UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-08953
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HIGHLAND FLOATING RATE FUND
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(Exact name of registrant as specified in charter)
13455 Noel Road, Suite 1300
Dallas, Texas 75240
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(Address of principal executive offices) (Zip code)
James D. Dondero
Highland Capital Management, L.P.
13455 Noel Road, Suite 1300
Dallas, Texas 75240
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(Name and address of agent for service)
registrant's telephone number, including area code: (877) 532-2834
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Date of fiscal year end: AUGUST 31
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Date of reporting period: FEBRUARY 28, 2006
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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, 100 F Street, NE,
Washington, DC 20549. 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.
[HIGHLAND FUNDS LOGO]
HIGHLAND FLOATING RATE FUND
SEMI-ANNUAL REPORT
FEBRUARY 28, 2006
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HIGHLAND FLOATING RATE FUND
TABLE OF CONTENTS
Fund Profile ............................................................. 1
Financial Statements ..................................................... 2
Investment Portfolio .................................................. 3
Portfolio Statement of Assets and Liabilities ......................... 13
Portfolio Statement of Operations ..................................... 14
Portfolio Statements of Changes in Net Assets ......................... 15
Portfolio Statement of Cash Flows ..................................... 16
Portfolio Financial Highlights ........................................ 17
Fund Statement of Assets and Liabilities .............................. 18
Fund Statement of Operations .......................................... 19
Fund Statements of Changes in Net Assets .............................. 20
Fund Financial Highlights ............................................. 22
Notes to Financial Statements ......................................... 26
Important Information About This Report .................................. 32
Economic and market conditions change frequently. There is no assurance that the
trends described in this report will continue or commence.
A prospectus must precede or accompany this report. Please read the
prospectus carefully before you invest.
FUND PROFILE
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HIGHLAND FLOATING RATE FUND
OBJECTIVE
The Highland Floating Rate Fund
(the "Fund") invests all of its
investable assets in Highland
Floating Rate Limited Liability
Company (the "Portfolio"). The
Portfolio seeks a high level of
current income consistent with
preservation of capital.
TOTAL NET ASSETS
(AS OF 02/28/06)
$1,328.2 million
The information below gives you a snapshot of the Portfolio at the end of the
reporting period. The Portfolio is actively managed and the composition of its
portfolio will change over time.
QUALITY BREAKDOWN IN THE PORTFOLIO AS OF 02/28/06 (%)
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Ba 16.6
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B 62.0
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Caa 6.5
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NR 14.9
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TOP 5 SECTORS IN THE PORTFOLIO AS OF 02/28/06 (%)
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Cable 10.2
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Retail 7.4
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Utilities 6.8
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Gaming/Leisure 6.1
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Telecommunications 5.6
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TOP 10 HOLDINGS IN THE PORTFOLIO AS OF 02/28/06 (%)
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Georgia-Pacific Corp., First Lien Term Loan, 02/14/13 1.9
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United Air Lines, Inc., Tranche B Term Loan, 8.63%, 02/01/12 1.9
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Home Interiors & Gifts, Inc., Initial Term Loan, 9.81%, 03/31/11 1.9
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DS Waters Enterprises LP, Term Loan, 9.03%, 11/07/09 1.7
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Charter Communications Operating LLC, Tranche B Term Loan, 7.92%, 04/07/11 1.7
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Georgia-Pacific Corp., Second Lien Term Loan, 7.56%, 02/14/14 1.5
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Blockbuster Entertainment Corp., Tranche B Term Loan, 8.73%, 08/20/11 1.4
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Resorts International Holdings Ltd., Second Lien Term Loan, 12.03%, 04/26/13 1.2
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Movie Gallery, Inc., Term Loan B, 8.28%, 04/27/11 1.1
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Cricket Communications, Inc., Term Loan B, 7.03%, 01/10/11 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.
1
FINANCIAL STATEMENTS
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FEBRUARY 28, 2006 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 was
affected by the fund's operating results.
The Financial Highlights table also
discloses the classes' performance and
certain key ratios (e.g., class expenses
and net investment income as a percentage
of average net assets).
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.
2
INVESTMENT PORTFOLIO (UNAUDITED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
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SENIOR LOAN NOTES (a) - 93.6%
AEROSPACE - AEROSPACE/DEFENSE - 1.0%
7,980,000 DeCrane Aircraft Holdings, Inc.
First Lien Term Loan,
8.78%, 03/31/08 .............................. 8,009,925
2,000,000 IAP Worldwide Services, Inc.
First Lien Term Loan,
7.63%, 12/30/12 .............................. 2,027,500
2,971,765 Vought Aircraft Industries, Inc.
Term Loan, 7.11%, 12/22/11 ................... 2,999,254
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13,036,679
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AEROSPACE - AIRLINES - 2.3%
Continental Airlines, Inc.
857,143 Tranche A-1 Term Loan,
9.79%, 06/01/11 .............................. 872,143
2,142,857 Tranche A-2 Term Loan,
9.79%, 06/01/11 .............................. 2,180,357
2,000,000 Northwest Airlines, Inc.
Tranche C Term Loan,
10.82%, 11/23/10 ............................. 2,035,000
24,500,000 United Airlines, Inc.
Tranche B Term Loan,
8.63%, 02/01/12 .............................. 24,949,330
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30,036,830
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BROADCASTING - 2.6%
1,000,000 Enterprise NewsMedia LLC
Term Loan, 7.53%, 06/30/12 ................... 1,012,500
NEP Supershooters LP
1,423,769 First Lien Term A Loan,
8.60%, 02/03/11 .............................. 1,446,008
1,043,977 Second Lien Term Loan,
12.53%, 08/03/11 ............................. 1,038,757
NextMedia Operating, Inc
1,227,692 Delay Draw Term Loan,
6.57%, 11/15/12 .............................. 1,238,815
2,762,308 Initial First Lien Term Loan,
6.57%, 11/15/12 .............................. 2,786,892
11,000,000 Paxson Communications Corp.
First Lien Term Loan,
7.78%, 01/15/12 .............................. 11,043,340
2,977,500 Spanish Broadcasting Systems, Inc.
First Lien Term Loan,
6.28%, 06/10/12 .............................. 3,015,969
13,003,592 Young Broadcasting, Inc.
Term Loan, 6.81%, 11/03/12 (b) ............... 13,052,486
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34,634,767
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CABLE - INTERNATIONAL CABLE - 2.4%
4,991,626 Adelphia Communications Corp.
Tranche B DIP Term Loan,
6.88%, 03/31/06 .............................. 5,016,585
1,870,505 Bragg Communications, Inc.
Term Loan B, 6.81%, 08/31/11 ................. 1,891,548
5,000,000 NTL, Inc.
B2 Sub-Tranche,
7.57%, 04/14/12 .............................. 5,028,100
2,962,500 Puerto Rico Cable Acquisition Co., Inc.
First Lien Term Loan,
7.25%, 07/28/11 .............................. 2,997,695
San Juan Cable, LLC
2,500,000 First Lien Term Loan,
9.94%, 10/31/12 .............................. 2,531,250
PRINCIPAL AMOUNT ($) VALUE ($)
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CABLE - INTERNATIONAL CABLE (CONTINUED)
San Juan Cable, LLC (continued)
2,500,000 Second Lien Term Loan,
6.44%, 10/31/13 .............................. 2,515,100
11,442,500 UPC Broadband Holding BV
Facility F2, 8.03%, 03/31/09 ................. 11,591,252
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31,571,530
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CABLE - US CABLE - 7.5%
1,150,000 Bresnan Communications LLC
Tranche B Term Loan,
8.07%, 09/30/10 .............................. 1,163,938
Century Cable Holdings LLC
7,500,000 Discretionary Term Loan,
9.50%, 12/31/09 .............................. 7,387,500
2,500,000 Revolver, 8.50%, 03/31/09 .................... 2,433,600
15,000,000 Term Loan, 9.50%, 06/30/09 ................... 14,733,750
Charter Communications Operating LLC
1,997,517 Tranche A Term Loan,
7.67%, 04/27/10 .............................. 2,008,303
21,770,446 Tranche B Term Loan,
7.92%, 04/07/11 (b) .......................... 22,011,683
14,087,500 Hilton Head Communications LP
Revolver, 7.50%, 09/30/07 .................... 13,721,225
5,044,914 Knology, Inc.
Second Lien Term Loan,
14.66%, 06/29/11 ............................. 5,498,956
Mediacom Broadband Group
3,520,000 Tranche A Term Loan,
5.94%, 03/31/10 .............................. 3,520,000
1,970,113 Tranche C Term Loan,
6.69%, 09/30/10 .............................. 1,996,118
990,000 Mediacom Illiniois, LLC
Tranche B Term Loan,
6.79%, 03/31/13 .............................. 1,003,613
Northland Cable Television, Inc.
5,000,000 First Lien Term Loan B,
10.50%, 12/22/12 ............................. 5,012,500
4,000,000 Second Lien Term Loan,
14.00%, 06/22/13 ............................. 4,000,000
Olympus Cable Holdings LLC
9,500,000 Term Loan A, 8.75%, 06/30/10 ................. 9,321,020
1,000,000 Term Loan B, 9.50%, 09/30/10 ................. 984,690
WideOpenWest LLC
2,955,000 Incremental Term Loan B,
7.53%, 06/22/11 .............................. 2,962,388
1,964,988 Term Loan B, 7.55%, 06/22/11 ................. 1,971,119
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99,730,403
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CHEMICALS - COMMODITY & FERTILIZER - 0.6%
7,454,142 Celenese
Dollar Term Loan B,
6.53%, 04/06/11 .............................. 7,546,647
78,772 Huntsman International LLC
Term B Dollar Loan,
6.32%, 08/16/12 .............................. 79,292
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7,625,939
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CHEMICALS - SPECIALTY CHEMICALS - 2.5%
Brenntag Holding GMBH & Co.
589,091 Acquisition Facility,
7.07%, 01/17/14 .............................. 598,664
2,410,909 Facility B2 Term Loan,
7.07%, 01/17/14 .............................. 2,457,922
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 3
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
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SENIOR LOAN NOTES (CONTINUED)
CHEMICALS - SPECIALTY CHEMICALS (CONTINUED)
Ineos US Finance LLC
2,000,000 Term Loan A4, 6.83%, 12/14/12 ................ 1,998,440
5,750,000 Term Loan B2, 6.83%, 12/14/13 (b) ............ 5,829,120
5,750,000 Term Loan C2, 7.33%, 12/14/14 (b) ............ 5,808,478
1,890,000 Innophos, Inc.
Tranche B Term Loan,
6.82%, 08/13/10 .............................. 1,916,762
443,136 INVISTA Canada Co.
Tranche B-2 Term Loan,
6.38%, 04/29/11 .............................. 448,121
886,272 INVISTA S.A.R.L.
Tranche B-1 Term Loan,
6.38%, 04/29/11 .............................. 896,243
4,500,000 ISP Chemco, Inc.
Term Loan, 02/16/13 (b) ...................... 4,542,210
4,012,903 Kraton Polymers Group of Cos.
Term Loan, 7.02%, 12/23/10 ................... 4,073,097
Nalco Co.
