-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CDYxxQiCvlbUFjtumN2kE0UlZ/RrNeMdCc/KTOiwYbKL1uzRFx5NtZn2U0maOOhN QaWKiDokiR0IWsTvyCjoiQ== 0000950124-99-001431.txt : 19990225 0000950124-99-001431.hdr.sgml : 19990225 ACCESSION NUMBER: 0000950124-99-001431 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VAN KAMPEN HIGH INCOME TRUST CENTRAL INDEX KEY: 0000843506 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 363616859 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05707 FILM NUMBER: 99548909 BUSINESS ADDRESS: STREET 1: ONE PARKVIEW PLZ STREET 2: VAN KAMPEN INVESTMENTS INC CITY: OAKBROOK TERRACE STATE: IL ZIP: 60181 BUSINESS PHONE: 6306846774 MAIL ADDRESS: STREET 1: VAN KAMPEN INVESTMENTS INC STREET 2: ONE PARKVIEW PLAZA CITY: OAKBROOK TERRACE STATE: IL ZIP: 60181 FORMER COMPANY: FORMER CONFORMED NAME: VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM HIGH INCOME TR DATE OF NAME CHANGE: 19960102 FORMER COMPANY: FORMER CONFORMED NAME: VAN KAMPEN MERRITT INTERMEDIATE TERM HIGH INCOME TRUST DATE OF NAME CHANGE: 19920703 N-30D 1 ANNUAL REPORT 1 TABLE OF CONTENTS Letter to Shareholders........................... 1 Performance Results.............................. 3 Glossary of Terms................................ 4 Portfolio Management Review...................... 6 Portfolio Highlights............................. 10 Portfolio of Investments......................... 11 Statement of Assets and Liabilities.............. 17 Statement of Operations.......................... 18 Statement of Changes in Net Assets............... 19 Financial Highlights............................. 20 Notes to Financial Statements.................... 22 Report of Independent Accountants................ 25 Dividend Reinvestment Plan....................... 26
VIT ANR 2/99 2 LETTER TO SHAREHOLDERS January 20, 1999 Dear Shareholder, The past decade has been a remarkable time for investors. Together, we've witnessed one of the greatest bull markets in investment history, unprecedented growth in mutual fund investing, and a surge in personal retirement planning. The coming millennium promises to hold even more opportunities. To lead us into this new era of investing, Richard F. Powers III has joined Van Kampen as Chairman and Chief Executive Officer. He comes to us from our parent company, Morgan Stanley Dean Witter & Co., where he served as Executive Vice President and Director of Marketing. He brings 27 years of experience in the financial services industry, including an extensive background in product management, strategic planning and brand development. Although former Chairman Don G. Powell retired on January 1, he will remain active in the industry and the community. Mr. Powell plans to continue his service as a member of the board of directors of the Investment Company Institute, the leading mutual fund industry association, and he will remain a trustee of your trust. ECONOMIC OVERVIEW Despite a stormy year in the global economy, the United States ended 1998 with only a moderate slowdown in growth. The nation's gross domestic product, a measure of economic health, grew 3.9 percent during the year, matching 1997's growth rate and indicating that our nation's economy remains strong. A continuation of low inflation--only a 1.6 percent increase in the consumer price index over the last 12 months--also helped sustain the domestic economy and kept inflation-adjusted interest rates attractive. Although the year ended on a positive note, the economic environment was quite unsettled in the third quarter, with the Asian financial crisis contributing to slowing corporate profits in the United States. Given the uncertainty surrounding emerging market nations and the near-collapse of a major U.S. hedge fund, the stock and bond markets experienced significant volatility during this period. With instability as a backdrop, American and foreign investors alike pursued a flight to quality--seeking the relative safety of large-company stocks and government bonds. In the last few months of the year the global financial situation improved in conjunction with the Federal Reserve's interest rate decreases. In response to declining corporate profits and mounting international concerns, the Fed lowered interest rates three times, with 0.25 percent cuts in September, October, and November. These rate cuts, coupled with a wave of corporate mergers and cost-cutting measures, lent the support needed to keep the economy growing. Dozens of foreign central banks also reduced interest rates in an effort to stimulate their economies. These actions gave a boost to investor confidence and encouraged a return to a more diversified range of investments in the last few months of the year. Continued on page 2 1 3 MARKET REVIEW The bond market continued to rally as interest rates fell during the year, with U.S. Treasury securities outpacing corporate and municipal bonds in price appreciation. Investors' desire for safer investments amid the global economic storm led to strong demand for high-quality bonds. In fact, the U.S. Treasury bond was considered one of the most attractive places to invest by both domestic and international investors, propelling the 30-year Treasury yield to 4.71 percent in October--its lowest yield since the federal government began selling these bonds in 1977. However, higher-yielding bonds suffered--primarily during the third quarter--as investors' demand for quality increased. Corporate bond prices, especially among lower-rated issues, fell in conjunction with concerns about declining corporate profits. OUTLOOK Our outlook for the domestic economy is positive, and we anticipate continued low inflation and healthy economic growth. However, the aftereffects of the global economic slowdown may continue to put pressure on corporate earnings in the first half of the year. Internationally, we anticipate that low interest rates and declining inflation will lead to improvements in troubled areas such as Asia and Latin America. With the successful launch of the euro, the new European transnational currency, we believe that many foreign markets will become increasingly attractive in 1999. In the long term, we are optimistic that the stock market will continue its record growth, although we could experience additional volatility in the months ahead if concerns about high stock valuations and increasing earnings pressure become more pronounced. Combined with growing questions about corporate and government reactions to the Year 2000 computer problem, we could see an increasingly cautious market by mid-year. Additional details about your trust, including a question-and-answer section with your portfolio management team, are provided in this report. As always, we are pleased to have the opportunity to share with you the progress of your investment. Sincerely, [SIG.] Richard F. Powers III Chairman Van Kampen Investment Advisory Corp. [SIG.] Dennis J. McDonnell President Van Kampen Investment Advisory Corp. 2 4 PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1998 VAN KAMPEN HIGH INCOME TRUST (NYSE TICKER SYMBOL--VIT) COMMON SHARE TOTAL RETURNS One-year total return based on market price(1)............ (4.33%) One-year total return based on NAV(2)..................... 1.35% DISTRIBUTION RATE Distribution rate as a % of closing common stock price(3)................................................ 11.01% SHARE VALUATIONS Net asset value........................................... $ 5.86 Closing common stock price................................ $6.375 One-year high common stock price (03/10/98)............... $7.625 One-year low common stock price (09/01/98)................ $5.6875 Preferred share rate(4)................................... 5.25%
