<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Portfolio Management Review...................... 4
Portfolio of Investments......................... 8
Statement of Assets and Liabilities.............. 24
Statement of Operations.......................... 25
Statement of Changes in Net Assets............... 26
Statement of Cash Flows.......................... 27
Financial Highlights............................. 28
Notes to Financial Statements.................... 29
</TABLE>
PRIT SAR 3/97
<PAGE> 2
LETTER TO SHAREHOLDERS
March 10, 1997
Dear Shareholder,
We are pleased to report that the
past year has been very exciting for
Van Kampen American Capital and for
the Prime Rate Income Trust. The [PHOTO]
Trust has continued to seek its
investment objective of providing a
high level of current income,
consistent with preservation of
capital, and has returned 3.44 DENNIS J. MCDONNELL AND DON G. POWELL
percent at net asset value over the
six-month period. During that time,
the Trust's net asset value fluctuated by only $0.03, ranging from $9.98 to
$10.01, and for the second consecutive year, the Trust was the number-one
selling retail income fund, based on net sales, according to Financial Research
Corporation.
As noted in your previous report, VK/AC Holding, Inc., the parent company of
Van Kampen American Capital, Inc., was acquired by Morgan Stanley Group Inc., a
world leader in asset management and investment banking. The transaction was
completed in October, and we look forward to exploring the opportunities it
creates for investors. As part of the acquisition, Van Kampen American Capital
became the distributor of Morgan Stanley retail funds as of January 2, 1997.
More recently, on February 5, 1997, it was announced that Morgan Stanley
Group Inc. and Dean Witter, Discover & Co. agreed to merge. The combined company
will be a preeminent global financial services firm, with leading market
positions in securities, asset management and credit services. As the financial
industry continues to witness unprecedented consolidations and new partnerships,
we believe those firms that want to offer investors the greatest opportunities
and services in the next century must be market leaders in all facets of their
business.
ECONOMIC REVIEW
Early in 1996, various indicators pointed to an overly robust rate of
economic activity. For example, non-farm payroll increased by a stunning 705,000
in February, the biggest jump in 13 years. A larger-than-expected 4.7 percent
increase in real GDP (the nation's output of goods and services, adjusted for
inflation) during the second quarter confirmed that the economy was in a
strong-growth mode. By summer, there were escalating concerns that the growth
rate was unsustainable and that interest rate hikes were forthcoming.
Despite mounting evidence of inflation, the Federal Reserve Board held to a
stable monetary policy, believing the supply-and-demand imbalances in the
commodity markets were temporary and that burdensome consumer debt loads would
eventually slow the economy without the need for higher interest rates.
Continued on page two
1
<PAGE> 3
Events over the second half of 1996 proved the wisdom of this policy. During
the past six months, inflation remained low, GDP growth ran at a relatively
modest pace, and commodity prices receded. For the year, core producer prices
rose by just 0.6 percent, the second-lowest annual increase on record. Prices at
the retail level, which include the volatile food and energy sectors, rose by
3.3 percent.
MARKET REVIEW
Stability characterized the capital markets over the reporting period. After
cutting the key federal funds rate by a quarter-percentage point on January 31,
1996, Federal Reserve policy makers left short-term rates unchanged for the next
12 months. In response to this steady monetary policy, bank lending rates
remained in a narrow range during the year.
The moderate pace of economic growth has continued to foster a generally
healthy business and lending environment. Corporate profits have remained
strong, and helped to support the repayment of debt obligations. Reflecting
widespread confidence of investors and lenders, syndicated leveraged loan volume
increased to $134.8 billion in 1996. This represents a 33 percent increase since
1995, according to the Loan Pricing Corporation, with an increase of more than
500 percent since 1991.
OUTLOOK
We expect interest rates during 1997 to repeat last year's modest
fluctuations. Stronger-than-expected U.S. economic growth and faint rumblings of
inflationary pressures over the first half of the year could prompt a series of
modest credit tightenings by the Fed. We anticipate that by the fourth quarter,
the economy will moderate enough to discourage any lingering concerns about
inflation and allow interest rates to begin to decline across the yield
spectrum.
Overall, we anticipate that the economy will continue to grow at a
controlled pace and that inflation will remain subdued. We expect corporate
profits to continue to be strong, as a result of cost-cutting measures and
increased attention to shareholder value.
Additional details about your Fund, including a question-and-answer section
with your portfolio manager, are provided in this report. We appreciate your
continued confidence in your investment with Van Kampen American Capital.
Sincerely,
[SIG.]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG.]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED JANUARY 31, 1997
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
<TABLE>
TOTAL RETURNS
<S> <C>
Six-month total return(1).................................. 3.44%
One-year total return(1)................................... 6.91%
Five-year average annual total return(1)................... 6.90%
Life-of-Trust average annual total return(1)............... 7.69%
Commencement date.......................................... 10/04/89
Distribution rate(2)....................................... 7.02%
SHARE VALUATIONS
Net asset value on 01/31/97................................ $9.99
Six-month high net asset value............................. $10.01
Six-month low net asset value.............................. $9.98
</TABLE>
(1)Total return assumes an investment at the beginning of the period indicated,
reinvestment of all distributions for the period and tender of all shares at the
end of the period indicated, excluding payment of any early withdrawal charges.
(2)Distribution rate is based upon the offering price and the monthly annualized
distributions of the Trust as of January 24, 1997.
Past performance does not guarantee future results. Distribution rates and net
asset value may fluctuate with market conditions. Trust shares, when tendered,
may be worth more or less than their original cost.
This report is intended for shareholders of the Trust and may not be used as
sales literature with prospective investors unless it is preceded or accompanied
by the Trust's current prospectus, which gives more complete information about
charges and expenses, investment objectives and operating policies. Prospective
investors should read the prospectus carefully before investing or sending
money.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE> 5
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
We recently spoke with the portfolio manager of Van Kampen American Capital
Prime Rate Income Trust about the key events and economic forces that shaped the
markets during the first half of the Trust's fiscal year. The Trust's portfolio
manager, Jeffrey W. Maillet, senior vice president of Van Kampen American
Capital Investment Advisory Corp., has been responsible for the day-to-day
management of the Trust's portfolio since its inception. The following excerpts
reflect his views on the Trust's performance during the six-month period ended
January 31, 1997.
Q HOW WOULD YOU CHARACTERIZE THE MARKET CONDITIONS FACED BY THE TRUST OVER
THE PAST SIX MONTHS?
A Overall, the Trust has been the beneficiary of a generally positive market
environment. We have seen an extended period of moderate but steady
economic growth, coupled with a low rate of inflation. Interest rates --
and, therefore, core lending rates -- have not fluctuated significantly during
recent months, as reflected in the Trust's relatively consistent distribution
rate.
In addition, the strength of the economy has enhanced corporate
profitability, which suggests that many companies should be able to meet their
senior loan obligations on a timely basis. Not surprisingly, the senior loan
market has been very active, and domestic corporate and industrial loan volume
reached $226 billion in the third quarter alone, according to Bank Loan Report.
As a result, we can continue to be very selective in our choice of investments
and still have plenty of alternatives.
Of course, the economy is cyclical by nature, so it is inevitable that it
will eventually slow down. This would cause a decrease in corporate activity and
profitability, making it more difficult for borrowers to service their loan
obligations.
Q DO YOU SEE AN ECONOMIC SLOWDOWN ON THE HORIZON?
A We don't anticipate any drastic changes in the near term, but it is still
our responsibility to be ready for whatever conditions we encounter. In
managing the Trust, we evaluate each individual issuer, weigh the credit
risk, and examine the terms of the underlying senior loan agreement before we
can include a loan in the portfolio.
To help us offset some of the potential risk, we have elected to maintain a
widely varied portfolio comprised primarily of senior secured loans issued by
large domestic corporations. As of January 31, 1997, we had allocated the
Trust's assets among more than 20 industry groups, representing over 225
individual companies. If you look through the portfolio, you're sure to
recognize a number of these issuers as large, established firms with broad
product offerings and widespread market presence.
Also, we have the luxury of investing in an asset class that has tended to
have a high degree of relative stability by its very nature. The Trust's
holdings are senior, secured, floating-rate obligations. They tend to reflect
the prevailing interest rate environment, so the Trust's value has been less
sensitive to interest rate changes. Also, in the event of a
4
<PAGE> 6
bankruptcy, payments to holders of these obligations are, in most cases, given
priority over payments to shareholders of subordinated debt and preferred and
common equity. Please see page 7 of this report for more explanation.
