UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-08953
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HIGHLAND FLOATING RATE FUND
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(Exact name of registrant as specified in charter)
13455 Noel Road, Suite 1300
DALLAS, TEXAS 75240
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(Address of principal executive offices) (Zip code)
James D. Dondero
Highland Capital Management, L.P.
13455 Noel Road, Suite 1300
DALLAS, TEXAS 75240
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(Name and address of agent for service)
registrant's telephone number, including area code: (877) 532-2834
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Date of fiscal year end: AUGUST 31
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Date of reporting period: FEBRUARY 28, 2005
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
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HIGHLAND FLOATING RATE FUND
TABLE OF CONTENTS
Fund Profile ............................................................. 1
Financial Statements ..................................................... 2
Investment Portfolio .................................................. 3
Portfolio Statement of Assets and Liabilities.......................... 11
Portfolio Statement of Operations ..................................... 12
Portfolio Statements of Changes in Net Assets.......................... 13
Portfolio Statement of Cash Flows ..................................... 14
Portfolio Financial Highlights ........................................ 15
Fund Statement of Assets and Liabilities .............................. 16
Fund Statement of Operations .......................................... 17
Fund Statements of Changes in Net Assets .............................. 18
Fund Financial Highlights ............................................. 20
Notes to Financial Statements ......................................... 24
Important Information About This Report .................................. 31
Economic and market conditions change frequently. There is no assurance that the
trends described in this report will continue or commence.
A prospectus must precede or accompany this report. Please read the
prospectus carefully before you invest.
FUND PROFILE
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HIGHLAND FLOATING RATE FUND
OBJECTIVE
The Fund invests all of its
investable assets in Highland
Floating Rate Limited Liability
Company (the "Portfolio"). The
Portfolio seeks a high level of
current income, consistent with
preservation of capital.
TOTAL NET ASSETS
(AS OF 02/28/05)
$922.0 million
The information below gives you a snapshot of your Fund at the end of the
reporting period. Your Fund is actively managed and the composition of its
portfolio will change over time.
QUALITY BREAKDOWN AS OF 02/28/05 (%)
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Ba 23.9
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B 53.7
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Caa 4.9
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NR 17.1
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Other 0.4
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TOP 5 SECTORS AS OF 02/28/05 (%)
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Cable & Satellite Television 10.5
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Health Care 7.8
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Chemicals/Plastics 5.8
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Utilities 5.4
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Telecommunications/Wireless 5.3
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TOP 10 HOLDINGS AS OF 02/28/05 (%)
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General Growth Properties, Inc., Tranche B Term Loan 2.1
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Cricket Communications, Inc., Term Loan B 1.5
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Century Cable Holdings LLC, Term Loan 1.5
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Charter Communications Operating LLC, Tranche B Term Loan 1.4
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Hilton Head Communications LP, Revolver 1.4
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LNR Property Corp., Tranche B Term Loan 1.3
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OpBiz LLC, Term Loan A 1.2
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UPC Financing Partnership, Term Loan C2 1.2
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Qwest Corp., Term Loan B 1.1
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Acterna Corp., Term Loan 1.0
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Quality is calculated as a percentage of total investments. Sectors and holdings
are calculated as a percentage of net assets.
1
FINANCIAL STATEMENTS
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FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND
A GUIDE TO UNDERSTANDING YOUR FUND'S
FINANCIAL STATEMENTS
INVESTMENT PORTFOLIO The Investment Portfolio details all of
the Fund's holdings and their market value
as of the last day of the reporting
period. Portfolio holdings are organized
by type of asset and industry to
demonstrate areas of concentration and
diversification.
STATEMENT OF ASSETS AND LIABILITIES This statement details the Fund's assets,
liabilities, net assets and share price
for each share class as of the last day of
the reporting period. Net assets are
calculated by subtracting all the Fund's
liabilities (including any unpaid
expenses) from the total of the Fund's
investment and non-investment assets. The
share price for each class is calculated
by dividing net assets for that class by
the number of shares outstanding in that
class as of the last day of the reporting
period.
STATEMENT OF OPERATIONS This statement details income earned by
the Fund and the expenses accrued by the
Fund during the reporting period. The
Statement of Operations also shows any net
gain or loss the Fund realized on the
sales of its holdings during the period,
as well as any unrealized gains or losses
recognized over the period. The total of
these results represents the Fund's net
increase or decrease in net assets from
operations.
STATEMENT OF CHANGES IN NET ASSETS This statement demonstrates how the Fund's
net assets were affected by its operating
results, distributions to shareholders and
shareholder transactions (e.g.,
subscriptions, redemptions and dividend
reinvestments) during the reporting
period. The Statement of Changes in Net
Assets also details changes in the number
of shares outstanding.
STATEMENT OF CASH FLOWS The Statement of Cash Flows reports net
cash provided or used by operating,
investing and financing activities and the
net effect of those flows on cash and cash
equivalents during the period.
NOTES TO FINANCIAL STATEMENTS These notes disclose the organizational
background of the Fund, its significant
accounting policies (including those
surrounding security valuation, income
recognition and distributions to
shareholders), federal tax information,
fees and compensation paid to affiliates
and significant risks and contingencies.
FINANCIAL HIGHLIGHTS The Financial Highlights demonstrate how
the Fund's net asset value per share was
affected by the fund's operating results.
The Financial Highlights table also
discloses the classes' performance and
certain key ratios (e.g., class expenses
and net investment income as a percentage
of average net assets).
2
INVESTMENT PORTFOLIO (UNAUDITED)
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
VARIABLE RATE SENIOR LOAN NOTES (A) - 97.9%
AEROSPACE/DEFENSE - 0.5%
1,985,000 CACI International, Inc.
Term Loan, 4.59%, 05/03/11 .................... 2,014,775
3,000,000 Vought Aircraft Industries, Inc.
Term Loan, 5.17%, 12/22/11 .................... 3,048,750
-----------
5,063,525
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AIR TRANSPORT - 0.2%
1,992,350 United Airlines, Inc.
Tranche B, 7.50%, 06/30/05 .................... 2,013,509
-----------
AUTOMOTIVE - 4.7%
CSA Acquisition Corp.
1,150,000 Tranche B Term Loan,
4.75%, 12/23/11 ............................... 1,167,969
616,667 Tranche C Term Loan,
4.75%, 12/23/11 ............................... 625,917
Federal-Mogul Corp.
392,157 Letter of Credit, 12/09/05 (b) ................ 398,039
1,372,995 Supplemental Revolver,
6.15%, 12/09/05 (c) ........................... 1,348,420
3,607,843 Term Loan, 12/09/11 (b) ....................... 3,440,980
5,000,000 Tranche B Term Loan,
5.17%, 06/30/05 ............................... 4,768,750
1,048,750 Tranche C Term Loan,
6.42%, 12/09/05 ............................... 1,055,305
5,000,000 Goodyear Tire & Rubber Co.
Term Loan ABL Tranche A,
6.56%, 03/31/06 ............................... 5,068,750
3,933,729 Hayes Lemmerz International, Inc.
Term Loan, 6.24%, 06/03/09 .................... 4,023,890
3,990,000 J.L. French Automotive Castings, Inc.
First Lien Term Loan,
6.95%, 07/31/11 ............................... 4,021,601
Key Automotive Group
5,526,534 Term Loan B, 5.70%, 06/29/10 .................. 5,630,212
6,250,000 Term Loan C, 8.02%, 06/25/11 .................. 6,308,625
Key Plastics Holdings, Inc.
55,843 Junior Secured Subordinated
Notes,
18.32%, 04/26/07 (d) .......................... 50,258
101,433 Senior Secured Subordinated
Notes,
7.00%, 04/26/07 (d) ........................... 81,146
913,043 Keystone Automotive Industries, Inc.
Term Loan, 5.61%, 10/30/09 .................... 923,315
3,980,000 Stanadyne Corp.
Term Loan, 6.00%, 08/02/10 .................... 4,029,750
Tenneco Automotive, Inc.
1,779,338 Tranche B Term Loan, 12/12/10 (b) ............. 1,779,338
907,701 Tranche B-1 Credit Linked Deposit,
12/12/10 (b) .................................. 907,701
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45,629,966
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BEVERAGE & TOBACCO - 2.0%
2,887,500 Caribbean Restaurant LLC
Tranche B, 5.34%, 06/30/09 .................... 2,935,317
853,171 Commonwealth Brands, Inc.
Term Loan, 5.94%, 08/28/07 .................... 871,301
2,825,833 Constellation Brands, Inc.
Tranche B Term Loan,
4.40%, 11/30/11 ............................... 2,869,238
5,379,658 Dr. Pepper Bottling Company of
Texas Term Loan B,
4.48%, 12/19/10 ............................... 5,481,871
PAR/
COMMITMENT ($) VALUE ($)
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BEVERAGE & TOBACCO (CONTINUED)
2,400,000 DS Waters Enterprises LP
Term Loan, 6.85%, 11/07/09 .................... 2,232,000
2,925,135 Southern Wine & Spirits of America,
Inc.
Term Loan B, 4.81%, 07/02/08 .................. 2,968,544
2,000,000 Sunny Delight Beverage Co.
First Lien Term Loan,
6.79%, 08/20/10 ............................... 1,995,000
-----------
19,353,271
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BROADCAST RADIO & TELEVISION - 1.3%
2,000,000 Emmis Operating Co.
Tranche B Term Loan,
4.34%, 11/10/11 ............................... 2,026,120
2,000,000 Freedom Communications, Inc.
Tranche B Term Loan,
4.60%, 05/18/12 ............................... 2,032,200
2,654,830 GT Brands LLC
Term Loan, 10.50%, 09/30/07 ................... 716,804
4,331,250 Spanish Broadcasting Systems, Inc.
Term Loan B, 5.92%, 10/30/09 .................. 4,412,461
2,970,000 Warner Music Group
Term Loan B, 5.09%, 02/28/11 .................. 3,021,025
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12,208,610
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BUILDING & DEVELOPMENT PRODUCTS - 3.3%
2,000,000 DESA LLC
Term Loan, 11/26/11 (b) ....................... 2,017,500
4,411,930 Lake at Las Vegas Joint Venture
First Lien Term Loan,
5.32%, 11/01/09 ............................... 4,477,667
LNR Property Corp.
2,000,000 Tranche A Term Loan,
0.50%, 02/03/08 (c) ........................... 1,961,360
12,500,000 Tranche B Term Loan,
5.59%, 02/03/08 ............................... 12,683,625
NATG Holdings LLC
1,039,746 Credit Linked Certificate of
Deposit, 0.85%, 01/23/09 ...................... 873,386
960,364 Term Loan A, 7.09%, 01/23/09 .................. 177,667
700,694 Term Loan B1, 7.69%, 01/23/10 ................. 182,180
72,363 Term Loan B2, 7.69%, 01/23/10 ................. 60,785
995,000 Nortek Holdings, Inc.
Term Loan, 4.78%, 08/27/11 .................... 1,011,666
Woodlands Commercial Property Co.
4,000,000 Bridge Loan, 4.84%, 08/30/05 .................. 4,030,000
5,000,000 Mezzanine Loan, 11/30/07 (b) .................. 5,075,000
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32,550,836
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BUSINESS EQUIPMENT & SERVICES - 4.5%
10,009,865 Acterna Corp.
Term Loan, 09/30/07 (b) ....................... 10,109,964
4,666,667 Brickman Group Holdings, Inc.
Term Loan, 7.97%, 11/15/09 .................... 4,655,000
Ferrell Cos., Inc.
1,500,000 Term Loan, 12/17/11 (b) ....................... 1,528,125
2,000,000 Term Loan, 6.10%, 12/17/11 .................... 2,037,500
1,736,875 Hillman Group, Inc.
Term Loan B, 5.50%, 03/30/11 .................. 1,762,893
3,228,235 Knoll, Inc.
Initial Term Loan, 5.59%, 09/30/11 ............ 3,260,518
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 3
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)
BUSINESS EQUIPMENT & SERVICES (CONTINUED)
2,694,716 OfficeMax, Inc.
