<PAGE>
HIGHLANDER
INCOME FUND
* * *
SEMIANNUAL
REPORT
1996
<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 and
lower-rated fixed income securities, which include securities commonly referred
to as "junk bonds." Each of these asset classes must comprise at least 30%, and
no more than 70%, of the portfolio. The mortgage-backed securities may include
certain derivative securities, such as inverse floating rate securities and Z-
bonds. Junk bond securities generally have greater volatility of price and
greater risks to principal and income than securities in the higher-rated
categories. Fund shares trade on the American Stock Exchange under the symbol
HLA.
AVERAGE ANNUAL TOTAL RETURNS . . . . . . . . . . . 1
LETTER TO SHAREHOLDERS . . . . . . . . . . . . . . 2
FINANCIAL STATEMENTS AND NOTES . . . . . . . . . . 6
INVESTMENTS IN SECURITIES. . . . . . . . . . . . . 16
SHAREHOLDER UPDATE . . . . . . . . . . . . . . . . 28
PLEASE REMEMBER YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF
PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED.
CALL FOR MORE INFORMATION
If you would like to be put on our mailing list to receive a quarterly update
for Highlander Income Fund (HLA), call our Mutual Fund Services Department at 1
800 866-7778. In addition, you can call that same number and listen to a
portfolio manager commentary for the fund, which is updated monthly.
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS
PERIODS ENDED AUG. 31, 1996
[GRAPH]
AVERAGE ANNUALIZED TOTAL RETURN FIGURES ARE THROUGH AUG. 31, 1996, 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 AUG. 31, 1996, WERE 8.62% AND
- -0.09% RESPECTIVELY. THESE FIGURES ALSO ASSUME REINVESTED DISTRIBUTIONS AND DO
NOT REFLECT SALES CHARGES.
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.
* THIS BLENDED INDEX IS COMPRISED OF 50% LEHMAN BROTHERS U.S. MORTGAGE INDEX AND
50% LEHMAN BROTHERS HIGH-YIELD SINGLE B SECURITIES INDEX, WHICH HAD INDIVIDUAL
ONE-YEAR RETURNS OF 4.98% AND 10.68% AND SINCE INCEPTION RETURNS OF 7.26% AND
10.51%, RESPECTIVELY.
THE LEHMAN BROTHERS U.S. MORTGAGE INDEX IS COMPRISED OF U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES WITH 5 TO 30 YEARS TO MATURITY. THE LEHMAN BROTHERS
HIGH-YIELD SINGLE B SECURITIES INDEX IS COMPRISED OF FIXED RATE, PUBLIC NON-
CONVERTIBLE ISSUES THAT ARE RATED B BY MOODY'S INVESTOR SERVICE. DEVELOPED BY
LEHMAN BROTHERS, THE INDEXES ARE UNMANAGED, REFLECT THE REINVESTMENT OF ALL
DISTRIBUTIONS AND DO NOT INCLUDE ANY FEES OR EXPENSES.
THE SINCE INCEPTION NUMBERS FOR THE LEHMAN BLENDED INDEX ARE CALCULATED FROM THE
MONTH END CLOSEST TO THE FUND'S INCEPTION THROUGH AUG. 31, 1996.
1
<PAGE>
HIGHLANDER INCOME FUND
[PHOTO]
TOM MCGLINCH, CFA, PIPER CAPITAL MANAGEMENT,
SHARES RESPONSIBILITY FOR THE MANAGEMENT OF HIGHLANDER INCOME FUND. HE HAS 15
YEARS OF FINANCIAL EXPERIENCE.
[PHOTO]
WAN-CHONG KUNG, PIPER CAPITAL MANAGEMENT,
SHARES RESPONSIBILITY FOR THE MANAGEMENT OF HIGHLANDER INCOME FUND. SHE HAS FOUR
YEARS OF FINANCIAL EXPERIENCE.
Oct. 15, 1996
Dear Shareholders:
HIGHLANDER INCOME FUND HAD A NET ASSET VALUE (NAV) TOTAL RETURN OF 2.24%* FOR
THE SIX-MONTH PERIOD ENDED AUG. 31, 1996. This figure assumes distributions
were reinvested and does not include sales charges. In comparison, the fund's
benchmark, a 50%/50% blend of the Lehman Brothers U.S. Mortgage Index and the
Lehman Brothers High-Yield Single B Securities Index, had a return of 2.54%. The
fund's return based on market price was -1.39% for this same six-month reporting
period.
THE FUND'S NAV TOTAL RETURN, WHILE LOWER THAN THE BLENDED LEHMAN INDEX, ROSE
OVER THE LAST HALF OF THIS SIX-MONTH REPORTING PERIOD. Early in the period,
economic reports showed stronger-than-expected growth, which caused an increase
in interest rates and, in turn, a drop in the price of bonds. During this time,
the fund had an effective duration that was longer than the blended benchmark,
which meant it was more sensitive to changes in interest rates and, therefore,
underperformed. We implemented a series of trades in June to reduce the fund's
duration. This move worked to close the underperformance gap, as evidenced by
the fund outperforming the blended index in the last three months. For more
information about effective duration and the ways it affects a fund, please
see page 5.
THE HIGH-YIELD MARKET ENJOYED STRONG RETURNS OVER THE PERIOD AS IMPROVING CREDIT
FUNDAMENTALS OFFSET MOST OF THE RISE IN INTEREST RATES. A strong economy has
two very different impacts on the high-
* 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.
2
<PAGE>
HIGHLANDER INCOME FUND
[PHOTO]
MARK DURBIANO, CFA, FEDERATED ADVISERS,
SHARES RESPONSIBILITY FOR THE MANAGEMENT OF HIGHLANDER INCOME FUND. HE HAS 14
YEARS OF FINANCIAL EXPERIENCE.
yield portion of the fund. First, a strong economy is usually accompanied by
rising interest rates. This is a negative for all fixed income instruments,
including high-yield bonds. However, a strong economy also has a positive impact
on high-yield securities, as the underlying credit quality of high-yield issuers
improves. This reduces the risk premium that investors demand to own high-yield
securities. Over the past six months, the improved risk premium effectively
offset the general rise in interest rates. We believe the economy will slow
modestly from its second quarter pace, but its strength will continue to help
reduce credit risk for high-yield securities.