(1) Total return based on market price assumes an investment at the 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 stock price at the end of the period indicated. (2) Total return based on net asset value (NAV) assumes an investment at the beginning of the period indicated, reinvestment of all distributions for the period, and sale of all shares at the end of the period, all at NAV. (3) Distribution rate represents the monthly annualized distributions of the Trust at the end of the period and not the earnings of the Trust. (4) See "Notes to Financial Statements" footnote #4, for more information concerning Preferred Share reset periods. Investing in high-yield, lower-rated securities involves certain risks, which may include the potential for greater sensitivity to general economic downturns and greater market price volatility. Past performance does not guarantee future results. Investment return, stock price and net asset value will fluctuate with market conditions. Trust shares, when sold, may be worth more or less than their original cost. 3 5 GLOSSARY OF TERMS CALL FEATURE: Allows the issuer to buy back a bond on specific dates at set prices before maturity. These dates and prices are set when the bond is issued. To compensate the bondholder for the potential loss of income and ownership, a bond's call price is usually higher than the face value of the bond. Bonds are usually called when interest rates drop so significantly that the issuer can save money by issuing new bonds at lower rates. CREDIT RATING: An evaluation of an issuer's credit history and capability of repaying obligations. Standard & Poor's and Moody's Investors Service are two companies that assign bond ratings. Standard & Poor's ratings range from a high of AAA to a low of D, while Moody's ratings range from a high of Aaa to a low of C. CREDIT SPREAD: Also called quality spread, the difference in yield between higher-quality issues (such as Treasury securities) and lower-quality issues. Normally, lower-quality issues provide higher yields to compensate investors for the additional credit risk. DURATION: A measure of the sensitivity of a bond's price to changes in interest rates, expressed in years. Each year of duration represents an expected 1 percent change in the price of a bond for every 1 percent change in interest rates. The longer a bond's duration, the greater the effect of interest rate movements on net asset value. Typically, funds with shorter durations perform better in rising rate environments, while funds with longer durations perform better when rates decline. FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve System, which is the central bank system of the United States. Its policy-making committee, called the Federal Open Market Committee, meets eight times a year to establish monetary policy and monitor the economic pulse of the United States. INFLATION: A persistent and measurable rise in the general level of prices. Inflation is widely measured by the Consumer Price Index, an economic indicator that measures the change in the cost of purchased goods and services. MATURITY LENGTH: The time it takes for a bond to mature. A bond issued in 1998 and maturing in 2008 is a 10-year bond. For corporate bonds, short-term bonds usually mature in five years or less, intermediate-term bonds mature in five to ten years, and long-term bonds mature after ten years. NET ASSET VALUE (NAV): The value of a trust share, calculated by deducting a trust's liabilities from the total assets applicable to common shareholders in its portfolio and dividing this amount by the number of common shares outstanding. VOLATILITY: A measure of the fluctuation in the market price of a security. A security that is volatile has frequent and large swings in price. 4 6 YIELD: The annual rate of return on an investment, expressed as a percentage. For bonds and notes, the yield is the annual interest divided by the market price. YIELD SPREAD: The additional yield investors can earn by either investing in bonds with longer maturities or by investing in bonds with lower ratings. The spread is the difference in yield between bonds with short versus long maturities or the difference in yield between high-quality bonds and lower-quality bonds. 5 7 PORTFOLIO MANAGEMENT REVIEW VAN KAMPEN HIGH INCOME TRUST We recently spoke with the management team of the Van Kampen High Income Trust about the key events and economic forces that shaped the markets during the past year. The team includes Ellis S. Bigelow, portfolio manager, and Peter W. Hegel, chief investment officer for fixed-income investments. Ms. Bigelow assumed management responsibilities for the Trust on March 21, 1998. The following comments reflect their views on the Trust's performance during the year ended December 31, 1998. Q HOW WOULD YOU CHARACTERIZE THE MARKET CONDITIONS IN WHICH THE TRUST OPERATED DURING THE REPORTING PERIOD? A This year was a volatile environment for high-yield bonds. Early in the year, these securities were in favor as investors were willing to assume additional risk in exchange for higher yields. However, as the financial problems in Asia came to light, investors began to seek the relative safety of U.S. Treasury bonds. Despite this moderate level of instability, bond prices generally moved higher during the first six months of the year as interest rates declined. In the third quarter, high-yield bonds suffered price declines as consumer confidence plummeted in conjunction with disappointing corporate earnings. Concerns about the economy, questionable hedge fund activity, and a lack of action by the Fed led many institutional, foreign and individual investors to sell their high-yield bonds. In fact, a record $2.9 billion was diverted from high-yield bond funds in August. This lack of demand led to unusually high yields in the marketplace as investors demanded significant premiums in exchange for purchasing these out-of-favor securities. The difference in yields between U.S. Treasury bonds and high-yield bonds widened to as much as 7.79 percent in mid-October. The high-yield market rebounded after the Fed's interest rate cuts in the fourth quarter, but the after-effects of such an unsettled environment remain. Q THESE SEEM LIKE EXTREME CONDITIONS. WAS THE MARKET UNDER AS MUCH PRESSURE AS PRICE LEVELS SEEMED TO INDICATE? A Absolutely not. The high-yield market was fundamentally sound during the period. One of the most difficult months in the high-yield market was June 1991, when more than 11.5 percent of high-yield bonds were in default. Compare that to a trailing 12-month default rate of about 2.7 percent in August 1998. In addition, we were about to enter a recession during that tough market of the early 1990s, whereas we saw continued strong economic growth in 1998. 