<PAGE>
[Graphic]
HIGHLANDER
INCOME FUND
* * *
ANNUAL REPORT
1995
<PAGE>
TABLE OF CONTENTS
LETTER TO SHAREHOLDERS . . . . . . 1
FINANCIAL STATEMENTS AND NOTES . . 6
INVESTMENTS IN SECURITIES. . . . .16
INDEPENDENT AUDITORS' REPORT . . .24
FEDERAL TAX INFORMATION. . . . . .25
SHAREHOLDER UPDATE . . . . . . . .26
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.
<PAGE>
HIGHLANDER INCOME FUND
TOTAL RETURN PERFORMANCE
FROM MARCH 31, 1994,* TO FEBRUARY 28, 1995
[Graphic]
HIGHLANDER INCOME FUND'S TOTAL RETURN IS BASED ON CHANGES IN NET ASSET VALUE
(NAV), ASSUMES ALL DISTRIBUTIONS WERE REINVESTED, AND DOES NOT REFLECT SALES
CHARGES. NAV-BASED PERFORMANCE IS USED TO MEASURE INVESTMENT MANAGEMENT RESULTS.
TOTAL RETURN, BASED ON THE CHANGE IN MARKET PRICE RATHER THAN NAV SINCE
INCEPTION THROUGH FEBRUARY 28, 1995, WAS -12.69%. THIS FIGURE ASSUMES
REINVESTMENT OF DISTRIBUTIONS.
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 AND DO NOT INCLUDE ANY FEES OR EXPENSES IN TOTAL RETURNS.
* COMMENCEMENT OF OPERATIONS.
April 17, 1995
Dear Shareholders:
THE PAST YEAR HAS BEEN EXTREMELY CHALLENGING FOR THE FIXED INCOME MARKET. The
Federal Reserve's move to slow the economy and reduce inflationary pressures by
raising the federal funds rate seven times, from 3% last February to 6% this
February, prompted long-term bond prices to fall rapidly. This economic
environment proved to have a negative effect on virtually all fixed income
assets, including Highlander Income Fund. The fund's net asset value total
return since its inception on March 31, 1994, through February 28, 1995, was
3.23%.** This compares to 5.51% for the Lehman Brothers U.S. Mortgage Index and
6.47% for the Lehman Brothers High-Yield Securities Single B Index.
SEVERAL FACTORS HAVE CONTRIBUTED TO THE FUND'S UNDERPERFORMANCE SINCE ITS
INCEPTION. In the period from the fund's inception until it became fully
invested at the end of May 1994, the Fed had already raised short-term interest
rates three times. This volatile interest rate
** FIGURES SHOWN REFLECT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS.
THE RETURN AND MARKET VALUE OF AN INVESTMENT IN THE FUND WILL FLUCTUATE AND
SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
1
<PAGE>
HIGHLANDER INCOME FUND
[Graphic]
environment in the fund's early months hindered its ability to generate income
and, therefore, reduced its total return. In addition, the sharp upward pressure
on interest rates caused the prices of the securities in the fund to drop. The
fund's longer average duration relative to the Lehman indexes heightened the
fund's sensitivity to interest rate movements which led to additional price
volatility. However, during the first two months of 1995, as interest rates
stabilized, the fund's longer average duration caused it to outperform the
indexes, enabling it to offset much of the negative returns from 1994.
ALTHOUGH THE FUND PERFORMED BELOW OUR EXPECTATIONS THROUGHOUT THE PAST YEAR, WE
BELIEVE THE FUND'S COMBINATION OF HIGH-YIELD AND MORTGAGE-BACKED SECURITIES
HELPED MINIMIZE THE EFFECTS OF THE SHARP RISE IN INTEREST RATES THAT THE
FINANCIAL MARKETS HAVE EXPERIENCED SINCE THE FUND'S INCEPTION. This occurred
because high-grade, mortgage-backed securities and high-yield securities often
react differently to economic conditions. In general, an environment of rising
interest rates and economic growth will favor high-yield bonds, as was the case
in 1994. On the other hand, mortgage-backed securities tend to perform better
when interest rates are
2
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HIGHLANDER INCOME FUND
[Graphic]
J. Bradley Stone,
Piper Capital Management
SHARES PRIMARY RESPONSIBILITY FOR THE DAY-TO-DAY MANAGEMENT OF HIGHLANDER INCOME
FUND. HE HAS SEVEN YEARS OF INVESTMENT EXPERIENCE.