THROUGHOUT THE PERIOD, WE FAVORED CABLE TELEVISION, BROADCASTING AND
TELECOMMUNICATIONS IN THE HIGH-YIELD PORTION OF THE FUND. In our view,
deregulation and consolidation will continue to positively impact the credit
quality of issuers in these industries. We are especially optimistic about the
telecommunications sector, where deregulation of the local phone markets has led
to some exciting growth opportunities.
THIS PERIOD ALSO SAW SUBSTANTIAL MERGER AND ACQUISITION ACTIVITY, WHICH
POSITIVELY AFFECTED THE TOTAL RETURN OF THE FUND. The fund owns the bonds of
several companies that are being acquired (or have been acquired) by larger
companies, including SCI Television, Motorwheel and Pace Industries. The merger
and acquisition activity typically leads to higher bond prices as a result
of better credit quality or tenders for the high-yield securities at attractive
prices.
IN THE MORTGAGE-BACKED PORTION OF THE FUND, WE INCREASED OUR PARTICIPATION IN
THE DOLLAR ROLL (OR SALE-FORWARD) PROGRAM DURING THE PERIOD. Participation in
the dollar roll program now represents 18% of the fund's total assets, compared
to 12% in March of this year. The dollar roll
3
<PAGE>
HIGHLANDER INCOME FUND
[PIE CHART]
program allows the fund to generate fee income by committing to pay for
securities in the future at today's prices. Keep in mind that these commitments
also increase the amount of assets exposed to market and interest rate risk.
WE CONTINUED TO USE A "COUPON BARBELL" STRATEGY FOR THE MORTGAGE-BACKED PORTION
OF THE FUND THAT IS NOT IN THE DOLLAR ROLL PROGRAM. This was accomplished by
investing in a combination of discount-priced mortgage securities and older,
seasoned higher-coupon mortgage securities. Both types of securities reduce the
fund's exposure to more volatile prepayment rates. The discounted securities
have lower coupon rates, which makes prepayment unlikely. Likewise, the older,
seasoned securities that have survived a few business cycles are also less
likely to prepay.
WE BELIEVE THE ECONOMIC ENVIRONMENT OF THE PAST YEAR, AND THE WAY THE FUND HAS
RESPONDED, ARE GOOD EXAMPLES OF THE EFFECTIVENESS OF THIS FUND'S STRATEGY. At
the fund's inception, our intent was to create stability by combining two
loosely correlated types of securities. That rationale is being played out now.
The period's strong economy and rising interest rates have favored high-yield
bonds more than mortgage-backed securities. Over a longer period or a whole
business cycle, we expect to see periods when the mortgage portion of the fund
provides stronger returns than the high-yield portion.
4
<PAGE>
HIGHLANDER INCOME FUND
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 on 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.
LOOKING AHEAD, WE BELIEVE THE ECONOMY WILL SLOW A BIT BUT REMAIN HEALTHY OVER
THE NEXT FEW MONTHS, WHICH SHOULD BODE WELL FOR BOTH THE HIGH-YIELD AND
MORTGAGE-BACKED PORTIONS OF THE FUND. We believe the fund is well positioned for
the coming months, and we don't anticipate making any immediate strategy
changes. However, we continue to look for new buying opportunities for the fund
and to weed out holdings in securities that disappoint us.
Thank you for your investment in Highlander Income Fund. We remain committed to
providing you with high-quality management service and look forward to helping
you reach your financial goals.
Sincerely,
/s/ Mark E. Durbiano
Mark E. Durbiano
Co-manager
/s/ Tom McGlinch
Tom McGlinch
Co-manager
/s/ Wan-Chong Kung
Wan-Chong Kung
Co-manager
5
<PAGE>
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FINANCIAL STATEMENTS (Unaudited)
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $464,000) ....... $ 32,883,300
Cash in bank on demand deposit ........................... 25,713
Accrued interest receivable .............................. 442,571
Variation margin receivable (note 2) ..................... 16,875
----------------
Total assets ......................................... 33,368,459
----------------
LIABILITIES:
Payable for investment securities purchased on a
when-issued basis (note 2) ............................. 5,948,125
Payable for investment securities purchased .............. 25,861
Accrued investment management fee ........................ 13,957
Accrued administrative fee ............................... 4,652
----------------
Total liabilities .................................... 5,992,595
----------------
Net assets applicable to outstanding capital stock ....... $ 27,375,864
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 200 million shares of $0.01 par
value; outstanding, 1,989,467 shares ................. $ 19,895
Additional paid-in capital ............................... 27,687,450
Undistributed net investment income ...................... 11,364
Accumulated net realized loss on investments ............. (490,586)
Unrealized appreciation of investments ................... 147,741
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 27,375,864
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 13.76
----------------
----------------
* Investments in securities at identified cost ........... $ 32,808,684
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 1996
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 1,274,769
Fee income (note 2) ...................................... 55,793
----------------
Total investment income .............................. 1,330,562
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 82,431
Administrative fee ....................................... 27,477
Custodian, accounting and transfer agent fees ............ 29,871
Reports to shareholders .................................. 21,798
Directors' fees .......................................... 2,851
Audit and legal fees ..................................... 27,885
Other expenses ........................................... 5,082
----------------
Total expenses ....................................... 197,395
Less expenses paid indirectly ............................ (256)
----------------
Total net expenses ................................... 197,139
----------------
Net investment income ................................ 1,133,423
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (79,685)
Net realized loss on closed futures contracts ............ (94,715)
----------------
Net realized loss on investments ....................... (174,400)
Net change in unrealized appreciation or depreciation of
investments ............................................ (359,082)
----------------
Net loss on investments ................................ (533,482)
----------------
Net increase in net assets resulting from
operations ....................................... $ 599,941
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
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FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
8/31/96 Year Ended
(Unaudited) 2/29/96
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 1,133,423 2,367,210
Net realized gain (loss) on investments .................. (174,400) 447,190
Net change in unrealized appreciation or depreciation of
investments ............................................ (359,082) 1,205,735
---------------- ----------------
Net increase in net assets resulting from operations ... 599,941 4,020,135
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (1,122,059) (2,367,210)
In excess of net investment income ....................... -- (3,049)
Tax return of capital .................................... -- (26,682)
---------------- ----------------
Total distributions .................................. (1,122,059) (2,396,941)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Payments for retirement of 17,200 shares (note 6) ........ -- (211,735)
---------------- ----------------
Total increase (decrease) in net assets .............. (522,118) 1,411,459
Net assets at beginning of period .......................... 27,897,982 26,486,523
---------------- ----------------
Net assets at end of period .............................. $ 27,375,864 27,897,982
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 11,364 --
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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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 investment management company. The fund invests
primarily in a combination of high-grade, mortgage-backed
securities and lower-rated fixed income securities, which
include securities commonly referred to as "junk bonds". The
mortgage-backed securities may include certain derivative
securities such as inverse floating rate securities and Z-bonds.