6 8 Q WHAT FACTORS CONTRIBUTED TO THE HIGH-YIELD MARKET'S RECOVERY IN THE LAST FEW WEEKS OF THE YEAR? A The growth in consumer confidence was the most important factor. Investors saw that Asia's financial situation was improving, troubled hedge funds were bailed out, and the International Monetary Fund helped Brazil and other countries with their economic difficulties. The Fed's rate cuts also had a tremendous impact on consumer confidence because they reflected a change in sentiment by the Federal Reserve. Investors saw that the Fed was willing to respond to the international economic situation and provide the liquidity needed to keep the economy growing, in addition to its traditional role in fighting inflation. Q HOW DID YOU MANAGE THE TRUST IN THIS ENVIRONMENT? A The Trust was positioned somewhat less aggressively, and was weighted heavily toward higher-quality bonds with shorter maturities. Both of these characteristics provided some stability during the turbulent market. We also emphasized higher-quality bonds in the telecommunications sector, which performed well during the period. Continued positive growth for telecommunications companies meant strong performance for many of our holdings in this sector. Telecommunications remained the Trust's largest sector, representing 14.4 percent of long-term investments at year-end. Q DID YOU MAKE ANY MAJOR CHANGES TO THE TRUST? A When the Trust came under new management in March, we made several changes to its structure to take advantage of prevailing market conditions. Traditionally, the Trust had maintained large cash reserves and also invested heavily in short-term debt. By using the cash reserves, as well as proceeds from bonds that were called, we purchased bonds with five- to eight-year maturities. This move enhanced total return potential because the longer-term bonds generally have higher yields and greater potential for price appreciation. It also allowed us to extend the duration of the Trust, which made it more sensitive to interest rate changes--and therefore better able to participate in the upside of the market as rates declined. In addition, we made a change that will help us to better manage the Trust when the supply of attractive securities is limited, such as the situation that occurred during the third quarter of 1998. The Board of Trustees approved a resolution allowing the Trust to hold up to 35 percent of its net assets in foreign securities, beginning April 1, 1999. The change allows us the opportunity to purchase foreign securities to enhance the Trust's income and structure. However, we do not anticipate making significant changes to the portfolio immediately after the resolution takes effect. Keep in mind, though, that investing in foreign securities presents certain risks that aren't normally associated with investing in securities of U.S. issuers. For more information about these risks, see the Important Trust Update on page 9. 7 9 Q HOW DID THE TRUST PERFORM DURING THE YEAR? A For the 12-month period ended December 31, 1998, the Trust generated a total return of -4.33 percent(1) based on market price. This reflects a decrease in market price per common share from $7.375 on December 31, 1997, to $6.375 on December 31, 1998, plus reinvestment of dividends. The monthly dividend of $0.0585 per share translates to a distribution rate of 11.01 percent based on the closing common stock price on December 31, 1998. (Editor's Note: Effective with the January 1999 distribution, the Trust's monthly dividend has been reduced to $0.056 per share.) The chart on page 3 provides additional performance information. Q WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS? A We believe the slower-growth economic environment will continue, and that we'll see a lot of money coming into the stock and bond markets in January as people invest year-end bonuses. The Trust should benefit from this "January effect," as demand for higher-yielding investments grows in the first few months of the year. The first quarter has traditionally been a strong one for high-yield bonds, and we anticipate that this trend will continue. With this in mind, we are positioning the Trust more aggressively for the first few months of the year to take advantage of the potential for a strong high-yield market. We will also keep a close eye on the dividend because the lower interest rate environment may put pressure on the Trust's income stream. [SIG.] Peter W. Hegel Chief Investment Officer Fixed Income Investments [SIG.] Ellis S. Bigelow Portfolio Manager Please see footnotes on page 3 8 10 IMPORTANT TRUST UPDATE As you may have read on page 7 of the Portfolio Management Review, the Board of Trustees approved a resolution that will allow the Trust to invest in foreign securities. This change will allow the portfolio management team to select from a greater number of available securities, particularly when the supply of attractive U.S. securities is limited. As of April 1, 1999, the Trust may invest up to 35 percent of its total assets in U.S. dollar denominated securities of foreign issuers. Investments in foreign securities present certain risks not ordinarily associated with investments in securities of U.S. issuers. These risks include fluctuations in foreign exchange rates, political and economic developments (including war or other instability, expropriation of assets, nationalization and confiscatory taxation), the imposition of foreign exchange limitations, withholding taxes on income or capital transactions or other restrictions, higher transaction costs and difficulty in taking judicial action. In addition, there generally is less publicly available information about many foreign issuers, and auditing, accounting, and financial reporting requirements are less stringent and less uniform in many foreign countries. Such securities may be less liquid than the securities of U.S. corporations or the U.S. government. Such securities may also be subject to greater fluctuations in price than securities of U.S. corporations or the U.S. government. There is generally less government regulation of stock exchanges, brokers and listed companies abroad than in the U.S., and, with respect to certain foreign countries, there is a possibility of expropriation or confiscatory taxation, or diplomatic developments which could affect investment in those countries. Because there is usually less supervision and governmental regulation of exchanges, brokers, and dealers than there is in the U.S., the Trust may experience settlement difficulties or delays not usually encountered in the U.S. The risks of foreign investments should be considered carefully by an investor in the Trust. 9 11 PORTFOLIO HIGHLIGHTS VAN KAMPEN HIGH INCOME TRUST TOP TEN PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997 Telecommunications......... 14.4% Printing, Publishing, & Hotel, Motel, Inns, & Broadcasting............. 15.1% Gaming................... 10.2% Oil & Gas.................. 10.5% Printing, Publishing, & Telecommunications......... 9.8% Broadcasting............. 8.3% Health Care................ 6.5% Oil & Gas.................. 8.1% Leisure/Entertainment...... 6.0% Health Care................ 6.7% Finance.................... 5.7% Grocery.................... 5.4% Aerospace & Defense........ 5.5% Mining, Steel, Iron & Hotel, Motel, Inns, & Non-Precious Metal....... 4.8% Gaming................... 4.8% Chemical................... 4.5% Grocery.................... 3.9% Containers, Packaging & Buildings & Real Estate.... 3.8% Glass.................... 4.3% Aerospace & Defense........ 4.1%
PORTFOLIO COMPOSITION BY CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM DEBT SECURITIES
A to AAA...... 2.5% A to AAA...... 1.9% BBB........... 7.4% BBB........... 6.4% BB............33.7% PIE CHART BB............28.0% PIE CHART B.............54.5% B.............62.9% CCC and Below. 0.4% Non-Rated.....62.9% Non-Rated..... 1.5%
