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 811-5845
Van Kampen Senior Loan Fund
- --------------------------------------------------------------------------------
(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: 7/03
-----------
Date of reporting period: 7/31/03
-----------
Item 1. Report to Shareholders
Welcome, Shareholder
In this update, you'll learn about how your fund performed during the
reporting period. The portfolio manager 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 fund's financial statements and a list of fund investments,
as well as other information.
This material must be preceded or accompanied by a prospectus for the
fund being offered.
Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the fund will achieve its investment
objective. The fund is subject to market risk which is the possibility
that the market values of securities owned by the fund will decline and,
therefore, the value of the fund shares may be less than what you paid
for them. Accordingly, you can lose money investing in this fund. Please
see the prospectus for more complete information on investment risks.
An investment in senior loans is subject to certain risks such as loan
defaults and illiquidity due to insufficient collateral backing.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Performance Summary
CURRENT DISTRIBUTION
(July 25, 1993--July 31, 2003)
(LINE GRAPH)
<Table>
<Caption>
SENIOR LOAN FUND - CLASS B 3-MONTH TREASURY BILL*
-------------------------- ----------------------
7/93 5.76 3.10
5.75 3.07
5.75 2.98
5.50 3.10
5.49 3.20
5.47 3.06
5.47 3.03
5.48 3.43
5.72 3.55
6.16 3.95
6.50 4.24
6.50 4.22
7/94 6.50 4.36
6.81 4.66
7.00 4.77
7.00 5.15
7.00 5.71
7.57 5.69
8.01 5.99
8.04 5.94
8.03 5.87
8.02 5.86
8.02 5.80
8.01 5.57
7/95 8.02 5.58
8.01 5.44
8.02 5.41
8.03 5.51
8.03 5.49
7.54 5.08
7.54 5.05
7.25 5.03
7.26 5.14
7.01 5.15
6.80 5.18
6.80 5.16
7/96 6.80 5.31
7.01 5.28
7.01 5.03
7.01 5.15
7.01 5.13
7.02 5.17
7.02 5.15
7.02 5.22
7.02 5.32
7.03 5.23
7.03 4.94
6.60 5.17
7/97 7.02 5.23
6.80 5.22
6.79 5.10
7.26 5.20
6.58 5.20
7.26 5.35
7.01 5.18
6.37 5.31
7.52 5.12
7.01 4.97
7.52 5.01
6.18 5.08
7/98 7.26 5.07
6.60 4.83
6.82 4.36
7.11 4.32
5.81 4.48
6.63 4.45
6.02 4.45
6.20 4.67
6.88 4.48
6.63 4.54
6.22 4.63
6.49 4.78
7/99 6.48 4.75
6.55 4.97
6.56 4.85
6.58 5.09
6.59 5.30
6.59 5.33
6.90 5.69
6.96 5.78
7.22 5.87
7.23 5.83
7.25 5.62
7.57 5.85
7/00 7.57 6.22
7.60 6.31
8.14 6.21
8.31 6.39
8.40 6.20
8.53 5.90
8.63 4.99
8.74 4.86
8.09 4.29
7.20 3.88
6.75 3.62
6.54 3.66
7/01 6.29 3.52
5.97 3.37
5.80 2.37
5.28 2.01
4.71 1.73
4.47 1.72
4.19 1.76
3.97 1.76
3.93 1.77
3.90 1.77
3.92 1.73
3.95 1.68
7/02 4.15 1.70
4.32 1.67
4.33 1.55
4.48 1.45
4.48 1.21
4.25 1.20
4.09 1.17
4.11 1.20
4.10 1.11
3.81 1.11
3.75 1.10
3.67 0.85
7/03 3.54 0.94
</Table>
Data provided for the fund reflects distributions that occur on the 25th of each
month or the prior business day if the 25th falls on a weekend or holiday,
whereas benchmark data is as of the month end.
* Source: Bloomberg
<Table>
<Caption>
B SHARES C SHARES
since 10/04/89 since 06/13/03
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL W/O SALES W/O SALES
TOTAL RETURNS CHARGES CHARGES
Since Inception 5.63% 2.02%
10-year 4.64 --
5-year 2.23 --
1-year 6.58 --
- -----------------------------------------------------------------------------------
</Table>
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate and fund shares, when tendered, 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. Average annual total return assumes
reinvestment of all dividends and capital gains and excludes payment of maximum
early withdrawal charge. An early withdrawal charge for Class B shares of 3.00%
will be imposed on most shares accepted by the fund for repurchase within the
first year after purchase and declining thereafter to 0.00% after the fifth
year. An early withdrawal charge for Class C shares of 1.00% will be imposed on
most shares accepted by the fund for repurchase, which have been held for less
than one year. Distribution rate represents the monthly annualized distributions
of the fund at the end of the period and not the earnings of the fund.
1
Fund Report
FOR THE 12-MONTH PERIOD ENDED JULY 31, 2003
Howard Tiffen, Managing Director, is primarily responsible for the day-
to-day management of Van Kampen Senior Loan Fund. The following
discussion reflects his views on the fund's performance.
Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE
OVERALL MARKET ENVIRONMENT.
A. The market over the past year can really be divided into two distinct
segments. During the first six months of the reporting period, a stagnant
economy, lack of corporate earning power, and the effects of a series of
corporate-governance scandals resulted in a very difficult environment
for senior loans.
During the latter half of the period, however, the market improved
dramatically. Absolute levels of corporate profitability began to
increase, the number of debt refinancings rose considerably, and default
rates began to subside. As a result, bank loan prices rallied. We believe
this marked improvement was the result of several factors. First,
corporate management has been forced to learn how to better operate in a
low-growth, low-inflation environment, which has led to stronger
corporate valuations. Second, more companies have been able to issue
long-term debt to shore up their balance sheets. And lastly, we began to
see many companies that were in bankruptcy two to three years ago return
to performing status and earn a profit.
Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A. -- The fund returned 6.58 percent for the twelve months ended July 31,
2003. This return is for Class B shares, assumes the reinvestment of
all distributions, but does not reflect the deduction of any
applicable early withdrawal charges. If these charges were included,
performance would be lower. Past performance is no guarantee of
future results.
-- The fund's monthly dividend of $.0244 for Class B shares translated
to a distribution rate of 3.54 percent based on the fund's offering
price on July 25, 2003.
See Performance Summary for additional information.
Q. WHAT FACTORS HELPED PERFORMANCE?
-- As mentioned earlier, declining default rates, improved corporate
profitability and increased loan issuance, as well as an overall
improving economy, all contributed to performance.
-- A deeper secondary trading market in senior loans created greater
opportunities for us to capture value. This, coupled with the
2
appreciation of bank loan prices overall, helped boost the fund's
return and net asset value.
-- In addition, our team now includes a total of 24 analysts, who have
an average of 16 years of industry experience. Given that we employ
a bottom-up investment approach, we believe that such a large team
has enabled us to conduct even more in-depth analysis of every
investment candidate as well as all existing portfolio holdings, and
is vital to our ongoing success.
Q. WHAT HINDERED PERFORMANCE DURING THE REPORTING PERIOD?
A. -- Early in the reporting period, flat corporate performance and a low
level of issuance dampened fund returns and left us with few
compelling new investment opportunities. However, we saw marked
improvement here in the last several months.
-- While we have seen default rates decline, they are still at
higher-than-normal levels. The number of issuers in the portfolio
that are in default (defined here as those not paying principal
and/or interest as contractually obligated) has also declined, by
approximately 45 percent since this same period last year.
-- Because senior-loan coupon rates float with short-term market rates,
the near-record low interest rates throughout the entire period also
held the fund back.
<Table>
TOP 10 INDUSTRIES AS OF 7/31/03
Healthcare 7.4%
Entertainment & Leisure 6.9
Broadcasting--Cable 6.8
Medical Products & Services 5.9
Printing & Publishing 5.9
Telecommunications--Wireless 5.7
Hotels, Motels, Inns & Gaming 5.0
Beverage, Food & Tobacco 4.8
Chemicals, Plastics & Rubber 4.8
Automotive 4.5
</Table>
Subject to change daily. All percentages are as a percentage of total assets.
Provided for informational purposes only and should not be deemed as a
recommendation to buy securities in the industries shown above. Morgan Stanley
is a full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisor services.
3
Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING
KEY THEMES.
A. We employed a variety of strategies during the period:
-- In an effort to build value and avoid losses in the portfolio, we
made greater use of the secondary market, where we were able to
purchase loans at or below their repayment or recovery values. In
fact, we now have two analysts on our team who are largely dedicated
to this market, conducting transactions daily.
-- We continued to keep the portfolio highly diversified by issuer. As
of July 31, the fund contained a total of 291 issuers. Typically,
each of the fund's ten largest holdings represents less than two
percent of total assets. We believe that a high level of
diversification--not only in this environment but going forward as
well--is instrumental to successful investing in the senior loan
asset class.
-- We strive to manage the fund as defensively as possible, and
therefore, don't typically favor individual sectors. Some sectors
may, however, fall out of favor from time to time. For example, we
have chosen to reduce the fund's exposure to the auto and aerospace
segments because we believe they are likely to deliver poor profits,
and the value of collateral they can offer is also likely to fall.
The fund's exposure to the health-care sector did increase slightly
over the past year. We believe that certain parts of this sector
have seen a significant improvement in business fundamentals, making
some companies in the sector more attractive investments than they
had previously been.
-- We continued with our long-term strategy of focusing on companies
that we believe demonstrate solid management strength--those that
have learned to improve productivity in a low-inflation environment
and keep their costs low.
Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW OF THE FUND, DO YOU HAVE ANY
CLOSING THOUGHTS FOR THE SHAREHOLDERS?
A. We believe that the turnaround we've seen in the senior loan market as of
late is based upon fundamentally-sound factors that may continue to
positively influence the market. We also anticipate that default rates
may continue their downward trend as the bankruptcies that occurred
between 1999 and 2002 increasingly work their way through the system.
4
While no one can predict with certainty where or when interest rates will
bottom out, we believe it's likely that short-term rates may rise, or at
least remain stable, over the next several months. Such an environment,
coupled with more robust corporate performance, has historically been
quite favorable for senior loans. Going forward, we will continue with
our disciplined investment approach, monitoring the market closely for
opportunities.
5
ANNUAL HOUSEHOLDING NOTICE
To reduce expenses, the fund attempts to eliminate duplicate mailings to
the same address. The fund delivers a single copy of certain shareholder
documents to investors who share an address, even if the accounts are
registered under different names. The fund's prospectus and shareholder
reports (including annual privacy notices) will be delivered to you in
this manner indefinitely unless you instruct us otherwise. You can
request multiple copies of these documents by either calling (800)
341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza,
P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has
received your instructions, we will begin sending individual copies for
each account within 30 days.
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.
