<PAGE> 1
<TABLE>
<S> <C>
Table of Contents
OVERVIEW
LETTER TO SHAREHOLDERS 1
ECONOMIC SNAPSHOT 2
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS 4
PORTFOLIO AT A GLANCE
CREDIT QUALITY 5
SIX-MONTH DIVIDEND HISTORY 5
TOP FIVE SECTORS 6
NET ASSET VALUE AND MARKET PRICE 6
Q&A WITH YOUR PORTFOLIO MANAGERS 7
GLOSSARY OF TERMS 11
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS 12
FINANCIAL STATEMENTS 19
NOTES TO FINANCIAL STATEMENTS 24
VAN KAMPEN FUNDS
THE VAN KAMPEN FAMILY OF FUNDS 27
TRUST OFFICERS AND IMPORTANT ADDRESSES 28
RESULTS OF SHAREHOLDER VOTES 29
</TABLE>
It is times like these when money- management experience may make a difference.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE> 2
OVERVIEW
LETTER TO SHAREHOLDERS
July 20, 2000
Dear Shareholder,
Whether you have held your trust for years or just joined the Van Kampen family
of shareholders in the last few months, you are likely to have questions and
even some concerns about how recent market volatility has affected your
investment. I encourage you to review the following Q&A in which your portfolio
manager provides an update on how your trust is being managed in this
environment.
It is times like these when money-management experience may make a difference.
Toward that end, you should know that Van Kampen is one of the nation's oldest
investment-management firms, with a history of money management dating back to
1926. Our portfolio managers have invested in all types of market
conditions--during bull and bear markets, periods of inflation and rising
interest rates, and now a technology revolution. We have managed money long
enough to understand short-term
market volatility and the value of investing for the long
term.
As we move through the second half of 2000, count on us to
continue to draw on the wisdom of our 74 years of experience.
Along those lines, Van Kampen's "Generations of Experience" is the theme of a
national advertising campaign that we recently kicked off. The message
emphasizes our depth of investment-management history, as well as our firm
belief that with the right investments, anyone can realize life's true wealth.
Sincerely,
[SIG]
Richard F. Powers, III
President and CEO
Van Kampen Investments
1
<PAGE> 3
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
BEGINNING IN THE SECOND QUARTER OF 2000, EVIDENCE OF SLOWER ECONOMIC GROWTH IN
THE UNITED STATES EMERGED. HOWEVER, ANALYSTS BELIEVE IT MAY HAVE BEEN PREMATURE
TO ASSUME THAT THE U.S. ECONOMY HAS SLOWED TO A SUSTAINABLE, NONINFLATIONARY
PACE, WITH THE GROSS DOMESTIC PRODUCT (GDP), A MEASURE OF ECONOMIC GROWTH, UP
5.2 PERCENT ANNUALIZED IN THE SECOND QUARTER OF 2000.
CONSUMER SPENDING AND EMPLOYMENT
CONSUMER SPENDING REMAINED THE MAIN ENGINE OF GROWTH BEHIND THE U.S. ECONOMY.
LIVING STANDARDS AND SPENDING HABITS WERE BOOSTED BY STRONG GAINS IN REAL
INCOME, AND INDIVIDUAL WEALTH INCREASED SUBSTANTIALLY, PRIMARILY DUE TO A
BUOYANT STOCK MARKET. NONETHELESS, DATA RELEASED IN THE SECOND QUARTER OF 2000
REFLECTED A MINOR DECREASE IN THE SPENDING OF INDIVIDUALS. IN JUNE, THE CONSUMER
PRICE INDEX (CPI), THE LEADING INFLATION INDICATOR, ROSE HIGHER THAN
EXPECTED--0.6 PERCENT MORE THAN THE PREVIOUS MONTH. THAT HEIGHTENED CONCERNS
ABOUT INFLATION, AND THE PROSPECT OF ADDITIONAL FEDERAL RESERVE BOARD
INTEREST-RATE INCREASES.
THE U.S. LABOR MARKET WAS STILL ROBUST DURING THIS TIME, AND JOB INSECURITY
CONTINUED TO DECLINE. SOLID EMPLOYMENT GROWTH WAS ACCOMPANIED BY UNUSUALLY LARGE
GAINS IN PRODUCTIVITY, WHICH LIMITED THE RISE IN UNIT LABOR COSTS ACROSS THE
WHOLE ECONOMY. GIVEN THE HIGH EMPLOYMENT NUMBERS AND STRONG LEVELS OF
PRODUCTIVITY, ANALYSTS BELIEVE AN INCREASE IN INTEREST RATES TO WARD OFF
INFLATION AND FURTHER SLOW THE ECONOMY IS POSSIBLE.
INTEREST RATES AND INFLATION
DURING THE PAST FEW MONTHS, PERSISTENT STRENGTH IN CONSUMER SPENDING ACCOMPANIED
BY A VERY TIGHT LABOR MARKET, RESULTED IN SOME INFLATION. THE CPI REACHED A
LEVEL OF 2.7 PERCENT IN JANUARY 2000 AND 3.7 PERCENT IN JUNE 2000, CLEARLY
DEMONSTRATING SIGNS OF INFLATION.
SINCE JUNE 1999, THE FEDERAL RESERVE HAS INCREASED THE FEDERAL FUNDS RATE SIX
TIMES BY A TOTAL OF 175 BASIS POINTS TO LOWER ECONOMIC GROWTH AND DECREASE ANY
FUTURE FEARS OF INFLATION. THESE INCREASES IN INTEREST RATES HELPED SLOW THE
INTEREST-SENSITIVE AUTO AND HOUSING MARKETS.
MANY OBSERVERS BELIEVE INTEREST RATES COULD BE LIFTED FURTHER IN COMING MONTHS.
WHILE MARKETS HAVE EXPERIENCED MUCH SHORT-TERM VOLATILITY, THE MARKET'S OUTLOOK
COULD IMPROVE ONCE INTEREST-RATE HIKES CEASE.
