UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08953
HIGHLAND FLOATING RATE FUND
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(Exact name of registrant as specified in charter)
Two Galleria Tower
13455 Noel Road, Suite 800
DALLAS, TEXAS 75240
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(Address of principal executive offices) (Zip code)
James D. Dondero
Highland Capital Management, L.P.
Two Galleria Tower
13455 Noel Road, Suite 800
DALLAS, TEXAS 75240
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(Name and address of agent for service)
registrant's telephone number, including area code: (877) 665-1287
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Date of fiscal year end: AUGUST 31
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Date of reporting period: FEBRUARY 28, 2007
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
[LOGO OMITTED]
HIGHLAND FUNDS
managed by
Highland Capital Management, L.P.
HIGHLAND FLOATING RATE FUND
SEMI-ANNUAL REPORT
FEBRUARY 28, 2007
[LOGO] HIGHLAND FLOATING RATE FUND [LOGO]
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TABLE OF CONTENTS
Fund Profile ............................................................. 1
Financial Statements ..................................................... 2
Investment Portfolio .................................................. 3
Portfolio Statement of Assets and Liabilities ......................... 15
Portfolio Statement of Operations ..................................... 16
Portfolio Statements of Changes in Net Assets ......................... 17
Portfolio Statement of Cash Flows ..................................... 18
Portfolio Financial Highlights ........................................ 19
Fund Statement of Assets and Liabilities .............................. 20
Fund Statement of Operations .......................................... 21
Fund Statements of Changes in Net Assets .............................. 22
Fund Financial Highlights ............................................. 24
Notes to Financial Statements ......................................... 28
Important Information About This Report .................................. 35
Economic and market conditions change frequently.
There is no assurance that the trends described in this report will
continue or commence.
A PROSPECTUS MUST PRECEDE OR ACCOMPANY THIS REPORT. PLEASE READ THE PROSPECTUS
CAREFULLY BEFORE YOU INVEST.
FUND PROFILE
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HIGHLAND FLOATING RATE FUND
Objective
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The Highland Floating Rate Fund (the "Fund") invests all of its investable
assets in Highland Floating Rate Limited Liability Company (the
"Portfolio"). The Fund and the Portfolio seek a high level of current
income consistent with preservation of capital.
Net Assets as of February 28, 2007
- --------------------------------------------------------------------------------
$2,061.3 million
Portfolio Data as of February 28, 2007
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The information below provides a snapshot of the Portfolio at the end of
the reporting period. The Portfolio is actively managed and the
composition of its investment portfolio will change over time.
QUALITY BREAKDOWN AS OF 02/28/07 (%)
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Baa 1.0
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Ba 25.9
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B 45.3
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Caa 5.2
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NR 22.6
TOP 5 SECTORS AS OF 02/28/07 (%)
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Retail 9.7
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Transportation -- Auto 7.7
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Utility 6.5
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Cable -- International Cable 6.0
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Broadcasting 5.4
TOP 10 HOLDINGS AS OF 02/28/07 (%)
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HCA, Inc. 2.9
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Movie Gallery, Inc. 2.8
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Cricket Communications, Inc. 2.2
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Ypso Holding SA 2.0
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Ford Motor Co. 2.0
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Delphi Corporation 1.9
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Amsterdamse Beheer-En Consultingmaatschappij B.V. 1.8
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Blockbuster Entertainment Corp. 1.7
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Metro PCS Wireless, Inc. 1.6
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Millennium Digital Media Systems, LLC 1.6
Quality is calculated as a percentage of total notes and bonds.
Sectors and holdings are calculated as a percentage of net assets.
Semi-Annual Report | 1
FINANCIAL STATEMENTS
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FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND
A GUIDE TO UNDERSTANDING THE FUND'S
FINANCIAL STATEMENTS
INVESTMENT PORTFOLIO The Investment Portfolio details all of
the Portfolio's holdings and their market
value as of the last day of the reporting
period. Portfolio holdings are organized
by type of asset and industry to
demonstrate areas of concentration and
diversification.
STATEMENT OF ASSETS AND LIABILITIES These statements detail the Fund's and the
Portfolio's assets, liabilities, net
assets and, with respect to the Fund,
share price for each share class as of the
last day of the reporting period. Net
assets are calculated by subtracting all
liabilities (including any unpaid
expenses) from the total of 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 These statements detail income earned by
the Fund and the Portfolio and the
expenses accrued by the Fund during the
reporting period. The Statement of
Operations also shows any net gain or loss
realized on the sales of holdings during
the period, as well as any unrealized
gains or losses recognized over the
period. The total of these results
represents net increase or decrease in net
assets from operations.
STATEMENTS OF CHANGES IN NET ASSETS These statements demonstrate how the
Fund's and the Portfolio's net assets were
affected by their operating results,
distributions to shareholders and
shareholder transactions (e.g.,
subscriptions, redemptions and dividend
reinvestments) during the reporting
period. The Statement of Changes in Net
Assets, with respect to the Fund, 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 also disclose the
classes' performance and certain key
ratios of the Fund and the Portfolio
(e.g., class expenses and net investment
income as a percentage of average net
assets).
NOTES TO FINANCIAL STATEMENTS These notes disclose the organizational
background of the Fund and the Portfolio,
their 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 | Semi-Annual Report
INVESTMENT PORTFOLIO (UNAUDITED)
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FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (a) - 78.4%
AEROSPACE - AEROSPACE/DEFENSE - 2.2%
AWAS Capital, Inc.
12,215,153 First Priority Term Loan,
7.13%, 03/15/13 ............................. 12,184,615
7,003,663 Second Priority Term Loan,
11.38%, 03/15/13 ............................ 7,108,718
6,500,000 DeCrane Aircraft Holdings, Inc.
First Lien Term Loan, 02/13/13 (b) .......... 6,565,000
1,903,900 Forgings International Holdings.
(Firth Rixon) (United Kingdom)
Term D (USD), 9.73%, 03/22/15 ............... 1,937,218
Forgings International Ltd.
(Firth Rixon) (United Kingdom)
2,403,900 Term B2 (USD), 7.83%, 09/07/14 .............. 2,445,968
2,403,900 Term C2 (USD), 8.08%, 09/07/15 .............. 2,445,968
1,980,000 IAP Worldwide Services, Inc.
First Lien Term Loan,
9.69%, 12/30/12 ............................. 1,976,278
TDS Investor Corp. (Travelport)
6,916,660 Dollar Term Loan,
8.37%, 08/23/13 (b) ......................... 6,992,744
662,496 Synthetic Letter of Credit,
8.36%, 08/23/13 (b) ......................... 670,572
2,943,529 Vought Aircraft Industries, Inc.
Term Loan, 7.88%, 12/22/11 .................. 2,976,674
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45,303,755
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AEROSPACE - AIRLINES - 1.3%
Continental Airlines, Inc.
1,714,286 Tranche A-1 Term Loan,
8.74%, 06/01/11 ............................. 1,733,571
4,285,714 Tranche A-2 Term Loan,
8.74%, 06/01/11 ............................. 4,333,929
2,000,000 Delta Airlines, Inc.
Trade Claim, 12/12/07 (b) ................... 1,176,680
Northwest Airlines, Inc.
5,000,000 Term Loan DIP, 7.85%, 08/21/08 .............. 5,035,150
1,500,000 U.S. Bank Trade Claim, 08/21/13 (b) ......... 1,307,505
12,500,000 U S Airways, Inc.
Term Loan, 8.87%, 03/31/11 .................. 12,610,500
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26,197,335
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BROADCASTING - 3.3%
2,403,831 Havana Bidco Ltd.
USD Term Loan B,
7.88%, 08/31/14 ............................. 2,412,845
Millennium Digital Media Systems, LLC
27,169,415 Facility B Term Loan,
8.90%, 06/30/11 ............................. 27,375,549
141,685 Revolver, 06/30/11 (b) (c) .................. 141,546
1,037,839 Term Facility, 06/30/11 (b) ................. 1,045,714
NextMedia Operating, Inc
1,185,930 Delay Draw Term Loan,
7.32%, 11/15/12 ............................. 1,182,965
2,668,341 Initial First Lien Term Loan,
7.32%, 11/15/12 ............................. 2,669,996
11,000,000 Paxson Communications Corp.
First Lien Term Loan,
8.62%, 01/15/12 ............................. 11,268,180
1,500,000 Persona Communications Corp. (Canada)
Second Lien Term Loan,
11.37%, 04/12/14 ............................ 1,530,000
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
BROADCASTING (CONTINUED)
1,000,000 ProQuest-CSA LLC
First Lien Term Loan,
8.35%, 02/09/14 ............................. 1,011,250
19,307,859 Young Broadcasting, Inc.
Term Loan, 7.92%, 11/03/12 (b) .............. 19,398,220
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68,036,265
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CABLE - INTERNATIONAL CABLE - 1.0%
1,851,515 Bragg Communications, Inc.
(Canada)
Term Loan B, 7.07%, 08/31/11 ................ 1,859,625
2,812,500 Puerto Rico Cable Acquisition Co., Inc.
(Puerto Rico)
First Lien Term Loan,
8.63%, 07/28/11 ............................. 2,837,109
San Juan Cable, LLC (Puerto Rico)
2,475,007 First Lien Term Loan,
7.37%, 10/31/12 ............................. 2,487,382
1,700,000 Second Lien Term Loan,
10.89%, 10/31/13 ............................ 1,727,625
UPC Broadband Holding BV
(Netherlands)
4,971,250 Facility J2, 7.64%, 03/31/13 ................ 4,998,691
3,971,250 Facility K2, 7.64%, 03/31/13 ................ 3,994,124
3,000,000 Virgin Media, Inc. (United Kingdom)
B4 Facility, 7.36%, 09/03/12 ................ 3,019,260
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20,923,816
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CABLE - US CABLE - 3.3%
123,952 Century Cable Holdings LLC
Term Loan, 10.25%, 06/30/09 ................. 121,783
Cequel Communications LLC
6,000,000 Bridge Term Loan,
10.32%, 10/30/07 ............................ 6,015,000
3,750,000 First Lien Term Loan B,
7.61%, 11/05/13 ............................. 3,788,963
3,000,000 NC Term Facility,
10.32%, 10/30/07 ............................ 3,007,500
2,000,000 Second Lien Tranche A Term Loan,
9.87%, 05/05/14 ............................. 2,062,500
2,000,000 Term Loan, 11/05/13 (b) ..................... 2,020,780
Charter Communications
Operating LLC
20,108,684 Term Loan, 7.99%, 04/28/13 .................. 20,277,195
3,000,000 Term Loan, 8.13%, 04/28/13 .................. 3,025,140
1,994,924 Tranche B Term Loan,
8.13%, 04/07/11 ............................. 2,006,933
Knology, Inc.
1,727,350 New Term Loan, 7.85%, 06/29/10 .............. 1,740,305
5,122,290 Second Lien Term Loan,
15.35%, 06/29/11 ............................ 5,865,022
3,020,000 Mediacom Broadband Group
Tranche A Term Loan,
7.37%, 03/31/10 ............................. 2,983,579
1,000,000 Mediacom Illinois, LLC
Tranche C Term Loan,
7.17%, 01/31/15 ............................. 1,005,320
Northland Cable Television, Inc.
4,950,000 First Lien Term Loan B,
9.38%, 12/22/12 ............................. 4,962,375
4,000,000 Second Lien Term Loan,
13.38%, 06/22/13 ............................ 4,000,000
WideOpenWest Finance LLC
4,000,000 First Lien Term Loan,
7.68%, 05/01/13 ............................. 4,040,000
See accompanying Notes to Financial Statements. | 3
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
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FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
CABLE - US CABLE (CONTINUED)
WideOpenWest Finance LLC (continued)
1,000,000 Second Lien Term Loan,
10.37%, 05/01/14 ............................ 1,033,120
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67,955,515
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CHEMICALS - COMMODITY & FERTILIZER - 0.1%
2,033,334 Ferro Corp.
Term Loan, 8.07%, 06/06/12 (c) .............. 2,033,984
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CHEMICALS - SPECIALTY CHEMICALS - 0.8%
1,800,000 Ineos U S Finance LLC
Term Loan A4, 7.34%, 12/14/12 ............... 1,802,484
1,354,545 Innophos, Inc.
Tranche B Term Loan,
7.57%, 08/13/10 ............................. 1,359,625
975,197 Kraton Polymers Group of Cos.
Term Loan, 7.38%, 12/23/10 .................. 984,646
1,600,000 Mosaic Co.
Tranche B Term Loan,
7.11%, 12/01/13 ............................. 1,616,512
956,000 Nusil Technology LLC
Tranche B Term Loan,
8.07%, 10/24/13 ............................. 963,170
3,000,000 Panda Hereford Ethanol, L.P.
Tranche A Term Loan,
9.07%, 07/28/13 ............................. 2,970,000
6,000,000 Solutia, Inc.
Add-on Term Loan B,
8.36%, 03/31/08 (b) ......................... 6,091,920
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15,788,357
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CONSUMER DURABLES - 0.1%
2,862,201 Rexair LLC
Additional Term Facility,
9.62%, 06/30/10 ............................. 2,869,357
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CONSUMER NON-DURABLES - 1.4%
1,985,000 Amscan Holdings
Term Loan B, 8.39%, 12/23/12 ................ 2,007,947
1,555,556 Camelbak Products, Inc.
Second Lien Term Loan,
13.41%, 02/04/12 ............................ 1,419,444
3,000,000 DS Waters of America, Inc.
Term Loan B, 7.86%, 10/27/12 ................ 3,015,000
367,974 Eastman Kodak Co.
Term B-1 Advance,
7.57%, 10/18/12 ............................. 369,354
2,778,214 Hanesbrands, Inc.
Term Loan B, 7.63%, 09/05/13 ................ 2,804,769
1,702,072 Hillman Group, Inc.
Term Loan B, 8.50%, 03/30/11 ................ 1,719,093
429,361 Polaroid Corp.
Term Loan, 12.38%, 04/27/11 ................. 431,508
Solo Cup Co.
5,758,234 Term B1 Loan, 8.82%, 02/27/11 ............... 5,851,287
868,833 Term B1 Loan, 8.87%, 02/27/11 ............... 882,873
1,500,000 Term B1 Loan, 02/27/11 (b) .................. 1,524,240
1,977,440 Spectrum Brands
U. S. Dollar Term Loan B,
8.60%, 02/07/12 ............................. 1,998,203
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
CONSUMER NON-DURABLES (CONTINUED)
UCG Paper Crafts, Inc.
400,000 First Lien Synthetic Facility,
5.37%, 02/17/13 ............................. 401,000
1,588,000 First Lien Term Facility,
8.57%, 02/17/13 ............................. 1,591,970
1,985,000 Second Lien Term Loan,
12.82%, 08/17/13 ............................ 2,002,369
3,684,375 VJCS Acquisition, Inc.
Term B Facility, 7.62%, 07/19/13 ............ 3,684,375
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29,703,432
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DIVERSIFIED MEDIA - 3.3%
3,194,727 American Lawyer Media Holdings, Inc.
