VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST, 497, 1996-11-18

VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
497, 1996-11-18

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VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
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Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a non-
diversified, closed-end management investment company. The Fund's investment
objective is to provide a high level of current income, consistent with
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in a professionally managed portfolio of interests in floating or
variable rate senior loans ("Senior Loans") to United States corporations,
partnerships and other entities ("Borrowers") which operate in a variety of
industries and geographical regions. Although the Fund's net asset value will
vary, the Fund's policy of acquiring interests in floating or variable rate
Senior Loans is expected to minimize fluctuations in the Fund's net asset value
as a result of changes in interest rates. The Fund's net asset value may be
affected by changes in the credit quality of Borrowers with respect to Senior
Loan interests in which the Fund invests. The Fund's investment adviser is Van
Kampen American Capital Investment Advisory Corp. (the "Adviser"). An investment
in the Fund may not be appropriate for all investors and there is no assurance
that the Fund will achieve its investment objective. SEE "INVESTMENT OBJECTIVE
AND POLICIES AND SPECIAL RISK CONSIDERATIONS."

The Board of Trustees of the Fund currently intends, each quarter, to
consider authorizing the Fund to make tender offers for all or a portion of its
outstanding common shares of beneficial interest ("Common Shares") at the then
current net asset value of the Common Shares. An early withdrawal charge payable
to Van Kampen American Capital Distributors, Inc. ("VKAC") will be imposed on
most Common Shares held for less than five years that are accepted for
repurchase pursuant to a tender offer by the Fund. The
(Continued on next page.)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATOR NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------

COMMON SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. COMMON SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Common Shares of the Fund. Please
read and retain this Prospectus for future reference. A Statement of Additional
Information dated November 13, 1996 has been filed with the Securities and
Exchange Commission and can be obtained without charge by calling 1-800-421-5666
or, for Telecommunications Device for the Deaf, 1-800-772-8889. A table of
contents to the Statement of Additional Information is located at page 50 of
this Prospectus. This Prospectus incorporates by reference the entire Statement
of Additional Information. The Statement of Additional Information has been
filed with the Securities and Exchange Commission ("SEC") and is available along
with other related materials at the SEC's internet web site
(http://www.sec.gov).
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VAN KAMPEN AMERICAN CAPITAL
------------------

THIS PROSPECTUS IS DATED NOVEMBER 13, 1996.
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(Continued from previous page.)

Fund does not intend to list the Common Shares on any national securities
exchange and none of the Fund, the Adviser or VKAC intends to make a secondary
market in the Common Shares at any time. Accordingly, Common Shares of the Fund
have no history of public trading, and there is not expected to be any secondary
trading market in the Common Shares. An investment in the Common Shares should
be considered illiquid.

The Fund completed an initial public offering of its Common Shares in October,
1989. Since November 13, 1989 the Fund has engaged in a continuous offering of
its Common Shares through VKAC, as principal underwriter, and through selected
broker-dealers and financial services firms, at a price per Common Share equal
to net asset value. There is no initial sales charge or underwriting discount on
purchases of Common Shares. VKAC will compensate from its own assets the
broker-dealers and financial services firms participating in the continuous
offering. The minimum initial investment is $1,000. The minimum initial
investment for tax sheltered retirement plans is $250. See "Purchasing Shares of
the Fund." The Fund has registered 225,000,000 Common Shares for sale under the
Registration Statement to which this Prospectus relates. The Fund expects to
incur approximately $830,000 in expenses in connection with the offering of such
Common Shares. A portion of such expenses will be charged as operating expenses
during the current period and the remainder will be amortized over a period of
not more than twelve months.

Senior Loans in which the Fund may invest generally will pay interest at rates
which are periodically redetermined on the basis of a base lending rate plus a
premium. These base lending rates are generally the Prime Rate offered by a
major United States bank, the London Inter-Bank Offered Rate, the Certificate of
Deposit rate or other base lending rates used by commercial lenders. The Fund
will seek to achieve over time an effective yield that approximates the average
published Prime Rate of major United States banks. Senior Loans generally will
hold the most senior position in the capital structure of the Borrowers and
generally will be secured with specific collateral, which may include
guarantees. The terms of Senior Loans typically will include various restrictive
covenants which are designed to limit certain activities of the Borrowers. It is
anticipated that the proceeds of the Senior Loans in which the Fund will acquire
interests will be used primarily to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. SEE "INVESTMENT OBJECTIVE AND POLICIES AND SPECIAL RISK
CONSIDERATIONS."

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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses.................................................. 4
Prospectus Summary............................................. 5
Financial Highlights........................................... 14
The Fund....................................................... 16
Use of Proceeds................................................ 17
Investment Objective and Policies and Special Risk Factors..... 17
Certain Characteristics of Senior Loan Interests............. 17
Special Risk Considerations.................................. 25
Investment Practices and Special Risks......................... 28
Taxation....................................................... 33
Management of the Fund......................................... 34
Distributions.................................................. 36
Dividend Reinvestment Plan..................................... 37
Repurchase of Shares........................................... 38
Description of Common Shares................................... 43
Purchasing Shares of the Fund.................................. 45
Communications with Shareholders............................... 48
Custodian, Dividend Disbursing and Transfer Agent.............. 49
Legal Opinions................................................. 50
Experts........................................................ 50
Additional Information......................................... 50
Table of Contents for Statement of Additional Information...... 50
</TABLE>

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE FUND'S ADVISER OR VKAC. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, IN ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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FUND EXPENSES
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The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
the Fund.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)........... None
Dividend Reinvestment Plan Fees.......................... None
Early Withdrawal Charge.................................. 0.00-3.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES)
Investment Advisory and Administration Fees(1)........... 1.20%
Interest Payments on Borrowed Funds...................... 0.00%
Other Expenses........................................... 0.26%
----------
Total Annual Operating Expenses...................... 1.46%
</TABLE>

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(1) See "Management of the Fund" for additional information.

EXAMPLE

An investor would pay the following expenses on a $1,000 investment in the
Fund, assuming a 5% annual return:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Assuming no tender of Common
Shares......................... $ 15 $46 $ 80 $ 175
Assuming tender and repurchase of
Common Shares on last day of
period and imposition of maximum
applicable early withdrawal
charge........................... $ 45 $66 $ 90 $ 175
</TABLE>

This "Example" assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed under Total
Annual Operating Expenses remain the same in the years shown except, as to the
Three, Five and Ten Year periods, for the completion of organization expense
amortization. The above tables and the assumptions in the Example of a 5% annual
return and reinvestment at net asset value are required by regulation of the
SEC; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Fund's Common Shares. THIS
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND THE
FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.

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PROSPECTUS SUMMARY
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The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement of
Additional Information.

THE FUND. Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a
non-diversified, closed-end management investment company, organized as a
Massachusetts business trust on July 14, 1989. The Fund completed an initial
public offering of its common shares of beneficial interest ("Common Shares") in
October, 1989. Since November 13, 1989 the Fund has engaged in a continuous
offering of its Common Shares through Van Kampen American Capital Distributors,
Inc. ("VKAC") (an indirect affiliate of the Fund), as principal underwriter. As
of November 8, 1996, the Fund had 523,806,758 Common Shares outstanding and had
net assets of $5,238,067,577. See "The Fund."

CONTINUOUS OFFERING. The Fund is continuously offering Common Shares through
VKAC, as principal underwriter, and through selected broker-dealers and
financial services firms, at a public offering price per Common Share equal to
net asset value. There is no initial sales charge or underwriting discount on
purchases of Common Shares. VKAC will compensate from its own assets the
broker-dealers and financial services firms participating in the continuous
offering. The minimum initial investment is $1,000 and minimum subsequent
investment is $100. The minimum initial investment for tax sheltered retirement
plans is $250. The Fund does not intend to list the Common Shares on any
national securities exchange. The Fund may from time to time make tender offers
for all or a portion of its Common Shares. An early withdrawal charge payable to
VKAC will be imposed on most Common Shares accepted for tender that have been
held for less than five years. See "Purchasing Shares of the Fund" and
"Repurchase of Shares."

INVESTMENT OBJECTIVE AND POLICIES. The Fund's investment objective is to
provide a high level of current income, consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in a
professionally managed portfolio of interests in floating or variable rate
senior loans ("Senior Loans") to United States corporations, partnerships and
other entities ("Borrowers"). Although the Fund's net asset value will vary, the
Fund's policy of acquiring interests in floating or variable rate Senior Loans
is expected to minimize fluctuations in the Fund's net asset value as a result
of changes in interest rates. Senior Loans in which the Fund will purchase
interests 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 the prime rate offered by one or more major United States banks
("Prime Rate"), the London Inter-Bank Offered Rate ("LIBOR"), the Certificate of
Deposit ("CD") rate or other base lending rates used by commercial lenders. The
Fund seeks to achieve over time an effective yield that

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approximates the average published Prime Rate of major United States banks. The
Fund's net asset value may be affected by changes in the credit quality of
Borrowers with respect to Senior Loan interests in which the Fund invests. An
investment in the Fund may not be appropriate for all investors and is not
intended to be a complete investment program. No assurance can be given that the
Fund will achieve its investment objective. As discussed below in this
Prospectus Summary under "Tender Offers," an investment in the Common Shares
should be considered illiquid.

Senior Loans generally are arranged through private negotiations between a
Borrower and several financial institutions ("Lenders") represented in each case
by one or more such Lenders acting as agent ("Agent") of the several Lenders. On
behalf of the several Lenders, the Agent will be primarily responsible for
negotiating the loan agreement ("Loan Agreement") that establishes the relative
terms and conditions of the Senior Loan and rights of the Borrower and the
several Lenders. The Fund will invest in participations ("Participations") in
Senior Loans, will purchase assignments ("Assignments") of portions of Senior
Loans from third parties and may act as one of the group of Lenders originating
a Senior Loan (an "Original Lender"). The Fund will purchase an Assignment or
act as Original Lender with respect to a syndicated Senior Loan, initially, only
where the Agent with respect to such Senior Loan at the time of investment has
outstanding debt or deposit obligations rated investment grade (BBB or A-3 or
higher by Standard & Poor's Ratings Group ("S&P") or Baa or P-3 or higher by
Moody's Investors Service ("Moody's")) or determined by the Adviser to be of
comparable quality. In addition, the Fund will purchase a Participation only
when the Lender selling such Participation, and any other person interpositioned
between such Lender and the Fund at the time of investment have outstanding debt
obligations rated investment grade or determined by the Adviser to be of
comparable quality. Further, the Fund will not purchase interests in Senior
Loans unless such Agent, Lender or interpositioned person has entered into an
agreement which provides for the holding of assets in safekeeping for, or the
prompt disbursement of assets to, the Fund. With respect to any given Senior
Loan, the rights of the Fund when it acquires a Participation may be different
from, and more limited than, the rights of Original Lenders or of persons who
acquire an Assignment. Participations may entail certain risks relating to the
creditworthiness of the parties from which the Participations are obtained. The
Fund may pay a fee or forgo a portion of interest payments to the Lender selling
a Participation or Assignment pursuant to the terms of such Participation or
Assignment.

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guarantees. The Fund may invest up to 5% of its total assets in interests in
Senior Loans which are not secured by any specific collateral in connection with
its investments in collateralized Senior Loans. The Fund may also acquire
warrants, equity securities and, in limited circumstances, junior debt
securities in connection with its investments in Senior Loans, as discussed
below. Such equity securities will not be treated by the Fund as Senior Loans.
Investment in Senior Loans which are not secured by specific collateral and in
warrants, equity securities and junior debt securities entails certain risks in
addition to those associated with investment in collateralized Senior Loans.
Loan Agreements may provide for various restrictive covenants designed to limit
the activities of the Borrower in an effort to protect the interests of the
Lenders. Breach of such covenants, if not waived by the Lenders, is generally an
event of default under the Loan Agreement and may give the Lenders the right to
accelerate principal and interest payments. The Adviser will consider the terms
of such restrictive covenants in deciding whether to invest in Senior Loans for
the Fund's portfolio. When the Fund holds a Participation in a Senior Loan it
may not have the right to vote to waive enforcement of any restrictive covenant
breached by a Borrower. Lenders voting in connection with a potential waiver of
a restrictive covenant may have interests different from those of the Fund and
such Lenders may not consider the interests of the Fund in connection with their
votes.

Pursuant to the relevant Loan Agreement, the Borrower may be required in
certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment penalty.
A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating a sufficient amount of cash and liquid securities as a reserve
against such commitments. The Fund will not purchase interests in Senior Loans
that would require the Fund to make any such additional loans if such additional
loan commitments would exceed 20% of the Fund's total assets or would cause the
Fund to fail to meet the diversification requirements set forth under the
heading "Investment Restrictions" in the Statement of Additional Information.

In normal market conditions, at least 80% of the Fund's total assets will be
invested in Senior Loans. The Fund is not subject to any restrictions with
respect to the maturity of Senior Loans held in its portfolio. It is currently
anticipated that the Fund's assets invested in Senior Loans will consist of
Senior Loans with stated maturities of between three and seven years, inclusive,
and with rates of interest which are redetermined either daily, monthly,
quarterly or semi-annually; provided, however, that the Fund may invest up to 5%
of its total assets in Senior Loans which permit the Borrower to select an
interest rate redetermination period of up to one year. Investment in Senior
Loans with longer interest rate redetermination periods may increase
fluctuations in the Fund's net asset value as a result of changes in interest
rates. The Senior Loans in the Fund's portfolio will at all times have a
dollar-weighted average time until next interest rate redetermination of 90 days
or

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less. Because most Senior Loans in the Fund's portfolio will be subject to
mandatory or optional prepayment and as there may be significant economic
incentives for a Borrower to prepay its Senior Loans, prepayment of Senior Loans
in the Fund's portfolio may occur. Accordingly, the actual remaining maturity of
the Fund's portfolio invested in Senior Loans may vary substantially from the
average stated maturity of the Senior Loans held in the Fund's portfolio.
However, because most Senior Loans in which the Fund may invest redetermine
interest rates at least semi-annually, the Fund and the Adviser believe that the
possibility of prepayment does not entail a significant yield risk to holders of
Common Shares.

During normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and, in limited circumstances, junior debt securities acquired in
connection with the Fund's investments in Senior Loans. Such high quality,
short-term debt securities may include commercial paper rated at least in the
top two rating categories of either S&P or Moody's or unrated commercial paper
considered by the Adviser to be of comparable quality, interests in short-term
loans of Borrowers having short-term debt obligations rated or a short-term
credit rating at least in such top two rating categories or having no such
rating but determined by the Adviser to be of comparable quality, certificates
of deposit and bankers' acceptances and securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Such high quality,
short-term debt securities may pay interest at rates that are periodically
redetermined, or may pay interest at fixed rates. If the Adviser determines that
market conditions temporarily warrant a defensive investment policy, the Fund
may, subject to its ability to liquidate its relatively illiquid portfolio of
Senior Loans, invest up to 100% of its assets in cash and such high quality,
short-term securities. The Fund may also lend its portfolio securities to other
parties and may enter into repurchase and reverse repurchase agreements for
securities, subject to certain restrictions. For further discussion of the
Fund's investment objective and policies and its investment practices and the
associated considerations, see "Investment Objective and Policies and Special
Risk Considerations" and "Investment Practices and Special Risks."

Senior Loans historically have not been rated by nationally recognized
statistical rating organizations. Because of the collateralized nature of most
Senior Loans in the Fund's portfolio, the Fund and the Adviser believe that
ratings of other securities issued by a Borrower do not necessarily reflect
adequately the relative quality of a Borrower's Senior Loans. Therefore,
although the Adviser may consider such ratings in determining whether to invest
in a particular Senior Loan, the Adviser is not required to consider such
ratings and such ratings will not be the determinative factor in the Adviser's
analysis. The Fund may invest in Senior Loans, the Borrowers with respect to
which have outstanding debt securities which are rated below investment grade by
a nationally recognized statistical rating organization or are unrated but of
comparable quality to such securities. Debt

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securities rated below investment grade, or unrated but of comparable quality,
commonly are referred to as "junk bonds." The Fund will invest only in those
Senior Loans with respect to which the Borrower, in the opinion of the Adviser,
demonstrates certain of the following characteristics: sufficient cash flow to
service debt; adequate liquidity; successful operating history; strong
competitive position; experienced management; and, with respect to
collateralized Senior Loans, adequate collateral coverage of the Senior Loan. In
addition, the Adviser will consider, and may rely in part, on analyses performed
by Lenders other than the Fund.

When the Fund purchases a Participation, the Fund typically enters into a
contractual relationship with the Lender selling such Participation, but not
with the Borrower. As a result, the Fund may assume the credit risk of both the
Borrower and the Lender selling the Participation and the Fund may not directly
benefit from the collateral supporting the Senior Loan in which it has purchased
the Participation. The Fund will only acquire Participations if the Lender
selling the Participation, and any other person interpositioned between the Fund
and such Lender (i) at the time of investment has outstanding debt or deposit
obligations rated investment grade or determined by the Adviser to be of
comparable quality and (ii) has entered into an agreement providing for the
holding of assets in safekeeping for the Fund. The Fund ordinarily will purchase
a Participation only if, at the time of such purchase, the Fund believes that
the party from whom it is purchasing such Participation is retaining an interest
in the underlying Senior Loan. The Fund believes that such policies
significantly reduce the credit risk that it assumes with respect to such Lender
or interpositioned person.

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser"), a wholly-owned subsidiary of Van Kampen American Capital, Inc., is
the Fund's investment adviser. Van Kampen American Capital, Inc. is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios and more
than $57 billion under management or supervision. Van Kampen American Capital,
Inc.'s more than 40 open-end and 38 closed-end funds and more than 2,800 unit
investment trusts are professionally distributed by leading financial advisers
nationwide. See "Management of the Fund."

ADMINISTRATOR. VKAC is the Fund's administrator (the "Administrator"). The
Administrator is responsible for managing the business affairs of the Fund,
subject to the supervision of the Fund's Board of Trustees. 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, recordkeeping responsibilities with respect to Senior Loans in the
Fund's portfolio and providing certain services to the holders of the Fund's
securities. See "Management of the Fund."

FEES AND EXPENSES. The Fund will pay the Adviser a monthly fee at an annual
rate of 0.95% of the average net assets of the Fund (as defined), such annual
rate is reduced when average net assets exceed $4 billion. The advisory fee is
higher than

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the fees paid by most other management investment companies, although it is
comparable to the fees paid by several publicly offered, closed-end management
investment companies with an investment objective and policies similar to those
of the Fund. The Fund will pay the Administrator a monthly fee at an annual rate
of 0.25% of the average net assets of the Fund (as defined). See "Management of
the Fund."

DISTRIBUTIONS. The Fund's policy is to declare daily and pay monthly
distributions to holders of Common Shares of substantially all net investment
income of the Fund. Distributions to holders of Common Shares cannot be assured,
and the amount of each monthly distribution is likely to vary. Net realized
long-term capital gains, if any, are distributed to holders of Common Shares at
least annually. Holders of Common Shares may elect to have distributions
automatically reinvested in additional Common Shares. See "Distributions,"
"Taxation" and "Dividend Reinvestment Plan."

TENDER OFFERS. The Board of Trustees of the Fund currently intends, each
quarter, to consider authorizing the Fund to make tender offers for all or a
portion of its outstanding Common Shares at the then current net asset value of
the Common Shares. As of the date hereof, the Fund has commenced and consummated
tender offers in each quarter since the commencement of investment operations.
An early withdrawal charge payable to VKAC will be imposed on most Common Shares
accepted for tender that have been held for less than five years. The Fund does
not intend to list the Common Shares on any national securities exchange and
none of the Fund, the Adviser or VKAC intends to make a secondary trading market
in the Common Shares at any time. Accordingly, there is not expected to be any
secondary trading market in the Common Shares and an investment in the Common
Shares should be considered illiquid. There can be no assurance that the Fund
will in fact tender for any of its Common Shares. If the Fund tenders for Common
Shares there is no guarantee that all, or any, Common Shares tendered will be
purchased. Subject to its borrowing restrictions, the Fund may incur debt to
finance repurchases of its Common Shares pursuant to tender offers; such
borrowings entail additional risks. The ability of the Fund to tender for its
Common Shares may be limited by certain requirements of the Internal Revenue
Code of 1986, as amended, that must be satisfied in order for the Fund to
maintain its desired tax status as a regulated investment company. The Fund may
be required to suspend the continuous offering of its Common Shares during the
term of any such tender offer. See "The Fund," "Purchasing Shares of the Fund"
and "Repurchase of Shares."

SPECIAL RISK CONSIDERATIONS. Illiquidity. The Fund is a closed-end
investment company designed primarily for long-term investors and not as a
trading vehicle. The Fund does not intend to list the Common Shares for trading
on any national securities exchange. There is not expected to be any secondary
trading market in the Common Shares and an investment in the Common Shares
should be considered illiquid. In the event that the Fund's Board of Trustees
does not, at any time or from time to time, authorize the Fund to engage in
tender offers for its Common Shares, it is unlikely that a holder of Common
Shares will be able to otherwise sell Common Shares to the Fund. The shares of
closed-end investment

10
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companies often trade at a discount from their net asset values and, in the
unlikely event that a secondary market for the Common Shares were to develop,
the Common Shares likewise may trade at a discount from net asset value. Because
the Fund intends to offer its Common Shares continuously at a price equal to net
asset value, it is unlikely that the Common Shares would trade at a premium to
net asset value should a secondary market for the Common Shares develop.

Borrowings. The Fund is authorized to borrow money in an amount up to 33 1/3%
of the Fund's total assets (after giving effect to the amount borrowed) for the
purpose of obtaining short-term credits in connection with tender offers by the
Fund for the Common Shares. Under the requirements of the Investment Company Act
of 1940, as amended (the "1940 Act"), the Fund, immediately after any such
borrowings, must have an asset coverage of at least 300%. Asset coverage is the
ratio which the value of the total assets of the Fund, less all liabilities and
indebtedness not represented by senior securities (as that term is defined in
the 1940 Act), bears to the aggregate amount of any such borrowings by the Fund.
The rights of any lenders to the Fund to receive payments of interest on and
repayments of principal of such borrowings will be senior to those of the
holders of Common Shares, and the terms of any such borrowings may contain
provisions which limit certain activities of the Fund, including the payment of
dividends to holders of Common Shares in certain circumstances. Further, the
terms of any such borrowings may, and the provisions of the 1940 Act do (in
certain circumstances), grant lenders certain voting rights in the event of
default in the payment of interest or repayment of principal. In the event that
such provisions would impair the Fund's status as a regulated investment
company, the Fund, subject to its ability to liquidate its relatively illiquid
portfolio, intends to repay the borrowings. Interest payments and fees incurred
in connection with any such borrowings will reduce the amount of net income
available for payment to the holders of Common Shares. The Fund does not intend
to use borrowings for leverage purposes. Accordingly, the Fund will not purchase
additional portfolio securities at any time that borrowings, including the
Fund's commitments pursuant to reverse repurchase agreements, exceed 5% of the
Fund's total assets (after giving effect to the amount borrowed). See
"Repurchase of Shares."

Senior Loans. Senior Loans in which the Fund will invest generally will not be
rated by a nationally recognized statistical rating organization, will not be
registered with the SEC or any state securities commission and generally will
not be listed on any national securities exchange. Although the Fund will
generally have access to financial and other information made available to the
Lenders in connection with Senior Loans, the amount of public information
available with respect to Senior Loans will generally be less extensive than
that available for more widely rated, registered and exchange-listed securities.
As a result, the performance of the Fund and its ability to meet its investment
objective is more dependent on the analytical abilities of the Adviser than
would be the case for an investment company that invests primarily in more
widely rated, registered or exchange-listed securities. See "Investment
Objective and Policies and Special Risk Considerations."

