<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................................ 7
Portfolio Highlights............................. 8
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 17
Statement of Operations.......................... 18
Statement of Changes in Net Assets............... 19
Financial Highlights............................. 20
Notes to Financial Statements.................... 22
Report of Independent Accountants................ 26
Dividend Reinvestment Plan....................... 27
</TABLE>
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
<PAGE> 2
LETTER TO SHAREHOLDERS
January 20, 2000
Dear Shareholder:
As we enter a new century--and millennium--it seems appropriate to take a
look back at the progress that's been made over the last 100 years and how the
world of investing has changed over the generations. Although rapid advances in
technology and science have dramatically altered the world that we live in
today, one of the greatest shifts we've seen is the increasing importance of
investing for many Americans.
Once considered primarily for the wealthy, investing in the stock market is
now available to most people. In fact, almost 79 million individuals--who
represent almost half of all U.S. households--own stocks either directly or
through mutual funds. This is even more impressive when considering that just 16
years earlier, only 19 percent of households owned stocks. Another important
shift has been the need for retirement planning beyond a pension plan or Social
Security. The Investment Company Institute, the leading mutual fund industry
association, reports that 77 percent of all mutual fund shareholders earmarked
retirement as their primary financial goal in 1998.
Through all the changes in the investment environment over the past century,
the general principles that have made generations of investors successful remain
the same. Some that have stood the test of time include:
- INVESTING FOR THE LONG-TERM
- BASING INVESTMENT DECISIONS ON SOUND RESEARCH
- BUILDING A DIVERSIFIED PORTFOLIO
- BELIEVING IN THE VALUE OF PROFESSIONAL INVESTMENT ADVICE
While no one can predict the future, at Van Kampen we believe that these
ideas will remain important tenets for investors well into this century. As we
continue to focus on these principles, we hope that our decades of investment
experience can help bring you closer to your financial goals as we welcome the
new millennium.
Sincerely,
<TABLE>
<S> <C>
/s/ Richard F. Powers, III /s/ Dennis J. McDonnell
Richard F. Powers, III Dennis J. McDonnell
Chairman President
Van Kampen Investment Advisory Van Kampen Investment Advisory
Corp. Corp.
</TABLE>
1
<PAGE> 3
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
The nation's brisk rate of economic growth continued throughout 1999,
bringing the United States to the verge of its longest economic expansion on
record. High levels of consumer spending, a host of new jobs, and increasing
productivity kept the economy strong. Gross domestic product, the primary
measure of economic growth, increased 4.2 percent for the year, including an
impressive annualized rate of 5.7 percent for the third quarter and 5.8 percent
in the fourth quarter.
EMPLOYMENT
The job market remained vibrant throughout the year, with more than 2.7
million U.S. jobs created in 1999. In addition, unemployment dropped to 4.1
percent in October--its lowest rate in three decades. With jobs plentiful and
wages on the rise, most Americans were optimistic about the future. At the end
of the year the consumer confidence index hit its highest level since 1968.
Although wage pressures caused some concerns about the potential erosion of
corporate profits, productivity gains helped keep those concerns muted through
the end of the year.
INFLATION AND INTEREST RATES
Although the Consumer Price Index continued to reflect historically low
inflation--rising only 2.7 percent during 1999--concerns about future increases
in inflation were prevalent throughout the reporting period. The Federal Reserve
Board remained active in guarding against inflation and trying to temper
economic growth. The Fed reversed its three interest-rate cuts from the fall of
1998 by raising rates in June, August, and November 1999.
U.S. GROSS DOMESTIC PRODUCT
Seasonally Adjusted Annualized Rates
Third Quarter 1997 through Fourth Quarter 1999
[GRAPH]
<TABLE>
<CAPTION>
<S> <C>
97Q3 4
97Q4 3.1
98Q1 6.7
98Q2 2.1
98Q3 3.8
98Q4 5.9
99Q1 3.7
99Q2 1.9
99Q3 5.7
99Q4 5.8
</TABLE>
Source: Bureau of Economic Analysis
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1999
VAN KAMPEN HIGH INCOME TRUST II
(NYSE TICKER SYMBOL--VLT)
<TABLE>
<S> <C>
COMMON SHARE TOTAL RETURNS
One-year total return on market price(1)................... (25.28%)
One-year total return based on NAV(2)...................... (1.77%)
DISTRIBUTION RATE
Distribution rate as a % of closing common stock
price(3)................................................... 15.03%
SHARE VALUATIONS
Net asset value............................................ $ 6.56
Closing common stock price................................. $ 5.750
One-year high common stock price (01/19/99)................ $8.8125
One-year low common stock price (12/29/99)................. $5.6875
Preferred share rate(4).................................... 5.95%
</TABLE>
(1)Total return based on market price assumes an investment at the market price
at the beginning of the period indicated, reinvestment of all distributions for
the period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing stock price at the end of the period indicated.
(2)Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(3)Distribution rate represents the monthly annualized distributions of the
Trust at the end of the period and not the earnings of the Trust.
(4)See "Notes to Financial Statements" footnote #4, for more information
concerning Preferred Share reset periods.
Investing in high-yield, lower-rated securities involves certain risks, which
may include the potential for greater sensitivity to general economic downturns
and greater market price volatility.
Past performance does not guarantee future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust shares,
when sold, may be worth more or less than their original cost.
3
<PAGE> 5
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN HIGH INCOME TRUST II
We recently spoke with representatives of the adviser of the Van Kampen High
Income Trust II about the key events and economic forces that shaped the markets
during the past year. Peter Ehret, portfolio manager, has managed the Trust
since June 1, 1999, and worked in the investment industry since 1988. He is
joined by Peter W. Hegel, chief investment officer for fixed-income investments.
The following discussion reflects their views on the Trust's performance during
the one-year period ended December 31, 1999.