First Lien Term Loan,
7.87%, 03/05/10 ............................. 3,202,043
375,889 Black Press Group Ltd. (Canada)
Term B-2 Tranche Loan,
7.50%, 08/01/13 ............................. 379,648
619,111 Black Press U S Partnership
Term B-1 Tranche Loan,
7.50%, 08/01/13 ............................. 625,302
3,990,000 Cinemark USA, Inc.
Term Loan, 7.38%, 10/05/13 .................. 4,030,858
1,263,083 Day International, Inc.
First Lien U.S. Term Loan,
7.86%, 12/05/12 ............................. 1,275,714
2,375,000 Deluxe Canada Holdings, Inc. (Canada)
First Lien Tranche C Term Loan,
8.36%, 01/28/11 ............................. 2,391,340
Endurance Business Media, Inc.
1,911,667 First Lien Term Loan,
8.07%, 07/24/13 ............................. 1,933,173
2,000,000 Second Lien Term Loan,
12.57%, 01/24/14 ............................ 2,015,000
1,000,000 HIT Entertainment PLC
(United Kingdom)
First Lien Term Advance,
03/20/12 (b) (e) ............................ 1,008,130
2,970,000 Merrill Communications LLC
Combined Term Loan,
7.59%, 05/15/11 ............................. 2,996,433
Metro-Goldwyn-Mayer Holdings II,
Inc./LOC Acquisition Co.
9,399,190 Tranche B Term Loan,
8.61%, 04/08/12 ............................. 9,508,315
12,750,000 Tranche B Term Loan,
8.62%, 04/08/12 ............................. 12,898,028
North American Membership
Group, Inc.
982,500 First Lien Tranche B Term Loan,
8.61%, 05/19/11 ............................. 962,850
3,000,000 Second Lien Term Loan,
12.86%, 11/18/11 ............................ 2,940,000
Penton Media, Inc.
3,500,000 First Lien Term Loan,
7.57%, 02/01/13 (b) ......................... 3,526,550
2,500,000 Second Lien Term Loan,
02/01/14 (b) ................................ 2,551,575
Riverdeep Interactive Learning USA, Inc.
2,500,000 Bridge Facility, 11.07%, 12/05/14 ........... 2,503,125
7,000,000 Term Loan, 8.10%, 12/20/13 (b) .............. 7,074,340
Springer Science+Business Media S.A. (Germany)
562,496 Tranche B-2, 7.99%, 09/16/11 ................ 569,528
562,496 Tranche C-2, 8.37%, 07/05/14 ................ 571,637
4 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
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FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
DIVERSIFIED MEDIA (CONTINUED)
Springer Science+Business Media S.A.
(continued)
338,124 USD Tranche B-2 Add On,
7.99%, 07/05/13 ............................. 342,351
338,124 USD Tranche C-2 Add On,
8.37%, 07/05/14 ............................. 343,619
366,301 USD Tranche E-2 Add On,
8.37%, 07/05/14 ............................. 372,254
4,000,000 West Corp.
Term B-2 Loan, 7.75%, 10/24/13 .............. 4,042,480
-------------
68,064,293
-------------
ENERGY - EXPLORATION & PRODUCTION - 0.7%
1,000,000 MEG Energy Corp. (Canada)
Initial Term Loan, 09/29/13 (b) ............. 998,120
3,000,000 Paramount Resources Ltd. (Canada)
Term Loan, 9.86%, 08/28/12 .................. 2,992,500
1,000,000 Superior Offshore International, LLC
Term Loan, 02/15/12 (b) ..................... 1,000,000
Targa Resources, Inc.
772,620 Synthetic Term Loan,
5.24%, 10/31/12 ............................. 782,757
3,179,009 Term Loan, 7.63%, 10/31/12 .................. 3,211,435
5,940,000 TARH E&P Holdings, LP
Second Lien Term Loan,
10.91%, 11/15/10 ............................ 5,940,000
-------------
14,924,812
-------------
ENERGY - OTHER ENERGY - 1.5%
Alon USA Energy, Inc.
221,111 Edgington Facility,
7.57%, 06/22/13 ............................. 223,322
1,768,889 Paramount Facility,
7.66%, 06/22/13 ............................. 1,783,270
Coffeyville Resources, LLC
324,324 Funded Letter of Credit,
8.36%, 12/28/10 ............................. 328,378
1,675,676 Tranche D Term Loan,
8.36%, 12/28/13 ............................. 1,695,918
4,500,000 Endeavour International Holding B.V.
(Netherlands)
Second Lien Term Loan,
12.37%, 11/01/11 ............................ 4,635,000
5,969,820 Helix Energy Solutions Group, Inc.
Term Loan, 7.33%, 07/01/13 .................. 6,013,937
Monitor US Finco, Inc.
4,000,000 First Lien Term Loan,
10.82%, 01/11/14 ............................ 4,020,000
3,000,000 Second Lien Term Loan,
17.32%, 01/11/15 ............................ 3,007,500
359,399 SemCrude LP
U.S. Term Loan,
7.59%, 03/16/11 ............................. 362,321
5,000,000 Volnay Acquisition Co. I (CGG)
Term Loan, 7.32%, 01/12/14 .................. 5,043,750
4,000,000 Willbros USA, Inc.
Syndicate Term Loan,
10.25%, 10/27/09 ............................ 4,020,000
-------------
31,133,396
-------------
ENERGY - REFINING - 0.3%
3,000,000 Connacher Finance Corp.
Term Loan, 8.61%, 10/20/13 .................. 3,026,250
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
ENERGY - REFINING (CONTINUED)
2,500,000 J Ray McDermott SA (Panama)
Synthetic Facility, 5.27%, 06/06/12 ......... 2,525,000
-------------
5,551,250
-------------
ENERGY - SERVICE & EQUIPMENT - 0.1%
1,923,567 Dresser, Inc.
Term Loan B, 8.13%, 10/31/13 ................ 1,948,804
-------------
FINANCIAL - 1.1%
1,750,000 AlixPartners, LLP
Tranche B Term Loan,
7.86%, 10/12/13 ............................. 1,768,060
2,000,000 American Wholesale Insurance
Group, Inc.
Second Lien Term Loan B,
12.82%, 04/27/12 ............................ 2,005,000
2,778,214 Arias Acquisitions, Inc.
Term Loan, 9.11%, 07/26/11 .................. 2,555,957
Checksmart Financial Co.
1,985,000 First Lien Tranche B Term Loan,
8.13%, 05/01/12 ............................. 1,992,444
2,500,000 Second Lien Term Loan,
10.89%, 05/01/13 ............................ 2,531,250
4,250,000 Crump Group, Inc.
Tranche B Term Loan,
8.37%, 12/19/12 ............................. 4,255,312
997,500 First American Payment Systems, L.P.
Term Loan, 8.63%, 10/06/13 ................. 1,004,981
Flatiron Re Ltd. (Bermuda)
1,684,211 Closing Date Term Loan,
9.61%, 12/29/10 ............................. 1,705,263
815,789 Delayed Draw Term Loan,
9.61%, 12/29/10 (c) ......................... 824,967
951,857 FleetCor Technologies, Inc.
Term Loan, 9.08%, 06/30/11 ................. 958,996
National Money Mart Co. (Canada)
1,149,661 Canadian Borrower Term Loan,
10.00%, 10/30/12 ............................ 1,156,846
845,339 Delayed Draw Term Loan,
10.00%, 10/30/12 ............................ 850,622
1,000,000 Online Resources Corp.
Term Loan A, 02/09/12 (b) ................... 1,000,000
-------------
22,609,698
-------------
FOOD AND DRUG - 0.7%
869,565 Bi-Lo LLC
Term Loan, 9.36%, 07/01/11 .................. 877,391
4,000,000 CTI Food Holdings Co. LLC
Second Lien Secured Term Loan,
11.36%, 06/02/12 ............................ 4,060,000
669,026 Duloxetine Royalty Sub
(Cayman Islands)
Term Loan, 9.87%, 10/18/13 .................. 674,043
8,000,000 Rite Aid Corp.
Senior Secured Bridge Loan,
10/23/07 (b) ................................ 7,960,000
1,500,000 Weight Watchers International, Inc.
Term Loan B, 6.88%, 01/26/14 ................ 1,508,820
-------------
15,080,254
-------------
FOOD/TOBACCO - BEVERAGES & BOTTLING - 0.3%
684,482 AFC Enterprises, Inc.
Tranche B Term Loan,
7.38%, 05/09/11 ............................. 689,615
See accompanying Notes to Financial Statements. | 5
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
FOOD/TOBACCO - BEVERAGES & BOTTLING (CONTINUED)
3,300,000 National Distributing Co., Inc.
Second Lien Term Loan,
11.85%, 06/01/10 ............................ 3,308,250
1,995,000 PBM Holdings, Inc.
Term Loan, 8.07%, 09/29/12 .................. 2,009,963
-------------
6,007,828
-------------
FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS - 0.6%
2,598,093 Chiquita Brands LLC
Term Loan C, 8.38%, 06/28/12 ................ 2,643,560
FSB Holdings, Inc.
1,500,000 First Lien Tranche B Term Loan,
7.88%, 09/29/13 ............................. 1,518,750
1,000,000 Second Lien Term Loan,
11.13%, 03/29/14 ............................ 1,012,500
Gate Gourmet Borrower LLC
678,682 Dollar Term Loan First Lien,
8.10%, 03/09/12 ............................. 687,166
111,100 First Lien Letter of Credit,
8.11%, 12/31/10 ............................. 112,489
3,849,107 Michelina's
Term Loan, 8.41%, 04/02/11 .................. 3,902,032
4,879,919 Nellson Nutraceutical, Inc.
Second Lien Term Loan,
14.25%, 04/04/10 (d) ........................ 2,139,015
-------------
12,015,512
-------------
FOOD/TOBACCO - RESTAURANTS - 1.5%
4,000,000 Aramark Canada Ltd. (Canada)
Canadian Term Loan,
01/26/14 (b) ................................ 4,045,000
Aramark Corp.
790,097 Line of Credit Facility,
7.45%, 01/26/14 ............................. 799,808
11,209,903 U.S. Term Loan, 7.47%, 01/26/14 ............. 11,338,368
Buffets Holdings, Inc.
2,221,875 Revolver, 10.01%, 11/01/11 .................. 2,217,542
476,577 Revolver, 8.37%, 11/01/13 ................... 475,647
4,416,667 Term Loan, 8.37%, 11/01/13 .................. 4,444,271
1,466,980 Caribbean Restaurant LLC
Tranche B Term Loan,
8.07%, 06/30/09 ............................. 1,479,215
1,980,000 El Pollo Loco, Inc.
Term Loan, 8.40%, 11/18/11 .................. 1,990,534
1,462,500 Garden Fresh Restaurant Corp.
First Lien Term Loan B,
8.62%, 06/22/11 ............................. 1,469,813
982,188 New World Restaurant Group, Inc.
First Lien Term Loan,
8.45%, 03/31/11 ............................. 984,643
1,000,000 Sbarro, Inc.
Term Loan B, 7.82%, 01/31/14 ................ 1,011,250
-------------
30,256,091
-------------
FOREST PRODUCTS - PACKAGING - 1.1%
4,222,507 Consolidated Container Holdings LLC
Term Loan, 8.63%, 12/15/08 .................. 4,238,341
9,340,264 Georgia-Pacific Corp.
First Lien Term B,
7.38%, 02/14/13 ............................. 9,438,897
6,352,545 Graham Packaging Co.
Term Loan B, 7.73%, 10/07/11 ................ 6,415,435
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
FOREST PRODUCTS - PACKAGING (CONTINUED)
JSG Acquisitions (Smurfit Kappa)
(Ireland)
1,000,000 B1 Term Loan Facility,
7.75%, 12/01/13 ............................. 1,008,760
1,000,000 C1 Term Loan Facility,
8.24%, 12/01/13 ............................. 1,013,760
-------------
22,115,193
-------------
FOREST PRODUCTS - PAPER - 0.3%
1,714,720 Appleton Papers, Inc.
Term Loan, 7.63%, 06/11/10 .................. 1,725,437
2,494,209 Graphic Packaging International, Inc.
Tranche C Term Loan,
7.86%, 08/09/10 ............................. 2,529,278
1,500,000 NewPage Corp.
Term Loan, 7.63%, 08/01/13 .................. 1,518,750
135,329 Verso Paper Holdings LLC
Term B Loan, 7.13%, 08/01/13 ................ 135,922
-------------
5,909,387
-------------
GAMING/LEISURE - GAMING - 0.6%
3,956,125 CCM Merger, Inc./MotorCity Casino
Term Loan B, 7.37%, 04/25/12 ................ 3,984,966
1,000,000 Great Canadian Gaming Corp.
Tranche B Term Loan,
02/14/14 (b) ................................ 1,008,440
2,000,000 Lakes Gaming and Resorts, LLC
Term Loan, 11.62%, 06/21/10 ................. 2,025,000
14,526 OpBiz LLC
Term Loan B, 9.51%, 08/31/10 ................ 14,145
VML U S Finance LLC
4,000,000 Term B Funded Project Loan,
8.12%, 05/25/13 ............................. 4,043,600
2,000,000 Term B Funded Project Loan,
02/01/13 (b) ................................ 2,021,800
-------------
13,097,951
-------------
GAMING/LEISURE - OTHER LEISURE - 1.8%
1,926,748 AMF Bowling Worldwide, Inc.
Term Loan B, 8.40%, 08/27/09 ................ 1,897,847
2,325,000 BRE/ESA MEZZ 5 LLC
Mezzanine D Loan,
8.57%, 07/11/08 ............................. 2,330,813
12,675,000 BRE/Homestead MEZZ 4 LLC
Mezzanine D Loan,
8.60%, 07/11/08 ............................. 12,706,688
5,000,000 Edge Las Vegas Development LLC
Second Lien Term Loan,
14.32%, 06/01/07 ............................ 5,025,000
Fontainebleu Florida Hotel LLC
3,000,000 Tranche A Term Loan,
8.10%, 05/11/08 ............................. 3,000,000
2,000,000 Tranche B Term Loan,
8.10%, 05/11/08 ............................. 2,000,000
1,000,000 Greenwood Racing Inc.
Term Loan, 7.57%, 11/28/11 .................. 1,010,000
1,664,415 Kuilima Resort Co.
First Lien Term Loan,
8.07%, 09/30/10 (b) ......................... 1,655,060
2,000,000 Riverdeep Interactive Learning USA, Inc.
Term Loan, 8.88%, 11/30/11 .................. 2,000,000
2,219,972 Trump Entertainment Resorts, Inc.
Term Loan B-1, 7.87%, 05/20/12 .............. 2,242,171
6 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
GAMING/LEISURE - OTHER LEISURE (CONTINUED)
1,950,000 Wallace Theaters
First Lien Term Loan,
8.62%, 07/31/09 ............................. 1,969,500
966,044 Yellowstone Mountain Club, LLC
Term Loan, 7.73%, 09/30/10 .................. 966,411
-------------
36,803,490
-------------
HEALTHCARE - ACUTE CARE - 3.1%
3,402,421 Alliance Imaging, Inc.
Tranche C1 Term Loan,
7.88%, 12/29/11 ............................. 3,432,192
Cornerstone Healthcare Group
Holding, Inc.
