Page: 1
[ COVER Page ]
Page: 2
Letter to Shareholders
--------------------------------------------------------------------------------
March 1, 1995
Dear Shareholder:
While 1994 will long be remembered as a challenging and difficult year in the
financial markets, the performance of the
Van Kampen Merritt Prime Rate Income Trust has been characterized by positive
returns and increasing dividend levels.
During the course of 1994, the Trust increased its monthly dividend seven
times, and again in January for an eighth time.
All together, annual dividends grew nearly 50 percent, from $0.0459 per share
(55 cents annualized) in January 1994, to its current monthly dividend level of
$0.0671 per share (80.5 cents annualized). This latest dividend increase
provides a distribution rate of 8.04 percent, based upon the February 24, 1995
net asset value of $10.02. For investors who reinvest their dividends, the new
dividend level represents a compounded distribution rate of 8.34 percent.
Additionally, we are pleased to report that the Trust celebrated its fifth
year of investment operations, providing investors with high monthly income and
capital preservation, while achieving a five-year average annual total return of
7.60 percent<F1> for the period ended January 31, 1995.
Market Overview
The Trust's performance during 1994, and through the period ended January 31,
1995, was positively impacted by the Federal Reserve Board's (the "Fed's") tight
monetary policy and periodic interest rate hikes. Because the Trust invests
primarily in a portfolio of floating or variable rate senior secured loans,
which adjust with changes in prevailing interest rates (downward as rates fall
and upward as rates rise), the Trust was able to increase its dividend level as
short-term interest rates continued to rise.
In an effort to moderate economic growth and keep inflation under control,
the Fed has raised the federal funds rate
(the rate banks charge each other for overnight loans) seven times over a
12-month period. As a result, the fed funds rate doubled from 3 percent to 6
percent, its highest level in three years. Intermediate and long-term interest
rates quickly followed the Fed's lead and moved significantly higher as well.
The yield on 30-year Treasury securities, for example, began the year at 6.35
percent and increased to a high of 8.16 percent before retreating to 7.69
percent by the end of January.
Investors in instruments whose interest rate is variable in nature, such as
the Prime Rate Income Trust, were the beneficiaries of this dramatic rise in
interest rates, while longer-term
<TABLE>
<CAPTION>
Performance Results for the Period
<S> <C>
One-year total return for period ended 01/31/95<F1>.............. 6.45%
Life of Trust average annual total return through 01/31/95<F1>... 7.77%
One-year total return for period ended 12/31/94<F1> ............. 6.52%
Distribution rate<F2>............................................ 7.58%
Compounded distribution rate<F2>................................. 7.85%
Net asset value as of 01/31/95................................... $ 10.04
High net asset value for year ended 01/31/95 .................... $ 10.07
Low net asset value for year ended 01/31/95 ..................... $ 10.03
Commencement date................................................ 10/04/89
<FN>
<F1> Total return assumes an investment at the beginning of the period
indicated, reinvestment of all distributions for the period and tender of all
shares at the end of the period indicated, excluding payment of any early
withdrawal charges.
<F2> Distribution rate is based upon the offering price and the monthly
annualized distributions of the Trust as of January 25, 1995. Compounded
distribution rate assumes reinvestment of all distributions.
Past performance does not guarantee future results. Distribution rates and net
asset value may fluctuate with market conditions. Investor's shares, when
tendered, may be worth more or less than their original cost.
This report is intended for shareholders of the Trust and may not be used as
sales literature with prospective investors unless it is preceded or accompanied
by the Trust's current prospectus, which gives more complete information about
charges and expenses, investment objectives and operating policies. Prospective
investors should read the prospectus carefully before investing or sending
money.
</TABLE>
Page: 3
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
fixed-income investors largely suffered as higher rates discounted the value of
their holdings. The value of 30-year Treasury bonds, for example, declined
approximately 17 percent during 1994. Stock market investors did not fare much
better during this rising rate environment, despite the robust economy and
stronger corporate earnings. Concerned that higher interest rates and the
prospect for continued rate hikes might altogether extinguish the current
economic expansion, the equity market sputtered for most of the year.
Consequently, the S&P 500 Index produced a meager 1.36 percent total return for
1994, while the average price change for the year for all stocks listed on the
New York Stock Exchange was down 20 percent.
Outlook
Although the Fed appears to have kept inflation well under control without
driving the economy into premature recession, the economy continues to grow at
higher-than-expected levels, contributing to upward pressure on short-term
interest rates. And, although it is unlikely that we will see the dramatic
increase in rates of the past year, we believe the Trust is well positioned to
take advantage of the current interest rate environment and prolonged economic
expansion.
We will continue to invest primarily in companies that are basic suppliers of
goods and services to the domestic economy, while maintaining a varied
portfolio. Meanwhile, increased loan demand by banks and mutual fund companies
has contributed to a significant increase in total bank loan trading volume,
which should provide additional liquidity and increased buying opportunities in
the bank loan market. Going forward, we will continue to seek to reduce the
Trust's exposure to non-performing issues, while maintaining strict standards
regarding credit quality and earnings potential.
Van Kampen Merritt Completes Merger
This past year also was a year of great change for
Van Kampen Merritt. In December, the company completed its merger with American
Capital Management & Research, Inc., creating one of the largest money
management firms in the country, representing 2 million investor accounts and
more than $50 billion in assets under management or supervision. While this
merger will have no direct impact on your investment, you will benefit from
enhanced money management and research capabilities, continued superior service,
and more investment options.
We will continue to communicate with you on a regular basis as we go forward,
providing information about both market conditions and new investment
opportunities. We appreciate your continued confidence in your Trust and Van
Kampen American Capital.
Sincerely,
Dennis J. McDonnell
President, Van Kampen American Capital
Investment Advisory Corp.
Page: 4
Portfolio Manager Comments
--------------------------------------------------------------------------------
[ PHOTOGRAPH Inserted Here ]
Van Kampen Merritt
Prime Rate Income Trust
With five full years of investment operations complete, the Van Kampen
Merritt Prime Rate Income Trust has established a track record of
competitive distribution rates, relative NAV stability, and solid total
returns. Jeff Maillet, Vice President of Van Kampen American Capital
Investment Advisory Corp., has been at the helm of the Trust since its
inception in October of 1989. We speak with him here about the Trust's
performance over the first six months of the fiscal year (August 1, 1994
through January 31, 1995) and his outlook for the months ahead.
