UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-09709
HIGHLAND FLOATING RATE ADVANTAGE FUND
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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 ADVANTAGE FUND
SEMI-ANNUAL REPORT
FEBRUARY 28, 2007
[LOGO] HIGHLAND FLOATING RATE ADVANTAGE FUND [LOGO]
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TABLE OF CONTENTS
Fund Profile ............................................................. 1
Financial Statements ..................................................... 2
Investment Portfolio .................................................. 3
Statement of Assets and Liabilities ................................... 18
Statement of Operations ............................................... 19
Statements of Changes in Net Assets ................................... 20
Statement of Cash Flows ............................................... 22
Financial Highlights .................................................. 23
Notes to Financial Statements ......................................... 27
Important Information About This Report .................................. 34
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 ADVANTAGE FUND
Objective
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To provide a high level of current income consistent with preservation of
capital.
Net Assets as of February 28, 2007
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$2,534.5 million
Portfolio Data as of February 28, 2007
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The information below provides a snapshot of the Fund at the end of the
reporting period. The Fund 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 0.5
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Ba 28.6
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B 45.9
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Caa 4.9
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NR 20.1
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TOP 5 SECTORS AS OF 02/28/07 (%)
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Retail 10.2
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Cable -- International Cable 7.3
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Utility 6.9
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Transportation -- Auto 6.7
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Information Technology 6.4
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TOP 10 HOLDINGS AS OF 02/28/07 (%)
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Movie Gallery, Inc. 3.6
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HCA, Inc. 2.7
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Ford Motor Co. 2.1
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Amsterdamse Beheer-En Consultingmaatschappij B.V. 1.9
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Ypso Holding SA 1.9
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Cricket Communications, Inc. 1.8
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Metro PCS Wireless, Inc. 1.7
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Delphi Corp. 1.7
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Blockbuster Entertainment Corp. 1.6
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Millennium Digital Media Systems, LLC 1.4
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Quality is calculated as a percentage of total notes and bonds. Sectors and
holdings are calculated as a percentage of net assets.
Semi-Annual Report | 1
FINANCIAL STATEMENTS
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FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
A GUIDE TO UNDERSTANDING THE FUND'S
FINANCIAL STATEMENTS
INVESTMENT PORTFOLIO The Investment Portfolio details all of
the Fund's holdings and their market value
as of the last day of the reporting
period. Portfolio holdings are organized
by type of asset and industry to
demonstrate areas of concentration and
diversification.
STATEMENT OF ASSETS AND LIABILITIES This statement details the Fund's assets,
liabilities, net assets and share price
for each share class as of the last day of
the reporting period. Net assets are
calculated by subtracting all the Fund's
liabilities (including any unpaid
expenses) from the total of the Fund's
investment and non-investment assets. The
share price for each class is calculated
by dividing net assets for that class by
the number of shares outstanding in that
class as of the last day of the reporting
period.
STATEMENT OF OPERATIONS This statement details income earned by
the Fund and the expenses accrued by the
Fund during the reporting period. The
Statement of Operations also shows any net
gain or loss the Fund realized on the
sales of its holdings during the period,
as well as any unrealized gains or losses
recognized over the period. The total of
these results represents the Fund's net
increase or decrease in net assets from
operations.
STATEMENTS OF CHANGES IN NET ASSETS These statements demonstrate how the
Fund's net assets were affected by its
operating results, distributions to
shareholders and shareholder transactions
(e.g., subscriptions, redemptions and
dividend reinvestments) during the
reporting period. The Statements of
Changes in Net Assets also detail 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 (e.g., class expenses and net
investment income as a percentage of
average net assets).
NOTES TO FINANCIAL STATEMENTS These notes disclose the organizational
background of the Fund, its significant
accounting policies (including those
surrounding security valuation, income
recognition and distributions to
shareholders), federal tax information,
fees and compensation paid to affiliates
and significant risks and contingencies.
2 | Semi-Annual Report
INVESTMENT PORTFOLIO (UNAUDITED)
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FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
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SENIOR LOAN NOTES (a) - 104.5%
AEROSPACE - AEROSPACE/DEFENSE - 2.3%
AWAS Capital, Inc.
12,215,153 First Priority Term Loan,
7.13%, 03/15/13 .............................. 12,184,602
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%, 09/11/14 ............... 2,445,968
2,403,900 Term C2 (USD), 8.08%, 09/11/15 ............... 2,445,968
IAP Worldwide Services, Inc.
1,000,000 First Lien Term Loan, 12/20/12 (b) ........... 998,120
1,980,000 First Lien Term Loan,
9.69%, 12/30/12 .............................. 1,976,278
3,500,000 Second Lien Term Loan,
15.19%, 06/20/13 ............................. 3,552,500
TDS Investor Corp. (Travelport)
12,984,113 Dollar Term Loan,
7.86%, 08/23/13 (b) .......................... 13,126,938
509,986 Synthetic Letter of Credit,
7.86%, 08/23/13 (b) .......................... 516,203
312,990 Tranche B Dollar Term Loan,
08/23/13 (b) ................................. 316,805
2,943,529 Vought Aircraft Industries, Inc.
Term Loan, 7.88%, 12/22/11 ................... 2,976,674
Wesco Aircraft Hardware Corp.
1,000,000 First Lien Term Loan,
7.60%, 09/30/13 .............................. 1,008,120
1,000,000 Second Lien Term Loan,
11.10%, 03/28/14 ............................. 1,022,820
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58,181,932
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AEROSPACE - AIRLINES - 2.4%
987,500 American Airlines, Inc.
Term Facility, 8.57%, 12/17/10 ............... 999,231
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
Delta Airlines, Inc.
4,708,333 DIP, Term Loan A,
8.11%, 03/16/08 .............................. 4,741,810
6,000,000 Term Loan Equipment Notes,
8.00%, 09/29/12 .............................. 6,007,500
2,000,000 Trade Claim, 12/12/07 (b) .................... 1,176,680
1,127,741 ILC Industries, Inc.
First Lien Term Loan,
7.87%, 02/24/12 .............................. 1,136,199
Northwest Airlines, Inc.
10,000,000 Term Loan DIP, 7.85%, 08/21/08 ............... 10,070,300
11,258,505 Term Loan DIP, 7.35%, 08/27/11 ............... 11,338,216
4,500,000 U.S. Bank Trade Claim, 08/21/13 (b) .......... 3,922,515
14,500,000 U S Airways, Inc.
Term Loan, 8.86%, 03/31/11 ................... 14,628,180
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60,088,131
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PRINCIPAL AMOUNT ($) VALUE ($)
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BROADCASTING - 3.3%
2,493,750 Barrington Broadcasting Group LLC
Term Loan, 7.61%, 08/11/13 ................... 2,513,999
CMP Susquehanna Corp.
978,571 Term Loan, 7.38%, 05/05/13 ................... 986,400
4,336,786 Term Loan, 7.44%, 05/05/13 ................... 4,370,960
2,403,831 Havana Bidco Ltd.
USD Term Loan B,
7.65%, 08/31/14 .............................. 2,412,845
Millennium Digital Media Systems, LLC
30,322,567 Facility B Term Loan,
8.90%, 06/30/11 .............................. 30,552,624
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.
684,882 Delay Draw Term Loan,
7.32%, 11/15/12 .............................. 683,170
1,540,984 Initial Term Loan (First Lien),
7.32%, 11/15/12 .............................. 1,541,939
1,000,000 Second Lien Term Loan,
9.82%, 11/15/13 .............................. 1,011,880
11,000,000 Paxson Communications Corp.
First Lien Term Loan,
8.61%, 01/15/12 .............................. 11,268,180
2,000,000 Persona Communications Corp.
(Canada)
Second Lien Term Loan,
11.37%, 04/12/14 ............................. 2,040,000
25,704,429 Young Broadcasting, Inc.
Term Loan, 7.88%, 11/03/12 (b) ............... 25,824,726
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84,393,983
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CABLE - INTERNATIONAL CABLE - 1.3%
4,962,500 Liberty Cablevision of Puerto Rico, Ltd.
(Puerto Rico)
Term Loan, 7.62%, 03/01/13 ................... 4,990,389
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,
10.87%, 10/31/13 ............................. 1,727,625
UPC Broadband Holding BV
(Netherlands)
6,965,000 Facility F2, 7.37%, 03/31/09 ................. 7,003,447
1,500,000 Facility H2, 7.37%, 09/30/12 ................. 1,508,640
UPC Financing Partnership
(Netherlands)
2,000,000 Facility J2, 7.37%, 03/31/13 ................. 2,011,040
3,000,000 Facility K2, 7.37%, 12/31/13 ................. 3,017,280
8,000,000 Virgin Media, Inc. (United Kingdom)
B4 Facility, 7.36%, 07/30/12 ................. 8,051,360
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33,634,272
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CABLE - US CABLE - 5.3%
2,481,255 Atlantic Broadband Finance LLC
Tranche B-1 Term Loan,
8.10%, 09/01/11 .............................. 2,515,372
7,825,000 Bresnan Communications LLC
Tranche B Term Loan,
7.11%, 09/29/13 .............................. 7,860,213
Century Cable Holdings LLC
2,500,000 Revolver, 9.25%, 03/31/09 .................... 2,425,000
See accompanying Notes to Financial Statements. | 3
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
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FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
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SENIOR LOAN NOTES (CONTINUED)
CABLE - US CABLE (CONTINUED)
Century Cable Holdings LLC (continued)
92,734 Term Loan, 10.25%, 06/30/09 .................. 91,112
Cequel Communications LLC
11,000,000 Bridge Term Loan, 10.32%, 10/30/07 ........... 11,027,500
5,250,000 First Lien Term Loan B,
7.61%, 11/05/13 .............................. 5,304,548
4,275,000 Second Lien Tranche A Term Loan,
9.86%, 05/05/14 (b) .......................... 4,408,594
3,000,000 Term Facility B, 11/01/13 (b) ................ 3,031,170
29,768,944 Charter Communications
Operating LLC
Term Loan, 7.99%, 04/28/13 ................... 30,018,408
23,812,500 CSC Holdings, Inc.
Incremental Term Loan,
7.11%, 03/29/13 .............................. 23,962,757
Knology, Inc.
5,697,964 New Term Loan, 7.98%, 06/29/10 ............... 5,740,699
5,634,519 Second Lien Term Loan,
15.35%, 06/29/11 ............................. 6,451,524
Mediacom Broadband Group
1,000,000 Tranche C Term Loan,
7.05%, 01/31/15 .............................. 1,002,300
1,000,000 Tranche D-2 Term Loan,
7.12%, 01/31/15 .............................. 999,060
1,000,000 Mediacom Illiniois, LLC
Tranche B Term Loan,
7.12%, 03/31/13 .............................. 1,005,320
Northland Cable Television, Inc.
4,950,000 First Lien Term Loan B,
9.38%, 12/22/12 .............................. 4,962,375
6,000,000 Second Lien Term Loan,
13.49%, 06/22/13 ............................. 6,000,000
Olympus Cable Holdings LLC
2,000,000 Term Loan A, 9.50%, 06/30/10 ................. 1,948,000
2,350,000 Term Loan B, 10.25%, 09/30/10 ................ 2,291,250
WideOpenWest Finance LLC
12,085,009 First Lien Term Loan,
7.61%, 05/01/13 .............................. 12,205,859
2,000,000 Second Lien Term Loan,
10.40%, 05/01/14 ............................. 2,066,240
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135,317,301
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CHEMICALS - COMMODITY & FERTILIZER - 0.5%
5,129,685 Celanese
Dollar Term Loan B,
7.37%, 04/06/11 .............................. 5,174,981
Cognis Corp. (Germany)
533,694 Dollar Facility B, 8.10%, 03/31/12 ........... 541,368
1,000,000 Facility B Second Lien, 11/15/13 (b) ......... 999,380
5,761,111 Ferro Corp.
Term Loan, 8.07%, 06/06/12 ................... 5,762,955
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12,478,684
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CHEMICALS - SPECIALTY CHEMICALS - 2.7%
2,000,000 Almatis Holdings 4 B.V. (Netherlands)
Facility A2, 7.61%, 12/31/12 ................. 2,004,380
Almatis U S Holding Inc.
1,500,000 Facility B3, 7.86%, 12/31/13 ................. 1,516,875
1,500,000 Facility C3, 8.36%, 12/31/14 ................. 1,523,430
Basell BV (Netherlands)
745,437 Facility B4 USD, 7.57%, 08/01/13 ............. 751,028
745,437 Facility C4 USD, 8.32%, 08/01/14 ............. 751,028
Basell USA, Inc.
3,727,186 Facility B2, 7.57%, 08/01/13 ................. 3,755,140
PRINCIPAL AMOUNT ($) VALUE ($)
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CHEMICALS - SPECIALTY CHEMICALS (CONTINUED)
Basell USA, Inc. (continued)
3,727,185 Facility C2, 8.32%, 08/01/14 ................. 3,755,139
4,000,000 BPC Holding Corp. (Berry Plastics)
Term Loan B, 7.12%, 09/20/13 ................. 4,030,000
Brenntag Holding GMBH & Co.
(Germany)
294,545 Acquisition Facility,
7.89%, 01/17/14 .............................. 298,964
1,205,364 Facility B2 Term Loan,
7.89%, 01/17/14 .............................. 1,223,336
1,000,000 Second Lien Dollar Facility,
11.43%, 06/22/15 ............................. 1,026,040
1,620,938 Georgia Gulf Corp.
Term Loan, 7.32%, 10/03/13 ................... 1,636,952
Ineos U S Finance LLC
1,800,000 Term Loan A4, 7.61%, 12/14/12 ................ 1,802,484
6,187,500 Term Loan B2, 7.61%, 12/14/13 ................ 6,282,293
6,187,500 Term Loan C2, 8.11%, 12/14/14 ................ 6,282,293
3,216,250 ISP Chemco, Inc.
Term Loan, 7.38%, 02/16/13 ................... 3,247,383
3,894,605 Kraton Polymers Group of Cos.
Term Loan, 7.38%, 12/23/10 ................... 3,932,344
1,841,889 Lucite International US Finco LLC
Term B-1 Facility, 8.07%, 07/07/13 ........... 1,864,913
5,000,000 Panda Hereford Ethanol, L.P.
Tranche A Term Loan,
9.07%, 07/28/13 .............................. 4,950,000
6,389,798 Rockwood Specialties Group, Inc.
Tranche E Term Loan,
7.36%, 07/30/12 .............................. 6,461,683
10,500,000 Solutia, Inc.
Add-on Term Loan B,
8.36%, 03/31/08 (b) .......................... 10,660,860
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67,756,565
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CONSUMER DURABLES - 0.2%
3,816,269 Rexair LLC
Additional Term Facility,
9.61%, 06/30/10 .............................. 3,825,809
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CONSUMER NON-DURABLES - 2.5%
2,129,807 American Achievement Corp.
Tranche B Term Loan,
7.77%, 03/25/11 .............................. 2,146,462
2,977,500 Amscan Holdings
Term Loan B, 8.38%, 12/23/12 ................. 3,011,920
1,416,546 Bare Escentuals Beauty, Inc.
(MD Beauty)
First Lien Term Loan,
7.82%, 02/18/12 .............................. 1,424,507
1,111,111 Camelbak Products, Inc.
Second Lien Term Loan,
12.91%, 02/04/12 ............................. 1,013,889
3,000,000 DS Waters of America, Inc.
Term Loan B, 7.86%, 10/27/12 ................. 3,015,000
Eastman Kodak Co.
