<PAGE>
[FPO-PHOTO]
[FPO-PHOTO]
HIGHLANDER
INCOME FUND
* * *
SEMIANNUAL REPORT
1995
[FPO-PHOTO]
[FPO-PHOTO]
<PAGE>
TABLE OF CONTENTS
HIGHLANDER INCOME FUND
Highlander Income Fund is a diversified, closed-end fund. The fund's investment
objective is to provide high current income. To achieve this objective, the fund
invests primarily in a combination of high-grade, mortgage-backed securities,
which may include derivative mortgage-backed securities, and lower-rated fixed
income securities, which include securities commonly referred to as "junk
bonds." These high-yield, or junk bond, securities generally involve greater
volatility of price and greater risks to principal and income than securities in
the higher-rated categories. Each of these asset classes must comprise at least
30%, and no more than 70%, of the portfolio. Fund shares trade on the American
Stock Exchange under the symbol HLA.
AVERAGE ANNUALIZED TOTAL RETURNS
AVERAGE ANNUALIZED TOTAL RETURNS . . . . . . 1
LETTER TO SHAREHOLDERS . . . . . . . . . . . 2
FINANCIAL STATEMENTS AND NOTES . . . . . . . 7
INVESTMENTS IN SECURITIES. . . . . . . . . . 17
SHAREHOLDER UPDATE . . . . . . . . . . . . . 26
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS FOR THE PERIODS ENDED AUGUST 31, 1995
[GRAPH]
Average annualized total return figures are through August 31, 1995, and are
based on the change in net asset value (NAV) and reflect the reinvestment of all
distributions but do not reflect sales charges. NAV-based performance is used to
measure investment management results.
Average annualized total return figures based on the change in market price for
the one-year and since inception periods ended August 31, 1995, were 4.70% and -
5.80%, respectively. These figures assume reinvestment of distributions and do
not reflect sales charges.
* This blended index is comprised of 50% Lehman Brothers U.S. Mortgage Index and
50% Lehman Brothers High-Yield Securities Single B Index, which had individual
one-year returns of 10.94% and 13.41% and since inception returns of 8.92% and
10.41%, respectively.
The Lehman Brothers U.S. Mortgage Index is comprised of U.S. government agency
mortgage-backed securities with 15 to 30 years to maturity. The Lehman Brothers
High-Yield Securities Single B Index is comprised of fixed rate, public non-
convertible issues that are rated B by Moody's Investor Service. Developed by
Lehman Brothers for comparative use by the mutual fund industry, the indexes are
unmanaged, reflect the reinvestment of all distributions and do not include any
fees or expenses in total returns.
Past performance does not guarantee future results. The investment return and
market value of an investment will fluctuate so that fund shares, when sold, may
be worth more or less than their original cost.
1
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HIGHLANDER INCOME FUND
OCTOBER 15, 1995
Dear Shareholders:
DURING THE SIX-MONTH PERIOD ENDED AUGUST 31, 1995, HIGHLANDER INCOME FUND SHOWED
A STRONG NET ASSET VALUE TOTAL RETURN OF 8.56%.* This assumes the reinvestment
of distributions and does not include a sales charge. The fund, which consists
of both high-yield and mortgage-backed securities, performed well compared to
the 7.54% return of a 50%/50% blend of the Lehman Brothers U.S. Mortgage Index
and the Lehman Brothers High-Yield Securities Single B Index. The fund's six-
month total return based on market price was 5.22%.*
BOTH THE MORTGAGE-BACKED AND HIGH-YIELD COMPONENTS OF THE FUND CONTRIBUTED TO
ITS STRONG TOTAL RETURN PERFORMANCE. The high-yield portion of the fund
benefited as several companies owned by the fund were acquired by higher-rated
companies. As a result, we were able to sell these securities at a profit and
reinvest the proceeds in companies that we believe will provide additional long-
term value. The fund's mortgage-backed
* THESE TOTAL RETURN FIGURES REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE
FUTURE RESULTS. THE INVESTMENT RETURN AND MARKET VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
DURING THIS SIX-MONTH PERIOD, THE LEHMAN BROTHERS U.S. MORTGAGE INDEX AND LEHMAN
BROTHERS HIGH-YIELD SECURITIES SINGLE B INDEX HAD RETURNS OF 6.99% AND 8.09%,
RESPECTIVELY.
DISTRIBUTION HISTORY
DISTRIBUTIONS PAID IN THE FUND SINCE ITS INCEPTION ON MARCH 31, 1994, THROUGH
AUGUST 31, 1995
Total Monthly
Income Dividends Paid. . . . . . . . . . $1.77
Capital Gains Distributions Paid . . . . $0.00
-----
TOTAL DISTRIBUTIONS PER SHARE. . . . . . $1.77
NET ASSET VALUE SUMMARY PER SHARE
Initial Offering Price (3/31/94) . . . . $15.00
Initial Offering and
Underwriting Expenses. . . . . . . . . . -$1.05
Accumulated Realized
Losses at 8/31/95. . . . . . . . . . . .- $0.36
-------
Subtotal . . . . . . . . . . . . . . $13.59
Undistributed Net Investment
Income/Dividend Reserve
at 8/31/95 . . . . . . . . . . . . . . - $0.02
Unrealized Appreciation
on Investments at 8/31/95. . . . . . . . $0.14
-----
NET ASSET VALUE ON 8/31/95 . . . . . . . $13.71
2
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HIGHLANDER INCOME FUND
portion also benefited from its allocation to premium mortgaged-backed
securities which pay higher coupons than other mortgage-backed securities. Over
this six-month period, the fund's high coupon premium mortgage-backed securities
experienced prepayment rates that were slower than market prepayment rates. This
resulted in higher than expected income levels from this portion of the fund. We
continue to believe the fund will benefit from its combination of high-yield and
mortgage-backed securities as these two asset classes tend to respond to
different economic and market variables. For example, mortgage-backed securities
in the fund have no credit risk and can help offset some of the credit risk from
the high-yield portion. Typically, high-yield securities respond like stocks to
changes in the economic environment, which can complement a portfolio of high-
quality bonds.