6
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
July 31, 2003
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 88.9%
AEROSPACE/DEFENSE 1.7%
$ 4,560 DeCrane Aircraft Holdings,
Inc., Term Loan............ B2 B 09/30/05 $ 4,081,094
3,554 DRS Technologies, Inc.,
Term Loan.................. Ba3 BB- 09/30/08 3,585,583
1,934 ILC Industries, Inc., Term
Loan....................... NR NR 04/11/10 1,919,458
2,801 Integrated Defense
Technologies, Inc., Term
Loan....................... Ba3 BB- 03/04/08 2,797,390
13,533 The Titan Corp., Term
Loan....................... Ba3 BB- 06/30/09 13,569,749
1,500 Transdigm, Inc., Term
Loan....................... B1 B+ 07/22/10 1,516,407
4,089 Veridian Corp., Term
Loan....................... Ba3 BB- 06/30/08 4,116,642
4,238 Vought Aircraft Industries,
Inc., Term Loan............ Ba3 B+ 12/31/06 to 06/30/08 4,237,879
--------------
35,824,202
--------------
AUTOMOTIVE 4.2%
2,264 AMCAN Consolidate
Technologies, Inc., Term
Loan....................... NR NR 03/28/07 2,161,948
3,216 Citation Corp., Term
Loan....................... NR B 12/01/07 2,612,614
29,161 Federal-Mogul Corp., Term
Loan (c)................... NR NR 10/01/03 to 02/24/05 27,744,267
3,090 Federal-Mogul Corp.,
Revolving Credit Agreement
(c)........................ NR NR 02/24/04 3,074,137
16,742 MetoKote Corp., Term Loan.. B1 B+ 11/14/05 16,480,196
2,633 Polypore, Inc., Term
Loan....................... Ba3 B+ 12/31/07 2,653,083
17,889 Safelite Glass Corp., Term
Loan (a)................... NR NR 09/30/07 17,620,787
863 Stoneridge, Inc., Term
Loan....................... Ba3 BB 04/30/08 862,500
5,500 The Goodyear Tire and
Rubber Co., Term Loan...... Ba2 BB- 03/31/06 5,472,500
</Table>
See Notes to Financial Statements 7
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
AUTOMOTIVE (CONTINUED)
$ 7,547 ThermaSys Corp., Term
Loan....................... NR NR 08/25/07 $ 4,475,286
4,000 TRW Automotive, Inc., Term
Loan....................... Ba2 BB 02/28/11 4,020,416
2,500 United Components, Inc.,
Term Loan.................. B1 BB- 06/30/10 2,522,395
--------------
89,700,129
--------------
BEVERAGE, FOOD & TOBACCO 4.9%
23,605 Aurora Foods, Inc., Term
Loan....................... B3 CC 09/30/06 23,375,200
4,040 B & G Foods, Inc., Term
Loan....................... B1 B+ 03/31/06 4,042,166
9,216 Birds Eye Foods, Inc., Term
Loan....................... NR B+ 06/30/08 9,246,789
4,988 Burns Philp Food, Inc.,
Term Loan.................. B1 B+ 02/26/09 5,018,672
5,258 Commonwealth Brands, Inc.,
Term Loan.................. NR NR 08/28/07 5,264,225
245 Cott Beverages, Inc., Term
Loan....................... NR BB+ 12/31/06 245,919
913 Dean Foods Co., Term Loan.. Ba1 BB+ 07/15/08 917,497
7,636 Doane Pet Care Co., Term
Loan....................... B1 B 12/30/05 to 12/29/06 7,653,896
5,271 Dole Food Co., Inc., Term
Loan....................... Ba3 BB+ 03/28/08 to 09/28/08 5,316,887
7,170 Hartz Mountain Corp., Term
Loan....................... B1 B 12/31/07 7,174,233
7,223 Land O' Lakes, Inc., Term
Loan....................... B1 BB 10/10/06 to 10/10/08 7,081,829
4,783 Mafco Worldwide Corp., Term
Loan....................... NR NR 03/31/06 4,734,863
418 Meow Mix Co., Term Loan.... Ba3 BB- 01/31/08 418,544
2,500 Merisant Co., Term Loan.... Ba3 BB- 01/11/10 2,518,750
2,000 NBTY, Inc., Term Loan...... Ba2 BB+ 07/25/09 2,022,500
3,301 New World Pasta Co., Term
Loan....................... B3 NR 01/28/06 2,805,704
954 New World Pasta Co.,
Revolving Credit
Agreement.................. B3 NR 01/28/05 829,980
2,895 Otis Spunkmeyer, Inc., Term
Loan....................... B1 B+ 02/20/09 2,899,469
</Table>
8 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
BEVERAGE, FOOD & TOBACCO (CONTINUED)
$ 6,993 Pinnacle Foods, Inc., Term
Loan....................... Ba3 BB- 05/22/08 $ 7,001,351
1,088 Southern Wine & Spirits of
America, Inc., Term Loan... NR NR 07/02/08 1,093,788
4,992 Swift & Co., Term Loan..... Ba2 BB 09/19/08 5,004,170
--------------
104,666,432
--------------
BROADCASTING--CABLE 7.0%
9,653 CC VIII Operating, LLC,
Term Loan.................. B2 B- 02/02/08 9,094,506
67,685 Charter Communications
Operating, LLC, Term Loan.. B2 B 09/18/07 to 09/18/08 63,873,175
37,637 Falcon Cable
Communications, LP, Term
Loan....................... B2 B 12/31/07 34,367,695
12,432 Frontiervision Operating
Partners, LP, Term Loan
(c)........................ NR NR 09/30/05 to 03/31/06 11,830,846
2,917 Frontiervision Operating
Partners, LP, Revolving
Credit Agreement (c)....... NR NR 10/31/05 2,775,837
10,500 Insight Midwest Holdings
LLC, Term Loan............. Ba3 BB+ 06/30/09 to 12/31/09 10,511,693
4,250 MCC Iowa, LLC, Term Loan... NR NR 09/30/10 4,285,122
1,489 Mediacom Illinois, LLC,
Term Loan.................. NR BB+ 12/31/08 1,486,889
739 Mediacom Southeast, LLC,
Term Loan.................. Ba3 BB+ 09/30/08 740,569
11,760 Olympus Cable Holdings,
LLC, Term Loan (c)......... NR NR 09/30/10 10,441,410
--------------
149,407,742
--------------
BROADCASTING--DIVERSIFIED 0.6%
955 Comcorp Broadcasting, Inc.,
Term Loan (g).............. NR NR 03/31/03 947,887
1,995 Cumulus Media, Inc., Term
Loan....................... Ba3 B+ 03/28/10 2,008,404
6,000 DirecTV Holdings, LLC, Term
Loan....................... NR BB- 03/06/10 6,038,628
</Table>
See Notes to Financial Statements 9
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
BROADCASTING--DIVERSIFIED (CONTINUED)
$ 843 Nexstar Broadcasting, Inc.,
Term Loan.................. NR NR 12/31/10 $ 846,845
3,422 White Knight Broadcasting,
Inc., Term Loan (g)........ NR NR 03/31/03 3,396,816
--------------
13,238,580
--------------
BROADCASTING--TELEVISION 0.7%
3,080 Gray Television, Inc., Term
Loan....................... Ba3 B+ 12/31/10 3,106,950
357 Mission Broadcasting, Inc.,
Term Loan.................. NR B+ 12/31/10 358,318
11,900 Quorum Broadcasting, Inc.,
Term Loan.................. NR NR 12/31/04 11,483,265
--------------
14,948,533
--------------
BUILDINGS & REAL ESTATE 2.6%
3,000 AIMCO Properties, L.P.,
Term Loan.................. NR NR 05/30/08 3,013,125
13,374 Builders FirstSource, Inc.,
Term Loan.................. NR BB- 12/30/05 13,072,634
5,950 CB Richard Ellis Services,
Inc., Term Loan............ B1 B+ 07/18/08 5,994,625
8,371 Central Parking Corp., Term
Loan....................... Ba2 BB+ 03/31/10 8,361,965
3,500 Century Maintenance &
Supply, Inc., Term Loan.... NR NR 05/12/10 3,552,500
9,083 Corrections Corp. of
America, Term Loan......... Ba3 BB- 03/31/08 9,138,191
3,122 The Macerich Co., Term
Loan....................... NR NR 07/26/05 3,133,447
5,490 Ventas, Inc., Term Loan.... NR NR 04/17/07 5,475,814
1,802 Ventas, Inc., Revolving
Credit Agreement........... NR NR 04/17/05 1,720,844
2,500 Wackenhut Corrections
Corp., Term Loan........... Ba3 BB- 07/09/09 2,512,500
--------------
55,975,645
--------------
CHEMICALS, PLASTICS & RUBBER 4.8%
9,815 CP Kelco ApS, Term Loan.... B3 B+ 09/30/06 to 09/30/08 9,811,577
6,893 GenTek, Inc., Term Loan
(c)........................ NR NR 04/30/05 to 10/31/07 4,542,740
2,824 GenTek, Inc., Revolving
Credit Agreement (c)....... NR NR 04/30/05 1,886,493
4,550 GEO Specialty Chemicals,
Inc., Term Loan............ B3 CCC+ 12/31/07 4,178,415
</Table>
10 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
CHEMICALS, PLASTICS & RUBBER (CONTINUED)
$38,586 Huntsman Corp., Term Loan.. B2 B+ 03/31/07 $ 35,655,090
17,440 Huntsman ICI Chemicals,
LLC, Term Loan............. B1 B+ 06/30/07 to 06/30/08 17,538,926
3,651 Jet Plastica Industries,
Inc., Term Loan............ NR NR 12/31/03 2,829,525
1,000 Jet Plastica Industries,
Inc., Revolving Credit
Agreement.................. NR NR 12/31/03 775,000
10,500 Lyondell Chemical Co., Term
Loan....................... Ba3 BB- 06/10/04 9,975,000
856 Messer Griesheim, Term
Loan....................... Ba2 BB 04/27/09 to 04/27/10 863,046
5,273 Nutrasweet Acquisition
Corp., Term Loan........... Ba3 NR 06/30/06 to 12/31/07 4,908,570
4,000 Rockwood Specialties Group,
Inc., Term Loan............ B1 B+ 07/23/10 4,050,000
2,943 TruSeal Technologies, Inc.,
Term Loan.................. NR NR 06/30/04 2,906,342
930 West American Rubber Co.,
LLC, Term Loan............. NR NR 11/09/03 929,583
--------------
100,850,307
--------------
CONSTRUCTION MATERIAL 0.5%
5,000 Interline Brands, Inc.,
Term Loan.................. B2 B+ 11/30/09 5,018,750
523 National Waterworks, Inc.,
Term Loan.................. B1 BB- 11/22/09 528,220
1,719 Therma-Tru Corp., Term
Loan....................... Ba3 BB- 02/21/10 1,727,435
3,750 Werner Holding Co., Inc.,
Term Loan.................. Ba3 B+ 06/11/09 3,799,999
--------------
11,074,404
--------------
CONTAINERS, PACKAGING & GLASS 3.2%
9,375 Crown Cork & Seal Co.,
Inc., Term Loan............ Ba3 NR 09/15/08 9,418,950
14,591 Dr. Pepper/Seven Up
Bottling Group, Inc., Term
Loan....................... NR NR 10/07/06 to 10/07/07 14,549,662
1,330 Fleming Packaging Corp.,
Term Loan (b) (c).......... NR NR 08/31/04 255,391
176 Fleming Packaging Corp.,
Revolving Credit Agreement
(b) (c) (g)................ NR NR 03/31/03 33,844
</Table>
See Notes to Financial Statements 11
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
CONTAINERS, PACKAGING & GLASS (CONTINUED)
$ 981 Impress Metal Packaging
Holding B.V., Term Loan.... NR NR 12/31/06 $ 978,196
374 Jefferson Smurfit Corp.,
Revolving Credit
Agreement.................. NR NR 03/31/05 363,859
9,698 Kranson Industries, Inc.,
Term Loan.................. NR NR 12/31/06 9,601,508
12,000 Owens-Illinois, Inc., Term
Loan....................... NR NR 04/01/07 to 04/01/08 12,038,281
4,732 Packaging Dynamics, Term
Loan....................... NR NR 11/20/05 4,719,673
2,931 Pliant Corp., Term Loan.... B2 BB- 05/31/08 2,911,133
156 Pliant Corp., Revolving
Credit Agreement........... B2 BB- 05/31/06 144,757
4,542 Riverwood International
Corp., Term Loan........... B1 B 12/31/06 to 03/31/07 4,537,277
611 Smurfit-Stone Container
Corp., Term Loan........... NR NR 06/30/09 614,296
3,607 Stone Container Corp., Term
Loan....................... NR NR 06/30/09 3,625,593
2,939 Tekni-Plex, Inc., Term
Loan....................... B1 B+ 06/21/08 2,898,060
2,211 U.S. Can Corp., Term
Loan....................... B2 B 01/04/06 2,189,491
--------------
68,879,971
--------------
DIVERSIFIED MANUFACTURING 2.3%
17,462 Chart Industries, Inc.,
Term Loan (b) (c).......... NR NR 03/31/06 13,708,021
2,438 EnerSys, Term Loan......... NR NR 11/09/08 2,443,672
13,817 Mueller Group, Inc., Term
Loan....................... B1 B+ 05/31/08 13,826,634
16,630 Neenah Foundry Co., Term
Loan (c)................... Caa3 D 09/30/05 16,526,212
3,396 United Fixtures Co., Term
Loan (a)................... NR NR 12/31/04 2,003,446
--------------
48,507,985
--------------
ECOLOGICAL 1.8%
23,000 Allied Waste North America,
Inc., Term Loan............ Ba3 BB 01/15/10 23,221,927
6,050 Casella Waste Systems,
Inc., Term Loan............ B1 BB- 05/11/07 6,082,519
</Table>
12 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
ECOLOGICAL (CONTINUED)
$ 4,844 Duratek, Inc., Term Loan... NR NR 12/08/06 $ 4,722,827
20,556 Safety-Kleen Corp., Term
Loan (b) (c)............... NR NR 04/03/05 to 04/03/06 5,036,186
--------------
39,063,459
--------------
ELECTRONICS 2.5%
372 AMI Semiconductor, Inc.,
Term Loan.................. Ba3 BB 12/26/06 370,792
7,308 Audio Visual Services
Corp., Term Loan........... NR NR 03/04/04 to 03/04/06 7,003,261
2,984 Dynamic Details, Inc., Term
Loan....................... Caa2 NR 04/22/05 1,641,392
4,987 Kinetics Group, Inc., Term
Loan....................... B1 NR 02/28/06 4,376,487
6,432 Knowles Electronics, Inc.,
Term Loan.................. B3 CCC+ 06/29/07 6,355,562
5,785 Rayovac Corp., Term Loan... Ba3 BB- 09/30/09 5,797,050
14,721 Semiconductor Components
Industries, LLC, Term
Loan....................... B3 B 08/04/06 to 08/04/07 14,626,196
13,541 Stratus Technologies, Inc.,
Term Loan.................. NR NR 02/26/05 11,915,877
--------------
52,086,617
--------------