Q DOES THE TRUST'S PERFORMANCE REFLECT THESE POSITIVE CONDITIONS?
A The Trust has performed well, but we wouldn't limit that statement to the
market conditions over the last six months. Throughout its history, the
Trust has sought to fulfill its objectives -- a high level of current
income, consistent with preservation of capital -- and has done so in a variety
of market environments, both good and bad.
The Trust's total return for the six-month reporting period was 3.44 percent
at net asset value, and 6.91 percent over the twelve months ended January 31,
1997. Over the last six months, the Trust's net asset value has remained within
a narrow range, between $10.01 and $9.98. The monthly dividend was increased
during the reporting period and stands at $0.0584 per share as of January 24,
1997. Based on the January 24, 1997 public offering price of $9.99, this
represents a distribution rate of 7.02 percent(1). For more information on the
Trust's performance, please refer to the chart on page three.
Q HAS THE STRUCTURE OF THE PORTFOLIO CHANGED SIGNIFICANTLY?
A No. Our top holdings by sector continue to be roughly the same, including
allocations to manufacturers, food and beverage companies, food stores,
retail stores, and broadcasting concerns. The chart below provides a more
complete profile of the portfolio allocations by industry sector.
TOP 10 PORTFOLIO HOLDINGS BY SECTOR*
<TABLE>
<CAPTION>
AS OF
JANUARY 31, 1997
<S> <C>
Cable....................................................... 10.6%
Manufacturing............................................... 7.9%
Food/Beverage............................................... 7.4%
Entertainment/Leisure....................................... 6.9%
Paper....................................................... 6.7%
Wireless Communications..................................... 6.7%
Health Care................................................. 6.6%
Radio and Television Broadcasting........................... 6.4%
Food Stores................................................. 5.3%
Other....................................................... 5.3%
</TABLE>
*As a Percentage of Variable Rate Senior Loan Interests
We see positive trends in many of these industries, especially in terms of
merger and acquisition activity. In many cases, companies are pursuing strategic
growth opportunities, which should give them significant competitive advantages
over the long run. The senior loan market continues to be an attractive and
logical source of funding for these ventures.
5
<PAGE> 7
Q WHAT IS YOUR OUTLOOK FOR THE TRUST AND THE MARKETS IN THE MONTHS AHEAD?
A The Federal Reserve Board has indicated that they may increase short-term
interest rates if economic strength appears to be adequate to fuel
potential inflation. The primary factors that tend to fuel inflationary
fears, such as wage pressure, producer and consumer price increases, and
supply-and-demand imbalances, have not shown any tendencies to increase
significantly. However, the economy continues to show modest growth and a
short-term interest rate increase in the second quarter cannot be ruled out.
The strong U.S. economy should continue to attract investments from around
the world, which is likely to sustain the demand for the type of senior loans in
which the Trust invests. Nevertheless, we will continue to be selective and
position the portfolio to participate in this growth without losing sight of the
potential for changes in the economy.
[SIG]
Jeffrey W. Maillet
Portfolio Manager
6
<PAGE> 8
A FOCUS ON SENIOR LOANS
The Prime Rate Income Trust invests primarily in senior collateralized loans to
U.S. corporations, partnerships, and other business entities which operate in a
variety of industries and geographical locations. Senior loans have a number of
characteristics which, in the opinion of the Trust's management team, are
important to the integrity of the Trust's portfolio. These include:
SENIOR STANDING
With respect to interest payments, senior loans generally have priority over
other classes of loans, preferred stock, or common stocks, though they may have
equal status with other senior securities of the borrower. This status is not a
guarantee, however, that monies to which the Trust is entitled will be paid. For
more details, please refer to the prospectus.
COLLATERAL BACKING
Senior loans are often secured by collateral that has been pledged by the
borrower under the terms of the loan agreement. Forms of collateral include,
among others, accounts receivable or inventory, buildings, and real estate.
Under certain circumstances, collateral might not be entirely sufficient to
satisfy the borrower's obligations in the event of non-payment of scheduled
interest or principal, and in some instances may be difficult to liquidate on a
timely basis.
Additionally, a decline in the value of the collateral could cause the loan
to become substantially unsecured, and circumstances could arise (such as the
bankruptcy of a borrower) which could cause the Trust's security interest in the
loan's collateral to be invalidated.
PROTECTIVE COVENANTS
Many senior loans carry provisions designed to protect the lender in certain
circumstances. Still, the Trust's net asset value may fluctuate with changes in
the perceived credit quality of the loans in which the Trust has invested and
may, from time to time, be more or less than the net asset value at the time of
the investment.
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS
AEROSPACE/DEFENSE 2.5%
$10,104 Aerostructures Corp., Term Loan -- Manufactures
and assembles structural aircraft parts.......... 09/30/03 to 09/30/04 $ 10,133
22,787 Alliant Techsystems, Inc., Term Loan --
Manufacturer of ordnance, composite metals....... 03/15/01 22,833
8,871 Fibers Inc., Term Loans -- Manufacturers of
Composite Fibers................................. 12/31/01 8,896
13,586 Grimes Aerospace Co., Term Loan -- Airplane
electronics manufacturer......................... 12/31/99 13,963
4,561 Grimes Aerospace Co., Revolving Credit........... 12/31/99 4,757
50,000 Gulfstream Delaware Corp., Term Loan -- Aircraft
manufacturer..................................... 09/30/02 50,107
5,000 MAG Aerospace Industries, Term Loan -- Waste and
trash systems supplier........................... 06/15/03 5,035
13,975 Tracor, Inc., Term Loan -- Manufacturer of
electronic systems and devices for the defense
and aerospace industries......................... 10/31/00 to 04/30/01 13,996
8,000 Tri-Star Aerospace, Revolving Credit --
Distributor of fasteners......................... 09/30/03 8,066
----------
137,786
----------
AUTOMOTIVE 3.3%
18,167 Bluebird Body Co., Term Loan -- Manufacturer of
school buses..................................... 11/19/03 18,214
208 Bluebird Body Co., Revolving Credit.............. 11/19/03 208
21,292 Cambridge Industries, Inc., Term Loan --
Manufacturer of plastic components for autos..... 05/17/02 to 05/17/04 21,407
20,691 Collins & Aikman Products Co., Term Loan --
Manufacturer of auto interiors, home interiors
and wallpapers................................... 01/13/02 to 12/31/02 20,731
18,000 Columbus-McKinnon Co., Term Loan -- Manufacturer
of material handling equipment................... 09/30/01 to 09/30/03 18,043
4,648 Columbus-McKinnon Co., Revolving Credit.......... 09/30/01 4,647
46,883 Hayes Wheels International, Inc., Term Loan --
Designer and manufacturer of car and truck
wheels........................................... 07/31/02 to 07/31/04 46,972
1,033 Lear Seating Corp., Revolving Credit --
Manufacturer of automobile and truck seat
systems.......................................... 09/30/01 1,033
11,933 Numatics, Inc., Term Loan -- Manufacturer of
pneumatic fluid power equipment.................. 12/31/03 12,000
10,000 Sinter Metals, Inc., Term Loan -- Manufacturer of
powder metal products............................ 06/30/05 10,046
10,492 Stanadyne Automotive, Term Loan -- Manufacturer
of diesel injection devices and engine parts..... 12/31/01 10,501
19,800 Venture Holding Trust, Term Loan -- Manufacturer
of auto parts.................................... 06/30/03 19,849
----------
183,651
----------
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUTOMOTIVE (CONTINUED)
BUILDING/HOUSING 2.0%
$59,850 National Gypsum Co., Term Loan -- Wallboard
manufacturer..................................... 09/20/03 $ 59,938
29,381 PrimeCo, Inc., Term Loan -- Equipment leasing.... 12/31/02 29,414
19,667 Walter Industries, Inc., Term Loan -- Home
builder.......................................... 01/22/03 19,685
----------
109,037
----------
CABLE 9.3%
14,312 Adelphia Cable Partners, L.P., Revolving Credit
-- Cable television operator..................... 12/31/03 14,400
3,182 Alexcom Limited Partnership, Term Loan --
Cellular telephone systems operator.............. 06/30/00 3,182
12,000 Cablevision of Ohio, Term Loan -- Cable
television owner/operator........................ 12/31/05 12,016
6,000 Cable Systems International, Term Loan
--Electrical wire and cable manufacturer......... 12/31/02 6,019
46,500 Charter Communications Entertainment I, Term Loan
