EX-99.(A)(1)(II) 3 c60983ex99-a1ii.txt OFFER TO PURCHASE 1 EXHIBIT (a)(1)(ii) VAN KAMPEN SENIOR FLOATING RATE FUND OFFER TO PURCHASE FOR CASH 30,914,257 OF ITS ISSUED AND OUTSTANDING COMMON SHARES AT NET ASSET VALUE PER COMMON SHARE -------------------------------------------------------------------------------- THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT EASTERN TIME ON FRIDAY, MAY 18, 2001, UNLESS THE OFFER IS EXTENDED. TO ENSURE PROCESSING OF YOUR REQUEST, A LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE OF IT (TOGETHER WITH ANY CERTIFICATES FOR COMMON SHARES AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE DEPOSITARY (AS DEFINED BELOW) ON OR BEFORE MAY 18, 2001. -------------------------------------------------------------------------------- To the Holders of Common Shares of VAN KAMPEN SENIOR FLOATING RATE FUND: Van Kampen Senior Floating Rate Fund (the "Trust") is offering to purchase up to 30,914,257 of its common shares of beneficial interest, with par value of $0.01 per share ("Common Shares"), at a price (the "Purchase Price") equal to the net asset value per Common Share ("NAV") determined as of 5:00 P.M. Eastern Time on the Expiration Date (as defined herein). The tendering, acceptance and withdrawal of tenders are subject to the terms and conditions set forth in this Offer to Purchase and the related Letter of Transmittal (which together constitute the "Offer"). The Offer is scheduled to terminate as of 12:00 Midnight Eastern Time on May 18, 2001, unless extended by action of the Trust's Board of Trustees. An Early Withdrawal Charge (as defined in Section 3) will be imposed on most Common Shares accepted for payment that have been held for less than one year. The Common Shares are not currently traded on an established trading market. The purpose of the Offer is to attempt to provide liquidity to shareholders since the Trust is unaware of any secondary market which exists for the Common Shares. The NAV on April 12, 2001 was $8.67. You may obtain current NAV quotations from Van Kampen Funds Inc. ("VKFI") by calling (800) 341-2911 between the hours of 7:00 A.M. and 7:00 P.M. Central Time, Monday through Friday, except holidays. See Section 9. If more than 30,914,257 Common Shares are duly tendered prior to the expiration of the Offer, the Trust presently intends to, subject to the condition that there have been no changes in the factors originally considered by the Board of Trustees when it determined to make the Offer and the other conditions set forth in Section 6, but is under no obligation to, extend the Offer period, if necessary, and increase the number of Common Shares that the Trust is offering to purchase to an amount which it believes will be sufficient to accommodate the excess Common Shares tendered as well as any Common Shares tendered during the extended Offer period or purchase 30,914,257 Common Shares (or such greater number of Common Shares sought) on a pro rata basis. THIS OFFER IS BEING MADE TO ALL SHAREHOLDERS OF THE TRUST AND IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF COMMON SHARES BEING TENDERED. THIS OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE SECTION 6. 13 SFR006-04/01 2 SUMMARY TERM SHEET THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION IN THIS OFFER TO PURCHASE. YOU SHOULD CAREFULLY READ THE ENTIRE OFFER TO PURCHASE AND RELATED LETTER OF TRANSMITTAL FOR A MORE COMPLETE DESCRIPTION OF THE TERMS AND CONDITIONS OF THE OFFER AND TO FULLY UNDERSTAND THESE TERMS AND CONDITIONS. The Trust The Trust is a non-diversified, closed-end management investment company organized as a Massachusetts business trust. The Trust seeks to provide a high level of current income, consistent with the preservation of capital. The Trust seeks to achieve its investment objective by investing in a professionally managed portfolio of interests in floating or variable rate senior loans. As of April 12, 2001, the Trust had net assets of approximately $812 million and had issued and outstanding 93,679,568 Common Shares. As of April 12, 2001, the Trust's NAV was $8.67. For additional information about the Trust, see Sections 9, 10, 13 and 14. The Offer The Trust is offering to purchase for cash at the Purchase Price up to 30,914,257 of its outstanding Common Shares which are properly tendered and accepted for payment prior to the Expiration Date of the Offer. The tendering, acceptance and withdrawal of tenders are subject to the terms and conditions set forth in this Offer to Purchase and the related Letter of Transmittal. See Sections 1, 2, 5 and 6. An early withdrawal charge will be imposed on most Common Shares accepted for payment that have been held for less than one year. See Section 3. Purpose of the Offer The purpose of this Offer is to attempt to provide liquidity to the holders of Common Shares. The Trust currently does not believe that an active secondary market for its Common Shares exists or is likely to develop, and therefore the Trustees consider each quarter making a tender offer to purchase Common Shares at their NAV to attempt to provide liquidity to the holders of Common Shares. There can be no assurance that this Offer will provide sufficient liquidity to all holders of Common Shares that desire to sell their Common Shares or that the Trust will make any such tender offer in the future. The Trustees may terminate the Offer, amend its terms, reject Common Shares tendered for payment or postpone payment, if during the tender period, certain events occur which the Trustees consider make it inadvisable to proceed with the Offer. See Sections 6, 7, 11 and 16. The Purchase Price The purchase price is equal to the NAV determined as of 5:00 P.M. Eastern Time on the Expiration Date. See Section 1. The cost of purchasing the full 30,914,257 Common Shares pursuant to the Offer would be approximately $268,026,608 (assuming a NAV of $8.67 on the Expiration Date). The Trust anticipates that cash necessary to purchase any Common Shares acquired pursuant to the Offer will first be derived from cash on hand, such as proceeds from sales of new common shares of the Trust and specified pay-downs from the senior loans in the Trust's portfolio, and then from the proceeds from the sale of cash equivalents held by the Trust. The Trust also may borrow amounts, if necessary, pursuant to a credit agreement which has been established to provide the Trust with additional liquidity for its tender offers. See Section 12. The Expiration Date The Offer is scheduled to terminate as of 12:00 Midnight Eastern Time on May 18, 2001, unless extended by action of the Trust's Board of Trustees. The later of May 18, 2001 or the latest time and date to which the Offer is extended is the "Expiration Date". If the expiration date is extended, the Trust will make a public announcement of the new expiration date. See Sections 1 and 16. Tendering Common Shares Shareholders seeking to tender their Common Shares pursuant to the Offer must send to the Trust's depositary on or before the Expiration Date a properly completed and executed Letter of Transmittal (or manually signed facsimile thereof), Common Share certificates (if applicable) and any other documents required by the Letter of Transmittal. See Section 3. Withdrawing Tenders Shareholders seeking to withdraw their tender of Common Shares must send to the Trust's depositary a written, telegraphic, telex or facsimile transmission notice of withdrawal that specifies the name of the person withdrawing a tender of Common Shares, the number of Common Shares to be withdrawn, and, if certificates representing such Common Shares have been delivered or otherwise identified to the depositary, the name of the registered holder(s) of such Common Shares. Shareholders may withdraw Common Shares tendered at any time prior to the Expiration Date and, if the Common Shares have not yet been accepted for payment by the Trust, at any time after 12:00 Midnight Eastern Time on June 15, 2001. See Section 4.
2 3 IMPORTANT If you desire to tender all or any portion of your Common Shares, you should either (1) complete and sign the Letter of Transmittal and mail or deliver it along with any Common Share certificate(s) and any other required documents to Van Kampen Investor Services Inc. (the "Depositary") or (2) request your broker, dealer, commercial bank, trust company or other nominee to effect the transaction for you. If your Common Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you must contact such broker, dealer, commercial bank, trust company or other nominee if you desire to tender your Common Shares. NEITHER THE TRUST NOR ITS BOARD OF TRUSTEES MAKES ANY RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY OR ALL OF SUCH SHAREHOLDER'S COMMON SHARES. SHAREHOLDERS ARE URGED TO EVALUATE CAREFULLY ALL INFORMATION IN THE OFFER, CONSULT THEIR OWN INVESTMENT AND TAX ADVISERS AND MAKE THEIR OWN DECISIONS WHETHER TO TENDER COMMON SHARES AND, IF SO, HOW MANY COMMON SHARES TO TENDER. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE TRUST AS TO WHETHER SHAREHOLDERS SHOULD TENDER COMMON SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER OTHER THAN THOSE CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATION AND SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. Questions and requests for assistance may be directed to VKFI at the address and telephone number set forth below. Requests for additional copies of this Offer to Purchase and the Letter of Transmittal should be directed to VKFI. April 20, 2001 VAN KAMPEN SENIOR FLOATING RATE FUND Van Kampen Funds Inc. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 (800) 341-2911 Depositary: Van Kampen Investor Services Inc. By Mail, Hand Delivery or Courier: 7501 Tiffany Springs Parkway Kansas City, MO 64153 Attn: Van Kampen Senior Floating Rate Fund 3 4 TABLE OF CONTENTS
SECTION PAGE ------- ---- 1. Price; Number of Common Shares.............................. 5 2. Procedure for Tendering Common Shares....................... 5 3. Early Withdrawal Charge..................................... 7 4. Withdrawal Rights........................................... 8 5. Payment for Shares.......................................... 9 6. Certain Conditions of the Offer............................. 9 7. Purpose of the Offer........................................ 10 8. Plans or Proposals of the Trust............................. 10 9. Price Range of Common Shares; Dividends..................... 11 10. Interest of Trustees and Executive Officers; Transactions and Arrangements Concerning the Common Shares............... 11 11. Certain Effects of the Offer................................ 11 12. Source and Amount of Funds.................................. 12 13. Certain Information about the Trust......................... 14 14. Additional Information...................................... 15 15. Certain Federal Income Tax Consequences..................... 15 16. Extension of Tender Period; Termination; Amendments......... 16 17. Miscellaneous............................................... 16 EXHIBIT A: Unaudited Financial Statements For The Period Ended January 31, 2001.................................................... A-1 Audited Financial Statements for the Fiscal Year Ended July 31, 2000.................................................... A-24
4 5 1. PRICE; NUMBER OF COMMON SHARES. The Trust will, upon the terms and subject to the conditions of the Offer, accept for payment (and thereby purchase) 30,914,257 or such lesser number of its issued and outstanding Common Shares which are properly tendered (and not withdrawn in accordance with Section 4) prior to 12:00 Midnight Eastern Time on May 18, 2001 (such time and date being hereinafter called the "Initial Expiration Date"). The Trust reserves the right to extend the Offer. See Section 16. The later of the Initial Expiration Date or the latest time and date to which the Offer is extended is hereinafter called the "Expiration Date." The Purchase Price of the Common Shares will be their NAV determined as of 5:00 P.M. Eastern Time on the Expiration Date. The NAV on April 12, 2001 was $8.67. You may obtain current NAV quotations from VKFI by calling (800) 341-2911 between the hours of 7:00 A.M. and 7:00 P.M. Central Time, Monday through Friday, except holidays. Shareholders tendering Common Shares remain entitled to receive dividends declared on such shares up to the settlement date of the Offer. See Section 9. The Trust will not pay interest on the Purchase Price under any circumstances. An Early Withdrawal Charge will be imposed on most Common Shares accepted for payment that have been held for less than one year. See Section 3. The Offer is being made to all shareholders of the Trust and is not conditioned upon any minimum number of Common Shares being tendered. If the number of Common Shares properly tendered prior to the Expiration Date and not withdrawn is less than or equal to 30,914,257 Common Shares (or such greater number of Common Shares as the Trust may elect to purchase pursuant to the Offer), the Trust will, upon the terms and subject to the conditions of the Offer, purchase at NAV all Common Shares so tendered. If more than 30,914,257 Common Shares are duly tendered prior to the expiration of the Offer and not withdrawn, the Trust presently intends to, subject to the condition that there have been no changes in the factors originally considered by the Board of Trustees when it determined to make the Offer and the other conditions set forth in Section 6, but is not obligated to, extend the Offer period, if necessary, and increase the number of Common Shares that the Trust is offering to purchase to an amount which it believes will be sufficient to accommodate the excess Common Shares tendered as well as any Common Shares tendered during the extended Offer period or purchase 30,914,257 Common Shares (or such greater number of Common Shares sought) on a pro rata basis. On April 12, 2001 there were approximately 93,679,568 Common Shares issued and outstanding and there were approximately 22,513 holders of record of Common Shares. The Trust has been advised that no trustees, officers or affiliates of the Trust intend to tender any Common Shares pursuant to the Offer. The Trust reserves the right, in its sole discretion, at any time or from time to time, to extend the period of time during which the Offer is open by giving oral or written notice of such extension to the Depositary and making a public announcement thereof. See Section 16. There can be no assurance, however, that the Trust will exercise its right to extend the Offer. If the Trust decides, in its sole discretion, to increase (except for any increase not in excess of 2% of the outstanding Common Shares) or decrease the number of Common Shares being sought and, at the time that notice of such increase or decrease is first published, sent or given to holders of Common Shares in the manner specified below, the Offer is scheduled to expire at any time earlier than the tenth business day from the date that such notice is first so published, sent or given, the Offer will be extended at least until the end of such ten business day period. 2. PROCEDURE FOR TENDERING COMMON SHARES. Proper Tender of Common Shares. Except as otherwise set forth under the heading "Procedures for Selling Group Members" below, for Common Shares to be properly tendered pursuant to the Offer, a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signature guarantees, any certificates for such Common Shares, and any other documents required by the Letter of Transmittal, must be received on or before the Expiration Date by the Depositary at its address set forth on page 3 of this Offer to Purchase. It is a violation of Section 14(e) of the Securities and Exchange Act of 1934 (the "Exchange Act"), and Rule 14e-4 promulgated thereunder, for a person to tender Common Shares in a partial tender offer for such person's own account unless at the time of tender and until such time as the securities are accepted for payment the person so tendering has a net long position equal to or greater than the amount tendered in (i) the Common Shares and will deliver or cause to be delivered such shares for purposes of tender to the 5 6 Trust prior to or on the Expiration Date, or (ii) an equivalent security and, upon the acceptance of his or her tender will acquire the Common Shares by conversion, exchange, or exercise of such equivalent security to the extent required by the terms of the Offer, and will deliver or cause to be delivered the Common Shares so acquired for the purpose of tender to the Trust prior to or on the Expiration Date. Section 14(e) and Rule 14e-4 provide a similar restriction applicable to the tender or guarantee of a tender on behalf of another person. The acceptance of Common Shares by the Trust for payment will constitute a binding agreement between the tendering shareholder and the Trust upon the terms and subject to the conditions of the Offer, including the tendering shareholder's representation that (i) such shareholder has a net long position in the Common Shares being tendered within the meaning of Rule 14e-4 promulgated under the Exchange Act and (ii) the tender of such Common Shares complies with Rule 14e-4. Signature Guarantees and Method of Delivery. Signatures on the Letter of Transmittal are not required to be guaranteed unless (1) the proceeds for the tendered Common Shares will amount to more than $100,000, (2) the Letter of Transmittal is signed by someone other than the registered holder of the Common Shares tendered therewith, or (3) payment for tendered Common Shares is to be sent to a payee other than the registered owner of such Common Shares and/or to an address other than the registered address of the registered owner of the Common Shares. In those instances, all signatures on the Letter of Transmittal must be guaranteed by a bank or trust company; a broker-dealer; a credit union; a national securities exchange, registered securities association or clearing agency; a savings and loan association; or a federal savings bank (an "Eligible Institution"). If Common Shares are registered in the name of a person or persons other than the signer of the Letter of Transmittal or (a) if payment is to be made to, (b) unpurchased Common Shares are to be registered in the name of or (c) any certificates for unpurchased Common Shares are to be returned to any person other than the registered owner, then the Letter of Transmittal and, if applicable, the tendered Common Share certificates must be endorsed or accompanied by appropriate authorizations, in either case signed exactly as such name or names appear on the registration of the Common Shares with the signatures on the certificates or authorizations guaranteed by an Eligible Institution. If signature is by attorney-in-fact, executor, administrator, Trustee, guardian, officer of a corporation or another acting in a fiduciary or representative capacity, other legal documents will be required. See Instructions 1 and 4 of the Letter of Transmittal. Payment for Common Shares tendered and accepted for payment pursuant to the Offer will be made only after receipt by the Depositary on or before the Expiration Date of a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) and any other documents required by the Letter of Transmittal. If your Common Shares are evidenced by certificates, those certificates must be received by the Depositary on or prior to the Expiration Date. THE METHOD OF DELIVERY OF ANY DOCUMENTS, INCLUDING CERTIFICATES FOR COMMON SHARES, IS AT THE ELECTION AND RISK OF THE PARTY TENDERING COMMON SHARES. IF DOCUMENTS ARE SENT BY MAIL, IT IS RECOMMENDED THAT THEY BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. Procedures for Selling Group Members. If you are a selling group member, in order for you to tender any Common Shares pursuant to the Offer, you may place a confirmed wire order with VKFI. All confirmed wire orders used to tender Common Shares pursuant to this Offer must be placed on the Expiration Date only (wire orders placed on any other date will not be accepted by the Trust). Common Shares tendered by a wire order are deemed to be tendered when VKFI receives the order but subject to the condition subsequent that the settlement instructions, including (with respect to tendered Common Shares for which the selling group member is not the registered owner) a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof), any other documents required by the Letter of Transmittal and any Common Share certificates, are received by the Depository within three New York Stock Exchange trading days after receipt by VKFI of such order. Determinations of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of tenders will be determined by the Trust, in its sole discretion, whose determination shall be final and binding. The Trust reserves the absolute right to reject any or all tenders determined by it not to be in 6 7 appropriate form or the acceptance of or payment for which may, in the opinion of the Trust's counsel, be unlawful. The Trust also reserves the absolute right to waive any of the conditions of the Offer or any defect in any tender with respect to any particular Common Share(s) or any particular shareholder, and the Trust's interpretations of the terms and conditions of the Offer will be final and binding. Unless waived, any defects or irregularities in connection with tenders must be cured within such times as the Trust shall determine. Tendered Common Shares will not be accepted for payment unless the defects or irregularities have been cured within such time or waived. Neither the Trust, VKFI, the Depositary nor any other person shall be obligated to give notice of any defects or irregularities in tenders, nor shall any of them incur any liability for failure to give such notice. Federal Income Tax Withholding. To prevent backup federal income tax withholding equal to 31% of the gross payments made pursuant to the Offer, each shareholder who has not previously submitted a Form W-9 to the Trust or does not otherwise establish an exemption from such withholding must notify the Depositary of such shareholder's correct taxpayer identification number (or certify that such taxpayer is awaiting a taxpayer identification number) and provide certain other information by completing the Form W-9 enclosed with the Letter of Transmittal. Foreign shareholders who are resident aliens and who have not previously submitted a Form W-9, or other foreign shareholders who have not previously submitted a Form W-8, to the Trust must do so in order to avoid backup withholding. The Depositary will withhold 30% of the gross payments payable to a foreign shareholder unless the foreign shareholder has provided to the Depositary a form on which it claims eligibility for a reduced rate of withholding or establishes an exemption from withholding. (Exemption from backup withholding does not exempt a foreign shareholder from the 30% withholding). For this purpose, a foreign shareholder, in general, is a shareholder that is not (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which is subject to United States federal income taxation regardless of the source of such income or (iv) a trust whose administration is subject to the primary jurisdiction of a United States court and which has one or more United States fiduciaries who have the authority to control all substantial decisions of the trust. The Depositary will determine a shareholder's status as a foreign shareholder and eligibility for a reduced rate of, or an exemption from, withholding by reference to certificates or statements provided by the foreign shareholder concerning eligibility for a reduced rate of, or exemption from, withholding unless facts and circumstances indicate that reliance is not warranted. A foreign shareholder who has not previously submitted the appropriate certificates or statements with respect to a reduced rate of, or exemption from, withholding for which such shareholder may be eligible should consider doing so in order to avoid over-withholding. A foreign shareholder may be eligible to obtain a refund of tax withheld if such shareholder meets one of the three tests for capital gain or loss treatment described in Section 15 or is otherwise able to establish that no tax or a reduced amount of tax was due. For a discussion of certain other federal income tax consequences to tendering shareholders, see Section 15. 3. EARLY WITHDRAWAL CHARGE. The Depositary will impose an early withdrawal charge (the "Early Withdrawal Charge") on most Common Shares accepted for payment which have been held less than one year. The Early Withdrawal Charge will be imposed on a number of Common Shares accepted for payment from a record holder of Common Shares the value of which exceeds the aggregate value at the time the tendered Common Shares are accepted for payment of (a) all Common Shares owned by such holder that were purchased more than one year prior to such acceptance, (b) all Common Shares owned by such holder that were acquired through reinvestment of distributions, and (c) the increase, if any, of value of all other Common Shares owned by such holder (namely, those purchased within the one year preceding acceptance for payment) over the purchase price of such Common Shares. The Early Withdrawal Charge will be paid to VKFI on behalf of the holder of the Common Shares. In determining whether an Early Withdrawal Charge is payable, Common Shares accepted for payment pursuant to the Offer shall be deemed to be those Common 7 8 Shares purchased earliest by the Shareholder. Any Early Withdrawal Charge which is required to be imposed will be made in accordance with the following schedule.