Based upon the highest credit quality ratings as issued by Standard & Poor's or Moody's. DIVIDEND HISTORY For the Period Ended December 31, 1998
DIVIDEND -------- 1/98 0.0585 2/98 0.0585 3/98 0.0585 4/98 0.0585 5/98 0.0585 6/98 0.0585 7/98 0.0585 8/98 0.0585 9/98 0.0585 10/98 0.0585 11/98 0.0585 12/98 0.0585
The dividend history represents past performance of the Trust and does not predict the Trust's future distributions. 10 12 PORTFOLIO OF INVESTMENTS December 31, 1998 - --------------------------------------------------------------------------------
Par Amount (000) Description Coupon Maturity Market Value - ----------------------------------------------------------------------------------------- CORPORATE BONDS 90.4% AEROSPACE & DEFENSE 3.7% $1,700 Dyncorp.................................... 9.500% 03/01/07 $ 1,704,250 2,800 Sequa Corp................................. 9.625 10/15/99 2,870,000 500 Sequa Corp................................. 9.375 12/15/03 520,000 ------------ 5,094,250 ------------ AUTOMOBILE 1.3% 400 Aetna Industries, Inc...................... 11.875 10/01/06 420,000 550 MCII Holdings, Inc. (a).................... 12.0/15.0 11/15/02 478,500 500 Venture Holdings, Inc...................... 9.750 04/01/04 492,500 400 Venture Holdings, Inc...................... 9.500 07/01/05 398,000 ------------ 1,789,000 ------------ BUILDINGS & REAL ESTATE 3.2% 3,050 American Standard, Inc..................... 10.875 05/15/99 3,103,375 550 Kevco, Inc................................. 10.375 12/01/07 497,750 825 Webb (Del E.) Corp......................... 9.375 05/01/09 806,437 ------------ 4,407,562 ------------ CHEMICAL 4.1% 975 Acetex Corp................................ 9.750 10/01/03 970,125 660 American Pacific Corp...................... 9.250 03/01/05 678,150 2,404 ISP Holdings, Inc.......................... 9.750 02/15/02 2,560,260 1,850 Pioneer Americas Acquisition Corp.......... 9.250 06/15/07 1,461,500 ------------ 5,670,035 ------------ CONTAINERS, PACKAGING & GLASS 3.9% 1,400 Fonda Group, Inc........................... 9.500 03/01/07 1,169,000 1,130 Printpack, Inc............................. 10.625 08/15/06 1,113,050 1,400 Radnor Holdings, Inc....................... 10.000 12/01/03 1,414,000 1,350 S.D. Warren Co............................. 12.000 12/15/04 1,471,500 325 Sweetheart Cup, Inc........................ 9.625 09/01/00 295,750 ------------ 5,463,300 ------------ DIVERSIFIED/CONGLOMERATE MANUFACTURING 1.0% 1,350 Communications & Power Industries, Inc..... 12.000 08/01/05 1,407,375 ------------
See Notes to Financial Statements 11 13 PORTFOLIO OF INVESTMENTS (CONTINUED) December 31, 1998 - --------------------------------------------------------------------------------
Par Amount (000) Description Coupon Maturity Market Value - ----------------------------------------------------------------------------------------- ECOLOGICAL 0.6% $ 600 Envirosource, Inc.......................... 9.750% 06/15/03 $ 564,000 200 Norcal Waste Systems, Inc.................. 13.500 11/15/05 220,000 ------------ 784,000 ------------ ELECTRONICS 1.9% 1,925 Advanced Micro Devices, Inc................ 11.000 08/01/03 2,059,750 1,300 DecisionOne Corp........................... 9.750 08/01/07 624,000 ------------ 2,683,750 ------------ FINANCE 2.0% 2,050 Americredit Corp........................... 9.250 02/01/04 1,988,500 1,200 Contifinancial Corp........................ 8.375 08/15/03 852,000 ------------ 2,840,500 ------------ GROCERY 4.9% 300 Aurora Foods, Inc.......................... 9.875 02/15/07 327,750 1,250 Fleming Cos., Inc.......................... 10.500 12/01/04 1,187,500 300 Fleming Cos., Inc.......................... 10.625 07/31/07 282,000 1,400 Jitney Jungle Stores America, Inc.......... 12.000 03/01/06 1,564,500 1,514 Pantry, Inc................................ 12.000 11/15/00 1,578,345 1,200 Pantry, Inc................................ 10.250 10/15/07 1,258,500 565 Shoppers Food Warehouse, Inc............... 9.750 06/15/04 617,262 ------------ 6,815,857 ------------ HEALTHCARE 6.0% 1,650 Columbia HCA Healthcare Corp............... 6.910 06/15/05 1,617,000 650 Fisher Scientific International, Inc....... 7.125 12/15/05 611,000 1,500 Fresenius Medical Care Capital Trust....... 9.000 12/01/06 1,567,500 650 Mariner Post Acute Network, Inc............ 9.500 11/01/07 507,000 1,950 Sun Healthcare Group, Inc.................. 9.500 07/01/07 1,560,000 1,300 Tenet Healthcare Corp...................... 8.625 12/01/03 1,368,250 1,100 Tenet Healthcare Corp...................... 8.625 01/15/07 1,157,750 ------------ 8,388,500 ------------ HOTEL, MOTEL, INNS & GAMING 9.3% 2,050 Argosy Gaming Co........................... 13.250 06/01/04 2,296,000 350 Booth Creek Ski Holdings, Inc.............. 12.500 03/15/07 348,250 848 Boyd Gaming Corp........................... 9.250 10/01/03 881,920
See Notes to Financial Statements 12 14 PORTFOLIO OF INVESTMENTS (CONTINUED) December 31, 1998 - --------------------------------------------------------------------------------
Par Amount (000) Description Coupon Maturity Market Value - ----------------------------------------------------------------------------------------- HOTEL, MOTEL, INNS & GAMING (CONTINUED) $1,430 Casino America, Inc........................ 12.500% 08/01/03 $ 1,587,300 825 Casino Magic Louisiana..................... 13.000 08/15/03 934,313 1,075 Coast Hotels & Casinos, Inc................ 13.000 12/15/02 1,214,750 1,550 Grand Casinos, Inc......................... 9.000 10/15/04 1,736,000 1,130 Hollywood Casino, Inc...................... 12.750 11/01/03 1,203,450 1,125 Horseshoe Gaming........................... 12.750 09/30/00 1,200,937 1,410 Majestic Star Casino....................... 12.750 05/15/03 1,469,925 ------------ 12,872,845 ------------ LEISURE 2.1% 2,750 Selmer, Inc................................ 11.000 05/15/05 2,956,250 ------------ MINING, STEEL, IRON & NON-PRECIOUS METAL 4.3% 1,130 AK Steel Corp.............................. 10.750 04/01/04 1,178,025 1,100 GS Technologies Operating, Inc............. 12.250 10/01/05 748,000 1,130 Kaiser Aluminum & Chemical, Inc............ 10.875 10/15/06 1,152,600 350 Renco Steel Holdings, Inc.................. 10.875 02/01/05 308,000 2,650 WCI Steel, Inc............................. 10.000 12/01/04 2,643,375 ------------ 6,030,000 ------------ OIL & GAS 7.3% 1,550 Benton Oil & Gas, Inc...................... 11.625 05/01/03 976,500 1,130 Chesapeake Energy Corp..................... 9.625 05/01/05 858,800 1,000 Frontier Oil Corp.......................... 9.125 02/15/06 925,000 1,507 Giant Industries, Inc...................... 9.750 11/15/03 1,491,930 1,950 Giant Industries, Inc...................... 9.000 09/01/07 1,818,375 2,270 KCS Energy, Inc............................ 11.000 01/15/03 2,088,400 600 Petroleum Heat & Power, Inc................ 12.250 02/01/05 588,000 1,000 Pride Petroleum Services, Inc.............. 9.375 05/01/07 940,000 850 Universal Compression, Inc. (a)............ 0/9.875 02/15/08 501,500 ------------ 10,188,505 ------------ PAPER 0.5% 850 Doman Industries........................... 9.250 11/15/07 633,250 ------------ PERSONAL & NON-DURABLE 1.1% 1,520 Cole National Group, Inc................... 9.875 12/31/06 1,580,800 ------------
