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: AUGUST 31, 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.
[GRAPHIC OMITTED] COVER PHOTO
HIGHLAND FLOATING RATE FUND
Annual Report
August 31, 2005
[GRAPHIC OMITTED] HIGHLAND FUNDS
managed by Highland Capital Management, L.P.
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HIGHLAND FLOATING RATE FUND
TABLE OF CONTENTS
Portfolio Managers' Letter ............................................... 1
Fund Profile ............................................................. 3
Performance Information .................................................. 4
Understanding Your Expenses .............................................. 5
Financial Statements ..................................................... 6
Investment Portfolio .................................................. 7
Portfolio Statement of Assets and Liabilities ......................... 16
Portfolio Statement of Operations ..................................... 17
Portfolio Statements of Changes in Net Assets ......................... 18
Portfolio Statement of Cash Flows ..................................... 19
Portfolio Financial Highlights ........................................ 20
Fund Statement of Assets and Liabilities .............................. 21
Fund Statement of Operations .......................................... 22
Fund Statements of Changes in Net Assets .............................. 23
Fund Financial Highlights ............................................. 25
Notes to Financial Statements ......................................... 29
Report of Independent Registered Public Accounting Firm .................. 36
Trustees and Officers .................................................... 37
Important Information About This Report .................................. 39
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.
PORTFOLIO MANAGERS' LETTER
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HIGHLAND FLOATING RATE FUND
Dear Shareholders:
Highland Floating Rate Fund (the "Fund") is a continuously offered,
non-diversified, closed-end management investment company that invests all of
its investable assets in the Highland Floating Rate Limited Liability Company
(the "Portfolio"). The Portfolio seeks to provide a high level of current income
consistent with preservation of capital.
PERFORMANCE SUMMARY
For the 12-month period ended August 31, 2005, Class A shares of Highland
Floating Rate Fund returned 5.93% without sales charge. That was less than the
return of the fund's benchmark, the Credit Suisse First Boston ("CSFB")
Leveraged Loan Index, which was 5.96% for the period. However, the Fund did
better than the Lipper Loan Participation Loan Category average, which was 5.83%
for the period. We are disappointed that the Fund did not outperform the CSFB
Leveraged Loan Index, but we believe that the Fund is positioned to excel in the
future.
LEVERAGE LOAN MARKET OVERVIEW
The year ending August 31, 2005 was another strong year for the leveraged loan
market, which was fueled by improved earnings, and increased demand for floating
rate loans. For the fiscal year ended August 31, 2005, total leveraged loan
volume, as tracked by Standard & Poor's/Leveraged Commentary & Data, increased
strongly to $279 billion, versus $215 billion in the prior year. However, during
the year default rates, as tracked by Standard & Poor's/Loan Syndication &
Trading Association Leveraged Loan Index, increased from a lagging 12 month
default rate of 0.94% as of August 31, 2004, to 1.51% as of August 31, 2005.
As tracked by the CSFB Leveraged Loan Index, spreads on leveraged loans
tightened considerably during the fiscal year of the Fund from a weighted
average spread of 302 basis points at August 31, 2004, to 265 basis points at
August 31, 2005. This spread tightening was offset by a significant increase in
LIBOR (London Interbank Offered Rate) over the fiscal year. LIBOR is the rate of
interest at which banks can borrow funds from other banks, in marketable size,
in the London interbank market. As you can see in the chart below, three month
LIBOR rose from 1.67% at August 31, 2004, to 3.70% at August 31, 2005. As a
result, even though spreads tightened, the weighted average coupon on leveraged
loans, as tracked by the CSFB Leveraged Loan Index, increased from 4.71% at
August 31, 2004, to 6.34% at August 31, 2005, a change of 1.63% over the fiscal
year.
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
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3 MONTH LIBOR - 8/31/04-8/31/05*
8/31/04 1.67
9/30/04 1.84
10/31/04 2
11/30/04 2.29
12/31/04 2.4
1/31/05 2.59
2/28/05 2.72
3/31/05 2.87
4/30/05 3.09
5/31/05 3.13
6/30/05 3.34
7/31/05 3.52
8/31/05 3.7
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* Source British Bankers Association
PORTFOLIO OVERVIEW
During the fiscal year the Portfolio initiated core positions in several new
investments. Specifically, positions were taken in loans issued by Home
Interiors & Gifts, Inc., a manufacturer and distributor of home decorative
accessories, DS Waters
1
PORTFOLIO MANAGERS' LETTER (CONTINUED)
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HIGHLAND FLOATING RATE FUND
Enterprises LP, a home and office delivery bottled water operator, General
Growth Properties, Inc., a real estate investment trust engaged in the
ownership, operation, acquisition, and development of regional mall and
community shopping centers, Extended Stay America, Inc., an operator of extended
stay lodging hotels, and SunGard Data Systems, Inc., a provider of integrated
software and processing solutions and information availability services. These
comprise 1.9%, 1.3%, 1.3%, 1.3%, and 1.3% of net assets, respectively. These
percentages represent the percentages of net assets for each holding as of
August 31, 2005 and are subject to change.
The Portfolio continues to overweight the following industries versus the index:
Cable & Satellite Television, Building & Development, and Lodging & Casinos.
Cable & Satellite Television, which constituted 9.9% of net assets, performed
well for the Portfolio. Specifically, Century Cable Holdings and Charter
Communications Operating LLC (2.2% and 1.4% of net assets, respectively) had
another strong year for the Portfolio.
We believe the Portfolio remains well diversified. As of August 31, 2005, the
average individual loan position represented approximately 0.03% of total
assets, while the average industry sector exposure accounted for roughly 2.4%.
ADDITIONAL FUND INFORMATION
Effective May 23, 2005, the Portfolio is now able to invest up to 20% of its net
assets in senior loans of foreign borrowers that are foreign currency
denominated. We believe this change will be of benefit to the Fund and allow it
to invest in senior loans previously unavailable to the Fund.
We thank you for your investment in the Fund.
/S/MARK OKADA /S/JOE DOUGHERTY
Mark Okada Joe Dougherty
Portfolio Manager Portfolio Manager
Mark Okada and Joe Dougherty have been portfolio managers of the Highland
Floating Rate Fund since April 15, 2004.
Just like any other investment, floating rate loan investments present financial
risks. Defaults on the loans in the Portfolio could reduce the Fund's net asset
value and its distributions, as could nonpayment of scheduled interest and
principal. Prepayment of principal by a borrower could result in the Funds'
managers having to replace the loan with a lower-yielding security, which could
affect the valuation of the Portfolio's holdings.
The Fund is a continuously offered, closed-end management investment company
that provides limited liquidity through a quarterly tender offer for between 5%
and 25% of outstanding shares. Each quarter, the Fund's Trustees must approve
the actual tender. Please read the Fund's prospectus and statement of additional
information carefully for more details.
The Fund may invest a high percentage of assets in a limited number of loans, so
the default of any individual holdings can have a greater impact on the Fund's
net asset value than could a default in a more diversified portfolio.
Floating rate loans are not covered by FDIC insurance or other guarantees
relating to timely payment of principal and interest.
Since economic and market conditions change frequently, there can be no
assurance that the trends described here will continue or that the forecasts
will come to pass. The opinions expressed are those of the management of the
Fund and are subject to change.
2
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 08/31/05)
$1,085.1 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 08/31/05 (%)
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Ba 17.0
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B 56.1
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Caa 6.6
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NR 20.3
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TOP 5 SECTORS AS OF 08/31/05 (%)
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Cable & Satellite Television 9.8
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Health Care 7.2
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Leisure Goods/Activities/Movies 6.0
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Electronic/Electric 5.7
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Building & Development 5.0
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TOP 10 HOLDINGS AS OF 08/31/05 (%)
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Home Interiors & Gifts, Inc., Initial Term Loan, 8.38%, 03/31/11 1.9
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DS Waters Enterprises LP, Term Loan, 8.17%, 11/07/09 1.3
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General Growth Properties, Inc., Tranche B Term Loan, 5.67%, 11/12/08 1.3
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Cricket Communications, Inc., Term Loan B, 5.99%, 01/10/11 1.3
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Extended Stay America, Inc., Mezzanine Loan, 08/01/08 1.3
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Century Cable Holdings LLC, Term Loan, 8.50%, 06/30/09 1.3
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OpBiz LLC, Term Loan A, 6.50%, 08/31/10 1.2
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Charter Communications Operating LLC, Tranche B Term Loan, 6.93%,
04/07/11 1.2
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Hilton Head Communications LP, Revolver, 6.50%, 09/30/07 1.2
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SunGard Data Systems, Inc., U.S. Term Loan, 6.28%, 02/11/13 1.1
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Quality is calculated as a percentage of total notes and bonds. Sectors and
holdings are calculated as a percentage of net assets.
3
PERFORMANCE INFORMATION
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HIGHLAND FLOATING RATE FUND
VALUE OF $10,000 INVESTMENT 12/17/98 (INCEPTION DATE) - 08/31/05*
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
Class Z Shares -- $15,235 ]
Class A (with sales charge) -- $13,527
Class B (without sales charge) -- $13,698
Class C (without sales charge) -- $13,579
CSFB Leveraged Loan Index -- $13,902
Floating cfsb Highland Highland Highland
Rate leveraged Floating Floating Floating
Class Z loan Rate Fund Rate Fund Rate Fund
shares index - Class A - Class B - Class C
12/98 10000 10000 (with sales (without (without
8/99 10555 10370 charge) sales charge) sales charge)
11/99 10633 10331 9654 10000 10000
8/00 11423 10846 10307 10633 10618
8/01 11982 11381 10777 11077 11047
8/02 11702 11162 10489 10743 10698
8/03 13038 12256 11646 11887 11819
8/04 14346 13120 12769 12989 12895
8/05 15235 13902 13527 13698 13579
This chart compares a $10,000 investment made in each class of the Fund to
$10,000 investments made in the index, the Credit Suisse First Boston ("CSFB")
Leveraged Loan Index. CSFB Leveraged Loan Index is an unmanaged index that
tracks the performance of senior floating rate bank loans. Unlike mutual funds,
indices are not investments, do not incur fees or expenses and are not
professionally managed. It is not possible to invest directly in an index.
Securities in the fund may not match those in an index.
* Highland Floating Rate Fund Class A, Class B, and Class C performance is from
November 02, 1999. Index performance is from December 31, 1998.
PERFORMANCE OF A $10,000 INVESTMENT CLASS INCEPTION - 08/31/05 ($)
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Sales Charge Without With
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Class A 14,011 13,527
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Class B 13,698 13,698
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Class C 13,579 13,579
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Class Z 15,235 n/a
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AVERAGE ANNUAL TOTAL RETURNS AS OF 08/31/05 (%)
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Share Class A B C Z
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Class Inception Date 11/02/99 11/02/99 11/02/99 12/17/98
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Sales Charge Without With Without With Without With Without
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1 - YEAR 5.93 2.18 5.46 2.21 5.30 4.30 6.20
5 - YEAR 5.59 4.84 5.20 5.04 5.04 5.04 5.93
SINCE INCEPTION 5.96 5.32 5.55 5.55 5.39 5.39 6.48
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES
NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, UPON REDEMPTION MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE VISIT OUR WEBSITE AT WWW.HIGHLANDFUNDS.COM.
PERFORMANCE FIGURES DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER
WOULD PAY ON FUND DISTRIBUTIONS OR REDEMPTIONS OF FUND SHARES. ALL RESULTS SHOWN
ASSUME REINVESTMENT OF DISTRIBUTIONS. RETURN FIGURES REFLECT VOLUNTARY EXPENSE
REIMBURSEMENTS AND FEE WAIVERS. WITHOUT REIMBURSEMENTS OR WAIVERS, FUND RETURNS
WOULD HAVE BEEN LOWER.
TOTAL RETURNS "WITHOUT SALES CHARGE", DOES NOT INCLUDE SALES CHARGE OR
CONTINGENT DEFERRED SALES CHARGE (CDSC). TOTAL RETURNS "WITH SALES CHARGE",
REFLECT THE MAXIMUM SALES CHARGE OF 3.50% ON CLASS A SHARES; THE MAXIMUM CDSC OF
3.25% ON CLASS B SHARES SUBMITTED AND ACCEPTED FOR REPURCHASE DURING THE FIRST
YEAR AFTER EACH PURCHASE FOR CALCULATION OF THE 1-YEAR RETURN AND THE MAXIMUM OF
1.00% ON CLASS B SHARES SOLD WITHIN THE FIFTH YEAR THEY ARE PURCHASED FOR
CALCULATION OF THE 5-YEAR RETURN; AND THE CDSC OF 1.00% ON CLASS C SHARES SOLD
WITHIN THE FIRST YEAR THEY ARE PURCHASED.
4
UNDERSTANDING YOUR EXPENSES
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HIGHLAND FLOATING RATE FUND
DISCLOSURE OF FUND EXPENSES: We believe it is important for you to understand
the impact of fees regarding your investment. All mutual funds have operating
expenses. As a shareholder of a mutual fund, you incur ongoing costs, which
include costs for portfolio management, administrative services, and shareholder
reports (like this one), among others. Operating expenses, which are deducted
from a fund's gross income, directly reduce the investment return of the fund. A
fund's expenses are expressed as a percentage of its average daily net assets.
This figure is known as the expense ratio. The following examples are intended
to help you understand the ongoing fees (in dollars) of investing in your Fund
and to compare these costs with those of other mutual funds. The examples are
based on an investment of $1,000 made at the beginning of the period shown and
held for the entire period.
This table illustrates your Fund's costs in two ways:
ACTUAL FUND RETURN: This section helps you to estimate the actual expenses,
after any applicable fee waivers, that you paid over the period. The "Ending
Account Value" shown is derived from the Fund's actual return for the past six
month period, the "Expense Ratio" column shows the period's annualized expense
ratio, and the "Expenses Paid During Period" column shows the dollar amount that
would have been paid by an investor who started with $1,000 in the Fund at the
beginning of the period.
