<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Economic Snapshot................................ 2
Performance Results.............................. 3
Portfolio Management Review...................... 4
Glossary of Terms................................ 8
A Focus on Senior Loans.......................... 9
Portfolio Highlights............................. 10
Portfolio of Investments......................... 12
Statement of Assets and Liabilities.............. 19
Statement of Operations.......................... 20
Statement of Changes in Net Assets............... 21
Statement of Cash Flows.......................... 22
Financial Highlights............................. 23
Notes to Financial Statements.................... 24
Report of Independent Accountants................ 30
</TABLE>
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
<PAGE> 2
LETTER TO SHAREHOLDERS
August 19, 1999
Dear Shareholder,
With the volatility that we've experienced recently in many financial
markets, some investors have sold securities because of uncertainty about where
the markets were going, only to be left rethinking whether they made the right
decision. We've witnessed this kind of market activity numerous times over the
past several years, sparked by concerns such as the impact of the Asian economic
crisis, high stock valuations, or, most recently, the stability of many
high-flying technology companies. While these fears eventually subsided,
investors who may have sold during this period were unable to reap the benefits
of the subsequent rally. That's partly because most of the recent big gains
happened in relatively short periods of time. This kind of volatility--and the
danger of making short-term decisions--highlights the importance of investing
for the long term, in accordance with your individual financial objectives.
Although the worst of the Asian crisis appears to be behind us, new concerns
are always emerging. In the coming months, we'll likely hear more about how the
year 2000 computer problem may affect the markets or that we're overdue for a
correction. While the markets could undoubtedly suffer as a result of these or
any number of other events, we encourage you to focus on your long-term
investment goals. Although nothing is certain, history has shown us that over
time, the markets tend to recover--and most investors want to be positioned to
take advantage of any recovery.
If you have concerns about market volatility or questions about how your
portfolio is structured to respond to these events, we encourage you to contact
your financial advisor. Your advisor can talk with you about sustaining a
long-term investment plan through a variety of market conditions. We hope that
Van Kampen Funds will play an important role as you and your advisor build a
portfolio designed to help you weather what the markets have in store.
Sincerely,
[SIG]
Richard F. Powers, III
Chairman
Van Kampen Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen Investment Advisory Corp.
1
<PAGE> 3
ECONOMIC SNAPSHOT
The economy continued to experience impressive growth during the past 12
months, but finally began to show signs of moderating toward the end of the
reporting period.
ECONOMIC GROWTH
The nation's gross domestic product (GDP), which peaked at 6.0 percent in
the fourth quarter of 1998, fell to more sustainable levels in the first and
second quarters of 1999. The unusually strong GDP early in the reporting period
was fueled by an increase in consumer spending, which was attributed to vibrant
consumer confidence as a result of the strong job market. However, economic
growth leveled off in the second quarter of 1999, as did consumer confidence and
retail spending.
EMPLOYMENT ENVIRONMENT
Throughout the reporting period, unemployment remained low, the number of
jobs grew, and wages rose. The labor market remained especially tight in the
service industry and most urban areas. As a result, the cost of labor as
measured by the Employment Cost Index grew at a surprising rate in July, causing
concerns about the potential for higher inflation in the months ahead.
INFLATION AND INTEREST RATES
Inflation remained low during most of the reporting period, although a sharp
increase in oil prices contributed to a spike in April's consumer price index
report (CPI). Following this up-tick, the Federal Reserve raised interest rates
0.25 percent on June 30, partially reversing a series of rate decreases from the
fall of 1998. (Editor's Note: The Fed increased rates an additional 0.25 percent
on August 24.)
ECONOMIC OUTLOOK
We believe the moderate slowdown in growth may continue, bringing the
economy back to historically normal levels. Strong corporate earnings, low
unemployment, and an active housing market should provide some balance against
slower spending and job growth rates.
INTEREST RATES AND INFLATION
July 31, 1997, through July 31, 1999
[GRAPH]
<TABLE>
<CAPTION>
INTEREST RATES INFLATION
-------------- ---------
<S> <C> <C>
Jul 1997 6.0000 2.2000
5.5000 2.2000
6.2500 2.2000
Oct 1997 5.7500 2.1000
5.6875 1.8000
6.5000 1.7000
Jan 1998 5.5625 1.6000
5.6250 1.4000
6.1250 1.4000
Apr 1998 5.6250 1.4000
5.6875 1.7000
6.0000 1.7000
Jul 1998 5.5625 1.7000
5.9375 1.6000
5.7500 1.5000
Oct 1998 5.2500 1.5000
4.8750 1.5000
4.0000 1.6000
Jan 1999 4.8125 1.7000
4.8750 1.6000
5.1250 1.7000
Apr 1999 4.9375 2.3000
4.5000 2.1000
4.0000 2.0000
Jul 1999 4.7500 2.1000
</TABLE>
Interest rates are represented by the closing midline federal funds rate
on the last day of each month. Inflation is indicated by the annual
percent change of the Consumer Price Index for all urban consumers at
the end of each month.
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED JULY 31, 1999
VAN KAMPEN SENIOR FLOATING RATE FUND
<TABLE>
<CAPTION>
<S> <C>
TOTAL RETURNS
One-year total return(1)................................... 7.09%
Life-of-Fund average annual total return(1)................ 7.18%
Commencement date.......................................... 03/27/98
Distribution rate(2)....................................... 6.52%
SHARE VALUATIONS
Net asset value on 07/31/99................................ $10.09
One-year high net asset value (07/28/99)................... $10.12
One-year low net asset value (08/09/98).................... $10.03
</TABLE>
(1) Total return assumes an investment at the beginning of the period indicated,
reinvestment of all distributions for the period and tender of all shares at the
end of the period indicated, excluding payment of any early withdrawal charges.
(2) Distribution rate is based upon the July 23, 1999 offering price of $10.12
and the current monthly dividend of $0.0550 per share.
Past performance does not guarantee future results. Distribution rates and net
asset value may fluctuate with market conditions. Fund shares, when tendered,
may be worth more or less than their original cost.
This report is intended for shareholders of the Fund and may not be used as
sales literature with prospective investors unless it is preceded or accompanied
by the Fund's current prospectus, which gives more complete information about
charges and expenses, investment objectives and operating policies. Prospective
investors should read the prospectus carefully before investing or sending
money.
3
<PAGE> 5
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN SENIOR FLOATING RATE FUND
We recently spoke with the portfolio management team of the Van Kampen Senior
Floating Rate Fund about the key events and economic forces that shaped the
markets during the past year. On July 23, 1999, Dennis J. McDonnell, president
and chief operating officer of Van Kampen Investment Advisory Corp., assumed
day-to-day management responsibilities for the Fund.
Mr. McDonnell has more than 30 years of asset management experience and
was pivotal in Van Kampen's entry into the senior loan business in 1989. He has
had oversight responsibilities for all senior loan fund operations since the
Fund's inception. The following excerpts reflect his views on the Fund's
performance during the 12 months ended July 31, 1999.
