<PAGE> 1
VAN KAMPEN SENIOR FLOATING RATE FUND
STATEMENT OF ADDITIONAL INFORMATION
Van Kampen Senior Floating Rate Fund (the "Fund") is a non-diversified,
closed-end management investment company whose investment objective is to
provide a high level of current income, consistent with preservation of capital.
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the Prospectus for the Fund dated March 15, 1999 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling 1-800-341-2911, or for Telecommunications Device for the Deaf,
1-800-421-2833. This Statement of Additional Information incorporates by
reference the entire Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk
Considerations............................................ B- 2
Investment Restrictions..................................... B- 2
Trustees and Officers....................................... B- 4
Portfolio Transactions...................................... B- 8
Management of the Fund...................................... B-10
Dividend Reinvestment Plan.................................. B-12
Net Asset Value............................................. B-13
Taxation.................................................... B-14
Repurchase of Shares........................................ B-16
Independent Accountants' Report............................. B-18
Financial Statements for the Period Ended July 31, 1998..... B-19
Notes to Financial Statements............................... B-27
</TABLE>
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (the "SEC"). These items
may be obtained from the SEC upon payment of the fee prescribed, or inspected at
the SEC's office at no charge.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MARCH 15, 1999,
AS SUPPLEMENTED ON JULY 20, 1999
B-1
<PAGE> 2
INVESTMENT OBJECTIVE AND POLICIES
AND SPECIAL RISK CONSIDERATIONS
The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate Senior Loans to Borrowers. Although the Fund's net
asset value will vary, the Fund's policy of acquiring interests in floating or
variable rate Senior Loans is expected to minimize the fluctuations in the
Fund's net asset value as a result of changes in interest rates. The Fund's net
asset value may be affected by changes in the credit quality of Borrowers with
respect to Senior Loan interests in which the Fund invests. An investment in the
Fund may not be appropriate for all investors and is not intended to be a
complete investment program. No assurance can be given that the Fund will
achieve its investment objective. For further discussion of the characteristics
of Senior Loan interests and associated special risk considerations, see
"Investment Objective and Policies" and "Special Risk Considerations" in the
Prospectus.
INVESTMENT RESTRICTIONS
The Fund's investment objective and the following investment restrictions are
fundamental and cannot be changed without the approval of the holders of a
majority (defined as the lesser of (i) 67% or more of the voting securities
present at a meeting of shareholders, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy at such
meeting, or (ii) more than 50% of the outstanding voting securities) of the
Fund's outstanding Shares. All other investment policies or practices are
considered by the Fund not to be fundamental and accordingly may be changed
without shareholder approval. If a percentage restriction on investment or use
of assets set forth below is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing market values will not be
considered a deviation from policy. In accordance with the foregoing, the Fund
may not:
1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets would then be invested
in securities of a single issuer or if as a result the Fund would hold
more than 10% of the outstanding voting securities of any single issuer;
provided that, with respect to 50% of the Fund's assets, the Fund may
invest up to 25% of its assets in the securities of any one issuer. For
purposes of this restriction, the term issuer includes both the Borrower
under a Loan Agreement and the Lender selling a Participation to the Fund
together with any other persons interpositioned between such Lender and
the Fund with respect to a Participation.
2. Purchase any security if, as a result of such purchase, 25% or more of the
Fund's total assets (taken at current value) would be invested in the
securities of Borrowers and other issuers having their principal business
activities in the same industry (the electric, gas, water and telephone
utility industries, commercial banks, thrift institutions and finance
companies being treated as separate industries for purposes of this
restriction); provided, that this limitation shall not apply with respect
to obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities.
3. Issue senior securities (including borrowing money or entering into
reverse repurchase agreements) in excess of 33 1/3% of its total assets
(including the amount of senior securities issued but excluding any
liabilities and indebtedness not constituting senior securities) except
that the Fund may borrow up to an additional 5% of its total assets for
temporary purposes, or pledge its assets other than to secure such
issuance or in connection with hedging transactions, when-issued and
delayed delivery transactions and similar investment strategies. The Fund
will not purchase additional portfolio securities at any time that
borrowings, including the Fund's commitments pursuant to reverse
repurchase agreements, exceed 5% of the Fund's total assets (after giving
effect to the amount borrowed).
4. Make loans of money or property to any person, except for obtaining
interests in Senior Loans in accordance with its investment objective,
through loans of portfolio securities or the acquisition of securities
subject to repurchase agreements.
B-2
<PAGE> 3
5. Buy any security "on margin." Neither the deposit of initial or variation
margin in connection with hedging transactions nor short-term credits as
may be necessary for the clearance of such transactions is considered the
purchase of a security on margin.
6. Sell any security "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except to the extent that the hedging transactions in which the Fund may
engage would be deemed to be any of the foregoing transactions.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of or granting of
interests in Senior Loans or other securities acquired by the Fund.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under Loan Agreements would be deemed to constitute such control or
participation.
9. Invest in securities of other investment companies, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the Securities and Exchange
Commission under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. The Fund
will rely on representations of Borrowers in Loan Agreements in
determining whether such Borrowers are investment companies.
10. Buy or sell oil, gas or other mineral leases, rights or royalty contracts
except pursuant to the exercise by the Fund of its rights under Loan
Agreements. In addition, the Fund may purchase securities of issuers which
deal in, represent interests in or are secured by interests in such
leases, rights or contracts.
11. Purchase or sell real estate, commodities or commodities contracts except
pursuant to the exercise by the Fund of its rights under Loan Agreements,
except to the extent the interests in Senior Loans the Fund may invest in
are considered to be interests in real estate, commodities or commodities
contracts and except to the extent that hedging instruments the Fund may
invest in are considered to be commodities or commodities contracts.
12. Notwithstanding the investment policies and restrictions of the Fund, upon
approval of the Board of Trustees, the Fund may invest all or part of its
investable assets in a management investment company with substantially
the same investment objective, policies and restrictions as the Fund.
For purposes of investment restriction number 2, the Fund will consider all
relevant factors in determining whether to treat the Lender selling a
Participation and any persons interpositioned between such Lender and the Fund
as an issuer, including: the terms of the Loan Agreement and other relevant
agreements (including inter-creditor agreements and any agreements between such
person and the Fund's custodian); the credit quality of such Lender or
interpositioned person; general economic conditions applicable to such Lender or
interpositioned person; and other factors relating to the degree of credit risk,
if any, of such Lender or interpositioned person incurred by the Fund.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objective. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund anticipates that the
annual portfolio turnover rate of the Fund will not be in excess of 100%. A high
rate of portfolio turnover involves correspondingly greater expenses than a
lower rate, which expenses must be borne by the Fund and its shareholders.
FUND STRUCTURE. The Fund's fundamental investment policies and restrictions
give the Fund the flexibility to pursue its investment objective through a fund
structure commonly known as a "master-feeder" structure. If the Fund converts to
a master-feeder structure, the existing shareholders of the Fund would continue
to hold their shares of the Fund and the Fund would become a feeder-fund of the
master-fund. The value of a shareholder's shares would be the same immediately
after any conversion as the value immediately before
B-3
<PAGE> 4
such conversion. Use of this master-feeder structure potentially would result in
increased assets invested among the collective investment vehicle of which the
Fund would be a part, thus allowing operating expenses to be spread over a
larger asset base, potentially achieving economies of scale. The Fund's Board of
Trustees presently does not intend to affect any conversion of the Fund to a
master-feeder structure.
TRUSTEES AND OFFICERS
The table below sets forth the officers and trustees of the Fund, their
principal occupations for the last five (5) years and their affiliations, if
any, with Van Kampen Investments Inc. ("Van Kampen"), Van Kampen Investment
Advisory Corp. (the "Adviser"), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc., the distributor of the Fund's shares
("VKF"), Van Kampen Management Inc., Van Kampen Advisors Inc., Van Kampen
Investor Services Inc., Van Kampen Insurance Agency of Illinois Inc., Van Kampen
Insurance Agency of Texas Inc., Van Kampen Recordkeeping Services Inc., American
Capital Contractual Services, Inc., Van Kampen Trust Company and Van Kampen
Exchange Corp. the Adviser and Asset Management sometimes are referred to herein
collectively as the "Advisers." For purposes hereof, the term "Fund Complex"
currently consists of 42 investment companies (including the Fund) advised by
the Adviser or its affiliates that have the same members on each investment
company's Board of Trustees. Unless otherwise noted the address of each of the
Trustees and officers is 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL
60181-5555.
DENNIS J. MCDONNELL,* DATE OF BIRTH 05/20/42, PRESIDENT, CHAIRMAN OF THE BOARD
AND TRUSTEE. Mr. McDonnell is Executive Vice President and a Director of Van
Kampen, President, Chief Operating Officer and a Director of the Advisers, Van
Kampen Advisors Inc., and Van Kampen Management Inc. Director or officer of
certain other subsidiaries of Van Kampen. Mr. McDonnell is also a Director of
Global Decisions Group LLC. Prior to July of 1998, Director and Executive Vice
President of VK/AC Holding, Inc. Prior to September of 1996, Mr. McDonnell was
Chief Executive Officer and Director of MCM Group, Inc., McCarthy, Crisanti &
Maffei, Inc. and Chairman and Director of MCM Asia Pacific Company, Limited and
MCM (Europe) Limited. Mr. McDonnell is also President, Chairman of the Board,
Trustee and Managing General Partner of each of the funds in the Fund Complex
and President of other investment companies advised by the Advisers or their
affiliates.
THEODORE A. MYERS, DATE OF BIRTH 08/03/30, TRUSTEE. Mr. Myers is a Senior
Financial Advisor of Qualitech Steel Corporation, a manufacturer of special
quality bar products, as well as iron carbide (a steel scrap substitute). Mr.
Myers is a Director of COVA Series Trust of COVA Financial Life Insurance
(formerly known as Xerox Life). He is also a member of the Arthur Anderson Chief
Financial Officer Advisory Committee. Prior to 1997, Mr. Myers was a Director of
McClouth Steel, and prior to July of 1996, Mr. Myers was an Executive Vice
President and Chief Financial Officer of Qualitech Steel Corporation. Prior to
August, 1993, Mr. Myers was Senior Vice President, Chief Financial Officer and a
Director of Foods Brand America (formerly known as Doskocil Companies, Inc.), a
food processing and distribution company. Prior to January, 1990, Mr. Myers was
Vice President and Chief Financial Officer of Inland Steel Industries. His
address is 550 Washington Avenue, Glencoe, Illinois 60022. Mr. Myers is also a
Trustee, Director and Managing General Partner of each of the funds in the Fund
Complex.