Fund shares are listed on the American Stock Exchange under the
symbol HLA.
(2) SUMMARY OF 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 sales price, and
open financial futures contracts 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
61.1% of total net assets invested in non-investment grade and
comparable quality unrated high-yield securities. Investments in
non-investment grade securities are accompanied by a greater
degree of credit risk and tend 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. The fund held one security,
representing 0.6% of total net assets, which was in default at
August 31, 1996.
OPTIONS TRANSACTIONS
For hedging purposes, the fund may buy and sell put and call
options, write covered call options on portfolio securities,
write cash-
9
<PAGE>
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
secured puts and write call options that are not covered for
cross hedging purposes. The risk in writing a call option is
that the fund gives up the opportunity for profit if the market
price of the security increases. The risk in writing a put
option is that the fund may incur a loss if the market price of
the security decreases and the option is exercised. The risk of
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.
Option contracts are valued daily 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 on the sale of a written call
option, the purchase cost of a written put option or the cost of
a security for purchased put and call options is adjusted by the
amount of premium received or paid.
FUTURES TRANSACTIONS
In order to gain exposure to or protect against changes in the
market, the fund may buy and sell financial futures contracts
and related options. 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.
At August 31, 1996, the fund had outstanding 20 interest rate
sales contracts on 30 year U.S. Treasury notes expiring in
December 1996 with a net unrealized gain of $73,125. The market
value and par value of the open contracts were $2,135,625 and
$2,000,000, respectively. Securities with a market value of
$71,753 were pledged as collateral to cover initial margin
deposits on these contracts.
10
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 fluctuation 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 net asset value if the fund makes such
purchases while remaining substantially fully invested. As of
August 31, 1996, the fund had entered into outstanding
when-issued or forward commitments of $5,948,125.
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, 1996, such fees earned by the fund amounted to
$55,793.
FEDERAL TAXES
The fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and
not be subject to federal income tax. Therefore, no income tax
provision is required. In addition, on a calendar-year basis,
the fund will distribute substantially all of its taxable net
investment income and realized gains, if any, to avoid the
payment of any federal excise taxes.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of
the timing of income recognition for certain defaulted
securities. The character of distributions made during the year
from net investment income or net realized gains may differ from
its ultimate characterization for federal income tax purposes.
Distributions which exceed the net investment income or net
realized gains for financial statement purposes are presented as
an "excess distribution" in the statements
11
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
of changes in net assets and the financial highlights.
Distributions that exceed the net investment income or net
realized gains recorded on a tax basis are presented as a "tax
return of capital" in the statements of changes in net assets
and the financial highlights. In addition, 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 TO SHAREHOLDERS
Distributions from net investment income are made monthly and
realized capital gains, if any, will be distributed at least
annually. 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
unless the market price plus commissions exceeds the net asset
value by 10% or more. 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
requirement, 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 or
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, including accrued interest, to protect the fund in the
event of a default.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
in the financial statements. Actual results may differ from
these estimates.
12
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(3) 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 equal to an annualized rate of 0.60% of
the fund's average weekly net assets. For its fee, the adviser
provides investment advice and conducts 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 equal to an annualized rate of 0.20%. For its fee,
the administrator provides reporting, regulatory and
record-keeping services for the fund.
In addition to the 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.
Expenses paid indirectly represent a reduction of custodian fees
for earnings on cash balances maintained by the fund.
(4) INVESTMENT SECURITY TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other
than temporary investments in short-term securities, for the six
months ended August 31, 1996, aggregated $9,687,166 and
$10,347,100, respectively.
For the six months ended August 31, 1996, no brokerage
commissions were paid to Piper Jaffray Inc., an affiliated
broker.
