EXHIBIT (a)(1)(ii)
VAN KAMPEN
SENIOR FLOATING RATE FUND
OFFER TO PURCHASE FOR CASH 17,663,716
OF ITS ISSUED AND OUTSTANDING COMMON SHARES
AT NET ASSET VALUE PER COMMON SHARE
- --------------------------------------------------------------------------------
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT
EASTERN TIME ON FRIDAY, MAY 17, 2002, UNLESS THE OFFER IS EXTENDED. TO ENSURE
PROCESSING OF YOUR REQUEST, A LETTER OF TRANSMITTAL OR A MANUALLY SIGNED
FACSIMILE OF IT (TOGETHER WITH ANY CERTIFICATES FOR COMMON SHARES AND ALL OTHER
REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE DEPOSITARY (AS DEFINED BELOW) ON OR
BEFORE MAY 17, 2002.
- --------------------------------------------------------------------------------
To the Holders of Common Shares of
VAN KAMPEN SENIOR FLOATING RATE FUND:
Van Kampen Senior Floating Rate Fund (the "Trust") is offering to purchase
up to 17,663,716 of its common shares of beneficial interest, with par value of
$0.01 per share ("Common Shares"), at a price (the "Purchase Price") equal to
the net asset value per Common Share ("NAV") determined as of 5:00 P.M. Eastern
Time on the Expiration Date (as defined herein). The tendering, acceptance and
withdrawal of tenders are subject to the terms and conditions set forth in this
Offer to Purchase and the related Letter of Transmittal (which together
constitute the "Offer"). The Offer is scheduled to terminate as of 12:00
Midnight Eastern Time on May 17, 2002, unless extended by action of the Trust's
Board of Trustees. An Early Withdrawal Charge (as defined in Section 3) will be
imposed on most Common Shares accepted for payment that have been held for less
than one year. The Common Shares are not currently traded on an established
trading market. The purpose of the Offer is to attempt to provide liquidity to
shareholders since the Trust is unaware of any secondary market which exists for
the Common Shares. The NAV on April 12, 2002 was $7.90. You can obtain current
NAV quotations from Van Kampen Funds Inc. ("VKFI") by calling (800) 341-2911
between the hours of 7:00 A.M. and 7:00 P.M. Central Time, Monday through
Friday, except holidays. See Section 9.
If more than 17,663,716 Common Shares are duly tendered prior to the
expiration of the Offer, the Trust presently intends to, subject to the
condition that there have been no changes in the factors originally considered
by the Board of Trustees when it determined to make the Offer and the other
conditions set forth in Section 6, but is under no obligation to, extend the
Offer period, if necessary, and increase the number of Common Shares that the
Trust is offering to purchase to an amount which it believes will be sufficient
to accommodate the excess Common Shares tendered as well as any Common Shares
tendered during the extended Offer period or purchase 17,663,716 Common Shares
(or such greater number of Common Shares sought) on a pro rata basis.
THIS OFFER IS BEING MADE TO ALL SHAREHOLDERS OF THE TRUST
AND IS NOT CONDITIONED UPON ANY MINIMUM NUMBER
OF COMMON SHARES BEING TENDERED.
THIS OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE SECTION 6.
17 SFR006-04/02
<Table>
SUMMARY TERM SHEET
THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION IN THIS OFFER TO PURCHASE. YOU SHOULD
CAREFULLY READ THE ENTIRE OFFER TO PURCHASE AND RELATED LETTER OF TRANSMITTAL FOR A
MORE COMPLETE DESCRIPTION OF THE TERMS AND CONDITIONS OF THE OFFER AND TO FULLY
UNDERSTAND THESE TERMS AND CONDITIONS.
The Trust The Trust is a non-diversified, closed-end management
investment company organized as a Massachusetts business
trust. The Trust seeks to provide a high level of current
income, consistent with preservation of capital. The Trust
seeks to achieve its investment objective by investing
primarily in adjustable rate senior loans. As of April 12,
2002, the Trust had net assets of approximately $423 million
and had issued and outstanding approximately 53,526,412
Common Shares. As of April 12, 2002, the Trust's NAV was
$7.90. For additional information about the Trust, see
Sections 9, 10, 13 and 14.
The Offer The Trust is offering to purchase for cash at the Purchase
Price up to 17,633,716 of its outstanding Common Shares
which are properly tendered and accepted for payment prior
to the Expiration Date of the Offer. The tendering,
acceptance and withdrawal of tenders are subject to the
terms and conditions set forth in this Offer to Purchase and
the related Letter of Transmittal. See Sections 1, 2, 5 and
6. An early withdrawal charge will be imposed on most Common
Shares accepted for payment that have been held for less
than one year. See Section 3.
Purpose of the Offer The purpose of this Offer is to attempt to provide liquidity
to the holders of Common Shares. The Trust currently does
not believe that an active secondary market for its Common
Shares exists or is likely to develop, and therefore the
Trustees consider each quarter making a tender offer to
purchase Common Shares at their NAV to attempt to provide
liquidity to the holders of Common Shares. There can be no
assurance that this Offer will provide sufficient liquidity
to all holders of Common Shares that desire to sell their
Common Shares or that the Trust will make any such tender
offer in the future. The Trustees may terminate the Offer,
amend its terms, reject Common Shares tendered for payment
or postpone payment, if during the tender period, certain
events occur which the Trustees consider make it inadvisable
to proceed with the Offer. See Sections 6, 7, 11 and 16.
The Purchase Price The purchase price is equal to the NAV determined as of 5:00
P.M. Eastern Time on the Expiration Date. See Section 1. The
cost of purchasing the full 17,663,716 Common Shares
pursuant to the Offer would be approximately $139,543,356
(assuming a NAV of $7.90 on the Expiration Date). The Trust
anticipates that cash necessary to purchase any Common
Shares acquired pursuant to the Offer will first be derived
from cash on hand, such as proceeds from sales of new common
shares of the Trust and specified payments of principal or
interest from the senior loans in the Trust's portfolio, and
then from the proceeds from the sale of cash equivalents
held by the Trust. The Trust may also borrow amounts, if
necessary, pursuant to a credit agreement which has been
established to provide the Trust with additional liquidity
for its tender offers. See Section 12.
The Expiration Date The Offer is scheduled to terminate as of 12:00 Midnight
Eastern Time on May 17, 2002, unless extended by action of
the Trust's Board of Trustees. The later of May 17, 2002 or
the latest time and date to which the Offer is extended is
the "Expiration Date". If the expiration date is extended,
the Trust will make a public announcement of the new
expiration date. See Sections 1 and 16.
Tendering Common Shares Shareholders seeking to tender their Common Shares pursuant
to the Offer must send to the Trust's depositary on or
before the Expiration Date a properly completed and executed
Letter of Transmittal (or manually signed facsimile
thereof), Common Share certificates (if applicable) and any
other documents required by the Letter of Transmittal. See
Section 3.
Withdrawing Tenders Shareholders seeking to withdraw their tender of Common
Shares must send to the Trust's depositary a written,
telegraphic, telex or facsimile transmission notice of
withdrawal that specifies the name of the person withdrawing
a tender of Common Shares, the number of Common Shares to be
withdrawn, and, if certificates representing such Common
Shares have been delivered or otherwise identified to the
depositary, the name of the registered holder(s) of such
Common Shares. Shareholders may withdraw Common Shares
tendered at any time up to 12:00 Midnight Eastern Time on
the Expiration Date and, if the Common Shares have not yet
been accepted for payment by the Trust, at any time after
12:00 Midnight Eastern Time on June 14, 2002. See Section 4.
</Table>
2
IMPORTANT
If you desire to tender all or any portion of your Common Shares, you
should either (1) complete and sign the Letter of Transmittal and mail or
deliver it along with any Common Share certificate(s) and any other required
documents to Van Kampen Investor Services Inc. (the "Depositary") or (2) request
your broker, dealer, commercial bank, trust company or other nominee to effect
the transaction for you. If your Common Shares are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee, you must
contact such broker, dealer, commercial bank, trust company or other nominee if
you desire to tender your Common Shares.
NEITHER THE TRUST NOR ITS BOARD OF TRUSTEES MAKES ANY RECOMMENDATION TO ANY
SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY OR ALL OF SUCH
SHAREHOLDER'S COMMON SHARES. SHAREHOLDERS ARE URGED TO EVALUATE CAREFULLY ALL
INFORMATION IN THE OFFER, CONSULT THEIR OWN INVESTMENT AND TAX ADVISERS AND MAKE
THEIR OWN DECISIONS WHETHER TO TENDER COMMON SHARES AND, IF SO, HOW MANY COMMON
SHARES TO TENDER.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
TRUST AS TO WHETHER SHAREHOLDERS SHOULD TENDER COMMON SHARES PURSUANT TO THE
OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFER OTHER THAN THOSE CONTAINED HEREIN
OR IN THE RELATED LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATION
AND SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST.
Questions and requests for assistance may be directed to VKFI at the
address and telephone number set forth below. Requests for additional copies of
this Offer to Purchase and the related Letter of Transmittal should be directed
to VKFI.
April 19, 2002 VAN KAMPEN SENIOR FLOATING
RATE FUND
Van Kampen Funds Inc.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
(800) 341-2911
Depositary: Van Kampen Investor
Services Inc.
By Regular Mail,
Van Kampen Investor Services Inc.
P.O. Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen Senior Floating
Rate Fund
By Certified, Registered,
Overnight Mail or Courier,
Van Kampen Investor Services Inc.
7501 Tiffany Springs Parkway
Kansas City, MO 64153
Attn: Van Kampen Senior Floating
Rate Fund
3
TABLE OF CONTENTS
<Table>
<Caption>
SECTION PAGE
- ------- ----
1. Price; Number of Common Shares.............................. 5
2. Procedure for Tendering Common Shares....................... 5
3. Early Withdrawal Charge..................................... 7
4. Withdrawal Rights........................................... 8
5. Payment for Shares Tendered................................. 9
6. Certain Conditions of the Offer............................. 9
7. Purpose of the Offer........................................ 10
8. Plans or Proposals of the Trust............................. 10
9. Price Range of Common Shares; Dividends..................... 11
10. Interest of Trustees and Executive Officers; Transactions
and Arrangements Concerning the Common Shares............... 11
11. Certain Effects of the Offer................................ 12
12. Source and Amount of Funds.................................. 12
13. Certain Information about the Trust......................... 14
14. Additional Information...................................... 15
15. Certain Federal Income Tax Consequences..................... 15
16. Extension of Tender Period; Termination; Amendments......... 16
17. Miscellaneous............................................... 17
EXHIBIT A:
Unaudited Financial Statements for the Period Ended January
31, 2002.................................................... A-1
Audited Financial Statements for the Fiscal Year Ended July
31, 2001.................................................... A-25
</Table>
4
1. PRICE; NUMBER OF COMMON SHARES. The Trust will, upon the terms and
subject to the conditions of the Offer, accept for payment (and thereby
purchase) 17,663,716 or such lesser number of its issued and outstanding Common
Shares which are properly tendered (and not withdrawn in accordance with Section
4) prior to 12:00 Midnight Eastern Time on May 17, 2002 (such time and date
being hereinafter called the "Initial Expiration Date"). The Trust reserves the
right to extend the Offer. See Section 16. The later of the Initial Expiration
Date or the latest time and date to which the Offer is extended is hereinafter
called the "Expiration Date." The Purchase Price of the Common Shares will be
their NAV determined as of 5:00 P.M. Eastern Time on the Expiration Date. The
NAV on April 12, 2002 was $7.90. You can obtain current NAV quotations from VKFI
by calling (800) 341-2911 between the hours of 7:00 A.M. and 7:00 P.M. Central
Time, Monday through Friday, except holidays. Shareholders tendering Common
Shares remain entitled to receive dividends declared on such shares up to the
settlement date of the Offer. See Section 9. The Trust will not pay interest on
the Purchase Price under any circumstances. An Early Withdrawal Charge will be
imposed on most Common Shares accepted for payment that have been held for less
than one year. See Section 3.
The Offer is being made to all shareholders of the Trust and is not
conditioned upon any minimum number of Common Shares being tendered. If the
number of Common Shares properly tendered prior to the Expiration Date and not
withdrawn is less than or equal to 17,663,716 Common Shares (or such greater
number of Common Shares as the Trust may elect to purchase pursuant to the
Offer), the Trust will, upon the terms and subject to the conditions of the
Offer, purchase at NAV all Common Shares so tendered. If more than 17,663,716
Common Shares are duly tendered prior to the expiration of the Offer and not
withdrawn, the Trust presently intends to, subject to the condition that there
have been no changes in the factors originally considered by the Board of
Trustees when it determined to make the Offer and the other conditions set forth
in Section 6, but is not obligated to, extend the Offer period, if necessary,
and increase the number of Common Shares that the Trust is offering to purchase
to an amount which it believes will be sufficient to accommodate the excess
Common Shares tendered as well as any Common Shares tendered during the extended
Offer period or purchase 17,663,716 Common Shares (or such greater number of
Common Shares sought) on a pro rata basis.
On April 12, 2002 there were approximately 53,526,412 Common Shares issued
and outstanding and there were approximately 14,047 holders of record of Common
Shares. The Trust has been advised that no trustees, officers or affiliates of
the Trust intend to tender any Common Shares pursuant to the Offer.
The Trust reserves the right, in its sole discretion, at any time or from
time to time, to extend the period of time during which the Offer is open by
giving oral or written notice of such extension to the Depositary and making a
public announcement thereof. See Section 16. There can be no assurance, however,
that the Trust will exercise its right to extend the Offer. If the Trust
decides, in its sole discretion, to increase (except for any increase not in
excess of 2% of the outstanding Common Shares) or decrease the number of Common
Shares being sought and, at the time that notice of such increase or decrease is
first published, sent or given to holders of Common Shares in the manner
specified below, the Offer is scheduled to expire at any time earlier than the
tenth business day from the date that such notice is first so published, sent or
given, the Offer will be extended at least until the end of such ten business
day period.
2. PROCEDURE FOR TENDERING COMMON SHARES.
Proper Tender of Common Shares. Except as otherwise set forth under the
heading "Procedures for Selling Group Members" below, for Common Shares to be
properly tendered pursuant to the Offer, a properly completed and duly executed
Letter of Transmittal (or manually signed facsimile thereof) with any required
signature guarantees, any certificates for such Common Shares, and any other
documents required by the Letter of Transmittal, must be received on or before
the Expiration Date by the Depositary at its address set forth on page 3 of this
Offer to Purchase.
It is a violation of Section 14(e) of the Securities and Exchange Act of
1934 (the "Exchange Act"), and Rule 14e-4 promulgated thereunder, for a person
to tender Common Shares in a partial tender offer for such person's own account
unless at the time of tender and until such time as the securities are accepted
for payment the person so tendering has a net long position equal to or greater
than the amount tendered in
5
(i) the Common Shares and will deliver or cause to be delivered such shares for
purposes of tender to the Trust prior to or on the Expiration Date, or (ii) an
equivalent security and, upon the acceptance of his or her tender will acquire
the Common Shares by conversion, exchange, or exercise of such equivalent
security to the extent required by the terms of the Offer, and will deliver or
cause to be delivered the Common Shares so acquired for the purpose of tender to
the Trust prior to or on the Expiration Date.
Section 14(e) and Rule 14e-4 provide a similar restriction applicable to
the tender or guarantee of a tender on behalf of another person.
The acceptance of Common Shares by the Trust for payment will constitute a
binding agreement between the tendering shareholder and the Trust upon the terms
and subject to the conditions of the Offer, including the tendering
shareholder's representation that (i) such shareholder has a net long position
in the Common Shares being tendered within the meaning of Rule 14e-4 promulgated
under the Exchange Act and (ii) the tender of such Common Shares complies with
Rule 14e-4.
Signature Guarantees and Method of Delivery. Signatures on the Letter of
Transmittal are not required to be guaranteed unless (1) the proceeds for the
tendered Common Shares will amount to more than $100,000, (2) the Letter of
Transmittal is signed by someone other than the registered holder of the Common
Shares tendered therewith, or (3) payment for tendered Common Shares is to be
sent to a payee other than the registered owner of such Common Shares and/or to
an address other than the registered address of the registered owner of the
Common Shares. In those instances, all signatures on the Letter of Transmittal
must be guaranteed by a bank or trust company; a broker-dealer; a credit union;
a national securities exchange, registered securities association or clearing
agency; a savings and loan association; or a federal savings bank (an "Eligible
Institution"). If Common Shares are registered in the name of a person or
persons other than the signer of the Letter of Transmittal or (a) if payment is
to be made to, (b) unpurchased Common Shares are to be registered in the name of
or (c) any certificates for unpurchased Common Shares are to be returned to any
person other than the registered owner, then the Letter of Transmittal and, if
applicable, the tendered Common Share certificates must be endorsed or
accompanied by appropriate authorizations, in either case signed exactly as such
name or names appear on the registration of the Common Shares with the
signatures on the certificates or authorizations guaranteed by an Eligible
Institution. If signature is by attorney-in-fact, executor, administrator,
Trustee, guardian, officer of a corporation or another acting in a fiduciary or
representative capacity, other legal documents will be required. See
Instructions 1 and 4 of the Letter of Transmittal.
Payment for Common Shares tendered and accepted for payment pursuant to the
Offer will be made only after receipt by the Depositary on or before the
Expiration Date of a properly completed and duly executed Letter of Transmittal
(or manually signed facsimile thereof) and any other documents required by the
Letter of Transmittal. If your Common Shares are evidenced by certificates,
those certificates must be received by the Depositary on or prior to the
Expiration Date.
THE METHOD OF DELIVERY OF ANY DOCUMENTS, INCLUDING CERTIFICATES FOR COMMON
SHARES, IS AT THE ELECTION AND RISK OF THE PARTY TENDERING COMMON SHARES. IF
DOCUMENTS ARE SENT BY MAIL, IT IS RECOMMENDED THAT THEY BE SENT BY REGISTERED
MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED.
Procedures for Selling Group Members. If you are a selling group member, in
order for you to tender any Common Shares pursuant to the Offer, you may place a
confirmed wire order with VKFI. All confirmed wire orders used to tender Common
Shares pursuant to this Offer must be placed on the Expiration Date only (wire
orders placed on any other date will not be accepted by the Trust). Common
Shares tendered by a wire order are deemed to be tendered when VKFI receives the
order but subject to the condition subsequent that the settlement instructions,
including (with respect to tendered Common Shares for which the selling group
member is not the registered owner) a properly completed and duly executed
Letter of Transmittal (or manually signed facsimile thereof), any other
documents required by the Letter of Transmittal and any Common Share
certificates, are received by the Depository within three New York Stock
Exchange trading days after receipt by VKFI of such order.