ENTERTAINMENT & LEISURE 6.0%
2,447 Bell Sports, Inc., Term
Loan....................... NR NR 12/31/05 to 03/31/07 1,847,238
7,028 Carmike Cinemas, Inc., Term
Loan....................... NR NR 01/31/07 7,070,787
1,467 Cinemark USA, Inc., Term
Loan....................... Ba3 BB- 03/31/08 1,478,373
2,685 Festival Fun Parks, LLC,
Term Loan.................. NR NR 06/30/07 to 12/31/07 2,674,290
33,323 Fitness Holdings Worldwide,
Inc., Term Loan............ NR B 11/02/06 to 11/02/07 33,094,079
1,990 Kerasotes Theatres, Inc.,
Term Loan.................. NR NR 12/31/08 2,004,925
14,491 Loews Cineplex
Entertainment Corp., Term
Loan....................... NR NR 03/31/07 to 02/29/08 14,462,383
13,425 Metro-Goldwyn-Mayer, Inc.,
Term Loan.................. NR NR 06/30/08 13,445,983
1,500 Mets II, LLC, Term Loan.... NR NR 08/23/05 1,498,125
</Table>
See Notes to Financial Statements 13
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
ENTERTAINMENT & LEISURE (CONTINUED)
$ 2,949 Panavision, Inc., Term
Loan....................... B3 CCC 03/31/05 $ 2,901,290
9,700 Playcore Wisconsin, Inc.,
Term Loan.................. NR NR 07/01/07 9,308,941
5,000 Pure Fishing, Term Loan.... NR NR 12/31/09 4,993,750
3,000 Regal Cinemas, Inc., Term
Loan....................... Ba2 BB- 06/30/09 3,033,750
2,500 Riddell Sports Group, Inc.,
Term Loan.................. NR NR 06/30/08 2,506,250
6,500 Six Flags Theme Parks,
Inc., Term Loan............ Ba2 BB- 06/30/09 6,496,614
233 Six Flags Theme Parks,
Inc., Revolving Credit
Agreement.................. Ba2 BB- 06/30/08 226,333
2,538 Sportcraft, Ltd., Term
Loan....................... NR NR 07/31/05 2,410,985
1,252 Sportcraft, Ltd., Revolving
Credit Agreement........... NR NR 07/31/05 1,188,979
9,200 Vivendi Universal
Entertainment, Term Loan... Ba2 B+ 06/30/08 9,258,935
3,750 Worldspan, LP, Term Loan... B1 BB- 06/30/07 3,775,781
4,465 Worldwide Sports &
Recreation, Inc., Term
Loan....................... NR NR 12/31/06 4,278,452
--------------
127,956,243
--------------
FARMING AND AGRICULTURE 0.1%
2,250 Central Garden & Pet Co.,
Term Loan.................. Ba2 BB+ 05/14/09 2,264,767
--------------
FINANCE 1.5%
39,320 Outsourcing Solutions, Term
Loan (b) (c)............... Caa1 NR 12/10/05 to 06/10/06 18,207,308
8,500 Rent-A-Center, Inc., Term
Loan....................... Ba2 BB 05/28/09 8,567,295
4,849 Risk Management Assurance
Co., Term Loan............. NR NR 12/21/06 4,845,521
--------------
31,620,124
--------------
</Table>
14 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
GROCERY 0.2%
$ 2,729 Fleming Cos., Inc., Term
Loan (c)................... NR NR 06/18/08 $ 2,578,640
1,569 Fleming Cos., Inc.,
Revolving Credit Agreement
(c)........................ NR NR 06/18/07 1,492,892
--------------
4,071,532
--------------
HEALTHCARE 4.2%
1,995 Ameripath, Inc., Term
Loan....................... B1 B+ 03/27/10 2,007,469
28,614 Community Health Systems,
Inc., Term Loan............ NR NR 07/16/10 to 01/16/11 28,721,006
4,411 Genesis Health Ventures,
Inc., Term Loan............ Ba3 B+ 03/31/07 4,405,989
8,855 InteliStaf Group, Inc.,
Term Loan.................. NR NR 10/31/05 to 10/31/07 8,788,632
22,206 Kindred Healthcare, Inc.,
Term Loan (a).............. NR NR 04/13/08 21,983,875
11,901 Magellan Health Services,
Inc., Term Loan (c)........ NR D 02/12/05 to 02/12/06 11,702,170
7,518 Medical Staffing Network
Holdings, Inc., Term
Loan....................... NR NR 10/26/06 7,485,389
3,758 Team Health, Inc., Term
Loan....................... Ba3 B+ 10/31/08 3,717,368
--------------
88,811,898
--------------
HEALTHCARE & BEAUTY 0.8%
3,750 Jafra Cosmetics
International, Inc., Term
Loan....................... NR B+ 05/20/08 3,656,250
1,288 Mary Kay, Inc., Term Loan.. Ba3 BB 10/03/07 1,294,186
2,895 Prestige Brands Holdings,
Inc., Term Loan............ NR NR 12/30/08 2,909,475
8,873 Revlon Consumer Products
Corp., Term Loan........... B3 B- 05/30/05 8,650,904
--------------
16,510,815
--------------
HOME & OFFICE FURNISHINGS, HOUSEWARES & DURABLE CONSUMER
PRODUCTS 1.0%
2,079 Formica Corp., Term Loan
(c)........................ NR NR 04/30/06 2,016,849
7,083 General Binding Corp., Term
Loan....................... B2 B+ 01/15/08 7,061,198
1,645 Holmes Products Corp., Term
Loan....................... NR B 02/05/07 1,606,234
</Table>
See Notes to Financial Statements 15
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
HOME & OFFICE FURNISHINGS, HOUSEWARES & DURABLE CONSUMER PRODUCTS
(CONTINUED)
$ 5,045 Imperial Home Decor Group,
Inc., Term Loan (a) (b).... NR NR 04/04/06 $ 126,121
3,289 National Bedding Co., Term
Loan....................... B1 B+ 08/31/08 3,302,348
3,567 Sealy Mattress Co., Term
Loan....................... B1 B+ 12/15/04 to 12/15/06 3,553,807
3,290 Targus Group International,
Inc., Term Loan............ NR NR 08/31/06 2,911,576
--------------
20,578,133
--------------
HOTELS, MOTELS, INNS & GAMING 5.1%
41,792 Aladdin Gaming, LLC, Term
Loan (b) (c)............... NR NR 02/25/05 to 02/26/08 35,092,779
3,908 Extended Stay America,
Inc., Term Loan............ Ba3 BB- 01/15/08 3,934,169
2,277 Greektown Casino, LLC, Term
Loan....................... NR NR 09/30/04 2,283,415
10,500 Mandalay Resort Group, Term
Loan....................... NR NR 08/21/06 10,493,437
4,273 Penn National Gaming, Inc.,
Term Loan.................. B1 B+ 09/01/07 4,290,179
7,463 Scientific Games Corp.,
Term Loan.................. Ba3 BB- 12/31/08 7,490,484
7,500 Thunder Valley Casino, Term
Loan....................... NR NR 12/01/08 7,518,750
44,123 Wyndham International,
Inc., Term Loan............ NR NR 06/30/04 to 06/30/06 37,566,981
--------------
108,670,194
--------------
INSURANCE 1.3%
5,000 Alea Group Holdings, Term
Loan....................... NR BBB- 03/31/07 4,987,500
16,275 BRW Acquisition, Inc., Term
Loan....................... NR NR 07/10/06 to 07/10/07 15,949,500
4,725 Gab Robins North America,
Inc., Term Loan............ NR NR 12/31/05 4,488,750
1,800 Infinity Property and
Casualty Corp., Term Loan.. Baa3 BBB 06/30/10 1,814,625
--------------
27,240,375
--------------
</Table>
16 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
MACHINERY 1.4%
$ 4,482 Alliance Laundry Holdings,
LLC, Term Loan............. B1 B 08/02/07 $ 4,462,257
139 Alliance Laundry Holdings,
LLC, Revolving Credit
Agreement.................. B1 B 06/02/05 135,417
8,690 Ashtead Group, PLC, Term
Loan....................... NR NR 06/01/07 6,669,816
2,136 Flowserve Corp., Term
Loan....................... Ba3 BB- 06/30/09 2,148,164
13,717 Gleason Corp., Term Loan... NR NR 02/18/06 to 02/18/08 13,658,311
2,214 SWT Finance, BV, Term
Loan....................... NR NR 09/30/05 1,715,992
--------------
28,789,957
--------------
MEDICAL PRODUCTS & SERVICES 4.3%
4,556 Alaris Medical Systems,
Inc., Term Loan............ B1 BB 06/30/09 4,604,531
5,061 Alliance Imaging, Inc.,
Term Loan.................. B1 B+ 06/10/08 4,945,066
2,000 Conmed Corp., Term Loan.... Ba3 BB- 12/15/09 2,021,250
15,340 Dade Behring, Inc., Term
Loan....................... B1 B+ 10/03/08 15,550,532
11,290 DaVita, Inc., Term Loan.... Ba3 BB- 03/31/07 to 03/31/09 11,319,123
3,950 Fisher Scientific
International, Inc., Term
Loan....................... Ba3 BB+ 03/31/10 3,973,801
15,794 Fresenius Medical Care
Holding, Inc., Term Loan... Ba1 BB+ 02/21/10 15,922,074
2,358 InSight Health, Term Loan.. NR B+ 10/17/08 2,368,205
7,926 Kinetic Concepts, Inc.,
Term Loan.................. Ba3 BB- 12/31/04 to 12/31/05 7,924,214
8,995 Mediq/PRN Life Support
Services, Inc., Term
Loan....................... NR NR 06/13/05 7,825,374
8,758 National Nephrology
Associates, Inc., Term
Loan....................... B1 B+ 12/31/05 8,703,134
1,605 Rotech Healthcare, Inc.,
Term Loan.................. Ba2 BB 03/31/08 1,606,572
4,000 Symmetry Medical, Inc.,
Term Loan.................. NR NR 06/30/08 to 06/30/09 4,002,092
--------------
90,765,968
--------------
</Table>
See Notes to Financial Statements 17
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
MINING, STEEL, IRON & NON-PRECIOUS METALS 2.8%
$14,621 Carmeuse Lime, Inc., Term
Loan....................... NR NR 03/31/06 $ 11,696,844
7,348 CII Carbon, LLC, Term
Loan....................... NR NR 06/25/08 6,540,093
1,915 Fairmount Minerals, Ltd.,
Term Loan.................. NR NR 03/13/09 1,919,852
56,070 Ispat Inland, Term Loan.... Caa1 B- 07/16/05 to 07/16/06 38,828,464
1,197 Peabody Energy Corp., Term
Loan....................... Ba1 BB+ 03/21/10 1,208,970
--------------
60,194,223
--------------
NATURAL RESOURCES 1.5%
1,250 CITGO Petroleum Corp., Term
Loan....................... Ba2 BB+ 02/27/06 1,290,625
7,500 El Paso Coastal, Term
Loan....................... NR NR 12/31/06 7,485,937
1,250 El Paso Coastal, Revolving
Credit Agreement........... NR NR 12/31/06 1,237,305
20,000 Ocean Rig ASA--(Norway),
Term Loan.................. NR NR 06/01/08 16,800,000
5,186 Tesoro Petroleum Corp.,
Term Loan.................. Ba3 BB 04/17/07 5,231,243
700 U.S. Synthetic Corp., Term
Loan....................... NR NR 05/31/05 672,000
--------------
32,717,110
--------------
NON-DURABLE CONSUMER PRODUCTS 0.4%
1,903 Aero Products
International, Inc., Term
Loan....................... NR NR 12/19/08 1,879,722
782 American Safety Razor Co.,
Term Loan.................. B2 B- 01/31/05 766,803
2,985 Amscan Holdings, Inc., Term
Loan....................... B1 BB- 06/15/07 2,999,925
2,000 The Boyds Collection, Ltd.,
Term Loan.................. Ba3 B+ 04/21/05 1,959,556
--------------
7,606,006
--------------
PAPER & FOREST PRODUCTS 0.3%
2,448 Bear Island Paper Co., LLC,
Term Loan.................. B3 B- 12/31/05 2,436,239
3,910 Port Townsend Paper Corp.,
Term Loan.................. NR NR 03/16/07 3,636,300
--------------
6,072,539
--------------
</Table>
18 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
PERSONAL & MISCELLANEOUS SERVICES 1.1%
$ 2,545 Aspen Marketing Group, Term
Loan....................... NR NR 09/30/04 $ 1,145,155
7,775 Aspen Marketing Group,
Revolving Credit
Agreement.................. NR NR 09/30/04 3,498,954
3,642 Encompass Service Corp.,
Term Loan (b) (c).......... NR NR 02/22/06 to 05/10/07 482,558
2,000 Global Imaging Systems,
Inc., Term Loan............ Ba3 BB- 06/25/09 2,025,000
1,925 infoUSA, Inc., Term Loan... Ba3 NR 04/30/07 1,922,594
4,950 Katun Corp., Term Loan..... NR B+ 06/30/09 4,934,531
1,695 Stewart Enterprises, Inc.,
Term Loan.................. Ba3 BB 01/31/06 1,703,586
8,086 The Relizon Co., Term
Loan....................... NR NR 09/30/06 to 12/31/07 7,951,991
--------------
23,664,369
--------------
PHARMACEUTICALS 0.7%
848 Alpharma, Inc., Term Loan.. B2 BB- 10/05/07 842,577
3,426 Caremark Rx, Inc., Term
Loan....................... Ba2 BBB- 03/31/06 3,433,898
10,247 MedPointe, Inc., Term
Loan....................... B1 B 09/30/07 to 09/30/08 9,644,331
--------------
13,920,806
--------------
PRINTING & PUBLISHING 6.1%
4,962 21st Century Newspapers,
Term Loan.................. NR NR 08/27/08 4,961,538
1,487 Adams Outdoor Advertising
LP, Term Loan.............. B1 B+ 02/08/08 1,494,395
8,396 Advanstar Communications,
Inc., Term Loan............ NR B 04/11/07 to 10/11/07 8,297,425
8,245 American Reprographics Co.,
Term Loan.................. NR NR 04/10/08 8,072,007
3,919 Check Printers, Inc., Term
Loan....................... NR NR 06/30/05 3,914,325
13,014 CommerceConnect Media,
Inc., Term Loan............ NR NR 12/31/07 12,493,670
2,010 Daily News, LP, Term Loan.. NR NR 03/19/08 1,927,427
5,119 F&W Publications, Inc.,
Term Loan.................. NR NR 12/31/09 5,118,668
</Table>
See Notes to Financial Statements 19
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
PRINTING & PUBLISHING (CONTINUED)
$ 5,082 Haights Cross
Communications, LLC, Term
Loan....................... B2 B+ 12/10/06 $ 4,925,455
10,785 Journal Register Co., Term
Loan....................... Ba1 BB+ 09/29/06 10,704,417
4,800 Lamar Media Corp., Term
Loan....................... Ba2 BB- 06/30/10 4,820,002