2
<PAGE> 4
U.S. GROSS DOMESTIC PRODUCT
SEASONALLY ADJUSTED ANNUALIZED RATES
(June 30, 1998 - June 30, 2000)
[BAR GRAPH]
<TABLE>
<CAPTION>
U.S. GROSS DOMESTIC PRODUCT
---------------------------
<S> <C>
Jun 98 2.1
Sep 98 3.8
Dec 98 5.9
Mar 99 3.5
Jun 99 2.5
Sep 99 5.7
Dec 99 8.3
Mar 00 4.8
Jun 00 5.2
</TABLE>
Source: Bureau of Economic Analysis
INTEREST RATES AND INFLATION
(June 30, 1998 - June 30, 2000)
[BAR GRAPH]
<TABLE>
<CAPTION>
INTEREST RATES INFLATION
-------------- ---------
<S> <C> <C>
Jun 98 5.50 1.70
5.50 1.70
5.50 1.60
Sep 98 5.25 1.50
5.00 1.50
4.75 1.50
Dec 98 4.75 1.60
4.75 1.70
4.75 1.60
Mar 99 4.75 1.70
4.75 2.30
4.75 2.10
Jun 99 5.00 2.00
5.00 2.10
5.25 2.30
Sep 99 5.25 2.60
5.25 2.60
5.50 2.60
Dec 99 5.50 2.70
5.50 2.70
5.75 3.20
Mar 00 6.00 3.70
6.00 3.00
6.50 3.10
Jun 00 6.50 3.70
</TABLE>
Interest rates are represented by the closing midline federal funds target 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.
3
<PAGE> 5
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS
(as of June 30, 2000)
<TABLE>
<S> <C> <C>
-----------------------------------------------------------------------
NYSE Ticker Symbol VLT
-----------------------------------------------------------------------
Six-month total return on market price(1) 26.27%
-----------------------------------------------------------------------
Six-month total return based on NAV(2) -0.59%
-----------------------------------------------------------------------
Distribution rate as a % of closing common stock
price(3) 12.07%
-----------------------------------------------------------------------
Net asset value $6.09
-----------------------------------------------------------------------
Closing common stock price $6.8125
-----------------------------------------------------------------------
Six-month high common stock price (04/04/00) $7.3250
-----------------------------------------------------------------------
Six-month low common stock price (01/03/00) $5.8125
-----------------------------------------------------------------------
Preferred share rate(4) 6.390%
-----------------------------------------------------------------------
</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 is no guarantee of 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.
4
<PAGE> 6
PORTFOLIO AT A GLANCE
CREDIT QUALITY
(as a percentage of long-term investments)
<TABLE>
<CAPTION>
As of June 30, 2000
<S> <C> <C>
- A/A................ 1.1%
- BBB/Baa............ 5.3%
- BB/Ba.............. 37.9%
- B/B................ 48.1%
- CCC/Caa and
below.............. 7.6%
[PIE CHART]
<CAPTION>
As of December 31, 1999
<S> <C> <C>
- BBB/Baa............ 4.6%
- BB/Ba.............. 36.5%
- B/B................ 54.6%
- CCC/Caa and
below.............. 4.3%
[PIE CHART]
</TABLE>
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's, respectively.
SIX-MONTH DIVIDEND HISTORY
(for the six months ending June 30, 2000, for common shares)
[BAR GRAPH]
<TABLE>
<CAPTION>
DIVIDENDS
---------
<S> <C>
1/00 0.0720
2/00 0.0720
3/00 0.0720
4/00 0.0720
5/00 0.0720
6/00 0.0685
</TABLE>
The dividend history represents past performance of the trust and is no
guarantee of the trust's future dividends.
5
<PAGE> 7
TOP FIVE SECTORS
(as a percentage of long-term investments)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Telecommunications 12.40 10.50
Printing, Publishing, & Broadcasting 11.30 8.60
Oil & Gas 9.90 7.70
Automobile 7.10 7.00
Hotel, Motel, Inns, & Gaming 5.40 4.40
</TABLE>
NET ASSET VALUE AND MARKET PRICE
(based upon quarter-end values--June 1990 through June 2000)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
NET ASSET VALUE MARKET PRICE
--------------- ------------
<S> <C> <C>
6/90 8.3900 8.2500
6.7900 5.1250
5.9100 5.2500
6.9500 6.5000
6/91 7.3100 6.8750
7.5900 7.3750
7.5200 7.5000
8.2100 8.2500
6/92 8.3400 8.6250
8.5800 9.1250
7.9200 9.3750
8.6100 9.7500
6/93 8.8400 10.1250
8.7400 10.2500
8.9800 9.7500
8.4900 9.6750
6/94 8.1200 9.7500
7.7500 8.8750
7.3200 7.5000
7.6700 8.2500
6/95 7.9700 8.6250
8.0300 8.6250
8.1200 8.7500
8.0900 8.8750
6/96 7.9400 8.7500
8.1200 9.1250
8.3100 9.3750
8.1300 9.3750
6/97 8.3200 9.8130
8.4700 10.0630
8.4400 9.8130
8.5000 10.0000
6/98 8.3800 9.5630
7.6400 8.5000
7.5900 8.6250
7.3700 8.4375
6/99 7.0900 8.3125
6.6500 7.1875
6.5600 5.7500
6.2100 6.3750
6/00 6.0900 6.8125
</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.
6
<PAGE> 8
Q&A WITH YOUR PORTFOLIO MANAGERS
WE RECENTLY SPOKE WITH THE MANAGEMENT TEAM OF THE VAN KAMPEN HIGH INCOME TRUST
II ABOUT THE KEY EVENTS AND ECONOMIC FORCES THAT SHAPED THE MARKETS AND
INFLUENCED THE TRUST'S RETURN DURING THE SIX MONTHS ENDED JUNE 30, 2000. THE
TEAM IS LED BY PETER EHRET, SENIOR PORTFOLIO MANAGER, WHO HAS MANAGED THE TRUST
SINCE JUNE 1999 AND HAS WORKED IN THE INVESTMENT INDUSTRY SINCE 1988. THE
FOLLOWING DISCUSSION REFLECTS HIS VIEWS ON THE TRUST'S PERFORMANCE.
