<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Portfolio Management Review...................... 4
Portfolio of Investments......................... 6
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 Accountants' Report.................. 24
</TABLE>
PRIT ANR 9/96
<PAGE> 2
LETTER TO SHAREHOLDERS
September 15, 1996
Dear Shareholder,
As you may be aware, an
agreement was reached in late June for
VK/AC Holding Inc., the parent company
of Van Kampen American Capital, Inc.,
to be acquired by Morgan Stanley Group
Inc. While this announcement may appear
commonplace in an ever-changing [PHOTO]
financial industry, we believe it
represents an exciting opportunity for
shareholders of our investment
products.
With Morgan Stanley's global
leadership in investment banking and
asset management and Van Kampen
American Capital's reputation for DENNIS J. MCDONNELL AND DON G. POWELL
competitive long-term performance and
superior investor services, together we will offer a broader range of investment
opportunities and expertise.
The new ownership will not affect our commitment to pursuing excellence
in all aspects of our business. We expect little change in the way your mutual
fund account is maintained and serviced.
A proxy was mailed to you explaining the acquisition and asking for your
vote of approval. Please read it carefully and return your response for
inclusion in the shareholder vote. We value our relationship with you and look
forward to communicating more details of this transaction, which is anticipated
to be completed in October.
ECONOMIC REVIEW
Economic growth accelerated during the last half of the reporting period.
After a nominal 0.3 percent growth rate in the last quarter of 1995, GDP (the
nation's Gross Domestic Product) grew at 2.0 percent in this year's first
quarter. In the second quarter, the rate of growth was much stronger at 4.2
percent, reflecting positive consumer sentiment and pent-up consumer demand. In
fact, upward momentum was marked by a 5.6 percent rise in retail sales in the
first six months of this year versus the comparable 1995 period.
In the manufacturing sector, economic reports such as the National
Association of Purchasing Managers Index suggested a continued rebound in
production from last year's lower levels. In June, this index reached its
highest level since early 1995. Strong levels of exports and a replenishing of
inventories have helped support this momentum.
Surprisingly healthy economic activity led to concerns that inflation
could rise and that the Federal Reserve Board may tighten monetary policy.
Inflation remains moderate, however, with consumer prices rising at about a 3
percent annual rate during the past year. Meanwhile, the closely watched "core"
Consumer Price Index, which excludes volatile food and energy components, has
risen year over year at rates between 2.7 and 3.0 percent per year, with
mid-1996 readings at a moderate 2.7 percent. Additionally, recent reports have
suggested some upward pressure in labor-related cost, a key factor in the Fed's
decision process for determining interest rate moves.
Continued on page two
1
<PAGE> 3
MARKET REVIEW
Our nation's continued economic resilience over the last 12 months has
spurred record corporate demand for bank loans, as well as other capital market
products. Over this period, leveraged corporate loans of the type in which the
Trust invests grew by an estimated $121 billion. Also contributing to this
market's strength has been a general improvement in corporate credit
fundamentals, which likewise benefit from solid economic activity.
You can read about this--and other factors--affecting the Prime Rate
Income Trust in the question and answer section of this report.
OUTLOOK
We anticipate that reasonably strong economic growth will continue during
the balance of 1996. In our view, inflation should remain stable, and the sharp
rise in interest rates experienced in the first half of 1996 is likely to
moderate economic growth. These factors should keep interest rates at their
current levels.
Looking ahead, we expect inflation and short-term rates to remain near
current levels. Throughout the rest of 1996, we expect that corporate earnings
will continue to be healthy.
We appreciate your continued confidence in your investment with Van
Kampen American Capital.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED JULY 31, 1996
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
<TABLE>
<CAPTION>
TOTAL RETURNS
<S> <C>
One-year total return(1)................................... 7.22%
Five-year average annual total return(1)................... 6.99%
Life-of-Trust average annual total return(1)............... 7.74%
Commencement date.......................................... 10/04/89
Distribution rate(2)....................................... 6.80%
SHARE VALUATIONS
Net asset value on 07/31/96................................ $10.00
One-year high net asset value.............................. $10.05
One-year low net asset value............................... $10.00
</TABLE>
(1) 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.
(2) Distribution rate is based upon the offering price and the monthly
annualized distributions of the Trust as of July 25, 1996.
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.
3
<PAGE> 5
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
We recently spoke with the portfolio manager of the Van Kampen American Capital
Prime Rate Income Trust about the key events and economic forces that shaped the
markets during the Trust's fiscal year. The Trust's portfolio manager, Jeffrey
W. Maillet, senior vice president of Van Kampen American Capital Investment
Advisory Corp., has been responsible for the day-to-day management of the
Trust's portfolio since its inception. The following excerpts reflect his views
on the Trust's performance during the 12-month period ended July 31, 1996.
Q HOW HAVE MARKET CONDITIONS AFFECTED THE PERFORMANCE OF THE TRUST?
A The interest rate environment has an impact on the Trust's dividend, of
course. All of the loans in the portfolio pay interest at a floating or
variable rate tied to key lending rates, such as the prime rate or LIBOR
(London Interbank Offered Rate). When interest rates fluctuate, so has the
dividend level paid out by the Trust. For instance, as short-term interest rates
continued to trend lower during the first half of 1996, the Trust's dividend was
reduced accordingly on three separate occasions--February, April, and May.
Nevertheless, the Trust's distribution rate-- 6.80 percent (2), as of July 25,
1996--was competitive with the prevailing rates available on more traditional
fixed-income investments. And, effective August 24, 1996, the Trust's monthly
dividend was increased from $0.0567 to $0.0584, providing shareholders with a
distribution rate of 7.00 percent, based upon the offering price of $10.01 on
August 23, 1996. Please refer to the chart on page three for additional
performance results.
Over the past 12 months, we've had an outstanding environment for investing
in senior loans. The strength of the economy has made it easier for corporations
to service their debt, which has translated into low default levels and a strong
rate of prepayment on the loans held by the Trust. As a result, we've had a
fairly high turnover rate within the portfolio.
At the same time, financing activity has been quite high, as illustrated by
the volume within the syndicated leveraged loan market of more than $101 billion
in 1995 alone. Secondary trading volume has also grown steadily, reaching $33.8
billion in 1995 and attracting major market participants, such as Morgan
Stanley, Goldman Sachs, Lehman Brothers, Citibank, Bank of America, and Bankers
Trust. However, the loan market should still be considered relatively illiquid.
Q HAS THE STRUCTURE OF THE PORTFOLIO CHANGED SIGNIFICANTLY?
A No. We continued to allocate the Trust's assets over a wide cross-section
of American business. The portfolio is currently spread out over more than
200 issuers representing over 20 industries. Maintaining a varied
portfolio has contributed to the relative stability of the Trust's net asset
value by diluting the impact of any adverse occurrence associated with any
single loan. In fact, not one of the loans we hold constitutes more than 2.3
percent of the Trust's net assets.
That's not to say that the Trust is devoid of risk. Because we're investing
in a concentration of non-investment grade corporate debt, which are senior
loans to corporations, we are diligent in our evaluation of the credit risk
involved in each transaction we pursue. In some cases, that's easy: many of the
loans we've had in the portfolio were made to large, well-established companies,
such as Westinghouse Electric, Revlon, and Northwest Airlines. In other cases,
when we select smaller, more growth oriented companies, our research must be
even more thorough.
In general, we feel we've done a good job of balancing risk and reward
potential, achieving a solid return with a relatively low rate of volatility.
Also, of the 772 loans we've held during the life of the Trust, only 10 have had
payment default. There is no guarantee that the monies to which the Trust is
entitled will be paid, and the loans may have equal status with other senior
securities of the borrower.
