N-30D 1 n-30d.txt SEMIANNUAL REPORT DATED 6/30/00 1 Table of Contents OVERVIEW LETTER TO SHAREHOLDERS 1 ECONOMIC SNAPSHOT 2 PERFORMANCE SUMMARY RETURN HIGHLIGHTS 4 PORTFOLIO AT A GLANCE CREDIT QUALITY 6 SIX-MONTH DIVIDEND HISTORY 6 TOP FIVE SECTORS 7 NET ASSET VALUE AND MARKET PRICE 7 Q&A WITH YOUR PORTFOLIO MANAGERS 8 GLOSSARY OF TERMS 11 BY THE NUMBERS YOUR TRUST'S INVESTMENTS 12 FINANCIAL STATEMENTS 19 NOTES TO FINANCIAL STATEMENTS 24 VAN KAMPEN FUNDS THE VAN KAMPEN FAMILY OF FUNDS 27 TRUST OFFICERS AND IMPORTANT ADDRESSES 28 RESULTS OF SHAREHOLDER VOTES 29
It is times like these when money- management experience may make a difference. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE 2 OVERVIEW LETTER TO SHAREHOLDERS July 20, 2000 Dear Shareholder, Whether you have held your trust for years or just joined the Van Kampen family of shareholders in the last few months, you are likely to have questions and even some concerns about how recent market volatility has affected your investment. I encourage you to review the following Q&A in which your portfolio manager provides an update on how your trust is being managed in this environment. It is times like these when money-management experience may make a difference. Toward that end, you should know that Van Kampen is one of the nation's oldest investment-management firms, with a history of money management dating back to 1926. Our portfolio managers have invested in all types of market conditions--during bull and bear markets, periods of inflation and rising interest rates, and now a technology revolution. We have managed money long enough to understand short-term market volatility and the value of investing for the long term. As we move through the second half of 2000, count on us to continue to draw on the wisdom of our 74 years of experience. Along those lines, Van Kampen's "Generations of Experience" is the theme of a national advertising campaign that we recently kicked off. The message emphasizes our depth of investment-management history, as well as our firm belief that with the right investments, anyone can realize life's true wealth. Sincerely, [SIG] Richard F. Powers, III President and CEO Van Kampen Investments 1 3 ECONOMIC SNAPSHOT ECONOMIC GROWTH BEGINNING IN THE SECOND QUARTER OF 2000, EVIDENCE OF SLOWER ECONOMIC GROWTH IN THE UNITED STATES EMERGED. HOWEVER, ANALYSTS BELIEVE IT MAY HAVE BEEN PREMATURE TO ASSUME THAT THE U.S. ECONOMY HAS SLOWED TO A SUSTAINABLE, NONINFLATIONARY PACE, WITH THE GROSS DOMESTIC PRODUCT (GDP), A MEASURE OF ECONOMIC GROWTH, UP 5.2 PERCENT ANNUALIZED IN THE SECOND QUARTER OF 2000. CONSUMER SPENDING AND EMPLOYMENT CONSUMER SPENDING REMAINED THE MAIN ENGINE OF GROWTH BEHIND THE U.S. ECONOMY. LIVING STANDARDS AND SPENDING HABITS WERE BOOSTED BY STRONG GAINS IN REAL INCOME, AND INDIVIDUAL WEALTH INCREASED SUBSTANTIALLY, PRIMARILY DUE TO A BUOYANT STOCK MARKET. NONETHELESS, DATA RELEASED IN THE SECOND QUARTER OF 2000 REFLECTED A MINOR DECREASE IN THE SPENDING OF INDIVIDUALS. IN JUNE, THE CONSUMER PRICE INDEX (CPI), THE LEADING INFLATION INDICATOR, ROSE HIGHER THAN EXPECTED--0.6 PERCENT MORE THAN THE PREVIOUS MONTH. THAT HEIGHTENED CONCERNS ABOUT INFLATION, AND THE PROSPECT OF ADDITIONAL FEDERAL RESERVE BOARD INTEREST-RATE INCREASES. THE U.S. LABOR MARKET WAS STILL ROBUST DURING THIS TIME, AND JOB INSECURITY CONTINUED TO DECLINE. SOLID EMPLOYMENT GROWTH WAS ACCOMPANIED BY UNUSUALLY LARGE GAINS IN PRODUCTIVITY, WHICH LIMITED THE RISE IN UNIT LABOR COSTS ACROSS THE WHOLE ECONOMY. GIVEN THE HIGH EMPLOYMENT NUMBERS AND STRONG LEVELS OF PRODUCTIVITY, ANALYSTS BELIEVE AN INCREASE IN INTEREST RATES TO WARD OFF INFLATION AND FURTHER SLOW THE ECONOMY IS POSSIBLE. INTEREST RATES AND INFLATION DURING THE PAST FEW MONTHS, PERSISTENT STRENGTH IN CONSUMER SPENDING ACCOMPANIED BY A VERY TIGHT LABOR MARKET, RESULTED IN SOME INFLATION. THE CPI REACHED A LEVEL OF 2.7 PERCENT IN JANUARY 2000 AND 3.7 PERCENT IN JUNE 2000, CLEARLY DEMONSTRATING SIGNS OF INFLATION. SINCE JUNE 1999, THE FEDERAL RESERVE HAS INCREASED THE FEDERAL FUNDS RATE SIX TIMES BY A TOTAL OF 175 BASIS POINTS TO LOWER ECONOMIC GROWTH AND DECREASE ANY FUTURE FEARS OF INFLATION. THESE INCREASES IN INTEREST RATES HELPED SLOW THE INTEREST-SENSITIVE AUTO AND HOUSING MARKETS. MANY OBSERVERS BELIEVE INTEREST RATES COULD BE LIFTED FURTHER IN COMING MONTHS. WHILE MARKETS HAVE EXPERIENCED MUCH SHORT-TERM VOLATILITY, THE MARKET'S OUTLOOK COULD IMPROVE ONCE INTEREST-RATE HIKES CEASE. 2 4 U.S. GROSS DOMESTIC PRODUCT SEASONALLY ADJUSTED ANNUALIZED RATES (June 30, 1998 -- June 30, 2000) [BAR GRAPH]
U.S. GROSS DOMESTIC PRODUCT --------------------------- Jun 98 2.10 Sep 98 3.80 Dec 98 5.90 Mar 99 3.50 Jun 99 2.50 Sep 99 5.70 Dec 99 8.30 Mar 00 4.80 Jun 00 5.20
Source: Bureau of Economic Analysis INTEREST RATES AND INFLATION (June 30, 1998 -- June 30, 2000) [BAR GRAPH]
INTEREST RATES INFLATION -------------- --------- Jun 98 5.50 1.70 5.50 1.70 5.50 1.60 Sep 98 5.25 1.50 5.00 1.50 4.75 1.50 Dec 98 4.75 1.60 4.75 1.70 4.75 1.60 Mar 99 4.75 1.70 4.75 2.30 4.75 2.10 Jun 99 5.00 2.00 5.00 2.10 5.25 2.30 Sep 99 5.25 2.60 5.25 2.60 5.50 2.60 Dec 99 5.50 2.70 5.50 2.70 5.75 3.20 Mar 00 6.00 3.70 6.00 3.00 6.50 3.10 Jun 00 6.50 3.70
Interest rates are represented by the closing midline federal funds target rate on the last day of each month. Inflation is indicated by the annual percent change of the Consumer Price Index for all urban consumers at the end of each month. 3 5 PERFORMANCE SUMMARY RETURN HIGHLIGHTS (as of June 30, 2000) ------------------------------------------------------------------------ NYSE Ticker Symbol VIT ------------------------------------------------------------------------ Six-month total return based on market price(1) 18.68% ------------------------------------------------------------------------ Six-month total return based on NAV(2) -0.51% ------------------------------------------------------------------------ Distribution rate as a % of closing common stock price(3) 12.36% ------------------------------------------------------------------------ Net asset value $4.75 ------------------------------------------------------------------------ Closing common stock price $5.00 ------------------------------------------------------------------------ Six-month high common stock price (06/30/00) $5.00 ------------------------------------------------------------------------ Six-month low common stock price (01/12/00) $4.25 ------------------------------------------------------------------------ Preferred share rate(4) 6.470% ------------------------------------------------------------------------
