<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Com-
mission Only (as permitted
by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
(Names of Registrant as Specified in Their Charters)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed per Exchange Act Rules 14a-6(i)(1) and 0-11.
[ ] Fee paid previously with preliminary materials.
<PAGE> 2
- APRIL 1997 -
IMPORTANT NOTICE
TO VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST SHAREHOLDERS
QUESTIONS
& ANSWERS
- --------------------------------------------------------------------------------
Although we recommend that you read the complete Proxy Statement, for your
convenience, we have provided a brief overview of the issues to be voted on.
- --------------------------------------------------------------------------------
Q WHY AM I RECEIVING THIS PROXY STATEMENT?
A Morgan Stanley Group, Inc., the indirect corporate parent of your Fund's
investment adviser, has entered into an agreement to merge with and into Dean
Witter, Discover & Co. Your Fund is seeking shareholder approval on a new
investment advisory agreement, to take effect following the merger. Your Fund
also is seeking approval of a new fundamental investment policy modifying its
existing fundamental investment policies and a corresponding conversion to a
master-feeder structure in the future. Please refer to the proxy statement for
a detailed explanation of the proposed items.
Q HOW WILL THIS AFFECT MY ACCOUNT?
A You can expect the same level of management expertise and high-quality
shareholder service to which you've grown accustomed. The new investment
advisory agreement between your Fund and its investment adviser will be
substantially similar to the Fund's current investment advisory agreement,
except for certain provisions added at the request of your trustees.
Q WILL MY VOTE MAKE A DIFFERENCE?
A Your vote is needed to ensure that the proposals can be acted upon. Your
immediate response on the enclosed proxy card(s) will help save on the costs of
any further solicitations for a shareholder vote. We encourage all shareholders
to participate in the governance of the Fund(s).
Q HOW DO THE TRUSTEES OF MY FUND SUGGEST THAT I VOTE?
A After careful consideration, the trustees of your Fund unanimously recommend
that you vote "FOR" each of the items proposed on the enclosed proxy card(s).
Q WHO IS PAYING FOR EXPENSES RELATED TO THE SHAREHOLDERS MEETING?
A Morgan Stanley Group, Inc. or its affiliates will pay for those expenses
relating to the shareholder meeting.
Q WHO DO I CALL IF I HAVE QUESTIONS?
A We will be happy to answer your questions about the proxy solicitation.
Please call us at 1-800-341-2911 (TDD users call 1-800-421-2833) between 7:00
a.m. and 7:00 p.m. Central time, Monday through Friday.
Q WHERE DO I MAIL MY PROXY CARD(S)?
A You may use the enclosed postage-paid envelope or mail your proxy card(s) to:
Proxy Tabulator
P.O. Box 9111
Hingham, MA 02043-9111
<PAGE> 3
ABOUT THE PROXY CARD
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
APPROVAL OF NEW ADVISORY AGREEMENT - mark "For," "Against" or "Abstain"
APPROVAL OF A NEW FUNDAMENTAL INVESTMENT POLICY - mark "For," "Against" or
"Abstain"
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
SAMPLE
PROXY
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<TABLE>
<S><C>
FOR AGAINST ABSTAIN
1. The proposal to approve a new / / / / / /
investment advisory agreement.
FOR AGAINST ABSTAIN
2. The proposal to approve a new / / / / / /
fundamental investment policy
modifying existing fundamental
investment policies and restrictions
and a corresponding conversion to a
"master-feeder" structure in the
future.
Please be sure to sign and date this Proxy. Date
Shareholder sign here Co-owner sign here
</TABLE>
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<PAGE> 4
April 23, 1997
Dear Van Kampen American Capital Prime Rate Income Trust Shareholder:
The enclosed proxy statement relates to a special meeting of the shareholders
of Van Kampen American Capital Prime Rate Income Trust (the "Fund"). We are
pleased to announce that Morgan Stanley Group Inc., the indirect corporate
parent of the investment adviser of your Fund, has entered into a merger
agreement with Dean Witter, Discover & Co. Under the terms of the merger
agreement, your Fund's investment adviser will become an indirect subsidiary of
the merged company, to be named Morgan Stanley, Dean Witter, Discover & Co. Your
Fund's investment adviser will continue to provide the Fund with investment
advisory and management services following the merger.
At the shareholder meeting, shareholders of the Fund will consider a new
investment advisory agreement to take effect following the merger. The new
investment advisory agreement between your Fund and its investment adviser will
be substantially similar to the Fund's current investment advisory agreement,
except for certain provisions added at the request of your trustees.
Shareholders also will consider a new fundamental investment policy modifying
the existing fundamental investment policies and restrictions and a
corresponding conversion to a master-feeder structure in the future. The
attached proxy statement seeks shareholder approval on these items.
Your vote is important and your participation
in the governance of your Fund does make a difference.
The proposals have been unanimously approved by the Board of Trustees of the
Fund, who recommend you vote "FOR" each of the proposals. YOUR IMMEDIATE
RESPONSE WILL HELP SAVE ON THE COSTS OF ADDITIONAL SOLICITATIONS. We look
forward to your participation, and we thank you for your continued confidence in
Van Kampen American Capital.
PLEASE SIGN AND RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Sincerely,
Dennis J. McDonnell
President and Chairman of the
Board of Trustees
<PAGE> 5
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
TELEPHONE (800) 341-2911
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 28, 1997
Notice is hereby given to the holders of common shares of beneficial interest,
par value $0.01 per share (the "Shares"), of Van Kampen American Capital Prime
Rate Income Trust (the "Fund") that a Special Meeting of the Shareholders of the
Fund (the "Meeting") will be held at the offices of Van Kampen American Capital,
Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on Wednesday, May
28, 1997, at 3:00 p.m., for the following purposes:
<TABLE>
<S> <C>
1. To approve a new investment advisory agreement.
2. To approve adding a new fundamental investment policy
modifying existing fundamental investment policies and
restrictions and a corresponding conversion to a
master-feeder structure in the future.
3. To transact such other business as may properly come before
the Meeting.
</TABLE>
Holders of record of the Shares of the Fund at the close of business on April
14, 1997 are entitled to notice of, and to vote at, the Meeting and any
adjournment thereof.
By order of the Board of Trustees
RONALD A. NYBERG,
Vice President and Secretary
April 23, 1997
<PAGE> 6
THE FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL REPORT
AND THE MOST RECENT SEMI-ANNUAL REPORT SUCCEEDING THE ANNUAL REPORT TO A
SHAREHOLDER UPON REQUEST. ANY SUCH REQUEST SHOULD BE DIRECTED TO THE VAN KAMPEN
AMERICAN CAPITAL PRIME RATE INCOME TRUST BY CALLING (800) 341-2911 OR BY WRITING
TO THE FUND AT ONE PARKVIEW PLAZA, OAKBROOK TERRACE, ILLINOIS 60181.
SHAREHOLDERS OF THE FUND ARE INVITED TO ATTEND THE MEETING IN PERSON. IF YOU
DO NOT EXPECT TO ATTEND THE MEETING, PLEASE INDICATE YOUR VOTING INSTRUCTIONS ON
THE ENCLOSED PROXY CARD, DATE AND SIGN SUCH PROXY CARD, AND RETURN IT IN THE
ENVELOPE PROVIDED, WHICH IS ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE
IF MAILED IN THE UNITED STATES.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT
YOU MAIL YOUR PROXY PROMPTLY.
THE BOARD OF TRUSTEES OF THE FUND RECOMMENDS THAT YOU CAST YOUR VOTE:
- FOR approval of a new investment advisory agreement.
- FOR approval of a new fundamental investment policy modifying existing
fundamental investment policies and restrictions and a corresponding
conversion to a "master-feeder" structure in the future.
YOUR VOTE IS IMPORTANT.
PLEASE RETURN YOUR PROXY CARD PROMPTLY
NO MATTER HOW MANY SHARES YOU OWN.
<PAGE> 7
PROXY STATEMENT
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
TELEPHONE (800) 341-2911
SPECIAL MEETING OF SHAREHOLDERS
MAY 28, 1997
This Proxy Statement is furnished in connection with the solicitation by the
Board of Trustees (the "Trustees" or "Board of Trustees") of the holders of the
common shares of beneficial interest, par value $0.01 per share (the "Shares"),
of Van Kampen American Capital Prime Rate Income Trust (the "Fund") of proxies
to be voted at a Special Meeting of Shareholders of the Fund, and all
adjournments thereof (the "Meeting"), to be held at the offices of Van Kampen
American Capital, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on
Wednesday, May 28, 1997, at 3:00 p.m. The approximate mailing date of this Proxy
Statement and accompanying form of proxy is April 23, 1997.
The purpose of the Meeting is to permit the Fund's shareholders to consider a
New Advisory Agreement (defined below) to take effect following the consummation
of the transactions contemplated by an Agreement and Plan of Merger, dated as of
February 4, 1997 (the "Merger Agreement"), between Dean Witter, Discover & Co.
("Dean Witter Discover") and Morgan Stanley Group Inc. ("Morgan Stanley"), the
indirect parent corporation of the Fund's investment adviser. Pursuant to the
Merger Agreement, the investment adviser will become an indirect subsidiary of
the merged company, which will be called Morgan Stanley, Dean Witter, Discover &
Co. ("MSDWD"). Shareholders also will consider a new fundamental investment
policy modifying the existing fundamental investment policies and restrictions
and a corresponding conversion to a master-feeder structure in the future.
Other Van Kampen American Capital investment companies will vote at separate
shareholder meetings on a proposal substantially similar to Proposal 1 in this
Proxy Statement. They will hold separate shareholder meetings because they are
supervised by boards of trustees that are not identical to the Board of Trustees
of the Fund or their shareholders will consider proposals different from those
of the Fund. If you are a shareholder of Van Kampen American Capital investment
<PAGE> 8
companies other than the Fund, you will receive one or more additional proxy
statements relating to such other shareholder meetings.
THE FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL REPORT
AND THE MOST RECENT SEMI-ANNUAL REPORT SUCCEEDING THE ANNUAL REPORT TO A
SHAREHOLDER UPON REQUEST. SUCH REPORTS HEREBY ARE INCORPORATED BY REFERENCE IN
THEIR ENTIRETY INTO THIS PROXY STATEMENT. ANY SUCH REQUEST SHOULD BE DIRECTED TO
THE VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST BY CALLING (800)
341-2911 OR BY WRITING TO THE FUND AT ONE PARKVIEW PLAZA, OAKBROOK TERRACE,
ILLINOIS 60181.
