-----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, KrAOxsf9KE9RUvg+wsY+CH7PI6SizyAGh++DnHgXmHJpxBKXpbybBUTE3M7NvVjm TfMpzhKrShXDKFxNl+szVg== 0000935069-07-000891.txt : 20070427 0000935069-07-000891.hdr.sgml : 20070427 20070427104730 ACCESSION NUMBER: 0000935069-07-000891 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20070228 FILED AS OF DATE: 20070427 DATE AS OF CHANGE: 20070427 EFFECTIVENESS DATE: 20070427 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: 07793844 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 ncsr.txt HIGHLAND LIMITED LIABILITY NCSR-S 0207. 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) Two Galleria Tower 13455 Noel Road, Suite 800 DALLAS, TEXAS 75240 --------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) James D. Dondero Highland Capital Management, L.P. Two Galleria Tower 13455 Noel Road, Suite 800 DALLAS, TEXAS 75240 --------------------------------------------------------------------------- (Name and address of agent for service) registrant's telephone number, including area code: (877) 665-1287 ----------------- Date of fiscal year end: AUGUST 31 ------------------- Date of reporting period: FEBRUARY 28, 2007 ------------------------ Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Report to Shareholders is attached herewith. [LOGO OMITTED] HIGHLAND FUNDS managed by Highland Capital Management, L.P. HIGHLAND FLOATING RATE FUND SEMI-ANNUAL REPORT FEBRUARY 28, 2007 [LOGO] HIGHLAND FLOATING RATE FUND [LOGO] - -------------------------------------------------------------------------------- TABLE OF CONTENTS Fund Profile ............................................................. 1 Financial Statements ..................................................... 2 Investment Portfolio .................................................. 3 Portfolio Statement of Assets and Liabilities ......................... 15 Portfolio Statement of Operations ..................................... 16 Portfolio Statements of Changes in Net Assets ......................... 17 Portfolio Statement of Cash Flows ..................................... 18 Portfolio Financial Highlights ........................................ 19 Fund Statement of Assets and Liabilities .............................. 20 Fund Statement of Operations .......................................... 21 Fund Statements of Changes in Net Assets .............................. 22 Fund Financial Highlights ............................................. 24 Notes to Financial Statements ......................................... 28 Important Information About This Report .................................. 35 Economic and market conditions change frequently. There is no assurance that the trends described in this report will continue or commence. A PROSPECTUS MUST PRECEDE OR ACCOMPANY THIS REPORT. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FUND PROFILE - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND Objective - -------------------------------------------------------------------------------- The Highland Floating Rate Fund (the "Fund") invests all of its investable assets in Highland Floating Rate Limited Liability Company (the "Portfolio"). The Fund and the Portfolio seek a high level of current income consistent with preservation of capital. Net Assets as of February 28, 2007 - -------------------------------------------------------------------------------- $2,061.3 million Portfolio Data as of February 28, 2007 - -------------------------------------------------------------------------------- The information below provides a snapshot of the Portfolio at the end of the reporting period. The Portfolio is actively managed and the composition of its investment portfolio will change over time. QUALITY BREAKDOWN AS OF 02/28/07 (%) - -------------------------------------------------------------------------------- Baa 1.0 - -------------------------------------------------------------------------------- Ba 25.9 - -------------------------------------------------------------------------------- B 45.3 - -------------------------------------------------------------------------------- Caa 5.2 - -------------------------------------------------------------------------------- NR 22.6 TOP 5 SECTORS AS OF 02/28/07 (%) - -------------------------------------------------------------------------------- Retail 9.7 - -------------------------------------------------------------------------------- Transportation -- Auto 7.7 - -------------------------------------------------------------------------------- Utility 6.5 - -------------------------------------------------------------------------------- Cable -- International Cable 6.0 - -------------------------------------------------------------------------------- Broadcasting 5.4 TOP 10 HOLDINGS AS OF 02/28/07 (%) - -------------------------------------------------------------------------------- HCA, Inc. 2.9 - -------------------------------------------------------------------------------- Movie Gallery, Inc. 2.8 - -------------------------------------------------------------------------------- Cricket Communications, Inc. 2.2 - -------------------------------------------------------------------------------- Ypso Holding SA 2.0 - -------------------------------------------------------------------------------- Ford Motor Co. 2.0 - -------------------------------------------------------------------------------- Delphi Corporation 1.9 - -------------------------------------------------------------------------------- Amsterdamse Beheer-En Consultingmaatschappij B.V. 1.8 - -------------------------------------------------------------------------------- Blockbuster Entertainment Corp. 1.7 - -------------------------------------------------------------------------------- Metro PCS Wireless, Inc. 1.6 - -------------------------------------------------------------------------------- Millennium Digital Media Systems, LLC 1.6 Quality is calculated as a percentage of total notes and bonds. Sectors and holdings are calculated as a percentage of net assets. Semi-Annual Report | 1 FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND A GUIDE TO UNDERSTANDING THE FUND'S FINANCIAL STATEMENTS INVESTMENT PORTFOLIO The Investment Portfolio details all of the Portfolio's holdings and their market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification. STATEMENT OF ASSETS AND LIABILITIES These statements detail the Fund's and the Portfolio's assets, liabilities, net assets and, with respect to the Fund, share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all liabilities (including any unpaid expenses) from the total of investment and non-investment assets. The share price for each class is calculated by dividing net assets for that class by the number of shares outstanding in that class as of the last day of the reporting period. STATEMENT OF OPERATIONS These statements detail income earned by the Fund and the Portfolio and the expenses accrued by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss realized on the sales of holdings during the period, as well as any unrealized gains or losses recognized over the period. The total of these results represents net increase or decrease in net assets from operations. STATEMENTS OF CHANGES IN NET ASSETS These statements demonstrate how the Fund's and the Portfolio's net assets were affected by their operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and dividend reinvestments) during the reporting period. The Statement of Changes in Net Assets, with respect to the Fund, also details changes in the number of shares outstanding. STATEMENT OF CASH FLOWS The Statement of Cash Flows reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash, foreign currency and cash equivalents during the period. FINANCIAL HIGHLIGHTS The Financial Highlights demonstrate how the Fund's net asset value per share was affected by the Fund's operating results. The Financial Highlights also disclose the classes' performance and certain key ratios of the Fund and the Portfolio (e.g., class expenses and net investment income as a percentage of average net assets). NOTES TO FINANCIAL STATEMENTS These notes disclose the organizational background of the Fund and the Portfolio, their significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies. 2 | Semi-Annual Report INVESTMENT PORTFOLIO (UNAUDITED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (a) - 78.4% AEROSPACE - AEROSPACE/DEFENSE - 2.2% AWAS Capital, Inc. 12,215,153 First Priority Term Loan, 7.13%, 03/15/13 ............................. 12,184,615 7,003,663 Second Priority Term Loan, 11.38%, 03/15/13 ............................ 7,108,718 6,500,000 DeCrane Aircraft Holdings, Inc. First Lien Term Loan, 02/13/13 (b) .......... 6,565,000 1,903,900 Forgings International Holdings. (Firth Rixon) (United Kingdom) Term D (USD), 9.73%, 03/22/15 ............... 1,937,218 Forgings International Ltd. (Firth Rixon) (United Kingdom) 2,403,900 Term B2 (USD), 7.83%, 09/07/14 .............. 2,445,968 2,403,900 Term C2 (USD), 8.08%, 09/07/15 .............. 2,445,968 1,980,000 IAP Worldwide Services, Inc. First Lien Term Loan, 9.69%, 12/30/12 ............................. 1,976,278 TDS Investor Corp. (Travelport) 6,916,660 Dollar Term Loan, 8.37%, 08/23/13 (b) ......................... 6,992,744 662,496 Synthetic Letter of Credit, 8.36%, 08/23/13 (b) ......................... 670,572 2,943,529 Vought Aircraft Industries, Inc. Term Loan, 7.88%, 12/22/11 .................. 2,976,674 ------------- 45,303,755 ------------- AEROSPACE - AIRLINES - 1.3% Continental Airlines, Inc. 1,714,286 Tranche A-1 Term Loan, 8.74%, 06/01/11 ............................. 1,733,571 4,285,714 Tranche A-2 Term Loan, 8.74%, 06/01/11 ............................. 4,333,929 2,000,000 Delta Airlines, Inc. Trade Claim, 12/12/07 (b) ................... 1,176,680 Northwest Airlines, Inc. 5,000,000 Term Loan DIP, 7.85%, 08/21/08 .............. 5,035,150 1,500,000 U.S. Bank Trade Claim, 08/21/13 (b) ......... 1,307,505 12,500,000 U S Airways, Inc. Term Loan, 8.87%, 03/31/11 .................. 12,610,500 ------------- 26,197,335 ------------- BROADCASTING - 3.3% 2,403,831 Havana Bidco Ltd. USD Term Loan B, 7.88%, 08/31/14 ............................. 2,412,845 Millennium Digital Media Systems, LLC 27,169,415 Facility B Term Loan, 8.90%, 06/30/11 ............................. 27,375,549 141,685 Revolver, 06/30/11 (b) (c) .................. 141,546 1,037,839 Term Facility, 06/30/11 (b) ................. 1,045,714 NextMedia Operating, Inc 1,185,930 Delay Draw Term Loan, 7.32%, 11/15/12 ............................. 1,182,965 2,668,341 Initial First Lien Term Loan, 7.32%, 11/15/12 ............................. 2,669,996 11,000,000 Paxson Communications Corp. First Lien Term Loan, 8.62%, 01/15/12 ............................. 11,268,180 1,500,000 Persona Communications Corp. (Canada) Second Lien Term Loan, 11.37%, 04/12/14 ............................ 1,530,000 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- BROADCASTING (CONTINUED) 1,000,000 ProQuest-CSA LLC First Lien Term Loan, 8.35%, 02/09/14 ............................. 1,011,250 19,307,859 Young Broadcasting, Inc. Term Loan, 7.92%, 11/03/12 (b) .............. 19,398,220 ------------- 68,036,265 ------------- CABLE - INTERNATIONAL CABLE - 1.0% 1,851,515 Bragg Communications, Inc. (Canada) Term Loan B, 7.07%, 08/31/11 ................ 1,859,625 2,812,500 Puerto Rico Cable Acquisition Co., Inc. (Puerto Rico) First Lien Term Loan, 8.63%, 07/28/11 ............................. 2,837,109 San Juan Cable, LLC (Puerto Rico) 2,475,007 First Lien Term Loan, 7.37%, 10/31/12 ............................. 2,487,382 1,700,000 Second Lien Term Loan, 10.89%, 10/31/13 ............................ 1,727,625 UPC Broadband Holding BV (Netherlands) 4,971,250 Facility J2, 7.64%, 03/31/13 ................ 4,998,691 3,971,250 Facility K2, 7.64%, 03/31/13 ................ 3,994,124 3,000,000 Virgin Media, Inc. (United Kingdom) B4 Facility, 7.36%, 09/03/12 ................ 3,019,260 ------------- 20,923,816 ------------- CABLE - US CABLE - 3.3% 123,952 Century Cable Holdings LLC Term Loan, 10.25%, 06/30/09 ................. 121,783 Cequel Communications LLC 6,000,000 Bridge Term Loan, 10.32%, 10/30/07 ............................ 6,015,000 3,750,000 First Lien Term Loan B, 7.61%, 11/05/13 ............................. 3,788,963 3,000,000 NC Term Facility, 10.32%, 10/30/07 ............................ 3,007,500 2,000,000 Second Lien Tranche A Term Loan, 9.87%, 05/05/14 ............................. 2,062,500 2,000,000 Term Loan, 11/05/13 (b) ..................... 2,020,780 Charter Communications Operating LLC 20,108,684 Term Loan, 7.99%, 04/28/13 .................. 20,277,195 3,000,000 Term Loan, 8.13%, 04/28/13 .................. 3,025,140 1,994,924 Tranche B Term Loan, 8.13%, 04/07/11 ............................. 2,006,933 Knology, Inc. 1,727,350 New Term Loan, 7.85%, 06/29/10 .............. 1,740,305 5,122,290 Second Lien Term Loan, 15.35%, 06/29/11 ............................ 5,865,022 3,020,000 Mediacom Broadband Group Tranche A Term Loan, 7.37%, 03/31/10 ............................. 2,983,579 1,000,000 Mediacom Illinois, LLC Tranche C Term Loan, 7.17%, 01/31/15 ............................. 1,005,320 Northland Cable Television, Inc. 4,950,000 First Lien Term Loan B, 9.38%, 12/22/12 ............................. 4,962,375 4,000,000 Second Lien Term Loan, 13.38%, 06/22/13 ............................ 4,000,000 WideOpenWest Finance LLC 4,000,000 First Lien Term Loan, 7.68%, 05/01/13 ............................. 4,040,000 See accompanying Notes to Financial Statements. | 3 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) CABLE - US CABLE (CONTINUED) WideOpenWest Finance LLC (continued) 1,000,000 Second Lien Term Loan, 10.37%, 05/01/14 ............................ 1,033,120 ------------- 67,955,515 ------------- CHEMICALS - COMMODITY & FERTILIZER - 0.1% 2,033,334 Ferro Corp. Term Loan, 8.07%, 06/06/12 (c) .............. 2,033,984 ------------- CHEMICALS - SPECIALTY CHEMICALS - 0.8% 1,800,000 Ineos U S Finance LLC Term Loan A4, 7.34%, 12/14/12 ............... 1,802,484 1,354,545 Innophos, Inc. Tranche B Term Loan, 7.57%, 08/13/10 ............................. 1,359,625 975,197 Kraton Polymers Group of Cos. Term Loan, 7.38%, 12/23/10 .................. 984,646 1,600,000 Mosaic Co. Tranche B Term Loan, 7.11%, 12/01/13 ............................. 1,616,512 956,000 Nusil Technology LLC Tranche B Term Loan, 8.07%, 10/24/13 ............................. 963,170 3,000,000 Panda Hereford Ethanol, L.P. Tranche A Term Loan, 9.07%, 07/28/13 ............................. 2,970,000 6,000,000 Solutia, Inc. Add-on Term Loan B, 8.36%, 03/31/08 (b) ......................... 6,091,920 ------------- 15,788,357 ------------- CONSUMER DURABLES - 0.1% 2,862,201 Rexair LLC Additional Term Facility, 9.62%, 06/30/10 ............................. 2,869,357 ------------- CONSUMER NON-DURABLES - 1.4% 1,985,000 Amscan Holdings Term Loan B, 8.39%, 12/23/12 ................ 2,007,947 1,555,556 Camelbak Products, Inc. Second Lien Term Loan, 13.41%, 02/04/12 ............................ 