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 811-09709
----------------------------
Highland Floating Rate Advantage Fund
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
13455 Noel Road, Suite 1300
Dallas, Texas 75240
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
James D. Dondero
Highland Capital Management, L.P.
13455 Noel Road, Suite 1300
Dallas, Texas 75240
- --------------------------------------------------------------------------------
(Name and address of agent for service)
registrant's telephone number, including area code: (877) 532-2834
---------------
Date of fiscal year end: AUGUST 31
----------
Date of reporting period: FEBRUARY 28, 2006
------------------
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
managed by Highland Capital Management, L.P.
HIGHLAND FLOATING RATE ADVANTAGE FUND
SEMI-ANNUAL REPORT
FEBRUARY 28, 2006
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
TABLE OF CONTENTS
Fund Profile .............................................................. 1
Financial Statements ...................................................... 2
Investment Portfolio .................................................. 3
Statement of Assets and Liabilities ................................... 13
Statement of Operations ............................................... 14
Statements of Changes in Net Assets ................................... 15
Statement of Cash Flows ............................................... 17
Financial Highlights .................................................. 18
Notes to Financial Statements ......................................... 22
Important Information About This Report ................................... 28
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
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
OBJECTIVE
To provide a high level of current income consistent with preservation of
capital.
TOTAL NET ASSETS
(AS OF 02/28/06)
$1,236.4 million
The information below gives you a snapshot of your Fund at the end of the
reporting period. Your Fund is actively managed and the composition of its
portfolio will change over time.
QUALITY BREAKDOWN AS OF 02/28/06 (%)
Ba 16.0
- -------------------------------
B 62.8
- -------------------------------
Caa 6.5
- -------------------------------
NR 14.7
- -------------------------------
TOP 5 SECTORS AS OF 02/28/06 (%)
Cable 11.0
- -------------------------------
Utilities 9.5
- -------------------------------
Retail 8.8
- -------------------------------
Housing 7.8
- -------------------------------
Telecommunications 6.9
- -------------------------------
TOP 10 HOLDINGS AS OF 02/28/06 (%)
Georgia-Pacific Corp., First Lien Term Loan, 02/14/13 2.2
- ------------------------------------------------------------------------------------
Blockbuster Entertainment Corp., Tranche B Term Loan, 8.73%, 08/20/11 2.1
- ------------------------------------------------------------------------------------
Home Interiors & Gifts, Inc., Initial Term Loan, 9.81%, 03/31/11 2.0
- ------------------------------------------------------------------------------------
United Air Lines, Inc., Tranche B Term Loan, 8.63%, 02/01/12 2.0
- ------------------------------------------------------------------------------------
DS Waters Enterprises LP, Term Loan, 9.03%, 11/07/09 1.9
- ------------------------------------------------------------------------------------
Millennium Digital Media Systems LLC, Facility B Term Loan, 10/31/08 1.7
- ------------------------------------------------------------------------------------
Georgia-Pacific Corp., Second Lien Term Loan, 02/14/14 1.7
- ------------------------------------------------------------------------------------
Charter Communications Operating LLC, Tranche B Term Loan, 7.92%, 04/07/11 1.6
- ------------------------------------------------------------------------------------
NRG Energy, Inc., Term Loan, 6.57%, 02/01/13 1.3
- ------------------------------------------------------------------------------------
Resorts International Holdings Ltd., Second Lien Term Loan, 12.03%, 04/26/13 1.2
- ------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
A GUIDE TO UNDERSTANDING YOUR FUND'S FINANCIAL STATEMENTS
INVESTMENT PORTFOLIO The Investment Portfolio details all of the Fund's
holdings and their market value as of the last day of
the reporting period. Portfolio holdings are organized
by type of asset and industry to demonstrate areas of
concentration and diversification.
STATEMENT OF ASSETS AND This statement details the Fund's assets, liabilities,
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 These statements demonstrate how the Fund's net assets
IN 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 Statements 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 These notes disclose the organizational background of
STATEMENTS 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 ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
SENIOR LOAN NOTES (A) - 115.0%
AEROSPACE - AEROSPACE/DEFENSE - 1.2%
7,980,000 DeCrane Aircraft Holdings, Inc.
First Lien Term Loan,
8.78%, 03/31/08 ........................... 8,009,925
IAP Worldwide Services, Inc.
2,000,000 First Lien Term Loan,
7.63%, 12/30/12 ........................... 2,027,500
1,500,000 Second Lien Term Loan,
12.63%, 06/20/13 .......................... 1,538,130
2,971,765 Vought Aircraft Industries, Inc.
Term Loan, 7.11%, 12/22/11 ................ 2,999,254
-------------
14,574,809
-------------
AEROSPACE - AIRLINES - 2.8%
997,481 American Airlines, Inc.
Term Facility, 9.79%, 12/17/10 ............ 1,014,518
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
Northwest Airlines, Inc.
3,000,000 Tranche A Term Loan,
11/23/09 (b) .............................. 3,045,000
2,000,000 Tranche C Term Loan,
10.82%, 11/23/10 .......................... 2,035,000
24,500,000 United Air Lines, Inc.
Tranche B Term Loan,
8.63%, 02/01/12 ........................... 24,949,330
-------------
34,096,348
-------------
BROADCASTING - 2.3%
1,000,000 Enterprise NewsMedia LLC
Term Loan, 7.53%, 06/30/12 ................ 1,012,500
1,000,000 NextMedia Operating, Inc.
Second Lien Term Loan,
9.07%, 11/15/13 ........................... 1,017,500
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
11,985,000 Young Broadcasting, Inc.
Term Loan, 6.81%, 11/03/12 (b) ............ 12,030,063
-------------
28,119,372
-------------
CABLE - INTERNATIONAL CABLE - 2.3%
4,991,627 Adelphia Communications Corp.
Tranche B DIP Term Loan,
6.88%, 03/31/06 ........................... 5,016,585
2,000,000 Liberty Cablevision of Puerto
Rico, Ltd.
Term Loan, 02/13/13 (b) ................... 2,020,000
5,000,000 NTL Investment Holdings Ltd.
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 ........................... 2,997,694
San Juan Cable, LLC
2,500,000 First Lien Term Loan,
9.94%, 10/31/12 ........................... 2,531,250
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
CABLE - INTERNATIONAL CABLE (continued)
San Juan Cable, LLC (continued)
2,500,000 Second Lien Term Loan,
6.44%, 10/31/13 ........................... 2,515,100
UPC Broadband Holding BV
6,965,000 Facility F2, 8.03%, 03/31/09 .............. 7,055,545
1,500,000 Facility H2, 7.28%, 09/30/12 .............. 1,515,420
-------------
28,679,694
-------------
CABLE - US CABLE - 8.4%
2,500,000 Atlantic Broadband Finance LLC
Tranche B-1 Term Loan,
7.20%, 09/01/11 ........................... 2,546,875
3,500,000 Bresnan Communications LLC
Tranche B Term Loan,
8.07%, 09/30/10 ........................... 3,542,420
6,386,250 Cebridge Connections, Inc.
Second Lien Term Loan,
10.43%, 02/23/10 .......................... 6,641,700
Century Cable Holdings LLC
1,000,000 Discretionary Term Loan,
9.50%, 12/31/09 ........................... 985,000
2,500,000 Revolver, 8.50%, 03/31/09 ................. 2,433,600
15,833,333 Term Loan, 9.50%, 06/30/09 (b) ............ 15,552,292
Charter Communications
Operating LLC
4,993,791 Tranche A Term Loan,
7.67%, 04/27/10 ........................... 5,020,758
19,825,471 Tranche B Term Loan,
7.92%, 04/07/11 (b) ....................... 20,045,137
5,549,406 Knology, Inc.
Second Lien Term Loan,
14.66%, 06/29/11 .......................... 6,048,852
3,447,697 Mediacom Broadband Group
Tranche C Term Loan,
6.69%, 09/30/10 ........................... 3,493,206
1,980,000 Mediacom Illiniois, LLC
Tranche B Term Loan,
6.79%, 03/31/13 ........................... 2,007,225
Northland Cable Television, Inc.
5,000,000 First Lien Term Loan B,
10.50%, 12/22/12 .......................... 5,012,500
6,000,000 Second Lien Term Loan,
14.00%, 06/22/13 .......................... 6,000,000
Olympus Cable Holdings LLC
9,000,000 Term Loan A, 8.75%, 06/30/10 (b) .......... 8,830,440
7,000,000 Term Loan B, 9.50%, 09/30/10 .............. 6,892,830
1,985,000 Rainbow National Services LLC
Term Loan B, 7.38%, 03/31/12 .............. 2,012,552
6,385,020 WideOpenWest LLC
Term Loan B, 7.55%, 06/22/11 .............. 6,404,941
-------------
103,470,328
-------------
CHEMICALS - COMMODITY & FERTILIZER - 1.0%
5,515,382 Celanese
Dollar Term Loan B,
6.53%, 04/06/11 ........................... 5,583,828
1,533,694 Cognis Corp.
Dollar Facility B,
7.42%, 03/31/12 ........................... 1,553,509
5,109,635 Huntsman International LLC
Term B Dollar Loan,
6.32%, 08/16/12 ........................... 5,143,359
-------------
12,280,696
-------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 3
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
SENIOR LOAN NOTES (CONTINUED)
CHEMICALS - SPECIALTY CHEMICALS - 3.4%
Basell BV
250,000 Facility B4 USD, 7.31%, 08/01/13 .......... 253,710
250,000 Facility C4 USD, 7.67%, 08/01/14 .......... 253,710
Basell USA, Inc.
1,250,001 Facility B2, 7.67%, 08/01/13 .............. 1,267,264
1,250,000 Facility C2, 7.67%, 08/01/14 .............. 1,269,825
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
1,000,000 Second Lien Dollar Facility,
11.07%, 06/22/15 .......................... 1,030,380
Ineos US Finance LLC
2,000,000 Term Loan A4, 6.83%, 12/14/12 ............. 1,998,440
7,500,000 Term Loan B2, 6.83%, 12/14/13 (b) ......... 7,603,200
7,500,000 Term Loan C2, 7.33%, 12/14/14 (b) ......... 7,576,275
4,500,000 ISP Chemco, Inc.
Term Loan, 02/16/13 (b) ................... 4,542,210
3,934,072 Kraton Polymers Group of Cos.
Term Loan, 7.02%, 12/23/10 ................ 3,993,083
Nalco Co.