Determinations of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of tenders will be
determined by the Trust, in its sole discretion, whose determination shall be
6
final and binding. The Trust reserves the absolute right to reject any or all
tenders determined by it not to be in appropriate form or the acceptance of or
payment for which may, in the opinion of the Trust's counsel, be unlawful. The
Trust also reserves the absolute right to waive any of the conditions of the
Offer or any defect in any tender with respect to any particular Common Share(s)
or any particular shareholder, and the Trust's interpretations of the terms and
conditions of the Offer will be final and binding. Unless waived, any defects or
irregularities in connection with tenders must be cured within such times as the
Trust shall determine. Tendered Common Shares will not be accepted for payment
unless the defects or irregularities have been cured within such time or waived.
Neither the Trust, VKFI, the Depositary nor any other person shall be obligated
to give notice of any defects or irregularities in tenders, nor shall any of
them incur any liability for failure to give such notice.
Federal Income Tax Withholding. The Depositary will withhold 30% of the
gross payments payable to a Non-U.S. Shareholder unless the Non-U.S. Shareholder
has provided to the Depositary a form on which it claims eligibility for a
reduced rate of withholding or establishes an exemption from withholding. For
this purpose, a Non-U.S. Shareholder, in general, is a shareholder that is not
(i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized under the laws of the United States or any
state thereof, (iii) an estate, the income of which is subject to United States
federal income taxation regardless of its source or (iv) a trust whose
administration is subject to the primary jurisdiction of a United States court
and which has one or more United States fiduciaries who have the authority to
control all substantial decisions of the trust. To claim tax treaty benefits,
Non-U.S. Shareholders will be required to provide the Depositary with a properly
completed Internal Revenue Service ("IRS") Form W-8BEN certifying their
entitlement thereto. In addition, in certain cases where payments are made to a
Non-U.S. Shareholder that is a partnership or other pass-through entity, persons
holding an interest in the entity will need to provide the required
certification. For example, an individual Non-U.S. Shareholder who holds shares
in the Trust through a non-United States partnership must provide an IRS Form
W-8BEN to the Depositary to claim the benefits of an applicable tax treaty. The
Depositary will determine a shareholder's status as a Non-U.S. Shareholder and
eligibility for a reduced rate of, or an exemption from, withholding by
reference to the Form W-8BEN or other appropriate Form W-8 provided by the
Non-U.S. Shareholder unless facts and circumstances indicate that reliance is
not warranted. A Non-U.S. Shareholder may be eligible to obtain a refund of tax
withheld if such shareholder meets one of the three tests for capital gain or
loss treatment described in Section 15 or is otherwise able to establish that no
tax or a reduced amount of tax was due.
To prevent backup federal income tax withholding of a percentage of the
gross payments made pursuant to the Offer, each shareholder (other than a
Non-U.S. Shareholder) who has not previously submitted a Form W-9 to the Trust
or does not otherwise establish an exemption from such withholding must notify
the Depositary of such shareholder's correct taxpayer identification number (or
certify that such taxpayer is awaiting a taxpayer identification number) and
provide certain other information by completing the Form W-9 enclosed with the
Letter of Transmittal. Non-U.S. Shareholders who are resident aliens and who
have not previously submitted a Form W-9, or other Non-U.S. Shareholders who
have not previously submitted a Form W-8BEN or other appropriate Form W-8, to
the Trust must do so in order to avoid backup withholding. Exemption from backup
withholding does not exempt a Non-U.S. Shareholder from the 30% withholding
described above.
For a discussion of certain other federal income tax consequences to
tendering shareholders, see Section 15.
3. EARLY WITHDRAWAL CHARGE. The Depositary will impose an early withdrawal
charge (the "Early Withdrawal Charge") on most Common Shares accepted for
payment which have been held less than one year. The Early Withdrawal Charge
will be imposed on a number of Common Shares accepted for payment from a record
holder of Common Shares the value of which exceeds the aggregate value at the
time the tendered Common Shares are accepted for payment of (a) all Common
Shares owned by such holder that were purchased more than one year prior to such
acceptance, (b) all Common Shares owned by such holder that were acquired
through reinvestment of distributions, and (c) the increase, if any, of value of
all other Common Shares owned by such holder (namely, those purchased within the
one year preceding acceptance for payment) over the purchase price of such
Common Shares. The Early Withdrawal Charge will be paid to
7
VKFI on behalf of the holder of the Common Shares. In determining whether an
Early Withdrawal Charge is payable, Common Shares accepted for payment pursuant
to the Offer shall be deemed to be those Common Shares purchased earliest by the
Shareholder. Any Early Withdrawal Charge which is required to be imposed will be
made in accordance with the following schedule.
<Table>
<Caption>
EARLY
YEAR OF REPURCHASE WITHDRAWAL
AFTER PURCHASE CHARGE
------------------ ----------
First....................................................... 1.0%
Second and following........................................ 0.0%
</Table>
Exchanges. Tendering shareholders may elect to have the Depositary invest
the cash proceeds from the tender of Common Shares of the Trust in contingent
deferred sales charge shares ("Class C Shares") of certain open-end investment
companies advised by either Van Kampen Investment Advisory Corp. or Van Kampen
Asset Management Inc. and distributed by VKFI (such funds are collectively
referred to herein as the "VK Funds"), subject to certain limitations, at the
net asset value of the Class C Shares of the respective VK Fund (or VK Funds)
selected by the tendering shareholders on the date the Trust accepts for payment
the Common Shares tendered. See Section 5 regarding acceptance and payment of
proceeds for shares tendered. The Early Withdrawal Charge will be waived for
Common Shares tendered pursuant to this election, however, such Class C Shares
immediately become subject to a contingent deferred sales charge schedule
equivalent to the Early Withdrawal Charge schedule of the Trust. Thus, shares of
such VK Funds may be subject to a contingent deferred sales charge upon a
subsequent redemption from the VK Funds. The purchase of shares of such VK Fund
will be deemed to have occurred at the time of the purchase of the Common Shares
of the Trust for calculating the applicable contingent deferred sales charge.
The prospectus for each VK Fund describes its investment objectives and
policies. Shareholders can obtain a prospectus without charge by calling
1-800-341-2911 and should consider these objectives and policies carefully
before making the election described above. Tendering shareholders may purchase
Class C Shares of a VK Fund only if shares of such VK Fund are available for
sale. An exchange is still deemed to be a tender of Common Shares causing a
taxable event and may result in a taxable gain or loss for the tendering
shareholders. Please consult your tax adviser regarding the tax consequences of
any exchange.
A shareholder may make the election described above by completing the
appropriate section on the Letter of Transmittal or by giving proper
instructions to the shareholder's broker or dealer. Although this election to
purchase Class C Shares of a VK Fund has been made available as a convenience to
the Trust's shareholders, neither the Trust nor its Board of Trustees makes any
recommendation as to whether shareholders should invest in shares of another VK
Fund. VK Funds may offer certain shareholder services to investors that are not
available to investors of the Trust. These shareholder services (including
certain purchase, redemption or exchange privileges) are described in the VK
Fund's prospectus. In order to use certain shareholder services on your VK Fund
Class C Share account, a signature guarantee form will be required for such
account. Shareholders may access materials to establish these shareholder
services, including the signature guarantee form, by calling the Investor
Services Department at (800) 341-2911 or accessing applicable forms at
http://www.vankampen.com and selecting the Literature section and then Download
Forms.
4. WITHDRAWAL RIGHTS. Except as otherwise provided in this Section 4,
tenders of Common Shares made pursuant to the Offer will be irrevocable. You may
withdraw Common Shares tendered at any time prior to 12:00 Midnight Eastern Time
on the Expiration Date and, if the Common Shares have not yet been accepted for
payment by the Trust, at any time after 12:00 Midnight Eastern Time on June 14,
2002.
To be effective, a written, telegraphic, telex or facsimile transmission
notice of withdrawal must be timely received by the Depositary at the address
set forth on page 3 of this Offer to Purchase. Any notice of withdrawal must
specify the name of the person having tendered the Common Shares to be
withdrawn, the number of Common Shares to be withdrawn, and, if certificates
representing such Common Shares have been delivered or otherwise identified to
the Depositary, the name of the registered holder(s) of such Common Shares as
set forth in such certificates if different from the name of the person
tendering the Common Shares.
8
If certificates have been delivered to the Depositary, then, prior to the
release of such certificates, you must also submit the certificate numbers shown
on the particular certificates evidencing such Common Shares and the signature
on the notice of withdrawal must be guaranteed by an Eligible Institution.
All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined by the Trust in its sole discretion,
whose determination shall be final and binding. None of the Trust, VKFI, Van
Kampen Investments Inc. ("VK Inc."), the Depositary or any other person is or
will be obligated to give any notice of any defects or irregularities in any
notice of withdrawal, and none of them will incur any liability for failure to
give any such notice. Common Shares properly withdrawn shall not thereafter be
deemed to be tendered for purposes of the Offer. However, withdrawn Common
Shares may be retendered by following the procedures described in Section 2
prior to the Expiration Date.
5. PAYMENT FOR SHARES TENDERED. For purposes of the Offer, the Trust will
be deemed to have accepted for payment (and thereby purchased) Common Shares
which are tendered and not withdrawn when, as and if it gives oral or written
notice to the Depositary of its acceptance of such Common Shares for payment
pursuant to the Offer.
Payment for Common Shares purchased pursuant to the Offer will be made by
depositing the aggregate purchase price therefor with the Depositary, which will
act as agent for tendering shareholders for the purpose of receiving payment
from the Trust and either transmitting payment directly to the tendering
shareholders or, in the case of tendering shareholders electing to invest such
proceeds in another VK Fund, transmitting payment directly to the transfer agent
for purchase of Class C Shares of the designated VK Fund for the account of such
shareholders. In all cases, payment for Common Shares accepted for payment
pursuant to the Offer will be made only after timely receipt by the Depositary,
as required pursuant to the Offer, of a properly completed and duly executed
Letter of Transmittal (or manually signed facsimile thereof), any certificates
representing such Common Shares, if issued, and any other required documents.
Certificates for Common Shares not purchased (see Sections 1 and 6), or for
Common Shares not tendered included in certificates forwarded to the Depositary,
will be returned promptly following the termination, expiration or withdrawal of
the Offer, without expense to the tendering shareholder.
The Trust will pay all transfer taxes, if any, payable on the transfer to
it of Common Shares purchased pursuant to the Offer. If, however, payment of the
purchase price is to be made to, or (in the circumstances permitted by the
Offer) if unpurchased Common Shares are to be registered in the name of any
person other than the registered holder, or if tendered certificates, if any,
are registered or the Common Shares tendered are held in the name of any person
other than the person signing the Letter of Transmittal, the amount of any
transfer taxes (whether imposed on the registered holder or such other person)
payable on account of the transfer to such person will be deducted from the
Purchase Price unless satisfactory evidence of the payment of such taxes, or
exemption therefrom, is submitted. Shareholders tendering Common Shares remain
entitled to receive dividends declared on such shares up to the settlement date
of the Offer. The Trust will not pay any interest on the Purchase Price under
any circumstances. An Early Withdrawal Charge will be imposed on most Common
Shares accepted for payment that have been held for less than one year. See
Section 3. In addition, if certain events occur, the Trust may not be obligated
to purchase Common Shares pursuant to the Offer. See Section 6.
ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO HAS NOT PREVIOUSLY SUBMITTED A
COMPLETED AND SIGNED FORM W-9 AND WHO FAILS TO COMPLETE FULLY AND SIGN THE FORM
W-9 ENCLOSED WITH THE LETTER OF TRANSMITTAL MAY BE SUBJECT TO REQUIRED FEDERAL
INCOME TAX WITHHOLDING OF A PERCENTAGE OF THE GROSS PROCEEDS PAID TO SUCH
SHAREHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE SECTION 2.
6. CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provision of
the Offer, the Trust shall not be required to accept for payment, purchase or
pay for any Common Shares tendered, and may terminate or amend the Offer or may
postpone the acceptance for payment of, the purchase of and payment for Common
Shares tendered, if at any time at or before the time of purchase of any such
Common Shares, any of the following events shall have occurred (or shall have
been determined by the Trust to have occurred) which, in the Trust's sole
judgment in any such case and regardless of the circumstances (including any
action or omission to act by the Trust), makes it inadvisable to proceed with
the Offer or with such purchase or
9
payment: (1) in the reasonable judgment of the Trustees, there is not sufficient
liquidity of the assets of the Trust; (2) such transactions, if consummated,
would (a) impair the Trust's status as a regulated investment company under
federal income tax law (which would make the Trust a taxable entity, causing the
Trust's taxable income to be taxed at the Trust level) or (b) result in a
failure to comply with applicable asset coverage requirements; or (3) there is,
in the Board of Trustees' reasonable judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Trust, (b) suspension of or limitation on
prices for trading securities generally on any United States national securities
exchange or in the over-the-counter market, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by banks
in the United States, (d) limitation affecting the Trust or the issuers of its
portfolio securities imposed by federal or state authorities on the extension of
credit by lending institutions, (e) commencement of war, a significant change in
armed hostilities or other international or national calamity directly or
indirectly involving the United States since the commencement of the Offer or
(f) other event or condition which would have a material adverse effect on the
Trust or the holders of its Common Shares if the tendered Common Shares are
purchased.
The foregoing conditions are for the Trust's sole benefit and may be
asserted by the Trust regardless of the circumstances giving rise to any such
condition (including any action or inaction by the Trust), and any such
condition may be waived by the Trust in whole or in part, at any time and from
time to time in its sole discretion. The Trust's failure at any time to exercise
any of the foregoing rights shall not be deemed a waiver of any such right; the
waiver of any such right with respect to particular facts and circumstances
shall not be deemed a waiver with respect to any other facts or circumstances;
and each such right shall be deemed an ongoing right which may be asserted at
any time and from time to time. Any determination by the Trust concerning the
events described in this Section 6 shall be final and shall be binding on all
parties.
If the Trust determines to terminate or amend the Offer or to postpone the
acceptance for payment of or payment for Common Shares tendered, it will, to the
extent necessary, extend the period of time during which the Offer is open as
provided in Section 16. Moreover, in the event any of the foregoing conditions
are modified or waived in whole or in part at any time, the Trust will promptly
make a public announcement of such waiver and may, depending on the materiality
of the modification or waiver, extend the Offer period as provided in Section
16.
7. PURPOSE OF THE OFFER. The Trust currently does not believe that an
active secondary market for its Common Shares exists or is likely to develop. In
recognition of the possibility that a secondary market may not develop for the
Common Shares of the Trust, or, if such a market were to develop, the Common
Shares might trade at a discount, the Trustees have determined that it would be
in the best interest of its shareholders for the Trust to take action to attempt
to provide liquidity to shareholders. To that end, the Trustees presently intend
each quarter to consider making a tender offer to purchase Common Shares at
their NAV. The purpose of this Offer is to attempt to provide liquidity to the
holders of Common Shares. There can be no assurance that this Offer will provide
sufficient liquidity to all holders of Common Shares that desire to sell their
Common Shares or that the Trust will make any such tender offer in the future.
NEITHER THE TRUST NOR ITS BOARD OF TRUSTEES MAKES ANY RECOMMENDATION TO ANY
SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY OR ALL OF SUCH
SHAREHOLDER'S COMMON SHARES AND HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY SUCH
RECOMMENDATION. SHAREHOLDERS ARE URGED TO EVALUATE CAREFULLY ALL INFORMATION IN
THE OFFER, CONSULT THEIR OWN INVESTMENT AND TAX ADVISERS AND MAKE THEIR OWN
DECISIONS WHETHER TO TENDER COMMON SHARES AND, IF SO, HOW MANY COMMON SHARES TO
TENDER.
8. PLANS OR PROPOSALS OF THE TRUST. Except as set forth in this Section 8,
the Trust has no present plans or proposals which relate to or would result in
any extraordinary transaction such as a merger, reorganization or liquidation
involving the Trust; any purchase, sale or transfer of a material amount of
assets of the Trust other than in its ordinary course of business; any material
changes in the Trust's present capitalization (except as resulting from the
Offer or otherwise set forth herein); or any other material changes in the
Trust's structure or business. The Trust's fundamental investment policies and
restrictions give the Trust the flexibility to pursue its investment objective
through a fund structure commonly known as a "master-feeder"
10
structure. If the Trust converts to a master-feeder structure, the existing
shareholders of the Trust would continue to hold their shares of the Trust and
the Trust would become a feeder-fund of the master-fund. The value of a
shareholder's shares would be the same immediately after any conversion as the
value immediately before such conversion. Use of this master-feeder structure
potentially would result in increased assets invested among the collective
investment vehicle of which the Trust would be a part, thus allowing operating
expenses to be spread over a larger asset base, potentially achieving economies
of scale. The Trust's Board of Trustees presently does not intend to affect any
conversion to a master-feeder structure.
9. PRICE RANGE OF COMMON SHARES; DIVIDENDS. The Trust's NAV from April 12,
2000 through April 12, 2002 ranged from a high of $9.78 to a low of $7.88. On
April 12, 2002, the NAV was $7.90. You can obtain current NAV quotations from
VKFI by calling (800) 341-2911 between the hours of 7:00 A.M. and 7:00 P.M.
Central Time, Monday through Friday, except holidays. NAV quotes also may be
obtained through the ICI Pricing Service which is released each Friday evening
and published by the Dow Jones Capital Markets Wire Service on each Friday;
published in the New York Times on each Saturday; published in the Chicago
Tribune on each Sunday; and published weekly in Barron's magazine. The Trust
offers and sells its Common Shares to the public on a continuous basis through
VKFI as principal underwriter. The Trust is not aware of any secondary market
trading for the Common Shares. Dividends on the Common Shares are declared daily
and paid monthly.
Over the twelve month period preceding the commencement of the Offer, the
Trust paid the following dividends per Common Share held for the entire
respective dividend period:
<Table>
<Caption>
DIVIDEND PAYMENT AMOUNT OF DIVIDEND
DATE PER COMMON SHARE
---------------- ------------------
March 25, 2002............................................. $0.0283
February 25, 2002.......................................... $0.0283
January 25, 2002........................................... $0.0234
December 31, 2001.......................................... $0.0066
December 24, 2001.......................................... $0.0320
November 23, 2001.......................................... $0.0354
October 25, 2001........................................... $0.0395
September 25, 2001......................................... $0.0423
August 24, 2001............................................ $0.0466
July 25, 2001.............................................. $0.0502
June 25, 2001.............................................. $0.0520
May 25, 2001............................................... $0.0535
April 25, 2001............................................. $0.0570
</Table>
Shareholders tendering Common Shares remain entitled to receive dividends
declared on such Common Shares up to the settlement date of the Offer.
