N-CSRS 1 c78412nvcsrs.txt SEMIANNUAL REPORT DATED JUNE 30, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-05273 Van Kampen Income Trust -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 1221 Avenue of the Americas NY NY 10020 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Ronald Robison 1221 Avenue of the Americas New York, NY 10020 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 ----------------------------- Date of fiscal year end: 12/31 ----------- Date of reporting period: 6/30/03 ----------- Item 1. Report to Shareholders Welcome, Shareholder In this update, you'll learn about how your trust performed during the reporting period. The portfolio management team will provide an overview of the market climate, and discuss some of the factors that helped or hindered performance during the reporting period. In addition, this report includes the trust's financial statements and a list of investments, as well as other information. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the trust will achieve its investment objective. The trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and, therefore, the value of the trust shares may be less than what you paid for them. Accordingly, you can lose money investing in this trust. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Performance Summary NET ASSET VALUE AND COMMON SHARE MARKET PRICE (based upon quarter-end values--June 1993 through June 2003) (LINE GRAPH)
NET ASSET VALUE COMMON SHARE MARKET PRICE --------------- ------------------------- 6/93 8.17 8.13 8.15 8.25 8.15 8.13 8.08 7.25 8.13 7.75 8.13 7.75 8.16 7.75 8.25 8.13 8.17 7.25 7.92 7.00 7.79 6.88 7.73 7.00 6/94 7.72 7.00 7.70 7.00 7.63 7.25 7.43 7.25 7.36 6.88 7.29 6.63 7.28 6.50 7.35 6.88 7.50 7.13 7.50 7.25 7.58 7.00 7.78 7.13 6/95 7.76 7.25 7.75 7.25 7.78 7.00 7.84 7.38 7.86 7.25 7.88 7.13 7.94 7.25 7.99 7.38 7.90 7.38 7.81 7.38 7.79 7.38 7.76 7.38 6/96 7.78 7.25 7.75 7.25 7.73 7.50 7.85 7.25 7.92 7.25 7.99 7.50 8.00 7.50 7.92 7.63 7.94 7.50 7.79 7.50 7.82 7.50 7.89 7.63 6/97 7.95 7.69 8.08 7.75 8.00 7.50 8.10 7.69 8.09 7.69 8.12 8.00 8.05 8.00 8.16 8.13 8.15 8.06 8.18 8.13 8.19 7.88 8.19 8.06 6/98 8.17 7.81 8.17 7.88 7.88 7.44 7.87 7.63 7.69 7.88 7.91 7.94 7.84 7.75 7.90 7.31 7.72 7.13 7.75 7.00 7.78 7.06 7.60 7.06 6/99 7.51 6.88 7.47 6.56 7.40 6.56 7.39 6.38 7.36 6.25 7.36 6.06 7.25 5.69 7.26 5.94 7.27 6.19 7.23 6.19 7.17 6.19 7.06 6.06 6/00 7.12 6.56 7.13 6.50 7.17 6.75 7.06 6.56 6.93 6.50 6.83 6.31 6.85 6.56 7.01 6.90 7.04 6.97 6.93 6.89 6.80 6.85 6.80 7.15 6/01 6.68 7.04 6.74 7.09 6.75 7.30 6.55 6.88 6.66 6.65 6.61 6.40 6.50 6.33 6.47 6.42 6.37 6.26 6.32 6.19 6.38 6.18 6.32 6.40 6/02 6.13 6.12 6.03 5.85 6.08 6.14 6.05 5.94 5.97 5.69 6.08 5.75 6.11 5.71 6.13 5.89 6.18 5.96 6.21 5.86 6.33 5.96 6.37 6.02 6/03 6.40 5.93
The solid line above represents the trust's net asset value (NAV), which indicates overall changes in value among the trust's underlying securities. The trust's common share market price is represented by the dashed line, which indicates the price the market is willing to pay for shares of the trust at a given time. Common share market price is influenced by a range of factors, including supply and demand and market conditions.
------------------------------------------------------------------------------ AVERAGE ANNUAL MARKET TOTAL RETURNS PRICE since 04/22/88 Since Inception 6.60% 10-year 5.66 5-year 2.88 1-year 4.00 6-month 7.32 ------------------------------------------------------------------------------
Past performance is no guarantee of future results. Investment return, common share market price and net asset value will fluctuate and trust shares, when sold, may be worth more or less than their original cost. As a result of recent market activity, current performance may vary from the figures shown. For more up-to-date information, please visit vankampen.com or speak with your financial advisor. Total return assumes an investment at the common share market price at the beginning of the period, reinvestment of all distributions for the period in accordance with the trust's dividend reinvestment plan, and sale of all shares at the closing common share market price at the end of the period. Distribution rate represents the monthly annualized distributions of the trust at the end of the period and not the earnings of the trust. 1 Trust Report FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2003 Van Kampen Income Trust is managed by the Adviser's Taxable Fixed Income team. Members of the team include Gordon Loery, Executive Director; Jaidip Singh, Executive Director; and Menglin Luo, Vice President.(1) The following discussion reflects their views on the trust's performance. Q. BEFORE YOU DISCUSS HOW THE TRUST PERFORMED, PLEASE DESCRIBE THE OVERALL MARKET ENVIRONMENT. A. Concerns over the strength of the U.S. economy caused the Federal Reserve Bank (the Fed) to cut interest rates twice during the period, taking Treasury yields to their lowest levels in decades. Plunging interest rates led to record levels of homeowner refinancing, and caused the mortgage-backed securities sector to underperform relative to Treasuries. The high-yield market roared ahead in the first half of 2003, posting its best six-month return since 1991. High-yield mutual fund inflows during the period were at their highest level ever, reflecting enormous demand on the part of individual and institutional investors. Overall, market performance was inversely related to credit rating, with CCC credits strongly outperforming B and BB rated bonds. Sector performance was dominated by industries such as wireless communications, utilities, telecommunications and cable, which were among the worst performers in 2002. Q. HOW DID THE TRUST PERFORM DURING THE REPORTING PERIOD? A. -- The trust generated a total return of 7.32 percent for the six months ended June 30, 2003, based on common share market price. Past performance is no guarantee of future results. -- The trust's monthly dividend of $0.0295 translated to a distribution rate of 5.97 percent, based on the trust's common share market price as of June 30, 2003. See Performance Summary for additional information. Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD? A. -- The high-yield sector, which made up approximately 43 percent of the portfolio, was among the best performing areas of the fixed-income markets during the period. -- Within the high-yield component of the portfolio, selected holdings in the wireless sector benefited the trust's performance. American (1)Team members may change at any time without notice. 2 Cellular performed especially well, rebounding strongly from a low valuation on the basis of its solid fundamentals. -- Housing companies such as CB Richard Ellis and Technical Olympic also performed well as housing activity remained one of the economy's few bright spots. Q. WHAT FACTORS HINDERED PERFORMANCE? A. -- Our expectation for an improving economy led us to assume a defensive duration posture, which held the trust back when interest rates fell sharply, especially in May. -- The trust's mortgage-backed securities holdings were hurt by that sector's underperformance relative to other fixed-income sectors. These holdings included premium-coupon bonds that lagged in the rally when investors began to bid down prices on bonds perceived to be vulnerable to prepayments. Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE TRUST, HIGHLIGHTING KEY THEMES. A. Within the high-yield portion of the portfolio, we took profits on some of the trust's energy holdings. We also reduced exposure to transportation companies whose fundamentals no longer supported their presence in the portfolio. We increased the portfolio's utilities and cable holdings when our analysts were able to identify attractive companies. Our expectations for the economy centered on an anticipated return to positive growth in the relatively near term. This led us to keep the portfolio's duration (a measure of interest-rate sensitivity) shorter than that of its benchmarks in an effort to protect the trust from unwanted TOP 5 SECTORS AS OF 6/30/03 RATINGS ALLOCATION AS OF 6/30/03 Telecommunications 4.9% AAA/Aaa 40.4% Media-Noncable 4.4 AA/Aa 0.1 Chemicals 4.2 BBB/Baa 4.9 Health Care 3.8 BB/Ba 20.4 Paper 3.1 B/B 25.6 CCC/Caa 5.6 CC/Ca 1.0 Non Rated 2.0
Subject to change daily. All percentages are as a percentage of long-term investments. Provided for informational purposes only and should not be deemed as a recommendation to buy securities in the sectors shown above. Securities are classified by sectors that represent broad groupings of related industries. Ratings allocation based upon ratings as issued by Standard and Poor's and Moody's, respectively. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. 3 volatility that could result from rising interest rates. We also adjusted the aggregate coupon structure of the trust's mortgage-backed holdings in an effort to avoid the effects of rapid homeowner-mortgage-prepayment rates associated with newer, more current-coupon mortgage product. Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW OF THE TRUST, DO YOU HAVE ANY CLOSING THOUGHTS FOR THE SHAREHOLDERS? A. There are several factors at work that we believe may be supportive of economic growth and, thus, rising interest rates. First, the economy's underlying strength appears fundamentally sound. Second, Treasury yields ended the period at multi-decade lows that appear to be unsustainable. Lastly, both fiscal and monetary policy remain geared to spurring near- term economic growth. While these factors appear to signal a potential turnaround, it is difficult to predict with certainty when that may occur. Regardless, we will continue with our disciplined investment approach while monitoring the markets closely for opportunities. PROXY VOTING POLICIES AND PROCEDURES A description of the fund's policies and procedures with respect to the voting of proxies relating to the Fund's portfolio securities is available without charge, upon request, by calling 1-800-847-2424. This information is also available on the Securities and Exchange Commission's website at http:///www.sec.gov. 4 BY THE NUMBERS YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited) THE FOLLOWING PAGES DETAIL YOUR TRUST'S PORTFOLIO OF INVESTMENTS AT THE END OF THE REPORTING PERIOD.