11
<PAGE> 12

Interests in Senior Loans generally are not listed on any national securities
exchange or automated quotation system and no regular market has developed in
which interests in Senior Loans are traded. Any secondary market purchases and
sales of Senior Loans generally are conducted in private transactions between
buyers and sellers. Senior Loans are thus relatively illiquid, which illiquidity
may impair the Fund's ability to realize the full value of its assets in the
event of a voluntary or involuntary liquidation of such assets. Liquidity
relates to the ability of the Fund to sell an investment in a timely manner. The
market for relatively illiquid securities tends to be more volatile than the
market for liquid securities. The substantial portion of the Fund's assets
invested in relatively illiquid Senior Loan interests may restrict the ability
of the Fund to dispose of its investments in Senior Loans in a timely fashion
and at a fair price, and could result in capital losses to the Fund and holders
of Common Shares. However, many of the Senior Loans in which the Fund expects to
purchase interests are of a relatively large principal amount and are held by a
relatively large number of owners which should, in the Adviser's opinion,
enhance the relative liquidity of such interests. The risks associated with
illiquidity are particularly acute in situations where the Fund's operations
require cash, such as when the Fund tenders for its Common Shares or when the
Adviser considers it advantageous to increase the percentage of the Fund's
portfolio invested in high quality, short-term securities, and may in certain
circumstances result in the Fund engaging in borrowings to meet short-term cash
requirements. See "Investment Objective and Policies and Special Risk
Considerations."

Credit Risks Associated with Investments in Participations. The Fund will
purchase Participations in Senior Loans. With respect to any given Senior Loan,
the terms of Participations are arrived at through private negotiations between
the Fund and the seller of such an interest in a Senior Loan, and may result in
the Fund having rights which differ from, and are more limited than, the rights
of Lenders or of persons who acquire such interests by Assignment.
Participations typically result in the Fund having a contractual relationship
with the Lender selling the Participation, but not with the Borrower. In the
event of the insolvency of the Lender selling the Participation, the Fund may be
treated as a general creditor of such Lender, and may not have any exclusive or
senior claim with respect to such Lender's interest in, or the collateral with
respect to, the Senior Loan. As such, the Fund may incur the credit risk of the
Lender selling the Participation in addition to the credit risk of the Borrower
with respect to the Senior Loan when purchasing Participations and may not
benefit directly from the security provided by the collateral supporting the
Senior Loan with respect to which such Participation was sold. The Fund has
implemented measures designed to reduce such risk. The Fund may pay a fee or
forgo a portion of interest payments when acquiring Participations or
Assignments. See "Investment Objective and Policies and Special Risk
Considerations."

Credit Risks Associated with Senior Loans. Senior Loans, like other corporate
debt obligations, are subject to the risk of non-payment of scheduled interest
or principal. Such non-payment would result in a reduction of income to the
Fund, a reduction in the value of the Senior Loan experiencing non-payment and a
potential

12
<PAGE> 13

decrease in the net asset value of the Fund. Although Senior Loans in which the
Fund will invest generally will be secured by specific collateral, there can be
no assurance that liquidation of such collateral would satisfy the Borrower's
obligation in the event of nonpayment of scheduled interest or principal or that
such collateral could be readily liquidated. In the event of bankruptcy of a
Borrower, the Fund could experience delays or limitations with respect to its
ability to realize the benefits of the collateral securing a Senior Loan. In the
event that the Fund invests a portion of its assets in Senior Loans that are not
secured by specific collateral, the Fund will not enjoy the benefits of
collateralization with respect to such Senior Loans. See "Investment Objective
and Policies and Special Risk Considerations."

Certain Investment Practices. The Fund may use various investment practices
that involve special considerations including lending its portfolio securities,
entering into when-issued and delayed delivery transactions and entering into
repurchase and reverse repurchase agreements. In addition, the Fund has the
authority to engage in interest rate and other hedging and risk management
transactions. For further discussion of these practices and associated special
considerations, see "Investment Practices and Special Risks."

Diversification. The Fund has registered as a "non-diversified" investment
company so that it will be able to invest more than 5% of the value of its
assets in the obligations of any single issuer, including Senior Loans of a
single Borrower or Participations purchased from a single Lender. The Fund does
not intend to invest, however, more than 5% of the value of its assets in
interests in Senior Loans of a single Borrower. To the extent the Fund invests a
relatively high percentage of its assets in obligations of a limited number of
issuers, the Fund will be more susceptible than a more widely diversified
investment company to any single corporate, economic, political or regulatory
occurrence. See "The Fund."

Percentage of Assets in Participations. The Fund may invest up to 100% of its
assets in Participations. The Lenders selling such Participations and other
persons interpositioned between such Lenders and the Fund with respect to such
Participations will likely conduct their principal business activities in the
bank, finance and financial services industries. Because the Fund may invest a
relatively high percentage of its assets in such Participations, the Fund may be
more susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting such industries. The Fund
has taken measures which it believes significantly reduce its exposure to such
risk. See "Investment Objective and Policies and Special Risk Considerations"
and "Investment Restrictions" in the Statement of Additional Information.

Anti-Takeover Provisions. The Fund's Declaration of Trust includes provisions
that could have the effect of limiting the ability of other persons or entities
to acquire control of the Fund or to change the composition of its Board of
Trustees. See "Description of Common Shares--Anti-Takeover Provisions in the
Declaration of Trust."

13
<PAGE> 14

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for one Common Share of the Fund outstanding throughout
the periods indicated)
- --------------------------------------------------------------------------------

The following schedule presents financial highlights for one Common Share of the
Fund outstanding throughout the periods indicated. The financial highlights have
been audited by KPMG Peat Marwick LLP, independent certified public accountants
for the periods indicated, and their report thereon appears in the Fund's
related Statement of Additional Information. This information should be read in
conjunction with the financial statements and related notes included in the
Statement of Additional Information.

<TABLE>
<CAPTION>
OCTOBER 4,
1989
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED JULY 31 OPERATIONS)
------------------------------------------------------------- TO
1996 1995 1994 1993 1992 1991 JULY 31, 1990
------- ------- ------- ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............ $10.046 $10.052 $10.004 $ 9.998 $9.985 $10.008 $10.000
------- ------- ------- ------- ------ ------- -------
Net Investment Income......................... .735 .756 .618 .600 .698 .907 .815
Net Realized and Unrealized Gain/Loss on
Investments................................. (.028) (.004) .015 .008 .004 (.008) .005
------- ------- ------- ------- ------ ------- -------
Total from Investment
Operations.................................... .707 .752 .633 .608 .702 .899 .820
------- ------- ------- ------- ------ ------- -------
Less:
Distributions from Net Investment Income...... .751 .758 .585 .600 .689 .910 .812
Distributions in Excess of Net Investment
Income...................................... -0- -0- -0- .002 -0- .012 -0-
------- ------- ------- ------- ------ ------- -------
Total Distributions............................. .751 .758 .585 .602 .689 .922 .812
------- ------- ------- ------- ------ ------- -------
Net Asset Value, End of Period.................. $10.002 $10.046 $10.052 $10.004 $9.998 $ 9.985 $10.008
======= ======= ======= ======= ====== ======= =======
</TABLE>

(Continued on following page)

See Financial Statements and Notes to Financial Statements.

14
<PAGE> 15

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued (for one Common Share of the Fund outstanding
throughout the periods indicated)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
OCTOBER 4,
1989
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED JULY 31 OPERATIONS)
-------------------------------------------------------------- TO
1996 1995 1994 1993 1992 1991 JULY 31, 1990
-------- -------- -------- ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Return(1) (Non-Annualized)............... 7.22% 7.82% 6.52% 6.17% 7.25% 9.41% 8.51%
Net Assets at End of Period (in millions)...... $4,865.8 $2,530.1 $1,229.0 $966.7 $928.3 $997.5 $ 659.1
Ratio of Expenses to Average Net Assets(1)
(Annualized)................................. 1.46% 1.49% 1.53% 1.53% 1.55% 1.56% 1.59%
Ratio of Net Investment Income to Average Net
Assets(1) (Annualized)....................... 7.33% 7.71% 6.16% 5.96% 6.98% 8.91% 9.91%
Portfolio Turnover(2).......................... 66% 71% 74% 67% 59% 41% 53%
- ----------------
(1) If certain expenses had not been assumed by the investment advisor, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net Assets
(Annualized)................................ N/A N/A N/A N/A N/A 1.58% N/A
Ratio of Net Investment Income to Average
Net Assets (Annualized)..................... N/A N/A N/A N/A N/A 8.89% N/A
(2) Calculation includes the proceeds from principal repayments and sales of variable rate senior loan
interests.
</TABLE>

See Financial Statements and Notes to Financial Statements.

15
<PAGE> 16

- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------

Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a
non-diversified, closed-end management investment company which was organized as
a Massachusetts business trust on July 14, 1989 and which commenced investment
operations on October 4, 1989. The Fund completed an initial public offering of
its common shares of beneficial interest ("Common Shares") in October, 1989.
Since November 13, 1989, the Fund has also engaged in a continuous offering of
the Common Shares through Van Kampen American Capital Distributors, Inc.
("VKAC") (an indirect affiliate of the Fund), as principal underwriter. As of
November 8, 1996, the Fund had 523,806,758 Common Shares outstanding and had net
assets of $5,238,067,577. The net asset value per Common Share of the Fund on
November 8, 1996 was $10.00. The Fund's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181 and its telephone number is
1-800-421-5666.

The Fund is a closed-end investment company designed primarily for long-term
investors and not as a trading vehicle. The Fund does not intend to list the
Common Shares for trading on any national securities exchange and none of the
Fund, Van Kampen American Capital Investment Advisory Corp. (the "Adviser") or
VKAC intends to make a secondary trading market in the Common Shares at any
time. Accordingly, there is not expected to be any secondary trading market in
the Common Shares and an investment in the Common Shares should be considered
illiquid. The Board of Trustees of the Fund currently intends each quarter to
consider authorizing the Fund to make tender offers for all or a portion of its
then outstanding Common Shares at the then current net asset value for the
Common Shares. As of the date hereof the Fund has commenced and consummated
tender offers in each quarter since the commencement of investment operations.
An early withdrawal charge payable to VKAC will be imposed on most Common Shares
held for less than five years which are accepted for repurchase pursuant to a
tender offer by the Fund. There can be no assurance that the Fund will in fact
tender for any of its Common Shares and, in the event that the Fund does not so
tender, it is unlikely that a holder of Common Shares will be able to otherwise
sell Common Shares to the Fund. If the Fund tenders for Common Shares, there is
no guarantee that all, or any, Common Shares tendered will be purchased. Subject
to its borrowing restrictions, the Fund may incur debt to finance repurchases of
its Common Shares pursuant to tender offers, which entails additional risks. The
ability of the Fund to enter into tender offers may be limited by certain
requirements of the Internal Revenue Code of 1986, as amended, that must be
satisfied in order for the Fund to maintain its desired tax status as a
regulated investment company. See "Repurchase of Shares."

16
<PAGE> 17

- ------------------------------------------------------------------------------
USE OF PROCEEDS
- ------------------------------------------------------------------------------

The net proceeds from the sale of the Common Shares offered hereby will be
invested in accordance with the Fund's investment objective and policies.
Pending such investment, the proceeds may be invested in high quality,
short-term securities.

- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES AND SPECIAL RISK FACTORS
- ------------------------------------------------------------------------------

An investment in the Fund may not be appropriate for all investors and is not
intended to be a complete investment program. No assurance can be given that the
Fund will achieve its investment objective.

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate senior loans ("Senior Loans") to United States
corporations, partnerships and other entities ("Borrowers"). Although the Fund's
net asset value will vary, the Fund's policy of acquiring interests in floating
or variable rate Senior Loans is expected to minimize the fluctuations in the
Fund's net asset value as a result of changes in interest rates. The Fund's net
asset value may be affected by changes in the credit quality of Borrowers with
respect to Senior Loan interests in which the Fund invests. The Fund seeks to
achieve over time an effective yield that approximates the average published
Prime Rate of major United States banks.

CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS

The Fund will invest in participations ("Participations") in Senior Loans,
will purchase assignments ("Assignments") of portions of Senior Loans from third
parties and may act as one of the group of Lenders originating a Senior Loan (an
"Original Lender").

It is anticipated that the proceeds of the Senior Loans in which the Fund will
acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations,

17
<PAGE> 18

mergers, acquisitions, stock repurchases, and, to a lesser extent, to finance
internal growth and for other corporate purposes of Borrowers. The Fund
currently does not intend to acquire interests in Senior Loans the proceeds of
which would be used primarily to finance construction or real estate development
projects. Senior Loans have the most senior position in a Borrower's capital
structure, although some Senior Loans may hold an equal ranking with other
senior securities of the Borrower. The capital structure of Borrowers may
include Senior Loans, senior and junior subordinated debt (which may include
"junk bonds"), preferred stock and common stock issued by the Borrower,
typically in descending order of seniority with respect to claims on the
Borrower's assets. Senior Loans generally are secured by specific collateral,
which may include guarantees. In connection with the acquisition of
collateralized Senior Loans, the Fund may invest up to 5% of its total assets in
Senior Loans which are not secured by any collateral. Such unsecured Senior
Loans would constitute an interim financing intended to be refinanced through,
in whole or in part, a collateralized Senior Loan. In the event that the Fund
invests a portion of its assets in Senior Loans that are not secured by specific
collateral, the Fund will not enjoy the benefits associated with
collateralization with respect to such Senior Loans and such Senior Loans may
pose a greater risk of nonpayment of interest or loss of principal than do
collateralized Senior Loans. As discussed below, the Fund may also acquire
warrants and equity securities issued by the Borrower or its affiliates as part
of a package of investments in the Borrower or its affiliates. Warrants and
equity securities will not be treated as Senior Loans and thus assets invested
in such securities will not count toward the 80% of the Fund's total assets that
normally will be invested in Senior Loans. The Fund will acquire such interests
in unsecured Senior Loans, warrants and equity securities only as an incident to
the intended purchase of interests in collateralized Senior Loans. Loan
Agreements may also include various restrictive covenants designed to limit the
activities of the Borrower in an effort to protect the right of the Lenders to
receive timely payments of interest on and repayment of principal of the Senior
Loans. In order to borrow money pursuant to collateralized Senior Loans, a
Borrower will frequently, for the term of the Senior Loan, pledge as collateral
assets, including but not limited to, trademarks, accounts receivable,
inventory, buildings, real estate, franchises and common and preferred stock in
its subsidiaries. In addition, in the case of some Senior Loans, there may be
additional collateral pledged in the form of guarantees by and/or securities of
affiliates of the Borrowers. In certain instances, a Senior Loan may be secured
only by stock in the Borrower or its subsidiaries. Such collateral may consist
of assets that may not be readily liquidated, and there is no assurance that the
liquidation of such assets would satisfy fully a Borrower's obligations under a
Senior Loan.

18
<PAGE> 19

accelerate principal and interest payments. The Adviser will consider the terms
of such restrictive covenants in deciding whether to invest in Senior Loans for
the Fund's portfolio. When the Fund holds a Participation in a Senior Loan it
may not have the right to vote to waive enforcement of any restrictive covenant
breached by a Borrower. Lenders voting in connection with a potential waiver of
a restrictive covenant may have interests different from those of the Fund and
such Lenders may not consider the interests of the Fund in connection with their
votes.

Senior Loans in which the Fund will invest generally pay interest at rates
which are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates generally are the prime rate offered by one or
more major United States banks (the "Prime Rate"), the London Inter-Bank Offered
Rate ("LIBOR"), the certificate of deposit ("CD") rate or other base lending
rates used by commercial lenders. The Prime Rate quoted by a major U.S. bank is
the interest rate at which such bank is willing to lend U.S. dollars to its most
creditworthy borrowers. LIBOR, as provided for in Loan Agreements, is an average
of the interest rates quoted by several designated banks as the rates at which
such banks would offer to pay interest to major financial institutional
depositors in the London interbank market on U.S. dollar denominated deposits
for a specified period of time. The CD rate, as generally provided for in Loan
Agreements, is the average rate paid on large certificates of deposit traded in
the secondary market. At least 80% of the Fund's total assets normally will be
invested in Senior Loans. In normal market conditions, at least 65% of the
Fund's assets will be invested in Senior Loans which, at the time of the Fund's
initial investment in such Senior Loans, provided the Fund with a rate of return
which was at least equal to the Prime Rate existing on the date of such initial
investment. The Fund is not subject to any restrictions with respect to the
maturity of Senior Loans held in its portfolio. It is currently anticipated that
the Fund's assets invested in Senior Loans will consist of Senior Loans with
stated maturities of between three and seven years, inclusive, and with rates of
interest which are redetermined either daily, monthly, quarterly or
semi-annually; provided, however, that the Fund may invest up to 5% of its total
assets in Senior Loans which permit the Borrower to select an interest rate
redetermination period of up to one year. Investment in Senior Loans with longer
interest rate redetermination periods may increase fluctuations in the Fund's
net asset value as a result of changes in interest rates. The Senior Loans in
the Fund's portfolio will at all times have a dollar-weighted average time until
the next interest rate redetermination of 90 days or less. As a result, as
short-term interest rates increase, interest payable to the Fund from its
investments in Senior Loans should increase, and as short-term interest rates
decrease, interest payable to the Fund from its investments in Senior Loans
should decrease. The amount of time required to pass before the Fund will
realize the effects of changing short-term market interest rates on its
portfolio will vary with the dollar-weighted average time until the next
interest rate redetermination on the Senior Loans in the Fund's portfolio. The
Fund may utilize certain investment practices to, among other things, shorten
the effective interest rate redetermination period of Senior Loans in its
portfolio. In such event, the Fund will consider such shortened period to be the
interest rate redetermination period of the Senior Loan; provided, however, that
the Fund will not invest in Senior Loans

19
<PAGE> 20

which permit the Borrower to select an interest rate redetermination period in
excess of one year. Because most Senior Loans in the Fund's portfolio will be
subject to mandatory and/or optional prepayment and there may be significant
economic incentives for a Borrower to prepay its loans, prepayments of Senior
Loans in the Fund's portfolio may occur. Accordingly, the actual remaining
maturity of the Fund's portfolio invested in Senior Loans may vary substantially
from the average stated maturity of the Senior Loans held in the Fund's
portfolio. As a result of expected prepayments from time to time of Senior Loans
in the Fund's portfolio, the Fund estimates that the actual average maturity of
the Senior Loans held in its portfolio will be approximately 18-24 months.

When interest rates decline, the value of a portfolio invested in fixed-rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested in fixed-rate obligations can be expected to
decline. Although the Fund's net asset value will vary, the Fund's management
expects the Fund's policy of acquiring interests in floating or variable rate
Senior Loans to minimize fluctuations in net asset value as a result of changes
in interest rates. Accordingly, the Fund's management expects the value of the
Fund's portfolio to fluctuate significantly less than a portfolio of fixed-rate,
longer term obligations as a result of interest rate changes. However, changes
in prevailing interest rates can be expected to cause some fluctuation in the
Fund's net asset value. In addition to changes in interest rates, changes in the
credit quality of Borrowers will also effect the Fund's net asset value.
Further, a serious deterioration in the credit quality of a Borrower could cause
a prolonged or permanent decrease in the Fund's net asset value.

The Fund may purchase and retain in its portfolio a Senior Loan interest the
Borrower with respect to which has filed for protection under the federal
bankruptcy laws or has had an involuntary bankruptcy petition filed against it
by its creditors. As of July 31, 1996, the date of the Fund's most recent
audited financial statements, the Fund held in its portfolio and had reduced the
value of three Senior Loan interests (the aggregate value of which represented
approximately 0.41% of the value of the Fund's total assets on such date) the
Borrowers with respect to which were subject to protection under the federal
bankruptcy laws. Subsequently, in August 1996, another Senior Loan interest went
into bankruptcy (the aggregate value of which represented approximately 0.49% of
the value of the Fund's total assets as of July 31, 1996). The values of such
Senior Loan interests, if any, reflect, among other things, the Adviser's
assessment of the likelihood that the Fund ultimately will receive full
repayment of the principal amount of such Senior Loan interests, the likely
duration, if any, of a lapse in the scheduled repayment of principal and
prevailing interest rates. At times, in connection with the restructuring of a
Senior Loan either outside of bankruptcy court or in the context of bankruptcy
court proceedings, the Fund may determine or be required to accept equity
securities or junior debt securities in exchange for all or a portion of a
Senior Loan interest. Depending upon, among other things, the Adviser's
evaluation of the potential value of such securities in relation to the price
that could be obtained by the Fund at any given time upon sale thereof, the Fund
may determine to hold such

20
<PAGE> 21

securities in its portfolio. Any equity securities and junior debt securities
held by the Fund will not be treated as Senior Loans and thus will not count
toward the 80% of the Fund's total assets that normally will be invested in
Senior Loans.

Senior Loans historically have not been rated by nationally recognized
statistical rating organizations. Because of the collateralized or guaranteed
nature of most Senior Loans, the Fund and the Adviser believe that ratings of
other securities issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Senior Loans. Therefore, although the Adviser
may consider such ratings in determining whether to invest in a particular
Senior Loan, the Adviser is not required to consider such ratings and such
ratings will not be the determinative factor in the Adviser's analysis. The Fund
may invest a substantial portion of its assets in Senior Loans, the Borrowers
with respect to which have outstanding debt securities which are rated below
investment grade by a nationally recognized statistical rating organization or
are unrated but of comparable quality to such securities. Debt securities rated
below investment grade or unrated but of comparable quality commonly are
referred to as "junk bonds." The Fund will invest only in those Senior Loans
with respect to which the Borrower, in the opinion of the Adviser, demonstrates
certain of the following characteristics: sufficient cash flow to service debt;
adequate liquidity; successful operating history; strong competitive position;
experienced management; and, with respect to collateralized Senior Loans,
collateral coverage that equals or exceeds the outstanding principal amount of
the Senior Loan. In addition, the Adviser will consider, and may rely in part,
on the analyses performed by the Agent and other Lenders, including such
persons' determinations with respect to collateral securing a Senior Loan.

The Fund may invest up to 100% of its assets in Participations. The selling
Lenders and other persons interpositioned between such Lenders and the Fund with
respect to such Participations will likely conduct their principal business
activities in the banking, finance and financial services industries. Although,
as discussed below, the Fund has taken measures which it believes significantly
reduce its exposure to any risks incident to such policy, the Fund may be more
susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting such industries. Persons
engaged in such industries may be more susceptible than are persons engaged in
some other industry to, among other things, fluctuations in interest rates,
changes in the Federal Open Market Committee's monetary policy, governmental
regulations concerning such industries and concerning capital raising activities
generally and fluctuations in the financial markets generally.