8,586,047 Term B-1 Advance,
7.57%, 10/18/12 (b) .......................... 8,618,245
3,386,240 Term B-2 Advance Delayed Draw,
7.57%, 10/18/12 .............................. 3,397,754
3,704,286 Hanesbrands, Inc.
Term Loan B, 7.63%, 09/05/13 ................. 3,739,699
5,592,522 Hillman Group, Inc.
Term Loan B, 8.50%, 03/30/11 ................. 5,648,447
773,898 Jarden Corp.
Term Loan B1, 7.11%, 01/24/12 ................ 778,371
4 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
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FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
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SENIOR LOAN NOTES (CONTINUED)
CONSUMER NON-DURABLES (CONTINUED)
2,887,500 Owens-Brockway Glass Container Inc.
Tranche B Term Loan,
6.82%, 06/14/13 .............................. 2,901,938
429,361 Polaroid Corp.
Term Loan, 12.38%, 04/28/11 .................. 431,508
2,853,569 Prestige Brands Holdings, Inc.
Tranche B Term Loan,
7.71%, 04/06/11 .............................. 2,878,538
Solo Cup Co.
1,000,000 Second Lien Term Loan,
11.57%, 03/31/12 ............................. 1,023,750
16,024,898 Term B1 Loan, 8.82%, 02/27/11 (b) ............ 16,283,860
1,977,440 Spectrum Brands
U. S. Dollar Term Loan B,
8.60%, 02/07/12 .............................. 1,998,203
Technical Concepts, LLC
857,143 U. S. Dollar Term Loan A,
8.57%, 02/15/11 .............................. 859,286
854,464 U. S. Dollar Term Loan B,
8.82%, 02/15/13 .............................. 856,600
3,684,375 VJCS Acquisition, Inc.
Term B Facility, 7.62%, 07/19/13 ............. 3,684,375
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63,712,352
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DIVERSIFIED MEDIA - 4.6%
12,777,209 American Lawyer Media Holdings, Inc.
First Lien Term Loan,
7.86%, 03/05/10 .............................. 12,806,469
375,889 Black Press Group Ltd. (Canada)
Term B-2 Tranche Loan,
7.37%, 08/01/13 .............................. 379,648
619,111 Black Press U S Partnership
Term B-1 Tranche Loan,
7.37%, 08/01/13 .............................. 625,302
9,975,000 Cinemark USA, Inc.
Term Loan, 7.39%, 10/05/13 ................... 10,077,144
1,263,083 Day International, Inc.
First Lien U.S. Term Loan,
8.12%, 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
1,911,667 Endurance Business Media, Inc.
First Lien Term Loan,
8.07%, 07/24/13 .............................. 1,933,173
2,970,000 HIT Entertainment PLC
(United Kingdom)
First Lien Term Advance,
7.60%, 03/20/12 .............................. 2,994,146
3,960,000 Merrill Communications LLC
Combined Term Loan,
7.59%, 05/15/11 .............................. 3,995,244
Metro-Goldwyn-Mayer Holdings II, Inc./
LOC Acquisition Co.
928,571 Tranche A Term Loan,
8.61%, 04/08/11 .............................. 936,046
23,879,679 Tranche B Term Loan,
8.62%, 04/08/12 .............................. 24,156,922
North American Membership Group, Inc.
989,924 First Lien Tranche B Term Loan,
8.61%, 05/19/11 .............................. 970,126
3,000,000 Second Lien Term Loan,
12.86%, 11/18/11 ............................. 2,940,000
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
DIVERSIFIED MEDIA (CONTINUED)
Panavision, Inc.
3,059,299 First Lien Term Loan,
8.37%, 03/30/11 .............................. 3,086,068
3,500,000 Second Lien Term Loan,
12.36%, 03/30/12 ............................. 3,561,250
Penton Media, Inc.
1,000,000 First Lien Term Loan,
7.62%, 02/01/13 .............................. 1,010,625
2,500,000 First Lien Term Loan, 01/09/13 (b) ........... 2,526,550
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
8,000,000 Term Loan, 8.81%, 12/20/13 (b) ............... 8,084,960
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
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 .............................. 372,253
6,518,043 VISANT Corp.
Tranche C Term Loan,
7.37%, 10/04/11 .............................. 6,567,711
8,475,000 VNU Inc./Nielsen Finance LLC
(Netherlands)
Dollar Term Loan, 8.13%, 08/09/13 ............ 8,572,124
2,874,991 Warner Music Group
Term Loan, 7.38%, 02/28/11 ................... 2,893,161
3,000,000 West Corp.
Term B-2 Loan, 7.75%, 10/24/13 ............... 3,031,860
450,000 WMG Acquisitions Corp.
Term Loan, 02/28/11 (b) ...................... 452,844
4,000,000 Yell Group PLC (United Kingdom)
Facility B1 (USD), 7.32%, 10/27/12 ........... 4,038,320
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116,560,835
-----------
ENERGY - EXPLORATION & PRODUCTION - 1.9%
ATP Oil & Gas Corp.
11,066,820 First Lien Term Loan,
8.81%, 04/14/10 .............................. 11,198,294
11,000,000 First Lien Term Loan,
8.91%, 04/14/10 .............................. 11,254,320
1,000,000 Second Lien Term Loan,
10.11%, 10/14/10 ............................. 1,023,120
1,000,000 Forest Alaska Operating LLC
Second Lien Term Loan,
11.85%, 12/08/11 ............................. 1,010,000
11,000,000 Paramount Resources Ltd. (Canada)
Term Loan, 9.86%, 08/28/12 ................... 10,972,500
Targa Resources, Inc.
1,161,290 Synthetic Term Loan,
5.24%, 10/31/12 .............................. 1,176,526
4,778,226 Term Loan, 7.61%, 10/31/12 ................... 4,826,964
5,940,000 TARH E&P Holdings, LP
Second Lien Term Loan,
10.88%, 11/15/10 ............................. 5,940,000
-----------
47,401,724
-----------
See accompanying Notes to Financial Statements. | 5
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
SENIOR LOAN NOTES (CONTINUED)
ENERGY - OTHER ENERGY - 2.2%
Alon USA Energy, Inc.
884,444 Edgington Facility,
7.57%, 06/22/13 .............................. 893,289
7,075,556 Paramount Facility,
7.64%, 06/22/13 .............................. 7,133,080
Coffeyville Resources, LLC
1,135,135 Funded Letter of Credit,
8.36%, 12/28/10 .............................. 1,149,324
5,864,865 Tranche D Term Loan,
8.36%, 12/28/13 .............................. 5,935,712
1,000,000 El Paso Corp.
Deposit Loan, 5.22%, 07/31/11 ................ 1,008,040
4,500,000 Endeavour International Holding B.V.
(Netherlands)
Second Lien Term Loan,
12.37%, 11/01/11 ............................. 4,635,000
Helix Energy Solutions Group, Inc.
7,959,760 Term Loan, 7.33%, 07/01/13 ................... 8,018,583
3,484,910 Term Loan, 05/05/13 (b) ...................... 3,510,664
2,977,500 MEG Energy Corp. (Canada)
Initial Term Loan, 7.37%, 04/03/13 ........... 3,007,603
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
1,616,287 SemCrude LP
U.S. Term Loan, 7.59%, 03/16/11 .............. 1,629,427
1,000,000 Superior Offshore International, LLC
Term Loan, 02/15/12 (b) ...................... 1,000,000
1,000,000 Total Safety U.S., Inc.
Second Lien Term Loan,
11.85%, 12/08/13 ............................. 1,010,000
1,000,000 Venoco, Inc.
Term Loan, 9.88%, 04/28/11 ................... 1,012,500
5,000,000 Volnay Acquisition Co. I (CGG)
Term Loan, 7.32%, 01/12/14 ................... 5,043,750
3,000,000 Willbros USA, Inc.
Syndicate Term Loan,
10.25%, 10/27/09 ............................. 3,015,000
-----------
55,029,472
-----------
ENERGY - REFINING - 1.0%
2,000,000 Connacher Finance Corp.
Term Loan, 8.61%, 10/20/13 ................... 2,017,500
2,992,500 Eagle Rock Energy Partners
Series B Term Loan,
7.61%, 08/31/11 .............................. 3,003,722
Energy Transfer Equity, L.P.
2,000,000 Term Loan, 7.10%, 02/08/12 ................... 2,021,080
3,000,000 Term Loan, 11/01/12 (b) ...................... 3,031,620
3,975,038 Hawkeye Renewables LLC
First Lien Term Loan,
9.49%, 06/30/12 .............................. 3,870,693
8,500,000 J Ray McDermott SA (Panama)
Synthetic Facility, 5.26%, 06/06/12 .......... 8,585,000
Northeast Biofuels, LLC
1,365,854 Construction Term Loan,
8.61%, 06/30/13 .............................. 1,376,098
634,146 Synthetic Letter of Credit,
8.62%, 06/30/13 .............................. 638,902
1,714,286 Resolute Aneth, LLC
Second Lien Tern Loan,
10.36%, 04/13/12 ............................. 1,722,857
-----------
26,267,472
-----------
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
ENERGY - SERVICE & EQUIPMENT - 0.1%
1,719,706 Petroleum Geo-Services ASA/PGS
Finance, Inc. (Norway)
Term Loan, 7.61%, 12/17/12 ................... 1,740,136
-----------
FINANCIAL - 2.4%
1,750,000 AlixPartners, LLP
Tranche B Term Loan,
7.86%, 10/12/13 .............................. 1,768,060
American Wholesale Insurance
Group, Inc.
966,064 First Lien Term Loan A,
8.59%, 10/27/11 .............................. 967,880
2,000,000 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
997,500 Arrowhead General Insurance
Agency, Inc.
First LienTerm Loan,
8.36%, 08/08/12 .............................. 1,009,350
1,500,000 Bay Point Re Ltd. (Bermuda)
Term Loan, 9.85%, 12/31/10 ................... 1,516,875
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
5,000,000 Concord Re Ltd. (Bermuda)
Term Loan, 9.61%, 02/29/12 ................... 5,075,000
5,987,500 Conseco, Inc.
Term Loan, 7.32%, 10/10/13 (b) ............... 6,043,663
4,250,000 Crump Group, Inc.
Tranche B Term Loan,
8.37%, 12/19/12 .............................. 4,255,313
2,000,000 Cyrus Reinsurance Ltd. (Bermuda)
Term Loan, 9.60%, 12/31/10 ................... 2,002,500
997,500 First American Payment Systems, L.P.
Term Loan, 8.63%, 10/06/13 ................... 1,004,981
Flatiron Re Ltd. (Bermuda)
4,378,947 Closing Date Term Loan,
9.61%, 12/20/10 .............................. 4,433,684
2,121,053 Delayed Draw Term Loan,
9.61%, 12/20/10 .............................. 2,144,914
955,000 IPayment, Inc.
Term Facility, 7.35%, 05/10/13 ............... 960,969
2,000,000 LPL Holdings, Inc.
Tranche C Term Loan,
8.11%, 06/27/14 .............................. 2,024,380
1,174,035 Mitchell International, Inc.
Term Loan, 7.37%, 08/15/11 ................... 1,179,905
NASDAQ Stock Market, Inc.
313,843 Tranche B Term Loan,
7.10%, 04/18/12 .............................. 316,124
181,927 Tranche C Term Loan,
7.10%, 04/18/12 .............................. 183,690
National Money Mart Co. (Canada)
2,009,032 Canadian Borrower Term Loan,
8.05%, 10/30/12 .............................. 2,021,588
1,476,702 Delayed Draw Term Loan,
8.05%, 10/30/12 .............................. 1,485,931
1,000,000 Online Resources Corp.
Term Loan A, 02/09/12 (b) .................... 1,000,000
Panther Re Holdings Ltd. (Bermuda)
3,000,000 Term Loan A, 7.62%, 12/01/10 ................. 3,022,500
2,000,000 Term Loan B, 9.87%, 12/01/10 ................. 2,020,000
6 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
SENIOR LOAN NOTES (CONTINUED)
FINANCIAL (CONTINUED)
1,000,000 Riskmetrics Group Holdings, LLC
First Lien Term Loan B,
7.60%, 01/11/14 .............................. 1,011,250
5,000,000 Starbound Reinsurance Ltd. (Bermuda)
Term Loan, 9.37%, 03/01/08 ................... 5,025,000
-----------
59,558,208
-----------
FOOD AND DRUG - 1.2%
1,304,348 Bi-Lo LLC
Term Loan, 9.34%, 07/01/11 ................... 1,316,087
3,000,000 CTI Food Holdings Co. LLC
Second Lien Secured Term Loan,
11.36%, 06/02/12 ............................. 3,045,000
1,338,052 Duloxetine Royalty Sub
(Cayman Islands)
Term Loan, 9.86%, 10/18/13 ................... 1,348,087
9,152,170 Jean Coutu Group, Inc.
Term Loan B, 8.00%, 07/30/11 ................. 9,175,050
1,947,556 Leiner Health Products Group, Inc.
Tranche B Term Loan,
8.88%, 05/27/11 .............................. 1,969,057
4,033,855 Michael Foods, Inc.
Term Loan B-1, 7.35%, 11/21/10 ............... 4,062,213
971,429 Nash Finch Co.
Initial Term Loan, 7.63%, 11/12/10 ........... 971,429
8,000,000 Rite Aid Corp.
Senior Secured Bridge Loan,
10/23/07 (b) ................................. 7,960,000
211,966 Supervalu, Inc.
Term Loan B, 7.10%, 06/02/12 ................. 213,647
1,500,000 Weight Watchers International, Inc.
Term Loan B, 6.88%, 01/26/14 ................. 1,508,820
-----------
31,569,390
-----------
FOOD/TOBACCO - BEVERAGES & BOTTLING - 1.2%
684,482 AFC Enterprises, Inc.
Tranche B Term Loan,
7.38%, 05/09/11 .............................. 689,615
1,000,000 B&G Foods, Inc.
Tranche C Term Loan, 02/15/13 (b) ............ 1,011,250
3,354,697 Commonwealth Brands, Inc.
Term Loan, 7.63%, 12/22/12 ................... 3,374,423
3,300,000 National Distributing Co., Inc.
Second Lien Term Loan,
11.82%, 06/01/10 ............................. 3,308,250
8,831,127 Nellson Nutraceutical, Inc.
First Lien Term Loan,
12.25%, 10/04/09 (b) ......................... 8,637,902
1,942,447 Nutro Products, Inc.
Term Facility, 7.36%, 04/26/13 ............... 1,952,781
6,965,000 Reynolds American, Inc.
Term Loan, 7.14%, 05/31/12 ................... 7,026,989
3,952,525 WM. Bolthouse Farms, Inc.
First Lien Term Loan,
7.63%, 12/16/12 .............................. 3,980,509
-----------
29,981,719
-----------
FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS - 0.6%
Chiquita Brands LLC
97,362 Term Loan B, 8.38%, 06/28/12 ................. 98,215
6,089,137 Term Loan C, 8.38%, 06/28/12 ................. 6,195,697
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS (CONTINUED)
Dole Food Co., Inc.
186,258 Credit Linked Deposit,
5.23%, 04/12/13 .............................. 186,142
415,937 Tranche B Term Loan,
7.55%, 04/12/13 .............................. 416,653
Gate Gourmet Borrower LLC
2,036,038 Dollar Term Loan First Lien,
8.10%, 03/09/12 .............................. 2,061,488
333,311 First Lien Letter of Credit,
8.11%, 12/31/10 .............................. 337,478
45,605 Merisant Co.
