-----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, OJpPs9bd46OHqdRSUopSbLA2Ghx+H6+nc15qIMPW7PnUHNFibFN7Jy3NXzg15LzP 7obPCEckbLuW7BYYZKI8Uw== 0000935069-07-000897.txt : 20070427 0000935069-07-000897.hdr.sgml : 20070427 20070427105441 ACCESSION NUMBER: 0000935069-07-000897 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 ADVANTAGE FUND CENTRAL INDEX KEY: 0001093062 IRS NUMBER: 000000000 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-09709 FILM NUMBER: 07793895 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 ADVANTAGE FUND DATE OF NAME CHANGE: 20031107 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY FLOATING RATE ADVANTAGE FUND DATE OF NAME CHANGE: 20001211 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND DATE OF NAME CHANGE: 20000124 N-CSRS 1 ncsr.txt HIGHLAND FLOATING RATE ADVANTAGE NCSRS 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 811-09709 HIGHLAND FLOATING RATE ADVANTAGE FUND -------------------------------------------------------------------- (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 ADVANTAGE FUND SEMI-ANNUAL REPORT FEBRUARY 28, 2007 [LOGO] HIGHLAND FLOATING RATE ADVANTAGE FUND [LOGO] - -------------------------------------------------------------------------------- TABLE OF CONTENTS Fund Profile ............................................................. 1 Financial Statements ..................................................... 2 Investment Portfolio .................................................. 3 Statement of Assets and Liabilities ................................... 18 Statement of Operations ............................................... 19 Statements of Changes in Net Assets ................................... 20 Statement of Cash Flows ............................................... 22 Financial Highlights .................................................. 23 Notes to Financial Statements ......................................... 27 Important Information About This Report .................................. 34 Economic and market conditions change frequently. There is no assurance that the trends described in this report will continue or commence. A PROSPECTUS MUST PRECEDE OR ACCOMPANY THIS REPORT. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FUND PROFILE - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE ADVANTAGE FUND Objective - -------------------------------------------------------------------------------- To provide a high level of current income consistent with preservation of capital. Net Assets as of February 28, 2007 - -------------------------------------------------------------------------------- $2,534.5 million Portfolio Data as of February 28, 2007 - -------------------------------------------------------------------------------- The information below provides a snapshot of the Fund at the end of the reporting period. The Fund is actively managed and the composition of its investment portfolio will change over time. QUALITY BREAKDOWN AS OF 02/28/07 (%) - -------------------------------------------------------------------------- Baa 0.5 - -------------------------------------------------------------------------- Ba 28.6 - -------------------------------------------------------------------------- B 45.9 - -------------------------------------------------------------------------- Caa 4.9 - -------------------------------------------------------------------------- NR 20.1 - -------------------------------------------------------------------------- TOP 5 SECTORS AS OF 02/28/07 (%) - -------------------------------------------------------------------------- Retail 10.2 - -------------------------------------------------------------------------- Cable -- International Cable 7.3 - -------------------------------------------------------------------------- Utility 6.9 - -------------------------------------------------------------------------- Transportation -- Auto 6.7 - -------------------------------------------------------------------------- Information Technology 6.4 - -------------------------------------------------------------------------- TOP 10 HOLDINGS AS OF 02/28/07 (%) - -------------------------------------------------------------------------- Movie Gallery, Inc. 3.6 - -------------------------------------------------------------------------- HCA, Inc. 2.7 - -------------------------------------------------------------------------- Ford Motor Co. 2.1 - -------------------------------------------------------------------------- Amsterdamse Beheer-En Consultingmaatschappij B.V. 1.9 - -------------------------------------------------------------------------- Ypso Holding SA 1.9 - -------------------------------------------------------------------------- Cricket Communications, Inc. 1.8 - -------------------------------------------------------------------------- Metro PCS Wireless, Inc. 1.7 - -------------------------------------------------------------------------- Delphi Corp. 1.7 - -------------------------------------------------------------------------- Blockbuster Entertainment Corp. 1.6 - -------------------------------------------------------------------------- Millennium Digital Media Systems, LLC 1.4 - -------------------------------------------------------------------------- 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 ADVANTAGE FUND A GUIDE TO UNDERSTANDING THE FUND'S FINANCIAL STATEMENTS INVESTMENT PORTFOLIO The Investment Portfolio details all of the Fund's holdings and their market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification. STATEMENT OF ASSETS AND LIABILITIES This statement details the Fund's assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all the Fund's liabilities (including any unpaid expenses) from the total of the Fund's investment and non-investment assets. The share price for each class is calculated by dividing net assets for that class by the number of shares outstanding in that class as of the last day of the reporting period. STATEMENT OF OPERATIONS This statement details income earned by the Fund and the expenses accrued by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its holdings during the period, as well as any unrealized gains or losses recognized over the period. The total of these results represents the Fund's net increase or decrease in net assets from operations. STATEMENTS OF CHANGES IN NET ASSETS These statements demonstrate how the Fund's net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and dividend reinvestments) during the reporting period. The Statements of Changes in Net Assets also detail changes in the number of shares outstanding. STATEMENT OF CASH FLOWS The Statement of Cash Flows reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash, foreign currency and cash equivalents during the period. FINANCIAL HIGHLIGHTS The Financial Highlights demonstrate how the Fund's net asset value per share was affected by the Fund's operating results. The Financial Highlights also disclose the classes' performance and certain key ratios (e.g., class expenses and net investment income as a percentage of average net assets). NOTES TO FINANCIAL STATEMENTS These notes disclose the organizational background of the Fund, its significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies. 2 | Semi-Annual Report INVESTMENT PORTFOLIO (UNAUDITED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- SENIOR LOAN NOTES (a) - 104.5% AEROSPACE - AEROSPACE/DEFENSE - 2.3% AWAS Capital, Inc. 12,215,153 First Priority Term Loan, 7.13%, 03/15/13 .............................. 12,184,602 7,003,663 Second Priority Term Loan, 11.38%, 03/15/13 ............................. 7,108,718 6,500,000 DeCrane Aircraft Holdings, Inc. First Lien Term Loan, 02/13/13 (b) ........... 6,565,000 1,903,900 Forgings International Holdings. (Firth Rixon) (United Kingdom) Term D (USD), 9.73%, 03/22/15 ................ 1,937,218 Forgings International Ltd. (Firth Rixon) (United Kingdom) 2,403,900 Term B2 (USD), 7.83%, 09/11/14 ............... 2,445,968 2,403,900 Term C2 (USD), 8.08%, 09/11/15 ............... 2,445,968 IAP Worldwide Services, Inc. 1,000,000 First Lien Term Loan, 12/20/12 (b) ........... 998,120 1,980,000 First Lien Term Loan, 9.69%, 12/30/12 .............................. 1,976,278 3,500,000 Second Lien Term Loan, 15.19%, 06/20/13 ............................. 3,552,500 TDS Investor Corp. (Travelport) 12,984,113 Dollar Term Loan, 7.86%, 08/23/13 (b) .......................... 13,126,938 509,986 Synthetic Letter of Credit, 7.86%, 08/23/13 (b) .......................... 516,203 312,990 Tranche B Dollar Term Loan, 08/23/13 (b) ................................. 316,805 2,943,529 Vought Aircraft Industries, Inc. Term Loan, 7.88%, 12/22/11 ................... 2,976,674 Wesco Aircraft Hardware Corp. 1,000,000 First Lien Term Loan, 7.60%, 09/30/13 .............................. 1,008,120 1,000,000 Second Lien Term Loan, 11.10%, 03/28/14 ............................. 1,022,820 ----------- 58,181,932 ----------- AEROSPACE - AIRLINES - 2.4% 987,500 American Airlines, Inc. Term Facility, 8.57%, 12/17/10 ............... 999,231 Continental Airlines, Inc. 1,714,286 Tranche A-1 Term Loan, 8.74%, 06/01/11 .............................. 1,733,571 4,285,714 Tranche A-2 Term Loan, 8.74%, 06/01/11 .............................. 4,333,929 Delta Airlines, Inc. 4,708,333 DIP, Term Loan A, 8.11%, 03/16/08 .............................. 4,741,810 6,000,000 Term Loan Equipment Notes, 8.00%, 09/29/12 .............................. 6,007,500 2,000,000 Trade Claim, 12/12/07 (b) .................... 1,176,680 1,127,741 ILC Industries, Inc. First Lien Term Loan, 7.87%, 02/24/12 .............................. 1,136,199 Northwest Airlines, Inc. 10,000,000 Term Loan DIP, 7.85%, 08/21/08 ............... 10,070,300 11,258,505 Term Loan DIP, 7.35%, 08/27/11 ............... 11,338,216 4,500,000 U.S. Bank Trade Claim, 08/21/13 (b) .......... 3,922,515 14,500,000 U S Airways, Inc. Term Loan, 8.86%, 03/31/11 ................... 14,628,180 ----------- 60,088,131 ----------- PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- BROADCASTING - 3.3% 2,493,750 Barrington Broadcasting Group LLC Term Loan, 7.61%, 08/11/13 ................... 2,513,999 CMP Susquehanna Corp. 978,571 Term Loan, 7.38%, 05/05/13 ................... 986,400 4,336,786 Term Loan, 7.44%, 05/05/13 ................... 4,370,960 2,403,831 Havana Bidco Ltd. USD Term Loan B, 7.65%, 08/31/14 .............................. 2,412,845 Millennium Digital Media Systems, LLC 30,322,567 Facility B Term Loan, 8.90%, 06/30/11 .............................. 30,552,624 141,685 Revolver, 06/30/11 (b) (c) ................... 141,546 1,037,839 Term Facility, 06/30/11 (b) .................. 1,045,714 NextMedia Operating, Inc. 684,882 Delay Draw Term Loan, 7.32%, 11/15/12 .............................. 683,170 1,540,984 Initial Term Loan (First Lien), 7.32%, 11/15/12 .............................. 1,541,939 1,000,000 Second Lien Term Loan, 9.82%, 11/15/13 .............................. 1,011,880 11,000,000 Paxson Communications Corp. First Lien Term Loan, 8.61%, 01/15/12 .............................. 11,268,180 2,000,000 Persona Communications Corp. (Canada) Second Lien Term Loan, 11.37%, 04/12/14 ............................. 2,040,000 25,704,429 Young Broadcasting, Inc. Term Loan, 7.88%, 11/03/12 (b) ............... 25,824,726 ----------- 84,393,983 ----------- CABLE - INTERNATIONAL CABLE - 1.3% 4,962,500 Liberty Cablevision of Puerto Rico, Ltd. (Puerto Rico) Term Loan, 7.62%, 03/01/13 ................... 4,990,389 2,812,500 Puerto Rico Cable Acquisition Co., Inc. (Puerto Rico) First Lien Term Loan, 8.63%, 07/28/11 .............................. 2,837,109 San Juan Cable, LLC (Puerto Rico) 2,475,007 First Lien Term Loan, 7.37%, 10/31/12 .............................. 2,487,382 1,700,000 Second Lien Term Loan, 10.87%, 10/31/13 ............................. 1,727,625 UPC Broadband Holding BV (Netherlands) 6,965,000 Facility F2, 7.37%, 03/31/09 ................. 7,003,447 1,500,000 Facility H2, 7.37%, 09/30/12 ................. 1,508,640 UPC Financing Partnership (Netherlands) 2,000,000 Facility J2, 7.37%, 03/31/13 ................. 2,011,040 3,000,000 Facility K2, 7.37%, 12/31/13 ................. 3,017,280 8,000,000 Virgin Media, Inc. (United Kingdom) B4 Facility, 7.36%, 07/30/12 ................. 8,051,360 ----------- 33,634,272 ----------- CABLE - US CABLE - 5.3% 2,481,255 Atlantic Broadband Finance LLC Tranche B-1 Term Loan, 8.10%, 09/01/11 .............................. 2,515,372 7,825,000 Bresnan Communications LLC Tranche B Term Loan, 7.11%, 09/29/13 .............................. 7,860,213 Century Cable Holdings LLC 2,500,000 Revolver, 9.25%, 03/31/09 .................... 2,425,000 See accompanying Notes to Financial Statements. | 3 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- SENIOR LOAN NOTES (CONTINUED) CABLE - US CABLE (CONTINUED) Century Cable Holdings LLC (continued) 92,734 Term Loan, 10.25%, 06/30/09 .................. 91,112 Cequel Communications LLC 11,000,000 Bridge Term Loan, 10.32%, 10/30/07 ........... 11,027,500 5,250,000 First Lien Term Loan B, 7.61%, 11/05/13 .............................. 5,304,548 4,275,000 Second Lien Tranche A Term Loan, 9.86%, 05/05/14 (b) .......................... 4,408,594 3,000,000 Term Facility B, 11/01/13 (b) ................ 3,031,170 29,768,944 Charter Communications Operating LLC Term Loan, 7.99%, 04/28/13 ................... 30,018,408 23,812,500 CSC Holdings, Inc. Incremental Term Loan, 7.11%, 03/29/13 .............................. 23,962,757 Knology, Inc. 5,697,964 New Term Loan, 7.98%, 06/29/10 ............... 5,740,699 5,634,519 Second Lien Term Loan, 15.35%, 06/29/11 ............................. 6,451,524 Mediacom Broadband Group 1,000,000 Tranche C Term Loan, 7.05%, 01/31/15 .............................. 1,002,300 1,000,000 Tranche D-2 Term Loan, 7.12%, 01/31/15 .............................. 999,060 1,000,000 Mediacom Illiniois, LLC Tranche B Term Loan, 7.12%, 03/31/13 .............................. 1,005,320 Northland Cable Television, Inc. 4,950,000 First Lien Term Loan B, 9.38%, 12/22/12 .............................. 4,962,375 6,000,000 Second Lien Term Loan, 13.49%, 06/22/13 ............................. 6,000,000 Olympus Cable Holdings LLC 2,000,000 Term Loan A, 9.50%, 06/30/10 ................. 1,948,000 2,350,000 Term Loan B, 10.25%, 09/30/10 ................ 2,291,250 WideOpenWest Finance LLC 12,085,009 First Lien Term Loan, 7.61%, 05/01/13 .............................. 12,205,859 2,000,000 Second Lien Term Loan, 10.40%, 05/01/14 ............................. 2,066,240 ----------- 135,317,301 ----------- CHEMICALS - COMMODITY & FERTILIZER - 0.5% 5,129,685 Celanese Dollar Term Loan B, 7.37%, 04/06/11 .............................. 5,174,981 Cognis Corp. (Germany) 533,694 Dollar Facility B, 8.10%, 03/31/12 ........... 541,368 1,000,000 Facility B Second Lien, 11/15/13 (b) ......... 999,380 5,761,111 Ferro Corp. Term Loan, 8.07%, 06/06/12 ................... 5,762,955 ----------- 12,478,684 ----------- CHEMICALS - SPECIALTY CHEMICALS - 2.7% 2,000,000 Almatis Holdings 4 B.V. (Netherlands) Facility A2, 7.61%, 12/31/12 ................. 2,004,380 Almatis U S Holding Inc. 1,500,000 Facility B3, 7.86%, 12/31/13 ................. 1,516,875 1,500,000 Facility C3, 8.36%, 12/31/14 ................. 1,523,430 Basell BV (Netherlands) 745,437 Facility B4 USD, 7.57%, 08/01/13 ............. 751,028 745,437 Facility C4 USD, 8.32%, 08/01/14 ............. 751,028 Basell USA, Inc. 3,727,186 Facility B2, 7.57%, 08/01/13 ................. 3,755,140 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- CHEMICALS - SPECIALTY CHEMICALS (CONTINUED) Basell USA, Inc. (continued) 3,727,185 Facility C2, 8.32%, 08/01/14 ................. 3,755,139 4,000,000 BPC Holding Corp. (Berry Plastics) Term Loan B, 7.12%, 09/20/13 ................. 4,030,000 Brenntag Holding GMBH & Co. (Germany) 294,545 Acquisition Facility, 7.89%, 01/17/14 .............................. 298,964 1,205,364 Facility B2 Term Loan, 7.89%, 01/17/14 .............................. 1,223,336 1,000,000 Second Lien Dollar Facility, 11.43%, 06/22/15 ............................. 1,026,040 1,620,938 Georgia Gulf Corp. Term Loan, 7.32%, 10/03/13 ................... 1,636,952 Ineos U S Finance LLC 1,800,000 Term Loan A4, 7.61%, 12/14/12 ................ 1,802,484 6,187,500 Term Loan B2, 7.61%, 12/14/13 ................ 6,282,293 6,187,500 Term Loan C2, 8.11%, 12/14/14 ................ 6,282,293 3,216,250 ISP Chemco, Inc. Term Loan, 7.38%, 02/16/13 ................... 3,247,383 3,894,605 Kraton Polymers Group of Cos. Term Loan, 7.38%, 12/23/10 ................... 3,932,344 1,841,889 Lucite International US Finco LLC Term B-1 Facility, 8.07%, 07/07/13 ........... 1,864,913 5,000,000 Panda Hereford Ethanol, L.P. Tranche A Term Loan, 9.07%, 07/28/13 .............................. 4,950,000 6,389,798 Rockwood Specialties Group, Inc. Tranche E Term Loan, 7.36%, 07/30/12 .............................. 6,461,683 10,500,000 Solutia, Inc. Add-on Term Loan B, 8.36%, 03/31/08 (b) .......................... 