BECAUSE WE DON'T BELIEVE INTEREST RATES WILL CONTINUE TO FALL AS THEY DID IN THE
FIRST HALF OF THE YEAR, WE HAVE TAKEN STEPS TO MAKE THE FUND LESS SENSITIVE TO
INTEREST RATE CHANGES. We shortened the portfolio's effective duration by
selling some of its long duration securities in the mortgage-backed portion of
the fund and purchasing short duration securities, such as high coupon
[BRAD STONE-PHOTO]
BRAD STONE
FPO 72%
[WAN-CHONG KUNG-PHOTO]
WAN-CHONG KUNG
FPO-52%
BRAD STONE, PIPER CAPITAL MANAGEMENT, AND MARK DURBIANO (PAGE 4), FEDERATED
ADVISERS, SHARE PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF HIGHLANDER INCOME
FUND. WAN-CHONG KUNG, PIPER CAPITAL MANAGEMENT, ASSISTS WITH THE FUND'S
MANAGEMENT. STONE, CFA, HAS WORKED ON THE FUND SINCE ITS INCEPTION AND HAS SEVEN
YEARS OF FINANCIAL EXPERIENCE. DURBIANO ALSO HAS WORKED ON THE FUND SINCE ITS
INCEPTION AND HAS 13 YEARS OF FINANCIAL EXPERIENCE. KUNG, WHO JOINED THE
MANAGEMENT TEAM IN MAY 1994, IS A VICE PRESIDENT AND FIXED INCOME PORTFOLIO
MANAGER. SHE ALSO MANAGES INSTITUTIONAL SEPARATE ACCOUNTS AND HAS THREE YEARS OF
FINANCIAL EXPERIENCE. PRIOR TO JOINING PIPER CAPITAL IN 1993, KUNG WAS A SENIOR
CONSULTANT FOR A FINANCIAL SERVICE FIRM. TOM MCGLINCH, WHO PREVIOUSLY MANAGED
THE FUND, IS CONCENTRATING ON MANAGING OTHER MUTUAL FUNDS AT PIPER CAPITAL. BEN
RINKEY, WHO ALSO MANAGED THE FUND, HAS LEFT PIPER CAPITAL. J. THOMAS MADDEN IS
CONCENTRATING ON OTHER MANAGEMENT DUTIES AT FEDERATED ADVISERS.
3
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Highlander Income Fund
30-year mortgage-backed pass-through and five-year balloon mortgage-backed pass-
through securities. As of September 30, the portfolio's effective duration was
5.1 years.
WE HAVE BEEN MAKING GRADUAL CHANGES TO THE HIGH-YIELD PORTION OF THE FUND
CONSISTENT WITH CURRENT ECONOMIC CONDITIONS. We feel that corporate credit
quality may begin to deteriorate because we are entering a period of the U.S.
business cycle in which companies typically experience a slowdown in activity
and growth. Therefore, we have increased the fund's allocation to relatively
higher-quality securities in the high-yield portion of the portfolio. We are
focusing on companies with stronger financial positions and more stable
operating profiles and are investing in companies that we believe are more
likely to grow at a faster rate than the overall economy. We believe this bias
toward stronger high-yield credit quality will be positive for the fund in the
long term. In addition, we have reduced the fund's exposure to cyclical
industries, such as forest products, as we believe these industries are
currently overvalued. We have increased our exposure to noncyclical industries,
such as broadcast radio and television, chemicals, telecommunications, steel,
and cable television, because we feel these sectors currently offer attractive
opportunities.
THE MORTGAGE-BACKED PORTION OF THE FUND CONTINUES TO FAVOR U.S. AGENCY MORTGAGE-
BACKED PASS-THROUGH SECURITIES. As of the end of August, 41% of the fund's total
assets were invested in these securities. The mortgage-backed portion of the
fund emphasizes mortgage-backed pass-through securities that pay both low and
high coupons, while underweighting middle coupon mortgages. As interest rates
rise or fall, low and
FPO 50%
[MARK DURBIANO-PHOTO]
MARK DURBIANO
4
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HIGHLANDER INCOME FUND
high coupon mortgages tend to outperform middle coupon mortgages because their
prepayment rates remain closer to expected levels. Typically, when actual
prepayment rates vary from what is expected, the performance of mortgage-backed
securities suffers. We believe the fund will likely benefit from this coupon
allocation during the remainder of 1995.
BEGINNING IN OCTOBER, THE FUND'S DIVIDEND DISTRIBUTION WAS REDUCED TO $0.094 PER
MONTH FROM $0.104 PER MONTH. This reduction was a result of the fund's decreased
earning capacity caused by the steps we took to both reduce the effective
duration and to increase the credit quality of the fund, as discussed above. The
fund's earning capacity was also reduced because its sale-forward (dollar-roll)
program,** which currently represents 19% of total assets, was not able to
generate expected income levels throughout 1995. Even with this dividend
reduction, however, the fund is still earning an attractive income level that is
competitive with comparable high-yield and mortgage-backed mutual funds. Also,
this reduction in the dividend distribution brings the fund's dividend in line
with the
** THE SALE-FORWARD PROGRAM GENERATES FEE INCOME FOR THE FUND BY COMMITTING TO
PAY FOR SECURITIES IN THE FUTURE WHICH ARE PURCHASED AT PRESENT-DAY PRICES. KEEP
IN MIND THAT THE SALE-FORWARD PROGRAM HAS THE POTENTIAL TO INCREASE THE NET
ASSET VALUE VOLATILITY OF THE PORTFOLIO.
HIGHLANDER INCOME FUND
PORTFOLIO COMPOSITION
AUGUST 31, 1995
[CHART]
5
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HIGHLANDER INCOME FUND
current earnings of the fund. Please remember, however, that the income earned
by the fund is subject to change which may cause the fund's dividend to change
in the future.
Going forward, we believe moderate economic growth and a stable to rising
interest rate environment should favor the fund's relatively low interest rate
sensitivity, the mortgage-backed portion's coupon allocation and
the high-quality bias in the high-yield portion.
Thank you for your investment in Highlander Income Fund. We remain committed to
providing you with top-quality investment management and service and look
forward to helping you achieve your long-term financial goals.
Sincerely,
/s/ Brad Stone
J. Bradley Stone
Portfolio Manager
/s/ Mark Durbiano
Mark E. Durbiano
Portfolio Manager
EFFECTIVE DURATION
Effective duration estimates the interest rate risk of a security, in other
words how much the value of the security is expected to change with a given
change in interest rates. The longer a security's effective duration, the more
sensitive its price is to changes in interest rates. For example, if interest
rates were to increase by 1%, the market value of a bond with an effective
duration of five years would decrease by about 5%, with all other factors being
constant.
