UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material under Rule 14a-12
HIGHLAND FLOATING RATE FUND
(Name of Registrant as Specified in its Charter)
________________________________________________
(Name of Person(s) filing Proxy Statement, if other than the Registrant)
Payment of filing fee (check the approximate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
HIGHLAND FLOATING RATE FUND
13455 NOEL ROAD, SUITE 800
DALLAS, TEXAS 75240
[_______], 2007
Dear Shareholder:
NOTICE IS HEREBY GIVEN that a SPECIAL MEETING OF SHAREHOLDERS (the "Special
Meeting") of Highland Floating Rate Fund (the "Fund"), a Massachusetts business
trust, will be held on [_______], 2007 at [_]:00 a.m., Central Time, at the
offices of Highland Capital Management, L.P., 13455 Noel Road, Suite 800,
Dallas, Texas 75240.
The Special Meeting is being held to consider and vote on the following
proposals:
PROPOSAL 1: To approve a new investment advisory agreement between Highland
Floating Rate Limited Liability Company and Highland Capital
Management, L.P.;
PROPOSAL 2: To approve an Agreement and Plan of Reorganization, pursuant to
which the Fund would be reorganized into a newly formed
Delaware statutory trust, also named Highland Floating Rate Fund;
PROPOSAL 3: To approve the Fund's conversion to a single-fund structure and
the liquidation and dissolution of Highland Floating Rate Limited
Liability Company; and
PROPOSAL 4: To transact such other business as may properly come before the
Special Meeting and any adjournments thereof.
Shareholders of record of the Fund at the close of business on [_______],
2007 (the "Record Date") are entitled to notice of, and to vote on, the
proposals at the Special Meeting or any adjournment thereof. Shareholders are
invited to attend in person. If you plan to attend the Special Meeting, please
indicate this on the enclosed proxy card and return it promptly in the enclosed
envelope. You may also cast your vote by completing, signing, and returning the
enclosed proxy card by mail in the envelope provided. Whether you will be able
to attend or not, PLEASE VOTE so that a quorum will be present at the Special
Meeting.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. YOU CAN
VOTE EASILY AND QUICKLY BY MAIL OR IN PERSON. A SELF-ADDRESSED, POSTAGE-PAID
ENVELOPE HAS BEEN ENCLOSED FOR YOUR CONVENIENCE. PLEASE HELP AVOID THE EXPENSE
OF A FOLLOW-UP MAILING BY VOTING TODAY!
We appreciate your participation and prompt response in these matters and
thank you for your continued support.
Sincerely,
James D. Dondero
PRESIDENT
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IMPORTANT NOTICE
At a Special Meeting of Shareholders of Highland Floating Rate Fund (the
"Fund") to be held on [_______], 2007 (the "Special Meeting"), shareholders will
have the opportunity to vote on proposals relating to the Fund. We recommend
that you read the entire enclosed Proxy Statement, which describes the proposals
in more detail. For your convenience, we have provided some "Questions and
Answers" to assist you in reviewing the proposals.
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
AND THE PROXY STATEMENT
Q. WHY IS THE FUND HOLDING A SPECIAL MEETING?
A. The Board of Trustees of the Fund ("Fund Board") is seeking your approval
on three proposals:
1. To approve a new investment advisory agreement between Highland
Floating Rate Limited Liability Company and Highland Capital
Management, L.P.;
2. To approve an Agreement and Plan of Reorganization, pursuant to which
the Fund would be reorganized into a newly formed Delaware statutory
trust, also named Highland Floating Rate Fund; and
3. To approve the Fund's conversion to a single-fund structure and the
liquidation and dissolution of Highland Floating Rate Limited
Liability Company.
Q. WHY AM I BEING ASKED TO APPROVE A NEW INVESTMENT ADVISORY AGREEMENT WITH
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY?
A. The Fund operates in a master-feeder structure so that instead of directly
investing in securities, the Fund is a "feeder fund" that invests
substantially all of its assets in shares of Highland Floating Rate Limited
Liability Company ("Portfolio"), which is a "master fund." The Portfolio is
seeking to adopt a new investment advisory agreement ("New Portfolio
Advisory Agreement") with Highland Capital Management, L.P. ("Highland")
and the Fund, as an investor in the Portfolio, is being asked to vote on
the New Portfolio Advisory Agreement. The Fund is therefore soliciting its
shareholders and will vote its interest in the Portfolio in proportion to
the votes cast by the Fund's shareholders.
Q. WILL THE NEW PORTFOLIO ADVISORY AGREEMENT DIFFER FROM THE CURRENT PORTFOLIO
ADVISORY AGREEMENT?
A. Under the current investment advisory agreement for the Portfolio (the
"Current Portfolio Advisory Agreement"), Highland provides portfolio
management services to the Portfolio. The New Portfolio Advisory Agreement
will also be with Highland. It will be substantially similar to the Current
Portfolio Advisory Agreement except that the New Portfolio Advisory
Agreement increases the advisory fee rate payable by the Portfolio to
Highland. This is the same proposal originally presented for shareholder
approval in a proxy statement dated July 28, 2006, and voted on at a
special shareholder meeting on September 11, 2006 and at subsequent
adjournments.
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Q. WHY HAS THE PROPOSAL BEEN RESUBMITTED TO SHAREHOLDERS?
A. In the original proxy vote, shareholders of the Fund failed to approve a
new investment advisory agreement with Highland by a slim margin (1.60%).
The proposal required approval by 67% of the shares present at the meeting
or by a majority of the outstanding shares and the proposal received
approval by 65.4% of the shares present at the meeting. In addition, the
meeting represented only about 55% of the outstanding shares of the Fund.
The proposal for the Fund also was done in conjunction with a proposal to
increase the advisory fee rate for Highland Floating Rate Advantage Fund,
which is another fund managed by Highland in a similar style as the Fund,
that was approved by shareholders of that fund. Highland also continues to
believe that an increase in the advisory fee rate is necessary to maintain
the high level of service that it provides to the Fund.
Q. WHY IS THE FUND BOARD RECOMMENDING AN INCREASE IN THE ADVISORY FEE RATE
UNDER THE NEW PORTFOLIO ADVISORY AGREEMENT?
A. The Fund Board concluded that an increase in the investment advisory fee
rate would be in the best interests of shareholders because it would enable
Highland to remain committed to the long-term management of the Fund at a
more appropriate fee level. In addition, in light of the resources that
Highland has devoted to managing the Portfolio during the period Highland
has served as the investment adviser to the Portfolio and in view of the
fact that the advisory fee rate for the Portfolio is substantially below
the average advisory/management fee rate of the other funds managed in a
similar style to the Portfolio, the Board determined that the proposed
increased advisory fee rate is fair and reasonable to the Portfolio and the
Fund and its shareholders. They also noted the Portfolio's excellent
performance under Highland's management.
The Fund Board also noted that if the New Portfolio Advisory Agreement is
approved, Highland has voluntarily agreed to waive advisory fees and
reimburse the Fund for certain expenses (exclusive of distribution and
service fees, brokerage commissions, commitment fees, interest, taxes and
extraordinary expenses, if any) so that total annual expenses do not exceed
1.00% of the average daily net assets of the Fund.
Q. WHY AM I BEING ASKED TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION?
A. You are being asked to approve an Agreement and Plan of Reorganization
because the Fund Board is asking for your approval in reorganizing the Fund
into a newly formed Delaware statutory trust called Highland Floating Rate
Fund ("New Fund") ("Reorganization"). The New Fund will have the same name
and a substantially identical investment program as the Fund. However, it
will be organized as a Delaware statutory trust. The Board of Trustees of
the Fund and New Fund will be identical. The Fund's existing administrator,
independent registered public accounting firm and other service providers
will continue to serve in same roles for the New Fund under agreements that
are substantially identical to the then current agreements for the Fund. In
addition, the New Fund will receive indirectly investment advisory services
under the then current investment advisory agreement between the Portfolio
and Highland. As a result, if the proposal to approve the New Portfolio
Advisory Agreement is approved by shareholders, the New Fund will receive
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investment advisory services under the terms of the New Portfolio Advisory
Agreement.
Q. WHY SHOULD I VOTE IN FAVOR OF THE REORGANIZATION?
A. The Reorganization is being proposed because Highland and the Fund Board
believe that the Delaware statutory trust form of organization offers a
number of advantages over the Massachusetts form of organization. As a
result of these advantages, the Delaware statutory trust organizational
form has been increasingly used by funds, including a number of the funds
in the family of funds managed by Highland.
Q. WHY SHOULD I VOTE IN FAVOR OF THE FUND'S CONVERSION TO A SINGLE-FUND
STRUCTURE AND THE LIQUIDATION AND DISSOLUTION OF THE PORTFOLIO?
A. The Fund is currently the sole feeder fund with respect to its
corresponding master fund. Thus, there is no longer any expectation of
economies of scale to be realized in the master-feeder structure. In fact
under such current circumstances, Highland and the Fund Board expect that
the conversion of the Fund to a single-fund structure ("Conversion") will
simplify the operations of the Fund and, consequently, may result in some
reduction in the Fund's operating expenses resulting from duplicative
custodial, administrative and professional fees of the two-tier
master-feeder structure that are otherwise offset by the economies of scale
realized under such structures when there are multiple feeder funds. The
liquidation and dissolution of the Portfolio is being proposed because the
Portfolio's board of managers has determined that, should the Feeder Fund
obtain the requisite shareholder approval for the Conversion, the
Portfolio's continuation is not economically viable. Such dissolution and
Conversion will be implemented through a Plan of Conversion, Liquidation
and Termination ("Conversion Plan") which dissolves the Portfolio and
distributes the Portfolio's assets in kind to the Fund.
The current agreements with the Fund regarding administrative,
distribution, transfer agent and custodian services are not expected to
change due to the implementation of the Conversion Plan. In addition, upon
completion of the Conversion Plan, the Fund will enter into an investment
advisory agreement with Highland, on terms and conditions substantially
identical to the terms and conditions of the current investment advisory
agreement between Highland and the Portfolio. The investment advisory fee
rate for the Fund once it converts to a single-fund structure will be the
same as the then-current investment advisory fee rate of the Portfolio.
Q. HOW DOES THE FUND BOARD RECOMMEND THAT I VOTE?
A. After careful consideration of the proposals, the Fund Board, including
those members who are not "interested persons" (as defined in the
Investment Company Act of 1940, as amended) of the Portfolio, Fund or New
Fund, approved the proposals and recommend that you vote in favor of all
three proposals. The reasons for the Fund Board's recommendation are
discussed in more detail in the enclosed Proxy Statement.
Q. WHAT HAPPENS IF A PROPOSAL IS NOT APPROVED?
A. If shareholders of the Fund do not approve the New Portfolio Advisory
Agreement, the Current Portfolio Advisory Agreement will continue in effect
and Highland may recommend to the Fund Board other alternatives and may
assess the future viability of its relationship with the Portfolio.
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If shareholders of the Fund do not approve the Reorganization, the Fund
will continue to operate as a Massachusetts business trust.
If shareholders of the Fund do not approve the Fund's conversion and the
liquidation and dissolution of the Portfolio, the Fund will continue to
operate in a master-feeder structure, investing all of its assets in the
Portfolio.
Q. WHO CAN I CALL IF I HAVE QUESTIONS?
A. We will be pleased to answer your questions about this proxy
solicitation. Please call the Fund toll free at [__________].
Q. WHO IS ELIGIBLE TO VOTE?
A. You are entitled to vote at the meeting and any adjournment if you owned
shares of the Fund at the close of business on [_______], 2007.
Q. HOW DO I VOTE?
A. You may use the enclosed postage-paid envelope to mail your proxy card or
you may attend the Special Meeting in person. You may also vote by phone by
calling the proxy solicitor, The Altman Group, at [_____].
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HIGHLAND FLOATING RATE FUND
13455 NOEL ROAD, SUITE 800
DALLAS, TEXAS 75240
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [_______], 2007
To the Shareholders:
A SPECIAL MEETING OF SHAREHOLDERS (the "Special Meeting") of Highland
Floating Rate Fund (the "Fund"), a Massachusetts business trust, will be held on
[_______], 2007 at [_]:00 a.m., Central Time, at the offices of Highland Capital
Management, L.P., 13455 Noel Road, Suite 800, Dallas, Texas 75240 for the
following purposes:
PROPOSAL 1: To approve a new investment advisory agreement between Highland
Floating Rate Limited Liability Company and Highland Capital
Management, L.P.;
PROPOSAL 2: To approve an Agreement and Plan of Reorganization, pursuant to
which the Fund would be reorganized into a newly formed Delaware
statutory trust, also named Highland Floating Rate Fund;
PROPOSAL 3: To approve the Fund's conversion to a single-fund structure and
the liquidation and dissolution of Highland Floating Rate Limited
Liability Company; and
PROPOSAL 4: To transact such other business as may properly come before the
Special Meeting and any adjournments thereof.
Shareholders of record at the close of business on [_______], 2007 are
entitled to notice of, and to vote at, the Special Meeting. Your attention is
called to the accompanying Proxy Statement. Regardless of whether you plan to
attend the Special Meeting, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD PROMPTLY so that a quorum will be present and a maximum number of
shares may be voted. If you are present at the Special Meeting, you may change
your vote, if desired, at that time.
By the Order of the Board of Trustees
M. Jason Blackburn, Treasurer and Secretary
Dated: [_______], 2007
YOUR BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS
THAT YOU VOTE IN FAVOR OF EACH PROPOSAL.
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HIGHLAND FLOATING RATE FUND
13455 NOEL ROAD, SUITE 800
DALLAS, TEXAS 75240
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [_______], 2007
This Proxy Statement is furnished in conjunction with the solicitation of
proxies by the Board of Trustees of Highland Floating Rate Fund (the "Fund"), a
Massachusetts business trust, for voting at a special meeting of shareholders
(the "Special Meeting") of the Fund to be held on [_______], 2007 at [_]:00
a.m., Central Time, at the offices of Highland Capital Management, L.P.
("Highland"), 13455 Noel Road, Suite 800, Dallas Parkway, Dallas, Texas 75240
for the following purposes:
PROPOSAL 1: To approve a new investment advisory agreement between
Highland Floating Rate Limited Liability Company
("Portfolio") and Highland ("New Portfolio Advisory Agreement");
PROPOSAL 2: To approve an Agreement and Plan of Reorganization ("Agreement"),
pursuant to which the Fund would be reorganized into a newly
formed Delaware statutory trust ("Reorganization"), also named
Highland Floating Rate Fund ("New Fund," and together with the
Fund, the "Funds");
PROPOSAL 3: To approve the Fund's conversion to a single-fund structure and
the liquidation and dissolution of Highland Floating Rate Limited
Liability Company; and
PROPOSAL 4: To transact such other business as may properly come before the
Special Meeting and any adjournments thereof.
SOLICITATION OF PROXIES
This solicitation of proxies is being made by the Board of Trustees of the
Fund ("Fund Board"). Solicitation of proxies is being made primarily by the
mailing of this Notice and Proxy Statement with its enclosures on or about
[_______], 2007. Shareholders of record at the close of business on [_______],
2007 (the "Record Date") are entitled to notice of, and to vote at, the Special
Meeting. Shareholders of the Fund whose shares are held by nominees, such as
brokers, can vote their proxies by contacting their respective nominees. In
addition to the solicitation of proxies by mail, officers and agents of the Fund
and its affiliates may, without additional compensation, solicit proxies by
telephone, telegraph, facsimile, or oral communication. Solicitation may also be
made by The Altman Group, a paid proxy solicitation firm. The costs of
soliciting the proxies, estimated to be approximately $[_____], will be borne by
the Fund.
A shareholder may revoke the accompanying proxy at any time prior to its
use by filing with the Fund a written revocation or duly executed proxy bearing
a later date. In addition, any shareholder who attends the Special Meeting in
person may vote by ballot at the Special Meeting, thereby canceling any proxy
previously given. The persons named in the accompanying proxy will vote as
directed by the proxy, but in the absence of voting directions in any proxy that
is signed and returned, they intend to vote "FOR" the proposal and any
adjournments of the Special Meeting needed to achieve a quorum, or if a quorum
is present but sufficient votes to approve the proposal have not been received,
the persons named as proxies may propose one or more adjournments of the Special
Meeting to permit further solicitation of proxies. It is expected that no other
matter will be presented at the Special Meeting.
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If you have questions regarding the Special Meeting agenda or the execution
of the proxy, call a representative toll-free at (877) 665-1287.
MASTER-FEEDER STRUCTURE AND VOTING
The Fund operates in a master-feeder structure so that instead of directly
investing in securities, the Fund is a "feeder fund" that invests substantially
all of its assets in shares of the Portfolio. The Fund does not have an
investment advisory agreement of its own, but shareholders of the Fund are
entitled to vote, as a single class, on the New Portfolio Advisory Agreement in
Proposal 1. In addition, shareholders of the Fund are entitled to vote, as a
single class, on the liquidation and dissolution of the Portfolio in Proposal 3.
VOTING RIGHTS
Shareholders of the Fund at the close of business on the Record Date will
be entitled to be present and to vote at the Special Meeting and any
adjournments thereof with respect to their shares owned as of the Record Date.
Shareholders of the Fund will be entitled to cast one vote on each proposal and
any adjournment of the Special Meeting for each share owned on the Record Date
and a proportionate fractional vote for each fractional share owned on the
Record Date. As of the Record Date, the Fund had the following shares
outstanding, which equals the number of votes to which the shareholders of the
Fund are entitled:
Class A [_________]
Class B [_________]
Class C [_________]
Class Z [_________]
A majority of the outstanding shares of the Fund on the Record Date,
represented in person or by proxy, must be present to constitute a quorum for
purposes of acting on the proposal.
If a quorum for the Fund is not present at the Special Meeting, or if a
quorum is present but sufficient votes to approve a proposal have not been
received, the persons named as proxies may propose one or more adjournments of
the Special Meeting to permit further solicitation of proxies. Any adjournment
will require the affirmative vote of a majority of the shares represented at the
Special Meeting in person or by proxy. In that case, the persons named as
proxies will vote FOR such an adjournment all proxies that they are required or
entitled to vote for a proposal and will vote AGAINST such an adjournment all
proxies that they are required to vote against a proposal.