ROD DAMMEYER, DATE OF BIRTH 11/05/40, TRUSTEE. Mr. Dammeyer is Managing Partner
of Equity Group Investments, Inc. (EGI), a company that makes private equity
investments in other companies, and Vice Chairman and Director of Anixter
International Inc., a value-added provider of integrated networking and cabling
solutions that support business information and network infrastructure
requirements (employed by Anixter since 1985). Prior to 1997, Mr. Dammeyer was
President, Chief Executive Officer and a Director of Great American Management &
Investment, Inc., a diversified manufacturing company. He is also a member of
the Board of Directors of TeleTech Holdings Inc., Lukens, Inc., Metal
Management, Inc., Stericycle, Inc., Transmedia Networks, Inc., Jacor
Communications, Inc., CNA Surety, Corp., IMC Global Inc., Antec Corporation,
Groupo Azucarero Mexico (GAM) and Kent State University Foundation. Mr. Dammeyer
was previously a Director of Santa Fe Energy Resources, Inc., Falcon Building
Products, Inc., Lomas Financial Corporation, Santa Fe Pacific Corporation,
Q-Tel, S.A. de C.V. and Servicios Financieros Quadrum, S.A. Prior to 1998, Mr.
Dammeyer was a Director of Capsure Holdings Corp., Revco D.S., Inc., the Chase
Manhattan Corporation National Advisory Board and Sealy, Inc. His address is Two
North Riverside Plaza,
B-4
<PAGE> 5
Suite 1950, Chicago, Illinois 60606. Mr. Dammeyer is also a Trustee and Managing
General Partner of each of the funds in the Fund Complex.
DAVID C. ARCH, DATE OF BIRTH 07/17/45, TRUSTEE. Mr. Arch is Chairman and Chief
Executive Officer of Blistex Inc., a consumer health care product's
manufacturer. Director of Elmhurst College and the Illinois Manufacturers'
Association. His address is 1800 Swift Drive, Oak Brook, Illinois 60523. Mr.
Arch is also a Trustee and Managing General Partner of each of the funds in the
Fund Complex.
STEVEN MULLER, DATE OF BIRTH 11/22/27, TRUSTEE. Dr. Muller is Chairman of The
21(st) Century Foundation (public affairs). He is President Emeritus of The
Johns Hopkins University. He is also a Director of Beneficial Corporation (bank
holding company) and Millpore Corporation (biotechnology). Prior to December,
1997, Dr. Muller was a director of the Common Sense Trust and, prior to May,
1997, a Director of BT Alex. Brown & Sons (investment banking). His address is
The Johns Hopkins University, Suite 711, 1619 Massachusetts Avenue, N.W.,
Washington, D.C. 20036. Dr. Muller is also a Trustee and Managing General
Partner of each of the funds in the Fund Complex.
HOWARD J KERR, DATE OF BIRTH 11/17/35, TRUSTEE. Mr. Kerr is President and Chief
Executive Officer of Pocklington Corporation, Inc., an investment holding
company. Mr. Kerr is also a Director of Canbra Foods, Ltd., a Canadian oilseed
crushing, refining, processing and packaging operation. Prior to 1991, Mr. Kerr
was President, Chief Executive Officer and Chairman of the Board of Directors of
Grabill Aerospace Industries, Ltd. His address is 736 North Western Ave., P.O.
Box 317, Lake Forest, Illinois 60045. Mr. Kerr is a Trustee and Managing General
Partner of each of the funds in the Fund Complex.
DON G. POWELL,* DATE OF BIRTH 10/19/39, TRUSTEE. Mr. Powell is currently a
member of the board of governors and executive committee for the Investment
Company Institute, and a member of the Board of Trustees of the Houston Museum
of Natural Science. Immediate past chairman of the Investment Company Institute.
Prior to January 1999, Chairman and a Director of Van Kampen Investments, the
Advisers, the Distributor and Investor Services and Director or officer of
certain other subsidiaries of Van Kampen Investments. Prior to July of 1998,
Director and Chairman of VK/AC Holding, Inc. Prior to November 1996, President,
Chief Executive Officer and a Director of VK/AC Holding, Inc. Trustee/Director
of each of the funds in the Fund Complex and Trustee of other funds advised by
the Advisers or Van Kampen Management Inc.
HUGO F. SONNENSCHEIN, DATE OF BIRTH 11/14/40, TRUSTEE. Mr. Sonnenschein is
President of the University of Chicago. Mr. Sonnenschein is a member of the
Board of Trustees of the University of Rochester and a member of its investment
committee. Prior to July, 1993, Mr. Sonnenschein was Provost of Princeton
University, and, from 1988 to 1991, Mr. Sonnenschein was Dean of the School of
Arts and Sciences at the University of Pennsylvania. Mr. Sonnenschein is a
member of the National Academy of Sciences and a fellow of the American Academy
of Arts and Sciences. His address is 5801 South Ellis Avenue, Suite 502,
Chicago, Illinois 60637. Mr. Sonnenschein is also a Trustee and Managing General
Partner of each of the funds in the Fund Complex.
WAYNE W. WHALEN,* DATE OF BIRTH 08/22/39, TRUSTEE. Mr. Whalen is a partner in
the law firm of Skadden, Arps, Slate, Meagher & Flom (Illinois), legal counsel
to each of the funds in the Fund Complex, and other investment companies advised
by the Advisers or their affiliates. His address is 333 West Wacker Drive,
Chicago, Illinois 60606. Mr. Whalen is also a Trustee and Managing General
Partner of each of the funds in the Fund Complex and Trustee and Director of
other investment companies advised by the Adviser or their affiliates.
PETER W. HEGEL, DATE OF BIRTH 06/25/56, VICE PRESIDENT. Mr. Hegel is Executive
Vice President and Portfolio Manager of the Adviser. He is Executive Vice
President of Asset Management, Van Kampen Management, Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, he was a Director of McCarthy,
Crisanti & Maffei, Inc. He is Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by the Advisers or their
affiliates.
JEFFREY W. MAILLET, DATE OF BIRTH 09/30/56, VICE PRESIDENT. Mr. Maillet is
Senior Vice President and Portfolio Manager of the Adviser. He is Senior Vice
President of Van Kampen Management Inc. and Asset Management.
B-5
<PAGE> 6
EDWARD C. WOOD, III, DATE OF BIRTH 01/11/56, VICE PRESIDENT. Mr. Wood is Senior
Vice President of Van Kampen, the Advisers and Van Kampen Management Inc. He is
also Senior Vice President and Chief Operating Officer of VKF. Mr. Wood is Vice
President of each of the funds in the Fund Complex and certain other investment
companies advised by the Advisers and their affiliates.
CURTIS W. MORELL, DATE OF BIRTH 08/04/46, VICE PRESIDENT AND CHIEF ACCOUNTING
OFFICER. Mr. Morell is Senior Vice President of Van Kampen and the Advisers.
His address is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Morell is Vice
President and Chief Accounting Officer of each of the funds in the Fund Complex
and certain other investment companies advised by the Advisers and their
affiliates.
WESTON B. WETHERELL, DATE OF BIRTH 06/15/56, ASSISTANT SECRETARY. Mr. Wetherell
is Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen, VKF, the Advisers and of certain other subsidiaries of Van Kampen. Prior
to September of 1996, Mr. Wetherell was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Mr. Wetherell is an Assistant Secretary of each of the
funds in the Fund Complex and certain other investment companies advised by the
Advisers and their affiliates.
NICHOLAS DALMASO, DATE OF BIRTH 03/01/65, ASSISTANT SECRETARY. Mr. Dalmaso is
Vice President, Assistant Secretary and Associate General Counsel of Van Kampen,
VKF, the Advisers and of certain other subsidiaries of Van Kampen. Mr. Dalmaso
is Assistant Secretary of each of the funds in the Fund Complex and certain
other investment companies advised by the Advisers and their affiliates.
JAMES J. BOYNE, DATE OF BIRTH 04/10/66, ASSISTANT SECRETARY. Mr. Boyne is Vice
President, Associate General Counsel and Assistant Secretary of Van Kampen, VKF,
the Advisers, Van Kampen Investor Services Inc., and of certain other
subsidiaries of Van Kampen. Prior to July of 1998, Mr. Boyne was Vice President,
Associate General Counsel and Assistant Secretary of VK/AC Holding, Inc. Prior
to September of 1996, Mr. Boyne was Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. He is Assistant Secretary of the Fund, Van Kampen Prime Rate Income
Trust and Van Kampen Senior Income Trust.
SCOTT E. MARTIN, DATE OF BIRTH 08/20/56, ASSISTANT SECRETARY. Mr. Martin is
Senior Vice President, Deputy General Counsel and Secretary of Van Kampen, VKF,
the Advisers, Van Kampen Investor Services Inc., and of certain other
subsidiaries of Van Kampen. Prior to July of 1998, Mr. Martin was Senior Vice
President, Deputy General Counsel and Assistant Secretary of VK/AC Holding, Inc.
Prior to September of 1996, Mr. Boyne was Deputy General Counsel and Secretary
of McCarthy, Crisanti Maffei, Inc. He is a Assistant Secretary of each of the
funds in the Fund Complex and certain other investment companies advised by the
Advisers and their affiliates.
JOHN L. SULLIVAN, DATE OF BIRTH 08/20/55, VICE PRESIDENT, TREASURER AND CHIEF
FINANCIAL OFFICER. Mr. Sullivan is First Vice President of Van Kampen and the
Advisers. Mr. Sullivan is Chief Financial Officer of each of the funds in the
Fund Complex and certain other investment companies advised by the Advisers and
their affiliates.
B-6
<PAGE> 7
STEVEN M. HILL, DATE OF BIRTH 10/16/64, ASSISTANT TREASURER. Mr. Hill is Vice
President of Van Kampen and the Advisers. Mr. Hill is Treasurer of each of the
funds in the Fund Complex and certain other investment companies advised by the
Advisers and their affiliates.
