<PAGE>
1997 SEMIANNUAL REPORT
HIGHLANDER
INCOME
FUND
HIGHLANDER INCOME FUND - 1997 SEMIANNUAL REPORT
HLA
[LOGO]
<PAGE>
CONTENTS
Portfolio Managers' Letter........... 2
Financial Statements and Notes....... 6
Investments in Securities............ 16
Shareholder Update................... 29
Glossary*** ......................... 32
***This report includes a glossary to help you understand financial terms
used in the portfolio managers' letter. When you see this symbol, it
indicates a word that is defined in the glossary.
[LOGO]
HIGHLANDER INCOME FUND
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FUND OBJECTIVE
High current income. As with other investment companies, there can be no
assurance this fund will achieve its objective.
PRIMARY INVESTMENTS
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 mortgage-backed securities, such as inverse floating rate securities
and Z-bonds. High-yield, or junk bond, securities generally involve greater
price volatility and risks to principal and income (credit risk) than securities
in the higher-rated categories.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS
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Based on net asset value for the periods ended August 31, 1997
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[EDGAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
SINCE
ONE THREE INCEPTION
YEAR YEAR (3/31/94)
---- ----- ---------
<S> <C> <C> <C>
Highlander Income Fund 14.36% 11.89% 10.29%
Lehman Brothers U.S. Mortgage Index/High-
Single B Securities Index* 13.05% 10.99% 10.09%
</TABLE>
Average annualized total returns are through August 31, 1997, and are based on
the change in net asset value (NAV). They 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 returns based on the change in market price for the
one-year, three-year and since inception periods ended August 31, 1997, were
23.07%, 11.85% and 6.19% respectively. These returns assume reinvested
distributions at actual prices pursuant to the fund's dividend reinvestment plan
and do not reflect sales charges on initial purchases.
PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF
PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED. Past performance does not
guarantee future results. The investment return and principal value of an
investment will fluctuate so that fund shares, when sold, may be worth more or
less than their original cost. Closed-end funds, such as this fund, often trade
at discounts to net asset value. Therefore, you may be unable to realize the
full net asset value of your shares when you sell.
* 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 10.48% and 15.65%, three-year returns of 8.76%
and 13.24% and since inception returns of 8.19% and 12.00%, respectively.
The Lehman Brothers U.S. Mortgage Index is comprised of U.S. government agency
mortgage-backed securities with five 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 Investors 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 following
the fund's inception through August 31, 1997.
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1997 Semiannual Report 1 Highlander Income Fund
<PAGE>
PORTFOLIO MANAGERS' LETTER
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October 16, 1997
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DEAR SHAREHOLDERS:
HIGHLANDER INCOME FUND HAD A NET ASSET VALUE (NAV) TOTAL RETURN OF 5.68% FOR THE
SIX-MONTH PERIOD ENDED AUGUST 31, 1997. That compares favorably to the fund's
benchmark, a 50%-50% blend of the Lehman Brothers U.S. Mortgage and Lehman
Brothers High-Yield Single B Securities indexes, which had a total return of
5.23%. Your fund's return based on market price was considerably higher at
9.53%.*
AS THE LATTER RETURN FIGURE INDICATES, THE DISCOUNT*** OF THE FUND'S MARKET
PRICE TO ITS NAV HAS DECLINED OVER THE PAST YEAR. As of August 31, 1997, the
fund's NAV was $14.54 and its market
[PHOTO]
TOM MCGLINCH, CFA, PIPER CAPITAL MANAGEMENT,
shares responsibility for the management of Highlander Income Fund. He has 16
years of financial experience.
* Returns assume reinvested distributions at actual prices pursuant to the
fund's dividend reinvestment plan and do not reflect sales charges on initial
purchases. Past performance does not guarantee future results. The investment
return and principal value of an investment will fluctuate so that fund shares,
when sold, may be worth more or less than their original cost.
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PORTFOLIO COMPOSITION
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As a percentage of total assets on August 31, 1997
[EDGAR REPRESENTATION OF CHART]
U.S. Treasury Securities................................... 6%
Other Assets............................................... 3%
Short-Term................................................. 1%
U.S. Agency Mortgage-Backed Z-Bond Securities.............. 7%
U.S. Agency Fixed Rate Mortgage-Backed Securities.......... 35%
B.......................................................... 34%
BB......................................................... 6%
BBB........................................................ 1%
CCC........................................................ 2%
D.......................................................... 1%
Non-Rated.................................................. 4%
High Yield Securities...................................... 48%
Mortgage-Backed Securities................................. 42%
U.S. Treasury Securities................................... 6%
Short-Term/Other Assets.................................... 4%
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
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1997 Semiannual Report 2 Highlander Income Fund
<PAGE>
PORTFOLIO MANAGERS' LETTER (CONTINUED)
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price was $13.38, a discount of 8.01%, which is down from 13.70% a year ago.
This has occurred mainly due to increased interest in the fund. We believe some
investors are becoming more concerned about high stock prices and thus are
beginning to focus more on bonds.
THE FUND'S SOLID NAV PERFORMANCE WAS DUE TO STRONG RETURNS FROM THE HIGH-YIELD
PORTION AND A LENGTHENING OF THE FUND'S EFFECTIVE DURATION*** MID-PERIOD.
High-yield securities made up 54% of the fund's total investments at the start
of the period, and these investments continued to benefit from positive economic
fundamentals, rising stock prices, falling interest rates and a strong demand
for high-yield bonds. In addition, the fund benefited from our decision to
extend effective duration to about five years (compared to the benchmark's 3.8
years) when interest rates approached a high point in May. Because the fund was
more sensitive to interest rate movements, it did well when rates fell through
the months of June and July (interest rates and bond prices move in opposite
directions). After rates declined, we shortened the fund's duration (to about
four years as of August 31), thus lowering the fund's sensitivity to interest
rate movements in case of a rate reversal.
OUR HIGH-YIELD COMPONENT CONTINUED TO FOCUS ON THE TELECOMMUNICATIONS AND CABLE
TV INDUSTRIES, AND THESE HOLDINGS OUTPERFORMED THE OVERALL HIGH-YIELD MARKET. A
combination of deregulation, technological change, company consolidation and new
business development drove the returns of companies in these industries.
OUR HIGH-YIELD SECURITIES' STRONG OVERALL PERFORMANCE BOOSTED THEIR ALLOCATION
IN THE FUND. To rebalance the fund's allocation toward a 50%-50% split between
high-yield and mortgage-backed securities, we began to pare high-yield issues
where appropriate. At the end of the period, our high-yield allocation was about
52% of total investments, and we are continuing to reduce it toward 50%.
