<PAGE>
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS For the Period Ended July 24, 1998*
................................................................................
<TABLE>
<S> <C>
INCOME:
Interest ................................................... $ 1,000,052
Fee income (note 2) ........................................ 12,913
-----------------
Total investment income .................................. 1,012,965
-----------------
EXPENSES (NOTE 3):
Investment management fee .................................. 71,256
Administrative fee ......................................... 23,752
Custodian and accounting fees .............................. 35,840
Transfer agent fees ........................................ 11,165
Registration fees .......................................... 7,000
Reports to shareholders .................................... 17,404
Directors' fees ............................................ 6,012
Audit and legal fees ....................................... 31,982
Other expenses ............................................. 3,224
-----------------
Total expenses ........................................... 207,635
Less expenses paid indirectly .......................... (540)
-----------------
Total net expenses ....................................... 207,095
-----------------
Net investment income .................................... 805,870
-----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain on investments (note 4) .................. 445,002
Net realized loss on closed futures contracts .............. (6,420)
-----------------
Net realized gain on investments ......................... 438,582
Net change in unrealized appreciation or depreciation of
investments .............................................. (541,653)
-----------------
Net loss on investments .................................. (103,071)
-----------------
Net increase in net assets resulting from operations ... $ 702,799
-----------------
-----------------
* DATE FUND DISCONTINUED OPERATIONS DUE TO MERGER. SEE NOTE 1 IN THE NOTES TO
FINANCIAL STATEMENTS.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- ---------------------------------------------------------------------
1998 Annual Report 1 Highlander Income Fund
<PAGE>
Financial Statements (continued)
- ---------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
................................................................................
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
7/24/98* 2/28/98
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 805,870 $ 2,164,112
Net realized gain on investments ........................... 438,582 402,345
Net change in unrealized appreciation or depreciation of
investments .............................................. (541,653) 736,412
----------------- -----------------
Net increase in net assets resulting from operations ..... 702,799 3,302,869
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (813,444) (2,196,372)
From net realized gains .................................... (363,145) (101,662)
Tax return of capital ...................................... (76,776) --
----------------- -----------------
Total distributions ...................................... (1,253,365) (2,298,034)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Fund merger (note 5) ....................................... (28,921,064) --
----------------- -----------------
Total increase (decrease) in net assets .................. (29,471,630) 1,004,835
Net assets at beginning of period .......................... 29,471,630 28,466,795
----------------- -----------------
Net assets at end of period ................................ $ -- $29,471,630
----------------- -----------------
----------------- -----------------
Undistributed net investment income ........................ $ -- $ 7,574
----------------- -----------------
----------------- -----------------
* DATE FUND DISCONTINUED OPERATIONS DUE TO MERGER. SEE NOTE 1 IN THE NOTES TO
FINANCIAL STATEMENTS.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- ---------------------------------------------------------------------
1998 Annual Report 2 Highlander Income Fund
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) ORGANIZATION
................................
Highlander Income Fund Inc. (the fund) is registered under the
Investment Company Act of 1940 (as amended) as a diversified,
closed-end management investment company. The fund invested
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 could
purchase securities through the dollar-roll program. Fund shares
were listed on the American Stock Exchange under the symbol HLA.
On May 1, 1998, Piper Jaffray Companies Inc., the parent company
of the fund's investment advisor, was acquired by U.S. Bancorp.
U.S. Bancorp is a multi-state bank holding company headquartered
in Minneapolis, Minnesota with a geographic service area spanning
17 states. As of June 30, 1998, U.S. Bancorp was the 14th largest
U.S. commercial bank holding company, with assets of nearly $73.8
billion. U.S. Bank National Association ("U.S. Bank"), a wholly
owned subsidiary of U.S. Bancorp, currently acts as the
investment advisor to 32 mutual funds (the "First American
Funds"). As of June 30, 1998, U.S. Bank, acting through its First
American Asset Management group, managed more than $77.5 billion
in assets, including approximately $28.4 billion in assets of the
First American Funds.
As discussed in note 5, all of the fund's net assets were merged
into First American Investment Funds, Inc. -- Strategic Income
Fund effective at the close of business on July 24, 1998. It is
anticipated that the fund will be dissolved under Minnesota law
as soon as practicable.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
................................
INVESTMENTS IN SECURITIES
Portfolio securities for which market quotations were readily
available were valued at current market value. If market
quotations or valuations were not readily available, or if such
quotations or valuations were believed to be inaccurate,
unreliable or not reflective of market value, portfolio
securities were valued according to procedures adopted by the
fund's board of directors in
- ---------------------------------------------------------------------
1998 Annual Report 3 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
good faith at "fair value", that is, a price that the fund might
have reasonably expected to receive for the security or other
asset upon its current sale.