We continue to favor industries where trends suggest a favorable environment
over the long term. The manufacturing sector has produced strong 1996
year-to-date results, driven by productivity improvements from modernized
operations. The cable communications industry is still enjoying high subscriber
growth rates and double-digit cash flow growth, enabling firms to make capital
investments that will shore up their ability to compete in a changing
4
<PAGE> 6
marketplace. Radio and television broadcasting continues to benefit from a
favorable advertising environment, bolstered by the summer Olympics and the
upcoming election season. In addition, changing telecommunications laws have
increased the valuation of many holdings in this sector.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY SECTOR AS OF AS OF
AS A PERCENT OF VARIABLE RATE SENIOR LOAN INTERESTS JULY 31, 1996 JANUARY 31, 1996
<S> <C> <C>
Manufacturing ................................................ 13.0% ................... 13.4%
Cable ........................................................ 12.3% ................... 8.2%
Radio and Television Broadcasting ............................ 9.2% ................... 8.8%
Paper ........................................................ 7.9% ................... 9.3%
Retail ....................................................... 7.8% ................... 9.8%
Food/Beverage ................................................ 7.6% ................... 6.5%
Food Stores .................................................. 7.2% ................... 7.7%
Entertainment/Leisure ........................................ 4.5% ................... 6.4%
Wireless Communications ...................................... 4.2% ................... 3.6%
Healthcare ................................................... 3.7% ................... 2.0%
</TABLE>
Q WHAT IS YOUR ASSESSMENT OF THE TRUST'S PERFORMANCE OVER THE PAST FISCAL
YEAR?
A The Trust has continued to perform according to its investment objective,
having provided a high level of current income consistent with
preservation of capital. The Trust's net asset value (NAV) fluctuated
within a five-cent range during the reporting period, and as of July 31, 1996,
the NAV was $10.00--equal to the original offering price. Taking into account
the Trust's dividend distributions, the total return for the 12-month period
was 7.22 percent(1) (at NAV). For a look at the Trust's three-year, five-year,
and Life-of-Trust total return, please refer to the chart on page three.
We believe the Trust has performed well for investors seeking a high level
of current income and preservation of capital. In our opinion, the concept on
which the Trust is based--professional management of a varied portfolio of
primarily senior collateralized loans--has been proven in practice to date. The
Trust has achieved equally strong performance during periods of major upheaval
and uncertainty in the marketplace, including the savings and loan crisis, the
collapse of the Exchange Rate Mechanism in Europe, fluctuating interest rates,
and good and bad stock markets. That's what we see as the true measure of the
Trust's validity as a long-term investment. Of course, there is no guarantee
that if similar events occur in the future, the Trust will perform as favorably.
Although the Trust has done what it set out to do, every year since inception
(October 1989), a portfolio of senior loans does involve credit risk and other
risks that may not be associated with alternative investments.
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We're generally bullish on the domestic economy. The longer interest rates
stay low, the more momentum the economy stands to gain. For that reason,
we would not be surprised to see a move by the Federal Reserve Board to
raise interest rates before the year ends.
While higher interest rates might not be good news for the stock market,
they would give the Trust more earnings potential. In addition, if higher rates
were to trigger a setback in the equity market, lower market valuation could
lead to an increase in merger and acquisition activity. Because this activity is
often financed by senior loans of the type in which the Trust invests, we would
then see an even greater range of investment opportunities.
We anticipate on-going domestic economic growth, which will positively
affect the Trust, and we will remain selective and conservative in our choice of
investments for the Trust's portfolio.
[SIG]
Jeffrey W. Maillet
Portfolio Manager
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
VARIABLE RATE** SENIOR LOAN INTERESTS
AEROSPACE/DEFENSE 1.8%
$ 14,604 Alliant Techsystems, Inc., Term Loan -- Manufacturer of ordnance,
composite metals......................................................... 03/15/01 $ 14,649
10,205 Grimes Aerospace Co., Term Loan -- Airplane electronics manufacturer..... 12/31/99 10,483
3,237 Grimes Aerospace Co., Revolving Credit................................... 12/31/99 3,380
19,800 Gulfstream Delaware Corp., Term Loan -- Aircraft manufacturer............ 03/31/98 19,786
9,611 Howmet Acquisition Co., Term Loan -- Manufacturer of aerospace
supplies................................................................. 11/20/02 to 05/20/03 9,641
21,151 Northrop Grumman Corp., Term Loan -- Manufacturer and contractor of
defense aircraft and electronic systems.................................. 03/02/02 21,319
9,325 Tracor, Inc., Term Loan -- Manufacturer of electronic systems and devices
for the defense and aerospace industries................................. 10/31/00 to 04/30/01 9,351
----------
88,609
----------
BUILDING/HOUSING 2.1%
59,950 National Gypsum Co., Term Loan -- Wallboard manufacturer................. 09/20/03 60,054
19,760 PrimeCo, Inc., Term Loan -- Equipment leasing............................ 12/31/00 19,783
3,333 RSI Home Products, Inc., Term Loan -- Bath and kitchen cabinet
manufacturer............................................................. 11/30/99 3,361
19,833 Walter Industries, Inc., Term Loan -- Home builder....................... 01/22/03 19,863
----------
103,061
----------
CABLE 11.0%
9,368 Adelphia Cable Partners, L.P., Revolving Credit -- Cable television
operator................................................................. 12/31/03 9,388
3,507 Alexcom Limited Partnership, Term Loan -- Cellular telephone systems
operator................................................................. 06/30/20 3,506
12,000 Cablevision of Ohio, Term Loan -- Cable television owner/operator........ 12/31/05 12,017
70,000 Charter Communications, Term Loan -- Cable television systems operator... 12/31/03 to 12/31/04 70,322
42,500 Chelsea Communications, Inc., Term Loan -- Cable television systems
operator................................................................. 09/30/04 42,625
21,500 Classic Cable, Inc., Term Loan -- Cable television systems operator...... 06/30/05 21,658
16,830 Coaxial Communications of Central Ohio, Term Loan -- Cable television
systems operator......................................................... 12/31/99 16,722
52,861 Colony Communications, Revolving Credit -- Cable television operator..... 09/30/04 53,017
26,625 Comcast MH Holdings, Term loan -- Cable television systems operator...... 12/31/03 26,681
45,789 Continental Cablevision, Revolving Credit -- Cable television systems
operator................................................................. 10/10/03 45,900
3,281 CSG Systems International, Inc., Term Loan -- Communications management
consultant............................................................... 12/31/00 3,285
38,000 Falcon Cable Media, Term Loan -- Cable television systems operator....... 07/11/05 38,074
26,500 Frontiervision Operating Partners, L.P., Term Loan -- Cable television
operator................................................................. 06/30/05 26,639
6,650 James Cable Partners, L.P., Term Loan -- Cable television systems
operator................................................................. 06/30/00 6,716
200 James Cable Partners, L.P., Revolving Credit............................. 06/30/00 209
6,250 Lenfest Communications, Term Loan -- Cable television operator........... 09/30/03 6,325
60,313 Marcus Cable Operating Co., L.P., Term Loan -- Cable television systems
operator................................................................. 12/31/02 to 04/30/04 60,874
2,500 Marcus Cable Operating Co., L.P., Revolving Credit....................... 12/31/02 2,657
8,711 Maryland Cable, Term Loan -- Cable television systems operator........... 12/31/02 8,717
8,500 Northland Cable Television, Inc., Term Loan -- Cable television systems
operator................................................................. 09/30/03 8,503