It is important to understand that, while a valuable measure, effective duration
is based upon certain assumptions and has several limitations. It is most
effective as a measure of interest rate risk when interest rate changes are
small, rapid and occur equally across all the different points of the yield
curve. In addition, effective duration is difficult to calculate precisely for
bonds with prepayment options, such as mortgage-backed securities, because the
calculation requires assumptions about prepayment rates. For example, when
interest rates go down, homeowners may prepay their mortgages at a higher rate
than assumed in the initial effective duration calculation, thereby shortening
the effective duration of the fund's mortgage-backed securities. Conversely, if
rates increase, prepayments may decrease to a greater extent than assumed,
extending the effective duration of such securities. For these reasons, the
effective durations of funds that invest a significant portion of their assets
in mortgage-backed securities can be greatly affected by changes in interest
rates.
6
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $1,589,000) ....... $ 34,428,410
Cash in bank on demand deposit ........................... 50,188
Accrued interest receivable .............................. 447,448
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Total assets ......................................... 34,926,046
----------------
LIABILITIES:
Payable for investment securities purchased on a
when-issued basis (note 2) ............................. 7,391,406
Payable for investment securities purchased .............. 52,813
Accrued investment management fee ........................ 13,918
Accrued administrative fee ............................... 4,639
Other accrued expenses ................................... 14,137
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Total liabilities .................................... 7,476,913
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Net assets applicable to outstanding capital stock ....... $ 27,449,133
----------------
----------------
REPRESENTED BY:
Capital stock-authorized 200 million shares of $0.01 par
value; outstanding, 2,002,467 shares ................. $ 20,025
Additional paid-in capital ............................... 27,906,238
Distributions in excess of net investment income ......... (39,304)
Accumulated net realized loss on investments ............. (727,999)
Unrealized appreciation of investments ................... 290,173
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 27,449,133
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 13.71
----------------
----------------
* Investments in securities at identified cost ........... $ 34,138,237
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 1995
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 1,336,148
Fee income (note 2) ...................................... 65,441
----------------
Total investment income .............................. 1,401,589
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EXPENSES (NOTE 3):
Investment management fee ................................ 81,745
Administrative fee ....................................... 27,248
Custodian, accounting and transfer agent fees ............ 24,904
Reports to shareholders .................................. 11,205
Directors' fees .......................................... 4,230
Audit and legal fees ..................................... 13,363
----------------
Total expenses ....................................... 162,695
----------------
Net investment income ................................ 1,238,894
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain on investments (note 4) ................ 35,377
Net change in unrealized appreciation or depreciation of
investments ............................................ 989,085
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Net gain on investments ................................ 1,024,462
----------------
Net increase in net assets resulting from
operations ....................................... $ 2,263,356
----------------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Period
Ended from
8/31/95 3/31/94*
(Unaudited) to 2/28/95
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 1,238,894 2,275,942
Net realized gain (loss) on investments .................. 35,377 (763,376)
Net change in unrealized appreciation or depreciation of
investments ............................................ 989,085 (698,912)
---------------- ----------------
Net increase in net assets resulting from operations ... 2,263,356 813,654
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (1,211,182) (2,275,942)
In excess of net investment income ....................... (39,304) (27,712)
---------------- ----------------
Total distributions .................................... (1,250,486) (2,303,654)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from initial public offering of 2,000,000 shares,
net of underwriting discount and offering expenses of
$2,123,482 ............................................. -- 27,876,518
Payments for retirement of 4,200 shares (note 6) ......... (50,260) --
---------------- ----------------
Increase (decrease) in net assets from capital share
transactions ......................................... (50,260) 27,876,518
---------------- ----------------
Total increase in net assets ......................... 962,610 26,386,518
Net assets at beginning of period (note 1) ................. 26,486,523 100,005
---------------- ----------------
Net assets at end of period .............................. $ 27,449,133 26,486,523
---------------- ----------------
---------------- ----------------
Distributions in excess of net investment income ......... $ (39,304) (27,712)
---------------- ----------------
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</TABLE>
* COMMENCEMENT OF OPERATIONS.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION
Highlander Income Fund Inc. (the fund) is registered under the
Investment Company Act of 1940 (as amended) as a diversified,
closed-end management investment company. The fund commenced
operations on March 31, 1994, upon completion of its initial
public offering of common stock. The only transaction of the
fund prior to March 31, 1994, was the sale to Piper Jaffray
Companies Inc. of 6,667 shares of capital stock for $100,005 on
March 24, 1994. Shares of the fund are listed on the American
Stock Exchange under the symbol HLA.
(2) SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are determined using
pricing services or prices quoted by independent brokers.
Exchange-listed options are valued at the last sale price and
open financial futures are valued at the last settlement price.
When market quotations are not readily available, securities are
valued at fair value according to methods selected in good faith
by the board of directors. Short-term securities with maturities
of 60 days or less are valued at amortized cost which
approximates market value.
Securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses are
calculated on the identified-cost basis. Interest income,
including amortization of bond discount and premium computed on
a level-yield basis, is accrued daily.
HIGH-YIELD DEBT SECURITIES
Although the fund has a diversified portfolio, the fund has
58.4% of total net assets invested in lower rated and comparable
quality unrated high-yield securities. High yield securities are
accompanied by a greater degree of credit risk and tends to be
more sensitive to economic conditions than higher rated
securities. The risk of loss due to default by the issuer may be
significantly greater for the holders of high-yield securities,
because such securities are generally unsecured and are often
subordinated to other creditors of the issuer.
OPTIONS TRANSACTIONS
For hedging purposes, the fund may buy and sell put and call
options, write covered call options on portfolio securities,
write cash-secured puts and write call options that are not
covered for cross-hedging purposes. The risk in writing a call
option is the fund gives
10
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
up the opportunity of profit if the market price of the security
increases. The risk in writing a put option is the fund may
incur a loss if the market price of the security decreases and
the option is exercised. The risk in buying an option is that
the fund pays a premium whether or not the option is exercised.
The fund also has the additional risk of not being able to enter
into a closing transaction if a liquid secondary market does not
exist. The fund also may write over-the-counter options where
the completion of the obligation is dependent upon the credit
standing of the other party.
Option contracts are valued daily at the closing prices on their
primary exchanges and unrealized appreciation or depreciation is
recorded. The fund will realize a gain or loss upon expiration
or closing of the option transaction. When an option is
exercised, the proceeds from sales for a written call option,
the purchase cost of a written put option or the cost of a
security for a purchased put or call option is adjusted by the
amount of premium received or paid.