You may use the information here, together with your account value, to estimate
the expenses that you paid over the period. To do so, simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number given for your fund in the first line
under the heading entitled "Expenses Paid During Period."
HYPOTHETICAL 5% RETURN: This section is intended to help you compare your Fund's
costs with those of other mutual funds. It assumes that the Fund had an annual
return of 5% before expenses, but that the expense ratio is unchanged. In this
case, because the return used is not the Fund's actual return, the results do
not apply to your investment. This example is useful in making comparisons to
other mutual funds because the SEC requires all mutual funds to calculate
expenses based on an assumed 5% annual return. You can assess your Fund's costs
by comparing this hypothetical example with the hypothetical examples that
appear in shareholder reports of other funds.
Please note that the expenses shown in the table reflect the expenses of both
the Fund and the allocated amount of the Portfolio and are meant to highlight
and help you compare your ongoing costs only and do not reflect any
transactional costs such as sales charges (loads) and redemption fees, which are
described in the Prospectus. If these costs were applied to your account, your
costs would be higher.
MARCH 1, 2005 - AUGUST 31, 2005
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Account Value at the Account Value at the Expenses Paid Fund's annualized
beginning of the period ($) end of the period ($) during the period ($)(1) expense ratio (%)(2)
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ACTUAL HYPOTHETICAL ACTUAL HYPOTHETICAL ACTUAL HYPOTHETICAL
CLASS A 1,000.00 1,000.00 1,030.40 1,018.95 6.35 6.31 1.24
CLASS B 1,000.00 1,000.00 1,028.60 1,017.19 8.13 8.08 1.59
CLASS C 1,000.00 1,000.00 1,027.80 1,016.43 8.89 8.84 1.74
CLASS Z 1,000.00 1,000.00 1,032.20 1,020.72 4.56 4.53 0.89
<FN>
(1) Expenses paid during the period are equal to the Fund's annualized expense
ratio including those expenses allocated from the Portfolio, multiplied by
the average account value over the period, then multiplied by the number of
days in most recent fiscal half-year and divided by 365.
(2) Annualized, based on the Fund's most recent fiscal half-year expenses.
</FN>
5
FINANCIAL STATEMENTS
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AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
A GUIDE TO UNDERSTANDING YOUR FUND AND PORTFOLIO'S FINANCIAL STATEMENTS
INVESTMENT PORTFOLIO The Investment Portfolio
details all of the Portfolio'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.
STATEMENTS OF CHANGES IN NET ASSETS These statements demonstrate 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 and foreign currency provided or used by operating, investing
and financing activities and the net effect of those flows on cash, foreign
currency and cash equivalents during the period.
FINANCIAL HIGHLIGHTS The Financial Highlights
demonstrate how the Fund's net asset value per share wasb 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).
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.
6
INVESTMENT PORTFOLIO
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
SENIOR LOAN NOTES (A) - 92.6%
AEROSPACE/DEFENSE - 0.3%
2,985,882 Vought Aircraft Industries, Inc.
Term Loan, 6.17%, 12/22/11 ...... 3,038,762
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AIR TRANSPORT - 0.7%
Continental Airlines, Inc.
857,143 Tranche A-1 Term Loan,
8.73%, 06/01/11 ................. 860,357
2,142,857 Tranche A-2 Term Loan,
8.73%, 06/01/11 ................. 2,150,893
2,000,000 Northwest Airlines, Inc.
Tranche C Term Loan,
10.07%, 11/23/10 ................ 1,967,500
3,363,375 United Airlines, Inc., DIP
Tranche B Term Loan,
7.96%, 12/30/05 ................. 3,390,013
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8,368,763
------------
AUTOMOTIVE - 4.4%
CSA Acquisition Corp.
1,144,250 Tranche B Term Loan,
5.50%, 12/23/11 ................. 1,147,592
613,583 Tranche C Term Loan,
5.50%, 12/23/11 ................. 613,583
4,500,000 Delphi Corp.
Term Loan, 10.30%, 06/14/11 (b) . 4,626,173
Federal-Mogul Corp.
1,270,249 Supplemental Revolver,
7.43%, 12/09/05 ................. 1,140,049
5,000,000 Tranche B Term Loan,
6.18%, 02/24/05 (f) ............. 4,648,200
1,048,750 Tranche C Term Loan,
7.43%, 12/09/05 ................. 1,051,372
Goodyear Tire & Rubber Co.
5,500,000 Second Lien Term Loan,
6.32%, 04/30/10 ................. 5,573,370
3,500,000 Third Lien Term Loan,
7.07%, 03/01/11 ................. 3,492,580
3,263,900 Hayes Lemmerz International, Inc.
Term Loan B, 6.85%, 06/03/09 .... 3,304,013
1,000,000 Insurance Auto Auctions, Inc.
Term Loan, 6.45%, 05/19/12 ...... 1,011,880
1,975,025 J.L. French Automotive
Castings, Inc.
First Lien Term Loan,
7.87%, 07/31/11 ................. 1,886,149
Key Plastics LLC
5,274,125 Term Loan B, 6.64%, 06/29/10 .... 5,313,681
5,825,000 Term Loan C, 9.40%, 06/25/11 .... 5,723,063
830,434 Keystone Automotive Industries, Inc.
Term Loan B, 5.81%, 10/30/09 .... 836,663
2,457,411 Rexnord Corp.
Term Loan B, 6.13%, 12/31/11 .... 2,486,605
3,960,000 Stanadyne Corp.
Term Loan, 7.08%, 08/02/10 ...... 4,009,500
Tenneco Automotive, Inc.
1,779,338 Tranche B Term Loan,
6.08%, 12/12/10 ................. 1,805,476
781,632 Tranche B-1 Credit Linked
Deposit, 5.59%, 12/12/10 ........ 797,264
------------
49,467,213
------------
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
BEVERAGE & TOBACCO - 2.7%
2,733,333 Caribbean Restaurant LLC
Tranche B, 6.34%, 06/30/09 ...... 2,776,903
581,925 Commonwealth Brands, Inc.
Incremental Term Loan,
7.00%, 08/28/07 592,836
5,154,000 Dr. Pepper Bottling Company of
Texas Tranche B Term Loan,
5.35%, 12/19/10 ................. 5,235,175
15,525,680 DS Waters Enterprises LP
Term Loan, 8.17%, 11/07/09 ...... 15,191,878
1,995,000 Intabex Netherlands BV
Term Loan B, 6.73%, 05/13/10 .... 2,024,925
3,750,000 National Distributing Co., Inc.
Second Lien Term Loan,
10.15%, 06/01/10 ................ 3,759,375
1,235,294 Sunny Delight Beverage Co.
First Lien Term Loan,
7.95%, 08/20/10 ................. 1,239,926
------------
30,821,018
------------
BROADCAST RADIO & TELEVISION - 1.6%
5,500,000 HIT Entertainment PLC
Second Lien Term Loan,
02/17/13 (b) .................... 5,634,090
1,043,977 NEP Supershooters LP
Second Lien Term Loan,
11.48%, 08/03/11 ................ 1,038,757
Spanish Broadcasting Systems, Inc.
2,992,500 First Lien Term Loan,
5.49%, 06/10/12 ................. 3,039,273
1,000,000 Second Lien Term Loan,
7.51%, 06/10/13 ................. 1,015,000
4,946,681 Warner Music Group
Term Loan B, 5.70%, 02/28/11 .... 5,004,952
3,000,000 Young Broadcasting, Inc.
Term Loan, 5.77%, 11/03/12 (b) .. 3,032,520
------------
18,764,592
------------
BUILDING & DEVELOPMENT - 5.0%
5,030,218 Atrium Cos., Inc.
Term Loan, 6.37%, 12/28/11 (b) .. 4,963,114
Custom Building Products, Inc.
1,995,000 First Lien Term Loan,
5.74%, 10/20/11 ................. 2,011,199
1,000,000 Second Lien Term Loan,
8.58%, 04/20/12 ................. 994,380
1,985,000 DESA LLC
Term Loan, 8.59%, 11/26/11 ...... 1,950,263
3,500,000 Harmon Koval Partners LLC
Second Lien Term Loan,
10.55%, 06/30/07 ................ 3,561,250
4,302,086 Lake at Las Vegas Joint Venture
First Lien Term Loan,
6.31%, 11/01/09 ................. 4,355,862
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7
INVESTMENT PORTFOLIO (CONTINUED)
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
SENIOR LOAN NOTES (CONTINUED)
BUILDING & DEVELOPMENT (CONTINUED)
LNR Property Corp.
1,000,000 Tier A Mezzanine,
7.71%, 02/03/08 ................. 1,007,500
1,866,467 Tranche A Term Loan,
6.53%, 02/03/08 ................. 1,867,624
12,249,625 Tranche B Term Loan,
6.69%, 02/03/08 ................. 12,369,916
NATG Holdings LLC
1,039,745 Credit Linked Certificate of Deposit,
6.11%, 01/23/09 ................. 977,361
992,938 Term Loan A, 8.20%, 01/23/09 .... 198,588
726,089 Term Loan B1, 8.70%, 01/23/10 ... 214,196
72,363 Term Loan B2, 8.70%, 01/23/10 ... 68,021
1,970,050 Nortek Holdings, Inc.
Term Loan, 5.91%, 08/27/11 ...... 1,996,725
4,000,000 Palmdale Hills Property LLC
First Lien Term Loan,
6.61%, 05/19/10 (b) ............. 4,000,000
1,500,000 Pivotal Group-Promontory
First Lien Term Loan,
08/31/10 (b) .................... 1,515,000
5,500,000 TE/TOUSA Mezzanine LLC
Senior Mezzanine Loan,
9.06%, 08/01/09 ................. 5,500,000
5,000,000 TWLDC Holdings LP
Mezzanine Loan, 7.76%, 11/30/07 . 5,040,600
4,000,000 Woodlands Commercial Property Co.
Bridge Loan, 6.27%, 11/01/05 .... 4,030,000
------------
56,621,599
------------
BUSINESS EQUIPMENT & SERVICES - 3.6%
997,500 ACI Billing Services, Inc.
Second Lien Term Loan,
11.25%, 04/18/11 ................ 1,012,463
700,000 American Reprographics Co.
Second Lien Term Loan,
10.24%, 12/18/09 ................ 728,000
3,990,000 Audio Visual Services Corp.
Term Loan, 6.23%, 05/18/11 ...... 4,039,875
4,416,667 Brickman Group Holdings, Inc.
Term Loan, 8.74%, 11/15/09 ...... 4,405,625
2,512,584 Carey International, Inc.
Second Lien Term Loan,
12.19%, 05/10/12 ................ 2,135,697
2,000,000 ClientLogic Corp.
Second Lien Term Loan,
12.45%, 09/03/12 ................ 2,021,240
965,242 Data Transmissions Network Corp.
Tranche B Term Loan,
6.61%, 03/17/12 ................. 974,894
3,250,882 Ferrell Cos., Inc.
Term Loan, 6.94%, 12/17/11 ...... 3,328,091
2,425,000 Fidelity National Information
Services, Inc.
Term Loan B, 5.32%, 03/09/13 .... 2,431,329
1,000,000 FleetCor Technologies, Inc.
Term Loan, 6.99%, 06/30/11 ...... 1,005,000
2,000,000 GXS Corp.
Second Lien Term Loan,
12/20/11 (b) (c) ................ 2,000,000
1,728,125 Hillman Group, Inc.
Term Loan B, 6.69%, 03/30/11 .... 1,759,439
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
BUSINESS EQUIPMENT & SERVICES (CONTINUED)
2,000,000 IPC Acquisition Corp.
First Lien Tranche B Term Loan,
6.31%, 08/05/11 ................. 2,024,160
2,816,471 Knoll, Inc.
Initial Term Loan, 6.52%, 09/30/11 2,841,115
2,000,000 Survey Sampling International LLC
Second Lien Term Loan,
10.74%, 05/06/12 ................ 2,023,760
8,000,000 Washington Group International
Tranche B Term Loan,
3.30%, 10/03/07 ................. 8,040,000
------------
40,770,688
------------
CABLE & SATELLITE TELEVISION - 9.5%
4,991,627 Adelphia Communications Corp.
Tranche B DIP Term Loan,
6.31%, 03/31/06 ................. 5,016,585
Century Cable Holdings LLC
7,500,000 Discretionary Term Loan,
8.50%, 12/31/09 ................. 7,425,000
2,500,000 Revolver, 7.25%, 03/31/09 ....... 2,463,550
15,000,000 Term Loan, 8.50%, 06/30/09 ...... 14,889,300
Charter Communications
Operating LLC
1,997,517 Tranche A Term Loan,
6.68%, 04/27/10 ................. 1,987,070
13,852,727 Tranche B Term Loan,
6.93%, 04/07/11 ................. 13,897,056
14,087,500 Hilton Head Communications LP
Revolver, 6.50%, 09/30/07 ....... 13,770,531
5,006,250 Knology, Inc.
Second Lien Term Loan,
13.68%, 06/29/11 ................ 4,856,063
Mediacom Communications Corp.