1,419,444 3,000,000 DS Waters of America, Inc. Term Loan B, 7.86%, 10/27/12 ................ 3,015,000 367,974 Eastman Kodak Co. Term B-1 Advance, 7.57%, 10/18/12 ............................. 369,354 2,778,214 Hanesbrands, Inc. Term Loan B, 7.63%, 09/05/13 ................ 2,804,769 1,702,072 Hillman Group, Inc. Term Loan B, 8.50%, 03/30/11 ................ 1,719,093 429,361 Polaroid Corp. Term Loan, 12.38%, 04/27/11 ................. 431,508 Solo Cup Co. 5,758,234 Term B1 Loan, 8.82%, 02/27/11 ............... 5,851,287 868,833 Term B1 Loan, 8.87%, 02/27/11 ............... 882,873 1,500,000 Term B1 Loan, 02/27/11 (b) .................. 1,524,240 1,977,440 Spectrum Brands U. S. Dollar Term Loan B, 8.60%, 02/07/12 ............................. 1,998,203 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- CONSUMER NON-DURABLES (CONTINUED) UCG Paper Crafts, Inc. 400,000 First Lien Synthetic Facility, 5.37%, 02/17/13 ............................. 401,000 1,588,000 First Lien Term Facility, 8.57%, 02/17/13 ............................. 1,591,970 1,985,000 Second Lien Term Loan, 12.82%, 08/17/13 ............................ 2,002,369 3,684,375 VJCS Acquisition, Inc. Term B Facility, 7.62%, 07/19/13 ............ 3,684,375 ------------- 29,703,432 ------------- DIVERSIFIED MEDIA - 3.3% 3,194,727 American Lawyer Media Holdings, Inc. First Lien Term Loan, 7.87%, 03/05/10 ............................. 3,202,043 375,889 Black Press Group Ltd. (Canada) Term B-2 Tranche Loan, 7.50%, 08/01/13 ............................. 379,648 619,111 Black Press U S Partnership Term B-1 Tranche Loan, 7.50%, 08/01/13 ............................. 625,302 3,990,000 Cinemark USA, Inc. Term Loan, 7.38%, 10/05/13 .................. 4,030,858 1,263,083 Day International, Inc. First Lien U.S. Term Loan, 7.86%, 12/05/12 ............................. 1,275,714 2,375,000 Deluxe Canada Holdings, Inc. (Canada) First Lien Tranche C Term Loan, 8.36%, 01/28/11 ............................. 2,391,340 Endurance Business Media, Inc. 1,911,667 First Lien Term Loan, 8.07%, 07/24/13 ............................. 1,933,173 2,000,000 Second Lien Term Loan, 12.57%, 01/24/14 ............................ 2,015,000 1,000,000 HIT Entertainment PLC (United Kingdom) First Lien Term Advance, 03/20/12 (b) (e) ............................ 1,008,130 2,970,000 Merrill Communications LLC Combined Term Loan, 7.59%, 05/15/11 ............................. 2,996,433 Metro-Goldwyn-Mayer Holdings II, Inc./LOC Acquisition Co. 9,399,190 Tranche B Term Loan, 8.61%, 04/08/12 ............................. 9,508,315 12,750,000 Tranche B Term Loan, 8.62%, 04/08/12 ............................. 12,898,028 North American Membership Group, Inc. 982,500 First Lien Tranche B Term Loan, 8.61%, 05/19/11 ............................. 962,850 3,000,000 Second Lien Term Loan, 12.86%, 11/18/11 ............................ 2,940,000 Penton Media, Inc. 3,500,000 First Lien Term Loan, 7.57%, 02/01/13 (b) ......................... 3,526,550 2,500,000 Second Lien Term Loan, 02/01/14 (b) ................................ 2,551,575 Riverdeep Interactive Learning USA, Inc. 2,500,000 Bridge Facility, 11.07%, 12/05/14 ........... 2,503,125 7,000,000 Term Loan, 8.10%, 12/20/13 (b) .............. 7,074,340 Springer Science+Business Media S.A. (Germany) 562,496 Tranche B-2, 7.99%, 09/16/11 ................ 569,528 562,496 Tranche C-2, 8.37%, 07/05/14 ................ 571,637 4 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) DIVERSIFIED MEDIA (CONTINUED) Springer Science+Business Media S.A. (continued) 338,124 USD Tranche B-2 Add On, 7.99%, 07/05/13 ............................. 342,351 338,124 USD Tranche C-2 Add On, 8.37%, 07/05/14 ............................. 343,619 366,301 USD Tranche E-2 Add On, 8.37%, 07/05/14 ............................. 372,254 4,000,000 West Corp. Term B-2 Loan, 7.75%, 10/24/13 .............. 4,042,480 ------------- 68,064,293 ------------- ENERGY - EXPLORATION & PRODUCTION - 0.7% 1,000,000 MEG Energy Corp. (Canada) Initial Term Loan, 09/29/13 (b) ............. 998,120 3,000,000 Paramount Resources Ltd. (Canada) Term Loan, 9.86%, 08/28/12 .................. 2,992,500 1,000,000 Superior Offshore International, LLC Term Loan, 02/15/12 (b) ..................... 1,000,000 Targa Resources, Inc. 772,620 Synthetic Term Loan, 5.24%, 10/31/12 ............................. 782,757 3,179,009 Term Loan, 7.63%, 10/31/12 .................. 3,211,435 5,940,000 TARH E&P Holdings, LP Second Lien Term Loan, 10.91%, 11/15/10 ............................ 5,940,000 ------------- 14,924,812 ------------- ENERGY - OTHER ENERGY - 1.5% Alon USA Energy, Inc. 221,111 Edgington Facility, 7.57%, 06/22/13 ............................. 223,322 1,768,889 Paramount Facility, 7.66%, 06/22/13 ............................. 1,783,270 Coffeyville Resources, LLC 324,324 Funded Letter of Credit, 8.36%, 12/28/10 ............................. 328,378 1,675,676 Tranche D Term Loan, 8.36%, 12/28/13 ............................. 1,695,918 4,500,000 Endeavour International Holding B.V. (Netherlands) Second Lien Term Loan, 12.37%, 11/01/11 ............................ 4,635,000 5,969,820 Helix Energy Solutions Group, Inc. Term Loan, 7.33%, 07/01/13 .................. 6,013,937 Monitor US Finco, Inc. 4,000,000 First Lien Term Loan, 10.82%, 01/11/14 ............................ 4,020,000 3,000,000 Second Lien Term Loan, 17.32%, 01/11/15 ............................ 3,007,500 359,399 SemCrude LP U.S. Term Loan, 7.59%, 03/16/11 ............................. 362,321 5,000,000 Volnay Acquisition Co. I (CGG) Term Loan, 7.32%, 01/12/14 .................. 5,043,750 4,000,000 Willbros USA, Inc. Syndicate Term Loan, 10.25%, 10/27/09 ............................ 4,020,000 ------------- 31,133,396 ------------- ENERGY - REFINING - 0.3% 3,000,000 Connacher Finance Corp. Term Loan, 8.61%, 10/20/13 .................. 3,026,250 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- ENERGY - REFINING (CONTINUED) 2,500,000 J Ray McDermott SA (Panama) Synthetic Facility, 5.27%, 06/06/12 ......... 2,525,000 ------------- 5,551,250 ------------- ENERGY - SERVICE & EQUIPMENT - 0.1% 1,923,567 Dresser, Inc. Term Loan B, 8.13%, 10/31/13 ................ 1,948,804 ------------- FINANCIAL - 1.1% 1,750,000 AlixPartners, LLP Tranche B Term Loan, 7.86%, 10/12/13 ............................. 1,768,060 2,000,000 American Wholesale Insurance Group, Inc. Second Lien Term Loan B, 12.82%, 04/27/12 ............................ 2,005,000 2,778,214 Arias Acquisitions, Inc. Term Loan, 9.11%, 07/26/11 .................. 2,555,957 Checksmart Financial Co. 1,985,000 First Lien Tranche B Term Loan, 8.13%, 05/01/12 ............................. 1,992,444 2,500,000 Second Lien Term Loan, 10.89%, 05/01/13 ............................ 2,531,250 4,250,000 Crump Group, Inc. Tranche B Term Loan, 8.37%, 12/19/12 ............................. 4,255,312 997,500 First American Payment Systems, L.P. Term Loan, 8.63%, 10/06/13 ................. 1,004,981 Flatiron Re Ltd. (Bermuda) 1,684,211 Closing Date Term Loan, 9.61%, 12/29/10 ............................. 1,705,263 815,789 Delayed Draw Term Loan, 9.61%, 12/29/10 (c) ......................... 824,967 951,857 FleetCor Technologies, Inc. Term Loan, 9.08%, 06/30/11 ................. 958,996 National Money Mart Co. (Canada) 1,149,661 Canadian Borrower Term Loan, 10.00%, 10/30/12 ............................ 1,156,846 845,339 Delayed Draw Term Loan, 10.00%, 10/30/12 ............................ 850,622 1,000,000 Online Resources Corp. Term Loan A, 02/09/12 (b) ................... 1,000,000 ------------- 22,609,698 ------------- FOOD AND DRUG - 0.7% 869,565 Bi-Lo LLC Term Loan, 9.36%, 07/01/11 .................. 877,391 4,000,000 CTI Food Holdings Co. LLC Second Lien Secured Term Loan, 11.36%, 06/02/12 ............................ 4,060,000 669,026 Duloxetine Royalty Sub (Cayman Islands) Term Loan, 9.87%, 10/18/13 .................. 674,043 8,000,000 Rite Aid Corp. Senior Secured Bridge Loan, 10/23/07 (b) ................................ 7,960,000 1,500,000 Weight Watchers International, Inc. Term Loan B, 6.88%, 01/26/14 ................ 1,508,820 ------------- 15,080,254 ------------- FOOD/TOBACCO - BEVERAGES & BOTTLING - 0.3% 684,482 AFC Enterprises, Inc. Tranche B Term Loan, 7.38%, 05/09/11 ............................. 689,615 See accompanying Notes to Financial Statements. | 5 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) FOOD/TOBACCO - BEVERAGES & BOTTLING (CONTINUED) 3,300,000 National Distributing Co., Inc. Second Lien Term Loan, 11.85%, 06/01/10 ............................ 3,308,250 1,995,000 PBM Holdings, Inc. Term Loan, 8.07%, 09/29/12 .................. 2,009,963 ------------- 6,007,828 ------------- FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS - 0.6% 2,598,093 Chiquita Brands LLC Term Loan C, 8.38%, 06/28/12 ................ 2,643,560 FSB Holdings, Inc. 1,500,000 First Lien Tranche B Term Loan, 7.88%, 09/29/13 ............................. 1,518,750 1,000,000 Second Lien Term Loan, 11.13%, 03/29/14 ............................ 1,012,500 Gate Gourmet Borrower LLC 678,682 Dollar Term Loan First Lien, 8.10%, 03/09/12 ............................. 687,166 111,100 First Lien Letter of Credit, 8.11%, 12/31/10 ............................. 112,489 3,849,107 Michelina's Term Loan, 8.41%, 04/02/11 .................. 3,902,032 4,879,919 Nellson Nutraceutical, Inc. Second Lien Term Loan, 14.25%, 04/04/10 (d) ........................ 2,139,015 ------------- 12,015,512 ------------- FOOD/TOBACCO - RESTAURANTS - 1.5% 4,000,000 Aramark Canada Ltd. (Canada) Canadian Term Loan, 01/26/14 (b) ................................ 4,045,000 Aramark Corp. 790,097 Line of Credit Facility, 7.45%, 01/26/14 ............................. 799,808 11,209,903 U.S. Term Loan, 7.47%, 01/26/14 ............. 11,338,368 Buffets Holdings, Inc. 2,221,875 Revolver, 10.01%, 11/01/11 .................. 2,217,542 476,577 Revolver, 8.37%, 11/01/13 ................... 475,647 4,416,667 Term Loan, 8.37%, 11/01/13 .................. 4,444,271 1,466,980 Caribbean Restaurant LLC Tranche B Term Loan, 8.07%, 06/30/09 ............................. 1,479,215 1,980,000 El Pollo Loco, Inc. Term Loan, 8.40%, 11/18/11 .................. 1,990,534 1,462,500 Garden Fresh Restaurant Corp. First Lien Term Loan B, 8.62%, 06/22/11 ............................. 1,469,813 982,188 New World Restaurant Group, Inc. First Lien Term Loan, 8.45%, 03/31/11 ............................. 984,643 1,000,000 Sbarro, Inc. Term Loan B, 7.82%, 01/31/14 ................ 1,011,250 ------------- 30,256,091 ------------- FOREST PRODUCTS - PACKAGING - 1.1% 4,222,507 Consolidated Container Holdings LLC Term Loan, 8.63%, 12/15/08 .................. 4,238,341 9,340,264 Georgia-Pacific Corp. First Lien Term B, 7.38%, 02/14/13 ............................. 9,438,897 6,352,545 Graham Packaging Co. Term Loan B, 7.73%, 10/07/11 ................ 6,415,435 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- FOREST PRODUCTS - PACKAGING (CONTINUED) JSG Acquisitions (Smurfit Kappa) (Ireland) 1,000,000 B1 Term Loan Facility, 7.75%, 12/01/13 ............................. 1,008,760 1,000,000 C1 Term Loan Facility, 8.24%, 12/01/13 ............................. 1,013,760 ------------- 22,115,193 ------------- FOREST PRODUCTS - PAPER - 0.3% 1,714,720 Appleton Papers, Inc. Term Loan, 7.63%, 06/11/10 .................. 1,725,437 2,494,209 Graphic Packaging International, Inc. Tranche C Term Loan, 7.86%, 08/09/10 ............................. 2,529,278 1,500,000 NewPage Corp. Term Loan, 7.63%, 08/01/13 .................. 1,518,750 135,329 Verso Paper Holdings LLC Term B Loan, 7.13%, 08/01/13 ................ 135,922 ------------- 5,909,387 ------------- GAMING/LEISURE - GAMING - 0.6% 3,956,125 CCM Merger, Inc./MotorCity Casino Term Loan B, 7.37%, 04/25/12 ................ 3,984,966 1,000,000 Great Canadian Gaming Corp. Tranche B Term Loan, 02/14/14 (b) ................................ 1,008,440 2,000,000 Lakes Gaming and Resorts, LLC Term Loan, 11.62%, 06/21/10 ................. 2,025,000 14,526 OpBiz LLC Term Loan B, 9.51%, 08/31/10 ................ 14,145 VML U S Finance LLC 4,000,000 Term B Funded Project Loan, 8.12%, 05/25/13 ............................. 4,043,600 2,000,000 Term B Funded Project Loan, 02/01/13 (b) ................................ 2,021,800 ------------- 13,097,951 ------------- GAMING/LEISURE - OTHER LEISURE - 1.8% 1,926,748 AMF Bowling Worldwide, Inc. Term Loan B, 8.40%, 08/27/09 ................ 1,897,847 2,325,000 BRE/ESA MEZZ 5 LLC Mezzanine D Loan, 8.57%, 07/11/08 ............................. 2,330,813 12,675,000 BRE/Homestead MEZZ 4 LLC Mezzanine D Loan, 8.60%, 07/11/08 ............................. 12,706,688 5,000,000 Edge Las Vegas Development LLC Second Lien Term Loan, 14.32%, 06/01/07 ............................ 5,025,000 Fontainebleu Florida Hotel LLC 3,000,000 Tranche A Term Loan, 8.10%, 05/11/08 ............................. 3,000,000 2,000,000 Tranche B Term Loan, 8.10%, 05/11/08 ............................. 2,000,000 1,000,000 Greenwood Racing Inc. Term Loan, 7.57%, 11/28/11 .................. 1,010,000 1,664,415 Kuilima Resort Co. First Lien Term Loan, 8.07%, 09/30/10 (b) ......................... 1,655,060 2,000,000 Riverdeep Interactive Learning USA, Inc. Term Loan, 8.88%, 11/30/11 .................. 2,000,000 2,219,972 Trump Entertainment Resorts, Inc. Term Loan B-1, 7.87%, 05/20/12 .............. 2,242,171 6 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) GAMING/LEISURE - OTHER LEISURE (CONTINUED) 1,950,000 Wallace Theaters First Lien Term Loan, 8.62%, 07/31/09 ............................. 1,969,500 966,044 Yellowstone Mountain Club, LLC Term Loan, 7.73%, 09/30/10 .................. 966,411 ------------- 36,803,490 ------------- HEALTHCARE - ACUTE CARE - 3.1% 3,402,421 Alliance Imaging, Inc. Tranche C1 Term Loan, 7.88%, 12/29/11 ............................. 3,432,192 Cornerstone Healthcare Group Holding, Inc. 375,017 Revolver, 9.35%, 07/15/11 (c) (i) ........... 360,477 1,029,361 Senior Subordinated Unsecured Notes, 14.00%, 07/15/12 (i) ................. 936,719 2,062,459 Term Loan, 9.35%, 07/15/11 (i) .............. 2,046,990 2,992,500 Encore Medical Finance LLC Term Loan, 7.88%, 11/04/13 .................. 3,005,607 HCA, Inc. 1,000,000 Tranche A Term Loan, 7.86%, 11/17/12 ............................. 1,010,260 52,000,000 Tranche B Term Loan, 7.11%, 11/17/13 ............................. 52,678,080 ------------- 63,470,325 ------------- HEALTHCARE - ALTERNATE SITE SERVICES - 1.0% 1,442,482 American HomePatient, Inc. Secured Promissory Note, 6.79%, 08/01/09 (i) ......................... 1,442,482 FHC Health Systems, Inc. 553,955 Delayed Draw Term Loan, 13.40%, 12/18/09 ............................ 573,343 791,364 Initial Term Loan, 11.40%, 12/18/09 ............................ 819,062 1,500,000 Third Lien Additional Term Loan, 14.37%, 02/09/11 ............................ 1,530,000 5,000,000 Third Lien Term Loan, 15.12%, 02/09/11 ............................ 5,137,500 6,902,010 LifeCare Holdings (Rainier Acquisition Corp.) Term Loan, 08/11/12 (b) ..................... 6,707,925 1,970,000 Skilled Healthcare LLC First Lien Term Loan, 7.60%, 06/15/12 ............................. 