Q COULD YOU DESCRIBE THE CONDITIONS IN THE BOND MARKET DURING THE REPORTING
PERIOD?
A The high-yield market proved to be one of the best-performing sectors of
the domestic bond market during a poor year for fixed-income securities.
Rising interest rates and concerns about inflation from a thriving economy
caused the domestic fixed-income markets to decline significantly during 1999.
Because the high-yield market typically displays lower sensitivity to interest
rates than other areas of the fixed-income markets, high-yield securities were
able to outperform Treasury, mortgage, and investment-grade corporate bonds,
despite having a relatively poor year themselves.
Credit problems and excess supply were among the major issues weighing down
the high-yield market, and the Trust was not spared from erosion of market
value. Credit problems mounted significantly in 1999, and as perceptions of
credit risk increased, yields increased and bond values fell. Although the
number of bond issuers in financial distress or bankruptcy increased during
1999, the trend appeared to be leveling off by year-end. The high-yield market
as a whole seemed to be on the upswing by the end of the reporting period.
Excess supply was mitigated as investors' interest in this asset class
heightened, new bond issuance slowed, and the market grew more confident that
the date rollover to the year 2000 was not going to present serious computer
problems. The year closed on a high note, as November and December provided some
of the year's best returns.
Q WHAT SECTORS PERFORMED WELL IN THIS ENVIRONMENT?
A Once again, the telecommunications sector saw tremendous new issuance and
outperformed other sectors as the industry grew during the year. Various
portfolio constraints limit the Trust's ability to invest in this sector.
However, we were able to purchase some attractive telecommunications securities
throughout the year that contributed to performance. At the end of the reporting
period, telecommunications represented 10.5 percent of the portfolio's long-term
holdings.
Other top-performing sectors that benefited the Trust included gaming and
commodity-oriented sectors such as energy and paper. Commodities generally
experienced a turnaround during the year, with higher oil and paper prices
underpinning the recoveries. For additional portfolio highlights, please refer
to page 8.
4
<PAGE> 6
Q WILL YOU TRY TO INCREASE YOUR EXPOSURE TO TELECOMMUNICATIONS AND OTHER
SECTORS GOING FORWARD?
A Yes, as long as our research supports doing so. However, the Trust is
constrained in its telecommunications sector holdings because of the
quality and structure of many telecommunications issues. During 1999, we
achieved a policy change with the major credit-rating agencies that now allows a
broader range of issues to be introduced to the Trust. We are in the process of
taking advantage of this opportunity and expect to invest more in
telecommunications.
Q OTHER THAN SECTOR LIMITATIONS, WERE THERE ANY DISAPPOINTMENTS DURING THE
YEAR?
A As we mentioned earlier, the high-yield market saw an increase in credit
erosion in 1999. Some credit problems had a negative impact on the Trust
during the year, although these effects were partially mitigated by
diversification and credit selection. We were disappointed with some holdings in
the supermarket and food sectors, which are currently experiencing limited
growth despite the economic expansion. Some of these issues experienced credit
problems that negatively affected the Trust's total return, so we will be
closely monitoring these holdings in the coming months. We also experienced
significant deterioration in some chemical sector investments, although we saw
some recovery by year-end.
Q WHAT TECHNIQUES DID YOU USE TO MANAGE THE TRUST?
A We focused on increasing the portfolio's diversification throughout the
year. To accomplish this, we selectively reduced our holdings in the
chemicals sector and purchased bonds in smaller blocks to allow the
portfolio to participate in a wider range of sectors and issues, including
telecommunications. We also purchased some foreign securities during the year,
which benefited the Trust as emerging-market and European high-yield issues
outperformed the domestic market. In addition, we sold some of the bonds in the
portfolio that were valued at a premium to their face value and invested the
proceeds in a broader range of sectors and issues. In some instances, we used
the proceeds from the premium sales to purchase discount bonds.
To help cushion the Trust's net asset value in this volatile market, we
purchased bonds with shorter maturities and higher credit quality. We also
reduced risk potential by increasing the portfolio's sector and issue
diversification, which we believe will reduce the consequences of individual
credit failures.
Q HOW DID THE TRUST PERFORM DURING THE PERIOD?
A Total return performance was disappointing because of the general downturn
in bond prices and the Trust's limited participation in high-performing
sectors such as telecommunications. In addition, the Trust's leverage
component hurt its performance during the period. Although leverage helps the
Trust provide higher income levels
5
<PAGE> 7
to common shareholders, it made the portfolio more sensitive to the
interest-rate increases we experienced during the reporting period and magnified
the weak performance of the overall high-yield market. For the one-year period
ended December 31, 1999, the Trust returned -25.28 percent(1) based on market
price. This reflects a decrease in market price from $8.625 per share on
December 31, 1998, to $5.75 per share on December 31, 1999.
The Trust continued to provide shareholders with an attractive dividend,
although the dividend rate was decreased in June and November. The adjustments
can be attributed to a combination of credit problems, declining bond prices,
and an increase in short-term interest rates that increased the cost of leverage
for the Trust. The current monthly dividend of $0.072 per share translates to a
distribution rate of 15.03 percent(3) based on the Trust's closing market price
on December 31, 1999. Please refer to the chart and footnotes on page 3 for
additional performance results. Past performance does not guarantee future
results.
Q WHAT DO YOU SEE AHEAD FOR THE HIGH-YIELD MARKET AND THE TRUST?
A With year 2000 computer concerns largely behind us, we expect to see
increased issuance in the high-yield market. We plan to maximize our new
ability to invest in a greater range of issues and attractive sectors such
as telecommunications, and we will continue to reduce the Trust's exposure to
the chemical sector in line with our diversification efforts. Overall, we will
continue to apply our research-intensive selection process and evaluate bonds on
a case-by-case basis to find those that we believe can add the most value to the
portfolio.