VOTING
The Board of Trustees has fixed the close of business on April 14, 1997 as the
record date (the "Record Date") for the determination of holders of Shares of
the Fund entitled to vote at the Meeting. Shareholders of the Fund on the Record
Date will be entitled to one vote per Share with respect to each proposal
submitted to the shareholders of the Fund, with no Share having cumulative
voting rights.
The voting requirement for passage of Proposal 1 is the "vote of a majority of
the outstanding voting securities", which is defined under the 1940 Act as the
lesser of (i) 67% or more of the voting securities of the Fund entitled to vote
thereon present in person or by proxy at the Meeting, if the holders of more
than 50% of the outstanding voting securities entitled to vote thereon are
present in person or represented by proxy or (ii) more than 50% of the
outstanding voting securities of the Fund entitled to vote thereon.
The voting requirement for passage of Proposal 2 is the vote of the holders of
a majority of the Shares outstanding and entitled to vote on Proposal 2. The
vote necessary to satisfy this voting requirement also will satisfy the 1940 Act
voting requirement applicable to Proposal 2.
The Board of Trustees of the Fund recommends that you cast your vote:
- FOR approval of the New Advisory Agreement.
- FOR approval of a new fundamental investment policy modifying existing
fundamental investment policies and restrictions and a corresponding
conversion to a "master-feeder" structure in the future.
All properly executed proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked thereon. Proxies received
prior to the Meeting on which no vote is indicated will be voted "for" each
proposal as to which it is entitled to vote. Shares not voted with respect to a
proposal due to an abstention or broker non-vote will be deemed votes not cast
with respect to such proposal, but such Shares will be deemed present for quorum
purposes. A majority
2
<PAGE> 9
of the outstanding Shares entitled to vote on a proposal must be present in
person or by proxy to have a quorum to conduct business at the Meeting.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the Fund a written notice of revocation, by delivering a
duly executed proxy bearing a later date or by attending the Meeting and voting
in person.
The Fund knows of no business other than that mentioned in Proposals 1 and 2
of the Notice that will be presented for consideration at the Meeting. If any
other matters are properly presented, it is the intention of the persons named
on the enclosed proxy to vote proxies in accordance with their best judgment. In
the event a quorum is present at the Meeting but sufficient votes to approve any
proposal are not received, the persons named as proxies may propose one or more
adjournments of the Meeting with respect to such proposal to permit further
solicitation of proxies, provided they determine that such an adjournment and
additional solicitation is reasonable and in the interest of shareholders based
on a consideration of all relevant factors, including the nature of the relevant
proposal, the percentage of votes then cast, the percentage of negative votes
then cast, the nature of the proposed solicitation activities and the nature of
the reasons for such further solicitation. An unfavorable vote on a proposal by
the shareholders will not affect the implementation of the other proposal if
such other proposal receives a favorable vote.
- ------------------------------------------------------------------------------
PROPOSAL 1: APPROVAL OF NEW ADVISORY AGREEMENT
- ------------------------------------------------------------------------------
THE ADVISER
Van Kampen American Capital Investment Advisory Corp. acts as investment
adviser (the "Adviser") for the Fund. The Adviser has acted as investment
adviser for the Fund since the Fund commenced its investment operations. Prior
to January 1995, the Adviser provided investment advisory services under the
name Van Kampen Merritt Investment Advisory Corp.
The Adviser currently is a wholly-owned subsidiary of Van Kampen American
Capital, Inc. ("VKAC"). VKAC is a wholly-owned subsidiary of VK/AC Holding, Inc.
("VKAC Holding"). VKAC Holding is an indirect wholly-owned subsidiary of Morgan
Stanley. The addresses of VKAC Holding, VKAC and the Adviser are One Parkview
Plaza, Oakbrook Terrace, Illinois 60181 and 2800 Post Oak Blvd., Houston, Texas
77056.
INFORMATION CONCERNING MORGAN STANLEY
Morgan Stanley and various of its directly or indirectly owned subsidiaries,
including Morgan Stanley & Co. Incorporated ("Morgan Stanley & Co."), a
3
<PAGE> 10
registered broker-dealer, Morgan Stanley Asset Management Inc., a registered
investment adviser, and Morgan Stanley & Co. International Limited, provide a
wide range of financial services on a global basis. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring real estate, project finance and other corporate finance advisory
activities; merchant banking and other principal investment activities; stock
brokerage and research services; asset management; the trading of foreign
exchange and commodities as well as derivatives on a broad range of asset
categories, rates and indices; real estate advice, financing and investing; and
global custody, securities clearance services and securities lending.
INFORMATION CONCERNING DEAN WITTER, DISCOVER & CO.
Dean Witter Discover is a diversified financial services company offering a
broad range of nationally marketed credit and investment products with a primary
focus on individual customers. Dean Witter Discover has two principal lines of
business: credit services and securities. Its credit services business consists
primarily of the issuance, marketing and servicing of general purpose credit
cards and the provision of transaction processing services, private-label credit
card services and real estate secured loans. It is the largest single issuer of
general purpose credit cards in the United States, as measured by number of
accounts and cardmembers, and the third largest originator and servicer of
credit card receivables, as measured by managed loans. Dean Witter Discover's
securities business is conducted primarily through its wholly-owned
subsidiaries, Dean Witter Reynolds Inc. ("DWR") and Dean Witter InterCapital
Inc. ("InterCapital"). DWR is a full-service securities firm offering a wide
variety of securities products to serve the investment needs of individual
clients through over 9,100 account executives located in 371 branch offices. DWR
is among the largest NYSE members and is a member of other major securities,
futures and options exchanges. InterCapital is a registered investment adviser
that, along with its subsidiaries, services investment companies, individual
accounts and institutional accountants. InterCapital and its wholly-owned
subsidiary, Dean Witter Services Company Inc., serve in various investment
management, advisory and administrative capacities to 102 investment companies
(the "InterCapital Funds") and other portfolios with net assets under management
of approximately $91.4 billion at March 31, 1997.
THE MERGER
Pursuant to the Merger Agreement, Morgan Stanley will be merged (the "Merger")
with and into Dean Witter Discover and the surviving corporation will be named
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"). Following the Merger, the
Adviser will be an indirect subsidiary of MSDWD.
Under the terms of the Merger Agreement, each of Morgan Stanley's common
shares will be converted into the right to receive 1.65 shares of MSDWD common
4
<PAGE> 11
stock and each issued and outstanding share of Dean Witter Discover common stock
will thereafter represent one share of MSDWD common stock. Following the Merger,
Morgan Stanley's former shareholders will own approximately 45% and Dean Witter
Discover's former shareholders will own approximately 55% of the outstanding
shares of common stock of MSDWD.
The Merger is expected to be consummated in mid-1997 and is subject to certain
closing conditions, including certain regulatory approvals and the approval of
shareholders of both Morgan Stanley and Dean Witter Discover.
Under the terms of the Merger Agreement, the Board of Directors of MSDWD
initially will consist of fourteen members, two of whom will be Morgan Stanley
insiders and two of whom will be Dean Witter Discover insiders. The remaining
ten directors will be independent directors, with Morgan Stanley and Dean Witter
Discover each nominating five of the ten. The Chairman and Chief Executive
Officer of MSDWD will be the current Chairman and Chief Executive Officer of
Dean Witter Discover, Phillip Purcell. The President and Chief Operating Officer
of MSDWD will be the current President of Morgan Stanley, John Mack.
The Adviser does not anticipate any reduction in the quality of services now
provided to the Fund and does not expect that the Merger will result in any
material changes in the business of the Adviser or in the manner in which the
Adviser renders services to the Fund. The Adviser also anticipates that neither
the Merger nor any ancillary transactions will have any adverse effect on the
Adviser's ability to fulfill their obligations under the New Advisory Agreements
(as defined below) or to operate their business in a manner consistent with past
business practices.
In connection with Morgan Stanley's purchase of VKAC Holding on October 31,
1996, certain officers of the Adviser, including Dennis J. McDonnell, who is a
member of the Board of Trustees, and Don G. Powell, who was a member of the
Board of Trustees prior to August 1996, entered into employment agreements with
VKAC Holding which expire from between 1998 and 2000. Certain of such officers,
including Messrs. McDonnell and Powell, also were granted options to purchase
shares of common stock of Morgan Stanley which vest from 1999 to 2001. Certain
officers of the Adviser also entered into retention agreements with VKAC
Holding, which will remain in place following the consummation of the Merger.
The employment agreements and retention agreements are intended to assure that
the services of the officers are available to the Adviser (and thus to the Fund)
until such agreements expire. Finally, certain officers of the Adviser,
including Messrs. McDonnell and Powell, received preferred stock of Morgan
Stanley that is convertible into common stock of Morgan Stanley from 1997 to
2000. As a result of the Merger, such preferred stock shall be convertible into
common stock of MSDWD at the effective time of the Merger.
5
<PAGE> 12
THE ADVISORY AGREEMENT
In anticipation of the Merger, a majority of the Trustees of the Fund who are
not parties to the New Advisory Agreement or interested persons of any such
party (the "Disinterested Trustees") approved a new investment advisory
agreement (the "New Advisory Agreement") between the Fund and the Adviser. The
holders of a majority of the outstanding voting securities (within the meaning
of the 1940 Act) of the Fund are being asked to approve the New Advisory
Agreement. See "The New Advisory Agreement" below.
THE CURRENT ADVISORY AGREEMENT. The Current Advisory Agreement for the Fund
was last approved by a majority of the Trustees, including a majority of the
Disinterested Trustees, voting in person at a meeting called for that purpose on
July 18, 1996, relating to the acquisition of the Adviser's corporate parent by
Morgan Stanley. The Current Advisory Agreement was last approved by shareholders
of the Fund at a meeting held on October 23, 1996 relating to the acquisition of
the Adviser's corporate parent by Morgan Stanley.
The Current Advisory Agreement 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 that Fund's portfolio transactions are executed. The Adviser also
administers the business affairs of the Fund, furnishes offices, necessary
facilities and equipment, provides administrative services, and permits its
officers and employees to serve without compensation as Trustees and officers of
the Fund if duly elected to such positions.
The Current 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 Current 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 obligations or duties under the Current
Advisory Agreement.
The Adviser's activities are subject to the review and supervision of the
Board of Trustees to which the Adviser renders periodic reports with respect to
the Fund's investment activities. The Current Advisory Agreement may be
terminated by either party, at any time, without penalty, upon 60 days written
notice, and automatically terminates in the event of its assignment.
The net assets of the Fund as of April 14, 1997, as well as other investment
companies sponsored by VKAC and advised by the Adviser and the rates of
compensation paid thereto are set forth at Annex A hereto. The Fund paid net
advisory expenses, for its most recently completed fiscal year, in the amount of
$36,408,473.