The current market value of certain fixed income securities was
provided by an independent pricing service. Fixed income
securities for which prices were not available from an
independent pricing service but where an active market exists
were 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 were valued at amortized cost, which approximated
market value.
Financial futures were valued at the last settlement price
established each day by the board of trade or exchange on which
they were traded.
Securities transactions were accounted for on the date securities
were purchased or sold. Realized gains and losses were calculated
on the identified-cost basis. Interest income, including
amortization of bond discount and premium, was recorded on an
accrual basis.
HIGH-YIELD DEBT SECURITIES
Although the fund had a diversified portfolio, the fund invested
a significant portion of its total net assets 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.
FUTURES TRANSACTIONS
For hedging purposes, the fund entered into financial futures
contracts. Risks of entering into futures contracts included the
- ---------------------------------------------------------------------
1998 Annual Report 4 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
possibility that there might be an illiquid market and that a
change in the value of the contract or option might not correlate
with changes in the value of the underlying securities.
Upon entering into a futures contract, the fund was 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) were made or received by the fund
each day. The variation margin payments were equal to the daily
changes in the contract value and were recorded as unrealized
gains and losses. The fund recognized a realized gain or loss
when the contract was closed or expired.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that were purchased by the
fund on a when-issued or forward-commitment basis could take
place a month or more after the transaction date. During this
period, such securities did not earn interest, were subject to
market fluctuation and may have increased or decreased in value
prior to their delivery. The fund segregated, 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 have increased the volatility of the
fund's net asset value if the fund made such purchases while
remaining substantially fully invested.
In connection with its ability to purchase securities on a when-
issued or forward-commitment basis, the fund entered into
mortgage dollar rolls in which the fund sold securities purchased
on a forward commitment basis and simultaneously contracted 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 received negotiated fees. For the period ended July 24,
1998, such fees earned by the fund amounted to $12,913.
- ---------------------------------------------------------------------
1998 Annual Report 5 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
FEDERAL TAXES
The fund complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and was not
subject to federal income tax. Therefore, no income tax provision
was required. The fund also distributed its taxable net
investment income and realized gains to avoid the payment of any
federal excise taxes.
Net investment income and net realized gains (losses) may have
differed 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 have differed from
its ultimate characterization for federal income tax purposes.
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 were
distributed may have differed from the year that the income or
realized gains or losses were recorded by the fund.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income were made monthly and
realized capital gains, if any, were distributed at least
annually. These distributions were recorded as of the close of
business on the ex-dividend date. Such distributions were payable
in cash or, pursuant to the fund's dividend reinvestment plan,
reinvested in additional shares of the fund's capital stock.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain
broker-dealers, the fund, along with other affiliated registered
investment companies, transferred uninvested cash balances into a
joint trading account, the daily aggregate of which was invested
in repurchase agreements secured by U.S. government or agency
- ---------------------------------------------------------------------
1998 Annual Report 6 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
obligations. Securities pledged as collateral for all individual
and joint repurchase agreements were held by the fund's custodian
bank until maturity of the repurchase agreement. Provisions for
all agreements ensured that the daily market value of the
collateral was 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 required management to
make estimates and assumptions that affected the reported amounts
in the financial statements. Actual results could have differed
from these estimates.
(3) EXPENSES
................................
INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES
The fund had entered into an investment advisory agreement with
Piper Capital Management Incorporated. In addition, Piper Capital
provided services under an administration agreement through April
30, 1998. Effective May 1, 1998, the fund entered into an
administration agreement with U.S. Bank, an affiliate of the
advisor.
The investment advisory agreement provided the advisor with a
monthly investment management fee in an amount equal to an
annualized rate of 0.60% of the fund's average weekly net assets.
For its fee, the advisor provided investment advice and, in
general, conducted the management and investment activity of the
fund. Federated Advisers was retained by the advisor as a
subadvisor and was paid a monthly fee by the advisor equal to 50%
of the investment management fee.
The administration agreement provided the administrator with a
monthly fee equal to an annualized rate of 0.20%. For its fee,
the administrator provided reporting, regulatory and
record-keeping services for the fund.
- ---------------------------------------------------------------------
1998 Annual Report 7 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
OTHER FEES AND EXPENSES
In addition to the investment management and administrative fees,
the fund was 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 represented 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 period ended July 24, 1998 aggregated
$9,286,439 and $9,434,646, respectively. Including dollar rolls,
such purchases and sales aggregated $21,243,470 and $21,391,677,
respectively.