10,660,860 ----------- 67,756,565 ----------- CONSUMER DURABLES - 0.2% 3,816,269 Rexair LLC Additional Term Facility, 9.61%, 06/30/10 .............................. 3,825,809 ----------- CONSUMER NON-DURABLES - 2.5% 2,129,807 American Achievement Corp. Tranche B Term Loan, 7.77%, 03/25/11 .............................. 2,146,462 2,977,500 Amscan Holdings Term Loan B, 8.38%, 12/23/12 ................. 3,011,920 1,416,546 Bare Escentuals Beauty, Inc. (MD Beauty) First Lien Term Loan, 7.82%, 02/18/12 .............................. 1,424,507 1,111,111 Camelbak Products, Inc. Second Lien Term Loan, 12.91%, 02/04/12 ............................. 1,013,889 3,000,000 DS Waters of America, Inc. Term Loan B, 7.86%, 10/27/12 ................. 3,015,000 Eastman Kodak Co. 8,586,047 Term B-1 Advance, 7.57%, 10/18/12 (b) .......................... 8,618,245 3,386,240 Term B-2 Advance Delayed Draw, 7.57%, 10/18/12 .............................. 3,397,754 3,704,286 Hanesbrands, Inc. Term Loan B, 7.63%, 09/05/13 ................. 3,739,699 5,592,522 Hillman Group, Inc. Term Loan B, 8.50%, 03/30/11 ................. 5,648,447 773,898 Jarden Corp. Term Loan B1, 7.11%, 01/24/12 ................ 778,371 4 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- SENIOR LOAN NOTES (CONTINUED) CONSUMER NON-DURABLES (CONTINUED) 2,887,500 Owens-Brockway Glass Container Inc. Tranche B Term Loan, 6.82%, 06/14/13 .............................. 2,901,938 429,361 Polaroid Corp. Term Loan, 12.38%, 04/28/11 .................. 431,508 2,853,569 Prestige Brands Holdings, Inc. Tranche B Term Loan, 7.71%, 04/06/11 .............................. 2,878,538 Solo Cup Co. 1,000,000 Second Lien Term Loan, 11.57%, 03/31/12 ............................. 1,023,750 16,024,898 Term B1 Loan, 8.82%, 02/27/11 (b) ............ 16,283,860 1,977,440 Spectrum Brands U. S. Dollar Term Loan B, 8.60%, 02/07/12 .............................. 1,998,203 Technical Concepts, LLC 857,143 U. S. Dollar Term Loan A, 8.57%, 02/15/11 .............................. 859,286 854,464 U. S. Dollar Term Loan B, 8.82%, 02/15/13 .............................. 856,600 3,684,375 VJCS Acquisition, Inc. Term B Facility, 7.62%, 07/19/13 ............. 3,684,375 ----------- 63,712,352 ----------- DIVERSIFIED MEDIA - 4.6% 12,777,209 American Lawyer Media Holdings, Inc. First Lien Term Loan, 7.86%, 03/05/10 .............................. 12,806,469 375,889 Black Press Group Ltd. (Canada) Term B-2 Tranche Loan, 7.37%, 08/01/13 .............................. 379,648 619,111 Black Press U S Partnership Term B-1 Tranche Loan, 7.37%, 08/01/13 .............................. 625,302 9,975,000 Cinemark USA, Inc. Term Loan, 7.39%, 10/05/13 ................... 10,077,144 1,263,083 Day International, Inc. First Lien U.S. Term Loan, 8.12%, 12/05/12 .............................. 1,275,714 2,375,000 Deluxe Canada Holdings, Inc. (Canada) First Lien Tranche C Term Loan, 8.36%, 01/28/11 .............................. 2,391,340 1,911,667 Endurance Business Media, Inc. First Lien Term Loan, 8.07%, 07/24/13 .............................. 1,933,173 2,970,000 HIT Entertainment PLC (United Kingdom) First Lien Term Advance, 7.60%, 03/20/12 .............................. 2,994,146 3,960,000 Merrill Communications LLC Combined Term Loan, 7.59%, 05/15/11 .............................. 3,995,244 Metro-Goldwyn-Mayer Holdings II, Inc./ LOC Acquisition Co. 928,571 Tranche A Term Loan, 8.61%, 04/08/11 .............................. 936,046 23,879,679 Tranche B Term Loan, 8.62%, 04/08/12 .............................. 24,156,922 North American Membership Group, Inc. 989,924 First Lien Tranche B Term Loan, 8.61%, 05/19/11 .............................. 970,126 3,000,000 Second Lien Term Loan, 12.86%, 11/18/11 ............................. 2,940,000 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- DIVERSIFIED MEDIA (CONTINUED) Panavision, Inc. 3,059,299 First Lien Term Loan, 8.37%, 03/30/11 .............................. 3,086,068 3,500,000 Second Lien Term Loan, 12.36%, 03/30/12 ............................. 3,561,250 Penton Media, Inc. 1,000,000 First Lien Term Loan, 7.62%, 02/01/13 .............................. 1,010,625 2,500,000 First Lien Term Loan, 01/09/13 (b) ........... 2,526,550 2,500,000 Second Lien Term Loan, 02/01/14 (b) ................................. 2,551,575 Riverdeep Interactive Learning USA, Inc. 2,500,000 Bridge Facility, 11.07%, 12/05/14 ............ 2,503,125 8,000,000 Term Loan, 8.81%, 12/20/13 (b) ............... 8,084,960 Springer Science+Business Media S.A. (Germany) 562,496 Tranche B-2, 7.99%, 09/16/11 ................. 569,528 562,496 Tranche C-2, 8.37%, 07/05/14 ................. 571,637 338,124 USD Tranche B-2 Add-on, 7.99%, 07/05/13 .............................. 342,351 338,124 USD Tranche C-2 Add On, 8.37%, 07/05/14 .............................. 343,619 366,301 USD Tranche E-2 Add On, 8.37%, 07/05/14 .............................. 372,253 6,518,043 VISANT Corp. Tranche C Term Loan, 7.37%, 10/04/11 .............................. 6,567,711 8,475,000 VNU Inc./Nielsen Finance LLC (Netherlands) Dollar Term Loan, 8.13%, 08/09/13 ............ 8,572,124 2,874,991 Warner Music Group Term Loan, 7.38%, 02/28/11 ................... 2,893,161 3,000,000 West Corp. Term B-2 Loan, 7.75%, 10/24/13 ............... 3,031,860 450,000 WMG Acquisitions Corp. Term Loan, 02/28/11 (b) ...................... 452,844 4,000,000 Yell Group PLC (United Kingdom) Facility B1 (USD), 7.32%, 10/27/12 ........... 4,038,320 ----------- 116,560,835 ----------- ENERGY - EXPLORATION & PRODUCTION - 1.9% ATP Oil & Gas Corp. 11,066,820 First Lien Term Loan, 8.81%, 04/14/10 .............................. 11,198,294 11,000,000 First Lien Term Loan, 8.91%, 04/14/10 .............................. 11,254,320 1,000,000 Second Lien Term Loan, 10.11%, 10/14/10 ............................. 1,023,120 1,000,000 Forest Alaska Operating LLC Second Lien Term Loan, 11.85%, 12/08/11 ............................. 1,010,000 11,000,000 Paramount Resources Ltd. (Canada) Term Loan, 9.86%, 08/28/12 ................... 10,972,500 Targa Resources, Inc. 1,161,290 Synthetic Term Loan, 5.24%, 10/31/12 .............................. 1,176,526 4,778,226 Term Loan, 7.61%, 10/31/12 ................... 4,826,964 5,940,000 TARH E&P Holdings, LP Second Lien Term Loan, 10.88%, 11/15/10 ............................. 5,940,000 ----------- 47,401,724 ----------- See accompanying Notes to Financial Statements. | 5 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- SENIOR LOAN NOTES (CONTINUED) ENERGY - OTHER ENERGY - 2.2% Alon USA Energy, Inc. 884,444 Edgington Facility, 7.57%, 06/22/13 .............................. 893,289 7,075,556 Paramount Facility, 7.64%, 06/22/13 .............................. 7,133,080 Coffeyville Resources, LLC 1,135,135 Funded Letter of Credit, 8.36%, 12/28/10 .............................. 1,149,324 5,864,865 Tranche D Term Loan, 8.36%, 12/28/13 .............................. 5,935,712 1,000,000 El Paso Corp. Deposit Loan, 5.22%, 07/31/11 ................ 1,008,040 4,500,000 Endeavour International Holding B.V. (Netherlands) Second Lien Term Loan, 12.37%, 11/01/11 ............................. 4,635,000 Helix Energy Solutions Group, Inc. 7,959,760 Term Loan, 7.33%, 07/01/13 ................... 8,018,583 3,484,910 Term Loan, 05/05/13 (b) ...................... 3,510,664 2,977,500 MEG Energy Corp. (Canada) Initial Term Loan, 7.37%, 04/03/13 ........... 3,007,603 Monitor US Finco, Inc. 4,000,000 First Lien Term Loan, 10.82%, 01/11/14 ............................. 4,020,000 3,000,000 Second Lien Term Loan, 17.32%, 01/11/15 ............................. 3,007,500 1,616,287 SemCrude LP U.S. Term Loan, 7.59%, 03/16/11 .............. 1,629,427 1,000,000 Superior Offshore International, LLC Term Loan, 02/15/12 (b) ...................... 1,000,000 1,000,000 Total Safety U.S., Inc. Second Lien Term Loan, 11.85%, 12/08/13 ............................. 1,010,000 1,000,000 Venoco, Inc. Term Loan, 9.88%, 04/28/11 ................... 1,012,500 5,000,000 Volnay Acquisition Co. I (CGG) Term Loan, 7.32%, 01/12/14 ................... 5,043,750 3,000,000 Willbros USA, Inc. Syndicate Term Loan, 10.25%, 10/27/09 ............................. 3,015,000 ----------- 55,029,472 ----------- ENERGY - REFINING - 1.0% 2,000,000 Connacher Finance Corp. Term Loan, 8.61%, 10/20/13 ................... 2,017,500 2,992,500 Eagle Rock Energy Partners Series B Term Loan, 7.61%, 08/31/11 .............................. 3,003,722 Energy Transfer Equity, L.P. 2,000,000 Term Loan, 7.10%, 02/08/12 ................... 2,021,080 3,000,000 Term Loan, 11/01/12 (b) ...................... 3,031,620 3,975,038 Hawkeye Renewables LLC First Lien Term Loan, 9.49%, 06/30/12 .............................. 3,870,693 8,500,000 J Ray McDermott SA (Panama) Synthetic Facility, 5.26%, 06/06/12 .......... 8,585,000 Northeast Biofuels, LLC 1,365,854 Construction Term Loan, 8.61%, 06/30/13 .............................. 1,376,098 634,146 Synthetic Letter of Credit, 8.62%, 06/30/13 .............................. 638,902 1,714,286 Resolute Aneth, LLC Second Lien Tern Loan, 10.36%, 04/13/12 ............................. 1,722,857 ----------- 26,267,472 ----------- PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- ENERGY - SERVICE & EQUIPMENT - 0.1% 1,719,706 Petroleum Geo-Services ASA/PGS Finance, Inc. (Norway) Term Loan, 7.61%, 12/17/12 ................... 1,740,136 ----------- FINANCIAL - 2.4% 1,750,000 AlixPartners, LLP Tranche B Term Loan, 7.86%, 10/12/13 .............................. 1,768,060 American Wholesale Insurance Group, Inc. 966,064 First Lien Term Loan A, 8.59%, 10/27/11 .............................. 967,880 2,000,000 Second Lien Term Loan B, 12.82%, 04/27/12 ............................. 2,005,000 2,778,214 Arias Acquisitions, Inc. Term Loan, 9.11%, 07/26/11 ................... 2,555,957 997,500 Arrowhead General Insurance Agency, Inc. First LienTerm Loan, 8.36%, 08/08/12 .............................. 1,009,350 1,500,000 Bay Point Re Ltd. (Bermuda) Term Loan, 9.85%, 12/31/10 ................... 1,516,875 Checksmart Financial Co. 1,985,000 First Lien Tranche B Term Loan, 8.13%, 05/01/12 .............................. 1,992,444 2,500,000 Second Lien Term Loan, 10.89%, 05/01/13 ............................. 2,531,250 5,000,000 Concord Re Ltd. (Bermuda) Term Loan, 9.61%, 02/29/12 ................... 5,075,000 5,987,500 Conseco, Inc. Term Loan, 7.32%, 10/10/13 (b) ............... 6,043,663 4,250,000 Crump Group, Inc. Tranche B Term Loan, 8.37%, 12/19/12 .............................. 4,255,313 2,000,000 Cyrus Reinsurance Ltd. (Bermuda) Term Loan, 9.60%, 12/31/10 ................... 2,002,500 997,500 First American Payment Systems, L.P. Term Loan, 8.63%, 10/06/13 ................... 1,004,981 Flatiron Re Ltd. (Bermuda) 4,378,947 Closing Date Term Loan, 9.61%, 12/20/10 .............................. 4,433,684 2,121,053 Delayed Draw Term Loan, 9.61%, 12/20/10 .............................. 2,144,914 955,000 IPayment, Inc. Term Facility, 7.35%, 05/10/13 ............... 960,969 2,000,000 LPL Holdings, Inc. Tranche C Term Loan, 8.11%, 06/27/14 .............................. 2,024,380 1,174,035 Mitchell International, Inc. Term Loan, 7.37%, 08/15/11 ................... 1,179,905 NASDAQ Stock Market, Inc. 313,843 Tranche B Term Loan, 7.10%, 04/18/12 .............................. 316,124 181,927 Tranche C Term Loan, 7.10%, 04/18/12 .............................. 183,690 National Money Mart Co. (Canada) 2,009,032 Canadian Borrower Term Loan, 8.05%, 10/30/12 .............................. 2,021,588 1,476,702 Delayed Draw Term Loan, 8.05%, 10/30/12 .............................. 1,485,931 1,000,000 Online Resources Corp. Term Loan A, 02/09/12 (b) .................... 1,000,000 Panther Re Holdings Ltd. (Bermuda) 3,000,000 Term Loan A, 7.62%, 12/01/10 ................. 3,022,500 2,000,000 Term Loan B, 9.87%, 12/01/10 ................. 2,020,000 6 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- SENIOR LOAN NOTES (CONTINUED) FINANCIAL (CONTINUED) 1,000,000 Riskmetrics Group Holdings, LLC First Lien Term Loan B, 7.60%, 01/11/14 .............................. 1,011,250 5,000,000 Starbound Reinsurance Ltd. (Bermuda) Term Loan, 9.37%, 03/01/08 ................... 5,025,000 ----------- 59,558,208 ----------- FOOD AND DRUG - 1.2% 1,304,348 Bi-Lo LLC Term Loan, 9.34%, 07/01/11 ................... 1,316,087 3,000,000 CTI Food Holdings Co. LLC Second Lien Secured Term Loan, 11.36%, 06/02/12 ............................. 3,045,000 1,338,052 Duloxetine Royalty Sub (Cayman Islands) Term Loan, 9.86%, 10/18/13 ................... 1,348,087 9,152,170 Jean Coutu Group, Inc. Term Loan B, 8.00%, 07/30/11 ................. 9,175,050 1,947,556 Leiner Health Products Group, Inc. Tranche B Term Loan, 8.88%, 05/27/11 .............................. 1,969,057 4,033,855 Michael Foods, Inc. Term Loan B-1, 7.35%, 11/21/10 ............... 4,062,213 971,429 Nash Finch Co. Initial Term Loan, 7.63%, 11/12/10 ........... 971,429 8,000,000 Rite Aid Corp. Senior Secured Bridge Loan, 10/23/07 (b) ................................. 7,960,000 211,966 Supervalu, Inc. Term Loan B, 7.10%, 06/02/12 ................. 213,647 1,500,000 Weight Watchers International, Inc. Term Loan B, 6.88%, 01/26/14 ................. 1,508,820 ----------- 31,569,390 ----------- FOOD/TOBACCO - BEVERAGES & BOTTLING - 1.2% 684,482 AFC Enterprises, Inc. Tranche B Term Loan, 7.38%, 05/09/11 .............................. 689,615 1,000,000 B&G Foods, Inc. Tranche C Term Loan, 02/15/13 (b) ............ 1,011,250 3,354,697 Commonwealth Brands, Inc. Term Loan, 7.63%, 12/22/12 ................... 3,374,423 3,300,000 National Distributing Co., Inc. Second Lien Term Loan, 11.82%, 06/01/10 ............................. 3,308,250 8,831,127 Nellson Nutraceutical, Inc. First Lien Term Loan, 12.25%, 10/04/09 (b) ......................... 8,637,902 1,942,447 Nutro Products, Inc. Term Facility, 7.36%, 04/26/13 ............... 1,952,781 6,965,000 Reynolds American, Inc. Term Loan, 7.14%, 05/31/12 ................... 7,026,989 3,952,525 WM. Bolthouse Farms, Inc. First Lien Term Loan, 7.63%, 12/16/12 .............................. 3,980,509 ----------- 29,981,719 ----------- FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS - 0.6% Chiquita Brands LLC 97,362 Term Loan B, 8.38%, 06/28/12 ................. 98,215 6,089,137 Term Loan C, 8.38%, 06/28/12 ................. 6,195,697 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- FOOD/TOBACCO - FOOD/TOBACCO PRODUCERS (CONTINUED) Dole Food Co., Inc. 186,258 Credit Linked Deposit, 5.23%, 04/12/13 .............................. 186,142 415,937 Tranche B Term Loan, 7.55%, 04/12/13 .............................. 416,653 Gate Gourmet Borrower LLC 2,036,038 Dollar Term Loan First Lien, 8.10%, 03/09/12 .............................. 2,061,488 333,311 First Lien Letter of Credit, 8.11%, 12/31/10 .............................. 337,478 45,605 Merisant Co. Tranche B Term Loan, 8.63%, 01/11/10 .............................. 45,795 5,585,320 Michelina's Term Loan, 8.31%, 04/02/11 ................... 5,662,119 1,389,950 Solvest, Ltd.(Bermuda) Tranche C Term Loan, 7.47%, 04/12/13 .............................. 1,391,117 ----------- 16,394,704 ----------- FOOD/TOBACCO - RESTAURANTS - 1.3% 4,000,000 Aramark Canada Ltd. (Canada) Canadian Term Loan, 01/26/14 (b) ............. 4,045,000 Aramark Corp. 823,018 Letter of Credit Facility, 01/26/14 (b) ...... 833,133 11,676,982 U.S. Term Loan, 01/26/14 (b) ................. 11,810,800 Buffets Holdings, Inc. 583,513 PF Letter of Credit, 8.37%, 05/01/13 .............................. 587,160 1,321,875 Revolver, 9.84%, 11/01/11 (c) ................ 1,319,297 4,416,667 Term Loan, 8.36%, 11/01/13 ................... 4,444,271 2,525,000 Caribbean Restaurant LLC Tranche B Term Loan, 8.07%, 06/30/09 .............................. 2,546,059 3,960,000 El Pollo Loco, Inc. Term Loan, 8.37%, 11/18/11 ................... 3,981,067 1,462,500 Garden Fresh Restaurant Corp. First Lien Term Loan B, 8.61%, 06/22/11 .............................. 1,469,813 982,188 New World Restaurant Group, Inc. First Lien Term Loan, 8.45%, 03/31/11 .............................. 984,643 ----------- 32,021,243 ----------- FOREST PRODUCTS - PACKAGING - 2.1% 7,061,114 Consolidated Container Co. LLC Term Loan, 8.63%, 12/15/08 ................... 7,087,594 Georgia-Pacific Corp. 5,500,000 Add-on Term Loan B, 7.11%, 12/20/12 .............................. 5,553,570 27,225,000 First Lien Term B, 7.36%, 12/20/12 .............................. 27,512,496 11,263,859 Graham Packaging Co. Term Loan B, 7.63%, 10/07/11 ................. 11,375,371 JSG Acquisitions (Smurfit Kappa) (Ireland) 1,000,000 B1 Term Loan Facility, 7.74%, 12/01/13 .............................. 1,008,760 1,000,000 C1 Term Loan Facility, 8.24%, 12/01/14 .............................. 1,013,760 ----------- 53,551,551 ----------- See accompanying Notes to Financial Statements. | 7 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- SENIOR LOAN NOTES (CONTINUED) FOREST PRODUCTS - PAPER - 0.4% 2,737,463 Appleton Papers, Inc. Term Loan, 7.62%, 06/11/10 ................... 2,754,572 3,325,612 Graphic Packaging International, Inc. Tranche C Term Loan, 7.86%, 08/09/10 .............................. 