Q HOW WOULD YOU DESCRIBE THE
MARKET ENVIRONMENT IN WHICH THE TRUST OPERATED, AND HOW DID THE TRUST
PERFORM IN THAT ENVIRONMENT?
A The year began quietly, with a
weaker high-yield market than we had expected. Investors appeared to be taking a
cautious approach to the new year, even though the much-anticipated year 2000
transition turned out to be a non-event. Sluggish trading, limited investor
demand, and a light calendar for new bond issuance during the month of January
set a lackluster tone for the high-yield market that persisted throughout most
of the reporting period. In fact, the market failed to improve until the latter
weeks of the reporting period, with June posting the best returns of the six
months.
Despite the relatively attractive yields available in the high-yield market,
the high-profile stock market continued to lure money away from the fixed-income
sector. Overall, prices for high-yield bonds drifted lower as demand remained
soft, regardless of the fundamental strengths of many of the market's offerings.
Also, credit quality remained a concern as the higher-than-average default
rates we saw in 1999, along with uncertainties about the economy and the
potential for further interest-rate hikes by the Fed, put investors on guard.
High-yield investors with short-term focus tend to get jittery when confronted
with the threat of sharply higher interest rates, which can translate into a
rapidly slowing economy. If higher interest rates slow the economy too much, the
resulting earnings pressure could make it more difficult for companies to meet
their debt payment obligations. We believe all of these issues weighed on the
market.
Nevertheless, the trust was able to post the best performance of 27 funds in
its peer group (Lipper's High Yield Leveraged Corporate Bond Fund category) for
the reporting period. For the six months through June 30, 2000, the trust
produced a total return of 26.27 percent based on market price.
7
<PAGE> 9
This reflects an increase in market price from $5.7500 per share on December 31,
1999, to $6.8125 per share on June 30, 2000. Of course, past performance is no
guarantee of future results. As a result of recent market activity, current
performance will vary from the figures shown.
The trust also continued to provide shareholders with an attractive
dividend, even though the dividend was decreased slightly during the reporting
period to reflect the portfolio's lower net income flow due to the rising cost
of leverage for the trust. Its monthly dividend of $0.0685 per share translates
to a distribution rate of 12.07 percent based on the trust's closing market
price on June 30, 2000. Please refer to the chart and footnotes on page 4 for
additional performance results. Past performance is no guarantee of future
results.
Q WHAT WERE SOME OF THE
CHALLENGES YOU FACED IN MANAGING THE TRUST DURING THIS PERIOD?
A Many industries have become so
fiercely competitive that companies have found it difficult to raise prices
without losing customers. Consequently, as companies lose their pricing power,
high levels of profitability are hard to sustain, accentuating the potential
credit-quality risks inherent to high-yield investments. This was particularly
true in the transportation, food, and automotive sectors, where profit margins
for many firms have been shrinking. The automotive sector has been hurt as many
investors expect the economy to slow and drag down auto sales. North American
cable holdings were hindered by concerns about satellite competition, heavy
capital spending, and depressed stock valuations, although we reduced the
trust's holdings at relatively good prices.
We also found that the low volume of new bond issuance in the high-yield
arena made it challenging to find suitable reinvestment opportunities as we
repositioned the portfolio to increase the trust's diversification. This made it
difficult to remain fully invested at times, causing the trust to carry a
larger-than-desired percentage of portfolio assets in cash. We began the period
with roughly 5.8 percent of the portfolio in cash and cash equivalents but,
despite market conditions, were able to end the period with just below 3.5
percent in cash and cash equivalents, which is much closer to our targeted range
for cash holdings.
Q WHAT SPECIFIC STRATEGIES DID
YOU USE IN REPOSITIONING THE PORTFOLIO?
A We continued to broaden its
diversification, increasing the number of the trust's investments within various
sectors and moving into a wider range of sectors overall.
Our focus was on adding some shorter-term securities issued by solid
companies, while relying on our extensive credit-research expertise to make
selective choices from among the more speculative sectors of the market. Our
relatively cautious approach during the period reflected market conditions and
an appreciation of the leverage used by the trust. Our mix of caution, research,
and leverage
8
<PAGE> 10
contributed to the trust's strong performance during the period.
Our investments in the transportation and automotive sectors gave us the
most trouble during the period. We held on to most of these investments because
we view their longer-term prospects as generally favorable compared to current
market prices. We took advantage of a solid run-up in the chemical sector by
selling some of the trust's holdings, fulfilling an objective of reducing the
trust's significant exposure to chemicals. While some of our steel holdings hurt
performance, we were successful at trimming our position at relatively good
prices. Textile holdings also generally detracted from performance.
Some of the sectors that boosted the trust's performance and continue to
look attractive include energy--including exploration, refining, and oil
services--and telecommunications, which is a dynamic, innovative industry with
very strong growth prospects. Gaming also helped results, given the industry's
strong underlying cash flows, which were appreciated by the market. We have
added to the trust's positions in these sectors and believe they have the
potential to provide excellent performance. Companies buying back their bonds
via tenders also helped performance. Keep in mind that not all securities in the
portfolio performed favorably, and there is no guarantee that any of these
securities will perform well or will be held by the trust in the future.
Q WHAT IS YOUR OUTLOOK FOR THE
MARKET AND THE TRUST IN THE MONTHS AHEAD?
A The strength of the economy will
be a key factor in the performance of the high-yield bond market. Clear signs
indicate that the pace of economic activity in the United States is moderating:
the housing and manufacturing sectors have cooled, and consumer spending has
leveled off from its pace of a year earlier. Importantly, core inflation (which
excludes the volatile food and energy sectors) remains subdued. As such, the
Fed's campaign of rate hikes may be nearing an end.