3,720,000 Term Loan A, 4.72%, 03/31/10 .... 3,713,006
995,000 Term Loan B, 5.81%, 03/31/13 .... 1,011,418
1,980,038 Term Loan C, 5.44%, 09/30/10 .... 2,008,510
Millennium Digital Media Systems LLC
972,725 Facility A Revolver,
8.72%, 10/31/08 ................. 980,020
3,087,013 Facility B Term Loan,
9.02%, 10/31/08 ................. 3,110,166
3,440,262 Facility C Term Loan,
9.00%, 10/31/08 ................. 3,466,064
Olympus Cable Holdings LLC
9,500,000 Term Loan A, 7.75%, 06/30/10 .... 9,399,110
1,000,000 Term Loan B, 8.50%, 09/30/10 .... 992,890
3,000,000 Puerto Rico Cable Acquisition Co.,
Inc. First Lien Term Loan,
8.75%, 07/28/11 ................. 3,043,140
11,442,500 UPC Broadband Holding BV
Term Loan F2, 7.19%, 03/31/09 ... 11,581,183
WideOpenWest LLC
2,970,000 Incremental Term Loan B,
6.49%, 06/22/11 ................. 2,992,275
1,974,963 Term Loan B, 6.56%, 06/22/11 .... 1,994,712
------------
108,597,649
------------
CHEMICALS/PLASTICS - 3.6%
2,500,000 Brenntag AG
Faciltiy B2, 6.81%, 02/27/12 .... 2,539,600
7,472,824 Celenese
Dollar Term Loan B,
5.74%, 04/06/11 ................. 7,614,807
8 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (CONTINUED)
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
SENIOR LOAN NOTES (CONTINUED)
CHEMICALS/PLASTICS (CONTINUED)
7,375,000 Huntsman International LLC
Term B Dollar Loan,
5.32%, 08/16/12 ................. 7,477,513
1,900,000 Innophos, Inc.
Tranche B Term Loan,
5.78%, 08/13/10 ................. 1,922,173
1,386,721 INVISTA Canada Co.
Tranche B2 Term Loan,
5.75%, 04/29/11 ................. 1,410,988
3,196,191 INVISTA S.A.R.L.
Tranche B1 Term Loan,
5.75%, 04/29/11 ................. 3,244,134
4,033,377 Kraton Polymers Group of Cos.
Term Loan, 6.29%, 12/23/10 ...... 4,102,711
Nalco Co.
1,813,782 Tranche A-1 Term Loan,
6.06%, 11/04/09 ................. 1,835,330
1,997,656 Tranche B Term Loan,
5.65%, 11/04/10 ................. 2,028,699
1,870,000 Polypore, Inc.
U S Term Loan, 5.92%, 11/12/11 .. 1,880,921
1,990,000 Rockwood Specialties Group, Inc.
Tranche B Term Loan,
5.93%, 07/30/12 ................. 2,024,825
4,959,950 Supresta U.S. LLC
Term Loan, 6.49%, 07/20/11 ...... 5,046,749
------------
41,128,450
------------
CLOTHING/TEXTILES - 0.8%
1,910,354 Levi Strauss & Co.
Tranche A Term Loan,
10.63%, 09/29/09 ................ 2,000,695
Polymer Group, Inc.
3,500,000 First Lien Term Loan,
6.73%, 04/27/10 ................. 3,548,125
3,000,000 Second Lien Term Loan,
9.73%, 04/27/11 ................. 3,075,000
------------
8,623,820
------------
CONGLOMERATE - 1.0%
3,346,000 Appleton Papers, Inc.
Term Loan, 5.64%, 06/11/10 ...... 3,389,933
2,054,572 Jason, Inc.
Term Loan B, 8.10%, 06/30/07 .... 2,023,754
2,638,412 Mueller Group, Inc.
Initial Term Loan, 6.37%, 04/23/11 2,669,756
2,781,120 Youth & Family Centered
Services, Inc.
Term Loan B, 7.65%, 05/28/11 .... 2,781,120
------------
10,864,563
------------
CONTAINER/GLASS PRODUCTS - 2.3%
4,805,341 Berry Plastics Corp.
Term Loan, 5.60%, 12/02/11 ...... 4,890,972
3,465,000 Consolidated Container Co. LLC
Term Loan, 6.69%, 12/15/08 ...... 3,508,313
7,462,500 Graham Packaging International, Inc.
Term Loan B, 6.03%, 10/07/11 .... 7,593,094
2,737,646 Graphic Packaging International, Inc.
Tranche C Term Loan,
6.03%, 08/09/10 ................. 2,785,308
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
CONTAINER/GLASS PRODUCTS (CONTINUED)
1,802,100 Precise Technology, Inc.
First Lien Term Loan,
6.50%, 03/31/11 ................. 1,822,374
5,910,000 Solo Cup, Inc.
Term B1 Loan, 5.68%, 02/27/11 ... 5,975,837
------------
26,575,898
------------
COSMETICS/TOILETRIES - 0.4%
1,000,000 MD Beauty, Inc.
Second Lien Term Loan,
9.90%, 02/18/13 ................. 1,022,500
2,875,000 Revlon Consumer Products Corp.
Term Loan, 9.53%, 07/09/10 ...... 2,981,605
------------
4,004,105
------------
DIVERSIFIED MANUFACTURING - 0.1%
1,000,000 GenTek, Inc.
Second Lien Term Loan,
9.35%, 02/28/12 ................. 986,660
------------
ECOLOGICAL SERVICE & EQUIPMENT - 0.6%
Allied Waste North America, Inc.
1,447,504 Term Loan, 01/15/12 (b) ......... 1,461,371
552,496 Tranche A Credit Linked
Deposit, 01/15/12 (b) ........... 557,789
4,500,000 Environmental Systems Products
Holdings
Second Lien, 13.70%, 12/12/10 ... 4,590,000
------------
6,609,160
------------
ELECTRONIC/ELECTRIC - 4.7%
997,500 AIS Acquisition Corp. / Sensor
Systems, Inc.
Term Loan, 6.23%, 04/01/11 ...... 1,010,288
2,437,500 Alliance Laundry Systems LLC
Term Loan, 5.80%, 01/27/12 ...... 2,477,865
3,500,000 Amkor Technology, Inc.
Second Lien Term Loan,
8.33%, 10/27/10 ................. 3,596,250
484,353 Bridge Information Systems, Inc.
Multidraw Term Loan,
07/07/13 (d) (e) ................ 7,265
3,000,000 Comsys Information Technology
Services, Inc.
Second Lien Term Loan,
11.02%, 04/30/10 ................ 3,007,500
Corel Corp.
987,500 First Lien Term Loan,
7.86%, 02/22/10 ................. 987,500
2,000,000 Second Lien Term Loan,
11.73%, 08/15/10 ................ 2,025,000
Infor Global Solutions European
Finance S.A.R.L.
1,014,228 Euro Revolving Credit,
7.21%, 04/18/10 (i) ............. 978,730
1,875,000 Second Lien Lux Term Loan,
10.75%, 04/18/12 ................ 1,896,094
3,125,000 Magellan Holdings, Inc.
Second Lien U S Term Loan,
10.75%, 04/18/12 ................ 3,160,156
6,975,000 On Semiconductor Corp.
Tranche G Term Loan,
6.50%, 12/15/11 (b) ............. 7,076,696
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9
INVESTMENT PORTFOLIO (CONTINUED)
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
SENIOR LOAN NOTES (CONTINUED)
ELECTRONIC/ELECTRIC (CONTINUED)
2,400,000 RedPrairie Corp.
Second Lien Term Loan,
12.50%, 05/23/09 ................ 2,406,000
3,880,000 Seagate Technology Holdings, Inc.
Term Loan B, 4.26%, 05/13/07 .... 3,940,605
12,500,000 SunGard Data Systems, Inc.
U S Term Loan, 6.28%, 02/11/13 .. 12,682,875
2,250,000 Transfirst Holdings, Inc.
Second Lien Term Loan,
11.00%, 03/31/11 ................ 2,289,375
1,418,390 UGS Corp.
Term Loan, 5.67%, 05/27/11 ...... 1,440,999
4,975,000 Viasystems, Inc.
Tranche B Term Loan,
7.64%, 09/30/09 ................. 5,034,103
------------
54,017,301
------------
EQUIPMENT LEASING - 1.1%
4,466,222 NES Rentals Holdings, Inc.
Second Lien Term Loan,
9.71%, 08/17/10 ................. 4,583,460
United Rentals, Inc.
1,666,667 Initial Term Loan, 02/14/11 (b) . 1,686,466
5,760,417 Initial Term Loan, 5.92%, 02/14/11 5,828,850
333,333 Tranche B-1 Credit Linked
Deposit, 02/14/11 (b) ........... 337,500
------------
12,436,276
------------
FINANCIAL INTERMEDIARIES - 0.4%
3,000,000 Arias Acquisitions, Inc.
Term Loan, 9.00%, 07/26/11 ...... 3,016,860
Stile Acquisition Corp.
997,500 Canadian Term Loan,
5.66%, 04/06/13 ................. 1,001,450
997,500 U S Dollar Term Loan,
5.66%, 04/06/13 ................. 1,001,749
------------
5,020,059
------------
FOOD PRODUCTS - 2.0%
2,954,201 American Seafoods Group LLC
Tranche B Term Loan,
6.74%, 03/31/09 ................. 2,987,465
4,000,000 CTI Food Holdings Co. LLC
Second Lien Secured Term Loan,
9.58%, 06/02/12 ................. 4,095,000
1,985,000 Doane Pet Care Co.
Term Loan, 7.41%, 11/05/09 ...... 2,015,609
Interstate Brands Corp.
1,875,000 Tranche A Term Loan,
7.75%, 07/19/06 ................. 1,886,250
1,959,596 Tranche C Term Loan,
7.77%, 07/19/07 ................. 1,982,876
3,980,893 Luigino's, Inc.
Term Loan, 6.49%, 04/02/11 ...... 4,013,218
905,527 Merisant Co.
Tranche B Term Loan,
6.93%, 01/11/10 ................. 897,033
1,721,667 Pierre Foods, Inc.
Term Loan B, 9.47%, 06/30/10 .... 1,749,110
3,130,151 Pinnacle Foods Holding Corp.
Term Loan, 6.76%, 11/25/10 ...... 3,174,756
------------
22,801,317
------------
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
FOOD SERVICES - 0.4%
1,000,000 AFC Enterprises, Inc.
Tranche B Term Loan,
5.75%, 05/09/11 ................. 1,012,500
2,935,303 Buffets, Inc.
Term Loan, 7.16%, 06/28/09 ...... 2,964,656
965,000 Captain D's Inc., LLC
First Lien Term Loan,
7.42%, 12/27/10 ................. 983,094
------------
4,960,250
------------
FOOD/DRUG RETAIL - 2.3%
1,000,000 Bi-Lo LLC
Term Loan, 7.56%, 07/01/11 ...... 1,004,380
7,429,962 Jean Coutu Group, Inc.
Term Loan B, 5.94%, 07/30/11 .... 7,556,420
Michael Foods, Inc.
3,000,000 Floater Term Loan,
6.59%, 11/20/11 ................. 3,083,460
4,563,758 Term Loan B, 5.15%, 11/21/10 .... 4,637,919
3,000,000 Nellson Nutraceutical, Inc.
Second Lien Term Loan,
13.00%, 04/02/10 ................ 1,883,700
2,493,750 Reliant Pharmaceuticals, Inc.
First Lien Term Loan,
13.06%, 06/30/08 ................ 2,496,867
Sturm Foods, Inc.
1,000,000 First Lien Term Loan,
6.25%, 05/26/11 ................. 1,007,500
2,000,000 Second Lien Term Loan,
10.94%, 05/26/12 ................ 2,030,000
1,995,000 Vitaquest International, Inc.
First Lien Term Loan,
7.07%, 03/07/11 ................. 1,996,237
------------
25,696,483
------------
FOREST PRODUCTS - 0.3%
3,000,000 NewPage Corp.
Term Loan, 6.58%, 05/02/11 ...... 3,048,750
SP Newsprint Co.
513,096 Tranche B-1 Credit Linked Deposit,
3.43%, 01/09/10 ................. 521,111
218,066 Tranche B-1 Term Loan,
6.00%, 01/09/10 ................. 221,472
------------
3,791,333
------------
HEALTH CARE - 7.2%
3,566,195 Alliance Imaging, Inc.
Tranche C1 Term Loan,
5.94%, 12/29/11 ................. 3,614,125
3,298,630 Alpharma Operating Corp.
Term Loan B, 6.86%, 10/05/08 .... 3,309,978
1,449,058 American HomePatient, Inc.
Term Loan, 08/01/09 (b) (j) ..... 1,438,191
3,051,333 American Medical Response, Inc.
Term Loan, 5.89%, 02/10/12 ...... 3,101,863
2,773,358 Ameripath, Inc.
Term Loan, 6.92%, 03/27/10 ...... 2,801,092
Carl Zeiss Vision
1,000,000 Term B U S Dollar Loan,
6.24%, 05/04/13 ................. 1,011,250
1,000,000 Term C U S Dollar Loan,
6.74%, 05/04/14 ................. 1,007,500
2,500,000 Term D U S Dollar Loan,
8.99%, 11/04/14 ................. 2,534,375
10 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (CONTINUED)
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
SENIOR LOAN NOTES (CONTINUED)
HEALTH CARE (CONTINUED)
1,995,000 Chemed Corp.
Term Loan, 5.45%, 08/24/10 ...... 2,014,950
Cornerstone Healthcare Group
Holding, Inc.
1,000,000 Senior Subordinated Unsecured
Notes, 14.00%, 07/15/12 (j) ..... 1,012,500
2,000,000 Term Loan, 7.84%, 07/15/11 ...... 2,012,500
2,000,000 CRC Health Corp.
Term Loan, 6.24%, 05/11/11 ...... 2,020,000
4,000,000 DaVita, Inc.
Tranche B Term Loan,
05/26/12 (b) .................... 4,062,800
1,170,970 Encore Medical IHC, Inc.
Term Loan, 6.48%, 10/04/10 ...... 1,189,260
FHC Health Systems, Inc.