478,782 Tranche A-1 Term Loan,
7.07%, 11/04/09 .............................. 482,373
1,997,656 Tranche B Term Loan,
6.34%, 11/04/10 .............................. 2,022,486
1,980,000 Rockwood Specialties Group, Inc.
Tranche E Term Loan,
6.67%, 07/30/12 .............................. 2,007,225
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33,081,141
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CONSUMER DURABLES - 0.2%
3,000,000 Rexair LLC
Second Lien Term Loan,
11.69%, 06/30/11 ............................. 3,000,000
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CONSUMER NON-DURABLES - OTHER NON-DURABLES - 3.9%
2,000,000 Amscan Holdings
Term Loan B, 7.77%, 12/23/12 ................. 1,982,500
23,757,927 DS Waters Enterprises LP
Term Loan, 9.03%, 11/07/09 (b) ............... 23,045,189
10,561,765 Eastman Kodak Co.
Term B-1 Advance,
6.72%, 10/18/12 .............................. 10,681,218
1,719,375 Hillman Group, Inc.
Term Loan B, 7.69%, 03/31/11 ................. 1,748,398
1,000,000 Jarden Corp
Term Loan B1, 01/24/12 (b) ................... 1,011,150
1,000,000 MD Beauty, Inc.
Second Lien Term Loan,
11.67%, 02/18/13 ............................. 1,011,880
1,970,800 Polaroid Corp.
Term Loan, 11.63%, 04/27/11 .................. 1,975,727
Prestige Brands Holdings, Inc.
107,078 Term Loan B Add-On,
6.89%, 04/06/11 .............................. 108,350
1,965,000 Tranche B Term Loan,
7.24%, 04/06/11 .............................. 1,988,344
2,875,000 Revlon Consumer Products Corp.
Term Loan, 10.50%, 07/09/10 .................. 2,962,458
875,533 Solo Cup, Inc.
Term B1 Loan, 7.03%, 02/27/11 ................ 884,446
UCG Paper Crafts
400,000 First Lien Synthetic Facility,
02/17/13 (b) ................................. 401,000
1,600,000 First Lien Term Loan, 02/17/13 (b) ........... 1,604,000
PRINCIPAL AMOUNT ($) VALUE ($)
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CONSUMER NON-DURABLES - OTHER NON-DURABLES (CONTINUED)
UCG Paper Crafts (continued)
2,000,000 Second Lien Term Loan, 08/17/13 (b) .......... 2,007,500
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51,412,160
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CONSUMER NON-DURABLES - TEXTILES - 0.3%
2,000,000 Camelbak Products, Inc.
Second Lien Term Loan,
6.50%, 02/04/12 .............................. 1,920,000
1,900,632 Levi Strauss & Co.
Tranche A Term Loan,
11.52%, 09/29/09 ............................. 1,958,126
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3,878,126
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DIVERSIFIED MEDIA - 4.1%
2,881,037 Adams Outdoor Advertising LP
Term Loan, 6.62%, 10/15/11 ................... 2,923,042
8,308,145 American Lawyer Media Holdings, Inc.
First Lien Term Loan,
7.03%, 03/05/10 .............................. 8,328,916
2,992,424 Cygnus Business Media
Term Loan B, 9.10%, 07/13/09 ................. 2,977,462
1,480,152 Day International, Inc.
First Lien U S Term Loan,
7.03%, 12/05/12 .............................. 1,499,128
2,500,000 Deluxe Canada Holdings, Inc.
First Lien Tranche C Term Loan,
8.33%, 01/28/11 .............................. 2,525,000
5,500,000 HIT Entertainment PLC
Second Lien Term Loan,
9.97%, 02/26/13 .............................. 5,552,140
3,000,000 Merrill Communications LLC
Combined Term Loan,
6.86%, 05/15/11 .............................. 3,030,480
9,505,000 Metro-Goldwyn-Mayer Holdings, Inc./
LOC Acquisition Co.
Tranche B Term Loan,
6.78%, 04/08/12 .............................. 9,614,498
North American Membership Group, Inc.
992,500 First Lien Tranche B Term Loan,
7.78%, 05/19/11 .............................. 987,538
3,000,000 Second Lien Term Loan,
12.03%, 11/18/11 ............................. 2,985,000
1,995,000 PBI Media, Inc.
First Lien Term Loan,
6.91%, 09/30/12 .............................. 1,999,150
3,000,000 PRIMEDIA, Inc.
Term Loan B, 09/30/13 (b) .................... 2,971,500
1,560,757 Six Flags Theme Parks, Inc.
Tranche B Term Loan,
7.11%, 06/30/09 .............................. 1,581,234
2,815,517 VISANT Corp.
Tranche C Term Loan,
6.78%, 10/04/11 .............................. 2,856,004
4,917,474 Warner Music Group
Term Loan, 6.66%, 02/28/11 ................... 4,975,107
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54,806,199
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ENERGY - EXPLORATION & PRODUCTION - 1.5%
4,488,750 Cheniere LNG Holdings LLC
Term Loan, 6.95%, 08/30/12 .................... 4,546,251
2,000,000 Primary Energy Operations LLC
Term Loan, 7.56%, 08/24/09 .................... 2,021,240
4 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
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SENIOR LOAN NOTES (CONTINUED)
ENERGY - EXPLORATION & PRODUCTION (CONTINUED)
Targa Resources, Inc.
2,000,000 Asset Bridge Term Loan,
6.83%, 10/31/07 .............................. 2,007,500
967,742 Synthetic Term Loan,
4.40%, 10/31/12 .............................. 979,839
4,022,177 Term Loan, 6.74%, 10/31/12 ................... 4,075,833
6,000,000 TARH E&P Holdings, LP
Second Lien Term Loan,
10.25%, 11/15/10 ............................. 6,015,000
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19,645,663
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ENERGY - OTHER ENERGY - 1.6%
4,477,500 Carrizo Oil & Gas, Inc.
Second Lien Term Loan,
10.53%, 07/21/10 ............................. 4,606,228
Coffeyville Resources LLC
597,004 First Lien Tranche B Term Loan,
7.07%, 06/24/12 .............................. 605,774
400,000 Funded Letter of Credit,
4.46%, 06/24/12 .............................. 406,000
8,000,000 Second Lien Term Loan,
11.31%, 06/24/13 ............................. 8,267,520
2,771,906 Ferrell Cos., Inc.
Term Loan, 8.00%, 12/17/11 ................... 2,820,414
1,430,336 Magellan MIdstream Holdings
Term Loan, 12/15/10 (b) ...................... 1,448,215
3,000,000 Nordic Biofuels of Ravenna, LLC
First Lien Term Loan,
8.92%, 04/30/13 .............................. 3,022,500
369,409 SemCrude LP
U S Term Loan, 6.75%, 03/16/11 374,721
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21,551,372
-----------
ENERGY - SERVICE & EQUIPMENT - 0.1%
361,291 Dresser, Inc.
Term Loan C, 7.11%, 04/10/09 ................. 367,314
1,250,000 Vetco International Holdings, Inc. (DE)
Second Lien Term D Loan,
9.70%, 01/12/14 .............................. 1,272,925
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1,640,239
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FINANCIAL - 1.6%
2,000,000 American Wholesale Insurance
Group, Inc.
Second Lien Term Loan B,
11.99%, 04/27/12 ............................. 2,005,000
2,962,500 Arias Acquisitions, Inc.
Term Loan, 8.28%, 07/26/11 ................... 2,958,797
4,872,782 Conseco, Inc.
Term Loan, 6.57%, 06/22/10 ................... 4,915,468
5,000,000 Crump Group, Inc.
Tranche B Term Loan,
7.55%, 12/19/12 .............................. 5,037,500
3,705,263 Flatiron Re Ltd.
Closing Date Term Loan,
8.81%, 12/29/10 .............................. 3,742,316
961,538 FleetCor Technologies, Inc.
Term Loan, 8.08%, 06/30/11 ................... 961,538
2,000,000 LPL Holdings, Inc.
Tranche B Term Loan,
7.88%, 06/28/13 .............................. 2,007,080
-----------
21,627,699
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PRINCIPAL AMOUNT ($) VALUE ($)
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FOOD AND DRUG - 1.8%
985,507 Bi-Lo LLC
Term Loan, 8.54%, 06/30/11 ................... 987,971
4,000,000 CTI Food Holdings Co. LLC
Second Lien Secured Term Loan,
10.31%, 06/02/12 ............................. 4,080,000
1,824,620 Duloxetine Royalty Sub
Term Loan, 9.10%, 10/18/13 ................... 1,833,743
8,461,196 Jean Coutu Group, Inc.
Term Loan B, 6.94%, 07/30/11 ................. 8,574,068
4,563,758 Michael Foods, Inc.
Term Loan B-1, 6.66%, 11/21/10 ............... 4,627,651
4,879,919 Nellson Nutraceutical, Inc.
Second Lien Term Loan,
14.00%, 04/04/10 ............................. 1,415,177
995,000 Sturm Foods, Inc.
First Lien Term Loan,
7.25%, 05/26/11 .............................. 1,010,542
1,962,314 Vitaquest International, Inc.
First Lien Term Loan,
7.94%, 03/07/11 .............................. 1,957,409
-----------
24,486,561
-----------
FOOD/TOBACCO - BEVERAGES & BOTTLING - 0.8%
942,368 AFC Enterprises, Inc.
Tranche B Term Loan,
6.81%, 05/09/11 .............................. 954,148
4,973,178 Dr. Pepper/Seven Up Bottling
Group, Inc.
Tranche B Term Loan,
6.57%, 12/19/10 .............................. 5,048,372
3,750,000 National Distributing Co., Inc.
Second Lien Term Loan,
11.11%, 06/01/10 ............................. 3,759,375
1,235,294 Sunny Delight Beverages Co.
First Lien Term Loan,
8.61%, 08/20/10 .............................. 1,226,029
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10,987,924
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FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS - 1.2%
7,865,193 Merisant Co.
Tranche B Term Loan,
7.92%, 01/11/10 .............................. 7,552,237
3,958,393 Michelina's
Term Loan, 7.50%, 04/02/11 ................... 4,012,821
1,588,333 Pierre Foods, Inc.
Term Loan B, 6.56%, 06/30/10 ................. 1,609,681
2,839,346 Pinnacle Foods Holding Corp.
Term Loan, 7.78%, 11/25/10 ................... 2,882,646
-----------
16,057,385
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FOOD/TOBACCO - RESTAURANTS - 0.8%
2,698,663 Buffets, Inc.
Term Loan, 8.19%, 06/28/09 ................... 2,725,650
930,000 Captain D's Inc., LLC
First Lien Term Loan,
8.36%, 12/27/10 .............................. 939,300
2,658,333 Caribbean Restaurant LLC
Tranche B Term Loan,
7.32%, 06/30/09 .............................. 2,685,475
2,000,000 El Pollo Loco, Inc.
Term Loan, 7.56%, 11/18/11 ................... 2,027,500
1,500,000 Garden Fresh Restaurant Corp.
First Lien Term Loan B,
7.82%, 06/22/11 .............................. 1,503,750
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 5
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
SENIOR LOAN NOTES (CONTINUED)
FOOD/TOBACCO - RESTAURANTS (CONTINUED)
1,000,000 New World Restaurant Group, Inc.
