | Finally, the Board discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith, pursuant to policies and procedures approved by the Board, based on the input of the valuation committee and an independent valuation firm. |
Determination of fair values is uncertain because it involves subjective judgments and estimates not easily substantiated by auditing procedures. | ||
Adoption of Statement of Financial Accounting Standards No. 157 “Fair Value Measurement” (“FAS 157”): | ||
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 157, “Fair Value Measurement,” which is effective for financial statements issued for fiscal years beginning after November 15, 2007. FAS 157 defines how fair value should be determined for financial reporting purposes, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about the use of fair value measurements, but is not expected to result in any changes to the fair value measurements of the Company’s investments. FAS 157 requires companies to provide expanded information about the assets and liabilities measured at fair value and the potential effect of these fair valuations on net assets. | ||
The Company has adopted FAS 157 as of January 1, 2008. The Company has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. Based on this assessment, the adoption of FAS 157 did not have any material effect on the Company’s net asset value. However, the adoption of FAS 157 does require the Company to provide additional disclosures about the inputs used to develop the measurements and the effect of certain measurements on changes in net assets for the reportable periods as contained in the Company’s periodic filings. The three levels of the fair value hierarchy established under FAS 157 are described below: |
• | Level 1 — Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement; | ||
• | Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and |
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• | Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company’s own assumptions that market participants would use to price the asset or liability based on the best available information. |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Company’s assets as of September 30, 2008 as follows: |
Assets at Fair Value | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Portfolio Investments | $ | 174,254,619 | $ | 151,109 | $ | 62,075,593 | $ | 112,027,917 | ||||||||
Cash, cash equivalents and foreign currency | 3,102 | 3,102 | — | — | ||||||||||||
Total | $ | 174,257,721 | $ | 154,211 | $ | 62,075,593 | $ | 112,027,917 | ||||||||
The Company did not have any liabilities that were measured at fair value on a recurring basis at September 30, 2008. | ||
The tables below set forth a summary of changes in the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2008. |
For the Three Months Ended | ||||
September 30, 2008 | ||||
Assets at Fair Value Using Unobservable Inputs (Level 3) | Portfolio Investments | |||
Balance as of June 30, 2008 | $ 46,033,783 | |||
Transfers in/(out) of Level 3 | 60,383,855 | |||
Net amortization/(accretion) of premium/(discount) | 41,054 | |||
Net realized gains/(losses) | (2,027,172 | ) | ||
Net unrealized gains/(losses) | 520,631 | |||
Net purchases and sales * | 7,075,766 | |||
Balance as of September 30, 2008 | $112,027,917 | |||
For the Nine Months Ended | ||||
September 30, 2008 | ||||
Assets at Fair Value Using Unobservable Inputs (Level 3) | Portfolio Investments | |||
Balance as of December 31, 2007 | $ 37,888,863 | |||
Transfers in/(out) of Level 3 | 85,188,420 | |||
Net amortization/(accretion) of premium/(discount) | 333,542 | |||
Net realized gains/(losses) | (2,027,172 | ) | ||
Net unrealized gains/(losses) | (21,971,482 | ) | ||
Net purchases and sales * | 12,615,746 | |||
Balance as of September 30, 2008 | $112,027,917 | |||
* | Includes any applicable borrowings and/or paydowns made on revolving credit facilities held in the Company’s investment portfolio. |
The net unrealized losses presented in the tables above relate to investments that are still held at September 30, 2008, and the Company presents these unrealized losses on the Statement of Operations as net change in unrealized appreciation/(depreciation) on investments. | ||
Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments. As a result, with respect to certain investments for which there is currently limited market visibility or activity, for the quarter ended September 30, 2008, approximately $60,383,855 of the Company’s portfolio investments were transferred from Level 2 to Level 3. | ||
(b) | Net asset value per share | |
The net asset value per share disclosed on the Statement of Assets and Liabilities is calculated by dividing the net assets attributable to the shares of the Company’s common stock by the number of such shares outstanding at period-end. |
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(c) | Securities transactions | |
All securities transactions are accounted for on a trade-date basis. Gains or losses on the sale of investments are calculated by using the specific identification method. | ||
(d) | Interest income | |
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income. Payment-in-Kind (“PIK”) interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of distributions, even though the Company has not yet collected cash. For the three months ended September 30, 2008, approximately $0.1 million of PIK interest income was recorded. | ||
(e) | Taxation — general | |
The Company intends to comply with the applicable provisions of the Code pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes. However, depending on the level of taxable income earned in a year, the Company may choose to carry forward taxable income in excess of distributions and pay the 4% excise tax on the difference. Additionally, the Company is subject to franchise taxes in the state of Delaware. In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 provides guidance on how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authorities. Tax positions not deemed to satisfy the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. FASB required adoption of FIN 48 for fiscal years beginning after December 15, 2006, and FIN 48 is to be applied to all open tax years as of the effective date. However, on December 22, 2006, the SEC delayed the required implementation date of FIN 48 for business development companies until March 31, 2007. As of December 31, 2007, the Company adopted FIN 48 for all subsequent reporting periods and management has determined that there is no material impact on the financial statements. | ||
(f) | Taxation of distributions | |
Book and tax basis differences relating to stockholder distributions and other permanent book and tax differences are reclassified to paid-in capital. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP. | ||
(g) | Payment of distributions | |
Distributions to common stockholders are recorded as of the date of declaration. The amount to be paid out as a distribution is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually. The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon its taxable income for the full year and distributions paid during the full year, therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of its distributions for a full year. | ||
(h) | Foreign currency | |
The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company’s investments in foreign securities may involve certain risks such as foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which |
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could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments and therefore the earnings of the Company. | ||
(i) | Forward contracts | |
The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. | ||
(j) | Investment in swap agreements | |
Swap agreements are recorded at fair value as estimated by management in good faith. The net unrealized gain or loss on swap agreements is recorded as an asset or liability on the Statement of Assets and Liabilities. The change in unrealized gain or loss is recorded in the Statement of Operations. Cash paid or received on net settlements is recorded as realized gain or loss in the Statement of Operations. | ||
(k) | Cash and cash equivalents | |
Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at cost which approximates fair value as of September 30, 2008. | ||
(l) | Registration expenses | |
The Company records registration expenses related to shelf filings as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with Section 8.24 of the AICPA Audit and Accounting Guide for Investment Companies. | ||
(m) | Incentive fee expense recognition | |
The realized capital gain component of the incentive fee (the “Capital Gains Fee”) is payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement, as of the termination date.) The Capital Gains Fee is estimated as of the end of the each calendar quarter based on the Company’s realized capital gains, if any, net of all realized capital losses, unrealized capital depreciation and fees paid on such net capital gains, computed on a cumulative basis. To the extent that Capital Gains Fees are earned by the Investment Adviser, an accrual is made in the amount of the estimated Capital Gains Fee. Because unrealized losses may fluctuate from quarter to quarter, the accrual, if any, may fluctuate as well. There were no Capital Gains Fees paid or accrued for the quarter ended September 30, 2008. (See Note 3 for additional information.) |
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E-15
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E-16
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Borrower | Unfunded Loan Commitment | |||
Comcorp Broadcasting, Inc. | $84,131 | |||
$84,131 | ||||
Issuer | Shares | Principal ($) | Market Value ($) | |||||||||
Comcorp Broadcasting, Inc. | ||||||||||||
Revolving Loan | $ | 1,800,821 | $ | 1,546,905 | ||||||||
Term Loan | $ | 18,849,521 | 16,191,739 | |||||||||
Communications Corp. of America | 1,256,635 | 6,584,767 | ||||||||||
Genesys Limited | 12,000,000 | 17,412,000 | ||||||||||
Total | $ | 41,735,411 | ||||||||||
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Nine Months Ended | Nine Months Ended | Year Ended | ||||||||||
September 30, 2008 | September 30, 2007(a) | December 31, 2007(a) | ||||||||||
Net asset value, beginning of period | $ 10.27 | $ 14.33 | (b) | $ 14.33 | (b) | |||||||
Net investment income | 0.54 | 0.67 | 0.97 | |||||||||
Net realized and unrealized loss on investments | (3.44 | ) | (2.32 | ) | (4.43 | ) | ||||||
Total from investment operations | (2.90 | ) | (1.65 | ) | (3.46 | ) | ||||||
Common Stock Offering Cost | — | (0.07 | ) | (0.07 | ) | |||||||
Capital Contribution | — | 0.26 | (c) | 0.26 | (c) | |||||||
Distributions Paid | (0.68 | ) | (0.53 | ) | (0.79 | ) | ||||||
Net asset value, end of period | $ 6.69 | $ 12.34 | $ 10.27 | |||||||||
Market price per share, beginning of period | $ 8.57 | $ 15.00 | $ 15.00 | |||||||||
Market price per share, end of period | $ 2.97 | $ 12.85 | $ 8.57 | |||||||||
Total investment return (d) | ||||||||||||
Based on net asset value per share | (26.30 | )%(e) | (10.42 | )%(e) | (23.30 | )%(e) | ||||||
Based on market price per share | (60.79 | )%(e) | (10.88 | )%(e) | (38.85 | )%(e) | ||||||
Net assets, end of period (f) | $118,540 | $218,595 | $182,015 | |||||||||
Ratios to Average Net Assets/Supplemental Data: | ||||||||||||
Total operating expense including interest expense | 9.09 | % | 8.78 | %(g) | 9.54 | %(g) | ||||||
Total operating expenses excluding interest expense | 6.55 | % | 5.15 | %(g) | 5.74 | %(g) | ||||||
Interest expense | 2.54 | % | 3.63 | %(g) | 3.80 | %(g) | ||||||
Waiver/reimbursement | 0.75 | % | 2.50 | %(g) | 2.24 | %(g) | ||||||
Net expense (h) | 8.34 | % | 6.28 | %(g) | 7.30 | %(g) | ||||||
Net investment income | 8.85 | % | 8.16 | %(g) | 8.77 | %(g) | ||||||
Portfolio turnover rate | 41 | %(e) | 166 | %(e) | 224 | %(e) | ||||||
Debt: | ||||||||||||
Total loan outstanding, end of period (f) | $ 49,000 | $165,000 | $142,000 | |||||||||
Asset Coverage per $1000 indebtedness, end of period | $ 3,419 | (i) | $ 2,325 | (i) | $ 2,282 | (i) |
(a) | The Company commenced operations on January 18, 2007. | |
(b) | Net asset value at the beginning of the period reflects the deduction of the one-time initial sales load in connection with the offering. | |
(c) | On February 20, 2007, the Investment Adviser contributed an additional $87,596 in capital to the Company prior to the Offering. No additional shares were issued in the transaction. The contribution per share is based on the pre-offering share amount of 333,333.33. | |
(d) | Total investment return based on market value may result in substantially different returns than investment return based on net asset value, because market value can be significantly greater or less than the net asset value. Investment return assumes reinvestment of distributions. | |
(e) | Not annualized. | |
(f) | Dollars in thousands. | |
(g) | Ratios to average net assets are calculated using the net assets for the period starting from the Offering on February 27, 2007 through December 31, 2007. | |
(h) | Net expense ratio has been calculated after applying any waiver/reimbursement. | |
(i) | Calculated by subtracting the Company’s total liabilities (not including any bank loans and senior securities) from the Company’s total assets, and dividing such amounts by the principal amount of the debt outstanding. |
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Distributions paid from: | 2007 | |||
Ordinary income * | $ | 13,915,795 | ||
Long-term capital gains | $ | — |
* | For tax purposes short-term capital gains distributions, if any, are considered ordinary income distributions. |
Capital loss carryforward ** | $ | (9,946,969 | ) | |
Undistributed ordinary income | $ | 3,525,488 | ||
Undistributed long-term capital gains | $ | — | ||
Net unrealized appreciation/(depreciation) | $ | (60,038,767 | ) |
** | The accumulated losses of $9,946,969 to offset future capital gains, if any, expire on December 31, 2015. |
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As of June 30, 2008
Principal ($) | Cost ($) | Value ($) | ||||||||||
Senior Loans (a) - 89.6% | ||||||||||||
AEROSPACE - 5.0% | ||||||||||||
IAP Worldwide Services, Inc. | ||||||||||||
First Lien Term Loan, 8.25%, 12/30/12 | 4,561,431 | 4,572,305 | 3,789,774 | |||||||||
US Airways Group, Inc. | ||||||||||||
Loan, 03/13/14 (b) | 4,000,000 | 3,060,000 | 2,681,280 | |||||||||
7,632,305 | 6,471,054 | |||||||||||
BROADCASTING - 15.4% | ||||||||||||
Comcorp Broadcasting, Inc. | ||||||||||||
Revolving Loan, 8.38%, 10/02/12 (c) (d) | 1,539,378 | 1,539,378 | 1,494,582 | |||||||||
Term Loan, 8.38%, 04/02/13 (c) | 18,849,521 | 18,490,181 | 18,301,000 | |||||||||
20,029,559 | 19,795,582 | |||||||||||
CABLE/WIRELESS VIDEO - 3.4% | ||||||||||||
WideOpen West Finance, LLC | ||||||||||||
Second Lien Term Loan, 9.50%, 06/27/15 | 5,126,645 | 5,038,989 | 4,357,648 | |||||||||
CONSUMER NON-DURABLES - 4.2% | ||||||||||||
Latham Manufacturing Corp. | ||||||||||||
New Term Loan, 8.75%, 06/30/12 | 1,919,396 | 1,917,584 | 1,353,174 | |||||||||
Totes Isotoner Corp. | ||||||||||||
Second Lien Term Loan, 8.63%, 01/31/14 | 4,877,228 | 4,917,065 | 4,023,713 | |||||||||
6,834,649 | 5,376,887 | |||||||||||
DIVERSIFIED MEDIA - 1.1% | ||||||||||||
Penton Media, Inc. | ||||||||||||
Second Lien Term Loan, 7.90%, 02/01/14 | 2,000,000 | 2,039,187 | 1,460,000 | |||||||||
ENERGY - 6.5% | ||||||||||||
Resolute Aneth, LLC | ||||||||||||
Second Lien Term Loan, 7.41%, 06/26/13 | 4,000,000 | 4,000,000 | 3,500,000 | |||||||||
TARH E&P Holdings, L.P. | ||||||||||||
First Lien Term Loan, 7.68%, 06/29/12 | 5,000,000 | 5,000,000 | 4,825,000 | |||||||||
9,000,000 | 8,325,000 | |||||||||||
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Table of Contents
Principal ($) | Cost ($) | Value ($) | ||||||||||
Senior Loans (continued) | ||||||||||||
FINANCIAL - 8.9% | ||||||||||||
Emerson Reinsurance Ltd. | ||||||||||||
Tranche C Term Loan, 8.06%, 12/15/11 | 1,500,000 | 1,494,200 | 1,417,500 | |||||||||
Flatiron Re Ltd. | ||||||||||||
Closing Date Term Loan, 7.06%, 12/29/10 | 314,150 | 316,850 | 310,223 | |||||||||
Delayed Draw Term Loan, 7.06%, 12/29/10 | 152,166 | 153,474 | 150,264 | |||||||||
Kepler Holdings Ltd. | ||||||||||||
Term Loan, 8.31%, 06/30/09 | 5,000,000 | 5,014,072 | 4,725,000 | |||||||||
Penhall International Corp. | ||||||||||||
PIK Term Loan, 10.13%, 04/01/12 | 5,456,661 | 5,388,366 | 4,856,428 | |||||||||
12,366,962 | 11,459,415 | |||||||||||
FOREST PRODUCTS/CONTAINERS - 0.3% | ||||||||||||
Tegrant Corp. | ||||||||||||
Second Lien Term Loan, 8.31%, 03/08/15 | 1,000,000 | 1,000,000 | 325,000 | |||||||||
GAMING/LEISURE - 16.7% | ||||||||||||
Fontainebleau Florida Hotel, LLC | ||||||||||||
Tranche C Term Loan, 8.79%, 06/06/12 | 6,000,000 | 6,000,000 | 5,175,000 | |||||||||
Harrah’s Operating Co. | ||||||||||||
Term B-2 Loan, 5.80%, 01/28/15 | 4,987,500 | 4,681,292 | 4,582,266 | |||||||||
Lake at Las Vegas Joint Venture, LLC | ||||||||||||
PIK Term Loan, 18.35%, 06/20/12 (e) | 30,984,287 | 28,269,771 | 6,737,535 | |||||||||
Revolving Loan Credit-Linked Deposit, 18.35%, 06/20/12 (e) | 3,611,111 | 3,611,111 | 860,636 | |||||||||
MetroFlag BP, LLC / Metroflag Cable, LLC | ||||||||||||
Second Lien Term Loan, 11.48%, 07/06/09 | 5,000,000 | 5,000,000 | 4,100,000 | |||||||||
47,562,174 | 21,455,437 | |||||||||||
HEALTHCARE - 5.7% | ||||||||||||
Aveta Inc. | ||||||||||||
MMM Original Term Loan, 08/22/11 (b) | 2,126,404 | 1,871,236 | 2,022,211 | |||||||||
NAMM New Term Loan, 08/22/11 (b) | 277,660 | 244,341 | 264,055 | |||||||||
NAMM Original Term Loan, 08/22/11 (b) | 500,330 | 440,291 | 475,814 | |||||||||
NAMM PHMC Acquistion Term Loan, 08/22/11 (b) | 48,406 | 42,597 | 46,034 | |||||||||
PHMC Acquisition Term Loan, 08/22/11 (b) | 1,742,637 | 1,533,521 | 1,657,248 | |||||||||
LifeCare Holdings, Inc. | ||||||||||||
Term Loan, 7.05%, 08/11/12 | 984,810 | 964,158 | 876,481 | |||||||||
Mylan, Inc. | ||||||||||||
Tranche B Term Loan, 10/02/14 (b) | 1,994,987 | 1,960,075 | 1,974,758 | |||||||||
7,056,219 | 7,316,601 | |||||||||||
HOUSING - 3.8% | ||||||||||||
MPH Mezzanine II, LLC | ||||||||||||
Mezzanine 2B, 7.48% (c) (e) | 10,000,000 | 10,000,000 | 0 | |||||||||
MPH Mezzanine III, LLC | ||||||||||||
Mezzanine 3, 8.48% (c) (e) | 4,000,000 | 4,000,000 | 0 | |||||||||
Pacific Clarion, LLC | ||||||||||||
Term Loan, 15.00%, 01/23/09 (c) (f) | 4,950,573 | 4,904,736 | 4,864,928 | |||||||||
18,904,736 | 4,864,928 | |||||||||||
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Principal ($) | Cost ($) | Value ($) | ||||||||||
Senior Loans (continued) | ||||||||||||
MANUFACTURING - 0.4% | ||||||||||||
Metrologic Instruments, Inc. | ||||||||||||
Second Lien Term Loan, 10.25%, 12/21/15 | 500,000 | 507,213 | 470,000 | |||||||||
RETAIL - 2.3% | ||||||||||||
Claire’s Stores, Inc. | ||||||||||||
Term B Loan, 05/29/14 (b) | 3,989,924 | 3,221,864 | 2,922,620 | |||||||||
SERVICE - 7.5% | ||||||||||||
LVI Services, Inc. | ||||||||||||
Tranche B Term Loan, 7.80%, 11/16/11 | 9,425,685 | 9,355,429 | 8,058,960 | |||||||||
NES Rentals Holdings, Inc. | ||||||||||||
Permanent Second Lien Term Loan, 9.63%, 07/20/13 | 2,000,000 | 2,030,943 | 1,565,000 | |||||||||
11,386,372 | 9,623,960 | |||||||||||
TRANSPORTATION — AUTOMOTIVE - 5.4% | ||||||||||||
BST Safety Textiles Acquisition GmbH | ||||||||||||
Second Lien Facility, 11.78%, 06/30/09 | 665,500 | 666,425 | 482,488 | |||||||||
Motor Coach Industries International, Inc. | ||||||||||||
PIK Second Lien Term Loan, 11.13%, 12/01/08 (e) | 7,715,836 | 7,780,136 | 6,442,723 | |||||||||
8,446,561 | 6,925,211 | |||||||||||
UTILITY - 3.0% | ||||||||||||
Entegra Power Group, LLC | ||||||||||||
PIK Third Lien Term Loan, 8.80%, 10/19/15 | 169,787 | 169,787 | 149,837 | |||||||||
Texas Competitive Electric Holdings Co., LLC | ||||||||||||
Initial Tranche B-2 Term Loan, 10/10/14 (b) | 3,987,444 | 3,819,131 | 3,700,826 | |||||||||
3,988,918 | 3,850,663 | |||||||||||
Total Senior Loans | 165,015,708 | 115,000,006 | ||||||||||
Corporate Notes and Bonds - 35.6% | ||||||||||||
BROADCASTING - 0.9% | ||||||||||||
Young Broadcasting, Inc. | ||||||||||||
10.00%, 03/01/11 | 2,000,000 | 1,992,980 | 1,130,000 | |||||||||
DIVERSIFIED MEDIA - 5.8% | ||||||||||||
Baker & Taylor, Inc. | ||||||||||||
11.50%, 07/01/13 (g) | 8,300,000 | 8,754,232 | 7,470,000 | |||||||||
FOOD/TOBACCO - 2.5% | ||||||||||||
Pinnacle Foods Group, Inc. | ||||||||||||
10.63%, 04/01/17 | 4,000,000 | 4,036,250 | 3,220,000 | |||||||||
E-22
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Principal ($) | Cost ($) | Value ($) | ||||||||||
Corporate Notes and Bonds (continued) | ||||||||||||
HEALTHCARE - 14.8% | ||||||||||||
Argatroban Royalty Sub, LLC | ||||||||||||
18.50%, 09/21/14 (g) | 4,131,674 | 4,131,674 | 4,152,332 | |||||||||
Azithromycin Royalty Sub, LLC | ||||||||||||
16.00%, 05/15/19 (g) | 5,000,000 | 4,975,925 | 5,025,000 | |||||||||
Celtic Pharma Phinco B.V., PIK | ||||||||||||
17.00%, 06/15/12 (g) | 9,743,318 | 9,273,126 | 9,792,035 | |||||||||
18,380,725 | 18,969,367 | |||||||||||
HOUSING - 6.6% | ||||||||||||
Realogy Corp. | ||||||||||||
10.50%, 04/15/14 | 5,000,000 | 4,961,767 | 3,500,000 | |||||||||
12.38%, 04/15/15 | 10,000,000 | 5,789,418 | 4,950,000 | |||||||||
10,751,185 | 8,450,000 | |||||||||||
INFORMATION TECHNOLOGY - 2.4% | ||||||||||||
Freescale Semiconductor, Inc. | ||||||||||||
10.13%, 12/15/16 | 4,000,000 | 4,000,000 | 3,070,000 | |||||||||
TRANSPORTATION — AUTOMOTIVE - 2.6% | ||||||||||||
Delphi Corp. | ||||||||||||
6.50%, 05/01/09 (e) | 2,500,000 | 1,850,000 | 543,750 | |||||||||
6.50%, 08/15/13 (e) | 2,667,000 | 1,861,483 | 570,071 | |||||||||
6.55%, 06/15/16 (e) | 1,500,000 | 1,151,250 | 330,000 | |||||||||
7.13%, 05/01/29 (e) | 3,500,000 | 2,565,250 | 752,500 | |||||||||
Motor Coach Industries International, Inc. | ||||||||||||
11.25%, 05/01/09 (e) | 12,000,000 | 10,999,042 | 1,200,000 | |||||||||
18,427,025 | 3,396,321 | |||||||||||
Total Corporate Notes and Bonds | 66,342,397 | 45,705,688 | ||||||||||
Claims - 0.2% (h) | ||||||||||||
AEROSPACE - 0.2% | ||||||||||||
Northwest Airlines, Inc. | ||||||||||||
ALPA Trade Claim | 3,000,000 | 659,420 | 26,250 | |||||||||
Bell Atlantic Trade Claim | 2,500,000 | 624,094 | 21,875 | |||||||||
EDC Trade Claims | 2,500,000 | 637,393 | 21,875 | |||||||||
Flight Attendant Claim | 5,326,500 | 1,144,392 | 46,607 | |||||||||
GE Trade Claim | 1,500,000 | 389,207 | 13,125 | |||||||||
IAM Trade Claim | 4,728,134 | 1,088,341 | 41,371 | |||||||||
Pinnacle Trade Claim | 8,433,116 | 2,170,109 | 73,790 | |||||||||
Retiree Claim | 3,512,250 | 754,602 | 30,732 | |||||||||
Total Claims | 7,467,558 | 275,625 | ||||||||||
E-23
Table of Contents
Shares | Cost ($) | Value ($) | ||||||||||
Common Stocks - 6.1% | ||||||||||||
AEROSPACE - 0.9% | ||||||||||||
Northwest Airlines, Inc. (h) | 179,224 | 1,190,455 | 1,193,629 | |||||||||
BROADCASTING - 0.4% | ||||||||||||
ICO Global Communications (h) | 138,632 | 500,000 | 451,940 | |||||||||
CABLE — US CABLE - 0.0% | ||||||||||||
Time Warner Cable, Inc. (h) | 61 | 1,544 | 1,622 | |||||||||
TELECOMMUNICATIONS - 4.8% | ||||||||||||
Communications Corp. of America (c) (h) | 1,256,635 | 7,187,203 | 6,132,379 | |||||||||
Total Common Stocks | 8,879,202 | 7,779,570 | ||||||||||
Total Investments - 131.5% | 247,704,865 | 168,760,889 | ||||||||||
Other Assets & Liabilities, Net - (31.5)% | (40,459,880 | ) | ||||||||||
Net Assets - 100.0% | 128,301,009 | |||||||||||
(a) | Senior loans in which Highland Distressed Opportunities, Inc. (the “Company”) invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium (unless otherwise identified by footnote (f), all senior loans carry a variable rate interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at June 30, 2008. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown. | |
(b) | All or a portion of this position has not settled. Contract rates do not take effect until settlement date. | |
(c) | Represents fair value as determined by the Company’s investment adviser, in good faith, pursuant to the policies and procedures approved by the Company’s Board of Directors (the “Board”). Securities with a total aggregate market value of $30,792,889, or 24.0% of net assets were fair valued as of June 30, 2008. | |
(d) | Senior loan has additional unfunded loan commitments. See Note 6. | |
(e) | The issuer is in default of certain debt covenants. Income is not being accrued. | |
(f) | Fixed rate senior loan. | |
(g) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At June 30, 2008, these securities amounted to $26,439,367 or 20.6% of net assets. | |
(h) | Non-income producing security. | |
PIK | Payment-in-Kind |
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As of June 30, 2008
As of | ||||||||
June 30, 2008 | As of | |||||||
(unaudited) | December 31, 2007 | |||||||
($) | ($) | |||||||
Assets: | ||||||||
Investments, at value (cost $247,704,865 and $372,026,014, respectively) | 168,760,889 | 311,986,151 | ||||||
Cash | 9,925,250 | 4,291,098 | ||||||
Foreign currency (cost $3,090 and $0, respectively) | 3,079 | — | ||||||
Receivable for: | ||||||||
Receivable for investments sold | 26,363,779 | 24,628,173 | ||||||
Dividend and interest receivable | 3,585,120 | 5,951,790 | ||||||
Other assets | 14,572 | 66,712 | ||||||
Total assets | 208,652,689 | 346,923,924 | ||||||
Liabilities: | ||||||||
Notes payable (Note 4) | 65,000,000 | 142,000,000 | ||||||
Net discount and unrealized depreciation on unfunded transactions | 10,056 | 16,228 | ||||||
Payables for: | ||||||||
Investments purchased | 13,899,915 | 19,387,884 | ||||||
Investment advisory fee payable (Note 3) | 1,162,652 | 1,812,285 | ||||||
Administration fee payable (Note 3) | 203,464 | 317,150 | ||||||
Incentive fee (Note 3) | — | 383,951 | ||||||
Interest expense payable (Note 4) | 1,847 | 759,465 | ||||||
Directors’ fees (Note 3) | 7,023 | 592 | ||||||
Accrued expenses and other liabilities | 66,723 | 231,317 | ||||||
Total liabilities | 80,351,680 | 164,908,872 | ||||||
Stockholders’ equity (net assets) | 128,301,009 | 182,015,052 | ||||||
Composition of stockholders’ equity (net assets): | ||||||||
Common Stock, par value $.001 per share: 550,000,000 common stock authorized, 17,716,771 common stock outstanding | 17,717 | 17,717 | ||||||
Paid-in capital | 253,163,644 | 253,163,644 | ||||||
Undistributed net investment income | 1,650,205 | 3,420,147 | ||||||
Accumulated net realized gain/(loss) on investments, total return swaps and foreign currency transactions | (47,579,590 | ) | (14,547,689 | ) | ||||
Net unrealized appreciation/(depreciation) on investments, unfunded transactions and translation of assets and liabilities denominated in foreign currency | (78,950,967 | ) | (60,038,767 | ) | ||||
Stockholders’ equity (net assets) | 128,301,009 | 182,015,052 | ||||||
Net Asset Value Per Share (Net Assets/Common Stock Outstanding) | 7.24 | 10.27 | ||||||
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As of June 30, 2008
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2008 | June 30, 2007 | June 30, 2008 | June 30, 2007(a) | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