Looking back over the past six months, what market conditions or events have
been at the forefront of your attention as the portfolio manager of the Prime
Rate Income Trust?
Like everyone else, I had my eyes on short-term interest rates -- although,
unlike everyone else, I've been happy with what I've seen.
In the fixed-income market, investors saw the value of their holdings decline
throughout 1994 as short-term interest rates climbed steadily higher. But
because the Prime Rate Income Trust invests primarily in variable- or
floating-rate senior loans, rising interest rates have had virtually no impact
on its net asset value, which has remained within a very narrow range (between
$10.03 and $10.07 per share for the twelve months ending 1/31/95).
Just as the Trust's dividend is reduced from time to time during periods of
declining interest rates, rising interest rates have enabled the Trust to
increase its dividend eight times within the last twelve months. Halfway through
the fiscal year, the Trust's distribution rate, considering the latest dividend
increase, is in the neighborhood of 8 percent, which compares very favorably
with the prevailing short-term interest rates available on more traditional
fixed-income alternatives.
Will higher interest rates figure prominently in the Trust's performance for the
remainder of the fiscal year?
Rising interest rates are always an important consideration in managing the
Trust, because they represent a double-edged sword. Obviously, as rates go up,
the variable-rate nature of the senior loans held by the Trust has enabled us to
periodically adjust the dividend upward. On the other hand, higher rates mean
the borrowers have to contend with higher debt costs. As long as the economy is
strong, these businesses should be reasonably comfortable in terms of being able
to finance their debt payments.
For the past twelve months, the Fed has acted pre-emptively -- and I believe
properly -- in hiking rates as sharply and as quickly as they did. Without
action by the Fed, the strength of the economy would drive inflation well above
the comfort level of the typical middle-class family in this country.
Will that economic strength continue to build? And, if so, what does that mean
for the Trust?
I believe we are in a period of very strong economic expansion. I look at
raw materials prices, rail traffic, and other economic indicators -- each
suggesting a generally strong business climate -- and I feel optimistic about
the prospects for corporate earnings, at least in the short run.
Nevertheless, I always manage the Trust with a degree of caution. The economy
is too complex, with too many variables in flux, to make any sure bets about
what's down the road. We are feeling the effects of a shift toward global
cooperation and global competition that can't be ignored.
In running the Trust, do you emphasize companies which are globally
positioned?
Many of the companies we evaluate are participants in this new global economy,
but a more important consideration in my mind is whether or not they are large
players in the domestic market -- suppliers of basic goods and services which
tend to be in demand regardless of the economic environment.
While we are careful to pay close attention to the overall credit quality of
the senior loans in the Trust's portfolio, I feel a widely varied portfolio
provides some protection from the inevitable ups and downs of the business
cycle. I don't want to commit a cent to a company that will be unable to
withstand a protracted downturn in its business operations -- but I realize that
it's probably impossible to achieve that goal 100 percent of the time.
For that reason, the Trust's assets are currently allocated across a range of
industry groups and geographic regions, with no one single loan representing
more than 3 percent of the Trust's total assets.
What is your outlook for the next six months?
I look at it this way: even if conservative estimates of the economy's
strength prove to be accurate, I expect to find ample opportunity for promising
situations in which to put the assets of the Trust to work. Our approach has
worked in the past -- providing a cumulative five-year total return of 44.2
percent<F1> -- and I expect that we can continue to be successful.
<TABLE>
<CAPTION>
Portfolio Composition by Industry (as of January 31, 1995)
<S> <C>
Manufacturing ............ 24.2%
Short-Term Investments ... 15.3
Retail ................... 9.9
Paper .................... 9.2
Communications .......... 7.2
Food Stores ............ 6.5
Printing ................. 4.9
Other .................... 4.5
Food & Tobacco ........... 4.3
Textiles ................ 4.2
Electric/Electronics ..... 3.4
Transportation .......... 2.8
Chemical ................. 2.2
Restaurants ............. 1.4
</TABLE>
Please see footnotes on bottom of page two.
Page: 5
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Portfolio of Investments
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(000) Borrower Type Maturity* Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests
Chemical 2.2%
$ 10,000 Exide Corporation - Automotive and industrial battery manufacturer .............. Term 09/30/01 $ 9,987,991
3,417 Findley Adhesives, Incorporated - Industrial glue manufacturer .................. Term 12/31/97 3,364,027
9,000 Freedom Chemical Company - Manufacturer of specialty chemicals .................. Term 06/30/02 8,984,035
5,870 Rheox, Incorporated - Chemical additives manufacturer ........................... Term 12/31/97 5,783,405
9,104 Thoro System Products, Incorporated - Manufacturer of chemicals for
construction industry ........................................................... Term 12/31/01 9,069,248
-------------
37,188,706
Communications 7.0%
4,151 Alexcom Limited Partnership - Cellular telephone systems operator ............... Term 06/30/00 4,078,651
10,000 Cable Services Group, Incorporated - Cable systems billing service .............. Term 11/30/01 10,061,760
17,000 Coaxial Communications of Central Ohio - Cable television systems operator ...... Term 12/31/99 16,992,698
8,500 Northland Cable Television, Incorporated - Cable television systems operator .... Revolving Credit 09/30/03 8,582,817
10,000 Pyramid Finance Corporation - Radio station owner/operator ...................... Term 09/30/01 10,087,666
13,930 SKTV, Incorporated - Television station owner/operator ......................... Term 07/31/02 13,908,138
39,257 Smart SMR of California, Incorporated - Cellular telephone systems operator ..... Term 03/15/01 39,257,000
2,950 U.S. Radio Holdings, Incorporated - Radio station owner/operator ............... Term 12/31/01 2,989,775
4,050 U.S. Radio Holdings, Incorporated ............................................... Term 09/20/03 4,104,843
10,000 Young Broadcasting, Incorporated - Television station owner/operator ........... Term 12/31/01 9,974,693
-------------
120,038,041
Electric/Electronics 3.3%