10. INTEREST OF TRUSTEES AND EXECUTIVE OFFICERS; TRANSACTIONS AND
ARRANGEMENTS CONCERNING THE COMMON SHARES. As of April 12, 2002, the trustees
and executive officers of the Trust as a group beneficially owned no Common
Shares. In connection with the Trust's organization on December 19, 1997, VK
Inc., an affiliate of the Trust's investment adviser, was issued 10,000 Common
Shares for $100,000. The Trust has been informed that no trustee or executive
officer or affiliate of the Trust intends to tender any Common Shares pursuant
to the Offer.
Based upon the Trust's records and upon information provided to the Trust
by its trustees, executive officers and affiliates (as such term is used in the
Securities Exchange Act of 1934), neither the Trust nor, to the best of the
Trust's knowledge, any of the trustees or executive officers of the Trust, nor
any affiliates of any of the foregoing, has effected any transactions in the
Common Shares during the 60 day period prior to the date hereof.
Except as set forth in this Offer to Purchase, neither the Trust nor, to
the best of the Trust's knowledge, any of its affiliates, trustees or executive
officers, is a party to any agreement, arrangement or understanding,
11
whether or not legally enforceable, between the Trust, any of the Trust's
executive officers or trustees, any person controlling the Trust or any officer
or director of any corporation ultimately in control of the Trust and any other
person with respect to any securities of the Trust.
11. CERTAIN EFFECTS OF THE OFFER. The purchase of Common Shares pursuant to
the Offer will have the effect of increasing the proportionate interest in the
Trust of shareholders who do not tender their Common Shares. If you retain your
Common Shares you will be subject to any increased risks that may result from
the reduction in the Trust's aggregate assets resulting from payment for the
tendered Common Shares (e.g., greater volatility due to decreased
diversification and higher expenses). However, the Trust believes that since the
Trust is engaged in a continuous offering of the Common Shares, those risks
would be reduced to the extent new Common Shares of the Trust are sold. All
Common Shares purchased by the Trust pursuant to the Offer will be held in
treasury pending disposition.
12. SOURCE AND AMOUNT OF FUNDS. The total cost to the Trust of purchasing
the full 17,663,716 Common Shares pursuant to the Offer would be approximately
$139,543,356 (assuming a NAV of $7.90 on the Expiration Date). The Trust
anticipates that the Purchase Price for any Common Shares acquired pursuant to
the Offer will first be derived from cash on hand, such as proceeds from sales
of new Common Shares of the Trust and specified pay-downs from the participation
interests in senior corporate loans which it has acquired, and then from the
proceeds from the sale of cash equivalents held by the Trust. The Trust may from
time to time enter into one or more credit agreements to provide the Trust with
additional liquidity to meet its obligations to purchase Common Shares pursuant
to any tender offer it may make. The Trust currently is a party to a credit
agreement (described in more detail below). If, in the judgment of the Trustees,
there is not sufficient liquidity of the assets of the Trust to pay for tendered
Common Shares, the Trust may terminate the Offer. See Section 6.
The Trust has entered into a Fourth Amendment and Restatement of Credit
Agreement, dated as of November 9, 2001 (the "Credit Agreement"), among the
Trust and Van Kampen Prime Rate Income Trust (the "Co-Borrower") as borrowers
(collectively the "Borrowers"), the banks party thereto (the "Financial
Institutions"), and Bank of America, N.A., ("BofA"), as agent, pursuant to which
the Financial Institutions have committed to provide a credit facility of up to
$500,000,000 (subject to an optional commitment increase upon approval of each
Borrower's Board of Trustees and the Financial Institutions) (the "Credit
Facility Commitment") to the Trust and the Co-Borrower, which is not secured by
the assets of the Trust or Co-Borrower or other collateral. As of the date
hereof, neither the Trust nor the Co-Borrower has any outstanding borrowing
under the Credit Agreement. The proceeds of any amounts borrowed under the
Credit Agreement may be used to provide the Trust with additional liquidity to
meet its obligations to purchase Common Shares pursuant to any tender offer that
it may make. The Credit Agreement has terms and conditions substantially similar
to the following:
a. Each of the Trust and the Co-Borrower is entitled to borrow money
("Loans") from the Financial Institutions in amounts which in the
aggregate do not exceed the amount of the Credit Facility Commitment,
provided that the aggregate amount of Loans to the Trust or the
Co-Borrower on an individual basis cannot exceed twenty-five percent
(25%) of the net asset value of the Trust or Co-Borrower, as the case
may be (defined as total assets minus total liabilities minus assets
subject to liens).
b. Loans made under the Credit Agreement, if any, will bear interest daily
at the option of the Trust or Co-Borrower, as applicable, (i) at a rate
per annum equal to the federal funds rate from time to time plus 0.50%,
or (ii) at a rate per annum equal to a reserve-adjusted interbank
offered rate offered by BofA's Grand Cayman Branch ("IBOR") plus 0.50%
per annum. Each of the Trust and Co-Borrower will bear the expenses of
any borrowings attributable to it under the Credit Agreement. Such
interest will be due, in arrears, on the outstanding principal amount of
each Loan (i) as to any federal funds rate Loan on the last business day
of each calendar quarter and (ii) as any offshore rate Loan, from one
(1) day to sixty (60) days from the date of the Loan, as selected by the
Trust or Co-Borrower, as applicable, in advance. Interest on the
outstanding principal of the Loans will also be due on the date of any
prepayment of any offshore rate Loan and on demand during the existence
of
12
an event of default under the Credit Agreement payable by the borrower
subject to such event of default. Overdue payments of principal and
interest will bear interest, payable upon demand, at a penalty rate. No
Loan shall be outstanding for a period of more than sixty (60) days, and
there shall be no more than three Interest Periods as defined in the
Credit Agreement in effect.
c. The Trust paid arrangement fees and expenses to BofA or its affiliates
on the date the Credit Agreement was executed. In addition, during the
term of the Credit Agreement, the Trust is obligated to pay its pro rata
share (based on the relative net assets of the Trust and Co-Borrower) of
a commitment fee computed at the rate of 0.11% per annum on the average
daily unused amount of the facility.
d. The principal amount of any Loan made under the Credit Agreement, if
any, is required to be paid sixty (60) days from the date of the Loan.
Each of the Trust and Co-Borrower is entitled to prepay a Loan made to
it in multiples of $1,000,000, provided that the Trust or Co-Borrower,
as applicable, gives sufficient notices of prepayment. On the Commitment
Termination Date (as defined below), all outstanding principal and
accrued interest under the Credit Agreement will be due and payable in
full.
e. The Credit Agreement provides for BofA to elect to make swingline loans
to each Borrower in amounts which in the aggregate do not exceed
$25,000,000, provided that the aggregate amount of such swingline loans
to the Trust or the Co-Borrower on an individual basis cannot exceed
the lesser of (a) BofA's commitment under the Credit Agreement, (b) the
combined commitment of all Financial Institutions under the Credit
Agreement or (c) twenty-five percent (25%) of the net asset value of
the Trust or Co-Borrower, as the case may be. Such swingline loans are
due no later than the seventh business day following the day the
swingline loan was made, bear interest at a rate per annum equal to the
federal funds rate from time to time plus 0.50% due upon the repayment
of such loan and, if unpaid when due or the Borrower otherwise elects,
may convert to a traditional federal funds rate Loan under the Credit
Agreement funded by BofA and all of the other Financial Institutions in
accordance with the Credit Agreement's commitment schedule.
f. The drawdown of the initial Loan or swingline loan, if any, under the
Credit Agreement is subject to certain conditions, including, among
other things, the Trust and Co-Borrower, as applicable, executing and
delivering a promissory note made payable to the order of each
Financial Institution, in the form attached to the Credit Agreement
(the "Promissory Notes"). The drawdown of each Loan or swingline loan,
if any, is further conditioned upon the satisfaction of additional
conditions, including, without limitation, (i) the providing of notice
with respect to the Loan; (ii) the asset coverage ratio for the
applicable borrower being at least 4 to 1; (iii) there being no default
or event of default in existence with respect to the applicable
borrower; (iv) the representations and warranties with respect to the
applicable borrower made in the Credit Agreement continuing to be true;
and (v) there being no Loans outstanding with respect to the applicable
borrower for more than sixty (60) days on the day preceding the
proposed borrowing.
g. The Credit Agreement contains various affirmative and negative covenants
of the Trust and Co-Borrower, including, without limitation,
obligations: (i) to provide periodic financial information; (ii) with
limited exceptions, to not consolidate with or merge into any other
entity or have any other entity merge into it and to not sell all or any
substantial part of its assets; (iii) to continue to engage in its
current type of business and to maintain its existence as a business
trust; (iv) to comply with applicable laws, rules and regulations; (v)
to maintain insurance on its property and business; (vi) to limit the
amount of its debt based upon 25% of the net asset value of the
applicable borrower; and (vii) to not create any lien on any of its
assets, with certain exceptions.
h. The Credit Agreement also contains various events of default (with
certain specified grace periods), including, without limitation: (i)
failure to pay when due any amounts required to be paid to the Financial
Institutions under the Credit Agreement or the Promissory Notes; (ii)
any material misrepresentations in the Credit Agreement or documents
delivered to the Financial Institutions; (iii) failure to observe or
perform certain terms, covenants and agreements contained in the Credit
Agreement, the Promissory Notes or other documents delivered to the
Financial Institutions;
13
(iv) failure to comply with the Trust's or Co-Borrower's, as applicable,
fundamental investment policies or investment restrictions; (v) failure
to comply by the Trust or Co-Borrower, as applicable, with all material
provisions of the Investment Company Act of 1940; (vi) the voluntary or
involuntary bankruptcy of the Trust or Co-Borrower, as applicable; (vii)
the entry of judgments for the payment of money in excess of $5,000,000
in the aggregate which remains unsatisfied or unstayed for a period of
30 days; and (viii) a change in control of the Trust's or Co-Borrower's,
as applicable, investment adviser.
i. The credit facility provided pursuant to the Credit Agreement will
terminate on November 8, 2002 (the "Commitment Termination Date"),
unless extended or earlier terminated pursuant to the terms thereof, and
all accrued interest and principal will be due thereon.
Pursuant to guidelines applicable to the Trust and the Co-Borrower, any
Loans to the Trust and Co-Borrower will be made on a first-come, first-serve
basis. If, at any time, the demand for borrowings by the Trust and Co-Borrower
exceeds amounts available under the Credit Agreement, such borrowing will be
allocated on a fair and equitable basis, taking into consideration factors,
including without limitation, relative net assets of the Trust and Co-Borrower,
amounts requested by the Trust and Co-Borrower, and availability of other
sources of cash to meet each parties needs.
The Trust intends to repay any Loans under the Credit Agreement from
proceeds from the specified pay-downs from the interests in Senior Loans (as
defined below) which will be acquired and from proceeds from the sale of Common
Shares.
The foregoing descriptions of the Credit Agreement do not purport to be
complete or final, and are qualified in their entirety by reference to the
Credit Agreement included as Exhibit (b)(1) to the Issuer Tender Offer Statement
on Schedule TO of the Trust. See Section 14.
13. CERTAIN INFORMATION ABOUT THE TRUST. The Trust was organized as a
Massachusetts business trust on December 19, 1997 and is a non-diversified,
closed-end management investment company under the Investment Company Act of
1940. The Trust's investment objective is to provide a high level of current
income, consistent with preservation of capital. The Trust plans to invest at
least 80% of its total assets in adjustable rate senior loans ("Senior Loans").
Senior Loans are business loans made to borrowers that may be corporations,
partnerships or other entities ("Borrowers"). These Borrowers operate in a
variety of industries and geographic regions. The interest rates on Senior Loans
adjust periodically, and the Trust's portfolio of Senior Loans will at all times
have a dollar-weighted average time until the next interest rate adjustment of
90 days or less. The Trust believes that investing in adjustable rate Senior
Loans should limit fluctuations in its net asset value caused by changes in
interest rates. The interest rates on Senior Loans adjust periodically. The
interest rates are adjusted based on a base rate plus a premium or spread over
the base rate. The base rate usually is the London Inter-Bank Offered Rate
("LIBOR"), the prime rate offered by one or more major United States banks (the
"Prime Rate") or the certificate of deposit ("CD") rate or other base lending
rates used by commercial lenders. As short term interest rates rise, interest
payable to the Fund should increase. As short term interest rates decline,
interest payable to the Fund should decrease. The amount of time that will pass
before the Fund experiences the effects of changing short-term interest rates
will depend on the dollar-weighted average time until the next interest rate
adjustment on the Fund's portfolio of Senior Loans.
The Trust has registered as a "non-diversified" investment company so that,
subject to its investment restrictions, it is able to invest more than 5% of the
value of its assets in the obligations of any single issuer, including Senior
Loans of a single Borrower or participations in Senior Loans purchased from a
single lender. To the extent the Trust invests a relatively high percentage of
its assets in obligations of a limited number of issuers, the Trust will be more
susceptible than a more widely diversified investment company to any single
corporate, economic, political or regulatory occurrence.
The Trust is advised by Van Kampen Investment Advisory Corp. (the
"Adviser") pursuant to an Investment Advisory Agreement under which the Trust
accrues daily and pays monthly to the Adviser an investment management fee based
on the per annum rate of: 0.95% of the first $4.0 billion of average daily net
assets of the Trust, 0.90% on the next $3.5 billion, 0.875% on the next $2.5
billion and 0.85% on average daily net
14
assets over $10.0 billion. The Trust is a party to an Administration Agreement
with VK Inc. Under the Administration Agreement, the Trust pays VK Inc. a
monthly fee based on the per annum rate of 0.25% of the Trust's average daily
net assets. The Trust is a party to an Offering Agreement with VKFI. Under the
Offering Agreement, the Trust offers and sells its Common Shares to the public
on a continuous basis through VKFI as principal underwriter. VKFI compensates
broker-dealers participating in the continuous offering of the Trust's Common
Shares at a rate of 0.75% of the dollar value of Common Shares purchased from
the Trust by such broker-dealers. VKFI also compensates broker-dealers who have
entered into sales agreements with VKFI at an annual rate, paid quarterly, equal
to an amount up to 0.75% of the value of Common Shares sold by each respective
broker-dealer and remaining outstanding after one year from the date of their
original purchase. VKFI also may provide, from time to time, additional cash
incentives to broker-dealers which employ representatives who sell a minimum
dollar amount of the Common Shares. All such compensation is or will be paid by
VKFI out of its own assets, and not out of the assets of the Trust. The
compensation paid to such broker-dealers and to VKFI, including the compensation
paid at the time of purchase, the quarterly payments, any additional incentives
paid from time to time and the Early Withdrawal Charge, if any, will not in the
aggregate exceed applicable limitations. In addition, the Trust may make service
fee payments pursuant to the Trust's Service Plan for personal services and/or
the maintenance of shareholder accounts to VKFI and broker-dealers and other
persons in amounts not exceeding 0.25% of the Trust's average daily net assets
for any fiscal year. The Trustees have initially implemented the Service Plan by
authorizing service fee payments to VKFI and broker-dealers and other persons in
amounts not expected to exceed 0.15% of the Trust's average daily net assets.
The principal executive offices of the Trust are located at 1 Parkview
Plaza, Oakbrook Terrace, IL 60181-5555.
Michael H. Santo, Vice President of the Trust, has announced his
resignation from the Trust to be effective on or about May 3, 2002.
Reference is hereby made to Section 9 of this Offer to Purchase and the
financial statements attached hereto as Exhibit A which are incorporated herein
by reference.
14. ADDITIONAL INFORMATION. The Trust has filed an Issuer Tender Offer
Statement on Schedule TO with the Securities and Exchange Commission (the
"Commission") which includes certain additional information relating to the
Offer. Such material may be inspected and copied at prescribed rates at the
Commission's public reference facilities at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549; Jacob K. Javits Federal Building, 26 Federal
Plaza, New York, New York 10278; and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may also be obtained by mail at prescribed rates from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Issuer Tender Offer Statement on Schedule TO is
available along with other related materials at the Commission's internet
website (http://www.sec.gov).
15. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a
general summary of the federal income tax consequences of a sale of Common
Shares pursuant to the Offer. Shareholders should consult their own tax advisers
regarding the tax consequences of a sale of Common Shares pursuant to the Offer,
as well as the effects of state, local and foreign tax laws and any proposed tax
law changes.
The sale of Common Shares pursuant to the Offer will be a taxable
transaction for federal income tax purposes, either as a "sale or exchange" or,
under certain circumstances, as a "dividend." Under Section 302(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), a sale of Common Shares
pursuant to the Offer generally will be treated as a sale or exchange if the
receipt of cash by the shareholder or by the Depositary on behalf of the
shareholder, in the case of a tendering shareholder electing to invest cash
proceeds from the tender of Common Shares in Class C Shares of a designated VK
Fund: (a) results in a "complete redemption" of the shareholder's interest in
the Trust, (b) is "substantially disproportionate" with respect to the
shareholder or (c) is "not essentially equivalent to a dividend" with respect to
the shareholder. In determining whether any of these tests has been met, Common
Shares actually owned, as well as Common Shares considered to be owned by the
shareholder by reason of certain constructive ownership rules set forth in
Section 318 of the Code, generally must be taken into account. If any of these
three tests for sale or exchange treatment is met, a shareholder will recognize
gain or loss equal to the difference between the amount of cash
15
received by the shareholder or, in the case of a tendering shareholder electing
to invest cash proceeds from the tender of Common Shares in Class C Shares of a
designated VK Fund, by the Depositary on behalf of the shareholder pursuant to
the Offer and the tax basis of the Common Shares sold. If such Common Shares are
held as a capital asset, the gain or loss will be a capital gain or loss. The
maximum tax rate applicable to net capital gains recognized by individuals and
other non-corporate taxpayers is (i) the same as the maximum ordinary income
rate for capital assets held for one year or less or (ii) 20% for capital assets
held for more than one year. The maximum long-term capital gains rate for
corporations is 35%.
If none of the tests set forth in Section 302(b) of the Code is met,
amounts received by a shareholder or by the Depositary on behalf of a
shareholder, as the case may be, who sells Common Shares pursuant to the Offer
will be taxable to the shareholder as a "dividend" to the extent of such
shareholder's allocable share of the Trust's current or accumulated earnings and
profits. The excess of such amounts received over the portion that is taxable as
a dividend would constitute a non-taxable return of capital (to the extent of
the shareholder's tax basis in the Common Shares sold pursuant to the Offer).