EARLY YEAR OF REPURCHASE WITHDRAWAL AFTER PURCHASE CHARGE ------------------ ---------- First....................................................... 1.0% Second and following........................................ 0.0%
Exchanges. Tendering shareholders may elect to have the Depositary invest the cash proceeds from the tender of Common Shares of the Trust in contingent deferred sales charge shares ("Class C Shares") of certain open-end investment companies advised by either Van Kampen Investment Advisory Corp. or Van Kampen Asset Management Inc. and distributed by VKFI (such funds are collectively referred to as "VK Funds"), subject to certain limitations. The Early Withdrawal Charge will be waived for Common Shares tendered pursuant to this election, however, such Class C Shares immediately become subject to a contingent deferred sales charge schedule equivalent to the Early Withdrawal Charge schedule of the Trust. Thus, shares of such VK Funds may be subject to a contingent deferred sales charge upon a subsequent redemption from the VK Funds. The purchase of shares of such VK Fund will be deemed to have occurred at the time of the purchase of the Common Shares of the Trust for calculating the applicable contingent deferred sales charge. The prospectus for each VK Fund describes its investment objectives and policies. Shareholders can obtain a prospectus without charge by calling 1-800-341-2911 and should consider these objectives and policies carefully before making the election described above. Tendering shareholders may purchase Class C Shares of a VK Fund only if shares of such VK Fund are available for sale, and shareholders establishing a new Class C Share account of a VK Fund must invest net tender proceeds from Common Shares which have a value at or above the new account minimum of such VK Fund. An exchange is still deemed to be a tender of Common Shares causing a taxable event and may result in a taxable gain or loss for the tendering shareholders. A shareholder may make the election described above by completing the appropriate section on the Letter of Transmittal or by giving proper instructions to the shareholder's broker or dealer. Although this election to purchase Class C Shares of a VK Fund has been made available as a convenience to the Trust's shareholders, neither the Trust nor its Board of Trustees makes any recommendation as to whether shareholders should invest in shares of another VK Fund. 4. WITHDRAWAL RIGHTS. Except as otherwise provided in this Section 4, tenders of Common Shares made pursuant to the Offer will be irrevocable. You may withdraw Common Shares tendered at any time prior to the Expiration Date and, if the Common Shares have not yet been accepted for payment by the Trust, at any time after 12:00 Midnight Eastern Time on June 15, 2001. To be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be timely received by the Depositary at the address set forth on page 3 of this Offer to Purchase. Any notice of withdrawal must specify the name of the person having tendered the Common Shares to be withdrawn, the number of Common Shares to be withdrawn, and, if certificates representing such Common Shares have been delivered or otherwise identified to the Depositary, the name of the registered holder(s) of such Common Shares as set forth in such certificates if different from the name of the person tendering the Common Shares. If certificates have been delivered to the Depositary, then, prior to the release of such certificates, you must also submit the certificate numbers shown on the particular certificates evidencing such Common Shares and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Trust in its sole discretion, whose determination shall be final and binding. None of the Trust, VKFI, Van Kampen Investments Inc. ("VK Inc."), the Depositary or any other person is or will be obligated to give any notice of any defects or irregularities in any notice of withdrawal, and none of them will incur any liability for failure to give any such notice. Common Shares properly withdrawn shall not thereafter 8 9 be deemed to be tendered for purposes of the Offer. However, withdrawn Common Shares may be retendered by following the procedures described in Section 2 prior to the Expiration Date. 5. PAYMENT FOR SHARES. For purposes of the Offer, the Trust will be deemed to have accepted for payment (and thereby purchased) Common Shares which are tendered and not withdrawn when, as and if it gives oral or written notice to the Depositary of its acceptance of such Common Shares for payment pursuant to the Offer. Payment for Common Shares purchased pursuant to the Offer will be made by depositing the aggregate purchase price therefor with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payment from the Trust and either transmitting payment directly to the tendering shareholders or, in the case of tendering shareholders electing to invest such proceeds in another VK Fund, transmitting payment directly to the transfer agent for purchase of Class C Shares of the designated VK Fund for the account of such shareholders. In all cases, payment for Common Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary, as required pursuant to the Offer, of a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof), any certificates representing such Common Shares, if issued, and any other required documents. Certificates for Common Shares not purchased (see Sections 1 and 6), or for Common Shares not tendered included in certificates forwarded to the Depositary, will be returned promptly following the termination, expiration or withdrawal of the Offer, without expense to the tendering shareholder. The Trust will pay all transfer taxes, if any, payable on the transfer to it of Common Shares purchased pursuant to the Offer. If, however, payment of the purchase price is to be made to, or (in the circumstances permitted by the Offer) if unpurchased Common Shares are to be registered in the name of any person other than the registered holder, or if tendered certificates, if any, are registered or the Common Shares tendered are held in the name of any person other than the person signing the Letter of Transmittal, the amount of any transfer taxes (whether imposed on the registered holder or such other person) payable on account of the transfer to such person will be deducted from the Purchase Price unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted. Shareholders tendering Common Shares remain entitled to receive dividends declared on such shares up to the settlement date of the Offer. The Trust will not pay any interest on the Purchase Price under any circumstances. An Early Withdrawal Charge will be imposed on most Common Shares accepted for payment that have been held for less than one year. See Section 3. In addition, if certain events occur, the Trust may not be obligated to purchase Common Shares pursuant to the Offer. See Section 6. ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO HAS NOT PREVIOUSLY SUBMITTED A COMPLETED AND SIGNED FORM W-9 AND WHO FAILS TO COMPLETE FULLY AND SIGN THE FORM W-9 ENCLOSED WITH THE LETTER OF TRANSMITTAL MAY BE SUBJECT TO REQUIRED FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE GROSS PROCEEDS PAID TO SUCH SHAREHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE SECTION 2. 6. CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provision of the Offer, the Trust shall not be required to accept for payment, purchase or pay for any Common Shares tendered, and may terminate or amend the Offer or may postpone the acceptance for payment of, the purchase of and payment for Common Shares tendered, if at any time at or before the time of purchase of any such Common Shares, any of the following events shall have occurred (or shall have been determined by the Trust to have occurred) which, in the Trust's sole judgment in any such case and regardless of the circumstances (including any action or omission to act by the Trust), makes it inadvisable to proceed with the Offer or with such purchase or payment: (1) in the reasonable judgment of the Trustees, there is not sufficient liquidity of the assets of the Trust; (2) such transactions, if consummated, would (a) impair the Trust's status as a regulated investment company under federal income tax law (which would make the Trust a taxable entity, causing the Trust's taxable income to be taxed at the Trust level) or (b) result in a failure to comply with applicable asset coverage requirements; or (3) there is, in the Board of Trustees' reasonable judgment, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Trust, (b) suspension of or limitation on prices for trading securities generally on any United States national securities exchange or in the over-the-counter market, (c) declaration of a banking 9 10 moratorium by federal or state authorities or any suspension of payment by banks in the United States, (d) limitation affecting the Trust or the issuers of its portfolio securities imposed by federal or state authorities on the extension of credit by lending institutions, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States or (f) other event or condition which would have a material adverse effect on the Trust or the holders of its Common Shares if the tendered Common Shares are purchased. The foregoing conditions are for the Trust's sole benefit and may be asserted by the Trust regardless of the circumstances giving rise to any such condition (including any action or inaction by the Trust), and any such condition may be waived by the Trust in whole or in part, at any time and from time to time in its sole discretion. The Trust's failure at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right; the waiver of any such right with respect to particular facts and circumstances shall not be deemed a waiver with respect to any other facts or circumstances; and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. Any determination by the Trust concerning the events described in this Section 6 shall be final and shall be binding on all parties. If the Trust determines to terminate or amend the Offer or to postpone the acceptance for payment of or payment for Common Shares tendered, it will, to the extent necessary, extend the period of time during which the Offer is open as provided in Section 16. Moreover, in the event any of the foregoing conditions are modified or waived in whole or in part at any time, the Trust will promptly make a public announcement of such waiver and may, depending on the materiality of the modification or waiver, extend the Offer period as provided in Section 16. 7. PURPOSE OF THE OFFER. The Trust currently does not believe that an active secondary market for its Common Shares exists or is likely to develop. In recognition of the possibility that a secondary market may not develop for the Common Shares of the Trust, or, if such a market were to develop, the Common Shares might trade at a discount, the Trustees have determined that it would be in the best interest of its shareholders for the Trust to take action to attempt to provide liquidity to shareholders or to reduce or eliminate any future market value discount from NAV that might otherwise exist, respectively. To that end, the Trustees presently intend each quarter to consider making a tender offer to purchase Common Shares at their NAV. The purpose of this Offer is to attempt to provide liquidity to the holders of Common Shares. There can be no assurance that this Offer will provide sufficient liquidity to all holders of Common Shares that desire to sell their Common Shares or that the Trust will make any such tender offer in the future. NEITHER THE TRUST NOR ITS BOARD OF TRUSTEES MAKES ANY RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY OR ALL OF SUCH SHAREHOLDER'S COMMON SHARES AND HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY SUCH RECOMMENDATION. SHAREHOLDERS ARE URGED TO EVALUATE CAREFULLY ALL INFORMATION IN THE OFFER, CONSULT THEIR OWN INVESTMENT AND TAX ADVISORS AND MAKE THEIR OWN DECISIONS WHETHER TO TENDER COMMON SHARES AND, IF SO, HOW MANY COMMON SHARES TO TENDER. 8. PLANS OR PROPOSALS OF THE TRUST. Except as set forth in this Section 8, the Trust has no present plans or proposals which relate to or would result in any extraordinary transaction such as a merger, reorganization or liquidation involving the Trust; any purchase, sale or transfer of a material amount of assets of the Trust other than in its ordinary course of business; any material changes in the Trust's present capitalization (except as resulting from the Offer or otherwise set forth herein); or any other material changes in the Trust's structure or business. The Trust's fundamental investment policies and restrictions give the Trust the flexibility to pursue its investment objective through a fund structure commonly known as a "master-feeder" structure. If the Trust converts to a master-feeder structure, the existing shareholders of the Trust would continue to hold their shares of the Trust and the Trust would become a feeder-fund of the master-fund. The value of a shareholder's shares would be the same immediately after any conversion as the value immediately before such conversion. Use of this master-feeder structure potentially would result in increased assets invested among the collective investment vehicle of which the Trust would be a part, thus allowing operating 10 11 expenses to be spread over a larger asset base, potentially achieving economies of scale. The Trust's Board of Trustees presently does not intend to affect any conversion to a master-feeder structure. 9. PRICE RANGE OF COMMON SHARES; DIVIDENDS. The Trust's NAV from April 12, 1999 through April 12, 2001 ranged from a high of $10.12 to a low of $8.67. On April 12, 2001, the NAV was $8.67. You may obtain current NAV quotations from VKFI by calling (800) 341-2911 between the hours of 7:00 A.M. and 7:00 P.M. Central Time, Monday through Friday, except holidays. NAV quotes also may be obtained through the ICI Pricing Service which is released each Friday evening and published by the Dow Jones Capital Markets Wire Service on each Friday; published in the New York Times on each Saturday; published in the Chicago Tribune on each Sunday; and published weekly in Barron's magazine. The Trust offers and sells its Common Shares to the public on a continuous basis through VKFI as principal underwriter. The Trust is not aware of any secondary market trading for the Common Shares. Dividends on the Common Shares are declared daily and paid monthly. Over the twelve month period preceding the commencement of the Offer, the Trust paid the following dividends per Common Share held for the entire respective dividend period:
DIVIDEND PAYMENT AMOUNT OF DIVIDEND DATE PER COMMON SHARE ---------------- ------------------ March 23, 2001............................................. $0.0610 February 23, 2001.......................................... $0.0665 January 25, 2001........................................... $0.0489 December 31, 2000.......................................... $0.017602938 December 22, 2000.......................................... $0.0665 November 24, 2000.......................................... $0.0665 October 25, 2000........................................... $0.0665 September 25, 2000......................................... $0.065693541 August 25, 2000............................................ $0.063999996 July 25, 2000.............................................. $0.0640 June 23, 2000.............................................. $0.0640 May 25, 2000............................................... $0.0640 April 25, 2000............................................. $0.0640
Shareholders tendering Common Shares remain entitled to receive dividends declared on such Common Shares up to the settlement date of the Offer. 10. INTEREST OF TRUSTEES AND EXECUTIVE OFFICERS; TRANSACTIONS AND ARRANGEMENTS CONCERNING THE COMMON SHARES. As of April 12, 2001, the trustees and executive officers of the Trust as a group beneficially owned no Common Shares. In connection with the Trust's organization on December 19, 1997, VK Inc., an affiliate of the Trust's investment adviser, was issued 10,000 Common Shares for $100,000. The Trust has been informed that no trustee or executive officer or affiliate of the Trust intends to tender any Common Shares pursuant to the Offer. Except as set forth in this Section 10, based upon the Trust's records and upon information provided to the Trust by its trustees, executive officers and affiliates (as such term is used in the Securities Exchange Act of 1934), neither the Trust nor, to the best of the Trust's knowledge, any of the trustees or executive officers of the Trust, nor any affiliates of any of the foregoing, has effected any transactions in the Common Shares during the 60 day period prior to the date hereof. Except as set forth in this Offer to Purchase, neither the Trust nor, to the best of the Trust's knowledge, any of its affiliates, trustees or executive officers, is a party to any agreement, arrangement or understanding, whether or not legally enforceable, between the Trust, any of the Trust's executive officers or trustees, any person controlling the Trust or any officer or director of any corporation ultimately in control of the Trust and any other person with respect to any securities of the Trust. 11. CERTAIN EFFECTS OF THE OFFER. The purchase of Common Shares pursuant to the Offer will have the effect of increasing the proportionate interest in the Trust of shareholders who do not tender their Common 11 12 Shares. If you retain your Common Shares you will be subject to any increased risks that may result from the reduction in the Trust's aggregate assets resulting from payment for the tendered Common Shares (e.g., greater volatility due to decreased diversification and higher expenses). However, the Trust believes that since the Trust is engaged in a continuous offering of the Common Shares, those risks would be reduced to the extent new Common Shares of the Trust are sold. All Common Shares purchased by the Trust pursuant to the Offer will be held in treasury pending disposition. 