Q CAN YOU DESCRIBE THE CONDITIONS OF THE SENIOR LOAN MARKET DURING THE PAST
YEAR?
A The second half of 1998 saw considerable volatility across the financial
markets, but the senior loan market handled the challenging conditions
quite well. Economic turmoil overseas sparked a credit crunch in the
United States, as banks became more cautious about lending to corporations--many
banks feared that a drop in corporate earnings might hinder the borrowers'
ability to repay their loans. This caution contributed to a slowdown in new
issuance of senior loans. The loans that did come to market carried attractive
yields, as banks required borrowing companies to pay a premium in light of the
uncertain economic environment. In addition, the companies that could afford to
pay these premiums were firms that generally displayed strong fundamentals. This
combination of desirable yields and strong issuers resulted in favorable
opportunities to add to our senior loan portfolio.
The Federal Reserve Board responded to market conditions with a series of
interest-rate cuts in late 1998. The market's absorption of these cuts in early
1999 coincided with a general recovery among global economies, and these factors
helped alleviate the U.S. credit crunch and accelerate new issuance in the
senior loan market. Surprisingly healthy economic growth and a mild surge in
inflation prompted the Fed to raise rates in June, adding more opportunities to
find attractive yields in the senior loan market. However, the corporate debt
market (including bonds and bank loans) has been experiencing some deterioration
over the last several months, resulting in an increase in the default rate.
4
<PAGE> 6
Q HOW DID CHANGING INTEREST RATES AFFECT THE FUND'S DIVIDEND?
A Senior loans have the ability to adjust their interest payments over time
in conjunction with changes in interest rates--generally, interest rates
on loans in the Fund's portfolio reset every 30 to 90 days. As a result,
the income generated by the Fund usually reflects the prevailing trend in
short-term interest rates. During late 1998, many of the Fund's holdings
adjusted their interest rates to reflect the downward trend in short-term rates
and the reductions by the Fed. We lowered the Fund's dividend accordingly on two
occasions last fall. In 1999, however, interest rates have been on the upswing,
so we were able to raise the Fund's dividend back to its original level of a
year ago.
Q WHAT AREAS OF THE MARKET PROVIDED THE BEST OPPORTUNITIES?
A We continued to find many opportunities in the telecommunications arena--
including cellular, wireless, and personal communications systems. This
segment constituted the largest industry weighting in the portfolio.
Telecommunications continues to experience a high level of
merger-and-acquisition activity, for which senior loans have helped provide the
financing. In addition to telecommunications, some of our largest industry
weightings were ecological sectors, transportation, and chemicals, plastics, and
rubber.
Q CAN YOU TALK ABOUT SOME OF YOUR LARGEST HOLDINGS?
A Most of the borrowing companies represented in the portfolio provide basic
goods and services to the domestic economy. Senior loans often provide
integral financing for the growth and development of these firms. Among
our ten largest holdings are:
- BCP SP--Based in Sao Paulo, this wireless communications company was
created through a joint venture between American-owned BellSouth and
Safra, a Brazilian firm.
- Starwood Hotels & Resorts Worldwide--This hotel operating company's brand
names include Sheraton, Westin, The Luxury Collection, and St. Regis. In
July, Starwood announced plans to acquire Vistana, a developer and
operator of high-quality vacation ownership resorts.
- Avis Rent A Car--This car rental company has made several recent
acquisitions and purchases, including Cendant's vehicle leasing and fleet
management unit.
- The Pantry--This convenience store operator based in the southeastern
United States recently completed the acquisition of 53 Depot food stores
and 28 Food Chief stores.
- Iridium Operating--This firm engages in the establishment and
commercialization of a global satellite communications system.
5
<PAGE> 7
When we purchase senior loans for the Fund's portfolio, we seek to invest
in companies that we believe can perform well in the long run and make their
loan payments on schedule. However, keep in mind that not every loan in the
portfolio will produce positive results, and all loans are subject to credit
risk. For additional portfolio highlights, please refer to page 10.
Q WHAT FACTORS WORKED AGAINST THE FUND?
A Although the Fund performed very well during the period, its modest
exposure to the lackluster health-care industry was a drag on the Fund's
performance and earnings. The challenges imposed by managed care and
changing Medicare reimbursement policies caused this area of the market to
struggle, and we believe these challenges will continue to have an impact on the
health-care industry into next year. Despite this turbulence, we feel confident
in the management teams of the borrowing companies in which we've invested, and
we expect them to adapt to the new health-care environment.
Another factor that negatively affected the Fund's performance was
defaults in certain senior loan holdings.
Q THE FUND PASSED ITS FIRST ANNIVERSARY IN MARCH--HOW HAS THE PORTFOLIO
CHANGED SINCE ITS INCEPTION?
A As the Fund's assets have grown, we've been able to broaden the portfolio
in terms of the number of issues held by the Fund, as well as the number
of industries represented by those issues. We held more than 120 issues as
of July 31, 1999, while we owned less than 50 issues one year ago. In addition,
we've been fortunate to be investing these new assets during a time when
conditions were favorable in the senior loan market. Consequently, we have been
able to acquire a number of loans that have increased the Fund's earnings and
enhanced its performance.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund's total return for the 12-month period was 7.09 percent(1) at net
asset value, and the Fund's current monthly dividend of $0.0550 represents
a distribution rate of 6.52 percent(2). For more information on the Fund's
performance, please refer to the chart and footnotes on page 3. Past performance
does not guarantee future results.
6
<PAGE> 8
Q WHAT IS YOUR OUTLOOK FOR THE SENIOR LOAN MARKET AND FOR THE FUND?
A Looking forward, there are several factors in place that suggest a
generally favorable environment for senior loans. Strong new issuance
continues to provide an ample supply of loans, and rising interest rates
have begun to create both increased income potential and increased demand for
senior loan products.
Nevertheless, we are mindful of deteriorating credit conditions, which may
adversely affect senior loan valuations. In light of the recent rise in defaults
and bankruptcy filings by corporate borrowers, we expect some weakening in the
quality of some existing positions in the portfolio, which could lead to greater
fluctuation in the Fund's net asset value than has been our previous experience.
During the reporting period, the Fund's net asset value fluctuated between
$10.03 and $10.12 per share. (Editor's note: As of September 14, 1999, the
Fund's net asset value was $10.01.) We expect to keep the Fund invested in a
broad variety of industries and individual loans, in our effort to limit the
effects of problems with a particular issuer or industry.
[SIG]
Dennis J. McDonnell
President
Van Kampen Investment Advisory Corp.
7
<PAGE> 9
GLOSSARY OF TERMS
FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve
System, which is the central bank of the United States. Its policy-making
committee, called the Federal Open Market Committee, meets eight times a
year to establish monetary policy and monitor the economic pulse of the
United States.
FUNDAMENTALS: Characteristics of a company, such as revenue growth, earnings
growth, financial strength, market share, and quality of management.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from the total assets in its portfolio and dividing
this amount by the number of shares outstanding. The NAV does not include
any initial or contingent deferred sales charge.