[PHOTO]
WAN-CHONG KUNG, CFA, PIPER CAPITAL MANAGEMENT,
shares responsibility for the management of Highlander Income Fund. She has
five years of financial experience.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
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1997 Semiannual Report 3 Highlander Income Fund
<PAGE>
PORTFOLIO MANAGERS' LETTER (CONTINUED)
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WE INVESTED THE PROCEEDS FROM OUR SALE OF HIGH-YIELD BONDS INTO SHORT-TERM
TREASURY SECURITIES. As of August 31, about 6% of the fund's assets were
invested in Treasuries with maturities between three and three-and-a-half years.
We intend to sell some of the Treasuries and buy mortgage-backed securities as
prices of mortgage-backed investments become less expensive.
THE MORTGAGE-BACKED PORTION OF THE FUND CONTINUED TO BE OVERWEIGHTED IN
15-YEAR AND BALLOON PASS-THROUGH*** SECURITIES AND UNDERWEIGHTED IN 30-YEAR
PASS-THROUGHS COMPARED TO OUR BENCHMARK. We maintained such an allocation to
keep the fund in a defensive posture. The prices of shorter-maturity issues
are less sensitive to interest rate movements, and the securities have more
predictable prepayment rates. Another reason we continued our underweighting
in 30-year securities is that we believed their prices were unattractive
during the period. Going forward, we will take advantage of opportunities to
swap out of some of the 15-year and balloon securities and into more 30-year
issues when we feel their prices become attractive. The 30-year pass-throughs
pay a higher yield and should help enhance the fund's yield.
CONSISTENT WITH OUR RELATIVELY DEFENSIVE POSTURE, WE ALSO CONTINUED TO INVEST
IN A MIX OF DISCOUNT-PRICED AND SEASONED*** HIGHER-COUPON MORTGAGE
SECURITIES. This strategy was successful in helping reduce volatility in fund
securities' prepayment activity and, consequently, market prices. Discount
securities' low coupon rates give mortgage holders little reason to prepay
their loans. Seasoned, higher-coupon issues have existed through several
business cycles (as their name implies) and thus are not likely to have
extensive prepayments.
LOOKING AHEAD, WE EXPECT FAVORABLE ECONOMIC CONDITIONS TO CONTINUE FOR SOME
TIME, BUT WE REMAIN VIGILANT FOR SIGNS OF CHANGE. It appears that moderate
economic growth will continue, inflation will remain subdued and that
interest rates will stay in a fairly tight range. However, we believe that
the Federal Reserve may be more inclined to raise rates rather than lower
them, though such a move may not occur right away. We will continue to
monitor events closely and manage your fund accordingly.
[PHOTO]
MARK DURBIANO, CFA, FEDERATED ADVISERS, shares responsibility for the management
of Highlander Income Fund. He has 15 years of financial experience.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
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1997 Semiannual Report 4 Highlander Income Fund
<PAGE>
PORTFOLIO MANAGERS' LETTER (CONTINUED)
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DURING THE PERIOD, STEFANIE BACHHUBER JOINED HIGHLANDER INCOME FUND'S MANAGEMENT
TEAM. Ms. Bachhuber is an assistant vice president of the fund's adviser,
Federated Advisers, as well as a Federated affiliate. She joined Federated in
1993 as an investment analyst. Prior to that she was in the M.B.A. program at
Duke University.
Thank you for your investment in Highlander Income Fund. We appreciate the
opportunity to manage your assets and help you pursue your long-term investment
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
/s/ Stefanie L. Bachhuber
Stefanie L. Bachhuber
Co-manager
[PHOTO]
STEFANIE L. BACHHUBER, CFA, FEDERATED ADVISERS, shares responsibility for the
management of Highlander Income Fund. She has seven years of financial
experience.
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1997 Semiannual Report 5 Highlander Income Fund
<PAGE>
Financial Statements (Unaudited)
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STATEMENT OF ASSETS AND LIABILITIES August 31, 1997
..................................................................
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $289,000) ........... $32,462,504
Cash in bank on demand deposit ............................. 11,930
Other assets ............................................... 21,190
Accrued interest receivable ................................ 445,973
Variation margin receivable (note 2) ....................... 4,781
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Total assets ............................................. 32,946,378
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LIABILITIES:
Payable for investment securities purchased on a when-issued
basis (note 2) ........................................... 3,997,500
Accrued investment management fee .......................... 14,752
Accrued administrative fee ................................. 4,917
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Total liabilities ........................................ 4,017,169
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Net assets applicable to outstanding capital stock ....... $28,929,209
-----------------
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COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital ............... $27,707,345
Undistributed net investment income ........................ 26,642
Accumulated net realized loss on investments ............... (126,935)
Unrealized appreciation of investments (note 2) ............ 1,322,157
-----------------
Total - representing net assets applicable to capital
stock .................................................. $28,929,209
-----------------
-----------------
* Investments in securities at identified cost ............. $31,171,285
-----------------
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NET ASSET VALUE AND MARKET PRICE:
Net assets ................................................. $28,929,209
Shares outstanding ......................................... 1,989,467
Net asset value ............................................ $ 14.54
Market price ............................................... $ 13.38
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Semiannual Report 6 Highlander Income Fund
<PAGE>
Financial Statements (Unaudited) (continued)
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STATEMENT OF OPERATIONS For the Six Months Ended August 31, 1997
..................................................................
<TABLE>
<S> <C>
INCOME:
Interest ................................................... $ 1,258,810
Fee income (note 2) ........................................ 35,932
-----------------
Total investment income .................................. 1,294,742
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EXPENSES (NOTE 3):
Investment management fee .................................. 85,772
Administrative fee ......................................... 28,601
Custodian and accounting fees .............................. 20,770
Transfer agent fees ........................................ 9,398
Reports to shareholders .................................... 6,820
Directors' fees ............................................ 7,821
Audit and legal fees ....................................... 15,724
Other expenses ............................................. 11,391
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Total expenses ........................................... 186,297
Less expenses paid indirectly .......................... (422)
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Total net expenses ....................................... 185,875
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Net investment income .................................... 1,108,867
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NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain on investments (note 4) .................. 191,303
Net realized gain on closed futures contracts .............. 57,882
-----------------
Net realized gain on investments ......................... 249,185
Net change in unrealized appreciation or depreciation of
investments .............................................. 226,421
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Net gain on investments .................................. 475,606
-----------------
Net increase in net assets resulting from operations ..... $ 1,584,473
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Semiannual Report 7 Highlander Income Fund
<PAGE>
Financial Statements (continued)
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STATEMENTS OF CHANGES IN NET ASSETS
..................................................................