($) | ($) | ($) | ($) | |||||||||||||
Investment Income: | ||||||||||||||||
Interest income | 6,479,208 | 9,352,578 | 14,331,263 | 10,451,170 | ||||||||||||
Dividends (net of foreign taxes withheld) | — | 224,542 | 40,685 | 779,199 | ||||||||||||
Total investment income | 6,479,208 | 9,577,120 | 14,371,948 | 11,230,369 | ||||||||||||
Expenses: | ||||||||||||||||
Investment advisory fees (Note 3) | 1,162,507 | 1,833,035 | 2,646,907 | 2,285,931 | ||||||||||||
Incentive fees (Note 3) | 809,977 | 1,326,507 | 1,680,346 | 1,326,507 | ||||||||||||
Administration fees (Note 3) | 203,439 | 320,754 | 463,209 | 400,011 | ||||||||||||
Accounting service fees | 39,962 | 37,522 | 77,250 | 51,129 | ||||||||||||
Transfer agent fees | 7,543 | 8,103 | 15,126 | 11,041 | ||||||||||||
Professional fees | 244,660 | 74,871 | 338,519 | 101,090 | ||||||||||||
Directors’ fees | 4,946 | 10,222 | 11,861 | 13,929 | ||||||||||||
Custody fees | 11,073 | 20,980 | 22,146 | 23,223 | ||||||||||||
Registration fees | 5,992 | — | 12,033 | — | ||||||||||||
Reports to stockholders | 17,167 | 28,173 | 20,971 | 38,389 | ||||||||||||
Delaware franchise tax expense | 14,918 | 15,673 | 29,836 | 21,098 | ||||||||||||
Organization expense (Note 3) | — | — | — | 170,383 | ||||||||||||
Rating agency fees | 9,013 | 7,991 | 29,762 | 7,991 | ||||||||||||
Other expense | 31,625 | 26,920 | 191,518 | 34,169 | ||||||||||||
Total operating expenses | 2,562,822 | 3,710,751 | 5,539,484 | 4,484,891 | ||||||||||||
Interest expense (Note 4) | 676,475 | 2,090,530 | 2,111,078 | 2,132,788 | ||||||||||||
Total expenses | 3,239,297 | 5,801,281 | 7,650,562 | 6,617,679 | ||||||||||||
Fees and expenses waived or reimbursed by Investment Adviser (Note 3) | (809,977 | ) | (2,396,766 | ) | (809,977 | ) | (2,849,662 | ) | ||||||||
Net expenses | 2,429,320 | 3,404,515 | 6,840,585 | 3,768,017 | ||||||||||||
Net investment income | 4,049,888 | 6,172,605 | 7,531,363 | 7,462,352 | ||||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||||||||||||||
Net realized gain/(loss) on investments | (20,543,764 | ) | 171,706 | (33,031,896 | ) | 244,081 | ||||||||||
Net realized gain/(loss) on total return swaps | — | 35,134 | — | 35,134 | ||||||||||||
Net realized gain/(loss) on foreign currency transactions | (38 | ) | (45,574 | ) | (5 | ) | (45,574 | ) | ||||||||
Net change in unrealized appreciation/(depreciation) on investments | 3,098,599 | (5,930,971 | ) | (18,904,113 | ) | (6,926,467 | ) | |||||||||
Net change in unrealized appreciation/(depreciation) on unfunded transactions | 12,865 | (1,825 | ) | (10,056 | ) | — | ||||||||||
Net change in unrealized appreciation/(depreciation) on total return swaps | — | 12,611 | — | — | ||||||||||||
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency | (400 | ) | 29,751 | 1,969 | 29,751 | |||||||||||
Net realized and unrealized gain/(loss) on investments | (17,432,738 | ) | (5,729,168 | ) | (51,944,101 | ) | (6,663,075 | ) | ||||||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | (13,382,850 | ) | 443,437 | (44,412,738 | ) | 799,277 | ||||||||||
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. |
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For the Six Months Ended June 30, 2008 (unaudited)
Total | ||||||||||||||||||||||||||||
Undistributed | Undistributed | Net Unrealized | Stockholders’ | |||||||||||||||||||||||||
Common Stock | Paid-in Capital | Net Investment | Net Realized | Appreciation/ | Equity | |||||||||||||||||||||||
Shares | Amount | in Excess of Par | Income | Gain/(Loss) | (Depreciation) | (Net Assets) | ||||||||||||||||||||||
Balance at December 31, 2007 | 17,716,771 | $ | 17,717 | $ | 253,163,644 | $ | 3,420,147 | $ | (14,547,689 | ) | $ | (60,038,767 | ) | $ | 182,015,052 | |||||||||||||
Distributions declared | — | — | — | (9,301,305 | ) | — | — | (9,301,305 | ) | |||||||||||||||||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | — | — | — | 7,531,363 | (33,031,901 | ) | (18,912,200 | ) | (44,412,738 | ) | ||||||||||||||||||
Balance at June 30, 2008 | 17,716,771 | $ | 17,717 | $ | 253,163,644 | $ | 1,650,205 | $ | (47,579,590 | ) | $ | (78,950,967 | ) | $ | 128,301,009 | |||||||||||||
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For the | For the | |||||||
Six Months Ended | Six Months Ended | |||||||
June 30, 2008 | June 30, 2007(a) | |||||||
(unaudited) | (unaudited) | |||||||
($) | ($) | |||||||
Cash Flows Provided by (Used in) Operating Activities: | ||||||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | (44,412,738 | ) | 799,277 | |||||
Adjustments to reconcile net increase/(decrease) in stockholders’ equity (net assets) resulting from operations: | ||||||||
Net realized (gain)/loss on investments, total return swaps and foreign currency transactions | 33,031,901 | (233,641 | ) | |||||
Net change in unrealized (appreciation)/depreciation on investments, unfunded transactions and translation of assets and liabilities denominated in foreign currency | 18,912,200 | 6,896,716 | ||||||
Purchase of investment securities | (55,091,302 | ) | (985,657,119 | ) | ||||
Proceeds from disposition of investment securities, total return swaps and foreign currency transactions | 147,087,525 | 517,899,508 | ||||||
(Increase)/Decrease in dividends, interest and fees receivable | 2,366,670 | (6,562,859 | ) | |||||
(Increase)/Decrease in receivable for investments sold | (1,735,606 | ) | (129,056,584 | ) | ||||
(Increase)/Decrease in other assets | 52,140 | (197,731 | ) | |||||
Net amortization/(accretion) of premium/(discount) | (706,970 | ) | (393,805 | ) | ||||
Increase/(Decrease) in payable for investments purchased | (5,487,969 | ) | 138,575,097 | |||||
Increase/(Decrease) in payables to related parties | (1,140,839 | ) | 1,083,504 | |||||
Net realized and change in unrealized gain/(loss) on foreign currency | 1,964 | 29,751 | ||||||
Increase/(Decrease) in interest payable | (757,618 | ) | 1,191,930 | |||||
Increase/(Decrease) in other liabilities | (180,822 | ) | 130,092 | |||||
Net Cash Flow Provided by (Used in) Operating Activities | 91,938,536 | (455,495,864 | ) | |||||
Cash Flows Provided by (Used in) Financing Activities: | ||||||||
Net proceeds from issuance of common stock | — | 251,852,704 | ||||||
Increase/(Decrease) in notes payable | (77,000,000 | ) | 240,000,000 | (b) | ||||
Increase in accrued offering cost | — | 80,240 | ||||||
Distributions paid in cash | (9,301,305 | ) | (3,772,519 | ) | ||||
Net Cash Flow Provided by (Used in) Financing Activities | (86,301,305 | ) | 488,160,425 | |||||
Net Increase/(Decrease) in Cash and Foreign Currency | 5,637,231 | 32,664,561 | ||||||
Cash and Foreign Currency: | ||||||||
Beginning of the period | 4,291,098 | — | ||||||
End of the period | 9,928,329 | 32,664,561 | ||||||
Supplemental Information: | ||||||||
Interest paid during the period | 2,868,696 | 90,858 | ||||||
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. | |
(b) | On January 18, 2007, $4 million was borrowed from an affiliate and repaid in March 2007. See Note 8 for details. |
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June 30, 2008
(a) | Investments in financial instruments | |
Investment transactions are recorded on the trade date. | ||
The Company will use the following valuation methods to determine either current market value for investments for which market quotations are available, or if not available, then fair value, as determined in good faith pursuant to policies and procedures approved by the Company’s Board of Directors (the “Board”): | ||
Market Quotations Available | ||
The market value of each security listed or traded on any recognized securities exchange or automated quotation system will be the last reported sale price at the relevant valuation date on the composite tape or on the principal exchange on which such security is traded. If no sale is reported on that date, the Company utilizes, when available, pricing quotations from principal market makers. Such quotations may be obtained from third-party pricing services or directly from investment brokers and dealers in the secondary market. Generally, the Company’s loan and bond positions are not traded on exchanges and consequently are valued based on market prices received from third-party pricing services or broker-dealer sources. The valuation of certain securities for |
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which there is no market may take into account appraisal reports from independent valuation firms. Short-term debt securities having a remaining maturity of 60 days or less when purchased and debt securities originally purchased with maturities in excess of 60 days but which currently have maturities of 60 days or less may be valued at cost adjusted for amortization of premiums and accretion of discounts. | ||
Market Quotations Not Available | ||
The Company will take the following steps each time it determines its net asset value in order to determine the value of its securities for which market quotations are not readily available, as determined in good faith pursuant to policies and procedures approved by the Board: |
1. | The valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment. | ||
2. | Preliminary valuation conclusions will then be documented and discussed with Highland Capital Management, L.P.’s (the “Investment Adviser”) senior management. | ||
3. | The valuation committee, comprised of the Investment Adviser’s investment professionals and other senior management, will then review these preliminary valuations. An independent valuation firm engaged by the Company’s Board will review all of these preliminary valuations each quarter. | ||
4. | Finally, the Board discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith, pursuant to policies and procedures approved by the Board, based on the input of the valuation committee and an independent valuation firm. |
Determination of fair values is uncertain because it involves subjective judgments and estimates not easily substantiated by auditing procedures. | ||
Adoption of Statement of Financial Accounting Standards No. 157 “Fair Value Measurement” (“FAS 157”): | ||
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 157, “Fair Value Measurement,” which is effective for financial statements issued for fiscal years beginning after November 15, 2007. FAS 157 defines how fair value should be determined for financial reporting purposes, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about the use of fair value measurements, but is not expected to result in any changes to the fair value measurements of the Company’s investments. FAS 157 requires companies to provide expanded information about the assets and liabilities measured at fair value and the potential effect of these fair valuations on net assets. | ||
The Company has adopted FAS 157 as of January 1, 2008. The Company has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. Based on this assessment, the adoption of FAS 157 did not have any material effect on the Company’s net asset value. However, the adoption of FAS 157 does require the Company to provide additional disclosures about the inputs used to develop the measurements and the effect of certain measurements on changes in net assets for the reportable periods as contained in the Company’s periodic filings. The three levels of the fair value hierarchy established under FAS 157 are described below: |
• | Level 1 — Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement; | ||
• | Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and | ||
• | Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company’s own assumptions that market participants would use to price the asset or liability based on the best available information. |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Company’s assets as of June 30, 2008 as follows: |
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Assets at Fair Value | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Portfolio Investments | $ | 168,760,889 | $ | 1,647,191 | $ | 121,079,915 | $ | 46,033,783 | ||||||||
Cash and foreign currency | 9,928,329 | 9,928,329 | — | — | ||||||||||||
Total | $ | 178,689,218 | $ | 11,575,520 | $ | 121,079,915 | $ | 46,033,783 | ||||||||
The Company did not have any liabilities that were measured at fair value on a recurring basis at June 30, 2008. | ||
The tables below set forth a summary of changes in the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2008. |
For the Three Months Ended | ||||
June 30, 2008 | ||||
Assets at Fair Value Using Unobservable Inputs (Level 3) | Portfolio Investments | |||
Balance as of March 31, 2008 | $ | 41,790,672 | ||
Transfers in/(out) of Level 3 | 24,804,566 | |||
Net amortization/(accretion) of premium/(discount) | 258,730 | |||
Net realized gains/(losses) | — | |||
Net unrealized gains/(losses) | (21,239,787 | ) | ||
Net purchases and sales * | 419,602 | |||
Balance as of June 30, 2008 | $ | 46,033,783 | ||
For the Six Months Ended | ||||
June 30, 2008 | ||||
Assets at Fair Value Using Unobservable Inputs (Level 3) | Portfolio Investments | |||
Balance as of December 31, 2007 | $ | 37,888,863 | ||
Transfers in/(out) of Level 3 | 24,804,566 | |||
Net amortization/(accretion) of premium/(discount) | 292,487 | |||
Net realized gains/(losses) | — | |||
Net unrealized gains/(losses) | (22,492,113 | ) | ||
Net purchases and sales * | 5,539,980 | |||
Balance as of June 30, 2008 | $ | 46,033,783 | ||
* | Includes any applicable borrowings and/or paydowns made on revolving credit facilities held in the Company’s investment portfolio. |
The net unrealized losses presented in the tables above relate to investments that are still held at June 30, 2008, and the Company presents these unrealized losses on the Statement of Operations as net change in unrealized appreciation/(depreciation) on investments. | ||
Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments. As a result, for the quarter ended June 30, 2008, $24,804,566 of the Company’s portfolio investments were transferred from Level 2 to Level 3. |
(b) | Net asset value per share | |
The net asset value per share disclosed on the Statement of Assets and Liabilities is calculated by dividing the net assets attributable to the shares of the Company’s common stock by the number of such shares outstanding at period-end. | ||
(c) | Securities transactions | |
All securities transactions are accounted for on a trade-date basis. Gains or losses on the sale of investments are calculated by using the specific identification method. |
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(d) | Interest income | |
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income. Payment-in-Kind (“PIK”) interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of distributions, even though the Company has not yet collected cash. For the three months ended June 30, 2008, approximately $1.5 million of PIK interest income was recorded. | ||
(e) | Taxation — general | |
The Company intends to comply with the applicable provisions of the Code pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes. However, depending on the level of taxable income earned in a year, the Company may choose to carry forward taxable income in excess of distributions and pay the 4% excise tax on the difference. Additionally, the Company is subject to franchise taxes in the state of Delaware. | ||
In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 provides guidance on how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authorities. Tax positions not deemed to satisfy the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. FASB required adoption of FIN 48 for fiscal years beginning after December 15, 2006, and FIN 48 is to be applied to all open tax years as of the effective date. However, on December 22, 2006, the SEC delayed the required implementation date of FIN 48 for business development companies until March 31, 2007. As of December 31, 2007, the Company adopted FIN 48 for all subsequent reporting periods and management has determined that there is no material impact on the financial statements. | ||
(f) | Taxation of distributions | |
Book and tax basis differences relating to stockholder distributions and other permanent book and tax differences are reclassified to paid-in capital. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP. | ||
(g) | Payment of distributions | |
Distributions to common stockholders are recorded as of the date of declaration. The amount to be paid out as a distribution is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually. The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon its taxable income for the full year and distributions paid during the full year, therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of its distributions for a full year. | ||
(h) | Foreign currency | |
The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company’s investments in foreign securities may involve certain risks such as foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments and therefore the earnings of the Company. | ||
(i) | Forward contracts | |
The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the |
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current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. | ||
(j) | Investment in swap agreements | |
Swap agreements are recorded at fair value as estimated by management in good faith. The net unrealized gain or loss on swap agreements is recorded as an asset or liability on the Statement of Assets and Liabilities. The change in unrealized gain or loss is recorded in the Statement of Operations. Cash paid or received on net settlements is recorded as realized gain or loss in the Statement of Operations. | ||
(k) | Cash and cash equivalents | |
Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at cost which approximates fair value as of June 30, 2008. | ||
(l) | Restricted cash | |
Restricted cash consists of cash held by the Company’s custodian as collateral with respect to certain transactions. The Company earns interest on the restricted cash, which is recorded on the accrual basis. | ||
(m) | Registration expenses | |
The Company records registration expenses related to shelf filings as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with Section 8.24 of the AICPA Audit and Accounting Guide for Investment Companies. | ||
(n) | Incentive fee expense recognition | |
The realized capital gain component of the incentive fee (the “Capital Gains Fee”) is payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement, as of the termination date.) The Capital Gains Fee is estimated as of the end of the each calendar quarter based on the Company’s realized capital gains, if any, net of all realized capital losses, unrealized capital depreciation and fees paid on such net capital gains, computed on a cumulative basis. To the extent that Capital Gains Fees are earned by the Investment Adviser, an accrual is made in the amount of the estimated Capital Gains Fee. Because unrealized losses may fluctuate from quarter to quarter, the accrual, if any, may fluctuate as well. There were no Capital Gains Fees paid or accrued for the quarter ended June 30, 2008. (See Note 3 for additional information.) |
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Borrower | Unfunded Loan Commitment | |||
Comcorp Broadcasting, Inc. | $ | 345,574 | ||
$ | 345,574 | |||
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Six Months Ended | Six Months Ended | Year Ended | ||||||||||
June 30, 2008 | June 30, 2007(a) | December 31, 2007(a) | ||||||||||
Net asset value, beginning of period | $ | 10.27 | $ | 14.33 | (b) | $ | 14.33 | (b) | ||||
Net investment income | 0.43 | 0.42 | 0.97 | |||||||||
Net realized and unrealized loss on investments | (2.93 | ) | (0.60 | ) | (4.43 | ) | ||||||
Total from investment operations | (2.50 | ) | (0.18 | ) | (3.46 | ) | ||||||
Common Stock Offering Cost | — | (0.07 | ) | (0.07 | ) | |||||||
Capital Contribution | — | 0.26 | (c) | 0.26 | (c) | |||||||
Distributions Paid | (0.53 | ) | (0.26 | ) | (0.79 | ) | ||||||
Net asset value, end of period | $ | 7.24 | $ | 14.08 | $ | 10.27 | ||||||
Market price per share, beginning of period | $ | 8.57 | $ | 15.00 | $ | 15.00 | ||||||
Market price per share, end of period | $ | 5.74 | $ | 14.25 | $ | 8.57 | ||||||
Total investment return (d) | ||||||||||||
Based on net asset value per share | (23.83 | )% (e) | 0.09 | % (e) | (23.30 | )% (e) | ||||||
Based on market price per share | (27.63 | )% (e) | (3.23 | )% (e) | (38.85 | )% (e) | ||||||
Net assets, end of period (f) | $ | 128,301 | $ | 248,879 | $ | 182,015 | ||||||
Ratios to Average Net Assets/Supplemental Data: | ||||||||||||
Total operating expenses | 7.31 | % | 5.31 | % (g) | 5.74 | % (g) | ||||||
Interest expense | 2.79 | % | 2.52 | % (g) | 3.80 | % (g) | ||||||
Waiver/reimbursement | 1.07 | % | 1.03 | % (g) | 2.24 | % (g) | ||||||
Net expense (h) | 9.03 | % | 4.46 | % (g) | 7.30 | % (g) | ||||||
Net investment income | 9.94 | % | 8.83 | % (g) | 8.77 | % (g) | ||||||
Portfolio turnover rate | 22 | % (e) | 130 | % (e) | 224 | % (e) | ||||||
Debt: | ||||||||||||
Total loan outstanding, end of period (f) | $ | 65,000 | $ | 240,000 | $ | 142,000 | ||||||
Asset Coverage per $1000 indebtedness, end of period | $ | 2,974 | (i) | $ | 2,037 | (i) | $ | 2,282 | (i) |
(a) | The Company commenced operations on January 18, 2007. |
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(b) | Net asset value at the beginning of the period reflects the deduction of the one-time initial sales load in connection with the offering. | |
(c) | On February 20, 2007, the Investment Adviser contributed an additional $87,596 in capital to the Company prior to the Offering. No additional shares were issued in the transaction. The contribution per share is based on the pre-offering share amount of 333,333.33 | |
(d) | Total investment return based on market value may result in substantially different returns than investment return based on net asset value, because market value can be significantly greater or less than the net asset value. Investment return assumes reinvestment of distributions. | |
(e) | Not annualized. | |
(f) | Dollars in thousands. | |
(g) | Ratios to average net assets are calculated using the net assets for the period starting from the Offering on February 27, 2007 through December 31, 2007. | |
(h) | Net expense ratio has been calculated after applying any waiver/reimbursement. | |
(i) | Calculated by subtracting the Company’s total liabilities (not including any bank loans and senior securities) from the Company’s total assets, and dividing such amounts by the principal amount of the debt outstanding. |
Distributions paid from: | 2007 | |||
Ordinary income * | $ | 13,915,795 | ||
Long-term capital gains | $ | — |
* | For tax purposes short-term capital gains distributions, if any, are considered ordinary income distributions. |
Capital loss carryforward ** | $ | (9,946,969 | ) | |
Undistributed ordinary income | $ | 3,525,488 | ||
Undistributed long-term capital gains | $ | — | ||
Net unrealized appreciation/(depreciation) | $ | (60,038,767 | ) |
** | The accumulated losses of $9,946,969 to offset future capital gains, if any, expire on December 31, 2015. |
E-37
Table of Contents
As of March 31, 2008
Principal ($) | Cost ($) | Value ($) | ||||||||||
Senior Loans (a) - 92.6% | ||||||||||||
AEROSPACE — AEROSPACE/DEFENSE - 2.7% | ||||||||||||
IAP Worldwide Services, Inc. | ||||||||||||
First Lien Term Loan, 11.50%, 12/30/12 | 4,936,869 | 4,947,844 | 4,017,377 | |||||||||
BROADCASTING - 13.2% | ||||||||||||
Comcorp Broadcasting, Inc. | ||||||||||||
Revolving Loan, 8.97%, 10/02/12 (b) (c) | 1,288,051 | 1,288,051 | 1,238,590 | |||||||||
Term Loan, 8.75%, 04/02/13 (b) | 18,849,521 | 18,471,568 | 18,125,699 | |||||||||
19,759,619 | 19,364,289 | |||||||||||
CABLE — US CABLE - 3.1% | ||||||||||||
CellNet Group, Inc. | ||||||||||||
Second Lien, 6.86%, 10/22/11 | 1,000,000 | 1,000,000 | 882,500 | |||||||||
WideOpen West Finance, LLC | ||||||||||||
Second Lien Term Loan, 11.45%, 06/29/15 | 5,000,000 | 4,909,255 | 3,625,000 | |||||||||
5,909,255 | 4,507,500 | |||||||||||
DIVERSIFIED MEDIA - 1.0% | ||||||||||||
Penton Media, Inc. | ||||||||||||
Second Lien Term Loan, 8.27%, 02/01/14 | 2,000,000 | 2,040,934 | 1,530,000 | |||||||||
ENERGY — EXPLORATION & PRODUCTION - 3.2% | ||||||||||||
TARH E&P Holdings, L.P. | ||||||||||||
First Lien Term Loan, 9.83%, 06/29/12 | 5,000,000 | 5,000,000 | 4,625,000 | |||||||||
ENERGY — OTHER ENERGY - 4.6% | ||||||||||||
Resolute Aneth, LLC | ||||||||||||
Second Lien Term Loan, 9.51%, 06/26/13 | 7,500,000 | 7,500,000 | 6,787,500 | |||||||||
FINANCIAL - 9.4% | ||||||||||||
Emerson Reinsurance Ltd. | ||||||||||||
Tranche C Term Loan, 10.85%, 12/15/11 | 1,500,000 | 1,493,784 | 1,387,500 | |||||||||
Flatiron Re Ltd. | ||||||||||||
Closing Date Term Loan, 9.49%, 12/29/10 | 383,291 | 386,914 | 367,959 | |||||||||
Delayed Draw Term Loan, 9.49%, 12/29/10 | 185,657 | 187,412 | 178,230 | |||||||||
Kepler Holdings Ltd. | ||||||||||||
Term Loan, 10.70%, 06/30/09 | 5,000,000 | 5,017,590 | 4,800,000 | |||||||||
Penhall International Corp. | ||||||||||||
Term Loan, 12.82%, 04/01/12 | 7,938,145 | 7,816,833 | 7,064,949 | |||||||||
14,902,533 | 13,798,638 | |||||||||||
FOREST PRODUCTS — PACKAGING - 0.3% | ||||||||||||
Tegrant Corp. | ||||||||||||
Second Lien Term Loan, 10.35%, 03/07/15 | 1,000,000 | 1,000,000 | 455,000 | |||||||||
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Table of Contents
Principal ($) | Cost ($) | Value ($) | ||||||||||
Senior Loans (continued) | ||||||||||||
GAMING/LEISURE — OTHER LEISURE - 13.0% | ||||||||||||
Fontainebleau Florida Hotel, LLC | ||||||||||||
Tranche C Term Loan, 11.11%, 06/06/12 | 10,000,000 | 10,000,000 | 8,150,000 | |||||||||
Lake at Las Vegas Joint Venture, LLC | ||||||||||||
Revolving Loan Credit-Linked Deposit, 10.20%, 12/22/14 (d) | 3,611,111 | 3,611,111 | 1,238,611 | |||||||||
Term Loan, 17.31%, 12/22/14 (d) | 28,104,031 | 28,104,031 | 9,639,683 | |||||||||
41,715,142 | 19,028,294 | |||||||||||
HEALTHCARE — ACUTE CARE - 0.6% | ||||||||||||
LifeCare Holdings, Inc. | ||||||||||||
Term Loan, 6.95%, 08/11/12 | 987,342 | 965,393 | 852,076 | |||||||||
HEALTHCARE — MEDICAL PRODUCTS - 1.1% | ||||||||||||
Graceway Pharmaceuticals, LLC | ||||||||||||
Mezzanine Loan, 13.45%, 11/01/13 | 2,000,000 | 1,658,088 | 1,540,000 | |||||||||
HOUSING — REAL ESTATE DEVELOPMENT - 15.6% | ||||||||||||
MetroFlag BP, LLC / Metroflag Cable, LLC | ||||||||||||
Second Lien Term Loan, 11.56%, 07/06/08 | 5,000,000 | 5,000,000 | 4,600,000 | |||||||||
MPH Mezzanine II, LLC | ||||||||||||
Mezzanine 2B, 7.48%, 02/09/08 (b) (d) | 10,000,000 | 10,000,000 | 9,540,000 | |||||||||
MPH Mezzanine III, LLC | ||||||||||||
Mezzanine 3, 8.48%, 02/09/08 (d) | 4,000,000 | 4,000,000 | 3,800,000 | |||||||||
Pacific Clarion, LLC | ||||||||||||
Term Loan, 15.00%, 01/23/09 (b) (e) | 4,950,573 | 4,884,441 | 4,869,052 | |||||||||
23,884,441 | 22,809,052 | |||||||||||
INFORMATION TECHNOLOGY - 0.3% | ||||||||||||
Metrologic Instruments, Inc. | ||||||||||||
Second Lien Term Loan, 8.95%, 12/21/13 | 500,000 | 507,541 | 470,000 | |||||||||