SENIOR LOANS: Loans or other debt securities that are given preference to junior
securities of the borrower. In the event of bankruptcy, payments to holders
of senior loan obligations are given priority over payments to shareholders
of subordinated debt, as well as shareholders of preferred and common stock.
Senior loans may share priority status with other senior securities of the
borrower, and such status is not a guarantee that monies to which the fund
is entitled will be paid.
8
<PAGE> 10
A FOCUS ON SENIOR LOANS
The Senior Floating Rate Fund invests primarily in senior collateralized
loans to corporations, partnerships, and other business entities that operate in
a variety of industries and geographic locations. Senior loans have a number of
characteristics that, in the opinion of the Fund's management team, are
important to the integrity of the Fund's portfolio. These include:
SENIOR STANDING
With respect to interest payments, senior loans generally have priority over
other classes of loans, preferred stock, or common stocks, though they may have
equal status with other securities of the borrower. This status is not a
guarantee, however, that monies to which the Fund is entitled will be paid. If
they are not fully paid, it potentially could have a negative effect on the
Fund's net asset value. For more details, please refer to the prospectus.
COLLATERAL BACKING
Senior loans are often secured by collateral that has been pledged by the
borrower under the terms of a loan agreement. Forms of collateral include
trademarks, accounts receivable or inventory, buildings, real estate,
franchises, and common and preferred stock in subsidiaries and affiliates. Under
certain circumstances, collateral might not be entirely sufficient to satisfy
the borrower's obligations in the event of non-payment of scheduled interest or
principal, and in some instances may be difficult to liquidate on a timely
basis.
Additionally, a decline in the value of the collateral could cause the loan
to become substantially undersecured, and circumstances could arise (such as
bankruptcy of a borrower) that could cause the Fund's security interest in the
loan's collateral to be invalidated. This could potentially have a negative
effect on the Fund's net asset value.
CREDIT QUALITY
Many senior loans carry provisions designed to protect the lender in certain
circumstances. In addition, the variable-rate nature of the portfolio is
expected to lessen the fluctuation in the Fund's net asset value. However, the
net asset value will still be subject to the influence of changes in the real or
perceived credit quality of the loans in which the Fund invests. This may occur,
for example, in the event of a sudden or extreme increase in prevailing interest
rates, a default in a loan in which the Fund holds an interest, or a substantial
deterioration in the borrower's creditworthiness. From time to time, the Fund's
net asset value may be more or less than at the time of the investment.
SPECIAL CONSIDERATIONS
Under normal market conditions, the Fund may invest up to 20 percent of its
assets in senior loans that are not secured by any specific collateral. In
addition, up to 20 percent of its assets may be invested in senior loans made to
non-U.S. borrowers, although these loans must be U.S.-dollar denominated.
9
<PAGE> 11
PORTFOLIO HIGHLIGHTS
VAN KAMPEN SENIOR FLOATING RATE FUND
TOP FIVE PORTFOLIO INDUSTRIES AS A PERCENTAGE OF VARIABLE RATE SENIOR LOAN
INTERESTS
<TABLE>
<S> <C>
AS OF JULY 31, 1999
Telecommunications--Wireless Messaging ......... 8.9%
Chemicals, Plastics and Rubber ................. 6.4%
Telecommunications--Hybrid ..................... 4.8%
Telecommunications--Cellular ................... 4.8%
Ecological ..................................... 4.6%
</TABLE>
NET ASSET VALUE SINCE INCEPTION
MARCH 27, 1998 THROUGH JULY 31, 1999
[Net Asset Value Graph]
<TABLE>
<CAPTION>
VAN KAMPEN SENIOR FLOATING RATE FUND
------------------------------------
<S> <C>
Mar 1998 10.00
10.01
Apr 1998 10.03
10.04
Jul 1998 10.04
10.04
10.05
Oct 1998 10.05
10.05
10.06
Jan 1999 10.08
10.11
10.12
Apr 1999 10.11
10.11
10.12
Jul 1999 10.09
High $10.12 on 7/28/99
Low $10.00 on 4/16/98
</TABLE>
Past performance does not guarantee future results.
10
<PAGE> 12
PORTFOLIO HIGHLIGHTS (CONTINUED)
VAN KAMPEN SENIOR FLOATING RATE FUND
CURRENT DISTRIBUTION
APRIL 24, 1998 THROUGH JULY 23, 1999
[Net Asset Value Graph]
<TABLE>
<CAPTION>
CURRENT DISTRIBUTION 3-MONTH TREASURY BILL
-------------------- ---------------------
<S> <C> <C>
Apr 1998 3.90 4.97
6.59 5.01
6.57 5.08
Jul 1998 6.57 5.07
6.57 4.83
6.57 4.36
Oct 1998 6.35 4.32
6.07 4.48
6.06 4.45
Jan 1999 6.05 4.45
6.03 4.67
6.40 4.48
Apr 1999 6.52 4.54
6.53 4.63
6.52 4.78
Jul 1999 6.52 4.66
Van Kampen Senior Floating Rate Fund
3 Month Treasury Bill
</TABLE>
TOP FIVE HOLDINGS AS A PERCENTAGE OF VARIABLE RATE SENIOR LOAN INTERESTS
<TABLE>
<S> <C>
AS OF JULY 31, 1999
Avis Rent A Car, Inc. .......................... 4.3%
Allied Waste North America, Inc. ............... 4.3%
Iridium Operating, LLC. ........................ 4.3%
Arch Paging, Inc. .............................. 3.7%
Starwood Hotels & Resorts Worldwide, Inc. ...... 3.5%
</TABLE>
Past performance does not guarantee future results.