3,372,370 1,500,000 NewPage Corp. New Term Loan, 7.63%, 02/01/12 ............... 1,518,750 2,364,671 Verso Paper Holdings LLC Term B Loan, 7.13%, 07/28/13 (d) ............. 2,375,028 ----------- 10,020,720 ----------- GAMING/LEISURE - GAMING - 1.7% 3,956,125 CCM Merger, Inc./MotorCity Casino Term Loan B, 7.36%, 04/25/12 (b) ............. 3,984,966 5,000,000 Copa Casino of Mississippi, LLC Term Loan, 10.44%, 06/14/12 .................. 5,050,000 1,881,226 DHM Holdings Co., Inc. Multi Draw Term Loan, 7.12%, 03/03/08 (c) .......................... 1,876,523 5,829,736 Drake Hotel Acquisition B Note 1, 8.22%, 04/01/07 (c) ................ 5,829,736 8,000,000 Lakes Gaming and Resorts, LLC Term Loan, 11.62%, 06/21/10 .................. 8,100,000 1,488,750 London Arena & Waterfront Finance LLC Tranche A Term Loan, 8.85%, 03/08/12 .............................. 1,502,714 4,975,000 Penn National Gaming, Inc. Term Loan B, 7.11%, 10/03/12 ................. 5,022,810 1,500,000 Pinnacle Entertainment, Inc. Term Loan B, 7.32%, 12/15/11 ................. 1,513,590 1,000,000 Town Sports International, LLC Term Loan, 02/27/14 (b) ...................... 1,006,250 8,000,000 VML U S Finance LLC Term B Funded Project Loan, 8.12%, 05/25/13 (b) .......................... 8,087,200 2,000,000 Wynn Las Vegas LLC Term Loan B, 7.23%, 08/15/13 ................. 2,013,340 ----------- 43,987,129 ----------- GAMING/LEISURE - OTHER LEISURE - 2.2% 1,926,748 AMF Bowling Worldwide, Inc. Term Loan B, 8.42%, 08/27/09 ................. 1,897,847 2,325,000 BRE/ESA MEZZ 5 LLC Mezzanine D Loan, 8.57%, 07/11/08 ............ 2,330,813 12,675,000 BRE/Homestead MEZZ 4 LLC Mezzanine D Loan, 8.60%, 07/11/08 ............ 12,706,688 Edge Las Vegas Development LLC 5,000,000 First Lien Term Loan, 8.82%, 06/01/07 .............................. 5,037,500 11,000,000 Second Lien Term Loan, 14.32%, 06/01/07 ............................. 11,055,000 Fontainebleu Florida Hotel LLC 3,000,000 Tranche A Term Loan, 8.10%, 05/11/08 .............................. 3,000,000 2,000,000 Tranche B Term Loan, 8.10%, 05/11/08 .............................. 2,000,000 1,000,000 Greenwood Racing Inc. Term Loan, 7.60%, 11/28/11 ................... 1,010,000 6,431,199 Kuilima Resort Co. First Lien Term Loan, 8.07%, 09/30/10 .............................. 6,395,056 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- GAMING/LEISURE - OTHER LEISURE (CONTINUED) 4,985,000 Regal Cinemas Corp. New Term Loan, 7.11%, 10/27/13 ............... 5,015,409 4,708,618 Trump Entertainment Resorts, Inc. Term Loan B-1, 7.87%, 05/20/12 (c) ........... 4,755,704 910,400 Yellowstone Mountain Club, LLC Term Loan, 7.70%, 09/30/10 ................... 910,746 ----------- 56,114,763 ----------- HEALTHCARE - ACUTE CARE - 3.8% 4,089,514 Alliance Imaging, Inc. Tranche C1 Term Loan, 7.88%, 12/29/11 .............................. 4,125,297 3,932,487 Ameripath, Inc. Tranche B Term Loan, 7.36%, 10/31/12 (b) .......................... 3,941,690 1,980,000 Capella Healthcare, Inc. First Lien Term Loan, 8.36%, 11/30/12 .............................. 1,999,800 1,947,613 ComPsych Investments Corp. Term Loan, 8.12%, 04/11/12 ................... 1,962,220 Cornerstone Healthcare Group Holding, Inc. 375,017 Revolver, 9.35%, 07/15/11 (c) ................ 360,477 1,024,458 Senior Subordinated Unsecured Notes, 14.00%, 07/15/12 (e) .................. 932,257 3,903,897 Term Loan, 9.35%, 07/15/11 ................... 3,874,617 HCA, Inc. 1,000,000 Tranche A Term Loan, 7.86%, 11/17/12 .............................. 1,010,260 62,000,000 Tranche B Term Loan, 7.86%, 11/18/13 .............................. 62,808,480 1,857,143 Healthcare Partners, LLC New Term Loan, 7.10%, 10/31/13 ............... 1,865,556 Matria Healthcare, Inc. 1,633,462 First Lien Tranche B Term Loan, 7.36%, 01/19/12 .............................. 1,645,712 1,995,000 Tranche B-2 Term Loan, 7.36%, 01/09/12 .............................. 2,009,963 MultiPlan, Inc. 1,980,124 Term Loan B, 7.84%, 04/12/13 ................. 2,004,876 2,500,000 Term Loan C, 7.84%, 04/12/13 ................. 2,521,875 National Mentor Holdings, Inc. 56,000 Institutional Letter of Credit Facility, 5.33%, 06/29/13 .............................. 56,367 939,280 Tranche B Term Loan, 7.87%, 06/29/13 .............................. 945,442 Sheridan Healthcare, Inc. 293,040 Delayed Draw Term Loan, 8.37%, 11/09/11 .............................. 295,238 1,701,960 First Lien Term C Loan, 8.36%, 11/09/11 .............................. 1,714,724 Stiefel Laboratories, Inc. 1,300,161 Delayed Draw Term Loan, 8.29%, 12/28/13 .............................. 1,318,038 1,699,839 First Lien Term Loan, 7.61%, 12/28/13 .............................. 1,720,034 ----------- 97,112,923 ----------- HEALTHCARE - ALTERNATE SITE SERVICES - 1.7% 1,442,482 American HomePatient, Inc. Secured Promissory Note, 6.79%, 08/01/09 (e) .......................... 1,442,482 8 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- SENIOR LOAN NOTES (CONTINUED) HEALTHCARE - ALTERNATE SITE SERVICES (CONTINUED) CHG Acquisition Corp./CHG Healthcare Services, Inc./CHG Companies Inc./ CHG Medical Staffing, Inc. 1,600,000 First Lien Term Loan B, 8.07%, 12/20/12 .............................. 1,619,008 1,000,000 Second Lien Term Loan C, 11.32%, 12/20/13 ............................. 1,017,500 400,000 Synthetic Letter of Credit, 8.07%, 12/20/12 .............................. 404,752 CRC Health Corp. 1,995,000 New Term Loan, 7.80%, 02/06/13 ............... 2,016,506 1,985,025 Term Loan, 7.61%, 02/06/13 ................... 2,007,972 FHC Health Systems, Inc. 1,500,000 Third Lien Additional Term Loan, 14.37%, 02/09/11 ............................. 1,530,000 5,000,000 Third Lien Term Loan, 15.12%, 02/09/11 ............................. 5,137,500 Gambro Holding AB (Sweden) 1,000,000 Facility B2, 7.82%, 06/05/14 ................. 1,010,630 1,000,000 Facility C2, 8.32%, 06/05/15 ................. 1,015,630 8,000,000 LifeCare Holdings (Rainier Acquisition Corp.) Term Loan, 08/11/12 (b) ...................... 7,775,040 5,661,587 Renal Advantage, Inc. Tranche B Term Loan, 7.86%, 10/06/12 .............................. 5,725,280 Rural/Metro Operating Co. LLC 720,588 Letter of Credit Term Loan, 5.17%, 03/04/11 .............................. 726,439 2,058,824 Term 1 Loan, 7.76%, 03/04/11 ................. 2,075,541 7,325,000 Select Medical Corp. Tranche B Term Loan, 7.11%, 02/24/12 .............................. 7,300,681 1,970,000 Skilled Healthcare LLC First Lien Term Loan, 7.57%, 06/15/12 .............................. 1,987,238 ----------- 42,792,199 ----------- HEALTHCARE - MEDICAL PRODUCTS - 6.8% 6,614,281 American Medical Systems, Inc. Term Loan, 7.68%, 07/20/12 ................... 6,672,156 1,725,000 Bradley Pharmaceuticals, Inc. Term Loan, 9.32%, 11/14/10 ................... 1,733,625 CCS Medical, Inc. 24,677,375 First Lien Term Loan, 8.62%, 09/30/12 (b) .......................... 24,433,316 4,750,000 Second Lien Term Loan, 13.37%, 03/30/13 ............................. 4,643,125 1,950,000 CompBenefits Corp. Tranche B Term Loan, 8.36%, 04/12/12 .............................. 1,967,063 2,992,500 Encore Medical IHC, Inc. Term Loan, 7.88%, 10/04/10 ................... 3,005,607 Fenwal, Inc. 428,571 First Lien Delayed Draw Term Loan, 02/28/14 (b) ................................. 431,786 4,571,429 Initial First Lien Term Loan, 02/28/14 (b) ................................. 4,605,714 Golden Gate National Senior Care LLC 4,962,500 First Lien Term Loan, 8.11%, 03/14/11 .............................. 5,018,328 1,000,000 Second Lien Term Loan, 13.11%, 09/14/11 ............................. 1,017,500 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- HEALTHCARE - MEDICAL PRODUCTS (CONTINUED) Graceway Pharmaceuticals, LLC 5,000,000 First Lien Term Loan B, 7.84%, 12/11/11 .............................. 5,045,300 3,000,000 Second Lien Term Loan, 11.34%, 12/29/12 ............................. 3,039,360 4,726,280 Hanger Orthopedic Group, Inc. Tranche B Term Loan, 7.87%, 05/26/13 .............................. 4,764,657 5,000,000 Health Management Associates, Inc. Term Loan B, 02/14/14 (b) .................... 5,046,500 20,451,250 HealthSouth Corp. Term Loan B, 8.62%, 03/10/13 ................. 20,665,988 MMM Holding, Inc./NAMM Holdings, Inc./PHMC (Puerto Rico) 2,927,639 MMM Original Term Loan, 7.61%, 08/22/11 .............................. 2,850,789 66,646 NAMM New Term Loan, 7.61%, 08/22/11 .............................. 64,897 688,856 NAMM Original Term Loan, 7.61%, 08/22/11 .............................. 670,774 382,283 NAMM PHMC Acquistion Term Loan, 7.61%, 08/22/11 .............................. 372,248 2,399,267 PHMC Acquisition Term Loan, 7.61%, 08/22/11 ............................ 2,336,286 8,478,750 National Renal Institutes, Inc. Term Facility, 7.59%, 03/31/13 ............... 8,510,545 Nyco Holdings 3 ApS (Denmark) 12,500,000 Facility B2, 12/29/14 (b) .................... 12,531,250 12,500,000 Facility C2, 12/29/15 (b) .................... 12,593,750 4,000,000 Pharmaceutical Holdings Corp. Term Loan, 8.57%, 01/30/12 ................... 4,010,000 2,352,456 Reliant Pharmaceuticals, Inc. First Lien Term Loan, 14.82%, 06/30/08 ............................. 2,375,980 Talecris Biotherapeutics Holdings Corp. 16,500,000 First Lien Term Loan, 10.50%, 12/06/14 ............................. 16,665,000 7,500,000 Second Lien Term Loan, 13.50%, 12/08/14 ............................. 7,706,250 Warner Chilcott Co., Inc. (Puerto Rico) 369,227 Dovobet Delayed Draw Term Loan, 7.61%, 01/18/12 .............................. 370,690 763,001 Dovonex Delayed Draw Term Loan, 7.87%, 01/18/12 .............................. 768,373 6,764,947 Tranche B Acquisition Date Term Loan, 7.62%, 01/18/12 ................... 6,810,746 1,908,028 Warner Chilcott Corp. Tranche C Acquisition Date Term Loan, 7.61%, 01/18/12 ................... 1,920,545 ----------- 172,648,148 ----------- HOUSING - BUILDING MATERIALS - 1.9% American Buildings Co. 1,544,641 Term Loan A, 8.87%, 12/31/08 ................. 1,424,407 1,298,494 Term Loan B, 10.00%, 12/31/08 ................ 1,220,585 Atrium Cos., Inc. 9,915,601 Closing Date Term Facility, 8.10%, 05/31/12 .............................. 9,983,821 890,343 Term Loan B, 06/09/12 (b) .................... 896,469 990,556 Contech Construction Products New Term Loan, 7.33%, 01/31/13 ............... 999,223 2,880,825 Custom Building Products, Inc. First Lien Term Loan, 7.61%, 10/20/11 (b) .......................... 2,892,233 2,500,000 Jacuzzi Brands Corp. First Lien Term Loan B, 02/07/14 (b) ......... 2,518,750 See accompanying Notes to Financial Statements. | 9 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- SENIOR LOAN NOTES (CONTINUED) HOUSING - BUILDING MATERIALS (CONTINUED) 4,500,000 Nortek, Inc. Term Loan, 08/27/11 (b) ...................... 4,531,860 1,588,840 PGT Industries, Inc. First Lien Tranche A-2 Term Loan, 8.36%, 02/14/12 .............................. 1,601,741 3,438,203 Pivotal Group Promontory First Lien Term Loan, 8.07%, 08/31/10 .............................. 3,436,071 Ply Gem Industries, Inc. 497,029 Canadian Term Loan, 8.32%, 08/15/11 .............................. 504,276 7,455,433 U.S. Term Loan, 8.32%, 08/15/11 .............. 7,564,134 2,992,500 Roofing Supply Group LLC First Lien Term Loan, 8.61%, 08/31/13 .............................. 2,970,056 1,000,000 Standard Pacific Corp. Term Loan B, 6.86%, 05/05/13 ................. 1,000,620 4,067,060 Stile Acquisition Corp. (Canada) Canadian Term Loan, 7.36%, 04/06/13 .............................. 4,060,715 3,389,227 Stile U.S. Acquisition Corp. U.S. Term Loan, 7.36%, 04/06/13 .............. 3,389,566 ----------- 48,994,527 ----------- HOUSING - REAL ESTATE DEVELOPMENT - 4.6% 2,500,000 BioMed Realty LP Senior Secured Term Loan, 7.57%, 05/31/10 .............................. 2,501,550 Edge Star Partners LLC 10,000,000 First Lien Term Loan, 9.36%, 05/21/07 .............................. 10,000,000 6,000,000 Second Lien Term Loan, 15.36%, 05/21/07 ............................. 5,940,000 4,000,000 EH/Transeastern, LLC/TE TOUSA Term Loan, 8.16%, 08/01/08 (d) (f) ........... 4,060,000 Ginn LA Conduit Lender, Inc. 2,514,016 First Lien Tranche A Credit-Linked Deposit, 7.72%, 06/08/11 ..................... 2,481,032 5,457,700 First Lien Tranche B Term Loan, 7.72%, 06/08/11 .............................. 5,379,273 2,143,382 Giraffe Intermediate, LLC Mezzanine Note A-1, 7.08%, 08/09/07 .............................. 2,143,382 13,438,539 Lake at Las Vegas Joint Venture First Lien Term Loan, 10.12%, 11/01/09 ............................. 13,455,337 4,954,975 LBREP/L-Suncal Master I LLC First Lien, 8.61%, 01/18/10 .................. 4,979,750 12,000,000 LNR Property Corp. Initial Tranche B Term Loan, 8.12%, 07/12/11 (b) .......................... 12,100,560 Morningside Assisted Living 1,995,167 Mezzanine Loan, 12.63%, 10/12/08 ............................. 2,000,155 1,496,375 Senior Mortgage Loan, 8.38%, 10/12/08 .............................. 1,500,116 606,618 MPO Intermediate LLC Mezzanine Note A-1, 7.08%, 08/09/07 .............................. 606,618 2,429,655 November 2005 Land Investors, LLC First Lien Term Loan, 8.11%, 05/09/11 .............................. 2,444,840 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ----------- HOUSING - REAL ESTATE DEVELOPMENT (CONTINUED) Pro-Build Holdings, Inc. 460,000 Delayed Draw Term Loan, 06/29/13 (b) ................................. 460,575 540,000 Initial Term Loan, 06/29/13 (b) .............. 540,675 7,500,000 Rubicon GSA II LLC (Australia) Term Loan, 8.07%, 08/30/08 ................... 7,500,000 Tamarack Resort LLC 3,196,689 Tranche A Credit-Linked Deposit, 5.89%, 05/19/11 .............................. 3,204,680 4,759,070 Tranche B Term Loan, 8.61%, 05/19/11 .............................. 4,770,968 5,500,000 TE/TOUSA Mezzanine LLC Senior Mezzanine Loan, 10.25%, 08/01/09 (f) ......................... 3,052,500 16,689,351 Westgate Investments, LLC Senior Secured Loan, 13.00%, 09/25/10 (e) ......................... 16,689,351 4,000,000 Weststate Land Partners LLC First Lien Term Loan, 8.57%, 05/01/07 .............................. 4,030,000 Woodlands Commercial Properties Co., LP 5,000,000 Bridge Loan, 8.12%, 02/28/08 ................. 5,006,250 400,000 Secured Term Loan, 7.32%, 08/29/09 .............................. 400,500 1,600,000 Woodlands Land Development Co., LP Secured Term Loan, 7.32%, 08/29/09 .............................. 1,602,000 ----------- 116,850,112 ----------- INFORMATION TECHNOLOGY - 5.5% 14,297,409 Advanced Micro Devices, Inc. Term Loan, 7.57%, 12/31/13 (b) ............... 14,444,387 9,794,485 Applied Systems, Inc. Term Loan, 8.17%, 09/26/13 ................... 9,861,871 Aspect Software, Inc. 1,000,000 Second Lien Term Loan, 12.56%, 07/11/12 ............................. 1,005,000 1,122,188 Tranche A-1 Term Loan, 8.38%, 07/11/11 .............................. 1,129,672 1,925,000 Billing Services Group North America, Inc. U.S. Term Loan, 8.13%, 05/05/12 .............. 1,927,406 1,985,025 Corel Corp. (Canada) First Lien Term Loan, 9.32%, 02/16/10 .............................. 1,985,025 Data Transmissions Network Corp. 992,500 First Lien Tranche B Term Loan, 8.36%, 03/10/13 .............................. 997,463 6,000,000 Second Lien Term Loan, 13.39%, 09/10/13 ............................. 6,030,000 992,470 Deltek Systems, Inc. Term Loan, 7.61%, 04/22/11 ................... 997,432 20,000,000 Freescale Semiconductor, Inc. Term Loan, 7.37%, 12/02/13 ................... 20,181,200 GXS Corp. 2,000,000 First Lien Term Loan, 10.35%, 07/29/11 ............................. 2,030,000 2,000,000 Second Lien Term Loan, 14.61%, 12/20/11 ............................. 2,030,000 Infor Enterprise Solutions Holdings, Inc. 3,420,000 Delayed Draw Term Loan, 9.12%, 07/28/12 .............................. 3,454,200 6,555,000 Initial U.S. Term Facility, 9.12%, 07/28/12 .............................. 6,617,797 10 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------ SENIOR LOAN NOTES (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) Infor Enterprise Solutions Holdings, Inc.(continued) 5,000,000 Stage One U.S. Bridge Facility, 11.50%, 07/29/13 (d) ........................ 5,000,000 Intergraph Corp. 7,000,000 First Lien Term Loan, 7.87%, 05/29/14 ............................. 7,085,330 2,000,000 Second Lien Term Loan, 11.37%, 11/29/14 ............................ 2,061,260 12,000,000 NameMedia, Inc. Term Loan, 11.33%, 09/07/08 ................. 12,060,000 1,000,000 Nuance Communications, Inc. Term Loan, 03/31/13 (b) ..................... 1,003,120 1,999,716 ON Semiconductor Corp. Term Loan H, 7.61%, 12/15/11 ................ 2,013,034 3,500,000 Open Solutions, Inc. Term Loan, 7.49%, 01/23/14 (b) .............. 3,537,205 2,992,500 Open Text Corp. (Canada) Term Loan, 7.85%, 10/02/13 .................. 3,014,944 4,750,000 PGS Solutions, Inc. Term Loan, 7.61%, 02/14/13 .................. 4,818,305 SCS Holdings II Inc. (Sirius Computer Solutions) 3,938,462 First Lien Term Loan, 8.10%, 11/30/12 ............................. 