6
<PAGE> 8
GLOSSARY OF TERMS
CREDIT RATING: An evaluation of an issuer's credit history and capability of
repaying obligations. Standard & Poor's and Moody's Investors Service are
two companies that assign bond ratings. Standard & Poor's ratings range from
a high of AAA to a low of D, while Moody's ratings range from a high of Aaa
to a low of C.
DISCOUNT BOND: A bond whose market price is lower than its face value (or "par
value"). Because bonds usually mature at face value, a discount bond has
more potential to appreciate in price than a par bond does.
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.
INFLATION: A persistent and measurable rise in the general level of prices.
Inflation is widely measured by the Consumer Price Index, an economic
indicator that measures the change in the cost of purchased goods and
services.
LEVERAGE: A process employed by the Trust that involves borrowing money at
short-term interest rates by issuing preferred shares. The proceeds are then
invested in longer-term bonds, which typically pay higher rates. The
difference between the long-term rates earned by the Trust and the
short-term rates paid on the preferred shares is passed along to
shareholders in the Trust's dividend. Common shareholders typically benefit
from leverage when short-term interest rates decline. However, a rise in
short-term rates would have a negative effect by raising the Trust's
borrowing costs and possibly affecting the dividend and price of common
shares.
PREMIUM BOND: A bond whose market price is above its face value (or "par
value"). Because bonds usually mature at face value, a premium bond has less
potential to appreciate in price than a par bond does.
7
<PAGE> 9
PORTFOLIO HIGHLIGHTS
VAN KAMPEN HIGH INCOME TRUST II
TOP FIVE PORTFOLIO INDUSTRIES*
[GRAPH]
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Telecommunications 10.5 14.6
Chemical 9.0 4.4
Printing, Publishing, & Broadcasting 8.6 8.3
Oil & Gas 7.7 8.1
Automobile 7.0 1.4
</TABLE>
* As a percentage of long-term investments
NET ASSET VALUE AND MARKET PRICE
(BASED UPON MONTH-END VALUES)
DECEMBER 1989 THROUGH DECEMBER 1999
[GRAPH]
<TABLE>
<CAPTION>
MARKET PRICE NET ASSET VALUE
------------ ---------------
<S> <C> <C>
Dec 1989 9.000 9.310
8.750 9.160
8.500 8.350
8.625 8.490
8.500 8.310
7.750 8.380
8.250 8.390
8.500 8.470
7.250 7.680
5.125 6.790
5.125 6.010
5.625 6.030
Dec 1990 5.250 5.900
5.250 5.910
5.250 5.980
6.000 6.560
6.500 6.950
7.000 7.200
6.750 7.140
6.875 7.310
7.000 7.450
7.125 7.500
7.375 7.590
7.750 7.770
7.375 7.700
Dec 1991 7.500 7.620
8.000 8.040
8.000 8.190
8.250 8.210
8.375 8.420
8.500 8.390
8.625 8.340
8.750 8.480
8.750 8.570
9.125 8.580
8.875 8.020
8.875 7.920
Dec 1992 9.375 7.920
9.500 8.170
9.875 8.390
9.750 8.610
9.875 8.580
9.625 8.550
10.125 8.840
10.250 8.840
10.500 8.760
10.250 8.740
10.500 8.910
10.000 8.910
Dec 1993 9.750 8.980
10.375 9.120
10.625 9.050
9.875 8.490
9.875 8.250
9.750 8.190
9.760 8.120
9.500 7.950
9.375 7.840
8.875 7.750
8.625 7.590
8.250 7.270
Dec 1994 7.500 7.320
7.625 7.370
8.000 7.620
8.250 7.670
8.125 7.870
8.375 8.030
8.625 7.970
8.500 8.070
8.750 8.010
8.625 8.030
9.000 8.060
8.750 8.040
Dec 1995 8.750 8.120
9.125 8.250
9.000 8.230
8.875 8.090
9.000 8.040
8.875 8.010
8.750 7.940
8.750 7.900
9.000 7.990
9.125 8.120
9.125 8.130
9.375 8.240
Dec 1996 9.375 8.310
9.375 8.300
9.625 8.400
9.375 8.130
9.125 8.110
9.500 8.270
9.813 8.320
10.000 8.440
10.000 8.380
10.063 8.470
9.938 8.380
10.188 8.400
Dec 1997 9.813 8.440
10.125 8.540
10.375 8.480
10.000 8.500
9.625 8.450
9.813 8.410
9.563 8.380
9.563 8.390
7.813 7.740
8.500 7.640
8.750 7.320
9.188 7.740
Dec 1998 8.625 7.590
8.750 7.600
8.625 7.340
8.438 7.370
8.000 7.400
8.125 7.230
8.313 7.090
8.125 6.980
7.625 6.820
7.188 6.650
7.000 6.460
7.125 6.510
Dec 1999 5.750 6.560
</TABLE>
The solid line above represents the Trust's net asset value (NAV), which
indicates overall changes in value among the Trust's underlying securities. The
Trust's market price is represented by the dashed line, which indicates the
price the market is willing to pay for shares of the Trust at a given time.
Market price is influenced by a range of factors, including supply and demand
and market conditions.
8
<PAGE> 10
PORTFOLIO HIGHLIGHTS (CONTINUED)
VAN KAMPEN HIGH INCOME TRUST II
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM DEBT SECURITIES
AS OF DECEMBER 31, 1999
[PIE CHART]
<TABLE>
<CAPTION>
BBB/BAA BB/BA B/B CCC/CAA AND BELOW
------- ----- --- -----------------
<S> <C> <C> <C> <C>
As of December 31, 1999 4.6 36.5 54.6 4.3
</TABLE>
AS OF DECEMBER 31, 1998
[PIE CHART]
<TABLE>
<CAPTION>
A/A TO CCC/CAA AND
AAA/AAA BBB/BAA BB/BA B/B BELOW
------- ------- ----- --- -----------
<S> <C> <C> <C> <C> <C>
As of December 31, 1998 2.7 7.5 33.3 54.7 0.3
<CAPTION>
NON-RATED
---------
<S> <C>
As of December 31, 1998 1.5
</TABLE>
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's, respectively.