TANYA M. LODEN, DATE OF BIRTH 11/19/59, CONTROLLER. Ms. Loden is Vice President
of Van Kampen and the Advisers. Her address is 2800 Post Oak Blvd., Houston, TX
77056. Ms. Loden is Controller of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers and their affiliates.
MICHAEL ROBERT SULLIVAN, DATE OF BIRTH 03/30/33, ASSISTANT CONTROLLER. Mr.
Sullivan is Assistant Vice President of Van Kampen and the Advisers. His address
is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Sullivan is Assistant Controller
of each of the funds in the Fund Complex and certain other investment companies
advised by the Advisers and their affiliates.
*Such trustees are "interested persons" as defined in the 1940 Act.
Messrs. McDonnell and Powell are interested persons of the Adviser and
the Fund by reason of their position at the Adviser. Mr. Whalen is an
interested person of the Fund by reason of his law firm having acted
as legal counsel to the Fund.
The officers and Trustees hold the same positions with other funds in the Fund
Complex. The officers and Trustees as a group own less than 1% of the Fund's
outstanding Shares. The compensation of the officers and trustees who are
affiliated persons (as defined in the 1940 Act) of the Adviser, VKF or Van
Kampen is paid by the respective entity. The Fund pays the compensation of all
other officers and trustees of the Fund. Funds in the Fund Complex, including
the Fund, pay the Trustees who are not affiliated persons of the Adviser, VKF or
Van Kampen, an annual Fund Complex retainer (generally equal to the product of
$2,500 times the number of funds in the Fund Complex), which retainer is then
allocated among the funds in the Fund Complex based on their relative net
assets, and $250 per fund per meeting of the Board of Trustees, as well as
reimbursement of expenses incurred in connection with such meetings. Under the
Fund's retirement plan, trustees who are not affiliated with the Adviser, VKF or
Van Kampen, have at least ten years of service (including years of service prior
to adoption of the retirement plan) and retire at or after attaining the age of
60, are eligible to receive a retirement benefit equal to $2,500 for each of the
ten years following such trustee's retirement. Under certain conditions, reduced
benefits are available for early retirement. Under the Fund's deferred
compensation plan, a trustee who is not affiliated with the Adviser, VKF or Van
Kampen can elect to defer receipt of all or a portion of the trustee's fees
earned by such trustee until such trustee's retirement. The deferred
compensation earns a rate of return determined by reference to the Fund or other
funds in the Fund Complex selected by the trustee. To the extent permitted by
the 1940 Act, the Fund may invest in securities of other funds in the Fund
Complex in order to match the deferred compensation obligation. The deferred
compensation plan is not funded and obligations thereunder represent general
unsecured claims against the general assets of the Fund. Subject to certain
exceptions and limitations, as fully described in Section 5.3 of the Fund's
Declaration of Trust on file with the SEC, the Fund indemnifies every Trustee
and officer of the Fund against liabilities and expenses reasonably incurred or
paid in connection with any claim, action, suit or proceeding in which he
becomes involved by virtue of his being or having been a Trustee or officer.
Such indemnification is unavailable for any Trustee or officer who is deemed to
have engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties or to not have acted in good faith in the reasonable
belief that his action was in the best interest of the Fund.
B-7
<PAGE> 8
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
------------------------------------------------------
ESTIMATED
ESTIMATED AGGREGATE PENSION TOTAL
AGGREGATE OR RETIREMENT ESTIMATED COMPENSATION
COMPENSATION BENEFITS ACCRUED AGGREGATE ANNUAL BEFORE DEFERRAL
BEFORE DEFERRAL AS PART OF BENEFITS UPON FROM FUND
NAME(1) FROM THE FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ---------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
David C. Arch....................... $603 $10,861 $97,500 $160,875
Rod Dammeyer........................ 603 19,532 97,500 161,125
Howard J Kerr....................... 603 37,215 96,250 161,125
Steven Muller....................... 603 22,683 7,500 161,125
Theodore A. Myers................... 603 66,530 81,750 161,125
Hugo F. Sonnenschein................ 603 18,878 97,500 161,125
Wayne W. Whalen..................... 597 22,126 97,500 160,625
</TABLE>
- ---------------
(1) Messrs. McDonnell and Powell are affiliated persons of the Adviser, VKF and
Van Kampen, and do not receive compensation or retirement benefits from the
Fund.
(2) The amounts shown in this column are the Aggregate Compensation of the Fund
before deferral by the trustees under the deferred compensation plan during
its last completed fiscal year ended July 31, 1998. The following trustees
deferred all or a portion of their compensation from the Fund during the
fiscal year ended July 31, 1998: Mr. Dammeyer $603; Mr. Sonnenschein $603;
Mr. Kerr $250; and Mr. Whalen $597. The cumulative deferred compensation
(including interest) accrued with respect to each Trustee from the Fund as
of July 31, 1998 is as follows: Mr. Dammeyer $614; Mr. Sonnenschein $600;
Mr. Kerr $250; and Mr. Whalen $591. The deferred compensation plan is
described above the table. Amounts deferred are retained by the Fund and
earn a rate of return determined by reference to either the return on the
Common Shares of the Fund or other funds in the Fund Complex as selected by
the respective trustee. To the extent permitted by the 1940 Act, the Fund
may invest in securities of these funds selected by the trustees in order
to match the deferred compensation obligation.
(3) The amounts shown in this column represent the sum of the estimated Pension
or Retirement Benefit Accruals expected to be accrued by the 41 operating
funds in the Fund Complex as of December 31, 1998 for their respective
fiscal years end in 1998. The retirement plan is described above the table.
(4) The amounts shown in this column represent the sum of the estimated annual
benefits payable per year by the 41 operating funds in the Fund Complex as
of December 31, 1998 for each year of the 10-year period commencing in the
year of such trustee's anticipated retirement. The Fund is expected to pay
benefits of $2,500 per year for each of the 10-year period commencing in
the year of such trustee's retirement to those trustees who retire at or
over the age of 60 and with at least ten years of service to the Fund. The
retirement plan is described above the compensation table.
(5) The amounts shown in this column are accumulated from the Aggregate
Compensation of 41 operating investment companies in the Fund Complex for
the year ended December 31, 1998 before deferral by the trustees under the
deferred compensation plan. Amounts deferred are retained by the respective
fund and earn a rate of return determined by reference to either the return
on the Common Shares of the Fund or common shares of other funds in the
Fund Complex as selected by the respective trustee. To the extent permitted
by the 1940 Act, the respective fund may invest in securities of the funds
selected by the trustees in order to match the deferred compensation
obligation. The Adviser also serves as investment adviser for other
investment companies; however, with the exception of Messrs. McDonnell,
Whalen and Powell, the Trustees are not trustees of other investment
companies. Combining the Fund Complex with other investment companies
advised by the Adviser or its affiliates, Mr. Whalen received Total
Compensation of $285,825, for the year ended December 31, 1998.
PORTFOLIO TRANSACTIONS
With respect to interests in Senior Loans, the Fund generally will engage in
privately negotiated transactions for purchase or sale in which the Adviser will
negotiate on behalf of the Fund, although a more developed market may exist for
certain Senior Loans. The Fund may be required to pay fees, or forgo a portion
of interest
B-8
<PAGE> 9
and any fees payable to the Fund, to the Lender selling Participations or
Assignments to the Fund. The Adviser will determine the Lenders from whom the
Fund will purchase Assignments and Participations by considering their
professional ability, level of service, relationship with the Borrower,
financial condition, credit standards and quality of management. Although the
Fund intends generally to hold interests in Senior Loans until maturity or
prepayment of the Senior Loan, the illiquidity of many Senior Loans may restrict
the ability of the Adviser to locate in a timely manner persons willing to
purchase the Fund's interests in Senior Loans at a fair price should the Fund
desire to sell such interests. See "Special Risk Considerations" in the
Prospectus. Affiliates of the Adviser may participate in the primary and
secondary market for Senior Loans. Because of certain limitations imposed by the
1940 Act, this may restrict the Fund's ability to acquire some Senior Loans. The
Adviser does not believe that this will have a material effect on the Fund's
ability to acquire Senior Loans consistent with its investment policies.
With respect to investments other than in Senior Loans, the Adviser will place
orders for portfolio transactions for the Fund with broker-dealer firms giving
consideration to the quality, quantity and nature of each firm's professional
services. These services include execution, clearance procedures, wire service
quotations and statistical and other research information provided to the Fund
and the Adviser, including quotations necessary to determine the value of the
Fund's net assets. Any research benefits so obtained are available for all
clients of the Adviser. Because statistical and other research information only
supplements the research efforts of the Adviser and still must be analyzed and
reviewed by its staff, the receipt of research information is not expected to
reduce materially its expenses. In selecting among the firms believed to meet
the criteria for handling a particular transaction, the Adviser may take into
consideration the fact that certain firms have sold Common Shares of the Fund
and that certain firms provide market, statistical or other research information
to the Fund and the Adviser and may select firms that are affiliated with the
Fund, the Adviser, VKF or Van Kampen. For the fiscal year ended July 31, 1998,
the Fund paid brokerage commissions of $0.
If it is believed to be in the best interest of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of services
described above, even if the Fund will have to pay a higher commission (or, if
the broker's profit is part of the cost of the security, will have to pay a
higher price for the security) than would be the case if the Adviser did not
consider the broker's furnishing of such services. This will be done, however,
only if, in the opinion of the Adviser, the amount of additional commission or
increased cost is reasonable in relation to the value of the services.
If purchases or sales of financial instruments for the Fund and for one or
more other investment companies or clients advised by the Adviser are considered
at or about the same time, transactions in such financial instruments will be
allocated among the several investment companies and clients, in a manner deemed
equitable by the Adviser, to each such investment company or client, taking into
account their respective sizes and the aggregate amount of financial instruments
to be purchased or sold. In this regard allocations of Senior Loans by the
Adviser will be made taking into account a variety of factors, including the
assets of such clients then available for investment in Senior Loans, such
clients' relative net asset value and such clients' investment objectives,
policies and limitations. Although in some cases this procedure could have a
detrimental effect on the price paid by the Fund for the financial instrument or
the volume of the financial instrument purchased by the Fund, the ability to
participate in volume transactions and to negotiate lower commissions, fees and
expenses possibly could benefit the Fund.
Although the Adviser will be responsible for the management of the Fund's
portfolio, the policies and practices in this regard must be consistent with the
foregoing and will be subject at all times to review by the Trustees of the
Fund. The Fund anticipates that the annual portfolio turnover rate will not
exceed 100%.