375,017 Revolver, 9.35%, 07/15/11 (c) (i) ........... 360,477
1,029,361 Senior Subordinated Unsecured
Notes, 14.00%, 07/15/12 (i) ................. 936,719
2,062,459 Term Loan, 9.35%, 07/15/11 (i) .............. 2,046,990
2,992,500 Encore Medical Finance LLC
Term Loan, 7.88%, 11/04/13 .................. 3,005,607
HCA, Inc.
1,000,000 Tranche A Term Loan,
7.86%, 11/17/12 ............................. 1,010,260
52,000,000 Tranche B Term Loan,
7.11%, 11/17/13 ............................. 52,678,080
-------------
63,470,325
-------------
HEALTHCARE - ALTERNATE SITE SERVICES - 1.0%
1,442,482 American HomePatient, Inc.
Secured Promissory Note,
6.79%, 08/01/09 (i) ......................... 1,442,482
FHC Health Systems, Inc.
553,955 Delayed Draw Term Loan,
13.40%, 12/18/09 ............................ 573,343
791,364 Initial Term Loan,
11.40%, 12/18/09 ............................ 819,062
1,500,000 Third Lien Additional Term Loan,
14.37%, 02/09/11 ............................ 1,530,000
5,000,000 Third Lien Term Loan,
15.12%, 02/09/11 ............................ 5,137,500
6,902,010 LifeCare Holdings (Rainier
Acquisition Corp.)
Term Loan, 08/11/12 (b) ..................... 6,707,925
1,970,000 Skilled Healthcare LLC
First Lien Term Loan,
7.60%, 06/15/12 ............................. 1,987,238
331,070 Sunrise Medical Holdings, Inc.
Term Loan B-1, 8.88%, 05/13/10 .............. 330,242
1,950,000 WellCare Health Plans, Inc.
Term Loan, 7.88%, 05/13/09 .................. 1,960,979
-------------
20,488,771
-------------
HEALTHCARE - MEDICAL PRODUCTS - 5.9%
1,889,795 American Medical Systems, Inc.
Term Loan, 7.68%, 07/20/12 .................. 1,906,330
CCS Medical, Inc.
20,163,810 First Lien Term Loan,
8.62%, 09/30/12 (b) ......................... 19,964,390
4,750,000 Second Lien Term Loan,
13.37%, 03/30/13 ............................ 4,643,125
1,950,000 CompBenefits Corp.
Tranche B Term Loan,
8.36%, 04/12/12 ............................. 1,967,063
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
HEALTHCARE - MEDICAL PRODUCTS (CONTINUED)
1,000,000 Golden Gate National Senior
Care LLC
Second Lien Term Loan,
13.11%, 09/14/11 ............................ 1,017,500
Graceway Pharmaceuticals, LLC
1,000,000 First Lien Term Loan B,
7.84%, 12/29/11 ............................. 1,009,060
2,000,000 Second Lien Term Loan,
11.34%, 12/29/12 ............................ 2,026,240
3,482,500 Hanger Orthopedic Group, Inc.
Tranche B Term Loan,
7.87%, 05/26/13 ............................. 3,510,778
5,000,000 Health Management Associates, Inc.
Term Loan B, 02/28/14 (b) ................... 5,046,500
HealthSouth Corp.
1,000,000 Term Loan B, 8.62%, 03/21/10 ................ 1,010,500
12,967,503 Term Loan B, 8.62%, 03/10/13 ................ 13,103,662
MMM Holding, Inc./NAMM Holdings,
Inc./PHMC (Puerto Rico)
895,644 MMM Original Term Loan,
7.60%, 08/22/11 ............................. 872,133
210,740 NAMM Original Term Loan,
7.60%, 08/22/11 ............................. 205,208
137,340 NAMM PHMC Acquistion Term Loan,
7.60%, 08/22/11 ............................. 133,735
734,000 PHMC Acquisition Term Loan,
7.61%, 08/10/11 ............................. 714,733
1,475,044 National Renal Institutes, Inc.
Term Facility, 7.63%, 03/31/13 .............. 1,480,575
Nyco Holdings 3 ApS (Denmark)
12,000,000 Facility B2, 6.20%, 12/29/14 (b) ............ 12,030,000
12,000,000 Facility C2, 6.70%, 12/29/15 (b) ............ 12,090,000
4,000,000 Pharmaceutical Holdings Corp.
Term Loan, 8.57%, 01/30/12 .................. 4,010,000
2,352,456 Reliant Pharmaceuticals, Inc.
First Lien Term Loan,
14.82%, 06/30/08 ............................ 2,375,980
Talecris Biotherapeutics
Holdings Corp.
16,500,000 First Lien Term Loan,
10.50%, 12/08/13 ............................ 16,665,000
7,500,000 Second Lien Term Loan,
11.86%, 12/08/14 ............................ 7,706,250
1,000,000 Triumph Healthcare Second
Holdings LLC
Second Lien Term Loan,
13.60%, 07/28/14 ............................ 997,500
Warner Chilcott Co., Inc.
(Puerto Rico)
782,387 Dovonex Delayed Draw Term Loan,
7.62%, 01/18/12 ............................. 787,895
4,396,953 Tranche B Acquisition Date
Term Loan, 7.49%, 01/18/12 .................. 4,426,720
540,396 Warner Chilcott Corp.
Tranche C Acquisition Date
Term Loan, 7.61%, 01/18/12 .................. 543,941
-------------
120,244,818
-------------
HOUSING - BUILDING MATERIALS - 2.1%
American Buildings Co.
1,544,641 Term Loan A,
8.86%, 12/31/08 ............................. 1,424,407
1,146,090 Term Loan B,
10.00%, 12/31/08 ............................ 1,077,324
See accompanying Notes to Financial Statements. | 7
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
HOUSING - BUILDING MATERIALS (CONTINUED)
2,120,000 Associated Materials Inc.
Term Loan, 8.18%, 08/29/10 .................. 2,134,586
7,314,079 Atrium Cos., Inc.
Closing Date Term Facility,
8.13%, 06/21/12 ............................. 7,364,400
Custom Building Products, Inc.
1,880,825 First Lien Term Loan,
7.61%, 10/20/11 ............................. 1,888,273
1,250,000 Second Lien Term Loan,
9.53%, 04/20/12 ............................. 1,251,825
1,765,667 DESA LLC
Term Loan, 11.12%, 11/26/11 ................. 1,589,100
1,000,000 Jacuzzi Brands Corp.
First Lien Term Loan B, 02/07/14 (b) ........ 1,007,500
4,500,000 Nortek, Inc.
Term Loan, 08/27/11 (b) ..................... 4,531,860
1,588,840 PGT Industries, Inc.
First Lien Tranche A-2 Term Loan,
8.38%, 02/14/12 ............................. 1,601,741
Ply Gem Industries, Inc.
264,256 Canadian Term Loan,
8.37%, 08/15/11 ............................. 268,109
3,963,844 U.S. Term Loan, 8.37%, 08/15/11 ............. 4,021,636
1,000,000 Standard Pacific Corp.
Term Loan B, 6.86%, 05/05/13 ................ 1,000,620
3,578,688 Stile Acquisition Corp. (Canada)
Canadian Term Loan,
7.36%, 04/06/13 ............................. 3,573,106
9,378,736 Stile U S Acquisition Corp.
U S Term Loan, 7.36%, 04/06/13 (b) .......... 9,379,674
-------------
42,114,161
-------------
HOUSING - REAL ESTATE DEVELOPMENT - 3.5%
6,000,000 Edge Star Partners LLC
First Lien Term Loan,
9.36%, 11/18/07 ............................. 6,000,000
EH/Transeastern, LLC/TE TOUSA
4,000,000 Term Loan, 8.25%, 08/01/08 (e) .............. 4,060,000
5,500,000 Term Loan, 10.75%, 08/01/08 ................. 3,052,500
Ginn LA Conduit Lender, Inc.
1,570,079 First Lien Tranche A Credit-Linked
Deposit, 8.29%, 06/08/11 .................... 1,549,480
3,408,499 First Lien Tranche B Term Loan,
8.17%, 06/08/11 ............................. 3,359,519
2,143,382 Giraffe Intermediate, LLC
Mezzanine Note A-1,
7.08%, 08/09/07 ............................. 2,143,382
6,574,553 Lake at Las Vegas Joint Venture
First Lien Term Loan,
10.11%, 11/01/09 ............................ 6,582,771
3,960,000 LBREP/L-Suncal Master I LLC
First Lien, 8.61%, 01/18/10 ................. 3,979,800
1,000,000 LNR Property Corp.
Initial Tranche B Term Loan,
07/12/11 (b) ................................ 1,008,380
Morningside Assisted Living
1,995,167 Mezzanine Loan,
12.63%, 10/12/08 ............................ 2,000,155
1,496,375 Senior Mortgage Loan,
8.38%, 10/12/08 ............................. 1,500,116
606,618 MPO Intermediate LLC
Mezzanine Note A-1,
7.08%, 08/09/07 ............................. 606,618
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
HOUSING - REAL ESTATE DEVELOPMENT (CONTINUED)
1,454,555 November 2005 Land Investors, LLC
First Lien Term Loan,
8.12%, 05/09/11 ............................. 1,463,646
Pro-Build Holdings, Inc.
460,000 Delayed Draw Term Loan,
06/29/13 (b) ................................ 460,575
540,000 Initial Term Loan, 06/29/13 (b) ............. 540,675
1,995,000 Shea Capital I, LLC
Facility B, 7.35%, 10/27/11 ................. 1,992,506
Tamarack Resort LLC
2,697,248 Tranche A Credit-Linked Deposit,
8.61%, 05/19/11 ............................. 2,703,991
4,015,527 Tranche B Term Loan,
8.61%, 05/19/11 ............................. 4,025,566
16,689,351 Westgate Investments, LLC
Senior Secured Loan,
13.00%, 07/15/10 (i) ........................ 16,689,351
4,000,000 Weststate Land Partners LLC
First Lien Term Loan,
8.57%, 05/01/07 ............................. 4,030,000
4,000,000 Woodlands Commercial Properties
Co., LP
Bridge Loan, 8.12%, 02/28/08 ................ 4,005,000
-------------
71,754,031
-------------
INFORMATION TECHNOLOGY - 4.3%
3,000,000 Applied Systems, Inc.
Term Loan, 8.18%, 09/26/13 .................. 3,020,640
1,000,000 Aspect Software, Inc.
Second Lien Term Loan,
12.38%, 07/05/12 ............................ 1,005,000
1,925,000 Billing Services Group North
America, Inc.
U.S. Term Loan,
8.13%, 01/01/00 ............................. 1,927,406
480,286 Bridge Information Systems, Inc.
Multidraw Term Loan,
07/07/13 (d) (e) ............................ 36,021
1,985,006 Data Transmission Network Corp.
First Lien Tranche B Term Loan,
8.48%, 03/10/13 ............................. 1,994,931
992,470 Deltek Systems, Inc.
Term Loan, 7.62%, 04/22/11 .................. 997,432
20,000,000 Freescale Semiconductor, Inc.
Term Loan, 7.37%, 12/02/13 .................. 20,181,200
2,000,000 GXS Corp.
Second Lien Term Loan,
7.38%, 12/20/11 ............................. 2,030,000
Infor Enterprise Solutions
Holdings, Inc.
3,420,000 Delayed Draw Term Loan,
9.12%, 07/28/12 ............................. 3,454,200
6,555,000 Initial U.S. Term Facility,
9.12%, 07/28/12 ............................. 6,617,797
5,000,000 Stage One U.S. Bridge Facility,
11.50%, 07/29/13 (e) ........................ 5,000,000
IPC Systems, Inc.
997,500 First Lien Tranche B-1 Term Loan,
7.86%, 09/30/13 ............................. 1,009,969
1,500,000 Second Lien Term Loan,
11.87%, 09/29/14 ............................ 1,521,570
2,000,000 MediMedia USA, Inc.
Tranche B Term Loan,
8.75%, 10/05/13 ............................. 2,010,000
8 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
8,000,000 NameMedia, Inc.
Term Loan, 11.37%, 08/31/08 ................. 8,040,000
1,000,000 Nuance Communications, Inc.
Term Loan, 03/31/13 (b) ..................... 1,003,120
1,382,366 ON Semiconductor Corp.
Term Loan H, 7.62%, 12/15/11 ................ 1,391,572
3,500,000 Open Solutions, Inc.
Term Loan, 7.49%, 01/23/14 (b) .............. 3,537,205
4,750,000 PGS Solutions, Inc.
Term Loan, 7.61%, 02/14/13 .................. 4,815,313
2,000,000 Sitel, LLC
U.S. Term Loan, 7.84%, 01/30/14 ............. 2,017,520
7,000,000 Spansion LLC
Term Loan B, 8.36%, 11/01/12 ................ 7,085,330
7,325,158 SunGard Data Systems, Inc.
U S Term Loan,
7.82%, 02/11/13 (b) ......................... 7,408,372
2,000,000 Transfirst Holdings, Inc.
Second Lien Term Loan,
11.62%, 08/15/13 ............................ 2,015,000
-------------
88,119,598
-------------
MANUFACTURING - 1.5%
1,355,991 AIRXCEL, Inc.
First Lien Term Loan,
8.38%, 08/31/12 ............................. 1,362,771
1,910,000 Baldor Electric Co.
Term Loan, 7.19%, 01/31/14 .................. 1,910,000
1,493,947 Coinmach Corp.
Tranche B-1 Term Loan,
7.88%, 12/16/12 ............................. 1,508,573
1,500,000 Dundee Holdco Ltd.
(United Kingdom)
U.S. Term Loan B1,
8.07%, 02/17/14 ............................. 1,508,430
828,947 Euramax International Holdings
B.V. (Netherlands)
Second Lien European Term Loan,
12.37%, 06/29/13 ............................ 822,730
Euramax International, Inc.
2,062,482 First Lien Domestic Term Loan,
8.19%, 06/29/12 ............................. 2,078,466
1,671,053 Second Lien Domestic Term Loan,
12.37%, 06/29/13 ............................ 1,691,941
FR Brand Acquisition Corp.
1,500,000 First Lien Term Loan B,
7.63%, 02/07/14 ............................. 1,514,685
1,000,000 Second Lien Term Loan,
11.38%, 02/07/15 ............................ 1,015,000
3,000,000 Generac Acquisition Corp.
Second Lien Term Loan,
11.32%, 05/12/14 (b) ........................ 3,007,500
1,990,000 Global Petroleum, Inc.
(SPI Petroleum)
Term Loan, 9.85%, 07/26/13 .................. 1,999,950
492,437 Longyear Canada, ULC (Boart Longyear)
First Lien Canadian Borrower
Term Loan, 8.61%, 10/08/12 .................. 497,519
Longyear Global Holdings, Inc.
(Boart Longyear)
530,316 First DrillCorp Delayed Draw
Term Loan, 8.61%, 10/08/12 .................. 535,789
4,962,247 First Lien U.S. Term Loan,
8.61%, 10/08/12 ............................. 5,021,198
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
MANUFACTURING (CONTINUED)
Longyear Global Holdings, Inc. (continued)
4,000,000 Second Lien Term Loan,
12.36%, 10/07/13 ............................ 4,070,000
1,769,247 Polypore, Inc.