MANUFACTURING - 1.0% | ||||||||||||
Latham Manufacturing Corp. | ||||||||||||
New Term Loan, 8.75%, 06/30/12 | 1,926,486 | 1,924,554 | 1,387,070 | |||||||||
RETAIL - 2.9% | ||||||||||||
Totes Isotoner Corp. | ||||||||||||
Second Lien Term Loan, 8.63%, 01/31/14 | 4,877,228 | 4,918,842 | 4,267,574 | |||||||||
SERVICE — ENVIRONMENTAL SERVICES - 6.2% | ||||||||||||
LVI Services, Inc. | ||||||||||||
Tranche B Term Loan, 7.46%, 11/16/11 | 10,060,609 | 9,978,892 | 9,104,851 | |||||||||
SERVICE — OTHER SERVICES - 1.1% | ||||||||||||
NES Rentals Holdings, Inc. | ||||||||||||
Permanent Term Loan, 10.63%, 07/20/13 | 2,000,000 | 2,032,469 | 1,645,000 | |||||||||
E-39
Table of Contents
Principal ($) | Cost ($) | Value ($) | ||||||||||
Senior Loans (continued) | ||||||||||||
TRANSPORTATION — AUTO - 5.4% | ||||||||||||
BST Safety Textiles Acquisition GmbH | ||||||||||||
Second Lien Facility, 10.03%, 06/30/09 | 665,500 | 666,656 | 582,312 | |||||||||
Gainey Corp. | ||||||||||||
Term Loan, 10.04%, 04/20/12 | 964,521 | 630,713 | 443,680 | |||||||||
Motor Coach Industries International, Inc. | ||||||||||||
PIK Second Lien, 13.64%, 12/01/08 | 7,713,301 | 7,815,845 | 6,826,272 | |||||||||
9,113,214 | 7,852,264 | |||||||||||
UTILITIES - 4.9% | ||||||||||||
Entegra Power Group, LLC | ||||||||||||
PIK Third Lien Term Loan, 8.70%, 10/19/15 | 8,491,114 | 8,418,464 | 7,123,366 | |||||||||
WIRELESS COMMUNICATIONS - 3.0% | ||||||||||||
Clearwire Corp. | ||||||||||||
Term Loan, 11.15%, 07/03/12 | 4,975,000 | 4,975,000 | 4,378,000 | |||||||||
Total Senior Loans | 171,152,225 | 135,542,851 | ||||||||||
Corporate Notes and Bonds - 75.2% | ||||||||||||
BROADCASTING - 0.9% | ||||||||||||
Young Broadcasting, Inc. | ||||||||||||
10.00%, 03/01/11 | 2,000,000 | 1,992,415 | 1,265,000 | |||||||||
CONSUMER NON-DURABLES - 4.1% | ||||||||||||
Solo Cup Co. | ||||||||||||
8.50%, 02/15/14 | 7,000,000 | 6,143,543 | 5,950,000 | |||||||||
DIVERSIFIED MEDIA - 5.1% | ||||||||||||
Baker & Taylor, Inc. | ||||||||||||
11.50%, 07/01/13 (f) | 8,300,000 | 8,756,504 | 7,521,875 | |||||||||
ENERGY — EXPLORATION & PRODUCTION - 10.8% | ||||||||||||
Energy XXI Gulf Coast, Inc. | ||||||||||||
10.00%, 06/15/13 | 12,200,000 | 10,896,741 | 10,187,000 | |||||||||
Helix Energy Solutions Group, Inc. | ||||||||||||
9.50%, 01/15/16 (f) | 2,500,000 | 2,500,000 | 2,512,500 | |||||||||
McMoran Exploration Co. | ||||||||||||
11.88%, 11/15/14 | 3,000,000 | 3,000,000 | 3,045,000 | |||||||||
16,396,741 | 15,744,500 | |||||||||||
FOOD/TOBACCO — BEVERAGES & BOTTLING - 3.8% | ||||||||||||
Pinnacle Foods Group, Inc. | ||||||||||||
10.63%, 04/01/17 | 6,500,000 | 6,561,250 | 5,557,500 | |||||||||
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Table of Contents
Principal ($) | Cost ($) | Value ($) | ||||||||||
Corporate Notes and Bonds (continued) | ||||||||||||
GAMING/LEISURE — OTHER LEISURE - 5.0% | ||||||||||||
Six Flags, Inc. | ||||||||||||
4.50%, 05/15/15 | 1,727,000 | 1,924,875 | 928,262 | |||||||||
Tropicana Entertainment Resorts Holdings, L.P. | ||||||||||||
9.63%, 12/15/14 | 12,199,000 | 10,266,880 | 6,389,226 | |||||||||
12,191,755 | 7,317,488 | |||||||||||
HEALTHCARE — ACUTE CARE - 8.2% | ||||||||||||
Argatroban Royalty Sub, LLC | ||||||||||||
18.50%, 09/21/14 | 4,131,674 | 4,131,674 | 4,152,332 | |||||||||
Azithromycin Royalty Sub, LLC | ||||||||||||
16.00%, 05/15/19 | 5,000,000 | 4,976,863 | 5,025,000 | |||||||||
HCA, Inc. | ||||||||||||
7.69%, 06/15/25 | 1,800,000 | 1,465,225 | 1,435,583 | |||||||||
Tenet Healthcare Corp. | ||||||||||||
9.88%, 07/01/14 | 1,500,000 | 1,513,826 | 1,458,750 | |||||||||
12,087,588 | 12,071,665 | |||||||||||
HEALTHCARE — ALTERNATE SITE SERVICES - 1.1% | ||||||||||||
Select Medical Corp. | ||||||||||||
8.45%, 09/15/15 (g) | 2,000,000 | 1,647,000 | 1,570,000 | |||||||||
HEALTHCARE — MEDICAL PRODUCTS - 10.9% | ||||||||||||
Angiotech Pharmaceuticals, Inc. | ||||||||||||
7.75%, 04/01/14 | 5,000,000 | 4,573,541 | 3,075,000 | |||||||||
Celtic Pharma Phinco B.V. | ||||||||||||
17.00%, 06/15/12 | 8,999,999 | 8,506,941 | 9,044,999 | |||||||||
Encysive Pharmaceuticals, Inc. | ||||||||||||
2.50%, 03/15/12 | 4,000,000 | 2,733,997 | 3,865,000 | |||||||||
15,814,479 | 15,984,999 | |||||||||||
HOUSING — BUILDING MATERIALS - 0.5% | ||||||||||||
Masonite Corp. | ||||||||||||
11.00%, 04/06/15 | 1,000,000 | 1,000,000 | 695,000 | |||||||||
HOUSING — REAL ESTATE DEVELOPMENT - 11.2% | ||||||||||||
Realogy Corp. | ||||||||||||
10.50%, 04/15/14 | 5,000,000 | 4,960,574 | 3,387,500 | |||||||||
12.38%, 04/15/15 | 29,000,000 | 20,956,790 | 13,050,000 | |||||||||
25,917,364 | 16,437,500 | |||||||||||
INFORMATION TECHNOLOGY - 4.8% | ||||||||||||
Freescale Semiconductor, Inc. | ||||||||||||
9.13%, 12/15/14 (f) | 3,000,000 | 2,998,161 | 2,205,000 | |||||||||
10.13%, 12/15/16 | 7,000,000 | 7,000,000 | 4,760,000 | |||||||||
9,998,161 | 6,965,000 | |||||||||||
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Table of Contents
Principal ($) | Cost ($) | Value ($) | ||||||||||
Corporate Notes and Bonds (continued) | ||||||||||||
RETAIL - 3.7% | ||||||||||||
Dollar General Corp. | ||||||||||||
10.63%, 07/15/15 | 3,000,000 | 2,780,672 | 2,910,000 | |||||||||
Rite Aid Corp. | ||||||||||||
9.38%, 12/15/15 | 1,250,000 | 1,233,055 | 987,500 | |||||||||
9.50%, 06/15/17 | 2,000,000 | 1,969,699 | 1,580,000 | |||||||||
5,983,426 | 5,477,500 | |||||||||||
SERVICE — OTHER SERVICES - 0.6% | ||||||||||||
Neff Corp. | ||||||||||||
10.00%, 06/01/15 | 2,000,000 | 957,500 | 960,000 | |||||||||
TRANSPORTATION — AUTO - 4.5% | ||||||||||||
Delphi Corp. | ||||||||||||
6.50%, 05/01/09 (d) | 2,500,000 | 1,850,000 | 825,000 | |||||||||
6.50%, 08/15/13 (d) | 2,667,000 | 1,861,483 | 853,440 | |||||||||
6.55%, 06/15/16 (d) | 1,500,000 | 1,151,250 | 480,000 | |||||||||
7.13%, 05/01/29 (d) | 3,500,000 | 2,565,250 | 1,120,000 | |||||||||
Motor Coach Industries International, Inc. | ||||||||||||
11.25%, 05/01/09 | 12,000,000 | 10,740,977 | 3,300,000 | |||||||||
18,168,960 | 6,578,440 | |||||||||||
Total Corporate Notes and Bonds | 143,616,686 | 110,096,467 | ||||||||||
Claims - 0.9% | ||||||||||||
AEROSPACE — AIRLINES - 0.7% | ||||||||||||
Northwest Airlines, Inc. | ||||||||||||
ALPA Trade Claim, 08/21/13 | 3,000,000 | 659,420 | 99,360 | |||||||||
Bell Atlantic Trade Claim, 08/21/13 | 2,500,000 | 735,130 | 82,800 | |||||||||
EDC Trade Claims, 08/21/13 | 2,500,000 | 772,468 | 82,800 | |||||||||
Flight Attendant Claim, 08/21/13 | 5,326,500 | 1,144,392 | 176,414 | |||||||||
GE Trade Claim, 08/21/13 | 1,500,000 | 460,536 | 49,680 | |||||||||
IAM Trade Claim, 08/21/13 | 4,728,134 | 1,088,341 | 156,596 | |||||||||
Lambert Leasing Trade Claim, 08/21/13 (h) | 3,433,116 | 896,468 | 113,705 | |||||||||
Pinnacle Trade Claim, 08/21/13 | 5,000,000 | 1,401,190 | 165,600 | |||||||||
Retiree Claim, 08/21/13 | 3,512,250 | 754,602 | 116,326 | |||||||||
7,912,547 | 1,043,281 | |||||||||||
CABLE — US CABLE - 0.2% | ||||||||||||
Adelphia Communications Corp. | ||||||||||||
06/15/11 | 4,056,000 | 64,490 | 324,480 | |||||||||
Total Claims | 7,977,037 | 1,367,761 | ||||||||||
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Table of Contents
Shares | Cost ($) | Value ($) | ||||||||||
Common Stocks - 17.5% | ||||||||||||
AEROSPACE — AIRLINES - 0.9% | ||||||||||||
Northwest Airlines, Inc. (i) | 145,984 | 1,190,444 | 1,312,398 | |||||||||
CABLE — US CABLE - 0.9% | ||||||||||||
Time Warner Cable, Inc. (i) | 51,127 | 1,900,532 | 1,277,159 | |||||||||
FOREST PRODUCTS — PAPER - 0.5% | ||||||||||||
Temple-Inland, Inc. | 52,500 | 1,839,716 | 667,800 | |||||||||
METALS/MINERALS — OTHER METALS/MINERALS - 7.0% | ||||||||||||
Alcoa, Inc | 208,439 | 8,240,259 | 7,516,310 | |||||||||
RTI International Metals, Inc. (i) | 62,112 | 5,129,522 | 2,808,084 | |||||||||
13,369,781 | 10,324,394 | |||||||||||
TELECOMMUNICATIONS - 5.5% | ||||||||||||
Communications Corp. of America (b) (i) | 1,256,635 | 7,187,203 | 8,017,331 | |||||||||
UTILITIES - 2.7% | ||||||||||||
Entegra TC, LLC (i) | 136,750 | 6,346,675 | 3,931,563 | |||||||||
Total Common Stocks | 31,834,351 | 25,530,645 | ||||||||||
Total Investments - 186.2% | 354,580,299 | 272,537,724 | ||||||||||
Other Assets & Liabilities, Net - (86.2)% | (126,203,212 | ) | ||||||||||
Net Assets - 100.0% | 146,334,512 | |||||||||||
(a) | Senior loans in which Highland Distressed Opportunities, Inc. (the “Company”) invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium. (Unless otherwise identified by footnote (e), all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at March 31, 2008. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown. | |
(b) | Represents fair value as determined by the Company’s investment adviser, in good faith, pursuant to the policies and procedures approved by the Company’s Board of Directors. Securities with a total aggregate market value of $41,790,672, or 28.6% of net assets, were valued under fair value by the Company’s investment adviser as of March 31, 2008. | |
(c) | Senior loan has additional unfunded loan commitment. See Note 6. | |
(d) | The issuer is in default of certain debt covenants. Income is not being accrued. | |
(e) | Fixed rate senior loan. | |
(f) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At March 31, 2008, these securities amounted to $12,239,375 or 8.4% of net assets. | |
(g) | Floating rate note. The interest rate shown reflects the rate in effect at March 31, 2008. | |
(h) | All or a portion of this position has not settled. Contract rates do not take effect until settlement date. | |
(i) | Non-income producing security. | |
PIK | Payment-in-Kind |
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Table of Contents
As of March 31, 2008
As of | ||||||||
March 31, 2008 | As of | |||||||
(unaudited) | December 31, 2007 | |||||||
($) | ($) | |||||||
Assets: | ||||||||
Investments, at value (cost $354,580,299 and $372,026,014, respectively) | 272,537,724 | 311,986,151 | ||||||
Cash | — | 4,291,098 | ||||||
Foreign currency (cost $4,284) | 4,578 | — | ||||||
Receivable for: | ||||||||
Receivable for investments sold | 1,368,739 | 24,628,173 | ||||||
Dividend and interest receivable | 7,506,900 | 5,951,790 | ||||||
Other assets | 46,798 | 66,712 | ||||||
Total assets | 281,464,739 | 346,923,924 | ||||||
Liabilities: | ||||||||
Short-term bank borrowings | 2,827,451 | — | ||||||
Notes payable (Note 4) | 124,000,000 | 142,000,000 | ||||||
Net discount and unrealized depreciation on unfunded transactions | 22,921 | 16,228 | ||||||
Payables for: | ||||||||
Investments purchased | 5,084,942 | 19,387,884 | ||||||
Investment advisory fee payable (Note 3) | 1,484,399 | 1,812,285 | ||||||
Administration fee payable (Note 3) | 259,770 | 317,150 | ||||||
Incentive fee (Note 3) | 870,369 | 383,951 | ||||||
Interest expense payable (Note 4) | 375,291 | 759,465 | ||||||
Directors’ fees (Note 3) | 7,453 | 592 | ||||||
Accrued expenses and other liabilities | 197,631 | 231,317 | ||||||
Total liabilities | 135,130,227 | 164,908,872 | ||||||
Stockholders’ equity (net assets) | 146,334,512 | 182,015,052 | ||||||
Composition of stockholders’ equity (net assets): | ||||||||
Common Stock, par value $.001 per share: 550,000,000 common stock authorized, 17,716,771 common stock outstanding | 17,717 | 17,717 | ||||||
Paid-in capital | 253,163,644 | 253,163,644 | ||||||
Undistributed net investment income | 2,250,970 | 3,420,147 | ||||||
Accumulated net realized gain/(loss) on investments, total return swaps and foreign currency transactions | (27,035,788 | ) | (14,547,689 | ) | ||||
Net unrealized appreciation/(depreciation) on investments and translation of assets and liabilities in foreign currency | (82,062,031 | ) | (60,038,767 | ) | ||||
Stockholders’ equity (net assets) | 146,334,512 | 182,015,052 | ||||||
Net Asset Value Per Share (Net Assets/Common Stock Outstanding) | 8.26 | 10.27 | ||||||
E-44
Table of Contents
As of March 31, 2008
For the Quarter Ended | ||||||||
March 31, 2008 | For the Period Ended | |||||||
(unaudited) | March 31, 2007(a) | |||||||
($) | ($) | |||||||
Investment Income: | ||||||||
Interest income | 7,852,055 | 1,098,592 | ||||||
Dividends (net of foreign taxes withheld) | 40,685 | 554,657 | ||||||
Total investment income | 7,892,740 | 1,653,249 | ||||||
Expenses: | ||||||||
Investment advisory fees (Note 3) | 1,484,400 | 452,896 | ||||||
Incentive fees (Note 3) | 870,369 | — | ||||||
Administration fees (Note 3) | 259,770 | 79,257 | ||||||
Accounting service fees | 37,288 | 13,607 | ||||||
Transfer agent fees | 7,583 | 2,938 | ||||||
Professional fees | 93,859 | 26,219 | ||||||
Directors’ fees | 6,915 | 3,707 | ||||||
Custody fees | 11,073 | 2,243 | ||||||
Registration fees | 6,041 | — | ||||||
Reports to Stockholders | 3,804 | 10,216 | ||||||
Delaware franchise tax expense | 14,918 | 5,425 | ||||||
Organization expense (Note 3) | — | 170,383 | ||||||
Rating agency fees | 20,749 | — | ||||||
Other expense | 159,893 | 7,249 | ||||||
Total operating expenses | 2,976,662 | 774,140 | ||||||
Interest expense (Note 4) | 1,434,603 | 42,258 | ||||||
Total expenses | 4,411,265 | 816,398 | ||||||
Fees and expenses waived or reimbursed by Investment Adviser (Note 3) | — | (452,896 | ) | |||||
Net expenses | 4,411,265 | 363,502 | ||||||
Net investment income | 3,481,475 | 1,289,747 | ||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||||||
Net realized gain/(loss) on investments | (12,488,132 | ) | 72,375 | |||||
Net realized gain/(loss) on foreign currency transactions | 33 | — | ||||||
Net change in unrealized appreciation/(depreciation) on investments | (22,002,712 | ) | (995,496 | ) | ||||
Net change in unrealized appreciation/(depreciation) on unfunded transactions | (22,921 | ) | 1,825 | |||||
Net change in unrealized appreciation/(depreciation) on total return swaps | — | (12,611 | ) | |||||
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency | 2,369 | — | ||||||
Net realized and unrealized gain/(loss) on investments | (34,511,363 | ) | (933,907 | ) | ||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | (31,029,888 | ) | 355,840 | |||||
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. |
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For the Quarter Ended March 31, 2008 (unaudited)
Total | ||||||||||||||||||||||||||||
Undistributed | Undistributed | �� | Net Unrealized | Stockholders’ | ||||||||||||||||||||||||
Common Stock | Paid-in Capital | Net Investment | Net Realized | Appreciation/ | Equity | |||||||||||||||||||||||
Shares | Amount | in Excess of Par | Income | Gain/(Loss) | (Depreciation) | (Net Assets) | ||||||||||||||||||||||
Balance at January 18, 2007 | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Issuance of common stock, 01/18/07 | 333,333 | 333 | 4,999,667 | — | — | — | 5,000,000 | |||||||||||||||||||||
Issuance of common stock | 17,284,300 | 17,285 | 247,965,312 | — | — | — | 247,982,597 | |||||||||||||||||||||
Distributions reinvested | 99,138 | 99 | 1,328,558 | — | — | — | 1,328,657 | |||||||||||||||||||||
Capital contribution, 02/20/07 (b) | — | — | 87,596 | — | — | — | 87,596 | |||||||||||||||||||||
Distributions declared | — | — | — | (13,915,795 | ) | — | — | (13,915,795 | ) | |||||||||||||||||||
Offering cost | — | — | (1,217,489 | ) | — | — | — | (1,217,489 | ) | |||||||||||||||||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | — | — | — | 17,335,942 | (14,547,689 | ) | (60,038,767 | ) | (57,250,514 | ) | ||||||||||||||||||
Balance at December 31, 2007 | 17,716,771 | $ | 17,717 | $ | 253,163,644 | $ | 3,420,147 | $ | (14,547,689 | ) | $ | (60,038,767 | ) | $ | 182,015,052 | |||||||||||||
Distributions declared | — | — | — | (4,650,652 | ) | — | — | (4,650,652 | ) | |||||||||||||||||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | — | — | — | 3,481,475 | (12,488,099 | ) | (22,023,264 | ) | (31,029,888 | ) | ||||||||||||||||||
Balance at March 31, 2008 | 17,716,771 | $ | 17,717 | $ | 253,163,644 | $ | 2,250,970 | $ | (27,035,788 | ) | $ | (82,062,031 | ) | $ | 146,334,512 | |||||||||||||
(a) | Highland Distressed Opportunities, Inc. (the “Company”) commenced operations on January 18, 2007. | |
(b) | On February 20, 2007, the Company’s investment adviser contributed an additional $87,596 in capital to the Company prior to the offering. No additional shares were issued in conjunction with this transaction. |
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For the | ||||||||
Quarter Ended | For the | |||||||
March 31, 2008 | Period Ended | |||||||
(unaudited) | March 31, 2007(a) | |||||||
($) | ($) | |||||||
Cash Flow Provided by (Used in) Operating Activates: | ||||||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | (31,029,888 | ) | 355,840 | |||||
Adjustments to reconcile net increase/(decrease) in stockholders’ equity (net assets) resulting from operations: | ||||||||
Net realized (gain)/loss on investments, total return swaps and foreign currency transactions | 12,488,099 | (72,375 | ) | |||||
Net change in unrealized (appreciation)/depreciation on investments and translation of assets and liabilities denominated in foreign currency | 22,023,264 | 1,006,282 | ||||||
Purchase of investment securities | (28,193,997 | ) | (562,463,960 | ) | ||||
Proceeds from disposition of investment securities, total return swaps and foreign currency transactions | 33,745,357 | 52,192,775 | ||||||
(Increase)/Decrease in restricted cash | — | (9,129,485 | ) | |||||
(Increase)/Decrease in dividends, interest and fees receivable | (1,555,110 | ) | (3,334,110 | ) | ||||
(Increase)/Decrease in receivable for investments sold | 23,259,434 | (26,987,848 | ) | |||||
(Increase)/Decrease in other assets | 19,914 | (1,271 | ) | |||||
Net amortization/(accretion) of premium/(discount) | (593,777 | ) | (31,011 | ) | ||||
Increase/(Decrease) in short-term bank borrowings | 2,827,451 | — | ||||||
Increase/(Decrease) in payable for investments purchased | (14,302,942 | ) | 294,882,141 | |||||
Increase/(Decrease) in payables to related parties | 108,013 | 79,257 | ||||||
Net realized and change in unrealized gain/(loss) on unfunded transactions | (22,921 | ) | — | |||||
Net realized and change in unrealized gain/(loss) on foreign currency | 2,402 | — | ||||||
Increase/(Decrease) in interest payable | (384,174 | ) | — | |||||
Increase/(Decrease) in other liabilities | (26,993 | ) | 1,651,061 | |||||
Net cash flow provided by (used in) operating activities | 18,364,132 | (251,852,704 | ) | |||||
Cash Flows Provided by (Used in) Financing Activities: | ||||||||
Net proceeds from issuance of common stock | — | 251,852,704 | ||||||
Increase/(Decrease) in notes payable (b) | (18,000,000 | ) | — | |||||
Distributions paid in cash | (4,650,652 | ) | — | |||||
Net cash flow provided by (used in) financing activities | (22,650,652 | ) | 251,852,704 | |||||
Net increase/(decrease) in cash and foreign currency | (4,286,520 | ) | — | |||||
Cash and Foreign Currency: | ||||||||
Beginning of the period | 4,291,098 | — | ||||||
End of the period | 4,578 | — | ||||||
Supplemental Information: | ||||||||
Interest paid during the period | 1,818,777 | — | ||||||
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. | |
(b) | During the period, $4 million was borrowed from an affiliate and repaid. See Note 8 for details. |
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March 31, 2008
(a) | Investments in financial instruments | |
Investment transactions are recorded on the trade date. | ||
The Company will use the following valuation methods to determine either current market value for investments for which market quotations are available, or if not available, then fair value, as determined in good faith pursuant to policies and procedures approved by the Company’s Board of Directors (the “Board”): | ||
Market Quotations Available | ||
The market value of each security listed or traded on any recognized securities exchange or automated quotation system will be the last reported sale price at the relevant valuation date on the composite tape or on the principal exchange on which such security is traded. If no sale is reported on that date, the Company utilizes, when available, pricing quotations from principal market makers. Such quotations may be obtained from third-party pricing services or directly from investment brokers and dealers in the secondary market. Generally, the Company’s loan and bond positions are not traded on exchanges and consequently are valued based on market prices received from third-party pricing services or broker-dealer sources. The valuation of certain securities for which there is no market may take into account appraisal reports from independent valuation firms. Short-term debt securities having a remaining maturity of 60 days or less when purchased and debt securities originally purchased with maturities in excess of 60 days but which currently have maturities of 60 days or less may be valued at cost adjusted for amortization of premiums and accretion of discounts. | ||
Market Quotations Not Available | ||
The Company will take the following steps each time it determines its net asset value in order to determine the value of its securities for which market quotations are not readily available, as determined in good faith pursuant to policies and procedures approved by the Board: |
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1. | The valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment. | ||
2. | Preliminary valuation conclusions will then be documented and discussed with Highland Capital Management, L.P.’s (the “Investment Adviser”) senior management. | ||
3. | The valuation committee, comprised of the Investment Adviser’s investment professionals, will then review these preliminary valuations. An independent valuation firm engaged by the Company’s Board will review some or all of these preliminary valuations at least annually. | ||
4. | Finally, the Board discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith, pursuant to policies and procedures approved by the Board, based on the input of the valuation committee and an independent valuation firm. |
Determination of fair values is uncertain because it involves subjective judgments and estimates not easily substantiated by auditing procedures. | ||
Adoption of Statement of Financial Accounting Standards No. 157 “Fair Value Measurement” (“FAS 157”): | ||
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 157, “Fair Value Measurement,” which is effective for financial statements issued for fiscal years beginning after November 15, 2007. FAS 157 defines how fair value should be determined for financial reporting purposes, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about the use of fair value measurements, but is not expected to result in any changes to the fair value measurements of the Company’s investments. FAS 157 requires companies to provide expanded information about the assets and liabilities measured at fair value and the potential effect of these fair valuations on net assets for the reportable periods as contained in the Company’s periodic filings. | ||
The Company has adopted FAS 157 as of January 1, 2008. The Company has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. Based on this assessment, the adoption of FAS 157 did not have any material effect on the Company’s net asset value. However, the adoption of FAS 157 does require the Company to provide additional disclosures about the inputs used to develop the measurements and the effect of certain measurements The three levels of the fair value hierarchy established under FAS 157 are described below: |
• | Level 1 — Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement; | ||
• | Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and | ||
• | Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company’s own assumptions that market participants would use to price the asset or liability based on the best available information. |
Assets at Fair Value | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Portfolio Investments | $ | 272,537,724 | $ | 13,581,751 | $ | 217,165,301 | $ | 41,790,672 | ||||||||
Cash and foreign currency | 4,578 | 4,578 | — | — | ||||||||||||
Total | $ | 272,542,302 | $ | 13,586,329 | $ | 217,165,301 | $ | 41,790,672 | ||||||||
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Assets at Fair Value Using Unobservable Inputs (Level 3) | Portfolio Investments | |||
Balance as of December 31, 2007 | $ | 37,888,863 | ||
Transfers in/(out) of Level 3 | — | |||
Net amortization/(accretion) of premium/(discount) | 33,757 | |||
Net realized gains/(losses) | — | |||
Net unrealized gains/(losses) | (1,252,327 | ) | ||
Net purchases and sales * | 5,120,379 | |||
Balance as of March 31, 2008 | $ | 41,790,672 | ||
* | Includes any applicable borrowings and/or paydowns made on revolving credit facilities held in the Company’s investment portfolio. |
(b) | Net asset value per share | |
The net asset value per share disclosed on the Statement of Assets and Liabilities is calculated by dividing the net assets attributable to the shares of the Company’s common stock by the number of such shares outstanding at period-end. | ||
(c) | Securities transactions | |
All securities transactions are accounted for on a trade-date basis. Gains or losses on the sale of investments are calculated by using the specific identification method. | ||
(d) | Interest income | |
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income. Payment-in-Kind (“PIK”) interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of distributions, even though the Company has not yet collected cash. For the quarter ended March 31, 2008, approximately $0.5 million of PIK interest income was recorded. | ||
(e) | Taxation — general | |
The Company intends to comply with the applicable provisions of the Code pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes. However, depending on the level of taxable income earned in a year, the Company may choose to carry forward taxable income in excess of distributions and pay the 4% excise tax on the difference. Additionally, the Company is subject to franchise taxes in the state of Delaware. | ||
In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FIN 48 provides guidance on how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authorities. Tax positions not deemed to satisfy the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. FASB required adoption of FIN 48 for fiscal years beginning after December 15, 2006, and FIN 48 is to be applied to all open tax years as of the effective date. However, on December 22, 2006, the Securities and Exchange Commission (“SEC”) delayed the required implementation date of FIN 48 for business development companies until March 31, 2007. As of December 31, 2007, the Company adopted FIN 48 for all |
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subsequent reporting periods and management has determined that there is no material impact on the financial statements. | ||
(f) | Taxation of distributions | |
Book and tax basis differences relating to stockholder distributions and other permanent book and tax differences are reclassified to paid-in capital. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP. | ||
(g) | Payment of distributions | |