The Fund expects that, before the Special Meeting, broker-dealer firms
holding shares of the Fund in "street name" for their customers will request
voting instructions from their customers and beneficial owners. The Fund
understands that under the rules of the New York Stock Exchange broker-dealers
that are members of the New York Stock Exchange will not be able to vote on
either proposal on behalf of customers and beneficial owners from whom they have
not received voting instructions.
In determining whether a quorum is present, the Fund will count shares
represented by proxies that reflect abstentions as shares that are present and
entitled to vote. Since these shares will be counted as present, but not as
voting in favor of either proposal, for purposes other than adjournment, these
shares will have the same effect as if they were voted against the proposals.
"Broker non-votes" are shares held by brokers or nominees as to which (i) the
broker or nominee does not have discretionary voting power and (ii) the broker
or nominee has not received instructions from the beneficial owner or other
person who is entitled to instruct how the shares will be voted. "Broker
non-votes" will not be treated as present for any purpose inasmuch as there is
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no matter to be considered at the Special Meeting on which they may be voted by
the broker or nominee.
YOU MAY OBTAIN A COPY, WITHOUT CHARGE, OF THE FUND'S ANNUAL REPORT FOR THE
FISCAL YEAR ENDED AUGUST 31, 2006 and the semi-annual report for the six months
ended February 28, 2007 by writing the Fund c/o PFPC Inc., P.O. Box 9840,
Providence, RI 02940 or by calling toll-free at (877) 665-1287.
PROPOSAL 1:
-----------
APPROVAL OF NEW ADVISORY AGREEMENT
BACKGROUND
Highland is the investment adviser to the Portfolio and provides portfolio
management services to the Portfolio under an investment advisory agreement with
the Portfolio (the "Current Portfolio Advisory Agreement"). The Fund indirectly
receives investment advisory services from Highland through its investment in
the Portfolio. Highland proposed that the Fund Board and the Board of Managers
of the Portfolio (the "Portfolio Board" and together with the Fund Board, the
"Board") approve a new investment advisory agreement (the "New Portfolio
Advisory Agreement") between the Portfolio and Highland. The New Portfolio
Advisory Agreement will be substantially similar to the Current Portfolio
Advisory Agreement except that the New Portfolio Advisory Agreement increases
the advisory fee rate payable by the Portfolio to Highland. A form of the
proposed New Portfolio Advisory Agreement is attached as Appendix A.
This is the same proposal originally presented for shareholder approval in
a proxy statement dated July 28, 2006, and voted on at a special shareholder
meeting on September 11, 2006 and at subsequent adjournments. In the original
proxy vote, shareholders of the Fund failed to approve a new investment advisory
agreement with Highland by a slim margin (1.60%). The proposal required approval
by 67% of the shares present at the meeting or by a majority of the outstanding
shares and the proposal received approval by 65.4% of the shares present at the
meeting. In addition, the meeting represented only about 55% of the outstanding
shares of the Fund. The proposal for the Fund also was done in conjunction with
a proposal to increase the advisory fee rate for Highland Floating Rate
Advantage Fund ("ADV"), which is another fund managed by Highland in a similar
style as the Fund, that was approved by shareholders of that Fund. Highland also
continues to believe that an increase in the advisory fee rate is necessary to
maintain the high level of service that it provides to the Fund.
Highland proposed the fee increase in light of the high level of services
that it provides to the Portfolio and the Fund and because the Portfolio's
advisory fee rate was below the average of other funds managed in a similar
style. The proposed advisory fee rate increase would still be below the average
of those other funds. In addition, this increase would allow Highland to receive
the same advisory fee rate that it receives for managing ADV, which is a fund
managed in a similar style to the Fund. As noted above, the shareholders of ADV
approved the increase in its advisory fee schedule in December 2006.
The New Portfolio Advisory Agreement increases the advisory fee rate at
each breakpoint by 0.20% of average daily net assets. It provides for a monthly
advisory fee, computed and accrued daily, based on an annual rate of 0.65% of
the average daily net assets of the Portfolio for the first one billion dollars
($1,000,000,000), 0.60% of the average daily net assets of the Portfolio for the
next one billion dollars ($1,000,000,000), and 0.55% of the average daily net
assets of the Portfolio over two billion dollars ($2,000,000,000). Although the
Fund does not pay any direct investment advisory fee because it is a "feeder
fund," the Fund does bear, as a result of its investment in the Portfolio, its
allocable portion of the advisory fee charged to the Portfolio.
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If the New Portfolio Advisory Agreement is approved, Highland will agree to
waive voluntarily advisory fees and reimburse the Fund for certain expenses
(exclusive of distribution and service fees, brokerage commissions, commitment
fees, interest, taxes and extraordinary expenses, if any) so that total annual
expenses will not exceed 1.00% of the average daily net assets of the Fund (the
"Voluntary Fee Waiver"). This arrangement may be modified or terminated by
Highland at any time. If the New Portfolio Management Agreement was in effect
last year with the Voluntary Fee Waiver, the Fund's total annual expenses would
have increased by 11.94%.
INFORMATION CONCERNING THE CURRENT PORTFOLIO ADVISORY AGREEMENT AND THE NEW
PORTFOLIO ADVISORY AGREEMENT
The terms of the New Portfolio Advisory Agreement are substantially
identical to those of the Current Portfolio Advisory Agreement, except for (i)
an increase in the advisory fee rate at each stated asset level by 0.20%; and
(ii) the date of the agreement. If approved by shareholders of the Fund, the New
Portfolio Advisory Agreement will take effect at the close of business on the
date of shareholder approval. Unless terminated as provided therein, the New
Portfolio Advisory Agreement will remain in full force and effect for two years
from its effective date. Subsequent to such initial period of effectiveness, the
New Portfolio Advisory Agreement shall continue in full force and effect for
successive one-year periods so long as such continuance is approved at least
annually (a) by either the Portfolio Board or by vote of a majority of the
outstanding voting securities (as defined in the Investment Company Act of 1940
Act (the "1940 Act")) of the Fund and (b) in either event, by the vote of a
majority of the members of the Portfolio Board who are not parties to the New
Portfolio Advisory Agreement or "interested persons" (as defined in the 1940
Act) of any party to the agreement or the Fund (the "Independent
Managers/Trustees") cast in person at a meeting called for the purpose of voting
on such approval.
INVESTMENT SERVICES AND DUTIES. Under each of the Current Portfolio
Advisory Agreement and the New Portfolio Advisory Agreement (each, an "Advisory
Agreement") Highland, among other things: (i) continuously furnishes an
investment program for the Portfolio; (ii) places orders for the purchase and
sale of securities for the account of the Portfolio; (iii) provides for certain
facilities and administrative services; (iv) arranges for the provision and
maintenance of an insurance bond against larceny and embezzlement by officers
and employees of the Portfolio; and (v) generally manages, supervises and
conducts the affairs and business of the Portfolio. Subject to general
supervision by the Managers of the Portfolio, Highland manages the investment of
the assets of the Portfolio in accordance with the Portfolio's Prospectus and
Statement of Additional Information, and in compliance with the 1940 Act and the
rules, regulations and orders thereunder.
EXPENSES. Under each Advisory Agreement, Highland is required to carry out
its investment services and duties at its own expense. The Portfolio is required
to pay its own ordinary operating and activity expenses, such as legal and
auditing fees, fees of Highland, the administrator, the custodian, accounting
services and third-party shareholder servicing agents, the cost of communicating
with shareholders and registration fees, as well as other operating expenses
such as interest, taxes, brokerage, insurance, bonding, compensation of the
Independent Managers of the Portfolio and extraordinary expenses.
COMPENSATION. Under the terms of the Current Portfolio Advisory Agreement,
the Portfolio pays Highland a monthly fee computed and accrued daily, based on
an annual rate of 0.45% of the average daily net assets of the Portfolio for the
first one billion U.S. dollars (US$1,000,000,000), 0.40% of the average daily
net assets of the Portfolio for the next one billion U.S. dollars
(US$1,000,000,000) and 0.35% of the average daily net assets of the Portfolio
that exceed two billion U.S. dollars (US$2,000,000,000) (the "Current Fee"). For
11
the most recent fiscal year ended August 31, 2006, the Portfolio paid $5,840,185
in advisory fees to Highland. During the fiscal year ended August 31, 2006,
Highland voluntarily waived $152,715 or 0.011% of the average daily net assets
of the Portfolio in fees. Highland terminated this waiver as of June 12, 2006.
Under the terms of the New Portfolio Advisory Agreement, Highland would
receive from the Portfolio monthly advisory fees, computed and accrued daily, at
the annual rate of 0.65% of the average daily net assets of the Portfolio for
the first one billion U.S. dollars (US$1,000,000,000), 0.60% of the average
daily net assets of the Portfolio for the next one billion U.S. dollars
(US$1,000,000,000) and 0.55% of the average daily net assets of the Portfolio
that exceed two billion U.S. dollars (US$2,000,000,000) (the "Proposed Fee"). If
the New Portfolio Advisory Agreement is approved, the Voluntary Fee Waiver will
take effect. This arrangement may be modified or terminated by Highland at any
time. If the New Portfolio Advisory Agreement and Voluntary Fee Waiver had been
in effect for the most recent fiscal year ended August 31, 2006, the Portfolio
would have paid $8,513,309 in advisory fees to Highland and Highland would have
waived $452,218 under the Voluntary Fee Waiver. The New Portfolio Advisory
Agreement would have represented a gross increase of approximately 45.77% in
advisory fees and a net increase (after taking into account the Voluntary Fee
Waiver) of approximately 38.03% in advisory fees.
In order to illustrate the impact of the Portfolio's increased advisory fee
rate on the Fund's annual operating expenses, we have provided a pro forma Fund
fee table and expense example. The fee table and expense example are designed to
assist shareholders in evaluating the increased advisory fee rate. The expense
example that follows the fee table below is also intended to help you compare
the cost of investing in the Fund with the cost of investing in other mutual
funds. The table below compares the Fund's operating expenses (including the
management fee) for the fiscal year ended August 31, 2006 with the Current
Portfolio Advisory Agreement in place to the Fund's hypothetical operating
expenses for the same period if the New Portfolio Advisory Agreement had been in
place for the entire fiscal year. Although the Fund does not pay any direct
investment advisory fee, the Fund does bear, as a result of its investment in
the Portfolio, its allocable portion of the advisory fee charged to the
Portfolio.
WITH CURRENT FEE IN PLACE PRO FORMA WITH PROPOSED FEE IN
PLACE
CLASS A CLASS B(2) CLASS C CLASS Z CLASS A CLASS B(2) CLASS C CLASS Z
------- ---------- ------- ------- -------- ---------- ------- -------
SHAREHOLDER TRANSACTION EXPENSES(1)
Maximum Sales Load Imposed 3.50% None None None 3.50% None None None
(as a percentage of offering price)
Sales Load Imposed on Reinvested Dividends None None None None None None None None
Contingent Deferred Sales Charge 1.00%(4) 3.25%(3) 1.00%(3) None 1.00%(4) 3.25%(3) 1.00%(3) None
Exchange Fee None None None None None None None None
ANNUAL EXPENSES
(as a percentage of average daily net assets)
Management Fees(5), (6) 0.64% 0.64% 0.64% 0.64% 0.84% 0.84% 0.84% 0.84%
Distribution and Service Fees 0.35% 0.70% 0.85% 0.00% 0.35% 0.70% 0.85% 0.00%
Interest Payments and Commitment Fees on
Borrowed Funds 0.04% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04%
Other Expenses(5) 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19%
Total Annual Expenses(5) 1.22% 1.57% 1.72% 0.87% 1.42% 1.77% 1.92% 1.07%
(1) Financial advisors may independently charge additional fees for shareholder
transactions or for advisory services. Please see their materials for
details.
(2) Class B shares will automatically convert to Class A shares eight years
after purchase.
12
(3) The CDSC on Class B shares is 3.25% for shares submitted and accepted for
repurchase during the first year after each purchase, 3.00% during the
second year, 2.00% during the third year, 1.50% during the fourth year, and
1.00% during the fifth year. There is no CDSC on Class B shares thereafter.
The CDSC on Class C shares is 1.00% within the first year after each
purchase. There is no CDSC on Class C shares thereafter.
(4) Class A shares bought without an initial sales charge in accounts
aggregating $1 million or more are subject to a 1.00% CDSC if the shares
are sold within 18 months from each purchase. The 18-month period begins on
the day on which the purchase is made.
(5) Prior to June 12, 2006, Highland had voluntarily agreed to waive advisory
fees and reimburse the Fund for certain expenses (exclusive of distribution
and service fees, brokerage commissions, commitment fees, interest, taxes
and extraordinary expenses, if any) so that total annual expenses did not
exceed 0.80% of the average daily net assets of the Fund. As a result, the
total annual expenses for Class A, B, C and Z shares were limited to 1.21%,
1.56%, 1.71% and 0.86% of the Class' average daily net assets,
respectively. This arrangement was terminated as of June 12, 2006. Such
reimbursements lowered the particular class's overall expense ratio and
increased its overall return to investors.
If the New Portfolio Advisory Agreement is approved by shareholders,
Highland will voluntarily agree to waive advisory fees and reimburse the
Fund for certain expenses (exclusive of distribution and service fees,
brokerage commissions, commitment fees, interest, taxes and extraordinary
expenses, if any) so that total annual expenses will not exceed 1.00% of
the average daily net assets of the Fund. As a result, the total annual
expenses for Class A, B, C and Z shares would be 1.39%, 1.74%, 1.89% and
1.04% of the Class' average daily net assets, respectively.
(6) Highland also receives an administration fee of 0.20% of the average daily
net assets of the Portfolio.
EXPENSE EXAMPLE. This Example helps you compare the cost of investing in
the Fund to the cost of investing in other investment companies. The Example
assumes that (i) you invest $1,000 in the Fund, (ii) your investment has a 5%
return each year, (iii) operating expenses remain the same, and (iv) all income
dividends and capital gains distributions are reinvested in additional shares.
The Example should not be considered a representation of future expenses. Your
actual costs may be higher or lower.
CLASS* 1 YEAR 3 YEARS 5 YEARS 10 YEARS
CURRENT FEE
Class A 42 72 100 178
Class B: did not sell your shares 16 50 86 178
sold all your shares at the end of the period 48 70 96 178
Class C: did not sell your shares 17 54 93 203
sold all your shares at the end of the period 27 54 93 203
Class Z 9 28 48 107
PROPOSED FEE
Class A 49 78 110 199
Class B: did not sell your shares 18 56 96 199
13
sold all your shares at the end of the period 51 76 106 199
Class C: did not sell your shares 20 60 104 224
sold all your shares at the end of the period 30 60 104 224
Class Z 11 34 59 131
* Class B shares convert to Class A shares after the first eight years. The
10-year expense example for Class B shares reflects Class B share expenses
for the first eight years and Class A expenses for the last two years
thereafter.
The purpose of the above tables is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly.
LIABILITY OF THE ADVISER. Each Advisory Agreement provides that, in the
absence of willful misfeasance, bad faith or gross negligence in the performance
of its duties or the reckless disregard of its obligations or duties under the
agreement on the part of Highland, Highland will not be subject to liability to
the Portfolio or to any shareholder of the Portfolio for any error of judgment,
mistake of law or any loss suffered by the Portfolio in connection with the
matters to which the Advisory Agreement relates.
TERM AND TERMINATION OF THE AGREEMENTS. Each Advisory Agreement has an
initial term of two years and continues in effect with respect to the Portfolio
(unless terminated sooner) if approved at least annually by (i) a majority of
the Independent Managers, cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the vote of a majority of the outstanding
shares of the Fund and any other then existing feeder fund of the Portfolio, or
the Portfolio Board. Each Advisory Agreement generally provides that it may be
terminated at any time, without penalty, by the Board or the shareholders or by
Highland, in each case on not more than sixty (60) days' nor less than thirty
(30) days' written notice. Each Advisory Agreement will also terminate
automatically in the event of its "assignment" (as defined in the 1940 Act).
Each Advisory Agreement may be amended only by a written instrument and Board
approval and, under interpretations of the staff of the Securities and Exchange
Commission (the "SEC"), if such amendment would increase the fee structure or
otherwise fundamentally alter the relationship, upon approval by the
shareholders. If the New Portfolio Advisory Agreement is not approved by
shareholders, the Current Portfolio Advisory Agreement will continue in effect
as described above.
BOARD CONSIDERATIONS
To assist the Board with its consideration of the continuation of the
Current Portfolio Advisory Agreement and the submission to shareholders of the
New Portfolio Advisory Agreement, the Board requested, through Fund counsel and
the Board's independent legal counsel, and received from Highland, various
written materials, including: (1) information confirming the financial soundness
of Highland; (2) information on the advisory and compliance personnel of
Highland; (3) information on the internal compliance procedures of Highland; (4)
comparative information showing how the Portfolio's proposed advisory fee rate
schedule and anticipated operating expenses of the Fund compare to (i) other
registered closed-end and private funds, in particular investment companies and
funds that follow investment strategies similar to those of the Fund and
investment companies that are comparable in structure and asset size, and (ii)
other private and registered pooled investment vehicles or accounts managed by
Highland, as well as the performance of such vehicles and accounts (in absolute
and market terms); (5) information regarding brokerage and portfolio
transactions; and (6) information on any legal proceedings or regulatory audits
or investigations affecting Highland.
After receiving and reviewing these materials, the Board, at an in-person
meeting held on April 30, 2007, discussed the terms of the Advisory Agreements.
14
Representatives from Highland attended the meeting and presented additional oral
and written information to the Board to assist the Board in its considerations.
Highland provided general information regarding its historic operating costs
associated with the services it provides to the Portfolio. Highland also
discussed its current and expected profitability from its relationship with the
Portfolio under the Current Portfolio Advisory Agreement and also assuming the
New Portfolio Advisory Agreement was approved by the Board and Fund
shareholders, and the asset level which was necessary to financially support
Highland's operational infrastructure. Highland also discussed various
alternatives it would consider in the event that the New Portfolio Advisory
Agreement was not approved, including its assessment of the future viability of
its relationship with the Portfolio.