The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act, which requires that the commissions
paid to affiliates of the Fund, or to affiliates of such persons, be reasonable
and fair compared to the commissions, fees or other remuneration received or to
be received by other brokers in connection with comparable transactions
involving similar financial instruments during a comparable period of time. The
rule and procedures also contain review requirements and require the Adviser to
furnish reports to the Trustees and to maintain records in connection with such
reviews. After review of all factors deemed relevant, the Trustees will consider
from time to time whether the advisory fee will be reduced by all or a portion
of the brokerage commissions given to brokers that are affiliated with the Fund.
B-9
<PAGE> 10
MANAGEMENT OF THE FUND
THE ADVISER
The Adviser was incorporated as a Delaware corporation in 1982. The Adviser is
a wholly-owned subsidiary of Van Kampen. Van Kampen is an indirect wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. The Adviser's principal office is
located at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois
60181-5555.
Van Kampen is a diversified asset management company with more than two
million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $75 billion under management or
supervision. Van Kampen's more than 50 open-end and 39 closed-end funds and more
than 2,500 unit investment trusts are professionally distributed by leading
financial advisers nationwide.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Dean Witter Investment Management
Inc., an investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
INVESTMENT ADVISORY AGREEMENT
The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund will continue in effect until December 19, 1999 and
thereafter from year to year, unless earlier terminated as described below, if
approved annually (a) by the Trustees of the Fund or by a majority of the Fund's
Shares and (b) by a majority of the Trustees who are not parties to the
agreement or interested persons of any such party, in compliance with the
requirements of the 1940 Act. The Advisory Agreement may be terminated without
penalty upon 60 days written notice by either party (in the case of the Fund,
such termination may be effected by the Board of Trustees or by a majority of
the Shares) and will automatically terminate in the event of assignment. The
Adviser may in its sole discretion from time to time waive all or a portion of
the advisory fee or reimburse the Fund for all or a portion of its other
expenses.
The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund provides that the Adviser will supply investment research
and portfolio management, including the selection of securities for the Fund to
purchase, hold or sell and the selection of financial institutions through whom
the Fund's portfolio transactions are executed. The Adviser also furnishes
necessary facilities and equipment, and permits its officers and employees to
serve without compensation as trustees and officers of the Fund if duly elected
to such positions. For the fiscal year ended July 31, 1998, the Fund recognized
investment advisory fees pursuant to the Advisory Agreement of $756,106.
The Advisory Agreement provides that the Adviser shall not be liable for any
error of judgment or of law, or for any loss suffered by the Fund in connection
with the matters to which the Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the Advisory
Agreement.
The Trustees are responsible for the overall management and supervision of the
Fund's affairs. The Adviser's activities are subject to the review and
supervision of the Trustees to whom the Adviser renders periodic reports of the
Fund's investment activities. The Advisory Agreement continues in effect from
year to year only if specifically approved by the Trustees, and by the
disinterested Trustees, or the Fund's holders of Shares in compliance with the
requirements of the 1940 Act. The Advisory Agreement may be terminated without
penalty upon 60 days' written notice by either party and will terminate
automatically in the event of assignment.
B-10
<PAGE> 11
THE ADMINISTRATOR
The administrator for the Fund is Van Kampen (in such capacity, the
"Administrator"). For the fiscal year ended July 31, 1998, the Fund recognized
administrative fees pursuant to the Administration Agreement of $198,975.
The Fund pays all other expenses incurred in the operation of the Fund
including, but not limited to, direct charges relating to the purchase and sale
of financial instruments in its portfolio, interest charges, fees and expenses
of legal counsel and independent auditors, taxes and governmental fees, cost of
share certificates, expenses (including clerical expenses) of issuance, sale or
repurchase of any of the Fund's portfolio holdings, expenses in connection with
the Fund's dividend reinvestments, membership fees in trade associations,
expenses of registering and qualifying the Shares of the Fund for sale under
federal and state securities laws, expenses of printing and distributing
reports, notices and proxy materials to existing holders of Shares, expenses of
filing reports and other documents filed with governmental agencies, expenses of
annual and special meetings of holders of Shares, fees and disbursements of the
transfer agents, custodians and sub-custodians, expenses of disbursing dividends
and distributions, fees, expenses and out-of-pocket costs of Trustees of the
Fund who are not affiliated with the Adviser, insurance premiums,
indemnification and other expenses not expressly provided for in the Advisory
Agreement or the Administration Agreement and any extraordinary expenses of a
nonrecurring nature.
SERVICE PLAN
In addition to the fees and expenses described herein, the Fund has adopted a
Service Plan (the "Service Plan") designed to meet the service fee requirements
of the sales charge rule of the National Association of Securities Dealers,
Inc., as if such rule were applicable. The Service Plan has been approved by the
independent Trustees of the Fund, who have no direct or indirect financial
interest in the Service Plan, and by all of the Trustees of the Fund.
The Service Plan provides that the Fund may make payments of service fees for
personal services and/or the maintenance of shareholder accounts to VKF and
broker-dealers and other persons in amounts not exceeding .25% of the Fund's
average daily net assets for any fiscal year. The Trustees of the Fund have
initially implemented the Service Plan by authorizing the Fund to make quarterly
service fee payments to VKF and broker-dealers in amounts not expected to exceed
.15% of the Fund's average daily net assets for each fiscal year. For the fiscal
year ended July 31, 1998, the Fund recognized service fees pursuant to the
Service Plan of $73,602.
The Service Plan shall continue in effect indefinitely for so long as such
continuance is approved at least annually by the vote of both a majority of (i)
the Trustees of the Fund who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Service Plan or
any agreements related to the Service Plan (the "Plan Trustees") and (ii) all of
the Trustees then in office cast in person at a meeting (or meetings) called for
the purpose of voting on this Service Plan. The Service Plan may not be amended
to increase materially the payments described herein without approval of the
shareholders of the Fund, and all material amendments of the Plan must also be
approved by the Trustees of the Fund in the manner described above. The Service
Plan may be terminated at any time by vote of a majority of the Plan Trustees or
by a vote of a majority of the outstanding voting securities of the Fund. Under
the Service Plan, the Trustees shall review at least quarterly a written report
of the amounts expended under the Service Plan and the purposes for which such
expenditures were made.
So long as the Service Plan is in effect, the selection and nomination of
Trustees who are not interested persons of the Fund shall be committed to the
discretion of the Trustees who are not such interested persons of the Adviser.
The Trustees have determined that in their judgment there is a reasonable
likelihood that the Service Plan will benefit the Fund and its shareholders.
OTHER AGREEMENTS
LEGAL SERVICES AGREEMENT. The Fund and each of the other funds advised by the
Adviser and distributed by VKF have entered into a Legal Services Agreements
pursuant to which Van Kampen provides legal services, including without
limitation: accurate maintenance of the Funds' minute books and records,
preparation and
B-11
<PAGE> 12
oversight of the Funds' regulatory reports, and other information provided to
shareholders, as well as responding to day-to-day legal issues on behalf of the
funds. Payment by the Fund for such services is made on a cost basis for the
salary and salary related benefits, including but not limited to bonuses, group
insurances and other regular wages for the employment of personnel, as well as
overhead and the expenses related to the office space and the equipment
necessary to render the legal services. Other funds distributed by VKF also
receive legal services from Van Kampen. Of the total costs for legal services
provided to funds distributed by VKF, one half of such costs are allocated
equally to each fund and the remaining one half of such costs are allocated to
specific funds based on monthly time records.
DIVIDEND REINVESTMENT PLAN
The Fund offers a Dividend Reinvestment Plan (the "Plan"). Under the Plan
Shareholders may elect to have all distributions of dividends and capital gains
automatically reinvested in additional Shares. Unless you elect to participate
in the Plan, you will receive distributions in cash.
State Street Bank and Trust Company, as plan agent (the "Plan Agent"), serves
as agent for Shareholders in administering the Plan. Participants in the Plan
will receive Shares valued on the valuation date, at net asset value. The
valuation date will be the dividend or distribution payment date or, if that
date is not a business day, the next preceding business day.
The Plan Agent maintains each Shareholder's account in the Plan and furnishes
monthly written confirmations of all transactions in the accounts, including
information needed by Shareholders for personal and tax records. Shares will be
held by the Plan Agent in non-certificated form in the name of the participant,
and each Shareholder's proxy will include those Shares purchased pursuant to the
Plan. The Plan Agent's fees for the handling of the reinvestment of dividends
and distributions will be paid by the Fund.
In the case of Shareholders, such as banks, brokers or nominees, which hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
record Shareholders as representing the total amount registered in the record
Shareholder's name and held for the account of beneficial owners who are
participating in the Plan.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable or required to be
withheld on such dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all Shareholders of the Fund at least 90 days before the record
date for the dividend distribution. The Plan also may be amended or terminated
by the Plan Agent by at least 90 days written notice to all Shareholders of the
Fund.
All registered Shareholders (other than brokers or nominees) will be mailed
information regarding the Plan, including a form with which they may elect to
participate in the Plan. Shareholders who intend to hold their Shares through a
broker or nominee should contact such person to confirm that they may
participate in the Plan and to determine the effect, if any, that a transfer of
the account by the shareholder to another broker or nominee will have on
continued participation in the Plan. A Shareholder may withdraw from the Plan at
any time by contacting the Plan Agent at the address or telephone number set
forth below. There is no penalty for non-participation in or withdrawal from the
Plan, and Shareholders who have previously withdrawn from the Plan may rejoin it
at any time. Changes in elections should be directed to the Plan Agent and
should include the name of the Fund and the Shareholder's name and address as
registered. An election to withdraw from the Plan will, until such election is
changed, be deemed to be an election by a Shareholder to take all subsequent
dividends and distributions in cash. Elections will only be effective for
dividends and distributions declared after, and with a record date of at least
ten days after, such elections are received by the Plan Agent. When a
participant withdraws from the Plan or upon termination of the Plan as provided
above, certificates for whole Shares credited to his or her account under the
Plan will be issued and a cash payment will be made for any fraction of a Share
credited to such account. All correspondence concerning the dividend
reinvestment plan should be directed to the State Street Bank and Trust Company,
as Plan Agent, c/o Van Kampen
B-12
<PAGE> 13
Investor Services Inc., P.O. Box 418256, Kansas City, MO 64153-9256. Please call
(800) 341-2911 between the hours of 7:00 a.m. and 7:00 p.m. Central Standard
Time if you have questions regarding the Plan.