DIVIDEND HISTORY
FOR THE PERIOD ENDED DECEMBER 31, 1999
[BAR GRAPH]
<TABLE>
<CAPTION>
MONTHLY DIVIDEND
----------------
<S> <C>
Jan 1999 0.0765
Feb 1999 0.0765
Mar 1999 0.0765
Apr 1999 0.0765
May 1999 0.0765
Jun 1999 0.0745
Jul 1999 0.0745
Aug 1999 0.0745
Sep 1999 0.0745
Oct 1999 0.0745
Nov 1999 0.0720
Dec 1999 0.0720
</TABLE>
The dividend history represents past performance of the Trust and does not
predict the Trust's future distributions.
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS 92.3%
AEROSPACE & DEFENSE 2.4%
$1,350 Dyncorp............................... 9.500% 03/01/07 $ 1,181,250
1,175 Sequa Corp............................ 9.000 08/01/09 1,139,750
-----------
2,321,000
-----------
AUTOMOBILE 6.4%
1,150 Aetna Industries, Inc................. 11.875 10/01/06 1,178,750
225 Cambridge Industries, Inc............. 10.250 07/15/07 95,625
1,935 JPS Automotive Products Corp.......... 11.125 06/15/01 1,944,675
2,250 Lear Seating Corp..................... 8.250 02/01/02 2,227,500
290 Venture Holdings, Inc................. 9.500 07/01/05 259,550
700 Venture Holdings, Inc................. 12.000 06/01/09 626,500
-----------
6,332,600
-----------
BEVERAGE, FOOD & TOBACCO 3.7%
450 Canandaigua Brands, Inc............... 8.625 08/01/06 449,437
755 Chiquita Brands International,
Inc................................... 10.000 06/15/09 551,150
900 Coca Cola Femsa S.A. (Mexico)......... 8.950 11/01/06 902,250
425 National Wine & Spirits, Inc.......... 10.125 01/15/09 434,563
1,300 Pepsi Gemex S.A. (Mexico)............. 9.750 03/30/04 1,248,000
-----------
3,585,400
-----------
BUILDINGS & REAL ESTATE 1.3%
225 Engle Homes, Inc...................... 9.250 02/01/08 204,750
433 Intrawest Corp........................ 9.750 08/15/08 426,505
675 Webb (Del E.) Corp.................... 10.250 02/15/10 651,375
-----------
1,282,630
-----------
CHEMICAL 8.3%
800 Acetex Corp. (Canada)................. 9.750 10/01/03 732,000
1,760 Agriculture Minerals & Chemicals,
Inc................................... 10.750 09/30/03 1,249,600
540 American Pacific Corp................. 9.250 03/01/05 545,400
890 Equistar Chemicals L.P................ 8.500 02/15/04 888,888
2,272 Huntsman Polymers Corp................ 11.750 12/01/04 2,385,600
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHEMICAL (CONTINUED)
$1,129 ISP Holdings, Inc..................... 9.750% 02/15/02 $ 1,137,467
1,500 Pioneer Americas Acquisition Corp..... 9.250 06/15/07 1,200,000
-----------
8,138,955
-----------
CONTAINERS, PACKAGING & GLASS 5.0%
700 Fonda Group, Inc...................... 9.500 03/01/07 589,750
870 Printpack, Inc........................ 10.625 08/15/06 839,550
1,100 Radnor Holdings, Inc.................. 10.000 12/01/03 1,105,500
950 S.D. Warren Co........................ 12.000 12/15/04 997,500
1,420 Sweetheart Cup, Inc................... 9.625 09/01/00 1,412,900
-----------
4,945,200
-----------
DIVERSIFIED/CONGLOMERATE
MANUFACTURING 0.9%
1,050 Communications & Power Industries,
Inc................................... 12.000 08/01/05 874,125
-----------
ELECTRONICS 1.6%
1,575 Advanced Micro Devices, Inc........... 11.000 08/01/03 1,567,125
1,050 DecisionOne Corp. (c)................. 9.750 08/01/07 9,188
-----------
1,576,313
-----------
FINANCE 4.7%
1,650 Americredit Corp...................... 9.250 02/01/04 1,662,375
1,000 Contifinancial Corp................... 8.375 08/15/03 110,000
450 Port Arthur Finance Corp., 144A
Private Placement (b)................. 12.500 01/15/09 456,750
2,500 Vicap S.A. (Mexico)................... 10.250 05/15/02 2,418,750
-----------
4,647,875
-----------
GROCERY 4.0%
895 Disco S.A. (Argentina)................ 9.125 05/15/03 816,688
150 Fleming Cos., Inc..................... 10.625 12/15/01 151,500
1,100 Fleming Cos., Inc..................... 10.500 12/01/04 1,014,750
1,180 Jitney Jungle Stores America, Inc.