<TABLE>
<CAPTION>
SIX MONTHS ENDED
8/31/97 YEAR ENDED
(UNAUDITED) 2/28/97
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 1,108,867 $ 2,283,953
Net realized gain (loss) on investments .................... 249,185 (59,934)
Net change in unrealized appreciation or depreciation of
investments .............................................. 226,421 588,913
----------------- -----------------
Net increase in net assets resulting from operations ..... 1,584,473 2,812,932
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (1,122,059) (2,244,119)
----------------- -----------------
Total increase in net assets ............................. 462,414 568,813
Net assets at beginning of period .......................... 28,466,795 27,897,982
----------------- -----------------
Net assets at end of period ................................ $28,929,209 $28,466,795
----------------- -----------------
----------------- -----------------
Undistributed net investment income ........................ $ 26,642 $ 39,834
----------------- -----------------
----------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Semiannual Report 8 Highlander Income Fund
<PAGE>
Notes to Financial Statements (Unaudited)
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(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 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 fund may
purchase securities through the dollar-roll program. Fund shares
are listed on the American Stock Exchange under the symbol HLA.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
................................
INVESTMENTS IN SECURITIES
Portfolio securities for which market quotations are readily
available are valued at current market value. If market
quotations or valuations are not available, or if such quotations
or valuations are believed to be inaccurate, unreliable or not
reflective of market value, portfolio securities are valued
according to procedures adopted by the fund's board of directors
in good faith at "fair value," that is, a price that the fund
might reasonably expect to receive for the security or other
asset upon its current sale.
The current market value of certain fixed income securities is
provided by an independent pricing service. Fixed income
securities for which prices are not available from an independent
pricing service but where an active market exists are valued
using market quotations obtained from one or more dealers that
make markets in the securities or from a widely-used quotation
system. Short-term securities with maturities of 60 days or less
are valued at amortized cost, which approximates market value.
Exchange-traded options are valued at the last sales price on the
exchange prior to the time when assets are valued. If no sales
were reported that day, the options will be valued at the mean
between the current closing bid and asked prices.
Over-the-counter options are valued using market quotations
obtained from broker-dealers. Financial futures are valued at the
last settlement price established each day by the board of trade
or exchange on which they are traded.
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1997 Semiannual Report 9 Highlander Income Fund
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
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Securities transactions are accounted for on the date 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, is recorded on an
accrual basis.
HIGH-YIELD DEBT SECURITIES
Although the fund has a diversified portfolio, the fund has 53.9%
of total net assets invested in non-investment grade (high-yield)
and comparable quality unrated high-yield securities. Investments
in high-yield 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 0.4% of total
net assets, which was in default at August 31, 1997.
FUTURES TRANSACTIONS
For hedging purposes, the fund may buy and sell financial futures
contracts and related options. Risks of entering into futures
contracts and related options include the possibility that 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, 1997, the fund had outstanding nine interest rate
futures sales contracts on 30-year U.S. Treasury bonds expiring
in
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1997 Semiannual Report 10 Highlander Income Fund
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
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September 1997 with a net unrealized gain of $30,938. The market
value and par value of the open contracts at August 31, 1997,
were $1,018,125 and $900,000, respectively. Securities with a
market value of $58,014 were pledged as collateral to cover
initial margin deposits on these contracts.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by
the fund on a when-issued or forward-commitment 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 segregates, 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, 1997,
the fund had entered into outstanding when-issued or forward
commitments of $3,997,500.
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
purchased on a forward commitment basis and simultaneously
contracts with a 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, 1997, such fees earned by the fund
amounted to $35,932.
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
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1997 Semiannual Report 11 Highlander Income Fund
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
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provision is required. The fund also intends to distribute 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
losses deferred due to "straddle" transactions. 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. 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 funds.
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 5% 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
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1997 Semiannual Report 12 Highlander Income Fund
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
- ---------------------------------------------------------------------
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 could differ from
these estimates.
(3) EXPENSES
................................
INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES
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.
OTHER FEES AND EXPENSES
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.
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1997 Semiannual Report 13 Highlander Income Fund
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
- ---------------------------------------------------------------------
Expenses paid indirectly represent a reduction of custodian fees
for earnings on miscellaneous 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 and dollar
roll transactions, for the six months ended August 31, 1997,
aggregated $3,572,177 and $3,868,934, respectively. Including
dollar rolls, such purchases and sales aggregated $17,529,052 and
$17,825,809, respectively.
(5) CAPITAL LOSS
CARRYOVER
................................
For federal income tax purposes, the fund had capital loss
carryovers at February 28, 1997, which, if not offset by
subsequent capital gains, will expire as indicated below. It is
unlikely the board of directors will authorize a distribution of
any net realized capital gains until the available capital loss
carryovers have been offset or expire.
<TABLE>
<CAPTION>
CAPITAL LOSS EXPIRATION
CARRYOVER YEAR
------------- -----
<S> <C>
$ 285,796 2003
</TABLE>
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1997 Semiannual Report 14 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
(6) 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 Year Period
8/31/97 Ended Ended Ended
(Unaudited) 2/28/97 2/29/96 2/28/95(c)
------- ------- ------- --------
<S> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........ $14.31 $14.02 $13.20 $ 13.95
------- ------- ------- --------
Operations:
Net investment income ..................... 0.56 1.15 1.19 1.13
Net realized and unrealized gains (losses)
on investments .......................... 0.23 0.27 0.83 (0.73)
------- ------- ------- --------
Total from operations ................... 0.79 1.42 2.02 0.40
------- ------- ------- --------
Distributions to shareholders:
From investment income .................... (0.56) (1.13) (1.19) (1.14)
In excess of net investment income ........ -- -- -- (0.01)
Tax return of capital ..................... -- -- (0.01) --
------- ------- ------- --------
Total distributions to shareholders ..... (0.56) (1.13) (1.20) (1.15)
------- ------- ------- --------
Net asset value, end of period .............. $14.54 $14.31 $14.02 $ 13.20
------- ------- ------- --------
------- ------- ------- --------
Market value, end of period ................. $13.38 $12.75 $12.63 $ 12.00
------- ------- ------- --------
------- ------- ------- --------
SELECTED INFORMATION
Total return, net asset value (a) ........... 5.68% 10.63% 15.84% 3.23%
Total return, market value (b) .............. 9.53% 10.80% 15.91% (12.69)%
Net assets at end of period (in millions) ... $ 29 $ 28 $ 28 $ 26
Ratio of expenses to average weekly net
assets .................................... 1.30%(d) 1.40% 1.44% 1.18%(d)
Ratio of net investment income to average
weekly net assets ......................... 7.75%(d) 8.25% 8.63% 9.37%(d)
Portfolio turnover rate (excluding short-term
securities and dollar roll
transactions) ............................. 11% 79% 90% 69%
</TABLE>
(a) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT
REFLECT A SALES CHARGE.