At this time, we see plenty of good companies that should continue to
perform well and provide strong investment opportunities within the high-yield
market. While we expect that headlines about the market's relatively high
default rate will continue, we believe the market has already largely identified
the companies that are likely to fail and priced their bonds accordingly. With
that in mind, we are optimistic, from a total return standpoint, about the
market's potential.
We expect a slow to moderate pace of new bond issuance. Most likely, we'll
see enough activity to absorb the market demand for high-yield bonds in the near
term. This demand is expected to remain tentative.
While we plan to keep the trust's portfolio as close to fully invested as is
feasible, we will remain cautious and selective, focusing on promising sectors
9
<PAGE> 11
with strong underlying fundamentals. We are particularly encouraged by the
prospects for the telecommunications industry, such as wireless, cable, and
satellite services, where consumer demand continues to be vigorous.
We believe the stage is being set for improved returns in the high-yield
market. The spread between the yields on high-yield bonds and comparable
Treasury bonds has widened substantially over the past six months, indicating
that carefully selected high-yield issues may prove to hold significant value
over time.
10
<PAGE> 12
GLOSSARY OF TERMS
A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.
CREDIT-QUALITY RISK: The possibility that a bond issuer will fail to pay the
principal or interest in a timely manner.
DEFAULT: The failure to make required debt payments on time.
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.
HIGH-YIELD BOND: A bond with a speculative credit rating equal to or lower than
BB (S&P) or Ba (Moody's).
LEVERAGE: The use of borrowed capital to finance a business.
PROFIT MARGIN: A measure of a company's efficiency, determined by dividing net
income by net sales during the past 12 months.
SECTOR: A group of securities that are similar with respect to industry,
maturity, type, rating, or coupon.
TENDER: An offer extended by a company to its shareholders to buy back its
issued securities.
TOTAL RETURN: The annual rate of return on a bond, taking into account interest
income plus appreciation or depreciation. If a bond is held to maturity, its
total return equals its yield to maturity.
TREASURY BONDS: Debt obligations of the U.S. government that have maturities of
10 years or more.
YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower ratings. The
spread is the difference in yield between bonds with short versus long
maturities or the difference in yield between high-quality bonds and lower-
quality bonds.
11
<PAGE> 13
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS
June 30, 2000 (Unaudited)
THE FOLLOWING PAGES DETAIL YOUR TRUST'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