The Independent Managers/Trustees, assisted by their independent legal
counsel, met in executive session to discuss the terms of the Advisory
Agreements. The Independent Managers/Trustees reviewed various factors discussed
in independent counsel's legal memorandum, detailed information provided by
Highland and other relevant information and factors including the following:
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES TO BE PROVIDED BY HIGHLAND
The Independent Managers/Trustees considered the portfolio
management services provided by Highland and the activities related to
portfolio management, including use of technology, research
capabilities, and investment management staff. They discussed the
experience and qualifications of the personnel who provide advisory
services, including the background and experience of the members of
the portfolio management team. The Independent Managers/Trustees
reviewed the management structure, assets under management and
investment philosophies and processes of Highland. They also reviewed
and discussed Highland's compliance policies and procedures. The
Independent Managers/Trustees concluded that Highland had the quality
and depth of personnel and investment methods essential to performing
its duties under the Advisory Agreements and that the nature of such
advisory services is satisfactory.
HIGHLAND'S HISTORICAL PERFORMANCE IN MANAGING THE PORTFOLIO AND THE
FUND
The Independent Managers/Trustees reviewed Highland's historical
performance in managing the Portfolio and the Fund as provided by
Lipper. They noted that as a result of its investment in the
Portfolio, the Fund is consistently outperforming its benchmark, the
Credit Suisse Leveraged Loan Index, as well as both its peers (other
than ADV) that employ leverage and those that do not employ leverage.
During the 12 months ended March 31, 2007, the Fund's Class Z Shares
earned a return of 10.10%, which represents a 38.36% incremental
return or 280 basis points more than its benchmark. Additionally, of
its peer group, only ADV (which employs leverage) outperformed the
Fund during the 12 months ended March 31, 2007. Additionally, in the
Lipper's Annualized Rate of Return categories, all of the Fund's share
classes were ranked in the Top 9 for the 3-year, 5-year and Since
Inception time frames of the Total Return set.
THE INVESTMENT PERFORMANCE OF OTHER ACCOUNTS OR FUNDS MANAGED BY
HIGHLAND
The Independent Managers/Trustees reviewed the performance of
Highland for accounts or funds that are similar to the Portfolio
compared with other investment companies of similar investment
objectives and size. They reviewed the performance of ADV and noted
that it is consistently outperforming its benchmark, the Credit Suisse
Leveraged Loan Index, as well as both its peers that employ leverage
and those that do not employ leverage. During the 12 months ended
March 31, 2007, its Class Z Shares earned a return of 10.83%, which
represents a 48.36% incremental return or 353 basis points more than
its benchmark. Furthermore, when compared to its peer group, all of
15
ADV's share classes have been the top performing share classes of any
peer, in the categories 1-Year Total Return, and Total Return since
April 15, 2004, as well as the Annualized Total Rates of Return in
3-Year, 5-Year, since April 15, 2004, and Since Inception time frames.
The Independent Managers/Trustees were satisfied with Highland's
overall performance records.
They also reviewed the performance of a private separate account
and noted that it is consistently outperforming its benchmark, the
Credit Suisse Leveraged Loan Index. During the 12 months ended March
31, 2007, it earned a return of 8.05%, which represents a 10.27%
incremental return or 75 basis points more than its benchmark.
Furthermore, the private separate account outperformed its benchmark
in the categories Total Return since April 15, 2004, as well as the
Annualized Total Rates of Return in 3-Year, 5-Year, since April 15,
2004 and Since Inception time frames.
THE COSTS OF THE SERVICES TO BE PROVIDED BY HIGHLAND AND THE PROFITS
TO BE REALIZED BY HIGHLAND AND ITS AFFILIATES FROM THE RELATIONSHIP
WITH THE PORTFOLIO AND THE FUND
The Independent Managers/Trustees also gave substantial
consideration to the fees payable under the Advisory Agreements,
including: (1) the basis points to be paid to Highland; (2) the
anticipated expenses Highland would incur in providing advisory
services; and (3) a comparison of the fees payable to Highland under
the Advisory Agreements to fees paid to Highland by other funds and to
investment advisers serving other investment companies with similar
investment programs to that of the Portfolio. After such review, the
Independent Managers/Trustees determined that the anticipated
profitability rate to Highland with respect to the Advisory Agreements
was fair and reasonable.
THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE
PORTFOLIO GROWS AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF
SCALE FOR THE BENEFIT OF SHAREHOLDERS
The Independent Managers/Trustees considered the effective fees
under the Advisory Agreements, as a percentage of assets at different
asset levels, and possible economies of scale to Highland. They
considered the anticipated asset levels of the Portfolio, the
information provided by Highland relating to its estimated costs, and
information comparing the fee rate to be charged by Highland with fee
rates charged by other unaffiliated investment advisers to their
clients. They also considered Highland's willingness to put the
Voluntary Fee Waiver in place if shareholders approve the New
Portfolio Advisory Agreement. The Independent Managers/Trustees
concluded that the fee structures are reasonable and appropriately
would result in a sharing of economies of scale in view of the
information provided by Highland.
In determining whether to approve the continuation of the Current
Portfolio Advisory Agreement and to recommend the submission to
shareholders of the New Portfolio Advisory Agreement, the Independent
Managers/Trustees drew the following conclusions:
The Independent Managers/Trustees concluded that an increase in
the investment advisory fee rate would be in the best interests of
shareholders because it would enable Highland to remain committed to
the long-term management of the Portfolio at a more appropriate fee
level. The Independent Managers/Trustees determined that the current
fee rate and the increased advisory fee rate proposal are fair and
reasonable, in light of the resources that Highland has devoted to
managing the Portfolio during the period Highland has served as the
investment adviser to the Portfolio and in view of the fact that the
current advisory fee rate for the Portfolio is substantially below the
average advisory/management fee rate in the Portfolio's Lipper peer
16
groups. The Board also noted that the proposed advisory fee rate
increase would still be below the average of other funds with similar
investment programs to that of the Portfolio. They also noted the
Portfolio's excellent performance under Highland's management.
The Board noted that at its May 19, 2006 board meeting it had
approved an advisory agreement substantially identical to the New
Portfolio Advisory Agreement and that the Fund had held a shareholder
meeting but failed to obtain the requisite shareholder approval by a
very slim margin. The Board noted that only 55% of the shares entitled
to vote on the proposal had been represented at the meeting and,
therefore, a significant portion of the shareholders did not have an
opportunity to vote on the proposal. The Board also noted the ADV
shareholder approval of a similar advisory fee rate increase and
Highland's continued belief that a fee rate increase is appropriate
and necessary to maintain the high level of service it provides to the
Fund. The Board considered whether any of the factors that led to its
approval at the May 19, 2006 meeting had changed. In light of the
continued high level of service that Highland provides to the Fund,
the Board determined that the New Portfolio Advisory Agreement be
submitted for shareholder approval.
THE BOARD THEN VOTED TO RECOMMEND THE NEW PORTFOLIO ADVISORY AGREEMENT TO THE
FUND'S SHAREHOLDERS FOR THEIR APPROVAL. FOR THE REASONS DESCRIBED ABOVE, THE
BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF THE FUND VOTE TO APPROVE THE
NEW PORTFOLIO ADVISORY AGREEMENT.
INFORMATION REGARDING HIGHLAND
The adviser to the Portfolio is Highland Capital Management, L.P. Its
business address is 13455 Noel Road, Suite 800, Dallas, Texas 75240.
Highland provides portfolio management services to the Portfolio under an
investment advisory agreement with the Portfolio dated July 30, 2004. The
Current Portfolio Advisory Agreement was last approved by Fund shareholders on
July 30, 2004 after termination of the prior investment advisory agreement after
the prior investment adviser transferred investment management of the Fund to
Highland.
Highland is registered as an investment adviser under the Investment
Advisers Act of 1940. As of [_____] Highland had $[___] billion in assets under
management. Highland's principal office address is 13455 Noel Road, Suite 800,
Dallas, Texas 75240.
Highland's principal executive officers and general partners and their
principal occupations are shown below. The address of each such person is the
same as that of Highland.
NAME PRINCIPAL OCCUPATION
James Dondero........................ President and Managing Partner
Mark Okada........................... Chief Investment Officer
Todd Travers......................... Senior Portfolio Manager
Strand Advisors, Inc................. General Partner
Highland is controlled by Strand Advisors, Inc., which in turn is
controlled by James Dondero and Mark Okada through their direct and indirect
ownership or control of all of the voting securities of Strand Advisors, Inc.
The Portfolio did not pay commissions to any affiliated broker during the
fiscal year ended August 31, 2006.
OTHER FUNDS MANAGED. In addition to the management services provided by
Highland to the Fund, Highland also provides management services to other
investment companies. Information with respect to the assets of and management
fees payable to Highland by those funds having investment objectives similar to
those of the Fund is set forth below:
- -----------------------------------------------------------------------------------------------------------------
ANNUAL
NAME OF FUND TOTAL NET MANAGEMENT WAIVERS, REDUCTIONS
ASSETS AT FEE AS A OR AGREEMENTS TO
[____], 2007 % OF AVERAGE WAIVE OR REDUCE
(IN MILLIONS) DAILY NET ASSETS* MANAGEMENT FEE
- -----------------------------------------------------------------------------------------------------------------
Highland Floating
Rate Advantage Fund $[___] 0.65% for the first $1 billion Highland has voluntarily agreed to waive
(ADV) advisory fees so that ADV's ordinary
annual operating expenses (exclusive of
0.60% for the next $1 billion advisory fees, administration fees,
brokerage commissions, taxes,
distribution and service fees, leverage
0.55% over $2 billion. expenses and extraordinary expenses, if
any) will not exceed 0.15% of the average
daily net assets of the Fund.
- -----------------------------------------------------------------------------------------------------------------
* "Average daily managed assets" of ADV means the average daily value of
the total assets of ADV less all accrued liabilities of ADV (other than the
aggregate amount of any outstanding borrowings constituting financial leverage).
VOTE REQUIRED
Approval of the New Portfolio Advisory Agreement on behalf of the Fund
requires the affirmative vote of a "majority of the outstanding voting
securities" of the Fund, which is defined by the 1940 Act to mean the
affirmative vote of the lesser of (i) more than fifty percent (50%) of the
outstanding shares of the Fund on the Record Date or (ii) sixty-seven percent
(67%) or more of the shares of the Fund present at the Special Meeting if more
than fifty percent (50%) of the outstanding shares of the Fund on the Record
Date are represented at the Special Meeting in person or by proxy.
PROPOSAL 2:
-----------
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION
OVERVIEW
HOW WILL THE FUND BE REORGANIZED?
At meetings of the Fund Board held on December 8, 2006 and April 16, 2007,
the Fund Board considered the Reorganization. Based on factors described below,
the Fund Board approved, on behalf of the Fund, an Agreement and Plan of
Reorganization pursuant to which the Fund would be reorganized into the New
Fund, a newly formed Delaware statutory trust. The form of the Agreement is
attached to this Proxy Statement as Appendix B.
WHAT ARE SHAREHOLDERS BEING ASKED TO APPROVE?
Shareholders of the Fund are now being asked to approve the Agreement. If
shareholders of the Fund approve the Agreement, the Trustees and officers of the
17
Fund will implement the Agreement on behalf of the Fund at a date and time that
the Fund Board deems appropriate ("Closing Date"). No Closing Date has been set
forth in the Agreement, however, it is currently expected that the
Reorganization for the Fund will take place by the end of [_________]. This date
may be adjusted in accordance with the Agreement.
The Agreement contemplates:
o the transfer of all of the assets of the Fund to the New Fund in
exchange for shares of beneficial interest (referred to simply as
"shares") of the New Fund;
o the assumption by the New Fund of all of the liabilities of the Fund;
o the distribution to shareholders of each class of the Fund, in
exchange for his or her shares of the Fund, of the same number of full
and fractional shares of the corresponding class of the New Fund
having an aggregate net asset value equal to the aggregate net asset
value of the full and fractional shares of that class of the Fund held
by that shareholder at the close of business on the Closing Date; and
o the subsequent complete termination of the Fund.
For a more detailed discussion of the terms of the Agreement, please see
"SUMMARY OF THE AGREEMENT" below.
If approved, the Reorganization will have the following effects with
respect to the New Fund:
(1) The same Trustees of the Fund will serve as Trustees for the New Fund.
(2) The New Fund will continue to receive investment advisory services
indirectly under the then current investment advisory agreement
between the Portfolio and Highland.
(3) Distribution plan will be adopted in accordance with Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act") with
respect to the New Fund and its classes, which is substantially
identical to the existing plan.
(4) Shareholders will be deemed to have approved, to the extent necessary,
any actions required to terminate the Fund.
Shareholders of the Fund are not being asked to vote separately on these
matters. Voting "FOR" the proposal constitutes shareholder approval of the
actions described above. More information on each of these matters is discussed
under "COMPARISON OF THE NEW FUND AND THE FUND" below.
WHY IS THE FUND BOARD RECOMMENDING APPROVAL OF THE AGREEMENT?
The Fund Board has determined that investment companies formed as Delaware
statutory trusts have certain advantages over investment companies organized as
Massachusetts business trusts. As a result of these advantages, the Delaware
statutory trust organizational form has been increasingly used by funds,
including a number of the funds in the family of funds managed by Highland. In
unanimously approving the Agreement and recommending that shareholders of the
Fund also approve the Agreement, the Fund Board was provided with and evaluated
such information as it reasonably believed necessary to consider the proposed
Reorganization. The Fund Board determined that (1) the interests of the Fund's
shareholders would not be diluted as a result of the Reorganization and (2) the
18
Reorganization would be in the best interests of the Fund and its shareholders.
Key factors considered by the Fund Board include:
o In recent years, many mutual funds have reorganized as Delaware
statutory trusts. Highland informed the Fund Board that the Delaware
statutory trust form of organization provides more flexibility with
respect to the administration of the New Fund, which potentially could
lead to greater operating efficiencies and lower expenses for
shareholders of the New Fund; greater certainty regarding limiting the
liability of shareholders for the obligations of the trust or its
trustees; and greater flexibility in structuring shareholder voting
rights and shareholder meetings.
o Highland informed the Fund Board that the New Fund may be able to
realize greater operating efficiencies because the Reorganization
would permit the New Fund to operate under uniform, modern and
flexible governing documents that would streamline the governance
process and could reduce costs associated with Fund governance and
compliance monitoring.
o Highland informed the Fund Board that the Reorganization will not
result in any material change in the investment objectives or
principal investment strategies of the Fund.
o Highland informed the Fund Board that there was no anticipated
material effect on the Fund's annual operating expenses and
shareholder fees and services as a result of the Reorganization.
o Highland informed the Fund Board that there were no anticipated direct
or indirect federal income tax consequences of the Reorganization to
Fund shareholders.
WHAT EFFECT WILL THE REORGANIZATION HAVE ON THE FUND AND ITS SHAREHOLDERS?
The Reorganization will not result in any material change in the investment
objectives or principal investment strategies of the Fund. The investment
adviser, portfolio managers and other service providers will remain the same.
The services provided by those service providers will be the same as those
currently being provided to the Fund.
Immediately after the Reorganization, shareholders of the Fund will own
shares of the corresponding class of the New Fund that are equal in number and
in value to the shares of the Fund that were held by those shareholders
immediately prior to the closing of the Reorganization ("Closing"). For example,
if you currently own 100 Class A shares of the Fund, immediately after the
Closing, you would own 100 Class A shares of the New Fund having the same net
asset value as your original 100 shares of the Fund.
As a result of the Reorganization, shareholders of the Fund, which is a
Massachusetts business trust, will become shareholders of the New Fund, which
will be a Delaware statutory trust. For a comparison of certain attributes of
these entities that may affect shareholders of the Fund, please see "COMPARISON
OF THE NEW FUND AND THE FUND--HOW WILL THE NEW FUND BE ORGANIZED?" below.
WILL THERE BE ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?
No. The full value of your shares of the Fund will be exchanged for shares
of the same class of the New Fund without any sales load, commission or other
transactional fee being imposed.
19
WHAT WILL BE THE FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION?
As a condition to consummation of the Reorganization, the Fund will receive
an opinion from Kirkpatrick & Lockhart Preston Gates Ellis LLP to the effect
that neither the Fund nor its shareholders will recognize any gain or loss as a
result of the Reorganization. As a general matter. the holding period for, and
the aggregate tax basis in, the New Fund's shares a shareholder receives
pursuant to the Reorganization will include the holding period for, and will be
the same as the aggregate tax basis in, the Fund shares the shareholder holds
immediately prior to the Reorganization (provided the shareholder holds the
shares as capital assets on the Closing Date). Also, the New Fund's holding
period for, and tax basis in, each asset the Fund transfers to it will include
the Fund's holding period for, and be the same as the New Fund's tax basis in,
that asset immediately prior to the Reorganization. Please see "Summary of the
Agreement--What are the Federal Income Tax Consequences of the Proposed
Reorganization" below for further information.
WHO IS BEARING THE EXPENSES RELATED TO THE REORGANIZATION?
The Fund will bear the expenses associated with the Reorganization.
SUMMARY OF THE AGREEMENT
WHAT ARE THE MATERIAL TERMS AND CONDITIONS OF THE AGREEMENT?
The terms and conditions under which the Reorganization would be completed
are contained in the Agreement. The following summary of the Agreement is
qualified in its entirety by reference to the Agreement itself, the form of
which is attached to this Proxy Statement as Appendix B.
The Agreement provides that the New Fund will acquire all of the assets of
the Fund in exchange solely for shares of the New Fund and the New Fund's
assumption of the Fund's liabilities. The Agreement further provides that, as
promptly as practicable after the Closing Date, the Fund will distribute to its
shareholders, by class, the shares of the New Fund it receives in the
Reorganization.
The number of full and fractional shares of the New Fund you will receive
in the Reorganization will be equal in value, as calculated at the close of
business (4:00 p.m. Eastern Time) on the Closing Date, to the number of full and
fractional shares of the Fund you own on the Closing Date and will be of the
same class as the shares you own on the Closing Date. The New Fund will not
issue certificates representing the New Fund shares issued in connection with
such exchange.
After such distribution, the Fund will take all necessary steps under
applicable state law, its governing documents, and any other applicable law to
effect a complete termination or dissolution of the Fund.
The Agreement may be terminated, and the Reorganization may be abandoned,
at any time prior to its consummation, before or after approval by the Fund
shareholders, if circumstances should develop that, in the Fund Board's opinion,
make proceeding with the Reorganization inadvisable with respect to the Fund.