-- Cable television systems operator............. 12/31/03 to 12/31/04 46,608
23,500 Charter Communications Entertainment II, Term
Loan -- Cable television systems operator........ 09/30/04 23,577
47,500 Chelsea Communications, Inc., Term Loan -- Cable
television systems operator...................... 09/30/04 47,586
21,500 Classic Cable, Inc., Term Loan -- Cable
television systems operator...................... 06/30/05 21,602
16,773 Coaxial Communications of Central Ohio, Term Loan
-- Cable television systems operator............. 12/31/99 16,646
26,250 Comcast MH Holdings, Term Loan -- Cable
television systems operator...................... 12/31/03 26,294
2,844 CSG Systems International, Inc., Term Loan --
Communications management consultant............. 12/31/00 2,846
43,000 Falcon Cable Media, Term Loan -- Cable television
systems operator................................. 07/11/05 43,055
26,500 Frontiervision Operating Partners, L.P., Term
Loan -- Cable television systems operator........ 06/30/05 26,599
6,636 Insight Communications, Revolving Credit --Cable
television systems operator...................... 03/31/05 6,702
18,500 Intermedia Partners, Term Loan --Cable television
system owner/operator............................ 01/01/05 18,535
6,425 James Cable Partners, L.P., Term Loan -- Cable
television systems operator...................... 06/30/00 6,465
300 James Cable Partners, L.P., Revolving Credit..... 06/30/00 306
3,250 Lenfest Communications, Term Loan -- Cable
television systems operator...................... 09/30/03 3,255
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CABLE (CONTINUED)
$ 3,918 Lenfest Communications, Revolving Credit......... 09/30/03 $ 3,931
65,313 Marcus Cable Operating Co., L.P., Term Loan --
Cable television systems operator................ 12/31/02 to 04/30/04 65,663
1,250 Marcus Cable Operating Co., L.P., Revolving
Credit........................................... 12/31/02 1,339
5,000 Mark Twain Cablevision, Term Loan --Cable
television systems operator...................... 06/30/04 5,038
10,800 Northland Cable Television, Inc., Term Loan --
Cable television systems operator................ 09/30/04 10,853
47,500 TCI Pacific Communications, Term Loan -- Cable
television systems operator...................... 12/31/04 47,623
6,441 TCI Southeast, Inc., Term Loan -- Cable
television systems operator...................... 06/30/01 6,451
7,890 TCI Southeast, Inc., Revolving Credit............ 06/30/01 7,907
25,000 Triax Midwest Association, Term Loan --Cable
television systems operator...................... 06/30/05 25,123
20,000 UCA Corp., Revolving Credit -- Cable television
systems operator................................. 09/30/03 20,121
----------
519,742
----------
CHEMICAL 3.0%
9,134 Cedar Chemicals Corp., Term Loan -- Manufacturer
of fertilizer.................................... 10/30/03 9,169
8,000 Hampshire Chemical Co., Term Loan -- Manufacturer
of specialty chemicals........................... 09/01/03 8,014
53,769 Huntsman Group Holding Corp., Term Loan --
Integrated chemical, plastic, packaging
producer......................................... 12/31/02 to 12/31/04 53,871
7,048 Huntsman Group Holding Corp., Revolving Credit... 12/31/02 7,073
12,216 Reid Plastics, Inc., Term Loan --Plastic bottle
manufacturer..................................... 03/31/03 12,298
15,000 Rheox, Inc., Term Loan -- Chemical additives
manufacturer..................................... 01/30/04 15,037
43,442 Sterling Chemicals, Inc., Term Loan -- Commodity
petrochemical manufacturer....................... 09/30/04 43,630
6,922 Texas Petrochemicals, Term Loan -- Processor of
petrochemicals................................... 06/30/04 6,941
12,442 Thoro System Products, Inc., Term Loan --
Manufacturer of chemicals for construction
industry......................................... 12/20/02 11,840
----------
167,873
----------
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ELECTRIC/ELECTRONICS 2.1%
$ 6,825 Banker's Systems, Inc., Term Loan -- Supplier of
compliance services and products................. 11/01/02 $ 6,824
33,250 Berg Electronics, Inc., Term Loan -- Manufacturer
of electronic connectors......................... 12/31/02 33,301
14,432 Circo Craft Technology, Inc., Term Loan
--Manufacturer of printed circuit boards and
backplanes....................................... 11/30/02 to 06/30/05 14,469
1,850 Exide Electronics Group, Inc., Term Loan --
Manufacturer of uninterruptible power supply
products......................................... 03/13/01 1,856
2,600 Exide Electronics Group, Inc., Revolving
Credit........................................... 03/13/01 2,614
9,500 HG Holdings, Inc., Term Loan -- Payment and
information processing provider.................. 06/30/01 9,543
10,000 Phase Metrics, Inc., Term Loan -- Manufacturer of
computer production test equipment............... 11/27/01 10,046
20,000 Primark Corp., Term Loan -- Information services
provider......................................... 06/30/02 20,018
8,358 Rowe International, Inc., Term Loan --
Manufacturer of jukeboxes and electronic
equipment (d).................................... 12/31/97 7,105
9,000 Sarcom, Inc., Term Loan -- Information services
provider......................................... 12/31/02 9,000
----------
114,776
----------
ENTERTAINMENT/LEISURE 6.0%
80,053 AMF Group, Inc., Term Loan -- Bowling center
operator and equipment manufacturer.............. 03/31/01 to 03/31/04 80,171
356 AMF Group, Inc., Revolving Credit................ 03/31/01 356
5,403 DW Investment, Inc., Revolving Credit --
Communications and entertainment conglomerate.... 08/09/00 5,408
6,343 Fairways Group, L.P., Term Loan -- Multiple golf
course owner/operator............................ 04/30/02 6,411
30,000 Fleer Corp., Term Loan -- Comic books and sports
cards............................................ 02/28/02 30,023
6,000 H.E.C. Investments, Inc., Term Loan -- Fitness
club operator.................................... 12/31/00 6,017
23,460 Marvel IV Holdings, Revolving Credit -- Comic
books, sports cards, and outdoor equipment....... 06/03/99 23,636
28,571 Metro-Goldwyn-Mayer, Term Loan --
Movie/television producer........................ 09/30/02 29,175
10,171 Metro-Goldwyn-Mayer, Revolving Credit............ 09/30/01 11,258
15,705 M.W. Manufacturer, Term Loan -- Manufacturer of
sporting goods and table games................... 09/15/02 15,762
27,667.. Orion Pictures Corp., Term Loan -- Theatrical
production....................................... 06/30/01 27,811
24,130 Six Flags Theme Parks, Term Loan -- Theme park
operator......................................... 06/23/03 24,162
6,700 Sportcraft, Ltd., Term Loan -- Supplier of
branded sporting goods........................... 12/31/02 6,747
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENTERTAINMENT/LEISURE (CONTINUED)
$ 8,250 TW Recreational Service, Term Loan -- Provider of
food and services for state and national parks... 09/30/02 $ 8,288
9,700 The U.S. Playing Card Co., Term Loan --
Manufacturer/distributor of playing cards........ 09/30/02 9,664
15,000 Vail Corp., Term Loan -- Mountain resort
operator......................................... 04/15/04 15,022
36,813 Viacom, Inc., Term Loan -- Entertainment
media/television programming..................... 07/01/02 36,839
----------
336,750
----------
FINANCE 0.6%
4,642 Ark Asset Holdings, Inc., Term Loan --
Institutional money manager...................... 11/30/01 4,642
14,000 Blackstone Capital Co., Term Loan -- Financial
services......................................... 05/31/99 14,050
14,947 Outsourcing Solutions, Inc., Term Loan --
Provider of accounts receivable management
services......................................... 11/01/03 14,981
----------
33,673
----------
FOOD/BEVERAGE 6.5%
10,973 American Italian Pasta Co., Term Loan -- Pasta
products producer................................ 02/28/04 11,017
11,535 Amerifoods, Inc., Term Loan -- Manufacturer of
snack foods and bakery products.................. 12/31/97 to 06/30/02 10,960
4,158 Edwards Baking Corp., Term Loan -- Manufacturer
of bakery products............................... 09/30/00 to 10/31/02 4,173
22,274 Foodbrands America, Term Loan -- Manufacturer of
food products.................................... 01/15/00 to 02/28/03 22,326
456 Foodbrands America, Revolving Credit............. 01/15/00 458
4,863 Ghirardelli Holdings Corp., Term Loan --
Manufacturer of chocolate products............... 03/30/03 4,902
9,957 IM Stadium, Inc., Term Loan -- Sports stadium
concessions...................................... 12/31/02 to 12/31/03 10,002
34,000 International Home Food, Term Loan --
Manufacturer of branded food products............ 09/30/04 to 09/30/05 34,045
14,868 Keebler Holding Corp., Term Loan -- Manufacturer
and distributor of cookies and crackers.......... 07/31/03 to 07/31/04 14,889
1,495 Mistic Brands, Inc., Revolving Credit -- Producer
and marketer of carbonated and non-carbonated
beverages........................................ 09/30/99 1,529
