UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-05273
Van Kampen Income Trust
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas NY NY 10020
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Ronald Robison
1221 Avenue of the Americas
New York, NY 10020
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
-----------------------------
Date of fiscal year end: 12/31
-----------
Date of reporting period: 6/30/03
-----------
Item 1. Report to Shareholders
Welcome, Shareholder
In this update, you'll learn about how your trust performed during the
reporting period. The portfolio management team will provide an overview
of the market climate, and discuss some of the factors that helped or
hindered performance during the reporting period. In addition, this
report includes the trust's financial statements and a list of
investments, as well as other information.
Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the trust will achieve its investment
objective. The trust is subject to market risk, which is the possibility
that the market values of securities owned by the trust will decline and,
therefore, the value of the trust shares may be less than what you paid
for them. Accordingly, you can lose money investing in this trust.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Performance Summary
NET ASSET VALUE AND COMMON SHARE MARKET PRICE
(based upon quarter-end values--June 1993 through June 2003)
(LINE GRAPH)
<Table>
<Caption>
NET ASSET VALUE COMMON SHARE MARKET PRICE
--------------- -------------------------
6/93 8.17 8.13
8.15 8.25
8.15 8.13
8.08 7.25
8.13 7.75
8.13 7.75
8.16 7.75
8.25 8.13
8.17 7.25
7.92 7.00
7.79 6.88
7.73 7.00
6/94 7.72 7.00
7.70 7.00
7.63 7.25
7.43 7.25
7.36 6.88
7.29 6.63
7.28 6.50
7.35 6.88
7.50 7.13
7.50 7.25
7.58 7.00
7.78 7.13
6/95 7.76 7.25
7.75 7.25
7.78 7.00
7.84 7.38
7.86 7.25
7.88 7.13
7.94 7.25
7.99 7.38
7.90 7.38
7.81 7.38
7.79 7.38
7.76 7.38
6/96 7.78 7.25
7.75 7.25
7.73 7.50
7.85 7.25
7.92 7.25
7.99 7.50
8.00 7.50
7.92 7.63
7.94 7.50
7.79 7.50
7.82 7.50
7.89 7.63
6/97 7.95 7.69
8.08 7.75
8.00 7.50
8.10 7.69
8.09 7.69
8.12 8.00
8.05 8.00
8.16 8.13
8.15 8.06
8.18 8.13
8.19 7.88
8.19 8.06
6/98 8.17 7.81
8.17 7.88
7.88 7.44
7.87 7.63
7.69 7.88
7.91 7.94
7.84 7.75
7.90 7.31
7.72 7.13
7.75 7.00
7.78 7.06
7.60 7.06
6/99 7.51 6.88
7.47 6.56
7.40 6.56
7.39 6.38
7.36 6.25
7.36 6.06
7.25 5.69
7.26 5.94
7.27 6.19
7.23 6.19
7.17 6.19
7.06 6.06
6/00 7.12 6.56
7.13 6.50
7.17 6.75
7.06 6.56
6.93 6.50
6.83 6.31
6.85 6.56
7.01 6.90
7.04 6.97
6.93 6.89
6.80 6.85
6.80 7.15
6/01 6.68 7.04
6.74 7.09
6.75 7.30
6.55 6.88
6.66 6.65
6.61 6.40
6.50 6.33
6.47 6.42
6.37 6.26
6.32 6.19
6.38 6.18
6.32 6.40
6/02 6.13 6.12
6.03 5.85
6.08 6.14
6.05 5.94
5.97 5.69
6.08 5.75
6.11 5.71
6.13 5.89
6.18 5.96
6.21 5.86
6.33 5.96
6.37 6.02
6/03 6.40 5.93
</Table>
The solid line above represents the trust's net asset value (NAV), which
indicates overall changes in value among the trust's underlying securities. The
trust's common share market price is represented by the dashed line, which
indicates the price the market is willing to pay for shares of the trust at a
given time. Common share market price is influenced by a range of factors,
including supply and demand and market conditions.
<Table>
<Caption>
- ------------------------------------------------------------------------------
AVERAGE ANNUAL MARKET
TOTAL RETURNS PRICE
since 04/22/88
Since Inception 6.60%
10-year 5.66
5-year 2.88
1-year 4.00
6-month 7.32
- ------------------------------------------------------------------------------
</Table>
Past performance is no guarantee of future results. Investment return, common
share market price and net asset value will fluctuate and trust shares, when
sold, may be worth more or less than their original cost.
As a result of recent market activity, current performance may vary from the
figures shown. For more up-to-date information, please visit vankampen.com or
speak with your financial advisor. Total return assumes an investment at the
common share market price at the beginning of the period, reinvestment of all
distributions for the period in accordance with the trust's dividend
reinvestment plan, and sale of all shares at the closing common share market
price at the end of the period. Distribution rate represents the monthly
annualized distributions of the trust at the end of the period and not the
earnings of the trust.
1
Trust Report
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2003
Van Kampen Income Trust is managed by the Adviser's Taxable Fixed Income
team. Members of the team include Gordon Loery, Executive Director;
Jaidip Singh, Executive Director; and Menglin Luo, Vice President.(1) The
following discussion reflects their views on the trust's performance.
Q. BEFORE YOU DISCUSS HOW THE TRUST PERFORMED, PLEASE DESCRIBE THE
OVERALL MARKET ENVIRONMENT.
A. Concerns over the strength of the U.S. economy caused the Federal Reserve
Bank (the Fed) to cut interest rates twice during the period, taking
Treasury yields to their lowest levels in decades. Plunging interest
rates led to record levels of homeowner refinancing, and caused the
mortgage-backed securities sector to underperform relative to Treasuries.
The high-yield market roared ahead in the first half of 2003, posting its
best six-month return since 1991. High-yield mutual fund inflows during
the period were at their highest level ever, reflecting enormous demand
on the part of individual and institutional investors.
Overall, market performance was inversely related to credit rating, with
CCC credits strongly outperforming B and BB rated bonds. Sector
performance was dominated by industries such as wireless communications,
utilities, telecommunications and cable, which were among the worst
performers in 2002.
Q. HOW DID THE TRUST PERFORM DURING THE REPORTING PERIOD?
A. -- The trust generated a total return of 7.32 percent for the six
months ended June 30, 2003, based on common share market price. Past
performance is no guarantee of future results.
-- The trust's monthly dividend of $0.0295 translated to a distribution
rate of 5.97 percent, based on the trust's common share market price
as of June 30, 2003.
See Performance Summary for additional information.
Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD?
A. -- The high-yield sector, which made up approximately 43 percent of the
portfolio, was among the best performing areas of the fixed-income
markets during the period.
-- Within the high-yield component of the portfolio, selected holdings
in the wireless sector benefited the trust's performance. American
(1)Team members may change at any time without notice.
2
Cellular performed especially well, rebounding strongly from a low
valuation on the basis of its solid fundamentals.
-- Housing companies such as CB Richard Ellis and Technical Olympic
also performed well as housing activity remained one of the
economy's few bright spots.
Q. WHAT FACTORS HINDERED PERFORMANCE?
A. -- Our expectation for an improving economy led us to assume a
defensive duration posture, which held the trust back when interest
rates fell sharply, especially in May.
-- The trust's mortgage-backed securities holdings were hurt by that
sector's underperformance relative to other fixed-income sectors.
These holdings included premium-coupon bonds that lagged in the
rally when investors began to bid down prices on bonds perceived to
be vulnerable to prepayments.
Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE TRUST, HIGHLIGHTING KEY
THEMES.