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE DOMESTIC CORPORATE BONDS 38.0% AUTOMOTIVE 1.9% $1,010 Aetna Industries, Inc. (a) (b) (e)... 11.875% 10/01/06 $ 5,050 110 ArvinMeritor, Inc. .................. 8.750 03/01/12 123,750 250 Autonation, Inc. (c)................. 9.000 08/01/08 278,750 180 Collins & Aikman Products Co. (c).... 10.750 12/31/11 159,300 275 Laidlaw International, Inc., 144A-- Private Placement (d)................ 10.750 06/15/11 290,125 335 Lear Corp. (c)....................... 8.110 05/15/09 385,250 195 Metaldyne Corp. ..................... 11.000 06/15/12 162,825 140 Sonic Automotive, Inc., Ser D........ 11.000 08/01/08 149,100 285 TRW Automotive, Inc., 144A--Private Placement (d)........................ 9.375 02/15/13 310,650 ------------ 1,864,800 ------------ BUILDING MATERIALS 1.0% 125 Brand Services, Inc. ................ 12.000 10/15/12 143,125 160 NMHG Holdings Co. ................... 10.000 05/15/09 176,800 60 Nortek Holdings, Inc. ............... 9.250 03/15/07 62,100 295 Schuler Homes, Inc. (c).............. 9.375 07/15/09 334,825 270 Trimas Corp. ........................ 9.875 06/15/12 278,100 10 Trimas Corp., 144A--Private Placement (d).................................. 9.875 06/15/12 10,300 ------------ 1,005,250 ------------ CHEMICALS 2.3% 50 ABB Finance, Inc. ................... 6.750 06/03/04 49,033 100 Equistar Chemicals LP, 144A--Private Placement (d)........................ 10.625 05/01/11 103,000 120 FMC Corp. ........................... 10.250 11/01/09 135,600 110 Huntsman Advanced Materials LLC, 144A--Private Placement (d).......... 11.000 07/15/10 114,950 420 Huntsman ICI Chemicals (c)........... 10.125 07/01/09 405,300 80 Huntsman International LLC, 144A-- Private Placement (d)................ 9.875 03/01/09 83,600 140 ISP Chemco, Inc. .................... 10.250 07/01/11 158,900 360 ISP Holdings, Inc. (c)............... 10.625 12/15/09 384,300 230 Johnsondiversey, Inc., Ser B......... 9.625 05/15/12 258,175
See Notes to Financial Statements 5 YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CHEMICALS (CONTINUED) $ 140 Lyondell Chemical Co. ............... 9.875% 05/01/07 $ 137,900 185 Lyondell Chemical Co. ............... 9.500 12/15/08 176,675 220 Millennium America, Inc. (c)......... 7.000 11/15/06 223,300 17 Pioneer Cos., Inc. (Variable Rate Coupon).............................. 4.600 12/31/06 14,795 ------------ 2,245,528 ------------ CONSTRUCTION MACHINERY 0.9% 85 Flowserve Corp. ..................... 12.250 08/15/10 99,450 730 Manitowoc, Inc. ..................... 10.500 08/01/12 813,950 ------------ 913,400 ------------ CONSUMER PRODUCTS 1.3% 255 Iron Mountain, Inc. ................. 8.625 04/01/13 274,125 110 Jacuzzi Brands, Inc., 144A--Private Placement (d)........................ 9.625 07/01/10 110,000 250 Muzak, LLC (c)....................... 9.875 03/15/09 238,750 185 Muzak, LLC, 144A-- Private Placement (d).................................. 10.000 02/15/09 194,712 370 Outsourcing Services Group, Inc. (c).................................. 10.875 03/01/06 223,850 280 Xerox Corp. ......................... 7.125 06/15/10 281,050 ------------ 1,322,487 ------------ ELECTRIC 1.8% 41 AES Corp. ........................... 9.375 09/15/10 41,410 26 AES Corp. ........................... 8.875 02/15/11 25,545 260 AES Corp., 144A--Private Placement (d).................................. 9.000 05/15/15 273,000 100 Allegheny Energy, Inc. .............. 7.750 08/01/05 100,500 185 Calpine Corp. ....................... 8.500 02/15/11 139,675 35 CMS Energy Corp. .................... 7.500 01/15/09 34,781 220 CMS Energy Corp. .................... 8.500 04/15/11 230,725 75 IPALCO Enterprises, Inc. ............ 8.625 11/14/11 82,500 260 Monongahela Power Co. (c)............ 5.000 10/01/06 259,675 225 PSEG Energy Holdings, Inc. (c)....... 8.625 02/15/08 242,152 165 PSEG Energy Holdings, Inc., 144A-- Private Placement (d)................ 7.750 04/16/07 174,659 125 Southern California Edison Co., 144A--Private Placement (d).......... 8.000 02/15/07 137,656 ------------ 1,742,278 ------------ ENVIRONMENTAL SERVICES 0.5% 435 Allied Waste North America, Inc. (c).................................. 10.000 08/01/09 464,362 ------------
6 See Notes to Financial Statements YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE FOOD 1.3% $ 150 Dominos, Inc., 144A--Private Placement (d)........................ 8.250% 07/01/11 $ 155,625 130 Merisant Co., 144A--Private Placement (d).................................. 9.500 07/15/13 135,200 190 Michael Foods, Inc., Ser B (c)....... 11.750 04/01/11 219,450 170 Pilgrim's Pride Corp. ............... 9.625 09/15/11 182,325 575 Smithfield Foods, Inc. (c)........... 8.000 10/15/09 625,312 ------------ 1,317,912 ------------ GAMING 2.1% 210 Harrahs Operating Co., Inc. (c)...... 7.875 12/15/05 228,900 150 Harrahs Operating Co., Inc. ......... 8.000 02/01/11 181,092 475 Horseshoe Gaming LLC (c)............. 8.625 05/15/09 505,875 180 Park Place Entertainment Corp. ...... 7.875 12/15/05 192,375 250 Park Place Entertainment Corp. (c)... 8.875 09/15/08 276,250 300 Station Casinos, Inc. (c)............ 8.875 12/01/08 316,500 100 Station Casinos, Inc. ............... 9.875 07/01/10 110,500 210 Venetian Casino Resort, LLC (c)...... 11.000 06/15/10 237,825 ------------ 2,049,317 ------------ HEALTHCARE 2.6% 390 AmerisourceBergen Corp. (c).......... 8.125 09/01/08 430,950 100 Apogent Technologies, Inc., 144A-- Private Placement (d)................ 6.500 05/15/13 103,750 180 Fisher Scientific International, Inc. ................................ 7.125 12/15/05 189,000 205 Fisher Scientific International, Inc., 144A--Private Placement (c) (d).................................. 8.125 05/01/12 220,375 165 Fresenius Medical Care Capital Trust II................................... 7.875 02/01/08 174,075 240 Fresenius Medical Care Capital Trust IV (c)............................... 7.875 06/15/11 254,400 335 HCA, Inc. (c)........................ 8.750 09/01/10 390,765 30 Manor Care, Inc. .................... 7.500 06/15/06 32,641 85 Manor Care, Inc. .................... 8.000 03/01/08 96,050 70 Manor Care, Inc., 144A--Private Placement (d)........................ 6.250 05/01/13 72,800 150 Omnicare, Inc. ...................... 8.125 03/15/11 163,500 345 Tenet Healthcare Corp. (c)........... 6.500 06/01/12 321,712 150 Tenet Healthcare Corp. .............. 7.375 02/01/13 145,500 ------------ 2,595,518 ------------
See Notes to Financial Statements 7 YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE HOME CONSTRUCTION 1.2% $ 220 KB Home (c).......................... 7.750% 02/01/10 $ 238,975 110 Meritage Corp., 144A--Private Placement (d)........................ 9.750 06/01/11 122,100 95 Tech Olympic USA, Inc. .............. 9.000 07/01/10 103,075 145 Tech Olympic USA, Inc. .............. 9.000 07/01/10 155,875 180 Tech Olympic USA, Inc. .............. 10.375 07/01/12 192,600 25 Tech Olympic USA, Inc., 144A-- Private Placement (d)................ 10.375 07/01/12 26,750 270 Toll Corp. (c)....................... 8.250 02/01/11 302,400 ------------ 1,141,775 ------------ INDEPENDENT ENERGY 0.3% 240 Equistar Chemicals LP (c)............ 10.125 09/01/08 248,400 ------------ INTEGRATED ENERGY 1.5% 445 BRL Universal Equipment (c).......... 8.875 02/15/08 485,050 425 Chesapeake Energy Corp. (c).......... 8.125 04/01/11 460,062 245 Hanover Equipment Trust.............. 8.500 09/01/08 258,475 125 Hanover Equipment Trust.............. 8.750 09/01/11 131,875 50 MSW Energy Holdings, LLC, 144A-- Private Placement (d)................ 8.500 09/01/10 51,625 95 Transcontinental Gas Pipe Line Corp. ............................... 8.875 07/15/12 107,825 ------------ 1,494,912 ------------ LIFE INSURANCE 0.5% 215 Anthem Insurance Cos., Inc., 144A-- Private Placement (c) (d)............ 9.125 04/01/10 271,078 215 Health Net, Inc. (c)................. 8.375 04/15/11 261,717 ------------ 532,795 ------------ LODGING 1.8% 250 Hilton Hotels Corp. (c).............. 7.950 04/15/07 270,000 130 Hilton Hotels Corp. ................. 7.625 12/01/12 143,000 50 HMH Properties, Inc. ................ 7.875 08/01/05 51,125 290 HMH Properties, Inc., Ser B (c)...... 7.875 08/01/08 295,800 345 LNR Property Corp., 144A--Private Placement (d)........................ 7.625 07/15/13 350,175 135 LodgeNet Entertainment Corp. ........ 9.500 06/15/13 139,050