First Lien Term Loan,
9.50%, 03/31/11 .............................. 1,007,500
-----------
10,889,175
-----------
FOREST PRODUCTS - PACKAGING - 4.5%
4,781,314 Berry Plastics Corp.
Term Loan, 6.45%, 12/02/11 ................... 4,850,069
Georgia-Pacific Corp.
25,000,000 First Lien Term Loan, 02/14/13 (b) ........... 25,216,000
20,000,000 Second Lien Term Loan,
7.56%, 02/14/14 .............................. 20,430,500
7,425,000 Graham Packaging Co.
Term Loan B, 6.84%, 10/07/11 ................. 7,527,094
JSG Acquisitions (Smurfit Kappa)
1,000,000 B1 Term Loan Facility, 12/01/13 (b) .......... 1,015,000
1,000,000 C1 Term Loan Facility, 12/01/13 (b) .......... 1,015,000
-----------
60,053,663
-----------
FOREST PRODUCTS - PAPER - 0.7%
3,238,331 Appleton Papers, Inc.
Term Loan, 6.58%, 06/11/10 ................... 3,276,803
2,621,875 Graphic Packaging International, Inc.
Tranche C Term Loan,
6.98%, 08/09/10 .............................. 2,667,233
2,985,000 NewPage Corp.
Term Loan, 7.56%, 05/02/11 ................... 3,029,775
SP Newsprint Co.
513,096 Tranche B-1 Credit Linked Deposit,
4.61%, 01/09/10 .............................. 520,793
198,382 Tranche B-1 Term Loan,
6.86%, 01/09/10 .............................. 201,358
-----------
9,695,962
-----------
GAMING/LEISURE - GAMING - 3.2%
2,986,125 CCM Merger, Inc./MotorCity Casino
Term Loan B, 6.57%, 04/25/12 ................. 3,009,656
3,930,300 Green Valley Ranch Gaming LLC
Term Loan, 6.53%, 12/22/10 ................... 3,984,342
OpBiz LLC
11,439,157 Term Loan A, 7.53%, 08/31/10 ................. 11,215,178
10,505 Term Loan B, 8.53%, 08/31/10 ................. 10,321
1,995,000 Penn National Gaming, Inc.
Term Loan B, 6.38%, 10/03/12 ................. 2,023,489
Resorts International Holdings Ltd.
17,333,264 Second Lien Term Loan,
12.03%, 04/26/13 ............................. 16,249,935
2,833,143 Term Loan B, 7.53%, 04/26/12 ................. 2,826,967
3,000,000 Washington County Casino & Golf
Resort
Tranche B Term Loan, 11/01/11 (b) ............ 3,000,000
-----------
42,319,888
-----------
GAMING/LEISURE - OTHER LEISURE - 2.6%
3,178,184 AMF Bowling Worldwide, Inc.
Term Loan B, 7.61%, 08/27/09 ................. 3,215,941
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
GAMING/LEISURE - OTHER LEISURE (CONTINUED)
2,325,000 BRE/ESA Mezz5 LLC
Mezzanine D Loan,
8.00%, 07/11/08 .............................. 2,330,812
12,675,000 BRE/Homestead MEZZ 4 LLC
Mezzanine D Loan,
8.00%, 07/11/08 .............................. 12,706,687
3,000,000 Fender Musical Instruments Corp.
Second Lien Term Loan,
8.72%, 09/30/12 .............................. 3,018,750
Fontainebleu Florida Hotel LLC
3,000,000 Tranche A Term Loan,
7.49%, 05/11/08 .............................. 3,000,000
2,000,000 Tranche B Term Loan,
7.49%, 05/11/08 .............................. 2,000,000
997,500 Kuilima Resort Co.
First Lien Term Loan,
7.36%, 09/30/10 .............................. 1,006,228
2,000,000 Riverside Casino & Golf Resort LLC
Term Loan, 8.88%, 11/30/11 ................... 2,000,000
2,000,000 Southwest Sports Group LLC
Term Loan, 7.07%, 12/22/10 ................... 2,025,000
1,741,250 Trump Entertainment Resorts, Inc.
Term Loan B-1, 7.17%, 05/20/12 ............... 1,760,856
1,970,000 Wallace Theaters
First Lien Term Loan,
7.77%, 07/31/09 .............................. 1,987,237
-----------
35,051,511
-----------
HEALTHCARE - ACUTE CARE - 1.1%
3,566,195 Alliance Imaging, Inc.
Tranche C1 Term Loan,
7.18%, 12/29/11 .............................. 3,569,904
2,000,000 Ameripath, Inc.
Tranche B Term Loan,
6.57%, 10/31/12 .............................. 2,025,940
2,000,000 Capella Healthcare, Inc.
First Lien Term Loan,
7.45%, 11/30/12 .............................. 2,018,760
Cornerstone Healthcare Group
Holding, Inc.
1,008,629 Senior Subordinated Unsecured Notes,
14.00%, 07/15/12 (c) ......................... 988,457
1,977,119 Term Loan, 8.64%, 07/15/11 ................... 1,962,290
4,029,118 DaVita, Inc.
Tranche B Term Loan,
6.79%, 10/05/12 .............................. 4,092,778
-----------
14,658,129
-----------
HEALTHCARE - ALTERNATE SITE SERVICES - 3.2%
1,442,482 American HomePatient, Inc.
Secured Promissory Note,
6.79%, 08/01/09 (c) .......................... 1,442,482
2,175,143 American Medical Response, Inc.
Term Loan, 5.25%, 02/10/12 ................... 2,202,332
1,985,000 Chemed Corp.
Term Loan, 6.53%, 08/24/10 ................... 2,004,850
2,000,000 CRC Health Corp.
New Term Loan, 6.81%, 02/06/13 ............... 2,025,000
FHC Health Systems, Inc.
1,300,000 Delayed Draw Term Loan,
12.41%, 10/31/06 ............................. 1,345,500
1,857,143 Initial Term Loan,
10.41%, 10/31/06 ............................. 1,922,143
1,500,000 Third Lien Additional Term Loan,
13.41%, 02/09/11 ............................. 1,530,000
6 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
SENIOR LOAN NOTES (CONTINUED)
HEALTHCARE - ALTERNATE SITE SERVICES (CONTINUED)
FHC Health Systems, Inc. (continued)
5,000,000 Third Lien Term Loan,
13.41%, 02/09/11 ............................. 5,112,500
2,524,139 Hanger Orthopedic Group, Inc.
Tranche B Term Loan,
8.27%, 09/30/09 .............................. 2,562,001
HealthSouth Corp.
3,917,813 Term Loan, 7.11%, 06/14/07 ................... 4,032,918
1,062,500 Tranche B Term Loan,
4.12%, 03/21/10 .............................. 1,065,156
546,631 Kinetic Concepts, Inc.
Tranche B2 Term Loan,
6.28%, 08/11/10 .............................. 552,781
2,750,000 MultiPlan, Inc.
Term Loan, 7.03%, 03/04/09 ................... 2,765,455
4,488,750 Renal Advantage, Inc.
Tranche B Term Loan,
7.07%, 10/06/12 .............................. 4,533,638
1,990,000 Skilled Healthcare LLC
First Lien Term Loan,
7.25%, 06/15/12 .............................. 2,011,134
474,603 Sunrise Medical Holdings, Inc.
Term Loan B-1, 7.89%, 05/13/10 ............... 475,196
2,000,000 Triumph Healthcare Second Holdings,
LLC Second Lien Term Loan,
13.06%, 08/31/12 ............................. 1,903,320
915,333 VWR International, Inc.
Tranche B Dollar Term Loan,
7.12%, 04/07/11 .............................. 928,606
1,970,000 WellCare Health Plans, Inc.
Term Loan, 7.06%, 05/13/09 ................... 1,986,016
2,669,346 Youth & Family Centered Services, Inc.
Term Loan B, 8.69%, 05/28/11 ................. 2,662,672
-----------
43,063,700
-----------
HEALTHCARE - MEDICAL PRODUCTS - 1.6%
Carl Zeiss TopCo GmbH/US Newco
1,000,000 Term B U S Dollar Loan,
6.95%, 05/04/13 .............................. 1,003,750
1,000,000 Term C U S Dollar Loan,
7.45%, 05/04/14 .............................. 1,007,500
CCS Medical, Inc.
3,500,000 First Lien Term Loan,
7.78%, 09/30/12 .............................. 3,476,690
1,250,000 Second Lien Term Loan,
12.53%, 03/30/13 ............................. 1,156,250
1,140,945 Encore Medical IHC, Inc.
Term Loan, 7.54%, 10/04/10 ................... 1,153,780
Matria Healthcare, Inc.
2,021,136 First Lien Tranche B Term Loan,
6.90%, 01/19/12 (b) .......................... 2,043,874
978,864 First Lien Tranche C Term Loan,
7.02%, 01/19/07 (b) .......................... 981,917
2,481,250 Reliant Pharmaceuticals, Inc.
First Lien Term Loan,
14.08%, 06/30/08 ............................. 2,506,062
Warner Chilcott Co., Inc.
165,046 Dovobet Delayed Draw Term Loan,
7.44%, 01/18/12 .............................. 165,973
825,155 Dovonex Delayed Draw Term Loan,
7.36%, 01/18/12 .............................. 829,792
4,038,967 Tranche B Acquisition Date Term Loan,
7.36%, 01/18/12 .............................. 4,068,008
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
HEALTHCARE - MEDICAL PRODUCTS (CONTINUED)
1,627,507 Warner Chilcott Corp.
Tranche C Acquisition Date
Term Loan, 7.28%, 01/18/12 ................... 1,640,234
751,862 Warner Chilcott Holdings Co. III, Ltd.
Tranche D Acquisition Date
Term Loan, 7.28%, 01/18/12 ................... 757,742
-----------
20,791,572
-----------
HOUSING - BUILDING MATERIALS - 2.1%
9,004,934 Atrium Cos., Inc.
Term Loan, 7.84%, 12/28/11 ................... 9,004,934
1,000,000 Contech Construction Products
New Term Loan, 6.69%, 01/31/13 ............... 1,013,750
1,899,968 Custom Building Products, Inc.
First Lien Term Loan,
6.78%, 10/20/11 .............................. 1,910,646
4,130,079 Lake at Las Vegas Joint Venture
First Lien Term Loan,
7.45%, 11/01/09 .............................. 4,141,271
1,960,101 Nortek Holdings, Inc.
Term Loan, 6.94%, 08/27/11 ................... 1,980,192
1,000,000 PGT Industries, Inc.
First Lien Tranche A-2 Term Loan,
7.75%, 02/14/12 .............................. 1,015,000
1,496,250 Pivotal Group Promotory
First Lien Term Loan,
7.36%, 08/31/10 .............................. 1,491,582
2,250,000 Ply Gem Industries, Inc.
U S Term Loan, 02/24/13 (b) .................. 2,272,500
3,000,000 Propex Fabrics
Tranche B Term Loan, 07/31/12 (b) ............ 3,030,000
Stile Acquisition Corp.