A. Within the high-yield portion of the portfolio, we took profits on some
of the trust's energy holdings. We also reduced exposure to
transportation companies whose fundamentals no longer supported their
presence in the portfolio. We increased the portfolio's utilities and
cable holdings when our analysts were able to identify attractive
companies.
Our expectations for the economy centered on an anticipated return to
positive growth in the relatively near term. This led us to keep the
portfolio's duration (a measure of interest-rate sensitivity) shorter
than that of its benchmarks in an effort to protect the trust from
unwanted
<Table>
TOP 5 SECTORS AS OF 6/30/03 RATINGS ALLOCATION AS OF 6/30/03
Telecommunications 4.9% AAA/Aaa 40.4%
Media-Noncable 4.4 AA/Aa 0.1
Chemicals 4.2 BBB/Baa 4.9
Health Care 3.8 BB/Ba 20.4
Paper 3.1 B/B 25.6
CCC/Caa 5.6
CC/Ca 1.0
Non Rated 2.0
</Table>
Subject to change daily. All percentages are as a percentage of long-term
investments. Provided for informational purposes only and should not be deemed
as a recommendation to buy securities in the sectors shown above. Securities are
classified by sectors that represent broad groupings of related industries.
Ratings allocation based upon ratings as issued by Standard and Poor's and
Moody's, respectively. Morgan Stanley is a full-service securities firm engaged
in securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services.
3
volatility that could result from rising interest rates. We also adjusted
the aggregate coupon structure of the trust's mortgage-backed holdings in
an effort to avoid the effects of rapid homeowner-mortgage-prepayment
rates associated with newer, more current-coupon mortgage product.
Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW OF THE TRUST, DO YOU HAVE ANY
CLOSING THOUGHTS FOR THE SHAREHOLDERS?
A. There are several factors at work that we believe may be supportive of
economic growth and, thus, rising interest rates. First, the economy's
underlying strength appears fundamentally sound. Second, Treasury yields
ended the period at multi-decade lows that appear to be unsustainable.
Lastly, both fiscal and monetary policy remain geared to spurring near-
term economic growth.
While these factors appear to signal a potential turnaround, it is
difficult to predict with certainty when that may occur. Regardless, we
will continue with our disciplined investment approach while monitoring
the markets closely for opportunities.
PROXY VOTING POLICIES AND PROCEDURES
A description of the fund's policies and procedures with respect to the
voting of proxies relating to the Fund's portfolio securities is
available without charge, upon request, by calling 1-800-847-2424. This
information is also available on the Securities and Exchange Commission's
website at http:///www.sec.gov.
4
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
THE FOLLOWING PAGES DETAIL YOUR TRUST'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
DOMESTIC CORPORATE BONDS 38.0%
AUTOMOTIVE 1.9%
$1,010 Aetna Industries, Inc. (a) (b) (e)... 11.875% 10/01/06 $ 5,050
110 ArvinMeritor, Inc. .................. 8.750 03/01/12 123,750
250 Autonation, Inc. (c)................. 9.000 08/01/08 278,750
180 Collins & Aikman Products Co. (c).... 10.750 12/31/11 159,300
275 Laidlaw International, Inc., 144A--
Private Placement (d)................ 10.750 06/15/11 290,125
335 Lear Corp. (c)....................... 8.110 05/15/09 385,250
195 Metaldyne Corp. ..................... 11.000 06/15/12 162,825
140 Sonic Automotive, Inc., Ser D........ 11.000 08/01/08 149,100
285 TRW Automotive, Inc., 144A--Private
Placement (d)........................ 9.375 02/15/13 310,650
------------
1,864,800
------------
BUILDING MATERIALS 1.0%
125 Brand Services, Inc. ................ 12.000 10/15/12 143,125
160 NMHG Holdings Co. ................... 10.000 05/15/09 176,800
60 Nortek Holdings, Inc. ............... 9.250 03/15/07 62,100
295 Schuler Homes, Inc. (c).............. 9.375 07/15/09 334,825
270 Trimas Corp. ........................ 9.875 06/15/12 278,100
10 Trimas Corp., 144A--Private Placement
(d).................................. 9.875 06/15/12 10,300
------------
1,005,250
------------
CHEMICALS 2.3%
50 ABB Finance, Inc. ................... 6.750 06/03/04 49,033
100 Equistar Chemicals LP, 144A--Private
Placement (d)........................ 10.625 05/01/11 103,000
120 FMC Corp. ........................... 10.250 11/01/09 135,600
110 Huntsman Advanced Materials LLC,
144A--Private Placement (d).......... 11.000 07/15/10 114,950
420 Huntsman ICI Chemicals (c)........... 10.125 07/01/09 405,300
80 Huntsman International LLC, 144A--
Private Placement (d)................ 9.875 03/01/09 83,600
140 ISP Chemco, Inc. .................... 10.250 07/01/11 158,900
360 ISP Holdings, Inc. (c)............... 10.625 12/15/09 384,300
230 Johnsondiversey, Inc., Ser B......... 9.625 05/15/12 258,175
</Table>
See Notes to Financial Statements 5
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CHEMICALS (CONTINUED)