718,174 Tranche A-1 Term Loan,
7.07%, 11/04/09 ........................... 723,560
2,061,824 Tranche B Term Loan,
6.34%, 11/04/10 ........................... 2,087,452
6,455,000 Rockwood Specialties Group, Inc.
Tranche E Term Loan,
6.67%, 07/30/12 (b) ....................... 6,543,756
-------------
42,199,451
-------------
CONSUMER DURABLES - 0.6%
4,000,000 Rexair LLC
Second Lien Term Loan,
11.69%, 06/30/11 .......................... 4,000,000
Ruby Cone I AB
2,000,000 Facility B1 Term Loan, 7.50%, 06/01/13 .... 2,008,500
1,633,901 Facility C1 Term Loan, 7.50%, 06/01/14 .... 1,646,156
-------------
7,654,656
-------------
CONSUMER NON-DURABLES - OTHER NON-DURABLES - 5.4%
2,772,516 American Achievement Corp.
Tranche B Term Loan, 6.92%, 09/29/12 ...... 2,821,035
2,000,000 Amscan Holdings
Term Loan B, 7.77%, 12/23/12 .............. 1,982,500
23,971,390 DS Waters Enterprises LP
Term Loan, 9.03%, 11/07/09 (b) ............ 23,252,248
12,561,765 Eastman Kodak Co.
Term B-1 Advance, 6.72%, 10/18/12 (b) ..... 12,703,838
5,649,375 Hillman Group, Inc.
Term Loan B, 7.69%, 03/31/11 .............. 5,744,736
1,000,000 Jarden Corp
Term Loan B1, 01/24/12 (b) ................ 1,011,150
1,970,000 Kranson Industries, Inc.
Term Loan, 7.28%, 07/30/11 ................ 1,994,625
2,000,000 MD Beauty, Inc.
Second Lien Term Loan, 11.67%, 02/18/13 ... 2,023,760
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
CONSUMER NON-DURABLES - OTHER NON-DURABLES
(CONTINUED)
1,970,800 Polaroid Corp.
Term Loan, 11.63%, 04/27/11 ............... 1,975,727
2,942,575 Prestige Brands Holdings, Inc.
Tranche B Term Loan, 7.24%, 04/06/11 ...... 2,977,533
2,875,000 Revlon Consumer Products Corp.
Term Loan, 10.50%, 07/09/10 ............... 2,962,458
4,870,152 Solo Cup, Inc.
Term B1 Loan, 7.03%, 02/27/11 ............. 4,919,730
Technical Concepts, LLC
952,381 U. S. Dollar Term Loan A,
7.82%, 02/15/11 ........................... 953,571
863,095 U. S. Dollar Term Loan B,
6.07%, 02/15/13 ........................... 864,174
-------------
66,187,085
-------------
CONSUMER NON-DURABLES - TEXTILES - 0.4%
2,000,000 Camelbak Products, Inc.
Second Lien Term Loan,
6.50%, 02/04/12 ........................... 1,920,000
2,962,121 Levi Strauss & Co.
Tranche A Term Loan,
11.52%, 09/29/09 .......................... 3,051,725
-------------
4,971,725
-------------
DIVERSIFIED MEDIA - 4.8%
1,772,946 Adams Outdoor Advertising LP
Term Loan, 6.62%, 10/15/11 ................ 1,798,795
5,964,375 American Lawyer Media Holdings, Inc.
First Lien Term Loan, 7.03%, 03/05/10 ..... 5,979,286
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
1,963,873 Herald Media, Inc.
First Lien Term Loan, 7.28%, 07/22/11 ..... 1,973,083
5,500,000 HIT Entertainment PLC
Second Lien Term Loan, 9.97%, 02/26/13 .... 5,552,140
4,000,000 Merrill Communications LLC
Combined Term Loan, 6.86%, 05/15/11 ....... 4,040,640
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.
1,000,000 First Lien Tranche B Term Loan,
7.78%, 05/19/11 ........................... 995,000
3,000,000 Second Lien Term Loan, 12.03%, 11/18/11 ... 2,985,000
2,500,000 PBI Media, Inc.
Second Lien Term Loan, 10.67%, 09/30/13 ... 2,464,600
6,000,000 PRIMEDIA, Inc.
Term Loan B, 09/30/13 (b) ................. 5,943,000
1,000,000 R H Donnelley, Inc.
Tranche D-1 Term Loan, 6.01%, 06/30/11 .... 1,005,620
4 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
SENIOR LOAN NOTES (CONTINUED)
DIVERSIFIED MEDIA (CONTINUED)
6,422,391 Six Flags Theme Parks, Inc.
Tranche B Term Loan, 7.11%, 06/30/09 ...... 6,506,653
3,754,023 VISANT Corp.
Tranche C Term Loan, 6.78%, 10/04/11 ...... 3,808,006
2,909,552 Warner Music Group
Term Loan, 6.67%, 02/28/11 ................ 2,943,652
-------------
59,634,101
-------------
ENERGY - EXPLORATION & PRODUCTION - 2.5%
9,925,000 ATP Oil & Gas Corp.
Term Loan, 9.80%, 04/14/10 ................ 10,229,003
4,488,750 Cheniere LNG Holdings LLC
Term Loan, 6.95%, 08/31/12 ................ 4,546,251
Targa Resources, Inc.
2,000,000 Asset Bridge Term Loan, 6.83%, 10/31/07 ... 2,007,500
1,161,290 Synthetic Term Loan, 4.40%, 10/31/12 ...... 1,175,806
4,826,613 Term Loan, 6.74%, 10/31/12 ................ 4,891,000
6,000,000 TARH E&P Holdings, LP
Second Lien Term Loan, 10.25%, 11/15/10 ... 6,015,000
1,828,312 Williams Production RMT Co.
Term Loan C, 6.82%, 05/30/07 .............. 1,854,604
-------------
30,719,164
-------------
ENERGY - OTHER ENERGY - 1.2%
2,487,500 Carrizo Oil & Gas, Inc.
Second Lien Term Loan, 10.53%, 07/21/10 ... 2,559,016
Coffeyville Resources LLC
597,004 First Lien Tranche B Term Loan,
7.07%, 06/24/12 ........................... 605,774
400,000 Funded Letter of Credit, 4.46%, 06/24/11 .... 406,000
7,500,000 Second Lien Term Loan, 11.31%, 06/24/13 ... 7,750,800
2,000,000 MarkWest Energy Operating, LLC
Term Loan, 6.82%, 12/29/10 ................ 2,020,000
1,661,301 SemCrude LPU S Term Loan, 6.75%, 03/16/11 ... 1,685,190
-------------
15,026,780
-------------
ENERGY - REFINING - 0.3%
4,000,000 Hawkeye Renewables, LLC
Term Loan, 7.84%, 01/31/12 ................ 3,987,520
-------------
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
ENERGY - SERVICE & EQUIPMENT - 0.9%
2,992,500 Complete Production Services
Term B Facility, 7.28%, 09/12/12 .......... 3,031,762
325,216 Dresser, Inc.
Term Loan C, 7.11%, 04/10/09 .............. 330,637
6,000,000 Petroleum Geo-Services ASA/PGS Finance, Inc.
Term Loan, 7.00%, 12/16/12 ................ 6,082,500
1,250,000 Vetco International Holdings, Inc. (DE)
Second Lien Term D Loan, 9.70%, 01/12/14 .. 1,272,925
-------------
10,717,824
-------------
FINANCIAL - 2.0%
American Wholesale Insurance Group, Inc.
997,500 First Lien Term Loan A,
7.74%, 10/27/11 ........................... 1,002,487
2,000,000 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
4,745,565 Conseco, Inc.
Term Loan, 6.57%, 06/22/10 (b) ............ 4,787,136
5,000,000 Crump Group, Inc.
Tranche B Term Loan, 7.55%, 12/19/12 ...... 5,037,500
4,378,947 Flatiron Re Ltd.
Closing Date Term Loan, 8.81%, 12/20/10 ... 4,422,737
2,000,000 LPL Holdings, Inc.
Tranche B Term Loan, 7.88%, 06/28/13 ...... 2,007,080
1,906,111 Mitchell International, Inc.
Term Loan, 6.53%, 08/15/11 ................ 1,933,521
858,981 Outsourcing Solutions, Inc.
Term Loan, 9.11%, 09/30/10 ................ 861,129
-------------
25,015,387
-------------
FOOD AND DRUG - 2.0%
1,478,261 Bi-Lo LLC
Term Loan, 8.54%, 07/01/11 ................ 1,481,957
3,000,000 CTI Food Holdings Co. LLC
Second Lien Secured Term Loan,
10.31%, 06/02/12 .......................... 3,060,000
3,649,239 Duloxetine Royalty SubTerm Loan,
9.10%, 10/18/13 ........................... 3,667,485
1,000,000 Harlan Sprague Dawley, Inc.
Term Loan, 7.12%, 12/19/11 ................ 1,011,880
4,830,045 Jean Coutu Group, Inc.
Term Loan B, 6.94%, 07/30/11 .............. 4,894,478
1,967,531 Leiner Health Products Group, Inc.
Tranche B Term Loan, 7.70%, 05/27/11 ...... 2,000,743
4,563,758 Michael Foods, Inc.
Term Loan B-1, 6.66%, 11/21/10 ............ 4,627,650
Vitaquest International, Inc.
1,962,314 First Lien Term Loan,
7.94%, 03/07/11 ........................... 1,957,409
1,500,000 Second Lien Term Loan,
11.57%, 03/07/12 .......................... 1,417,500
-------------
24,119,102
-------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 5
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
SENIOR LOAN NOTES (CONTINUED)
FOOD/TOBACCO - BEVERAGES & BOTTLING - 0.9%
995,000 AFC Enterprises, Inc.
Tranche B Term Loan, 6.81%, 05/09/11 ...... 1,007,437
989,167 Commonwealth Brands, Inc.
Term Loan, 7.00%, 12/22/12 ................ 1,002,145
3,770,176 Dr. Pepper/Seven Up Bottling Group, Inc.
Tranche B Term Loan, 6.57%, 12/19/10 ...... 3,827,181
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
-------------
10,822,167
-------------
FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS - 2.0%
3,616,875 Chiquita Brands, LLC
Term C Loan, 6.61%, 06/28/12 .............. 3,659,048
Krispy Kreme Doughnuts, Inc.