Tranche B Term Loan,
4.94%, 10/28/11 ............................... 2,744,245
1,324,391 URS Corp.
Term Loan B, 4.71%, 08/22/08 .................. 1,332,258
2,000,000 VUTEk, Inc.
Term Loan, 06/25/10 (b) ....................... 2,010,000
9,600,000 Washington Group International
Term Loan B, 2.57%, 10/03/07 .................. 9,648,000
5,000,000 Xerox Corp.
New Term Loan, 4.42%, 09/30/08 ................ 5,052,700
-----------
44,141,203
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CABLE & SATELLITE TELEVISION - 10.5%
5,000,000 Adelphia Communications Corp.
Tranche B DIP Term Loan,
03/31/06 (b) .................................. 5,025,000
1,400,000 Atlantic Broadband Finance LLC
Term Loan B, 5.19%, 09/01/11 .................. 1,424,052
Century Cable Holdings LLC
3,500,000 Discretionary Term Loan,
7.50%, 12/31/09 ............................... 3,486,875
15,000,000 Term Loan, 7.50%, 06/30/09 .................... 14,957,850
Charter Communications
Operating LLC
2,000,000 Tranche A Term Loan, 04/27/10 (b) ............. 1,998,280
13,940,000 Tranche B Term Loan,
5.98%, 04/27/11 ............................... 14,001,475
14,087,500 Hilton Head Communications LP
Revolver, 5.50%, 09/30/07 ..................... 13,864,354
Insight Midwest Holdings LLC
1,980,000 Additional Term Loan,
5.44%, 12/31/09 ............................... 2,015,264
1,760,000 Term Loan A, 4.19%, 06/30/09 .................. 1,763,837
2,970,000 Term Loan B, 5.44%, 12/31/09 .................. 3,022,153
Mediacom Communications Corp.
3,920,000 Term Loan A, 4.16%, 03/31/10 .................. 3,905,300
1,990,000 Term Loan B, 5.04%, 09/30/10 .................. 2,024,825
1,000,000 Term Loan B, 5.14%, 03/31/13 .................. 1,017,500
Millennium Digital Media Capital Corp.
1,405,417 Revolver, 10/31/08 (b) ........................ 1,401,904
4,673,552 Term Loan B, 10/31/08 (b) ..................... 4,661,868
1,421,031 Term Loan C, 10/31/08 (b) ..................... 1,417,479
Olympus Cable Holdings LLC
9,500,000 Term Loan A, 6.75%, 06/30/10 .................. 9,376,120
1,000,000 Term Loan B, 7.50%, 09/30/10 .................. 995,310
11,442,500 UPC Financing Partnership
Term Loan C2, 5.98%, 03/31/09 ................. 11,621,232
WideOpenWest LLC
2,985,000 Incremental Term Loan B,
7.06%, 06/22/11 ............................... 3,003,656
1,984,962 Term Loan B, 7.11%, 06/22/11 .................. 1,997,368
-----------
102,981,702
-----------
CHEMICALS/PLASTICS - 5.8%
2,500,000 Brenntag AG
Term Loan B2, 5.88%, 02/27/12 ................. 2,545,850
7,485,000 Celenese
Dollar Term Loan B,
5.10%, 04/06/11 ............................... 7,647,125
7,952,437 Coffeyville, Inc.
Term Loan, 7.56%, 05/10/10 .................... 8,071,724
PAR/
COMMITMENT ($) VALUE ($)
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CHEMICALS/PLASTICS (CONTINUED)
7,000,000 Huntsman Co. LLC
Term Loan B, 6.15%, 03/31/10 .................. 7,092,960
3,827,923 Huntsman International LLC
Dollar Term B Loan,
5.13%, 12/31/10 ............................... 3,896,520
1,995,954 Innophos, Inc.
Tranche B Term Loan,
4.86%, 08/13/10 ............................... 2,030,884
Invista
3,196,191 Tranche B1, 5.31%, 04/29/11 ................... 3,240,139
1,442,044 Tranche B2, 5.31%, 04/29/11 ................... 1,461,872
4,053,851 Kraton Polymers Group of Cos.
Term Loan, 5.34%, 12/23/10 .................... 4,120,983
Nalco Co.
1,963,782 Term Loan A, 5.18%, 11/04/09 .................. 1,987,348
1,997,656 Term Loan B, 4.67%, 11/04/10 .................. 2,034,692
1,870,000 Polypore, Inc.
Term Loan, 4.92%, 11/12/11 .................... 1,893,375
2,000,000 Rockwood Specialties Group, Inc.
Tranche B Term Loan,
4.95%, 07/30/12 ............................... 2,028,540
4,985,000 Supresta U.S. LLC
Term Loan B, 5.56%, 06/21/11 .................. 5,059,775
4,365,000 Waddington North America, Inc.
Term Loan B, 5.32%, 04/07/11 .................. 4,232,697
-----------
57,344,484
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CLOTHING/TEXTILES - 0.7%
Polymer Group, Inc.
3,518,750 First Lien Term Loan,
5.78%, 04/27/10 ............................... 3,558,899
3,000,000 Second Lien Term Loan,
8.78%, 04/27/11 ............................... 3,060,000
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6,618,899
-----------
CONGLOMERATE - 1.5%
3,482,500 Appleton Papers, Inc.
Term Loan, 4.56%, 06/11/10 .................... 3,526,588
2,065,386 Jason, Inc.
Term Loan B, 7.14%, 06/30/07 .................. 2,081,289
2,921,053 Language Line LCC
Term Loan B, 6.87%, 06/13/11 .................. 2,957,566
2,645,872 Mueller Group, Inc.
New Term Loan, 5.57%, 04/23/11 ................ 2,677,305
2,985,000 Youth & Family Centered
Services, Inc.
Term Loan B, 6.77%, 05/28/11 .................. 2,992,463
-----------
14,235,211
-----------
CONTAINER/GLASS PRODUCTS - 3.5%
1,809,889 Berry Plastics Corp.
Term Loan, 4.77%, 06/30/10 .................... 1,838,160
3,482,500 Consolidated Container Co. LLC
Term Loan, 5.13%, 12/15/08 .................... 3,526,031
7,500,000 Graham Packaging International, Inc.
Term Loan B, 5.09%, 10/07/11 .................. 7,635,300
2,737,646 Graphic Packaging International, Inc.
Term Loan C, 5.14%, 08/09/10 .................. 2,787,252
1,288,115 Kerr Group, Inc.
Term Loan, 6.08%, 08/13/10 .................... 1,303,251
1,815,512 Precise Technology, Inc.
First Lien Term Loan,
5.56%, 03/31/11 ............................... 1,829,710
4 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)
CONTAINER/GLASS PRODUCTS (CONTINUED)
740,625 Reddy Ice Group, Inc.
Term Loan, 5.17%, 08/14/09 .................... 746,180
Smurfit-Stone Container Corp.
654,975 Credit Linked Certificate of
Deposit,
2.49%, 11/01/10 ............................... 665,206
5,234,431 Tranche B, 4.60%, 11/01/11 .................... 5,315,146
1,610,594 Tranche C, 4.50%, 11/01/11 .................... 1,631,725
1,203,125 Sola International, Inc.
Term Loan, 5.17%, 12/11/09 .................... 1,218,164
5,940,000 Solo Cup, Inc.
Term Loan, 5.06%, 02/27/11 .................... 6,045,435
-----------
34,541,560
-----------
COSMETICS/TOILETRIES - 0.8%
1,587,443 Church & Dwight Co., Inc.
Tranche B, 4.40%, 05/30/11 .................... 1,610,271
3,112,842 Johnson Diversey, Inc.
Term Loan B, 4.99%, 11/03/09 .................. 3,165,386
1,000,000 MD Beauty, Inc.
Second Lien Term Loan,
02/18/13 (b) .................................. 1,015,000
2,000,000 Revlon Consumer Products Corp.
Term Loan, 8.59%, 07/09/10 .................... 2,090,000
-----------
7,880,657
-----------
DIVERSIFIED MANUFACTURING - 0.1%
1,000,000 GenTek, Inc.
Second Lien Term Loan,
02/01/12 (b) .................................. 1,025,000
-----------
ECOLOGICAL SERVICE & EQUIPMENT - 1.2%
Allied Waste North America, Inc.
1,570,450 Term Loan D, 5.09%, 01/15/10 .................. 1,580,752
4,709,571 Tranche A, 4.59%, 01/15/10 .................... 4,761,565
4,500,000 Environmental Systems Products
Holdings
Second Lien, 12.72%, 12/12/10 ................. 4,651,875
711,571 Synagro Technologies, Inc.
Term Loan, 5.79%, 05/07/07 .................... 715,129
-----------
11,709,321
-----------
ELECTRONIC/ELECTRIC - 3.3%
2,500,000 Alliance Laundry Systems LLC
Term Loan, 4.84%, 01/27/12 .................... 2,532,825
2,500,000 Amkor Technology, Inc.
Second Lien Term Loan,
7.37%, 10/27/10 ............................... 2,618,750
500,757 Bridge Information Systems, Inc.
Multidraw Term Loan,
7.25%, 07/07/13 (e) (f) ....................... 22,534
2,000,000 Camp Acquisition Co.
Term Loan A, 5.88%, 06/30/11 .................. 2,000,000
3,000,000 Comsys Information Technology
Services, Inc.
Second Lien Term Loan,
10.00%, 04/30/10 .............................. 3,000,000
3,000,000 Corel Corp.
Second Lien Term Loan,
10.59%, 08/15/10 .............................. 3,015,000
730,135 Itron, Inc.
Term Loan B, 4.98%, 06/28/11 738,043
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
ELECTRONIC/ELECTRIC (CONTINUED)
5,000,000 ON Semiconductor Corp.
Tranche G Term Loan,
5.56%, 12/15/11 ............................... 5,009,400
3,900,000 Seagate Technology Holdings, Inc.
Term Loan B, 4.63%, 05/13/07 .................. 3,950,232
2,250,000 Transfirst Holdings, Inc.
Second Lien Term Loan,
10.06%, 03/31/11 .............................. 2,300,625
1,492,500 UGS Corp.
Term Loan B, 6.50%, 05/27/11 .................. 1,518,619
1,000,000 Verifone, Inc.
Second Lien Term Loan,
8.73%, 12/31/11 ............................... 1,031,880
5,000,000 Viasystems, Inc.
Tranche B Term Loan,
6.49%, 09/30/09 ............................... 5,057,800
-----------
32,795,708
-----------
EQUIPMENT LEASING - 1.2%
1,492,500 National Equipment Service, Inc.
Second Lien Term Loan,
8.98%, 08/17/10 ............................... 1,529,813
4,000,000 Neff Rental, Inc.
Initial Term Loan, 7.25%, 05/01/08 ............ 3,960,000
5,789,583 United Rentals, Inc.
Term Loan C2, 4.92%, 02/14/11 ................. 5,896,343
-----------
11,386,156
-----------
FARMING/AGRICULTURE - 0.5%
4,590,833 AGCO Corp.
Term Loan, 4.48%, 01/31/06 .................... 4,675,488
-----------
FINANCIAL INTERMEDIARIES - 0.2%
1,500,000 Metris Cos., Inc.
Term Loan, 12.09%, 05/06/07 ................... 1,584,375
-----------
FOOD PRODUCTS - 3.1%
2,986,674 American Seafoods Group LLC
Term Loan B, 5.81%, 03/31/09 .................. 3,018,393
1,995,000 Doane Pet Care Co.
Term Loan, 6.43%, 11/05/09 .................... 2,031,150
7,500,000 Interstate Bakeries Corp.
Revolver, 0.50%, 09/22/06 (c) ................. 7,448,475
Interstate Brands Corp.
1,959,596 Term Loan C, 6.77%, 07/19/07 .................. 1,919,581
1,875,000 Tranche A, 6.80%, 07/19/06 .................... 1,849,988
4,183,393 Luigino's, Inc.