THOMAS MCGLINCH (NOT PICTURED), PIPER CAPITAL MANAGEMENT, ASSISTS WITH THE
DAY-TO-DAY MANAGEMENT OF HIGHLANDER INCOME FUND. HE HAS 14 YEARS OF INVESTMENT
EXPERIENCE.
stable or slightly declining. However, it's important to keep in mind that while
the fund may offer opportunities and diversification not available in a
portfolio consisting only of high-grade securities, it also carries additional
risks due to its high-yield investments.
BEGINNING IN FEBRUARY 1995, THE FUND'S DIVIDEND DISTRIBUTION WAS REDUCED TO
$0.104 PER MONTH FROM $0.116 PER MONTH. This reduction was the result of two
factors. First, the rise in short-term interest rates created a situation where
short-term rates were only slightly below long-term rates. This caused the
fund's sale-forward (dollar-roll) program to perform below our expectations. In
the sale-forward program -- representing 22% of gross assets -- the fund
generates fee income by committing to buy securities in the future at
present-day prices. Second, due to the volatile interest rate environment, we
favored mortgage pass-through securities over their higher-yielding derivative
counterparts in order to reduce net asset value volatility. This had the effect
of slightly reducing the portfolio's yield. We believe this reduction in the
dividend distribution will bring the fund's dividend in line with the long-term
earnings potential of the fund's holdings. Keep in mind that due to the risks
inherent in high-yield investments, unexpected changes in income earned by the
fund may cause the distribution to change.
AS OF THE END OF MARCH 1995, NEARLY 90% OF THE FUND'S MORTGAGE ALLOCATION WAS
INVESTED IN 30-YEAR U.S. AGENCY MORTGAGE-BACKED PASS-THROUGH SECURITIES. We have
eliminated the fund's investments in seven- and 15-year mortgage-backed
securities because we feel they have become overvalued. The fund has maintained
its 4% investment in a U.S. agency inverse floating rate bond. (This reflects
the percentage of total investments in securities.) Based on the market
3
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HIGHLANDER INCOME FUND
[Graphic]
Mark Durbiano,
Federated Advisers
SHARES PRIMARY RESPONSIBILITY FOR THE DAY-TO-DAY MANAGEMENT OF HIGHLANDER INCOME
FUND. HE HAS 11 YEARS OF INVESTMENT EXPERIENCE.
J. THOMAS MADDEN (NOT PICTURED), FEDERATED ADVISERS, ASSISTS WITH THE DAY-TO-DAY
MANAGEMENT OF HIGHLANDER INCOME FUND. HE HAS 25 YEARS OF INVESTMENT EXPERIENCE.
experience of 1994, this type of security may exhibit more price volatility than
traditional fixed income investments; however, we believe its yield offers
adequate potential for compensation over a longer investment horizon.
THE HIGH-YIELD PORTION OF THE FUND WAS LESS AFFECTED BY THE RISE IN INTEREST
RATES THROUGHOUT 1994 THAN WERE HIGH-GRADE BONDS. As interest rates rose, the
economy was able to remain relatively strong. This reduced the high-yield bonds'
credit risk by allowing the corporate profits and financial outlook for many
high-yield issuers to improve. This caused the spread between the interest rate
that investors demanded from high-yield issuers and those of high-grade issuers
to narrow. Because we believe the economy will grow at a slower pace in 1995
than it did in 1994, we have been modestly raising the credit quality of the
high-yield section of the fund. We've also sold our investments in companies
where we feel long-term operating conditions have deteriorated.
THE HIGH-YIELD PORTION OF THE FUND REMAINS WIDELY DIVERSIFIED BY BOTH INDUSTRY
AND ISSUER. Currently, the five largest industry weightings in the high-yield
portion of the fund are chemical and plastics, steel, broadcast radio and TV,
food products, and forest products. We believe that the cyclical companies in
the steel and forest product areas will continue to benefit from higher prices
and increasing volumes created by the current economic environment.
4
<PAGE>
Highlander Income Fund
LOOKING AHEAD, WE BELIEVE BOTH THE HIGH-YIELD AND MORTGAGE-BACKED PORTIONS OF
THE FUND ARE WELL POSITIONED FOR 1995. Moderate economic growth and a stable or
declining interest rate environment will favor the high-yield market's ability
to generate income, and the mortgage sector of the fund is positioned to capture
value in current long-term yields. We will continue to monitor companies and
sell positions where we feel the credit profile is deteriorating, always seeking
to maintain the integrity of the fund.
Thank you for your investment in Highlander Income Fund. We consider it a
privilege to manage your money and to serve your investment needs.