FUTURES TRANSACTIONS
For hedging purposes, the fund may buy and sell interest rate
futures contracts. Risks of entering into futures contracts and
related options include the possibility there may be an illiquid
market and that a change in the value of the contract or option
may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the fund
each day. The variation margin payments are equal to the daily
changes in the contract value and are recorded as unrealized
gains and losses. The fund recognizes a realized gain or loss
when the contract is closed
or expires.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by
the fund on a forward-commitment or when-issued basis can take
place a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to
market fluctuations and may increase or decrease in value prior
to their delivery. The fund maintains, in a segregated account
with its custodian, assets with a
11
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
market value equal to the amount of its purchase commitments.
The purchase of securities on a when-issued or
forward-commitment basis may increase the volatility of the
fund's NAV to the extent the fund makes such purchases while
remaining substantially fully invested. As of August 31, 1995,
the fund had entered into outstanding when-issued or forward
commitments of $7,391,406.
In connection with its ability to purchase securities on a
when-issued or forward-commitment basis, the fund may enter into
mortgage "dollar rolls" in which the fund sells securities for
delivery in the current month and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon,
and maturity) but not identical securities on a specified future
date. As an inducement to "roll over" its purchase commitments,
the fund receives negotiated fees. For the six months ended
August 31, 1995, such fees earned by the fund amounted to
$65,441.
FEDERAL TAXES
The fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment
companies and to distribute all taxable income to shareholders.
Therefore, no income tax provision is required.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of
losses deferred due to "wash sale" transactions and the timing
of income recognition for certain defaulted securities and
collateralized mortgage obligations. The character of
distributions made during the year from net investment income or
net realized gains may differ from their ultimate
characterization for federal income tax purposes. The effect on
dividend distributions of certain book-to-tax differences is
presented as an "excess distribution" in the statement of
changes in net assets and the financial highlights. Also, due to
the timing of dividend distributions, the fiscal year in which
amounts are distributed may differ from the year that the income
or realized gains (losses) were recorded by the fund.
DISTRIBUTIONS
The fund pays monthly distributions from net investment income,
and realized capital gains, if any, will be distributed on an
annual basis. These distributions are recorded as of the close
of business on
12
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
the ex-dividend date. Such distributions are payable in cash, or
pursuant to the fund's dividend reinvestment plan, reinvested in
additional shares of the fund's capital stock. Under the plan,
fund shares will be purchased in the open market. However, if
the market price plus commission exceeds the net asset value by
10% or more, the fund will issue new shares at a discount of up
to 5% from the current market price.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain
broker-dealers, the fund, along with other affiliated registered
investment companies, may transfer uninvested cash balances into
a joint trading account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. government and
agency obligations. Securities pledged as collateral for all
individual and joint repurchase agreements are held by the
fund's custodian bank until maturity of the repurchase
agreement. Provisions for all agreements ensure that the daily
market value of the collateral is in excess of the repurchase
amount in the event of default.
(3) FEES AND
EXPENSES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and the
administrator):
The investment management agreement provides the adviser with a
monthly management fee computed at the per annum rate of 0.60%
of the fund's average weekly net assets. For its fee, the
advisor will provide investment advice and, in general, will
conduct the management and investment activity of the fund.
Federated Advisers has been retained by the adviser as a
subadviser and is paid a monthly fee by the adviser equal to 50%
of the investment management fee.
The administration agreement provides the administrator with a
monthly fee computed at the per annum rate of 0.20%. For its
fee, the administrator will provide reporting, regulatory, and
record-keeping services for the fund.
In addition to investment management and administrative fees,
the fund is responsible for paying most other operating
expenses, including outside directors' fees and expenses,
custodian fees,
13
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
registration fees, printing and shareholder reports, transfer
agent fees and expenses, legal, auditing and accounting
services, insurance, interest, taxes, and other miscellaneous
expenses.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other
than short-term securities) aggregated $13,407,735 and
$14,672,956, respectively, for the six months ended August 31,
1995.
During the six months ended August 31, 1995, the fund paid no
brokerage commissions to affiliated brokers.
(5) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the fund had a capital loss
carryover of $763,376 on February 28, 1995, which, if not offset
by subsequent capital gains will expire in 2003. It is unlikely
the board of directors will authorize a distribution of any net
realized capital gains until the available capital loss
carryover has been offset or expires.
(6) RETIREMENT OF
FUND SHARES
The funds' board of directors has approved a plan to repurchase
shares of the funds in the open market and retire those shares.
Repurchases may only be made when the previous day's closing
market price was at a discount from net asset value. Daily
repurchases are limited to 25% of the previous four weeks
average daily trading volume on the American Stock Exchange.
Under the current plan, cumulative repurchases in each fund
cannot exceed 3% of the total shares originally issued. The
board of directors will review the plan every six months and may
change the amount which may be repurchased. The plan was last
reviewed and reapproved by the board of directors on August 18,
1995. Pursuant to the plan, the fund cumulatively repurchased
and retired 4,200 shares as of August 31, 1995, which represents
0.21% of the shares originally issued.
14
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NOTES TO FINANCIAL STATEMENTS
(7) FINANCIAL
HIGHLIGHTS
Per-share data for a share of capital stock outstanding
throughout the period and selected information for the period
are as follows:
<TABLE>
<CAPTION>
Six Months Period from
Ended 8/31/95 3/31/94* to
(Unaudited) 2/28/95
------------- ------------
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 13.20 13.95
------ ------
Operations:
Net investment income .......................... 0.62 1.13
Net realized and unrealized gain (loss) on
investments .................................. 0.51 (0.73)
------ ------
Total from operations ........................ 1.13 0.40
------ ------
Distributions to shareholders:
From net investment income ..................... (0.60) (1.14)
In excess of net investment income ............. (0.02) (0.01)
------ ------
Total distributions .......................... (0.62) (1.15)
------ ------
Net asset value, end of period ................. $ 13.71 13.20
------ ------
------ ------
Per-share market value, end of period .......... $ 12.00 12.00
------ ------
------ ------
SELECTED INFORMATION
Total return, net asset value** .................. 8.56% 3.23%
Total return, market value*** .................... 5.22% (12.69%)
Net assets at end of period (in millions) ...... $ 27 26
Ratio of expenses to average weekly net assets ... 1.19%+ 1.18%+
Ratio of net investment income to average weekly
net assets ..................................... 9.09%+ 9.37%+
Portfolio turnover rate (excluding short-term
securities) .................................... 42% 69%
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET ASSET VALUE OF
A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET
ASSET VALUE.
*** TOTAL RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET PRICE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL
PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT PLAN.