9,347 Bell & Howell Company - Electronic storage and information systems ............. Term 12/31/99 9,336,109
4,456 Berg Electronics, Incorporated - Manufacturer of electronic connectors .......... Term 03/31/00 4,433,907
21,908 Berg Electronics, Incorporated .................................................. Term 03/31/01 21,976,937
5,668 Grimes Aerospace Company - Airplane electronics manufacturer ................... Term 12/31/99 5,623,259
2,022 Grimes Aerospace Company ....................................................... Revolving Credit 12/31/99 2,042,070
8,358 Rowe International, Incorporated - Manufacturer of jukeboxes and
electronic equipment ............................................................ Term 06/30/00 8,398,045
5,000 Thermoscan Incorporated - Electronic thermometer manufacturer ................... Term 07/31/00 5,063,082
-------------
56,873,409
Food and Tobacco 4.2%
9,500 American Italian Pasta Company - Pasta products producer ........................ Term 12/29/00 9,570,752
5,750 Amerifoods, Incorporated - Manufacturer of snack foods and bakery products ...... Term 06/30/01 5,730,744
5,750 Amerifoods, Incorporated ........................................................ Term 06/30/02 5,730,744
8,199 Core-Mark International, Incorporated - Confectionary and tobacco distributor ... Term 03/31/95 8,199,337
13,500 G. Heileman Brewing Company - Beverage brewing company .......................... Term 12/31/00 13,553,493
9,938 President Baking Company, Incorporated - Bread/bread products manufacturer ...... Term 09/29/00 9,906,854
3,510 Tom's Foods Incorporated - Snack foods producer/distributor ..................... Term 12/31/98 3,506,106
</TABLE>
See Notes to Financial Statements
Page: 6
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(000) Borrower Type Maturity* Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests (Continued)
Food and Tobacco (Continued)
$ 12,333 U.S. Food Service Incorporated - Wholesale food distributor .................... Term 06/30/00 $ 12,272,991
4,266 U.S. Food Service Incorporated ................................................. Term 12/31/98 4,264,255
-----------
72,735,276
Food Stores 6.3%
9,600 Big V Supermarkets, Incorporated - Northeastern retail food chain operator ..... Term 03/15/00 9,624,576
27,158 Food 4 Less Supermarkets, Incorporated - Midwest and California retail food
chain operator .................................................................. Term 01/01/99 27,153,253
1,834 Mayfair Supermarkets, Incorporated - New Jersey based retail food chain operator. Term 02/28/98 1,797,179
1,147 Mayfair Supermarkets, Incorporated .............................................. Term 08/31/99 1,124,110
7,889 Pathmark Stores, Incorporated - New Jersey based retail food chain operator .... Term 07/31/98 8,061,534
2,403 Pathmark Stores, Incorporated ................................................... Revolving Credit 07/31/98 2,523,163
27,225 Pathmark Stores, Incorporated .................................................. Term 10/31/99 27,463,766
15,427 Ralph's Grocery Company - Los Angeles, California based
retail food chain operator ...................................................... Term 06/30/98 15,426,504
582 Ralph's Grocery Company ........................................................ Revolving Credit 06/30/98 581,634
8,421 Star Markets Company, Incorporated - New England based retail food chain
operator......................................................................... Term 01/31/02 8,412,672
6,316 Star Markets Company, Incorporated ............................................. Term 12/31/02 6,330,998
-----------
108,499,389
Manufacturing 23.7%
35,000 American Standard Incorporated - Manufacturer of HVAC systems, braking systems
and plumbing fixtures .......................................................... Term 02/28/01 34,974,476
12,103 American Standard Incorporated .................................................. Term 02/28/00 12,149,295
7,000 Bankers Systems, Incorporated - Compliance services supplier ................... Term 11/01/02 7,041,832
20,000 Collins & Aikman Products Company - Manufacturer of auto interiors,
home interiors and wallpapers ................................................... Term 01/12/02 19,988,422
5,926 Dade International Incorporated - Medical equipment manufacturer/marketer ...... Term 12/31/01 5,923,795
6,667 Dade International Incorporated ................................................ Term 12/31/02 6,664,269
7,407 Dade International Incorporated ................................................ Term 06/30/03 7,404,744
9,697 Dal-Tile Group Incorporated - Ceramic tile and floor covering
manufacturer/retailer .......................................................... Revolving Credit 01/09/98 9,565,945
10,021 Ebel USA Incorporated - Manufacturer of luxury time pieces ...................... Term 09/30/01 10,171,362
17,925 Elsag Bailey, Incorporated - Manufacturer of electronic measurement and
control systems ................................................................. Term 08/30/02 17,906,566
33,000 Formica Corporation - Manufacturer, designer and distributor of laminates ....... Term 10/17/01 33,474,550
7,368 Golden Cat Corporation - Household pet products producer ........................ Term 05/01/99 7,368,184
19,800 Gulfstream Delaware Corporation - Aircraft manufacturer ......................... Term 03/31/98 19,895,477
12,292 Health O Meter, Incorporated - Manufacturer of small appliances ................ Term 08/15/01 12,277,677
4,341 Intermetro Industries Corporation - Manufacturer of metal/polymer storage
products......................................................................... Term 06/30/01 4,340,532
</TABLE>
See Notes to Financial Statements
Page: 7
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(000) Borrower Type Maturity* Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests (Continued)
Manufacturing (Continued)
$ 6,272 Intermetro Industries Corporation ............................................... Term 12/31/02 $ 6,271,521
4,236 KDI Corporation - Manufacturer of defense and leisure products <F3> ............. Term 03/31/98 2,753,529
11,057 Overhead Door Corporation - Manufacturer of garage doors and
garage door openers ............................................................ Term 08/18/99 11,052,069
2,332 Overhead Door Corporation ....................................................... Revolving Credit 08/18/99 2,326,303
24,474 Playtex Products, Incorporated - Manufacturer of beauty aid and hygiene products. Term 06/01/02 24,853,858
27,000 PSF Finance L.P. - Integrated pork producer ..................................... Term 12/23/99 28,179,879
4,000 RSI Home Products, Incorporated - Bath and kitchen cabinet manufacturer ......... Term 11/30/99 4,135,679
7,465 Spalding & Evenflo Companies, Incorporated - Manufacturer of sporting goods ..... Term 10/14/02 7,497,155