6
<PAGE> 13
The Fund pays all other expenses incurred in its operation including, but not
limited to, direct charges relating to the purchase and sale of its portfolio
securities, interest charges, fees and expenses of legal counsel and independent
auditors, taxes and governmental fees, costs of share certificates and any other
expenses (including clerical expenses), expenses in connection with its dividend
reinvestment plan, membership fees in trade associations, expenses of
registering and qualifying its Shares for sale under federal and state
securities laws, expenses of printing and distribution, expenses of filing
reports and other documents filed with governmental agencies, expenses of annual
and special meetings of the trustees and shareholders, 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 the
trustees who are not affiliated with the Adviser, insurance premiums,
indemnification and other expenses not expressly provided for in the Current
Advisory Agreement and any extraordinary expenses of a nonrecurring nature. The
Fund also compensates the Adviser, VKAC, the Distributor (defined below) and
ACCESS (defined below) for certain non-advisory services provided pursuant to
agreements discussed below. See "OTHER INFORMATION -- Non-Advisory Agreements"
below.
THE NEW ADVISORY AGREEMENT. The Board of Trustees approved a proposed New
Advisory Agreement between the Fund and the Adviser on March 26, 1997, the form
of which is attached hereto as Annex B.
The form of the proposed New Advisory Agreement is substantially similar to
the Current Advisory Agreement between the Fund and the Adviser. The material
differences between the Current Advisory Agreement and the New Advisory
Agreement are described in this paragraph. The New Advisory Agreement designates
certain officers of the Adviser and the officers of the Fund as essential
personnel with respect to the operations of the Fund. Under the terms of the New
Advisory Agreement, the Adviser may not make any material or significant
personnel changes or replace any essential personnel or materially change the
responsibilities or duties of any essential personnel prior to the first
anniversary of the agreement without first informing with the Board of Trustees
in a timely manner. The New Advisory Agreement also prohibits the Adviser from
changing its name without the prior consent of the Board of Trustees.
The investment advisory fee as a percentage of net assets payable by the Fund
will be the same under its New Advisory Agreement as under its Current Advisory
Agreement. If the investment advisory fee under the New Advisory Agreement had
been in effect for the Fund's most recently completed fiscal year, contractual
advisory fees payable to the Adviser by the Fund would have been identical to
those payable under the Current Advisory Agreement.
In connection with approving the New Advisory Agreement, the Board of Trustees
held a special telephone meeting on February 10, 1997 and special in-person
meetings on March 20, 1997 and March 26, 1997. At the meetings, the
7
<PAGE> 14
Board of Trustees considered the possible effects of the Merger upon VKAC, the
Adviser, Van Kampen American Capital Distributors, Inc., the distributor of the
Shares (the "Distributor"), and ACCESS Investors Services, Inc., the Fund's
transfer agent ("ACCESS"), and upon their ability to provide investment
advisory, distribution, transfer agency and other services to the Fund.
Representatives of Dean Witter Discover and VKAC attended one or more of the
in-person meetings and represented to the Board of Trustees that (i) the VKAC
family of funds will be maintained and operated as a separate mutual fund
complex and will not be consolidated with Dean Witter Discover's InterCapital
Funds and (ii) VKAC, the Adviser, the Distributor and ACCESS will be maintained
separate from their counterparts in the InterCapital Fund complex and will be
operated for the benefit of the Fund and other investment companies sponsored by
VKAC. The representatives of Morgan Stanley, Dean Witter Discover and VKAC also
stated that (i) the Fund will continue to be distributed by the Distributor
through third-party broker-dealers and, following the Merger, also will be
distributed through Dean Witter Discover broker-dealers on a proprietary basis,
and (ii) the InterCapital Funds will continue to be distributed solely through
Dean Witter Discover broker-dealers on a propriety basis. The representatives of
Dean Witter Discover also described the financial and other resources available
to VKAC and its affiliates, after giving effect to the Merger, to secure for the
Fund quality investment research, investment advice, distribution, transfer
agency and other client services.
In evaluating the New Advisory Agreement, the Board of Trustees took into
account that the Fund's Current Advisory Agreement and its New Advisory
Agreement, including the terms relating to the services to be provided
thereunder by the Adviser and the fees and expenses payable by the Fund, are
substantially similar, except for those provisions added to each New Advisory
Agreement at the request of the Trustees. The Board of Trustees considered the
skills and capabilities of the Adviser, the representations of Dean Witter
Discover and VKAC described above and the representations of Dean Witter
Discover and VKAC that no material change was planned in the current management
or facilities of the Adviser as a result of the Merger. The Board of Trustees
also considered the reputation, expertise and resources of Morgan Stanley and
Dean Witter Discover and their affiliates in domestic and international
financial markets. The Board of Trustees considered the continued employment of
members of senior management of the Adviser, the Distributor and ACCESS pursuant
to current and future employment and retention agreements to be important to
help assure the continuity of the personnel primarily responsible for
maintaining the quality of investment advisory and other services for the Fund.
The Board of Trustees also considered the affect of certain shares of preferred
stock of Morgan Stanley owned by senior management of the Adviser becoming
immediately convertible into common stock of Morgan Stanley at the time of the
Merger. The Trustees considered the possible benefits the Adviser may receive as
a result of the Merger, including the continued use, to the
8
<PAGE> 15
extent permitted by law, of Morgan Stanley & Co., DWR and their affiliates for
brokerage services.
The Board of Trustees considered the affects on the Fund of the Adviser
becoming an affiliated person of MSDWD. Following the Merger, the 1940 Act will
prohibit or impose certain conditions on the ability of the Fund to engage in
certain transactions with MSDWD and its affiliates. For example, absent
exemptive relief, the Fund will be prohibited from purchasing securities from
Morgan Stanley & Co. or DWR, both of which will be wholly-owned broker-dealer
subsidiaries of MSDWD, in transactions in which Morgan Stanley & Co. or DWR acts
as a principal, and the Fund will have to satisfy certain conditions in order to
engage in securities transactions in which Morgan Stanley & Co. or DWR act as a
broker or to purchase securities in an underwritten offering in which Morgan
Stanley & Co. or DWR is acting as an underwriter. In this connection, management
of the Adviser represented to the Board of Trustees that they do not believe
these prohibitions or conditions will have a material affect on the management
or performance of the Fund and, to the extent permitted by applicable law, VKAC
anticipates that the Fund will continue to use Morgan Stanley & Co., DWR and
their affiliates for brokerage services. The Fund did not pay any brokerage
commissions to Morgan Stanley & Co. or DWR during its most recently completed
fiscal year.
The Board of Trustees was advised that Section 15(f) of the 1940 Act is still
applicable to the Adviser as a result of Morgan Stanley's previous acquisition
of the Adviser's parent corporation on October 31, 1996. Section 15(f) of the
1940 Act permits, in the context of a change in control of an investment adviser
to a registered investment company, the receipt by such investment adviser, or
any of its affiliated persons, of an amount or benefit in connection with such
sale, provided two conditions are satisfied. First, an "unfair burden" must not
be imposed on the investment company for which the investment adviser acts in
such capacity as a result of the sale of such interest, or any express or
implied terms, conditions or understandings applicable thereto. The term "unfair
burden," as defined in the 1940 Act, includes any arrangement during the
two-year period after the transaction whereby the investment adviser (or
predecessor or successor adviser), or any interested person of any such adviser,
receives or is entitled to receive any compensation, directly or indirectly,
from the investment company or its security holders (other than fees for bona
fide investment advisory and other services), or from any person in connection
with the purchase or sale of securities or other property to, from or on behalf
of the investment company (other than ordinary fees for bona fide principal
underwriting services). Management of Dean Witter Discover and VKAC are aware of
no circumstances arising from the Merger, preparatory transactions to the Merger
or any potential financing that might result in the imposition of an "unfair
burden" on the Fund.
The second condition of Section 15(f) is that during the three-year period
immediately following a transaction to which Section 15(f) is applicable, at
least
9
<PAGE> 16
75% of the subject investment company's board of directors must not be
"interested persons" (as defined in the 1940 Act) of the investment company's
investment adviser or predecessor adviser. The composition of the Board of
Trustees currently complies with such condition and the composition of the Board
of Trustees will continue to comply with such condition.
The Board of Trustees, including the Disinterested Trustees, concluded that if
the Merger occurs, entry by the Fund into a New Advisory Agreement would be in
the best interest of the Fund and the shareholders of the Fund. The Board of
Trustees of the Fund, including the Disinterested Trustees, unanimously approved
the New Advisory Agreement for the Fund and recommended such agreement for
approval by the shareholders of the Fund at the Meeting. The New Advisory
Agreement would take effect upon the later to occur of (i) the obtaining of
shareholder approval or (ii) the closing of the Merger. The New Advisory
Agreement will continue in effect until May 31, 1999 and thereafter for
successive annual periods as long as such continuance is approved in accordance
with the 1940 Act.
In the event that shareholders of the Fund do not approve the New Advisory
Agreement and the Merger is consummated, the Board of Trustees of the Fund would
seek to obtain for the Fund interim investment advisory services at the lesser
of cost or the current fee rate either from the Adviser or from another advisory
organization. Thereafter, the Board of Trustees of the Fund would either
negotiate a new investment advisory agreement with an advisory organization
selected by the Board of Trustees or make other appropriate arrangements, in
either event subject to approval of the shareholders of the Fund. In the event
the Merger is not consummated, the Adviser would continue to serve as investment
adviser of the Fund pursuant to the terms of the Current Advisory Agreement.
SHAREHOLDER APPROVAL
To become effective, the New Advisory Agreement must be approved by the "vote
of a majority of the outstanding voting securities", which is defined under the
1940 Act as the lesser of the vote of (i) 67% or more of the Shares of the Fund
entitled to vote thereon present at the Meeting if the holders of more than 50%
of such outstanding Shares are present in person or represented by proxy; or
(ii) more than 50% of such outstanding Shares of the Fund entitled to vote
thereon. The New Advisory Agreement was unanimously approved by the Board of
Trustees after consideration of all factors which they determined to be relevant
to their deliberations, including those discussed above. The Board of Trustees
also unanimously determined to submit the New Advisory Agreement for
consideration by the shareholders of the Fund. THE BOARD OF TRUSTEES OF THE FUND
RECOMMENDS A VOTE "FOR" APPROVAL OF THE NEW ADVISORY AGREEMENT.