(b) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE
FUND'S DIVIDEND REINVESTMENT PLAN.
(c) COMMENCEMENT OF OPERATIONS WAS MARCH 31, 1994.
(d) ANNUALIZED.
- ---------------------------------------------------------------------
1997 Semiannual Report 15 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGHLANDER INCOME FUND August 31, 1997
..........................................................................................
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 (54.0%):
U.S. GOVERNMENT SECURITIES (6.8%):
6.38%, U.S. Treasury Note, 3/31/01 .................. $ 1,150,000 $ 1,157,866
8.75%, U.S. Treasury Note, 8/15/00 .................. 750,000 803,250
------------
1,961,116
------------
U.S. AGENCY MORTGAGE-BACKED SECURITIES (47.2%):
FIXED RATE (39.7%):
11.00%, FNMA, 10/1/20 ............................... 257,980(b) 290,067
9.00%, FNMA, 7/1/24 ................................. 718,472 764,497
10.00%, FNMA, 10/1/17 ............................... 414,001 452,814
6.50%, FNMA, 9/1/25 ................................. 705,892 682,654
8.00%, FNMA, 3/1/08 ................................. 952,154 990,536
6.00%, FNMA, 3/1/11 ................................. 920,441 894,052
6.50%, FNMA, 5/1/26 ................................. 947,782 916,581
6.00%, FNMA, 3/1/26 ................................. 950,481 895,429
6.50%, FNMA, 2/1/04 ................................. 1,415,746 1,407,790
7.00%, FNMA, 4/22/03 ................................ 2,000,000(c) 2,013,740
7.00%, FNMA, 1/1/08 ................................. 2,000,000(c) 2,007,500
9.00%, GNMA, 6/15/16 ................................ 166,258 177,896
------------
11,493,556
------------
Z-BOND (d) (7.5%):
8.06%, FHLMC, Series 1694, Class Z, 3/15/24 ......... 1,247,927 1,069,611
8.29%, FNMA , Series 1993-223, Class ZA, 12/25/23 ... 1,255,633 1,093,781
------------
2,163,392
------------
Total U.S. Government and Agency Securities
(cost: $15,333,473) ............................ 15,618,064
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 16 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
HIGH YIELD CORPORATE BONDS (53.9%):
AUTOMOTIVE (1.4%):
Aftermarket Technology, Senior Subordinated Note,
12.00%, 8/1/04 .................................... N-R $ 112,000 $ 124,880
Collins & Aikman Products, Senior Subordinated Note,
11.50%, 4/15/06 ................................... B 150,000 171,000
Lear Seating Corp., Subordinated Note, 8.25%,
2/1/02 ............................................ BB+ 100,000 101,625
------------
397,505
------------
BANKING (0.9%):
First Nationwide Holdings, Senior Subordinated Note,
10.63%, 10/1/03 ................................... B 250,000 275,000
------------
BEVERAGE AND TOBACCO (0.6%):
Dr. Pepper Bottling Holdings, Senior Note, Delayed
Interest, 10.63%, 2/15/03 ......................... N-R 175,000(d) 174,125
------------
BROADCAST RADIO AND TELEVISION (3.6%):
Capstar Broadcasting, Senior Subordinated Note,
9.25%, 7/1/07 ..................................... B- 75,000(e) 77,250
Chancellor Radio Broadcasting Co., Senior
Subordinated Note, 9.38%, 10/1/04 ................. B- 50,000 52,250
Chancellor Radio Broadcasting, Senior Subordinated
Note, 8.75%, 6/15/07 .............................. B 75,000(e) 76,031
Echostar Satellite Broadcast, Senior Discount Note,
Delayed Interest, 13.25%, 3/15/04 ................. CCC+ 150,000(d) 113,250
Fox/Liberty Networks LLC, Senior Discount Note,
Delayed Interest, 9.55%, 8/15/07 .................. B 75,000(d)(e) 46,688
Fox/Liberty Networks LLC, Senior Note, 8.88%,
8/15/07 ........................................... B 50,000(e) 49,750
Heritage Media Corp., Senior Subordinated Note,
8.75%, 2/15/06 .................................... BBB- 200,000 215,000
Outdoor Systems Inc., Senior Subordinated Note,
8.88%, 6/15/07 .................................... B 75,000(e) 76,875
Pegasus Media & Communications, Note, 12.50%,
7/1/05 ............................................ B- 100,000 111,500
Sinclair Broadcast Group Inc., Senior Subordinated
Note, 10.00%, 12/15/03 ............................ B 200,000 209,000
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 17 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
Sullivan Broadcasting Holdings, Debenture, 13.25%,
12/15/06 .......................................... B- $ 25,000 $ 25,750
------------
1,053,344
------------
BUILDER (0.2%):
American Builders & Contractors, Senior Subordinated
Note, 10.63%, 5/15/07 ............................. N-R 50,000(e) 52,125
------------
BUSINESS SERVICES (1.5%):
Electronic Retailing Systems International, Inc.,
Senior Discount Note (and Warrants), Delayed
Interest, 13.92%, 2/1/04 .......................... N-R 75,000(d) 49,125
Knoll Inc., Senior Subordinated Note, 10.88%,
3/15/06 ........................................... B+ 114,000 127,395
Outsourcing Solutions, Senior Subordinated Note,
11.00%, 11/1/06 ................................... B- 100,000 110,250
United Stationery Supply, Senior Subordinated Note,
12.75%, 5/1/05 .................................... B- 125,000 142,187
------------
428,957
------------
CABLE TELEVISION (5.3%):
Cablevision Systems Corp., Senior Subordinated
Debenture, 9.88%, 2/15/13 ......................... BB- 150,000 161,250
Cablevision Systems Corp., Senior Subordinated
Debenture, 10.50%, 5/15/16 ........................ BB- 50,000 56,250
Cablevision Systems Corp., Senior Subordinated Note,
9.88%, 5/15/06 .................................... BB- 50,000 53,625
Charter Communications South East L.P., Senior Note,
11.25%, 3/15/06 ................................... B 100,000 108,750
Comcast Corp., Senior Subordinated Debenture, 9.38%,
5/15/05 ........................................... BB+ 75,000 80,250
Comcast UK Cable Partners Ltd., Senior Discount
Debenture, Delayed Interest, 11.07%, 11/15/07 ..... B- 125,000(d)(i) 95,937
Diamond Cable Communications Plc, Senior Discount
Note, Delayed Interest, 10.52%, 2/15/07 ........... B- 300,000(d)(i) 186,000