U.S. Term Loan, 8.32%, 11/12/11 ............. 1,773,670
-------------
30,318,222
-------------
METALS/MINERALS - OTHER METALS/MINERALS - 0.9%
5,000,000 Kaiser Aluminum & Fabricated
Products, LLC
Term Loan, 9.61%, 04/24/11 .................. 5,025,000
8,094,024 Murray Energy Corp.
Tranche B Term Loan,
8.40%, 01/28/10 ............................. 8,195,200
767,143 Oglebay Norton Co.
Tranche B Term Loan,
7.87%, 07/31/12 ............................. 774,814
4,466,250 Universal Buildings Products, Inc.
Term Loan, 8.86%, 04/28/12 .................. 4,443,919
-------------
18,438,933
-------------
METALS/MINERALS - STEEL - 0.1%
1,484,925 CII Carbon LLC
Term Loan B, 7.38%, 08/23/12 ................ 1,496,062
829,167 Standard Steel, LLC
Initial Term Loan, 7.87%, 06/30/12 .......... 836,422
-------------
2,332,484
-------------
RETAIL - 8.6%
34,757,936 Blockbuster Entertainment Corp.
Tranche B Term Loan,
8.90%, 08/20/11 ............................. 35,261,926
30,575,741 Burlington Coat Factory
Warehouse Corp.
Term Loan, 7.61%, 05/28/13 (b) .............. 30,618,853
950,306 Dollarama Group LP (Canada)
Term Loan B, 7.38%, 11/18/11 ................ 958,621
2,479,675 Eddie Bauer, Inc.
Term Loan, 11.50%, 06/21/11 ................. 2,491,304
1,000,000 Harbor Freight Tools USA, Inc.
Tranche C Term Loan,
7.61%, 02/12/13 ............................. 1,008,120
Home Interiors & Gifts, Inc.
2,407,902 Initial Term Loan, 10.32%, 03/31/11 ......... 1,781,848
25,541,353 Initial Term Loan, 10.41%, 03/31/11 ......... 18,900,602
1,000,000 Mattress Holding Corp.
Term Loan, 7.61%, 01/18/14 .................. 1,000,000
8,748,906 Michaels Stores, Inc.
Term Loan, 8.13%, 10/31/13 .................. 8,845,319
Movie Gallery, Inc.
330,296 Term Loan A, 9.87%, 04/27/11 ................ 328,578
58,097,159 Term Loan B, 10.62%, 04/27/11 (b) ........... 57,915,896
1,348,945 Neiman Marcus Group, Inc. (The)
Term Loan, 7.60%, 04/06/13 .................. 1,366,373
2,000,000 PetCo Animal Supplies, Inc.
Term Loan, 8.10%, 10/28/13 .................. 2,026,240
Sally Holdings, LLC
1,500,000 Term Loan A, 11/01/12 (b) ................... 1,502,820
1,500,000 Term Loan B, 7.86%, 11/18/13 ................ 1,517,700
995,000 Sports Authority, Inc., The
Term Loan B, 7.61%, 05/03/13 ................ 999,667
Totes Isotoner Corp.
3,500,000 First Lien Term Loan,
7.82%, 01/31/13 (b) ......................... 3,522,610
See accompanying Notes to Financial Statements. | 9
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
RETAIL (CONTINUED)
Totes Isotoner Corp. (continued)
1,000,000 Second Lien Term Loan,
11.32%, 01/31/14 ............................ 1,010,000
4,000,000 Toys "R" Us
Tranche B Term Loan,
9.61%, 07/19/12 ............................. 4,125,320
1,000,000 TRU 2005 Holding Co. I, Ltd
Term Loan, 8.33%, 12/09/08 .................. 1,010,110
-------------
176,191,907
-------------
SERVICE - ENVIRONMENTAL SERVICES - 0.7%
3,122,340 Alliance Laundry Systems LLC
Term Loan, 7.57%, 01/27/12 (b) .............. 3,151,623
1,000,000 Brickman Group Holdings, Inc.
Tranche Loan B, 01/23/14 (b) ................ 1,005,630
596,848 Duratek, Inc.
Term Loan B, 7.63%, 06/07/13 ................ 604,869
EnergySolutions, LLC
62,893 Synthetic Letter of Credit,
7.57%, 06/07/13 ............................. 63,738
1,318,039 Term Loan, 7.76%, 09/30/11 .................. 1,335,753
Safety-Kleen Systems, Inc.
1,322,034 Synthetic Letter of Credit,
7.88%, 08/02/13 ............................. 1,325,339
4,666,271 Term Loan B, 7.88%, 08/02/13 ................ 4,677,937
Valleycrest Holding Co. (VCC Holdco)
1,995,000 First Lien Term Loan,
7.82%, 10/04/13 ............................. 2,016,187
1,000,000 Second Lien Term Loan,
10.82%, 04/04/14 ............................ 1,008,440
-------------
15,189,516
-------------
SERVICE - OTHER SERVICES - 0.9%
2,000,000 Cydcor, Inc.
First Lien Tranche B Term Loan,
10.50%, 02/05/13 ............................ 1,990,000
Education Management LLC
3,500,000 Term Loan C, 7.38%, 06/01/13 ................ 3,500,000
3,478,759 Tranche B Term Loan,
7.88%, 06/01/13 ............................. 3,513,547
Koosharem Corp.
2,962,500 First Lien Term Loan,
9.83%, 06/30/12 ............................. 2,962,500
1,000,000 Second Lien Term Loan,
13.87%, 06/30/13 ............................ 990,000
4,000,000 NES Rentals Holdings, Inc.
Second Lien Permanent Term Loan,
12.13%, 07/20/13 ............................ 4,060,000
1,660,844 United Rentals, Inc.
Initial Term Loan,
7.32%, 02/14/11 ............................. 1,682,385
-------------
18,698,432
-------------
TELECOMMUNICATIONS - 2.2%
6,636,373 Advanced Micro Devices, Inc.
Term Loan, 7.62%, 12/31/13 .................. 6,704,595
2,000,000 American Messaging Services, Inc.
Senior Secured Note,
11.62%, 09/03/08 ............................ 2,015,000
Global Tel Link Corp.
65,217 Synthetic Deposit,
8.82%, 02/13/08 (c) ......................... 66,114
782,609 Term Facility, 8.82%, 02/13/08 .............. 793,370
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
TELECOMMUNICATIONS (CONTINUED)
3,990,000 Intelsat Corp.
Tranche B-2 Term Loan,
7.87%, 01/03/14 ............................. 4,034,888
5,000,000 Level 3 Financing, Inc.
Term Loan, 8.40%, 12/01/11 .................. 5,044,800
3,000,000 Revolution Studios
Tranche B Term Loan,
9.07%, 12/21/14 ............................. 3,022,500
5,959,537 Sorenson Communications, Inc.
Tranche B Term Loan,
8.36%, 08/16/13 ............................. 6,010,432
742,500 Stratos Global Corp./Stratos
Funding LP (Canada)
Term B Facility, 8.10%, 02/13/12 ............ 748,692
5,498,594 Time Warner Telecom Holdings, Inc.
Term Loan B, 7.32%, 01/07/13 (b) ............ 5,546,706
2,000,000 Unity Media
Mezzanine Loan, 10/15/11 (b) ................ 2,017,500
Wind Acquisition Holdings Finance
S.A. (Italy)
2,500,000 PIK Term Loan USD, 01/01/13 (b) ............. 2,500,000
6,014,651 PIK Term Loan USD,
12.56%, 12/21/11 ............................ 6,210,127
-------------
44,714,724
-------------
TELECOMMUNICATIONS - CLEC - 0.2%
4,937,500 Consolidated Communications, Inc.
Term Loan D, 7.36%, 10/14/11 ................ 4,980,703
-------------
TELECOMMUNICATIONS - DATA/INTERNET - 0.0%
1,000,000 Pine Tree Holdings/Country Road
Communications, Inc.
Second Lien Tranche B
Term Loan, 13.15%, 07/15/13 ................. 1,010,000
-------------
TELECOMMUNICATIONS - FIBER/LONG DISTANCE - 0.4%
5,000,000 FairPoint Communications, Inc.
Replacement B Term Loan,
7.13%, 02/08/12 ............................. 5,027,350
993,333 Hawaiian Telcom Communications, Inc.
Tranche B Term Loan,
7.62%, 10/31/12 ............................. 998,211
1,000,000 Qwest Corp.
Tranche B Term Loan,
6.95%, 06/30/10 (i) ......................... 1,024,640
1,000,000 WestCom Corp.
Second Lien Term Loan,
12.36%, 06/17/11 ............................ 1,008,120
-------------
8,058,321
-------------
TRANSPORTATION - AUTO - 6.6%
2,103,956 Autocam Corp.
Domestic Revolver,
9.37%, 06/21/09 (c) ......................... 2,082,916
16,000,000 Dana Corp.
DIP Term Loan, 7.82%, 04/13/08 .............. 16,041,760
Delphi Corp.
2,500,000 First Lien DIP Term Loan
(Tranche B), 7.61%, 10/08/07 (b) ............ 2,517,510
36,500,000 Second Lien DIP Term Loan
(Tranche C), 8.13%, 12/31/07 ................ 36,787,620
10 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
TRANSPORTATION - AUTO (CONTINUED)
4,500,000 Environmental Systems Products Holdings, Inc.
Second Lien Term Loan,
15.37%, 12/12/10 ............................ 2,475,000
Federal-Mogul Corp.
1,270,249 Supplemental Revolver,
9.07%, 07/01/07 ............................. 1,271,837
1,048,750 Tranche C Term Loan,
03/09/08 (d) ................................ 1,045,037
40,000,000 Ford Motor Co.
Term Loan, 8.36%, 12/16/13 .................. 40,509,600
11,000,000 General Motors Corp.
Secured Term Loan,
7.70%, 11/29/13 ............................. 11,147,400
2,000,000 Gleason Works (The)
Second Lien Term Loan,
10.88%, 12/30/13 ............................ 2,030,840
5,500,000 Goodyear Tire & Rubber Co.
Third Lien Term Loan,
8.89%, 03/01/11 ............................. 5,581,125
5,124,728 Key Plastics LLC
Term Loan B, 8.84%, 06/29/10 (i) ............ 5,201,599
5,000,000 Pep Boys, The - Manny, Moe & Jack
Term Loan, 7.37%, 10/27/13 (b) .............. 5,059,400
1,304,615 Stanadyne Corp.
Term Loan, 8.82%, 08/02/10 .................. 1,311,138
1,490,000 Vanguard Car Rental USA Holding, Inc.
Term Loan, 8.36%, 06/14/13 .................. 1,506,599
-------------
134,569,381
-------------
TRANSPORTATION - LAND - 0.4%
Quality Distribution, Inc.
1,427,481 Synthetic Letters of Credit,
5.26%, 11/13/09 ............................. 1,431,050
6,991,376 Term Loan, 8.32%, 11/13/09 (e) .............. 7,008,815
-------------
8,439,865
-------------
UTILITIES - 3.9%
5,940,000 Calpine Construction Finance Co., LP
First Lien Term Loan,
11.33%, 08/26/09 ............................ 6,207,300
Calpine Corp.
1,292,355 First Lien DIP Revolver,
7.62%, 12/20/07 ............................. 1,299,890
233,749 Second Lien Term Loan,
07/16/07 (d) ................................ 262,528
9,750,000 Second Lien Term Loan B,
10.35%, 07/16/07 ............................ 10,950,420
Coleto Creek Power, LP
4,975,000 Second Lien Term Loan,
9.37%, 06/28/13 ............................. 4,856,844
318,471 Synthetic Facility,
5.27%, 06/28/13 ............................. 320,860
4,658,121 Term Loan, 8.12%, 06/28/13 .................. 4,693,057
Covanta Energy Corp.
3,750 Delayed Draw Term Loan,
9.50%, 06/30/12 ............................. 3,770
659,794 Funded Letter of Credit,
5.38%, 02/09/14 ............................. 663,508
1,340,206 Term Loan, 6.88%, 02/09/14 .................. 1,347,470
4,000,000 GBGH, LLC (U S Energy)
First Lien Term Loan,
10.86%, 08/07/13 ............................ 4,010,000
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
UTILITIES (CONTINUED)
1,500,000 HCP Acquisition, Inc. (Canada)
First Lien Term Loan,
02/13/14 (b) ................................ 1,537,500
500,000 La Paloma Generating Co. LLC
Second Lien Term Loan,
8.87%, 08/16/13 ............................. 505,210
Magnolia Energy LP
30,043 Additional PCLC Facility,
12/14/11 (b) ................................ 29,668
4,504,913 Facility A, 12/14/11 (b) .................... 4,448,602
465,044 Facility B, 12/14/11 (b) .................... 459,230
1,000,000 Mirant North America, LLC
Term Loan, 01/03/13 (b) ..................... 1,005,000
NATG Holdings LLC
376,135 Credit-Linked Certificate of
Deposit, 01/23/09 (d) ....................... 327,238
1,001,749 Term Loan A, 01/23/09 (d) ................... 177,810
733,455 Term Loan B-1, 01/23/10 (d) ................. 130,188
72,363 Term Loan B2, 01/23/10 (d) .................. 68,021
NRG Energy, Inc.
2,413,620 Credit Linked Certificate of Deposit,
7.36%, 02/02/13 ............................. 2,437,322
4,268,769 Term Loan, 7.36%, 02/01/13 (b) .............. 4,316,536
4,227,632 Plum Point Energy Associates, LLC
Second Lien Term Loan,
10.61%, 09/14/14 ............................ 4,333,323
2,000,000 Primary Energy Operations LLC
Term Loan, 8.12%, 08/24/09 .................. 2,005,640
Reliant Energy, Inc.
2,857,143 New Term Loan,
7.73%, 12/01/10 ............................. 2,889,029
2,142,857 Pre-Funded Letter of Credit,
5.20%, 12/01/10 ............................. 2,168,486
4,487,632 Riverside Energy Center LLC
Term Loan, 9.61%, 06/24/11 .................. 4,599,823
Rocky Mountain Energy Center LLC
361,073 Credit-Linked Certificate of
Deposit, 5.26%, 06/24/11 .................... 369,197
2,857,277 Term Loan, 9.61%, 06/24/11 .................. 2,928,709
TECO Panda - Union Power
Partners, L.P.
1,297,170 Tranche A Term Loan,
06/01/12 (b) (e) ............................ 1,893,573
1,245,283 Tranche B Term Loan,
06/01/20 (b) (e) ............................ 1,817,830
TECO Panda Generating Co. -
Gila River Power L.P.
2,205,189 Tranche A Term Loan,
9.00%, 06/01/12 (b) (e) ..................... 3,219,075
2,125,358 Tranche B Term Loan,
9.00%, 06/01/20 (b) (e) ..................... 3,094,952
-------------
79,377,609
-------------
WIRELESS - CELLULAR/PCS - 4.7%
2,925,000 Cellular South, Inc.
Term Loan, 7.13%, 05/04/11 .................. 2,939,625
7,645,000 Centennial Cellular Operating Co.
Term Loan, 5.92%, 02/09/11 .................. 7,718,545
38,307,500 Cricket Communications, Inc.