10
<PAGE> 17
- ------------------------------------------------------------------------------
PROPOSAL 2: APPROVAL OF A NEW FUNDAMENTAL INVESTMENT POLICY MODIFYING THE
EXISTING FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS OF THE
FUND AND A CORRESPONDING CONVERSION TO A MASTER-FEEDER STRUCTURE IN
THE FUTURE
- ------------------------------------------------------------------------------
This Proposal 2 would approve a modification of the Fund's existing
fundamental investment policies and restrictions to give the Fund the
flexibility to pursue its investment objective through a fund structure commonly
known as a "master-feeder" structure (the "Master-Feeder Structure") and would
approve a corresponding conversion to a Master-Feeder Structure in the future.
In a Master-Feeder Structure, one or more funds, each having substantially
similar investment objectives, policies and restrictions (the "Feeder Funds"),
invest exclusively in another fund also having a substantially similar
investment objective and substantially similar investment policies and
restrictions (the "Master Fund"). If the Fund converts to the Master-Feeder
Structure, shareholders in the Fund would continue to hold their shares of the
Fund and the Fund would become a Feeder Fund by investing all or substantially
all of its investable assets in a Master Fund. The process by which the Fund
would begin to use the Master-Feeder Structure is referred to in this proposal
as a "Conversion". The value of a shareholder's Shares would be the same
immediately after Conversion as the value immediately before Conversion.
The Master Fund in a Master-Feeder Structure pools the assets of all of the
Feeder Funds and invests these assets in portfolio securities and other assets
in pursuit of the Master-Feeder Structure's common investment objective. Use of
the Master-Feeder Structure may result in investment in the Master Fund by other
collective investment vehicles with different distribution arrangements and with
shareholders that may not have invested in the Fund. In this event, the
additional assets invested by such other collective investment vehicles may
allow operating expenses to be spread over a larger asset base, potentially
achieving economies of scale.
Approval of this proposal will constitute authorization of the Trustees to
effect a Conversion in the future and authorization of the Fund to invest all or
substantially all of its investable assets (including the Fund's portfolio of
securities and loan interests and other assets) in a Master Fund pursuant to the
Conversion. The Board of Trustees does not intend to effect any Conversion in
which (i) the Master Fund does not have substantially the same investment
management team, investment objective, investment policies and restrictions as
the Fund just prior to Conversion, (ii) the value of a shareholder's investment
in the Fund would not be the same immediately after Conversion as it was
immediately before Conversion or (iii) an increase in the Fund's expense ratio
is expected as a result of Conversion.
There can be no assurance that a Conversion to the Master-Feeder Structure
will be effected or that use of a Master-Feeder Structure will attract
additional investors or achieve operating efficiencies.
11
<PAGE> 18
MODIFICATION OF FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS.
Certain of the Fund's existing fundamental investment restrictions, such as
those limiting investments by the Fund in a single issuer or in another
investment company, presently prevent the Fund from using a Master-Feeder
Structure. In order to provide the Fund with the flexibility to use a
Master-Feeder Structure, the Board of Trustees proposes to modify the Fund's
fundamental investment policies and restrictions by adding the following new
fundamental investment policy to the fundamental investment restrictions of the
Fund:
"(12) Notwithstanding the investment policies and restrictions of the Fund,
upon approval of the Board of Trustees, the Fund may invest all or part of
its investable assets in a management investment company with substantially
the same investment objective, policies and restrictions as the Fund."
This additional investment policy would also apply to any conflicting
nonfundamental investment policies or restrictions of the Fund.
THE MASTER-FEEDER STRUCTURE
Set forth below is a discussion of certain of the terms and conditions that
the Adviser currently believes would be applicable in the event of a Conversion
to the Master-Feeder Structure.
The Master Fund is expected to be a no-load, closed-end management investment
company registered under the 1940 Act. Interests in the Master Fund
("Interests") would be offered privately on a continuous or periodic basis to
different types of collective investment entities such as mutual funds,
commingled institutional funds and, potentially, offshore investment funds.
Interests in the Master Fund are not expected to be available for purchase
directly by members of the public.
The Master Fund would have substantially the same investment objective,
policies and restrictions as the Fund immediately prior to Conversion. The
Master Fund, like the Fund, would seek to invest in a professionally managed
portfolio of interests in floating or variable rate senior loans to United
States corporations, partnerships and other entities. The investment
restrictions and policies of the Master Fund would be such that the Master Fund
may not invest in any security or engage in any transaction which would not be
permitted by the fundamental investment policies and restrictions of the Fund in
effect at the time of Conversion if the Fund were to invest directly in such a
security or engage directly in such a transaction.
The investment adviser and administrator to the Fund immediately prior to
Conversion would be the investment adviser and administrator to the Master Fund
upon completion of Conversion. The investment advisory agreement between the
Master Fund and its investment adviser would be substantially identical to the
investment advisory agreement of the Fund and its investment adviser in effect
at
12
<PAGE> 19
the time of Conversion. Because portfolio management would take place primarily
at the Master Fund, in the event of Conversion it is likely that the Fund would
no longer require the services of an investment adviser and the Fund's
investment advisory agreement would be terminated. Similarly, many of the
services provided to the Fund by its administrator would become unnecessary in
the event of Conversion and it is likely that the Fund would substantially
revise its administration agreement to eliminate the requirement to provide
services which have become unnecessary. There would be no increase in the
schedule of advisory and administration fee rates directly or indirectly
applicable to the Fund as a result of the Conversion. Other entities that
perform services for the Fund at the time of Conversion likely would perform
substantially the same services for either the Fund or the Master Fund after the
Conversion.
The Master Fund would have its own board of trustees (the "Master Trustees").
The Master Trustees at the time of Conversion would be identical to the Trustees
of the Fund at the time of Conversion.
The Master Fund would value its assets at the same time, on the same days and
pursuant to the same method as the Fund values its assets at the time of
Conversion. After the Conversion, the Fund's net asset value would be determined
at the same time and on the same days that the net asset value of the Master
Fund will be calculated.
It is expected that the Master Fund, like the Fund, normally would not hold
meetings of holders of Interests (the "Interest Holders") except as required
under the 1940 Act or its organizational documents. The approval of the Interest
Holders would be required to change any of the Master Fund's fundamental
investment restrictions; however, any change in non-fundamental investment
policies would not require such approval. The Master Trustees of the Master Fund
would continue to hold office until their successors are elected and have
qualified. Interest Holders entitled to vote on the removal of a Master Trustee
and holding at least a specified percentage interest in the Master Fund would be
entitled to call a meeting of Interest Holders for the purpose of removing any
Master Trustee. It is expected that a Master Trustee may be removed upon a vote
of Interest Holders representing two-thirds of the Interests in the Master Fund
qualified to vote in the election. The 1940 Act requires the Master Fund to
assist its Interest Holders in calling such a meeting.
Each Interest Holder in the Master Fund would be entitled to a vote in
proportion to its share of the total Interests in the Master Fund. Except as
described below, whenever the Fund is requested to vote on matters pertaining to
the Master Fund, the Fund would hold a meeting of its shareholders and cast its
votes as an Interest Holder proportionately as instructed by Fund shareholders.
If there are other investors in the Master Fund, there can be no assurance that
any issue that receives a majority of the votes cast by the Fund's shareholders
would receive a majority of votes cast by all the Interest Holders in the Master
Fund.
13
<PAGE> 20
Subject to applicable statutory and regulatory requirements, the Fund would
not request a vote of its shareholders with respect to (a) any proposal relating
to the Master Fund, which proposal, if made with respect to the Fund, would not
require the vote of the shareholders of the Fund, or (b) any proposal with
respect to the Master Fund that is identical, in all material respects, to a
proposal that has previously been approved by shareholders of the Fund. Any
proposal submitted to Interest Holders in the Master Fund that is not required
to be voted on by shareholders of the Fund would be voted pursuant to the
discretion of the Trustees of the Fund.
Interests in the Master Fund are not expected to be freely transferable. The
Fund generally would only be able to withdraw its investment in the Master Fund
pursuant to a tender offer by the Master Fund and a determination by the
Trustees that it is in the best interests of the Fund to do so. It is expected
that the Master Fund would express an intention that the Master Trustees
consider, each quarter, authorizing the Master Fund to make tender offers for
all or a portion of its then outstanding Interests. In such event, the Trustees
of the Fund intend to continue, each quarter, to consider authorizing the Fund
to make tender offers for all or a portion of its then outstanding Shares.
However, there are no assurances that either Board of Trustees would, in fact,
decide to undertake the making of such tender offers. The Fund would not be able
to make a tender offer to shareholders larger than that made by the Master Fund
to the Fund. Master Fund tender offers would be made on the same terms to the
Fund as to any other Interest Holder in the Master Fund. Subject to the Master
Fund's investment restriction with respect to borrowings, it is expected that
the Master Fund may be authorized to borrow money to finance the repurchase of
Interests pursuant to tender offers.
Depending on the organizational structure adopted by the Master Fund, each
Interest Holder of the Master Fund, including the Fund, may be liable for all
obligations of the Master Fund. However, the risk of an Interest Holder in the
Master Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Master Fund
itself was unable to meet its obligations. Thus, the risk that shareholders of
the Fund would experience losses on account of such liability is remote.
Following the Conversion, the Master Fund and the Fund, as the case may be,
would each be responsible for all of its respective costs and expenses not
expressly stated to be payable by the Master Fund's investment adviser under the
Master Fund investment advisory agreement, by the administrator under the Master
Fund's or the Fund's administration agreement or by the distributor under an
offering agreement with the Fund. Such costs and expenses to be borne by the
Master Fund and the Fund, as the case may be, would include, without limitation:
direct charges relating to the purchase and sale of financial instruments,
interest charges, fees and expenses of legal counsel and independent auditors,
taxes and governmental fees, costs of Fund Share certificates and Master Fund
Interest certificates, expenses (including
14
<PAGE> 21
clerical expenses) of issuance, sale or repurchase of any investment holdings,
expenses in connection with dividend reinvestment plans, membership fees in
trade associations, expenses of registering the Shares of the Fund for sale
under federal and state securities laws, expenses of printing and distributing
reports, notices and proxy materials to shareholders and Interest Holders,
expenses of filing reports and other documents filed with governmental agencies,
expenses of annual and special meetings of Shareholders and Interest Holders,
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 and Master Trustees who are not affiliated with the
Fund's or Master Fund's investment adviser, insurance premiums, indemnification
expenses and any extraordinary expenses of a nonrecurring nature. It is possible
that from time to time conflicts of interest may arise between the Fund and the
Master Fund. In the event such a conflict arises, the Board of Trustees of the
Master Fund and the Fund, which initially would be identical, would seek to
resolve the conflict in a fair and equitable manner.
Upon liquidation of the Master Fund, Interest Holders in the Master Fund would
be entitled to share pro rata in the net assets of the Master Fund available for
distribution to Interest Holders.