21
<PAGE> 22

with respect to any funds acquired by other Lenders through set-off against the
Borrower and the Fund may not directly benefit from the collateral supporting
the Senior Loan in which it has purchased the Participation. As a result, the
Fund may assume the credit risk of both the Borrower and the Lender selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of such Lender, and
may not benefit from any set-off between such Lender and the Borrower. The Fund
has taken the following measures in an effort to minimize such risks. The Fund
will only acquire Participations if the Lender selling the Participation, and
any other persons interpositioned between the Fund and the Lender, (i) at the
time of investment has outstanding debt or deposit obligations rated investment
grade (BBB or A-3 or higher by Standard & Poor's Ratings Group ("S&P") or Baa or
P-3 or higher by Moody's Investors Service ("Moody's")) or determined by the
Adviser to be of comparable quality and (ii) has entered into an agreement which
provides for the holding of assets in safekeeping for, or the prompt
disbursement of assets to, the Fund. Long-term debt rated BBB by S&P is regarded
by S&P as having adequate capacity to pay interest and repay principal and debt
rated Baa by Moody's is regarded by Moody's as a medium grade obligation, i.e.,
it is neither highly protected nor poorly secured. Commercial paper rated A-1 by
S&P indicates that the degree of safety regarding timely payment is considered
by S&P to be either overwhelming or very strong and issues of commercial paper
rated Prime-1 by Moody's are considered by Moody's to have a superior ability
for repayment of senior short-term debt obligations. The Fund ordinarily will
purchase a Participation only if, at the time of such purchase, the Fund
believes that the party from whom it is purchasing such Participation is
retaining an interest in the underlying Senior Loan.

The Fund may also purchase Assignments from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the Loan
Agreement of the assigning Lender and becomes a Lender under the Loan Agreement
with the same rights and obligations as the assigning Lender. Assignments are,
however, arranged through private negotiations between potential assignees and
potential assignors, and the rights and obligations acquired by the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.

When the Fund is an Original Lender originating a Senior Loan it may share in
a fee paid to the Original Lenders. The Fund will never act as the Agent or
principal negotiator or administrator of a Senior Loan. When the Fund is a
Lender, it will have a direct contractual relationship with the Borrower, may
enforce compliance by the Borrower with the terms of the Loan Agreement and may
have rights with respect to any funds acquired by other Lenders through set-off.
Lenders also have full voting and consent rights under the applicable Loan
Agreement. Action subject to Lender vote or consent generally requires the vote
or consent of the holders of some specified percentage of the outstanding
principal amount of the Senior Loan. Certain decisions, such as reducing the
amount or increasing the time for payment

22
<PAGE> 23

of interest on or repayment of principal of a Senior Loan, or releasing
collateral therefor, frequently require the unanimous vote or consent of all
Lenders affected.

The Fund will purchase an Assignment or act as a Lender with respect to a
syndicated Senior Loan only where the Agent with respect to such Senior Loan at
the time of investment has outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by the Adviser to be of comparable quality. In addition,
the Fund will purchase a Participation only where the Lender selling such
Participation, and any other person interpositioned between such Lender and the
Fund at the time of investment, have outstanding debt obligations rated
investment grade or determined by the Adviser to be of comparable quality.
Further, the Fund will not purchase interests in Senior Loans unless such Agent,
Lender or interpositioned person has entered into an agreement which provides
for the holding of assets in safekeeping for, or the prompt disbursement of
assets to, the Fund.

Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should such an Agent, Lender or assignor with respect to
an Assignment interpositioned between the Fund and the Borrower become insolvent
or enter FDIC receivership or bankruptcy, any interest in the Senior Loan of
such person and any loan payment held by such person for the benefit of the Fund
should not be included in such person's estate. If, however, any such amount
were included in such person's estate, the Fund would incur certain costs and
delays in realizing payment or could suffer a loss of principal or interest. In
such event, the Fund could experience a decrease in net asset value.

The Fund may be required to pay and may receive various fees and commissions
in connection with purchasing, selling and holding interests in Senior Loans.
The fees normally paid by Borrowers may include three types: facility fees,
commitment fees and prepayment penalties. Facility fees are paid to Lenders upon
origination of a Senior Loan. Commitment fees are paid to Lenders on an ongoing
basis based upon the undrawn portion committed by the Lenders of the underlying
Senior Loan. Lenders may receive prepayment penalties when a Borrower prepays
all or part of a Senior Loan. The Fund will receive these fees directly from the
Borrower if the Fund is an Original Lender, or, in the case of commitment fees
and prepayment penalties, if the Fund acquires an interest in a Senior Loan by
way of Assignment. Whether or not the Fund receives a facility fee from the
Lender in the case of an Assignment, or any fees in the case of a Participation,
depends upon negotiations between the Fund and the Lender selling such
interests. When the Fund is an assignee, it may be required to pay a fee, or
forgo a portion of interest and any fees payable to it, to the Lender selling
the Assignment. Occasionally, the assignor will pay a fee to the assignee based
on the portion of the principal amount of the Senior Loan which is being
assigned. A Lender selling a Participation to the Fund may deduct a portion of
the interest and any fees payable to the Fund as an administrative fee prior to
payment thereof to the Fund. The Fund may be required to pay over or

23
<PAGE> 24

pass along to a purchaser of an interest in a Senior Loan from the Fund a
portion of any fees that the Fund would otherwise be entitled to.

Pursuant to the relevant Loan Agreement, a Borrower may be required in certain
circumstances, and may have the option at any time, to prepay the principal
amount of a Senior Loan, often without incurring a prepayment penalty. Because
the interest rates on Senior Loans are periodically redetermined at relatively
short intervals, the Fund and the Adviser believe that the prepayment of, and
subsequent reinvestment by the Fund in, Senior Loans will not have a materially
adverse impact on the yield on the Fund's portfolio and may have a beneficial
impact on income due to receipt of prepayment penalties, if any, and any
facility fees earned in connection with reinvestment.

A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating a sufficient amount of cash and liquid securities as a reserve
against such commitments. The Fund will not purchase interests in Senior Loans
that would require the Fund to make any such additional loans if such additional
loan commitments would exceed 20% of the Fund's total assets or would cause the
Fund to fail to meet the diversification requirements set forth under the
heading "Investment Restrictions" in the Statement of Additional Information.

During normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and, in certain limited circumstances discussed above, junior debt
securities acquired in connection with the Fund's investments in Senior Loans.
Such high quality, short-term securities may include commercial paper rated at
least in the top two rating categories of either S&P or Moody's, or unrated
commercial paper considered by the Adviser to be of similar quality, interests
in short-term loans of Borrowers having short-term debt obligations rated or a
short-term credit rating at least in such top two rating categories or having no
such rating but determined by the Adviser to be of comparable quality,
certificates of deposit and bankers' acceptances and securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Such high
quality, short-term securities may pay interest at rates which are periodically
redetermined or may pay interest at fixed rates. If the Adviser determines that
market conditions temporarily warrant a defensive investment policy, the Fund
may invest, subject to its ability to liquidate its relatively illiquid
portfolio of Senior Loans, up to 100% of its assets in cash and such high
quality, short-term debt securities. The Fund will acquire such warrants and
equity securities only as an incident to the purchase or intended purchase of
interests in collateralized Senior Loans. Although the Fund generally will
acquire interests in warrants and equity securities only when the Adviser
believes that the relative value being given by the Fund in exchange for such
interests is substantially outweighed

24
<PAGE> 25

by the potential value of such instruments, investment in warrants and equity
securities entail certain risks in addition to those associated with investments
in Senior Loans. Warrants and equity securities have a subordinate claim on a
Borrower's assets as compared with debt securities and junior debt securities
have a subordinate claim on such assets as compared with Senior Loans. As such,
the values of warrants and equity securities generally are more dependent on the
financial condition of the Borrower and less dependent on fluctuations in
interest rates than are the values of many debt securities. The values of
warrants, equity securities and junior debt securities may be more volatile than
those of Senior Loans and thus may have an adverse impact on the ability of the
Fund to minimize fluctuations in its net asset value.

SPECIAL RISK CONSIDERATIONS

On behalf of the several Lenders, the Agent generally will be required to
administer and manage the Senior Loan and, with respect to collateralized Senior
Loans, to service or monitor the collateral. In this connection, the valuation
of assets pledged as collateral will reflect market value and the Agent may rely
on independent appraisals as to the value of specific collateral. The Agent,
however, may not obtain an independent appraisal as to the value of assets
pledged as collateral in all cases. The Fund normally will rely primarily on the
Agent (where the Fund is an Original Lender or owns an Assignment) or the
selling Lender (where the Fund owns a Participation) to collect principal of and
interest on a Senior Loan. Furthermore, the Fund usually will rely on the Agent
(where the Fund is an Original Lender or owns an Assignment) or the selling
Lender (where the Fund owns a Participation) to monitor compliance by the
Borrower with the restrictive covenants in the Loan Agreement and notify the
Fund of any adverse change in the Borrower's financial condition or any
declaration of insolvency. Collateralized Senior Loans will frequently be
secured by all assets of the Borrower that qualify as collateral, which may
include common stock of the Borrower or its subsidiaries. Additionally, the
terms of the Loan Agreement may require the Borrower to pledge additional
collateral to secure the Senior Loan, and enable the Agent, upon proper
authorization of the Lenders, to take possession of and liquidate the collateral
and to distribute the liquidation proceeds pro rata among the Lenders. If the
terms of a Senior Loan do not require the Borrower to pledge additional
collateral in the event of a decline in the value of the original collateral,
the Fund will be exposed to the risk that the value of the collateral will not
at all times equal or exceed the amount of the Borrower's obligations under the
Senior Loan. Lenders that have sold Participation interests in such Senior Loan
will distribute liquidation proceeds received by the Lenders pro rata among the
holders of such Participations. The Adviser will also monitor these aspects of
the Fund's investments and, where the Fund is an Original Lender or owns an
Assignment, will be directly involved with the Agent and the other Lenders
regarding the exercise of credit remedies. Senior Loans, like other corporate
debt obligations, are subject to the risk of non-payment of scheduled interest
or principal. Such non-payment would result in a reduction of income to the
Fund, a reduction in the value of the Senior Loan

25
<PAGE> 26

experiencing non-payment and a potential decrease in the net asset value of the
Fund. Although, with respect to collateralized Senior Loans, the Fund generally
will invest only in Senior Loans that the Adviser believes are secured by
specific collateral, which may include guarantees, the value of which exceeds
the principal amount of the Senior Loan at the time of initial investment, there
can be no assurance that the liquidation of any such collateral would satisfy
the Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of bankruptcy of a Borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the Borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of bankruptcy of the
Borrower. The Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan. Some Senior Loans in which the Fund may invest are subject to the
risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate such Senior Loans to presently existing or future indebtedness
of the Borrower or take other action detrimental to the holders of Senior Loans,
such as the Fund, including, under certain circumstances, invalidating such
Senior Loans. Lenders commonly have certain obligations pursuant to the Loan
Agreement, which may include the obligation to make additional loans or release
collateral in certain circumstances.

Senior Loans in which the Fund will invest historically have not been rated by
a nationally recognized statistical rating organization, will not be registered
with the SEC or any state securities commission and will not be listed on any
national securities exchange. Although the Fund will generally have access to
financial and other information made available to the Lenders in connection with
Senior Loans, the amount of public information available with respect to Senior
Loans will generally be less extensive than that available for rated, registered
or exchange listed securities. As a result, the performance of the Fund and its
ability to meet its investment objective is more dependent on the analytical
ability of the Adviser than would be the case for an investment company that
invests primarily in rated, registered or exchange listed securities.

Senior Loans are, at present, not readily marketable and may be subject to
restrictions on resale. Interests in Senior Loans generally are not listed on
any national securities exchange or automated quotation system and no regular
market has developed for such interests. Any secondary market purchases and
sales of Senior Loans generally are conducted in private transactions between
buyers and sellers. Senior Loans are thus relatively illiquid, which illiquidity
may impair the Fund's ability to realize the full value of its assets in the
event of a voluntary or involuntary liquidation of such assets. Liquidity
relates to the ability of the Fund to sell an investment in a timely manner. The
market for relatively illiquid securities tends to be more volatile than the
market for more liquid securities. The Fund has no limitation on the amount of
its assets which may be invested in securities which are not readily marketable
or are subject to restrictions on resale. The substantial

26
<PAGE> 27

portion of the Fund's assets invested in relatively illiquid Senior Loan
interests may restrict the ability of the Fund to dispose of its investments in
Senior Loans in a timely fashion and at a fair price, and could result in
capital losses to the Fund and holders of Common Shares. However, many of the
Senior Loans in which the Fund expects to purchase interests are of a relatively
large principal amount and are held by a relatively large number of owners which
should, in the Adviser's opinion, enhance the relative liquidity of such
interests. The risks associated with illiquidity are particularly acute in
situations where the Fund's operations require cash, such as when the Fund
tenders for its Common Shares, and may result in the Fund borrowing to meet
short-term cash requirements.

To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans in connection
with highly leveraged transactions, the availability of Senior Loan interests
for investment by the Fund may be adversely affected. In addition, such
requirements or restrictions may reduce or eliminate sources of financing for
certain Borrowers. Further, to the extent that legislation or federal or state
regulators that regulate certain financial institutions require such
institutions to dispose of Senior Loan interests relating to highly leveraged
transactions or subject such Senior Loan interests to increased regulatory
scrutiny, such financial institutions may determine to sell such Senior Loan
interests in a manner that results in a price which, in the opinion of the
Adviser, is not indicative of fair value. Were the Fund to attempt to sell a
Senior Loan interest at a time when a financial institution was engaging in such
a sale with respect to such Senior Loan interest, the price at which the Fund
could consummate such a sale might be adversely affected.

The Fund has registered as a "non-diversified" investment company so that,
subject to its investment restrictions, it will be able to invest more than 5%
of the value of its assets in the obligations of any single issuer, including
Senior Loans of a single Borrower or Participations purchased from a single
Lender. See "Investment Restrictions" in the Statement of Additional
Information. The Fund does not intend, however, to invest more than 5% of the
value of its assets in interests in Senior Loans of a single Borrower. To the
extent the Fund invests a relatively high percentage of its assets in
obligations of a limited number of issuers, the Fund will be more susceptible
than a more widely diversified investment company to any single corporate,
economic, political or regulatory occurrence.

The Fund may use various investment practices that involve special
considerations including engaging in interest rate and other hedging
transactions, lending its portfolio securities, entering into when-issued and
delayed delivery transactions and entering into repurchase and reverse
repurchase agreements. For further discussion of these practices and associated
special considerations, see "Investment Practices and Special Risks."

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<PAGE> 28

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INVESTMENT PRACTICES AND SPECIAL RISKS
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In connection with the investment objective and policies described above, the
Fund may: engage in interest rate and other hedging transactions, lend portfolio
holdings, purchase and sell interests in Senior Loans and other portfolio debt
securities on a "when issued" or "delayed delivery" basis, and enter into
repurchase and reverse repurchase agreements. These investment practices involve
certain special risk considerations. The Adviser may use some or all of the
following investment practices when, in the opinion of the Adviser, their use is
appropriate. Although the Adviser believes that these investment practices may
further the Fund's investment objective, no assurance can be given that these
investment practices will achieve this result.

INTEREST RATE AND OTHER HEDGING TRANSACTIONS

The Fund may enter into various interest rate hedging and risk management
transactions. Certain of these interest rate hedging and risk management
transactions may be considered to involve derivative instruments. A derivative
is a financial instrument whose performance is derived at least in part from the
performance of an underlying index, security or asset. The values of certain
derivatives can be affected dramatically by even small market movements,
sometimes in ways that are difficult to predict. There are many different types
of derivatives, with many different uses. The Fund expects to enter into these
transactions primarily to seek to preserve a return on a particular investment
or portion of its portfolio, and may also enter into such transactions to seek
to protect against decreases in the anticipated rate of return on floating or
variable rate financial instruments the Fund owns or anticipates purchasing at a
later date, or for other risk management strategies such as managing the
effective dollar-weighted average duration of the Fund's portfolio. In addition,
with respect to fixed-income securities in the Fund's portfolio or to the extent
an active secondary market develops in interests in Senior Loans in which the
Fund may invest, the Fund may also engage in hedging transactions to seek to
protect the value of its portfolio against declines in net asset value resulting
from changes in interest rates or other market changes. The Fund does not intend
to engage in such transactions to enhance the yield on its portfolio to increase
income available for distributions. Market conditions will determine whether and
in what circumstances the Fund would employ any of the hedging and risk
management techniques described below. The Fund will not engage in any of the
transactions for speculative purposes and will use them only as a means to hedge
or manage the risks associated with assets held in, or anticipated to be
purchased for, the Fund's portfolio or obligations incurred by the Fund. The
successful utilization of hedging and risk management transactions requires
skills different from those needed in the selection of the Fund's portfolio
securities. The Fund believes that the Adviser possesses the skills necessary
for the successful utilization of hedging and risk management transactions. The
Fund will incur brokerage and other costs in connection with its hedging
transactions.

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<PAGE> 29

To the extent permitted by applicable regulatory authority, the Fund may enter
into interest rate swaps or purchase or sell interest rate caps or floors. The
Fund will not sell interest rate caps or floors that it does not own. Interest
rate swaps involve the exchange by the Fund with another party of their
respective obligations to pay or receive interest, e.g., an exchange of an
obligation to make floating rate payments for an obligation to make fixed rate
payments. For example, the Fund may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio the Borrower to which
has selected an interest rate redetermination period of one year. The Fund could
exchange the Borrower's obligation to make fixed rate payments for one year for
an obligation to make payments that readjust monthly. In such event, the Fund
would consider the interest rate redetermination period of such Senior Loan to
be the shorter period.

The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest at the difference of the index and the predetermined rate
on a notional principal amount (the reference amount with respect to which
interest obligations are determined although no actual exchange of principal
occurs) from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest at
the difference of the index and the predetermined rate on a notional principal
amount from the party selling such interest rate floor. The Fund will not enter
into swaps, caps or floors if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Fund.

In circumstances in which the Adviser anticipates that interest rates will
decline, the Fund might, for example, enter into an interest rate swap as the
floating rate payor or, alternatively, purchase an interest rate floor. In the
case of purchasing an interest rate floor, if interest rates declined below the
floor rate, the Fund would receive payments from its counterparty which would
wholly or partially offset the decrease in the payments it would receive in
respect of the portfolio assets being hedged. In the case where the Fund
purchases such an interest rate swap, if the floating rate payments fell below
the level of the fixed rate payment set in the swap agreement, the Fund's
counterparty would pay the Fund amounts equal to interest computed at the
difference between the fixed and floating rates over the notional principal
amount. Such payments would offset or partially offset the decrease in the
payments the Fund would receive in respect of floating rate portfolio assets
being hedged.

The successful use of swaps, caps and floors to preserve the rate of return on
a portfolio of financial instruments depends on the Adviser's ability to predict
correctly the direction and extent of movements in interest rates. Although the
Fund believes that use of the hedging and risk management techniques described
above will benefit the Fund, if the Adviser's judgment about the direction or
extent of the movement in interest rates in incorrect, the Fund's overall
performance

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<PAGE> 30

would be worse than if it had not entered into any such transactions. For
example, if the Fund had purchased an interest rate swap or an interest rate
floor to hedge against its expectation that interest rates would decline but
instead interest rates rose, the Fund would lose part or all of the benefit of
the increased payments it would receive as a result of the rising interest rates
because it would have to pay amounts to its counterparty under the swap
agreement or would have paid the purchase price of the interest rate floor.

Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, the Adviser and the Fund believe such obligations do not
constitute senior securities. The Fund will usually enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If the Fund enters into a swap on other than a net basis, the
Fund will maintain in the segregated account the full amount of the Fund's
obligations under each such swap. Accordingly, the Fund does not treat swaps as
senior securities. The Fund may enter into swaps, caps and floors with member
banks of the Federal Reserve System, members of the New York Stock Exchange or
other entities determined by the Adviser, pursuant to procedures adopted and
reviewed on an ongoing basis by the Board of Trustees, to be creditworthy. If a
default occurs by the other party to such transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction but
such remedies may be subject to bankruptcy and insolvency laws which could
affect the Fund's rights as a creditor. The swap market has grown substantially
in recent years with a large number of banks and financial services firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations and they are less liquid than swaps. There can be no
assurance, however, that the Fund will be able to enter into interest rate swaps
or to purchase interest rate caps or floors at prices or on terms the Adviser
believes are advantageous to the Fund. In addition, although the terms of
interest rate swaps, caps and floors may provide for termination, there can be
no assurance that the Fund will be able to terminate an interest rate swap or to
sell or offset interest rate caps or floors that it has purchased.

New financial products continue to be developed and the Fund may invest in any
such products as may be developed to the extent consistent with its investment
objective and the regulatory and federal tax requirements applicable to
investment companies.

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<PAGE> 31

LENDING OF PORTFOLIO HOLDINGS

The Fund may seek to increase its income by lending financial instruments in
its portfolio in accordance with present regulatory policies, including those of
the Board of Governors of the Federal Reserve System and the SEC. Such loans may
be made, without limit, to brokers, dealers, banks or other recognized
institutional borrowers of financial instruments and would be required to be
secured continuously by collateral, including cash, cash equivalents or U.S.
Treasury bills maintained on a current basis at an amount at least equal to the
market value of the financial instruments loaned. The Fund would have the right
to call a loan and obtain the financial instruments loaned at any time on five
days' notice. For the duration of a loan, the Fund would continue to receive the
equivalent of the interest paid by the issuer on the financial instruments
loaned and also would receive compensation from the investment of the
collateral. The Fund would not have the right to vote any financial instruments
having voting rights during the existence of the loan, but the Fund could call
the loan in anticipation of an important vote to be taken among holders of the
financial instruments or in anticipation of the giving or withholding of their
consent on a material matter affecting the financial instruments. As with other
extensions of credit, risks of delay in recovery or even loss of rights in the
collateral exist should the borrower of the financial instruments fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing and when, in the judgment of the Adviser, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. The creditworthiness of firms to which the Fund lends its
portfolio holdings will be monitored on an ongoing basis by the Adviser pursuant
to procedures adopted and reviewed, on an ongoing basis, by the Board of
Trustees of the Fund. No specific limitation exists as to the percentage of the
Fund's assets which the Fund may lend.

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS

The Fund may also purchase and sell interests in Senior Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Senior Loans and other portfolio debt securities
at delivery may be more or less than their purchase price, and yields generally
available on such interests or securities when delivery occurs may be higher or
lower than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will make
commitments to purchase such interests or securities on such basis only with

31
<PAGE> 32

the intention of actually acquiring these interests or securities, but the Fund
may sell such interests or securities prior to the settlement date if such sale
is considered to be advisable. To the extent the Fund engages in "when issued"
and "delayed delivery" transactions, it will do so for the purpose of acquiring
interests or securities for the Fund's portfolio consistent with the Fund's
investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements (a purchase of, and a
simultaneous commitment to resell, a financial instrument at an agreed upon
price on an agreed upon date) only with member banks of the Federal Reserve
System and member firms of the New York Stock Exchange. When participating in
repurchase agreements, the Fund buys securities from a vendor, e.g., a bank or
brokerage firm, with the agreement that the vendor will repurchase the
securities at a higher price at a later date. Such transactions afford an
opportunity for the Fund to earn a return on available cash at minimal market
risk, although the Fund may be subject to various delays and risks of loss if
the vendor is unable to meet its obligation to repurchase. Under the 1940 Act,
repurchase agreements are deemed to be collateralized loans of money by the Fund
to the seller. In evaluating whether to enter into a repurchase agreement, the
Adviser will consider carefully the creditworthiness of the vendor. If the
member bank or member firm that is the party to the repurchase agreement
petitions for bankruptcy or otherwise becomes subject to the U.S. Bankruptcy
Code, the law regarding the rights of the Fund is unsettled. The securities
underlying a repurchase agreement will be marked to market every business day so
that the value of the collateral is at least equal to the value of the loan,
including the accrued interest thereon, and the Adviser will monitor the value
of the collateral. No specific limitation exists as to the percentage of the
Fund's assets which may be used to participate in repurchase agreements.