5,375 Mistic Brands, Inc., Term Loan................... 09/30/01 5,474
18,810 President Baking Co., Inc., Term Loan --
Bread/bread products manufacturer................ 12/30/02 18,750
39,838 Rykoff-Sexton, Inc., Term Loan -- Distributor and
manufacturer of food and related non-food
products......................................... 10/31/02 to 04/30/03 39,922
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOOD/BEVERAGE (CONTINUED)
$46,011 S.C. International Services, Term Loan --
In-flight food services.......................... 09/30/00 to 09/30/03 $ 46,126
14,108 Select Beverages, Inc., Term Loan -- Independent
bottler.......................................... 06/30/01 to 06/30/02 14,138
66,664 Silgan Corp., Term Loan -- Manufacturer of food
cans............................................. 12/31/00 to 03/15/02 66,665
3,307 Silgan Corp., Revolving Credit................... 12/31/00 3,307
25,000 Stroh Brewery Co., Term Loan -- Beer producer and
distributor...................................... 06/30/03 25,110
20,779 Van De Kamp's, Inc., Term Loan -- Frozen seafood
processor/distributor............................ 04/30/03 to 09/30/03 20,847
7,219 Windsor Quality Food, Term Loan -- Frozen food
processor........................................ 12/31/01 7,246
----------
361,886
----------
FOOD STORES 4.6%
34,013 Bruno's, Inc., Term Loan -- Southeastern retail
food chain operator.............................. 02/18/03 to 02/18/05 34,216
12,870 Carr-Gottstein Foods, Term Loan -- Alaska based
retail food chain operator....................... 12/31/02 12,880
9,821 Core-Mark International, Revolving Credit --
Wholesale distributor............................ 06/30/01 9,937
20,128 Grand Union Co., Term Loan -- New York based
retail food chain operator....................... 06/15/02 20,134
7,733 Harvest Foods, Inc., Term Loan -- Mississippi
based retail food chain operator (d) (f)......... 06/30/02 5,839
28,429 Pathmark Stores, Inc., Term Loan -- New Jersey
based retail food chain operator................. 07/31/98 to 10/31/99 28,412
2,523 Pathmark Stores, Inc., Revolving Credit.......... 07/31/98 2,476
2,691 Ralph's Grocery Co., Revolving Credit -- Los
Angeles, California based retail food chain
operator......................................... 06/15/01 2,702
68,553 Ralph's Grocery Co., Term Loan................... 06/15/01 to 02/15/04 68,691
61,846 Smith Food & Drug Center, Term Loan -- Food and
drug retailer.................................... 08/31/02 to 08/31/05 62,100
8,331 Star Markets Co., Inc., Term Loan -- New England
based retail food chain operator................. 01/31/01 to 12/31/02 8,332
2,174 Star Markets Co., Inc., Revolving Credit......... 01/31/01 2,177
----------
257,896
----------
FUEL RETAILER 0.1%
2,877 Truckstops of America, Inc., Term Loan --
Interstate fueling stations operator............. 12/10/00 2,845
----------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTHCARE 5.8%
$13,101 Alaris Medial Systems, Inc., Term Loan --
Infusion systems provider........................ 11/30/03 to 05/31/05 $ 13,117
4,200 Alaris Medial Systems, Inc., Revolving Credit.... 08/30/02 4,200
59,493 Community Health Systems, Inc., Term Loan --
Provider of healthcare services.................. 12/31/03 to 12/31/05 59,706
37,500 Corning Clinical Labs, Term Loan -- Clinical
testing laboratory operator...................... 12/15/02 to 12/15/03 37,720
57,067 Dade International, Inc., Term Loan -- Medical
equipment manufacturer/marketer.................. 12/31/01 to 12/31/04 57,291
15,833 Graphic Controls Corp., Term Loan -- Manufacturer
of medical equipment............................. 09/28/03 15,867
24,787 Integrated Health Services, Inc., Revolving
Credit -- Provider of post-acute healthcare
services......................................... 06/30/02 24,942
7,563 Magellan Health Services, Revolving Credit --
Behavorial healthcare services provider.......... 10/16/00 to 10/16/01 7,579
7,000 Medical Specialities, Term Loan -- Supplier of
medical pumps and consumables.................... 06/30/01 to 06/30/04 7,035
9,975 Mediq/PRN Life Support, Term Loan -- Medical
equipment rental operator........................ 09/30/04 10,023
18,315 Merit Behavioral Corp., Term Loan -- Psychiatric
hospital operator................................ 10/06/03 18,365
60,000 National Medical Care, Inc., Term Loan -- Kidney
dialysis service provider........................ 09/30/03 60,278
6,000 Premiere Ambulatory, Term Loan -- Outpatient
surgery centers.................................. 06/30/01 to 06/30/03 6,046
----------
322,169
----------
MANUFACTURING 6.9%
7,481 CII Carbon, L.L.C., Term Loan -- Calcined coke
producer......................................... 09/30/04 7,521
12,344 Calmar, Inc., Term Loan -- Manufacturer of
dispensing and spray products.................... 09/15/03 to 03/15/04 12,365
9,844 CBP Resources, Inc., Term Loan -- Manufacturer of
animal feed ingredients.......................... 09/30/03 9,884
15,238 Dal-Tile Group, Inc., Term Loan -- Ceramic tile
and floor covering manufacturer/retailer......... 12/31/02 15,264
3,429 Dal-Tile Group, Inc., Revolving Credit........... 12/31/02 3,434
21,868 Desa International, Inc., Term Loan --
Diversified manufacturer of heaters, fireplaces,
and specialty tools.............................. 02/28/03 21,981
52,500 E&S Holding Corp., Term Loan -- Manufacturer of
sporting goods/juvenile products................. 09/30/03 to 03/30/06 52,550
750 E&S Holding Corp., Revolving Credit.............. 09/30/03 750
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING (CONTINUED)
$ 9,321 Ebel USA, Inc., Term Loan -- Manufacturer of
luxury time pieces............................... 09/30/01 $ 9,318
1,946 Essex Group, Inc., Revolving Credit --
Manufacturer of electrical wire and cable........ 10/31/01 1,972
10,625 Health O Meter, Inc., Term Loan -- Manufacturer
of small appliances.............................. 08/15/01 10,569
10,000 Hedstrom Corp., Term Loan -- Manufacturer of
children's outdoor toys.......................... 04/27/01 10,023
6,484 Identity Group, Inc., Term Loan -- Manufacturer
of identity products............................. 11/22/03 6,513
10,435 Intermetro Industries Corp., Term Loan --
Manufacturer of metal/polymer storage products... 06/30/03 to 06/30/04 10,404
36,022 International Wire Group, Term Loan --
Manufacturer of auto, appliance, and
communication wires.............................. 09/30/02 to 09/30/03 36,105
9,634 IPC, Inc., Term Loan -- Manufacturer of packaging
materials........................................ 09/30/01 9,647
2,306 IPC, Inc., Revolving Credit...................... 09/30/01 2,314
29,001 Johnstown America, Term Loan -- Manufacturer of
railcars......................................... 03/31/03 29,063
20,045 Lifestyle Furnishing, Term Loan -- Manufacturer
of furniture and fabric.......................... 08/30/04 20,139
8,400 Mettler Toledo Holdings, Term Loan --
Manufacturer of weighing instruments............. 12/31/03 to 12/31/04 8,427
5,000 Precise Technology, Term Loan -- Custom injection
molding company.................................. 03/31/03 5,037
5,542 Rayovac Corp., Term Loan -- Manufacturer of
battery, lighting products....................... 09/30/03 to 09/30/04 5,553
10,000 RBX Corp., Term Loan -- Manufacturer of rubber
products......................................... 12/31/03 10,018
9,682 RTI Funding Corp., Term Loan -- Manufacturer of
building blocks for children..................... 02/08/03 to 02/03/04 9,731
8,810 Safelite Glass Corp, Term Loan -- Manufacturer of
auto glass replacement........................... 12/19/02 to 12/09/04 8,851
1,000 Samsonite Corp., Term Loan -- Manufacturer of
luggage.......................................... 07/14/00 1,000
111 Samsonite Corp., Revolving Credit................ 07/14/00 111
6,957 Simmons Co., Term Loan -- Manufacturer and
distributor of bedding........................... 03/31/03 6,977
12,944 Superior Telecom, Inc., Revolving Credit --
Manufacturer of copper wire and cable............ 10/31/01 13,017
24,000 UCAR International, Inc., Term Loan --
Manufacturer of graphite/carbide electrodes...... 12/31/02 24,030
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING (CONTINUED)
$ 7,871 U.F. Acquisition, Term Loan -- Provider of
fixtures and storage for retail stores........... 12/15/02 $ 7,941
13,965 Wesley Jessen Corp., Term Loan -- Manufacturer of
contact lenses................................... 02/29/04 14,040
----------
384,549
----------
PAPER 5.9%
22,394 Advo, Inc., Term Loan -- Direct mail marketing
company.......................................... 03/31/04 22,458
27,118 Crown Paper Co./Crown Vantage, Inc., Term Loan --
Producer of value-added paper products........... 06/30/02 to 08/22/03 27,117
1,504 Crown Paper Co./Crown Vantage, Inc., Revolving
Credit........................................... 06/30/02 1,512
5,000 CST Office Products, Inc., Term Loan --
Manufacturer and distributor of stock computer
forms............................................ 12/31/01 5,071