NTL Inc., Senior Note, Delayed Interest, 10.84%,
10/15/03 .......................................... N-R 250,000(d) 228,750
Rogers Cablesystems, Senior Note, 10.00%, 3/15/05 ... BB+ 150,000(i) 163,313
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 18 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
Telewest Communications Plc, Senior Discount
Debenture, Delayed Interest, 10.88%, 10/1/07 ...... B+ $ 375,000(d)(i) $ 278,438
United International Holdings Australia/Pacific,
Senior Discount Note, Delayed Interest, 13.99%,
5/15/06 ........................................... N-R 150,000(d) 99,750
Wireless One Inc., Senior Note, 13.00%, 10/15/03 .... B- 50,000 20,500
------------
1,532,813
------------
CHEMICALS AND PLASTICS (1.8%):
Astor Corp., Senior Subordinated Note, 10.50%,
10/15/06 .......................................... B- 100,000 106,500
ISP Holdings Inc., Senior Note, 9.00%, 10/15/03 BB- 150,000 156,375
RBX Corp., Senior Subordinated Note, 11.25%,
10/15/05 .......................................... N-R 75,000 64,687
Sterling Chemical Holdings, Senior Discount Note,
Delayed Interest, 12.99%, 8/15/08 ................. B+ 100,000(d) 68,750
Uniroyal Technology Corp., Senior Note, 11.75%,
6/1/03 ............................................ B 125,000 125,625
------------
521,937
------------
CONSUMER HEALTH (1.1%):
Icon Health Corp., Senior Discount Note, Delayed
Interest, 13.58%, 11/15/06 ........................ CCC+ 100,000(d) 54,250
Renaissance Cosmetics, Senior Note, 11.75%,
2/15/04 ........................................... B- 100,000 101,000
Simmons Co., Senior Subordinated Note, 10.75%,
4/15/06 ........................................... B 150,000 158,250
------------
313,500
------------
CONSUMER NON-DURABLES (0.8%):
Curtice-Burns Foods Inc., Senior Subordinated Note,
12.25%, 2/1/05 .................................... B 75,000 83,250
Playtex Family Products Corp., Senior Subordinated
Note, 9.00%, 12/15/03 ............................. B 150,000 151,500
------------
234,750
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 19 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
COSMETICS AND TOILETRIES (0.2%):
Revlon Consumer Products, Senior Subordinated Note,
10.50%, 2/15/03 ................................... B- $ 50,000 $ 53,000
------------
ECOLOGICAL SERVICES AND EQUIPMENT (1.2%):
Allied Waste Industries, Senior Discount Note,
Delayed Interest, 10.36%, 6/1/07 .................. B+ 200,000(d)(e) 136,000
Allied Waste North American Inc., 10.25%, 12/1/06 ... B+ 100,000 109,250
Mid-American Waste System Inc., Senior Subordinated
Note, 12.25%, 2/15/03 ............................. D 250,000(h) 106,250
------------
351,500
------------
ELECTRICAL UTILITIES (0.6%):
El Paso Electric Co., 9.40%, 5/1/11 ................. BB- 150,000 164,840
------------
FINANCE (0.4%):
Arcadia Financial Ltd, Senior Note (and Warrants),
11.50%, 3/15/07 ................................... BB- 50,000 50,375
Trizec Finance Ltd., Senior Note, 10.88%,
10/15/05 .......................................... BB+ 50,000(i) 57,187
------------
107,562
------------
FOOD PRODUCTS (1.4%):
Carr-Gottstein Foods Co., Senior Subordinated Note,
12.00%, 11/15/05 .................................. B- 100,000 111,500
International Home Foods, Senior Subordinated Note,
10.38%, 11/1/06 ................................... B- 175,000 185,063
Van De Kamps Inc., Senior Subordinated Note, 12.00%,
9/15/05 ........................................... B- 100,000 111,500
------------
408,063
------------
FOOD SERVICES (0.3%):
AmeriServ Food Company, Senior Subordinated Note,
10.13%, 7/15/07 ................................... B- 75,000(e) 77,625
------------
FOOD AND DRUG RETAILING (0.6%):
Ralphs Grocery Co., Senior Note, 10.45%, 6/15/04 .... B 175,000 190,530
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 20 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
FOREST PRODUCTS (2.2%):
Container Corporation of America, Senior Note, 9.75%,
4/1/03 ............................................ B+ $ 125,000 $ 135,937
Four M Corp., Senior Note, 12.00%, 6/1/06 ........... B 100,000 108,500
Repap New Brunswick, Senior Note, 10.63%, 4/15/05 ... CC 50,000(i) 47,750
SD Warren Co., Senior Subordinated Note, 12.00%,
12/15/04 .......................................... B+ 100,000 112,250
Stone Container Corp., Senior Note, 11.50%,
10/1/04 ........................................... B 150,000 160,688
Uniforet Inc., Senior Note, 11.13%, 10/15/06 ........ B+ 75,000(i) 71,438
------------
636,563
------------
HEALTH CARE SERVICES (1.7%):
Dade International Inc., Senior Subordinated Note,
11.13%, 5/1/06 .................................... B 150,000 170,250
Genesis Health Ventures, Senior Subordinated Note,
9.25%, 10/1/06 .................................... B- 100,000 103,250
Tenet Healthcare Corp, Senior Subordinated Note,
10.13%, 3/1/05 .................................... B+ 200,000 220,000
------------
493,500
------------
HEAVY ELECTRICAL MACHINERY (1.1%):
Alvey Systems Inc., Senior Subordinated Note, 11.38%,
1/31/03 ........................................... B- 150,000 157,875
Tokheim Corp., Senior Subordinated Note, 11.50%,
8/1/06 ............................................ N-R 150,000 168,750
------------
326,625
------------
HOME PRODUCTS AND FURNISHINGS (0.3%):
Syratech Corp., Senior Note, 11.00%, 4/15/07 ........ B 75,000 80,437
------------
HOTELS AND LEISURE (0.4%):
Courtyard By Marriott, Senior Note, 10.75%,
2/1/08 ............................................ B- 100,000 108,500
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 21 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
INDUSTRIAL PRODUCTS AND EQUIPMENT (2.6%):
Cabot Safety Corp., Senior Subordinated Note, 12.50%,
7/15/05 ........................................... B $ 150,000 $ 165,750
Clark Materials Handling Inc., Senior Note, 10.75%,
11/15/06 .......................................... B+ 100,000 105,000
Continental Global Group, Senior Note, 11.00%,