Any amounts in excess of the shareholder's tax basis would constitute taxable
gain. Thus, a shareholder's tax basis in the Common Shares sold will not reduce
the amount of the dividend. Any remaining tax basis in the Common Shares
tendered to the Trust will be transferred to any remaining Common Shares held by
such shareholder. In addition, if a tender of Common Shares is treated as a
dividend to a tendering shareholder, a constructive dividend under Section
305(c) of the Code may result to a non-tendering shareholder whose proportionate
interest in the earnings and assets of the Trust has been increased by such
tender. The Trust believes, however, that the nature of the repurchase will be
such that a tendering shareholder will qualify for sale or exchange treatment
(as opposed to dividend treatment).
16. EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENTS. The Trust
reserves the right, at any time and from time to time, to extend the period of
time during which the Offer is pending by making a public announcement thereof.
In the event that the Trust so elects to extend the tender period, the Purchase
Price for the Common Shares tendered will be determined as of 5:00 P.M. Eastern
Time on the Expiration Date, as extended, and the Offer will terminate as of
12:00 Midnight Eastern Time on the Expiration Date, as extended. During any such
extension, all Common Shares previously tendered and not purchased or withdrawn
will remain subject to the Offer. The Trust also reserves the right, at any time
and from time to time up to and including the Expiration Date, to (a) terminate
the Offer and not to purchase or pay for any Common Shares or, subject to
applicable law, postpone payment for Common Shares upon the occurrence of any of
the conditions specified in Section 6, and (b) amend the Offer in any respect by
making a public announcement thereof. Such public announcement will be issued no
later than 9:00 A.M. Eastern Time on the next business day after the previously
scheduled Expiration Date and will disclose the approximate number of Common
Shares tendered as of that date. Without limiting the manner in which the Trust
may choose to make a public announcement of extension, termination or amendment,
except as provided by applicable law, the Trust shall have no obligation to
publish, advertise or otherwise communicate any such public announcement, other
than by making a release to the Dow Jones News Service.
If the Trust materially changes the terms of the Offer or the information
concerning the Offer, or if it waives a material condition of the Offer, the
Trust will extend the Offer to the extent required by Rule 13e-4 promulgated
under the Exchange Act. These rules require that the minimum period during which
an offer must remain open following material changes in the terms of the offer
or information concerning the offer (other than a change in price or a change in
percentage of securities sought) will depend on the facts and circumstances,
including the relative materiality of such terms or information. If (i) the
Trust increases or decreases the price to be paid for Common Shares, or the
Trust increases the number of Common Shares being sought by an amount exceeding
2% of the outstanding Common Shares, or the Trust decreases the number of Common
Shares being sought and (ii) the Offer is scheduled to expire at any time
earlier than the expiration of a period ending on the tenth business day from,
and including, the date that notice of such increase or decrease is first
published, sent or given, the Offer will be extended at least until the
expiration of such period of ten business days.
16
17. MISCELLANEOUS. The Offer is not being made to, nor will the Trust
accept tenders from, owners of Common Shares in any jurisdiction in which the
Offer or its acceptance would not comply with the securities or Blue Sky laws of
such jurisdiction. The Trust is not aware of any jurisdiction in which the
making of the Offer or the tender of Common Shares would not be in compliance
with the laws of such jurisdiction. However, the Trust reserves the right to
exclude holders in any jurisdiction in which it is asserted that the Offer
cannot lawfully be made. So long as the Trust makes a good-faith effort to
comply with any state law deemed applicable to the Offer, the Trust believes
that the exclusion of holders residing in such jurisdiction is permitted under
Rule 13e-4(f)(9) promulgated under the Exchange Act. In any jurisdiction the
securities or Blue Sky laws of which require the Offer to be made by a licensed
broker or dealer, the Offer shall be deemed to be made on the Trust's behalf by
one or more registered brokers or dealers licensed under the laws of such
jurisdiction.
April 19, 2002 VAN KAMPEN SENIOR FLOATING RATE FUND
17
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.(1)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
VARIABLE RATE** SENIOR LOAN INTERESTS 82.9%
AEROSPACE/DEFENSE 3.9%
$ 2,916 Aerostructures Corp., Term
Loan...................... NR BB- 12/31/03 $ 2,869,653
969 Alliant Techsystems, Inc.,
Term Loan................. Ba2 BB- 04/20/09 981,295
3,685 DeCrane Aircraft Holdings,
Inc., Term Loan........... B2 B+ 09/30/05 3,615,864
2,095 DRS Technologies, Inc.,
Term Loan................. Ba3 BB- 09/30/08 2,113,735
2,088 EG&G Technical Services,
Inc., Term Loan........... B1 NR 08/20/07 2,078,013
6,829 Fairchild Corp.,
Term Loan................. B1 B+ 04/30/06 5,890,426
1,781 United Defense Industries,
Inc., Term Loan........... B1 BB- 08/13/09 1,788,857
------------
19,337,843
------------
AUTOMOTIVE 6.2%
3,930 AMCAN Technologies, Inc.,
Term Loan................. NR NR 03/28/07 3,753,150
963 Breed Technologies, Inc.,
Term Loan................. NR NR 12/20/04 819,151
5,169 Citation Corp.,
Term Loan................. NR B+ 09/30/07 4,355,048
4,850 Federal-Mogul Corp., Term
Loan (b).................. NR D 02/24/04 4,583,250
9,391 Metalforming Technologies,
Inc., Term Loan........... NR NR 06/30/06 6,573,365
4,900 MetoKote Corp., Term
Loan...................... NR NR 11/04/05 4,361,000
6,251 Safelite Glass Corp., Term
Loan...................... NR NR 09/30/07 6,297,480
------------
30,742,444
------------
</Table>
See Notes to Financial Statements
A-1
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
BEVERAGE, FOOD & TOBACCO 3.1%
$ 2,457 Agrilink Foods, Inc., Term
Loan...................... B1 B+ 09/30/04 to 09/30/05 $ 2,386,281
3,702 B & G Foods, Inc., Term
Loan...................... B1 B+ 03/31/06 3,676,604
1,493 Hartz Mountain Corp., Term
Loan...................... B1 NR 12/31/07 1,474,375
4,000 Land O' Lakes, Inc., Term
Loan...................... Ba2 BBB- 10/10/08 3,995,000
1,833 Mafco Worldwide Corp.,
Term Loan................. NR NR 03/31/06 1,823,199
2,000 Pinnacle Foods, Inc., Term
Loan...................... Ba3 BB- 06/20/08 2,003,750
------------
15,359,209
------------
BROADCASTING -- CABLE 2.1%
8,765 Charter Communications,
Inc., Term Loan........... Ba3 BBB- 03/18/08 to 12/30/08 8,655,220
1,680 Olympus Cable Holdings,
LLC, Term Loan............ Ba2 BB 09/30/10 1,667,284
------------
10,322,504
------------
BROADCASTING -- DIVERSIFIED 1.9%
7,542 Comcorp Broadcasting,
Inc., Term Loan........... NR NR 06/30/07 6,372,670
3,432 White Knight Broadcasting,
Inc., Term Loan........... NR NR 06/30/07 2,899,583
------------
9,272,253
------------
BROADCASTING -- TELEVISION 1.5%
500 Gray Communications
Systems, Inc.,
Term Loan................. Ba3 B+ 09/30/09 500,469
6,589 Quorum Broadcasting, Inc.,
Term Loan................. NR NR 09/30/07 6,028,914
1,000 Sinclair Broadcast Group,
Inc., Term Loan........... Ba2 BB- 09/30/09 1,006,000
------------
7,535,383
------------
</Table>
See Notes to Financial Statements
A-2
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
BUILDINGS & REAL ESTATE 1.6%
$ 3,121 Builders FirstSource,
Inc., Term Loan........... NR BB- 12/30/05 $ 3,027,272
4,979 Corrections Corp. of
America, Term Loan........ B2 B 12/31/02 4,943,746
------------
7,971,018
------------
CHEMICALS, PLASTICS & RUBBER 4.5%
4,924 Applied Tech Management
Corp., Term Loan.......... B1 NR 04/30/07 4,910,376
3,482 Huntsman Corp., Term
Loan...................... Caa2 NR 12/31/02 to 12/31/05 2,267,463
2,081 Huntsman Corp., Revolving
Credit Agreement.......... Caa2 NR 02/07/03 1,310,875
1,000 Messer Griesheim, Term
Loan...................... Ba3 BB 04/27/09 to 04/27/10 1,005,781
4,581 Nutrasweet Acquisition
Corp., Term Loan.......... Ba3 NR 05/25/07 to 05/25/09 4,563,032
3,611 Pioneer Corp. of America,
Term Loan................. NR NR 12/31/06 3,611,271
4,232 Sterling Pulp Chemicals,
Inc., Term Loan........... NR NR 07/10/05 4,147,669
518 West American Rubber Co.,
LLC, Term Loan............ NR NR 11/09/03 518,421
------------
22,334,888
------------
CONSTRUCTION MATERIAL 0.4%
875 Dayton Superior Corp.,
Term Loan................. Ba3 BB- 06/01/08 873,906
5,374 Flextek Components, Inc.,
Term Loan (a) (b)......... NR NR 08/31/03 96,734
1,069 Magnatrax Corp., Term
Loan...................... NR NR 11/15/05 956,858
------------
1,927,498
------------
CONTAINERS, PACKAGING & GLASS 1.4%
2,000 LLS Corp., Term Loan (a)
(b)....................... NR NR 07/31/06 1,125,000
163 LLS Corp., Revolving
Credit Agreement (b)...... NR NR 01/24/03 163,338
2,411 Pliant Corp., Term Loan... B2 B+ 05/31/08 2,391,629
3,277 Stone Container Corp.,
Term Loan................. Ba3 B+ 10/01/03 3,279,810
------------
6,959,777
------------
</Table>
See Notes to Financial Statements
A-3
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
DIVERSIFIED MANUFACTURING 1.9%
$ 2,407 Mueller Group, Inc., Term
Loan...................... B1 B+ 08/16/07 $ 2,390,884
4,462 UCAR International, Inc.,
Term Loan................. Ba3 NR 12/31/07 4,405,069
2,500 Walter Industries, Inc.,
Term Loan................. NR NR 10/15/03 2,412,500
------------
9,208,453
------------
ECOLOGICAL 1.6%
7,340 Allied Waste North
America, Inc.,
Term Loan................. Ba3 BB 07/21/05 to 07/21/07 7,237,261
506 IT Group, Inc. Term Loan
(a) (b)................... NR D 06/11/06 108,873
500 Stericycle, Inc.,
Term Loan................. B1 BB- 09/30/07 502,734
------------
7,848,868
------------
ELECTRONICS 4.1%
3,338 Audio Visual Services
Corp., Term Loan (a) (f)
(g)....................... NR NR 10/01/01 1,452,052
1,154 Audio Visual Services
Corp., Revolving Credit
Agreement (a) (f) (g)..... NR NR 10/01/01 502,203
4,932 Dynamic Details, Inc.,
Term Loan................. Ba3 NR 04/22/05 4,315,049
3,750 Kinetic Group, Inc., Term
Loan...................... B1 NR 02/28/06 3,400,001
4,704 Stratus Technologies,
Inc., Term Loan........... NR NR 02/26/05 4,610,240
2,773 Superior Telecom, Inc.,
Term Loan................. B2 B+ 11/27/05 1,874,737
2,463 Veridian Corp.,
Term Loan................. NR NR 08/24/06 2,456,344
1,820 Viasystems, Inc.,
Term Loan................. B3 CCC 03/31/07 1,460,431
------------
20,071,057
------------
</Table>
See Notes to Financial Statements
A-4
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
ENTERTAINMENT & LEISURE 2.8%
$10,794 Fitness Holdings
Worldwide, Inc.,
Term Loan................. NR B 11/02/06 to 11/02/07 $ 9,103,191
2,294 Six Flags Theme Parks,
Inc., Term Loan........... Ba2 BB- 11/05/05 2,308,016
2,565 True Temper, Inc., Term
Loan...................... B1 BB- 09/30/05 2,551,949
------------
13,963,156
------------
FARMING & AGRICULTURE 0.7%
3,241 The Scotts Co.,
Term Loan................. Ba3 BB 12/31/07 3,259,259
------------
FINANCE 1.9%
3,673 Mafco Finance Corp., Term
Loan...................... NR NR 08/14/02 3,638,994
3,729 Outsourcing Solutions,
Term Loan................. B2 NR 06/10/06 3,495,981
2,177 Rent-A-Center, Inc., Term
Loan...................... Ba2 BB- 01/31/07 2,162,422
------------
9,297,397
------------
HEALTHCARE 3.5%
586 Community Health Systems,
Inc.,
Term Loan................. NR B+ 12/31/05 588,676
4,675 Genesis Health Ventures,
Inc., Term Loan........... Ba3 BB- 03/30/07 to 04/02/07 4,703,542
2,000 Integrated Health
Services, Inc., Term Loan
(a) (b)................... NR NR 09/30/04 to 12/31/05 1,135,834
1,000 Integrated Health
Services, Inc., Revolving
Credit Agreement (b)...... NR NR 09/30/03 559,500
990 InteliStaf Group, Inc.,
Term Loan................. NR NR 10/31/07 984,122
7,244 Kindred Healthcare, Inc.,
Term Loan................. NR NR 04/13/08 7,249,573
1,745 Triad Hospitals, Inc.,
Term Loan................. Ba3 B+ 09/30/08 1,766,280
------------
16,987,527
------------
</Table>
See Notes to Financial Statements
A-5
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
HEALTHCARE & BEAUTY 0.8%
$ 4,000 Mary Kay, Inc.,
Term Loan................. Ba3 B+ 10/03/07 $ 4,000,000
------------
HOME & OFFICE FURNISHINGS, HOUSEWARES &
DURABLE CONSUMER PRODUCTS 1.1%
440 Formica Corp.,
Term Loan................. Caa1 CCC 04/30/06 366,700
2,463 Imperial Home Decor Group,
Inc.,
Term Loan (e)............. NR NR 04/04/06 2,277,998
752 Sleepmaster, LLC, Term
Loan (b).................. NR NR 12/31/06 620,448
1,481 Targus Group
International, Inc., Term
Loan...................... NR NR 12/20/06 1,440,470
977 Winsloew Furniture, Inc.,
Term Loan................. Ba3 B 03/31/06 923,523
------------
5,629,139
------------
HOTELS, MOTELS, INNS & GAMING 1.7%
2,825 Aladdin Gaming, LLC, Term
Loan (a) (b).............. NR NR 08/26/06 2,043,742
1,437 Isle of Capri Casinos,
Inc., Term Loan........... Ba2 BB- 03/02/06 to 03/02/07 1,444,706
2,469 Scientific Games Corp.,
Term Loan................. B1 B+ 09/30/07 2,473,379
2,661 Wyndham International,
Inc., Term Loan........... NR NR 06/30/06 2,322,083
------------
8,283,910
------------
INSURANCE 1.6%
4,875 Brera GAB Robins, Inc.,
Term Loan................. NR NR 12/31/05 4,753,125
3,000 White Mountains Insurance
Group, Ltd., Term Loan.... NR NR 03/31/07 3,009,999
------------
7,763,124
------------
MACHINERY 3.4%
2,925 Alliance Laundry Systems,
LLC, Term Loan............ B1 B 06/30/05 2,683,687
4,950 Ashtead Group, PLC, Term
Loan...................... NR NR 06/01/07 4,838,625
4,223 Gleason Corp.,
Term Loan................. NR NR 02/17/08 4,222,674
</Table>
See Notes to Financial Statements
A-6
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
MACHINERY (CONTINUED)
$ 1,223 Terex Corp., Term Loan.... Ba3 BB- 07/15/06 $ 1,225,702
993 United Rentals (North
America), Inc.,
Term Loan................. Ba3 BB+ 08/31/07 1,000,812
2,947 Weigh-Tronix, LLC, Term
Loan...................... NR NR 06/30/07 2,622,555
------------
16,594,055
------------
MEDICAL PRODUCTS & SUPPLIES 3.7%
2,269 Alliance Imaging, Inc.,
Term Loan................. B1 B+ 11/02/07 to 11/02/08 2,281,889
998 Conmed Corp.,
Term Loan................. B1 BB- 12/30/04 989,820
7,582 Dade Behring, Inc., Term
Loan...................... NR NR 06/30/06 to 06/30/07 7,322,268
345 DaVita, Inc., Term Loan... Ba2 BB- 03/31/06 347,534
4,875 National Nephrology
Associates, Inc.,
Term Loan................. B1 B+ 12/31/05 4,838,812
2,610 Unilab Corp.,
Term Loan................. B1 BB- 11/23/06 2,626,427
------------
18,406,750
------------
MINING, STEEL, IRON & NON-PRECIOUS METALS 1.1%
8,592 Ispat Inland, Term Loan... Caa2 CCC 07/16/05 to 07/16/06 5,219,844
------------
NATURAL RESOURCES 1.3%
5,000 Ocean Rig ASA (Norway),
Term Loan................. B3 NR 12/29/06 4,375,000
2,000 Premcor Refining Group,
Inc., Term Loan........... Ba3 BB- 08/23/03 1,992,500
------------
6,367,500
------------
NON-DURABLE CONSUMER PRODUCTS 1.6%
8,029 American Marketing
Industries, Inc., Term
Loan (a).................. NR NR 04/01/04 4,014,565
804 American Safety Razor Co.,
Term Loan................. B1 B 04/30/07 776,553
1,118 GFSI, Inc., Term Loan..... Ba3 NR 03/31/04 1,068,018
4,794 Norcorp, Inc.,
Term Loan................. NR NR 05/30/06 to 11/30/06 1,941,556
------------
7,800,692
------------
</Table>
See Notes to Financial Statements
A-7
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
PAPER & FOREST PRODUCTS 0.2%
$ 989 Port Townsend Paper Corp.,
Term Loan................. NR NR 03/16/07 $ 966,456
------------
PERSONAL & MISCELLANEOUS SERVICES 4.0%
9,720 Aspen Marketing Group,
Term Loan................. NR NR 06/30/06 8,262,000
1,500 Church & Dwight Co., Inc.,
Term Loan................. Ba2 BB 09/30/07 1,511,812
4,699 DIMAC Holdings, Inc., Term
Loan (a) (b) (g).......... NR NR 01/01/02 to 12/31/05 1,691,746
4,150 DIMAC Marketing Partners,
Inc., Term Loan (a) (b)... NR NR 07/01/03 to 01/01/05 1,494,137
370 DIMAC Marketing Partners,
Inc., Revolving Credit
Agreement (a) (b)......... NR NR 04/01/03 133,376
1,430 Stewart Enterprises, Inc.,
Term Loan................. Ba3 BB 06/30/06 1,438,669
10,205 Telespectrum Worldwide,
Inc., Term Loan (a)....... NR NR 07/01/02 4,694,310
368 Veterinary Centers of
America, Term Loan........ NR NR 09/30/08 370,666
------------
19,596,716
------------
PHARMACEUTICALS 0.7%
2,481 Caremark Rx, Inc., Term
Loan...................... Ba3 BB 03/15/06 2,506,839
998 MedPointe, Inc.,
Term Loan................. B1 B+ 09/30/08 994,072
------------
3,500,911
------------
PRINTING & PUBLISHING 5.8%
2,923 21st Century Newspapers,
Term Loan................. NR NR 09/15/05 2,733,261
1,928 American Media Operations,
Inc., Term Loan........... Ba3 B+ 04/01/07 1,941,093
1,493 CommerceConnect Media,
Inc., Term Loan........... NR NR 12/31/07 1,470,112
2,000 Goss Graphics Corp., Term
Loan (a) (b).............. NR NR 09/30/03 140,000
</Table>
See Notes to Financial Statements
A-8
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
PRINTING & PUBLISHING (CONTINUED)
$ 12 Goss Graphics Corp.,
Revolving Credit Agreement
(b)....................... NR NR 03/17/02 $ 12,195
5,820 Haights Cross
Communications, LLC, Term
Loan...................... B2 B+ 02/28/09 5,689,348
800 Lamar Media Corp., Term
Loan...................... Ba2 BB- 02/01/07 805,334
1,896 Liberty Group Operating,
Inc., Term Loan........... B1 B 03/31/07 1,857,741
3,214 Medical Arts Press, Inc.,
Term Loan................. NR NR 05/16/06 3,157,646
1,590 Payment Processing
Solutions, Inc.,
Term Loan................. NR NR 06/30/05 1,578,157
2,143 Penton Media, Inc., Term
Loan...................... B2 B 06/30/07 1,789,746
995 PRIMEDIA, Inc.,
Term Loan................. NR BB- 06/30/09 929,081
5,771 Vutek, Inc., Term Loan.... B1 NR 12/30/07 5,713,592
969 Ziff-Davis Media, Inc.,
Term Loan................. B3 CCC- 03/31/07 744,290