Sincerely,
/s/ J. Bradley Stone
J. Bradley Stone
Portfolio Manager
/s/ Mark E. Durbiano
Mark E. Durbiano
Portfolio Manager
5
<PAGE>
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INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
HIGHLANDER INCOME FUND INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of Highlander Income Fund Inc. as of
February 28, 1995 and the related statements of operations and changes in net
assets and the financial highlights for the period from March 31, 1994
(commencement of operations) to February 28, 1995. These financial statements
and the financial highlights are the responsibility of the fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Investment securities held in custody are confirmed to us by the custodian. As
to securities purchased and sold but not received or delivered, we request
confirmations from brokers, and where replies are not received, we carry out
other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
Highlander Income Fund Inc. as of February 28, 1995, and the results of its
operations, changes in its net assets and the financial highlights for the
period from March 31, 1994 to February 28, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 7, 1995
<PAGE>
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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.
John T. Golle, PRESIDENT AND DIRECTOR, EDUCATION
ALTERNATIVES
George Latimer, DIRECTOR, SPECIAL ACTIONS OFFICE, OFFICE
OF THE SECRETARY, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Thomas S. McGlinch, SENIOR VICE PRESIDENT
J. Bradley Stone, SENIOR VICE PRESIDENT
Robert H. Nelson, VICE PRESIDENT
Scott Jacobson, 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
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
</TABLE>
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FEDERAL INCOME TAX INFORMATION
Fiscal Year Ended February 28, 1995
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the distributions. Shareholders should consult a tax
adviser on how to report these distributions on the state and local levels.
Distributions shown below are taxable as dividend income. None qualify for
corporate dividends received deduction. In early February 1995, each shareholder
should have received a breakdown of income earned by investment category for
calendar year 1994.
<TABLE>
<CAPTION>
Payable Date Per Share
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<S> <C>
May 25, 1994 ............................................................. $ 0.1160
June 22, 1994............................................................... 0.1160
July 27, 1994............................................................... 0.1160
August 24, 1994............................................................. 0.1160
September 28, 1994.......................................................... 0.1160
October 26, 1994............................................................ 0.1160
November 23, 1994........................................................... 0.1160
December 28, 1994........................................................... 0.1160
January 13, 1995............................................................ 0.1160
February 22, 1995........................................................... 0.1040
-----------
$ 1.1480
-----------
-----------
</TABLE>
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FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $520,000) ......... $ 33,600,169
Cash in bank on demand deposit ........................... 44,333
Receivable for investment securities sold ................ 174,176
Accrued interest receivable .............................. 462,998
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Total assets ......................................... 34,281,676
----------------
LIABILITIES:
Payable for investment securities purchased on a
when-issued basis (note 2) ............................. 7,504,219
Payable for investment securities purchased .............. 275,000
Accrued investment management fee ........................ 11,951
Accrued administrative fee ............................... 3,983
----------------
Total liabilities .................................... 7,795,153
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Net assets applicable to outstanding capital stock ....... $ 26,486,523
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 200 million shares of $0.01 par
value; outstanding, 2,006,667 shares ................. $ 20,067
Additional paid-in capital ............................... 27,956,456
Distributions in excess of net investment income ......... (27,712)
Accumulated net realized losses from investments ......... (763,376)
Unrealized depreciation of investments ................... (698,912)
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 26,486,523
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 13.20
----------------
----------------
* Investments in securities at identified cost ........... $ 34,299,081
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
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FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 31, 1994,*
TO FEBRUARY 28, 1995
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 2,304,651
Fee income (note 2) ...................................... 258,161
----------------
Total investment income .............................. 2,562,812
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 145,739
Administrative fee ....................................... 48,579
Custodian, accounting and transfer agent fees ............ 46,442
Reports to shareholders .................................. 11,845
Directors' fees .......................................... 8,696
Audit and legal fees ..................................... 17,588
Other expenses ........................................... 7,981
----------------
Total expenses ....................................... 286,870
----------------
Net investment income ................................ 2,275,942
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (763,376)
Net change in unrealized appreciation or depreciation of
investments ............................................ (698,912)
----------------
Net loss on investments ................................ (1,462,288)
----------------
Net increase in net assets resulting from
operations ....................................... $ 813,654
----------------
----------------
* COMMENCEMENT OF OPERATIONS.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
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FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM MARCH 31, 1994,*
TO FEBRUARY 28, 1995
<TABLE>
<S> <C>
OPERATIONS:
Net investment income .................................. $ 2,275,942
Net realized loss on investments ......................... (763,376)
Net change in unrealized appreciation or depreciation of
investments ............................................ (698,912)
----------------
Net increase in net assets resulting from operations ... 813,654
----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (2,275,942)
In excess of net investment income ....................... (27,712)
----------------
Total distributions .................................... (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
----------------
Total increase in net assets ......................... 26,386,518
Net assets at beginning of period (note 1) ................. 100,005
----------------
Net assets at end of period .............................. $ 26,486,523
----------------
----------------
Distributions in excess of net investment income ......... $ (27,712)
----------------
----------------
* COMMENCEMENT OF OPERATIONS.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
(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
63.4% of total net assets invested in lower rated and comparable
quality unrated high-yield securities. Investments in higher
yield securities are accompanied by a greater degree of credit
risk and the risk 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-yielding securities, because such securities are
generally unsecured and are often subordinated to other
creditors of the issuer. The fund held one security,
representing 0.5% of total net assets, which was in default at
February 28, 1995.