See Notes to Financial Statements 13 15 PORTFOLIO OF INVESTMENTS (CONTINUED) December 31, 1998 - --------------------------------------------------------------------------------
Par Amount (000) Description Coupon Maturity Market Value - ----------------------------------------------------------------------------------------- PRINTING, PUBLISHING & BROADCASTING 7.5% $ 450 CSC Holdings, Inc.......................... 8.125% 08/15/09 $ 482,625 1,200 CSC Holdings, Inc.......................... 10.500 05/15/16 1,416,000 1,100 Grupo Televisa, Inc........................ 11.875 05/15/06 1,100,000 1,130 Helicon Group, Inc......................... 11.000 11/01/03 1,175,200 1,000 International Cabletel, Inc. (a)........... 0/12.750 04/15/05 905,000 750 International Cabletel, Inc. (a)........... 0/11.500 02/01/06 615,000 1,500 K-III Communications Corp.................. 10.250 06/01/04 1,590,000 700 Northland Cable Television, Inc............ 10.250 11/15/07 740,250 1,350 United International Holdings, Inc. (a).... 0/10.750 02/15/08 742,500 550 Valassis Communications, Inc............... 9.550 12/01/03 629,750 950 Young Broadcasting, Inc.................... 11.750 11/15/04 1,016,500 ------------ 10,412,825 ------------ PRODUCER MANUFACTURING 0.7% 200 Associated Materials, Inc.................. 9.250 03/01/08 201,000 500 Carpenter W. R., Inc....................... 10.625 06/15/07 508,750 250 Numatics, Inc.............................. 9.625 04/01/08 236,250 ------------ 946,000 ------------ RETAIL 4.0% 200 Big 5 Corp................................. 10.875 11/15/07 203,000 600 Community Distributors, Inc. .............. 10.250 10/15/04 570,000 500 Hosiery Corp. of America, Inc.............. 13.750 08/01/02 515,000 1,100 K Mart Corp. .............................. 8.250 11/21/06 1,166,000 825 Musicland Group, Inc. ..................... 9.875 03/15/08 816,750 2,090 United Stationers Supply Co. .............. 12.750 05/01/05 2,330,350 ------------ 5,601,100 ------------ TELECOMMUNICATIONS 13.0% 1,200 Capstar Broadcasting Partners.............. 9.250 07/01/07 1,251,000 1,625 Centennial Cellular Corp. ................. 8.875 11/01/01 1,726,562 1,325 Centennial Cellular Corp. ................. 10.125 05/15/05 1,643,000 600 Century Communications Corp. .............. * 03/15/03 449,250 300 Century Communications Corp. .............. 9.500 03/01/05 336,375 1,300 Century Communications Corp. .............. 8.875 01/15/07 1,441,375 1,100 EZ Communications, Inc. ................... 9.750 12/01/05 1,204,500
See Notes to Financial Statements 14 16 PORTFOLIO OF INVESTMENTS (CONTINUED) December 31, 1998 - --------------------------------------------------------------------------------
Par Amount (000) Description Coupon Maturity Market Value - ----------------------------------------------------------------------------------------- TELECOMMUNICATIONS (CONTINUED) $1,300 Gray Communications Systems, Inc........... 10.625% 10/01/06 $ 1,391,000 600 Intermedia Communications of Florida, Inc........................................ 13.500 06/01/05 685,500 250 Intermedia Communications, Inc. ........... 8.875 11/01/07 242,500 1,230 Intermedia Communications, Inc. ........... 8.600 06/01/08 1,174,650 1,100 McLeod USA, Inc. .......................... 9.250 07/15/07 1,142,625 1,450 Pegasus Communications Corp ............... 9.625 10/15/05 1,457,250 1,300 Pinnacle Holdings, Inc. (a) ............... 0/10.000 03/15/08 780,000 2,750 Sprint Spectrum LP......................... 11.000 08/15/06 3,190,000 ------------ 18,115,587 ------------ TEXTILES 2.8% 1,350 Dan River, Inc. ........................... 10.125 12/15/03 1,390,500 1,905 Pillowtex Corp. ........................... 10.000 11/15/06 2,043,113 550 Scovill Fasteners, Inc. ................... 11.250 11/30/07 478,500 ------------ 3,912,113 ------------ TRANSPORTATION 1.6% 1,220 Greyhound Lines, Inc. ..................... 11.500 04/15/07 1,390,800 825 International Shipholding Corp. ........... 9.000 07/01/03 843,563 ------------ 2,234,363 ------------ UTILITIES 3.6% 2,150 AES Corp. ................................. 10.250 07/15/06 2,330,063 400 AES Corp. ................................. 8.375 08/15/07 404,000 450 El Paso Electric Co. ...................... 8.250 02/01/03 481,500 1,050 El Paso Electric Co. ...................... 8.900 02/01/06 1,176,000 152 Midland Cogeneration Venture............... 10.330 07/23/02 162,523 1,100 National Energy Group, Inc. (c)............ 10.750 11/01/06 429,000 ------------ 4,983,086 ------------ TOTAL CORPORATE BONDS 90.4%............................................... 125,810,853 ------------
See Notes to Financial Statements 15 17 PORTFOLIO OF INVESTMENTS (CONTINUED) December 31, 1998 - --------------------------------------------------------------------------------
Description Market Value - ----------------------------------------------------------------------------------------- EQUITIES 0.0% Hosiery Corp. of America, Inc., (500 common shares) 144A Private Placement (b)............................................................ $ 26,250 Intermedia Communications of Florida, Inc., (600 common stock warrants) 144A Private Placement (b)............................................... 29,749 NTL, Inc., (1,662 common stock warrants) 144A Private Placement (b)...... 20,782 Petroleum Heat & Power, Inc., (2,024 convertible preferred shares) ...... 2,125 Urohealth Systems, Inc., (675 common stock warrants) 144A Private Placement (b)............................................................ 7 ------------ TOTAL EQUITIES............................................................. 78,913 ------------ TOTAL LONG-TERM INVESTMENTS 90.4% (Cost $130,258,543)...................................................... 125,889,766 REPURCHASE AGREEMENT 7.9% State Street Bank & Trust (Collateralized by U.S. Treasury Bonds, $8,990,000 par, 6.875% coupon, due 08/15/25, dated 12/31/98, to be sold on 01/04/99 at $10,927,472) (Cost $10,926,000)........................... 10,926,000 ------------ TOTAL INVESTMENTS 98.3% (Cost $141,184,543)...................................................... 136,815,766 OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%................................ 2,388,773 ------------ NET ASSETS 100.0%......................................................... $139,204,539 ------------
*Zero coupon bond (a) Security is a "step-up" bond where the coupon increases or steps up at a predetermined rate. (b) 144A securities are those which are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may only be resold in transactions exempt from registration which are normally transactions with qualified institutional buyers. (c) Interest is accruing at less than the stated coupon. See Notes to Financial Statements 16 18 STATEMENT OF ASSETS AND LIABILITIES December 31, 1998 - -------------------------------------------------------------------------------- ASSETS: Total Investments (Cost $141,184,543)....................... $136,815,766 Cash........................................................ 322 Interest Receivable ........................................ 2,917,736 Other....................................................... 1,117 ------------ Total Assets.......................................... 139,734,941 ============ LIABILITIES: Payables: Income Distributions--Common and Preferred Shares......... 187,164 Investment Advisory Fee................................... 88,893 Affiliates................................................ 11,051 Accrued Expenses............................................ 