Tranche B Term Loan,
8.63%, 01/11/10 .............................. 45,795
5,585,320 Michelina's
Term Loan, 8.31%, 04/02/11 ................... 5,662,119
1,389,950 Solvest, Ltd.(Bermuda)
Tranche C Term Loan,
7.47%, 04/12/13 .............................. 1,391,117
-----------
16,394,704
-----------
FOOD/TOBACCO - RESTAURANTS - 1.3%
4,000,000 Aramark Canada Ltd. (Canada)
Canadian Term Loan, 01/26/14 (b) ............. 4,045,000
Aramark Corp.
823,018 Letter of Credit Facility, 01/26/14 (b) ...... 833,133
11,676,982 U.S. Term Loan, 01/26/14 (b) ................. 11,810,800
Buffets Holdings, Inc.
583,513 PF Letter of Credit,
8.37%, 05/01/13 .............................. 587,160
1,321,875 Revolver, 9.84%, 11/01/11 (c) ................ 1,319,297
4,416,667 Term Loan, 8.36%, 11/01/13 ................... 4,444,271
2,525,000 Caribbean Restaurant LLC
Tranche B Term Loan,
8.07%, 06/30/09 .............................. 2,546,059
3,960,000 El Pollo Loco, Inc.
Term Loan, 8.37%, 11/18/11 ................... 3,981,067
1,462,500 Garden Fresh Restaurant Corp.
First Lien Term Loan B,
8.61%, 06/22/11 .............................. 1,469,813
982,188 New World Restaurant Group, Inc.
First Lien Term Loan,
8.45%, 03/31/11 .............................. 984,643
-----------
32,021,243
-----------
FOREST PRODUCTS - PACKAGING - 2.1%
7,061,114 Consolidated Container Co. LLC
Term Loan, 8.63%, 12/15/08 ................... 7,087,594
Georgia-Pacific Corp.
5,500,000 Add-on Term Loan B,
7.11%, 12/20/12 .............................. 5,553,570
27,225,000 First Lien Term B,
7.36%, 12/20/12 .............................. 27,512,496
11,263,859 Graham Packaging Co.
Term Loan B, 7.63%, 10/07/11 ................. 11,375,371
JSG Acquisitions (Smurfit Kappa)
(Ireland)
1,000,000 B1 Term Loan Facility,
7.74%, 12/01/13 .............................. 1,008,760
1,000,000 C1 Term Loan Facility,
8.24%, 12/01/14 .............................. 1,013,760
-----------
53,551,551
-----------
See accompanying Notes to Financial Statements. | 7
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
SENIOR LOAN NOTES (CONTINUED)
FOREST PRODUCTS - PAPER - 0.4%
2,737,463 Appleton Papers, Inc.
Term Loan, 7.62%, 06/11/10 ................... 2,754,572
3,325,612 Graphic Packaging International, Inc.
Tranche C Term Loan,
7.86%, 08/09/10 .............................. 3,372,370
1,500,000 NewPage Corp.
New Term Loan, 7.63%, 02/01/12 ............... 1,518,750
2,364,671 Verso Paper Holdings LLC
Term B Loan, 7.13%, 07/28/13 (d) ............. 2,375,028
-----------
10,020,720
-----------
GAMING/LEISURE - GAMING - 1.7%
3,956,125 CCM Merger, Inc./MotorCity Casino
Term Loan B, 7.36%, 04/25/12 (b) ............. 3,984,966
5,000,000 Copa Casino of Mississippi, LLC
Term Loan, 10.44%, 06/14/12 .................. 5,050,000
1,881,226 DHM Holdings Co., Inc.
Multi Draw Term Loan,
7.12%, 03/03/08 (c) .......................... 1,876,523
5,829,736 Drake Hotel Acquisition
B Note 1, 8.22%, 04/01/07 (c) ................ 5,829,736
8,000,000 Lakes Gaming and Resorts, LLC
Term Loan, 11.62%, 06/21/10 .................. 8,100,000
1,488,750 London Arena & Waterfront
Finance LLC
Tranche A Term Loan,
8.85%, 03/08/12 .............................. 1,502,714
4,975,000 Penn National Gaming, Inc.
Term Loan B, 7.11%, 10/03/12 ................. 5,022,810
1,500,000 Pinnacle Entertainment, Inc.
Term Loan B, 7.32%, 12/15/11 ................. 1,513,590
1,000,000 Town Sports International, LLC
Term Loan, 02/27/14 (b) ...................... 1,006,250
8,000,000 VML U S Finance LLC
Term B Funded Project Loan,
8.12%, 05/25/13 (b) .......................... 8,087,200
2,000,000 Wynn Las Vegas LLC
Term Loan B, 7.23%, 08/15/13 ................. 2,013,340
-----------
43,987,129
-----------
GAMING/LEISURE - OTHER LEISURE - 2.2%
1,926,748 AMF Bowling Worldwide, Inc.
Term Loan B, 8.42%, 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
Edge Las Vegas Development LLC
5,000,000 First Lien Term Loan,
8.82%, 06/01/07 .............................. 5,037,500
11,000,000 Second Lien Term Loan,
14.32%, 06/01/07 ............................. 11,055,000
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, 7.60%, 11/28/11 ................... 1,010,000
6,431,199 Kuilima Resort Co.
First Lien Term Loan,
8.07%, 09/30/10 .............................. 6,395,056
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
GAMING/LEISURE - OTHER LEISURE (CONTINUED)
4,985,000 Regal Cinemas Corp.
New Term Loan, 7.11%, 10/27/13 ............... 5,015,409
4,708,618 Trump Entertainment Resorts, Inc.
Term Loan B-1, 7.87%, 05/20/12 (c) ........... 4,755,704
910,400 Yellowstone Mountain Club, LLC
Term Loan, 7.70%, 09/30/10 ................... 910,746
-----------
56,114,763
-----------
HEALTHCARE - ACUTE CARE - 3.8%
4,089,514 Alliance Imaging, Inc.
Tranche C1 Term Loan,
7.88%, 12/29/11 .............................. 4,125,297
3,932,487 Ameripath, Inc.
Tranche B Term Loan,
7.36%, 10/31/12 (b) .......................... 3,941,690
1,980,000 Capella Healthcare, Inc.
First Lien Term Loan,
8.36%, 11/30/12 .............................. 1,999,800
1,947,613 ComPsych Investments Corp.
Term Loan, 8.12%, 04/11/12 ................... 1,962,220
Cornerstone Healthcare Group
Holding, Inc.
375,017 Revolver, 9.35%, 07/15/11 (c) ................ 360,477
1,024,458 Senior Subordinated Unsecured
Notes, 14.00%, 07/15/12 (e) .................. 932,257
3,903,897 Term Loan, 9.35%, 07/15/11 ................... 3,874,617
HCA, Inc.
1,000,000 Tranche A Term Loan,
7.86%, 11/17/12 .............................. 1,010,260
62,000,000 Tranche B Term Loan,
7.86%, 11/18/13 .............................. 62,808,480
1,857,143 Healthcare Partners, LLC
New Term Loan, 7.10%, 10/31/13 ............... 1,865,556
Matria Healthcare, Inc.
1,633,462 First Lien Tranche B Term Loan,
7.36%, 01/19/12 .............................. 1,645,712
1,995,000 Tranche B-2 Term Loan,
7.36%, 01/09/12 .............................. 2,009,963
MultiPlan, Inc.
1,980,124 Term Loan B, 7.84%, 04/12/13 ................. 2,004,876
2,500,000 Term Loan C, 7.84%, 04/12/13 ................. 2,521,875
National Mentor Holdings, Inc.
56,000 Institutional Letter of Credit Facility,
5.33%, 06/29/13 .............................. 56,367
939,280 Tranche B Term Loan,
7.87%, 06/29/13 .............................. 945,442
Sheridan Healthcare, Inc.
293,040 Delayed Draw Term Loan,
8.37%, 11/09/11 .............................. 295,238
1,701,960 First Lien Term C Loan,
8.36%, 11/09/11 .............................. 1,714,724
Stiefel Laboratories, Inc.
1,300,161 Delayed Draw Term Loan,
8.29%, 12/28/13 .............................. 1,318,038
1,699,839 First Lien Term Loan,
7.61%, 12/28/13 .............................. 1,720,034
-----------
97,112,923
-----------
HEALTHCARE - ALTERNATE SITE SERVICES - 1.7%
1,442,482 American HomePatient, Inc.
Secured Promissory Note,
6.79%, 08/01/09 (e) .......................... 1,442,482
8 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
SENIOR LOAN NOTES (CONTINUED)
HEALTHCARE - ALTERNATE SITE SERVICES (CONTINUED)
CHG Acquisition Corp./CHG
Healthcare Services, Inc./CHG
Companies Inc./ CHG
Medical Staffing, Inc.
1,600,000 First Lien Term Loan B,
8.07%, 12/20/12 .............................. 1,619,008
1,000,000 Second Lien Term Loan C,
11.32%, 12/20/13 ............................. 1,017,500
400,000 Synthetic Letter of Credit,
8.07%, 12/20/12 .............................. 404,752
CRC Health Corp.
1,995,000 New Term Loan, 7.80%, 02/06/13 ............... 2,016,506
1,985,025 Term Loan, 7.61%, 02/06/13 ................... 2,007,972
FHC Health Systems, Inc.
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
Gambro Holding AB (Sweden)
1,000,000 Facility B2, 7.82%, 06/05/14 ................. 1,010,630
1,000,000 Facility C2, 8.32%, 06/05/15 ................. 1,015,630
8,000,000 LifeCare Holdings (Rainier
Acquisition Corp.)
Term Loan, 08/11/12 (b) ...................... 7,775,040
5,661,587 Renal Advantage, Inc.
Tranche B Term Loan,
7.86%, 10/06/12 .............................. 5,725,280
Rural/Metro Operating Co. LLC
720,588 Letter of Credit Term Loan,
5.17%, 03/04/11 .............................. 726,439
2,058,824 Term 1 Loan, 7.76%, 03/04/11 ................. 2,075,541
7,325,000 Select Medical Corp.
Tranche B Term Loan,
7.11%, 02/24/12 .............................. 7,300,681
1,970,000 Skilled Healthcare LLC
First Lien Term Loan,
7.57%, 06/15/12 .............................. 1,987,238
-----------
42,792,199
-----------
HEALTHCARE - MEDICAL PRODUCTS - 6.8%
6,614,281 American Medical Systems, Inc.
Term Loan, 7.68%, 07/20/12 ................... 6,672,156
1,725,000 Bradley Pharmaceuticals, Inc.
Term Loan, 9.32%, 11/14/10 ................... 1,733,625
CCS Medical, Inc.
24,677,375 First Lien Term Loan,
8.62%, 09/30/12 (b) .......................... 24,433,316
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
2,992,500 Encore Medical IHC, Inc.
Term Loan, 7.88%, 10/04/10 ................... 3,005,607
Fenwal, Inc.
428,571 First Lien Delayed Draw Term Loan,
02/28/14 (b) ................................. 431,786
4,571,429 Initial First Lien Term Loan,
02/28/14 (b) ................................. 4,605,714
Golden Gate National Senior Care LLC
4,962,500 First Lien Term Loan,
8.11%, 03/14/11 .............................. 5,018,328
1,000,000 Second Lien Term Loan,
13.11%, 09/14/11 ............................. 1,017,500
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
HEALTHCARE - MEDICAL PRODUCTS (CONTINUED)
Graceway Pharmaceuticals, LLC
5,000,000 First Lien Term Loan B,
7.84%, 12/11/11 .............................. 5,045,300
3,000,000 Second Lien Term Loan,
11.34%, 12/29/12 ............................. 3,039,360
4,726,280 Hanger Orthopedic Group, Inc.
Tranche B Term Loan,
7.87%, 05/26/13 .............................. 4,764,657
5,000,000 Health Management Associates, Inc.
Term Loan B, 02/14/14 (b) .................... 5,046,500
20,451,250 HealthSouth Corp.
Term Loan B, 8.62%, 03/10/13 ................. 20,665,988
MMM Holding, Inc./NAMM Holdings,
Inc./PHMC (Puerto Rico)
2,927,639 MMM Original Term Loan,
7.61%, 08/22/11 .............................. 2,850,789
66,646 NAMM New Term Loan,
7.61%, 08/22/11 .............................. 64,897
688,856 NAMM Original Term Loan,
7.61%, 08/22/11 .............................. 670,774
382,283 NAMM PHMC Acquistion Term Loan,
7.61%, 08/22/11 .............................. 372,248
2,399,267 PHMC Acquisition Term Loan,
7.61%, 08/22/11 ............................ 2,336,286
8,478,750 National Renal Institutes, Inc.
Term Facility, 7.59%, 03/31/13 ............... 8,510,545
Nyco Holdings 3 ApS (Denmark)
12,500,000 Facility B2, 12/29/14 (b) .................... 12,531,250
12,500,000 Facility C2, 12/29/15 (b) .................... 12,593,750
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%, 12/06/14 ............................. 16,665,000
7,500,000 Second Lien Term Loan,
13.50%, 12/08/14 ............................. 7,706,250
Warner Chilcott Co., Inc. (Puerto Rico)
369,227 Dovobet Delayed Draw Term Loan,
7.61%, 01/18/12 .............................. 370,690
763,001 Dovonex Delayed Draw Term Loan,
7.87%, 01/18/12 .............................. 768,373
6,764,947 Tranche B Acquisition Date
Term Loan, 7.62%, 01/18/12 ................... 6,810,746
1,908,028 Warner Chilcott Corp.
Tranche C Acquisition Date
Term Loan, 7.61%, 01/18/12 ................... 1,920,545
-----------
172,648,148
-----------
HOUSING - BUILDING MATERIALS - 1.9%
American Buildings Co.
1,544,641 Term Loan A, 8.87%, 12/31/08 ................. 1,424,407
1,298,494 Term Loan B, 10.00%, 12/31/08 ................ 1,220,585
Atrium Cos., Inc.
9,915,601 Closing Date Term Facility,
8.10%, 05/31/12 .............................. 9,983,821
890,343 Term Loan B, 06/09/12 (b) .................... 896,469
990,556 Contech Construction Products
New Term Loan, 7.33%, 01/31/13 ............... 999,223
2,880,825 Custom Building Products, Inc.
First Lien Term Loan,
7.61%, 10/20/11 (b) .......................... 2,892,233
2,500,000 Jacuzzi Brands Corp.
First Lien Term Loan B, 02/07/14 (b) ......... 2,518,750
See accompanying Notes to Financial Statements. | 9
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
SENIOR LOAN NOTES (CONTINUED)
HOUSING - BUILDING MATERIALS (CONTINUED)
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,
8.36%, 02/14/12 .............................. 1,601,741
3,438,203 Pivotal Group Promontory
First Lien Term Loan,
8.07%, 08/31/10 .............................. 3,436,071
Ply Gem Industries, Inc.
497,029 Canadian Term Loan,
8.32%, 08/15/11 .............................. 504,276
7,455,433 U.S. Term Loan, 8.32%, 08/15/11 .............. 7,564,134
2,992,500 Roofing Supply Group LLC
First Lien Term Loan,
8.61%, 08/31/13 .............................. 2,970,056
1,000,000 Standard Pacific Corp.
Term Loan B, 6.86%, 05/05/13 ................. 1,000,620
4,067,060 Stile Acquisition Corp. (Canada)
Canadian Term Loan,
7.36%, 04/06/13 .............................. 4,060,715
3,389,227 Stile U.S. Acquisition Corp.