$ 140 Lyondell Chemical Co. ............... 9.875% 05/01/07 $ 137,900
185 Lyondell Chemical Co. ............... 9.500 12/15/08 176,675
220 Millennium America, Inc. (c)......... 7.000 11/15/06 223,300
17 Pioneer Cos., Inc. (Variable Rate
Coupon).............................. 4.600 12/31/06 14,795
------------
2,245,528
------------
CONSTRUCTION MACHINERY 0.9%
85 Flowserve Corp. ..................... 12.250 08/15/10 99,450
730 Manitowoc, Inc. ..................... 10.500 08/01/12 813,950
------------
913,400
------------
CONSUMER PRODUCTS 1.3%
255 Iron Mountain, Inc. ................. 8.625 04/01/13 274,125
110 Jacuzzi Brands, Inc., 144A--Private
Placement (d)........................ 9.625 07/01/10 110,000
250 Muzak, LLC (c)....................... 9.875 03/15/09 238,750
185 Muzak, LLC, 144A-- Private Placement
(d).................................. 10.000 02/15/09 194,712
370 Outsourcing Services Group, Inc.
(c).................................. 10.875 03/01/06 223,850
280 Xerox Corp. ......................... 7.125 06/15/10 281,050
------------
1,322,487
------------
ELECTRIC 1.8%
41 AES Corp. ........................... 9.375 09/15/10 41,410
26 AES Corp. ........................... 8.875 02/15/11 25,545
260 AES Corp., 144A--Private Placement
(d).................................. 9.000 05/15/15 273,000
100 Allegheny Energy, Inc. .............. 7.750 08/01/05 100,500
185 Calpine Corp. ....................... 8.500 02/15/11 139,675
35 CMS Energy Corp. .................... 7.500 01/15/09 34,781
220 CMS Energy Corp. .................... 8.500 04/15/11 230,725
75 IPALCO Enterprises, Inc. ............ 8.625 11/14/11 82,500
260 Monongahela Power Co. (c)............ 5.000 10/01/06 259,675
225 PSEG Energy Holdings, Inc. (c)....... 8.625 02/15/08 242,152
165 PSEG Energy Holdings, Inc., 144A--
Private Placement (d)................ 7.750 04/16/07 174,659
125 Southern California Edison Co.,
144A--Private Placement (d).......... 8.000 02/15/07 137,656
------------
1,742,278
------------
ENVIRONMENTAL SERVICES 0.5%
435 Allied Waste North America, Inc.
(c).................................. 10.000 08/01/09 464,362
------------
</Table>
6 See Notes to Financial Statements
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
FOOD 1.3%
$ 150 Dominos, Inc., 144A--Private
Placement (d)........................ 8.250% 07/01/11 $ 155,625
130 Merisant Co., 144A--Private Placement
(d).................................. 9.500 07/15/13 135,200
190 Michael Foods, Inc., Ser B (c)....... 11.750 04/01/11 219,450
170 Pilgrim's Pride Corp. ............... 9.625 09/15/11 182,325
575 Smithfield Foods, Inc. (c)........... 8.000 10/15/09 625,312
------------
1,317,912
------------
GAMING 2.1%
210 Harrahs Operating Co., Inc. (c)...... 7.875 12/15/05 228,900
150 Harrahs Operating Co., Inc. ......... 8.000 02/01/11 181,092
475 Horseshoe Gaming LLC (c)............. 8.625 05/15/09 505,875
180 Park Place Entertainment Corp. ...... 7.875 12/15/05 192,375
250 Park Place Entertainment Corp. (c)... 8.875 09/15/08 276,250
300 Station Casinos, Inc. (c)............ 8.875 12/01/08 316,500
100 Station Casinos, Inc. ............... 9.875 07/01/10 110,500
210 Venetian Casino Resort, LLC (c)...... 11.000 06/15/10 237,825
------------
2,049,317
------------
HEALTHCARE 2.6%
390 AmerisourceBergen Corp. (c).......... 8.125 09/01/08 430,950
100 Apogent Technologies, Inc., 144A--
Private Placement (d)................ 6.500 05/15/13 103,750
180 Fisher Scientific International,
Inc. ................................ 7.125 12/15/05 189,000
205 Fisher Scientific International,
Inc., 144A--Private Placement (c)
(d).................................. 8.125 05/01/12 220,375
165 Fresenius Medical Care Capital Trust
II................................... 7.875 02/01/08 174,075
240 Fresenius Medical Care Capital Trust
IV (c)............................... 7.875 06/15/11 254,400
335 HCA, Inc. (c)........................ 8.750 09/01/10 390,765
30 Manor Care, Inc. .................... 7.500 06/15/06 32,641
85 Manor Care, Inc. .................... 8.000 03/01/08 96,050
70 Manor Care, Inc., 144A--Private
Placement (d)........................ 6.250 05/01/13 72,800
150 Omnicare, Inc. ...................... 8.125 03/15/11 163,500
345 Tenet Healthcare Corp. (c)........... 6.500 06/01/12 321,712
150 Tenet Healthcare Corp. .............. 7.375 02/01/13 145,500
------------
2,595,518
------------
</Table>
See Notes to Financial Statements 7
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
HOME CONSTRUCTION 1.2%
$ 220 KB Home (c).......................... 7.750% 02/01/10 $ 238,975
110 Meritage Corp., 144A--Private
Placement (d)........................ 9.750 06/01/11 122,100
95 Tech Olympic USA, Inc. .............. 9.000 07/01/10 103,075
145 Tech Olympic USA, Inc. .............. 9.000 07/01/10 155,875
180 Tech Olympic USA, Inc. .............. 10.375 07/01/12 192,600
25 Tech Olympic USA, Inc., 144A--
Private Placement (d)................ 10.375 07/01/12 26,750
270 Toll Corp. (c)....................... 8.250 02/01/11 302,400
------------
1,141,775
------------
INDEPENDENT ENERGY 0.3%
240 Equistar Chemicals LP (c)............ 10.125 09/01/08 248,400
------------
INTEGRATED ENERGY 1.5%
445 BRL Universal Equipment (c).......... 8.875 02/15/08 485,050
425 Chesapeake Energy Corp. (c).......... 8.125 04/01/11 460,062
245 Hanover Equipment Trust.............. 8.500 09/01/08 258,475
125 Hanover Equipment Trust.............. 8.750 09/01/11 131,875
50 MSW Energy Holdings, LLC, 144A--
Private Placement (d)................ 8.500 09/01/10 51,625
95 Transcontinental Gas Pipe Line
Corp. ............................... 8.875 07/15/12 107,825
------------
1,494,912
------------
LIFE INSURANCE 0.5%
215 Anthem Insurance Cos., Inc., 144A--
Private Placement (c) (d)............ 9.125 04/01/10 271,078
215 Health Net, Inc. (c)................. 8.375 04/15/11 261,717
------------
532,795
------------
LODGING 1.8%
250 Hilton Hotels Corp. (c).............. 7.950 04/15/07 270,000
130 Hilton Hotels Corp. ................. 7.625 12/01/12 143,000
50 HMH Properties, Inc. ................ 7.875 08/01/05 51,125
290 HMH Properties, Inc., Ser B (c)...... 7.875 08/01/08 295,800
345 LNR Property Corp., 144A--Private
Placement (d)........................ 7.625 07/15/13 350,175
135 LodgeNet Entertainment Corp. ........ 9.500 06/15/13 139,050
</Table>
8 See Notes to Financial Statements
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
LODGING (CONTINUED)
$ 65 Starwood Hotels & Resorts Worldwide,
Inc. ................................ 7.375% 05/01/07 $ 68,737
455 Starwood Hotels & Resorts Worldwide,
Inc. ................................ 7.875 05/01/12 500,500
------------
1,818,387
------------
MEDIA-CABLE 1.9%
55 Avalon Cable, LLC (f)................ 0/11.875 12/01/08 52,869
645 Charter Communications Holdings
(c).................................. 8.250 04/01/07 499,875
50 CSC Holdings, Inc. .................. 7.250 07/15/08 50,250
260 CSC Holdings, Inc. .................. 8.125 07/15/09 269,750
70 CSC Holdings, Inc. .................. 9.875 02/15/13 73,500
65 CSC Holdings, Inc. .................. 10.500 05/15/16 71,175
330 DirecTV Holdings, LLC, 144A--Private
Placement (d)........................ 8.375 03/15/13 369,600
310 Echostar DBS Corp. .................. 9.375 02/01/09 332,087
1,000 Park N View, Inc., Ser B (a) (b)
(e).................................. 13.000 05/15/08 0
160 Pegasus Communications Corp., Ser B.. 9.750 12/01/06 146,400
20 Pegasus Satellite (f)................ 0/13.500 03/01/07 16,800
35 Renaissance Media Group.............. 10.000 04/15/08 34,738
