Page: i
COVER
Page: ii
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Letter to Shareholders ................ 1
Performance Results ................... 3
Portfolio Management Review ........... 4
Portfolio of Investments ............. 7
Statement of Assets and Liabilities ... 14
Statement of Operations ............... 15
Statement of Changes in Net Assets .... 16
Statement of Cash Flows ............... 17
Financial Highlights ................. 18
Notes to Financial Statements ......... 19
Independent Auditors'Report .......... 23
</TABLE>
Page: 1
[PHOTO]
Dennis J. McDonnell and Don G. Powell
Letter to Shareholders
September 15, 1995
Dear Shareholder:
The first seven months of 1995 have been very
positive for most investors. Both the fixed-income and stock
markets have made considerable gains for the period ended
July 31, 1995.
This year serves as a reminder of just how quickly
markets can move, and how difficult it can be to predict the
timing of those movements. Moreover, this year reinforces
the importance of maintaining a long-term perspective, and
reaffirms the principle that it is time -- not timing --
that leads to investment success.
Economic Overview
Due in large part to the Federal Reserve Board's efforts to
tighten monetary supply in 1994, the economy has slowed
significantly this year. Evidence of this guided slow down was
reflected in gross domestic product for the second quarter, which
grew at an annual rate of 1.1 percent, substantially lower than its
first quarter rate of 2.7 percent and fourth quarter 1994 rate of
5.1 percent. While other key economic data, including unemployment
rates and housing starts, have shown mixed signs during recent months,
the general economic trends for the first half of the year continue
to support a "soft landing" scenario.
Comfortable with the economy's current rate of growth and level
of inflation, the Fed reversed its year-long trend of rising interest
rates and lowered short-term rates by 0.25 percent on July 6.
Subsequently, the U.S. Prime lending rate, as quoted by domestic money
center banks, was also reduced by a quarter percent to 8.75 percent.
Financial markets, perceiving that the Fed's monetary initiatives had
taken hold without driving the economy into a recession, rallied through
the first part of the year. With slowing growth, interest rates declined
and the value of many fixed-income investments rose (bond yields and prices
typically move in the opposite direction). For example, the yield on
30-year Treasury securities fell from 7.88 percent at the end of December
to 6.85 percent at the end of July,while prices on the "long bond" rose
12 percent.
Corporate earnings have remained quite strong during 1995, helping push
stocks to new highs. The strongest performance has been in the technology
sector of the market -- and in large "capitalized" stocks. As the U.S. dollar
plunged against several international currencies earlier in the year, U.S.
companies which had diversified globally were able to capture additional
earnings, while technology stocks benefited from the continued booming
growth in computers and telecommunications throughout the world.
Economic Outlook
We believe the Fed will continue to move cautiously before changing
short-term interest rates again, waiting for further signs that the economy
has settled into a slow growth pattern. We anticipate that the economy will
grow at an annual rate between 2 and 3 percent in the second half of the
year and that inflation will run at an annualized rate between 3.1 and 3.3
percent. Based upon a generally modest growth and low inflation outlook, we
believe fixed-income markets will continue to make positive gains. We look
for stocks to perform well, but perhaps not as strongly as in the
(Continued on page two)
Page: 2
first half of the year, as some companies may find it difficult to maintain
their strong earnings momentum. In the near term, we believe domestic markets
will benefit from a stabilizing U.S. dollar and increased business activity
driven in part by a number of recently announced "high profile" mergers and
acquisitions.
This positive outlook was also reflected in the public's sentiment toward
investing. According to the Van Kampen American Capital Index of Investor
Intentions for August, a total of 43.6 percent of those individuals
surveyed said the next 60-90 days would be a "good" time to invest. The
index, computed from an independently conducted survey, measures the
investment climate (the public's confidence) by asking 1,000 individuals
about what they intend to do with their money over the next 60-90 days. The
August index reached 134, reflecting a 4 percent increase from the previous
month.
On the following pages, you can read about your Trust's performance for the
period, as well as portfolio management's outlook for the Trust in the coming
months. We hope that you will find the information contained in the
question-and-answer section helpful.
Corporate News
Along with your Trust's shareholder report, we are pleased to introduce a
new shareholder publication called Your Portfolio. The purpose of this
publication is to provide you with additional information about your invest-
ment, as well as offer helpful insights regarding long-term investment
strategies and trends in the marketplace. The publication will be mailed
twice a year with your July and January shareholder reports. This
premier issue focuses on our various shareholder services and privileges
designed to make mutual fund investing easier for you.
We appreciate your continued confidence in your investment with Van Kampen
American Capital, and we look forward to communicating with you again regarding
the performance of your Trust.
Sincerely,
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
Page: 3
Performance Results for the Period Ended July 31, 1995
Van Kampen Merritt Prime Rate Income Trust
<TABLE>
<CAPTION>
<S> <C>
Total Returns
One-year total return<F1> ....................... 7.82%
Five-year average annual total return<F1> ....... 7.43%
Life-of-Trust average annual total return<F1> ... 7.83%
Commencement Date ............................... 10/04/89
Distribution Rates
Distribution rate<F2> ........................... 8.01%
Compounded distribution rate<F2> ................ 8.31%
Share Valuations
Net asset value on 07/31/95 ..................... $ 10.05
High net asset value for the year .............. $ 10.07
Low net asset value for the year ............... $ 10.02
<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 July 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. Trust 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.
</FN>
</TABLE>
Page: 4
Portfolio Management Review
Van Kampen Merritt Prime Rate Income Trust
Jeffrey W. Maillet, senior vice president of Van Kampen American Capital
Investment Advisory Corp., has been at the helm of the Van Kampen Merritt
Prime Rate Income Trust since its inception in October of 1989. Below, he
discusses the Trust's performance over the past fiscal year (August 1, 1994
through July 31, 1995) and his outlook for the months ahead.
Q What were the key market conditions or events that influenced the
Trust's performance over the past fiscal year?
A As always, the trend in interest rates is a key consideration for
shareholders of the Prime Rate Income Trust. Because the Trust invests
primarily in variable- or floating-rate senior loans, changes in
short-term interest rates -- both upward and downward -- tend to be
reflected, over time, in the Trust's ability to generate current income.
The past fiscal year was no exception. We were able to increase the
Trust's dividend level on four separate occasions between July 31, 1994
and July 31, 1995. As aresult, the Trust's distribution rate climbed to
8.01 percent <F2> (as of July 31, 1995) from 6.50 percent <F2> at the
start of the fiscal year.