------------
28,561,596
------------
RESTAURANTS & FOOD SERVICE 0.9%
4,127 Domino's Pizza, Inc., Term
Loan...................... B1 B+ 12/21/06 to 12/21/07 4,182,926
------------
RETAIL -- OIL & GAS 2.7%
7,322 Barjan Products, LLC, Term
Loan...................... NR NR 05/31/06 6,919,158
4,502 Kwik Trip, Term Loan...... NR NR 07/27/07 4,536,186
1,946 The Pantry, Inc.,
Term Loan................. B1 BB- 01/31/06 1,933,445
------------
13,388,789
------------
RETAIL -- SPECIALTY 0.4%
2,010 Hollywood Entertainment
Corp., Revolving Credit
Agreement................. NR CCC 09/05/02 1,997,243
------------
</Table>
See Notes to Financial Statements
A-9
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
RETAIL -- STORES 1.9%
$ 5,894 Kirklands Holdings, Term
Loan...................... NR NR 06/30/02 $ 5,657,932
3,882 Rite Aid Corp.,
Term Loan................. B1 BB- 06/27/05 3,821,912
------------
9,479,844
------------
TELECOMMUNICATIONS -- LOCAL EXCHANGE CARRIERS 1.0%
2,000 Broadwing, Inc.,
Term Loan................. Ba1 BB+ 06/28/07 1,968,000
600 McLeodUSA, Inc., Term Loan
(b)....................... Caa2 D 05/30/08 371,666
9,097 Orius Corp., Term Loan.... NR CC 12/14/06 2,479,040
------------
4,818,706
------------
TELECOMMUNICATIONS -- LONG DISTANCE 0.5%
4,156 Pacific Crossing, Ltd.,
Term Loan................. NR NR 07/28/06 2,417,561
------------
TELECOMMUNICATIONS-WIRELESS 2.5%
4,378 BCP SP Ltd., Term Loan.... NR NR 03/31/02 to 03/31/05 3,955,123
2,739 Crown Castle International
Corp., Term Loan.......... Ba3 BB- 03/15/08 2,681,636
3,309 Nextel Finance Co., Term
Loan...................... Ba2 BB- 06/30/08 to 12/31/08 2,945,919
192 Nextel Partners, Inc.,
Term Loan................. B1 B- 07/29/08 180,769
3,000 Spectrasite
Communications, Inc., Term
Loan...................... B3 B+ 12/31/07 2,572,314
------------
12,335,761
------------
TEXTILES & LEATHER 1.0%
4,655 Glenoit Corp., Term Loan
(b)....................... NR NR 12/31/03 to 06/30/04 3,049,047
1,685 Norcross Safety Products,
LLC, Term Loan............ NR NR 10/02/05 1,596,951
499 The William Carter Co.,
Term Loan................. Ba3 BB- 09/30/08 500,309
------------
5,146,307
------------
</Table>
See Notes to Financial Statements
A-10
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
TRANSPORTATION -- CARGO 1.7%
$ 3,598 Evergreen International
Aviation, Inc.,
Term Loan................. NR NR 05/07/04 $ 3,067,410
1,099 Gemini Leasing, Inc., Term
Loan (h).................. B1 NR 08/12/05 673,203
497 Kansas City Southern
Railway Co., Term Loan.... Ba1 BB+ 12/29/06 500,009
4,359 OmniTrax Railroads, LLC,
Term Loan................. NR NR 05/13/05 4,348,000
------------
8,588,622
------------
TRANSPORTATION -- PERSONAL 0.1%
509 Motor Coach Industries,
Inc., Term Loan........... B2 B 06/16/06 396,798
------------
TRANSPORTATION -- RAIL MANUFACTURING 0.1%
834 RailWorks Corp., Term Loan
(a) (b)................... NR NR 09/30/06 525,182
------------
TOTAL VARIABLE RATE** SENIOR LOAN INTERESTS 82.9%.......................... 408,366,966
------------
</Table>
<Table>
<Caption>
DESCRIPTION VALUE
EQUITIES 1.5%
Breed Technologies, Inc. (126,731 common shares) (c)........ 363,718
DIMAC Holdings, Inc. (6,526 preferred shares) (c) (d)....... 0
DIMAC Holdings, Inc. (Warrants for 6,526 common shares) (c)
(d)....................................................... 0
Flextex Components, Inc. (Warrants for 758 common shares)
(c) (d)................................................... 0
Genesis Health Ventures, Inc. (1,070 preferred shares) (c)
(d)....................................................... 128,582
Genesis Health Ventures, Inc. (91,986 common shares) (c)
(d)....................................................... 1,471,776
Imperial Home Decor Group, Inc. (886,572 common shares) (c)
(d) (e)................................................... 0
Imperial Home Decor Realty, Inc. (886,572 common shares) (c)
(d) (e)................................................... 0
Kindred Healthcare, Inc. (55,081 common shares) (c) (d)..... 2,186,165
Pioneer Corp. of America (175,147 common shares) (c) (d).... 502,672
Safelite Glass Corp. (321,953 common shares) (c) (d)........ 2,192,500
Safelite Realty (21,732 common shares) (c) (d).............. 0
</Table>
See Notes to Financial Statements
A-11
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
<Table>
<Caption>
DESCRIPTION VALUE
Stellex Aerostructures, Inc. (33,390 common shares) (c)
(d)....................................................... $ 504,923
West American Rubber Co., LLC (6.35% ownership interest) (c)
(d)....................................................... 0
--------------
TOTAL EQUITIES 1.5%........................................ 7,350,336
--------------
TOTAL LONG-TERM INVESTMENTS 84.4%
(Cost $477,156,695)....................................... 415,717,302
--------------
SHORT-TERM INVESTMENTS 15.4%
COMMERCIAL PAPER 12.3%
Conagra, Inc. ($10,000,000 par, maturing 02/12/02, yielding
1.99%).................................................... 9,993,920
Cox Communications, Inc. ($10,000,000 par, maturing
02/14/02, yielding 2.05%)................................. 9,992,597
General Mills, Inc. ($10,000,000 par, maturing 02/06/02,
yielding 2.01%)........................................... 9,997,208
Kellogg Co. ($3,000,000 par, maturing 02/12/02, yielding
2.00%).................................................... 2,998,167
Phillips Petroleum Co. ($10,000,000 par, maturing 02/07/02,
yielding 2.05%)........................................... 9,996,583
Sprint Capital Corp. ($13,000,000 par, maturing 02/14/02,
yielding 2.16%)........................................... 12,989,860
Unum Corp. ($4,650,000 par, maturing 02/20/02, yielding
2.10%).................................................... 4,644,846
--------------
TOTAL COMMERCIAL PAPER...................................... 60,613,181
--------------
SHORT-TERM LOAN PARTICIPANTS 2.4%
Conagra, Inc. ($2,000,000 par, maturing 02/01/02, yielding
2.15%).................................................... 2,000,000
Viacom, Inc. ($10,000,000 par, maturing 02/01/02, yielding
2.00%).................................................... 10,000,000
--------------
TOTAL SHORT-TERM LOAN PARTICIPATIONS........................ 12,000,000
--------------
TIME DEPOSIT 0.7%
State Street Bank and Trust Corp. ($3,372,585 par, 0.75%
coupon, dated 01/31/02, to be sold on 02/01/02 at
$3,372,656)............................................... 3,372,585
--------------
TOTAL SHORT-TERM INVESTMENTS 15.4%
(Cost $75,985,766)........................................ 75,985,766
--------------
TOTAL INVESTMENTS 99.8%
(Cost $553,142,461)....................................... 491,703,068
OTHER ASSETS IN EXCESS OF LIABILITIES 0.2%................. 1,143,626
--------------
NET ASSETS 100.0%.......................................... $ 492,846,694
==============
</Table>
See Notes to Financial Statements
A-12
YOUR FUND'S INVESTMENTS
January 31, 2002 (Unaudited)
NR--Not rated
+ Bank Loans rated below Baa by Moody's Investor Service, Inc. or BBB by
Standard & Poor's Group are considered to be below investment grade.
(1) Industry percentages are calculated as a percentage of net assets.
(a) This Senior Loan interest is non-income producing.
(b) This borrower has filed for protection in federal bankruptcy court.
(c) Non-income producing security as this stock currently does not declare
dividends.
(d) Restricted security.
(e) Affiliated company. See Notes to Financial Statements.
(f) Subsequent to January 31, 2002, this borrower has emerged from bankruptcy.
(g) The borrower is in the process of restructuring or amending the terms of
this loan.
(h) Subsequent to January 31, 2002, this borrower filed for protection in
federal bankruptcy court.
* Senior Loans in the Fund's portfolio generally are subject to mandatory
and/or optional prepayment. Because of these mandatory prepayment conditions
and because there may be significant economic incentives for a Borrower to
prepay, prepayments of Senior Loans in the Fund's portfolio may occur. As a
result, the actual remaining maturity of Senior Loans held in the Fund's
portfolio may be substantially less than the stated maturities shown.
Although the Fund is unable to accurately estimate the actual remaining
maturity of individual Senior Loans, the Fund estimates that the actual
average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.
** Senior Loans in which the Fund invests generally pay interest at rates which
are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates are generally (i) the lending rate offered
by one or more major European banks, such as the London Inter-Bank Offered
Rate ("LIBOR"), (ii) the prime rate offered by one or more major United
States banks and (iii) the certificate of deposit rate. Senior Loans are
generally considered to be restricted in that the Fund ordinarily is
contractually obligated to receive approval from the Agent Bank and/or
borrower prior to the disposition of a Senior Loan.
See Notes to Financial Statements
A-13
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
January 31, 2002 (Unaudited)
<Table>
ASSETS:
Total Investments (Cost $553,142,461)....................... $ 491,703,068
Cash........................................................ 2,748,926
Receivables:
Interest and Fees......................................... 2,834,505
Investments Sold.......................................... 2,616,821
Fund Shares Sold.......................................... 42,273
Other....................................................... 492,809
-------------
Total Assets............................................ 500,438,402
-------------
LIABILITIES:
Payables:
Investments Purchased..................................... 4,965,085
Distributor and Affiliates................................ 529,800
Investment Advisory Fee................................... 395,905
Income Distributions...................................... 338,365
Administrative Fee........................................ 104,185
Accrued Expenses............................................ 1,152,132
Trustees' Deferred Compensation and Retirement Plans........ 106,236
-------------
Total Liabilities....................................... 7,591,708
-------------
NET ASSETS.................................................. $ 492,846,694
=============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 61,791,190 shares issued and
outstanding).............................................. $ 617,912
Paid in Surplus............................................. 728,029,292
Accumulated Undistributed Net Investment Income............. 1,707,311
Net Unrealized Depreciation................................. (61,439,393)
Accumulated Net Realized Loss............................... (176,068,428)
-------------
NET ASSETS.................................................. $ 492,846,694
=============
NET ASSET VALUE PER COMMON SHARE ($492,846,694 divided by
61,791,190 shares outstanding)............................ $ 7.98
=============
</Table>
See Notes to Financial Statements
A-14
Statement of Operations
For the Six Months Ended January 31, 2002 (Unaudited)
<Table>
INVESTMENT INCOME:
Interest.................................................... $ 19,104,082
Fees........................................................ 18,601
Other....................................................... 912,222
------------
Total Income............................................ 20,034,905
------------
EXPENSES:
Investment Advisory Fee..................................... 2,674,462
Administrative Fee.......................................... 703,806
Service Fee................................................. 422,283
Shareholder Services........................................ 334,451
Legal....................................................... 243,242
Custody..................................................... 151,478
Trustees' Fees and Related Expenses......................... 20,396
Other....................................................... 481,763
------------
Total Expenses.......................................... 5,031,881
------------
NET INVESTMENT INCOME....................................... $ 15,003,024
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(41,694,733)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (67,046,131)
End of the Period......................................... (61,439,393)
------------
Net Unrealized Appreciation During the Period............... 5,606,738
------------
NET REALIZED AND UNREALIZED LOSS............................ $(36,087,995)
============
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $(21,084,971)
============
</Table>
See Notes to Financial Statements
A-15
Statements of Changes in Net Assets
For the Six Months Ended January 31, 2002 and the Year Ended July 31, 2001
(Unaudited)
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
JANUARY 31, 2002 JULY 31, 2001
----------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................... $ 15,003,024 $ 79,684,458
Net Realized Loss................................... (41,694,733) (134,371,044)
Net Unrealized Appreciation During the Period....... 5,606,738 18,050,440
------------- --------------
Change in Net Assets from Operations................ (21,084,971) (36,636,146)
------------- --------------
Distributions from Net Investment Income............ (15,378,589) (81,218,673)
Distributions from Net Realized Gain................ -0- (2,869,500)
------------- --------------
Total Distributions................................. (15,378,589) (84,088,173)
------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES........................................ (36,463,560) (120,724,319)
------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................... 6,789,740 78,021,054
Net Asset Value of Shares Issued Through Dividend
Reinvestment...................................... 7,752,450 50,840,841
Cost of Shares Repurchased.......................... (167,842,066) (783,136,054)
------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.. (153,299,876) (654,274,159)
------------- --------------
TOTAL DECREASE IN NET ASSETS........................ (189,763,436) (774,998,478)
NET ASSETS:
Beginning of the Period............................. 682,610,130 1,457,608,608
------------- --------------
End of the Period (Including accumulated
undistributed net investment income of $1,707,311
and $2,082,876, respectively)..................... $ 492,846,694 $ 682,610,130
============= ==============
</Table>
See Notes to Financial Statements
A-16
Statement of Cash Flows
For the Six Months Ended January 31, 2002 (Unaudited)
<Table>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ (21,084,971)
-------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Decrease in Investments at Value.......................... 158,972,684
Decrease in Interest and Fees Receivables................. 1,931,935
Decrease in Receivable for Investments Sold............... 27,862,978
Decrease in Other Assets.................................. 13,201
Decrease in Investment Advisory Fee Payable............... (153,604)
Decrease in Administrative Fee Payable.................... (40,484)
Increase in Distributor and Affiliates Payable............ 39,018
Increase in Payable for Investments Purchased............. 2,584,420
Increase in Accrued Expenses.............................. 132,313
Increase in Trustees' Deferred Compensation and Retirement
Plans................................................... 8,413
-------------
Total Adjustments....................................... 191,350,874
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 170,265,903
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 7,067,325
Payments on Shares Repurchased.............................. (167,846,315)
Cash Dividends Paid......................................... (8,036,425)
-------------
Net Cash Used for Financing Activities.................. (168,815,415)
-------------
NET INCREASE IN CASH........................................ 1,450,488
Cash at Beginning of the Period............................. 1,298,438
-------------
CASH AT THE END OF THE PERIOD............................... $ 2,748,926
=============
</Table>
See Notes to Financial Statements
A-17
Financial Highlights
(Unaudited)
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
MARCH 27, 1998
SIX MONTHS (COMMENCEMENT
ENDED YEAR ENDED JULY 31, OF INVESTMENT
JANUARY 31, ------------------------------ OPERATIONS) TO
2002 2001 2000 1999 JULY 31, 1998
---------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF THE PERIOD............ $ 8.49 $ 9.58 $ 10.09 $ 10.04 $10.00
------ ------ -------- -------- ------
Net Investment Income.... .23 .75 .72 .65 .21
Net Realized and
Unrealized Gain/Loss... (.51) (1.07) (.50) .04 .04
------ ------ -------- -------- ------
Total from Investment
Operations............... (.28) (.32) .22 .69 .25
------ ------ -------- -------- ------
Less:
Distributions from Net
Investment Income...... .23 .74 .72 .64 .21
Distributions from Net
Realized Gain.......... -0- .03 .01 -0- -0-
------ ------ -------- -------- ------
Total Distributions........ .23 .77 .73 .64 .21
------ ------ -------- -------- ------
NET ASSET VALUE, END OF THE
PERIOD................... $ 7.98 $ 8.49 $ 9.58 $ 10.09 $10.04
====== ====== ======== ======== ======
Total Return* (a).......... -3.42%** -3.59% 2.27% 7.09% 2.52%**
Net Assets at End of the
Period (In millions)..... $492.8 $682.6 $1,457.6 $1,472.0 $411.4
Ratio of Expenses to
Average Net Assets*...... 1.79% 1.69% 1.64% 1.60% 1.70%
Ratio of Net Investment
Income to Average Net
Assets*.................. 5.33% 8.07% 7.37% 6.66% 6.33%
Portfolio Turnover (b)..... 63%** 25% 54% 23% 4%**
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net Assets....... N/A N/A N/A 1.61% 1.92%
Ratio of Net Investment
Income to Average Net
Assets................... N/A N/A N/A 6.65% 6.11%
</Table>
** Non-Annualized
(a) Total return assumes an investment at the beginning of the period indicated,
reinvestment of all distributions for the period and tender of all shares at
the end of the period indicated, excluding payment of 1% imposed on most
shares accepted by the Fund for repurchase which have been held for less
than one year. If the early withdrawal charge was included, total return
would be lower.