Term Loan B, 5.53%, 04/02/11 .................. 4,195,190
985,270 Merisant Co.
Term Loan B, 5.48%, 01/11/10 .................. 987,122
1,820,000 Pierre Foods, Inc.
Term Loan B, 4.48%, 06/30/10 .................. 1,843,514
7,146,000 Pinnacle Foods Holding Corp.
Delayed Draw Term Loan,
5.81%, 11/25/10 ............................... 7,195,164
-----------
30,488,577
-----------
FOOD SERVICES - 0.7%
3,246,603 Buffets, Inc.
Term Loan, 6.27%, 06/28/09 .................... 3,273,680
1,000,000 Captain D's Inc., LLC
First Lien Term Loan,
6.42%, 12/27/10 ............................... 1,007,500
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 5
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)
FOOD SERVICES (CONTINUED)
2,413,139 Domino's, Inc.
New Term Loan, 4.31%, 06/25/10 ................ 2,445,813
-----------
6,726,993
-----------
FOOD/DRUG RETAIL - 2.0%
1,869,300 Atkins Nutritionals, Inc.
First Lien Term Loan,
11.75%, 10/29/09 .............................. 1,637,507
Jean Coutu Group, Inc.
2,000,000 Term Loan B, 07/30/11 (b) ..................... 2,036,760
5,472,500 Term Loan B, 5.00%, 07/30/11 .................. 5,573,084
Michael Foods, Inc.
3,000,000 Floater Term Loan,
6.59%, 11/20/11 ............................... 3,090,000
4,596,465 Term Loan, 5.07%, 11/21/10 .................... 4,674,605
3,000,000 Nellson Nutraceutical, Inc.
Second Lien Term Loan,
12.00%, 04/02/10 .............................. 2,730,000
-----------
19,741,956
-----------
FOREST PRODUCTS - 0.3%
SP Newsprint Co.
1,036,667 Term Loan B, 5.67%, 01/08/10 .................. 1,054,166
1,933,333 Term Loan B Letter of Credit,
2.59%, 01/09/08 ............................... 1,965,968
-----------
3,020,134
-----------
HEALTH CARE - 7.5%
Alliance Imaging, Inc.
758,588 Term Loan A, 3.50%, 11/02/06 .................. 752,898
1,587,051 Tranche C Term Loan,
4.97%, 12/29/11 ............................... 1,608,381
6,872,427 Alpharma Operating Corp.
Term Loan B, 5.81%, 10/05/08 .................. 6,911,050
3,066,667 American Medical Response, Inc.
Term Loan, 5.60%, 02/10/12 .................... 3,126,099
3,211,600 Ameripath, Inc.
Term Loan, 5.92%, 03/27/10 .................... 3,239,702
2,992,500 Ardent Health Services
Term Loan, 4.80%, 08/12/11 .................... 3,033,647
2,000,000 Chemed Corp.
Term Loan, 08/24/10 (b) ....................... 2,035,000
1,967,677 Davita, Inc.
Term Loan B, 4.58%, 03/31/09 .................. 1,977,653
712,500 dj Orthopedics LLC
Term Loan, 4.88%, 05/15/09 .................... 724,969
699,121 Educate Operating Co. LLC
Term Loan, 5.06%, 03/31/11 .................... 703,372
2,984,962 Express Scripts, Inc.
Tranche B Term Loan,
4.13%, 02/13/10 ............................... 3,010,454
FHC Health Systems, Inc.
1,300,000 Delayed Draw Term Loan,
10.40%, 10/31/06 .............................. 1,313,000
1,857,143 Initial Term Loan,
8.40%, 10/31/06 ............................... 1,875,714
1,500,000 Third Lien Term Loan, 02/07/11 (b) ............ 1,530,000
5,000,000 Third Lien Term Loan,
11.77%, 01/14/11 .............................. 5,100,000
2,549,961 Hanger Orthopedic Group, Inc.
Term Loan B, 6.06%, 09/30/09 .................. 2,562,711
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
HEALTH CARE (CONTINUED)
2,600,000 HealthSouth Corp.
Term Loan, 10.38%, 01/16/11 ................... 2,873,000
6,209,032 Insight Health Services Corp.
Tranche B, 6.31%, 10/17/08 .................... 6,243,927
840,104 Kinetic Concepts, Inc.
Term Loan B1, 4.31%, 08/11/10 ................. 845,884
7,703,704 Knowledge Learning Corp.
Term Loan, 5.15%, 01/07/12 .................... 7,771,188
MedAssets, Inc.
500,000 Second Lien Term Loan,
12.56%, 06/16/08 .............................. 510,000
727,968 Senior Term Loan,
7.31%, 03/16/09 ............................... 737,977
4,000,000 MultiPlan, Inc.
Term Loan, 5.31%, 03/04/09 .................... 4,045,000
1,221,023 Orthofix International N.V.
Term Loan B, 4.55%, 12/30/08 .................. 1,238,581
Select Medical Corp.
2,000,000 Revolver, 02/24/11 (b) ........................ 1,998,760
3,000,000 Tranche B Term Loan, 02/24/12 (b) ............. 3,039,390
3,482,503 Skilled Healthcare LLC
First Lien Term Loan,
5.34%, 07/31/10 ............................... 3,521,681
490,000 Sunrise Medical Holdings, Inc.
Term Loan B-1, 5.88%, 05/13/10 ................ 495,513
915,333 VWR International, Inc.
Term Loan B, 5.17%, 04/07/11 .................. 932,267
-----------
73,757,818
-----------
HOME FURNISHINGS - 1.0%
Holmes Group, Inc.
2,985,000 First Lien Term Loan,
5.91%, 11/08/10 ............................... 3,018,581
2,000,000 Second Lien Term Loan,
10.15%, 05/06/11 .............................. 2,030,000
2,441,406 Home Interiors & Gifts, Inc.
Term Loan, 7.17%, 03/31/11 .................... 2,339,697
2,491,071 Sealy Mattress Co.
Term Loan C, 4.80%, 08/06/12 .................. 2,533,121
-----------
9,921,399
-----------
INDUSTRIAL EQUIPMENT - 0.8%
1,990,002 Blount International, Inc.
Term Loan B, 5.31%, 08/09/10 .................. 2,019,016
1,950,000 Bucyrus International, Inc.
Term Loan, 4.38%, 07/28/10 .................... 1,989,000
1,068,778 Copperweld Corp.
Term Loan, 7.17%, 12/16/11 .................... 1,071,450
1,098,325 Dresser, Inc.
Term Loan C, 5.17%, 04/10/09 .................. 1,114,119
1,471,432 Terex Corp.
Term Loan, 4.89%, 07/03/09 .................... 1,489,825
-----------
7,683,410
-----------
INSURANCE - 1.5%
9,600,000 Conseco, Inc.
Term Loan, 6.17%, 06/22/10 .................... 9,801,024
2,985,000 Mitchell International, Inc.
Second Lien Term Loan,
8.80%, 08/15/12 ............................... 3,003,656
1,990,000 WellCare Health Plans, Inc.
Term Loan, 6.49%, 05/13/09 .................... 2,007,413
-----------
14,812,093
-----------
6 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)
LEISURE GOODS/ACTIVITIES/MOVIES - 4.5%
3,216,949 AMF Bowling Worldwide, Inc.
Term Loan B, 5.39%, 08/27/09 .................. 3,240,046
2,985,000 Amscan Holdings, Inc.
Term Loan B, 5.60%, 04/30/12 .................. 2,996,194
10,000,000 Blockbuster Entertainment Corp.
Term Loan B, 5.32%, 08/20/11 .................. 10,062,500
1,000,000 Camelbak Products, Inc.
Second Lien Term Loan,
9.54%, 02/04/12 ............................... 1,014,380
4,620,000 Carmike Cinemas, Inc.
Senior Secured Second Priority
Term Loan,
5.92%, 02/02/09 ............................... 4,715,264
2,481,250 Cinemark USA, Inc.
Tranche C Term Loan,
4.35%, 03/31/11 ............................... 2,512,266
CNL Hospitality Partners LP
5,000,000 First Lien Term Loan,
5.23%, 09/09/06 ............................... 5,000,000
3,000,000 Term Loan, 5.09%, 10/13/06 .................... 3,060,000
1,995,000 Metro-Goldwyn-Mayer Studios, Inc.
Term Loan B, 5.06%, 04/30/11 .................. 2,003,100
5,774,093 Regal Cinemas, Inc.
Term Loan, 4.56%, 11/10/10 .................... 5,865,786
1,576,602 Six Flags Theme Parks, Inc.
Term Loan B, 5.09%, 06/30/09 .................. 1,594,985
1,990,000 Wallace Theaters
First Lien Term Loan,
5.81%, 07/31/09 ............................... 2,031,034
-----------
44,095,555
-----------
LODGING & CASINOS - 3.8%
692,600 Ameristar Casinos, Inc.
Term Loan B1, 4.63%, 12/20/06 ................. 704,720
3,970,000 Green Valley Ranch Gaming LLC
Term Loan B, 4.50%, 12/22/10 .................. 4,024,588
2,500,000 Mississippi Band of Chocktaw
Indians Term Loan,
5.02%, 11/04/11 ............................... 2,540,625
OpBiz LLC
11,926,349 Term Loan A, 5.56%, 08/31/10 .................. 11,871,726
28,141 Term Loan B, 6.56%, 08/31/10 .................. 28,012
Venetian Casino Resort LLC
683,761 Delayed DrawTerm Loan B,
06/15/11 (b) .................................. 692,739
3,316,239 Term Loan B, 06/15/11 (b) ..................... 3,373,245
Wyndham International, Inc.
9,860,000 IRL Tranche II, 06/30/06 (b) .................. 9,914,230
4,360,152 Term Loan I, 7.38%, 06/30/06 .................. 4,378,465
-----------
37,528,350
-----------
NONFERROUS METALS/MINING - 1.1%
997,500 J W Aluminum Co.
First Lien Term Loan,
5.89%, 10/20/10 ............................... 1,013,709
Murray Energy Corp.
1,000,000 Tranche B Term Loan, 01/28/10 (b) ............. 1,017,500
3,750,000 Tranche B Term Loan,
5.94%, 01/28/10 ............................... 3,815,625
Novelis, Inc.
1,826,923 Term Loan, 01/07/12 (b) ....................... 1,855,935
3,173,077 Term Loan, 01/07/12 (b) ....................... 3,225,433
-----------
10,928,202
-----------
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
OIL/GAS - 3.3%
5,000,000 ALON USA
Term Loan, 10.00%, 01/15/09 ................... 5,125,000
8,967,425 ATP Oil & Gas Corp.
First Lien Term Loan,
8.58%, 03/29/09 ............................... 9,146,774
3,382,353 Basic Energy Services, Inc.
Term Loan B, 5.55%, 10/03/09 .................. 3,416,177
4,027,500 Belden & Blake Corp.
Term Loan, 5.69%, 07/07/11 .................... 4,085,415
1,730,003 Dresser Rand Group, Inc.
Tranche B Dollar Term Loan,
4.56%, 10/29/11 ............................... 1,761,905
El Paso Corp.
2,500,000 Deposit Accounts,
2.40%, 11/23/09 ............................... 2,540,250
3,486,000 Term Loan, 5.44%, 11/23/09 .................... 3,552,234
1,544,000 Tesoro Petroleum Corp.
Initial Term Loan, 7.99%, 04/15/08 ............ 1,592,605
1,320,000 Western Refining Co. LP
Term Loan, 6.17%, 08/28/08 .................... 1,339,800
-----------
32,560,160
-----------
PUBLISHING - 3.0%
3,233,750 Adams Outdoor Advertising LP
First Lien Term Loan,
4.92%, 10/15/11 ............................... 3,287,624
Advertising Directory Solutions, Inc.