The completion of the Reorganization also is subject to various conditions,
including completion of all necessary filings with the SEC; the receipt of all
material consents, orders and permits of federal, state, and local regulatory
authorities necessary to consummate the Reorganization; delivery of a legal
opinion regarding the federal tax consequences of the Reorganization; and other
customary corporate and securities matters. Subject to the satisfaction of those
conditions, the Reorganization will take place immediately after the close of
business on the Closing Date. The Agreement provides that either the Fund or the
20
New Fund may waive compliance with any of the covenants or conditions made
therein for the benefit of the Fund or New Fund, as applicable, if such waiver
will not have a material adverse effect on the Fund's shareholders other than
the requirements that: (1) all necessary filings shall have been made and all
material consents, orders and permits shall have been obtained as contemplated
in the Agreement and (2) the Fund and the New Fund receive an opinion of counsel
that the transactions contemplated by the Agreement will constitute a tax-free
reorganization for federal income tax purposes.
WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION?
The Reorganization is intended to qualify for federal income tax purposes
as a tax-free reorganization under section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code").
As a condition to consummation of the Reorganization, the Fund and New Fund
will receive an opinion from Kirkpatrick & Lockhart Preston Gates Ellis LLP to
the effect that, based on the facts and assumptions stated therein as well as
certain representations of the Fund and New Fund and conditioned on the
Reorganization being completed in accordance with the Agreement, for federal
income tax purposes, with respect to the Reorganization and the Fund
participating therein:
(1) the Reorganization will qualify as a "reorganization" (as defined in
section 368(a)(1)(F) of the Code), and the Fund will be a "party to a
reorganization" (within the meaning of section 368(b) of the Code);
(2) the Fund will not recognize gain or loss on the Reorganization;
(3) the shareholders will not recognize any gain or loss on the exchange
of shares of the Fund for shares of the New Fund;
(4) the holding period for, and tax basis in, the shares of the New Fund a
shareholder receives pursuant to the Reorganization will include the
holding period for, and will be the same as the aggregate tax basis
in, the shares of the Fund the shareholder holds immediately prior to
the Reorganization (provided the shareholder holds the shares as
capital assets on the applicable Closing Date); and
(5) the New Fund's holding period for, and tax basis in, each asset the
Fund transfers to it will include the Fund's holding period for, and
will be the same as the New Fund's tax basis in, that asset
immediately prior to the Reorganization.
Notwithstanding clauses (2) and (5), such opinion may state that no opinion
is expressed as to the effect of the Reorganization on the Fund or the
shareholders with respect to any transferred asset as to which any unrealized
gain or loss is required to be recognized for federal income tax purposes on the
termination or transfer thereof under a mark-to-market system of accounting.
The foregoing description of the federal income tax consequences of the
Reorganization does not take into account the particular circumstances of any
shareholder. If the Reorganization fails to meet the requirements of section
368(a)(1)(F), a shareholder could realize a gain or loss on the transaction.
Shareholders are therefore urged to consult their tax advisers as to the
specific consequences to them of the Reorganization, including the applicability
and effect of state, local, foreign and other taxes.
21
COMPARISON OF THE NEW FUND AND THE FUND
HOW WILL THE NEW FUND BE ORGANIZED?
The Fund is currently organized as a Massachusetts business trust. If the
Reorganization is approved, the Fund will redomicile by merging into the New
Fund, a newly formed Delaware statutory trust governed by its own Declaration of
Trust and By-Laws. The operations of the Fund and New Fund are also governed by
applicable state and federal law.
WHAT WILL HAPPEN TO THE FUND'S CURRENT BOARD OF TRUSTEES?
The Trustees of the New Fund are expected to be the same as the Trustees of
the Fund. The approval of the Agreement will constitute shareholder approval of
the Fund's current Board of Trustees to the same positions with the New Fund.
HOW DOES THE NEW FUND COMPARE TO THE FUND'S CURRENT LEGAL STRUCTURE?
Under the Agreement and Declaration of Trust and By-Laws of the New Fund,
the Trustees of the New Fund will have more flexibility than Trustees of the
Fund and, subject to applicable requirements of the 1940 Act and Delaware law,
broader authority to act, as further described below. The increased flexibility
may allow the Trustees of the New Fund to react more quickly to changes in
competitive and regulatory conditions and, as a consequence, may allow the New
Fund to operate in a more efficient and economical manner and may reduce the
circumstances in which shareholder approval would be required.
Importantly, the Trustees of the New Fund will have the same fiduciary
obligations to act with due care and in the interest of the New Fund and its
shareholders as do the Trustees of the Fund with respect to the Fund and its
shareholders.
In addition, Delaware law may provide more certainty with regard to the
personal liability of Fund shareholders and Trustees of the Fund for the
obligations of the Fund. Under Massachusetts law, Fund shareholders and Trustees
of the Fund could, under certain circumstances, be held personally liable for
the obligations of the Fund. The governing instruments of the Fund, which is a
Massachusetts business trust, included language that limited the liability of
Fund shareholders and Trustees of the Fund but there are no express provisions
under Massachusetts law relating to the limitation of liability of shareholders
or trustees. Delaware law contains express language limiting the personal
liability of shareholders and trustees. In addition, consistent with Delaware
law, the governing instruments of the New Fund will include language that limits
the liability of New Fund shareholders and Trustees of the New Fund.
Certain other similarities and differences between these entities are
summarized at Appendix E, although this is not a complete comparison.
Shareholders should refer to the provisions of the governing documents directly
for a more thorough comparison. Copies of the governing documents are available
to shareholders without charge upon written request to 13455 Noel Road, Suite
800, Dallas, Texas 75240.
WHAT WILL HAPPEN TO THE MANAGEMENT OF THE FUND?
The approval of the Agreement will constitute shareholder approval of the
Portfolio's then current investment advisory agreement with Highland. This means
that if the Agreement is approved by shareholders and the Reorganization occurs,
the Portfolio, and the Fund indirectly, will continue to receive investment
advisory services under the then current investment advisory agreement with
Highland. In other words, if the New Portfolio Advisory Agreement in proposal 1
is approved, the Portfolio, and the New Fund indirectly, will continue to
22
receive investment advisory services under the New Portfolio Advisory Agreement.
If proposal 1 is not approved, the Portfolio, and the New Fund indirectly, will
continue to receive investment advisory services under the Current Portfolio
Advisory Agreement.
WILL THE ADVISORY RATES FOR THE NEW FUND BE DIFFERENT?
No. The investment advisory fee rate for the New Fund will be the same as
the then current investment advisory fee rate of the Fund. In other words, if
proposal 1 is approved, the New Fund would pay indirectly through its investment
in the Portfolio a monthly advisory fee at an annual rate of 0.65% of the
average daily net assets of the New Fund for the first $1 billion, 0.60% of the
average daily net assets of the New Fund for the next $1 billion, and 0.55% of
the average daily net assets of the New Fund over $2 billion. The Reorganization
also will not change the impact of the Voluntary Fee Waiver. If proposal 1 is
not approved, the New Fund would pay indirectly through its investment in the
Portfolio a monthly advisory fee at an annual rate of 0.45% of the average daily
net assets of the New Fund for the first $1 billion, 0.40% of the average daily
net assets of the New Fund for the next $1 billion, and 0.35% of the average
daily net assets of the New Fund over $2 billion.
WHAT WILL HAPPEN TO THE FUND'S CURRENT DISTRIBUTION PLAN?
The Fund currently has a distribution plan in accordance with Rule 12b-1
under the 1940 Act for its Class A, Class B and Class C shares. Approval of the
Agreement will constitute shareholder approval of the distribution plan for the
New Fund. The terms of the distribution plan for the New Fund will be
substantially identical to the current distribution plan for the Fund.
HOW WILL THE FUND'S INVESTMENT OBJECTIVE AND INVESTMENT STRATEGIES CHANGE?
If the Reorganization is approved, the New Fund's investment objective and
investment strategies will remain the same.
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS OF THE FUND VOTE "FOR"
APPROVAL OF THE AGREEMENT.
VOTE REQUIRED
Approval of the Agreement requires the affirmative vote of a "majority of
the outstanding voting securities" of the Fund, which is defined by the 1940 Act
to mean the affirmative vote of the lesser of (i) more than fifty percent (50%)
of the outstanding shares of the Fund on the Record Date or (ii) sixty-seven
percent (67%) or more of the shares of the Fund present at the Special Meeting
if more than fifty percent (50%) of the outstanding shares of the Fund on the
Record Date are represented at the Special Meeting in person or by proxy.
PROPOSAL 3:
-----------
APPROVAL OF THE FUND'S CONVERSION TO A SINGLE-FUND STRUCTURE AND THE
LIQUIDATION AND DISSOLUTION OF THE PORTFOLIO
HOW WOULD THE FUND CONVERT TO A SINGLE-FUND STRUCTURE?
The Fund currently operates in a master-feeder structure so that, instead
of directly investing in securities, the Fund is a "feeder fund" that invests
23
substantially all of its assets in the Portfolio, which is a "master fund" that
invests directly in securities. The Fund Board is recommending that shareholders
approve the conversion of the Fund to a single-fund structure without changing
the Fund's investment objective or investment restrictions.
If the Fund is converted to a single-fund structure, it will receive from
the Portfolio the Portfolio's entire portfolio of marketable securities and
other assets in exchange for the shares of the Portfolio that the Fund holds
("Conversion"). Thus, the Fund will no longer operate as a feeder fund investing
in a master fund. Instead, it will directly own the securities the Portfolio
formerly held and, in the future, will invest directly in securities rather than
in the Portfolio.
The Portfolio's board of managers ("Portfolio Board") intends to facilitate
that Conversion if it is approved by the Fund's shareholders. The Portfolio
Board recognizes that upon the Fund's Conversion there would be no feeder funds
invested in the Portfolio; therefore, the Portfolio Board has asked that if the
Fund receives a favorable shareholder vote on Conversion that it also vote in
favor of liquidating and dissolving the Portfolio. Accordingly, if the Fund
receives the requisite shareholder approval for the Conversion, it will deem all
votes for the Conversion to be instructions to vote for the dissolution of the
Portfolio (see "Required Vote"). Such dissolution and Conversion will be
implemented through a Plan of Conversion, Liquidation and Termination
("Conversion Plan") that dissolves the Portfolio and distributes the Portfolio's
assets in kind to the Fund. The Fund Board, at a meeting held on April 30, 2007,
considered, approved and recommended for shareholder approval the Conversion
Plan.
WHAT ARE THE SHAREHOLDERS BEING ASKED TO APPROVE?
Shareholders of the Fund are now being asked to approve the Conversion
Plan, which will convert the Fund to a single-fund structure and liquidate and
dissolve the Portfolio.
WHY IS THE BOARD RECOMMENDING APPROVAL TO CONVERT THE FUND TO A SINGLE-FUND
STRUCTURE AND TO LIQUIDATE AND DISSOLVE THE PORTFOLIO THROUGH THE CONVERSION
PLAN?
The Conversion is being proposed because the Board and Highland each
believe that eliminating the master-feeder structure and operating in a
single-fund structure would simplify the operations of the Fund and,
consequently, may result in some reduction in the Fund's operating expenses. For
example, separate audits of the Portfolio would no longer be necessary. Over
time, the Fund may benefit from the fewer required filings with the SEC and
other legal and administrative cost savings. Some of the cost savings may
benefit Highland due to its voluntary agreement with the Fund to limit the
Fund's total annual operating expenses.
The Fund was originally organized in a master-feeder structure because its
sponsors believed this form of organization would achieve certain efficiencies
of operation and economies of scale. The original master-feeder structure was
established with two feeder funds (including the Fund) investing in the
Portfolio with the expectation that additional feeder funds would be added in
the future. However, last year the other feeder fund investing in the Portfolio
dissolved and Highland has since indicated that it does not expect any
additional feeder funds to be added to the structure. Due to these events, the
Fund is currently, and would likely continue to be, the sole investor in the
Portfolio, and therefore the master-feeder structure will not be able to achieve
the desired efficiencies of operation and economies of scale. For these reasons
and under these circumstances, the Board has determined that it would be in the
best interests of the Fund and its shareholders to operate the Fund in the
single-fund structure.
24
The liquidation and dissolution of the Portfolio is being proposed because
the Portfolio Board has determined that, should the Feeder Fund convert to a
single-fund structure, the Portfolio's existence would no longer economically
viable.
WHAT EFFECT WILL IMPLEMENTATION OF THE CONVERSION PLAN HAVE ON SHAREHOLDERS?
Immediately after the Conversion, you will hold the same number of shares,
with the same dollar value, as you held immediately before the Conversion, and
the portfolio of marketable securities and other assets in which you're invested
through the Fund will be unchanged.
WHAT ARE THE TERMS OF THE CONVERSION PLAN?
The following summary does not purport to be complete and is subject in all
respects to the provisions of, and is qualified in its entirety by reference to,
the Conversion Plan, a copy of which is attached hereto as Appendix C.
Shareholders are urged to read the Conversion Plan in its entirety.
EFFECTIVE DATE OF THE CONVERSION PLAN, CONVERSION OF THE FUND TO A
SINGLE-FUND STRUCTURE AND CESSATION OF THE PORTFOLIO'S ACTIVITIES OF INVESTING
IN SECURITIES. The Conversion Plan will become effective only upon its adoption
and approval by the required vote of the holders of Fund shares (see "Required
Vote"). Following this event, (i) the Portfolio will cease its business of
investing in securities, (ii) the Portfolio's affairs will be wound up and (iii)
the Portfolio will dissolve in accordance with the Conversion Plan, including
filing a certificate of cancellation with the Delaware Secretary of State and
filing a Form N-8F to de-register the Portfolio under the 1940 Act. (Conversion
Plan, Article 2).
LIQUIDATION DISTRIBUTIONS. As soon as reasonably practicable after (1)
paying or adequately providing for the payment of the Portfolio's liabilities
and (2) receiving such releases, indemnities and refunding agreements as the
Portfolio's Board deems necessary for its protection, the Portfolio's remaining
assets will be distributed in kind to the Fund, as the sole member of the
Portfolio, in redemption and cancellation of the Fund's interest therein.
(Conversion Plan, Article 3).
AMENDMENT OF THE CONVERSION PLAN. The Portfolio's Board may authorize
variations from, or amendments of, the provisions of the Conversion Plan (other
than the terms of the liquidating distribution(s)) that it deems necessary or
appropriate to effect the distribution(s) and the Portfolio's liquidation and
dissolution. (Conversion Plan, Article 4).
The completion of the Conversion Plan is subject to various conditions,
including approval thereof by the shareholders of the Fund, completion of all
filings with, and receipt of all necessary approvals from, the SEC and other
customary corporate and securities matters.
WHAT WILL BE THE FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION?
For federal income tax purposes, the Portfolio is disregarded as an entity
separate from the Fund, its sole member, and the Fund is treated as if it holds
all of the Portfolio's assets directly. Accordingly, the liquidation and
25
dissolution of the Portfolio, and the distribution of its assets to the Fund,
will have no federal income tax consequences for the Fund or its shareholders.
HOW WILL THE FUND'S INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS CHANGE?
The investment objective, policies and restrictions under which the assets
of the Fund presently are managed will not be affected by the proposed
Conversion, except that rather than investing all of its net investable assets
in the Portfolio, the Fund will seek to achieve the same investment objective
directly by engaging Highland as its investment adviser to manage its assets.
Thus, the Fund's investment objective, policies and restrictions will not change
as a result of the Conversion and the dissolution of the Portfolio.
WHAT WILL HAPPEN TO THE MANAGEMENT OF THE FUND?
Highland currently manages the assets of the Fund indirectly, by virtue of
the fact that it manages the assets of the Portfolio in which the Fund invests.
Since the Fund currently invests its assets only through the Portfolio, it does
not engage Highland or any other investment adviser directly. Upon completion of
the Conversion Plan, the Fund will enter into an investment advisory agreement
with Highland, on terms and conditions substantially identical to the terms and
conditions of the current investment advisory agreement between Highland and the
Portfolio.
WILL THERE BE CHANGES TO THE ADVISORY FEE RATE FOR THE FUND?
The investment advisory fee rate for the Fund once it converts to a
single-fund structure will be the same as the then-current investment advisory
fee rate of the Portfolio. In other words, if proposal 1 is approved, the Fund
would pay Highland a monthly advisory fee at an annual rate of 0.65% of the
average daily net assets of the Fund for the first $1 billion, 0.60% of the
average daily net assets of the Fund for the next $1 billion, and 0.55% of the
average daily net assets of the Fund over $2 billion. The Conversion to a
single-fund structure will not change the impact of the Voluntary Fee Waiver. If
proposal 1 is not approved, but this proposal 3 is approved, then the Fund would
pay a monthly advisory fee to Highland at an annual rate of 0.45% of the average
daily net assets of the Fund for the first $1 billion, 0.40% of the average
daily net assets of the Fund for the next $1 billion, and 0.35% of the average
daily net assets of the Fund over $2 billion.
WILL THERE BE ANY CHANGES TO THE ADMINISTRATIVE SERVICES, DISTRIBUTION, TRANSFER
AGENT AND CUSTODIAN AGREEMENTS?
The current agreements with the Fund regarding administrative,
distribution, transfer agent and custodian services are not expected to change
due to the implementation of the Conversion Plan.
WILL THERE BE CHANGES TO THE PORTFOLIO TRANSACTIONS AND BROKERAGE POLICIES OF
THE FUND?
Highland will execute the portfolio transactions and allocate the brokerage
business of the Fund subject to the policies established by the Fund Board,
which are substantially identical to those in effect with respect to the
Portfolio immediately prior to the Conversion.
FOR THE REASONS DESCRIBED ABOVE, THE BOARD UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS OF THE FUND VOTE TO APPROVE THE CONVERSION PLAN.
26
VOTE REQUIRED
The Conversion of the Fund under the Conversion Plan may be deemed an
exchange of the Fund's assets which requires, in accordance with the terms of
the Fund's Declaration of Trust, the affirmative vote of a "majority of the
outstanding voting securities" of the Fund, which is defined by the 1940 Act to
mean the affirmative vote of the lesser of (i) more than 50% of the outstanding
shares of the Fund on the Record Date or (ii) 67% or more of the shares of the
Fund present at the Special Meeting if more than 50% of the outstanding shares
of the Fund on the Record Date are represented at the Special Meeting in person
or by proxy (a "1940 Act Majority").