(b) Calculation includes the proceeds from principal repayments and sales of
variable rate senior loan interests.
N/A--Not Applicable.
See Notes to Financial Statements
A-18
NOTES TO
FINANCIAL STATEMENTS
January 31, 2002 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Senior Floating Rate Fund (the "Fund") is registered as a non-
diversified, closed-end management investment company under the Investment
Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment
objective is to provide a high level of current income, consistent with
preservation of capital. The Fund invests primarily in adjustable Senior Loans.
Senior Loans are business loans that have a senior right to payment and are made
to borrowers that may be corporations, partnerships or other entities. These
borrowers operate in a variety of industries and geographic regions. The Fund
commenced investment operations on March 27, 1998.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
A. SECURITY VALUATION The Fund's Senior Loans are valued by the Fund following
valuation guidelines established and periodically reviewed by the Fund's Board
of Trustees. Under the valuation guidelines, Senior Loans for which reliable
market quotes are readily available are valued at the mean of such bid and ask
quotes. Where reliable market quotes are not readily available, Senior Loans are
valued, where possible, using independent pricing sources approved by the Board
of Trustees. Other Senior Loans are valued by independent pricing sources
approved by the Board of Trustees based upon pricing models developed,
maintained and operated by those pricing sources or valued by Van Kampen
Investment Advisory Corp. (the "Adviser") by considering a number of factors
including consideration of market indicators, transactions in instruments which
the Adviser believes may be comparable (including comparable credit quality,
interest rate redetermination period and maturity), the credit worthiness of the
Borrower, the current interest rate, the period until next interest rate
redetermination and the maturity of such Senior Loans. Consideration of
comparable instruments may include commercial paper, negotiable certificates of
deposit and short-term variable rate securities which have adjustment periods
comparable to the Senior Loans in the Fund's portfolio. The fair value of Senior
Loans are reviewed and approved by the Fund's Valuation Committee and Board of
Trustees.
A-19
NOTES TO
FINANCIAL STATEMENTS
January 31, 2002 (Unaudited)
Equity securities are valued on the basis of prices furnished by pricing
services or as determined in good faith by the Adviser under the direction of
the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value. Short-term loan
participations are valued at cost in the absence of any indication of
impairment.
B. SECURITY TRANSACTIONS Investment transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Facility
fees received are treated as market discounts. Market premiums are amortized and
discounts are accreted over the stated life of each applicable Senior Loan,
note, or fixed-income security. Other income is comprised primarily of amendment
fees. Amendment fees are earned as compensation for agreeing to changes in loan
agreements.
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund 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 July 31, 2001, the Fund had an accumulated capital loss carryforward
for tax purposes of $52,192,254 which will expire on July 31, 2009. Net realized
gains or losses may differ for financial reporting and tax purposes primarily as
a result of the deferral of losses relating to wash sale transactions and losses
that were recognized for book purposes but not tax purposes.
At January 31, 2002, for federal income tax purposes the cost of long- and
short-term investments is $583,626,512, the aggregate gross unrealized
appreciation is $3,401,938 and the aggregate gross unrealized depreciation is
$95,325,382, resulting in net unrealized depreciation on long- and short-term
investments of $91,923,444.
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed at least annually. Distributions from net realized gains for book
purposes may include short-term capital gains, which are included as ordinary
income for tax purposes.
A-20
NOTES TO
FINANCIAL STATEMENTS
January 31, 2002 (Unaudited)
2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<Table>
<Caption>
AVERAGE DAILY NET ASSETS % PER ANNUM
First $4.0 billion.......................................... .950%
Next $3.5 billion........................................... .900%
Next $2.5 billion........................................... .875%
Over $10 billion............................................ .850%
</Table>
In addition, the Fund will pay a monthly administrative fee to Van Kampen
Investments Inc., the Fund's Administrator, at an annual rate of .25% of the
average daily net assets of the Fund. The administrative services to be provided
by the Administrator include monitoring the provisions of the loan agreements
and any agreements with respect to participations and assignments, record
keeping responsibilities with respect to interests in Senior Loans in the Fund's
portfolio and providing certain services to the holders of the Fund's
securities.
For the six months ended January 31, 2002, the Fund recognized expenses of
approximately $109,900 representing legal services provided by Skadden, Arps,
Slate, Meagher, & Flom (Illinois), counsel to the Fund, of which a trustee of
the Fund is an affiliated person.
Under a Legal Services agreement, the Adviser provides legal services to the
Fund. The Adviser allocates the cost of such services to each fund. For the six
months ended January 31, 2002, the Fund recognized expenses of approximately
$26,400 representing Van Kampen Investments Inc.'s, or its affiliates'
(collectively "Van Kampen") cost of providing legal services to the Fund, which
are reported as part of "Legal" expenses on the Statement of Operations.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the six months ended January
31, 2002, the Fund recognized expenses for their services of approximately
$252,600. Shareholder servicing fees are determined through negotiations with
the Fund's Board of Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later
A-21
NOTES TO
FINANCIAL STATEMENTS
January 31, 2002 (Unaudited)
date. Benefits under the retirement plan are payable upon retirement for a
ten-year period and are based upon each trustee's years of service to the Fund.
The maximum annual benefit per trustee under the plan is $2,500.
At January 31, 2002, Van Kampen owned 10,000 shares of the Fund.
During the period, the Fund owned shares of the following affiliated
companies. Affiliated companies are defined by the 1940 Act, as amended, as
those companies in which a fund holds 5% or more of the outstanding voting
securities.
<Table>
<Caption>
REALIZED DIVIDEND MARKET VALUE
NAME SHARES * GAIN/LOSS INCOME 01/31/02
Imperial Home Decor Group, Inc. ....... 886,572 -0- -0- -0-
Imperial Home Decor Realty, Inc........ 886,572 -0- -0- -0-
</Table>
* Shares were acquired through restructuring of senior loan interests.
3. CAPITAL TRANSACTIONS
At January 31, 2002 and July 31, 2001, paid in surplus aggregated $728,029,292
and $881,143,047, respectively.
Transactions in common shares were as follows:
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
JANUARY 31, 2002 JULY 31, 2001
---------------- -------------
Beginning Shares..................................... 80,403,273 152,178,276
----------- -----------
Shares Sold.......................................... 826,233 8,494,149
Shares Issued Through Dividend Reinvestment.......... 947,503 5,595,595
Shares Repurchased................................... (20,385,819) (85,864,747)
----------- -----------
Net Change in Shares Outstanding..................... (18,612,083) (71,775,003)
----------- -----------
Ending Shares........................................ 61,791,190 80,403,273
=========== ===========
</Table>
4. INVESTMENT TRANSACTIONS
During the period, the costs of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $315,629,826 and $466,999,500,
respectively.
5. TENDER OF SHARES
The Board of Trustees currently intends, each quarter, to consider authorizing
the Fund to make tender offers for all or a portion of its then outstanding
common shares at the net asset value of the shares on the expiration date of the
tender
A-22
NOTES TO
FINANCIAL STATEMENTS
January 31, 2002 (Unaudited)
offer. For the six months ended January 31, 2002, 20,385,819 shares were
tendered and repurchased by the Fund.
6. EARLY WITHDRAWAL CHARGE
An early withdrawal charge to recover offering expenses will be imposed in
connection with most common shares held for less than one year which are
accepted by the Fund for repurchase pursuant to tender offers. The early
withdrawal charge of 1.00% will be payable to Van Kampen. For the six months
ended January 31, 2002, Van Kampen received early withdrawal charges of
approximately $187,000 in connection with tendered shares of the Fund.
7. COMMITMENTS/BORROWINGS
Pursuant to the terms of certain Senior Loan agreements, the Fund had unfunded
loan commitments of approximately $2,706,400 as of January 31, 2002. The Fund
generally will maintain with its custodian short-term investments having an
aggregate value at least equal to the amount of unfunded loan commitments.
The Fund, along with the Van Kampen Prime Rate Income Trust, has entered
into a revolving credit agreement with a syndicate led by Bank of America for an
aggregate of $500,000,000, which will terminate on November 8, 2002. The
proceeds of any borrowing by the Fund under the revolving credit agreement shall
be used for temporary liquidity purposes and funding of shareholder tender
offers. Annual commitment fees of .11% are charged on the unused portion of the
credit line. Borrowings under this facility will bear interest at either the
LIBOR rate or the Federal Funds rate plus .50%.
At January 31, 2002, the Fund did not have any outstanding borrowings under
this agreement.
8. SENIOR LOAN PARTICIPATION COMMITMENTS
The Fund invests primarily in participations, assignments, or acts as a party to
the primary lending syndicate of a Senior Loan interest to corporations,
partnerships, and other entities. When the Fund purchases a participation of a
Senior Loan interest, the Fund typically enters into a contractual agreement
with the lender or other third party selling the participation, but not with the
borrower directly. As such, the Fund assumes the credit risk of the borrower,
selling participant or other persons interpositioned between the Fund and the
borrower.
A-23
NOTES TO
FINANCIAL STATEMENTS
January 31, 2002 (Unaudited)
At January 31, 2002, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Fund on a participation
basis.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SELLING PARTICIPANT (000) (000)
Bank of New York............................................ $ 738 $ 738
Canadian Imperial Bank of Commerce.......................... 3,277 3,280
Morgan Guaranty............................................. 1,500 852
------ ------
Total....................................................... $5,515 $4,870
====== ======
</Table>
9. SERVICE PLAN
The Fund has adopted a Service Plan (the "Plan") designed to meet the service
fee requirements of the sales charge rule of the National Association of
Securities Dealers, Inc. The Plan governs payments for personal services and/or
the maintenance of shareholder accounts.
Annual fees under the Plan of .15% (.25% maximum) of average daily net
assets are accrued daily and paid quarterly. For the six months ended January
31, 2002, the Fund paid service fees of approximately $10,900 to Van Kampen and
payments to Morgan Stanley DW Inc., an affiliate of the Adviser, of
approximately $316,600.
A-24
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Van Kampen Senior Floating Rate
Fund
We have audited the accompanying statement of assets and liabilities of Van
Kampen Senior Floating Rate Fund (the "Fund"), including the portfolio of
investments, as of July 31, 2001, the related statements of operations and cash
flows for the year then ended, and the statements of changes in net assets and
the financial highlights for each of the two years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The Fund's
financial highlights for the periods ended prior to July 31, 2000 were audited
by other auditors whose report, dated September 14, 1999, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 2001, by correspondence with the Fund's
custodian, brokers, and selling or agent banks; where replies were not received,
we performed alternative auditing procedures. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Senior Floating Rate Fund as of July 31, 2001, the results of its
operations, cash flows, changes in net assets, and financial highlights for the
respective stated periods, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
September 14, 2001
A-25
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
July 31, 2001
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.(1)
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
VARIABLE RATE** SENIOR LOAN INTERESTS 82.7%
AEROSPACE/DEFENSE 4.1%
$ 2,959 Aerostructures Corp., Term
Loan...................... NR BB- 12/31/03 $ 2,948,638
998 Alliant Techsystems, Inc.,
Term Loan................. Ba2 BB- 04/20/09 1,011,319
3,704 DeCrane Finance Co., Term
Loan...................... NR NR 09/30/05 3,666,903
9,373 EG&G Technical Services,
Inc., Term Loan........... B1 NR 08/20/07 8,786,979
6,867 Fairchild Corp., Term
Loan...................... Ba3 BB- 04/30/06 6,644,105
4,892 Stellex Technologies,
Inc., Term Loan (a) (b)... NR NR 09/30/06 3,021,009
1,653 Vought Aircraft
Industries, Inc., Term
Loan...................... NR NR 06/30/07 to 06/30/08 1,657,320
------------
27,736,273
------------
AUTOMOTIVE 6.0%
3,950 AMCAN Technologies, Inc.,
Term Loan................. NR NR 03/28/07 3,772,250
963 Breed Technologies, Inc.,
Term Loan................. NR NR 12/20/04 890,774
4,605 Exide Corp., Term Loan.... Ba3 B+ 03/18/05 4,320,623
4,900 Federal-Mogul Corp., Term
Loan...................... Caa1 CCC+ 02/24/05 4,795,875
4,985 J.L. French Automotive
Castings, Inc., Term
Loan...................... B1 NR 10/21/06 4,087,962
7,500 Meridian Automotive
Systems, Inc., Term
Loan...................... NR NR 03/31/07 4,875,000
9,439 Metalforming Technologies,
Inc., Term Loan........... NR NR 06/30/06 8,022,877
3,789 Polypore, Inc., Term
Loan...................... Ba3 B+ 12/31/06 3,802,887
6,883 Safelite Glass Corp., Term
Loan...................... NR NR 09/30/07 6,262,867
------------
40,831,115
------------
</Table>
See Notes to Financial Statements
A-26
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
BEVERAGE, FOOD & TOBACCO 1.5%
$ 2,459 Agrilink Foods, Inc., Term
Loan...................... B1 B+ 09/30/04 to 09/30/05 $ 2,373,387
3,714 B & G Foods, Inc., Term
Loan...................... B1 B+ 03/31/06 3,605,345
1,944 Mafco Worldwide Corp.,
Term Loan................. NR NR 03/31/06 1,920,139
2,000 Pinnacle Foods, Inc., Term
Loan...................... Ba3 BB- 05/22/08 1,995,000
------------
9,893,871
------------
BROADCASTING--CABLE 1.5%
10,000 Charter Communications,
Inc., Term Loan........... Ba3 BB+ 03/18/08 to 09/18/08 9,945,006
------------
BROADCASTING--DIVERSIFIED 2.1%
10,000 Comcorp Broadcasting,
Inc., Term Loan (a)....... NR NR 06/30/07 9,750,000
4,550 White Knight Broadcasting,
Inc., Term Loan (a)....... NR NR 06/30/07 4,436,250
------------
14,186,250
------------
BROADCASTING--RADIO 0.5%
3,250 Citadel Broadcasting Co.,
Term Loan................. NR NR 06/30/09 3,260,156
------------
BROADCASTING--TELEVISION 1.0%
6,629 Quorum Broadcasting, Inc.,
Term Loan................. NR NR 09/30/07 6,081,304
1,000 Sinclair Broadcast Group,
Inc., Term Loan........... Ba2 BB- 09/30/09 1,008,125
------------
7,089,429
------------
BUILDINGS & REAL ESTATE 0.7%
3,379 Builders FirstSource,
Inc., Term Loan........... NR BB- 12/30/05 3,336,286
1,330 Corrections Corp. of
America, Term Loan........ B3 B 12/31/02 1,274,452
------------
4,610,738
------------
CHEMICALS, PLASTICS & RUBBER 6.8%
4,950 Applied Tech Management
Corp., Term Loan.......... B1 NR 04/30/07 4,833,420
4,913 Georgia Gulf Corp., Term
Loan...................... Ba2 BBB- 11/12/06 4,910,190
</Table>
See Notes to Financial Statements
A-27
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
CHEMICALS, PLASTICS & RUBBER (CONTINUED)
$ 4,628 Huntsman Corp., Term
Loan...................... B1 NR 12/31/02 to 12/31/05 $ 3,906,170
2,081 Huntsman Corp., Revolving
Credit Agreement.......... B1 NR 12/31/02 1,661,135
5,776 Lyondell Chemical Co.,
Term Loan................. Ba3 NR 06/30/05 to 05/17/06 5,858,151
1,000 Messer Griesheim, Term
Loan...................... Ba3 BB 05/04/09 to 05/04/10 1,008,750
4,925 MetoKote Corp., Term
Loan...................... NR NR 11/02/05 4,752,625