1,987,238 331,070 Sunrise Medical Holdings, Inc. Term Loan B-1, 8.88%, 05/13/10 .............. 330,242 1,950,000 WellCare Health Plans, Inc. Term Loan, 7.88%, 05/13/09 .................. 1,960,979 ------------- 20,488,771 ------------- HEALTHCARE - MEDICAL PRODUCTS - 5.9% 1,889,795 American Medical Systems, Inc. Term Loan, 7.68%, 07/20/12 .................. 1,906,330 CCS Medical, Inc. 20,163,810 First Lien Term Loan, 8.62%, 09/30/12 (b) ......................... 19,964,390 4,750,000 Second Lien Term Loan, 13.37%, 03/30/13 ............................ 4,643,125 1,950,000 CompBenefits Corp. Tranche B Term Loan, 8.36%, 04/12/12 ............................. 1,967,063 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- HEALTHCARE - MEDICAL PRODUCTS (CONTINUED) 1,000,000 Golden Gate National Senior Care LLC Second Lien Term Loan, 13.11%, 09/14/11 ............................ 1,017,500 Graceway Pharmaceuticals, LLC 1,000,000 First Lien Term Loan B, 7.84%, 12/29/11 ............................. 1,009,060 2,000,000 Second Lien Term Loan, 11.34%, 12/29/12 ............................ 2,026,240 3,482,500 Hanger Orthopedic Group, Inc. Tranche B Term Loan, 7.87%, 05/26/13 ............................. 3,510,778 5,000,000 Health Management Associates, Inc. Term Loan B, 02/28/14 (b) ................... 5,046,500 HealthSouth Corp. 1,000,000 Term Loan B, 8.62%, 03/21/10 ................ 1,010,500 12,967,503 Term Loan B, 8.62%, 03/10/13 ................ 13,103,662 MMM Holding, Inc./NAMM Holdings, Inc./PHMC (Puerto Rico) 895,644 MMM Original Term Loan, 7.60%, 08/22/11 ............................. 872,133 210,740 NAMM Original Term Loan, 7.60%, 08/22/11 ............................. 205,208 137,340 NAMM PHMC Acquistion Term Loan, 7.60%, 08/22/11 ............................. 133,735 734,000 PHMC Acquisition Term Loan, 7.61%, 08/10/11 ............................. 714,733 1,475,044 National Renal Institutes, Inc. Term Facility, 7.63%, 03/31/13 .............. 1,480,575 Nyco Holdings 3 ApS (Denmark) 12,000,000 Facility B2, 6.20%, 12/29/14 (b) ............ 12,030,000 12,000,000 Facility C2, 6.70%, 12/29/15 (b) ............ 12,090,000 4,000,000 Pharmaceutical Holdings Corp. Term Loan, 8.57%, 01/30/12 .................. 4,010,000 2,352,456 Reliant Pharmaceuticals, Inc. First Lien Term Loan, 14.82%, 06/30/08 ............................ 2,375,980 Talecris Biotherapeutics Holdings Corp. 16,500,000 First Lien Term Loan, 10.50%, 12/08/13 ............................ 16,665,000 7,500,000 Second Lien Term Loan, 11.86%, 12/08/14 ............................ 7,706,250 1,000,000 Triumph Healthcare Second Holdings LLC Second Lien Term Loan, 13.60%, 07/28/14 ............................ 997,500 Warner Chilcott Co., Inc. (Puerto Rico) 782,387 Dovonex Delayed Draw Term Loan, 7.62%, 01/18/12 ............................. 787,895 4,396,953 Tranche B Acquisition Date Term Loan, 7.49%, 01/18/12 .................. 4,426,720 540,396 Warner Chilcott Corp. Tranche C Acquisition Date Term Loan, 7.61%, 01/18/12 .................. 543,941 ------------- 120,244,818 ------------- HOUSING - BUILDING MATERIALS - 2.1% American Buildings Co. 1,544,641 Term Loan A, 8.86%, 12/31/08 ............................. 1,424,407 1,146,090 Term Loan B, 10.00%, 12/31/08 ............................ 1,077,324 See accompanying Notes to Financial Statements. | 7 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) HOUSING - BUILDING MATERIALS (CONTINUED) 2,120,000 Associated Materials Inc. Term Loan, 8.18%, 08/29/10 .................. 2,134,586 7,314,079 Atrium Cos., Inc. Closing Date Term Facility, 8.13%, 06/21/12 ............................. 7,364,400 Custom Building Products, Inc. 1,880,825 First Lien Term Loan, 7.61%, 10/20/11 ............................. 1,888,273 1,250,000 Second Lien Term Loan, 9.53%, 04/20/12 ............................. 1,251,825 1,765,667 DESA LLC Term Loan, 11.12%, 11/26/11 ................. 1,589,100 1,000,000 Jacuzzi Brands Corp. First Lien Term Loan B, 02/07/14 (b) ........ 1,007,500 4,500,000 Nortek, Inc. Term Loan, 08/27/11 (b) ..................... 4,531,860 1,588,840 PGT Industries, Inc. First Lien Tranche A-2 Term Loan, 8.38%, 02/14/12 ............................. 1,601,741 Ply Gem Industries, Inc. 264,256 Canadian Term Loan, 8.37%, 08/15/11 ............................. 268,109 3,963,844 U.S. Term Loan, 8.37%, 08/15/11 ............. 4,021,636 1,000,000 Standard Pacific Corp. Term Loan B, 6.86%, 05/05/13 ................ 1,000,620 3,578,688 Stile Acquisition Corp. (Canada) Canadian Term Loan, 7.36%, 04/06/13 ............................. 3,573,106 9,378,736 Stile U S Acquisition Corp. U S Term Loan, 7.36%, 04/06/13 (b) .......... 9,379,674 ------------- 42,114,161 ------------- HOUSING - REAL ESTATE DEVELOPMENT - 3.5% 6,000,000 Edge Star Partners LLC First Lien Term Loan, 9.36%, 11/18/07 ............................. 6,000,000 EH/Transeastern, LLC/TE TOUSA 4,000,000 Term Loan, 8.25%, 08/01/08 (e) .............. 4,060,000 5,500,000 Term Loan, 10.75%, 08/01/08 ................. 3,052,500 Ginn LA Conduit Lender, Inc. 1,570,079 First Lien Tranche A Credit-Linked Deposit, 8.29%, 06/08/11 .................... 1,549,480 3,408,499 First Lien Tranche B Term Loan, 8.17%, 06/08/11 ............................. 3,359,519 2,143,382 Giraffe Intermediate, LLC Mezzanine Note A-1, 7.08%, 08/09/07 ............................. 2,143,382 6,574,553 Lake at Las Vegas Joint Venture First Lien Term Loan, 10.11%, 11/01/09 ............................ 6,582,771 3,960,000 LBREP/L-Suncal Master I LLC First Lien, 8.61%, 01/18/10 ................. 3,979,800 1,000,000 LNR Property Corp. Initial Tranche B Term Loan, 07/12/11 (b) ................................ 1,008,380 Morningside Assisted Living 1,995,167 Mezzanine Loan, 12.63%, 10/12/08 ............................ 2,000,155 1,496,375 Senior Mortgage Loan, 8.38%, 10/12/08 ............................. 1,500,116 606,618 MPO Intermediate LLC Mezzanine Note A-1, 7.08%, 08/09/07 ............................. 606,618 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- HOUSING - REAL ESTATE DEVELOPMENT (CONTINUED) 1,454,555 November 2005 Land Investors, LLC First Lien Term Loan, 8.12%, 05/09/11 ............................. 1,463,646 Pro-Build Holdings, Inc. 460,000 Delayed Draw Term Loan, 06/29/13 (b) ................................ 460,575 540,000 Initial Term Loan, 06/29/13 (b) ............. 540,675 1,995,000 Shea Capital I, LLC Facility B, 7.35%, 10/27/11 ................. 1,992,506 Tamarack Resort LLC 2,697,248 Tranche A Credit-Linked Deposit, 8.61%, 05/19/11 ............................. 2,703,991 4,015,527 Tranche B Term Loan, 8.61%, 05/19/11 ............................. 4,025,566 16,689,351 Westgate Investments, LLC Senior Secured Loan, 13.00%, 07/15/10 (i) ........................ 16,689,351 4,000,000 Weststate Land Partners LLC First Lien Term Loan, 8.57%, 05/01/07 ............................. 4,030,000 4,000,000 Woodlands Commercial Properties Co., LP Bridge Loan, 8.12%, 02/28/08 ................ 4,005,000 ------------- 71,754,031 ------------- INFORMATION TECHNOLOGY - 4.3% 3,000,000 Applied Systems, Inc. Term Loan, 8.18%, 09/26/13 .................. 3,020,640 1,000,000 Aspect Software, Inc. Second Lien Term Loan, 12.38%, 07/05/12 ............................ 1,005,000 1,925,000 Billing Services Group North America, Inc. U.S. Term Loan, 8.13%, 01/01/00 ............................. 1,927,406 480,286 Bridge Information Systems, Inc. Multidraw Term Loan, 07/07/13 (d) (e) ............................ 36,021 1,985,006 Data Transmission Network Corp. First Lien Tranche B Term Loan, 8.48%, 03/10/13 ............................. 1,994,931 992,470 Deltek Systems, Inc. Term Loan, 7.62%, 04/22/11 .................. 997,432 20,000,000 Freescale Semiconductor, Inc. Term Loan, 7.37%, 12/02/13 .................. 20,181,200 2,000,000 GXS Corp. Second Lien Term Loan, 7.38%, 12/20/11 ............................. 2,030,000 Infor Enterprise Solutions Holdings, Inc. 3,420,000 Delayed Draw Term Loan, 9.12%, 07/28/12 ............................. 3,454,200 6,555,000 Initial U.S. Term Facility, 9.12%, 07/28/12 ............................. 6,617,797 5,000,000 Stage One U.S. Bridge Facility, 11.50%, 07/29/13 (e) ........................ 5,000,000 IPC Systems, Inc. 997,500 First Lien Tranche B-1 Term Loan, 7.86%, 09/30/13 ............................. 1,009,969 1,500,000 Second Lien Term Loan, 11.87%, 09/29/14 ............................ 1,521,570 2,000,000 MediMedia USA, Inc. Tranche B Term Loan, 8.75%, 10/05/13 ............................. 2,010,000 8 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) 8,000,000 NameMedia, Inc. Term Loan, 11.37%, 08/31/08 ................. 8,040,000 1,000,000 Nuance Communications, Inc. Term Loan, 03/31/13 (b) ..................... 1,003,120 1,382,366 ON Semiconductor Corp. Term Loan H, 7.62%, 12/15/11 ................ 1,391,572 3,500,000 Open Solutions, Inc. Term Loan, 7.49%, 01/23/14 (b) .............. 3,537,205 4,750,000 PGS Solutions, Inc. Term Loan, 7.61%, 02/14/13 .................. 4,815,313 2,000,000 Sitel, LLC U.S. Term Loan, 7.84%, 01/30/14 ............. 2,017,520 7,000,000 Spansion LLC Term Loan B, 8.36%, 11/01/12 ................ 7,085,330 7,325,158 SunGard Data Systems, Inc. U S Term Loan, 7.82%, 02/11/13 (b) ......................... 7,408,372 2,000,000 Transfirst Holdings, Inc. Second Lien Term Loan, 11.62%, 08/15/13 ............................ 2,015,000 ------------- 88,119,598 ------------- MANUFACTURING - 1.5% 1,355,991 AIRXCEL, Inc. First Lien Term Loan, 8.38%, 08/31/12 ............................. 1,362,771 1,910,000 Baldor Electric Co. Term Loan, 7.19%, 01/31/14 .................. 1,910,000 1,493,947 Coinmach Corp. Tranche B-1 Term Loan, 7.88%, 12/16/12 ............................. 1,508,573 1,500,000 Dundee Holdco Ltd. (United Kingdom) U.S. Term Loan B1, 8.07%, 02/17/14 ............................. 1,508,430 828,947 Euramax International Holdings B.V. (Netherlands) Second Lien European Term Loan, 12.37%, 06/29/13 ............................ 822,730 Euramax International, Inc. 2,062,482 First Lien Domestic Term Loan, 8.19%, 06/29/12 ............................. 2,078,466 1,671,053 Second Lien Domestic Term Loan, 12.37%, 06/29/13 ............................ 1,691,941 FR Brand Acquisition Corp. 1,500,000 First Lien Term Loan B, 7.63%, 02/07/14 ............................. 1,514,685 1,000,000 Second Lien Term Loan, 11.38%, 02/07/15 ............................ 1,015,000 3,000,000 Generac Acquisition Corp. Second Lien Term Loan, 11.32%, 05/12/14 (b) ........................ 3,007,500 1,990,000 Global Petroleum, Inc. (SPI Petroleum) Term Loan, 9.85%, 07/26/13 .................. 1,999,950 492,437 Longyear Canada, ULC (Boart Longyear) First Lien Canadian Borrower Term Loan, 8.61%, 10/08/12 .................. 497,519 Longyear Global Holdings, Inc. (Boart Longyear) 530,316 First DrillCorp Delayed Draw Term Loan, 8.61%, 10/08/12 .................. 535,789 4,962,247 First Lien U.S. Term Loan, 8.61%, 10/08/12 ............................. 5,021,198 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- MANUFACTURING (CONTINUED) Longyear Global Holdings, Inc. (continued) 4,000,000 Second Lien Term Loan, 12.36%, 10/07/13 ............................ 4,070,000 1,769,247 Polypore, Inc. U.S. Term Loan, 8.32%, 11/12/11 ............. 1,773,670 ------------- 30,318,222 ------------- METALS/MINERALS - OTHER METALS/MINERALS - 0.9% 5,000,000 Kaiser Aluminum & Fabricated Products, LLC Term Loan, 9.61%, 04/24/11 .................. 5,025,000 8,094,024 Murray Energy Corp. Tranche B Term Loan, 8.40%, 01/28/10 ............................. 8,195,200 767,143 Oglebay Norton Co. Tranche B Term Loan, 7.87%, 07/31/12 ............................. 774,814 4,466,250 Universal Buildings Products, Inc. Term Loan, 8.86%, 04/28/12 .................. 4,443,919 ------------- 18,438,933 ------------- METALS/MINERALS - STEEL - 0.1% 1,484,925 CII Carbon LLC Term Loan B, 7.38%, 08/23/12 ................ 1,496,062 829,167 Standard Steel, LLC Initial Term Loan, 7.87%, 06/30/12 .......... 836,422 ------------- 2,332,484 ------------- RETAIL - 8.6% 34,757,936 Blockbuster Entertainment Corp. Tranche B Term Loan, 8.90%, 08/20/11 ............................. 35,261,926 30,575,741 Burlington Coat Factory Warehouse Corp. Term Loan, 7.61%, 05/28/13 (b) .............. 30,618,853 950,306 Dollarama Group LP (Canada) Term Loan B, 7.38%, 11/18/11 ................ 958,621 2,479,675 Eddie Bauer, Inc. Term Loan, 11.50%, 06/21/11 ................. 2,491,304 1,000,000 Harbor Freight Tools USA, Inc. Tranche C Term Loan, 7.61%, 02/12/13 ............................. 1,008,120 Home Interiors & Gifts, Inc. 2,407,902 Initial Term Loan, 10.32%, 03/31/11 ......... 1,781,848 25,541,353 Initial Term Loan, 10.41%, 03/31/11 ......... 18,900,602 1,000,000 Mattress Holding Corp. Term Loan, 7.61%, 01/18/14 .................. 1,000,000 8,748,906 Michaels Stores, Inc. Term Loan, 8.13%, 10/31/13 .................. 8,845,319 Movie Gallery, Inc. 330,296 Term Loan A, 9.87%, 04/27/11 ................ 328,578 58,097,159 Term Loan B, 10.62%, 04/27/11 (b) ........... 57,915,896 1,348,945 Neiman Marcus Group, Inc. (The) Term Loan, 7.60%, 04/06/13 .................. 1,366,373 2,000,000 PetCo Animal Supplies, Inc. Term Loan, 8.10%, 10/28/13 .................. 2,026,240 Sally Holdings, LLC 1,500,000 Term Loan A, 11/01/12 (b) ................... 1,502,820 1,500,000 Term Loan B, 7.86%, 11/18/13 ................ 1,517,700 995,000 Sports Authority, Inc., The Term Loan B, 7.61%, 05/03/13 ................ 999,667 Totes Isotoner Corp. 3,500,000 First Lien Term Loan, 7.82%, 01/31/13 (b) ......................... 3,522,610 See accompanying Notes to Financial Statements. | 9 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) RETAIL (CONTINUED) Totes Isotoner Corp. (continued) 1,000,000 Second Lien Term Loan, 11.32%, 01/31/14 ............................ 1,010,000 4,000,000 Toys "R" Us Tranche B Term Loan, 9.61%, 07/19/12 ............................. 4,125,320 1,000,000 TRU 2005 Holding Co. I, Ltd Term Loan, 8.33%, 12/09/08 .................. 1,010,110 ------------- 176,191,907 ------------- SERVICE - ENVIRONMENTAL SERVICES - 0.7% 3,122,340 Alliance Laundry Systems LLC Term Loan, 7.57%, 01/27/12 (b) .............. 3,151,623 1,000,000 Brickman Group Holdings, Inc. Tranche Loan B, 01/23/14 (b) ................ 1,005,630 596,848 Duratek, Inc. Term Loan B, 7.63%, 06/07/13 ................ 604,869 EnergySolutions, LLC 62,893 Synthetic Letter of Credit, 7.57%, 06/07/13 ............................. 63,738 1,318,039 Term Loan, 7.76%, 09/30/11 .................. 1,335,753 Safety-Kleen Systems, Inc. 1,322,034 Synthetic Letter of Credit, 7.88%, 08/02/13 ............................. 1,325,339 4,666,271 Term Loan B, 7.88%, 08/02/13 ................ 4,677,937 Valleycrest Holding Co. (VCC Holdco) 1,995,000 First Lien Term Loan, 7.82%, 10/04/13 ............................. 2,016,187 1,000,000 Second Lien Term Loan, 10.82%, 04/04/14 ............................ 1,008,440 ------------- 15,189,516 ------------- SERVICE - OTHER SERVICES - 0.9% 2,000,000 Cydcor, Inc. First Lien Tranche B Term Loan, 10.50%, 02/05/13 ............................ 