8 See Notes to Financial Statements YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE LODGING (CONTINUED) $ 65 Starwood Hotels & Resorts Worldwide, Inc. ................................ 7.375% 05/01/07 $ 68,737 455 Starwood Hotels & Resorts Worldwide, Inc. ................................ 7.875 05/01/12 500,500 ------------ 1,818,387 ------------ MEDIA-CABLE 1.9% 55 Avalon Cable, LLC (f)................ 0/11.875 12/01/08 52,869 645 Charter Communications Holdings (c).................................. 8.250 04/01/07 499,875 50 CSC Holdings, Inc. .................. 7.250 07/15/08 50,250 260 CSC Holdings, Inc. .................. 8.125 07/15/09 269,750 70 CSC Holdings, Inc. .................. 9.875 02/15/13 73,500 65 CSC Holdings, Inc. .................. 10.500 05/15/16 71,175 330 DirecTV Holdings, LLC, 144A--Private Placement (d)........................ 8.375 03/15/13 369,600 310 Echostar DBS Corp. .................. 9.375 02/01/09 332,087 1,000 Park N View, Inc., Ser B (a) (b) (e).................................. 13.000 05/15/08 0 160 Pegasus Communications Corp., Ser B.. 9.750 12/01/06 146,400 20 Pegasus Satellite (f)................ 0/13.500 03/01/07 16,800 35 Renaissance Media Group.............. 10.000 04/15/08 34,738 ------------ 1,917,044 ------------ MEDIA-NONCABLE 1.7% 125 Echostar DBS Corp. (c)............... 9.125 01/15/09 140,313 125 Houghton Mifflin Co., 144A--Private Placement (d)........................ 8.250 02/01/11 132,500 275 Interep National Radio Sales, Inc. ................................ 10.000 07/01/08 235,125 320 Nextmedia Operating, Inc. (c)........ 10.750 07/01/11 360,000 120 PEI Holdings, Inc., 144A--Private Placement (d)........................ 11.000 03/15/10 132,900 325 Primedia, Inc. (c)................... 8.875 05/15/11 343,688 275 Salem Communications Corp. .......... 7.750 12/15/10 286,000 ------------ 1,630,526 ------------ METALS 0.8% 305 Doe Run Resources Corp., 144A-- Private Placement (d) (e) (i)........ 11.750 11/01/08 106,882 750 GS Technologies Operating, Inc. (a) (b) (e).............................. 12.000 09/01/04 22,500 220 Oregon Steel Mills, Inc. ............ 10.000 07/15/09 199,100 47 Republic Engineered Products......... 10.000 08/16/09 11,765
See Notes to Financial Statements 9 YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE METALS (CONTINUED) $ 245 UCAR Finance, Inc. (c)............... 10.250% 02/15/12 $ 241,325 225 United States Steel Corp. ........... 9.750 05/15/10 229,500 ------------ 811,072 ------------ NATURAL GAS PIPELINES 1.6% 340 Dynegy Holdings, Inc................. 6.875 04/01/11 287,300 75 El Paso Energy Partners LP, 144A-- Private Placement (d)................ 8.500 06/01/10 80,625 240 El Paso Production Holding Co., 144A--Private Placement (d).......... 7.750 06/01/13 240,600 315 GulfTerra Energy Partners LP......... 10.625 12/01/12 365,400 55 Northwest Pipeline Corp.............. 8.125 03/01/10 59,400 105 Southern Natural Gas Co., 144A-- Private Placement (d)................ 8.875 03/15/10 114,975 155 Williams Cos., Inc. ................. 9.250 03/15/04 159,650 290 Williams Cos., Inc. ................. 7.875 09/01/21 284,200 ------------ 1,592,150 ------------ OIL FIELD SERVICES 0.2% 160 Magnum Hunter Resources, Inc. ....... 9.600 03/15/12 176,800 ------------ OTHER INDUSTRIAL 0.1% 150 Eagle-Picher Industries, Inc. ....... 9.375 03/01/08 141,000 ------------ PACKAGING 1.0% 450 Owens-Illinois, Inc. (c)............. 7.500 05/15/10 443,250 250 Riverwood International Corp. (c).... 10.875 04/01/08 257,500 250 Tekni-Plex, Inc., Ser B (c).......... 12.750 06/15/10 245,000 ------------ 945,750 ------------ PAPER 1.0% 435 Georgia-Pacific Corp., 144A--Private Placement (c) (d).................... 8.875 02/01/10 474,150 50 Louisiana Pacific Corp. ............. 10.875 11/15/08 57,250 145 Louisiana Pacific Corp. ............. 8.875 08/15/10 166,750 80 Owens Brockway Glass Containers, Inc. ................................ 8.750 11/15/12 87,200 25 Owens Brockway Glass Containers, Inc., 144A--Private Placement (d).... 7.750 05/15/11 26,563 35 Pliant Corp. ........................ 13.000 06/01/10 33,075 185 Pliant Corp. ........................ 13.000 06/01/10 174,825 ------------ 1,019,813 ------------
10 See Notes to Financial Statements YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE REAL ESTATE INVESTMENT TRUSTS 0.4% $ 320 Istar Financial, Inc. (c)............ 8.750% 08/15/08 $ 350,400 ------------ REFINING 1.2% 120 Citgo Petroleum Corp., 144A--Private Placement (d)........................ 11.375 02/01/11 134,400 250 Frontier Oil Corp. (c)............... 11.750 11/15/09 276,250 145 Tesoro Petroleum Corp. .............. 9.000 07/01/08 131,950 135 Tesoro Petroleum Corp. (c)........... 9.625 04/01/12 124,200 435 Vintage Petroleum, Inc. (c).......... 7.875 05/15/11 468,713 ------------ 1,135,513 ------------ RETAIL 1.7% 339 Big 5 Corp., Ser B (c)............... 10.875 11/15/07 358,069 160 Elizabeth Arden, Inc. (c)............ 11.750 02/01/11 179,200 80 Gap, Inc. ........................... 6.900 09/15/07 86,600 130 Gap, Inc. ........................... 10.550 12/15/08 158,600 105 Houghton Mifflin Co., 144A--Private Placement (d)........................ 9.875 02/01/13 114,450 120 Oxford Industries, Inc., 144A-- Private Placement (d)................ 8.875 06/01/11 126,600 45 Penney JC Co., Inc. ................. 7.600 04/01/07 47,475 120 Penney JC Co., Inc. ................. 8.000 03/01/10 126,300 135 Penney JC Co., Inc. ................. 9.000 08/01/12 147,150 35 Penney JC Co., Inc. ................. 6.875 10/15/15 32,921 1,000 Sleepmaster LLC, Ser B (a) (b)....... 11.000 05/15/09 276,250 ------------ 1,653,615 ------------ SERVICES 0.8% 315 CB Richard Ellis Service, Inc. (c)... 11.250 06/15/11 339,413 60 CBRE Escrow, Inc., 144A--Private Placement (d)........................ 9.750 05/15/10 63,375 240 Intermet Corp. (c)................... 9.750 06/15/09 231,600 170 Iron Mountain, Inc. ................. 7.750 01/15/15 180,625 ------------ 815,013 ------------ SUPERMARKETS 1.0% 235 Ahold Finance USA, Inc. ............. 8.250 07/15/10 242,050 390 Delhaize America, Inc. .............. 8.125 04/15/11 429,000 263 Kroger Co., 144A--Private Placement (c) (d).............................. 8.500 07/15/17 291,057 ------------ 962,107 ------------