800,000 Second Lien Tranche A
Credit Link Deposit, 4.57%, 04/01/10 ...... 828,000
3,176,000 Second Lien Tranche B Term Loan,
11.92%, 04/01/10 .......................... 3,287,160
10,195,601 Merisant Co.Tranche B Term Loan,
7.92%, 01/11/10 ........................... 9,789,918
3,958,393 Michelina's
Term Loan, 7.50%, 04/02/11 ................ 4,012,821
2,839,346 Pinnacle Foods Holding Corp.
Term Loan, 7.78%, 11/25/10 ................ 2,882,646
-------------
24,459,593
-------------
FOOD/TOBACCO - RESTAURANTS - 1.3% Buffets, Inc.
500,000 Synthetic Letters of Credit,
3.92%, 06/28/09 ........................... 505,000
3,669,821 Term Loan, 8.19%, 06/28/09 ................ 3,706,519
2,790,000 Captain D's Inc., LLC
First Lien Term Loan, 8.36%, 12/27/10 ..... 2,817,900
2,658,333 Caribbean Restaurant LLC
Tranche B Term Loan, 7.32%, 06/30/09 ...... 2,685,475
4,000,00 El Pollo Loco, Inc.
Term Loan, 7.56%, 11/18/11 ................ 4,055,000
1,500,000 Garden Fresh Restaurant Corp.
First Lien Term Loan B, 7.82%, 06/22/11 ... 1,503,750
1,000,000 New World Restaurant Group, Inc.
First Lien Term Loan, 9.50%, 03/31/11 ..... 1,007,500
-------------
16,281,144
-------------
FOREST PRODUCTS - PACKAGING - 5.6%
2,985,000 Berry Plastics Corp.
Term Loan, 6.45%, 12/02/11 ................ 3,027,924
2,867,721 Consolidated Container Co. LLC
Term Loan, 7.50%, 12/15/08 ................ 2,882,060
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
FOREST PRODUCTS - PACKAGING (CONTINUED)
Georgia-Pacific Corp.
27,500,000 First Lien Term Loan, 02/14/13 (b) ........ 27,737,600
20,000,000 Second Lien Term Loan, 02/14/14 (b) ....... 20,430,400
11,378,797 Graham Packaging Co.
Term Loan B, 6.84%, 10/07/11 (b) .......... 11,535,255
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
1,965,000 U.S. Can Corp.
Term Loan B, 8.36%, 01/10/10 .............. 1,982,194
-------------
69,625,433
-------------
FOREST PRODUCTS - PAPER - 0.8%
3,238,331 Appleton Papers, Inc.
Term Loan, 6.58%, 06/11/10 ................ 3,276,803
3,495,833 Graphic Packaging International, Inc.
Tranche C Term Loan, 6.98%, 08/09/10 ...... 3,556,311
2,985,000 NewPage Corp.
Term Loan, 7.56%, 05/02/11 ................ 3,029,775
-------------
9,862,889
-------------
GAMING/LEISURE - GAMING - 4.1%
2,986,125 CCM Merger, Inc./MotorCity Casino
Term Loan B, 6.57%, 04/25/12 .............. 3,009,656
3,243,495 Global Cash Access LLC
Term Loan B, 6.86%, 03/10/10 .............. 3,284,038
3,930,300 Green Valley Ranch Gaming LLC
Term Loan, 6.53%, 12/22/10 ................ 3,984,342
13,954,971 OpBiz LLC
Term Loan A, 7.53%, 08/31/10 .............. 13,681,733
1,995,000 Penn National Gaming, Inc.
Term Loan B, 6.38%, 10/03/12 .............. 2,023,489
Resorts International Holdings Ltd.
16,102,206 Second Lien Term Loan, 12.03%, 04/26/13 (b) 15,095,818
4,903,089 Term Loan B, 7.53%, 04/26/12 .............. 4,892,400
4,000,000 Wynn Las Vegas LLC
Term Loan, 6.75%, 12/14/11 ................ 4,045,520
-------------
50,016,996
-------------
GAMING/LEISURE - OTHER LEISURE - 2.8%
3,178,184 AMF Bowling Worldwide, Inc.
Term Loan B, 7.61%, 08/27/09 .............. 3,215,941
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 ......... 12,706,688
1,500,000 Century California Subsidiary, Inc.
Term Loan B, 03/01/13 (b) ................. 1,500,000
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
3,486,250 Kuilima Resort Co.
First Lien Term Loan, 7.36%, 09/30/10 ..... 3,516,755
2,200,063 Oak Hill Capital Partners
Mezzanine Loan, 9.47%, 02/09/07 ........... 2,200,063
6 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
SENIOR LOAN NOTES (CONTINUED)
GAMING/LEISURE - OTHER LEISURE (CONTINUED)
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
-------------
34,256,115
-------------
HEALTHCARE - ACUTE CARE - 1.2%
4,286,361 Alliance Imaging, Inc.
Tranche C1 Term Loan, 7.18%, 12/29/11 ..... 4,290,819
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
2,053,676 DaVita, Inc.
Tranche B Term Loan, 6.79%, 10/05/12 ...... 2,086,125
2,000,000 MMM Holding, Inc./NAMM Holdings, Inc.
Term Loan, 8.03%, 08/22/11 ................ 2,015,000
-------------
15,387,391
-------------
HEALTHCARE - ALTERNATE SITE SERVICES - 3.0%
1,442,482 American HomePatient, Inc.
Secured Promissory Note,
6.79%, 08/01/09 (c) ....................... 1,442,482
2,127,857 American Medical Response, Inc.
Term Loan, 5.25%, 02/10/12 ................ 2,154,455
2,000,000 CRC Health Corp.
New Term Loan, 6.81%, 05/11/11 ............ 2,025,000
6,500,000 FHC Health Systems, Inc.
Third Lien Term Loan, 13.41%, 02/09/11 .... 6,642,500
1,000,000 Gentiva Health Services, Inc.
Term Loan, 03/31/13 (b) ................... 1,000,000
1,964,823 Hanger Orthopedic Group, Inc.
Tranche B Term Loan, 8.27%, 09/30/09 ...... 1,994,296
HealthSouth Corp.
6,268,500 Term Loan, 7.11%, 06/14/07 ................ 6,452,669
1,700,000 Tranche B Term Loan, 4.12%, 03/21/10 ...... 1,704,250
4,488,750 Renal Advantage, Inc.
Tranche B Term Loan, 7.07%, 10/06/12 ...... 4,533,638
Rural/Metro Operating Co. LLC
720,588 Letter of Credit Term Loan, 4.42%, 03/04/11 731,397
2,305,882 Term Loan, 7.11%, 03/04/11 ................ 2,340,471
1,990,000 Skilled Healthcare LLC
First Lien Term Loan, 7.25%, 06/15/12 ..... 2,011,134
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
HEALTHCARE - ALTERNATE SITE SERVICES (CONTINUED)
2,000,000 Triumph Healthcare Second
Holdings, LLC
Second Lien Term Loan, 13.06%, 08/31/12 ... 1,903,320
2,669,346 Youth & Family Centered Services, Inc.
Term Loan B, 8.69%, 05/28/11 .............. 2,662,672
-------------
37,598,284
-------------
HEALTHCARE - MEDICAL PRODUCTS - 1.6%
1,950,000 Bradley Pharmaceuticals, Inc.
Term Loan, 8.75%, 11/14/10 ................ 1,954,875
Carl Zeiss TopCo GmbH/US Newco
1,000,000 Term B U S Dollar Loan, 6.95%, 05/04/13 ... 1,003,750
2,000,000 Term C U S Dollar Loan, 7.45%, 05/04/14 ... 2,015,000
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
2,481,250 Reliant Pharmaceuticals, Inc.
First Lien Term Loan, 14.08%, 06/30/08 .... 2,506,063
Warner Chilcott Co., Inc.
98,800 Dovobet Delayed Draw
Term Loan, 7.44%, 01/18/12 ................ 99,355
493,925 Dovonex Delayed Draw Term Loan,
7.36%, 01/18/12 (h) ....................... 496,701
3,654,483 Tranche B Acquisition Date Term Loan,
7.36%, 01/18/12 ........................... 3,680,759
1,472,578 Warner Chilcott Corp.
Tranche C Acquisition Date
Term Loan, 7.28%, 01/18/12 ................ 1,484,094
680,290 Warner Chilcott Holdings Co. III, Ltd.
Tranche D Acquisition Date
Term Loan, 7.28%, 01/18/12 ................ 685,610
-------------
19,712,927
-------------
HOUSING - BUILDING MATERIALS - 2.4%
8,844,047 Atrium Cos., Inc.
Term Loan, 7.84%, 12/28/11 ................ 8,844,047
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
1,871,227 Lake at Las Vegas Joint Venture
First Lien Term Loan, 7.45%, 11/01/09 ..... 1,876,298
985,000 Nortek Holdings, Inc.
Term Loan, 6.94%, 08/27/11 ................ 995,096
PGT Industries, Inc.
1,000,000 First Lien Tranche A-2 Term Loan,
7.75%, 02/14/12 ........................... 1,015,000
1,000,000 Second Lien Term Loan,
11.75%, 08/14/12 .......................... 1,018,750
2,493,750 Pivotal Group Promotory
First Lien Term Loan, 7.36%, 08/31/10 ..... 2,485,969
5,000,000 Ply Gem Industries, Inc.
U S Term Loan, 02/24/13 (b) ............... 5,000,000
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
SENIOR LOAN NOTES (CONTINUED)
HOUSING - BUILDING MATERIALS (CONTINUED)
3,000,000 Propex Fabrics
Tranche B Term Loan, 07/31/12 (b) ......... 3,030,000
980,000 St. Mary's Cement, Inc.
Tranche B Term Loan, 6.53%, 12/04/09 ...... 995,935
Stile Acquisition Corp.
1,485,842 Canadian Term Loan, 6.63%, 04/06/13 ....... 1,459,840
494,183 U S Term Loan, 6.63%, 04/06/13 ............ 486,187
-------------
30,131,518
-------------
HOUSING - REAL ESTATE DEVELOPMENT - 5.4%
2,500,000 BioMed Realty LP
Senior Secured Term Loan, 6.82%, 05/31/10 . 2,506,250
2,657,927 CB Richard Ellis Services, Inc.
Term Loan, 6.57%, 03/31/10 ................ 2,689,504
Edge Star Partners LLC
10,000,000 First Lien Term Loan, 8.02%, 11/18/06 ..... 10,125,000
6,000,000 Second Lien Term Loan, 14.27%, 11/18/06 ... 6,075,000
2,143,382 Giraffe Intermediate, LLC
Mezzanine Note A-1, 6.32%, 08/09/07 ....... 2,143,382
3,886,842 Lion Gables Realty LP
Term Loan, 6.32%, 09/30/06 ................ 3,908,414
LNR Property Corp.