1,990,000 Education Management LLC 3,500,000 Term Loan C, 7.38%, 06/01/13 ................ 3,500,000 3,478,759 Tranche B Term Loan, 7.88%, 06/01/13 ............................. 3,513,547 Koosharem Corp. 2,962,500 First Lien Term Loan, 9.83%, 06/30/12 ............................. 2,962,500 1,000,000 Second Lien Term Loan, 13.87%, 06/30/13 ............................ 990,000 4,000,000 NES Rentals Holdings, Inc. Second Lien Permanent Term Loan, 12.13%, 07/20/13 ............................ 4,060,000 1,660,844 United Rentals, Inc. Initial Term Loan, 7.32%, 02/14/11 ............................. 1,682,385 ------------- 18,698,432 ------------- TELECOMMUNICATIONS - 2.2% 6,636,373 Advanced Micro Devices, Inc. Term Loan, 7.62%, 12/31/13 .................. 6,704,595 2,000,000 American Messaging Services, Inc. Senior Secured Note, 11.62%, 09/03/08 ............................ 2,015,000 Global Tel Link Corp. 65,217 Synthetic Deposit, 8.82%, 02/13/08 (c) ......................... 66,114 782,609 Term Facility, 8.82%, 02/13/08 .............. 793,370 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- TELECOMMUNICATIONS (CONTINUED) 3,990,000 Intelsat Corp. Tranche B-2 Term Loan, 7.87%, 01/03/14 ............................. 4,034,888 5,000,000 Level 3 Financing, Inc. Term Loan, 8.40%, 12/01/11 .................. 5,044,800 3,000,000 Revolution Studios Tranche B Term Loan, 9.07%, 12/21/14 ............................. 3,022,500 5,959,537 Sorenson Communications, Inc. Tranche B Term Loan, 8.36%, 08/16/13 ............................. 6,010,432 742,500 Stratos Global Corp./Stratos Funding LP (Canada) Term B Facility, 8.10%, 02/13/12 ............ 748,692 5,498,594 Time Warner Telecom Holdings, Inc. Term Loan B, 7.32%, 01/07/13 (b) ............ 5,546,706 2,000,000 Unity Media Mezzanine Loan, 10/15/11 (b) ................ 2,017,500 Wind Acquisition Holdings Finance S.A. (Italy) 2,500,000 PIK Term Loan USD, 01/01/13 (b) ............. 2,500,000 6,014,651 PIK Term Loan USD, 12.56%, 12/21/11 ............................ 6,210,127 ------------- 44,714,724 ------------- TELECOMMUNICATIONS - CLEC - 0.2% 4,937,500 Consolidated Communications, Inc. Term Loan D, 7.36%, 10/14/11 ................ 4,980,703 ------------- TELECOMMUNICATIONS - DATA/INTERNET - 0.0% 1,000,000 Pine Tree Holdings/Country Road Communications, Inc. Second Lien Tranche B Term Loan, 13.15%, 07/15/13 ................. 1,010,000 ------------- TELECOMMUNICATIONS - FIBER/LONG DISTANCE - 0.4% 5,000,000 FairPoint Communications, Inc. Replacement B Term Loan, 7.13%, 02/08/12 ............................. 5,027,350 993,333 Hawaiian Telcom Communications, Inc. Tranche B Term Loan, 7.62%, 10/31/12 ............................. 998,211 1,000,000 Qwest Corp. Tranche B Term Loan, 6.95%, 06/30/10 (i) ......................... 1,024,640 1,000,000 WestCom Corp. Second Lien Term Loan, 12.36%, 06/17/11 ............................ 1,008,120 ------------- 8,058,321 ------------- TRANSPORTATION - AUTO - 6.6% 2,103,956 Autocam Corp. Domestic Revolver, 9.37%, 06/21/09 (c) ......................... 2,082,916 16,000,000 Dana Corp. DIP Term Loan, 7.82%, 04/13/08 .............. 16,041,760 Delphi Corp. 2,500,000 First Lien DIP Term Loan (Tranche B), 7.61%, 10/08/07 (b) ............ 2,517,510 36,500,000 Second Lien DIP Term Loan (Tranche C), 8.13%, 12/31/07 ................ 36,787,620 10 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) TRANSPORTATION - AUTO (CONTINUED) 4,500,000 Environmental Systems Products Holdings, Inc. Second Lien Term Loan, 15.37%, 12/12/10 ............................ 2,475,000 Federal-Mogul Corp. 1,270,249 Supplemental Revolver, 9.07%, 07/01/07 ............................. 1,271,837 1,048,750 Tranche C Term Loan, 03/09/08 (d) ................................ 1,045,037 40,000,000 Ford Motor Co. Term Loan, 8.36%, 12/16/13 .................. 40,509,600 11,000,000 General Motors Corp. Secured Term Loan, 7.70%, 11/29/13 ............................. 11,147,400 2,000,000 Gleason Works (The) Second Lien Term Loan, 10.88%, 12/30/13 ............................ 2,030,840 5,500,000 Goodyear Tire & Rubber Co. Third Lien Term Loan, 8.89%, 03/01/11 ............................. 5,581,125 5,124,728 Key Plastics LLC Term Loan B, 8.84%, 06/29/10 (i) ............ 5,201,599 5,000,000 Pep Boys, The - Manny, Moe & Jack Term Loan, 7.37%, 10/27/13 (b) .............. 5,059,400 1,304,615 Stanadyne Corp. Term Loan, 8.82%, 08/02/10 .................. 1,311,138 1,490,000 Vanguard Car Rental USA Holding, Inc. Term Loan, 8.36%, 06/14/13 .................. 1,506,599 ------------- 134,569,381 ------------- TRANSPORTATION - LAND - 0.4% Quality Distribution, Inc. 1,427,481 Synthetic Letters of Credit, 5.26%, 11/13/09 ............................. 1,431,050 6,991,376 Term Loan, 8.32%, 11/13/09 (e) .............. 7,008,815 ------------- 8,439,865 ------------- UTILITIES - 3.9% 5,940,000 Calpine Construction Finance Co., LP First Lien Term Loan, 11.33%, 08/26/09 ............................ 6,207,300 Calpine Corp. 1,292,355 First Lien DIP Revolver, 7.62%, 12/20/07 ............................. 1,299,890 233,749 Second Lien Term Loan, 07/16/07 (d) ................................ 262,528 9,750,000 Second Lien Term Loan B, 10.35%, 07/16/07 ............................ 10,950,420 Coleto Creek Power, LP 4,975,000 Second Lien Term Loan, 9.37%, 06/28/13 ............................. 4,856,844 318,471 Synthetic Facility, 5.27%, 06/28/13 ............................. 320,860 4,658,121 Term Loan, 8.12%, 06/28/13 .................. 4,693,057 Covanta Energy Corp. 3,750 Delayed Draw Term Loan, 9.50%, 06/30/12 ............................. 3,770 659,794 Funded Letter of Credit, 5.38%, 02/09/14 ............................. 663,508 1,340,206 Term Loan, 6.88%, 02/09/14 .................. 1,347,470 4,000,000 GBGH, LLC (U S Energy) First Lien Term Loan, 10.86%, 08/07/13 ............................ 4,010,000 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- UTILITIES (CONTINUED) 1,500,000 HCP Acquisition, Inc. (Canada) First Lien Term Loan, 02/13/14 (b) ................................ 1,537,500 500,000 La Paloma Generating Co. LLC Second Lien Term Loan, 8.87%, 08/16/13 ............................. 505,210 Magnolia Energy LP 30,043 Additional PCLC Facility, 12/14/11 (b) ................................ 29,668 4,504,913 Facility A, 12/14/11 (b) .................... 4,448,602 465,044 Facility B, 12/14/11 (b) .................... 459,230 1,000,000 Mirant North America, LLC Term Loan, 01/03/13 (b) ..................... 1,005,000 NATG Holdings LLC 376,135 Credit-Linked Certificate of Deposit, 01/23/09 (d) ....................... 327,238 1,001,749 Term Loan A, 01/23/09 (d) ................... 177,810 733,455 Term Loan B-1, 01/23/10 (d) ................. 130,188 72,363 Term Loan B2, 01/23/10 (d) .................. 68,021 NRG Energy, Inc. 2,413,620 Credit Linked Certificate of Deposit, 7.36%, 02/02/13 ............................. 2,437,322 4,268,769 Term Loan, 7.36%, 02/01/13 (b) .............. 4,316,536 4,227,632 Plum Point Energy Associates, LLC Second Lien Term Loan, 10.61%, 09/14/14 ............................ 4,333,323 2,000,000 Primary Energy Operations LLC Term Loan, 8.12%, 08/24/09 .................. 2,005,640 Reliant Energy, Inc. 2,857,143 New Term Loan, 7.73%, 12/01/10 ............................. 2,889,029 2,142,857 Pre-Funded Letter of Credit, 5.20%, 12/01/10 ............................. 2,168,486 4,487,632 Riverside Energy Center LLC Term Loan, 9.61%, 06/24/11 .................. 4,599,823 Rocky Mountain Energy Center LLC 361,073 Credit-Linked Certificate of Deposit, 5.26%, 06/24/11 .................... 369,197 2,857,277 Term Loan, 9.61%, 06/24/11 .................. 2,928,709 TECO Panda - Union Power Partners, L.P. 1,297,170 Tranche A Term Loan, 06/01/12 (b) (e) ............................ 1,893,573 1,245,283 Tranche B Term Loan, 06/01/20 (b) (e) ............................ 1,817,830 TECO Panda Generating Co. - Gila River Power L.P. 2,205,189 Tranche A Term Loan, 9.00%, 06/01/12 (b) (e) ..................... 3,219,075 2,125,358 Tranche B Term Loan, 9.00%, 06/01/20 (b) (e) ..................... 3,094,952 ------------- 79,377,609 ------------- WIRELESS - CELLULAR/PCS - 4.7% 2,925,000 Cellular South, Inc. Term Loan, 7.13%, 05/04/11 .................. 2,939,625 7,645,000 Centennial Cellular Operating Co. Term Loan, 5.92%, 02/09/11 .................. 7,718,545 38,307,500 Cricket Communications, Inc. Term B Facility, 8.11%, 06/16/13 ............ 38,714,326 Insight Midwest Holdings, LLC 1,375,000 B Delayed Draw Term Loan, 7.61%, 04/06/14 (b) ......................... 1,389,617 6,375,000 B Initial Term Loan, 7.61%, 04/06/14 (b) ......................... 6,445,954 3,428,302 Term Loan B, 7.36%, 04/07/14 (b) ............ 3,467,829 See accompanying Notes to Financial Statements. | 11 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) WIRELESS - CELLULAR/PCS (CONTINUED) 1,496,250 Maritime Telecommunications Network, Inc. First Lien Term Loan, 8.10%, 05/11/12 ............................. 1,494,380 MetroPCS Wireless, Inc. 9,000,000 New Tranche B Term Loan, 7.63%, 11/04/13 (b) ......................... 9,097,403 23,940,000 Tranche B Term Loan, 7.88%, 11/04/13 ............................. 24,203,819 ------------- 95,471,498 ------------- Total Senior Loan Notes (Cost $1,599,616,321) ....................... 1,608,313,074 ------------- FOREIGN DENOMINATED SENIOR LOAN NOTES (a) - 12.1% DENMARK - 0.6% EUR Nordic Telephone Co. Holdings APS 3,750,000 Euro Facility B2, 5.54%, 04/10/14 ........... 5,002,857 3,750,000 Euro Facility C2, 6.04%, 04/10/15 ........... 5,019,104 2,000,000 Nyco Holdings 3 ApS Facility D (Second Lien), 8.70%, 12/29/16 ............................. 2,672,602 ------------- 12,694,563 ------------- FRANCE - 2.1% EUR 2,712,600 Autocam France, S.a.r.L. Revolver, 6.96%, 06/21/09 ................... 3,547,381 Ypso Holding SA 133,622 Capex Term Loan, 2.25%, 12/15/12 (c) ......................... 175,340 5,886,228 Eur A (Acq) 1 Facility, 5.49%, 06/06/13 ............................. 7,736,545 1,307,335 Eur A (Acq) 2 Facility, 5.49%, 06/06/13 ............................. 1,715,494 6,342,536 Eur A (Recap) 1 Facility, 5.49%, 06/06/13 ............................. 8,309,566 77,009 Eur A (Recap) 2 Facility, 5.75%, 06/06/13 ............................. 100,892 3,149,824 Eur B (Acq) 1 Facility, 5.87%, 06/06/14 ............................. 4,155,980 5,139,187 Eur B (Acq) 2 Facility, 5.87%, 06/06/14 ............................. 6,780,810 73,323 Eur B (Acq) 2 Facility, 6.11%, 06/06/14 ............................. 96,791 8,161,913 Eur B (Recap) 1 Facility, 5.87%, 06/06/14 ............................. 10,774,269 ------------- 43,393,068 ------------- GERMANY - 1.7% EUR 4,000,000 Iesy Hessen/Gmbh & Co. KG Euro Senior Secured Term Loan, 6.63%, 10/15/11 ............................. 5,330,040 2,500,000 Kabel Baden Wurttemburg GH & CO. KG Second Lien Facility, 12/09/15 (b) .......... 3,344,121 Kabel Baden Wurttemburg GMBH & CO. KG 1,826,284 Term B Facility, 5.97%, 06/09/14 ............ 2,432,239 1,826,284 Term C Facility, 6.47%, 06/09/15 ............ 2,439,597 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- GERMANY (CONTINUED) EUR 14,900,000 P7S1 Holding II S.A.R.L - GMP Facility B, 7.59%, 07/08/11 ................. 19,737,486 Prysmian Cables & Systems, Inc. 875,000 Euro Term Loan B, 6.00%, 08/04/12 ............................. 1,161,254 875,000 Euro Term Loan C2, 5.57%, 08/04/12 ............................. 1,167,033 ------------- 35,611,770 ------------- ITALY - 0.7% EUR 4,000,000 H3G S.p.A. Euro Term Loan A1, 12/30/11 (b) ............. 5,204,549 Wind Telecommunicatione S.p.A. 3,302,546 A1 Term Loan Facility, 5.27%, 05/26/12 ............................. 4,375,591 1,750,000 B1 Term Loan Facility, 5.63%, 05/26/13 ............................. 2,330,806 1,750,000 C1 Term Loan Facility, 6.13%, 05/26/14 ............................. 2,335,614 ------------- 14,246,560 ------------- NETHERLANDS - 1.9% EUR Amsterdamse Beheer- En Consultingmaatschappij B.V. 4,388,443 Casema B1 Term Loan, 6.17%, 09/12/14 ............................. 5,877,266 2,279,577 Casema B2 Term Loan, 6.17%, 09/12/14 ............................. 3,054,512 6,668,019 Casema C Term Loan, 6.67%, 09/12/15 ............................. 8,961,216 1,500,000 Casema D Term Loan Second Lien, 7.92%, 03/12/16 ............................. 2,031,716 5,150,162 Kabelcom B Term Loan, 6.11%, 09/12/14 ............................. 6,900,944 5,150,162 Kabelcom C Term Loan, 6.11%, 09/12/15 ............................. 6,909,380 1,000,000 Kabelcom D Term Loan Second Lien, 6.11%, 03/12/16 ....................... 1,354,477 YBR Acquisition B.V. 806,733 Facility B2 Term Loan, 5.82%, 06/30/13 ............................. 1,081,726 1,250,000 Facility C2 Term Loan, 5.64%, 06/30/14 ............................. 1,679,458 ------------- 37,850,695 ------------- SPAIN - 0.3% EUR Gasmedi 2000 S.A. / Nattai, S.L.U. 1,666,667 Tranche B Term Loan, 6.65%, 08/11/14 ............................. 2,207,090 1,666,667 Tranche C Term Loan, 7.15%, 08/11/15 ............................. 2,207,090 1,666,667 Tranche E Second Lien Term Loan, 8.90%, 02/11/16 ............................. 2,229,106 ------------- 6,643,286 ------------- 12 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- FOREIGN DENOMINATED SENIOR LOAN NOTES (CONTINUED) UNITED KINGDOM - 4.8% GBP 4,000,000 Airport Development & Investment Ltd. (BAA) Facility B, 9.12%, 04/07/11 ................. 7,865,954 1,000,000 Ansco UK Finance CO. Ltd. Tranche B Term Loan, 8.49%, 03/08/12 ............................. 1,964,646 1,250,000 Aramark Corp. U K Term Loan, 01/26/14 (b) ................. 2,480,305 1,364,688 Champion Home Builders Co. Term Loan, 7.93%, 10/31/12 .................. 2,667,756 2,755,472 Dollar Financial UK Limited UK Borrower Euro Term Loan, 6.38%, 10/31/12 ............................. 3,676,243 869,822 Eggborough Power Ltd. Term Loan, 03/31/22 (b) (i) ................. 5,966,208 Forgings International Ltd. (Firth Rixon) 500,000 Term B1 (GBP), 7.56%, 09/22/14 .............. 992,729 500,000 Term C1 (GBP), 8.01%, 09/22/15 .............. 997,629 Havana Bidco Ltd. 602,543 Facility B, 7.65%, 08/31/14 ................. 1,183,783 2,176,700 Facility C, 8.24%, 08/31/15 ................. 4,297,774 3,000,000 Facility D (Second Lien), 10.24%, 02/28/16 ............................ 6,011,524 3,523,711 Mezzanine Loan, 14.15%, 08/31/16 ............................ 7,095,486 Highland Acquisitions Ltd. 1,000,000 Facility B, 8.13%, 01/31/14 ................. 1,959,747 1,000,000 Facility C, 8.63%, 01/31/15 ................. 1,959,747 1,000,000 Mezzanine Facility, 15.42%, 01/31/16 ............................ 1,959,747 Mobileserv Ltd. (Phones 4U) 625,000 Facility B, 7.76%, 09/22/14 ................. 1,228,198 625,000 Facility C, 8.26%, 09/22/15 ................. 1,230,709 Peacock Group (The) 2,250,000 Facility B, 8.19%, 10/30/13 ................. 4,436,990 2,250,000 Facility C, 7.94%, 10/30/14 ................. 4,436,990 4,959,184 PlayPower, Inc. Add-On Term Loan, 8.17%, 12/18/09 (b) ......................... 9,791,636 2,777,622 SunGard U K Holdings Ltd. U.K. Term Loan, 7.71%, 02/11/13 (b) ......................... 