See Notes to Financial Statements 11 YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE TECHNOLOGY 0.9% $ 315 Avaya, Inc. ......................... 11.125% 04/01/09 $ 346,500 250 Fairchild Semiconductor Corp. (c).... 10.500 02/01/09 282,500 415 Solectron Corp., LYON (c)............ * 11/20/20 232,400 ------------ 861,400 ------------ TELECOMMUNICATIONS 2.7% 465 American Cellular Corp. (a).......... 9.500 10/15/09 234,825 50 American Tower Corp. ................ 9.375 02/01/09 50,500 465 American Tower Corp. ................ 6.250 10/15/09 432,450 240 Dobson Communications Corp. ......... 10.875 07/01/10 260,400 210 Exodus Communications, Inc. (a) (b) (e).................................. 11.250 07/01/08 12,576 336 Exodus Communications, Inc. (a) (b) (e).................................. 11.625 07/15/10 20,135 122 Globix Corp., 144A--Private Placement (d) (i).............................. 11.000 05/01/08 92,474 235 Nextel Communications, Inc. (c)...... 9.375 11/15/09 253,506 160 Nextel Partners, Inc. ............... 11.000 03/15/10 173,600 65 Nextel Partners, Inc., 144A--Private Placement (d)........................ 8.125 07/01/11 65,163 200 Primus Telecom Group................. 9.875 05/15/08 179,000 15 Primus Telecom Group................. 11.250 01/15/09 13,950 75 Qwest Corp. ......................... 6.625 09/15/05 76,688 170 RH Donnelley Finance Corp. I, 144A-- Private Placement (d)................ 10.875 12/15/12 198,900 335 SBA Communications Corp. ............ 12.000 03/01/08 344,213 150 SBA Communications Corp. ............ 10.250 02/01/09 138,750 405 WorldCom, Inc. (a) (b)............... 8.250 05/15/31 120,488 ------------ 2,667,618 ------------ TRANSPORTATION SERVICES 0.0% 14 Aran Shipping & Trading, SA (a) (e).................................. 8.300 01/31/04 0 ------------ TOTAL DOMESTIC CORPORATE BONDS 38.0%.......................................... 37,436,942 ------------ FOREIGN BONDS AND DEBT SECURITIES (US $) 6.4% BRAZIL 0.2% 500 Multicanal Participacoes, Ser B (a).................................. 12.625 06/18/04 176,250 ------------ CANADA 2.8% 200 360 Networks, Inc. (a) (b) (e)....... 13.000 05/01/08 0 80 Abitibi-Consolidated, Inc. .......... 6.000 06/20/13 76,308 180 Acetex Corp. ........................ 10.875 08/01/09 200,925 300 Air Canada (a) (b)................... 10.250 03/15/11 136,500
12 See Notes to Financial Statements YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CANADA (CONTINUED) $ 355 Alliance Atlantis Communications, Inc. (c)............................. 13.000% 12/15/09 $ 406,475 231 Hollinger Participation Trust, 144A-- Private Placement (d) (i)............ 12.125 11/15/10 260,562 400 Husky Oil Ltd. (Variable Rate Coupon) (c).................................. 8.900 08/15/28 464,000 250 Hydrochem Industrial Services, Inc., Ser B................................ 10.375 08/01/07 176,875 125 Norampac, Inc., 144A--Private Placement (d)........................ 6.750 06/01/13 131,875 200 Norske Skog Canada Ltd. ............. 8.625 06/15/11 210,000 130 Pacifica Papers, Inc. (c)............ 10.000 03/15/09 139,100 55 PCI Chemicals Canada, Inc. .......... 10.000 12/31/08 47,679 125 Rogers Cable, Inc., 144A--Private Placement (d)........................ 6.250 06/15/13 125,312 350 Tembec Industries, Inc. (c).......... 7.750 03/15/12 341,250 ------------ 2,716,861 ------------ FRANCE 0.5% 220 Rhodia S.A., 144A--Private Placement (d).................................. 8.875 06/01/11 228,800 235 Vivendi Universal SA, 144A--Private Placement (d)........................ 9.250 04/15/10 268,488 ------------ 497,288 ------------ GUERNSEY 0.2% 200 ABB International Finance Ltd. (Euro)............................... 9.500 01/15/08 230,939 ------------ LUXEMBOURG 0.7% 110 Johnsondiversey, Inc. (Euro)......... 9.625 05/15/12 136,650 115 Safilo Capital International SA, 144A--Private Placement (Euro) (d)... 9.625 05/15/13 140,546 350 Tyco International Group SA.......... 6.750 02/15/11 372,750 ------------ 649,946 ------------ MEXICO 0.6% 475 Satelites Mexicanos SA............... 10.125 11/01/04 219,688 350 TV Azteca SA (c)..................... 10.500 02/15/07 347,375 ------------ 567,063 ------------ SINGAPORE 0.2% 230 Flextronics International Ltd. (c)... 9.875 07/01/10 253,000 ------------
See Notes to Financial Statements 13 YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE UNITED KINGDOM 1.2% $ 155 Avecia Group Plc..................... 11.000% 07/01/09 $ 141,050 390 British Sky Broadcasting Group Plc (c).................................. 8.200 07/15/09 462,827 325 JSG Funding Plc (Euro)............... 10.125 10/01/12 407,476 160 Xerox Capital Europe Plc............. 5.875 05/15/04 161,600 ------------ 1,172,953 ------------ TOTAL FOREIGN BONDS AND DEBT SECURITIES 6.4%.................................. 6,264,300 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS 20.8% 953 Federal Home Loan Mortgage Corp. (Interest Only)...................... 5.000 09/15/14 63,989 582 Federal Home Loan Mortgage Corp. (Interest Only) (g).................. 6.320 01/15/29 48,064 479 Federal Home Loan Mortgage Corp. (Interest Only) REMIC (g)............ 6.820 03/15/32 36,245 774 Federal National Mortgage Association Pools (Interest Only)................ 5.500 06/25/26 62,238 1,250 Federal National Mortgage Association Pools (Interest Only) REMIC.......... 6.000 07/20/20 to 07/25/33 185,951 1,768 Federal National Mortgage Association Pools (Interest Only)................ 6.500 07/01/31 to 05/25/33 169,661 839 Federal National Mortgage Association Pools (Interest Only)................ 7.000 03/01/32 to 04/25/33 88,610 173 Federal National Mortgage Association Pools (Interest Only)................ 8.000 05/01/30 25,828 784 Government National Mortgage Association Pools (Interest Only) (g).................................. 6.220 05/16/32 56,110 689 Government National Mortgage Association Pools (Interest Only) REMIC (g)............................ 6.820 05/16/32 55,168 7,400 Federal Home Loan Mortgage Corp., July................................. 6.500 TBA 7,702,941 400 Federal Home Loan Mortgage Corp., July................................. 7.500 TBA 425,250 3,000 Federal National Mortgage Association, July.................... 6.000 TBA 3,118,125 5,750 Federal National Mortgage Association, September............... 5.000 TBA 5,796,719
14 See Notes to Financial Statements YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) $1,500 Federal National Mortgage Association, September............... 5.500% TBA $ 1,541,250 1,000 Government National Mortgage Association, September............... 5.500 TBA 1,034,375 ------------ TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 20.8%............................... 20,410,524 ------------ MORTGAGE BACKED SECURITIES 14.0% 1,129 Federal Home Loan Mortgage Corp. 30 Year Pools (c)....................... 7.500 11/01/29 to 10/01/31 1,200,235 151 Federal National Mortgage Association 15 Year Pools (c).................... 6.500 06/01/15 159,141 723 Federal National Mortgage Association 15 Year Pools (c).................... 7.000 03/01/15 to 05/01/15 769,331 157 Federal National Mortgage Association 15 Year Pools........................ 7.500 03/01/15 to 06/01/15 168,638 1,088 Federal National Mortgage Association 30 Year Pools (c).................... 6.000 04/01/28 to 12/01/28 1,132,848 5,437 Federal National Mortgage Association 30 Year Pools........................ 7.000 04/01/28 to 03/01/33 5,729,583 1,168 Federal National Mortgage Association 30 Year Pools (c).................... 7.500 03/01/30 to 03/01/32 1,241,809 461 Government National Mortgage Association 30 Year Pools (c)........ 7.000 07/15/29 to 01/15/30 487,558 945 Government National Mortgage Association 30 Year Pools............ 7.500 07/15/23 to 09/15/29 1,010,964 679 Government National Mortgage Association 30 Year Pools............ 8.000 03/15/17 to 10/15/22 741,587 261 Government National Mortgage Association 30 Year Pools............ 8.500 07/15/24 to 12/15/24 285,296 638 Government National Mortgage Association 30 Year Pools............ 9.000 08/15/16 to 12/15/24 711,751 94 Government National Mortgage Association 30 Year Pools............ 9.500 11/15/09 to 01/15/17 105,149 ------------ TOTAL MORTGAGE BACKED SECURITIES............................................... 13,743,890 ------------