FEDERAL INCOME TAX CONSIDERATIONS
The Fund will receive a ruling from the Internal Revenue Service and/or an
opinion from its tax counsel, Skadden, Arps, Slate, Meagher & Flom (Illinois),
on or prior to the date of the Conversion, generally to the effect that (i) the
Fund's contribution of its assets to the Master Fund in exchange for 100% of the
equity interests of the Master Fund will be disregarded for federal income tax
purposes and thus will not result in the recognition of gain or loss by the Fund
or the Master Fund for federal income tax purposes and (ii) at the time a second
fund contributes cash or a diversified (within the meaning of applicable tax
rules) portfolio of assets to the Master Fund (the "Second Conversion") in
exchange for an equity interest in the Master Fund (i.e., the Master Fund ceases
to be wholly owned by the Fund), the Fund will be treated, for federal income
tax purposes, as if it made a contribution to the Master Fund of the assets held
by the Master Fund immediately prior to the Second Conversion in exchange for an
equity interest in the Master Fund, which will not result in the recognition of
gain or loss by the Fund or the Master Fund pursuant to Section 721 of the
Internal Revenue Code of 1986, as amended (the "Code"), and related authorities.
A legal opinion is not binding on the Internal Revenue Service or any court. If
it were determined that the transaction described above was taxable, the Fund
would recognize gain in an amount equal to the appreciation in the transferred
assets (undiminished by losses) as of the date of the deemed transfer. In such
event, the Fund would be required to make a distribution in order to avoid
federal income and excise taxes or to preserve its qualification as a regulated
investment company under the Code.
15
<PAGE> 22
The Fund's status as a regulated investment company under the Code would not
be affected by the Master-Feeder Structure. As a regulated investment company
under the Code, the Fund does not pay federal income or excise taxes to the
extent that it distributes to shareholders its net investment income and net
capital gains in accordance with the timing requirements imposed by the Code.
The Master Fund is not expected to be required to pay any federal income or
excise taxes in respect of its income or gains.
INFORMATION ON EXPENSES
The following table shows the expenses of the Fund for its fiscal year ended
July 31, 1996 and a pro forma adjustment thereof assuming the Fund had invested
its investable assets in a newly formed Master Fund for the entire period then
ended. The pro forma adjustment assumes that: (i) there were no holders of
Interests in the Master Fund other than the Fund; (ii) the average daily net
assets of the Fund and the Master Fund were equal to the actual average daily
net assets of the Fund during the period; (iii) substantially all of the
required administrative services are provided directly to the Master Fund; and
(iv) consistent with the Board of Trustees expressed intention with respect to
any Conversion, except to the extent that the Fund experiences economies of
scale during the first three years following any Conversion, the Fund's
investment adviser or an affiliate, not the Fund, paid the expenses of the
Conversion.
FUND EXPENSES
<TABLE>
<CAPTION>
PRO FORMA (ASSUMING THAT
THE AVERAGE DAILY NET ASSETS
INVESTED BY THE FUND IN THE
SIX MONTHS MASTER FUND WERE $5.2 BILLION)
ENDED ------------------------------
JANUARY 31, MASTER
1997 FUND FUND TOTAL
----------- ---- ------ -----
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of
offering price).................... None None None None
Dividend Reinvestment Plan Fees...... None None None None
Early Withdrawal Charge.............. 0.0%-3.0% 0.0%-3.0% None 0.0%-3.0%
ANNUAL FUND OPERATING EXPENSES (as a
percentage of net assets attributable
to Shares)
Investment Advisory and
Administration Fees.............. 1.19% 0.00% 1.19% 1.19%
Interest Payments on Borrowed
Funds............................ 0.00% 0.00% 0.00% 0.00%
Other Expenses..................... 0.25% 0.19% 0.06% 0.25%
-------- -------- ---- --------
Total Fund Operating Expenses.......... 1.44% 0.19% 1.25% 1.44%
======== ======== ==== ========
</TABLE>
Assuming that the Fund was the only holder of Interests in the Master Fund and
that the Fund was fully invested therein, the net asset value per share,
distributions
16
<PAGE> 23
per share and net investment income per share of the Fund would have been the
same on a pro forma basis as the actual net asset value per share, distributions
per share and net investment income per share of the Fund during the period
indicated.
EXAMPLE
An investor would pay the following expenses on a $1,000 investment in the
Fund assuming a 5% annual return:
<TABLE>
<CAPTION>
PRO FORMA (ASSUMING
THAT THE AVERAGE DAILY NET
ASSETS INVESTED BY THE FUND
IN THE MASTER FUND
SIX MONTHS WERE $5.2 BILLION)
ENDED ---------------------------
JANUARY 31, MASTER
1997 FUND FUND TOTAL
----------- ---- ------ -----
<S> <C> <C> <C> <C>
Assuming no tender of Shares:
One Year................................ $ 15 $ 2 $ 13 $ 15
Three Years............................. 46 6 40 46
Five Years.............................. 79 10 69 79
Ten Years............................... 172 22 150 172
Assuming tender and repurchase of Shares
on the last day of period and imposition
of maximum applicable early withdrawal
charge:
One Year................................ 45 32 13 45
Three Years............................. 66 26 40 66
Five Years.............................. 89 20 69 89
Ten Years............................... 172 22 150 172
</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. 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 Shares. This Example should not be considered a
representation of future expenses, and the Fund's and the Master Fund's actual
expenses may be more or less than those shown.
DELIBERATIONS OF THE BOARD OF TRUSTEES
At special meetings held on March 20, 1997 and March 26, 1997, the Board of
Trustees considered a proposal from the Adviser to seek to obtain from
shareholders of the Fund approval to convert in the future to the Master-Feeder
Structure. Management of the Adviser stated that it believes the Master-Feeder
Structure may attract additional assets by permitting collective investment
vehicles having different distribution arrangements and investors to invest in
the Master Fund together with the Fund. The Board of Trustees considered the
possibility that such
17
<PAGE> 24
additional assets may, over time, permit the Fund to achieve a variety of
operating economies that may benefit the Fund and the Fund's current and future
shareholders. In general, to the extent that certain operating costs are
relatively fixed and currently are borne by the Fund alone, these expenses would
instead be borne in whole or in part by the Master Fund and shared by the Fund's
shareholders with any other investors in such Master Fund. Increased asset size
may also enable shareholders to gain access to a broader portfolio of
investments (one with more numerous holdings). These potential economies and
other potential benefits would be likely only if assets of the Master Fund were
to grow through investments in the Master Fund by entities other than the Fund.
There can be no assurance that such expense savings and other benefits would be
realized in the event of Conversion.
The Board of Trustees also considered corporate governance issues associated
with Conversion to the Master-Feeder Structure. The Adviser stated that the
Board of Trustees of the Master Fund will be identical to the Board of Trustees
of the Fund immediately following the Conversion. The Adviser also stated that
it currently believes that each Feeder Fund would have a board of trustees
identical or substantially similar to the then current Board of Trustees of the
Fund. The Board of Trustees does not intend to effect any Conversion in which
(i) the Master Fund does not have substantially the same investment management
team, investment objective, investment policies and restrictions as the Fund
just prior to Conversion, (ii) the value of a shareholder's investment in the
Fund would not be the same immediately after the Conversion as it was
immediately before Conversion or (iii) an increase in the Fund's expense ratio
is expected as a result of the Conversion.
The Board of Trustees considered the expenses associated with the Conversion
to the Master-Feeder Structure, which expenses would include, among other
things, solicitation expenses associated with seeking shareholder approval of
the Conversion. The Board of Trustees concluded that it would be in the best
interests of the Fund and the Fund's shareholders to seek shareholder approval
of the Conversion at this time in order to avoid the expense of a second proxy
solicitation following the consummation of Morgan Stanley's merger with and into
Dean Witter Discover. The Board recognized that the Adviser could benefit from
the proposed Conversion because the Master-Feeder Structure could enable the
Adviser to increase its assets under management through the development of new
vehicles to attract investor assets to the Adviser. The Board of Trustees and
the Adviser agreed that the Adviser initially would assume the expenses
associated with seeking approval of this Proposal 2 and with effecting any
Conversion. The Fund will reimburse the Adviser for such expenses only in the
event and to the extent that the Fund experiences benefits of economies of scale
during the first three years following any Conversion.
Based on their consideration, analysis and evaluation of the above factors and
other information deemed by them to be relevant to this proposal, the Fund's
Board
18
<PAGE> 25
of Trustees has unanimously concluded that it would be in the best interests of
the Fund and its shareholders to approve a new fundamental investment policy
modifying the Fund's existing fundamental investment policies and restrictions
to provide the Fund with the flexibility to use a Master-Feeder Structure and a
corresponding Conversion to a Master-Feeder Structure in the future.
In the event that shareholders of the Fund do not approve this Proposal 2, the
Fund would continue to operate as a separate entity and to manage the Fund's
assets in accordance with the Fund's existing fundamental investment policies
and restrictions.
SHAREHOLDER APPROVAL
This Proposal 2 must be approved by the vote of the holders of a majority of
the Shares outstanding and entitled to vote on Proposal 2. To become effective,
the Fund's new fundamental investment policy and policies modifying its existing
fundamental investment restrictions must be approved by the "vote of a majority
of the outstanding voting securities", which is defined under the 1940 Act as
the lesser of the vote of (i) 67% or more of the Shares of the Fund entitled to
vote thereon present at the Meeting if the holders of more than 50% of such
outstanding shares of the Fund are present in person or represented by proxy; or
(ii) more than 50% of the outstanding Shares of the Fund entitled to vote
thereon. The vote necessary to satisfy the vote required to approve Proposal 2
also will satisfy this 1940 Act voting requirement. The Board of Trustees
unanimously determined to submit the Fund's new fundamental investment policy
and any corresponding Conversion to the Master-Feeder Structure in the future
for consideration by the shareholders of the Fund. THE BOARD OF TRUSTEES OF THE
FUND RECOMMENDS A VOTE "FOR" APPROVAL OF A NEW FUNDAMENTAL INVESTMENT POLICY
MODIFYING THE FUND'S EXISTING FUNDAMENTAL INVESTMENT POLICIES AND A
CORRESPONDING CONVERSION TO A MASTER-FEEDER STRUCTURE IN THE FUTURE.
19
<PAGE> 26
- ------------------------------------------------------------------------------
OTHER INFORMATION
- ------------------------------------------------------------------------------
DIRECTORS AND OFFICERS OF THE ADVISER
The following table sets forth certain information concerning the principal
executive officers and directors of the Adviser.