U.S. Term Loan, 7.36%, 04/06/13 .............. 3,389,566
-----------
48,994,527
-----------
HOUSING - REAL ESTATE DEVELOPMENT - 4.6%
2,500,000 BioMed Realty LP
Senior Secured Term Loan,
7.57%, 05/31/10 .............................. 2,501,550
Edge Star Partners LLC
10,000,000 First Lien Term Loan,
9.36%, 05/21/07 .............................. 10,000,000
6,000,000 Second Lien Term Loan,
15.36%, 05/21/07 ............................. 5,940,000
4,000,000 EH/Transeastern, LLC/TE TOUSA
Term Loan, 8.16%, 08/01/08 (d) (f) ........... 4,060,000
Ginn LA Conduit Lender, Inc.
2,514,016 First Lien Tranche A Credit-Linked
Deposit, 7.72%, 06/08/11 ..................... 2,481,032
5,457,700 First Lien Tranche B Term Loan,
7.72%, 06/08/11 .............................. 5,379,273
2,143,382 Giraffe Intermediate, LLC
Mezzanine Note A-1,
7.08%, 08/09/07 .............................. 2,143,382
13,438,539 Lake at Las Vegas Joint Venture
First Lien Term Loan,
10.12%, 11/01/09 ............................. 13,455,337
4,954,975 LBREP/L-Suncal Master I LLC
First Lien, 8.61%, 01/18/10 .................. 4,979,750
12,000,000 LNR Property Corp.
Initial Tranche B Term Loan,
8.12%, 07/12/11 (b) .......................... 12,100,560
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
2,429,655 November 2005 Land Investors, LLC
First Lien Term Loan,
8.11%, 05/09/11 .............................. 2,444,840
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -----------
HOUSING - REAL ESTATE DEVELOPMENT (CONTINUED)
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
7,500,000 Rubicon GSA II LLC (Australia)
Term Loan, 8.07%, 08/30/08 ................... 7,500,000
Tamarack Resort LLC
3,196,689 Tranche A Credit-Linked Deposit,
5.89%, 05/19/11 .............................. 3,204,680
4,759,070 Tranche B Term Loan,
8.61%, 05/19/11 .............................. 4,770,968
5,500,000 TE/TOUSA Mezzanine LLC
Senior Mezzanine Loan,
10.25%, 08/01/09 (f) ......................... 3,052,500
16,689,351 Westgate Investments, LLC
Senior Secured Loan,
13.00%, 09/25/10 (e) ......................... 16,689,351
4,000,000 Weststate Land Partners LLC
First Lien Term Loan,
8.57%, 05/01/07 .............................. 4,030,000
Woodlands Commercial Properties
Co., LP
5,000,000 Bridge Loan, 8.12%, 02/28/08 ................. 5,006,250
400,000 Secured Term Loan,
7.32%, 08/29/09 .............................. 400,500
1,600,000 Woodlands Land Development Co., LP
Secured Term Loan,
7.32%, 08/29/09 .............................. 1,602,000
-----------
116,850,112
-----------
INFORMATION TECHNOLOGY - 5.5%
14,297,409 Advanced Micro Devices, Inc.
Term Loan, 7.57%, 12/31/13 (b) ............... 14,444,387
9,794,485 Applied Systems, Inc.
Term Loan, 8.17%, 09/26/13 ................... 9,861,871
Aspect Software, Inc.
1,000,000 Second Lien Term Loan,
12.56%, 07/11/12 ............................. 1,005,000
1,122,188 Tranche A-1 Term Loan,
8.38%, 07/11/11 .............................. 1,129,672
1,925,000 Billing Services Group North
America, Inc.
U.S. Term Loan, 8.13%, 05/05/12 .............. 1,927,406
1,985,025 Corel Corp. (Canada)
First Lien Term Loan,
9.32%, 02/16/10 .............................. 1,985,025
Data Transmissions Network Corp.
992,500 First Lien Tranche B Term Loan,
8.36%, 03/10/13 .............................. 997,463
6,000,000 Second Lien Term Loan,
13.39%, 09/10/13 ............................. 6,030,000
992,470 Deltek Systems, Inc.
Term Loan, 7.61%, 04/22/11 ................... 997,432
20,000,000 Freescale Semiconductor, Inc.
Term Loan, 7.37%, 12/02/13 ................... 20,181,200
GXS Corp.
2,000,000 First Lien Term Loan,
10.35%, 07/29/11 ............................. 2,030,000
2,000,000 Second Lien Term Loan,
14.61%, 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
10 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- ------------
SENIOR LOAN NOTES (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
Infor Enterprise Solutions Holdings, Inc.(continued)
5,000,000 Stage One U.S. Bridge Facility,
11.50%, 07/29/13 (d) ........................ 5,000,000
Intergraph Corp.
7,000,000 First Lien Term Loan,
7.87%, 05/29/14 ............................. 7,085,330
2,000,000 Second Lien Term Loan,
11.37%, 11/29/14 ............................ 2,061,260
12,000,000 NameMedia, Inc.
Term Loan, 11.33%, 09/07/08 ................. 12,060,000
1,000,000 Nuance Communications, Inc.
Term Loan, 03/31/13 (b) ..................... 1,003,120
1,999,716 ON Semiconductor Corp.
Term Loan H, 7.61%, 12/15/11 ................ 2,013,034
3,500,000 Open Solutions, Inc.
Term Loan, 7.49%, 01/23/14 (b) .............. 3,537,205
2,992,500 Open Text Corp. (Canada)
Term Loan, 7.85%, 10/02/13 .................. 3,014,944
4,750,000 PGS Solutions, Inc.
Term Loan, 7.61%, 02/14/13 .................. 4,818,305
SCS Holdings II Inc.
(Sirius Computer Solutions)
3,938,462 First Lien Term Loan,
8.10%, 11/30/12 ............................. 3,958,154
2,000,000 Second Lien Term Loan,
11.35%, 05/30/13 ............................ 2,020,000
2,444,444 Secure Computing Corp.
Term Loan, 8.61%, 08/31/13 .................. 2,473,484
4,152,500 Serena Software, Inc.
Term Loan, 7.61%, 03/11/13 (b) .............. 4,201,832
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
2,000,000 Transfirst Holdings, Inc.
Second Lien Term Loan,
11.62%, 08/15/13 ............................ 2,015,000
X-Rite, Inc.
995,000 First Lien Initial Term Loan,
7.64%, 06/30/12 ............................. 997,488
1,000,000 Second Lien Term Loan,
10.39%, 06/30/13 ............................ 1,005,000
-------------
139,058,459
-------------
MANUFACTURING - 2.3%
1,995,000 Acument Global Technologies, Inc.
(TFS Acquisition Corp.)
Term Loan, 8.92%, 08/11/13 .................. 2,009,963
1,355,991 AIRXCEL, Inc.
First Lien Term Loan,
8.38%, 08/31/12 ............................. 1,362,771
1,333,333 CI Acquisition, Inc.
Term Loan B, 7.43%, 10/17/12 ................ 1,346,667
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
Elster Group GmbH (Nachtwache
Acquisition GmbH) (Germany)
868,082 USD Term Loan B1,
7.86%, 08/01/13 ............................. 876,763
868,082 USD Term Loan C1,
8.36%, 08/01/14 ............................. 881,103
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
MANUFACTURING (CONTINUED)
828,947 Euramax International Holdings B.V.
(Netherlands)
Second Lien European Term Loan,
12.36%, 06/29/13 ............................ 822,730
Euramax International, Inc.
3,112,360 First Lien Domestic Term Loan,
8.13%, 06/28/12 ............................. 3,136,481
1,671,053 Second Lien Domestic Term Loan,
12.36%, 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
4,000,000 Generac Acquisition Corp.
Second Lien Term Loan,
11.36%, 05/12/14 (b) ........................ 4,010,000
4,975,000 Global Petroleum, Inc. (SPI
Petroleum)
Term Loan, 9.85%, 07/26/13 .................. 4,999,875
410,364 Longyear Canada, ULC (Boart Longyear)
First Lien Canadian Borrower
Term Loan, 8.61%, 10/08/12 .................. 414,599
Longyear Global Holdings, Inc.
(Boart Longyear)
441,930 First DrillCorp Delayed Draw
Term Loan, 8.61%, 10/08/12 .................. 446,491
4,135,206 First Lien U.S. Term Loan,
8.61%, 10/08/12 ............................. 4,184,332
6,000,000 Second Lien Term Loan,
12.36%, 10/06/13 ............................ 6,105,000
Matinvest 2 SAS (Deutsche Connector)
2,250,000 B-2 Facility, 7.90%, 06/22/14 ............... 2,273,895
2,250,000 C-2 Facility, 8.08%, 06/22/15 ............... 2,285,145
5,952,749 Mueller Group LLC
Term Loan, 7.36%, 10/03/12 .................. 6,010,014
3,538,495 Polypore, Inc.
U.S. Term Loan, 8.32%, 11/12/11 ............. 3,547,341
2,916,667 Quantum Corp.
First Lien Term Loan,
9.44%, 08/22/12 ............................. 2,934,896
3,000,000 Ray Acquisition SCA (Rexel) (France)
Term Loan B-3A US,
7.61%, 08/02/14 ............................. 3,010,290
-------------
57,896,985
-------------
METALS/MINERALS - OTHER METALS/MINERALS - 1.1%
1,237,500 Alpha Natural Resources LLC
Tranche B Term Loan,
7.11%, 10/26/12 ............................. 1,243,292
1,496,250 CST Industries, Inc.
Term Loan, 8.55%, 08/09/13 .................. 1,495,322
3,000,000 JW Aluminum Co.
Second Lien Term Loan,
11.61%, 12/15/13 ............................ 3,007,500
5,000,000 Kaiser Aluminum & Fabricated
Products, LLC
Term Loan, 9.61%, 07/06/11 .................. 5,025,000
9,110,342 Murray Energy Corp.
Tranche B Term Loan,
8.37%, 01/28/10 ............................. 9,224,222
1,180,000 Neo Material Technologies, Inc.
Term Loan, 9.00%, 08/31/09 .................. 1,180,000
767,143 Oglebay Norton Co.
Tranche B Term Loan,
7.86%, 07/31/12 ............................. 774,814
See accompanying Notes to Financial Statements. | 11
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
METALS/MINERALS - OTHER METALS/MINERALS (CONTINUED)
1,989,950 PinnOak Resources, LLC
Term Loan, 8.61%, 11/23/12 .................. 1,952,638
2,977,500 Universal Buildings Products, Inc.
Term Loan, 8.86%, 04/28/12 .................. 2,962,613
-------------
26,865,401
-------------
METALS/MINERALS - STEEL - 0.0%
829,167 Standard Steel, LLC
Initial Term Loan, 7.87%, 06/30/12 .......... 836,422
-------------
RETAIL - 9.0%
Blockbuster Entertainment Corp.
1,851,836 Tranche A Term Loan,
8.63%, 08/20/09 ............................. 1,859,447
36,969,023 Tranche B Term Loan,
8.97%, 08/20/11 ............................. 37,505,073
32,935,942 Burlington Coat Factory Warehouse Corp.
Term Loan, 7.61%, 05/28/13 (b) .............. 32,982,382
2,940,281 Dollarama Group LP (Canada)
Term Loan B, 7.36%, 11/18/11 ................ 2,966,009
4,219,037 Eddie Bauer, Inc.
Term Loan, 9.60%, 06/21/11 .................. 4,238,824
1,000,000 Harbor Freight Tools USA
Tranche C Term Loan,
7.61%, 02/12/13 ............................. 1,008,120
32,352,762 Home Interiors & Gifts, Inc.
Initial Term Loan,
10.39%, 03/31/11 ............................ 23,941,044
891,434 MAPCO Express, Inc./MAPCO
Family Centers, Inc.
Term Loan, 8.10%, 04/28/11 .................. 899,234
1,000,000 Mattress Holding Corp.
Term Loan, 7.62%, 01/18/14 .................. 1,012,500
8,883,594 Michaels Stores, Inc.
Term Loan, 8.13%, 10/31/13 (b) .............. 8,981,491
Movie Gallery, Inc.
4,628,638 Term Loan A, 10.37%, 04/27/11 ............... 4,604,569
86,046,980 Term Loan B, 10.62%, 04/27/11 (b) ........... 85,778,514
9,310,970 Neiman Marcus Group, Inc. (The)
Term Loan, 7.60%, 04/06/13 .................. 9,431,268
2,000,000 PetCo Animal Supplies, Inc.
Term Loan, 8.10%, 10/28/13 .................. 2,026,240
5,490,000 Sally Holdings, LLC
Term Loan B, 7.86%, 11/18/13 ................ 5,554,782
1,492,500 Sports Authority, Inc., The
Term Loan B, 7.61%, 05/03/13 ................ 1,499,500
4,000,000 Toys "R" Us
Tranche B Term Loan,
9.61%, 07/19/12 ............................. 4,125,320
-------------
228,414,317
-------------
SERVICE - ENVIRONMENTAL SERVICES - 0.5%
1,483,861 Duratek, Inc.
Term Loan B, 7.63%, 06/07/13 ................ 1,503,804
EnergySolutions, LLC
157,233 Synthetic Letter of Credit,
7.57%, 06/07/13 ............................. 159,346
3,303,355 Term Loan, 7.63%, 09/30/11 .................. 3,347,752
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
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SERVICE - ENVIRONMENTAL SERVICES (CONTINUED)
Valleycrest Holding Co. (VCC Holdco)
1,995,000 First Lien Term Loan,
7.87%, 10/04/13 ............................. 2,016,187
500,000 Second Lien Term Loan,
10.82%, 04/04/14 ............................ 504,220
-------------
13,534,585
-------------
SERVICE - OTHER SERVICES - 2.1%
2,000,000 Cydcor, Inc.
First Lien Tranche B Term Loan,
8.57%, 02/05/13 ............................. 1,990,000
Education Management LLC
10,000,000 Term Loan C, 7.38%, 06/01/13 ................ 10,100,050
9,950,000 Tranche B Term Loan,
7.88%, 06/01/13 ............................. 10,049,500
820,312 Headwaters, Inc.
First Lien Term Loan B-1,
7.32%, 04/30/11 ............................. 824,923
Koosharem Corp.
2,925,000 First Lien Term Loan,
9.87%, 06/30/12 ............................. 2,925,000
1,000,000 Second Lien Term Loan,
15.75%, 06/30/13 ............................ 990,000
8,000,000 NES Rentals Holdings, Inc.
Second Lien Permanent Term Loan,
12.13%, 07/20/10 ............................ 8,120,000
11,250,000 Rental Service Corp.
Second Lien Initial Term Loan,
8.86%, 12/02/13 ............................. 11,486,700
United Rentals, Inc.
2,507,507 Initial Term Loan,
7.32%, 02/14/11 ............................. 2,540,030
3,229,596 Tranche B Credit-Linked Deposit,
5.32%, 02/14/11 ............................. 3,274,003
-------------
52,300,206
-------------
TELECOMMUNICATIONS - 2.8%
2,000,000 American Messaging Services, Inc.
Senior Secured Note,
11.62%, 09/03/08 ............................ 2,015,000
2,000,000 Cellnet Group, Inc.
Second Lien Term Loan,
10/12/11 (b) ................................ 2,040,000
Global Tel Link Corp.
65,217 Synthetic Deposit,
8.82%, 02/13/08 ............................. 66,114
782,609 Term Facility, 8.82%, 02/13/08 .............. 793,370
9,975,000 Intelsat Corp.