See Notes to Financial Statements 15 YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE UNITED STATES TREASURY OBLIGATIONS 16.4% $1,600 United States Treasury Bonds......... 5.250% 02/15/29 $ 1,742,688 1,770 United States Treasury Bonds......... 7.625 02/15/25 2,517,204 2,575 United States Treasury Bonds (c)..... 8.125 08/15/21 3,766,141 1,450 United States Treasury Bonds (c)..... 8.750 08/15/20 2,220,936 810 United States Treasury Bonds (c)..... 8.875 02/15/19 1,240,755 1,600 United States Treasury Bonds (c)..... 11.125 08/15/03 1,620,501 250 United States Treasury Bonds (c)..... 11.250 02/15/15 426,094 1,250 United States Treasury Notes......... 6.750 05/15/05 1,377,002 1,200 United States Treasury Notes......... 7.250 05/15/04 1,265,016 ------------ TOTAL UNITED STATES TREASURY OBLIGATIONS....................................... 16,176,337 ------------ FOREIGN GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS 0.5% 332 Federal Republic of Brazil (Brazil)............................. 8.000 04/15/14 292,078 180 United Mexican States (Mexico) (c)... 8.375 01/14/11 216,090 ------------ TOTAL FOREIGN GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS..................... 508,168 ------------
DESCRIPTION EQUITIES 1.1% Aurora Foods, Inc. (8,855 Common Shares) (h)................................. 3,099 Dobson Communications Corp. (2,871 Preferred Shares) (i)..................... 282,057 Doe Run Resources Corp. (1 Common Stock Warrant) (e) (h)..................... 0 Globix Corp. (12,844 Common Shares) (h)...................................... 37,248 HF Holdings, Inc. (5,260 Common Stock Warrants) (e) (h)...................... 0 ICG Communications, Inc. (110 Common Stock Warrants) (e) (h)................. 0 ICG Communications, Inc. (677 Common Shares) (h)............................. 5,553 Intermedia Communications, Inc. (1,260 Preferred Shares) (a) (i)............. 4,095 McLeodUSA, Inc., Class A (2,015 Preferred Shares) (h)........................ 14,589 McLeodUSA, Inc., Class A (4,466 Preferred Stock Warrants) (h)................ 1,831 McLeodUSA, Inc., Class A (497 Common Shares) (h)............................. 750 Microcell Telecommunications, Inc. (1,222 Common Stock Warrants) (CAN) (h)... 721 Microcell Telecommunications, Inc. (1,986 Preferred Shares) (CAN) (h)........ 17,025 Microcell Telecommunications, Inc. (17 Common Shares) (CAN) (h).............. 134 Microcell Telecommunications, Inc. (733 Common Stock Warrants) (CAN) (h)..... 243 Microcell Telecommunications, Inc., Class B (1,974 Common Shares) (CAN) (h)........................................................................ 14,922 Optel, Inc. (500 Common Shares) (e) (h)...................................... 0 Park N View, Inc., 144A--Private Placement (1,000 Common Stock Warrants) (d) (e) (h).................................................................... 0
16 See Notes to Financial Statements YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited)
MARKET DESCRIPTION VALUE EQUITIES (CONTINUED) Paxon Communications Corp. (3,700 Preferred Shares) (c) (i).................. $ 365,375 Pioneer Cos., Inc. (3,533 Common Shares) (h)................................. 12,895 Republic Technologies International, Inc., 144A--Private Placement (250 Common Stock Warrants) (d) (h)............................................. 3 Startec Global Communications, 144A--Private Placement (1,000 Common Stock Warrants) (d) (e) (h)...................................................... 0 TNP Enterprises, Inc. (4,022 Preferred Shares) (c) (i)....................... 302,646 XO Communications, Inc. (487 Common Shares) (h).............................. 3,531 XO Communications, Inc., Class A (975 Common Stock Warrants) (e) (h)......... 975 XO Communications, Inc., Class B (731 Common Stock Warrants) (e) (h)......... 0 XO Communications, Inc., Class C (731 Common Stock Warrants) (e) (h)......... 0 ------------ TOTAL EQUITIES 1.1%......................................................... 1,067,692 ------------ TOTAL LONG-TERM INVESTMENTS 97.2% (Cost $98,280,916)......................................................... 95,607,853 ------------ SHORT-TERM INVESTMENTS 22.7% REPURCHASE AGREEMENT 4.3% Banc of America Securities LLC ($4,179,000 par collateralized by U.S. Government obligations in a pooled cash account, dated 06/30/03, to be sold on 07/01/03 at $4,179,129)................................................. 4,179,000 U.S. GOVERNMENT AGENCY OBLIGATIONS 18.4% Federal Home Loan Bank Discount Note ($18,124,000 par, yielding 0.95%, 07/01/03 maturity)......................................................... 18,124,000 ------------ TOTAL SHORT-TERM INVESTMENTS (Cost $22,303,000)......................................................... 22,303,000 ------------ TOTAL INVESTMENTS 119.9% (Cost $120,583,916)........................................................ 117,910,853 LIABILITIES IN EXCESS OF OTHER ASSETS (19.9%)............................... (19,549,790) ------------ NET ASSETS 100.0%........................................................... $ 98,361,063 ============
* Zero coupon bond (a) Non-income producing as security is in default. (b) This borrower has filed for protection in federal bankruptcy court. See Notes to Financial Statements 17 YOUR TRUST'S INVESTMENTS June 30, 2003 (Unaudited) (c) Assets segregated as collateral for open forward transactions. (d) 144A securities are those which are exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may only be resold in transactions exempt from registration which are normally those transactions with qualified institutional buyers. (e) Market value is determined in accordance with procedures established in good faith by the Board of Trustees. (f) Security is a "step-up" bond where the coupon increases or steps up at a predetermined date. (g) An Inverse Floating Rate security is one where the coupon is inversely indexed to a short-term floating interest rate multiplied by a specific factor. As the floating rate rises, the coupon is reduced. Conversely, as the floating rate declines, the coupon is increased. The price of these securities may be more volatile than the price of a comparable fixed rate security. These instruments are typically used by the Trust to enhance the yield of the portfolio. All of the Trust's portfolio holdings, including derivative instruments, are marked to market. (h) Non-income producing security. (i) Payment-in-kind security. TBA -- To be announced, maturity date has not yet been established. The maturity date will be determined upon settlement and delivery of the mortgage pools. LYON--Liquid Yield Option Note REMIC--Real Estate Mortgage Investment Conduits EURO--Eurodollar CAN--Canadian Dollar 18 See Notes to Financial Statements FINANCIAL STATEMENTS Statement of Assets and Liabilities June 30, 2003 (Unaudited) ASSETS: Total Investments (Cost $120,583,916)....................... $117,910,853 Cash........................................................ 516 Receivables: Investments Sold.......................................... 13,852,970 Interest.................................................. 1,426,929 Other....................................................... 30,655 ------------ Total Assets............................................ 133,221,923 ------------ LIABILITIES: Payables: Investments Purchased..................................... 34,625,196 Investment Advisory Fee................................... 52,612 Affiliates................................................ 2,217 Trustees' Deferred Compensation and Retirement Plans........ 107,434 Accrued Expenses............................................ 46,018 Forward Foreign Currency Contracts.......................... 27,383 ------------ Total Liabilities....................................... 34,860,860 ------------ NET ASSETS.................................................. $ 98,361,063 ============ NET ASSET VALUE PER COMMON SHARE ($98,361,063 divided by 15,371,738 shares outstanding)............................ $ 6.40 ============ NET ASSETS CONSIST OF: Common Shares (no par value with unlimited shares authorized, 15,371,738 shares issued and outstanding)..... $122,393,211 Accumulated Undistributed Net Investment Income............. (1,670,301) Net Unrealized Depreciation................................. (2,699,508) Accumulated Net Realized Loss............................... (19,662,339) ------------ NET ASSETS.................................................. $ 98,361,063 ============