12. SOURCE AND AMOUNT OF FUNDS. The total cost to the Trust of purchasing the full 30,914,257 Common Shares pursuant to the Offer would be approximately $268,026,608 (assuming a NAV of $8.67 on the Expiration Date). The Trust anticipates that the Purchase Price for any Common Shares acquired pursuant to the Offer will first be derived from cash on hand, such as proceeds from sales of new Common Shares of the Trust and specified pay-downs from the participation interests in senior corporate loans which it has acquired, and then from the proceeds from the sale of cash equivalents held by the Trust. The Trust may from time to time enter into one or more credit agreements to provide the Trust with additional liquidity to meet its obligations to purchase Common Shares pursuant to any tender offer it may make. The Trust currently is a party to a credit agreement which will terminate by its terms on September 12, 2001 (described in more detail below). The Trust has never borrowed any amounts available under such credit arrangements in the past. If, in the judgment of the Trustees, there is not sufficient liquidity of the assets of the Trust to pay for tendered Common Shares, the Trust may terminate the Offer. See Section 6. The Trust has entered into a Third Amendment and Restatement of Credit Agreement, dated as of September 13, 2000 (the "Credit Agreement"), among the Trust and Van Kampen Prime Rate Income Trust (the "Co-Borrower") as borrowers (collectively the "Borrowers"), the banks party thereto (the "Financial Institutions"), and Bank of America, N.A., ("BofA"), as agent, pursuant to which the Financial Institutions have committed to provide a credit facility of up to $500,000,000 (subject to an optional commitment increase upon approval of each Borrower's Board of Trustees and the Financial Institutions) (the "Credit Facility Commitment") to the Trust and the Co-Borrower, which is not secured by the assets of the Trust or Co-Borrower or other collateral. As of the date hereof, neither the Trust nor the Co-Borrower has drawn any of the funds available under the Credit Agreement. The proceeds of any amounts borrowed under the Credit Agreement may be used to provide the Trust with additional liquidity to meet its obligations to purchase Common Shares pursuant to any tender offer that it may make. The Credit Agreement has terms and conditions substantially similar to the following: a. Each of the Trust and the Co-Borrower is entitled to borrow money ("Loans") from the Financial Institutions in amounts which in the aggregate do not exceed the amount of the Credit Facility Commitment, provided that the aggregate amount of Loans to the Trust or the Co-Borrower on an individual basis cannot exceed twenty-five percent (25%) of the net asset value of the Trust or Co-Borrower, as the case may be (defined as total assets minus total liabilities minus assets subject to liens). b. Loans made under the Credit Agreement, if any, will bear interest daily at the option of the Trust or Co-Borrower, as applicable, (i) at a rate per annum equal to the federal funds rate from time to time plus 0.50%, or (ii) at a rate per annum equal to a reserve-adjusted interbank offered rate offered by BofA's Grand Cayman Branch ("IBOR") plus 0.50% per annum. Each of the Trust and Co-Borrower will bear the expenses of any borrowings attributable to it under the Credit Agreement. Such interest will be due, in arrears, on the outstanding principal amount of each Loan (i) as to any federal funds rate Loan on the last business day of each calendar quarter and (ii) as any offshore rate Loan, from one (1) day to sixty (60) days from the date of the Loan, as selected by the Trust or Co-Borrower, as applicable, in advance. Interest on the outstanding principal of the Loans will also be due on the date of any prepayment of any offshore rate Loan and on demand during the existence of an event of default under the Credit Agreement payable by the borrower subject to such event of default. Overdue payments of principal and interest will bear interest, payable upon demand, at a penalty rate. No Loan shall be outstanding for a period of more than sixty (60) days, and there shall be no more than three Interest Periods as defined in the Credit Agreement in effect. 12 13 c. The Trust paid arrangement fees and expenses to BofA or its affiliates on the date the Credit Agreement was executed. In addition, during the term of the Credit Agreement, the Trust is obligated to pay its pro rata share (based on the relative net assets of the Trust and Co-Borrower) of a commitment fee computed at the rate of 0.09% per annum on the average daily unused amount of the facility. d. The principal amount of any Loan made under the Credit Agreement, if any, is required to be paid sixty (60) days from the date of the Loan. Each of the Trust and Co-Borrower is entitled to prepay a Loan made to it in multiples of $1,000,000, provided that the Trust or Co-Borrower, as applicable, gives sufficient notices of prepayment. On the Commitment Termination Date (as defined below), all outstanding principal and accrued interest under the Credit Agreement will be due and payable in full. e. The Credit Agreement provides for BofA to elect to make swingline loans to each Borrower in amounts which in the aggregate do not exceed $25,000,000, provided that the aggregate amount of such swingline loans to the Trust or the Co-Borrower on an individual basis cannot exceed the lesser of (a) BofA's commitment under the Credit Agreement, (b) the combined commitment of all Financial Institutions under the Credit Agreement or (c) twenty-five percent (25%) of the net asset value of the Trust or Co-Borrower, as the case may be. Such swingline loans are due no later than the seventh business day following the day the swingline loan was made, bear interest at a rate per annum equal to the federal funds rate from time to time plus 0.50% due upon the repayment of such loan and, if unpaid when due or the Borrower otherwise elects, may convert to a traditional federal funds rate Loan under the Credit Agreement funded by BofA and all of the other Financial Institutions in accordance with the Credit Agreement's commitment schedule. f. The drawdown of the initial Loan or swingline loan, if any, under the Credit Agreement is subject to certain conditions, including, among other things, the Trust and Co-Borrower, as applicable, executing and delivering a promissory note made payable to the order of each Financial Institution, in the form attached to the Credit Agreement (the "Promissory Notes"). The drawdown of each Loan or swingline loan, if any, is further conditioned upon the satisfaction of additional conditions, including, without limitation, (i) the providing of notice with respect to the Loan; (ii) the asset coverage ratio for the applicable borrower being at least 4 to 1; (iii) there being no default or event of default in existence with respect to the applicable borrower; (iv) the representations and warranties with respect to the applicable borrower made in the Credit Agreement continuing to be true; and (v) there being no Loans outstanding with respect to the applicable borrower for more than sixty (60) days on the day preceding the proposed borrowing. g. The Credit Agreement contains various affirmative and negative covenants of the Trust and Co-Borrower, including, without limitation, obligations: (i) to provide periodic financial information; (ii) with limited exceptions, to not consolidate with or merge into any other entity or have any other entity merge into it and to not sell all or any substantial part of its assets; (iii) to continue to engage in its current type of business and to maintain its existence as a business trust; (iv) to comply with applicable laws, rules and regulations; (v) to maintain insurance on its property and business; (vi) to limit the amount of its debt based upon 25% of the net asset value of the applicable borrower; and (vii) to not create any lien on any of its assets, with certain exceptions. h. The Credit Agreement also contains various events of default (with certain specified grace periods), including, without limitation: (i) failure to pay when due any amounts required to be paid to the Financial Institutions under the Credit Agreement or the Promissory Notes; (ii) any material misrepresentations in the Credit Agreement or documents delivered to the Financial Institutions; (iii) failure to observe or perform certain terms, covenants and agreements contained in the Credit Agreement, the Promissory Notes or other documents delivered to the Financial Institutions; (iv) failure to comply with the Trust's or Co-Borrower's, as applicable, fundamental investment policies or investment restrictions; (v) failure to comply by the Trust or Co-Borrower, as applicable, with all material provisions of the Investment Company Act of 1940; (vi) the voluntary or involuntary bankruptcy of the Trust or Co-Borrower, as applicable; (vii) the entry of judgments for the payment 13 14 of money in excess of $5,000,000 in the aggregate which remains unsatisfied or unstayed for a period of 30 days; and (viii) a change in control of the Trust's or Co-Borrower's, as applicable, investment adviser. i. The credit facility provided pursuant to the Credit Agreement will terminate on September 12, 2001 (the "Commitment Termination Date"), unless extended or earlier terminated pursuant to the terms thereof, and all accrued interest and principal will be due thereon. Pursuant to guidelines applicable to the Trust and the Co-Borrower, any Loans to the Trust and Co-Borrower will be made on a first-come, first-serve basis. If, at any time, the demand for borrowings by the Trust and Co-Borrower exceeds amounts available under the Credit Agreement, such borrowing will be allocated on a fair and equitable basis, taking into consideration factors, including without limitation, relative net assets of the Trust and Co-Borrower, amounts requested by the Trust and Co-Borrower, and availability of other sources of cash to meet each parties needs. The Trust intends to repay any Loans under the Credit Agreement from proceeds from the specified pay-downs from the interests in Senior Loans (as defined below) which will be acquired and from proceeds from the sale of Common Shares. The foregoing descriptions of the Credit Agreement do not purport to be complete or final, and are qualified in their entirety by reference to the Credit Agreement included as Exhibit (b)(1) to the Issuer Tender Offer Statement on Schedule TO of the Trust. See Section 14. 13. CERTAIN INFORMATION ABOUT THE TRUST. The Trust was organized as a Massachusetts business trust on December 19, 1997 and is a non-diversified, closed-end management investment company under the Investment Company Act of 1940. The Trust's investment objective is to provide a high level of current income, consistent with preservation of capital. The Trust seeks to achieve its investment objective by investing in a professionally managed portfolio of interests primarily in floating or variable rate senior loans ("Senior Loans") to corporations, partnerships and other entities ("Borrowers") which operate in a variety of industries and geographical regions. Although the Trust's NAV will vary, the Trust's policy of acquiring interests in floating or variable rate Senior Loans is expected to minimize fluctuations in the Trust's NAV as a result of changes in interest rates. Senior Loans in which the Trust will invest 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 the prime rate offered by one or more major United States banks ("Prime Rate"), the London Inter-Bank Offered Rate ("LIBOR"), the certificate of deposit rate or other base lending rates used by commercial lenders. The Senior Loans in the Trust's portfolio at all times have a dollar-weighted average time until next interest rate redetermination of 90 days or less. As a result, as short-term interest rates increase, the interest payable to the Trust from its investments in Senior Loans should increase, and as short-term interest rates decrease, the interest payable to the Trust on its investments in Senior Loans should decrease. The amount of time required to pass before the Trust realizes the effects of changing short-term market interest rates on its portfolio varies with the dollar-weighted average time until the next interest rate redetermination on securities in the Trust's portfolio. The Trust has registered as a "non-diversified" investment company so that, subject to its investment restrictions, it is able to invest more than 5% of the value of its assets in the obligations of any single issuer, including Senior Loans of a single Borrower or participations in Senior Loans purchased from a single lender. To the extent the Trust invests a relatively high percentage of its assets in obligations of a limited number of issuers, the Trust will be more susceptible than a more widely diversified investment company to any single corporate, economic, political or regulatory occurrence. The Trust is advised by Van Kampen Investment Advisory Corp. (the "Adviser") pursuant to an Investment Advisory Agreement under which the Trust accrues daily and pays monthly to the Adviser an investment management fee based on the per annum rate of: 0.95% of the first $4.0 billion of average daily net assets of the Trust, 0.90% on the next $3.5 billion, 0.875% on the next $2.5 billion and 0.85% on average daily net assets over $10.0 billion. The Trust is a party to an Administration Agreement with VK Inc. Under the Administration Agreement, the Trust pays VK Inc. a monthly fee based on the per annum rate of 0.25% of the 14 15 Trust's average daily net assets. The Trust is a party to an Offering Agreement with VKFI. Under the Offering Agreement, the Trust offers and sells its Common Shares to the public on a continuous basis through VKFI as principal underwriter. The Adviser, VK Inc. and VKFI are indirect wholly owned subsidiaries of Morgan Stanley Dean Witter & Co. VKFI compensates broker-dealers participating in the continuous offering of the Trust's Common Shares at a rate of 0.75% of the dollar value of Common Shares purchased from the Trust by such broker-dealers. VKFI also compensates broker-dealers who have entered into sales agreements with VKFI at an annual rate, paid quarterly, equal to an amount up to 0.75% of the value of Common Shares sold by each respective broker-dealer and remaining outstanding after one year from the date of their original purchase. VKFI also may provide, from time to time, additional cash incentives to broker-dealers which employ representatives who sell a minimum dollar amount of the Common Shares. All such compensation is or will be paid by VKFI out of its own assets, and not out of the assets of the Trust. The compensation paid to such broker-dealers and to VKFI, including the compensation paid at the time of purchase, the quarterly payments, any additional incentives paid from time to time and the Early Withdrawal Charge, if any, will not in the aggregate exceed applicable limitations. In addition, the Trust may make service fee payments pursuant to the Trust's Service Plan for personal services and/or the maintenance of shareholder accounts to VKFI and broker-dealers and other persons in amounts not exceeding 0.25% of the Trust's average daily net assets for any fiscal year. The Trustees have initially implemented the Service Plan by authorizing service fee payments to VKFI and broker-dealers and other persons in amounts not expected to exceed 0.15% of the Trust's average daily net assets. The principal executive offices of the Trust are located at 1 Parkview Plaza, Oakbrook Terrace, IL 60181-5555. Reference is hereby made to Section 9 of this Offer to Purchase and the financial statements attached hereto as Exhibit A which are incorporated herein by reference. 14. ADDITIONAL INFORMATION. The Trust has filed an Issuer Tender Offer Statement on Schedule TO with the Securities and Exchange Commission (the "Commission") which includes certain additional information relating to the Offer. Such material may be inspected and copied at prescribed rates at the Commission's public reference facilities at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Jacob K. Javits Federal Building, 26 Federal Plaza, New York, New York 10278; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained by mail at prescribed rates from the Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Issuer Tender Offer Statement on Schedule TO is available along with other related materials at the Commission's internet website (http://www.sec.gov). 15. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a general summary of the federal income tax consequences of a sale of Common Shares pursuant to the Offer. Shareholders should consult their own tax advisers regarding the tax consequences of a sale of Common Shares pursuant to the Offer, as well as the effects of state, local and foreign tax laws and any proposed tax law changes. The sale of Common Shares pursuant to the Offer will be a taxable transaction for federal income tax purposes, either as a "sale or exchange," or under certain circumstances, as a "dividend." Under Section 302(b) of the Internal Revenue Code of 1986, as amended (the "Code"), a sale of Common Shares pursuant to the Offer generally will be treated as a "sale or exchange" if the receipt of cash by the shareholder or by the Depositary on behalf of the shareholder, in the case of a tendering shareholder electing to invest cash proceeds from the tender of Common Shares in Class C Shares of a designated VK Fund: (a) results in a "complete redemption" of the shareholder's interest in the Trust, (b) is "substantially disproportionate" with respect to the shareholder, or (c) is "not essentially equivalent to a dividend" with respect to the shareholder. In determining whether any of these tests has been met, Common Shares actually owned, as well as Common Shares considered to be owned by the shareholder by reason of certain constructive ownership rules set forth in Section 318 of the Code, generally must be taken into account. If any of these three tests for "sale or exchange" treatment is met, a shareholder will recognize gain or loss equal to the difference between the amount of cash received by the shareholder or by the Depositary on behalf of the shareholder, in the case of a tendering shareholder electing to invest cash proceeds from the tender of Common Shares in Class C Shares of a designated VK Fund, pursuant to the Offer and the tax basis of the Common Shares sold. If such 15 16 Common Shares are held as a capital asset, the gain or loss will be a capital gain or loss. The maximum tax rate applicable to net capital gains recognized by individuals and other non-corporate taxpayers is (i) the same as the maximum ordinary income rate for capital assets held for one year or less or (ii) 20% for capital assets held for more than one year. The maximum long-term capital gains rate for corporations is 35%. If none of the tests set forth in Section 302(b) of the Code is met, amounts received by a shareholder or by the Depositary on behalf of a shareholder, as the case may be, who sells Common Shares pursuant to the Offer will be taxable to the shareholder as a "dividend" to the extent of such shareholder's allocable share of the Trust's current or accumulated earnings and profits, and the excess of such amounts received over the portion that is taxable as a dividend would constitute a non-taxable return of capital (to the extent of the shareholder's tax basis in the Common Shares sold pursuant to the Offer), and any amounts in excess of the shareholder's tax basis would constitute taxable gain. Thus, a shareholder's tax basis in the Common Shares sold will not reduce the amount of the "dividend." Any remaining tax basis in the Common Shares tendered to the Trust will be transferred to any remaining Common Shares held by such shareholder. In addition, if a tender of Common Shares is treated as a "dividend" to a tendering shareholder, a constructive dividend under Section 305(c) of the Code may result to a non-tendering shareholder whose proportionate interest in the earnings and assets of the Trust has been increased by such tender. The Trust believes, however, that the nature of the repurchase will be such that a tendering shareholder will qualify for "sale or exchange" treatment (as opposed to "dividend" treatment). 16. EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENTS. The Trust reserves the right, at any time and from time to time, to extend the period of time during which the Offer is pending by making a public announcement thereof. In the event that the Trust so elects to extend the tender period, the Purchase Price for the Common Shares tendered will be determined as of 5:00 P.M. Eastern Time on the Expiration Date, as extended, and the Offer will terminate as of 12:00 Midnight Eastern Time on the Expiration Date, as extended. During any such extension, all Common Shares previously tendered and not purchased or withdrawn will remain subject to the Offer. The Trust also reserves the right, at any time and from time to time up to and including the Expiration Date, to (a) terminate the Offer and not to purchase or pay for any Common Shares or, subject to applicable law, postpone payment for Common Shares upon the occurrence of any of the conditions specified in Section 6, and (b) amend the Offer in any respect by making a public announcement thereof. Such public announcement will be issued no later than 9:00 A.M. Eastern Time on the next business day after the previously scheduled Expiration Date and will disclose the approximate number of Common Shares tendered as of that date. Without limiting the manner in which the Trust may choose to make a public announcement of extension, termination or amendment, except as provided by applicable law, the Trust shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a release to the Dow Jones News Service. If the Trust materially changes the terms of the Offer or the information concerning the Offer, or if it waives a material condition of the Offer, the Trust will extend the Offer to the extent required by Rule 13e-4 promulgated under the Exchange Act. These rules require that the minimum period during which an offer must remain open following material changes in the terms of the offer or information concerning the offer (other than a change in price or a change in percentage of securities sought) will depend on the facts and circumstances, including the relative materiality of such terms or information. If (i) the Trust increases or decreases the price to be paid for Common Shares, or the Trust increases the number of Common Shares being sought by an amount exceeding 2% of the outstanding Common Shares, or the Trust decreases the number of Common Shares being sought and (ii) the Offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth business day from, and including, the date that notice of such increase or decrease is first published, sent or given, the Offer will be extended at least until the expiration of such period of ten business days. 17. MISCELLANEOUS. The Offer is not being made to, nor will the Trust accept tenders from, owners of Common Shares in any jurisdiction in which the Offer or its acceptance would not comply with the securities or Blue Sky laws of such jurisdiction. The Trust is not aware of any jurisdiction in which the making of the Offer or the tender of Common Shares would not be in compliance with the laws of such jurisdiction. However, the Trust reserves the right to exclude holders in any jurisdiction in which it is asserted that the 16 17 Offer cannot lawfully be made. So long as the Trust makes a good-faith effort to comply with any state law deemed applicable to the Offer, the Trust believes that the exclusion of holders residing in such jurisdiction is permitted under Rule 13e-4(f)(9) promulgated under the Exchange Act. In any jurisdiction the securities or Blue Sky laws of which require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on the Trust's behalf by one or more registered brokers or dealers licensed under the laws of such jurisdiction. April 20, 2001 VAN KAMPEN SENIOR FLOATING RATE FUND 17 18 BY THE NUMBERS YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited) THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF THE REPORTING PERIOD.(1)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE VARIABLE RATE** SENIOR LOAN INTERESTS 84.1% AEROSPACE/DEFENSE 2.6% $ 3,198 Aerostructures Corp., Term Loan............... NR BB- 12/31/03 $ 3,167,829 3,723 Decrane Finance Co., Term Loan............... B2 B+ 06/30/05 3,568,002 9,574 EG&G Technical Services, Inc., Term Loan......... B1 NR 08/20/07 9,438,308 2,146 Hexcel Corp., Term Loan.................... Ba3 BB- 09/15/05 2,116,440 7,432 Stellex Technologies, Inc., Term Loan (b)..... Caa2 NR 09/30/06 6,391,364 1,990 Vought Aircraft Industries, Inc., Term Loan.................... NR NR 07/30/07 to 06/30/08 1,980,879 -------------- 26,662,822 -------------- AUTOMOTIVE 5.3% 3,970 AMCAN Technologies, Inc., Term Loan......... NR NR 03/28/07 3,961,114 963 Breed Technologies, Inc., Term Loan (a)..... NR NR 12/20/04 962,999 4,685 Exide Corp., Term Loan.. Ba3 B+ 03/18/05 4,278,586 5,000 Federal-Mogul Corp., Term Loan............... B2 B+ 02/24/04 4,975,000 12,515 J.L. French Automotive Castings, Inc., Term Loan.................... B1 B+ 10/21/06 11,814,874 7,500 Meridian Automotive Systems, Inc., Term Loan.................... B1 BB- 03/31/07 7,505,424 9,850 Metalforming Technologies, Inc., Term Loan.................... NR NR 06/30/06 9,198,343
See Notes to Financial Statements A-1 19 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE AUTOMOTIVE (CONTINUED) $ 3,980 Polypore, Inc., Term Loan.................... Ba3 B+ 12/31/06 $ 3,997,114 7,155 Safelite Glass Corp., Term Loan (a)........... NR NR 09/30/07 7,154,506 -------------- 53,847,960 -------------- BEVERAGE, FOOD & TOBACCO 2.0% 18,716 Agrilink Foods, Inc., Term Loan............... B1 B+ 09/30/04 to 09/30/05 17,160,154 3,721 B & G Foods, Inc., Term Loan.................... B1 B+ 03/31/06 3,463,933 -------------- 20,624,087 -------------- BROADCASTING--CABLE 0.6% 6,975 Fairchild Corp., Term Loan.................... Ba3 BB- 04/30/06 6,556,335 -------------- BROADCASTING--DIVERSIFIED 1.4% 10,000 Comcorp Broadcasting, Inc., Term Loan......... NR NR 06/30/07 8,400,000 2,000 Emmis Communications Corp., Term Loan........ Ba2 B+ 08/31/09 2,005,312 4,550 White Knight Broadcasting, Inc., Term Loan.................... NR NR 06/30/07 3,822,000 -------------- 14,227,312 -------------- BROADCASTING--TELEVISION 0.8% 7,920 Quoram Broadcasting, Inc., Term Loan......... NR NR 09/30/07 7,926,605 566 Sinclair Broadcast Group, Inc., Term Loan.................... Ba2 BB- 09/15/05 554,450 -------------- 8,481,055 -------------- BUILDINGS & REAL ESTATE 1.1% 4,904 Builders Firstsource, Inc., Term Loan......... NR BB- 12/30/05 4,927,707 5,412 Corrections Corp. of America, Term Loan...... B3 B 12/31/02 4,221,481 1,491 Crescent Real Estate Equities Co., Term Loan.................... NR NR 02/01/04 1,494,885 -------------- 10,644,073 --------------
See Notes to Financial Statements A-2 20 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE CHEMICALS, PLASTICS & RUBBER 4.9% $ 4,975 Applied Tech Management Corp., Term Loan........ B1 NR 04/30/07 $ 4,953,670 4,938 Georgia Gulf Corp., Term Loan.................... Ba1 BBB- 11/12/06 4,955,329 4,628 Huntsman Corp., Term Loan.................... Ba2 NR 09/30/03 to 12/31/05 4,534,187 1,507 Huntsman Corp., Revolving Credit Agreement............... Ba2 NR 12/31/02 1,462,784 3,910 Huntsman ICI Chemicals, LLC, Term Loan.......... Ba3 BB 06/30/07 to 06/30/08 3,921,343 5,803 Lyondell Chemical Co., Term Loan............... Ba3 NR 06/30/05 to 05/17/06 5,909,532 4,950 MetoKote Corp., Term Loan.................... NR NR 11/02/05 4,919,070 4,945 Nutrasweet Acquisition Corp., Term Loan........ Ba3 NR 05/25/07 to 05/25/09 4,917,549 2,978 OM Group, Inc., Term Loan.................... NR NR 03/31/07 2,990,527 8,000 Pioneer America Acquisition Corp., Term Loan (a)................ Caa1 D 12/31/06 2,800,000 5,437 Sterling Pulp Chemicals, Inc., Term Loan......... B3 BB- 06/30/05 5,347,168 5,825 West American Rubber Co., Term Loan.......... NR NR 06/30/05 to 12/30/05 3,494,751 -------------- 50,205,910 -------------- CONSTRUCTION MATERIAL 1.9% 875 Dayton Superior Corp., Term Loan............... Ba3 BB- 06/01/08 878,281 6,194 Flextek Components, Inc., Term Loan (a)..... NR NR 08/31/03 2,229,856 10,192 Magnatrax Corp., Term Loan.................... NR NR 11/15/05 10,168,581 5,970 Washington Group International, Inc., Term Loan............... NR BBB- 07/07/07 5,949,481 -------------- 19,226,199 --------------
See Notes to Financial Statements A-3 21 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE CONTAINERS, PACKAGING & GLASS 3.7% $10,000 LLS Corp., Term Loan.... B1 B+ 07/31/06 $ 9,971,880 14,775 Nexpak Corp., Term Loan.................... NR NR 12/31/05 to 12/31/06 13,775,477 5,000 Pliant Corp., Term Loan.................... B2 BB- 05/31/08 4,772,362 3,891 Stone Container Corp., Term Loan............... Ba3 B+ 10/01/03 3,907,715 4,975 Tekni-Plex, Inc., Term Loan.................... Ba3 B+ 06/26/08 4,875,500 -------------- 37,302,934 -------------- DIVERSIFIED MANUFACTURING 1.0% 7,491 Citation Corp., Term Loan.................... NR B+ 12/01/07 7,355,296 2,431 Mueller Group, Inc., Term Loan............... B1 B+ 08/16/07 2,441,619 -------------- 9,796,915 -------------- ECOLOGICAL 0.4% 3,467 Allied Waste Industries, Inc., Term Loan......... Ba3 BB 07/23/06 to 07/23/07 3,413,111 3,143 Safety-Kleen Corp., Term Loan (a) (b)............ NR NR 04/03/05 to 04/03/06 958,549 -------------- 4,371,660 -------------- ELECTRONICS 4.1% 838 Audio Visual Services Corp., Term Loan........ NR NR 10/01/01 519,591 1,118 Audio Visual Services Corp., Revolving Credit Agreement............... NR NR 10/01/01 693,188 5,334 Dynamic Details, Inc., Term Loan............... B1 B+ 04/22/05 5,310,270 4,500 Kinetic Group, Inc., Term Loan............... Ba3 B- 02/28/06 4,501,047 9,781 Stratus Computer, Inc., Term Loan............... NR NR 02/26/05 9,761,599 5,000 Stream International Holdings, Inc., Term Loan.................... NR NR 12/31/06 4,968,750 5,896 Superior Telecom, Inc., Term Loan............... B2 B+ 11/27/05 5,350,891
See Notes to Financial Statements A-4 22 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE ELECTRONICS (CONTINUED) $ 2,488 Veridian Corp., Term Loan.................... Ba3 BB- 08/24/06 $ 2,499,373 7,993 Viasystems, Inc., Term Loan.................... B1 BB- 03/31/07 7,959,362 -------------- 41,564,071 -------------- ENTERTAINMENT & LEISURE 2.6% 9,860 Aspen Marketing Group, Term Loan............... NR NR 06/30/06 9,773,410 10,882 Fitness Holdings Worldwide, Inc., Term Loan.................... NR B 11/02/06 to 11/02/07 10,544,716 4,000 Six Flags Theme Parks, Inc., Term Loan......... Ba2 BB- 09/30/05 4,027,748 2,615 True Temper, Inc., Term Loan.................... B1 BB- 09/30/05 2,546,271 -------------- 26,892,145 -------------- FARMING & AGRICULTURE 0.3% 3,250 The Scotts Co., Term Loan.................... Ba3 BB 12/31/07 3,271,531 -------------- FINANCE 2.2% 2,305 Bridge Information Systems, Inc., Term Loan (a) (c)................. NR NR 05/29/05 368,790 16,788 Outsourcing Solutions, Term Loan............... B2 BB- 06/01/06 16,395,797 5,715 Rent-A-Center, Inc., Term Loan............... Ba3 BB- 01/31/06 to 01/31/07 5,659,967 -------------- 22,424,554 -------------- GROCERY 0.5% 4,990 The Pantry, Inc., Term Loan.................... B1 BB- 01/31/06 5,004,963 -------------- HEALTHCARE 3.9% 7,500 AMN Healthcare, Inc., Term Loan............... NR NR 03/31/05 7,428,511 589 Community Health Systems, Inc., Term Loan.................... NR NR 12/31/05 584,300 1,000 InteliStaf Group, Inc., Term Loan............... NR NR 10/31/07 991,281
See Notes to Financial Statements A-5 23 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE HEALTHCARE (CONTINUED) $ 8,014 LifePoint Hospitals, Inc., Term Loan......... B1 B+ 11/11/05 $ 8,050,182 4,919 Unilab Corp., Term Loan.................... B1 B+ 11/23/06 4,937,758 18,119 Vencor, Inc., Term Loan (a) (b)................. NR NR 01/15/05 17,394,520 -------------- 39,386,552 -------------- HOME & OFFICE FURNISHINGS, HOUSEWARES & DURABLE CONSUMER PRODUCTS 1.2% 8,436 Formica Corp., Term Loan.................... B1 B+ 04/30/06 8,090,423 16,043 Imperial Home Decor Group, Inc., Term Loan (a) (b)................. NR NR 03/12/04 to 03/13/06 1,331,582 5,355 Imperial Home Decor Group, Inc., Revolving Credit Agreement (a) (b)................. NR NR 03/12/04 444,450 873 Sleepmaster, LLC, Term Loan.................... B1 BB- 12/31/06 872,843 1,500 Targus Group International, Inc., Term Loan............... NR NR 08/31/06 1,491,552 -------------- 12,230,850 -------------- HOTELS, MOTELS, INNS & GAMING 2.9% 9,947 Aladdin Gaming, LLC, Term Loan............... B2 NR 03/31/07 8,057,368 2,494 Autotote Corp., Term Loan.................... B1 B+ 09/30/07 2,504,331 10,000 Extended Stay America, Inc., Term Loan......... Ba3 NR 06/30/07 10,046,430 3,474 Isle of Capri Casinos, Inc., Term Loan......... Ba2 BB- 03/02/06 to 03/02/07 3,486,235 5,473 Las Vegas Sands, Inc., Term Loan............... B2 B+ 06/30/04 5,483,615 -------------- 29,577,979 -------------- INSURANCE 0.5% 4,975 Brera GAB Robins, Inc., Term Loan............... NR NR 12/01/05 4,654,579 --------------
See Notes to Financial Statements A-6 24 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE MACHINERY 3.5% $ 2,993 Alliance Laundry Systems, LLC, Term Loan.................... B1 B+ 06/30/05 $ 2,921,428 5,000 Ashtead Group, PLC, Term Loan.................... NR NR 06/01/07 4,946,875 7,250 Gleason Corp., Term Loan.................... NR NR 02/18/08 7,280,702 15,000 Ocean Rig ASA--(Norway), Term Loan............... NR NR 06/01/08 14,116,988 3,190 Terex Corp., Term Loan.. Ba3 BB- 03/06/06 3,186,177 2,989 Weigh-Tronix, LLC, Term Loan.................... NR NR 06/30/07 2,970,075 -------------- 35,422,245 -------------- MEDICAL PRODUCTS & SUPPLIES 4.1% 10,000 Alliance Imaging, Inc., Term Loan............... B1 NR 11/02/07 to 11/02/08 9,858,330 6,300 Charles River Laboratories, Inc., Term Loan.................... Ba3 BB- 09/29/07 6,324,839 14,849 Dade Behring, Inc., Term Loan.................... NR B 06/30/06 to 06/30/07 10,691,457 9,925 National Nephrology Associates, Inc., Term Loan.................... B1 B+ 12/31/05 9,866,075 5,136 Stryker Corp., Term Loan.................... Ba1 BBB- 12/04/05 5,163,941 -------------- 41,904,642 -------------- MINING, STEEL, IRON & NON-PRECIOUS METALS 1.9% 15,689 Ispat Inland, Term Loan.................... Ba3 BB- 07/16/05 to 07/16/06 11,296,142 2,695 P&L Coal Holdings Corp., Term Loan............... Ba2 NR 06/30/06 2,695,760 4,950 UCAR International, Inc., Term Loan......... Ba3 BB- 12/30/07 4,895,277 -------------- 18,887,179 --------------
See Notes to Financial Statements A-7 25 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE NON-DURABLE CONSUMER PRODUCTS 1.5% $ 8,072 American Marketing Industries, Inc., Term Loan.................... NR NR 11/30/04 to 11/30/05 $ 7,518,137 992 American Safety Razor Co., Term Loan.......... B1 B+ 04/30/07 988,734 1,636 GFSI, Inc., Term Loan... Ba3 NR 03/31/04 1,609,882 4,939 Norcorp, Inc., Term Loan.................... NR NR 05/30/06 to 11/30/06 4,906,196 -------------- 15,022,949 -------------- PERSONAL & MISCELLANEOUS SERVICES 1.5% 2,466 Coinmach Laundry Corp., Term Loan............... NR BB- 12/31/04 2,405,668 11,953 DIMAC Corp., Term Loan (b)..................... NR NR 06/30/06 to 12/30/06 6,215,556 414 DIMAC Corp., Debtor in Possession (b).......... NR NR 03/31/01 414,208 9,454 Telespectrum Worldwide, Inc., Term Loan......... NR NR 12/31/01 to 12/31/03 6,618,034 -------------- 15,653,466 -------------- PHARMACEUTICALS 0.1% 988 Bergen Brunswig Corp., Term Loan............... NR BB 03/31/06 989,282 -------------- PRINTING & PUBLISHING 7.0% 4,974 21st Century Newspapers, Term Loan............... NR NR 09/15/05 4,949,552 4,963 American Reprographics Co., Term Loan.......... NR NR 03/31/08 4,986,212 4,873 Check Printers, Inc., Term Loan............... NR NR 06/30/05 4,761,180 8,500 Commerce Connect Media, Inc., Term Loan......... NR NR 12/31/07 8,432,260 9,900 Haights Cross Communications, LLC, Term Loan............... B2 B+ 12/10/06 9,323,981 4,975 Liberty Group Operating, Inc., Term Loan......... B1 B 03/31/07 4,984,328 4,888 Medical Arts Press, Inc., Term Loan......... NR NR 05/16/06 4,910,828
See Notes to Financial Statements A-8 26 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE PRINTING & PUBLISHING (CONTINUED) $ 6,396 Penton Media, Inc., Term Loan.................... Ba3 BB- 06/30/07 $ 6,235,462 5,000 PRIMEDIA, Inc., Term Loan.................... NR BB- 07/31/04 4,992,190 4,026 TWP, Inc., Term Loan.... Ba3 B+ 10/01/04 3,911,199 5,951 Vertis, Inc., Term Loan.................... B1 BB- 12/06/08 5,847,302 5,985 Vutek, Inc., Term Loan.................... NR NR 06/30/07 5,932,815 2,031 Ziff-Davis Media, Inc., Term Loan............... Ba3 B+ 03/31/07 2,028,402 -------------- 71,295,711 -------------- RESTAURANTS & FOOD SERVICE 1.5% 2,600 AFC Enterprises, Inc., Term Loan............... Ba2 BB- 06/30/02 2,590,513 7,500 Captain D's, Inc., Term Loan.................... B2 B+ 12/31/01 6,862,528 1,384 Carvel Corp., Term Loan.................... NR NR 06/30/01 1,365,625 4,344 Domino's Pizza, Inc., Term Loan............... B1 B+ 12/21/06 to 12/21/07 4,365,129 -------------- 15,183,795 -------------- RETAIL--OFFICE PRODUCTS 0.2% 3,760 U.S. Office Products Co., Term Loan.......... Caa1 CCC- 06/09/06 2,331,253 -------------- RETAIL--OIL & GAS 1.2% 7,396 Barjan Products, LLC, Term Loan............... NR NR 05/31/06 7,427,997 4,975 Kwik Trip, Term Loan.... NR NR 07/27/07 4,931,621 -------------- 12,359,618 -------------- RETAIL--STORES 2.1% 7,051 Kirklands Holdings, Term Loan.................... NR NR 06/30/02 7,051,024 14,000 Rite Aid Corp., Term Loan.................... B1 BB- 08/01/02 13,860,000 -------------- 20,911,024 -------------- TELECOMMUNICATIONS--LOCAL EXCHANGE CARRIERS 3.5% 12,000 360networks, Inc., Term Loan.................... B1 BB- 10/24/07 11,709,996 2,973 Alaska Communications Systems Holdings, Inc., Term Loan............... B1 BB 11/14/07 to 05/14/08 2,967,523