(5) MERGER
................................
At a special meeting held July 10, 1998, shareholders of HLA
approved a plan to merge the fund's assets into First American
Investment Funds, Inc. -- Strategic Income Fund, a newly-created,
diversified, open-end investment management company. This tax-
free reorganization was effective July 24, 1998.
The following table presents the composition of the net assets of
HLA immediately prior to the merger.
<TABLE>
<CAPTION>
<S> <C>
Capital stock and additional paid-in
capital .............................. $27,630,569
Unrealized appreciation of
investments .......................... 1,290,495
-----------
Total - representing net assets
applicable to capital stock ........ $28,921,064
-----------
-----------
Net asset value ........................ $ 14.537
Shares outstanding ..................... 1,989,467
</TABLE>
- ---------------------------------------------------------------------
1998 Annual Report 8 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>
Period Year Year Year Period
Ended Ended Ended Ended Ended
7/24/98(e) 2/28/98 2/28/97 2/29/96 2/28/95(c)
-------------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ... $14.81 $14.31 $14.02 $13.20 $13.95
-------------- -------- -------- -------- --------------
Operations:
Net investment income ................ 0.41 1.09 1.15 1.19 1.13
Net realized and unrealized gains
(losses) on investments ............ (0.05) 0.57 0.27 0.83 (0.73)
-------------- -------- -------- -------- --------------
Total from operations .............. 0.36 1.66 1.42 2.02 0.40
-------------- -------- -------- -------- --------------
Distributions to shareholders:
From investment income ............... (0.40) (1.11) (1.13) (1.19) (1.14)
In excess of net investment income ... -- -- -- -- (0.01)
From net realized gains on investments (0.19) (0.05) -- -- --
Tax return of capital ................ (0.04) -- -- (0.01) --
-------------- -------- -------- -------- --------------
Total distributions to
shareholders ..................... (0.63) (1.16) (1.13) (1.20) (1.15)
-------------- -------- -------- -------- --------------
Net asset value, date of merger
(7/24/98) ............................ (14.54) -- -- -- --
-------------- -------- -------- -------- --------------
Net asset value, end of period ......... -- $14.81 $14.31 $14.02 $13.20
-------------- -------- -------- -------- --------------
-------------- -------- -------- -------- --------------
Market value, end of period (f) ........ -- $13.38 $12.75 $12.63 $12.00
-------------- -------- -------- -------- --------------
-------------- -------- -------- -------- --------------
SELECTED INFORMATION
Total return, net asset value (a) ...... 2.44% 12.04% 10.63% 15.84% 3.23%
Total return, market value (b) ......... 13.53% 14.39% 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 ............................... 1.74%(d) 1.36% 1.40% 1.44% 1.18%(d)
Ratio of net investment income to
average weekly net assets ............ 6.74%(d) 7.51% 8.25% 8.63% 9.37%(d)
Portfolio turnover rate (excluding
short-term securities and dollar roll
transactions) ........................ 29% 44% 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. FOR PURPOSES OF THE FISCAL 1998
COMPUTATION, THE JULY 24, 1998 NET ASSET VALUE IS USED AS THE END OF PERIOD
VALUE. SEE NOTE 5 REGARDING THE MERGER INTO AN OPEN-END MANAGEMENT
INVESTMENT COMPANY ON JULY 24, 1998.
(c) COMMENCEMENT OF OPERATIONS WAS MARCH 31, 1994.
(d) ANNUALIZED.
(e) DATE THE FUND DISCONTINUED OPERATIONS DUE TO MERGER INTO FIRST AMERICAN
INVESTMENT FUNDS, INC. -- STRATEGIC INCOME FUND. SEE NOTE 5 IN THE NOTES TO
FINANCIAL STATEMENTS.
(f) SHARES STOPPED TRADING ON THE AMERICAN STOCK EXCHANGE AT THE CLOSE OF
BUSINESS ON JULY 20, 1998.
- ---------------------------------------------------------------------
1998 Annual Report 9 Highlander Income Fund
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
HIGHLANDER INCOME FUND INC.:
We have audited the statement of operations of Highlander Income Fund Inc. for
the period from March 1, 1998 to July 24, 1998 (date of merger) and the
statements of changes in net assets for the period from March 1, 1998 to July
24, 1998 and the year ended February 28, 1998, and the financial highlights for
the periods presented in note 6 to the financial statements. These financial
statements and the financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, for Highlander Income Fund Inc., the results of its operations, the
changes in its net assets and the financial highlights for the periods stated in
the paragraph above, in conformity with generally accepted accounting
principles.