5,501,245 Towergate Partnership Ltd. 1,875,000 Facility A, 7.90%, 10/31/12 ................. 3,715,864 1,875,000 Facility B, 8.40%, 10/31/13 ................. 3,734,237 Trinitybrook PLC 2,500,000 Term Loan B1, 7.66%, 07/31/13 ............... 4,917,740 2,500,000 Term Loan C1, 8.16%, 07/31/14 ............... 4,933,369 1,750,000 Virgin Media, Inc. GBP Tranche C Term Loan, 8.48%, 03/03/13 ............................. 3,525,310 ------------- 98,531,566 ------------- Total Foreign Denominated Senior Loan Notes (Cost $237,066,712) ...................... 248,971,508 ------------- SHARES VALUE ($) - -------------------- ------------- CORPORATE NOTES AND BONDS (f) (i) - 0.0% TRANSPORTATION - AUTO - 0.0% Key Plastics Holdings, Inc. 72,552 Junior Secured Subordinated Notes, 18.32%, 04/26/07 ..................... 71,397 101,433 Senior Secured Subordinated Notes, 7.00%, 04/26/07 ...................... 99,841 ------------- 171,238 ------------- Total Corporate Notes and Bonds (Cost $171,273) .......................... 171,238 ------------- COMMON STOCKS (g) - 1.6% MANUFACTURING - 0.0% 12 GenTek, Inc., B Shares ......................... 413 ------------- UTILITIES - 1.3% 12,470 CenterPoint Energy, Inc. ....................... 210,868 731,628 Mirant Corp. ................................... 27,260,459 ------------- 27,471,327 ------------- WIRELESS - CELLULAR/PCS - 0.3% 76,137 Leap Wireless International, Inc. .............. 5,144,577 ------------- Total Common Stocks (Cost $21,307,404) ....................... 32,616,317 ------------- PREFERRED STOCK - 0.0% MANUFACTURING - 0.0% 14,382 Superior Telecom, Inc., Series A ............... 14,382 ------------- Total Preferred Stock (Cost $14,382) ........................... 14,382 ------------- CLAIMS (h) - 0.0% UTILITIES - 0.0% 17,500,000 Mirant Corp. ................................... 656,250 ------------- Total Claims (Cost $2) ................................ 656,250 ------------- TOTAL INVESTMENTS - 92.1% ...................................... 1,890,742,769 ------------- (cost of $1,858,176,094) (j) OTHER ASSETS & LIABILITIES, NET - 7.9% ......................... 161,070,589 ------------- NET ASSETS - 100.0% ............................................ 2,051,813,358 ============= - ---------- Forward foreign currency contracts outstanding as of February 28, 2007 were as follows: PRINCIPAL NET CONTRACTS AMOUNT UNREALIZED TO BUY OR COVERED BY APPRECIATION TO SELL CURRENCY CONTRACTS EXPIRATION (DEPRECIATION) - ------------------------------------------------------------------------ Sell EUR 50,000,000 06/06/07 $ 713,681 Sell EUR 40,000,000 07/10/07 (846,589) Sell EUR 34,000,000 08/01/07 (881,903) Sell EUR 21,000,000 08/02/07 (668,942) Sell GBP 25,000,000 06/07/07 356,285 Sell GBP 15,000,000 07/10/07 (464,220) ----------- ($1,791,688) =========== See accompanying Notes to Financial Statements. | 13 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY (a) Senior loans in which the Fund invests generally pay interest at rates which are periodically predetermined by reference to a base lending rate plus a premium. (Unless otherwise identified by footnote (i), all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate ("LIBOR") or (iii) the certificate of deposit rate. Rate shown represents the weighted average rate at February 28, 2007. Senior loans, while exempt from registration under the Security Act of 1933, as amended, contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual maturity may be substantially less than the stated maturities shown. (b) All or a portion of this position has not settled. Contract rates do not take effect until settlement date. (c) Senior loan notes have additional unfunded loan commitments. See Note 9. (d) The issuer is in default of certain debt covenants. Income is not being accrued. (e) Loan or a portion of the loan is held on participation. See Note 7. (f) Represents fair value as determined in good faith under the direction of the Board of Trustees. (g) Non-income producing security. (h) Security is the result of company restructuring that will be converted into equity upon the completion of court proceedings. (i) Fixed rate senior loan or corporate note. (j) Cost for U.S. federal income tax purposes is $1,858,604,347. CLEC Competitive Local Exchange Carrier DIP Debtor in Possession EUR Euro Currency GBP Great Britain Pound FOREIGN SENIOR LOAN NOTES INDUSTRY CONCENTRATION TABLE (% of Total Net Assets) Cable-International Cable ...................................... 4.2% Broadcasting ................................................... 1.9% Retail ......................................................... 1.3% Telecommunication .............................................. 1.0% Financial ...................................................... 0.5% Aerospace-Aerospace/Defense .................................... 0.5% Gaming/Leisure-Other Leisure ................................... 0.5% Healthcare ..................................................... 0.5% Media/Telecom-Telecommunciation ................................ 0.4% Information Technology ......................................... 0.4% Utilities ...................................................... 0.3% Transportation-Auto ............................................ 0.2% Diversified Media .............................................. 0.1% Housing-Real Estate ............................................ 0.1% Food/Tobacco-Producers.......................................... 0.1% Forest Products-Paper........................................... 0.1% ---- 12.1% ==== 14 | See accompanying Notes to Financial Statements. STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 (UNAUDITED) HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY ($) - -------------------------------------------------------------------------------- ASSETS: Investments, at value (Cost $1,858,176,094) ................. 1,890,742,769 Cash ........................................................ 322,230,817 Foreign currency (Cost $12,294,481) ......................... 12,480,869 Receivable for: Investments sold ......................................... 54,416,443 Dividend and interest receivable ......................... 7,169,933 ------------- Total assets .......................................... 2,287,040,831 ------------- LIABILITIES: Deferred Facility fees (Note 2) ............................ 1,086 Net discount and unrealized appreciation/(depreciation) on unfunded transactions (Note 9) ........................ 309,201 Net unrealized appreciation/(depreciation) on forward foreign currency contracts ............................... 1,791,688 Payable for: Investments purchased .................................... 232,295,613 Investment advisory fee payable (Note 4) ................. 646,687 Trustees' fees (Note 4) .................................. 12 Accrued expenses and other liabilities ...................... 183,186 ------------- Total liabilities ..................................... 235,227,473 ------------- TOTAL NET ASSETS ............................................... 2,051,813,358 ============= See accompanying Notes to Financial Statements. | 15 STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED)
($) - --------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Interest Income ............................................................................. 80,072,620 Dividends ................................................................................... 716 Facility and other fees ..................................................................... 7,304 -------------- Total investment income .................................................................. 80,080,640 -------------- EXPENSES: Investment advisory fee (Note 4) ............................................................ 3,875,974 Professional fees ........................................................................... 53,360 Accounting service fee ...................................................................... 211,393 Trustees' fees (Note 4) .................................................................... 10,161 Custodian fees .............................................................................. 32,154 Reports to shareholders ..................................................................... 16,937 -------------- Net operating expenses ................................................................... 4,199,979 Interest expense (Note 8) ................................................................... 170,729 Facility expense ............................................................................ 147,580 -------------- Net expenses ............................................................................. 4,518,288 -------------- Net investment income .................................................................... 75,562,352 -------------- NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS: Net realized gain/(loss) on investments ..................................................... 283,023 Net realized gain/(loss) on foreign currency transactions ................................... 1,630,493 Net change in unrealized appreciation/(depreciation) on investments ......................... 25,072,885 Net change in unrealized appreciation/(depreciation) on unfunded transactions ............... 49,549 Net change in unrealized appreciation/(depreciation) on forward foreign currency transactions ............................................................................. (1,791,688) Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency .......................................................... 329,761 -------------- Net realized and unrealized gain/(loss) on investments ................................... 25,574,023 -------------- Net increase in net assets resulting from operations ..................................... 101,136,375 ==============
16 | See accompanying Notes to Financial Statements. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
SIX MONTHS ENDED FEBRUARY 28, 2007 YEAR ENDED (UNAUDITED) AUGUST 31, 2006 ($) ($) ----------------- --------------- INCREASE IN NET ASSETS: FROM OPERATIONS: Net investment income ........................................................... 75,562,352 104,530,900 Net realized gain/(loss) on investments and foreign currency transactions ....... 1,913,516 12,363,756 Net change in unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign currency contracts and translation of assets and liabilities denominated in foreign currency .............................. 23,660,507 (1,281,401) ----------------- --------------- Net increase in net assets from operations ................................... 101,136,375 115,613,255 ----------------- --------------- TRANSACTIONS IN INVESTOR'S BENEFICIAL INTEREST: Contributions ................................................................... 552,444,058 817,426,901 Withdrawals ..................................................................... (328,579,303) (345,645,810) ----------------- --------------- Net increase from transactions in investor's beneficial interest ............. 223,864,755 471,781,091 ----------------- --------------- Total increase in net assets ................................................. 325,001,130 587,394,346 ----------------- --------------- NET ASSETS Beginning of period ............................................................. 1,726,812,228 1,139,417,882 ----------------- --------------- End of period ................................................................... 2,051,813,358 1,726,812,228 ================= ===============
See accompanying Notes to Financial Statements. | 17 STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED) HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY
($) - ------------------------------------------------------------------------------------------------------------- CASH FLOWS USED FOR OPERATING ACTIVITIES Net investment income .................................................................. 75,562,352 ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH AND FOREIGN CURRENCY USED FOR OPERATING ACTIVITIES Purchase of investments securities ..................................................... (1,034,134,567) Proceeds from disposition of investment securities ..................................... 818,829,952 Decrease in dividends, interest and fees receivable .................................... 10,847,491 Increase in receivable for investments sold ............................................ (35,513,125) Decrease in other assets ............................................................... 69,969 Decrease in deferred facility fees ..................................................... (4,214) Net amortization/(accretion) of premium/(discount) ..................................... (2,235,758) Increase in payable for investments purchased .......................................... 119,178,627 Increase in payables to related parties ................................................ 32,932 Increase in mark-to-market on realized and unrealized gain/(loss) on foreign currency .. 1,960,254 Decrease in other liabilities .......................................................... (319,903) --------------- Net cash and foreign currency flow from operating activities ........................ (45,725,990) --------------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES Proceeds from capital contributions .................................................... 552,444,058 Payment of capital withdrawals ......................................................... (328,579,303) --------------- Net cash flow provided by financing activities ...................................... 223,864,755 --------------- Net increase in cash and foreign currency ........................................... 178,138,765 --------------- CASH AND FOREIGN CURRENCY Beginning of the period ................................................................ 156,572,921 End of the period ...................................................................... 334,711,686 ===============
18 | See accompanying Notes to Financial Statements. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED) 2006 2005 2004 2003 2002 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA Total return 5.29%(e) 8.72% 6.54% 10.39% 11.68%(a) (2.20)% Operating expenses 0.46% 0.52% 0.51%(b) 0.52%(b) 0.57%(b) 0.55%(b) Interest expense and facility expense 0.04% 0.04% 0.05% --%(c) --%(c) 0.03% Net expenses 0.50% 0.56% 0.56%(b) 0.52%(b) 0.57%(b) 0.58%(b) Net investment income 8.33% 7.74% 5.69%(b) 4.45%(b) 5.96%(b) 6.42%(b(d) Portfolio turnover rate 46%(e) 64% 75% 97% 75% 70% - ---------- (a) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Portfolio's return. (b) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (c) Rounds to less than 0.01%. (d) Effective September 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premiums and discounts on debt securities. The effect of this change for the year ended August 31, 2002, was to increase the ratio of net investment income to average net assets from 6.41% to 6.42%. Ratios and supplemental data for the periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (e) Not annualized.
