-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K760MhYvnthqXmYZ1E+Xo2wPtzPbB165oWGdNUMBUABfu7TXSanfOIZHh2ciUjL/ W7FRuY9GKIXOGlEtJCqEdA== 0000935069-05-001135.txt : 20050509 0000935069-05-001135.hdr.sgml : 20050509 20050509153355 ACCESSION NUMBER: 0000935069-05-001135 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050228 FILED AS OF DATE: 20050509 DATE AS OF CHANGE: 20050509 EFFECTIVENESS DATE: 20050509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIGHLAND FLOATING RATE LTD LIABILITY CO CENTRAL INDEX KEY: 0001068201 IRS NUMBER: 364251184 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08957 FILM NUMBER: 05811575 BUSINESS ADDRESS: STREET 1: TWO GALLERIA TOWER STREET 2: 13455 NOEL ROAD, SUITE 1300 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9726284100 MAIL ADDRESS: STREET 1: TWO GALLERIA TOWER STREET 2: 13455 NOEL ROAD, SUITE 1300 CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: COLUMBIA FLOATING RATE LIMITED LIABILITY CO DATE OF NAME CHANGE: 20031107 FORMER COMPANY: FORMER CONFORMED NAME: STEIN ROE FLOATING RATE LIMITED LIABILITY CO DATE OF NAME CHANGE: 19980929 N-CSRS 1 limitedliabilityncsr.txt HIGHLAND LIMITED LIABLITY NCSRS 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 811-08957 ---------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 13455 Noel Road, Suite 1300 DALLAS, TEXAS 75240 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) James D. Dondero Highland Capital Management, L.P. 13455 Noel Road, Suite 1300 DALLAS, TEXAS 75240 - -------------------------------------------------------------------------------- (Name and address of agent for service) registrant's telephone number, including area code: (877) 532-2834 --------------- Date of fiscal year end: AUGUST 31 ---------- Date of reporting period: FEBRUARY 28, 2005 ------------------ Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Report to Shareholders is attached herewith. - -------------------------------------------------------------------------------- HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND TABLE OF CONTENTS Fund Profile ............................................................. 1 Financial Statements ..................................................... 2 Investment Portfolio .................................................. 3 Portfolio Statement of Assets and Liabilities ......................... 11 Portfolio Statement of Operations ..................................... 12 Portfolio Statements of Changes in Net Assets ......................... 13 Portfolio Statement of Cash Flows ..................................... 14 Portfolio Financial Highlights ........................................ 15 Fund Statement of Assets and Liabilities .............................. 16 Fund Statement of Operations .......................................... 17 Fund Statements of Changes in Net Assets .............................. 18 Fund Financial Highlights ............................................. 19 Notes to Financial Statements ......................................... 20 Important Information About This Report .................................. 26 Economic and market conditions change frequently. There is no assurance that the trends described in this report will continue or commence. A prospectus must precede or accompany this report. Please read the prospectus carefully before you invest. FUND PROFILE - -------------------------------------------------------------------------------- HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND OBJECTIVE The Fund invests all of its investable assets in Highland Floating Rate Limited Liability Company (the "Portfolio"). The Portfolio seeks a high level of current income, consistent with preservation of capital TOTAL NET ASSETS (AS OF 02/28/05) $64.6 million The information below gives you a snapshot of your Fund at the end of the reporting period. Your Fund is actively managed and the composition of its portfolio will change over time. QUALITY BREAKDOWN AS OF 02/28/05 (%) - ------------------------------------------------------------------------- Ba 23.9 - ------------------------------------------------------------------------- B 53.7 - ------------------------------------------------------------------------- Caa 4.9 - ------------------------------------------------------------------------- NR 17.1 - ------------------------------------------------------------------------- Other 0.4 - ------------------------------------------------------------------------- TOP 5 SECTORS AS OF 02/28/05 (%) - ------------------------------------------------------------------------- Cable & Satellite Television 10.5 - ------------------------------------------------------------------------- Health Care 7.8 - ------------------------------------------------------------------------- Chemicals/Plastics 5.8 - ------------------------------------------------------------------------- Utilities 5.4 - ------------------------------------------------------------------------- Telecommunications/Wireless 5.3 - ------------------------------------------------------------------------- TOP 10 HOLDINGS AS OF 02/28/05 (%) - ------------------------------------------------------------------------- General Growth Properties, Inc., Tranche B Term Loan 2.1 - ------------------------------------------------------------------------- Cricket Communications, Inc., Term Loan B 1.5 - ------------------------------------------------------------------------- Century Cable Holdings LLC, Term Loan 1.5 - ------------------------------------------------------------------------- Charter Communications Operating LLC, Tranche B Term Loan 1.4 - ------------------------------------------------------------------------- Hilton Head Communications LP, Revolver 1.4 - ------------------------------------------------------------------------- LNR Property Corp., Tranche B Term Loan 1.3 - ------------------------------------------------------------------------- OpBiz LLC, Term Loan A 1.2 - ------------------------------------------------------------------------- UPC Financing Partnership, Term Loan C2 1.2 - ------------------------------------------------------------------------- Qwest Corp., Term Loan B 1.1 - ------------------------------------------------------------------------- Acterna Corp., Term Loan 1.0 - ------------------------------------------------------------------------- Quality is calculated as a percentage of total investments. Sectors and holdings are calculated as a percentage of net assets. 1 FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND A GUIDE TO UNDERSTANDING YOUR FUND'S FINANCIAL STATEMENTS INVESTMENT PORTFOLIO The Investment Portfolio details all of the Fund's holdings and their market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification. STATEMENT OF ASSETS AND 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. STATEMENT OF CHANGES IN NET ASSETS This statement demonstrates how the Fund's net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and dividend reinvestments) during the reporting period. The Statement of Changes in Net Assets also details changes in the number of shares outstanding. STATEMENT OF CASH FLOWS The Statement of Cash Flows reports net cash provided or used by operating, investing and financing activities and the net effect of those flows on cash and cash equivalents during the period. 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. FINANCIAL HIGHLIGHTS The Financial Highlights demonstrate how the Fund's net asset value per share was affected by the fund's operating results. The Financial Highlights table also discloses the classes' performance and certain key ratios (e.g., class expenses and net investment income as a percentage of average net assets).
2 INVESTMENT PORTFOLIO (UNAUDITED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- VARIABLE RATE SENIOR LOAN NOTES (A) - 97.9% AEROSPACE/DEFENSE - 0.5% 1,985,000 CACI International, Inc. Term Loan, 4.59%, 05/03/11 .................. 2,014,775 3,000,000 Vought Aircraft Industries, Inc. Term Loan, 5.17%, 12/22/11 .................. 3,048,750 ------------- 5,063,525 ------------- AIR TRANSPORT - 0.2% 1,992,350 United Airlines, Inc. Tranche B, 7.50%, 06/30/05 .................. 2,013,509 ------------- AUTOMOTIVE - 4.7% CSA Acquisition Corp. 1,150,000 Tranche B Term Loan, 4.75%, 12/23/11 ............................. 1,167,969 616,667 Tranche C Term Loan, 4.75%, 12/23/11 ............................. 625,917 Federal-Mogul Corp. 392,157 Letter of Credit, 12/09/05 (b) .............. 398,039 1,372,995 Supplemental Revolver, 6.15%, 12/09/05 (c) ......................... 1,348,420 3,607,843 Term Loan, 12/09/11 (b) ..................... 3,440,980 5,000,000 Tranche B Term Loan, 5.17%, 06/30/05 ............................. 4,768,750 1,048,750 Tranche C Term Loan, 6.42%, 12/09/05 ............................. 1,055,305 5,000,000 Goodyear Tire & Rubber Co. Term Loan ABL Tranche A, 6.56%, 03/31/06 ............................. 5,068,750 3,933,729 Hayes Lemmerz International, Inc. Term Loan, 6.24%, 06/03/09 .................. 4,023,890 3,990,000 J.L. French Automotive Castings, Inc. First Lien Term Loan, 6.95%, 07/31/11 ............................. 4,021,601 Key Automotive Group 5,526,534 Term Loan B, 5.70%, 06/29/10 ................ 5,630,212 6,250,000 Term Loan C, 8.02%, 06/25/11 ................ 6,308,625 Key Plastics Holdings, Inc. 55,843 Junior Secured Subordinated Notes, 18.32%, 04/26/07 (d) ........................ 50,258 101,433 Senior Secured Subordinated Notes, 7.00%, 04/26/07 (d) ......................... 81,146 913,043 Keystone Automotive Industries, Inc. Term Loan, 5.61%, 10/30/09 .................. 923,315 3,980,000 Stanadyne Corp. Term Loan, 6.00%, 08/02/10 .................. 4,029,750 Tenneco Automotive, Inc. 1,779,338 Tranche B Term Loan, 12/12/10 (b) ........... 1,779,338 907,701 Tranche B-1 Credit Linked Deposit, 12/12/10 (b) ................................ 907,701 ------------- 45,629,966 ------------- BEVERAGE & TOBACCO - 2.0% 2,887,500 Caribbean Restaurant LLC Tranche B, 5.34%, 06/30/09 .................. 2,935,317 853,171 Commonwealth Brands, Inc. Term Loan, 5.94%, 08/28/07 .................. 871,301 2,825,833 Constellation Brands, Inc. Tranche B Term Loan, 4.40%, 11/30/11 ............................. 2,869,238 5,379,658 Dr. Pepper Bottling Company of Texas Term Loan B, 4.48%, 12/19/10 ............................. 5,481,871 PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- BEVERAGE & TOBACCO (CONTINUED) 2,400,000 DS Waters Enterprises LP Term Loan, 6.85%, 11/07/09 .................. 2,232,000 2,925,135 Southern Wine & Spirits of America, Inc. Term Loan B, 4.81%, 07/02/08 ................ 2,968,544 2,000,000 Sunny Delight Beverage Co. First Lien Term Loan, 6.79%, 08/20/10 ............................. 1,995,000 ------------- 19,353,271 ------------- BROADCAST RADIO & TELEVISION - 1.3% 2,000,000 Emmis Operating Co. Tranche B Term Loan, 4.34%, 11/10/11 ............................. 2,026,120 2,000,000 Freedom Communications, Inc. Tranche B Term Loan, 4.60%, 05/18/12 ............................. 2,032,200 2,654,830 GT Brands LLC Term Loan, 10.50%, 09/30/07 ................. 716,804 4,331,250 Spanish Broadcasting Systems, Inc. Term Loan B, 5.92%, 10/30/09 ................ 4,412,461 2,970,000 Warner Music Group Term Loan B, 5.09%, 02/28/11 ................ 3,021,025 ------------- 12,208,610 ------------- BUILDING & DEVELOPMENT PRODUCTS - 3.3% 2,000,000 DESA LLC Term Loan, 11/26/11 (b) ..................... 2,017,500 4,411,930 Lake at Las Vegas Joint Venture First Lien Term Loan, 5.32%, 11/01/09 ............................. 4,477,667 LNR Property Corp. 2,000,000 Tranche A Term Loan, 0.50%, 02/03/08 (c) ......................... 1,961,360 12,500,000 Tranche B Term Loan, 5.59%, 02/03/08 ............................. 12,683,625 NATG Holdings LLC 1,039,746 Credit Linked Certificate of Deposit, 0.85%, 01/23/09 .................... 873,386 960,364 Term Loan A, 7.09%, 01/23/09 ................ 177,667 700,694 Term Loan B1, 7.69%, 01/23/10 ............... 182,180 72,363 Term Loan B2, 7.69%, 01/23/10 ............... 60,785 995,000 Nortek Holdings, Inc. Term Loan, 4.78%, 08/27/11 .................. 1,011,666 Woodlands Commercial Property Co. 4,000,000 Bridge Loan, 4.84%, 08/30/05 ................ 4,030,000 5,000,000 Mezzanine Loan, 11/30/07 (b) ................ 5,075,000 ------------- 32,550,836 ------------- BUSINESS EQUIPMENT & SERVICES - 4.5% 10,009,865 Acterna Corp. Term Loan, 09/30/07 (b) ..................... 10,109,964 4,666,667 Brickman Group Holdings, Inc. Term Loan, 7.97%, 11/15/09 .................. 4,655,000 Ferrell Cos., Inc. 1,500,000 Term Loan, 12/17/11 (b) ..................... 1,528,125 2,000,000 Term Loan, 6.10%, 12/17/11 .................. 2,037,500 1,736,875 Hillman Group, Inc. Term Loan B, 5.50%, 03/30/11 ................ 1,762,893 3,228,235 Knoll, Inc. Initial Term Loan, 5.59%, 09/30/11 .......... 3,260,518 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 3 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) BUSINESS EQUIPMENT & SERVICES (CONTINUED) 2,694,716 OfficeMax, Inc. Tranche B Term Loan, 4.94%, 10/28/11 ............................. 2,744,245 1,324,391 URS Corp. Term Loan B, 4.71%, 08/22/08 ................ 1,332,258 2,000,000 VUTEk, Inc. Term Loan, 06/25/10 (b) ..................... 2,010,000 9,600,000 Washington Group International Term Loan B, 2.57%, 10/03/07 ................ 9,648,000 5,000,000 Xerox Corp. New Term Loan, 4.42%, 09/30/08 .............. 5,052,700 ------------- 44,141,203 ------------- CABLE & SATELLITE TELEVISION - 10.5% 5,000,000 Adelphia Communications Corp. Tranche B DIP Term Loan, 03/31/06 (b) ................................ 5,025,000 1,400,000 Atlantic Broadband Finance LLC Term Loan B, 5.19%, 09/01/11 ................ 1,424,052 Century Cable Holdings LLC 3,500,000 Discretionary Term Loan, 7.50%, 12/31/09 ............................. 3,486,875 15,000,000 Term Loan, 7.50%, 06/30/09 .................. 14,957,850 Charter Communications Operating LLC 2,000,000 Tranche A Term Loan, 04/27/10 (b) ........... 1,998,280 13,940,000 Tranche B Term Loan, 5.98%, 04/27/11 ............................. 14,001,475 14,087,500 Hilton Head Communications LP Revolver, 5.50%, 09/30/07 ................... 13,864,354 Insight Midwest Holdings LLC 1,980,000 Additional Term Loan, 5.44%, 12/31/09 ............................. 2,015,264 1,760,000 Term Loan A, 4.19%, 06/30/09 ................ 1,763,837 2,970,000 Term Loan B, 5.44%, 12/31/09 ................ 3,022,153 Mediacom Communications Corp. 3,920,000 Term Loan A, 4.16%, 03/31/10 ................ 3,905,300 1,990,000 Term Loan B, 5.04%, 09/30/10 ................ 2,024,825 1,000,000 Term Loan B, 5.14%, 03/31/13 ................ 1,017,500 Millennium Digital Media Capital Corp. 1,405,417 Revolver, 10/31/08 (b) ...................... 1,401,904 4,673,552 Term Loan B, 10/31/08 (b) ................... 4,661,868 1,421,031 Term Loan C, 10/31/08 (b) ................... 1,417,479 Olympus Cable Holdings LLC 9,500,000 Term Loan A, 6.75%, 06/30/10 ................ 9,376,120 1,000,000 Term Loan B, 7.50%, 09/30/10 ................ 995,310 11,442,500 UPC Financing Partnership Term Loan C2, 5.98%, 03/31/09 ............... 11,621,232 WideOpenWest LLC 2,985,000 Incremental Term Loan B, 7.06%, 06/22/11 ............................. 3,003,656 1,984,962 Term Loan B, 7.11%, 06/22/11 ................ 1,997,368 ------------- 102,981,702 ------------- CHEMICALS/PLASTICS - 5.8% 2,500,000 Brenntag AG Term Loan B2, 5.88%, 02/27/12 ............... 2,545,850 7,485,000 Celenese Dollar Term Loan B, 5.10%, 04/06/11 ............................. 7,647,125 7,952,437 Coffeyville, Inc. Term Loan, 7.56%, 05/10/10 .................. 8,071,724 PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- CHEMICALS/PLASTICS (CONTINUED) 7,000,000 Huntsman Co. LLC Term Loan B, 6.15%, 03/31/10 ................ 7,092,960 3,827,923 Huntsman International LLC Dollar Term B Loan, 5.13%, 12/31/10 ............................. 3,896,520 1,995,954 Innophos, Inc. Tranche B Term Loan, 4.86%, 08/13/10 ............................. 2,030,884 Invista 3,196,191 Tranche B1, 5.31%, 04/29/11 ................. 3,240,139 1,442,044 Tranche B2, 5.31%, 04/29/11 ................. 1,461,872 4,053,851 Kraton Polymers Group of Cos. Term Loan, 5.34%, 12/23/10 .................. 4,120,983 Nalco Co. 1,963,782 Term Loan A, 5.18%, 11/04/09 ................ 1,987,348 1,997,656 Term Loan B, 4.67%, 11/04/10 ................ 2,034,692 1,870,000 Polypore, Inc. Term Loan, 4.92%, 11/12/11 .................. 1,893,375 2,000,000 Rockwood Specialties Group, Inc. Tranche B Term Loan, 4.95%, 07/30/12 ............................. 2,028,540 4,985,000 Supresta U.S. LLC Term Loan B, 5.56%, 06/21/11 ................ 5,059,775 4,365,000 Waddington North America, Inc. Term Loan B, 5.32%, 04/07/11 ................ 4,232,697 ------------- 57,344,484 ------------- CLOTHING/TEXTILES - 0.7% Polymer Group, Inc. 3,518,750 First Lien Term Loan, 5.78%, 04/27/10 ............................. 3,558,899 3,000,000 Second Lien Term Loan, 8.78%, 04/27/11 ............................. 3,060,000 ------------- 6,618,899 ------------- CONGLOMERATE - 1.5% 3,482,500 Appleton Papers, Inc. Term Loan, 4.56%, 06/11/10 .................. 3,526,588 2,065,386 Jason, Inc. Term Loan B, 7.14%, 06/30/07 ................ 2,081,289 2,921,053 Language Line LCC Term Loan B, 6.87%, 06/13/11 ................ 2,957,566 2,645,872 Mueller Group, Inc. New Term Loan, 5.57%, 04/23/11 .............. 2,677,305 2,985,000 Youth & Family Centered Services, Inc. Term Loan B, 6.77%, 05/28/11 ................ 2,992,463 ------------- 14,235,211 ------------- CONTAINER/GLASS PRODUCTS - 3.5% 1,809,889 Berry Plastics Corp. Term Loan, 4.77%, 06/30/10 .................. 1,838,160 3,482,500 Consolidated Container Co. LLC Term Loan, 5.13%, 12/15/08 .................. 3,526,031 7,500,000 Graham Packaging International, Inc. Term Loan B, 5.09%, 10/07/11 ................ 7,635,300 2,737,646 Graphic Packaging International, Inc. Term Loan C, 5.14%, 08/09/10 ................ 2,787,252 1,288,115 Kerr Group, Inc. Term Loan, 6.08%, 08/13/10 .................. 1,303,251 1,815,512 Precise Technology, Inc. First Lien Term Loan, 5.56%, 03/31/11 ............................. 1,829,710 4 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) CONTAINER/GLASS PRODUCTS (CONTINUED) 740,625 Reddy Ice Group, Inc. Term Loan, 5.17%, 08/14/09 .................. 746,180 Smurfit-Stone Container Corp. 654,975 Credit Linked Certificate of Deposit, 2.49%, 11/01/10 ............................. 665,206 5,234,431 Tranche B, 4.60%, 11/01/11 .................. 5,315,146 1,610,594 Tranche C, 4.50%, 11/01/11 .................. 1,631,725 1,203,125 Sola International, Inc. Term Loan, 5.17%, 12/11/09 .................. 1,218,164 5,940,000 Solo Cup, Inc. Term Loan, 5.06%, 02/27/11 .................. 6,045,435 ------------- 34,541,560 ------------- COSMETICS/TOILETRIES - 0.8% 1,587,443 Church & Dwight Co., Inc. Tranche B, 4.40%, 05/30/11 .................. 1,610,271 3,112,842 Johnson Diversey, Inc. Term Loan B, 4.99%, 11/03/09 ................ 3,165,386 1,000,000 MD Beauty, Inc. Second Lien Term Loan, 02/18/13 (b) ................................ 1,015,000 2,000,000 Revlon Consumer Products Corp. Term Loan, 8.59%, 07/09/10 .................. 2,090,000 ------------- 7,880,657 ------------- DIVERSIFIED MANUFACTURING - 0.1% 1,000,000 GenTek, Inc. Second Lien Term Loan, 02/01/12 (b) ................................ 1,025,000 ------------- ECOLOGICAL SERVICE & EQUIPMENT - 1.2% Allied Waste North America, Inc. 1,570,450 Term Loan D, 5.09%, 01/15/10 ................ 1,580,752 4,709,571 Tranche A, 4.59%, 01/15/10 .................. 4,761,565 4,500,000 Environmental Systems Products Holdings Second Lien, 12.72%, 12/12/10 ............... 4,651,875 711,571 Synagro Technologies, Inc. Term Loan, 5.79%, 05/07/07 .................. 715,129 ------------- 11,709,321 ------------- ELECTRONIC/ELECTRIC - 3.3% 2,500,000 Alliance Laundry Systems LLC Term Loan, 4.84%, 01/27/12 .................. 2,532,825 2,500,000 Amkor Technology, Inc. Second Lien Term Loan, 7.37%, 10/27/10 ............................. 2,618,750 500,757 Bridge Information Systems, Inc. Multidraw Term Loan, 7.25%, 07/07/13 (e) (f) ..................... 22,534 2,000,000 Camp Acquisition Co. Term Loan A, 5.88%, 06/30/11 ................ 2,000,000 3,000,000 Comsys Information Technology Services, Inc. Second Lien Term Loan, 10.00%, 04/30/10 ............................ 3,000,000 3,000,000 Corel Corp. Second Lien Term Loan, 10.59%, 08/15/10 ............................ 3,015,000 730,135 Itron, Inc. Term Loan B, 4.98%, 06/28/11 ................ 738,043 PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- ELECTRONIC/ELECTRIC (CONTINUED) 5,000,000 ON Semiconductor Corp. Tranche G Term Loan, 5.56%, 12/15/11 ............................. 5,009,400 3,900,000 Seagate Technology Holdings, Inc. Term Loan B, 4.63%, 05/13/07 ................ 3,950,232 2,250,000 Transfirst Holdings, Inc. Second Lien Term Loan, 10.06%, 03/31/11 ............................ 2,300,625 1,492,500 UGS Corp. Term Loan B, 6.50%, 05/27/11 ................ 1,518,619 1,000,000 Verifone, Inc. Second Lien Term Loan, 8.73%, 12/31/11 ............................. 1,031,880 5,000,000 Viasystems, Inc. Tranche B Term Loan, 6.49%, 09/30/09 ............................. 5,057,800 ------------- 32,795,708 ------------- EQUIPMENT LEASING - 1.2% 1,492,500 National Equipment Service, Inc. Second Lien Term Loan, 8.98%, 08/17/10 ............................. 1,529,813 4,000,000 Neff Rental, Inc. Initial Term Loan, 7.25%, 05/01/08 .......... 3,960,000 5,789,583 United Rentals, Inc. Term Loan C2, 4.92%, 02/14/11 ............... 5,896,343 ------------- 11,386,156 ------------- FARMING/AGRICULTURE - 0.5% 4,590,833 AGCO Corp. Term Loan, 4.48%, 01/31/06 .................. 4,675,488 ------------- FINANCIAL INTERMEDIARIES - 0.2% 1,500,000 Metris Cos., Inc. Term Loan, 12.09%, 05/06/07 ................. 1,584,375 ------------- FOOD PRODUCTS - 3.1% 2,986,674 American Seafoods Group LLC Term Loan B, 5.81%, 03/31/09 ................ 3,018,393 1,995,000 Doane Pet Care Co. Term Loan, 6.43%, 11/05/09 .................. 2,031,150 7,500,000 Interstate Bakeries Corp. Revolver, 0.50%, 09/22/06 (c) ............... 7,448,475 Interstate Brands Corp. 1,959,596 Term Loan C, 6.77%, 07/19/07 ................ 1,919,581 1,875,000 Tranche A, 6.80%, 07/19/06 .................. 1,849,988 4,183,393 Luigino's, Inc. Term Loan B, 5.53%, 04/02/11 ................ 4,195,190 985,270 Merisant Co. Term Loan B, 5.48%, 01/11/10 ................ 987,122 1,820,000 Pierre Foods, Inc. Term Loan B, 4.48%, 06/30/10 ................ 1,843,514 7,146,000 Pinnacle Foods Holding Corp. Delayed Draw Term Loan, 5.81%, 11/25/10 ............................. 7,195,164 ------------- 30,488,577 ------------- FOOD SERVICES - 0.7% 3,246,603 Buffets, Inc. Term Loan, 6.27%, 06/28/09 .................. 3,273,680 1,000,000 Captain D's Inc., LLC First Lien Term Loan, 6.42%, 12/27/10 ............................. 