1,388 Liberty Group Operating,
Inc., Term Loan............ B1 B 03/31/07 1,386,388
5,167 Merrill Communications,
LLC, Term Loan............. B3 B 11/23/05 to 11/23/07 5,064,027
2,500 Moore Corp., Ltd, Term
Loan....................... B2 BB+ 03/15/10 2,508,203
10,000 Morris Communications
Corp., Term Loan........... NR BB 09/30/09 10,031,250
3,435 Network Communications,
Inc., Term Loan............ NR NR 06/27/08 3,443,380
10,031 Primedia, Inc., Term
Loan....................... NR B 06/30/08 to 06/30/09 9,735,865
5,833 R.H. Donnelley, Inc., Term
Loan....................... Ba3 BB 12/31/08 to 06/30/10 5,941,413
5,757 The Reader's Digest
Association, Inc., Term
Loan....................... Ba1 BB+ 05/21/07 5,691,784
5,684 Vutek, Inc., Term Loan..... B1 NR 07/31/07 5,513,182
9,500 Xerox Corp., Term Loan..... NR BB- 09/30/08 9,428,750
4,793 Ziff-Davis Media, Inc.,
Term Loan.................. NR CCC 03/31/07 4,290,081
--------------
129,763,652
--------------
RESTAURANTS & FOOD SERVICE 0.2%
1,632 Carvel Corp., Term Loan.... NR NR 12/31/06 1,615,841
2,672 Papa Ginos, Inc., Term
Loan....................... NR NR 08/31/07 2,665,237
--------------
4,281,078
--------------
RETAIL--OIL & GAS 0.6%
4,458 Barjan Products, LLC, Term
Loan....................... NR NR 05/31/06 2,228,944
9,421 The Pantry, Inc., Term
Loan....................... B1 B- 03/31/07 9,502,856
--------------
11,731,800
--------------
</Table>
20 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
RETAIL--SPECIALTY 0.5%
$ 1,049 American Blind & Wallpaper
Factory, Inc., Term Loan
(a)........................ NR NR 12/31/05 $ 1,048,652
3,209 DRL Acquisition, Inc., Term
Loan....................... NR NR 04/30/09 3,197,340
1,739 Home Interiors & Gifts,
Inc., Term Loan............ B2 B+ 12/31/06 1,722,951
5,113 Nebraska Book Co., Inc.,
Term Loan.................. Ba3 B+ 03/31/06 5,125,493
--------------
11,094,436
--------------
RETAIL--STORES 2.1%
4,198 Advance Stores Co., Inc.,
Term Loan.................. Ba3 BB- 11/30/07 4,221,509
5,350 CSK Auto, Inc., Term Loan.. Ba3 BB- 02/15/06 5,403,500
6,481 Murray's Discount Auto
Stores, Inc., Term Loan.... NR NR 08/15/03 6,474,333
410 Murray's Discount Auto
Stores, Inc., Revolving
Credit Agreement........... NR NR 08/15/03 409,567
28,000 Rite Aid Corp., Term
Loan....................... B1 BB 04/30/08 28,231,000
--------------
44,739,909
--------------
TELECOMMUNICATIONS--LOCAL EXCHANGE CARRIERS 1.1%
6,170 Alaska Communications
Systems Holdings, Inc.,
Term Loan.................. B1 BB- 11/14/07 to 05/14/08 6,165,007
3,143 Cincinnati Bell, Inc., Term
Loan....................... B1 B+ 11/09/04 to 06/29/07 3,170,973
2,000 FairPoint Communications,
Inc., Term Loan............ B1 BB- 03/31/07 2,007,500
7,406 NATG Holdings, LLC, Term
Loan (a)................... NR NR 01/23/09 to 01/23/10 1,919,327
4,331 NATG Holdings, LLC,
Revolving Credit Agreement
(a)........................ NR NR 01/23/05 2,490,270
5,381 Qwest Corp., Term Loan..... Ba3 B- 06/30/07 5,425,345
7,500 WCI Capital Corp., Term
Loan (b) (c)............... NR NR 09/30/07 9,375
2,158 WCI Capital Corp.,
Revolving Credit Agreement
(b) (c) (g)................ NR NR 12/31/02 1,035,884
--------------
22,223,681
--------------
</Table>
See Notes to Financial Statements 21
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
TELECOMMUNICATIONS--LONG DISTANCE 0.1%
$29,946 Pacific Crossing, Ltd.,
Term Loan (b) (c).......... NR NR 07/28/06 $ 2,096,223
--------------
TELECOMMUNICATIONS-WIRELESS 5.5%
9,124 American Cellular Corp.,
Term Loan.................. B3 CC 03/31/08 to 03/31/09 9,044,255
269 American Cellular Corp.,
Revolving Credit
Agreement.................. B3 CC 03/31/07 268,218
25,338 BCP SP Ltd., Term Loan (g)
(j)........................ NR NR 03/31/02 to 03/31/05 8,543,218
2,246 Centennial Cellular, Corp.,
Term Loan.................. B3 B 11/30/06 2,176,482
4,409 Centennial Puerto Rico
Operations Corp., Term
Loan....................... NR B 05/31/07 to 11/30/07 4,287,380
8,000 Cricket Communications,
Inc., Term Loan (b) (c).... NR NR 06/30/07 3,100,000
1,773 Crown Castle International
Corp., Term Loan........... Ba3 B- 03/15/08 1,778,084
7,280 Dobson Operating Co., Term
Loan....................... Ba3 B- 03/31/08 7,100,442
24,475 Nextel Finance Co., Term
Loan....................... Ba2 BB 12/31/07 to 12/31/08 24,300,660
12,439 Nextel Partners, Inc., Term
Loan....................... B1 B- 01/29/08 to 07/29/08 12,391,894
17,624 Rural Cellular Corp., Term
Loan....................... B2 B- 10/03/08 to 04/03/09 17,366,109
4,076 Spectrasite Communications,
Inc., Term Loan............ B1 B+ 12/31/07 4,117,659
18,589 Sygnet Wireless, Inc., Term
Loan....................... NR NR 12/23/06 to 12/23/07 18,222,312
1,043 TSI Telecommunication
Services, Inc., Term
Loan....................... Ba3 B+ 12/31/06 1,044,640
2,034 Western Wireless Corp.,
Term Loan.................. B3 B- 09/30/08 2,003,934
--------------
115,745,287
--------------
TRANSPORTATION--CARGO 1.6%
7,912 American Commercial Lines,
LLC, Term Loan (c)......... NR NR 07/31/04 to 06/30/07 6,663,304
14,612 Atlas Freighter Leasing,
Inc., Term Loan............ Caa3 NR 04/25/05 to 04/25/06 8,858,659
</Table>
22 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
TRANSPORTATION--CARGO (CONTINUED)
$ 4,872 Comcar Industries, Inc.,
Term Loan.................. NR NR 09/30/04 $ 4,092,781
3,763 Havco Wood Products, Inc.,
Term Loan (j).............. NR NR 06/30/06 2,351,697
2,652 Ingram Industries, Inc.,
Term Loan.................. NR NR 07/02/08 2,625,859
7,118 Pacer International, Inc.,
Term Loan.................. B1 BB- 06/10/10 7,179,927
1,196 Roadway Corp., Term Loan... Baa3 BBB 11/30/06 1,191,424
1,305 United States Shipping,
LLC, Term Loan............. Ba2 BB 09/12/08 1,309,096
--------------
34,272,747
--------------
TRANSPORTATION--PERSONAL 0.9%
5,996 IAP Newsub, Inc., Term Loan
(b)........................ NR NR 05/29/05 929,438
900 IAP Newsub, Inc., Revolving
Credit Agreement (b)....... NR NR 05/29/05 139,476
9,900 Laidlaw Investments Ltd.,
Term Loan.................. Ba3 BB+ 06/19/09 9,974,250
7,063 Motor Coach Industries,
Inc., Term Loan............ B2 B 06/16/05 5,950,256
1,905 Transcore Holdings, Inc.,
Term Loan.................. NR NR 10/01/06 1,912,112
--------------
18,905,532
--------------
TRANSPORTATION-RAIL MANUFACTURING 0.1%
2,423 Helm, Inc., Term Loan...... NR NR 10/18/06 2,259,706
1,998 RailWorks Corp., Term
Loan....................... NR NR 11/13/04 749,216
--------------
3,008,922
--------------
UTILITIES 0.6%
750 Alleghany Energy, Inc.,
Term Loan.................. B2 B 09/30/04 750,375
853 Aquila, Inc., Term Loan.... B2 B+ 05/15/06 859,573
27 CMS Energy Corp., Term
Loan....................... B2 B 09/30/04 27,044
950 Consumers Energy Co., Term
Loan....................... Baa3 NR 07/11/04 956,531
2,471 Pike Electric, Inc., Term
Loan....................... NR NR 04/18/10 2,488,347
3,125 Southern California Edison
Co., Term Loan............. Ba2 NR 03/01/05 3,137,697
</Table>
See Notes to Financial Statements 23
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
BANK LOAN
PRINCIPAL RATINGS+
AMOUNT --------------
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
UTILITIES (CONTINUED)
$ 441 TNP Enterprises, Inc., Term
Loan....................... Ba2 BB+ 03/30/06 $ 435,117
4,213 Westar Energy, Inc., Term
Loan....................... NR NR 06/05/05 4,233,951
10 Westar Energy, Inc.,
Revolving Credit
Agreement.................. NR NR 06/05/05 9,375
--------------
12,898,010
--------------
TOTAL VARIABLE RATE** SENIOR LOAN INTERESTS 88.9%........................... 1,886,440,342
--------------
</Table>
<Table>
DESCRIPTION VALUE
NOTES 2.1%
Alderwoods Group, Inc. ($1,877,300 par, 11.00% to 12.25% coupon, maturing
01/02/07 to 01/02/09)...................................................... 1,971,473
American Home Patient, Inc. ($814,858 par, 6.79% to 8.57% coupon, maturing
07/01/09).................................................................. 554,104
Commonwealth Brands, Inc. ($1,500,000 par, 8.74% coupon, maturing 04/15/08)
(h)........................................................................ 1,537,500
Dade Behring, Inc. ($5,244,700 par, 11.91% coupon, maturing 10/03/10)........ 5,506,935
Genesis Health Ventures, Inc. ($12,837,827 par, 6.11% coupon, maturing
04/02/07) (h).............................................................. 12,837,827
PCI Chemicals Canada, Inc. ($3,128,801 par, 10.00% coupon, maturing
12/31/08).................................................................. 2,706,413
Pioneer Cos., Inc. ($1,515,821 par, 4.60% coupon, maturing 12/31/06) (h)..... 1,296,027
Premcor Refining Group, Inc. ($8,500,000 par, 4.34% coupon, maturing
02/11/06) (h).............................................................. 8,574,375
Satelites Mexicanos ($10,320,000 par, 5.61% coupon, maturing 06/30/04), 144A
Private Placement (f) (h).................................................. 9,133,200
--------------
44,117,854
--------------
EQUITIES 6.6%
Alderwoods Group, Inc. (89,681 common shares) (e)............................ 608,844
American Home Patient, Inc. (Warrants for 10,147 common shares) (e).......... 0
Aspen Marketing (166,871 common shares) (e).................................. 0
Audio Visual Services Corp. (137,193 common shares) (d) (e).................. 1,440,526
Best Products Co., Inc. (297,480 common shares) (e).......................... 0
Chart Industries, Inc. (Warrants for 169,199 common shares) (e).............. 0
Dade Behring Holdings, Inc. (486,689 common shares) (e)...................... 12,001,751
DecorateToday.com (198,600 common shares) (a) (d) (e)........................ 2,125,020
Genesis Health Ventures, Inc. (1,568,796 common shares) (e).................. 33,336,915
Genesis Health Ventures, Inc. (19,700 preferred shares) (d) (j).............. 2,043,875
</Table>
24 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
DESCRIPTION VALUE
EQUITIES (CONTINUED)
Havco Wood Products, Inc. (30 common shares) (d) (e)......................... $ 0
Holmes Group, Inc. (Warrants for 11,447 common shares) (e)................... 0
Imperial Home Decor Group, Inc. (1,816,143 common shares) (a) (d) (e)........ 0
Imperial Home Decor Realty, Inc. (1,846,143 common shares) (a) (d) (e)....... 0
Kindred Healthcare, Inc. (1,033,585 common shares) (a) (e)................... 24,764,697
London Fog Industries, Inc. (515,922 common shares) (a) (d) (e).............. 8,848,062
Mediq/PRN Life Support Services, Inc. (22,626 preferred shares) (d) (e)...... 0
Murray's Discount Auto Stores, Inc. (Warrants for 290 common shares) (d)
(e)........................................................................ 1,485,680
Orius Corp. (1,211,236 common shares) (a) (d) (e)............................ 0
Pioneer Cos., Inc. (251,854 common shares) (e)............................... 805,933
RailWorks Corp. (223 preferred shares) (d) (e)............................... 0
RailWorks Corp. (Warrants for 3,935 common shares) (d) (e)................... 0
Rotech Healthcare, Inc. (930,691 common shares) (e).......................... 22,103,911
Rotech Medical Corp. (94,289 common shares) (d) (e).......................... 0
Safelite Glass Corp. (724,479 common shares) (a) (d) (e)..................... 8,266,305
Safelite Realty (48,903 common shares) (a) (d) (e)........................... 0
Stellex (33,390 common shares) (d) (e)....................................... 122,207
Teligent, Inc. (400 common shares) (d) (e)................................... 0
Tembec, Inc. (140,409 common shares) (e)..................................... 727,319
Trans World Entertainment Corp. (3,789,962 common shares) (a) (e)............ 22,550,274
United Fixtures Holdings, Inc. (196,020 common shares) (a) (d) (e)........... 0
United Fixtures Holdings, Inc. (53,810 preferred shares) (a) (d) (e)......... 0
West American Rubber Co., LLC (11.39% ownership interest) (d) (e)............ 0
--------------