Tranche B-2 Term Loan,
7.86%, 01/03/14 ............................. 10,087,219
9,000,000 Level 3 Financing, Inc.
Term Loan, 8.37%, 12/01/11 .................. 9,080,640
1,496,250 Maritime Telecommunications
Network, Inc.
First Lien Term Loan,
8.12%, 05/11/12 ............................. 1,494,380
4,000,000 PaeTec Communications, Inc.
First Lien Initial Term Loan,
9.88%, 02/05/13 ............................. 4,063,760
4,537,900 RCN Corp.
Initial Term Loan, 7.19%, 05/30/13 .......... 4,543,572
3,000,000 Revolution Studios
Tranche B Term Loan,
9.07%, 12/21/14 ............................. 3,022,500
12 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
Sorenson Communications, Inc.
5,500,000 Second Lien Term Loan,
12.37%, 02/16/14 ............................ 5,603,125
8,445,374 Tranche B Term Loan,
8.38%, 08/16/13 ............................. 8,517,497
3,712,500 Stratos Global Corp./Stratos
Funding LP (Canada)
Term B Facility, 8.10%, 02/13/12 ............ 3,743,462
6,498,594 Time Warner Telecom Holdings, Inc.
Term Loan B, 7.32%, 01/07/13 (b) ............ 6,555,456
8,514,651 Wind Acquisition Holdings
Finance S.A. (Italy)
PIK Term Loan USD,
12.61%, 12/21/11 (b) ........................ 8,785,127
-------------
70,411,222
-------------
TELECOMMUNICATIONS - CLEC - 0.3%
7,875,000 Consolidated Communications, Inc.
Term Loan D, 7.36%, 10/14/11 ................ 7,943,906
-------------
TELECOMMUNICATIONS - DATA/INTERNET - 0.1%
2,000,000 Pine Tree Holdings/Country Road
Communications, Inc.
Second Lien Tranche B Term Loan,
13.15%, 07/15/13 ............................ 2,020,000
-------------
TELECOMMUNICATIONS - FIBER/LONG DISTANCE - 0.9%
6,500,000 FairPoint Communications, Inc.
Replacement B Term Loan,
7.13%, 02/08/12 ............................. 6,535,555
993,333 Hawaiian Telcom Communications, Inc.
Tranche B Term Loan,
7.62%, 10/31/12 ............................. 998,211
7,000,000 Qwest Corp.
Tranche B Term Loan,
6.95%, 06/30/10 (e) ......................... 7,150,010
8,500,000 WestCom Corp.
Second Lien Term Loan,
12.36%, 06/17/11 ............................ 8,569,020
-------------
23,252,796
-------------
TRANSPORTATION - AUTO - 7.2%
2,103,956 Autocam Corp.
Domestic Revolver,
9.37%, 06/21/09 (c) ......................... 2,082,916
1,958,333 Avon Automotive
U.S. Term Loan, 11.25%, 08/11/11 ............ 1,884,896
380,167 Cooper-Standard Automotive
Canada Ltd. (Canada)
Tranche B Term Loan,
7.88%, 12/23/11 ............................. 383,140
Cooper-Standard Automotive, Inc.
2,199,827 Term Loan D, 7.88%, 12/23/11 (b) ............ 2,218,393
84,453 Tranche C Term Loan,
7.88%, 12/23/11 ............................. 85,166
20,000,000 Dana Corp.
DIP Term Loan, 7.82%, 04/13/08 .............. 20,052,200
Delphi Corp.
6,000,000 First Lien DIP Term Loan Tranche B,
7.63%, 12/31/07 (b) ......................... 6,045,000
36,000,000 Second Lien DIP Term Loan
Tranche C, 8.13%, 12/31/07 (b) .............. 36,283,680
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
TRANSPORTATION - AUTO (CONTINUED)
4,500,000 Environmental Systems Products
Holdings, Inc.
Second Lien Term Loan,
15.35%, 12/12/10 ............................ 2,475,000
Federal-Mogul Corp.
1,457,560 Supplemental Revolver,
9.07%, 07/01/07 (c) ......................... 1,459,381
573,404 Tranche C Term Loan,
9.07%, 03/31/07 ............................. 571,374
52,000,000 Ford Motor Co.
Term Loan, 8.36%, 12/16/13 (b) .............. 52,662,480
12,500,000 General Motors Corp.
Secured Term Loan,
7.70%, 11/29/13 ............................. 12,667,500
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
3,132,878 Hayes Lemmerz International, Inc.
Term Loan B, 8.87%, 06/03/09 ................ 3,171,068
Hertz Corp. (The)
369,899 Delayed Draw Term Loan,
7.35%, 08/15/07 ............................. 373,139
444,444 Letter of Credit, 5.37%, 12/21/12 ........... 448,889
2,118,990 Tranche B Term Loan,
7.20%, 12/21/12 ............................. 2,140,689
4,228,533 Insurance Auto Auctions, Inc.
Delayed Draw Term Loan,
7.87%, 05/19/12 ............................. 4,236,482
Key Plastics LLC
4,409,879 Term Loan B, 8.84%, 06/29/10 ................ 4,476,027
4,597,591 Term Loan C, 11.59%, 06/29/11 ............... 4,678,049
3,988,000 Lear Corp.
First Lien Term Loan B,
7.86%, 04/25/12 ............................. 4,009,934
2,000,000 Pep Boys, The - Manny, Moe & Jack
Term Loan, 10/27/13 (b) ..................... 2,023,760
4,010,181 Tire Rack Holdings, Inc.
Tranche B Term Loan,
7.12%, 06/24/12 ............................. 4,010,181
537,020 United Components, Inc.
Tranche D Term Loan,
7.61%, 06/30/10 ............................. 540,038
5,960,000 Vanguard Car Rental USA Holding, Inc.
Term Loan, 8.36%, 06/14/13 .................. 6,026,394
-------------
182,617,741
-------------
TRANSPORTATION - LAND - 0.8%
1,000,000 JHT Holdings, Inc.
Term Loan B, 10.00%, 12/21/12 ............... 1,005,000
3,000,000 OSHKOSH TRUCK CORP.
Term Loan B, 7.35%, 12/06/13 ................ 3,029,250
2,560,846 Ozburn-Hessey Holding Co., LLC
Term Loan, 8.78%, 08/10/12 .................. 2,567,248
Quality Distribution, Inc.
2,427,481 Synthetic Letters of Credit,
5.27%, 11/13/09 ............................. 2,433,550
5,591,786 Term Loan, 8.32%, 11/13/09 .................. 5,605,766
896,267 Term Loan, 8.32%, 11/13/09 (d) .............. 898,508
4,183,320 SIRVA Worldwide, Inc.
Tranche B Term Loan,
11.61%, 12/01/10 ............................ 4,157,174
-------------
19,696,496
-------------
See accompanying Notes to Financial Statements. | 13
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
SENIOR LOAN NOTES (CONTINUED)
UTILITIES - 5.6%
2,000,000 ANP Funding I, LLC
Tranche A Term Loan,
8.87%, 07/29/10 ............................. 2,017,500
Astoria Generating Co. Acquisitions LLC
708,929 First Lien Term Loan B,
7.37%, 02/23/12 ............................. 715,132
4,500,000 Second Lien Term Loan C,
9.12%, 08/23/13 ............................. 4,565,745
Boston Generating LLC
1,551,724 First Lien Synthetic Letter of Credit
Facility, 5.24%, 12/20/13 (b) ............... 1,571,121
434,483 First Lien Synthetic Revolver,
7.62%, 12/20/13 (b) ......................... 439,913
7,013,793 First Lien Term Loan,
7.60%, 12/20/13 (b) ......................... 7,094,171
2,000,000 Mezzanine, 12.35%, 12/21/16 ................. 2,153,320
2,000,000 Second Lien Term Loan,
9.60%, 06/20/13 ............................. 2,061,260
8,828,628 Calpine Construction Finance Co. LP
First Lien Term Loan,
11.33%, 08/26/09 ............................ 9,225,916
Calpine Corp.
3,088,206 First Lien DIP Revolver,
7.62%, 12/20/07 ............................. 3,106,210
14,359,818 Second Lien Term Loan,
9.90%, 07/16/07 (f) ......................... 16,127,799
Coleto Creek Power, LP
5,985,000 Second Lien Term Loan,
9.37%, 06/28/13 ............................. 5,842,856
318,471 Synthetic Facility, 8.26%, 06/28/13 ......... 320,860
4,658,121 Term Loan, 8.11%, 06/28/13 .................. 4,693,057
Covanta Energy Corp.
329,897 Funded Letter of Credit,
5.38%, 02/09/14 ............................. 331,754
670,103 Term Loan, 6.88%, 02/09/14 .................. 673,735
4,000,000 GBGH, LLC (U S Energy)
First Lien Term Loan,
10.94%, 08/07/13 ............................ 4,010,000
1,500,000 HCP Acquisition, Inc. (Canada)
First Lien Term Loan, 02/13/14 (b) .......... 1,537,500
934,023 Infrastrux Group, Inc.
Term Loan, 8.57%, 11/05/12 (c) .............. 942,195
Longview Power, LLC
1,125,000 Construction Commitment, 08/31/11 (b) ....... 1,125,000
466,667 Delayed Draw Term Loan, 02/28/14 (b) ........ 471,044
133,333 Synthetic Letter of Credit, 02/28/14 (b) .... 134,584
2,000,000 Synthetic Revolver, 02/28/13 (b) ............ 2,000,000
400,000 Term Loan B, 02/28/14 (b) ................... 403,752
LSP General Finance Co. LLC
57,908 First Lien Delayed Draw Term Loan,
7.11%, 05/04/13 ............................. 58,318
1,345,987 First Lien Term Loan B,
7.11%, 05/04/13 ............................. 1,354,951
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
2,994,962 Mirant North America, LLC
Term Loan, 7.10%, 01/03/13 (b) .............. 3,009,937
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
UTILITIES (CONTINUED)
NATG Holdings LLC
8,316 Credit-Linked Certificate of Deposit,
6.08%, 01/23/09 (f) ......................... 7,235
126,579 Term Loan A, 8.75%, 01/23/09 (f) ............ 22,468
92,678 Term Loan B-1, 12.25%, 01/23/10 (f) ......... 16,450
9,144 Term Loan B2, 12.25%, 01/23/10 (f) .......... 8,595
NE Energy, Inc.
2,682,927 First Lien Term Loan B,
9.75%, 11/01/13 ............................. 2,718,985
1,000,000 Second Lien Term Loan,
11.75%, 05/01/14 ............................ 1,017,080
317,073 Synthetic Line of Credit,
9.75%, 11/01/13 ............................. 321,531
NRG Energy, Inc.
6,898,925 Credit-Linked Certificate of Deposit,
7.36%, 02/01/13 ............................. 6,966,672
15,059,410 Term Loan, 7.36%, 02/01/13 .................. 15,227,925
4,227,632 Plum Point Energy Associates, LLC
Second Lien Term Loan,
10.61%, 09/14/14 ............................ 4,333,323
Reliant Energy, Inc.
2,857,143 New Term Loan, 7.70%, 12/01/10 .............. 2,889,029
2,142,857 Pre-Funded Letter of Credit,
5.21%, 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,
5.39%, 06/24/11 ............................. 369,197
2,857,277 Term Loan, 9.61%, 06/24/11 .................. 2,928,709
TECO Panda Generating Co. -
Gila River Power L.P.
2,525,943 Tranche A Term Loan,
4.00%, 06/01/12 (b) (d) ..................... 4,559,328
2,436,793 Tranche B Term Loan,
9.00%, 06/01/20 (b) (d) ..................... 4,377,088
TECO Panda - Union Power Partners, L.P.
1,485,849 Tranche A Term Loan,
4.00%, 06/01/12 (b) (d) ..................... 2,681,957
1,426,415 Tranche B Term Loan,
9.00%, 06/01/20 (b) (d) ..................... 2,574,679
4,000,000 TPF Generation Holdings, LLC
Second Lien Term Loan,
9.62%, 12/15/14 ............................. 4,088,320
-------------
142,802,010
-------------
WIRELESS - CELLULAR/PCS - 4.0%
Centennial Cellular Operating Co.
3,562,535 New Term Loan, 7.36%, 02/09/11 .............. 3,596,806
4,111,181 Term Loan, 7.61%, 02/09/11 .................. 4,150,730
38,307,500 Cricket Communications, Inc.
Term B Facility, 8.11%, 06/16/13 ............ 38,714,326
11,678,302 Insight Midwest Holdings, LLC
Term Loan B, 7.61%, 04/07/14 (b) ............ 11,807,407
41,922,500 MetroPCS Wireless, Inc.
Tranche B Term Loan,
7.63%, 11/04/13 (b) ......................... 42,384,486
-------------
100,653,755
-------------
WIRELESS - WIRELESS INFRASTRUCTURE - 0.1%
1,975,000 DPI Holdings, LLC
Term Loan, 7.36%, 09/30/10 .................. 1,972,531
-------------
Total Senior Loan Notes
(Cost $2,620,565,377) ..................... 2,648,262,836
-------------
14 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
FOREIGN DENOMINATED SENIOR LOAN NOTES (a) - 13.9%
DENMARK - 0.6%
EUR
Nordic Telephone Co. Holdings APS
3,750,000 Euro Facility B2, 6.08%, 04/10/14 .......... 5,002,857
3,750,000 Euro Facility C2, 6.58%, 04/10/15 .......... 5,019,104
5,000,000 Nyco Holdings 3 ApS
Facility D (Second Lien),
8.70%, 12/29/16 ............................ 6,681,505
-------------
16,703,466
-------------
FRANCE - 2.0%
EUR
4,052,962 Autocam France, S.a.r.L.
Revolver, 6.95%, 06/21/09 .................. 5,300,229
Ypso Holding SA
3,163,863 B (Acq) 1 Facility, 6.11%, 06/15/14 ........ 4,174,504
133,622 Capex Term Loan,
2.25%, 12/15/12 (c) ........................ 175,340
7,568,709 Eur A (Acq) 1 Facility,
5.73%, 06/06/13 ............................ 9,947,909
1,705,145 Eur A (Acq) 2 Facility,
5.73%, 06/06/13 ............................ 2,237,503
9,155,675 Eur A (Recap) 1 Facility,
5.73%, 06/06/13 ............................ 11,995,152
183,579 Eur A (Recap) 2 Facility,
5.73%, 06/06/13 ............................ 240,512
5,162,092 Eur B (Acq) 2 Facility,
6.11%, 06/15/14 ............................ 6,811,033
8,198,292 Eur B (Recap) 1 Facility,
6.11%, 06/15/14 ............................ 10,822,291
-------------
51,704,473
-------------
GERMANY - 1.8%
EUR
11,500,000 Iesy Hessen/GmbH & Co. KG
Euro Senior Secured Term Loan,
6.63%, 10/15/11 ............................ 15,323,864
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
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,
7.32%, 08/04/12 ............................ 1,161,254
875,000 Euro Term Loan C2,
6.66%, 08/04/12 ............................ 1,167,033
-------------
45,605,594
-------------
ITALY - 1.4%
EUR
4,000,000 H3G S.p.A.
Euro Term Loan A1, 12/30/11 (b) ............ 5,204,549
Wind Telecommunicatione S.p.A.