1,007,500 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 5 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) FOOD SERVICES (CONTINUED) 2,413,139 Domino's, Inc. New Term Loan, 4.31%, 06/25/10 .............. 2,445,813 ------------- 6,726,993 ------------- FOOD/DRUG RETAIL - 2.0% 1,869,300 Atkins Nutritionals, Inc. First Lien Term Loan, 11.75%, 10/29/09 ............................ 1,637,507 Jean Coutu Group, Inc. 2,000,000 Term Loan B, 07/30/11 (b) ................... 2,036,760 5,472,500 Term Loan B, 5.00%, 07/30/11 ................ 5,573,084 Michael Foods, Inc. 3,000,000 Floater Term Loan, 6.59%, 11/20/11 ............................. 3,090,000 4,596,465 Term Loan, 5.07%, 11/21/10 .................. 4,674,605 3,000,000 Nellson Nutraceutical, Inc. Second Lien Term Loan, 12.00%, 04/02/10 ............................ 2,730,000 ------------- 19,741,956 ------------- FOREST PRODUCTS - 0.3% SP Newsprint Co. 1,036,667 Term Loan B, 5.67%, 01/08/10 ................ 1,054,166 1,933,333 Term Loan B Letter of Credit, 2.59%, 01/09/08 ............................. 1,965,968 ------------- 3,020,134 ------------- HEALTH CARE - 7.5% Alliance Imaging, Inc. 758,588 Term Loan A, 3.50%, 11/02/06 ................ 752,898 1,587,051 Tranche C Term Loan, 4.97%, 12/29/11 ............................. 1,608,381 6,872,427 Alpharma Operating Corp. Term Loan B, 5.81%, 10/05/08 ................ 6,911,050 3,066,667 American Medical Response, Inc. Term Loan, 5.60%, 02/10/12 .................. 3,126,099 3,211,600 Ameripath, Inc. Term Loan, 5.92%, 03/27/10 .................. 3,239,702 2,992,500 Ardent Health Services Term Loan, 4.80%, 08/12/11 .................. 3,033,647 2,000,000 Chemed Corp. Term Loan, 08/24/10 (b) ..................... 2,035,000 1,967,677 Davita, Inc. Term Loan B, 4.58%, 03/31/09 ................ 1,977,653 712,500 dj Orthopedics LLC Term Loan, 4.88%, 05/15/09 .................. 724,969 699,121 Educate Operating Co. LLC Term Loan, 5.06%, 03/31/11 .................. 703,372 2,984,962 Express Scripts, Inc. Tranche B Term Loan, 4.13%, 02/13/10 ............................. 3,010,454 FHC Health Systems, Inc. 1,300,000 Delayed Draw Term Loan, 10.40%, 10/31/06 ............................ 1,313,000 1,857,143 Initial Term Loan, 8.40%, 10/31/06 ............................. 1,875,714 1,500,000 Third Lien Term Loan, 02/07/11 (b) .......... 1,530,000 5,000,000 Third Lien Term Loan, 11.77%, 01/14/11 ............................ 5,100,000 2,549,961 Hanger Orthopedic Group, Inc. Term Loan B, 6.06%, 09/30/09 ................ 2,562,711 PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- HEALTH CARE (CONTINUED) 2,600,000 HealthSouth Corp. Term Loan, 10.38%, 01/16/11 ................. 2,873,000 6,209,032 Insight Health Services Corp. Tranche B, 6.31%, 10/17/08 .................. 6,243,927 840,104 Kinetic Concepts, Inc. Term Loan B1, 4.31%, 08/11/10 ............... 845,884 7,703,704 Knowledge Learning Corp. Term Loan, 5.15%, 01/07/12 .................. 7,771,188 MedAssets, Inc. 500,000 Second Lien Term Loan, 12.56%, 06/16/08 ............................ 510,000 727,968 Senior Term Loan, 7.31%, 03/16/09 ............................. 737,977 4,000,000 MultiPlan, Inc. Term Loan, 5.31%, 03/04/09 .................. 4,045,000 1,221,023 Orthofix International N.V. Term Loan B, 4.55%, 12/30/08 ................ 1,238,581 Select Medical Corp. 2,000,000 Revolver, 02/24/11 (b) ...................... 1,998,760 3,000,000 Tranche B Term Loan, 02/24/12 (b) ........... 3,039,390 3,482,503 Skilled Healthcare LLC First Lien Term Loan, 5.34%, 07/31/10 ............................. 3,521,681 490,000 Sunrise Medical Holdings, Inc. Term Loan B-1, 5.88%, 05/13/10 .............. 495,513 915,333 VWR International, Inc. Term Loan B, 5.17%, 04/07/11 ................ 932,267 ------------- 73,757,818 ------------- HOME FURNISHINGS - 1.0% Holmes Group, Inc. 2,985,000 First Lien Term Loan, 5.91%, 11/08/10 ............................. 3,018,581 2,000,000 Second Lien Term Loan, 10.15%, 05/06/11 ............................ 2,030,000 2,441,406 Home Interiors & Gifts, Inc. Term Loan, 7.17%, 03/31/11 .................. 2,339,697 2,491,071 Sealy Mattress Co. Term Loan C, 4.80%, 08/06/12 ................ 2,533,121 ------------- 9,921,399 ------------- INDUSTRIAL EQUIPMENT - 0.8% 1,990,002 Blount International, Inc. Term Loan B, 5.31%, 08/09/10 ................ 2,019,016 1,950,000 Bucyrus International, Inc. Term Loan, 4.38%, 07/28/10 .................. 1,989,000 1,068,778 Copperweld Corp. Term Loan, 7.17%, 12/16/11 .................. 1,071,450 1,098,325 Dresser, Inc. Term Loan C, 5.17%, 04/10/09 ................ 1,114,119 1,471,432 Terex Corp. Term Loan, 4.89%, 07/03/09 .................. 1,489,825 ------------- 7,683,410 ------------- INSURANCE - 1.5% 9,600,000 Conseco, Inc. Term Loan, 6.17%, 06/22/10 .................. 9,801,024 2,985,000 Mitchell International, Inc. Second Lien Term Loan, 8.80%, 08/15/12 ............................. 3,003,656 1,990,000 WellCare Health Plans, Inc. Term Loan, 6.49%, 05/13/09 .................. 2,007,413 ------------- 14,812,093 ------------- 6 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) LEISURE GOODS/ACTIVITIES/MOVIES - 4.5% 3,216,949 AMF Bowling Worldwide, Inc. Term Loan B, 5.39%, 08/27/09 ................ 3,240,046 2,985,000 Amscan Holdings, Inc. Term Loan B, 5.60%, 04/30/12 ................ 2,996,194 10,000,000 Blockbuster Entertainment Corp. Term Loan B, 5.32%, 08/20/11 ................ 10,062,500 1,000,000 Camelbak Products, Inc. Second Lien Term Loan, 9.54%, 02/04/12 ............................. 1,014,380 4,620,000 Carmike Cinemas, Inc. Senior Secured Second Priority Term Loan, 5.92%, 02/02/09 ............................. 4,715,264 2,481,250 Cinemark USA, Inc. Tranche C Term Loan, 4.35%, 03/31/11 ............................. 2,512,266 CNL Hospitality Partners LP 5,000,000 First Lien Term Loan, 5.23%, 09/09/06 ............................. 5,000,000 3,000,000 Term Loan, 5.09%, 10/13/06 .................. 3,060,000 1,995,000 Metro-Goldwyn-Mayer Studios, Inc. Term Loan B, 5.06%, 04/30/11 ................ 2,003,100 5,774,093 Regal Cinemas, Inc. Term Loan, 4.56%, 11/10/10 .................. 5,865,786 1,576,602 Six Flags Theme Parks, Inc. Term Loan B, 5.09%, 06/30/09 ................ 1,594,985 1,990,000 Wallace Theaters First Lien Term Loan, 5.81%, 07/31/09 ............................. 2,031,034 ------------- 44,095,555 ------------- LODGING & CASINOS - 3.8% 692,600 Ameristar Casinos, Inc. Term Loan B1, 4.63%, 12/20/06 ............... 704,720 3,970,000 Green Valley Ranch Gaming LLC Term Loan B, 4.50%, 12/22/10 ................ 4,024,588 2,500,000 Mississippi Band of Chocktaw Indians Term Loan, 5.02%, 11/04/11 ............................. 2,540,625 OpBiz LLC 11,926,349 Term Loan A, 5.56%, 08/31/10 ................ 11,871,726 28,141 Term Loan B, 6.56%, 08/31/10 ................ 28,012 Venetian Casino Resort LLC 683,761 Delayed DrawTerm Loan B, 06/15/11 (b) ................................ 692,739 3,316,239 Term Loan B, 06/15/11 (b) ................... 3,373,245 Wyndham International, Inc. 9,860,000 IRL Tranche II, 06/30/06 (b) ................ 9,914,230 4,360,152 Term Loan I, 7.38%, 06/30/06 ................ 4,378,465 ------------- 37,528,350 ------------- NONFERROUS METALS/MINING - 1.1% 997,500 J W Aluminum Co. First Lien Term Loan, 5.89%, 10/20/10 ............................. 1,013,709 Murray Energy Corp. 1,000,000 Tranche B Term Loan, 01/28/10 (b) ........... 1,017,500 3,750,000 Tranche B Term Loan, 5.94%, 01/28/10 ............................. 3,815,625 Novelis, Inc. 1,826,923 Term Loan, 01/07/12 (b) ..................... 1,855,935 3,173,077 Term Loan, 01/07/12 (b) ..................... 3,225,433 ------------- 10,928,202 ------------- PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- OIL/GAS - 3.3% 5,000,000 ALON USA Term Loan, 10.00%, 01/15/09 ................. 5,125,000 8,967,425 ATP Oil & Gas Corp. First Lien Term Loan, 8.58%, 03/29/09 ............................. 9,146,774 3,382,353 Basic Energy Services, Inc. Term Loan B, 5.55%, 10/03/09 ................ 3,416,177 4,027,500 Belden & Blake Corp. Term Loan, 5.69%, 07/07/11 .................. 4,085,415 1,730,003 Dresser Rand Group, Inc. Tranche B Dollar Term Loan, 4.56%, 10/29/11 ............................. 1,761,905 El Paso Corp. 2,500,000 Deposit Accounts, 2.40%, 11/23/09 ............................. 2,540,250 3,486,000 Term Loan, 5.44%, 11/23/09 .................. 3,552,234 1,544,000 Tesoro Petroleum Corp. Initial Term Loan, 7.99%, 04/15/08 .......... 1,592,605 1,320,000 Western Refining Co. LP Term Loan, 6.17%, 08/28/08 .................. 1,339,800 ------------- 32,560,160 ------------- PUBLISHING - 3.0% 3,233,750 Adams Outdoor Advertising LP First Lien Term Loan, 4.92%, 10/15/11 ............................. 3,287,624 Advertising Directory Solutions, Inc. 2,000,000 First Lien Term Loan, 4.72%, 11/09/11 ............................. 2,029,160 2,000,000 Second Lien Term Loan, 6.47%, 05/09/12 ............................. 2,058,500 Dex Media East LLC 5,976,992 Term Loan A, 4.52%, 11/08/08 ................ 6,060,191 1,126,925 Term Loan B, 4.50%, 05/08/09 ................ 1,143,401 2,309,701 Dex Media West LLC Term Loan A, 4.72%, 09/09/09 ................ 2,343,330 2,049,486 PRIMEDIA, Inc. Term Loan B, 5.38%, 06/30/09 ................ 2,049,917 1,748,005 R.H. Donnelley Corp. Term Loan D, 4.28%, 06/30/11 ................ 1,774,994 1,300,533 Relizon Co. Term Loan, 5.78%, 02/20/11 .................. 1,303,784 1,306,956 Sun Media Corp. Term Loan B, 4.13%, 02/07/09 ................ 1,320,235 3,088,750 Transwestern Publishing Co. First Lien Term Loan, 4.20%, 02/25/11 ............................. 3,107,591 2,910,000 VISANT Corp. Tranche B Term Loan, 4.81%, 10/04/11 ............................. 2,955,105 ------------- 29,433,832 ------------- REAL ESTATE INVESTMENT TRUST - 2.8% 2,000,000 AIMCO Properties, L.P. Term Loan, 4.75%, 11/02/09 .................. 2,040,000 20,000,000 General Growth Properties, Inc. Tranche B Term Loan, 4.84%, 11/12/08 ............................. 20,302,000 5,000,000 Strategic Hotel Capital, Inc. Term Loan B2, 5.48%, 07/09/06 ............... 4,992,300 ------------- 27,334,300 ------------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) RETAILERS - 0.6% 2,000,000 Dollarama Term Loan B, 5.02%, 11/18/11 ................ 2,030,000 2,049,951 Harbor Freight Tools USA Term Loan, 4.83%, 07/15/10 .................. 2,065,961 2,093,163 Prestige Brands Holdings, Inc. Tranche B, 5.40%, 04/06/11 .................. 2,120,301 ------------- 6,216,262 ------------- STEEL - 0.3% 2,887,500 The Techs Industries, Inc. Term Loan, 4.81%, 01/14/10 .................. 2,901,937 ------------- SURFACE TRANSPORT - 1.5% 6,985,000 Helm Holding Corp. Term Loan B, 5.37%, 07/02/10 ................ 7,078,110 603,922 Pacer International, Inc. New Term Loan, 4.68%, 06/10/10 616,755 Quality Distribution, Inc. 2,752,717 Term Loan, 5.64%, 11/13/09 .................. 2,683,046 2,176,502 Term Loan, 5.64%, 11/13/09 (f) .............. 2,121,415 2,595,963 Transport Industries LP Term Loan B, 6.56%, 06/13/10 ................ 2,600,844 ------------- 15,100,170 ------------- TELECOMMUNICATIONS/CELLULAR - 1.4% 2,985,000 Cellular South, Inc. Term Loan, 4.75%, 05/04/11 .................. 3,031,626 625,000 Dobson Cellular Systems, Inc. Revolver, 0.63%, 10/21/09 (c) ............... 599,219 10,000,000 Qwest Corp. Term Loan B, 6.95%, 06/30/10 ................ 10,332,400 ------------- 13,963,245 ------------- TELECOMMUNICATIONS/COMBINATION - 2.3% 2,000,000 Alaska Communications Systems Holdings, Inc. Term Loan, 4.64%, 02/01/12 .................. 2,021,560 Centennial Cellular Operating Co. 2,250,000 Revolver, 0.50%, 02/09/11 (c) ............... 2,248,605 4,128,300 Term Loan, 4.46%, 02/09/11 .................. 4,192,289 5,000,000 NTL, Inc. Tranche B Term Loan, 5.20%, 04/14/12 ............................. 5,068,750 4,962,349 PanAmSat Corp. Term Loan B, 5.34%, 08/20/11 ................ 5,038,472 4,000,000 RCN Corp. Term Loan, 7.06%, 12/21/11 .................. 4,023,360 ------------- 22,593,036 ------------- TELECOMMUNICATIONS/WIRELESS - 5.1% 2,150,000 Bresnan Communications LLC Term Loan B, 6.04%, 09/30/10 ................ 2,181,992 4,966,667 Consolidated Communications, Inc. Term Loan C, 5.18%, 10/14/11 ................ 5,041,167 Cricket Communications, Inc. 5,000,000 Revolver, 0.75%, 01/10/10 (c) ............... 4,925,000 15,000,000 Term Loan B, 5.09%, 01/10/11 ................ 15,182,850 FairPoint Communications, Inc. 2,500,000 Initial B Term Loan, 02/08/12 (b) ........... 2,541,025 2,500,000 Initial B Term Loan, 4.75%, 02/08/12 ............................. 2,541,025 PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- TELECOMMUNICATIONS/WIRELESS (CONTINUED) 6,500,000 Nextel Partners Operating Corp. Term Loan C, 4.94%, 05/31/11 ................ 6,595,420 1,000,000 Primus Telecommunications Group, Inc. Term Loan, 9.61%, 02/18/11 .................. 1,005,000 4,477,500 SBA Senior Finance, Inc. Term Loan, 4.86%, 10/31/08 .................. 4,555,856 5,994,105 WilTel Communications Group, Inc. Term Loan, 7.00%, 04/01/10 .................. 5,814,282 ------------- 50,383,617 ------------- TELECOMMUNICATIONS/WIRELINE - 0.4% 4,000,000 Valor Telecommunications Enterprises LLC Tranche B Term Loan, 5.99%, 02/14/12 ............................. 4,061,000 ------------- UTILITIES - 5.1% 2,605,732 Allegheny Energy, Inc. Term Advances, 4.80%, 03/08/11 .............. 2,663,371 7,000,000 Astoria Energy LLC First Lien Term Loan, 7.19%, 04/15/12 ............................. 7,166,250 2,066,017 Calpine Corp. Second Lien Term Loan B, 8.41%, 07/16/07 ............................. 1,833,591 1,953,933 Infrasource, Inc. Term Loan, 5.56%, 09/30/10 .................. 1,973,472 2,801,674 Midwest Generations LLC Term Loan, 5.65%, 04/27/11 .................. 2,848,602 Mirant Corp. 4,000,000 Revolver, 07/17/05 (b) ...................... 2,923,360 4,000,000 Revolver, 07/15/08 (b) ...................... 2,932,520 5,000,000 Reliant Energy, Inc. Term Loan, 5.06%, 04/30/10 .................. 5,088,400 4,626,288 Riverside Energy Center LLC Term Loan, 6.98%, 06/24/11 .................. 4,741,945 Rocky Mountain Energy Center LLC 361,073 Credit Linked Certificate of Deposit, 2.63%, 06/24/11 .................... 368,295 3,286,536 Term Loan, 6.98%, 06/24/11 .................. 3,368,699 Texas Genco LLC 1,461,538 Delayed Draw Term Loan, 1.25%, 12/14/11 (c) ......................... 1,485,741 9,871,795 Initial Term Loan, 4.48%, 12/14/11 .......... 10,043,762 2,955,000 TNP Enterprises, Inc. Term Loan, 7.72%, 12/31/06 .................. 2,995,631 ------------- 50,433,639 ------------- Total Variable Rate Senior Loan Notes (Cost $937,217,769) ....................... 961,425,166 ------------- CORPORATE NOTES AND BONDS - 1.7% CONTAINER/GLASS PRODUCTS - 0.3% 2,500,000 Constar International, Inc. Floating Rate Note, 6.15%, 02/15/12 (g) ......................... 2,550,000 ------------- HEALTH CARE - 0.2% 2,000,000 Elan Finance Floating Rate Note, 6.49%, 11/15/11 (g) ......................... 1,750,000 ------------- 8 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- CORPORATE NOTES AND BONDS (CONTINUED) OIL & GAS - 0.4% 4,000,000 Secunda International Ltd. Floating Rate Note, 10.66%, 09/01/12 (g) ........................ 4,000,000 ------------- TELECOMMUNICATIONS/CELLULAR - 0.2% 2,000,000 Dobson Cellular Systems, Inc. Floating Rate Note, 7.49%, 11/01/11 (g) ......................... 2,120,000 ------------- TELECOMMUNICATIONS/COMBINATION - 0.4% 4,000,000 US Unwired, Inc. Floating Rate Note, Series B, 6.74%, 06/15/10 ............................. 4,200,000 ------------- UTILITIES - 0.2% 2,000,000 Calpine Construction Finance Co. LP Floating Rate Note, 11.63%, 08/26/11 (g) ........................ 2,240,000 ------------- Total Corporate Notes and Bonds (Cost $16,613,840) ........................ 16,860,000 ------------- COMMERCIAL MORTGAGE-BACKED SECURITY - 0.5% 5,000,000 Bear Stearns Series 2004-ESA, Class K, 5.09%, 05/14/16 ............................. 5,008,123 ------------- Total Commercial Mortgage- Backed Security (Cost $5,000,000) ......................... 5,008,123 ------------- SHARES ------ COMMON STOCKS (H) - 0.4% BUSINESS SERVICES - 0.0% 322,876 NATG Holdings LLC (d) ......................... 0 ------------- DIVERSIFIED MANUFACTURING - 0.0% 4,015 GenTek, Inc., B Shares ........................ 193,242 ------------- ECOLOGICAL SERVICE & EQUIPMENT - 0.0% 3,445 Environmental Systems Products Holdings (d) ................................ 0 ------------- HEALTH CARE - 0.1% 95,453 Sun Healthcare Group, Inc. .................... 650,989 ------------- INDUSTRIAL EQUIPMENT - 0.1% 400 Copperweld Corp., Class A (d) ................. 232,000 56 Copperweld Corp., Class B (d) ................. 939,400 ------------- 1,171,400 ------------- TELECOMMUNICATIONS/COMBINATION - 0.0% 87,288 SAVVIS Communications Corp. ................... 66,339 ------------- TELECOMMUNICATIONS/WIRELESS - 0.2% 76,137 Leap Wireless International, Inc. ............. 2,040,472 ------------- Total Common Stocks (Cost $4,684,320) ......................... 4,122,442 ------------- PAR/ COMMITMENT ($) VALUE ($) - ------------------ ------------- PREFERRED STOCKS(D) - 0.0% AUTOMOTIVE - 0.0% 13 Key Plastics Holdings, Inc. (h) ............... 0 ------------- DIVERSIFIED MANUFACTURING - 0.0% 14,382 Superior Essex, Inc., Series A ................ 14,382 ------------- Total Preferred Stocks (Cost $14,382) ............................ 14,382 ------------- UNITS ----- WARRANTS - 0.0% DIVERSIFIED MANUFACTURING - 0.0% 4 GenTek, Inc., Class A expires 10/31/06 .................................... 14 2 GenTek, Inc., Class B expires 10/31/08 .................................... 8 ------------- .............................................................. 22 ------------- UTILITIES - 0.0% 8,508 CenterPoint Energy, Inc., expires 08/01/08 (d) ................................ 0 ------------- Total Warrants (Cost $34) ................................ 22 ------------- UNFUNDED LOAN COMMITMENTS - (1.9)% ............................ (18,946,153) ------------- TOTAL INVESTMENTS - 98.6% ..................................... 968,483,982 ------------- (cost of $963,530,345) (i) OTHER ASSETS & LIABILITIES, NET - 1.4% ........................ 13,277,359 ------------- NET ASSETS - 100.0% ........................................... 981,761,341 ============= - --------------------- (a) Senior loans in which the Portfolio invests generally pay interest at rates which are periodically predetermined by reference to a base lending rate plus a premium. These base lending rates are generally (i) the prime rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate ("LIBOR") and (iii) the certificate of deposit rate. Rate shown represents the weighted average rate at February 28, 2005. Senior loans are generally considered to be restricted in that the Portfolio ordinarily is contractually obligated to receive approval from the agent bank and/or borrower prior to the disposition of a senior loan. (b) Unsettled loan. Interest rate cannot be determined at this time. (c) Unfunded commitment. As of February 28, 2005, the Portfolio had unfunded loan commitments of $18,946,153, which could be extended at the option of the Borrower, pursuant to the following loan agreements: UNFUNDED LOAN BORROWER COMMITMENT -------- ------------ Centennial Cellular Operating Co. $ 2,250,000 Cricket Communications, Inc. 5,000,000 Dobson Cellular Systems, Inc. 625,000 Federal-Mogul Corp. 109,615 Interstate Bakeries Corp. 7,500,000 LNR Property Corp. 2,000,000 Texas Genco LLC 1,461,538 ------------ $ 18,946,153 ============ SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY (d) Represents fair value as determined in good faith under the direction of the Board of Trustees. (e) The issuer is in default of certain debt covenants. Income is not being accrued. As of February 28, 2005, the value of these securities amounted to $22,534, which represents 0.0% of net assets. (f) Loans held on participation. (g) Securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At February 28, 2005, these securities amounted to $12,660,000 or 1.3% of net assets. These securities have been determined by the Portfolio's investment adviser to be liquid securities. (h) Non-income producing security. (i) Cost for Federal income tax purposes is $963,793,491. DIP Debtor in Possession IRL Increasing Rate Loan 10 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 (UNAUDITED) HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY ($) - ------------------------------------------------------------------------------- ASSETS: Investments, at cost ...................................... 963,530,345 ------------- Investments, at value ..................................... 968,483,982 Cash and cash equivalents ................................. 80,491,662 Receivable for: Investments sold ....................................... 15,111,697 Interest and fees ...................................... 6,204,236 Deferred Trustees' compensation plan (Note 4) ............. 1,906 ------------- Total Assets ........................................ 1,070,293,483 LIABILITIES: Deferred facility fees .................................... 255,511 Payable for: Investments purchased .................................. 87,807,040 Investment advisory fee (Note 4) ....................... 329,033 Trustees' fees (Note 4) ................................ 3,333 Deferred Trustees' fees (Note 4) .......................... 1,906 Accrued expenses and other liabilities .................... 135,319 ------------- Total Liabilities ................................... 88,532,142 ------------- NET ASSETS .................................................... 981,761,341 ============= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED) ($) - ------------------------------------------------------------------------------- INVESTMENT INCOME Interest .................................................. 24,207,119 Dividends ................................................. 28,105 Facility and other fees ................................... 1,250,462 ------------- Total Investment Income ............................. 25,485,686 EXPENSES Investment advisory fee (Note 4) .......................... 2,020,811 Transfer agent fee (Note 4) ............................... 843 Professional fees ......................................... 127,404 Accounting services fee (Note 4) .......................... 142,341 Trustees' fees (Note 4) ................................... 15,240 Custody fee (Note 4) ...................................... 44,307 Other expenses ............................................ 31,355 ------------- Total Operating Expenses ............................ 2,382,301 Interest expense .......................................... 16,479 Commitment fee ............................................ 130,945 ------------- Total Expenses (Note 8) ............................. 2,529,725 Custody earnings credit (Note 4) .......................... (36) ------------- Net Expenses ........................................ 2,529,689 ------------- Net Investment Income ..................................... 