3,958,154 2,000,000 Second Lien Term Loan, 11.35%, 05/30/13 ............................ 2,020,000 2,444,444 Secure Computing Corp. Term Loan, 8.61%, 08/31/13 .................. 2,473,484 4,152,500 Serena Software, Inc. Term Loan, 7.61%, 03/11/13 (b) .............. 4,201,832 2,000,000 Sitel, LLC U.S. Term Loan, 7.84%, 01/30/14 ............. 2,017,520 7,000,000 Spansion LLC Term Loan B, 8.36%, 11/01/12 ................ 7,085,330 2,000,000 Transfirst Holdings, Inc. Second Lien Term Loan, 11.62%, 08/15/13 ............................ 2,015,000 X-Rite, Inc. 995,000 First Lien Initial Term Loan, 7.64%, 06/30/12 ............................. 997,488 1,000,000 Second Lien Term Loan, 10.39%, 06/30/13 ............................ 1,005,000 ------------- 139,058,459 ------------- MANUFACTURING - 2.3% 1,995,000 Acument Global Technologies, Inc. (TFS Acquisition Corp.) Term Loan, 8.92%, 08/11/13 .................. 2,009,963 1,355,991 AIRXCEL, Inc. First Lien Term Loan, 8.38%, 08/31/12 ............................. 1,362,771 1,333,333 CI Acquisition, Inc. Term Loan B, 7.43%, 10/17/12 ................ 1,346,667 1,493,947 Coinmach Corp. Tranche B-1 Term Loan, 7.88%, 12/16/12 ............................. 1,508,573 1,500,000 Dundee Holdco Ltd. (United Kingdom) U.S. Term Loan B1, 8.07%, 02/17/14 ............................. 1,508,430 Elster Group GmbH (Nachtwache Acquisition GmbH) (Germany) 868,082 USD Term Loan B1, 7.86%, 08/01/13 ............................. 876,763 868,082 USD Term Loan C1, 8.36%, 08/01/14 ............................. 881,103 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- MANUFACTURING (CONTINUED) 828,947 Euramax International Holdings B.V. (Netherlands) Second Lien European Term Loan, 12.36%, 06/29/13 ............................ 822,730 Euramax International, Inc. 3,112,360 First Lien Domestic Term Loan, 8.13%, 06/28/12 ............................. 3,136,481 1,671,053 Second Lien Domestic Term Loan, 12.36%, 06/29/13 ............................ 1,691,941 FR Brand Acquisition Corp. 1,500,000 First Lien Term Loan B, 7.63%, 02/07/14 ............................. 1,514,685 1,000,000 Second Lien Term Loan, 11.38%, 02/07/15 ............................ 1,015,000 4,000,000 Generac Acquisition Corp. Second Lien Term Loan, 11.36%, 05/12/14 (b) ........................ 4,010,000 4,975,000 Global Petroleum, Inc. (SPI Petroleum) Term Loan, 9.85%, 07/26/13 .................. 4,999,875 410,364 Longyear Canada, ULC (Boart Longyear) First Lien Canadian Borrower Term Loan, 8.61%, 10/08/12 .................. 414,599 Longyear Global Holdings, Inc. (Boart Longyear) 441,930 First DrillCorp Delayed Draw Term Loan, 8.61%, 10/08/12 .................. 446,491 4,135,206 First Lien U.S. Term Loan, 8.61%, 10/08/12 ............................. 4,184,332 6,000,000 Second Lien Term Loan, 12.36%, 10/06/13 ............................ 6,105,000 Matinvest 2 SAS (Deutsche Connector) 2,250,000 B-2 Facility, 7.90%, 06/22/14 ............... 2,273,895 2,250,000 C-2 Facility, 8.08%, 06/22/15 ............... 2,285,145 5,952,749 Mueller Group LLC Term Loan, 7.36%, 10/03/12 .................. 6,010,014 3,538,495 Polypore, Inc. U.S. Term Loan, 8.32%, 11/12/11 ............. 3,547,341 2,916,667 Quantum Corp. First Lien Term Loan, 9.44%, 08/22/12 ............................. 2,934,896 3,000,000 Ray Acquisition SCA (Rexel) (France) Term Loan B-3A US, 7.61%, 08/02/14 ............................. 3,010,290 ------------- 57,896,985 ------------- METALS/MINERALS - OTHER METALS/MINERALS - 1.1% 1,237,500 Alpha Natural Resources LLC Tranche B Term Loan, 7.11%, 10/26/12 ............................. 1,243,292 1,496,250 CST Industries, Inc. Term Loan, 8.55%, 08/09/13 .................. 1,495,322 3,000,000 JW Aluminum Co. Second Lien Term Loan, 11.61%, 12/15/13 ............................ 3,007,500 5,000,000 Kaiser Aluminum & Fabricated Products, LLC Term Loan, 9.61%, 07/06/11 .................. 5,025,000 9,110,342 Murray Energy Corp. Tranche B Term Loan, 8.37%, 01/28/10 ............................. 9,224,222 1,180,000 Neo Material Technologies, Inc. Term Loan, 9.00%, 08/31/09 .................. 1,180,000 767,143 Oglebay Norton Co. Tranche B Term Loan, 7.86%, 07/31/12 ............................. 774,814 See accompanying Notes to Financial Statements. | 11 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) METALS/MINERALS - OTHER METALS/MINERALS (CONTINUED) 1,989,950 PinnOak Resources, LLC Term Loan, 8.61%, 11/23/12 .................. 1,952,638 2,977,500 Universal Buildings Products, Inc. Term Loan, 8.86%, 04/28/12 .................. 2,962,613 ------------- 26,865,401 ------------- METALS/MINERALS - STEEL - 0.0% 829,167 Standard Steel, LLC Initial Term Loan, 7.87%, 06/30/12 .......... 836,422 ------------- RETAIL - 9.0% Blockbuster Entertainment Corp. 1,851,836 Tranche A Term Loan, 8.63%, 08/20/09 ............................. 1,859,447 36,969,023 Tranche B Term Loan, 8.97%, 08/20/11 ............................. 37,505,073 32,935,942 Burlington Coat Factory Warehouse Corp. Term Loan, 7.61%, 05/28/13 (b) .............. 32,982,382 2,940,281 Dollarama Group LP (Canada) Term Loan B, 7.36%, 11/18/11 ................ 2,966,009 4,219,037 Eddie Bauer, Inc. Term Loan, 9.60%, 06/21/11 .................. 4,238,824 1,000,000 Harbor Freight Tools USA Tranche C Term Loan, 7.61%, 02/12/13 ............................. 1,008,120 32,352,762 Home Interiors & Gifts, Inc. Initial Term Loan, 10.39%, 03/31/11 ............................ 23,941,044 891,434 MAPCO Express, Inc./MAPCO Family Centers, Inc. Term Loan, 8.10%, 04/28/11 .................. 899,234 1,000,000 Mattress Holding Corp. Term Loan, 7.62%, 01/18/14 .................. 1,012,500 8,883,594 Michaels Stores, Inc. Term Loan, 8.13%, 10/31/13 (b) .............. 8,981,491 Movie Gallery, Inc. 4,628,638 Term Loan A, 10.37%, 04/27/11 ............... 4,604,569 86,046,980 Term Loan B, 10.62%, 04/27/11 (b) ........... 85,778,514 9,310,970 Neiman Marcus Group, Inc. (The) Term Loan, 7.60%, 04/06/13 .................. 9,431,268 2,000,000 PetCo Animal Supplies, Inc. Term Loan, 8.10%, 10/28/13 .................. 2,026,240 5,490,000 Sally Holdings, LLC Term Loan B, 7.86%, 11/18/13 ................ 5,554,782 1,492,500 Sports Authority, Inc., The Term Loan B, 7.61%, 05/03/13 ................ 1,499,500 4,000,000 Toys "R" Us Tranche B Term Loan, 9.61%, 07/19/12 ............................. 4,125,320 ------------- 228,414,317 ------------- SERVICE - ENVIRONMENTAL SERVICES - 0.5% 1,483,861 Duratek, Inc. Term Loan B, 7.63%, 06/07/13 ................ 1,503,804 EnergySolutions, LLC 157,233 Synthetic Letter of Credit, 7.57%, 06/07/13 ............................. 159,346 3,303,355 Term Loan, 7.63%, 09/30/11 .................. 3,347,752 Safety-Kleen Systems, Inc. 1,322,034 Synthetic Letter of Credit, 7.88%, 08/02/13 ............................. 1,325,339 4,666,271 Term Loan B, 7.88%, 08/02/13 ................ 4,677,937 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SERVICE - ENVIRONMENTAL SERVICES (CONTINUED) Valleycrest Holding Co. (VCC Holdco) 1,995,000 First Lien Term Loan, 7.87%, 10/04/13 ............................. 2,016,187 500,000 Second Lien Term Loan, 10.82%, 04/04/14 ............................ 504,220 ------------- 13,534,585 ------------- SERVICE - OTHER SERVICES - 2.1% 2,000,000 Cydcor, Inc. First Lien Tranche B Term Loan, 8.57%, 02/05/13 ............................. 1,990,000 Education Management LLC 10,000,000 Term Loan C, 7.38%, 06/01/13 ................ 10,100,050 9,950,000 Tranche B Term Loan, 7.88%, 06/01/13 ............................. 10,049,500 820,312 Headwaters, Inc. First Lien Term Loan B-1, 7.32%, 04/30/11 ............................. 824,923 Koosharem Corp. 2,925,000 First Lien Term Loan, 9.87%, 06/30/12 ............................. 2,925,000 1,000,000 Second Lien Term Loan, 15.75%, 06/30/13 ............................ 990,000 8,000,000 NES Rentals Holdings, Inc. Second Lien Permanent Term Loan, 12.13%, 07/20/10 ............................ 8,120,000 11,250,000 Rental Service Corp. Second Lien Initial Term Loan, 8.86%, 12/02/13 ............................. 11,486,700 United Rentals, Inc. 2,507,507 Initial Term Loan, 7.32%, 02/14/11 ............................. 2,540,030 3,229,596 Tranche B Credit-Linked Deposit, 5.32%, 02/14/11 ............................. 3,274,003 ------------- 52,300,206 ------------- TELECOMMUNICATIONS - 2.8% 2,000,000 American Messaging Services, Inc. Senior Secured Note, 11.62%, 09/03/08 ............................ 2,015,000 2,000,000 Cellnet Group, Inc. Second Lien Term Loan, 10/12/11 (b) ................................ 2,040,000 Global Tel Link Corp. 65,217 Synthetic Deposit, 8.82%, 02/13/08 ............................. 66,114 782,609 Term Facility, 8.82%, 02/13/08 .............. 793,370 9,975,000 Intelsat Corp. Tranche B-2 Term Loan, 7.86%, 01/03/14 ............................. 10,087,219 9,000,000 Level 3 Financing, Inc. Term Loan, 8.37%, 12/01/11 .................. 9,080,640 1,496,250 Maritime Telecommunications Network, Inc. First Lien Term Loan, 8.12%, 05/11/12 ............................. 1,494,380 4,000,000 PaeTec Communications, Inc. First Lien Initial Term Loan, 9.88%, 02/05/13 ............................. 4,063,760 4,537,900 RCN Corp. Initial Term Loan, 7.19%, 05/30/13 .......... 4,543,572 3,000,000 Revolution Studios Tranche B Term Loan, 9.07%, 12/21/14 ............................. 3,022,500 12 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) TELECOMMUNICATIONS (CONTINUED) Sorenson Communications, Inc. 5,500,000 Second Lien Term Loan, 12.37%, 02/16/14 ............................ 5,603,125 8,445,374 Tranche B Term Loan, 8.38%, 08/16/13 ............................. 8,517,497 3,712,500 Stratos Global Corp./Stratos Funding LP (Canada) Term B Facility, 8.10%, 02/13/12 ............ 3,743,462 6,498,594 Time Warner Telecom Holdings, Inc. Term Loan B, 7.32%, 01/07/13 (b) ............ 6,555,456 8,514,651 Wind Acquisition Holdings Finance S.A. (Italy) PIK Term Loan USD, 12.61%, 12/21/11 (b) ........................ 8,785,127 ------------- 70,411,222 ------------- TELECOMMUNICATIONS - CLEC - 0.3% 7,875,000 Consolidated Communications, Inc. Term Loan D, 7.36%, 10/14/11 ................ 7,943,906 ------------- TELECOMMUNICATIONS - DATA/INTERNET - 0.1% 2,000,000 Pine Tree Holdings/Country Road Communications, Inc. Second Lien Tranche B Term Loan, 13.15%, 07/15/13 ............................ 2,020,000 ------------- TELECOMMUNICATIONS - FIBER/LONG DISTANCE - 0.9% 6,500,000 FairPoint Communications, Inc. Replacement B Term Loan, 7.13%, 02/08/12 ............................. 6,535,555 993,333 Hawaiian Telcom Communications, Inc. Tranche B Term Loan, 7.62%, 10/31/12 ............................. 998,211 7,000,000 Qwest Corp. Tranche B Term Loan, 6.95%, 06/30/10 (e) ......................... 7,150,010 8,500,000 WestCom Corp. Second Lien Term Loan, 12.36%, 06/17/11 ............................ 8,569,020 ------------- 23,252,796 ------------- TRANSPORTATION - AUTO - 7.2% 2,103,956 Autocam Corp. Domestic Revolver, 9.37%, 06/21/09 (c) ......................... 2,082,916 1,958,333 Avon Automotive U.S. Term Loan, 11.25%, 08/11/11 ............ 1,884,896 380,167 Cooper-Standard Automotive Canada Ltd. (Canada) Tranche B Term Loan, 7.88%, 12/23/11 ............................. 383,140 Cooper-Standard Automotive, Inc. 2,199,827 Term Loan D, 7.88%, 12/23/11 (b) ............ 2,218,393 84,453 Tranche C Term Loan, 7.88%, 12/23/11 ............................. 85,166 20,000,000 Dana Corp. DIP Term Loan, 7.82%, 04/13/08 .............. 20,052,200 Delphi Corp. 6,000,000 First Lien DIP Term Loan Tranche B, 7.63%, 12/31/07 (b) ......................... 6,045,000 36,000,000 Second Lien DIP Term Loan Tranche C, 8.13%, 12/31/07 (b) .............. 36,283,680 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- TRANSPORTATION - AUTO (CONTINUED) 4,500,000 Environmental Systems Products Holdings, Inc. Second Lien Term Loan, 15.35%, 12/12/10 ............................ 2,475,000 Federal-Mogul Corp. 1,457,560 Supplemental Revolver, 9.07%, 07/01/07 (c) ......................... 1,459,381 573,404 Tranche C Term Loan, 9.07%, 03/31/07 ............................. 571,374 52,000,000 Ford Motor Co. Term Loan, 8.36%, 12/16/13 (b) .............. 52,662,480 12,500,000 General Motors Corp. Secured Term Loan, 7.70%, 11/29/13 ............................. 12,667,500 2,000,000 Gleason Works (The) Second Lien Term Loan, 10.88%, 12/30/13 ............................ 2,030,840 5,500,000 Goodyear Tire & Rubber Co. Third Lien Term Loan, 8.89%, 03/01/11 ............................. 5,581,125 3,132,878 Hayes Lemmerz International, Inc. Term Loan B, 8.87%, 06/03/09 ................ 3,171,068 Hertz Corp. (The) 369,899 Delayed Draw Term Loan, 7.35%, 08/15/07 ............................. 373,139 444,444 Letter of Credit, 5.37%, 12/21/12 ........... 448,889 2,118,990 Tranche B Term Loan, 7.20%, 12/21/12 ............................. 2,140,689 4,228,533 Insurance Auto Auctions, Inc. Delayed Draw Term Loan, 7.87%, 05/19/12 ............................. 4,236,482 Key Plastics LLC 4,409,879 Term Loan B, 8.84%, 06/29/10 ................ 4,476,027 4,597,591 Term Loan C, 11.59%, 06/29/11 ............... 4,678,049 3,988,000 Lear Corp. First Lien Term Loan B, 7.86%, 04/25/12 ............................. 4,009,934 2,000,000 Pep Boys, The - Manny, Moe & Jack Term Loan, 10/27/13 (b) ..................... 2,023,760 4,010,181 Tire Rack Holdings, Inc. Tranche B Term Loan, 7.12%, 06/24/12 ............................. 4,010,181 537,020 United Components, Inc. Tranche D Term Loan, 7.61%, 06/30/10 ............................. 540,038 5,960,000 Vanguard Car Rental USA Holding, Inc. Term Loan, 8.36%, 06/14/13 .................. 6,026,394 ------------- 182,617,741 ------------- TRANSPORTATION - LAND - 0.8% 1,000,000 JHT Holdings, Inc. Term Loan B, 10.00%, 12/21/12 ............... 1,005,000 3,000,000 OSHKOSH TRUCK CORP. Term Loan B, 7.35%, 12/06/13 ................ 3,029,250 2,560,846 Ozburn-Hessey Holding Co., LLC Term Loan, 8.78%, 08/10/12 .................. 2,567,248 Quality Distribution, Inc. 2,427,481 Synthetic Letters of Credit, 5.27%, 11/13/09 ............................. 2,433,550 5,591,786 Term Loan, 8.32%, 11/13/09 .................. 5,605,766 896,267 Term Loan, 8.32%, 11/13/09 (d) .............. 898,508 4,183,320 SIRVA Worldwide, Inc. Tranche B Term Loan, 11.61%, 12/01/10 ............................ 4,157,174 ------------- 19,696,496 ------------- See accompanying Notes to Financial Statements. | 13 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- SENIOR LOAN NOTES (CONTINUED) UTILITIES - 5.6% 2,000,000 ANP Funding I, LLC Tranche A Term Loan, 8.87%, 07/29/10 ............................. 2,017,500 Astoria Generating Co. Acquisitions LLC 708,929 First Lien Term Loan B, 7.37%, 02/23/12 ............................. 715,132 4,500,000 Second Lien Term Loan C, 9.12%, 08/23/13 ............................. 4,565,745 Boston Generating LLC 1,551,724 First Lien Synthetic Letter of Credit Facility, 5.24%, 12/20/13 (b) ............... 1,571,121 434,483 First Lien Synthetic Revolver, 7.62%, 12/20/13 (b) ......................... 439,913 7,013,793 First Lien Term Loan, 7.60%, 12/20/13 (b) ......................... 7,094,171 2,000,000 Mezzanine, 12.35%, 12/21/16 ................. 2,153,320 2,000,000 Second Lien Term Loan, 9.60%, 06/20/13 ............................. 2,061,260 8,828,628 Calpine Construction Finance Co. LP First Lien Term Loan, 11.33%, 08/26/09 ............................ 9,225,916 Calpine Corp. 3,088,206 First Lien DIP Revolver, 7.62%, 12/20/07 ............................. 3,106,210 14,359,818 Second Lien Term Loan, 9.90%, 07/16/07 (f) ......................... 16,127,799 Coleto Creek Power, LP 5,985,000 Second Lien Term Loan, 9.37%, 06/28/13 ............................. 5,842,856 318,471 Synthetic Facility, 8.26%, 06/28/13 ......... 320,860 4,658,121 Term Loan, 8.11%, 06/28/13 .................. 4,693,057 Covanta Energy Corp. 329,897 Funded Letter of Credit, 5.38%, 02/09/14 ............................. 331,754 670,103 Term Loan, 6.88%, 02/09/14 .................. 673,735 4,000,000 GBGH, LLC (U S Energy) First Lien Term Loan, 10.94%, 08/07/13 ............................ 4,010,000 1,500,000 HCP Acquisition, Inc. (Canada) First Lien Term Loan, 02/13/14 (b) .......... 1,537,500 934,023 Infrastrux Group, Inc. Term Loan, 8.57%, 11/05/12 (c) .............. 942,195 Longview Power, LLC 1,125,000 Construction Commitment, 08/31/11 (b) ....... 1,125,000 466,667 Delayed Draw Term Loan, 02/28/14 (b) ........ 471,044 133,333 Synthetic Letter of Credit, 02/28/14 (b) .... 134,584 2,000,000 Synthetic Revolver, 02/28/13 (b) ............ 2,000,000 400,000 Term Loan B, 02/28/14 (b) ................... 403,752 LSP General Finance Co. LLC 57,908 First Lien Delayed Draw Term Loan, 7.11%, 05/04/13 ............................. 58,318 1,345,987 First Lien Term Loan B, 7.11%, 05/04/13 ............................. 1,354,951 Magnolia Energy LP 30,043 Additional PCLC Facility, 12/14/11 (b) ...... 29,668 4,504,913 Facility A, 12/14/11 (b) .................... 4,448,602 465,044 Facility B, 12/14/11 (b) .................... 459,230 2,994,962 Mirant North America, LLC Term Loan, 7.10%, 01/03/13 (b) .............. 