13
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(5) CAPITAL LOSS CARRYOVER
For federal income tax purposes, the fund had capital loss
carryovers of $316,186 as of February 29, 1996, which, if not
offset by subsequent capital gains, will expire in 2003 and
2004. 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 fund's board of directors voted to discontinue the share
repurchase program effective February 6, 1996. Pursuant to the
plan, the fund has cumulatively repurchased and retired 17,200
shares as of January 29, 1996, which represents 0.9% 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 each period and selected information for each period
are as follows:
<TABLE>
<CAPTION>
Six months
ended Year Period
8/31/96 Ended Ended
(Unaudited) 2/29/96 2/28/95(d)
----------- ------- --------
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ...... $ 14.02 13.20 13.95
----------- ------- --------
Operations:
Net investment income ..................... 0.57 1.19 1.13
Net realized and unrealized gains (losses)
on investments .......................... (0.27) 0.83 (0.73)
----------- ------- --------
Total from operations ................... 0.30 2.02 0.40
----------- ------- --------
Distributions to shareholders:
From net investment income ................ (0.56) (1.19) (1.14)
In excess of net investment income ........ -- -- (0.01)
Tax return of capital ..................... -- (0.01) --
----------- ------- --------
Total distributions to shareholders ..... (0.56) (1.20) (1.15)
----------- ------- --------
Net asset value, end of period ............ $ 13.76 14.02 13.20
----------- ------- --------
----------- ------- --------
Market value, end of period ............... $ 11.88 12.63 12.00
----------- ------- --------
----------- ------- --------
SELECTED INFORMATION
Total return, net asset value (a) ........... 2.24% 15.84% 3.23%
Total return, market value (b) .............. (1.41)% 15.91% (12.69)%
Net assets at end of period (in
millions) ............................... $ 27 28 26
Ratio of expenses to average weekly net
assets (c) ................................ 1.43%(e) 1.44% 1.18%(e)
Ratio of net investment income to average
weekly net assets ......................... 8.23%(e) 8.63% 9.37%(e)
Portfolio turnover rate (excluding short-term
securities) ............................... 30% 90% 69%
</TABLE>
(A) BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
(B) 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.
(C) BEGINNING IN FISCAL 1996, THE EXPENSE RATIOS REFLECT THE EFFECT OF GROSS
EXPENSES PAID INDIRECTLY BY THE FUND. THE EXPENSE RATIO REFLECTS THE EFFECT
OF GROSS EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIO
HAS NOT BEEN ADJUSTED.
(D) COMMENCEMENT OF OPERATIONS WAS MARCH 31, 1994.
(E) ADJUSTED TO AN ANNUAL BASIS.
15
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (Unaudited)
HIGHLANDER INCOME FUND
AUGUST 31, 1996
<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (56.1%):
U.S. Agency Mortgage-Backed Securities (56.1%):
Fixed Rate (49.5%):
7.50%, FHLMC, 4/1/24 ............................... $ 673,691 661,053
7.50%, FHLMC, 10/16/25 ............................... 2,000,000(b) 1,955,600
11.00%, FNMA, 10/1/20 ................................ 322,217(h) 358,767
9.00%, FNMA, 7/1/24 .................................. 864,032 898,585
10.00%, FNMA, 10/1/17 ................................ 501,010 544,217
9.50%, FNMA, 5/1/25 .................................. 824,684 879,822
6.50%, FNMA, 9/1/25 .................................. 729,699 676,102
8.00%, FNMA, 3/1/08 .................................. 1,199,208 1,223,923
6.00%, FNMA, 3/1/11 .................................. 981,008 919,686
6.50%, FNMA, 5/1/26 .................................. 983,474 909,703
7.50%, FNMA, 4/9/11 .................................. 2,000,000(b) 1,997,460
7.00%, FNMA, 1/1/08 .................................. 2,000,000(b) 1,959,340
7.50%, GNMA, 9/15/23 ................................. 61,260 60,187
7.50%, GNMA, 7/15/23 ................................. 304,326 298,617
9.00%, GNMA, 6/15/16 ................................. 194,865 204,483
-----------
13,547,545
-----------
Z-Bond (d) (6.6%):
8.07%, FHLMC, Series 1694, Class Z, 3/15/24 .......... 1,169,597 902,648
8.32%, FNMA, Series 1993-223, Class ZA, 12/25/23 ..... 1,176,819 910,693
-----------
1,813,341
-----------
Total U.S. Government and Agency Securities
(cost: $15,516,185) ............................... 15,360,886
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
16
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
HIGH YIELD CORPORATE BONDS (61.1%):
Aerospace and Defense (0.4%):
Tracor Inc., Senior Subordinated Note, 10.88%,
8/15/01 ............................................. B $ 100,000 107,000
-----------
Automotive (1.8%):
Aftermarket Technology, Senior Subordinated Note,
12.00%, 8/1/04 ...................................... N-R 150,000 161,625
Collins & Aikman Products, Senior Subordinated Note,
11.50%, 4/15/06 ..................................... B 150,000 154,500
Delco Remy International Inc., Senior Subordinated
Note, 10.63%, 8/1/06 ................................ B- 75,000(e) 76,687
Lear Seating Corp., Subordinated Note, 8.25%,
2/1/02 .............................................. BB- 100,000 97,750
-----------
490,562
-----------
Banking (0.7%):
First Nationwide Holdings, Senior Note, 12.25%,
5/15/01 ............................................. BB- 100,000 106,250
First Nationwide Holdings, Senior Note, 12.50%,
4/15/03 ............................................. B 75,000 77,437
-----------
183,687
-----------
Beverage and Tobacco (0.6%):
Dr. Pepper Bottling Holdings, Senior Note, Delayed
Interest, 10.63%, 2/15/03 ........................... N-R 175,000(f) 153,562
-----------
Broadcast Radio and Television (5.9%):
Chancellor Broadcasting, Senior Subordinated Note,
12.50%, 10/1/04 ..................................... B- 75,000 83,906
Chancellor Broadcasting, Senior Subordinated Note,
9.38%, 10/1/04 ...................................... B- 50,000 49,250
Echostar Satellite Broadcast, Senior Discount Note,
Delayed Interest, 13.25%, 3/15/04 ................... B- 150,000(f) 94,500
Granite Broadcasting Corp., Senior Subordinated Note,
10.38%, 5/15/05 ..................................... B- 250,000 251,875