(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 6 (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 is no guarantee of 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. 5 7 PORTFOLIO AT A GLANCE CREDIT QUALITY (as a percentage of long-term investments)
As of June 30, 2000 - A/A................ 1.0% - BBB/Baa............ 5.3% - BB/Ba.............. 37.9% - B/B................ 48.3% - CCC/Caa and below.............. 7.5% [PIE CHART] As of December 31, 1999 - BBB/Baa............ 4.5% - BB/Ba.............. 36.2% - B/B................ 55.1% - CCC/Caa and below.............. 4.2% [PIE CHART]
Based upon the highest credit quality ratings as issued by Standard & Poor's or Moody's, respectively. SIX-MONTH DIVIDEND HISTORY (for the six months ending June 30, 2000, for common shares) [BAR GRAPH]
DIVIDENDS --------- 1/00 0.0540 2/00 0.0540 3/00 0.0540 4/00 0.0540 5/00 0.0540 6/00 0.0515
The dividend history represents past performance of the trust and is no guarantee of the trust's future dividends. 6 8 TOP FIVE SECTORS (as a percentage of long-term investments) [INVESTMENT PERFORMANCE GRAPH]
JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- Telecommunications 12.40 10.70 Printing, Publishing, & Broadcasting 11.50 8.80 Oil & Gas 9.90 7.70 Automobile 6.90 6.90 Hotel, Motel, Inns, & Gaming 5.30 4.30
NET ASSET VALUE AND MARKET PRICE (based upon quarter-end values--June 1990 through June 2000) [INVESTMENT PERFORMANCE GRAPH]
NET ASSET VALUE MARKET PRICE --------------- ------------ 6/90 6.6500 6.7500 5.3600 4.8750 4.6200 4.1250 5.4300 5.3750 6/91 5.6900 5.6250 5.8900 6.2500 5.9200 6.8750 6.3200 7.3750 6/92 6.3400 8.0000 6.4300 7.8750 6.2300 7.2500 6.6300 8.0000 6/93 6.7600 8.3750 6.6600 8.3750 6.7400 8.1250 6.3300 7.6250 6/94 6.0600 8.0000 5.8500 7.0000 5.6200 5.5000 5.8400 6.1250 6/95 6.0700 6.6250 6.1200 6.3750 6.1900 6.3750 6.1600 6.7500 6/96 6.0500 6.5000 6.2000 6.8750 6.3500 6.7500 6.2200 6.7500 6/97 6.3600 7.3130 6.4900 7.3130 6.4700 7.3750 6.5300 7.3130 6/98 6.4400 7.0000 5.8900 6.3130 5.8600 6.3750 5.7000 6.4375 6/99 5.4900 6.3750 5.1600 5.9375 5.1000 4.5000 4.8400 4.6250 6/00 4.7500 5.0000
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 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. Market price is influenced by a range of factors, including supply and demand and market conditions. 7 9 Q&A WITH YOUR PORTFOLIO MANAGERS 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 AND INFLUENCED THE TRUST'S RETURN DURING THE SIX MONTHS ENDED JUNE 30, 2000. THE TEAM IS LED BY PETER EHRET, SENIOR PORTFOLIO MANAGER, WHO HAS MANAGED THE TRUST SINCE JUNE 1999 AND HAS WORKED IN THE INVESTMENT INDUSTRY SINCE 1988. THE FOLLOWING DISCUSSION REFLECTS HIS VIEWS ON THE TRUST'S PERFORMANCE. Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE TRUST OPERATED, AND HOW DID THE TRUST PERFORM IN THAT ENVIRONMENT? A The year began quietly, with a weaker high-yield market than we had expected. Investors appeared to be taking a cautious approach to the new year, even though the much-anticipated year 2000 transition turned out to be a non-event. Sluggish trading, limited investor demand, and a light calendar for new bond issuance during the month of January set a lackluster tone for the high-yield market that persisted throughout most of the reporting period. In fact, the market failed to improve until the latter weeks of the reporting period, with June posting the best returns of the six months. Despite the relatively attractive yields available in the high-yield market, the high-profile stock market continued to lure money away from the fixed-income sector. Overall, prices for high-yield bonds drifted lower as demand remained soft, regardless of the fundamental strengths of many of the market's offerings. Also, credit quality remained a concern as the higher-than-average default rates we saw in 1999, along with uncertainties about the economy and the potential for further interest-rate hikes by the Fed, put investors on guard. High-yield investors with short-term focus tend to get jittery when confronted with the threat of sharply higher interest rates, which can translate into a rapidly slowing economy. If higher interest rates slow the economy too much, the resulting earnings pressure could make it more difficult for companies to meet their debt payment obligations. We believe all of these issues weighed on the market. Nevertheless, the trust ranked third out of the 27 funds in its peer group (Lipper's High Yield Leveraged Corporate Bond Fund category) for the reporting period. For the six months through June 30, 2000, the trust produced a total return of 18.68 percent based on market price. This reflects an increase in market price from $4.50 per share on December 31, 1999, to $5.00 per share on June 30, 2000. Of course, past performance is no guarantee of future results. As a result of recent market activity, current performance will vary from the figures shown. The trust also continued to provide shareholders with an attractive dividend, even though the dividend was 8 10 decreased slightly during the reporting period to reflect the portfolio's lower net income flow due to the rising cost of leverage for the trust. Its monthly dividend of $0.0515 per share translates to a distribution rate of 12.36 percent based on the trust's closing market price on June 30, 2000. Please refer to the chart and footnotes on page 4 for additional performance results. Past performance is no guarantee of future results. Q WHAT WERE SOME OF THE CHALLENGES YOU FACED IN MANAGING THE TRUST DURING THIS PERIOD? A Many industries have become so fiercely