(c)................................... 12.000 03/01/06 289,100
1,340 Pantry, Inc........................... 10.250 10/15/07 1,306,500
425 Pathmark Stores, Inc.................. 9.625 05/01/03 320,875
-----------
3,899,413
-----------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HEALTHCARE 3.3%
$ 450 Fisher Scientific International,
Inc................................... 7.125% 12/15/05 $ 403,875
1,050 Fresenius Medical Care Capital
Trust................................. 9.000 12/01/06 1,034,250
430 Health South Rehab Corp............... 9.500 04/01/01 417,100
520 Iasis Healthcare Corp., 144A Private
Placement (b)......................... 13.000 10/15/09 536,900
900 Tenet Healthcare Corp................. 8.625 01/15/07 870,750
-----------
3,262,875
-----------
HOTEL, MOTEL, INNS & GAMING 4.1%
195 Agrosy Gaming Co...................... 10.750 06/01/09 205,725
460 Booth Creek Ski Holdings, Inc......... 12.500 03/15/07 333,500
652 Boyd Gaming Corp...................... 9.250 10/01/03 655,260
675 Casino Magic Louisiana Corp........... 13.000 08/15/03 747,562
195 Hollywood Casino Shreveport, 144A
Private Placement (b)................. 13.000 08/01/06 210,600
325 Majestic Star Casino LLC.............. 10.875 07/01/06 316,063
1,100 Mohegan Tribal Gaming Authority....... 8.125 01/01/06 1,072,500
440 Park Place Entertainment.............. 8.500 11/15/06 438,900
-----------
3,980,110
-----------
LEISURE 2.3%
2,100 Selmer Co., Inc....................... 11.000 05/15/05 2,215,500
-----------
MINING, STEEL, IRON & NON-PRECIOUS
METAL 4.0%
900 GS Technologies Operating, Inc........ 12.250 10/01/05 414,000
175 Kaiser Aluminum & Chemical, Inc....... 9.875 02/15/02 175,875
870 Kaiser Aluminum & Chemical, Inc....... 10.875 10/15/06 880,875
250 Renco Steel Holdings, Inc............. 10.875 02/01/05 218,750
2,150 WCI Steel, Inc........................ 10.000 12/01/04 2,198,375
-----------
3,887,875
-----------
OIL & GAS 7.1%
1,200 Benton Oil & Gas, Inc................. 11.625 05/01/03 870,000
235 Chesapeake Energy Corp................ 9.625 05/01/05 222,663
800 Frontier Oil Corp..................... 11.750 11/15/09 789,000
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OIL & GAS (CONTINUED)
$1,053 Giant Industries, Inc................. 9.750% 11/15/03 $ 1,029,307
1,125 Giant Industries, Inc................. 9.000 09/01/07 1,046,250
1,760 KCS Energy, Inc. (c).................. 11.000 01/15/03 1,364,000
425 Petroleos Mexicanos Pemex (Mexico) ... 8.799 01/15/00 418,115
800 Pride Petroleum Services, Inc......... 9.375 05/01/07 806,000
700 Universal Compression, Inc. (a) ...... 0/9.875 02/15/08 437,500
-----------
6,982,835
-----------
PAPER 1.3%
1,320 Repap New Brunswick, Inc.............. 9.000 06/01/04 1,287,000
-----------
PRINTING, PUBLISHING &
BROADCASTING 7.9%
450 Adelphia Communications Corp.......... 9.250 10/01/02 454,500
150 Classic Cable, Inc.................... 9.375 08/01/09 145,500
900 CSC Holdings, Inc..................... 10.500 05/15/16 999,000
900 Grupo Televisa, Inc., S.A.
(Mexico) ............................. 11.375 05/15/03 960,750
900 Grupo Televisa, Inc., S.A.
(Mexico) ............................. 11.875 05/15/06 960,750
850 International Cabletel, Inc. (a) ..... 0/12.750 04/15/05 858,500
400 International Cabletel, Inc. (a) ..... 0/11.500 02/01/06 366,000
505 James Cable Partners L.P.............. 10.750 08/15/04 508,787
1,100 K-III Communications Corp............. 10.250 06/01/04 1,146,750
550 Northland Cable Television, Inc....... 10.250 11/15/07 554,125
800 Young Broadcasting, Inc............... 11.750 11/15/04 840,000
-----------
7,794,662
-----------
PRODUCER MANUFACTURING 3.9%
150 Associated Materials, Inc............. 9.250 03/01/08 147,750
500 Carpenter W.R., Inc................... 10.625 06/15/07 287,500
750 Cemex S. A., 144A Private Placement
(Mexico) (b) ......................... 9.250 06/17/02 765,000
420 Federal Mogul Corp.................... 7.500 07/01/04 398,475
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRODUCER MANUFACTURING (CONTINUED)
$ 210 Juno Lighting, Inc.................... 11.875% 07/01/09 $ 196,350
650 Numatics, Inc......................... 9.625 04/01/08 490,750
1,450 Ucar Global Enterprises, Inc.......... 12.000 01/15/05 1,526,125
-----------
3,811,950
-----------
RETAIL 2.3%
200 Big 5 Corp............................ 10.875 11/15/07 198,000
500 Community Distributors, Inc........... 10.250 10/15/04 427,500
500 Hosiery Corp. of America, Inc. ....... 13.750 08/01/02 522,500
430 K Mart Corp........................... 8.375 12/01/04 428,925
50 Musicland Group, Inc.................. 9.000 06/15/03 47,750
675 Musicland Group, Inc.................. 9.875 03/15/08 610,875
-----------
2,235,550
-----------
TELECOMMUNICATIONS 9.5%
375 Airgate PCS, Inc...................... * 10/01/09 247,500
160 Airgate PCS, Inc...................... * 10/01/09 91,200
1,020 Capstar Broadcasting Partners ........ 9.250 07/01/07 1,060,800
950 EZ Communications, Inc................ 9.750 12/01/05 1,002,250
575 Global Crossing Holdings Limited, 144A
Private Placement (b)................. 9.125 11/15/06 570,687
200 Globenet Communications Group Ltd.,
144A Private Placement
(Bermuda) (b)......................... 13.000 07/15/07 205,000
950 Gray Communications Systems, Inc...... 10.625 10/01/06 983,250
400 Intermedia Communications of Florida,
Inc................................... 13.500 06/01/05 452,000
150 Intermedia Communications, Inc........ 8.875 11/01/07 141,000
940 Intermedia Communications, Inc........ 8.600 06/01/08 871,850
435 IXC Communications, Inc............... 9.000 04/15/08 439,894
900 McLeod USA, Inc....................... 8.375 03/15/08 859,500
300 Metromedia Fiber Network, Inc......... 10.000 12/15/09 309,000
420 Nextlink Communications, Inc., 144A
Private Placement (b) ................ 10.500 12/01/09 428,400
930 Pegasus Communications Corp........... 9.625 10/15/05 925,350
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
$ 150 Philippine Long Distance Telephone
(Philippines)......................... 10.500% 04/15/09 $ 150,375
250 Telefonica De Argentina S.A., 144A
Private Placement (Argentina) (b) .... 9.875 07/01/02 249,375