------------
1,917,044
------------
MEDIA-NONCABLE 1.7%
125 Echostar DBS Corp. (c)............... 9.125 01/15/09 140,313
125 Houghton Mifflin Co., 144A--Private
Placement (d)........................ 8.250 02/01/11 132,500
275 Interep National Radio Sales,
Inc. ................................ 10.000 07/01/08 235,125
320 Nextmedia Operating, Inc. (c)........ 10.750 07/01/11 360,000
120 PEI Holdings, Inc., 144A--Private
Placement (d)........................ 11.000 03/15/10 132,900
325 Primedia, Inc. (c)................... 8.875 05/15/11 343,688
275 Salem Communications Corp. .......... 7.750 12/15/10 286,000
------------
1,630,526
------------
METALS 0.8%
305 Doe Run Resources Corp., 144A--
Private Placement (d) (e) (i)........ 11.750 11/01/08 106,882
750 GS Technologies Operating, Inc. (a)
(b) (e).............................. 12.000 09/01/04 22,500
220 Oregon Steel Mills, Inc. ............ 10.000 07/15/09 199,100
47 Republic Engineered Products......... 10.000 08/16/09 11,765
</Table>
See Notes to Financial Statements 9
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
METALS (CONTINUED)
$ 245 UCAR Finance, Inc. (c)............... 10.250% 02/15/12 $ 241,325
225 United States Steel Corp. ........... 9.750 05/15/10 229,500
------------
811,072
------------
NATURAL GAS PIPELINES 1.6%
340 Dynegy Holdings, Inc................. 6.875 04/01/11 287,300
75 El Paso Energy Partners LP, 144A--
Private Placement (d)................ 8.500 06/01/10 80,625
240 El Paso Production Holding Co.,
144A--Private Placement (d).......... 7.750 06/01/13 240,600
315 GulfTerra Energy Partners LP......... 10.625 12/01/12 365,400
55 Northwest Pipeline Corp.............. 8.125 03/01/10 59,400
105 Southern Natural Gas Co., 144A--
Private Placement (d)................ 8.875 03/15/10 114,975
155 Williams Cos., Inc. ................. 9.250 03/15/04 159,650
290 Williams Cos., Inc. ................. 7.875 09/01/21 284,200
------------
1,592,150
------------
OIL FIELD SERVICES 0.2%
160 Magnum Hunter Resources, Inc. ....... 9.600 03/15/12 176,800
------------
OTHER INDUSTRIAL 0.1%
150 Eagle-Picher Industries, Inc. ....... 9.375 03/01/08 141,000
------------
PACKAGING 1.0%
450 Owens-Illinois, Inc. (c)............. 7.500 05/15/10 443,250
250 Riverwood International Corp. (c).... 10.875 04/01/08 257,500
250 Tekni-Plex, Inc., Ser B (c).......... 12.750 06/15/10 245,000
------------
945,750
------------
PAPER 1.0%
435 Georgia-Pacific Corp., 144A--Private
Placement (c) (d).................... 8.875 02/01/10 474,150
50 Louisiana Pacific Corp. ............. 10.875 11/15/08 57,250
145 Louisiana Pacific Corp. ............. 8.875 08/15/10 166,750
80 Owens Brockway Glass Containers,
Inc. ................................ 8.750 11/15/12 87,200
25 Owens Brockway Glass Containers,
Inc., 144A--Private Placement (d).... 7.750 05/15/11 26,563
35 Pliant Corp. ........................ 13.000 06/01/10 33,075
185 Pliant Corp. ........................ 13.000 06/01/10 174,825
------------
1,019,813
------------
</Table>
10 See Notes to Financial Statements
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
REAL ESTATE INVESTMENT TRUSTS 0.4%
$ 320 Istar Financial, Inc. (c)............ 8.750% 08/15/08 $ 350,400
------------
REFINING 1.2%
120 Citgo Petroleum Corp., 144A--Private
Placement (d)........................ 11.375 02/01/11 134,400
250 Frontier Oil Corp. (c)............... 11.750 11/15/09 276,250
145 Tesoro Petroleum Corp. .............. 9.000 07/01/08 131,950
135 Tesoro Petroleum Corp. (c)........... 9.625 04/01/12 124,200
435 Vintage Petroleum, Inc. (c).......... 7.875 05/15/11 468,713
------------
1,135,513
------------
RETAIL 1.7%
339 Big 5 Corp., Ser B (c)............... 10.875 11/15/07 358,069
160 Elizabeth Arden, Inc. (c)............ 11.750 02/01/11 179,200
80 Gap, Inc. ........................... 6.900 09/15/07 86,600
130 Gap, Inc. ........................... 10.550 12/15/08 158,600
105 Houghton Mifflin Co., 144A--Private
Placement (d)........................ 9.875 02/01/13 114,450
120 Oxford Industries, Inc., 144A--
Private Placement (d)................ 8.875 06/01/11 126,600
45 Penney JC Co., Inc. ................. 7.600 04/01/07 47,475
120 Penney JC Co., Inc. ................. 8.000 03/01/10 126,300
135 Penney JC Co., Inc. ................. 9.000 08/01/12 147,150
35 Penney JC Co., Inc. ................. 6.875 10/15/15 32,921
1,000 Sleepmaster LLC, Ser B (a) (b)....... 11.000 05/15/09 276,250
------------
1,653,615
------------
SERVICES 0.8%
315 CB Richard Ellis Service, Inc. (c)... 11.250 06/15/11 339,413
60 CBRE Escrow, Inc., 144A--Private
Placement (d)........................ 9.750 05/15/10 63,375
240 Intermet Corp. (c)................... 9.750 06/15/09 231,600
170 Iron Mountain, Inc. ................. 7.750 01/15/15 180,625
------------
815,013
------------
SUPERMARKETS 1.0%
235 Ahold Finance USA, Inc. ............. 8.250 07/15/10 242,050
390 Delhaize America, Inc. .............. 8.125 04/15/11 429,000
263 Kroger Co., 144A--Private Placement
(c) (d).............................. 8.500 07/15/17 291,057
------------
962,107
------------
</Table>
See Notes to Financial Statements 11
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
TECHNOLOGY 0.9%
$ 315 Avaya, Inc. ......................... 11.125% 04/01/09 $ 346,500
250 Fairchild Semiconductor Corp. (c).... 10.500 02/01/09 282,500
415 Solectron Corp., LYON (c)............ * 11/20/20 232,400
------------
861,400
------------
TELECOMMUNICATIONS 2.7%
465 American Cellular Corp. (a).......... 9.500 10/15/09 234,825
50 American Tower Corp. ................ 9.375 02/01/09 50,500
465 American Tower Corp. ................ 6.250 10/15/09 432,450
240 Dobson Communications Corp. ......... 10.875 07/01/10 260,400
210 Exodus Communications, Inc. (a) (b)
(e).................................. 11.250 07/01/08 12,576
336 Exodus Communications, Inc. (a) (b)
(e).................................. 11.625 07/15/10 20,135
122 Globix Corp., 144A--Private Placement
(d) (i).............................. 11.000 05/01/08 92,474
235 Nextel Communications, Inc. (c)...... 9.375 11/15/09 253,506
160 Nextel Partners, Inc. ............... 11.000 03/15/10 173,600
65 Nextel Partners, Inc., 144A--Private
Placement (d)........................ 8.125 07/01/11 65,163
200 Primus Telecom Group................. 9.875 05/15/08 179,000
15 Primus Telecom Group................. 11.250 01/15/09 13,950
75 Qwest Corp. ......................... 6.625 09/15/05 76,688
170 RH Donnelley Finance Corp. I, 144A--
Private Placement (d)................ 10.875 12/15/12 198,900
335 SBA Communications Corp. ............ 12.000 03/01/08 344,213
150 SBA Communications Corp. ............ 10.250 02/01/09 138,750
405 WorldCom, Inc. (a) (b)............... 8.250 05/15/31 120,488
------------
2,667,618
------------
TRANSPORTATION SERVICES 0.0%
14 Aran Shipping & Trading, SA (a)
(e).................................. 8.300 01/31/04 0
------------
TOTAL DOMESTIC CORPORATE BONDS 38.0%.......................................... 37,436,942
------------
FOREIGN BONDS AND DEBT SECURITIES (US $) 6.4%
BRAZIL 0.2%
500 Multicanal Participacoes, Ser B
(a).................................. 12.625 06/18/04 176,250
------------
CANADA 2.8%
200 360 Networks, Inc. (a) (b) (e)....... 13.000 05/01/08 0
80 Abitibi-Consolidated, Inc. .......... 6.000 06/20/13 76,308
180 Acetex Corp. ........................ 10.875 08/01/09 200,925
300 Air Canada (a) (b)................... 10.250 03/15/11 136,500
</Table>
12 See Notes to Financial Statements
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CANADA (CONTINUED)