See Notes to Financial Statements A-9 27 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE TELECOMMUNICATIONS--LOCAL EXCHANGE CARRIERS (CONTINUED) $ 5,000 Cincinnati Bell, Inc., Term Loan............... Ba1 BB+ 12/30/06 $ 5,013,670 2,000 McLeodUSA, Inc., Term Loan.................... Ba2 BB- 05/31/08 2,003,334 9,190 Orius Corp., Term Loan.. NR B+ 12/14/06 8,914,519 5,000 Rural Cellular Corp., Term Loan............... B1 B+ 10/03/08 to 04/03/09 4,989,065 -------------- 35,598,107 -------------- TELECOMMUNICATIONS--LONG DISTANCE 1.3% 14,000 Pacific Crossing, Ltd., Term Loan............... NR NR 07/28/06 13,282,500 -------------- TELECOMMUNICATIONS--PAGING 0.0% 10,973 TSR Wireless, LLC, Term Loan (a) (b)............ NR NR 06/30/05 0 -------------- TELECOMMUNICATIONS--WIRELESS 4.3% 15,000 BCP SP, Ltd., Term Loan.................... NR NR 03/31/02 to 03/31/05 14,702,668 5,000 Crown Castle International Corp., Term Loan............... Ba3 BB- 03/15/08 5,024,305 3,500 Nextel Finance Co., Term Loan.................... Ba2 BB- 06/30/08 to 12/31/08 3,510,434 5,000 Nextel Partners, Inc., Term Loan............... B2 B- 07/29/08 5,017,710 10,000 VoiceStream Wireless Corp., Term Loan........ B1 B+ 06/30/09 9,934,380 5,000 Western Wireless Corp., Term Loan............... Ba2 BB 09/30/08 5,016,145 -------------- 43,205,642 -------------- TEXTILES & LEATHER 2.0% 18,955 Glenoit Corp., Term Loan.................... Caa1 D 12/31/03 to 06/30/04 14,784,511 5,397 Humphrey's, Inc., Term Loan.................... NR NR 01/15/03 1,322,151
See Notes to Financial Statements A-10 28 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BANK LOAN PRINCIPAL RATINGS+ AMOUNT -------------- (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE TEXTILES & LEATHER (CONTINUED) $ 3,044 Joan Fabrics Corp., Term Loan.................... NR BB- 06/30/05 to 06/30/06 $ 2,966,271 1,703 Norcross Safety Products, LLC, Term Loan.................... NR NR 10/02/05 1,670,929 -------------- 20,743,862 -------------- TRANSPORTATION--CARGO 2.4% 4,340 Atlas Freighter Leasing, Inc., Term Loan......... NR NR 04/20/05 to 04/20/06 4,194,496 3,936 Evergreen International Aviation, Inc., Term Loan.................... NR NR 05/02/04 3,920,780 3,474 Gemini Leasing, Inc., Term Loan............... B1 NR 08/12/05 3,477,925 4,860 North American Van Lines, Inc., Term Loan.................... B1 B+ 11/18/07 4,550,387 7,977 OmniTrax Railroads, LLC, Term Loan............... NR NR 05/14/05 7,894,773 -------------- 24,038,361 -------------- TRANSPORTATION--PERSONAL 1.3% 18,363 Motor Coach Industries International, Inc., Term Loan............... Ba3 BB- 06/16/06 13,496,749 -------------- TRANSPORTATION--RAIL MANUFACTURING 0.2% 2,978 RailWorks Corp., Term Loan.................... B3 B 09/30/06 2,471,325 -------------- UTILITIES 0.6% 5,970 Western Resources, Inc., Term Loan............... NR NR 03/17/03 6,024,727 -------------- TOTAL VARIABLE RATE** SENIOR LOAN INTERESTS 84.1%........................ 855,776,923 --------------
EQUITIES 0.2% Breed Technologies, Inc. (Warrants for 126,731 common shares) (d) (e)........................................... 718,565 Flextek Components, Inc. (Warrants for 758 common shares) (d) (e)................................................... 0 Safelite Glass Corp. (321,953 common shares) (e)............ 978,737
See Notes to Financial Statements A-11 29 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BORROWER VALUE EQUITIES (CONTINUED) Safelite Realty (21,732 common shares) (d) (e).............. $ 0 Stream International, Inc. (Warrants for 286,063 common shares) (d) (e)........................................... 0 -------------- TOTAL EQUITIES.............................................. 1,697,302 -------------- TOTAL LONG-TERM INVESTMENTS 84.3% (Cost $955,009,243)....................................... 857,474,225 -------------- SHORT-TERM INVESTMENTS 15.2% COMMERCIAL PAPER 7.3% Centex Corp. ($15,000,000 par, maturing 02/09/01, yielding 6.63%).................................................... 14,977,900 Chevron Phillips Chemical Co. ($18,400,000 par, maturing 02/09/01, yielding 6.55% to 6.65%)........................ 18,372,995 Comdisco, Inc. ($15,000,000 par, maturing 02/08/01, yielding 6.70% to 6.75%)........................................... 14,980,361 ConAgra Foods, Inc. ($10,000,000 par, maturing 02/05/01, yielding 6.60%)........................................... 9,992,667 TRW, Inc. ($4,900,000 par, maturing 02/06/01, yielding 6.85%).................................................... 4,895,338 TXU Corp. ($11,000,000 par, maturing 02/12/01, yielding 6.70%).................................................... 10,977,481 -------------- TOTAL COMMERCIAL PAPER...................................... 74,196,742 -------------- SHORT-TERM LOAN PARTICIPATIONS 7.7% Chevron Philips Chemical Co. ($4,200,000 par, maturing 02/01/01, yielding 6.50%)................................. 4,200,000 Cox Communications, Inc. ($15,000,000 par, maturing 02/01/01, yielding 6.50%)................................. 15,000,000 Federated Department Stores, Inc. ($1,200,000 par, maturing 02/01/01, yielding 6.50%)................................. 1,200,000 NiSource, Inc. ($13,000,000 par, maturing 02/05/01 to 02/09/01, yielding 6.60% to 6.62%)........................ 13,000,000 Tampa Electric Co. ($10,000,000 par, maturing 02/01/01, yielding 5.95%)........................................... 10,000,000 TRW, Inc. ($4,900,000 par, maturing 02/01/01, yielding 6.50%).................................................... 10,000,000 WorldCom, Inc. ($25,000,000 par, maturing 02/01/01, yielding 6.60% to 6.75%)........................................... 25,000,000 -------------- TOTAL SHORT-TERM LOAN PARTICIPATIONS........................ 78,400,000 --------------
See Notes to Financial Statements A-12 30 YOUR FUND'S INVESTMENTS January 31, 2001 (Unaudited)
BORROWER VALUE TIME DEPOSIT 0.2% State Street Bank & Trust Corp. ($2,000,000 par, 5.625% coupon, dated 01/31/01, to be sold on 02/01/01 at $2,000,313)............................................... $ 2,000,000 -------------- TOTAL SHORT-TERM INVESTMENTS 15.2% (Cost $154,596,742)....................................... 154,596,742 -------------- TOTAL INVESTMENTS 99.5% (Cost $1,109,605,985)..................................... 1,012,070,967 OTHER ASSETS IN EXCESS OF LIABILITIES 0.5%................. 5,169,580 -------------- NET ASSETS 100.0%.......................................... $1,017,240,547 ==============
NR--Not rated + Bank Loans rated below Baa by Moody's Investor Service, Inc. or BBB by Standard & Poor's Group are considered to be below investment grade. (1) Industry percentages are calculated as a percentage of net assets. (a) This Senior Loan interest is non-income producing. (b) This borrower has filed for protection in federal bankruptcy court. (c) Subsequent to January 31, 2001, this borrower has filed for protection in federal bankruptcy court. (d) Non-income producing security as this stock currently does not declare dividends. (e) Restricted Security * Senior Loans in the Fund's portfolio generally are subject to mandatory and/or optional prepayment. Because of these mandatory prepayment conditions and because there may be significant economic incentives for a Borrower to prepay, prepayments of Senior Loans in the Fund's portfolio may occur. As a result, the actual remaining maturity of Senior Loans held in the Fund's portfolio may be substantially less than the stated maturities shown. Although the Fund is unable to accurately estimate the actual remaining maturity of individual Senior Loans, the Fund estimates that the actual average maturity of the Senior Loans held in its portfolio will be approximately 18-24 months. ** Senior Loans in which the Fund invests generally pay interest at rates which are periodically redetermined by reference to a base lending rate plus a premium. These base lending rates are generally (i) the lending rate offered by one or more major European banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the prime rate offered by one or more major United States banks and (iii) the certificate of deposit rate. Senior Loans are generally considered to be restricted in that the Fund ordinarily is contractually obligated to receive approval from the Agent Bank and/or borrower prior to the disposition of a Senior Loan. See Notes to Financial Statements A-13 31 FINANCIAL STATEMENTS Statement of Assets and Liabilities January 31, 2001 (Unaudited) ASSETS: Total Investments (Cost $1,109,605,985)..................... $1,012,070,967 Receivables: Investments Sold.......................................... 20,511,094 Interest.................................................. 9,628,742 Fund Shares Sold.......................................... 659,931 Prepaid Expenses............................................ 506,710 Other....................................................... 46,410 -------------- Total Assets............................................ 1,043,423,854 -------------- LIABILITIES: Payables: Custodian Bank............................................ 21,990,302 Income Distributions...................................... 1,577,194 Investment Advisory Fee................................... 893,064 Distributor and Affiliates................................ 484,108 Administrative Fee........................................ 254,686 Initial Offering and Registration Costs................... 41,558 Accrued Expenses............................................ 866,693 Trustees' Deferred Compensation and Retirement Plans........ 75,702 -------------- Total Liabilities....................................... 26,183,307 -------------- NET ASSETS.................................................. $1,017,240,547 ============== NET ASSETS CONSIST OF: Common Shares ($.01 par value with an unlimited number of shares authorized, 114,790,745 shares issued and outstanding).............................................. $ 1,147,907 Paid in Surplus............................................. 1,181,582,432 Accumulated Undistributed Net Investment Income............. 4,659,362 Accumulated Net Realized Loss............................... (72,614,136) Net Unrealized Depreciation................................. (97,535,018) -------------- NET ASSETS.................................................. $1,017,240,547 ============== NET ASSET VALUE PER COMMON SHARE ($1,017,240,547 divided by 114,790,745 shares outstanding)........................... $ 8.86 ==============
See Notes to Financial Statements A-14 32 Statement of Operations For the Six Months Ended January 31, 2001 (Unaudited) INVESTMENT INCOME: Interest.................................................... $ 60,701,939 Fees........................................................ 21,644 Other....................................................... 888,545 ------------ Total Income............................................ 61,612,128 ------------ EXPENSES: Investment Advisory Fee..................................... 5,690,100 Administrative Fee.......................................... 1,497,395 Service Fee................................................. 898,437 Shareholder Services........................................ 580,569 Legal....................................................... 338,150 Custody..................................................... 200,502 Trustees' Fees and Related Expenses......................... 25,297 Other....................................................... 859,006 ------------ Total Expenses.......................................... 10,089,456 ------------ NET INVESTMENT INCOME....................................... $ 51,522,672 ============ REALIZED AND UNREALIZED GAIN/LOSS: Net Realized Loss........................................... $(72,607,098) ------------ Unrealized Appreciation/Depreciation: Beginning of the Period................................... (85,096,571) End of the Period......................................... (97,535,018) ------------ Net Unrealized Depreciation During the Period............... (12,438,447) ------------ NET REALIZED AND UNREALIZED LOSS............................ $(85,045,545) ============ NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $(33,522,873) ============
See Notes to Financial Statements A-15 33 Statement of Changes in Net Assets For the Six Months Ended January 31, 2001 and the Year Ended July 31, 2000 (Unaudited)
SIX MONTHS ENDED YEAR ENDED JANUARY 31, 2001 JULY 31, 2000 --------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income........................... $ 51,522,672 $ 116,971,614 Net Realized Gain/Loss.......................... (72,607,098) 3,089,393 Net Unrealized Depreciation During the Period... (12,438,447) (84,184,679) -------------- -------------- Change in Net Assets from Operations............ (33,522,873) 35,876,328 -------------- -------------- Distributions from Net Investment Income........ (50,467,727) (116,807,793) Distributions from Net Realized Gain............ (2,869,516) (1,076,619) -------------- -------------- Total Distributions......................... (53,337,243) (117,884,412) -------------- -------------- NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.................................... (86,860,116) (82,008,084) -------------- -------------- FROM CAPITAL TRANSACTIONS: Proceeds from Shares Sold....................... 56,259,606 568,093,865 Net Asset Value of Shares Issued Through Dividend Reinvestment......................... 34,777,539 81,211,399 Cost of Shares Repurchased...................... (444,545,090) (581,641,209) -------------- -------------- NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.................................. (353,507,945) 67,664,055 -------------- -------------- TOTAL DECREASE IN NET ASSETS.................... (440,368,061) (14,344,029) NET ASSETS: Beginning of the Period......................... 1,457,608,608 1,471,952,637 -------------- -------------- End of the Period (Including accumulated undistributed net investment income of $4,659,362 and $3,604,417, respectively)...... $1,017,240,547 $1,457,608,608 ============== ==============
See Notes to Financial Statements A-16 34 Statement of Cash Flows For the Six Months Ended January 31, 2001 (Unaudited) CHANGE IN NET ASSETS FROM OPERATIONS........................ $ (33,522,873) ------------- Adjustments to Reconcile the Change in Net Assets from Operations to Net Cash Used for Operating Activities: Decrease in Investments at Value.......................... 437,561,147 Decrease in Interest Receivable........................... 1,403,144 Increase in Receivable for Investments Sold............... (20,511,094) Decrease in Prepaid Expenses.............................. 9,426 Increase in Other Assets.................................. (12,786) Decrease in Investment Advisory Fees Payable.............. (339,976) Decrease in Administrative Fees Payable................... (89,468) Increase in Distributor & Affiliates Payable.............. 110,059 Increase in Accrued Expenses.............................. 102,312 Increase in Trustees' Deferred Compensation and Retirement Plans................................................... 9,657 ------------- Total Adjustments....................................... 418,242,421 ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES................... 384,719,548 ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Shares Sold................................... 58,277,856 Change in Intra-day Credit Line with Custodian Bank......... 20,462,657 Payments on Shares Repurchased.............................. (444,596,879) Cash Dividends Paid......................................... (15,993,666) Capital Gain Distributions Paid............................. (2,869,516) ------------- Net Cash Provided by Financing Activities................. (384,719,548) ------------- NET INCREASE IN CASH........................................ -0- Cash at Beginning of the Period............................. -0- ------------- CASH AT END OF THE PERIOD................................... $ -0- =============
See Notes to Financial Statements A-17 35 Financial Highlights (Unaudited) THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
MARCH 27, 1998 SIX MONTHS (COMMENCEMENT ENDED YEAR ENDED JULY 31, OF INVESTMENT JANUARY 31, ------------------------- OPERATIONS) TO 2001 2000 1999 JULY 31, 1998 ---------------------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD......................... $ 9.58 $ 10.09 $ 10.04 $ 10.00 -------- -------- -------- ------- Net Investment Income.......... .42 .72 .65 .21 Net Realized and Unrealized Gain/Loss.................... (.71) (.50) .04 .04 -------- -------- -------- ------- Total from Investment Operations..................... (.29) .22 .69 .25 -------- -------- -------- ------- Less: Distributions from Net Investment Income............ .40 .72 .64 .21 Distributions from Realized Gain......................... .03 .01 -0- -0- -------- -------- -------- ------- Total Distributions.............. .43 .73 .64 .21 -------- -------- -------- ------- NET ASSET VALUE, END OF THE PERIOD......................... $ 8.86 $ 9.58 $ 10.09 $ 10.04 ======== ======== ======== ======= Total Return* (a)................ -3.37%** 2.27% 7.09% 2.52%** Net Assets at End of the Period (In millions).................. $1,017.2 $1,457.6 $1,472.0 $ 411.4 Ratio of Expenses to Average Net Assets*........................ 1.68% 1.64% 1.60% 1.70% Ratio of Net Investment Income to Average Net Assets*............ 8.60% 7.37% 6.66% 6.33% Portfolio Turnover (b)........... 10%** 54% 23% 4%** * If certain expenses had not been waived by Van Kampen, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets......................... N/A N/A 1.61% 1.92% Ratio of Net Investment Income to Average Net Assets............. N/A N/A 6.65% 6.11%