8,500,000 A1 Term Loan Facility,
5.66%, 05/26/12 ............................ 11,261,773
6,750,000 B1 Term Loan Facility,
6.30%, 05/28/13 (b) ........................ 8,990,252
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
ITALY (CONTINUED)
EUR
Wind Telecommunicatione S.p.A. (continued)
6,750,000 C1 Term Loan Facility,
6.80%, 05/27/14 (b) ........................ 9,008,798
-------------
34,465,372
-------------
NETHERLANDS - 1.4%
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,
6.61%, 09/12/15 ............................ 6,909,380
1,000,000 Kabelcom D Term Loan
Second Lien,
7.86%, 03/12/16 ............................ 1,354,477
-------------
35,089,511
-------------
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
-------------
UNITED KINGDOM - 6.4%
GBP
4,000,000 Airport Development &
Investment Ltd. (BAA)
Facility B, 9.12%, 04/07/11 ................ 7,865,954
997,487 Ansco UK Finance CO. Ltd.
Tranche B Term Loan,
8.77%, 03/08/12 ............................ 1,959,710
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
1,275,000 Eggborough Power Ltd.
Term Loan, 03/31/22 (b) (e) ................ 8,745,371
Forgings International Ltd.
(Firth Rixon)
500,000 Term B1 (GBP), 7.56%, 09/11/14 ............. 992,729
500,000 Term C1 (GBP), 7.81%, 09/11/15 ............. 997,629
Havana Bidco Ltd.
602,543 Facility B, 7.65%, 08/31/14 ................ 1,183,783
2,176,700 Facility C, 8.15%, 08/31/15 ................ 4,297,774
3,000,000 Facility D (Second Lien),
10.15%, 02/29/16 ........................... 6,011,524
3,523,711 Mezzanine Loan, 9.25%, 08/31/16 ............ 7,095,486
See accompanying Notes to Financial Statements. | 15
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
PRINCIPAL AMOUNT ($) VALUE ($)
- -------------------- -------------
FOREIGN DENOMINATED SENIOR LOAN NOTES (a)
(CONTINUED)
UNITED KINGDOM (CONTINUED)
GBP
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
Lion / Katsu Investments
(Wagamama)
5,000,000 Facility B, 8.01%, 06/30/13 ................ 9,945,716
4,400,000 Facility C, 8.51%, 06/30/14 ................ 8,752,230
3,000,000 Facility E (Second Lien),
10.76%, 12/31/14 ........................... 6,004,175
Mobileserv Ltd. (Phones 4U)
1,875,000 Facility B, 8.02%, 09/22/14 ................ 3,684,594
1,875,000 Facility C, 8.52%, 09/22/15 ................ 3,692,127
Peacock Group (The)
2,250,000 Facility B, 7.33%, 10/30/13 ................ 4,436,990
2,250,000 Facility C, 7.83%, 10/30/14 ................ 4,436,990
4,959,184 PlayPower, Inc.
Add-On Term Loan,
8.17%, 06/30/12 (b) ........................ 9,791,636
Safety-Kleen JPMP SK Holdings Ltd.
1,817,400 Euro Term Loan C,
6.81%, 12/20/14 ............................ 2,418,703
1,350,000 GBP Term Loan B1,
7.10%, 12/14/12 ............................ 2,625,816
1,385,295 Sungard U K Holdings Ltd.
U.K. Term Loan B, 02/12/14 (b) ............. 2,743,659
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, 8.18%, 07/31/13 .............. 4,917,740
2,500,000 Term Loan C1, 8.68%, 07/31/14 .............. 4,933,369
United Biscuits Holdco Ltd.
12,383,459 Facility B1, 8.23%, 12/14/14 ............... 24,658,683
3,500,000 Second Lien Facility,
9.73%, 06/14/16 ............................ 7,011,661
1,750,000 Virgin Media, Inc.
GBP Tranche C Term Loan,
8.48%, 03/03/13 ............................ 3,525,310
-------------
161,206,762
-------------
Total Foreign Denominated
Senior Loan Notes
(Cost $336,269,614) ..................... 351,418,464
-------------
SHARES
- -------------
COMMON STOCKS (G) - 1.3%
UTILITIES - 1.1%
980 EBG Holding LLC ............................... 347,737
780,934 Mirant Corp. .................................. 29,097,590
-------------
29,445,327
-------------
WIRELESS - CELLULAR/PCS - 0.2%
76,137 Leap Wireless International, Inc. ............. 5,144,577
-------------
Total Common Stocks
(Cost $22,257,084) ...................... 34,589,904
-------------
SHARES VALUE ($)
- ------------- -------------
PREFERRED STOCK - 0.0%
MANUFACTURING - 0.0%
14,382 Superior Telecom, Inc., Series A .............. 14,382
-------------
Total Preferred Stock
(Cost $14,382) .......................... 14,382
-------------
UNITS
- -------------
CLAIMS (h) - 0.0%
UTILITIES - 0.0%
18,500,000 Mirant Corp. .................................. 693,750
-------------
Total Claims
(Cost $2) ............................... 693,750
-------------
TOTAL INVESTMENTS - 119.7% .................................... 3,034,979,336
-------------
(cost of $2,979,106,459) (j)
OTHER ASSETS & LIABILITIES, NET - (19.7)% ..................... (500,446,999)
-------------
NET ASSETS - 100.0% ........................................... 2,534,532,337
=============
- ----------
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 60,000,000 07/10/07 (1,270,244)
Sell EUR 48,000,000 08/01/07 (1,244,917)
Sell EUR 28,000,000 08/02/07 (688,749)
Sell GBP 25,000,000 06/07/07 356,285
Sell GBP 45,000,000 07/10/07 (1,392,772)
----------------
($ 3,526,716)
===============
(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 (e), 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 remaining maturity may be substantially less than the
stated maturities shown.
(b) All or a portion of this position has not settled. Contract rates do not
take effect until settlement date.
(c) Senior loan notes have additional unfunded loan commitments. See Note 9.
(d) Loan held on participation. See note 7.
(e) Fixed rate senior loan.
(f) The issuer is in default of certain debt covenants. Income is not being
accrued.
(g) Non-income producing security.
16 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
(h) Security is the result of company restructuring that will be converted
into equity upon the completion of court proceedings.
(i) Cost for U.S. federal income tax purposes is $2,980,168,495.
CLEC Competitive Local Exchange Carrier
DIP Debtor in Possession
EUR Euro Currency
GBP Great Britain Pound
PIK Payment In Kind
FOREIGN VARIABLE SENIOR LOAN NOTES
INDUSTRY CONCENTRATION TABLE:
(% of Total Net Assets)
Cable - International Cable ..................... 4.4%
Food/Tabacco - Beverage & Bottling .............. 2.2%
Telecommunications .............................. 1.8%
Broadcasting .................................... 1.5%
Retail .......................................... 1.3%
Healthcare - Medical Products ................... 0.5%
Manufacturing ................................... 0.5%
Utilities ....................................... 0.3%
Financial ....................................... 0.3%
Aerospace - Airlines ............................ 0.3%
Services - Environmental Services ............... 0.2%
Transportation - Auto ........................... 0.2%
Aerospace - Aerospace/Defense ................... 0.1%
Gaming/Leisure - Gaming ......................... 0.1%
Information Technology .......................... 0.1%
Housing - Real Estate Development ............... 0.1%
-----
Total ........................................... 13.9%
=====
See accompanying Notes to Financial Statements. | 17
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 (UNAUDITED) HIGHLAND FLOATING RATE ADVANTAGE FUND
($)
- -------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost $2,979,106,459) .......................................................... 3,034,979,336
Cash ................................................................................................. 116,427,656
Foreign currency (Cost $3,692,430) ................................................................... 3,679,215
Receivable for:
Investments sold .................................................................................. 109,790,953
Fund shares sold .................................................................................. 20,366,202
Dividend and interest receivable .................................................................. 5,837,639
Other assets ......................................................................................... 33,232
-------------
Total assets ................................................................................... 3,291,114,233
-------------
LIABILITIES:
Notes payable (Note 8) ............................................................................... 415,000,000
Net discount and unrealized appreciation/(depreciation) on unfunded transactions (Note 9) ............ 34,552
Net unrealized appreciation/(depreciation) on forward currency contracts ............................. 3,526,716
Payable for:
Fund shares redeemed .............................................................................. 4,317
Distributions ..................................................................................... 1,402,153
Investments purchased ............................................................................. 331,974,608
Investment advisory fee payable (Note 4) .......................................................... 1,371,138
Administration fee (Note 4) ....................................................................... 456,753
Trustees' fees (Note 4) ........................................................................... 34
Distribution and service fees (Note 4) ............................................................ 1,066,298
Interest expense (Note 8) ......................................................................... 1,652,622
Accrued expenses and other liabilities ............................................................... 92,705
-------------
Total liabilities .............................................................................. 756,581,896
-------------
NET ASSETS .............................................................................................. 2,534,532,337
=============
COMPOSITION OF NET ASSETS
Paid-in capital ...................................................................................... 2,480,487,178
Undistributed net investment income .................................................................. 2,216,775
Accumulated net realized gain/(loss) on Investments and foreign currency transactions ................ (1,318,598)
Net unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign
currency contracts and translation of assets and liabilities denominated in foreign currency ...... 53,146,982
-------------
NET ASSETS .............................................................................................. 2,534,532,337
=============
CLASS A
Net assets ........................................................................................... 993,434,209
Shares outstanding (unlimited authorization) ......................................................... 79,269,677
Net asset value per share (Net assets/shares outstanding) ............................................ 12.53(a)
Maximum offering price per share (100 / 96.50 of $12.53) ............................................. 12.98(b)
CLASS B
Net assets ........................................................................................... 110,389,266
Shares outstanding (unlimited authorization) ......................................................... 8,808,290
Net asset value and offering price per share (Net assets/shares outstanding) ......................... 12.53(a)
CLASS C
Net assets ........................................................................................... 1,155,686,042
Shares outstanding (unlimited authorization) ......................................................... 92,206,130
Net asset value and offering price per share (Net assets/shares outstanding) ......................... 12.53(a)
CLASS Z
Net assets ........................................................................................... 275,022,820
Shares outstanding (unlimited shares authorized) ..................................................... 22,051,230
Net asset value, offering and redemption price per share (Net assets/shares outstanding) ............. 12.47
<FN>
- ----------------
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $100,000 or more, the offering price is reduced.
</FN>
18 | See accompanying Notes to Financial Statements.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED)
($)
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest Income .............................................................................. 112,177,413
Dividends .................................................................................... 683
Facility and other fees ...................................................................... 10,479
-----------
Total investment income ................................................................ 112,188,575
-----------
EXPENSES:
Investment advisory fee (Note 4) ............................................................. 4,583,465
Administration fee (Note 4) .................................................................. 2,565,548
Accounting service fee ....................................................................... 271,015
Distribution fee: (Note 4)
Class A ................................................................................... 426,969
Class B ................................................................................... 254,437
Class C ................................................................................... 2,917,541
Service fee: (Note 4)
Class A ................................................................................... 1,067,422
Class B ................................................................................... 141,354
Class C ................................................................................... 1,215,642
Transfer agent fee ........................................................................... 507,880
Professional fees ............................................................................ 106,395
Trustees' fees (Note 4) ...................................................................... 50,803
Custody fee .................................................................................. 40,137
Registration fees ............................................................................ 130,665
Reports to shareholders ...................................................................... 355,787
Other expense ................................................................................ 121,290
-----------
Net operating expenses ................................................................. 14,756,350
Interest expense (Note 8) .................................................................... 11,431,915
Facility expense ............................................................................. 39,213
-----------
Net expenses ........................................................................... 26,227,478
-----------
Net investment income .................................................................. 85,961,097
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on investments ...................................................... 710,094
Net realized gain/(loss) on foreign currency transactions .................................... (1,135,847)
Net change in unrealized appreciation/(depreciation) on investments .......................... 37,545,496
Net change in unrealized appreciation/(depreciation) on unfunded transactions (Note 9) ....... 264,384
Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts ... (3,526,716)
Net change in unrealized appreciation/(depreciation) on translation of assets and
liabilities denominated in foreign currency ............................................... 807,482
-----------
Net realized and unrealized gain/(loss) on investments ................................. 34,664,893
-----------
Net increase in net assets resulting from operations ................................... 120,625,990
===========
See accompanying Notes to Financial Statements. | 19
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2007 YEAR ENDED
(UNAUDITED) AUGUST 31, 2006
($) ($)
----------------- ---------------
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income ....................................................... 85,961,097 98,262,114
Net realized gain/(loss) on investments and foreign currency transactions ... (425,753) 19,527,838
Net change in unrealized appreciation on investments, unfunded
transactions, forward foreign currency contracts and translation of
assets and liabilities denominated in foreign currency ................ 35,090,646 3,159,526
----------------- ---------------
Net increase in net assets from operations ............................ 120,625,990 120,949,478
----------------- ---------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income:
Class A .................................................................. (36,222,051) (39,595,036)
Class B .................................................................. (4,617,361) (8,837,518)
Class C .................................................................. (38,799,042) (40,413,435)
Class Z .................................................................. (10,530,387) (8,134,869)
----------------- ---------------
Total distributions from net investment income ........................ (90,168,841) (96,980,858)
From capital gains:
Class A .................................................................. (4,805,043) --
Class B .................................................................. (606,560) --
Class C .................................................................. (5,510,036) --
Class Z .................................................................. (1,314,861) --
----------------- ---------------
Total distributions from capital gains ................................ (12,236,500) --
----------------- ---------------
Total distributions declared to shareholders .......................... (102,405,341) (96,980,858)
----------------- ---------------
SHARE TRANSACTIONS
Class A
Subscriptions ............................................................ 329,078,346 509,092,824
Distributions reinvested ................................................. 26,754,021 26,150,996
Redemptions .............................................................. (99,923,642) (166,364,386)
----------------- ---------------
Net increase .......................................................... 255,908,725 368,879,434
Class B
Subscriptions ............................................................ 995 789
Distributions reinvested ................................................. 3,270,514 5,382,976
Redemptions .............................................................. (9,422,334) (16,695,298)
----------------- ---------------
Net decrease .......................................................... (6,150,825) (11,311,533)
Class C
Subscriptions ............................................................ 362,504,472 471,122,036
Distributions reinvested ................................................. 30,666,561 27,967,790
Redemptions .............................................................. (62,943,534) (84,176,434)
----------------- ---------------
Net increase .......................................................... 330,227,499 414,913,392
Class Z
Subscriptions ............................................................ 136,085,189 115,875,101
Distributions reinvested ................................................. 6,440,559 4,884,669
Redemptions .............................................................. (30,411,949) (35,802,179)
----------------- ---------------
Net increase .......................................................... 112,113,799 84,957,591
----------------- ---------------
Net increase from share transactions .................................. 692,099,198 857,438,884
----------------- ---------------
Total increase in net assets .......................................... 710,319,847 881,407,504
----------------- ---------------
NET ASSETS
Beginning of period ......................................................... 1,824,212,490 942,804,986
End of period (including undistributed net investment income of $2,216,775
and $6,424,519, respectively) ............................................ 2,534,532,337 1,824,212,490
================= ===============
20 | See accompanying Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
SIX MONTHS ENDED
FEBRUARY 28, 2007 PERIOD ENDED
(UNAUDITED) AUGUST 31, 2006
($) ($)
----------------- ---------------
CHANGE IN SHARES
Class A
Subscriptions ............................................................ 26,432,869 17,322,296
Issued for distributions reinvested ...................................... 2,148,324 846,869
Redemptions .............................................................. (8,014,358) (6,887,056)
----------------- ---------------
Net increase .......................................................... 20,566,835 11,282,109
Class B
Subscriptions ............................................................ 80 855,878
Issued for distributions reinvested ...................................... 262,695 332,132
Redemptions .............................................................. (756,396) (1,285,093)
----------------- ---------------
Net decrease .......................................................... (493,621) (97,083)
Class C
Subscriptions ............................................................ 29,113,888 13,815,400
Issued for distributions reinvested ...................................... 2,462,546 918,787
Redemptions .............................................................. (5,051,895) (5,686,448)
----------------- ---------------
Net increase .......................................................... 26,524,539 9,047,739
Class Z
Subscriptions ............................................................ 10,940,671 3,359,211
Issued for distributions reinvested ...................................... 517,159 154,587
Redemptions .............................................................. (2,437,148) (1,726,328)
----------------- ---------------
Net increase .......................................................... 9,020,682 1,787,470
See accompanying Notes to Financial Statements. | 21
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED)
($)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment income .................................................................... 85,961,097
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO
NET CASH AND FOREIGN CURRENCY USED FOR OPERATING ACTIVITIES
Purchase of investments securities ....................................................... (1,457,748,543)
Proceeds from disposition of investment securities ....................................... 756,781,965
Increase in dividends, interest and fees receivable ...................................... 16,701,042
Increase in receivable for investments sold .............................................. (92,251,740)
Decrease in other assets ................................................................. 45,785
Net amortization/(accretion) of premium/(discount) ....................................... (1,757,268)
Increase in payable for investments purchased ............................................ 48,309,517
Increase in payables to related parties .................................................. 1,052,043
Decrease in mark-to-market on realized and unrealized gain/(loss) on foreign currency .... (328,365)
Decrease in other liabilities ............................................................ (452,249)
--------------
Net cash and foreign currency flow from operating activities ....................... (643,686,716)
--------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Increase in notes payable ................................................................ 80,000,000
Increase in interest payable ............................................................. 392,289
Proceeds from shares sold ................................................................ 823,602,006
Payment of shares redeemed ............................................................... (202,697,142)
Distributions paid in cash ............................................................... (33,879,641)
--------------
Net cash flow provided by financing activities ..................................... 667,417,512
--------------
Net decrease in cash and foreign currency .......................................... 23,730,796
--------------
CASH AND FOREIGN CURRENCY
Beginning of the period .................................................................. 96,376,075
--------------
End of the period ........................................................................ 120,106,871
==============
22 | See accompanying Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2007
CLASS A SHARES (UNAUDITED) 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.50 0.96 0.67 0.56 0.81 0.83(b)
Net realized and unrealized
gain/(loss) on investments(a) 0.19 0.22 0.11 0.89 0.74 (1.26)(b)
---------- --------- --------- ----------- ---------- --------
Total from investment operations 0.69 1.18 0.78 1.45 1.55 (0.43)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.52) (0.94) (0.67) (0.59) (0.81) (0.83)
From net realized gains (0.07) -- -- -- -- --
---------- --------- --------- ----------- ---------- --------
Total distributions declared to
shareholders (0.59) (0.94) (0.67) (0.59) (0.81) (0.83)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 12.53 $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48
Total return(c) 5.75%(d) 10.08% 6.56%(e) 13.14% 15.55% (3.88)%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.16% 1.12% 1.28% 1.29%(f) 1.38%(f) 1.38%(f)
Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73% 0.99%
Net expenses(g) 2.22% 2.16% 2.00% 1.69%(f) 2.11%(f) 2.37%(f)
Net investment income 8.14% 7.78% 5.60% 4.73%(f) 7.67%(f) 7.25%(b)(f)
Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36% 0.32%
Portfolio turnover rate 28% 61% 85% 110% 90% 98%
Net assets, end of period (000's) $ 993,434 $ 729,845 $ 351,557 $ 212,205 $ 85,166 $ 69,733
<FN>
- ----------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01.