$ 355 Alliance Atlantis Communications,
Inc. (c)............................. 13.000% 12/15/09 $ 406,475
231 Hollinger Participation Trust, 144A--
Private Placement (d) (i)............ 12.125 11/15/10 260,562
400 Husky Oil Ltd. (Variable Rate Coupon)
(c).................................. 8.900 08/15/28 464,000
250 Hydrochem Industrial Services, Inc.,
Ser B................................ 10.375 08/01/07 176,875
125 Norampac, Inc., 144A--Private
Placement (d)........................ 6.750 06/01/13 131,875
200 Norske Skog Canada Ltd. ............. 8.625 06/15/11 210,000
130 Pacifica Papers, Inc. (c)............ 10.000 03/15/09 139,100
55 PCI Chemicals Canada, Inc. .......... 10.000 12/31/08 47,679
125 Rogers Cable, Inc., 144A--Private
Placement (d)........................ 6.250 06/15/13 125,312
350 Tembec Industries, Inc. (c).......... 7.750 03/15/12 341,250
------------
2,716,861
------------
FRANCE 0.5%
220 Rhodia S.A., 144A--Private Placement
(d).................................. 8.875 06/01/11 228,800
235 Vivendi Universal SA, 144A--Private
Placement (d)........................ 9.250 04/15/10 268,488
------------
497,288
------------
GUERNSEY 0.2%
200 ABB International Finance Ltd.
(Euro)............................... 9.500 01/15/08 230,939
------------
LUXEMBOURG 0.7%
110 Johnsondiversey, Inc. (Euro)......... 9.625 05/15/12 136,650
115 Safilo Capital International SA,
144A--Private Placement (Euro) (d)... 9.625 05/15/13 140,546
350 Tyco International Group SA.......... 6.750 02/15/11 372,750
------------
649,946
------------
MEXICO 0.6%
475 Satelites Mexicanos SA............... 10.125 11/01/04 219,688
350 TV Azteca SA (c)..................... 10.500 02/15/07 347,375
------------
567,063
------------
SINGAPORE 0.2%
230 Flextronics International Ltd. (c)... 9.875 07/01/10 253,000
------------
</Table>
See Notes to Financial Statements 13
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
UNITED KINGDOM 1.2%
$ 155 Avecia Group Plc..................... 11.000% 07/01/09 $ 141,050
390 British Sky Broadcasting Group Plc
(c).................................. 8.200 07/15/09 462,827
325 JSG Funding Plc (Euro)............... 10.125 10/01/12 407,476
160 Xerox Capital Europe Plc............. 5.875 05/15/04 161,600
------------
1,172,953
------------
TOTAL FOREIGN BONDS AND DEBT SECURITIES 6.4%.................................. 6,264,300
------------
COLLATERALIZED MORTGAGE
OBLIGATIONS 20.8%
953 Federal Home Loan Mortgage Corp.
(Interest Only)...................... 5.000 09/15/14 63,989
582 Federal Home Loan Mortgage Corp.
(Interest Only) (g).................. 6.320 01/15/29 48,064
479 Federal Home Loan Mortgage Corp.
(Interest Only) REMIC (g)............ 6.820 03/15/32 36,245
774 Federal National Mortgage Association
Pools (Interest Only)................ 5.500 06/25/26 62,238
1,250 Federal National Mortgage Association
Pools (Interest Only) REMIC.......... 6.000 07/20/20 to 07/25/33 185,951
1,768 Federal National Mortgage Association
Pools (Interest Only)................ 6.500 07/01/31 to 05/25/33 169,661
839 Federal National Mortgage Association
Pools (Interest Only)................ 7.000 03/01/32 to 04/25/33 88,610
173 Federal National Mortgage Association
Pools (Interest Only)................ 8.000 05/01/30 25,828
784 Government National Mortgage
Association Pools (Interest Only)
(g).................................. 6.220 05/16/32 56,110
689 Government National Mortgage
Association Pools (Interest Only)
REMIC (g)............................ 6.820 05/16/32 55,168
7,400 Federal Home Loan Mortgage Corp.,
July................................. 6.500 TBA 7,702,941
400 Federal Home Loan Mortgage Corp.,
July................................. 7.500 TBA 425,250
3,000 Federal National Mortgage
Association, July.................... 6.000 TBA 3,118,125
5,750 Federal National Mortgage
Association, September............... 5.000 TBA 5,796,719
</Table>
14 See Notes to Financial Statements
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
$1,500 Federal National Mortgage
Association, September............... 5.500% TBA $ 1,541,250
1,000 Government National Mortgage
Association, September............... 5.500 TBA 1,034,375
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 20.8%............................... 20,410,524
------------
MORTGAGE BACKED SECURITIES 14.0%
1,129 Federal Home Loan Mortgage Corp. 30
Year Pools (c)....................... 7.500 11/01/29 to 10/01/31 1,200,235
151 Federal National Mortgage Association
15 Year Pools (c).................... 6.500 06/01/15 159,141
723 Federal National Mortgage Association
15 Year Pools (c).................... 7.000 03/01/15 to 05/01/15 769,331
157 Federal National Mortgage Association
15 Year Pools........................ 7.500 03/01/15 to 06/01/15 168,638
1,088 Federal National Mortgage Association
30 Year Pools (c).................... 6.000 04/01/28 to 12/01/28 1,132,848
5,437 Federal National Mortgage Association
30 Year Pools........................ 7.000 04/01/28 to 03/01/33 5,729,583
1,168 Federal National Mortgage Association
30 Year Pools (c).................... 7.500 03/01/30 to 03/01/32 1,241,809
461 Government National Mortgage
Association 30 Year Pools (c)........ 7.000 07/15/29 to 01/15/30 487,558
945 Government National Mortgage
Association 30 Year Pools............ 7.500 07/15/23 to 09/15/29 1,010,964
679 Government National Mortgage
Association 30 Year Pools............ 8.000 03/15/17 to 10/15/22 741,587
261 Government National Mortgage
Association 30 Year Pools............ 8.500 07/15/24 to 12/15/24 285,296
638 Government National Mortgage
Association 30 Year Pools............ 9.000 08/15/16 to 12/15/24 711,751
94 Government National Mortgage
Association 30 Year Pools............ 9.500 11/15/09 to 01/15/17 105,149
------------
TOTAL MORTGAGE BACKED SECURITIES............................................... 13,743,890
------------
</Table>
See Notes to Financial Statements 15
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
UNITED STATES TREASURY OBLIGATIONS 16.4%
$1,600 United States Treasury Bonds......... 5.250% 02/15/29 $ 1,742,688
1,770 United States Treasury Bonds......... 7.625 02/15/25 2,517,204
2,575 United States Treasury Bonds (c)..... 8.125 08/15/21 3,766,141
1,450 United States Treasury Bonds (c)..... 8.750 08/15/20 2,220,936
810 United States Treasury Bonds (c)..... 8.875 02/15/19 1,240,755
1,600 United States Treasury Bonds (c)..... 11.125 08/15/03 1,620,501
250 United States Treasury Bonds (c)..... 11.250 02/15/15 426,094
1,250 United States Treasury Notes......... 6.750 05/15/05 1,377,002
1,200 United States Treasury Notes......... 7.250 05/15/04 1,265,016
------------
TOTAL UNITED STATES TREASURY OBLIGATIONS....................................... 16,176,337
------------
FOREIGN GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS 0.5%
332 Federal Republic of Brazil
(Brazil)............................. 8.000 04/15/14 292,078
180 United Mexican States (Mexico) (c)... 8.375 01/14/11 216,090
------------
TOTAL FOREIGN GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS..................... 508,168
------------
</Table>
<Table>
<Caption>
DESCRIPTION
EQUITIES 1.1%
Aurora Foods, Inc. (8,855 Common Shares) (h)................................. 3,099
Dobson Communications Corp. (2,871 Preferred Shares) (i)..................... 282,057
Doe Run Resources Corp. (1 Common Stock Warrant) (e) (h)..................... 0
Globix Corp. (12,844 Common Shares) (h)...................................... 37,248
HF Holdings, Inc. (5,260 Common Stock Warrants) (e) (h)...................... 0
ICG Communications, Inc. (110 Common Stock Warrants) (e) (h)................. 0
ICG Communications, Inc. (677 Common Shares) (h)............................. 5,553
Intermedia Communications, Inc. (1,260 Preferred Shares) (a) (i)............. 4,095
McLeodUSA, Inc., Class A (2,015 Preferred Shares) (h)........................ 14,589
McLeodUSA, Inc., Class A (4,466 Preferred Stock Warrants) (h)................ 1,831
McLeodUSA, Inc., Class A (497 Common Shares) (h)............................. 750
Microcell Telecommunications, Inc. (1,222 Common Stock Warrants) (CAN) (h)... 721
Microcell Telecommunications, Inc. (1,986 Preferred Shares) (CAN) (h)........ 17,025