competitive that companies have found it difficult to raise prices without losing customers. Consequently, as companies lose their pricing power, high levels of profitability are hard to sustain, accentuating the potential credit-quality risks inherent to high-yield investments. This was particularly true in the transportation, food, and automotive sectors, where profit margins for many firms have been shrinking. The automotive sector has been hurt as many investors expect the economy to slow and drag down auto sales. North American cable holdings were hindered by concerns about satellite competition, heavy capital spending, and depressed stock valuations, although we reduced the trust's holdings at relatively good prices. We also found that the low volume of new bond issuance in the high-yield arena made it challenging to find suitable reinvestment opportunities as we repositioned the portfolio to increase the trust's diversification. This made it difficult to remain fully invested at times, causing the trust to carry a larger-than-desired percentage of portfolio assets in cash. We began the period with roughly 7.4 percent of the portfolio in cash and cash equivalents but, despite market conditions, were able to end the period with just below 4 percent in cash and cash equivalents, which is much closer to our targeted range for cash holdings. Q WHAT SPECIFIC STRATEGIES DID YOU USE IN REPOSITIONING THE PORTFOLIO? A We continued to broaden its diversification, increasing the number of the trust's investments within various sectors and moving into a wider range of sectors overall. Our focus was on adding some shorter-term securities issued by solid companies, while relying on our extensive credit-research expertise to make selective choices from among the more speculative sectors of the market. Our relatively cautious approach during the period reflected market conditions and an appreciation of the leverage used by the trust. Our mix of caution, research, and leverage contributed to the trust's strong performance during the period. Our investments in the transportation and automotive sectors gave us the most trouble during the period. We held on to most of these investments because we view their longer-term prospects as generally favorable compared to current market prices. We took advantage of a solid run-up in the chemical sector by selling some of the trust's holdings, fulfilling an objective of reducing the trust's significant 9 11 exposure to chemicals. While some of our steel holdings hurt performance, we were successful at trimming our position at relatively good prices. Textile holdings also generally detracted from performance. Some of the sectors that boosted the trust's performance and continue to look attractive include energy--including exploration, refining, and oil services--and telecommunications, which is a dynamic, innovative industry with very strong growth prospects. Gaming also helped results, given the industry's strong underlying cash flows, which were appreciated by the market. We have added to the trust's positions in these sectors and believe they have the potential to provide excellent performance. Companies buying back their bonds via tenders also helped performance. Keep in mind that not all securities in the portfolio performed favorably, and there is no guarantee that any of these securities will perform well or will be held by the trust in the future. Q WHAT IS YOUR OUTLOOK FOR THE MARKET AND THE TRUST IN THE MONTHS AHEAD? A The strength of the economy will be a key factor in the performance of the high-yield bond market. Clear signs indicate that the pace of economic activity in the United States is moderating: the housing and manufacturing sectors have cooled, and consumer spending has leveled off from its pace of a year earlier. Importantly, core inflation (which excludes the volatile food and energy sectors) remains subdued. As such, the Fed's campaign of rate hikes may be nearing an end. At this time, we see plenty of good companies that should continue to perform well and provide strong investment opportunities within the high-yield market. While we expect that headlines about the market's relatively high default rate will continue, we believe the market has already largely identified the companies that are likely to fail and priced their bonds accordingly. With that in mind, we are optimistic, from a total return standpoint, about the market's potential. We expect a slow to moderate pace of new bond issuance. Most likely, we'll see enough activity to absorb the market demand for high-yield bonds in the near term. This demand is expected to remain tentative. While we plan to keep the trust's portfolio as close to fully invested as is feasible, we will remain cautious and selective, focusing on promising sectors with strong underlying fundamentals. We are particularly encouraged by the prospects for the telecommunications industry, such as wireless, cable, and satellite services, where consumer demand continues to be vigorous. We believe the stage is being set for improved returns in the high-yield market. The spread between the yields on high-yield bonds and comparable Treasury bonds has widened substantially over the past six months, indicating that carefully selected high-yield issues may prove to hold significant value over time. 10 12 GLOSSARY OF TERMS A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT AND OTHER FINANCIAL PUBLICATIONS. CREDIT-QUALITY RISK: The possibility that a bond issuer will fail to pay the principal or interest in a timely manner. DEFAULT: The failure to make required debt payments on time. FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve System, which is the central bank 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. HIGH-YIELD BOND: A bond with a speculative credit rating equal to or lower than BB (S&P) or Ba (Moody's). LEVERAGE: The use of borrowed capital to finance a business. PROFIT MARGIN: A measure of a company's efficiency, determined by dividing net income by net sales during the past 12 months. SECTOR: A group of securities that are similar with respect to industry, maturity, type, rating, or coupon. TENDER: An offer extended by a company to its shareholders to buy back its issued securities. TOTAL RETURN: The annual rate of return on a bond, taking into account interest income plus appreciation or depreciation. If a bond is held to maturity, its total return equals its yield to maturity. TREASURY BONDS: Debt obligations of the U.S. government that have maturities of 10 years or more. 