47,500 TCI Pacific Communications, Term Loan -- Cable television services
provider................................................................. 12/31/04 47,667
6,964 TCI Southeast, Inc., Term Loan -- Cable television systems operator...... 06/30/01 6,964
2,657 TCI Southeast, Inc., Revolving Credit.................................... 06/30/01 2,681
10,000 UCA Corp., Revolving Credit -- Cable television operator................. 09/30/03 10,088
3,334 Viacom Cablevision, Term Loan -- Cable television systems operator....... 07/01/02 3,345
----------
534,580
----------
CHEMICAL 2.3%
9,951 AEP Industries, Inc., Term Loan -- Manufacturer and converter of plastic
products................................................................. 07/31/02 9,976
9,250 Cedar Chemicals Corp., Term Loan -- Manufacturer of fertilizer........... 10/30/03 9,308
6,429 Chattem, Inc., Term Loan -- Manufacturer and marketer of
pharmaceuticals.......................................................... 10/30/02 6,457
8,887 Freedom Chemical Co., Term Loan -- Manufacturer of specialty chemicals... 06/30/02 8,820
9,923 Hampshire Chemical Co., Term Loan -- Manufacturer of specialty
chemicals................................................................ 09/01/03 9,949
</TABLE>
See Notes to Financial Statements
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CHEMICAL (CONTINUED)
$ 33,641 Huntsman Group Holding Corp., Term Loan -- Integrated chemical, plastic
and packaging producer................................................... 12/31/02 $ 33,688
11,143 Huntsman Group Holding Corp., Revolving Credit........................... 12/31/02 11,171
2,253 Rheox, Inc., Term Loan -- Chemical additives manufacturer................ 12/31/97 2,218
7,000 Texas Petrochemicals, Term Loan -- Processor of petrochemicals........... 06/30/04 7,024
12,507 Thoro System Products, Inc., Term Loan -- Manufacturer of chemicals for
construction industry.................................................... 12/20/02 12,414
----------
111,025
----------
ELECTRIC/ELECTRONICS 1.0%
34,125 Berg Electronics, Inc., Term Loan -- Manufacturer of electronic
connectors............................................................... 12/31/02 34,196
1,950 Exide Electronics Group, Inc., Term Loan -- Manufacturer of
uninterruptible power supply products.................................... 03/13/01 1,958
3,120 Exide Electronics Group, Inc., Revolving Credit.......................... 03/13/01 3,141
8,358 Rowe International, Inc., Term Loan -- Manufacturer of jukeboxes and
electronic equipment..................................................... 12/31/96 7,940
----------
47,235
----------
ENTERTAINMENT/LEISURE 4.1%
3,452 DW Investment, Inc., Term Loan -- Communications and entertainment
conglomerate............................................................. 08/09/00 3,459
6,643 Fairways Group, L.P., Term Loan -- Multiple golf course owner/operator... 04/30/02 6,735
6,000 H.E.C. Investments, Inc., Term Loan -- Fitness club operator............. 12/31/00 6,030
30,000 Marvel Entertainment, Term Loan -- Children's magazine publisher......... 02/28/02 30,069
8,500 Marvel IV Holdings, Revolving Credit -- Comic books, sports cards and
outdoor equipment distributor............................................ 06/03/99 8,741
30,000 Metro-Goldwyn-Mayer, Term Loan -- Movie/television producer.............. 04/15/97 30,101
25,000 Orion Pictures Corp., Term Loan -- Theatrical production................. 06/30/01 25,188
8,000 Panavision International, L.P., Term Loan -- Manufacturer and lessor of
motion picture cameras and lenses........................................ 03/31/04 8,040
26,115 Six Flags Theme Parks, Term Loan -- Theme park operator.................. 06/23/03 26,181
8,333 TW Recreational Service, Term Loan -- Provider of food and services for
state and national parks................................................. 09/30/02 8,394
9,700 The U.S. Playing Card Co., Term Loan -- Manufacturer/distributor of
playing cards............................................................ 09/30/02 9,668
34,901 Viacom, Inc., Term Loan -- Entertainment media/television programming.... 07/01/02 34,977
----------
197,583
----------
FINANCE 0.7%
8,000 American Life Holding Co., Term Loan -- Life insurance company........... 04/15/03 8,012
4,991 Ark Asset Holdings, Inc., Term Loan -- Institutional money manager....... 11/30/01 5,008
12,500 Blackstone Capital Co., Term Loan -- Financial services company.......... 01/13/97 12,500
7,833 Conseco, Inc., Revolving Credit -- Life insurance company................ 04/12/01 7,898
----------
33,418
----------
FOOD/BEVERAGE 6.8%
10,973 American Italian Pasta Co., Term Loan -- Pasta products producer......... 02/28/04 11,030
11,720 Amerifoods, Inc., Term Loan -- Manufacturer of snack foods and bakery
products................................................................. 12/31/97 to 06/30/02 9,999
4,178 Edwards Baking Corp., Term Loan -- Manufacturer of bakery products....... 09/30/00 to 10/31/02 4,200
22,687 Foodbrands America, Term Loan -- Manufacturer of food products........... 01/15/00 to 02/28/03 22,769
473 Foodbrands America, Revolving Credit..................................... 01/15/00 476
4,888 Ghirardelli Holdings Corp., Term Loan -- Manufacturer of chocolate
products................................................................. 03/30/03 4,940
9,979 IM Stadium, Inc., Term Loan -- Sports stadium concessions................ 12/31/02 to 12/31/03 10,049
14,943 Keebler Holding Corp., Term Loan -- Manufacturer and distributor of
cookies and crackers..................................................... 07/31/03 to 07/31/04 14,961
1,995 Mistic Brands, Inc., Revolving Credit -- Producer and marketer of
carbonated and non-carbonated beverages.................................. 09/30/99 2,042
5,625 Mistic Brands, Inc., Term Loan........................................... 09/30/01 5,759
18,905 President Baking Co., Inc., Term Loan -- Bread/bread products
manufacturer............................................................. 12/30/02 18,857
35,000 Rykoff-Sexton, Inc., Term Loan -- Distributor and manufacturer of food
and related non-food products............................................ 10/31/02 to 04/30/03 35,106
46,691 S.C. International Services, Term Loan -- In-flight food services........ 09/30/00 to 09/30/03 46,895
14,165 Select Beverages, Inc., Term Loan -- Independent bottler................. 06/30/01 to 06/30/02 14,238
</TABLE>
See Notes to Financial Statements
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
FOOD/BEVERAGE (CONTINUED)
$ 68,298 Silgan Corp., Term Loan -- Manufacturer of food cans..................... 12/31/00 to 03/15/02 $ 68,314
4,805 Silgan Corp., Revolving Credit........................................... 12/31/00 4,805
25,000 Stroh Brewery Co., Term Loan -- Beer producer and distributor............ 06/30/03 25,135
3,281 Tom's Foods, Inc., Term Loan -- Snack foods producer/distributor (d)..... 12/31/98 1,968
21,000 Van De Kamp's, Inc., Term Loan -- Frozen seafood processor/distributor... 04/30/03 to 09/30/03 21,084
7,673 Windsor Quality Food, Term Loan -- Frozen food processor................. 12/31/01 7,710
----------
330,337
----------
FOOD STORES 6.4%
9,600 Big V Supermarkets, Inc., Term Loan -- Northeastern retail food chain
operator................................................................. 03/15/00 9,596
61,247 Bruno's, Inc., Term Loan -- Southeastern retail food chain operator...... 02/18/03 to 02/18/05 61,570
12,935 Carr-Gottstein Foods, Term Loan -- Alaska based retail food chain
operator................................................................. 12/31/02 12,949
41,985 Dominick's Finer Foods, Inc., Term Loan -- Illinois based retail food
chain operator........................................................... 03/31/02 to 09/30/03 42,240
20,128 Grand Union Co., Term Loan -- New York based retail food chain
operator................................................................. 06/15/02 20,131
7,733 Harvest Foods, Inc., Term Loan -- Mississippi based retail food chain
operator (d) (g)......................................................... 06/30/02 7,051
31,678 Pathmark Stores, Inc., Term Loan -- New Jersey based retail food chain
operator................................................................. 07/31/98 to 10/31/99 31,604
3,294 Ralph's Grocery Co., Revolving Credit -- Los Angeles, California based
retail food chain operator............................................... 06/15/01 3,441
47,786 Ralph's Grocery Co., Term Loan........................................... 06/15/01 to 02/15/04 47,976
70,097 Smith Food & Drug Center, Term Loan -- Food and drug retailer............ 08/31/02 to 11/30/04 70,449