REVERSE REPURCHASE AGREEMENTS

The Fund may enter into reverse repurchase agreements with respect to debt
obligations which could otherwise be sold by the Fund. A reverse repurchase
agreement is an instrument under which the Fund may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker or dealer) to sell the security back to the Fund at
an agreed upon price on an agreed upon date. The Fund will maintain in a
segregated account with its custodian cash or liquid securities in an amount
sufficient to cover its obligations with respect to reverse repurchase
agreements. The Fund receives payment for such securities only upon physical
delivery or evidence of book entry transfer by its custodian. Regulations of the
SEC require either that securities sold by the Fund under a reverse repurchase
agreement be segregated pending repurchase or that the proceeds be segregated on
the Fund's books and records pending repurchase. Reverse repurchase agreements
could involve certain risks in the event

32
<PAGE> 33

of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them. Reverse repurchase agreements will be considered
borrowings by the Fund and as such would be subject to the restrictions on
borrowing described in the Statement of Additional Information under "Investment
Restrictions." The Fund will not hold more than 5% of the value of its total
assets in reverse repurchase agreements.

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TAXATION
- ------------------------------------------------------------------------------

The following federal tax discussion is based on the advice of Skadden, Arps,
Slate, Meagher & Flom (Illinois), reflects applicable tax laws as of the date of
this Prospectus and is qualified by reference to the additional federal income
tax discussion included in the Statement of Additional Information.

The Fund intends to qualify each year and to elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). If the Fund so qualifies and distributes each
year to its shareholders at least 90% of its net investment income (including,
among other things, interest and net short-term capital gains, but not net
capital gains, which are the excess of net long-term capital gains over net
short-term capital losses) in each year, the Fund will not be required to pay
federal income taxes on any income distributed to shareholders. The Fund will
not be subject to federal income tax on any net capital gains distributed to
shareholders. As a Massachusetts business trust, the Fund will not be subject to
any excise or income taxes in Massachusetts as long as it qualifies as a
regulated investment company for federal income tax purposes.

Distributions. Distributions of the Fund's net investment income are taxable
to holders of Common Shares as ordinary income, whether paid in cash or
reinvested in additional Common Shares. Distributions of the Fund's net capital
gains ("capital gains dividends"), if any, are taxable to holders of Common
Shares at the rates applicable to long-term capital gains regardless of the
length of time shares of the Fund have been held by such shareholders. The Fund
will inform shareholders of the source and tax status of all distributions
promptly after the close of each calendar year.

Sale of Shares. Except as discussed below, selling shareholders will
generally recognize gain or loss in an amount equal to the difference between
their adjusted

33
<PAGE> 34

tax basis in the Common Shares and the amount received. If such Common Shares
are held as a capital asset, the gain or loss will be a capital gain or loss and
will be long-term if such Common Shares have been held for more than one year.
It is possible, although the Fund believes it is unlikely, that tendering
holders of Common Shares may not qualify for gain or loss treatment as described
above, which in turn may result in deemed distributions to non-tendering holders
of Common Shares. The federal income tax consequences of the repurchase of
Common Shares pursuant to tender offers will be disclosed in the related
offering documents. Any loss realized upon a taxable disposition of Common
Shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gains dividends received with respect to such
Common Shares. For purposes of determining whether Common Shares have been held
for six months or less, the holding period is suspended for any periods during
which the Common Shareholder's risk of loss is diminished as a result of holding
one or more other positions in substantially similar or related property or
through certain options or short sales.

General. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal and state tax consequences of holding and disposing of
Common Shares, as well as the effects of other state, local and foreign tax laws
and any proposed tax law changes.

- ------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------------------

BOARD OF TRUSTEES

The management of the Fund, including general supervision of the duties
performed by the Adviser under the Advisory Agreement, is the responsibility of
the Fund's Board of Trustees.

THE ADVISER

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser is a wholly-owned subsidiary of Van
Kampen American Capital, Inc., which in turn is a wholly-owned subsidiary of
VK/AC Holding, Inc. VK/AC Holding, Inc. is a wholly-owned subsidiary of MSAM
Holdings II, Inc. which, in turn, is a wholly-owned subsidiary of Morgan Stanley
Group Inc. The Adviser's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.

Van Kampen American Capital, Inc. is a diversified asset management company
with more than two million retail investor accounts, extensive capabilities for
managing institutional portfolios, and more than $57 billion under management or
supervision. Van Kampen American Capital, Inc.'s more than 40 open-end and 38
closed-end funds and more than 2,800 unit investment trusts are professionally
distributed by leading financial advisers nationwide.

34
<PAGE> 35

Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered broker-
dealer and investment manager adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.

INVESTMENT ADVISORY AGREEMENT. The business and affairs of the Fund will be
managed under the direction of the Fund's Board of Trustees. Subject to their
authority, the Adviser and the Fund's officers will supervise and implement the
Fund's investment activities and will be responsible for overall management of
the Fund's business affairs. The investment advisory agreement (the "Advisory
Agreement") between the Adviser and the Fund provides that the Adviser will
supply investment research and portfolio management, including the selection of
securities for the Fund to purchase, hold, or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed. The Adviser also
furnishes offices, necessary facilities and equipment and permits its officers
and employees to serve without compensation as Trustees and officers of the Fund
if duly elected to such positions. The Fund has reimbursed VKAC for costs
incurred in connection with the Fund's organization and its initial registration
of the common shares in the amount of $1,037,578. The Fund expects to incur
approximately $830,000 in expenses in connection with the offering of
225,000,000 Common Shares pursuant to this Prospectus. A portion of such
expenses will be charged as operating expenses during the current period and the
remainder will be amortized over a period of not more than twelve months.

For the services provided by the Adviser under the Advisory Agreement, the
Fund will pay the Adviser an annualized fee (accrued daily and paid monthly)
equal to a percentage of the average net assets of the Fund as indicated below.
The advisory fee is higher than the fees paid by most management investment
companies, although it is comparable to the fees paid by several publicly
offered, closed-end management investment companies with investment objectives
and policies similar to those of the Fund.

<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS PERCENT PER ANNUM
- ------------------------ -----------------
<S> <C>
First $4.0 Billion 0.950 of 1.00%
Next $ 3.5 Billion 0.900 of 1.00%
Next $ 2.5 Billion 0.875 of 1.00%
Over $10.0 Billion 0.850 of 1.00%
</TABLE>

PORTFOLIO MANAGEMENT. Jeffrey W. Maillet is a Senior Vice President of the
Adviser and has been primarily responsible for the day to day management of the

35
<PAGE> 36

Fund's portfolio since the Fund's commencement of investment operations.
Mr. Maillet has been employed by the Adviser since 1989.

THE ADMINISTRATOR. The administrator for the Fund is VKAC (in such capacity,
the "Administrator"). Its principal business address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. The Administrator is a wholly-owned subsidiary
of Van Kampen American Capital, Inc., which in turn is a wholly-owned subsidiary
of VK/AC Holding, Inc. VK/AC Holding, Inc. is a wholly-owned subsidiary of MSAM
Holdings II, Inc. which, in turn, is a wholly-owned subsidiary of Morgan Stanley
Group Inc. The Administrator maintains offices and regional representatives in
major cities across the nation. VKAC is the principal underwriter of the Common
Shares in connection with the offering thereof by the Fund. See "Purchase of
Shares."

Pursuant to the administration agreement between the Fund and the
Administrator (the "Administration Agreement") and in consideration of its
administrative fee, the Administrator will (i) monitor the provisions of the
Loan Agreements and any agreements with respect to Participations and
Assignments and be responsible for recordkeeping with respect to Senior Loans in
the Fund's portfolio; (ii) arrange for the printing and dissemination of reports
to holders of Common Shares; (iii) arrange for the dissemination of the Fund's
proxy and any tender offer materials to holders of Common Shares, and oversee
the tabulation of proxies by the Fund's transfer agent; (iv) negotiate the terms
and conditions under which custodian services will be provided to the Fund and
the fees to be paid by the Fund in connection therewith; (v) negotiate the terms
and conditions under which dividend disbursing services will be provided to the
Fund, and the fees to be paid by the Fund in connection therewith and review the
provision of dividend disbursing services to the Fund; (vi) provide the Fund's
dividend disbursing agent and custodian with such information as is required for
such parties to effect payment of dividends and distributions and to implement
the Fund's dividend reinvestment plan; (vii) make such reports and
recommendations to the Board of Trustees as the Trustees reasonably request or
deem appropriate; and (viii) provide shareholder services to holders or
potential holders of the Fund's securities.

For the services rendered to the Fund and related expenses borne by the
Administrator, the Fund pays the Administrator a fee, accrued daily and paid
monthly, at the annualized rate of 0.25% of the Fund's net assets.

- ------------------------------------------------------------------------------
DISTRIBUTIONS
- ------------------------------------------------------------------------------

The Fund's present policy is to declare daily and pay monthly distributions to
holders of Common Shares of substantially all net investment income of the Fund.
Net investment income of the Fund consists of all interest income, fee income,
other ordinary income earned by the Fund on its portfolio assets and net
short-term capital gains, less all expenses of the Fund. Expenses of the Fund
are accrued each day. Distributions to holders of Common Shares cannot be
assured, and the amount

36
<PAGE> 37

of each monthly distribution is likely to vary. Net realized long-term capital
gains, if any, are expected to be distributed to holders of Common Shares at
least annually. Holders of Common Shares may elect to have distributions
automatically reinvested in additional Common Shares. See "Dividend Reinvestment
Plan."

- ------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
- ------------------------------------------------------------------------------

The Fund offers a Dividend Reinvestment Plan (the "Plan") pursuant to which
Common Shareholders may elect to have all distributions of dividends and all
capital gains automatically reinvested in Common Shares pursuant to the Plan.
Unless Common Shareholders elect to participate in the Plan, all Common
Shareholders will receive distributions of dividends and capital gains in cash.

State Street Bank and Trust Company, as plan agent (the "Plan Agent"), serves
as agent for the Common Shareholders in administering the Plan. Participants in
the Plan will receive the equivalent in Common Shares valued on the valuation
date, at net asset value. The valuation date will be the dividend or
distribution payment date or, if that date is not a business day, the next
preceding business day.

The Plan Agent maintains each Common Shareholder's account in the Plan and
furnishes monthly written confirmations of all transactions in the accounts,
including information needed by Common Shareholders for personal and tax
records. Common Shares in the account of each Plan participant will be held by
the Plan Agent in non-certificated form in the name of the participant, and each
Common Shareholder's proxy will include those Common Shares purchased pursuant
to the Plan. The Plan Agent's fees for the handling of the reinvestment of
dividends and distributions will be paid by the Fund.

In the case of Common Shareholders, such as banks, brokers or nominees, which
hold Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record Common Shareholders as representing the total amount
registered in the record Common Shareholder's name and held for the account of
beneficial owners who are participating in the Plan.

The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable or required to be
withheld on such dividends or distributions.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all Common Shareholders of the Fund at least 90 days before the
record date for the dividend distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Fund.

37
<PAGE> 38

All registered Common Shareholders (other than brokers or nominees) will be
mailed information regarding the Plan, including a form with which they may
elect to participate in the Plan. Shareholders who intend to hold their Common
Shares through a broker or nominee should contact such person to confirm that
they may participate in the Plan and to determine the effect, if any, that a
transfer of the account by the shareholder to another broker or nominee will
have on continued participation in the Plan. A Common Shareholder may withdraw
from the Plan at any time by contacting the Plan Agent at the address or
telephone number set forth below. There is no penalty for non-participation in
or withdrawal from the Plan, and Common Shareholders who have previously
withdrawn from the Plan may rejoin it at any time. Changes in elections should
be directed to the Plan Agent and should include the name of the Fund and the
Common Shareholder's name and address as registered. An election to withdraw
from the Plan will, until such election is changed, be deemed to be an election
by a Common Shareholder to take all subsequent dividends and distributions in
cash. Elections will only be effective for dividends and distributions declared
after, and with a record date of at least ten days after, such elections are
received by the Plan Agent. When a participant withdraws from the Plan or upon
termination of the Plan as provided above, certificates for whole Common Shares
credited to his or her account under the Plan will be issued and a cash payment
will be made for any fraction of a Common Share credited to such account. All
correspondence concerning the Plan should be directed to the Plan Agent at P.O.
Box 8200, Boston, MA 02101. Telephone calls concerning the Plan may be directed
to the Plan Agent between the hours of 7:30 a.m. and 5:00 p.m. Central Standard
Time at (800) 341-2929.

DIVIDEND DIVERSIFICATION. A shareholder also may, upon written request by
completing the appropriate section of the application form or by calling (800)
421-5666 ((800) 772-8889 for the hearing impaired), elect to have all dividends
and other distributions paid on Common Shares of the Fund invested into shares
of certain mutual funds advised by the Adviser or its affiliates so long as a
pre-existing account for such shares exists for the shareholder. A shareholder
may call the phone numbers shown above to obtain a list of the mutual funds
available and to request current prospectuses.

If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.

- ------------------------------------------------------------------------------
REPURCHASE OF SHARES
- ------------------------------------------------------------------------------

The Board of Trustees of the Fund currently intends, each quarter, to consider
authorizing the Fund to make tender offers for all or a portion of its then

38
<PAGE> 39

outstanding Common Shares at the net asset value of the Common Shares on the
expiration date of the tender offer. Commencement by the Fund of a tender offer
during a period in which it is simultaneously engaged in the continuous offering
of its Common Shares may be a violation of rules promulgated by the SEC under
the Securities Exchange Act of 1934. The Fund has obtained an exemption from the
SEC that would permit the Fund to make tender offers for its Common Shares while
simultaneously engaged in the continuous offering of its Common Shares. No
assurance can be given that the Fund will be able to maintain such exemption
indefinitely. If the Board of Trustees of the Fund authorizes the Fund to make
such a tender offer at such time, if any, that the Fund shall be unable to rely
on such exemption, the Fund intends to suspend the continuous offering of its
Common Shares during the term of such tender offer.

Although such tender offers, if undertaken and completed, will provide some
liquidity for holders of the Common Shares, there can be no assurance that such
tender offers will in fact be undertaken or completed or, if completed, that
they will provide sufficient liquidity for all holders of Common Shares who may
desire to sell such Common Shares. As such, investment in the Common Shares
should be considered illiquid. As of the date of this Prospectus, the Fund has
commenced and consummated tender offers in each quarter since the commencement
of investment operations. An early withdrawal charge payable to VKAC will be
imposed on most Common Shares accepted for tender by the Fund which have been
held for less than five years, as described below.

Although the Board of Trustees believes that tender offers for the Common
Shares generally would increase the liquidity of the Common Shares, the
acquisition of Common Shares by the Fund will decrease the total assets of the
Fund and, therefore, have the effect of increasing the Fund's expense ratio.
Because of the nature of the Fund's investment objective and policies and the
Fund's portfolio, the Adviser anticipates potential difficulty in disposing of
portfolio securities in order to consummate tender offers for the Common Shares.
As a result, the Fund may be required to borrow money in order to finance
repurchases and tenders.

The Fund's Declaration of Trust authorizes the Fund, without prior approval of
the holders of Common Shares, to borrow money in an amount up to 33 1/3% of the
Fund's total assets, for the purpose of, among other things, obtaining
short-term credits in connection with tender offers by the Fund for Common
Shares. In this connection, the Fund may issue notes or other evidence of
indebtedness or secure any such borrowings by mortgaging, pledging or otherwise
subjecting as security the Fund's assets. Under the requirements of the 1940
Act, the Fund, immediately after any such borrowing, must have an "asset
coverage" of at least 300%. With respect to any such borrowing, asset coverage
means the ratio which the value of the total assets of the Fund, less all
liabilities and indebtedness not represented by senior securities (as defined in
the 1940 Act), bears to the aggregate amount of such borrowing by the Fund. The
rights of lenders to the Fund to receive interest on and repayment of principal
of any such borrowings will be senior to those of the holders

39
<PAGE> 40

of Common Shares, and the terms of any such borrowings may contain provisions
which limit certain activities of the Fund, including the payment of dividends
to holders of Common Shares in certain circumstances. Further, the terms of any
such borrowing may and the 1940 Act does (in certain circumstances) grant to the
lenders to the Fund certain voting rights in the event of default in the payment
of interest on or repayment of principal. In the event that such provisions
would impair the Fund's status as a regulated investment company, the Fund,
subject to its ability to liquidate its relatively illiquid portfolio, intends
to repay the borrowings. Any borrowing will likely rank senior to or pari passu
with all other existing and future borrowings of the Fund. Interest payments and
fees incurred in connection with borrowings will reduce the amount of net income
available for payment to the holders of Common Shares. The Fund does not intend
to use borrowings for leverage purposes. Accordingly, the Fund will not purchase
additional portfolio securities at any time that borrowings, including the
Fund's commitments, pursuant to reverse repurchase agreements, exceed 5% of the
Fund's total assets (after giving effect to the amount borrowed).

The Fund has entered into a Credit Agreement with Morgan Guaranty Trust
Company of New York ("Morgan") pursuant to which Morgan has agreed to provide a
credit facility in the maximum amount of $50,000,000 to the Fund. The credit
facility provided by Morgan will terminate on January 24, 1997, unless extended
pursuant to the terms thereof. The Fund has entered into a revolving credit
agreement with Bank of America Illinois, formerly known as Continental Bank N.A.
("Bank of America"), pursuant to which Bank of America has agreed to provide a
credit facility in the maximum amount of $50,000,000 to the Fund. The credit
facility provided by Bank of America will terminate on December 11, 1996, unless
extended pursuant to the terms thereof. The Fund is also a party to a letter
agreement with State Street Bank and Trust Company ("State Street") pursuant to
which State Street has agreed to provide a credit facility in the maximum amount
of $50,000,000 to the Fund. The credit facility provided by State Street will
terminate on February 28, 1997, unless extended by its terms. As of the date of
this Prospectus, the Fund had not borrowed any amounts pursuant to the credit
agreements with Morgan, State Street and Bank of America. See "Repurchase of
Shares" in the Statement of Additional Information.

Should the Fund determine to make a tender offer for its Common Shares, a
notice describing the tender offer, containing information shareholders should
consider in deciding whether to tender their Common Shares and including
instructions on how to tender Common Shares will be sent to shareholders of
record. Information concerning the purchase price to be paid by the Fund and the
manner in which shareholders may ascertain net asset value during the pendency
of a tender offer will also be set forth in the notice. The Fund will purchase
all Common Shares tendered in accordance with the terms of the offer unless it
determines to terminate the offer. Costs associated with the tender will be
charged against capital. See the Statement of Additional Information for
additional information concerning repurchase of Common Stock.

40
<PAGE> 41

Upon the death of a holder of Common Shares, VKAC will waive any early
withdrawal charge (discussed below) applicable to the first $100,000 worth of
such holder's Common Shares repurchased pursuant to a tender offer commenced
within one year of such holder's death; provided that the Fund's transfer agent
has received, on VKAC's behalf, proper notice of the death of such holder. For
this purpose, the transfer agent will be deemed to have received proper notice
of such holder's death upon its receipt of (i) a duly executed Letter of
Transmittal duly submitted in connection with a tender offer, (ii) a written
request for waiver of the early withdrawal charge, in form satisfactory to the
transfer agent, signed by the holder's duly authorized representative or
surviving tenant, (iii) appropriate evidence of death and (iv) appropriate
evidence of the authority of the representative of the deceased holder or
surviving tenant. Common Shares held in joint tenancy or tenancy in common will
be deemed to be held by a single holder (which may be either tenant in the case
of joint tenancy) and the death of any such tenant will be deemed to be the
death of such holder of Common Shares. Information concerning the waiver of the
early withdrawal charge may be obtained by contacting the Fund.

If the Fund must liquidate portfolio holdings in order to purchase Common
Shares tendered, the Fund may realize gains and losses. Such gains may be
realized on securities held for less than three months. Due to the requirement
for qualification as a regulated investment company under the Code that less
than 30% of the Fund's annual gross income be derived from the disposition of
securities held for less than three months, the Fund may not be able to sell
portfolio holdings held for less than three months that the Fund may wish to
sell in the ordinary course of its portfolio management, which may affect
adversely the Fund's yield.

EARLY WITHDRAWAL CHARGE. An early withdrawal charge to recover offering
expenses will be charged in connection with most Common Shares held for less
than five years which are accepted by the Fund for repurchase pursuant to tender
offers. The early withdrawal charge will be imposed on a number of Common Shares
accepted for cash tender from a record holder of Common Shares the value of
which exceeds the aggregate value at the time the tender is accepted of (a) all
Common Shares owned by such holder that were purchased more than five years
prior to such acceptance, (b) all Common Shares owned by such holder that were
acquired through reinvestment of distributions, and (c) the increase, if any, of
value of all other Common Shares owned by such holder (namely those purchased
within the five years preceding the acceptance) over the purchase price of such
Common Shares. The early withdrawal charge will be paid to VKAC. For the fiscal
years ended July 31, 1994, 1995 and 1996, VKAC received payments totalling
$2,100,000, $1,469,000 and $5,721,300, respectively, pursuant to the early
withdrawal charge. In determining whether an early withdrawal charge is payable,
it is assumed that the acceptance of a repurchase offer would be made from the
earliest

41
<PAGE> 42

purchase of Common Shares. Any early withdrawal charge which is required to be
imposed will be made in accordance with the following schedule.

<TABLE>
<CAPTION>
YEAR OF REPURCHASE
AFTER PURCHASE EARLY WITHDRAWAL CHARGE
- --------------------------------------------------- -----------------------
<S> <C> <C>
First........................................ 3.0%
Second....................................... 2.5%
Third........................................ 2.0%
Fourth....................................... 1.5%
Fifth........................................ 1.0%
Sixth and following.......................... 0.0%
</TABLE>

The following example will illustrate the operation of the early withdrawal
charge. Assume that an investor purchases $10,000 worth of the Fund's Common
Shares for cash through VKAC and that 21 months later the value of the account
has grown through the reinvestment of dividends and capital appreciation to
$12,000. The investor then may submit for repurchase pursuant to a tender offer
up to $2,000 worth of Common Shares without incurring an early withdrawal
charge. If the investor should submit for repurchase pursuant to a tender offer
$5,000 worth of Common Shares, an early withdrawal charge would be imposed on
$3,000 worth of the Common Shares submitted. The charge would be imposed at the
rate of 2.5% because it is in the second year after the purchase was made and
the charge would be $75.

EXCHANGES. Tendering shareholders may elect to receive, in lieu of cash, the
proceeds from the tender of Common Shares of the Fund in contingent deferred
sales charge shares ("Class B Shares") of certain open-end investment companies
distributed by VKAC ("VKAC Funds"). The Early Withdrawal Charge will be waived
for Common Shares tendered in exchange for Class B Shares in the VKAC Funds;
however, such Class B Shares immediately become subject to a contingent deferred
sales charge equivalent to the Early Withdrawal Charge on Common Shares of the
Fund. Thus, shares of such VKAC Funds may be subject to a contingent deferred
sales charge upon a subsequent redemption from the VKAC Funds. The purchase of
shares of such VKAC Fund will be deemed to have occurred at the time of the
initial purchase of the Common Shares of the Fund for calculating the applicable
contingent deferred sales charge.

The prospectus for each VKAC Fund describes its investment objectives and
policies. Shareholders can obtain, without charge, a prospectus by calling
1-800-421-5666 and should consider these objectives and policies carefully
before requesting an exchange. Each exchange must involve proceeds from Common
Shares which have a net asset value of at least $500. An exchange is a taxable
event and may result in a taxable gain or loss.