Heritage Media Corp., Senior Subordinated Note, 8.75%,
2/15/06 ............................................. B 200,000 191,000
Pegasus Media & Communications, Note, 12.50%,
7/1/05 .............................................. N-R 100,000 106,500
SCI Television Inc., Senior Note, 11.00%, 6/30/05 BB- 250,000 267,500
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
SFX Broadcasting, Senior Subordinated Note, 10.75%,
5/15/06 ............................................. B- $ 125,000(e) 128,125
Sinclair Broadcast Group Inc., Senior Subordinated
Note, 10.00%, 12/15/03 .............................. B 250,000 246,250
Sullivan Broadcasting Holdings, Debenture, 13.25%,
12/15/06 ............................................ B- 25,000 21,875
Sullivan Broadcasting, Senior Subordinated Note,
10.25%, 12/15/05 .................................... B- 50,000 49,375
Young Broadcasting Inc., Senior Subordinated Note,
9.00%, 1/15/06 ...................................... B 150,000 138,375
-----------
1,628,531
-----------
Business Services (1.1%):
Knoll Inc., Senior Subordinated Note, 10.88%,
3/15/06 ............................................. B+ 150,000 156,375
United Stationery Supply, Senior Subordinated Note,
12.75%, 5/1/05 ...................................... B- 125,000 135,937
-----------
292,312
-----------
Cable Television (5.6%):
Bell Cablemedia Plc, Senior Discount Note, Delayed
Interest, 12.98%, 7/15/04 ........................... BB- 50,000(f) 37,625
Cablevision System Corp., Senior Subordinated
Debenture, 9.88%, 2/15/13 ........................... B 150,000 142,687
Cablevision Systems Corp., Senior Subordinated
Debenture, 10.50%, 5/15/16 .......................... B 50,000 49,375
Charter Communications South East L.P., Senior Note,
11.25%, 3/15/06 ..................................... B 100,000(e) 100,000
Comcast UK Cable Partners Ltd., Senior Discount
Debenture, Delayed Interest, 11.07%, 11/15/07 ....... B 125,000(f) 78,594
CS Wireless Systems Inc., Senior Discount Note (and
Common Stock), Delayed Interest, 11.26%, 3/1/06 ..... CCC+ 200,000(e)(f) 97,000
Groupe Videotron, Senior Note, 10.63%, 2/15/05 BB+ 100,000 107,750
International Cabeltel Inc., Senior Note, Delayed
Interest, 11.77%, 2/1/06 ............................ B 100,000(f) 59,250
International Cabletel Inc., Senior Note, Delayed
Interest, 10.84%, 10/15/03 .......................... N-R 250,000(f) 188,750
International Cabletel Inc., Senior Note, Delayed
Interest, 11.67%, 4/15/05 ........................... B 75,000(f) 49,875
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
18
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
People's Choice TV Corp., Senior Discount Note (and
Warrants), Delayed Interest, 13.37%, 6/1/04 ......... CCC+ $ 150,000(f) 87,000
Rogers Cablesystems, Senior Note, 10.00%, 3/15/05 .... BB+ 150,000 151,500
Telewest Plc, Senior Discount Debenture, Delayed
Interest, 10.67%, 10/1/07 ........................... BB 425,000(f) 267,750
UIH Australia/Pacific, Senior Discount Note, Delayed
Interest, 13.99%, 5/15/06 ........................... B- 150,000(e)(f) 76,500
Wireless One Inc., Senior Note, 13.00%, 10/15/03 B- 50,000 50,500
-----------
1,544,156
-----------
Chemicals and Plastics (3.7%):
Crain Industries Inc., Senior Subordinated Note,
13.50%, 8/15/05 ..................................... N-R 125,000 134,688
Foamex LP, Senior Note, 11.25%, 10/1/02 .............. B 100,000 105,000
Foamex LP, Senior Subordinated Note, 11.88%,
10/1/04 ............................................. B- 50,000 52,750
G-I Holdings Inc., Senior Note, Zero-Coupon, 10.50%,
10/1/98 ............................................. B+ 228,000(c) 184,680
Harris Chemical North American, Senior Note, 10.25%,
7/15/01 ............................................. B+ 150,000 150,375
Polymer Group, Senior Note, 12.25%, 7/15/02 .......... B- 83,000 89,225
RBX Corp., Senior Subordinated Note, 11.25%,
10/15/05 ............................................ N-R 75,000 70,125
Sterling Chemical Holdings, Senior Discount Note (and
Warrants), Delayed Interest, 12.99%, 8/15/08 ........ B+ 100,000(f) 56,250
Sterling Chemicals Inc., Senior Subordinated Note,
11.75%, 8/15/06 ..................................... B+ 50,000 51,625
Uniroyal Technology Corp., Senior Note, 11.75%,
6/1/03 .............................................. B 125,000 119,375
-----------
1,014,093
-----------
Communication (0.4%):
Park Communications Inc., Senior Payment-in-Kind Note
(and Warrants), 13.13%, 5/15/04 ..................... CCC+ 75,000(e)(f) 97,125
-----------
Conglomerate (0.7%):
Veridan Inc., Note, 9.75%, 4/1/03 .................... BB- 175,000 181,125
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
19
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
Consumer Health (0.5%):
Simmons Co., Senior Subordinated Note, 10.75%,
4/15/06 ............................................. B $ 150,000(e) 148,500
-----------
Consumer Non-Durables (0.8%):
Curtice/Burns Foods Inc., Senior Subordinated Note,
12.25%, 2/1/05 ...................................... B 75,000 71,625
Playtex Family Products Corp., Senior Subordinated
Note, 9.00%, 12/15/03 ............................... B 150,000 146,062
-----------
217,687
-----------
Container and Glass Products (1.2%):
Owens Illinois Inc., Senior Subordinated Note, 10.50%,
6/15/02 ............................................. B+ 250,000 260,937
Packaging Resources Inc., Senior Note, 11.63%,
5/1/03 .............................................. B+ 75,000(e) 76,500
-----------
337,437
-----------
Cosmetics and Toiletries (0.2%):
Revlon Consumer Products, Senior Subordinated Note,
10.50%, 2/15/03 ..................................... B- 50,000 52,000
-----------
Ecological Services and Equipment (0.8%):
ICF Kaiser International, Senior Subordinated Note,
13.00%, 12/31/03 .................................... B- 75,000 71,625
Mid-American Waste System Inc., Senior Subordinated
Note, 12.25%, 2/15/03 ............................... D 250,000(i) 161,250
-----------
232,875
-----------
Electrical Utilities (0.5%):
El Paso Electric Co., 9.40%, 5/1/11 .................. BB- 150,000 148,434
-----------
Finance (0.3%):
Trizec Finance Limited, Senior Note, 10.88%,