See Notes to Financial Statements 19 Statement of Operations For the Six Months Ended June 30, 2003 (Unaudited) INVESTMENT INCOME: Interest.................................................... $ 2,827,438 Dividends................................................... 77,659 Other....................................................... 6,890 ------------ Total Income............................................ 2,911,987 ------------ EXPENSES: Investment Advisory Fee..................................... 309,310 Shareholder Reports......................................... 23,048 Trustees' Fees and Related Expenses......................... 21,549 Custody..................................................... 13,590 Legal....................................................... 2,429 Other....................................................... 56,529 ------------ Total Expenses.......................................... 426,455 Less Credits Earned on Cash Balances.................... 98 ------------ Net Expenses............................................ 426,357 ------------ NET INVESTMENT INCOME....................................... $ 2,485,630 ============ REALIZED AND UNREALIZED GAIN/LOSS: Realized Gain/Loss: Investments............................................... $ (3,245,863) Foreign Currency Contracts................................ (19,455) Foreign Currency Transactions............................. (29,192) ------------ Net Realized Loss........................................... (3,294,510) ------------ Unrealized Appreciation/Depreciation: Beginning of the Period................................... (11,096,106) End of the Period: Investments............................................. (2,673,063) Foreign Currency Contracts.............................. (27,383) Foreign Currency Translation............................ 938 ------------ (2,699,508) ------------ Net Unrealized Appreciation During the Period............... 8,396,598 ------------ NET REALIZED AND UNREALIZED GAIN............................ $ 5,102,088 ============ NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 7,587,718 ============
20 See Notes to Financial Statements Statements of Changes in Net Assets (Unaudited)
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2003 DECEMBER 31, 2002 ------------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income................................. $ 2,485,630 $ 5,997,463 Net Realized Loss..................................... (3,294,510) (6,169,169) Net Unrealized Appreciation During the Period......... 8,396,598 1,071,689 ----------- ------------ Change in Net Assets from Operations.................. 7,587,718 899,983 Distributions from Net Investment Income.............. (3,035,755) (7,220,386) ----------- ------------ NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... 4,551,963 (6,320,403) FROM CAPITAL TRANSACTIONS: Value of Common Shares Issued Through Dividend Reinvestment........................................ -0- 81,841 ----------- ------------ TOTAL INCREASE/DECREASE IN NET ASSETS................. 4,551,963 (6,238,562) NET ASSETS: Beginning of the Period............................... 93,809,100 100,047,662 ----------- ------------ End of the Period (Including accumulated undistributed net investment income of ($1,670,301) and ($1,120,176), respectively)......................... $98,361,063 $ 93,809,100 =========== ============
See Notes to Financial Statements 21 Financial Highlights (Unaudited) THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
SIX MONTHS ENDED JUNE 30, -------------------------------------------------- 2003 2002 2001 (a) 2000 1999 1998 -------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD.......................... $6.10 $ 6.51 $ 6.85 $ 7.25 $ 7.84 $ 8.05 ----- ------ ------ ------- ------- ------ Net Investment Income........... .17 .39 .53 .60 .64 .66 Net Realized and Unrealized Gain/Loss..................... .33 (.33) (.29) (.40) (.63) (.22) ----- ------ ------ ------- ------- ------ Total from Investment Operations...................... .50 .06 .24 .20 .01 .44 Distributions from Net Investment Income.......................... (.20) (.47) (.58) (.60) (.60) (.65) ----- ------ ------ ------- ------- ------ NET ASSET VALUE, END OF THE PERIOD.......................... $6.40 $ 6.10 $ 6.51 $ 6.85 $ 7.25 $ 7.84 ===== ====== ====== ======= ======= ====== Common Share Market Price at End of the Period................... $5.93 $ 5.71 $ 6.33 $6.5625 $5.6875 $ 7.75 Total Return (b).................. 7.32%* -2.59% 5.05% 26.59% -19.81% 5.05% Net Assets at End of the Period (In millions)................... $98.4 $ 93.8 $100.0 $ 104.8 $ 110.9 $120.0 Ratio of Expenses to Average Net Assets.......................... .90% .89% .93% .96% .95% .96% Ratio of Net Investment Income to Average Net Assets.............. 5.22% 6.29% 7.88% 8.51% 8.46% 8.17% Portfolio Turnover................ 154%* 101% 46% 60% 28% 47% * Non-Annualized
(a) As required, effective January 1, 2001, the Trust has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on fixed income securities and presenting paydown gains and losses on mortgage- and asset-backed securities as interest income. The effect of these changes for the year ended December 31, 2001 was an increase in the ratio of net investment income to average net assets from 7.83% to 7.88%. Net investment income per share and net realized and unrealized gains and losses per share were unaffected by the adjustments. Per share, ratios and supplemental data for periods prior to December 31, 2001 have not been restated to reflect this change in presentation. (b) Total return assumes an investment at the common share market price at the beginning of the period indicated, reinvestment of all distributions for the period in accordance with the Trust's dividend reinvestment plan, and sale of all shares at the closing common share price at the end of the period indicated. 22
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ----------------------------------------------- $ 7.93 $ 7.94 $ 7.28 $ 8.15 $ 7.85 ------ ------ ------ ------ ------ .66 .66 .65 .65 .78 .18 (.01) .66 (.86) .29 ------ ------ ------ ------ ------ .84 .65 1.31 (.21) 1.07 (.72) (.66) (.65) (.66) (.77) ------ ------ ------ ------ ------ $ 8.05 $ 7.93 $ 7.94 $ 7.28 $ 8.15 ====== ====== ====== ====== ====== $ 8.00 $ 7.50 $ 7.25 $ 6.50 $ 7.75 16.97% 12.95% 21.83% -8.06% 11.82% $123.1 $121.2 $121.4 $111.4 $124.7 .91% 1.00% .94% .96% 1.00% 8.32% 8.40% 8.50% 7.94% 8.99% 55% 36% 34% 45% 53%