42
<PAGE> 43

- ------------------------------------------------------------------------------
DESCRIPTION OF COMMON SHARES
- ------------------------------------------------------------------------------

The Fund is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by a Declaration of Trust dated July 14, 1989, as
amended and restated on September 19, 1989 (the "Declaration of Trust"). The
Declaration of Trust provides that the Trustees of the Fund may authorize
separate classes of shares of beneficial interest. The Trustees have authorized
an unlimited number of Common Shares. The Declaration of Trust also authorizes
the Fund to borrow money or otherwise obtain credit and in this connection issue
notes or other evidence of indebtedness. The Fund does not intend to hold annual
meetings of the holders of Common Shares.

COMMON SHARES. The Declaration of Trust permits the Fund to issue an
unlimited number of full and fractional Common Shares of beneficial interest,
$.01 par value per Common Share. Each Common Share represents an equal
proportionate interest in the assets of the Fund with each other Common Share in
the Fund. Holders of Common Shares will be entitled to the payment of dividends
when, as and if declared by the Board of Trustees. The terms of any borrowings
may limit the payment of dividends to the holders of Common Shares. Each whole
Common Share shall be entitled to one vote as to matters on which it is entitled
to vote pursuant to the terms of the Fund's Declaration of Trust on file with
the SEC. Upon liquidation of the Fund, after paying or adequately providing for
the payment of all liabilities of the Fund, and upon receipt of such releases,
indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining assets of the Fund among
the holders of the Common Shares. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Fund, requires inclusion
of a clause to that effect in every agreement entered into by the Fund and
indemnifies shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law, in certain
limited circumstances, may be held personally liable for the obligations of the
trust as though they were general partners, the provisions of the Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote.

As a rule, the Fund will not issue share certificates. However, upon written
request to the Fund's transfer agent, a Share certificate will be issued for any
or all of the full Common Shares credited to an investor's account. Share
certificates which have been issued to an investor may be returned at any time.

The Common Shares are not, and are not expected to be, listed for trading on
any national securities exchange nor, to the Fund's knowledge, is there, or is
there expected to be, any secondary trading market in the Common Shares. The
following table sets forth, since the commencement of the Fund's investment
operations, for

43
<PAGE> 44

the quarterly periods ending on the dates set forth below the high and low net
asset value per Common Share during such period.

<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDING HIGH LOW
----------------------------------------------- ------ ------
<S> <C> <C>
September 30, 1996............................. $10.01 $10.00
June 30, 1996.................................. 10.00 10.00
March 31, 1996................................. 10.03 10.00
December 31, 1995.............................. $10.04 $10.02
September 30, 1995............................. 10.05 10.04
June 30, 1995.................................. 10.05 10.03
March 31, 1995................................. 10.07 10.02
December 31, 1994.............................. $10.06 $10.04
September 30, 1994............................. 10.05 10.03
June 30, 1994.................................. 10.05 10.03
March 31, 1994................................. 10.07 10.05
December 31, 1993.............................. $10.07 $10.00
September 30, 1993............................. 10.01 9.99
June 30, 1993.................................. 10.06 9.99
March 31, 1993................................. 10.06 10.04
December 31, 1992.............................. $10.04 $ 9.97
September 30, 1992............................. 10.02 9.99
June 30, 1992.................................. 10.01 9.98
March 31, 1992................................. 10.02 10.00
December 31, 1991.............................. $10.01 $ 9.99
September 30, 1991............................. 9.99 9.98
June 30, 1991.................................. 9.99 9.98
March 31, 1991................................. 10.00 9.99
December 31, 1990.............................. $10.00 9.99
September 30, 1990............................. 10.01 10.00
June 30, 1990.................................. 10.02 10.00
March 31, 1990................................. 10.02 10.02
December 31, 1989.............................. $10.02 $10.00
</TABLE>

As of November 8, 1996, the net asset value per Common Share was $10.00. The
following table sets forth certain information with respect to the Common Shares
as of November 8, 1996:

<TABLE>
<CAPTION>
(4)
(3) AMOUNT
AMOUNT HELD OUTSTANDING
(2) BY FUND FOR EXCLUSIVE OF
(1) AMOUNT ITS OWN AMOUNT SHOWN
TITLE OF CLASS AUTHORIZED ACCOUNT UNDER (3)
----------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
Common Shares of beneficial
interest, $.01 par value unlimited 0 523,806,758
</TABLE>

To the knowledge of the Fund, as of November 8, 1996, no person held 5% or
more of the Fund's Common Shares either beneficially or of record. Further, as
of such date, officers and trustees of the Fund as a group owned less than 1% of
the Common Shares.

44
<PAGE> 45

ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST. The Fund's Declaration
of Trust includes provisions that could have the effect of limiting the ability
of other entities or persons to acquire control of the Fund or to change the
composition of its Board of Trustees by discouraging a third party from seeking
to obtain control of the Fund. In addition, in the event a secondary market were
to develop in the Common Shares, such provisions could have the effect of
depriving holders of Common Shares of an opportunity to sell their Common Shares
at a premium over prevailing market prices. A Trustee may be removed from office
only for cause by a written instrument signed by at least two-thirds of the
remaining Trustees or by a vote of the holders of at least two-thirds of the
Common Shares.

In addition, the Declaration of Trust requires the favorable vote of the
holders of at least two-thirds of the outstanding Common Shares then entitled to
vote to approve, adopt or authorize certain transactions with 5%-or-greater
holders of Common Shares and their associates, unless the Board of Trustees
shall by resolution have approved a memorandum of understanding with such
holders, in which case normal voting requirements would be in effect. See
"Repurchase of Shares--Anti-takeover Provisions" in the Statement of Additional
Information.

- ------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- ------------------------------------------------------------------------------

The Fund offers continuously its Common Shares through VKAC, the principal
underwriter of the continuous offering of the Common Shares, whose offices are
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. The Common
Shares will also be offered through members of the National Association of
Securities Dealers, Inc. ("NASD") or eligible non-NASD members who are acting as
brokers or agents for investors ("broker-dealers"). The Fund reserves the right
to terminate or suspend the continuous offering of its Common Shares at any time
without prior notice.

The Fund does not intend to list the Common Shares on any national securities
exchange and none of the Fund, the Adviser or VKAC, intends to make a secondary
market in the Common Shares. Accordingly, there is not expected to be any
secondary trading market in the Common Shares and an investment in the Common
Shares should be considered illiquid.

Except as discussed below under "Investments by Tax Sheltered Retirement
Plans," the minimum initial investment in the Fund is $1,000 and minimum
subsequent investment is $100.

During the continuous offering, the Common Shares will be offered by the Fund
at the public offering price next computed after an investor places an order to
purchase directly with VKAC, or with the investor's broker-dealer. The price of
Common Shares ordered through an investor's broker-dealer will be the public
offering price next determined after the Fund receives the order. Because the
Fund determines the public offering price once daily on each business day as of
5:00 p.m.

45
<PAGE> 46

Eastern time, orders placed through an investor's broker-dealer must be
transmitted to the Fund by the broker-dealer prior to such time for the
investor's order to be executed at the public offering price to be determined
that day. Any change in price due to the failure of the Fund to receive an order
prior to such time must be settled between the investor and the broker-dealer
placing the order. The public offering price is equal to the net asset value per
Common Share. There will be no initial sales charge or underwriting discount on
purchases of Common Shares.

VKAC will compensate broker-dealers participating in the continuous offering
at a rate of 3.0% of the dollar value of Common Shares purchased from the Fund
by such broker-dealers. If the Common Shares remain outstanding after one year
from the date of their original purchase, VKAC will compensate such
broker-dealers at an annual rate, paid quarterly, in an amount based on a
percentage of the value of such Common Shares, in accordance with the following
schedule:

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION AS A
YEAR AFTER DATE PERCENTAGE OF VALUE
OF ORIGINAL PURCHASE OF SHARES OUTSTANDING
- --------------------------------------------------- -----------------------
<S> <C>
First.............................................. 0.00%
Second............................................. 0.10%
Third.............................................. 0.15%
Fourth............................................. 0.20%
Fifth.............................................. 0.25%
Sixth and following................................ 0.35%
</TABLE>

At various times VKAC may implement programs under which a broker-dealer's sales
force may be eligible to win nominal awards for certain sales efforts. The value
of any such non-cash awards will not exceed $50 per person annually. These
incentives will not change the price investors pay for Common Shares or the
amount that the Fund will receive from the sale of Common Shares. The
compensation paid to broker-dealers at the time of purchase, the quarterly
payments mentioned above will be paid by VKAC out of its own assets, and not out
of the assets of the Fund. An early withdrawal charge payable to VKAC will be
imposed on most Common Shares held for less than five years that are accepted
for repurchase pursuant to a tender offer by the Fund. See "Repurchase of
Shares." The compensation paid to broker-dealers and VKAC, including the
compensation paid at the time of purchase, the quarterly payments mentioned
above and the early withdrawal charge, if any, will not in the aggregate exceed
applicable limitations. VKAC will monitor the aggregate value of all such
compensation on an ongoing basis.

Automatic Investment. Once an investor has opened an account in the Fund with
the minimum $1,000 investment, the automatic investment option may be utilized
to make regular monthly investments of $100 or more into such investor's account
with the Fund. In order to utilize this option, an investor must fill out and
sign the Automatic Investment application available from the transfer agent, the
Fund, such

46
<PAGE> 47

investor's broker or dealer, or VKAC. Once the transfer agent has received this
application, such investor's checking account at his designated local bank will
be debited each month in the amount authorized by such investor to purchase
shares of the Fund. Once enrolled in the Automatic Investment Program, an
investor may change the monthly amount or terminate participation at any time by
writing the transfer agent. Investors in the automatic investment program will
receive a confirmation of these transactions from the Fund quarterly and their
regular bank account statements will show the debit transaction each month.

Investments by Tax-Sheltered Retirement Plans. Common Shares are available for
purchase in connection with certain types of tax-sheltered retirement plans,
including: Individual Retirement Accounts ("IRAs") for individuals; Simplified
Employee Pension Plans ("SEP's") for employees; qualified plans for
self-employed individuals; and qualified corporate pension and profit sharing
plans for employees.

The purchase of shares of the Fund may be limited by the plans' provisions and
does not itself establish such plans. The minimum initial investment in
connection with a tax-sheltered retirement plan is $250.

IRAs are available for individuals under age 70 1/2 whether or not they are
active participants in any other tax-qualified employer plan. Generally,
individuals who are not active participants in a tax-qualified employer plan may
deduct from gross income their IRA contributions which do not exceed 100% of
compensation received during a year or $2,000 ($2,250 for a spousal account),
whichever is less. If an employee or the employee's spouse is an active
participant in a tax-qualified employer plan, the IRA deduction is phased out
above certain income levels. Individuals may, however, make non-deductible
contributions to their IRAs up to the lesser of 100% of annual compensation or
$2,000 ($2,250 for a spousal account) without being subject to an excise tax on
excessive contributions. Generally, earnings on investments held in an IRA are
not taxable until withdrawn. Subject to certain exceptions, substantial tax
penalties apply to withdrawals before age 59 1/2.

A SEP is a retirement program established by an employer (including
individuals) for the benefit of its eligible employees. Generally, any employee
who has attained age 21, worked for the employer during three of the past five
years and earned a specified amount from the employer in the current year will
be eligible to participate. Under a SEP, each participant establishes an IRA to
which the sponsoring employer makes annual calendar year contributions.
Generally, those contributions cannot exceed the lesser of $30,000 or 15% of the
participant's compensation for the year. A participating employee may also make
his or her IRA contribution to the same account. Generally, earnings on accounts
held in an IRA established pursuant to a SEP are not taxable until withdrawn.
Subject to certain exceptions, substantial tax penalties apply to withdrawals
before attainment of age 59 1/2.

Common Shares may also be purchased by employer sponsored tax qualified
retirement plans which allow for investments in investment companies. A
standard-

47
<PAGE> 48

ized plan is available through securities dealers or brokers, the Fund, or VKAC
for employers (including individuals) who desire to start or amend a retirement
plan. The form of this standardized plan has been determined to be "qualified"
under the Code. An employer may use this prototype to establish a profit sharing
plan, a money purchase pension plan or both for its eligible employees. The cost
for the use of the prototype is an initial fee of $50 and there are no annual
fees. The adopting employer determines within the prescribed limits the
eligibility standards, rate of contributions and other significant provisions of
the prototype plan. VKAC, as sponsor of this prototype plan, reserves the right
to amend such plan from time to time to assure its continued qualification under
the Code or for other reasons. Employers adopting this prototype plan will be
bound by such amendments.

Shareholders considering establishing a retirement plan or purchasing any Fund
shares in connection with a retirement plan, should consult with their attorney
or tax advisor with respect to plan requirements and tax aspects pertaining to
the shareholder.

The illiquid nature of the Fund's Common Shares may affect the nature of
distributions from tax sheltered retirement plans and may affect the ability of
participants in such plans to rollover assets to other tax sheltered retirement
plans.
- ------------------------------------------------------------------------------
COMMUNICATIONS WITH SHAREHOLDERS
- ------------------------------------------------------------------------------

The Fund will send semi-annual and annual reports to shareholders, including a
list of the portfolio investments held by the Fund.

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Business Week, Forbes or
other industry publications.

The Fund's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Fund's distributions per
Common Share during such a monthly distribution period and dividing the
annualized distribution by the Fund's maximum offering price per Common Share on
the last day of such period. The Fund calculates the compounded distribution
rate by adding one to the monthly distribution rate, raising the sum to the
power of 12 and subtracting one from the product. In circumstances in which the
Fund believes that, as a result of decreases in market rates of interest, its
expected monthly distributions may be less than the distributions with respect
to the immediately preceding monthly distribution period, the Fund reserves the
right to calculate the distribution rate on the basis of a period of less than
one month.

Distribution rate and compounded distribution rate figures utilized by the
Fund are based on historical performance and are not intended to indicate future

48
<PAGE> 49

performance. Distribution rate, compounded distribution rate and net asset value
per share can be expected to fluctuate over time.

The following table is intended to provide investors with a comparison of
short-term money market rates. This comparison should not be considered a
representation of future money market rates, nor what an investment in the Fund
may earn or what an investor's yield or total return may be in the future. These
comparisons may be used in advertisements and in information furnished to
present or prospective shareholders.

<TABLE>
<CAPTION>
COMPARISON OF PRIME RATE,
CERTIFICATE OF DEPOSIT RATE, MONEY MARKET RATE AND
LONDON INTER-BANK OFFERED RATE
(AVERAGE OF CALENDAR YEAR)
-----------------------------------------------------------------------------------------------------------------
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
----- ----- ----- ---- ---- ---- ---- ----- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prime
Rate(1)....... 15.06% 10.78% 12.06% 9.99% 8.38% 8.15% 9.24% 10.88% 10.01% 8.46% 6.25% 6.00% 8.50% 8.83%
C.D. Rate(2)... 12.57 9.27 10.68 8.25 6.51 7.01 7.91 9.08 8.17 5.91 3.76 3.28 6.90 5.93
Money Market
Rate(3)....... 11.70 8.20 9.58 7.50 6.17 5.89 6.77 8.53 7.82 5.44 3.36 2.70 3.75 5.47
LIBOR(4)....... 9.18 9.81 8.75 8.00 6.37 7.43 9.62 8.37 7.56 4.25 3.43 3.37 6.50 5.49
</TABLE>

- ---------------
(1) The Prime Rate quoted by a major U.S. bank is the base rate on corporate
loans at large U.S. money center commercial banks. Source: Federal Reserve
Bulletin.

(2) The Certificate of Deposit Rate represents the average annual rate paid on
large six-month CDs traded in the secondary market. Source: Bloomberg.

(3) The Money Market Rate represents Donoghue's Money Fund Averages for taxable
money market funds.

(4) The London Inter-Bank Offered Rate represents the rate at which most
creditworthy international banks dealing in Eurodollars charge each other
for large loans. Source: Bloomberg.

- ------------------------------------------------------------------------------
CUSTODIAN, DIVIDEND DISBURSING AND TRANSFER AGENT
- ------------------------------------------------------------------------------

State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, Massachusetts 02105-1713, is the custodian of the Fund and has custody
of the securities and cash of the Fund. The custodian, among other things,
attends to the collection of principal and income and payment for and collection
of proceeds of securities bought and sold by the Fund. State Street Bank and
Trust Company also will perform certain accounting services for the Fund
pursuant to the Fund Accounting Agreement between it and the Fund. ACCESS
Investor Services, Inc., P.O. Box 418256, Kansas City, Missouri 64141-9256 is
the dividend disbursing and transfer agent of the Fund.

49
<PAGE> 50

- ------------------------------------------------------------------------------
LEGAL OPINIONS
- ------------------------------------------------------------------------------

Certain legal matters in connection with the Common Shares offered hereby have
been passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom
(Illinois).

- ------------------------------------------------------------------------------
EXPERTS
- ------------------------------------------------------------------------------

The financial statements for the period ended July 31, 1996, included in the
Statement of Additional Information, have been so included in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants, given
on the authority of said firm as experts in auditing and accounting.

- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------

The Prospectus and the Statement of Additional Information do not contain all
of the information set forth in the Registration Statement that the Fund has
filed with the SEC. The complete Registration Statement may be obtained from the
SEC upon payment of the fee prescribed by its rules and regulations.

Statements contained in this Prospectus as to the contents of any contract or
other documents referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference.

The Table of Contents for the Statement of Additional Information is as
follows:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk
Considerations................................................ B- 2
Investment Restrictions......................................... B- 8
Officers and Trustees........................................... B-10
Portfolio Transactions.......................................... B-14
Management of the Fund.......................................... B-15
Net Asset Value................................................. B-17
Taxation........................................................ B-18
Repurchase of Shares............................................ B-21
Independent Accountants' Report................................. B-25
Financial Statements for the Year Ended July 31, 1996........... B-26
Notes to Financial Statements................................... B-38
</TABLE>

50
<PAGE> 51

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE
CALL THE FUND'S TOLL-FREE
NUMBER 1-800-421-5666.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-421-5666.

DEALERS--FOR DEALER
INFORMATION, CALL
1-800-421-5666. FOR WIRE ORDERS
CALL ACCESS INVESTOR
SERVICES, INC.'S TOLL FREE
NUMBER--1-800-231-7166

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-847-2424

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
One Parkview Plaza
Oakbrook Terrace, IL 60181

Investment Adviser

VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Principal Underwriter

VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Dividend Disbursing and Transfer Agent

ACCESS INVESTOR
SERVICES, INC.
P.O. BOX 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Prime Rate Income Trust

Custodian

STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Prime Rate Income Trust

Legal Counsel

SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606

Independent Auditors

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 52

- ------------------------------------------------------------------------------

PRIME RATE
INCOME TRUST

- ------------------------------------------------------------------------------

P R O S P E C T U S

NOVEMBER 13, 1996

------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------

VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 53

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST

STATEMENT OF ADDITIONAL INFORMATION

Van Kampen American Capital Prime Rate Income Trust, formerly known as Van
Kampen Merritt Prime Rate Income Trust (prior to October 11, 1995) (the "Fund"),
is a non-diversified, closed-end management investment company whose investment
objective is to provide a high level of current income, consistent with
preservation of capital. This Statement of Additional Information is not a
prospectus, but should be read in conjunction with the Prospectus for the Fund
dated November 13, 1996 (the "Prospectus"). This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing shares of the Fund, and investors should obtain and
read the Prospectus prior to purchasing shares. A copy of the Prospectus may be
obtained without charge, by calling 1-800-421-5666, or for Telecommunications
Device for the Deaf, 1-800-772-8889. This Statement of Additional Information
incorporates by reference the entire Prospectus.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk Considerations..................... B- 2
Investment Restrictions............................................................... B- 8
Officers and Trustees................................................................. B-10
Portfolio Transactions................................................................ B-14
Management of the Fund................................................................ B-15
Net Asset Value....................................................................... B-17
Taxation.............................................................................. B-18
Repurchase of Shares.................................................................. B-21
Independent Accountants' Report....................................................... B-25
Financial Statements for the Year Ended July 31, 1996................................. B-26
Notes to Financial Statements......................................................... B-38
</TABLE>

The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (the "SEC"). These items
may be obtained from the SEC upon payment of the fee prescribed, or inspected at
the SEC's office at no charge.

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED NOVEMBER 13, 1996

B-1
<PAGE> 54

INVESTMENT OBJECTIVE AND POLICIES
AND SPECIAL RISK CONSIDERATIONS

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate Senior Loans to Borrowers. Although the Fund's net
asset value will vary, the Fund's policy of acquiring interests in floating or
variable rate Senior Loans is expected to minimize the fluctuations in the
Fund's net asset value as a result of changes in interest rates. The Fund's net
asset value may be affected by changes in the credit quality of Borrowers with
respect to Senior Loan interests in which the Fund invests. The Fund seeks to
achieve over time an effective yield that approximates the average published
Prime Rate of major United States banks. An investment in the Fund may not be
appropriate for all investors and is not intended to be a complete investment
program. No assurance can be given that the Fund will achieve its investment
objective.

CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS

It is anticipated that the proceeds of the Senior Loans in which the Fund will
acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. The Fund currently does not intend to acquire interests in Senior
Loans the proceeds of which would be used primarily to finance construction or
real estate development projects. Senior Loans have the most senior position in
a Borrower's capital structure, although some Senior Loans may hold an equal
ranking with other senior securities of the Borrower. The capital structure of
Borrowers may include Senior Loans, senior and junior subordinated debt (which
may include "junk bonds"), preferred stock and common stock issued by the
Borrower, typically in descending order of seniority with respect to claims on
the Borrower's assets. Senior Loans generally are secured by specific
collateral, which may include guarantees. In connection with the acquisition of
collateralized Senior Loans, the Fund may invest up to 5% of its total assets in
Senior Loans which are not secured by any collateral. Such unsecured Senior
Loans would constitute an interim financing intended to be refinanced through,
in whole or in part, a collateralized Senior Loan. In the event that the Fund
invests a portion of its assets in Senior Loans that are not secured by specific
collateral, the Fund will not enjoy the benefits associated with
collateralization with respect to such Senior Loans and such Senior Loans may
pose a greater risk of nonpayment of interest or loss of principal than do
collateralized Senior Loans. As discussed below, the Fund may also acquire
warrants and equity securities issued by the Borrower or its affiliates as part
of a package of investments in the Borrower or its affiliates. Warrants and
equity securities will not be treated as Senior Loans and thus assets invested
in such securities will not count toward the 80% of the Fund's total assets that
normally will be invested in Senior Loans. The Fund will acquire such interests
in unsecured Senior Loans, warrants and equity securities only as an incident to
the intended purchase of interests in collateralized Senior Loans. Loan
Agreements may also include various restrictive covenants designed to limit the
activities of the Borrower in an effort to protect the right of the Lenders to
receive timely payments of interest on and repayment of principal of the Senior
Loans. In order to borrow money pursuant to collateralized Senior Loans, a
Borrower will frequently, for the term of the Senior Loan, pledge as collateral
assets, including but not limited to, trademarks, accounts receivable,
inventory, buildings, real estate, franchises and common and

B-2
<PAGE> 55

preferred stock in its subsidiaries. In addition, in the case of some Senior
Loans, there may be additional collateral pledged in the form of guarantees by
and/or securities of affiliates of the Borrowers. In certain instances, a Senior
Loan may be secured only by stock in the Borrower or its subsidiaries. Such
collateral may consist of assets that may not be readily liquidated, and there
is no assurance that the liquidation of such assets would satisfy fully a
Borrower's obligations under a Senior Loan.

