HIGHLAND GROWTH FUND
SEMI-ANNUAL REPORT
JUNE 30, 1997
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HIGHLAND GROWTH FUND
TABLE OF CONTENTS
JUNE 30, 1997
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A MESSAGE TO OUR SHAREHOLDERS..........................................1
FINANCIAL STATEMENTS
Statement of Assets and Liabilities...........................2
Statement of Operations.......................................3
Statement of Changes in Net Assets............................4
Financial Highlights..........................................5
Notes to Financial Statements.................................6
Schedule of Investments.......................................8
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HIGHLAND GROWTH FUND
A MESSAGE TO OUR SHAREHOLDERS
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August 1, 1997
Dear Shareholders:
The Highland Growth Fund opened its door to shareholders on May 14, 1997. As
investors came into the Fund and cash levels built up, the Fund's management
began to gradually deploy assets. As of June 30, 1997, the Fund had risen 2.9%
as compared with 6.1% for the S&P 500 during the same period.
We believe in the spirit of enterprise and believe that many American companies
continue to display the innovative energy which brought us from an agrarian
economy to an industrial nation. We believe in the importance of corporate
leadership to take us into the next millennium. The investment process requires
leadership as well, which we at Highland call investing in the Championship
Tradition.
Companies at the forefront of change are the natural standard bearers of the
Championship Tradition. We believe growth opportunities arise whenever
industries and companies are faced with social, demographic and economic
changes. We have identified a number of mega-trends which cross national
borders, and we call these forces for difference our "Delta Forces." We look for
companies that are providing the driving force for change in their industries.
Growth momentum is the primary criterion sought in the selection of each
investment. The Fund uses its "Delta Forces" to achieve portfolio
diversification.
Delta is the fourth letter of the Greek alphabet. Its symbol, the triangle,
emphasizes upward motion, conveying growth and strength. It equates with
difference and has also been used to refer to the eternal flow of time. In
mathematics it refers to a finite increment in a variable. It is our belief that
superior performance follows companies that show they can make a positive
difference. We call the forces for positive difference and change our "Delta
Forces."
The "Delta Forces" are the engines for growth in our economy. They include such
worldwide trends as outsourcing and resource management. These trends reflect
the growing importance of emphasizing core business and the need to manage
resources in a global competitive environment. Initial investments in
outsourcing companies included Accustaff, Caribiner International, Pediatrix
Medical Group, Robert Half and Volt Information Sciences. Managed health care
and cost containment, while well recognized as a force for change, is still only
at the beginning of a powerful cycle. Cerner, Express Scripts, National Surgery
Centers and Oxford Health Plans are all working in very different ways to reduce
medical costs. Financial empowerment and leisure/retirement needs are both
"Delta Forces" addressing the enormous changes we expect to see in the habits of
Americans as they enter different phases of their lives. Charles Schwab and
Marriott International seek to address the critical issues of financial planning
and assisted living care. Biogenetic engineering, privatization and deregulation
are still in the process of unfolding. Global trade/telecommunications and
virtual reality represent compelling "Delta Forces" already at work in our
economy. Federal Express has emerged as a dominant force in the transportation
of goods and MasTec has grown into a global player in telecommunications
infrastructure. MetaCreations Corp. continues to strengthen its niche in the
potentially explosive 3-D graphics imagery market. The most powerful mega-trend
may well be computer networking and database management, which is at the
forefront of linking individuals together. Bay Networks, Cisco Systems and
Oracle Corp. represent our core holdings in this area.
These "Delta Forces" represent our touchstones.
Over the balance of the year, we will continue to invest in companies which are
leaders in their industries. The Championship Tradition is about leadership.
Leadership appears in different guises. We look for corporate managements that
demonstrate vision, companies that are product innovators, business that are
finding new ways of delivering services, industries that are expanding globally
and demographic trends that are moving social and economic change forward.
Leadership is about partnership, the kind of partnership that comes when
individual enterprise is combined with powerful ideas.
We are grateful to you, our earliest supporters, and your show of confidence in
the Highland Growth Fund.