TOTAL EQUITIES 6.6%......................................................... 141,231,319
--------------
TOTAL LONG-TERM INVESTMENTS 97.6%
(Cost $2,338,486,814)...................................................... 2,071,789,515
--------------
SHORT TERM INVESTMENTS 4.4%
REPURCHASE AGREEMENT 4.3%
State Street Bank & Trust Corp. ($90,800,000 par collateralized by U.S.
Government Obligations in a pooled cash account, 0.95% coupon, dated
07/31/03, to be sold on 08/01/03 at $90,802,396) (i)....................... 90,800,000
--------------
</Table>
See Notes to Financial Statements 25
YOUR FUND'S INVESTMENTS
July 31, 2003
<Table>
<Caption>
DESCRIPTION VALUE
TIME DEPOSIT 0.1%
State Street Bank & Trust Corp. ($2,132,356 par collateralized by U.S.
Government Obligations in a pooled cash account, 0.15% coupon, dated
07/31/03, to be sold on 08/01/03 at $2,132,364) (i)........................ $ 2,132,356
--------------
TOTAL SHORT-TERM INVESTMENTS 4.4%
(Cost $92,932,356)......................................................... 92,932,356
--------------
TOTAL INVESTMENTS 102.0%
(Cost $2,431,419,170)...................................................... 2,164,721,871
LIABILITIES IN EXCESS OF OTHER ASSETS (2.0)%................................ (42,561,964)
--------------
NET ASSETS 100.0%........................................................... $2,122,159,907
==============
</Table>
26 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
July 31, 2003
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) Affiliated company. See Notes to Financial Statements
(b) This Senior Loan interest is non-income producing.
(c) This borrower has filed for protection in federal bankruptcy court.
(d) Restricted security.
(e) Non-income producing security as this stock currently does not declare
dividends.
(f) 144A Securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally
transactions with qualified institutional buyers.
(g) This borrower is in the process of restructuring or amending the terms of
this loan.
(h) Variable rate security. Interest rate shown is that in effect at July 31,
2003.
(i) A portion of this security is designated in connection with unfunded loan
commitments.
(j) Payment-in-kind 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 or (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 27
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
July 31, 2003
<Table>
ASSETS:
Total Investments (Cost $2,431,419,170)..................... $ 2,164,721,871
Receivables:
Investments Sold.......................................... 21,778,473
Interest and Fees......................................... 8,165,835
Fund Shares Sold.......................................... 1,441,080
Other....................................................... 30,530
---------------
Total Assets............................................ 2,196,137,789
---------------
LIABILITIES:
Payables:
Investments Purchased..................................... 67,255,749
Investment Advisory Fee................................... 1,778,730
Income Distributions...................................... 1,152,100
Distributor and Affiliates................................ 549,457
Administrative Fee........................................ 468,087
Custodian Bank............................................ 242,280
Fund Shares Repurchased................................... 160,355
Accrued Expenses............................................ 1,485,822
Trustees' Deferred Compensation and Retirement Plans........ 885,302
---------------
Total Liabilities....................................... 73,977,882
---------------
NET ASSETS.................................................. $ 2,122,159,907
===============
NET ASSETS CONSIST OF:
Capital..................................................... $ 3,407,661,893
Accumulated Undistributed Net Investment Income............. (8,537,236)
Net Unrealized Depreciation................................. (266,697,299)
Accumulated Net Realized Loss............................... (1,010,267,451)
---------------
NET ASSETS.................................................. $ 2,122,159,907
===============
NET ASSET VALUE PER COMMON SHARE:
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $1,876,097,431 and 226,254,943 shares of
beneficial interest issued and outstanding)............. $ 8.29
===============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $246,062,476 and 29,686,398 shares of
beneficial interest issued and outstanding)............. $ 8.29
===============
</Table>
28 See Notes to Financial Statements
Statement of Operations
For the Year Ended July 31, 2003
<Table>
INVESTMENT INCOME:
Interest.................................................... $ 118,478,312
Dividends................................................... 465,709
Other....................................................... 5,785,405
-------------
Total Income............................................ 124,729,426
-------------
EXPENSES:
Investment Advisory Fee..................................... 20,652,618
Administrative Fee.......................................... 5,434,899
Shareholder Services........................................ 2,586,458
Legal....................................................... 1,805,592
Custody..................................................... 658,498
Trustees' Fees and Related Expenses......................... 183,546
Service Fees--Class C....................................... 47,460
Other....................................................... 1,994,093
-------------
Total Operating Expenses................................ 33,363,164
Less Credits Earned on Cash Balances.................... 101,748
-------------
Net Operating Expenses.................................. 33,261,416
-------------
Interest Expense........................................ 57,912
-------------
Total Expenses.......................................... 33,319,328
-------------
NET INVESTMENT INCOME....................................... $ 91,410,098
=============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(180,662,448)
-------------
Net Unrealized Appreciation During the Period............... 202,756,414
-------------
NET REALIZED AND UNREALIZED LOSS............................ $ 22,093,966
=============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 113,504,064
=============
</Table>
See Notes to Financial Statements 29
Statements of Changes in Net Assets
<Table>
<Caption>
YEAR ENDED YEAR ENDED
JULY 31, 2003 JULY 31, 2002
---------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................... $ 91,410,098 $ 161,678,241
Net Realized Loss....................................... (180,662,448) (178,082,248)
Net Unrealized Appreciation/Depreciation During the
Period................................................ 202,756,414 (34,932,297)
-------------- ---------------
Change in Net Assets from Operations.................... 113,504,064 (51,336,304)
-------------- ---------------
Distributions from Net Investment Income:
Class B Shares........................................ (79,942,206) (151,858,532)
Class C Shares........................................ (1,067,561) -0-
-------------- ---------------
(81,009,767) (151,858,532)
-------------- ---------------
Return of Capital Distribution:
Class B Shares........................................ (7,501,943) -0-
Class C Shares........................................ -0- -0-
-------------- ---------------
(7,501,943) -0-
-------------- ---------------
Total Distributions..................................... (88,511,710) (151,858,532)
-------------- ---------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..... 24,992,354 (203,194,836)
-------------- ---------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................... 267,313,569 28,378,816
Net Asset Value of Shares Issued Through Dividend
Reinvestment.......................................... 44,870,091 73,318,476
Cost of Shares Repurchased.............................. (773,706,504) (1,329,486,630)
-------------- ---------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS...... (461,522,844) (1,227,789,338)
-------------- ---------------
TOTAL DECREASE IN NET ASSETS............................ (436,530,490) (1,430,984,174)
NET ASSETS:
Beginning of the Period................................. 2,558,690,397 3,989,674,571
-------------- ---------------
End of the Period (Including accumulated undistributed
net investment income of $(8,537,236) and $3,552,247,
respectively)......................................... $2,122,159,907 $ 2,558,690,397
============== ===============
</Table>
30 See Notes to Financial Statements
Statement of Cash Flows
For the Year Ended July 31, 2003
<Table>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 113,504,064
-------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash provided by Operating Activities:
Decrease in Investments at Value.......................... 388,505,003
Decrease in Interest and Fees Receivables................. 2,730,313
Decrease in Receivable for Investments Sold............... 19,230,801
Decrease in Other Assets.................................. 90,818
Decrease in Investment Advisory Fee Payable............... (402,987)
Decrease in Administrative Fee Payable.................... (106,049)
Decrease in Distributor and Affiliates Payable............ (127,214)
Increase in Payable for Investments Purchased............. 28,359,189
Decrease in Accrued Expenses.............................. (291,415)
Increase in Trustees' Deferred Compensation and Retirement
Plans................................................... 216,616
-------------
Total Adjustments....................................... 438,205,075
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 551,709,139
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 266,009,003
Change in Intra-day Credit Line with Custodian Bank......... 238,474
Payments on Shares Repurchased.............................. (773,590,111)
Cash Dividends Paid......................................... (44,366,505)
-------------
Net Cash Used for Financing Activities.................. (551,709,139)
-------------
NET INCREASE IN CASH........................................ -0-
Cash at Beginning of the Period............................. -0-
-------------
CASH AT THE END OF THE PERIOD............................... $ -0-
=============
</Table>
See Notes to Financial Statements 31
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED JULY 31,
CLASS B SHARES --------------------------------------------------------
2003 (c) 2002 (c) 2001 (c) 2000 1999
--------------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 8.09 $ 8.61 $ 9.50 $ 9.85 $ 9.98
-------- -------- -------- -------- --------
Net Investment Income............. .33 .41 .66 .68 .64
Net Realized and Unrealized
Gain/Loss....................... .19 (.55) (.86) (.36) (.13)
-------- -------- -------- -------- --------
Total from Investment Operations.... .52 (.14) (.20) .32 .51
Less:
Distributions from Net Investment
Income.......................... .29 .38 .69 .67 .64
Return of Capital Distributions... .03 -0- -0- -0- -0-
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 8.29 $ 8.09 $ 8.61 $ 9.50 $ 9.85
======== ======== ======== ======== ========
Total Return (a).................... 6.58% -1.61% -2.11% 3.15% 5.23%
Net Assets at End of the Period (In
millions)......................... $1,876.1 $2,558.7 $3,989.7 $6,458.0 $8,136.4
Ratio of Gross Expenses to Average
Net Assets........................ 1.54% 1.43% 1.43% 1.34% 1.35%
Ratio of Net Investment Income to
Average Net Assets................ 4.21% 4.85% 7.34% 6.97% 6.48%
Portfolio Turnover (b).............. 49% 36% 42% 36% 44%
</Table>
(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 the 3% imposed on most
shares accepted by the Fund for repurchase within the first year and
declining to 0% after the fifth 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.