+ ADJUSTED TO AN ANNUAL BASIS.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(8) QUARTERLY DATA
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
Net Realized
and Net Increase
Unrealized in Net Assets
Total Net Gains Resulting
Investment Investment (Losses) on from
Income Income Investments Operations Distributions
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
5/31/95 $ 705,940 628,335 1,076,849 1,705,184 (625,716)
8/31/95 695,649 610,559 (52,387) 558,172 (624,770)
----------- ----------- ------------- ------------- -------------
$ 1,401,589 1,238,894 1,024,462 2,263,356 (1,250,486)
----------- ----------- ------------- ------------- -------------
----------- ----------- ------------- ------------- -------------
</TABLE>
PER-SHARE AMOUNTS
<TABLE>
<CAPTION>
Net Realized and Net Increase
Unrealized Gains in Net Assets Quarter End
Net Investment (Losses) Resulting from Net Asset
Income on Investments Operations Distributions Value
--------------- ----------------- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
5/31/95 $ 0.31 0.54 0.85 (0.31) 13.74
8/31/95 0.31 (0.03) 0.28 (0.31) 13.71
----- ----- ----- -----
$ 0.62 0.51 1.13 (0.62)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
MORTGAGE-BACKED SECURITIES (60.2%):
COLLATERALIZED MORTGAGE OBLIGATIONS (C) (8.2%):
U.S. AGENCY INVERSE FLOATER (5.0%):
9.62%, FNMA, Series 1992-155, Class SB, COFI,
12/25/06 .......................................... $ 1,646,000 1,381,669
----------
U.S. AGENCY Z-TRANCHE (3.2%):
6.50%, FHLMC, Series 1694, Class Z, 3/15/24 .......... 1,096,184 872,836
----------
U.S. AGENCY FIXED RATE MORTGAGES (52.0%):
7.50%, FHLMC, 4/1/24 ................................. 1,957,304 1,965,838
6.50%, FHLMC, 8/23/00 ................................ 2,000,000(b) 2,007,480
11.00%, FNMA, 10/1/20 ................................ 407,705 449,234
8.00%, FNMA, 7/1/24 .................................. 968,831 988,499
9.50%, FNMA, 5/1/25 .................................. 978,463 1,029,206
6.50%, FNMA, 9/14/25 ................................. 1,250,000(b) 1,201,150
7.50%, GNMA, 9/15/23 ................................. 72,034 72,461
7.50%, GNMA, 7/15/23 ................................. 371,359 373,558
7.00%, GNMA, 2/15/24 ................................. 1,004,341 987,689
9.00%, GNMA, 5/15/25 ................................. 945,449 993,005
8.50%, GNMA, 6/19/20 ................................. 2,000,000(b) 2,078,100
9.50%, GNMA, 8/1/22 .................................. 2,000,000(b) 2,122,480
----------
14,268,700
----------
Total Mortgage-Backed Securities
(cost: $16,448,519) ............................... 16,523,205
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (d) Amount Value (a)
- --------------------------------------------------------- ---------- --------------- ------------
<S> <C> <C> <C>
HIGH YIELD CORPORATE BONDS (58.4%):
AEROSPACE AND DEFENSE (0.9%):
Tracor Incorporated, Senior Subordinated Note, 10.88%,
8/15/01 ............................................. B $ 250,000 259,375
------------
AUTOMOTIVE (2.7%):
Aftermarket Technology, Senior Subordinated Note,
12.00%, 8/1/04 ...................................... NR 250,000 266,250
Lear Seating, 8.25%, 2/1/02 .......................... B 100,000 95,250
Motor Wheel Corporation, Senior Note, 11.50%,
3/1/00 .............................................. B- 400,000 366,000
------------
727,500
------------
BROADCAST RADIO AND TELEVISION (5.2%):
Allbritton Communications Company, Senior Subordinated
Debenture, 11.50%, 8/15/04 .......................... B- 250,000 266,250
Australis Media LTD, Note, Delayed Interest, 14.00%,
5/15/03 ............................................. CCC 150,000(f) 89,625
Chancellor Broadcasting, Senior Subordinated Note,
12.50%, 10/1/04 ..................................... B- 100,000 104,750
Granite Broadcast, Senior Subordinated Note, 10.38%,
5/15/05 ............................................. B- 250,000(e) 254,687
Pegasus Media and Communications, Note, 12.50%,
7/1/05 .............................................. NR 100,000(e) 102,000
SCI Television Incorporated, Senior Note, 11.00%,
6/30/05 ............................................. BB- 250,000 263,438
Sinclair Broadcast Group Incorporated, Senior
Subordinated Note, 10.00%, 12/15/03 ................. B+ 250,000 252,813
Young Broadcasting Corporation, Senior Subordinated
Note, 10.13%, 2/15/05 ............................... B 100,000(e) 104,500
------------
1,438,063
------------
BUSINESS SERVICES (0.4%):
United Stationer Supply, Senior Subordinated Note,
12.75%, 5/1/05 ...................................... B- 100,000(e) 105,250
------------
CABLE TELEVISION (3.1%):
Cablevision System Corporation, Senior Subordinated
Debenture, 9.88%, 2/15/13 ........................... B 125,000 135,625
Continental Cablevision Incorporated, Debenture,
9.50%, 8/1/13 ....................................... BB+ 125,000 129,375
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
18
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (d) Amount Value (a)
- --------------------------------------------------------- ---------- --------------- ------------
<S> <C> <C> <C>
Groupe Videotron, Senior Note, 10.63%, 2/15/05 ....... BB+ $ 100,000 105,250
International Cabletel Incorporated, Senior Note,
Delayed Interest, 10.84%, 10/15/03 .................. NR 250,000(f) 165,000
People's Choice TV Corporation, Note, Delayed
Interest, 13.13%, 6/1/04 ............................ CCC+ 150,000(f) 69,374
Rogers Cablesystems, Senior Note, 10.00%, 3/15/05 .... BB+ 150,000 155,062
Videotron Holdings PLC, Senior Discount Note, Delayed
Interest, 11.27%, 8/15/05 ........................... B+ 150,000(f) 83,624
------------
843,310
------------
CHEMICALS AND PLASTICS (4.1%):
Arcadian Partners LP, Senior Note, 10.75%, 5/1/05 .... BB- 250,000 261,250
Crain Industries, 13.50%, 8/15/05 .................... NR 125,000(e) 126,250
G-I Holdings Incorporated, Senior Note, 10.85%,
10/1/98 ............................................. B+ 500,000 360,000
Laroche Industries Incorporated, Senior Subordinated