Distributions to common stockholders are recorded as of the date of declaration. The amount to be paid out as a distribution is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually. | ||
(h) | Foreign currency | |
The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company’s investments in foreign securities may involve certain risks such as foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments and therefore the earnings of the Company. | ||
(i) | Forward contracts | |
The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. | ||
(j) | Investment in swap agreements | |
Swap agreements are recorded at fair value as estimated by management in good faith. The net unrealized gain or loss on swap agreements is recorded as an asset or liability on the Statement of Assets and Liabilities. The change in unrealized gain or loss is recorded in the Statement of Operations. Cash paid or received on net settlements is recorded as realized gain or loss in the Statement of Operations. | ||
(k) | Cash and cash equivalents | |
Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at cost which approximates fair value as of March 31, 2008. | ||
(l) | Restricted cash | |
Restricted cash consists of cash held by the Company’s custodian as collateral with respect to certain transactions. The Company earns interest on the restricted cash, which is recorded on the accrual basis. | ||
(m) | Registration expenses | |
The Company records registration expenses related to shelf filings as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with Section 8.24 of the AICPA Audit and Accounting Guide for Investment Companies. | ||
(n) | Incentive fee expense recognition | |
The realized capital gain component of the incentive fee (the “Capital Gains Fee”), is payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement, as of the termination date.) The Capital Gains Fee is estimated as of the end of the each calendar quarter based on the Company’s realized capital gains, if any, net of all realized capital losses, unrealized capital depreciation and fees paid on such net capital gains, computed on a cumulative basis. To the extent that Capital Gains Fees are earned by the Investment Adviser, an accrual is made in the amount of the estimated Capital Gains Fee. Because unrealized |
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losses may fluctuate from quarter to quarter, the accrual, if any, may fluctuate as well. There were no Capital Gains Fees paid or accrued for the quarter ended March 31, 2008. (See Note 3 for additional information.) |
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Borrower | Unfunded Loan Commitment | |||
Comcorp Broadcasting, Inc. | $596,901 | |||
$596,901 | ||||
Quarter Ended March 31, 2008 | Period Ended December 31, 2007(a) | |||||||
Net asset value, beginning of period | $ 10.27 | $ 14.33 | (b) | |||||
Net investment income | 0.19 | 0.97 | ||||||
Net realized and unrealized loss on investments | (1.94 | ) | (4.43 | ) | ||||
Total from investment operations | (1.75 | ) | (3.46 | ) | ||||
Common Stock Offering Cost | — | (0.07 | ) | |||||
Capital Contribution | — | 0.26 | (c) | |||||
Distributions Paid | (0.26 | ) | (0.79 | ) | ||||
Net asset value, end of period | $ 8.26 | $ 10.27 | ||||||
Market price per share, beginning of period | $ 8.57 | $ 15.00 | ||||||
Market price per share, end of period | $ 7.00 | $ 8.57 | ||||||
Total investment return (d) | ||||||||
Based on net asset value per share | (16.73 | )% (e) | (23.30 | )% (e) | ||||
Based on market price per share | (15.43 | )% (e) | (38.85 | )% (e) | ||||
Net assets, end of period (f) | $146,335 | $182,015 | ||||||
Ratios to Average Net Assets/Supplemental Data: | ||||||||
Total operating expenses | 7.23 | % | 5.74 | % (g) | ||||
Interest expense | 3.49 | % | 3.80 | % (g) | ||||
Waiver/reimbursement | — | 2.24 | % (g) | |||||
Net expense (h) | 10.72 | % | 7.30 | % (g) | ||||
Net investment income | 8.46 | % | 8.77 | % (g) | ||||
Portfolio turnover rate | 10 | % (e) | 224 | % (e) |
(a) | The Company commenced operations on January 18, 2007. | |
(b) | Net asset value at the beginning of the period reflects the deduction of the one-time initial sales load in connection with the offering. |
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(c) | On February 20, 2007, the Investment Adviser contributed an additional $87,596 in capital to the Company prior to the Offering. No additional shares were issued in the transaction. The contribution per share is based on the pre-offering share amount of 333,333.33 | |
(d) | Total investment return based on market value may result in substantially different returns than investment return based on net asset value, because market value can be significantly greater or less than the net asset value. Investment return assumes reinvestment of distributions. | |
(e) | Not annualized. | |
(f) | Dollars in thousands. | |
(g) | Ratios to average net assets are calculated using the net assets for the period starting from the Offering on February 27, 2007 through December 31, 2007. | |
(h) | Net expense ratio has been calculated after applying any waiver/reimbursement. |
Distributions paid from: | 2007 | |||
Ordinary income * | $ | 13,915,795 | ||
Long-term capital gains | $ | — |
* | For tax purposes short-term capital gains distributions, if any, are considered ordinary income distributions. |
Capital loss carryforward * | $ | (9,946,969 | ) | |
Undistributed ordinary income | $ | 3,525,488 | ||
Undistributed long-term capital gains | $ | — | ||
Net unrealized appreciation/(depreciation) | $ | (60,038,767 | ) |
* | The accumulated losses of $9,946,969 to offset future capital gains, if any, expire on December 31, 2015. |
Unrealized appreciation | $ | 3,139,257 | ||
Unrealized depreciation | (85,181,832 | ) | ||
Net unrealized depreciation | $ | (82,042,575 | ) | |
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Dallas, Texas
March 13, 2008
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Principal ($) | Value ($) | |||||||
Senior Loans (a) - 82.9% | ||||||||
AEROSPACE — AEROSPACE/DEFENSE - 2.4% | ||||||||
IAP Worldwide Services, Inc. | ||||||||
4,949,495 | First Lien Term Loan, 11.50%, 12/30/12 | 4,439,103 | ||||||
BROADCASTING - 10.9% | ||||||||
Comcorp Broadcasting, Inc. | ||||||||
1,036,724 | Revolving Loan, 10.84%, 10/02/12 (b) (c) | 1,036,724 | ||||||
18,849,521 | Term Loan, 10.44%, 04/02/13 (b) | 18,849,521 | ||||||
19,886,245 | ||||||||
CABLE — US CABLE - 3.6% | ||||||||
Bresnan Communications, LLC | ||||||||
1,000,000 | First Lien Additional Term Loan B, 06/30/13 (d) | 958,120 | ||||||
CellNet Group, Inc. | ||||||||
1,000,000 | Second Lien, 10.85%, 10/22/11 | 959,380 | ||||||
WideOpen West Finance, LLC | ||||||||
5,000,000 | Second Lien Term Loan, 11.61%, 06/29/15 | 4,550,000 | ||||||
6,467,500 | ||||||||
DIVERSIFIED MEDIA - 0.9% | ||||||||
Penton Media, Inc. | ||||||||
2,000,000 | Second Lien Term Loan, 10.36%, 02/01/14 | 1,690,000 | ||||||
ENERGY — EXPLORATION & PRODUCTION - 2.7% | ||||||||
TARH E&P Holdings, L.P. | ||||||||
5,000,000 | First Lien Term Loan, 9.88%, 06/29/12 | 4,950,000 | ||||||
ENERGY — OTHER ENERGY - 4.1% | ||||||||
Resolute Aneth, LLC | ||||||||
7,500,000 | Second Lien Term Loan, 9.51%, 06/26/13 | 7,443,750 | ||||||
FINANCIAL - 8.7% | ||||||||
Emerson Reinsurance Ltd. | ||||||||
1,500,000 | Tranche C Term Loan, 10.95%, 12/15/11 (j) | 1,492,500 | ||||||
Flatiron Re Ltd. | ||||||||
610,748 | Closing Date Term Loan, 9.61%, 12/29/10 (j) | 607,694 | ||||||
295,831 | Delayed Draw Term Loan, 9.61%, 12/29/10 (j) | 294,352 | ||||||
Kepler Holdings Ltd. | ||||||||
5,000,000 | Term Loan, 10.70%, 06/30/09 (j) | 4,975,000 | ||||||
Panther Re Holdings Ltd. | ||||||||
500,000 | Term B Loan, 10.08%, 12/01/10 (j) | 497,500 | ||||||
Penhall International Corp. | ||||||||
7,938,145 | Senior Unsecured PIK Toggle Term Loan, 12.82%, 04/01/12 | 7,957,990 | ||||||
15,825,036 | ||||||||
FOREST PRODUCTS — PACKAGING - 0.5% | ||||||||
Tegrant Corp. | ||||||||
1,000,000 | Second Lien Term Loan, 10.35%, 03/07/15 | 850,000 | ||||||
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Principal ($) | Value ($) | |||||||
Senior Loans (continued) | ||||||||
GAMING/LEISURE — OTHER LEISURE - 13.0% | ||||||||
Fontainebleau Florida Hotel, LLC | ||||||||
10,000,000 | Tranche C Term Loan, 11.11%, 06/06/12 | 9,375,000 | ||||||
Lake at Las Vegas Joint Venture, LLC | ||||||||
27,290,363 | PIK Term Loan, 15.31%, 06/20/12 (e) | 12,690,019 | ||||||
3,611,111 | Synthetic Revolver, 10.20%, 06/20/12 (e) | 1,679,167 | ||||||
23,744,186 | ||||||||
HEALTHCARE — ACUTE CARE - 0.5% | ||||||||
LifeCare Holdings, Inc. | ||||||||
989,873 | Term Loan, 8.20%, 08/11/12 | 876,652 | ||||||
HEALTHCARE — MEDICAL PRODUCTS - 4.1% | ||||||||
Graceway Pharmaceuticals, LLC | ||||||||
2,000,000 | Mezzanine Loan, 13.45%, 11/01/13 (j) | 1,660,000 | ||||||
Rotech Healthcare, Inc. | ||||||||
6,413,395 | PIK Term Loan, 11.36%, 09/26/11 | 5,707,921 | ||||||
7,367,921 | ||||||||
HOUSING — REAL ESTATE DEVELOPMENT - 10.2% | ||||||||
Metroflag BP, LLC / Metroflag Cable, LLC | ||||||||
5,000,000 | Second Lien Term Loan, 13.65%, 07/06/08 | 4,500,000 | ||||||
MPH Mezzanine II, LLC | ||||||||
10,000,000 | Mezzanine 2B, 7.90%, 02/09/08 (b) | 9,987,800 | ||||||
MPH Mezzanine III, LLC | ||||||||
4,000,000 | Mezzanine 3, 9.34%, 02/09/08 | 3,990,000 | ||||||
18,477,800 | ||||||||
INFORMATION TECHNOLOGY - 0.3% | ||||||||
Metrologic Instruments, Inc. | ||||||||
500,000 | Second Lien Term Loan, 11.45%, 12/21/13 | 481,875 | ||||||
MANUFACTURING - 0.9% | ||||||||
Latham Manufacturing Corp. | ||||||||
1,931,388 | New Term Loan, 8.52%, 06/30/12 | 1,709,279 | ||||||
RETAIL - 2.5% | ||||||||
Totes Isotoner Corp. | ||||||||
4,877,228 | Second Lien Term Loan, 10.83%, 01/31/14 | 4,584,594 | ||||||
SERVICE — ENVIRONMENTAL SERVICES - 5.3% | ||||||||
LVI Services, Inc. | ||||||||
10,086,339 | Tranche B Term Loan, 9.91%, 11/16/11 | 9,695,493 | ||||||
SERVICE — OTHER SERVICES - 1.0% | ||||||||
NES Rentals Holdings, Inc. | ||||||||
2,000,000 | Permanent Term Loan, 12.13%, 07/20/13 (j) | 1,880,000 | ||||||
TRANSPORTATION — AUTO - 4.4% | ||||||||
BST Safety Textiles Acquisition GmbH | ||||||||
665,500 | Second Lien Facility, 12.49%, 06/30/09 | 598,950 | ||||||
Motor Coach Industries International, Inc. | ||||||||
7,662,162 | PIK Second Lien, 13.64%, 12/01/08 | 7,432,298 | ||||||
8,031,248 | ||||||||
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Principal ($) | Value ($) | |||||||
Senior Loans (continued) | ||||||||
UTILITIES - 4.3% | ||||||||
Entegra Power Group, LLC | ||||||||
8,264,857 | PIK Third Lien Term Loan, 10.83%, 10/19/15 | 7,753,510 | ||||||
WIRELESS COMMUNICATIONS - 2.6% | ||||||||
Clearwire Corp. | ||||||||
4,987,500 | Term Loan, 11.15%, 07/03/12 (j) | 4,812,938 | ||||||
Total Senior Loans (cost $172,517,898) | 150,967,130 | |||||||
Corporate Notes and Bonds - 59.6% | ||||||||
BROADCASTING - 0.9% | ||||||||
Young Broadcasting, Inc. | ||||||||
2,000,000 | 10.00%, 03/01/11 | 1,572,500 | ||||||
CONSUMER NON-DURABLES - 4.0% | ||||||||
Ames True Temper, Inc. | ||||||||
2,000,000 | 10.00%, 07/15/12 | 1,110,000 | ||||||
Solo Cup Co. | ||||||||
7,000,000 | 8.50%, 02/15/14 | 6,055,000 | ||||||
7,165,000 | ||||||||
DIVERSIFIED MEDIA - 4.6% | ||||||||
Baker & Taylor, Inc. | ||||||||
8,300,000 | 11.50%, 07/01/13 (f) | 8,258,500 | ||||||
ENERGY — EXPLORATION & PRODUCTION - 7.3% | ||||||||
Energy XXI Gulf Coast | ||||||||
6,200,000 | 10.00%, 06/15/13 | 5,719,500 | ||||||
Helix Energy Solutions Group, Inc. | ||||||||
2,500,000 | 9.50%, 01/15/16 (f) | 2,556,250 | ||||||
McMoran Exploration Co. | ||||||||
5,000,000 | 11.88%, 11/15/14 (j) | 5,043,750 | ||||||
13,319,500 | ||||||||
FOOD/TOBACCO — FOOD/TOBACCO PRODUCERS - 3.1% | ||||||||
Pinnacle Foods Group, Inc. | ||||||||
6,500,000 | 10.63%, 04/01/17 (f) | 5,622,500 | ||||||
GAMING/LEISURE — OTHER LEISURE - 5.2% | ||||||||
Six Flags, Inc. | ||||||||
2,267,000 | 4.50%, 05/15/15 (j) | 1,646,409 | ||||||
Tropicana Entertainment Resorts Holdings, L.P. | ||||||||
12,199,000 | 9.63%, 12/15/14 | 7,807,360 | ||||||
9,453,769 | ||||||||
HEALTHCARE — ACUTE CARE - 4.0% | ||||||||
Argatroban Royalty Sub, LLC | ||||||||
4,389,424 | 18.50%, 09/21/14 | 4,411,371 | ||||||
HCA, Inc. | ||||||||
1,800,000 | 7.69%, 06/15/25 (j) | 1,499,222 | ||||||
Tenet Healthcare Corp. | ||||||||
1,500,000 | 9.88%, 07/01/14 (j) | 1,436,250 | ||||||
7,346,843 | ||||||||
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Principal ($) | Value ($) | |||||||
Corporate Notes and Bonds (continued) | ||||||||
HEALTHCARE — MEDICAL PRODUCTS - 3.4% | ||||||||
Angiotech Pharmaceuticals, Inc. | ||||||||
5,000,000 | 7.75%, 04/01/14 (j) | 4,212,500 | ||||||
Encysive Pharmaceuticals, Inc. | ||||||||
4,000,000 | 2.50%, 03/15/12 | 1,995,000 | ||||||
6,207,500 | ||||||||
HOUSING — BUILDING MATERIALS - 0.4% | ||||||||
Masonite Corp. | ||||||||
1,000,000 | 11.00%, 04/06/15 (j) | 785,000 | ||||||
HOUSING — REAL ESTATE DEVELOPMENT - 9.5% | ||||||||
Realogy Corp. | ||||||||
5,000,000 | 10.50%, 04/15/14 (f) | 3,750,000 | ||||||
21,500,000 | 12.38%, 04/15/15 (f) | 13,598,750 | ||||||
17,348,750 | ||||||||
INFORMATION TECHNOLOGY - 4.6% | ||||||||
Freescale Semiconductor, Inc. | ||||||||
3,000,000 | 9.13%, 12/15/14 (f) | 2,565,000 | ||||||
7,000,000 | 10.13%, 12/15/16 | 5,810,000 | ||||||
8,375,000 | ||||||||
RETAIL - 3.0% | ||||||||
Dollar General Corp. | ||||||||
3,000,000 | 10.63%, 07/15/15 (f) (j) | 2,767,500 | ||||||
Rite Aid Corp. | ||||||||
1,250,000 | 9.38%, 12/15/15 (j) | 1,043,750 | ||||||
2,000,000 | 9.50%, 06/15/17 (j) | 1,665,000 | ||||||
5,476,250 | ||||||||
TELECOMMUNICATIONS - 2.8% | ||||||||
Intelsat Bermuda, Ltd. | ||||||||
5,000,000 | 10.83%, 06/15/13 (g) | 5,150,000 | ||||||
TRANSPORTATION — AUTO - 6.8% | ||||||||
Delphi Corp. | ||||||||
1,500,000 | 6.55%, 06/15/06 (e) | 900,000 | ||||||
2,500,000 | 6.50%, 05/01/09 (e) | 1,512,500 | ||||||
2,667,000 | 6.50%, 08/15/13 (e) | 1,560,195 | ||||||
3,500,000 | 7.13%, 05/01/29 (e) | 2,152,500 | ||||||
Motor Coach Industries International, Inc. | ||||||||
12,000,000 | 11.25%, 05/01/09 | 6,300,000 | ||||||
12,425,195 | ||||||||
Total Corporate Notes and Bonds (cost $128,342,264) | 108,506,307 | |||||||
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Principal ($) | Value ($) | |||||||
Claims - 0.9% | ||||||||
AEROSPACE — AIRLINES - 0.6% | ||||||||
Northwest Airlines, Inc. | ||||||||
3,000,000 | ALPA Trade Claim, 08/21/13 | 108,750 | ||||||
2,500,000 | Bell Atlantic Trade Claim, 08/21/13 | 90,625 | ||||||
2,500,000 | EDC Trade Claims, 08/21/13 | 90,625 | ||||||
5,326,500 | Flight Attendant Claim, 08/21/13 | 193,086 | ||||||
1,500,000 | GE Trade Claim, 08/21/13 | 54,375 | ||||||
4,728,134 | IAM Trade Claim, 08/21/13 | 171,395 | ||||||
3,433,116 | Lambert Leasing Trade Claim, 08/21/13 (d) | 124,450 | ||||||
5,000,000 | Pinnacle Trade Claim, 08/21/13 | 181,250 | ||||||
3,512,250 | Retiree Claim, 08/21/13 | 127,319 | ||||||
1,141,875 | ||||||||
CABLE — US CABLE - 0.3% | ||||||||
4,056,000 | Adelphia Communications, 06/15/11 | 441,090 | ||||||
Total Claims (cost $9,506,305) | 1,582,965 | |||||||
Shares | ||||||||
Common Stocks - 28.0% | ||||||||
AEROSPACE — AIRLINES - 6.3% | ||||||||
787,799 | Northwest Airlines, Inc. (h) | 11,430,959 | ||||||
CABLE — US CABLE - 0.8% | ||||||||
50,336 | Time Warner Cable, Inc. (h) | 1,389,264 | ||||||
DIVERSIFIED MEDIA - 0.7% | ||||||||
35,000 | Gannett Co., Inc. (j) | 1,365,000 | ||||||
FINANCIAL - 0.2% | ||||||||
17,500 | Guaranty Financial Group, Inc. (h) | 280,000 | ||||||
7,731 | Jer Investors Trust, Inc., REIT | 83,263 | ||||||
363,263 | ||||||||
FOREST PRODUCTS — PAPER - 0.6% | ||||||||
52,500 | Temple-Inland, Inc. (j) | 1,094,625 | ||||||
GAMING/LEISURE — OTHER LEISURE - 0.7% | ||||||||
26,923 | Starwood Hotels & Resorts Worldwide, Inc. (j) | 1,185,420 | ||||||
HEALTHCARE — MEDICAL PRODUCTS - 3.3% | ||||||||
221,600 | PDL BioPharma, Inc. (h) (j) | 3,882,432 | ||||||
636,900 | TLC Vision Corp. (h) (j) | 2,120,877 | ||||||
6,003,309 | ||||||||
HOUSING — BUILDING MATERIALS - 0.1% | ||||||||
13,125 | Owens Corning, Inc. (h) (j) | 265,388 | ||||||
HOUSING — REAL ESTATE DEVELOPMENT - 0.2% | ||||||||
17,500 | Forestar Real Estate Group, Inc. (h) | 412,825 | ||||||
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Shares | Value ($) | |||||||
Common Stocks (continued) | ||||||||
METALS/MINERALS — OTHER METALS/MINERALS - 6.5% | ||||||||
208,439 | Alcoa, Inc (j) | 7,618,446 | ||||||
62,112 | RTI International Metals, Inc. (h) (j) | 4,281,380 | ||||||
11,899,826 | ||||||||
TELECOMMUNICATIONS - 4.4% | ||||||||
1,256,635 | Communications Corp. of America (b) (h) | 8,014,818 | ||||||
TRANSPORTATION — AUTO - 1.7% | ||||||||
107,852 | The Goodyear Tire & Rubber Co. (h) (j) | 3,043,583 | ||||||
UTILITIES - 2.5% | ||||||||
136,750 | Entegra TC, LLC (h) | 4,461,469 | ||||||
Total Common Stocks (cost $61,659,547) | 50,929,749 | |||||||
Total Investments - 171.4% | 311,986,151 | |||||||
(cost of $372,026,014) (i) | ||||||||
Other Assets & Liabilities, Net — (71.4)% | (129,971,099 | ) | ||||||
Net Assets - 100.0% | 182,015,052 | |||||||
(a) | Senior loans in which Highland Distressed Opportunities, Inc. (the “Company”) invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium. (Unless otherwise identified, all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at December 31, 2007. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown. | |
(b) | Represents fair value as determined by the Investment Adviser, in good faith, pursuant to the policies and procedures approved by the Company’s Board of Directors. Securities with a total aggregate market value of $37,888,863, or 20.8% of net assets, were valued under fair value by the Investment Adviser as of December 31, 2007. | |
(c) | Senior Loan has additional unfunded loan commitment. See Note 6. | |
(d) | All or a portion of this position has not settled. Contract rates do not take effect until settlement date. | |
(e) | The issuer is in default of certain debt covenants. Income is not being accrued. | |
(f) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At December 31, 2007, these securities amounted to $39,118,500 or 21.5% of net assets. These securities have been determined by the Company’s investment adviser to be liquid securities. | |
(g) | Floating rate note. The interest rate shown reflects the rate in effect at December 31, 2007. | |
(h) | Non-income producing security. | |
(i) | Cost for U.S. federal income tax purposes is $372,026,014. | |
(j) | Non-qualifying asset — Investment is a not security of a eligible portfolio company as defined in the 1940 Act and in Rule 2a-46. The Company must invest at least 70% of its total assets in qualify assets. Securities with a total aggregate market value of $250,809,635 or 72.30% of total assets were qualifying as of December 31, 2007. |
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($) | ||||
Assets: | ||||
Investments, at value (cost $372,026,014) | 311,986,151 | |||
Cash | 4,291,098 | |||
Receivable for: | ||||
Receivable for investments sold | 24,628,173 | |||
Dividend and interest receivable | 5,951,790 | |||
Other assets | 66,712 | |||
Total assets | 346,923,924 | |||
Liabilities: | ||||
Notes payable (Note 4) | 142,000,000 | |||
Net discount and unrealized depreciation on unfunded transactions | 16,228 | |||
Payables for: | ||||
Investments purchased | 19,387,884 | |||
Investment advisory fee payable (Note 3) | 1,812,285 | |||
Administration fee payable (Note 3) | 317,150 | |||
Incentive fee (Note 3) | 383,951 | |||
Interest expense payable (Note 4) | 759,465 | |||
Directors’ fees (Note 3) | 592 | |||
Accrued expenses and other liabilities | 231,317 | |||
Total liabilities | 164,908,872 | |||
Stockholders’ equity (net assets) | 182,015,052 | |||
Composition of stockholders’ equity (net assets): | ||||
Common Stock, par value $.001 per share: 550,000,000 common stock authorized, 17,716,771 common stock outstanding | 17,717 | |||
Paid-in capital | 253,163,644 | |||
Undistributed net investment income | 3,420,147 | |||
Accumulated net realized gain/(loss) on investments, total return swaps and foreign currency transactions | (14,547,689 | ) | ||
Net unrealized appreciation/(depreciation) on investments and translation of assets and liabilities in foreign currency | (60,038,767 | ) | ||
Stockholders’ equity (net assets) | 182,015,052 | |||
Net Asset Value Per Share (Net Assets/Common Stock Outstanding) | 10.27 | |||
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For the Period Ended | ||||
December 31, 2007(a) | ||||
($) | ||||
Investment Income: | ||||
Interest Income | 30,536,959 | |||
Dividends (net of foreign taxes withheld) | 792,762 | |||
Total investment income | 31,329,721 | |||
Expenses: | ||||
Investment advisory fees (Note 3) | 6,306,869 | |||
Incentive fees (Note 3) | 2,475,541 | |||
Administration fees (Note 3) | 1,103,702 | |||
Accounting service fees | 123,913 | |||
Transfer agent fees | 24,500 | |||
Professional fees | 523,596 | |||
Directors’ fees | 35,441 | |||
Custody fees | 50,956 | |||
Registration fees | 20,247 | |||
Delaware franchise tax expense | 119,367 | |||
Organization expense (Note 3) | 170,383 | |||
Rating agency fees | 57,003 | |||
Other expense | 181,109 | |||
Total operating expenses | 11,192,627 | |||
Interest expense (Note 4) | 7,407,511 | |||
Total expenses | 18,600,138 | |||
Fees and expenses waived or reimbursed by Investment Adviser (Note 3) | (4,359,935 | ) | ||
Net expenses | 14,240,203 | |||
Net investment income | 17,089,518 | |||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||
Net realized gain/(loss) on investments | (14,507,557 | ) | ||
Net realized gain/(loss) on total return swaps | 172,955 | |||
Net realized gain/(loss) on foreign currency transactions | 33,337 | |||
Net change in unrealized appreciation/(depreciation) on investments | (60,039,863 | ) | ||
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency | 1,096 | |||
Net realized and unrealized gain/(loss) on investments | (74,340,032 | ) | ||
Net decrease in stockholders’ equity (net assets) resulting from operations | (57,250,514 | ) | ||
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. |
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Total | ||||||||||||||||||||||||||||
Undistributed | Undistributed | Net Unrealized | Stockholders’ | |||||||||||||||||||||||||
Common Stock | Paid-in Capital | Net Investment | Net Realized | Appreciation/ | Equity | |||||||||||||||||||||||
Shares | Amount | in Excess of Par | Income | Gain/(Loss) | (Depreciation) | (Net Assets) | ||||||||||||||||||||||
Balance at January 18, 2007 | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Issuance of common stock, 01/18/07 | 333,333 | 333 | 4,999,667 | — | — | — | 5,000,000 | |||||||||||||||||||||
Issuance of common stock | 17,284,300 | 17,285 | 247,965,312 | — | — | — | 247,982,597 | |||||||||||||||||||||
Distributions reinvested | 99,138 | 99 | 1,328,558 | — | — | — | 1,328,657 | |||||||||||||||||||||
Capital contribution, 02/20/07(b) | — | — | 87,596 | — | — | — | 87,596 | |||||||||||||||||||||
Distributions declared | — | — | — | (13,915,795 | ) | — | — | (13,915,795 | ) | |||||||||||||||||||
Offering cost | — | — | (1,217,489 | ) | — | — | — | (1,217,489 | ) | |||||||||||||||||||
Net increase/(decrease) in stockholders’ equity (net assets) resulting from operations | — | — | — | 17,335,942 | (14,547,689 | ) | (60,038,767 | ) | (57,250,514 | ) | ||||||||||||||||||
Balance at December 31, 2007 | 17,716,771 | $ | 17,717 | $ | 253,163,644 | $ | 3,420,147 | $ | (14,547,689 | ) | $ | (60,038,767 | ) | $ | 182,015,052 | |||||||||||||
(a) | Highland Distressed Opportunities, Inc. (the “Company”) commenced operations on January 18, 2007. | |
(b) | On February 20, 2007, the Company’s investment adviser contributed an additional $87,596 in capital to the Company prior to the offering. No additional shares were issued in conjunction with this transaction. |
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($) | ||||
Cash Flow Used in Operating Activates: | ||||
Net decrease in stockholders’ equity (net assets) resulting from operations | (57,250,514 | ) | ||
Adjustments to reconcile net decrease in stockholders’ equity (net assets) resulting from operations: | ||||
Net realized gain/(loss) on investments, total return swaps and foreign currency transactions | 14,301,265 | |||
Net change in unrealized appreciation/(depreciation) on investments and translation of assets and liabilities denominated in foreign currency | 60,038,767 | |||
Purchase of investment securities | (1,255,368,821 | ) | ||
Proceeds from disposition of investment securities, total return swaps and foreign currency transactions | 870,095,540 | |||
Increase in dividends, interest and fees receivable | (5,951,790 | ) | ||
Increase in receivable for investments sold | (24,628,173 | ) | ||
Increase in other assets | (66,712 | ) | ||
Net amortization/(accretion) of premium/(discount) | (1,260,290 | ) | ||
Increase in payable for investments purchased | 19,387,884 | |||
Increase in payables to related parties | 2,513,978 | |||
Net realized gain/(loss) on total return swaps | 172,955 | |||
Net realized and change in unrealized gain/(loss) on foreign currency | 34,433 | |||
Increase in interest payable | 759,465 | |||
Increase in other liabilities | 247,545 | |||
Net cash flow used in operating activities | (376,974,468 | ) | ||
Cash Flows Provided by Financing Activities: | ||||
Net proceeds from issuance of common stock | 251,852,704 | |||
Increase in notes payable (b) | 142,000,000 | |||
Distributions paid in cash | (12,587,138 | ) | ||
Net cash flow provided by financing activities | 381,265,566 | |||
Net increase in cash | 4,291,098 | |||
Cash: | ||||
Beginning of the period | — | |||
End of the period | 4,291,098 | |||
Supplemental Information: | ||||
Interest paid during the period | 6,648,046 | |||
(a) | Highland Distressed Opportunities, Inc. commenced operations on January 18, 2007. | |
(b) | During the period, $4 million was borrowed from an affiliate and repaid. See Note 9 for details. |
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NOTES TO FINANCIAL STATEMENTS | ||
December 31, 2007 | Highland Distressed Opportunities, Inc. |
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1. | The valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment. | ||
2. | Preliminary valuation conclusions will then be documented and discussed with Highland Capital Management, L.P.’s (the “Investment Adviser”) senior management. | ||
3. | The valuation committee, comprised of the Investment Adviser’s investment professionals, will then review these preliminary valuations. An independent valuation firm engaged by the Company’s Board will review some or all of these preliminary valuations at least annually. | ||
4. | Finally, the Board discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith, pursuant to policies and procedures approved by the Board, based on the input of the valuation committee and an independent valuation firm. |
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Borrower | Unfunded Loan Commitment | |||
Comcorp Broadcasting, Inc. | $848,228 | |||
$848,228 | ||||
Period Ended December 31, 2007(a) | ||||