More notable, however, was the fact that the Trust's variable-rate nature
resisted the steep principal declines that plagued the fixed-income market
during 1994. In other words, its performance was an exception in a market
environment where negative returns were the rule.
Of course, the Trust is not a bond fund, but its performance in 1994 shows
that it may complement a core holding of fixed-income investments.
[GRAPH]
Maintaining Relative NAV Stability
Van Kampen Merritt Prime Rate Income Trust
(October 1989 through July 1995)
Date NAV
------- -------
04-Oct-89 $10.00
31-Dec-89 $10.02
31-Mar-90 $10.02
30-Jun-90 $10.01
30-Sep-90 $10.00
31-Dec-90 $9.99
31-Mar-91 $9.99
30-Jun-91 $9.98
30-Sep-91 $9.99
31-Dec-91 $10.01
31-Mar-92 $10.00
30-Jun-92 $9.99
30-Sep-92 $10.00
31-Dec-92 $10.04
31-Mar-93 $10.04
30-Jun-93 $10.00
30-Sep-93 $10.01
31-Dec-93 $10.07
31-Mar-94 $10.05
30-Jun-94 $10.04
30-Sep-94 $10.04
31-Dec-94 $10.06
31-Mar-95 $10.03
30-Jun-95 $10.05
31-Jul-95 $10.05
Past performance is no guarantee of future results. Investment
return and net asset value will fluctuate with market conditions
and shares when tendered may be worth more or less than their
original cost.
Q That was 1994. What kind of performance have we seen for the current
fiscal year?
A First, it's important to note that while investing in senior loans will
always carry a degree of credit risk, the Trust's performance was achieved
without exposing our shareholders to currency risk, foreign loans, or
derivatives. Although by prospectus the Trust may use alternative
investment strategies, we have not employed them to any great extent.
Page: 5
Overall, for the twelve months ended July 31, 1995, the Trust's
one-year total return was 7.82 percent <F1>. The Trust's three- and
five-year average annual total returns were 6.83 percent <F1> and
7.43 percent <F1>, respectively, and its average annual total return
since inception (October 4, 1989) is 7.83 percent <F1>.
More recently, during the first seven months of 1995, we've seen
short-term interest rates decline. While the Trust's dividend level has
been adjusted accordingly, investors are still earning an attractive
distribution rate of 8.01 percent <F2> (as of July 31, 1995). The Trust's
net asset value has remained relatively stable, fluctuating between $10.02
and $10.07 (January through July, 1995).
Q In managing the Trust today,what are your expectations for the economic
environment in the near term?
A In general, we're bullish. Because a number of indicators are showing
signs of strength, our outlook for corporate earnings is positive.
Companies are generally better able to service their debt in an expanding
economy, so that would be a plus for the Trust.
Looking back, many of the companies in the Trust's portfolio posted
strong results for the past year. In fact, nearly half of the companies
in the portfolio prepaid some portion of their debt in 1994.
If the economy were to slow, there is an increased possibility that
corporate profits may decrease, which could make it more difficult for
highly leveraged companies to service their debt. But at this point, we
feel the Trust's portfolio is more widely varied than ever before, which
should help to reduce investment risk in slower times.
Overall, we are confident in the strength of the issuers we hold and
believe the portfolio's widely varied portfolio would sustain the Trust
should the economy reverse direction.
[BAR GRAPH]
Top Ten Long-Term Holdings by Industry as of July 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Manufacturing 24.48%
Communications 20.13%
Retail 10.78%
Paper 8.48%
Food Stores 7.77%
Food 3.89%
Printing 3.48%
Textiles 3.44%
Electric/Electronics 2.70%
Transportation 2.28%
</TABLE>
Page: 6
Q What is your outlook for the senior loan market and the Trust in the
months ahead?
A Throughout the Trust's fiscal period, the demand for floating-rate debt
increased significantly. According to Goldman Sachs, secondary trading
totaled $25 billion for all of 1994 -- a level that was surpassed by the
end of the first half of 1995. New demand -- from insurance companies,
domestic and off-shore institutional managers, and structured product
offerings -- has expanded secondary trading. However, senior loans should
still be considered relatively illiquid.
We believe we will continue to see a growing number of quality deals and
an expansion of the senior loan market, so if the Trust continues to
experience record cash inflows, we should be able to put the money to work
relatively quickly.
Since it is our belief the economy is expanding, we expect to continue
with our current management style. We feel the Trust's portfolio has been
built on a realistic framework which is geared toward the pursuit of our
investment objective: providing the Trust's shareholders with high current
income, consistent with preservation of capital.
Jeffrey W. Maillet
Portfolio Manager
Please see footnotes on page three
Page: 7
<TABLE>
<CAPTION>
Portfolio of Investments
July 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(OOO) Borrower Type Maturity* Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests
Chemical 1.4%
$ 9,925 Exide Corporation - Automotive and industrial battery manufacturer ........ Term 09/30/01 $ 9,975,032
2,652 Findley Adhesives, Incorporated - Industrial glue manufacturer ............. Term 12/31/97 2,613,401
9,000 Freedom Chemical Company - Manufacturer of specialty chemicals ............ Term 06/30/02 8,967,331
4,371 Rheox, Incorporated - Chemical additives manufacturer ..................... Term 12/31/97 4,305,900
9,046 Thoro System Products, Incorporated - Manufacturer of
chemicals for construction industry ........................................ Term 12/31/01 8,990,184
------------
34,851,848
------------
Communications 15.9%
4,089 Alexcom Limited Partnership - Cellular telephone systems operator ......... Term 06/30/00 4,017,639
20,000 CCA Acquisition Corporation - Cable television systems operator ............ Term 12/31/03 20,145,959
10,000 Cable Services Group, Incorporated - Cable systems billing service ......... Term 11/30/01 10,043,315
4,000 Classic Cable, Incorporated - Cable television systems operator ............ Term 03/31/03 4,039,097
6,500 Classic Cable, Incorporated ............................................... Term 03/31/04 6,563,533
16,943 Coaxial Communications of Central Ohio - Cable
television systems operator ................................................ Term 12/31/99 16,888,916
15,874 Continental Cablevision - Cable television systems operator ................ Revolving Credit 10/10/03 15,942,405
19,933 Ellis Communications, Incorporated - Southeastern U.S.