Note, 13.00%, 8/15/04 ............................... B 125,000 130,937
Polymer Group Incorporated, Senior Note, 12.75%,
7/15/02 ............................................. B- 125,000(e) 128,438
Uniroyal Technology, Senior Note, 11.75%, 6/1/03 ..... B 125,000 116,875
------------
1,123,750
------------
CONGLOMERATE (1.4%):
Sherritt Gordon Limited, Note, 9.75%, 4/1/03 ......... BB- 375,000 378,750
------------
CONSUMER NON-DURABLES (1.5%):
Curtice/Burns Foods Incorporated, Senior Subordinated
Note, 12.25%, 2/1/05 ................................ B 250,000 268,125
Playtex Family Products Corporation, Senior
Subordinated Note, 9.00%, 12/15/03 .................. B+ 150,000 141,750
------------
409,875
------------
CONTAINER AND GLASS PRODUCTS (3.2%):
Owens Illinois Incorporated, Senior Subordinated Note,
10.50%, 6/15/02 ..................................... B+ 250,000 259,375
Owens-Illinois Incorporated, Senior Subordinated Note,
10.00%, 8/1/02 ...................................... B+ 100,000 103,500
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
19
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (d) Amount Value (a)
- --------------------------------------------------------- ---------- --------------- ------------
<S> <C> <C> <C>
Sea Containers Limited, Senior Note, 9.50%, 7/1/03 ... BB- $ 250,000 245,625
Silgan Corporation, Senior Subordinated Note, 11.75%,
6/15/02 ............................................. B- 250,000 263,750
------------
872,250
------------
COSMETICS AND TOILETRIES (0.9%):
Revlon Consumer Products Corporation, Senior Note,
9.38%, 4/1/01 ....................................... B 250,000 247,813
------------
ECOLOGICAL SERVICES AND EQUIPMENT (1.9%):
Allied Waste Industries Incorporated, Senior
Subordinated Note, 12.00%, 2/1/04 ................... B 250,000 270,000
Mid-American Waste System Incorporated, Senior
Subordinated Note, 12.25%, 2/15/03 .................. B 250,000 261,250
------------
531,250
------------
FOOD PRODUCTS (2.2%):
Doskocil Companies Incorporated, Senior Subordinated
Note, 9.75%, 7/15/00 ................................ B 125,000 122,500
PMI Acquisition Corporation, Senior Subordinated Note,
10.25%, 9/1/03 ...................................... B 250,000 255,625
Specialty Foods Corporation, Senior Subordinated Note,
11.25%, 8/15/03 ..................................... B- 250,000 238,750
------------
616,875
------------
FOOD SERVICES (1.4%):
Flagstar Corporation, Senior Note, 10.88%, 12/1/02 ... B- 400,000 371,000
------------
FOOD AND DRUG RETAILING (1.2%):
Pathmark Stores Incorporated, Senior Subordinated
Note, 9.63%, 5/1/03 ................................. B 125,000 125,313
Penn Traffic Company, Senior Subordinated Note, 9.63%,
4/15/05 ............................................. B 125,000 101,875
Ralph's Grocery Company, Senior Note, 10.45%,
6/15/04 ............................................. B 100,000 98,000
------------
325,188
------------
FOREST PRODUCTS (2.8%):
Container Corporation America, Senior Note, 9.75%,
4/1/03 .............................................. B+ 125,000 127,969
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
20
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (d) Amount Value (a)
- --------------------------------------------------------- ---------- --------------- ------------
<S> <C> <C> <C>
Riverwood International Corporation, Senior
Subordinated Note, 11.25%, 6/15/02 .................. B $ 150,000 164,250
SD Warren Company, Senior Subordinated Note, 12.00%,
12/15/04 ............................................ B+ 200,000 222,000
Stone Container Corporation, Senior Note, 9.88%,
2/1/01 .............................................. B+ 250,000 248,750
------------
762,969
------------
HEALTH CARE SERVICES (1.9%):
Amerisource Distribution, Payment-in-kind Debenture,
11.25%, 7/15/05 ..................................... B 139,458(f) 150,615
Genesis Health, Senior Subordinated Note, 9.75%,
6/15/05 ............................................. B 150,000 154,125
Tenet Healthcare Corporation, Senior Subordinated
Note, 10.13%, 3/1/05 ................................ B+ 200,000 211,250
------------
515,990
------------
HOME PRODUCTS AND FURNISHINGS (1.7%):
American Standard Incorporated, Senior Subordinated
Debenture, Delayed Interest, 10.78%, 6/1/05 ......... B 250,000(f) 194,688
Triangle Pacific Corporation , Senior Note, 10.50%,
8/1/03 .............................................. B 250,000 258,750
------------
453,438
------------
INDUSTRIAL PRODUCTS AND EQUIPMENT (2.7%):
Cabot Safety Corporation, Senior Subordinated Note,
12.50%, 7/15/05 ..................................... B 150,000(e) 156,375
Exide Corporation, Senior Note, 10.00%, 4/15/05 ...... NR 125,000(e) 130,937
Fairfield Manufacturing, Senior Subordinated Note,
11.38%, 7/1/01 ...................................... CCC+ 100,000 97,500
Monarch Aquisition, Senior Note, 12.50%, 7/1/03 ...... B+ 150,000(e) 153,000
Panamsat LP, Senior Subordinated Note, Delayed
Interest, 11.82%, 8/1/03 ............................ B- 250,000(f) 193,750
------------
731,562
------------
LEISURE AND ENTERTAINMENT (2.8%):
Affinity Group Incorporated, Senior Subordinated Note,
11.50%, 10/15/03 .................................... B 250,000 251,875
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
21
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (d) Amount Value (a)
- --------------------------------------------------------- ---------- --------------- ------------
<S> <C> <C> <C>
Alliance Entertainment, Senior Subordinated Note,
11.25%, 7/15/05 ..................................... B- $ 100,000(e) 100,000
Motels of America, Incorporated, Senior Subordinated
Note, 12.00%, 4/15/04 ............................... B 125,000 127,031
Premier Parks, Senior Note, 12.00%, 8/15/03 .......... B+ 150,000(e) 151,500
Six Flags Theme Parks, Senior Subordinated Note,
Delayed Interest, 12.25%, 6/15/05 ................... B 200,000(e)(f) 147,500
------------
777,906
------------
MACHINE TOOL MANUFACTURER (1.1%):
Primeco Incorporated, Senior Subordinated Note,
12.75%, 3/1/05 ...................................... B 125,000 127,188