35,311 Fort Howard Corp., Term Loan -- Paper
manufacturer..................................... 03/31/02 to 12/31/02 35,417
105,623 Jefferson Smurfit Corp., Term Loan -- Corrugated
paper products manufacturer...................... 04/30/01 to 10/31/02 105,733
27,947 S.D. Warren Co., Term Loan -- Coated-free paper
manufacturer..................................... 04/26/04 27,993
91,673 Stone Container Corp., Term Loan -- Paper
products manufacturer............................ 04/01/00 to 10/01/03 91,757
1,587 Stone Container Corp., Revolving Credit.......... 05/15/99 1,587
7,200 Stronghaven, Inc., Term Loan -- Corrugated
container manufacturer........................... 05/15/04 7,248
----------
325,893
----------
PERSONAL/NON-DURABLE 2.7%
6,396 Chattem, Inc., Term Loan -- Manufacturer and
marketer of OTC pharmaceuticals.................. 10/30/02 6,417
44,280 Mary Kay Cosmetics, Term Loan -- Direct cosmetic
sales............................................ 12/06/02 44,294
8,000 Personal Care Holdings, Term Loan -- Manufacturer
and marketer of consumer products................ 04/09/03 8,055
37,935 Playtex Products, Inc., Term Loan -- Manufacturer
of beauty aid and hygiene products............... 06/30/02 37,969
54,577 Revlon Consumer Products Corp., Term Loan --
Manufacturer of cosmetics........................ 12/31/00 54,893
----------
151,628
----------
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRINTING 3.7%
$21,280 Advanstar Holdings, Inc., Term Loan -- Trade
magazine publisher and trade show exhibitor...... 12/31/02 to 12/31/03 $ 21,406
47,184 American Media Operations, Inc., Term Loan --
Magazine/newspaper publisher..................... 09/30/01 to 09/30/02 47,054
16,041 Brylane, L.P., Term Loan -- Catalog retailer of
apparel.......................................... 01/31/02 to 02/28/03 16,082
7,663 Garden State Newspapers, Term Loan -- Suburban
newspaper operator............................... 03/31/04 7,704
10,274 Garden State Newspapers, Revolving Credit........ 06/30/03 to 03/31/04 10,360
27,525 Journal News, Inc., Term Loan -- Multiple
newspaper printer................................ 12/31/02 27,547
4,000 K III Communications, Term Loan -- Diversified
publisher........................................ 06/30/04 4,017
22,250 Peterson Publications, Term Loan -- Consumer
magazines publisher.............................. 12/31/02 to 09/30/04 22,341
12,000 Polyfibron Technologies, Inc., Term Loan --
Manufacturer/marketer of consumable printing
products......................................... 12/28/03 12,030
26,730 Treasure Chest Advertising, Term Loan --
Advertising circular producer.................... 12/31/01 26,739
10,000 Treasure Chest Advertising, Revolving Credit..... 12/31/01 10,020
----------
205,300
----------
RADIO AND TELEVISION BROADCASTING 5.7%
5,160 American Radio Systems, Revolving Credit -- Radio
station owner/operator........................... 12/31/04 5,327
13,497 Benedek Broadcasting Corp., Term Loan --
Television station owner/operator................ 05/01/01 to 11/01/02 13,515
10,000 Citicasters, Inc., Term Loan -- Radio station
owner/operator................................... 06/12/04 10,041
35,000 Eller Media Co., Term Loan -- Outdoor
advertiser....................................... 12/31/04 35,079
4,800 Evergreen Media Corp., Term Loan -- Radio station
owner/operator................................... 12/31/02 4,802
10,544 Evergreen Media Corp., Revolving Credit.......... 12/31/02 10,549
10,952 Katz Media Corp., Term Loan -- Media
representation firm.............................. 12/31/04 10,972
1,286 Katz Media Corp., Revolving Credit............... 12/31/04 1,293
45,798 Outdoor Systems, Inc., Term Loan -- Outdoor
advertiser....................................... 12/31/02 to 12/31/03 46,731
15,000 Patterson Broadcasting, Term Loan -- Radio
station operator................................. 06/30/04 15,078
10,246 River City Broadcasting, L.P., Term Loan --
Midwestern radio station owner/operator.......... 12/31/99 10,285
62,630 Sinclair Broadcasting Group, Inc., Term Loan --
Television and radio station owner/operator...... 12/31/02 to 11/30/03 62,715
6,705 Sinclair Broadcasting Group, Inc., Revolving
Credit........................................... 11/30/03 6,710
9,511 SKTV, Inc., Term Loan -- Television station
owner/operator................................... 07/31/02 9,450
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RADIO AND TELEVISION BROADCASTING (CONTINUED)
$ 7,000 Smith Television, Term Loan -- Television station
owner/operator................................... 12/31/02 $ 7,035
22,737 Sullivan Broadcasting, Term Loan -- Television
station owner/operator........................... 12/31/03 22,793
1,680 Sullivan Broadcasting, Revolving Credit.......... 12/31/03 1,683
11,298 Universal Outdoor, Inc., Revolving Credit --
Outdoor advertiser............................... 09/30/03 11,401
29,700 Young Broadcasting, Inc., Term Loan -- Television
broadcaster...................................... 09/30/03 29,717
48 Young Broadcasting, Inc., Revolving Credit....... 09/30/03 67
----------
315,243
----------
RESTAURANTS 0.3%
8,778 America's Favorite Chicken Co., Term Loan --
Church's and Popeye's Fried Chicken
restaurants...................................... 10/31/01 8,778
960 Carvel Corp., Term Loan -- Soft ice cream
products franchiser.............................. 12/31/98 960
4,129 Long John Silver's Restaurants, Inc., Term Loan
-- Retail seafood restaurant owner/operator...... 09/30/04 4,444
----------
14,182
----------
RETAIL 3.9%
100 American Blind and Wallpaper Factory, Inc., Term
Loan -- Wallcover distributor.................... 03/07/97 99
32,500 Camelot Music, Inc., Term Loan -- Retail
distributor of music and video
cassettes (d) (f)................................ 02/28/02 24,394
17,525 Color Tile, Inc., Term Loan -- National retailer
of floor and wall covering products (d).......... 12/31/98 12,267
1,191 Color Tile Holdings, Inc., Revolving
Credit (d)....................................... 12/31/97 1,170
8,000 CSK Auto, Inc., Term Loan -- Auto parts
retailer......................................... 10/31/03 8,108
4,560 CSK Auto, Inc., Revolving Credit................. 10/31/03 4,654
26,369 Federated Department Stores, Inc., Term Loan --
National department store chain.................. 03/31/00 26,471
2,985 Kirkland's Holdings, Term Loan -- Retailer of
decorative home accessories and gift items....... 06/30/02 3,002
37,500 Kmart Corp., Term Loan -- International mass
merchandise retailer............................. 06/17/99 38,016
13,780 Luxottica U.S. Holdings, Term Loan -- Eyewear
retailer and manufacturer........................ 06/30/01 13,787
6,700 Movie Gallery, Term Loan -- Video speciality
retailer......................................... 06/30/00 6,715
7,435 Nebraska Book Co., Term Loan -- Used book
distributor...................................... 10/31/03 7,457
26,000 Payless Cashways, Inc., Term Loan -- Building
products retailer................................ 11/20/00 26,107
See Notes to Financial Statements
</TABLE>
18
<PAGE> 20
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RETAIL (CONTINUED)
$11,143 Payless Cashways, Inc., Revolving Credit......... 11/20/00 $ 11,219
10,879 Peebles, Inc., Term Loan -- Mid-Atlantic
retailer......................................... 06/09/02 11,045
19,375 QVC Programming, Term Loan -- Home shopping
television network............................... 02/15/02 19,422
261 Service Merchandise, Revolving Credit -- Catalog
retailer......................................... 06/08/99 304
----------
214,237
----------
TEXTILES 2.1%
11,385 American Marketing Industries, Inc., Term Loan --
Textile manufacturer............................. 11/30/02 11,447
5,750 Homemakers Industries, Term Loan -- Manufacturer
of braided rugs.................................. 06/30/04 5,786
8,598 Hosiery Corp. of America, Term Loan --
Manufacturer/direct mail marketer of women's
hosiery.......................................... 07/31/01 8,468
7,950 Ithaca Industries, Inc., Term Loan --
Undergarment and hosiery manufacturer............ 08/31/99 8,104
775 Ithaca Industries, Inc., Revolving Credit........ 08/31/99 917
14,652 Johnston Industries, Term Loan -- Diversified
manufacturer of home furnishings and textiles.... 03/28/03 14,743
32,517 London Fog Industries, Inc., Term Loan --
Manufacturer of rainwear and outerwear (e)....... 05/31/02 24,913
12,500 Maxim Group, Inc., Term Loan -- Retail chain of
floor coverings.................................. 09/30/03 12,544
20,000 Polymer Group, Inc., Term Loan -- Manufacturer of
polyolefin products.............................. 03/31/02 20,036
7,200 William Carter Co., Term Loan -- Manufacturer of
children's clothing.............................. 10/30/03 7,232
----------
114,190
----------
TRANSPORTATION 0.7%
13,547 Atlas Air, Inc., Revolving Credit -- Air cargo
carrier.......................................... 06/30/98 13,618
26,162 Continental Micronesia, Term Loan -- Commercial
airlines......................................... 07/31/01 to 07/31/03 26,222