CORPORATE BONDS 92.0%
AEROSPACE & DEFENSE 2.3%
$1,350 Dyncorp................................... 9.500% 03/01/07 $ 1,032,750
1,175 Sequa Corp. .............................. 9.000 08/01/09 1,133,875
-----------
2,166,625
-----------
AUTOMOBILE 6.5%
1,150 Aetna Industries, Inc..................... 11.875 10/01/06 1,012,000
350 Aftermarket Technology Corp. ............. 12.000 08/01/04 351,313
225 Cambridge Industries, Inc. (d)............ 10.250 07/15/07 68,625
1,935 JPS Automotive Products Corp. ............ 11.125 06/15/01 1,939,837
1,600 Lear Corp. ............................... 8.250 02/01/02 1,576,000
650 Lear Corp. ............................... 7.960 05/15/05 606,937
110 Talon Automotive Group, Inc. ............. 9.625 05/01/08 48,950
290 Venture Holdings, Inc. ................... 9.500 07/01/05 211,700
645 Venture Holdings, Inc. ................... 12.000 06/01/09 354,750
-----------
6,170,112
-----------
BEVERAGE, FOOD & TOBACCO 4.1%
450 Canandaigua Brands, Inc. ................. 8.625 08/01/06 446,062
755 Chiquita Brands International, Inc. ...... 10.000 06/15/09 581,350
900 Coca Cola Femsa S.A. (Mexico)............. 8.950 11/01/06 902,250
645 National Wine & Spirits, Inc. ............ 10.125 01/15/09 625,650
1,300 Pepsi Gemex S.A. (Mexico)................. 9.750 03/30/04 1,296,750
-----------
3,852,062
-----------
BUILDINGS & REAL ESTATE 1.5%
225 Engle Homes, Inc. ........................ 9.250 02/01/08 191,250
653 Intrawest Corp. .......................... 9.750 08/15/08 646,470
675 Webb (Del E.) Corp. ...................... 10.250 02/15/10 594,000
-----------
1,431,720
-----------
CHEMICAL 4.7%
265 Agriculture Minerals & Chemicals, Inc. ... 10.750 09/30/03 166,950
650 Equistar Chemicals L.P. .................. 8.500 02/15/04 645,125
2,272 Huntsman Polymers Corp. .................. 11.750 12/01/04 2,306,080
1,204 ISP Holdings, Inc. ....................... 9.750 02/15/02 1,167,880
260 Pioneer Americas Acquisition Corp. ....... 9.250 06/15/07 171,600
-----------
4,457,635
-----------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
YOUR TRUST'S INVESTMENTS
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
CONTAINERS, PACKAGING & GLASS 1.8%
$ 700 Fonda Group, Inc. ........................ 9.500% 03/01/07 $ 553,000
1,100 Radnor Holdings, Inc. .................... 10.000 12/01/03 984,500
205 Sweetheart Cup, Inc. ..................... 10.500 09/01/03 188,600
-----------
1,726,100
-----------
DIVERSIFIED/CONGLOMERATE MANUFACTURING 1.3%
1,050 Communications & Power Industries,
Inc. ..................................... 12.000 08/01/05 745,500
495 Pacifica Papers, Inc. (Canada)............ 10.000 03/15/09 490,050
-----------
1,235,550
-----------
ELECTRONICS 3.1%
1,185 Advanced Micro Devices, Inc............... 11.000 08/01/03 1,229,438
650 Flextronics International Ltd.
(Singapore) .............................. 8.750 10/15/07 625,625
260 Globix Corp. ............................. 12.500 02/01/10 215,800
800 Hadco Corp. .............................. 9.500 06/15/08 807,000
-----------
2,877,863
-----------
FINANCE 3.8%
1,065 Americredit Corp. (c)..................... 9.250 02/01/04 1,033,050
240 Banco Nacional de Comercio Exterior
(Mexico).................................. 7.250 02/02/04 228,600
290 Labranche & Co. Inc....................... 12.000 03/01/07 288,550
220 Madison River Capital LLC, 144A Private
Placement (a)............................. 13.250 03/01/10 200,200
450 Port Arthur Finance Corp. ................ 12.500 01/15/09 452,250
1,450 Vicap S.A. (Mexico)....................... 10.250 05/15/02 1,381,125
-----------
3,583,775
-----------
GROCERY 4.6%
895 Disco S.A. (Argentina).................... 9.125 05/15/03 825,638
685 Fleming Cos., Inc. ....................... 10.625 12/15/01 681,575
1,100 Fleming Cos., Inc. ....................... 10.500 12/01/04 990,000
1,180 Jitney Jungle Stores America, Inc. (d)
(f)....................................... 12.000 03/01/06 182,900
1,405 Pantry, Inc. ............................. 10.250 10/15/07 1,338,262
425 Pathmark Stores, Inc. (d) (f)............. 9.625 05/01/03 306,000
-----------
4,324,375
-----------
HEALTHCARE 3.8%
450 Fisher Scientific International, Inc. .... 7.125 12/15/05 403,875
1,050 Fresenius Medical Care Capital Trust...... 9.000 12/01/06 1,008,000
760 Health South Rehab Corp. ................. 9.500 04/01/01 763,800
540 Meditrust................................. 7.375 07/15/00 540,000
850 Tenet Healthcare Corp. ................... 8.000 01/15/05 822,375
-----------
3,538,050
-----------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
YOUR TRUST'S INVESTMENTS
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
HOTEL, MOTEL, INNS & GAMING 5.0%
$ 195 Agrosy Gaming Co. ........................ 10.750% 06/01/09 $ 201,825
460 Booth Creek Ski Holdings, Inc. ........... 12.500 03/15/07 335,800
652 Boyd Gaming Corp. ........................ 9.250 10/01/03 648,740
675 Casino Magic Louisiana Corp. (c).......... 13.000 08/15/03 722,250
430 Harvey's Casino Resorts................... 10.625 06/01/06 435,375
110 Horseshoe Gaming LLC (b).................. 8.625 05/15/09 103,675
230 Majestic Star Casino LLC.................. 10.875 07/01/06 190,900
220 MGM Grand, Inc. .......................... 9.750 06/01/07 224,400
1,100 Mohegan Tribal Gaming Authority........... 8.125 01/01/06 1,053,250
380 Park Place Entertainment Corp. ........... 7.875 12/15/05 359,100
440 Park Place Entertainment Corp. ........... 8.500 11/15/06 434,500
-----------
4,709,815
-----------
LEISURE 1.0%
905 Selmer Co., Inc. ......................... 11.000 05/15/05 936,675
-----------
MINING, STEEL, IRON & NON-PRECIOUS METAL 3.1%
900 GS Technologies Operating, Inc. .......... 12.250 10/01/05 297,000
1,475 Kaiser Aluminum & Chemical Corp. ......... 9.875 02/15/02 1,416,000
140 Renco Steel Holdings, Inc. ............... 10.875 02/01/05 115,500
1,210 WCI Steel, Inc. .......................... 10.000 12/01/04 1,137,400
-----------
2,965,900
-----------
OIL & GAS 9.1%
760 Benton Oil & Gas, Inc. ................... 11.625 05/01/03 562,400
220 Cliffs Drilling Co. ...................... 10.250 05/15/03 222,200
910 Frontier Oil Corp. ....................... 11.750 11/15/09 919,100
1,373 Giant Industries, Inc. (b)................ 9.750 11/15/03 1,352,405
585 Giant Industries, Inc. ................... 9.000 09/01/07 541,125
1,810 KCS Energy, Inc. (d) (f).................. 11.000 01/15/03 1,683,300
425 Petroleos Mexicanos (Mexico).............. 9.437 07/15/05 425,000
325 Pioneer Natural Resources Co. ............ 9.625 04/01/10 333,937
800 Pride Petroleum Services, Inc. ........... 9.375 05/01/07 804,000
430 R & B Falcon Corp. ....................... 6.500 04/15/03 400,975
515 R & B Falcon Corp. ....................... 9.500 12/15/08 520,150
870 Triton Energy Ltd. ....................... 8.750 04/15/02 865,650
-----------
8,630,242
-----------
PAPER 0.6%
575 Repap New Brunswick, Inc. ................ 9.000 06/01/04 552,000
-----------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
YOUR TRUST'S INVESTMENTS
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
PRINTING, PUBLISHING & BROADCASTING 10.5%
$1,100 Adelphia Communications Corp. ............ 9.250% 10/01/02 $ 1,075,250
430 Century Communications Corp. ............. 9.750 02/15/02 428,925
650 Charter Communication Holdings, LLC....... 8.250 04/01/07 576,875
150 Classic Cable, Inc. ...................... 9.375 08/01/09 130,500
900 CSC Holdings, Inc. ....................... 10.500 05/15/16 945,000
725 EchoStar Communications Corp. ............ 9.250 02/01/06 699,625