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS
July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings* Stated
(000) Borrower Moody's S&P Maturity** Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE *** SENIOR LOAN
INTERESTS 78.7% AEROSPACE/DEFENSE
1.8%
$ 4,952 Aerostructures Corp., Term
Loan.............................. NR BB- 12/31/03 $ 4,948,658
13,920 Decrane Finance Co., Term Loan.... B2 B+ 09/30/05 to 04/23/06 13,912,566
7,483 Stellex Technologies, Inc., Term
Loan.............................. B2 B+ 09/30/06 7,476,987
--------------
26,338,211
--------------
AUTOMOTIVE 1.9%
4,868 Breed Technologies, Inc., Term
Loan.............................. Caa1 CCC 04/27/04 to 04/27/06 4,866,610
717 Breed Technologies, Inc.,
Revolving Credit Agreement........ Caa1 CCC 04/27/04 717,137
12,632 JL French Automotive Castings,
Inc., Term Loan................... B1 B+ 10/21/06 12,630,974
10,000 Metalforming Technologies, Inc.,
Term Loan......................... NR NR 06/30/06 9,990,325
--------------
28,205,046
--------------
BEVERAGE, FOOD & TOBACCO 3.3%
39,940 Agrilink Foods, Term Loan......... B1 BB- 09/30/04 to 09/30/05 39,937,063
9,250 B & G Foods, Inc., Term Loan...... B1 B+ 03/31/06 9,243,122
--------------
49,180,185
--------------
BROADCASTING 2.2%
10,000 Comcorp Broadcasting, Inc., Term
Loan.............................. NR NR 06/30/07 9,999,726
4,376 Fairchild Corp., Term Loan........ Ba3 BB- 04/30/06 4,374,840
8,000 Quoram Broadcasting, Inc., Term
Loan.............................. Ba1 BB 09/30/07 8,009,522
9,667 Sinclair Broadcasting, Term
Loan.............................. Ba2 BB- 09/15/05 9,654,995
--------------
32,039,083
--------------
BUILDINGS & REAL ESTATE 0.3%
4,979 BSL Holdings, Term Loan........... NR BB- 12/30/05 4,975,019
--------------
CHEMICALS, PLASTICS & RUBBER 5.0%
6,451 High Performance Plastics, Inc.,
Term Loan......................... NR NR 03/31/05 6,446,921
24,170 Lyondell Petrochemical Co., Term
Loan.............................. Ba3 NR 06/30/05 to 05/17/06 24,162,755
5,000 MetoKote Corp., Term Loan......... NR NR 11/02/05 4,999,730
8,125 Pioneer Americas Acquisition
Corp., Term Loan.................. B2 B+ 12/31/06 8,111,409
6,575 Sterling Pulp Chemicals, Inc.,
Term Loan......................... B3 BB- 09/30/04 6,571,201
17,806 Sybron Chemicals, Inc., Term
Loan.............................. NR NR 07/31/04 17,802,942
5,742 West American Rubber, Term
Loan.............................. NR NR 06/30/05 5,741,504
--------------
73,836,462
--------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings* Stated
(000) Borrower Moody's S&P Maturity** Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS -- TELEPHONE 1.9%
$18,937 Davel Financing Co., LLC, Term
Loan............................. NR NR 06/23/05 $ 18,918,326
9,819 Telespectrum Worldwide, Inc.,
Term Loan........................ NR NR 12/31/01 to 12/31/03 9,815,712
--------------
28,734,038
--------------
CONSTRUCTION MATERIALS 2.4%
21,000 American Buildings Co., Term
Loan............................. NR NR 11/15/05 20,999,978
5,216 Flextek Components, Inc., Term
Loan (a)......................... NR NR 02/28/05 4,182,641
10,114 Hexcel Corp., Term Loan.......... Ba2 BB 09/14/05 10,105,369
--------------
35,287,988
--------------
CONTAINERS, PACKAGING & GLASS
1.3%
5,925 American Bottling Co., Term
Loan............................. NR NR 05/01/07 5,924,050
1,148 Huntsman Packaging Corp., Term
Loan............................. Ba2 NR 12/31/02 1,148,028
2,093 Huntsman Packaging Corp.,
Revolving Credit Agreement....... Ba2 NR 12/31/02 2,093,316
4,947 Safelite Glass Corp., Term
Loan............................. B1 B+ 12/23/03 4,944,638
1,200 Safelite Glass Corp., Revolving
Credit Agreement................. B1 B+ 12/23/03 1,199,729
3,911 Stone Container Corp., Term
Loan............................. Ba3 B+ 10/01/03 3,910,712
--------------
19,220,473
--------------
DIVERSIFIED MANUFACTURING 0.6%
7,792 Intesys Technologies, Inc., Term
Loan............................. NR NR 06/30/04 to 06/30/06 7,786,137
672 Intesys Technologies, Inc.,
Revolving Credit Agreement....... NR NR 06/30/04 672,000
--------------
8,458,137
--------------
ECOLOGICAL 3.6%
50,000 Allied Waste North America, Inc.,
Term Loan........................ Ba3 NR 07/23/06 to 07/23/07 50,000,000
3,204 Safety-Kleen Corp., Term Loan.... Ba3 BB 04/03/05 to 04/03/06 3,202,946
--------------
53,202,946
--------------
ELECTRONICS 1.5%
7,500 Amphenol Corp., Term Loan........ Ba3 B+ 05/19/04 7,493,775
8,982 Details Capital Corp., Term
Loan............................. B1 B+ 04/22/05 8,981,225
4,984 Stratus Computers, Inc., Term
Loan............................. NR NR 12/31/04 5,007,542
--------------
21,482,542
--------------
ENTERTAINMENT & LEISURE 0.3%
4,963 True Temper Sports, Inc., Term
Loan............................. B1 BB- 09/30/05 4,958,950
--------------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings* Stated
(000) Borrower Moody's S&P Maturity** Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FARMING & AGRICULTURE 0.3%
$ 4,887 Walco International, Inc., Term
Loan............................. NR NR 03/31/04 $ 4,918,047
--------------
FINANCE 1.8%
10,000 Bridge Information Systems, Inc.,
Term Loan........................ NR NR 05/29/05 9,993,589
6,961 Outsourcing Solutions, Term
Loan............................. B2 BB- 10/15/04 6,957,363
10,000 Paul G. Allen, Term Loan......... NR NR 06/10/03 9,999,150
--------------
26,950,102
--------------
GROCERY 1.9%
27,759 The Pantry, Inc., Term Loan...... B1 BB- 01/31/06 27,758,315
--------------
HEALTHCARE 2.2%
6,908 Meditrust Corp., Term Loan....... NR NR 07/17/01 6,907,522
18,151 Vencor, Inc., Term Loan (b)...... Caa2 NR 01/15/05 17,241,865
7,900 Wilson Greatbatch, Ltd., Term
Loan............................. NR NR 07/30/04 7,898,611
--------------
32,047,998
--------------
HOME & OFFICE FURNISHINGS,
HOUSEWARES & DURABLE CONSUMER
PRODUCTS 2.6%
21,500 Imperial Home Decor Group, Inc.,
Term Loan........................ B1 B 03/13/05 to 03/13/06 21,573,296
16,583 Renters Choice, Inc., Term
Loan............................. Ba3 BB- 01/31/06 to 01/31/07 16,583,642
--------------
38,156,938
--------------
HOTELS, MOTELS, INNS, & GAMING
3.4%
10,000 Aladdin Gaming, LLC, Term Loan... B2 NR 08/25/06 to 08/26/06 9,997,342
40,000 Starwood Hotels & Resorts
Worldwide, Inc., Term Loan....... Ba1 NR 02/23/03 40,011,547
50,008,889
--------------
MACHINERY 1.3%
4,187 Numatics, Inc., Term Loan........ Ba3 B 03/19/04 to 09/19/05 4,184,097
15,000 Ocean Rig (Norway), Term Loan.... NR NR 06/01/08 14,992,358
--------------
19,176,455
--------------
MINING, STEEL, IRON &
NON-PRECIOUS METALS 1.0%
9,900 Ispat Inland, Term Loan.......... Ba3 BB 07/16/05 to 07/16/06 9,893,616
5,000 White Knight Resources, Ltd.,
Term Loan........................ NR NR 06/30/07 5,001,004
--------------
14,894,620
--------------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings* Stated
(000) Borrower Moody's S&P Maturity** Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PAPER & FOREST PRODUCTS 1.6%
$14,850 Le Group Forex, Inc., Term
Loan............................. NR BB 06/30/05 $ 14,850,000
8,833 Pacifica Papers, Inc., Term
Loan............................. Ba2 BB 03/12/06 8,832,072
--------------
23,682,072
--------------
PERSONAL & MISCELLANEOUS
SERVICES 1.1%
2,131 Boyds Collection, Ltd., Term
Loan............................. Ba3 B+ 04/21/06 2,128,845
13,500 Dimac Corp., Term Loan........... Caa1 B- 06/30/06 to 12/30/06 13,527,759
--------------
15,656,604
--------------
PHARMACEUTICALS 1.2%
17,559 King Pharmaceuticals, Inc., Term
Loan............................. B1 BB- 12/18/06 17,558,824
--------------
PRINTING & PUBLISHING 1.8%
6,474 Advanstar Communications, Term