NET ASSET VALUE
The net asset value per share of the Fund's Shares is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities, and dividing the result by the number of Shares outstanding. The
net asset value will be computed on each business day as of 5:00 p.m. Eastern
time. The Fund reserves the right to calculate the net asset value more
frequently if deemed desirable.
The value of the Fund's portfolio will be determined by the Adviser, following
guidelines established and periodically reviewed by the Trustees. Interests in
Senior Loans will be valued by the Adviser on behalf of the Fund on the basis of
market quotations and transactions in instruments which the Adviser believes may
be comparable to Senior Loan interests with respect to the following
characteristics: credit quality, interest rate, interest rate redetermination
period and maturity. Such instruments may include commercial paper, negotiable
certificates of deposit and short-term variable rate securities which have
adjustment periods comparable to the Senior Loan interests in the Fund's
portfolio. In determining the relationship between such instruments and the
Senior Loan interests in the Fund's portfolio, the Adviser will consider on an
ongoing basis, among other factors, (i) the credit worthiness of the Borrower
and (ii) the current interest rate, the period until next interest rate
redetermination and maturity of such Senior Loan interests. It is expected that
the Fund's net asset value will fluctuate as a function of interest rate and
credit factors. Because of the short-term nature of such instruments, however,
the Fund's net asset value is expected to fluctuate less in response to changes
in interest rates than the net asset values of investment companies with
portfolios consisting primarily of fixed-income or longer term securities. The
Adviser believes that Lenders selling Senior Loan interests or otherwise
involved in a Senior Loan transaction may tend, in valuing Senior Loan interests
for their own account, to be less sensitive to interest rate and credit quality
changes and, accordingly, the Adviser does not intend to rely solely on such
valuations in valuing the Senior Loan interests for the Fund's account. In
addition, because a secondary trading market in Senior Loans has not yet fully
developed, in valuing Senior Loans, the Adviser may not rely solely on but may
consider, to the extent the Adviser believes such information to be reliable,
prices or quotations provided by banks, dealers or pricing services with respect
to secondary market transactions in Senior Loans. To the extent that an active
secondary market in Senior Loan interests develops to a reliable degree, the
Adviser may rely to an increasing extent on such market prices and quotations in
valuing the Senior Loan interests in the Fund's portfolio. In light of the
senior nature of Senior Loan interests that may be included in the Fund's
portfolio and taking into account the Fund's access to non-public information
with respect to Borrowers relating to such Senior Loan interests, the Adviser
does not currently believe that consideration on a systematic basis of ratings
provided by any nationally recognized statistical rating organization or price
fluctuations with respect to long- or short-term debt of such Borrowers
subordinate to the Senior Loans of such Borrowers is necessary for the
determination of the value of such Senior Loan interests. Accordingly, the
Adviser generally will not systematically consider (but may consider in certain
instances) and, in any event, will not rely upon such ratings or price
fluctuations in determining the value of Senior Loan interests in the Fund's
portfolio.
Other portfolio securities (other than short-term obligations, but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, portfolio
securities will be valued at the last sale price on the exchange that is the
primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The value of
interest rate swaps will be determined in accordance with a discounted present
value formula and then confirmed by obtaining a bank quotation.
Short-term obligations which mature in 60 days or less will be valued at
amortized cost, if their original term to maturity when acquired by the Fund was
60 days or less, or will be valued at amortized cost using their value on the
61st day prior to maturity, if their original term to maturity when acquired by
the Fund was more
B-13
<PAGE> 14
than 60 days, unless in each case this is determined not to represent fair
value. Repurchase agreements will be valued at cost plus accrued interest.
Securities for which there exist no price quotations or valuations and all other
assets will be valued at fair value as determined in good faith by or on behalf
of the Trustees.
Through February 17, 1999, the Fund's net asset value has ranged from a high
of $10.09 to a low of $10.00 since its commencement of investment operations on
March 27, 1998.
TAXATION
FEDERAL INCOME TAXATION
The Fund intends to qualify each year to be treated as a regulated investment
company under Subchapter M of the Code. To qualify as a regulated investment
company, the Fund must, among other things: (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of securities
and gains from the sale or other disposition of securities or certain other
related income; and (b) diversify its holdings so that at the end of each
quarter of the Fund's taxable year (i) at least 50% of the value of the Fund's
assets is represented by cash, U.S. government securities, securities of other
regulated investment companies, and other securities which, with respect to any
one issuer, do not represent more than 5% of the value of the Fund's assets or
more than 10% of the voting securities of such issuer, and (ii) not more than
25% of the value of the Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or the securities of other
regulated investment companies).
If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (including among other things, interest
and net short-term capital gain, but not net capital gains, which are the excess
of net long-term capital gains over net short-term capital losses), in each
year, it will not be required to pay federal income taxes on any income
distributed to Shareholders. The Fund intends to distribute at least the minimum
amount of net investment income necessary to satisfy the 90% distribution
requirement. The Fund will not be subject to federal income tax on any net
capital gains distributed to Shareholders. As a Massachusetts business trust,
the Fund will not be subject to any excise or income taxes in Massachusetts as
long as it qualifies as a regulated investment company for federal income tax
purposes.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least an amount equal to the sum of (a) 98% of its
ordinary income for such year and (b) 98% of its capital gain net income (which
generally is computed on the basis of the one-year period ending on October 31
of such year), plus any amounts that were not distributed in previous taxable
years. For purposes of the excise tax, any ordinary income or capital gain net
income retained by, and subject to federal income tax in the hands of, the Fund
will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income was
distributed to its Shareholders) and all distributions out of earnings and
profits would be taxed to Shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to Shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income
B-14
<PAGE> 15
and excise taxes. The Fund will monitor its transactions and may make certain
tax elections in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
Shareholders. For example, with respect to certain securities issued at a
discount, the Fund will be required to accrue as income each year a portion of
the discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Fund may have to dispose of securities that it would otherwise have
continued to hold.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes.
DISTRIBUTIONS
Distributions of the Fund's net investment income are taxable to Shareholders
as ordinary income, whether paid in cash or reinvested in additional Shares.
Distributions of the Fund's net capital gains ("capital gain dividends"), if
any, are taxable to Shareholders at the rates applicable to long-term capital
gains regardless of the length of time Shares of the Fund have been held by such
Shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's Shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such Shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rate" below. It is not expected that any portion of the
distributions from the Fund will be eligible for the dividends received
deduction for corporations. The Fund will inform Shareholders of the source and
tax status of all distributions promptly after the close of each calendar year.
Shareholders receiving distributions in the form of additional Shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the Shares received,
determined as of the distribution date. The basis of such Shares will equal the
fair market value of such shares on the distribution date.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to Shareholders of
record on a specified date in such a month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the Shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
Shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
Shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications, or who are otherwise subject to backup
withholding. Foreign shareholders, including shareholders who are non-resident
aliens, may be subject to U.S. withholding tax on certain distributions (whether
received in cash or shares) at a rate of 30% or such lower rate as prescribed by
an applicable income tax treaty.
SALE OF SHARES
Except as discussed below, selling Shareholders will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the Shares and the amount received. If such Shares are held as a capital asset,
the gain or loss will be a capital gain or loss. For a summary of the tax rates
applicable to capital gains, see "Capital Gains Rates" below. It is possible,
although the Fund believes it is unlikely, that, in connection with a tender
offer, distributions to tendering shareholders may be subject to tax as ordinary
income (rather than as gain or loss), which in turn may result in deemed
distributions subject to tax as
B-15
<PAGE> 16
ordinary income for non-tendering shareholders. The federal income tax
consequences of repurchase of Shares pursuant to tender offers will be disclosed
in the related offering documents. Any loss recognized upon a taxable
disposition of Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such Shares. For purposes of determining whether Shares have been held for
six months or less, the holding period is suspended for any periods during which
the Shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.
CAPITAL GAINS RATES
Capital Gains Rate. The maximum tax applicable to net capital gains recognized
by individuals and other non-corporate taxpayers is (i) the same as the maximum
ordinary income tax rate for capital assets held for one year or less or (ii)
20% for capital assets held for more than one year. The maximum long-term
capital gains rate for corporations is 35%.
GENERAL
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their advisers regarding the specific
federal tax consequences of purchasing, holding and disposing of Shares, as well
as the effects of state, local and foreign tax laws and any proposed tax law
changes.
REPURCHASE OF SHARES
The Fund may from time to time enter into one or more credit agreements to
provide the Fund with additional liquidity to meet its obligations to purchase
Common Shares pursuant to any tender offer it may make. The Fund has entered
into a Second Amendment and Restatement of Credit Agreement dated as of June 14,
1999 (the "Credit Agreement") among the Fund and Van Kampen Prime Rate Income
Trust (the "Co-Borrower") as borrowers, the banks party thereto (the "Financial
Institutions"), and Bank of America National Trust and Savings Association
("BofA"), as agent, pursuant to which the Financial Institutions have committed
to provide a credit facility of up to $500,000,000 to the Fund and the
Co-Borrower, which is not secured by the assets of the Fund or Co-Borrower or
other collateral. As of the date hereof neither the Fund nor the Co-Borrower has
drawn any of the funds available under the Credit Agreement. The proceeds of any
amounts borrowed under the Credit Agreement may be used to provide the Fund with
additional liquidity to meet its obligations to purchase Common Shares pursuant
to any tender offer that it may make. The Credit Agreement has terms and
conditions substantially similar to the following:
a. Each of the Fund and Co-Borrower is entitled to borrow money ("Loans") from
the Financial Institutions in amounts which in the aggregate do not exceed
the $500 million credit facility, provided that the aggregate amount of
loans to the Fund or the Co-Borrower on an individual basis cannot exceed
twelve and one half percent (12.5%) of the net asset value of the Fund or
Co-Borrower, as the case may be (defined as total assets minus total
liabilities minus assets subject to liens). Pursuant to guidelines
applicable to the Fund and the Co-Borrower, any Loans to the Fund and
Co-Borrower will be made on a first-come, first-serve basis. If, at any
time, the demand for borrowings by the Fund and Co-Borrower exceeds amounts
available under the Credit Agreement, such borrowing will be allocated on a
fair and equitable basis, taking into consideration factors, including,
without limitation, relative net assets of the Fund and Co-Borrower,
amounts requested by the Fund and Co-Borrower, and availability of other
sources of cash to meet each parties' needs.
b. Loans made under the Credit Agreement, if any, will bear interest daily at
the option of the Fund or Co-Borrower as applicable, (i) at a rate per
annum equal to the federal funds rate from time to time plus 0.45%,
provided, however, that during the period from December 17, 1999 through
January 14, 2000, the rate shall be the federal funds rate plus 0.575%, or
(ii) at a rate per annum equal to a reserve-adjusted interbank offered rate
offered by BofA's Grand Cayman Branch ("IBOR") plus 0.45% per annum,
provided, however, that during the period from December 17, 1999 through
January 14, 2000, the rate shall be IBOR plus 0.575%. Each of the Fund and
Co-Borrower will bear the expenses of any borrowings attributable to it
under the Credit Agreement. Such interest will be due, in arrears, on the
B-16
<PAGE> 17
outstanding principal amount of each loan (i) as to any federal funds rate
Loan on the last business day of each calendar quarter and (ii) as any
offshore rate loan, from one (1) day to sixty (60) days from the date of
the loan, as selected by the Fund or Co-Borrower as applicable in advance.