149,607 Trustees' Deferred Compensation and Retirement Plans........ 93,687 ------------ Total Liabilities..................................... 530,402 ------------ NET ASSETS.................................................. $139,204,539 ============ NET ASSETS CONSIST OF: Preferred Shares ($.01 par value, 1,000,000 shares authorized, 588 shares outstanding with liquidation preference of $100,000 per share)......................... $ 58,800,000 ------------ Common Shares ($.01 par value with an unlimited number of shares authorized, 13,710,760 shares issued and outstanding)................. 137,108 Paid in Surplus............................................. 106,631,828 Accumulated Undistributed Net Investment Income............. 147,635 Net Unrealized Depreciation................................. (4,368,777) Accumulated Net Realized Loss............................... (22,143,255) ------------ Net Assets Applicable to Common Shares................ 80,404,539 ------------ NET ASSETS.................................................. $139,204,539 ============ NET ASSET VALUE PER COMMON SHARE ($80,404,539 divided by 13,710,760 shares outstanding)....................................... $ 5.86 ============
See Notes to Financial Statements 17 19 STATEMENT OF OPERATIONS For the Year Ended December 31, 1998 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest.................................................... $13,569,288 Dividends................................................... 86,715 Other....................................................... 400,831 ----------- Total Income............................................ 14,056,834 ----------- EXPENSES: Investment Advisory Fee..................................... 1,083,673 Preferred Share Maintenance................................. 181,026 Custody..................................................... 18,112 Trustees' Fees and Expenses................................. 17,832 Legal....................................................... 16,898 Other....................................................... 263,884 ----------- Total Expenses.......................................... 1,581,425 ----------- NET INVESTMENT INCOME....................................... $12,475,409 =========== REALIZED AND UNREALIZED GAIN/LOSS: Net Realized Gain........................................... $ 416,102 ----------- Unrealized Appreciation/Depreciation: Beginning of the Period................................... 3,948,231 End of the Period......................................... (4,368,777) ----------- Net Unrealized Depreciation During the Period............... (8,317,008) ----------- NET REALIZED AND UNREALIZED LOSS............................ $(7,900,906) =========== NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 4,574,503 ===========
See Notes to Financial Statements 18 20 STATEMENT OF CHANGES IN NET ASSETS For the Years Ended December 31, 1998 and 1997 - --------------------------------------------------------------------------------
Year Ended Year Ended December 31, 1998 December 31, 1997 - ------------------------------------------------------------------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income................................ $ 12,475,409 $ 12,749,953 Net Realized Gain.................................... 416,102 2,448,838 Net Unrealized Depreciation During the Period........ (8,317,008) (652,535) ------------ ------------- Change in Net Assets from Operations................. 4,574,503 14,546,256 ------------ ------------- Distributions from Net Investment Income: Common Shares...................................... (9,624,412) (9,624,454) Preferred Shares................................... (3,245,532) (3,230,780) ------------ ------------- Total Distributions.................................. (12,869,944) (12,855,234) ------------ ------------- NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......................................... (8,295,441) 1,691,022 NET ASSETS: Beginning of the Period.............................. 147,499,980 145,808,958 ------------ ------------- End of the Period (Including accumulated undistributed net investment income of $147,635 and $1,108,297, respectively).......................... $139,204,539 $147,499,980 ============ =============
See Notes to Financial Statements 19 21 FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for one common share of the Trust outstanding throughout the periods indicated. - --------------------------------------------------------------------------------
----------------------------------------------- 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------- Net Asset Value, Beginning of the Period (a)............................... $6.469 $6.346 $6.186 $5.623 $6.735 ------- ------- ------- ------- ------- Net Investment Income...................... .910 .930 .946 .982 1.002 Net Realized and Unrealized Gain/Loss...... (.576) .131 .147 .537 (.975) ------- ------- ------- ------- ------- Total from Investment Operations........... .334 1.061 1.093 1.519 .027 ------- ------- ------- ------- ------- Less Distributions from Net Investment Income: Paid to Common Shareholders.............. .702 .702 .702 .702 .954 Common Share Equivalent of Distributions Paid to Preferred Shareholders......... .237 .236 .231 .254 .185 ------- ------- ------- ------- ------- Total Distributions........................ .939 .938 .933 .956 1.139 ------- ------- ------- ------- ------- Net Asset Value, End of the Period......... $5.864 $6.469 $6.346 $6.186 $5.623 ======= ======= ======= ======= ======= Market Price Per Share at End of the Period................................... $6.375 $7.375 $6.750 $6.375 $5.500 Total Investment Return at Market Price (b)................................ (4.33%) 20.29% 17.34% 29.17% (23.22%) Total Return at Net Asset Value (c)........ 1.35% 13.69% 14.86% 23.70% (2.54%) Net Assets at End of the Period (In millions)................................ $139.2 $147.5 $145.8 $143.6 $135.9 Ratio of Expenses to Average Net Assets Applicable to Common Shares**....................... 1.85% 1.76% 1.87% 1.92% 1.96% Ratio of Net Investment Income to Average Net Assets Applicable to Common Shares (d)............................... 10.77% 10.90% 11.58% 12.16% 13.31% Portfolio Turnover......................... 65% 102% 92% 119% 110% * Non-Annualized ** Ratio of Expenses to Average Net Assets Including Preferred Shares.............. 1.09% 1.05% 1.11% 1.12% 1.16%
(a) Net Asset Value at January 26, 1989 of $9.300 is adjusted for common and preferred share offering costs of $.198 per share. (b) Total Investment Return at Market Price reflects the change in market value of the common shares for the period indicated with reinvestment of dividends in accordance with the Trust's dividend reinvestment plan. (c) Total Return at Net Asset Value (NAV) reflects the change in value of the Trust's assets with reinvestment of dividends based on NAV. (d) Net Investment Income is adjusted for the common share equivalent of distributions paid to preferred shareholders. N/A = Not Applicable 20 22 - --------------------------------------------------------------------------------