1,370,467 Tranche A Term Loan, 7.57%, 02/03/08 ...... 1,379,032
12,223,395 Tranche B Term Loan, 7.57%, 02/03/08 ...... 12,341,717
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
2,985,00 Palmdale Hills Property LLC
First Lien Term Loan, 7.61%, 05/19/10 ..... 2,985,000
2,992,500 Panolam Industries Ltd.
Term Loan, 7.28%, 09/30/12 ................ 3,037,387
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
2,000,000 Trustreet Properties, Inc.
Term Loan, 6.57%, 04/08/10 ................ 2,020,000
5,000,000 Woodlands Commercial Property Co.
Bridge Loan, 7.36%, 02/28/08 .............. 5,037,500
968,000 Yellowstone Mountain Club, LLC
Loan, 6.98%, 09/30/10 ..................... 973,150
-------------
67,315,257
-------------
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
INFORMATION TECHNOLOGY - 4.8%
925,000 ACI Billing Services, Inc.
First Lien Term Loan, 7.59%, 04/18/10 ..... 936,562
1,995,000 Avago Technologies
Tranche B-1 Term Loan, 7.07%, 12/01/12 .... 2,001,224
2,000,000 ClientLogic Corp.
Second Lien Term Loan, 13.55%, 09/03/12 ... 2,010,000
6,000,000 Comsys Information Services
Second Lien Term Loan, 12.16%, 10/31/10 ... 6,015,000
Corel Corp.
2,936,859 First Lien Term Loan, 8.82%, 02/16/10 ..... 2,951,543
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
GXS Corp.
2,000,000 First Lien Term Loan, 13.68%, 06/20/11 .... 1,975,000
2,000,000 Second Lien Term Loan, 9.66%, 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 (d) 1,066,500
1,791,000 First Lien Term Loan, 7.82%, 04/18/11 ..... 1,792,110
1,500,000 Second Lien Lux Term Loan, 11.82%, 04/18/12 1,535,625
2,886,251 IPC Acquisition Corp.
First Lien Tranche B Term Loan,
7.21%, 08/05/11 ........................... 2,924,119
Magellan Holdings, Inc.
2,189,000 First Lien Term Loan, 7.57%, 04/18/11 ..... 2,190,357
2,500,000 Second Lien U S Term Loan, 11.82%, 04/18/12 2,559,375
3,339,080 Per-Se Technologies, Inc.
Term Loan, 6.79%, 01/06/13 ................ 3,389,167
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
2,693,911 UGS Corp.
Replacement Term Loan, 6.61%, 05/27/11 .... 2,729,821
4,950,000 Viasystems, Inc.
Replacement Tranche B Term Loan,
8.83%, 09/30/09 ........................... 4,996,431
-------------
59,447,985
-------------
MANUFACTURING - 2.0%
1,440,156 AIRXCEL, Inc.
First Lien Term Loan, 7.63%, 08/31/12 ..... 1,458,158
1,944,444 CI Acquisition, Inc.
Term Loan B, 6.63%, 10/17/12 .............. 1,980,903
8 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
SENIOR LOAN NOTES (CONTINUED)
MANUFACTURING (CONTINUED)
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.
2,996,496 First Lien Domestic Term Loan,
7.25%, 06/28/12 (b) ....................... 2,995,238
1,671,053 Second Lien Domestic
Term Loan, 11.54%, 06/29/13 ............... 1,625,099
8,982,500 Mueller Group LLC
Term Loan, 6.84%, 10/03/12 ................ 9,104,842
1,773,784 Polypore, Inc.
U S Term Loan, 7.53%, 11/12/11 ............ 1,784,320
Terex Corp.
354,496 Incremental Term Loan, 7.34%, 12/31/09 .... 359,147
3,526,545 Term Loan, 6.84%, 07/03/09 ................ 3,575,036
-------------
25,223,225
-------------
METALS/MINERALS - OTHER METALS/MINERALS - 1.9%
2,500,000 Alpha Natural Resources LLC
Tranche B Term Loan, 6.32%, 10/26/12 ...... 2,513,800
1,795,000 AMR Technologies, Inc.
Term Loan, 8.00%, 08/31/09 ................ 1,799,487
2,500,000 James River Coal Co.
Credit Linked Certificate of Deposit,
4.57%, 11/30/11 ........................... 2,537,500
9,179,887 Murray Energy Corp.
Tranche B Term Loan, 7.61%, 01/28/10 ...... 9,208,528
Trout Coal Holdings LLC
6,955,000 First Lien Term Loan, 7.73%, 03/23/11 ..... 6,920,225
500,000 Second Lien Term Loan, 11.24%, 03/23/12 ... 497,500
-------------
23,477,040
-------------
NONFERROUS METALS/MINERALS - 0.2%
2,737,500 Techs Industries, Inc. (The)
Term Loan, 7.61%, 01/14/10 ................ 2,740,922
-------------
RETAIL - 7.0%
26,350,119 Blockbuster Entertainment Corp.
Tranche B Term Loan, 8.73%, 08/20/11 (b) .. 25,658,691
2,970,000 Dollarama Group LP
Term Loan B, 6.92%, 11/18/11 .............. 2,999,700
2,683,453 Harbor Freight Tools USA
Term Loan, 6.82%, 07/15/10 ................ 2,710,717
26,953,361 Home Interiors & Gifts, Inc.
Initial Term Loan, 9.81%, 03/31/11 ........ 25,285,757
995,000 MAPCO Express, Inc./MAPCO Family Centers, Inc.
Term Loan, 7.26%, 04/28/11 ................ 1,008,681
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
RETAIL (CONTINUED)
Movie Gallery, Inc.
1,520,263 Term Loan A, 8.03%, 04/27/11 .............. 1,429,047
15,399,437 Term Loan B, 8.28%, 04/27/11 (b) .......... 14,451,448
8,781,646 Neiman Marcus Group, Inc. (The)
Term Loan, 6.95%, 04/06/13 ................ 8,916,532
4,000,000 Oriental Trading Co., Inc.
Second Lien Term Loan, 9.31%, 01/08/11 .... 4,052,480
-------------
86,513,053
-------------
SERVICE - ENVIRONMENTAL SERVICES - 1.0%
Allied Waste North America, Inc.
4,918,367 Term Loan, 6.44%, 01/15/12 (b) ............ 4,974,338
1,909,531 Tranche A Credit Linked Deposit,
6.39%, 01/15/12 (b) ....................... 1,932,503
3,370,000 Audio Visual Services Corp.
Term Loan, 7.28%, 05/18/11 ................ 3,403,700
1,727,273 Envirocare of Utah LLC
Term Loan, 7.38%, 04/13/10 ................ 1,746,705
-------------
12,057,246
-------------
SERVICE - OTHER SERVICES - 1.8%
4,138,889 Brickman Group Holdings, Inc.
Term Loan, 9.81%, 11/15/09 ................ 4,128,542
1,297,872 Headwaters, Inc.
First Lien Term Loan B-1,
6.86%, 04/30/11 ........................... 1,314,095
NES Rentals Holdings, Inc.
1,080,000 First Lien Term Loan, 6.98%, 08/17/09 ..... 1,082,700
167 Revolver, 8.00%, 08/17/09 (d) 166
2,966,165 Second Lien Term Loan, 10.47%, 08/17/10 ... 3,010,657
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.
5,592,360 Initial Term Loan, 6.86%, 02/14/11 ........ 5,664,614
3,229,596 Tranche B Credit Linked Deposit,
6.64%, 02/14/11 ........................... 3,269,966
-------------
22,518,860
-------------
TELECOMMUNICATIONS - 3.9%
1,995,000 Maritime Telecommunications
Network, Inc.
First Lien Term Loan, 7.48%, 04/07/11 ..... 2,004,975
Millennium Digital Media Systems LLC
1,405,668 Facility A Revolver, 10/31/08 (b) ......... 1,416,210
21,092,257 Facility B Term Loan 10/31/08 (b) ......... 21,303,179
2,403,009 Facility C Term Loan, 8.74%, 10/31/08 (b) . 2,421,031
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
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
SENIOR LOAN NOTES (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
10,412,481 PanAmSat Corp.
Tranche B-1 Term Loan,
6.49%, 08/20/11 (b) ....................... 10,545,761
Sorenson Communications, Inc.
4,000,000 First Lien Term Loan B, 7.49%, 11/15/12 ... 4,061,280
1,000,000 Second Lien Term Loan, 11.49%, 05/15/12 ... 1,025,840
3,000,000 Stratus Global
Term B Facility, 02/15/12 (b) ............. 3,036,570
-------------
48,590,579
-------------
TELECOMMUNICATIONS - CLEC - 1.0%
7,875,000 Consolidated Communications, Inc.
Term Loan D, 6.34%, 10/14/11 .............. 7,956,270
3,933,070 RCN Corp.
Term Loan, 8.81%, 12/21/11 ................ 4,001,899
-------------
11,958,169
-------------
TELECOMMUNICATIONS - DATA/INTERNET - 0.2%
2,000,000 Pine Tree Holdings/Country Road
Communications, Inc.
Second Lien Tranche B Term Loan,
12.55%, 07/15/13 .......................... 2,035,000
-------------
TELECOMMUNICATIONS - FIBER/LONG DISTANCE - 1.8%
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
Qwest Corp.
4,000,000 Tranche A Term Loan, 9.32%, 06/30/07 ...... 4,111,400
4,000,000 Tranche B Term Loan, 6.95%, 06/30/10 (c) .. 4,076,680
WestCom Corp.
6,000,000 Second Lien Term Facility, 11.79%, 06/17/11 6,105,000
2,301,642 Tranche B Term Loan, 7.53%, 12/17/10 ...... 2,305,969
-------------
22,642,999
-------------
TRANSPORTATION - AUTO - 3.9%
3,765,101 Carey International, Inc.
Second Lien Term Loan, 16.52%, 05/10/12 ... 3,459,187
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
Federal-Mogul Corp.
1,500,000 DIP Term Loan, 6.56%, 12/09/06 ............ 1,508,430
1,457,559 Supplemental Revolver, 8.35%, 03/31/06 (d) 1,461,203
573,404 Tranche C Term Loan, 8.35%, 03/31/06 ...... 576,271
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
TRANSPORTATION - AUTO (CONTINUED)
3,500,000 Goodyear Tire & Rubber Co.