Loan............................. Ba3 B+ 04/30/05 6,473,441
4,948 Check Printers, Inc., Term
Loan............................. NR NR 06/30/05 4,948,221
5,566 Penton Media, Inc., Term Loan.... Ba3 BB- 05/31/06 5,565,960
4,984 Reiman Publications, Inc., Term
Loan............................. NR NR 12/10/05 4,983,950
4,190 TransWestern Publishing, LP, Term
Loan............................. Ba3 B+ 10/01/04 4,189,907
--------------
26,161,479
--------------
RESTAURANTS & FOOD SERVICE 2.1%
4,171 Americas Favorite Chicken, Inc.,
Term Loan........................ Ba3 BB- 06/30/02 4,168,827
1,384 Carvel Corp., Term Loan.......... NR NR 06/30/00 1,382,250
24,918 Domino's Pizza, Term Loan........ B1 B+ 12/21/06 to 12/21/07 24,908,997
--------------
30,460,074
--------------
RETAIL -- OFFICE PRODUCTS 0.7%
9,985 U.S. Office Products Co., Term
Loan............................. B2 B 06/09/06 9,984,561
--------------
RETAIL -- STORES 1.5%
14,888 Duane Reade, Inc., Term Loan..... B1 B+ 02/15/06 14,892,722
7,159 Kirklands Holdings, Term Loan.... NR NR 06/30/02 7,158,350
--------------
22,051,072
--------------
TELECOMMUNICATIONS -- CELLULAR
3.8%
38,300 BCP SP Ltd., Term Loan........... NR NR 03/31/00 37,938,261
3,000 Cellular, Inc. Financial Corp.
(CommNet), Term Loan............. B1 NR 09/30/05 2,994,465
15,000 Wireless One Network, LP, Term
Loan............................. NR NR 09/30/07 14,973,525
--------------
55,906,251
--------------
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings* Stated
(000) Borrower Moody's S&P Maturity** Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS -- HYBRID 3.8%
$32,000 Nextel Finance Co., Term Loan.... Ba3 B 09/30/06 to 03/31/07 $ 32,001,236
24,000 Pacific Crossing, Ltd., Term
Loan............................. NR NR 07/28/06 23,998,088
--------------
55,999,324
--------------
TELECOMMUNICATIONS -- PERSONAL
COMMUNICATIONS SYSTEMS 2.3%
29,133 Omnipoint Communications, Inc.,
Term Loan........................ B2 NR 02/01/06 to 02/17/06 29,553,419
5,000 Telecorp PCS, Inc., Term Loan.... B2 NR 12/05/07 4,998,546
--------------
34,551,965
--------------
TELECOMMUNICATIONS -- WIRELESS
MESSAGING 7.0%
45,000 Arch Paging, Inc., Term Loan..... B2 B 06/30/06 42,266,962
55,000 Iridium Operating, LLC, Term Loan
(b).............................. NR CC 12/29/00 49,496,314
11,000 TSR Wireless, LLC, Term Loan..... NR NR 06/30/05 10,996,383
--------------
102,759,659
--------------
TEXTILES & LEATHER 3.6%
8,196 American Marketing Industries,
Inc., Term Loan.................. NR NR 11/30/04 to 11/30/05 8,193,262
20,000 Glenoit Corp., Term Loan......... B1 BB- 12/31/03 to 06/30/04 19,995,312
5,400 Humphrey's, Inc., Term Loan...... B2 NR 01/15/03 5,389,878
4,822 Joan Fabrics Corp., Term Loan.... NR NR 06/30/05 4,817,305
13,895 Norcross Safety Products, Term
Loan............................. NR NR 10/02/05 13,893,518
--------------
52,289,275
--------------
TRANSPORTATION -- CARGO 0.9%
4,450 Gemini Air Cargo, Inc., Term
Loan............................. B1 NR 12/12/02 4,446,759
8,100 OmniTrax Railroads, LLC, Term
Loan............................. NR NR 05/14/05 8,098,386
--------------
12,545,145
--------------
TRANSPORTATION -- MANUFACTURING
COMPONENTS 3.3%
24,813 SPX Corp., Term Loan............. Ba3 BB 09/30/06 24,809,445
23,200 Transportation Manufacturing,
Inc., Term Loan.................. NR BB- 06/15/06 23,200,000
--------------
48,009,445
--------------
TRANSPORTATION -- PERSONAL 3.4%
50,000 Avis Rent A Car, Inc., Term
Loan............................. Ba3 BB+ 06/30/06 to 06/30/07 50,000,234
--------------
TOTAL VARIABLE RATE *** SENIOR LOAN INTERESTS 78.7%
(Cost $1,158,358,320)............................................................ $1,157,446,428
--------------
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- ----------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS 19.9%
COMMERCIAL PAPER 14.4%
Alabama Power Co. ($10,000,000 par, maturing 08/03/99, yielding 5.10%)........... $ 9,997,167
Baxter International, Inc. ($144,000 par, maturing 08/03/99, yielding 5.10%)..... 143,959
CSX Corp. ($15,000,000 par, maturing 08/24/99, yielding 5.27%)................... 14,949,496
Centex Corp. ($1,181,000 par, maturing 08/05/99, yielding 5.23%)................. 1,180,314
Comdisco, Inc. ($21,500,000 par, maturing 08/10/99 to 08/11/99, yielding 5.27% to
5.30%)......................................................................... 21,469,121
Compaq Computer Corp. ($8,122,000 par, maturing 08/25/99, yielding 5.28%)........ 8,093,411
Cox Communications, Inc. ($20,900,000 par, maturing 08/09/99 to 08/10/99,
yielding 5.22% to 5.25%)....................................................... 20,875,552
General Electric Capital Corp. ($1,450,000 par, maturing 08/23/99, yielding
5.07%)......................................................................... 1,445,507
General Motors Corp. ($505,000 par, maturing 08/05/99, yielding 5.05%)........... 504,717
Halliburton Co. ($4,591,000 par, maturing 08/02/99, yielding 5.07%).............. 4,590,353
Hunt (J.B.) Transportation Services, Inc. ($4,000,000 par, maturing 08/04/99,
yielding 5.18%)................................................................ 3,998,273
Pfizer, Inc. ($3,788,000 par, maturing 08/12/99 to 08/13/99, yielding 5.06%)..... 3,781,890
Praxair, Inc. ($1,479,000 par, maturing 08/19/99, yielding 5.25%)................ 1,475,118
Raytheon Co. ($10,000,000 par, maturing 08/09/99, yielding 5.22%)................ 9,988,400
Rite Aid Corp. ($22,000,000 par, maturing 08/09/99 to 08/12/99, yielding
5.25%)......................................................................... 21,971,271
Safeway, Inc. ($17,500,000 par, maturing 08/02/99, yielding 5.28% to 5.30%)...... 17,497,432
TRW, Inc. ($15,675,000 par, maturing 08/16/99, yielding 5.30%)................... 15,640,384
Tampa Electric Co. ($5,585,000 par, maturing 08/19/99, yielding 5.04%)........... 5,570,926
Tandy Corp. ($15,700,000 par, maturing 08/23/99 to 08/25/99, yielding 5.18%)..... 15,647,797
Temple Inland, Inc. ($9,787,000 par, maturing 08/02/99, yielding 5.25%).......... 9,785,573
Western Resources, Inc. ($8,512,000 par, maturing 08/02/99 to 08/25/99, yielding
5.25% to 5.27%)................................................................ 8,486,075
Xtra, Inc. ($14,576,000 par, maturing 08/05/99 to 08/24/99, yielding 5.22% to
5.30%)......................................................................... 14,540,220
--------------
TOTAL COMMERCIAL PAPER............................................................. 211,632,956
--------------
SHORT-TERM LOAN PARTICIPATIONS 5.5%
Cummins Engine, Inc. ($10,000,000 par, maturing 08/02/99, yielding 5.23%)........ 10,000,000
Englehard Corp. ($12,707,000 par, maturing 08/18/99, yielding 5.27%)............. 12,707,000
Enron Oil & Gas Co. ($2,000,000 par, maturing 08/02/99, yielding 5.28%).......... 2,000,000
Gillette Co. ($5,000,000 par, maturing 08/02/99, yielding 5.16%)................. 5,000,000
National Rural Utilities Coop Finance Corp. ($3,600,000 par, maturing 08/12/99,
yielding 5.10%)................................................................ 3,600,000
Ralston Purina Co. ($10,000,000 par, maturing 08/03/99, yielding 5.23%).......... 10,000,000
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- ----------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM LOAN PARTICIPATIONS (CONTINUED)
Sprint Capital Corp. ($12,863,000 par, maturing 08/17/99 to 08/24/99, yielding
5.26% to 5.27%)................................................................ $ 12,863,000
Temple Inland, Inc. ($5,000,000 par, maturing 08/03/99, yielding 5.24%).......... 5,000,000
Universal Corp. ($15,000,000 par, maturing 08/03/99 to 08/24/99, yielding 5.27%