(c) Based on average shares outstanding.
32 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
JUNE 13, 2003
(COMMENCEMENT
OF INVESTMENT
CLASS C SHARES OPERATIONS) TO
JULY 31, 2003 (c)
-----------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.................... $ 8.16
------
Net Investment Income..................................... .04
Net Realized and Unrealized Gain.......................... .12
------
Total from Investment Operations............................ .16
Less Distributions from Net Investment Income............... .03
------
NET ASSET VALUE, END OF THE PERIOD.......................... $ 8.29
======
Total Return (a)............................................ 2.02%*
Net Assets at End of the Period (In millions)............... $246.1
Ratio of Gross Expenses to Average Net Assets............... 1.56%
Ratio of Net Investment Income to Average Net Assets........ 3.89%
Portfolio Turnover (b)...................................... 49%
</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 the 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.
(c) Based on average shares outstanding.
See Notes to Financial Statements 33
NOTES TO
FINANCIAL STATEMENTS
July 31, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Senior Loan Fund (formerly, Van Kampen Prime Rate Income Trust) (the
"Fund") is registered as a non-diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended. The Fund invests
primarily in adjustable rate 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 October 4, 1989. In June 2003, the Fund completed a transaction in
which it redesignated its shares issued before June 13, 2003 as Class B Shares
and issued new Class C Shares to the shareholders of Van Kampen Senior Floating
Rate Fund in exchange for the assets and liabilities of that fund.
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 market indicators provided by
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.
Equity securities are valued on the basis of prices furnished by pricing
services or at fair value 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. The Fund may invest in repurchase
34
NOTES TO
FINANCIAL STATEMENTS
July 31, 2003
agreements, which are short-term investments in which the Fund acquires
ownership of a debt security and the seller agrees to repurchase the security at
a future time and specified price. Repurchase agreements are fully
collateralized by the underlying debt security. The Fund will 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 Fund.
B. SECURITY TRANSACTIONS Investment transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. INCOME AND EXPENSES Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Facility fees on senior loans
purchased are treated as market discounts. Market premiums are amortized and
discounts are accreted over the stated life of each applicable senior loan, note
or other fixed-income security.
Other income is comprised primarily of amendment fees which are recorded
when received. Amendment fees are earned as compensation for agreeing to changes
in loan agreements. Income, expenses and realized and unrealized gains or losses
are allocated on a pro-rata basis to each class of shares except for service
fees, which are applicable only to Class C shares.
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, 2003, the Fund had an accumulated capital loss carryforward
for tax purposes of $727,526,397, which will expire between July 31, 2004 and
July 31, 2011.
At July 31, 2003, the cost and related gross unrealized appreciation and
depreciation are as follows:
<Table>
Cost of investments for tax purposes........................ $2,553,716,266
==============
Gross tax unrealized appreciation........................... $ 42,518,730
Gross tax unrealized depreciation........................... (431,513,125)
--------------
Net tax unrealized depreciation on investments.............. $ (388,994,395)
==============
</Table>
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.
35
NOTES TO
FINANCIAL STATEMENTS
July 31, 2003
The tax character of distributions paid during the years ended July 31, 2003
and 2002 were as follows:
<Table>
<Caption>
2003 2002
Distributions paid from:
Ordinary income........................................... $81,734,653 $151,858,532
Return of Capital......................................... 7,501,943 -0-
----------- ------------
$89,236,596 $151,858,532
=========== ============
</Table>
Due to inherent differences in the recognition of income, expenses, and
realized gains/losses under accounting principles generally accepted in the
United States of America and federal income tax purposes, permanent differences
between financial and tax basis reporting for the 2003 fiscal year have been
identified and appropriately reclassified on the Statement of Assets and
Liabilities. Permanent differences relating to return of capital distributions
totaling $7,501,943 were reclassified from accumulated undistributed net
investment income to capital. Also, permanent differences relating to book to
tax amortization differences totaling $21,719,457 were reclassified from
accumulated undistributed net investment income to accumulated net realized
loss.
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of the deferral of losses related 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 losses that were
recognized for book purposes but not for tax purposes at the end of the fiscal
year.
F. CREDITS EARNED ON CASH BALANCES During the year ended July 31, 2003, the
Fund's custody fee was reduced by $101,748 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 Senior Loans in the Fund's
portfolio and providing certain services to the holders of the Fund's
securities.
36
NOTES TO
FINANCIAL STATEMENTS
July 31, 2003
For the year ended July 31, 2003, the Fund recognized expenses of
approximately $934,700 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, 2003, the Fund recognized expenses of approximately $70,300
representing Van Kampen Investments Inc.'s or its affiliates (collectively "Van
Kampen") cost of providing legal services to the Fund, which are reported as
"Legal" expenses in the Statement of Operations.
Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended July
31, 2003, the Fund recognized expenses for these services of approximately
$1,939,200 representing transfer agency fees paid to VKIS. Transfer agency fees
are determined through negotiations with the Fund's Board of Trustees.
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.
37
NOTES TO
FINANCIAL STATEMENTS
July 31, 2003
During the period, the Fund owned shares of the following affiliated
companies. Affiliated companies are defined by the Investment Company Act of
1940, as amended, as those companies in which a Fund holds 5% or more of the
outstanding voting securities.
<Table>
<Caption>
REALIZED INTEREST/ MARKET
PAR/ GAIN/ DIVIDEND VALUE
NAME SHARES* (LOSS) INCOME 7/31/03 COST
American Blind & Wallpaper
Factory, Inc.-- Term
Loan...................... $ 1,048,652 $ 0 $ 164,729 $ 1,048,652 $ 1,048,652
Decorate Today.com--Common
Shares.................... 198,600 0 0 2,125,020 3,505,909
Imperial Home Decor Group,
Inc.--Common Shares....... 1,816,143 0 0 0 1,852,465
Imperial Home Decor Realty,
Inc.--Common Shares....... 1,816,143 0 0 0 0
Imperial Home Decor Group,
Inc.--Term Loan........... $ 5,044,842 0 177,723 126,121 5,015,112
Kindred Healthcare, Inc.--
Common Shares............. 1,033,585 0 0 24,764,697 29,967,875
Kindred Healthcare, Inc.--
Term Loan................. $22,205,934 0 1,539,557 21,983,875 20,589,617
London Fog Industries,
Inc.--Common Shares....... 515,922 0 0 8,848,062 33,576,536
NATG Holdings, LLC--Term
Loan...................... $ 7,405,983 (17,566,361) 472,418 1,919,327 2,422,870
NATG Holdings, LLC--
Revolver.................. $ 4,330,904 0 111,168 2,490,270 2,947,872
Orius Corp.--Common
Shares.................... 1,211,236 0 0 0 0
Safelite Glass Corp.--
Common Shares............. 724,479 0 0 8,266,305 3,912,187
Safelite Glass Realty--
Common Shares............. 48,903 0 0 0 0
Safelite Glass Corp.--Term
Loan...................... $17,889,124 150,487 737,388 17,620,787 17,844,359
Transworld Entertainment
Corp.--Common Shares...... 3,789,962 0 0 22,550,274 69,498,017
United Fixtures Holdings,
Inc.--Common & Preferred
Shares.................... 249,830 0 0 0 535,486
United Fixtures Holdings,
Inc.--Term Loan........... $ 3,395,671 0 166,320 2,003,446 3,395,671
</Table>
* Shares were acquired through the restructuring of senior loan interests.
38
NOTES TO
FINANCIAL STATEMENTS
July 31, 2003
3. CAPITAL TRANSACTIONS
At July 31, 2003, capital aggregated $2,991,737,259 and $415,924,634 for
Classes B and C, respectively. For the year ended July 31, 2003, transactions
were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class B................................................... 1,819,593 $ 14,406,804
Class C................................................... 31,027,158 252,906,765
----------- -------------
Total Sales................................................. 32,846,751 $ 267,313,569
=========== =============
Dividend Reinvestment:
Class B................................................... 5,643,216 $ 44,419,861
Class C................................................... 54,622 450,230
----------- -------------
Total Dividend Reinvestment................................. 5,697,838 $ 44,870,091
=========== =============
Repurchases:
Class B................................................... (97,344,162) $(762,180,622)
Class C................................................... (1,395,382) (11,525,882)
----------- -------------
Total Repurchases........................................... (98,739,544) $(773,706,504)
=========== =============
</Table>
At July 31, 2002, capital aggregated $3,702,593,159 and $0, for Classes B
and C, respectively. For the year ended July 31, 2002, transactions in common
shares were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class B................................................. 3,382,131 $ 28,378,816
Class C................................................. -- --
------------ ---------------
Total Sales............................................... 3,382,131 $ 28,378,816
============ ===============
Dividend Reinvestment:
Class B................................................. 8,743,854 $ 73,318,476
Class C................................................. -- --
------------ ---------------
Total Dividend Reinvestment............................... 8,743,854 $ 73,318,476
============ ===============
Repurchases:
Class B................................................. (159,456,892) $(1,329,486,630)
Class C................................................. -- --
------------ ---------------
Total Repurchases......................................... (159,456,892) $(1,329,486,630)
============ ===============
</Table>
On June 13, 2003, the Fund acquired all of the assets and liabilities of the
Van Kampen Senior Floating Rate Fund (the "VKSFR Fund") through a tax-free
reorganization approved by VKSFR Fund shareholders on June 3, 2003. The Fund
issued 30,644,607 shares of Class C valued at $249,753,514 in exchange for VKSFR
Fund's net assets. Fund shares held prior to the acquisition were renamed Class
B Shares. The shares of VKSFR Fund were converted into Class C shares at a ratio
of 1.089 to 1. Included in these net assets was a capital loss
39
NOTES TO
FINANCIAL STATEMENTS
July 31, 2003
carryforward of $88,912,248, amortization differences of $49,259,549 and wash
sales of $1,603, which is included in accumulated net realized loss. Also
included in these net assets was a deferred compensation balance of $102,698 and
non-accrual interest income of $667,659, which are included in accumulated
undistributed net investment income. Net unrealized depreciation of VKSFR Fund
as of June 13, 2003 was $35,149,764. Shares issued in connection with this
reorganization are included in proceeds from shares sold for the year ended July
31, 2003. Combined net assets on the day of reorganization were $2,213,412,834.