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
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 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.
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
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 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
February 28, 1995, the fund had entered into outstanding
when-issued or forward commitments of $7,504,219.
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 period from March 31,
1994, to February 28, 1995, such fees earned by the fund
amounted to $258,161.
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
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
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 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.
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
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, 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 $56,107,022 and
$21,564,565, respectively, for the period from March 31, 1994,
(commencement of operations) to February 28, 1995.
During the period ended February 28, 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.
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
(6) 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>
Period from
3/31/94* to
2/28/95
-------------
<S> <C>
PER-SHARE DATA
Net asset value, beginning of period .................................. $ 13.95
-------------
Operations:
Net investment income ................................................. 1.13
Net realized and unrealized loss on investments ....................... (0.73)
-------------
Total from operations ............................................... 0.40
-------------
Distributions to shareholders:
From net investment income ............................................ (1.14)
In excess of net investment income .................................... (0.01)
-------------
Total distributions ................................................. (1.15)
-------------
Net asset value, end of period ........................................ $ 13.20
-------------
-------------
Per-share market value, end of period ................................. $ 12.00
-------------
-------------
SELECTED INFORMATION
Total return, net asset value*** ........................................ 3.23%
Total return, market value** ............................................ (12.69%)
Net assets at end of period (in millions) ............................. $ 26
Ratio of expenses to average weekly net assets .......................... 1.18%+
Ratio of net investment income to average weekly net assets ............. 9.37%+
Portfolio turnover rate (excluding short-term securities) ............... 69 %
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** 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.
*** 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.
+ ADJUSTED TO AN ANNUAL BASIS.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(7) QUARTERLY DATA (UNAUDITED)
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
Net Realized Net Increase
and (Decrease)
Unrealized in Net Assets
Total Net Gains Resulting
Investment Investment (Losses) on from
Income Income Investments Operations Distributions
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
5/31/94* $ 406,115 352,524 (666,547) (314,023) (232,774)
8/31/94 716,089 639,931 (382,699) 257,232 (698,320)
11/30/94 725,308 654,606 (1,532,596) (877,990) (698,320)
2/28/95 715,300 628,881 1,119,554 1,748,435 (674,240)
----------- ----------- ------------- ------------- -------------
$ 2,562,812 2,275,942 (1,462,288) 813,654 (2,303,654)
----------- ----------- ------------- ------------- -------------
----------- ----------- ------------- ------------- -------------
</TABLE>
PER-SHARE AMOUNTS
<TABLE>
<CAPTION>
Net Increase
Net Realized and (Decrease)
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>
5/31/94* $ 0.18 (0.34) (0.16) (0.12) 13.67
8/31/94 0.32 (0.19) 0.13 (0.35) 13.45
11/30/94 0.32 (0.76) (0.44) (0.35) 12.66
2/28/95 0.31 0.56 0.87 (0.33) 13.20
----- ----- ----- -----
$ 1.13 (0.73) 0.40 (1.15)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
* Period from March 31, 1994 (commencement of operations), to May 31, 1994.
<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.
TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN
As a shareholder, you may choose to participate in the Dividend Reinvestment
Plan. It is a convenient and economical way to buy additional shares of the fund
by automatically reinvesting dividends and capital gains. The plan is
administered by Investors Fiduciary Trust Company (IFTC), the plan agent.
ELIGIBILITY/PARTICIPATION
You may join the plan at any time. Reinvestment of distributions will begin with
the next distribution paid, provided your enrollment card is received at least
10 days before the record date for that distribution.
<PAGE>
- ---------------------------------------------------------------------
SHAREHOLDER UPDATE
If your shares are in certificate form, you may join the plan directly and have
your distributions reinvested in additional shares of the fund. To enroll in
this plan, call IFTC at 1-800-543-1627. If your shares are registered in your
brokerage firm's name or another name, ask the holder of your shares how you may
participate.