Catherine C. Lawson
Portfolio Manager
1
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HIGHLAND GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
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ASSETS:
Investments (Note 2):
Investments at cost $ 259,957
Net unrealized appreciation (depreciation) 6,391
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Total investments at value 266,348
Cash 1,357
Interest, dividends and other receivables 534
Receivable for Fund shares issued 12,100
Receivable from investment adviser (Note 3) 40,161
Organization costs, net of amortization (Note 2) 47,881
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Total Assets 368,381
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LIABILITIES:
Payable for investments purchased 13,935
Payable to related parties (Note 3) 5,377
Accrued expenses and other liabilities 83,158
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Total Liabilities 102,470
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NET ASSETS $ 265,911
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COMPONENTS OF NET ASSETS
Paid in capital $ 259,201
Undistributed net investment income 319
Unrealized appreciation (depreciation) on investments 6,391
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NET ASSETS $ 265,911
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SHARES OF BENEFICIAL INTEREST 25,837
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NET ASSET VALUE AND REDEMPTION PRICE PER SHARE $ 10.29
===================
</TABLE>
See Notes to Financial Statements. 2
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HIGHLAND GROWTH FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
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INVESTMENT INCOME:
Interest income $ 751
Dividend income 61
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Total investment income 812
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EXPENSES:
Investment advisory (Note 3) 295
Management (Note 3) 5,377
Transfer agent (Note 3) 3,286
Insurance 22,000
Registration 20,107
Accounting (Note 3) 4,839
Legal 6,850
Audit 13,000
Directors fees and expenses 4,500
Amortization of organization costs (Note 3) 1,323
Miscellaneous 6,043
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Total expenses 87,620
Fees waived and expenses reimbursed (Note 5) (87,127)
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Net expenses 493
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NET INVESTMENT INCOME (LOSS) 319
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NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 6,391
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 6,710
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</TABLE>
See Note 1 of Notes to Financial Statements for date of commencement of
operations.
See Notes to Financial Statements. 3
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HIGHLAND GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
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NET ASSETS - BEGINNING OF PERIOD (A) $ 100,000
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OPERATIONS:
Net investment income (loss) $ 319
Net change in unrealized appreciation (depreciation)
on investments 6,391
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 6,710
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CAPITAL SHARE TRANSACTIONS (B):
Sale of shares 159,241
Redemption of shares (40)
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Net increase (decrease) from capital transactions 159,201
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Net increase (decrease) in net assets 165,911
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NET ASSETS - JUNE 30, 1997 (INCLUDING LINE C) $ 265,911
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(a) See Note 1 of Notes to Financial Statements for date of commencement of
operations.
(b) Shares Issued (Redeemed)
Sale of shares 15,841
Redemption of shares (4)
-------------------
Net increase (decrease) in shares outstanding 15,837
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(c) Undistributed Net Investment Income $ 319
===================
</TABLE>
See Notes to Financial Statements. 4
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HIGHLAND GROWTH FUND
FINANCIAL HIGHLIGHTS
FOR THE PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
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SELECTED PER SHARE DATA AND RATIOS
FOR A SHARE OUTSTANDING
Net Asset Value, Beginning of Period $10.00(a)
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Investment Operations
Net Investment Income (Loss) 0.01
Net Realized and Unrealized Gain (Loss) on Investments 0.28
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Total from Investment Operations 0.29
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Net Asset Value, End of Period $10.29
============
Total Return (b) 2.90%(c)
Ratio/Supplementary Data:
Net Assets at End of Period (000's omitted) $266
Ratios to Average Net Assets:
Expenses including reimbursement/waiver 1.95%(d)
Expenses excluding reimbursement/waiver 342.14%(d)
Net investment income (loss) including reimbursement/waiver 1.22%(d)
Average Commission Rate (e) $ 0.2296
Portfolio Turnover Rate 0.00%
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(a) See Note 1 of Notes to Financial Statements for date of commencement of
operations.
(b) Total return calculation does not include sales charges.
(c) Not Annualized.
(d) Annualized.
(e) Amount represents the average commission per share paid to brokers on the
purchase or sale of equity securities.
See Notes to Financial Statements. 5
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HIGHLAND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED)
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NOTE 1. ORGANIZATION
The Highland Family of Funds ("Company") is a diversified, open end, management
investment company registered under the Investment Company Act of 1940. The
Company was established as a Massachusetts business trust organized pursuant to
a Declaration of Trust dated October 7, 1996. The Highland Growth Fund ("Fund")
is a separate series of the Company. The Fund commenced operations on May 13,
1997.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements are prepared in accordance with generally accepted
accounting principles, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of increase and decrease in net assets from
operations during the fiscal period. Actual results could differ from those
estimates.
The following represent significant accounting policies of the Fund:
SECURITY VALUATION - Securities traded on a national securities exchange are
valued at the last reported sales price. Common stocks which are not so traded,
for which no sale was reported, and over-the-counter securities are valued at
the mean between the last reported bid and asked prices. Debt instruments having
sixty days or less remaining until maturity are stated at amortized cost. Debt
instruments having a remaining maturity of more than sixty days will be valued
at prices furnished by a pricing service, subject to review and possible
revision by the Fund's investment adviser. Any modification of the price of a
debt security furnished by a pricing service is made pursuant to procedures
adopted by the Fund's Board of Trustees. All other investment assets, including
restricted and not readily marketable securities, are valued at their fair
market value as determined in good faith by the investment adviser pursuant to
guidelines established by the Fund's Board of Trustees.