Term B Facility, 8.11%, 06/16/13 ............ 38,714,326
Insight Midwest Holdings, LLC
1,375,000 B Delayed Draw Term Loan,
7.61%, 04/06/14 (b) ......................... 1,389,617
6,375,000 B Initial Term Loan,
7.61%, 04/06/14 (b) ......................... 6,445,954
3,428,302 Term Loan B, 7.36%, 04/07/14 (b) ............ 3,467,829
See accompanying Notes to Financial Statements. | 11
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
WIRELESS - CELLULAR/PCS (CONTINUED)
1,496,250 Maritime Telecommunications
Network, Inc.
First Lien Term Loan,
8.10%, 05/11/12 ............................. 1,494,380
MetroPCS Wireless, Inc.
9,000,000 New Tranche B Term Loan,
7.63%, 11/04/13 (b) ......................... 9,097,403
23,940,000 Tranche B Term Loan,
7.88%, 11/04/13 ............................. 24,203,819
-------------
95,471,498
-------------
Total Senior Loan Notes
(Cost $1,599,616,321) ....................... 1,608,313,074
-------------
FOREIGN DENOMINATED SENIOR LOAN NOTES (a) - 12.1%
DENMARK - 0.6%
EUR
Nordic Telephone Co. Holdings APS
3,750,000 Euro Facility B2, 5.54%, 04/10/14 ........... 5,002,857
3,750,000 Euro Facility C2, 6.04%, 04/10/15 ........... 5,019,104
2,000,000 Nyco Holdings 3 ApS
Facility D (Second Lien),
8.70%, 12/29/16 ............................. 2,672,602
-------------
12,694,563
-------------
FRANCE - 2.1%
EUR
2,712,600 Autocam France, S.a.r.L.
Revolver, 6.96%, 06/21/09 ................... 3,547,381
Ypso Holding SA
133,622 Capex Term Loan,
2.25%, 12/15/12 (c) ......................... 175,340
5,886,228 Eur A (Acq) 1 Facility,
5.49%, 06/06/13 ............................. 7,736,545
1,307,335 Eur A (Acq) 2 Facility,
5.49%, 06/06/13 ............................. 1,715,494
6,342,536 Eur A (Recap) 1 Facility,
5.49%, 06/06/13 ............................. 8,309,566
77,009 Eur A (Recap) 2 Facility,
5.75%, 06/06/13 ............................. 100,892
3,149,824 Eur B (Acq) 1 Facility,
5.87%, 06/06/14 ............................. 4,155,980
5,139,187 Eur B (Acq) 2 Facility,
5.87%, 06/06/14 ............................. 6,780,810
73,323 Eur B (Acq) 2 Facility,
6.11%, 06/06/14 ............................. 96,791
8,161,913 Eur B (Recap) 1 Facility,
5.87%, 06/06/14 ............................. 10,774,269
-------------
43,393,068
-------------
GERMANY - 1.7%
EUR
4,000,000 Iesy Hessen/Gmbh & Co. KG
Euro Senior Secured Term Loan,
6.63%, 10/15/11 ............................. 5,330,040
2,500,000 Kabel Baden Wurttemburg GH &
CO. KG
Second Lien Facility, 12/09/15 (b) .......... 3,344,121
Kabel Baden Wurttemburg
GMBH & CO. KG
1,826,284 Term B Facility, 5.97%, 06/09/14 ............ 2,432,239
1,826,284 Term C Facility, 6.47%, 06/09/15 ............ 2,439,597
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
GERMANY (CONTINUED)
EUR
14,900,000 P7S1 Holding II S.A.R.L - GMP
Facility B, 7.59%, 07/08/11 ................. 19,737,486
Prysmian Cables & Systems, Inc.
875,000 Euro Term Loan B,
6.00%, 08/04/12 ............................. 1,161,254
875,000 Euro Term Loan C2,
5.57%, 08/04/12 ............................. 1,167,033
-------------
35,611,770
-------------
ITALY - 0.7%
EUR
4,000,000 H3G S.p.A.
Euro Term Loan A1, 12/30/11 (b) ............. 5,204,549
Wind Telecommunicatione S.p.A.
3,302,546 A1 Term Loan Facility,
5.27%, 05/26/12 ............................. 4,375,591
1,750,000 B1 Term Loan Facility,
5.63%, 05/26/13 ............................. 2,330,806
1,750,000 C1 Term Loan Facility,
6.13%, 05/26/14 ............................. 2,335,614
-------------
14,246,560
-------------
NETHERLANDS - 1.9%
EUR
Amsterdamse Beheer- En
Consultingmaatschappij B.V.
4,388,443 Casema B1 Term Loan,
6.17%, 09/12/14 ............................. 5,877,266
2,279,577 Casema B2 Term Loan,
6.17%, 09/12/14 ............................. 3,054,512
6,668,019 Casema C Term Loan,
6.67%, 09/12/15 ............................. 8,961,216
1,500,000 Casema D Term Loan Second Lien,
7.92%, 03/12/16 ............................. 2,031,716
5,150,162 Kabelcom B Term Loan,
6.11%, 09/12/14 ............................. 6,900,944
5,150,162 Kabelcom C Term Loan,
6.11%, 09/12/15 ............................. 6,909,380
1,000,000 Kabelcom D Term Loan Second
Lien, 6.11%, 03/12/16 ....................... 1,354,477
YBR Acquisition B.V.
806,733 Facility B2 Term Loan,
5.82%, 06/30/13 ............................. 1,081,726
1,250,000 Facility C2 Term Loan,
5.64%, 06/30/14 ............................. 1,679,458
-------------
37,850,695
-------------
SPAIN - 0.3%
EUR
Gasmedi 2000 S.A. / Nattai, S.L.U.
1,666,667 Tranche B Term Loan,
6.65%, 08/11/14 ............................. 2,207,090
1,666,667 Tranche C Term Loan,
7.15%, 08/11/15 ............................. 2,207,090
1,666,667 Tranche E Second Lien Term Loan,
8.90%, 02/11/16 ............................. 2,229,106
-------------
6,643,286
-------------
12 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
FOREIGN DENOMINATED SENIOR LOAN NOTES (CONTINUED)
UNITED KINGDOM - 4.8%
GBP
4,000,000 Airport Development & Investment
Ltd. (BAA)
Facility B, 9.12%, 04/07/11 ................. 7,865,954
1,000,000 Ansco UK Finance CO. Ltd.
Tranche B Term Loan,
8.49%, 03/08/12 ............................. 1,964,646
1,250,000 Aramark Corp.
U K Term Loan, 01/26/14 (b) ................. 2,480,305
1,364,688 Champion Home Builders Co.
Term Loan, 7.93%, 10/31/12 .................. 2,667,756
2,755,472 Dollar Financial UK Limited
UK Borrower Euro Term Loan,
6.38%, 10/31/12 ............................. 3,676,243
869,822 Eggborough Power Ltd.
Term Loan, 03/31/22 (b) (i) ................. 5,966,208
Forgings International Ltd.
(Firth Rixon)
500,000 Term B1 (GBP), 7.56%, 09/22/14 .............. 992,729
500,000 Term C1 (GBP), 8.01%, 09/22/15 .............. 997,629
Havana Bidco Ltd.
602,543 Facility B, 7.65%, 08/31/14 ................. 1,183,783
2,176,700 Facility C, 8.24%, 08/31/15 ................. 4,297,774
3,000,000 Facility D (Second Lien),
10.24%, 02/28/16 ............................ 6,011,524
3,523,711 Mezzanine Loan,
14.15%, 08/31/16 ............................ 7,095,486
Highland Acquisitions Ltd.
1,000,000 Facility B, 8.13%, 01/31/14 ................. 1,959,747
1,000,000 Facility C, 8.63%, 01/31/15 ................. 1,959,747
1,000,000 Mezzanine Facility,
15.42%, 01/31/16 ............................ 1,959,747
Mobileserv Ltd. (Phones 4U)
625,000 Facility B, 7.76%, 09/22/14 ................. 1,228,198
625,000 Facility C, 8.26%, 09/22/15 ................. 1,230,709
Peacock Group (The)
2,250,000 Facility B, 8.19%, 10/30/13 ................. 4,436,990
2,250,000 Facility C, 7.94%, 10/30/14 ................. 4,436,990
4,959,184 PlayPower, Inc.
Add-On Term Loan,
8.17%, 12/18/09 (b) ......................... 9,791,636
2,777,622 SunGard U K Holdings Ltd.
U.K. Term Loan,
7.71%, 02/11/13 (b) ......................... 5,501,245
Towergate Partnership Ltd.
1,875,000 Facility A, 7.90%, 10/31/12 ................. 3,715,864
1,875,000 Facility B, 8.40%, 10/31/13 ................. 3,734,237
Trinitybrook PLC
2,500,000 Term Loan B1, 7.66%, 07/31/13 ............... 4,917,740
2,500,000 Term Loan C1, 8.16%, 07/31/14 ............... 4,933,369
1,750,000 Virgin Media, Inc.
GBP Tranche C Term Loan,
8.48%, 03/03/13 ............................. 3,525,310
-------------
98,531,566
-------------
Total Foreign Denominated
Senior Loan Notes
(Cost $237,066,712) ...................... 248,971,508
-------------
SHARES VALUE ($)
- -------------------- -------------
CORPORATE NOTES AND BONDS (f) (i) - 0.0%
TRANSPORTATION - AUTO - 0.0%
Key Plastics Holdings, Inc.
72,552 Junior Secured Subordinated
Notes, 18.32%, 04/26/07 ..................... 71,397
101,433 Senior Secured Subordinated
Notes, 7.00%, 04/26/07 ...................... 99,841
-------------
171,238
-------------
Total Corporate Notes and Bonds
(Cost $171,273) .......................... 171,238
-------------
COMMON STOCKS (g) - 1.6%
MANUFACTURING - 0.0%
12 GenTek, Inc., B Shares ......................... 413
-------------
UTILITIES - 1.3%
12,470 CenterPoint Energy, Inc. ....................... 210,868
731,628 Mirant Corp. ................................... 27,260,459
-------------
27,471,327
-------------
WIRELESS - CELLULAR/PCS - 0.3%
76,137 Leap Wireless International, Inc. .............. 5,144,577
-------------
Total Common Stocks
(Cost $21,307,404) ....................... 32,616,317
-------------
PREFERRED STOCK - 0.0%
MANUFACTURING - 0.0%
14,382 Superior Telecom, Inc., Series A ............... 14,382
-------------
Total Preferred Stock
(Cost $14,382) ........................... 14,382
-------------
CLAIMS (h) - 0.0%
UTILITIES - 0.0%
17,500,000 Mirant Corp. ................................... 656,250
-------------
Total Claims
(Cost $2) ................................ 656,250
-------------
TOTAL INVESTMENTS - 92.1% ...................................... 1,890,742,769
-------------
(cost of $1,858,176,094) (j)
OTHER ASSETS & LIABILITIES, NET - 7.9% ......................... 161,070,589
-------------
NET ASSETS - 100.0% ............................................ 2,051,813,358
=============
- ----------
Forward foreign currency contracts outstanding as of February 28, 2007 were as
follows:
PRINCIPAL NET
CONTRACTS AMOUNT UNREALIZED
TO BUY OR COVERED BY APPRECIATION
TO SELL CURRENCY CONTRACTS EXPIRATION (DEPRECIATION)
- ------------------------------------------------------------------------
Sell EUR 50,000,000 06/06/07 $ 713,681
Sell EUR 40,000,000 07/10/07 (846,589)
Sell EUR 34,000,000 08/01/07 (881,903)
Sell EUR 21,000,000 08/02/07 (668,942)
Sell GBP 25,000,000 06/07/07 356,285
Sell GBP 15,000,000 07/10/07 (464,220)
-----------
($1,791,688)
===========
See accompanying Notes to Financial Statements. | 13
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
(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 footnote (i), 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, 2007. 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 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) Senior loan notes have additional unfunded loan commitments. See Note 9.
(d) The issuer is in default of certain debt covenants. Income is not being
accrued.
(e) Loan or a portion of the loan is held on participation. See Note 7.
(f) Represents fair value as determined in good faith under the direction of
the Board of Trustees.
(g) Non-income producing security.
(h) Security is the result of company restructuring that will be converted
into equity upon the completion of court proceedings.
(i) Fixed rate senior loan or corporate note.
(j) Cost for U.S. federal income tax purposes is $1,858,604,347.