Restrictive covenants may include mandatory prepayment provisions arising from
excess cash flows and typically include restrictions on dividend payments,
specific mandatory minimum financial ratios, limits on total debt and other
financial tests. Breach of such covenants, if not waived by the Lenders, is
generally an event of default under the applicable Loan Agreement and may give
the Lenders the right to accelerate principal and interest payments. The Adviser
will consider the terms of such restrictive covenants in deciding whether to
invest in Senior Loans for the Fund's portfolio. When the Fund holds a
Participation in a Senior Loan it may not have the right to vote to waive
enforcement of any restrictive covenant breached by a Borrower. Lenders voting
in connection with a potential waiver of a restrictive covenant may have
interests different from those of the Fund and such Lenders may not consider the
interests of the Fund in connection with their votes.

Senior Loans in which the Fund will invest 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 the Prime Rate, LIBOR, the CD
rate or other base lending rates used by commercial lenders. The Prime Rate
quoted by a major U.S. bank is the interest rate at which such bank is willing
to lend U.S. dollars to its most creditworthy borrowers. LIBOR, as provided for
in Loan Agreements, is an average of the interest rates quoted by several
designated banks as the rates at which such banks would offer to pay interest to
major financial institutional depositors in the London interbank market on U.S.
dollar denominated deposits for a specified period of time. The CD rate, as
generally provided for in Loan Agreements, is the average rate paid on large
certificates of deposit traded in the secondary market. At least 80% of the
Fund's total assets normally will be invested in Senior Loans. In normal market
conditions, at least 65% of the Fund's assets will be invested in Senior Loans
which, at the time of the Fund's initial investment in such Senior Loans,
provided the Fund with a rate of return which was at least equal to the Prime
Rate existing on the date of such initial investment. The Fund is not subject to
any restrictions with respect to the maturity of Senior Loans held in its
portfolio. It is currently anticipated that the Fund's assets invested in Senior
Loans will consist of Senior Loans with stated maturities of between three and
seven years, inclusive, and with rates of interest which are redetermined either
daily, monthly, quarterly or semi-annually; provided, however, that the Fund may
invest up to 5% of its total assets in Senior Loans which permit the Borrower to
select an interest rate redetermination period of up to one year. Investment in
Senior Loans with longer interest rate redetermination periods may increase
fluctuations in the Fund's net asset value as a result of changes in interest
rates. The Senior Loans in the Fund's portfolio will at all times have a
dollar-weighted average time until the next interest rate redetermination of 90
days or less. As a result, as short-term interest rates increase, interest
payable to the Fund from its investments in Senior Loans should increase, and as
short-term interest rates decrease, interest payable to the Fund from its
investments in Senior Loans should decrease. The amount of time required to pass
before the Fund will realize the effects of changing short-term market interest
rates on its portfolio will vary with the dollar-weighted average time until the
next interest rate redetermination on the Senior Loans in the Fund's portfolio.
The Fund may utilize certain investment practices to, among other things,
shorten the effective interest rate redetermination period of Senior Loans in
its portfolio. In such event, the Fund will consider such shortened period to be
the interest rate redetermination period of the Senior Loan; provided, however,
that the Fund will not invest in Senior Loans which permit the Borrower to
select an interest rate redetermination period in excess of one year. Because
most Senior Loans in the Fund's portfolio will be subject to mandatory and/or
optional prepayment and there may be significant economic incentives for a
Borrower to prepay its loans, prepayments of Senior Loans in the Fund's
portfolio may occur. Accordingly, the actual remaining maturity of the Fund's
portfolio invested in Senior Loans may vary substantially from the average
stated maturity of the Senior Loans held in the Fund's portfolio. As a result of
expected prepayments from time to time of Senior Loans in the Fund's portfolio,
the Fund estimates that the actual average maturity of the Senior Loans held in
its portfolio will be approximately 18-24 months.

B-3
<PAGE> 56

Senior Loans generally are not rated by nationally recognized statistical
rating organizations. Because of the collateralized and/or guaranteed nature of
most Senior Loans, the Fund and the Adviser believe that ratings of other
securities issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Senior Loans. Therefore, although the Adviser
may consider such ratings in determining whether to invest in a particular
Senior Loan, the Adviser is not required to consider such ratings and such
ratings will not be the determinative factor in the Adviser's analysis. The Fund
may invest in Senior Loans, the Borrowers with respect to which have outstanding
debt securities which are rated below investment grade by a nationally
recognized statistical rating organization or are unrated but of comparable
quality to such securities. Debt securities rated below investment grade or
unrated but of comparable quality commonly are referred to as "junk bonds." The
Fund will invest only in those Senior Loans with respect to which the Borrower,
in the opinion of the Adviser, demonstrates certain of the following
characteristics: sufficient cash flow to service debt; adequate liquidity;
successful operating history; strong competitive position; experienced
management; and, with respect to collateralized Senior Loans, collateral
coverage that equals or exceeds the outstanding principal amount of the Senior
Loan. In addition, the Adviser will consider, and may rely in part, on the
analyses performed by the Agent and other Lenders, including such persons'
determinations with respect to collateral securing a Senior Loan.

Participations by the Fund in a Lender's portion of a Senior Loan typically
result in the Fund having a contractual relationship only with such Lender, not
with the Borrower. The Fund has the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by such Lender of such payments from the
Borrower. In connection with purchasing Participations, the Fund generally will
have no right to enforce compliance by the Borrower with the terms of the Loan
Agreement, nor any rights with respect to any funds acquired by other Lenders
through set-off against the Borrower and the Fund may not directly benefit from
the collateral supporting the Senior Loan in which it has purchased the
Participation. As a result, the Fund may assume the credit risk of both the
Borrower and the Lender selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of such Lender, and may not benefit from any set-off between
such Lender and the Borrower. The Fund has taken the following measures in an
effort to minimize such risks. The Fund will only acquire Participations if the
Lender selling the Participation, and any other persons interpositioned between
the Fund and the Lender, (i) at the time of investment has outstanding debt or
deposit obligations rated investment grade (BBB or A-3 or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or P-3 or higher by Moody's Investors
Service ("Moody's")) or determined by the Adviser to be of comparable quality
and (ii) has entered into an agreement which provides for the holding of

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assets in safekeeping for, or the prompt disbursement of assets to, the Fund.
Long-term debt rated BBB by S&P is regarded by S&P as having adequate capacity
to pay interest and repay principal and debt rated Baa by Moody's is regarded by
Moody's as a medium grade obligation, i.e., it is neither highly protected nor
poorly secured. Commercial paper rated A-1 by S&P indicates that the degree of
safety regarding timely payment is considered by S&P to be either overwhelming
or very strong and issues of commercial paper rated Prime-1 by Moody's are
considered by Moody's to have a superior ability for repayment of senior
short-term debt obligations. The Fund ordinarily will purchase a Participation
only if, at the time of such purchase, the Fund believes that the party from
whom it is purchasing such Participation is retaining an interest in the
underlying Senior Loan. In the event that the Fund does not so believe, it will
only purchase such a Participation if, in addition to the requirements set forth
above, the party from whom the Fund is purchasing such Participation (i) is a
bank, a member of a national securities exchange or other entity designated in
the Investment Company Act of 1940, as amended ("1940 Act"), as qualified to
serve as a custodian for a registered investment company and (ii) has been
approved as a custodian by the Board of Trustees of the Fund (a "Designated
Custodian").

The Fund will purchase an Assignment or act as a Lender with respect to a
syndicated Senior Loan only where the Agent with respect to such Senior Loan at
the time of investment has outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by the Adviser to be of comparable quality. In addition,
the Fund will purchase a Participation only where the Lender selling such
Participation, and any other person interpositioned between such Lender and the
Fund at the time of investment have outstanding debt obligations rated
investment grade or determined by the Adviser to be of comparable quality.
Further, the Fund will not purchase interests in Senior Loans unless such Agent,
Lender or interpositioned person has entered into an agreement which provides
for the prompt disbursement of assets to the Fund.

Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should such an Agent, Lender or assignor with respect to
an Assignment interpositioned between the Fund and the Borrower become insolvent
or enter FDIC receivership or bankruptcy, any interest in the Senior Loan of
such person and any loan payment held by such person for the benefit of the Fund
should not be included in such person's estate. If, however, any such amount
were included in such person's estate, the Fund would incur certain costs and
delays in realizing payment or could suffer a loss of principal and/or interest.
In such event, the Fund could experience a decrease in net asset value.

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origination of a Senior Loan. Commitment fees are paid to Lenders on an ongoing
basis based upon the undrawn portion committed by the Lenders of the underlying
Senior Loan. Lenders may receive prepayment penalties when a Borrower prepays
all or part of a Senior Loan. The Fund will receive these fees directly from the
Borrower if the Fund is an Original Lender, or, in the case of commitment fees
and prepayment penalties, if the Fund acquires an interest in a Senior Loan by
way of Assignment. Whether or not the Fund receives a facility fee from the
Lender in the case of an Assignment, or any fees in the case of a Participation,
depends upon negotiations between the Fund and the Lender selling such
interests. When the Fund is an assignee, it may be required to pay a fee, or
forgo a portion of interest and any fees payable to it, to the Lender selling
the Assignment. Occasionally, the assignor will pay a fee to the assignee based
on the portion of the principal amount of the Senior Loan which is being
assigned. A Lender selling a Participation to the Fund may deduct a portion of
the interest and any fees payable to the Fund as an administrative fee prior to
payment thereof to the Fund. The Fund may be required to pay over or pass along
to a purchaser of an interest in a Senior Loan from the Fund a portion of any
fees that the Fund would otherwise be entitled to.

During normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and, in certain limited circumstances discussed above, junior debt
securities acquired in connection with the Fund's investments in Senior Loans.
If the Adviser determines that market conditions temporarily warrant a defensive
investment policy, the Fund may invest, subject to its ability to liquidate its
relatively illiquid portfolio of Senior Loans, up to 100% of its assets in cash
and such high quality, short-term debt securities. The Fund will acquire such
warrants and equity securities only as an incident to the purchase or intended
purchase of interests in collateralized Senior Loans. Although the Fund
generally will acquire interests in warrants and equity securities only when the
Adviser believes that the relative value being given by the Fund in exchange for
such interests is substantially outweighed by the potential value of such
instruments, investment in warrants and equity securities entail certain risks
in addition to those associated with investments in Senior Loans. Warrants and
equity securities have a subordinate claim on a Borrower's assets as compared
with debt securities and junior debt securities have a subordinate claim on such
assets as compared with Senior Loans. As such, the values of warrants and equity
securities generally are more dependent on the financial condition of the
Borrower and less dependent on fluctuations in interest rates than are the
values of many debt securities. The values of warrants, equity securities and
junior debt securities may be more volatile than those of Senior Loans and thus
may have an adverse impact on the ability of the Fund to minimize fluctuations
in its net asset value.

SPECIAL RISK CONSIDERATIONS

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as to the value of assets pledged as collateral in all cases. The Fund normally
will rely primarily on the Agent (where the Fund is an Original Lender or owns
an Assignment) or the selling Lender (where the Fund owns a Participation) to
collect principal of and interest on a Senior Loan. Furthermore, the Fund
usually will rely on the Agent (where the Fund is an Original Lender or owns an
Assignment) or the selling Lender (where the Fund owns a Participation) to
monitor compliance by the Borrower with the restrictive covenants in the Loan
Agreement and notify the Fund of any adverse change in the Borrower's financial
condition or any declaration of insolvency. Collateralized Senior Loans will
frequently be secured by all assets of the Borrower that qualify as collateral,
which may include common stock of the Borrower or its subsidiaries.
Additionally, the terms of the Loan Agreement may require the Borrower to pledge
additional collateral to secure the Senior Loan, and enable the Agent, upon
proper authorization of the Lenders, to take possession of and liquidate the
collateral and to distribute the liquidation proceeds pro rata among the
Lenders. If the terms of a Senior Loan do not require the Borrower to pledge
additional collateral in the event of a decline in the value of the original
collateral, the Fund will be exposed to the risk that the value of the
collateral will not at all times equal or exceed the amount of the Borrower's
obligations under the Senior Loan. Lenders that have sold Participation
interests in such Senior Loan will distribute liquidation proceeds received by
the Lenders pro rata among the holders of such Participations. The Adviser will
also monitor these aspects of the Fund's investments and, where the Fund is an
Original Lender or owns an Assignment, will be directly involved with the Agent
and the other Lenders regarding the exercise of credit remedies. Senior Loans,
like other corporate debt obligations, are subject to the risk of non-payment of
scheduled interest or principal. Such non-payment would result in a reduction of
income to the Fund, a reduction in the value of the Senior Loan experiencing
non-payment and a potential decrease in the net asset value of the Fund.
Although, with respect to collateralized Senior Loans, the Fund generally will
invest only in Senior Loans that the Adviser believes are secured by specific
collateral, which may include guarantees, the value of which exceeds the
principal amount of the Senior Loan at the time of initial investment, there can
be no assurance that the liquidation of any such collateral would satisfy the
Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of bankruptcy of a Borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the Borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of bankruptcy of the
Borrower. The Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan. In the event that the Fund does not believe that a perfected
security interest has been obtained with respect to a collateralized Senior
Loan, the Fund will only obtain an interest in such Senior Loan if the Agent is
a Designated Custodian. Some Senior Loans in which the Fund may invest are
subject to the risk that a court, pursuant to fraudulent conveyance or other
similar laws, could subordinate such Senior Loans to presently existing or
future indebtedness of the Borrower or take other action detrimental to the
holders of Senior Loans, such as the Fund, including, under certain
circumstances, invalidating such Senior Loans. Lenders commonly have certain
obligations pursuant to the Loan Agreement, which may include the obligation to
make additional loans or release collateral in certain circumstances.

Senior Loans in which the Fund will invest generally will not be rated by a
nationally recognized statistical rating organization, will not be registered
with the SEC or any state securities commission and will not be listed on any
national securities exchange. Although the Fund will generally have access to
financial and other information made available to the Lenders in connection with
Senior Loans, the amount of public information available with respect to Senior
Loans will generally be less extensive than that available for rated, registered
and/or exchange listed securities. As a result, the performance of the Fund and
its ability to meet its investment objective is more dependent on the analytical
ability of the Adviser than would be the case for an investment company that
invests primarily in rated, registered and/or exchange listed securities.

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market for more liquid securities. The Fund has no limitation on the amount of
its assets which may be invested in securities which are not readily marketable
or are subject to restrictions on resale. The substantial portion of the Fund's
assets invested in relatively illiquid Senior Loan interests may restrict the
ability of the Fund to dispose of its investments in Senior Loans in a timely
fashion and at a fair price, and could result in capital losses to the Fund and
holders of Common Shares. However, many of the Senior Loans in which the Fund
expects to purchase interests are of a relatively large principal amount and are
held by a relatively large number of owners which should, in the Adviser's
opinion, enhance the relative liquidity of such interests. The risks associated
with illiquidity are particularly acute in situations where the Fund's
operations require cash, such as when the Fund tenders for its Common Shares,
and may result in the Fund borrowing to meet short-term cash requirements.

INVESTMENT RESTRICTIONS

The Fund's investment objective and the following investment restrictions are
fundamental and cannot be changed without the approval of the holders of a
majority (defined as the lesser of (i) 67% or more of the voting securities
present at a meeting of shareholders, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy at such
meeting, or (ii) more than 50% of the outstanding voting securities) of the
Fund's outstanding Common Shares. All other investment policies or practices are
considered by the Fund not to be fundamental and accordingly may be changed
without shareholder approval. If a percentage restriction on investment or use
of assets set forth below is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing market values will not be
considered a deviation from policy. In accordance with the foregoing, the Fund
may not:

1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets would then be invested
in securities of a single issuer or if as a result the Fund would hold
more than 10% of the outstanding voting securities of any single issuer;
provided that, with respect to 50% of the Fund's assets, the Fund may
invest up to 25% of its assets in the securities of any one issuer. For
purposes of this restriction, the term issuer includes both the Borrower
under a Loan Agreement and the Lender selling a Participation to the Fund
together with any other persons interpositioned between such Lender and
the Fund with respect to a Participation.

2. Purchase any security if, as a result of such purchase, more than 25% of
the Fund's total assets (taken at current value) would be invested in the
securities of Borrowers and other issuers having their principal business
activities in the same industry (the electric, gas, water and telephone
utility industries, commercial banks, thrift institutions and finance
companies being treated as separate industries for purposes of this
restriction); provided, that this limitation shall not apply with respect
to obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities.

B-8
<PAGE> 61

3. Issue senior securities (including borrowing money or entering into
reverse repurchase agreements) in excess of 33 1/3% of its total assets
(including the amount of senior securities issued but excluding any
liabilities and indebtedness not constituting senior securities) except
that the Fund may borrow up to an additional 5% of its total assets for
temporary purposes, or pledge its assets other than to secure such
issuance or in connection with hedging transactions, when-issued and
delayed delivery transactions and similar investment strategies. The Fund
will not purchase additional portfolio securities at any time that
borrowings, including the Fund's commitments pursuant to reverse
repurchase agreements, exceed 5% of the Fund's total assets (after giving
effect to the amount borrowed).

4. Make loans of money or property to any person, except for obtaining
interests in Senior Loans in accordance with its investment objective,
through loans of portfolio securities or the acquisition of securities
subject to repurchase agreements.

5. Buy any security "on margin." Neither the deposit of initial or variation
margin in connection with hedging transactions nor short-term credits as
may be necessary for the clearance of such transactions is considered the
purchase of a security on margin.

6. Sell any security "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except to the extent that the hedging transactions in which the Fund may
engage would be deemed to be any of the foregoing transactions.

7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of or granting of
interests in Senior Loans or other securities acquired by the Fund.

8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under Loan Agreements would be deemed to constitute such control or
participation.

9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisitions. The Fund will rely on
representations of Borrowers in Loan Agreements in determining whether
such Borrowers are investment companies.

10. Buy or sell oil, gas or other mineral leases, rights or royalty contracts
except pursuant to the exercise by the Fund of its rights under Loan
Agreements. In addition, the Fund may purchase securities of issuers which
deal in, represent interests in or are secured by interests in such
leases, rights or contracts.

11. Purchase or sell real estate, commodities or commodities contracts except
pursuant to the exercise by the Fund of its rights under Loan Agreements,
except to the extent the interests in Senior Loans the Fund may invest in
are considered to be interests in real estate, commodities or commodities
contracts and except to the extent that hedging instruments the Fund may
invest in are considered to be commodities or commodities contracts.

For purposes of investment restriction number 2, the Fund will consider all
relevant factors in determining whether to treat the Lender selling a
Participation and any persons interpositioned between such Lender and the Fund
as an issuer, including: the terms of the Loan Agreement and other relevant
agreements (including inter-creditor agreements and any agreements between such
person and the Fund's custodian); the credit quality of such Lender or
interpositioned person; general economic conditions applicable to such Lender or
interpositioned person; and other factors relating to the degree of credit risk,
if any, of such Lender or interpositioned person incurred by the Fund.

Pursuant to requirements of Minnesota law, the Fund will not invest more than
30% of its total assets in restricted debt securities; invest more than 15% of
its total assets in illiquid securities (excluding restricted debt securities);
invest in securities carrying more than 10% of the voting rights of an issuer;
invest in more than 10% of the equity securities of any one issuer; or invest
more than 10% of its total assets in securities of real estate investment trusts
or other investment companies, in each case except as permitted by the Minnesota
Commissioner of Securities. For purposes of the foregoing, instruments and
securities not subject to the registration provisions of the Securities Act of
1933 are not considered restricted securities and an illiquid security is any
security that in the Adviser's view cannot be sold at a fair price within a
commercially reasonable period of time.

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The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objective. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund anticipates that the
annual portfolio turnover rate of the Fund will not be in excess of 100%. A high
rate of portfolio turnover involves correspondingly greater expenses than a
lower rate, which expenses must be borne by the Fund and its shareholders. High
portfolio turnover also may result in the realization of substantial net
short-term capital gains. Due to the requirement for qualification as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, that less than 30% of the Fund's annual gross income be derived from
the disposition of securities held for less than three months, the Fund may not
be able to sell portfolio holdings held for less than three months that the Fund
may wish to sell in the ordinary course of management, which may affect
adversely the Fund's yield.

OFFICERS AND TRUSTEES

The table below sets forth the officers and trustees of the Fund, their
principal occupations for the last five years and their affiliations, if any,
with the Adviser, Van Kampen American Capital Asset Management, Inc. (the "AC
Adviser"), Van Kampen American Capital Management, Inc., Van Kampen American
Capital Distributors, Inc., Van Kampen American Capital, Inc., Van Kampen
American Capital Advisors, Inc., Van Kampen Merritt Equity Advisors Corp., Van
Kampen Merritt Equity Holdings Corp., American Capital Contractual Services,
Inc., Van Kampen American Capital Trust Company, Van Kampen American Capital
Exchange Corporation, or VK/AC Holding, Inc. (affiliates of the Adviser). Unless
otherwise noted the address of each of the Trustees and officers is One Parkview
Plaza, Oakbrook Terrace, IL 60181.

DENNIS J. MCDONNELL,* DATE OF BIRTH 05/20/42, PRESIDENT, CHAIRMAN OF THE BOARD
AND TRUSTEE. Mr. McDonnell is President, Chief Operating Officer and a Director
of the Adviser, AC Adviser, Van Kampen American Capital Advisors, Inc., and Van
Kampen American Capital Management, Inc. He is also an Executive Vice President
and Director of VK/AC Holding, Inc., Van Kampen American Capital, Inc. Mr.
McDonnell is President and a Director of Van Kampen Merritt Equity Advisors
Corp., and a Director of Van Kampen Merritt Equity Holdings Corp. He is the
President, Chairman of the Board and a Trustee of other investment companies
advised by the Adviser and the AC Adviser. Prior to September of 1996, Mr.
McDonnell was Chief Executive Officer and Director of McCarthy, Crisanti &
Maffei, Inc. and Chairman and Director of MCM Asia Pacific Company, Limited.
Prior to July of 1996, Mr. McDonnell was President, Chief Operating Officer and
Trustee of VSM Inc. and VCJ Inc. Prior to December, 1991, Mr. McDonnell was
Senior Vice President of Van Kampen Merritt Inc. His address is One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.

THEODORE A. MYERS, DATE OF BIRTH 08/03/30, TRUSTEE. Mr. Myers is a Senior
Financial Advisor of Qualitech Steel Corporation, a manufacturer of special
quality bar products, as well as iron carbide (a steel scrap substitute). He is
also a Director of McLouth Steel and a member of the Arthur Anderson Chief
Financial Officer Advisory Committee. Prior to July of 1996, Mr. Myers was an
Executive Vice President and Chief Financial Officer of Qualitech Steel
Corporation. Prior to August, 1993, Mr. Myers was Senior Vice President, Chief
Financial Officer and a Director of Doskocil Companies, Inc., a food processing
and distribution company. Prior to January, 1990, Mr. Myers was Vice President
and Chief Financial Officer of Inland Steel Industries. Prior to October, 1989
he was a Director of First National Bank of East Chicago. His address is 1940
East 6th Street, Cleveland, Ohio 44114. Mr. Myers is also a Trustee of other
investment companies advised by the Adviser.

ROD DAMMEYER, DATE OF BIRTH 11/05/40, TRUSTEE. Mr. Dammeyer is President, Chief
Executive Officer and Director of Anixter International Inc. (formerly known as
Itel Corporation), a value-added provider of integrated networking and cabling
solutions that support business information and network infrastructure
requirements; and Great American Management & Investment, Inc., a diversified
manufacturing company. He is also a Director of Teletech Holdings Inc., Lukens,
Inc., Falcon Building Products, Inc., Revco D.S., Inc., Jacor Communications,
Inc., Capsure Holdings Corp., IMC Global Inc. (formerly known as The Vigoro
Corporation) and Antec Corporation. Mr. Dammeyer was previously a Director of
Santa Fe Energy

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<PAGE> 63

Resources, Inc., Lomas Financial Corporation, Santa Fe Pacific Corporation,
Q-Tel, S.A. de C.V. and Servicios Financieros Quadrum, S.A. His address is Two
North Riverside Plaza, Suite 1950, Chicago, Illinois 60606. Mr. Dammeyer is also
a Trustee of other investment companies advised by the Adviser.