----------
39,840
----------
WIRELESS COMMUNICATIONS 5.9%
23,250 Arch Communications Group, Inc., Term Loan --
Wireless communications operator................. 12/31/02 to 12/31/03 23,287
2,100 Arch Communications Group, Inc., Revolving
Credit........................................... 12/31/02 2,101
5,000 Clarity Telecom, Inc., Term Loan -- Seller and
servicer of telephone systems and software....... 11/30/02 5,024
12,098 Comcast Cellular Communications, Revolving Credit
-- Cellular systems operator..................... 09/30/03 12,206
17,739 Comcast Cellular Communications, Term Loan....... 09/30/04 17,882
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WIRELESS COMMUNICATIONS (CONTINUED)
$ 6,585 Intesys Technologies, Inc., Term Loan --
Equipment manufacturer for
telecommunications/autos......................... 12/31/01 $ 6,597
45,735 Mobilemedia Communications, Term Loan --
Nationwide paging operator....................... 06/30/02 to 06/30/03 44,937
1,616 Mobilemedia Communications, Revolving Credit..... 06/30/02 1,597
60,000 Nextel Communications, Term Loan -- Wireless
communications operator.......................... 06/30/03 60,873
12,769 Shared Technologies, Term Loan -- Provider of
telecommunications services...................... 03/30/01 to 03/31/03 12,821
667 Shared Technologies, Revolving Credit............ 03/30/01 675
13,050 Skytel Corp., Revolving Credit -- Wireless
communications operator.......................... 12/31/01 13,117
50,000 Sprint Spectrum, L.P., Term Loan -- Wireless
communications operator.......................... 01/31/02 50,636
9,500 Teletouch Communications, Term Loan -- Wireless
communications operator.......................... 11/30/03 9,652
65,000 Western Wireless Corp., Term Loan -- Cellular and
personal communications services operator........ 03/31/05 65,049
----------
326,454
----------
OTHER 4.6%
11,925 Alliance Coal Corp., Term Loan -- Coal mining.... 12/31/01 to 12/31/02 11,971
43,065 Allied Waste North America, Term Loan -- Waste
service.......................................... 06/30/01 to 06/30/05 43,271
25,000 Amax Gold, Inc., Term Loan -- Gold and silver
mining and processing............................ 12/31/01 25,152
9,900 American Disposal Services, Term Loan -- Waste
service.......................................... 06/30/03 9,950
9,950 Anker Coal Group, Inc., Term Loan -- Coal
mining........................................... 06/30/04 9,998
20,630 Borg-Warner Security Corp., Term Loan --
Protection services.............................. 12/31/98 20,961
16,536 Brand Scaffold Services, Term Loan -- Industrial
scaffolding rental services...................... 09/30/02 to 09/30/04 16,622
9,671 Fairmont Minerals, Ltd., Term Loan -- Silica pond
and gravel supplier.............................. 03/31/03 9,722
13,075 Loewen Group, Inc., Revolving Credit -- Funeral
home and cemetery owner/operator................. 05/29/01 13,220
6,475 Rigco North America, Inc., Term Loan -- Oil rig
owner/operator................................... 09/30/98 6,516
22,616 Ryder TRS, Inc., Term Loan -- Rental
truck/trailer operator........................... 10/31/01 22,672
5,000 SMC Acquisition Corp., Term Loan -- Carts/storage
lockers.......................................... 06/30/03 5,023
</TABLE>
See Notes to Financial Statements
20
<PAGE> 22
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER (CONTINUED)
$19,923 United Stationers Supply Co., Term Loan --
Distributor of office products................... 10/31/03 $ 19,965
34,612 US Office Products, Revolving Credit -- Office
products retailer................................ 08/21/01 34,876
8,760 USS Acquisition, Inc., Term Loan -- Producer of
industrial silica................................ 12/31/03 8,828
----------
258,747
----------
TOTAL VARIABLE RATE ** SENIOR LOAN
INTERESTS 88.2%................................. 4,898,347
----------
</TABLE>
See Notes to Financial Statements
21
<PAGE> 23
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Borrower (000)
- ------------------------------------------------------------------------------------------------
<S> <C>
EQUITIES 0.3%
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 04/11/04, convertible into 10.0% cash pay
subordinated debt) (b)(e)............................................... 3,487
Best Products Co., Inc. (297,480 common shares) (c)..................... 0
Best Products Co., Inc. (Warrants for 28,080 common shares) (c)......... 0
Classic Cable, Inc. (Warrants for 760 common shares) (c)................ 0
Dan River, Inc., Class A (10,975 common shares) (b)(c).................. 1,967
Flagstar Cos., Inc. (8,755 common shares) (c)........................... 9
London Fog Industries, Inc. (10,833,012 common shares) (b)(c)........... 0
London Fog Industries, Inc., ($19,181,547 par amount of preferred stock,
17.5% coupon, maturity 05/31/02) (b)(e)................................. 9,591
Nextel Communications, Inc. (Warrants for 60,000 common
shares) (b)(c).......................................................... 23
RIGCO, North America, L.L.C (Warrants for .325% interest of company's
fully diluted equity)................................................... 16
----------
TOTAL EQUITIES.......................................................... 17,097
----------
TOTAL LONG-TERM INVESTMENTS 88.5%
(Cost $4,932,113,535) (a)............................................... 4,915,444
----------
SHORT-TERM INVESTMENTS AT AMORTIZED COST
COMMERCIAL PAPER 1.1%
Comdisco, Inc. ($20,000,000 par, maturing 02/10/97, yielding 5.45%)..... 19,973
Cox Communications, Inc. ($20,000,000 par, maturing 02/10/97 to
02/14/97, yielding 5.45% to 5.46%)...................................... 19,966
Federal Express Corp. ($20,000,000 par, maturing 02/03/97, yielding
5.47%).................................................................. 19,994
----------
TOTAL COMMERCIAL PAPER.................................................. 59,933
----------
SHORT-TERM LOAN PARTICIPATIONS 9.7%
American Stores Co. ($30,000,000 par, maturing 02/03/97, yielding
5.60%).................................................................. 30,000
Army & Air Force Exchange ($30,000,000 par, maturing 02/21/97, yielding
5.37%).................................................................. 30,000
Baxter International, Inc. ($23,800,000 par, maturing 02/03/97, yielding
5.34%).................................................................. 23,800
Cabot Corp. ($25,000,000 par, maturing 02/04/97 to 02/21/97, yielding
5.45% to 5.50%)......................................................... 25,000
Centex Corp. ($12,300,000 par, maturing 02/03/97, yielding 5.62%)....... 12,300
Conagra Inc. ($30,000,000 par, maturing 02/03/97 to 02/12/97, yielding
5.44% to 5.49%)......................................................... 30,000
Echlin, Inc. ($30,000,000 par, maturing 02/03/97, yielding 5.50%)....... 30,000
Electronic Data Services Corp. ($25,000,000 par, maturing 02/21/97,
yielding 5.33%)......................................................... 25,000
Englehard Corp. ($20,000,000 par, maturing 02/04/97, yielding 5.32%).... 20,000
Enron Oil & Gas Co. ($30,000,000 par, maturing 02/03/97, yielding
5.45%).................................................................. 30,000
FMC Corp. ($15,000,000 par, maturing 02/21/97, yielding 5.50%).......... 15,000
Georgia Power Corp. ($5,000,000 par, maturing 02/14/97, yielding
5.35%).................................................................. 5,000
Hertz Corp. ($30,000,000 par, maturing 02/07/97 to 02/10/97, yielding
5.34%).................................................................. 30,000
IKON Office Solutions, Inc. ($10,000,000 par, maturing 02/03/97,
yielding 5.60%)......................................................... 10,000
</TABLE>
See Notes to Financial Statements
22
<PAGE> 24
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Borrower (000)
- ------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM LOAN PARTICIPATIONS (CONTINUED)
Indiana Gas, Inc. ($30,000,000 par, maturing 02/07/97 to 03/03/97,
yielding 5.35% to 5.40%)................................................ $ 30,000
MAPCO, Inc. ($5,000,000 par, maturing 02/21/97, yielding 5.49%)......... 5,000
Mead Corp. ($30,000,000 par, maturing 02/07/97, yielding 5.47% to
5.49%).................................................................. 30,000
National Rural Utilities Coop ($30,000,000 par, maturing 02/06/97 to
02/13/97, yielding 5.35%)............................................... 30,000
Pacificorp ($20,000,000 par, maturing 02/20/97, yielding 5.35%)......... 20,000
Ralston Purina Co. ($25,000,000 par, maturing 02/12/97 to 02/18/97,
yielding 5.50%)......................................................... 25,000
Tandy Corp. ($20,000,000 par, maturing 03/04/97 to 03/13/97, yielding
5.51% to 5.52%)......................................................... 20,000
Universal Corp. ($30,000,000 par, maturing 02/05/97 to 02/14/97,
yielding 5.47%)......................................................... 30,000