CLEC Competitive Local Exchange Carrier
DIP Debtor in Possession
EUR Euro Currency
GBP Great Britain Pound
FOREIGN SENIOR LOAN NOTES
INDUSTRY CONCENTRATION TABLE
(% of Total Net Assets)
Cable-International Cable ...................................... 4.2%
Broadcasting ................................................... 1.9%
Retail ......................................................... 1.3%
Telecommunication .............................................. 1.0%
Financial ...................................................... 0.5%
Aerospace-Aerospace/Defense .................................... 0.5%
Gaming/Leisure-Other Leisure ................................... 0.5%
Healthcare ..................................................... 0.5%
Media/Telecom-Telecommunciation ................................ 0.4%
Information Technology ......................................... 0.4%
Utilities ...................................................... 0.3%
Transportation-Auto ............................................ 0.2%
Diversified Media .............................................. 0.1%
Housing-Real Estate ............................................ 0.1%
Food/Tobacco-Producers.......................................... 0.1%
Forest Products-Paper........................................... 0.1%
----
12.1%
====
14 | See accompanying Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 (UNAUDITED) HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
($)
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost $1,858,176,094) ................. 1,890,742,769
Cash ........................................................ 322,230,817
Foreign currency (Cost $12,294,481) ......................... 12,480,869
Receivable for:
Investments sold ......................................... 54,416,443
Dividend and interest receivable ......................... 7,169,933
-------------
Total assets .......................................... 2,287,040,831
-------------
LIABILITIES:
Deferred Facility fees (Note 2) ............................ 1,086
Net discount and unrealized appreciation/(depreciation)
on unfunded transactions (Note 9) ........................ 309,201
Net unrealized appreciation/(depreciation) on forward
foreign currency contracts ............................... 1,791,688
Payable for:
Investments purchased .................................... 232,295,613
Investment advisory fee payable (Note 4) ................. 646,687
Trustees' fees (Note 4) .................................. 12
Accrued expenses and other liabilities ...................... 183,186
-------------
Total liabilities ..................................... 235,227,473
-------------
TOTAL NET ASSETS ............................................... 2,051,813,358
=============
See accompanying Notes to Financial Statements. | 15
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED)
($)
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest Income ............................................................................. 80,072,620
Dividends ................................................................................... 716
Facility and other fees ..................................................................... 7,304
--------------
Total investment income .................................................................. 80,080,640
--------------
EXPENSES:
Investment advisory fee (Note 4) ............................................................ 3,875,974
Professional fees ........................................................................... 53,360
Accounting service fee ...................................................................... 211,393
Trustees' fees (Note 4) .................................................................... 10,161
Custodian fees .............................................................................. 32,154
Reports to shareholders ..................................................................... 16,937
--------------
Net operating expenses ................................................................... 4,199,979
Interest expense (Note 8) ................................................................... 170,729
Facility expense ............................................................................ 147,580
--------------
Net expenses ............................................................................. 4,518,288
--------------
Net investment income .................................................................... 75,562,352
--------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on investments ..................................................... 283,023
Net realized gain/(loss) on foreign currency transactions ................................... 1,630,493
Net change in unrealized appreciation/(depreciation) on investments ......................... 25,072,885
Net change in unrealized appreciation/(depreciation) on unfunded transactions ............... 49,549
Net change in unrealized appreciation/(depreciation) on forward foreign currency
transactions ............................................................................. (1,791,688)
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities
denominated in foreign currency .......................................................... 329,761
--------------
Net realized and unrealized gain/(loss) on investments ................................... 25,574,023
--------------
Net increase in net assets resulting from operations ..................................... 101,136,375
==============
16 | See accompanying Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SIX MONTHS ENDED
FEBRUARY 28, 2007 YEAR ENDED
(UNAUDITED) AUGUST 31, 2006
($) ($)
----------------- ---------------
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income ........................................................... 75,562,352 104,530,900
Net realized gain/(loss) on investments and foreign currency transactions ....... 1,913,516 12,363,756
Net change in unrealized appreciation/(depreciation) on investments, unfunded
transactions, forward foreign currency contracts and translation of assets
and liabilities denominated in foreign currency .............................. 23,660,507 (1,281,401)
----------------- ---------------
Net increase in net assets from operations ................................... 101,136,375 115,613,255
----------------- ---------------
TRANSACTIONS IN INVESTOR'S BENEFICIAL INTEREST:
Contributions ................................................................... 552,444,058 817,426,901
Withdrawals ..................................................................... (328,579,303) (345,645,810)
----------------- ---------------
Net increase from transactions in investor's beneficial interest ............. 223,864,755 471,781,091
----------------- ---------------
Total increase in net assets ................................................. 325,001,130 587,394,346
----------------- ---------------
NET ASSETS
Beginning of period ............................................................. 1,726,812,228 1,139,417,882
----------------- ---------------
End of period ................................................................... 2,051,813,358 1,726,812,228
================= ===============
See accompanying Notes to Financial Statements. | 17
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED)
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
($)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment income .................................................................. 75,562,352
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH AND FOREIGN CURRENCY
USED FOR OPERATING ACTIVITIES
Purchase of investments securities ..................................................... (1,034,134,567)
Proceeds from disposition of investment securities ..................................... 818,829,952
Decrease in dividends, interest and fees receivable .................................... 10,847,491
Increase in receivable for investments sold ............................................ (35,513,125)
Decrease in other assets ............................................................... 69,969
Decrease in deferred facility fees ..................................................... (4,214)
Net amortization/(accretion) of premium/(discount) ..................................... (2,235,758)
Increase in payable for investments purchased .......................................... 119,178,627
Increase in payables to related parties ................................................ 32,932
Increase in mark-to-market on realized and unrealized gain/(loss) on foreign currency .. 1,960,254
Decrease in other liabilities .......................................................... (319,903)
---------------
Net cash and foreign currency flow from operating activities ........................ (45,725,990)
---------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from capital contributions .................................................... 552,444,058
Payment of capital withdrawals ......................................................... (328,579,303)
---------------
Net cash flow provided by financing activities ...................................... 223,864,755
---------------
Net increase in cash and foreign currency ........................................... 178,138,765
---------------
CASH AND FOREIGN CURRENCY
Beginning of the period ................................................................ 156,572,921
End of the period ...................................................................... 334,711,686
===============
18 | See accompanying Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
-------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2007
(UNAUDITED) 2006 2005 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA
Total return 5.29%(e) 8.72% 6.54% 10.39% 11.68%(a) (2.20)%
Operating expenses 0.46% 0.52% 0.51%(b) 0.52%(b) 0.57%(b) 0.55%(b)
Interest expense and facility
expense 0.04% 0.04% 0.05% --%(c) --%(c) 0.03%
Net expenses 0.50% 0.56% 0.56%(b) 0.52%(b) 0.57%(b) 0.58%(b)
Net investment income 8.33% 7.74% 5.69%(b) 4.45%(b) 5.96%(b) 6.42%(b(d)
Portfolio turnover rate 46%(e) 64% 75% 97% 75% 70%
<FN>
- ----------
(a) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Portfolio's return.
(b) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(c) Rounds to less than 0.01%.
(d) Effective September 1, 2001, the Portfolio adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies and began
amortizing and accreting premiums and discounts on debt securities. The
effect of this change for the year ended August 31, 2002, was to increase
the ratio of net investment income to average net assets from 6.41% to
6.42%. Ratios and supplemental data for the periods prior to August 31,
2002 have not been restated to reflect this change in presentation.
(e) Not annualized.
</FN>
See accompanying Notes to Financial Statements. | 19
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 (UNAUDITED) HIGHLAND FLOATING RATE FUND
($)
- -----------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Portfolio .......................................................................... 2,051,813,358
Receivable for:
Fund shares sold ............................................................................... 10,837,521
Other assets ...................................................................................... 26,517
-------------
Total assets ................................................................................ 2,062,677,396
=============
LIABILITIES:
Payable for:
Distributions .................................................................................. 27,504
Administration fee (Note 4) .................................................................... 304,348
Trustees' fees (Note 4) ........................................................................ 48
Service and distribution fees (Note 4) ......................................................... 799,639
Accrued expenses and other liabilities ............................................................ 283,516
-------------
Total liabilities ........................................................................... 1,415,055
-------------
TOTAL NET ASSETS ..................................................................................... 2,061,262,341
=============
COMPOSITON OF NET ASSETS
Paid-in capital ................................................................................... 2,032,426,510
Undistributed net investment income ............................................................... 1,911,569
Accumulated net realized gain/(loss) on Investments and foreign currency transactions allocated
from Portfolio ................................................................................. (3,726,074)
Net unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign
currency contracts and assets and liabilities denominated in foreign currency allocated from
Portfolio ...................................................................................... 30,650,336
-------------
NET ASSETS ........................................................................................... 2,061,262,341
=============
CLASS A
Net assets ........................................................................................ 834,168,200
Shares outstanding (unlimited authorization) ...................................................... 82,710,658
Net asset value per share (Net assets/shares outstanding) ......................................... 10.09(a)
Maximum offering price per share (100 / 96.50 of $10.09) .......................................... 10.33(b)
CLASS B
Net assets ........................................................................................ 141,482,953
Shares outstanding (unlimited authorization) ...................................................... 14,035,467
Net asset value and offering price per share (Net assets/shares outstanding) ...................... 10.08(a)
CLASS C
Net assets ........................................................................................ 807,118,383
Shares outstanding (unlimited authorization) ...................................................... 80,069,103
Net asset value and offering price per share (Net assets/shares outstanding) ...................... 10.08(a)
CLASS Z
Net assets ........................................................................................ 278,492,805
Shares outstanding (unlimited authorization) ...................................................... 27,628,711
Net asset value, offering and redemption price per share (Net assets/shares outstanding) .......... 10.08
<FN>
- ----------
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $100,000 or more, the offering price is reduced.
</FN>
20 | See accompanying Notes to Financial Statements.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED)
($)
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO (NOTE 1):
Interest Income ................................................................................... 80,072,620
Dividends ......................................................................................... 716
Facility and other fees ........................................................................... 7,304
-------------
Total investment income ..................................................................... 80,080,640
-------------
EXPENSES:
Net operating expenses allocated from Portfolio (Note 1) .......................................... 4,199,979
Administration fee (Note 4) ....................................................................... 1,814,197
Accounting services fee ........................................................................... 6,250
Distribution fee: (Note 4)
Class A ........................................................................................ 365,180
Class B ........................................................................................ 319,789
Class C ........................................................................................ 2,093,872
Service fee: (Note 4)
Class A ........................................................................................ 912,951
Class B ........................................................................................ 177,660
Class C ........................................................................................ 872,447
Transfer agent fee ................................................................................ 378,547
Professional fees ................................................................................. 36,985
Trustee's fees (Note 4) ........................................................................... 40,642
Registration fees ................................................................................. 121,440
Reports to shareholders ........................................................................... 321,790
Other expense ..................................................................................... 54,390
-------------
Net operating expenses ...................................................................... 11,716,119
Interest expense (Note 8) ......................................................................... 170,729
Facility expense .................................................................................. 147,580
-------------
Net expenses ................................................................................ 12,034,428
-------------
Net investment income ....................................................................... 68,046,212
-------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS ALLOCATED FROM PORTFOLIO (NOTE 1):
Net realized gain/(loss) on investments ........................................................... 283,023
Net realized gain/(loss) on foreign currency transactions ......................................... 1,630,493
Net change in unrealized appreciation/(depreciation) on investments ............................... 25,072,885
Net change in unrealized appreciation/(depreciation) on unfunded transactions (Note 9) ............ 49,549
Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts ........ (1,791,688)
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities
denominated in foreign currency ................................................................ 329,761
-------------
Net realized and unrealized gain/(loss) on investments allocated from Portfolio ............. 25,574,023
-------------
Net increase in net assets resulting from operations ........................................ 93,620,235
=============
See accompanying Notes to Financial Statements. | 21
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2007 YEAR ENDED
(UNAUDITED) AUGUST 31, 2006
($) ($)
----------------- ---------------
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income ............................................................... 68,046,212 92,524,047
Net realized gain/(loss) on investments and foreign currency transactions allocated
from Portfolio ................................................................ 1,913,516 12,076,962
Net change in unrealized appreciation/(depreciation) on investments, unfunded
transactions, forward foreign currency contracts and translation of assets and
liabilities denominated in foreign currency ................................... 23,660,507 (851,203)
----------------- ---------------
Net increase in net assets from operations .................................... 93,620,235 103,749,806
----------------- ---------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income:
Class A .......................................................................... (28,240,831) (36,949,931)
Class B .......................................................................... (5,267,832) (10,607,992)
Class C .......................................................................... (25,254,484) (31,033,409)
Class Z .......................................................................... (9,871,424) (14,588,702)
----------------- ---------------
Total distributions declared to shareholders .................................. (68,634,571) (93,180,034)
----------------- ---------------
SHARE TRANSACTIONS
Class A
Subscriptions .................................................................... 248,835,958 460,060,712
Distributions reinvested ......................................................... 12,154,206 17,848,900
Redemptions ...................................................................... (169,592,413) (105,237,595)
----------------- ---------------
Net increase .................................................................. 91,397,751 372,672,017
Class B
Subscriptions .................................................................... 108,833 370,397
Distributions reinvested ......................................................... 3,128,775 6,226,923
Redemptions ...................................................................... (14,532,835) (26,685,543)
----------------- ---------------
Net decrease .................................................................. (11,295,227) (20,088,223)
Class C
Subscriptions .................................................................... 212,156,170 307,867,391
Distributions reinvested ......................................................... 11,934,077 15,573,084
Redemptions ...................................................................... (54,675,979) (66,041,445)
----------------- ---------------
Net increase .................................................................. 169,414,268 257,399,030
Class Z
Subscriptions .................................................................... 90,552,809 88,139,842
Distributions reinvested ......................................................... 3,377,287 5,020,371
Redemptions ...................................................................... (44,107,435) (61,876,293)
----------------- ---------------
Net Increase .................................................................. 49,822,661 31,283,920
----------------- ---------------
Net increase from share transactions .......................................... 299,339,453 641,266,744
----------------- ---------------
Total increase in net assets .................................................. 324,325,117 651,836,516
----------------- ---------------
NET ASSETS
Beginning of period ................................................................. 1,736,937,224 1,085,100,708
----------------- ---------------
End of period (including undistributed net investment income of $1,911,569 and
$2,499,928, respectively) ........................................................ 2,061,262,341 1,736,937,224
================= ===============
22 | See accompanying Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2007 YEAR ENDED
(UNAUDITED) AUGUST 31, 2006
($) ($)
----------------- ---------------
CHANGE IN SHARES
Class A
Subscriptions .................................................................... 24,885,445 46,389,131
Issued for distributions reinvested .............................................. 1,214,824 1,799,527
Redemptions ...................................................................... (16,999,546) (10,621,709)
----------------- ---------------
Net increase .................................................................. 9,100,723 37,566,949
Class B
Subscriptions .................................................................... 10,893 37,376
Issued for distributions reinvested .............................................. 313,015 628,285
Redemptions ...................................................................... (1,456,174) (2,694,070)
----------------- ---------------
Net decrease .................................................................. (1,132,266) (2,028,409)
Class C
Subscriptions .................................................................... 21,243,106 31,050,062
Issued for distributions reinvested .............................................. 1,193,512 1,570,587
Redemptions ...................................................................... (5,476,762) (6,667,761)
----------------- ---------------
Net increase .................................................................. 16,959,856 25,952,888
Class Z
Subscriptions .................................................................... 9,065,667 8,891,919
Issued for distributions reinvested .............................................. 337,838 506,341
Redemptions ...................................................................... (4,416,455) (6,252,836)
----------------- ---------------
Net increase .................................................................. 4,987,050 3,145,424
See accompanying Notes to Financial Statements. | 23
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2007
CLASS A SHARES (UNAUDITED) 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.95 $ 9.88 $ 9.80 $ 9.29 $ 8.83 $ 9.62
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.38 0.70 0.49 0.37 0.48 0.54(b)
Net realized and unrealized gain/(loss)
allocated from Portfolio(a) 0.14 0.07 0.08 0.52 0.46 (0.79)(b)
----------- ---------- --------- ---------- --------- ---------
Total from investment operations 0.52 0.77 0.57 0.89 0.94 (0.25)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.38) (0.70) (0.49) (0.38) (0.48) (0.54)
From net realized gains -- -- -- -- -- --(c)
---------- --------- -------- --------- -------- --------
Total distributions declared to
shareholders (0.38) (0.70) (0.49) (0.38) (0.48) (0.54)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 10.09 $ 9.95 $ 9.88 $ 9.80 $ 9.29 $ 8.83
Total return(d) 5.26%(e) 8.18% 5.93% 9.65% 11.03%(f) (2.67)%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.12% 1.17% 1.15% 1.15% 1.15% 1.15%
Interest expense & facility expense
allocated from Portfolio 0.03% 0.04% 0.05% --(g) --(g) 0.03%
Net expenses(h) 1.15% 1.21% 1.20% 1.15% 1.15% 1.18%
Net investment income 7.67% 7.08% 5.05% 3.78% 5.39% 5.83%(b)
Waiver/reimbursement -- 0.01% 0.08% 0.17% 0.28% 0.28%
Net assets, end of period (000's) $ 834,168 $ 732,767 $ 355,998 $ 222,032 $ 97,924 $ 108,583
<FN>
- ----------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01,
and increased the ratio of net investment income to average net assets
from 5.82% to 5.83%. Per share data and ratios for periods prior to August
31, 2002 have not been restated to reflect this change in presentation.
(c) Rounds to less than $0.01.
(d) Total return is at net asset value assuming all distributions reinvested
and no initial sales charge or CDSC. Had the Portfolio's investment
adviser not waived or reimbursed a portion of expenses, total return would
have been reduced.
(e) Not annualized.
(f) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Fund's Class A Shares return.