992,500 Canadian Term Loan,
6.63%, 04/06/13 .............................. 975,131
992,500 U S Term Loan, 6.63%, 04/06/13 ............... 976,441
-----------
27,811,447
-----------
HOUSING - REAL ESTATE DEVELOPMENT - 3.8%
1,975,000 DESA LLC
Term Loan, 9.50%, 11/26/11 ................... 1,954,026
6,000,000 Edge Star Partners LLC
First Lien Term Loan,
8.02%, 11/18/06 .............................. 6,075,000
2,143,382 Giraffe Intermediate, LLC
Mezzanine Note A-1,
6.32%, 08/09/07 .............................. 2,143,382
LNR Property Corp.
907,200 Tier A Mezzanine, 7.26%, 02/03/08 ............ 914,566
1,370,467 Tranche A Term Loan,
7.57%, 02/03/08 .............................. 1,379,032
11,317,958 Tranche B Term Loan,
7.57%, 02/03/08 .............................. 11,427,516
Morningside Assisted Living
1,998,622 Mezzanine Loan, 11.75%, 10/12/08 ............. 1,998,622
1,498,967 Senior Mortgage Loan,
7.50%, 10/12/08 .............................. 1,498,967
606,618 MPO Intermediate LLC
Mezzanine Note A-1,
6.32%, 08/09/07 .............................. 606,618
3,980,000 Palmdale Hills Property LLC
First Lien Term Loan,
7.61%, 05/19/10 .............................. 3,980,000
2,000,000 Shea Capital I, LLC
Facility B, 6.69%, 10/27/11 .................. 2,002,500
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
HOUSING - REAL ESTATE DEVELOPMENT (CONTINUED)
Spanish Peaks Holdings LLC
751,997 Tranche A Credit-Linked Deposit,
4.43%, 08/10/11 ............................ 759,517
1,703,670 Tranche B Term Loan,
6.90%, 08/10/11 ............................ 1,716,447
5,500,000 TE/TOUSA Mezzanine LLC
Senior Mezzanine Loan,
10.25%, 08/01/09 ........................... 5,513,750
5,000,000 TWLDC Holdings LP
Mezzanine Loan, 8.78%, 11/30/07 5,043,750
4,000,000 Woodlands Commercial Property Co.
Bridge Loan, 7.36%, 02/28/08 ............... 4,030,000
-------------
51,043,693
-------------
INFORMATION TECHNOLOGY - 4.0%
205,526 Avago Technologies
Tranche B-1 Term Loan,
7.07%, 12/01/12 ............................ 206,168
484,353 Bridge Information Systems, Inc.
Multidraw Term Loan,
07/07/13 (d) (e) ........................... 7,265
6,000,000 Comsys Information Services
Second Lien Term Loan,
12.16%, 10/31/10 ........................... 6,015,000
Corel Corp.
962,500 First Lien Term Loan,
8.82%, 02/16/10 ............................ 967,313
2,000,000 Second Lien Term Loan,
12.57%, 08/15/10 ........................... 2,010,000
960,323 Data Transmissions Network Corp.
Tranche B Term Loan,
7.62%, 03/17/12 ............................ 969,926
416,965 Fidelity National Information
Services, Inc.
Term Loan B, 6.32%, 03/09/13 ............... 420,426
2,000,000 GXS Corp.
Second Lien Term Loan,
13.68%, 12/20/11 ........................... 2,010,000
Infor Global Solutions European
Finance S.A.R.L.
1,080,000 Euro Revolving Credit,
7.86%, 04/18/10 (f) ........................ 1,066,500
1,875,000 Second Lien Lux Term Loan,
11.82%, 04/18/12 ........................... 1,919,531
1,922,561 IPC Acquisition Corp.
First Lien Tranche B Term Loan,
7.21%, 08/05/11 ............................ 1,947,785
3,125,000 Magellan Holdings, Inc.
Second Lien U S Term Loan,
11.82%, 04/18/12 ........................... 3,199,219
6,939,950 On Semiconductor Corp.
Term Loan H, 7.14%, 12/15/11 ............... 7,016,567
992,500 Overwatch Systems
Term Loan, 7.28%, 04/01/11 ................. 1,003,676
2,431,034 Per-Se Technologies, Inc.
Term Loan, 6.79%, 01/06/13 (b) ............. 2,467,500
12,437,500 SunGard Data Systems, Inc.
U S Term Loan, 7.22%, 02/11/13 ............. 12,623,441
483,781 Telcordia Technologies, Inc.
Term Loan, 7.31%, 09/15/12 ................. 478,034
2,250,000 Transfirst Holdings, Inc.
Second Lien Term Loan,
12.06%, 03/31/11 ........................... 2,283,750
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
INFORMATION TECHNOLOGY (CONTINUED)
1,346,956 UGS Corp.
Replacement Term Loan,
6.61%, 05/27/11 ............................ 1,364,910
4,950,000 Viasystems, Inc.
Replacement Tranche B Term Loan,
8.83%, 09/30/09 ............................ 4,996,431
-------------
52,973,442
-------------
MANUFACTURING - 1.3%
1,440,156 AIRXCEL, Inc.
First Lien Term Loan,
7.63%, 08/31/12 ............................ 1,458,158
1,443,641 Blount International, Inc.
U S Term Loan B, 7.06%, 08/09/10 ........... 1,458,828
1,500,000 Coinmach Corp.
Tranche B-1 Term Loan,
7.13%, 12/16/12 ............................ 1,525,005
828,947 Euramax International Holdings B.V.
Second Lien European Term Loan,
11.54%, 06/29/13 ........................... 815,477
Euramax International, Inc.
2,062,482 First Lien Domestic Term Loan,
7.25%, 06/29/13 (b) ........................ 2,061,616
1,671,053 Second Lien Domestic Term Loan,
11.54%, 06/29/13 ........................... 1,625,099
4,490,000 Mueller Group LLC
Term Loan, 6.84%, 10/03/12 (b) ............. 4,551,154
1,773,784 Polypore, Inc.
U S Term Loan, 7.53%, 11/12/11 ............. 1,784,320
1,272,933 Terex Corp.
Term Loan, 6.84%, 07/03/09 ................. 1,290,436
-------------
16,570,093
-------------
METALS/MINERALS - OTHER METALS/MINERALS - 1.1%
2,500,000 Alpha Natural Resources LLC
Tranche B Term Loan,
6.32%, 10/26/12 ............................ 2,513,800
8,176,616 Murray Energy Corp.
Tranche B Term Loan,
7.61%, 01/28/10 ............................ 8,202,127
3,977,500 Trout Coal Holdings LLC
First Lien Term Loan,
7.73%, 03/23/11 ............................ 3,957,613
-------------
14,673,540
-------------
METALS/MINERALS - STEEL - 0.5%
1,990,000 CII Carbon LLC
Term Loan B, 6.56%, 08/23/12 ............... 2,013,641
Novelis, Inc.
751,617 Canadian Term Loan,
6.44%, 01/07/12 ............................ 761,478
1,305,439 U S Term Loan, 6.44%, 01/07/12 ............. 1,322,671
2,737,500 Techs Industries, Inc. (The)
Term Loan, 7.61%, 01/14/10 ................. 2,740,922
-------------
6,838,712
-------------
RETAIL - 5.7%
19,606,375 Blockbuster Entertainment Corp.
Tranche B Term Loan,
8.73%, 08/20/11 (b) ........................ 19,091,903
2,970,000 Dollarama Group LP
Term Loan B, 6.92%, 11/18/11 ............... 2,999,700
8 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
RETAIL (CONTINUED)
3,615,910 Harbor Freight Tools USA
Term Loan, 6.82%, 07/15/10 ................. 3,652,647
26,199,071 Home Interiors & Gifts, Inc.
Initial Term Loan, 9.81%, 03/31/11 ......... 24,578,134
Movie Gallery, Inc.
395,263 Term Loan A, 8.03%, 04/27/11 ............... 371,547
16,170,687 Term Loan B, 8.28%, 04/27/11 ............... 15,175,220
4,984,177 Neiman Marcus Group, Inc. (The)
Term Loan, 6.95%, 04/06/13 ................. 5,060,734
3,000,000 Oriental Trading Co., Inc.
Second Lien Term Loan,
9.31%, 01/08/11 ............................ 3,039,360
1,000,000 TRU 2005 Holding Co. I, Ltd
Term Loan, 7.57%, 12/09/08 ................. 995,620
-------------
74,964,865
-------------
SERVICE - ENVIRONMENTAL SERVICES - 1.3%
2,212,500 Alliance Laundry Systems LLC
Term Loan, 6.73%, 01/27/12 ................. 2,244,316
Allied Waste North America, Inc.
2,849,497 Term Loan, 6.44%, 01/15/12 ................. 2,881,925
1,106,303 Tranche A Credit Linked Deposit,
6.39%, 01/15/12 ............................ 1,119,612
3,370,000 Audio Visual Services Corp.
Term Loan, 7.28%, 05/18/11 ................. 3,403,700
8,000,000 Washington Group International
Tranche B Term Loan,
6.18%, 10/03/07 ............................ 8,040,000
-------------
17,689,553
-------------
SERVICE - OTHER SERVICES - 1.4%
4,138,889 Brickman Group Holdings, Inc.
Term Loan, 9.81%, 11/15/09 ................. 4,128,542
2,443,665 NES Rentals Holdings, Inc.
Second Lien Term Loan,
10.47%, 08/17/10 ........................... 2,480,320
3,000,000 Penhall International Corp.
Second Lien Term Loan,
11.21%, 11/01/10 ........................... 3,037,500
1,000,000 Survey Sampling International LLC
Second Lien Term Loan,
11.78%, 05/06/12 ........................... 1,010,620
United Rentals, Inc.
7,385,987 Initial Term Loan, 6.86%, 02/14/11 ......... 7,481,414
336,842 Tranche B Credit-Linked Deposit,
6.64%, 02/14/11 ............................ 341,053
-------------
18,479,449
-------------
TELECOMMUNICATIONS - 3.4%
2,000,000 Alaska Communications Systems
Holdings, Inc.
Term Loan, 6.28%, 02/01/12 ................. 2,016,680
1,500,000 IWL Communications, Inc.
First Lien Tranche B Term Loan,
8.07%, 01/31/12 ............................ 1,496,250
1,995,000 Maritime Telecommunications
Network, Inc.
First Lien Term Loan,
7.48%, 04/07/11 ............................ 2,004,975
Millennium Digital Media Systems LLC
2,382,473 Facility A Revolver,
9.32%, 10/31/08 (b) ........................ 2,400,341
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
TELECOMMUNICATIONS (CONTINUED)
Millennium Digital Media
Systems LLC (continued)
10,108,137 Facility B Term Loan,
9.19%, 10/31/08 (b) ........................ 10,201,468
11,577,379 Facility C Term Loan,
8.74%, 10/31/08 (b) ........................ 11,684,516
2,000,000 Nextel Partners Operating Corp.
Tranche D Term Loan,
5.91%, 05/31/12 ............................ 2,006,440
NTELOS, Inc.
1,242,462 First Lien Term B Advance,
7.11%, 08/24/11 ............................ 1,257,223
1,500,000 Second Lien Term Loan,
9.61%, 02/24/12 ............................ 1,518,510
4,937,500 PanAmSat Corp.
Tranche B-1 Term Loan,
6.49%, 08/20/11 ............................ 5,000,700
5,500,000 Sorenson Communications, Inc.
First Lien Term Loan B,
7.49%, 11/15/12 ............................ 5,584,260
-------------
45,171,363
-------------
TELECOMMUNICATIONS - CLEC - 0.7%
4,937,500 Consolidated Communications, Inc.