Net asset value, beginning of period | $14.33 | (b) | ||
Net investment income | 0.97 | |||
Net realized and unrealized loss on investments | (4.43 | ) | ||
Total from investment operations | (3.46 | ) | ||
Common Stock Offering Cost | (0.07 | ) | ||
Capital Contribution | 0.26 | (c) | ||
Distributions Paid | (0.79 | ) | ||
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Period Ended | ||||
December 31, 2007(a) | ||||
Net asset value, end of period | $ 10.27 | |||
Market price per share, beginning of period | $ 15.00 | |||
Market price per share, end of period | $ 8.57 | |||
Total investment return (d) | ||||
Based on net asset value per share | (23.30 | )%(e) | ||
Based on market price per share | (38.85 | )%(e) | ||
Net assets, end of period (f) | $182,015 | |||
Ratios to Average Net Assets/Supplemental Data (g): | ||||
Total operating expenses | 5.74 | % | ||
Interest expense | 3.80 | % | ||
Waiver/reimbursement | 2.24 | % | ||
Net expense (h) | 7.30 | % | ||
Net investment income | 8.77 | % | ||
Portfolio turnover rate | 224 | %(e) |
(a) | The Company commenced operations on January 18, 2007. | |
(b) | Net asset value at the beginning of the period reflects the deduction of the one-time initial sales load in connection with the offering. | |
(c) | On February 20, 2007, the Investment Adviser contributed an additional $87,596 in capital to the Company prior to the Offering. No additional shares were issued in the transaction. The contribution per share is based on the pre-offering share amount of 333,333.33 | |
(d) | Total investment return based on market value may result in substantially different returns than investment return based on net asset value, because market value can be significantly greater or less than the net asset value. Investment return assumes reinvestment of distributions. | |
(e) | Not annualized. | |
(f) | Dollars in thousands. | |
(g) | Ratios to average net assets are calculated using the net assets for the period starting from the Offering on February 27, 2007 through December 31, 2007. | |
(h) | Net expense ratio has been calculated after applying any waiver/reimbursement. |
Undistributed Net Investment Income | $ | 246,424 | ||
Accumulated Net Realized Loss | $ | (246,424 | ) |
Distributions paid from: | 2007 | |||
Ordinary income* | $ | 13,915,795 | ||
Long-term capital gains | $ | — |
* | For tax purposes short-term capital gains distributions, if any, are considered ordinary income distributions. |
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Capital loss carryforward * | $ | (9,946,969 | ) | |
Undistributed ordinary income | $ | 3,525,488 | ||
Undistributed long-term capital gains | $ | — | ||
Net unrealized appreciation/(depreciation) | $ | (60,038,767 | ) |
* | The accumulated losses of $9,946,969 to offset future capital gains, if any, expire on December 31, 2015. |
Unrealized appreciation | $ | 2,429,611 | ||
Unrealized depreciation | (62,469,474 | ) | ||
Net unrealized depreciation | $ | (60,039,863 | ) | |
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RELATING TO REORGANIZATION OF
(the “Acquired Fund”)
(the “Acquiring Fund,” and together with the Acquired Fund, the “Funds”)
Table of Contents
1 | ||||
2 | ||||
11 | ||||
20 | ||||
23 | ||||
31 | ||||
44 | ||||
A-1 | ||||
B-1 |
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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 of 1940, as amended (the “1940 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 Acquiring Fund’s 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 Acquiring Fund’s 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 Acquiring Fund may be deemed to be an underwriter; |
5. | purchase or sell real estate, except that the Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund’s 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 Acquiring Fund becoming subject to registration with the Commodity Futures Trading Commission (the “CFTC”) as a commodity pool. |
1. | 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 Acquiring Fund’s total assets and the Acquiring Fund’s 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 Acquiring Fund 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 Acquiring Fund owns or has the immediate and unconditional right to acquire at no additional cost the identical security; and |
2. | purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act or any exemptive relief obtained thereunder. Under the 1940 Act, the Acquiring Fund 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 shares of any one investment company, provided the investment does not represent more than 3% |
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of the voting stock of the acquired investment company at the time such shares are purchased. As a shareholder in any investment company, the Acquiring Fund will bear its ratable share of that investment company’s expenses and will remain subject to payment of advisory fees and other expenses with respect to assets invested therein. Holders of common shares will therefore be subject to duplicative expenses to the extent the Acquiring Fund 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. |
1. | 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 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 Acquiring Fund may not be fully insured by the Federal Deposit Insurance Corporation. |
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3. | Repurchase agreements, which involve purchases of debt securities. At the time the Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund to invest temporarily available cash. The Acquiring Fund 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 Acquiring Fund may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Acquiring Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the Acquiring Fund 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 Acquiring Fund could incur a loss of both principal and interest. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Acquiring Fund 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 Acquiring Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by the Acquiring Fund at any time. Highland Capital Management, L.P. (“Highland” or the “Investment Adviser”) will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continually monitor the corporation’s ability to meet all of its financial obligations, because the Acquiring Fund’s 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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• | The Acquiring Fund may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Acquiring Fund intends to acquire. The Acquiring Fund 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. | ||
• | The Acquiring Fund may also use forward currency contracts to shift the Acquiring Fund’s exposure to foreign currency exchange rate changes from one currency to another. For example, if the Acquiring Fund owns securities denominated in a foreign currency and Highland believes that currency will decline relative to another currency, the Acquiring Fund 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. | ||
• | The Acquiring Fund 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. | ||
• | The Acquiring Fund 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. | ||
• | The Acquiring Fund could also enter into a forward currency contract to sell another currency expected to perform similarly to the currency in which the Acquiring Fund’s 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 Acquiring Fund’s existing investments are denominated. | ||
• | The Acquiring Fund 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. | ||
• | The cost to the Acquiring Fund 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 |
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forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. |
• | When the Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund might be unable to close out a forward currency contract. In either event, the Acquiring Fund 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 Acquiring Fund 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. |
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Number of | ||||||||||||
Portfolios in | ||||||||||||
Position | Highland Fund | Other | ||||||||||
with the | Term of Office | Complex | Directorships/ | |||||||||
Name and | Acquiring | and Length of | Principal Occupation(s) | Overseen by | Trusteeships | |||||||
Age | Fund | Time Served(1) | During Past Five Years | Trustee(2) | Held | |||||||
INDEPENDENT TRUSTEES(3) | ||||||||||||
Timothy Hui (Age 60) | Trustee | 3 years and Trustee since May 19, 2006. | Vice President since February 2008, Dean of Educational Resources from July 2006 to January 2008, Assistant Provost for Graduate Education from July 2004 to June 2006, and Assistant Provost for Educational Resources, July 2001 to June 2004 at Philadelphia Biblical University. | 9 | None |
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Number of | ||||||||||||
Portfolios in | ||||||||||||
Position | Highland Fund | Other | ||||||||||
with the | Term of Office | Complex | Directorships/ | |||||||||
Name and | Acquiring | and Length of | Principal Occupation(s) | Overseen by | Trusteeships | |||||||
Age | Fund | Time Served(1) | During Past Five Years | Trustee(2) | Held | |||||||
Scott Kavanaugh (Age 48) | Trustee | 3 years and Trustee since May 19, 2006. | Vice-Chairman, President and Chief Operating Officer at Keller Financial Group since September 2007; Chairman and Chief Executive Officer at First Foundation Bank since September 2007; Private investor since February 2004; Sales Representative at Round Hill Securities from March 2003 to January 2004; Executive at Provident Funding Mortgage Corporation from February 2003 to July 2003; Executive Vice President, Director and Treasurer at Commercial Capital Bank from January 2000 to February 2003; Managing Principal and Chief Operating Officer at Financial Institutional Partners Mortgage Company and Managing Principal and President of Financial Institutional Partners, LLC (an investment banking firm) from April 1998 to February 2003. | 9 | None | |||||||
James F. Leary (Age 78) | Trustee | 3 years and Trustee since May 19, 2006. | Managing Director, Benefit Capital Southwest, Inc. (a financial consulting firm) since January 1999. | 9 | Board Member of Capstone Group of Funds (7 portfolios). | |||||||
Bryan A. Ward (Age 53) | Trustee | 3 years and Trustee since May 19, 2006. | Senior Manager, Accenture, LLP (a consulting firm) since January 2002. | 9 | None. | |||||||
INTERESTED TRUSTEE | ||||||||||||
R. Joseph Dougherty(4) (Age 38) | Senior Vice President; Trustee and Chairman of the Board | 3 years and Trustee since March 10, 2006. | Senior Portfolio Manager of Investment Adviser since 2000, Director/Trustee of the funds in the Highland Fund Complex since 2004 and President and Chief | 9 | None. |
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Number of | ||||||||||||
Portfolios in | ||||||||||||
Position | Highland Fund | Other | ||||||||||
with the | Term of Office | Complex | Directorships/ | |||||||||
Name and | Acquiring | and Length of | Principal Occupation(s) | Overseen by | Trusteeships | |||||||
Age | Fund | Time Served(1) | During Past Five Years | Trustee(2) | Held | |||||||
Executive Officer of the funds in the Highland Fund Complex since December 2008; Senior Vice President of the funds in the Highland Fund Complex from 2004 to December 2008. |
Position with | Term of Office and | |||||
Name and | the Acquiring | Length of Time | ||||
Age | Fund | Served | Principal Occupation(s) During Past Five Years | |||
Brad Borud (Age [ ]) | Executive Vice President | Indefinite Term and Officer since December 2008. | Senior Trader and Chief Investment Officer — Retail Products of the Adviser since April 2008 and Executive Vice President of the funds in the Highland Complex since December 2008; Senior Trader and Co-Director of Portfolio Management of the Adviser from 2003 to March 2008. | |||
M. Jason Blackburn (Age 32) | Chief Financial Officer (Principal Accounting Officer), Treasurer and Secretary | Indefinite Term and Officer since May 19, 2006. | Assistant Controller of the Investment Adviser since November 2001; Treasurer and Secretary of the funds in the Highland Fund Complex. | |||
Michael Colvin (Age 39) | Chief Compliance Officer | Indefinite Term and Officer since July 2007. | General Counsel and Chief Compliance Officer of the 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 in the Private Equity Practice Group at Weil, Gotshal & Manges, LLP from January 2003 to January 2007. |
(1) | After a Trustee’s 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, were re-elected in 2008; and Mr. Dougherty, the sole Class III Trustee, is expected to stand for re-election in 2009. |
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(2) | 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 Trustee 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. | |
(3) | Independent Trustees are those who are not “interested persons” as that term is defined under Section 2(a)(19) of the Investment Company Act. | |
(4) | Mr. Dougherty is deemed to be an “interested person” of the Acquiring Fund under the Investment Company Act because of his position with the Investment Adviser. |
Aggregate Compensation from | ||||||||
Aggregate Compensation from the | Highland Fund Complex for the | |||||||
Acquiring Fund for the fiscal year | calendar year ended December 31, | |||||||
Name of Trustee | ended December 31, 2007 | 2007 | ||||||
INTERESTED TRUSTEE | ||||||||
R. Joseph Dougherty | $ | 0 | $ | 0 | ||||
INDEPENDENT TRUSTEES | ||||||||
Bryan A. Ward | $ | 7,500 | $ | 122,722 | ||||
Scott F. Kavanaugh | $ | 7,500 | $ | 122,722 | ||||
James F. Leary | $ | 7,500 | $ | 122,722 | ||||
Timothy K. Hui | $ | 7,500 | $ | 122,722 |
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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 | ($ MILLIONS) | FEE | ($ MILLIONS) | ||||||||||||
Registered Investment Companies | 12 | 8,076 | 0 | 0 | ||||||||||||
Other Pooled Investment Vehicles | 30 | 21,227 | 26 | 19,821 | ||||||||||||
Other Accounts | 0 | 0 | 0 | 0 |
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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 | ($ MILLIONS) | FEE | ($ MILLIONS) | ||||||||||||
Registered Investment Companies | 2 | 933 | 1 | 85 | ||||||||||||
Other Pooled Investment Vehicles | 6 | 3,189 | 4 | 2,610 | ||||||||||||
Other Accounts | 0 | 0 | 0 | 0 |
NUMBER OF | ASSETS | |||||||||||||||
ACCOUNTS | SUBJECT TO A | |||||||||||||||
ASSETS OF | SUBJECT TO A | PERFORMANCE | ||||||||||||||
NUMBER OF | ACCOUNTS | PERFORMANCE | FEE | |||||||||||||
TYPE OF ACCOUNT | ACCOUNTS | ($ MILLIONS) | FEE | ($ MILLIONS) | ||||||||||||
Registered Investment Companies | 0 | 0 | 0 | 0 | ||||||||||||
Other Pooled Investment Vehicles | 0 | 0 | 0 | 0 | ||||||||||||
Other Accounts | 0 | 0 | 0 | 0 |
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Dollar Range of Equity Securities Beneficially Owned | ||||
by Portfolio Manager in the Acquiring Fund for the | ||||
Name of Portfolio Manager | fiscal year ended December 31, 2007 | |||
Mark Okada | $ | 100,001 - $500,000 | ||
Kurtis Plumer | $ | 1 - $10,000 | ||
Brad Borud | $ | 1 - $10,000 |
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As of September 30, 2008 (unaudited) | Highland Credit Strategies Fund |
($) | ||||
Assets: | ||||
Unaffiliated Issuers, at value (cost $1,119,667,338) | 885,163,868 | |||
Affiliated issuers, at value (cost $23,498,613) | 24,751,046 | |||
Total investments, at value (cost $1,143,165,951) | 909,914,914 | |||
Cash | 8,595,831 | |||
Restricted cash (Note 2) | 104,027,450 | |||
Net unrealized appreciation on forward foreign currency contracts | 4,100,360 | |||
Securities covering shorts | 55,628 | |||
Cash held as collateral for securities loaned (Note 10) | 31,976,043 | |||
Receivable for: | ||||
Investments sold | 50,751,175 | |||
Derivatives (Swap agreements) | 7,255,989 | |||
Dividends and interest receivable | 23,601,224 | |||
Other assets | 92,969 | |||
Total assets | 1,140,371,583 | |||
Liabilities: | ||||
Notes payable (Note 8) | 315,000,000 | |||
Foreign currency (Cost $1,520,188) | 1,423,500 | |||
Securities sold short, at value (Proceeds $29,538,607) | 30,030,496 | |||
Dividends payable on securities sold short | 21,615 | |||
Net discount and unrealized depreciation on unfunded transactions (Note 9) | 5,365,259 | |||
Payable upon receipt of securities loaned (Note 10) | 31,976,043 | |||
Net unrealized depreciation on credit default swaps | 61,479 | |||
Net unrealized depreciation on senior loan based derivatives (total return swaps) | 25,595,027 | |||
Payables for: | ||||
Interest payable | 15,767 | |||
Investments purchased | 35,797,710 | |||
Investment advisory fee payable (Note 4) | 810,993 | |||
Administration fee (Note 4) | 142,624 | |||
Interest expense (Note 7) | 1,150,247 | |||
Accrued expenses and other liabilities | 238,322 | |||
Total liabilities | 447,629,082 | |||
Net Assets Applicable To Common Shares | 692,742,501 | |||
Composition of Net Assets: | ||||
Paid-in capital in excess of par value of common shares | 969,282,793 | |||
Undistributed net investment income | 8,901,547 | |||
Accumulated net realized gain/(loss) from investments, short positions, swaps and foreign currency transactions | (26,502,306 | ) | ||
Net unrealized appreciation/(depreciation) on investments, unfunded transactions, short positions, forward currency contracts, swaps and translation of assets and liabilities denominated in foreign currency | (258,939,533 | ) | ||
Net Assets Applicable to Common Shares | 692,742,501 | |||
Common Shares | ||||
Net assets | 692,301,444 | |||
Shares outstanding (unlimited authorization) | 55,526,190 | |||
Net asset value per share (Net assets/shares outstanding) | 12.48 |
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For the Nine Months Ended September 30, 2008 | Highland Credit Strategies Fund |
($) | ||||
Investment Income: | ||||
Interest from unaffiliated issuers | 74,610,857 | |||
Interest from affiliated issuers (Note 10) | 856,053 | |||
Dividends | 212,257 | |||
Securities lending income | 185,158 | |||
Less taxes withheld | (906 | ) | ||
Total investment income | 75,863,419 | |||
Expenses: | ||||
Investment advisory fees (Note 4) | 7,201,797 | |||
Administration fees (Note 4) | 1,440,360 | |||
Accounting service fees | 347,294 | |||
Transfer agent fee | 23,774 | |||
Professional fees | 203,302 | |||
Trustees’ fees (Note 4) | 62,181 | |||
Custodian fees | 67,382 | |||
Registration fees | 50,283 | |||
Reports to shareholders | 87,998 | |||
Merger expenses (Note 13) | 539,642 | |||
Interest expense (Note 8) | 7,934,735 | |||
Other expenses | 317,317 | |||
Net operating expenses | 18,276,065 | |||
Dividends paid on securities sold short | 960,285 | |||
Fees and expenses waived or reimbursed by Investment Adviser (Note 4) | (243,030 | ) | ||
Net expenses | 18,993,320 | |||
Net investment income | 56,870,099 | |||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||
Net realized gain/(loss) on investments from unaffiliated issuers | (31,058,922 | ) | ||
Net realized gain/(loss) on short positions | 298,570 | |||
Net realized gain/(loss) on swaps | 6,274,058 | |||
Net realized gain/(loss) on foreign currency transactions | (3,389,888 | ) | ||
Net change in unrealized appreciation/(depreciation) on investments | (187,051,307 | ) | ||
Net change in unrealized appreciation/(depreciation) on unfunded transactions (Note 9) | (3,015,131 | ) | ||
Net change in unrealized appreciation/(depreciation) on short positions | (889,914 | ) | ||
Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts | 5,375,618 | |||
Net change in unrealized appreciation/(depreciation) on swaps and senior loan based derivatives | (19,727,236 | ) | ||
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency | 997,579 | |||
Net realized and unrealized gain/(loss) on investments | (232,186,573 | ) | ||
Net decrease in net assets from operations | (175,316,474 | ) | ||
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Highland Credit Strategies Fund |
Period Ended | Year Ended | |||||||
September 30, | December 31, | |||||||
2008(unaudited) | 2007 | |||||||
($) | ($) | |||||||
Increase/(Decrease) in Net Assets: | ||||||||
From Operations | ||||||||
Net investment income | 56,870,099 | 59,104,689 | ||||||
Net realized gain/(loss) on investments, short positions, swaps, senior loan based derivatives and foreign currency transactions | (27,876,182 | ) | 17,606,118 | |||||
Net change in unrealized appreciation/(depreciation) on investments, unfunded transactions, short positions, forward foreign currency contracts, swaps, senior loan based derivatives, and translation of assets and liabilities denominated in foreign currency | (204,310,391 | ) | (81,472,559 | ) | ||||
Net change in net assets from operations | (175,316,474 | ) | (4,761,752 | ) | ||||
Distributions Declared to Common Shareholders | ||||||||
From net investment income | (55,614,137 | ) | (56,955,142 | ) | ||||
From capital gains | (9,338,531 | ) | (10,356,165 | ) | ||||
Total distributions declared to common shareholders | (64,952,668 | ) | (67,311,307 | ) | ||||
Share Transactions from Common Shares | ||||||||
Subscriptions from rights offering | 143,506,876 | — | ||||||
Reorganization | 168,008,787 | — | ||||||
Distributions reinvested | — | 187,383 | ||||||
Redemptions from reorganizations | (23,238 | ) | — | |||||
Net increase from share transactions from common shares | 311,492,425 | 187,383 | ||||||
Total increase (decrease) in net assets from common shares | 71,664,340 | (71,885,676 | ) | |||||
Net Assets Applicable to Common Shares | ||||||||
Beginning of period | 621,078,161 | 692,963,837 | ||||||
End of period (including undistributed net investment income of $8,901,547 and $7,645,585, respectively) | 692,301,444 | 621,078,161 | ||||||
Change in Common Shares | ||||||||
Subscriptions from Rights Offering | 11,535,615 | — | ||||||
Shares issued in reorganization | 9,471,694 | |||||||
Issued for distributions reinvested | — | 9,195 | ||||||
Redemptions | (1,669 | ) | — | |||||
Net increase in common shares | 21,005,640 | 9,195 |
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For the Period Ended September 30, 2008 (unaudited) | Highland Credit Strategies Fund |
($) | ||||
Cash Flows Provided by Operating Activities | ||||
Net investment income | 56,870,099 | |||
Adjustments to Reconcile Net Investment Income to Net Cash and Foreign Currency Provided by Operating Activities | ||||
Purchase of investment securities | (634,917,069 | ) | ||
Proceeds from disposition of investment securities | 517,915,481 | |||
Increase in receivable for investments sold | (28,722,190 | ) | ||
Decrease in receivable for swap agreements (a) | 72,902 | |||
Increase in interest and fees receivable | (10,450,252 | ) | ||
Increase in restricted cash | (64,765,859 | ) | ||
Increase in receivable for securities lending | (31,976,043 | ) | ||
Increase in other assets | (51,486 | ) | ||
Increase in securities sold short | 28,920,954 | |||
Net amortization/(accretion) of premium/(discount) | (4,825,227 | ) | ||
Mark-to-market on realized and unrealized gain/(loss) on foreign currency | (2,392,309 | ) | ||
Increase in payable for investments purchased | 6,063,003 | |||
Increase in payables to related parties | 50,530 | |||
Decrease in interest payable | (111,998 | ) | ||
Increase in payable upon receipt of securities loaned | 31,976,043 | |||
Increase in unrealized appreciation/(depreciation) on securities sold short | (591,344 | ) | ||
Increase in dividends payable on securities sold short | 21,615 | |||
Increase in other expenses and liabilities | 895,427 | |||
Net cash and foreign currency used by operating activities | (136,017,723 | ) | ||
Cash Flows Used by Financing Activities | ||||
Increase in notes payable | 67,000,000 | |||
Proceeds from shares sold | 143,506,876 | |||
Payment of shares redeemed | (23,238 | ) | ||
Distributions paid in cash | (70,130,750 | ) | ||
Net cash flow provided by financing activities | 140,352,888 | |||
Net increase in cash and foreign currency | 4,335,165 | |||
Cash and Foreign Currency | ||||
Beginning of the year | 2,837,166 | |||
End of the year | 7,172,331 | |||
(a) | Includes realized gain/(loss) on swap. |
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September 30, 2008 | Highland Credit Strategies Fund |
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September 30, 2008 | Highland Credit Strategies Fund |
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September 30, 2008 | Highland Credit Strategies Fund |
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September 30, 2008 | Highland Credit Strategies Fund |
Distributions paid from: | 2007 | 2006 | ||||||
Ordinary income* | $ | 67,311,307 | $ | 20,704,560 | ||||
Long-term capital gains | — | — |
* | For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions. |
Undistributed | Undistributed | |||||||||||
Ordinary | Long-Term | Net Unrealized | ||||||||||
Income | Capital Gains | (Depreciation)* | ||||||||||
$ | 9,794,646 | $ | 1,024,735 | $ | (47,531,588 | ) |
* | Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to deferral of losses from wash sales. |
Unrealized appreciation | $ | 9,493,355 | ||
Unrealized depreciation | (242,744,392 | ) | ||
Net unrealized depreciation | $ | (232,251,037 | ) | |
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Table of Contents
September 30, 2008 | Highland Credit Strategies Fund |
Principal | ||||||||
Selling Participant | Amount | Value | ||||||
Goldman Sachs Credit Partners L.P.: | ||||||||
Realogy Corp Initial B Term Loan | $ | 250,000 | $ | 189,525 | ||||
Morgan Stanley Senior Funding: | ||||||||
Realogy Corp Synthetic Letter of Credit | 67,333 | 51,026 | ||||||
Citi London: | ||||||||
SMG H5 Property Ltd. Facility A Term Loan | AUD | 22,940,476 | 15,743,019 | |||||
$ | 23,257,809 | $ | 15,983,570 | |||||
Asset Coverage | ||||||||
Total Amount | per $1,000 of | |||||||
Date | Outstanding | Indebtedness | ||||||
09/30/2008 | $ | 315,000,000 | $ | 3,127 | ||||
12/31/2007 | 248,000,000 | 3,504 | ||||||
12/31/2006 | 285,000,000 | 3,429 |
41
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September 30, 2008 | Highland Credit Strategies Fund |
Unfunded | ||||
Loan | ||||
Borrower | Commitment | |||
Comcorp Broadcasting, Inc. | $ | 50,479 | ||
Fontainebleau Las Vegas LLC | 666,667 | |||
Mobileserv Ltd | 5,000,000 | |||
Sirva Worldwide, Inc. | 1,089,156 | |||
Sorenson Communications, Inc. | 2,000,000 | |||
Tronox Worldwide, LLC | 1,780,800 | |||
Westgate Investments, LLC | 1,804,223 | |||
$ | 12,391,325 | |||
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Table of Contents
September 30, 2008 | Highland Credit Strategies Fund |
Shares | Percentage | Shares With | Percentage | |||||||||||||
Voted | of Shares | Authority | of Shares | |||||||||||||
Name | For | Voted | Withheld | Voted | ||||||||||||
Timothy K. Hui | 41,458,241.478 | 97.743 | % | 957,197.000 | 2.257 | % | ||||||||||
Scott F. Kavanaugh | 41,485,518.478 | 97.808 | % | 929,920.000 | 2.192 | % |