Waters Corproation, Senior Subordinated Note, 12.75%,
9/30/04 ............................................. B- 200,000 213,500
------------
340,688
------------
OIL AND GAS (3.0%):
California Energy Incorporated, Senior Note, Delayed
Interest, 10.70%, 1/15/04 ........................... BB- 400,000(f) 350,000
Falcon Drilling, Senior Note, 9.75%, 1/15/01 ......... B 150,000 149,438
Giant Industries Incorporated, Senior Subordinated
Note, 9.75%, 11/15/03 ............................... B+ 250,000 246,250
WRT Energy Corporation, Note, 13.88%, 3/1/02 ......... B- 100,000 86,500
------------
832,188
------------
PRINTING AND PUBLISHING (1.1%):
Affiliated Newspaper Investments, Senior Discount
Note, Delayed Interest, 12.79%, 7/1/06 .............. B+ 500,000(f) 287,500
------------
RETAIL STORES (2.6%):
Brylane LP/Brylane Capital Corporation , Senior
Subordinated Note, 10.00%, 9/1/03 ................... B+ 375,000 343,594
Herff Jones Inc, Senior Subordinated Note, 11.00%,
8/15/05 ............................................. B 200,000(e) 204,500
Icon Health and Fitness, Senior Subordinated Note,
13.00%, 7/15/02 ..................................... B- 150,000 156,000
------------
704,094
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
22
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (d) Amount Value (a)
- --------------------------------------------------------- ---------- --------------- ------------
<S> <C> <C> <C>
STEEL MANUFACTURER (3.4%):
Carbide/Graphite Group Incorporated, Senior Note,
11.50%, 9/1/03 ...................................... B+ $ 250,000 262,500
Envirosource Incorporated, Senior Note, 9.75%,
6/15/03 ............................................. B 250,000 227,500
Geneva Steel Corporation, Senior Note, 11.13%,
3/15/01 ............................................. B 250,000 210,000
GS Technologies, Senior Note, 12.00%, 9/1/04 ......... B 250,000 246,250
------------
946,250
------------
SURFACE TRANSPORTATION (1.3%):
Gearbulk Holding LTD, Senior Note, 11.25%, 12/1/04 ... BB 125,000 131,563
Trism Incorporated, Senior Subordinated Note, 10.75%,
12/15/00 ............................................ B 215,000 213,924
------------
345,487
------------
TELECOMMUNICATIONS AND CELLULAR (2.8%):
Cellular Communications, Note, Zero Coupon, 13.25%,
8/15/00 ............................................. CCC+ 150,000(f) 82,123
Dial Call Communications, Senior Discount Note,
Delayed Interest, 11.84%, 4/15/04 ................... CCC 500,000(f) 260,000
Peoples Telephone Company, Inc, Senior Note, 12.25%,
7/15/02 ............................................. NR 100,000 100,750
Pronet Inc, Senior Subordinated Note, 11.88%,
6/15/05 ............................................. B- 100,000(e) 106,000
USA Mobile Communications Incorporated II, Senior
Note, 9.50%, 2/1/04 ................................. CCC+ 250,000 230,000
------------
778,873
------------
TEXTILES AND APPAREL (1.1%):
Westpoint Stevens Incorporated, Senior Subordinated
Debenture, 9.38%, 12/15/05 .......................... B+ 300,000 292,500
------------
Total High Yield Corporate Bonds
(cost: $15,822,017) ............................... 16,019,694
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
23
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Shares or
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- ---------------
<S> <C> <C> <C>
COMMON STOCK (0.4%):
RETAIL TRADE (0.4%):
Grand Union
(cost: $108,701) .................................... 7,070 $ 96,329
----------
PREFERRED STOCK (0.7%):
RETAIL TRADE (0.4%):
K - III Comm ......................................... 1,000 96,500
----------
INDUSTRIAL MANUFACTURING (0.3%):
Panamsat Corporation ................................. 77 85,919
----------
Total Preferred Stock
(cost: $170,000) .................................. 182,419
----------
WARRANTS (0.0%):
Dial Call Communications, 4/25/97 .................... 500 1,000
Uniroyal Technology Corporation, 6/1/03 .............. 1,250 1,263
Affiliated Newspaper Investments, Class B ............ 500 12,500
Icon Health and Fitness, 11/14/99 .................... 150(e) 3,000
----------
Total Warrants
(cost: $0) ......................................... 17,763
----------
SHORT-TERM SECURITIES (5.8%):
Repurchase agreement with Morgan Stanley in a joint
trading account collateralized by U.S. government
agency securities, acquired on 8/31/95, accrued
interest at repurchase date of $249, 5.65%, 9/1/95
(cost: $1,589,000) ................................ $ 1,589,000 1,589,000
----------
Total Investments in Securities
(cost: $34,138,237) (g) .......................... $ 34,428,410
----------
----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON AUGUST 31, 1995, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $7,391,406.
(C) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH
DISTRICT
24
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
<TABLE>
<S> <C>
INVERSE FLOATER - REPRESENT SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE)
WITH A DECLINE (INCREASE) IN A SPECIFIED INDEX. THE INTEREST RATE PAID BY
THE INVERSE FLOATER WILL GENERALLY CHANGE AT A MULTIPLE OF ANY CHANGE IN
THE INDEX.
INTEREST RATES DISCLOSED ARE IN EFFECT ON AUGUST 31, 1995.
Z-TRANCHE - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED
UPON ESTIMATED TIMING OF FUTURE CASH FLOWS.
(D) THE STANDARD & POOR'S RATING IS A CURRENT ASSESSMENT OF THE CREDIT
WORTHINESS OF AN ISSUER WITH RESPECT TO A SPECIFIC OBLIGATION. DEBT RATED
"BB," "B," OR "CCC," IS REGARDED AS HAVING PREDOMINANTLY SPECULATIVE
CHARACTERISTICS.
"BB" - LESS NEAR-TERM VULNERABILITY TO DEFAULT THAN OTHER SPECULATIVE
ISSUES. HOWEVER, IT FACES MAJOR ONGOING UNCERTAINTIES OR EXPOSURE TO
ADVERSE BUSINESS, FINANCIAL OR ECONOMIC CONDITIONS WHICH COULD LEAD TO
INADEQUATE CAPACITY TO MEET TIMELY INTEREST PRINCIPAL PAYMENTS.
"B" - A GREATER VULNERABILITY TO DEFAULT BUT CURRENTLY HAS THE CAPACITY TO
MEET INTEREST PAYMENTS AND PRINCIPAL REPAYMENTS. ADVERSE BUSINESS,
FINANCIAL OR ECONOMIC CONDITIONS WILL LIKELY IMPAIR CAPACITY OR
WILLINGNESS TO PAY INTEREST AND REPAY PRINCIPAL.