Third Lien Term Loan, 7.81%, 03/01/11 ..... 3,518,970
Hayes Lemmerz International, Inc.
3,175,880 Term Loan B, 7.78%, 06/03/09 .............. 3,186,487
1,000,000 Term Loan C, 06/03/10 (b) ................. 983,000
Hertz Corp. (The)
555,556 Letter of Credit, 4.50%, 12/21/12 ......... 565,000
3,793,333 Tranche B Term Loan, 6.89%, 12/21/12 ...... 3,855,999
Key Plastics LLC
4,421,566 Term Loan B, 7.65%, 06/29/10 .............. 4,421,566
2,279,091 Term Loan C, 10.41%, 06/24/11 ............. 2,233,509
1,302,252 Plastech, Inc.
Term Loan B, 9.28%, 03/31/10 .............. 1,234,535
2,000,000 RJ Tower Corp.
Tranche B DIP Term Loan, 7.25%, 02/02/07 .. 2,035,360
1,947,170 Tire Rack Holdings, Inc.
Tranche B Term Loan, 6.78%, 06/24/12 ...... 1,971,509
723,333 United Components, Inc.
Tranche C Term Loan, 7.22%, 06/30/10 ...... 734,639
-------------
47,787,388
-------------
TRANSPORTATION - LAND - 1.3%
595,102 Ozburn-Hessey Holding Co., LLC
Term Loan, 7.29%, 08/10/12 ................ 603,284
Quality Distribution, Inc.
2,427,481 Synthetic Letters of Credit,
4.43%, 11/13/09 ........................... 2,439,618
5,662,189 Term Loan, 7.57%, 11/13/09 ................ 5,690,500
964,646 Term Loan, 7.57%, 11/13/09 (e) ............ 969,470
821,771 SIRVA Worldwide, Inc.
Tranche B Term Loan, 8.56%, 12/01/10 ...... 792,318
5,860,313 Transport Industries, LP
Term Loan B, 7.19%, 09/30/11 (b) .......... 5,929,933
-------------
16,425,123
-------------
UTILITIES - 7.9%
4,566,551 Allegheny Energy, Inc.
Term Advances, 5.63%, 03/08/11 ............ 4,603,312
2,000,000 ANP Funding I, LLC
Tranche A Term Loan, 8.21%, 07/29/10 ...... 2,017,500
4,500,000 Astoria Generating Co. Acquisitions, LLC
Second Lien Term Loan C, 08/23/13 (b) ..... 4,595,625
Boston Generating LLC
15,918 DSR Letter of Credit, 03/31/06 (b) ........ 23,081
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
45,275 Project Letter of Credit, 03/31/06 (b) .... 65,648
828,326 Project Term Loan, 03/31/06 (b) ........... 1,201,072
110,482 Working Capital Letter of Credit,
03/31/06 (b) .............................. 160,199
10 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
SENIOR LOAN NOTES (CONTINUED)
UTILITIES (CONTINUED)
4,899,497 Calpine Construction Finance Co. LP
First Lien Term Loan, 10.57%, 08/26/09 .... 5,211,840
Calpine Corp.
4,000,000 First Lien Revolver, 12/20/07 (b) ......... 3,960,000
3,446,809 First Lien Term Loan, 12/20/07 (b) ........ 3,502,819
14,359,818 Second Lien Term Loan B,
10.35%, 07/16/07 (f) ...................... 13,218,213
CenterPoint Energy, Inc.
3,636,200 Term Loan, 6.09%, 04/30/10 ................ 3,638,454
3,990,000 Term Loan, 6.92%, 04/30/10 ................ 3,992,474
Covanta Energy Corp.
1,658,537 Letter of Credit Term Loan,
4.53%, 06/24/12 ........................... 1,683,415
1,118,598 Term Loan, 7.53%, 06/24/12 ................ 1,139,571
El Paso Corp.
2,500,000 Deposit Accounts, 4.11%, 11/23/09 ......... 2,526,400
8,369,516 Term Loan, 7.31%, 11/23/09 ................ 8,473,466
3,223,743 Infrasource, Inc.
Term Loan, 7.53%, 09/30/10 ................ 3,239,862
KGen, LLC
1,985,000 Tranche A Term Loan, 7.15%, 08/05/11 ...... 1,985,000
35,187 Tranche B Term Loan, 13.53%, 08/05/11 ..... 35,363
1,357,920 Midwest Generation LLC
Term Loan, 6.35%, 04/27/11 ................ 1,376,089
NATG Holdings LLC
72,073 Credit Linked Certificate of Deposit,
6.81%, 01/23/09 ........................... 67,748
126,579 Term Loan A, 01/23/09 (d) ................. 29,746
92,678 Term Loan B1, 11.50%, 01/23/10 ............ 21,779
9,144 Term Loan B2, 11.50%, 01/23/10 ............ 8,595
NRG Energy, Inc.
3,527,598 Credit Linked Certificate of Deposit,
6.62%, 02/02/13 (f) ....................... 3,559,700
15,472,402 Term Loan, 6.57%, 02/01/13 (b) ............ 15,644,764
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.
500,000 Credit Linked Certificate of Deposit,
6.32%, 10/12/13 ........................... 503,440
1,496,964 Term Loan, 6.28%, 10/12/13 ................ 1,507,263
-------------
97,695,080
-------------
WIRELESS - CELLULAR/PCS - 3.4%
4,111,181 Centennial Cellular Operating Co.
Term Loan, 6.64%, 02/09/11 ................ 4,171,286
14,850,000 Cricket Communications, Inc.
Term Loan B, 7.03%, 01/10/11 .............. 15,063,543
MetroPCS, Inc.
10,850,000 First Lien Tranche B Term Loan,
9.50%, 05/27/11 ........................... 11,198,068
10,800,000 Second Lien Term Loan,
12.00%, 05/27/12 .......................... 11,394,000
-------------
41,826,897
-------------
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
WIRELESS - WIRELESS INFRASTRUCTURE - 0.3%
1,990,000 CellNet Data Systems, Inc.
First Lien Term Loan B, 7.53%, 04/26/12 ... 2,024,825
1,995,000 DPI Holdings, LLC
Term Loan, 6.65%, 09/30/10 ................ 1,985,025
-------------
4,009,850
-------------
Total Senior Loan Notes
(Cost $1,409,883,299) ..................... 1,421,873,172
-------------
FOREIGN VARIABLE RATE SENIOR LOAN NOTES (A) - 5.0%
GERMANY - 0.9%
EUR
3,625,000 debitel (Netherlands) Holding BV
Second Lien Facility, 9.49%, 06/11/14 ..... 4,449,404
debitel Konzernfinanzierungs GmbH
1,125,000 Term Facility B, 5.24%, 06/11/13 .......... 1,352,186
803,571 Term Facility C1, 5.74%, 06/11/14 ......... 968,041
321,429 Term Facility C2, 5.74%, 06/11/14 ......... 389,363
iesy Hessen GmbH & Co.
1,500,000 Facility B, 5.39%, 02/14/13 ............... 1,801,574
1,500,000 Facility C, 5.89%, 02/14/14 ............... 1,804,167
-------------
10,764,735
-------------
ITALY - 0.6%
EUR
Prysmian Cables & Systems, Inc.
3,461,538 Second Lien Term Loan, 9.44%, 01/20/15 .... 4,240,018
875,000 Euro Term Loan B, 5.07%, 08/04/12 ......... 1,048,560
875,000 Euro Term Loan C2, 4.75%, 08/04/12 ........ 1,048,435
1,038,462 Second Lien Tranche C Term Loan,
9.44%, 01/20/15 ........................... 1,272,006
-------------
7,609,019
-------------
SWITZERLAND - 0.2%
EUR
2,077,716 Merisant Co.
Tranche A (Euro) Term Loan,
5.79%, 01/11/09 ........................... 2,399,746
-------------
UNITED KINGDOM - 3.3%
GBP
Debenhams Finance Holdings PLC
1,500,000 Sterling Tranche B, 7.34%, 04/25/13 ....... 2,612,798
1,500,000 Sterling Tranche C, 7.84%, 04/25/14 ....... 2,618,367
Peacock Group (The)
2,250,000 Facility B, 7.33%, 10/30/13 ............... 3,974,795
2,250,000 Facility C, 7.83%, 10/30/14 ............... 3,974,795
3,125,000 PlayPower, Inc.
Add-on Term Loan,
7.63%, 12/18/09 ........................... 5,547,912
Red Football Ltd.
1,250,000 Facility B Term Loan,
7.85%, 05/11/13 ........................... 2,220,544
1,250,000 Facility C Term Loan,
8.35%, 05/11/14 ........................... 2,226,016
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- ------------------- ---------
FOREIGN VARIABLE RATE SENIOR LOAN NOTES (CONTINUED)
UNITED KINGDOM (CONTINUED)
GBP
1,399,358 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 $61,709,623) ........................ 62,088,461
-------------
SHARES
--------
COMMON STOCKS (G) - 1.3%
TELECOMMUNICATIONS - 0.0%
2,167 Eningen Realty (h) .......................... 0
-------------
UTILITIES - 1.0%
490,818 Mirant Corp. ................................ 12,074,116
40,800 NATG Holdings LLC (h) ....................... 0
-------------
12,074,116
-------------
WIRELESS - CELLULAR/PCS - 0.3%
76,137 Leap Wireless International, Inc. ........... 3,206,129
-------------
Total Common Stocks
(Cost $8,263,621) ......................... 15,280,245
-------------
PREFERRED STOCK - 0.0%
MANUFACTURING - 0.0%
14,382 Superior Telecom, Inc., Series A ............ 12,225
-------------
Total Preferred Stock
(Cost $14,382) ............................ 12,225
-------------
UNITS
-------
WARRANTS (G) (H) - 0.0%
GAMING/LEISURE - GAMING - 0.0%
10 OpBiz LLC, expires 08/11/09 ................. 0
32,173 OpBiz LLC, expires 08/11/09 ................. 0
-------------
Total Warrants
(Cost $0) ................................. 0
-------------
CLAIMS (I) - 0.1%
UTILITIES - 0.1%
28,000,000 Mirant Corp. ................................ 1,586,760
-------------
Total Claims
(Cost $0) ................................. 1,586,760
-------------
TOTAL INVESTMENTS - 121.4% .................................... 1,500,840,863
-------------
(Cost of $1,479,870,925) (j)
VALUE ($)
---------
OTHER ASSETS & LIABILITIES, NET - (21.4)% ..................... (264,396,005)
-------------
NET ASSETS - 100.0% ........................................... 1,236,444,858
=============
- -----------
(a) Senior loans in which the Fund invests generally pay interest at rates which
are periodically predetermined by reference to a base lending rate plus a
premium. (Unless otherwise identified by (f), all senior loans carry a
variable rate interest.) These base lending rates are generally (i) the
prime rate offered by one or more major United States banks, (ii) the
lending rate offered by one or more European banks such as the London
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) Senior Loan Notes have additional unfunded loan committments. See Note 10.