1,300,000 Delayed Draw Term Loan,
11.33%, 10/31/06 ................ 1,332,500
1,857,143 Initial Term Loan, 9.33%, 10/31/06 1,875,714
6,500,000 Third Lien Term Loan,
12.23%, 02/09/11 ................ 6,597,500
1,000,000 Genoa Healthcare Group LLC
Second Lien Term Loan,
13.25%, 02/10/13 ................ 1,025,000
2,537,050 Hanger Orthopedic Group, Inc.
Tranche B Term Loan,
6.99%, 09/30/09 ................. 2,584,620
HealthSouth Corp.
2,600,000 Fixed Rate Loan, 10.38%,
01/16/11 (j) .................... 2,708,316
3,937,500 Term Loan, 6.15%, 06/14/07 ...... 3,984,258
1,062,500 Tranche B Term Loan,
3.34%, 03/08/10 ................. 1,073,784
7,174,326 Insight Health Services Corp.
Tranche B Term Loan,
7.24%, 10/17/08 ................. 7,205,750
577,881 Kinetic Concepts, Inc.
Tranche B2 Term Loan,
5.24%, 08/11/10 ................. 586,006
6,652,137 Knowledge Learning Corp.
Term Loan, 5.99%, 01/07/12 ...... 6,702,028
1,000,000 LifeCare Holdings, Inc.
Term Loan, 5.82%, 08/11/12 ...... 1,005,000
3,000,000 Medical Devise Group, Inc.
Tranche C Term Loan,
5.74%, 06/30/10 ................. 3,028,140
3,125,000 MultiPlan, Inc.
Term Loan, 6.24%, 03/04/09 ...... 3,136,719
1,066,667 Select Medical Corp.
Revolver, 6.22%, 02/24/11 (i) ... 1,061,333
Skilled Healthcare LLC
2,000,000 First Lien Term Loan,
6.42%, 06/15/12 ................. 2,035,000
3,000,000 Second Lien Term Loan,
11.53%, 12/15/12 ................ 3,077,520
474,603 Sunrise Medical Holdings, Inc.
Term Loan B-1, 6.95%, 05/13/10 .. 475,196
915,333 VWR International, Inc.
Tranche B Dollar Term Loan,
6.14%, 04/07/11 ................. 928,258
------------
81,553,026
------------
HOME FURNISHINGS - 1.9%
23,222,442 Home Interiors & Gifts, Inc.
Initial Term Loan, 8.38%,
03/31/11 (b) .................... 21,712,983
------------
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
INDUSTRIAL EQUIPMENT - 1.0%
1,625,000 AIRXCEL, Inc.
First Lien Term Loan, 08/31/12 (b) 1,637,188
1,756,475 Blount International, Inc.
U S Term Loan B, 6.16%, 08/09/10 1,782,822
4,518,407 Copperweld Corp.
Term Loan, 8.17%, 12/17/11 ...... 4,512,759
1,098,325 Dresser, Inc.
Term Loan C, 5.99%, 04/10/09 .... 1,110,220
1,000,000 Penn Engineering & Manufacturing
Corp.
Second Lien Term Loan,
9.47%, 05/25/12 ................. 1,005,000
1,276,231 Terex Corp.
Term Loan, 5.68%, 07/03/09 ...... 1,293,779
------------
11,341,768
------------
INSURANCE - 1.0%
5,000,000 American Wholesale Insurance
Group, Inc.
Second Lien Term Loan,
11.86%, 10/13/11 ................ 5,000,000
1,882,192 Conseco, Inc.
Term Loan, 5.57%, 06/22/10 ...... 1,903,385
2,970,000 Mitchell International, Inc.
Second Lien Term Loan,
9.75%, 08/15/12 ................. 3,021,975
1,980,000 WellCare Health Plans, Inc.
Term Loan, 7.62%, 05/13/09 ...... 1,994,018
------------
11,919,378
------------
LEISURE GOODS/ACTIVITIES/MOVIES - 4.7%
3,200,742 AMF Bowling Worldwide, Inc.
Term Loan B, 6.67%, 08/27/09 .... 3,238,671
2,970,000 Amscan Holdings, Inc.
Term Loan B, 6.13%, 04/30/12 .... 3,003,413
1,500,000 BLB Investors LLC
Senior Secured Note,
07/18/12 (b) .................... 1,531,875
11,750,000 Blockbuster Entertainment Corp.
Tranche B Term Loan,
7.24%, 08/20/11 (b) ............. 11,490,560
2,000,000 Camelbak Products, Inc.
Second Lien Term Loan,
10.54%, 02/04/12 ................ 1,992,500
CNL Hospitality Properties LP
5,000,000 First Mezzanine Loan,
5.83%, 09/09/06 ................. 5,012,500
873,331 Term Facility, 6.07%, 10/13/06 .. 875,515
3,000,000 Fender Musical Instruments Corp.
Second Lien Term Loan,
8.10%, 09/30/12 ................. 3,060,000
9,505,000 Metro-Goldwyn-Mayer Holdings,
Inc./LOC Acquisition Co.
Tranche B Term Loan,
5.74%, 04/08/12 ................. 9,623,052
3,000,000 Movie Gallery, Inc.
Term Loan B, 6.49%, 04/27/11 .... 3,018,420
4,500,000 Oriental Trading Co., Inc.
Second Lien Term Loan,
8.25%, 01/08/11 ................. 4,560,030
1,000,000 Pine Tree Holdings/Pine Tree
Country Club
Second Lien Tranche B Term Loan,
11.64%, 07/15/13 ................ 1,017,500
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11
INVESTMENT PORTFOLIO (CONTINUED)
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
SENIOR LOAN NOTES (CONTINUED)
LEISURE GOODS/ACTIVITIES/MOVIES (CONTINUED)
1,980,800 Polaroid Corp.
Second Lien Term Loan,
11.75%, 04/27/11 ................ 1,985,752
1,568,679 Six Flags Theme Parks, Inc.
Tranche B Term Loan,
6.36%, 06/30/09 ................. 1,587,315
1,980,000 Wallace Theaters
First Lien Term Loan,
6.74%, 07/31/09 ................. 1,999,800
------------
53,996,903
------------
LODGING & CASINOS - 5.4%
641,902 Ameristar Casinos, Inc.
Term Loan B1, 5.50%, 12/20/06 ... 648,321
2,550,000 CCM Merger, Inc./MotorCity Casino
Term Loan B, 5.69%, 04/25/12 .... 2,582,946
3,000,000 CNL Hotel Del Partners LP
First Mezzanine Loan,
7.09%, 02/09/07 ................. 3,007,500
15,000,000 Extended Stay America, Inc.
Mezzanine Loan,
08/01/08 (b) (c) ................ 15,000,000
Fontainebleu Florida Hotel LLC
3,000,000 Tranche A Term Loan,
6.54%, 05/11/08 ................. 3,000,000
2,000,000 Tranche B Term Loan,
6.54%, 05/11/08 ................. 2,000,000
3,950,150 Green Valley Ranch Gaming LLC
Term Loan, 5.49%, 12/22/10 ...... 4,001,976
OpBiz LLC
13,921,569 Term Loan A, 6.50%, 08/31/10 .... 13,999,947
33,987 Term Loan B, 7.50%, 08/31/10 .... 34,142
Penn National Gaming, Inc.
1,333,333 Second Lien Term Loan,
05/26/12 (b) .................... 1,354,533
666,667 Tranche B-2 Term Loan,
05/15/12 (b) .................... 677,500
Resorts International Holdings Ltd.
11,000,000 Second Lien Term Loan,
9.42%, 04/26/13 ................. 11,044,660
1,995,000 Term Loan B, 6.20%, 04/26/12 .... 2,023,429
1,750,000 Trump Entertainment Resorts, Inc.
Term Loan B-1, 6.14%, 05/20/12 .. 1,780,625
------------
61,155,579
------------
NONFERROUS METALS/MINING - 1.4%
2,000,000 CII Carbon LLC
Term Loan B, 07/13/12 (b) ....... 2,020,000
992,500 J W Aluminum Co.
First Lien Term Loan,
6.92%, 10/20/10 ................. 1,007,387
4,726,250 Murray Energy Corp.
Tranche B Term Loan,
6.86%, 01/28/10 ................. 4,752,811
Novelis, Inc.
904,352 Canadian Term Loan,
5.46%, 01/07/12 ................. 917,809
1,570,715 U S Term Loan,
5.46%, 01/07/12 ................. 1,593,491
Trout Coal Holdings LLC
2,992,500 First Lien Term Loan,
6.02%, 03/23/11 ................. 3,001,837
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
NONFERROUS METALS/MINING (CONTINUED)
2,210,000 Second Lien Term Loan,
8.50%, 03/23/12 ................. 2,227,282
------------
15,520,617
------------
OIL/GAS - 4.3%
5,000,000 ALON USA
Term Loan, 10.30%, 01/15/09 ..... 5,150,000
3,311,252 Basic Energy Services, Inc.
Term Loan B, 6.50%, 10/03/09 .... 3,336,087
2,500,000 Carrizo Oil & Gas, Inc.
Second Lien Term Loan,
9.87%, 07/21/10 ................. 2,578,125
Coffeyville Resources LLC
600,000 First Lien Tranche B Term Loan,
6.06%, 06/24/12 ................. 610,218
400,000 Funded Letter of Credit,
6.06%, 06/24/12 ................. 406,876
5,000,000 Second Lien Term Loan,
10.31%, 06/24/13 ................ 5,150,000
El Paso Corp.
2,500,000 Deposit Accounts, 3.24%, 11/23/09 2,534,200
4,951,952 Term Loan, 6.44%, 11/23/09 ...... 5,030,687
4,000,000 Energy Transfer Partners LP
Term Loan, 6.47%, 06/16/08 ...... 4,056,480
Kerr-McGee Corp.
11,500,000 Tranche B Term Loan,
6.14%, 05/24/11 ................. 11,580,845
4,000,000 Tranche X Term Loan,
5.85%, 05/24/07 ................. 4,013,760
1,000,000 Primary Energy Holdings LLC
Term Loan, 8.25%, 08/24/09 ...... 1,007,820
1,000,000 SemCrude LP
U S Term Loan, 6.12%, 03/16/11 .. 1,013,750
3,000,000 Trident Exploration Corp.
Second Lien Term Loan,
10.61%, 04/26/11 ................ 3,037,500
------------
49,506,348
------------
PUBLISHING - 1.8%
3,047,652 Adams Outdoor Advertising LP
Term Loan, 5.64%, 10/15/11 ...... 3,090,197
7,950,000 American Lawyer Media Holdings, Inc.
First Lien Term Loan,
5.99%, 03/05/10 (b) ............. 7,974,804
North American Membership
Group, Inc.
997,500 First Lien Tranche B Term Loan,
6.86%, 05/19/11 ................. 1,002,488
3,000,000 Second Lien Term Loan,
11.11%, 11/18/11 ................ 3,015,000
1,756,706 PRIMEDIA, Inc.
Term Loan B, 6.44%, 06/30/09 .... 1,761,098
1,300,533 Relizon Co.
Tranche B Term Loan,
6.82%, 02/20/11 ................. 1,307,035
2,850,000 VISANT Corp.
Tranche C Term Loan,
5.94%, 12/21/11 ................. 2,895,714
------------
21,046,336
------------
REAL ESTATE INVESTMENT TRUST - 1.8%
14,917,752 General Growth Properties, Inc.
Tranche B Term Loan,
5.67%, 11/12/08 ................. 15,107,656
12 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (CONTINUED)
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
SENIOR LOAN NOTES (CONTINUED)
REAL ESTATE INVESTMENT TRUST (CONTINUED)
5,000,000 Strategic Hotel Capital, Inc.
B2 Participation Interest Notes,
6.39%, 07/09/06 ................. 4,976,200
------------
20,083,856
------------
RETAILERS - 0.8%
2,985,000 Dollarama Group LP
Term Loan B, 5.93%, 11/18/11 .... 3,037,238
4,022,194 Harbor Freight Tools USA
Term Loan, 6.27%, 07/15/10 ...... 4,069,978
Prestige Brands Holdings, Inc.
107,620 Term Loan B Add-On,
5.19%, 04/06/11 ................. 108,607
1,975,000 Tranche B Term Loan,
6.32%, 04/06/11 ................. 1,993,921
------------
9,209,744
------------
STEEL - 0.4%
1,250,000 Euramax International, Inc.
First Lien Term Loan,
6.13%, 06/29/13 ................. 1,263,800
2,812,500 The Techs Industries, Inc.
Term Loan, 6.24%, 01/14/10 ...... 2,819,531
------------
4,083,331
------------
SURFACE TRANSPORT - 0.6%
Quality Distribution, Inc.
2,147,512 Term Loan, 6.59%, 11/13/09 (e) .. 2,162,287
2,731,151 Term Loan, 6.67%, 11/13/09 ...... 2,749,941
2,479,234 Transport Industries LP
Term Loan B, 7.50%, 06/13/10 .... 2,488,531
------------
7,400,759
------------
TELECOMMUNICATIONS/CELLULAR - 2.0%
2,970,000 Cellular South, Inc.
Term Loan, 5.33%, 05/04/11 ...... 3,012,709
MetroPCS, Inc.
4,000,000 First Lien Tranche B Term Loan,
8.25%, 05/27/11 ................. 4,122,480
6,000,000 Second Lien Term Loan,
10.75%, 05/27/12 ................ 6,236,280
10,000,000 Qwest Corp.
Term Loan B, 6.95%, 06/30/10 (j) 9,992,600
------------
23,364,069
------------
TELECOMMUNICATIONS/COMBINATION - 2.0%
2,000,000 Alaska Communications Systems
Holdings, Inc.
Term Loan, 5.49%, 02/01/12 ...... 2,025,840
4,107,450 Centennial Cellular Operating Co.
Term Loan, 5.70%, 02/09/11 ...... 4,176,455
NTELOS, Inc.