As described in note 1 to the financial statements, Highlander Income Fund Inc.
merged into First American Strategic Income Fund (a series of First Americn
Investment Funds, Inc.), effective July 24, 1998.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 4, 1998
- ---------------------------------------------------------------------
1998 Annual Report 10 Highlander Income Fund
<PAGE>
Federal Income Tax Information
- --------------------------------------------------------------------------------
The following per-share information describes the federal tax
treatment of distributions made during the fiscal year.
Distributions for the calendar year will be reported to you on
Form 1099-DIV. Please consult a tax advisor on how to report
these distributions at the state and local levels.
INCOME DISTRIBUTIONS (93.90% TAXABLE AS ORDINARY DIVIDENDS, 6.10%
TAX RETURN OF CAPITAL, NONE QUALIFYING FOR DEDUCTION BY
CORPORATIONS)
<TABLE>
<CAPTION>
PAYABLE DATE AMOUNT
- ---------------------------------------- -------
<S> <C>
March 25, 1998 ......................... $0.0880
April 22, 1998 ......................... 0.0880
May 27, 1998 ........................... 0.0880
June 24, 1998 .......................... 0.0880
July 17, 1998 .......................... 0.0729
-------
Total .............................. $0.4249
-------
-------
</TABLE>
SHORT-TERM GAINS (93.90% TAXABLE AS ORDINARY DIVIDENDS, 6.10% TAX
RETURN OF CAPITAL)
<TABLE>
<CAPTION>
PAYABLE DATE AMOUNT
- ---------------------------------------- -------
<S> <C>
July 17, 1998 .......................... $0.0201
-------
-------
</TABLE>
MID-TERM GAINS (93.90% TAXABLE AS CAPITAL GAIN DISTRIBUTIONS AT
28%, 6.10% TAX RETURN OF CAPITAL)
<TABLE>
<CAPTION>
PAYABLE DATE AMOUNT
- ---------------------------------------- -------
<S> <C>
July 17, 1998 .......................... $0.0617
-------
-------
</TABLE>
LONG-TERM GAINS (93.90% TAXABLE AS CAPITAL GAIN DISTRIBUTIONS AT
20%, 6.10% TAX RETURN OF CAPITAL)
<TABLE>
<CAPTION>
PAYABLE DATE AMOUNT
- ---------------------------------------- -------
<S> <C>
July 17, 1998 .......................... $0.1233
-------
-------
</TABLE>
- ---------------------------------------------------------------------
1998 Annual Report 11 Highlander Income Fund
<PAGE>
Shareholder Update
- --------------------------------------------------------------------------------
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on July 10,
1998. 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. PROPOSAL TO RATIFY AND APPROVE AN INTERIM ADVISORY AGREEMENT
between the fund, and Piper Capital Management Incorporated
("Piper Capital"), and the receipt of investment advisory
fees by Piper Capital under such agreement:
<TABLE>
<CAPTION>
SHARES VOTED
------------
<S> <C>
For .................................... 1,718,295
Against ................................ 42,630
Abstain ................................ 25,851
------------
Total ................................ 1,786,776
</TABLE>
2. PROPOSAL TO RATIFY AND APPROVE AN INTERIM SUB-ADVISORY
AGREEMENT between Piper Capital and Federated Advisors
("Federated") and receipt of sub-advisory fees by Federated
under such agreement:
<TABLE>
<CAPTION>
SHARES VOTED
------------
<S> <C>
For .................................... 1,708,687
Against ................................ 44,810
Abstain ................................ 33,278
------------
Total ................................ 1,786,775
</TABLE>
3. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION
providing for the transfer of the assets and liabilities of
the Fund to Strategic Income
- ---------------------------------------------------------------------
1998 Annual Report 12 Highlander Income Fund
<PAGE>
Shareholder Update (continued)
- --------------------------------------------------------------------------------
Fund, a newly created open-end fund of First American
Investment Funds, Inc. ("FAIF"), in exchange for Class A
Shares of Strategic Income Fund:
<TABLE>
<CAPTION>
SHARES VOTED
------------
<S> <C>
For .................................... 1,081,590
Against ................................ 45,863
Abstain ................................ 54,704
Broker Non-Vote ........................ 604,620
------------
Total ................................ 1,786,777
</TABLE>
- ---------------------------------------------------------------------
1998 Annual Report 13 Highlander Income Fund