22,955,997 ------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments .......................... 172,031 Net change in unrealized appreciation on investments ...... 4,016,208 ------------- Net Gain .................................................. 4,188,239 ------------- Net Increase in Net Assets ................................ 27,144,236 ============= 12 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SIX MONTHS ENDED FEBRUARY 28, 2005 YEAR ENDED (UNAUDITED) AUGUST 31, 2004 ($) ($) ----------------- ---------------- INCREASE IN NET ASSETS: OPERATIONS Net investment income .............................................. 22,955,997 32,557,033 Net realized gain on investments ................................... 172,031 12,489,394 Net change in unrealized appreciation on investments ............... 4,016,208 20,295,744 ----------------- ---------------- Net Increase from Operations ................................... 27,144,236 65,342,171 ----------------- ---------------- TRANSACTIONS IN INVESTORS' BENEFICIAL INTEREST Contributions ...................................................... 158,462,053 453,429,815 Withdrawals ........................................................ (100,215,444) (133,062,921) ----------------- ---------------- Net Increase from Transactions in Investors' Beneficial Interest 58,246,609 320,366,894 ----------------- ---------------- Total Increase in Net Assets ................................... 85,390,845 385,709,065 NET ASSETS Beginning of period ................................................ 896,370,496 510,661,431 ----------------- ---------------- End of period ...................................................... 981,761,341 896,370,496 ================= ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED) ($) - ------------------------------------------------------------------------------- INCREASE IN CASH CASH FLOWS USED FOR OPERATING ACTIVITIES Net investment income ..................................... 22,955,997 ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Purchase of investment securities ......................... (526,450,444) Proceeds from disposition of investment securities ........ 322,283,178 Sale of short-term portfolio investments, net ............. 130,267,000 Increase in interest and fees receivable .................. (2,132,558) Increase in receivable for investments sold ............... (11,445,831) Decrease in other assets .................................. 5,731 Decrease in deferred facility fees ........................ (189,395) Decrease in payable for accrued expenses .................. (51,305) Net amortization of premium (discount) .................... (832,133) Increase in payable for investments purchased ............. 87,807,040 Increase in other liabilities ............................. 27,311 ------------- Net cash flow provided by operating activities ...... 22,244,591 CASH FLOWS PROVIDED BY FINANCING ACTIVITIES Proceeds from capital contributions ....................... 158,462,053 Payment of capital withdrawals ............................ (100,215,444) ------------- Net cash flow provided by financing activities ...... 58,246,609 ------------- Net increase in cash ................................ 80,491,200 CASH Cash at beginning of the period ........................... 462 ------------- Cash at end of the period ................................. 80,491,662 ============= 14 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY SELECTED DATA FOR AN INTEREST OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, --------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED) 2004 2003 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA Total return 3.06%(e) 10.39% 11.68%(a) (2.20)% 5.15% 8.73% Operating expenses 0.53%(f) 0.52%(b) 0.57%(b) 0.55%(b) 0.53%(b) 0.55% Interest expense 0.03%(c) --%(c) --%(c) 0.03% --% --% Net expenses 0.56%(f) 0.52%(b) 0.57%(b) 0.58%(b) 0.53%(b) 0.55% Net investment income 5.11%(f) 4.45%(b) 5.96%(b) 6.42%(b)(d) 8.94%(b) 9.26% Portfolio turnover rate 37%(e) 97% 75% 70% 63% 21%
_______________________________ (a) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Portfolio's return. (b) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (c) Rounds to less than 0.01%. (d) Effective September 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on debt securities. The effect of this change for the year ended August 31, 2002, was to increase the ratio of net investment income to average net assets from 6.41% to 6.42%. Ratios and supplemental data for the periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (e) Not annualized. (f) Annualized. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15 STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 (UNAUDITED) HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND ($) - ------------------------------------------------------------------------------- ASSETS: Investments in Portfolio, at cost ......................... 64,266,185 ------------- Investments in Portfolio, at value ........................ 64,630,280 Expense reimbursement due from Investment Adviser (Note 4) .............................. 17,781 Deferred Trustees' compensation plan (Note 4) ............. 3,461 Other assets .............................................. 15,575 ------------- Total Assets ........................................ 64,667,097 LIABILITIES: Payable for: Distributions .......................................... 36,441 Administration fee (Note 4) ............................ 9,888 Trustees' fees (Note 4) ................................ 1,000 Deferred Trustees' fees (Note 4) .......................... 3,461 ------------- Total Liabilities ................................... 50,790 ------------- NET ASSETS .................................................... 64,616,307 ============= COMPOSITION OF NET ASSETS Paid-in capital ........................................... 71,739,494 Overdistributed net investment income ..................... (45,232) Accumulated net realized loss ............................. (7,442,050) Net unrealized appreciation on investments allocated from Portfolio ..................... 364,095 ------------- NET ASSETS .................................................... 64,616,307 ============= Net assets ................................................ 64,616,307 Shares outstanding ........................................ 6,574,052 Net asset value per share (Net assets/Shares outstanding) .......................... 9.83 16 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED) ($) - ------------------------------------------------------------------------------- INVESTMENT INCOME Interest, dividends and fees allocated from Portfolio (Note 1) .................................. 1,827,568 ------------- EXPENSES Net operating expenses allocated from Portfolio (Note 1) .................................. 170,027 Administration fee (Note 4) ............................... 64,308 Transfer agent fee (Note 4) ............................... 8,018 Professional fees ......................................... 38,115 Accounting services fee (Note 4) .......................... 3,225 Trustees' fees (Note 4) ................................... 3,616 Custody fee (Note 4) ...................................... 774 Other expenses ............................................ 25,390 ------------- Total Operating Expenses ............................ 313,473 Interest expense allocated from Portfolio (Note 1) .................................. 1,177 Commitment fee allocated from Portfolio (Note 1) .................................. 9,349 ------------- Total Expenses (Note 8) ............................ 323,999 Fees and expenses waived or reimbursed by Investment Adviser (Note 4) ........................... (81,548) ------------- Net Expenses ........................................ 242,451 ------------- Net Investment Income ..................................... 1,585,117 ------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ALLOCATED FROM PORTFOLIO (NOTE 1) Net realized gain on investments allocated from Portfolio ................................. 37,043 Net change in unrealized appreciation on investments allocated from Portfolio ...................... 262,345 ------------- Net Gain .................................................. 299,388 ------------- Net Increase in Net Assets from ........................... 1,884,505 ============= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17 STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND
SIX MONTHS ENDED FEBRUARY 28, 2005 YEAR ENDED (UNAUDITED) AUGUST 31, 2004 INCREASE IN NET ASSETS: ($) ($) ----------------- --------------- OPERATIONS Net investment income .............................................. 1,585,117 3,555,345 Net realized gain on investments allocated from Portfolio .......................................... 37,043 772,663 Net change in unrealized appreciation on investments allocated from Portfolio .............................. 262,345 3,878,586 ----------------- --------------- Net Increase from Operations ................................... 1,884,505 8,206,594 DISTRIBUTIONS DECLARED TO SHAREHOLDERS From net investment income ......................................... (1,602,377) (3,568,779) ----------------- --------------- SHARE TRANSACTIONS Subscriptions .................................................. 100,000 1,300,003 Distributions reinvested ....................................... 1,377,497 3,199,887 Redemptions .................................................... (3,177,420) (32,809,314) ----------------- --------------- Net Decrease from Share Transactions ........................... (1,699,923) (28,309,424) ----------------- --------------- Total Decrease in Net Assets ............................ (1,417,795) (23,671,609) ----------------- --------------- NET ASSETS Beginning of period ................................................ 66,034,102 89,705,711 End of period (including overdistributed net investment income of $(45,232) and $(27,972), respectively) ....................................... 64,616,307 66,034,102 ================= =============== CHANGES IN SHARES Subscriptions .................................................. 10,193 134,996 Issued for distributions reinvested ............................ 140,392 330,554 Redemptions .................................................... (323,980) (3,389,936) ----------------- --------------- Net Decrease ................................................... (173,395) (2,924,386)
18 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, --------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED) 2004 2003 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.79 $ 9.27 $ 8.81 $ 9.61 $ 10.00 $ 10.07 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.24(a) 0.41(a) 0.52(a) 0.60(a)(b) 0.87(a) 0.88 Net realized and unrealized gain (loss) allocated from Portfolio 0.04 0.53 0.46 (0.82)(b) (0.40) (0.07) ======== ======== ======== ========= ========= ======== Total from Investment Operations 0.28 0.94 0.98 (0.22) 0.47 0.81 - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.24) (0.42) (0.52) (0.58) (0.85) (0.88) From net realized gains -- -- -- -- (0.01) --(c) ======== ======== ======== ========= ========= ======== Total Distributions Declared to Shareholders (0.24) (0.42) (0.52) (0.58) (0.86) (0.88) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 9.83 $ 9.79 $ 9.27 $ 8.81 $ 9.61 $ 10.00 Total return (d) (e) 2.91%(g) 10.25% 11.50%(f) (2.39)% 4.93% 8.52% - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Net operating expenses 0.72%(i) 0.75% 0.75% 0.75% 0.75% 0.75% Interest expense allocated from Portfolio 0.03%(h) --%(h) --%(h) 0.03% --% --% Net expenses 0.75%(i) 0.75% 0.75% 0.78% 0.75% 0.75% Net investment income 4.93%(i) 4.29% 5.81% 6.28%(b) 8.90% 8.97% Waiver/reimbursement 0.25%(i) 0.15% 0.24% 0.21% 0.10% 0.14% Net assets, end of period (000's) $ 64,616 $ 66,034 $ 89,706 $ 100,912 $ 135,964 $184,661
________________________________________ (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 was to increase net investment income per share by $0.01, and increase net realized and unrealized loss per share by $0.01. The ratio of net investment income to average net assets increased from 6.27% to 6.28%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Rounds to less than $0.01. (d) Had the Portfolio's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Total return at net asset value assuming all distributions reinvested. (f) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Fund's return. (g) Not annualized. (h) Rounds to less than 0.01%. (i) Annualized. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND NOTE 1. ORGANIZATION Highland Institutional Floating Rate Income 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. Effective October 18, 2004, Columbia Institutional Floating Rate Income Fund was renamed Highland Institutional Floating Rate Income Fund. Also on that date, Columbia Floating Rate Limited Liability Company was renamed Highland Floating Rate Limited Liability Company (the "Portfolio"). INVESTMENT GOAL The Fund invests all of its investable assets in the Portfolio. The Portfolio seeks a high level of current income consistent with preservation of capital. THE PORTFOLIO The Portfolio is registered under the 1940 Act as a non-diversified, closed-end management investment company and is organized as a Delaware limited liability company. The Portfolio allocates income, expenses, realized and unrealized gains and losses to each investor on a daily basis, based on methods in compliance with the Internal Revenue Code of 1986, as amended (the "Code"). At February 28, 2005, the Fund and Highland Floating Rate Fund were the sole investors in the Portfolio and owned 6.6% and 93.4%, respectively, of the Portfolio. FUND SHARES The Fund may issue an unlimited number of shares, which are offered continuously at net asset value. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Portfolio and the Fund in the preparation of their financial statements. SECURITY VALUATION The value of the Fund's assets is based on its proportionate share of the current market value of the Portfolio's investments. For securities with readily available market quotations, the Portfolio uses those quotations for pricing. When portfolio securities are traded on the relevant day of valuation, the valuation will be the last reported sale price on that day. If there are no such sales on that day, the security will be valued at the mean between the most recently quoted bid and asked prices from principal market makers. Securities without a sale price or bid and ask quotations on the valuation day will be priced by an independent pricing service. If securities do not have readily available market quotations or pricing service prices, including circumstances under which such are determined not to be accurate or current (including when events materially affect the value of securities occurring between the time when market price is determined and calculation of the Portfolio's net asset value), such securities are valued at their fair value, as determined in good faith in accordance with procedures established by the Portfolio's Board of Trustees. In these cases, the Portfolio's net asset value will reflect the affected portfolio securities' value as determined in the judgment of the Board of Trustees or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different from a security's most recent sale price and from the prices used by other investment companies to calculate their net asset values. There can be no assurance that the Portfolio's valuation of a security will not differ from the amount that it realizes upon the sale of such security. SECURITY TRANSACTIONS Security transactions are accounted for on the trade date. Cost is determined and gains (losses) are based upon the specific identification method for both financial statement and federal income tax purposes. REPURCHASE AGREEMENTS The Portfolio may engage in repurchase agreement transactions with institutions that the Portfolio's investment adviser has determined are creditworthy. The Portfolio, through its custodian, receives delivery of underlying securities collateralizing a repurchase agreement. Collateral is at least equal, at all times, to the value of the repurchase obligation including interest. A repurchase agreement transaction involves certain risks in the event of default or insolvency of the counterparty. 20 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND These risks include possible delays or restrictions upon the Portfolio's ability to dispose of the underlying securities and a possible decline in the value of the underlying securities during the period while the Portfolio seeks to assert its rights. INCOME RECOGNITION Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. Facility fees received are treated as market discounts. Unamortized facility fees are reflected as deferred fees on the Portfolio's Statement of Assets and Liabilities. FEDERAL INCOME TAX STATUS The Fund intends to qualify each year as a "regulated investment company" under Subchapter M of the Code, and will distribute substantially all of its taxable income, if any, for its tax year, and as such will not be subject to federal income taxes. In addition, the Portfolio is treated as a partnership for federal income tax purposes and all of its income is allocated to its owners based on methods in compliance with the Internal Revenue Service. Therefore, no federal income tax provision is recorded. DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income are declared by the Fund daily and paid monthly. Net realized capital gains, if any, are distributed at least annually. STATEMENT OF CASH FLOWS Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows is the amount included within the Portfolio's Statement of Assets and Liabilities and includes cash on hand at its custodian bank and does not include any short-term investments. NOTE 3. FEDERAL TAX INFORMATION The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. 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, 2004 and August 31, 2003 was as follows: - -------------------------------------------------------------------------------- 2004 2003 - -------------------------------------------------------------------------------- Distributions paid from: - -------------------------------------------------------------------------------- Ordinary income* $3,568,779 $5,397,399 - -------------------------------------------------------------------------------- Long-term capital gains -- -- - -------------------------------------------------------------------------------- * For tax purposes short-term capital gains distributions, if any, are considered ordinary income distributions. As of August 31, 2004, the components of distributable earnings on a tax basis were as follows: - -------------------------------------------------------------------------------- Undistributed Undistributed Ordinary Long-Term Net Unrealized Income Capital Gains Appreciation* - -------------------------------------------------------------------------------- $35,698 $ -- $ 42,839 - -------------------------------------------------------------------------------- * 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. These amounts are as of the most recent tax year end. Portfolio unrealized appreciation and depreciation at February 28, 2005, based on cost of investments for federal income tax purposes was: - -------------------------------------------------------------------------------- Unrealized appreciation $ 13,705,110 - -------------------------------------------------------------------------------- Unrealized depreciation (9,014,619) -------------- Net unrealized appreciation $ 4,690,941 - -------------------------------------------------------------------------------- The following capital loss carryforwards may be available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code: - -------------------------------------------------------------------------------- Year of Capital Loss Expiration Carryforward - -------------------------------------------------------------------------------- 2009 $ 16,991 - -------------------------------------------------------------------------------- 2010 2,799,382 - -------------------------------------------------------------------------------- 2011 1,685,798 - -------------------------------------------------------------------------------- 2012 2,947,361 - -------------------------------------------------------------------------------- Total $ 7,449,532 - -------------------------------------------------------------------------------- 21 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, TRUSTEE, AND OTHER FEES INVESTMENT ADVISORY FEE Effective April 15, 2004, Highland Capital Management, L.P. ("Highland") is the investment adviser to the Portfolio. Highland receives a monthly investment advisory fee based on the Portfolio's average daily managed net assets at the following annual rates: - -------------------------------------------------------------------------------- Average Daily Managed Net Assets Annual Fee Rate - -------------------------------------------------------------------------------- First $1billion 0.45% - -------------------------------------------------------------------------------- Next $1billion 0.40% - -------------------------------------------------------------------------------- Over $2 billion 0.35% - -------------------------------------------------------------------------------- Average daily managed net assets of the Portfolio means the average daily value of the total assets of the Portfolio less all accrued liabilities of the Portfolio (other than the aggregate amount of any outstanding borrowing constituting financial leverage). For the six months ended February 28, 2005, the Portfolio's effective investment advisory fee rate was 0.45%. Prior to April 15, 2004, Columbia Management Advisors, Inc. ("Columbia Management") was the investment adviser to the Portfolio. Columbia Management was an indirect, wholly owned subsidiary of FleetBoston Financial Corporation ("FleetBoston"). Effective April 1, 2004, FleetBoston, including Columbia Management and the Fund's transfer agent and distributor, was acquired by Bank of America Corporation. ADMINISTRATION FEES Effective October 18, 2004, Highland provides administrative services to the Portfolio and the Fund for a monthly administration fee at the annual rate of 0.20% of the Fund's average daily managed assets. The Fund, but not the Portfolio, pays Highland for these services. Under separate sub-administration agreements, Highland has delegated certain administrative functions to PFPC Inc. ("PFPC"). For the period ended February 28, 2005, Highland received $47,514 in administration fees and paid PFPC $2,376 for their services. This amount is included in the "Administration fee" on the Statement of Operations of the Fund. Prior to October 18, 2004, Columbia Management provided administrative and other services to the Fund for a monthly administration fee at the