Term Loan D, 6.34%, 10/14/11 ............... 4,988,455
3,933,070 RCN Corp.
Term Loan, 8.81%, 12/21/11 ................. 4,001,899
-------------
8,990,354
-------------
TELECOMMUNICATIONS - DATA/INTERNET - 0.1%
1,000,000 Pine Tree Holdings/Country Road
Communications, Inc.
Second Lien Tranche B Term Loan,
12.55%, 07/15/13 ........................... 1,017,500
-----------
TELECOMMUNICATIONS - FIBER/LONG DISTANCE - 1.4%
5,000,000 FairPoint Communications, Inc.
Replacement B Term Loan,
6.31%, 02/08/12 ............................ 5,034,400
1,000,000 Hawaiian Telcom Communications
Tranche B Term Loan,
6.78%, 10/31/12 ............................ 1,009,550
10,000,000 Qwest Corp.
Tranche B Term Loan,
6.95%, 06/30/10 (g) ........................ 10,191,700
1,950,820 WestCom Corp.
Tranche B Term Loan,
7.53%, 12/17/10 ............................ 1,954,487
-------------
18,190,137
-------------
TRANSPORTATION - AUTO - 3.7%
3,757,551 Carey International, Inc.
Second Lien Term Loan,
16.53%, 05/10/12 ........................... 3,452,250
Delphi Corp.
1,000,000 Revolver, 06/18/09 (b) ..................... 1,039,160
8,403,133 Term Loan, 13.00%, 06/14/11 ................ 8,886,313
1,500,000 Tranche B DIP Term Loan,
7.38%, 10/08/07 ............................ 1,526,250
4,500,000 Environmental Systems Products
Holdings
Second Lien Term Loan,
14.71%, 12/12/10 ........................... 4,590,000
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
TRANSPORTATION - AUTO (CONTINUED)
Federal-Mogul Corp.
4,500,000 DIP Term Loan, 6.56%, 12/09/06 ............. 4,525,290
1,270,249 Supplemental Revolver,
8.35%, 03/31/06 (f) ........................ 1,273,425
1,048,750 Tranche C Term Loan,
8.35%, 03/31/06 ............................ 1,053,994
3,500,000 Goodyear Tire & Rubber Co.
Third Lien Term Loan,
7.81%, 03/01/11 ............................ 3,518,970
Hertz Corp. (The)
444,444 Letter of Credit, 4.50%, 12/21/12 .......... 452,000
3,034,667 Tranche B Term Loan,
6.89%, 12/21/12 ............................ 3,084,799
991,644 Insurance Auto Auctions, Inc.
Term Loan, 7.40%, 05/19/12 ................. 1,004,040
5,138,310 Key Plastics LLC
Term Loan B, 7.65%, 06/29/10 ............... 5,138,310
2,312,606 Rexnord Corp.
Term Loan B, 6.89%, 12/31/11 ............... 2,342,971
3,940,000 Stanadyne Corp.
Term Loan, 8.07%, 08/02/10 ................. 3,959,700
Tenneco Automotive, Inc.
1,779,338 Tranche B Term Loan,
7.02%, 12/12/10 ............................ 1,808,270
781,632 Tranche B-1 Credit Linked Deposit,
6.82%, 12/12/10 ............................ 795,310
-------------
48,451,052
-------------
TRANSPORTATION - LAND - 0.7%
Quality Distribution, Inc.
1,427,481 Synthetic Letters of Credit,
4.43%, 11/13/09 ............................ 1,434,618
2,716,252 Term Loan, 7.57%, 11/13/09 (e) ............. 2,729,833
4,412,330 Term Loan, 7.57%, 11/13/09 ................. 4,434,391
-------------
8,598,842
-------------
UTILITIES - 5.4%
3,652,727 Allegheny Energy, Inc.
Term Advances, 5.63%, 03/08/11 ............. 3,682,131
Boston Generating LLC
1,418,919 First Lien Series A Term Advance,
09/30/10 (b) ............................... 1,453,796
81,081 First Lien Series B Term Advance,
09/30/10 (b) ............................... 83,074
1,950,000 Calpine Construction Finance Co., LP
First Lien Term Loan,
10.57%, 08/26/09 ........................... 2,074,313
Calpine Corp.
2,000,000 First Lien Revolver, 12/20/07 (b) .......... 1,980,000
3,446,809 First Lien Term Loan, 12/20/07 (b) ......... 3,502,819
9,983,749 Second Lien Term Loan B,
10.35%, 07/16/07 (b) (d) ................... 9,190,041
CenterPoint Energy, Inc.
2,700,554 Term Loan, 6.09%, 04/30/10 ................. 2,702,228
5,985,000 Term Loan, 6.92%, 04/30/10 ................. 5,988,711
El Paso Corp.
2,500,000 Deposit Accounts, 4.11%, 11/23/09 .......... 2,526,400
7,611,855 Term Loan, 7.31%, 11/23/09 (b) ............. 7,706,394
1,934,246 Infrasource, Inc.
Term Loan, 7.53%, 09/30/10 ................. 1,943,917
KGen, LLC
1,985,000 Tranche A Term Loan,
7.15%, 08/05/11 ............................ 1,985,000
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
UTILITIES (CONTINUED)
KGen, LLC (continued)
35,187 Tranche B Term Loan,
13.53%, 08/05/11 ........................... 35,363
500,000 La Paloma Generating Co. LLC
Second Lien Term Loan,
8.03%, 08/16/13 ............................ 508,440
1,357,921 Midwest Generation LLC
Term Loan, 6.38%, 04/27/11 ................. 1,376,090
NATG Holdings LLC
570,221 Credit Linked Certificate of Deposit,
6.81%, 01/23/09 ............................ 536,008
1,001,749 Term Loan A, 11.00%, 01/23/09 (d) .......... 235,411
733,455 Term Loan B1, 11.50%, 01/23/10 ............. 172,362
72,363 Term Loan B2, 11.50%, 01/23/10 ............. 68,021
NRG Energy, Inc.
2,413,620 Credit Linked Certificate of Deposit,
6.62%, 02/02/13 ............................ 2,435,584
10,586,380 Term Loan, 6.57%, 02/01/13 ................. 10,704,312
4,541,692 Riverside Energy Center LLC
Term Loan, 8.92%, 06/24/11 ................. 4,609,817
Rocky Mountain Energy Center LLC
361,073 Credit Linked Certificate of Deposit,
8.92%, 06/24/11 ............................ 366,489
3,142,331 Term Loan, 8.92%, 06/24/11 ................. 3,189,466
Thermal North America, Inc.
1,000,000 Credit Linked Certificate of Deposit,
6.32%, 10/12/13 ........................... 1,006,880
997,976 Term Loan, 6.28%, 10/12/13 ................ 1,004,842
-------------
71,067,909
-------------
WIRELESS - CELLULAR/PCS - 3.3%
2,955,000 Cellular South, Inc.
Term Loan, 6.37%, 05/04/11 ................. 2,995,631
3,822,500 Centennial Cellular Operating Co.
Term Loan, 6.64%, 02/09/11 ................. 3,878,385
14,850,000 Cricket Communications, Inc.
Term Loan B, 7.03%, 01/10/11 ............... 15,063,543
MetroPCS, Inc.
9,850,000 First Lien Tranche B Term Loan,
9.50%, 05/27/11 ............................ 10,165,988
10,800,000 Second Lien Term Loan,
12.00%, 05/27/12 ........................... 11,394,000
-------------
43,497,547
-------------
Total Senior Loan Notes
(Cost $1,236,371,363) ................... 1,241,363,715
-------------
FOREIGN VARIABLE RATE SENIOR LOAN NOTES (a) - 4.7%
GERMANY - 0.8%
EUR
3,625,000 debitel (Netherlands) Holding BV
Second Lien Facility,
9.49%, 06/11/14 ............................ 4,449,404
debitel Konzernfinanzierungs GmbH
1,125,000 Term Facility B, 5.24%, 06/11/13 ........... 1,352,186
803,571 Term Facility C1, 5.74%, 06/11/14 .......... 968,041
321,429 Term Facility C2, 5.74%, 06/11/14 .......... 389,363
iesy Hessen GmbH & Co.
1,500,000 Facility B, 5.39%, 02/14/13 ................ 1,801,574
1,500,000 Facility C, 5.89%, 02/14/14 ................ 1,804,167
-------------
10,764,735
-------------
10 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
FOREIGN VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)
ITALY - 0.4%
EUR
Prysmian Cables & Systems, Inc.
1,923,077 Second Lien Term Loan,
9.44%, 01/20/15 ............................ 2,355,566
875,000 Euro Term Loan B,
5.07%, 08/04/12 ............................ 1,048,560
875,000 Euro Term Loan C2,
4.75%, 08/04/12 ............................ 1,048,435
576,923 Second Lien Tranche C Term Loan,
9.44%, 01/20/15 ............................ 706,670
-------------
5,159,231
-------------
NETHERLANDS - 0.2%
EUR
YBR Acquisition B.V.
1,250,000 Facility B2 Term Loan,
5.14%, 06/30/13 ............................ 1,514,173
1,250,000 Facility C2 Term Loan,
5.64%, 06/30/14 ............................ 1,516,006
-------------
3,030,179
-------------
SWITZERLAND - 0.2%
EUR
2,077,716 Merisant Co.
Tranche A (Euro) Term Loan,
5.79%, 01/11/09 ............................ 2,399,746
-------------
UNITED KINGDOM - 3.1%
GBP
Debenhams Finance Holdings PLC
1,500,000 Sterling Tranche B,
7.34%, 04/25/13 ............................ 2,612,798
1,500,000 Sterling Tranche C,
7.84%, 04/25/14 ............................ 2,618,367
Peacock Group (The)
2,250,000 Facility B, 7.33%, 10/30/13 ................ 3,974,795
2,250,000 Facility C, 7.83%, 10/30/14 ................ 3,974,795
3,125,000 PlayPower, Inc.
Add-on Term Loan,
7.63%, 12/18/09 ............................ 5,547,912
Red Football Ltd.
1,250,000 Facility B Term Loan,
7.85%, 05/11/13 ............................ 2,220,544
1,250,000 Facility C Term Loan,
8.35%, 05/11/14 ............................ 2,226,016
1,399,359 SunGard U K Holdings Ltd.
U K Term Loan, 7.13%, 02/11/13 2,464,402
3,938,551 Teesside Power Ltd.
Term Loan, 5.44%, 04/01/08 ................. 6,880,151
Trinitybrook PLC
2,500,000 Term Loan B1, 7.32%, 07/31/13 .............. 4,392,490
2,500,000 Term Loan C1, 7.32%, 07/31/14 .............. 4,402,691
-------------
41,314,961
-------------
Total Foreign Variable Rate Senior
Loan Notes
(Cost $62,214,205) ...................... 62,668,852
-------------
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
CORPORATE NOTES AND BONDS (g) - 0.0%
TRANSPORTATION - AUTO - 0.0%
Key Plastics Holdings, Inc.