DIRECTORS AND OFFICERS OF THE ADVISER
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
---------------- --------------------
<S> <C>
Don G. Powell......... Chairman, President, Chief Executive Officer and a
2800 Post Oak Blvd. Director of VKAC. Chairman, Chief Executive Officer
Houston, TX 77056 and a Director of the Distributor, the Adviser, Van
Kampen American Capital Asset Management, Inc.,
("Asset Management"), Van Kampen American Capital
Management, Inc. ("Management Inc.") and Van Kampen
American Capital Advisors, Inc. ("Advisors Inc.").
Chairman and a Director of ACCESS, Van Kampen
American Capital Recordkeeping Services, Inc. and Van
Kampen American Capital Trust Company. Chairman,
President and a Director of Van Kampen American
Capital Services, Inc. and Van Kampen American
Capital Exchange Corporation. President, Chief
Executive Officer and a Trustee/Director of certain
open-end investment companies and closed-end
investment companies advised by Asset Management.
Chairman of the Board of Governors and the Executive
Committee of the Investment Company Institute. Prior
to July 1996, President, Chief Executive Officer and
a Trustee/Director of the closed-end funds advised by
the Adviser and open-end investment companies advised
by Management Inc. (collectively, the "Fund Complex")
and certain open-end investment companies advised by
the Adviser and Asset Management.
Dennis J. McDonnell... President, Chief Operating Officer and a Director of
One Parkview Plaza the Adviser, Asset Management, Management Inc. and
Oakbrook Terrace, IL Advisors Inc. Executive Vice President of VKAC.
60181 Director of MCM Group, Inc., McCarthy, Crisanti &
Maffei Inc., MCM Asia Pacific Company, Limited and
MCM (Europe) Limited. Prior to November 1996,
Executive Vice President and a Director of VKAC
Holding. Chairman, President, Chief Executive Officer
and Trustee of funds in the Fund Complex. President
and Trustee of certain open-end investment companies
advised by the Adviser and Asset Management.
</TABLE>
20
<PAGE> 27
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
---------------- --------------------
<S> <C>
Ronald A. Nyberg...... Executive Vice President, General Counsel and
One Parkview Plaza Secretary of VKAC. Executive Vice President, General
Oakbrook Terrace, IL Counsel, Assistant Secretary and a Director of the
60181 Distributor, the Adviser, Asset Management,
Management Inc., Van Kampen American Capital Trust
Company, Van Kampen American Capital Recordkeeping
Services, Inc. and Van Kampen American Capital
Insurance Agency of Illinois, Inc. Executive Vice
President, General Counsel and Assistant Secretary of
Advisors Inc., Van Kampen American Capital Exchange
Corporation, ACCESS and Van Kampen American Capital
Services, Inc. Prior to November 1996, Executive Vice
President, General Counsel and Secretary of VKAC
Holding. Vice President and Secretary of the funds in
the Fund Complex and certain open-end and closed-end
investment companies advised by the Adviser and Asset
Management. Director of ICI Mutual Insurance Co., a
provider of insurance to members of the Investment
Company Institute.
William R. Rybak...... Executive Vice President and Chief Financial Officer
One Parkview Plaza of VKAC since February 1993. Treasurer of VKAC
Oakbrook Terrace, IL Holding through December 1993 and Chief Financial
60181 Officer of VKAC Holding through October 1996.
Executive Vice President, Chief Financial Officer and
a Director of the Distributor, the Adviser, Asset
Management, Management Inc. and Van Kampen American
Capital Recordkeeping Services, Inc. Executive Vice
President and Chief Financial Officer of Advisors
Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital Trust
Company, ACCESS, Van Kampen American Capital
Insurance Agency of Illinois, Inc. and American
Capital Contractual Services, Inc. Director of
Alliance Bancorp, a savings and loan holding company,
and prior to February 1997, Chairman of the Board of
Hinsdale Financial Corp., a savings and loan holding
company.
Peter W. Hegel........ Executive Vice President of the Adviser, Management
One Parkview Plaza Inc. and Advisors Inc. Executive Vice President and
Oakbrook Terrace, IL Director of Asset Management. Vice President of the
60181 funds in the Fund Complex and open-end investment
companies advised by the Adviser and Asset
Management.
Alan T. Sachtleben.... Executive Vice President of the Adviser, Management
2800 Post Oak Blvd. Inc. and Advisors Inc. Executive Vice President and a
Houston, TX 77056 Director of Asset Management. Vice President of funds
in the Fund Complex and certain open-end investment
companies advised by the Adviser and Asset
Management.
Jeffrey W. Maillet.... Senior Vice President of the Adviser, Asset
One Parkview Plaza Management and Management Inc. Vice President and
Oakbrook Terrace, IL Portfolio Manager of the Fund.
60181
</TABLE>
21
<PAGE> 28
The following table sets forth the trustees and officers of the Fund who are
also officers of the Adviser.
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE FUND
---- -----------------------
<S> <C>
Dennis J. McDonnell.................. Trustee and President
Peter W. Hegel....................... Vice President
Jeffrey W. Maillet................... Vice President and Portfolio Manager
Curtis W. Morell..................... Vice President and Chief Accounting Officer
Ronald A. Nyberg..................... Vice President and Secretary
Edward C. Wood III................... Vice President and Chief Financial Officer
John L. Sullivan..................... Treasurer
Tanya M. Loden....................... Controller
Nicholas Dalmaso..................... Assistant Secretary
Huey P. Falgout, Jr.................. Assistant Secretary
Scott E. Martin...................... Assistant Secretary
Weston B. Wetherell.................. Assistant Secretary
Steven M. Hill....................... Assistant Treasurer
M. Robert Sullivan................... Assistant Controller
</TABLE>
The officers of the Fund serve for one year or until their respective
successors are chosen and qualified. The Fund's officers receive no compensation
from the Fund, but are all officers of the Adviser, Asset Management, the
Distributor, VKAC or their affiliates and receive compensation in such
capacities.
NON-ADVISORY AGREEMENTS
The Fund has entered into other agreements with the Adviser, VKAC or their
affiliates, as set forth below. These agreements do not need to be voted on by
the shareholders of the Fund at the Meeting. The Adviser currently anticipates
that the services provided to the Fund pursuant to these agreements will
continue to be provided after the proposed New Advisory Agreement is approved.
Offering Agreement. The Fund has entered into an offering agreement with Van
Kampen American Capital Distributors, Inc. (the "Distributor") pursuant to which
the Distributor, as principal underwriter, purchases shares for resale to the
public, either directly or through securities dealers. The address of the
Distributor is One Parkview Plaza, Oakbrook Terrace, Illinois 60181. In
connection with their consideration of the Merger, the Board of Trustees
considered the affects of the Merger on the Distributor and the ability of the
Distributor to continue distributing the shares of the Fund. The new offering
agreement between the Fund and the Distributor is substantially similar to the
current offering agreement, except that the new offering agreement designates
certain officers of the Distributor and the officers of the Fund to be essential
personnel with respect to the operations of the Fund. The Distributor may not
make any material or significant personnel changes or replace any essential
personnel or materially change the responsibilities or duties of any essential
personnel prior to the first anniversary of the agreement without first
informing the
22
<PAGE> 29
Board of Trustees in a timely manner. In addition, the Distributor may not offer
or distribute shares of any investment companies other than the Fund without the
prior approval of the Board of Trustees. The Distributor may not change its name
without the prior consent of the Board of Trustees.
Transfer Agency Agreement. The Fund has entered into a Transfer Agency
Agreement with ACCESS pursuant to which ACCESS provides transfer agency and
dividend disbursing services for the Fund. The address of ACCESS is 7501 Tiffany
Springs Parkway, Kansas City, Missouri 64153. For its services, ACCESS charges
the Fund a fee that is determined in accordance with a cost allocation model
developed in conjunction with, and periodically reviewed by, Coopers & Lybrand
LLP. The model allocates among the Fund and other participating investment
companies ACCESS' cost of providing the funds with transfer agency services,
plus a profit margin approved by the Board of Trustees. The allocation is based
upon a number of factors including the number of shareholder accounts per fund,
the number and type of shareholder transactions experienced by each fund and
other factors. In connection with their consideration of the Merger, the Board
of Trustees considered the effects of the Merger on ACCESS and the ability of
ACCESS to continue to provide transfer agency and dividend disbursing services
to the Fund. The new Transfer Agency Agreement between the Fund and ACCESS is
substantially similar to the current Transfer Agency Agreement, except that the
new Transfer Agency Agreement designates certain officers of the transfer agent
and the officers of the Fund to be essential personnel. ACCESS may not make any
material or significant personnel changes or replace any essential personnel or
materially change their duties and responsibilities prior to the first
anniversary of the agreement without first informing the Board of Trustees in a
timely manner. Under the Transfer Agency Agreement, the Fund paid ACCESS the
amount of $3,848,327 for its most recently completed fiscal year.
Administration Agreement. The Fund has entered into an administration
agreement (the "Administration Agreement") with the Distributor pursuant to
which the Distributor (or an affiliate) provides certain administrative services
to the Fund. Pursuant to the Administration Agreement, the Fund pays to the
Distributor a fee based on the Fund's average weekly managed assets at the
annualized rate of 0.25%. Under the Administration Agreement, the Fund paid the
Distributor the amount of $9,614,696 for its most recently completed fiscal
year.
Fund Accounting Agreement. The Fund has entered into a Fund Accounting
Agreement with the Adviser, and currently receives all accounting services
through its Adviser. The Fund shares equally, together with the other mutual
funds advised and distributed by the Adviser, the Distributor and their
affiliates, in 25% of the cost of providing such services, with the remaining
75% of such cost being paid by each fund based proportionally upon their
respective net assets.
23
<PAGE> 30
Legal Services Agreement. The Fund has entered into a Legal Services Agreement
pursuant to which VKAC provides legal services, including without limitation
maintenance of the Fund's minute books and records, preparation and oversight of
the Fund's regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues. Payment by the Fund for such
services is made on a cost basis for the employment of personnel as well as the
overhead and equipment necessary to render such services. VKAC also provides
legal services for certain other Van Kampen American Capital investment
companies, some of which do not currently reimburse VKAC for the provision of
such services. VKAC allocates 50% of its costs equally to the Fund or other
investment companies and the remaining 50% of such costs are allocated to the
Fund or other investment companies based on specific time allocations, or in the
event services are attributable only to types of investment companies (i.e.
closed-end or open-end), the relative amount of time spent on each type of
investment companies and then further allocated among investment companies of
that type based upon their respective net asset values. Under the Legal Services
Agreement, the Fund paid VKAC the amount of $38,823 for its most recently
completed fiscal year.