The Portfolio Board, recognizing that upon the Fund's conversion there
would be no feeder funds invested in the Portfolio and the Portfolio would no
longer be economically viable, has asked that if the Fund receives a favorable
shareholder vote on Conversion that it also vote in favor of liquidating and
dissolving the Portfolio. Accordingly, if the Fund receives the affirmative vote
of a 1940 Act Majority of Fund shares on the Fund's Conversion, it will deem all
votes for the Conversion to be instructions to vote for the dissolution of the
Portfolio. Such dissolution and Conversion will be implemented through the
Conversion Plan, which dissolves the Portfolio and distributes the Portfolio's
assets in kind to the Fund.
The Fund, as a Portfolio member, will vote all of its shares in the
Portfolio for and against the dissolution of the Portfolio proportionately to
the instructions to vote for and against such matter received from the Fund's
shareholders. The proportion of the Fund's interest in the Portfolio equal to
the proportion of Fund shares that are not voted will be voted for and against
this matter in the same proportion as the shares for which it receives voting
instructions. The Portfolio's amended and restated limited liability agreement
("LLC Agreement") requires a majority vote of its members for dissolution.(1)
Thus, if the Fund receives the requisite 1940 Act Majority vote in favor of the
Conversion Plan, there will also be sufficient votes to dissolve the Portfolio.
OTHER BUSINESS
The Board knows of no business other than that specifically mentioned in
the Notice of Special Meeting of Shareholders that will be presented for
consideration at the Special Meeting. If other business should properly come
before the Special Meeting, the proxy holders will vote thereon in their
discretion.
GENERAL INFORMATION
BENEFICIAL OWNERS
Appendix D to this Proxy Statement lists the persons that, to the knowledge
of the Fund, owned beneficially 5% or more of the outstanding shares of any
class of the Fund as of the Record Date. The Trustees and officers of the Fund,
in the aggregate, owned less than one (1) per centum of the Fund's outstanding
shares as of the Record Date. R. Joseph Dougherty owned [____] shares as of
[____]. The Fund Board is aware of no arrangements, the operation of which at a
subsequent date may result in a change in control of the Fund.
- --------------------
(1) The LLC Agreement requires a majority vote of its members (i.e., feeder
funds invested in the Portfolio) provided the is recommended by at least three-
fourths of the total number of Portfolio Managers then in office and by at least
three-fourths of the total number of Continuing Managers (as defined in the LLC
Agreement). The requisite number of Managers and Managers made these
recommendations on April 30, 2007.
27
EXPENSES
The expenses incurred in connection with the solicitation of proxies for
the Special Meeting, including preparation, filing, printing, mailing,
solicitation, legal fees, out-of-pocket expenses and expenses of any proxy
solicitation firm will be paid by the Fund.
ADMINISTRATOR/SUB-ADMINISTRATOR
28
Highland provides administration services to the Fund under an
Administration Agreement for a monthly administration fee at the annual rate of
0.20% of the Fund's average daily managed assets. During the fiscal year ended
August 31, 2006, the Fund paid Highland 2,674,362 for services received under
the Administration Agreement. Under a separate Sub-Administration Services
Agreement, Highland has delegated certain administrative functions to PFPC Inc.
("PFPC"), 760 Moore Road, King of Prussia, Pennsylvania, 19406.
ACCOUNTING SERVICES AGENT
PFPC provides accounting services to the Fund pursuant to an Accounting
Services Agreement dated October 18, 2004.
DISTRIBUTOR
Fund shares are offered for sale through PFPC Distributors, Inc., 760 Moore
Road, King of Prussia, Pennsylvania 19406.
TRANSFER AGENT
PFPC is the agent of the Fund for the transfer of shares, disbursement of
dividends, and maintenance of shareholder accounting records.
CUSTODIAN
PFPC Trust Company, 8800 Tinicum Boulevard, Philadelphia, Pennsylvania
19153, is the custodian of the Fund. PFPC Trust Company, among other things,
attends to the collection of principal and income and payment for and collection
of proceeds of securities and other investments bought and sold.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm of the Fund is
PricewaterhouseCoopers LLP. Its business address is 2001 Ross Avenue, Suite
1800, Dallas, Texas 75201. Representatives of PricewaterhouseCoopers LLP are not
expected to be present at the Meeting but have been given the opportunity to
make a statement if they so desire and will be available should any matter arise
requiring their presence.
SHAREHOLDER PROPOSALS
The Fund is not required to hold annual meetings of shareholders and
currently does not intend to hold such meetings unless shareholder action is
required in accordance with the 1940 Act. A shareholder proposal, to be
considered for inclusion in the proxy statement at any subsequent meeting of
shareholders, must be submitted a reasonable time before the proxy statement for
such meeting is printed and mailed. No shareholder proposals have been submitted
and accordingly any shareholder wishing to make a proposal should do it
sufficiently in advance of any subsequent meeting of shareholders.
SHAREHOLDER COMMUNICATIONS
Shareholders may communicate with the Trustees as a group or individually.
Any such communications should be sent to the Fund Board or to an individual
Trustee in writing, care of the secretary of the Fund, at 13455 Noel Road, Suite
800, Dallas, Texas 75240. The secretary of the Fund may determine not to forward
29
any letter to the Fund Board or to a Trustee that does not relate to the
business of the Fund.
PROXY STATEMENT DELIVERY
"Householding" is the term used to describe the practice of delivering one
copy of a document to a household of shareholders instead of delivering one copy
of a document to each shareholder in the household. Shareholders of the Fund who
share a common address and who have not opted out of the householding process
should receive a single copy of this Proxy Statement together with one proxy
card for each account. If you received more than one copy of this Proxy
Statement, you may elect to household in the future; if you received a single
copy of this Proxy Statement, you may opt out of householding in the future; and
you may, in any event, obtain an additional copy of this Proxy Statement by
writing to the Fund at the following address: 13455 Noel Road, Suite 800,
Dallas, Texas 75240, or by calling the Fund at the following number: (877)
665-1287.
OFFICERS OF THE FUND AND HIGHLAND
The principal executive officers of the Fund are James D. Dondero,
President; Mark Okada, Executive Vice President; R. Joseph Dougherty, Senior
Vice President; M. Jason Blackburn, Secretary and Treasurer; and Michael S.
Minces, Chief Compliance Officer. Each officer's mailing address is c/o Highland
Capital Management, L.P., 13455 Noel Road, Suite 800, Dallas, Texas 75240. Mr.
Dondero is the President and Managing Partner of, and Mr. Okada is the Chief
Investment Officer of, Highland.
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY IS REQUESTED. A
PRE-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
M. Jason Blackburn,
Secretary and Treasurer
[_______], 2007
30
APPENDIX A
FORM OF NEW PORTFOLIO ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT made as of _________, 2007, by and between
Highland Capital Management, L.P., a Delaware limited partnership (the
"MANAGER"), and Highland Floating Rate Limited Liability Company, a Delaware
limited liability company (the "LLC").
WHEREAS, the LLC is engaged in business as a closed-end management
investment company and is registered as such under the Investment Company Act of
1940 (the "1940 Act"), and periodically offers to repurchase its shares in
conformity with the provisions of Rule 23c-3 under the 1940 Act, which funds are
generally referred to as "interval funds"; and
WHEREAS the Manager is engaged principally in the business of rendering
investment management services and is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended;
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the parties
hereto as follows:
SECTION 1. APPOINTMENT OF MANAGER.
The LLC hereby appoints the Manager to act as manager and investment
adviser to the LLC for the period and on the terms herein set forth. The Manager
accepts such appointment and agrees to render the services herein set forth, for
the compensation herein provided.
SECTION 2. DUTIES OF MANAGER.
The Manager, at its own expense, shall furnish the following services and
facilities to the LLC:
(a) INVESTMENT PROGRAM. The Manager shall (i) furnish continuously an
investment program for the LLC, (ii) determine (subject to the overall
supervision and review of the Board of Managers of the LLC (the "BOARD"))
what investments shall be purchased, held, sold or exchanged by the LLC and
what portion, if any, of the assets of the LLC shall be held uninvested,
and (iii) make changes in the investments of the LLC. The Manager also
shall manage, supervise and conduct the other affairs and business of the
LLC and matters incidental thereto, subject always to the control of the
Board, and to the provisions of the organizational documents of the LLC,
the Registration Statement of the LLC and its securities, including the
Prospectuses and Statements of Additional Information of the Highland
Floating Rate Fund and the Highland Institutional Floating Rate Income Fund
(collectively, the "FEEDER FUNDS"), and the 1940 Act, in each case as from
time to time amended and in effect. Subject to the foregoing, the Manager
shall have the authority to engage one or more sub-advisers in connection
with the management of the LLC, which sub-advisers may be affiliates of the
Manager.
(b) OFFICE SPACE AND FACILITIES. The Manager shall furnish the LLC
office space in the offices of the Manager, or in such other place or
places as may be agreed upon from time to time, and all necessary office
facilities, simple business equipment, supplies, utilities and telephone
service for managing the affairs and investments of the LLC.
A-1
(c) ADMINISTRATIVE SERVICES. The Manager shall supervise the business
and affairs of the LLC and shall provide such services and facilities as
may be required for the effective administration of the LLC as are not
provided by employees or other agents engaged by the LLC, provided that the
Manager shall not have any obligation to provide under this Agreement any
such services which are the subject of a separate agreement or arrangement
between the LLC and the Manager, or an affiliate of the Manager, or any
third-party administrator.
(d) FIDELITY BOND. The Manager shall arrange for providing and
maintaining a bond issued by a reputable insurance company authorized to do
business in the place where the bond is issued against larceny and
embezzlement covering each officer and employee of the LLC who may singly
or jointly with others have access to funds or securities of the LLC, with
direct or indirect authority to draw upon such funds or to direct generally
the disposition of such funds. The bond shall be in such reasonable amount
as a majority of the managers who are not "interested persons" of the LLC,
as defined in the 1940 Act, shall determine, with due consideration given
to the aggregate assets of the LLC to which any such officer or employee
may have access. The premium for the bond shall be payable by the LLC in
accordance with Section 3(m).
(e) PORTFOLIO TRANSACTIONS. The Manager shall place all orders for the
purchase and sale of portfolio securities for the account of the LLC with
brokers or dealers selected by the Manager, although the LLC will pay the
actual brokerage commissions on portfolio transactions in accordance with
SECTION 3(D).
In placing portfolio transactions for the LLC, it is recognized that the
Manager will give primary consideration to securing the most favorable price and
efficient execution. Consistent with this policy, the Manager may consider the
financial responsibility, research and investment information and other services
provided by brokers or dealers who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may be a
party. It is understood that neither the LLC nor the Manager has adopted a
formula for allocation of the LLC's investment transaction business. It is also
understood that it is desirable for the LLC that the Manager have access to
supplemental investment and market research and security and economic analysis
provided by brokers who may execute brokerage transactions at a higher cost to
the LLC than would otherwise result when allocating brokerage transactions to
other brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the Manager is authorized to place orders for the purchase
and sale of securities for the LLC with such brokers, subject to review by the
LLC's Board of Managers from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided by
such brokers may be useful or beneficial to the Manager in connection with its
services to other clients.
On occasions when the Manager deems the purchase or sale of a security to
be in the best interest of the LLC as well as other clients, the Manager, to the
extent permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be so sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Manager in
the manner it considers to be the most equitable and consistent with its
fiduciary obligations to the LLC and to such other clients.
SECTION 3. ALLOCATION OF EXPENSE.
Except for the services and facilities to be provided by the Manager as set
forth in SECTION 2 above, the LLC assumes and shall pay all expenses for all
other LLC operations and activities and shall reimburse the Manager for any such
expenses incurred by the Manager. Unless the Prospectuses or Statements of
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Additional Information of the Feeder Funds provide otherwise, the expenses to be
borne by the LLC shall include, without limitation:
(a) all expenses of organizing the LLC;
(b) the charges and expenses of (i) any registrar, stock transfer or
dividend disbursing agent, shareholder servicing agent, custodian or
depository appointed by the LLC for the safekeeping of its cash, portfolio
securities and other property, including the costs of servicing shareholder
investment accounts and bookkeeping, accounting and pricing services,
provided to the LLC (other than those utilized by the Manager in providing
the services described in SECTION 2), (ii) any agent engaged for the
purposes of conducting auctions with respect to the LLC's taxable auction
rate preferred stock, if any shall be issued, (iii) any institution serving
as trustee with respect to the LLC's Senior Extendible Notes, and (iv) fees
of any stock exchange or any rating agency responsible for rating
outstanding securities of the LLC;
(c) the charges and expenses of bookkeeping, accounting and auditors;
(d) brokerage commissions and other costs incurred in connection with
transactions in the portfolio securities of the LLC, including any portion
of such commissions attributable to brokerage and research services as
defined in Section 28(e) of the Securities Exchange Act of 1934;
(e) taxes, including issuance and transfer taxes, and registration,
filing or other fees payable by the LLC to federal, state or other
governmental agencies;
(f) expenses, including the cost of printing certificates, relating to
the issuance of shares of the LLC;
(g) expenses involved in registering and maintaining registrations of
the LLC and of its securities with the Securities and Exchange Commission
and various states and other jurisdictions, including reimbursement of
actual expenses incurred by the Manager or others in performing such
functions for the LLC, and including compensation of persons who are
employees of the Manager, in proportion to the relative time spent on such
matters;
(h) expenses of shareholders', unitholders' and managers' meetings,
including meetings of committees, and of preparing, printing and mailing
proxy statements, quarterly reports, semi-annual reports, annual reports
and other communications to existing shareholders;
(i) expenses of preparing and printing prospectuses and marketing
materials;
(j) compensation and expenses of the LLC's managers who are not
affiliated with the Manager;
(k) charges and expenses of legal counsel in connection with matters
relating to the LLC, including, without limitation, legal services rendered
in connection with the LLC's trust and financial structure and relations
with its shareholders, issuance of shares of the LLC and registration and
qualification of shares under federal, state and other laws;
(l) the cost and expense of maintaining the books and records of the
LLC, including general ledger accounting;
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(m) insurance premiums on fidelity, errors and omissions and other
coverages, including the expense of obtaining and maintaining a fidelity
bond as required by Section 17(g) of the 1940 Act which may also cover the
Manager;
(n) expenses incurred in obtaining and maintaining any surety bond or
similar coverage with respect to securities of the LLC;
(o) interest payable on the LLC's borrowings;
(p) such other non-recurring expenses of the LLC as may arise,
including expenses of actions, suits or proceedings to which the LLC is a
party and expenses resulting from the legal obligation which the LLC may
have to provide indemnity with respect thereto;
(q) expenses and fees reasonably incidental to any of the foregoing
specifically identified expenses; and
(r) all other expenses permitted by the Prospectuses and Statements of
Additional Information of the Feeder Funds as being paid by the LLC.
SECTION 4. INVESTMENT ADVISORY FEE.
In return for its investment advisory services, the LLC will pay the
Manager a monthly fee, computed and accrued daily, based on an annual rate of
0.65% of the Average Daily Net Assets of the LLC for the first one billion
dollars ($1,000,000,000), 0.60% of the Average Daily Net Assets of the LLC for
the next one billion dollars ($1,000,000,000), and 0.55% of the Average Daily
Net Assets of the LLC over two billion dollars ($2,000,000,000). The Manager may
waive a portion of its fees. If this Agreement becomes effective subsequent to
the first day of a month or shall terminate before the last day of a month,
compensation for such month shall be computed in a manner consistent with the
calculation of the fees payable on a monthly basis. Subject to the provisions of
SECTION 5 below, the accrued fees will be payable monthly as promptly as
possible after the end of each month during which this Agreement is in effect.
Operating expenses shall not include brokerage, interest, taxes, deferred
organization expenses and extraordinary expenses, if any.
SECTION 5. REIMBURSEMENTS.
The parties agree that they may negotiate from time to time for the Manager
to reimburse certain costs and expenses of the LLC. If such an agreement is in
effect, the determination of whether reimbursement for such costs and expenses
is due the LLC from the Manager will be made on an accrual basis once monthly,
and if it is so determined that such reimbursement is due, the accrued amount of
such reimbursement which is due shall serve as an offset to the investment
advisory fee payable monthly by the LLC to the Manager pursuant to SECTION 4
hereof, and the amount to be paid by the Manager to the LLC as soon as is
practicable at the end of a fiscal year of the LLC shall be equal to the
difference between the aggregate reimbursement due the LLC from the Manager for
that fiscal year and the aggregate offsets made by the LLC against the aggregate
investment advisory fees payable to the Manager pursuant to SECTION 4 hereof for
that fiscal year by virtue of such aggregate reimbursement. The foregoing
limitation on reimbursement of costs and expenses shall exclude interest, taxes,
brokers' charges and expenses, extraordinary costs and expenses (as determined
by the Board in its exercise of its business judgment), and, if payable by the
LLC, the costs and expenses incident to the public offering or private placement
of securities of the LLC, including debt securities.
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SECTION 6. RELATIONS WITH THE LLC.
Subject to and in accordance with the organizational documents of the
Manager and the LLC, as well as their policies and procedures and codes of
ethics, it is understood that managers, officers, agents and shareholders of the
LLC are or may be interested in the Manager (or any successor thereof) as
directors, officers or otherwise, that partners, officers and agents of the
Manager (or any successor thereof) are or may be interested in the LLC as
managers, officers, agents, shareholders or otherwise, and that the Manager (or
any such successor thereof) is or may be interested in the LLC as a shareholder
or otherwise.
SECTION 7. LIABILITY OF MANAGER.
The Manager shall not be liable to the LLC for any error of judgment or
mistake of law or for any loss suffered by the LLC in connection with the
matters to which this Agreement relates; provided, however, that no provision of
this Agreement shall be deemed to protect the Manager against any liability to
the LLC or its shareholders to which it might otherwise be subject by reason of
any willful misfeasance, bad faith or gross negligence in the performance of its
duties, or the reckless disregard of its obligations and duties under this
Agreement, nor shall any provision hereof be deemed to protect any manager or
officer of the LLC against any such liability to which he might otherwise be
subject by reason of any willful misfeasance, bad faith or gross negligence in
the performance of his duties or the reckless disregard of his obligations and
duties.