DAVID C. ARCH, DATE OF BIRTH 07/17/45, TRUSTEE. Mr. Arch is Chairman and Chief
Executive Officer of Blistex Inc., a consumer health care products manufacturer.
His address is 1800 Swift Drive, Oak Brook, Illinois 60521. Mr. Arch is also a
Trustee of other investment companies advised by the Adviser.

HOWARD J KERR, DATE OF BIRTH 11/17/35, TRUSTEE. Mr. Kerr is President and Chief
Executive Officer of Pocklington Corporation, Inc., an investment holding
company. Mr. Kerr is also a Director of Canbra Foods, Ltd., a Canadian oilseed
crushing, refining, processing and packaging operation. Prior to 1991, Mr. Kerr
was President, Chief Executive Officer and Chairman of the Board of Directors of
Grabill Aerospace Industries, Ltd. His address is 736 North Western Ave., P.O.
Box 317, Lake Forest, Illinois 60045. Mr. Kerr is a Trustee of other investment
companies advised by the Adviser.

HUGO F. SONNENSCHEIN, DATE OF BIRTH 11/14/40, TRUSTEE. Mr. Sonnenschein is
President of the University of Chicago. Mr. Sonnenschein is a member of the
Board of Trustees of the University of Rochester and a member of its investment
committee. Prior to July, 1993, Mr. Sonnenschein was Provost of Princeton
University, and, from 1988 to 1991, Mr. Sonnenschein was Dean of the School of
Arts and Sciences at the University of Pennsylvania. Mr. Sonnenschein is a
member of the National Academy of Sciences and a fellow of the American Academy
of Arts and Sciences. His address is 5801 South Ellis Avenue, Suite 502,
Chicago, Illinois 60637. Mr. Sonnenschein is also a trustee of other investment
companies advised by the Adviser.

WAYNE W. WHALEN,* DATE OF BIRTH 08/22/39, TRUSTEE. Mr. Whalen is a partner in
the law firm of Skadden, Arps, Slate, Meagher & Flom (Illinois). His address is
333 West Wacker Drive, Chicago, Illinois 60606. Mr. Whalen is also a Trustee of
other investment companies advised by the Adviser and the AC Adviser.

PETER W. HEGEL, DATE OF BIRTH 06/25/56, VICE PRESIDENT. Mr. Hegel is Executive
Vice President and Portfolio Manager of the Adviser. He is Executive Vice
President of Van Kampen American Capital Management, Inc., Van Kampen American
Capital Advisors, Inc., and Executive Vice President and Director of the AC
Adviser. Prior to July of 1996, Mr. Hegel was a Director of VSM Inc. Prior to
September of 1996, Mr. Hegel was a Director of McCarthy, Crisanti & Maffei, Inc.
His address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181. He is Vice
President of other investment companies advised by the Adviser and the AC
Adviser.

WILLIAM N. BROWN, DATE OF BIRTH 05/26/53, VICE PRESIDENT. Mr. Brown is
Executive Vice President of the AC Adviser, VK/AC Holding, Inc., Van Kampen
American Capital Inc., and American Capital Contractual Services, Inc. He is
also Executive Vice President and Director of Van Kampen American Capital Trust
Company, Van Kampen American Capital Advisors, Inc., Van Kampen American Capital
Exchange Corporation and ACCESS Investor Services, Inc. Prior to September of
1996, Mr. Brown was a Director of American Capital Shareholders Corporation. His
address is 2800 Post Oak Blvd., Houston, TX 77056. He is Vice President of other
investment companies advised by the Adviser and the AC Adviser.

JEFFREY W. MAILLET, DATE OF BIRTH 09/30/56, VICE PRESIDENT. Mr. Maillet is
Senior Vice President and Portfolio Manager of the Adviser. He is Senior Vice
President of Van Kampen American Capital Management, Inc., and the AC Adviser.
His address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

RONALD A. NYBERG, DATE OF BIRTH 07/29/53, VICE PRESIDENT AND SECRETARY. Mr.
Nyberg is Executive Vice President, General Counsel and Secretary of Van Kampen
American Capital, Inc., VK/AC Holding, Inc., and Executive Vice President,
General Counsel and Director of the Adviser, the AC Adviser, Van Kampen American
Capital Management, Inc., Van Kampen American Capital Distributors, Inc., Van
Kampen Merritt Equity Holdings Corp. and Van Kampen Merritt Equity Advisors
Corp. Mr. Nyberg is also Executive Vice President, General Counsel and Assistant
Secretary of ACCESS Investor Services, Inc., Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital Exchange Corporation, American
Capital Contractual Services, Inc., Van Kampen American Capital Services, Inc.
and Executive Vice President, General Counsel, Assistant Secretary and Director
of Van Kampen American Capital Trust Company. Prior to July of 1996, Mr. Nyberg
was Executive Vice President and General Counsel of VSM Inc. and Executive

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Vice President and General Counsel of VCJ Inc. Prior to September of 1996, he
was General Counsel of McCarthy, Crisanti & Maffei, Inc. He is a Vice President
and Secretary of other investment companies advised by the Adviser and the AC
Adviser, and is a Director of ICI Mutual Insurance Co., a provider of insurance
to members of the Investment Company Institute. Prior to March of 1991, Mr.
Nyberg was Secretary of Van Kampen Merritt Inc., the Adviser and McCarthy,
Crisanti & Maffei, Inc. His address is One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.

EDWARD C. WOOD, III, DATE OF BIRTH 01/11/56, VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER. Mr. Wood is Senior Vice President of the Adviser, the AC Adviser, and
Van Kampen American Capital Management, Inc. His address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. Mr. Wood is Vice President and Chief Financial
Officer of other investment companies advised by the Adviser and the AC Adviser.

CURTIS W. MORELL, DATE OF BIRTH 08/04/46, VICE PRESIDENT AND CHIEF ACCOUNTING
OFFICER. Mr. Morell is Senior Vice President of the Adviser and the AC Adviser.
His address is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Morell is Vice
President and Chief Accounting Officer each of other investment companies
advised by the Adviser and the AC Adviser.

NICHOLAS DALMASO, DATE OF BIRTH 03/01/65, ASSISTANT SECRETARY. Mr. Dalmaso is
Assistant Vice President and Attorney of Van Kampen American Capital, Inc. Mr.
Dalmaso is also Assistant Vice President and Assistant Secretary of the Adviser,
the AC Adviser, Van Kampen American Capital Distributors, Inc. and Van Kampen
American Capital Management, Inc. His address is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. Prior to May 1992, attorney for Cantwell & Cantwell, a
Chicago law firm. Mr. Dalmaso is Assistant Secretary of other investment
companies advised by the Adviser and the AC Adviser.

SCOTT E. MARTIN, DATE OF BIRTH 08/20/56, ASSISTANT SECRETARY. Mr. Martin is
Senior Vice President, Deputy General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., VK/AC Holding, Inc., and Senior Vice President,
Deputy General Counsel and Secretary of Van Kampen American Capital
Distributors, Inc., the Adviser, the AC Adviser, Van Kampen American Capital
Advisors, Inc., ACCESS Investor Services, Inc., Van Kampen American Capital
Exchange Corporation, American Capital Contractual Services, Inc., Van Kampen
American Capital Services, Inc., Van Kampen American Capital Management, Inc.,
Van Kampen Merritt Equity Holdings Corp., and Van Kampen Merritt Equity Advisors
Corp. Prior to September of 1996, Mr. Martin was Deputy General Counsel and
Secretary of McCarthy, Crisanti & Maffei, Inc., and prior to July of 1996, he
was Senior Vice President, Deputy General Counsel and Secretary of VSM Inc. and
VCJ Inc. His address in One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Mr. Martin is an Assistant Secretary of other investment companies advised by
the Adviser and the AC Adviser.

WESTON B. WETHERELL, DATE OF BIRTH 06/15/56, ASSISTANT SECRETARY. Mr. Wetherell
is Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., Van Kampen American Capital Distributors, Inc.,
the Adviser, the AC Adviser, Van Kampen American Capital Management, Inc., and
Van Kampen American Capital Advisors, Inc. Prior to September of 1996, Mr.
Wetherell was Assistant Secretary of McCarthy, Crisanti & Maffei, Inc. His
address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Mr. Wetherell
is an Assistant Secretary of other investment companies advised by the Adviser
and the AC Adviser.

JOHN L. SULLIVAN, DATE OF BIRTH 08/20/55, TREASURER. Mr. Sullivan is First Vice
President of the Adviser and the AC Adviser. His address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. Mr. Sullivan is Treasurer of other investment
companies advised by the Adviser and the AC Adviser.

STEVEN M. HILL, DATE OF BIRTH 10/16/64, ASSISTANT TREASURER. Mr. Hill is
Assistant Vice President of the Adviser and the AC Adviser. His address is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Mr. Hill is Assistant
Treasurer of other investment companies advised by the Adviser and the AC
Adviser.

TANYA M. LODEN, DATE OF BIRTH 11/19/59, CONTROLLER. Ms. Loden is Vice President
of the Adviser and the AC Adviser. Her address is 2800 Post Oak Blvd., Houston,
TX 77056. Ms. Loden is Controller of other investment companies advised by the
Adviser and the AC Adviser.

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M. ROBERT SULLIVAN, DATE OF BIRTH 03/30/33, ASSISTANT CONTROLLER. Mr. Sullivan
is Assistant Vice President of the Adviser and the AC Adviser. His address is
2800 Post Oak Blvd., Houston, TX 77056. Mr. Sullivan is Assistant Controller of
other investment companies advised by the Adviser and the AC Adviser.

*Such trustees are "interested persons" as defined in the 1940 Act.
Mr. McDonnell is an interested person of the Adviser and the Fund by
reason of his position at the Adviser. Mr. Whalen is an interested
person of the Fund by reason of his law firm having acted as legal
counsel to the Fund.

The officers and Trustees as a group own less than 1% of the Fund's outstanding
Common Shares. The compensation of the officers and trustees who are affiliated
persons (as defined in the 1940 Act) of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. is paid by the
respective entity. The Fund pays the compensation of all other officers and
trustees of the Fund. During the next year, the Fund expects to pay the Trustees
who are not affiliated persons of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. an annual fee of $2,500
and $250 per meeting of the Board of Trustees and each committee meeting, as
well as reimbursement of expenses incurred in connection with such meetings.
Under the Fund's retirement plan, trustees who are not affiliated with the
Adviser, Van Kampen American Capital Distributors, Inc. or Van Kampen American
Capital, Inc., have at least ten years of service and retire at or after
attaining the age of 60, are eligible to receive a retirement benefit equal to
the annual retainer for each of the ten years following such trustee's
retirement. Under certain conditions, reduced benefits are available for early
retirement. Under the Fund's deferred compensation plan, a trustee who is not
affiliated with the Adviser, Van Kampen American Capital Distributors, Inc. or
Van Kampen American Capital, Inc. can elect to defer receipt of all or a portion
of the trustee's fees earned by such trustee until such trustee's retirement.
The deferred compensation earns a rate of return determined by reference to the
Fund or other Van Kampen American Capital closed-end investment companies
advised by the Adviser as selected by the trustee. To the extent permitted by
the 1940 Act, the Fund may invest in securities of other Van Kampen American
Capital closed-end investment companies advised by the Adviser in order to match
the deferred compensation obligation. The deferred compensation plan is not
funded and obligations thereunder represent general unsecured claims against the
general assets of the Fund. Subject to certain exceptions and limitations, as
fully described in Section 5.3 of the Fund's Declaration of Trust on file with
the SEC, the Fund indemnifies every Trustee and officer of the Fund against
liabilities and expenses reasonably incurred or paid in connection with any
claim, action, suit or proceeding in which he becomes involved by virtue of his
being or having been a Trustee or officer. Such indemnification is unavailable
for any Trustee or officer who is deemed to have engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of his duties or to not have
acted in good faith in the reasonable belief that his action was in the best
interest of the Fund. As more fully described in the Fund's Declaration of
Trust, a Trustee may be removed by a vote of not less than two-thirds of the
outstanding Common Shares and, in certain circumstances, holders of Common
Shares may call a meeting to remove a Trustee. The Fund is required to assist in
communications with holders of Common Shares regarding such a meeting.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM THE FUND AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME(1) FROM THE FUND(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
- --------------------------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
David C. Arch.................... $3,757 $2,321 $2,500 $ 144,625
Rod Dammeyer..................... 3,757 625 2,500 144,625
Theodore A. Myers................ 3,757 346 2,500 144,625
Hugo F. Sonnenschein............. 3,757 1,159 2,500 144,625
Howard J Kerr.................... 3,757 460 2,500 144,625
Wayne W. Whalen.................. 3,750 707 2,500 144,125
</TABLE>

- ---------------
(1) Mr. McDonnell is an affiliated person of the Adviser, Van Kampen American
Capital Distributors, Inc. and Van Kampen American Capital, Inc., and does
not receive compensation or retirement benefits from the Fund.

(2) The amounts shown in this column are the Aggregate Compensation of the Fund
before deferral by the trustees under the deferred compensation plan during
its last completed fiscal year ended July 31, 1996. The following trustees
deferred all or a portion of their compensation from the Fund during the
fiscal year ended July 31, 1996: Mr. Dammeyer $8,241; Mr. Sonnenschein
$8,948; Mr. Kerr $8,085; and

B-13
<PAGE> 66

Mr. Whalen $5,881. The cumulative deferred compensation (including
interest) accrued with respect to each trustee from the Fund as of July 31,
1996 is as follows: Mr. Dammeyer $3,757; Mr. Sonnenschein $3,757; Mr. Kerr
$3,757; and Mr. Whalen $3,750. The deferred compensation plan is described
above the table. Amounts deferred are retained by the Fund and earn a rate
of return determined by reference to either the return on the Common Shares
of the Fund or other funds in the Fund Complex (as defined below) as
selected by the respective trustee. To the extent permitted by the 1940
Act, the Fund may invest in securities of these funds selected by the
trustees in order to match the deferred compensation obligation.

(3) The amounts shown in this column are the Pension or Retirement Benefit
Accruals by the Fund for the fiscal year ended July 31, 1996. The
retirement plan is described above the table.

(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such trustee's retirement from the Fund
assuming: the trustee has 10 or more years of service on the Board of
Trustees and retires at or after attaining the age of 60. Trustees retiring
prior to reaching age 60 or with fewer than 10 years of service may receive
reduced benefits from the Fund.

(5) The "Fund Complex" consists of 36 investment companies advised by the
Adviser that have the same members on each investment company's Board of
Trustees. The amounts shown in this column are accumulated from the
Aggregate Compensation of each of these 36 investment companies in the Fund
Complex for the year ended December 31, 1995 before deferral by the
trustees under the deferred compensation plan. The following trustees
deferred compensation paid by the Fund Complex during the calendar year
ended December 31, 1996: Mr. Dammeyer $128,000; Mr. Sonnenschein $128,000;
Mr. Kerr $128.000; and Mr. Whalen $127,500. The deferred compensation plan
is described above the table. The cumulative deferred compensation
(including interest) accrued with respect to each trustee as of December
31, 1995 is as follows: Mr. Dammeyer $138,935; Mr. Sonnenchein $160,309;
Mr. Kerr $134,992; and Mr. Whalen $130,380. Amounts deferred are retained
by the respective fund and earn a rate of return determined by reference to
either the return on the Common Shares of the Fund or common shares of
other funds in the Fund Complex (as defined below) as selected by the
respective trustee. To the extent permitted by the 1940 Act, the respective
fund may invest in securities of the funds selected by the trustees in
order to match the deferred compensation obligation. The Adviser also
serves as investment adviser for other investment companies; however, with
the exception of Messrs. McDonnell and Whalen, the Trustees are not
trustees of other investment companies. Combining the Fund Complex with
other investment companies advised by the Adviser, Mr. Whalen received
Total Compensation of $268,857 for the year ended December 31, 1995.

PORTFOLIO TRANSACTIONS

With respect to interests in Senior Loans, the Fund generally will engage in
privately negotiated transactions for purchase or sale in which the Adviser will
negotiate on behalf of the Fund. The Fund may be required to pay fees, or forgo
a portion of interest and any fees payable to the Fund, to the Lender selling
Participations or Assignments to the Fund. The Adviser will determine the
Lenders from whom the Fund will purchase Assignments and Participations by
considering their professional ability, level of service, relationship with the
Borrower, financial condition, credit standards and quality of management.
Although the Fund intends generally to hold interests in Senior Loans until
maturity or prepayment of the Senior Loan, the illiquidity of Senior Loans may
restrict the ability of the Adviser to locate in a timely manner persons willing
to purchase the Fund's interests in Senior Loans at a fair price should the Fund
desire to sell such interests. See "Investment Objective and Policies."

With respect to investments other than in Senior Loans, the Adviser will place
orders for portfolio transactions for the Fund with broker-dealer firms giving
consideration to the quality, quantity and nature of each firm's professional
services. These services include execution, clearance procedures, wire service
quotations and statistical and other research information provided to the Fund
and the Adviser, including quotations necessary to determine the value of the
Fund's net assets. Any research benefits so obtained are available for all
clients of the Adviser. Because statistical and other research information only
supplements the research efforts of the Adviser and still must be analyzed and
reviewed by its staff, the receipt of research information is not expected to
reduce materially its expenses. In selecting among the firms believed to meet
the criteria for handling a particular transaction, the Adviser may take into
consideration the fact that certain

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<PAGE> 67

firms have sold Common Shares of the Fund and that certain firms provide market,
statistical or other research information to the Fund and the Adviser and may
select firms that are affiliated with the Fund, the Adviser, Van Kampen American
Capital Distributors, Inc. ("VKAC") or Van Kampen American Capital, Inc. For the
fiscal years ended July 31, 1994, 1995 and 1996, the Fund paid brokerage
commissions of $72,000, $211,000 and $179,000, respectively.

If it is believed to be in the best interest of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of services
described above, even if the Fund will have to pay a higher commission (or, if
the broker's profit is part of the cost of the security, will have to pay a
higher price for the security) than would be the case if the Adviser did not
consider the broker's furnishing of such services. This will be done, however,
only if, in the opinion of the Adviser, the amount of additional commission or
increased cost is reasonable in relation to the value of the services.

If purchases or sales of financial instruments for the Fund and for one or
more other investment companies or clients advised by the Adviser are considered
at or about the same time, transactions in such financial instruments will be
allocated among the several investment companies and clients, in a manner deemed
equitable by the Adviser, to each such investment company or client, taking into
account their respective sizes and the aggregate amount of financial instruments
to be purchased or sold. Although in some cases this procedure could have a
detrimental effect on the price paid by the Fund for the financial instrument or
the volume of the financial instrument purchased by the Fund, the ability to
participate in volume transactions and to negotiate lower commissions, fees and
expenses possibly could benefit the Fund.

Although the Adviser will be responsible for the management of the Fund's
portfolio, the policies and practices in this regard must be consistent with the
foregoing and will be subject at all times to review by the Trustees of the
Fund. The Fund anticipates that the annual portfolio turnover rate will not
exceed 100%.

The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act, which requires that the commissions
paid to affiliates of the Fund, or to affiliates of such persons, be reasonable
and fair compared to the commissions, fees or other remuneration received or to
be received by other brokers in connection with comparable transactions
involving similar financial instruments during a comparable period of time. The
rule and procedures also contain review requirements and require the Adviser to
furnish reports to the Trustees and to maintain records in connection with such
reviews. After review of all factors deemed relevant, the Trustees will consider
from time to time whether the advisory fee will be reduced by all or a portion
of the brokerage commissions given to brokers that are affiliated with the Fund.

MANAGEMENT OF THE FUND

THE ADVISER

The Adviser was incorporated as a Delaware corporation in 1982. The Adviser is
a wholly-owned subsidiary of Van Kampen American Capital, Inc., which in turn is
a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is a
wholly-owned subsidiary of MSAM Holdings II, Inc. which, in turn, is a wholly-
owned subsidiary of Morgan Stanley Group Inc. The Adviser's principal office is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

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<PAGE> 68

options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.

INVESTMENT ADVISORY AGREEMENT

The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund was approved by the shareholders of the Fund at a
shareholders meeting held on October 23, 1996 and will continue in effect until
May 30, 1997 and thereafter from year to year, unless earlier terminated as
described below, if approved annually (a) by the Trustees of the Fund or by a
majority of the Fund's Common Shares and (b) by a majority of the Trustees who
are not parties to the agreement or interested persons of any such party, in
compliance with the requirements of the 1940 Act. The Advisory Agreement may be
terminated without penalty upon 60 days written notice by either party (in the
case of the Fund, such termination may be effected by the Board of Trustees or
by a majority of the Common Shares) and will automatically terminate in the
event of assignment. The Adviser may in its sole discretion from time to time
waive all or a portion of the advisory fee or reimburse the Fund for all or a
portion of its other expenses.

The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund provides that the Adviser will supply investment research
and portfolio management, including the selection of securities for the Fund to
purchase, hold or sell and the selection of financial institutions through whom
the Fund's portfolio transactions are executed. The Adviser also furnishes
necessary facilities and equipment, and permits its officers and employees to
serve without compensation as trustees and officers of the Fund if duly elected
to such positions. For the fiscal years ended July 31, 1994, 1995 and 1996, the
Fund recognized investment advisory fees pursuant to the Advisory Agreement of
$9,867,144, $16,722,752 and $36,408,493, respectively.

The Advisory Agreement specifies that the Adviser will reimburse the Fund for
annual expenses of the Fund which exceed the most stringent limits prescribed by
any State in which the Common Shares are offered for sale. The most stringent
limit as of the date of this Prospectus, as affecting the Fund, requires the
Adviser to reimburse the Fund to the extent that aggregate expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.

The Advisory Agreement provides that the Adviser shall not be liable for any
error of judgment or of law, or for any loss suffered by the Fund in connection
with the matters to which the Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the Advisory
Agreement.

The Trustees are responsible for the overall management and supervision of the
Fund's affairs. The Adviser's activities are subject to the review and
supervision of the Trustees to whom the Adviser renders periodic reports of the
Fund's investment activities. The Advisory Agreement continues in effect from
year to year only if specifically approved by the Trustees, and by the
disinterested Trustees, or the Fund's holders of Common Shares in compliance
with the requirements of the 1940 Act. The Advisory Agreement may be terminated
without penalty upon 60 days' written notice by either party and will terminate
automatically in the event of assignment.

THE ADMINISTRATOR

The administrator for the Fund is Van Kampen American Capital Distributors,
Inc. (in such capacity, the "Administrator"), who is an affiliate of the
Adviser. For the fiscal years ended July 31, 1994, 1995 and 1996, the Fund
recognized administrative fees pursuant to the Administration Agreement of
$2,596,617, $4,400,724 and $9,614,696, respectively.