2,000,000 First Lien Term Loan,
4.72%, 11/09/11 ............................... 2,029,160
2,000,000 Second Lien Term Loan,
6.47%, 05/09/12 ............................... 2,058,500
Dex Media East LLC
5,976,992 Term Loan A, 4.52%, 11/08/08 .................. 6,060,191
1,126,925 Term Loan B, 4.50%, 05/08/09 .................. 1,143,401
2,309,701 Dex Media West LLC
Term Loan A, 4.72%, 09/09/09 .................. 2,343,330
2,049,486 PRIMEDIA, Inc.
Term Loan B, 5.38%, 06/30/09 .................. 2,049,917
1,748,005 R.H. Donnelley Corp.
Term Loan D, 4.28%, 06/30/11 .................. 1,774,994
1,300,533 Relizon Co.
Term Loan, 5.78%, 02/20/11 .................... 1,303,784
1,306,956 Sun Media Corp.
Term Loan B, 4.13%, 02/07/09 .................. 1,320,235
3,088,750 Transwestern Publishing Co.
First Lien Term Loan,
4.20%, 02/25/11 ............................... 3,107,591
2,910,000 VISANT Corp.
Tranche B Term Loan,
4.81%, 10/04/11 ............................... 2,955,105
-----------
29,433,832
-----------
REAL ESTATE INVESTMENT TRUST - 2.8%
2,000,000 AIMCO Properties, L.P.
Term Loan, 4.75%, 11/02/09 .................... 2,040,000
20,000,000 General Growth Properties, Inc.
Tranche B Term Loan,
4.84%, 11/12/08 ............................... 20,302,000
5,000,000 Strategic Hotel Capital, Inc.
Term Loan B2, 5.48%, 07/09/06 ................. 4,992,300
-----------
27,334,300
-----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PAR/
COMMITMENT ($) VALUE ($)
- --------------- ------------
VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)
RETAILERS - 0.6%
2,000,000 Dollarama
Term Loan B, 5.02%, 11/18/11 .................. 2,030,000
2,049,951 Harbor Freight Tools USA
Term Loan, 4.83%, 07/15/10 .................... 2,065,961
2,093,163 Prestige Brands Holdings, Inc.
Tranche B, 5.40%, 04/06/11 .................... 2,120,301
-----------
6,216,262
-----------
STEEL - 0.3%
2,887,500 The Techs Industries, Inc.
Term Loan, 4.81%, 01/14/10 .................... 2,901,937
-----------
SURFACE TRANSPORT - 1.5%
6,985,000 Helm Holding Corp.
Term Loan B, 5.37%, 07/02/10 .................. 7,078,110
603,922 Pacer International, Inc.
New Term Loan, 4.68%, 06/10/10 ................ 616,755
Quality Distribution, Inc.
2,752,717 Term Loan, 5.64%, 11/13/09 .................... 2,683,046
2,176,502 Term Loan, 5.64%, 11/13/09 (f) ................ 2,121,415
2,595,963 Transport Industries LP
Term Loan B, 6.56%, 06/13/10 .................. 2,600,844
-----------
15,100,170
-----------
TELECOMMUNICATIONS/CELLULAR - 1.4%
2,985,000 Cellular South, Inc.
Term Loan, 4.75%, 05/04/11 .................... 3,031,626
625,000 Dobson Cellular Systems, Inc.
Revolver, 0.63%, 10/21/09 (c) ................. 599,219
10,000,000 Qwest Corp.
Term Loan B, 6.95%, 06/30/10 .................. 10,332,400
-----------
13,963,245
-----------
TELECOMMUNICATIONS/COMBINATION - 2.3%
2,000,000 Alaska Communications Systems
Holdings, Inc.
Term Loan, 4.64%, 02/01/12 .................... 2,021,560
Centennial Cellular Operating Co.
2,250,000 Revolver, 0.50%, 02/09/11 (c) ................. 2,248,605
4,128,300 Term Loan, 4.46%, 02/09/11 .................... 4,192,289
5,000,000 NTL, Inc.
Tranche B Term Loan,
5.20%, 04/14/12 ............................... 5,068,750
4,962,349 PanAmSat Corp.
Term Loan B, 5.34%, 08/20/11 .................. 5,038,472
4,000,000 RCN Corp.
Term Loan, 7.06%, 12/21/11 .................... 4,023,360
-----------
22,593,036
-----------
TELECOMMUNICATIONS/WIRELESS - 5.1%
2,150,000 Bresnan Communications LLC
Term Loan B, 6.04%, 09/30/10 .................. 2,181,992
4,966,667 Consolidated Communications, Inc.
Term Loan C, 5.18%, 10/14/11 .................. 5,041,167
Cricket Communications, Inc.
5,000,000 Revolver, 0.75%, 01/10/10 (c) ................. 4,925,000
15,000,000 Term Loan B, 5.09%, 01/10/11 .................. 15,182,850
FairPoint Communications, Inc.
2,500,000 Initial B Term Loan, 02/08/12 (b) ............. 2,541,025
2,500,000 Initial B Term Loan,
4.75%, 02/08/12 ............................... 2,541,025
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
TELECOMMUNICATIONS/WIRELESS (CONTINUED)
6,500,000 Nextel Partners Operating Corp.
Term Loan C, 4.94%, 05/31/11 .................. 6,595,420
1,000,000 Primus Telecommunications
Group, Inc.
Term Loan, 9.61%, 02/18/11 .................... 1,005,000
4,477,500 SBA Senior Finance, Inc.
Term Loan, 4.86%, 10/31/08 .................... 4,555,856
5,994,105 WilTel Communications Group, Inc.
Term Loan, 7.00%, 04/01/10 .................... 5,814,282
-----------
50,383,617
-----------
TELECOMMUNICATIONS/WIRELINE - 0.4%
4,000,000 Valor Telecommunications
Enterprises LLC
Tranche B Term Loan,
5.99%, 02/14/12 ............................... 4,061,000
-----------
UTILITIES - 5.1%
2,605,732 Allegheny Energy, Inc.
Term Advances, 4.80%, 03/08/11 ................ 2,663,371
7,000,000 Astoria Energy LLC
First Lien Term Loan,
7.19%, 04/15/12 ............................... 7,166,250
2,066,017 Calpine Corp.
Second Lien Term Loan B,
8.41%, 07/16/07 ............................... 1,833,591
1,953,933 Infrasource, Inc.
Term Loan, 5.56%, 09/30/10 .................... 1,973,472
2,801,674 Midwest Generations LLC
Term Loan, 5.65%, 04/27/11 .................... 2,848,602
Mirant Corp.
4,000,000 Revolver, 07/17/05 (b) ........................ 2,923,360
4,000,000 Revolver, 07/15/08 (b) ........................ 2,932,520
5,000,000 Reliant Energy, Inc.
Term Loan, 5.06%, 04/30/10 .................... 5,088,400
4,626,288 Riverside Energy Center LLC
Term Loan, 6.98%, 06/24/11 .................... 4,741,945
Rocky Mountain Energy Center LLC
361,073 Credit Linked Certificate of
Deposit, 2.63%, 06/24/11 ...................... 368,295
3,286,536 Term Loan, 6.98%, 06/24/11 .................... 3,368,699
Texas Genco LLC
1,461,538 Delayed Draw Term Loan,
1.25%, 12/14/11 (c) ........................... 1,485,741
9,871,795 Initial Term Loan, 4.48%, 12/14/11 ............ 10,043,762
2,955,000 TNP Enterprises, Inc.
Term Loan, 7.72%, 12/31/06 .................... 2,995,631
-----------
50,433,639
-----------
Total Variable Rate Senior
Loan Notes
(Cost $937,217,769) ......................... 961,425,166
-----------
CORPORATE NOTES AND BONDS - 1.7%
CONTAINER/GLASS PRODUCTS - 0.3%
2,500,000 Constar International, Inc.
Floating Rate Note,
6.15%, 02/15/12 (g) ........................... 2,550,000
-----------
HEALTH CARE - 0.2%
2,000,000 Elan Finance
Floating Rate Note,
6.49%, 11/15/11 (g) ........................... 1,750,000
-----------
8 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
CORPORATE NOTES AND BONDS (CONTINUED)
OIL & GAS - 0.4%
4,000,000 Secunda International Ltd.
Floating Rate Note,
10.66%, 09/01/12 (g) .......................... 4,000,000
-----------
TELECOMMUNICATIONS/CELLULAR - 0.2%
2,000,000 Dobson Cellular Systems, Inc.
Floating Rate Note,
7.49%, 11/01/11 (g) ........................... 2,120,000
-----------
TELECOMMUNICATIONS/COMBINATION - 0.4%
4,000,000 US Unwired, Inc.
Floating Rate Note, Series B,
6.74%, 06/15/10 ............................... 4,200,000
-----------
UTILITIES - 0.2%
2,000,000 Calpine Construction Finance Co. LP
Floating Rate Note,
11.63%, 08/26/11 (g) .......................... 2,240,000
-----------
Total Corporate Notes
and Bonds
(Cost $16,613,840) .......................... 16,860,000
-----------
COMMERCIAL MORTGAGE-BACKED SECURITY - 0.5%
5,000,000 Bear Stearns
Series 2004-ESA, Class K,
5.09%, 05/14/16 ............................... 5,008,123
-----------
Total Commercial Mortgage-
Backed Security
(Cost $5,000,000) ........................... 5,008,123
-----------
SHARES
---------
COMMON STOCKS (H) - 0.4%
BUSINESS SERVICES - 0.0%
322,876 NATG Holdings LLC (d) ........................... 0
-----------
DIVERSIFIED MANUFACTURING - 0.0%
4,015 GenTek, Inc., B Shares .......................... 193,242
-----------
ECOLOGICAL SERVICE & EQUIPMENT - 0.0%
3,445 Environmental Systems Products
Holdings (d) .................................. 0
-----------
HEALTH CARE - 0.1%
95,453 Sun Healthcare Group, Inc. ...................... 650,989
-----------
INDUSTRIAL EQUIPMENT - 0.1%
400 Copperweld Corp., Class A (d) ................... 232,000
56 Copperweld Corp., Class B (d) ................... 939,400
-----------
1,171,400
-----------
TELECOMMUNICATIONS/COMBINATION - 0.0%
87,288 SAVVIS Communications Corp. ..................... 66,339
-----------
TELECOMMUNICATIONS/WIRELESS - 0.2%
76,137 Leap Wireless International, Inc. ............... 2,040,472
-----------
Total Common Stocks
(Cost $4,684,320) ........................... 4,122,442
-----------
PAR/
COMMITMENT ($) VALUE ($)
- --------------- -----------
PREFERRED STOCKS (D) - 0.0%
AUTOMOTIVE - 0.0%
13 Key Plastics Holdings, Inc. (h) ................. 0
-----------
DIVERSIFIED MANUFACTURING - 0.0%
14,382 Superior Essex, Inc., Series A .................. 14,382
-----------
Total Preferred Stocks
(Cost $14,382) .............................. 14,382
-----------
UNITS
-----
WARRANTS - 0.0%
DIVERSIFIED MANUFACTURING - 0.0%
4 GenTek, Inc., Class A expires
10/31/06 ...................................... 14
2 GenTek, Inc., Class B expires
10/31/08 ...................................... 8
-----------
22
-----------
UTILITIES - 0.0%
8,508 CenterPoint Energy, Inc., expires
08/01/08 (d) .................................. 0
-----------
Total Warrants
(Cost $34) .................................. 22
-----------
UNFUNDED LOAN COMMITMENTS - (1.9)% .............................. (18,946,153)
-----------
TOTAL INVESTMENTS - 98.6% ....................................... 968,483,982
-----------
(cost of $963,530,345) (i)
OTHER ASSETS & LIABILITIES, NET - 1.4% .......................... 13,277,359
-----------
NET ASSETS - 100.0% ............................................. 981,761,341
===========
__________________
(a) Senior loans in which the Portfolio invests generally pay interest at
rates which are periodically predetermined by reference to a base lending
rate plus a premium. These base lending rates are generally (i) the prime
rate offered by one or more major United States banks, (ii) the lending
rate offered by one or more European banks such as the London Inter-Bank
Offered Rate ("LIBOR") and (iii) the certificate of deposit rate. Rate
shown represents the weighted average rate at February 28, 2005. Senior
loans are generally considered to be restricted in that the Portfolio
ordinarily is contractually obligated to receive approval from the agent
bank and/or borrower prior to the disposition of a senior loan.