310 Voicestream Wire ..................... 10.375 11/15/09 320,075
-----------
9,307,506
-----------
TECHNOLOGY 0.5%
275 PSINet, Inc. ......................... 10.000 02/15/05 272,937
250 Williams Communications Corp. ........ 10.700 10/01/07 262,188
-----------
535,125
-----------
TEXTILES 2.3%
1,315 Dan River, Inc. ...................... 10.125 12/15/03 1,328,150
1,575 Pillowtex Corp. ...................... 10.000 11/15/06 732,375
450 Scovill Fasteners, Inc. .............. 11.250 11/30/07 213,750
-----------
2,274,275
-----------
TRANSPORTATION 3.9%
435 Cenargo International PLC (United
Kingdom) ............................. 9.750 06/15/08 364,313
975 Continental Airlines, Inc. ........... 9.500 12/15/01 989,625
930 Greyhound Lines, Inc. ................ 11.500 04/15/07 1,050,900
675 International Shipholding Corp. ...... 9.000 07/01/03 658,125
433 Northwest Airlines Corp. ............. 8.375 03/15/04 411,891
430 Stena AB (Sweden) .................... 10.500 12/15/05 395,600
-----------
3,870,454
-----------
UTILITIES 1.6%
1,100 AES Corp. ............................ 9.500 06/01/09 1,113,750
90 Midland Cogeneration Venture ......... 10.330 07/23/02 93,672
800 National Energy Group, Inc. (c) ...... 10.750 11/01/06 384,000
-----------
1,591,422
-----------
TOTAL CORPORATE BONDS 92.3%........................................... 90,640,650
-----------
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Market Value
- ---------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
EQUITIES 0.2%
Hosiery Corp. of America, Inc., (500 common shares) 144A Private
Placement (b)........................................................ $ 20,250
Intermedia Communications of Florida, Inc., (400 common stock warrants)
144A Private Placement (b)........................................... 58,486
NTL, Inc., (1,188 common stock warrants) 144A Private Placement (b).... 157,907
Star Gas Partners L.P. (220 limited partnership units)................. 2,915
Urohealth Systems, Inc., (525 common stock warrants) 144A Private
Placement (b)........................................................ 5
-----------
TOTAL EQUITIES......................................................... 239,563
-----------
TOTAL LONG-TERM INVESTMENTS 92.5%
(Cost $100,093,881).................................................. 90,880,213
REPURCHASE AGREEMENT 5.8%
State Street Bank and Trust, (Collateralized by U.S. Treasury Bond,
$5,035,000 par, 7.875% coupon, due 02/15/21, dated 12/31/99, to be sold
on 01/03/00 at $5,666,534) (Cost $5,665,000)........................... 5,665,000
-----------
TOTAL INVESTMENTS 98.3%
(Cost $105,758,881).................................................. 96,545,213
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%............................ 1,658,076
-----------
NET ASSETS 100.0%..................................................... $98,203,289
===========
</TABLE>
* Zero coupon bond
(a) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(b) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(c) Non-income producing security.
See Notes to Financial Statements
16
<PAGE> 18
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $105,758,881)....................... $96,545,213
Cash........................................................ 945
Interest Receivable......................................... 2,158,641
Other....................................................... 7,066
-----------
Total Assets.......................................... 98,711,865
-----------
LIABILITIES:
Payables:
Income Distributions - Common and Preferred Shares........ 168,994
Investment Advisory Fee................................... 62,320
Affiliates................................................ 12,990
Accrued Expenses............................................ 155,600
Trustees' Deferred Compensation and Retirement Plans........ 108,672
-----------
Total Liabilities..................................... 508,576
-----------
NET ASSETS.................................................. $98,203,289
===========
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, 100,000,000 shares
authorized, 1,800 outstanding with liquidation preference
of $25,000 per share)..................................... $45,000,000
-----------
Common Shares ($.01 par value with an unlimited number of
shares authorized,
8,109,000 shares issued and outstanding).................. 81,090
Paid in Surplus............................................. 68,364,379
Accumulated Distributions in Excess of Net Investment
Income.................................................... (358,543)
Accumulated Net Realized Loss............................... (5,669,969)
Net Unrealized Depreciation................................. (9,213,668)
-----------
Net Assets Applicable to Common Shares................ 53,203,289
-----------
NET ASSETS.................................................. $98,203,289
===========
NET ASSET VALUE PER COMMON SHARE ($53,203,289 divided by
8,109,000 shares outstanding)............................. $ 6.56
===========
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $10,087,190
Other....................................................... 307,484
-----------
Total Income.......................................... 10,394,674
-----------
EXPENSES:
Investment Advisory Fee..................................... 764,958
Preferred Share Maintenance................................. 119,264
Trustees' Fees and Related Expenses......................... 22,254
Custody..................................................... 12,775
Legal....................................................... 10,448
Other....................................................... 194,936
-----------
Total Expenses........................................ 1,124,635
-----------
NET INVESTMENT INCOME....................................... $ 9,270,039
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(2,589,717)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (3,670,167)
End of the Period......................................... (9,213,668)
-----------
Net Unrealized Depreciation During the Period............... (5,543,501)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $(8,133,218)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 1,136,821