See accompanying Notes to Financial Statements. | 19 STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 (UNAUDITED) HIGHLAND FLOATING RATE FUND
($) - ----------------------------------------------------------------------------------------------------------------------- ASSETS: Investments in Portfolio .......................................................................... 2,051,813,358 Receivable for: Fund shares sold ............................................................................... 10,837,521 Other assets ...................................................................................... 26,517 ------------- Total assets ................................................................................ 2,062,677,396 ============= LIABILITIES: Payable for: Distributions .................................................................................. 27,504 Administration fee (Note 4) .................................................................... 304,348 Trustees' fees (Note 4) ........................................................................ 48 Service and distribution fees (Note 4) ......................................................... 799,639 Accrued expenses and other liabilities ............................................................ 283,516 ------------- Total liabilities ........................................................................... 1,415,055 ------------- TOTAL NET ASSETS ..................................................................................... 2,061,262,341 ============= COMPOSITON OF NET ASSETS Paid-in capital ................................................................................... 2,032,426,510 Undistributed net investment income ............................................................... 1,911,569 Accumulated net realized gain/(loss) on Investments and foreign currency transactions allocated from Portfolio ................................................................................. (3,726,074) Net unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign currency contracts and assets and liabilities denominated in foreign currency allocated from Portfolio ...................................................................................... 30,650,336 ------------- NET ASSETS ........................................................................................... 2,061,262,341 ============= CLASS A Net assets ........................................................................................ 834,168,200 Shares outstanding (unlimited authorization) ...................................................... 82,710,658 Net asset value per share (Net assets/shares outstanding) ......................................... 10.09(a) Maximum offering price per share (100 / 96.50 of $10.09) .......................................... 10.33(b) CLASS B Net assets ........................................................................................ 141,482,953 Shares outstanding (unlimited authorization) ...................................................... 14,035,467 Net asset value and offering price per share (Net assets/shares outstanding) ...................... 10.08(a) CLASS C Net assets ........................................................................................ 807,118,383 Shares outstanding (unlimited authorization) ...................................................... 80,069,103 Net asset value and offering price per share (Net assets/shares outstanding) ...................... 10.08(a) CLASS Z Net assets ........................................................................................ 278,492,805 Shares outstanding (unlimited authorization) ...................................................... 27,628,711 Net asset value, offering and redemption price per share (Net assets/shares outstanding) .......... 10.08 - ---------- (a) Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. (b) On sales of $100,000 or more, the offering price is reduced.
20 | See accompanying Notes to Financial Statements. STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED)
($) - ----------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME ALLOCATED FROM PORTFOLIO (NOTE 1): Interest Income ................................................................................... 80,072,620 Dividends ......................................................................................... 716 Facility and other fees ........................................................................... 7,304 ------------- Total investment income ..................................................................... 80,080,640 ------------- EXPENSES: Net operating expenses allocated from Portfolio (Note 1) .......................................... 4,199,979 Administration fee (Note 4) ....................................................................... 1,814,197 Accounting services fee ........................................................................... 6,250 Distribution fee: (Note 4) Class A ........................................................................................ 365,180 Class B ........................................................................................ 319,789 Class C ........................................................................................ 2,093,872 Service fee: (Note 4) Class A ........................................................................................ 912,951 Class B ........................................................................................ 177,660 Class C ........................................................................................ 872,447 Transfer agent fee ................................................................................ 378,547 Professional fees ................................................................................. 36,985 Trustee's fees (Note 4) ........................................................................... 40,642 Registration fees ................................................................................. 121,440 Reports to shareholders ........................................................................... 321,790 Other expense ..................................................................................... 54,390 ------------- Net operating expenses ...................................................................... 11,716,119 Interest expense (Note 8) ......................................................................... 170,729 Facility expense .................................................................................. 147,580 ------------- Net expenses ................................................................................ 12,034,428 ------------- Net investment income ....................................................................... 68,046,212 ------------- NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS ALLOCATED FROM PORTFOLIO (NOTE 1): Net realized gain/(loss) on investments ........................................................... 283,023 Net realized gain/(loss) on foreign currency transactions ......................................... 1,630,493 Net change in unrealized appreciation/(depreciation) on investments ............................... 25,072,885 Net change in unrealized appreciation/(depreciation) on unfunded transactions (Note 9) ............ 49,549 Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts ........ (1,791,688) Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency ................................................................ 329,761 ------------- Net realized and unrealized gain/(loss) on investments allocated from Portfolio ............. 25,574,023 ------------- Net increase in net assets resulting from operations ........................................ 93,620,235 =============
See accompanying Notes to Financial Statements. | 21 STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED FEBRUARY 28, 2007 YEAR ENDED (UNAUDITED) AUGUST 31, 2006 ($) ($) ----------------- --------------- INCREASE IN NET ASSETS: FROM OPERATIONS: Net investment income ............................................................... 68,046,212 92,524,047 Net realized gain/(loss) on investments and foreign currency transactions allocated from Portfolio ................................................................ 1,913,516 12,076,962 Net change in unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign currency contracts and translation of assets and liabilities denominated in foreign currency ................................... 23,660,507 (851,203) ----------------- --------------- Net increase in net assets from operations .................................... 93,620,235 103,749,806 ----------------- --------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS From net investment income: Class A .......................................................................... (28,240,831) (36,949,931) Class B .......................................................................... (5,267,832) (10,607,992) Class C .......................................................................... (25,254,484) (31,033,409) Class Z .......................................................................... (9,871,424) (14,588,702) ----------------- --------------- Total distributions declared to shareholders .................................. (68,634,571) (93,180,034) ----------------- --------------- SHARE TRANSACTIONS Class A Subscriptions .................................................................... 248,835,958 460,060,712 Distributions reinvested ......................................................... 12,154,206 17,848,900 Redemptions ...................................................................... (169,592,413) (105,237,595) ----------------- --------------- Net increase .................................................................. 91,397,751 372,672,017 Class B Subscriptions .................................................................... 108,833 370,397 Distributions reinvested ......................................................... 3,128,775 6,226,923 Redemptions ...................................................................... (14,532,835) (26,685,543) ----------------- --------------- Net decrease .................................................................. (11,295,227) (20,088,223) Class C Subscriptions .................................................................... 212,156,170 307,867,391 Distributions reinvested ......................................................... 11,934,077 15,573,084 Redemptions ...................................................................... (54,675,979) (66,041,445) ----------------- --------------- Net increase .................................................................. 169,414,268 257,399,030 Class Z Subscriptions .................................................................... 90,552,809 88,139,842 Distributions reinvested ......................................................... 3,377,287 5,020,371 Redemptions ...................................................................... (44,107,435) (61,876,293) ----------------- --------------- Net Increase .................................................................. 49,822,661 31,283,920 ----------------- --------------- Net increase from share transactions .......................................... 299,339,453 641,266,744 ----------------- --------------- Total increase in net assets .................................................. 324,325,117 651,836,516 ----------------- --------------- NET ASSETS Beginning of period ................................................................. 1,736,937,224 1,085,100,708 ----------------- --------------- End of period (including undistributed net investment income of $1,911,569 and $2,499,928, respectively) ........................................................ 2,061,262,341 1,736,937,224 ================= ===============
22 | See accompanying Notes to Financial Statements. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND
SIX MONTHS ENDED FEBRUARY 28, 2007 YEAR ENDED (UNAUDITED) AUGUST 31, 2006 ($) ($) ----------------- --------------- CHANGE IN SHARES Class A Subscriptions .................................................................... 24,885,445 46,389,131 Issued for distributions reinvested .............................................. 1,214,824 1,799,527 Redemptions ...................................................................... (16,999,546) (10,621,709) ----------------- --------------- Net increase .................................................................. 9,100,723 37,566,949 Class B Subscriptions .................................................................... 10,893 37,376 Issued for distributions reinvested .............................................. 313,015 628,285 Redemptions ...................................................................... (1,456,174) (2,694,070) ----------------- --------------- Net decrease .................................................................. (1,132,266) (2,028,409) Class C Subscriptions .................................................................... 21,243,106 31,050,062 Issued for distributions reinvested .............................................. 1,193,512 1,570,587 Redemptions ...................................................................... (5,476,762) (6,667,761) ----------------- --------------- Net increase .................................................................. 16,959,856 25,952,888 Class Z Subscriptions .................................................................... 9,065,667 8,891,919 Issued for distributions reinvested .............................................. 337,838 506,341 Redemptions ...................................................................... (4,416,455) (6,252,836) ----------------- --------------- Net increase .................................................................. 4,987,050 3,145,424
See accompanying Notes to Financial Statements. | 23 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ---------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2007 CLASS A SHARES (UNAUDITED) 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 9.88 $ 9.80 $ 9.29 $ 8.83 $ 9.62 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(a) 0.38 0.70 0.49 0.37 0.48 0.54(b) Net realized and unrealized gain/(loss) allocated from Portfolio(a) 0.14 0.07 0.08 0.52 0.46 (0.79)(b) ----------- ---------- --------- ---------- --------- --------- Total from investment operations 0.52 0.77 0.57 0.89 0.94 (0.25) - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.38) (0.70) (0.49) (0.38) (0.48) (0.54) From net realized gains -- -- -- -- -- --(c) ---------- --------- -------- --------- -------- -------- Total distributions declared to shareholders (0.38) (0.70) (0.49) (0.38) (0.48) (0.54) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 10.09 $ 9.95 $ 9.88 $ 9.80 $ 9.29 $ 8.83 Total return(d) 5.26%(e) 8.18% 5.93% 9.65% 11.03%(f) (2.67)% - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Net operating expenses 1.12% 1.17% 1.15% 1.15% 1.15% 1.15% Interest expense & facility expense allocated from Portfolio 0.03% 0.04% 0.05% --(g) --(g) 0.03% Net expenses(h) 1.15% 1.21% 1.20% 1.15% 1.15% 1.18% Net investment income 7.67% 7.08% 5.05% 3.78% 5.39% 5.83%(b) Waiver/reimbursement -- 0.01% 0.08% 0.17% 0.28% 0.28% Net assets, end of period (000's) $ 834,168 $ 732,767 $ 355,998 $ 222,032 $ 97,924 $ 108,583 - ---------- (a) Per share data was calculated using average shares outstanding during the period. (b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01, and increased the ratio of net investment income to average net assets from 5.82% to 5.83%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Rounds to less than $0.01. (d) Total return is at net asset value assuming all distributions reinvested and no initial sales charge or CDSC. Had the Portfolio's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Not annualized. (f) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Fund's Class A Shares return. (g) Rounds to less than 0.01%. (h) Net expense ratio has been calculated after applying any waiver/reimbursement.