(e) Loans held on participation.
(f) The issuer is in default of certain debt covenants. Income is not being
accrued.
(g) Non-income producing security.
(h) Represents fair value as determined in good faith under the direction of the
Board of Trustees.
(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 $1,480,729,237.
CLEC Competitive Local Exchange Carrier
DE Delaware
DIP Debtor in Possession
DSR Debt Service Reserve
EUR Euro Currency
GBP Great Britain Pound
FOREIGN VARIABLE SENIOR LOAN NOTES
INDUSTRY CONCENTRATION TABLE
(% of Total Net Assets)
Retail ............................ 1.8%
Manufacturing ..................... 1.1%
Wireless - Cellular/PCS ........... 0.5%
Utilities ......................... 0.5%
Gaming/Leisure - Other Leisure .... 0.4%
Cable - International Cable ....... 0.3%
Information Technology ............ 0.2%
Food/Tobacco - Food/Tobacco
Producers ...................... 0.2%
---
5.0%
===
12 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 (UNAUDITED) HIGHLAND FLOATING RATE ADVANTAGE FUND
($)
- ----------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost $1,479,870,925) .............................................. 1,500,840,863
Cash ..................................................................................... 97,742,218
Foreign currency (Cost $8,051,860) ....................................................... 8,052,734
Receivable for:
Investments sold ................................................................... 31,952,317
Fund shares sold ................................................................... 19,590,076
Interest and fees .................................................................. 13,356,581
Other assets ............................................................................. 64,993
---------------
Total assets ................................................................... 1,671,599,782
LIABILITIES:
Notes payable ............................................................................ 235,000,000
Net discount and unrealized appreciation on unfunded transactions (Note 10) .............. 139,148
Payable for:
Investments purchased .............................................................. 194,584,663
Distributions ...................................................................... 2,000,953
Investment advisory fee (Note 4) ................................................... 1,613,095
Administration fee (Note 4) ........................................................ 213,237
Trustees' fees (Note 4) ............................................................ 16,667
Distribution and service fees (Note 4) ............................................. 532,459
Interest expense (Note 8) .......................................................... 642,958
Accrued expenses and other liabilities ................................................... 411,744
---------------
Total liabilities .............................................................. 435,154,924
---------------
NET ASSETS .................................................................................. 1,236,444,858
===============
COMPOSITION OF NET ASSETS
Paid-in capital .......................................................................... 1,209,948,303
Overdistributed net investment income .................................................... (415,442)
Accumulated net realized gain on investments and foreign currency transactions ........... 5,745,311
Net unrealized appreciation on investments, translation of assets and liabilities
denominated in foreign currency and unfunded transactions .......................... 21,166,686
---------------
NET ASSETS .................................................................................. 1,236,444,858
===============
CLASS A
Net assets ............................................................................... 504,460,969
Shares outstanding (unlimited shares authorized) ......................................... 40,826,628
Net asset value per share (Net assets/Shares outstanding) ............................... 12.36(a)
Maximum offering price per share (100 / 96.50 of $12.36) ................................. 12.81(b)
CLASS B
Net assets ............................................................................... 121,312,692
Shares outstanding (unlimited shares authorized) ......................................... 9,817,884
Net asset value and offering price per share (Net assets/Shares outstanding) ............ 12.36(a)
CLASS C
Net assets ............................................................................... 527,125,698
Shares outstanding (unlimited shares authorized) ......................................... 42,656,601
Net asset value and offering price per share (Net assets/Shares outstanding) ............ 12.36(a)
CLASS Z
Net assets ............................................................................... 83,545,499
Shares outstanding (unlimited shares authorized) ......................................... 6,761,829
Net asset value, offering and redemption price per share (Net assets/Shares outstanding) . 12.36
<FN>
- ----------------------------------------------------
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $100,000 or more, the offering price is reduced.
</FN>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2006 (UNAUDITED) HIGHLAND FLOATING RATE ADVANTAGE FUND
($)
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest ................................................................................. 49,382,934
Dividends ................................................................................ 683
Facility and other fees .................................................................. 39,850
---------------
Total investment income 49,423,467
EXPENSES
Investment advisory fee (Note 4) ......................................................... 2,819,637
Administration fee (Note 4) .............................................................. 1,285,846
Accounting services fee .................................................................. 189,586
Distribution fee (Note 4):
Class A ............................................................................ 203,655
Class B ............................................................................ 276,653
Class C ............................................................................ 1,351,487
Service fee (Note 4):
Class A ............................................................................ 509,139
Class B ............................................................................ 153,696
Class C ............................................................................ 563,120
Transfer agent fee ....................................................................... 419,435
Professional fees ........................................................................ 100,068
Trustees' fees (Note 4) .................................................................. 59,110
Custody fee .............................................................................. 85,347
Registration fees ........................................................................ 39,503
Reports to shareholders .................................................................. 120,012
Other expenses ........................................................................... 241,680
---------------
Total operating expenses ....................................................... 8,417,974
Interest expense (Note 8) ................................................................ 4,772,528
Facility expense ......................................................................... 678,642
---------------
Total expenses ................................................................. 13,869,144
Fees and expenses waived or reimbursed by Investment Adviser (Note 4) .................... (461,233)
---------------
Net expenses ................................................................... 13,407,911
---------------
Net investment income .................................................................... 36,015,556
---------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments ......................................................... 8,928,241
Net realized gain on foreign currency transactions ....................................... 143,017
Net change in unrealized appreciation on investments ..................................... 6,429,347
Net change in unrealized appreciation on unfunded transactions (Note 10) ................. 123,388
Net change in unrealized depreciation on translation of assets and liabilities denominated
in foreign currency ................................................................ (282,859)
---------------
Net gain ................................................................................. 15,341,134
---------------
Net increase in net assets from operations ............................................... 51,356,690
===============
14 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2006 YEAR ENDED
(UNAUDITED) AUGUST 31, 2005
($) ($)
-------------- --------------
INCREASE IN NET ASSETS:
OPERATIONS
Net investment income ................................................................ 36,015,556 43,218,962
Net realized gain on investments and foreign currency transactions ................... 9,071,258 447,820
Net change in unrealized appreciation on investments, translation of assets and
liabilities denominated in foreign currency and unfunded transactions ....... 6,269,876 7,240,459
-------------- --------------
Net increase from operations ................................................ 51,356,690 50,907,241
-------------- --------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income:
Class A ..................................................................... (14,560,151) (15,863,369)
Class B ..................................................................... (4,194,661) (6,648,815)
Class C ..................................................................... (15,012,289) (16,600,896)
Class Z ..................................................................... (2,948,924) (4,020,231)
-------------- --------------
Total distributions declared to shareholders ................................ (36,716,025) (43,133,311)
-------------- --------------
SHARE TRANSACTIONS
Class A
Subscriptions ............................................................... 234,446,434 209,578,268
Distributions reinvested .................................................... 9,556,117 10,245,197
Redemptions ................................................................. (96,690,568) (83,335,719)
-------------- --------------
Net increase ................................................................ 147,311,983 136,487,746
Class B
Subscriptions -- 10,362,773
Distributions reinvested .................................................... 2,553,354 4,017,411
Redemptions ................................................................. (7,439,131) (15,567,850)
-------------- --------------
Net decrease ................................................................ (4,885,777) (1,187,666)
Class C
Subscriptions ............................................................... 162,809,354 167,261,240
Distributions reinvested .................................................... 8,737,840 11,115,461
Redemptions ................................................................. (42,177,266) (68,853,512)
-------------- --------------
Net increase ................................................................ 129,369,928 109,523,189
Class Z
Subscriptions ............................................................... 28,971,872 40,633,785
Distributions reinvested .................................................... 1,697,465 1,870,278
Redemptions ................................................................. (23,466,264) (20,870,623)
-------------- --------------
Net increase ................................................................ 7,203,073 21,633,440
-------------- --------------
Net increase from share transactions ........................................ 278,999,207 266,456,709
-------------- --------------
Total increase in net assets ................................................ 293,639,872 274,230,639
-------------- --------------
NET ASSETS
Beginning of period .................................................................. 942,804,986 668,574,347
End of period (including undistributed and (overdistributed) net investment income of
$(415,442) and $285,027, respectively) ...................................... 1,236,444,858 942,804,986
============== ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2006 YEAR ENDED
(UNAUDITED) AUGUST 31, 2005
-------------- --------------
CHANGE IN SHARES
Class A
Subscriptions ................................................... 19,077,358 17,322,296
Issued for distributions reinvested ............................. 778,473 846,869
Redemptions ..................................................... (7,876,160) (6,887,056)
-------------- --------------
Net increase .................................................... 11,979,671 11,282,109
Class B
Subscriptions ................................................... -- 855,878
Issued for distributions reinvested ............................. 208,108 332,132
Redemptions ..................................................... (605,943) (1,285,093)
-------------- --------------
Net decrease .................................................... (397,835) (97,083)
Class C
Subscriptions ................................................... 13,130,898 13,815,400
Issued for distributions reinvested ............................. 839,352 918,787
Redemptions ..................................................... (3,432,415) (5,686,448)
-------------- --------------
Net increase .................................................... 10,537,835 9,047,739
Class Z
Subscriptions ................................................... 2,360,067 3,359,211
Issued for distributions reinvested ............................. 138,282 154,587
Redemptions ..................................................... (1,914,857) (1,726,328)
-------------- --------------
Net increase .................................................... 583,492 1,787,470
16 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2006 (UNAUDITED) HIGHLAND FLOATING RATE ADVANTAGE FUND
($)
- --------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND FOREIGN CURRENCY
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment income .................................................................. 36,015,556
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH USED FOR OPERATING ACTIVITIES
Purchase of investments securities ..................................................... (718,221,540)
Proceeds from dispostion of investment securities ...................................... 390,359,783
Increase in interest and fees receivable ............................................... (5,671,943)
Increase in receivable for investments sold ............................................ (24,117,969)
Decrease in other assets ............................................................... 78,823
Decrease in deferred facility fees ..................................................... (36,337)
Net amortization of premium (discount) ................................................. (558,092)
Increase in payable for investments purchased .......................................... 112,241,127
Decrease in mark-to-market on realized and unrealized gain (loss) on foreign currency .. (139,842)
Increase in payable for accrued affiliated expenses .................................... 1,208,934
Increase in other expenses and liabilities ............................................. 76,984
---------------
Net cash and foreign currency flow used for operating activities .................. (208,764,516)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Decrease in notes payable .............................................................. (15,000,000)
Decrease in interest payable ........................................................... (15,480)
Proceeds from shares sold .............................................................. 416,331,990
Payment of shares redeemed ............................................................. (169,773,229)
Distributions paid in cash ............................................................. (13,798,456)
---------------
Net cash flow provided by financing activities .................................... 217,744,825
---------------
Net increase in cash and foreign currency ......................................... 8,980,309
CASH AND FOREIGN CURRENCY
Beginning of the period ................................................................ 96,814,643
---------------
End of the period ...................................................................... 105,794,952
===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE 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 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.09
- ------------------------------------------------------------------------------------------------------------------------------------
Income from Investment
Operations:
Net investment income(a) 0.43 0.67 0.56 0.81 0.83(b) 1.10
Net realized and unrealized gain (loss)
on investments(a) 0.18 0.11 0.89 0.74 (1.26)(b) (0.32)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations 0.61 0.78 1.45 1.55 (0.43) 0.78
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.44) (0.67) (0.59) (0.81) (0.83) (1.13)
From net realized gains -- -- -- -- -- --(c)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions declared to
shareholders (0.44) (0.67) (0.59) (0.81) (0.83) (1.13)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.36 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74
Total return(d)(e) 5.13%(f) 6.56%(g) 13.14% 15.55% (3.88)% 6.71%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.27%(h) 1.28% 1.29%(i) 1.38%(i) 1.38%(i) 1.37%(i)
Interest and facility expenses 1.03%(h) 0.72% 0.40% 0.73% 0.99% 2.04%
Net expenses(j) 2.30%(h) 2.00% 1.69%(i) 2.11%(i) 2.37%(i) 3.41%(i)
Net investment income 7.03%(h) 5.60% 4.73%(i) 7.67%(i) 7.25%(b)(i) 9.24%(i)
Waiver/reimbursement 0.09%(h) 0.10% 0.18% 0.36% 0.32% 0.32%
Portfolio turnover rate 30%(f) 85% 110% 90% 98% 65%
Net assets, end of period (000's) $ 504,461 $ 351,557 $ 212,205 $ 85,166 $ 69,733 $ 108,399
<FN>
- ----------------------------------------------------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing and
accreting premium and discount on all debt securities. The effect of this
change for the year ended August 31, 2002, on the net investment income and
net realized and unrealized loss per share was less than $0.01. The impact
to the ratio of net investment income to average net assets was less than
0.01%. 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) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge ("CDSC").