(b) Unsettled loan. Interest rate cannot be determined at this time.
(c) Unfunded commitment. As of February 28, 2005, the Portfolio had unfunded
loan commitments of $18,946,153, which could be extended at the option of
the Borrower, pursuant to the following loan agreements:
UNFUNDED
LOAN
BORROWER COMMITMENT
-------- -----------
Centennial Cellular Operating Co. $ 2,250,000
Cricket Communications, Inc. 5,000,000
Dobson Cellular Systems, Inc. 625,000
Federal-Mogul Corp. 109,615
Interstate Bakeries Corp. 7,500,000
LNR Property Corp. 2,000,000
Texas Genco LLC 1,461,538
-----------
$18,946,153
===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
(d) Represents fair value as determined in good faith under the direction of
the Board of Trustees.
(e) The issuer is in default of certain debt covenants. Income is not being
accrued. As of February 28, 2005, the value of these securities amounted
to $22,534, which represents 0.0% of net assets.
(f) Loans held on participation.
(g) Securities exempt from registration under Rule 144A of the Securities Act
of 1933, as amended. These securities may only be resold, in transactions
exempt from registration, to qualified institutional buyers. At February
28, 2005, these securities amounted to $12,660,000 or 1.3% of net assets.
These securities have been determined by the Portfolio's investment
adviser to be liquid securities.
(h) Non-income producing security.
(i) Cost for Federal income tax purposes is $963,793,491.
DIP Debtor in Possession
IRL Increasing Rate Loan
10 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005 (UNAUDITED) HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
($)
- -------------------------------------------------------------------------------
ASSETS:
Investments, at cost ...................................... 963,530,345
-------------
Investments, at value ..................................... 968,483,982
Cash and cash equivalents ................................. 80,491,662
Receivable for:
Investments sold ....................................... 15,111,697
Interest and fees ...................................... 6,204,236
Deferred Trustees' compensation plan (Note 4) ............. 1,906
-------------
Total Assets ........................................ 1,070,293,483
LIABILITIES:
Deferred facility fees .................................... 255,511
Payable for:
Investments purchased .................................. 87,807,040
Investment advisory fee (Note 4) ....................... 329,033
Trustees' fees (Note 4) ................................ 3,333
Deferred Trustees' fees (Note 4) .......................... 1,906
Accrued expenses and other liabilities .................... 135,319
-------------
Total Liabilities ................................... 88,532,142
-------------
NET ASSETS .................................................... 981,761,341
=============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED)
($)
- -------------------------------------------------------------------------------
INVESTMENT INCOME
Interest .................................................. 24,207,119
Dividends ................................................. 28,105
Facility and other fees ................................... 1,250,462
-------------
Total Investment Income ............................. 25,485,686
EXPENSES
Investment advisory fee (Note 4) .......................... 2,020,811
Transfer agent fee (Note 4) ............................... 843
Professional fees ......................................... 127,404
Accounting services fee (Note 4) .......................... 142,341
Trustees' fees (Note 4) ................................... 15,240
Custody fee (Note 4) ...................................... 44,307
Other expenses ............................................ 31,355
-------------
Total Operating Expenses ............................ 2,382,301
Interest expense .......................................... 16,479
Commitment fee ............................................ 130,945
-------------
Total Expenses (Note 8) ............................. 2,529,725
Custody earnings credit (Note 4) .......................... (36)
-------------
Net Expenses ........................................ 2,529,689
-------------
Net Investment Income ..................................... 22,955,997
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments .......................... 172,031
Net change in unrealized appreciation on investments ...... 4,016,208
-------------
Net Gain .................................................. 4,188,239
-------------
Net Increase in Net Assets ................................ 27,144,236
=============
12 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SIX MONTHS ENDED
FEBRUARY 28, 2005 YEAR ENDED
(UNAUDITED) AUGUST 31, 2004
($) ($)
----------------- ---------------
INCREASE IN NET ASSETS:
OPERATIONS
Net investment income ................................................... 22,955,997 32,557,033
Net realized gain on investments ........................................ 172,031 12,489,394
Net change in unrealized appreciation on investments .................... 4,016,208 20,295,744
----------------- ---------------
Net Increase from Operations ........................................ 27,144,236 65,342,171
----------------- ---------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTEREST
Contributions ........................................................... 158,462,053 453,429,815
Withdrawals ............................................................. (100,215,444) (133,062,921)
----------------- ---------------
Net Increase from Transactions in Investors' Beneficial Interest .... 58,246,609 320,366,894
----------------- ---------------
Total Increase in Net Assets ........................................ 85,390,845 385,709,065
NET ASSETS
Beginning of period ..................................................... 896,370,496 510,661,431
----------------- ---------------
End of period ........................................................... 981,761,341 896,370,496
================= ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED)
($)
- ----------------------------------------------------------------------------------------------------------
INCREASE IN CASH
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment income ................................................................. 22,955,997
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Purchase of investment securities ..................................................... (526,450,444)
Proceeds from disposition of investment securities .................................... 322,283,178
Sale of short-term portfolio investments, net ......................................... 130,267,000
Increase in interest and fees receivable .............................................. (2,132,558)
Increase in receivable for investments sold ........................................... (11,445,831)
Decrease in other assets .............................................................. 5,731
Decrease in deferred facility fees .................................................... (189,395)
Decrease in payable for accrued expenses .............................................. (51,305)
Net amortization of premium (discount) ................................................ (832,133)
Increase in payable for investments purchased ......................................... 87,807,040
Increase in other liabilities ......................................................... 27,311
------------
Net cash flow provided by operating activities .................................. 22,244,591
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from capital contributions ................................................... 158,462,053
Payment of capital withdrawals ........................................................ (100,215,444)
------------
Net cash flow provided by financing activities .................................. 58,246,609
------------
Net increase in cash ............................................................ 80,491,200
CASH
Cash at beginning of the period ....................................................... 462
------------
Cash at end of the period ............................................................. 80,491,662
============
14 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SELECTED DATA FOR AN INTEREST OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
-----------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2005
(UNAUDITED) 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA
Total return 3.06%(e) 10.39% 11.68%(a) (2.20)% 5.15% 8.73%
Operating expenses 0.53%(f) 0.52%(b) 0.57%(b) 0.55%(b) 0.53%(b) 0.55%
Interest expense 0.03%(c) --%(c) --%(c) 0.03% --% --%
Net expenses 0.56%(f) 0.52%(b) 0.57%(b) 0.58%(b) 0.53%(b) 0.55%
Net investment income 5.11%(f) 4.45%(b) 5.96%(b) 6.42%(b)(d) 8.94%(b) 9.26%
Portfolio turnover rate 37%(e) 97% 75% 70% 63% 21%
________________________________
(a) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Portfolio's return.
(b) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(c) Rounds to less than 0.01%.
(d) Effective September 1, 2001, the Portfolio adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies and began
amortizing and accreting premium and discount on debt securities. The
effect of this change for the year ended August 31, 2002, was to increase
the ratio of net investment income to average net assets from 6.41% to
6.42%. Ratios and supplemental data for the periods prior to August 31,
2002 have not been restated to reflect this change in presentation.
(e) Not annualized.
(f) Annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005 (UNAUDITED) HIGHLAND FLOATING RATE FUND
($)
- ----------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Portfolio, at cost ................................................................ 912,541,519
------------
Investments in Portfolio, at value ............................................................... 917,131,061
Receivable for:
Fund shares sold .............................................................................. 6,672,171
Deferred Trustees' compensation plan (Note 4) .................................................... 6,120
Other assets ..................................................................................... 127,881
------------
Total Assets ............................................................................... 923,937,233
LIABILITIES:
Payable for:
Distributions ................................................................................. 1,420,268
Administration fee (Note 4) ................................................................... 137,234
Trustees' fees (Note 4) ....................................................................... 12,333
Distribution and service fees (Note 4) ........................................................ 354,851
Deferred Trustees' fees (Note 4) ................................................................. 6,120
Accrued expenses and other liabilities ........................................................... 34,451
------------
Total Liabilities .......................................................................... 1,965,257
------------
NET ASSETS ........................................................................................... 921,971,976
============
COMPOSITION OF NET ASSETS
Paid-in capital .................................................................................. 932,383,466
Overdistributed net investment income ............................................................ (387,981)
Accumulated net realized loss .................................................................... (14,613,051)
Net unrealized appreciation on investments allocated from Portfolio .............................. 4,589,542
------------
NET ASSETS ........................................................................................... 921,971,976
============
CLASS A
Net assets ....................................................................................... 259,322,789
Shares outstanding ............................................................................... 26,339,738
Net asset value per share (Net assets/Shares outstanding) ........................................ 9.85(a)
Maximum offering price per share ($9.85 / 0.9650) ................................................ 10.21(b)
CLASS B
Net assets ....................................................................................... 182,569,676
Shares outstanding ............................................................................... 18,551,657
Net asset value and offering price per share (Net assets/Shares outstanding) ..................... 9.84(a)
CLASS C
Net assets ....................................................................................... 302,389,787
Shares outstanding ............................................................................... 30,726,882
Net asset value and offering price per share (Net assets/Shares outstanding) ..................... 9.84(a)
CLASS Z
Net assets ....................................................................................... 177,689,724
Shares outstanding ............................................................................... 18,055,335
Net asset value, offering and redemption price per share (Net assets/Shares outstanding) ......... 9.84
____________________________________________________
(a) Redemption price per share is equal to the net asset value per share less
any applicable contingent deferred sales charge.
(b) On sales of $100,000 or more, the offering price is reduced.