television station owner/operator .......................................... Term 03/31/03 20,079,087
400 Granite Broadcasting - Midwestern television station owner/operator ........ Revolving Credit 12/31/01 421,536
10,200 Granite Broadcasting ...................................................... Term 12/31/01 10,237,297
11,500 Granum Finance Partners - Radio station owner/operator .................... Term 12/31/02 11,554,195
15,000 Journal News, Incorporated - Multiple newspaper printer ................... Term 12/31/01 15,047,961
15,000 Journal News, Incorporated ................................................ Term 05/01/03 15,101,129
20,000 K III Communications - Tabloids, magazines and other media producer ........ Term 05/01/03 20,191,605
30,000 Marvel Entertainment - Children's magazine publisher ...................... Term 02/28/02 30,173,737
8,711 Maryland Cable - Cable television systems operator ......................... Term 12/31/02 8,735,790
25,000 Metro-Goldwyn-Mayer - Movie/television producer ........................... Term 04/15/97 25,255,020
15,000 Mobilemedia Communications - Nationwide paging operator ................... Term 06/30/02 15,053,972
8,500 Northland Cable Television, Incorporated - Cable television
systems operator .......................................................... Term 09/30/03 8,556,473
9,653 Pyramid Finance Corporation - Radio station owner/operator ................ Term 09/30/01 9,709,638
9,510 River City Broadcasting, L.P. - Midwestern radio station owner/operator ... Revolving Credit 06/30/01 9,574,619
10,000 River City Broadcasting, L.P. ............................................ Term 12/31/02 10,064,205
13,860 SKTV, Incorporated - Television station owner/operator ..................... Term 07/31/02 13,816,320
14,925 Sinclair Broadcasting - Television station owner/operator .................. Term 06/30/02 14,974,976
39,257 Smart SMR of California, Incorporated - Cellular telephone
systems operator .......................................................... Term 03/15/01 39,257,000
2,929 U.S. Radio Holdings, Incorporated - Radio station owner/operator ........... Term 12/31/01 2,959,625
4,050 U.S. Radio Holdings, Incorporated ......................................... Term 09/20/03 4,092,358
1,651 U.S. Radio Holdings, Incorporated ......................................... Term 09/30/03 1,666,650
4,756 Viacom Cablevision - Cable television systems operator ..................... Term 07/01/02 4,782,548
33,479 Viacom, Incorporated - Entertainment media/television programming ......... Term 07/01/02 33,657,540
------------
402,604,145
------------
Electric/Electronics 2.1%
557 Bell & Howell Company - Electronic storage and information systems ......... Revolving Credit 07/31/98 575,406
6,874 Bell & Howell Company ..................................................... Term 12/31/99 6,870,305
4,228 Berg Electronics, Incorporated - Manufacturer of electronic connectors ..... Term 03/31/00 4,207,561
21,725 Berg Electronics, Incorporated ............................................ Term 03/31/01 21,784,587
5,668 Grimes Aerospace Company - Airplane electronics manufacturer .............. Term 12/31/99 5,516,730
</TABLE>
See Notes to Financial Statements
Page: 8
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
July 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(OOO) Borrower Type Maturity* Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests (Continued)
Electric/Electronics (Continued)
$ 2,116 Grimes Aerospace Company ................................................... Revolving Credit 12/31/99 $ 2,077,256
8,358 Rowe International, Incorporated - Manufacturer of jukeboxes
and electronic equipment ................................................... Term 12/31/96 7,964,120
5,000 Thermoscan, Incorporated - Electronic thermometer manufacturer ............. Term 07/31/00 5,044,486
------------
54,040,451
------------
Food 3.1%
9,500 American Italian Pasta Company - Pasta products producer .................. Term 12/29/00 9,555,603
5,750 Amerifoods, Incorporated - Manufacturer of snack foods
and bakery products ........................................................ Term 06/30/01 5,151,567
5,750 Amerifoods, Incorporated ................................................... Term 06/30/02 5,151,567
867 G. Heileman Brewing Company - Beverage brewing company ..................... Revolving Credit 12/31/98 935,274
13,500 G. Heileman Brewing Company ................................................ Term 12/31/00 13,541,666
9,903 President Baking Company, Incorporated - Bread/bread
products manufacturer ...................................................... Term 09/29/00 9,860,536
5,700 Select Beverages, Incorporated - Independent bottler ...................... Term 06/30/01 5,766,565
8,550 Select Beverages, Incorporated ............................................. Term 06/30/02 8,649,848
3,357 Tom's Foods, Incorporated - Snack foods producer/distributor .............. Term 12/31/98 3,353,083
3,736 U.S. Food Service, Incorporated - Wholesale food distributor ............... Term 12/31/98 3,734,927
12,121 U.S. Food Service, Incorporated ........................................... Term 06/30/00 12,038,909
------------
77,739,545
------------
Food Stores 6.1%
9,600 Big V Supermarkets, Incorporated - Northeastern retail food chain operator.. Term 03/15/00 9,617,160
11,567 Dominick's Finer Foods, Incorporated - Illinois based
retail food chain operator ................................................ Term 03/31/02 11,778,141
12,531 Dominick's Finer Foods, Incorporated ....................................... Term 03/31/03 12,759,679
12,531 Dominick's Finer Foods, Incorporated ....................................... Term 09/30/03 12,759,679
7,022 Grand Union Company - New York based retail food chain operator............. Term 06/15/02 7,023,441
8,000 Harvest Foods, Incorporated - Mississippi based retail food chain operator.. Term 06/30/02 7,998,550
801 Pathmark Stores, Incorporated - New Jersey based retail
food chain operator ........................................................ Revolving Credit 07/31/98 865,583
6,564 Pathmark Stores, Incorporated .............................................. Term 07/31/98 6,672,695
25,167 Pathmark Stores, Incorporated .............................................. Term 10/31/99 25,331,428
15,000 Ralph's Grocery Company - Los Angeles, California
based retail food chain operator ........................................... Term 06/15/02 15,277,538
15,000 Ralph's Grocery Company .................................................... Term 06/15/03 15,277,538
15,000 Ralph's Grocery Company .................................................... Term 02/15/04 15,277,538
8,421 Star Markets Company, Incorporated - New England based
retail food chain operator ................................................. Term 01/31/02 8,403,484