January 26, 1989 (Commencement Year Ended December 31, of Investment - ------------------------------------------- Operations) to 1993 1992 1991 1990 December 31, 1989 - ----------------------------------------------------------------------- $6.228 $5.924 $4.603 $7.488 $9.102 ------ ------ ------ ------ ------ 1.109 1.206 1.150 1.566 1.387 .526 .174 1.282 (2.866) (1.653) ------ ------ ------ ------ ------ 1.635 1.380 2.432 (1.300) (.266) ------ ------ ------ ------ ------ .990 .908 .840 1.083 1.020 .138 .168 .271 .502 .328 ------ ------ ------ ------ ------ 1.128 1.076 1.111 1.585 1.348 ------ ------ ------ ------ ------ $6.735 $6.228 $5.924 $4.603 $7.488 ====== ====== ====== ====== ====== $8.125 $7.250 $6.875 $4.125 $7.375 26.12% 18.67% 92.24% (32.91%) (17.27%)* 25.46% 21.36% 48.77% (26.20%) (15.58%)* $151.1 $144.2 $140.0 $121.9 $187.7 1.72% 1.87% 2.51% 2.10% 1.56% 14.66% 16.48% 15.86% 17.24% 13.20% 99% 109% 78% 57% 33%* 1.04% 1.11% 1.42% 1.90% N/A
See Notes to Financial Statements 21 23 NOTES TO FINANCIAL STATEMENTS December 31, 1998 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen High Income Trust, formerly known as Van Kampen American Capital High 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 high current income, consistent with preservation of capital, by investing in a portfolio of medium or lower grade fixed-income securities, or non-rated securities of comparable quality. As of April 1, 1999, through a resolution approved by the Board of Trustees, the Trust may invest up to 35 percent of its total assets in securities of foreign issuers. The Trust commenced investment operations on January 26, 1989. 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 generally accepted accounting principles 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--Investments are stated at value using market quotations, prices provided by market makers or estimates obtained from yield data relating to instruments or securities with similar characteristics 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. 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" or "delayed delivery" basis with settlement to occur at a later date. The value of the security so purchased is subject to market fluctuations during this period. 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 or delayed delivery purchase commitments until payment is made. At December 31, 1998, there were no when issued or delayed delivery purchase commitments. The Trust may invest in repurchase agreements, which are short-term investments in which the Trust acquires ownership of a debt security and the seller agrees to repurchase the security at a future time and specified price. Repurchase agreements are fully 22 24 NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 - -------------------------------------------------------------------------------- collateralized by the underlying debt security. The Trust will make payment for such securities only upon physical delivery or evidence of book entry transfer to the account of the custodian bank. The seller is required to maintain the value of the underlying security at not less than the repurchase proceeds due the Trust. C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Discounts 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 such losses against any future realized capital gains. At December 31, 1998, the Trust had an accumulated capital loss carry forward for tax purposes of $22,125,692 which expires between December 31, 1999 and December 31, 2003. Of this amount $19,427,104 will expire in 1999. Net realized gains or losses differ for financial reporting and tax purposes as a result of losses from wash sales. At December 31, 1998, for federal income tax purposes, cost of long- and short-term investments is $141,202,106 the aggregate gross unrealized appreciation is $2,610,115 and the aggregate gross unrealized depreciation is $6,996,455, resulting in net unrealized depreciation on long- and short-term investments of $4,386,340. E. DISTRIBUTION OF INCOME AND GAINS--The Trust declares and pays monthly dividends from net investment income to common shareholders. Net realized gains, if any, are distributed annually to common shareholders. 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 1998 fiscal year have been identified and appropriately reclassified. Permanent differences relating to expenses which are not deductible for tax purposes totaling $18,679 were reclassified from accumulated undistributed net investment income to capital, $17,773,482 relating to a portion of the capital loss carryforward that expired during the period was reclassified from accumulated net realized loss to capital and $584,806 relating to fee income was reclassified from accumulated undistributed net investment income to accumulated net realized gains/losses. 23 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998 - -------------------------------------------------------------------------------- 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Trust's Investment Advisory Agreement, Van Kampen Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Trust for an annual fee payable monthly of .75% of the average net assets of the Trust. For the year ended December 31, 1998, the Trust recognized expenses of approximately $6,500 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. For the year ended December 31, 1998, the Trust recognized expenses of approximately $61,400 representing Van Kampen Funds Inc.'s or its affiliates' (collectively "Van Kampen") cost of providing accounting and legal services to the Trust. 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 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. INVESTMENT TRANSACTIONS During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments, were $88,612,196 and $84,896,855, respectively. 4. AUCTION MARKET PREFERRED SHARES The Trust has outstanding 588 shares of Auction Market Preferred Shares ("AMPS") at a liquidation value of $100,000 per share. Dividends are cumulative and the rate is currently reset through an auction process every 28 days. The rate in effect on December 31, 1998, was 5.250%. During the year ended December 31, 1998, the rates ranged from 5.180% to 5.700%. The Trust pays annual fees equivalent to .25% of the preferred share liquidation value for the remarketing efforts associated with the preferred auctions. These fees are included as a component of Preferred Share Maintenance expense. The AMPS are redeemable at the option of the Trust in whole or in part at a price of $100,000 per share plus accumulated and unpaid dividends. The Trust is subject to certain asset coverage tests, and the AMPS are subject to mandatory redemption if the tests are not met. 24 26 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Trustees and Shareholders of Van Kampen High Income Trust: We have audited the accompanying statement of assets and liabilities of Van Kampen High Income Trust (the "Trust"), including the portfolio of investments, as of December 31, 1998, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. 