3,009,937 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- UTILITIES (CONTINUED) NATG Holdings LLC 8,316 Credit-Linked Certificate of Deposit, 6.08%, 01/23/09 (f) ......................... 7,235 126,579 Term Loan A, 8.75%, 01/23/09 (f) ............ 22,468 92,678 Term Loan B-1, 12.25%, 01/23/10 (f) ......... 16,450 9,144 Term Loan B2, 12.25%, 01/23/10 (f) .......... 8,595 NE Energy, Inc. 2,682,927 First Lien Term Loan B, 9.75%, 11/01/13 ............................. 2,718,985 1,000,000 Second Lien Term Loan, 11.75%, 05/01/14 ............................ 1,017,080 317,073 Synthetic Line of Credit, 9.75%, 11/01/13 ............................. 321,531 NRG Energy, Inc. 6,898,925 Credit-Linked Certificate of Deposit, 7.36%, 02/01/13 ............................. 6,966,672 15,059,410 Term Loan, 7.36%, 02/01/13 .................. 15,227,925 4,227,632 Plum Point Energy Associates, LLC Second Lien Term Loan, 10.61%, 09/14/14 ............................ 4,333,323 Reliant Energy, Inc. 2,857,143 New Term Loan, 7.70%, 12/01/10 .............. 2,889,029 2,142,857 Pre-Funded Letter of Credit, 5.21%, 12/01/10 ............................. 2,168,486 4,487,632 Riverside Energy Center LLC Term Loan, 9.61%, 06/24/11 .................. 4,599,823 Rocky Mountain Energy Center LLC 361,073 Credit-Linked Certificate of Deposit, 5.39%, 06/24/11 ............................. 369,197 2,857,277 Term Loan, 9.61%, 06/24/11 .................. 2,928,709 TECO Panda Generating Co. - Gila River Power L.P. 2,525,943 Tranche A Term Loan, 4.00%, 06/01/12 (b) (d) ..................... 4,559,328 2,436,793 Tranche B Term Loan, 9.00%, 06/01/20 (b) (d) ..................... 4,377,088 TECO Panda - Union Power Partners, L.P. 1,485,849 Tranche A Term Loan, 4.00%, 06/01/12 (b) (d) ..................... 2,681,957 1,426,415 Tranche B Term Loan, 9.00%, 06/01/20 (b) (d) ..................... 2,574,679 4,000,000 TPF Generation Holdings, LLC Second Lien Term Loan, 9.62%, 12/15/14 ............................. 4,088,320 ------------- 142,802,010 ------------- WIRELESS - CELLULAR/PCS - 4.0% Centennial Cellular Operating Co. 3,562,535 New Term Loan, 7.36%, 02/09/11 .............. 3,596,806 4,111,181 Term Loan, 7.61%, 02/09/11 .................. 4,150,730 38,307,500 Cricket Communications, Inc. Term B Facility, 8.11%, 06/16/13 ............ 38,714,326 11,678,302 Insight Midwest Holdings, LLC Term Loan B, 7.61%, 04/07/14 (b) ............ 11,807,407 41,922,500 MetroPCS Wireless, Inc. Tranche B Term Loan, 7.63%, 11/04/13 (b) ......................... 42,384,486 ------------- 100,653,755 ------------- WIRELESS - WIRELESS INFRASTRUCTURE - 0.1% 1,975,000 DPI Holdings, LLC Term Loan, 7.36%, 09/30/10 .................. 1,972,531 ------------- Total Senior Loan Notes (Cost $2,620,565,377) ..................... 2,648,262,836 ------------- 14 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- FOREIGN DENOMINATED SENIOR LOAN NOTES (a) - 13.9% DENMARK - 0.6% EUR Nordic Telephone Co. Holdings APS 3,750,000 Euro Facility B2, 6.08%, 04/10/14 .......... 5,002,857 3,750,000 Euro Facility C2, 6.58%, 04/10/15 .......... 5,019,104 5,000,000 Nyco Holdings 3 ApS Facility D (Second Lien), 8.70%, 12/29/16 ............................ 6,681,505 ------------- 16,703,466 ------------- FRANCE - 2.0% EUR 4,052,962 Autocam France, S.a.r.L. Revolver, 6.95%, 06/21/09 .................. 5,300,229 Ypso Holding SA 3,163,863 B (Acq) 1 Facility, 6.11%, 06/15/14 ........ 4,174,504 133,622 Capex Term Loan, 2.25%, 12/15/12 (c) ........................ 175,340 7,568,709 Eur A (Acq) 1 Facility, 5.73%, 06/06/13 ............................ 9,947,909 1,705,145 Eur A (Acq) 2 Facility, 5.73%, 06/06/13 ............................ 2,237,503 9,155,675 Eur A (Recap) 1 Facility, 5.73%, 06/06/13 ............................ 11,995,152 183,579 Eur A (Recap) 2 Facility, 5.73%, 06/06/13 ............................ 240,512 5,162,092 Eur B (Acq) 2 Facility, 6.11%, 06/15/14 ............................ 6,811,033 8,198,292 Eur B (Recap) 1 Facility, 6.11%, 06/15/14 ............................ 10,822,291 ------------- 51,704,473 ------------- GERMANY - 1.8% EUR 11,500,000 Iesy Hessen/GmbH & Co. KG Euro Senior Secured Term Loan, 6.63%, 10/15/11 ............................ 15,323,864 2,500,000 Kabel Baden Wurttemburg GH & CO. KG Second Lien Facility, 12/09/15 (b) ......... 3,344,121 Kabel Baden Wurttemburg GMBH & CO. KG 1,826,284 Term B Facility, 5.97%, 06/09/14 ........... 2,432,239 1,826,284 Term C Facility, 6.47%, 06/09/15 ........... 2,439,597 14,900,000 P7S1 Holding II S.a.r.L. - GMP Facility B, 7.59%, 07/08/11 ................ 19,737,486 Prysmian Cables & Systems, Inc. 875,000 Euro Term Loan B, 7.32%, 08/04/12 ............................ 1,161,254 875,000 Euro Term Loan C2, 6.66%, 08/04/12 ............................ 1,167,033 ------------- 45,605,594 ------------- ITALY - 1.4% EUR 4,000,000 H3G S.p.A. Euro Term Loan A1, 12/30/11 (b) ............ 5,204,549 Wind Telecommunicatione S.p.A. 8,500,000 A1 Term Loan Facility, 5.66%, 05/26/12 ............................ 11,261,773 6,750,000 B1 Term Loan Facility, 6.30%, 05/28/13 (b) ........................ 8,990,252 PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- ITALY (CONTINUED) EUR Wind Telecommunicatione S.p.A. (continued) 6,750,000 C1 Term Loan Facility, 6.80%, 05/27/14 (b) ........................ 9,008,798 ------------- 34,465,372 ------------- NETHERLANDS - 1.4% EUR Amsterdamse Beheer- En Consultingmaatschappij B.V. 4,388,443 Casema B1 Term Loan, 6.17%, 09/12/14 ............................ 5,877,266 2,279,577 Casema B2 Term Loan, 6.17%, 09/12/14 ............................ 3,054,512 6,668,019 Casema C Term Loan, 6.67%, 09/12/15 ............................ 8,961,216 1,500,000 Casema D Term Loan Second Lien, 7.92%, 03/12/16 ............................ 2,031,716 5,150,162 Kabelcom B Term Loan, 6.11%, 09/12/14 ............................ 6,900,944 5,150,162 Kabelcom C Term Loan, 6.61%, 09/12/15 ............................ 6,909,380 1,000,000 Kabelcom D Term Loan Second Lien, 7.86%, 03/12/16 ............................ 1,354,477 ------------- 35,089,511 ------------- SPAIN - 0.3% EUR Gasmedi 2000 S.A. / Nattai, S.L.U. 1,666,667 Tranche B Term Loan, 6.65%, 08/11/14 ............................ 2,207,090 1,666,667 Tranche C Term Loan, 7.15%, 08/11/15 ............................ 2,207,090 1,666,667 Tranche E Second Lien Term Loan, 8.90%, 02/11/16 ............................ 2,229,106 ------------- 6,643,286 ------------- UNITED KINGDOM - 6.4% GBP 4,000,000 Airport Development & Investment Ltd. (BAA) Facility B, 9.12%, 04/07/11 ................ 7,865,954 997,487 Ansco UK Finance CO. Ltd. Tranche B Term Loan, 8.77%, 03/08/12 ............................ 1,959,710 1,250,000 Aramark Corp. U.K. Term Loan, 01/26/14 (b) ............... 2,480,305 1,364,688 Champion Home Builders Co. Term Loan, 7.93%, 10/31/12 ................. 2,667,756 1,275,000 Eggborough Power Ltd. Term Loan, 03/31/22 (b) (e) ................ 8,745,371 Forgings International Ltd. (Firth Rixon) 500,000 Term B1 (GBP), 7.56%, 09/11/14 ............. 992,729 500,000 Term C1 (GBP), 7.81%, 09/11/15 ............. 997,629 Havana Bidco Ltd. 602,543 Facility B, 7.65%, 08/31/14 ................ 1,183,783 2,176,700 Facility C, 8.15%, 08/31/15 ................ 4,297,774 3,000,000 Facility D (Second Lien), 10.15%, 02/29/16 ........................... 6,011,524 3,523,711 Mezzanine Loan, 9.25%, 08/31/16 ............ 7,095,486 See accompanying Notes to Financial Statements. | 15 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND PRINCIPAL AMOUNT ($) VALUE ($) - -------------------- ------------- FOREIGN DENOMINATED SENIOR LOAN NOTES (a) (CONTINUED) UNITED KINGDOM (CONTINUED) GBP Highland Acquisitions Ltd. 1,000,000 Facility B, 8.13%, 01/31/14 ................ 1,959,747 1,000,000 Facility C, 8.63%, 01/31/15 ................ 1,959,747 1,000,000 Mezzanine Facility, 15.42%, 01/31/16 ....... 1,959,747 Lion / Katsu Investments (Wagamama) 5,000,000 Facility B, 8.01%, 06/30/13 ................ 9,945,716 4,400,000 Facility C, 8.51%, 06/30/14 ................ 8,752,230 3,000,000 Facility E (Second Lien), 10.76%, 12/31/14 ........................... 6,004,175 Mobileserv Ltd. (Phones 4U) 1,875,000 Facility B, 8.02%, 09/22/14 ................ 3,684,594 1,875,000 Facility C, 8.52%, 09/22/15 ................ 3,692,127 Peacock Group (The) 2,250,000 Facility B, 7.33%, 10/30/13 ................ 4,436,990 2,250,000 Facility C, 7.83%, 10/30/14 ................ 4,436,990 4,959,184 PlayPower, Inc. Add-On Term Loan, 8.17%, 06/30/12 (b) ........................ 9,791,636 Safety-Kleen JPMP SK Holdings Ltd. 1,817,400 Euro Term Loan C, 6.81%, 12/20/14 ............................ 2,418,703 1,350,000 GBP Term Loan B1, 7.10%, 12/14/12 ............................ 2,625,816 1,385,295 Sungard U K Holdings Ltd. U.K. Term Loan B, 02/12/14 (b) ............. 2,743,659 Towergate Partnership Ltd. 1,875,000 Facility A, 7.90%, 10/31/12 ................ 3,715,864 1,875,000 Facility B, 8.40%, 10/31/13 ................ 3,734,237 Trinitybrook PLC 2,500,000 Term Loan B1, 8.18%, 07/31/13 .............. 4,917,740 2,500,000 Term Loan C1, 8.68%, 07/31/14 .............. 4,933,369 United Biscuits Holdco Ltd. 12,383,459 Facility B1, 8.23%, 12/14/14 ............... 24,658,683 3,500,000 Second Lien Facility, 9.73%, 06/14/16 ............................ 7,011,661 1,750,000 Virgin Media, Inc. GBP Tranche C Term Loan, 8.48%, 03/03/13 ............................ 3,525,310 ------------- 161,206,762 ------------- Total Foreign Denominated Senior Loan Notes (Cost $336,269,614) ..................... 351,418,464 ------------- SHARES - ------------- COMMON STOCKS (G) - 1.3% UTILITIES - 1.1% 980 EBG Holding LLC ............................... 347,737 780,934 Mirant Corp. .................................. 29,097,590 ------------- 29,445,327 ------------- WIRELESS - CELLULAR/PCS - 0.2% 76,137 Leap Wireless International, Inc. ............. 5,144,577 ------------- Total Common Stocks (Cost $22,257,084) ...................... 34,589,904 ------------- SHARES VALUE ($) - ------------- ------------- PREFERRED STOCK - 0.0% MANUFACTURING - 0.0% 14,382 Superior Telecom, Inc., Series A .............. 14,382 ------------- Total Preferred Stock (Cost $14,382) .......................... 14,382 ------------- UNITS - ------------- CLAIMS (h) - 0.0% UTILITIES - 0.0% 18,500,000 Mirant Corp. .................................. 693,750 ------------- Total Claims (Cost $2) ............................... 693,750 ------------- TOTAL INVESTMENTS - 119.7% .................................... 3,034,979,336 ------------- (cost of $2,979,106,459) (j) OTHER ASSETS & LIABILITIES, NET - (19.7)% ..................... (500,446,999) ------------- NET ASSETS - 100.0% ........................................... 2,534,532,337 ============= - ---------- Forward foreign currency contracts outstanding as of February 28, 2007 were as follows: PRINCIPAL NET CONTRACTS AMOUNT UNREALIZED TO BUY OR COVERED BY APPRECIATION TO SELL CURRENCY CONTRACTS EXPIRATION (DEPRECIATION) - -------------------------------------------------------------------------------- Sell EUR 50,000,000 06/06/07 $ 713,681 Sell EUR 60,000,000 07/10/07 (1,270,244) Sell EUR 48,000,000 08/01/07 (1,244,917) Sell EUR 28,000,000 08/02/07 (688,749) Sell GBP 25,000,000 06/07/07 356,285 Sell GBP 45,000,000 07/10/07 (1,392,772) ---------------- ($ 3,526,716) =============== (a) Senior loans in which the Fund invests generally pay interest at rates which are periodically predetermined by reference to a base lending rate plus a premium. (Unless otherwise identified by (e), all senior loans carry a variable rate interest). These base lending rates are generally (i) the prime rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate ("LIBOR") or (iii) the certificate of deposit rate. Rate shown represents the weighted average rate at February 28, 2007. Senior loans, while exempt from registration under the Security Act of 1933, as amended, contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturities shown. (b) All or a portion of this position has not settled. Contract rates do not take effect until settlement date. (c) Senior loan notes have additional unfunded loan commitments. See Note 9. (d) Loan held on participation. See note 7. (e) Fixed rate senior loan. (f) The issuer is in default of certain debt covenants. Income is not being accrued. (g) Non-income producing security. 16 | See accompanying Notes to Financial Statements. INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND (h) Security is the result of company restructuring that will be converted into equity upon the completion of court proceedings. (i) Cost for U.S. federal income tax purposes is $2,980,168,495. CLEC Competitive Local Exchange Carrier DIP Debtor in Possession EUR Euro Currency GBP Great Britain Pound PIK Payment In Kind FOREIGN VARIABLE SENIOR LOAN NOTES INDUSTRY CONCENTRATION TABLE: (% of Total Net Assets) Cable - International Cable ..................... 4.4% Food/Tabacco - Beverage & Bottling .............. 2.2% Telecommunications .............................. 1.8% Broadcasting .................................... 1.5% Retail .......................................... 1.3% Healthcare - Medical Products ................... 0.5% Manufacturing ................................... 0.5% Utilities ....................................... 0.3% Financial ....................................... 0.3% Aerospace - Airlines ............................ 0.3% Services - Environmental Services ............... 0.2% Transportation - Auto ........................... 0.2% Aerospace - Aerospace/Defense ................... 0.1% Gaming/Leisure - Gaming ......................... 0.1% Information Technology .......................... 0.1% Housing - Real Estate Development ............... 0.1% ----- Total ........................................... 13.9% ===== See accompanying Notes to Financial Statements. | 17 STATEMENT OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 (UNAUDITED) HIGHLAND FLOATING RATE ADVANTAGE FUND
($) - ------------------------------------------------------------------------------------------------------------------------- ASSETS: Investments, at value (Cost $2,979,106,459) .......................................................... 3,034,979,336 Cash ................................................................................................. 116,427,656 Foreign currency (Cost $3,692,430) ................................................................... 3,679,215 Receivable for: Investments sold .................................................................................. 109,790,953 Fund shares sold .................................................................................. 20,366,202 Dividend and interest receivable .................................................................. 5,837,639 Other assets ......................................................................................... 33,232 ------------- Total assets ................................................................................... 3,291,114,233 ------------- LIABILITIES: Notes payable (Note 8) ............................................................................... 415,000,000 Net discount and unrealized appreciation/(depreciation) on unfunded transactions (Note 9) ............ 34,552 Net unrealized appreciation/(depreciation) on forward currency contracts ............................. 3,526,716 Payable for: Fund shares redeemed .............................................................................. 4,317 Distributions ..................................................................................... 1,402,153 Investments purchased ............................................................................. 331,974,608 Investment advisory fee payable (Note 4) .......................................................... 1,371,138 Administration fee (Note 4) ....................................................................... 456,753 Trustees' fees (Note 4) ........................................................................... 34 Distribution and service fees (Note 4) ............................................................ 1,066,298 Interest expense (Note 8) ......................................................................... 1,652,622 Accrued expenses and other liabilities ............................................................... 92,705 ------------- Total liabilities .............................................................................. 756,581,896 ------------- NET ASSETS .............................................................................................. 2,534,532,337 ============= COMPOSITION OF NET ASSETS Paid-in capital ...................................................................................... 2,480,487,178 Undistributed net investment income .................................................................. 2,216,775 Accumulated net realized gain/(loss) on Investments and foreign currency transactions ................ (1,318,598) Net unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign currency contracts and translation of assets and liabilities denominated in foreign currency ...... 53,146,982 ------------- NET ASSETS .............................................................................................. 2,534,532,337 ============= CLASS A Net assets ........................................................................................... 993,434,209 Shares outstanding (unlimited authorization) ......................................................... 79,269,677 Net asset value per share (Net assets/shares outstanding) ............................................ 12.53(a) Maximum offering price per share (100 / 96.50 of $12.53) ............................................. 12.98(b) CLASS B Net assets ........................................................................................... 110,389,266 Shares outstanding (unlimited authorization) ......................................................... 8,808,290 Net asset value and offering price per share (Net assets/shares outstanding) ......................... 12.53(a) CLASS C Net assets ........................................................................................... 1,155,686,042 Shares outstanding (unlimited authorization) ......................................................... 92,206,130 Net asset value and offering price per share (Net assets/shares outstanding) ......................... 12.53(a) CLASS Z Net assets ........................................................................................... 275,022,820 Shares outstanding (unlimited shares authorized) ..................................................... 22,051,230 Net asset value, offering and redemption price per share (Net assets/shares outstanding) ............. 12.47 - ---------------- (a) Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. (b) On sales of $100,000 or more, the offering price is reduced.