6,316 Star Markets Company, Incorporated ......................................... Term 12/31/02 6,317,456
------------
155,359,910
------------
Manufacturing 19.4%
18,831 Alliant Techsystems, Incorporated - Manufacturer of
ordnance, composite metals ................................................. Term 03/15/01 18,934,366
7,000 Bankers Systems, Incorporated - Compliance services supplier ............... Term 11/02/02 7,035,054
22,891 Case Corporation - Manufacturer of farm and construction equipment ......... Term 08/31/99 23,134,843
27,000 Collins & Aikman Products Company - Manufacturer of
auto interiors, home interiors and wallpapers ............................. Term 01/12/02 27,027,077
5,896 Dade International, Incorporated - Medical equipment
manufacturer/marketer ..................................................... Term 12/31/01 5,885,167
</TABLE>
See Notes to Financial Statements
Page: 9
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
July 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(OOO) Borrower Type Maturity* Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests (Continued)
Manufacturing (Continued)
$ 6,633 Dade International, Incorporated ........................................... Term 12/31/02 $ 6,625,981
7,370 Dade International, Incorporated ........................................... Term 06/30/03 7,358,253
9,697 Dal-Tile Group, Incorporated - Ceramic tile and
floor covering manufacturer/retailer ....................................... Revolving Credit 01/09/98 9,578,408
10,021 Ebel USA, Incorporated - Manufacturer of luxury time pieces ............... Term 09/30/01 10,138,293
17,850 Elsag Bailey, Incorporated - Manufacturer of electronic
measurement and control systems ........................................... Term 08/30/02 17,810,136
5,385 Essex Group, Incorporated - Manufacturer of electrical wire and cable ...... Term 04/30/00 5,407,089
19,800 Gulfstream Delaware Corporation - Aircraft manufacturer ................... Term 03/31/98 19,835,757
11,875 Health O Meter, Incorporated - Manufacturer of small appliances ........... Term 08/15/01 11,848,371
4,341 Intermetro Industries Corporation - Manufacturer of
metal-polymer storage products ............................................. Term 06/30/01 4,329,335
6,272 Intermetro Industries Corporation .......................................... Term 12/31/02 6,255,345
16,250 International Wire Group - Manufacturer of auto, appliance, and
communication wires ........................................................ Term 09/30/02 16,335,321
7,500 Intesys Technologies, Incorporated - Original equipment manufacturer
for telecommunications/autos ............................................... Term 12/31/01 7,569,452
3,579 Luxottica U.S. Holdings - Manufacturer/distributor of eyeglasses .......... Revolving Credit 06/30/01 3,602,875
20,088 Luxottica U.S. Holdings ................................................... Term 06/30/01 20,113,584
140 Mail-Well Corporation - Manufacturer of envelopes and graphic printers ... Term 07/31/98 141,417
2,904 Mail-Well Corporation ..................................................... Term 07/31/01 2,952,046
8,340 Mail-Well Corporation ..................................................... Term 07/31/03 8,460,000
8,415 Nimbus Manufacturing - Manufacturer of compact discs ....................... Term 03/31/02 8,473,502
2,700 Overhead Door Corporation - Manufacturer of garage doors and
garage door openers ........................................................ Revolving Credit 08/18/99 2,686,482
10,553 Overhead Door Corporation ................................................. Term 08/18/99 10,534,977
40,000 Playtex Products, Incorporated - Manufacturer of beauty aid
and hygiene products ....................................................... Term 06/30/02 40,196,586
9,342 Print Tech International - Manufacturer of consumable paper products ...... Term 12/31/01 9,418,388
2,845 PSF Finance, L.P. - Integrated pork producer .............................. Term 12/23/99 3,718,148
50,000 Revlon Consumer Products Corporation - Manufacturer of cosmetics ........... Term 06/30/97 50,982,071
3,800 RSI Home Products, Incorporated - Bath and kitchen cabinet manufacturer .... Term 11/30/99 3,903,351
7,424 Spalding & Evenflo Companies, Incorporated -
Manufacturer of sporting goods ............................................ Term 10/14/02 7,425,756
4,088 Sperry Marine, Incorporated - Manufacturer of navigational instruments ..... Term 11/12/00 4,052,303
10,694 Stanadyne Automotive - Manufacturer of diesel injection devices and
engine parts ............................................................... Term 12/31/01 10,763,929
2,912 Sun Pharmaceuticals Corporation - Skincare product producer ................ Term 12/31/97 2,912,524
7,900 The Hawk Group of Companies, Incorporated - Manufacturer of
powdered metals ........................................................... Term 06/30/02 7,976,029
4,817 The Pullman Company - Diversified manufacturer, primarily in the
transportation sector ...................................................... Revolving Credit 12/31/99 4,644,293
9,520 The Pullman Company ........................................................ Term 12/31/99 9,174,243
9,700 The U.S. Playing Card Company - Manufacturer/distributor of
playing cards .............................................................. Term 09/30/02 9,687,294
</TABLE>
See Notes to Financial Statements
Page: 10
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
July 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(OOO) Borrower Type Maturity* Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests (Continued)
Manufacturing (Continued)
$ 20,000 Thompson Minwax Company - Manufacturer of wood stains and
finishing products ....................................................... Term 12/31/02 $ 20,142,764
14,621 UCAR International, Incorporated - Manufacturer of
graphite/carbide electrodes ............................................... Term 01/31/03 14,732,730
7,654 UCAR International, Incorporated ......................................... Term 07/31/03 7,711,909
7,654 UCAR International, Incorporated ......................................... Term 01/30/04 7,720,550
5,407 Waters Corporation - Manufacturer/distributor of high performance
liquid chromatography instruments ......................................... Term 11/30/01 5,429,130
3,784 Waters Corporation ....................................................... Term 11/30/02 3,799,595
3,041 Waters Corporation ....................................................... Term 05/31/03 3,053,973
-------------
489,518,697
-------------
Paper 6.7%
50,000 Fort Howard Corporation - Paper manufacturer .............................. Term 12/31/02 50,638,293
30,194 Jefferson Smurfit Corporation - Corrugated paper products manufacturer ... Term 04/03/02 30,428,011