4/1/07 ............................................ B 50,000(e) 52,750
Fairchild Semiconductor, Senior Subordinated Note,
10.13%, 3/15/07 ................................... B 50,000 53,750
International Knife and Saw Inc., Senior Subordinated
Note, 11.38%, 11/15/06 ............................ B- 100,000 107,875
Mettler-Toledo Inc., Senior Subordinated Note, 9.75%,
10/1/06 ........................................... B 75,000 79,500
MMI Products Inc., Senior Subordinated Note, 11.25%,
4/15/07 ........................................... B- 75,000(e) 80,813
Unifrax Investment Corp., Senior Note, 10.50%,
11/1/03 ........................................... B 100,000 104,000
------------
749,438
------------
LEISURE AND ENTERTAINMENT (3.5%):
AMF Group Inc., Senior Discount Note, Delayed
Interest, 11.03%, 3/15/06 ......................... B- 250,000(d) 188,125
Cobblestone Golf Group, Senior Note, 11.50%,
6/1/03 ............................................ B 150,000 158,250
Premier Parks, Senior Note, 12.00%, 8/15/03 ......... B+ 150,000 168,000
Six Flags Theme Parks Inc., Senior Subordinated Note,
Delayed Interest, 12.53%, 6/15/05 ................. B 200,000(d) 206,500
Viacom Inc., Subordinated Debenture, 8.00%,
7/7/06 ............................................ BB- 300,000 295,125
------------
1,016,000
------------
METAL & MINING (0.5%):
Euramax International Plc, Senior Subordinated Note,
11.25%, 10/1/06 ................................... B 125,000(i) 137,187
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 22 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
OIL AND GAS (3.2%):
Abraxas Petroleum Corp., Senior Note, 11.50%,
11/1/04 ........................................... B $ 125,000 $ 137,500
California Energy Company Inc., Senior Discount Note,
Delayed Interest, 10.70%, 1/15/04 ................. BB+ 250,000(d) 270,625
Dailey Petroleum Services Corp., Senior Note, 9.75%,
8/15/07 ........................................... B+ 50,000(e) 50,875
DI Industries Inc., Senior Note, 8.88%, 7/1/07 ...... B+ 50,000 50,000
Falcon Drilling Company Inc., Senior Note, 9.75%,
1/15/01 ........................................... B+ 100,000 105,250
Forcenergy Inc., Senior Subordinated Note, 9.50%,
11/1/06 ........................................... B 100,000 104,500
Pacalta Resources Ltd, Senior Note, 10.75%,
6/15/04 ........................................... B- 50,000(e)(i) 51,563
United Meridian Corp., Senior Subordinated Note,
10.38%, 10/15/05 .................................. B 50,000 54,625
United Refining Co., Senior Note, 10.75%, 6/15/07 ... B- 50,000(e) 50,500
XCL Ltd., Senior Subordinated Note (and Warrants),
13.50%, 5/1/04 .................................... N-R 50,000(e) 50,750
------------
926,188
------------
PRINTING AND PUBLISHING (1.0%):
Affiliated Newspaper Investments, Senior Discount
Note, Delayed Interest, 12.79%, 7/1/06 ............ B 250,000(d) 231,250
Hollinger International Publishing, Senior
Subordinated Note, 9.25%, 3/15/07 ................. BB- 50,000 52,000
------------
283,250
------------
RETAIL STORES (1.3%):
Brylane LP, Senior Subordinated Note, 10.00%,
9/1/03 ............................................ B+ 150,000 160,500
Herff Jones Inc., Senior Subordinated Note, 11.00%,
8/15/05 ........................................... B 100,000 108,750
Hosiery Corp of America Inc., Senior Subordinated
Note, 13.75%, 8/1/02 .............................. B- 100,000 107,750
------------
377,000
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 23 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
SERVICES (0.3%):
Intertek Finance Plc, Senior Subordinated Note,
10.25%, 11/1/06 ................................... B $ 75,000(i) $ 78,750
------------
STEEL MANUFACTURER (1.8%):
Acme Metals Inc., Senior Discount Note, Delayed
Interest, 13.19%, 8/1/04 .......................... B 75,000(d) 84,375
Bayou Steel Corp., 10.25%, 3/1/01 ................... B 50,000 51,750
Envirosource Inc., Senior Note, 9.75%, 6/15/03 B 100,000 99,500
GS Technologies, Senior Operating Note, 12.00%,
9/1/04 ............................................ B 250,000 271,875
------------
507,500
------------
SURFACE TRANSPORTATION (2.1%):
Chemical Leaman Corp., Senior Note, 10.38%,
6/15/05 ........................................... B 50,000(e) 52,000
Gearbulk Holding Ltd., Senior Note, 11.25%,
12/1/04 ........................................... BB 75,000(i) 83,063
Statia Terminals, 11.75%, 11/15/03 .................. B 100,000 106,000
Stena AB, Senior Note, 10.50%, 12/15/05 ............. BB- 150,000(i) 164,625
Trism Inc., Senior Subordinated Note, 10.75%,
12/15/00 .......................................... B 215,000 216,075
------------
621,763
------------
TELECOMMUNICATIONS AND CELLULAR (7.9%):
Advanced Micro Devices, Senior Note, 11.00%,
8/1/03 ............................................ BB- 100,000 113,000
American Communication Services, Inc., Senior Note,
13.75%, 7/15/07 ................................... N-R 50,000(e) 53,625
Amphenol Corp., Senior Subordinated Note, 9.88%,
5/15/07 ........................................... B- 50,000 52,750
Brooks Fiber Properties, Senior Discount Note,
Delayed Interest, 10.81%, 3/1/06 .................. N-R 300,000(d) 220,500
Cellular Communications International Inc., Senior
Discount Note, Zero-Coupon, 12.68%, 8/15/00 ....... CCC+ 150,000(f) 114,375
Dial Call Communications Inc., Senior Discount Note,
Delayed Interest, 11.84%, 4/15/04 ................. CCC- 150,000(d) 137,250
Hermes Europe Railtel BV, 11.50%, 8/15/07 ........... B 50,000(e)(i) 53,000
Intermedia Communications of Florida, Senior Discount
Note, Delayed Interest, 11.03%, 5/15/06 ........... B 250,000(d) 181,875
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 24 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
McLeodUSA Inc., Senior Note, 9.25%, 7/15/07 . B $ 125,000(e) $ 127,187
Metronet Communications, Senior Note (and Warrants),
12.00%, 8/15/07 ................................... N-R 50,000(e)(i) 54,000
Millicom International Cellular, Senior Discount