18 | See accompanying Notes to Financial Statements. STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE ADVANTAGE FUND FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED)
($) - --------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Interest Income .............................................................................. 112,177,413 Dividends .................................................................................... 683 Facility and other fees ...................................................................... 10,479 ----------- Total investment income ................................................................ 112,188,575 ----------- EXPENSES: Investment advisory fee (Note 4) ............................................................. 4,583,465 Administration fee (Note 4) .................................................................. 2,565,548 Accounting service fee ....................................................................... 271,015 Distribution fee: (Note 4) Class A ................................................................................... 426,969 Class B ................................................................................... 254,437 Class C ................................................................................... 2,917,541 Service fee: (Note 4) Class A ................................................................................... 1,067,422 Class B ................................................................................... 141,354 Class C ................................................................................... 1,215,642 Transfer agent fee ........................................................................... 507,880 Professional fees ............................................................................ 106,395 Trustees' fees (Note 4) ...................................................................... 50,803 Custody fee .................................................................................. 40,137 Registration fees ............................................................................ 130,665 Reports to shareholders ...................................................................... 355,787 Other expense ................................................................................ 121,290 ----------- Net operating expenses ................................................................. 14,756,350 Interest expense (Note 8) .................................................................... 11,431,915 Facility expense ............................................................................. 39,213 ----------- Net expenses ........................................................................... 26,227,478 ----------- Net investment income .................................................................. 85,961,097 ----------- NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS: Net realized gain/(loss) on investments ...................................................... 710,094 Net realized gain/(loss) on foreign currency transactions .................................... (1,135,847) Net change in unrealized appreciation/(depreciation) on investments .......................... 37,545,496 Net change in unrealized appreciation/(depreciation) on unfunded transactions (Note 9) ....... 264,384 Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts ... (3,526,716) Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency ............................................... 807,482 ----------- Net realized and unrealized gain/(loss) on investments ................................. 34,664,893 ----------- Net increase in net assets resulting from operations ................................... 120,625,990 ===========
See accompanying Notes to Financial Statements. | 19 STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE ADVANTAGE FUND
SIX MONTHS ENDED FEBRUARY 28, 2007 YEAR ENDED (UNAUDITED) AUGUST 31, 2006 ($) ($) ----------------- --------------- INCREASE IN NET ASSETS: FROM OPERATIONS: Net investment income ....................................................... 85,961,097 98,262,114 Net realized gain/(loss) on investments and foreign currency transactions ... (425,753) 19,527,838 Net change in unrealized appreciation on investments, unfunded transactions, forward foreign currency contracts and translation of assets and liabilities denominated in foreign currency ................ 35,090,646 3,159,526 ----------------- --------------- Net increase in net assets from operations ............................ 120,625,990 120,949,478 ----------------- --------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS From net investment income: Class A .................................................................. (36,222,051) (39,595,036) Class B .................................................................. (4,617,361) (8,837,518) Class C .................................................................. (38,799,042) (40,413,435) Class Z .................................................................. (10,530,387) (8,134,869) ----------------- --------------- Total distributions from net investment income ........................ (90,168,841) (96,980,858) From capital gains: Class A .................................................................. (4,805,043) -- Class B .................................................................. (606,560) -- Class C .................................................................. (5,510,036) -- Class Z .................................................................. (1,314,861) -- ----------------- --------------- Total distributions from capital gains ................................ (12,236,500) -- ----------------- --------------- Total distributions declared to shareholders .......................... (102,405,341) (96,980,858) ----------------- --------------- SHARE TRANSACTIONS Class A Subscriptions ............................................................ 329,078,346 509,092,824 Distributions reinvested ................................................. 26,754,021 26,150,996 Redemptions .............................................................. (99,923,642) (166,364,386) ----------------- --------------- Net increase .......................................................... 255,908,725 368,879,434 Class B Subscriptions ............................................................ 995 789 Distributions reinvested ................................................. 3,270,514 5,382,976 Redemptions .............................................................. (9,422,334) (16,695,298) ----------------- --------------- Net decrease .......................................................... (6,150,825) (11,311,533) Class C Subscriptions ............................................................ 362,504,472 471,122,036 Distributions reinvested ................................................. 30,666,561 27,967,790 Redemptions .............................................................. (62,943,534) (84,176,434) ----------------- --------------- Net increase .......................................................... 330,227,499 414,913,392 Class Z Subscriptions ............................................................ 136,085,189 115,875,101 Distributions reinvested ................................................. 6,440,559 4,884,669 Redemptions .............................................................. (30,411,949) (35,802,179) ----------------- --------------- Net increase .......................................................... 112,113,799 84,957,591 ----------------- --------------- Net increase from share transactions .................................. 692,099,198 857,438,884 ----------------- --------------- Total increase in net assets .......................................... 710,319,847 881,407,504 ----------------- --------------- NET ASSETS Beginning of period ......................................................... 1,824,212,490 942,804,986 End of period (including undistributed net investment income of $2,216,775 and $6,424,519, respectively) ............................................ 2,534,532,337 1,824,212,490 ================= ===============
20 | See accompanying Notes to Financial Statements. STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE ADVANTAGE FUND
SIX MONTHS ENDED FEBRUARY 28, 2007 PERIOD ENDED (UNAUDITED) AUGUST 31, 2006 ($) ($) ----------------- --------------- CHANGE IN SHARES Class A Subscriptions ............................................................ 26,432,869 17,322,296 Issued for distributions reinvested ...................................... 2,148,324 846,869 Redemptions .............................................................. (8,014,358) (6,887,056) ----------------- --------------- Net increase .......................................................... 20,566,835 11,282,109 Class B Subscriptions ............................................................ 80 855,878 Issued for distributions reinvested ...................................... 262,695 332,132 Redemptions .............................................................. (756,396) (1,285,093) ----------------- --------------- Net decrease .......................................................... (493,621) (97,083) Class C Subscriptions ............................................................ 29,113,888 13,815,400 Issued for distributions reinvested ...................................... 2,462,546 918,787 Redemptions .............................................................. (5,051,895) (5,686,448) ----------------- --------------- Net increase .......................................................... 26,524,539 9,047,739 Class Z Subscriptions ............................................................ 10,940,671 3,359,211 Issued for distributions reinvested ...................................... 517,159 154,587 Redemptions .............................................................. (2,437,148) (1,726,328) ----------------- --------------- Net increase .......................................................... 9,020,682 1,787,470
See accompanying Notes to Financial Statements. | 21 STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE ADVANTAGE FUND FOR THE SIX MONTHS ENDED FEBRUARY 28, 2007 (UNAUDITED)
($) - -------------------------------------------------------------------------------------------------------------- CASH FLOWS USED FOR OPERATING ACTIVITIES Net investment income .................................................................... 85,961,097 ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH AND FOREIGN CURRENCY USED FOR OPERATING ACTIVITIES Purchase of investments securities ....................................................... (1,457,748,543) Proceeds from disposition of investment securities ....................................... 756,781,965 Increase in dividends, interest and fees receivable ...................................... 16,701,042 Increase in receivable for investments sold .............................................. (92,251,740) Decrease in other assets ................................................................. 45,785 Net amortization/(accretion) of premium/(discount) ....................................... (1,757,268) Increase in payable for investments purchased ............................................ 48,309,517 Increase in payables to related parties .................................................. 1,052,043 Decrease in mark-to-market on realized and unrealized gain/(loss) on foreign currency .... (328,365) Decrease in other liabilities ............................................................ (452,249) -------------- Net cash and foreign currency flow from operating activities ....................... (643,686,716) -------------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES Increase in notes payable ................................................................ 80,000,000 Increase in interest payable ............................................................. 392,289 Proceeds from shares sold ................................................................ 823,602,006 Payment of shares redeemed ............................................................... (202,697,142) Distributions paid in cash ............................................................... (33,879,641) -------------- Net cash flow provided by financing activities ..................................... 667,417,512 -------------- Net decrease in cash and foreign currency .......................................... 23,730,796 -------------- CASH AND FOREIGN CURRENCY Beginning of the period .................................................................. 96,376,075 -------------- End of the period ........................................................................ 120,106,871 ==============
22 | See accompanying Notes to Financial Statements. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE ADVANTAGE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ------------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2007 CLASS A SHARES (UNAUDITED) 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(a) 0.50 0.96 0.67 0.56 0.81 0.83(b) Net realized and unrealized gain/(loss) on investments(a) 0.19 0.22 0.11 0.89 0.74 (1.26)(b) ---------- --------- --------- ----------- ---------- -------- Total from investment operations 0.69 1.18 0.78 1.45 1.55 (0.43) - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.52) (0.94) (0.67) (0.59) (0.81) (0.83) From net realized gains (0.07) -- -- -- -- -- ---------- --------- --------- ----------- ---------- -------- Total distributions declared to shareholders (0.59) (0.94) (0.67) (0.59) (0.81) (0.83) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 12.53 $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 Total return(c) 5.75%(d) 10.08% 6.56%(e) 13.14% 15.55% (3.88)% - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Operating expenses 1.16% 1.12% 1.28% 1.29%(f) 1.38%(f) 1.38%(f) Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73% 0.99% Net expenses(g) 2.22% 2.16% 2.00% 1.69%(f) 2.11%(f) 2.37%(f) Net investment income 8.14% 7.78% 5.60% 4.73%(f) 7.67%(f) 7.25%(b)(f) Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36% 0.32% Portfolio turnover rate 28% 61% 85% 110% 90% 98% Net assets, end of period (000's) $ 993,434 $ 729,845 $ 351,557 $ 212,205 $ 85,166 $ 69,733 - ---------- (a) Per share data was calculated using average shares outstanding during the period. (b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01. The impact to the ratio of net investment income to average net assets was less than 0.01%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Total return is at net asset value assuming all distributions reinvested and no initial sales charge or CDSC. Had the Fund's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (d) Not annualized. (e) Total return is calculated using the Net Asset Value used for trading at the close of business on August 31, 2005. (f) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (g) Net expense ratio has been calculated after applying any waiver/reimbursement.