24 | See accompanying Notes to Financial Statements. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ---------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2007 CLASS B SHARES (UNAUDITED) 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(a) 0.36 0.67 0.46 0.34 0.45 0.51(b) Net realized and unrealized gain/(loss) allocated from Portfolio(a) 0.14 0.08 0.06 0.51 0.46 (0.79)(b) ----------- ---------- --------- ---------- --------- --------- Total from investment operations 0.50 0.75 0.52 0.85 0.91 (0.28) - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.37) (0.67) (0.45) (0.34) (0.45) (0.51) From net realized gains -- -- -- -- -- --(c) ---------- --------- -------- --------- -------- -------- Total distributions declared to shareholders (0.37) (0.67) (0.45) (0.34) (0.45) (0.51) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 10.08 $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83 Total return(d) 5.19%(e) 7.82% 5.46% 9.27% 10.65%(f) (3.02)% - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Net operating expenses 1.47% 1.52% 1.50% 1.50% 1.50% 1.50% Interest expense & facility expense allocated from Portfolio 0.03% 0.04% 0.05% --(g) --(g) 0.03% Net expenses(h) 1.50% 1.56% 1.55% 1.50% 1.50% 1.53% Net investment income 7.32% 6.73% 4.70% 3.51% 5.05% 5.48%(b) Waiver/reimbursement -- 0.01% 0.08% 0.17% 0.28% 0.28% Net assets, end of period (000's) $ 141,483 $ 150,922 $ 169,780 $ 191,365 $ 163,448 $ 174,707 - ---------- (a) Per share data was calculated using average shares outstanding during the period. (b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01, and increased the ratio of net investment income to average net assets from 5.47% to 5.48%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Rounds to less than $0.01. (d) Total return is at net asset value assuming all distributions reinvested and no CDSC. Had the Portfolio's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Not annualized. (f) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Fund's Class B Shares return. (g) Rounds to less than 0.01%. (h) Net expense ratio has been calculated after applying any waiver/reimbursement.
See accompanying Notes to Financial Statements. | 25 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ---------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2007 CLASS C SHARES (UNAUDITED) 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(a) 0.35 0.65 0.45 0.32 0.44 0.50(b) Net realized and unrealized gain/(loss) allocated from Portfolio(a) 0.14 0.08 0.06 0.52 0.46 (0.79)(b) ---------- --------- -------- --------- -------- -------- Total from investment operations 0.49 0.73 0.51 0.84 0.90 (0.29) - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.36) (0.65) (0.44) (0.33) (0.44) (0.50) From net realized gains -- -- -- -- -- --(c) ---------- --------- -------- --------- -------- -------- Total distributions declared to shareholders (0.36) (0.65) (0.44) (0.33) (0.44) (0.50) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 10.08 $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83 Total return(d) 5.40%(e) 7.65% 5.30% 9.10% 10.48%(f) (3.16)% - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Net operating expenses 1.62% 1.67% 1.65% 1.65% 1.65% 1.65% Interest expense & facility expense allocated from Portfolio 0.03% 0.04% 0.05% --(g) --(g) 0.03% Net expenses(h) 1.65% 1.71% 1.70% 1.65% 1.65% 1.68% Net investment income 7.17% 6.58% 4.55% 3.28% 4.88% 5.33%(b) Waiver/reimbursement -- 0.01% 0.08% 0.17% 0.28% 0.28% Net assets, end of period (000's) $ 807,118 $ 627,964 $ 366,841 $ 278,797 $ 132,656 $ 137,098 - ---------- (a) Per share data was calculated using average shares outstanding during the period. (b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01, and increased the ratio of net investment income to average net assets from 5.32% to 5.33%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Rounds to less than $0.01. (d) Total return is at net asset value assuming all distributions reinvested and no CDSC. Had the Portfolio's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Not annualized. (f) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Fund's Class C Shares return. (g) Rounds to less than 0.01%. (h) Net expense ratio has been calculated after applying any waiver/reimbursement.
26 | See accompanying Notes to Financial Statements. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ---------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2007 CLASS Z SHARES (UNAUDITED) 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83 $ 9.62 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(a) 0.40 0.74 0.53 0.40 0.50 0.57(b) Net realized and unrealized gain/(loss) allocated from Portfolio(a) 0.13 0.08 0.06 0.52 0.47 (0.78)(b) ----------- ---------- --------- ---------- --------- --------- Total from investment operations 0.53 0.82 0.59 0.92 0.97 (0.21) - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.40) (0.74) (0.52) (0.41) (0.51) (0.58) From net realized gains -- -- -- -- -- --(c) ---------- --------- -------- --------- -------- -------- Total distributions declared to shareholders (0.40) (0.74) (0.52) (0.41) (0.51) (0.58) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 10.08 $ 9.95 $ 9.87 $ 9.80 $ 9.29 $ 8.83 Total return (d) 5.55%(e) 8.57% 6.20% 10.03% 11.42%(f) (2.33)% - ------------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Net operating expenses 0.77% 0.82% 0.80% 0.80% 0.80% 0.80% Interest expense & facility expense allocated from Portfolio 0.03% 0.04% 0.05% --(g) --(g) 0.03% Net expenses(h) 0.80% 0.86% 0.85% 0.80% 0.80% 0.83% Net investment income 8.02% 7.43% 5.40% 4.12% 5.53% 6.18%(b) Waiver/reimbursement -- 0.01% 0.08% 0.17% 0.28% 0.28% Net assets, end of period (000's) $ 278,493 $ 225,284 $ 192,482 $ 139,577 $ 31,055 $ 13,236 - ---------- (a) Per share data was calculated using average shares outstanding during the period. (b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01, and increased the ratio of net investment income to average net assets from 6.17% to 6.18%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Rounds to less than $0.01. (d) Total return is at net asset value assuming all distributions reinvested. Had the Portfolio's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Not annualized. (f) Total return includes a voluntary reimbursement by the Portfolio's investment adviser for a realized investment loss on an investment not meeting the Portfolio's investment restrictions. This reimbursement had an impact of less than 0.01% on the Fund's Class Z Shares return. (g) Rounds to less than 0.01%. (h) Net expense ratio has been calculated after applying any waiver/reimbursement.
See accompanying Notes to Financial Statements. | 27 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND NOTE 1. ORGANIZATION Highland Floating Rate Fund (the "Fund") is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a non-diversified, closed-end management investment company. INVESTMENT OBJECTIVE The Fund invests all of its investable assets in Highland Floating Rate Limited Liability Company (the "Portfolio"). The Portfolio seeks a high level of current income consistent with preservation of capital. THE PORTFOLIO The Portfolio is registered under the 1940 Act as a non-diversified, closed-end management investment company and is organized as a Delaware limited liability company. The Portfolio allocates income, expenses and realized and unrealized gains and losses to each investor on a daily basis, based on methods in compliance with the Internal Revenue Code of 1986, as amended (the "Code"). Prior to May 5, 2006, the Fund and Highland Institutional Floating Rate Income Fund (the "Institutional Fund") were the sole investors in the Portfolio. On May 5, 2006, the Institutional Fund liquidated and the Fund became the sole investor in the Portfolio. At February 28, 2007, the Fund was the sole investor in the Portfolio. FUND SHARES The Fund may issue an unlimited number of shares and continuously offers three classes of shares: Class A, Class C and Class Z. The Fund has discontinued selling Class B Shares to new and existing investors, although existing investors may still reinvest distributions in Class B Shares. Certain share classes have their own sales charge and bear class specific expenses, which include distribution fees and service fees. Class A Shares are subject to a maximum front-end sales charge of 3.50% based on the amount of initial investment. Class A Shares purchased without an initial sales charge by accounts aggregating $1 million and greater at the time of purchase are subject to a 1.00% contingent deferred sales charge ("CDSC") on shares sold within eighteen months. Class B Shares are subject to a maximum CDSC of 3.25% based upon the holding period after purchase. Class B Shares will convert to Class A Shares eight years after purchase. Please read the Fund's prospectus for additional details on the Class B CDSC. Class C Shares are subject to a 1.00% CDSC on shares sold within one year after purchase. Class Z Shares are not subject to a sales charge. There are certain restrictions on the purchase of Class Z Shares, as described in the Fund's prospectus. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Portfolio and the Fund in the preparation of their financial statements. SECURITY VALUATION The value of the Fund's assets is based on its proportionate share of the current market value of the Portfolio's net assets. For securities with readily available market quotations, the Portfolio uses those quotations for pricing. Securities without a sale price or bid and ask quotations on the valuation day will be priced by an independent pricing service. When portfolio securities are traded on the relevant day of valuation, the valuation will be the last reported sale price on that day. If there are no such sales on that day, the security will be valued at the mean between the most recently quoted bid and asked prices from principal market makers. If securities do not have readily available market quotations or pricing service prices, including circumstances under which such are determined not to be accurate or current (including when events materially affect the value of securities occurring between the time when market price is determined and calculation of the Portfolio's net asset value), such securities are valued at their fair value, as determined in good faith by the Portfolio's investment adviser, Highland Capital Management, L.P. ("Highland" or the "Investment Adviser"), in accordance with procedures established by the Portfolio's Board of Trustees. In these cases, the Portfolio's net asset value will reflect the affected portfolio securities' value as determined in the judgment of the Board of Trustees or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different from a security's most recent sale price and from the prices used by other investment companies to calculate their net asset values. There can be no assurance that the Portfolio's valuation of a security will not differ from the amount that it realizes upon the sale of such security. 28 | Semi-Annual Report NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND SECURITY TRANSACTIONS Security transactions are accounted for on the trade date. Costs and gains (losses) are determined based upon the specific identification method for both financial statement and federal income tax purposes. FOREIGN CURRENCY Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and liabilities resulting from changes in exchange rates, between trade and settlement dates on securities transactions and between the accrual and payment dates on dividends, interest income and foreign withholding taxes, are recorded as unrealized foreign currency gains (losses). Realized gains (losses) and unrealized appreciation (depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The effect of changes in foreign currency exchange rates on investments in securities are not segregated in the statement of operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities. FORWARD FOREIGN CURRENCY CONTRACTS In order to protect against a possible loss on investments resulting from a decline or appreciation in the value of a particular foreign currency against the U.S. dollar or another foreign currency or for other reasons, the Portfolio is authorized to enter into forward currency exchange contracts. These contracts involve an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Forward currency contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Portfolio to establish a rate of exchange for a future point in time. REPURCHASE AGREEMENTS The Portfolio may engage in repurchase agreement transactions with institutions that the Portfolio's investment adviser has determined are creditworthy. The Portfolio, through its custodian, receives delivery of underlying securities collateralizing a repurchase agreement. Collateral is at least equal, at all times, to the value of the repurchase obligation including interest. A repurchase agreement transaction involves certain risks in the event of default or insolvency of the counterparty. These risks include possible delays or restrictions upon the Portfolio's ability to dispose of the underlying securities and a possible decline in the value of the underlying securities during the period while the Portfolio seeks to assert its rights. INCOME RECOGNITION Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums, if any. Facility fees received are recorded as a reduction of cost to the loan and amortized through the maturity of the loan. Unamortized facility fees are reflected as deferred fees on the Statement of Assets and Liabilities. DETERMINATION OF CLASS NET ASSET VALUES All income, expenses (other than distribution fees and service fees, which are class-specific expenses, as shown on the Statement of Operations) and realized and unrealized gains (losses) are allocated to each class of shares of the Fund on a daily basis for purposes of determining the net asset value of each class. Income and expenses are allocated to each class based on the settled shares method, while realized and unrealized gains (losses) are allocated based on the relative net assets of each class. FEDERAL INCOME TAX STATUS The Fund intends to qualify each year as a "regulated investment company" under Subchapter M of the Code and will distribute substantially all of its taxable income and gains, if any, for its tax year, and as such will not be subject to federal income taxes. In addition, the Portfolio is treated as a partnership for federal income tax purposes and all of its income is allocated to its owners based on methods in compliance with the Internal Revenue Service. Therefore, no federal income tax provision is recorded. The Fund is the sole member of the Portfolio. For federal income tax purposes, the Portfolio is a disregarded entity. DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income are declared by the Fund daily and paid monthly. Net realized capital gains, if any, are distributed at least annually. STATEMENT OF CASH FLOWS Information on financial transactions which have been settled through the receipt or disbursement of cash are presented in the Statement of Cash Flows. The cash and foreign currency amount shown in the Statement of Cash Flows is the amount included within the Portfolio's Statement of Assets and Liabilities and includes cash on hand at its custodian bank and sub-custodian bank, respectively, and does not include any short-term investments. Semi-Annual Report | 29 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND ADDITIONAL ACCOUNTING STANDARDS On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken in the course of preparing the Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be booked as a tax expense in the current year and recognized as: a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of deferred tax asset; an increase in deferred tax liability; or a combination thereof. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006, and implementation of FIN 48 for net asset value calculations is required beginning on August 31, 2007. In addition, in September 2006, Statement of Financial Accounting Standards No. 157 FAIR VALUE MEASUREMENTS ("SFAS 157") was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. At this time, Highland is evaluating the implications of FIN 48 and SFAS 157 and their impact on the financial statements have not yet been determined. NOTE 3. FEDERAL TAX INFORMATION The timing and character of income and capital gain distributions are determined in accordance with Federal income tax regulations, which may differ from GAAP. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Reclassifications are made to the Fund's capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. The tax character of distributions paid during the years ended August 31, 2006 and August 31, 2005 was as follows: - -------------------------------------------------------------------------------- 2006 2005 - -------------------------------------------------------------------------------- Distributions paid from: - -------------------------------------------------------------------------------- Ordinary income* $93,180,034 $43,895,175 - -------------------------------------------------------------------------------- Long-term capital gains -- -- - -------------------------------------------------------------------------------- * For tax purposes, short-term capital gain distributions, if any, are considered ordinary income distributions. As of August 31, 2006, the most recent tax year end, the components of distributable earnings on a tax basis were as follows: ------------------------------------------------------------- Undistributed Undistributed Ordinary Long-Term Net Unrealized Income Capital Gains Appreciation* ------------------------------------------------------------- $2,956,459 $-- $7,443,072 ------------------------------------------------------------- * The differences between book-basis and tax-basis net unrealized appreciation/depreciation are primarily due to deferral of losses from wash sales, premium amortization and Section 732 adjustments. Portfolio unrealized appreciation and depreciation at February 28, 2007, based on cost of investments for federal income tax purposes, and excluding any unrealized appreciation and depreciation from changes in the value of other assets and liabilities resulting from changes in exchange rates, was: - -------------------------------------------------------------------------------- Unrealized appreciation $ 43,342,205 Unrealized depreciation (11,203,783) ------------ Net unrealized appreciation $ 32,138,422 ============ - -------------------------------------------------------------------------------- The following capital loss carryforwards may be available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code: ------------------------------------------------------------- Year of Capital Loss Expiration Carryforward ------------------------------------------------------------- 2011 $2,282,275 ------------------------------------------------------------- 2012 3,291,779 ------------------------------------------------------------- Total $5,574,054 ------------------------------------------------------------- NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, AND TRUSTEE FEES INVESTMENT ADVISORY FEE Highland Capital Management, L.P. is the investment adviser to the Portfolio. Highland receives a monthly investment advisory fee from the Portfolio based on the Portfolio's average daily net assets at the following annual rates: ------------------------------------------------------------- Average Daily Net Assets Annual Fee Rate ------------------------------------------------------------- First $1billion 0.45% ------------------------------------------------------------- Next $1billion 0.40% ------------------------------------------------------------- Over $2 billion 0.35% ------------------------------------------------------------- For the six months ended February 28, 2007, the Portfolio's effective investment advisory fee rate was 0.43%. 