6,684 Star Markets Co., Inc., Term Loan -- New England based retail food chain
operator................................................................. 01/31/02 to 12/31/02 6,695
----------
313,702
----------
FUEL RETAILER 0.1%
3,721 Petro PSC Properties, L.P., Term Loan -- Multi-service truck-stop
operator................................................................. 05/18/01 3,721
3,048 Truckstops of America, Inc., Term Loan -- Interstate fueling stations
operator................................................................. 12/10/00 3,014
----------
6,735
----------
HEALTHCARE 3.3%
60,000 Community Health Systems, Inc., Term Loan -- Provider of healthcare
services................................................................. 12/31/03 to 12/31/05 60,290
57,265 Dade International, Inc., Term Loan -- Medical equipment
manufacturer/marketer.................................................... 12/31/01 to 12/31/04 57,543
168 Dade International, Inc., Revolving Credit............................... 12/31/01 184
15,923 Graphic Controls Corp., Term Loan -- Manufacturer of medical equipment... 09/28/03 15,970
7,542 Integrated Health Services, Inc., Revolving Credit -- Provider of
post-acute healthcare services........................................... 06/30/02 7,746
18,500 Merit Behavioral Corp., Term Loan -- Psychiatric hospital operator....... 10/06/03 18,565
----------
160,298
----------
MANUFACTURING 11.6%
12,406 Calmar, Inc., Term Loan -- Manufacturer of dispensing and spray
products................................................................. 09/15/03 to 03/15/04 12,443
21,400 Cambridge Industries, Inc., Term Loan -- Manufacturer of plastic
components for autos..................................................... 05/17/02 to 05/17/04 21,577
9,979 CBP Resources, Inc., Term Loan -- Manufacturer of animal feed
ingredients.............................................................. 09/30/03 10,035
18,759 Collins & Aikman Products Co., Term Loan -- Manufacturer of auto
interiors, home interiors and wallpapers................................. 12/31/02 18,756
9,697 Dal-Tile Group, Inc., Revolving Credit -- Ceramic tile and floor covering
manufacturer/retailer.................................................... 01/09/98 9,697
21,978 Desa International, Inc., Term Loan -- Diversified manufacturer of
heaters, fireplaces, and specialty tools................................. 02/28/03 22,144
9,321 Ebel USA, Inc., Term Loan -- Manufacturer of luxury time pieces.......... 09/30/01 9,330
6,038 Essex Group, Inc., Term Loan -- Manufacturer of electrical wire and
cable.................................................................... 04/30/00 6,048
8,936 Fiberite, Inc., Term Loan -- Manufacturer of composite fibers............ 12/31/01 8,977
43,588 Furniture Brands International, Inc., Term Loan -- Manufacturer and
marketer of furniture.................................................... 12/29/01 to 03/29/04 43,702
7,821 The Hawk Group of Companies, Inc., Term Loan -- Manufacturer of powdered
metals and friction materials............................................ 06/30/02 7,857
11,042 Health O Meter, Inc., Term Loan -- Manufacturer of small appliances...... 08/15/01 10,982
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MANUFACTURING (CONTINUED)
$ 10,000 Hedstrom Corp., Term Loan -- Manufacturer of children's outdoor toys..... 04/27/01 $ 10,039
36,486 Hayes Wheels International, Inc., Term Loan -- Designer and manufacturer
of car and truck wheels.................................................. 07/31/02 to 07/31/04 36,606
239 Hayes Wheels International, Inc., Revolving Credit....................... 07/31/04 239
9,444 Hunt Manufacturing Co., Term Loan -- Manufacturer and distributor of
office and art supplies.................................................. 12/31/00 9,450
9,941 Intermetro Industries Corp., Term Loan -- Manufacturer of metal/polymer
storage products......................................................... 06/30/01 to 12/31/02 9,891
36,124 International Wire Group, Term Loan -- Manufacturer of auto, appliance
and
communication wires...................................................... 09/30/02 to 09/30/03 36,242
10,072 IPC, Inc., Term Loan -- Manufacturer of packaging materials.............. 09/30/01 10,101
29,501 Johnstown America, Term Loan -- Manufacturer of railcars................. 03/31/03 29,597
29,878 K-Tec Holdings, Inc., Term Loan -- Manufacturer of telecommunications
equipment................................................................ 02/01/03 to 02/01/04 29,961
19,463 Lear Seating Corp., Revolving Credit -- Manufacturer of automobile and
truck seat systems....................................................... 09/30/01 19,449
8,982 Merkle-Korff Industries, Term Loan -- Manufacturer of electrical
motors................................................................... 09/22/01 to 06/15/03 9,048
53 Merkle-Korff Industries, Revolving Credit................................ 09/22/01 61
15,772 M.W. Manufacturers, Term Loan -- Conglomerate............................ 09/15/02 15,871
11,709 National-Oilwell, L.P., Term Loan -- Oil equipment manufacturer.......... 12/31/01 11,760
11,967 Numatics, Inc., Term Loan -- Manufacturer of pneumatic fluid power
equipment................................................................ 12/31/03 12,059
8,000 Personal Care Holdings, Term Loan -- Manufacturer and marketer of
consumer products........................................................ 04/03/03 8,074
5,000 Precise Technology, Term Loan -- Custom injection molding company........ 03/31/03 5,052
10,000 RBX Corp., Term Loan -- Manufacturer of rubber products.................. 12/31/03 10,025
9,694 RTI Funding Corp., Term Loan -- Manufacturer of building blocks for
children................................................................. 02/08/03 to 02/03/04 9,766
1,111 Samsonite Corp., Term Loan -- Manufacturer of luggage.................... 07/14/00 1,111
556 Samsonite Corp., Revolving Credit........................................ 07/14/00 556
7,000 Simmons Co., Term Loan -- Manufacturer and distributor of bedding........ 03/31/03 7,028
16,204 Spalding & Evenflo Cos., Inc., Term Loan -- Manufacturer of sporting
goods.................................................................... 10/31/00 to 10/14/02 16,264
6,700 Sportcraft, Ltd., Term Loan -- Supplier of branded sporting goods........ 12/31/02 6,764
10,559 Stanadyne Automotive, Term Loan -- Manufacturer of diesel injection
devices and engine parts................................................. 12/31/01 10,589
18,400 Thompson Minwax Co., Term Loan -- Manufacturer of wood stains and
finishing products....................................................... 12/31/02 18,433
15,621 T.K.G. Acquisition, Term Loan -- Office furniture manufacturer........... 02/28/02 to 08/31/03 15,684
27,000 UCAR International, Inc., Term Loan -- Manufacturer of graphite/carbide
electrodes............................................................... 12/31/02 27,050
7,910 U.F. Acquisition, Term Loan -- Provider of fixtures and storage for
retail stores............................................................ 12/15/02 8,013
----------
566,331
----------
PAPER 7.1%
4,963 Crown Paper Co./Crown Vantage, Inc., Term Loan -- Producer of value-added
paper products........................................................... 08/22/03 4,962
4,750 CST Office Products, Inc., Term Loan -- Manufacturer and distributor of
stock computer forms..................................................... 03/31/01 4,815
66,278 Fort Howard Corp., Term Loan -- Paper manufacturer....................... 03/31/02 to 12/31/02 66,621
113,319 Jefferson Smurfit Corp., Term Loan -- Corrugated paper products
manufacturer............................................................. 04/30/01 to 10/31/02 113,463
10,112 Mail-Well Corp., Term Loan -- Manufacturer of envelopes and graphic
printers................................................................. 07/31/98 to 07/31/03 10,176
1,042 Mail-Well SPX, Term Loan -- Manufacturer of envelopes and graphic
printers................................................................. 07/31/03 1,047
2,609 Mail-Well SPX, Revolving Credit.......................................... 07/31/03 2,624
29,787 S.D. Warren Co., Term Loan -- Coated-free paper manufacturer............. 04/26/04 29,850
92,145 Stone Container Corp., Term Loan -- Paper products manufacturer.......... 04/01/00 to 10/01/03 92,212
18,064 United Stationers Supply Co., Term Loan -- Distributor of office
products................................................................. 03/31/02 18,129
----------
343,899
----------
PERSONAL/NON-DURABLE 3.1%
44,640 Mary Kay Cosmetics, Term Loan -- Direct cosmetic sales................... 12/06/02 44,714