See accompanying Notes to Financial Statements. | 23 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE ADVANTAGE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ------------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2007 CLASS B SHARES (UNAUDITED) 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(a) 0.48 0.92 0.63 0.53 0.78 0.78(b) Net realized and unrealized gain/(loss) on investments(a) 0.19 0.22 0.11 0.88 0.73 (1.25)(b) ---------- --------- --------- ----------- ---------- --------- Total from investment operations 0.67 1.14 0.74 1.41 1.51 (0.47) - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.50) (0.90) (0.63) (0.55) (0.77) (0.79) From net realized gains (0.07) -- -- -- -- -- ---------- --------- --------- ----------- ---------- -------- Total distributions declared to shareholders (0.57) (0.90) (0.63) (0.55) (0.77) (0.79) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 12.53 $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 Total return(c) 5.57%(d) 9.70% 6.19%(e) 12.75% 15.16% (4.22)% - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Operating expenses 1.51% 1.47% 1.63% 1.64%(f) 1.73%(f) 1.73%(f) Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73% 0.99% Net expenses(g) 2.57% 2.51% 2.35% 2.04%(f) 2.46%(f) 2.72%(f) Net investment income 7.79% 7.43% 5.25% 4.50%(f) 7.34%(f) 6.90%(b)(f) Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36% 0.32% Portfolio turnover rate 28% 61% 85% 110% 90% 98% Net assets, end of period (000's) $ 110,389 $ 115,651 $ 124,500 $ 124,589 $ 76,379 $ 68,157 - ---------- (a) Per share data was calculated using average shares outstanding during the period. (b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01. The impact to the ratio of net investment income to average net assets was less than 0.01%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Total return is at net asset value assuming all distributions reinvested and no CDSC. Had the Fund's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (d) Not annualized. (e) Total return is calculated using the Net Asset Value used for trading at the close of business on August 31, 2005. (f) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (g) Net expense ratio has been calculated after applying any waiver/reimbursement.
24 | See accompanying Notes to Financial Statements. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE ADVANTAGE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ------------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2007 CLASS C SHARES (UNAUDITED) 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(a) 0.47 0.90 0.61 0.50 0.76 0.76(b) Net realized and unrealized gain/(loss) on investments(a) 0.19 0.22 0.11 0.89 0.74 (1.25)(b) ---------- --------- --------- ----------- ---------- -------- Total from investment operations 0.66 1.12 0.72 1.39 1.50 (0.49) - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.49) (0.88) (0.61) (0.53) (0.76) (0.77) From net realized gains (0.07) -- -- -- -- -- ---------- --------- --------- ----------- ---------- -------- Total distributions declared to shareholders (0.56) (0.88) (0.61) (0.53) (0.76) (0.77) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 12.53 $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 Total return(c) 5.40%(d) 9.62% 6.03%(e) 12.57% 14.99% (4.36)% - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Operating expenses 1.66% 1.62% 1.78% 1.79%(f) 1.88%(f) 1.88%(f) Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73% 0.99% Net expenses(g) 2.72% 2.66% 2.50% 2.19%(f) 2.61%(f) 2.87%(f) Net investment income 7.64% 7.28% 5.10% 4.19%(f) 7.14%(f) 6.75%(b)(f) Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36% 0.32% Portfolio turnover rate 28% 61% 85% 110% 90% 98% Net assets, end of period (000's) $ 1,155,686 $ 816,720 $ 391,455 $ 278,731 $ 80,572 $ 61,811 - ---------- (a) Per share data was calculated using average shares outstanding during the period. (b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01. The impact to the ratio of net investment income to average net assets was less than 0.01%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Total return is at net asset value assuming all distributions reinvested and no CDSC. Had the Fund's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (d) Not annualized. (e) Total return is calculated using the Net Asset Value used for trading at the close of business on August 31, 2005. (f) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (g) Net expense ratio has been calculated after applying any waiver/reimbursement.
See accompanying Notes to Financial Statements. | 25 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- HIGHLAND FLOATING RATE ADVANTAGE FUND SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
YEAR ENDED AUGUST 31, ------------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2007 CLASS Z SHARES (UNAUDITED) 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 $ 11.74 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(a) 0.52 1.00 0.71 0.59 0.78 0.86(b) Net realized and unrealized gain/(loss) on investments(a) 0.13 0.22 0.11 0.90 0.81 (1.25)(b) ----------- ---------- --------- ----------- ---------- -------- Total from investment operations 0.65 1.22 0.82 1.49 1.59 (0.39) - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.54) (0.98) (0.71) (0.63) (0.85) (0.87) From net realized gains (0.07) -- -- -- -- -- ---------- --------- --------- ----------- ---------- -------- Total distributions declared to shareholders (0.61) (0.98) (0.71) (0.63) (0.85) (0.87) =================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 12.47 $ 12.43 $ 12.19 $ 12.08 $ 11.22 $ 10.48 Total return(c) 5.93%(d) 10.47% 6.93%(e) 13.52% 15.95% (3.53)% - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Operating expenses 0.81% 0.77% 0.93% 0.94%(f) 1.03%(f) 1.03%(f) Interest and facility expenses 1.06% 1.04% 0.72% 0.40% 0.73% 0.99% Net expenses(g) 1.87% 1.81% 1.65% 1.34%(f) 1.76%(f) 2.02%(f) Net investment income 8.49% 8.13% 5.95% 4.93%(f) 7.21%(f) 7.60%(b)(f) Waiver/reimbursement -- 0.04% 0.10% 0.18% 0.36% 0.32% Portfolio turnover rate 28% 61% 85% 110% 90% 98% Net assets, end of period (000's) $ 275,023 $ 161,996 $ 75,293 $ 53,049 $ 5,178 $ 140 - ---------- (a) Per share data was calculated using average shares outstanding during the period. (b) Effective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended August 31, 2002, on the net investment income and net realized and unrealized loss per share was less than $0.01. The impact to the ratio of net investment income to average net assets was less than 0.01%. Per share data and ratios for periods prior to August 31, 2002 have not been restated to reflect this change in presentation. (c) Total return is at net asset value assuming all distributions reinvested. Had the Fund's investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (d) Not annualized. (e) Total return is calculated using the Net Asset Value used for trading at the close of business on August 31, 2005. (f) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (g) Net expense ratio has been calculated after applying any waiver/reimbursement.
26 | See accompanying Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND NOTE 1. ORGANIZATION Highland Floating Rate Advantage Fund (the "Fund") is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a non-diversified, closed-end management investment company. INVESTMENT OBJECTIVE The Fund seeks to provide a high level of current income consistent with preservation of capital. FUND SHARES The Fund may issue an unlimited number of shares and continuously offers three classes of shares: Class A, Class C and Class Z. The Fund has discontinued selling Class B Shares to new and existing investors, although existing investors may still reinvest distributions in Class B Shares. Certain share classes have their own sales charge and bear class specific expenses, which include distribution fees and service fees. Class A Shares are subject to a maximum front-end sales charge of 3.50% based on the amount of initial investment. Class A Shares purchased without an initial sales charge by accounts aggregating $1 million and greater at the time of purchase are subject to a 1.00% contingent deferred sales charge ("CDSC") on shares sold within eighteen months. Class B Shares are subject to a maximum CDSC of 3.25% based upon the holding period after purchase. Class B Shares will convert to Class A Shares eight years after purchase. Please read the Fund's prospectus for additional details on the Class B CDSC. Class C Shares are subject to a 1.00% CDSC on shares sold within one year after purchase. Class Z Shares are not subject to a sales charge. There are certain restrictions on the purchase of Class Z Shares, as described in the Fund's prospectus. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION The value of the Fund's assets is based on the current market value of its investments. For securities with readily available market quotations, the Fund uses those quotations for pricing. Securities without a sale price or bid and ask quotations on the valuation day will be priced by an independent pricing service. When portfolio securities are traded on the relevant day of valuation, the valuation will be the last reported sale price on that day. If there are no such sales on that day, the security will be valued at the mean between the most recently quoted bid and asked prices from principal market makers. If securities do not have readily available market quotations or pricing service prices, including circumstances under which such are determined not to be accurate or current (including when events materially affect the value of securities occurring between the time when market price is determined and calculation of the Fund's net asset value), such securities are valued at their fair value, as determined in good faith by the Fund's investment adviser, Highland Capital Management, L.P. ("Highland" or the "Investment Adviser") in accordance with procedures established by the Fund's Board of Trustees. In these cases, the Fund's net asset value will reflect the affected portfolio securities' value as determined in the judgment of the Board of Trustees or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different from a security's most recent sale price and from the prices used by other investment companies to calculate their net asset values. There can be no assurance that the Fund's valuation of a security will not differ from the amount that it realizes upon the sale of such security. SECURITY TRANSACTIONS Security transactions are accounted for on the trade date. Costs and gains (losses) are determined based upon the specific identification method for both financial statement and federal income tax purposes. FOREIGN CURRENCY Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and liabilities resulting from changes in exchange rates, between trade and settlement dates on securities transactions and between the accrual and payment dates on dividends, interest income and foreign withholding taxes, are recorded as unrealized foreign currency gains (losses). Realized gains (losses) and unrealized appreciation (depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The effect of changes in foreign currency exchange rates on investments in securities are not segregated in the statement of operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities. Semi-Annual Report | 27 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND FORWARD FOREIGN CURRENCY CONTRACTS In order to protect against a possible loss on investments resulting from a decline or appreciation in the value of a particular foreign currency against the U.S. dollar or another foreign currency or for other reasons, the Fund is authorized to enter into forward currency exchange contracts. These contracts involve an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Forward currency contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Fund to establish a rate of exchange for a future point in time. REPURCHASE AGREEMENTS The Fund may engage in repurchase agreement transactions with institutions that the Fund's investment adviser has determined are creditworthy. The Fund, through its custodian, receives delivery of underlying securities collateralizing a repurchase agreement. Collateral is at least equal, at all times, to the value of the repurchase obligation including interest. A repurchase agreement transaction involves certain risks in the event of default or insolvency of the counterparty. These risks include possible delays or restrictions upon the Fund's ability to dispose of the underlying securities and a possible decline in the value of the underlying securities during the period while the Fund seeks to assert its rights. INCOME RECOGNITION Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums, if any. Facility fees received are recorded as a reduction of cost to the loan and amortized through the maturity of the loan. Unamortized facility fees are reflected as deferred fees on the Statement of Assets and Liabilities. DETERMINATION OF CLASS NET ASSET VALUES All income, expenses (other than distribution fees and service fees, which are class-specific expenses, as shown on the Statement of Operations) and realized and unrealized gains (losses) are allocated to each class of shares of the Fund on a daily basis for purposes of determining the net asset value of each class. Income and expenses are allocated to each class based on the settled shares method, while realized and unrealized gains (losses) are allocated based on the relative net assets of each class. FEDERAL INCOME TAX STATUS The Fund intends to qualify each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and will distribute substantially all of its taxable income and gains, if any, for its tax year, and as such will not be subject to federal income taxes. DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income are declared daily and paid monthly. Net realized capital gains, if any, are distributed at least annually. STATEMENT OF CASH FLOWS Information on financial transactions which have been settled through the receipt or disbursement of cash are presented in the Statement of Cash Flows. The cash and foreign currency amount shown in the Statement of Cash Flows is the amount included within the Fund's Statement of Assets and Liabilities and includes cash and foreign currency on hand at its custodian bank and sub-custodian bank, respectively, and does not include any short-term investments. ADDITIONAL ACCOUNTING STANDARDS On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken in the course of preparing the Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be booked as a tax expense in the current year and recognized as: a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of deferred tax asset; an increase in deferred tax liability; or a combination thereof. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006, and implementation of FIN 48 for net asset value calculations is required beginning on August 31, 2007. In addition, in September 2006, Statement of Financial Accounting Standards No. 157 FAIR VALUE MEASUREMENTS ("SFAS 157") was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. At this time, Highland is evaluating the implications of FIN 48 and SFAS 157 and their impact on the financial statements have not yet been determined. NOTE 3. FEDERAL TAX INFORMATION The timing and character of income and capital gain distributions are determined in accordance with Federal income tax regulations, which may differ from GAAP. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. 28 | Semi-Annual Report NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND Reclassifications are made to the Fund's capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. The tax character of distributions paid during the years ended August 31, 2006 and August 31, 2005 was as follows: - -------------------------------------------------------------------------------- 2006 2005 - -------------------------------------------------------------------------------- Distributions paid from: - -------------------------------------------------------------------------------- Ordinary income* $96,980,858 $43,133,311 - -------------------------------------------------------------------------------- Long-term capital gains -- -- - -------------------------------------------------------------------------------- * For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions. As of August 31, 2006, the most recent tax year end, the components of distributable earnings on a tax basis were as follows: - -------------------------------------------------------------------------------- Undistributed Undistributed Ordinary Long-Term Net Unrealized Income Capital Gains Appreciation* - -------------------------------------------------------------------------------- $22,490,899 $193,580 $17,274,021 - -------------------------------------------------------------------------------- * The differences between book-basis and tax-basis net unrealized appreciation/depreciation are primarily due to deferral of losses from wash sales and accretion/amortization on debt securities. Unrealized appreciation and depreciation at February 28, 2007, based on cost of investments for federal income tax purposes, and excluding any unrealized appreciation (depreciation) from changes in the value of other assets and liabilities resulting from changes in exchange rates, was: - ------------------------------------------------------------------------------- Unrealized appreciation $ 57,245,412 Unrealized depreciation (2,434,571) ------------ Net unrealized appreciation $ 54,810,841 ============ - ------------------------------------------------------------------------------- NOTE 4. ADVISORY, ADMINISTRATION, SERVICE AND DISTRIBUTION, TRUSTEE, AND OTHER FEES INVESTMENT ADVISORY FEE Highland Capital Management, L.P. is the investment adviser to the Fund. Effective December 18, 2006, the Fund is accruing a monthly investment advisory fee based on the Fund's average daily managed assets at the following annual rates: - -------------------------------------------------------------------------------- Average Daily Managed Assets Annual Fee Rate - -------------------------------------------------------------------------------- First $1billion 0.65% - -------------------------------------------------------------------------------- Next $1billion 0.60% - -------------------------------------------------------------------------------- Over $2billion 0.55% - -------------------------------------------------------------------------------- Prior to December 18, 2006, the Fund was accruing a monthly investment advisory fee based on the Fund's average daily net assets at the following annual rates: - -------------------------------------------------------------------------------- Average Daily Net Assets Annual Fee Rate - -------------------------------------------------------------------------------- First $1billion 0.45% - -------------------------------------------------------------------------------- Next $1billion 0.40% - -------------------------------------------------------------------------------- Over $2billion 0.35% - -------------------------------------------------------------------------------- For the six months ended February 28, 2007, the Fund's effective investment advisory fee rate was 0.42%. The excess investment advisory fees held in escrow as a result of the differing calculation methodologies (discussed below) that was expensed for the six months ended February 28, 2007 was $1,416,799. The impact of the investment advisory fee for the six months ended February 28, 2007 was as follows: - ------------------------------------------------------------------------------- Calculated Investment Advisory Fee $ 6,000,264 Release of Escrow (1,416,799) ------------ Net Investment Advisory Fee $ 4,583,465 ============ - ------------------------------------------------------------------------------- Without the impact of the release of the escrowed amounts, the Fund's effective advisory fee for the six months ended February 28, 2007 was 0.55%. On April 9, 2004, Columbia Management Advisors, Inc. ("Columbia") and Highland entered into an agreement to sell certain of the assets of Columbia's bank loan asset management group to Highland. Upon completion of the sale on April 15, 2004, the advisory agreement between Columbia and the Fund terminated because such sale effected an "assignment" (as defined in the1940 Act), and an interim advisory agreement between Highland and the Fund took effect. At a meeting held on March 29, 2004, the prior board of trustees of the Fund, approved by an unanimous vote of the Trustees present, (i) the interim advisory agreement to take effect on April 15, 2004 and (ii) the agreement that was in effect between the Fund and Highland until December 18, 2006 (the "Former Advisory Agreement"), subject to shareholder approval. On July 30, 2004 the shareholders of the Fund approved the Former Advisory Agreement with Highland and it became effective immediately after such approval. Due to a drafting error, the detailed description of the advisory fee in the proxy statement and the form of the Former Advisory Agreement submitted to shareholders in 2004 and signed by the parties described an advisory fee calculation methodology based on average daily net rather than managed assets that would result in Highland's receiving a lower advisory fee than that believed approved by the prior trustees and actually calculated and paid to Highland since the adoption of the Former Advisory Agreement. The only difference between the two Semi-Annual Report | 29 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND methodologies is that the intended advisory fee would have been charged against managed assets rather than net assets. Because the Fund borrows to seek to enhance its returns, Highland's fee computed on the basis of average daily managed assets