annual rate of 0.20% of the Fund's average daily net assets. For the period September 1, 2004 through October 17, 2004, Columbia Management received $16,794 in administration fees, which is included in the "Administration fee" on the Statement of Operations of the Fund. ACCOUNTING SERVICES FEES Effective October 18, 2004, the Portfolio and the Fund entered into separate accounting services agreements with PFPC. All fees are paid by the Portfolio. For the period October 18, 2004 through February 28, 2005, PFPC received $95,526 for this service. An allocated portion of the Portfolio fee is included in the "Net operating expenses allocated from Portfolio" on the Statement of Operations of the Fund. Prior to October 18, 2004, Columbia Management was responsible for providing pricing and bookkeeping services to the Portfolio and the Fund under a pricing and bookkeeping agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia Management delegated those functions to State Street Bank and Trust Company ("State Street"). As a result, Columbia Management paid the total fees collected under the Outsourcing Agreement to State Street. Under its pricing and bookkeeping agreement with the Fund, Columbia Management received from the Portfolio and the Fund an annual flat fee of $10,000 and $5,000, respectively, paid monthly, and in any month that the Fund's average daily net assets exceeded $50 million, an additional monthly fee. The additional fee rate was calculated by taking into account the fees payable to State Street under the Outsourcing Agreement. This rate was applied to the average daily net assets of the Fund for that month. The Portfolio also paid additional fees for pricing services based on the number of securities held by the Portfolio. For the period September 1, 2004 through October 17, 2004, Columbia Management received pricing and bookkeeping fees of $2,817 from the Fund and $30,460 from the Portfolio. The Fund fee is included in the "Accounting Services fee" and an allocated portion of the Portfolio fee is included in the "Net operating expenses allocated from Portfolio" on the Statement of Operations of the Fund. 22 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND TRANSFER AGENT FEE Effective October 18, 2004, PFPC provides shareholder services to the Fund. For the period October 18, 2004 through February 28, 2005, PFPC received $6,679 for this service. This fee is included in the "Transfer agent fee" on the Statement of Operations of the Fund. Prior to October 18, 2004, Columbia Funds Services, Inc. ("Columbia Services"), an affiliate of Columbia Management, provided shareholder services to the Fund. For such services, Columbia Services received a fee, paid monthly, at the annual rate of $34 per open account. Columbia Services also received reimbursement for certain out-of-pocket expenses. For the period September 1, 2004 through October 17, 2004, Columbia Services received transfer agent fees, excluding out-of-pocket expenses, of $843 from the Portfolio and $57 from the Fund. An allocated portion of the Portfolio fee is included in the "Net operating expenses allocated from Portfolio" and the Fund fee is included in the "Transfer agent fee" on the Statement of Operations of the Fund. EXPENSE LIMITS AND FEE REIMBURSEMENTS Highland has voluntarily agreed to waive fees and reimburse certain expenses to the extent that total expenses (inclusive of allocated Portfolio expenses but exclusive of brokerage commissions, interest, commitment fees, taxes and extraordinary expenses, if any) exceed 0.75% annually of the Fund's average daily net assets. This arrangement may be revised or discontinued by Highland at any time. CUSTODY Effective October 18, 2004, PFPC Trust Company ("PFPC Trust") is the custodian for the Portfolio and Fund. For the period October 18, 2004 through February 28, 2005, PFPC Trust received custody fees of $40,471 from the Portfolio and $500 from the Fund. An allocated portion of the Portfolio fee is included in the "Net operating expenses allocated from Portfolio" and the Fund fee is included in the "Custody fee" on the Statement of Operations of the Fund. For the period September 1, 2004 through October 17, 2004, the Portfolio and Fund had an agreement with its prior custodian bank, State Street, under which custody fees could have been reduced by balance credits. The Portfolio and Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if they had not entered into such an agreement. FEES PAID TO OFFICERS AND TRUSTEES The Fund pays no compensation to its officers, all of whom are employees of Highland. Trustees who are not interested persons (as defined in the 1940 Act) of the Fund each receive an annual retainer fee of $25,000 for services provided as Trustees of the Fund. The Fund and Highland Floating Rate Fund pay $20,000 of this fee (allocated based on their relative net assets). The remaining $5,000 is paid by the Portfolio. Prior to July 30, 2004, the previous Trustees of the Fund participated in a deferred compensation plan. Any continuing obligations of the plan will be paid solely out of the Fund's assets. NOTE 5. PORTFOLIO INFORMATION For the six months ended February 28, 2005, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $526,450,444 and $322,283,178, respectively. NOTE 6. PERIODIC REPURCHASE OFFERS The Fund has adopted a fundamental policy to offer each calendar quarter to repurchase a specified percentage (between 5% and 25%) of the shares then outstanding at NAV ("Repurchase Offers"). Repurchase Offers are scheduled to occur on or about the 15th day (or the next business day if the 15th is not a business day) in the months of March, June, September, and December. It is anticipated that normally the date on which the repurchase price of shares will be determined (the "Repurchase Pricing Date") will be the same date as the deadline for shareholders to provide their repurchase requests to the Distributor (the "Repurchase Request Deadline"), and if so, the Repurchase Request Deadline will be set for a time no later than the close of regular trading on the NYSE on such date. The Repurchase Pricing Date will occur no later than the 14th day after the Repurchase Request Deadline, or the next business day if the 14th day is not a business day. Repurchase proceeds will be paid to shareholders no later than seven days after the Repurchase Pricing Date. For the six months ended February 28, 2005, there were two Repurchase Offers. For each Repurchase Offer, the Fund offered to repurchase 10% of its shares. In the December and March Repurchase Offers 2.70% and 0.00%, respectively, of shares outstanding were repurchased. 23 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS The Portfolio invests at least 80% of its net assets (plus any borrowings for investment purposes) in adjustable rate senior loans ("Senior Loans") the interest rates of which float or vary periodically based upon a benchmark indicator of prevailing interest rates to domestic foreign corporations, partnerships and other entities ("Borrowers"). If the lead lender in a typical lending syndicate becomes insolvent, enters FDIC receivership or, if not FDIC insured enters into bankruptcy, the Portfolio may incur certain costs and delays in receiving payment or may suffer a loss of principal and/or interest. When the Portfolio purchases a participation of a Senior Loan interest, the Portfolio typically enters into a contractual agreement with the lender or other third party selling the participation, not with the borrower directly. As such, the Portfolio assumes the credit risk of the Borrower, selling participant or other persons interpositioned between the Portfolio and the Borrower. The ability of Borrowers to meet their obligations may be affected by economic developments in a specific industry. At February 28, 2005, the following sets forth the selling participants with respect to interests in senior loans purchased by the Portfolio on a participation basis. - -------------------------------------------------------------------------------- Principal Selling Participant Amount Value - -------------------------------------------------------------------------------- Goldman Sachs: Bridge Information Systems, Inc. Multi Term Loan $ 500,757 $ 22,534 - -------------------------------------------------------------------------------- CSFB: Quality Distribution, Inc. Term Loan 2,176,502 2,121,415 - -------------------------------------------------------------------------------- NOTE 8. LINE OF CREDIT On September 13, 2004, the Portfolio entered into a $150,000,000 credit facility used for temporary or emergency purposes to facilitate portfolio liquidity. Interest is charged to the Portfolio based on its borrowings. In addition, the Portfolio has agreed to pay commitment fees on the unutilized line of credit, which are included in "Other expenses" on the Statement of Operations. For the six months ended February 28, 2005, the average daily loan balance outstanding on days where borrowings existed was $100,000,000 at a weighted average interest rate of 2.97%. For the period September 1, 2004 through September 12, 2004, the Portfolio and other previously affiliated funds participated in a $350,000,000 credit facility, for temporary or emergency purposes to facilitate portfolio liquidity. Interest was charged to the Portfolio based on its borrowings. In addition, the Portfolio agreed to pay commitment fees on its pro-rata portion of the unutilized line of credit. NOTE 9. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES INDUSTRY FOCUS The Portfolio may focus its investments in the financial services industry, 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 or principal. Non-payment would result in a reduction of income to the Portfolio, a reduction in the value of the Senior Loan experiencing non-payment and a potential decrease in the net asset value of the Fund. CREDIT RISK Securities rated below investment grade are commonly referred to as high-yield, high risk or "junk debt." They are regarded as predominantly speculative with respect to the issuing company's continuing ability to meet principal and/or interest payments. Investments in high-yield Senior Loans may result in greater net asset value fluctuation than if the Portfolio did not make such investments. LEGAL PROCEEDINGS Prior to April 15, 2004, the Fund was advised by Columbia Management and was part of the Columbia funds complex (the "Columbia Funds"). Several Columbia Funds are defendants in civil lawsuits that have been transferred and consolidated for pretrial proceedings in the United States District Court for the District of Maryland in the Special Multi-District Litigation proceeding (Index No. 04-MO-15863) created for actions involving market timing issues against mutual fund complexes. The lawsuits have been commenced as putative class actions on behalf of investors who purchased, held or redeemed shares of the Funds during specified periods or as derivative actions on behalf of the Funds. The lawsuits seek, among other things, unspecified compensatory damages plus interest and, in some cases, punitive damages, the rescission of investment advisory contracts, 24 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND INSTITUTIONAL FLOATING RATE INCOME FUND the return of fees paid under those contracts, and restitution. The consolidated amended class action complaint against Columbia-affiliated defendants was filed on September 29, 2004 and does not name the Fund as a defendant or nominal defendant. The consolidated amended fund derivative complaint against Columbia-affiliated defendants was also filed on September 29, 2004 and names the Columbia Funds, collectively, as nominal defendants. On March 2, 2005, four civil revenue sharing actions alleging, among other things, that various mutual funds advised by Columbia Management and Columbia Wanger Asset Management L.P. inappropriately used fund assets to pay brokers to promote the funds by directing fund brokerage transactions to such brokers and did not fully disclose such arrangements to shareholders, and charged excessive 12b-1 fees, were consolidated into a single action in the United States District Court for Massachusetts (In re Columbia Entities Litigation, Civil Action No. 04-11704-REK). The consolidated complaint has not yet been filed. The Fund was named as a nominal defendant in each of the four revenue sharing actions. 25 IMPORTANT INFORMATION ABOUT THIS REPORT - -------------------------------------------------------------------------------- TRANSFER AGENT PFPC Inc. 760 Moore Road King of Prussia, PA 19406 877.665.1287 DISTRIBUTOR PFPC Distributors, Inc. 760 Moore Road King of Prussia, PA 19406 INVESTMENT ADVISER Highland Capital Management, L.P. 13455 Noel Rd. Suite 1300 Dallas, TX 75240 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 125 High Street Boston, MA 02110 The Fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-877-665-1287 and additional reports will be sent to you. This report has been prepared for shareholders of Highland Institutional Floating Rate Income 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, beginning with the fiscal quarter ending November 30, 2004. The Fund's Forms N-Q are available on the Commission's website at http:/www.sec.gov and also may be reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Statement of Additional Information includes information about Fund Directors and is available upon request without charge by calling 1-877-665-1287. 26 This page intentionally left blank This page intentionally left blank - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND TABLE OF CONTENTS Fund Profile ............................................................. 1 Financial Statements ..................................................... 2 Investment Portfolio .................................................. 3 Portfolio Statement of Assets and Liabilities.......................... 11 Portfolio Statement of Operations ..................................... 12 Portfolio Statements of Changes in Net Assets.......................... 13 Portfolio Statement of Cash Flows ..................................... 14 Portfolio Financial Highlights ........................................ 15 Fund Statement of Assets and Liabilities .............................. 16 Fund Statement of Operations .......................................... 17 Fund Statements of Changes in Net Assets .............................. 18 Fund Financial Highlights ............................................. 20 Notes to Financial Statements ......................................... 24 Important Information About This Report .................................. 31 Economic and market conditions change frequently. There is no assurance that the trends described in this report will continue or commence. A prospectus must precede or accompany this report. Please read the prospectus carefully before you invest. FUND PROFILE - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND OBJECTIVE The Fund invests all of its investable assets in Highland Floating Rate Limited Liability Company (the "Portfolio"). The Portfolio seeks a high level of current income, consistent with preservation of capital. TOTAL NET ASSETS (AS OF 02/28/05) $922.0 million The information below gives you a snapshot of your Fund at the end of the reporting period. Your Fund is actively managed and the composition of its portfolio will change over time. QUALITY BREAKDOWN AS OF 02/28/05 (%) - -------------------------------------------------------------------------- Ba 23.9 - -------------------------------------------------------------------------- B 53.7 - -------------------------------------------------------------------------- Caa 4.9 - -------------------------------------------------------------------------- NR 17.1 - -------------------------------------------------------------------------- Other 0.4 - -------------------------------------------------------------------------- TOP 5 SECTORS AS OF 02/28/05 (%) - -------------------------------------------------------------------------- Cable & Satellite Television 10.5 - -------------------------------------------------------------------------- Health Care 7.8 - -------------------------------------------------------------------------- Chemicals/Plastics 5.8 - -------------------------------------------------------------------------- Utilities 5.4 - -------------------------------------------------------------------------- Telecommunications/Wireless 5.3 - -------------------------------------------------------------------------- TOP 10 HOLDINGS AS OF 02/28/05 (%) - -------------------------------------------------------------------------- General Growth Properties, Inc., Tranche B Term Loan 2.1 - -------------------------------------------------------------------------- Cricket Communications, Inc., Term Loan B 1.5 - -------------------------------------------------------------------------- Century Cable Holdings LLC, Term Loan 1.5 - -------------------------------------------------------------------------- Charter Communications Operating LLC, Tranche B Term Loan 1.4 - -------------------------------------------------------------------------- Hilton Head Communications LP, Revolver 1.4 - -------------------------------------------------------------------------- LNR Property Corp., Tranche B Term Loan 1.3 - -------------------------------------------------------------------------- OpBiz LLC, Term Loan A 1.2 - -------------------------------------------------------------------------- UPC Financing Partnership, Term Loan C2 1.2 - -------------------------------------------------------------------------- Qwest Corp., Term Loan B 1.1 - -------------------------------------------------------------------------- Acterna Corp., Term Loan 1.0 - -------------------------------------------------------------------------- Quality is calculated as a percentage of total investments. Sectors and holdings are calculated as a percentage of net assets. 1 FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND A GUIDE TO UNDERSTANDING YOUR FUND'S FINANCIAL STATEMENTS INVESTMENT PORTFOLIO The Investment Portfolio details all of the Fund's holdings and their market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification. STATEMENT OF ASSETS AND 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. STATEMENT OF CHANGES IN NET ASSETS This statement demonstrates how the Fund's net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and dividend reinvestments) during the reporting period. The Statement of Changes in Net Assets also details changes in the number of shares outstanding. STATEMENT OF CASH FLOWS The Statement of Cash Flows reports net cash provided or used by operating, investing and financing activities and the net effect of those flows on cash and cash equivalents during the period. 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. FINANCIAL HIGHLIGHTS The Financial Highlights demonstrate how the Fund's net asset value per share was affected by the fund's operating results. The Financial Highlights table also discloses the classes' performance and certain key ratios (e.g., class expenses and net investment income as a percentage of average net assets). 2 INVESTMENT PORTFOLIO (UNAUDITED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- VARIABLE RATE SENIOR LOAN NOTES (A) - 97.9% AEROSPACE/DEFENSE - 0.5% 1,985,000 CACI International, Inc. Term Loan, 4.59%, 05/03/11 .................... 2,014,775 3,000,000 Vought Aircraft Industries, Inc. Term Loan, 5.17%, 12/22/11 .................... 3,048,750 ----------- 5,063,525 ----------- AIR TRANSPORT - 0.2% 1,992,350 United Airlines, Inc. Tranche B, 7.50%, 06/30/05 .................... 2,013,509 ----------- AUTOMOTIVE - 4.7% CSA Acquisition Corp. 1,150,000 Tranche B Term Loan, 4.75%, 12/23/11 ............................... 1,167,969 616,667 Tranche C Term Loan, 4.75%, 12/23/11 ............................... 625,917 Federal-Mogul Corp. 392,157 Letter of Credit, 12/09/05 (b) ................ 398,039 1,372,995 Supplemental Revolver, 6.15%, 12/09/05 (c) ........................... 1,348,420 3,607,843 Term Loan, 12/09/11 (b) ....................... 3,440,980 5,000,000 Tranche B Term Loan, 5.17%, 06/30/05 ............................... 4,768,750 1,048,750 Tranche C Term Loan, 6.42%, 12/09/05 ............................... 1,055,305 5,000,000 Goodyear Tire & Rubber Co. Term Loan ABL Tranche A, 6.56%, 03/31/06 ............................... 5,068,750 3,933,729 Hayes Lemmerz International, Inc. Term Loan, 6.24%, 06/03/09 .................... 4,023,890 3,990,000 J.L. French Automotive Castings, Inc. First Lien Term Loan, 6.95%, 07/31/11 ............................... 4,021,601 Key Automotive Group 5,526,534 Term Loan B, 5.70%, 06/29/10 .................. 5,630,212 6,250,000 Term Loan C, 8.02%, 06/25/11 .................. 6,308,625 Key Plastics Holdings, Inc. 55,843 Junior Secured Subordinated Notes, 18.32%, 04/26/07 (d) .......................... 50,258 101,433 Senior Secured Subordinated Notes, 7.00%, 04/26/07 (d) ........................... 81,146 913,043 Keystone Automotive Industries, Inc. Term Loan, 5.61%, 10/30/09 .................... 923,315 3,980,000 Stanadyne Corp. Term Loan, 6.00%, 08/02/10 .................... 4,029,750 Tenneco Automotive, Inc. 1,779,338 Tranche B Term Loan, 12/12/10 (b) ............. 1,779,338 907,701 Tranche B-1 Credit Linked Deposit, 12/12/10 (b) .................................. 907,701 ----------- 45,629,966 ----------- BEVERAGE & TOBACCO - 2.0% 2,887,500 Caribbean Restaurant LLC Tranche B, 5.34%, 06/30/09 .................... 2,935,317 853,171 Commonwealth Brands, Inc. Term Loan, 5.94%, 08/28/07 .................... 871,301 2,825,833 Constellation Brands, Inc. Tranche B Term Loan, 4.40%, 11/30/11 ............................... 2,869,238 5,379,658 Dr. Pepper Bottling Company of Texas Term Loan B, 4.48%, 12/19/10 ............................... 5,481,871 PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- BEVERAGE & TOBACCO (CONTINUED) 2,400,000 DS Waters Enterprises LP Term Loan, 6.85%, 11/07/09 .................... 2,232,000 2,925,135 Southern Wine & Spirits of America, Inc. Term Loan B, 4.81%, 07/02/08 .................. 2,968,544 2,000,000 Sunny Delight Beverage Co. First Lien Term Loan, 6.79%, 08/20/10 ............................... 1,995,000 ----------- 19,353,271 ----------- BROADCAST RADIO & TELEVISION - 1.3% 2,000,000 Emmis Operating Co. Tranche B Term Loan, 4.34%, 11/10/11 ............................... 2,026,120 2,000,000 Freedom Communications, Inc. Tranche B Term Loan, 4.60%, 05/18/12 ............................... 2,032,200 2,654,830 GT Brands LLC Term Loan, 10.50%, 09/30/07 ................... 716,804 4,331,250 Spanish Broadcasting Systems, Inc. Term Loan B, 5.92%, 10/30/09 .................. 4,412,461 2,970,000 Warner Music Group Term Loan B, 5.09%, 02/28/11 .................. 3,021,025 ----------- 12,208,610 ----------- BUILDING & DEVELOPMENT PRODUCTS - 3.3% 2,000,000 DESA LLC Term Loan, 11/26/11 (b) ....................... 2,017,500 4,411,930 Lake at Las Vegas Joint Venture First Lien Term Loan, 5.32%, 11/01/09 ............................... 