to 5.28%)...................................................................... 15,000,000
Western Resources, Inc. ($5,500,000 par, maturing 08/06/99, yielding 5.28%)...... 5,500,000
--------------
TOTAL SHORT-TERM LOAN PARTICIPATIONS 5.5%......................................... 81,670,000
--------------
TOTAL SHORT-TERM INVESTMENTS 19.9%
(Cost $293,302,956).............................................................. 293,302,956
--------------
TOTAL INVESTMENTS 98.6%
(Cost $1,451,661,276)............................................................ 1,450,749,384
OTHER ASSETS IN EXCESS OF LIABILITIES 1.4%......................................... 21,203,253
--------------
NET ASSETS 100.0%................................................................. $1,471,952,637
==============
</TABLE>
NR = Not Rated
(a) This Senior Loan interest is non-income producing.
(b) Subsequent to the year ended July 31, 1999, this borrower has filed for
protection in federal bankruptcy court.
* Bank loans rated below Baa by Moody's Investor Services, 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 lending rate offered
by one or more major European banks, such as the London Inter-Bank Offered
Rate ("LIBOR"), (ii) the prime rate offered by one or more major United
States banks, 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
18
<PAGE> 20
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $1,451,661,276)..................... $1,450,749,384
Receivables:
Fund Shares Sold.......................................... 19,292,144
Interest.................................................. 7,486,042
Funding Fee............................................... 250,000
Prepaid Expenses............................................ 248,635
Unamortized Organizational Costs............................ 102,254
Other....................................................... 12,742
--------------
Total Assets.......................................... 1,478,141,201
--------------
LIABILITIES:
Payables:
Custodian Bank............................................ 2,093,112
Income Distributions...................................... 1,906,304
Investment Advisory Fee................................... 1,194,857
Administrative Fee........................................ 334,106
Distributor and Affiliates................................ 321,213
Initial Offering and Registration Costs................... 41,558
Accrued Expenses............................................ 262,972
Trustees' Deferred Compensation and Retirement Plans........ 34,442
--------------
Total Liabilities..................................... 6,188,564
--------------
NET ASSETS.................................................. $1,471,952,637
==============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 145,951,374 shares issued and
outstanding).............................................. $ 1,459,514
Paid in Surplus............................................. 1,467,251,336
Accumulated Undistributed Net Investment Income............. 3,303,975
Accumulated Net Realized Gain............................... 849,704
Net Unrealized Depreciation................................. (911,892)
--------------
NET ASSETS.................................................. $1,471,952,637
==============
NET ASSET VALUE PER COMMON SHARE
($1,471,952,637 divided by 145,951,374 shares
outstanding).............................................. $ 10.09
==============
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
STATEMENT OF OPERATIONS
For the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $72,161,646
Fees........................................................ 183,161
Other....................................................... 694,082
-----------
Total Income............................................ 73,038,889
-----------
EXPENSES:
Investment Advisory Fee..................................... 8,398,576
Administrative Fee.......................................... 2,210,152
Service Fee................................................. 1,326,091
Shareholder Services........................................ 593,110
Legal....................................................... 250,491
Custody..................................................... 179,791
Trustees' Fees and Related Expenses......................... 44,013
Amortization of Organizational Costs........................ 28,003
Other....................................................... 1,191,214
-----------
Total Expenses.......................................... 14,221,441
Investment Advisory Fee Reduction....................... 95,436
-----------
Net Expenses............................................ 14,126,005
-----------
NET INVESTMENT INCOME....................................... $58,912,884
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 891,210
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 560,714
End of the Period......................................... (911,892)
-----------
Net Unrealized Depreciation During the Period............... (1,472,606)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $ (581,396)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $58,331,488
===========
</TABLE>
See Notes to Financial Statements
20
<PAGE> 22
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended July 31, 1999 and the Period March 27, 1998
(Commencement of Investment Operations) to July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Period Ended
July 31, 1999 July 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income........................... $ 58,912,884 $ 5,120,997
Net Realized Gain/Loss.......................... 891,210 (2,430)
Net Unrealized Appreciation/Depreciation During
the Period.................................... (1,472,606) 560,714
-------------- ------------
Change in Net Assets from Operations............ 58,331,488 5,679,281
-------------- ------------
Distributions from Net Investment Income........ (56,436,224) (4,980,066)
Distributions from Net Realized Gain............ (39,076) -0-
-------------- ------------
Total Distributions........................... (56,475,300) (4,980,066)
-------------- ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES.................................... 1,856,188 699,215
-------------- ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold....................... 1,133,265,976 408,647,472
Net Asset Value of Shares Issued Through
Dividend Reinvestment......................... 39,411,306 3,263,134
Cost of Shares Repurchased...................... (114,016,137) (1,274,517)
-------------- ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................................. 1,058,661,145 410,636,089
-------------- ------------
TOTAL INCREASE IN NET ASSETS.................... 1,060,517,333 411,335,304
NET ASSETS:
Beginning of the Period......................... 411,435,304 100,000
-------------- ------------
End of the Period (Including undistributed net
investment income of $3,303,975 and $309,945,
respectively)................................. $1,471,952,637 $411,435,304
============== ============
</TABLE>
See Notes to Financial Statements
21
<PAGE> 23
STATEMENT OF CASH FLOWS
For the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 58,331,488
---------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Increase in Investments at Value.......................... (1,057,228,835)
Increase in Interest Receivable........................... (4,953,617)
Increase in Receivable for Funding Fee.................... (250,000)
Decrease in Prepaid Expenses.............................. 230,851
Decrease in Unamortized Organizational Costs.............. 28,003
Decrease in Other Assets.................................. 6,370
Increase in Investment Advisory Fees Payable.............. 886,398
Increase in Administrative Fees Payable................... 236,132