16 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED)
($)
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest, dividends and fees allocated from Portfolio (Note 1) ................................... 23,658,118
------------
EXPENSES
Net operating expenses allocated from Portfolio (Note 1) ......................................... 2,212,237
Administration fee (Note 4) ...................................................................... 833,400
Distribution fee: (Note 4)
Class A ....................................................................................... 111,007
Class B ....................................................................................... 409,131
Class C ....................................................................................... 819,527
Service fee: (Note 4)
Class A ....................................................................................... 283,858
Class B ....................................................................................... 227,295
Class C ....................................................................................... 341,470
Transfer agent fee (Note 4) ...................................................................... 340,101
Professional fees ................................................................................ 71,998
Accounting services fee (Note 4) ................................................................. 42,494
Trustees' fees (Note 4) .......................................................................... 46,489
Custody fee (Note 4) ............................................................................. 1,024
Other expenses ................................................................................... 379,163
------------
Total Operating Expenses ................................................................... 6,119,194
Interest expense allocated from Portfolio (Note 1) ............................................... 15,303
Commitment fee allocated from Portfolio (Note 1) ................................................. 121,596
------------
Total Expenses (Note 8) .................................................................... 6,256,093
Fees and expenses waived or reimbursed by Investment Adviser (Note 4) ............................ (715,357)
------------
Net Expenses ............................................................................... 5,540,736
------------
Net Investment Income ............................................................................ 18,117,382
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ALLOCATED FROM PORTFOLIO (NOTE 1)
Net realized gain on investments allocated from Portfolio ........................................ 134,988
Net change in unrealized appreciation on investments allocated from Portfolio .................... 3,753,863
------------
Net Gain ......................................................................................... 3,888,851
------------
Net Increase in Net Assets ....................................................................... 22,006,233
============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2005 YEAR ENDED
(UNAUDITED) AUGUST 31, 2004
($) ($)
----------------- ---------------
INCREASE IN NET ASSETS:
OPERATIONS
Net investment income ............................................................... 18,117,382 23,375,298
Net realized gain on investments allocated from Portfolio ........................... 134,988 11,716,731
Net change in unrealized appreciation on investments allocated from Portfolio ....... 3,753,863 16,417,157
----------------- ---------------
Net Increase from Operations .................................................... 22,006,233 51,509,186
----------------- ---------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income:
Class A ......................................................................... (5,226,228) (6,051,546)
Class B ......................................................................... (3,849,738) (6,346,275)
Class C ......................................................................... (5,554,353) (7,124,188)
Class Z ......................................................................... (3,729,760) (3,993,912)
----------------- ---------------
Total Distributions Declared to Shareholders .................................... (18,360,079) (23,515,921)
----------------- ---------------
SHARE TRANSACTIONS
Class A:
Subscriptions ................................................................... 68,974,111 150,174,094
Distributions reinvested ........................................................ 3,521,375 4,056,148
Redemptions ..................................................................... (36,285,148) (36,606,622)
----------------- ---------------
Net Increase .................................................................... 36,210,338 117,623,620
Class B:
Subscriptions ................................................................... 4,450,831 42,636,771
Distributions reinvested ........................................................ 2,294,043 3,649,856
Redemptions ..................................................................... (16,310,258) (27,516,151)
----------------- ---------------
Net Increase (Decrease) ......................................................... (9,565,384) 18,770,476
Class C:
Subscriptions ................................................................... 53,366,634 166,995,336
Distributions reinvested ........................................................ 3,467,721 4,331,572
Redemptions ..................................................................... (34,398,838) (34,117,656)
----------------- ---------------
Net Increase .................................................................... 22,435,517 137,209,252
Class Z:
Subscriptions ................................................................... 49,109,708 126,869,430
Distributions reinvested ........................................................ 808,345 1,029,585
Redemptions ..................................................................... (12,443,625) (22,807,614)
----------------- ---------------
Net Increase .................................................................... 37,474,428 105,091,401
----------------- ---------------
Net Increase from Share Transactions ............................................ 86,554,899 378,694,749
----------------- ---------------
Total Increase in Net Assets ............................................. 90,201,053 406,688,014
----------------- ---------------
NET ASSETS
Beginning of period ................................................................. 831,770,923 425,082,909
End of period (including overdistributed net investment income of $(387,981) and
$(145,284), respectively) ....................................................... 921,971,976 831,770,923
================= ===============
18 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2005 YEAR ENDED
(UNAUDITED) AUGUST 31, 2004
----------------- ---------------
CHANGES IN SHARES
Class A:
Subscriptions ................................................................... 7,019,991 15,464,717
Issued for distributions reinvested.............................................. 358,393 416,590
Redemptions ..................................................................... (3,694,615) (3,764,250)
----------------- ---------------
Net Increase .................................................................... 3,683,769 12,117,057
Class B:
Subscriptions ................................................................... 453,244 4,402,237
Issued for distributions reinvested.............................................. 233,527 375,744
Redemptions ..................................................................... (1,661,316) (2,840,856)
----------------- ---------------
Net Increase (Decrease) ......................................................... (974,545) 1,937,125
Class C:
Subscriptions ................................................................... 5,428,602 17,241,992
Issued for distributions reinvested.............................................. 353,002 445,134
Redemptions ..................................................................... (3,502,379) (3,515,347)
----------------- ---------------
Net Increase .................................................................... 2,279,225 14,171,779
Class Z:
Subscriptions ................................................................... 4,998,204 13,152,535
Issued for distributions reinvested.............................................. 82,268 105,643
Redemptions ..................................................................... (1,266,923) (2,357,817)
----------------- ---------------
Net Increase .................................................................... 3,813,549 10,900,361
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
--------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
FEBRUARY 28, 2005 AUGUST 31,
CLASS A SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 $ 10.05
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (b) 0.22 0.37 0.48 0.54(c) 0.81 0.71
Net realized and unrealized gain (loss)
allocated from Portfolio 0.05 0.52 0.46 (0.79)(c) (0.37) (0.05)
========= ========= ======== ========= ========= =========
Total from Investment Operations 0.27 0.89 0.94 (0.25) 0.44 0.66
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.22) (0.38) (0.48) (0.54) (0.82) (0.71)
From net realized gains -- -- -- --(d) --(d) --(d)
========= ========= ======== ========= ========= =========
Total Distributions Declared to
Shareholders (0.22) (0.38) (0.48) (0.54) (0.82) (0.71)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 9.85 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
Total return (e)(f) 2.81%(h) 9.65% 11.03%(g) (2.67)% 4.56% 6.79%(h)
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.12%(j) 1.15% 1.15% 1.15% 1.15% 1.15%(j)
Interest expense allocated from
Portfolio 0.03%(i) --%(i) --%(i) 0.03% --% --%
Net expenses 1.15%(j) 1.15% 1.15% 1.18% 1.15% 1.15%(j)
Net investment income 4.53%(j) 3.78% 5.39% 5.83%(c) 8.28% 8.53%(j)
Waiver/reimbursement 0.17%(j) 0.17% 0.28% 0.28% 0.18% 0.13%(j)
Net assets, end of period (000's) $ 259,323 $ 222,032 $ 97,924 $ 108,583 $ 138,058 $ 147,209
_____________________________________________
(a) Class A Shares were initially offered on November 2, 1999. Per share data
and total return reflect activity from that date.
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01,
and increased the ratio of net investment income to average net assets
from 5.82% to 5.83%. Per share data and ratios for periods prior to August
31, 2002 have not been restated to reflect this change in presentation.
(d) Rounds to less than $0.01.
(e) Had the Portfolio's investment adviser not waived or reimbursed a portion
of expenses, total return would have been reduced.
(f) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or CDSC.
(g) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Fund's Class A Shares return.
(h) Not annualized.
(i) Rounds to less than 0.01%.
(j) Annualized.
20 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
--------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
FEBRUARY 28, 2005 AUGUST 31,
CLASS B SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 $ 10.05
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (b) 0.20 0.34 0.45 0.51(c) 0.77 0.67
Net realized and unrealized gain (loss)
allocated from Portfolio 0.05 0.51 0.46 (0.79)(c) (0.37) (0.05)
========= ========= ======== ========= ========= =========
Total from Investment Operations 0.25 0.85 0.91 (0.28) 0.40 0.62
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.21) (0.34) (0.45) (0.51) (0.78) (0.67)
From net realized gains -- -- -- --(d) --(d) --(d)
========= ========= ======== ========= ========= =========
Total Distributions Declared to
Shareholders (0.21) (0.34) (0.45) (0.51) (0.78) (0.67)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 9.84 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
Total return (e)(f) 2.53%(h) 9.27% 10.65%(g) (3.02)% 4.19% 6.35%(h)
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.47%(j) 1.50% 1.50% 1.50% 1.50% 1.50%(j)
Interest expense allocated from
Portfolio 0.03%(i) --%(i) --%(i) 0.03% --% --%
Net expenses 1.50%(j) 1.50% 1.50% 1.53% 1.50% 1.50%(j)
Net investment income 4.17%(j) 3.51% 5.05% 5.48%(c) 7.93% 8.18%(j)
Waiver/reimbursement 0.17%(j) 0.17% 0.28% 0.28% 0.18% 0.13%(j)
Net assets, end of period (000's) $ 182,570 $ 191,365 $163,448 $ 174,707 $ 195,891 $ 83,695
_____________________________________________________
(a) Class B Shares were initially offered on November 2, 1999. Per share data
and total return reflect activity from that date.
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01,
and increased the ratio of net investment income to average net assets
from 5.47% to 5.48%. Per share data and ratios for periods prior to August
31, 2002 have not been restated to reflect this change in presentation.
(d) Rounds to less than $0.01.
(e) Had the Portfolio's investment adviser not waived or reimbursed a portion
of expenses, total return would have been reduced.
(f) Total return at net asset value assuming all distributions reinvested and
no CDSC.
(g) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Fund's Class B Shares return.
(h) Not annualized.
(i) Rounds to less than 0.01%.
(j) Annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 21
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
--------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
FEBRUARY 28, 2005 AUGUST 31,
CLASS C SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 $ 10.05
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (b) 0.20 0.32 0.44 0.50(c) 0.76 0.66
Net realized and unrealized gain (loss)
allocated from Portfolio 0.04 0.52 0.46 (0.79)(c) (0.37) (0.05)
========= ========= ======== ========= ========= =========
Total from Investment Operations 0.24 0.84 0.90 (0.29) 0.39 0.61
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.20) (0.33) (0.44) (0.50) (0.77) (0.66)
From net realized gains -- -- -- --(d) --(d) --(d)
========= ========= ======== ========= ========= =========
Total Distributions Declared to
Shareholders (0.20) (0.33) (0.44) (0.50) (0.77) (0.66)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 9.84 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
Total return (e)(f) 2.46%(h) 9.10% 10.48%(g) (3.16)% 4.04% 6.20%(h)
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.62%(j) 1.65% 1.65% 1.65% 1.65% 1.65%(j)
Interest expense allocated from
Portfolio 0.03%(i) --%(i) --%(i) 0.03% --% --%
Net expenses 1.65%(j) 1.65% 1.65% 1.68% 1.65% 1.65%(j)
Net investment income 4.02%(j) 3.28% 4.88% 5.33%(c) 7.78% 8.03%(j)
Waiver/reimbursement 0.17%(j) 0.17% 0.28% 0.28% 0.18% 0.13%(j)
Net assets, end of period (000's) $ 302,390 $ 278,797 $132,656 $ 137,098 $ 184,399 $ 91,664
______________________________________________________
(a) Class C Shares were initially offered on November 2, 1999. Per share data
and total return reflect activity from that date.
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01,
and increased the ratio of net investment income to average net assets
from 5.32% to 5.33%. Per share data and ratios for periods prior to August
31, 2002 have not been restated to reflect this change in presentation.
(d) Rounds to less than $0.01.
(e) Had the Portfolio's investment adviser not waived or reimbursed a portion
of expenses, total return would have been reduced.
(f) Total return at net asset value assuming all distributions reinvested and
no CDSC.
(g) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Fund's Class C Shares return.
(h) Not annualized.
(i) Rounds to less than 0.01%.
(j) Annualized.
22 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2005
CLASS Z SHARES (UNAUDITED) 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 $ 10.07
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (a) 0.24 0.40 0.50 0.57(b) 0.84 0.87
Net realized and unrealized gain (loss)
allocated from Portfolio 0.04 0.52 0.47 (0.78)(b) (0.37) (0.07)
========= ========= ======== ========= ========= =========
Total from Investment Operations 0.28 0.92 0.97 (0.21) 0.47 0.80
- ----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.24) (0.41) (0.51) (0.58) (0.85) (0.87)
From net realized gains -- -- -- --(c) --(c) --(c)
========= ========= ======== ========= ========= =========
Total Distributions Declared to
Shareholders (0.24) (0.41) (0.51) (0.58) (0.85) (0.87)
==================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 9.84 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
Total return (e)(f) 2.89%(h) 10.03% 11.42%(f) (2.33)% 4.89% 8.23%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 0.77%(i) 0.80% 0.80% 0.80% 0.80% 0.80%
Interest expense allocated from
Portfolio 0.03%(g) --%(g) --%(g) 0.03% --% --%
Net expenses 0.80%(i) 0.80% 0.80% 0.83% 0.80% 0.80%
Net investment income 4.87%(i) 4.12% 5.53% 6.18%(b) 8.63% 8.94%
Waiver/reimbursement 0.17%(i) 0.17% 0.28% 0.28% 0.18% 0.39%
Net assets, end of period (000's) $ 177,690 $ 139,577 $ 31,055 $ 13,236 $ 11,662 $ 6,845
_____________________________________________
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01,
and increased the ratio of net investment income to average net assets
from 6.17% to 6.18%. Per share data and ratios for periods prior to August
31, 2002 have not been restated to reflect this change in presentation.
(c) Rounds to less than $0.01.
(d) Had the Portfolio's investment adviser not waived or reimbursed a portion
of expenses, total return would have been reduced.
(e) Total return at net asset value assuming all distributions reinvested.
(f) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Fund's Class Z Shares return.