40,000 S.D. Warren Company - Coated-free paper manufacturer ..................... Term 12/20/02 40,432,633
47,750 Stone Container Corporation - Paper products manufacturer ................. Term 04/01/00 48,078,780
-------------
169,577,717
-------------
Printing 2.8%
26,268 American Media Operations, Incorporated - Magazine/newspaper
publisher ................................................................. Term 09/30/02 26,249,681
4,150 TransWestern Publishing Company, L.P. - Publisher of telephone
yellow pages ............................................................. Term 04/30/00 4,137,948
19,974 Ziff-Davis Publishing Company - Publisher of computer magazine ........... Term 12/31/01 20,206,993
18,814 Ziff-Davis Publishing Company ............................................ Term 12/31/02 19,033,631
-------------
69,628,253
-------------
Restaurants 0.9%
13,561 America's Favorite Chicken Company - Church's and
Popeye's Fried Chicken restaurants ........................................ Term 11/05/98 13,561,197
1,335 Carvel Corporation - Soft ice cream products franchisor ................... Term 12/31/98 1,335,554
900 Flagstar Companies, Incorporated - Restaurant holding company ............ Revolving Credit 12/31/00 1,039,062
7,779 Long John Silver's Restaurants, Incorporated - Retail seafood
restaurant owner/operator ................................................. Term 09/30/97 7,779,337
-------------
23,715,150
-------------
Retail 8.5%
32,500 Camelot Music, Incorporated - Retail distributor of music
and video cassettes ...................................................... Term 02/28/02 32,616,324
17,600 Color Tile, Incorporated - Ceramic tile and floor covering retailer ...... Term 12/31/98 17,586,821
10,000 Duane Reade - Retail drug store ........................................... Term 09/30/99 10,001,608
18,272 Eckerd Corporation - Retail drug store .................................... Term 07/29/00 18,308,228
6,786 Federated Department Stores, Incorporated - National department
store chain ............................................................... Revolving Credit 03/31/00 7,021,070
15,714 Federated Department Stores, Incorporated ................................. Term 03/31/00 15,955,309
9,250 General Nutrition, Incorporated - Vitamin, mineral and food supplement
manufacturer and retailer ................................................ Term 06/30/01 9,261,630
</TABLE>
See Notes to Financial Statements
Page: 11
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
July 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
Principal
Amount Loan Stated
(OOO) Borrower Type Maturity* Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate** Senior Loan Interests (Continued)
Manufacturing (Continued)
$ 20,000 Mary Kay Cosmetics - Direct cosmetic sales ................................ Term 12/06/02 $ 20,214,717
15,000 National Propane Corporation - Propane gas distributor ..................... Term 03/31/03 14,957,043
10,000 Nine West Group, Incorporated - Shoe designer and retailer ................. Term 10/01/01 10,000,000
3,895 Petro PSCProperties, L.P. - Multi-service truckstop operator .............. Term 05/18/01 3,932,475
29,825 Saks & Company - Retail fashions and accessories .......................... Term 06/30/00 29,941,289
2,139 Service Merchandise - Catalog retailer ..................................... Revolving Credit 06/08/99 2,316,794
19,849 Thrifty Payless, Incorporated - Retail drug store .......................... Term 09/30/01 20,036,883
3,356 Truckstops of America, Incorporated - Interstate fueling stations operator.. Term 12/10/00 3,330,434
-------------
215,480,625
--------------
Textiles 2.7%
19,950 Chicopee, Incorporated - Manufacturer of non-woven fabrics
to medical industry ........................................................ Term 03/31/03 20,194,293
9,381 Hosiery Corporation of America - Manufacturer/direct mail
marketer of women's hosiery ................................................ Term 07/31/01 9,329,811
8,018 Ithaca Industries, Incorporated - Undergarment and hosiery manufacturer .... Term 10/31/98 8,035,904
3,083 London Fog Industries, Incorporated - Manufacturer of rainwear
and outerwear ............................................................. Revolving Credit 03/31/97 3,250,432
29,320 London Fog Industries, Incorporated ........................................ Term 05/31/02 27,922,942
------------
68,733,382
------------
Transportation 1.8%
22,119 Northwest Airlines, Incorporated - Consumer airline carrier ............... Term 12/15/99 22,914,255
22,119 Northwest Airlines, Incorporated ........................................... Term 12/15/00 22,723,526
-------------
45,637,781
-------------
Other 6.8%
6,852 Ark Asset Holdings, Incorporated - Institutional money manager ............ Term 11/30/01 6,916,331
12,500 Blackstone Capital Company - Financial services ........................... Term 01/13/97 12,467,512
10,000 Harrah's Jazz Company - Owner/operator of gaming casinos .................. Term 09/30/99 10,163,608
1,979 New Street Capital Corporation - Financial services ...................... Term 02/28/96 1,994,435
19,920 PrimeCo, Incorporated - Equipment leasing ................................. Term 12/31/00 20,025,490
28,000 QVC Programming - Home shopping television network ........................ Term 01/31/04 28,248,962
28,888 Six Flags Theme Park - Theme park operator ................................ Term 06/23/08 29,029,676
1,012 Tenet Healthcare - Hospital operator ...................................... Revolving Credit 08/31/01 1,066,643
20,594 Tenet Healthcare ........................................................ Term 08/31/01 20,818,238
8,632 Unilab Corporation - Clinical laboratory testing ......................... Term 05/15/02 8,700,342
11,845 USI American Holdings - Conglomerate, consumer goods, building
and industrial products ................................................... Term 06/15/00 11,847,498
19,286 United Stationers Supply Company - Distributor of office paper products ... Term 03/31/02 19,451,884
-------------
170,730,619
-------------
Total Variable Rate ** Senior Loan Interests 78.2%............................................................. 1,977,618,123
-------------
</TABLE>
See Notes to Financial Statements
Page: 12
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
July 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Borrower Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Equities 0.8%
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> .............................................. 2,305,470
Best Products Company, Incorporated (Warrants for 28,080 common shares)<F3> .................................. 0
Braelan Corporation (5,330 common shares)<F2> <F3> ............................................................ 0