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. 11 13 BY THE NUMBERS YOUR TRUST'S INVESTMENTS June 30, 2000 (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 CORPORATE BONDS 91.4% AEROSPACE & DEFENSE 2.2% $1,700 Dyncorp.................................. 9.500% 03/01/07 $ 1,300,500 1,500 Sequa Corp............................... 9.000 08/01/09 1,447,500 ------------ 2,748,000 ------------ AUTOMOBILE 6.3% 1,520 Aetna Industries, Inc. (c) .............. 11.875 10/01/06 1,337,600 450 Aftermarket Technology Corp.............. 12.000 08/01/04 451,688 300 Cambridge Industries, Inc. (d)........... 10.250 07/15/07 91,500 2,530 JPS Automotive Products Corp. ........... 11.125 06/15/01 2,536,325 1,900 Lear Corp. .............................. 8.250 02/01/02 1,871,500 850 Lear Corp. .............................. 7.960 05/15/05 793,687 140 Talon Automotive Group, Inc.............. 9.625 05/01/08 62,300 375 Venture Holdings, Inc.................... 9.500 07/01/05 273,750 825 Venture Holdings, Inc. .................. 12.000 06/01/09 453,750 ------------ 7,872,100 ------------ BEVERAGE, FOOD & TOBACCO 4.0% 550 Canandaigua Brands, Inc. ................ 8.625 08/01/06 545,188 1,035 Chiquita Brands International, Inc. ..... 10.000 06/15/09 796,950 1,100 Coca Cola Femsa S.A. (Mexico)............ 8.950 11/01/06 1,102,750 855 National Wine & Spirits, Inc. ........... 10.125 01/15/09 829,350 1,700 Pepsi Gemex S.A. (Mexico)................ 9.750 03/30/04 1,695,750 ------------ 4,969,988 ------------ BUILDINGS & REAL ESTATE 1.6% 525 Engle Homes, Inc. ....................... 9.250 02/01/08 446,250 847 Intrawest Corp. ......................... 9.750 08/15/08 838,530 825 Webb (Del E.) Corp. ..................... 10.250 02/15/10 726,000 ------------ 2,010,780 ------------ CHEMICAL 4.8% 735 Agriculture Minerals & Chemicals, Inc. .................................... 10.750 09/30/03 463,050 850 Equistar Chemicals L.P. ................. 8.500 02/15/04 843,625 2,891 Huntsman Polymers Corp. ................. 11.750 12/01/04 2,934,365 1,579 ISP Holdings, Inc........................ 9.750 02/15/02 1,531,630 230 Pioneer Americas Acquisition Corp........ 9.250 06/15/07 151,800 ------------ 5,924,470 ------------
See Notes to Financial Statements 12 14 YOUR TRUST'S INVESTMENTS June 30, 2000 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CONTAINERS, PACKAGING & GLASS 1.7% $ 850 Fonda Group, Inc......................... 9.500% 03/01/07 $ 671,500 1,400 Radnor Holdings, Inc. ................... 10.000 12/01/03 1,253,000 275 Sweetheart Cup, Inc...................... 10.500 09/01/03 253,000 ------------ 2,177,500 ------------ DIVERSIFIED/CONGLOMERATE MANUFACTURING 1.4% 1,350 Communications & Power Industries, Inc...................................... 12.000 08/01/05 958,500 855 Pacifica Papers, Inc. (Canada)........... 10.000 03/15/09 846,450 ------------ 1,804,950 ------------ ELECTRONICS 3.0% 1,455 Advanced Micro Devices, Inc. (c) ........ 11.000 08/01/03 1,509,562 850 Flextronics International Ltd. (Singapore).............................. 8.750 10/15/07 818,125 340 Globix Corp. ............................ 12.500 02/01/10 282,200 1,050 Hadco Corp. ............................. 9.500 06/15/08 1,059,188 ------------ 3,669,075 ------------ FINANCE 3.8% 1,305 Americredit Corp. ....................... 9.250 02/01/04 1,265,850 310 Banco Nacional de Comercio Exterior (Mexico)................................. 7.250 02/02/04 295,275 385 Labranche & Co., Inc..................... 12.000 03/01/07 383,075 280 Madison River Capital LLC, 144A Private Placement (a)............................ 13.250 03/01/10 254,800 550 Port Arthur Finance Corp. ............... 12.500 01/15/09 552,750 2,000 Vicap S.A. (Mexico)...................... 10.250 05/15/02 1,905,000 ------------ 4,656,750 ------------ GROCERY 4.7% 1,160 Disco S.A. (Argentina)................... 9.125 05/15/03 1,070,100 915 Fleming Cos., Inc. ...................... 10.625 12/15/01 910,425 1,550 Fleming Cos., Inc. ...................... 10.500 12/01/04 1,395,000 1,570 Jitney Jungle Stores America, Inc. (d) (f)...................................... 12.000 03/01/06 243,350 1,845 Pantry, Inc. ............................ 10.250 10/15/07 1,757,362 575 Pathmark Stores, Inc. (d) (f)............ 9.625 05/01/03 414,000 ------------ 5,790,237 ------------ HEALTHCARE 3.9% 650 Fisher Scientific International, Inc. ... 7.125 12/15/05 583,375 1,500 Fresenius Medical Care Capital Trust..... 9.000 12/01/06 1,440,000 990 Health South Rehab Corp. ................ 9.500 04/01/01 994,950
See Notes to Financial Statements 13 15 YOUR TRUST'S INVESTMENTS June 30, 2000 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE HEALTHCARE (CONTINUED) $ 710 Meditrust................................ 7.375% 07/15/00 $ 710,000 1,150 Tenet Healthcare Corp. .................. 8.000 01/15/05 1,112,625 ------------ 4,840,950 ------------ HOTEL, MOTEL, INNS & GAMING 4.8% 260 Agrosy Gaming Co. ....................... 10.750 06/01/09 269,100 540 Booth Creek Ski Holdings, Inc............ 12.500 03/15/07 394,200 848 Boyd Gaming Corp. ....................... 9.250 10/01/03 843,760 825 Casino Magic Louisiana Corp. (c)......... 13.000 08/15/03 882,750 570 Harvey's Casino Resorts.................. 10.625 06/01/06 577,125 140 Horseshoe Gaming LLC (b)................. 8.625 05/15/09 131,950 320 Majestic Star Casino LLC................. 10.875 07/01/06 265,600 280 MGM Grand, Inc. ......................... 9.750 06/01/07 285,600 1,400 Mohegan Tribal Gaming Authority.......... 8.125 01/01/06 1,340,500 490 Park Place Entertainment Corp. .......... 7.875 12/15/05 463,050 560 Park Place Entertainment Corp. .......... 