Banks, brokers or nominees, on behalf of their beneficial owners who wish to
reinvest dividend and capital gain distributions, may participate in the plan by
informing IFTC at least 10 days before each share's dividend and/or capital
gains distribution.
PLAN ADMINISTRATION
Fund shares to cover reinvestments will generally be purchased by IFTC in the
open market. However, if fund shares are trading at a 10% or greater premium
over net asset value, and in certain other circumstances, the fund may issue new
shares to cover such reinvestments at a discount of up to 5% of the market price
without brokerage commissions.
Beginning no more than five business days before the dividend payment date, IFTC
may purchase fund shares on behalf of participants in the plan to satisfy
dividend reinvestments. Such purchases are made on the New York Stock Exchange
(the Exchange) or elsewhere at any time when the price of the fund's common
stock on the Exchange is at less than a 10% premium over the fund's most
recently calculated net asset value per share. If, at the close of business on
the dividend payment date, the shares purchased in the open market are
insufficient to satisfy the dividend reinvestment requirements -- either because
the fund's shares have been trading at a greater than 10% premium over net asset
value or because IFTC, for any other reason, has not been able to purchase a
sufficient number of shares -- IFTC will accept payment of the dividend, or the
remaining portion therefore, in authorized but unissued shares of the fund. Such
shares will be issued at a price per share equal to the higher of (1) the net
asset value per share as of the close of business on the payment date, or (2)
95% of the closing market price per share on the payment date. The number of
shares allocated to you will be determined by dividing the amount of the
dividend or distribution by the applicable price per share.
There is no direct charge to you for reinvestment of dividends and capital
gains, since IFTC fees are paid by the fund. However, if fund shares are
purchased in the open market, each participant in the plan pays a pro rata
portion of the brokerage commissions. Brokerage charges are expected to be lower
than those for individual transactions because the plan purchases shares for all
participants in blocks. Distributions paid on the shares in your plan account
will also be reinvested as long as you continue to participate in the plan.
<PAGE>
- ---------------------------------------------------------------------
SHAREHOLDER UPDATE
IFTC maintains accounts for plan participants holding shares in certificate form
and will furnish written confirmation of all transactions, including information
you need for tax records. Reinvested shares in your account will be held by IFTC
in non-certificated form in your name.
TAX INFORMATION
Distributions reinvested in shares purchased in the open market are subject to
income tax, the same as if such distributions were received as cash. When shares
are issued by the fund at a discount from market value, shareholders will be
treated as having received distributions of an amount equal to the full market
value of those shares. Shareholders, as required by the Internal Revenue
Service, will receive a Form 1099 information return regarding the Federal tax
status of the prior year's distributions.
PLAN WITHDRAWAL
If you hold your shares in certificate form, you may terminate your
participation in the plan at any time by giving written notice to IFTC. If your
shares are registered in your brokerage firm's name, you may terminate your
participation via verbal or written instructions to your investment
professional. Written instructions should include your name and address as they
appear on the certificate or account.
If notice is received at least 10 days before the record date, all future
distributions will be paid directly to the shareholder of record.
If your shares are in certificate form and you discontinue your participation in
the plan, you (or your nominee) will receive an additional certificate for all
full shares and a check for any fractional shares in your account.
PLAN AMENDMENT/TERMINATION
The funds reserve the right to amend or terminate the plan. Should the plan be
terminated, participants will be notified in writing at least 90 days before the
record date for the next dividend or distribution. The plan may also be amended
or terminated by IFTC with at least 90 days written notice to participants in
the plan.