Microcell Telecommunications, Inc. (17 Common Shares) (CAN) (h).............. 134
Microcell Telecommunications, Inc. (733 Common Stock Warrants) (CAN) (h)..... 243
Microcell Telecommunications, Inc., Class B (1,974 Common Shares) (CAN)
(h)........................................................................ 14,922
Optel, Inc. (500 Common Shares) (e) (h)...................................... 0
Park N View, Inc., 144A--Private Placement (1,000 Common Stock Warrants) (d)
(e) (h).................................................................... 0
</Table>
16 See Notes to Financial Statements
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
<Table>
<Caption>
MARKET
DESCRIPTION VALUE
EQUITIES (CONTINUED)
Paxon Communications Corp. (3,700 Preferred Shares) (c) (i).................. $ 365,375
Pioneer Cos., Inc. (3,533 Common Shares) (h)................................. 12,895
Republic Technologies International, Inc., 144A--Private Placement (250
Common Stock Warrants) (d) (h)............................................. 3
Startec Global Communications, 144A--Private Placement (1,000 Common Stock
Warrants) (d) (e) (h)...................................................... 0
TNP Enterprises, Inc. (4,022 Preferred Shares) (c) (i)....................... 302,646
XO Communications, Inc. (487 Common Shares) (h).............................. 3,531
XO Communications, Inc., Class A (975 Common Stock Warrants) (e) (h)......... 975
XO Communications, Inc., Class B (731 Common Stock Warrants) (e) (h)......... 0
XO Communications, Inc., Class C (731 Common Stock Warrants) (e) (h)......... 0
------------
TOTAL EQUITIES 1.1%......................................................... 1,067,692
------------
TOTAL LONG-TERM INVESTMENTS 97.2%
(Cost $98,280,916)......................................................... 95,607,853
------------
SHORT-TERM INVESTMENTS 22.7%
REPURCHASE AGREEMENT 4.3%
Banc of America Securities LLC ($4,179,000 par collateralized by U.S.
Government obligations in a pooled cash account, dated 06/30/03, to be sold
on 07/01/03 at $4,179,129)................................................. 4,179,000
U.S. GOVERNMENT AGENCY OBLIGATIONS 18.4%
Federal Home Loan Bank Discount Note ($18,124,000 par, yielding 0.95%,
07/01/03 maturity)......................................................... 18,124,000
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $22,303,000)......................................................... 22,303,000
------------
TOTAL INVESTMENTS 119.9%
(Cost $120,583,916)........................................................ 117,910,853
LIABILITIES IN EXCESS OF OTHER ASSETS (19.9%)............................... (19,549,790)
------------
NET ASSETS 100.0%........................................................... $ 98,361,063
============
</Table>
* Zero coupon bond
(a) Non-income producing as security is in default.
(b) This borrower has filed for protection in federal bankruptcy court.
See Notes to Financial Statements 17
YOUR TRUST'S INVESTMENTS
June 30, 2003 (Unaudited)
(c) Assets segregated as collateral for open forward transactions.
(d) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally those
transactions with qualified institutional buyers.
(e) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
(f) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(g) An Inverse Floating Rate security is one where the coupon is inversely
indexed to a short-term floating interest rate multiplied by a specific
factor. As the floating rate rises, the coupon is reduced. Conversely, as
the floating rate declines, the coupon is increased. The price of these
securities may be more volatile than the price of a comparable fixed rate
security. These instruments are typically used by the Trust to enhance the
yield of the portfolio. All of the Trust's portfolio holdings, including
derivative instruments, are marked to market.
(h) Non-income producing security.
(i) Payment-in-kind security.
TBA -- To be announced, maturity date has not yet been established. The maturity
date will be determined upon settlement and delivery of the mortgage
pools.
LYON--Liquid Yield Option Note
REMIC--Real Estate Mortgage Investment Conduits
EURO--Eurodollar
CAN--Canadian Dollar
18 See Notes to Financial Statements
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
June 30, 2003 (Unaudited)
<Table>
ASSETS:
Total Investments (Cost $120,583,916)....................... $117,910,853
Cash........................................................ 516
Receivables:
Investments Sold.......................................... 13,852,970
Interest.................................................. 1,426,929
Other....................................................... 30,655
------------
Total Assets............................................ 133,221,923
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 34,625,196
Investment Advisory Fee................................... 52,612
Affiliates................................................ 2,217
Trustees' Deferred Compensation and Retirement Plans........ 107,434
Accrued Expenses............................................ 46,018
Forward Foreign Currency Contracts.......................... 27,383
------------
Total Liabilities....................................... 34,860,860
------------
NET ASSETS.................................................. $ 98,361,063
============
NET ASSET VALUE PER COMMON SHARE ($98,361,063 divided by
15,371,738 shares outstanding)............................ $ 6.40
============
NET ASSETS CONSIST OF:
Common Shares (no par value with unlimited shares
authorized, 15,371,738 shares issued and outstanding)..... $122,393,211
Accumulated Undistributed Net Investment Income............. (1,670,301)
Net Unrealized Depreciation................................. (2,699,508)
Accumulated Net Realized Loss............................... (19,662,339)
------------
NET ASSETS.................................................. $ 98,361,063
============
</Table>
See Notes to Financial Statements 19
Statement of Operations
For the Six Months Ended June 30, 2003 (Unaudited)
<Table>
INVESTMENT INCOME:
Interest.................................................... $ 2,827,438
Dividends................................................... 77,659
Other....................................................... 6,890
------------
Total Income............................................ 2,911,987
------------
EXPENSES:
Investment Advisory Fee..................................... 309,310
Shareholder Reports......................................... 23,048
Trustees' Fees and Related Expenses......................... 21,549
Custody..................................................... 13,590
Legal....................................................... 2,429
Other....................................................... 56,529
------------
Total Expenses.......................................... 426,455
Less Credits Earned on Cash Balances.................... 98
------------
Net Expenses............................................ 426,357
------------
NET INVESTMENT INCOME....................................... $ 2,485,630
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ (3,245,863)
Foreign Currency Contracts................................ (19,455)
Foreign Currency Transactions............................. (29,192)
------------
Net Realized Loss........................................... (3,294,510)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (11,096,106)
End of the Period:
Investments............................................. (2,673,063)
Foreign Currency Contracts.............................. (27,383)
Foreign Currency Translation............................ 938
------------
(2,699,508)
------------
Net Unrealized Appreciation During the Period............... 8,396,598
------------
NET REALIZED AND UNREALIZED GAIN............................ $ 5,102,088
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 7,587,718
============
</Table>
20 See Notes to Financial Statements
Statements of Changes in Net Assets
(Unaudited)
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31, 2002
-------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................. $ 2,485,630 $ 5,997,463