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September 30, 2008 | Highland Credit Strategies Fund |
44
Table of Contents
Pro Forma Combined | Pro Forma Combined | |||||||||||||||||||||||
Highland Credit | Highland Distressed | Highland Credit | Highland Credit | Highland Distressed | Highland Credit | |||||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | |||||||||||||||||||
Principal Amount ($) | Principal Amount ($) | Principal Amount ($) | Security | Value ($) | Value ($) | Value ($) | ||||||||||||||||||
Senior Loans (a) — 74.9% | ||||||||||||||||||||||||
AEROSPACE — 2.6% | ||||||||||||||||||||||||
AWAS Capital, Inc. | ||||||||||||||||||||||||
1,808,201 | — | 1,808,201 | Second Lien Term Loan, 9.25%, 03/15/13 | 1,310,945 | — | 1,310,945 | ||||||||||||||||||
Continental Airlines, Inc. | ||||||||||||||||||||||||
571,429 | — | 571,429 | New Tranche A-1 Term Loan, 06/01/11 (b) | 484,286 | — | 484,286 | ||||||||||||||||||
1,428,571 | — | 1,428,571 | New Tranche A-2 Term Loan, 06/01/11 (b) | 1,207,143 | — | 1,207,143 | ||||||||||||||||||
Delta Airlines, Inc. | ||||||||||||||||||||||||
7,299,556 | — | 7,299,556 | Term Loan Equipment Notes, 7.38%, 09/29/12 | 5,474,667 | — | 5,474,667 | ||||||||||||||||||
DTN, Inc. | ||||||||||||||||||||||||
1,752,273 | — | 1,752,273 | Tranche C Term Loan, 5.82%, 03/10/13 | 1,647,137 | — | 1,647,137 | ||||||||||||||||||
IAP Worldwide Services, Inc. | ||||||||||||||||||||||||
2,736,277 | — | 2,736,277 | First Lien Term Loan, 9.06%, 12/30/12 | 2,120,615 | — | 2,120,615 | ||||||||||||||||||
— | 4,560,462 | 4,560,462 | PIK First Lien Term Loan, 8.06%, 12/30/12 | — | 3,534,358 | 3,534,358 | ||||||||||||||||||
2,033,688 | — | 2,033,688 | Second Lien Term Loan, PIK, 10.50%, 06/18/13 | 1,264,263 | — | 1,264,263 | ||||||||||||||||||
Northwest Airlines, Inc. | ||||||||||||||||||||||||
3,079,596 | — | 3,079,596 | Term Loan, 4.75%, 08/21/13 | 2,717,743 | — | 2,717,743 | ||||||||||||||||||
United Air Lines, Inc. | ||||||||||||||||||||||||
2,482,449 | ��� | 2,482,449 | Tranche B Loan, 5.46%, 01/31/14 | 1,553,070 | — | 1,553,070 | ||||||||||||||||||
17,779,869 | 3,534,358 | 21,314,227 | ||||||||||||||||||||||
BROADCASTING — 4% | ||||||||||||||||||||||||
Comcorp Broadcasting, Inc. | ||||||||||||||||||||||||
1,080,492 | 1,800,821 | 2,881,313 | Revolving Loan, 8.15%, 04/13/13 (c) (d) (e) | 928,143 | 1,546,905 | 2,475,048 | ||||||||||||||||||
11,309,712 | 18,849,521 | 30,159,233 | Term Loan, 8.31%, 04/03/13 (b) (d) (e) | 9,715,043 | 16,191,739 | 25,906,782 | ||||||||||||||||||
Univision Communications, Inc. | ||||||||||||||||||||||||
4,623,000 | — | 4,623,000 | Second Lien Term Loan, 6.50%, 03/25/09 | 4,414,965 | — | 4,414,965 | ||||||||||||||||||
15,058,151 | 17,738,644 | 32,796,795 | ||||||||||||||||||||||
CABLE/WIRELESS VIDEO — 2.7% | ||||||||||||||||||||||||
Broadstripe, LLC | ||||||||||||||||||||||||
14,148,290 | — | 14,148,290 | First Lien Term Loan, 9.81%, 06/30/11 | 13,936,066 | — | 13,936,066 | ||||||||||||||||||
1,428,203 | — | 1,428,203 | Revolver, 9.78%, 06/30/11 | 1,402,238 | — | 1,402,238 | ||||||||||||||||||
Charter Communications Operating, LLC | ||||||||||||||||||||||||
1,977,500 | — | 1,977,500 | Replacement Term Loan, 4.80%, 03/06/14 | 1,582,277 | — | 1,582,277 | ||||||||||||||||||
WideOpenWest Finance, LLC | ||||||||||||||||||||||||
1,303,398 | 5,213,592 | 6,516,990 | Second Lien Term Loan, 9.50%, 06/29/15 | 1,010,133 | 4,040,534 | 5,050,667 | ||||||||||||||||||
17,930,714 | 4,040,534 | 21,971,248 | ||||||||||||||||||||||
CHEMICALS — 0.5% | ||||||||||||||||||||||||
Arclin US Holdings, Inc. | ||||||||||||||||||||||||
400,000 | — | 400,000 | First Lien Term Loan, 5.56%, 07/10/14 | 328,000 | — | 328,000 | ||||||||||||||||||
Solutia, Inc. | ||||||||||||||||||||||||
1,970,038 | — | 1,970,038 | Term Loan, 8.50%, 02/28/14 | 1,809,480 | — | 1,809,480 | ||||||||||||||||||
Tronox Worldwide, LLC | ||||||||||||||||||||||||
2,419,200 | — | 2,419,200 | Revolving Credit Loan, 6.85%, 11/28/10 (c) | 2,116,800 | — | 2,116,800 | ||||||||||||||||||
4,254,280 | — | 4,254,280 | ||||||||||||||||||||||
CONSUMER DURABLES — 0.2% | ||||||||||||||||||||||||
Rexair LLC | ||||||||||||||||||||||||
2,127,676 | — | 2,127,676 | First Lien Term Loan, 8.01%, 06/30/10 | 1,914,908 | — | 1,914,908 | ||||||||||||||||||
1,914,908 | — | 1,914,908 | ||||||||||||||||||||||
CONSUMER NON-DURABLES — 0.8% | ||||||||||||||||||||||||
Spectrum Brands, Inc. | ||||||||||||||||||||||||
4,597,313 | — | 4,597,313 | Dollar Term B Loan, 6.73%, 03/30/13 | 3,420,401 | — | 3,420,401 | ||||||||||||||||||
160,498 | — | 160,498 | Letter of Credit, 6.49%, 03/30/13 | 119,410 | — | 119,410 | ||||||||||||||||||
Totes Isotoner Corp. | ||||||||||||||||||||||||
— | 3,377,228 | 3,377,228 | Second Lien Term Loan, 9.88%, 01/31/14 | — | 2,786,213 | 2,786,213 | ||||||||||||||||||
3,539,811 | 2,786,213 | 6,326,024 | ||||||||||||||||||||||
DIVERSIFIED MEDIA — 4.3% | ||||||||||||||||||||||||
Alpha Topco Ltd. (Formula One) | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Second Lien Facility D, 6.63%, 06/30/14 | 1,677,500 | — | 1,677,500 | ||||||||||||||||||
Clarke American Corp. | ||||||||||||||||||||||||
1,975,000 | — | 1,975,000 | Tranche B Term Loan, 6.03%, 06/30/14 | 1,530,625 | — | 1,530,625 | ||||||||||||||||||
Endurance Business Media, Inc. | ||||||||||||||||||||||||
3,000,000 | — | 3,000,000 | Second Lien Term Loan, 10.96%, 01/26/14 | 2,370,000 | — | 2,370,000 | ||||||||||||||||||
Metro-Goldwyn-Mayer, Inc. | ||||||||||||||||||||||||
8,254,644 | — | 8,254,644 | Tranche B Term Loan, 7.01%, 04/06/12 | 5,664,750 | — | 5,664,750 | ||||||||||||||||||
2,955,000 | — | 2,955,000 | Tranche B-1 Term Loan, 7.01%, 04/08/12 | 2,027,869 | — | 2,027,869 | ||||||||||||||||||
Nielsen Finance LLC | ||||||||||||||||||||||||
7,884,322 | — | 7,884,322 | Dollar Term Loan, 4.80%, 08/09/13 | 6,994,498 | — | 6,994,498 | ||||||||||||||||||
Penton Media, Inc. | ||||||||||||||||||||||||
10,000,000 | 2,000,000 | 12,000,000 | Second Lien Term Loan, 7.80%, 02/01/14 | 6,750,000 | 1,350,000 | 8,100,000 | ||||||||||||||||||
Tribune Co. | ||||||||||||||||||||||||
7,865,126 | — | 7,865,126 | Initial Tranche B Advance, 5.79%, 06/04/14 | 4,112,045 | — | 4,112,045 | ||||||||||||||||||
2,730,667 | — | 2,730,667 | Tranche X Advance, 5.54%, 05/30/09 | 2,554,047 | — | 2,554,047 | ||||||||||||||||||
33,681,334 | 1,350,000 | 35,031,334 | ||||||||||||||||||||||
ENERGY — 5.5% | ||||||||||||||||||||||||
Alon USA Energy, Inc. | ||||||||||||||||||||||||
216,202 | — | 216,202 | Edington Facility, 5.06%, 06/22/13 | 175,124 | — | 175,124 | ||||||||||||||||||
1,729,620 | — | 1,729,620 | Paramount Facility, 5.75%, 06/22/13 | 1,400,992 | — | 1,400,992 | ||||||||||||||||||
Crusader Energy Group, Inc. | ||||||||||||||||||||||||
14,985,000 | — | 14,985,000 | Second Lien Term Loan, 10.55%, 07/17/13 | 14,685,300 | — | 14,685,300 | ||||||||||||||||||
Delphi Acquisition Holding I B.V. | ||||||||||||||||||||||||
455,035 | — | 455,035 | Facility B1, 6.01%, 01/12/15 | 408,776 | — | 408,776 | ||||||||||||||||||
455,035 | — | 455,035 | Facility C1, 6.64%, 01/11/16 | 411,051 | — | 411,051 | ||||||||||||||||||
Resolute Aneth, LLC | ||||||||||||||||||||||||
6,000,000 | 4,000,000 | 10,000,000 | Second Lien Term Loan, 7.30%, 06/26/13 | 5,280,000 | 3,520,000 | 8,800,000 | ||||||||||||||||||
TARH E&P Holdings, L.P. | ||||||||||||||||||||||||
— | 5,000,000 | 5,000,000 | First Lien Term Loan, 7.30%, 06/29/12 | — | 4,862,500 | 4,862,500 | ||||||||||||||||||
Venoco, Inc. | ||||||||||||||||||||||||
14,500,000 | — | 14,500,000 | Second Lien Loan, 6.81%, 09/20/11 | 13,702,500 | — | 13,702,500 | ||||||||||||||||||
36,063,743 | 8,382,500 | 44,446,243 | ||||||||||||||||||||||
45
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Pro Forma Combined | Pro Forma Combined | |||||||||||||||||||||||
Highland Credit | Highland Distressed | Highland Credit | Highland Credit | Highland Distressed | Highland Credit | |||||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | |||||||||||||||||||
Principal Amount ($) | Principal Amount ($) | Principal Amount ($) | Security | Value ($) | Value ($) | Value ($) | ||||||||||||||||||
FINANCIAL — 0.9% | ||||||||||||||||||||||||
Emerson Reinsurance Ltd. | ||||||||||||||||||||||||
1,300,000 | 1,300,000 | Series A Loan, 4.57%, 12/15/11 | 1,111,500 | 1,111,500 | ||||||||||||||||||||
500,000 | 500,000 | Series B Loan, 5.82%, 12/15/11 | 427,500 | 427,500 | ||||||||||||||||||||
200,000 | 200,000 | Series C Loan, 8.07%, 12/15/11 | 171,000 | 171,000 | ||||||||||||||||||||
— | 1,500,000 | 1,500,000 | Tranche C Term Loan, 8.07%, 12/15/11 | — | 1,282,500 | 1,282,500 | ||||||||||||||||||
Flatiron Re Ltd. | ||||||||||||||||||||||||
— | 64,177 | 64,177 | Closing Date Term Loan, 8.02%, 12/29/10 | — | 59,685 | 59,685 | ||||||||||||||||||
— | 31,086 | 31,086 | Delayed Draw Term Loan, 8.02%, 12/29/10 | — | 28,910 | 28,910 | ||||||||||||||||||
Kepler Holdings Ltd. | ||||||||||||||||||||||||
— | 5,000,000 | 5,000,000 | Term Loan, 9.31%, 06/30/09 | — | 4,500,000 | 4,500,000 | ||||||||||||||||||
1,710,000 | 5,871,095 | 7,581,095 | ||||||||||||||||||||||
FOOD/TOBACCO — 1.9% | ||||||||||||||||||||||||
DS Waters of America, Inc. | ||||||||||||||||||||||||
1,853,889 | — | 1,853,889 | Term B Loan, 5.95%, 10/25/12 | 1,687,039 | — | 1,687,039 | ||||||||||||||||||
PBM Holdings, Inc. | ||||||||||||||||||||||||
1,828,160 | — | 1,828,160 | Term Loan, 5.96%, 09/27/12 | 1,727,611 | — | 1,727,611 | ||||||||||||||||||
Wm Wrigley Jr. Co. | ||||||||||||||||||||||||
4,500,000 | 7,500,000 | 12,000,000 | Tranche B Term Loan, 07/17/14 (b) | 4,430,925 | 7,384,875 | 11,815,800 | ||||||||||||||||||
7,845,575 | 7,384,875 | 15,230,450 | ||||||||||||||||||||||
FOREST PRODUCTS/CONTAINERS — 1% | ||||||||||||||||||||||||
Boise Paper Holdings LLC | ||||||||||||||||||||||||
2,500,000 | 2,500,000 | Second Lien Term Loan, 11.00%, 02/23/15 | 2,275,000 | 2,275,000 | ||||||||||||||||||||
Newark Group, Inc. | ||||||||||||||||||||||||
1,619,000 | 1,619,000 | Credit-Link Letter of Credit, 10.21%, 03/09/13 | 1,295,200 | 1,295,200 | ||||||||||||||||||||
240,300 | 240,300 | Term Loan, 9.53%, 03/09/13 | 192,240 | 192,240 | ||||||||||||||||||||
Tegrant Corp. | ||||||||||||||||||||||||
— | 1,000,000 | 1,000,000 | Second Lien Term Loan, 9.27%, 03/08/15 | — | 200,000 | 200,000 | ||||||||||||||||||
Verso Paper Finance Holdings LLC | ||||||||||||||||||||||||
4,928,000 | 4,928,000 | Term Loan, 10.01%, 02/01/13 | 3,880,800 | 3,880,800 | ||||||||||||||||||||
7,643,240 | 200,000 | 7,843,240 | ||||||||||||||||||||||
GAMING/LEISURE — 14.7% | ||||||||||||||||||||||||
Drake Hotel Acquisition | ||||||||||||||||||||||||
6,041,285 | — | 6,041,285 | B Note 1, 12.90%, 04/01/09 (e) (f) | 5,341,101 | — | 5,341,101 | ||||||||||||||||||
Fontainebleau Florida Hotel LLC | ||||||||||||||||||||||||
12,500,000 | 6,000,000 | 18,500,000 | Tranche C Term Loan, 8.82%, 06/06/12 | 11,375,000 | 5,460,000 | 16,835,000 | ||||||||||||||||||
Fontainebleau Las Vegas LLC | ||||||||||||||||||||||||
1,333,333 | — | 1,333,333 | Initial Term Loan, 6.07%, 06/06/14 | 810,000 | — | 810,000 | ||||||||||||||||||
Ginn LA Conduit Lender, Inc. | ||||||||||||||||||||||||
3,937,249 | — | 3,937,249 | First Lien Tranche A Credit-Linked Deposit, 8.54%, 06/08/11 (f) | 1,017,110 | — | 1,017,110 | ||||||||||||||||||
8,438,203 | — | 8,438,203 | First Lien Tranche B Term Loan, 6.20%, 06/08/11 (f) | 2,179,841 | — | 2,179,841 | ||||||||||||||||||
Green Valley Ranch Gaming LLC | ||||||||||||||||||||||||
1,561,338 | — | 1,561,338 | New Term Loan, 5.71%, 02/16/14 | 1,108,550 | — | 1,108,550 | ||||||||||||||||||
1,000,000 | — | 1,000,000 | Second Lien Term Loan, 6.96%, 08/16/14 | 522,500 | — | 522,500 | ||||||||||||||||||
Harrah’s Operating Co. | ||||||||||||||||||||||||
— | 4,975,000 | 4,975,000 | Term B-2 Loan, 5.80%, 01/28/15 | — | 4,089,848 | 4,089,848 | ||||||||||||||||||
Kuilima Resort Co. | ||||||||||||||||||||||||
7,439,660 | — | 7,439,660 | First Lien Term Loan, 11.50%, 09/30/10 (f) | 4,860,627 | — | 4,860,627 | ||||||||||||||||||
Lake at Las Vegas Joint Venture | ||||||||||||||||||||||||
4,549,027 | 3,611,111 | 8,160,138 | Revolving Loan Credit-Linked Deposit Account, 16.10%, 06/20/12 (b) (f) | 1,000,786 | 794,444 | 1,795,230 | ||||||||||||||||||
34,125,359 | — | 34,125,359 | Term Loan DIP, 11.98%, 07/16/09 | 34,125,359 | — | 34,125,359 | ||||||||||||||||||
40,074,794 | — | 40,074,794 | Term Loan, PIK, 16.35%, 06/20/12 (b) (f) | 7,858,845 | — | 7,858,845 | ||||||||||||||||||
32,377,252 | PIK Term Loan, 15.60%, 06/20/12 (b) (f) | — | 6,219,350 | 6,219,350 | ||||||||||||||||||||
Pacific Clarion LLC | ||||||||||||||||||||||||
19,802,292 | — | 19,802,292 | Term Loan, 15.00%, 01/23/09 (e) (g) | 18,925,051 | — | 18,925,051 | ||||||||||||||||||
WAICCS Las Vegas 3 LLC | ||||||||||||||||||||||||
6,000,000 | — | 6,000,000 | First Lien Term Loan, 5.96%, 02/01/09 | 4,950,000 | — | 4,950,000 | ||||||||||||||||||
7,000,000 | — | 7,000,000 | Second Lien Term Loan, 11.46%, 02/01/09 | 5,075,000 | — | 5,075,000 | ||||||||||||||||||
Wimar Landco, LLC | ||||||||||||||||||||||||
5,000,000 | — | 5,000,000 | Term Loan, 6.25%, 07/03/09 (f) | 3,830,000 | — | 3,830,000 | ||||||||||||||||||
102,979,770 | 16,563,642 | 119,543,412 | ||||||||||||||||||||||
HEALTHCARE — 6.2% | ||||||||||||||||||||||||
Applied Biosystems | ||||||||||||||||||||||||
— | 2,000,000 | 2,000,000 | Term Loan, 09/30/15 (b) | — | 1,895,000 | 1,895,000 | ||||||||||||||||||
Aveta, Inc. | ||||||||||||||||||||||||
5,912,325 | 1,864,296 | 7,776,621 | MMM Original Term Loan, 9.21%, 08/22/11 (b) | 5,114,161 | 1,612,616 | 6,726,777 | ||||||||||||||||||
878,304 | 276,950 | 1,155,254 | NAMM New Term Loan, 9.21%, 08/22/11 (b) | 759,733 | 239,562 | 999,295 | ||||||||||||||||||
1,582,662 | 499,051 | 2,081,713 | NAMM Original Term Loan, 9.21%, 08/22/11 (b) | 1,369,002 | 431,679 | 1,800,681 | ||||||||||||||||||
4,845,285 | 1,527,833 | 6,373,118 | PHMC Acquisition Term Loan, 9.21%, 08/22/11 (b) | 4,191,172 | 1,321,576 | 5,512,748 | ||||||||||||||||||
CCS Medical, Inc. | ||||||||||||||||||||||||
11,555,348 | — | 11,555,348 | First Lien Term Loan, 7.02%, 09/30/12 | 9,475,385 | — | 9,475,385 | ||||||||||||||||||
Danish Holdco A/S | ||||||||||||||||||||||||
2,500,000 | — | 2,500,000 | Facility D, 6.54%, 11/01/16 | 1,500,000 | — | 1,500,000 | ||||||||||||||||||
3,256,337 | — | 3,256,337 | Mezzanine Facility, PIK, 10.20%, 05/01/17 | 1,790,985 | — | 1,790,985 | ||||||||||||||||||
LifeCare Holdings | ||||||||||||||||||||||||
5,422,514 | 982,278 | 6,404,792 | Term Loan, 7.96%, 08/11/12 | 4,527,800 | 820,202 | 5,348,002 | ||||||||||||||||||
Medical Staffing Network, Inc. | ||||||||||||||||||||||||
987,500 | — | 987,500 | First Lien Term Loan, 6.31%, 07/02/13 | 972,687 | — | 972,687 | ||||||||||||||||||
Mylan, Inc. | ||||||||||||||||||||||||
4,947,525 | — | 4,947,525 | U.S. Tranche B Term Loan, 7.04%, 10/02/14 | 4,658,887 | — | 4,658,887 | ||||||||||||||||||
Nyco Holdings 3 ApS | ||||||||||||||||||||||||
79,926 | — | 79,926 | Facility A3, 5.34%, 12/29/13 | 64,168 | — | 64,168 | ||||||||||||||||||
50,914 | — | 50,914 | Facility A4, 5.34%, 12/29/13 | 40,876 | — | 40,876 | ||||||||||||||||||
360,000 | — | 360,000 | Facility A5, 5.34%, 12/29/13 | 289,022 | — | 289,022 | ||||||||||||||||||
Talecris Biotherapeutics Holdings Corp. | ||||||||||||||||||||||||
8,954,430 | — | 8,954,430 | First Lien Term Loan, 6.31%, 12/06/13 | 8,730,570 | — | 8,730,570 | ||||||||||||||||||
Triumph Healthcare Second Holdings LLC | ||||||||||||||||||||||||
500,000 | — | 500,000 | Second Lien Term Loan, 10.76%, 07/28/14 | 462,500 | — | 462,500 | ||||||||||||||||||
43,946,948 | 6,320,635 | 50,267,583 | ||||||||||||||||||||||
46
Table of Contents
Pro Forma Combined | Pro Forma Combined | |||||||||||||||||||||||
Highland Credit | Highland Distressed | Highland Credit | Highland Credit | Highland Distressed | Highland Credit | |||||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | |||||||||||||||||||
Principal Amount ($) | Principal Amount ($) | Principal Amount ($) | Security | Value ($) | Value ($) | Value ($) | ||||||||||||||||||
HOUSING — 4.8% | ||||||||||||||||||||||||
Custom Building Products, Inc. | ||||||||||||||||||||||||
4,633,371 | — | 4,633,371 | First Lien Term Loan, 5.95%, 10/20/11 | 3,845,698 | — | 3,845,698 | ||||||||||||||||||
1,625,000 | 1,625,000 | Second Lien Term Loan, 8.70%, 04/20/12 | 1,283,750 | — | 1,283,750 | |||||||||||||||||||
LBREP/L-Suncal Master I LLC | ||||||||||||||||||||||||
3,190,581 | — | 3,190,581 | First Lien Term Loan, 8.59%, 01/19/10 (f) | 11,965 | — | 11,965 | ||||||||||||||||||
LNR Property Corp. | ||||||||||||||||||||||||
8,800,000 | — | 8,800,000 | Initial Tranche B Term Loan, 6.04%, 07/12/11 | 5,844,608 | — | 5,844,608 | ||||||||||||||||||
MetroFlag BP, LLC / Metroflag Cable, LLC | ||||||||||||||||||||||||
5,000,000 | Second Lien Term Loan, 12.43%, 01/06/09 | — | 3,675,000 | 3,675,000 | ||||||||||||||||||||
MPH Mezzanine II, LLC | ||||||||||||||||||||||||
6,000,000 | 10,000,000 | 16,000,000 | Mezzanine 2B, 7.48%, 02/09/09 (e) (f) | — | — | |||||||||||||||||||
MPH Mezzanine III, LLC | ||||||||||||||||||||||||
4,000,000 | 4,000,000 | 8,000,000 | Mezzanine 3, 8.48%, 02/09/09 (e) (f) | — | — | |||||||||||||||||||
November 2005 Land Investors LLC | ||||||||||||||||||||||||
2,500,000 | — | 2,500,000 | Second Lien Term Loan, 11.95%, 04/24/12 | 625,000 | 625,000 | |||||||||||||||||||
Pacific Clarion, LLC | ||||||||||||||||||||||||
— | 4,950,573 | Term Loan, 15.00%, 01/23/09 (e) (g) | — | 4,731,263 | 4,731,263 | |||||||||||||||||||
Realogy Corp. | ||||||||||||||||||||||||
250,093 | — | 250,093 | Initial Term B Loan, 5.57%, 10/10/13 (h) | 189,525 | — | 189,525 | ||||||||||||||||||
67,333 | — | 67,333 | Synthetic Letter of Credit, 6.93%, 10/10/13 (h) | 51,026 | — | 51,026 | ||||||||||||||||||
Roofing Supply Group LLC | ||||||||||||||||||||||||
3,832,580 | — | 3,832,580 | Term Loan, PIK, 7.80%, 08/14/13 | 2,922,342 | — | 2,922,342 | ||||||||||||||||||
Universal Buildings Products, Inc. | ||||||||||||||||||||||||
1,074,187 | — | 1,074,187 | Term Loan, 6.34%, 04/28/12 | 859,349 | — | 859,349 | ||||||||||||||||||
Westgate Investments LLC | ||||||||||||||||||||||||
8,073,323 | — | 8,073,323 | Senior Secured Loan, PIK, 6.75%, 09/25/10 (g) | 8,113,689 | — | 8,113,689 | ||||||||||||||||||
1,980,405 | — | 1,980,405 | Senior Unsecured Loan, PIK, 18.00%, 09/25/12 (g) | 1,990,307 | — | 1,990,307 | ||||||||||||||||||
3,165,493 | — | 3,165,493 | Third Lien Term Loan, 18.00%, 06/30/15 (c) (g) | 2,880,598 | — | 2,880,598 | ||||||||||||||||||
Weststate Land Partners LLC | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Second Lien Term Loan, 10.99%, 10/31/08 | 1,720,000 | — | 1,720,000 | ||||||||||||||||||
30,337,857 | 8,406,263 | 38,744,120 | ||||||||||||||||||||||
INFORMATION TECHNOLOGY — 2% | ||||||||||||||||||||||||
Freescale Semiconductor, Inc. | ||||||||||||||||||||||||
148,489 | — | 148,489 | Term Loan, 4.24%, 11/29/13 | 121,946 | — | 121,946 | ||||||||||||||||||
Infor Enterprise Solutions Holdings, Inc. | ||||||||||||||||||||||||
3,000,000 | — | 3,000,000 | Dollar Tranche B-1, Second Lien Term Commitment, 9.26%, 07/28/12 | 1,380,000 | — | 1,380,000 | ||||||||||||||||||
2,200,000 | — | 2,200,000 | Second Lien Delayed Draw Term Loan, 10.01%, 03/02/14 (b) | 1,067,000 | — | 1,067,000 | ||||||||||||||||||
3,800,000 | — | 3,800,000 | Second Lien Term Loan, 10.01%, 03/02/14 (b) | 1,843,000 | — | 1,843,000 | ||||||||||||||||||
Serena Software, Inc. | ||||||||||||||||||||||||
1,706,667 | — | 1,706,667 | Term Loan, 4.68%, 03/11/13 | 1,553,067 | — | 1,553,067 | ||||||||||||||||||
Sungard Data Systems Inc. | ||||||||||||||||||||||||
— | 5,000,000 | 5,000,000 | Incremental Term Loan Facility, 02/28/14 (b) | — | 4,820,850 | 4,820,850 | ||||||||||||||||||
Verint Systems, Inc. | ||||||||||||||||||||||||
6,000,000 | — | 6,000,000 | Term Loan, 5.74%, 05/25/14 | 5,100,000 | — | 5,100,000 | ||||||||||||||||||
11,065,013 | 4,820,850 | 15,885,863 | ||||||||||||||||||||||
MANUFACTURING — 2.9% | ||||||||||||||||||||||||
Acument Global Technologies, Inc. | ||||||||||||||||||||||||
7,842,456 | — | 7,842,456 | Term Loan, 7.26%, 08/11/13 | 7,293,484 | — | 7,293,484 | ||||||||||||||||||
Generac Acquisition Corp. | ||||||||||||||||||||||||
1,666,667 | — | 1,666,667 | Second Lien Term Loan, 8.79%, 05/06/14 | 786,667 | — | 786,667 | ||||||||||||||||||
Hunter Defense Technologies, Inc. | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Term Loan, 7.03%, 08/12/14 | 830,000 | — | 830,000 | ||||||||||||||||||
Manitowoc Co., Inc. | ||||||||||||||||||||||||
5,000,000 | — | 5,000,000 | Term B Loan, 08/30/14 (b) | 4,810,000 | — | 4,810,000 | ||||||||||||||||||
Matinvest 2 SAS / Butterfly Wendal US, Inc. | ||||||||||||||||||||||||
1,254,328 | — | 1,254,328 | B-2 Facility, 5.38%, 06/22/14 | 1,128,895 | — | 1,128,895 | ||||||||||||||||||
1,116,317 | — | 1,116,317 | C-2 Facility, 5.63%, 06/22/15 | 1,010,267 | — | 1,010,267 | ||||||||||||||||||
Matinvest 2 SAS / Deutsche Connector | ||||||||||||||||||||||||
1,091,124 | — | 1,091,124 | Mezzanine A USD Facility, PIK, 11.43%, 06/22/16 | 943,822 | — | 943,822 | ||||||||||||||||||
Maxum Petroleum, Inc. | ||||||||||||||||||||||||
5,855,176 | — | 5,855,176 | Term Loan, 9.33%, 09/18/13 | 5,445,314 | — | 5,445,314 | ||||||||||||||||||
United Central Industrial Supply Co., LLC | ||||||||||||||||||||||||
1,564,569 | — | 1,564,569 | Term Loan, 5.00%, 03/31/12 | 1,455,049 | — | 1,455,049 | ||||||||||||||||||
23,703,498 | — | 23,703,498 | ||||||||||||||||||||||
METALS/MINERALS — 0.9% | ||||||||||||||||||||||||
Euramax International Holdings B.V. | ||||||||||||||||||||||||
1,326,316 | — | 1,326,316 | Second Lien European Loan, 10.79%, 06/29/13 | 895,263 | — | 895,263 | ||||||||||||||||||
Euramax International, Inc. | ||||||||||||||||||||||||
2,753,611 | — | 2,753,611 | Domestic Term Loan, 8.00%, 06/29/12 | 2,184,549 | — | 2,184,549 | ||||||||||||||||||
6,673,684 | — | 6,673,684 | Second Lien Domestic Term Loan, 10.79%, 06/29/13 | 4,337,895 | — | 4,337,895 | ||||||||||||||||||
7,417,707 | — | 7,417,707 | ||||||||||||||||||||||
RETAIL — 2.7% | ||||||||||||||||||||||||
Burlington Coat Factory Warehouse Corp. | ||||||||||||||||||||||||
3,930,028 | — | 3,930,028 | Term Loan, 5.06%, 05/28/13 | 2,816,848 | — | 2,816,848 | ||||||||||||||||||
Claire’s Stores, Inc. | ||||||||||||||||||||||||
— | 3,979,849 | 3,979,849 | Term B Loan, 05/29/14 (b) | — | 2,416,644 | 2,416,644 | ||||||||||||||||||
Dollar General Corp. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Tranche B-2 Term Loan, 6.48%, 07/07/14 | 1,744,360 | — | 1,744,360 | ||||||||||||||||||
Home Interiors & Gifts, Inc. | ||||||||||||||||||||||||
7,223,706 | — | 7,223,706 | Initial Term Loan, 10.36%, 03/31/11 (e) (f) | 1,697,571 | — | 1,697,571 | ||||||||||||||||||
Movie Gallery, Inc. | ||||||||||||||||||||||||
94,136 | — | 94,136 | First Lien Synthetic Letter of Credit Loan, 9.51%, 03/08/12 | 64,954 | — | 64,954 | ||||||||||||||||||
2,433,626 | — | 2,433,626 | First Lien Term Loan, 13.21%, 03/08/12 | 1,679,202 | — | 1,679,202 | ||||||||||||||||||
Spirit Finance Corp. | ||||||||||||||||||||||||
6,500,000 | — | 6,500,000 | Term Loan, 5.80%, 08/01/13 | 4,550,000 | — | 4,550,000 | ||||||||||||||||||
Sports Authority, Inc., The | ||||||||||||||||||||||||
1,955,000 | — | 1,955,000 | Term Loan B, 6.01%, 05/03/13 | 1,495,575 | — | 1,495,575 | ||||||||||||||||||
Toys “R” Us | ||||||||||||||||||||||||
5,970,149 | — | 5,970,149 | Tranche B Term Loan, 7.06%, 07/19/12 | 5,392,537 | — | 5,392,537 | ||||||||||||||||||
19,441,047 | 2,416,644 | 21,857,691 | ||||||||||||||||||||||
SERVICE — 5.4% | ||||||||||||||||||||||||
Cydcor, Inc. | ||||||||||||||||||||||||
9,375,000 | — | 9,375,000 | First Lien Tranche B Term Loan, 9.00%, 02/05/13 | 8,812,500 | — | 8,812,500 | ||||||||||||||||||
3,000,000 | — | 3,000,000 | Second Lien Tranche B Term Loan, 12.00%, 02/05/14 | 2,820,000 | — | 2,820,000 | ||||||||||||||||||
LVI Services, Inc. | ||||||||||||||||||||||||
— | 9,401,516 | 9,401,516 | Tranche B Term Loan, 8.06%, 11/16/11 | — | 6,933,618 | 6,933,618 | ||||||||||||||||||
NES Rentals Holdings, Inc. | ||||||||||||||||||||||||
7,765,705 | 2,000,000 | 9,765,705 | Second Lien Permanent Term Loan, 9.50%, 07/20/13 | 5,668,964 | 1,460,000 | 7,128,964 | ||||||||||||||||||
Penhall Holding Co. | ||||||||||||||||||||||||
3,000,000 | 5,456,661 | 8,456,661 | Term Loan PIK, 10.13%, 04/01/12 | 1,950,000 | 3,546,830 | 5,496,830 | ||||||||||||||||||
Safety-Kleen Systems, Inc. | ||||||||||||||||||||||||
1,627,119 | — | 1,627,119 | Synthetic Letter of Credit, 5.00%, 08/02/13 | 1,513,220 | — | 1,513,220 | ||||||||||||||||||
6,128,136 | — | 6,128,136 | Term Loan B, 5.00%, 08/02/13 | 5,699,166 | — | 5,699,166 | ||||||||||||||||||
Total Safety U.S., Inc. | ||||||||||||||||||||||||
982,500 | — | 982,500 | First Lien Tranche B Term Loan, 6.51%, 12/08/12 | 943,200 | — | 943,200 | ||||||||||||||||||
Valleycrest Cos., LLC | ||||||||||||||||||||||||
4,676,648 | — | 4,676,648 | New Term Loan, 4.82%, 10/04/13 | 4,045,301 | — | 4,045,301 | ||||||||||||||||||
31,452,351 | 11,940,448 | 43,392,799 | ||||||||||||||||||||||
47
Table of Contents
Pro Forma Combined | Pro Forma Combined | |||||||||||||||||||||||
Highland Credit | Highland Distressed | Highland Credit | Highland Credit | Highland Distressed | Highland Credit | |||||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | |||||||||||||||||||
Principal Amount ($) | Principal Amount ($) | Principal Amount ($) | Security | Value ($) | Value ($) | Value ($) | ||||||||||||||||||
TELECOMMUNICATIONS — 0.9% | ||||||||||||||||||||||||
Level 3 Financing, Inc. | ||||||||||||||||||||||||
3,000,000 | — | 3,000,000 | Term Loan, 4.95%, 03/13/14 | 2,568,780 | — | 2,568,780 | ||||||||||||||||||
PaeTec Holding Corp. | ||||||||||||||||||||||||
4,063,132 | — | 4,063,132 | Replacement Term Loan, 6.20%, 02/26/13 | 3,419,817 | — | 3,419,817 | ||||||||||||||||||
Sorenson Communications, Inc. | ||||||||||||||||||||||||
1,673,748 | — | 1,673,748 | Tranche C Term Loan, 5.03%, 08/16/13 | 1,569,139 | — | 1,569,139 | ||||||||||||||||||
7,557,736 | — | 7,557,736 | ||||||||||||||||||||||
TRANSPORTATION — AUTOMOTIVE — 3.3% | ||||||||||||||||||||||||
BST Safety Textiles Acquisition GMBH | ||||||||||||||||||||||||
2,662,000 | 665,500 | 3,327,500 | Second Lien Facility, 12.10%, 06/30/09 | 1,929,950 | 395,972 | 2,325,922 | ||||||||||||||||||
Delphi Corp. | ||||||||||||||||||||||||
8,168,139 | — | 8,168,139 | Initial Tranche C Loan DIP, 8.50%, 12/31/08 (b) | 6,765,915 | — | 6,765,915 | ||||||||||||||||||
831,861 | — | 831,861 | Subsequent Tranche C Loan DIP, 8.50%, 12/31/08 (b) | 689,055 | — | 689,055 | ||||||||||||||||||
Ford Motor Co. | ||||||||||||||||||||||||
9,750,190 | — | 9,750,190 | Term Loan, 5.49%, 12/13/13 | 6,508,252 | — | 6,508,252 | ||||||||||||||||||
Motor Coach Industries International, Inc. | ||||||||||||||||||||||||
3,371,170 | — | 3,371,170 | Second Lien Loan, PIK, 11.13%, 12/01/08 (f) | 3,034,053 | — | 3,034,053 | ||||||||||||||||||
4,133,355 | — | 4,133,355 | Tranche A DIP, 09/16/09 (b) | 4,149,330 | — | 4,149,330 | ||||||||||||||||||
2,949,240 | — | 2,949,240 | Tranche B DIP, 18.25%, 09/16/09 | 2,890,255 | — | 2,890,255 | ||||||||||||||||||
25,966,810 | 395,972 | 26,362,782 | ||||||||||||||||||||||