4,213 Sperry Marine Incorporated - Manufacturer of navigational instruments .......... Term 11/12/00 4,189,350
3,494 Sun Pharmaceuticals Corporation - Skincare product producer ..................... Term 12/31/97 3,494,020
9,520 The Pullman Company - Diversified manufacturer, primarily in the
transportation sector .......................................................... Term 12/31/99 9,218,022
4,485 The Pullman Company ............................................................. Term 12/31/99 4,354,046
9,700 The U.S. Playing Card Company - Manufacturer/distributor of playing cards ....... Term 09/30/02 9,696,014
20,000 Thompson Minwax Company - Manufacturer of wood stains and finishing products .... Term 12/31/02 20,215,066
4,493 Tyler Refrigeration Corporation - Manufacturer of refrigeration systems ......... Term 09/30/98 4,446,304
14,656 UCAR International, Incorporated - Manufacturer of graphite/carbide electrodes .. Term 01/31/03 14,803,399
7,672 UCAR International, Incorporated ................................................ Term 07/31/03 7,748,902
7,672 UCAR International, Incorporated ................................................ Term 01/30/04 7,748,902
10,456 USG Corporation - Manufacturer of building materials/gypsum wallboard ........... Term 12/31/00 10,518,285
5,644 Waters Corporation - Manufacturer/distributor of high
performance liquid chromatography instruments ................................... Term 11/30/01 5,677,534
3,950 Waters Corporation ............................................................. Term 11/30/02 3,973,442
3,175 Waters Corporation ............................................................. Term 05/31/03 3,193,705
-----------
405,494,110
Paper 9.0%
19,125 Fort Howard Corporation - Paper manufacturer ................................... Term 05/01/97 19,153,345
3,897 Fort Howard Corporation ......................................................... Term 12/31/96 3,896,997
39,000 Jefferson Smurfit Corporation - Corrugated paper products manufacturer .......... Term 04/30/02 39,411,433
40,000 S.D. Warren Company - Coated-free paper manufacturer ........................... Term 12/20/02 40,563,092
50,000 Stone Container Corporation - Paper products manufacturer ...................... Term 04/01/00 50,570,234
-----------
153,595,101
Printing 4.8%
36,400 American Media Operations, Incorporated - Magazine/newspaper publisher .......... Term 09/30/02 36,390,663
4,800 TransWestern Publishing Company, L.P. - Publisher of telephone yellow pages ..... Term 04/30/00 4,797,941
</TABLE>
See Notes to Financial Statements
Page: 8
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(000) Borrower Type Maturity* Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests (Continued)
Printing (Continued)
$ 20,588 Ziff-Davis Publishing Company - Publisher of computer magazine .................. Term 12/31/01 $ 21,188,942
19,412 Ziff-Davis Publishing Company .................................................. Term 12/31/02 19,978,145
-----------
82,355,691
Restaurants 1.4%
13,617 America's Favorite Chicken Company - Church's and
Popeye's Fried Chicken restaurants .............................................. Term 11/05/98 13,617,370
1,960 Carvel Corporation - Soft ice cream products franchisor ......................... Term 12/31/98 1,958,763
8,034 Long John Silver's Restaurants, Incorporated - Retail seafood restaurant
owner/operator ................................................................. Term 09/30/97 8,033,350
-----------
23,609,483
Retail 9.6%
32,500 Camelot Music, Incorporated - Retail distributor of music and video cassettes ... Term 02/28/02 32,952,668
17,600 Color Tile, Incorporated - Ceramic tile and floor covering retailer ............. Term 12/31/98 17,593,237
10,000 Duane Reade - Retail drug store ................................................ Term 09/30/99 9,997,580
19,112 Eckerd Corporation - Retail drug store .......................................... Term 07/29/00 19,107,503
9,750 General Nutrition Incorporated - Vitamin, mineral and food supplement
manufacturer and retailer ....................................................... Term 06/30/01 9,784,329
4,000 Petro PSC Properties, L.P. - Multi-service truck-stop operator ................. Term 05/18/01 4,057,328
19,825 Saks & Company - Retail fashions and accessories ................................ Term 06/30/00 19,868,152
19,867 The Circle K Corporation, Incorporated - Convenience store operator ............. Term 07/31/01 19,937,553
27,897 Thrifty Payless, Incorporated - Retail drug store ............................... Term 09/30/01 28,308,821
3,493 Truckstops of America, Incorporated - Interstate fueling stations operator ..... Term 12/10/00 3,470,261
-----------
165,077,432
Textiles 4.1%
8,631 Bidermann Industries Corporation - Apparel manufacturer ......................... Term 03/31/97 8,542,771
73 Bidermann Industries Corporation ............................................... Revolving Credit 03/31/97 65,152
9,500 Hosiery Corporation of America - Manufacturer/direct mail marketer
of women's hosiery ............................................................. Term 07/31/01 9,479,308
8,909 Ithaca Industries, Incorporated - Undergarment and hosiery manufacturer ......... Term 10/31/98 8,939,199
5,752 Lincoln Group Holdings Corporation - Book binding material manufacturer ........ Term 09/30/97 5,722,900
12,000 London Fog Industries, Incorporated - Manufacturer of rainwear and outerwear ... Term 06/30/01 10,532,114
30,000 London Fog Industries, Incorporated ............................................ Term 06/30/02 26,285,826
-----------
69,567,270
</TABLE>
See Notes to Financial Statements
Page: 9
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(000) Borrower Type Maturity* Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests (Continued)
Transportation 2.7%
$ 9,211 Northwest Airlines, Incorporated - Consumer airline carrier .................. Term 12/15/98 $ 9,418,599
17,895 Northwest Airlines, Incorporated ............................................ Term 12/15/99 18,432,630
17,895 Northwest Airlines, Incorporated ............................................ Term 12/15/00 18,432,629
-------------
46,283,858
Other 4.4%
7,200 Ark Asset Holdings, Incorporated - Institutional money manager ................ Term 11/30/01 7,285,819
12,500 Blackstone Capital Company - Financial services ............................... Term 01/13/97 12,470,661
10,000 Harrah's Jazz Company - Owner/operator of gaming casinos ..................... Term 09/30/99 10,224,817
1,576 Healthco International, Incorporated - Hospital owner/operator <F4> .......... Revolving Credit 06/30/95 547,887
3,170 Healthco International, Incorporated <F4> .................................... Term 06/30/95 1,102,048
3,661 New Street Capital Corporation - Financial services ........................... Term 02/28/96 3,689,182
20,000 NHL Intermediate Holdings Corporation - Clinical lab testing services ......... Term 12/31/00 20,047,808