Interest on the outstanding principal of the Loans will also be due on the
date of any prepayment of any offshore rate Loan and on demand during the
existence of an event of default under the Credit Agreement payable by the
borrower subject to such event of default. Overdue payments of principal
and interest will bear interest, payable upon demand, at a penalty rate. No
Loan shall be outstanding for a period of more than sixty (60) days, and
there shall be no more than three Interest Periods in effect as defined in
the Credit Agreement.
c. The Fund paid approximately $5,320 of fees and expenses to BofA or its
affiliates on the date the Credit Agreement was executed. In addition,
during the term of the Credit Agreement, the Fund is obligated to pay its
pro rata share (based on the relative net assets of the Fund and
Co-Borrower) of a commitment fee computed at the rate of 0.09% per annum on
the average daily unused amount of the facility.
d. The principal amount of any loans made under the Credit Agreement, if any,
is required to be paid sixty (60) days from the date of the Loan. Each of
the Fund and Co-Borrower is entitled to prepay a Loan made to it in
multiples of $1,000,000, provided that the Fund or Co-Borrower as
applicable gives sufficient notices of prepayment. On the Commitment
Termination Date (as defined below), all outstanding principal and accrued
interest under the Credit Agreement will be due and payable in full.
e. The drawdown of the initial Loan, if any, under the Credit Agreement is
subject to certain conditions, including, among other things, the Fund and
Co-Borrower, as applicable, executing and delivering a promissory note made
payable to the order of each Financial Institution, in the form attached to
the Credit Agreement (the "Promissory Notes").
The drawdown of each Loan, if any, is further conditioned upon the
satisfaction of additional conditions, including, without limitation, (i)
the providing of notice with respect to the Loan, (ii) the asset coverage
ratio for the applicable borrower, being at least 8 to 1; (iii) there being
no default or event of default in existence; (iv) the representations and
warranties with respect to the applicable borrower made in the Credit
Agreement continuing to be true and (v) there being no loans outstanding
with the applicable borrower for more than sixty (60) days on the day
preceding the proposed borrowing date.
f. The Credit Agreement contains various affirmative and negative covenants
of the Fund and Co-Borrower, including, without limitation, obligations:
(i) to provide periodic financial information; (ii) with limited
exceptions, to not consolidate with or merge into any other entity or have
any other entity merge into it and to not sell all or any substantial part
of its assets; (iii) to continue to engage in its current type of business
and to maintain its existence as a business trust; (iv) to comply with
applicable laws, rules and regulations; (v) to maintain insurance on its
property and business; (vi) to limit the amount of its debt based upon
12.5% of the net asset value of the applicable borrower; and (vii) to not
create any lien on any of its assets, with certain exceptions.
g. The Credit Agreement also contains various events of default (with certain
specified grace periods), including, without limitation: (i) failure to pay
when due any amounts required to be paid to the Financial Institutions
under the Credit Agreement or the Promissory Notes; (ii) any material
misrepresentations in the Credit Agreement or documents delivered to the
Financial Institutions; (iii) failure to observe or perform certain terms,
covenants and agreements contained in the Credit Agreement, the Promissory
Notes or other documents delivered to the Financial Institutions; (iv)
failure to comply with the Fund's or Co-Borrower's, as applicable,
fundamental investment policies or investment restrictions; (v) failure to
comply by the Fund or Co-Borrower, as applicable, with all material
provisions of the Investment Company Act of 1940; (vi) the voluntary or
involuntary bankruptcy of the Fund or Co-Borrower, as applicable; (vii) the
entry of judgments for the payment of money in excess of $5,000,000 in the
aggregate which remains unsatisfied or unstayed for a period of 30 days;
and (viii) a change in control of the Fund's or Co-Borrower's, as
applicable, investment adviser.
B-17
<PAGE> 18
h. The credit facility provided pursuant to the Credit Agreement will
terminate on June 13, 2000 (the "Commitment Termination Date"), unless
extended or earlier terminated pursuant to the terms thereof, and all
accrued interest and principal will be due thereon.
The Fund intends to repay any Loans under the Credit Agreement from proceeds
from the specified pay-downs from the interests in Senior Loans which will be
acquired and from proceeds from the sale of Shares.
During the pendency of any tender offer by the Fund, the Fund will calculate
daily the net asset value of the Shares and will establish procedures which will
be specified in the tender offer documents, to enable Shareholders to ascertain
readily such net asset value. The relative illiquidity of some of the Fund's
portfolio securities could adversely impact the Fund's ability to calculate net
asset value in connection with determinations of pricing for tender offers, if
any. Each offer will be made and Shareholders notified in accordance with the
requirements of the Securities Exchange Act of 1934, as amended, and the 1940
Act, either by publication or mailing or both. Each offering document will
contain such information as is prescribed by such laws and the rules and
regulations promulgated thereunder.
Tendered Shares that have been accepted and repurchased by the Fund will be
held in treasury and may be retired by the Board of Trustees. Treasury Shares
will be recorded and reported as an offset to Shareholders' equity and
accordingly will reduce the Fund's total assets. If Treasury Shares are retired,
Shares issued and outstanding and capital in excess of par value will be reduced
accordingly.
If the Fund must liquidate portfolio securities in order to repurchase Shares
tendered, the Fund may realize gains and losses.
B-18
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Senior Floating Rate Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Senior Floating Rate Fund (the "Fund"), including the portfolio of
investments, as of July 31, 1998, and the related statements of operations, cash
flows and changes in net assets and financial highlights for the period from
March 27, 1998 (commencement of investment operations) to July 31, 1998. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and 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. Our procedures included confirmation of securities owned as of July
31, 1998, by correspondence with the custodian and selling or agent banks; where
replies were not received we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Van Kampen Senior Floating Rate Fund as of July 31, 1998, the
results of its operations, cash flows, the changes in its net assets and
financial highlights for the period from March 27, 1998 (commencement of
investment operations) to July 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Chicago, Illinois
September 4, 1998
B-18
<PAGE> 20
PORTFOLIO OF INVESTMENTS
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P
(000) Borrower (Unaudited) Stated Maturity* Value
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
VARIABLE RATE** SENIOR LOAN INTERESTS 79.5%
AEROSPACE/DEFENSE 1.5%
$ 4,990 Aerostructures Corp., Term Loan.......................... NR NR 12/31/03 $ 4,990,387
981 Whittaker Corp., Term Loan............................... NR NR 05/31/03 980,770
300 Whittaker Corp., Revolving Credit........................ NR NR 05/31/01 300,000
------------
6,271,157
------------
AUTOMOTIVE 1.2%
5,111 Breed Technologies, Inc., Term Loan...................... B1 BB 04/27/04 to 04/27/06 5,111,156
------------
BROADCASTING -- CABLE 1.2%
5,000 Insight Communication Co., L.P., Term Loan............... NR NR 03/31/05 5,001,861
------------
BROADCASTING -- TELEVISION 4.6%
8,684 NTL (UK) Group, Term Loan................................ NR NR 12/31/05 8,684,233
10,000 Sinclair Broadcasting, Term Loan......................... Ba2 BB- 09/15/05 10,000,067
------------
18,684,300
------------
CHEMICALS, PLASTICS AND RUBBER 3.3%
6,500 High Performance Plastics, Inc., Term Loan............... NR NR 03/31/05 6,500,000
7,172 Sterling Pulp Chemicals, Inc., Term Loan................. Ba3 NR 09/30/04 7,171,585
------------
13,671,585
------------
CONSTRUCTION MATERIALS 1.3%
5,217 Enclosures Holding Corp., Term Loan...................... NR NR 02/28/05 5,217,216
------------
CONTAINERS, PACKAGING AND GLASS 3.4%
5,985 American Bottling, Term Loan............................. NR NR 05/01/07 5,985,000
1,651 Huntsman Packaging Corp., Term Loan...................... Ba2 BB- 12/31/02 1,650,698
2,365 Huntsman Packaging Corp., Revolving Credit............... Ba2 BB- 12/31/02 2,365,445
4,162 Stone Container Corp., Term Loan......................... Ba3 B+ 10/01/03 4,161,672
------------
14,162,815
------------
DIVERSIFIED MANUFACTURING 2.8%
10,833 Intesys Technologies, Inc., Term Loan.................... NR NR 06/30/04 to 06/30/06 10,833,351
763 Intesys Technologies, Inc., Revolving Credit............. NR NR 06/30/04 762,671
------------
11,596,022
------------
ECOLOGICAL 0.8%
3,236 Safety-Kleen Corp., Term Loan............................ Ba3 BB 04/03/05 to 04/03/06 3,236,282
------------
ELECTRONICS 1.8%
7,500 Amphenol Corp., Term Loan................................ Ba3 B+ 05/19/04 7,506,835
------------
FARMING & AGRICULTURE 2.4%
4,995 Seminis, Inc., Term Loan................................. NR NR 12/31/03 to 12/31/04 4,994,995
4,937 Walco International, Term Loan........................... NR NR 03/31/04 4,968,246
------------
9,963,241
------------
FINANCE 8.9%
10,000 Bridge Information Systems, Inc., Term Loan.............. NR NR 05/27/05 10,000,000
9,375 Meditrust Corp., Term Loan............................... NR NR 07/15/99 9,375,162
6,992 OSI Holdings Corp., Term Loan............................ B2 NR 10/15/04 6,991,941
10,000 Paul G. Allen, Term Loan................................. NR NR 06/10/03 9,999,827
------------
36,366,930
------------
HEALTHCARE 4.9%
20,000 Vencor, Inc., Term Loan.................................. B1 B+ 01/15/05 20,000,035
------------
HOME & OFFICE FURNISHINGS 1.6%
6,500 Imperial Home Decor Group, Inc., Term Loan............... B1 B+ 03/13/05 to 03/13/06 6,500,000
------------
</TABLE>
See Notes to Financial Statements
B-19
<PAGE> 21
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P
(000) Borrower (Unaudited) Stated Maturity* Value
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
HOTELS, MOTELS, INNS, AND GAMING 2.4%
$10,000 Aladdin Gaming, LLC., Term Loan.......................... B2 NR 08/26/06 $ 10,000,279
------------
MACHINERY 4.7%
4,455 Numatics, Inc., Term Loan................................ Ba3 B+ 03/19/04 to 09/19/05 4,454,386
15,000 Ocean Rig (Norway), Term Loan............................ NR NR 06/01/08 15,000,701
------------
19,455,087
------------
PAPER AND FOREST PRODUCTS 3.7%
15,000 Le Group Forex, Inc., Term Loan.......................... NR BB 06/30/05 15,000,000
------------
PERSONAL/NON-DURABLE 1.5%
6,305 Boyd's Collection, Ltd., Term Loan....................... Ba3 B+ 04/21/06 6,305,006
------------
PRINTING AND PUBLISHING 2.8%
6,500 Advanstar Communications, Term Loan...................... Ba3 B+ 04/30/05 6,500,000
4,967 TransWestern Publishing, L.P., Term Loan................. Ba3 B+ 10/01/04 4,966,575
------------
11,466,575
------------
RESTAURANTS AND FOOD SERVICE 1.2%