** Non-Annualized N/A = Not Applicable. (a) Total return assumes an investment at the beginning of the period indicated, reinvestment of all distributions for the period and tender of all shares at the end of the period indicated, excluding payment of 1% imposed on most shares accepted by the Fund for repurchase which have been held for less than one year. If the early withdrawal charge was included, total return would be lower. (b) Calculation includes the proceeds from principal repayments and sales of variable rate senior loan interests. See Notes to Financial Statements A-18 36 NOTES TO FINANCIAL STATEMENTS January 31, 2001 (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen Senior Floating Rate Fund (the "Fund") is registered as a non- diversified closed-end management investment company under the Investment Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment objective is to provide a high level of current income, consistent with preservation of capital. The Fund seeks to achieve its objective by investing primarily in a portfolio of interests in floating or variable rate senior loans to corporations, partnerships and other entities which operate in a variety of industries and geographical regions. The Fund commenced investment operations on March 27, 1998. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION The Fund's Variable Rate Senior Loan interests ("Loan interests") 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 and securities for which reliable market quotes are readily available are valued at the mean of such bid and ask quotes and all other Senior Loans securities and assets of the Fund are valued at fair value in good faith following procedures established by the Board of Trustees. Subject to criteria established by the Fund's Board of Trustees about the availability and reliability of market indicators obtained from independent pricing sources approved by the Board, certain Senior Loans will be valued on the basis of such indicators. Other Senior Loans will be valued by independent pricing sources approved by the Fund's 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, interest rate redetermination period and maturity), the credit worthiness of the Borrower, the current interest rate, the period until next interest rate redetermination and the maturity of such Senior Loan interests. 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 Loan interests in the Fund's portfolio. The fair value of Senior Loans are reviewed and approved by the Fund's Valuation Committee A-19 37 NOTES TO FINANCIAL STATEMENTS January 31, 2001 (Unaudited) consistent with a methodology established by the Fund's Trustees. The Fund and Trustees will continue to monitor development in the Senior Loan market and will make modifications to the current valuation methodology as deemed appropriate. Equity securities are valued on the basis of prices furnished by pricing services or as determined in good faith by the Adviser under the direction of the Board of Trustees. Short-term securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. Short-term loan participations are valued at cost in the absence of any indication of impairment. B. SECURITY TRANSACTIONS Investment transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Facility fees received are treated as market discounts. Market premiums are amortized and discounts are accreted over the stated life of each applicable security. Other income is comprised primarily of amendment fees. Amendment fees are earned as compensation for agreeing to changes in loan agreements. 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. Net realized gains or losses may differ for financial reporting and tax purposes primarily as a result of the deferral of losses relating to wash sale transactions. At January 31, 2001, for federal income tax purposes the cost of long- and short-term investments is $1,109,608,636, the aggregate gross unrealized appreciation is $4,008,705 and the aggregate gross unrealized depreciation is $101,546,374, resulting in net unrealized depreciation on long- and short-term investments of $97,537,669. E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly dividends from net investment income. Net realized gains, if any, are distributed at least annually. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income for tax purposes. A-20 38 NOTES TO FINANCIAL STATEMENTS January 31, 2001 (Unaudited) 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, the Adviser will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE DAILY NET ASSETS % PER ANNUM First $4.0 billion.......................................... .950 of 1% Next $3.5 billion........................................... .900 of 1% Next $2.5 billion........................................... .875 of 1% Over $10.0 billion.......................................... .850 of 1%
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 net assets of the Fund. The administrative services to be provided by the Administrator include monitoring the provisions of the loan agreements and any agreements with respect to participations and assignments, record keeping responsibilities with respect to interests in Variable Rate Senior Loans in the Fund's portfolio and providing certain services to the holders of the Fund's securities. For the six months ended January 31, 2001, the Fund recognized expenses of approximately $165,700 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 six months ended January 31, 2001, the Fund recognized expenses of approximately $29,600 representing Van Kampen Investments or its affiliates (collectively "Van Kampen") cost of providing legal services to the Fund, which are reported as part of legal expenses, in the statement of operations. Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as the shareholder servicing agent of the Fund. For the six months ended January 31, 2001, the Fund recognized expenses for their services of approximately $432,100. Shareholder servicing fees are determined through negotiations with the Fund's Board of Trustees and are based on competitive market benchmarks. Certain officers and trustees of the Fund are also officers and directors of Van Kampen. The Fund does not compensate its officers or trustees who are officers of Van Kampen. The Fund provides deferred compensation and retirement plans for its trustees who are not officers of Van Kampen. Under the deferred compensation plan, trustees may elect to defer all or a portion of their compensation to a later date. Benefits under the retirement plan are payable for a ten-year period and are A-21 39 NOTES TO FINANCIAL STATEMENTS January 31, 2001 (Unaudited) based upon each trustee's years of service to the Fund. The maximum annual benefit per trustee under the plan is $2,500. 3. CAPITAL TRANSACTIONS At January 31, 2001 and July 31, 2000, paid in surplus aggregated $1,181,582,432 and $1,534,716,501, respectively. Transactions in common shares were as follows:
SIX MONTHS ENDED YEAR ENDED JANUARY 31, 2001 JULY 31, 2000 Beginning Shares.................................... 152,178,276 145,951,374 ----------- ----------- Shares Sold....................................... 5,985,842 57,196,384 Shares Issued Through Dividend Reinvestment....... 3,736,676 8,251,082 Shares Repurchased................................ (47,110,049) (59,220,564) ----------- ----------- Net Increase/Decrease in Shares................... (37,387,531) 6,226,902 ----------- ----------- Ending Shares....................................... 114,790,745 152,178,276 =========== ===========
4. INVESTMENT TRANSACTIONS During the period, the costs of purchases and proceeds from investments sold and repaid, excluding short-term investments, were $110,515,091 and $541,170,282, 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 six months ended January 31, 2001, 47,110,049 shares were tendered and repurchased by the Fund. 6. EARLY WITHDRAWAL CHARGE An early withdrawal charge to recover offering expenses will be imposed in connection with most common shares held for less than one year which are accepted by the Fund for repurchase pursuant to tender offers. The early withdrawal charge of 1.00% will be payable to Van Kampen. For the six months ended January 31, 2001, Van Kampen received early withdrawal charges of approximately $825,000 in connection with tendered shares of the Fund. 7. COMMITMENTS/BORROWINGS Pursuant to the terms of certain of the Variable Rate Senior Loan agreements, the Fund had unfunded loan commitments of approximately $6,609,600 as of A-22 40 NOTES TO FINANCIAL STATEMENTS January 31, 2001 (Unaudited) January 31, 2001. The Fund generally will maintain with its custodian short-term investments having an aggregate value at least equal to the amount of unfunded loan commitments. The Fund, along with the Van Kampen Prime Rate Income Trust, has entered into a revolving credit agreement with a syndicate led by Bank of America for an aggregate of $500,000,000, which will terminate on September 12, 2001. The proceeds of any borrowing by the Fund under the revolving credit agreement shall be used for temporary liquidity purposes and funding of shareholder tender offers. Annual commitment fees of .09% are charged on the unused portion of the credit line. Borrowings under this facility will bear interest at either the LIBOR rate or the Federal Funds rate plus .50%. There have been no borrowings under this agreement to date. 8. SENIOR LOAN PARTICIPATION COMMITMENTS The Fund invests primarily in participations, assignments, or acts as a party to the primary lending syndicate of a Variable Rate 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 January 31, 2001, the following sets forth the selling participants with respect to interests in Senior Loans purchased by the Fund on a participation basis.
PRINCIPAL AMOUNT VALUE SELLING PARTICIPANT (000) (000) Canadian Imperial Bank of Commerce.......................... $ 8,626 $ 8,572 Bankers Trust............................................... 16,508 15,609 ------- ------- Total....................................................... $25,134 $24,181 ======= =======
9. SERVICE PLAN The Fund has adopted a Service Plan (the "Plan") designed to meet the service fee requirements of the sales charge rule of the National Association of Securities Dealers, Inc. The Plan governs payments for personal services and/or the maintenance of shareholder accounts. Annual fees under the Plan of .15% (.25% maximum) of net assets are accrued daily and paid quarterly. For the six months ended January 31, 2001, the Fund paid service fees of approximately $951,400 to Van Kampen. A-23 41 REPORT OF INDEPENDENT AUDITORS To the Board of Trustees and Shareholders of Van Kampen Senior Floating Rate Fund We have audited the accompanying statement of assets and liabilities of Van Kampen Senior Floating Rate Trust (the "Fund"), including the portfolio of investments as of July 31, 2000, and the related statements of operations, cash flows, changes in net assets, and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The Fund's financial statements and 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 statements. We conducted our audit 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, 2000, by correspondence with the Fund's custodian and selling or agent banks. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Van Kampen Senior Floating Rate Fund as of July 31, 2000, the results of its operations, cash flows, changes in net assets, and financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1A, the portfolio of investments includes certain loan interests for which, fair values are determined by the Fund's investment adviser under procedures approved by the Board of Trustees. Determination of fair values involves subjective judgement, as the actual market value of a particular security can be established only by negotiations between parties in a transaction. We have reviewed the procedures established by the Board of Trustees and applied by the investment adviser in determining the fair values of such loan interests and inspected the underlying documentation. We believe that, in the circumstances, the procedures are reasonable and the documentation appropriate. DELOITTE & TOUCHE LLP Chicago, Illinois September 15, 2000 A-24 42 BY THE NUMBERS YOUR FUND'S INVESTMENTS July 31, 2000 THE FOLLOWING PAGES DETAIL THE PORTFOLIO OF INVESTMENTS OF YOUR FUND AT THE END OF THE REPORTING PERIOD.(1)
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE VARIABLE RATE** SENIOR LOAN INTERESTS 94.1% AEROSPACE/DEFENSE 1.8% $ 4,782 Aerostructures Corp., Term Loan............... NR BB- 12/31/03 $ 4,720,699 13,780 Decrane Finance Co., Term Loan............... B2 B+ 09/30/05 13,781,452 7,432 Stellex Technologies, Inc., Term Loan......... Caa1 CCC- 09/30/06 7,431,818 -------------- 25,933,969 -------------- AUTOMOTIVE 4.4% 5,042 Breed Technologies, Inc., Term Loan (a) (b)............ NR NR 09/30/00 to 04/27/06 2,319,253 648 Breed Technologies, Inc., Revolving Credit Agreement (a) (b)....... NR NR 04/27/04 298,073 284 Breed Technologies, Inc., Debtor In Possession (b).......... NR NR 09/30/00 284,335 4,985 Exide Corp., Term Loan.................... Ba3 B+ 03/18/05 4,997,461 12,548 J.L. French Automotive Castings, Inc., Term Loan.................... B1 B+ 10/21/06 12,430,776 7,500 Meridian Automotive Systems, Inc., Term Loan.................... B1 BB- 03/31/07 7,490,853 9,900 Metalforming Technologies, Inc., Term Loan.................... NR NR 06/30/06 9,899,956 4,000 Polypore, Inc., Term Loan.................... Ba3 B+ 12/31/06 4,000,014
See Notes to Financial Statements A-25 43 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE AUTOMOTIVE (CONTINUED) $ 9,947 Safelite Glass Corp., Term Loan (a) (b)....... Caa1 NR 12/23/03 to 12/23/05 $ 5,468,191 3,144 Safelite Glass Corp., Revolving Credit Agreement (a) (b)....... Caa1 NR 12/23/03 1,728,394 15,000 Tenneco Automotive, Inc., Term Loan......... Ba3 BB 11/04/07 to 07/04/08 14,899,680 -------------- 63,816,986 -------------- BEVERAGE, FOOD & TOBACCO 2.6% 28,741 Agrilink Foods, Inc., Term Loan............... B1 B+ 09/30/04 to 09/30/05 28,740,512 9,250 B & G Foods, Inc., Term Loan.................... B1 B+ 03/31/06 9,245,946 -------------- 37,986,458 -------------- BROADCASTING--CABLE 0.5% 6,975 Fairchild Corp., Term Loan.................... Ba3 BB- 04/30/06 6,975,039 -------------- BROADCASTING--DIVERSIFIED 1.0% 10,000 Comcorp Broadcasting, Inc., Term Loan......... NR NR 06/30/07 10,000,024 4,550 White Knight Broadcasting, Inc., Term Loan.................... NR NR 06/30/07 4,550,011 -------------- 14,550,035 -------------- BROADCASTING--RADIO 0.5% 7,000 Cumulus Media, Inc., Term Loan............... B1 B+ 09/30/07 to 02/28/08 7,000,000 -------------- BROADCASTING--TELEVISION 1.2% 7,960 Quoram Broadcasting, Inc., Term Loan......... NR NR 09/30/07 7,959,965 8,833 Sinclair Broadcast Group, Inc., Term Loan.................... Ba2 BB- 09/15/05 8,834,182 -------------- 16,794,147 --------------
See Notes to Financial Statements A-26 44 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE BUILDINGS & REAL ESTATE 1.3% $ 4,929 Builders FirstSource, Inc., Term Loan......... NR BB- 12/30/05 $ 4,929,731 1,491 Crescent Real Estate Equities Co., Term Loan.................... NR NR 02/01/04 1,483,104 6,000 Morrison Knudsen Corp., Term Loan............... Ba1 NR 08/14/00 5,996,250 7,450 Prison Realty Trust, Inc., Term Loan......... B3 B 12/31/02 7,286,816 -------------- 19,695,901 -------------- CHEMICAL, PLASTICS & RUBBER 5.1% 4,247 Applied Tech Management Corp., Term Loan........ B1 NR 04/30/07 4,231,088 4,962 Georgia Gulf Corp., Term Loan.................... Ba1 BBB- 11/12/06 4,996,100 4,628 Huntsman Group Holdings, Term Loan............... Ba2 NR 04/01/02 4,613,284 1,026 Huntsman Group Holdings, Revolving Credit Agreement............... Ba2 NR 12/31/02 1,025,812 4,950 Huntsman ICI Chemicals LLC, Term Loan.......... Ba3 BB 06/30/07 to 06/30/08 4,987,407 14,081 Lyondell Petrochemical Co., Term Loan.......... Ba3 NR 06/30/05 to 05/17/06 14,447,930 4,975 MetoKote Corp., Term Loan.................... NR NR 11/02/05 4,975,703 10,000 Nutrasweet Co., Term Loan.................... Ba3 NR 05/25/07 to 05/25/09 9,988,086 2,993 Om Group, Inc., Term Loan.................... NR NR 03/31/07 2,999,981 8,025 Pioneer Americas Acquisition Corp., Term Loan.................... B3 B 12/31/06 8,024,117 6,220 Sterling Pulp Chemicals, Inc., Term Loan......... B3 BB- 09/30/04 6,220,670
See Notes to Financial Statements A-27 45 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE CHEMICAL, PLASTICS & RUBBER (CONTINUED) $ 3,990 Sybron Chemicals, Inc., Term Loan............... NR NR 07/31/04 $ 3,977,631 5,713 West American Rubber, Term Loan............... NR NR 06/30/05 3,999,100 -------------- 74,486,909 -------------- CONSTRUCTION MATERIALS 3.4% 875 Dayton Superior Corp., Term Loan............... Ba3 BB- 06/01/08 872,920 5,538 Flextek Components, Inc., Term Loan (a)..... NR NR 08/31/03 3,045,808 8,479 Formica Corp., Term Loan.................... B1 B+ 04/30/06 8,491,998 7,180 Hexcel Corp., Term Loan.................... Ba3 BB- 09/14/05 7,171,891 20,731 Magnatrax Corp., Term Loan.................... NR NR 11/15/05 20,731,053 9,900 Mueller Group, Inc., Term Loan............... B1 B+ 08/16/06 to 08/16/07 9,924,750 -------------- 50,238,420 -------------- CONTAINERS, PACKAGING & GLASS 3.7% 10,905 Dr. Pepper/Seven-Up Cos., Inc., Term Loan... NR NR 10/07/07 10,910,363 10,000 Huntsman Packaging Corp., Term Loan........ B1 BB- 05/31/08 10,031,250 10,000 LLS Corp., Term Loan.... B1 B+ 07/31/06 10,000,534 14,850 Mediapak Corp., Term Loan.................... NR NR 12/31/05 to 12/31/06 14,851,104 3,894 Stone Container Corp., Term Loan............... Ba3 B+ 10/01/03 3,906,148 5,000 Tekni-Plex, Inc., Term Loan.................... Ba3 B+ 06/26/08 5,028,125 -------------- 54,727,524 -------------- DIVERSIFIED MANUFACTURING 1.8% 4,938 Blount, Inc., Term Loan.................... B1 B+ 09/30/06 4,965,337 12,500 Citation Corp., Term Loan.................... NR B+ 12/01/07 12,501,694
See Notes to Financial Statements A-28 46 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE DIVERSIFIED MANUFACTURING (CONTINUED) $ 3,990 Tritech Precision, Inc., Term Loan............... B1 B+ 03/28/07 $ 3,968,996 4,983 UCAR Global Enterprises, Inc., Term Loan......... Ba3 BB- 12/31/07 4,981,778 -------------- 26,417,805 -------------- ECOLOGICAL 2.8% 40,000 Allied Waste Industries, Inc., Term Loan......... Ba3 BB 07/23/06 to 07/23/07 38,545,600 3,180 Safety-Kleen Corp., Term Loan (a) (b)............ NR NR 04/03/05 to 04/03/06 2,162,215 -------------- 40,707,815 -------------- ELECTRONICS 3.5% 7,131 Amphenol Corp., Term Loan.................... Ba2 BB 05/19/04 7,031,038 5,355 Dynamic Details, Inc., Term Loan............... B1 B+ 04/22/05 5,355,242 9,914 EG&G Technical Services, Inc., Term Loan......... B1 NR 08/20/07 9,913,772 9,844 Stratus Computers, Inc., Term Loan............... NR NR 02/26/05 9,856,055 5,000 Stream International Holdings, Inc., Term Loan.................... NR NR 12/31/06 5,000,177 5,928 Superior Telcom, Inc., Term Loan............... Ba3 B+ 11/27/05 5,910,433 8,000 Viasystems, Inc., Term Loan.................... B1 BB- 03/31/07 7,996,248 -------------- 51,062,965 -------------- ENTERTAINMENT & LEISURE 4.2% 9,930 Aspen Marketing Group, Term Loan............... NR NR 06/30/06 9,930,697 15,936 Fitness Holdings Worldwide, Inc., Term Loan.................... NR B+ 11/02/06 to 11/02/07 15,789,384 15,000 SFX Entertainment, Inc., Term Loan............... B1 NR 06/30/06 15,015,000