4. INVESTMENT TRANSACTIONS
During the period, the costs of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $1,027,632,358 and
$1,702,354,765, 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, 2003, 98,739,544 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 five years which are
accepted by the Fund for repurchase pursuant to tender offers. The early
withdrawal charge will be payable to Van Kampen. Any early withdrawal charge
which is required to be imposed will be made in accordance with the following
schedule.
<Table>
<Caption>
WITHDRAWAL WITHDRAWAL
CHARGE CHARGE
------------------------
YEAR OF REDEMPTION CLASS B CLASS C
First....................................................... 3.0% 1.0%
Second...................................................... 2.5% --
Third....................................................... 2.0% --
Fourth...................................................... 1.5% --
Fifth....................................................... 1.0% --
Sixth and following......................................... 0.0% --
</Table>
For the year ended July 31, 2003, Van Kampen received early withdrawal
charges of approximately $3,060,000, in connection with tendered shares of the
Fund.
7. COMMITMENTS/BORROWINGS
Pursuant to the terms of certain of the Senior Loan agreements, the Fund had
unfunded loan commitments of approximately $31,991,200 as of July 31, 2003. The
Fund intends to reserve against such contingent obligations by designating cash,
liquid securities and liquid senior loans as a reserve.
40
NOTES TO
FINANCIAL STATEMENTS
July 31, 2003
The Fund 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 7, 2003. 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. For the year ended July 31, 2003, the Fund
recognized commitment fee expenses of approximately $638,400. Borrowings under
this facility will bear interest at either the LIBOR rate or the Federal Funds
rate plus .50%.
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.
At July 31, 2003, 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)
Credit Suisse First Boston.................................. $1,196 $1,191
Goldman Sachs Credit Partners L.P. ......................... 738 722
------ ------
Total....................................................... $1,934 $1,913
====== ======
</Table>
9. LITIGATION
On September 28, 2001 and October 11, 2001, separate complaints were filed in
the United States District Court for the Northern District of Illinois each by a
shareholder of the Fund against the Fund, the Adviser, Van Kampen Funds Inc. and
certain directors and officers of the Fund. The respective complaints, framed as
class actions, allege misstatements and omissions in the Fund's registration
statements in violation of the federal securities laws. The separate complaints
were consolidated on or about December 15, 2001, and the class was certified on
or about August 26, 2002. The consolidated action is entitled Abrams et al. v.
Van Kampen Funds, Inc., et al., No. 01 C 7538 (N.D. Ill., Hart J.).
10. SERVICE PLAN
For Class C, 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.
41
NOTES TO
FINANCIAL STATEMENTS
July 31, 2003
Annual fees under the Plan of .15% (.25% maximum) of average daily net
assets are accrued daily and paid quarterly for Class C. Included in the fees
for the year ended July 31, 2003, are payments made to Morgan Stanley DW Inc.,
an affiliate of the Adviser, of approximately $46,900.
42
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Van Kampen Senior Loan Fund
We have audited the accompanying statement of assets and liabilities of Van
Kampen Senior Loan Fund (the "Fund"), including the portfolio of investments, as
of July 31, 2003, the related statements of operations and cash flows for the
year then ended, the statements of changes in net assets for the two years in
the period then ended, and the financial highlights for each of the four 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, 2003, by correspondence with the Fund's
custodian, brokers, and selling or agent banks; where replies were not received,
we performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Senior Loan Fund as of July 31, 2003, the results of its operations, cash
flows, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
September 4, 2003
43
VAN KAMPEN INVESTMENTS
THE VAN KAMPEN
FAMILY OF FUNDS
Global/International
Asian Equity**
Emerging Markets
European Value Equity
Global Equity Allocation
Global Franchise
Global Value Equity
International Advantage
International Magnum
Latin American**
Worldwide High Income
Growth
Aggressive Growth
American Value
Emerging Growth
Enterprise
Equity Growth
Focus Equity
Growth
Mid Cap Growth
Pace
Select Growth
Small Cap Growth
Small Cap Value
Technology
Growth and Income
Comstock
Equity and Income
Growth and Income
Harbor
Real Estate Securities
Utility
Value
Value Opportunities
Income
Corporate Bond
Government Securities
High Income Corporate Bond
High Yield
Limited Maturity Government
U.S. Government
Tax Free
California Insured Tax Free
High Yield Municipal*
Insured Tax Free Income
Intermediate Term Municipal Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Strategic Municipal Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan
Senior Loan Fund
For more complete information, including risk considerations, fees, sales
charges and ongoing expenses, please contact your financial advisor for a
prospectus. Please read it carefully before you invest or send money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- - visit our Web site at
VANKAMPEN.COM--
to view a prospectus, select
Download Fund Info (COMPUTER ICON)
- - call us at (800) 847-2424
Telecommunications Device
for the Deaf (TDD) users,
call (800) 421-2833. (PHONE ICON)
- - e-mail us by visiting
VANKAMPEN.COM and
selecting Contact Us
(MAIL ICON)
* Open to new investors for a limited time
** Closed to new investors.
44
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
VAN KAMPEN SENIOR LOAN FUND
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN *
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 947
Jersey City, New Jersey 07303-0947
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02110
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.
45
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Trust
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory
Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds
Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp.
and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and
Asset Management sometimes are referred to herein collectively as the
"Advisers." The term "Fund Complex" includes each of the investment companies
advised by the Advisers or their affiliates as of the date of this Statement of
Additional Information. Trustees serve until reaching their retirement age or
until their successors are duly elected and qualified. Officers are annually
elected by the trustees.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief 91 Trustee/Director/Managing
Blistex Inc. since 1988 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Former
Director of the World
Presidents
Organization-Chicago
Chapter. Director of the
Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago.
</Table>
46
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 91 Trustee/Director/Managing
CAC, llc. since 1988 private company offering General Partner of funds
4350 LaJolla Village Drive capital investment and in the Fund Complex.
Suite 980 management advisory Director of TeleTech
San Diego, CA 92122-6223 services. Prior to July Holdings Inc.,
2000, Managing Partner of Stericycle, Inc.,
Equity Group Corporate TheraSense, Inc., GATX
Investment (EGI), a Corporation, Arris Group,
company that makes Inc. and Trustee of the
private investments in University of Chicago
other companies. Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems Inc.
Prior to February 2001,
Vice Chairman and
Director of Anixter
International, Inc. and
IMC Global Inc. Prior to
July 2000, Director of
Allied Riser
Communications Corp.,
Matria Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety, Corp.
and Grupo Azcarero Mexico
(GAM). Prior to April
1999, Director of Metal
Management, Inc.
Howard J Kerr (67) Trustee Trustee Prior to 1998, President 91 Trustee/Director/Managing
736 North Western Avenue since 1992 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation
</Table>
47
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Theodore A. Myers (73) Trustee Trustee Financial consultant, 36 Director of Met Life
550 Washington Avenue since 1988 Trustee or Managing Investors (formerly knows
Glencoe, IL 60022 General Partner of other as COVA Financial Life
funds in the Closed-End Insurance). Prior to
Fund Complex. Prior to 1997, Director of McLouth
1998, Senior Financial Steel.
Advisor (and, prior to
1997, an Executive Vice
President, Chief
Financial Officer and
Director) of Qualitech
Steel Corporation, a
producer of high quality
engineered steels for
automotive,
transportation and
capital goods industries.
Prior to 1997, member of
the Arthur Andersen Chief
Financial Officers'
Advisory Committee.
Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 91 Trustee/Director/Managing
1126 E. 59th Street since 1994 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
</Table>
48
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 91 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 91 Trustee/Director/Managing
333 West Wacker Drive since 1988 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom in the Fund Complex.
(Illinois), legal counsel
to funds in the Fund
Complex.
</Table>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of certain funds in the
Fund Complex by reason of his firm currently acting as legal counsel to such
funds in the Fund Complex. Messrs. Merin and Powers are interested persons of
funds in the Fund Complex and the Advisers by reason of their current or
former positions with Morgan Stanley or its affiliates.
49
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Advisers and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Advisers and Van Kampen Advisors Inc. Prior to December
2000, Executive Vice President and Chief Investment Officer
of Van Kampen Investments, and President and Chief Operating
Officer of the Advisers. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and Chief since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Investment Officer Management Inc. and Morgan Stanley Investments LP and
Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Advisers and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers
1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Advisers and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Advisers. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
</Table>
50
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal Executive funds in the Fund Complex. Chief Global Operations Officer
Officer and Managing Director of Morgan Stanley Investment
Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the
New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Managing Director and General
Counsel-Mutual Funds of Morgan Stanley Investment Advisors,
Inc. Vice President and Secretary of funds in the Fund
Complex. Prior to July 2001, Managing Director, General
Counsel, Secretary and Director of Van Kampen Investments,
the Advisers, the Distributor, Investor Services, and
certain other subsidiaries of Van Kampen Investments. Prior
to December 2000, Executive Vice President, General Counsel,
Secretary and Director of Van Kampen Investments, the
Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Prior to January 1999, Vice President
and Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate, Willkie
Farr & Gallagher. Prior to January 1989, Staff Attorney at
the Securities and Exchange Commission, Division of
Investment Management, Office of Chief Counsel.
John L. Sullivan (48) Vice President, Chief Officer Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Financial Officer and since 1996 the Advisers, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Treasurer subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Advisers and Van
Kampen Advisors Inc.
Howard Tiffen (55) Vice President Officer Managing Director of the Advisers and Van Kampen Advisors
1 Parkview Plaza since 2000 Inc. Vice President of the senior loan funds advised by the
P.O. Box 5555 Adviser. Prior to 1999, senior portfolio manager for Pilgrim
Oakbrook Terrace, IL 60181 Investments. Associate of the Chartered Institute of Bankers
and a member of the Economic Club of Chicago.
</Table>
51
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.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling (800)
847-2424.
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. 59 359
SLF ANR 9/03 12025I03-AP-9/03
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit 10A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has one "audit committee
financial expert" serving on its audit committee, each of whom is "independent"
Trustee: Theodore A. Myers. Under applicable securities laws, a person who is
determined to be an audit committee financial expert will not be deemed an
"expert" for any purpose, including without limitation for the purposes of
Section 11 of the Securities Act of 1933, as a result of being designated or
identified as an audit committee financial expert. The designation or
identification of a person as an audit committee financial expert does not
impose on such person any duties, obligations, or liabilities that are greater
than the duties, obligations, and liabilities imposed on such person as a member
of the audit committee and Board of Trustees in the absence of such designation
or identification.
Item 4. Principal Accountant Fees and Services.
Applicable only for reports covering fiscal years ending on or after December
15, 2003.
Item 5. Audit Committee of Listed Registrants.
Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
The Fund's and its investment advisor's Proxy Voting Policies and Procedures are
as follows:
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Introduction - Morgan Stanley Investment Management's ("MSIM") policies and
procedures for voting proxies with respect to securities held in the accounts of
clients applies to those MSIM entities that provide discretionary Investment
Management services and for which a MSIM entity has the authority to vote their
proxies. The policies and procedures and general guidelines in this section will
be reviewed and, as necessary, updated periodically to address new or revised
proxy voting issues. The MSIM entities covered by these policies and procedures
currently include the following: Morgan Stanley Investment Advisors Inc., Morgan
Stanley Alternative Investment Partners, L.P., Morgan Stanley AIP GP LP, Morgan
Stanley Investment Management Inc., Morgan Stanley Investment Group Inc., Morgan
Stanley Investment Management Limited, Morgan Stanley Investment Management
Company, Morgan Stanley Asset & Investment Trust Management Co., Limited, Morgan
Stanley Investment Management Private Limited, Morgan Stanley Investments LP,
Morgan Stanley Hedge Fund Partners GP LP, Morgan Stanley Hedge Fund Partners LP,
Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., and Van
Kampen Advisors Inc. (each a "MSIM Affiliate" and collectively referred to as
the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds) (collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in the
case of an account not governed by ERISA, the Investment Management Agreement
does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in
a prudent and diligent manner, vote proxies in the best interests of clients,
including beneficiaries of and participants in a client's benefit plan(s) for
which we manage assets, consistent with the objective of maximizing long-term
investment returns ("Client Proxy Standard"). In certain situations, a client or
its fiduciary may provide a MSIM Affiliate with a statement of proxy voting
policy. In these situations, the MSIM Affiliate will comply with the client's
policy unless to do so would be inconsistent with applicable laws or regulations
or the MSIM Affiliate's fiduciary responsibility.