37,935 Playtex Products, Inc., Term Loan -- Manufacturer of beauty aid and
hygiene products......................................................... 06/30/02 38,017
55,000 Revlon Consumer Products Corp., Term Loan -- Manufacturer of cosmetics... 12/31/00 55,430
11,000 Treasure Chest Advertising Co., Inc., Term Loan -- Advertising and
information services..................................................... 12/31/01 11,000
----------
149,161
----------
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
PRINTING 2.0%
$ 16,500 Advanstar Holdings, Inc., Term Loan -- Trade magazine publisher and trade
show exhibitor........................................................... 12/21/03 $ 16,594
47,889 American Media Operations, Inc., Term Loan -- Magazine/newspaper
publisher................................................................ 09/30/01 to 09/30/02 47,840
28,350 Journal News, Inc., Term Loan -- Multiple newspaper printer.............. 12/31/01 28,411
7,097 Polyfibron Technologies, Inc., Term Loan -- Textile manufacturer......... 12/31/01 7,131
----------
99,976
----------
RADIO AND TELEVISION BROADCASTING 8.2%
9,100 Benedek Broadcasting Corp., Term Loan -- Television station
owner/operator........................................................... 05/01/01 to 11/01/02 9,131
11,629 Chancellor Corp., Term Loan -- Radio station owner/operator.............. 09/01/02 to 09/01/03 11,720
356 Chancellor Corp., Revolving Credit....................................... 09/01/02 370
44,000 E.H. & F., Inc., Term Loan -- Outdoor media.............................. 06/30/02 to 12/21/03 44,198
32,859 Ellis Communications, Inc., Term Loan -- Southeastern U.S. television
station owner/operator................................................... 03/31/02 to 03/31/03 32,929
4,800 Evergreen Media Corp., Term Loan -- Radio station owner/operator......... 12/31/02 4,802
12,544 Evergreen Media Corp., Revolving Credit.................................. 12/31/02 12,551
1,500 Granite Broadcasting Corp., Revolving Credit -- Midwestern television
station owner/operator................................................... 12/31/01 1,510
14,000 Heftel Broadcasting Corp., Term Loan -- Spanish language radio
broadcasting............................................................. 09/30/02 14,113
15,000 NWC Acquisition Corp., Term Loan -- Television production and
broadcasting............................................................. 09/30/01 15,023
15,000 Patterson Broadcasting, Term Loan -- Radio station operator.............. 06/30/04 15,107
10,800 River City Broadcasting, L.P., Term Loan -- Midwestern radio station
owner/operator........................................................... 12/31/99 10,853
13,145 Shared Technologies, Term Loan -- Provider of telecommunications
services................................................................. 03/30/01 to 03/31/03 13,211
667 Shared Technologies, Revolving Credit.................................... 03/30/01 677
53,750 Sinclair Broadcasting Group, Inc., Term Loan -- Television and radio
station owner/operator................................................... 12/31/02 to 11/30/03 53,863
2,763 Sinclair Broadcasting Group, Inc., Revolving Credit...................... 11/30/03 2,770
13,345 SKTV, Inc., Term Loan -- Television station owner/operator............... 07/31/02 13,260
7,133 Smith Television, Term Loan -- Television station owner/operator......... 12/31/02 7,185
23,320 Sullivan Broadcasting, Term Loan -- Television station owner/operator.... 12/31/03 23,405
1,680 Sullivan Broadcasting, Revolving Credit.................................. 12/31/03 1,685
111,795 Westinghouse Electric, Term Loan -- Radio and television broadcaster..... 11/24/02 112,046
----------
400,409
----------
RESTAURANTS 0.3%
8,952 America's Favorite Chicken Co., Term Loan -- Church's and Popeye's Fried
Chicken restaurants...................................................... 10/31/01 8,951
1,085 Carvel Corp., Term Loan -- Soft ice cream products franchiser............ 12/31/98 1,084
6,394 Long John Silver's Restaurants, Inc., Term Loan -- Retail seafood
restaurant owner/operator................................................ 09/30/97 6,394
----------
16,429
----------
RETAIL 7.0%
175 American Blind and Wallpaper Factory, Inc., Term Loan -- Wallcover
distributor.............................................................. 10/31/96 173
32,500 Camelot Music, Inc., Term Loan -- Retail distributor of music and video
cassettes (f)............................................................ 02/28/02 24,375
17,525 Color Tile, Inc., Term Loan -- National retailer of floor and wall
covering products (d) (g)................................................ 12/31/98 12,271
780 Color Tile Holdings, Inc., Revolving Credit -- National retailer of floor
and wall covering products (g)........................................... 12/31/96 763
8,400 Eckerd Corp., Term Loan -- Retail drug store............................. 11/29/00 8,403
20,366 Federated Department Stores, Inc., Term Loan -- National department store
chain.................................................................... 03/31/00 20,610
4,782 Federated Department Stores, Inc., Revolving Credit...................... 03/31/00 5,022
3,000 Kirklands Holdings, Term Loan -- Retailer of decorative home accessories
and gift items........................................................... 06/30/02 3,022
50,000 Kmart Corp., Term Loan -- International mass merchandise retailer........ 06/17/99 50,704
5,368 Luxottica U.S. Holdings, Revolving Credit -- Manufacturer/distributor of
eyeglasses............................................................... 06/30/01 5,380
15,311 Luxottica U.S. Holdings, Term Loan....................................... 06/30/01 15,323
7,470 Nebraska Book Co., Term Loan -- Used book distributor.................... 10/31/03 7,512
6,455 Nine West Group, Inc., Term Loan -- Shoe designer and retailer........... 10/01/01 6,455
38,857 Payless Cashways, Inc., Term Loan -- Building products retailer.......... 11/18/00 38,922
10,939 Peebles, Inc., Term Loan -- Mid-Atlantic retailer........................ 06/09/02 11,206
19,792 QVC Programming, Term Loan -- Home shopping television network........... 02/15/02 19,853
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
RETAIL (CONTINUED)
$ 31,495 Saks & Co., Term Loan -- Retail fashions and accessories................. 06/30/00 $ 31,674
2,191 Service Merchandise, Revolving Credit -- Catalog retailer................ 06/08/99 2,279
16,875 Thrifty Payless, Inc., Term Loan -- Retail drug store.................... 10/19/02 17,026
26,393 Thrifty Payless, Inc., Revolving Credit.................................. 10/19/02 26,848
31,429 TJX Companies, Inc., Term Loan -- Specialty apparel retailer............. 11/17/00 31,827
----------
339,648
----------
TEXTILES 2.1%
11,443 American Marketing Industries, Inc., Term Loan -- Textile manufacturer... 11/30/02 11,538
8,645 Hosiery Corp. of America, Term Loan -- Manufacturer/direct mail marketer
of women's hosiery....................................................... 07/31/01 8,526
11,578 Ithaca Industries, Inc., Term Loan -- Undergarment and hosiery
manufacturer............................................................. 10/31/98 11,401
842 Ithaca Industries, Inc., Revolving Credit................................ 10/31/98 924
14,652 Johnston Industries, Term Loan -- Diversified manufacturer of home
furnishings and textiles................................................. 03/28/03 14,782
3,083 London Fog Industries, Revolving Credit -- Manufacturer of rainwear and
outerwear................................................................ 03/31/97 3,150
31,466 London Fog Industries, Inc., Term Loan................................... 05/31/02 29,866
20,000 Polymer Group, Inc., Term Loan -- Manufacturer of polyolefin products.... 03/31/02 20,050
----------
100,237
----------
TRANSPORTATION 0.2%
12,500 Northwest Airlines, Inc., Term Loan -- Minnesota-based cargo and
passenger airliner....................................................... 12/15/99 12,548
----------
WIRELESS COMMUNICATIONS 3.8%
16,750 Arch Communications Group, Inc., Term Loan -- Wireless communications
operator................................................................. 12/31/02 to 12/31/03 16,799
1,163 Arch Communications Group, Inc., Revolving Credit........................ 12/31/02 1,163
5,000 Clarity Telecom, Inc., Term Loan -- Seller and servicer of telephone
systems and software..................................................... 11/30/02 5,036
8,125 Comcast Cellular Communications, Revolving Credit -- Cellular systems
operator................................................................. 09/30/03 8,124