4,477,667 LNR Property Corp. 2,000,000 Tranche A Term Loan, 0.50%, 02/03/08 (c) ........................... 1,961,360 12,500,000 Tranche B Term Loan, 5.59%, 02/03/08 ............................... 12,683,625 NATG Holdings LLC 1,039,746 Credit Linked Certificate of Deposit, 0.85%, 01/23/09 ...................... 873,386 960,364 Term Loan A, 7.09%, 01/23/09 .................. 177,667 700,694 Term Loan B1, 7.69%, 01/23/10 ................. 182,180 72,363 Term Loan B2, 7.69%, 01/23/10 ................. 60,785 995,000 Nortek Holdings, Inc. Term Loan, 4.78%, 08/27/11 .................... 1,011,666 Woodlands Commercial Property Co. 4,000,000 Bridge Loan, 4.84%, 08/30/05 .................. 4,030,000 5,000,000 Mezzanine Loan, 11/30/07 (b) .................. 5,075,000 ----------- 32,550,836 ----------- BUSINESS EQUIPMENT & SERVICES - 4.5% 10,009,865 Acterna Corp. Term Loan, 09/30/07 (b) ....................... 10,109,964 4,666,667 Brickman Group Holdings, Inc. Term Loan, 7.97%, 11/15/09 .................... 4,655,000 Ferrell Cos., Inc. 1,500,000 Term Loan, 12/17/11 (b) ....................... 1,528,125 2,000,000 Term Loan, 6.10%, 12/17/11 .................... 2,037,500 1,736,875 Hillman Group, Inc. Term Loan B, 5.50%, 03/30/11 .................. 1,762,893 3,228,235 Knoll, Inc. Initial Term Loan, 5.59%, 09/30/11 ............ 3,260,518 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 3 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) BUSINESS EQUIPMENT & SERVICES (CONTINUED) 2,694,716 OfficeMax, Inc. Tranche B Term Loan, 4.94%, 10/28/11 ............................... 2,744,245 1,324,391 URS Corp. Term Loan B, 4.71%, 08/22/08 .................. 1,332,258 2,000,000 VUTEk, Inc. Term Loan, 06/25/10 (b) ....................... 2,010,000 9,600,000 Washington Group International Term Loan B, 2.57%, 10/03/07 .................. 9,648,000 5,000,000 Xerox Corp. New Term Loan, 4.42%, 09/30/08 ................ 5,052,700 ----------- 44,141,203 ----------- CABLE & SATELLITE TELEVISION - 10.5% 5,000,000 Adelphia Communications Corp. Tranche B DIP Term Loan, 03/31/06 (b) .................................. 5,025,000 1,400,000 Atlantic Broadband Finance LLC Term Loan B, 5.19%, 09/01/11 .................. 1,424,052 Century Cable Holdings LLC 3,500,000 Discretionary Term Loan, 7.50%, 12/31/09 ............................... 3,486,875 15,000,000 Term Loan, 7.50%, 06/30/09 .................... 14,957,850 Charter Communications Operating LLC 2,000,000 Tranche A Term Loan, 04/27/10 (b) ............. 1,998,280 13,940,000 Tranche B Term Loan, 5.98%, 04/27/11 ............................... 14,001,475 14,087,500 Hilton Head Communications LP Revolver, 5.50%, 09/30/07 ..................... 13,864,354 Insight Midwest Holdings LLC 1,980,000 Additional Term Loan, 5.44%, 12/31/09 ............................... 2,015,264 1,760,000 Term Loan A, 4.19%, 06/30/09 .................. 1,763,837 2,970,000 Term Loan B, 5.44%, 12/31/09 .................. 3,022,153 Mediacom Communications Corp. 3,920,000 Term Loan A, 4.16%, 03/31/10 .................. 3,905,300 1,990,000 Term Loan B, 5.04%, 09/30/10 .................. 2,024,825 1,000,000 Term Loan B, 5.14%, 03/31/13 .................. 1,017,500 Millennium Digital Media Capital Corp. 1,405,417 Revolver, 10/31/08 (b) ........................ 1,401,904 4,673,552 Term Loan B, 10/31/08 (b) ..................... 4,661,868 1,421,031 Term Loan C, 10/31/08 (b) ..................... 1,417,479 Olympus Cable Holdings LLC 9,500,000 Term Loan A, 6.75%, 06/30/10 .................. 9,376,120 1,000,000 Term Loan B, 7.50%, 09/30/10 .................. 995,310 11,442,500 UPC Financing Partnership Term Loan C2, 5.98%, 03/31/09 ................. 11,621,232 WideOpenWest LLC 2,985,000 Incremental Term Loan B, 7.06%, 06/22/11 ............................... 3,003,656 1,984,962 Term Loan B, 7.11%, 06/22/11 .................. 1,997,368 ----------- 102,981,702 ----------- CHEMICALS/PLASTICS - 5.8% 2,500,000 Brenntag AG Term Loan B2, 5.88%, 02/27/12 ................. 2,545,850 7,485,000 Celenese Dollar Term Loan B, 5.10%, 04/06/11 ............................... 7,647,125 7,952,437 Coffeyville, Inc. Term Loan, 7.56%, 05/10/10 .................... 8,071,724 PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- CHEMICALS/PLASTICS (CONTINUED) 7,000,000 Huntsman Co. LLC Term Loan B, 6.15%, 03/31/10 .................. 7,092,960 3,827,923 Huntsman International LLC Dollar Term B Loan, 5.13%, 12/31/10 ............................... 3,896,520 1,995,954 Innophos, Inc. Tranche B Term Loan, 4.86%, 08/13/10 ............................... 2,030,884 Invista 3,196,191 Tranche B1, 5.31%, 04/29/11 ................... 3,240,139 1,442,044 Tranche B2, 5.31%, 04/29/11 ................... 1,461,872 4,053,851 Kraton Polymers Group of Cos. Term Loan, 5.34%, 12/23/10 .................... 4,120,983 Nalco Co. 1,963,782 Term Loan A, 5.18%, 11/04/09 .................. 1,987,348 1,997,656 Term Loan B, 4.67%, 11/04/10 .................. 2,034,692 1,870,000 Polypore, Inc. Term Loan, 4.92%, 11/12/11 .................... 1,893,375 2,000,000 Rockwood Specialties Group, Inc. Tranche B Term Loan, 4.95%, 07/30/12 ............................... 2,028,540 4,985,000 Supresta U.S. LLC Term Loan B, 5.56%, 06/21/11 .................. 5,059,775 4,365,000 Waddington North America, Inc. Term Loan B, 5.32%, 04/07/11 .................. 4,232,697 ----------- 57,344,484 ----------- CLOTHING/TEXTILES - 0.7% Polymer Group, Inc. 3,518,750 First Lien Term Loan, 5.78%, 04/27/10 ............................... 3,558,899 3,000,000 Second Lien Term Loan, 8.78%, 04/27/11 ............................... 3,060,000 ----------- 6,618,899 ----------- CONGLOMERATE - 1.5% 3,482,500 Appleton Papers, Inc. Term Loan, 4.56%, 06/11/10 .................... 3,526,588 2,065,386 Jason, Inc. Term Loan B, 7.14%, 06/30/07 .................. 2,081,289 2,921,053 Language Line LCC Term Loan B, 6.87%, 06/13/11 .................. 2,957,566 2,645,872 Mueller Group, Inc. New Term Loan, 5.57%, 04/23/11 ................ 2,677,305 2,985,000 Youth & Family Centered Services, Inc. Term Loan B, 6.77%, 05/28/11 .................. 2,992,463 ----------- 14,235,211 ----------- CONTAINER/GLASS PRODUCTS - 3.5% 1,809,889 Berry Plastics Corp. Term Loan, 4.77%, 06/30/10 .................... 1,838,160 3,482,500 Consolidated Container Co. LLC Term Loan, 5.13%, 12/15/08 .................... 3,526,031 7,500,000 Graham Packaging International, Inc. Term Loan B, 5.09%, 10/07/11 .................. 7,635,300 2,737,646 Graphic Packaging International, Inc. Term Loan C, 5.14%, 08/09/10 .................. 2,787,252 1,288,115 Kerr Group, Inc. Term Loan, 6.08%, 08/13/10 .................... 1,303,251 1,815,512 Precise Technology, Inc. First Lien Term Loan, 5.56%, 03/31/11 ............................... 1,829,710 4 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) CONTAINER/GLASS PRODUCTS (CONTINUED) 740,625 Reddy Ice Group, Inc. Term Loan, 5.17%, 08/14/09 .................... 746,180 Smurfit-Stone Container Corp. 654,975 Credit Linked Certificate of Deposit, 2.49%, 11/01/10 ............................... 665,206 5,234,431 Tranche B, 4.60%, 11/01/11 .................... 5,315,146 1,610,594 Tranche C, 4.50%, 11/01/11 .................... 1,631,725 1,203,125 Sola International, Inc. Term Loan, 5.17%, 12/11/09 .................... 1,218,164 5,940,000 Solo Cup, Inc. Term Loan, 5.06%, 02/27/11 .................... 6,045,435 ----------- 34,541,560 ----------- COSMETICS/TOILETRIES - 0.8% 1,587,443 Church & Dwight Co., Inc. Tranche B, 4.40%, 05/30/11 .................... 1,610,271 3,112,842 Johnson Diversey, Inc. Term Loan B, 4.99%, 11/03/09 .................. 3,165,386 1,000,000 MD Beauty, Inc. Second Lien Term Loan, 02/18/13 (b) .................................. 1,015,000 2,000,000 Revlon Consumer Products Corp. Term Loan, 8.59%, 07/09/10 .................... 2,090,000 ----------- 7,880,657 ----------- DIVERSIFIED MANUFACTURING - 0.1% 1,000,000 GenTek, Inc. Second Lien Term Loan, 02/01/12 (b) .................................. 1,025,000 ----------- ECOLOGICAL SERVICE & EQUIPMENT - 1.2% Allied Waste North America, Inc. 1,570,450 Term Loan D, 5.09%, 01/15/10 .................. 1,580,752 4,709,571 Tranche A, 4.59%, 01/15/10 .................... 4,761,565 4,500,000 Environmental Systems Products Holdings Second Lien, 12.72%, 12/12/10 ................. 4,651,875 711,571 Synagro Technologies, Inc. Term Loan, 5.79%, 05/07/07 .................... 715,129 ----------- 11,709,321 ----------- ELECTRONIC/ELECTRIC - 3.3% 2,500,000 Alliance Laundry Systems LLC Term Loan, 4.84%, 01/27/12 .................... 2,532,825 2,500,000 Amkor Technology, Inc. Second Lien Term Loan, 7.37%, 10/27/10 ............................... 2,618,750 500,757 Bridge Information Systems, Inc. Multidraw Term Loan, 7.25%, 07/07/13 (e) (f) ....................... 22,534 2,000,000 Camp Acquisition Co. Term Loan A, 5.88%, 06/30/11 .................. 2,000,000 3,000,000 Comsys Information Technology Services, Inc. Second Lien Term Loan, 10.00%, 04/30/10 .............................. 3,000,000 3,000,000 Corel Corp. Second Lien Term Loan, 10.59%, 08/15/10 .............................. 3,015,000 730,135 Itron, Inc. Term Loan B, 4.98%, 06/28/11 738,043 PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- ELECTRONIC/ELECTRIC (CONTINUED) 5,000,000 ON Semiconductor Corp. Tranche G Term Loan, 5.56%, 12/15/11 ............................... 5,009,400 3,900,000 Seagate Technology Holdings, Inc. Term Loan B, 4.63%, 05/13/07 .................. 3,950,232 2,250,000 Transfirst Holdings, Inc. Second Lien Term Loan, 10.06%, 03/31/11 .............................. 2,300,625 1,492,500 UGS Corp. Term Loan B, 6.50%, 05/27/11 .................. 1,518,619 1,000,000 Verifone, Inc. Second Lien Term Loan, 8.73%, 12/31/11 ............................... 1,031,880 5,000,000 Viasystems, Inc. Tranche B Term Loan, 6.49%, 09/30/09 ............................... 5,057,800 ----------- 32,795,708 ----------- EQUIPMENT LEASING - 1.2% 1,492,500 National Equipment Service, Inc. Second Lien Term Loan, 8.98%, 08/17/10 ............................... 1,529,813 4,000,000 Neff Rental, Inc. Initial Term Loan, 7.25%, 05/01/08 ............ 3,960,000 5,789,583 United Rentals, Inc. Term Loan C2, 4.92%, 02/14/11 ................. 5,896,343 ----------- 11,386,156 ----------- FARMING/AGRICULTURE - 0.5% 4,590,833 AGCO Corp. Term Loan, 4.48%, 01/31/06 .................... 4,675,488 ----------- FINANCIAL INTERMEDIARIES - 0.2% 1,500,000 Metris Cos., Inc. Term Loan, 12.09%, 05/06/07 ................... 1,584,375 ----------- FOOD PRODUCTS - 3.1% 2,986,674 American Seafoods Group LLC Term Loan B, 5.81%, 03/31/09 .................. 3,018,393 1,995,000 Doane Pet Care Co. Term Loan, 6.43%, 11/05/09 .................... 2,031,150 7,500,000 Interstate Bakeries Corp. Revolver, 0.50%, 09/22/06 (c) ................. 7,448,475 Interstate Brands Corp. 1,959,596 Term Loan C, 6.77%, 07/19/07 .................. 1,919,581 1,875,000 Tranche A, 6.80%, 07/19/06 .................... 1,849,988 4,183,393 Luigino's, Inc. Term Loan B, 5.53%, 04/02/11 .................. 4,195,190 985,270 Merisant Co. Term Loan B, 5.48%, 01/11/10 .................. 987,122 1,820,000 Pierre Foods, Inc. Term Loan B, 4.48%, 06/30/10 .................. 1,843,514 7,146,000 Pinnacle Foods Holding Corp. Delayed Draw Term Loan, 5.81%, 11/25/10 ............................... 7,195,164 ----------- 30,488,577 ----------- FOOD SERVICES - 0.7% 3,246,603 Buffets, Inc. Term Loan, 6.27%, 06/28/09 .................... 3,273,680 1,000,000 Captain D's Inc., LLC First Lien Term Loan, 6.42%, 12/27/10 ............................... 1,007,500 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 5 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) FOOD SERVICES (CONTINUED) 2,413,139 Domino's, Inc. New Term Loan, 4.31%, 06/25/10 ................ 2,445,813 ----------- 6,726,993 ----------- FOOD/DRUG RETAIL - 2.0% 1,869,300 Atkins Nutritionals, Inc. First Lien Term Loan, 11.75%, 10/29/09 .............................. 1,637,507 Jean Coutu Group, Inc. 2,000,000 Term Loan B, 07/30/11 (b) ..................... 2,036,760 5,472,500 Term Loan B, 5.00%, 07/30/11 .................. 5,573,084 Michael Foods, Inc. 3,000,000 Floater Term Loan, 6.59%, 11/20/11 ............................... 3,090,000 4,596,465 Term Loan, 5.07%, 11/21/10 .................... 4,674,605 3,000,000 Nellson Nutraceutical, Inc. Second Lien Term Loan, 12.00%, 04/02/10 .............................. 2,730,000 ----------- 19,741,956 ----------- FOREST PRODUCTS - 0.3% SP Newsprint Co. 1,036,667 Term Loan B, 5.67%, 01/08/10 .................. 1,054,166 1,933,333 Term Loan B Letter of Credit, 2.59%, 01/09/08 ............................... 1,965,968 ----------- 3,020,134 ----------- HEALTH CARE - 7.5% Alliance Imaging, Inc. 758,588 Term Loan A, 3.50%, 11/02/06 .................. 752,898 1,587,051 Tranche C Term Loan, 4.97%, 12/29/11 ............................... 1,608,381 6,872,427 Alpharma Operating Corp. Term Loan B, 5.81%, 10/05/08 .................. 6,911,050 3,066,667 American Medical Response, Inc. Term Loan, 5.60%, 02/10/12 .................... 3,126,099 3,211,600 Ameripath, Inc. Term Loan, 5.92%, 03/27/10 .................... 3,239,702 2,992,500 Ardent Health Services Term Loan, 4.80%, 08/12/11 .................... 3,033,647 2,000,000 Chemed Corp. Term Loan, 08/24/10 (b) ....................... 2,035,000 1,967,677 Davita, Inc. Term Loan B, 4.58%, 03/31/09 .................. 1,977,653 712,500 dj Orthopedics LLC Term Loan, 4.88%, 05/15/09 .................... 724,969 699,121 Educate Operating Co. LLC Term Loan, 5.06%, 03/31/11 .................... 703,372 2,984,962 Express Scripts, Inc. Tranche B Term Loan, 4.13%, 02/13/10 ............................... 3,010,454 FHC Health Systems, Inc. 1,300,000 Delayed Draw Term Loan, 10.40%, 10/31/06 .............................. 1,313,000 1,857,143 Initial Term Loan, 8.40%, 10/31/06 ............................... 1,875,714 1,500,000 Third Lien Term Loan, 02/07/11 (b) ............ 1,530,000 5,000,000 Third Lien Term Loan, 11.77%, 01/14/11 .............................. 5,100,000 2,549,961 Hanger Orthopedic Group, Inc. Term Loan B, 6.06%, 09/30/09 .................. 2,562,711 PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- HEALTH CARE (CONTINUED) 2,600,000 HealthSouth Corp. Term Loan, 10.38%, 01/16/11 ................... 2,873,000 6,209,032 Insight Health Services Corp. Tranche B, 6.31%, 10/17/08 .................... 6,243,927 840,104 Kinetic Concepts, Inc. Term Loan B1, 4.31%, 08/11/10 ................. 845,884 7,703,704 Knowledge Learning Corp. Term Loan, 5.15%, 01/07/12 .................... 7,771,188 MedAssets, Inc. 500,000 Second Lien Term Loan, 12.56%, 06/16/08 .............................. 510,000 727,968 Senior Term Loan, 7.31%, 03/16/09 ............................... 737,977 4,000,000 MultiPlan, Inc. Term Loan, 5.31%, 03/04/09 .................... 4,045,000 1,221,023 Orthofix International N.V. Term Loan B, 4.55%, 12/30/08 .................. 1,238,581 Select Medical Corp. 2,000,000 Revolver, 02/24/11 (b) ........................ 1,998,760 3,000,000 Tranche B Term Loan, 02/24/12 (b) ............. 3,039,390 3,482,503 Skilled Healthcare LLC First Lien Term Loan, 5.34%, 07/31/10 ............................... 3,521,681 490,000 Sunrise Medical Holdings, Inc. Term Loan B-1, 5.88%, 05/13/10 ................ 495,513 915,333 VWR International, Inc. Term Loan B, 5.17%, 04/07/11 .................. 932,267 ----------- 73,757,818 ----------- HOME FURNISHINGS - 1.0% Holmes Group, Inc. 2,985,000 First Lien Term Loan, 5.91%, 11/08/10 ............................... 3,018,581 2,000,000 Second Lien Term Loan, 10.15%, 05/06/11 .............................. 2,030,000 2,441,406 Home Interiors & Gifts, Inc. Term Loan, 7.17%, 03/31/11 .................... 2,339,697 2,491,071 Sealy Mattress Co. Term Loan C, 4.80%, 08/06/12 .................. 2,533,121 ----------- 9,921,399 ----------- INDUSTRIAL EQUIPMENT - 0.8% 1,990,002 Blount International, Inc. Term Loan B, 5.31%, 08/09/10 .................. 2,019,016 1,950,000 Bucyrus International, Inc. Term Loan, 4.38%, 07/28/10 .................... 1,989,000 1,068,778 Copperweld Corp. Term Loan, 7.17%, 12/16/11 .................... 1,071,450 1,098,325 Dresser, Inc. Term Loan C, 5.17%, 04/10/09 .................. 1,114,119 1,471,432 Terex Corp. Term Loan, 4.89%, 07/03/09 .................... 1,489,825 ----------- 7,683,410 ----------- INSURANCE - 1.5% 9,600,000 Conseco, Inc. Term Loan, 6.17%, 06/22/10 .................... 9,801,024 2,985,000 Mitchell International, Inc. Second Lien Term Loan, 8.80%, 08/15/12 ............................... 3,003,656 1,990,000 WellCare Health Plans, Inc. Term Loan, 6.49%, 05/13/09 .................... 2,007,413 ----------- 14,812,093 ----------- 6 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) LEISURE GOODS/ACTIVITIES/MOVIES - 4.5% 3,216,949 AMF Bowling Worldwide, Inc. Term Loan B, 5.39%, 08/27/09 .................. 3,240,046 2,985,000 Amscan Holdings, Inc. Term Loan B, 5.60%, 04/30/12 .................. 2,996,194 10,000,000 Blockbuster Entertainment Corp. Term Loan B, 5.32%, 08/20/11 .................. 10,062,500 1,000,000 Camelbak Products, Inc. Second Lien Term Loan, 9.54%, 02/04/12 ............................... 1,014,380 4,620,000 Carmike Cinemas, Inc. Senior Secured Second Priority Term Loan, 5.92%, 02/02/09 ............................... 4,715,264 2,481,250 Cinemark USA, Inc. Tranche C Term Loan, 4.35%, 03/31/11 ............................... 2,512,266 CNL Hospitality Partners LP 5,000,000 First Lien Term Loan, 5.23%, 09/09/06 ............................... 5,000,000 3,000,000 Term Loan, 5.09%, 10/13/06 .................... 3,060,000 1,995,000 Metro-Goldwyn-Mayer Studios, Inc. Term Loan B, 5.06%, 04/30/11 .................. 2,003,100 5,774,093 Regal Cinemas, Inc. Term Loan, 4.56%, 11/10/10 .................... 5,865,786 1,576,602 Six Flags Theme Parks, Inc. Term Loan B, 5.09%, 06/30/09 .................. 1,594,985 1,990,000 Wallace Theaters First Lien Term Loan, 5.81%, 07/31/09 ............................... 2,031,034 ----------- 44,095,555 ----------- LODGING & CASINOS - 3.8% 692,600 Ameristar Casinos, Inc. Term Loan B1, 4.63%, 12/20/06 ................. 704,720 3,970,000 Green Valley Ranch Gaming LLC Term Loan B, 4.50%, 12/22/10 .................. 4,024,588 2,500,000 Mississippi Band of Chocktaw Indians Term Loan, 5.02%, 11/04/11 ............................... 2,540,625 OpBiz LLC 11,926,349 Term Loan A, 5.56%, 08/31/10 .................. 11,871,726 28,141 Term Loan B, 6.56%, 08/31/10 .................. 28,012 Venetian Casino Resort LLC 683,761 Delayed DrawTerm Loan B, 06/15/11 (b) .................................. 692,739 3,316,239 Term Loan B, 06/15/11 (b) ..................... 3,373,245 Wyndham International, Inc. 9,860,000 IRL Tranche II, 06/30/06 (b) .................. 9,914,230 4,360,152 Term Loan I, 7.38%, 06/30/06 .................. 4,378,465 ----------- 37,528,350 ----------- NONFERROUS METALS/MINING - 1.1% 997,500 J W Aluminum Co. First Lien Term Loan, 5.89%, 10/20/10 ............................... 1,013,709 Murray Energy Corp. 1,000,000 Tranche B Term Loan, 01/28/10 (b) ............. 1,017,500 3,750,000 Tranche B Term Loan, 5.94%, 01/28/10 ............................... 3,815,625 Novelis, Inc. 1,826,923 Term Loan, 01/07/12 (b) ....................... 1,855,935 3,173,077 Term Loan, 01/07/12 (b) ....................... 3,225,433 ----------- 10,928,202 ----------- PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- OIL/GAS - 3.3% 5,000,000 ALON USA Term Loan, 10.00%, 01/15/09 ................... 5,125,000 8,967,425 ATP Oil & Gas Corp. First Lien Term Loan, 8.58%, 03/29/09 ............................... 9,146,774 3,382,353 Basic Energy Services, Inc. Term Loan B, 5.55%, 10/03/09 .................. 3,416,177 4,027,500 Belden & Blake Corp. Term Loan, 5.69%, 07/07/11 .................... 4,085,415 1,730,003 Dresser Rand Group, Inc. Tranche B Dollar Term Loan, 4.56%, 10/29/11 ............................... 1,761,905 El Paso Corp. 2,500,000 Deposit Accounts, 2.40%, 11/23/09 ............................... 2,540,250 3,486,000 Term Loan, 5.44%, 11/23/09 .................... 3,552,234 1,544,000 Tesoro Petroleum Corp. Initial Term Loan, 7.99%, 04/15/08 ............ 1,592,605 1,320,000 Western Refining Co. LP Term Loan, 6.17%, 08/28/08 .................... 1,339,800 ----------- 32,560,160 ----------- PUBLISHING - 3.0% 3,233,750 Adams Outdoor Advertising LP First Lien Term Loan, 4.92%, 10/15/11 ............................... 3,287,624 Advertising Directory Solutions, Inc. 2,000,000 First Lien Term Loan, 4.72%, 11/09/11 ............................... 2,029,160 2,000,000 Second Lien Term Loan, 6.47%, 05/09/12 ............................... 2,058,500 Dex Media East LLC 5,976,992 Term Loan A, 4.52%, 11/08/08 .................. 6,060,191 1,126,925 Term Loan B, 4.50%, 05/08/09 .................. 1,143,401 2,309,701 Dex Media West LLC Term Loan A, 4.72%, 09/09/09 .................. 2,343,330 2,049,486 PRIMEDIA, Inc. Term Loan B, 5.38%, 06/30/09 .................. 2,049,917 1,748,005 R.H. Donnelley Corp. Term Loan D, 4.28%, 06/30/11 .................. 1,774,994 1,300,533 Relizon Co. Term Loan, 5.78%, 02/20/11 .................... 1,303,784 1,306,956 Sun Media Corp. Term Loan B, 4.13%, 02/07/09 .................. 1,320,235 3,088,750 Transwestern Publishing Co. First Lien Term Loan, 4.20%, 02/25/11 ............................... 3,107,591 2,910,000 VISANT Corp. Tranche B Term Loan, 4.81%, 10/04/11 ............................... 2,955,105 ----------- 29,433,832 ----------- REAL ESTATE INVESTMENT TRUST - 2.8% 2,000,000 AIMCO Properties, L.P. Term Loan, 4.75%, 11/02/09 .................... 2,040,000 20,000,000 General Growth Properties, Inc. Tranche B Term Loan, 4.84%, 11/12/08 ............................... 20,302,000 5,000,000 Strategic Hotel Capital, Inc. Term Loan B2, 5.48%, 07/09/06 ................. 4,992,300 ----------- 27,334,300 ----------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - --------------- ------------ VARIABLE RATE SENIOR LOAN NOTES (CONTINUED) RETAILERS - 0.6% 2,000,000 Dollarama Term Loan B, 5.02%, 11/18/11 .................. 2,030,000 2,049,951 Harbor Freight Tools USA Term Loan, 4.83%, 07/15/10 .................... 2,065,961 2,093,163 Prestige Brands Holdings, Inc. Tranche B, 5.40%, 04/06/11 .................... 2,120,301 ----------- 6,216,262 ----------- STEEL - 0.3% 2,887,500 The Techs Industries, Inc. Term Loan, 4.81%, 01/14/10 .................... 2,901,937 ----------- SURFACE TRANSPORT - 1.5% 6,985,000 Helm Holding Corp. Term Loan B, 5.37%, 07/02/10 .................. 7,078,110 603,922 Pacer International, Inc. New Term Loan, 4.68%, 06/10/10 ................ 616,755 Quality Distribution, Inc. 2,752,717 Term Loan, 5.64%, 11/13/09 .................... 2,683,046 2,176,502 Term Loan, 5.64%, 11/13/09 (f) ................ 2,121,415 2,595,963 Transport Industries LP Term Loan B, 6.56%, 06/13/10 .................. 2,600,844 ----------- 15,100,170 ----------- TELECOMMUNICATIONS/CELLULAR - 1.4% 2,985,000 Cellular South, Inc. Term Loan, 4.75%, 05/04/11 .................... 