4,939 Nutrasweet Acquisition
Corp., Term Loan.......... Ba3 NR 05/25/07 to 05/25/09 4,913,027
2,963 OM Group, Inc., Term
Loan...................... Ba3 BB 03/31/07 2,972,993
8,000 Pioneer America
Acquisition Corp., Term
Loan (a) (b).............. NR NR 12/31/06 4,080,000
5,378 Sterling Pulp Chemicals,
Inc., Term Loan........... NR NR 06/30/05 5,270,753
5,901 West American Rubber Co.,
Term Loan (a)............. NR NR 06/30/05 to 12/30/05 1,888,170
------------
46,055,384
------------
CONSTRUCTION MATERIAL 0.9%
875 Dayton Superior Corp.,
Term Loan................. Ba3 BB- 06/16/08 877,461
5,717 Flextek Components, Inc.,
Term Loan (a)............. NR NR 08/31/03 743,235
5,092 Magnatrax Corp., Term
Loan...................... NR NR 11/15/05 4,659,134
------------
6,279,830
------------
CONTAINERS, PACKAGING & GLASS 3.7%
2,375 Dr. Pepper/Seven Up
Bottling Group, Inc., Term
Loan...................... NR NR 10/07/06 2,373,612
2,000 LLS Corp., Term Loan...... Caa1 B 07/31/06 1,540,000
13,843 Nexpak Corp., Term Loan... NR NR 12/31/05 to 12/31/06 10,036,208
2,411 Pliant Corp., Term Loan... B2 B+ 05/31/08 2,306,752
</Table>
See Notes to Financial Statements
A-28
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
CONTAINERS, PACKAGING & GLASS (CONTINUED)
$ 3,862 Stone Container Corp.,
Term Loan................. Ba3 B+ 10/01/03 $ 3,878,905
4,950 Tekni-Plex, Inc., Term
Loan...................... B1 B+ 06/26/08 4,793,248
------------
24,928,725
------------
DIVERSIFIED MANUFACTURING 1.2%
7,182 Citation Corp., Term
Loan...................... NR B+ 12/01/07 5,925,216
2,419 Mueller Group, Inc., Term
Loan...................... B1 B+ 08/16/07 2,429,099
------------
8,354,315
------------
ECOLOGICAL 1.9%
12,967 Allied Waste Industries,
Inc., Term Loan........... Ba3 BB 07/21/05 to 07/21/06 12,893,684
------------
ELECTRONICS 3.6%
838 Audio Visual Services
Corp., Term Loan.......... NR NR 10/01/01 481,879
1,150 Audio Visual Services
Corp., Revolving Credit
Agreement................. NR NR 10/01/01 661,521
5,312 Dynamic Details, Inc.,
Term Loan................. Ba3 NR 04/22/05 5,303,670
4,500 Kinetic Group, Inc., Term
Loan...................... B1 NR 02/28/06 4,404,375
4,735 Stratus Technologies,
Inc., Term Loan........... NR NR 02/26/05 4,699,265
5,861 Superior Telecom, Inc.,
Term Loan................. B2 B+ 11/27/05 4,462,934
2,475 Veridian Corp., Term
Loan...................... Ba3 BB- 08/24/06 2,475,000
2,483 Viasystems, Inc., Term
Loan...................... B1 B+ 03/31/07 to 12/06/08 2,272,232
------------
24,760,876
------------
ENTERTAINMENT & LEISURE 2.9%
10,838 Fitness Holdings
Worldwide, Inc., Term
Loan...................... NR B 11/02/06 to 11/02/07 10,296,272
2,000 Six Flags Theme Parks,
Inc., Term Loan........... Ba2 BB- 09/30/05 2,021,500
</Table>
See Notes to Financial Statements
A-29
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
ENTERTAINMENT & LEISURE (CONTINUED)
$ 2,590 True Temper, Inc., Term
Loan...................... B1 BB- 09/30/05 $ 2,576,824
4,988 United Artists Theatre,
Inc., Term Loan........... B3 B- 02/02/05 4,830,085
------------
19,724,681
------------
FARMING & AGRICULTURE 0.6%
994 Hartz Mountain Corp., Term
Loan...................... B1 NR 12/31/07 998,934
3,247 The Scotts Co., Term
Loan...................... Ba3 BB 12/31/07 3,270,100
------------
4,269,034
------------
FINANCE 1.2%
3,748 Outsourcing Solutions,
Term Loan................. B2 BB- 12/10/06 3,535,726
4,884 Rent-A-Center, Inc., Term
Loan...................... Ba2 BB- 01/31/06 to 01/31/07 4,849,671
------------
8,385,397
------------
HEALTHCARE 1.9%
2,500 AMN Healthcare, Inc., Term
Loan...................... NR NR 03/31/05 2,444,140
589 Community Health Systems,
Inc., Term Loan........... NR NR 12/31/05 593,346
712 Genesis Health Ventures,
Inc., Term Loan (a) (b)... NR NR 09/30/03 537,115
1,612 Genesis Health Ventures,
Inc., Revolving Credit
Agreement (a) (b)......... NR NR 05/30/06 1,195,298
995 InteliStaf Group, Inc.,
Term Loan................. NR NR 10/31/07 989,093
1,831 Kindred Healthcare, Inc.,
Term Loan (a)............. NR NR 04/13/08 1,703,084
853 Multicare Cos., Inc., Term
Loan (a) (b).............. NR NR 09/30/03 667,472
694 Multicare Cos., Inc.,
Revolving Credit Agreement
(a) (b)................... NR NR 09/30/03 543,055
1,750 Triad Hospitals, Inc.,
Term Loan................. Ba3 B+ 09/30/08 1,768,813
2,663 Unilab Corp., Term Loan... B1 B+ 11/23/06 2,668,919
------------
13,110,335
------------
</Table>
See Notes to Financial Statements
A-30
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
HOME & OFFICE FURNISHINGS, HOUSEWARES & DURABLE CONSUMER
PRODUCTS 1.2%
$ 3,406 Formica Corp., Term Loan.. B1 B+ 04/30/06 $ 2,759,165
2,463 Imperial Home Decor Group,
Inc., Term Loan........... NR NR 04/04/06 2,241,057
802 Sleepmaster, LLC, Term
Loan...................... B1 BB- 12/31/06 787,124
1,492 Targus Group
International, Inc., Term
Loan...................... NR NR 08/31/06 1,466,363
992 Winsloew Furniture, Inc.,
Term Loan................. Ba3 B+ 03/31/06 983,741
------------
8,237,450
------------
HOTELS, MOTELS, INNS & GAMING 1.4%
7,825 Aladdin Gaming, LLC, Term
Loan...................... B1 NR 08/26/06 6,397,307
444 Isle of Capri Casinos,
Inc., Term Loan........... Ba2 BB- 03/02/06 to 03/02/07 444,154
2,481 Scientific Games Corp.,
Term Loan................. B1 B+ 09/30/07 2,462,641
------------
9,304,102
------------
INSURANCE 1.1%
4,925 Brera GAB Robins, Inc.,
Term Loan................. NR NR 12/01/05 4,801,875
3,000 White Mountains Insurance
Group, Ltd., Term Loan.... NR NR 03/31/07 3,009,375
------------
7,811,250
------------
MACHINERY 3.3%
2,985 Alliance Laundry Systems,
LLC, Term Loan............ B1 B 06/30/05 2,746,200
4,950 Ashtead Group, PLC, Term
Loan...................... NR NR 06/01/07 4,909,781
4,550 Gleason Corp., Term Loan.. NR NR 02/18/08 4,526,782
5,000 Ocean Rig ASA--(Norway),
Term Loan................. NR NR 06/01/08 4,525,000
2,313 Terex Corp., Term Loan.... Ba3 BB- 03/06/06 2,320,167
</Table>
See Notes to Financial Statements
A-31
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
MACHINERY (CONTINUED)
$ 998 United Rentals (North
America), Inc., Term
Loan...................... Ba3 BB+ 07/31/07 $ 999,006
2,978 Weigh-Tronix, LLC, Term
Loan...................... NR NR 06/30/07 2,709,525
------------
22,736,461
------------
MEDICAL PRODUCTS & SUPPLIES 3.4%
5,000 Alliance Imaging, Inc.,
Term Loan................. B1 B+ 11/02/07 to 11/02/08 5,009,375
4,800 Charles River
Laboratories, Inc., Term
Loan...................... Ba3 BB- 09/29/07 4,842,000
9,708 Dade Behring, Inc., Term
Loan...................... NR D 06/30/06 to 06/30/07 7,805,185
995 DaVita, Inc., Term Loan... Ba2 BB- 03/31/06 1,004,683
4,900 National Nephrology
Associates, Inc., Term
Loan...................... B1 B+ 12/31/05 4,864,971
------------
23,526,214
------------
MINING, STEEL, IRON & NON-PRECIOUS METALS 1.7%
8,637 Ispat Inland, Term Loan... B2 BB- 07/16/05 to 07/16/06 7,024,639
4,524 UCAR International, Inc.,
Term Loan................. Ba3 NR 12/31/01 4,448,236
------------
11,472,875
------------
NON-DURABLE CONSUMER PRODUCTS 1.9%
8,051 American Marketing
Industries, Inc., Term
Loan...................... NR NR 11/30/04 to 11/30/05 6,521,242
987 American Safety Razor Co.,
Term Loan................. B1 NR 04/30/07 985,271
1,248 GFSI, Inc., Term Loan..... Ba3 NR 03/31/04 1,229,658
4,866 Norcorp, Inc., Term
Loan...................... NR NR 05/12/06 to 11/30/06 4,379,539
------------
13,115,710
------------
PAPER & FOREST PRODUCTS 0.1%
998 Port Townsend Paper Corp.,
Term Loan................. NR NR 03/16/07 985,031
------------
PERSONAL & MISCELLANEOUS SERVICES 3.0%
9,790 Aspen Marketing Group,
Term Loan................. NR NR 06/30/06 9,300,500
2,449 Coinmach Laundry Corp.,
Term Loan................. NR BB- 12/31/04 2,432,817
</Table>
See Notes to Financial Statements
A-32
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
PERSONAL & MISCELLANEOUS SERVICES (CONTINUED)
$ 4,552 DIMAC Holdings, Inc., Term
Loan (a).................. NR NR 12/31/05 $ 1,502,018
4,205 DIMAC Marketing Partners,
Inc., Term Loan (a) (c)... NR NR 07/01/03 1,387,544
370 DIMAC Marketing Partners,
Inc., Revolving Credit
Agreement (a) (c)......... NR NR 04/01/03 122,261
9,945 Telespectrum Worldwide,
Inc., Term Loan (a)....... NR NR 07/01/02 5,718,215
------------
20,463,355
------------
PHARMACEUTICALS 0.5%
983 Bergen Brunswig Corp.,
Term Loan................. NR BB 03/31/06 984,298
2,494 Caremark Rx, Inc., Term
Loan...................... Ba3 BB 03/15/06 2,514,792
------------
3,499,090
------------
PRINTING & PUBLISHING 6.9%
4,949 21st Century Newspapers,
Term Loan................. NR NR 09/15/05 4,917,919
4,938 American Reprographics
Co., Term Loan............ NR NR 04/10/08 4,912,864
8,500 CommerceConnect Media,
Inc., Term Loan........... NR NR 12/31/07 8,372,500
2,000 Goss Graphics Term Loan... NR NR 09/30/03 1,220,000
5,850 Haights Cross
Communications, LLC, Term
Loan...................... B2 B+ 12/10/06 5,791,500
1,905 Liberty Group Operating,
Inc., Term Loan........... B1 B 03/31/07 1,890,987
4,825 Medical Arts Press, Inc.,
Term Loan................. NR NR 06/16/06 4,776,750
4,606 Payment Processing
Solutions, Inc., Term
Loan...................... NR NR 06/30/05 4,588,801
2,154 Penton Media, Inc., Term
Loan...................... Ba3 BB- 06/30/07 2,139,478
1,000 PRIMEDIA, Inc., Term
Loan...................... NR BB- 06/20/09 994,750
</Table>
See Notes to Financial Statements
A-33
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
PRINTING & PUBLISHING (CONTINUED)
$ 5,955 Vutek, Inc., Term Loan.... NR NR 06/30/07 $ 5,940,112
1,475 Ziff-Davis Media, Inc.,
Term Loan................. Ba3 B+ 03/31/07 1,353,183
------------
46,898,844
------------
RESTAURANTS & FOOD SERVICE 1.9%
7,500 Captain D's, Inc., Term
Loan...................... B2 B+ 12/31/01 7,387,500
1,384 Carvel Corp., Term Loan... NR NR 08/17/01 1,342,238
4,263 Domino's Pizza, Inc., Term
Loan...................... B1 B+ 12/21/06 to 12/21/07 4,302,091
------------
13,031,829
------------
RETAIL--OIL & GAS 2.4%
7,359 Barjan Products, LLC, Term
Loan...................... NR NR 05/31/06 7,027,871
4,612 Kwik Trip, Term Loan...... NR NR 07/27/07 4,635,506
4,964 The Pantry, Inc., Term
Loan...................... B1 BB- 01/31/06 4,956,769
------------
16,620,146
------------
RETAIL--STORES 1.5%
6,974 Kirklands Holdings, Term
Loan...................... NR NR 06/30/02 6,329,192
4,000 Rite Aid Corp., Term
Loan...................... B1 BB- 06/27/05 4,001,000
------------
10,330,192
------------
TELECOMMUNICATIONS--HYBRID 0.1%
1,000 Broadwing, Inc., Term
Loan...................... Ba1 BB+ 06/29/07 990,625
------------
TELECOMMUNICATIONS--LOCAL EXCHANGE CARRIERS 1.1%
1,723 Alaska Communications
Systems Holdings, Inc.,
Term Loan................. B1 BB 11/14/07 to 05/14/08 1,658,884
600 McLeodUSA, Inc., Term
Loan...................... B2 B 05/31/08 498,225
9,144 Orius Corp., Term Loan.... NR B- 12/15/06 5,623,443
------------
7,780,552
------------
TELECOMMUNICATIONS--LONG DISTANCE 0.6%
4,179 Pacific Crossing, Ltd.,
Term Loan................. NR NR 07/28/06 3,837,542
------------
</Table>
See Notes to Financial Statements
A-34
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
TELECOMMUNICATIONS--PAGING 0.1%
$10,973 TSR Wireless, LLC, Term
Loan (a) (b).............. NR NR 06/30/05 $ 658,350
------------
TELECOMMUNICATIONS--WIRELESS 3.7%
4,615 BCP SP Ltd., Term Loan.... B3 NR 03/31/02 to 03/31/05 4,217,473
5,000 Crown Castle International
Corp., Term Loan.......... Ba3 BB- 03/15/08 4,992,190
3,500 Nextel Finance Co., Term
Loan...................... Ba2 BB- 06/30/08 to 12/31/08 3,291,015
192 Nextel Partners, Inc.,
Term Loan................. B1 B- 07/29/08 183,974
3,000 Spectrasite
Communications, Inc., Term
Loan...................... B1 B+ 12/31/07 2,827,968
10,000 VoiceStream Wireless
Corp., Term Loan.......... Baa1 NR 02/25/08 to 06/30/09 9,994,270
------------
25,506,890
------------
TEXTILES & LEATHER 2.6%
18,673 Glenoit Corp., Term Loan
(b)....................... NR NR 12/31/03 to 06/30/04 13,071,303
3,031 Joan Fabrics Corp., Term
Loan...................... NR B+ 06/30/05 to 06/30/06 2,884,069
1,694 Norcross Safety Products,
LLC, Term Loan............ NR NR 09/30/04 1,626,381
------------
17,581,753
------------
TRANSPORTATION--CARGO 1.8%
3,598 Evergreen International
Aviation, Inc., Term
Loan...................... NR NR 05/07/03 2,878,508
3,099 Gemini Leasing, Inc., Term
Loan...................... B1 NR 08/12/05 2,781,449
2,342 North American Van Lines,
Inc., Term Loan........... B1 B+ 11/18/07 2,131,228
4,359 OmniTrax Railroads, LLC,
Term Loan................. NR NR 05/13/05 4,348,000
------------
12,139,185
------------
TRANSPORTATION--PERSONAL 0.1%
509 Motor Coach Industries,
Inc., Term Loan........... B2 B 06/16/06 399,342
------------
</Table>
See Notes to Financial Statements
A-35
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
TRANSPORTATION--RAIL MANUFACTURING 0.1%
$ 834 RailWorks Corp., Term
Loan...................... Caa1 B 09/30/06 $ 654,393
------------
UTILITIES 0.1%
965 Western Resources, Inc.,
Term Loan................. NR NR 03/17/03 968,986
------------
TOTAL VARIABLE RATE** SENIOR LOAN INTERESTS 82.7%.......................... 564,865,266
------------
</Table>
<Table>
EQUITIES 1.0%
Breed Technologies, Inc. (126,731 common shares) (d)........ 646,328
DIMAC Holdings, Inc. (6,526 preferred shares) (d) (e)....... 0
DIMAC Holdings, Inc. (Warrants for 6,526 common shares) (d)
(e)....................................................... 0
Flextek Components, Inc. (Warrants for 758 common shares)
(d) (e)................................................... 0
Imperial Home Decor Group, Inc. (886,572 common shares) (d)
(e)....................................................... 1,250,067
Imperial Home Decor Realty, Inc. (886,572 common shares) (d)
(e)....................................................... 0
Kindred Healthcare, Inc. (59,981 common shares) (d) (e)..... 2,819,107
Safelite Glass Corp. (321,953 common shares) (d) (e)........ 2,140,987
Safelite Realty (21,732 common shares) (d) (e).............. 0
------------
TOTAL EQUITIES.............................................. 6,856,489
------------
TOTAL LONG-TERM INVESTMENTS 83.7%
(Cost $638,767,886)....................................... 571,721,755
------------
SHORT-TERM INVESTMENTS 11.6%
COMMERCIAL PAPER 7.5%
Centex Corp. ($5,000,000 par, maturing 08/17/01, yielding
3.90%).................................................... 4,991,334
Glencore Funding, Inc. ($10,000,000 par, maturing 08/16/01,
yielding 3.90%)........................................... 9,983,458
Praxair, Inc. ($5,000,000 par, maturing 08/09/01, yielding
3.84%).................................................... 4,995,733
Praxair, Inc. ($5,000,000 par, maturing 08/09/01, yielding
3.85%).................................................... 4,995,722
Sprint Corp. ($14,000,000 par, maturing 08/02/01, yielding
4.07%).................................................... 13,998,417
Texas Utilities Co. ($12,000,000 par, maturing 08/09/01,
yielding 4.00%)........................................... 11,989,333
------------
TOTAL COMMERCIAL PAPER...................................... 50,953,997
------------
</Table>
See Notes to Financial Statements
A-36
YOUR FUND'S INVESTMENTS
July 31, 2001
<Table>
SHORT-TERM LOAN PARTICIPANTS 4.1%
Englehard Corp. ($10,000,000 par, maturing 08/03/01,
yielding 3.90%)........................................... $ 10,000,000
Illinois Power Co. ($5,000,000 par, maturing 08/01/01,
yielding 3.95%)........................................... 5,000,000
TRW, Inc. ($6,000,000 par, maturing 08/01/01, yielding
4.00%).................................................... 6,000,000
TRW, Inc. ($7,000,000 par, maturing 08/02/01, yielding
3.95%).................................................... 7,000,000
------------
TOTAL SHORT-TERM LOAN PARTICIPATIONS........................ 28,000,000
------------
TOTAL SHORT-TERM INVESTMENTS 11.6%
(Cost $78,953,997)........................................ 78,953,997
------------
TOTAL INVESTMENTS 95.3%
(Cost $717,721,883)....................................... 650,675,752
OTHER ASSETS IN EXCESS OF LIABILITIES 4.7%................. 31,934,378
------------
NET ASSETS 100.0%.......................................... $682,610,130
============
</Table>
NR--Not rated
+ Bank Loans rated below Baa by Moody's Investor Service, Inc. or BBB by
Standard & Poor's Group are considered to be below investment grade. (Bank
loan ratings are unaudited.)
(1) Industry percentages are calculated as a percentage of net assets.
(a) This Senior Loan interest is non-income producing.
(b) This borrower has filed for protection in federal bankruptcy court.
(c) Subsequent to July 31, 2001, this borrower filed for protection in federal
bankruptcy court.
(d) Non-income producing security as this stock currently does not declare
dividends.
(e) Restricted Security.