17,739 Comcast Cellular Communications, Term Loan............................... 09/30/04 17,942
6,585 Intesys Technologies, Inc., Term Loan -- Equipment manufacturer for
telecommunications/autos................................................. 12/31/01 6,614
39,000 Mobilemedia Communications, Term Loan -- Nationwide paging operator...... 06/30/02 to 06/30/03 38,999
11,050 Skytel Corp., Revolving Credit -- Paging and personal communications
services operator........................................................ 12/31/01 11,153
39,257 Smart SMR of California, Inc., Term Loan -- Cellular telephone systems
operator................................................................. 03/15/01 39,257
40,000 Western Wireless Corp., Term Loan -- Cellular and personal communications
services operator........................................................ 03/31/05 40,064
----------
185,151
----------
OTHER 4.5%
24,000 Advo, Inc., Term Loan -- Direct mail marketer............................ 03/31/04 24,094
25,000 Amax Gold, Inc., Term Loan -- Gold and silver mining and processing...... 12/31/01 25,199
58,141 AMF Group, Inc., Term Loan -- Integrated bowling equipment
manufacturer............................................................. 03/31/01 to 03/31/04 58,198
267 AMF Group, Inc., Revolving Credit........................................ 03/31/01 267
6,913 Bankers Systems, Inc., Term Loan -- Compliance services supplier......... 11/02/02 6,916
35,712 Borg-Warner Security Corp., Term Loan -- Protection services............. 12/31/98 36,192
9,768 Fairmont Minerals, Ltd., Term Loan -- Silica pond and gravel supplier.... 03/31/03 9,840
10,000 HG Holdings, Inc., Term Loan -- Information processor.................... 06/30/01 10,065
5,840 Iron Mountain Information Services Inc., Term Loan -- Records management
and storage.............................................................. 06/28/02 5,840
11,350 Loewen Group, Inc., Revolving Credit -- Funeral home and cemetery
owner/operator........................................................... 05/29/01 11,546
20,000 Primark Corp., Term Loan -- Information services provider................ 06/30/02 20,020
9,000 USS Acquisition, Inc., Term Loan -- Producer of industrial silica........ 12/31/03 9,096
----------
217,273
----------
TOTAL VARIABLE RATE ** SENIOR LOAN INTERESTS 89.5%...................... 4,357,645
----------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Borrower (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
EQUITIES 0.5%
America's Favorite Chicken Co. (604,251 common shares) (b)(c)................................. $ 2,004
America's Favorite Chicken Co. ($3,486,400 par amount of preferred stock, 10.0% coupon,
maturity 08/11/04, convertible to 10.0% cash pay subordinated debt) (b)(e).................... 3,593
Best Products Co., Inc. (297,480 common shares) (c)........................................... 372
Best Products Co., Inc. (Warrants for 28,080 common shares) (c)............................... 0
Braelan Corp. Class A (10,975 common shares) (b)(c)........................................... 1,967
Classic Cable, Inc. (Warrants for 760 common shares) (c)...................................... 0
Core-Mark International, L.L.C. (Class B ownership interest) (b).............................. 4,368
Flagstar Cos., Inc. (8,755 common shares) (c)................................................. 23
London Fog Industries, Inc. (10,833,012 common shares) (b)(c)................................. 0
London Fog Industries, Inc., ($17,687,936 par amount of preferred stock, 17.5% coupon,
maturity 05/31/02) (b)(e)..................................................................... 12,503
Nextel Communications, Inc. (Warrants for 60,000 common shares) (b)(c)........................ 8
----------
TOTAL EQUITIES................................................................................ 24,838
----------
TOTAL LONG-TERM INVESTMENTS 90.0%
(Cost $4,388,796)(a)........................................................................ 4,382,483
----------
SHORT-TERM INVESTMENTS AT AMORTIZED COST
COMMERCIAL PAPER 2.2%
Amoco Corp. ($20,000,000 par, maturing 08/05/96, yielding 5.33%).............................. 19,988
AT&T Corp. ($20,000,000 par, maturing 08/01/96, yielding 5.33%)............................... 20,000
Cargill Financial Services Corp. ($20,000,000 par, maturing 08/05/96, yielding 5.36%)......... 19,988
Illinois Central Railroad Co. ($13,050,000 par, maturing 08/16/96, yielding 5.53% to 5.54%)... 13,020
International Paper Co. ($20,000,000 par, maturing 08/07/96, yielding 5.34%).................. 19,982
Nabisco Inc. ($14,000,000 par, maturing 08/01/96 to 08/20/96, yielding 5.46% to 5.70%)........ 13,977
----------
TOTAL COMMERCIAL PAPER........................................................................ 106,955
----------
SHORT-TERM LOAN PARTICIPATIONS 7.4%
Anadarko Petroleum Corp. ($20,000,000 par, maturing 08/06/96 to 08/07/96, yielding 5.43% to
5.56%)........................................................................................ 20,000
Army & Air Force Exchange Services ($17,000,000 par, maturing 08/13/96, yielding 5.41%)....... 17,000
Ashland Oil Co. ($20,000,000 par, maturing 08/01/96 to 08/07/96, yielding 5.43% to 5.68%)..... 20,000
Baxter International, Inc. ($20,000,000 par, maturing 08/26/96, yielding 5.55%)............... 20,000
Bell Atlantic Financial Services ($20,000,000 par, maturing 08/01/96, yielding 5.44%)......... 20,000
Bell Atlantic Network Funding ($8,900,000 par, maturing 08/05/96, yielding 5.33%)............. 8,900
Cabot Corp. ($10,000,000 par, maturing 08/01/96, yielding 5.43%).............................. 10,000
Centex Corp. ($20,000,000 par, maturing 08/08/96, yielding 5.50%)............................. 20,000
Conagra Inc. ($20,000,000 par, maturing 08/30/96, yielding 5.50%)............................. 20,000
Echlin, Inc. ($7,000,000 par, maturing 08/02/96, yielding 5.32%).............................. 7,000
Englehard Corp. ($20,000,000 par, maturing 08/02/96, yielding 5.40%).......................... 20,000
Enron Corp. ($20,000,000 par, maturing 08/05/96, yielding 5.47%).............................. 20,000
Gillette Co. ($10,650,000 par, maturing 08/01/96, yielding 5.63%)............................. 10,650
Hertz Corp. ($10,000,000 par, maturing 08/02/96, yielding 5.41%).............................. 10,000
Nabisco Inc. ($6,000,000 par, maturing 08/01/96, yielding 5.80%).............................. 6,000
Olin Corp. ($20,000,000 par, maturing 08/01/96, yielding 5.75%)............................... 20,000
Pacific Telecom Inc. ($10,000,000 par, maturing 08/16/96, yielding 5.51%)..................... 10,000
Pacificorp ($12,000,000 par, maturing 08/12/96, yielding 5.59%)............................... 12,000
Ralston Purina Co. ($20,000,000 par, maturing 08/09/96, yielding 5.55%)....................... 20,000
Tandy Corp. ($6,350,000 par, maturing 08/20/96, yielding 5.47%)............................... 6,350
Temple Inland Inc. ($11,000,000 par, maturing 08/01/96, yielding 5.45%)....................... 11,000
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Borrower (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM LOAN PARTICIPATIONS (CONTINUED)
Tyson Foods ($20,000,000 par, maturing 08/08/96, yielding 5.44% to 5.45%)..................... $ 20,000
USAA Capital Corp. ($10,000,000 par, maturing 08/01/96, yielding 5.40%)....................... 10,000
Western Resources Inc. ($20,000,000 par, maturing 08/06/96 to 08/19/96, yielding 5.50%)....... 20,000
----------
TOTAL SHORT-TERM LOAN PARTICIPATIONS.......................................................... 358,900
----------
TOTAL SHORT-TERM INVESTMENTS AT AMORTIZED COST 9.6%.......................................... 465,855
----------
OTHER ASSETS IN EXCESS OF LIABILITIES 0.4%................................................... 17,446
----------
NET ASSETS 100.0%............................................................................ $4,865,784
==========
</TABLE>
(a) At July 31, 1996, cost for federal income tax purposes is $4,392,208,484;
the aggregate gross unrealized appreciation is $24,440,164, and the
aggregate gross unrealized depreciation is $34,165,402, resulting in net
unrealized depreciation of $9,725,238.
(b) Restricted security.
(c) Non-income producing security, as this stock currently does not declare
dividends.
(d) This Senior Loan Interest is non-income producing.
(e) Payment-in-kind security.
(f) In August, 1996, this Borrower filed for protection in federal bankruptcy
court and as a result has become a non-income producing Senior Loan
interest.
(g) This Borrower has filed for protection in federal bankruptcy court.
* 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