See Notes to Financial Statements A-29 47 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE ENTERTAINMENT & LEISURE (CONTINUED) $ 17,000 Six Flags Theme Parks, Inc., Term Loan......... Ba2 B+ 09/30/05 $ 17,111,571 3,185 True Temper Sports, Inc., Term Loan......... B1 BB- 09/30/05 3,185,171 -------------- 61,031,823 -------------- FINANCE 2.8% 7,305 Bridge Information Systems, Inc., Term Loan.................... NR NR 05/29/05 7,306,036 16,873 Outsourcing Solutions, Term Loan............... B2 BB- 06/01/06 16,832,951 10,000 Paul G. Allen, Term Loan.................... NR NR 06/10/03 9,995,667 6,000 Sovereign Bancorp, Inc., Term Loan............... Ba3 NR 11/14/03 6,022,500 -------------- 40,157,154 -------------- GROCERY 0.5% 7,523 The Pantry, Inc., Term Loan.................... B1 BB- 01/31/06 7,523,400 -------------- HEALTHCARE 4.5% 6,300 Charles River Laboratories, Inc., Term Loan.................... B1 B+ 09/29/07 6,300,000 5,000 Columbia/HCA Healthcare Corp., Term Loan........ NR NR 09/13/01 4,946,882 14,925 Dade Behring, Inc., Term Loan.................... Ba3 B+ 06/30/06 to 06/30/07 14,924,193 8,055 LifePoint Hospitals, Inc., Term Loan......... B1 B+ 11/11/05 8,059,796 9,975 National Nephrology Associates, Inc., Term Loan.................... B1 B+ 12/31/05 9,975,373 4,944 Unilab Corp., Term Loan.................... B1 B+ 11/23/06 4,945,092 18,119 Vencor, Inc., Term Loan (a) (b)............ NR NR 01/15/05 15,763,783 -------------- 64,915,119 --------------
See Notes to Financial Statements A-30 48 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE HOME & OFFICE FURNISHINGS, HOUSEWARES & DURABLE CONSUMER PRODUCTS 2.1% $ 16,043 Imperial Home Decor Group, Inc., Term Loan (a) (b)............ NR NR 03/12/04 to 03/13/06 $ 9,306,205 5,355 Imperial Home Decor Group, Inc., Revolving Credit Agreement (a) (b)....... NR NR 03/12/04 3,103,405 4,913 Medical Arts Press, Inc., Term Loan......... NR NR 05/16/06 4,912,061 13,402 Rent-A-Center, Inc., Term Loan............... Ba3 BB- 01/31/06 to 12/31/07 13,359,207 -------------- 30,680,878 -------------- HOTELS, MOTELS, INNS & GAMING 3.5% 10,000 Aladdin Gaming LLC, Term Loan.................... B2 NR 08/25/06 10,000,007 15,000 Extended Stay America, Inc., Term Loan......... Ba3 NR 12/31/03 to 06/30/07 14,961,470 9,973 FelCor Lodging LP, Term Loan.................... Ba2 BB 03/31/04 9,931,774 3,491 Isle Of Capri Casinos, Inc., Term Loan......... Ba2 BB- 03/02/06 to 03/02/07 3,510,578 5,500 Las Vegas Sands, Inc., Term Loan............... NR B+ 07/31/04 5,479,858 7,569 Meditrust Corp., Revolving Credit Agreement............... NR NR 07/17/01 7,569,735 -------------- 51,453,422 -------------- INSURANCE 0.3% 5,000 Brera Gab Robins, Inc., Term Loan............... NR NR 12/01/05 5,000,104 -------------- MACHINERY 4.0% 3,000 Alliance Laundry Systems LLC, Term Loan.......... B1 B+ 06/30/05 2,985,000 15,000 Ashtead Group PLC, Term Loan.................... NR NR 06/01/07 14,913,506 4,970 Coinmach Corp., Term Loan.................... NR BB- 12/31/04 to 06/30/05 4,951,912 7,323 Gleason Corp., Term Loan.................... NR NR 02/18/08 7,305,005
See Notes to Financial Statements A-31 49 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE MACHINERY (CONTINUED) $ 15,000 Ocean Rig (Norway), Term Loan.................... NR NR 06/01/08 $ 15,001,271 9,834 Terex Corp., Term Loan.................... Ba3 BB- 03/06/06 9,844,058 3,000 Weigh-Tronix LLC, Term Loan.................... NR NR 06/30/07 2,985,000 -------------- 57,985,752 -------------- MEDICAL PRODUCTS & SUPPLIES 1.9% 15,000 Alliance Imaging, Inc., Term Loan............... B1 NR 11/02/07 to 11/02/08 14,887,500 5,162 Stryker Corp., Term Loan.................... Ba2 BB 12/04/05 5,186,488 7,860 Wilson Greatbatch, Ltd., Term Loan............... NR NR 07/30/04 7,860,229 -------------- 27,934,217 -------------- MINING, STEEL, IRON & NON-PRECIOUS METALS 1.1% 15,770 Ispat Inland, Term Loan.................... Ba3 BB 07/16/05 to 07/16/06 15,702,066 -------------- NATURAL RESOURCES 0.2% 3,268 P&L Coal Holdings Corp., Term Loan............... Ba2 NR 06/30/06 3,263,400 -------------- NON-DURABLE CONSUMER GOODS 0.1% 997 American Safety Razor Co., Term Loan.......... B1 B+ 04/30/07 994,157 -------------- PAPER & FOREST PRODUCTS 0.6% 8,745 Pacifica Papers, Inc., Term Loan............... Ba2 BB 03/12/06 8,788,725 -------------- PERSONAL & MISCELLANEOUS SERVICES 1.6% 917 Boyds Collection, Ltd., Term Loan............... Ba3 B+ 04/21/06 911,107 18,762 Davel Financing Co. LLC, Term Loan (c)........... NR NR 06/23/05 3,002,000 13,500 DIMAC Corp., Term Loan (b)................ NR NR 06/30/06 to 12/30/06 10,935,000 9,525 Telespectrum Worldwide, Inc., Term Loan......... NR NR 12/31/01 to 12/31/03 9,527,735 -------------- 24,375,842 --------------
See Notes to Financial Statements A-32 50 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE PHARMACEUTICALS 0.6% $ 8,620 King Pharmaceuticals, Inc., Term Loan......... B1 BB- 12/18/06 $ 8,631,508 -------------- PRINTING & PUBLISHING 5.1% 5,000 21st Century Newspaper, Term Loan............... B3 NR 09/15/05 4,981,536 6,380 Advanstar Communications, Term Loan.................... Ba3 B+ 04/30/05 6,379,673 4,988 American Reprographics, Term Loan............... NR NR 03/31/08 4,942,311 5,990 Big Flower Press Holdings, Inc., Term Loan.................... B1 NR 12/06/08 6,012,651 4,898 Check Printers, Inc., Term Loan............... NR NR 06/30/05 4,897,963 8,500 Commerce Connect Media, Term Loan............... NR NR 12/31/07 8,457,877 9,950 Haights Cross Comm. Operating Co., Term Loan.................... B2 B+ 12/10/06 9,951,490 5,000 Liberty Group Operating, Inc., Term Loan......... B1 B 03/31/07 4,987,828 6,429 Penton Media, Inc., Term Loan.................... Ba3 BB- 06/30/07 6,428,789 4,980 Reiman Publications, Inc., Term Loan......... NR NR 12/10/05 4,999,492 4,081 TWP LP, Term Loan....... Ba3 B+ 10/01/04 4,080,543 6,000 Vutek, Inc., Term Loan.................... NR NR 06/30/07 5,962,500 2,495 Ziff-Davis Media, Inc., Term Loan............... Ba3 B+ 03/31/07 2,499,050 -------------- 74,581,703 -------------- RESTAURANTS & FOOD SERVICE 0.6% 3,120 Americas Favorite Chicken, Inc., Term Loan.................... Ba3 BB- 06/30/02 3,120,307 1,384 Carvel Corp., Term Loan.................... NR NR 06/30/01 1,383,744 4,354 Domino's Pizza, Term Loan.................... B1 B+ 12/21/06 to 12/21/07 4,372,268 -------------- 8,876,319 --------------
See Notes to Financial Statements A-33 51 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE RETAIL--OFFICE PRODUCTS 1.0% $ 6,540 Buhrmann U.S., Inc., Term Loan............... Ba3 BB- 10/26/07 $ 6,556,445 8,804 U.S. Office Products Co., Term Loan.......... Caa1 CCC+ 06/09/06 8,363,623 -------------- 14,920,068 -------------- RETAIL--OIL & GAS 1.8% 7,433 Barjan Products LLC, Term Loan............... NR NR 05/31/06 7,396,501 5,000 Kwik Trip, Inc., Term Loan.................... NR NR 07/27/07 4,987,500 5,000 Port Arthur Coker Co., Term Loan............... Ba3 NR 07/15/07 4,743,876 9,288 Superior Energy Services, Inc., Term Loan.................... Ba3 BB- 06/30/06 9,288,760 -------------- 26,416,637 -------------- RETAIL--STORES 2.5% 14,738 Duane Reade, Inc., Term Loan.................... B1 B+ 02/15/06 14,738,547 7,087 Kirklands, Holdings, Term Loan............... NR NR 06/30/02 7,087,096 14,000 Rite Aid Corp., Term Loan.................... Ba3 B 08/01/02 13,930,003 -------------- 35,755,646 -------------- TELECOMMUNICATIONS--LOCAL EXCHANGE CARRIERS 2.2% 2,973 Alaska Communications Systems Holdings, Inc., Term Loan............... B1 BB 11/14/07 to 05/14/08 2,974,559 5,000 Cincinnati Bell, Inc., Term Loan............... Ba1 NR 12/30/06 5,010,115 7,000 McLeodUSA, Inc., Term Loan.................... Ba2 BB- 05/31/08 7,015,624 11,743 Orius Corp., Term Loan.................... NR B+ 12/14/06 11,744,126 5,000 Rural Cellular Corp., Term Loan............... B1 B+ 10/03/08 to 04/03/09 4,994,375 -------------- 31,738,799 -------------- TELECOMMUNICATIONS--LONG DISTANCE 1.6% 24,000 Pacific Crossing, Ltd., Term Loan............... NR NR 07/28/06 24,000,000 --------------
See Notes to Financial Statements A-34 52 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE TELECOMMUNICATIONS--PAGING 0.8% $ 10,973 TSR Wireless LLC, Term Loan.................... NR NR 06/30/05 $ 10,972,500 -------------- TELECOMMUNICATIONS--WIRELESS 7.2% 5,000 American Cellular Corp., Term Loan............... Ba3 B+ 03/31/08 to 03/31/09 5,000,390 15,000 BCP SP Ltd., Term Loan.. NR NR 03/31/00 to 03/31/05 14,851,437 5,000 Crown Castle International Corp., Term Loan............... Ba3 BB- 03/15/08 5,015,180 53,996 Iridium Operating LLC, Term Loan (a) (b)....... NR D 12/29/00 11,879,117 19,500 Nextel Finance Co., Term Loan.................... Ba2 BB- 06/30/08 to 03/31/09 19,554,599 15,000 Nextel Partners, Inc., Term Loan............... Ba2 B- 07/29/08 15,081,255 5,000 Telecorp PCS, Inc., Term Loan.................... B2 NR 12/05/07 4,994,790 23,250 VoiceStream Wireless Corp., Term Loan........ B1 B+ 02/25/08 to 02/25/09 23,147,950 5,000 Western Wireless Corp., Term Loan............... Ba2 BB 09/30/08 5,021,250 -------------- 104,545,968 -------------- TEXTILES & LEATHER 3.7% 8,113 American Marketing Industries, Inc., Term Loan.................... NR NR 11/30/04 to 11/30/05 8,114,153 1,645 GFSI, Inc., Term Loan... Ba3 NR 03/31/04 1,628,674 18,955 Glenoit Corp., Term Loan (c)................ Caa1 D 12/31/03 to 06/30/04 16,682,696 5,400 Humphrey's, Inc., Term Loan.................... NR NR 01/15/03 3,832,952 3,370 Jo-Ann Fabrics Corp., Term Loan............... Ba3 BB- 06/30/05 3,353,361 4,968 Norcorp, Inc., Term Loan.................... NR NR 05/30/06 to 11/30/06 4,968,252
See Notes to Financial Statements A-35 53 YOUR FUND'S INVESTMENTS July 31, 2000
PRINCIPAL BANK LOAN AMOUNT RATINGS+ (000) BORROWER MOODY'S S&P STATED MATURITY* VALUE TEXTILES & LEATHER (CONTINUED) $ 13,755 Norcross Safety Products, Term Loan..... NR NR 10/02/05 $ 13,750,181 2,000 Sleepmaster LLC, Term Loan.................... B1 BB- 12/31/06 1,992,507 -------------- 54,322,776 -------------- TRANSPORTATION--CARGO 2.6% 4,903 Atlas Freighter Leasing, Term Loan............... NR NR 04/20/05 to 04/20/06 4,884,325 3,936 Evergreen International Aviation, Inc., Term Loan.................... NR NR 05/02/04 3,901,303 3,783 Gemini Leasing, Inc., Term Loan............... B1 NR 08/12/05 3,783,888 16,915 North American Van Lines, Inc., Term Loan.................... B1 B+ 11/18/07 16,915,000 8,018 OmniTrax Railroads LLC, Term Loan............... NR NR 05/14/05 8,019,343 -------------- 37,503,859 -------------- TRANSPORTATION--PERSONAL 2.1% 9,973 Avis Rent A Car, Inc., Term Loan............... Ba3 BB+ 06/30/06 to 06/30/07 9,982,030 19,976 Motor Coach Industries International, Inc., Term Loan............... Ba3 BB- 06/15/06 19,979,456 -------------- 29,961,486 -------------- TRANSPORTATION--RAIL MANUFACTURING 0.2% 2,993 RailWorks Corp., Term Loan.................... B1 BB- 09/30/06 3,014,955 -------------- UTILITIES 1.1% 10,000 AES Texas Funding LLC, Term Loan............... Ba1 NR 04/24/01 10,001,126 6,000 Western Resources, Inc., Term Loan............... NR NR 03/17/03 6,025,500 -------------- 16,026,626 -------------- TOTAL VARIABLE RATE** SENIOR LOAN INTERESTS 94.1% (Cost $1,456,565,453).................................................... 1,371,468,882 --------------
See Notes to Financial Statements A-36 54 YOUR FUND'S INVESTMENTS July 31, 2000
DESCRIPTION VALUE COMMERCIAL PAPER 5.4% Armstrong World Industries, Inc. ($10,000,000 par, maturing 08/09/00, yielding 6.67%).............................................................. $ 9,985,178 Ashland, Inc. ($20,000,000 par, maturing 08/04/00, yielding 6.67%)........... 19,988,883 Bridgestone/Firestone, Inc. ($2,300,000 par, maturing 08/02/00, yielding 6.50%)....................................................................... 2,299,585 Federated Department Stores, Inc. ($10,000,000 par, maturing 08/02/00, yielding 6.67%).............................................................. 9,998,147 Hunt (J.B.) Transportation Services, Inc. ($5,000,000 par, maturing 08/03/00, yielding 6.70%).............................................................. 4,998,139 Mallinckrodt, Inc. ($11,500,000 par, maturing 08/01/00, yielding 6.75%)...... 11,500,000 Temple Inland, Inc. ($3,400,000 par, maturing 08/01/00, yielding 6.78%)...... 3,400,000 Texas Utilities Co. ($10,000,000 par, maturing 08/01/00, yielding 6.68%)..... 10,000,000 Xtra, Inc. ($6,000,000 par, maturing 08/07/00, yielding 6.70%)............... 5,993,300 -------------- TOTAL COMMERCIAL PAPER 5.4% (Cost $78,163,232)......................................................... 78,163,232 -------------- TOTAL INVESTMENTS 99.5% (Cost $1,534,728,685)...................................................... 1,449,632,114 OTHER ASSETS IN EXCESS OF LIABILITIES 0.5%.................................. 7,976,494 -------------- NET ASSETS 100.0%........................................................... $1,457,608,608 ==============
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. (Unaudited) 1 Industry percentages are calculated as a percentage of net assets. (a) This Senior Loan interest is non-income producing. (b) This Borrower has filed for protection in federal bankruptcy court. (c) Subsequent to July 31, 2000, this borrower has filed for protection in federal bankruptcy court. See Notes to Financial Statements A-37 55 YOUR FUND'S INVESTMENTS July 31, 2000 * Senior Loans in the Fund's portfolio generally are subject to mandatory and/or optional prepayment. Because of these mandatory prepayment conditions and because there may be significant economic incentives for a Borrower to prepay, prepayments of Senior Loans in the Fund's portfolio may occur. As a result, the actual remaining maturity of Senior Loans held in the Fund's portfolio may be substantially less than the stated maturities shown. Although the Fund is unable to accurately estimate the actual remaining maturity of individual Senior Loans, the Fund estimates that the actual average maturity of the Senior Loans held in its portfolio will be approximately 18-24 months. ** Senior Loans in which the Fund invests generally pay interest at rates which are periodically redetermined by reference to a base lending rate plus a premium. These base lending rates are generally (i) the lending rate offered by one or more major European banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the prime rate offered by one or more major United States banks and (iii) the certificate of deposit rate. Senior loans are generally considered to be restricted in that the Fund ordinarily is contractually obligated to receive approval from the Agent Bank and/or borrower prior to the disposition of a Senior Loan. See Notes to Financial Statements A-38 56 FINANCIAL STATEMENTS Statement of Assets and Liabilities July 31, 2000 ASSETS: Total Investments (Cost $1,534,728,685)..................... $1,449,632,114 Receivables: Interest.................................................. 11,031,886 Fund Shares Sold.......................................... 2,678,181 Prepaid Expenses............................................ 516,136 Other....................................................... 33,624 -------------- Total Assets.......................................... 1,463,891,941 ============== LIABILITIES: Payables: Income Distributions...................................... 1,880,672 Custodian Bank............................................ 1,527,645 Investment Advisory Fee................................... 1,233,040 Distributor and Affiliates................................ 374,049 Administrative Fee........................................ 344,154 Fund Shares Repurchased................................... 51,789 Initial Offering and Registration Costs................... 41,558 Accrued Expenses............................................ 764,381 Trustees' Deferred Compensation and Retirement Plans........ 66,045 -------------- Total Liabilities..................................... 6,283,333 -------------- NET ASSETS.................................................. $1,457,608,608 ============== NET ASSETS CONSIST OF: Common Shares ($.01 par value with an unlimited number of shares authorized, 152,178,276 shares issued and outstanding).............................................. $ 1,521,783 Paid in Surplus............................................. 1,534,716,501 Accumulated Undistributed Net Investment Income............. 3,604,417 Accumulated Net Realized Gain............................... 2,862,478 Net Unrealized Depreciation................................. (85,096,571) -------------- NET ASSETS.................................................. $1,457,608,608 ============== NET ASSET VALUE PER COMMON SHARE ($1,457,608,608 divided by 152,178,276 shares outstanding)........................... $ 9.58 ==============
See Notes to Financial Statements A-39 57 Statement of Operations For the Year Ended July 31, 2000 INVESTMENT INCOME: Interest.................................................... $140,920,030 Fees........................................................ 33,586 Other....................................................... 2,077,389 ------------ Total Income............................................ 143,031,005 ------------ EXPENSES: Investment Advisory Fee..................................... 15,073,901 Administrative Fee.......................................... 3,966,816 Service Fee................................................. 2,380,090 Shareholder Services........................................ 1,159,712 Custody..................................................... 674,541 Legal....................................................... 622,791 Amortization of Organizational Costs........................ 102,254 Trustees' Fees and Related Expenses......................... 76,608 Other....................................................... 2,002,678 ------------ Total Expenses.......................................... 26,059,391 ------------ NET INVESTMENT INCOME....................................... $116,971,614 ============ REALIZED AND UNREALIZED GAIN/LOSS: Net Realized Gain........................................... $ 3,089,393 ------------ Unrealized Appreciation/Depreciation: Beginning of the Period................................... (911,892) End of the Period......................................... (85,096,571) ------------ Net Unrealized Depreciation During the Period............... (84,184,679) ------------ NET REALIZED AND UNREALIZED LOSS............................ $(81,095,286) ============ NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 35,876,328 ============