Core-Mark, L.L.C. (Class B ownership interest) <F2> .......................................................... 2,571,831
Flagstar Companies, Incorporated (8,755 common shares) <F3> ................................................... 49,248
London Fog Industries, Incorporated (10,833,012 common shares) <F2> <F3> ...................................... 0
London Fog Industries, Incorporated ($14,457,139 par amount of preferred stock, 17.5% coupon,
maturity 05/31/02) <F2> <F4> ................................................................................. 11,287,716
MICOM Communications, Incorporated (Warrants for 114,035 common shares) <F3> .................................. 955,043
Nextel Communications, Incorporated (Warrants for 60,000 common shares) <F2> <F3> ............................. 255,000
Sun Pharmaceuticals Corporation (Warrants for 120 common shares) <F2> <F3> ................................... 0
Thermoscan, Incorporated (Warrants for 3,930 common shares) <F2> <F3> ........................................ 0
-------------
Total Equities ................................................................................................... 20,943,137
-------------
Corporate Bonds 0.0%
Braelan Corporation ($971,283 par, 16.35% coupon, 09/03/95 maturity) <F4> .................................... 997,342
-------------
Total Long-Term Investments 79.0%
(Cost $1,990,921,983) <F1> .................................................................................... 1,999,558,602
-------------
Short-Term Investments at Amortized Cost
Commercial Paper 7.2%
Abbott Laboratory ($20,000,000 par, maturing 08/16/95, yielding 5.70%) ....................................... 19,952,500
Bank America Corporation ($20,000,000 par, maturing 08/07/95, yielding 5.68%) ................................. 19,981,067
Cargill Financial Services Corporation ($20,000,000 par, maturing 08/01/95, yielding 5.72%) .................. 20,000,000
General Electric Company ($9,779,000 par, maturing 08/08/95, yielding 5.71%) ................................. 9,768,142
General Electric Capital Corporation ($10,000,000 par, maturing 08/09/95, yielding 5.70%) ..................... 9,987,333
Harley Davidson Dealer Funding Corporation ($6,225,000 par, maturing 08/03/95, yielding 5.72%) ................ 6,223,022
Heinz, H. J. Company ($4,600,000 par, maturing 08/16/95, yielding 5.70%) ..................................... 4,589,075
McDonald's Corporation ($20,000,000 par, maturing 08/03/95, yielding 5.71%) ................................... 19,993,656
Michelin Tire Corporation ($10,000,000 par, maturing 08/21/95, yielding 5.72%) ............................... 9,968,222
Pacificorp ($11,250,000 par, maturing 08/04/95, yielding 5.72%) ........................................ ..... 11,244,637
Pitney Bowes, Incorporated ($20,000,000 par, maturing 08/04/95 through 08/11/95, yielding 5.70% to 5.72%) ..... 19,987,270
Raytheon Company ($20,000,000 par, maturing 08/04/95, yielding 5.72%) ........................................ 19,990,467
Transamerica Corporation ($10,000,000 par, maturing 08/14/95, yielding 5.70%) ................................ 9,979,417
-------------
Total Commercial Paper .......................................................................................... 181,664,808
-------------
</TABLE>
Page: 13
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
July 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Borrower Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Short-Term Investments at Amortized Cost (Continued)
Short-Term Loan Participations 12.4%
AIG Funding Corporation ($20,000,000 par, maturing 08/21/95, yielding 5.71%) ................................... $ 20,000,000
Alltel Corporation ($20,000,000 par, maturing 08/10/95, yielding 5.81%) ........................................ 20,000,000
American Greetings Corporation ($20,000,000 par, maturing 08/09/95 through 08/16/95, yielding 5.75% to 5.77%).. 20,000,000
Ameritech Corporation ($15,000,000 par, maturing 08/16/95, yielding 5.70%) ..................................... 15,000,000
AON Corporation ($11,950,000 par, maturing 08/03/95, yielding 5.80%) ........................................... 11,950,000
Army & Air Force Exchange Services ($20,000,000 par, maturing 08/11/95, yielding 5.85%) ....................... 20,000,000
Avery Dennison Corporation ($18,000,000 par, maturing 08/01/95, yielding 5.95%) ............................... 18,000,000
Bell Atlantic Financial Services ($20,000,000 par, maturing 08/09/95, yielding 5.77%) .......................... 20,000,000
Bell Atlantic Network Funding Corporation ($15,000,000 par, maturing 08/14/95, yielding 5.72%) ................. 15,000,000
Bell Communications Research, Incorporated ($16,100,000 par, maturing 08/01/95, yielding 5.74%) ................ 6,100,000
Central Telephone Company ($15,000,000 par, maturing 08/11/95 through 08/21/95, yielding 5.78% to 5.80%)........ 15,000,000
Echlin, Incorporated ($20,000,000 par, maturing 08/01/95 to 08/11/95, yielding 5.74% to 5.82%) ................ 20,000,000
Gillette Company ($20,000,000 par, maturing 08/01/95 through 08/10/95, yielding 5.74% to 5.83%) ................ 20,000,000
Grainger, W. W., Incorporated ($10,000,000 par, maturing 08/10/95, yielding 5.75%) ............................. 10,000,000
National Rural Utilities Cooperative Finance ($13,000,000 par, maturing 08/15/95 through 08/28/95,
yielding 5.80%) ............................................................................................... 13,000,000
Sara Lee Corporation ($20,000,000 par, maturing 08/07/95 through 08/21/95, yielding 5.70% to 5.71%) ............ 20,000,000
Temple Inland, Incorporated ($20,000,000 par, maturing 08/03/95 through 08/10/95, yielding 5.78% to 5.81%) ..... 20,000,000
USAA Capital Corporation ($20,000,000 par, maturing 08/04/95 through 08/11/95, yielding 5.72% to 5.77%) ........ 20,000,000
------------
Total Short-Term Loan Participations ........................................................................... 314,050,000
------------
Total Short-Term Investments at Amortized Cost 19.6% .............................................................. 495,714,808
Other Assets In Excess of Liabilities 1.4% ....................................................................... 34,791,577
------------
Net Assets 100.0% ............................................................................................... $2,530,064,987
--------------
--------------
<FN>
<F1> At July 31, 1995, cost for federal income tax purposes is $1,990,921,983;
the aggregate gross unrealized appreciation is $19,600,252, and the aggregate
gross unrealized depreciation is $10,963,633, resulting in net unrealized
appreciation of $8,636,619.
<F2> Restricted security.
<F3> Non-income producing security.
<F4> Payment-in-kind security.
* 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 ratio. 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.