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<PAGE> 69

The Fund pays all other expenses incurred in the operation of the Fund
including, but not limited to, direct charges relating to the purchase and sale
of financial instruments in its portfolio, interest charges, fees and expenses
of legal counsel and independent auditors, taxes and governmental fees, cost of
share certificates, expenses (including clerical expenses) of issuance, sale or
repurchase of any of the Fund's portfolio holdings, expenses in connection with
the Fund's dividend reinvestments, membership fees in trade associations,
expenses of registering and qualifying the Common Shares of the Fund for sale
under federal and state securities laws, expenses of printing and distributing
reports, notices and proxy materials to existing holders of Common Shares,
expenses of filing reports and other documents filed with governmental agencies,
expenses of annual and special meetings of holders of Common Shares, fees and
disbursements of the transfer agents, custodians and sub-custodians, expenses of
disbursing dividends and distributions, fees, expenses and out-of-pocket costs
of Trustees of the Fund who are not affiliated with the Adviser, insurance
premiums, indemnification and other expenses not expressly provided for in the
Advisory Agreement or the Administration Agreement and any extraordinary
expenses of a nonrecurring nature.

OTHER AGREEMENTS

LEGAL SERVICES AGREEMENT. The Fund and each of the other funds advised by the
Adviser and distributed by VKAC have entered into a Legal Services Agreements
pursuant to which Van Kampen American Capital, Inc. provides legal services,
including without limitation: accurate maintenance of the Funds' minute books
and records, preparation and oversight of the Funds' regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the funds. Payment by the Fund for such services is
made on a cost basis for the salary and salary related benefits, including but
not limited to bonuses, group insurances and other regular wages for the
employment of personnel, as well as overhead and the expenses related to the
office space and the equipment necessary to render the legal services. Other
funds distributed by VKAC also receive legal services from Van Kampen American
Capital, Inc. Of the total costs for legal services provided to funds
distributed by VKAC, one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.

NET ASSET VALUE

The net asset value per share of the Fund's Common Shares is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities, and dividing the result by the number of Common Shares outstanding.
The net asset value will be computed on each business day as of 5:00 p.m.
Eastern time. The Fund reserves the right to calculate the net asset value more
frequently if deemed desirable.

The value of the Fund's portfolio will be determined by the Adviser, following
guidelines established and periodically reviewed by the Trustees. Interests in
Senior Loans will be valued by the Adviser on behalf of the Fund on the basis of
market quotations and transactions in instruments which the Adviser believes may
be comparable to Senior Loan interests with respect to the following
characteristics: credit quality, interest rate, interest rate redetermination
period and maturity. Such instruments may include commercial paper, negotiable
certificates of deposit and short-term variable rate securities which have
adjustment periods comparable to the Senior Loan interests in the Fund's
portfolio. In determining the relationship between such instruments and the
Senior Loan interests in the Fund's portfolio, the Adviser will consider on an
ongoing basis, among other factors, (i) the credit worthiness of the Borrower
and (ii) the current interest rate, the period until next interest rate
redetermination and maturity of such Senior Loan interests. It is expected that
the Fund's net asset value will fluctuate as a function of interest rate and
credit factors. Because of the short-term nature of such instruments, however,
the Fund's net asset value is expected to fluctuate less in response to changes
in interest rates than the net asset values of investment companies with
portfolios consisting primarily of fixed-income or longer term securities. The
Adviser believes that Lenders selling Senior Loan interests or otherwise
involved in a Senior Loan transaction may tend, in valuing Senior Loan interests
for their own account, to be less sensitive to interest rate and credit quality
changes and, accordingly, the Adviser does not intend to rely solely on such
valuations in valuing the Senior Loan interests for the Fund's account. In
addition, because a secondary trading market in Senior Loans has not yet fully
developed, in valuing Senior Loans, the Adviser may not rely solely on but may
consider, to the extent the Adviser believes such information to be reliable,
prices or quotations provided by banks, dealers or pricing services with respect
to

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<PAGE> 70

secondary market transactions in Senior Loans. To the extent that an active
secondary market in Senior Loan interests develops to a reliable degree, the
Adviser may rely to an increasing extent on such market prices and quotations in
valuing the Senior Loan interests in the Fund's portfolio. In light of the
senior nature of Senior Loan interests included in the Fund's portfolio and
taking into account the Fund's access to non-public information with respect to
Borrowers relating to such Senior Loan interests, the Adviser does not currently
believe that consideration on a systematic basis of ratings provided by any
nationally recognized statistical rating organization or price fluctuations with
respect to long- or short-term debt of such Borrowers subordinate to the Senior
Loans of such Borrowers is necessary for the determination of the value of such
Senior Loan interests. Accordingly, the Adviser generally does not
systematically consider (but may consider in certain instances) and, in any
event, does not rely upon such ratings or price fluctuations in determining the
value of Senior Loan interests in the Fund's portfolio.

Other portfolio securities (other than short-term obligations, but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, portfolio
securities will be valued at the last sale price on the exchange that is the
primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The value of
interest rate swaps will be determined in accordance with a discounted present
value formula and then confirmed by obtaining a bank quotation.

Short-term obligations which mature in 60 days or less are valued at amortized
cost, if their original term to maturity when acquired by the Fund was 60 days
or less, or are valued at amortized cost using their value on the 61st day prior
to maturity, if their original term to maturity when acquired by the Fund was
more than 60 days, unless in each case this is determined not to represent fair
value. Repurchase agreements will be valued at cost plus accrued interest.
Securities for which there exist no price quotations or valuations and all other
assets are valued at fair value as determined in good faith by or on behalf of
the Trustees.

The Fund's net asset value has ranged from a high of $10.07 to a low of $9.97
since its commencement of investment operations on October 4, 1989. During such
time the world has experienced a number of significant political and economic
events. In 1989, East and West Germany moved toward unification and high yield
bonds experienced significant defaults. In 1990, Germany reunified, Iraq invaded
Kuwait and the Dow reached 3,000. During 1991, the U.S. experienced and recorded
negative growth in Gross Domestic Product, the Gulf War began, the Soviet Union
collapsed and U.S. unemployment reached an eight year high. In 1992, the ERM
crashed, beginning a currency crisis and Bill Clinton was elected. In 1993,
Israel and the PLO signed a peace accord, long-term treasury rates fell to
5.79%, NAFTA was approved and the Dow Jones Industrial Average reached a new
high. During 1994, the Fed began its first interest rate tightening in 5 years,
and on December 6, 1994, Orange County, California, together with its pooled
investment funds, filed for protection under Chapter 9 of the Federal Bankruptcy
Code. In 1995, the Federal Reserve Board eased short-term rates first in July
and for a second and final time in December. There was a partial government
shutdown in November and the Dow crossed 5200 in December. Currently, in 1996,
The Fed once again eased short-term rates in January. In June, Alan Greenspan
was appointed for a third term. In July, inflation fears caused the stock market
to sell off, Small Capitalization stocks to decline and technology stocks to
sell off. The Dow crossed 6000 in October and President Bill Clinton was
re-elected for a second term in November.

TAXATION

The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom (Illinois), and reflects applicable tax laws as of
the date of this Statement of Additional Information.

FEDERAL TAXATION

The Fund intends to qualify each year and to elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a regulated

B-18
<PAGE> 71

investment company, the Fund must, among other things: (a) derive at least 90%
of its gross income from dividends, interest, payments with respect to loans of
securities and gains from the sale or other disposition of securities or certain
other related income; (b) derive less than 30% of its gross income from gains
from the sale or other disposition of securities and certain other investments
held for less than three months (the "short-short rule"); and (c) diversify its
holdings so that at the end of each quarter of the Fund's taxable year (i) at
least 50% of the value of the Fund's assets is represented by cash, U.S.
government securities, securities of other regulated investment companies, and
other securities which, with respect to any one issuer, do not represent more
than 5% of the value of the Fund's assets or more than 10% of the voting
securities of such issuer, and (ii) not more than 25% of the value of the Fund's
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment
companies).

If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (including among other things, interest
and net short-term capital gain, but not net capital gains, which are the excess
of net long-term capital gains over net short-term capital losses), in each
year, it will not be required to pay federal income taxes on any income
distributed to Shareholders. The Fund intends to distribute at least the minimum
amount of net investment income necessary to satisfy the 90% distribution
requirement. The Fund will not be subject to federal income tax on any net
capital gains distributed to Shareholders. As a Massachusetts business trust,
the Fund will not be subject to any excise or income taxes in Massachusetts as
long as it qualifies as a regulated investment company for federal income tax
purposes.

In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (the latter of which generally is
computed on the basis of the one-year period ending on October 31 of such year),
plus any amounts that were not distributed in previous taxable years. For
purposes of the excise tax, any ordinary income or capital gain net income
retained by, and subject to federal income tax in the hands of, the Fund will be
treated as having been distributed.

If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income was
distributed to its Shareholders) and all distributions out of earnings and
profits would be taxed to Shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.

Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.

Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
Shareholders. For example, with respect to certain securities issued at a
discount, the Fund will be required to accrue as income each year a portion of
the discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to

B-19
<PAGE> 72

avoid income and excise taxes, the Fund may have to dispose of securities that
it would otherwise have continued to hold.

The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.

Income from investments in foreign securities received by the Fund may be
subject to withholding or other taxes imposed by foreign countries and U.S.
possessions. Such taxes will not be deductible or creditable by shareholders.

DISTRIBUTIONS

Distributions of the Fund's net investment income are taxable to Common
Shareholders as ordinary income, whether paid in cash or reinvested in
additional Common Shares. Distributions of the Fund's net capital gains
("capital gains dividends"), if any, are taxable to Common Shareholders at the
rates applicable to long-term capital gains regardless of the length of time
Shares of the Fund have been held by such Common Shareholders. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's Common Shares and, after such adjusted tax basis is reduced
to zero, will constitute capital gains to such holder (assuming such Common
Shares are held as a capital asset). It is not expected that any portion of the
distributions from the Fund will be eligible for the dividends received
deduction for corporations. The Fund will inform Shareholders of the source and
tax status of all distributions promptly after the close of each calendar year.

Common Shareholders receiving distributions in the form of additional Common
Shares issued by the Fund will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
Common Shares received, determined as of the distribution date. The basis of
such Common Shares will equal the fair market value on the distribution date.

Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to Shareholders of
record on a specified date in such a month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the Shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
Shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.

The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to Common
Shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.

SALE OF SHARES

Except as discussed below, selling Common Shareholders will generally
recognize gain or loss in an amount equal to the difference between their
adjusted tax basis in the Common Shares and the amount received. If such Common
Shares are held as a capital asset, the gain or loss will be a capital gain or
loss and will be long-term if such Common Shares have been held for more than
one year. It is possible, although the Fund believes it is unlikely, that
tendering holders of Common Shares may not qualify for gain or loss treatment as
described above, which in turn may result in deemed distributions to
non-tendering holders of Common Shares. The federal income tax consequences of
repurchase of Common Shares pursuant to tender offers will be disclosed in the
related offering documents. Any loss realized upon a taxable disposition of
Common Shares held for six months or less will be treated as a long-term capital
loss to the extent of any capital gains dividends received with respect to such
Common Shares. For purposes of determining whether Common Shares have been held
for six months or less, the holding period is suspended for any periods during
which the Common Shareholder's risk of loss is diminished as a result of holding
one or more other positions in substantially similar or related property or
through certain options or short sales.

B-20
<PAGE> 73

GENERAL

The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their advisers regarding the specific
federal tax consequences of holding and disposing of Common Shares, as well as
the effects of state, local and foreign tax laws and any proposed tax law
changes.

REPURCHASE OF SHARES

Commencement by the Fund of a tender offer during a period in which it is
simultaneously engaged in the continuous offering of its Common Shares may be a
violation of rules promulgated by the SEC under the Securities Exchange Act of
1934. The Fund has obtained an exemption from the SEC that would permit the Fund
to make tender offers for its Common Shares while simultaneously engaged in the
continuous offering of its Common Shares. No assurance can be given that the
Fund will be able to maintain such exemption indefinitely. If the Board of
Trustees of the Fund authorizes the Fund to make such a tender offer at such
time, if any, that the Fund shall be unable to rely on such exemption, the Fund
intends to suspend the continuous offering of its Common Shares during the term
of such tender offer.

The Fund has entered into a Credit Agreement dated March 14, 1991, as amended
as of January 31, 1992, January 30, 1993, January 19, 1994, January 27, 1995 and
January 25, 1996 (the "Morgan Agreement") with Morgan Guaranty Trust Company of
New York ("Morgan") pursuant to which Morgan has agreed to provide a credit
facility in the maximum amount of $50,000,000 to the Fund, which is not secured
by the assets of the Fund or other collateral. As of the date of this
Prospectus, the Fund has not borrowed any of the money available pursuant to the
Morgan Agreement. The purpose of this credit facility is to provide the Fund
with additional liquidity to meet its obligations to purchase Common Shares
pursuant to any tender offer that the Fund may make. The Fund paid approximately
$30,000 of fees and expenses to Morgan on the date the Morgan Agreement was
executed. In addition, during the term of the Morgan Agreement, the Fund is
obligated to pay a commitment fee computed at the rate of .10 of 1% per annum on
the average daily amount of the unused facility. Loans made under the Morgan
Agreement, if any, will bear interest daily at a rate equal to the higher of (1)
the prime rate for such day and (2) the sum of one-half of one percent ( 1/2 of
1%) plus the federal funds rate for such day. Such interest will be due on the
outstanding principal amount of each loan on each interest payment date
thereunder, thirty (30) days from the date of the loan and each day which is
thirty days thereafter. Overdue payments of principal and interest will bear
interest, payable upon demand, at a penalty rate. The credit facility provided
pursuant to the Morgan Agreement will terminate on January 24, 1997, unless
extended pursuant to the terms thereof, and all accrued interest and principal
will be due thereon.

The Fund has entered into a Revolving Credit Agreement dated July 12, 1991 and
amended as of July 11, 1992, December 16, 1992, December 15, 1993, December 14,
1994 and December 12, 1995 (the "Bank of America Agreement") with Bank of
America Illinois, formerly known as Continental Bank N.A. ("Bank of America"),
pursuant to which Bank of America has agreed to provide a credit facility in the
maximum amount of $50,000,000 to the Fund, which is not secured by the assets of
the Fund or other collateral. As of the date of this Prospectus, the Fund has
not borrowed any of the money available under the Bank of America Agreement. The
purpose of the Bank of America Agreement is to provide the Fund with additional
liquidity to meet its obligations to purchase Common Shares pursuant to any
tender offer that it may make. The Fund paid a closing fee in an amount equal to
$12,500 to Bank of America upon the execution of the Bank of America Agreement.
In addition, during the term of the Bank of America Agreement, the Fund is
obligated to pay a commitment fee computed at the rate of 0.10% per annum on the
daily average of Bank of America's commitment to make loans under the terms of
such agreement. Loans made under the Bank of America Agreement, if any, will
bear interest, at the option of the Fund, either, (1) at a rate equal to the
fluctuating rate per annum equal to the greater of (a) the rate of interest
announced from time to time by Bank of America at Chicago, Illinois as its
reference rate (an "Alternate Rate Loan") or (b) the Federal Funds Effective
Rate for any such day plus 1/4 of 1% per annum, or (2) at a rate per annum equal
to the rate at which dollar deposits are offered to Bank of America's eurodollar
office by major banks in the interbank eurodollar market (adjusted for any
applicable reserve requirements) plus 0.75% (an "Eurodollar Loan"). Accrued
interest shall be payable on (1) with respect to any Alternate Reference Rate
Loan, the last day of each June, September, December and March, and (2) with
respect to any Eurodollar Loan, the last day of each Interest

B-21
<PAGE> 74

Period (defined as a period commencing on the borrowing date and ending not less
than one day nor more than two months thereafter, as selected by the Fund upon
the initiation of the loan). All accrued interest on both Alternate Reference
Rate Loans and Eurodollar Loans shall be payable on the termination date of the
Bank of America Agreement. Overdue payments of principal will bear interest,
payable upon demand, at a penalty rate. As extended, the credit facility
provided pursuant to the Bank of America Agreement will terminate on December
11, 1996, unless extended pursuant to the terms thereof.

The Fund is a party to a letter agreement dated March 3, 1994, as amended as
of March 13, 1995 and February 29, 1996 (the "State Street Agreement") with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street has agreed to provide up to $50,000,000 of unsecured bank financing to
the Fund. The Fund has not drawn down any of the money available under the State
Street Agreement. The purpose of the State Street Agreement is to provide the
Trust with additional liquidity to meet its obligation to purchase Common Shares
of the Fund pursuant to any tender offer the Fund may make or for temporary or
emergency purposes. The State Street Agreement has the following terms and
conditions:

a. The Fund is entitled to borrow from State Street in such amounts as the
Fund may from time to time request of up to $50,000,000 of unsecured bank
financing.

b. The drawdown of the initial loan, if any, under the State Street
Agreement is subject to certain conditions, including, among other
things, executing and providing to State Street: (i) an advance request
form, in the form set forth as an exhibit to the State Street Agreement
(the "Advance Request"), (ii) an executed promissory note, in the form
set forth as an exhibit to the State Street Agreement, (iii) a certified
copy of the resolutions of the Board of Trustees of the Fund approving
the loan, and (iv) an opinion of counsel to the Fund in a form
satisfactory to State Street. The drawdown advance is further conditioned
upon the Fund warranting (i) its compliance with the Investment Company
Act of 1940 and the prospectus and statement of additional information of
the Fund, (ii) usage in accordance with the terms of the State Street
Agreement, and (iii) compliance with the requirement that all borrowings
utilized to fund previous tender requests be repaid in full.

c. Subsequent advances under the State Street Agreement require a completed
Advance Request.

d. The principal amount of any advances made pursuant to the State Street
Agreement are payable on demand by State Street. The principal amount
bears interest (computed on the basis of actual days elapsed and a 360
day-year) at a fluctuating rate per annum, as it exists from time to
time, announced by State Street as its prime rate (the "State Street
Rate") and payable in arrears on the same day as the principal amount is
paid or demand is made, whichever is earlier. Overdue payments of
principal bear interest at a fluctuating rate equal to 4% above the State
Street Rate.

e. While any advance is outstanding under the State Street Agreement, the
Fund shall not create, incur or assume or suffer to exist any lien
(statutory or otherwise), security interest, priority, conditional sale,
pledge, charge or other encumbrance or similar rights of others or any
agreement to give any of the foregoing, upon or with respect to any of
its properties, owned or acquired during such period and the Fund shall
maintain a net asset value of at least $500,000,000.

f. During the term of the State Street Agreement, the Fund is required to
pay a commitment fee computed at a rate of .10 of 1% per annum on the
unused portion of the commitment. Such fee is payable quarterly in
arrears.

g. The State Street Agreement contains the following events of default
causing any amounts outstanding to become immediately due and payable
without notice or demand: (i) failure of the Fund to make any payment of
principal or interest or pay any fee on any loan made to the Fund when
due, (ii) failure of the Fund to pay or perform any liability, obligation
or agreement under the State Street Agreement or other borrowing
agreements, (iii) failure of any representation or warranty in any
statement or document or financial statements delivered to State Street
pursuant to the State Street Agreement, (iv) failure to promptly furnish
financial information to State Street, (v) loss, theft, substantial
damage, sale or encumbrance to or of any Fund property deemed collateral
under the State Street Agreement or the making of any levy, seizure or
attachment thereof or thereon or the failure to pay when due any tax
thereon or, with respect to any insurance policy, any premium therefor,
(vi) default

B-22
<PAGE> 75

under any instrument constituting, or under any agreement relating to,
any collateral, (vii) change in the condition (financial or otherwise) of
the Fund which in the opinion of State Street will impair its security or
increase its risk and (viii) the occurrence of any of the following:
admission of the Fund in writing of its inability, or to be generally
unable, to pay debts as they become due, dissolution, termination of
existence, business failure, insolvency, appointment of a receiver for
the benefit of creditors or commencement of any proceedings under
bankruptcy or insolvency laws.

h. The State Street Agreement terminates on February 28, 1997, unless
extended pursuant to the terms thereof.

Even if a tender offer has been made, the Trustees' announced policy, which
may be changed by the Trustees, is that the Fund cannot accept tenders if (1) in
the reasonable judgment of the Trustees, there is not sufficient liquidity of
the assets of the Fund; (2) such transactions, if consummated, would (a) impair
the Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's taxable income to be taxed at
the Fund level, as more fully described in "Taxation") or (b) result in a
failure to comply with applicable asset coverage requirements; or (3) there is,
in the Board of Trustees' reasonable judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Fund, (b) suspension of or limitation on
prices for trading securities generally on any United States national securities
exchange or in the over-the-counter market, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by banks
in the United States or New York State, (d) limitation affecting the Fund or the
issuers of its portfolio securities imposed by federal or state authorities on
the extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or (f) other event or condition which would have a
material adverse effect on the Fund or the holders of its Common Shares if
Common Shares were repurchased. The Trustees may modify these conditions in
light of experience.

Any tender offer made by the Fund for its Common Shares will be at a price
equal to the net asset value of the Common Shares determined at the close of
business on the day the offer ends. During the pendency of any tender offer by
the Fund, the Fund will calculate daily the net asset value of the Common Shares
and will establish procedures which will be specified in the tender offer
documents, to enable Common Shareholders to ascertain readily such net asset
value. The relative illiquidity of some of the Fund's portfolio securities could
adversely impact the Fund's ability to calculate net asset value in connection
with determinations of pricing for tender offers, if any. Each offer will be
made and Common Shareholders notified in accordance with the requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act, either by
publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder.

Tendered Common Shares that have been accepted and repurchased by the Fund
will be held in treasury and may be retired by the Board of Trustees. Treasury
Common Shares will be recorded and reported as an offset to Shareholders' equity
and accordingly will reduce the Fund's total assets. If Treasury Common Shares
are retired, Common Shares issued and outstanding and capital in excess of par
value will be reduced accordingly.

If the Fund must liquidate portfolio securities in order to repurchase Common
Shares tendered, the Fund may realize gains and losses. Such gains may be
realized on securities held for less than three months. Because of the
limitation of 30% on the portion of the Fund's gross income that may be derived
from the sale or disposition of stocks and securities held less than three
months (in order to retain the Fund's tax status as a regulated investment
company under the Code), such gains would reduce the ability of the Fund to sell
other securities held for less than three months that the Fund may wish to sell
in the ordinary course of its portfolio management which may adversely affect
the Fund's yield.

ANTI-TAKEOVER PROVISIONS

For purposes of these provisions, a 5%-or-greater holder of Common Shares (a
"Principal Shareholder") refers to any person who, whether directly or
indirectly and whether alone or together with its affiliates and associates,
beneficially owns 5% or more of the outstanding Common Shares of the Fund. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of the Fund or any

B-23
<PAGE> 76

subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance
of any securities of the Fund to any Principal Shareholder for cash; (iii) the
sale, lease or exchange of all or any substantial part of the assets of the Fund
to any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purpose of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period); or (iv) the sale, lease or exchange to the Fund
or any subsidiary thereof, in exchange for securities of the Fund, of any assets
of any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purposes of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period).

The Board of Trustees has determined that the voting requirements described
above, which are greater than the minimum requirements under Massachusetts law
or the 1940 Act, are in the best interests of shareholders generally. Reference
should be made to the Declaration of Trust on file with the SEC for the full
text of these provisions.

B-24
<PAGE> 77

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

B-25
<PAGE> 78

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

B-26
<PAGE> 79

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
B-27
<PAGE> 80

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

B-28
<PAGE> 81

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
B-29
<PAGE> 82

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

B-30
<PAGE> 83

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

B-31
<PAGE> 84

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

B-32
<PAGE> 85

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.

(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

B-33
<PAGE> 86

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

B-34
<PAGE> 87

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

B-35
<PAGE> 88

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

B-36
<PAGE> 89

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

B-37
<PAGE> 90

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.

B-38
<PAGE> 91

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.

B-39
<PAGE> 92

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.

B-40
<PAGE> 93

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.

B-41
<PAGE> 94

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>

B-42