See Notes to Financial Statements A-40 58 Statement of Changes in Net Assets For the Years Ended July 31, 2000 and 1999
YEAR ENDED YEAR ENDED JULY 31, 2000 JULY 31, 1999 -------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income............................ $ 116,971,614 $ 58,912,884 Net Realized Gain................................ 3,089,393 891,210 Net Unrealized Depreciation During the Period.... (84,184,679) (1,472,606) -------------- -------------- Change in Net Assets from Operations............. 35,876,328 58,331,488 -------------- -------------- Distributions from Net Investment Income......... (116,807,793) (56,436,224) Distributions from Net Realized Gain............. (1,076,619) (39,076) -------------- -------------- Total Distributions.......................... (117,884,412) (56,475,300) -------------- -------------- NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..................................... (82,008,084) 1,856,188 -------------- -------------- FROM CAPITAL TRANSACTIONS: Proceeds from Shares Sold........................ 568,093,865 1,133,265,976 Net Asset Value of Shares Issued Through Dividend Reinvestment................................... 81,211,399 39,411,306 Cost of Shares Repurchased....................... (581,641,209) (114,016,137) -------------- -------------- NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS................................... 67,664,055 1,058,661,145 -------------- -------------- TOTAL INCREASE/DECREASE IN NET ASSETS............ (14,344,029) 1,060,517,333 NET ASSETS: Beginning of the Period.......................... 1,471,952,637 411,435,304 -------------- -------------- End of the Period (Including accumulated undistributed net investment income of $3,604,417 and $3,303,975, respectively)....... $1,457,608,608 $1,471,952,637 ============== ==============
See Notes to Financial Statements A-41 59 Statement of Cash Flows For the Year Ended July 31, 2000 CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 35,876,328 ------------- Adjustments to Reconcile the Change in Net Assets from Operations to Net Cash Used for Operating Activities: Decrease in Investments at Value.......................... 1,117,270 Increase in Interest Receivable........................... (3,545,844) Decrease in Receivable for Funding Fee.................... 250,000 Increase in Prepaid Expenses.............................. (267,501) Decrease in Unamortized Organizational Costs.............. 102,254 Increase in Other Assets.................................. (20,882) Increase in Investment Advisory Fees Payable.............. 38,183 Increase in Administrative Fees Payable................... 10,048 Increase in Distributor & Affiliates Payable.............. 52,836 Increase in Accrued Expenses.............................. 501,409 Increase in Trustees' Deferred Compensation and Retirement Plans................................................... 31,603 ------------- Total Adjustments....................................... (1,730,624) ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES................... 34,145,704 ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Shares Sold................................... 584,707,828 Change in Intra-day Credit Line with Custodian Bank......... (565,467) Payments on Shares Repurchased.............................. (581,589,420) Cash Dividends Paid......................................... (35,622,026) Capital Gain Distributions Paid............................. (1,076,619) ------------- Net Cash Provided by Financing Activities................. (34,145,704) ------------- NET INCREASE IN CASH........................................ -0 - Cash at Beginning of the Period............................. -0 - ------------- CASH AT END OF THE PERIOD................................... $ -0 - =============
See Notes to Financial Statements A-42 60 Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
MARCH 27, 1998 (COMMENCEMENT YEAR ENDED JULY 31, OF INVESTMENT ------------------------- OPERATIONS) TO 2000 1999 JULY 31, 1998 ------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD..... $ 10.09 $ 10.04 $ 10.00 -------- -------- ------- Net Investment Income...................... .72 .65 .21 Net Realized and Unrealized Gain/Loss...... (.50) .04 .04 -------- -------- ------- Total from Investment Operations............. .22 .69 .25 -------- -------- ------- Less: Distributions from Net Investment Income... .72 .64 .21 Distributions from Realized Gain........... .01 -0- -0- -------- -------- ------- Total Distributions.......................... .73 .64 .21 -------- -------- ------- NET ASSET VALUE, END OF THE PERIOD........... $ 9.58 $ 10.09 $ 10.04 ======== ======== ======= Total Return* (a)............................ 2.27% 7.09% 2.52%** Net Assets at End of the Period (In millions).................................. $1,457.6 $1,472.0 $ 411.4 Ratio of Expenses to Average Net Assets*..... 1.64% 1.60% 1.70% Ratio of Net Investment Income to Average Net Assets*.................................... 7.37% 6.66% 6.33% Portfolio Turnover (b)....................... 54% 23% 4%** * If certain expenses had not been waived by Van Kampen, Total Return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets................................. N/A 1.61% 1.92% Ratio of Net Investment Income to Average Net Assets............................. N/A 6.65% 6.11%
** Non-Annualized N/A = Not Applicable. (a) Total return assumes an investment at the beginning of the period indicated, reinvestment of all distributions for the period and tender of all shares at the end of the period indicated, excluding payment of 1% imposed on most shares accepted by the Fund for repurchase which have been held for less than one year. If the early withdrawal charge was included, total return would be lower. (b) Calculation includes the proceeds from principal repayments and sales of variable rate senior loan interests. See Notes to Financial Statements A-43 61 NOTES TO FINANCIAL STATEMENTS July 31, 2000 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen Senior Floating Rate Fund (the "Fund") is registered as a non- diversified closed-end management investment company under the Investment Company Act of 1940, as amended. The Fund's investment objective is to provide a high level of current income, consistent with preservation of capital. The Fund seeks to achieve its objective by investing primarily in a portfolio of interests in floating or variable rate senior loans to corporations, partnerships and other entities which operate in a variety of industries and geographical regions. The Fund commenced investment operations on March 27, 1998. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION The Fund's Variable Rate Senior Loan interests ("Loan interests") are valued by the Fund following guidelines established and periodically reviewed by the Fund's Board of Trustees. Subject to criteria established by the Fund's Board of Trustees about the availability and reliability of market indicators obtained from independent pricing sources, certain Loan interests are valued at the mean of bid and ask market indicators supplied by independent pricing sources approved by the Fund's Board of Trustees. All other Loan interests are valued by considering a number of factors including consideration of market indicators, transactions in instruments which Van Kampen Investment Advisory Corp. (the "Adviser") believes may be comparable (including comparable credit quality, interest rate, interest rate redetermination period and maturity), the credit worthiness of the borrower, the current interest rate, the period until next interest rate redetermination and the maturity of such Loan interests. 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 Loan interests in the Fund's portfolio. The fair value of Loan interests are reviewed and approved by the Fund's Valuation Committee and by the Fund's Board of Trustees. The fair value of a Loan interest may differ significantly from the market value that would have been used had there been a ready and reliable market for that Loan interest. 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. A-44 62 NOTES TO FINANCIAL STATEMENTS July 31, 2000 B. SECURITY TRANSACTIONS Investment transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Facility fees received are treated as market discounts. Market premiums are amortized and discounts are accreted over the stated life of each applicable security. Other income is comprised primarily of amendment fees. Amendment fees are earned as compensation for agreeing to changes in loan agreements. D. ORGANIZATIONAL COSTS The Fund has agreed to reimburse Van Kampen Funds Inc. or its affiliates (collectively "Van Kampen") for costs incurred in connection with the Fund's organization in the amount of $140,000. These costs normally are amortized over a 60 month period beginning on the date of the Fund's initial public offering of its shares. However, AICPA Statement of Position 98-5, which is effective for fiscal years beginning after December 15, 1998, requires that unamortized organizational costs on the Fund's statement of assets and liabilities be written off. Therefore, the Fund wrote off the remaining unamortized organizational costs in August 1999. E. 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. Net realized gains or losses may differ for financial reporting and tax purposes primarily as a result of the deferral of losses relating to wash sale transactions. At July 31, 2000, for federal income tax purposes the cost of long- and short-term investments is $1,534,731,336, the aggregate gross unrealized appreciation is $6,537,395 and the aggregate gross unrealized depreciation is $91,636,617, resulting in net unrealized depreciation on long- and short-term investments of $85,099,222. F. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly dividends from net investment income. Net realized gains, if any, are distributed at least annually. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income for tax purposes. Due to inherent differences in the recognition of income, expenses and realized gains/losses under generally accepted accounting principles and federal income tax purposes, permanent differences between financial and tax basis reporting for the 2000 fiscal year have been identified and appropriately reclassified. A permanent difference of $136,621 relating to expenses not A-45 63 NOTES TO FINANCIAL STATEMENTS July 31, 2000 deductible for tax purposes has been reclassified from capital to accumulated undistributed net investment income. 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:
AVERAGE DAILY NET ASSETS % PER ANNUM First $4.0 billion.......................................... .950 of 1% Next $3.5 billion........................................... .900 of 1% Next $2.5 billion........................................... .875 of 1% Over $10.0 billion.......................................... .850 of 1%
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 net assets of the Fund. The administrative services to be provided by the Administrator include monitoring the provisions of the loan agreements and any agreements with respect to participations and assignments, record keeping responsibilities with respect to interests in Variable Rate Senior Loans in the Fund's portfolio and providing certain services to the holders of the Fund's securities. For the year ended July 31, 2000, the Fund recognized expenses of approximately $284,100 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. For the year ended July 31, 2000, the Fund recognized expenses of approximately $22,500 representing Van Kampen's cost of providing legal services to the Fund. Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as the shareholder servicing agent of the Fund. For the year ended July 31, 2000, the Fund recognized expenses for their services of approximately $887,100. Shareholder servicing fees are determined through negotiations with the Fund's Board of Trustees and are based on competitive market benchmarks. Certain officers and trustees of the Fund are also officers and directors of Van Kampen. The Fund does not compensate its officers or trustees who are officers of Van Kampen. The Fund provides deferred compensation and retirement plans for its trustees who are not officers of Van Kampen. Under the deferred compensation plan, trustees may elect to defer all or a portion of their compensation to a later date. Benefits under the retirement plan are payable for a ten-year period and are A-46 64 NOTES TO FINANCIAL STATEMENTS July 31, 2000 based upon each trustee's years of service to the Fund. The maximum annual benefit per trustee under the plan is $2,500. 3. CAPITAL TRANSACTIONS At July 31, 2000 and July 31, 1999, paid in surplus aggregated $1,534,716,501 and $1,467,251,336 respectively. Transactions in common shares were as follows:
YEAR ENDED YEAR ENDED JULY 31, 2000 JULY 31, 1999 Beginning Shares....................................... 145,951,374 40,992,495 ----------- ----------- Shares Sold.......................................... 57,196,384 112,343,843 Shares Issued Through Dividend Reinvestment.......... 8,251,082 3,904,175 Shares Repurchased................................... (59,220,564) (11,289,139) ----------- ----------- Net Increase in Shares............................... 6,226,902 104,958,879 ----------- ----------- Ending Shares.......................................... 152,178,276 145,951,374 =========== ===========
4. INVESTMENT TRANSACTIONS During the period, the costs of purchases and proceeds from investments sold and repaid, excluding short-term investments, were $1,004,256,377 and $702,218,160, 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, 2000, 59,220,564 shares were tendered and repurchased by the Fund. 6. EARLY WITHDRAWAL CHARGE An early withdrawal charge to recover offering expenses will be imposed in connection with most common shares held for less than one year which are accepted by the Fund for repurchase pursuant to tender offers. The early withdrawal charge of 1.00% will be payable to Van Kampen. For the year ended July 31, 2000, Van Kampen received early withdrawal charges of approximately $1,278,800 in connection with tendered shares of the Fund. 7. COMMITMENTS/BORROWINGS Pursuant to the terms of certain of the Variable Rate Senior Loan agreements, the Fund had unfunded loan commitments of approximately $9,631,900 as of July 31, A-47 65 NOTES TO FINANCIAL STATEMENTS July 31, 2000 2000. The Fund generally will maintain with its custodian short-term investments having an aggregate value at least equal to the amount of unfunded loan commitments. The Fund, along with the Van Kampen Prime Rate Income Trust, has entered into a revolving credit agreement with a syndicate led by Bank of America for an aggregate of $500,000,000, which will terminate on September 12, 2001. The proceeds of any borrowing by the Fund under the revolving credit agreement shall be used for temporary liquidity purposes and funding of shareholder tender offers. Annual commitment fees of .09% are charged on the unused portion of the credit line. Borrowings under this facility will bear interest at either the LIBOR rate or the Federal Funds rate plus .50%. There have been no borrowings under this agreement to date. 8. SENIOR LOAN PARTICIPATION COMMITMENTS The Fund invests primarily in participations, assignments, or acts as a party to the primary lending syndicate of a Variable Rate 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, 2000, the following sets forth the selling participants with respect to interests in Senior Loans purchased by the Fund on a participation basis.
PRINCIPAL AMOUNT VALUE SELLING PARTICIPANT (000) (000) Chase Securities, Inc. ..................................... $ 66,879 $ 64,546 Bankers Trust............................................... 65,217 65,195 Toronto Dominion............................................ 34,250 34,186 Canadian Imperial Bank of Commerce.......................... 26,279 26,296 Bank of America............................................. 20,654 20,693 Morgan Guaranty Trust....................................... 19,983 20,011 Lehman Brothers............................................. 15,688 15,502 Bank of New York............................................ 15,000 14,914 ABN Amro.................................................... 15,000 14,851 Bank One.................................................... 14,078 14,013 Fleet National Bank......................................... 11,055 11,045 Credit Suisse............................................... 10,985 10,994 Union Bank.................................................. 10,975 10,952 IBJ Schroder Bank........................................... 10,000 9,974
A-48 66 NOTES TO FINANCIAL STATEMENTS July 31, 2000
PRINCIPAL AMOUNT VALUE SELLING PARTICIPANT (CONTINUED) (000) (000) GE Capital.................................................. 9,000 8,948 Industrial Bank of Japan.................................... 5,000 4,987 Deutsche Bank............................................... 5,000 4,744 Citibank.................................................... 5,000 4,988 Bank of Nova Scotia......................................... 4,913 4,912 Heller Finance.............................................. 4,247 4,231 National City Bank.......................................... 2,993 3,000 First Union................................................. 2,000 1,993 UBS AG...................................................... 1,491 1,483 -------- -------- Total....................................................... $375,687 $372,458 ======== ========
9. SERVICE PLAN The Fund has adopted a Service Plan (the "Plan") designed to meet the service fee requirements of the sales charge rule of the National Association of Securities Dealers, Inc. The Plan governs payments for personal services and/or the maintenance of shareholder accounts. Annual fees under the Plan of .15% (.25% maximum) of net assets are accrued daily and paid quarterly. For the year ended July 31, 2000, the Fund paid service fees of approximately $2,380,100 to Van Kampen. A-49