"CCC" - CURRENTLY IDENTIFIABLE VULNERABILITY TO DEFAULT, AND IS DEPENDENT
UPON FAVORABLE BUSINESS, FINANCIAL AND ECONOMIC CONDITIONS TO MEET TIMELY
PAYMENT OF INTEREST AND REPAYMENT OF PRINCIPAL. IN THE EVENT OF ADVERSE
BUSINESS, FINANCIAL OR ECONOMIC CONDITIONS, IT IS NOT LIKELY TO HAVE THE
CAPACITY TO PAY INTEREST AND REPAY PRINCIPAL.
"D" - PAYMENT IS IN DEFAULT. INTEREST OR PRINCIPAL PAYMENTS ARE NOT MADE ON
THE DATE DUE EVEN IF THE APPLICABLE GRACE PERIOD HAS NOT EXPIRED.
THE RATINGS ABOVE MAY BE MODIFIED BY THE ADDITION OF A PLUS OR MINUS SIGN
TO SHOW RELATIVE STANDING WITHIN THE MAJOR RATING CATEGORIES.
(E) SECURITIES SOLD WITHIN TERMS OF A PRIVATE PLACEMENT MEMORANDUM ARE EXEMPT
FROM REGISTRATION UNDER SECTION 144A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY BE SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER
"ACCREDITED INVESTORS." THESE INVESTMENTS HAVE BEEN IDENTIFIED BY PORTFOLIO
MANAGEMENT AS ILLIQUID SECURITIES. THE AGGREGATE VALUE OF THESE SECURITIES
AT AUGUST 31, 1995, IS $1,970,937, WHICH REPRESENTS 7% OF TOTAL NET ASSETS.
(F) THE INTEREST RATES DISCLOSED FOR ZERO COUPON, DELAYED INTEREST AND PIK
BONDS REPRESENTS EFFECTIVE YIELDS AT AUGUST 31, 1995, BASED UPON THE
ESTIMATED TIMING AND AMOUNT OF FUTURE INTEREST AND PRINCIPAL PAYMENTS.
PIK - PAYMENT-IN-KIND INTEREST IS GENERALLY PAID BY ISSUING ADDITIONAL PAR
OF THE SECURITY RATHER THAN PAYING CASH
DELAYED INTEREST - SECURITIES THAT REMAIN ZERO-COUPON SECURITIES UNTIL A
PREDETERMINED DATE AT WHICH TIME THE STATED COUPON RATE BECOMES EFFECTIVE
AND INTEREST BECOMES PAYABLE AT REGULAR INTERVALS.
(G) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
</TABLE>
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 722,651
GROSS UNREALIZED DEPRECIATION ...... (432,478)
----------
NET UNREALIZED APPRECIATION .... $ 290,173
----------
----------
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
SHARE REPURCHASE PROGRAM
Your fund's board of directors has reapproved the fund's share repurchase
program, which enables the fund to 'buy back' shares of its common stock in the
open market. Repurchases may only be made when the previous day's closing market
price per share was at a discount from net asset value. Repurchases cannot
exceed 3% of the fund's originally issued shares.
WHAT EFFECT WILL THIS PROGRAM HAVE ON SHAREHOLDERS?
- - We do not expect any adverse impact on the adviser's ability to manage the
fund.
- - Because repurchases will be at a price below net asset value, remaining shares
outstanding may experience a slight increase in net asset value.
- - Although the effect of share repurchases on market price is less certain, the
board of directors believes the program may have a favorable effect on the
market price of fund shares.
- - We do not anticipate any material increase in the fund's expense ratio.
WHEN WILL SHARES BE REPURCHASED?
Share repurchases may be made from time to time and may be discontinued at any
time. Share repurchases are not mandatory when fund shares are trading at a
discount from net asset value; all repurchases will be at the discretion of the
fund's investment adviser. The board of directors will consider whether to
continue the share repurchase program on at least a semiannual basis and will
notify shareholders of its determination in the next semiannual or annual
report.
HOW WILL SHARES BE REPURCHASED?
We expect to finance the repurchase of shares by liquidating portfolio
securities or using current cash balances. We do not anticipate borrowing in
order to finance share repurchases.
ANNUAL MEETING RESULTS
An annual meeting of the funds' shareholders was held on August 17, 1995. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, the number of abstentions, and the number of broker
non-votes with respect to such matters, are set forth below.
26
<PAGE>
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SHAREHOLDER UPDATE
1. The funds' shareholders elected the following eight directors:
<TABLE>
<CAPTION>
Shares Voted Shares Withholding
"For" Authority to Vote
------------ -------------------
<S> <C> <C>
David T. Bennett 1,702,920 26,936
Jaye F. Dyer 1,701,826 28,030
William H. Ellis 1,702,548 27,308
Karol D. Emmerich 1,702,920 26,936
Luella G. Goldberg 1,702,920 26,936
George Latimer 1,702,920 26,936
</TABLE>
2. The funds' shareholders ratified the selection by a majority of the
independent members of the funds' Boards of Directors of KPMG Peat Marwick LLP
as the independent public accountants for the fund for the fiscal year ending
February 29, 1996. The following votes were cast regarding this matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
- ---------------------- ---------------------- ----------------------
<S> <C> <C>
1,703,012 11,572 15,092
</TABLE>
27
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL
PRODUCTS, INC., AND KIEFER BUILT, INC.
OF COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER CAPITAL MANAGEMENT
INCORPORATED AND PIPER JAFFRAY COMPANIES INC.
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR
FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, DIRECTOR, SPECIAL ACTIONS OFFICE, OFFICE
OF THE SECRETARY, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD AND PRESIDENT
Thomas S. McGlinch, SENIOR VICE PRESIDENT
J. Bradley Stone, SENIOR VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT
David E. Rosedahl, SECRETARY
Charles N. Hayssen, TREASURER
INVESTMENT Piper Capital Management Incorporated
ADVISER 222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402
SUB ADVISER Federated Advisers
FEDERATED INVESTORS TOWER, PITTSBURGH, PA 15222-3779
CUSTODIAN AND Investors Fiduciary Trust Company
TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney P.L.L.P.
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
</TABLE>
28
<PAGE>
PIPER CAPITAL
MANAGEMENT Bulk Rate
U.S. Postage
PIPER CAPITAL MANAGEMENT INCORPORATED PAID
222 SOUTH NINTH STREET Permit No. 3008
MINNEAPOLIS, MN 55402-3804 Mpls., MN
PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER.
[LOGO]
THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
312-95 HLA-02
STAPLES