1,248,737 First Lien Term Loan B,
6.17%, 08/24/11 ................. 1,261,812
1,500,000 Second Lien Term Loan,
8.49%, 02/24/12 ................. 1,503,750
5,000,000 NTL, Inc.
B2 Sub-Tranche,
6.41%, 04/14/12 ................. 5,043,150
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
TELECOMMUNICATIONS/COMBINATION (CONTINUED)
4,962,349 PanAmSat Corp.
Tranche B-1 Term Loan,
5.65%, 08/20/11 ................. 5,030,582
3,952,934 RCN Corp.
Term Loan, 7.94%, 12/21/11 ...... 3,992,464
------------
23,034,053
------------
TELECOMMUNICATIONS/WIRELESS - 3.9%
2,150,000 Bresnan Communications LLC
Tranche B Term Loan,
7.08%, 09/30/10 ................. 2,188,700
4,937,500 Consolidated Communications, Inc.
Term Loan D, 5.93%, 10/14/11 .... 5,011,563
14,925,000 Cricket Communications, Inc.
Term Loan B, 5.99%, 01/10/11 .... 15,079,026
5,000,000 FairPoint Communications, Inc.
Initial B Term Loan,
5.55%, 02/08/12 ................. 5,061,250
2,000,000 Maritime Telecommunications
Network, Inc.
First Lien Term Loan,
04/07/11 (b) .................... 2,010,000
2,000,000 Nextel Partners Operating Corp.
Tranche D Term Loan,
4.83%, 05/31/12 ................. 2,019,780
4,455,000 SBA Senior Finance, Inc.
Tranche D Term Loan,
5.58%, 10/31/08 ................. 4,491,174
2,992,500 Telcordia Technologies, Inc.
Term Loan, 6.61%, 09/15/12 ...... 2,992,500
5,959,163 WilTel Communications Group, Inc.
Promissory Note, 7.00%,
04/01/10 (j) .................... 5,124,880
------------
43,978,873
------------
TELECOMMUNICATIONS/WIRELINE - 0.2%
1,933,333 Valor Telecommunications
Enterprises LLC
Tranche B Term Loan,
5.49%, 02/14/12 ................. 1,956,108
------------
UTILITIES - 4.4%
2,862,685 Allegheny Energy, Inc.
Term Advances, 5.35%, 03/08/11 .. 2,873,420
1,960,000 Calpine Construction Finance Co.
First Lien Term Loan,
9.51%, 08/26/09 ................. 2,065,350
234,347 Calpine Corp.
Second Lien Term Loan B,
9.35%, 07/16/07 ................. 190,992
7,219,361 CenterPoint Energy, Inc.
Term Loan, 6.08%, 04/30/10 ...... 7,293,287
1,944,089 Infrasource, Inc.
Term Loan, 6.24%, 09/30/10 ...... 1,948,949
KGen, LLC
1,995,000 Tranche A Term Loan,
6.12%, 08/05/11 ................. 1,990,013
34,181 Tranche B Term Loan,
12.49%, 08/05/11 ................ 33,839
2,000,000 La Paloma Generating Co. LLC
Second Lien Term Loan,
7.21%, 08/16/13 ................. 2,045,000
1,393,217 Midwest Generations LLC
Term Loan, 5.45%, 04/27/11 ...... 1,409,629
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13
INVESTMENT PORTFOLIO (CONTINUED)
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
SENIOR LOAN NOTES (CONTINUED)
UTILITIES (CONTINUED)
Mirant Corp.
2,000,000 Revolver, 12/31/05 (d) (f) ...... 1,750,000
6,000,000 Revolver, 07/15/08 (d) (f) ...... 5,253,000
2,500,000 Perryville Claim, 07/17/06 (d) (f) 2,112,500
1,000,000 Primary Energy Holdings LLC
Term Loan, 07/15/09 (b) ......... 1,007,820
4,565,367 Riverside Energy Center LLC
Term Loan, 7.93%, 06/24/11 ...... 4,679,501
Rocky Mountain Energy Center LLC
361,073 Credit Linked Certificate of Deposit,
3.58%, 06/24/11 ................. 368,295
3,159,350 Term Loan, 7.93%, 06/24/11 ...... 3,238,334
Texas Genco LLC
1,457,885 Delayed Draw Term Loan,
5.41%, 12/14/11 ................. 1,482,027
9,822,436 Initial Term Loan, 5.42%, 12/14/11 9,981,166
-------------
49,723,122
-------------
Total Senior Loan Notes
(Cost $1,048,300,987) ......... 1,054,552,812
-------------
FOREIGN VARIABLE RATE SENIOR LOAN NOTES (A) - 5.2%
FRANCE - 0.3%
EUR
2,500,000 Novalis S.A.S.
Second Lien Term Loan,
7.90%, 12/31/13 ................. 3,130,327
-------------
GERMANY - 1.0%
EUR
3,625,000 debitel (Netherlands) Holding BV
Second Lien Term Loan,
9.10%, 06/11/14 ................. 4,565,455
debitel Konzemfinanzierungs GmbH
1,125,000 Term Facility B, 4.85%, 06/11/13 1,389,969
803,571 Term Facility C1, 5.35%, 06/11/14 995,217
321,429 Term Facility C2, 5.35%, 06/11/14 396,790
iesy Hessen GmbH & Co.
1,500,000 Facility B, 4.88%, 02/14/13 ..... 1,850,764
1,500,000 Faciltiy C, 5.38%, 02/14/14 ..... 1,856,299
-------------
11,054,494
-------------
ITALY - 0.7%
EUR
Pirelli Cables & Systems, Inc.
4,500,000 Second Lien Term Loan, 01/20/15 (b) 5,588,266
875,000 Euro Term Loan B, 08/01/12 (b) .. 1,070,961
875,000 Euro Term Loan C, 08/01/12 (b) .. 1,072,080
-------------
7,731,307
-------------
PRINCIPAL AMOUNT/
COMMITMENT ($) VALUE ($)
- ----------------- ---------
NETHERLANDS - 0.4%
EUR
YBR Acquisition BV
1,250,000 Facility B Term Loan,
06/30/13 (b) .................... 1,560,367
1,250,000 Facility C Term Loan,
06/30/14 (b) .................... 1,559,414
1,250,000 Facility D Term Loan,
12/30/14 (b) .................... 1,573,818
-------------
4,693,599
-------------
UNITED KINGDOM - 2.8%
GBP
3,125,000 PlayPower, Inc.
Add On Term Loan,
12/20/09 (b) .................... 5,690,759
Red Football Ltd.
1,250,000 Facility B Term Loan,
7.85%, 05/11/13 ................. 2,281,924
1,250,000 Facility C Term Loan,
8.35%, 05/11/14 ................. 2,281,924
2,000,000 Term Loan D, 11.10%, 05/11/14 ... 3,687,050
1,402,875 SunGard UK Holdings Ltd
Term Loan, 02/11/13 (b) ......... 2,557,849
4,000,000 Teesside Power Ltd.
Term Loan, 04/01/08 (b) ......... 7,041,366
Trinitybrook PLC
2,500,000 Term Loan B1, 7.34%, 07/31/13 ... 4,428,911
2,500,000 Term Loan C, 7.84%, 07/31/14 .... 4,478,597
-------------
32,448,380
-------------
Total Foreign Variable Rate
Senior Loan Notes
(Cost $57,753,978) ............ 59,058,107
-------------
CORPORATE NOTES AND BONDS - 0.4%
AUTOMOTIVE - 0.0%
Key Plastics Holdings, Inc.
63,642 Junior Secured Subordinated
Notes, 18.32%, 04/26/07 (c) ..... 52,186
101,433 Senior Secured Subordinated
Notes, 7.00%, 04/26/07 (c) ...... 91,289
-------------
143,475
-------------
BEVERAGE & TOBACCO - 0.2%
2,000,000 Commonwealth Brands, Inc
Floating Rate Note,
10.91%, 04/15/08 (g) ............ 2,095,000
-------------
TELECOMMUNICATIONS/WIRELESS - 0.2%
2,000,000 Dobson Cellular Systems
Floating Rate Note,
8.44%, 11/01/11 ................. 2,090,000
-------------
Total Corporate Notes and Bonds
(Cost $4,216,224) ............. 4,328,475
-------------
SHARES
-------
COMMON STOCKS (H) - 0.2%
AUTOMOTIVE - 0.0%
13 Key Plastics Holdings, Inc. (c) .. 0
-------------
14 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (CONTINUED)
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SHARES VALUE ($)
------ ---------
COMMON STOCKS (CONTINUED)
BUSINESS SERVICES - 0.0%
322,876 NATG Holdings LLC (c) ............ 0
-------------
DIVERSIFIED MANUFACTURING - 0.0%
4,021 GenTek, Inc., B Shares ........... 57,179
-------------
ECOLOGICAL SERVICE & EQUIPMENT - 0.0%
3,445 Environmental Systems Products
Holdings (c) .................... 0
-------------
HEALTH CARE - 0.0%
22,500 Sun Healthcare Group, Inc. ....... 147,825
-------------
TELECOMMUNICATIONS/COMBINATION - 0.0%
1,756 Eningen Realty (c) ............... 0
92,473 SAVVIS Communications Corp. ...... 89,699
-------------
89,699
-------------
TELECOMMUNICATIONS/WIRELESS - 0.2%
76,137 Leap Wireless International, Inc. 2,600,840
-------------
Total Common Stocks
(Cost $2,612,831) ............. 2,895,543
-------------
PREFERRED STOCK (C) - 0.0%
DIVERSIFIED MANUFACTURING - 0.0%
14,382 Superior Telecom, Inc., Series A . 14,382
-------------
Total Preferred Stock
(Cost $14,382) ................ 14,382
-------------
UNITS
-------
WARRANTS - 0.0%
DIVERSIFIED MANUFACTURING - 0.0%
4 GenTek, Inc., Class A expires
10/31/06 ........................ 12
-------------
LODGING & CASINOS - 0.0%
4,023 OpBiz LLC, expires 08/11/09 (c) .. 0
9 OpBiz LLC, expires 08/11/09 (c) .. 0
-------------
0
-------------
UTILITIES - 0.0%
12,470 Reliant Energy, Inc., expires
08/15/08 (c) .................... 0
-------------
Total Warrants
(Cost $20) .................... 12
-------------
TOTAL INVESTMENTS - 98.4% ...................... 1,120,849,331
-------------
(cost of $1,112,898,422) (k)
OTHER ASSETS & LIABILITIES, NET - 1.6% ......... 18,568,551
-------------
NET ASSETS - 100.0% ............................ 1,139,417,882
=============
- -------------
(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. (Unless otherwise identified by (j), all senior loans carry
a variable rate interest). These base lending rates are generally (i) the
prime rate offered by one or more major United States banks, (ii) the
lending rate offered by one or more European banks such as the London
Inter-Bank Offered Rate ("LIBOR") and (iii) the certificate of deposit
rate. Rate shown represents the weighted average rate at August 31, 2005.
Senior loans, while exempt from registration under the Security Act of
1933, as amended, contain certain restrictions on resale and cannot be sold
publicly. Senior secured floating rate interests often require prepayments
from excess cash flow or permit the borrower to repay at its election. The
degree to which borrowers repay, whether as a contractual requirement or at
their election, cannot be predicted with accuracy. As a result, the actual
remaining maturity may be substantially less than the stated maturities
shown.
(b) All or a portion of this position has not settled. Contract rates do not
take effect until settlement date.
(c) Represents fair value as determined in good faith under the direction of
the Board of Trustees.
(d) The issuer is in default of certain debt covenants. Income is not being
accrued.
(e) Loans held on participation.
(f) This issue is under the protection of the Federal bankruptcy court.
(g) Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. This security may only be resold, in transactions exempt
from registration, to qualified institutional buyers. At August 31, 2005,
this security amounted to $2,095,000 or 0.2% of net assets. This security
has been determined by the investment adviser to be a liquid security.
(h) Non-income producing security.
(i) Addiitional unfunded commitment. See Note 9.
(j) Fixed rate senior loan.
(k) Cost for Federal income tax purposes is $1,113,279,937.