10/15/05 ............................................ BB- 75,000 78,188
-----------
Food Manufacturer (0.3%):
Spreckles Industries Inc., Senior Note, 11.50%,
9/1/00 .............................................. B 75,000 78,375
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
20
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
Food Products (1.5%):
Carr-Gottstein Foods Co., Senior Subordinated Note,
12.00%, 11/15/05 .................................... B- $ 100,000 102,500
Specialty Foods Corp., Senior Subordinated Note,
11.25%, 8/15/03 ..................................... B- 250,000 207,500
Van De Kamps Inc., Senior Subordinated Note, 12.00%,
9/15/05 ............................................. B- 100,000 108,250
-----------
418,250
-----------
Food Services (1.1%):
Americold Corp., Senior Subordinated Note, 12.88%,
5/1/08 .............................................. B- 75,000 77,250
Flagstar Corp., Senior Note, 10.88%, 12/1/02 ......... B- 250,000 220,625
-----------
297,875
-----------
Food and Drug Retailing (1.0%):
Ralphs Grocery Co., Senior Note, 10.45%, 6/15/04 ..... B 100,000 98,500
Ralphs Grocery Co., Senior Subordinated Note, 11.00%,
6/15/05 ............................................. B- 75,000 73,125
Smiths Food & Drug Centers, Senior Subordinated Note,
11.25%, 5/15/07 ..................................... B- 100,000 104,750
-----------
276,375
-----------
Forest Products (3.0%):
Container Corporation of America, Senior Note, 9.75%,
4/1/03 .............................................. B+ 125,000 124,531
Four M Corp., Senior Note, 12.00%, 6/1/06 ............ B 100,000(e) 103,750
Repap New Bruswick, Senior Note, 10.63%, 4/15/05 ..... B+ 50,000 48,125
Riverwood International, Senior Subordinated Note,
10.88%, 4/1/08 ...................................... B 175,000 170,188
SD Warren Co., Senior Subordinated Note, 12.00%,
12/15/04 ............................................ B+ 200,000 213,000
Stone Container, Senior Note, 11.50%, 10/1/04 ........ B+ 150,000 157,500
-----------
817,094
-----------
Health Care Services (1.6%):
Dade International Inc., Senior Subordinated Note,
11.13%, 5/1/06 ...................................... B 150,000(e) 159,750
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
21
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
Prime Succession Acquisition Co., Senior Subordinated
Note, 10.75%, 8/15/04 ............................... B $ 50,000(e) 51,875
Tenet Healthcare Corp, Senior Subordinated Note,
10.13%, 3/1/05 ...................................... B+ 200,000 216,000
-----------
427,625
-----------
Heavy Electrical Machinery (0.9%):
Alvey Systems Inc., Senior Subordinated Note, 11.38%,
1/31/03 ............................................. B- 150,000 156,750
Tokheim Corp., Senior Subordinated Note, 11.50%,
8/1/06 .............................................. N-R 100,000(e) 102,250
-----------
259,000
-----------
Hotels and Leisure (0.4%):
Courtyard By Marriott, Senior Note, 10.75%, 2/1/08 ... B- 100,000 100,500
-----------
Industrial Products and Equipment (2.8%):
BAR Technologies, Senior Note, 13.50%, 4/1/01 ........ B- 50,000 49,000
Cabot Safety Corp., Senior Subordinated Note, 12.50%,
7/15/05 ............................................. B 150,000 166,125
CAI Wireless Systems Inc., Senior Note, 12.25%,
9/15/02 ............................................. BB- 75,000 78,188
Exide Corp., Senior Note, 10.00%, 4/15/05 ............ N-R 125,000 126,875
Fairfield Manufacturing, Senior Subordinated Note,
11.38%, 7/1/01 ...................................... CCC+ 100,000 100,750
PanAmSat LP, Senior Subordinated Discount Note,
Delayed Interest, 11.82%, 8/1/03 .................... B 150,000(f) 134,250
Coinmach Corp., Senior Note, 11.75%, 11/15/05 . B+ 100,000 105,750
-----------
760,938
-----------
Industrial Property (0.6%):
Monarch Marking Systems, Senior Note, 12.50%,
7/1/03 .............................................. B+ 150,000 162,750
-----------
Leisure and Entertainment (3.2%):
Affinity Group Incorporated, Senior Subordinated Note,
11.50%, 10/15/03 .................................... B 100,000 101,750
AMF Group Inc., Senior Discount Note, Delayed
Interest, 12.27%, 3/15/06 ........................... B- 200,000(e)(f) 117,000
AMF Group Inc., Senior Subordinated Note, 10.88%,
3/15/06 ............................................. B- 100,000(e) 100,250
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
22
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
Cobblestone Golf Group, Senior Note, 11.50%,
6/1/03 .............................................. B $ 150,000(e) 153,000
Premier Parks, Senior Note, 12.00%, 8/15/03 .......... B+ 150,000 159,750
Six Flags Theme Parks Inc., Senior Subordinated Note,
Delayed Interest, 12.53%, 6/15/05 ................... B 300,000(f) 255,750
-----------
887,500
-----------
Machine Tool Manufacturer (0.6%):
Primeco Inc., Senior Subordinated Note, 12.75%,
3/1/05 .............................................. B 150,000 163,125
-----------
Metal & Mining (0.5%):
Royal Oak Mines Inc., Senior Subordinated Note,
11.00%, 8/15/06 ..................................... B- 125,000 125,313
-----------
Oil and Gas (3.4%):
California Energy Company Inc., Senior Discount Note,
Delayed Interest, 10.70%, 1/15/04 ................... BB 250,000(f) 251,250
Clark USA Inc., Senior Note, 10.88%, 12/1/05 ......... B+ 100,000(e) 101,500
Falcon Drilling Inc., Senior Note, 9.75%, 1/15/01 B 100,000 103,250
Giant Industries Inc., Senior Subordinated Note,
9.75%, 11/15/03 ..................................... B+ 250,000 253,125
Mesa Operating Co., 10.63%, 7/1/06 ................... B 75,000 78,188
Mesa Operating Co., Delayed Interest, 10.98%,
7/1/06 .............................................. B 125,000(f) 77,812
United Meridian Corp., Senior Subordinated Note,
10.38%, 10/15/05 .................................... B 50,000 53,000
-----------
918,125
-----------
Printing and Publishing (1.5%):
Affiliated Newspaper Investments, Senior Discount
Note, Delayed Interest, 12.79%, 7/1/06 B 500,000(f) 372,500
Hollinger International Publishing, Senior
Subordinated Note, 9.25%, 2/1/06 .................... BB- 50,000 47,250
-----------
419,750
-----------
Retail Stores (2.7%):
Brylane LP/Brylane Capital Corp., Senior Subordinated