850 International Cabletel, Inc. ............. 12.750 04/15/05 867,000
810 James Cable Partners L.P. ................ 10.750 08/15/04 781,650
1,100 K-III Communications Corp. ............... 10.250 06/01/04 1,116,500
260 Northland Cable Television, Inc. ......... 10.250 11/15/07 217,100
430 Price Communications Wireless, Inc. ...... 9.125 12/15/06 430,000
325 Sinclair Broadcast Group, Inc. ........... 10.000 09/30/05 313,625
860 Telewest PLC (United Kingdom)............. 9.625 10/01/06 814,850
430 United Pan Europe Communications
(Netherlands)............................. 10.875 08/01/09 382,700
345 United Pan Europe Communications
(Netherlands)............................. 11.250 02/01/10 310,500
800 Young Broadcasting, Inc. ................. 11.750 11/15/04 816,000
-----------
9,906,100
-----------
PRODUCER MANUFACTURING 2.3%
150 Associated Materials, Inc. ............... 9.250 03/01/08 140,625
275 Carpenter (W. R.), Inc. .................. 10.625 06/15/07 60,500
465 Cemex S. A., 144A Private Placement
(Mexico) (a).............................. 9.250 06/17/02 473,137
420 Federal Mogul Corp. ...................... 7.500 07/01/04 310,800
455 Numatics, Inc. ........................... 9.625 04/01/08 366,275
870 Playtex Family Products Corp. ............ 9.000 12/15/03 843,900
-----------
2,195,237
-----------
RETAIL 3.1%
205 Big 5 Corp. .............................. 10.875 11/15/07 189,625
500 Community Distributors, Inc. ............. 10.250 10/15/04 392,500
500 Hosiery Corp. of America, Inc. ........... 13.750 08/01/02 447,500
260 K Mart Corp. ............................. 8.375 12/01/04 247,975
170 Musicland Group, Inc. .................... 9.000 06/15/03 158,525
675 Musicland Group, Inc. .................... 9.875 03/15/08 567,000
540 Polaroid Corp. ........................... 6.750 01/15/02 518,400
430 Saks, Inc. ............................... 7.000 07/15/04 386,306
-----------
2,907,831
-----------
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
YOUR TRUST'S INVESTMENTS
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS 11.4%
$ 375 Airgate PCS, Inc. (e)..................... 0/13.500% 10/01/09 $ 217,500
280 Alamosa Holdings, Inc. (e)................ 0/12.875 02/15/10 146,300
800 Capstar Broadcasting Partners (c)......... 9.250 07/01/07 812,000
950 EZ Communications, Inc. .................. 9.750 12/01/05 997,500
650 Filtronic PLC (United Kingdom)............ 10.000 12/01/05 568,750
435 Focal Communications Corp., 144A Private
Placement (a)............................. 11.875 01/15/10 435,000
650 Frontier Corp. ........................... 6.000 10/15/13 578,500
575 Global Crossing Holdings Ltd. ............ 9.125 11/15/06 553,438
200 Globenet Communications Group (Bermuda)... 13.000 07/15/07 203,000
440 Grupo Iusacell S.A. (Mexico).............. 10.000 07/15/04 437,800
960 GT Group Telecom, Inc., 144A Private
Placement (a) (e)......................... 0/13.250 02/01/10 544,800
150 Intermedia Communications, Inc. .......... 8.875 11/01/07 139,500
940 Intermedia Communications, Inc. .......... 8.600 06/01/08 862,450
900 McLeod USA, Inc. ......................... 8.375 03/15/08 819,000
875 Metromedia Fiber Network, Inc. ........... 10.000 12/15/09 861,875
220 MGC Communications, Inc. ................. 13.000 10/01/04 235,400
845 Nextel Communications, Inc. .............. 9.375 11/15/09 813,312
430 Nextlink Communications, Inc. ............ 9.625 10/01/07 406,350
420 Nextlink Communications, Inc. ............ 10.500 12/01/09 413,700
220 Philippine Long Distance Telephone
(Philippines)............................. 10.625 06/02/04 218,350
150 Philippine Long Distance Telephone
(Philippines)............................. 10.500 04/15/09 134,250
250 Telefonica De Argentina S.A., 144A Private
Placement (Argentina) (a)................. 9.875 07/01/02 255,000
160 US Unwired, Inc. (e)...................... 0/13.375 11/01/09 88,800
-----------
10,742,575
-----------
TECHNOLOGY 1.0%
220 Exodus Communications, Inc., 144A Private
Placement (a) (b)......................... 11.625 07/15/10 220,550
275 PSINet Inc. (b) .......................... 10.500 12/01/06 258,500
470 Williams Communications Corp. ............ 10.700 10/01/07 470,000
-----------
949,050
-----------
TEXTILES 2.1%
215 Anvil Knitwear, Inc. ..................... 10.875 03/15/07 189,738
875 Dan River, Inc. .......................... 10.125 12/15/03 853,125
1,575 Pillowtex Corp. .......................... 10.000 11/15/06 551,250
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
YOUR TRUST'S INVESTMENTS
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
TEXTILES (CONTINUED)
$ 450 Scovill Fasteners, Inc. .................. 11.250% 11/30/07 $ 202,500
220 Supreme International Corp. .............. 12.250 04/01/06 211,200
-----------
2,007,813
-----------
TRANSPORTATION 3.4%
655 Cenargo International PLC (United
Kingdom).................................. 9.750 06/15/08 484,700
1,580 Greyhound Lines, Inc. .................... 11.500 04/15/07 1,153,400
565 International Shipholding Corp. .......... 9.000 07/01/03 562,175
650 Laidlaw, Inc. (Canada) (d)................ 7.700 08/15/02 169,000
433 Northwest Airlines Corp. ................. 8.375 03/15/04 409,185
430 Stena AB (Sweden)......................... 10.500 12/15/05 423,550
-----------
3,202,010
-----------
UTILITIES 1.9%
1,100 AES Corp. (c)............................. 9.500 06/01/09 1,078,000
325 Calpine Corp. ............................ 9.250 02/01/04 325,000
800 National Energy Group, Inc. (d) (f)....... 10.750 11/01/06 428,000
-----------
1,831,000
-----------
TOTAL CORPORATE BONDS 92.0%.............................................. 86,900,115
-----------
GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS 0.3%
300 United Mexican States (Mexico)............ 9.875 02/01/10 312,375
-----------
EQUITIES 0.2%
Airgate PCS, Inc. (45 common shares)...................................... 2,365
Decisionone Corp. (2,450 common shares)................................... 35
Decisionone Corp. (5,386 common stock warrants)........................... 5,249
Hosiery Corp. of America, Inc., (500 common shares) 144A Private Placement
(a)..................................................................... 20,250
Intermedia Communications, Inc. (1,494 common shares)..................... 44,447
NTL, Inc., (1,187 common stock warrants) 144A Private Placement (a)....... 83,083
Star Gas Partners L.P. (220 limited partnership units).................... 3,383
-----------
TOTAL EQUITIES............................................................ 158,812
-----------
TOTAL LONG-TERM INVESTMENTS 92.5%
(Cost $97,321,112)...................................................... 87,371,302
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
YOUR TRUST'S INVESTMENTS
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
MARKET
DESCRIPTION VALUE
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT 3.5%
State Street Bank and Trust (Collateralized by U.S. Treasury Bond,
$3,273,000 par, 6.45% coupon due 08/15/21, dated 06/30/00, to be sold on
07/03/00 at $3,274,759) (Cost $3,273,000)............................... $ 3,273,000
-----------
TOTAL INVESTMENTS 96.0%
(Cost $100,594,112)..................................................... 90,644,302
OTHER ASSETS IN EXCESS OF LIABILITIES 4.0%............................... 3,762,909
-----------
NET ASSETS 100.0%........................................................ $94,407,211
===========
</TABLE>
(a) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally
transactions with qualified institutional buyers.