8.500 11/15/06 553,000 ------------ 6,006,635 ------------ LEISURE 1.0% 1,195 Selme Co., Inc. ......................... 11.000 05/15/05 1,236,825 ------------ MINING, STEEL, IRON & NON-PRECIOUS METAL 3.1% 1,100 GS Technologies Operating, Inc. ......... 12.250 10/01/05 363,000 1,925 Kaiser Aluminum & Chemical Corp. ........ 9.875 02/15/02 1,848,000 210 Renco Steel Holdings, Inc. .............. 10.875 02/01/05 173,250 1,590 WCI Steel, Inc. ......................... 10.000 12/01/04 1,494,600 ------------ 3,878,850 ------------ OIL & GAS 9.1% 990 Benton Oil & Gas, Inc. .................. 11.625 05/01/03 732,600 280 Cliffs Drilling Co. ..................... 10.250 05/15/03 282,800 1,140 Frontier Oil Corp. ...................... 11.750 11/15/09 1,151,400 1,902 Giant Industries, Inc. (b)............... 9.750 11/15/03 1,873,470 715 Giant Industries, Inc. .................. 9.000 09/01/07 661,375 2,335 KCS Energy, Inc. (d) (f)................. 11.000 01/15/03 2,171,550 575 Petroleos Mexicanos (Mexico)............. 9.437 07/15/05 575,000 425 Pioneer Natural Resources Co. ........... 9.625 04/01/10 436,687 1,000 Pride Petroleum Services, Inc. .......... 9.375 05/01/07 1,005,000 570 R & B Falcon Corp. ...................... 6.500 04/15/03 531,525 685 R & B Falcon Corp. ...................... 9.500 12/15/08 691,850 1,130 Triton Energy Ltd. ...................... 8.750 04/15/02 1,124,350 ------------ 11,237,607 ------------
See Notes to Financial Statements 14 16 YOUR TRUST'S INVESTMENTS June 30, 2000 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE PAPER 0.6% $ 825 Repap New Brunswick, Inc. ............... 9.000% 06/01/04 $ 792,000 ------------ PRINTING, PUBLISHING & BROADCASTING 10.6% 1,400 Adelphia Communications Corp. ........... 9.250 10/01/02 1,368,500 570 Century Communications Corp. ............ 9.750 02/15/02 568,575 850 Charter Communication Holdings, LLC...... 8.250 04/01/07 754,375 200 Classic Cable, Inc. ..................... 9.375 08/01/09 174,000 1,200 CSC Holdings, Inc. ...................... 10.500 05/15/16 1,260,000 975 EchoStar Communications Corp. ........... 9.250 02/01/06 940,875 1,000 International Cabletel, Inc. ............ 12.750 04/15/05 1,020,000 1,300 James Cable Partners L.P................. 10.750 08/15/04 1,254,500 1,500 K-III Communications Corp. .............. 10.250 06/01/04 1,522,500 325 Northland Cable Television, Inc. ........ 10.250 11/15/07 271,375 570 Price Communications Wireless, Inc....... 9.125 12/15/06 570,000 425 Sinclair Broadcast Group, Inc. .......... 10.000 09/30/05 410,125 1,140 Telewest PLC (United Kingdom)............ 9.625 10/01/06 1,080,150 570 United Pan Europe Communications (Netherlands)............................ 10.875 08/01/09 507,300 455 United Pan Europe Communications (Netherlands)............................ 11.250 02/01/10 409,500 950 Young Broadcasting, Inc. ................ 11.750 11/15/04 969,000 ------------ 13,080,775 ------------ PRODUCER MANUFACTURING 2.3% 200 Associated Materials, Inc. .............. 9.250 03/01/08 187,500 275 Carpenter (W. R.), Inc. ................. 10.625 06/15/07 60,500 635 Cemex S. A., 144A Private Placement (Mexico) (a)............................. 9.250 06/17/02 646,113 580 Federal Mogul Corp. ..................... 7.500 07/01/04 429,200 595 Numatics, Inc............................ 9.625 04/01/08 478,975 1,130 Playtex Family Products Corp. ........... 9.000 12/15/03 1,096,100 ------------ 2,898,388 ------------ RETAIL 2.9% 210 Big 5 Corp. ............................. 10.875 11/15/07 194,250 600 Community Distributors, Inc. ............ 10.250 10/15/04 471,000 500 Hosiery Corp. of America, Inc. .......... 13.750 08/01/02 447,500 340 K Mart Corp. ............................ 8.375 12/01/04 324,275 235 Musicland Group, Inc. ................... 9.000 06/15/03 219,138 825 Musicland Group, Inc. ................... 9.875 03/15/08 693,000
See Notes to Financial Statements 15 17 YOUR TRUST'S INVESTMENTS June 30, 2000 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE RETAIL (CONTINUED) $ 710 Polaroid Corp. .......................... 6.750% 01/15/02 $ 681,600 570 Saks, Inc. .............................. 7.000 07/15/04 512,079 ------------ 3,542,842 ------------ TELECOMMUNICATIONS 11.3% 490 Airgate PCS, Inc. (e).................... 0/13.500 10/01/09 284,200 365 Alamosa Holdings, Inc. (e)............... 0/12.875 02/15/10 190,713 1,050 Capstar Broadcasting Partners (c)........ 9.250 07/01/07 1,065,750 1,100 EZ Communications, Inc. ................. 9.750 12/01/05 1,155,000 850 Filtronic PLC (United Kingdom)........... 10.000 12/01/05 743,750 570 Focal Communications Corp., 144A Private Placement (a)............................ 11.875 01/15/10 570,000 850 Frontier Corp. .......................... 6.000 10/15/13 756,500 755 Global Crossing Holdings Ltd. ........... 9.125 11/15/06 726,687 300 Globenet Communications Group (Bermuda).......................... 13.000 07/15/07 304,500 560 Grupo Iusacell S. A. (Mexico)............ 10.000 07/15/04 557,200 1,260 GT Group Telecom, Inc., 144A Private Placement (a)(e)......................... 0/13.250 02/01/10 715,050 250 Intermedia Communications, Inc. ......... 8.875 11/01/07 232,500 1,230 Intermedia Communications, Inc. ......... 8.600 06/01/08 1,128,525 1,100 McLeod USA, Inc. ........................ 8.375 03/15/08 1,001,000 1,160 Metromedia Fiber Network, Inc. .......... 10.000 12/15/09 1,142,600 280 MGC Communications, Inc.................. 13.000 10/01/04 299,600 1,105 Nextel Communications, Inc. ............. 9.375 11/15/09 1,063,562 570 Nextlink Communications, Inc. ........... 9.625 10/01/07 538,650 600 Nextlink Communications, Inc. ........... 10.500 12/01/09 591,000 280 Philippine Long Distance Telephone (Philippines)............................ 10.625 06/02/04 277,900 175 Philippine Long Distance Telephone (Philippines)............................ 10.500 04/15/09 156,625 325 Telefonica De Argentina S. A., 144A Private Placement (Argentina) (a)........ 9.875 07/01/02 331,500 220 US Unwired, Inc. (e)..................... 0/13.375 11/01/09 122,100 ------------ 13,954,912 ------------ TECHNOLOGY 1.0% 280 Exodus Communications Inc., 144A Private Placement (a)(b)......................... 11.625 07/15/10 280,700 350 PSI Net, Inc. (b)........................ 10.500 12/01/06 329,000 580 Williams Communications Corp. ........... 10.700 10/01/07 580,000 ------------ 1,189,700 ------------