Increase in Distributor & Affiliates Payable.............. 201,797
Decrease in Organizational Costs Payable.................. (135,000)
Decrease in Offering & Registration Fees Payable.......... (430,251)
Increase in Accrued Expenses.............................. 145,577
Increase in Trustees' Deferred Compensation and Retirement
Plans Payable........................................... 28,631
---------------
Total Adjustments....................................... (1,061,233,944)
---------------
NET CASH USED FOR OPERATING ACTIVITIES...................... (1,002,902,456)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 1,130,436,489
Change in Intra-day Credit Line with Custodian Bank......... 2,093,112
Payments on Shares Repurchased.............................. (114,016,137)
Cash Dividends Paid......................................... (15,610,394)
Capital Gain Distributions Paid............................. (39,076)
---------------
Net Cash Provided by Financing Activities................. 1,002,863,994
---------------
NET DECREASE IN CASH........................................ (38,462)
Cash at Beginning of the Period............................. 38,462
---------------
CASH AT END OF THE PERIOD................................... $ -0-
===============
</TABLE>
See Notes to Financial Statements
22
<PAGE> 24
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 27, 1998
(Commencement
of Investment
Year Ended Operations) to
July 31, 1999 July 31, 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period............. $ 10.037 $10.000
-------- -------
Net Investment Income.............................. .652 .213
Net Realized and Unrealized Gain................... .037 .034
-------- -------
Total from Investment Operations..................... .689 .247
-------- -------
Less:
Distributions from Net Investment Income........... .640 .210
Distributions from Realized Gain................... .001 -0-
-------- -------
Total Distributions.................................. .641 .210
-------- -------
Net Asset Value, End of the Period................... $ 10.085 $10.037
======== =======
Total Return* (a).................................... 7.09% 2.52%**
Net Assets at End of the Period (In millions)........ $1,472.0 $ 411.4
Ratio of Expenses to Average Net Assets*............. 1.60% 1.70%
Ratio of Net Investment Income to Average Net
Assets*............................................ 6.66% 6.33%
Portfolio Turnover (b)............................... 23% 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.............. 1.61% 1.92%
Ratio of Net Investment Income to Average Net
Assets............................................. 6.65% 6.11%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the contingent deferred sales charge.
(b) Calculation includes the proceeds from principal repayments and sales of
variable rate senior loan interests.
See Notes to Financial Statements
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
July 31, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen 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 $1,157,446,428 (78.7% of net assets) is determined 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 secondary 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 in the nature of 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 reliable market activity
for that Variable Rate Senior Loan interest. Short-term securities with
remaining maturities of 60 days or less are valued at
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
amortized cost. Short-term loan participations are valued at cost in the absence
of any indication of impairment.
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. Other income is
comprised primarily of amendment fees. Amendment fees are earned as compensation
for agreeing to changes in loan agreements.
D. ORGANIZATIONAL COSTS--The Fund has agreed to 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 normally are
amortized over a 60 month period beginning on the date of the Fund's initial
public offering of its shares. However, AICPA Statement of Position 98-5, which
is effective for fiscal years beginning after December 15, 1998, requires that
unamortized organizational costs on the Fund's statement of assets and
liabilities be written off. Therefore, the Fund will write off the remaining
unamortized organizational costs in August 1999. The Adviser has agreed that in
the event any of the initial shares of the Fund originally purchased by Van
Kampen are redeemed, the Fund will be reimbursed for 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.
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.
Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral of losses relating to wash sale
transactions.
At July 31, 1999, for federal income tax purposes the cost of long- and
short-term investments is $1,451,663,912, the aggregate gross unrealized
appreciation is $5,579,324 and the aggregate gross unrealized depreciation is
$6,493,852 resulting in net unrealized depreciation on long- and short-term
investments of $914,528.
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
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 1999 fiscal year have been identified and appropriately
reclassified. Permanent differences of $479,486 relating to certain offering
costs which are not deductible for tax purposes and $37,884 relating to expenses
not deductible for tax purposes have been reclassified from capital to
accumulated undistributed net investment income.
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 year ended July 31, 1999, the Adviser voluntarily waived $95,436 of
its investment advisory fees. This waiver is voluntary in nature and can be
discontinued at the Adviser's discretion.
For the year ended July 31, 1999, the Fund recognized expenses of
approximately $226,700 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.
26
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
For the year ended July 31, 1999, the Fund recognized expenses of
approximately $23,800 representing Van Kampen's cost of providing legal services
to the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended July 31, 1999,
the Fund recognized expenses for their services of approximately $484,500.
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, 1999 and 1998, paid in surplus aggregated $1,467,251,336 and
$410,157,150, respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
July 31, 1999 July 31, 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares............................ 40,992,495 10,000
----------- ----------
Shares Sold............................... 112,343,843 40,784,384
Shares Issued Through Dividend
Reinvestment........................... 3,904,175 325,311
Shares Repurchased........................ (11,289,139) (127,200)
----------- ----------
Net Increase in Shares.................... 104,958,879 40,982,495
----------- ----------
Ending Shares............................... 145,951,374 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 $1,005,714,746 and $176,166,968,
respectively.
27
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
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
year ended July 31, 1999, 11,289,139 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 year ended
July 31, 1999, Van Kampen received early withdrawal charges of approximately
$528,221 in connection with tendered shares of the Fund.
7. COMMITMENTS/BORROWINGS
Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Fund had unfunded loan commitments of approximately $8,233,701 as of July
31, 1999. The Fund generally will maintain with its custodian short-term
investments having an aggregate value at least equal to the amount of unfunded
loan commitments.