Union Pacific Corp. ($30,000,000 par, maturing 03/03/97, yielding
5.51%).................................................................. 30,000
XTRA, Inc. ($5,000,000 par, maturing 02/03/97, yielding 5.50%).......... 5,000
----------
TOTAL SHORT-TERM LOAN PARTICIPATIONS.................................... 541,100
----------
TIME DEPOSIT 0.1%
State Street Bank & Trust ($3,500,000 par, to be sold on 02/03/97 at
$3,501,313)............................................................. 3,500
----------
TOTAL SHORT-TERM INVESTMENTS AT AMORTIZED COST 10.9%................... 604,533
----------
OTHER ASSETS IN EXCESS OF LIABILITIES 0.6%............................. 33,090
----------
NET ASSETS 100.0%...................................................... $5,553,067
----------
</TABLE>
(a) At January 31, 1997, cost for federal income tax purposes is $4,932,113,535;
the aggregate gross unrealized appreciation is $40,259,182, and the
aggregate gross unrealized depreciation is $56,928,647, resulting in net
unrealized depreciation of $16,669,465.
(b) Restricted security.
(c) Non-income producing security, as this stock currently does not declare
dividends.
(d) This Senior Loan interest is non-income producing.
(e) Payment-in-kind security.
(f) 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
23
<PAGE> 25
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997 (Unaudited)
All amounts, except for Net Asset Value information,
reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $4,932,113)
(Note 1).................................................. $4,915,444
Short-Term Investments (Note 1)............................. 604,533
Receivables:
Interest and Fees......................................... 44,872
Fund Shares Sold.......................................... 28,840
Investments Sold.......................................... 1,039
Other....................................................... 82
----------
Total Assets.......................................... 5,594,810
----------
LIABILITIES:
Deferred Facility Fees...................................... 20,646
Payables:
Income Distributions...................................... 7,054
Investment Advisory Fee (Note 2).......................... 4,397
Fund Shares Repurchased................................... 4,025
Custodian Bank............................................ 2,284
Administrative Fee (Note 2)............................... 1,174
Distributor and Affiliates (Note 2)....................... 888
Accrued Expenses............................................ 1,217
Deferred Compensation and Retirement Plans (Note 2)......... 58
----------
Total Liabilities..................................... 41,743
----------
NET ASSETS.................................................. $5,553,067
==========
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 556,121,269 shares issued and
outstanding) (Note 3)..................................... $ 5,561
Paid in Surplus (Note 3).................................... 5,567,789
Accumulated Undistributed Net Investment Income............. 4,374
Accumulated Net Realized Loss on Investments................ (7,988)
Net Unrealized Depreciation on Investments.................. (16,669)
----------
NET ASSETS.................................................. $5,553,067
==========
NET ASSET VALUE PER COMMON SHARE
($5,553,067,126 divided by 556,121,269 shares
outstanding).............................................. $ 9.99
==========
</TABLE>
See Notes to Financial Statements
24
<PAGE> 26
STATEMENT OF OPERATIONS
For the Six Months Ended January 31, 1997 (Unaudited)
All amounts reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest........................................................ $208,079
Fees............................................................ 12,767
Other........................................................... 1,174
--------
Total Income................................................ 222,020
--------
EXPENSES:
Investment Advisory Fee (Note 2)................................ 24,716
Administrative Fee (Note 2)..................................... 6,585
Shareholder Services (Note 2)................................... 3,056
Custody......................................................... 632
Legal (Note 2).................................................. 552
Trustee Fees and Expenses (Note 2).............................. 14
Other........................................................... 2,146
--------
Total Expenses.............................................. 37,701
--------
NET INVESTMENT INCOME........................................... $184,319
========
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Net Realized Gain on Investments................................ $ 48
--------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period....................................... (6,313)
End of the Period............................................. (16,669)
--------
Net Unrealized Depreciation on Investments During the
Period........................................................ (10,356)
--------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS................. $(10,308)
========
NET INCREASE IN NET ASSETS FROM OPERATIONS...................... $174,011
========
</TABLE>
See Notes to Financial Statements
25
<PAGE> 27
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended January 31, 1997 and the
Year Ended July 31, 1996 (Unaudited)
All amounts reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1997 July 31, 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income................................... $ 184,319 $ 281,969
Net Realized Gain on Investments........................ 48 542
Net Unrealized Depreciation on Investments During the
Period................................................ (10,356) (14,950)
---------- -----------
Change in Net Assets from Operations.................... 174,011 267,561
Distributions from Net Investment Income................ (182,820) (283,580)
---------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..... (8,809) (16,019)
---------- -----------
FROM CAPITAL TRANSACTIONS (NOTES 3 AND 5):
Proceeds from Common Shares Sold........................ 844,414 2,551,158
Value of Shares Issued Through Dividend Reinvestment.... 98,269 155,100
Cost of Shares Repurchased.............................. (246,591) (354,520)
---------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS...... 696,092 2,351,738
---------- -----------
TOTAL INCREASE IN NET ASSETS............................ 687,283 2,335,719
NET ASSETS:
Beginning of the Period................................. 4,865,784 2,530,065
---------- -----------
End of the Period (Including undistributed net
investment income of $4,374 and $2,875,
respectively)......................................... $5,553,067 $4,865,784
========== ==========
</TABLE>
See Notes to Financial Statements
26
<PAGE> 28
STATEMENT OF CASH FLOWS
For the Six Months Ended January 31, 1997 (Unaudited)
All amounts reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 174,011
---------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Increase in Investments at Value.......................... (532,961)
Increase in Short-Term Investments at Amortized Cost...... (138,678)
Increase in Interest and Fees Receivables................. (10,349)
Increase in Receivable for Investments Sold............... (995)
Increase in Other Assets.................................. (29)
Decrease in Accrued Expenses.............................. (338)
Decrease in Deferred Facility Fees........................ (70)
Increase in Investment Advisory and Administrative Fees
Payable................................................. 683
Increase in Distributor and Affiliates Payable............ 535
Increase in Deferred Compensation and Retirement Plans
Expenses................................................ 13
---------
Total Adjustments....................................... (682,189)
---------
NET CASH USED FOR OPERATING ACTIVITIES...................... (508,178)
---------
CASH FLOWS FROM FINANCING ACTIVITIES (NOTES 3 AND 5):
Proceeds from Shares Sold................................... 832,186
Payments on Shares Repurchased.............................. (242,566)
Increase in Intra-day Credit Line........................... 1,727
Cash Dividends Paid......................................... (83,169)
---------
Net Cash Provided by Financing Activities................. 508,178
---------
NET INCREASE IN CASH........................................ -0-
Cash at Beginning of the Period............................. -0-
---------
CASH AT END OF THE PERIOD................................... $ -0-
=========
</TABLE>
See Notes to Financial Statements
27
<PAGE> 29
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended July 31
January 31, --------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $ 10.002 $ 10.046 $ 10.052 $ 10.004 $ 9.998
-------- -------- -------- -------- -------
Net Investment Income.............. .351 .735 .756 .618 .600
Net Realized and Unrealized
Gain/Loss on Investments......... (.019) (.028) (.004) .015 .008