63,642 Junior Secured Subordinated
Notes, 18.32%, 04/26/07 .................... 52,186
101,432 Senior Secured Subordinated
Notes, 7.00%, 04/26/07 ..................... 93,825
-------------
Total Corporate Notes and Bonds
(Cost $156,225) ......................... 146,011
-------------
SHARES
--------
COMMON STOCKS (h) - 1.1%
TELECOMMUNICATIONS - 0.0%
1,756 Eningen Realty (g) ............................ 0
33,727 SAVVIS Communications Corp. ................... 23,946
-------------
23,946
-------------
TRANSPORTATION - AUTO - 0.0%
3,445 Environmental Systems Products
Holdings (g) ............................... 0
-------------
UTILITIES - 0.8%
12,470 CenterPoint Energy, Inc. (g) .................. 126,695
439,003 Mirant Corp. .................................. 10,799,485
322,876 NATG Holdings LLC (g) ......................... 0
-------------
10,926,180
-------------
WIRELESS - CELLULAR/PCS - 0.3%
76,137 Leap Wireless International, Inc. ............. 3,206,129
-------------
Total Common Stocks
(Cost $8,943,166) ....................... 14,156,255
-------------
PREFERRED STOCK - 0.0%
MANUFACTURING - 0.0%
14,382 Superior Telecom, Inc., Series A .............. 12,225
-------------
AUTOMOTIVE - 0.0%
13 Key Plastics Holdings, Inc. (g) (h) ........... 0
-------------
Total Preferred Stock
(Cost $14,382) .......................... 12,225
-------------
UNITS
- -------------
WARRANTS (h) - 0.0%
GAMING/LEISURE - GAMING (g) - 0.0%
26,091 OpBiz LLC, expires 08/11/09 ................... 0
28 OpBiz LLC, expires 08/11/09 ................... 0
-------------
0
-------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
UNITS VALUE ($)
- ------------- -------------
WARRANTS (CONTINUED)
MANUFACTURING - 0.0%
4 GenTek, Inc., Class A expires
10/31/06 .................................. 31
-------------
Total Warrants
(Cost $20) ............................. 31
-------------
CLAIMS (I) - 0.1%
UTILITIES - 0.1%
28,000,000 Mirant Corp. .................................. 1,586,760
-------------
Total Claims
(Cost $0) ............................... 1,586,760
-------------
TOTAL INVESTMENTS - 99.5% ..................................... 1,319,933,849
(Cost of $1,307,699,361) (j) -------------
OTHER ASSETS & LIABILITIES, NET - 0.5% ........................ 7,249,258
-------------
NET ASSETS - 100.0% ........................................... 1,327,183,107
=============
- ----------
(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 (g), all senior loans
carry a variable rate interest). These base lending rates are generally
(i) the prime rate offered by one or more major United States banks, (ii)
the lending rate offered by one or more European banks such as the London
Inter-Bank Offered Rate ("LIBOR") or (iii) the certificate of deposit
rate. Rate shown represents the weighted average rate at February 28,
2006. 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 loans often require
prepayments from excess cash flow or permit the borrower to repay at its
election. The degree to which borrowers repay, whether as a contractual
requirement or at their election, cannot be predicted with accuracy. As a
result, the actual remaining maturity may be substantially less than the
stated maturities shown.
(b) All or a portion of this position has not settled. Contract rates do not
take effect until settlement date.
(c) Fixed rate senior loan
(d) The issuer is in default of certain debt covenants. Income is not being
accrued.
(e) Loans held on participation.
(f) Senior Loan Notes have additional unfunded loan commitments. See Note 9.
(g) Represents fair value as determined in good faith under the direction of
the Board of Trustees.
(h) Non-income producing security.
(i) Security is the result of company restructuring that will be converted to
equity upon the conclusion of court proceedings.
(j) Cost for Federal income tax purposes is $1,308,046,346.
CLEC Competitive Local Exchange Carrier
DE Delaware
DIP Debtor in Possession
EUR Euro Currency
GBP Great Britain Pound
FOREIGN VARIABLE SENIOR LOAN NOTES
INDUSTRY CONCENTRATION TABLE
(% of Total Net Assets)
Retail ................................ 1.7%
Manufacturing ......................... 0.8%
Wireless - Cellular/PCS ............... 0.5%
Utilities ............................. 0.5%
Gaming/Leisure - Other Leisure ........ 0.3%
Cable - International Cable ........... 0.3%
Diversified Media ..................... 0.2%
Information Technology ................ 0.2%
Food/Tobacco - Food/Tobacco
Producers ........................... 0.2%
---
4.7%
===
12 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 (UNAUDITED) HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
($)
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost $1,307,699,361) ................ 1,319,933,849
Cash ....................................................... 78,849,328
Foreign currency (Cost $11,912,817) ........................ 11,917,439
Receivable for:
Investments sold ........................................ 30,731,723
Interest and fees ....................................... 12,421,192
Other assets ............................................... 1,056
-------------
Total assets ......................................... 1,453,854,587
LIABILITIES:
Net discount and unrealized appreciation on unfunded
transactions (Note 9) .................................... 160,964
Payable for:
Investments purchased ................................... 125,982,485
Investment advisory fee (Note 4) ........................ 432,829
Trustees' fees (Note 4) ................................. 3,333
Accrued expenses and other liabilities ..................... 91,869
-------------
Total liabilities .................................... 126,671,480
-------------
NET ASSETS .................................................... 1,327,183,107
=============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2006 (UNAUDITED)
($)
- ------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest ................................................................................. 46,100,032
Dividends ................................................................................ 683
Facility and other fees .................................................................. 77,503
----------
Total investment income ............................................................... 46,178,218
EXPENSES
Investment advisory fee (Note 4) ......................................................... 2,625,484
Accounting services fee .................................................................. 179,207
Professional fees ........................................................................ 47,611
Trustees' fees (Note 4) .................................................................. 10,631
Custody fee .............................................................................. 52,032
Reports to shareholders .................................................................. 5,800
Texas franchise expense .................................................................. 126,081
Other expenses ........................................................................... 12,375
----------
Total operating expenses .............................................................. 3,059,221
Interest expense (Note 8) ................................................................ 114,563
Facility expense (Note 8) ................................................................ 148,128
----------
Net expenses .......................................................................... 3,321,912
----------
Net investment income .................................................................... 42,856,306
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments ......................................................... 3,302,503
Net realized loss on foreign currency transactions ....................................... (379,134)
Net change in unrealized appreciation on investments ..................................... 4,283,579
Net change in unrealized appreciation on unfunded transactions (Note 9) .................. 101,072
Net change in unrealized depreciation on translation of assets and liabilities denominated
in foreign currency .................................................................... (336,454)
----------
Net gain ................................................................................. 6,971,566
----------
Net increase in net assets from operations ............................................... 49,827,872
==========
14 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SIX MONTHS ENDED
FEBRUARY 28, 2006 YEAR ENDED
(UNAUDITED) AUGUST 31, 2005
($) ($)
------------------ ---------------
INCREASE IN NET ASSETS:
OPERATIONS
Net investment income ......................................................... 42,856,306 55,342,478
Net realized gain (loss) on investments and foreign currency transactions ..... 2,923,369 (155,500)
Net change in unrealized appreciation on investments, translation of assets and
liabilities denominated in foreign currency and unfunded transactions ...... 4,048,197 7,371,115
------------------ ---------------
Net increase from operations ............................................... 49,827,872 62,558,093
------------------ ---------------
TRANSACTIONS IN INVESTOR'S BENEFICIAL INTEREST
Contributions ................................................................. 337,884,585 401,269,018
Withdrawals ................................................................... (199,947,232) (220,779,725)
------------------ ---------------
Net increase from transactions in investor's beneficial interest ........... 137,937,353 180,489,293
------------------ ---------------
Total increase in net assets ............................................... 187,765,225 243,047,386
NET ASSETS
Beginning of period ........................................................... 1,139,417,882 896,370,496
------------------ ---------------
End of period ................................................................. 1,327,183,107 1,139,417,882
================== ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2006 (UNAUDITED)
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
($)
- -----------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND FOREIGN CURRENCY
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment income ............................................................... 42,856,306
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH USED FOR OPERATING ACTIVITIES
Purchase of investments securities ..................................................... (589,351,285)
Proceeds from disposition of investment securites ...................................... 398,502,964
Increase in interest and fees receivable ............................................... (4,564,644)
Increase in receivable for investments sold ............................................ (23,583,842)
Decrease in other assets ............................................................... 3,129
Decrease in deferred facility fees ..................................................... (78,593)
Net amortization of premium (discount) ................................................. (650,115)
Increase in payable for investments purchased ......................................... 33,280,069
Decrease in mark-to-market on realized and unrealized gain (loss) on foreign currency .. (715,588)
Increase in payable for accrued affiliated expenses ................................... 14,107
Decrease in other expenses and liabilities ............................................. (101,802)
------------
Net cash and foreign currency flow used for operating activities .................... (144,389,294)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from capital contributions .................................................... 337,884,585
Payment of capital withdrawals ......................................................... (199,947,232)
------------
Net cash flow provided by financing activities ...................................... 137,937,353
------------
Net decrease in cash and foreign currency ........................................... (6,451,941)
CASH AND FOREIGN CURRENCY
Beginning of the period ................................................................ 97,218,708
End of the period ...................................................................... 90,766,767
============
16 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SELECTED DATA FOR AN INTEREST OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2006
(UNAUDITED) 2005 2004 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA
Total return 4.22%(e) 6.54% 10.39% 11.68%(a) (2.20)% 5.15%
Operating expenses 0.52%(f) 0.51%(b) 0.52%(b) 0.57%(b) 0.55%(b) 0.53%(b)
Interest expense and facility
expense 0.04%(f) 0.05% --%(c) --%(c) 0.03% --%
Net expenses 0.56%(f) 0.56%(b) 0.52%(b) 0.57%(b) 0.58%(b) 0.53%(b)
Net investment income 7.21%(f) 5.69%(b) 4.45%(b) 5.96%(b) 6.42%(b(d) 8.94%(b)
Portfolio turnover rate 33%(e) 75% 97% 75% 70% 63%
- ----------
(a) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Portfolio's return.
(b) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(c) Rounds to less than 0.01%.
(d) Effective September 1, 2001, the Portfolio adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies and began
amortizing and accreting premium and discount on debt securities. The
effect of this change for the year ended August 31, 2002, was to increase
the ratio of net investment income to average net assets from 6.41% to
6.42%. Ratios and supplemental data for the periods prior to August 31,
2002 have not been restated to reflect this change in presentation.
(e) Not annualized.