See Notes to Financial Statements 16 18 YOUR TRUST'S INVESTMENTS June 30, 2000 (Unaudited)
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE TEXTILES 2.0% $ 285 Anvil Knitwear, Inc. .................... 10.875% 03/15/07 $ 251,513 1,075 Dan River, Inc. ......................... 10.125 12/15/03 1,048,125 1,905 Pillowtex Corp. ......................... 10.000 11/15/06 666,750 550 Scovill Fasteners, Inc. ................. 11.250 11/30/07 247,500 280 Supreme International Corp. ............. 12.250 04/01/06 268,800 ------------ 2,482,688 ------------ TRANSPORTATION 3.3% 845 Cenargo International PLC (United Kingdom)......................... 9.750 06/15/08 625,300 2,070 Greyhound Lines, Inc..................... 11.500 04/15/07 1,511,100 685 International Shipholding Corp. ......... 9.000 07/01/03 681,575 850 Laidlaw, Inc. (Canada) (d)............... 7.700 08/15/02 221,000 567 Northwest Airlines Corp. ................ 8.375 03/15/04 535,815 570 Stena AB (Sweden)........................ 10.500 12/15/05 561,450 ------------ 4,136,240 ------------ UTILITIES 2.0% 1,475 AES Corp. (c)............................ 9.500 06/01/09 1,445,500 425 Calpine Corp. ........................... 9.250 02/01/04 425,000 1,100 National Energy Group, Inc. (d) (f)...... 10.750 11/01/06 588,500 ------------ 2,459,000 ------------ TOTAL CORPORATE BONDS 91.4%............................................. 113,361,262 ------------ GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS 0.4% 450 United Mexican States (Mexico)........... 9.875 02/01/10 468,563 ------------ EQUITIES 0.2% Airgate PCS, Inc. (52 common shares)..................................... 2,733 Decisionone Corp. (3,033 common shares).................................. 44 Decisionone Corp. (6,670 common stock warrants).......................... 6,500 Hosiery Corp. of America, Inc., (500 common shares) 144A Private Placement (a)............................................................ 20,250 Intermedia Communications, Inc. (2,241 common shares).................... 66,670 NTL, Inc., (1,662 common stock warrants) 144A Private Placement (a)...... 116,330 Star Gas Partners L. P. (264 limited partnership units).................. 4,059 ------------ TOTAL EQUITIES........................................................... 216,586 ------------ TOTAL LONG-TERM INVESTMENTS 92.0% (Cost $126,785,985).................................................... 114,046,411
See Notes to Financial Statements 17 19 YOUR TRUST'S INVESTMENTS June 30, 2000 (Unaudited)
MARKET DESCRIPTION VALUE REPURCHASE AGREEMENT 3.9% State Street Bank and Trust, (Collateralized by U.S. Treasury Note, $4,860,000 par, 6.450% coupon, due 08/15/21, dated 06/30/00, to be sold on 07/03/00 at $4,862,612) (Cost $4,860,000)............................. $ 4,860,000 ------------ TOTAL INVESTMENTS 95.9% (Cost $131,645,985).................................................... 118,906,411 OTHER ASSETS IN EXCESS OF LIABILITIES 4.1%.............................. 5,029,794 ------------ NET ASSETS 100.0%....................................................... $123,936,205 ============
(a) 144A securities are those which are exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may only be resold in transactions exempt from registration which are normally transactions with qualified institutional buyers. (b) Securities purchased on a when--issued or delayed delivery basis. (c) Assets segregated as collateral for when--issued or delayed delivery purchase commitments, open option and open futures transactions. (d) Non-Income producing as security is in default. (e) Security is a "step-up" bond where the coupon increases or steps up at a predetermined date. (f) This borrower has filed for protection in federal bankruptcy court. See Notes to Financial Statements 18 20 FINANCIAL STATEMENTS Statement of Assets and Liabilities June 30, 2000 (Unaudited) ASSETS: Total Investments (Cost $131,645,985)....................... $118,906,411 Cash........................................................ 576 Receivables: Investments Sold.......................................... 3,542,695 Interest.................................................. 2,789,349 Other....................................................... 7,731 ------------ Total Assets............................................ 125,246,762 ------------ LIABILITIES: Payables: Investments Purchased..................................... 988,512 Investment Advisory Fee................................... 72,725 Income Distributions--Common and Preferred Shares......... 13,576 Affiliates................................................ 5,596 Accrued Expenses............................................ 117,010 Trustees' Deferred Compensation and Retirement Plans........ 113,138 ------------ Total Liabilities....................................... 1,310,557 ------------ NET ASSETS.................................................. $123,936,205 ============ NET ASSETS CONSIST OF: Preferred Shares ($.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............................................. 87,204,724 Accumulated Distributions in Excess of Net Investment Income.................................................... (686,629) Accumulated Net Realized Loss............................... (8,779,424) Net Unrealized Depreciation................................. (12,739,574) ------------ Net Assets Applicable to Common Shares.................. 65,136,205 ------------ NET ASSETS.................................................. $123,936,205 ============ NET ASSET VALUE PER COMMON SHARE ($65,136,205 divided by 13,710,760 shares outstanding)............................ $ 4.75 ============