===========
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.......................... $ 9,270,039 $ 9,580,076
Net Realized Gain/Loss......................... (2,589,717) 219,158
Net Unrealized Depreciation During the
Period....................................... (5,543,501) (6,422,414)
----------- -----------
Change in Net Assets from Operations........... 1,136,821 3,376,820
----------- -----------
Distributions from and in Excess of Net
Investment Income:
Common Shares................................ (7,289,187) (7,783,535)
Preferred Shares............................. (2,220,961) (2,430,458)
----------- -----------
Total Distributions............................ (9,510,148) (10,213,993)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES................................... (8,373,327) (6,837,173)
NET ASSETS:
Beginning of the Period........................ 106,576,616 113,413,789
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
($358,543) and $165,091, respectively)....... $98,203,289 $106,576,616
=========== ===========
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period (a)........................ $ 7.594 $8.437 $ 8.307 $8.117 $7.320
------- ------ ------- ------ ------
Net Investment Income............. 1.144 1.182 1.202 1.228 1.273
Net Realized and Unrealized
Gain/Loss....................... (1.004) (.765) .179 .214 .806
------- ------ ------- ------ ------
Total from Investment Operations.... .140 .417 1.381 1.442 2.079
------- ------ ------- ------ ------
Less:
Distributions from and in Excess
of Net Investment Income:
Paid to Common Shareholders..... .899 .960 .960 .960 .960
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders........ .274 .300 .291 .292 .322
Return of Capital Paid to Common
Shareholders.................... -0- -0- -0- -0- -0-
------- ------ ------- ------ ------
Total Distributions................. 1.173 1.260 1.251 1.252 1.282
------- ------ ------- ------ ------
Net Asset Value, End of the
Period............................ $ 6.561 $7.594 $ 8.437 $8.307 $8.117
======= ====== ======= ====== ======
Market Price Per Share at End of the
Period............................ $ 5.750 $8.625 $9.8125 $9.375 $8.750
Total Investment Return at Market
Price (b)......................... (25.28%) (2.73%) 15.34% 18.91% 30.33%
Total Return at Net Asset
Value (c)......................... (1.77%) 1.22% 13.90% 15.15% 25.19%
Net Assets at End of the Period (In
millions)......................... $ 98.2 $106.6 $ 113.4 $112.4 $110.8
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares**.......................... 1.97% 1.92% 1.83% 1.89% 1.96%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares (d)................. 12.41% 10.85% 10.93% 11.58% 12.09%
Portfolio Turnover.................. 56% 65% 98% 94% 124%
** Ratio of Expenses to Average Net
Assets Including Preferred
Shares........................... 1.10% 1.14% 1.10% 1.12% 1.15%
</TABLE>
(a) Net asset value at December 31, 1991 of $7.619 is adjusted for redemption
costs associated with the 9.5% cumulative preferred shares and offering
costs associated with the auction preferred shares of $.332 per share.
(b) Total Investment Return at Market Price reflects the change in market value
of the common shares for the period indicated with reinvestment of dividends
in accordance with the Trust's dividend reinvestment plan.
(c) Total Return at Net Asset Value (NAV) reflects the change in value of the
Trust's assets with reinvestment of dividends based upon NAV.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
20
<PAGE> 22
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------
1994 1993 1992 1991 1990
- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
8.982 $7.916 $7.287 $5.884 $9.307
$
------ ------ ------ ------ ------
1.283 1.422 1.691 1.512 1.908
(1.530) 1.021 .415 1.686 (3.410)
------ ------ ------ ------ ------
(.247) 2.443 2.106 3.198 (1.502)
------ ------ ------ ------ ------
1.180 1.200 .975 .920 1.238
.177 .502 .543 .666
.235
-0- -0- -0- .017
-0-
------ ------ ------ ------ ------
1.415 1.377 1.477 1.463 1.921
------ ------ ------ ------ ------
$7.320 $8.982 $7.916 $7.619 $5.884
====== ====== ====== ====== ======
$7.500 $9.750 $9.375 $7.500 $5.250
(12.94%) 17.01% 39.58% 62.27% (30.57%)
(5.70%) 30.08% 16.92% 46.26% (24.92%)
104.4 $117.8 $109.2 $108.2 $ 94.1
$
1.72% 1.73% 2.73% 2.12%
1.97%
14.41% 14.49% 13.59% 15.99%
12.87%
125% 140% 145% 97% 65%
1.17% 1.05% 1.02% 1.52% 1.11%
</TABLE>
See Notes to Financial Statements.
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen High Income Trust II (the "Trust") is registered as a diversified
closed-end management investment company under the Investment Company Act of
1940, as amended. The Trust's investment objective is to provide high current
income, consistent with preservation of capital, by investing in a portfolio of
medium or lower grade fixed-income securities, or non-rated securities of
comparable quality. As of April 1, 1999, through a resolution approved by the
Board of Trustees, the Trust may invest up to 35 percent of its total assets in
securities of foreign issuers. The Trust commenced investment operations on
April 28, 1989.
The following is a summary of significant accounting policies consistently
followed by the Trust 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--Investments are stated at value using market quotations
or indications of value obtained from an independent pricing service. For those
securities where quotations or prices are not available, valuations are obtained
from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Trustees. Short-term securities with remaining maturities of 60 days or
less are valued at amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Trust may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Trust will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1999, there were no
when issued or delayed delivery purchase commitments.
The Trust may invest in repurchase agreements, which are short-term
investments in which the Trust acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
Repurchase agreements are fully collateralized by the underlying debt security.