The impact to the ratio of net investment income to average net assets was
less than 0.01%. Per share data and ratios for periods prior to August 31,
2002 have not been restated to reflect this change in presentation.
(c) Total return is at net asset value assuming all distributions reinvested
and no initial sales charge or CDSC. Had the Fund's investment adviser not
waived or reimbursed a portion of expenses, total return would have been
reduced.
(d) Not annualized.
(e) Total return is calculated using the Net Asset Value used for trading at
the close of business on August 31, 2005.
(f) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(g) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
See accompanying Notes to Financial Statements. | 23
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2007
CLASS B SHARES (UNAUDITED) 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.48 0.92 0.63 0.53 0.78 0.78(b)
Net realized and unrealized
gain/(loss) on investments(a) 0.19 0.22 0.11 0.88 0.73 (1.25)(b)
---------- --------- --------- ----------- ---------- ---------
Total from investment operations 0.67 1.14 0.74 1.41 1.51 (0.47)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.50) (0.90) (0.63) (0.55) (0.77) (0.79)
From net realized gains (0.07) -- -- -- -- --
---------- --------- --------- ----------- ---------- --------
Total distributions declared to
shareholders (0.57) (0.90) (0.63) (0.55) (0.77) (0.79)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 12.53 $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48
Total return(c) 5.57%(d) 9.70% 6.19%(e) 12.75% 15.16% (4.22)%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.51% 1.47% 1.63% 1.64%(f) 1.73%(f) 1.73%(f)
Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73% 0.99%
Net expenses(g) 2.57% 2.51% 2.35% 2.04%(f) 2.46%(f) 2.72%(f)
Net investment income 7.79% 7.43% 5.25% 4.50%(f) 7.34%(f) 6.90%(b)(f)
Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36% 0.32%
Portfolio turnover rate 28% 61% 85% 110% 90% 98%
Net assets, end of period (000's) $ 110,389 $ 115,651 $ 124,500 $ 124,589 $ 76,379 $ 68,157
<FN>
- ----------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01.
The impact to the ratio of net investment income to average net assets was
less than 0.01%. Per share data and ratios for periods prior to August 31,
2002 have not been restated to reflect this change in presentation.
(c) Total return is at net asset value assuming all distributions reinvested
and no CDSC. Had the Fund's investment adviser not waived or reimbursed a
portion of expenses, total return would have been reduced.
(d) Not annualized.
(e) Total return is calculated using the Net Asset Value used for trading at
the close of business on August 31, 2005.
(f) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(g) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
24 | See accompanying Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2007
CLASS C SHARES (UNAUDITED) 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.47 0.90 0.61 0.50 0.76 0.76(b)
Net realized and unrealized
gain/(loss) on investments(a) 0.19 0.22 0.11 0.89 0.74 (1.25)(b)
---------- --------- --------- ----------- ---------- --------
Total from investment operations 0.66 1.12 0.72 1.39 1.50 (0.49)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.49) (0.88) (0.61) (0.53) (0.76) (0.77)
From net realized gains (0.07) -- -- -- -- --
---------- --------- --------- ----------- ---------- --------
Total distributions declared to
shareholders (0.56) (0.88) (0.61) (0.53) (0.76) (0.77)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 12.53 $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48
Total return(c) 5.40%(d) 9.62% 6.03%(e) 12.57% 14.99% (4.36)%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 1.66% 1.62% 1.78% 1.79%(f) 1.88%(f) 1.88%(f)
Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73% 0.99%
Net expenses(g) 2.72% 2.66% 2.50% 2.19%(f) 2.61%(f) 2.87%(f)
Net investment income 7.64% 7.28% 5.10% 4.19%(f) 7.14%(f) 6.75%(b)(f)
Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36% 0.32%
Portfolio turnover rate 28% 61% 85% 110% 90% 98%
Net assets, end of period (000's) $ 1,155,686 $ 816,720 $ 391,455 $ 278,731 $ 80,572 $ 61,811
<FN>
- ----------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01.
The impact to the ratio of net investment income to average net assets was
less than 0.01%. Per share data and ratios for periods prior to August 31,
2002 have not been restated to reflect this change in presentation.
(c) Total return is at net asset value assuming all distributions reinvested
and no CDSC. Had the Fund's investment adviser not waived or reimbursed a
portion of expenses, total return would have been reduced.
(d) Not annualized.
(e) Total return is calculated using the Net Asset Value used for trading at
the close of business on August 31, 2005.
(f) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(g) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
See accompanying Notes to Financial Statements. | 25
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGHLAND FLOATING RATE ADVANTAGE FUND
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28, 2007
CLASS Z SHARES (UNAUDITED) 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.52 1.00 0.71 0.59 0.78 0.86(b)
Net realized and unrealized
gain/(loss) on investments(a) 0.13 0.22 0.11 0.90 0.81 (1.25)(b)
----------- ---------- --------- ----------- ---------- --------
Total from investment operations 0.65 1.22 0.82 1.49 1.59 (0.39)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.54) (0.98) (0.71) (0.63) (0.85) (0.87)
From net realized gains (0.07) -- -- -- -- --
---------- --------- --------- ----------- ---------- --------
Total distributions declared to
shareholders (0.61) (0.98) (0.71) (0.63) (0.85) (0.87)
===================================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 12.47 $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48
Total return(c) 5.93%(d) 10.47% 6.93%(e) 13.52% 15.95% (3.53)%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Operating expenses 0.81% 0.77% 0.93% 0.94%(f) 1.03%(f) 1.03%(f)
Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73% 0.99%
Net expenses(g) 1.87% 1.81% 1.65% 1.34%(f) 1.76%(f) 2.02%(f)
Net investment income 8.49% 8.13% 5.95% 4.93%(f) 7.21%(f) 7.60%(b)(f)
Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36% 0.32%
Portfolio turnover rate 28% 61% 85% 110% 90% 98%
Net assets, end of period (000's) $ 275,023 $ 161,996 $ 75,293 $ 53,049 $ 5,178 $ 140
<FN>
- ----------
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended August 31, 2002, on the net investment
income and net realized and unrealized loss per share was less than $0.01.
The impact to the ratio of net investment income to average net assets was
less than 0.01%. Per share data and ratios for periods prior to August 31,
2002 have not been restated to reflect this change in presentation.
(c) Total return is at net asset value assuming all distributions reinvested.
Had the Fund's investment adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.
(d) Not annualized.
(e) Total return is calculated using the Net Asset Value used for trading at
the close of business on August 31, 2005.
(f) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(g) Net expense ratio has been calculated after applying any
waiver/reimbursement.
</FN>
26 | See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
NOTE 1. ORGANIZATION
Highland Floating Rate Advantage Fund (the "Fund") is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a non-diversified, closed-end management investment company.
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income consistent with
preservation of capital.
FUND SHARES
The Fund may issue an unlimited number of shares and continuously offers three
classes of shares: Class A, Class C and Class Z. 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 Fund in the preparation of its financial statements.
SECURITY VALUATION
The value of the Fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, the Fund
uses those quotations for pricing. 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 Fund's net asset value), such securities are valued at their fair value, as
determined in good faith by the Fund's investment adviser, Highland Capital
Management, L.P. ("Highland" or the "Investment Adviser") in accordance with
procedures established by the Fund's Board of Trustees. In these cases, the
Fund's net asset value will reflect the affected portfolio securities' value as
determined in the judgment of the Board of Trustees or its designee instead of
being determined by the market. Using a fair value pricing methodology to price
securities may result in a value that is different from a security's most recent
sale price and from the prices used by other investment companies to calculate
their net asset values. There can be no assurance that the Fund's valuation of a
security will not differ from the amount that it realizes upon the sale of such
security.
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. 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.
Semi-Annual Report | 27
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
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 Fund 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 Fund to establish a rate of exchange for a future point in time.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions with institutions that
the Fund's investment adviser has determined are creditworthy. The Fund, through
its custodian, receives delivery of underlying securities collateralizing a
repurchase agreement. Collateral is at least equal, at all times, to the value
of the repurchase obligation including interest. A repurchase agreement
transaction involves certain risks in the event of default or insolvency of the
counterparty. These risks include possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities and a possible decline in
the value of the underlying securities during the period while the Fund seeks to
assert its rights.
INCOME RECOGNITION
Interest income is recorded on the accrual basis and includes accretion of
discounts and amortization of premiums, if any. Facility fees received are
recorded as a reduction of cost to the loan and amortized through the maturity
of the loan. 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 Internal Revenue Code of 1986, as amended (the "Code"), and
will distribute substantially all of its taxable income and gains, if any, for
its tax year, and as such will not be subject to federal income taxes.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and paid monthly. Net
realized capital gains, if any, are distributed at least annually.
STATEMENT OF CASH FLOWS
Information on financial transactions which have been settled through the
receipt or disbursement of cash are presented in the Statement of Cash Flows.
The cash and foreign currency amount shown in the Statement of Cash Flows is the
amount included within the Fund's Statement of Assets and Liabilities and
includes cash and foreign currency on hand at its custodian bank and
sub-custodian bank, respectively, and does not include any short-term
investments.
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.
28 | Semi-Annual Report
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
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* $96,980,858 $43,133,311
- --------------------------------------------------------------------------------
Long-term capital gains -- --
- --------------------------------------------------------------------------------
* For tax purposes, short-term capital gains 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*
- --------------------------------------------------------------------------------
$22,490,899 $193,580 $17,274,021
- --------------------------------------------------------------------------------
* The differences between book-basis and tax-basis net unrealized
appreciation/depreciation are primarily due to deferral of losses from
wash sales and accretion/amortization on debt securities.
Unrealized appreciation and depreciation at February 28, 2007, based on cost of
investments for federal income tax purposes, and excluding any unrealized
appreciation (depreciation) from changes in the value of other assets and
liabilities resulting from changes in exchange rates, was:
- -------------------------------------------------------------------------------
Unrealized appreciation $ 57,245,412
Unrealized depreciation (2,434,571)
------------
Net unrealized appreciation $ 54,810,841
============
- -------------------------------------------------------------------------------
NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, TRUSTEE, AND OTHER
FEES
INVESTMENT ADVISORY FEE
Highland Capital Management, L.P. is the investment adviser to the Fund.
Effective December 18, 2006, the Fund is accruing a monthly investment advisory
fee based on the Fund's average daily managed assets at the following annual
rates:
- --------------------------------------------------------------------------------
Average Daily Managed Assets Annual Fee Rate
- --------------------------------------------------------------------------------
First $1billion 0.65%
- --------------------------------------------------------------------------------
Next $1billion 0.60%
- --------------------------------------------------------------------------------
Over $2billion 0.55%
- --------------------------------------------------------------------------------
Prior to December 18, 2006, the Fund was accruing a monthly investment advisory
fee based on the Fund'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 $2billion 0.35%
- --------------------------------------------------------------------------------
For the six months ended February 28, 2007, the Fund's effective investment
advisory fee rate was 0.42%.
The excess investment advisory fees held in escrow as a result of the differing
calculation methodologies (discussed below) that was expensed for the six months
ended February 28, 2007 was $1,416,799. The impact of the investment advisory
fee for the six months ended February 28, 2007 was as follows:
- -------------------------------------------------------------------------------
Calculated Investment Advisory Fee $ 6,000,264
Release of Escrow (1,416,799)
------------
Net Investment Advisory Fee $ 4,583,465
============
- -------------------------------------------------------------------------------
Without the impact of the release of the escrowed amounts, the Fund's effective
advisory fee for the six months ended February 28, 2007 was 0.55%.