Proxy Research Services - To assist the MSIM Affiliates in their responsibility
for voting proxies and the overall global proxy voting process, Institutional
Shareholder Services ("ISS") and the Investor Responsibility Research Center
("IRRC") have been retained as experts in the proxy voting and corporate
governance area. ISS and IRRC are independent advisers that specialize in
providing a variety of fiduciary-level proxy-related services to institutional
investment managers, plan sponsors, custodians,
consultants, and other institutional investors. The services provided to MSIM
Affiliates include in-depth research, global issuer analysis, and voting
recommendations. In addition to research, ISS provides vote execution,
reporting, and recordkeeping. MSIM's Proxy Review Committee (see Section IV.A.
below) will carefully monitor and supervise the services provided by the proxy
research services.
Voting Proxies for certain Non-US Companies - While the proxy voting process is
well established in the United States and other developed markets with a number
of tools and services available to assist an investment manager, voting proxies
of non-US companies located in certain jurisdictions, particularly emerging
markets, may involve a number of problems that may restrict or prevent a MSIM
Affiliate's ability to vote such proxies. These problems include, but are not
limited to: (i) proxy statements and ballots being written in a language other
than English; (ii) untimely and/or inadequate notice of shareholder meetings;
(iii) restrictions on the ability of holders outside the issuer's jurisdiction
of organization to exercise votes; (iv) requirements to vote proxies in person,
(v) the imposition of restrictions on the sale of the securities for a period of
time in proximity to the shareholder meeting; and (vi) requirements to provide
local agents with power of attorney to facilitate the MSIM Affiliate's voting
instructions. As a result, clients' non-U.S. proxies will be voted on a best
efforts basis only, consistent with the Client Proxy Standard. ISS has been
retained to provide assistance to the MSIM Affiliates in connection with voting
their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
III. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items the following proposals
are generally voted in support of management, subject to the
review and approval of the Proxy Review Committee, as
appropriate.
- Selection or ratification of auditors.
- Approval of financial statements, director and
auditor reports.
- Election of Directors.
- Limiting Directors' liability and broadening
indemnification of Directors.
- Requirement that a certain percentage (up to 66 2/3%)
of its Board's members be comprised of independent
and unaffiliated Directors.
- Requirement that members of the company's
compensation, nominating and audit committees be
comprised of independent or unaffiliated Directors.
- Recommendations to set retirement ages or require
specific levels of stock ownership by Directors.
- General updating/corrective amendments to the
charter.
- Elimination of cumulative voting.
- Elimination of preemptive rights.
- Provisions for confidential voting and independent
tabulation of voting results.
- Proposals related to the conduct of the annual
meeting except those proposals that relate to the
"transaction of such other business which may come
before the meeting."
2. The following non-routine proposals, which potentially may
have a substantive financial or best interest impact on a
shareholder, are generally voted in support of management,
subject to the review and approval of the Proxy Review
Committee, as appropriate.
Capitalization changes
- Capitalization changes that eliminate other classes
of stock and voting rights.
- Proposals to increase the authorization of existing
classes of common stock (or securities convertible
into common stock) if: (i) a clear and legitimate
business purpose is stated; (ii) the number of shares
requested is reasonable in relation to the purpose
for which authorization is requested; and (iii) the
authorization does not exceed 100% of shares
currently authorized and at least 30% of the new
authorization will be outstanding.
- Proposals to create a new class of preferred stock or
for issuances of preferred stock up to 50% of issued
capital.
- Proposals for share repurchase plans.
- Proposals to reduce the number of authorized shares
of common or preferred stock, or to eliminate classes
of preferred stock.
- Proposals to effect stock splits.
- Proposals to effect reverse stock splits if
management proportionately reduces the authorized
share amount set forth in the corporate charter.
Reverse stock splits that do not adjust
proportionately to the authorized share amount will
generally be approved if the resulting increase in
authorized shares coincides with the proxy guidelines
set forth above for common stock increases.
Compensation
- Director fees, provided the amounts are not excessive
relative to other companies in the country or
industry.
- Employee stock purchase plans that permit discounts
up to 15%, but only for grants that are part of a
broad based employee plan, including all
non-executive employees.
- Establishment of Employee Stock Option Plans and
other employee ownership plans.
Anti-Takeover Matters
- Modify or rescind existing supermajority vote
requirements to amend the charters or bylaws.
- Adoption of anti-greenmail provisions provided that
the proposal: (i) defines greenmail; (ii) prohibits
buyback offers to large block holders not made to all
shareholders or not approved by disinterested
shareholders; and (iii) contains no anti-takeover
measures or other provisions restricting the rights
of shareholders.
3. The following non-routine proposals, which potentially may
have a substantive financial or best interest impact on the
shareholder, are generally voted against (notwithstanding
management support), subject to the review and approval of the
Proxy Review Committee, as appropriate.
- Capitalization changes that add classes of stock
which substantially dilute the voting interests of
existing shareholders.
- Proposals to increase the authorized number of shares
of existing classes of stock that carry preemptive
rights or supervoting rights.
- Creation of "blank check" preferred stock.
- Changes in capitalization by 100% or more.
- Compensation proposals that allow for discounted
stock options that have not been offered to employees
in general.
- Amendments to bylaws that would require a
supermajority shareholder vote to pass or repeal
certain provisions.
- Proposals to indemnify auditors.
4. The following types of non-routine proposals, which
potentially may have a potential financial or best interest
impact on an issuer, are voted as determined by the Proxy
Review Committee.
Corporate Transactions
- Mergers, acquisitions and other special corporate
transactions (i.e., takeovers, spin-offs, sales of
assets, reorganizations, restructurings and
recapitalizations) will be examined on a case-by-case
basis. In all cases, ISS and IRRC research and
analysis will be used along with MSIM Affiliates'
research and analysis, based on, among other things,
MSIM internal company-specific knowledge.
- Change-in-control provisions in non-salary
compensation plans, employment contracts, and
severance agreements that benefit management and
would be costly to shareholders if triggered.
- Shareholders rights plans that allow appropriate
offers to shareholders to be blocked by the board or
trigger provisions that prevent legitimate offers
from proceeding.
- Executive/Director stock option plans. Generally,
stock option plans should meet the following
criteria:
(i) Whether the stock option plan is incentive
based;
(ii) For mature companies, should be no more than
5% of the issued capital at the time of
approval;
(iii) For growth companies, should be no more than
10% of the issued capital at the time of
approval.
Anti-Takeover Provisions
- Proposals requiring shareholder ratification of
poison pills.
- Anti-takeover and related provisions that serve to
prevent the majority of shareholders from exercising
their rights or effectively deter the appropriate
tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals are generally supported,
subject to the review and approval of the Proxy Review
Committee, as appropriate:
- Requiring auditors to attend the annual meeting of
shareholders.
- Requirement that members of the company's
compensation, nominating and audit committees be
comprised of independent or unaffiliated Directors.
- Requirement that a certain percentage of its Board's
members be comprised of independent and unaffiliated
Directors.
- Confidential voting.
- Reduction or elimination of supermajority vote
requirements.
2. The following shareholder proposals will be voted as
determined by the Proxy Review Committee.
- Proposals that limit tenure of directors.
- Proposals to limit golden parachutes.
- Proposals requiring directors to own large amounts of
stock to be eligible for election.
- Restoring cumulative voting in the election of
directors.
- Proposals that request or require disclosure of
executive compensation in addition to the disclosure
required by the Securities and Exchange Commission
("SEC") regulations.
- Proposals that limit retirement benefits or executive
compensation.
- Requiring shareholder approval for bylaw or charter
amendments.
- Requiring shareholder approval for shareholder rights
plan or poison pill.
- Requiring shareholder approval of golden parachutes.
- Elimination of certain anti-takeover related
provisions.
- Prohibit payment of greenmail.
3. The following shareholder proposals are generally not
supported, subject to the review and approval of the
Committee, as appropriate.
- Requirements that the issuer prepare reports that are
costly to provide or that would require duplicative
efforts or expenditures that are of a non-business
nature or would provide no pertinent information from
the perspective of institutional shareholders.
- Restrictions related to social, political or special
interest issues that impact the ability of the
company to do business or be competitive and that
have a significant financial or best interest impact
to the shareholders.
- Proposals that require inappropriate endorsements or
corporate actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible
for creating and implementing MSIM's Proxy Voting Policy and
Procedures and, in this regard, has expressly adopted them.
Following are some of the functions and responsibilities of
the Committee.
(a) The Committee, which will consist of members
designated by MSIM's Chief Investment Officer, is
responsible for establishing MSIM's proxy voting
policies and guidelines and determining how MSIM will
vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the
authority to amend as necessary MSIM's proxy voting
policies and guidelines (as expressed in these Proxy
Voting Policy and Procedures) and establish and
direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among
other matters): (1) address any outstanding issues
relating to MSIM's Proxy Voting Policy and
Procedures; and (2) generally review proposals at
upcoming shareholder meetings of MSIM portfolio
companies in accordance with this Policy and
Procedures including, as appropriate, the voting
results of prior shareholder meetings of the same
issuer where a similar proposal was presented to
shareholders. The Committee, or its designee, will
timely communicate to ISS MSIM's Proxy Voting Policy
and Procedures (and any amendments to them and/or any
additional guidelines or procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among
other matters): (1) authorize "split voting" (i.e.,
allowing certain shares of the same issuer that are
the subject of the same proxy solicitation and held
by one or more MSIM portfolios to be voted
differently than other shares) and/or "override
voting" (i.e., voting
all MSIM portfolio shares in a manner contrary to the
Procedures); (2) review and approve upcoming votes,
as appropriate, for matters for which specific
direction has been provided in Sections I, II, and
III above; and (3) determine how to vote matters for
which specific direction has not been provided in
Sections I, II and III above. Split votes will
generally not be approved within a single Global
Investor Group team. The Committee may take into
account ISS recommendations and the research provided
by IRRC as well as any other relevant information
they may request or receive.
(e) In addition to the procedures discussed above, if the
Committee determines that an issue raises a potential
material conflict of interest, or gives rise to the
appearance of a potential material conflict of
interest, the Committee will designate a special
committee to review, and recommend a course of action
with respect to, the conflict(s) in question
("Special Committee"). The Special Committee may
request the assistance of the Law and Compliance
Departments and will have sole discretion to cast a
vote. In addition to the research provided by ISS and
IRRC, the Special Committee may request analysis from
MSIM Affiliate investment professionals and outside
sources to the extent it deems appropriate.
(f) The Committee and the Special Committee, or their
designee(s), will document in writing all of their
decisions and actions, which documentation will be
maintained by the Committee and the Special
Committee, or their designee(s) for a period of at
least 6 years. To the extent these decisions relate
to a security held by a MSIM U.S. registered
investment company, the Committee and Special
Committee, or their designee(s), will report their
decisions to each applicable Board of
Trustees/Directors of those investment companies at
each Board's next regularly Scheduled Board meeting.
The report will contain information concerning
decisions made by the Committee and Special Committee
during the most recently ended calendar quarter
immediately preceding the Board meeting.
(g) The Committee and Special Committee, or their
designee(s), will timely communicate to applicable
PMs, the Compliance Departments and, as necessary to
ISS, decisions of the Committee and Special Committee
so that, among other things, ISS will vote proxies
consistent with their decisions.
Item 8. [Reserved.]
Item 9. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund 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.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's second fiscal half-year that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are 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 SENIOR LOAN FUND
--------------------------------------------------------------------
By: /s/ Ronald E. Robison
-----------------------------------------------------------------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: September 22, 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: September 22, 2003
By: /s/ John L. Sullivan
-----------------------------------------------------------------------------
Name: John L. Sullivan
Title: Principal Financial Officer
Date: September 22, 2003