TRANSPORTATION — LAND TRANSPORTATION — 0.8% | ||||||||||||||||||||||||
New Century Transportation, Inc. | ||||||||||||||||||||||||
2,308,221 | — | 2,308,221 | Term Loan, 8.96%, 08/14/12 | 1,615,755 | — | 1,615,755 | ||||||||||||||||||
SIRVA Worldwide, Inc. | ||||||||||||||||||||||||
1,270,682 | — | 1,270,682 | Revolving Credit Loan (Exit Finance), 9.96%, 05/12/12 (c) | 1,200,794 | — | 1,200,794 | ||||||||||||||||||
2,923,930 | — | 2,923,930 | Second Lien Term Loan, 12.00%, 05/15/15 | 1,827,457 | — | 1,827,457 | ||||||||||||||||||
1,535,256 | — | 1,535,256 | Term Loan (Exit Finance), 10.21%, 05/12/12 | 1,450,817 | — | 1,450,817 | ||||||||||||||||||
6,094,823 | — | 6,094,823 | ||||||||||||||||||||||
UTILITY — 4.6% | ||||||||||||||||||||||||
Boston Generating LLC | ||||||||||||||||||||||||
6,946,970 | — | 6,946,970 | First Lien Term Loan, 6.01%, 12/20/13 | 5,569,733 | — | 5,569,733 | ||||||||||||||||||
Coleto Creek Power, LP | ||||||||||||||||||||||||
184,651 | — | 184,651 | First Lien Synthetic Letter of Credit, 6.51%, 06/28/13 | 162,954 | — | 162,954 | ||||||||||||||||||
2,613,277 | 2,613,277 | First Lien Term Loan, 6.51%, 06/28/13 | 2,306,217 | — | 2,306,217 | |||||||||||||||||||
4,887,500 | — | 4,887,500 | Second Lien Term Loan, 7.76%, 06/28/13 | 4,015,863 | — | 4,015,863 | ||||||||||||||||||
Entegra TC LLC | ||||||||||||||||||||||||
9,267,119 | — | 9,267,119 | Third Lien Term Loan, PIK, 8.80%, 10/19/15 | 6,104,715 | — | 6,104,715 | ||||||||||||||||||
GBGH LLC | ||||||||||||||||||||||||
5,024,486 | — | 5,024,486 | First Lien Advance, PIK, 11.75%, 08/07/13 (f) | 4,923,996 | — | 4,923,996 | ||||||||||||||||||
5,828,655 | — | 5,828,655 | Second Lien Advance, PIK, 14.50%, 08/07/14 (e) (f) | 3,709,356 | — | 3,709,356 | ||||||||||||||||||
Mach Gen LLC | ||||||||||||||||||||||||
8,718,960 | — | 8,718,960 | Term C Loan, PIK, 10.14%, 02/22/15 | 7,515,743 | — | 7,515,743 | ||||||||||||||||||
Texas Competitive Electric Holdings Co., LLC | ||||||||||||||||||||||||
— | 3,979,900 | 3,979,900 | Initial Tranche B-2 Term Loan, 6.23%, 10/10/14 | — | 3,363,015 | 3,363,015 | ||||||||||||||||||
34,308,577 | 3,363,015 | 37,671,592 | ||||||||||||||||||||||
WIRELESS COMMUNICATIONS — 1.2% | ||||||||||||||||||||||||
American Messaging Services, Inc. | ||||||||||||||||||||||||
554,434 | — | 554,434 | Senior Secured Note, 8.88%, 09/30/09 | 557,206 | — | 557,206 | ||||||||||||||||||
Clearwire Corp. | ||||||||||||||||||||||||
9,900,000 | — | 9,900,000 | Term Loan, 8.82%, 07/03/12 | 9,405,000 | — | 9,405,000 | ||||||||||||||||||
9,962,206 | — | 9,962,206 | ||||||||||||||||||||||
Total Senior Loans | 501,655,968 | 105,515,688 | 607,171,656 | |||||||||||||||||||||
(HCF Cost $612,188,402) (HCD Cost $161,839,820) | ||||||||||||||||||||||||
Foreign Denominated Senior Loans (a) — 5.2% | ||||||||||||||||||||||||
AUSTRALIA - 1.9% | ||||||||||||||||||||||||
AUD | ||||||||||||||||||||||||
SMG H5 Property Ltd. | ||||||||||||||||||||||||
22,940,476 | — | 22,940,476 | Facility A Term Loan, 9.69%, 12/22/13 (h) | 15,743,019 | — | 15,743,019 | ||||||||||||||||||
15,743,019 | — | 15,743,019 | ||||||||||||||||||||||
FRANCE — 1.9% | ||||||||||||||||||||||||
EUR | ||||||||||||||||||||||||
Ypso Holding SA | ||||||||||||||||||||||||
2,012,048 | — | 2,012,048 | Eur B Acq 1 Facility, 7.51%, 03/02/15 | 2,119,134 | — | 2,119,134 | ||||||||||||||||||
3,282,814 | — | 3,282,814 | Eur B Acq 2 Facility, 7.51%, 03/02/15 | 3,457,533 | — | 3,457,533 | ||||||||||||||||||
5,213,674 | — | 5,213,674 | Eur B Recap 1 Facility, 7.51%, 03/02/15 | 5,491,157 | — | 5,491,157 | ||||||||||||||||||
1,389,750 | — | 1,389,750 | Eur C Acq Facility, 7.76%, 12/31/15 | 1,547,052 | — | 1,547,052 | ||||||||||||||||||
2,610,250 | — | 2,610,250 | Eur C Recap Facility, 7.76%, 12/31/15 | 2,778,542 | — | 2,778,542 | ||||||||||||||||||
15,393,418 | — | 15,393,418 | ||||||||||||||||||||||
SWEDEN — 0.5% | ||||||||||||||||||||||||
SEK | ||||||||||||||||||||||||
Nordic Cable Acquisition Co., AB | ||||||||||||||||||||||||
15,333,333 | — | 15,333,333 | Facility B2 Com Hen Comm, 7.38%, 01/31/14 | 1,891,172 | — | 1,891,172 | ||||||||||||||||||
14,666,667 | — | 14,666,667 | Facility C2 Com Hen, 7.51%, 01/31/15 | 1,766,878 | — | 1,766,878 | ||||||||||||||||||
3,658,050 | — | 3,658,050 | ||||||||||||||||||||||
UNITED KINGDOM — 0.9% | ||||||||||||||||||||||||
GBP | ||||||||||||||||||||||||
Mobileserv Ltd. | ||||||||||||||||||||||||
2,764,925 | — | 2,764,925 | Facility B, 8.39%, 09/22/14 | 3,513,485 | — | 3,513,485 | ||||||||||||||||||
3,250,000 | — | 3,250,000 | Facility C, 8.89%, 09/22/15 | 4,155,259 | — | 4,155,259 | ||||||||||||||||||
7,668,744 | — | 7,668,744 | ||||||||||||||||||||||
Total Foreign Denominated Senior Loans | 42,463,231 | — | 42,463,231 | |||||||||||||||||||||
(Cost $52,651,447) | ||||||||||||||||||||||||
Asset-Backed Securities (i) — 5.1% | ||||||||||||||||||||||||
AB CLO, Ltd. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-1A, Class C, 6.60%, 04/15/21 (j) | 1,191,420 | — | 1,191,420 |
48
Table of Contents
Pro Forma Combined | Pro Forma Combined | |||||||||||||||||||||||
Highland Credit | Highland Distressed | Highland Credit | Highland Credit | Highland Distressed | Highland Credit | |||||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | |||||||||||||||||||
Principal Amount ($) | Principal Amount ($) | Principal Amount ($) | Security | Value ($) | Value ($) | Value ($) | ||||||||||||||||||
ACA CLO, Ltd. | ||||||||||||||||||||||||
4,000,000 | — | 4,000,000 | Series 2006-2A, Class B, 3.51%, 01/20/21 (j) | 2,844,370 | — | 2,844,370 | ||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-1A, Class D, 7.10%, 06/15/22 (j) | 1,118,600 | — | 1,118,600 | ||||||||||||||||||
Babson CLO, Ltd. | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2007-2A, Class D, 4.49%, 04/15/21 (j) | 556,840 | — | 556,840 | ||||||||||||||||||
Bluemountain CLO, Ltd. | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2007-3A, Class D, 4.22%, 03/17/21 (j) | 550,000 | — | 550,000 | ||||||||||||||||||
Cent CDO, Ltd. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-15A, Class C, 5.07%, 03/11/21 (j) | 1,162,624 | — | 1,162,624 | ||||||||||||||||||
Columbus Nova CLO, Ltd. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007- 1A, Class D, 4.16%, 05/16/19 (j) | 1,084,000 | — | 1,084,000 | ||||||||||||||||||
Commercial Industrial Finance Corp. | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2006-1BA, Class B2L, 7.20%, 12/22/20 | 497,344 | — | 497,344 | ||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2006-2A, Class B2L, 6.81%, 03/01/21 (j) | 395,762 | — | 395,762 | ||||||||||||||||||
Cornerstone CLO, Ltd. | ||||||||||||||||||||||||
2,500,000 | — | 2,500,000 | Series 2007-1A, Class C, 5.19%, 07/15/21 (j) | 1,498,075 | — | 1,498,075 | ||||||||||||||||||
Goldman Sachs Asset Management CLO PLC | ||||||||||||||||||||||||
4,000,000 | — | 4,000,000 | Series 2007-1A, Class D, 5.42%, 08/01/22 (j) | 2,662,888 | — | 2,662,888 | ||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2007-1A, Class E, 7.67%, 08/02/22 (j) | 528,458 | — | 528,458 | ||||||||||||||||||
Greywolf CLO, Ltd | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2007-1A, Class D, 4.31%, 02/18/21 (j) | 577,500 | — | 577,500 | ||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2007-1A, Class E, 6.76%, 02/18/21 (j) | 451,300 | — | 451,300 | ||||||||||||||||||
GSC Partners CDO Fund, Ltd. | ||||||||||||||||||||||||
3,000,000 | — | 3,000,000 | Series 2007-8A, Class C, 4.26%, 04/17/21 (j) | 1,396,995 | — | 1,396,995 | ||||||||||||||||||
Gulf Stream Sextant CLO, Ltd. | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2007-1A, Class D, 5.22%, 06/17/21 (j) | 587,800 | — | 587,800 | ||||||||||||||||||
Hillmark Funding | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2006-1A, Class C, 4.51%, 05/21/21 (j) | 1,172,600 | — | 1,172,600 | ||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2006-1A, Class D, 6.41%, 05/21/21 (j) | 435,580 | — | 435,580 | ||||||||||||||||||
Inwood Park CDO, Ltd. | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2006-1A, Class C, 3.49%, 01/20/21 (j) | 706,400 | — | 706,400 | ||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2006-1A, Class D, 4.19%, 01/20/21 (j) | 640,700 | — | 640,700 | ||||||||||||||||||
Limerock CLO | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-1A, Class D, 6.15%, 04/24/23 (j) | 921,000 | — | 921,000 | ||||||||||||||||||
Madison Park Funding Ltd. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-5A, Class C, 4.26%, 02/26/21 (j) | 1,082,958 | — | 1,082,958 | ||||||||||||||||||
1,500,000 | — | 1,500,000 | Series 2007-5A, Class D, 6.31%, 02/26/21 (j) | 726,141 | — | 726,141 | ||||||||||||||||||
Marquette US/European CLO, PLC | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2006-1A, Class D1, 4.54%, 07/15/20 (j) | 596,280 | — | 596,280 | ||||||||||||||||||
Navigator CDO, Ltd. | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2006-2A, Class D, 6.70%, 09/20/20 (j) | 519,700 | — | 519,700 | ||||||||||||||||||
Ocean Trails CLO | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2006-1A, Class D, 6.54%, 10/12/20 (j) | 558,320 | — | 558,320 | ||||||||||||||||||
2,500,000 | — | 2,500,000 | Series 2007-2A, Class C, 5.14%, 06/27/22 (j) | 1,397,500 | — | 1,397,500 | ||||||||||||||||||
PPM Grayhawk CLO, Ltd. | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2007-1A, Class C, 4.19%, 04/18/21 (j) | 578,900 | — | 578,900 | ||||||||||||||||||
1,150,000 | — | 1,150,000 | Series 2007-1A, Class D, 6.39%, 04/18/21 (j) | 563,796 | — | 563,796 | ||||||||||||||||||
Primus CLO, Ltd. | ||||||||||||||||||||||||
5,000,000 | — | 5,000,000 | Series 2007-2A, Class D, 5.19%, 07/15/21 (j) | 3,074,000 | — | 3,074,000 | ||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-2A, Class E, 7.54%, 07/15/21 (j) | 1,068,000 | — | 1,068,000 | ||||||||||||||||||
Rampart CLO, Ltd. | ||||||||||||||||||||||||
4,000,000 | — | 4,000,000 | Series 2006-1A, Class C, 4.24%, 04/18/21 (j) | 2,415,000 | — | 2,415,000 | ||||||||||||||||||
St. James River CLO, Ltd. | ||||||||||||||||||||||||
3,000,000 | — | 3,000,000 | Series 2007-1A, Class E, 7.12%, 06/11/21 (j) | 1,638,198 | — | 1,638,198 | ||||||||||||||||||
Stanfield Daytona CLO, Ltd. | ||||||||||||||||||||||||
1,200,000 | — | 1,200,000 | Series 2007-1A, Class B1L, 4.15%, 04/27/21 (j) | 684,936 | — | 684,936 | ||||||||||||||||||
Stanfield McLaren CLO, Ltd. | ||||||||||||||||||||||||
4,000,000 | — | 4,000,000 | Series 2007-1A, Class B1L, 5.21%, 02/27/21 (j) | 2,624,496 | — | 2,624,496 | ||||||||||||||||||
Stone Tower CLO, Ltd. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-6A, Class C, 4.14%, 04/17/21 (j) | 1,080,000 | — | 1,080,000 | ||||||||||||||||||
Venture CDO, Ltd. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-9A, Class D, 6.94%, 10/12/21 (j) | 1,292,000 | — | 1,292,000 | ||||||||||||||||||
Westbrook CLO, Ltd. | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | Series 2006-1A, Class D, 4.90%, 12/20/20 (j) | 585,000 | — | 585,000 | ||||||||||||||||||
41,465,481 | — | 41,465,481 | ||||||||||||||||||||||
Total Asset-Backed Securities | 41,465,481 | — | 41,465,481 | |||||||||||||||||||||
(Cost $50,368,386) | ||||||||||||||||||||||||
Foreign Asset-Backed Securities (i) — 0.5% | ||||||||||||||||||||||||
IRELAND — 0.5% | ||||||||||||||||||||||||
EUR | ||||||||||||||||||||||||
Static Loan Funding | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-1X, Class D, 12.15%, 07/31/17 | 2,157,827 | — | 2,157,827 | ||||||||||||||||||
2,000,000 | — | 2,000,000 | Series 2007-1X, Class E, 9.65%, 07/31/17 | 1,854,141 | — | 1,854,141 | ||||||||||||||||||
4,011,968 | — | 4,011,968 | ||||||||||||||||||||||
Total Foreign Asset-Backed Securities | 4,011,968 | — | 4,011,968 | |||||||||||||||||||||
(Cost $5,440,884) | ||||||||||||||||||||||||
Corporate Notes and Bonds — 38.3% | ||||||||||||||||||||||||
AEROSPACE — 0.2% | ||||||||||||||||||||||||
Delta Air Lines, Inc. | ||||||||||||||||||||||||
5,000,000 | — | 5,000,000 | 8.00%, 06/30/23 (f) (k) | 125,000 | — | 125,000 | ||||||||||||||||||
7,000,000 | — | 7,000,000 | 8.30%, 12/15/29 (f) | 175,000 | — | 175,000 | ||||||||||||||||||
Northwest Airlines Corp. | ||||||||||||||||||||||||
2,500,000 | — | 2,500,000 | 12/30/27 (f) | 21,875 | — | 21,875 | ||||||||||||||||||
Northwest Airlines, Inc. | ||||||||||||||||||||||||
1,623,507 | — | 1,623,507 | 9.06%, 05/20/12 | 1,404,689 | — | 1,404,689 | ||||||||||||||||||
1,726,564 | — | 1,726,564 | ||||||||||||||||||||||
BROADCASTING — 0.85% | ||||||||||||||||||||||||
Clear Channel Communications, Inc. | ||||||||||||||||||||||||
3,000,000 | — | 3,000,000 | 5.00%, 03/15/12 | 1,605,000 | — | 1,605,000 | ||||||||||||||||||
7,000,000 | — | 7,000,000 | 6.25%, 03/15/11 | 4,550,000 | — | 4,550,000 | ||||||||||||||||||
Young Broadcasting, Inc. | ||||||||||||||||||||||||
3,065,000 | 2,000,000 | 5,065,000 | 10.00%, 03/01/11 (k) | 459,750 | 300,000 | 759,750 | ||||||||||||||||||
6,614,750 | 300,000 | 6,914,750 | ||||||||||||||||||||||
49
Table of Contents
Pro Forma Combined | Pro Forma Combined | |||||||||||||||||||||||
Highland Credit | Highland Distressed | Highland Credit | Highland Credit | Highland Distressed | Highland Credit | |||||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | |||||||||||||||||||
Principal Amount ($) | Principal Amount ($) | Principal Amount ($) | Security | Value ($) | Value ($) | Value ($) | ||||||||||||||||||
CABLE/WIRELESS VIDEO - 2% | ||||||||||||||||||||||||
CCH I Holdings LLC | ||||||||||||||||||||||||
1,250,000 | — | 1,250,000 | 9.92%, 04/01/14 (k) | 468,750 | — | 468,750 | ||||||||||||||||||
3,375,000 | — | 3,375,000 | 10.00%, 05/15/14 (k) | 1,265,625 | — | 1,265,625 | ||||||||||||||||||
2,500,000 | — | 2,500,000 | 11.75%, 05/15/14 | 975,000 | — | 975,000 | ||||||||||||||||||
CCH I LLC | ||||||||||||||||||||||||
8,860,000 | — | 8,860,000 | 11.00%, 10/01/15 (k) | 5,891,900 | — | 5,891,900 | ||||||||||||||||||
Charter Communications, Inc., Convertible | ||||||||||||||||||||||||
2,634,000 | — | 2,634,000 | 6.50%, 10/01/27 | 767,153 | — | 767,153 | ||||||||||||||||||
Grande Communications Holdings, Inc. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | 14.00%, 04/01/11 | 2,090,000 | — | 2,090,000 | ||||||||||||||||||
Intelsat Bermuda Ltd. | ||||||||||||||||||||||||
4,500,000 | — | 4,500,000 | 11.25%, 06/15/16 (j) | 4,398,750 | — | 4,398,750 | ||||||||||||||||||
15,857,178 | — | 15,857,178 | ||||||||||||||||||||||
CHEMICALS - 0.7% | ||||||||||||||||||||||||
Albemarle Corp. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | 5.10%, 02/01/15 | 1,849,944 | — | 1,849,944 | ||||||||||||||||||
Georgia Gulf Corp. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | 9.50%, 10/15/14 | 1,240,000 | — | 1,240,000 | ||||||||||||||||||
Tronox Worldwide, LLC | ||||||||||||||||||||||||
6,750,000 | — | 6,750,000 | 9.50%, 12/01/12 (k) | 2,261,250 | — | 2,261,250 | ||||||||||||||||||
5,351,194 | — | 5,351,194 | ||||||||||||||||||||||
CONSUMER NON-DURABLES — 2% | ||||||||||||||||||||||||
Ames True Temper, Inc. | ||||||||||||||||||||||||
5,000,000 | — | 5,000,000 | 6.79%, 01/15/12 (i) | 3,775,000 | — | 3,775,000 | ||||||||||||||||||
Outsourcing Services Group, Inc. | ||||||||||||||||||||||||
837,840 | — | 837,840 | 9.00%, 03/01/09 (e) (f) | — | — | — | ||||||||||||||||||
Solo Cup Co. | ||||||||||||||||||||||||
13,245,000 | — | 13,245,000 | 8.50%, 02/15/14 | 10,662,225 | — | 10,662,225 | ||||||||||||||||||
Spectrum Brands, Inc., PIK | ||||||||||||||||||||||||
2,530,000 | — | 2,530,000 | 12.00%, 10/02/13 (k) (l) | 1,631,850 | — | 1,631,850 | ||||||||||||||||||
16,069,075 | — | 16,069,075 | ||||||||||||||||||||||
DIVERSIFIED MEDIA — 0.8% | ||||||||||||||||||||||||
Baker & Taylor, Inc. | ||||||||||||||||||||||||
— | 8,300,000 | 8,300,000 | 11.50%, 07/01/13 (j) | — | 6,515,500 | 6,515,500 | ||||||||||||||||||
— | 6,515,500 | 6,515,500 | ||||||||||||||||||||||
ENERGY — 0.39% | ||||||||||||||||||||||||
Energy XXI Gulf Coast, Inc. | ||||||||||||||||||||||||
4,150,000 | — | 4,150,000 | 10.00%, 06/15/13 | 3,133,250 | — | 3,133,250 | ||||||||||||||||||
3,133,250 | — | 3,133,250 | ||||||||||||||||||||||
FINANCIAL — 3.9% | ||||||||||||||||||||||||
Allied Capital Corp. | ||||||||||||||||||||||||
3,500,000 | — | 3,500,000 | 6.00%, 04/01/12 | 3,260,362 | — | 3,260,362 | ||||||||||||||||||
BankAmerica Institutional, Class A | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | 8.07%, 12/31/26 (j) | 1,718,614 | — | 1,718,614 | ||||||||||||||||||
HUB International Holdings, Inc. | ||||||||||||||||||||||||
22,200,000 | 2,000,000 | 24,200,000 | 10.25%, 06/15/15 (j) | 17,649,000 | 1,590,000 | 19,239,000 | ||||||||||||||||||
National City Corp. | ||||||||||||||||||||||||
7,000,000 | — | 7,000,000 | 4.00%, 02/01/11 | 3,290,000 | — | 3,290,000 | ||||||||||||||||||
3,000,000 | — | 3,000,000 | 5.75%, 02/01/09 | 1,835,154 | — | 1,835,154 | ||||||||||||||||||
Penhall International, Corp. | ||||||||||||||||||||||||
3,500,000 | — | 3,500,000 | 12.00%, 08/01/14 (j) | 2,432,500 | — | 2,432,500 | ||||||||||||||||||
30,185,630 | 1,590,000 | 31,775,630 | ||||||||||||||||||||||
FOOD/TOBACCO — 0.4% | ||||||||||||||||||||||||
Pinnacle Foods Group, Inc. | ||||||||||||||||||||||||
500,000 | 4,000,000 | 4,500,000 | 10.63%, 04/01/17 (k) | 377,500 | 3,020,000 | 3,397,500 | ||||||||||||||||||
377,500 | 3,020,000 | 3,397,500 | ||||||||||||||||||||||
FOREST PRODUCTS/CONTAINERS — 0% | ||||||||||||||||||||||||
NewPage Corp., PIK | ||||||||||||||||||||||||
296,010 | — | 296,010 | 9.99%, 11/01/13 (i) | 263,449 | — | 263,449 | ||||||||||||||||||
263,449 | — | 263,449 | ||||||||||||||||||||||
GAMING/LEISURE — 0.5% | ||||||||||||||||||||||||
Tropicana Entertainment LLC | ||||||||||||||||||||||||
28,974,000 | 28,974,000 | 9.63%, 12/15/14 (f) | 4,201,230 | — | 4,201,230 | |||||||||||||||||||
4,201,230 | — | 4,201,230 | ||||||||||||||||||||||
HEALTHCARE — 16.9% | ||||||||||||||||||||||||
Argatroban Royalty Sub LLC | ||||||||||||||||||||||||
12,482,208 | 3,921,541 | 16,403,749 | 18.50%, 09/21/14 (j) | 12,544,619 | 3,941,149 | 16,485,768 | ||||||||||||||||||
Azithromycin Royalty Sub LLC | ||||||||||||||||||||||||
10,000,000 | 5,000,000 | 15,000,000 | 16.00%, 05/15/19 (j) | 10,050,000 | 5,025,000 | 15,075,000 | ||||||||||||||||||
Celtic Pharma Phinco B.V. | ||||||||||||||||||||||||
31,496,522 | 9,744,782 | 41,241,304 | PIK, 17.00%, 06/15/12 (j) | 31,181,557 | 9,647,334 | 40,828,891 | ||||||||||||||||||
Cinacalcet Royalty Sub LLC | ||||||||||||||||||||||||
371,434 | — | 371,434 | 8.00%, 03/30/17 | 419,721 | 419,721 | |||||||||||||||||||
— | 1,038,750 | 1,038,750 | 15.50%, 03/30/17 (j) | — | 1,028,362 | 1,028,362 | ||||||||||||||||||
Fosamprenavir Pharma | ||||||||||||||||||||||||
4,849,949 | — | 4,849,949 | 15.50%, 06/15/18 | 4,874,199 | — | 4,874,199 | ||||||||||||||||||
Ledgemont Royalty Sub, LLC | ||||||||||||||||||||||||
— | 2,500,000 | 2,500,000 | 16.00%, 11/05/24 (j) | — | 2,512,500 | 2,512,500 | ||||||||||||||||||
LifeCare Holdings | ||||||||||||||||||||||||
5,000,000 | — | 5,000,000 | 9.25%, 08/15/13 (k) | 2,925,000 | — | 2,925,000 | ||||||||||||||||||
Molecular Insight Pharmaceuticals, Inc. | ||||||||||||||||||||||||
2,500,000 | 1,000,000 | 3,500,000 | PIK, 11.10%, 11/01/12 (i) | 2,556,250 | 1,022,500 | 3,578,750 | ||||||||||||||||||
Pharma 17 (Sanctura XR) | ||||||||||||||||||||||||
24,500,000 | — | 24,500,000 | 16.00%, 11/05/24 | 24,622,500 | — | 24,622,500 | ||||||||||||||||||
Pharma II (Risperidone) | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | 7.00%, 01/18/18 | 1,820,000 | — | 1,820,000 | ||||||||||||||||||
Pharma IV (Eszopiclone) | ||||||||||||||||||||||||
2,933,753 | — | 2,933,753 | 12.00%, 06/30/14 | 2,992,428 | — | 2,992,428 | ||||||||||||||||||
Pharma V (Duloxetine) | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | 13.00%, 10/15/13 | 2,060,000 | — | 2,060,000 | ||||||||||||||||||
Pharma X (Sensipar-Cinacalcet) | ||||||||||||||||||||||||
2,077,500 | — | 2,077,500 | 15.50%, 03/30/17 | 2,056,725 | — | 2,056,725 | ||||||||||||||||||
TCD Pharma | ||||||||||||||||||||||||
15,500,000 | — | 15,500,000 | 16.00%, 04/15/24 | 15,577,500 | — | 15,577,500 | ||||||||||||||||||
Teva Pharmaceutical Finance LLC | ||||||||||||||||||||||||
250,000 | — | 250,000 | 5.55%, 02/01/16 | 232,717 | — | 232,717 | ||||||||||||||||||
113,913,216 | 23,176,845 | 137,090,061 | ||||||||||||||||||||||
HOUSING — 2.3% | ||||||||||||||||||||||||
Realogy Corp. | ||||||||||||||||||||||||
11,000,000 | 5,000,000 | 16,000,000 | 10.50%, 04/15/14 | 4,895,000 | 2,225,000 | 7,120,000 | ||||||||||||||||||
20,170,000 | 7,500,000 | 27,670,000 | 12.38%, 04/15/15 (k) | 6,958,650 | 2,587,500 | 9,546,150 | ||||||||||||||||||
SUSA Partnership LP | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | 7.45%, 07/01/18 | 1,103,165 | — | 1,103,165 | ||||||||||||||||||
WII Components, Inc | ||||||||||||||||||||||||
1,000,000 | — | 1,000,000 | 10.00%, 02/15/12 (k) | 685,000 | — | 685,000 | ||||||||||||||||||
13,641,815 | 4,812,500 | 18,454,315 | ||||||||||||||||||||||
50
Table of Contents
Pro Forma Combined | Pro Forma Combined | |||||||||||||||||||||||
Highland Credit | Highland Distressed | Highland Credit | Highland Credit | Highland Distressed | Highland Credit | |||||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | |||||||||||||||||||
Principal Amount ($) | Principal Amount ($) | Principal Amount ($) | Security | Value ($) | Value ($) | Value ($) | ||||||||||||||||||
INFORMATION TECHNOLOGY — 1.6% | ||||||||||||||||||||||||
Charys Holding Co., Inc. | ||||||||||||||||||||||||
5,000,000 | — | 5,000,000 | 8.75%, 02/16/12 (e) (f) (j) | 1,565,500 | — | 1,565,500 | ||||||||||||||||||
Freescale Semiconductor, Inc. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | 6.69%, 12/15/14 (i) | 1,350,000 | — | 1,350,000 | ||||||||||||||||||
700,000 | 800,000 | 1,500,000 | 9.13%, 12/15/14 PIK (j) | 444,500 | 508,000 | 952,500 | ||||||||||||||||||
— | 3,200,000 | 3,200,000 | 10.13%, 12/15/16 | — | 2,064,000 | 2,064,000 | ||||||||||||||||||
MagnaChip Semiconductor | ||||||||||||||||||||||||
13,000,000 | — | 13,000,000 | 6.07%, 12/15/11 (i) (k) | 4,355,000 | — | 4,355,000 | ||||||||||||||||||
Spansion LLC | ||||||||||||||||||||||||
5,000,000 | — | 5,000,000 | 11.25%, 01/15/16 (j) (k) | 2,900,000 | — | 2,900,000 | ||||||||||||||||||
10,615,000 | 2,572,000 | 13,187,000 | ||||||||||||||||||||||
RETAIL — 1.4% | ||||||||||||||||||||||||
Blockbuster, Inc. | ||||||||||||||||||||||||
6,022,000 | — | 6,022,000 | 9.00%, 09/01/12 | 4,335,840 | — | 4,335,840 | ||||||||||||||||||
Claire’s Stores, Inc. | ||||||||||||||||||||||||
7,250,000 | — | 7,250,000 | 10.50%, 06/01/17 | 2,465,000 | — | 2,465,000 | ||||||||||||||||||
Dollar General Corp. | ||||||||||||||||||||||||
4,830,000 | — | 4,830,000 | 10.63%, 07/15/15 (k) | 4,781,700 | — | 4,781,700 | ||||||||||||||||||
11,582,540 | — | 11,582,540 | ||||||||||||||||||||||
TELECOMMUNICATIONS — 0.1% | ||||||||||||||||||||||||
Nordic Telephone Co. Holdings APS | ||||||||||||||||||||||||
500,000 | — | 500,000 | 8.88%, 05/01/16 (j) | 457,500 | — | 457,500 | ||||||||||||||||||
457,500 | — | 457,500 | ||||||||||||||||||||||
TRANSPORTATION — AUTOMOTIVE — 1.6% | ||||||||||||||||||||||||
American Tire Distributors Holdings, Inc. | ||||||||||||||||||||||||
11,500,000 | — | 11,500,000 | 9.04%, 04/01/12 (i) | 9,717,500 | — | 9,717,500 | ||||||||||||||||||
Delphi Corp. | ||||||||||||||||||||||||
3,784,000 | 2,500,000 | 6,284,000 | 6.50%, 05/01/09 (f) | 473,000 | 312,500 | 785,500 | ||||||||||||||||||
200,000 | 2,667,000 | 2,867,000 | 6.50%, 08/15/13 (f) | 26,000 | 346,710 | 372,710 | ||||||||||||||||||
3,933,000 | 1,500,000 | 5,433,000 | 6.55%, 06/15/09 (f) (k) | 491,625 | 187,500 | 679,125 | ||||||||||||||||||
8,334,000 | 3,500,000 | 11,834,000 | 7.13%, 05/01/29 (f) (k) | 1,041,750 | 437,500 | 1,479,250 | ||||||||||||||||||
Motor Coach Industries International, Inc. | ||||||||||||||||||||||||
1,250,000 | 12,000,000 | 13,250,000 | 11.25%, 05/01/09 (f) | 93,750 | 60,000 | 153,750 | ||||||||||||||||||
11,843,625 | 1,344,210 | 13,187,835 | ||||||||||||||||||||||
UTILITY — 0.2% | ||||||||||||||||||||||||
Kiowa Power | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | 5.74%, 03/30/21 (j) | 1,835,898 | — | 1,835,898 | ||||||||||||||||||
USGEN New England PCG | ||||||||||||||||||||||||
56,303 | — | 56,303 | 7.46%, 01/02/15 (f) | — | — | — | ||||||||||||||||||
1,835,898 | — | 1,835,898 | ||||||||||||||||||||||
WIRELESS COMMUNICATIONS — 2.5% | ||||||||||||||||||||||||
Alltel Corp. | ||||||||||||||||||||||||
2,000,000 | — | 2,000,000 | 7.88%, 07/01/32 | 1,995,000 | — | 1,995,000 | ||||||||||||||||||
Digicel Group, Ltd. PIK | ||||||||||||||||||||||||
19,492,000 | — | 19,492,000 | 9.13%, 01/15/15 (j) | 16,422,010 | — | 16,422,010 | ||||||||||||||||||
ICO North America, Inc. | ||||||||||||||||||||||||
2,173,000 | — | 2,173,000 | 8.50%, 08/15/09 | 1,488,505 | — | 1,488,505 | ||||||||||||||||||
19,905,515 | — | 19,905,515 | ||||||||||||||||||||||
Total Corporate Notes and Bonds | 267,574,929 | 43,331,055 | 310,905,984 | |||||||||||||||||||||
(HCF Cost $351,754,554) (HCD Cost $70,279,883) | ||||||||||||||||||||||||
Claims — 0.2% | ||||||||||||||||||||||||
AEROSPACE — 0.2% | ||||||||||||||||||||||||
Delta Airlines, Inc. | ||||||||||||||||||||||||
581,794 | — | 581,794 | Delta ALPA Claim, 12/31/10 (m) | 18,908 | — | 18,908 | ||||||||||||||||||
Northwest Airlines, Inc. | ||||||||||||||||||||||||
3,000,000 | 3,000,000 | 6,000,000 | ALPA Trade Claim, 8/21/2013 (m) | 120,000 | 120,000 | 240,000 | ||||||||||||||||||
— | 2,500,000 | 2,500,000 | Bell Atlantic Trade Claim, 08/21/13 (m) | — | 100,000 | 100,000 | ||||||||||||||||||
— | 2,500,000 | 2,500,000 | EDC Trade Claims, 08/21/13 (m) | — | 100,000 | 100,000 | ||||||||||||||||||
5,326,500 | 5,326,500 | 10,653,000 | Flight Attendant Claim, 8/21/2013 (m) | 213,060 | 213,060 | 426,120 | ||||||||||||||||||
— | 1,500,000 | 1,500,000 | GE Trade Claim, 08/21/13 (m) | — | 60,000 | 60,000 | ||||||||||||||||||
3,161,250 | 4,728,134 | 7,889,384 | IAM Trade Claim, 8/21/2013 (m) | 126,450 | 189,125 | 315,575 | ||||||||||||||||||
— | 8,433,116 | 8,433,116 | Pinnacle Trade Claim, 08/21/13 (m) | — | 337,325 | 337,325 | ||||||||||||||||||
3,512,250 | 3,512,250 | 7,024,500 | Retiree Claim, 8/21/2013 (m) | 140,490 | 140,490 | 280,980 | ||||||||||||||||||
618,908 | 1,260,000 | 1,878,908 | ||||||||||||||||||||||
Total Claims | 618,908 | 1,260,000 | 1,878,908 | |||||||||||||||||||||
(HCF Cost $2,612,060) (HCD Cost $5,362,822) | ||||||||||||||||||||||||
Shares | ||||||||||||||||||||||||
Common Stocks — 8.2% | ||||||||||||||||||||||||
BROADCASTING — 1.3% | ||||||||||||||||||||||||
753,981 | 1,256,635 | 2,010,616 | Communications Corp. of America (e) (d) (m) | 3,950,860 | 6,584,767 | 10,535,627 | ||||||||||||||||||
18,118 | — | 18,118 | Gray Television, Inc. | 31,163 | — | 31,163 | ||||||||||||||||||
108,772 | — | 108,772 | Gray Television, Inc., Class A | 375,263 | — | 375,263 | ||||||||||||||||||
4,357,286 | 6,584,767 | 10,942,053 | ||||||||||||||||||||||
CHEMICALS — 0.6% | ||||||||||||||||||||||||
265,045 | — | 265,045 | Hercules, Inc. (k) | 5,245,241 | — | 5,245,241 | ||||||||||||||||||
CONSUMER NON-DURABLES — 0% | ||||||||||||||||||||||||
24,015 | — | 24,015 | Outsourcing Services Group, Inc. (e) (j) (m) | — | — | — | ||||||||||||||||||