Net Realized Loss..................................... (3,294,510) (6,169,169)
Net Unrealized Appreciation During the Period......... 8,396,598 1,071,689
----------- ------------
Change in Net Assets from Operations.................. 7,587,718 899,983
Distributions from Net Investment Income.............. (3,035,755) (7,220,386)
----------- ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... 4,551,963 (6,320,403)
FROM CAPITAL TRANSACTIONS:
Value of Common Shares Issued Through Dividend
Reinvestment........................................ -0- 81,841
----------- ------------
TOTAL INCREASE/DECREASE IN NET ASSETS................. 4,551,963 (6,238,562)
NET ASSETS:
Beginning of the Period............................... 93,809,100 100,047,662
----------- ------------
End of the Period (Including accumulated undistributed
net investment income of ($1,670,301) and
($1,120,176), respectively)......................... $98,361,063 $ 93,809,100
=========== ============
</Table>
See Notes to Financial Statements 21
Financial Highlights
(Unaudited)
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE TRUST
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
SIX
MONTHS
ENDED
JUNE 30, --------------------------------------------------
2003 2002 2001 (a) 2000 1999 1998
--------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE
PERIOD.......................... $6.10 $ 6.51 $ 6.85 $ 7.25 $ 7.84 $ 8.05
----- ------ ------ ------- ------- ------
Net Investment Income........... .17 .39 .53 .60 .64 .66
Net Realized and Unrealized
Gain/Loss..................... .33 (.33) (.29) (.40) (.63) (.22)
----- ------ ------ ------- ------- ------
Total from Investment
Operations...................... .50 .06 .24 .20 .01 .44
Distributions from Net Investment
Income.......................... (.20) (.47) (.58) (.60) (.60) (.65)
----- ------ ------ ------- ------- ------
NET ASSET VALUE, END OF THE
PERIOD.......................... $6.40 $ 6.10 $ 6.51 $ 6.85 $ 7.25 $ 7.84
===== ====== ====== ======= ======= ======
Common Share Market Price at End
of the Period................... $5.93 $ 5.71 $ 6.33 $6.5625 $5.6875 $ 7.75
Total Return (b).................. 7.32%* -2.59% 5.05% 26.59% -19.81% 5.05%
Net Assets at End of the Period
(In millions)................... $98.4 $ 93.8 $100.0 $ 104.8 $ 110.9 $120.0
Ratio of Expenses to Average Net
Assets.......................... .90% .89% .93% .96% .95% .96%
Ratio of Net Investment Income to
Average Net Assets.............. 5.22% 6.29% 7.88% 8.51% 8.46% 8.17%
Portfolio Turnover................ 154%* 101% 46% 60% 28% 47%
* Non-Annualized
</Table>
(a) As required, effective January 1, 2001, the Trust has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on fixed income securities and presenting paydown gains
and losses on mortgage- and asset-backed securities as interest income. The
effect of these changes for the year ended December 31, 2001 was an increase
in the ratio of net investment income to average net assets from 7.83% to
7.88%. Net investment income per share and net realized and unrealized gains
and losses per share were unaffected by the adjustments. Per share, ratios
and supplemental data for periods prior to December 31, 2001 have not been
restated to reflect this change in presentation.
(b) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing common share price at the end of the period
indicated.
22
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------
$ 7.93 $ 7.94 $ 7.28 $ 8.15 $ 7.85
------ ------ ------ ------ ------
.66 .66 .65 .65 .78
.18 (.01) .66 (.86) .29
------ ------ ------ ------ ------
.84 .65 1.31 (.21) 1.07
(.72) (.66) (.65) (.66) (.77)
------ ------ ------ ------ ------
$ 8.05 $ 7.93 $ 7.94 $ 7.28 $ 8.15
====== ====== ====== ====== ======
$ 8.00 $ 7.50 $ 7.25 $ 6.50 $ 7.75
16.97% 12.95% 21.83% -8.06% 11.82%
$123.1 $121.2 $121.4 $111.4 $124.7
.91% 1.00% .94% .96% 1.00%
8.32% 8.40% 8.50% 7.94% 8.99%
55% 36% 34% 45% 53%
</Table>
23
NOTES TO
FINANCIAL STATEMENTS
June 30, 2003 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Income Trust (the "Trust") is registered as a diversified, closed-end
management investment company under the Investment Company Act of 1940, as
amended. The Trust's investment objective is to provide current income through
investing in a portfolio of U.S. Government securities and in corporate fixed
income securities, including high-yielding, lower rated or nonrated securities
believed not to involve undue risk to income or principal. The Trust commenced
investment operations on April 22, 1988.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with 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 Fixed income investments are stated at value using market
quotations or indications of value obtained from an independent pricing service.
Investments in securities listed on a securities exchange are valued at their
sales price as of the close of such securities exchange. Listed and unlisted
securities for which the last sales price is not available are valued at the
mean of the bid and asked prices. For those securities where quotations or
prices are not available, valuations are determined in accordance with
procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market value.
B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Trust may purchase and sell securities on a "when-issued", "delayed delivery",
or "forward commitment" basis, with settlement to occur at a later date. The
price of the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is negotiated. The
value of the security so purchased is subject to market fluctuations during this
period. Purchasing securities on this basis involves a risk that the market
value at the time of delivery may be lower than the agreed upon purchase price
resulting in an unrealized loss. The Trust will maintain, in a segregated
account with its custodian, assets having an aggregate value at least equal to
the amount of the when-issued, delayed delivery, or forward purchase commitments
until payment is made. At June 30, 2003, the Trust has $19,618,660 of forward
purchase commitments.
The Trust may invest in repurchase agreements, which are short-term
investments whereby the Trust acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Trust may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen Asset Management Inc. (the "Adviser") or its
affiliates, the daily aggregate of which is invested in repurchase agreements.
Repurchase agreements are fully collateralized by the underlying debt security.
The Trust will
24
NOTES TO
FINANCIAL STATEMENTS
June 30, 2003 (Unaudited)
make payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of the custodian bank. The seller is required to
maintain the value of the underlying security at not less than the repurchase
proceeds due the Trust.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis and
dividend income is recorded on the ex-dividend date. Discounts are accreted and
premiums are amortized over the expected life of each applicable security.
D. FEDERAL INCOME TAXES It is the Trust's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Trust intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset these losses against any future realized capital
gains. At December 31, 2002, the Trust had an accumulated capital loss
carryforward for tax purposes of $15,817,862, which will expire between December
31, 2003 and December 31, 2010. Of this amount, $1,776,125 will expire on
December 31, 2003.
At June 30, 2003, the cost and related gross unrealized appreciation and
depreciation are as follows:
<Table>
Cost of investments for tax purposes........................ $120,917,809
============
Gross tax unrealized appreciation........................... $ 4,898,895
Gross tax unrealized depreciation........................... (7,905,852)
------------
Net tax unrealized depreciation on investments.............. $ (3,006,957)
============
</Table>
E. DISTRIBUTION OF INCOME AND GAINS The Trust declares and pays dividends
monthly from net investment income to shareholders. Net realized gains, if any,
are distributed annually. Distributions from net realized gains for book
purposes may include short-term capital gains, which are included in ordinary
income for tax purposes.