SECTION 8. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) DURATION. This Agreement shall become effective on the date first set
forth above, such date being the date on which this Agreement has been executed
following (1) the approval of the Board of Managers of the LLC, including
approval by a vote of a majority of the managers who are not "interested
persons" (as defined in the 1940 Act) of the Manager or the LLC, cast in person
at a meeting called for the purpose of voting on such approval and (2) the
approval by a "vote of a majority of the outstanding voting securities" of the
Feeder Funds, voting as a single class (as defined in the 1940 Act and the rules
thereunder). Unless terminated as herein provided, this Agreement shall remain
in full force and effect until the date which is two years after the effective
date of this Agreement. Subsequent to such initial period of effectiveness, this
Agreement shall continue in full force and effect, subject to SECTION 8(C), for
successive one-year periods so long as such continuance is approved at least
annually (a) by either the Board of Managers of the LLC or by vote of a majority
of the outstanding voting securities (as defined in the 1940 Act) of the Feeder
Funds, voting as a single class, and (b) in either event, by the vote of a
majority of the managers of the LLC who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such approval.
(b) AMENDMENT. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by vote of the holders of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Feeder Funds, voting as a single
class.
(c) TERMINATION. This Agreement may be terminated at any time, without
payment of any penalty, by vote of the Board or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Feeder Funds,
voting as a single class, or by the Manager, in each case on not more than sixty
(60) days' nor less than thirty (30) days' prior written notice to the other
party.
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(d) AUTOMATIC TERMINATION. This Agreement shall automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
SECTION 9. SERVICES NOT EXCLUSIVE.
The services of the Manager to the LLC hereunder are not to be deemed
exclusive, and the Manager shall be free to render similar services to others so
long as its services hereunder are not impaired thereby. In addition, the
parties may enter into agreements pursuant to which the Manager provides
administrative or other non-investment advisory services to the LLC, and may be
compensated for such other services.
SECTION 10. PRIOR AGREEMENTS SUPERSEDED.
This Agreement supersedes any prior agreement relating to the subject
matter hereof between the parties hereto.
SECTION 11. NOTICES.
Notices under this Agreement shall be in writing and shall be addressed,
and delivered or mailed postage prepaid, to the other party at such address as
such other party may designate from time to time for the receipt of such
notices. Until further notice to the other party, the address of each party to
this Agreement for this purpose shall be 13455 Noel Road, Suite 800, Dallas,
Texas 75240.
SECTION 12. GOVERNING LAW; COUNTERPARTS.
This Agreement shall be construed in accordance with the laws of the State
of Delaware, and the applicable provisions of the 1940 Act. To the extent that
applicable law of the State of Delaware, or any of the provisions herein,
conflict with applicable provisions of the 1940 Act, the latter shall control.
If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
SECTION 13. MISCELLANEOUS.
The Manager agrees to advise the LLC of any change of its membership (which
shall mean its general partner) within a reasonable time after such change. If
the Manager enters into a definitive agreement that would result in a change of
control (within the meaning of the 1940 Act) of the Manager, it agrees to give
the LLC the lesser of sixty days' notice and such notice as is reasonably
practicable before consummating the transaction.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above.
HIGHLAND CAPITAL MANAGEMENT, L.P.
By: STRAND ADVISORS, INC.,
its general partner
By:
--------------------------------
Name:
Title:
HIGHLAND FLOATING RATE
LIMITED LIABILITY COMPANY
By:
--------------------------------
Name:
Title:
A copy of the document establishing the LLC is filed with the Secretary of
State of the State of Delaware. This Agreement is executed by officers not as
individuals and is not binding upon any of the Managers, officers or
shareholders of the LLC individually but only upon assets of the LLC.
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APPENDIX B
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("AGREEMENT") is made as of
_________ __, 2007 between HIGHLAND FLOATING RATE FUND, a Delaware statutory
trust ("NEW FUND"), and HIGHLAND FLOATING RATE FUND, a Massachusetts business
trust ("OLD FUND"). Each of New Fund and Old Fund is sometimes referred to
herein as a "FUND."
Each Fund wishes to effect a reorganizations described in section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("CODE"), and
intends this Agreement to be, and adopts it as, a "plan of reorganization"
within the meaning of the regulations under the Code ("REGULATIONS"). The
reorganization will involve Old Fund's changing its identity, form, and place of
organization by (1) transferring all its assets to New Fund (which is being
established solely for the purpose of acquiring such assets and continuing Old
Fund's business) in exchange solely for voting shares of beneficial interest
("SHARES") in New Fund and New Fund's assumption of all Old Fund's liabilities,
(2) distributing those shares pro rata to Old Fund's shareholders in exchange
for their shares therein and in complete liquidation thereof, and (3)
terminating Old Fund (all the foregoing transactions involving Old Fund and New
Fund being referred to herein collectively as a "REORGANIZATION"), all on the
terms and conditions set forth herein.
Each Fund's Board of Trustees (each, a "BOARD"), in each case including a
majority of its members who are not "interested persons" (as that term is
defined in the Investment Company Act of 1940, as amended ("1940 ACT")) thereof,
(1) has duly adopted and approved this Agreement and the transactions
contemplated hereby and (2) has determined that participation in the
Reorganization is in the best interests of its Fund and that the interests of
the existing shareholders of its Fund will not be diluted as a result of the
Reorganization.
Old Fund offers four classes of voting shares of common stock, designated
Class A, Class B, Class C and Class Z shares ("CLASS A OLD FUND SHARES," "CLASS
B OLD FUND SHARES," "CLASS C OLD FUND SHARES" and "CLASS Z OLD FUND SHARES,"
respectively, and collectively, "Old Fund Shares"). New Fund will offer four
classes of voting shares of beneficial interest, also designated Class A, Class
B, Class C and Class Z shares ("CLASS A NEW FUND SHARES," "CLASS B NEW FUND
SHARES," "CLASS C NEW FUND SHARES" and "CLASS Z NEW FUND SHARES," respectively,
and collectively, "NEW FUND SHARES"). The rights, powers, privileges, and
obligations of each class of New Fund Shares will be identical to those of the
similarly designated class of Old Fund Shares.
In consideration of the mutual promises contained herein, the Funds agree
as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
1.1. Subject to the requisite approval of Old Fund's shareholders and the
terms and conditions set forth herein, Old Fund shall assign, sell, convey,
transfer, and deliver all of its assets described in paragraph 1.2 ("ASSETS") to
New Fund. In exchange therefor, New Fund shall:
(a) issue and deliver to Old Fund the number of full and fractional New
Fund Shares equal to the number of full and fractional Old Fund Shares then
outstanding (all references herein to "fractional" shares meaning fractions
rounded to the third decimal place), and
(b) assume all of Old Fund's liabilities described in paragraph 1.3
("LIABILITIES").
Such transactions shall take place at the Closing (as defined in paragraph 2.1).
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1.2 The Assets shall consist of all assets and property that Old Fund owns
at the EFFECTIVE TIME (as defined in paragraph 2.1). These assets and property
include all cash, cash equivalents, securities, commodities, futures interests,
receivables (including interest and dividends receivable), claims and rights of
action, rights to register shares under applicable securities laws, books and
records, and deferred and prepaid expenses shown as assets on Old Fund's books.
1.3 The Liabilities shall consist of all of Old Fund's liabilities, debts,
obligations, and duties of whatever kind or nature existing at the Effective
Time, whether absolute, accrued, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at that time, and
whether or not specifically referred to in this Agreement. Notwithstanding the
foregoing, Old Fund shall endeavor to discharge all its known liabilities,
debts, obligations, and duties before the Effective Time.
1.4 At or prior to the Closing, New Fund shall redeem the INITIAL SHARE (as
defined in paragraph 5.4) for $10.00 each. At the Effective Time (or as soon
thereafter as is reasonably practicable), Old Fund shall distribute the New Fund
Shares it receives pursuant to paragraph 1.1(a) to its shareholders of record
determined as of the Effective Time (each, a "SHAREHOLDER"), in proportion to
their Old Fund Shares then held of record and in exchange for their Old Fund
Shares, and shall completely liquidate. That distribution shall be accomplished
by NEW FUND'S transfer agent's opening accounts on New Fund's share transfer
books in the Shareholders' names and transferring those New Fund Shares thereto.
Pursuant to such transfer, each Shareholder's account shall be credited with the
number of full and fractional New Fund Shares equal to the number of full and
fractional Old Fund Shares that Shareholder holds at the Effective Time. All
issued and outstanding Old Fund Shares, including any represented by
certificates, shall simultaneously be canceled on Old Fund's share transfer
books. New Fund shall not issue certificates representing the New Fund Shares
issued in connection with the Reorganization.
1.5 As soon as reasonably practicable after distribution of the New Fund
Shares pursuant to paragraph 1.4, but in all events within six months after the
Effective Time, Old Fund shall be dissolved, liquidated, and terminated and any
further actions shall be taken in connection therewith as required by applicable
law.
1.6 Any reporting responsibility of Old Fund to a public authority,
including the responsibility for filing regulatory reports, tax returns, and
other documents with the Securities and Exchange Commission ("COMMISSION"), any
state securities commission, any federal, state, and local tax authorities, and
any other relevant regulatory authority, is and shall remain its responsibility
up to and including the date on which it is terminated.
1.7 Any transfer taxes payable on issuance of New Fund Shares in a name
other than that of the registered holder on Old Fund's share transfer books of
the Old Fund Shares actually or constructively exchanged therefor shall be paid
by the person to whom those New Fund Shares are to be issued, as a condition of
that transfer.
2. CLOSING AND EFFECTIVE TIME
2.1 The Reorganization, together with related acts necessary to consummate
the same ("CLOSING"), shall occur at the Funds' offices on [_____], 2007 or at
such other place and/or on such other date as to which the Funds may agree. All
acts taking place at the Closing shall be deemed to take place simultaneously
immediately after the close of business (i.e., 4:00 p.m., Eastern time) on the
date thereof ("EFFECTIVE TIME").
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2.2 Old Fund shall direct the custodian for its assets ("CUSTODIAN") to
deliver at the Closing a certificate of an authorized officer stating that (a)
the Assets have been delivered in proper form to New Fund within two business
days before or at the Effective Time and (b) all necessary taxes in connection
with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made. Each of Old Fund's portfolio securities represented by a certificate or
other written instrument shall be transferred and delivered by Old Fund as of
the Effective Time for New Fund's account duly endorsed in proper form for
transfer in such condition as to constitute good delivery thereof. The Custodian
shall deliver as of the Effective Time by book entry, in accordance with the
customary practices of the Custodian and any securities depository (as defined
in Rule 17f-4 under the 1940 Act) in which any Assets are deposited, the Assets
that are deposited with such depositories. The cash to be transferred by Old
Fund shall be delivered by wire transfer of federal funds at the Effective Time.
2.3 Old Fund shall direct its transfer agent to deliver at the Closing a
certificate of an authorized officer stating that Old Fund's share transfer
books contain the number of full and fractional outstanding Old Fund Shares each
Shareholder owned immediately before the Closing.
2.4 Old Fund shall deliver to New Fund at the Closing a certificate of an
authorized officer of Old Fund setting forth information (including adjusted
basis and holding period, by lot) concerning the Assets, including all portfolio
securities, on Old Fund's books immediately before the Effective Time.
2.5 Each Fund shall deliver to the other at the Closing a certificate
executed in its name by its President or a Vice President in form and substance
reasonably satisfactory to the recipient and dated the date of the Closing, to
the effect that the representations and warranties it made in this Agreement are
true and correct at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
3. REPRESENTATIONS AND WARRANTIES
3.1 Old Fund represents and warrants to New Fund as follows:
(a) Old Fund is a trust operating under a written instrument or
declaration of trust, the beneficial interest under which is divided
into transferable shares, organized under the laws of the Commonwealth
of Massachusetts (a "MASSACHUSETTS BUSINESS TRUST") that is duly
organized and validly existing under such laws and has the power to
own all its properties and assets and to carry on its business as
described in its current registration statement on Form N-2; and its
Agreement and Declaration of Trust, including all amendments thereto
("DECLARATION"), is on file with that commonwealth's Secretary of
State.
(b) Old Fund is duly registered as a non-diversified, closed-end
management investment company under the 1940 Act, and such
registration will be in full force and effect at the Effective Time
and no proceeding has been instituted to suspend such registration;
(c) At the Effective Time, Old Fund will have good and marketable title to
the Assets and full right, power, and authority to sell, assign,
transfer, and deliver the Assets hereunder free of any liens or other
encumbrances (except securities that are subject to "securities loans"
as referred to in section 851(b)(2) of the Code or that are restricted
to resale by their terms); and on delivery and payment for the Assets,
New Fund will acquire good and marketable title thereto;
(d) Old Fund is not engaged currently, and Old Fund's execution, delivery,
and performance of this Agreement will not result, in (1) a material
violation of the Declaration or Old Fund's By-Laws (collectively, "OLD
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FUND GOVERNING DOCUMENTS") or of any agreement, indenture, instrument,
contract, lease, or other undertaking to which Old Fund is a party or
by which it is bound or (2) the acceleration of any obligation, or the
imposition of any penalty, under any agreement, indenture, instrument,
contract, lease, judgment, or decree to which Old Fund is a party or
by which it is bound;
(e) All material contracts and other commitments of Old Fund (other than
this Agreement and certain investment contracts, including options,
futures, and forward contracts) will terminate, or provision for
discharge of any liabilities of Old Fund thereunder will be made, at
or before the Effective Time, without either Fund's incurring any
liability or penalty with respect thereto and without diminishing or
releasing any rights Old Fund may have had with respect to actions
taken or omitted or to be taken by any other party thereto before the
Closing;
(f) No litigation, administrative proceeding, action, or investigation of
or before any court, governmental body, or arbitrator is presently
pending or, to its knowledge, threatened against Old Fund with respect
to any of its properties or assets that, if adversely determined,
would materially and adversely affect its financial condition or the
conduct of its business; and Old Fund knows of no facts that might
form the basis for the institution of such proceedings and is not a
party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the
transactions herein contemplated, except as otherwise disclosed to New
Fund;
(g) Old Fund's Statement of Assets and Liabilities, Statements of
Operations and Changes in Net Assets, and Portfolio of Investments
(collectively, "Statements") at and for the year ended on August 31,
2006 ("2006 Statements"), have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm ("PWC"); the
2006 Statements and Old Fund's unaudited Statements at and for the
six-month period ended on February 28, 2007, present fairly, in all
material respects, Old Fund's financial condition as of the respective
dates thereof in accordance with generally accepted accounting
principles consistently applied ("GAAP"); and to Old Fund's
management's best knowledge and belief, there are and will be no known
contingent liabilities, debts, obligations, or duties of Old Fund
required to be reflected on a balance sheet (including the notes
thereto) in accordance with GAAP as of such respective dates that are
not disclosed therein;
(h) Since August 31, 2006, there has not been any material adverse change
in Old Fund's financial condition, assets, liabilities, or business,
other than changes occurring in the ordinary course of business, or
any incurrence by Old Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred; for purposes of this
subparagraph, a decline in net asset value per Old Fund Share due to
declines in market values of securities Old Fund holds, the discharge
of Old Fund liabilities, or the redemption of Old Fund Shares by its
shareholders shall not constitute a material adverse change;
(i) At the Effective Time, all federal and other tax returns, dividend
reporting forms, and other tax-related reports of Old Fund required by
law to have been filed by such date (including any extensions) shall
have been filed and are or will be correct in all material respects,
and all federal and other taxes shown as due or required to be shown
as due on such returns and reports shall have been paid or provision
shall have been made for the payment thereof, and to the best of Old
Fund's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
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(j) For each taxable year of its operation, Old Fund has met (or, for its
current taxable year, will meet) the requirements of Subchapter M of
Chapter 1 of the Code for qualification as a regulated investment
company ("RIC") and has been (or will be) eligible to and has computed
(or will compute) its federal income tax under section 852 of the
Code; from the time Old Fund's Board approved the transactions
contemplated by this Agreement ("APPROVAL TIME") through the Effective
Time, Old Fund has invested and will invest its assets in a manner
that ensures its compliance with the foregoing; and Old Fund has no
earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it;
(k) Old Fund incurred the Liabilities, which are associated with the
Assets, in the ordinary course of its business;
(l) Old Fund is not under the jurisdiction of a court in a "title 11 or
similar case" (as defined in section 368(a)(3)(A) of the Code);
(m) Not more than 25% of the value of Old Fund's total assets (excluding
cash, cash items, and U.S. government securities) is invested in the
stock and securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock and securities of five
or fewer issuers;
(n) Each of the PROXY STATEMENT (as defined in paragraph 4.5) (other than
written information New Fund provided for inclusion therein) and Old
Fund's registration statement under the 1933 Act and the 1940 Act did
not, on its effective date, and will not, at the Effective Time and at
the time of the SHAREHOLDERS MEETING (as defined in paragraph 4.1),
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, in light of the circumstances under which such
statements were made, not misleading;
(o) The New Fund Shares are not being acquired for the purpose of any
distribution thereof, other than in accordance with the terms hereof;
(p) The Old Fund's Declaration permits the Old Fund to vary its
shareholders' investment; and the Old Fund does not have a fixed pool
of assets, but rather is a managed portfolio of securities, and its
investment adviser, Highland Capital Management, L.P. ("ADVISER"),
will have the authority to buy and sell securities for it; and
(q) For all periods ending on or before May __, 2006, Highland Floating
Rate Limited Liability Company ("MASTER FUND") was treated as a
partnership for U.S. federal tax purposes, and for all subsequent
periods the Master Fund has been treated as an entity disregarded as
separate from its owner for U.S. federal tax purposes. The Master Fund
was organized as a limited liability company under the laws of the
State of Delaware and is duly organized and validly existing under
such laws. The Master Fund is duly registered as a non-diversified,
closed-end management investment company under the 1940 Act, and such
registration will be in full force and effect at the Effective Time
and no proceeding has been instituted to suspend such registration.