20,000 PrimeCo Incorporated - Equipment leasing ..................................... Term 12/31/00 20,142,306
-------------
75,510,528
-------------
Total Variable Rate** Senior Loan Interests 82.7% ................................................................... 1,416,828,294
-------------
</TABLE>
See Notes to Financial Statements
Page: 10
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Borrower Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Equities 0.6%
America's Favorite Chicken Company (604,251 common shares) <F2> <F3> ................................................ $ 1,148,077
America's Favorite Chicken Company (34,864 preferred shares) <F2> <F3> .............................................. 2,370,752
Best Products Company, Incorporated (297,480 common shares) <F3> ................................................... 1,710,510
Best Products Company, Incorporated (Warrants for 28,080 common shares) <F3> ........................................ 0
Braelan Corporation (533 common shares) <F2> <F3> .................................................................. 0
Core-Mark International, Incorporated, Preferred Stock ($2,782,512 par amount, 0% coupon, maturity 12/31/95) <F2> ... 2,551,040
Core-Mark International, Incorporated (Warrants for 18,365 common shares) <F2> <F3> ................................. 0
DM Holdings, Incorporated (Series A) (Warrants for 2,739 common shares) <F2> <F3> ................................... 1,225,018
DM Holdings, Incorporated (Series B) (Warrants for 1,013 common shares) <F2> <F3> ................................... 453,064
Flagstar Companies, Incorporated (8,755 common shares) <F3> ........................................................ 56,909
MICOM Communications, Incorporated (Warrants for 114,035 common shares) <F3> ....................................... 898,025
Nextel Communications, Incorporated (Warrants for 60,000 common shares) <F2> <F3> ................................... 0
Sun Pharmaceuticals Corporation (Warrants for 120 common shares) <F2> <F3> .......................................... 0
Thermoscan Incorporated (Warrants for 3,930 common shares) <F2> <F3> ............................................... 0
--------------
Total Equities ...................................................................................................... 10,413,395
--------------
Corporate Bonds 0.1%
Braelan Corporation ($861,291 par, 16.35% coupon, 09/03/95 maturity) ................................................ 921,741
--------------
Total Long-Term Investments 83.4%
(Cost $1,426,251,564) <F1> ......................................................................................... 1,428,163,430
--------------
Short-Term Investments at Amortized Cost
Commercial Paper 3.4%
Cargill, Incorporated ($17,600,000 par, maturing 02/01/95 through 02/03/95, yielding 5.50% to 5.75%) ................ 17,596,150
Dow Chemical Company ($15,000,000 par, maturing 02/01/95, yielding 5.85%) ........................................... 15,000,000
Northern Illinois Gas Company ($6,000,000 par, maturing 02/17/95, yielding 5.95%) ................................... 5,984,133
Raytheon Company ($20,000,000 par, maturing 02/01/95, yielding 5.32%) ............................................... 20,000,000
--------------
Total Commercial Paper .............................................................................................. 58,580,283
--------------
</TABLE>
See Notes to Financial Statements
Page: 11
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Borrower Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Short-Term Investments at Amortized Cost (Continued)
Short-Term Loan Participations 11.5%
Alltel Corporation ($20,000,000 par, maturing 02/01/95, yielding 5.95%) ............................................ $ 20,000,000
AON Corporation ($20,000,000 par, maturing 02/06/95, yielding 5.75%) .............................................. 20,000,000
Army & Air Force Exchange Service ($20,000,000 par, maturing 02/03/95, yielding 5.75%) ............................ 20,000,000
Avery Dennison ($8,900,000 par, maturing 02/01/95, yielding 5.91%) ................................................ 8,900,000
Bell Atlantic Network Funding Corporation ($15,000,000 par, maturing 02/01/95, yielding 5.62%) .................... 15,000,000
General Mills, Incorporated ($18,200,000 par, maturing 02/08/95, yielding 5.95%) ................................... 18,200,000
Gillette Company ($20,000,000 par, maturing 02/01/95, yielding 5.82%) ............................................. 20,000,000
ITT Hartford Group ($10,000,000 par, maturing 2/21/95, yielding 5.92%) ............................................. 10,000,000
Indiana Gas, Incorporated ($15,300,000 par, maturing 02/01/95, yielding 5.65% to 5.95%) ........................... 15,300,000
Morton International, Incorporated ($20,000,000 par, maturing 02/01/95 through 02/16/95, yielding 5.72% to 5.89%) .. 20,000,000
Sara Lee Corporation ($10,000,000 par, maturing 02/27/95, yielding 5.90%) ......................................... 10,000,000
USAA Capital Corporation ($20,000,000 par, maturing 02/21/95, yielding 5.87%) ...................................... 20,000,000
--------------
Total Short-Term Loan Participations ............................................................................... 197,400,000
--------------
Total Short-Term Investments at Amortized Cost 14.9% ............................................................... 255,980,283
Other Assets in Excess of Liabilities 1.7% ........................................................................ 28,329,112
--------------
Net Assets 100.0% ................................................................................................. $1,712,472,825
--------------
<FN>
<F1> At January 31, 1995, cost for federal income tax purposes is
$1,426,251,564; the aggregate gross unrealized appreciation is
$16,684,438, and the aggregate gross unrealized depreciation is
$14,772,572, resulting in net unrealized appreciation of $1,911,866.
<F2> Restricted security.
<F3> Non-income producing Senior Loan interest or security.
<F4> As of January 31, 1995, this Senior Loan is non-income producing. The
Borrower falls under the protection of the federal bankruptcy laws.
</TABLE>
* Senior Loans in the Trust's portfolio generally are subject to mandatory
and/or optional prepayment. Because of these mandatory prepayment conditions
and because there may be significant economic incentives for a Borrower to
prepay, prepayments of Senior Loans in the Trust's portfolio may occur. As
a result, the actual remaining maturity of Senior Loans held in the Trust's
portfolio may be substantially less than the stated maturities shown.
Although the Trust is unable to accurately estimate the actual remaining
maturity of individual Senior Loans, the Trust estimates that the actual
average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.