23 NOTES TO FINANCIAL STATEMENTS June 30, 2003 (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen Income Trust (the "Trust") is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended. The Trust's investment objective is to provide current income through investing in a portfolio of U.S. Government securities and in corporate fixed income securities, including high-yielding, lower rated or nonrated securities believed not to involve undue risk to income or principal. The Trust commenced investment operations on April 22, 1988. The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION Fixed income investments are stated at value using market quotations or indications of value obtained from an independent pricing service. Investments in securities listed on a securities exchange are valued at their sales price as of the close of such securities exchange. Listed and unlisted securities for which the last sales price is not available are valued at the mean of the bid and asked prices. For those securities where quotations or prices are not available, valuations are determined in accordance with procedures established in good faith by the Board of Trustees. Short-term securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. The Trust may purchase and sell securities on a "when-issued", "delayed delivery", or "forward commitment" basis, with settlement to occur at a later date. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security so purchased is subject to market fluctuations during this period. Purchasing securities on this basis involves a risk that the market value at the time of delivery may be lower than the agreed upon purchase price resulting in an unrealized loss. The Trust will maintain, in a segregated account with its custodian, assets having an aggregate value at least equal to the amount of the when-issued, delayed delivery, or forward purchase commitments until payment is made. At June 30, 2003, the Trust has $19,618,660 of forward purchase commitments. The Trust may invest in repurchase agreements, which are short-term investments whereby the Trust acquires ownership of a debt security and the seller agrees to repurchase the security at a future time and specified price. The Trust may invest independently in repurchase agreements, or transfer uninvested cash balances into a pooled cash account along with other investment companies advised by Van Kampen Asset Management Inc. (the "Adviser") or its affiliates, the daily aggregate of which is invested in repurchase agreements. Repurchase agreements are fully collateralized by the underlying debt security. The Trust will 24 NOTES TO FINANCIAL STATEMENTS June 30, 2003 (Unaudited) make payment for such securities only upon physical delivery or evidence of book entry transfer to the account of the custodian bank. The seller is required to maintain the value of the underlying security at not less than the repurchase proceeds due the Trust. C. INVESTMENT INCOME Interest income is recorded on an accrual basis and dividend income is recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the expected life of each applicable security. D. FEDERAL INCOME TAXES It is the Trust's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Trust intends to utilize provisions of the federal income tax laws which allow it to carry a realized capital loss forward for eight years following the year of the loss and offset these losses against any future realized capital gains. At December 31, 2002, the Trust had an accumulated capital loss carryforward for tax purposes of $15,817,862, which will expire between December 31, 2003 and December 31, 2010. Of this amount, $1,776,125 will expire on December 31, 2003. At June 30, 2003, the cost and related gross unrealized appreciation and depreciation are as follows: Cost of investments for tax purposes........................ $120,917,809 ============ Gross tax unrealized appreciation........................... $ 4,898,895 Gross tax unrealized depreciation........................... (7,905,852) ------------ Net tax unrealized depreciation on investments.............. $ (3,006,957) ============
E. DISTRIBUTION OF INCOME AND GAINS The Trust declares and pays dividends monthly from net investment income to shareholders. Net realized gains, if any, are distributed annually. Distributions from net realized gains for book purposes may include short-term capital gains, which are included in ordinary income for tax purposes. The tax character of distributions paid during the year ended December 31, 2002 was as follows: Distributions paid from: Ordinary Income........................................... $7,220,386 Long-term capital gain.................................... -0- ---------- $7,220,386 ==========
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income............................... $156,125
25 NOTES TO FINANCIAL STATEMENTS June 30, 2003 (Unaudited) Net realized gains or losses may differ for financial and tax reporting purposes as a result of the deferral of losses relating to wash sale transactions. F. FOREIGN CURRENCY TRANSLATION Asset and liabilities denominated in foreign currencies and commitments under forward foreign currency contracts are translated into U.S. dollars at the mean of the quoted bid and ask prices of such currencies against the U.S. dollar. Purchases and sales of portfolio securities are translated at the rate of exchange prevailing when such securities were acquired or sold. Realized gain and loss on foreign currency transactions on the Statement of Operations includes the net realized amount from the sale of foreign currency and the amount realized between trade date and settlement date on securities transactions. Income and expenses are translated at rates prevailing when accrued. G. EXPENSE REDUCTION During the six months ended June 30, 2003, the Trust's custody fee was reduced by $98 as a result of credits earned on cash balances. 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Trust's Investment Advisory Agreement, the Adviser will provide investment advice and facilities to the Trust for an annual fee payable monthly of .65% of the average daily net assets of the Trust. For the six months ended June 30, 2003, the Trust recognized expenses of approximately $2,400 representing legal services provided by Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of the Trust is an affiliated person. Under an Accounting Services agreement, the Adviser provides accounting services to the Trust. The Adviser allocates the cost of such services to each trust. For the six months ended June 30, 2003, the Trust recognized expenses of approximately $6,600 representing Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen") cost of providing accounting services to the Trust, which is reported as part of "Other" expenses in the Statement of Operations. Certain officers and trustees of the Trust are also officers and directors of Van Kampen. The Trust does not compensate its officers or trustees who are officers of Van Kampen. The Trust provides deferred compensation and retirement plans for its trustees who are not officers of Van Kampen. Under the deferred compensation plan, trustees may elect to defer all or a portion of their compensation to a later date. Benefits under the retirement plan are payable upon retirement for a ten-year period and are based upon each trustee's years of service to the Trust. The maximum annual benefit per trustee under the plan is $2,500. 3. CAPITAL TRANSACTIONS At June 30, 2003 and December 31, 2002, paid in surplus related to common shares aggregated $122,393,211. 26 NOTES TO FINANCIAL STATEMENTS June 30, 2003 (Unaudited) Transactions in common shares were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2003 DECEMBER 31, 2002 Beginning Shares...................................... 15,371,738 15,358,477 Shares issued Through Dividend Reinvestment........... -0- 13,261 ---------- ---------- Ending Shares......................................... 15,371,738 15,371,738 ========== ==========