(f) Annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 (UNAUDITED) HIGHLAND FLOATING RATE FUND
($)
- -----------------------------------------------------------------------------------------------------------------------
ASSETS:
Investment in Portfolio ........................................................................... 1,324,768,752
Receivable for Fund shares sold ................................................................... 7,560,060
Other assets ...................................................................................... 70,887
-------------
Total assets ................................................................................ 1,332,399,699
LIABILITIES:
Payable for:
Distributions .................................................................................. 3,309,473
Administration fee (Note 4) .................................................................... 111,427
Trustees' fees (Note 4) ........................................................................ 12,833
Distribution and service fees (Note 4) ......................................................... 510,247
Accrued expenses and other liabilities ............................................................ 207,451
-------------
Total liabilities ........................................................................... 4,151,431
-------------
NET ASSETS ........................................................................................... 1,328,248,268
=============
COMPOSITION OF NET ASSETS
Paid-in capital ................................................................................... 1,328,892,589
Overdistributed net investment income ............................................................. (252,657)
Accumulated net realized loss on investments and foreign currency transactions allocated from
Portolio ....................................................................................... (12,400,261)
Net unrealized appreciation on investments, translation of assets and liabilities denominated in
foreign currency and unfunded transactions allocated from Portfolio ............................ 12,008,597
-------------
NET ASSETS ........................................................................................... 1,328,248,268
=============
CLASS A
Net assets ........................................................................................ 507,372,329
Shares outstanding (unlimited shares authorized) .................................................. 51,126,846
Net asset value per share (Net assets/Shares outstanding) ......................................... 9.92(a)
Maximum offering price per share (100 / 96.50 of $9.92) ........................................... 10.28(b)
CLASS B
Net assets ........................................................................................ 160,157,754
Shares outstanding (unlimited shares authorized) .................................................. 16,145,690
Net asset value and offering price per share (Net assets/Shares outstanding) ...................... 9.92(a)
CLASS C
Net assets ........................................................................................ 466,590,208
Shares outstanding (unlimited shares authorized) .................................................. 47,036,688
Net asset value and offering price per share (Net assets/Shares outstanding) ...................... 9.92(a)
CLASS Z
Net assets ........................................................................................ 194,127,977
Shares outstanding (unlimited shares authorized) .................................................. 19,570,575
Net asset value, offering and redemption price per share (Net assets/Shares outstanding) .......... 9.92
- ----------
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $100,000 or more, the offering price is reduced.
18 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2006 (UNAUDITED)
HIGHLAND FLOATING RATE FUND
($)
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO (NOTE 1)
Interest .......................................................................................... 45,066,276
Dividends ......................................................................................... 658
Facility and other fees ........................................................................... 74,958
-----------
Total investment income allocated from Portfolio ............................................ 45,141,892
EXPENSES
Net operating expense allocated from Portfolio (Note 1) ........................................... 2,865,064
Administration fee (Note 4) ....................................................................... 1,162,313
Distribution fee (Note 4):
Class A ........................................................................................ 207,956
Class B ........................................................................................ 361,563
Class C ........................................................................................ 1,196,057
Service fee (Note 4):
Class A ........................................................................................ 519,890
Class B ........................................................................................ 200,868
Class C ........................................................................................ 498,357
Transfer agent fee ................................................................................ 366,834
Professional fees ................................................................................. 41,012
Accounting services fee ........................................................................... 7,326
Trustees' fees (Note 4) ........................................................................... 38,250
Custody fee ....................................................................................... 700
Registration fees ................................................................................. 33,000
Reports to shareholders ........................................................................... 162,119
Texas franchise expense allocated from Portfolio (Note 1) ......................................... 121,540
Other expenses .................................................................................... 218,662
-----------
Total operating expenses .................................................................... 8,001,511
-----------
Interest expense allocated from Portfolio (Note 8) ................................................ 110,273
Facility expense allocated from Portfolio (Note 8) ................................................ 144,915
-----------
Total expenses .............................................................................. 8,256,699
Fees and expenses waived or reimbursed by Investment Adviser (Note 4) ............................. (246,026)
-----------
Net expenses ................................................................................ 8,010,673
-----------
Net investment income ............................................................................. 37,131,219
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ALLOCATED FROM PORTFOLIO (NOTE 1)
Net realized gain on investments .................................................................. 3,147,384
Net realized loss on foreign currency transactions ................................................ (374,843)
Net change in unrealized appreciation on investments .............................................. 4,384,949
Net change in unrealized appreciation on unfunded transactions .................................... 103,180
Net change in unrealized depreciation on translation of assets and liabilities denominated in
foreign currency ............................................................................... (320,564)
-----------
Net gain .......................................................................................... 6,940,106
-----------
Net increase in net assets from operations ........................................................ 44,071,325
===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2006 YEAR ENDED
(UNAUDITED) AUGUST 31, 2005
($) ($)
----------------- ---------------
INCREASE IN NET ASSETS:
OPERATIONS
Net investment income ............................................................... 37,131,219 44,426,514
Net realized gain (loss) on investments and foreign currency transactions allocated
from Portfolio ................................................................... 2,772,541 (177,535)
Net change in unrealized appreciation on investments, translation of assets and
liabilities denominated in foreign currency and unfunded transactions allocated
from Portfolio ................................................................... 4,167,565 7,005,353
----------------- ---------------
Net increase from operations ..................................................... 44,071,325 51,254,332
----------------- ---------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income:
Class A .......................................................................... (13,951,773) (13,226,644)
Class B .......................................................................... (5,108,998) (8,228,190)
Class C .......................................................................... (12,364,301) (13,491,196)
Class Z .......................................................................... (6,592,086) (8,949,145)
----------------- ---------------
Total distributions declared to Shareholders ..................................... (38,017,158) (43,895,175)
----------------- ---------------
SHARE TRANSACTIONS
Class A
Subscriptions .................................................................... 187,632,361 194,284,743
Distributions reinvested ......................................................... 7,180,190 8,414,712
Redemptions ...................................................................... (45,727,909) (71,078,183)
----------------- ---------------
Net increase ..................................................................... 149,084,642 131,621,272
Class B
Subscriptions .................................................................... 120,787 5,874,003
Distributions reinvested ......................................................... 2,997,338 4,892,459
Redemptions ...................................................................... (13,503,632) (33,620,192)
----------------- ---------------
Net decrease ..................................................................... (10,385,507) (22,853,730)
Class C
Subscriptions .................................................................... 121,509,924 152,460,394
Distributions reinvested ......................................................... 6,402,112 8,018,612
Redemptions ...................................................................... (30,255,810) (74,887,937)
----------------- ---------------
Net increase ..................................................................... 97,656,226 85,591,069
Class Z
Subscriptions .................................................................... 39,228,149 97,758,278
Distributions reinvested ......................................................... 2,087,977 2,265,809
Redemptions ...................................................................... (40,578,094) (48,412,070)
----------------- ---------------
Net increase ..................................................................... 738,032 51,612,017
----------------- ---------------
Net increase from share transactions ............................................. 237,093,393 245,970,628
----------------- ---------------
Total increase in net assets ..................................................... 243,147,560 253,329,785
----------------- ---------------
NET ASSETS
Beginning of period ................................................................. 1,085,100,708 831,770,923
End of period (including undistributed and (overdistributed) net investment income
of $(252,657) and $633,282, respectively) ........................................ 1,328,248,268 1,085,100,708
================= ===============
20 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2006 YEAR ENDED
(UNAUDITED) AUGUST 31, 2005
----------------- ---------------
CHANGE IN SHARES
Class A
Subscriptions .................................................................... 18,983,957 19,770,029
Issued for distributions reinvested .............................................. 726,301 856,198
Redemptions ...................................................................... (4,626,398) (7,239,210)
----------------- ---------------
Net increase ..................................................................... 15,083,860 13,387,017
Class B
Subscriptions .................................................................... 12,224 597,890
Issued for distributions reinvested .............................................. 303,326 497,995
Redemptions ...................................................................... (1,366,002) (3,425,945)
----------------- ---------------
Net decrease ..................................................................... (1,050,452) (2,330,060)
Class C
Subscriptions .................................................................... 12,294,824 15,517,260
Issued for distributions reinvested .............................................. 647,835 816,243
Redemptions ...................................................................... (3,062,330) (7,624,801)
----------------- ---------------
Net increase ..................................................................... 9,880,329 8,708,702
Class Z
Subscriptions .................................................................... 3,970,142 9,948,182
Issued for distributions reinvested .............................................. 211,291 230,667
Redemptions ...................................................................... (4,107,095) (4,924,398)
----------------- ---------------
Net increase ..................................................................... 74,338 5,254,451
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 21
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2006
CLASS A SHARES (UNAUDITED) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.88 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.32 0.49 0.37 0.48 0.54(b) 0.81
Net realized and unrealized gain (loss)
allocated from Portfolio(a) 0.05 0.08 0.52 0.46 (0.79)(b) (0.37)
========== ========= ========= ========== ========= =========
Total from investment operations 0.37 0.57 0.89 0.94 (0.25) 0.44
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.33) (0.49) (0.38) (0.48) (0.54) (0.82)
From net realized gains -- -- -- -- --(c) --(c)
========== ========= ========= ========== ========= =========
Total distributions declared to
shareholders (0.33) (0.49) (0.38) (0.48) (0.54) (0.82)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 9.92 $ 9.88 $ 9.80 $ 9.29 $ 8.83 $ 9.62
Total return(d)(e) 3.79%(f) 5.93% 9.65% 11.03%(h) (2.67)% 4.56%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.17%(g) 1.15% 1.15% 1.15% 1.15% 1.15%
Interest expense & facility expense
allocated from Portfolio 0.04%(g) 0.05% --%(i) --%(i) 0.03% --%
Net expenses(j) 1.21%(g) 1.20% 1.15% 1.15% 1.18% 1.15%
Net investment income 6.55%(g) 5.05% 3.78% 5.39% 5.83%(b) 8.28%
Waiver/reimbursement 0.04%(g) 0.08% 0.17% 0.28% 0.28% 0.18%
Net assets, end of period (000's) $ 507,372 $ 355,998 $ 222,032 $ 97,924 $ 108,583 $ 138,058
- ----------
(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) Not annualized.
(g) Annualized.
(h) 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.
(i) Rounds to less than 0.01%.
(j) Net expense ratio has been calculated after applying any
waiver/reimbursement.
22 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2006
CLASS B SHARES (UNAUDITED) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.30 0.46 0.34 0.45 0.51(b) 0.77
Net realized and unrealized gain (loss)
allocated from Portfolio(a) 0.06 0.06 0.51 0.46 (0.79)(b) (0.37)
========== ========= ========= ========== ========= =========
Total from investment operations 0.36 0.52 0.85 0.91 (0.28) 0.40
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.31) (0.45) (0.34) (0.45) (0.51) (0.78)
From net realized gains -- -- -- -- --(c) --(c)
========== ========= ========= ========== ========= =========
Total distributions declared to (0.31) (0.45) (0.34) (0.45) (0.51) (0.78)
shareholders
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 9.92 $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62
Total return(d)(e) 3.72%(f) 5.46% 9.27% 10.65%(h) (3.02)% 4.19%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.52%(g) 1.50% 1.50% 1.50% 1.50% 1.50%
Interest expense & facility expense
allocated from Portfolio 0.04%(g) 0.05% --%(i) --%(i) 0.03% --%
Net expenses(j) 1.56%(g) 1.55% 1.50% 1.50% 1.53% 1.50%
Net investment income 6.20%(g) 4.70% 3.51% 5.05% 5.48%(b) 7.93%
Waiver/reimbursement 0.04%(g) 0.08% 0.17% 0.28% 0.28% 0.18%
Net assets, end of period (000's) $ 160,158 $ 169,780 $ 191,365 $ 163,448 $ 174,707 $ 195,891
- ----------
(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) Not annualized.
(g) Annualized.
(h) 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.
(i) Rounds to less than 0.01%.