** Senior Loans in which the Trust invests generally pay interest at rates
which are periodically redetermined by reference to a base lending rate
plus a premium. These base lending rates are generally (i) the prime
rate offered by one or more major United States banks, (ii) the lending
rate offered by one or more major European banks, such as the London
Inter-Bank Offered Rate ("LIBOR") and (iii) the certificate of deposit
rate. Senior loans are generally considered to be restricted in that
the Trust ordinarily is contractually obligated to receive approval
from the Agent Bank and/or borrower prior to the disposition of a Senior
Loan.
See Notes to Financial Statements
Page: 12
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Statement of Assets and Liabilities
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $1,426,251,564) (Note 1) .................................. $ 1,428,163,430
Short-Term Investments (Note 1) .............................................................. 255,980,283
Cash ........................................................................................ 304,838
Receivables:
Fund Shares Sold ............................................................................ 19,900,932
Investments Sold ............................................................................. 14,158,076
Interest and Fees ........................................................................... 12,905,528
Other ........................................................................................ 117,521
----------------
Total Assets ................................................................................. 1,731,530,608
----------------
Liabilities:
Deferred Facility Fees ....................................................................... 13,961,265
Payables:
Income Distributions ........................................................................ 2,264,214
Investment Advisory Fee (Note 2) ............................................................. 1,340,563
Administrative Fee (Note 2) ................................................................. 352,780
Investments Purchased ........................................................................ 208,228
Fund Shares Repurchased ..................................................................... 15,053
Accrued Expenses ............................................................................ 915,680
----------------
Total Liabilities ........................................................................... 19,057,783
----------------
Net Assets ................................................................................... $ 1,712,472,825
----------------
Net Assets Consist of:
Common Shares ($.01 par value with an unlimited number of shares authorized,
170,484,390 shares issued and outstanding) (Note 3) .......................................... $ 1,704,844
Paid in Surplus ............................................................................. 1,707,025,632
Accumulated Undistributed Net Investment Income ............................................. 5,527,818
Net Unrealized Appreciation on Investments .................................................. 1,911,866
Accumulated Net Realized Loss on Investments ................................................. (3,697,335)
----------------
Net Assets ................................................................................... $ 1,712,472,825
----------------
Net Asset Value Per Common Share($1,712,472,825 divided by 170,484,390 shares outstanding) ... $ 10.04
----------------
</TABLE>
See Notes to Financial Statements
Page: 13
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest ........................................................................... $ 58,919,903
Fees ............................................................................... 5,873,704
Other .............................................................................. 395,753
---------------
Total Income ...................................................................... 65,189,360
---------------
Expenses:
Investment Advisory Fee (Note 2) ................................................... 7,002,005
Administrative Fee (Note 2) ........................................................ 1,842,633
Shareholder Services (Note 2) ..................................................... 748,129
Legal (Note 2) .................................................................... 301,000
Amortization of Organizational Expenses and Initial Registration Costs (Note 1) ... 37,067
Other .............................................................................. 1,123,922
---------------
Total Expenses ..................................................................... 11,054,756
---------------
Net Investment Income .............................................................. $ 54,134,604
---------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales and Principal Repayments ...................................... $ 403,294,320
Cost of Securities Sold and Repaid ................................................. (401,714,059)
---------------
Net Realized Gain on Investments ................................................... 1,580,261
---------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period ........................................................... 6,529,519
End of the Period .................................................................. 1,911,866
---------------
Net Unrealized Depreciation on Investments During the Period ....................... (4,617,653)
---------------
Net Realized and Unrealized Loss on Investments ................................... $ (3,037,392)
---------------
Net Increase in Net Assets from Operations ......................................... $ 51,097,212
---------------
</TABLE>
See Notes to Financial Statements
Page: 14
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Six Months Ended January 31, 1995
and the Year Ended July 31, 1994 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1995 July 31, 1994
<S> <C> <C>
From Investment Activities:
Net Investment Income........................................................ $ 54,134,604 $ 64,333,964
Net Realized Gain/Loss on Investments........................................ 1,580,261 (1,392,765)
Net Unrealized Appreciation/Depreciation on Investments During the Period ... (4,617,653) 2,441,749
---------------- -----------------
Change in Net Assets from Operations ....................................... 51,097,212 65,382,948
Distributions from Net Investment Income..................................... (51,995,207) (60,454,184)
---------------- -----------------
Net Change in Net Assets from Investment Activities.......................... (897,995) 4,928,764
---------------- -----------------
From Capital Transactions (Notes 3 and 5):
Proceeds from Common Shares Sold............................................. 498,527,251 355,652,204
Value of Shares Issued Through Dividend Reinvestment ........................ 28,667,926 33,006,495
Cost of Shares Repurchased................................................... (42,828,137) (131,252,262)
---------------- -----------------
Net Change in Net Assets from Capital Transactions........................... 484,367,040 257,406,437
---------------- -----------------
Total Increase in Net Assets ................................................ 483,469,045 262,335,201
Net Assets:
Beginning of the Period ..................................................... 1,229,003,780 966,668,579
---------------- -----------------
End of the Period (Including undistributed net investment income of
$5,527,818 and $3,388,421, respectively) .................................... $ 1,712,472,825 $ 1,229,003,780
---------------- -----------------
</TABLE>
See Notes to Financial Statements
Page: 15
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Statement of Cash Flows
For the Six Months Ended January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Change in Net Assets from Operations .............................................. $ 51,097,212
---------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Provided by Operating Activities:
Increase in Investments at Value .................................................. (406,492,653)
Increase in Short-Term Investments at Amortized Cost .............................. (64,866,290)
Increase in Interest and Fee Receivables .......................................... (5,912,789)
Increase in Receivable for Investments Sold ...................................... (14,158,076)
Decrease in Unamortized Organizational Expenses and Initial Registration Costs ... 37,067