SHAREHOLDER INFORMATION
As of April 14, 1997, the trustees and officers of the Fund as a group owned
less than 1% of the outstanding Shares of the Fund. As of April 14, 1997,
certain trustees owned, directly or beneficially, the number of Shares of the
Fund as follows: David Arch, 1,051; Dennis McDonnell, 770; and Wayne Whalen,
1,511. At such date the "interested persons" of the Fund, as a group, owned an
aggregate of less than 5% of the outstanding shares of the Fund.
The number of the Fund's outstanding Shares as of April 14, 1997 was
598,473,607. No shareholders, to the knowledge of the Fund, owned beneficially
more than 5% of a class of the Fund's outstanding Shares as of April 14, 1997.
- ------------------------------------------------------------------------------
EXPENSES
- ------------------------------------------------------------------------------
MSDWD or its affiliates will pay for the expense of preparing, printing and
mailing the enclosed form of proxy, the accompanying Notice and this Proxy
Statement. As described in Proposal 2 herein, the Fund will reimburse expenses
associated with such proposal in the event and to the extent the Fund
experiences benefits of economies of scale during the first three years
following the Conversion. In order to obtain the necessary quorum at the
Meeting, additional solicitation may be made by mail, telephone, telegraph,
facsimile or personal interview by representatives of the Fund, the Adviser,
VKAC, ACCESS or by dealers or their representatives or by First Data Investor
Services Group, a solicitation firm located in Boston, Massachusetts that has
been engaged to assist in proxy solicitations at an estimated cost of
approximately $390,000.
24
<PAGE> 31
- ------------------------------------------------------------------------------
SHAREHOLDER PROPOSALS
- ------------------------------------------------------------------------------
As a general matter, the Fund does not hold regular meetings of shareholders.
Any shareholder who wishes to submit proposals for consideration at a meeting of
the Fund should send such proposal to the Fund at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. To be considered for presentation at a shareholders'
meeting, rules promulgated by the SEC require that, among other things, a
shareholder's proposal must be received at the offices of the Fund a reasonable
time before a solicitation is made. Timely submission of a proposal does not
necessarily mean that such proposal will be included.
- ------------------------------------------------------------------------------
GENERAL
- ------------------------------------------------------------------------------
Management of the Fund does not intend to present and does not have reason to
believe that others will present any other items of business at the Meeting.
However, if other matters are properly presented to the Meeting for a vote, the
proxies will be voted upon such matters in accordance with the judgment of the
persons acting under the proxies.
A list of shareholders of the Fund entitled to be present and vote at the
Meeting will be available at the offices of the Fund, One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, for inspection by any shareholder during
regular business hours for ten days prior to the date of the Meeting.
Failure of a quorum to be present at the Meeting for the Fund may necessitate
adjournment and may subject such Fund to additional expense.
The Fund's most recent annual report and the most recent semi-annual report
succeeding the annual report are hereby incorporated by reference in their
entirety into this Proxy Statement. A shareholder may obtain copies of such
reports upon request by calling 1-800-341-2911 or by writing to the Fund at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
IF YOU CANNOT BE PRESENT IN PERSON, YOU ARE REQUESTED TO FILL IN, SIGN AND
RETURN THE ENCLOSED PROXY PROMPTLY. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
RONALD A. NYBERG,
Vice President and Secretary
April 23, 1997
25
<PAGE> 32
ANNEX A
The table below sets forth, for each investment company advised by the
Adviser, the number of such fund's outstanding shares, such fund's net assets
and the rate at which it compensates the Adviser for investment advisory
services. Funds for which the Adviser has waived or reduced its compensation are
marked by an "*". There can be no assurance that the Adviser will continue such
waiver or reduction.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
COMMON SHARES PREFERRED SHARES
OUTSTANDING OUTSTANDING NET ASSETS
AS OF AS OF AS OF ANNUAL
APRIL 14, APRIL 14, APRIL 14, ADVISORY FEE
FUNDS 1997 1997 1997 SCHEDULE
----- ------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
I. ADVISORY AGREEMENT BETWEEN THE ADVISER AND
THE FUND
Van Kampen American Capital Prime Rate Income
Trust....................................... 598,473,607 N/A $5,970,030,121 First $4.0 Billion .950%
Next $3.5 Billion .900%
Next $2.5 Billion .875%
Over $10.0 Billion .850%
II. ADVISORY AGREEMENTS BETWEEN THE ADVISER AND
OTHER CLOSED-END FUNDS
A. Van Kampen American Capital Investment Grade
Municipal Trust............................. 4,839,000 250 $ 74,199,561 .600%
Van Kampen American Capital Trust for Insured
Municipals.................................. 9,648,688 1,800 $ 244,564,209
Van Kampen American Capital Municipal Income
Trust....................................... 28,227,514 330 $ 438,770,639
Van Kampen American Capital California
Municipal Trust............................. 3,213,291 400 $ 52,394,670
B. Van Kampen American Capital Trust for
Investment Grade Municipals................. 27,013,149 5,300 $ 700,870,502 .650%
Van Kampen American Capital Trust for
Investment Grade California Municipals...... 4,619,242 900 $ 119,174,629
Van Kampen American Capital Trust for
Investment Grade New York Municipals........ 6,200,986 1,200 $ 160,490,070
Van Kampen American Capital Trust for
Investment Grade Pennsylvania Municipals.... 7,420,970 1,400 $ 192,003,872
Van Kampen American Capital Trust for
Investment Grade Florida Municipals......... 4,137,306 800 $ 109,036,402
</TABLE>
A-1
<PAGE> 33
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
COMMON SHARES PREFERRED SHARES
OUTSTANDING OUTSTANDING NET ASSETS
AS OF AS OF AS OF ANNUAL
APRIL 14, APRIL 14, APRIL 14, ADVISORY FEE
FUNDS 1997 1997 1997 SCHEDULE
----- ------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Van Kampen American Capital Trust for
Investment Grade New Jersey Municipals...... 3,925,373 800 $104,436,247 .650%
Van Kampen American Capital Municipal
Opportunity Trust........................... 15,352,890 3,000 $391,978,159
Van Kampen American Capital Advantage
Municipal Income Trust...................... 19,106,785 3,800 $481,440,438
Van Kampen American Capital Advantage
Pennsylvania Municipal Income Trust......... 4,361,902 800 $110,907,277
Van Kampen American Capital New Jersey Value
Municipal Income Trust...................... 2,499,940 500 $ 60,084,869
Van Kampen American Capital Ohio Value
Municipal Income Trust...................... 1,681,438 300 $ 38,739,234
Van Kampen American Capital Massachusetts
Value Municipal Income Trust................ 2,658,295 500 $ 62,681,807
Van Kampen American Capital New York Value
Municipal Income Trust...................... 4,291,172 800 $100,222,797
Van Kampen American Capital Strategic Sector
Municipal Trust............................. 10,806,700 1,900 $238,966,336
Van Kampen American Capital California Value
Municipal Income Trust...................... 6,029,844 1,200 $148,201,632
Van Kampen American Capital Pennsylvania
Value Municipal Income Trust................ 4,468,924 900 $109,501,090
Van Kampen American Capital Value Municipal
Income Trust................................ 23,555,115 4,500 $556,406,285
Van Kampen American Capital Florida Municipal
Opportunity Trust........................... 1,683,270 320 $ 22,936,086
Van Kampen American Capital Municipal
Opportunity Trust II........................ 11,681,211 2,300 $272,508,703
Van Kampen American Capital Advantage
Municipal Income Trust II................... 8,168,211 1,600 $187,500,134
C. Van Kampen American Capital Municipal
Trust....................................... 36,270,470 6,000 $873,341,104 .700%
Van Kampen American Capital California
Quality Municipal Trust..................... 9,623,295 1,500 $231,610,324
Van Kampen American Capital New York Quality
Municipal Trust............................. 5,655,638 900 $135,502,915
Van Kampen American Capital Pennsylvania
Quality Municipal Trust..................... 8,153,254 1,300 $198,976,007
Van Kampen American Capital Florida Quality
Municipal Trust............................. 6,484,566 1,000 $155,697,006
Van Kampen American Capital Ohio Quality
Municipal Trust............................. 4,212,910 700 $104,886,266
Van Kampen American Capital Select Sector
Municipal Trust............................. 4,682,128 1,360 $ 93,101,836
D. Van Kampen American Capital Intermediate Term
High Income Trust........................... 13,710,760 588 $142,802,100 .750%
Van Kampen American Capital Limited Term High
Income Trust................................ 8,109,000 900 $109,916,050
</TABLE>
A-2
<PAGE> 34
<TABLE>
<CAPTION>
NET ASSETS
NUMBER OF SHARES AS OF ANNUAL
OUTSTANDING AS OF APRIL 14, ADVISORY FEE
FUNDS APRIL 14, 1997 1997 SCHEDULE
----- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
III. ADVISORY AGREEMENTS BETWEEN THE ADVISER AND OPEN-END FUNDS
A. Van Kampen American Capital California Insured Tax Free
Fund....................................................... 9,646,097 $ 163,334,836 First $100 Million
.500%
Next $150 Million .450%
Next $250 Million .425%
Over $500 Million .400%
B. Van Kampen American Capital Insured Tax Free Income Fund.... 69,155,642 $1,289,795,159 First $500 Million
.525%
Next $500 Million .500%
Next $500 Million .475%
Over $1.5 Billion .450%
C. Van Kampen American Capital Tax Free High Income Fund....... 60,457,824 $ 861,393,223 First $500 Million
.500%
Van Kampen American Capital Municipal Income Fund*.......... 64,107,315 $ 959,978,437 Over $500 Million .450%
Van Kampen American Capital Intermediate Term Municipal
Income Fund*............................................... 3,299,006 $ 33,196,241
Van Kampen American Capital Florida Insured Tax Free Income
Fund*...................................................... 2,884,810 $ 42,443,535
D. Van Kampen American Capital New Jersey Tax Free Income
Fund*...................................................... 1,204,064 $ 17,472,239 First $500 Million
.600%
Van Kampen American Capital New York Tax Free Income
Fund*...................................................... 1,373,760 $ 20,233,852 Over $500 Million .500%
Van Kampen American Capital Pennsylvania Tax Free Income
Fund....................................................... 15,696,014 $ 268,599,884
E. Van Kampen American Capital High Yield Fund*................ 40,814,295 $ 392,912,646 First $500 Million
.750%
Over $500 Million .650%
F. Van Kampen American Capital Short-Term Global Income Fund... 13,128,649 $ 97,896,782 .550%
G. Van Kampen American Capital Strategic Income Fund........... 9,257,872 $ 114,928,876 First $500 Million
.750%
Van Kampen American Capital Growth Fund..................... 6,567,983 $ 100,867,384 Next $500 Million .700%
Van Kampen American Capital Value Fund...................... 104,821 $ 1,269,204 Over $1 Billion .650%
Van Kampen American Capital Aggressive Growth Fund.......... 18,619,629 $ 152,058,318
</TABLE>
A-3
<PAGE> 35
<TABLE>
<CAPTION>
NET ASSETS
NUMBER OF SHARES AS OF ANNUAL
OUTSTANDING AS OF APRIL 14, ADVISORY FEE
FUNDS APRIL 14, 1997 1997 SCHEDULE
----- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
H. Van Kampen American Capital Utility Fund.................... 8,741,353 $ 130,376,971 First $500 Million
.650%
Next $500 Million .600%
Over $1 Billion .550%
I. Van Kampen American Capital U.S. Government Fund............ 197,602,466 $2,787,212,993 First $500 Million
.550%
Next $500 Million .525%
Next $2 Billion .500%
Next $2 Billion .475%
Next $2 Billion .450%
Next $2 Billion .425%
Next $2 Billion .400%
J. Van Kampen American Capital Tax Free Money Fund*............ 35,320,568 $ 35,295,356 First $500 Million
.500%
Next $500 Million .475%
Next $500 Million .425%
Over $1.5 Billion .375%
K. Van Kampen American Capital Great American Companies Fund... 101,964 $ 1,233,948 First $500 Million
.700%
Van Kampen American Capital Prospector Fund................. 104,019 $ 1,228,624 Next $500 Million .650%
L. Van Kampen American Capital Foreign Securities Fund......... 96,305 $ 949,974 N/A(1)
</TABLE>
- ---------------
(1) This Fund does not charge an advisory fee; shares of the Fund are held by
other funds advised by Advisory Corp. or Asset Management. Assets of the
fund also are reflected in the assets of such other funds.