(g) Rounds to less than 0.01%.
(h) Not annualized.
(i) Annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND
NOTE 1. ORGANIZATION
Highland Floating Rate Fund (the "Fund") is a Massachusetts business trust
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a non-diversified, closed-end management investment company. Effective
October 18, 2004, Columbia Floating Rate Fund was renamed Highland Floating Rate
Fund. Also on that date, Columbia Floating Rate Limited Liability Company was
renamed Highland Floating Rate Limited Liability Company (the "Portfolio").
INVESTMENT GOAL
The Fund invests all of its investable assets in the Portfolio. The Portfolio
seeks a high level of current income consistent with preservation of capital.
THE PORTFOLIO
The Portfolio is registered under the 1940 Act as a non-diversified, closed-end
management investment company and is organized as a Delaware limited liability
company. The Portfolio allocates income, expenses and realized and unrealized
gains and losses to each investor on a daily basis, based on methods in
compliance with the Internal Revenue Code of 1986, as amended (the "Code"). At
February 28, 2005, the Fund and Highland Institutional Floating Rate Income Fund
were the sole investors in the Portfolio and owned 93.4% and 6.6%, respectively,
of the Portfolio.
FUND SHARES
The Fund may issue an unlimited number of shares and continuously offers four
classes of shares: Class A, Class B, Class C and Class Z. Certain share classes
have their own sales charge and bear class specific expenses, which include
distribution fees and service fees.
Class A shares are subject to a maximum front-end sales charge of 3.50% based on
the amount of initial investment. Class A shares purchased without an initial
sales charge by accounts aggregating $1 million to $25 million are subject to a
1.00% contingent deferred sales charge ("CDSC") on shares sold within eighteen
months. Class B shares are subject to a maximum CDSC of 3.25% based upon the
holding period after purchase. Class B shares will convert to Class A shares
eight years after purchase. Class C shares are subject to a 1.00% CDSC on shares
sold within one year after purchase. Class Z shares are not subject to a CDSC.
There are certain restrictions on the purchase of Class Z shares, as described
in the Fund's prospectus.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Portfolio and the Fund in the preparation of their financial statements.
SECURITY VALUATION
The value of the Fund's assets is based on its proportionate share of the
current market value of the Portfolio's investments. For securities with readily
available market quotations, the Portfolio uses those quotations for pricing.
When portfolio securities are traded on the relevant day of valuation, the
valuation will be the last reported sale price on that day. If there are no such
sales on that day, the security will be valued at the mean between the most
recently quoted bid and asked prices from principal market makers. Securities
without a sale price or bid and ask quotations on the valuation day will be
priced by an independent pricing service. If securities do not have readily
available market quotations or pricing service prices, including circumstances
under which such are determined not to be accurate or current (including when
events materially affect the value of securities occurring between the time when
market price is determined and calculation of the Portfolio's net asset value),
such securities are valued at their fair value, as determined in good faith in
accordance with procedures established by the Portfolio's Board of Trustees. In
these cases, the Portfolio's net asset value will reflect the affected portfolio
securities' value as determined in the judgment of the Board of Trustees or its
designee instead of being determined by the market. Using a fair value pricing
methodology to price securities may result in a value that is different from a
security's most recent sale price and from the prices used by other investment
companies to calculate their net asset values. There can
24
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND
be no assurance that the Portfolio's valuation of a security will not differ
from the amount that it realizes upon the sale of such security.
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. Cost is determined
and gains (losses) are based upon the specific identification method for both
financial statement and federal income tax purposes.
REPURCHASE AGREEMENTS
The Portfolio may engage in repurchase agreement transactions with institutions
that the Portfolio's investment adviser has determined are creditworthy. The
Portfolio, through its custodian, receives delivery of underlying securities
collateralizing a repurchase agreement. Collateral is at least equal, at all
times, to the value of the repurchase obligation including interest. A
repurchase agreement transaction involves certain risks in the event of default
or insolvency of the counterparty. These risks include possible delays or
restrictions upon the Portfolio's ability to dispose of the underlying
securities and a possible decline in the value of the underlying securities
during the period while the Portfolio seeks to assert its rights.
INCOME RECOGNITION
Interest income is recorded on the accrual basis and includes accretion of
discounts and amortization of premiums. Facility fees received are treated as
market discounts. Unamortized facility fees are reflected as deferred fees on
the Portfolio's Statement of Assets and Liabilities.
DETERMINATION OF CLASS NET ASSET VALUES
All income, expenses (other than class-specific expenses of distribution fees
and service fees, as shown on the Statement of Operations) and realized and
unrealized gains (losses) are allocated to each class of the Fund on a daily
basis for purposes of determining the net asset value of each class. Income and
expenses are allocated to each class based on the settled shares method, while
realized and unrealized gains (losses) are allocated based on the relative net
assets of each class.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Code and will distribute substantially all of its taxable
income, if any, for its tax year, and as such will not be subject to federal
income taxes. In addition, the Portfolio is treated as a partnership for federal
income tax purposes and all of its income is allocated to its owners based on
methods in compliance with the Internal Revenue Service. Therefore, no federal
income tax provision is recorded.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared by the Fund daily and paid
monthly. Net realized capital gains, if any, are distributed at least annually.
STATEMENT OF CASH FLOWS
Information on financial transactions which have been settled through the
receipt or disbursement of cash is presented in the Statement of Cash Flows. The
cash amount shown in the Statement of Cash Flows is the amount included within
the Portfolio's Statement of Assets and Liabilities and includes cash on hand at
its custodian bank and does not include any short-term investments.
NOTE 3. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with income tax regulations, which may differ from GAAP.
Reclassifications are made to the Fund's capital accounts for permanent tax
differences to reflect income and gains available for distribution (or available
capital losscarryforwards) under income tax regulations.
The tax character of distributions paid during the years ended August 31, 2004
and August 31, 2003 was as follows:
- --------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------------------
Distributions paid from:
- --------------------------------------------------------------------------------
Ordinary income* $23,515,921 $18,706,968
- --------------------------------------------------------------------------------
Long-term capital gains -- --
- --------------------------------------------------------------------------------
* For tax purposes short-term capital gains distributions, if any, are
considered ordinary income distributions.
25
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND
As of August 31, 2004, the components of distributable earnings on a tax basis
were as follows:
- --------------------------------------------------------------------------------
Undistributed Undistributed
Ordinary Long-Term Net Unrealized
Income Capital Gains Appreciation*
- --------------------------------------------------------------------------------
$1,036,894 $-- $551,610
- --------------------------------------------------------------------------------
* The differences between book-basis and tax-basis net unrealized
appreciation/depreciation are primarily due to deferral of losses from
wash sales and accretion/amortization on debt securities.
These amounts are as of the most recent tax year end.
Portfolio unrealized appreciation and depreciation at February 28, 2005, based
on cost of investments for federal income tax purposes was:
- --------------------------------------------------------------------------------
Unrealized appreciation $ 13,705,110
- --------------------------------------------------------------------------------
Unrealized depreciation (9,014,619)
------------
Net unrealized appreciation $ 4,690,491
- --------------------------------------------------------------------------------
The following capital loss carryforwards may be available to reduce taxable
income arising from future net realized gains on investments, if any, to the
extent permitted by the Code:
- --------------------------------------------------------------------------------
Year of Capital Loss
Expiration Carryforward
- --------------------------------------------------------------------------------
2010 $ 7,156,391
- --------------------------------------------------------------------------------
2011 4,178,432
- --------------------------------------------------------------------------------
2012 3,291,779
- --------------------------------------------------------------------------------
Total $ 14,626,602
- --------------------------------------------------------------------------------
NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, TRUSTEE, AND OTHER
FEES
INVESTMENT ADVISORY FEE
Effective April 15, 2004, Highland Capital Management, L.P. ("Highland") is the
investment adviser to the Portfolio. Highland receives a monthly investment
advisory fee based on the Portfolio's average daily managed net assets at the
following annual rates:
- --------------------------------------------------------------------------------
Average Daily Managed Net Assets Annual Fee Rate
- --------------------------------------------------------------------------------
First $1billion 0.45%
- --------------------------------------------------------------------------------
Next $1billion 0.40%
- --------------------------------------------------------------------------------
Over $2 billion 0.35%
- --------------------------------------------------------------------------------
Average daily managed net assets of the Portfolio means the average daily value
of the total assets of the Portfolio less all accrued liabilities of the
Portfolio (other than the aggregate amount of any outstanding borrowing
constituting financial leverage).
For the six months ended February 28, 2005, the Portfolio's effective investment
advisory fee rate was 0.45%.
Prior to April 15, 2004, Columbia Management Advisors, Inc. ("Columbia
Management") was the investment adviser to the Portfolio. Columbia Management
was an indirect, wholly owned subsidiary of FleetBoston Financial Corporation
("FleetBoston"). Effective April 1, 2004, FleetBoston, including Columbia
Management and the Fund's transfer agent and distributor, was acquired by Bank
of America Corporation.
ADMINISTRATION FEES
Effective October 18, 2004, Highland provides administrative services to the
Portfolio and the Fund for a monthly administration fee at the annual rate of
0.20% of the Fund's average daily managed assets. The Fund, but not the
Portfolio, pays Highland for these services. Under separate sub-administration
agreements, Highland has delegated certain administrative functions to PFPC Inc.
("PFPC"). For the period ended February 28, 2005, Highland received $623,365 in
administration fees and paid PFPC $31,168 for their services. This amount is
included in the "Administration fee" on the Statement of Operations of the Fund.
Prior to October 18, 2004, Columbia Management provided administrative and other
services to the Fund for a monthly administration fee at the annual rate of
0.20% of the Fund's average daily net assets. For the period September 1, 2004
through October 17, 2004, Columbia Management received $210,035 in
administration fees, which is included in the "Administration fee" on the
Statement of Operations of the Fund.
26
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND
ACCOUNTING SERVICES FEES
Effective October 18, 2004, the Portfolio and the Fund entered into separate
accounting services agreements with PFPC. All fees are paid by the Portfolio.
For the period October 18, 2004 through February 28, 2005, PFPC received $95,526
for this service. An allocated portion of the Portfolio fee is included in the
"Net operating expense allocated from Portfolio" on the Statement of Operations
of the Fund.
Prior to October 18, 2004, Columbia Management was responsible for providing
pricing and bookkeeping services to the Portfolio and the Fund under a pricing
and bookkeeping agreement. Under a separate agreement (the "Outsourcing
Agreement"), Columbia Management delegated those functions to State Street Bank
and Trust Company ("State Street"). As a result, Columbia Management paid the
total fees collected under the Outsourcing Agreement to State Street.
Under its pricing and bookkeeping agreement with the Fund, Columbia Management
received from the Portfolio and the Fund an annual flat fee of $10,000 and
$5,000, respectively, paid monthly, and in any month that the Fund's average
daily net assets exceeded $50 million, an additional monthly fee. The additional
fee rate was calculated by taking into account the fees payable to State Street
under the Outsourcing Agreement. This rate was applied to the average daily net
assets of the Fund for that month. The Fund also paid additional fees for
pricing services based on the number of securities held by the Portfolio. For
the period September 1, 2004 through October 17, 2004, Columbia Management
received pricing and bookkeeping fees of $27,762 from the Fund and $30,460 from
the Portfolio. The Fund fee is included in the "Accounting Services fee" and an
allocated portion of the Portfolio fee is included in the "Net operating
expenses allocated from Portfolio" on the Statement of Operations of the Fund.
TRANSFER AGENT FEE
Effective October 18, 2004, PFPC provides shareholder services to the Fund. For
the period October 18, 2004 through February 28, 2005, PFPC received $151,670
for this service. This fee is included in the "Transfer agent fee" on the
Statement of Operations of the Fund.
Prior to October 18, 2004, Columbia Funds Services, Inc. ("Columbia Services"),
an affiliate of Columbia Management, provided shareholder services to the Fund.