3.2 New Fund represents and warrants to Old Fund as follows:
(a) New Fund is a statutory trust that is duly organized, validly
existing, and in good standing under the laws of the State of Delaware
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and has the power to own all its properties and assets and carry on
its business as a non-diversified, closed-end management investment
company; and its Certificate of Trust has been duly filed in the
office of the Secretary of State thereof;
(b) Immediately after the Effective Time, New Fund will be duly registered
as a non-diversified, closed-end management investment company under
the 1940 Act;
(c) New Fund has not commenced operations and will not do so until after
the Closing;
(d) Before the Closing, there will be no (1) issued and outstanding New
Fund Shares, (2) options, warrants, or other rights to subscribe for
or purchase any New Fund Shares, (3) securities convertible into any
New Fund Shares, or (4) any other securities issued by New Fund,
except the Initial Shares;
(e) No consideration other than New Fund Shares (and New Fund's assumption
of the Liabilities) will be issued in exchange for the Assets in the
Reorganization;
(f) New Fund is not engaged currently, and New Fund's execution, delivery,
and performance of this Agreement will not result, in (1) a material
violation of New Fund's Agreement and Declaration of Trust or By-Laws
(collectively, "NEW FUND GOVERNING DOCUMENTS") or of any agreement,
indenture, instrument, contract, lease, or other undertaking to which
New Fund is a party or by which it is bound or (2) the acceleration of
any obligation, or the imposition of any penalty, under any agreement,
indenture, instrument, contract, lease, judgment, or decree to which
New Fund is a party or by which it is bound;
(g) No litigation, administrative proceeding, action, or investigation of
or before any court, governmental body, or arbitrator is presently
pending or, to its knowledge, threatened against New Fund with respect
to New Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect its financial
condition or the conduct of its business; and New Fund knows of no
facts that might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated, except as otherwise
disclosed to Old Fund;
(h) New Fund will meet the requirements of Subchapter M of Chapter 1 of
the Code for qualification as a RIC for its taxable year in which the
Reorganization occurs; and it intends to continue to meet all such
requirements for the next taxable year;
(i) There is no plan or intention for New Fund to be dissolved or merged
into another statutory or business trust or a corporation or any
"fund" thereof (as defined in section 851(g)(2) of the Code) following
the Reorganization;
(j) Assuming the truthfulness and correctness of Old Fund's representation
and warranty in paragraph 3.1(n), immediately after the
Reorganization, (1) not more than 25% of the value of New Fund's total
assets (excluding cash, cash items, and U.S. government securities)
will be invested in the stock and securities of any one issuer and (2)
not more than 50% of the value of such assets will be invested in the
stock and securities of five or fewer issuers;
(k) The New Fund Shares to be issued and delivered to Old Fund, for the
Shareholders' accounts, pursuant to the terms hereof, (1) will at the
Effective Time have been duly authorized and duly registered under the
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federal securities laws (and appropriate notices respecting them will
have been duly filed under applicable state securities laws) and (2)
when so issued and delivered, will be duly and validly issued and
outstanding New Fund Shares and will be fully paid and non-assessable
by New Fund;
(l) The Proxy Statement (only with respect to written information New Fund
provided for inclusion therein) will, on its effective date, at the
Effective Time, and at the time of the Shareholders Meeting, 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, in light of the circumstances under which such
statements were made, not misleading; and
(m) The New Fund's Agreement and Declaration of Trust permits the New Fund
to vary its shareholders' investment; and after it commences
operations the New Fund will not have a fixed pool of assets, but
rather will be a managed portfolio of securities, and its investment
adviser, the Adviser, will have the authority to buy and sell
securities for it.
3.3 Each Fund represents and warrants to the other as follows:
(a) No governmental consents, approvals, authorizations, or filings are
required under the 1933 Act, the Securities Exchange Act of 1934, as
amended ("1934 ACT"), the 1940 Act, or state securities laws for its
execution or performance of this Agreement, except for (1) the Old
Fund's amendment of its registration statement under the 1933 Act and
the 1940 Act and the amendment of its notification of registration
filed on Form N-8A under the 1940 Act to reflect the Reorganization
and any additional information necessary to comply with Rule 414 under
the 1933 Act and (2) such consents, approvals, authorizations, and
filings as have been made or received or as may be required subsequent
to the Effective Time;
(b) The fair market value of the New Fund Shares each Shareholder receives
will be approximately equal to the fair market value of its Old Fund
Shares it actually or constructively surrenders in exchange therefor;
(c) The Shareholders will pay their own expenses (such as fees of personal
investment or tax advisers for advice regarding the Reorganization),
if any, incurred in connection with the Reorganization;
(d) The fair market value of the Assets on a going concern basis will
equal or exceed the Liabilities to be assumed by New Fund and those to
which the Assets are subject;
(e) None of the compensation received by any Shareholder who is an
employee of or service provider to Old Fund will be separate
consideration for, or allocable to, any of the Old Fund Shares that
Shareholder held; none of the New Fund Shares any such Shareholder
receives will be separate consideration for, or allocable to, any
employment agreement, investment advisory agreement, or other service
agreement; and the compensation paid to any such Shareholder will be
for services actually rendered and will be commensurate with amounts
paid to third parties bargaining at arm's-length for similar services;
(f) Neither Fund will be reimbursed for any expenses incurred by it or on
its behalf in connection with the Reorganization unless those expenses
are solely and directly related to the Reorganization (determined in
accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1
C.B. 187) ("REORGANIZATION EXPENSES");
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(g) Immediately following consummation of the Reorganization, the
Shareholders will own all the New Fund Shares and will own such shares
solely by reason of their ownership of the Old Fund Shares immediately
before the Reorganization; and
(h) Immediately following consummation of the Reorganization, New Fund
will hold the same assets - except for assets used to pay the Funds'
expenses incurred in connection with the Reorganization - and be
subject to the same liabilities that Old Fund held or was subject to
immediately before the Reorganization, plus any liabilities for such
expenses; and such excepted assets, together with the amount of all
redemptions and distributions (other than regular, normal dividends)
Old Fund makes immediately preceding the Reorganization, will, in the
aggregate, constitute less than 1% of its net assets.
(i) The execution, delivery and performance of this Agreement by each Fund
and the consummation of the transactions contemplated hereby are
within such Fund's corporate powers, and do not and will not
materially violate any provision of such Fund's Governing Documents
or, to such Fund's knowledge, violate any obligation of such Fund
under the express terms of any court order that names the Fund and is
specifically directed to it or its property. This Agreement
constitutes a valid and binding agreement of each Fund.
4. COVENANTS
4.1 Old Fund covenants to call a meeting of Old Fund's shareholders to
consider and act on this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein ("SHAREHOLDERS
MEETING").
4.2 Old Fund covenants that the New Fund Shares to be delivered hereunder
are not being acquired for the purpose of making any distribution thereof, other
than in accordance with the terms hereof.
4.3 Old Fund covenants that it will assist New Fund in obtaining
information New Fund reasonably requests concerning the beneficial ownership of
Old Fund Shares.
4.4 Old Fund covenants that it will turn over its books and records
(including all books and records required to be maintained under the 1940 Act
and the rules and regulations thereunder) to New Fund at the Closing.
4.5 Each Fund covenants to cooperate in preparing, in compliance with
applicable federal securities laws, a proxy statement on Schedule 14A relating
to the Reorganization to be furnished in connection with Old Fund's Board's
solicitation of proxies for use at the Shareholders Meeting ("PROXY STATEMENT").
4.6 Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all assignments and other instruments, and will take or cause to be
taken further action, the other Fund deems necessary or desirable in order to
vest in, and confirm to, (a) New Fund, title to and possession of all the
Assets, and (b) Old Fund, title to and possession of the New Fund Shares to be
delivered hereunder, and otherwise to carry out the intent and purpose hereof.
4.7 New Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1934 Act, the 1940
Act, and state securities laws it deems appropriate to continue its operations
after the Effective Time.
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4.8 Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
5. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all its obligations to be performed hereunder at or before the
Closing, (b) all representations and warranties of the other Fund contained
herein being true and correct in all material respects as of the date hereof
and, except as they may be affected by the transactions contemplated hereby, as
of the Effective Time, with the same force and effect as if made at and as of
such time, and (c) the following further conditions that, at or before such
time:
5.1 All necessary filings shall have been made with the Commission and
state securities authorities, and no order or directive shall have been received
that any other or further action is required to permit the parties to carry out
the transactions contemplated hereby. The Commission shall not have issued an
unfavorable report with respect to the Reorganization under section 25(b) of the
1940 Act nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the Commission and state securities authorities) either
Fund deems necessary to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where failure
to obtain same would not involve a risk of a material adverse effect on either
Fund's assets or properties;
5.2 At the Effective Time, no action, suit, or other proceeding shall be
pending (or, to either Fund's knowledge, threatened to be commenced) before any
court, governmental agency, or arbitrator in which it is sought to enjoin the
performance of, restrain, prohibit, affect the enforceability of, or obtain
damages or other relief in connection with, the transactions contemplated
hereby;
5.3 The Funds shall have received an opinion of Kirkpatrick & Lockhart
Preston Gates Ellis LLP ("SPECIAL TAX COUNSEL") as to the federal income tax
consequences mentioned below ("TAX OPINION"). In rendering the Tax Opinion,
Special Tax Counsel may rely as to factual matters, exclusively and without
independent verification, on the representations and warranties made in this
Agreement, which Special Tax Counsel may treat as representations and warranties
made to it, and in separate letters addressed to it. The Tax Opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein and conditioned on consummation of the Reorganization in accordance with
this Agreement, for federal income tax purposes:
(a) New Fund's acquisition of the Assets in exchange solely for New Fund
Shares and its assumption of the Liabilities, followed by Old Fund's
distribution of those shares pro rata to the Shareholders actually or
constructively in exchange for their Old Fund Shares, will qualify as
a "reorganization" (as defined in section 368(a)(1)(F) of the Code),
and each Fund will be "a party to a reorganization" within the meaning
of section 368(b) of the Code;
(b) Old Fund will recognize no gain or loss on the transfer of the Assets
to New Fund in exchange solely for New Fund Shares and New Fund's
assumption of the Liabilities or on the subsequent distribution of
those shares to the Shareholders in exchange for their Old Fund
Shares;
(c) New Fund will recognize no gain or loss on its receipt of the Assets
in exchange solely for New Fund Shares and its assumption of the
Liabilities;
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(d) New Fund's basis in each Asset will be the same as Old Fund's basis
therein immediately before the Reorganization, and New Fund's holding
period for each Asset will include Old Fund's holding period therefor;
(e) A Shareholder will recognize no gain or loss on the exchange of all
its Old Fund Shares solely for New Fund Shares pursuant to the
Reorganization;
(f) A Shareholder's aggregate basis in the New Fund Shares it receives in
the Reorganization will be the same as the aggregate basis in its Old
Fund Shares it actually or constructively surrenders in exchange for
those New Fund Shares, and its holding period for those New Fund
Shares will include, in each instance, its holding period for those
Old Fund Shares, provided the Shareholder holds them as capital assets
at the Effective Time; and
(g) For purposes of section 381 of the Code, New Fund will be treated as
if there had been no Reorganization. Accordingly, the Reorganization
will not result in the termination of Old Fund's taxable year, Old
Fund's tax attributes enumerated in section 381(c) of the Code will be
taken into account by New Fund as if there had been no Reorganization,
and the part of Old Fund's taxable year before the Reorganization will
be included in New Fund's taxable year after the Reorganization.
Notwithstanding subparagraphs (b) and (d), the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Shareholder with respect to any Asset as to which any unrealized gain or loss is
required to be recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a mark-to-market
system of accounting;
5.4 Before the Closing, New Fund's Board shall have authorized the issuance
of, and New Fund shall have issued, one New Fund Share in each class ("INITIAL
SHARE") to the Adviser or an affiliate thereof in consideration of the payment
of $10.00 each to take whatever action it may be required to take as New Fund's
sole shareholder pursuant to paragraph 5.5;
5.5 New Fund shall have entered into, or adopted, as appropriate, an
investment advisory contract and other agreements and plans necessary for New
Fund's operation as a non-diversified, closed-end management investment company.
Each such contract and agreement shall have been approved by New Fund's Board
and, to the extent required by law (as interpreted by Commission staff
positions), by its trustees who are not "interested persons" (as defined in the
1940 Act) thereof and by the Adviser or its affiliate as New Fund's sole
shareholder; and
5.6 At any time before the Closing, either Fund may waive any of the
foregoing conditions (except those set forth in paragraphs 5.1, 5.3, 5.4, and
5.5) if, in the judgment of its Board, such waiver will not have a material
adverse effect on its Fund's shareholders' interests.
6. EXPENSES
Subject to complying with the representation contained in paragraph 3.3(f),
the Reorganization Expenses shall be borne by the Old Fund. The Reorganization
Expenses include costs associated with obtaining any necessary order of
exemption from the 1940 Act, preparation of the Post-Effective Amendment,
printing and distributing New Fund's prospectus and Old Fund's proxy materials,
soliciting proxies, legal fees, accounting fees, securities registration fees,
and expenses of holding shareholders meetings. Notwithstanding the foregoing,
expenses shall be paid by the party directly incurring them if and to the extent
that the payment thereof by another person would result in such party's
disqualification as a RIC or would prevent the Reorganization from qualifying as
a tax-free reorganization.
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7. ENTIRE AGREEMENT; NO SURVIVAL
Neither Fund has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
Funds. The representations, warranties, and covenants contained herein or in any
document delivered pursuant hereto or in connection herewith shall not survive
the Closing.
8. TERMINATION
This Agreement may be terminated, with respect to one or more
Reorganizations, at any time at or before the Closing:
8.1 By either Fund (a) in the event of the other Fund's material breach of
any representation, warranty, or covenant contained herein to be performed at or
before the Closing, (b) if a condition to its obligations has not been met and
it reasonably appears that such condition will not or cannot be met, (c) if a
governmental body issues an order, decree, or ruling having the effect of
permanently enjoining, restraining, or otherwise prohibiting consummation of the
Reorganization, or (d) if the Closing has not occurred on or before _______ __,
2007, or such other date as to which the Funds agree; or
8.2 By the Funds' mutual agreement.
In the event of termination under paragraphs 8.1(c) or 8.2, neither Fund (nor
its trustees, officers, or shareholders) shall have any liability to the other
Fund.
9. AMENDMENTS
The Funds may amend, modify, or supplement this Agreement at any time in
any manner they mutually agree on in writing, notwithstanding Old Fund's
shareholders' approval thereof; provided that, following such approval no such
amendment, modification, or supplement shall have a material adverse effect on
the Shareholders' interests.
10. SEVERABILITY
Any term or provision of this Agreement that is invalid or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms and provisions of this Agreement in any
other jurisdiction.
11. MISCELLANEOUS
11.1 This Agreement shall be construed and interpreted in accordance with
the internal laws of the State of Delaware; provided that, in the case of any
conflict between those laws and the federal securities laws, the latter shall
govern.
11.2 Nothing expressed or implied herein is intended or shall be construed
to confer on or give any person, firm, trust, or corporation other than each
Fund and its respective successors and assigns any rights or remedies under or
by reason of this Agreement.
11.3 Notice is hereby given that this instrument is executed and delivered
on behalf of each Fund's trustees solely in their capacities as trustees and not
individually. Each Fund's obligations under this instrument are not binding on
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or enforceable against any of its trustees, officers, or shareholders but are
only binding on and enforceable against the Fund's property. Each Fund, in
asserting any rights or claims under this Agreement, shall look only to the
other Fund's property in settlement of such rights or claims and not to the
property of any other series of the other Fund or to such trustees, officers, or
shareholders.
11.4 This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been executed by each Fund and delivered to
the other Fund. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed and
delivered by its duly authorized officer as of the day and year first written
above.
HIGHLAND FLOATING RATE FUND,
a Delaware statutory trust
By:
------------------------------------
Name:
Title:
HIGHLAND FLOATING RATE FUND,
a Massachusetts business trust
By:
------------------------------------
Name:
Title:
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APPENDIX C
FORM OF PLAN OF CONVERSION, LIQUIDATION AND TERMINATION
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
THIS PLAN OF CONVERSION, LIQUIDATION AND TERMINATION ("PLAN") is made by
Highland Floating Rate Limited Liability Company, a Delaware limited liability
company ("COMPANY") that is registered with the Securities and Exchange
Commission ("COMMISSION") as a closed-end, non-diversified management investment
company under the Investment Company Act of 1940, as amended ("1940 ACT").
RECITALS
A. The sole holder of the Company's outstanding limited liability company
interests ("SHARES") is Highland Floating Rate Fund, a Massachusetts business
trust ("FEEDER FUND") that is registered with the Commission as a closed-end,
non-diversified management investment company under the 1940 Act. The board of
trustees of the Feeder Fund has determined to solicit its shareholders for
approval to convert to a single-fund structure ("CONVERSION").
B. The Company's board of managers ("Board," and members thereof,
"MANAGERS"), including the Managers who are not "INTERESTED PERSONS" (as that
term is defined in the 1940 Act) of the Company, has unanimously determined to
facilitate the Conversion if it is approved by the Feeder Fund shareholders. The
Board, including the Managers who are not interested persons of the Company, has
unanimously determined that, should the Feeder Fund obtain from its shareholders
the requisite approval for the Conversion, the Company's dissolution and
liquidation would be in the best interests of the Company and of its members.
C. Article II and Section 15.6 of the Company's amended and restated
limited liability company agreement, entered into as of November 3, 1998 ("LLC
AGREEMENT"), require the affirmative vote or consent of a majority of the
outstanding Shares of the Company for, among other things, the Company's
dissolution or liquidation or sale or exchange of all or substantially all of
its assets ("REQUIRED VOTE"), provided that such action is recommended by at
least three-fourths of the total number of Managers then in office and by at
least three-fourths of the total number of Continuing Managers (as those terms
are defined in the LLC Agreement) then in office. The Board's determination
described in paragraph B above satisfies this requirement with respect to the
recommendation of the Managers and Continuing Managers.
D. If the Feeder Fund, as a Company member, is requested to vote on a
proposed change in a fundamental policy of the Company or any other matter
pertaining to the Company (other than continuation of the business of the
Company after withdrawal of another investor), the Feeder Fund will solicit
proxies from its shareholders and vote all of its Shares for and against such
matters proportionately to the instructions to vote for and against such matters
received from the Feeder Fund's shareholders.
E. The Board has determined to request the Feeder Fund to vote on the
dissolution and liquidation of the Company should the Conversion be approved. If
C-1
the Feeder Fund receives from its shareholders the requisite vote in favor of
the Conversion,(2) and if a simple majority of the Feeder Fund shareholders
participating in the Feeder Fund's proxy solicitation with respect to the
proposed dissolution and liquidation of the Company vote in favor of that
action, then the Feeder Fund will vote a majority of the outstanding Shares in
favor of that action, and the Required Vote will be received.
F. At the same time that the Feeder Fund solicits its shareholders for
approval of the Conversion and the dissolution and liquidation of the Company,
the Feeder Fund will also solicit its shareholders for approval of an agreement
and plan of reorganization, pursuant to which the Feeder Fund would be
reorganized into a newly formed Delaware statutory trust ("Reorganization"). If
all these actions are approved, the Reorganization will take place [immediately
following] the Conversion and the dissolution and liquidation of the Company.