DIVERSIFIED MEDIA — 0.1% | ||||||||||||||||||||||||
46,601 | — | 46,601 | American Banknote Corp. (e) (m) | 675,715 | — | 675,715 | ||||||||||||||||||
ENERGY — 0.1% | ||||||||||||||||||||||||
17,100 | — | 17,100 | Helix Energy Solutions Group, Inc. (m) | 415,188 | — | 415,188 | ||||||||||||||||||
FINANCIAL — 0.2% | ||||||||||||||||||||||||
555,258 | 555,258 | Altiva Financial Corp. (m) | 3,609 | — | 3,609 | |||||||||||||||||||
84,158 | — | 84,158 | Hatteras Financial Corp. (k) | 1,952,466 | — | 1,952,466 | ||||||||||||||||||
1,956,075 | — | 1,956,075 | ||||||||||||||||||||||
GAMING/LEISURE — 0.4% | ||||||||||||||||||||||||
111,988 | — | 111,988 | Penn National Gaming, Inc. (m) | 2,975,521 | — | 2,975,521 | ||||||||||||||||||
HEALTHCARE — 4.1% | ||||||||||||||||||||||||
7,000,000 | 12,000,000 | 19,000,000 | Genesys Ltd. (d) (e) (m) | 10,157,000 | 17,412,000 | 27,569,000 | ||||||||||||||||||
1,072,961 | — | 1,072,961 | Microvision, Inc. (m) | 2,081,544 | — | 2,081,544 | ||||||||||||||||||
44,008 | — | 44,008 | Teva Pharmaceutical Industries Ltd., SP ADR (k) | 2,015,126 | — | 2,015,126 | ||||||||||||||||||
36,795 | — | 36,795 | UnitedHealth Group, Inc. | 934,225 | — | 934,225 | ||||||||||||||||||
22,397 | — | 22,397 | WellPoint, Inc. (m) | 1,047,508 | — | 1,047,508 | ||||||||||||||||||
16,235,403 | 17,412,000 | 33,647,403 | ||||||||||||||||||||||
51
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Pro Forma Combined | Pro Forma Combined | |||||||||||||||||||||||
Highland Credit | Highland Distressed | Highland Credit | Highland Credit | Highland Distressed | Highland Credit | |||||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | Strategies Fund (HCF) | Opportunities Inc. (HCD) | Strategies Fund (HCF) | |||||||||||||||||||
Principal Amount ($) | Principal Amount ($) | Principal Amount ($) | Security | Value ($) | Value ($) | Value ($) | ||||||||||||||||||
HOUSING — 0% | ||||||||||||||||||||||||
8 | — | 8 | Westgate Investments LLC, Class B-1 (m) (e) | — | — | — | ||||||||||||||||||
RETAIL — 0% | ||||||||||||||||||||||||
15,000 | — | 15,000 | Sally Beauty Holdings, Inc. (k) (m) | 129,000 | — | 129,000 | ||||||||||||||||||
SERVICE — 0.4% | ||||||||||||||||||||||||
200,964 | — | 200,964 | Safety-Kleen Systems, Inc. (m) | 3,016,475 | — | 3,016,475 | ||||||||||||||||||
TELECOMMUNICATIONS — 0.3% | ||||||||||||||||||||||||
107,953 | — | 107,953 | iPCS, Inc. (m) | 2,404,113 | — | 2,404,113 | ||||||||||||||||||
232 | — | 232 | Knology, Inc. (m) | 1,872 | — | 1,872 | ||||||||||||||||||
70,342 | — | 70,342 | Micadent PLC (m) (e) | — | — | |||||||||||||||||||
1 | — | 1 | Viatel Holding (Bermuda) Ltd. (m) | 11 | — | 11 | ||||||||||||||||||
2,405,996 | — | 2,405,996 | ||||||||||||||||||||||
TRANSPORTATION — AUTOMOTIVE — 0% | ||||||||||||||||||||||||
1,544,148 | — | 1,544,148 | Delphi Corp. (m) | 106,546 | — | 106,546 | ||||||||||||||||||
TRANSPORTATION — LAND TRANSPORTATION — 0.2% | ||||||||||||||||||||||||
18,030 | — | 18,030 | SIRVA Worldwide, Inc. (e) (m) | 1,262,100 | — | 1,262,100 | ||||||||||||||||||
UTILITY — 0.2% | ||||||||||||||||||||||||
81,194 | — | 81,194 | Entegra TC LLC (m) | 1,542,686 | — | 1,542,686 | ||||||||||||||||||
WIRELESS COMMUNICATIONS — 0.2% | ||||||||||||||||||||||||
1,078,905 | 138,632 | 1,217,537 | ICO Global Communications Holding Ltd. (m) | 1,176,006 | 151,109 | 1,327,115 | ||||||||||||||||||
554,527 | — | 554,527 | ICO Global Communications Holding Ltd. (Restricted) (m) | 604,434 | — | 604,434 | ||||||||||||||||||
1,780,440 | 151,109 | 1,931,549 | ||||||||||||||||||||||
Total Common Stocks | 42,103,672 | 24,147,876 | 66,251,548 | |||||||||||||||||||||
(HCF Cost $56,204,872) (HCD Cost $19,687,203) | ||||||||||||||||||||||||
Preferred Stocks — 1.2% | ||||||||||||||||||||||||
10,000 | — | 10,000 | Adelphia Communications Corp., Series B (m) | — | ||||||||||||||||||||
1,000,000 | — | 1,000,000 | Adelphia Recovery Trust (m) | 20,000 | — | 20,000 | ||||||||||||||||||
2,150,537 | — | 2,150,537 | Dfine, Inc., Series D (e) (m) | 9,999,997 | — | 9,999,997 | ||||||||||||||||||
10,019,997 | — | 10,019,997 | ||||||||||||||||||||||
Total Preferred Stocks | 10,019,997 | — | 10,019,997 | |||||||||||||||||||||
(HCF Cost $10,934,997) | ||||||||||||||||||||||||
Warrants (m) — 0% | ||||||||||||||||||||||||
20,000 | — | 20,000 | Clearwire Corp., expires 08/15/10 | 750 | — | 750 | ||||||||||||||||||
1,000 | — | 1,000 | Grande Communications, expires 04/01/11 | 10 | — | 10 | ||||||||||||||||||
— | IAP Worldwide Services, Inc. | — | — | |||||||||||||||||||||
49,317 | 49,317 | Series A, expires 06/12/15, | ||||||||||||||||||||||
— | IAP Worldwide Services, Inc. | — | — | |||||||||||||||||||||
14,444 | 14,444 | Series B, expires 06/12/15, | ||||||||||||||||||||||
— | IAP Worldwide Services, Inc. | — | — | |||||||||||||||||||||
7,312 | 7,312 | Series C, expires 06/12/15, | ||||||||||||||||||||||
643,777 | — | 643,777 | Microvision, Inc., expires 07/23/13 | — | — | |||||||||||||||||||
6,000 | — | 6,000 | Sirius XM Radio, Inc., expires 03/15/10 | — | — | |||||||||||||||||||
Total Warrants | 760 | — | 760 | |||||||||||||||||||||
(HCF Cost $1,010,349) | ||||||||||||||||||||||||
Total Investments — 133.7% | 909,914,914 | 174,254,619 | 1,084,169,533 | |||||||||||||||||||||
(HCF cost of $1,143,165,951) (n) (HCD Cost $257,169,728) (k) | ||||||||||||||||||||||||
The amount of $53,186,352 in HCF cash was segregated with the brokers and/or custodian to cover investments sold short outstanding as of September 30, 2008 and is included in “Other Assets & Liabilities, Net”: | ||||||||||||||||||||||||
Short Sales — 3.7% | ||||||||||||||||||||||||
DEBT SECURITIES - 0.9% | ||||||||||||||||||||||||
GAMING/LEISURE — 0.5% | ||||||||||||||||||||||||
6,000,000 | — | 6,000,000 | Isle of Capri Casinos, Inc. | 4,050,000 | — | 4,050,000 | ||||||||||||||||||
7.00%, 03/01/14 | ||||||||||||||||||||||||
HOUSING — 0.4% | ||||||||||||||||||||||||
6,000,000 | — | 6,000,000 | Nortek, Inc. | 3,450,000 | — | 3,450,000 | ||||||||||||||||||
8.50%, 09/01/14 | ||||||||||||||||||||||||
EQUITY SECURITIES — 2.8% | ||||||||||||||||||||||||
Shares | ||||||||||||||||||||||||
CHEMICALS — 0.1% | ||||||||||||||||||||||||
24,649 | — | 24,649 | Ashland, Inc. | 720,737 | — | 720,737 | ||||||||||||||||||
CONSUMER DURABLES — 0.1% | ||||||||||||||||||||||||
75,000 | — | 75,000 | Interface, Inc., Class A | 852,750 | — | 852,750 | ||||||||||||||||||
CONSUMER NON-DURABLES — 0.4% | ||||||||||||||||||||||||
147,059 | — | 147,059 | Helen of Troy Ltd. (o) | 3,348,533 | — | 3,348,533 | ||||||||||||||||||
DIVERSIFIED MEDIA — 0.3% | ||||||||||||||||||||||||
172,200 | — | 172,200 | New York Times Co., Class A | 2,460,738 | — | 2,460,738 | ||||||||||||||||||
HOUSING — 0.3% | ||||||||||||||||||||||||
253,771 | — | 253,771 | Furniture Brands International, Inc. | 2,669,671 | — | 2,669,671 | ||||||||||||||||||
INFORMATION TECHNOLOGY — 0.2% | ||||||||||||||||||||||||
70,000 | — | 70,000 | Watts Water Technologies, Inc., Class A | 1,914,500 | — | 1,914,500 | ||||||||||||||||||
MANUFACTURING — 0.5% | ||||||||||||||||||||||||
65,000 | — | 65,000 | Carlisle Cos., Inc. | 1,948,050 | — | 1,948,050 | ||||||||||||||||||
27,110 | — | 27,110 | Mohawk Industries, Inc. (o) | 1,826,943 | — | 1,826,943 | ||||||||||||||||||
3,774,993 | 3,774,993 | |||||||||||||||||||||||
RETAIL — 0.8% | ||||||||||||||||||||||||
242,276 | — | 242,276 | Ethan Allen Interiors, Inc. | 6,788,574 | — | 6,788,574 | ||||||||||||||||||
Total Investments sold short | 30,030,496 | - | 30,030,496 | |||||||||||||||||||||
(HCF Proceeds $29,538,607) |
a) | Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which Highland Credit Strategies Fund (the “Fund”) invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium. (Unless otherwise identified by footnote (g), all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at September 30, 2008. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown. | |
b) | All or a portion of this position has not settled. Contract rates do not take effect until settlement date. |
52
Table of Contents
c) | Senior Loan assets have additional unfunded loan commitments. As of September 30, 2008, the Fund had unfunded loan commitments of $12,475,474, which could be extended at the option of the Borrower, pursuant to the following loan agreements: |
Unfunded Loan | ||||
Borrower | Commitment | |||
ComCorp Broadcasting, Inc. | $ | 134,628 | ||
Fontainebleu Las Vegas, LLC | 666,667 | |||
Mobileserv Ltd. | 5,000,000 | |||
Sirva Worldwide, Inc. | 1,089,156 | |||
Sorenson Communications, Inc. | 2,000,000 | |||
Tronox Worldwide, LLC | 1,780,800 | |||
Westgate Investments, LLC | 1,804,223 | |||
$ | 12,475,474 | |||
d) | Affiliated issuer. Under Section 2(a)(3) of the 1940 Act, a portfolio company is defined as “affiliated” if a Fund owns five percent or more of its voting stock. Comcorp Broadcasting, Inc.(Senior Loan and Common Stock) and Genesys Ltd.(Common Stock), with a total aggregate market value of $66,486,457, or 8.2% of net assets, were affiliated as of September 30, 2008. valued under fair value procedures as of September 30, 2008. | |
e) | Represents fair value as determined by the Fund’s Board of Trustees (the “Board”) or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate market value of $110,038,697, or 13.57% of net assets, were valued under fair value procedures as of September 30, 2008. | |
f) | The issuer is in default of its payment obligation. Income is not being accrued. | |
g) | Fixed rate senior loan. | |
h) | Loans held on participation. | |
i) | Floating rate asset. The interest rate shown reflects the rate in effect at September 30, 2008. | |
j) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At September 30, 2008, these securities amounted to $122,582,754 or 15.12% of net assets. | |
k) | Securities (or a portion of securites) on loan. As of September 30, 2008, the market value of securities loaned was $28,434,847. The loaned securities were secured with cash collateral of $31,976,043. | |
l) | Step Coupon. A bond that pays an initial coupon rate for the first period and then a higher coupon rate for the following periods until maturity. Spectrum Brands, Inc., (Corporate Note & Bond) has a rate of 12.00% until 10/02/08. | |
m) | Non-income producing security. | |
n) | Cost basis for U.S. federal income tax purposes is identical to book basis. Unrealized appreciation and depreciation on investments are as follows: |
Gross unrealized appreciation | $ | 15,526,068 | ||
Gross unrealized depreciation | (331,692,214 | ) | ||
Net unrealized depreciation | $ | (316,166,146 | ) | |
o) | No dividend payable on security sold short. | |
AUD Australian Dollar | ||
EUR Euro Currency | ||
GBP Great Britain Pound | ||
SEK Swedish Kronor | ||
CDO Collateralized Debt Obligation | ||
CLO Collateralized Loan Obligation | ||
DIP Debtor-in-Possession | ||
PIK Payment-in-Kind | ||
SP ADR Sponsored American Depositary Receipt | ||
Forward foreign currency contracts outstanding as of September 30, 2008 were as follows: |
Contracts to | Principal Amount | Net Unrealized | ||||||||||||||
Buy or Sell | Currency | Covered by Contacts | Expiration | Appreciation | ||||||||||||
Sell | EUR | 9,746,166 | 11/28/2008 | $ | 1,595,026.00 | |||||||||||
Sell | EUR | 7,500,000 | 2/4/2009 | 988,506 | ||||||||||||
Sell | GBP | 1,074,620 | 11/28/2008 | 334,942 | ||||||||||||
Sell | GBP | 7,000,000 | 2/4/2009 | 1,181,886 | ||||||||||||
$ | 4,100,360 | |||||||||||||||
53
Table of Contents
Pro Forma Combined | ||||||||||||||||||||
Highland Credit | Highland Distressed | Pro Forma | Highland Credit | |||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Adjustments | Strategies Fund (HCF) | |||||||||||||||||
Assets: | ||||||||||||||||||||
Unaffiliated Investments, at value | 885,163,868 | 132,519,208 | 1,017,683,076 | |||||||||||||||||
Affiliated Investments, at value | 24,751,046 | 41,735,411 | 66,486,457 | |||||||||||||||||
Total Investments, at value | 909,914,914 | 174,254,619 | ||||||||||||||||||
Cash | 8,595,831 | — | 8,595,831 | |||||||||||||||||
Foreign Currency | — | 3,102 | 3,102 | |||||||||||||||||
Restricted Cash | 104,027,450 | — | 104,027,450 | |||||||||||||||||
Net unrealized appreciation on forward currency contracts | 4,100,360 | — | 4,100,360 | |||||||||||||||||
Securities covering shorts | 55,628 | — | 55,628 | |||||||||||||||||
Cash held as collateral for securities loaned | 31,976,043 | — | 31,976,043 | |||||||||||||||||
Receivable for: | — | |||||||||||||||||||
Investments Sold | 50,751,175 | 17,716,081 | 68,467,256 | |||||||||||||||||
Swap agreements | 7,255,989 | — | 7,255,989 | |||||||||||||||||
Dividends and interest receivables | 23,601,224 | 4,506,802 | 28,108,026 | |||||||||||||||||
Other assets | 92,969 | 154,586 | 247,555 | |||||||||||||||||
Total assets | 1,140,371,583 | 196,635,190 | — | 1,337,006,773 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||
Due to Custodian | — | 3,224,095 | 3,224,095 | |||||||||||||||||
Note payable | 315,000,000 | 49,000,000 | 364,000,000 | |||||||||||||||||
Foreign currency | 1,423,500 | — | 1,423,500 | |||||||||||||||||
Securities sold short, at value | 30,030,496 | — | 30,030,496 | |||||||||||||||||
Dividends payable on securities sold short | 21,615 | — | 21,615 | |||||||||||||||||
Net discount and unrealized depreciation on unfunded transactions | 5,365,259 | 11,862 | 5,377,121 | |||||||||||||||||
Payable upon receipt of securities loaned | 31,976,043 | — | 31,976,043 | |||||||||||||||||
Net unrealized depreciation on credit default swaps | 61,479 | — | 61,479 | |||||||||||||||||
Net unrealized depreciation on total return swaps | 25,595,027 | — | 25,595,027 | |||||||||||||||||
Payables for: | — | |||||||||||||||||||
Interest payable | 15,767 | — | 15,767 | |||||||||||||||||
Investments purchased | 35,797,710 | 24,299,666 | 60,097,376 | |||||||||||||||||
Investment advisory fee payable | 810,993 | 919,733 | 1,730,726 | |||||||||||||||||
Administration fee | 142,624 | 160,953 | 303,577 | |||||||||||||||||
Incentive fee | — | — | — | |||||||||||||||||
Interest expense | 1,150,247 | 195,259 | 1,345,506 | |||||||||||||||||
Directors’ fees | — | 2,006 | 2,006 | |||||||||||||||||
Accrued expenses and other liabilities | 238,322 | 281,281 | 500,000 | 1 | 1,019,603 | |||||||||||||||
Total liabilities | 447,629,082 | 78,094,855 | 500,000 | 526,223,937 | ||||||||||||||||
Net Assets Applicable to Common Shares: | 692,742,501 | 118,540,335 | (500,000 | ) | 810,782,836 | |||||||||||||||
Composition of Net Assets: | ||||||||||||||||||||
Par value of common shares | 55,526 | 17,717 | (8,212 | ) | 65,031 | |||||||||||||||
Paid-in capital in excess of par value of common shares | 969,227,267 | 253,163,644 | 8,212 | 1,222,399,123 | ||||||||||||||||
Undistributed net investment income | 8,901,547 | 965,144 | (500,000 | ) | 1 | 9,366,691 | ||||||||||||||
Accumulated net realized gain/(loss) from investments, swaps and foreign currency transactions | (26,502,306 | ) | (52,679,469 | ) | (79,181,775 | ) | ||||||||||||||
Net unrealized appreciation/(depreciation) on investments, unfunded transactions, short positions, forward currency contracts, swaps and translation of assets and liabilities denominated in foreign currency | (258,939,533 | ) | (82,926,701 | ) | — | (341,866,234 | ) | |||||||||||||
Net Assets Applicable to Common Shares | 692,742,501 | 118,540,335 | (500,000 | ) | 1 | 810,782,836 | ||||||||||||||
Common Shares | ||||||||||||||||||||
Net Assets | 692,742,501 | 118,540,335 | 810,782,836 | |||||||||||||||||
Shares outstanding | 55,526,190 | 17,716,771 | (8,212,604 | ) | 2 | 65,030,357 | ||||||||||||||
Net asset value per share (net assets/shares outstanding) | 12.48 | 6.69 | 12.47 |
(1) | Reflects adjustments for estimated reorganization expenses of $500,000. | |
(2) | Reflects adjustments to the number of shares outstanding due to the reorganization |
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Pro Forma Combined | ||||||||||||||||||||
Highland Credit | Highland Distressed | Pro Forma | Highland Credit | |||||||||||||||||
Strategies Fund (HCF) | Opportunities Inc. (HCD) | Adjustments | Strategies Fund (HCF) | |||||||||||||||||
Investment Income: | ||||||||||||||||||||
Unaffliated interest income | 74,610,857 | 17,089,645 | — | 91,700,502 | ||||||||||||||||
Affiliated interest income | 856,053 | 1,328,066 | — | 2,184,119 | ||||||||||||||||
Dividends | 212,257 | 40,685 | — | 252,942 | ||||||||||||||||
Securities lending income | 185,158 | — | ||||||||||||||||||
Other income | (906 | ) | — | — | (906 | ) | ||||||||||||||
Total investment income | 75,863,419 | 18,458,396 | — | 94,136,657 | ||||||||||||||||
Expenses: | ||||||||||||||||||||
Investment advisory fees | 7,201,797 | 3,566,640 | (2,070,722 | ) | a | 8,697,715 | ||||||||||||||
Incentive fees | — | 1,680,346 | (1,680,346 | ) | b | — | ||||||||||||||
Administration fees | 1,440,360 | 624,162 | (324,979 | ) | a | 1,739,543 | ||||||||||||||
Accounting service fees | 347,294 | 119,027 | (74,879 | ) | c | 391,442 | ||||||||||||||
Transfer agent fees | 23,774 | 23,367 | (23,367 | ) | c | 23,774 | ||||||||||||||
Professional fees | 203,302 | 582,386 | (555,464 | ) | c | 230,224 | ||||||||||||||
Trustees’ fees | 62,181 | 16,788 | — | c | 78,969 | |||||||||||||||
Custodian fees | 67,382 | 28,573 | (14,577 | ) | c | 81,378 | ||||||||||||||
Registration fees | 50,283 | 18,065 | (18,065 | ) | c | 50,283 | ||||||||||||||
Delware franchise tax | — | 38,951 | (38,951 | ) | c | — | ||||||||||||||
Rating agency fees | 23,985 | 40,148 | (40,148 | ) | c | 23,985 | ||||||||||||||
Reports to shareholders | 87,998 | 41,554 | (23,275 | ) | c | 106,277 | ||||||||||||||
Reorganization expense related to PHY and CNN | 539,642 | — | — | c | 539,642 | |||||||||||||||
Other Expenses | 293,332 | 258,070 | (243,193 | ) | c | 308,209 | ||||||||||||||
Net operating expenses | 10,341,330 | 7,038,077 | (5,107,966 | ) | 12,271,441 | |||||||||||||||
Interest Expense | 7,934,735 | 2,726,479 | — | 10,661,214 | ||||||||||||||||
Dividends on securities sold short | 960,285 | — | — | 960,285 | ||||||||||||||||
Total Expenses | 19,236,350 | 9,764,556 | (5,107,966 | ) | 23,892,940 | |||||||||||||||
Less: Fee waiver | (243,030 | ) | (809,977 | ) | — | (1,053,007 | ) | |||||||||||||
Net expense | 18,993,320 | 8,954,579 | (5,107,966 | ) | 22,839,933 | |||||||||||||||
Net investment income | 56,870,099 | 9,503,817 | 5,107,966 | 71,296,724 | ||||||||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||||||||||||||||||
Net realized gain/(loss) on investments | (31,058,922 | ) | (38,131,772 | ) | (69,190,694 | ) | ||||||||||||||
Net realized gain/(loss) on short positions | 298,570 | — | ||||||||||||||||||
Net realized gain/(loss) on swaps | 6,274,058 | — | 6,274,058 | |||||||||||||||||
Net realized gain/(loss) on foreign currency transactions | (3,389,888 | ) | (8 | ) | (3,389,896 | ) | ||||||||||||||
Net change in unrealized appreciation/(depreciation) on investments | (187,051,307 | ) | (22,875,246 | ) | (209,926,553 | ) | ||||||||||||||
Net change in unrealized appreciation/(depreciation) on unfunded transactions | (3,015,131 | ) | (11,863 | ) | (3,026,994 | ) | ||||||||||||||
Net change in unrealized appreciation/(depreciation) on short positions | (889,914 | ) | — | (889,914 | ) | |||||||||||||||
Net change in unrealized appreciation/(depreciation) on forward currency contracts | 5,375,618 | — | 5,375,618 | |||||||||||||||||
Net change in unrealized appreciation/(depreciation) on swaps | (19,727,236 | ) | — | (19,727,236 | ) | |||||||||||||||
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency | 997,579 | (825 | ) | 996,754 | ||||||||||||||||
Net realized and unrealized gain/(loss) on investments | (232,186,573 | ) | (61,019,714 | ) | — | (293,504,857 | ) | |||||||||||||
Net (decrease)/increase in net assets, applicable to common shareholders, from operations | (175,316,474 | ) | (51,515,897 | ) | 5,107,966 | (222,208,133 | ) | |||||||||||||
See Notes to Pro Forma Combined Financial Statements |
(a) | Reflects the decrease in the advisory and administration fee due to the lower advisory and administration fee of HCF relative to HCD. | |
(b) | Reflects the elimination of the incentive fee as HCF does not charge an incentive fee. | |
(c) | Reflects the elimination of duplicative expenses and economies of scale due to the proposed merger |
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• | Likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; | ||
• | Nature of and provisions of the obligation; | ||
• | 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. |
Appendix A-1
Table of Contents
Appendix A-2
Table of Contents
Appendix A-3
Table of Contents
Appendix A-4
Table of Contents
• | 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 & Poor’s of appropriate documentation. Changes in the information provided to Standard & Poor’s could result in the assignment of a different rating. In addition, Standard & Poor ‘s reserves the right not to issue a final rating. | ||
• | 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 & Poor’s policies. The final rating may differ from the preliminary rating. |
Appendix A-5
Table of Contents
Appendix A-6
Table of Contents
• | Notes containing features that link interest or principal to the credit performance of any third party or parties (i.e., credit-linked notes); | ||
• | Notes allowing for negative coupons, or negative principal | ||
• | Notes containing any provision that could obligate the investor to make any additional payments | ||
• | Notes containing provisions that subordinate the claim. |
Appendix A-7
Table of Contents
Appendix A-8
Table of Contents
PROXY VOTING POLICY
Appendix B-1
Table of Contents
1 | For the purposes of this Policy, “relative” includes the following family members: spouse, minor children or stepchildren or children or stepchildren sharing the person’s home. |
Appendix B-2
Table of Contents
Appendix B-3
Table of Contents
Signature(s) | Date |
FOR | AGAINST | ABSTAIN | ||||||||||
1. | A proposal to approve an Agreement and Plan of Merger and Liquidation among Highland Distressed Opportunities, Inc. (the “Acquired Fund”), Highland Credit Strategies Fund (the “Acquiring Fund”) and HCF Acquisition LLC, a wholly owned subsidiary of the Acquiring Fund (“Merger Sub”), pursuant to which the Acquired Fund will merge with and into Merger Sub (the “Merger”) with Merger Sub being the surviving entity and the common stockholders of Acquired Fund will receive shares of beneficial interest of Acquiring Fund (and cash in lieu of any fractional shares); the Acquired Fund will withdraw its election to be regulated as a business development company; immediately after the Merger, Merger Sub will distribute its assets to Acquiring Fund and Acquiring Fund will assume the liabilities of Merger Sub, in complete liquidation and dissolution of Merger Sub. | [ ] | [ ] | [ ] |
Control Number: | TAG ID: | |
Check Digit | CUSIP: |
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(1) | Agreement and Declaration of Trust (Incorporated by reference to Pre-Effective Amendment No. 4 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 9, 2006) | |
(2) | By-laws (Incorporated by reference to Pre-Effective Amendment No. 4 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 9, 2006) | |
(3) | Voting Trust Agreement. (Not Applicable) | |
(4) | Form of Agreement and Plan of Reorganization. (Filed herewith as Appendix A to the Proxy Statement/Prospectus) | |
(5) | Provisions of instruments defining the rights of holders of securities are contained in the Registrant’s Agreement and Declaration of Trust and By-laws. | |
(6) | Investment Advisory Agreement. (Incorporated by reference to Pre-Effective Amendment No. 5 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 21, 2006) |
(7) | (a) | Underwriting Agreement. (Incorporated by reference to Pre- Effective Amendment No. 5 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 21, 2006) | |
(b) | Dealer Manager Agreement with respect to rights offering. (Incorporated by reference to Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement, File Nos. 333-147121 and 811-21869, filed on December 14, 2007) |
(8) | Bonus, profit sharing or pension contracts. (Not applicable) | |
(9) | Custodian Services Agreement. (Incorporated by reference to Pre-Effective Amendment No. 4 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 9, 2006) | |
(10) | 12b-1 or 18f-3 Plans. (Not applicable) | |
(11) | Opinion and Consent of Counsel as to the legality of shares being registered. (To be filed by amendment) | |
(12) | Opinion and Consent of Counsel regarding certain tax matters and consequences to shareholders discussed in the Proxy Statement/Prospectus. (To be filed by post-effective amendment) |
(13) | (a) | Administration Services Agreement. (Incorporated by reference to Pre-Effective Amendment No. 5 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 21, 2006) | |
(b) | Sub-administration Services Agreement. (Incorporated by reference to Pre-Effective Amendment No. 4 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 9, 2006) | ||
(c) | Transfer Agency Services Agreement. (Incorporated by reference to Pre-Effective Amendment No. 4 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 9, 2006) |
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(d) | Accounting Services Agreement. (Incorporated by reference to Pre-Effective Amendment No. 4 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 9, 2006) | ||
(e) | Marketing and Structuring Fee Agreement. (Incorporated by reference to Pre-Effective Amendment No. 5 to the Registrant’s Registration Statement, File Nos. 333-132436 and 811-21869, filed on June 21, 2006) | ||
(f) | Form of Amendment No. 1 to Administration Services Agreement. (Filed herewith) |
(14) | Consent of Independent Registered Public Accounting Firm. (Filed herewith) | |
(15) | Omitted Financial Statements. (Not applicable) | |
(16) | Powers of Attorney. (Filed herewith) | |
(17) | Additional Exhibits. (Not applicable) |
(1) | The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933 (“1933 Act”), the reoffering prospectus will contain the information called for by the applicable registration form for the reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. | ||
(2) | The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed the initial bona fide offering of them. | ||
(3) | The undersigned registrant agrees to file by post-effective amendment, an opinion of counsel supporting the tax consequences of the proposed reorganization within a reasonable time after receipt of such opinion. |
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HIGHLAND CREDIT STRATEGIES FUND | ||||
/s/ R. Joseph Dougherty | ||||
R. Joseph Dougherty | ||||
Chief Executive Officer and President |
NAME | TITLE | |
/s/ R. Joseph Dougherty | Trustee, Chief Executive Officer and President | |
/s/ Timothy Hui | Trustee | |
/s/ Scott Kavanaugh | Trustee | |
/s/ James Leary | Trustee | |
/s/ Bryan Ward | Trustee | |
/s/ M. Jason Blackburn | Chief Financial Officer (Principal Accounting Officer), Treasurer and Secretary | |
*By: /s/ M. Jason Blackburn | ||
Attorney-in-Fact | ||
December 24, 2008 |
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