3,031,626 625,000 Dobson Cellular Systems, Inc. Revolver, 0.63%, 10/21/09 (c) ................. 599,219 10,000,000 Qwest Corp. Term Loan B, 6.95%, 06/30/10 .................. 10,332,400 ----------- 13,963,245 ----------- TELECOMMUNICATIONS/COMBINATION - 2.3% 2,000,000 Alaska Communications Systems Holdings, Inc. Term Loan, 4.64%, 02/01/12 .................... 2,021,560 Centennial Cellular Operating Co. 2,250,000 Revolver, 0.50%, 02/09/11 (c) ................. 2,248,605 4,128,300 Term Loan, 4.46%, 02/09/11 .................... 4,192,289 5,000,000 NTL, Inc. Tranche B Term Loan, 5.20%, 04/14/12 ............................... 5,068,750 4,962,349 PanAmSat Corp. Term Loan B, 5.34%, 08/20/11 .................. 5,038,472 4,000,000 RCN Corp. Term Loan, 7.06%, 12/21/11 .................... 4,023,360 ----------- 22,593,036 ----------- TELECOMMUNICATIONS/WIRELESS - 5.1% 2,150,000 Bresnan Communications LLC Term Loan B, 6.04%, 09/30/10 .................. 2,181,992 4,966,667 Consolidated Communications, Inc. Term Loan C, 5.18%, 10/14/11 .................. 5,041,167 Cricket Communications, Inc. 5,000,000 Revolver, 0.75%, 01/10/10 (c) ................. 4,925,000 15,000,000 Term Loan B, 5.09%, 01/10/11 .................. 15,182,850 FairPoint Communications, Inc. 2,500,000 Initial B Term Loan, 02/08/12 (b) ............. 2,541,025 2,500,000 Initial B Term Loan, 4.75%, 02/08/12 ............................... 2,541,025 PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- TELECOMMUNICATIONS/WIRELESS (CONTINUED) 6,500,000 Nextel Partners Operating Corp. Term Loan C, 4.94%, 05/31/11 .................. 6,595,420 1,000,000 Primus Telecommunications Group, Inc. Term Loan, 9.61%, 02/18/11 .................... 1,005,000 4,477,500 SBA Senior Finance, Inc. Term Loan, 4.86%, 10/31/08 .................... 4,555,856 5,994,105 WilTel Communications Group, Inc. Term Loan, 7.00%, 04/01/10 .................... 5,814,282 ----------- 50,383,617 ----------- TELECOMMUNICATIONS/WIRELINE - 0.4% 4,000,000 Valor Telecommunications Enterprises LLC Tranche B Term Loan, 5.99%, 02/14/12 ............................... 4,061,000 ----------- UTILITIES - 5.1% 2,605,732 Allegheny Energy, Inc. Term Advances, 4.80%, 03/08/11 ................ 2,663,371 7,000,000 Astoria Energy LLC First Lien Term Loan, 7.19%, 04/15/12 ............................... 7,166,250 2,066,017 Calpine Corp. Second Lien Term Loan B, 8.41%, 07/16/07 ............................... 1,833,591 1,953,933 Infrasource, Inc. Term Loan, 5.56%, 09/30/10 .................... 1,973,472 2,801,674 Midwest Generations LLC Term Loan, 5.65%, 04/27/11 .................... 2,848,602 Mirant Corp. 4,000,000 Revolver, 07/17/05 (b) ........................ 2,923,360 4,000,000 Revolver, 07/15/08 (b) ........................ 2,932,520 5,000,000 Reliant Energy, Inc. Term Loan, 5.06%, 04/30/10 .................... 5,088,400 4,626,288 Riverside Energy Center LLC Term Loan, 6.98%, 06/24/11 .................... 4,741,945 Rocky Mountain Energy Center LLC 361,073 Credit Linked Certificate of Deposit, 2.63%, 06/24/11 ...................... 368,295 3,286,536 Term Loan, 6.98%, 06/24/11 .................... 3,368,699 Texas Genco LLC 1,461,538 Delayed Draw Term Loan, 1.25%, 12/14/11 (c) ........................... 1,485,741 9,871,795 Initial Term Loan, 4.48%, 12/14/11 ............ 10,043,762 2,955,000 TNP Enterprises, Inc. Term Loan, 7.72%, 12/31/06 .................... 2,995,631 ----------- 50,433,639 ----------- Total Variable Rate Senior Loan Notes (Cost $937,217,769) ......................... 961,425,166 ----------- CORPORATE NOTES AND BONDS - 1.7% CONTAINER/GLASS PRODUCTS - 0.3% 2,500,000 Constar International, Inc. Floating Rate Note, 6.15%, 02/15/12 (g) ........................... 2,550,000 ----------- HEALTH CARE - 0.2% 2,000,000 Elan Finance Floating Rate Note, 6.49%, 11/15/11 (g) ........................... 1,750,000 ----------- 8 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- CORPORATE NOTES AND BONDS (CONTINUED) OIL & GAS - 0.4% 4,000,000 Secunda International Ltd. Floating Rate Note, 10.66%, 09/01/12 (g) .......................... 4,000,000 ----------- TELECOMMUNICATIONS/CELLULAR - 0.2% 2,000,000 Dobson Cellular Systems, Inc. Floating Rate Note, 7.49%, 11/01/11 (g) ........................... 2,120,000 ----------- TELECOMMUNICATIONS/COMBINATION - 0.4% 4,000,000 US Unwired, Inc. Floating Rate Note, Series B, 6.74%, 06/15/10 ............................... 4,200,000 ----------- UTILITIES - 0.2% 2,000,000 Calpine Construction Finance Co. LP Floating Rate Note, 11.63%, 08/26/11 (g) .......................... 2,240,000 ----------- Total Corporate Notes and Bonds (Cost $16,613,840) .......................... 16,860,000 ----------- COMMERCIAL MORTGAGE-BACKED SECURITY - 0.5% 5,000,000 Bear Stearns Series 2004-ESA, Class K, 5.09%, 05/14/16 ............................... 5,008,123 ----------- Total Commercial Mortgage- Backed Security (Cost $5,000,000) ........................... 5,008,123 ----------- SHARES --------- COMMON STOCKS (H) - 0.4% BUSINESS SERVICES - 0.0% 322,876 NATG Holdings LLC (d) ........................... 0 ----------- DIVERSIFIED MANUFACTURING - 0.0% 4,015 GenTek, Inc., B Shares .......................... 193,242 ----------- ECOLOGICAL SERVICE & EQUIPMENT - 0.0% 3,445 Environmental Systems Products Holdings (d) .................................. 0 ----------- HEALTH CARE - 0.1% 95,453 Sun Healthcare Group, Inc. ...................... 650,989 ----------- INDUSTRIAL EQUIPMENT - 0.1% 400 Copperweld Corp., Class A (d) ................... 232,000 56 Copperweld Corp., Class B (d) ................... 939,400 ----------- 1,171,400 ----------- TELECOMMUNICATIONS/COMBINATION - 0.0% 87,288 SAVVIS Communications Corp. ..................... 66,339 ----------- TELECOMMUNICATIONS/WIRELESS - 0.2% 76,137 Leap Wireless International, Inc. ............... 2,040,472 ----------- Total Common Stocks (Cost $4,684,320) ........................... 4,122,442 ----------- PAR/ COMMITMENT ($) VALUE ($) - --------------- ----------- PREFERRED STOCKS (D) - 0.0% AUTOMOTIVE - 0.0% 13 Key Plastics Holdings, Inc. (h) ................. 0 ----------- DIVERSIFIED MANUFACTURING - 0.0% 14,382 Superior Essex, Inc., Series A .................. 14,382 ----------- Total Preferred Stocks (Cost $14,382) .............................. 14,382 ----------- UNITS ----- WARRANTS - 0.0% DIVERSIFIED MANUFACTURING - 0.0% 4 GenTek, Inc., Class A expires 10/31/06 ...................................... 14 2 GenTek, Inc., Class B expires 10/31/08 ...................................... 8 ----------- 22 ----------- UTILITIES - 0.0% 8,508 CenterPoint Energy, Inc., expires 08/01/08 (d) .................................. 0 ----------- Total Warrants (Cost $34) .................................. 22 ----------- UNFUNDED LOAN COMMITMENTS - (1.9)% .............................. (18,946,153) ----------- TOTAL INVESTMENTS - 98.6% ....................................... 968,483,982 ----------- (cost of $963,530,345) (i) OTHER ASSETS & LIABILITIES, NET - 1.4% .......................... 13,277,359 ----------- NET ASSETS - 100.0% ............................................. 981,761,341 =========== __________________ (a) Senior loans in which the Portfolio invests generally pay interest at rates which are periodically predetermined by reference to a base lending rate plus a premium. These base lending rates are generally (i) the prime rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate ("LIBOR") and (iii) the certificate of deposit rate. Rate shown represents the weighted average rate at February 28, 2005. Senior loans are generally considered to be restricted in that the Portfolio ordinarily is contractually obligated to receive approval from the agent bank and/or borrower prior to the disposition of a senior loan. (b) Unsettled loan. Interest rate cannot be determined at this time. (c) Unfunded commitment. As of February 28, 2005, the Portfolio had unfunded loan commitments of $18,946,153, which could be extended at the option of the Borrower, pursuant to the following loan agreements: UNFUNDED LOAN BORROWER COMMITMENT -------- ----------- Centennial Cellular Operating Co. $ 2,250,000 Cricket Communications, Inc. 5,000,000 Dobson Cellular Systems, Inc. 625,000 Federal-Mogul Corp. 109,615 Interstate Bakeries Corp. 7,500,000 LNR Property Corp. 2,000,000 Texas Genco LLC 1,461,538 ----------- $18,946,153 =========== SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) FEBRUARY 28, 2005 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY (d) Represents fair value as determined in good faith under the direction of the Board of Trustees. (e) The issuer is in default of certain debt covenants. Income is not being accrued. As of February 28, 2005, the value of these securities amounted to $22,534, which represents 0.0% of net assets. (f) Loans held on participation. (g) Securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At February 28, 2005, these securities amounted to $12,660,000 or 1.3% of net assets. These securities have been determined by the Portfolio's investment adviser to be liquid securities. (h) Non-income producing security. (i) Cost for Federal income tax purposes is $963,793,491. DIP Debtor in Possession IRL Increasing Rate Loan 10 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 (UNAUDITED) HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY ($) - ------------------------------------------------------------------------------- ASSETS: Investments, at cost ...................................... 963,530,345 ------------- Investments, at value ..................................... 968,483,982 Cash and cash equivalents ................................. 80,491,662 Receivable for: Investments sold ....................................... 15,111,697 Interest and fees ...................................... 6,204,236 Deferred Trustees' compensation plan (Note 4) ............. 1,906 ------------- Total Assets ........................................ 1,070,293,483 LIABILITIES: Deferred facility fees .................................... 255,511 Payable for: Investments purchased .................................. 87,807,040 Investment advisory fee (Note 4) ....................... 329,033 Trustees' fees (Note 4) ................................ 3,333 Deferred Trustees' fees (Note 4) .......................... 1,906 Accrued expenses and other liabilities .................... 135,319 ------------- Total Liabilities ................................... 88,532,142 ------------- NET ASSETS .................................................... 981,761,341 ============= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED) ($) - ------------------------------------------------------------------------------- INVESTMENT INCOME Interest .................................................. 24,207,119 Dividends ................................................. 28,105 Facility and other fees ................................... 1,250,462 ------------- Total Investment Income ............................. 25,485,686 EXPENSES Investment advisory fee (Note 4) .......................... 2,020,811 Transfer agent fee (Note 4) ............................... 843 Professional fees ......................................... 127,404 Accounting services fee (Note 4) .......................... 142,341 Trustees' fees (Note 4) ................................... 15,240 Custody fee (Note 4) ...................................... 44,307 Other expenses ............................................ 31,355 ------------- Total Operating Expenses ............................ 2,382,301 Interest expense .......................................... 16,479 Commitment fee ............................................ 130,945 ------------- Total Expenses (Note 8) ............................. 2,529,725 Custody earnings credit (Note 4) .......................... (36) ------------- Net Expenses ........................................ 2,529,689 ------------- Net Investment Income ..................................... 22,955,997 ------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments .......................... 172,031 Net change in unrealized appreciation on investments ...... 4,016,208 ------------- Net Gain .................................................. 4,188,239 ------------- Net Increase in Net Assets ................................ 27,144,236 ============= 12 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SIX MONTHS ENDED FEBRUARY 28, 2005 YEAR ENDED (UNAUDITED) AUGUST 31, 2004 ($) ($) ----------------- --------------- INCREASE IN NET ASSETS: OPERATIONS Net investment income ................................................... 22,955,997 32,557,033 Net realized gain on investments ........................................ 172,031 12,489,394 Net change in unrealized appreciation on investments .................... 4,016,208 20,295,744 ----------------- --------------- Net Increase from Operations ........................................ 27,144,236 65,342,171 ----------------- --------------- TRANSACTIONS IN INVESTORS' BENEFICIAL INTEREST Contributions ........................................................... 158,462,053 453,429,815 Withdrawals ............................................................. (100,215,444) (133,062,921) ----------------- --------------- Net Increase from Transactions in Investors' Beneficial Interest .... 58,246,609 320,366,894 ----------------- --------------- Total Increase in Net Assets ........................................ 85,390,845 385,709,065 NET ASSETS Beginning of period ..................................................... 896,370,496 510,661,431 ----------------- --------------- End of period ........................................................... 981,761,341 896,370,496 ================= ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED)
($) - ---------------------------------------------------------------------------------------------------------- INCREASE IN CASH CASH FLOWS USED FOR OPERATING ACTIVITIES Net investment income ................................................................. 22,955,997 ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Purchase of investment securities ..................................................... (526,450,444) Proceeds from disposition of investment securities .................................... 322,283,178 Sale of short-term portfolio investments, net ......................................... 130,267,000 Increase in interest and fees receivable .............................................. (2,132,558) Increase in receivable for investments sold ........................................... (11,445,831) Decrease in other assets .............................................................. 5,731 Decrease in deferred facility fees .................................................... (189,395) Decrease in payable for accrued expenses .............................................. (51,305) Net amortization of premium (discount) ................................................ (832,133) Increase in payable for investments purchased ......................................... 87,807,040 Increase in other liabilities ......................................................... 27,311 ------------ Net cash flow provided by operating activities .................................. 22,244,591 CASH FLOWS PROVIDED BY FINANCING ACTIVITIES Proceeds from capital contributions ................................................... 158,462,053 Payment of capital withdrawals ........................................................ (100,215,444) ------------ Net cash flow provided by financing activities .................................. 58,246,609 ------------ Net increase in cash ............................................................ 80,491,200 CASH Cash at beginning of the period ....................................................... 462 ------------ Cash at end of the period ............................................................. 80,491,662 ============
14 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY SELECTED DATA FOR AN INTEREST OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ----------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED) 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA Total return 3.06%(e) 10.39% 11.68%(a) (2.20)% 5.15% 8.73% Operating expenses 0.53%(f) 0.52%(b) 0.57%(b) 0.55%(b) 0.53%(b) 0.55% Interest expense 0.03%(c) --%(c) --%(c) 0.03% --% --% Net expenses 0.56%(f) 0.52%(b) 0.57%(b) 0.58%(b) 0.53%(b) 0.55% Net investment income 5.11%(f) 4.45%(b) 5.96%(b) 6.42%(b)(d) 8.94%(b) 9.26% Portfolio turnover rate 37%(e) 97% 75% 70% 63% 21%
________________________________ (a) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Portfolio's return. (b) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (c) Rounds to less than 0.01%. (d) Effective September 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on debt securities. The effect of this change for the year ended August 31, 2002, was to increase the ratio of net investment income to average net assets from 6.41% to 6.42%. Ratios and supplemental data for the periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (e) Not annualized. (f) Annualized. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15 STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 (UNAUDITED) HIGHLAND FLOATING RATE FUND
($) - ---------------------------------------------------------------------------------------------------------------------- ASSETS: Investments in Portfolio, at cost ................................................................ 912,541,519 ------------ Investments in Portfolio, at value ............................................................... 917,131,061 Receivable for: Fund shares sold .............................................................................. 6,672,171 Deferred Trustees' compensation plan (Note 4) .................................................... 6,120 Other assets ..................................................................................... 127,881 ------------ Total Assets ............................................................................... 923,937,233 LIABILITIES: Payable for: Distributions ................................................................................. 1,420,268 Administration fee (Note 4) ................................................................... 137,234 Trustees' fees (Note 4) ....................................................................... 12,333 Distribution and service fees (Note 4) ........................................................ 354,851 Deferred Trustees' fees (Note 4) ................................................................. 6,120 Accrued expenses and other liabilities ........................................................... 34,451 ------------ Total Liabilities .......................................................................... 1,965,257 ------------ NET ASSETS ........................................................................................... 921,971,976 ============ COMPOSITION OF NET ASSETS Paid-in capital .................................................................................. 932,383,466 Overdistributed net investment income ............................................................ (387,981) Accumulated net realized loss .................................................................... (14,613,051) Net unrealized appreciation on investments allocated from Portfolio .............................. 4,589,542 ------------ NET ASSETS ........................................................................................... 921,971,976 ============ CLASS A Net assets ....................................................................................... 259,322,789 Shares outstanding ............................................................................... 26,339,738 Net asset value per share (Net assets/Shares outstanding) ........................................ 9.85(a) Maximum offering price per share ($9.85 / 0.9650) ................................................ 10.21(b) CLASS B Net assets ....................................................................................... 182,569,676 Shares outstanding ............................................................................... 18,551,657 Net asset value and offering price per share (Net assets/Shares outstanding) ..................... 9.84(a) CLASS C Net assets ....................................................................................... 302,389,787 Shares outstanding ............................................................................... 30,726,882 Net asset value and offering price per share (Net assets/Shares outstanding) ..................... 9.84(a) CLASS Z Net assets ....................................................................................... 177,689,724 Shares outstanding ............................................................................... 18,055,335 Net asset value, offering and redemption price per share (Net assets/Shares outstanding) ......... 9.84