For such services, Columbia Services received a fee, paid monthly, at the annual
rate of $34 per open account. Columbia Services also received reimbursement for
certain out-of-pocket expenses. For the period September 1, 2004 through October
17, 2004, Columbia Services received transfer agent fees, excluding
out-of-pocket expenses, of $843 from the Portfolio and $98,372 from the Fund. An
allocated portion of the Portfolio fee is included in the "Net operating
expenses allocated from Portfolio" and the Fund fee is included in the "Transfer
agent fee" on the Statement of Operations of the Fund.
SERVICE AND DISTRIBUTION FEES
Effective April 15, 2004, PFPC Distributors, Inc. (the "Distributor") serves as
the principal underwriter and distributor of the Fund's shares. Prior to April
15, 2004, Columbia Funds Distributor, Inc., an affiliate of Columbia Management,
served as the principal underwriter of the Fund. The Distributor is paid a CDSC
on certain redemptions of Class A, Class B and Class C Shares. For the six
months ended February 28, 2005, the Distributor received $6,900, $77,015 and
$42,863 of CDSC on Class A, Class B and Class C share redemptions, respectively.
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan"), which requires the payment of a monthly service fee to the Distributor
at the annual rate of 0.25% of the average daily net assets attributable to
Class A, Class B and Class C shares of the Fund. The Plan also requires the
payment of a monthly distribution fee to the Distributor not exceeding, on an
annual basis, 0.10% for Class A shares and 0.75% for Class B and Class C shares.
As of February 28, 2005, the distribution fees paid to the Distributor, on an
annual basis, were 0.10%, 0.45% and 0.60% of the average daily net assets
attributable to Class A, Class B and Class C shares, respectively.
The CDSC and the fees received from the Plan are used principally as repayment
for amounts paid to dealers who sold such shares.
EXPENSE LIMITS AND FEE REIMBURSEMENTS
Highland has voluntarily agreed to waive fees and reimburse certain expenses to
the extent that total expenses (inclusive of allocated Portfolio expenses but
exclusive of distribution and service fees, brokerage commissions, interest,
commitment fees, taxes and extraordinary expenses, if any) exceed 0.80% annually
of the Fund's average daily net assets. This arrangement may be revised or
discontinued by Highland at any time.
27
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND
CUSTODY
Effective October 18, 2004, PFPC Trust Company ("PFPC Trust") is the custodian
to the Portfolio and Fund. For the period October 18, 2004 through February 28,
2005, PFPC Trust received custody fees of $40,471 from the Portfolio and $500
from the Fund. An allocated portion of the Portfolio fee is included in the "Net
operating expenses allocated from Portfolio" and the Fund fee is included in the
"Custody fee" on the Statement of Operations of the Fund.
For the period September 1, 2004 through October 17, 2004, the Portfolio and
Fund had an agreement with its prior custodian bank, State Street, under which
custody fees could have been reduced by balance credits. The Portfolio and Fund
could have invested a portion of the assets utilized in connection with the
expense offset arrangement in an income-producing asset if they had not entered
into such an agreement.
FEES PAID TO OFFICERS AND TRUSTEES
The Fund pays no compensation to its officers, all of whom are employees of
Highland.
Trustees who are not interested persons (as defined in the 1940 Act) of the Fund
each receive an annual retainer fee of $25,000 for services provided as Trustees
of the Fund. The Fund and Highland Institutional Floating Rate Income Fund pay
$20,000 of this fee (allocated based on their relative net assets). The
remaining $5,000 is paid by the Portfolio.
Prior to July 30, 2004, the previous Trustees of the Fund participated in a
deferred compensation plan. Any continuing obligations of the plan will be paid
solely out of the Fund's assets.
NOTE 5. PORTFOLIO INFORMATION
For the six months ended February 28, 2005, the cost of purchases and proceeds
from sales of securities, excluding short-term obligations, were $526,450,444
and $322,283,178, respectively.
NOTE 6. PERIODIC REPURCHASE OFFERS
The Fund has adopted a fundamental policy to offer each calendar quarter to
repurchase a specified percentage (between 5% and 25%) of the shares then
outstanding at NAV ("Repurchase Offers"). Repurchase Offers are scheduled to
occur on or about the 15th day (or the next business day if the 15th is not a
business day) in the months of March, June, September, and December. It is
anticipated that normally the date on which the repurchase price of shares will
be determined (the "Repurchase Pricing Date") will be the same date as the
deadline for shareholders to provide their repurchase requests to the
Distributor (the "Repurchase Request Deadline"), and if so, the Repurchase
Request Deadline will be set for a time no later than the close of regular
trading on the NYSE on such date. The Repurchase Pricing Date will occur no
later than the 14th day after the Repurchase Request Deadline, or the next
business day if the 14th day is not a business day. Repurchase proceeds will be
paid to shareholders no later than seven days after the Repurchase Pricing Date.
For the six months ended February 28, 2005, there were two Repurchase Offers.
For each Repurchase Offer, the Fund offered to repurchase 10% of its shares. In
the December and March Repurchase Offers, 5.87% and 4.29%, respectively, of
shares outstanding were repurchased.
NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS
The Portfolio invests at least 80% of its net assets (plus any borrowings for
investment purposes) in adjustable rate senior loans ("Senior Loans") the
interest rates of which float or vary periodically based upon a benchmark
indicator of prevailing interest rates to domestic foreign corporations,
partnerships and other entities ("Borrowers"). If the lead lender in a typical
lending syndicate becomes insolvent, enters FDIC receivership or, if not FDIC
insured enters into bankruptcy, the Portfolio may incur certain costs and delays
in receiving payment or may suffer a loss of principal and/or interest. When the
Portfolio purchases a participation of a Senior Loan interest, the Portfolio
typically enters into a contractual agreement with the lender or other third
party selling the participation, not with the borrower directly. As such, the
Portfolio assumes the credit risk of the Borrower, selling participant or other
persons interpositioned between the Portfolio and the Borrower. The ability of
Borrowers to meet their obligations may be affected by economic developments in
a specific industry.
At February 28, 2005, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Portfolio on a
participation basis.
28
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND
Principal
Selling Participant Amount Value
- --------------------------------------------------------------------------------
Goldman Sachs:
Bridge Information Systems, Inc.
Multi Term Loan $ 500,757 $ 22,534
- --------------------------------------------------------------------------------
CSFB:
Quality Distribution, Inc.
Term Loan 2,176,502 2,121,415
- --------------------------------------------------------------------------------
NOTE 8. LINE OF CREDIT
On September 13, 2004, the Portfolio entered into a $150,000,000 credit facility
used for temporary or emergency purposes to facilitate portfolio liquidity.
Interest is charged to the Portfolio based on its borrowings. In addition, the
Portfolio has agreed to pay commitment fees on the unutilized line of credit,
which are included in "Other expenses" on the Statement of Operations.
For the six months ended February 28, 2005, the average daily loan balance
outstanding on days where borrowings existed was $100,000,000 at a weighted
average interest rate of 2.97%.
For the period September 1, 2004 through September 12, 2004, the Portfolio and
other previously affiliated funds participated in a $350,000,000 credit
facility, for temporary or emergency purposes to facilitate portfolio liquidity.
Interest was charged to the Portfolio based on its borrowings. In addition, the
Portfolio agreed to pay commitment fees on its pro-rata portion of the
unutilized line of credit.
NOTE 9. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES
INDUSTRY FOCUS
The Portfolio may focus its investments in the financial services industry,
subjecting it to greater risk than a Portfolio that is more diversified.
NON-PAYMENT RISK
Senior Loans, like other corporate debt obligations, are subject to the risk of
non-payment of scheduled interest and/or principal. Non-payment would result in
a reduction of income to the Portfolio, a reduction in the value of the Senior
Loan experiencing non-payment and a potential decrease in the net asset value of
the Fund.
CREDIT RISK
Securities rated below investment grade are commonly referred to as high-yield,
high risk or "junk debt." They are regarded as predominantly speculative with
respect to the issuing company's continuing ability to meet principal and/or
interest payments. Investments in high-yield Senior Loans may result in greater
net asset value fluctuation than if the Portfolio did not make such investments.
LEGAL PROCEEDINGS
Prior to April 15, 2004, the Fund was advised by Columbia Management and was
part of the Columbia funds complex (the "Columbia Funds"). Several Columbia
Funds are defendants in civil lawsuits that have been transferred and
consolidated for pretrial proceedings in the United States District Court for
the District of Maryland in the Special Multi-District Litigation proceeding
(Index No. 04-MO-15863) created for actions involving market timing issues
against mutual fund complexes. The lawsuits have been commenced as putative
class actions on behalf of investors who purchased, held or redeemed shares of
the Funds during specified periods or as derivative actions on behalf of the
Funds. The lawsuits seek, among other things, unspecified compensatory damages
plus interest and, in some cases, punitive damages, the rescission of investment
advisory contracts, the return of fees paid under those contracts, and
restitution. The consolidated amended class action complaint against
Columbia-affiliated defendants was filed on September 29, 2004 and does not name
the Fund as a defendant or nominal defendant. The consolidated amended fund
derivative complaint against Columbia-affiliated defendants was also filed on
September 29, 2004 and names the Columbia Funds, collectively, as nominal
defendants.
On March 2, 2005, four civil revenue sharing actions alleging, among other
things, that various mutual funds advised by Columbia Management and Columbia
Wanger Asset Management L.P. inappropriately used fund assets to pay brokers to
promote the funds by directing fund brokerage transactions to such brokers and
did not fully disclose such arrangements to shareholders, and charged excessive
12b-1 fees, were consolidated into a single action in the United States District
Court for Massachusetts (IN RE COLUMBIA ENTITIES LITIGATION, Civil Action No.
04-11704-REK). The consolidated complaint has not yet been filed. The Fund, but
not the Portfolio, was named as a nominal defendant in each of the four revenue
sharing actions.
29
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND
NOTE 10. SUBSEQUENT EVENT
On March 4, 2005, the Board of Trustees of the Fund approved the closing of the
Fund's Class B shares to purchases by new and existing shareholders. The Fund's
Class B shares will not accept purchases by new and existing investors after the
close of business on May 2, 2005. Existing investors may still reinvest
distributions in Class B shares.
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IMPORTANT INFORMATION ABOUT THIS REPORT
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TRANSFER AGENT
PFPC Inc.
760 Moore Road
King of Prussia, PA 19406
877.665.1287
DISTRIBUTOR
PFPC Distributors, Inc.
760 Moore Road
King of Prussia, PA 19406
INVESTMENT ADVISER
Highland Capital Management, L.P.
13455 Noel Rd. Suite 1300
Dallas, TX 75240
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
125 High Street
Boston, MA 02110
The Fund mails one shareholder report to each shareholder address. If you would
like more than one report, please call shareholder services at 1-877-665-1287
and additional reports will be sent to you.
This report has been prepared for shareholders of Highland Floating Rate Fund.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to its portfolio securities, and the Fund's proxy
voting record for the most recent 12-month period ended June 30, are available
(i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the
Securities and Exchange Commission's website at http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q, beginning with the fiscal quarter ending November 30,
2004. The Fund's Forms N-Q are available on the Commission's website at
http:/www.sec.gov and also may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC. Information on the Public Reference Room may
be obtained by calling 1-800-SEC-0330.
The Statement of Additional Information includes information about Fund
Directors and is available upon request without charge by calling
1-877-665-1287.
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ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not yet applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) HIGHLAND FLOATING RATE FUND
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By (Signature and Title)* /S/ JAMES D. DONDERO
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James D. Dondero, Chief Executive Officer
(principal executive officer)
Date MAY 9, 2005
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES D. DONDERO
-------------------------------------------------------
James D. Dondero, Chief Executive Officer
(principal executive officer)
Date MAY 9, 2005
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By (Signature and Title)* /S/ M. JASON BLACKBURN
-------------------------------------------------------
M. Jason Blackburn, Chief Financial Officer
(principal financial officer)
Date MAY 9, 2005
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* Print the name and title of each signing officer under his or her signature.