(j) Net expense ratio has been calculated after applying any
waiver/reimbursement.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2006
CLASS C SHARES (UNAUDITED) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.30 0.45 0.32 0.44 0.50(b) 0.76
Net realized and unrealized gain
(loss) allocated from Portfolio(a) 0.05 0.06 0.52 0.46 (0.79)(b) (0.37)
========== ========= ========= ========== ========= =========
Total from investment operations 0.35 0.51 0.84 0.90 (0.29) 0.39
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.30) (0.44) (0.33) (0.44) (0.50) (0.77)
From net realized gains -- -- -- -- --(c) --(c)
========== ========= ========= ========== ========= =========
Total distributions declared to (0.30) (0.44) (0.33) (0.44) (0.50) (0.77)
shareholders
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 9.92 $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62
Total return(d)(e) 3.64%(f) 5.30% 9.10% 10.48%(h) (3.16)% 4.04%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.67%(g) 1.65% 1.65% 1.65% 1.65% 1.65%
Interest expense & facility expense
allocated from Portfolio 0.04%(g) 0.05% --%(i) --%(i) 0.03% --%
Net expenses(j) 1.71%(g) 1.70% 1.65% 1.65% 1.68% 1.65%
Net investment income 6.05%(g) 4.55% 3.28% 4.88% 5.33%(b) 7.78%
Waiver/reimbursement 0.04%(g) 0.08% 0.17% 0.28% 0.28% 0.18%
Net assets, end of period (000's) $ 466,590 $ 366,841 $ 278,797 $ 132,656 $ 137,098 $ 184,399
- ----------
(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) Not annualized.
(g) Annualized.
(h) 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.
(i) Rounds to less than 0.01%.
(j) Net expense ratio has been calculated after applying any
waiver/reimbursement.
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,
----------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2006
CLASS Z SHARES (UNAUDITED) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.34 0.53 0.40 0.50 0.57(b) 0.84
Net realized and unrealized gain (loss)
allocated from Portfolio(a) 0.06 0.06 0.52 0.47 (0.78)(b) (0.37)
========== ========= ========= ========== ========= =========
Total from investment operations 0.40 0.59 0.92 0.97 (0.21) 0.47
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.35) (0.52) (0.41) (0.51) (0.58) (0.85)
From net realized gains -- -- -- -- --(c) --(c)
========== ========= ========= ========== ========= =========
Total distributions declared to (0.35) (0.52) (0.41) (0.51) (0.58) (0.85)
shareholders
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 9.92 $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62
Total return (d)(e) 4.08%(f) 6.20% 10.03% 11.42%(h) (2.33)% 4.89%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 0.82%(g) 0.80% 0.80% 0.80% 0.80% 0.80%
Interest expense & facility expense
allocated from Portfolio 0.04%(g) 0.05% --%(i) --%(i) 0.03% --%
Net expenses(j) 0.86%(g) 0.85% 0.80% 0.80% 0.83% 0.80%
Net investment income 6.90%(g) 5.40% 4.12% 5.53% 6.18%(b) 8.63%
Waiver/reimbursement 0.04%(g) 0.08% 0.17% 0.28% 0.28% 0.18%
Net assets, end of period (000's) $ 194,128 $ 192,482 $ 139,577 $ 31,055 $ 13,236 $ 11,662
- ----------
(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) Not annualized.
(g) Annualized.
(h) 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.
(i) Rounds to less than 0.01%.
(j) Net expense ratio has been calculated after applying any
waiver/reimbursement.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 25
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 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
February 28, 2006, the Fund and Highland Institutional Floating Rate Income Fund
were the sole investors in the Portfolio and owned 99.8% and 0.2%, 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
26
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE FUND
the judgment of the Board of Trustees or its designee instead of being
determined by the market. Using a fair value pricing methodology to price
securities may result in a value that is different from a security's most recent
sale price and from the prices used by other investment companies to calculate
their net asset values. There can 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.
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 and gains, 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.
27
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 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.
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 most recent tax year end, 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.
Portfolio unrealized appreciation and depreciation at February 28, 2006, based
on cost of investments for federal income tax purposes, and excluding any
unrealized appreciation and depreciation from changes in the value of other
assets and liabilities resulting from changes in exchange rates, was:
- --------------------------------------------------------------------------------
Unrealized appreciation $ 22,550,123
Unrealized depreciation (10,662,620)
------------
Net unrealized appreciation $ 11,887,503
============
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, AND TRUSTEE FEES
INVESTMENT ADVISORY FEE
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%
- --------------------------------------------------------------------------------
For the six months ended February 28, 2006, the Portfolio's effective investment
advisory fee rate was 0.44%.
ADMINISTRATION FEES
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"). Highland pays PFPC
directly for these services.
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 six months ended
February 28, 2006, the Distributor received $21,736, $86,390 and $28,816 of CDSC
on Class A, Class B and Class C share redemptions, respectively.
28
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE FUND
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 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.
FEES PAID TO OFFICERS AND TRUSTEES
The Fund pays no compensation to its one interested Trustee or to any of its
other 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 six months ended February 28, 2006, the cost of purchases and proceeds
from sales of securities, excluding short-term obligations, were $589,351,285
and $398,502,964, respectively.
NOTE 6. PERIODIC REPURCHASE OFFERS
The Fund has adopted a fundamental policy to offer each calendar quarter to
repurchase a specified percentage (between 5% and 25%) of the shares then
outstanding at NAV ("Repurchase Offers"). Repurchase Offers are scheduled to
occur on or about the 15th day (or the next business day if the 15th is not a
business day) in the months of March, June, September, and December. It is
anticipated that normally the date on which the repurchase price of shares will
be determined (the "Repurchase Pricing Date") will be the same date as the
deadline for shareholders to provide their repurchase requests to the
Distributor (the "Repurchase Request Deadline"), and if so, the Repurchase
Request Deadline will be set for a time no later than the close of regular
trading on the NYSE on such date. The Repurchase Pricing Date will occur no
later than the 14th day after the Repurchase Request Deadline, or the next
business day if the 14th day is not a business day. Repurchase proceeds will be
paid to shareholders no later than seven days after the Repurchase Pricing Date.
For the six months ended February 28, 2006, there were two Repurchase Offers.
For each Repurchase Offer, the Fund offered to repurchase 10% of its shares. In
the September and December Repurchase Offers, 4.65% and 6.38%, respectively, of
shares outstanding were repurchased.
NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS
The Portfolio invests at least 80% of its net assets (plus any borrowings for
investment purposes) in adjustable rate senior loans ("Senior Loans") the
interest rates of which float or vary periodically based upon a benchmark
indicator of prevailing interest rates to domestic foreign corporations,
partnerships and other entities ("Borrowers"). If the lead lender in a typical
lending syndicate becomes insolvent, enters FDIC receivership or, if not FDIC
insured enters into bankruptcy, the Portfolio may incur certain costs and delays
in receiving payment or may suffer a loss of principal and/or interest. When the
Portfolio purchases a participation of a Senior Loan interest, the Portfolio
typically enters into a contractual agreement with the lender or other third
party selling the participation, not with the borrower directly. As such, the
Portfolio assumes the credit risk of the Borrower, selling participant or other
persons interpositioned between the Portfolio and the Borrower. The ability of
Borrowers to meet their obligations may be affected by economic developments in
a specific industry.
At February 28, 2006, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Portfolio on a
participation basis.
29
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE FUND
Principal
Selling Participant Amount Value
- --------------------------------------------------------------------------------
Goldman Sachs:
Bridge Information Systems, Inc.
Multidraw Term Loan $ 484,353 $ 7,265
- --------------------------------------------------------------------------------
CSFB:
Quality Distribution, Inc.
Term Loan 2,716,252 2,729,833
- --------------------------------------------------------------------------------
NOTE 8. LINE OF CREDIT
On September 13, 2004, the Portfolio entered into a $150,000,000 credit
facility, which was amended on September 12, 2005 to $200,000,000, 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 six months ended February 28, 2006, the average daily loan balance
outstanding on days where borrowings existed was $34,000,000 at a weighted
average interest rate of 6.74%.
Interest expense allocated to the Fund of $110,273 was paid for use of the line
of credit and is included on the Statement of Operations.
NOTE 9. UNFUNDED LOAN COMMITMENTS
As of February 28, 2006, the Portfolio had unfunded loan commitments of
$28,616,386, which could be extended at the option of the Borrower, pursuant to
the following loan agreements:
- --------------------------------------------------------------------------------
Unfunded
Loan
Borrower Commitment
- --------------------------------------------------------------------------------
Centennial Cellular Operating Co. $ 2,250,000
- --------------------------------------------------------------------------------
Covanta Energy Corp. 1,000,000
- --------------------------------------------------------------------------------
Cricket Communications, Inc. 5,000,000
- --------------------------------------------------------------------------------
DeCrane Aircraft Holdings, Inc. 1,000,000
- --------------------------------------------------------------------------------
Dobson Cellular Systems, Inc. 625,000
- --------------------------------------------------------------------------------
Eastman Kodak Co. 2,411,764
- --------------------------------------------------------------------------------
Federal-Mogul Corp. 102,746
- --------------------------------------------------------------------------------
Flatiron Re Ltd. 1,794,737
- --------------------------------------------------------------------------------
Hertz Corp. 520,889
- --------------------------------------------------------------------------------
Infor Global Solutions European
Finance S.A.R.L. 1,170,000
- --------------------------------------------------------------------------------
Interstate Bakeries Corp. 7,500,000
- --------------------------------------------------------------------------------
Trump Entertainment Resorts, Inc. 1,741,250
- --------------------------------------------------------------------------------
United Airlines, Inc. 3,500,000
- --------------------------------------------------------------------------------
$ 28,616,386
=============
- --------------------------------------------------------------------------------
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.
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.
FOREIGN SECURITIES
Investments in foreign securities may involve special risks compared to
investing in securities of U.S. issuers. These risks are more pronounced to the
extent that the Portfolio invests a significant portion of its non-U.S.
investment in one region or in the securities of emerging market issuers. These
risk may include (i) less information about non-U.S. issuers or markets being
available due to less rigorous disclosure, accounting standards or
30
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE FUND
regulatory requirements; (ii) many non-U.S. markets are smaller, less liquid and
more volitile and the Adviser may not be able to sell the Portfolio's securities
at times, in amounts and at prices it considers reasonable; (iii) the ecomomies
of non-U.S. markets may grow at slower rates than expected or may experience a
downturn or recession; and (iv) witholdings and other non-U.S. taxes may
decrease the Fund's returns.
31
IMPORTANT INFORMATION ABOUT THIS REPORT
- --------------------------------------------------------------------------------
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.
32
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND Semi-Annual Report, February 28, 2006
[HIGHLAND FUNDS LOGO]
www.highlandfunds.com SEMIFRF
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not yet applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required by
this paragraph, based on their evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) HIGHLAND FLOATING RATE FUND
--------------------------------------------------------------------
By (Signature and Title)* /S/ JAMES D. DONDERO
-------------------------------------------------------
James D. Dondero, Chief Executive Officer
(principal executive officer)
Date APRIL 26, 2006
----------------------------------------------------------------------------
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 APRIL 26, 2006
----------------------------------------------------------------------------
By (Signature and Title)* /S/ M. JASON BLACKBURN
-------------------------------------------------------
M. Jason Blackburn, Chief Financial Officer
(principal financial officer)
Date APRIL 26, 2006
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.