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 December 31, 1998 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Van Kampen High Income Trust as of December 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois February 4, 1999 25 27 DIVIDEND REINVESTMENT PLAN The Trust offers a Dividend Reinvestment Plan (the "Plan") in which Common Shareholders may elect to have dividends and capital gains distributions automatically reinvested in Common Shares of the Trust. The service is entirely voluntary and you may join or withdraw at any time. HOW TO PARTICIPATE If you wish to elect to participate in the Plan and your shares are held in your own name, call 1-800-341-2929 for more information and a brochure. If your shares are held in the name of a brokerage firm, bank, or other nominee, you should contact your nominee to see if it would participate in the Plan on your behalf. If you wish to participate in the Plan, but your brokerage firm, bank, or nominee is unable to participate on your behalf, you should request that your shares be re-registered in your own name which will enable your participation in the Plan. HOW THE PLAN WORKS State Street Bank and Trust Company, as your Plan Agent, serves as agent for the Common Shareholders in administering the Plan. After the Trust declares a dividend or determines to make a capital gains distribution, the Plan Agent will, as agent for the participants, receive the cash payment and use it to buy Common Shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts. The Trust will not issue any new Common Shares in connection with the Plan. All reinvestments are in full and fractional Common Shares, carried to three decimal places. Experience under the Plan may indicate that changes are desirable. Accordingly, the Trust reserves the right to amend or terminate the Plan as applied to any dividend or capital gains distribution paid subsequent to written notice of the change sent to all Common Shareholders of the Trust at least 90 days before the record date for the dividend or distribution. The Plan also may be amended or terminated by the Plan Agent, with the written consent of the Trust, by providing at least 90 days written notice to all Participants in the Plan. COSTS OF THE PLAN The Plan Agent's fees for the handling of the reinvestment of dividends and distributions will be paid by the Trust. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of dividends and distributions. No other charges will be made to participants for reinvesting dividends or capital gains distributions, except for certain brokerage commissions, as described above. TAX IMPLICATIONS You will receive tax information annually for your personal records and to help you prepare your federal income tax return. The automatic reinvestment of dividends and capital gains distributions does not relieve you of any income tax which may be payable on dividends or capital gains distributions. RIGHT TO WITHDRAW You may withdraw from the Plan at any time by calling 1-800-341-2929 or by writing State Street Bank and Trust Company. If you withdraw, you will receive, without charge, a share certificate issued in your name for all full Common Shares credited to your account under the Plan, and a cash payment will be made for any fractional Common Share credited to your account under the Plan. You may again elect to participate in the Plan at any time by calling 1-800-341-2929 or writing to the Trust at: 2800 Post Oak Blvd., Houston, TX 77056, Attn: Closed-End Funds 26 28 VAN KAMPEN HIGH INCOME TRUST BOARD OF TRUSTEES DAVID C. ARCH ROD DAMMEYER HOWARD J KERR DENNIS J. MCDONNELL*--Chairman STEVEN MULLER THEODORE A. MYERS DON G. POWELL* HUGO F. SONNENSCHEIN WAYNE W. WHALEN* OFFICERS DENNIS J. MCDONNELL* President JOHN L. SULLIVAN* Vice President, Treasurer and Chief Financial Officer CURTIS W. MORELL* Vice President and Chief Accounting Officer TANYA M. LODEN* Controller PETER W. HEGEL* EDWARD C. WOOD, III* Vice Presidents INVESTMENT ADVISER VAN KAMPEN INVESTMENT ADVISORY CORP. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 CUSTODIAN AND TRANSFER AGENT STATE STREET BANK AND TRUST COMPANY 225 Franklin Street P.O. Box 1713 Boston, Massachusetts 02105 LEGAL COUNSEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago, Illinois 60606 INDEPENDENT ACCOUNTANTS KPMG LLP 303 East Wacker Drive Chicago, Illinois 60601 * "Interested" persons of the Trust, as defined in the Investment Company Act of 1940. (C) Van Kampen Funds Inc., 1999. All rights reserved. (SM) denotes a service mark of Van Kampen Funds Inc. 27 29 RESULTS OF SHAREHOLDER VOTES The Annual Meeting of Shareholders of the Trust was held on July 28, 1998, where shareholders voted on the election of trustees and the selection of independent public accountants. 1) With regard to the election of the following trustees by the preferred shareholders of the Trust:
# OF SHARES ------------------- IN FAVOR WITHHELD - ------------------------------------------------------------------------ Theodore A. Myers................................... 344 0
2) With regard to the election of the following trustees by the common shareholders of the Trust:
# OF SHARES --------------------- IN FAVOR WITHHELD - ----------------------------------------------------------------------- Don G. Powell.................................... 10,819,994 168,771 Hugo F. Sonnenschein............................. 10,807,120 181,645
The other trustees of the Trust whose terms did not expire in 1998 are David C. Arch, Rod Dammeyer, Howard J Kerr, Dennis J. McDonnell, Steven Muller and Wayne W. Whalen. 3) With regard to the ratification of KPMG LLP as independent public accountants for the Trust, 10,783,694 shares voted in favor of the proposal, 81,062 shares voted against and 124,353 shares abstained. 28 30 YEAR 2000 READINESS DISCLOSURE Like other mutual funds, financial and business organizations and individuals around the world, the Trust could be adversely affected if the computer systems used by the Trust's investment adviser and other service providers do not properly process and calculate date-related information and data from and after January 1, 2000. This is commonly known as the "Year 2000 Problem." The Trust's investment adviser is taking steps that it believes are reasonably designed to address the Year 2000 Problem with respect to computer systems that it uses and to obtain reasonable assurances that comparable steps are being taken by the Trust's other major service providers. At this time, there can be no assurances that these steps will be sufficient to avoid any adverse impact to the Trust. In addition, the Year 2000 Problem may adversely affect the markets and the issuers of securities in which the Trust may invest that, in turn, may adversely affect the net asset value of the Trust. Improperly functioning trading systems may result in settlement problems and liquidity issues. In addition, corporate and governmental data processing errors may result in production problems for individual companies or issuers and overall economic uncertainty. Earnings of individual issuers will be affected by remediation costs, which may be substantial and may be reported inconsistently in U.S. and foreign financial statements. Accordingly, the Trust's investments may be adversely affected. The statements above are subject to the Year 2000 Information and Readiness Disclosure Act, which may limit the legal rights regarding the use of such statements in the case of dispute. EX-27 2 FINANCIAL DATA SCHEDULE
6 11 HIGH INCOME TRUST 1 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 141,184,543 136,815,766 2,917,736 1,117 322 139,734,941 0 0 530,402 530,402 58,800,000 106,768,936 13,710,760 13,710,760 147,635 0 (22,143,255) 0 (4,368,777) 139,204,539 86,715 13,569,288 400,831 (1,581,425) 12,475,409 416,102 (8,317,008) 4,574,503 0 (12,869,944) 0 0 0 0 0 (8,295,441) 1,108,297 (40,917,645) 0 0 1,083,673 0 1,581,425 85,692,261 6.469 0.910 (0.576) (0.939) 0.000 0.000 5.864 1.85 0 0
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