Note, Delayed Interest, 12.68%, 6/1/06 ............ B- 175,000(d)(i) 132,344
Paging Network, Senior Subordinated Note, 10.00%,
10/15/08 .......................................... B 250,000 252,500
Phonetel Technologies, Senior Note, 12.00%,
12/15/06 .......................................... B- 50,000 51,250
Qwest Communications International, Senior Note,
10.88%, 4/1/07 .................................... B+ 75,000(e) 83,250
Sygnet Wireless Inc., Senior Note, 11.50%,
10/1/06 ........................................... CCC+ 100,000 105,000
Teleport Communications Plc, Senior Discount Note,
Delayed Interest, 10.54%, 7/1/07 .................. B 300,000(d) 225,750
Telesystem International Wireless, Senior Discount
Note, Delayed Interest, 13.01%, 6/30/07 ........... B- 75,000(d)(e)(i) 44,625
USA Mobile Communications Inc. II, Senior Note,
9.50%, 2/1/04 ..................................... B- 100,000 96,500
Vanguard Cellular System, Senior Debenture, 9.38%,
4/15/06 ........................................... B+ 200,000 207,000
------------
2,305,781
------------
TEXTILES AND APPAREL (1.8%):
Glenoit Corp., Senior Subordinated Note, 11.00%,
4/15/07 ........................................... B- 100,000(e) 107,500
Pillowtex Corp., Senior Subordinated Note, 10.00%,
11/15/06 .......................................... B+ 100,000 106,000
Westpoint Stevens Inc., Senior Subordinated
Debenture, 9.38%, 12/15/05 ........................ B+ 300,000 314,250
------------
527,750
------------
TRANSPORTATION (0.3%):
Lear Corp., Subordinated Note, 9.50%, 7/15/06 . BB+ 75,000 81,750
------------
Total High Yield Corporate Bonds
(cost: $14,744,598) ............................ 15,595,158
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 25 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Market
Description of Security Shares Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
COMMON STOCK (j) (0.2%):
RETAIL TRADE (0.0%):
Hosiery Corp of America Inc. ........................ 50 $ 350
------------
CABLE TELEVISION (0.0%):
CS Wireless Systems Inc. ............................ 27 --
Sullivan Broadcasting Holdings ...................... 400 4,200
------------
4,200
------------
TECHNOLOGY (0.0%):
Pegasus Communications Corp. ........................ 225 3,038
------------
PRINTING & PUBLISHING (0.2%):
Affiliated Newspaper Investments .................... 500 50,250
------------
Total Common Stock
(cost: $3,233) ................................. 57,838
------------
PREFERRED STOCK (3.0%):
TECHNOLOGY (0.4%):
IXC Communications Inc., Cumulative, Non-Voting,
Exchangeable, PIK, 12.50% ......................... 75(d)(e) 79,406
Nextel Communications, PIK, 13.00% .................. 50(d)(e) 54,875
------------
134,281
------------
FINANCIAL SERVICES (0.3%):
Crown American Realty Trust, Cumulative, Non-Voting,
Exchangeable, 11.00% .............................. 1,500 78,750
------------
COMMERCIAL SERVICES (2.3%):
American Radio Systems Corp., Exchangeable, PIK,
11.38% ............................................ 1,438(d) 166,089
Chancellor Radio Broadcasting Co., Exchangeable,
12.00% ............................................ 794(e) 90,119
K - III Communications Corp., Exchangeable, PIK,
11.63% ............................................ 2,261(d)(e) 248,807
SFX Broadcasting Inc., Cumulative, Non-Voting,
Exchangeable, PIK, 12.63% ......................... 750(d) 81,375
Sinclair Capital, Cumulative, Non-Voting,
Exchangeable, 11.63% .............................. 750 82,125
------------
668,515
------------
Total Preferred Stock
(cost: $781,645) ............................... 881,546
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 26 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
HIGHLANDER INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Market
Description of Security Shares Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
WARRANTS (j) (0.1%):
BAR Technologies, 4/1/01 ............................ 50 $ 2,250
Cellular Communications International Inc.,
8/15/03 ........................................... 150 3,000
Electronic Retailing Systems International, Inc.,
1/24/98 ........................................... 75 3,000
ICF Kaiser International, 12/31/98 .................. 120 45
Icon Health Corp., 11/14/99 ......................... 150 7,537
Nextel Communications, 4/15/99 ...................... 250 3
Sterling Chemicals Holdings, 8/15/08 ................ 100 3,500
Uniroyal Technology Corp., 6/1/03 ................... 1,250 1,563
Wireless One Inc., 10/19/00 ......................... 150 --
------------
Total Warrants
(cost: $19,336) ................................ 20,898
------------
SHORT-TERM SECURITIES (1.0%):
Repurchase agreement with Goldman Sachs, acquired on
8/29/97, interest of $179, 5.58%, 9/2/97
(cost: $289,000) .................................. 289,000(k) 289,000
------------
Total Investments in Securities
(cost: $31,171,285) (l) ........................ $ 32,462,504
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 27 Highlander Income Fund
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES:
(a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(b) THIS ISSUE IS PARTIALLY PLEDGED AS INITIAL MARGIN DEPOSITS ON OPEN INTEREST
RATE FUTURES SALES CONTRACTS (SEE NOTE 2 TO THE FINANCIAL STATEMENTS).
(c) ON AUGUST 31, 1997, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $3,997,500.
(d) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
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.
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. THE INTEREST RATES DISCLOSED REPRESENT YIELDS AT AUGUST 31,
1997, 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 OR SHARES OF THE SECURITY RATHER THAN PAYING CASH.
(e) SECURITIES PURCHASED AS PART OF A PRIVATE PLACEMENT WHICH HAVE NOT BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933 AND ARE CONSIDERED TO BE ILLIQUID. ON AUGUST 31, 1997, THE
TOTAL MARKET VALUE OF THESE INVESTMENTS WAS $1,977,989 OR 6.8% OF TOTAL NET
ASSETS.