Decrease in Other Assets ......................................................... 111,723
Increase in Investment Advisory and Administrative Fees Payable .................. 470,617
Increase in Deferred Facility Fees ................................................ 5,249,718
Increase in Investments Purchased ................................................. 208,228
Increase in Accrued Expenses ...................................................... 251,244
---------------
Total Adjustments ................................................................ (485,101,211)
---------------
Net Cash Used for Operating Activities ........................................... (434,003,999)
---------------
Cash Flows from Financing Activities (Notes 3 and 5):
Proceeds from Shares Sold ......................................................... 497,159,338
Payments on Shares Repurchased .................................................... (43,040,542)
Cash Dividends Paid .............................................................. (22,328,020)
---------------
Net Cash Provided by Financing Activities ........................................ 431,790,776
---------------
Net Decrease in Cash ............................................................. (2,213,223)
Cash at Beginning of Period ....................................................... 2,518,061
---------------
Cash at End of Period ............................................................ $ 304,838
---------------
</TABLE>
See Notes to Financial Statements
Page: 16
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Financial Highlights
The following schedule presents financial highlights for one common share of the
Trust outstanding throughout the periods indicated. (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 4, 1989
(Commencement
Year Ended July 31 of Investment
Six Months Ended ----------------------------------------------- Operations) to
January 31, 1995 1994 1993 1992 1991 July 31, 1990
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 10.052 $ 10.004 $ 9.998 $ 9.985 $ 10.008 $ 10.000
--------------- ----------- ---------- --------- ----------- --------------
Net Investment Income........................ .360 .618 .600 .698 .907 .815
Net Realized and Unrealized Gain/Loss
on Investments............................... (.012) .015 .008 .004 (.008) .005
--------------- ----------- ---------- --------- ----------- --------------
Total from Investment Operations............. .348 .633 .608 .702 .899 .820
--------------- ----------- ---------- --------- ----------- --------------
Less:
Distributions from Net Investment Income..... .356 .585 .600 .689 .910 .812
Distributions in Excess of Net Investment
Income (Note 1).............................. -0- -0- .002 -0- .012 -0-
--------------- ----------- ---------- --------- ----------- --------------
Total Distributions.......................... .356 .585 .602 .689 .922 .812
--------------- ----------- ---------- --------- ----------- --------------
Net Asset Value, End of Period .............. $ 10.044 $ 10.052 $ 10.004 $ 9.998 $ 9.985 $ 10.008
--------------- ----------- ---------- --------- ----------- --------------
Total Return (Non-Annualized)................ 3.49% 6.52% 6.17% 7.25% 9.41%* 8.51%
Net Assets at End of Period (In millions) ... $ 1,712.5 $ 1,229.0 $ 966.7 $ 928.3 $ 997.5 $ 659.1
Ratio of Expenses to Average Net
Assets (Annualized) ......................... 1.51% 1.53% 1.53% 1.55% 1.56%* 1.59%
Ratio of Net Investment Income to
Average Net Assets (Annualized).............. 7.37% 6.16% 5.96% 6.98% 8.91%* 9.91%
Portfolio Turnover <F1> ..................... 33.04% 73.50% 66.54% 58.79% 40.73% 53.44%
<FN>
<F1> Calculation includes the proceeds from repayments and sales of variable
rate senior loan interests.
</TABLE>
*If certain expenses had not been assumed by the Investment Adviser for the
year ended July 31, 1991, total return would have been lower and the Ratio
of Expenses to Average Net Assets would have been 1.58% and the Ratio of
Net Investment Income to Average Net Assets would have been 8.89%.
See Notes to Financial Statements
Page: 17
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Notes to Financial Statements
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Prime Rate Income Trust (the "Trust") is registered as a
non-diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. The Trust commenced investment operations on
October 4, 1989.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements.
A. Security Valuation -- The value of the Trust's portfolio is determined by Van
Kampen American Capital Investment Advisory Corp. (the "Adviser") following
guidelines and procedures established, and periodically reviewed, by the Board
of Trustees. The value of a Variable Rate Senior Loan interest in the Trust's
portfolio is determined with reference to changes in market interest rates and
to the creditworthiness of the underlying obligor. In valuing Variable Rate
Senior Loan interests, the Adviser considers market quotations and transactions
in instruments that the Adviser believes may be comparable to such Variable Rate
Senior Loan interests. In determining the relationship between such instruments
and the Variable Rate Senior Loan interests, the Adviser considers such factors
as the creditworthiness of the underlying obligor, the current interest rate,
the interest rate redetermination period and maturity date. To the extent that
reliable market transactions in Variable Rate Senior Loan interests have
occurred, the Adviser also considers pricing information derived from such
secondary market transactions in valuing Variable Rate Senior Loan interests.
Other portfolio securities are valued on the basis of prices furnished by
pricing services or as determined in good faith by the Adviser. Short-term
securities 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 interests in Variable Rate Senior Loans and other
portfolio securities on a "when issued" and "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 January 31, 1995, there were no when issued or delayed
delivery purchase commitments.
C. Investment Income -- Interest income is recorded on an accrual basis.
Facility fees received are recognized as income ratably over the expected life
of the loan. Market discounts are accreted over the stated life of each
applicable security.
D. Organizational Expenses and Initial Registration Costs -- The Trust has
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
("VKAC") for costs incurred in connection with the Trust's organization and its
initial registration of the common shares in the amount of $1,037,578. These
costs have been amortized on a straight line basis over the 60 month period
ended October 4, 1994.
E. 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 July 31, 1994, the Trust had an accumulated capital loss carryforward
of $1,837,054 which will expire on July 31, 2002. Net realized gains or losses
may differ for financial and tax reporting purposes primarily as a result of
post October 31 losses which are not recognized for tax purposes until the
first day of the following fiscal year.
F. Distribution of Income and Gains -- The Trust declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Due to inherent differences in the recognition of interest
income under generally accepted accounting principles and federal income tax
purposes, for those securities which the Trust has placed on non-accrual status,
the amount of distributable net investment income may differ between book and
federal income tax purposes for a particular period. These differences are
temporary in nature, but may result in book basis distributions in excess of net
investment income for certain periods.
Page: 18
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
2. Investment Advisory Agreement and Other Agreements
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly of .95% of the average net assets of the Trust. In addition, the Trust
will pay a monthly administrative fee to VKAC, the Trust's Administrator, at an
annual rate of .25% of the average net assets of the Trust. The administrative
services to be provided by the Administrator include monitoring the provisions
of the loan agreements and any agreements with respect to participations and
assignments, record keeping responsibilities with respect to interests in
Variable Rate Senior Loans in the Trust's portfolio and providing certain
services to the holders of the Trust's securities.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Trust, of which a trustee of the Trust is an affiliated person.