See Notes to Financial Statements 19 21 Statement of Operations For the Six Months Ended June 30, 2000 (Unaudited) INVESTMENT INCOME: Interest.................................................... $ 6,397,798 Other....................................................... 136,233 ------------ Total Income............................................ 6,534,031 ------------ EXPENSES: Investment Advisory Fee..................................... 469,179 Preferred Share Maintenance................................. 79,436 Trustees' Fees and Related Expenses......................... 5,773 Legal....................................................... 5,142 Custody..................................................... 3,183 Other....................................................... 106,224 ------------ Total Expenses.......................................... 668,937 ------------ NET INVESTMENT INCOME....................................... $ 5,865,094 ============ REALIZED AND UNREALIZED GAIN/LOSS: Net Realized Loss........................................... $ (3,244,853) ------------ Unrealized Appreciation/Depreciation: Beginning of the Period................................... (11,451,630) End of the Period......................................... (12,739,574) ------------ Net Unrealized Depreciation During the Period............... (1,287,944) ------------ NET REALIZED AND UNREALIZED LOSS............................ $ (4,532,797) ============ NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 1,332,297 ============
See Notes to Financial Statements 20 22 Statement of Changes in Net Assets For the Six Months Ended June 30, 2000 and the Year Ended December 31, 1999 (Unaudited)
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2000 DECEMBER 31, 1999 ------------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income............................. $ 5,865,094 $ 11,998,822 Net Realized Loss................................. (3,244,853) (3,180,995) Net Unrealized Depreciation During the Period..... (1,287,944) (7,082,853) ------------ ------------ Change in Net Assets from Operations.............. 1,332,297 1,734,974 ------------ ------------ Distributions from and in Excess of Net Investment Income: Common Shares................................... (4,408,009) (9,158,353) Preferred Shares................................ (1,763,023) (3,006,220) ------------ ------------ Total Distributions............................... (6,171,032) (12,164,573) ------------ ------------ NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES...................................... (4,838,735) (10,429,599) NET ASSETS: Beginning of the Period........................... 128,774,940 139,204,539 ------------ ------------ End of the Period (Including accumulated distributions in excess of net investment income of $686,629 and $380,691, respectively)......... $123,936,205 $128,774,940 ============ ============
See Notes to Financial Statements 21 23 Financial Highlights (Unaudited) THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
SIX MONTHS ENDED ----------------------------- JUNE 30, 2000 1999 1998 1997 ------------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD............................. $ 5.104 $ 5.864 $ 6.469 $ 6.346 ------- ------- ------- ------- Net Investment Income.............. .428 .875 .910 .930 Net Realized and Unrealized Gain/Loss........................ (.331) (.748) (.576) .131 ------- ------- ------- ------- Total from Investment Operations..... .097 .127 .334 1.061 ------- ------- ------- ------- Less Distributions from and in Excess of Net Investment Income: Paid to Common Shareholders........ .321 .668 .702 .702 Common Share Equivalent of Distributions Paid to Preferred Shareholders..................... .129 .219 .237 .236 ------- ------- ------- ------- Total Distributions.................. .450 .887 .939 .938 ------- ------- ------- ------- Net Asset Value, End of the Period... $ 4.751 $ 5.104 $ 5.864 $ 6.469 ======= ======= ======= ======= Market Price Per Share at End of the Period............................. $ 5.000 $ 4.500 $ 6.375 $ 7.375 Total Investment Return at Market Price (a).......................... 18.68%* -21.20% -4.33% 20.29% Total Return at Net Asset Value (b).......................... -0.51* -1.60% 1.35% 13.69% Net Assets at End of the Period (In millions).......................... $ 123.9 $ 128.8 $ 139.2 $ 147.5 Ratio of Expenses to Average Net Assets Applicable to Common Shares**........................... 2.01% 1.92% 1.85% 1.76% Ratio of Net Investment Income to Average Net Assets Applicable to Common Shares (c).................. 12.31% 12.09% 10.77% 10.90% Portfolio Turnover................... 41%* 57% 65% 102% * Non-Annualized ** Ratio of Expenses to Average Net Assets Including Preferred Shares.................. 1.07% 1.07% 1.09% 1.05%
(a) 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 common stock price at the end of the period indicated. (b) 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. (c) Net Investment Income is adjusted for the common share equivalent of distributions paid to preferred shareholders. 22 24
YEAR ENDED DECEMBER 31 -------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 -------------------------------------------------------------- $ 6.186 $ 5.623 $ 6.735 $ 6.228 $ 5.924 $ 4.603 ------- ------- ------- ------- ------- ------- .946 .982 1.002 1.109 1.206 1.150 .147 .537 (.975) .526 .174 1.282 ------- ------- ------- ------- ------- ------- 1.093 1.519 .027 1.635 1.380 2.432 ------- ------- ------- ------- ------- ------- .702 .702 .954 .990 .908 .840 .231 .254 .185 .138 .168 .271 ------- ------- ------- ------- ------- ------- .933 .956 1.139 1.128 1.076 1.111 ------- ------- ------- ------- ------- ------- $ 6.346 $ 6.186 $ 5.623 $ 6.735 $ 6.228 $ 5.924 ======= ======= ======= ======= ======= ======= $ 6.750 $ 6.375 $ 5.500 $ 8.125 $ 7.250 $ 6.875 17.34% 29.17% -23.22% 26.12% 18.67% 92.24% 14.86% 23.70% -2.54% 25.46% 21.36% 48.77% $ 145.8 $ 143.6 $ 135.9 $ 151.1 $ 144.2 $ 140.0 1.87% 1.92% 1.96% 1.72% 1.87% 2.51% 11.58% 12.16% 13.31% 14.66% 16.48% 15.86% 92% 119% 110% 99% 109% 78% 1.11% 1.12% 1.16% 1.04% 1.11% 1.42%