would be higher than the fee computed on the basis of average daily net assets and thus Highland may have an economic incentive to incur more leverage in order to maximize its compensation. In view of the time and resources it would take to obtain a judicial ruling regarding retroactive approval of the correction under the 1940 Act, Highland resolved to release the fee differential to the Fund and recommend that the Board approve and submit to shareholders a new advisory agreement that would make certain changes to the way that the advisory fee is calculated. Inasmuch as the proxy disclosure presented to shareholders in 2004 as to the precise rate of the advisory fee to be paid by the Fund was inconsistent with the intention of the prior board, Highland proposed that the current Board approve a correction to the advisory fee calculation methodology to indicate that advisory fees are calculated based on average daily managed assets rather than average daily net assets. Additionally, in light of the excellent performance of the Fund during the period Highland has served as the investment adviser and in view of the fact that the advisory/management fee for the Fund is substantially below the average of the Fund's Lipper peer group, Highland also proposed that the Board approve an increase in the advisory fee. At an in-person Board meeting held on May 19, 2006, the current Board, including the members of the Board who are not "interested persons" (as defined in the 1940 Act) of the Fund (the "Independent Trustees"), unanimously approved both the continuation of the Former Advisory Agreement and a new advisory agreement between the Fund and Highland that would include the terms that Highland proposed (the "New Advisory Agreement"). The New Advisory Agreement was submitted to and approved by shareholders at a meeting on December 18, 2006. ADMINISTRATION FEES Highland provides administrative services to the Fund for a monthly administration fee at the annual rate of 0.20% of the Fund's average daily managed net assets. Under a separate sub-administration agreement, Highland has delegated certain administrative functions to PFPC Inc. ("PFPC"). Highland pays PFPC directly for these services. SERVICE AND DISTRIBUTION FEES PFPC Distributors, Inc. (the "Distributor") serves as the principal underwriter and distributor of the Fund's shares. The Distributor receives the CDSC imposed on certain redemptions of Class A, Class B and Class C Shares. For the six months ended February 28, 2007, the Distributor received $46,197, $71,641 and $136,501 of CDSCs on Class A, Class B and Class C Share redemptions, respectively. The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), which requires the payment of a monthly service fee to the Distributor at an annual rate of 0.25% of the average daily net assets attributable to Class A, Class B and Class C Shares of the Fund. The Plan also requires the payment of a monthly distribution fee to the Distributor at an annual rate of 0.10%, 0.45% and 0.60% of the average daily net assets attributable to Class A, Class B and Class C shares, respectively. The CDSC and the fees received from the Plan are used principally as repayment for amounts paid by the Distributor to dealers who sold such shares. EXPENSE LIMITS AND FEE REIMBURSEMENTS Effective December 8, 2006, Highland has voluntarily agreed to waive fees and reimburse certain expenses to the extent that total expenses (exclusive of investment advisory fees, administration fees, distribution and service fees, brokerage commissions, interest, facility expense, taxes and extraordinary expenses, if any) exceed 0.15% annually of the Fund's average daily net assets. This arrangement may be revised or discontinued by Highland at any time. FEES PAID TO OFFICERS AND TRUSTEES The Fund pays no compensation to its one interested Trustee or any of its other officers, all of whom are employees of Highland. The Fund pays to each of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Fund each an annual retainer of $25,000 for services provided as Trustees of the Fund. NOTE 5. PORTFOLIO INFORMATION For the six months ended February 28, 2007, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $1,457,748,543 and $756,781,965, respectively. NOTE 6. PERIODIC REPURCHASE OFFERS The Fund has adopted a fundamental policy to offer each fiscal quarter to repurchase a specified percentage (between 5% and 25%) of the shares then outstanding at the Fund's net asset value ("Repurchase Offers"). Repurchase Offers are scheduled to occur on or about the 15th day (or the next business day if the 15th is not a business day) in the months of February, May, August, and November. It is anticipated that the date on which the repurchase price of shares will be determined (the "Repurchase Pricing Date") will be the same date as the deadline for shareholders to provide their repurchase requests to the Distributor (the "Repurchase Request Deadline"), and if so, the Repurchase Request Deadline will be set for a time no later than the close of regular trading on the New York Stock Exchange on such 30 | Semi-Annual Report NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND date. The Repurchase Pricing Date will occur no later than the 14th day after the Repurchase Request Deadline, or the next business day if the 14th day is not a business day. Repurchase proceeds will be paid to shareholders no later than seven days after the Repurchase Pricing Date. For the six months ended February 28, 2007, there were two Repurchase Offers. For each Repurchase Offer, the Fund offered to repurchase 10% of its shares. In the November 2006 and February 2007, Repurchase Offers, 4.14% and 4.67%, respectively, of shares outstanding were repurchased. NOTE 7. SENIOR LOAN PARTICIPATION COMMITMENTS The Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in adjustable rate senior loans ("Senior Loans"), the interest rates of which float or vary periodically based upon a benchmark indicator of prevailing interest rates to domestic foreign corporations, partnerships and other entities ("Borrowers"). If the lead lender in a typical lending syndicate becomes insolvent, enters FDIC receivership or, if not FDIC insured enters into bankruptcy, the Fund may incur certain costs and delays in receiving payment or may suffer a loss of principal and/or interest. When the Fund purchases a participation of a Senior Loan interest, the Fund typically enters into a contractual agreement with the lender or other third party selling the participation, not with the borrower directly. As such, the Fund assumes the credit risk of the Borrower, selling participant or other persons interpositioned between the Fund and the Borrower. The ability of Borrowers to meet their obligations may be affected by economic developments in a specific industry. At February 28, 2007, the following sets forth the selling participants with respect to interests in Senior Loans purchased by the Fund on a participation basis. - -------------------------------------------------------------------------------- Principal Selling Participant Amount Value - -------------------------------------------------------------------------------- Bank of America, NA: Gila River Power, L.P. Tranche A Term Loan $ 240,566 $ 434,222 Tranche B Term Loan 232,075 416,865 Union Power Partners, L.P. Tranche A Term Loan 141,509 255,425 Tranche B Term Loan 135,849 245,207 Citibank, NA: Gila River Power, L.P. Tranche A Term Loan 641,509 1,157,924 Tranche B Term Loan 618,868 1,111,642 Union Power Partners, L.P. Tranche A Term Loan 377,358 681,131 Tranche B Term Loan 362,264 653,887 Credit Suisse, Cayman Island Branch: Gila River Power, L.P. Tranche A Term Loan 641,509 1,157,924 Tranche B Term Loan 618,868 1,111,642 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Principal Selling Participant Amount Value - -------------------------------------------------------------------------------- Credit Suisse, Cayman Island Branch (continued): Union Power Partners, L.P. Tranche A Term Loan $ 377,358 $ 681,131 Tranche B Term Loan 362,264 653,887 Verso Paper Holdings Term B Loan 2,274,452 2,284,414 CSFB: Quality Distributions, Inc. Term Loan 944,444 946,805 JPMorgan Chase: EH/Transeastern, LLC/TE TOUSA Term Loan 2,000,000 2,030,000 Infor Enterprise Solutions Holdings, Inc. Stage One U.S. Bridge Facility 2,301,093 2,301,093 Lehman Commercial Paper, Inc.: Gila River Power, L.P. Tranche A Term Loan 320,755 578,963 Tranche B Term Loan 309,434 555,821 Union Power Partners, L.P. Tranche A Term Loan 188,679 340,566 Tranche B Term Loan 181,132 326,943 Merrill Lynch Credit Products: Gila River Power, L.P Tranche A Term Loan 681,604 1,230,295 Tranche B Term Loan 657,547 1,181,118 Union Power Partners, L.P. Tranche A Term Loan 400,944 723,704 Tranche B Term Loan 384,906 694,755 - -------------------------------------------------------------------------------- NOTE 8. LOAN AGREEMENT Effective October 12, 2006, and amended on February 13, 2007, the Fund entered into a $650,000,000 secured loan agreement with The Bank of Nova Scotia ("Scotia") (the "Loan Agreement"). Prior to October 12, 2006, the Fund had a secured loan agreement with Citicorp North America, Inc. under which the Fund could borrow up to $400,000,000. At February 28, 2007, the Fund had one term loan outstanding with Scotia, totaling $415,000,000. The interest rate charged on this loan at February 28, 2007 was 5.34%. The average daily loan balance was $402,182,320 at a weighted average interest rate of 5.35%. The Fund was required to maintain certain asset coverage with respect to the loan. Interest expense of $11,431,915 is included on the Statement of Operations. The Fund is required to maintain 300% asset coverage with respect to amounts outstanding under the Loan Agreement. The Loan Agreement asset coverage is calculated by subtracting the Fund's total liabilities, not including any bank loans and senior securities, from the Fund's total net assets and dividing such amount by the principal amount of the debt out-standing and is as follows: Semi-Annual Report | 31 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND - -------------------------------------------------------------------------------- Asset Coverage per Total Amount $1,000 of Date Outstanding Indebtedness - -------------------------------------------------------------------------------- 02/28/2007 $ 415,000,000 $ 7,914 - -------------------------------------------------------------------------------- 08/30/2006 335,000,000 7,292 - -------------------------------------------------------------------------------- 08/31/2005 250,000,000 5,129 - -------------------------------------------------------------------------------- 08/31/2004 95,000,000 8,038 - -------------------------------------------------------------------------------- 08/31/2003 59,500,000 5,156 - -------------------------------------------------------------------------------- 08/31/2002 74,000,000 3,701 - -------------------------------------------------------------------------------- NOTE 9. UNFUNDED LOAN COMMITMENTS As of February 28, 2007, the Fund had unfunded loan commitments of $39,473,259 which could be extended at the option of the Borrower, pursuant to the following loan agreements: - -------------------------------------------------------------------------------- Unfunded Loan Borrower Commitment - -------------------------------------------------------------------------------- American Buildings Co. $ 239,463 - -------------------------------------------------------------------------------- Autocam Corp. 38,773 - -------------------------------------------------------------------------------- Atrium Co., Inc. 547,059 - -------------------------------------------------------------------------------- Buffets Holdings, Inc. 928,375 - -------------------------------------------------------------------------------- Cornerstone Healthcare Group Holdings, Inc. 562,525 - -------------------------------------------------------------------------------- Covanta Energy Corp. 1,000,000 - -------------------------------------------------------------------------------- Cricket Communications, Inc. 6,500,000 - -------------------------------------------------------------------------------- DeCrane Aircraft Holdings, Inc. 2,000,000 - -------------------------------------------------------------------------------- DHM Holdings Co., Inc. 118,774 - -------------------------------------------------------------------------------- Drake Hotel Acquisition 1,170,264 - -------------------------------------------------------------------------------- Federal-Mogul Corp. 117,897 - -------------------------------------------------------------------------------- Global Tel Link Corp. 652,174 - -------------------------------------------------------------------------------- Infrastrux Group, Inc. 63,636 - -------------------------------------------------------------------------------- Interstate Bakeries Corp. 7,500,000 - -------------------------------------------------------------------------------- Lucite International US Finco LLC 648,855 - -------------------------------------------------------------------------------- MEG Energy Corp. 3,000,000 - -------------------------------------------------------------------------------- Millennium Digital Media Systems, LLC 4,109,024 - -------------------------------------------------------------------------------- NES Rentals Holdings, Inc. 666,667 - -------------------------------------------------------------------------------- Oglebay Norton Co. 200,000 - -------------------------------------------------------------------------------- Sorenson Communications, Inc. 2,000,000 - -------------------------------------------------------------------------------- Standard Steel, LLC 166,667 - -------------------------------------------------------------------------------- Trump Entertainment Resorts, Inc. 4,708,618 - -------------------------------------------------------------------------------- VML US Finance LLC 2,000,000 - -------------------------------------------------------------------------------- Ypxo Holding SA 534,488 - -------------------------------------------------------------------------------- $ 39,473,259 =============== - -------------------------------------------------------------------------------- The net discount in unrealized gain (loss) on the unfunded commitments is recorded as a liability on the Statement of Assets and Liabilities. The change in unrealized gain (loss) is recorded on the Statement of Operations. NOTE 10. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES INDUSTRY FOCUS The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NON-PAYMENT RISK Senior Loans, like other corporate debt obligations, are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to the Fund, a reduction in the value of the Senior Loan experiencing non-payment and a potential decrease in the net asset value of the Fund. CREDIT RISK Investments rated below investment grade are commonly referred to as high-yield, high risk or "junk debt." They are regarded as predominantly speculative with respect to the issuing company's continuing ability to meet principal and/or interest payments. Investments in high yield Senior Loans may result in greater net asset value fluctuation than if the Fund did not make such investments. CURRENCY RISK A portion of the Fund's assets may be quoted or denominated in non-U.S. currencies. These securities may be adversely affected by fluctuations in relative currency exchange rates and by exchange control regulations. The Fund's investment performance may be negatively affected by a devaluation of a currency in which the Fund's investments are quoted or denominated. Further, the Fund's investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities quoted or denominated in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar. FOREIGN SECURITIES Investments in foreign securities may involve special risks compared to investing in securities of U.S. issuers. These risks are more pronounced to the extent that the Fund invests a significant portion of its non-U.S. investment in one region or in the securities of emerging market issuers. These risks may include (i) less information about non-U.S. issuers or markets being available due to less rigorous disclosure, accounting standards or regulatory requirements; (ii) many non-U.S. markets are smaller, less liquid and more volatile and the Adviser may not be able to sell the Fund's securities at times, in amounts and at prices it considers reasonable; (iii) the economies of non-U.S. markets may grow at slower rates than expected or may experience a downturn or recession; and (iv) withholdings and other non-U.S. taxes may decrease the Fund's returns. 32 | Semi-Annual Report NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- FEBRUARY 28, 2007 HIGHLAND FLOATING RATE ADVANTAGE FUND NOTE 11. SHAREHOLDER VOTING RESULTS On November 17, 2006, at a Special Meeting of the Shareholders of the Fund (the "Meeting"), the Shareholders of Record of the Fund were asked to vote on a new advisory agreement between Highland Capital Management, L.P. and the Fund (the "Proposal"). On September 28, 2006, the Record Date of the Meeting, the Fund had the following shares of beneficial interest outstanding: - -------------------------------------------------------------------------------- Class A 61,324,690 - -------------------------------------------------------------------------------- Class B 9,301,911 - -------------------------------------------------------------------------------- Class C 69,675,867 - -------------------------------------------------------------------------------- Class Z 14,401,072 - -------------------------------------------------------------------------------- On November 17, 2006, the date of the Meeting, there was a quorum present, however, there were not enough votes present to approve the Proposal. At the Meeting, the persons named as proxies voted all proxies, except those required to be voted against the Proposal, for an adjournment of the Meeting to permit further solicitation of proxies. A majority of all shares present at the Meeting voted for an adjournment until December 15, 2006. On December 15, 2006, there was again a quorum without sufficient votes to approve the Proposal. A majority of all shares present at the Meeting voted to further adjourn the Meeting until December 18, 2006. On December 18, 2006, the Proposal was voted on and was approved by the Shareholders of the Fund. The results of the voting on the Proposal on December 18, 2006 were as follows: - -------------------------------------------------------------------------------- For: 55,760,621 - -------------------------------------------------------------------------------- Against: 19,656,905 - -------------------------------------------------------------------------------- Abstain: 7,635,376 - -------------------------------------------------------------------------------- Broker Non-Votes: 0 - -------------------------------------------------------------------------------- Semi-Annual Report | 33 IMPORTANT INFORMATION ABOUT THIS REPORT - -------------------------------------------------------------------------------- INVESTMENT ADVISER Highland Capital Management, L.P. 13455 Noel Road, Suite 800 Dallas, TX 75240 TRANSFER AGENT PFPC Inc. 101 Sabin Street Pawtucket, RI 02860 DISTRIBUTOR PFPC Distributors, Inc. 760 Moore Road King of Prussia, PA 19406 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 2001 Ross Avenue, Suite 1800 Dallas, TX 75201 The Fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-877-665-1287 to request that additional reports be sent to you. This report has been prepared for shareholders of Highland Floating Rate Advantage Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities, and the Fund's proxy voting record for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the Securities and Exchange Commission's website at http://www.sec.gov. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov and also may be reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Statement of Additional Information includes information about Fund Trustees and is available upon request without charge by calling 1-877-665-1287. 34 | Semi-Annual Report THIS PAGE LEFT BLANK INTENTIONALLY. THIS PAGE LEFT BLANK INTENTIONALLY. Highland Floating Rate Advantage Fund Semi-Annual Report, February 28, 2007 [LOGO OMITTED] [HIGHLAND FUNDS managed by Highland Capital Management, L.P. www.highlandfunds.com HLC-FR-ADV-SEMI-02/07 ITEM 2. CODE OF ETHICS. Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. There has been no change, as of the date of this filing, in any of the portfolio managers identified in response to paragraph (a)(1) of this Item in the registrant's most recently filed annual report on Form N-CSR. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Not applicable. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) HIGHLAND FLOATING RATE ADVANTAGE FUND By (Signature and Title)* /S/ JAMES D. DONDERO ------------------------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) Date APRIL 25, 2007 ---------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /S/ JAMES D. DONDERO ------------------------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) Date APRIL 25, 2007 ---------------------------------------------------------------------------- By (Signature and Title)* /S/ M. JASON BLACKBURN ------------------------------------------------------- M. Jason Blackburn, Chief Financial Officer (principal financial officer) Date APRIL 25, 2007 ---------------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature. 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 Advantage Fund; 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 Advantage Fund; 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 Advantage Fund (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 Advantage Fund (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-----