-------- -------- -------- -------- -------
Total from Investment Operations..... .332 .707 .752 .633 .608
-------- -------- -------- -------- -------
Less:
Distributions from Net Investment
Income........................... .349 .751 .758 .585 .600
Distributions in Excess of Net
Investment Income (Note 1)....... -0- -0- -0- -0- .002
-------- -------- -------- -------- -------
Total Distributions.................. .349 .751 .758 .585 .602
-------- -------- -------- -------- -------
Net Asset Value, End of the Period... $ 9.985 $ 10.002 $ 10.046 $ 10.052 $10.004
======== ======== ======== ======== =======
Total Return (a)..................... 3.44%* 7.22% 7.82% 6.52% 6.17%
Net Assets at End of the Period (In
millions).......................... $5,553.1 $4,865.8 $2,530.1 $1,229.0 $ 966.7
Ratio of Expenses to Average Net
Assets............................. 1.44% 1.46% 1.49% 1.53% 1.53%
Ratio of Net Investment Income to
Average Net Assets................. 7.06% 7.33% 7.71% 6.16% 5.96%
Portfolio Turnover (b)............... 36%* 66% 71% 74% 67%
</TABLE>
* Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the contingent deferred sales charge.
(b) Calculation includes the proceeds from repayments and sales of variable rate
senior loan interests.
See Notes to Financial Statements
28
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
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 $4,898,347,191 (88.2% 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 uncertainty inherent in the valuation process, the estimated value of
a Variable Rate Senior Loan interest may differ significantly from the value
that would have been used had there been 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.
29
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
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.
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.
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
30
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
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
(Illinois), counsel to the Trust, of which a trustee of the Trust is an
affiliated person.
For the six months ended January 31, 1997, the Trust recognized expenses of
approximately $34,500 representing the Administrator's or its affiliates'
(collectively "VKAC") cost of providing legal services to the Trust.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Trust. For the six months ended
January 31, 1997, the Fund recognized expenses of approximately $2,528,800,
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 January 31, 1997 and July 31, 1996, paid in surplus aggregated $5,567,788,973
and $4,872,393,497, respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JANUARY 31, 1997 JULY 31, 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares....................... 486,490,317 251,848,949
----------- -----------
Shares Sold............................ 84,465,282 254,577,948
Shares Issued Through Dividend
Reinvestment......................... 9,828,263 15,483,081
Shares Repurchased..................... (24,662,593) (35,419,661)
----------- -----------
Net Increase in Shares Outstanding..... 69,630,952 234,641,368
----------- -----------
Ending Shares.......................... 556,121,269 486,490,317
=========== ===========
</TABLE>
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, for the six months ended January 31,
1997, were $2,213,549,287 and $1,670,456,563, respectively.
31
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
5. TENDER OF SHARES
The Board of Trustees currently intends, each quarter, to consider authorizing
the Trust to make tender offers for all or a portion of its then outstanding
common shares at the then net asset value of the common shares. For the six
months ended January 31, 1997, 24,662,593 shares were tendered and repurchased
by the Trust.
6. EARLY WITHDRAWAL CHARGE
An early withdrawal charge to recover offering expenses will be imposed in
connection with most common shares held for less than five years which are
accepted by the Trust for repurchase pursuant to tender offers. The early
withdrawal charge will be payable to VKAC. Any early withdrawal charge which is
required to be imposed will be made in accordance with the following schedule.
<TABLE>
<CAPTION>
YEAR OF REPURCHASE WITHDRAWAL CHARGE
- -----------------------------------------------------------------------
<S> <C>
First............................................... 3.0%
Second.............................................. 2.5%
Third............................................... 2.0%
Fourth.............................................. 1.5%
Fifth............................................... 1.0%
Sixth and following................................. 0.0%
</TABLE>
For the six months ended January 31, 1997, VKAC received early withdrawal
charges of approximately $3,707,300 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 $508,451,284 as of
January 31, 1997. 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 a revolving credit agreement with a syndicate led
by Bank of America for an aggregate of $250,000,000. The proceeds of any
borrowing by the Trust under the revolving credit agreement 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 of .065% are charged on the unused portion of the credit line. Borrowings
under this facility will bear interest at either the LIBOR rate or the Federal
Funds rate plus .375%. There have been no borrowings under this agreement to
date.
32
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
8. SENIOR LOAN PARTICIPATION COMMITMENTS
The Trust invests primarily in participations, assignments, or acts as a party
to the primary lending syndicate of a Variable Rate Senior Loan interest to
United States corporations, partnerships, and other entities. When the Trust
purchases a participation of a Senior Loan interest, the Trust typically enters
into a contractual agreement with the lender or other third party selling the
participation, but not with the borrower directly. As such, the Trust assumes
the credit risk of the Borrower, Selling Participant or other persons
interpositioned between the Trust and the Borrower.
At January 31, 1997, 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.................................. $232,624 $233,202
Canadian Imperial Bank of Commerce............. 51,386 51,575
NationsBank.................................... 31,961 32,014
Goldman Sachs.................................. 25,342 25,346
Merrill Lynch Capital Corp..................... 20,000 20,121
Mellon Bank.................................... 20,000 20,018
Chase Securities Inc........................... 18,629 18,649
Lehman Brothers................................ 12,500 12,500
Donaldson Lufkin Jenrette...................... 10,571 10,622
Bank of New York............................... 8,750 8,795
PNC Securities Corp. .......................... 5,041 5,041
ABN AMRO....................................... 5,000 5,031
-------- --------
Total.......................................... $441,804 $442,914
======== ========
</TABLE>
33
<PAGE> 35
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
GLOBAL AND
INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Aggressive Growth Fund
Emerging Growth Fund
Enterprise Fund
Growth Fund
Pace Fund
Growth & Income
Balanced Fund
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free
Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Intermediate Term Municipal
Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
MORGAN STANLEY FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
Worldwide High Income Fund
Ask your investment representative for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us weekdays from 7:00 a.m. to 7:00
p.m. Central time at 1-800-341-2911 for Van Kampen American Capital funds, or
1-800-282-4404 for Morgan Stanley retail funds.
34
<PAGE> 36
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*--Chairman
THEODORE A. MYERS
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
JEFFREY W. MAILLET*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, as defined in
the Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1997
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
RESULTS OF SHAREHOLDER VOTES
A Special Meeting of Shareholders of the Trust was held on October 23, 1996
where shareholders voted on a new investment advisory agreement and the
selection of KPMG Peat Marwick LLP as Independent Auditors. With regard to the
approval of a new investment advisory agreement between Van Kampen American
Capital Investment Advisory Corp. and the Trust, 338,443,125 shares voted for
the proposal, 4,303,195 shares voted against, 14,751,190 shares abstained and 0
shares represented broker non-votes. With regard to the selection of KPMG Peat
Marwick LLP as Independent Auditors, 278,838,120 shares voted for the proposal,
1,338,011 shares voted against, 4,215,394 shares abstained and 73,105,988 shares
represented broker non-votes.
35
<PAGE> 37
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
THIS PAGE INTENTIONALLY LEFT BLANK
36