4,866 Americas Favorite Chicken, Inc., Term Loan............... Ba3 NR 06/30/02 4,865,998
------------
RETAIL -- OFFICE PRODUCTS 2.4%
10,000 U.S. Office Products Co., Term Loan...................... B1 B- 06/09/06 10,000,052
------------
TELECOMMUNICATIONS -- CELLULAR 9.0%
34,300 BCP SP, Ltd., Term Loan.................................. NR NR 03/31/00 33,969,244
3,000 Cellular, Inc. Financial Corp. (CommNet), Term Loan...... B1 B 09/30/05 3,000,044
------------
36,969,288
------------
TELECOMMUNICATIONS -- HYBRID 0.5%
2,000 Nextel Finance Co., Term Loan............................ Ba3 B- 09/30/06 2,000,800
------------
TELECOMMUNICATIONS -- PERSONAL COMMUNICATIONS SYSTEMS 2.4%
9,975 Omnipoint Communications, Inc., Term Loan................ B2 B 02/17/06 9,975,000
------------
TELECOMMUNICATIONS -- WIRELESS MESSAGING 2.7%
11,000 TSR Wireless, LLC, Term Loan............................. NR NR 06/30/05 11,000,000
------------
TEXTILES AND LEATHER 3.2%
8,279 American Marketing Industries, Inc., Term Loan........... NR NR 11/30/04 to 11/30/05 8,279,243
4,986 Joan Fabrics Corp., Term Loan............................ NR NR 06/30/05 to 06/30/06 4,985,511
------------
13,264,754
------------
TRANSPORTATION 3.3%
4,450 Gemini Air Cargo, Inc., Term Loan........................ B1 NR 12/12/02 4,450,000
9,000 OmniTRAX Railroads, LLC., Term Loan...................... NR NR 05/14/05 9,000,059
------------
13,450,059
------------
TOTAL VARIABLE RATE** SENIOR LOAN INTERESTS 79.5%
(Cost $326,481,619)............................................................................................ 327,042,333
------------
SHORT-TERM INVESTMENTS 16.1%
COMMERCIAL PAPER 7.5%
CSX Corp. ($7,000,000 par, maturing 08/06/98, yielding 5.77%).................................................. 6,994,390
Case Credit Corp. ($10,000,000 par, maturing 08/03/98, yielding 5.82%)......................................... 9,996,767
Illinois Power Co. ($790,000 par, maturing 08/04/98, yielding 5.85%)........................................... 789,615
Western Resources, Inc. ($13,400,000 par, maturing 08/03/98 to 08/13/98, yielding 5.72% to 5.75%).............. 13,397,444
------------
31,178,216
------------
SHORT-TERM LOAN PARTICIPATIONS 8.6%
Anadarko (Pete.) Corp. ($2,500,000 par, maturing 08/05/98, yielding 5.69%)..................................... 2,500,000
Englehard Corp. ($5,000,000 par, maturing 08/04/98, yielding 5.69%)............................................ 5,000,000
</TABLE>
See Notes to Financial Statements
B-20
<PAGE> 22
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
SHORT-TERM LOAN PARTICIPATIONS (CONTINUED)
Enron Oil & Gas Co. ($11,800,000 par, maturing 08/03/98, yielding 5.80%)..................................... $11,800,000
National Rural Utilities Cooperative Finance Corp. ($5,000,000 par, maturing 08/20/98, yielding 5.57%)....... 5,000,000
Ralston Purina Co. ($11,000,000 par, maturing 08/03/98, yielding 5.80%)...................................... 11,000,000
------------
35,300,000
TOTAL SHORT-TERM INVESTMENTS 16.1%
(Cost $66,478,216)........................................................................................... 66,478,216
------------
TOTAL INVESTMENTS 95.6%
(Cost $392,959,835).......................................................................................... 393,520,549
OTHER ASSETS IN EXCESS OF LIABILITIES 4.4%.................................................................... 17,914,755
------------
NET ASSETS 100.0%............................................................................................. $411,435,304
----------
</TABLE>
NR = Not rated
+ Bank loans rated below Baa by Moody's Investor Service, Inc. or BBB by
Standard & Poor's Group are considered to be below investment grade.
* Senior Loans in the Fund's portfolio generally are subject to mandatory
and/or optional prepayment. Because of these mandatory prepayment conditions
and because there may be significant economic incentives for a Borrower to
prepay, prepayments of Senior Loans in the Fund's portfolio may occur. As a
result, the actual remaining maturity of Senior Loans held in the Fund's
portfolio may be substantially less than the stated maturities shown.
Although the Fund is unable to accurately estimate the actual remaining
maturity of individual Senior Loans, the Fund estimates that the actual
average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.
** Senior Loans in which the Fund invests generally pay interest at rates which
are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates are generally (i) the prime rate offered by
one or more major United States banks, (ii) the lending rate offered by one
or more major European banks, such as the London Inter-Bank Offered Rate
("LIBOR") and (iii) the certificate of deposit rate. Senior loans are
generally considered to be restricted in that the Fund ordinarily is
contractually obligated to receive approval from the Agent Bank and/or
borrower prior to the disposition of a Senior Loan.
See Notes to Financial Statements
B-21
<PAGE> 23
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $392,959,835)....................... $393,520,549
Cash........................................................ 38,462
Receivables:
Fund Shares Sold.......................................... 16,462,657
Interest.................................................. 2,532,425
Prepaid Expenses............................................ 479,486
Unamortized Organizational Costs............................ 130,257
Other....................................................... 19,112
------------
Total Assets.......................................... 413,182,948
------------
LIABILITIES:
Payables:
Income Distributions...................................... 491,780
Initial Offering and Registration Costs................... 471,809
Investment Advisory Fee................................... 308,459
Organizational Costs...................................... 135,000
Administrative Fee........................................ 97,974
Distributor and Affiliates................................ 73,633
Service Fee............................................... 45,783
Accrued Expenses............................................ 117,395
Trustees' Deferred Compensation and Retirement Plans........ 5,811
------------
Total Liabilities..................................... 1,747,644
------------
NET ASSETS.................................................. $411,435,304
============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 40,992,495 shares issued and
outstanding).............................................. $ 409,925
Paid in Surplus............................................. 410,157,150
Net Unrealized Appreciation................................. 560,714
Accumulated Undistributed Net Investment Income............. 309,945
Accumulated Net Realized Loss............................... (2,430)
------------
NET ASSETS.................................................. $411,435,304
============
NET ASSET VALUE PER COMMON SHARE
($411,435,304 divided by 40,992,495 shares outstanding)... $ 10.04
============
</TABLE>
See Notes to Financial Statements
B-22
<PAGE> 24
STATEMENT OF OPERATIONS
For the Period March 27, 1998
(Commencement of Investment Operations)
to July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $6,476,183
Fees........................................................ 19,415
----------
Total Income............................................ 6,495,598
----------
EXPENSES:
Investment Advisory Fee..................................... 756,106
Administrative Fee.......................................... 198,975
Service Fee................................................. 119,385
Printing Costs.............................................. 91,588
Shareholder Services........................................ 88,345
Custody..................................................... 35,816
Amortization of Organizational Costs........................ 9,743
Trustees' Fees and Expenses................................. 6,075
Other....................................................... 248,540
----------
Total Expenses.......................................... 1,554,573
Less Investment Advisory Fees Waived.................... 179,972
----------
Net Expenses............................................ 1,374,601
----------
NET INVESTMENT INCOME....................................... $5,120,997
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $ (2,430)
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... -0-
End of the Period......................................... 560,714
----------
Net Unrealized Appreciation During the Period............... 560,714
----------
NET REALIZED AND UNREALIZED GAIN............................ $ 558,284
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $5,679,281
==========
</TABLE>
See Notes to Financial Statements
B-23
<PAGE> 25
STATEMENT OF CHANGES IN NET ASSETS
For the Period March 27, 1998
(Commencement of Investment Operations)
to July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended
July 31, 1998
- ---------------------------------------------------------------------------
<S> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income....................................... $5,120,997
Net Realized Loss........................................... (2,430)
Net Unrealized Appreciation During the Period............... 560,714
------------
Change in Net Assets from Operations........................ 5,679,281
Distributions from Net Investment Income.................... (4,980,066)
------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... 699,215
------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................... 408,647,472
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 3,263,134
Cost of Shares Repurchased.................................. (1,274,517)
------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 410,636,089
------------
TOTAL INCREASE IN NET ASSETS................................ 411,335,304
NET ASSETS:
Beginning of the Period..................................... 100,000
------------
End of the Period (Including undistributed net investment
income of $309,945)....................................... $411,435,304
============
</TABLE>
See Notes to Financial Statements
B-24
<PAGE> 26
STATEMENT OF CASH FLOWS
For the Period March 27, 1998 (Commencement of Investment Operations) to July
31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 5,679,281
-------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Increase in Investments at Value.......................... (393,520,549)
Increase in Interest and Fees Receivables................. (2,532,425)
Increase in Prepaid Expenses.............................. (479,486)
Increase in Unamortized Organizational Costs.............. (130,257)
Increase in Other Assets.................................. (19,112)
Increase in Offering & Registration Fees.................. 471,809
Increase in Investment Advisory Fees...................... 308,459
Increase in Organizational Costs Payable.................. 135,000
Increase in Accrued Expenses.............................. 117,395
Increase in Administrative Fees........................... 97,974
Increase in Distributor & Affiliates Payable.............. 73,633
Increase in Service Fees.................................. 45,783
Increase in Deferred Compensation and Retirement Plans
Expenses................................................ 5,811
-------------
Total Adjustments....................................... (395,425,965)
-------------
NET CASH USED FOR OPERATING ACTIVITIES...................... (389,746,684)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 392,184,815