See Notes to Financial Statements 23 25 NOTES TO FINANCIAL STATEMENTS June 30, 2000 (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen 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 or indications of value obtained from an independent pricing service. For those securities where quotations or prices are not available, valuations are 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, 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" 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. 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 collateralized by the underlying debt security. The Trust will make payment for such securities only upon physical delivery or evidence of book 24 26 NOTES TO FINANCIAL STATEMENTS June 30, 2000 (Unaudited) 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. Bond premium is amortized and discount is accreted 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, 1999, the Trust had an accumulated capital loss carry forward for tax purposes of $5,083,598 which expires between December 31, 2002 and December 31, 2007. Net realized gains or losses may differ for financial reporting and tax purposes as a result of the deferral of losses relating to wash sale transactions. At June 30, 2000, for federal income tax purposes, cost of long- and short-term investments is $131,670,024; the aggregate gross unrealized appreciation is $867,807 and the aggregate gross unrealized depreciation is $13,631,420, resulting in net unrealized depreciation on long- and short-term investments of $12,763,613. 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 certain expenses under generally accepted accounting principles and federal income tax purposes, the amount of distributed net investment income may differ for a particular period. These differences are temporary in nature, but may result in book basis distribution in excess of net investment income for certain periods. 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. 25 27 NOTES TO FINANCIAL STATEMENTS June 30, 2000 (Unaudited) For the six months ended June 30, 2000, the Trust recognized expenses of approximately $1,400 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. For the six months ended June 30, 2000, the Trust recognized expenses of approximately $8,700 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 $48,064,292 and $46,801,603, 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 June 30, 2000, was 6.470%. During the six months ended June 30, 2000, the rates ranged from 5.420% to 6.470%. 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. 26 28 VAN KAMPEN FUNDS THE VAN KAMPEN FAMILY OF FUNDS Growth Aggressive Growth American Value* Emerging Growth Enterprise Equity Growth Focus Equity Growth Mid Cap Growth Pace Select Growth Small Cap Value Tax Managed Equity Growth Technology Growth and Income Comstock Equity Income Growth and Income Harbor Real Estate Securities Utility Value Global/International Asian Growth Emerging Markets European Equity Global Equity Global Equity Allocation International Magnum Latin American Strategic Income Tax Managed Global Franchise Worldwide High Income Income Corporate Bond Government Securities High Income Corporate Bond High Yield High Yield & Total Return* Limited Maturity Government U.S. Government U.S. Government Trust for Income Capital Preservation Reserve Tax Free Money Senior Loan Prime Rate Income Trust Senior Floating Rate Tax Free California Insured Tax Free Florida Insured Tax Free Income High Yield Municipal** Insured Tax Free Income Intermediate Term Municipal Income Municipal Income New York Tax Free Income Pennsylvania Tax Free Income Tax Free High Income To find out more about any of these funds, ask your financial advisor for a prospectus, which contains more complete information, including sales charges, risks, and ongoing expenses. Please read it carefully before you invest or send money. To view a current Van Kampen fund prospectus or to receive additional fund information, choose from one of the following: - visit our Web site at WWW.VANKAMPEN.COM-- to view a prospectus, select Download Prospectus [COMPUTER ICON] - call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time. Telecommunications Device for the Deaf users, call 1-800-421-2833. [PHONE ICON] - e-mail us by visiting WWW.VANKAMPEN.COM and selecting Contact Us [MAIL ICON] * Closed to new investors ** Open to new investors for a limited time 27 29 TRUST OFFICERS AND IMPORTANT ADDRESSES VAN KAMPEN HIGH INCOME TRUST BOARD OF TRUSTEES DAVID C. ARCH ROD DAMMEYER HOWARD J KERR THEODORE A. MYERS RICHARD F. POWERS, III* - Chairman HUGO F. SONNENSCHEIN WAYNE W. WHALEN* OFFICERS RICHARD F. POWERS, III* President STEPHEN L. BOYD* Executive Vice President and Chief Investment Officer A. THOMAS SMITH III* Vice President and Secretary JOHN L. SULLIVAN* Vice President, Treasurer and Chief Financial Officer RICHARD A. CICCARONE* JOHN R. REYNOLDSON* MICHAEL H. SANTO* JOHN H. ZIMMERMANN, 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 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. (C) Van Kampen Funds Inc., 2000. All rights reserved. (SM) denotes a service mark of Van Kampen Funds Inc. 28 30 RESULTS OF SHAREHOLDER VOTES An Annual Meeting of the Shareholders of the Trust was held on June 21, 2000, where shareholders voted on the election of trustees and the selection of independent auditors. 1) With regards to the election of the following trustee by the common shareholders of the Trust:
# OF SHARES ------------------------------ IN FAVOR WITHHELD Wayne W. Whalen....................................... 11,877,354 228,744
With regards to the election of the following trustee by the preferred shareholders of the Trust:
# OF SHARES ------------------------------ IN FAVOR WITHHELD Rod Dammeyer.......................................... 530 --
The other trustees whose terms did not expire in 2000 were David C. Arch, Howard J Kerr, Theodore A. Myers, Richard F. Powers, III, and Hugo F. Sonnenschein. 2) With regards to the ratification of Deloitte & Touche LLP as independent auditors of the Trust, 11,886,318 shares voted in favor of the proposal, 51,614 shares voted against, and 168,696 shares abstained. 29