DIP Debtor in Possession
EUR Euro
GBP Great Britain Pound
FOREIGN VARIABLE SENIOR LOAN NOTES
INDUSTRY CONCENTRATION TABLE
(% of Total Net Assets)
Leisure/Goods/Activities/Movies .... 1.2%
Electronic/Electric ................ 1.0%
Retailers .......................... 0.8%
Telecommunications/Cellular ........ 0.6%
Utilities .......................... 0.6%
Publishing ......................... 0.4%
Cable & Satellite Television ....... 0.3%
Clothing/Textiles .................. 0.3%
----
Total .............................. 5.2%
====
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
($)
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost $1,112,898,422) ...................................................... 1,120,849,331
Cash and cash equivalents ........................................................................ 70,284,580
Foreign currency (Cost $26,503,681) .............................................................. 26,934,128
Receivable for:
Investments sold .............................................................................. 7,147,881
Interest and fees ............................................................................. 7,856,548
Other assets ..................................................................................... 4,185
---------------
Total Assets ............................................................................... 1,233,076,653
LIABILITIES:
Deferred facility fees (Note 2) .................................................................. 78,593
Net discount and unrealized appreciation on unfunded transactions (Note 9) ....................... 263,641
Payable for:
Investments purchased ......................................................................... 92,702,416
Investment advisory fee (Note 4) .............................................................. 418,722
Trustees' fees (Note 4) ....................................................................... 3,333
Accrued expenses and other liabilities ........................................................... 192,066
---------------
Total Liabilities .......................................................................... 93,658,771
---------------
NET ASSETS .......................................................................................... 1,139,417,882
===============
16 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
($)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest ......................................................................................... 58,476,258
Dividends ........................................................................................ 153,936
Facility and other fees .......................................................................... 2,174,020
--------------
Total Investment Income .................................................................... 60,804,214
EXPENSES
Investment advisory fee (Note 4) ................................................................. 4,369,407
Accounting services fee (Note 4) ................................................................. 305,196
Transfer agent fee (Note 4) ...................................................................... 843
Professional fees ................................................................................ 115,762
Trustees' fees (Note 4) .......................................................................... 25,935
Custody fee (Note 4) ............................................................................. 132,440
Other expenses ................................................................................... 48,799
--------------
Total Operating Expenses ................................................................... 4,998,382
Interest expense (Note 8) ........................................................................ 97,313
Facility expense (Note 8) ........................................................................ 366,077
.................................................................................................... --------------
Total Expenses ............................................................................. 5,461,772
Custody earnings credit (Note 4) ................................................................. (36)
--------------
Net Expenses ............................................................................... 5,461,736
--------------
Net Investment Income ............................................................................ 55,342,478
--------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized loss on investments ................................................................. (76,108)
Net realized loss on foreign currency transactions ............................................... (79,392)
Net change in unrealized appreciation on investments ............................................. 7,013,479
Net change in unrealized appreciation on unfunded transactions (Note 9) .......................... 46,057
Net change in unrealized appreciation on translation of assets and liabilities denominated in
foreign currency .............................................................................. 311,579
--------------
Net Gain ......................................................................................... 7,215,615
--------------
Net Increase in Net Assets ....................................................................... 62,558,093
==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
YEARS ENDED AUGUST 31,
2005 2004
($) ($)
---------------- ---------------
INCREASE IN NET ASSETS:
OPERATIONS
Net investment income .......................................................... 55,342,478 32,557,033
Net realized gain (loss) on investments and foreign currency transactions ...... (155,500) 12,489,394
Net change in unrealized appreciation on investments, translation of assets and
liabilities denominated in foreign currency and unfunded transactions ....... 7,371,115 20,295,744
---------------- --------------
Net Increase from Operations ................................................ 62,558,093 65,342,171
---------------- --------------
TRANSACTIONS IN INVESTOR'S BENEFICIAL INTEREST
Contributions .................................................................. 401,269,018 453,429,815
Withdrawals .................................................................... (220,779,725) (133,062,921)
---------------- --------------
Net Increase from Transactions in Investor's Beneficial Interest ............ 180,489,293 320,366,894
---------------- --------------
Total Increase in Net Assets .......................................... 243,047,386 385,709,065
NET ASSETS
Beginning of period ............................................................ 896,370,496 510,661,431
---------------- --------------
End of period .................................................................. 1,139,417,882 896,370,496
================ ==============
18 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
($)
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND FOREIGN CURRENCY
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment income ............................................................................ 55,342,478
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH USED FOR OPERATING ACTIVITIES
Purchase of investments securities ............................................................... (1,066,823,826)
Proceeds from disposition of investment securities and realized gain (loss) on foreign currency .. 713,283,129
Sale of short-term portfolio investments, net .................................................... 130,267,000
Increase in unrealized appreciation on unfunded transactions ..................................... (46,057)
Increase in interest and fees receivable ......................................................... (3,784,870)
Increase in receivable for investments sold ...................................................... (3,482,015)
Decrease in other assets ......................................................................... 3,452
Decrease in deferred facility fees ............................................................... (366,313)
Increase in payable for accrued expenses ......................................................... 38,384
Net amortization of premium (discount) ........................................................... (1,028,862)
Increase in payable for investments purchased .................................................... 92,702,416
Increase in mark-to-market and realized gain (loss) on foreign currency and unsettled positions .. 232,187
Increase in other liabilities 391,850
---------------
Net cash and foreign currency flow used for operating activities ........................... (83,271,047)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from capital contributions .............................................................. 401,269,018
Payment of capital withdrawals ................................................................... (220,779,725)
---------------
Net cash flow provided by financing activities ............................................. 180,489,293
---------------
Net increase in cash and foreign currency .................................................. 97,218,246
CASH AND FOREIGN CURRENCY
Beginning of the period .......................................................................... 462
---------------
End of the period ................................................................................ 97,218,708
===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SELECTED DATA FOR AN INTEREST OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------
2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA
Total return(a) 6.54% 10.39% 11.68%(b) (2.20)% 5.15%
Operating expenses(c) 0.51% 0.52% 0.57% 0.55% 0.53%
Interest expense and facility expense 0.05% --%(d) --%(d) 0.03% --%
Net expenses(c) 0.56% 0.52% 0.57% 0.58% 0.53%
Net investment income(c) 5.69% 4.45% 5.96% 6.42%(e) 8.94%
Portfolio turnover rate 75% 97% 75% 70% 63%
<FN>
- ----------------------------------------------------
(a) Total return would have been lower had certain expenses not been reimbursed.
(b) 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.
(c) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(d) Rounds to less than 0.01%.
(e) 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.
</FN>
20 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
($)
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investment in Portfolio .......................................................................... 1,080,843,087
Receivable for:
Fund shares sold .............................................................................. 7,409,085
Other assets ..................................................................................... 156,853
---------------
Total Assets ............................................................................... 1,088,409,025
LIABILITIES:
Payable for:
Distributions ................................................................................. 2,321,363
Administration fee (Note 4) ................................................................... 360,452
Trustees' fees (Note 4) ....................................................................... 12,333
Distribution and service fees (Note 4) ........................................................ 456,933
Accrued expenses and other liabilities ........................................................... 157,236
---------------
Total Liabilities .......................................................................... 3,308,317
---------------
NET ASSETS .......................................................................................... 1,085,100,708
===============
COMPOSITION OF NET ASSETS
Paid-in capital .................................................................................. 1,091,799,196
Undistributed net investment income .............................................................. 633,282
Accumulated net realized loss on investments and foreign currency transactions allocated from
Portfolio ..................................................................................... (15,172,802)
Net unrealized appreciation on investments, translation of assets and liabilities denominated in
foreign currency and unfunded transactions allocated from Portfolio ........................... 7,841,032
---------------
NET ASSETS .......................................................................................... 1,085,100,708
===============
CLASS A
Net assets ....................................................................................... 355,997,904
Shares outstanding ............................................................................... 36,042,986
Net asset value per share (Net assets/Shares outstanding) ....................................... 9.88(a)
Maximum offering price per share (100 / 96.50 of $9.88) .......................................... 10.24(b)
CLASS B
Net assets ....................................................................................... 169,779,684
Shares outstanding ............................................................................... 17,196,142
Net asset value and offering price per share (Net assets/Shares outstanding) .................... 9.87(a)
CLASS C
Net assets ....................................................................................... 366,840,641
Shares outstanding ............................................................................... 37,156,359
Net asset value and offering price per share (Net assets/Shares outstanding) .................... 9.87(a)
CLASS Z
Net assets ....................................................................................... 192,482,479
Shares outstanding ............................................................................... 19,496,237
Net asset value, offering and redemption price per share (Net assets/Shares outstanding) ......... 9.87
<FN>
- ----------------------------------------------------
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $100,000 or more, the offering price is reduced.
</FN>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 21
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
($)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest, dividends and fees allocated from Portfolio (Note 1) ................................... 56,876,988
--------------
EXPENSES
Net operating expenses allocated from Portfolio (Note 1) ......................................... 4,668,152
Administration fee (Note 4) ...................................................................... 1,820,045
Distribution fee (Note 4):
Class A ....................................................................................... 260,844
Class B ....................................................................................... 803,926
Class C ....................................................................................... 1,803,596
Service fee (Note 4):
Class A ....................................................................................... 658,450
Class B ....................................................................................... 446,626
Class C ....................................................................................... 751,499
Transfer agent fee (Note 4) ...................................................................... 736,422
Professional fees ................................................................................ 92,570
Accounting services fee (Note 4) ................................................................. 44,201
Trustees' fees (Note 4) .......................................................................... 83,489
Custody fee (Note 4) ............................................................................. 1,732
Other expenses ................................................................................... 610,241
--------------
Total Operating Expenses ................................................................... 12,781,793
--------------
Interest expenses allocated from Portfolio (Note 8) .............................................. 92,311
Facility expenses allocated from Portfolio (Note 8) .............................................. 345,733
--------------
Total Expenses ............................................................................. 13,219,837
Fees and expenses waived or reimbursed by Investment Adviser (Note 4) ............................ (769,363)
--------------
Net Expenses ............................................................................... 12,450,474
--------------
Net Investment Income ............................................................................ 44,426,514
--------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ALLOCATED FROM PORTFOLIO (NOTE 1)
Net realized loss on investments allocated from Portfolio ........................................ (102,212)
Net realized loss on foreign currency transactions allocated from Portfolio ...................... (75,323)
Net change in unrealized appreciation on investments allocated from Portfolio .................... 6,665,613
Net change in unrealized appreciation on unfunded transactions allocated from Portfolio (Note 9) . 43,708
Net change in unrealized appreciation on translation of assets and liabilities denominated in
foreign currency allocated from Portfolio ..................................................... 296,032
--------------
Net Gain ......................................................................................... 6,827,818
--------------
Net Increase in Net Assets ....................................................................... 51,254,332
==============
22 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
YEARS ENDED AUGUST 31,
2005 2004
($) ($)
---------------- ---------------
INCREASE IN NET ASSETS:
OPERATIONS
Net investment income ............................................................. 44,426,514 23,375,298
Net realized gain (loss) on investments and foreign currency transactions allocated
from Portfolio ................................................................. (177,535) 11,716,731
Net change in unrealized appreciation on investments, translation of assets and
liabilities denominated in foreign currency and unfunded transactions allocated
from Portfolio ................................................................. 7,005,353 16,417,157
-------------- --------------
Net Increase from Operations ................................................... 51,254,332 51,509,186
-------------- --------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS From net investment income:
Class A ........................................................................ (13,226,644) (6,051,546)
Class B ........................................................................ (8,228,190) (6,346,275)
Class C ........................................................................ (13,491,196) (7,124,188)
Class Z ........................................................................ (8,949,145) (3,993,912)
-------------- --------------
Total Distributions Declared to Shareholders ................................... (43,895,175) (23,515,921)
-------------- --------------
SHARE TRANSACTIONS
Class A
Subscriptions .................................................................. 194,284,743 150,174,094
Distributions reinvested ....................................................... 8,414,712 4,056,148
Redemptions .................................................................... (71,078,183) (36,606,622)
-------------- --------------
Net Increase ................................................................... 131,621,272 117,623,620
Class B
Subscriptions .................................................................. 5,874,003 42,636,771
Distributions reinvested ....................................................... 4,892,459 3,649,856
Redemptions .................................................................... (33,620,192) (27,516,151)
-------------- --------------
Net Increase (Decrease) ........................................................ (22,853,730) 18,770,476
Class C
Subscriptions .................................................................. 152,460,394 166,995,336
Distributions reinvested ....................................................... 8,018,612 4,331,572
Redemptions .................................................................... (74,887,937) (34,117,656)
-------------- --------------
Net Increase ................................................................... 85,591,069 137,209,252
Class Z:
Subscriptions .................................................................. 97,758,278 126,869,430
Distributions reinvested ....................................................... 2,265,809 1,029,585
Redemptions .................................................................... (48,412,070) (22,807,614)
-------------- --------------
Net Increase ................................................................... 51,612,017 105,091,401
-------------- --------------
Net Increase from Share Transactions ........................................... 245,970,628 378,694,749
-------------- --------------
Total Increase in Net Assets ................................................... 253,329,785 406,688,014
-------------- --------------
NET ASSETS
Beginning of period ............................................................... 831,770,923 425,082,909
End of period (including undistributed and overdistributed net investment income of
$633,282 and $(145,284), respectively) ......................................... 1,085,100,708 831,770,923
-------------- --------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
YEARS ENDED AUGUST 31,
2005 2004
---------------- ---------------
CHANGE IN SHARES
Class A:
Subscriptions ............................................................... 19,770,029 15,464,717
Issued for distributions reinvested ......................................... 856,198 416,590
Redemptions ................................................................. (7,239,210) (3,764,250)
--------------- --------------
Net Increase ................................................................ 13,387,017 12,117,057
Class B:
Subscriptions ............................................................... 597,890 4,402,237
Issued for distributions reinvested ......................................... 497,995 375,744
Redemptions ................................................................. (3,425,945) (2,840,856)
--------------- --------------
Net Increase (Decrease) ..................................................... (2,330,060) 1,937,125
Class C:
Subscriptions ............................................................... 15,517,260 17,241,992
Issued for distributions reinvested ......................................... 816,243 445,134
Redemptions ................................................................. (7,624,801) (3,515,347)
--------------- --------------
Net Increase ................................................................ 8,708,702 14,171,779
Class Z:
Subscriptions ............................................................... 9,948,182 13,152,535
Issued for distributions reinvested ......................................... 230,667 105,643
Redemptions ................................................................. (4,924,398) (2,357,817)
--------------- --------------
Net Increase ................................................................ 5,254,451 10,900,361
24 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,
-----------------------------------------------------------------------------------------------
CLASS A SHARES 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 0.49 0.37 0.48 0.54(b) 0.81
Net realized and unrealized gain (loss)
allocated from Portfolio(a) 0.08 0.52 0.46 (0.79)(b) (0.37)
----------- ----------- ----------- ----------- -----------
Total from Investment Operations 0.57 0.89 0.94 (0.25) 0.44
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.49) (0.38) (0.48) (0.54) (0.82)
From net realized gains -- -- -- --(c) --(c)
----------- ----------- ----------- ----------- -----------
Total Distributions Declared to
Shareholders (0.49) (0.38) (0.48) (0.54) (0.82)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.88 $ 9.80 $ 9.29 $ 8.83 $ 9.62
Total return(d)(e) 5.93% 9.65% 11.03%(f) (2.67)% 4.56%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.15% 1.15% 1.15% 1.15% 1.15%
Interest expense & facility expense
allocated from Portfolio 0.05% --%(g) --%(g) 0.03% --%
Net expenses 1.20% 1.15% 1.15% 1.18% 1.15%
Net investment income 5.05% 3.78% 5.39% 5.83%(b) 8.28%
Waiver/reimbursement 0.08% 0.17% 0.28% 0.28% 0.18%
Net assets, end of period (000's) $ 355,998 $ 222,032 $ 97,924 $ 108,583 $ 138,058
<FN>
- ----------------------------------------------------
(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
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.