(g) Rounds to less than 0.01%.
(h) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
24 | See accompanying Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2007
CLASS B SHARES (UNAUDITED) 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.36 0.67 0.46 0.34 0.45 0.51(b)
Net realized and unrealized gain/(loss)
allocated from Portfolio(a) 0.14 0.08 0.06 0.51 0.46 (0.79)(b)
----------- ---------- --------- ---------- --------- ---------
Total from investment operations 0.50 0.75 0.52 0.85 0.91 (0.28)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.37) (0.67) (0.45) (0.34) (0.45) (0.51)
From net realized gains -- -- -- -- -- --(c)
---------- --------- -------- --------- -------- --------
Total distributions declared to
shareholders (0.37) (0.67) (0.45) (0.34) (0.45) (0.51)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 10.08 $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83
Total return(d) 5.19%(e) 7.82% 5.46% 9.27% 10.65%(f) (3.02)%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.47% 1.52% 1.50% 1.50% 1.50% 1.50%
Interest expense & facility expense
allocated from Portfolio 0.03% 0.04% 0.05% --(g) --(g) 0.03%
Net expenses(h) 1.50% 1.56% 1.55% 1.50% 1.50% 1.53%
Net investment income 7.32% 6.73% 4.70% 3.51% 5.05% 5.48%(b)
Waiver/reimbursement -- 0.01% 0.08% 0.17% 0.28% 0.28%
Net assets, end of period (000's) $ 141,483 $ 150,922 $ 169,780 $ 191,365 $ 163,448 $ 174,707
<FN>
- ----------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01,
and increased the ratio of net investment income to average net assets
from 5.47% to 5.48%. Per share data and ratios for periods prior to August
31, 2002 have not been restated to reflect this change in presentation.
(c) Rounds to less than $0.01.
(d) Total return is at net asset value assuming all distributions reinvested
and no CDSC. Had the Portfolio's investment adviser not waived or
reimbursed a portion of expenses, total return would have been reduced.
(e) Not annualized.
(f) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Fund's Class B Shares return.
(g) Rounds to less than 0.01%.
(h) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
See accompanying Notes to Financial Statements. | 25
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2007
CLASS C SHARES (UNAUDITED) 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.35 0.65 0.45 0.32 0.44 0.50(b)
Net realized and unrealized gain/(loss)
allocated from Portfolio(a) 0.14 0.08 0.06 0.52 0.46 (0.79)(b)
---------- --------- -------- --------- -------- --------
Total from investment operations 0.49 0.73 0.51 0.84 0.90 (0.29)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.36) (0.65) (0.44) (0.33) (0.44) (0.50)
From net realized gains -- -- -- -- -- --(c)
---------- --------- -------- --------- -------- --------
Total distributions declared to
shareholders (0.36) (0.65) (0.44) (0.33) (0.44) (0.50)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 10.08 $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83
Total return(d) 5.40%(e) 7.65% 5.30% 9.10% 10.48%(f) (3.16)%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 1.62% 1.67% 1.65% 1.65% 1.65% 1.65%
Interest expense & facility expense
allocated from Portfolio 0.03% 0.04% 0.05% --(g) --(g) 0.03%
Net expenses(h) 1.65% 1.71% 1.70% 1.65% 1.65% 1.68%
Net investment income 7.17% 6.58% 4.55% 3.28% 4.88% 5.33%(b)
Waiver/reimbursement -- 0.01% 0.08% 0.17% 0.28% 0.28%
Net assets, end of period (000's) $ 807,118 $ 627,964 $ 366,841 $ 278,797 $ 132,656 $ 137,098
<FN>
- ----------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01,
and increased the ratio of net investment income to average net assets
from 5.32% to 5.33%. Per share data and ratios for periods prior to August
31, 2002 have not been restated to reflect this change in presentation.
(c) Rounds to less than $0.01.
(d) Total return is at net asset value assuming all distributions reinvested
and no CDSC. Had the Portfolio's investment adviser not waived or
reimbursed a portion of expenses, total return would have been reduced.
(e) Not annualized.
(f) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Fund's Class C Shares return.
(g) Rounds to less than 0.01%.
(h) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
26 | See accompanying Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2007
CLASS Z SHARES (UNAUDITED) 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.40 0.74 0.53 0.40 0.50 0.57(b)
Net realized and unrealized gain/(loss)
allocated from Portfolio(a) 0.13 0.08 0.06 0.52 0.47 (0.78)(b)
----------- ---------- --------- ---------- --------- ---------
Total from investment operations 0.53 0.82 0.59 0.92 0.97 (0.21)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.40) (0.74) (0.52) (0.41) (0.51) (0.58)
From net realized gains -- -- -- -- -- --(c)
---------- --------- -------- --------- -------- --------
Total distributions declared to
shareholders (0.40) (0.74) (0.52) (0.41) (0.51) (0.58)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 10.08 $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83
Total return (d) 5.55%(e) 8.57% 6.20% 10.03% 11.42%(f) (2.33)%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net operating expenses 0.77% 0.82% 0.80% 0.80% 0.80% 0.80%
Interest expense & facility expense
allocated from Portfolio 0.03% 0.04% 0.05% --(g) --(g) 0.03%
Net expenses(h) 0.80% 0.86% 0.85% 0.80% 0.80% 0.83%
Net investment income 8.02% 7.43% 5.40% 4.12% 5.53% 6.18%(b)
Waiver/reimbursement -- 0.01% 0.08% 0.17% 0.28% 0.28%
Net assets, end of period (000's) $ 278,493 $ 225,284 $ 192,482 $ 139,577 $ 31,055 $ 13,236
<FN>
- ----------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01,
and increased the ratio of net investment income to average net assets
from 6.17% to 6.18%. Per share data and ratios for periods prior to August
31, 2002 have not been restated to reflect this change in presentation.
(c) Rounds to less than $0.01.
(d) Total return is at net asset value assuming all distributions reinvested.
Had the Portfolio's investment adviser not waived or reimbursed a portion
of expenses, total return would have been reduced.
(e) Not annualized.
(f) Total return includes a voluntary reimbursement by the Portfolio's
investment adviser for a realized investment loss on an investment not
meeting the Portfolio's investment restrictions. This reimbursement had an
impact of less than 0.01% on the Fund's Class Z Shares return.
(g) Rounds to less than 0.01%.
(h) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
See accompanying Notes to Financial Statements. | 27
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND
NOTE 1. ORGANIZATION
Highland Floating Rate Fund (the "Fund") is a Massachusetts business trust
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a non-diversified, closed-end management investment company.
INVESTMENT OBJECTIVE
The Fund invests all of its investable assets in Highland Floating Rate Limited
Liability Company (the "Portfolio"). The Portfolio seeks a high level of current
income consistent with preservation of capital.
THE PORTFOLIO
The Portfolio is registered under the 1940 Act as a non-diversified, closed-end
management investment company and is organized as a Delaware limited liability
company. The Portfolio allocates income, expenses and realized and unrealized
gains and losses to each investor on a daily basis, based on methods in
compliance with the Internal Revenue Code of 1986, as amended (the "Code").
Prior to May 5, 2006, the Fund and Highland Institutional Floating Rate Income
Fund (the "Institutional Fund") were the sole investors in the Portfolio. On May
5, 2006, the Institutional Fund liquidated and the Fund became the sole investor
in the Portfolio. At February 28, 2007, the Fund was the sole investor in the
Portfolio.
FUND SHARES
The Fund may issue an unlimited number of shares and continuously offers three
classes of shares: Class A, Class C and Class Z. The Fund has discontinued
selling Class B Shares to new and existing investors, although existing
investors may still reinvest distributions in Class B Shares. Certain share
classes have their own sales charge and bear class specific expenses, which
include distribution fees and service fees.
Class A Shares are subject to a maximum front-end sales charge of 3.50% based on
the amount of initial investment. Class A Shares purchased without an initial
sales charge by accounts aggregating $1 million and greater 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 the Class B CDSC. Class C Shares are
subject to a 1.00% CDSC on shares sold within one year after purchase. Class Z
Shares are not subject to a sales charge. There are certain restrictions on the
purchase of Class Z Shares, as described in the Fund's prospectus.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Portfolio and the Fund in the preparation of their financial statements.
SECURITY VALUATION
The value of the Fund's assets is based on its proportionate share of the
current market value of the Portfolio's net assets. For securities with readily
available market quotations, the Portfolio uses those quotations for pricing.
Securities without a sale price or bid and ask quotations on the valuation day
will be priced by an independent pricing service. 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. If securities do not have readily available market
quotations or pricing service prices, including circumstances under which such
are determined not to be accurate or current (including when events materially
affect the value of securities occurring between the time when market price is
determined and calculation of the Portfolio's net asset value), such securities
are valued at their fair value, as determined in good faith by the Portfolio's
investment adviser, Highland Capital Management, L.P. ("Highland" or the
"Investment Adviser"), in accordance with procedures established by the
Portfolio's Board of Trustees. In these cases, the Portfolio's net asset value
will reflect the affected portfolio securities' value as determined in the
judgment of the Board of Trustees or its designee instead of being determined by
the market. Using a fair value pricing methodology to price securities may
result in a value that is different from a security's most recent sale price and
from the prices used by other investment companies to calculate their net asset
values. There can be no assurance that the Portfolio's valuation of a security
will not differ from the amount that it realizes upon the sale of such security.
28 | Semi-Annual Report
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. Costs 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 PM London Time
Spot Rate. Fluctuations in the value of the foreign currencies and other assets
and liabilities resulting from changes in exchange rates, between trade and
settlement dates on securities transactions and between the accrual and payment
dates on dividends, interest income and foreign withholding taxes, are recorded
as unrealized foreign currency gains (losses). Realized gains (losses) and
unrealized appreciation (depreciation) on investment securities and income and
expenses are translated on the respective dates of such transactions. The effect
of changes in foreign currency exchange rates on investments in securities are
not segregated in the statement of operations from the effects of changes in
market prices of those securities, but are included with the net realized and
unrealized gain or loss on investment securities.
FORWARD FOREIGN CURRENCY CONTRACTS
In order to protect against a possible loss on investments resulting from a
decline or appreciation in the value of a particular foreign currency against
the U.S. dollar or another foreign currency or for other reasons, the Portfolio
is authorized to enter into forward currency exchange contracts. These contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow
the Portfolio to establish a rate of exchange for a future point in time.
REPURCHASE AGREEMENTS
The Portfolio may engage in repurchase agreement transactions with institutions
that the Portfolio's investment adviser has determined are creditworthy. The
Portfolio, through its custodian, receives delivery of underlying securities
collateralizing a repurchase agreement. Collateral is at least equal, at all
times, to the value of the repurchase obligation including interest. A
repurchase agreement transaction involves certain risks in the event of default
or insolvency of the counterparty. These risks include possible delays or
restrictions upon the Portfolio's ability to dispose of the underlying
securities and a possible decline in the value of the underlying securities
during the period while the Portfolio seeks to assert its rights.
INCOME RECOGNITION
Interest income is recorded on the accrual basis and includes accretion of
discounts and amortization of premiums, if any. Facility fees received are
recorded as a reduction of cost to the loan and amortized through the maturity
of the loan. Unamortized facility fees are reflected as deferred fees on the
Statement of Assets and Liabilities.
DETERMINATION OF CLASS NET ASSET VALUES
All income, expenses (other than distribution fees and service fees, which are
class-specific expenses, as shown on the Statement of Operations) and realized
and unrealized gains (losses) are allocated to each class of shares of the Fund
on a daily basis for purposes of determining the net asset value of each class.
Income and expenses are allocated to each class based on the settled shares
method, while realized and unrealized gains (losses) are allocated based on the
relative net assets of each class.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Code and will distribute substantially all of its taxable
income and gains, if any, for its tax year, and as such will not be subject to
federal income taxes. In addition, the Portfolio is treated as a partnership for
federal income tax purposes and all of its income is allocated to its owners
based on methods in compliance with the Internal Revenue Service. Therefore, no
federal income tax provision is recorded. The Fund is the sole member of the
Portfolio. For federal income tax purposes, the Portfolio is a disregarded
entity.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared by the Fund daily and paid
monthly. Net realized capital gains, if any, are distributed at least annually.
STATEMENT OF CASH FLOWS
Information on financial transactions which have been settled through the
receipt or disbursement of cash are presented in the Statement of Cash Flows.
The cash and foreign currency amount shown in the Statement of Cash Flows is the
amount included within the Portfolio's Statement of Assets and Liabilities and
includes cash on hand at its custodian bank and sub-custodian bank,
respectively, and does not include any short-term investments.
Semi-Annual Report | 29
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND
ADDITIONAL ACCOUNTING STANDARDS
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken in the course of preparing the Fund's tax
returns to determine whether the tax positions are "more-likely-than-not" of
being sustained by the applicable tax authority. Tax benefits of positions not
deemed to meet the more-likely-than-not threshold would be booked as a tax
expense in the current year and recognized as: a liability for unrecognized tax
benefits; a reduction of an income tax refund receivable; a reduction of
deferred tax asset; an increase in deferred tax liability; or a combination
thereof. Adoption of FIN 48 is required for fiscal years beginning after
December 15, 2006, and implementation of FIN 48 for net asset value calculations
is required beginning on August 31, 2007.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157 FAIR VALUE MEASUREMENTS ("SFAS 157") was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.
At this time, Highland is evaluating the implications of FIN 48 and SFAS 157 and
their impact on the financial statements have not yet been determined.
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, 2006
and August 31, 2005 was as follows:
- --------------------------------------------------------------------------------
2006 2005
- --------------------------------------------------------------------------------
Distributions paid from:
- --------------------------------------------------------------------------------
Ordinary income* $93,180,034 $43,895,175
- --------------------------------------------------------------------------------
Long-term capital gains -- --
- --------------------------------------------------------------------------------
* For tax purposes, short-term capital gain distributions, if any, are
considered ordinary income distributions.
As of August 31, 2006, 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*
-------------------------------------------------------------
$2,956,459 $-- $7,443,072
-------------------------------------------------------------
* The differences between book-basis and tax-basis net unrealized
appreciation/depreciation are primarily due to deferral of losses from
wash sales, premium amortization and Section 732 adjustments.
Portfolio unrealized appreciation and depreciation at February 28, 2007, based
on cost of investments for federal income tax purposes, and excluding any
unrealized appreciation and depreciation from changes in the value of other
assets and liabilities resulting from changes in exchange rates, was:
- --------------------------------------------------------------------------------
Unrealized appreciation $ 43,342,205
Unrealized depreciation (11,203,783)
------------
Net unrealized appreciation $ 32,138,422
============
- --------------------------------------------------------------------------------
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 $2,282,275
-------------------------------------------------------------
2012 3,291,779
-------------------------------------------------------------
Total $5,574,054
-------------------------------------------------------------
NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, AND TRUSTEE FEES
INVESTMENT ADVISORY FEE
Highland Capital Management, L.P. is the investment adviser to the Portfolio.