</FN>
</TABLE>
See Notes to Financial Statements
Page: 14
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
July 31, 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at Market Value (Cost $1,990,921,983) (Note 1) ................................... $ 1,999,558,602
Short-Term Investments (Note 1) ............................................................... 495,714,808
Cash .......................................................................................... 10,335,463
Receivables:
Fund Shares Sold ........................................................................... 32,122,526
Interest and Fees .......................................................................... 16,241,117
----------------
Total Assets ............................................................................ 2,553,972,516
----------------
Liabilities:
Deferred Facility Fees ....................................................................... 17,005,076
Payables:
Income Distributions ....................................................................... 3,210,542
Investment Advisory Fee (Note 2) .......................................................... 1,960,872
Administrative Fee (Note 2) ................................................................ 516,019
Fund Shares Repurchased .................................................................... 8,134
Accrued Expenses .............................................................................. 1,206,886
----------------
Total Liabilities ........................................................................ 23,907,529
----------------
Net Assets ................................................................................... $ 2,530,064,987
----------------
----------------
Net Assets Consist of:
Common Shares ($.01 par value with an unlimited number of shares authorized,
251,848,949 shares issued and outstanding) (Note 3) ....................................... $ 2,518,489
Paid in Surplus ............................................................................... 2,523,028,402
Net Unrealized Appreciation on Investments .................................................... 8,636,619
Accumulated Undistributed Net Investment Income ............................................... 6,627,293
Accumulated Net Realized Loss on Investments ................................................. (10,745,816)
----------------
Net Assets ................................................................................... $ 2,530,064,987
----------------
----------------
Net Asset Value Per Common Share($2,530,064,987 divided by 251,848,949 shares outstanding) ... $ 10.05
----------------
----------------
</TABLE>
See Notes to Financial Statements
Page: 15
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended July 31, 1995
- -------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest ........................................................................... $ 148,983,994
Fees ............................................................................... 13,643,866
Other ............................................................................. 994,764
-----------------
Total Income .................................................................. 163,622,624
-----------------
Expenses:
Investment Advisory Fee (Note 2) .................................................. 16,722,752
Administrative Fee (Note 2) ........................................................ 4,400,724
Shareholder Services (Note 2) ...................................................... 2,302,518
Legal (Note 2) ..................................................................... 552,500
Amortization of Organizational Expenses and Initial Registration Costs (Note 1) ... 37,067
Other ............................................................................. 2,538,446
-----------------
Total Expenses ................................................................ 26,554,007
-----------------
Net Investment Income ............................................................. $ 137,068,617
-----------------
-----------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales and Principal Repayments .................................... $ 1,021,633,872
Cost of Securities Sold and Repaid ............................................. (1,027,102,092)
-----------------
Net Realized Loss on Investments .................................................. (5,468,220)
-----------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period ......................................................... 6,529,519
End of the Period .............................................................. 8,636,619
-----------------
Net Unrealized Appreciation on Investments During the Period ....................... 2,107,100
-----------------
Net Realized and Unrealized Loss on Investments .................................... $ (3,361,120)
-----------------
-----------------
Net Increase in Net Assets from Operations ......................................... $ 133,707,497
-----------------
-----------------
</TABLE>
See Notes to Financial Statements
Page: 16
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Years Ended July 31,1995 and 1994
- --------------------------------------------------------------------------------------------------------
Year Ended Year Ended
July 31,1995 July 31,1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Net Investment Income ............................................. $ 137,068,617 $ 64,333,964
Net Realized Loss on Investments ................................. (5,468,220) (1,392,765)
Net Unrealized Appreciation on Investments During the Period ...... 2,107,100 2,441,749
---------------- ----------------
Change in Net Assets from Operations ............................ 133,707,497 65,382,948
Distributions from Net Investment Income .......................... (133,993,957) (60,454,184)
---------------- ----------------
Net Change in Net Assets from Investment Activities .............. (286,460) 4,928,764
---------------- ----------------
From Capital Transactions (Notes 3 and 5):
Proceeds from Common Shares Sold ................................. 1,349,284,514 355,652,204
Value of Shares Issued Through Dividend Reinvestment .............. 74,960,773 33,006,495
Cost of Shares Repurchased ........................................ (122,897,620) (131,252,262)
---------------- ----------------
Net Change in Net Assets from Capital Transactions ................ 1,301,347,667 257,406,437
---------------- ----------------
Total Increase in Net Assets ...................................... 1,301,061,207 262,335,201
Net Assets:
Beginning of the Period .......................................... 1,229,003,780 966,668,579
---------------- ----------------
End of the Period (Including undistributed net investment income of
$6,627,293 and $3,388,421, respectively) ....................... $ 2,530,064,987 $ 1,229,003,780
---------------- ----------------
---------------- ----------------
</TABLE>
See Notes to Financial Statements
Page: 17
<TABLE>
<CAPTION>
Statement of Cash Flows
For the Year Ended July 31,1995
- ------------------------------------------------------------------------------------------------------
<S> <C>
Change in Net Assets from Operations ............................................. $ 133,707,497
------------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Provided by Operating Activities:
Increase in Investments at Value ............................................. (977,887,825)
Increase in Short-Term Investments at Amortized Cost .......................... (304,600,815)
Increase in Interest and Fee Receivables ..................................... (9,248,378)
Decrease in Unamortized Organizational Expenses and Initial Registration Costs. 37,067
Decrease in Other Assets ...................................................... 229,244
Increase in Deferred Facility Fees ........................................... 8,293,529
Increase in Investment Advisory and Administrative Fees Payable................ 1,254,165
Increase in Accrued Expenses .................................................. 542,450
------------------
Total Adjustments ........................................................... (1,281,380,563)
------------------
Net Cash Used for Operating Activities ........................................... (1,147,673,066)
------------------
Cash Flows from Financing Activities (Notes 3 and 5):
Proceeds from Shares Sold ........................................................ 1,335,695,007
Payments on Shares Repurchased ................................................... (123,116,944)
Cash Dividends Paid .............................................................. (57,087,595)
------------------
Net Cash Provided by Financing Activities ..................................... 1,155,490,468
------------------
Net Increase in Cash ............................................................ 7,817,402
Cash at Beginning of Period ..................................................... 2,518,061
------------------
Cash at End of Period ............................................................ $ 10,335,463
------------------
------------------
</TABLE>
See Notes to Financial Statements
Page: 18
Financial Highlights
The following schedule presents financial highlights for one common share
of the Trust outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 4,1989
(Commencement
Year Ended July 31 of Investment
--------------------------------------------------------- Operations) to
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 .................... .756 .618 .600 .698 .907 .815
Net Realized and Unrealized Gain/Loss
on Investments ............................ (.004) .015 .008 .004 (.008) .005
------------ ----------- ---------- --------- ----------- ------------
Total from Investment Operations ............. .752 .0.633 .608 .702 .899 .820
------------ ----------- ---------- --------- ----------- ------------
Less:
Distributions from Net Investment Income .. .758 .585 .600 .689 .910 .812
Distributions in Excess of Net Investment
Income (Note 1) ........................... -0- -0- .002 -0- .012 -0-
------------ ----------- ---------- --------- ----------- ------------
Total Distributions .......................... .758 .585 .602 .689 .922 .812
------------ ----------- ---------- --------- ----------- ------------
Net Asset Value, End of Period ............... $ 10.046 $ 10.052 $ 10.004 $ 9.998 $ 9.985 $ 10.008
------------ ----------- ---------- --------- ----------- ------------
------------ ----------- ---------- --------- ----------- ------------
Total Return (Non-Annualized) ................ 7.82% 6.52% 6.17% 7.25% 9.41%* 8.51%
Net Assets at End of Period (In millions) ... $ 2,530.1 $ 1,229.0 $ 966.7 $ 928.3 $ 997.5 $ 659.1
Ratio of Expenses to Average Net
Assets (Annualized) ...................... 1.49% 1.53% 1.53% 1.55% 1.56%* 1.59%
Ratio of Net Investment Income to
Average Net Assets (Annualized) ........... 7.71% 6.16% 5.96% 6.98% 8.91%* 9.91%
Portfolio Turnover <F1> ..................... 71.31% 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.