(e) Had the Fund's investment adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.
(f) Not annualized.
(g) Total return is calculated using the Net Asset Value used for trading at the
close of business on August 31, 2005.
(h) Annualized.
(i) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(j) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
18 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE 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 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.07
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 0.40 0.63 0.53 0.78 0.78(b) 1.05
Net realized and unrealized gain (loss)
on investments(a) 0.18 0.11 0.88 0.73 (1.25)(b) (0.30)
---------- ---------- ---------- ---------- ---------- ---------
Total from investment operations 0.58 0.74 1.41 1.51 (0.47) 0.75
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.41) (0.63) (0.55) (0.77) (0.79) (1.08)
From net realized gains -- -- -- -- -- --(c)
---------- ---------- ---------- ---------- ---------- ---------
Total distributions declared to
shareholders (0.41) (0.63) (0.55) (0.77) (0.79) (1.08)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.36 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74
Total return(d)(e) 4.95%(f) 6.19%(g) 12.75% 15.16% (4.22)% 6.52%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.62%(h) 1.63% 1.64%(i) 1.73%(i) 1.73%(i) 1.72%(i)
Interest and facility expenses 1.03%(h) 0.72% 0.40% 0.73% 0.99% 2.04%
Net expenses(j) 2.65%(h) 2.35% 2.04%(i) 2.46%(i) 2.72%(i) 3.76%(i)
Net investment income 6.68%(h) 5.25% 4.50%(i) 7.34%(i) 6.90%(b)(i) 8.89%(i)
Waiver/reimbursement 0.09%(h) 0.10% 0.18% 0.36% 0.32% 0.32%
Portfolio turnover rate 30%(f) 85% 110% 90% 98% 65%
Net assets, end of period (000's) $ 121,313 $ 124,500 $ 124,589 $ 76,379 $ 68,157 $ 80,609
<FN>
- ----------------------------------------------------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing and
accreting premium and discount on all debt securities. The effect of this
change for the year ended August 31, 2002, on the net investment income and
net realized and unrealized loss per share was less than $0.01. The impact
to the ratio of net investment income to average net assets was less than
0.01%. 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) Total return at net asset value assuming all distributions reinvested and no
CDSC.
(e) Had the Fund's investment adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.
(f) Not annualized.
(g) Total return is calculated using the Net Asset Value used for trading at the
close of business on August 31, 2005.
(h) Annualized.
(i) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(j) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE 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 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.07
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 0.40 0.61 0.50 0.76 0.76(b) 1.03
Net realized and unrealized gain (loss)
on investments(a) 0.18 0.11 0.89 0.74 (1.25)(b) (0.30)
---------- ---------- ---------- ---------- ---------- ---------
Total from investment operations 0.58 0.72 1.39 1.50 (0.49) 0.73
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.41) (0.61) (0.53) (0.76) (0.77) (1.06)
From net realized gains -- -- -- -- -- --(c)
---------- ---------- ---------- ---------- ---------- ---------
Total distributions declared to
shareholders (0.41) (0.61) (0.53) (0.76) (0.77) (1.06)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.36 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74
Total return(d)(e) 4.88%(f) 6.03%(g) 12.57% 14.99% (4.36)% 6.35%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.77%(h) 1.78% 1.79%(i) 1.88%(i) 1.88%(i) 1,87%(i)
Interest and facility expenses 1.03%(h) 0.72% 0.40% 0.73% 0.99% 2.04%
Net expenses(j) 2.80%(h) 2.50% 2.19%(i) 2.61%(i) 2.87%(i) 3.91%(i)
Net investment income 6.53%(h) 5.10% 4.19%(i) 7.14%(i) 6.75%(b)(i) 8.74%(i)
Waiver/reimbursement 0.09%(h) 0.10% 0.18% 0.36% 0.32% 0.32%
Portfolio turnover rate 30%(f) 85% 110% 90% 98% 65%
Net assets, end of period (000's) $ 527,126 $ 391,455 $ 278,731 $ 80,572 $ 61,811 $ 64,074
<FN>
- ----------------------------------------------------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing and
accreting premium and discount on all debt securities. The effect of this
change for the year ended August 31, 2002, on the net investment income and
net realized and unrealized loss per share was less than $0.01. The impact
to the ratio of net investment income to average net assets was less than
0.01%. 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) Total return at net asset value assuming all distributions reinvested and no
CDSC.
(e) Had the Fund's investment adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.
(f) Not annualized.
(g) Total return is calculated using the Net Asset Value used for trading at the
close of business on August 31, 2005.
(h) Annualized.
(i) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(j) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
20 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE 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 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74 $ 12.08
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a) 0.45 0.71 0.59 0.78 0.86(b) 1.14
Net realized and unrealized gain (loss)
on investments(a) 0.18 0.11 0.90 0.81 (1.25)(b) (0.31)
---------- ---------- ---------- ---------- ---------- ---------
Total from investment operations 0.63 0.82 1.49 1.59 (0.39) 0.83
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.46) (0.71) (0.63) (0.85) (0.87) (1.17)
From net realized gains -- -- -- -- -- --(c)
---------- ---------- ---------- ---------- ---------- ---------
Total distributions declared to
shareholders (0.46) (0.71) (0.63) (0.85) (0.87) (1.17)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.36 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74
Total return(d)(e) 5.32%(f) 6.93%(g) 13.52% 15.95% (3.53)% 7.17%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 0.92%(h) 0.93% 0.94%(i) 1.03%(i) 1.03%(i) 1.02%(i)
Interest and facility expenses 1.03%(h) 0.72% 0.40% 0.73% 0.99% 2.04%
Net expenses(j) 1.95%(h) 1.65% 1.34%(i) 1.76%(i) 2.02%(i) 3.06%(i)
Net investment income 7.38%(h) 5.95% 4.93%(i) 7.21%(i) 7.60%(b)(i) 9.59%(i)
Waiver/reimbursement 0.09%(h) 0.10% 0.18% 0.36% 0.32% 0.32%
Portfolio turnover rate 30%(f) 85% 110% 90% 98% 65%
Net assets, end of period (000's) $ 83,545 $ 75,293 $ 53,049 $ 5,178 $ 140 $ 2,850
<FN>
- ----------------------------------------------------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing and
accreting premium and discount on all debt securities. The effect of this
change for the year ended August 31, 2002, on the net investment income and
net realized and unrealized loss per share was less than $0.01. The impact
to the ratio of net investment income to average net assets was less than
0.01%. 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) Total return at net asset value assuming all distributions reinvested.
(e) Had the Fund's investment adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.
(f) Not annualized.
(g) Total return is calculated using the Net Asset Value used for trading at the
close of business on August 31, 2005.
(h) Annualized.
(i) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(j) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 21
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
NOTE 1. ORGANIZATION
Highland Floating Rate Advantage 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 seeks to provide a high level of current income consistent with
preservation of capital.
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 Fund in the preparation of its financial statements.
SECURITY VALUATION
The value of the Fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, the Fund
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 Fund'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 Fund's Board of Trustees. In these cases, the Fund's net
asset value will reflect the affected portfolio securities' value as determined
in the judgment of the Board of Trustees or its designee instead of being
determined by the market. Using a fair value pricing methodology to price
securities may result in a value that is different from a security's most recent
sale price and from the prices used by other investment companies to calculate
their net asset values. There can be no assurance that the Fund'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 unreal-
22
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
ized 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 Fund may engage in repurchase agreement transactions with institutions that
the Fund's investment adviser has determined are creditworthy. The Fund, 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
Fund's ability to dispose of the underlying securities and a possible decline in
the value of the underlying securities during the period while the Fund 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. 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 Internal Revenue Code of 1986, as amended (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.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared 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 Fund's Statement of Assets and Liabilities and
includes cash and foreign currency on hand at its custodian bank and
sub-custodian bank, respectively, and does not include any short-term
investments.