Any questions about the plan should be directed to your investment professional
or to Investors Fiduciary Trust Company, P.O. Box 419432, Kansas City, Missouri
64141, 1-800-543-1627.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
HIGHLANDER INCOME FUND
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (2.0%):
U.S. Treasury Strip, 7.59%, 11/15/22
(cost: $519,022) .................................. $ 4,000,000(c) 518,680
----------
MORTGAGE-BACKED SECURITIES (59.5%):
U.S. AGENCY FIXED-RATE MORTGAGES (51.8%):
7.50%, FHLMC, 4/1/24 ................................. 1,983,701 1,926,011
8.00%, FNMA, 1/1/21 .................................. 2,000,000(b) 1,987,480
11.00%, FNMA, 10/1/20 ................................ 445,255 491,726
7.50%, FNMA, 11/1/22 ................................. 918,234 890,384
7.50%, FNMA, 10/1/22 ................................. 920,748 893,973
8.00%, FNMA, 8/1/24 .................................. 974,870 967,549
8.50%, FNMA, 4/1/23 .................................. 1,500,000(b) 1,519,200
7.50%, GNMA, 9/15/23 ................................. 79,514 76,879
7.50%, GNMA, 8/15/23 ................................. 476,253 460,470
7.50%, GNMA, 7/15/23 ................................. 374,232 361,830
8.50%, GNMA, 6/19/20 ................................. 2,000,000(b) 2,033,120
9.50%, GNMA, 8/1/22 .................................. 2,000,000(b) 2,113,100
----------
13,721,722
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (D) (7.7%):
U.S. AGENCY INVERSE FLOATER (4.9%):
10.99%, FNMA, Series 1992-155, Class SB, COFI,
12/25/06 ............................................ 1,646,000 1,292,110
----------
U.S. AGENCY Z-TRANCHE (2.8%):
6.50%, FHLMC, Series 1694, Class Z, 3/15/24 .......... 1,066,972 742,698
----------
Total Mortgage-Backed Securities
(cost: $15,913,342) ................................ 15,756,530
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P
Rating Principal
Name of Issuer (g) Amount
- --------------------------------------------------------- --------- ----------
Market
Value
(a)
--
<S> <C> <C> <C>
HIGH-YIELD CORPORATE BONDS (63.4%):
AEROSPACE AND DEFENSE (1.0%):
Tracor Incorporated, Senior Subordinated Note, 10.88%,
8/15/01 ............................................. B $ 250,000 251,875
----------
AUTOMOTIVE (2.4%):
Aftermarket Technology Company, Senior Subordinated
Note, 12.00%, 8/1/04 ................................ B- 250,000 263,125
Motor Wheel Corporation, Senior Note, 11.50%,
3/1/00 .............................................. B- 400,000 353,000
----------
616,125
----------
BEVERAGE AND TOBACCO (0.7%):
Heileman Acquisition Corporation, Senior Subordinated
Note, 9.63%, 1/31/04 ................................ B- 250,000 177,500
----------
BROADCAST RADIO AND TELEVISION (4.3%):
Ackerley Communications Incorporated, Senior Note,
10.75%, 10/1/03 ..................................... B+ 250,000 251,250
Allbritton Communications Company, Senior Subordinated
Debenture, 11.50%, 8/15/04 .......................... B- 250,000 256,250
Chancellor Broadcasting, Senior Subordinated Note,
12.50%, 10/1/04 ..................................... B- 100,000 100,500
SCI Television Incorporated, Senior Note, 11.00%,
6/30/05 ............................................. BB- 250,000 257,500
Sinclair Broadcast Group Incorporated, Senior
Subordinated Note, 10.00%, 12/15/03 ................. B+ 250,000 241,250
----------
1,106,750
----------
BUSINESS SERVICES (0.9%):
Bell & Howell Company, Senior Subordinated Note,
10.75%, 10/1/02 ..................................... B- 250,000 246,250
----------
CABLE TELEVISION (3.3%):
Cablevision System Corporation, Senior Subordinated
Debenture, 9.88%, 2/15/13 ........................... B 250,000 242,500
Continental Cablevision Incorporated, Debenture,
9.50%, 8/1/13 ....................................... BB 375,000 361,875
Groupe Videotron, Senior Note, 10.63%, 2/15/05 BB+ 100,000 103,500
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
International Cabletel Incorporated, Senior Note,
Delayed Interest, 10.84%, 10/15/03 .................. NR $ 250,000(f) 148,125
----------
856,000
----------
CHEMICALS AND PLASTICS (5.5%):
Arcadian Partners LP, Senior Note, 10.75%, 5/1/05 .... B+ 400,000 397,000
G-I Holdings Incorporated, Senior Note, 10.88%,
10/1/98 ............................................. B+ 500,000 321,250
Laroche Industries Incorporated, Senior Subordinated
Note, 13.00%, 8/15/04 ............................... B 250,000 245,000
Polymer Group Incorporated, Senior Note, 12.75%,
7/15/02 ............................................. B- 125,000(e) 120,625
UCC Investors Holding Incorporated, Senior
Subordinated Note, 11.00%, 5/1/03 ................... B- 250,000 251,875