The Fund, along with the Van Kampen Prime Rate Income Trust, has entered
into a revolving credit agreement with a syndicate led by Bank of America for an
aggregate of $500,000,000, which will terminate on June 13, 2000. The proceeds
of any borrowing by the Fund under the revolving credit agreement may only be
used, directly or indirectly, for liquidity purposes in connection with the
consummation of a tender offer by the Fund for its shares. Annual commitment
fees of .09% are charged on the unused portion of the credit line. Borrowings
under this facility will bear interest at either the LIBOR rate or the Federal
Funds rate plus .45%, except during the period from December 17, 1999 through
January 14, 2000 the applicable margin shall be .575%. There have been no
borrowings under this agreement to date.
8. 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
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 the
credit risk
28
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1999
- --------------------------------------------------------------------------------
of the Borrower, Selling Participant or other persons interpositioned between
the Fund and the Borrower.
At July 31, 1999, 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..................................... $ 8,196 $ 8,193
Canadian Imperial Bank of Commerce................ 12,152 12,147
------- -------
Total............................................. $20,348 $20,340
======= =======
</TABLE>
9. 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 year ended July 31, 1999, the Fund paid
service fees of $1,327,950 to Van Kampen.
29
<PAGE> 31
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, 1999, and the related statements of operations and
cash flows for the year then ended, the statement of changes in net assets
for the year then ended and then for the period from March 27, 1998
(commencement of investment operations) to July 31, 1998, and the financial
highlights for each of the periods presented. 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, 1999, 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 audits provide 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, 1999, the results of its
operations and cash flows for the year then ended, the changes in its net assets
for the year then ended and for the period from March 27, 1998 (commencement of
investment operations) to July 31, 1998, and the financial highlights for each
of the periods presented, in conformity with generally accepted accounting
principles.
KPMG LLP
Chicago, Illinois
September 14, 1999
30
<PAGE> 32
VAN KAMPEN FUNDS
GROWTH
Aggressive Equity
Aggressive Growth
American Value
Emerging Growth
Enterprise
Equity Growth
Growth
Pace
Small Cap Value
Technology
GROWTH AND INCOME
Comstock
Equity Income
Growth and Income
Harbor
Real Estate Securities
Utility
Value
GLOBAL/INTERNATIONAL
Asian Growth
Emerging Markets
European Equity
Global Equity
Global Equity Allocation
Global Fixed Income
Global Franchise
Global Government Securities
Global Managed Assets
International Magnum
Latin American
Short-Term Global Income
Strategic Income
Worldwide High Income
INCOME
Corporate Bond
Government Securities
High Income Corporate Bond
High Yield
High Yield & Total Return
Limited Maturity Government
U.S. Government
U.S. Government Trust for Income
CAPITAL PRESERVATION
Reserve
Tax Free Money
SENIOR LOAN
Prime Rate Income Trust
Senior Floating Rate
TAX FREE
California Insured Tax Free
Florida Insured Tax Free Income
High Yield Municipal
Insured Tax Free Income
Intermediate Term Municipal Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Tax Free High Income
To find out more about any of these funds, ask your financial advisor for a
prospectus, which contains more complete information, including sales charges,
risks, and ongoing expenses. Please read it carefully before you invest or send
money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- - visit our Web site at
WWW.VANKAMPEN.COM--to view a prospectus, select Download Prospectus
- - call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time.
Telecommunications Device for the Deaf users, call 1-800-421-2833.
- - e-mail us by visiting WWW.VANKAMPEN.COM and selecting Contact Us
31
<PAGE> 33
VAN KAMPEN SENIOR FLOATING RATE FUND
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*
STEVEN MULLER
THEODORE A. MYERS
RICHARD F. POWERS, III*--Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
RICHARD F. POWERS, III*
President
DENNIS J. MCDONNELL*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
MICHAEL SANTO*
EDWARD C. WOOD, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT
ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 218256
Kansas City, Missouri 64121-8256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG LLP
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in
the Investment Company Act of 1940.
(C) Van Kampen Funds Inc., 1999 All rights reserved.
(SM) denotes a service mark of
Van Kampen Funds Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares and other pertinent
data. After December 31, 1999 the report must, if used with prospective
investors, be accompanied by a monthly performance update.
32
<PAGE> 34
YEAR 2000 READINESS DISCLOSURE
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's investment adviser and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Fund's
investment adviser is taking steps that it believes are reasonably designed to
address the Year 2000 Problem with respect to computer systems that it uses and
to obtain reasonable assurances that comparable steps are being taken by the
Fund's other major service providers. At this time, there can be no assurances
that these steps will be sufficient to avoid any adverse impact to the Fund. In
addition, the Year 2000 Problem may adversely affect the markets and the issuers
of securities in which the Fund may invest that, in turn, may adversely affect
the net asset value of the Fund. Improperly functioning trading systems may
result in settlement problems and liquidity issues. In addition, corporate and
governmental data processing errors may result in production problems for
individual companies or issuers and overall economic uncertainty. Earnings of
individual issuers will be affected by remediation costs, which may be
substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected. The
statements above are subject to the Year 2000 Information and Readiness
Disclosure Act, which may limit the legal rights regarding the use of such
statements in the case of dispute.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> SR FLOATING RATE
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<INVESTMENTS-AT-COST> 1,451,661,276
<INVESTMENTS-AT-VALUE> 1,450,749,384
<RECEIVABLES> 27,028,186
<ASSETS-OTHER> 350,889
<OTHER-ITEMS-ASSETS> 12,742
<TOTAL-ASSETS> 1,478,141,201
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,188,564
<TOTAL-LIABILITIES> 6,188,564
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,468,710,850
<SHARES-COMMON-STOCK> 145,951,374
<SHARES-COMMON-PRIOR> 40,992,495
<ACCUMULATED-NII-CURRENT> 3,303,975
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 849,704
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (911,892)
<NET-ASSETS> 1,471,952,637
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 72,161,646
<OTHER-INCOME> 877,243
<EXPENSES-NET> (14,126,005)
<NET-INVESTMENT-INCOME> 58,912,884
<REALIZED-GAINS-CURRENT> 891,210
<APPREC-INCREASE-CURRENT> (1,472,606)
<NET-CHANGE-FROM-OPS> 58,331,488
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (56,436,224)
<DISTRIBUTIONS-OF-GAINS> (39,076)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 112,343,843
<NUMBER-OF-SHARES-REDEEMED> (11,289,139)
<SHARES-REINVESTED> 3,904,175
<NET-CHANGE-IN-ASSETS> 1,060,517,333
<ACCUMULATED-NII-PRIOR> 309,945
<ACCUMULATED-GAINS-PRIOR> (2,430)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,398,576
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,221,441
<AVERAGE-NET-ASSETS> 884,149,277
<PER-SHARE-NAV-BEGIN> 10.037
<PER-SHARE-NII> 0.652
<PER-SHARE-GAIN-APPREC> 0.037
<PER-SHARE-DIVIDEND> (0.640)
<PER-SHARE-DISTRIBUTIONS> (0.001)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.085
<EXPENSE-RATIO> 1.60
</TABLE>