Note, 10.00%, 9/1/03 ................................ B+ 375,000 371,250
Herff Jones Inc., Senior Subordinated Note, 11.00%,
8/15/05 ............................................. B 100,000 103,500
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
23
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
Hosiery Corp Of America Inc., Senior Subordinated
Note, 13.75%, 8/1/02 ................................ B- $ 100,000 110,500
Icon Health and Fitness, Senior Subordinated Note,
13.00%, 7/15/02 ..................................... B- 150,000 165,750
-----------
751,000
-----------
Steel Manufacturer (2.7%):
Acme Metals Inc., Senior Discount Note, Delayed
Interest, 13.19%, 8/1/04 ............................ B 75,000(f) 70,125
Bayou Steel Corp., 10.25%, 3/1/01 .................... B 75,000 71,625
Envirosource Inc., Senior Note, 9.75%, 6/15/03 ....... B 250,000 236,250
GS Technologies, Senior Note, 12.00%, 9/1/04 ......... B 250,000 258,750
Republic Engineered Steel, 9.88%, 12/15/01 ........... B 100,000 94,000
-----------
730,750
-----------
Surface Transportation (1.6%):
Gearbulk Holding LTD, Senior Note, 11.25%, 12/1/04 ... BB 125,000 133,125
Stena AB, Senior Note, 10.50%, 12/15/05 .............. BB- 100,000 101,000
Trism Inc., Senior Subordinated Note, 10.75%,
12/15/00 ............................................ B 215,000 204,250
-----------
438,375
-----------
Telecommunications and Cellular (5.1%):
Advanced Micro Devices, Senior Note, 11.00%,
8/1/03 .............................................. BB- 100,000 102,250
America Communications Services, Senior Discount Note,
Delayed Interest, 13.30%, 4/1/06 N-R 100,000(f) 52,250
Brooks Fiber Properties, Senior Discount Notes,
Delayed Interest, 10.78%, 3/1/06 .................... N-R 250,000(e)(f) 142,500
Cellular Communications International Inc., Senior
Discount Note (and Warrants), Zero-Coupon, 12.70%,
8/15/00 ............................................. CCC+ 150,000(c) 93,750
Dial Call Communications, Senior Discount Note,
Delayed Interest, 11.84%, 4/15/04 ................... CCC- 150,000(f) 93,750
Fonorola Inc., Senior Note, 12.50%, 8/15/02 .......... B+ 50,000 54,375
Millicom International Cellular, Senior Discount Note,
Delayed Interest, 12.58%, 6/1/06 .................... B- 200,000(e)(f) 108,000
Mobilemedia Communications, Senior Subordinated Note,
9.38%, 11/1/07 ...................................... CCC 25,000 21,875
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
24
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal
Rating Amount Market
Description of Security (g) or Shares Value (a)
- --------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
Nextlink Communications Inc., Senior Note, 12.50%,
4/15/06 ............................................. N-R $ 150,000(e) 149,250
Pronet Inc., Senior Subordinated Note, 11.88%,
6/15/05 ............................................. CCC 100,000 93,000
Teleport Communications, Senior Discount Note, Delayed
Interest, 11.24%, 7/1/07 ............................ B 150,000(f) 92,250
Teleport Communications, Senior Note, 9.88%,
7/1/06 .............................................. B 50,000 50,250
USA Mobile Communications Inc. II, Senior Note, 9.50%,
2/1/04 .............................................. B- 250,000 228,750
Vanguard Cellular System, Debenture, 9.38%,
4/15/06 ............................................. B+ 125,000 122,813
-----------
1,405,063
-----------
Textiles and Apparel (1.1%):
Westpoint Stevens Inc., Senior Subordinated Debenture,
9.38%, 12/15/05 ..................................... B+ 300,000 299,250
-----------
Transportation (0.3%):
Lear Corp., Senior Subordinated Note, 9.50%,
7/15/06 ............................................. BB- 75,000 76,688
-----------
Total High Yield Corporate Bonds
(cost: $16,482,585) ............................... 16,720,995
-----------
COMMON STOCK (0.2%):
Cable Television (0.0%):
Pegasus Media & Communications ................................. 10 $ 6,000
Sullivan Broadcasting Holdings ................................. 400 4,100
----------
10,100
----------
Printing & Publishing (0.1%):
Affiliated Newspaper Investments Class B ....................... 500 15,000
----------
Retail Trade (0.1%):
Grand Union Co. ................................................ 7,070 40,653
Hosiery Corp of America Inc. ................................... 50 200
----------
40,853
----------
Total Common Stock
(cost: $111,943) ............................................ 65,953
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
25
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal
Amount Market
Description of Security or Shares Value (a)
- ------------------------------------------------------------------- --------- ----------
<S> <C> <C>
PREFERRED STOCK (1.0%):
Commercial and Industrial Services (0.4%):
PanAmSat LP, Non-Convertible, 12.75%, 4/15/05 ........ 85$ 99,025
-----------
Commercial Services (0.6%):
K - III Comm, Non-Convertible, 11.63%, 5/1/05 ........ 1,635 162,776
-----------
Total Preferred Stock
(cost: $220,500) .................................. 261,801
-----------
WARRANTS (0.0%):
BAR Technologies, 4/1/01 ............................. 50 2,525
Cellular Communications International Inc.,
8/15/03 ............................................. 150 1,313
ICF Kaiser International, 12/31/98 ................... 120 60
Icon Health and Fitness, 11/14/99 .................... 150 3,750
Nextel Communications, 4/15/99 ....................... 250 5
Uniroyal Technology Corp., 6/1/03 .................... 1,250 1,262
Wireless One Inc., 10/19/00 .......................... 150 750
-----------
Total Warrants
(cost: $13,471) ................................... 9,665
-----------
SHORT-TERM SECURITIES (1.7%):
Repurchase agreement with Goldman Sachs in a joint
trading account, collateralized by U.S. government
agency securities, acquired on 8/30/96, accrued
interest of $272, 5.28%, 9/3/96
(cost: $464,000) .................................. $ 464,000 464,000
-----------
Total Investments in Securities
(cost: $32,808,684) (j) .......................... $ 32,883,300
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
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, 1996, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $5,948,125.