____________________________________________________ (a) Redemption price per share is equal to the net asset value per share less any applicable contingent deferred sales charge. (b) On sales of $100,000 or more, the offering price is reduced. 16 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND FOR THE SIX MONTHS ENDED FEBRUARY 28, 2005 (UNAUDITED)
($) - ---------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Interest, dividends and fees allocated from Portfolio (Note 1) ................................... 23,658,118 ------------ EXPENSES Net operating expenses allocated from Portfolio (Note 1) ......................................... 2,212,237 Administration fee (Note 4) ...................................................................... 833,400 Distribution fee: (Note 4) Class A ....................................................................................... 111,007 Class B ....................................................................................... 409,131 Class C ....................................................................................... 819,527 Service fee: (Note 4) Class A ....................................................................................... 283,858 Class B ....................................................................................... 227,295 Class C ....................................................................................... 341,470 Transfer agent fee (Note 4) ...................................................................... 340,101 Professional fees ................................................................................ 71,998 Accounting services fee (Note 4) ................................................................. 42,494 Trustees' fees (Note 4) .......................................................................... 46,489 Custody fee (Note 4) ............................................................................. 1,024 Other expenses ................................................................................... 379,163 ------------ Total Operating Expenses ................................................................... 6,119,194 Interest expense allocated from Portfolio (Note 1) ............................................... 15,303 Commitment fee allocated from Portfolio (Note 1) ................................................. 121,596 ------------ Total Expenses (Note 8) .................................................................... 6,256,093 Fees and expenses waived or reimbursed by Investment Adviser (Note 4) ............................ (715,357) ------------ Net Expenses ............................................................................... 5,540,736 ------------ Net Investment Income ............................................................................ 18,117,382 ------------ NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ALLOCATED FROM PORTFOLIO (NOTE 1) Net realized gain on investments allocated from Portfolio ........................................ 134,988 Net change in unrealized appreciation on investments allocated from Portfolio .................... 3,753,863 ------------ Net Gain ......................................................................................... 3,888,851 ------------ Net Increase in Net Assets ....................................................................... 22,006,233 ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17 STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED FEBRUARY 28, 2005 YEAR ENDED (UNAUDITED) AUGUST 31, 2004 ($) ($) ----------------- --------------- INCREASE IN NET ASSETS: OPERATIONS Net investment income ............................................................... 18,117,382 23,375,298 Net realized gain on investments allocated from Portfolio ........................... 134,988 11,716,731 Net change in unrealized appreciation on investments allocated from Portfolio ....... 3,753,863 16,417,157 ----------------- --------------- Net Increase from Operations .................................................... 22,006,233 51,509,186 ----------------- --------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS From net investment income: Class A ......................................................................... (5,226,228) (6,051,546) Class B ......................................................................... (3,849,738) (6,346,275) Class C ......................................................................... (5,554,353) (7,124,188) Class Z ......................................................................... (3,729,760) (3,993,912) ----------------- --------------- Total Distributions Declared to Shareholders .................................... (18,360,079) (23,515,921) ----------------- --------------- SHARE TRANSACTIONS Class A: Subscriptions ................................................................... 68,974,111 150,174,094 Distributions reinvested ........................................................ 3,521,375 4,056,148 Redemptions ..................................................................... (36,285,148) (36,606,622) ----------------- --------------- Net Increase .................................................................... 36,210,338 117,623,620 Class B: Subscriptions ................................................................... 4,450,831 42,636,771 Distributions reinvested ........................................................ 2,294,043 3,649,856 Redemptions ..................................................................... (16,310,258) (27,516,151) ----------------- --------------- Net Increase (Decrease) ......................................................... (9,565,384) 18,770,476 Class C: Subscriptions ................................................................... 53,366,634 166,995,336 Distributions reinvested ........................................................ 3,467,721 4,331,572 Redemptions ..................................................................... (34,398,838) (34,117,656) ----------------- --------------- Net Increase .................................................................... 22,435,517 137,209,252 Class Z: Subscriptions ................................................................... 49,109,708 126,869,430 Distributions reinvested ........................................................ 808,345 1,029,585 Redemptions ..................................................................... (12,443,625) (22,807,614) ----------------- --------------- Net Increase .................................................................... 37,474,428 105,091,401 ----------------- --------------- Net Increase from Share Transactions ............................................ 86,554,899 378,694,749 ----------------- --------------- Total Increase in Net Assets ............................................. 90,201,053 406,688,014 ----------------- --------------- NET ASSETS Beginning of period ................................................................. 831,770,923 425,082,909 End of period (including overdistributed net investment income of $(387,981) and $(145,284), respectively) ....................................................... 921,971,976 831,770,923 ================= ===============
18 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED FEBRUARY 28, 2005 YEAR ENDED (UNAUDITED) AUGUST 31, 2004 ----------------- --------------- CHANGES IN SHARES Class A: Subscriptions ................................................................... 7,019,991 15,464,717 Issued for distributions reinvested.............................................. 358,393 416,590 Redemptions ..................................................................... (3,694,615) (3,764,250) ----------------- --------------- Net Increase .................................................................... 3,683,769 12,117,057 Class B: Subscriptions ................................................................... 453,244 4,402,237 Issued for distributions reinvested.............................................. 233,527 375,744 Redemptions ..................................................................... (1,661,316) (2,840,856) ----------------- --------------- Net Increase (Decrease) ......................................................... (974,545) 1,937,125 Class C: Subscriptions ................................................................... 5,428,602 17,241,992 Issued for distributions reinvested.............................................. 353,002 445,134 Redemptions ..................................................................... (3,502,379) (3,515,347) ----------------- --------------- Net Increase .................................................................... 2,279,225 14,171,779 Class Z: Subscriptions ................................................................... 4,998,204 13,152,535 Issued for distributions reinvested.............................................. 82,268 105,643 Redemptions ..................................................................... (1,266,923) (2,357,817) ----------------- --------------- Net Increase .................................................................... 3,813,549 10,900,361
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, -------------------------------------------------------- SIX MONTHS ENDED PERIOD ENDED FEBRUARY 28, 2005 AUGUST 31, CLASS A SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 $ 10.05 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.22 0.37 0.48 0.54(c) 0.81 0.71 Net realized and unrealized gain (loss) allocated from Portfolio 0.05 0.52 0.46 (0.79)(c) (0.37) (0.05) ========= ========= ======== ========= ========= ========= Total from Investment Operations 0.27 0.89 0.94 (0.25) 0.44 0.66 - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.22) (0.38) (0.48) (0.54) (0.82) (0.71) From net realized gains -- -- -- --(d) --(d) --(d) ========= ========= ======== ========= ========= ========= Total Distributions Declared to Shareholders (0.22) (0.38) (0.48) (0.54) (0.82) (0.71) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 9.85 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 Total return (e)(f) 2.81%(h) 9.65% 11.03%(g) (2.67)% 4.56% 6.79%(h) - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Net operating expenses 1.12%(j) 1.15% 1.15% 1.15% 1.15% 1.15%(j) Interest expense allocated from Portfolio 0.03%(i) --%(i) --%(i) 0.03% --% --% Net expenses 1.15%(j) 1.15% 1.15% 1.18% 1.15% 1.15%(j) Net investment income 4.53%(j) 3.78% 5.39% 5.83%(c) 8.28% 8.53%(j) Waiver/reimbursement 0.17%(j) 0.17% 0.28% 0.28% 0.18% 0.13%(j) Net assets, end of period (000's) $ 259,323 $ 222,032 $ 97,924 $ 108,583 $ 138,058 $ 147,209
_____________________________________________ (a) Class A Shares were initially offered on November 2, 1999. Per share data and total return reflect activity from that date. (b) Per share data was calculated using average shares outstanding during the period. (c) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01, and increased the ratio of net investment income to average net assets from 5.82% to 5.83%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (d) Rounds to less than $0.01. (e) Had the Portfolio's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (f) Total return at net asset value assuming all distributions reinvested and no initial sales charge or CDSC. (g) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Fund's Class A Shares return. (h) Not annualized. (i) Rounds to less than 0.01%. (j) Annualized. 20 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, -------------------------------------------------------- SIX MONTHS ENDED PERIOD ENDED FEBRUARY 28, 2005 AUGUST 31, CLASS B SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 $ 10.05 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.20 0.34 0.45 0.51(c) 0.77 0.67 Net realized and unrealized gain (loss) allocated from Portfolio 0.05 0.51 0.46 (0.79)(c) (0.37) (0.05) ========= ========= ======== ========= ========= ========= Total from Investment Operations 0.25 0.85 0.91 (0.28) 0.40 0.62 - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.21) (0.34) (0.45) (0.51) (0.78) (0.67) From net realized gains -- -- -- --(d) --(d) --(d) ========= ========= ======== ========= ========= ========= Total Distributions Declared to Shareholders (0.21) (0.34) (0.45) (0.51) (0.78) (0.67) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 9.84 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 Total return (e)(f) 2.53%(h) 9.27% 10.65%(g) (3.02)% 4.19% 6.35%(h) - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Net operating expenses 1.47%(j) 1.50% 1.50% 1.50% 1.50% 1.50%(j) Interest expense allocated from Portfolio 0.03%(i) --%(i) --%(i) 0.03% --% --% Net expenses 1.50%(j) 1.50% 1.50% 1.53% 1.50% 1.50%(j) Net investment income 4.17%(j) 3.51% 5.05% 5.48%(c) 7.93% 8.18%(j) Waiver/reimbursement 0.17%(j) 0.17% 0.28% 0.28% 0.18% 0.13%(j) Net assets, end of period (000's) $ 182,570 $ 191,365 $163,448 $ 174,707 $ 195,891 $ 83,695
_____________________________________________________ (a) Class B Shares were initially offered on November 2, 1999. Per share data and total return reflect activity from that date. (b) Per share data was calculated using average shares outstanding during the period. (c) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01, and increased the ratio of net investment income to average net assets from 5.47% to 5.48%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (d) Rounds to less than $0.01. (e) Had the Portfolio's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (f) Total return at net asset value assuming all distributions reinvested and no CDSC. (g) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Fund's Class B Shares return. (h) Not annualized. (i) Rounds to less than 0.01%. (j) Annualized. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 21 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, -------------------------------------------------------- SIX MONTHS ENDED PERIOD ENDED FEBRUARY 28, 2005 AUGUST 31, CLASS C SHARES (UNAUDITED) 2004 2003 2002 2001 2000 (a) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 $ 10.05 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.20 0.32 0.44 0.50(c) 0.76 0.66 Net realized and unrealized gain (loss) allocated from Portfolio 0.04 0.52 0.46 (0.79)(c) (0.37) (0.05) ========= ========= ======== ========= ========= ========= Total from Investment Operations 0.24 0.84 0.90 (0.29) 0.39 0.61 - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.20) (0.33) (0.44) (0.50) (0.77) (0.66) From net realized gains -- -- -- --(d) --(d) --(d) ========= ========= ======== ========= ========= ========= Total Distributions Declared to Shareholders (0.20) (0.33) (0.44) (0.50) (0.77) (0.66) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 9.84 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 Total return (e)(f) 2.46%(h) 9.10% 10.48%(g) (3.16)% 4.04% 6.20%(h) - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Net operating expenses 1.62%(j) 1.65% 1.65% 1.65% 1.65% 1.65%(j) Interest expense allocated from Portfolio 0.03%(i) --%(i) --%(i) 0.03% --% --% Net expenses 1.65%(j) 1.65% 1.65% 1.68% 1.65% 1.65%(j) Net investment income 4.02%(j) 3.28% 4.88% 5.33%(c) 7.78% 8.03%(j) Waiver/reimbursement 0.17%(j) 0.17% 0.28% 0.28% 0.18% 0.13%(j) Net assets, end of period (000's) $ 302,390 $ 278,797 $132,656 $ 137,098 $ 184,399 $ 91,664
______________________________________________________ (a) Class C Shares were initially offered on November 2, 1999. Per share data and total return reflect activity from that date. (b) Per share data was calculated using average shares outstanding during the period. (c) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01, and increased the ratio of net investment income to average net assets from 5.32% to 5.33%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (d) Rounds to less than $0.01. (e) Had the Portfolio's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (f) Total return at net asset value assuming all distributions reinvested and no CDSC. (g) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Fund's Class C Shares return. (h) Not annualized. (i) Rounds to less than 0.01%. (j) Annualized. 22 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ---------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2005 CLASS Z SHARES (UNAUDITED) 2004 2003 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 $ 10.07 - ---------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (a) 0.24 0.40 0.50 0.57(b) 0.84 0.87 Net realized and unrealized gain (loss) allocated from Portfolio 0.04 0.52 0.47 (0.78)(b) (0.37) (0.07) ========= ========= ======== ========= ========= ========= Total from Investment Operations 0.28 0.92 0.97 (0.21) 0.47 0.80 - ---------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.24) (0.41) (0.51) (0.58) (0.85) (0.87) From net realized gains -- -- -- --(c) --(c) --(c) ========= ========= ======== ========= ========= ========= Total Distributions Declared to Shareholders (0.24) (0.41) (0.51) (0.58) (0.85) (0.87) ================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 9.84 $ 9.80 $ 9.29 $ 8.83 $ 9.62 $ 10.00 Total return (e)(f) 2.89%(h) 10.03% 11.42%(f) (2.33)% 4.89% 8.23% - ---------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Net operating expenses 0.77%(i) 0.80% 0.80% 0.80% 0.80% 0.80% Interest expense allocated from Portfolio 0.03%(g) --%(g) --%(g) 0.03% --% --% Net expenses 0.80%(i) 0.80% 0.80% 0.83% 0.80% 0.80% Net investment income 4.87%(i) 4.12% 5.53% 6.18%(b) 8.63% 8.94% Waiver/reimbursement 0.17%(i) 0.17% 0.28% 0.28% 0.18% 0.39% Net assets, end of period (000's) $ 177,690 $ 139,577 $ 31,055 $ 13,236 $ 11,662 $ 6,845
_____________________________________________ (a) Per share data was calculated using average shares outstanding during the period. (b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01, and increased the ratio of net investment income to average net assets from 6.17% to 6.18%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Rounds to less than $0.01. (d) Had the Portfolio's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Total return at net asset value assuming all distributions reinvested. (f) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Fund's Class Z Shares return. (g) Rounds to less than 0.01%. (h) Not annualized. (i) Annualized. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND NOTE 1. ORGANIZATION Highland Floating Rate Fund (the "Fund") is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a non-diversified, closed-end management investment company. Effective October 18, 2004, Columbia Floating Rate Fund was renamed Highland Floating Rate Fund. Also on that date, Columbia Floating Rate Limited Liability Company was renamed Highland Floating Rate Limited Liability Company (the "Portfolio"). INVESTMENT GOAL The Fund invests all of its investable assets in the Portfolio. The Portfolio seeks a high level of current income consistent with preservation of capital. THE PORTFOLIO The Portfolio is registered under the 1940 Act as a non-diversified, closed-end management investment company and is organized as a Delaware limited liability company. The Portfolio allocates income, expenses and realized and unrealized gains and losses to each investor on a daily basis, based on methods in compliance with the Internal Revenue Code of 1986, as amended (the "Code"). At February 28, 2005, the Fund and Highland Institutional Floating Rate Income Fund were the sole investors in the Portfolio and owned 93.4% and 6.6%, respectively, of the Portfolio. FUND SHARES The Fund may issue an unlimited number of shares and continuously offers four classes of shares: Class A, Class B, Class C and Class Z. Certain share classes have their own sales charge and bear class specific expenses, which include distribution fees and service fees. Class A shares are subject to a maximum front-end sales charge of 3.50% based on the amount of initial investment. Class A shares purchased without an initial sales charge by accounts aggregating $1 million to $25 million 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. 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 CDSC. There are certain restrictions on the purchase of Class Z shares, as described in the Fund's prospectus. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Portfolio and the Fund in the preparation of their financial statements. SECURITY VALUATION The value of the Fund's assets is based on its proportionate share of the current market value of the Portfolio's investments. For securities with readily available market quotations, the Portfolio uses those quotations for pricing. When portfolio securities are traded on the relevant day of valuation, the valuation will be the last reported sale price on that day. If there are no such sales on that day, the security will be valued at the mean between the most recently quoted bid and asked prices from principal market makers. Securities without a sale price or bid and ask quotations on the valuation day will be priced by an independent pricing service. If securities do not have readily available market quotations or pricing service prices, including circumstances under which such are determined not to be accurate or current (including when events materially affect the value of securities occurring between the time when market price is determined and calculation of the Portfolio's net asset value), such securities are valued at their fair value, as determined in good faith in accordance with procedures established by the Portfolio's Board of Trustees. In these cases, the Portfolio's net asset value will reflect the affected portfolio securities' value as determined in the judgment of the Board of 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 24 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND be no assurance that the Portfolio's valuation of a security will not differ from the amount that it realizes upon the sale of such security. SECURITY TRANSACTIONS Security transactions are accounted for on the trade date. Cost is determined and gains (losses) are based upon the specific identification method for both financial statement and federal income tax purposes. REPURCHASE AGREEMENTS The Portfolio may engage in repurchase agreement transactions with institutions that the Portfolio's investment adviser has determined are creditworthy. The Portfolio, through its custodian, receives delivery of underlying securities collateralizing a repurchase agreement. Collateral is at least equal, at all times, to the value of the repurchase obligation including interest. A repurchase agreement transaction involves certain risks in the event of default or insolvency of the counterparty. These risks include possible delays or restrictions upon the Portfolio's ability to dispose of the underlying securities and a possible decline in the value of the underlying securities during the period while the Portfolio seeks to assert its rights. INCOME RECOGNITION Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. Facility fees received are treated as market discounts. Unamortized facility fees are reflected as deferred fees on the Portfolio's Statement of Assets and Liabilities. DETERMINATION OF CLASS NET ASSET VALUES All income, expenses (other than class-specific expenses of distribution fees and service fees, as shown on the Statement of Operations) and realized and unrealized gains (losses) are allocated to each class of the Fund on a daily basis for purposes of determining the net asset value of each class. Income and expenses are allocated to each class based on the settled shares method, while realized and unrealized gains (losses) are allocated based on the relative net assets of each class. FEDERAL INCOME TAX STATUS The Fund intends to qualify each year as a "regulated investment company" under Subchapter M of the Code and will distribute substantially all of its taxable income, if any, for its tax year, and as such will not be subject to federal income taxes. In addition, the Portfolio is treated as a partnership for federal income tax purposes and all of its income is allocated to its owners based on methods in compliance with the Internal Revenue Service. Therefore, no federal income tax provision is recorded. DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income are declared by the Fund daily and paid monthly. Net realized capital gains, if any, are distributed at least annually. STATEMENT OF CASH FLOWS Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows is the amount included within the Portfolio's Statement of Assets and Liabilities and includes cash on hand at its custodian bank and does not include any short-term investments. NOTE 3. FEDERAL TAX INFORMATION The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. Reclassifications are made to the Fund's capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital losscarryforwards) under income tax regulations. The tax character of distributions paid during the years ended August 31, 2004 and August 31, 2003 was as follows: - -------------------------------------------------------------------------------- 2004 2003 - -------------------------------------------------------------------------------- Distributions paid from: - -------------------------------------------------------------------------------- Ordinary income* $23,515,921 $18,706,968 - -------------------------------------------------------------------------------- Long-term capital gains -- -- - -------------------------------------------------------------------------------- * For tax purposes short-term capital gains distributions, if any, are considered ordinary income distributions. 