Uniroyal Technology, Senior Note, 11.75%, 6/1/03 ..... B 125,000 105,625
----------
1,441,375
----------
CONGLOMERATE (1.4%):
Sherritt Gordon Limited, Notes, 9.75%, 4/1/03 ........ BB- 375,000 371,719
----------
CONSUMER NON-DURABLES (1.0%):
Curtice/Burns Foods Incorporated, Senior Subordinated
Note, 12.25%, 2/1/05 ................................ B 250,000 260,625
----------
CONTAINER AND GLASS PRODUCTS (3.2%):
Owens Illinois Incorporated, Senior Subordinated Note,
10.50%, 6/15/02 ..................................... B+ 250,000 256,250
Owens-Illinois Incorporated, Senior Subordinated Note,
10.00%, 8/1/02 ...................................... B+ 100,000 100,625
Sea Containers Limited, Senior Note, 9.50%, 7/1/03 ... BB 250,000 230,000
Silgan Corporation, Senior Subordinated Note, 11.75%,
6/15/02 ............................................. B- 250,000 261,563
----------
848,438
----------
COSMETICS AND TOILETRIES (0.9%):
Revlon Consumer Products Corporation, Senior Note,
9.38%, 4/1/01 ....................................... B 250,000 234,063
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
ECOLOGICAL SERVICES AND EQUIPMENT (1.9%):
Allied Waste Industries Incorporated, Senior
Subordinated Note, 12.00%, 2/1/04 ................... B $ 250,000 247,500
Mid-American Waste System Incorporated, Senior
Subordinated Note, 12.25%, 2/15/03 .................. B 250,000 256,875
----------
504,375
----------
FOOD PRODUCTS (3.1%):
Doskocil Companies Incorporated, Senior Subordinated
Note, 9.75%, 7/15/00 ................................ B 250,000 227,500
PMI Acquisition Corporation, Senior Subordinated Note,
10.25%, 9/1/03 ...................................... B 250,000 241,875
Specialty Foods Corporation, Senior Subordinated Note,
11.25%, 8/15/03 ..................................... B- 375,000 361,875
----------
831,250
----------
FOOD SERVICES (1.5%):
Flagstar Corporation, Senior Note, 10.88%, 12/1/02 ... B 400,000 391,500
----------
FOOD AND DRUG RETAILING (2.2%):
Grand Union Company, Senior Subordinated Note, 12.25%,
7/15/02 ............................................. D 400,000 122,000
Pathmark Stores Incorporated, Senior Subordinated
Note, 9.63%, 5/1/03 ................................. B 250,000 235,000
Penn Traffic Company, Senior Subordinated Note, 9.63%,
4/15/05 ............................................. B 250,000 235,625
----------
592,625
----------
FOREST PRODUCTS (4.1%):
Container Corporation of America, Senior Note, 9.75%,
4/1/03 .............................................. B+ 125,000 122,813
Riverwood International Corporation, Senior
Subordinated Note, 11.25%, 6/15/02 .................. B 250,000 264,375
SD Warren Company, Senior Subordinated Note, 12.00%,
12/15/04 ............................................ B+ 200,000(e) 212,500
Stone Container Corporation, Senior Note, 9.88%,
2/1/01 .............................................. B 500,000 491,875
----------
1,091,563
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
HEALTH CARE SERVICES (2.2%):
Amerisource Distribution, Payment-in-Kind Debenture,
11.25%, 7/15/05 ..................................... B- $ 278,916(f) 297,743
National Medical Enterprises, Senior Subordinated
Note, 10.13%, 3/1/05 ................................ B+ 150,000 153,375
Surgical Health Corporation, Senior Subordinated Note,
11.50%, 7/15/04 ..................................... B- 125,000 136,875
----------
587,993
----------
HOME PRODUCTS AND FURNISHINGS (2.4%):
American Standard Incorporated, Senior Subordinated
Debenture, Delayed Interest, 10.78%, 6/1/05 ......... B 250,000(f) 171,563
Nortek Incorporated, Senior Subordinated Note, 9.88%,
3/1/04 .............................................. CCC 250,000 230,000
Triangle Pacific Corporation, Senior Note, 10.50%,
8/1/03 .............................................. B 250,000 246,250
----------
647,813
----------
INDUSTRIAL PRODUCTS AND EQUIPMENT (1.3%):
Fairfield Manufacturing, Senior Subordinated Note,
11.38%, 7/1/01 ...................................... CCC+ 100,000 95,500
Truck Components Incorporated, Senior Note, 12.25%,
6/30/01 ............................................. B 250,000 260,000
----------
355,500
----------
LEISURE AND ENTERTAINMENT (0.9%):
Affinity Group Incorporated, Senior Subordinated Note,
11.50%, 10/15/03 .................................... B 250,000 237,188
----------
MACHINE TOOL MANUFACTURER (1.2%):
Primeco Incorporated, Senior Subordinated Note,
12.75%, 3/1/05 ...................................... B 125,000 125,000
Waters Corporation, Senior Subordinated Note, 12.75%,
9/30/04 ............................................. B- 200,000 204,000
----------
329,000
----------
OIL AND GAS (2.6%):
California Energy Incorporated, Senior Note, Delayed