Payments on Shares Repurchased.............................. (1,274,517)
Cash Dividends Paid......................................... (1,225,152)
-------------
Net Cash Provided by Financing Activities................. 389,685,146
-------------
NET DECREASE IN CASH........................................ (61,538)
Cash at Beginning of the Period............................. 100,000
-------------
CASH AT END OF THE PERIOD................................... $ 38,462
-----------
</TABLE>
See Notes to Financial Statements
B-25
<PAGE> 27
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the period indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 27, 1998
(Commencement
of Investment
Operations) to
July 31, 1998
- ---------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of the Period.................... $10.000
-------
Net Investment Income..................................... .213
Net Realized and Unrealized Gain.......................... .034
-------
Total from Investment Operations............................ 0.247
-------
Less Distributions from Net Investment Income............... 0.210
-------
Net Asset Value, End of the Period.......................... $10.037
=======
Total Return*............................................... 2.52%**
Net Assets at End of the Period (In millions)............... $ 411.4
Ratio of Expenses to Average Net Assets*.................... 1.70%
Ratio of Net Investment Income to Average Net Assets*....... 6.33%
Portfolio Turnover.......................................... 4%**
* If certain expenses had not been waived by Van Kampen, Total Return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets..................... 1.92%
Ratio of Net Investment Income to Average Net Assets........ 6.11%
</TABLE>
**Non-Annualized
See Notes to Financial Statements
B-26
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
July 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Senior Floating Rate Fund, formerly known as Van Kampen American
Capital Senior Floating Rate Fund (the "Fund"), is registered as a
non-diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective is to provide a
high level of current income, consistent with preservation of capital. The Fund
seeks to achieve its objective by investing primarily in a portfolio of
interests in floating or variable rate senior loans to corporations,
partnerships and other entities which operate in a variety of industries and
geographical regions. The Fund commenced investment operations on March 27,
1998.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A. SECURITY VALUATION--The value of the Fund's Variable Rate Senior Loan
interests, totaling $327,042,333 (79.5% of net assets) is determined in the
absence of actual market values by Van Kampen Investment Advisory Corp. (the
"Adviser") following guidelines and procedures established, and periodically
reviewed, by the Board of Trustees. The value of a Variable Rate Senior Loan
interest in the Fund's portfolio is determined with reference to changes in
market interest rates and to the creditworthiness of the underlying obligor. In
valuing Variable Rate Senior Loan interests, the Adviser considers market
quotations and transactions in instruments that the Adviser believes may be
comparable to such Variable Rate Senior Loan interests. In determining the
relationship between such instruments and the Variable Rate Senior Loan
interest, the Adviser considers such factors as the creditworthiness of the
underlying obligor, the current interest rate, the interest rate redetermination
period and the maturity date. To the extent that reliable market transactions in
Variable Rate Senior Loan interest have occurred, the Adviser also considers
pricing information derived from such secondary market transactions in valuing
Variable Rate Senior Loan interests. Because of uncertainty inherent in the
valuation process, the estimated value of a Variable Rate Senior Loan interest
may differ significantly from the value that would have been used had there been
market activity for that Variable Rate Senior Loan interest. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. SECURITY TRANSACTIONS--Investment transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Facility
fees received are treated as market discounts. Market premiums and discounts are
amortized over the stated life of each applicable security.
D. ORGANIZATIONAL COSTS--The Fund will reimburse Van Kampen Funds Inc. or its
affiliates (collectively "Van Kampen") for costs incurred in connection with the
Fund's organization in the amount of $140,000. These costs are being amortized
on a straight line basis over the 60 month period ending March 26, 2003. The
Adviser has agreed that in the event any of the initial shares of the Fund
originally purchased by Van Kampen are redeemed by the Fund during the
amortization period, the Fund will be reimbursed any unamortized organizational
costs in the same proportion as the number of shares redeemed bears to the
number of initial shares held at the time of redemption.
B-27
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
E. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
At July 31, 1998, for federal income tax purposes cost of long- and
short-term investments is $392,957,384, the aggregate gross unrealized
appreciation is $719,299 and the aggregate gross unrealized depreciation is
$156,134 resulting in net unrealized appreciation of $563,165. Net realized
gains or losses may differ for financial reporting and tax purposes primarily as
a result of the deferral of losses for tax purposes resulting from wash sales.
F. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between financial and tax basis
reporting for the 1998 fiscal year have been identified and appropriately
reclassified. Permanent differences of $169,014 relating to certain offering
costs which are not deductible for tax purposes have been reclassified from
accumulated undistributed net investment income to capital.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- -------------------------------------------------------------------------
<S> <C>
First $4.0 billion.......................................... .950 of 1%
Next $3.5 billion........................................... .900 of 1%
Next $2.5 billion........................................... .875 of 1%
Over $10.0 billion.......................................... .850 of 1%
</TABLE>
In addition, the Fund will pay a monthly administrative fee to Van Kampen
Funds Inc., the Fund's Administrator, at an annual rate of .25% of the average
net assets of the Fund. The administrative services to be provided by the
Administrator include monitoring the provisions of the loan agreements and any
agreements with respect to participations and assignments, record keeping
responsibilities with respect to interests in Variable Rate Senior Loans in the
Fund's portfolio and providing certain services to the holders of the Fund's
securities.
For the period ended July 31, 1998, the Fund recognized expenses of
approximately $16,200 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the period ended July 31, 1998, the Fund recognized expenses of
approximately $9,700 representing the Administrator's or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the period ended July
31, 1998, the Fund recognized expenses for their services
B-28
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
of approximately $68,400. The transfer agency fees are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
market benchmarks.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
3. CAPITAL TRANSACTIONS
At July 31, 1998, paid in surplus aggregated $410,157,150. Transactions in
common shares were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
JULY 31, 1998
- ---------------------------------------------------------------------------
<S> <C>
Beginning Shares............................................ 10,000
----------
Shares Sold................................................. 40,784,384
Shares Issued Through Dividend Reinvestment................. 325,311
Shares Repurchased.......................................... (127,200)
----------
Net Increases in Shares..................................... 40,982,495
----------
Outstanding Ending Shares................................... 40,992,495
==========
</TABLE>
4. INVESTMENT TRANSACTIONS
During the period, the costs of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $334,319,527 and $7,911,217,
respectively.
5. TENDER OF SHARES
The Board of Trustees currently intends, each quarter, to consider authorizing
the Fund to make tender offers for all or a portion of its then outstanding
common shares at the net asset value of the common shares at that time. For the
period ended July 31, 1998, 127,200 shares were tendered and repurchased by the
Fund.
6. EARLY WITHDRAWAL CHARGE
An early withdrawal charge to recover offering expenses will be imposed in
connection with most common shares held for less than one year which are
accepted by the Fund for repurchase pursuant to tender offers. The early
withdrawal charge of 1.00% will be payable to Van Kampen. For the period ended
July 31, 1998, Van Kampen received early withdrawal charges of approximately
$11,320 in connection with tendered shares of the Fund.
7. SENIOR LOAN PARTICIPATION COMMITMENTS
The Fund invests primarily in participations, assignments, or acts as a party to
the primary lending syndicate of a Variable Rate Senior Loan interest to United
States corporations, partnerships, and other entities. When the Fund purchases a
participation of a Senior Loan interest, the Fund typically enters into a
contractual agreement with the lender or other third party selling the
participation, but not with the borrower directly. As such, the Fund assumes
B-29
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
the credit risk of the Borrower, Selling Participant or other persons
interpositioned between the Fund and the Borrower.
At July 31, 1998, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Fund on a participation
basis.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SELLING PARTICIPANT (000) (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Bankers Trust............................................... $ 8,279 $ 8,279
Canadian Imperial Bank of Commerce.......................... 19,459 19,461
------- -------
Total....................................................... $27,738 $27,740
======= =======
</TABLE>
8. SERVICE PLAN
The Fund has adopted a Service Plan (the "Plan") designed to meet the service
fee requirements of the sales charge rule of the National Association of
Securities Dealers, Inc. The Plan governs payments for personal services and/or
the maintenance of shareholder accounts.
Annual fees under the Plan of .15% (.25% maximum) of net assets are
accrued daily and paid quarterly. For the period ended July 31, 1998, the Fund
paid service fees of $73,602 to Van Kampen.
9. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project
to review both the internal systems and external vendor connections. The goal of
this project is to position our business to continue unaffected as a result of
the century change. At this time, there can be no assurance that the steps taken
will be sufficient to avoid any adverse impact to the Fund, but we do not
anticipate that the move to Year 2000 will have a material impact on our ability
to continue to provide the Fund with service at current levels. In addition, it
is possible that the securities markets in which the Fund invests may be
detrimentally affected by computer failures throughout the financial services
industry beginning January 1, 2000. Improperly functioning trading systems may
result in settlement problems and liquidity issues.
B-30