However, none of these actions is contingent upon the approval of any other
action.
PROVISIONS
This Plan, as set forth below, shall be effective from and after the date
the Required Vote is received ("EFFECTIVE DATE").
ARTICLE 1. LIQUIDATION AND DISSOLUTION; MANAGERS' POWERS
(a) The Company is hereby liquidated and dissolved as of the Effective
Date, whereupon it shall cease its business of investing in securities and its
affairs shall be wound up as the Board authorizes and directs.
(b) The Board authorizes the appropriate parties to wind up the Company's
affairs. All powers of the Managers under the Company's certificate of formation
and the Company's LLC Agreement shall continue, including the powers to (1)
fulfill and/or discharge the Company's contracts, (2) collect the Company's
assets, (3) sell, convey, assign, exchange, transfer, and/or otherwise dispose
of all or any part of the Company's remaining property to one or more persons at
public or private sale for consideration that may consist in whole or in part of
cash, securities, or other property of any kind, (4) discharge and/or pay the
Company's liabilities, (5) prosecute, settle, and/or compromise claims of the
Company to which it is subject, (6) file final state and federal tax returns for
the Company, (7) mail notice to all known creditors and employees, if any, of
the Company, at their respective addresses shown on the Company's records, and
(8) do all other acts necessary or appropriate to wind up the Company's
business.
ARTICLE 2. FILINGS WITH GOVERNMENTAL AUTHORITIES
(a) The Board authorizes the appropriate parties to file for and obtain any
necessary tax clearance certificates and/or other documents required from the
State of Delaware and any other applicable governmental authority.
(b) The Board authorizes the appropriate parties to prepare and execute a
certificate of cancellation and to file same for record with the Delaware
Secretary of State.
- ------------------------------
2) Approval of the Conversion by Feeder Fund shareholders requires the
affirmative vote of a "majority of the outstanding voting securities" of the
Feeder Fund, which is defined by the 1940 Act to mean the affirmative vote of
the lesser of (i) more than 50% of the outstanding shares of the Feeder Fund on
the record date for the vote or (ii) 67% or more of the shares of the Feeder
Fund present at the special meeting called for the vote if more than 50% of the
outstanding shares of the Feeder Fund on the record date are represented at the
special meeting in person or by proxy.
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(c) The Board authorizes the appropriate parties to file any other
documents required by any other applicable governmental authority.
(d) As soon as practicable after distribution of the Company's assets
pursuant to paragraph (b) of Article 3, the Company shall prepare and file a
Form N-8F with the Commission to de-register the Company under the 1940 Act. The
Company also shall file with the Commission, if required, a final Form N-SAR.
ARTICLE 3. LIQUIDATION PROCEDURES
(a) The Board authorizes all actions to be taken such that the Company will
apply its assets to the payment of all its existing debts and obligations,
including necessary expenses of redeeming and canceling the Shares and its
liquidation and dissolution.
(b) As soon as reasonably practicable after (1) paying or adequately
providing for the payment of the Company's liabilities and (2) receiving such
releases, indemnities, and refunding agreements as the Board deems necessary for
its protection, the Board shall cause the Company's remaining assets to be
distributed in kind to the Feeder Fund, as sole holder of the Company's Shares,
in redemption and cancellation of such Shares.
ARTICLE 4. AMENDMENT OF THIS PLAN
The Board may authorize variations from, or amendments of, the provisions
of this Plan (other than the terms of the liquidating distribution(s)) that it
deems necessary or appropriate to effect the distribution(s) and the Company's
liquidation and dissolution.
ARTICLE 5. EXPENSES
The Company shall bear all the expenses incurred in connection with
carrying out this Plan, including the cost of liquidating its assets and its
dissolution, subject to any expense limitation arrangements in effect with its
investment adviser and administrator.
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APPENDIX D
BENEFICIAL OWNERS OF FUND SHARES
IN EXCESS OF FIVE PER CENTUM
As of the Record Date, to the knowledge of management of the Fund, no
person owned beneficially more than five (5) per centum of the outstanding
shares of any class of the Fund, except as set forth below:
Name and Address of Beneficial Amount and Nature of Percent of
Title of Class Owner Beneficial Ownership Class
- -------------- ------------------------------ -------------------- ----------
D-1
APPENDIX E
SUMMARY OF DIFFERENCES BETWEEN SHARES OF
THE FUND AND NEW FUND
The following is a discussion of only certain principal differences between
the governing documents of the Fund, a Massachusetts business trust, and the New
Fund, a Delaware statutory trust, and is not a complete description of either
Fund's governing documents. Shareholders should refer to the provisions of the
governing documents directly for a more thorough comparison. Copies of the
governing documents are available to shareholders without charge upon written
request to 13455 Noel Road, Suite 800, Dallas, Texas 75240.
ORGANIZATION AND CAPITAL STRUCTURE
The Fund is a Massachusetts business trust (an "MBT"). An MBT is an
unincorporated business association organized under a Massachusetts statute
governing business trusts (the "Massachusetts Statute"). The Fund's operations
are governed by its Agreement and Declaration of Trust (the "MA Declaration")
and its By-Laws (the "MA By-Laws"), both as they may have been amended from time
to time. The business and affairs of the Fund are managed under the supervision
of its Board of Trustees.
The shares of beneficial interest of the Fund have no par value. The MA
Declaration authorizes an unlimited number of shares, which may be divided into
separate and distinct classes.
The New Fund will be organized as a Delaware statutory trust (a "DST"). A
DST is an unincorporated association organized under the Delaware Statutory
Trust Act (the "Delaware Act"). Like an MBT, the New Fund's operations will be
governed by its Agreement and Declaration of Trust (the "DE Declaration") and
its By-Laws (its "DE By-Laws"). The business and affairs of the New Fund also
will be managed under the supervision of its Board of Trustees.
The shares of beneficial interest of the New Fund will be issued without
par value. The DE Declaration will authorize an unlimited number of shares,
which may be divided into separate and distinct classes. The New Fund's classes
will be identical to those of the Fund.
MEETINGS OF SHAREHOLDERS AND VOTING RIGHTS
Neither the MA Declaration nor the MA By-Laws require the Fund to hold an
annual shareholders' meeting. A meeting may be called by the Fund's Board of
Trustees or upon written request of shareholders entitled to cast at least 25%
of all outstanding shares of the Fund.
The MA Declaration provides that, except when a larger quorum is required
by applicable law, a majority of the outstanding shares entitled to vote shall
constitute a quorum at a shareholders' meeting. The MA Declaration provides that
shareholders are entitled to one vote for each whole share that they own, and a
proportionate fractional vote for each fractional share that they hold. When a
quorum is present at a meeting, a majority of the shares voted shall decide any
questions and a plurality of votes shall elect a trustee, except when a larger
vote is required by any provision of the Fund's governing documents or by
applicable law.
Neither the DE Declaration nor the DE By-Laws will require the New Fund to
hold an annual shareholders' meeting. A meeting may be called by the New Fund's
Board of Trustees, the president of the New Fund, the chairperson of the New
Fund or upon written request of shareholders entitled to cast at least 51% of
all outstanding shares of the New Fund. No meeting may be called at the request
E-1
of shareholders to consider any matter that is substantially the same as a
matter voted upon at a shareholders' meeting held during the preceding twelve
(12) months, unless requested by holders of a majority of all outstanding shares
entitled to vote at such meeting.
The DE Declaration provides that, except when a larger quorum is required
by applicable law, 30% of the outstanding shares entitled to vote shall
constitute a quorum at a shareholders' meeting. The DE Declaration provides that
shareholders are entitled to one vote for each whole share that they own, and a
proportionate fractional vote for each fractional share that they hold. When a
quorum is present at a meeting, a majority of the shares voted shall decide any
questions and a plurality of votes shall elect a trustee, except when a larger
vote is required by any provision of the Fund's governing documents or by
applicable law.
DIVIDENDS AND DISTRIBUTIONS
The MA Declaration provides that Fund shareholders are entitled to receive
distributions as determined by the Fund's Board of Trustees. The DE Declaration
provides that the New Fund shareholders will be entitled to receive dividends
and distributions when, if and as declared by the New Fund's Board of Trustees.
For both MBTs and DSTs, dividends and distributions may be paid in cash, kind or
in shares of the Funds, and the Boards may retain such amounts as they may deem
necessary or desirable for the conduct of each Fund's affairs.
ELECTION OF TRUSTEES
Under the MA Declaration and DE Declaration, there is no cumulative voting
for the election of trustees. The governing instruments for both Funds provide
that a plurality of the shares present and entitled to vote at a meeting will
elect trustees, provided a quorum is present.
LIMITATION OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OFFICERS
The Massachusetts Statute does not include an express provision relating to
the limitation of liability of the beneficial owners or the trustees of an MBT.
The MA Declaration provides all persons extending credit to, contracting with or
having any claim against the Fund shall look only to the assets of the Fund for
payment under such credit, contract or claim; and neither the shareholders nor
the trustees, nor any of the Fund's officers, employees or agents, whether past,
present or future, shall be personally liable therefor. In addition, the MA
Declaration provides that the Fund Trustees are not be responsible or liable for
any neglect or wrongdoing of any officer, agent, employee, manager or principal
underwriter of the Fund, nor shall any Trustees be responsible for the act or
omission of any other Trustee. A Fund Trustee is not protected against any
liability to which such Trustee would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee. The MA Declaration requires
that notice of such disclaimer of liability be given in each note, bond,
contract, instrument, certificate or undertaking executed or made on behalf of
the Fund
Consistent with the Delaware Act, the DE Declaration provides that
shareholder of the New Fund will not be subject in such capacity to any personal
liability whatsoever to any person in connection with property of the New Fund
or the acts, obligations or affairs of the New Fund. Shareholders of the New
Fund will have the same limitation of personal liability as is extended to
stockholders of a private corporation for profit incorporated under the Delaware
corporate law. The DE Declaration provides that no Trustee or officer of the New
Fund shall be subject in such capacity to any personal liability whatsoever to
any person, save only liability to the New Fund or its shareholders arising from
bad faith, willful misfeasance, gross negligence or reckless disregard for his
duty to such person; and, subject to the foregoing exception, all such persons
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shall look solely to the property of the New Fund for satisfaction of claims of
any nature arising in connection with the affairs of the New Fund. If any
shareholder, Trustee or officer of the New Fund, is made a party to any suit or
proceeding to enforce any such liability, subject to the foregoing exception, he
shall not, on account thereof, be held to any personal liability.
INDEMNIFICATION
The MA Declaration and DE Declaration provides for indemnification of any
shareholder against any loss and expense arising from personal liability solely
by reason of being or having been a shareholder and not because of his or her
acts or omissions or for some other reason.
The MA Declaration provides that the Fund shall indemnify each of its
Trustees and officers (hereinafter referred to as a "Covered Person") against
all liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees reasonably incurred by any Covered Person in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or otherwise or with which
such person may be or may have been threatened, while in office or thereafter,
by reason of being or having been such a Covered Person, except that no Covered
Person shall be indemnified against any liability to the Fund or its
shareholders (1) to which such Covered Person shall have been finally
adjudicated in any such action, suit or other proceeding not to have acted in
good faith in the reasonable belief that such Covered Person's action was in the
best interests of the Trust or (2) to which such Covered Person would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office.
The DE Declaration provides that the New Fund will indemnify each of its
Covered Persons against any liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and
reasonable counsel fees reasonably incurred by such Covered Person in connection
with the defense or disposition of any action, suit or other proceeding, whether
civil or criminal, before any court or administrative or investigative body in
which he may be or may have been involved as a party or otherwise or with which
he may be or may have been threatened, by reason of being or having been such a
Trustee or officer, except with respect to any matter as to which he shall not
have acted in good faith in the reasonable belief that his action was in the
best interest of the New Fund or, in the case of any criminal proceeding, as to
which he shall have had reasonable cause to believe that the conduct was
unlawful, provided, however, that no Covered Person shall be indemnified
hereunder against any liability to any person or any expense of such Covered
Person arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross
negligence, or (iv) reckless disregard of the duties involved in the conduct of
his position (the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"). The rights to
indemnification will continue as to a person who has ceased to be a Trustee or
officer of the New Fund and shall inure to the benefit of his or her heirs,
executors and personal and legal representatives.
PREEMPTIVE, DISSENTER'S AND OTHER RIGHTS
The MA Declaration provides that Fund shareholders shall have no preemptive
or other right to subscribe for any additional shares or other securities issued
by the Fund. The DE Declaration provides that no shareholder shall have any
preference, preemptive, appraisal, conversion or exchange rights except as
specified by the Board of Trustees.
E-3
AMENDMENTS TO DECLARATION OF TRUST
The MA Declaration may be amended by an instrument in writing signed by a
majority of the trustees when authorized by the majority of outstanding shares
except that amendments to certain provisions call for authorization by 75% of
the outstanding share unless the amendment has been approved by 75% of the
trustees then a majority of outstanding shares is sufficient to approve the
amendment. The Board of Trustees may amend the MA Declaration, without the need
for a shareholder vote, to authorize additional series or classes of shares or
for the purpose of changing the name of the Fund, supplying any omission, curing
any ambiguity or curing, correcting or supplementing any defective or
inconsistent provision in the MA Declaration.
The DE Declaration may be amended by a majority of the Trustees and, if
legally required, by approval of the amendment by shareholders.
INSPECTION RIGHTS
The MA Declaration and MA By-Laws have no provisions regarding inspection
rights. The DE Declaration provides that shareholders may inspect records to the
same extent as is permitted under Delaware corporate law.
TERMINATION AND DISSOLUTION
The MA Declaration provides that the Fund may be terminated at any time (1)
by the vote of shareholders holding at least 75% of the shares entitled to vote
unless the termination has been approved by 75% of the trustees then a majority
of outstanding shares is sufficient to approve the termination or (2) by the
Trustees by written notice to the shareholders if the termination has been
approved by 75% of the trustees. The DE Declaration provides that the New Fund
may be dissolved by vote of 80% of the Trustees.
DERIVATIVE ACTIONS
The MA Declaration provides that no shareholder shall bring or maintain any
action, proceeding or claim derivatively or as a class action on behalf of the
Fund or the shareholders unless approved by the Trustees and, to the same extent
required as to stockholders of a Massachusetts business corporation, by the
shareholders. A Trustee who is not an "interested person" of the Fund, as
defined in the 1940 Act, shall not be disqualified from acting on such matter by
reason of such Trustee's service as a director or trustee of one or more other
registered investment companies having the same investment adviser or
distributor.
Under the Delaware Act, a shareholder may bring a derivative action if
trustees with authority to do so have refused to bring the action or if a demand
upon the trustees to bring the action is not likely to succeed. A shareholder
may bring a derivative action only if the shareholder is a shareholder at the
time the action is brought and (1) was a shareholder at the time of the
transaction complained about, or (2) acquired the status of shareholder by
operation of law or an Acquiring Trust's governing instrument from a person who
was a shareholder at the time of the transaction.
A shareholder's right to bring a derivative action may also be subject to
additional standards and restrictions set forth in the New Fund's governing
instrument. The DE Declaration provides that a shareholder may bring a
derivative action on behalf of the New Fund only if the shareholder first makes
a pre-suit demand upon its Board of Trustees to bring the action, unless the
pre-suit demand is excused. A pre-suit demand shall only be excused if a
majority of the Board of Trustees, or a majority of any committee established to
E-4
consider the merits of the action, has a material personal financial interest in
the action at issue. A trustee shall not be deemed to have a material personal
financial interest in an action by virtue of receiving payment for serving on
the Board of Trustees of the New Fund or of one or more other investment
companies with the same or an affiliated investment adviser or underwriter.
E-5
FORM OF PROXY CARD
IMPORTANT
********************************
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE STRONGLY
URGE YOU TO REVIEW, COMPLETE AND RETURN YOUR BALLOT AS SOON AS POSSIBLE. YOUR
VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE SIGN AND
DATE BEFORE MAILING.
This proxy card is SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES of Highland
Floating Rate Fund for the special meeting of shareholders to be held at [_]:00
a.m. Central Time, on [_______], 2007 at the offices of Highland Capital
Management, L.P., 13455 Noel Road, Suite 800, Dallas, Texas 75240 (the "Special
Meeting").
The signers of this proxy card hereby appoint Mark Okada and M. Jason Blackburn
as proxies, each with the power to appoint his substitute and to vote the shares
held by the undersigned at the Special Meeting, and at any adjournment thereof,
in the manner directed with respect to the matter referred to in the Proxy
Statement for the Special Meeting, receipt of which is hereby acknowledged.
The Board of Trustees unanimously recommends a vote "FOR" the matter.
HIGHLAND FLOATING RATE FUND
Please be sure to sign and date this Proxy.
__________________________
Date
__________________________
Signature
__________________________
Signature (if held jointly)
[ ] CHECK HERE IF YOU PLAN TO ATTEND THE MEETING (___ PERSON(S) WILL ATTEND.)
THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY
WILL BE VOTED "FOR" THE MATTER.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE FOLLOWING MATTER.
Please indicate your vote by marking the appropriate box. Example: [X]
1. To approve a new investment advisory agreement between the Highland Floating
Rate Limited Liability Company and Highland Capital Management, L.P.
For Against Abstain
[ ] [ ] [ ]
2. To approve an Agreement and Plan of Reorganization, pursuant to which
Highland Floating Rate Fund would be reorganized into a newly formed Delaware
statutory trust, also named Highland Floating Rate Fund.
For Against Abstain
[ ] [ ] [ ]
3. To approve the Fund's conversion to a single-fund structure and the
liquidation and dissolution of Highland Floating Rate Limited Liability Company.
For Against Abstain
[ ] [ ] [ ]
MARK BOX FOR ADDRESS CHANGE AND NOTE NEW ADDRESS BELOW [ ]
PLEASE VOTE, SIGN AND DATE THIS PROXY CARD AND RETURN IT IN THE ENCLOSED
ENVELOPE.
NOTE: This proxy card must be signed exactly as your name(s) appear(s) hereon.
If you sign as an attorney, executor, guardian or in some representative
capacity as an officer of a corporation, please add titles as such. A proxy with
respect to shares held in the name of two or more persons shall be valid if
executed by one of them unless at or prior to exercise of such proxy Highland
Floating Rate Fund receives specific written notice to the contrary from any one
of them.