(b) Securities purchased on a when-issued or delayed delivery basis.
(c) Assets segregated as collateral for when-issued or delayed delivery purchase
commitments, open option and open futures transactions.
(d) Non-Income producing as security is in default.
(e) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(f) This borrower has filed for protection in federal bankruptcy court.
See Notes to Financial Statements
18
<PAGE> 20
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
June 30, 2000 (Unaudited)
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $100,594,112)....................... $90,644,302
Cash........................................................ 1,590
Receivables:
Investments Sold.......................................... 2,753,758
Interest.................................................. 2,136,658
Other....................................................... 7,603
-----------
Total Assets............................................ 95,543,911
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 782,192
Income Distributions - Common and Preferred Shares........ 71,740
Investment Advisory Fee................................... 55,251
Affiliates................................................ 3,438
Accrued Expenses............................................ 112,181
Trustees' Deferred Compensation and Retirement Plans........ 111,898
-----------
Total Liabilities....................................... 1,136,700
-----------
NET ASSETS.................................................. $94,407,211
===========
NET ASSETS CONSIST OF:
Preferred Shares ($.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.................................................... (652,102)
Accumulated Net Realized Loss............................... (8,436,346)
Net Unrealized Depreciation................................. (9,949,810)
-----------
Net Assets Applicable to Common Shares.................. 49,407,211
-----------
NET ASSETS.................................................. $94,407,211
===========
NET ASSET VALUE PER COMMON SHARE ($49,407,211 divided by
8,109,000 shares outstanding)............................. $ 6.09
===========
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
Statement of Operations
For the Six Months Ended June 30, 2000 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 4,899,016
Other....................................................... 109,427
-----------
Total Income............................................ 5,008,443
-----------
EXPENSES:
Investment Advisory Fee..................................... 357,576
Preferred Share Maintenance................................. 61,917
Trustees' Fees and Related Expenses......................... 6,067
Custody..................................................... 4,533
Legal....................................................... 2,758
Other....................................................... 93,904
-----------
Total Expenses.......................................... 526,755
-----------
NET INVESTMENT INCOME....................................... $ 4,481,688
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(2,766,377)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (9,213,668)
End of the Period......................................... (9,949,810)
-----------
Net Unrealized Depreciation During the Period............... (736,142)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $(3,502,519)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 979,169
===========
</TABLE>
See Notes to Financial Statements
20
<PAGE> 22
Statement of Changes in Net Assets
For the Six Months Ended June 30, 2000 and the Year Ended
December 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................. $ 4,481,688 $ 9,270,039
Net Realized Loss................................. (2,766,377) (2,589,717)
Net Unrealized Depreciation During the Period..... (736,142) (5,543,501)
------------ ------------
Change in Net Assets from Operations.............. 979,169 1,136,821
------------ ------------
Distributions from and in Excess of Net
Investment Income:
Common Shares................................... (3,474,707) (7,289,187)
Preferred Shares................................ (1,300,540) (2,220,961)
------------ ------------
Total Distributions............................... (4,775,247) (9,510,148)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES...................................... (3,796,078) (8,373,327)
NET ASSETS:
Beginning of the Period........................... 98,203,289 106,576,616
------------ ------------
End of the Period (Including accumulated
distributions in excess of net investment income
of $652,102 and $358,543, respectively)......... $ 94,407,211 $ 98,203,289
============ ============
</TABLE>
See Notes to Financial Statements
21
<PAGE> 23
Financial Highlights
(Unaudited)
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, ----------------------------
2000 1999 1998 1997
-----------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD
(A)....................................... $ 6.561 $ 7.594 $8.437 $ 8.307
------- ------- ------ -------
Net Investment Income..................... .553 1.144 1.182 1.202
Net Realized and Unrealized Gain/Loss..... (.432) (1.004) (.765) .179
------- ------- ------ -------
Total from Investment Operations............ .121 .140 .417 1.381
------- ------- ------ -------
Less:
Distributions from and in Excess of Net
Investment Income:
Paid to Common Shareholders............. .429 .899 .960 .960
Common Share Equivalent of Distributions
Paid to Preferred Shareholders........ .160 .274 .300 .291
------- ------- ------ -------
Total Distributions......................... .589 1.173 1.260 1.251
------- ------- ------ -------
NET ASSET VALUE, END OF THE PERIOD.......... $ 6.093 $ 6.561 $7.594 $ 8.437
======= ======= ====== =======
Market Price Per Share at End of the
Period.................................... $6.8125 $ 5.750 $8.625 $9.8125
Total Investment Return at Market Price
(b)....................................... 26.27%* -25.28% -2.73% 15.34%
Total Return at Net Asset Value (c)......... -.59%* -1.77% 1.22% 13.90%
Net Assets at End of the Period (In
millions)................................. $ 94.4 $ 98.2 $106.6 $ 113.4
Ratio of Expenses to Average Net Assets
Applicable to Common Shares**............. 2.08% 1.97% 1.92% 1.83%
Ratio of Net Investment Income to Average
Net Assets Applicable to Common Shares
(d)....................................... 12.57% 12.41% 10.85% 10.93%
Portfolio Turnover.......................... 21%* 56% 65% 98%
* Non-Annualized
** Ratio of Expenses to Average Net Assets
Including Preferred Shares............... 1.10% 1.10% 1.14% 1.10%
</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 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 common stock price at the end of the
period indicated.