(C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD
ON THE DATE OF PURCHASE.
(D) Z-BOND - 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 THE COST
BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
</TABLE>
26
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
<TABLE>
<S> <C>
(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, 1996, IS $2,089,562, WHICH REPRESENTS 7.6% OF TOTAL NET
ASSETS.
(F) THE INTEREST RATES DISCLOSED FOR DELAYED INTEREST AND PAYMENT-IN-KIND BONDS
REPRESENTS EFFECTIVE YIELDS AT AUGUST 31, 1996, BASED UPON THE ESTIMATED
TIMING AND AMOUNT OF FUTURE INTEREST AND PRINCIPAL PAYMENTS.
PAYMENT-IN-KIND - REPRESENTS SECURITIES ON WHICH INTEREST IS GENERALLY PAID
BY ISSUING ADDITIONAL PAR OF THE SECURITY RATHER THAN PAYING CASH.
DELAYED INTEREST - REPRESENTS 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. SECURITIES
DESIGNATED AS "N-R" ARE NOT RATED BY STANDARD & POOR'S.
"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 RATING ABOVE MAY BE MODIFIED BY THE ADDITION OF A PLUS OR MINUS
SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR RATING CATEGORIES.
(H) THIS ISSUE IS PARTIALLY PLEDGED AS INITIAL MARGIN DEPOSITS ON THE FOLLOWING
OPEN INTEREST RATE FUTURES SALES CONTRACTS (SEE NOTE 2 TO THE FINANCIAL
STATEMENTS).
(I) INTEREST IS CURRENTLY NOT BEING ACCRUED ON THIS SECURITY WHICH REPRESENTS
0.6% OF NET ASSETS AT AUGUST 31, 1996.
(J) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES,
INCLUDING OPEN FUTURE CONTRACTS, BASED ON THIS COST WERE AS FOLLOWS:
</TABLE>
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 701,699
GROSS UNREALIZED DEPRECIATION ...... (553,958)
-----------
NET UNREALIZED APPRECIATION .... $ 147,741
-----------
-----------
</TABLE>
27
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August 20, 1996. 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.
1. The fund's shareholders elected the following directors:
<TABLE>
<CAPTION>
Shares
Shares Withholding
Voted Authority
"For" to Vote
---------- -------
<S> <C> <C>
David T. Bennett ............................ 1,767,234 19,925
William H. Ellis ............................ 1,764,148 23,011
Jaye F. Dyer ................................ 1,767,231 9,925
Karol D. Emmerich ........................... 1,767,634 19,525
Luella G. Goldberg .......................... 1,766,060 21,099
George Latimer .............................. 1,767,634 19,525
</TABLE>
2. The fund's shareholders ratified the selection by a majority of the
independent members of the fund's board of directors of KPMG Peat Marwick
LLP as the independent public accountants for the fund for the fiscal year
ending February 28, 1997. The following votes were cast regarding this
matter:
<TABLE>
<CAPTION>
Shares
Shares Voted
Voted "For" "Against" Abstentions
-------------- ------- -------
<S> <C> <C>
1,774,445 2,080 10,634
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC.,
USL PRODUCTS, INC., KIEFER BUILT, INC., OF
COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT,
P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER JAFFRAY
COMPANIES INC., PIPER CAPITAL MANAGEMENT
INCORPORATED
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL,
RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL
EQUITY FUNDS
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Paul A. Dow, PRESIDENT
Robert H. Nelson, VICE PRESIDENT AND TREASURER
Susan Sharp Miley, SECRETARY
INVESTMENT ADVISER Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804
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 LLP
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
29
<PAGE>
PIPER CAPITAL
MANAGEMENT
PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402-3804
[LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15%
POST-CONSUMER WASTE.
In an effort to reduce costs to our shareholders, we have
implemented a process to reduce duplicate mailings of the fund's
shareholder reports. This householding process should allow us to
mail one report to each address where one or more registered
shareholders with the same last name reside. If you would like to
have additional reports mailed to your address, please call our
Mutual Fund Services Department at 1 800 866-7778, or mail your
request to:
Piper Capital Management
Attn: Communications Department
222 South Ninth Street
Minneapolis, MN 55402-3804
21710 10/1996 230-96
STAPLES
|
|
V
Bulk Rate
U.S. Postage
PAID
Permit No. 3008
Mpls., MN