13
<PAGE> 15
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1996
All amounts, except for Net Asset Value information, reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $4,388,796) (Note 1)........................ $4,382,483
Short-Term Investments (Note 1)................................................ 465,855
Receivables:
Interest and Fees............................................................ 34,523
Fund Shares Sold............................................................. 16,612
Investments Sold............................................................. 44
Other.......................................................................... 53
----------
Total Assets............................................................... 4,899,570
----------
LIABILITIES:
Deferred Facility Fees......................................................... 20,716
Payables:
Income Distributions......................................................... 5,672
Investment Advisory Fee (Note 2)............................................. 3,862
Administrative Fee (Note 2).................................................. 1,026
Custodian Bank............................................................... 557
Distributor and Affiliates (Note 2).......................................... 353
Accrued Expenses............................................................... 1,555
Deferred Compensation and Retirement Plans (Note 2)............................ 45
----------
Total Liabilities.......................................................... 33,786
----------
NET ASSETS..................................................................... $4,865,784
==========
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of shares authorized,
486,490,317 shares issued and outstanding) (Note 3).......................... $ 4,865
Paid in Surplus (Note 3)....................................................... 4,872,393
Accumulated Undistributed Net Investment Income................................ 2,875
Net Unrealized Depreciation on Investments..................................... (6,313)
Accumulated Net Realized Loss on Investments................................... (8,036)
----------
NET ASSETS..................................................................... $4,865,784
==========
NET ASSET VALUE PER COMMON SHARE
($4,865,784,178 divided by 486,490,317 shares outstanding)................... $ 10.00
==========
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
STATEMENT OF OPERATIONS
For the Year Ended July 31, 1996
All amounts reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest...................................................................... $311,378
Fees.......................................................................... 24,771
Other......................................................................... 1,992
--------
Total Income.............................................................. 338,141
--------
EXPENSES:
Investment Advisory Fee (Note 2).............................................. 36,408
Administrative Fee (Note 2)................................................... 9,615
Shareholder Services (Note 2)................................................. 4,708
Legal (Note 2)................................................................ 1,281
Trustee Fees and Expenses (Note 2)............................................ 35
Other......................................................................... 4,125
--------
Total Expenses............................................................ 56,172
--------
NET INVESTMENT INCOME......................................................... $281,969
========
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Net Realized Gain on Investments.............................................. $ 542
--------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period..................................................... 8,637
End of the Period........................................................... (6,313)
--------
Net Unrealized Depreciation on Investments During the Period.................. (14,950)
--------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS............................... $(14,408)
========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................................... $267,561
========
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended July 31, 1996 and 1995
All amounts reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1996 July 31, 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income................................................ $ 281,969 $ 137,069
Net Realized Gain/Loss on Investments................................ 542 (5,468)
Net Unrealized Appreciation/Depreciation on Investments
During the Period.................................................. (14,950) 2,107
----------- -----------
Change in Net Assets from Operations................................. 267,561 133,708
Distributions from Net Investment Income............................. (283,580) (133,994)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.................. (16,019) (286)
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTES 3 AND 5):
Proceeds from Common Shares Sold..................................... 2,551,158 1,349,284
Value of Shares Issued Through Dividend Reinvestment................. 155,100 74,961
Cost of Shares Repurchased........................................... (354,520) (122,898)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS................... 2,351,738 1,301,347
----------- -----------
TOTAL INCREASE IN NET ASSETS......................................... 2,335,719 1,301,061
NET ASSETS:
Beginning of the Period.............................................. 2,530,065 1,229,004
----------- -----------
End of the Period (Including undistributed net investment income
of $2,875 and $6,627, respectively)................................ $ 4,865,784 $ 2,530,065
=========== ===========
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
STATEMENT OF CASH FLOWS
For the Year Ended July 31, 1996
All amounts reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS.......................................... $ 267,561
-----------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Provided by Operating Activities:
Increase in Investments at Value............................................ (2,382,924)
Increase in Interest and Fees Receivables................................... (18,282)
Increase in Other Assets.................................................... (53)
Increase in Receivable for Investments Sold................................. (44)
Decrease in Short-Term Investments at Amortized Cost........................ 29,860
Increase in Deferred Facility Fees.......................................... 3,711
Increase in Investment Advisory and Administrative Fees Payable............. 2,411
Increase in Accrued Expenses................................................ 469
Increase in Distributor and Affiliates Payable.............................. 251
Increase in Deferred Compensation and Retirement Plans Expenses............. 26
-----------
Total Adjustments......................................................... (2,364,575)
-----------
NET CASH USED FOR OPERATING ACTIVITIES........................................ (2,097,014)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES (NOTES 3 AND 5):
Proceeds from Shares Sold..................................................... 2,566,669
Payments on Shares Repurchased................................................ (354,528)
Increase in Intra-day Credit Line............................................. 557
Cash Dividends Paid........................................................... (126,019)
-----------
Net Cash Provided by Financing Activities................................... 2,086,679
-----------
NET DECREASE IN CASH.......................................................... (10,335)
Cash at Beginning of the Period............................................... 10,335
-----------
CASH AT END OF THE PERIOD..................................................... $ -0-
===========
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share
of the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended July 31
--------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period......................... $ 10.046 $ 10.052 $ 10.004 $ 9.998 $ 9.985
-------- -------- -------- -------- --------
Net Investment Income.......................................... .735 .756 .618 .600 .698
Net Realized and Unrealized Gain/Loss on Investments........... (.028) (.004) .015 .008 .004
-------- -------- -------- -------- --------
Total from Investment Operations................................. .707 .752 .633 .608 .702