The Trust will make payment for such
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
securities only upon physical delivery or evidence of book entry transfer to the
account of the custodian bank. The seller is required to maintain the value of
the underlying security at not less than the repurchase proceeds due the Trust.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Bond
discounts are amortized over the expected life of each applicable security.
D. FEDERAL INCOME TAXES--It is the Trust'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.
The Trust intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1999, the Trust had an accumulated capital loss
carryforward for tax purposes of $5,348,493 which expires between December 31,
2002 and December 31, 2007. Net realized gains or losses may differ for
financial reporting and tax purposes as a result of the deferral of losses
relating to wash sale transactions and post-October losses which may not be
recognized for tax purposes until the first day of the following fiscal year.
At December 31, 1999, for federal income tax purposes, cost for long- and
short-term investments is $105,776,414, the aggregate gross unrealized
appreciation is $728,361 and the aggregate gross unrealized depreciation is
$9,959,562, resulting in net unrealized depreciation on long- and short-term
investments of $9,231,201.
E. DISTRIBUTION OF INCOME AND GAINS--The Trust declares and pays monthly
dividends from net investment income to common shareholders. Net realized gains,
if any, are distributed annually to common shareholders.
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 $11,048,002 relating to a portion of the
capital loss carryforward that expired during the period was reclassified from
accumulated net realized loss to capital and $283,525 relating to fee income was
reclassified from accumulated distributions in excess of net investment income
to accumulated net realized loss.
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Trust for an annual fee payable monthly of .75% of the average
net assets of the Trust.
For the year ended December 31, 1999, the Fund recognized expenses of
approximately $4,700 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.
For the year ended December 31, 1999, the Trust recognized expenses of
approximately $58,000 representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Trust.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
officers of Van Kampen.
The Trust 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 Trust. The maximum
annual benefit per trustee under the plan is $2,500.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments were $53,787,347 and $53,394,372, respectively.
4. AUCTION PREFERRED SHARES
Effective with the close of business on April 23, 1999, the liquidation
preference on the Trust's preferred shares decreased from $50,000 to $25,000 per
share. This decrease was effected by means of a 2 for 1 stock split that doubled
the Trust's number of outstanding preferred shares. The total liquidation value
for the Trust was unchanged.
As of December 31, 1999, the trust has outstanding 1,800 Auction Preferred
Shares ("APS"). Dividends are cumulative and the dividend rate is currently
reset every 28 days through an auction process. The rate in effect on December
31, 1999, was 5.95%. During the year ended December 31, 1999, the rates ranged
from 4.55% to 5.95%.
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense.
The APS are redeemable at the option of the Trust in whole or in part at the
liquidation value of $25,000 per share plus accumulated and unpaid dividends.
The Trust is subject to certain asset coverage tests and the APS are subject to
mandatory redemption if the tests are not met.
25
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen High Income Trust II:
We have audited the accompanying statement of assets and liabilities of Van
Kampen High Income Trust II (the "Trust"), including the portfolio of
investments, as of December 31, 1999, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and 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
December 31, 1999, by correspondence with the custodian. 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 High Income Trust II as of December 31, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.
KPMG LLP
Chicago, Illinois
February 4, 2000
26
<PAGE> 28
DIVIDEND REINVESTMENT PLAN
The Trust offers a Dividend Reinvestment Plan (the "Plan") pursuant to which
Common Shareholders who are participants in the Plan may have all distributions
of dividends and capital gains automatically reinvested in Common Shares of the
Trust. All Common Shareholders are deemed to be participants in the Plan unless
they specifically elect not to participate. Common Shareholders who elect not to
participate in the Plan will receive all distributions of dividends and capital
gains in cash paid by check mailed directly to the Common Shareholder by the
Trust's dividend disbursing agent.
HOW THE PLAN WORKS
State Street Bank and Trust Company, as your Plan Agent, serves as agent for the
Common Shareholders in administering the Plan. After the Trust declares a
dividend or determines to make a capital gains distribution, the Plan Agent
will, as agent for the participants, receive the cash payment and use it to buy
Common Shares in the open market, on the New York Stock Exchange or elsewhere,
for the participants' accounts. The Trust will not issue any new Common Shares
in connection with the Plan. All reinvestments are in full and fractional Common
Shares, carried to three decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid subsequent to written
notice of the change sent to all Common Shareholders of the Trust at least 90
days before the record date for the dividend or distribution. The Plan also may
be amended or terminated by the Plan Agent, with the written consent of the
Trust, by providing at least 90 days written notice to all Participants in the
Plan.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to help
you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
RIGHT TO WITHDRAW
All Common Shareholders of the Trust are deemed to be participants in the Plan
unless they specifically elect not to participate. You may withdraw from the
Plan at any time by calling 1-800-341-2929 or by writing State Street Bank and
Trust Company. If you withdraw, you will receive, without charge, a share
certificate issued in your name for all full Common Shares credited to your
account under the Plan, and a cash payment will be made for any fractional
Common Share credited to your account under the Plan. You may again elect to
participate in the Plan at any time by calling 1-800-341-2929 or writing to the
Trust at:
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056,
27
<PAGE> 29
VAN KAMPEN HIGH INCOME TRUST II
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*
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
PETER W. HEGEL*
MICHAEL H. 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
CUSTODIAN AND TRANSFER AGENT
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 Trust, as defined in
the Investment Company Act of 1940.
(C) Van Kampen Funds Inc., 2000 All rights reserved.
(SM) denotes a service mark of
Van Kampen Funds Inc.
28
<PAGE> 30
YEAR 2000 UPDATE
As we enter the new century, it's "business as usual" for Van Kampen. Thank you
for the confidence you showed in us during the changeover on January 1, 2000,
and for entrusting us with your investment portfolio. We look forward to
continuing to serve your investment needs.