NOTE 3. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with 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* $43,133,311 $21,394,034
- --------------------------------------------------------------------------------
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*
- --------------------------------------------------------
$2,422,808 $-- $14,316,812
- --------------------------------------------------------
*The differences between book-basis and tax-basis net unrealized
appreciation/depreciation are primarily due to deferral of losses from wash
sales and accretion/amortization on debt securities.
Unrealized appreciation and depreciation at February 28, 2006, based on cost of
investments for federal income tax purposes, and excluding any unrealized
appreciation
23
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
(depreciation) from changes in the value of other assets and liabilities
resulting from changes in exchange rates, was:
Unrealized appreciation $ 25,503,009
Unrealized depreciation (5,141,383)
------------
Net unrealized appreciation $ 20,361,626
============
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
- ---------------------------------------------------
2011 $ 3,018,341
NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, TRUSTEE, AND OTHER1
FEES
INVESTMENT ADVISORY FEE
Highland Capital Management, L.P. ("Highland") is the investment adviser to the
Fund. The Fund is accruing a monthly investment advisory fee based on the Fund's
average daily managed assets at the following annual rates:
Average Daily Managed Assets Annual Fee Rate
- --------------------------------------------------------------
First $1billion 0.45%
- --------------------------------------------------------------
Next $1billion 0.40%
- --------------------------------------------------------------
Over $2 billion 0.35%
Average daily managed assets of the Fund means the average daily value of the
total assets of the Fund less all accrued liabilities of the Fund (other than
the aggregate amount of any outstanding borrowing constituting financial
leverage).
For the six months ended February 28, 2006, the Portfolio's effective
investment advisory fee rate was 0.44%.
Prior to April 15, 2004, the Fund's investment advisory agreement provided for
an investment advisory fee based on the Fund's average daily managed assets,
which includes assets acquired with leverage. Although the Fund's board and
shareholders were informed that the new advisory agreements implemented
commencing on April 15, 2004 in connection with a change in investment adviser
would not change the fee structure, due to a scrivener's error the text of the
agreement submitted to shareholders inadvertently provided for a fee based on
the Fund's average daily net assets, which formulation would not include assets
acquired with leverage.
At an in person meeting held on November 1, 2005, the Board of Trustees,
including a majority of the Board's Independent Trustees, unanimously approved,
subject to shareholder approval, a corrective amendment to the Fund's investment
advisory agreement to revert to the intended fee schedule - that is, the
schedule based on the Fund's average daily managed assets in effect on April 15,
2004. In the course of the review of the corrective amendment, the Board
considered information about the Fund and its performance prior to and after
Highland began managing the Fund and information about Highland and the nature,
extent and quality of services provided by Highland because the Board concluded
that the effectiveness of Highland's performance of its duties under the
investment advisory agreement was potentially germane to a decision to approve
the corrective amendment. The Board also concluded that the limited nature of
the amendment and the circumstances leading to the need to consider the
amendment rendered other information that it would normally review in the
context of reapproving the entire investment advisory agreement not relevant to
a decision to approve the amendment. Consequently, the Board concluded that,
based on the materials presented to it at this meeting and conversations with
representatives of Highland, the Fund's auditors, Fund counsel and independent
counsel to the Independent Trustees, it would be unfair to penalize Highland for
a drafting error in the investment advisory agreement given that (i) the prior
Board had approved a fee schedule based on average daily managed assets, (ii)
both the prior Board and Highland had intended that the Fund's shareholders
approve a fee on the same basis and (iii) the fee described in the Fund's 2004
proxy statement and the investment advisory agreement was a mistake that should
be corrected. The Board also noted that a substantial majority of closed-end
funds that utilize leverage pay advisory fees based on total assets rather than
net assets and that since Highland had become the Fund's investment adviser, the
Fund had enjoyed performance superior to that of other leveraged bank loan funds
and, on an adjusted basis, the other unleveraged bank loan funds. On December 2,
2005, the Fund filed preliminary proxy soliciting materials with the Securities
and Exchange Commission (the "Commission") relating to the corrective amendment.
The Fund and Highland are currently discussing the matters set forth in such
preliminary proxy soliciting materials with the staff of the Commission, which
has questioned whether the Fund should seek an exemptive order in connection
with the proposed amendment. Pending the outcome of such discussions and
approval of the corrective amendment by shareholders of the Fund, the Fund will
continue to accrue advisory fees on the basis of aver-
24
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
age daily managed assets, but will escrow the difference between the advisory
fees calculated on that basis and advisory fees calculated on the basis of
average daily net assets.
ADMINISTRATION FEES
Highland provides administrative services to the Fund for a monthly
administration fee at the annual rate of 0.20% of the Fund's average daily
managed net assets. Under a separate sub-administration agreement, Highland has
delegated certain administrative functions to PFPC Inc. ("PFPC"). For the six
months ended February 28, 2006, the effective administration fee rate was 0.24%.
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 $150,018, $182,337 and $67,651 of
CDSC on Class A, Class B and Class C share redemptions, respectively.
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan"), which requires the payment of a monthly service fee to the Distributor
at the annual rate not to exceed 0.25% of the average daily net assets
attributable to Class A, Class B and Class C 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 (exclusive of investment advisory fees,
administration fees, distribution and service fees, brokerage commissions,
interest, facility expense, taxes and extraordinary expenses, if any) exceed
0.15% 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 any of its other
officers, all of whom are employees of Highland.
The Fund pays Trustees who are not interested persons (as defined in the 1940
Act) each an annual retainer of $25,000 for services provided as Trustees of the
Fund.
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 $718,221,540
and $390,359,783, respectively.
NOTE 6. PERIODIC REPURCHASE OFFERS
The Fund has adopted a fundamental policy to offer each fiscal 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 February, May, August, and November. 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 November and February Repurchase Offers, 8.38% and 5.00%, respectively, of
shares outstanding were repurchased.
NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS
The Fund 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 Fund may incur certain costs and delays in
receiving payment or may suffer a loss of principal and/or interest. When the
Fund purchases a participation of a Senior Loan interest, the Fund typically
enters into a contractual agreement with the lender or other third party selling
the participation, not with the borrower directly. As such, the Fund assumes the
credit risk of the Borrower, selling participant or other persons
interpositioned between the Fund and the Borrower. The ability of Borrowers to
meet their obliga-
25
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
tions 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 Fund on a participation
basis.
Principal
Selling Participant Amount Value
- ---------------------------------------------------------------------------
CSFB:
Quality Distributions, Inc.
Term Loan $964,646 $969,470
NOTE 8. LOAN AGREEMENT
Effective October 18, 2004, and amended on November 14, 2005, the Fund entered
into a $400,000,000 secured loan agreement with Citicorp North America, Inc.
("Citicorp") replacing a previous agreement. The Fund is required to maintain
certain asset coverage with respect to amounts outstanding under the agreement.
At February 28, 2006, the Fund had one term loan outstanding with Citicorp,
totaling $235,000,000. The interest rate charged on this loan at February 28,
2006 was 4.58%. The average daily loan balance was $228,243,106 at weighted
average interest rate of 4.11%. The Fund was required to maintain certain asset
coverage with respect to the loan. Interest expense of $4,772,528 is included on
the Statement of Operations.
NOTE 9. LOAN AGREEMENT ASSET COVERAGE
REQUIREMENTS
Asset
Coverage per
Total Amount $1,000 of
Date Outstanding Indebtedness
- ----------------------------------------------------------------
02/28/2006 $235,000,000 $7,089
- ----------------------------------------------------------------
08/31/2005 250,000,000 5,129
- ----------------------------------------------------------------
08/31/2004 95,000,000 8,038
- ----------------------------------------------------------------
08/31/2003 59,500,000 5,156
- ----------------------------------------------------------------
08/31/2002 74,000,000 3,701
- ----------------------------------------------------------------
08/31/2001 88,000,000 3,908
- ----------------------------------------------------------------
08/31/2001 19,000,000 6,739
NOTE 10. UNFUNDED LOAN COMMITMENTS
As of February 28, 2006, the Portfolio had unfunded loan commitments of
$29,025,465, which could be extended at the option of the Borrower, pursuant to
the following loan agreements:
Unfunded
Loan
Borrower Commitment
--------------------------------------------------------
Covanta Energy Corp. $ 1,000,000
--------------------------------------------------------
Cricket Communications, Inc. 5,000,000
--------------------------------------------------------
Decrane Aircraft Holdings, Inc. 2,000,000
--------------------------------------------------------
Dobson Cellular Systems, Inc. 625,000
--------------------------------------------------------
Eastman Kodak Co. 2,411,765
--------------------------------------------------------
Federal-Mogul Corp. 117,897
--------------------------------------------------------
Flatiron Re Ltd. 2,121,053
--------------------------------------------------------
Hertz Corp. 1,172,000
--------------------------------------------------------
Infor Global Solutions S.A.R.L. 1,170,000
--------------------------------------------------------
Interstate Bakeries Corp. 7,500,000
--------------------------------------------------------
NES Rentals Holdings, Inc. 666,500
--------------------------------------------------------
Trump Entertainment Resorts, Inc. 1,741,250
--------------------------------------------------------
United Air Lines, Inc. 3,500,000
--------------------------------------------------------
$ 29,025,465
=================
NOTE 11. DISCLOSURE OF SIGNIFICANT RISKS AND
CONTINGENCIES
INDUSTRY FOCUS
The Fund may focus its investments in certain industries, subjecting it to
greater risk than a fund 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 Fund, 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
Investments 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 Fund 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,
26
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2006 HIGHLAND FLOATING RATE ADVANTAGE FUND
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 Fund 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 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 Fund'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.
27
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
Advantage 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.
28
HIGHLAND FLOATING RATE ADVANTAGE FUND SEMI-ANNUAL REPORT, FEBRUARY 28, 2006
HIGHLAND FUNDS
MANAGED BY CAPITAL MANAGEMENT, L.P.
WWW.HIGHLANDFUNDS.COM SEMIADV
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 ADVANTAGE 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.