(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 and no
initial sales charge or CDSC.
(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 A Shares return.
(g) Rounds to less than 0.01%.
</FN>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 25
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------------------------
CLASS B SHARES 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 0.46 0.34 0.45 0.51(b) 0.77
Net realized and unrealized gain (loss)
allocated from Portfolio(a) 0.06 0.51 0.46 (0.79)(b) (0.37)
----------- ----------- ----------- ----------- -----------
Total from Investment Operations 0.52 0.85 0.91 (0.28) 0.40
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.45) (0.34) (0.45) (0.51) (0.78)
From net realized gains -- -- -- --(c) --(c)
----------- ----------- ----------- ----------- -----------
Total Distributions Declared to
Shareholders (0.45) (0.34) (0.45) (0.51) (0.78)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62
Total return(d)(e) 5.46% 9.27% 10.65%(f) (3.02)% 4.19%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.50% 1.50% 1.50% 1.50% 1.50%
Interest expense & facility expense
allocated from Portfolio 0.05% --%(g) --%(g) 0.03% --%
Net expenses 1.55% 1.50% 1.50% 1.53% 1.50%
Net investment income 4.70% 3.51% 5.05% 5.48%(b) 7.93%
Waiver/reimbursement 0.08% 0.17% 0.28% 0.28% 0.18%
Net assets, end of period (000's) $ 169,780 $ 191,365 $ 163,448 $ 174,707 $ 195,891
<FN>
- ----------------------------------------------------
(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
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.
(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 and no
CDSC.
(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 B Shares return.
(g) Rounds to less than 0.01%.
</FN>
26 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,
-----------------------------------------------------------------------------------------------
CLASS C SHARES 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 0.45 0.32 0.44 0.50(b) 0.76
Net realized and unrealized gain (loss)
allocated from Portfolio(a) 0.06 0.52 0.46 (0.79)(b) (0.37)
----------- ----------- ----------- ----------- -----------
Total from Investment Operations 0.51 0.84 0.90 (0.29) 0.39
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.44) (0.33) (0.44) (0.50) (0.77)
From net realized gains -- -- -- --(c) --(c)
----------- ----------- ----------- ----------- -----------
Total Distributions Declared to
Shareholders (0.44) (0.33) (0.44) (0.50) (0.77)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62
Total return(d)(e) 5.30% 9.10% 10.48%(f) (3.16)% 4.04%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.65% 1.65% 1.65% 1.65% 1.65%
Interest expense & facility expense
allocated from Portfolio 0.05% --%(g) --%(g) 0.03% --%
Net expenses 1.70% 1.65% 1.65% 1.68% 1.65%
Net investment income 4.55% 3.28% 4.88% 5.33%(b) 7.78%
Waiver/reimbursement 0.08% 0.17% 0.28% 0.28% 0.18%
Net assets, end of period (000's) $ 366,841 $ 278,797 $ 132,656 $ 137,098 $ 184,399
<FN>
- ----------------------------------------------------
(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
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.
(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 and no
CDSC.
(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 C Shares return.
(g) Rounds to less than 0.01%.
</FN>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 27
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------------------------
CLASS Z SHARES 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 0.53 0.40 0.50 0.57(b) 0.84
Net realized and unrealized gain (loss)
allocated from Portfolio(a) 0.06 0.52 0.47 (0.78)(b) (0.37)
----------- ----------- ----------- ----------- -----------
Total from Investment Operations 0.59 0.92 0.97 (0.21) 0.47
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.52) (0.41) (0.51) (0.58) (0.85)
From net realized gains -- -- -- --(c) --(c)
----------- ----------- ----------- ----------- -----------
Total Distributions Declared to
Shareholders (0.52) (0.41) (0.51) (0.58) (0.85)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62
Total return (d)(e) 6.20% 10.03% 11.42%(f) (2.33)% 4.89%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 0.80% 0.80% 0.80% 0.80% 0.80%
Interest expense & facility expense
allocated from Portfolio 0.05% --%(g) --%(g) 0.03% --%
Net expenses 0.85% 0.80% 0.80% 0.83% 0.80%
Net investment income 5.40% 4.12% 5.53% 6.18%(b) 8.63%
Waiver/reimbursement 0.08% 0.17% 0.28% 0.28% 0.18%
Net assets, end of period (000's) $ 192,482 $ 139,577 $ 31,055 $ 13,236 $ 11,662
<FN>
- ----------------------------------------------------
(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%.
</FN>
28 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
AUGUST 31, 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.
INVESTMENT GOAL
The Fund invests all of its investable assets in the Highland Floating Rate
Limited Liability Company (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
August 31, 2005, the Fund and Highland Institutional Floating Rate Income Fund
were the sole investors in the Portfolio and owned 94.9% and 5.1%, respectively,
of the Portfolio.
FUND SHARES
The Fund may issue an unlimited number of shares and continuously offers three
classes of shares: Class A, 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.
On March 3, 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
discontinued selling Class B shares to new and existing investors following the
close of business on May 2, 2005. Existing investors may still reinvest
distributions in Class B shares.
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 at the time of
purchase 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. Please read the Fund's
prospectus for additional details on Class B CDSC. 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 sales charge. 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 net assets. 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 by the Investment
Adviser 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
29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
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 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 and gains
(losses) are determined based upon the specific identification method for both
financial statement and federal income tax purposes.
FOREIGN CURRENCY
Foreign currencies, investments and other assets and liabilities are translated
into U.S. dollars at the exchange rates using the current 4:00 p.m. London Time
Spot Rate. Fluctuations in the value of the foreign currencies and other assets
and liabilities resulting from changes in exchange rates, between trade and
settlement dates on securities transactions and between the accrual and payment
dates on dividends, interest income and foreign withholding taxes, are recorded
as unrealized foreign currency gains (losses). Realized gains (losses) and
unrealized appreciation (depreciation) on investment securities and income and
expenses are translated on the respective dates of such transactions. The effect
of changes in foreign currency exchange rates on investments in securities are
not segregated in the statement of operations from the effects of changes in
market prices of those securities, but are included with the net realized and
unrealized gain or loss on investment securities.
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, if any. As of April 2004, facility fees
received are recorded as a reduction of cost to the loan and amortized through
the maturity of the loan. Prior to May 2004, facility fees received were treated
as deferred revenue and amortized over two years. 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 distribution fees and service fees, which are
class-specific expenses, 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 are presented in the Statement of Cash Flows.
The cash and foreign currency 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 sub-custodian bank,
respectively, and does not include any short-term investments.
30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
NOTE 3. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with Federal income tax regulations, which may differ from GAAP.
As a result, net investment income (loss) and net realized gain (loss) on
investment transactions for a reporting period may differ significantly from
distributions during such period.
Reclassifications are made to the Fund's capital accounts for permanent tax
differences to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
For the year ended August 31, 2005, permanent differences resulting primarily
from differing treatments for discount accretion/premium amortization on debt
securities and Section 988 gain (loss) were identified and reclassified among
the components of the Fund's net assets as follows:
- --------------------------------------------------------------------------------
Overdistributed Accumulated Net
Net Investment Realized Gain Paid-In
Income (Loss) Capital
- --------------------------------------------------------------------------------
$247,227 $(247,228) $1
- --------------------------------------------------------------------------------
Net investment income and net realized gains (losses), as disclosed on the
Statement of Operations, and net assets were not affected by these
reclassifications.
The tax character of distributions paid during the years ended August 31, 2005
and August 31, 2004 was as follows:
- --------------------------------------------------------------------------------
2005 2004
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income* $43,895,175 $23,515,921
- --------------------------------------------------------------------------------
Long-term capital gains -- --
- --------------------------------------------------------------------------------
*For tax purposes short-term capital gains distributions, if any, are considered
ordinary income distributions.
As of August 31, 2005, the components of distributable earnings on a tax basis
were as follows:
- --------------------------------------------------------------------------------
Undistributed Undistributed
Ordinary Long-Term Net Unrealized
Income Capital Gains Appreciation*
- --------------------------------------------------------------------------------
$3,339,596 $-- $7,475,892
- --------------------------------------------------------------------------------
*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.
Portfolio unrealized appreciation and depreciation at August 31, 2005, based on
cost of investments for federal income tax purposes, and excluding any
unrealized appreciation (depreciation) from changes in the value of other assets
and liabilities resulting from changes in exchange rates, was:
- --------------------------------------------------------------------------------
Unrealized appreciation $14,617,239
- --------------------------------------------------------------------------------
Unrealized depreciation (7,047,845)
-----------
Net unrealized appreciation $ 7,569,394
- --------------------------------------------------------------------------------
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 $ 6,525,450
- --------------------------------------------------------------------------------
2011 4,178,432
- --------------------------------------------------------------------------------
2012 3,291,779
- --------------------------------------------------------------------------------
Total $ 13,995,661
- --------------------------------------------------------------------------------
Under current laws, certain capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fiscal year.
For the fiscal year ended August 31, 2005, the Fund has elected to defer net
realized capital losses of $1,166,146 and net realized currency losses of
$75,323 incurred from November 1, 2004 to August 31, 2005.
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 net assets at the following
annual rates:
- --------------------------------------------------------------------------------
Average Daily Net Assets Annual Fee Rate
- --------------------------------------------------------------------------------
First $1 billion 0.45%
- --------------------------------------------------------------------------------
Next $1 billion 0.40%
- --------------------------------------------------------------------------------
Over $2 billion 0.35%
- --------------------------------------------------------------------------------
31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
For the year ended August 31, 2005, the Portfolio's effective investment
advisory fee rate was 0.45%.
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 net 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 August 31, 2005, Highland received $1,610,009 in
administration fees and paid PFPC $80,500 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 Advisors, Inc. ("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.
ACCOUNTING SERVICES FEES
Effective October 18, 2004, the Portfolio and the Fund entered into separate
accounting services agreements with PFPC. All accounting services fees are paid
by the Portfolio. For the period October 18, 2004 through August 31, PFPC
received $239,481 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 August 31, 2005, PFPC received $385,392 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
PFPC Distributors, Inc. (the "Distributor") serves as the principal underwriter
and distributor of the Fund's shares. The Distributor is paid a CDSC on certain
redemptions of Class A, Class B and Class C Shares. For the year ended August
31, 2005, the Distributor received $6,903, $233,286 and $90,996 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 not to exceed 0.25% of the average daily net assets
attributable to Class A, Class B and Class C
32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
shares of the Fund. The Plan also requires the payment of a monthly distribution
fee to the Distributor on an annual basis not to exceed 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,
facility expense, 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.
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 August 31,
2005, PFPC Trust received custody fees of $112,192 from the Portfolio and $1,100
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
Portfolio and Fund each receive an annual retainer fee of $25,000 for services
provided as Trustees of the Portfolio and 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.
NOTE 5. PORTFOLIO INFORMATION
For the year ended August 31, 2005, the cost of purchases and proceeds from
sales of securities, excluding short-term obligations, were $1,066,823,826 and
$713,283,129, 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 year ended August 31, 2005, there were four Repurchase Offers. For each
Repurchase Offer, the Fund offered to repurchase 10% of its shares. In the
September, December, March and June Repurchase Offers, 5.39%, 5.87%, 4.29% and
6.27%, respectively, of shares outstanding were repurchased.
33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
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 August 31, 2005, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Portfolio on a
participation basis.
Principal
Selling Participant Amount Value
- --------------------------------------------------------------------------------
Goldman Sachs:
Bridge Information Systems, Inc.
Multidraw Term Loan $ 484,353 $ 7,265
- --------------------------------------------------------------------------------
CSFB:
Quality Distributions, Inc.
Term Loan $ 2,147,512 $2,162,287
- --------------------------------------------------------------------------------
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 facility expenses on the unutilized line of credit,
which are included on the Statement of Operations.
For the year ended August 31, 2005, the average daily loan balance outstanding
on days where borrowings existed was $59,166,667 at a weighted average interest
rate of 4.93%.
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 facility expenses on its pro-rata portion of the
unutilized line of credit.
Interest expense allocated to the Fund of $92,311 was paid for use of the line
of credit and is included on the Statement of Operations.
NOTE 9. UNFUNDED LOAN COMMITMENTS
As of August 31, 2005, the Portfolio had unfunded loan commitments of
$20,846,852, which could be extended at the option of the Borrower, pursuant to
the following loan agreements:
- --------------------------------------------------------------------------------
Unfunded
Loan
Borrower Commitment
- --------------------------------------------------------------------------------
CCM Merger, Inc./MotorCity Casino $ 450,000
- --------------------------------------------------------------------------------
Centennial Cellular Operating Co. 2,250,000
- --------------------------------------------------------------------------------
Covanta Energy Corp. 1,000,000
- --------------------------------------------------------------------------------
Cricket Communications, Inc. 5,000,000
- --------------------------------------------------------------------------------
Dobson Cellular Systems, Inc. 625,000
- --------------------------------------------------------------------------------
Federal-Mogul Corp. 102,746
- --------------------------------------------------------------------------------
Infor Global Solutions European Finance S.A.R.L. 1,235,772
- --------------------------------------------------------------------------------
Interstate Bakeries Corp. 7,500,000
- --------------------------------------------------------------------------------
Select Medical Corp. 933,334
- --------------------------------------------------------------------------------
Trump Entertainment Resorts, Inc. 1,750,000
- --------------------------------------------------------------------------------
$ 20,846,852
- --------------------------------------------------------------------------------
NOTE 10. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES
INDUSTRY FOCUS
The Portfolio may focus its investments in certain industries, 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.