The tax character of distributions paid during the year ended December 31,
2002 was as follows:
<Table>
Distributions paid from:
Ordinary Income........................................... $7,220,386
Long-term capital gain.................................... -0-
----------
$7,220,386
==========
</Table>
As of December 31, 2002, the components of distributable earnings on a tax
basis were as follows:
<Table>
Undistributed ordinary income............................... $156,125
</Table>
25
NOTES TO
FINANCIAL STATEMENTS
June 30, 2003 (Unaudited)
Net realized gains or losses may differ for financial and tax reporting
purposes as a result of the deferral of losses relating to wash sale
transactions.
F. FOREIGN CURRENCY TRANSLATION Asset and liabilities denominated in foreign
currencies and commitments under forward foreign currency contracts are
translated into U.S. dollars at the mean of the quoted bid and ask prices of
such currencies against the U.S. dollar. Purchases and sales of portfolio
securities are translated at the rate of exchange prevailing when such
securities were acquired or sold. Realized gain and loss on foreign currency
transactions on the Statement of Operations includes the net realized amount
from the sale of foreign currency and the amount realized between trade date and
settlement date on securities transactions. Income and expenses are translated
at rates prevailing when accrued.
G. EXPENSE REDUCTION During the six months ended June 30, 2003, the Trust's
custody fee was reduced by $98 as a result of credits earned on cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly of .65% of the average daily net assets of the Trust.
For the six months ended June 30, 2003, the Trust recognized expenses of
approximately $2,400 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.
Under an Accounting Services agreement, the Adviser provides accounting
services to the Trust. The Adviser allocates the cost of such services to each
trust. For the six months ended June 30, 2003, the Trust recognized expenses of
approximately $6,600 representing Van Kampen Investments Inc.'s or its
affiliates' (collectively "Van Kampen") cost of providing accounting services to
the Trust, which is reported as part of "Other" expenses in the Statement of
Operations.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
officers of Van Kampen.
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable upon retirement for a
ten-year period and are based upon each trustee's years of service to the Trust.
The maximum annual benefit per trustee under the plan is $2,500.
3. CAPITAL TRANSACTIONS
At June 30, 2003 and December 31, 2002, paid in surplus related to common shares
aggregated $122,393,211.
26
NOTES TO
FINANCIAL STATEMENTS
June 30, 2003 (Unaudited)
Transactions in common shares were as follows:
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31, 2002
Beginning Shares...................................... 15,371,738 15,358,477
Shares issued Through Dividend Reinvestment........... -0- 13,261
---------- ----------
Ending Shares......................................... 15,371,738 15,371,738
========== ==========
</Table>
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $141,482,946 and $146,126,870,
respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Trust has a variety of reasons to use derivative instruments, such as to
attempt to protect the Trust against possible changes in the market value of its
portfolio, foreign currency exposure, or generate potential gain. All of the
Trust's holdings, including derivative instruments, are marked to market each
day with the change in value reflected in unrealized appreciation/depreciation.
Upon disposition, a realized gain or loss is recognized accordingly, except when
taking delivery of a security underlying a forward commitment. In this instance,
the recognition of gain or loss is postponed until the disposal of the security
underlying the forward commitment.
Purchasing securities on a forward commitment involves a risk that the
market value at the time of delivery may be lower than the agreed upon purchase
price resulting in an unrealized loss. Selling securities on a forward
commitment involves different risks and can result in losses more significant
than those arising from the purchase of such securities. Risks may arise as a
result of the potential inability of the counterparties to meet the terms of
their contracts.
A forward foreign currency contract is a commitment to purchase or sell a
foreign currency at a future date at a negotiated forward rate. Upon the
settlement of the contract, a realized gain or loss is recognized and is
included as a component of realized gain/ loss on forwards. The following
forward foreign currency contracts were outstanding as of June 30, 2003.
<Table>
<Caption>
UNREALIZED
CURRENT APPRECIATION/
VALUE DEPRECIATION
SHORT CONTRACTS:
Euro Currency
475,000 expiring 7/24/03.................................. $545,967 $(25,842)
70,000 expiring 7/24/03................................... 80,458 (3,808)
140,000 expiring 7/24/03.................................. 160,917 2,267
-------- --------
$787,342 $(27,383)
======== ========
</Table>
27
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
VAN KAMPEN INCOME TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
J. MILES BRANAGAN(1)
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*(1)
THEODORE A. MYERS
JACK E. NELSON(1)
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN ASSET MANAGEMENT INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
c/o EquiServe
P.O. Box 43011
Providence, Rhode Island 02940-3011
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
(1) Appointed to the Board of Trustees effective July 23, 2003.
28
RESULTS OF
SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Trust was held on June 24, 2003, where
shareholders voted on the election of trustees.
With regards to the election of the following trustees by common shareholders of
the Trust:
<Table>
<Caption>
# OF SHARES
------------------------------
IN FAVOR WITHHELD
- ------------------------------------------------------------------------------------------
Jerry D. Choate........................................... 14,076,724 383,129
Linda Hutton Heagy........................................ 14,073,212 386,641
R. Craig Kennedy.......................................... 14,065,952 393,901
Theodore A. Myers......................................... 14,070,691 389,162
Richard F. Powers, III.................................... 14,021,646 438,207
Hugo F. Sonnenschein...................................... 14,077,152 382,701
Suzanne H. Woolsey........................................ 14,068,485 391,368
</Table>
Trustees not voted on include: David C. Arch, Rod Dammeyer, Howard J. Kerr, and
Wayne W. Whalen.
29
Van Kampen
Privacy Notice
The Van Kampen companies and investment products* respect your right to privacy.
We also know that you expect us to conduct and process your business in an
accurate and efficient manner. To do so, we must collect and maintain certain
nonpublic personal information about you. This is information we collect from
you on applications or other forms, and from the transactions you conduct with
us, our affiliates, or third parties. We may also collect information you
provide when using our Web site, and text files (also known as "cookies") may be
placed on your computer to help us to recognize you and to facilitate
transactions you initiate. We do not disclose any nonpublic personal information
about you or any of our former customers to anyone, except as permitted by law.
For instance, so that we may continue to offer you Van Kampen investment
products and services that meet your investing needs, and to effect transactions
that you request or authorize, we may disclose the information we collect to
companies that perform services on our behalf, such as printers and mailers that
assist us in the distribution of investor materials. These companies will use
this information only for the services for which we hired them, and are not
permitted to use or share this information for any other purpose. To protect
your nonpublic personal information internally, we permit access to it only by
authorized employees, and maintain physical, electronic and procedural
safeguards to guard your nonpublic personal information.
* Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp.,
Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen
Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc.,
Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many
Van Kampen mutual funds and Van Kampen unit investment trusts.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
(VAN KAMPEN INVESTMENTS LOGO)
Copyright (C)2003 Van Kampen
Funds Inc. All rights reserved.
Member NASD/SIPC. 920, 957, 107
VIN SAR 8/03 11618H03-AS-8/03
Item 2. Code of Ethics.
Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semi-annual reports.
Item 4. Principal Accountant Fees and Services.
Not applicable for semi-annual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semi-annual reports.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semi-annual reports.
Item 8. [Reserved.]
Item 9.
The Trust's principal executive officer and principal financial officer have
concluded that the Trust's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Trust in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation.
Item 10. Exhibits.
(a) Code of Ethics - Not applicable for semi-annual reports.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Van Kampen Income Trust
------------------------------------------------------------------
By: /s/ Ronald E. Robison
----------------------------------------------------------------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Ronald E. Robison
----------------------------------------------------------------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2003
By: /s/ John L. Sullivan
----------------------------------------------------------------------------
Name: John L. Sullivan
Title: Principal Financial Officer
Date: August 19, 2003