* Senior Loans in the Fund's portfolio generally are subject to mandatory
and/or optional prepayment. Because of these mandatory prepayment conditions
and because there may be significant economic incentives for a Borrower to
prepay, prepayments of Senior Loans in the Fund's portfolio may occur. As a
result, the actual remaining maturity of Senior Loans held in the Fund's
portfolio may be substantially less than the stated maturities shown.
Although the Fund is unable to accurately estimate the actual remaining
maturity of individual Senior Loans, the Fund estimates that the actual
average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.
** Senior Loans in which the Fund invests generally pay interest at rates which
are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates are generally (i) the lending rate offered
by one or more major European banks, such as the London Inter-Bank Offered
Rate ("LIBOR"), (ii) the prime rate offered by one or more major United
States banks and (iii) the certificate of deposit rate. Senior Loans are
generally considered to be restricted in that the Fund ordinarily is
contractually obligated to receive approval from the Agent Bank and/or
borrower prior to the disposition of a Senior Loan.
See Notes to Financial Statements
A-37
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
July 31, 2001
<Table>
ASSETS:
Total Investments (Cost $717,721,883)....................... $ 650,675,752
Cash........................................................ 1,298,438
Receivables:
Investments Sold.......................................... 30,479,799
Interest and Fees......................................... 4,766,440
Fund Shares Sold.......................................... 319,858
Other....................................................... 506,010
-------------
Total Assets............................................ 688,046,297
-------------
LIABILITIES:
Payables:
Investments Purchased..................................... 2,380,665
Income Distributions...................................... 748,651
Investment Advisory Fee................................... 549,509
Distributor and Affiliates................................ 490,782
Administrative Fee........................................ 144,669
Initial Offering and Registration Costs................... 41,558
Fund Shares Repurchased................................... 4,249
Accrued Expenses............................................ 978,261
Trustees' Deferred Compensation and Retirement Plans........ 97,823
-------------
Total Liabilities....................................... 5,436,167
-------------
NET ASSETS.................................................. $ 682,610,130
=============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 80,403,273 shares issued and
outstanding).............................................. $ 804,033
Paid in Surplus............................................. 881,143,047
Accumulated Undistributed Net Investment Income............. 2,082,876
Net Unrealized Depreciation................................. (67,046,131)
Accumulated Net Realized Loss............................... (134,373,695)
-------------
NET ASSETS.................................................. $ 682,610,130
=============
NET ASSET VALUE PER COMMON SHARE ($682,610,130 divided by
80,403,273 shares outstanding)............................ $ 8.49
=============
</Table>
See Notes to Financial Statements
A-38
Statement of Operations
For the Year Ended July 31, 2001
<Table>
INVESTMENT INCOME:
Interest.................................................... $ 94,340,173
Fees........................................................ 5,389
Other....................................................... 2,072,986
-------------
Total Income............................................ 96,418,548
-------------
EXPENSES:
Investment Advisory Fee..................................... 9,381,752
Administrative Fee.......................................... 2,468,882
Service Fee................................................. 1,481,329
Shareholder Services........................................ 862,316
Legal....................................................... 602,195
Custody..................................................... 357,493
Trustees' Fees and Related Expenses......................... 57,293
Other....................................................... 1,504,919
-------------
Total Operating Expenses................................ 16,716,179
Less Credits Earned on Cash Balances.................... 362
-------------
Net Operating Expenses.................................. 16,715,817
Interest Expense........................................ 18,273
-------------
NET INVESTMENT INCOME....................................... $ 79,684,458
=============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(134,371,044)
-------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (85,096,571)
End of the Period......................................... (67,046,131)
-------------
Net Unrealized Appreciation During the Period............... 18,050,440
-------------
NET REALIZED AND UNREALIZED LOSS............................ $(116,320,604)
=============
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $ (36,636,146)
=============
</Table>
See Notes to Financial Statements
A-39
Statements of Changes in Net Assets
For the Years Ended July 31, 2001 and 2000
<Table>
<Caption>
YEAR ENDED YEAR ENDED
JULY 31, 2001 JULY 31, 2000
--------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................ $ 79,684,458 $ 116,971,614
Net Realized Gain/Loss............................... (134,371,044) 3,089,393
Net Unrealized Appreciation/Depreciation During the
Period............................................. 18,050,440 (84,184,679)
-------------- --------------
Change in Net Assets from Operations................. (36,636,146) 35,876,328
-------------- --------------
Distributions from Net Investment Income............. (81,218,673) (116,807,793)
Distributions from and in Excess of Net Realized
Gains.............................................. (2,869,500) (1,076,619)
-------------- --------------
Total Distributions.................................. (84,088,173) (117,884,412)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.. (120,724,319) (82,008,084)
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................ 78,021,054 568,093,865
Net Asset Value of Shares Issued Through Dividend
Reinvestment....................................... 50,840,841 81,211,399
Cost of Shares Repurchased........................... (783,136,054) (581,641,209)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS... (654,274,159) 67,664,055
-------------- --------------
TOTAL DECREASE IN NET ASSETS......................... (774,998,478) (14,344,029)
NET ASSETS:
Beginning of the Period.............................. 1,457,608,608 1,471,952,637
-------------- --------------
End of the Period (Including accumulated
undistributed net investment income of $2,082,876
and $3,604,417, respectively)...................... $ 682,610,130 $1,457,608,608
============== ==============
</Table>
See Notes to Financial Statements
A-40
Statement of Cash Flows
For the Year Ended July 31, 2001
<Table>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ (36,636,146)
-------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Decrease in Investments at Value.......................... 798,956,362
Decrease in Interest and Fees Receivables................. 6,265,446
Increase in Receivable for Investments Sold............... (30,479,799)
Decrease in Prepaid Expenses and Other Assets............. 43,750
Decrease in Investment Advisory Fee Payable............... (683,531)
Decrease in Administrative Fee Payable.................... (199,485)
Increase in Distributor and Affiliates Payable............ 116,733
Increase in Payable for Investments Purchased............. 2,380,665
Increase in Accrued Expenses.............................. 213,880
Increase in Trustees' Deferred Compensation and Retirement
Plans................................................... 31,778
-------------
Total Adjustments....................................... 776,645,799
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 740,009,653
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 80,379,377
Change in Intra-day Credit Line with Custodian Bank......... (1,527,645)
Payments on Shares Repurchased.............................. (783,183,594)
Cash Dividends Paid......................................... (31,509,853)
Capital Gain Dividends Paid................................. (2,869,500)
-------------
Net Cash Used for Financing Activities.................... (738,711,215)
-------------
NET INCREASE IN CASH........................................ 1,298,438
Cash at Beginning of the Period............................. -0-
-------------
CASH AT THE END OF THE PERIOD............................... $ 1,298,438
=============
</Table>
See Notes to Financial Statements
A-41
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
MARCH 27, 1998
(COMMENCEMENT
YEAR ENDED JULY 31, OF INVESTMENT
------------------------------ OPERATIONS) TO
2001 2000 1999 JULY 31, 1998
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE
PERIOD.............................. $ 9.58 $ 10.09 $ 10.04 $10.00
------ -------- -------- ------
Net Investment Income............... .75 .72 .65 .21
Net Realized and Unrealized
Gain/Loss......................... (1.07) (.50) .04 .04
------ -------- -------- ------
Total from Investment Operations...... (.32) .22 .69 .25
------ -------- -------- ------
Less:
Distributions from Net Investment
Income............................ .74 .72 .64 .21
Distributions from and in Excess of
Net Realized Gains................ .03 .01 -0- -0-
------ -------- -------- ------
Total Distributions................... .77 .73 .64 .21
------ -------- -------- ------
NET ASSET VALUE, END OF THE PERIOD.... $ 8.49 $ 9.58 $ 10.09 $10.04
====== ======== ======== ======
Total Return* (a)..................... -3.59% 2.27% 7.09% 2.52%**
Net Assets at End of the Period (In
millions)........................... $682.6 $1,457.6 $1,472.0 $411.4
Ratio of Expenses to Average Net
Assets*............................. 1.69% 1.64% 1.60% 1.70%
Ratio of Net Investment Income to
Average Net Assets*................. 8.07% 7.37% 6.66% 6.33%
Portfolio Turnover (b)................ 25% 54% 23% 4%**
* If certain expenses had not been assumed by Van Kampen, total return would have been
lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets.............................. N/A N/A 1.61% 1.92%
Ratio of Net Investment Income to
Average Net Assets.................. N/A N/A 6.65% 6.11%
</Table>
** Non-Annualized
(a) Total return assumes an investment at the beginning of the period indicated,
reinvestment of all distributions for the period and tender of all shares at
the end of the period indicated, excluding payment of 1% imposed on most
common shares accepted by the Fund for repurchase which have been held for
less than one year. If the early withdrawal charge was included, total
return would be lower.
(b) Calculation includes the proceeds from principal repayments and sales of
variable rate senior loan interests.
N/A--Not Applicable.
See Notes to Financial Statements
A-42
NOTES TO
FINANCIAL STATEMENTS
July 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Senior Floating Rate Fund (the "Fund") is registered as a non-
diversified, closed-end management investment company under the Investment
Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment
objective is to provide a high level of current income, consistent with
preservation of capital. The Fund invests primarily in adjustable Senior Loans.
Senior Loans are business loans that have a senior right to payment and are made
to borrowers that may be corporations, partnerships or other entities. These
borrowers operate in a variety of industries and geographic regions. The Fund
commenced investment operations on March 27, 1998.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
A. SECURITY VALUATION The Fund's Senior Loans are valued by the Fund following
valuation guidelines established and periodically reviewed by the Fund's Board
of Trustees. Under the valuation guidelines, Senior Loans for which reliable
market quotes are readily available are valued at the mean of such bid and ask
quotes. Where reliable market quotes are not readily available, Senior Loans are
valued, where possible, using independent pricing sources approved by the Board
of Trustees. Other Senior Loans are valued by independent pricing sources
approved by the Board of Trustees based upon pricing models developed,
maintained and operated by those pricing sources or valued by Van Kampen
Investment Advisory Corp. (the "Adviser") by considering a number of factors
including consideration of market indicators, transactions in instruments which
the Adviser believes may be comparable (including comparable credit quality,
interest rate redetermination period and maturity), the credit worthiness of the
borrower, the current interest rate, the period until the next interest rate
redetermination and the maturity of such Senior Loans. Consideration of
comparable instruments may include commercial paper, negotiable certificates of
deposit and short-term variable rate securities which have adjustment periods
comparable to the Senior Loans in the Fund's portfolio. The fair value of Senior
Loans are reviewed and approved by the Fund's Valuation Committee and Board of
Trustees.
A-43
NOTES TO
FINANCIAL STATEMENTS
July 31, 2001
Equity securities are valued on the basis of prices furnished by pricing
services or as determined in good faith by the Adviser under the direction of
the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value. Short-term loan
participations are valued at cost in the absence of any indication of
impairment.
B. SECURITY TRANSACTIONS Investment transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Facility
fees received are treated as market discounts. Market premiums are amortized and
discounts are accreted over the stated life of each applicable security. Other
income is comprised primarily of amendment fees. Amendment fees are earned as
compensation for agreeing to changes in loan agreements.
In November 2000 the American Institute of Certified Public Accountants
("AICPA") issued a revised version of the AICPA Audit and Accounting Guide for
Investment Companies ("the Guide"). The revised version of the Guide is
effective for annual financial statements issued for fiscal years beginning
after December 15, 2000 and requires investment companies to amortize premiums
and accrete discounts on fixed income securities. As noted above, the fund
currently amortizes premiums and accretes discounts on fixed income securities;
therefore, this accounting change has no impact to the Fund.
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund 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 July 31, 2001, the Fund had an accumulated capital loss carryforward
for tax purposes of $52,192,254 which will expire on July 31, 2009. Net realized
gains or losses may differ for financial reporting and tax purposes primarily as
a result of the deferral of losses relating to wash sale transactions, post
October losses which may not be recognized for tax purposes until the first day
of the following fiscal year and other losses that were recognized for book
purposes but not tax purposes at the end of the fiscal year.
At July 31, 2001, for federal income tax purposes the cost of long- and
short-term investments is $748,286,189, the aggregate gross unrealized
appreciation
A-44
NOTES TO
FINANCIAL STATEMENTS
July 31, 2001
is $35,106,047 and the aggregate gross unrealized depreciation is $132,716,484,
resulting in net unrealized depreciation on long- and short-term investments of
$97,610,437.
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed at least annually. Distributions from net realized gains for book
purposes may include short-term capital gains, which are included as ordinary
income for tax purposes.
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis reporting
for the 2001 fiscal year have been identified and appropriately reclassified. A
permanent difference of $17,045 relating to expenses that are not deductible for
tax purposes has been reclassified from accumulated undistributed net investment
income to capital. Additionally, a permanent difference relating to a
distribution reclassification totaling $4,371 has been reclassified from
accumulated net realized loss to accumulated undistributed net investment
income.
F. EXPENSE REDUCTIONS During the year ended July 31, 2001, the Fund's custody
fee was reduced by $362 as a result of credits earned on cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<Table>
<Caption>
AVERAGE DAILY NET ASSETS % PER ANNUM
First $4.0 billion.......................................... .950%
Next $3.5 billion........................................... .900%
Next $2.5 billion........................................... .875%
Over $10 billion............................................ .850%
</Table>
In addition, the Fund will pay a monthly administrative fee to Van Kampen
Funds Inc., the Fund's Administrator, at an annual rate of .25% of the average
daily net assets of the Fund. The administrative services to be provided by the
Administrator include monitoring the provisions of the loan agreements and any
agreements with respect to participations and assignments, record keeping
responsibilities with respect to interests in Variable Rate Senior Loans in the
Fund's portfolio and providing certain services to the holders of the Fund's
securities.
A-45
NOTES TO
FINANCIAL STATEMENTS
July 31, 2001
For the year ended July 31, 2001, the Fund recognized expenses of
approximately $199,700 representing legal services provided by Skadden, Arps,
Slate, Meagher, & Flom (Illinois), counsel to the Fund, of which a trustee of
the Fund is an affiliated person.
Under a Legal Services agreement, the Adviser provides legal services to the
Fund. The Adviser allocates the cost of such services to each fund. For the year
ended July 31, 2001, the Fund recognized expenses of approximately $62,900
representing Van Kampen Investments Inc.'s or its affiliates' (collectively "Van
Kampen") cost of providing legal services to the Fund, which are reported as
part of legal expenses on the Statement of Operations.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended July 31, 2001,
the Fund recognized expenses for their services of approximately $673,400.
Shareholder servicing fees are determined through negotiations with the Fund's
Board of Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable upon retirement for a
ten-year period and are based upon each trustee's years of service to the Fund.
The maximum annual benefit per trustee under the plan is $2,500.
At July 31, 2001, Van Kampen owned 10,000 shares of the Fund.
3. CAPITAL TRANSACTIONS
At July 31, 2001 and July 31, 2000, paid in surplus aggregated $881,143,047 and
$1,534,716,501, respectively.
Transactions in common shares were as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
JULY 31, 2001 JULY 31, 2000
------------- -------------
Beginning Shares..................................... 152,178,276 145,951,374
----------- -----------
Shares Sold.......................................... 8,494,149 57,196,384
Shares Issued Through Dividend Reinvestment.......... 5,595,595 8,251,082
Shares Repurchased................................... (85,864,747) (59,220,564)
----------- -----------
Net Change in Shares Outstanding..................... (71,775,003) 6,226,902
----------- -----------
Ending Shares........................................ 80,403,273 152,178,276
=========== ===========
</Table>
A-46
NOTES TO
FINANCIAL STATEMENTS
July 31, 2001
4. INVESTMENT TRANSACTIONS
During the period, the costs of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $230,269,980 and $889,982,325,
respectively.
5. TENDER OF SHARES
The Board of Trustees currently intends, each quarter, to consider authorizing
the Fund to make tender offers for all or a portion of its then outstanding
common shares at the net asset value of the shares on the expiration date of the
tender offer. For the year ended July 31, 2001, 85,864,747 shares were tendered
and repurchased by the Fund.
6. EARLY WITHDRAWAL CHARGE
An early withdrawal charge to recover offering expenses will be imposed in
connection with most common shares held for less than one year which are
accepted by the Fund for repurchase pursuant to tender offers. The early
withdrawal charge of 1.00% will be payable to Van Kampen. For the year ended
July 31, 2001, Van Kampen received early withdrawal charges of approximately
$1,171,500 in connection with tendered shares of the Fund.
7. COMMITMENTS/BORROWINGS
Pursuant to the terms of certain Senior Loan agreements, the Fund had unfunded
loan commitments of approximately $5,165,500 as of July 31, 2001. The Fund
generally will maintain with its custodian short-term investments having an
aggregate value at least equal to the amount of unfunded loan commitments.
The Fund, along with the Van Kampen Prime Rate Income Trust, has entered
into a revolving credit agreement with a syndicate led by Bank of America for an
aggregate of $500,000,000, which will terminate on November 9, 2001. The
proceeds of any borrowing by the Fund under the revolving credit agreement shall
be used for temporary liquidity purposes and funding of shareholder tender
offers. Annual commitment fees of .09% are charged on the unused portion of the
credit line. Borrowings under this facility will bear interest at either the
LIBOR rate or the Federal Funds rate plus .50%. At July 31, 2001, the Fund did
not have any outstanding borrowings under this agreement.
8. SENIOR LOAN PARTICIPATION COMMITMENTS
The Fund invests primarily in participations, assignments, or acts as a party to
the primary lending syndicate of a Senior Loan interest to corporations,
partnerships, and other entities. When the Fund purchases a participation of a
Senior Loan interest, the Fund typically enters into a contractual agreement
with the lender or
A-47
NOTES TO
FINANCIAL STATEMENTS
July 31, 2001
other third party selling the participation, but not with the borrower directly.
As such, the Fund assumes the credit risk of the borrower, selling participant
or other persons interpositioned between the Fund and the borrower.
At July 31, 2001, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Fund on a participation
basis.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SELLING PARTICIPANT (000) (000)
Canadian Imperial Bank of Commerce.......................... $ 3,862 $ 3,879
------- -------
</Table>
9. SERVICE PLAN
The Fund has adopted a Service Plan (the "Plan") designed to meet the service
fee requirements of the sales charge rule of the National Association of
Securities Dealers, Inc. The Plan governs payments for personal services and/or
the maintenance of shareholder accounts.
Annual fees under the Plan of .15% (.25% maximum) of the average daily net
assets are accrued daily and paid quarterly. For the year ended July 31, 2001,
the Fund paid service fees of approximately $1,590,400 to Van Kampen.
A-48