*If certain expenses had not been assumed by the 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%.
</FN>
</TABLE>
See Notes to Financial Statements
Page: 19
Notes to Financial Statements
July 31,1995
- -------------------------------------------------------------------------------
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 -- Investment 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" or "delayed delivery" basis, with
settlement to occur at a later date. The value of the security so purchased is
subject to market fluctuations during this period. The Trust will maintain, in a
segregated account with its custodian, assets having an aggregate value at least
equal to the amount of the when issued or delayed delivery purchase commitments
until payment is made. At July 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
(collectively "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.
Page: 20
Notes to Financial Statements (Continued)
July 31,1995
- --------------------------------------------------------------------------------
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, 1995, the Trust had an accumulated capital loss carryforward
for tax purposes of $5,605,446. Of this amount, $137,226 and $5,468,220 will
expire on July 31, 2002 and 2003, respectively. 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. Permanent book and tax basis differences related to
expense recognition totaling $164,212 were reclassified from paid in surplus to
accumulated undistributed net investment income.
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 year ended July 31, 1995, the Trust recognized expenses of
approximately $549,300 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. The Trust's liability under the
deferred compensation and retirement plans at July 31, 1995, was approximately
$19,400.
Page: 21
Notes to Financial Statements (Continued)
July 31,1995
- --------------------------------------------------------------------------------
3. Capital Transactions
At July 31, 1995 and 1994, paid in surplus aggregated $2,523,028,402 and
$1,223,140,759, respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31,1995 July 31,1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares ................. 122,267,677 96,624,807
------------- -------------
Shares Sold ...................... 134,357,255 35,430,303
Shares Issued Through
Dividend Reinvestment ......... 7,465,118 3,287,782
Shares Repurchased ............... (12,241,101) (13,075,215)
------------- -------------
Net Increase in
Shares Outstanding ............ 129,581,272 25,642,870
------------- -------------
Ending Shares .................... 251,848,949 122,267,677
------------- -------------
</TABLE>
4. Investment Transactions
Aggregate purchases and the cost of securities sold and repaid, excluding
short-term notes, for the year ended July 31, 1995, were $1,934,490,431 and
$1,027,102,092, 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 year
ended July 31, 1995, 12,241,101 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 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>
Page: 22
Notes to Financial Statements (Continued)
July 31,1995
- --------------------------------------------------------------------------------
For the year ended July 31, 1995, VKAC received early withdrawal charges of
approximately $1,469,000 in connection with tendered shares of the Trust.
7. Commitments
Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $93,239,800 as of July
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
borrowings 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 July 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 ............................... $ 63,698 $ 53,961,703
Bank of America ............................ 14,845 11,847,498
Citibank ................................... 10,000 10,000,000
Natwest USA ................................. 9,697 9,578,408
Banque Paribas .............................. 4,228 4,207,561
FNB Canada ................................. 3,357 3,353,083
--------- --------------
Total ....................................... $105,825 $ 92,948,253
--------- --------------
--------- --------------
</TABLE>
Page: 23
Independent Auditors' Report
The Board of Trustees and Shareholders of
Van Kampen Merritt Prime Rate Income Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Merritt Prime Rate Income Trust (the "Trust"), including the portfolio of
investments, as of July 31, 1995, and the related statements of operations and
cash flows for the year then ended and the statement of changes in net assets
for each of the two years in the period then ended and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high
lights are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities and variable rate
senior loan interests owned as of July 31, 1995, by correspondence with the
custodian and selling or agent banks; where replies were not received we
performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Van
Kampen Merritt Prime Rate Income Trust as of July 31, 1995, and the results of
its operations and cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented in conformity with generally
accepted accounting principles.
As discussed in Note 1A, the financial statements include variable rate senior
loan interests valued at $1,977,618,123 (78.2% of net assets), whose values are
determined by the Trust's management, following procedures established by the
Board of Trustees, in the absence of actual market values. Because of
uncertainty inherent in the valuation process, the estimated value of a variable
rate senior loan interest may differ significantly from the value that would
have been used had there been recent market activity for that senior loan
interest. We have reviewed the procedures established by the Board of Trustees
and used by the Trust's management in arriving at its estimate of the value of
these senior loan interests and have inspected underlying documentation, and, in
the circumstances, we believe the procedures are reasonable and the
documentation appropriate.
KPMG Peat Marwick LLP
Chicago, Illinois
September 15, 1995
Page: 24
Funds Distributed by Van Kampen American Capital
GLOBAL AND INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Emerging Growth Fund
Enterprise Fund
Pace Fund
Growth & Income
Balanced Fund
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free
Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Limited Term Municipal
Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
Texas Tax Free Income Fund
THE GOVETT FUNDS
Emerging Markets Fund
Global Income Fund
International Equity Fund
Latin America Fund
Pacific Strategy Fund
Smaller Companies Fund
Ask your investment representative for a prospectus
containing more complete information, including sales
charges and expenses. Please read it carefully before
you invest or send money. Or call us direct at
1-800-421-5666 weekdays from 7:00 a.m. to 7:00 p.m.
Central time.
Page: 25
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
Nicholas Dalmaso*
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
ACCESS Investor
Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
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.
Van Kampen American Capital Distributors, Inc., 1995
All rights reserved.
SM denotes a service mark of
Van Kampen American Capital Distributors, Inc.
Page: 26
BACK COVER