-------- -------- -------- -------- --------
Less:
Distributions from Net Investment Income....................... .751 .758 .585 .600 .689
Distributions in Excess of Net Investment Income (Note 1)...... -0- -0- -0- .002 -0-
-------- -------- -------- -------- --------
Total Distributions.............................................. .751 .758 .585 .602 .689
-------- -------- -------- -------- --------
Net Asset Value, End of the Period............................... $ 10.002 $ 10.046 $ 10.052 $ 10.004 $ 9.998
======== ======== ======== ======== ========
Total Return (a)................................................. 7.22% 7.82% 6.52% 6.17% 7.25%
Net Assets at End of the Period (In millions).................... $4,865.8 $2,530.1 $1,229.0 $ 966.7 $ 928.3
Ratio of Expenses to Average Net Assets.......................... 1.46% 1.49% 1.53% 1.53% 1.55%
Ratio of Net Investment Income to Average Net Assets............. 7.33% 7.71% 6.16% 5.96% 6.98%
Portfolio Turnover (b)........................................... 66% 71% 74% 67% 59%
</TABLE>
(a) Total return is based upon net asset value which does not include payment of
the contingent deferred sales charge.
(b) Calculation includes the proceeds from repayments and sales of variable rate
senior loan interests.
See Notes to Financial Statements
18
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
July 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital 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's investment objective is
to provide a high level of current income, consistent with preservation of
capital. The Trust seeks to achieve its objective by investing primarily in a
portfolio of interests in floating or variable rate senior loans to United
States corporations, partnerships and other entities. 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. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A. SECURITY VALUATION--The value of the Trust's Variable Rate Senior Loan
interests, totaling $4,357,645,025 (89.5% of net assets) is determined in the
absence of actual market values 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.
Because of uncertainly 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 market activity for that Variable Rate
Senior Loan interest. Equity 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.
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 premiums and discounts are amortized over the stated life of each
applicable security.
19
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
D. FEDERAL INCOME TAXES--It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The Trust intends to utilize provisions of the federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At July 31, 1996, the Trust had an accumulated capital
loss carryforward for tax purposes of $4,507,275, which will expire on July 31,
2004. 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.
E. 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 relating to the recognition of
expenses totaling $26,779 have been reclassified from paid in surplus to
undistributed net investment income. Additionally, $2,168,429, representing
permanent differences related to the recognition of income on certain
investments between book and tax reporting purposes was reclassified from
undistributed net investment income to accumulated net realized gain on
investments.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ------------------------------------------------------------------------------
<S> <C>
First $4.0 billion............................................. .950 of 1%
Next $3.5 billion.............................................. .900 of 1%
Next $2.5 billion.............................................. .875 of 1%
Over $10.0 billion............................................. .850 of 1%
</TABLE>
In addition, the Trust will pay a monthly administrative fee to Van
Kampen American Capital Distributors, Inc., 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, 1996, the Trust recognized expenses of
approximately $38,800 representing the Administrator's or its affiliates'
(collectively "VKAC") cost of providing legal services to the Trust.
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Trust. For the year ended July
31, 1996, the Fund recognized expenses of approximately $3,848,300, representing
ACCESS' cost of providing transfer agency and shareholder services plus a
profit.
Certain officers and trustees of the Trust are also officers and
directors of VKAC. The Fund 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 July 31, 1996 and 1995, paid in surplus aggregated $4,872,393,497 and
$2,523,028,402, respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares.................................... 251,848,949 122,267,677
------------ ------------
Shares Sold......................................... 254,577,948 134,357,255
Shares Issued Through Dividend Reinvestment......... 15,483,081 7,465,118
Shares Repurchased.................................. (35,419,661) (12,241,101)
------------ ------------
Net Increase in Shares Outstanding.................. 234,641,368 129,581,272
------------ ------------
Ending Shares....................................... 486,490,317 251,848,949
============ ============
</TABLE>
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, for the year ended July 31, 1996, were
$4,564,819,045 and $2,168,339,118, 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, 1996, 35,419,661 shares were tendered and repurchased by the
Trust.
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
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>
For the year ended July 31, 1996, VKAC received early withdrawal charges
of approximately $5,721,300 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 $472,375,400 as of July
31, 1996. The Trust generally will maintain with its custodian short-term
investments having an aggregate value at least equal to the amount of unfunded
loan commitments.
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 an aggregate of $150,000,000. The proceeds of any borrowing by
the Trust under the revolving credit agreements may only be used, directly or
indirectly, for liquidity purposes in connection with the consummation of a
tender offer by the Trust for its shares. Annual commitment fees under each
facility of 1/10 of 1% are 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.
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
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, 1996, 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 VALUE
SELLING PARTICIPANT (000) (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
Bankers Trust......................................... $213,651 $214,095
Pearl Street L.P...................................... 51,632 52,040
NationsBank........................................... 33,002 33,072
Canadian Imperial Bank of Commerce.................... 29,883 29,923
Merrill Lynch Capital Corp............................ 22,273 22,431
Mellon Bank........................................... 20,000 20,020
Chase Securities Inc.................................. 18,007 18,000
Natwest USA........................................... 9,697 9,697
G. E. Capital Corp.................................... 7,467 7,499
ABN AMRO.............................................. 5,000 5,041
Citibank.............................................. 4,182 4,182
FNB Canada............................................ 3,281 1,968
-------- --------
Total................................................. $418,075 $417,968
======== ========
</TABLE>
23
<PAGE> 25
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Trustees and Shareholders of
Van Kampen American Capital Prime Rate Income Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Prime Rate Income Trust (the "Trust"), including the
portfolio of investments, as of July 31, 1996, and the related statements of
operations and cash flows for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities and variable rate
senior loan interests owned as of July 31, 1996, 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 American Capital Prime Rate Income Trust as of July 31, 1996, 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.
KPMG Peat Marwick LLP
Chicago, Illinois
September 18, 1996
24
<PAGE> 26
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*--Chairman
THEODORE A. MYERS
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
WILLIAM N. BROWN*
PETER W. HEGEL*
JEFFREY W. MAILLET*
Vice Presidents
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
SHAREHOLDER SERVICING 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 ACCOUNTANTS
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., 1996
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
25