34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE 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.
CURRENCY RISK
A portion of the Fund's assets may be quoted or denominated in non-U.S.
currencies. These securities may be adversely affected by fluctuations in
relative currency exchange rates and by exchange control regulations. The Fund's
investment performance may be negatively affected by a devaluation of a currency
in which the Fund's investments are quoted or denominated. Further, the Fund's
investment performance may be significantly affected, either positively or
negatively, by currency exchange rates because the U.S. dollar value of
securities quoted or denominated in another currency will increase or decrease
in response to changes in the value of such currency in relation to the U.S.
dollar.
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 (including the Fund) 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). On June 9, 2005, plaintiffs
filed a consolidated amended class action complaint and a motion for class
certification. On or about August 8, 2005, all defendents (including the Fund)
filed motions to dismiss the consolidated amended complaint. The court has not
decided either the class certification or dismissal motions.
NOTE 11. SUBSEQUENT EVENT
On September 7, 2005, the Board of Directors of the Highland Institutional
Floating Rate Income Fund ("Institutional Fund") (See Note 1) determined it to
be in the best interest of the Institutional Fund and the Institutional Fund's
shareholders that the Institutional Fund be terminated and its assets be
liquidated at a date to be determined. Furthermore, that the Board of Directors
of the Institutional Fund designated the officers of the Institutional Fund to
take any and all action they deem necessary, to (i) cease the sale of shares of
the Institutional Fund, (ii) cease the investment activity of the Institutional
Fund and (iii) terminate and liquidate the Institutional Fund's portfolio
investments and wind up its operations.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
TO THE TRUSTEES AND SHAREHOLDERS OF HIGHLAND FLOATING RATE FUND AND THE TRUSTEES
AND PARTICIPANTS OF HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY:
In our opinion, the accompanying statements of assets and liabilities, including
the investment portfolio, and the related statements of operations, changes in
net assets and of cash flows and the financial highlights present fairly, in all
material respects, the financial position of Highland Floating Rate Fund (the
"Fund") and Highland Floating Rate Limited Liability Company (the "Portfolio")
at August 31, 2005, and the results of their operations, the changes in their
net assets, the Portfolio's cash flows and their financial highlights for the
periods indicated, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's and the Portfolio's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments held at August 31, 2005 by
correspondence with the custodian and the banks with whom the Portfolio owns
participations in loans, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 25, 2005
36
ADDITIONAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
TRUSTEES AND OFFICERS
The Trustees and officers serve terms of indefinite duration. The names,
addresses and ages of the Trustees and officers of the Fund, the year each was
first elected or appointed to office, their principal business occupations
during at least the last five years, the number of portfolios overseen by each
Trustee and other directorships they hold are shown below. Each officer listed
below serves as an officer of each Fund in the Highland Funds Complex.
YEAR FIRST PRINCIPAL NUMBER OF PORTFOLIOS
ELECTED OR OCCUPATION(S) IN HIGHLAND FUNDS OTHER
NAME, ADDRESS, POSITION APPOINTED DURING PAST COMPLEX OVERSEEN DIRECTORSHIPS
AND AGE WITH FUND TO OFFICE FIVE YEARS BY TRUSTEE1 HELD
INDEPENDENT TRUSTEES
Timothy K. Hui Trustee 2004 Associate Provost for Graduate 8 None.
(Age 56) Education since July 2004 and
c/o Highland Capital Assistant Provost for Educational
Management, L.P. Resources from July 2001 to
13455 Noel Road, June 2004, Philadelphia
Suite 1300 Biblical University.
Dallas, Texas 75240
Scott F. Kavanaugh Trustee 2004 Private Investor. From February 8 None.
(Age 44) 2003, to July 2003, an Executive at
c/o Highland Capital Provident Funding Mortgage
Management, L.P. Corporation. From January 2000
13455 Noel Road, to February 2003, Executive Vice
Suite 1300 President, Director and Treasurer
Dallas, Texas 75240 of Commercial Capital Bank. From
April 1998 to February
2003, Managing Principal
and Chief Operating
Officer of Financial
Institutional Partners
Mortgage Company and the
Managing Principal and
President of Financial
Institutional Partners,
LLC, an investment
banking firm.
James F. Leary Trustee 2004 Since January 1999, a Managing 8 Capstone
(Age 75) Director of Benefit Capital Series Fund,
c/o Highland Capital Southwest, Inc., a financial Inc.; Stewart
Management, L.P. consulting firm. Funds, Inc.
13455 Noel Road, (3 portfolios);
Suite 1300 Pacesetter/
Dallas, Texas 75240 MVHC Inc.
(small business
investment
company)
Bryan A. Ward Trustee 2004 Since January 2002, Senior 8 None.
(Age 50) Manager of Accenture, LLP. From
c/o Highland Capital September 1998 to December
Management, L.P. 2001, he was Special Projects
13455 Noel Road, Advisor to Accenture, LLP
Suite 1300 with focus on the oil and gas
Dallas, Texas 75240 industry.
37
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
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AUGUST 31, 2005 HIGHLAND FLOATING RATE FUND
TRUSTEES AND OFFICERS
YEAR FIRST PRINCIPAL NUMBER OF PORTFOLIOS
ELECTED OR OCCUPATION(S) IN HIGHLAND FUNDS OTHER
NAME, ADDRESS, POSITION APPOINTED DURING PAST COMPLEX OVERSEEN DIRECTORSHIPS
AND AGE WITH FUND TO OFFICE FIVE YEARS BY TRUSTEE1 HELD
INTERESTED TRUSTEE 2
R. Joseph Dougherty Trustee 2004 Portfolio Manager of the 8 None.
(Age 34) and Senior Vice Adviser. Prior to 2000, he
c/o Highland Capital President was a Portfolio Analyst
Management, L.P. for the Adviser.
13455 Noel Road,
Suite 1300
Dallas, TX 75240
OFFICERS
James D. Dondero President 2004 President and Managing N/A N/A
(Age 42) Partner of the Adviser.
c/o Highland Capital Director of Heritage Bank.
Management, L.P. Director and Chairman of
13455 Noel Road, Heritage Bankshares, Inc.
Suite 1300
Dallas, TX 75240
Mark Okada Executive 2004 Chief Investment Officer of N/A N/A
(Age 44) Vice the Adviser. Director of Heritage
c/o Highland Capital President Bank and Heritage Bankshares,
Management, L.P. Inc.
13455 Noel Road,
Suite 1300
Dallas, TX 75240
M. Jason Blackburn Secretary and 2004 Assistant Controller of the Adviser. N/A N/A
(Age 29) Treasurer From September 1999 to
c/o Highland Capital October 2001, he was an
Management, L.P. accountant for KPMG LLP.
13455 Noel Road,
Suite 1300
Dallas, TX 75240
Michael S. Minces Chief 2004 From October 2003 to August 2004, N/A N/A
(Age 30) Compliance associate at Akin Gump Strauss
c/o Highland Capital Officer Hauer & Feld LLP (law firm). From
Management, L.P. October 2000 to March 2003,
13455 Noel Road, associate at Skadden, Arps, Slate,
Suite 1300 Meagher & Flom LLP (law firm).
Dallas, TX 75240 Previously, he attended The University
of Texas at Austin School of Law.
<FN>
1 The Highland Fund Complex consists of the following funds (the "Highland
Funds"): Highland Floating Rate Limited Liability Company, Highland Floating
Rate Fund, Highland Floating Rate Advantage Fund, Highland Institutional
Floating Rate Income Fund, Highland Corporate Opportunities Fund, Restoration
Opportunities Fund, Prospect Street(R) High Income Portfolio Inc. and Prospect
Street(R) Income Shares Inc.
2 Mr. Dougherty is deemed to be an "interested person" of the Fund under the
1940 Act because of his position with the Adviser.
</FN>
38
IMPORTANT INFORMATION ABOUT THIS REPORT
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TRANSFER AGENT
PFPC Inc.
101 Sabin Street
Pawtucket, RI 02860
DISTRIBUTOR
PFPC Distributors, Inc.
760 Moore Road
King of Prussia, PA 19406
INVESTMENT ADVISER
Highland Capital Management, L.P.
13455 Noel Road 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. 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.
39
THIS PAGE LEFT BLANK INTENTIONALLY.
HIGHLAND FLOATING RATE FUND Annual Report, August 31, 2005
[GRAPHIC OMITTED] HIGHLAND FUNDS
managed by Highland Capital Management, L.P.
HLC-FR AR-8/05
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions.
(b) Not applicable.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions.
(d) The registrant has not granted any waiver, including any implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller.
(e) Not applicable.
(f) The registrant's code of ethics is incorporated by reference to Exhibit
(a)(1) to the registrant's Form N-CSR filed with the Securities and
Exchange Commission on November 9, 2004 (Accession No.
0001047469-04-033535).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Registrant's Board of Trustees (the "Board") has determined that James
Leary, a member of the Audit Committee of the Board, is an audit committee
financial expert as defined by the Securities and Exchange Commission (the
"SEC"). Mr. Leary is "independent" as defined by the SEC for purposes of audit
committee financial expert determinations.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the
audit of the registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years were
$11,250 for the fiscal year ended August 31, 2004 and $11,850 for the
fiscal year ended August 31, 2005.
AUDIT-RELATED FEES
(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of this
Item were $4,000 for the fiscal year ended August 31, 2004 and $5,000
for the fiscal year ended August 31, 2005. The nature of those services
was agreed-upon procedures related to semi-annual financial statements.
TAX FEES
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning were $3,400 for the fiscal
year ended August 31, 2004 and $3,700 for the fiscal year ended August
31, 2005. The nature of those services was assistance on tax returns
and excise tax calculations.
ALL OTHER FEES
(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item were
$0 for the fiscal year ended August 31, 2004 and $0 for the fiscal year
ended August 31, 2005.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
The Audit Committee shall:
(a) have direct responsibility for the appointment, compensation,
retention and oversight of the Fund's independent auditors and, in
connection therewith, to review and evaluate matters potentially
affecting the independence and capabilities of the auditors; and
(b) review and pre-approve (including associated fees) all audit and
other services to be provided by the independent auditors to the
Fund and all non-audit services to be provided by the independent
auditors to the Fund's investment adviser or any entity
controlling, controlled by or under common control with the
investment adviser (an "Adviser Affiliate") that provides ongoing
services to the Fund, if the engagement relates directly to the
operations and financial reporting of the Fund; and
(c) establish, to the extent permitted by law and deemed appropriate
by the Audit Committee, detailed pre-approval policies and
procedures for such services; and
(d) consider whether the independent auditors' provision of any
non-audit services to the Fund, the Fund's investment adviser or
an Adviser Affiliate not pre-approved by the Audit Committee are
compatible with maintaining the independence of the independent
auditors.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:
(b) 100%
(c) 100%
(d) Not applicable
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant were $0 for the fiscal year ended August 31, 2004 and
$85,252 for the fiscal year ended August 31, 2005.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence.
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.
The Adviser has adopted proxy voting guidelines (the "Guidelines") that
provide as follows:
o The Adviser votes proxies in respect of a client's securities in the
client's best economic interests and without regard to the interests
of the Adviser or any other client of the Adviser.
o Unless the Adviser's Proxy Voting Committee (the "Committee")
otherwise determines (and documents the basis for its decision) or as
otherwise provided below, the Adviser votes proxies in a manner
consistent with the Guidelines.
o To avoid material conflicts of interest, the Adviser applies the
Guidelines in an objective and consistent manner across client
accounts. Where a material conflict of interest has been identified
and the matter is covered by the Guidelines, the Committee votes in
accordance with the Guidelines. For clients that are registered
investment companies, where a conflict of interest has been identified
and the matter is not covered in the Guidelines, the Adviser will
disclose the conflict and the Committee's determination of the manner
in which to vote to the Fund's Board. For clients that are not
investment companies, where a conflict of interest has been identified
and the matter is not covered in the Guidelines, the Committee will
disclose the conflict to the client and advise the client that its
securities will be voted only upon the client's written direction.
o The Adviser also may determine not to vote proxies in respect of
securities of any issuer if it determines it would be in its clients'
overall best interests not to vote.
The Adviser's Guidelines address how it will vote proxies on particular types of
matters such as changes in corporate government structures, adoption of options
plans and anti-takeover proposals. For example, the Adviser generally will:
o support management in most elections for directors, unless the board
gives evidence of acting contrary to the best economic interests of
shareholders;
o support option plans, if it believes that they provide for their
administration by disinterested parties and provide incentive to
directors, managers and other employees by aligning their economic
interests with those of the shareholders while limiting the transfer
of wealth out of the company; and
o oppose anti-takeover proposals unless they are structured in such a
way that they give shareholders the ultimate decision on any proposal
or offer.
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")) are effective, as of a date within 90 days of this filing,
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)
that occurred during the registrant's last half year 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
--------------------------------------------------------------------
By (Signature and Title)* /S/ JAMES D. DONDERO
-------------------------------------------------------
James D. Dondero, Chief Executive Officer
(principal executive officer)
Date NOVEMBER 3, 2005
----------------------------------------------------------------------------
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 NOVEMBER 3, 2005
----------------------------------------------------------------------------
By (Signature and Title)* /S/ M. JASON BLACKBURN
-------------------------------------------------------
M. Jason Blackburn, Chief Financial Officer
(principal financial officer)
Date NOVEMBER 3, 2005
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.