4. INVESTMENT TRANSACTIONS During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments, were $141,482,946 and $146,126,870, respectively. 5. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument in very general terms refers to a security whose value is "derived" from the value of an underlying asset, reference rate or index. The Trust has a variety of reasons to use derivative instruments, such as to attempt to protect the Trust against possible changes in the market value of its portfolio, foreign currency exposure, or generate potential gain. All of the Trust's holdings, including derivative instruments, are marked to market each day with the change in value reflected in unrealized appreciation/depreciation. Upon disposition, a realized gain or loss is recognized accordingly, except when taking delivery of a security underlying a forward commitment. In this instance, the recognition of gain or loss is postponed until the disposal of the security underlying the forward commitment. Purchasing securities on a forward commitment involves a risk that the market value at the time of delivery may be lower than the agreed upon purchase price resulting in an unrealized loss. Selling securities on a forward commitment involves different risks and can result in losses more significant than those arising from the purchase of such securities. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. Upon the settlement of the contract, a realized gain or loss is recognized and is included as a component of realized gain/ loss on forwards. The following forward foreign currency contracts were outstanding as of June 30, 2003.
UNREALIZED CURRENT APPRECIATION/ VALUE DEPRECIATION SHORT CONTRACTS: Euro Currency 475,000 expiring 7/24/03.................................. $545,967 $(25,842) 70,000 expiring 7/24/03................................... 80,458 (3,808) 140,000 expiring 7/24/03.................................. 160,917 2,267 -------- -------- $787,342 $(27,383) ======== ========
27 BOARD OF TRUSTEES AND IMPORTANT ADDRESSES VAN KAMPEN INCOME TRUST BOARD OF TRUSTEES DAVID C. ARCH J. MILES BRANAGAN(1) JERRY D. CHOATE ROD DAMMEYER LINDA HUTTON HEAGY R. CRAIG KENNEDY HOWARD J KERR MITCHELL M. MERIN*(1) THEODORE A. MYERS JACK E. NELSON(1) RICHARD F. POWERS, III* HUGO F. SONNENSCHEIN WAYNE W. WHALEN* - Chairman SUZANNE H. WOOLSEY INVESTMENT ADVISER VAN KAMPEN ASSET MANAGEMENT INC. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 CUSTODIAN AND TRANSFER AGENT STATE STREET BANK AND TRUST COMPANY c/o EquiServe P.O. Box 43011 Providence, Rhode Island 02940-3011 LEGAL COUNSEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago, Illinois 60606 INDEPENDENT AUDITORS DELOITTE & TOUCHE LLP 180 North Stetson Avenue Chicago, Illinois 60601 * "Interested persons" of the Trust, as defined in the Investment Company Act of 1940, as amended. (1) Appointed to the Board of Trustees effective July 23, 2003. 28 RESULTS OF SHAREHOLDER VOTES The Annual Meeting of Shareholders of the Trust was held on June 24, 2003, where shareholders voted on the election of trustees. With regards to the election of the following trustees by common shareholders of the Trust:
# OF SHARES ------------------------------ IN FAVOR WITHHELD ------------------------------------------------------------------------------------------ Jerry D. Choate........................................... 14,076,724 383,129 Linda Hutton Heagy........................................ 14,073,212 386,641 R. Craig Kennedy.......................................... 14,065,952 393,901 Theodore A. Myers......................................... 14,070,691 389,162 Richard F. Powers, III.................................... 14,021,646 438,207 Hugo F. Sonnenschein...................................... 14,077,152 382,701 Suzanne H. Woolsey........................................ 14,068,485 391,368
Trustees not voted on include: David C. Arch, Rod Dammeyer, Howard J. Kerr, and Wayne W. Whalen. 29 Van Kampen Privacy Notice The Van Kampen companies and investment products* respect your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain nonpublic personal information about you. This is information we collect from you on applications or other forms, and from the transactions you conduct with us, our affiliates, or third parties. We may also collect information you provide when using our Web site, and text files (also known as "cookies") may be placed on your computer to help us to recognize you and to facilitate transactions you initiate. We do not disclose any nonpublic personal information about you or any of our former customers to anyone, except as permitted by law. For instance, so that we may continue to offer you Van Kampen investment products and services that meet your investing needs, and to effect transactions that you request or authorize, we may disclose the information we collect to companies that perform services on our behalf, such as printers and mailers that assist us in the distribution of investor materials. These companies will use this information only for the services for which we hired them, and are not permitted to use or share this information for any other purpose. To protect your nonpublic personal information internally, we permit access to it only by authorized employees, and maintain physical, electronic and procedural safeguards to guard your nonpublic personal information. * Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc., Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many Van Kampen mutual funds and Van Kampen unit investment trusts. Van Kampen Funds Inc. 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 www.vankampen.com (VAN KAMPEN INVESTMENTS LOGO) Copyright (C)2003 Van Kampen Funds Inc. All rights reserved. Member NASD/SIPC. 920, 957, 107 VIN SAR 8/03 11618H03-AS-8/03 Item 2. Code of Ethics. Not applicable for semi-annual reports. Item 3. Audit Committee Financial Expert. Not applicable for semi-annual reports. Item 4. Principal Accountant Fees and Services. Not applicable for semi-annual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semi-annual reports. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semi-annual reports. Item 8. [Reserved.] Item 9. The Trust's principal executive officer and principal financial officer have concluded that the Trust's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Trust in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Trust's internal controls or in other factors that could significantly affect the Trust's internal controls subsequent to the date of their evaluation. Item 10. Exhibits. (a) Code of Ethics - Not applicable for semi-annual reports. (b) Certifications of Principal Executive Officer and Principal Financial Officer attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) Van Kampen Income Trust ------------------------------------------------------------------ By: /s/ Ronald E. Robison ---------------------------------------------------------------------------- Name: Ronald E. Robison Title: Principal Executive Officer Date: August 19, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Ronald E. Robison ---------------------------------------------------------------------------- Name: Ronald E. Robison Title: Principal Executive Officer Date: August 19, 2003 By: /s/ John L. Sullivan ---------------------------------------------------------------------------- Name: John L. Sullivan Title: Principal Financial Officer Date: August 19, 2003