(f) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD
ON THE DATE OF PURCHASE.
(g) THE STANDARD & POOR'S (S&P) 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.
"BBB" - AN ADEQUATE CAPACITY TO PAY INTEREST AND REPAY PRINCIPAL.
WHEREAS IT NORMALLY EXHIBITS ADEQUATE PROTECTION PARAMETERS, ADVERSE
ECONOMIC CONDITIONS OR CHANGING CIRCUMSTANCES ARE MORE LIKELY TO LEAD
TO A WEAKENED CAPACITY TO PAY INTEREST AND REPAY PRINCIPAL FOR DEBT IN
THIS CATEGORY THAN IN HIGHER RATED CATEGORIES.
"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 AND 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.
"CC" - TYPICALLY APPLIED TO DEBT SUBORDINATED TO SENIOR DEBT WHICH IS
ASSIGNED AN ACTUAL OR IMPLIED "CCC" DEBT RATING.
"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) SECURITY IS ILLIQUID AND IN DEFAULT WITH RESPECT TO ITS INTEREST PAYMENT.
INTEREST IS CURRENTLY NOT BEING ACCRUED. THE AGGREGATE VALUE OF THIS
SECURITY AT AUGUST 31, 1997, IS $106,250, WHICH REPRESENTS 0.4% OF TOTAL
NET ASSETS.
(i) SECURITIES OF FOREIGN ISSUERS ARE DENOMINATED IN U.S. DOLLARS. THE
AGGREGATE VALUE OF THESE SECURITIES AT AUGUST 31, 1997, IS $1,699,220,
WHICH REPRESENTS 5.9% OF TOTAL NET ASSETS.
(j) CURRENTLY NON-INCOME PRODUCING.
(k) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(l) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES,
INCLUDING OPEN FUTURES TRANSACTIONS, BASED ON THIS COST WERE AS FOLLOWS:
GROSS UNREALIZED APPRECIATION ...... $ 1,547,890
GROSS UNREALIZED DEPRECIATION ...... (225,733)
------------
NET UNREALIZED APPRECIATION ...... $ 1,322,157
------------
------------
- ---------------------------------------------------------------------
1997 Semiannual Report 28 Highlander Income Fund
<PAGE>
Shareholder Update
- ----------------------------------------
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August
20, 1997. Each matter voted upon at that 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 ............................ * *
Jaye F. Dyer ................................ 1,457,837 18,130
William H. Ellis ............................ * *
Karol D. Emmerich ........................... 1,458,069 17,898
Luella G. Goldberg .......................... 1,458,069 17,898
David A. Hughey ............................. 1,458,069 17,898
George Latimer .............................. 1,454,736 21,231
</TABLE>
* The names of Mr. Bennett and Mr. Ellis were inadvertently
omitted from the proxy cards for the annual meeting. To
assure that their terms of office continue, the remaining
board members have elected Mr. Bennett and Mr. Ellis to serve
as directors of the fund.
(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 Februray
28, 1998. The following votes were cast regarding this
matter:
<TABLE>
<CAPTION>
SHARES
SHARES VOTED BROKER
VOTED "FOR" "AGAINST" ABSTENTIONS NON-VOTES
------------ ------ ------ ----------
<S> <C> <C> <C>
1,459,006 7,230 9,729 --
</TABLE>
- ---------------------------------------------------------------------
1997 Semiannual Report 29 Highlander Income Fund
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
- --------------------------------------------------------------------------------
1997 Semiannual Report 30 Highlander Income Fund
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
- --------------------------------------------------------------------------------
1997 Semiannual Report 31 Highlander Income Fund
<PAGE>
GLOSSARY OF TERMS***
- --------------------------------------------------------------------------------
COUPON
Coupon is the interest rate on a bond that the issuer promises to pay to the
holder until the bond matures or resets its rate. It is expressed as an annual
percentage of face value.
DISCOUNT
Closed-end funds may trade in the market at prices that are equal to, above or
below their net asset value (NAV). When investors purchase or sell shares at a
price that is below current NAV, the shares are said to be trading at a
discount.
EFFECTIVE DURATION
Effective duration is an estimate of how much the value of a security is
expected to change with a given change in interest rates. Longer effective
durations indicate more sensitivity 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 remember that effective duration is
based on certain assumptions and has several limitations. It is most effective
as a measure 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. 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.
PASS-THROUGH SECURITIES
Pass-through securities are securities that represent an interest in a pool of
mortgages. These securities provide for the pass-through to investors of their
proportional share of monthly payments (including any prepayments) made by the
individual borrowers on the mortgage loans, after any fees are paid.
SEASONED
For mortgage-backed securities, a seasoned issue is one that has already gone
through one or more refinancing cycle(s) and, therefore, is less likely to
prepay principal at an accelerated rate if general refinancings pick up again.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
- --------------------------------------------------------------------------------
1997 Semiannual Report 32 Highlander Income Fund
<PAGE>
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, Retired 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.
DAVID A. HUGHEY, Retired Executive Vice President and Chief Administrative
Officer of Dean Witter InterCapital Inc. and Dean Witter Trust Co.
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
SUBADVISER
- --------------------------------------------------------------------------------
FEDERATED ADVISERS
Federated Investors Tower, Pittsburgh, PA 15222-3779
CUSTODIAN, ACCOUNTING AND TRANSFER AGENT
- --------------------------------------------------------------------------------
INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street, Kansas City, MO 64105-1716
LEGAL COUNSEL
- --------------------------------------------------------------------------------
DORSEY & WHITNEY LLP
220 South Sixth Street, Minneapolis, MN 55402
FOR MORE INFORMATION
BY PHONE
1 800 866-7778
FOR GENERAL INFORMATION
press 5, our Mutual Fund Services representatives are ready to answer your
questions.
TO ORDER LITERATURE
press 5, ask a service
representative to mail you additional literature, including a Quarterly Update.
You can also request to be put on a mailing list to receive this information
automatically each quarter.
BY MAIL
Piper Capital Management
Attn: Mutual Fund Services
222 South Ninth Street
Minneapolis, MN 55402-3804
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 area at 1 800 866-7778, or mail a request to us.
ON-LINE
http://www.piperjaffray.com/
<PAGE>
[LOGO]
PIPER CAPITAL MANAGEMENT INCORPORATED ----------------
222 SOUTH NINTH STREET Bulk Rate
MINNEAPOLIS, MN 55402-3804 U.S. Postage
PAID
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[GRAPHIC] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM Mpls., MN
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE. ---------------
#21710 10/1997 263-97