25 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND As of August 31, 2004, the components of distributable earnings on a tax basis were as follows: - -------------------------------------------------------------------------------- Undistributed Undistributed Ordinary Long-Term Net Unrealized Income Capital Gains Appreciation* - -------------------------------------------------------------------------------- $1,036,894 $-- $551,610 - -------------------------------------------------------------------------------- * 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. These amounts are as of the most recent tax year end. Portfolio unrealized appreciation and depreciation at February 28, 2005, based on cost of investments for federal income tax purposes was: - -------------------------------------------------------------------------------- Unrealized appreciation $ 13,705,110 - -------------------------------------------------------------------------------- Unrealized depreciation (9,014,619) ------------ Net unrealized appreciation $ 4,690,491 - -------------------------------------------------------------------------------- The following capital loss carryforwards may be available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code: - -------------------------------------------------------------------------------- Year of Capital Loss Expiration Carryforward - -------------------------------------------------------------------------------- 2010 $ 7,156,391 - -------------------------------------------------------------------------------- 2011 4,178,432 - -------------------------------------------------------------------------------- 2012 3,291,779 - -------------------------------------------------------------------------------- Total $ 14,626,602 - -------------------------------------------------------------------------------- NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, TRUSTEE, AND OTHER FEES INVESTMENT ADVISORY FEE Effective April 15, 2004, Highland Capital Management, L.P. ("Highland") is the investment adviser to the Portfolio. Highland receives a monthly investment advisory fee based on the Portfolio's average daily managed net assets at the following annual rates: - -------------------------------------------------------------------------------- Average Daily Managed Net Assets Annual Fee Rate - -------------------------------------------------------------------------------- First $1billion 0.45% - -------------------------------------------------------------------------------- Next $1billion 0.40% - -------------------------------------------------------------------------------- Over $2 billion 0.35% - -------------------------------------------------------------------------------- Average daily managed net assets of the Portfolio means the average daily value of the total assets of the Portfolio less all accrued liabilities of the Portfolio (other than the aggregate amount of any outstanding borrowing constituting financial leverage). For the six months ended February 28, 2005, the Portfolio's effective investment advisory fee rate was 0.45%. Prior to April 15, 2004, Columbia Management Advisors, Inc. ("Columbia Management") was the investment adviser to the Portfolio. Columbia Management was an indirect, wholly owned subsidiary of FleetBoston Financial Corporation ("FleetBoston"). Effective April 1, 2004, FleetBoston, including Columbia Management and the Fund's transfer agent and distributor, was acquired by Bank of America Corporation. ADMINISTRATION FEES Effective October 18, 2004, Highland provides administrative services to the Portfolio and the Fund for a monthly administration fee at the annual rate of 0.20% of the Fund's average daily managed assets. The Fund, but not the Portfolio, pays Highland for these services. Under separate sub-administration agreements, Highland has delegated certain administrative functions to PFPC Inc. ("PFPC"). For the period ended February 28, 2005, Highland received $623,365 in administration fees and paid PFPC $31,168 for their services. This amount is included in the "Administration fee" on the Statement of Operations of the Fund. Prior to October 18, 2004, Columbia Management provided administrative and other services to the Fund for a monthly administration fee at the annual rate of 0.20% of the Fund's average daily net assets. For the period September 1, 2004 through October 17, 2004, Columbia Management received $210,035 in administration fees, which is included in the "Administration fee" on the Statement of Operations of the Fund. 26 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND ACCOUNTING SERVICES FEES Effective October 18, 2004, the Portfolio and the Fund entered into separate accounting services agreements with PFPC. All fees are paid by the Portfolio. For the period October 18, 2004 through February 28, 2005, PFPC received $95,526 for this service. An allocated portion of the Portfolio fee is included in the "Net operating expense allocated from Portfolio" on the Statement of Operations of the Fund. Prior to October 18, 2004, Columbia Management was responsible for providing pricing and bookkeeping services to the Portfolio and the Fund under a pricing and bookkeeping agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia Management delegated those functions to State Street Bank and Trust Company ("State Street"). As a result, Columbia Management paid the total fees collected under the Outsourcing Agreement to State Street. Under its pricing and bookkeeping agreement with the Fund, Columbia Management received from the Portfolio and the Fund an annual flat fee of $10,000 and $5,000, respectively, paid monthly, and in any month that the Fund's average daily net assets exceeded $50 million, an additional monthly fee. The additional fee rate was calculated by taking into account the fees payable to State Street under the Outsourcing Agreement. This rate was applied to the average daily net assets of the Fund for that month. The Fund also paid additional fees for pricing services based on the number of securities held by the Portfolio. For the period September 1, 2004 through October 17, 2004, Columbia Management received pricing and bookkeeping fees of $27,762 from the Fund and $30,460 from the Portfolio. The Fund fee is included in the "Accounting Services fee" and an allocated portion of the Portfolio fee is included in the "Net operating expenses allocated from Portfolio" on the Statement of Operations of the Fund. TRANSFER AGENT FEE Effective October 18, 2004, PFPC provides shareholder services to the Fund. For the period October 18, 2004 through February 28, 2005, PFPC received $151,670 for this service. This fee is included in the "Transfer agent fee" on the Statement of Operations of the Fund. Prior to October 18, 2004, Columbia Funds Services, Inc. ("Columbia Services"), an affiliate of Columbia Management, provided shareholder services to the Fund. For such services, Columbia Services received a fee, paid monthly, at the annual rate of $34 per open account. Columbia Services also received reimbursement for certain out-of-pocket expenses. For the period September 1, 2004 through October 17, 2004, Columbia Services received transfer agent fees, excluding out-of-pocket expenses, of $843 from the Portfolio and $98,372 from the Fund. An allocated portion of the Portfolio fee is included in the "Net operating expenses allocated from Portfolio" and the Fund fee is included in the "Transfer agent fee" on the Statement of Operations of the Fund. SERVICE AND DISTRIBUTION FEES Effective April 15, 2004, PFPC Distributors, Inc. (the "Distributor") serves as the principal underwriter and distributor of the Fund's shares. Prior to April 15, 2004, Columbia Funds Distributor, Inc., an affiliate of Columbia Management, served as the principal underwriter of the Fund. The Distributor is paid a CDSC on certain redemptions of Class A, Class B and Class C Shares. For the six months ended February 28, 2005, the Distributor received $6,900, $77,015 and $42,863 of CDSC on Class A, Class B and Class C share redemptions, respectively. The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), which requires the payment of a monthly service fee to the Distributor at the annual rate 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 not exceeding, on an annual basis, 0.10% for Class A shares and 0.75% for Class B and Class C shares. As of February 28, 2005, the distribution fees paid to the Distributor, on an annual basis, were 0.10%, 0.45% and 0.60% of the average daily net assets attributable to Class A, Class B and Class C shares, respectively. The CDSC and the fees received from the Plan are used principally as repayment for amounts paid to dealers who sold such shares. EXPENSE LIMITS AND FEE REIMBURSEMENTS Highland has voluntarily agreed to waive fees and reimburse certain expenses to the extent that total expenses (inclusive of allocated Portfolio expenses but exclusive of distribution and service fees, brokerage commissions, interest, commitment fees, taxes and extraordinary expenses, if any) exceed 0.80% annually of the Fund's average daily net assets. This arrangement may be revised or discontinued by Highland at any time. 27 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND CUSTODY Effective October 18, 2004, PFPC Trust Company ("PFPC Trust") is the custodian to the Portfolio and Fund. For the period October 18, 2004 through February 28, 2005, PFPC Trust received custody fees of $40,471 from the Portfolio and $500 from the Fund. An allocated portion of the Portfolio fee is included in the "Net operating expenses allocated from Portfolio" and the Fund fee is included in the "Custody fee" on the Statement of Operations of the Fund. For the period September 1, 2004 through October 17, 2004, the Portfolio and Fund had an agreement with its prior custodian bank, State Street, under which custody fees could have been reduced by balance credits. The Portfolio and Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if they had not entered into such an agreement. FEES PAID TO OFFICERS AND TRUSTEES The Fund pays no compensation to its officers, all of whom are employees of Highland. Trustees who are not interested persons (as defined in the 1940 Act) of the Fund each receive an annual retainer fee of $25,000 for services provided as Trustees of the Fund. The Fund and Highland Institutional Floating Rate Income Fund pay $20,000 of this fee (allocated based on their relative net assets). The remaining $5,000 is paid by the Portfolio. Prior to July 30, 2004, the previous Trustees of the Fund participated in a deferred compensation plan. Any continuing obligations of the plan will be paid solely out of the Fund's assets. NOTE 5. PORTFOLIO INFORMATION For the six months ended February 28, 2005, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $526,450,444 and $322,283,178, respectively. NOTE 6. PERIODIC REPURCHASE OFFERS The Fund has adopted a fundamental policy to offer each calendar quarter to repurchase a specified percentage (between 5% and 25%) of the shares then outstanding at NAV ("Repurchase Offers"). Repurchase Offers are scheduled to occur on or about the 15th day (or the next business day if the 15th is not a business day) in the months of March, June, September, and December. It is anticipated that normally the date on which the repurchase price of shares will be determined (the "Repurchase Pricing Date") will be the same date as the deadline for shareholders to provide their repurchase requests to the Distributor (the "Repurchase Request Deadline"), and if so, the Repurchase Request Deadline will be set for a time no later than the close of regular trading on the NYSE on such date. The Repurchase Pricing Date will occur no later than the 14th day after the Repurchase Request Deadline, or the next business day if the 14th day is not a business day. Repurchase proceeds will be paid to shareholders no later than seven days after the Repurchase Pricing Date. For the six months ended February 28, 2005, there were two Repurchase Offers. For each Repurchase Offer, the Fund offered to repurchase 10% of its shares. In the December and March Repurchase Offers, 5.87% and 4.29%, respectively, of shares outstanding were repurchased. NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS The Portfolio invests at least 80% of its net assets (plus any borrowings for investment purposes) in adjustable rate senior loans ("Senior Loans") the interest rates of which float or vary periodically based upon a benchmark indicator of prevailing interest rates to domestic foreign corporations, partnerships and other entities ("Borrowers"). If the lead lender in a typical lending syndicate becomes insolvent, enters FDIC receivership or, if not FDIC insured enters into bankruptcy, the Portfolio may incur certain costs and delays in receiving payment or may suffer a loss of principal and/or interest. When the Portfolio purchases a participation of a Senior Loan interest, the Portfolio typically enters into a contractual agreement with the lender or other third party selling the participation, not with the borrower directly. As such, the Portfolio assumes the credit risk of the Borrower, selling participant or other persons interpositioned between the Portfolio and the Borrower. The ability of Borrowers to meet their obligations may be affected by economic developments in a specific industry. At February 28, 2005, the following sets forth the selling participants with respect to interests in Senior Loans purchased by the Portfolio on a participation basis. 28 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND Principal Selling Participant Amount Value - -------------------------------------------------------------------------------- Goldman Sachs: Bridge Information Systems, Inc. Multi Term Loan $ 500,757 $ 22,534 - -------------------------------------------------------------------------------- CSFB: Quality Distribution, Inc. Term Loan 2,176,502 2,121,415 - -------------------------------------------------------------------------------- NOTE 8. LINE OF CREDIT On September 13, 2004, the Portfolio entered into a $150,000,000 credit facility used for temporary or emergency purposes to facilitate portfolio liquidity. Interest is charged to the Portfolio based on its borrowings. In addition, the Portfolio has agreed to pay commitment fees on the unutilized line of credit, which are included in "Other expenses" on the Statement of Operations. For the six months ended February 28, 2005, the average daily loan balance outstanding on days where borrowings existed was $100,000,000 at a weighted average interest rate of 2.97%. For the period September 1, 2004 through September 12, 2004, the Portfolio and other previously affiliated funds participated in a $350,000,000 credit facility, for temporary or emergency purposes to facilitate portfolio liquidity. Interest was charged to the Portfolio based on its borrowings. In addition, the Portfolio agreed to pay commitment fees on its pro-rata portion of the unutilized line of credit. NOTE 9. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES INDUSTRY FOCUS The Portfolio may focus its investments in the financial services industry, subjecting it to greater risk than a Portfolio that is more diversified. NON-PAYMENT RISK Senior Loans, like other corporate debt obligations, are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to the Portfolio, a reduction in the value of the Senior Loan experiencing non-payment and a potential decrease in the net asset value of the Fund. CREDIT RISK Securities rated below investment grade are commonly referred to as high-yield, high risk or "junk debt." They are regarded as predominantly speculative with respect to the issuing company's continuing ability to meet principal and/or interest payments. Investments in high-yield Senior Loans may result in greater net asset value fluctuation than if the Portfolio did not make such investments. LEGAL PROCEEDINGS Prior to April 15, 2004, the Fund was advised by Columbia Management and was part of the Columbia funds complex (the "Columbia Funds"). Several Columbia Funds are defendants in civil lawsuits that have been transferred and consolidated for pretrial proceedings in the United States District Court for the District of Maryland in the Special Multi-District Litigation proceeding (Index No. 04-MO-15863) created for actions involving market timing issues against mutual fund complexes. The lawsuits have been commenced as putative class actions on behalf of investors who purchased, held or redeemed shares of the Funds during specified periods or as derivative actions on behalf of the Funds. The lawsuits seek, among other things, unspecified compensatory damages plus interest and, in some cases, punitive damages, the rescission of investment advisory contracts, the return of fees paid under those contracts, and restitution. The consolidated amended class action complaint against Columbia-affiliated defendants was filed on September 29, 2004 and does not name the Fund as a defendant or nominal defendant. The consolidated amended fund derivative complaint against Columbia-affiliated defendants was also filed on September 29, 2004 and names the Columbia Funds, collectively, as nominal defendants. On March 2, 2005, four civil revenue sharing actions alleging, among other things, that various mutual funds advised by Columbia Management and Columbia Wanger Asset Management L.P. inappropriately used fund assets to pay brokers to promote the funds by directing fund brokerage transactions to such brokers and did not fully disclose such arrangements to shareholders, and charged excessive 12b-1 fees, were consolidated into a single action in the United States District Court for Massachusetts (IN RE COLUMBIA ENTITIES LITIGATION, Civil Action No. 04-11704-REK). The consolidated complaint has not yet been filed. The Fund, but not the Portfolio, was named as a nominal defendant in each of the four revenue sharing actions. 29 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2005 HIGHLAND FLOATING RATE FUND NOTE 10. SUBSEQUENT EVENT On March 4, 2005, the Board of Trustees of the Fund approved the closing of the Fund's Class B shares to purchases by new and existing shareholders. The Fund's Class B shares will not accept purchases by new and existing investors after the close of business on May 2, 2005. Existing investors may still reinvest distributions in Class B shares. 30 IMPORTANT INFORMATION ABOUT THIS REPORT - -------------------------------------------------------------------------------- TRANSFER AGENT PFPC Inc. 760 Moore Road King of Prussia, PA 19406 877.665.1287 DISTRIBUTOR PFPC Distributors, Inc. 760 Moore Road King of Prussia, PA 19406 INVESTMENT ADVISER Highland Capital Management, L.P. 13455 Noel Rd. Suite 1300 Dallas, TX 75240 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 125 High Street Boston, MA 02110 The Fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-877-665-1287 and additional reports will be sent to you. This report has been prepared for shareholders of Highland Floating Rate Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities, and the Fund's proxy voting record for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the Securities and Exchange Commission's website at http://www.sec.gov. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q, beginning with the fiscal quarter ending November 30, 2004. The Fund's Forms N-Q are available on the Commission's website at http:/www.sec.gov and also may be reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Statement of Additional Information includes information about Fund Directors and is available upon request without charge by calling 1-877-665-1287. 31 This page intentionally left blank ITEM 2. CODE OF ETHICS. Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not yet applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR 240.14a-101), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Not applicable. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY ------------------------------------------------- By (Signature and Title)* /S/ JAMES D. DONDERO ------------------------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) Date MAY 9, 2005 ---------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /S/ JAMES D. DONDERO ------------------------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) Date MAY 9, 2005 ---------------------------------------------------------------------------- By (Signature and Title)* /S/ M. JASON BLACKBURN ------------------------------------------------------- M. Jason Blackburn, Chief Financial Officer (principal financial officer) Date MAY 9, 2005 ---------------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature. EX-99.CERT 2 certs302.txt 302 CERTS CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, James D. Dondero, certify that: 1. I have reviewed this report on Form N-CSR of Highland Floating Rate Limited Liability Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: MAY 9, 2005 /S/ JAMES D. DONDERO ------------------------------- ----------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, M. Jason Blackburn, certify that: 1. I have reviewed this report on Form N-CSR of Highland Floating Rate Limited Liability Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: MAY 9, 2005 /S/ M. JASON BLACKBURN --------------------------- ------------------------------------------- M. Jason Blackburn, Chief Financial Officer (principal financial officer) EX-99.906 3 certs906.txt 906 CERT CERTIFICATION PURSUANT TO RULE 30A-2(B) UNDER THE 1940 ACT AND SECTION 906 OF THE SARBANES-OXLEY ACT I, James D. Dondero, Chief Executive Officer of Highland Floating Rate Limited Liability Company (the "Registrant"), certify that: 1. The Form N-CSR of the Registrant (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: MAY 9, 2005 /S/ JAMES D. DONDERO ----------------------------- ----------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) I, M. Jason Blackburn, Chief Financial Officer of Highland Floating Rate Limited Liability Company (the "Registrant"), certify that: 1. The Form N-CSR of the Registrant (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: MAY 9, 2005 /S/ M. JASON BLACKBURN ------------------------- --------------------------------------------- M. Jason Blackburn, Chief Financial Officer (principal financial officer) -----END PRIVACY-ENHANCED MESSAGE-----