Interest, 10.7%, 1/15/04 ............................ BB- 500,000(f) 372,500
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
Giant Industries Incorporated, Senior Subordinated
Note, 9.75%, 11/15/03 ............................... B+ $ 250,000 228,750
Mesa Capital Corporation, Notes, Delayed Interest,
12.95%, 6/30/98 ..................................... CCC+ 100,000(f) 94,000
----------
695,250
----------
PRINTING AND PUBLISHING (3.2%):
Affiliated Newspaper Investments, Senior Discount
Note, Delayed Interest, 12.79%, 7/1/06 .............. B+ 500,000(f) 250,000
American Media Operation, Senior Subordinated Note,
11.63%, 11/15/04 .................................... B 250,000 266,250
Garden State Newspapers Incorporated, Senior
Subordinated Note, 12.00%, 7/1/04 ................... B+ 125,000 122,656
Webcraft Technologies Incorporated, Senior
Subordinated Note, 9.38%, 2/15/02 ................... B 250,000 221,563
----------
860,469
----------
RETAIL STORES (2.0%):
Brylane LP/Brylane Capital Corporation, Senior
Subordinated Note, 10.00%, 9/1/03 ................... B+ 375,000 371,250
Icon Health and Fitness, Senior Subordinated Note,
13.00%, 7/15/02 ..................................... B- 150,000(e) 156,750
----------
528,000
----------
STEEL MANUFACTURER (5.0%):
Carbide/Graphite Group Incorporated, Senior Note,
11.50%, 9/1/03 ...................................... B+ 250,000 261,875
Envirosource Incorporated, Senior Note, 9.75%,
6/15/03 ............................................. B- 250,000 223,750
Geneva Steel Corporation, Senior Note, 11.13%,
3/15/01 ............................................. B+ 250,000 237,500
GS Technologies, Senior Note, 12.00%, 9/1/04 ......... B 250,000 257,188
Northwestern Steel & Wire Company, Senior Note, 9.50%,
6/15/01 ............................................. B 375,000 348,750
----------
1,329,063
----------
SURFACE TRANSPORTATION (1.7%):
Trism Incorporated, Senior Subordinated Note, 10.75%,
12/15/00 ............................................ B 465,000 458,025
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Name of Issuer Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
TECHNOLOGY SERVICES (0.4%):
Computervision, Senior Subordinated Note, 11.38%,
8/15/99 ............................................. CCC+ $ 125,000 114,375
----------
TELECOMMUNICATIONS AND CELLULAR (1.5%):
Dial Call Communications, Senior Discount Note,
Delayed Interest, 11.84%, 4/15/04 ................... CCC- 500,000(f) 190,000
USA Mobile Communications Incorporated II, Senior
Note, 9.50%, 2/1/04 ................................. CCC+ 250,000 215,625
----------
405,625
----------
TEXTILES AND APPAREL (1.6%):
Westpoint Stevens Incorporated, Senior Subordinated
Debenture, 9.38%, 12/15/05 .......................... B+ 450,000 420,750
----------
Total High-Yield Corporate Bonds
(cost: $17,346,717) ................................ 16,791,084
----------
WARRANTS (0.0%):
Dial Call Communications, 4/25/97 .................... 500 125
Affiliated Newspaper Investments, Class B ............ 500 12,500
Uniroyal Technology Corporation, 6/1/03 .............. 1,250 1,250
----------
Total Warrants
(cost: $0) ......................................... 13,875
----------
SHORT-TERM SECURITIES (2.0%):
Repurchase agreement with Morgan Stanley in a joint
trading account collateralized by U.S. government
agency securities, acquired on 2/28/95, accrued
interest at repurchase date of $86, 5.97%, 3/1/95
(cost: $520,000) .................................... 520,000 520,000
----------
Total Investments in Securities
(cost: $34,299,081) (h) ............................ $33,600,169
----------
----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON FEBRUARY 28, 1995, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $7,504,219.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
<TABLE>
<S> <C>
(C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD
ON THE DATE OF PURCHASE.
(D) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH
DISTRICT
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 FEBRUARY 28, 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.
(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 FEBRUARY 28, 1995, IS $489,875, WHICH REPRESENTS 2% OF TOTAL NET ASSETS.
(F) THE INTEREST RATES DISCLOSED FOR DELAYED INTEREST AND PIK BONDS REPRESENTS
EFFECTIVE YIELDS AT FEBRUARY 28, 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) 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.
(H) 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 .... $ 422,297
GROSS UNREALIZED DEPRECIATION ...... (1,121,209)
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NET UNREALIZED DEPRECIATION .... $ (698,912)
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</TABLE>