(c) 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.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
22
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992 1991
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 8.117 $ 7.320 $ 8.982 $7.916 $7.287 $5.884
------- ------- ------- ------ ------ ------
1.228 1.273 1.283 1.422 1.691 1.512
.214 .806 (1.530) 1.021 .415 1.686
------- ------- ------- ------ ------ ------
1.442 2.079 (.247) 2.443 2.106 3.198
------- ------- ------- ------ ------ ------
.960 1.180 1.200 .975 .920
.960
.322 .235 .177 .502 .543
.292
------- ------- ------- ------ ------ ------
1.252 1.282 1.415 1.377 1.477 1.463
------- ------- ------- ------ ------ ------
$ 8.307 $ 8.117 $ 7.320 $8.982 $7.916 $7.619
======= ======= ======= ====== ====== ======
$ 9.375 $ 8.750 $ 7.500 $9.750 $9.375 $7.500
18.91% 30.33% -12.94% 17.01% 39.58% 62.27%
15.15% 25.19% -5.70% 30.08% 16.92% 46.26%
$ 112.4 $ 110.8 $ 104.4 $117.8 $109.2 $108.2
1.96% 1.97% 1.72% 1.73% 2.73%
1.89%
12.09% 12.87% 14.41% 14.49% 13.59%
11.58%
94% 124% 125% 140% 145% 97%
1.15% 1.17% 1.05% 1.02% 1.52%
1.12%
</TABLE>
See Notes to Financial Statements
23
<PAGE> 25
NOTES TO
FINANCIAL STATEMENTS
June 30, 2000 (Unaudited)
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, which approximates market value.
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.
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 securities only upon physical delivery or
evidence of book
24
<PAGE> 26
NOTES TO
FINANCIAL STATEMENTS
June 30, 2000 (Unaudited)
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
premium is amortized and original issue discount is accreted 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.
At June 30, 2000, for federal income tax purposes, cost for long- and
short-term investments is $100,611,645, the aggregate gross unrealized
appreciation is $628,248 and the aggregate gross unrealized depreciation is
$10,595,591, resulting in net unrealized depreciation on long- and short-term
investments of $9,967,343.
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 certain expenses under
generally accepted accounting principles and federal income tax purposes, the
amount of distributed net investment income may differ for a particular period.
These differences are temporary in nature, but may result in book basis
distribution in excess of net investment income for certain periods.
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
25
<PAGE> 27
NOTES TO
FINANCIAL STATEMENTS
June 30, 2000 (Unaudited)
facilities to the Trust for an annual fee payable monthly of .75% of the average
net assets of the Trust.
For the six months ended June 30, 2000, the Fund recognized expenses of
approximately $800 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 six months ended June 30, 2000, the Trust recognized expenses of
approximately $7,400 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 $18,768,736 and $19,030,220,
respectively.
4. AUCTION PREFERRED SHARES
As of June 30, 2000, 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 June 30, 2000, was
6.390%. During the six months ended June 30, 2000, the rates ranged from 5.190%
to 6.449%.
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.
26
<PAGE> 28
VAN KAMPEN FUNDS
THE VAN KAMPEN
FAMILY OF FUNDS
Growth
Aggressive Growth
American Value*
Emerging Growth
Enterprise
Equity Growth
Focus Equity
Growth
Mid Cap Growth
Pace
Select Growth
Small Cap Value
Tax Managed Equity Growth
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
International Magnum
Latin American
Strategic Income
Tax Managed Global Franchise
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 [COMPUTER ICON]
- 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.
[PHONE ICON]
- e-mail us by visiting
WWW.VANKAMPEN.COM and
selecting Contact Us
[MAIL ICON]
* Closed to new investors
** Open to new investors for a limited time
27
<PAGE> 29
TRUST OFFICERS AND IMPORTANT ADDRESSES
VAN KAMPEN HIGH INCOME TRUST II
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
RICHARD F. POWERS, III*
President
STEPHEN L. BOYD*
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
RICHARD A. CICCARONE*
JOHN R. REYNOLDSON*
MICHAEL H. SANTO*
JOHN H. ZIMMERMANN, 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 AUDITORS
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
(C) Van Kampen Funds Inc., 2000. All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
28
<PAGE> 30
RESULTS OF
SHAREHOLDER VOTES
An Annual Meeting of the Shareholders of the Trust was held on June 21, 2000,
where shareholders voted on the election of trustees and the selection of
independent auditors.
1) With regards to the election of the following trustee by the common
shareholders of the Trust:
<TABLE>
<CAPTION>
# OF SHARES
------------------------------
IN FAVOR WITHHELD
<S> <C> <C>
Wayne W. Whalen....................................... 7,013,252 136,912
</TABLE>
With regards to the election of the following trustee by the preferred
shareholders of the Trust:
<TABLE>
<CAPTION>
# OF SHARES
------------------------------
IN FAVOR WITHHELD
<S> <C> <C>
Rod Dammeyer.......................................... 1,418 --
</TABLE>
The other trustees whose terms did not expire in 2000 were David C. Arch, Howard
J Kerr, Theodore A. Myers, Richard F. Powers, III, and Hugo F. Sonnenschein.
2) With regards to the ratification of Deloitte & Touche LLP as independent
auditors of the Trust, 6,887,656 shares voted in favor of the proposal, 55,737
shares voted against, and 208,189 shares abstained.
29