30 | Semi-Annual Report NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND At an in-person Board meeting held on May 19, 2006, the Fund's Board, including the members of the Board who are not "interested persons" (as defined in the 1940 Act) of the Fund (the "Independent Trustees"), unanimously approved the continuation of the current advisory agreement between the Portfolio and Highland (the "Advisory Agreement"). As discussed in Note 1, prior to May 5, 2006, Highland also provided portfolio management services to another feeder fund, the Institutional Fund, via the Institutional Fund's investment in the Portfolio. The Institutional Fund was liquidated as of May 5, 2006. The Fund's management believes that it would be in the best interests of the Fund's shareholders for the Fund to terminate the Portfolio by exchanging all of its shares in the Portfolio for all of the assets of the Portfolio and investing directly in securities. Once the Fund withdraws from the Portfolio, the Portfolio will be dissolved. At that time, the Fund would adopt an investment advisory agreement with Highland with the same terms and fee arrangements as the advisory agreement that is in place at that time. ADMINISTRATION FEES Highland provides administrative services to the Portfolio and the Fund for a monthly administration fee at the annual rate of 0.20% of the Fund's average daily net assets. The Fund, but not the Portfolio, pays Highland for these services. Under separate sub-administration agreements, Highland has delegated certain administrative functions to PFPC Inc. ("PFPC"). Highland pays PFPC directly for these services. SERVICE AND DISTRIBUTION FEES PFPC Distributors, Inc. (the "Distributor") serves as the principal underwriter and distributor of the Fund's shares. The Distributor receives a CDSC imposed on certain redemptions of Class A, Class B and Class C Shares. For the six months ended February 28, 2007, the Distributor received $25,887, $47,714 and $45,653 of CDSCs on Class A, Class B and Class C Share redemptions, respectively. The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the "Plan") which requires the payment of a monthly service fee to the Distributor at an annual rate of 0.25% of the average daily net assets attributable to Class A, Class B and Class C Shares of the Fund. The Plan also requires the payment of a monthly distribution fee to the Distributor at an annual rate of 0.10%, 0.45% and 0.60% of the average daily net assets attributable to Class A, Class B and Class C Shares, respectively. The CDSC and the fees received from the Plan are used principally as repayment for amounts paid by the Distributor to dealers who sold such shares. FEES PAID TO OFFICERS AND TRUSTEES The Fund pays no compensation to its one interested Trustee or to any of its other officers, all of whom are employees of Highland. Trustees who are not "interested persons" (as defined in the Investment Company Act of 1940 the "1940 Act"), as amended, of the Portfolio and the Fund each receive an annual retainer fee of $25,000 for services provided as Trustees of the Portfolio and the Fund. The Fund pays $20,000 of this fee and the remaining $5,000 is paid by the Portfolio. NOTE 5. PORTFOLIO INFORMATION For the six months ended February 28, 2007, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $1,034,134,567 and $818,829,952, respectively. NOTE 6. PERIODIC REPURCHASE OFFERS The Fund has adopted a fundamental policy to offer each calendar quarter to repurchase a specified percentage (between 5% and 25%) of the shares then outstanding at the Fund's net asset value ("Repurchase Offers"). Repurchase Offers are scheduled to occur on or about the 15th day (or the next business day if the 15th is not a business day) in the months of March, June, September, and December. It is anticipated that normally the date on which the repurchase price of shares will be determined (the "Repurchase Pricing Date") will be the same date as the deadline for shareholders to provide their repurchase requests to the Distributor (the "Repurchase Request Deadline"), and if so, the Repurchase Request Deadline will be set for a time no later than the close of regular trading on the New York Stock Exchange on such date. The Repurchase Pricing Date will occur no later than the 14th day after the Repurchase Request Deadline, or the next business day if the 14th day is not a business day. Repurchase proceeds will be paid to shareholders no later than seven days after the Repurchase Pricing Date. For the six months ended February 28, 2007, there were two Repurchase Offers. For each Repurchase Offer, the Fund offered to repurchase 10% of its shares. In the September 2006 and December 2006 Repurchase Offers, 8.03% and 7.15%, respectively, of shares outstanding were repurchased. Semi-Annual Report | 31 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS The Portfolio invests at least 80% of its net assets (plus any borrowings for investment purposes) in adjustable rate senior loans ("Senior Loans") the interest rates of which float or vary periodically based upon a benchmark indicator of prevailing interest rates to domestic foreign corporations, partnerships and other entities ("Borrowers"). If the lead lender in a typical lending syndicate becomes insolvent, enters FDIC receivership or, if not FDIC insured, enters into bankruptcy, the Portfolio may incur certain costs and delays in receiving payment or may suffer a loss of principal and/or interest. When the Portfolio purchases a participation of a Senior Loan interest, the Portfolio typically enters into a contractual agreement with the lender or other third party selling the participation, not with the borrower directly. As such, the Portfolio assumes the credit risk of the Borrower, selling participant or other persons interpositioned between the Portfolio and the Borrower. The ability of Borrowers to meet their obligations may be affected by economic developments in a specific industry. At February 28, 2007, the following sets forth the selling participants with respect to interests in Senior Loans purchased by the Portfolio on a participation basis. - -------------------------------------------------------------------------------- Principal Selling Participant Amount Value - -------------------------------------------------------------------------------- Bank of America, NA: Gila River Power, L.P. Tranche A Term Loan $240,566 $ 286,875 Tranche B Term Loan 232,075 276,750 Union Power Partners, L.P. Tranche A Term Loan 141,509 168,750 Tranche B Term Loan 135,849 162,000 Citibank, NA: Gila River Power, L.P. Tranche A Term Loan 641,510 765,000 Tranche B Term Loan 618,868 738,000 Union Power Partners, L.P. Tranche A Term Loan 377,359 450,000 Tranche B Term Loan 362,264 432,000 Credit Suisse, Cayman Island Branch: Gila River Power, L.P. Tranche A Term Loan 641,509 1,157,925 Tranche B Term Loan 618,868 1,111,641 Union Power Partners, L.P. Tranche A Term Loan 377,359 681,131 Tranche B Term Loan 362,264 653,887 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Principal Selling Participant Amount Value - -------------------------------------------------------------------------------- CSFB: Quality Distributions, Inc. Term Loan 2,087,210 2,092,428 Goldman Sachs: Bridge Information Systems, Inc. Multidraw Term Loan 480,286 36,021 JPMorgan Chase: EH/Transeastern, LLC/TE TOUSA Term Loan 1,000,000 1,015,000 Infor Enterprise Solutions Holdings, Inc. Stage One U.S. Bridge Facility 2,301,093 2,301,093 Merrill Lynch Credit Products: Gila River Power, L.P Tranche A Term Loan 681,604 1,009,275 Tranche B Term Loan 657,547 968,561 Union Power Partners, L.P. Tranche A Term Loan 400,943 593,692 Tranche B Term Loan 384,906 569,943 HIT Entertainment First lien Term Advance 1,000,000 1,008,130 - -------------------------------------------------------------------------------- NOTE 8. LINE OF CREDIT On September 13, 2004, the Portfolio entered into a $150,000,000 credit facility, which was increased on September 12, 2005 to $200,000,000, used for temporary or emergency purposes to facilitate portfolio liquidity. Interest is charged to the Portfolio based on its borrowings. In addition, the Portfolio has agreed to pay facility expenses on the unutilized line of credit, which are included on the Statement of Operations. For the six months ended February 28, 2007, the average daily loan balance outstanding on days where borrowings existed was $82,777,778 at a weighted average interest rate of 8.25%. Interest expense allocated to the Fund of $170,729 was paid for use of the line of credit and is included on the Statement of Operations. NOTE 9. UNFUNDED LOAN COMMITMENTS As of February 28, 2007, the Portfolio had unfunded loan commitments of $26,839,756, which could be extended at the option of the Borrower, pursuant to the following loan agreements: 32 | Semi-Annual Report NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND - -------------------------------------------------------------------------------- Unfunded Loan Borrower Commitment - -------------------------------------------------------------------------------- American Buildings Co. $ 239,463 - -------------------------------------------------------------------------------- Autocam Corp. 38,773 - -------------------------------------------------------------------------------- Atrium Co., Inc. 164,118 - -------------------------------------------------------------------------------- Buffets Holdings, Inc. 28,125 - -------------------------------------------------------------------------------- Centennial Cellular Operating Co. 2,250,000 - -------------------------------------------------------------------------------- Cornerstone Holding, Inc. 562,525 - -------------------------------------------------------------------------------- Covanta Energy Corp. 1,000,000 - -------------------------------------------------------------------------------- Cricket Communications, Inc. 6,500,000 - -------------------------------------------------------------------------------- DeCrane Aircraft Holdings, Inc. 1,000,000 - -------------------------------------------------------------------------------- Federal-Mogul Corp. 102,746 - -------------------------------------------------------------------------------- Global Tel Link Corp. 652,174 - -------------------------------------------------------------------------------- Interstate Bakeries Corp. 7,500,000 - -------------------------------------------------------------------------------- Millennium Digital Media Systems, LLC 3,680,705 - -------------------------------------------------------------------------------- Oglebay Norton Co. 200,000 - -------------------------------------------------------------------------------- Standard Steel, LLC 166,667 - -------------------------------------------------------------------------------- Trump Entertainment Resorts, Inc. 2,219,972 - -------------------------------------------------------------------------------- Ypso Holding SA 534,488 - -------------------------------------------------------------------------------- $26,839,756 =========== - -------------------------------------------------------------------------------- NOTE 10. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES INDUSTRY FOCUS The Portfolio may focus its investments in certain industries, subjecting it to greater risk than a Portfolio that is more diversified. NON-PAYMENT RISK Senior Loans, like other corporate debt obligations, are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to the Portfolio, a reduction in the value of the Senior Loan experiencing non-payment and a potential decrease in the net asset value of the Fund. CREDIT RISK Securities rated below investment grade are commonly referred to as high-yield, high risk or "junk debt." They are regarded as predominantly speculative with respect to the issuing company's continuing ability to meet principal and/or interest payments. Investments in high-yield Senior Loans may result in greater net asset value fluctuation than if the Portfolio did not make such investments. CURRENCY RISK A portion of the Portfolio's assets may be quoted or denominated in non-U.S. currencies. These securities may be adversely affected by fluctuations in relative currency exchange rates and by exchange control regulations. The Portfolio's investment performance may be negatively affected by a devaluation of a currency in which the Portfolio's investments are quoted or denominated. Further, the Portfolio's investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities quoted or denominated in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar. FOREIGN SECURITIES Investments in foreign securities may involve special risks compared to investing in securities of U.S. issuers. These risks are more pronounced to the extent that the Portfolio invests a significant portion of its non-U.S. investment in one region or in the securities of emerging market issuers. These risks may include (i) less information about non-U.S. issuers or markets being available due to less rigorous disclosure, accounting standards or regulatory requirements; (ii) many non-U.S. markets are smaller, less liquid and more volatile and Highland may not be able to sell the Portfolio's securities at times, in amounts and at prices it considers reasonable; (iii) the economies of non-U.S. markets may grow at slower rates than expected or may experience a downturn or recession; and (iv) withholdings and other non-U.S. taxes may decrease the Fund's returns. NOTE 11. SHAREHOLDER VOTING RESULTS On September 11, 2006, at a Special Meeting of the Shareholders of the Fund (the "Meeting"), the Shareholders of Record of the Fund were asked to vote on a new advisory agreement between Highland Capital Management, L.P. and Highland Floating Rate Limited Liability Company (the "Proposal"). On July 20, 2006, the Record Date of the Meeting, the Fund had the following shares of beneficial interest outstanding: - -------------------------------------------------------------------------------- Class A 66,406,216.610 - -------------------------------------------------------------------------------- Class B 15,046,052.090 - -------------------------------------------------------------------------------- Class C 57,333,508.331 - -------------------------------------------------------------------------------- Class Z 21,021,477.568 - -------------------------------------------------------------------------------- Semi-Annual Report | 33 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE FUND On September 11, 2006, the date of the Meeting, there was not present in person, or by proxy, more than 50% of the outstanding shares entitled to vote at the Meeting. Therefore, the Fund's quorum requirement was not met and the Meeting was adjourned until October 2, 2006. On October 2, 2006, the Fund's quorum requirement was not met and the Meeting was further adjourned until October 16, 2006. Again, on October 16, 2006, the Fund's quorum requirement was not met and the Meeting was further adjourned until October 17, 2006. On October 17, 2006, the Fund's quorum requirement was again not met and the Meeting was adjourned until October 18, 2006. On October 18, 2006, a majority of the total number of outstanding shares of the Fund entitled to vote was represented at the Meeting and the Fund's quorum requirement was met. On October 18, 2006, the Proposal was voted on and was not approved by the required 67% of Shareholders of the Fund present at the Meeting. The results of the voting on the Proposal on October 18, 2006 were as follows: - -------------------------------------------------------------------------------- For: 57,771,178 - -------------------------------------------------------------------------------- Against: 21,683,569 - -------------------------------------------------------------------------------- Abstain: 8,874,322 - -------------------------------------------------------------------------------- Broker Non-Votes: 0 - -------------------------------------------------------------------------------- 34 | Semi-Annual Report IMPORTANT INFORMATION ABOUT THIS REPORT - -------------------------------------------------------------------------------- INVESTMENT ADVISER Highland Capital Management, L.P. 13455 Noel Road, Suite 800 Dallas, TX 75240 TRANSFER AGENT PFPC Inc. 101 Sabin Street Pawtucket, RI 02860 DISTRIBUTOR PFPC Distributors, Inc. 760 Moore Road King of Prussia, PA 19406 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 125 High Street Boston, MA 02110 The Fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-877-665-1287 to request that additional reports be sent to you. This report has been prepared for shareholders of Highland Floating Rate Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities, and the Fund's proxy voting record for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the Securities and Exchange Commission's website at http://www.sec.gov. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov and also may be reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Statement of Additional Information includes information about Fund Trustees and is available upon request without charge by calling 1-877-665-1287. Semi-Annual Report | 35 THIS PAGE LEFT BLANK INTENTIONALLY. Highland Floating Rate Fund Semi-Annual Report, February 28, 2007 [LOGO OMITTED] pHIGHLAND FUNDS managed by Highland Capital Management, L.P. www.highlandfunds.com HLC-FR-SEMI-02/07 ITEM 2. CODE OF ETHICS. Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. There has been no change, as of the date of this filing, in any of the portfolio managers identified in response to paragraph (a)(1) of this Item in the registrant's most recently filed annual report on Form N-CSR. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Not applicable. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) HIGHLAND FLOATING RATE LIMITED LIABILITY COMPANY By (Signature and Title)* /S/ JAMES D. DONDERO ------------------------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) Date APRIL 25, 2007 ---------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /S/ JAMES D. DONDERO ------------------------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) Date APRIL 25, 2007 ---------------------------------------------------------------------------- By (Signature and Title)* /S/ M. JASON BLACKBURN ------------------------------------------------------- M. Jason Blackburn, Chief Financial Officer (principal financial officer) Date APRIL 25, 2007 ---------------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature. EX-99.CERT 2 cert302.txt 302 CERT 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 internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (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 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: APRIL 25, 2007 /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 internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (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 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: APRIL 25, 2007 /S/ M. JASON BLACKBURN ----------------- ------------------------------------------------ M. Jason Blackburn, Chief Financial Officer (principal financial officer) EX-99.906CERT 3 cert906.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: APRIL 25, 2007 /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: APRIL 25, 2007 /S/ M. JASON BLACKBURN ------------------------- -------------------------------------------- M. Jason Blackburn, Chief Financial Officer (principal financial officer) -----END PRIVACY-ENHANCED MESSAGE-----