Highland receives a monthly investment advisory fee from the Portfolio based on
the Portfolio's average daily net assets at the following annual rates:
-------------------------------------------------------------
Average Daily Net Assets Annual Fee Rate
-------------------------------------------------------------
First $1billion 0.45%
-------------------------------------------------------------
Next $1billion 0.40%
-------------------------------------------------------------
Over $2 billion 0.35%
-------------------------------------------------------------
For the six months ended February 28, 2007, the Portfolio's effective investment
advisory fee rate was 0.43%.
30 | Semi-Annual Report
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND
At an in-person Board meeting held on May 19, 2006, the Fund's Board, including
the members of the Board who are not "interested persons" (as defined in the
1940 Act) of the Fund (the "Independent Trustees"), unanimously approved the
continuation of the current advisory agreement between the Portfolio and
Highland (the "Advisory Agreement").
As discussed in Note 1, prior to May 5, 2006, Highland also provided portfolio
management services to another feeder fund, the Institutional Fund, via the
Institutional Fund's investment in the Portfolio. The Institutional Fund was
liquidated as of May 5, 2006. The Fund's management believes that it would be in
the best interests of the Fund's shareholders for the Fund to terminate the
Portfolio by exchanging all of its shares in the Portfolio for all of the assets
of the Portfolio and investing directly in securities. Once the Fund withdraws
from the Portfolio, the Portfolio will be dissolved. At that time, the Fund
would adopt an investment advisory agreement with Highland with the same terms
and fee arrangements as the advisory agreement that is in place at that time.
ADMINISTRATION FEES
Highland provides administrative services to the Portfolio and the Fund for a
monthly administration fee at the annual rate of 0.20% of the Fund's average
daily net assets. The Fund, but not the Portfolio, pays Highland for these
services. Under separate sub-administration agreements, Highland has delegated
certain administrative functions to PFPC Inc. ("PFPC"). Highland pays PFPC
directly for these services.
SERVICE AND DISTRIBUTION FEES
PFPC Distributors, Inc. (the "Distributor") serves as the principal underwriter
and distributor of the Fund's shares. The Distributor receives a CDSC imposed on
certain redemptions of Class A, Class B and Class C Shares. For the six months
ended February 28, 2007, the Distributor received $25,887, $47,714 and $45,653
of CDSCs 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 an annual rate of 0.25% of the average daily net assets attributable to Class
A, Class B and Class C Shares of the Fund. The Plan also requires the payment of
a monthly distribution fee to the Distributor at an annual rate of 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 by the Distributor to dealers who sold such shares.
FEES PAID TO OFFICERS AND TRUSTEES
The Fund pays no compensation to its one interested Trustee or to any of its
other officers, all of whom are employees of Highland.
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940 the "1940 Act"), as amended, of the Portfolio and the Fund each
receive an annual retainer fee of $25,000 for services provided as Trustees of
the Portfolio and the Fund. The Fund pays $20,000 of this fee and the remaining
$5,000 is paid by the Portfolio.
NOTE 5. PORTFOLIO INFORMATION
For the six months ended February 28, 2007, the cost of purchases and proceeds
from sales of securities, excluding short-term obligations, were $1,034,134,567
and $818,829,952, respectively.
NOTE 6. PERIODIC REPURCHASE OFFERS
The Fund has adopted a fundamental policy to offer each calendar quarter to
repurchase a specified percentage (between 5% and 25%) of the shares then
outstanding at the Fund's net asset value ("Repurchase Offers"). Repurchase
Offers are scheduled to occur on or about the 15th day (or the next business day
if the 15th is not a business day) in the months of March, June, September, and
December. It is anticipated that normally the date on which the repurchase price
of shares will be determined (the "Repurchase Pricing Date") will be the same
date as the deadline for shareholders to provide their repurchase requests to
the Distributor (the "Repurchase Request Deadline"), and if so, the Repurchase
Request Deadline will be set for a time no later than the close of regular
trading on the New York Stock Exchange 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, 2007, there were two Repurchase Offers.
For each Repurchase Offer, the Fund offered to repurchase 10% of its shares. In
the September 2006 and December 2006 Repurchase Offers, 8.03% and 7.15%,
respectively, of shares outstanding were repurchased.
Semi-Annual Report | 31
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND
NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS
The Portfolio invests at least 80% of its net assets (plus any borrowings for
investment purposes) in adjustable rate senior loans ("Senior Loans") the
interest rates of which float or vary periodically based upon a benchmark
indicator of prevailing interest rates to domestic foreign corporations,
partnerships and other entities ("Borrowers"). If the lead lender in a typical
lending syndicate becomes insolvent, enters FDIC receivership or, if not FDIC
insured, enters into bankruptcy, the Portfolio may incur certain costs and
delays in receiving payment or may suffer a loss of principal and/or interest.
When the Portfolio purchases a participation of a Senior Loan interest, the
Portfolio typically enters into a contractual agreement with the lender or other
third party selling the participation, not with the borrower directly. As such,
the Portfolio assumes the credit risk of the Borrower, selling participant or
other persons interpositioned between the Portfolio and the Borrower. The
ability of Borrowers to meet their obligations may be affected by economic
developments in a specific industry.
At February 28, 2007, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Portfolio on a
participation basis.
- --------------------------------------------------------------------------------
Principal
Selling Participant Amount Value
- --------------------------------------------------------------------------------
Bank of America, NA:
Gila River Power, L.P.
Tranche A Term Loan $240,566 $ 286,875
Tranche B Term Loan 232,075 276,750
Union Power Partners, L.P.
Tranche A Term Loan 141,509 168,750
Tranche B Term Loan 135,849 162,000
Citibank, NA:
Gila River Power, L.P.
Tranche A Term Loan 641,510 765,000
Tranche B Term Loan 618,868 738,000
Union Power Partners, L.P.
Tranche A Term Loan 377,359 450,000
Tranche B Term Loan 362,264 432,000
Credit Suisse, Cayman Island Branch:
Gila River Power, L.P.
Tranche A Term Loan 641,509 1,157,925
Tranche B Term Loan 618,868 1,111,641
Union Power Partners, L.P.
Tranche A Term Loan 377,359 681,131
Tranche B Term Loan 362,264 653,887
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal
Selling Participant Amount Value
- --------------------------------------------------------------------------------
CSFB:
Quality Distributions, Inc.
Term Loan 2,087,210 2,092,428
Goldman Sachs:
Bridge Information Systems, Inc.
Multidraw Term Loan 480,286 36,021
JPMorgan Chase:
EH/Transeastern, LLC/TE TOUSA
Term Loan 1,000,000 1,015,000
Infor Enterprise Solutions Holdings, Inc.
Stage One U.S. Bridge Facility 2,301,093 2,301,093
Merrill Lynch Credit Products:
Gila River Power, L.P
Tranche A Term Loan 681,604 1,009,275
Tranche B Term Loan 657,547 968,561
Union Power Partners, L.P.
Tranche A Term Loan 400,943 593,692
Tranche B Term Loan 384,906 569,943
HIT Entertainment
First lien Term Advance 1,000,000 1,008,130
- --------------------------------------------------------------------------------
NOTE 8. LINE OF CREDIT
On September 13, 2004, the Portfolio entered into a $150,000,000 credit
facility, which was increased on September 12, 2005 to $200,000,000, used for
temporary or emergency purposes to facilitate portfolio liquidity. Interest is
charged to the Portfolio based on its borrowings. In addition, the Portfolio has
agreed to pay facility expenses on the unutilized line of credit, which are
included on the Statement of Operations.
For the six months ended February 28, 2007, the average daily loan balance
outstanding on days where borrowings existed was $82,777,778 at a weighted
average interest rate of 8.25%.
Interest expense allocated to the Fund of $170,729 was paid for use of the line
of credit and is included on the Statement of Operations.
NOTE 9. UNFUNDED LOAN COMMITMENTS
As of February 28, 2007, the Portfolio had unfunded loan commitments of
$26,839,756, which could be extended at the option of the Borrower, pursuant to
the following loan agreements:
32 | Semi-Annual Report
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND
- --------------------------------------------------------------------------------
Unfunded
Loan
Borrower Commitment
- --------------------------------------------------------------------------------
American Buildings Co. $ 239,463
- --------------------------------------------------------------------------------
Autocam Corp. 38,773
- --------------------------------------------------------------------------------
Atrium Co., Inc. 164,118
- --------------------------------------------------------------------------------
Buffets Holdings, Inc. 28,125
- --------------------------------------------------------------------------------
Centennial Cellular Operating Co. 2,250,000
- --------------------------------------------------------------------------------
Cornerstone Holding, Inc. 562,525
- --------------------------------------------------------------------------------
Covanta Energy Corp. 1,000,000
- --------------------------------------------------------------------------------
Cricket Communications, Inc. 6,500,000
- --------------------------------------------------------------------------------
DeCrane Aircraft Holdings, Inc. 1,000,000
- --------------------------------------------------------------------------------
Federal-Mogul Corp. 102,746
- --------------------------------------------------------------------------------
Global Tel Link Corp. 652,174
- --------------------------------------------------------------------------------
Interstate Bakeries Corp. 7,500,000
- --------------------------------------------------------------------------------
Millennium Digital Media Systems, LLC 3,680,705
- --------------------------------------------------------------------------------
Oglebay Norton Co. 200,000
- --------------------------------------------------------------------------------
Standard Steel, LLC 166,667
- --------------------------------------------------------------------------------
Trump Entertainment Resorts, Inc. 2,219,972
- --------------------------------------------------------------------------------
Ypso Holding SA 534,488
- --------------------------------------------------------------------------------
$26,839,756
===========
- --------------------------------------------------------------------------------
NOTE 10. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES
INDUSTRY FOCUS
The Portfolio may focus its investments in certain industries, subjecting it to
greater risk than a Portfolio that is more diversified.
NON-PAYMENT RISK
Senior Loans, like other corporate debt obligations, are subject to the risk of
non-payment of scheduled interest and/or principal. Non-payment would result in
a reduction of income to the Portfolio, a reduction in the value of the Senior
Loan experiencing non-payment and a potential decrease in the net asset value of
the Fund.
CREDIT RISK
Securities rated below investment grade are commonly referred to as high-yield,
high risk or "junk debt." They are regarded as predominantly speculative with
respect to the issuing company's continuing ability to meet principal and/or
interest payments. Investments in high-yield Senior Loans may result in greater
net asset value fluctuation than if the Portfolio did not make such investments.
CURRENCY RISK
A portion of the Portfolio'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
Portfolio's investment performance may be negatively affected by a devaluation
of a currency in which the Portfolio's investments are quoted or denominated.
Further, the Portfolio's investment performance may be significantly affected,
either positively or negatively, by currency exchange rates because the U.S.
dollar value of securities quoted or denominated in another currency will
increase or decrease in response to changes in the value of such currency in
relation to the U.S. dollar.
FOREIGN SECURITIES
Investments in foreign securities may involve special risks compared to
investing in securities of U.S. issuers. These risks are more pronounced to the
extent that the Portfolio invests a significant portion of its non-U.S.
investment in one region or in the securities of emerging market issuers. These
risks 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
volatile and Highland may not be able to sell the Portfolio's securities at
times, in amounts and at prices it considers reasonable; (iii) the economies of
non-U.S. markets may grow at slower rates than expected or may experience a
downturn or recession; and (iv) withholdings and other non-U.S. taxes may
decrease the Fund's returns.
NOTE 11. SHAREHOLDER VOTING RESULTS
On September 11, 2006, at a Special Meeting of the Shareholders of the Fund (the
"Meeting"), the Shareholders of Record of the Fund were asked to vote on a new
advisory agreement between Highland Capital Management, L.P. and Highland
Floating Rate Limited Liability Company (the "Proposal"). On July 20, 2006, the
Record Date of the Meeting, the Fund had the following shares of beneficial
interest outstanding:
- --------------------------------------------------------------------------------
Class A 66,406,216.610
- --------------------------------------------------------------------------------
Class B 15,046,052.090
- --------------------------------------------------------------------------------
Class C 57,333,508.331
- --------------------------------------------------------------------------------
Class Z 21,021,477.568
- --------------------------------------------------------------------------------
Semi-Annual Report | 33
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND
On September 11, 2006, the date of the Meeting, there was not present in person,
or by proxy, more than 50% of the outstanding shares entitled to vote at the
Meeting. Therefore, the Fund's quorum requirement was not met and the Meeting
was adjourned until October 2, 2006. On October 2, 2006, the Fund's quorum
requirement was not met and the Meeting was further adjourned until October 16,
2006. Again, on October 16, 2006, the Fund's quorum requirement was not met and
the Meeting was further adjourned until October 17, 2006. On October 17, 2006,
the Fund's quorum requirement was again not met and the Meeting was adjourned
until October 18, 2006. On October 18, 2006, a majority of the total number of
outstanding shares of the Fund entitled to vote was represented at the Meeting
and the Fund's quorum requirement was met. On October 18, 2006, the Proposal was
voted on and was not approved by the required 67% of Shareholders of the Fund
present at the Meeting. The results of the voting on the Proposal on October 18,
2006 were as follows:
- --------------------------------------------------------------------------------
For: 57,771,178
- --------------------------------------------------------------------------------
Against: 21,683,569
- --------------------------------------------------------------------------------
Abstain: 8,874,322
- --------------------------------------------------------------------------------
Broker Non-Votes: 0
- --------------------------------------------------------------------------------
34 | Semi-Annual Report
IMPORTANT INFORMATION ABOUT THIS REPORT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240
TRANSFER AGENT
PFPC Inc.
101 Sabin Street
Pawtucket, RI 02860
DISTRIBUTOR
PFPC Distributors, Inc.
760 Moore Road
King of Prussia, PA 19406
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 to
request that additional reports be sent to you.
This report has been prepared for shareholders of Highland Floating Rate Fund.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to its portfolio securities, and the Fund's proxy
voting record for the most recent 12-month period ended June 30, are available
(i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the
Securities and Exchange Commission's website at http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov and also may be reviewed and copied at the Commission's
Public Reference Room in Washington, DC. Information on the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
The Statement of Additional Information includes information about Fund Trustees
and is available upon request without charge by calling 1-877-665-1287.
Semi-Annual Report | 35
THIS PAGE LEFT BLANK INTENTIONALLY.
Highland Floating Rate Fund Semi-Annual Report, February 28, 2007
[LOGO OMITTED]
pHIGHLAND FUNDS
managed by
Highland Capital Management, L.P.
www.highlandfunds.com HLC-FR-SEMI-02/07
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.
There has been no change, as of the date of this filing, in any of the portfolio
managers identified in response to paragraph (a)(1) of this Item in the
registrant's most recently filed annual report on Form N-CSR.
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 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act
and Section 302 of the Sarbanes-Oxley Act of 2002 are
attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act
and Section 906 of the Sarbanes-Oxley Act of 2002 are
attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) HIGHLAND FLOATING RATE FUND
By (Signature and Title)* /S/ JAMES D. DONDERO
-------------------------------------------------------
James D. Dondero, Chief Executive Officer
(principal executive officer)
Date APRIL 25, 2007
----------------------------------------------------------------------------
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 25, 2007
----------------------------------------------------------------------------
By (Signature and Title)* /S/ M. JASON BLACKBURN
-------------------------------------------------------
M. Jason Blackburn, Chief Financial Officer
(principal financial officer)
Date APRIL 25, 2007
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.