INVESTMENT INCOME - Dividend income is recorded on the ex-dividend date.
Interest income is recorded on an accrual basis.
DISTRIBUTIONS TO SHAREHOLDERS - Dividends from net investment income and capital
gain distributions, if any, are distributed to shareholders at least annually.
Distributions are based on amounts calculated in accordance with applicable
federal income tax regulations.
FEDERAL TAXES - The Fund intends to qualify each year as a regulated investment
company and distribute all of its taxable income. In addition, by distributing
in each calendar year substantially all of its net investment income, capital
gain and certain other amounts, if any, the Fund will not be subject to a
federal excise tax. Therefore, no federal income or excise tax provision is
required.
REALIZED GAIN AND LOSS - Security transactions are recorded on a trade date
basis. Realized gain and loss on investments sold are recorded on the basis of
identified cost.
ORGANIZATIONAL COST - Costs incurred by the Fund in connection with its
organization and the initial offering of its shares have been deferred and will
be amortized on a straight-line basis from the date upon which the Fund will
commence its investment activities, over a period of five years. In the event
that any of the initial shares of the Fund are redeemed during the amortization
period, the redemption proceeds will be reduced by any unamortized organization
and registration expenses in the same proportion as the number of shares being
redeemed bears to the number of initial shares outstanding at the time of such
redemption.
6
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HIGHLAND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED) (CONCLUDED)
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NOTE 3. INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER - The investment adviser is Highland Investment Group L.P.
(the "Adviser"). Pursuant to an Investment Advisory Agreement, the Adviser
receives an advisory fee at an annual rate of 1.15% of the Fund's average daily
net assets.
ADMINISTRATION - Pursuant to an Administration Agreement, the Fund pays an
administration fee to Forum Administrative Services, Limited Liability Company
("FAS") equal to 0.10% of the Fund's first $100 million and 0.05% thereafter on
the average daily net assets. The minimum annual fee payable for administration
is $40,000.
DISTRIBUTION - Forum Financial Services, Inc.(R) ("FFSI") acts as the
distributor for the Fund pursuant to a Distribution Agreement.
OTHER SERVICES - Forum Financial Corp.(R) ("FFC") an affiliate of FAS and FFSI,
acts as the transfer agent and dividend disbursing agent for the Fund. FFC also
provides fund accounting services.
NOTE 4. PURCHASES AND SALES OF SECURITIES
The cost of securities purchased and the proceeds from sales of securities
(excluding short-term investments) for the period ended June 30, 1997,
aggregated $259,957 and $0 respectively.
For federal income tax purposes, the tax basis of investment securities owned as
of June 30, 1997 was $259,957. The aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost was
$11,471, and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over market value was $5,080.
NOTE 5. WAIVER OF FEES AND REIMBURSEMENT OF EXPENSES
The Adviser has agreed to waive a portion of its fee and/or assume certain
expenses of the Fund so that the total operating expenses of the Fund do not
exceed 1.95% of its average daily net assets. FAS and FFC may waive voluntarily
all or a portion of their fees, from time to time. For the period ended June 30,
1997, the Adviser waived fees and reimbursed expenses of $295 and $86,832,
respectively.