On April 9, 2004, Columbia Management Advisors, Inc. ("Columbia") and Highland
entered into an agreement to sell certain of the assets of Columbia's bank loan
asset management group to Highland. Upon completion of the sale on April 15,
2004, the advisory agreement between Columbia and the Fund terminated because
such sale effected an "assignment" (as defined in the1940 Act), and an interim
advisory agreement between Highland and the Fund took effect. At a meeting held
on March 29, 2004, the prior board of trustees of the Fund, approved by an
unanimous vote of the Trustees present, (i) the interim advisory agreement to
take effect on April 15, 2004 and (ii) the agreement that was in effect between
the Fund and Highland until December 18, 2006 (the "Former Advisory Agreement"),
subject to shareholder approval. On July 30, 2004 the shareholders of the Fund
approved the Former Advisory Agreement with Highland and it became effective
immediately after such approval. Due to a drafting error, the detailed
description of the advisory fee in the proxy statement and the form of the
Former Advisory Agreement submitted to shareholders in 2004 and signed by the
parties described an advisory fee calculation methodology based on average daily
net rather than managed assets that would result in Highland's receiving a lower
advisory fee than that believed approved by the prior trustees and actually
calculated and paid to Highland since the adoption of the Former Advisory
Agreement. The only difference between the two
Semi-Annual Report | 29
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
methodologies is that the intended advisory fee would have been charged against
managed assets rather than net assets. Because the Fund borrows to seek to
enhance its returns, Highland's fee computed on the basis of average daily
managed assets would be higher than the fee computed on the basis of average
daily net assets and thus Highland may have an economic incentive to incur more
leverage in order to maximize its compensation.
In view of the time and resources it would take to obtain a judicial ruling
regarding retroactive approval of the correction under the 1940 Act, Highland
resolved to release the fee differential to the Fund and recommend that the
Board approve and submit to shareholders a new advisory agreement that would
make certain changes to the way that the advisory fee is calculated. Inasmuch as
the proxy disclosure presented to shareholders in 2004 as to the precise rate of
the advisory fee to be paid by the Fund was inconsistent with the intention of
the prior board, Highland proposed that the current Board approve a correction
to the advisory fee calculation methodology to indicate that advisory fees are
calculated based on average daily managed assets rather than average daily net
assets. Additionally, in light of the excellent performance of the Fund during
the period Highland has served as the investment adviser and in view of the fact
that the advisory/management fee for the Fund is substantially below the average
of the Fund's Lipper peer group, Highland also proposed that the Board approve
an increase in the advisory fee. At an in-person Board meeting held on May 19,
2006, the current 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 both the continuation of the Former Advisory
Agreement and a new advisory agreement between the Fund and Highland that would
include the terms that Highland proposed (the "New Advisory Agreement"). The New
Advisory Agreement was submitted to and approved by shareholders at a meeting on
December 18, 2006.
ADMINISTRATION FEES
Highland provides administrative services to the Fund for a monthly
administration fee at the annual rate of 0.20% of the Fund's average daily
managed net assets. Under a separate sub-administration agreement, Highland has
delegated certain administrative functions to PFPC Inc. ("PFPC"). 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 the 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 $46,197, $71,641 and
$136,501 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.
EXPENSE LIMITS AND FEE REIMBURSEMENTS
Effective December 8, 2006, Highland has voluntarily agreed to waive fees and
reimburse certain expenses to the extent that total expenses (exclusive of
investment advisory fees, administration fees, distribution and service fees,
brokerage commissions, interest, facility expense, taxes and extraordinary
expenses, if any) exceed 0.15% annually of the Fund's average daily net assets.
This arrangement may be revised or discontinued by Highland at any time.
FEES PAID TO OFFICERS AND TRUSTEES
The Fund pays no compensation to its one interested Trustee or any of its other
officers, all of whom are employees of Highland.
The Fund pays to each of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Fund each an annual retainer of $25,000 for
services provided as Trustees of the Fund.
NOTE 5. PORTFOLIO INFORMATION
For the six months ended February 28, 2007, the cost of purchases and proceeds
from sales of securities, excluding short-term obligations, were $1,457,748,543
and $756,781,965, respectively.
NOTE 6. PERIODIC REPURCHASE OFFERS
The Fund has adopted a fundamental policy to offer each fiscal quarter to
repurchase a specified percentage (between 5% and 25%) of the shares then
outstanding at 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 February, May, August, and
November. It is anticipated that 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
30 | Semi-Annual Report
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
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 November 2006 and February 2007, Repurchase Offers, 4.14% and 4.67%,
respectively, of shares outstanding were repurchased.
NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS
The Fund invests at least 80% of its net assets (plus any borrowings for
investment purposes) in adjustable rate senior loans ("Senior Loans"), the
interest rates of which float or vary periodically based upon a benchmark
indicator of prevailing interest rates to domestic foreign corporations,
partnerships and other entities ("Borrowers"). If the lead lender in a typical
lending syndicate becomes insolvent, enters FDIC receivership or, if not FDIC
insured enters into bankruptcy, the Fund may incur certain costs and delays in
receiving payment or may suffer a loss of principal and/or interest. When the
Fund purchases a participation of a Senior Loan interest, the Fund typically
enters into a contractual agreement with the lender or other third party selling
the participation, not with the borrower directly.
As such, the Fund assumes the credit risk of the Borrower, selling participant
or other persons interpositioned between the Fund and the Borrower. The ability
of Borrowers to meet their 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 Fund on a participation
basis.
- --------------------------------------------------------------------------------
Principal
Selling Participant Amount Value
- --------------------------------------------------------------------------------
Bank of America, NA:
Gila River Power, L.P.
Tranche A Term Loan $ 240,566 $ 434,222
Tranche B Term Loan 232,075 416,865
Union Power Partners, L.P.
Tranche A Term Loan 141,509 255,425
Tranche B Term Loan 135,849 245,207
Citibank, NA:
Gila River Power, L.P.
Tranche A Term Loan 641,509 1,157,924
Tranche B Term Loan 618,868 1,111,642
Union Power Partners, L.P.
Tranche A Term Loan 377,358 681,131
Tranche B Term Loan 362,264 653,887
Credit Suisse, Cayman Island Branch:
Gila River Power, L.P.
Tranche A Term Loan 641,509 1,157,924
Tranche B Term Loan 618,868 1,111,642
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal
Selling Participant Amount Value
- --------------------------------------------------------------------------------
Credit Suisse, Cayman Island Branch (continued):
Union Power Partners, L.P.
Tranche A Term Loan $ 377,358 $ 681,131
Tranche B Term Loan 362,264 653,887
Verso Paper Holdings
Term B Loan 2,274,452 2,284,414
CSFB:
Quality Distributions, Inc.
Term Loan 944,444 946,805
JPMorgan Chase:
EH/Transeastern, LLC/TE TOUSA
Term Loan 2,000,000 2,030,000
Infor Enterprise Solutions Holdings, Inc.
Stage One U.S. Bridge Facility 2,301,093 2,301,093
Lehman Commercial Paper, Inc.:
Gila River Power, L.P.
Tranche A Term Loan 320,755 578,963
Tranche B Term Loan 309,434 555,821
Union Power Partners, L.P.
Tranche A Term Loan 188,679 340,566
Tranche B Term Loan 181,132 326,943
Merrill Lynch Credit Products:
Gila River Power, L.P
Tranche A Term Loan 681,604 1,230,295
Tranche B Term Loan 657,547 1,181,118
Union Power Partners, L.P.
Tranche A Term Loan 400,944 723,704
Tranche B Term Loan 384,906 694,755
- --------------------------------------------------------------------------------
NOTE 8. LOAN AGREEMENT
Effective October 12, 2006, and amended on February 13, 2007, the Fund entered
into a $650,000,000 secured loan agreement with The Bank of Nova Scotia
("Scotia") (the "Loan Agreement").
Prior to October 12, 2006, the Fund had a secured loan agreement with Citicorp
North America, Inc. under which the Fund could borrow up to $400,000,000.
At February 28, 2007, the Fund had one term loan outstanding with Scotia,
totaling $415,000,000. The interest rate charged on this loan at February 28,
2007 was 5.34%. The average daily loan balance was $402,182,320 at a weighted
average interest rate of 5.35%. The Fund was required to maintain certain asset
coverage with respect to the loan. Interest expense of $11,431,915 is included
on the Statement of Operations.
The Fund is required to maintain 300% asset coverage with respect to amounts
outstanding under the Loan Agreement. The Loan Agreement asset coverage is
calculated by subtracting the Fund's total liabilities, not including any bank
loans and senior securities, from the Fund's total net assets and dividing such
amount by the principal amount of the debt out-standing and is as follows:
Semi-Annual Report | 31
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
- --------------------------------------------------------------------------------
Asset
Coverage per
Total Amount $1,000 of
Date Outstanding Indebtedness
- --------------------------------------------------------------------------------
02/28/2007 $ 415,000,000 $ 7,914
- --------------------------------------------------------------------------------
08/30/2006 335,000,000 7,292
- --------------------------------------------------------------------------------
08/31/2005 250,000,000 5,129
- --------------------------------------------------------------------------------
08/31/2004 95,000,000 8,038
- --------------------------------------------------------------------------------
08/31/2003 59,500,000 5,156
- --------------------------------------------------------------------------------
08/31/2002 74,000,000 3,701
- --------------------------------------------------------------------------------
NOTE 9. UNFUNDED LOAN COMMITMENTS
As of February 28, 2007, the Fund had unfunded loan commitments of $39,473,259
which could be extended at the option of the Borrower, pursuant to the following
loan agreements:
- --------------------------------------------------------------------------------
Unfunded
Loan
Borrower Commitment
- --------------------------------------------------------------------------------
American Buildings Co. $ 239,463
- --------------------------------------------------------------------------------
Autocam Corp. 38,773
- --------------------------------------------------------------------------------
Atrium Co., Inc. 547,059
- --------------------------------------------------------------------------------
Buffets Holdings, Inc. 928,375
- --------------------------------------------------------------------------------
Cornerstone Healthcare Group Holdings, Inc. 562,525
- --------------------------------------------------------------------------------
Covanta Energy Corp. 1,000,000
- --------------------------------------------------------------------------------
Cricket Communications, Inc. 6,500,000
- --------------------------------------------------------------------------------
DeCrane Aircraft Holdings, Inc. 2,000,000
- --------------------------------------------------------------------------------
DHM Holdings Co., Inc. 118,774
- --------------------------------------------------------------------------------
Drake Hotel Acquisition 1,170,264
- --------------------------------------------------------------------------------
Federal-Mogul Corp. 117,897
- --------------------------------------------------------------------------------
Global Tel Link Corp. 652,174
- --------------------------------------------------------------------------------
Infrastrux Group, Inc. 63,636
- --------------------------------------------------------------------------------
Interstate Bakeries Corp. 7,500,000
- --------------------------------------------------------------------------------
Lucite International US Finco LLC 648,855
- --------------------------------------------------------------------------------
MEG Energy Corp. 3,000,000
- --------------------------------------------------------------------------------
Millennium Digital Media Systems, LLC 4,109,024
- --------------------------------------------------------------------------------
NES Rentals Holdings, Inc. 666,667
- --------------------------------------------------------------------------------
Oglebay Norton Co. 200,000
- --------------------------------------------------------------------------------
Sorenson Communications, Inc. 2,000,000
- --------------------------------------------------------------------------------
Standard Steel, LLC 166,667
- --------------------------------------------------------------------------------
Trump Entertainment Resorts, Inc. 4,708,618
- --------------------------------------------------------------------------------
VML US Finance LLC 2,000,000
- --------------------------------------------------------------------------------
Ypxo Holding SA 534,488
- --------------------------------------------------------------------------------
$ 39,473,259
===============
- --------------------------------------------------------------------------------
The net discount in unrealized gain (loss) on the unfunded commitments is
recorded as a liability on the Statement of Assets and Liabilities. The change
in unrealized gain (loss) is recorded on the Statement of Operations.
NOTE 10. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES
INDUSTRY FOCUS
The Fund may focus its investments in certain industries, subjecting it to
greater risk than a fund that is more diversified.
NON-PAYMENT RISK
Senior Loans, like other corporate debt obligations, are subject to the risk of
non-payment of scheduled interest and/or principal. Non-payment would result in
a reduction of income to the Fund, a reduction in the value of the Senior Loan
experiencing non-payment and a potential decrease in the net asset value of the
Fund.
CREDIT RISK
Investments rated below investment grade are commonly referred to as high-yield,
high risk or "junk debt." They are regarded as predominantly speculative with
respect to the issuing company's continuing ability to meet principal and/or
interest payments. Investments in high yield Senior Loans may result in greater
net asset value fluctuation than if the Fund did not make such investments.
CURRENCY RISK
A portion of the Fund's assets may be quoted or denominated in non-U.S.
currencies. These securities may be adversely affected by fluctuations in
relative currency exchange rates and by exchange control regulations. The Fund's
investment performance may be negatively affected by a devaluation of a currency
in which the Fund's investments are quoted or denominated. Further, the Fund's
investment performance may be significantly affected, either positively or
negatively, by currency exchange rates because the U.S. dollar value of
securities quoted or denominated in another currency will increase or decrease
in response to changes in the value of such currency in relation to the U.S.
dollar.
FOREIGN SECURITIES
Investments in foreign securities may involve special risks compared to
investing in securities of U.S. issuers. These risks are more pronounced to the
extent that the Fund invests a significant portion of its non-U.S. investment in
one region or in the securities of emerging market issuers. These 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 the Adviser may not be able to sell the Fund'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.
32 | Semi-Annual Report
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND
NOTE 11. SHAREHOLDER VOTING RESULTS
On November 17, 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 the Fund (the
"Proposal"). On September 28, 2006, the Record Date of the Meeting, the Fund had
the following shares of beneficial interest outstanding:
- --------------------------------------------------------------------------------
Class A 61,324,690
- --------------------------------------------------------------------------------
Class B 9,301,911
- --------------------------------------------------------------------------------
Class C 69,675,867
- --------------------------------------------------------------------------------
Class Z 14,401,072
- --------------------------------------------------------------------------------
On November 17, 2006, the date of the Meeting, there was a quorum present,
however, there were not enough votes present to approve the Proposal. At the
Meeting, the persons named as proxies voted all proxies, except those required
to be voted against the Proposal, for an adjournment of the Meeting to permit
further solicitation of proxies. A majority of all shares present at the Meeting
voted for an adjournment until December 15, 2006. On December 15, 2006, there
was again a quorum without sufficient votes to approve the Proposal. A majority
of all shares present at the Meeting voted to further adjourn the Meeting until
December 18, 2006.
On December 18, 2006, the Proposal was voted on and was approved by the
Shareholders of the Fund. The results of the voting on the Proposal on December
18, 2006 were as follows:
- --------------------------------------------------------------------------------
For: 55,760,621
- --------------------------------------------------------------------------------
Against: 19,656,905
- --------------------------------------------------------------------------------
Abstain: 7,635,376
- --------------------------------------------------------------------------------
Broker Non-Votes: 0
- --------------------------------------------------------------------------------
Semi-Annual Report | 33
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
2001 Ross Avenue, Suite 1800
Dallas, TX 75201
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
Advantage Fund.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to its portfolio securities, and the Fund's proxy
voting record for the most recent 12-month period ended June 30, are available
(i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the
Securities and Exchange Commission's website at http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov and also may be reviewed and copied at the Commission's
Public Reference Room in Washington, DC. Information on the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
The Statement of Additional Information includes information about Fund Trustees
and is available upon request without charge by calling 1-877-665-1287.
34 | Semi-Annual Report
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Highland Floating Rate Advantage Fund Semi-Annual Report, February 28, 2007
[LOGO OMITTED]
[HIGHLAND FUNDS
managed by
Highland Capital Management, L.P.
www.highlandfunds.com HLC-FR-ADV-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 ADVANTAGE 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.