For the six months ended January 31, 1995, the Trust recognized expenses of
approximately $56,800 representing VKAC's cost of providing legal and certain
shareholder services to the Trust.
Certain officers and trustees of the Trust are also officers and directors of
VKAC. The Trust does not compensate its officers or trustees who are officers of
VKAC.
The Trust has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.
3. Capital Transactions
At January 31, 1995 and July 31, 1994, paid in surplus aggregated $1,707,025,632
and $1,223,140,759, respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1995 July 31, 1994
---------------------------------------------------------
<S> <C> <C>
Beginning Shares ....... 122,267,677 96,624,807
--------------- -------------
Shares Sold ............ 49,629,173 35,430,303
Shares Issued Through
Dividend Reinvestment... 2,853,286 3,287,782
Shares Repurchased...... (4,265,746) (13,075,215)
--------------- -------------
Net Increase in
Shares Outstanding...... 48,216,713 25,642,870
--------------- -------------
Ending Shares........... 170,484,390 122,267,677
--------------- -------------
</TABLE>
4. Investment Transactions
Aggregate purchases and the cost of securities sold and repaid, excluding
short-term notes, for the six months ended January 31, 1995, were $813,197,131
and $401,714,059, respectively.
5. Tender of Shares
The Board of Trustees currently intends, each quarter, to consider authorizing
the Trust to make tender offers for all or a portion of its then outstanding
common shares at the then net asset value of the common shares. For the six
months ended January 31, 1995, 4,265,746 shares were tendered and repurchased by
the Trust.
6. Early Withdrawal Charge
An early withdrawal charge to recover offering expenses will be imposed in
connection with most common shares held for less than five years which are
accepted by the Trust for repurchase pursuant to tender offers. The early
withdrawal charge will be imposed on the number of common shares accepted for
payment from a record holder of common shares, the value of which exceeds the
aggregate value at the time the tender is accepted of (a) all common shares
owned by such holder that were purchased more than five years prior to such
acceptance, (b) all common shares owned by such holder that were acquired
through dividend reinvestment and (c) the increase, if any, of value of all
other common shares owned by such holder (namely those purchased within the five
years preceding the acceptance) over the purchase price of such common shares.
The early withdrawal charge will be payable to VKAC. Any early withdrawal charge
which is required to be imposed will be made in accordance with the following
schedule.
<TABLE>
<CAPTION>
Year of Repurchase Withdrawal Charge
------------------------------------------
<S> <C>
First ................. 3.0%
Second ................ 2.5%
Third ................. 2.0%
Fourth ............... 1.5%
Fifth ................. 1.0%
Sixth and following ... 0.0%
</TABLE>
For the six months ended January 31, 1995, VKAC received early withdrawal
charges of approximately $885,800 in connection with tendered shares of the
Trust.
Page: 19
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
January 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
7. Commitments
Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $55,140,000 as of
January 31, 1995.
The Trust has entered into revolving credit agreements with Morgan Guaranty
Trust Company of New York, Bank of America and State Street Bank and Trust
Company for up to $50,000,000, $25,000,000 and $25,000,000, respectively. The
proceeds of any borrowing by the Trust under the revolving credit agreements may
only be used, directly or indirectly, in connection with the consummation of a
tender offer by the Trust for its shares. Annual commitment fees ranging from
1/4 to 3/8 of 1% will be charged on the unused portion of the credit lines.
Borrowings under these facilities will bear interest at either the banks' prime
rate or the Federal Funds rate plus 1/4 to 1/2 of 1%. There have been no bor
rowings under these agreements to date.
8. Senior Loan Participation Commitments
The Trust invests primarily in participations, assignments, or acts as a party
to the primary lending syndicate of a Variable Rate Senior Loan interest to
United States corporations, partnerships, and other entities. When the Trust
purchases a participation of a Senior Loan interest, the Trust typically enters
into a contractual agreement with the lender or other third party selling the
participation, but not with the borrower directly. As such, the Trust assumes
the credit risk of the Borrower, Selling Participant or other persons
interpositioned between the Trust and the Borrower.
At January 31, 1995, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Trust on a participation
basis.
<TABLE>
<CAPTION>
--------------------------------------------------
Principal
Amount
Selling Participant (000) Value
--------------------------------------------------
<S> <C> <C>
Bankers Trust ......... $ 52,644 $ 53,005,295
National Westminster ... 9,697 9,565,945
Chase Manhattan ........ 1,185 1,185,246
Chemical Bank ......... 12,184 10,827,228
Banque Paribas ......... 4,456 4,433,907
FNB Canada ............ 3,510 3,506,106
Union Bank ............. 432 431,765
--------- -------------
Totals ................. $ 84,108 $ 82,955,492
--------- -------------
</TABLE>
Page: 20
Van Kampen Merritt Prime Rate Income Trust
--------------------------------------------------------------------------------
Officers and Trustees
Don G. Powell*
Chairman and Trustee
Dennis J. McDonnell*
President and Trustee
David C. Arch
Trustee
Rod Dammeyer
Trustee
Howard J Kerr
Trustee
Theodore A. Myers
Trustee
Hugo F. Sonnenschein
Trustee
Wayne W. Whalen*
Trustee
Peter W. Hegel*
Vice President
Jeffrey W. Maillet*
Vice President
Ronald A. Nyberg*
Vice President and Secretary
Edward C. Wood, III*
Vice President and Treasurer
Scott E. Martin*
Assistant Secretary
Weston B. Wetherell*
Assistant Secretary
John L. Sullivan*
Controller
Steven M. Hill*
Assistant Treasurer
Investment Adviser
Van Kampen American Capital Investment Advisory Corp.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Distributor
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Transfer Agent
State Street Bank and Trust Company
c/o National Financial Data Services
P.O. Box 419001 Kansas City, Missouri 64141-6001
Custodian
State Street Bank
and Trust Company
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive Chicago, Illinois 60606
Independent Auditors
KPMG Peat Marwick LLP
Peat Marwick Plaza
303 East Wacker Drive Chicago, Illinois 60601
*"Interested'' persons of the Trust, as defined in the Investment
Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc.,
1995 All rights reserved.
(R) Denotes a registered trademark of
Van Kampen American Capital Distributors, Inc.