7
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HIGHLAND GROWTH FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED)
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SHARES SECURITY DESCRIPTION VALUE
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COMMON STOCK (100.0%)
APPAREL & ACCESSORY STORES (2.0%)
100 St. John Knits, Inc. $ 5,400
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APPAREL & OTHER FINISHED PRODUCTS MADE FROM FABRICS & SIMILAR
Materials (2.8%)
300 Cutter & Buck, Inc. (a) 4,875
100 Nautica Enterprises (a) 2,643
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7,518
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BUSINESS SERVICES (19.9%)
200 Accustaff, Inc. (a) 4,746
300 Cabletron Systems, Inc. (a) 8,493
100 Caribiner International, Inc. (a) 3,262
200 Cerner Corp. (a) 4,200
200 IDX Systems Corp. (a) 6,900
500 MetaCreations Corp. (a) 5,500
100 Oracle Corp. (a) 5,090
100 Robert Half International, Inc. (a) 4,706
200 Volt Information Sciences, Inc. (a) 10,190
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53,087
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CHEMICALS & ALLIED PRODUCTS (1.6%)
500 International Murex Technologies Corp. (a) 4,281
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COMMUNICATIONS (1.8%)
100 MasTec, Inc. (a) 4,731
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DEPOSITORY INSTITUTIONS (7.4%)
50 Citicorp 6,028
200 Queens County Bancorp, Inc. 9,100
100 State Street Corp. 4,625
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19,753
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EATING & DRINKING PLACES (2.4%)
1000 TCBY Enterprises, Inc. 6,312
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ELECTRIC, GAS & SANITARY SERVICES (1.8%)
100 Duke Energy Corp. 4,794
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ELECTRONIC & OTHER ELECTRICAL EQUIPMENT & COMPONENTS, EXCEPT COMPUTER
EQUIPMENT (14.2%)
300 Atmel Corp. (a) 8,400
300 Bay Networks, Inc. (a) 7,968
</TABLE>
See Notes to Financial Statements. 8
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HIGHLAND GROWTH FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED) (CONTINUED)
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SHARES SECURITY DESCRIPTION VALUE
- --------- ---------------------------------------------------------------------- ----------------
COMMON STOCK (CONTINUED)
ELECTRONIC & OTHER ELECTRICAL EQUIPMENT & COMPONENTS, EXCEPT COMPUTER
EQUIPMENT (CONTINUED)
700 Cree Research, Inc. (a) 8,575
100 Linear Technology Corp. 5,175
200 Zoltek Cos., Inc. (a) 7,650
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37,768
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ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT & RELATED SERVICES (1.4%)
200 Transition Systems, Inc. (a) 3,638
----------------
HEALTH SERVICES (4.9%)
200 Express Scripts, Inc. (a) 8,350
100 Pediatrix Medical Group, Inc. (a) 4,581
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12,931
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HOTELS, ROOMING HOUSES, CAMPS & OTHER LODGING PLACES (2.3%)
100 Marriott International, Inc. 6,138
----------------
INDUSTRIAL & COMMERCIAL MACHINERY & COMPUTER EQUIPMENT (12.5%)
150 3Com Corp. (a) 6,750
100 Cisco Systems, Inc. (a) 6,713
100 EMC Corp. (a) 3,900
300 Gateway 2000, Inc. (a) 9,732
100 Smith International, Inc. (a) 6,075
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33,170
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INSURANCE CARRIERS (1.3%)
50 Oxford Health Plans, Inc. (a) 3,588
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MEASURING, ANALYZING & CONTROLLING INSTRUMENTS; PHOTOGRAPHIC, MEDIAL &
Optical Goods (2.2%)
200 Mentor Corp. 5,926
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OIL & GAS EXTRACTION (3.4%)
300 Global Marine, Inc. (a) 6,975
100 Newfield Exploration Co. (a) 2,000
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8,975
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PAPER & ALLIED PRODUCTS (1.8%)
100 Sealed Air Corp. (a) 4,750
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PHARMACEUTICAL PREPARATIONS (3.9%)
100 Merck & Co., Inc. 10,350
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</TABLE>
See Notes to Financial Statements. 9
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HIGHLAND GROWTH FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED) (CONCLUDED)
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Shares Security Description Value
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COMMON STOCK (CONTINUED)
SECURITY & COMMODITY BROKERS, DEALERS, EXCHANGES & SERVICES (1.5%)
100 Charles Schwab Corp. 4,069
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TELECOMMUNICATIONS (4.4%)
300 International Telecommunication Data Systems, Inc. (a) 7,350
100 Newbridge Networks Corp. (a) 4,350
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11,700
----------------
TRANSPORTATION BY AIR (3.1%)
100 Federal Express Corp. (a) 5,775
100 Southwest Airlines Co. 2,588
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8,363
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WHOLESALE TRADE-NONDURABLE GOODS (3.4%)
100 Borg-Warner Automotive, Inc. 5,406
100 Synetic, Inc. (a) 3,700
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9,106
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TOTAL INVESTMENTS (100.0%) (COST $259,957) $ 266,348
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</TABLE>
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(a) Non-income producing security.
See Notes to Financial Statements. 10
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INVESTMENT ADVISER
Highland Investment Group L.P.
1248 Post Road
Fairfield, CT 06430
ADMINISTRATOR
Forum Administrative Services,
Limited Liability Company
Two Portland Square
Portland, ME 04101
DISTRIBUTOR
Forum Financial Services, Inc.(R)
Two Portland Square
Portland, ME 04101
CUSTODIAN
BankBoston, N.A.
P.O. Box 1959
Boston, Massachusetts 02105
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY TO SHAREHOLDERS AND TO OTHERS
WHO HAVE RECEIVED A COPY OF THE HIGHLAND GROWTH FUND PROSPECTUS.