A-4
<PAGE> 36
ANNEX B
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT, dated as of , 1997 (the
"Agreement"), by and between VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
(the "Fund"), a Massachusetts business trust (the "Trust"), and VAN KAMPEN
AMERICAN CAPITAL INVESTMENT ADVISORY CORP. (the "Adviser"), a Delaware
corporation.
1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions set
forth herein, the Fund hereby employs the Adviser to act as the investment
adviser for and to manage the investment and reinvestment of the assets of the
Fund in accordance with the Fund's investment objective and policies and
limitations, and to administer its affairs to the extent requested by, and
subject to the review and supervision of, the Board of Trustees of the Fund for
the period and upon the terms herein set forth. The investment of funds shall be
subject to all applicable restrictions of applicable law and of the Declaration
of Trust and By-Laws of the Trust, and resolutions of the Board of Trustees of
the Fund as may from time to time be in force and delivered or made available to
the Adviser.
(b) ADVISER'S ACCEPTANCE OF EMPLOYMENT. The Adviser accepts such employment
and agrees during such period to render such services, to supply investment
research and portfolio management (including without limitation 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, in accordance with
the policies adopted by the Fund and its Board of Trustees), to administer the
business affairs of the Fund, to furnish offices and necessary facilities and
equipment to the Fund, to provide administrative services for the Fund, to
render periodic reports to the Board of Trustees of the Fund, and to permit any
of its officers or employees to serve without compensation as trustees or
officers of the Fund if elected to such positions.
(c) ESSENTIAL PERSONNEL. For a period of one year commencing on the effective
date of this Agreement, the Adviser and the Fund agree that the retention of (i)
the chief executive officer, president, chief financial officer and secretary of
the Adviser and (ii) each director, officer and employee of the Adviser or any
of its Affiliates (as defined in the Investment Company Act of 1940, as amended
(the "1940 Act")) who serves as an officer of the Fund (each person referred to
in (i) or (ii) hereinafter being referred to as an "Essential Person"), in his
or her current capacities, is in the best interest of the Fund and the Fund's
shareholders. In connection with the Adviser's acceptance of employment
hereunder, the Adviser hereby agrees and covenants for itself and on behalf of
its Affiliates that neither the
B-1
<PAGE> 37
Adviser nor any of its Affiliates shall make any material or significant
personnel changes or replace or seek to replace any Essential Person or cause to
be replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In addition, neither the Adviser nor
any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.
(d) INDEPENDENT CONTRACTOR. The Adviser shall be deemed to be an independent
contractor under this Agreement and, unless otherwise expressly provided or
authorized, shall have no authority to act for or represent the Fund in any way
or otherwise be deemed as agent of the Fund.
(e) NON-EXCLUSIVE AGREEMENT. The services of the Adviser to the Fund under
this Agreement are not to be deemed exclusive, and the Adviser shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
2. (a) FEE. For the services and facilities described in Section 1, the Fund
will accrue daily and pay to the Adviser at the end of each calendar month an
investment management fee computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:
<TABLE>
<CAPTION>
FEE PERCENTAGE PER
AVERAGE DAILY ANNUM OF AVERAGE
NET ASSETS DAILY NET ASSETS
------------- ------------------
<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>
(b) DETERMINATION OF NET ASSET VALUE. The net asset value of the Fund shall be
calculated as of the close of the New York Stock Exchange on the last day the
Exchange is open for trading in each calendar week or such other time or times
as the trustees may determine in accordance with the provisions of applicable
law and the Declaration of Trust and By-Laws of the Trust, and resolutions of
the Board of Trustees of the Fund as from time to time in force. For the purpose
of the foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset value of such share as of the close of
business of the last day on which such calculation was made.
(c) PRORATION. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in effect
during such month and year, respectively.
B-2
<PAGE> 38
3. EXPENSES. In addition to the fee of the Adviser, the Fund shall assume and
pay any expenses for services rendered by a custodian for the safekeeping of the
Fund's securities or other property, for keeping its books of account, for any
other charges of the custodian and for calculating the net asset value of the
Fund as provided above. The Adviser shall not be required to pay, and the Fund
shall assume and pay, the charges and expenses of its operations, including
compensation of the trustees (other than those who are interested persons of the
Adviser), charges and expenses of independent accountants, of legal counsel and
of any transfer or dividend disbursing agent, costs of acquiring and disposing
of portfolio securities, cost of listing shares of the New York Stock Exchange
or other exchange, interest (if any) on obligations incurred by the Fund, costs
of share certificates, membership dues in the Investment Company Institute or
any similar organization, costs of reports and notices to shareholders, costs of
registering shares of the Fund under the federal securities laws, miscellaneous
expenses and all taxes and fees to federal, state or other governmental agencies
on account of the registration of securities issued by the Fund, filing of
corporate documents or otherwise. The Fund shall not pay or incur any obligation
for any management or administrative expenses for which the Fund intends to seek
reimbursement from the Adviser without first obtaining the written approval of
the Adviser. The Adviser shall arrange, if desired by the Fund, for officers or
employees of the Adviser to serve, without compensation from the Fund, as
trustees, officers or agents of the Fund if duly elected or appointed to such
positions and subject to their individual consent and to any limitations imposed
by the law.
4. INTERESTED PERSONS. Subject to applicable statutes and regulations, it is
understood that trustees, officers, shareholders and agents of the Fund are or
may be interested in the Adviser as directors, officers, shareholders, agents or
otherwise and that the directors, officers, shareholders and agents of the
Adviser may be interested in the Fund as trustees, officers, shareholders,
agents or otherwise.
5. LIABILITY. 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 this 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 this Agreement.
6. (a) TERM. This Agreement shall become effective on the date hereof and
shall remain in full force until May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved as
least annually, in the manner required by the 1940 Act.
(b) TERMINATION. This Agreement shall automatically terminate in the event of
its assignment. This Agreement may be terminated at any time without the payment
of any penalty by the Fund or by the Adviser on sixty (60) days written
B-3
<PAGE> 39
notice to the other party. The Fund may effect termination by action of the
Board of Trustees or by vote of a majority of the outstanding shares of stock of
the Fund, accompanied by appropriate notice. This Agreement may be terminated at
any time without the payment of any penalty and without advance notice by the
Board of Trustees or by vote of a majority of the outstanding shares of the Fund
in the event that it shall have been established by a court of competent
jurisdiction that the Adviser or any officer or director of the Adviser has
taken any action which results in a breach of the covenants of the Adviser set
forth herein.
(c) PAYMENT UPON TERMINATION. Termination of this Agreement shall not affect
the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
7. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall not
thereby affected.
8. NOTICES. Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notice.
9. DISCLAIMER. The Adviser acknowledges and agrees that, as provided by
Section 5.5 of the Declaration of Trust of the Trust, the shareholders,
trustees, officers, employees and other agents of the Trust and the Fund shall
not personally be bound by or liable hereunder, nor shall resort be had to their
private property for the satisfaction of any obligation or claim hereunder.
10. GOVERNING LAW. All questions concerning the validity, meaning and effect
of this Agreement shall be determined in accordance with the laws (without
giving effect to the choice-of-law principles thereof) of the State of Delaware
applicable to contracts made and to be performed in that state.
11. NAME. In connection with its employment hereunder, the Adviser hereby
agrees and covenants not to change its name without the prior consent of the
Board of Trustees of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN VAN KAMPEN AMERICAN
CAPITAL PRIME RATE CAPITAL INVESTMENT
INCOME TRUST ADVISORY CORP.
By: By:
- ------------------------------- -------------------------------
Name: Name:
- --------------------------- ---------------------------
Title: Title:
- ----------------------------- -----------------------------
B-4
<PAGE> 40
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
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.
<PAGE> 41
[PASTE VKAC LOGO]
PRIME
<PAGE> 42
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE
FORM OF PROXY
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
SPECIAL MEETING OF SHAREHOLDERS
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned holder of common shares of VAN KAMPEN AMERICAN
CAPITAL PRIME RATE INCOME TRUST, a Massachusetts business trust
(the "Fund"), hereby appoints Dennis J. McDonnell, Ronald A.
Nyberg and Edward C. Wood III, and each of them, with full power
of substitution and revocation, as proxies to represent the
undersigned at the Special Meeting of Shareholders to be held at
the offices of Van Kampen American Capital, Inc., One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, on Wednesday, May 28,
1997 at 3:00 p.m., and any and all adjournments thereof (the
"Meeting"), and thereat to vote all common shares which the
undersigned would be entitled to vote, with all powers the
undersigned would possess if personally present, in accordance
with the following instructions.
Account No. No. of Shares Proxy No.
<TABLE>
<S> <C> <C> <C> <C>
1. The proposal to approve a new investment advisory agreement; FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. The proposal to approve adding a new fundamental investment FOR AGAINST ABSTAIN
policy modifying existing fundamental investment policies [ ] [ ] [ ]
and restrictions and a corresponding conversion to a
master-feeder structure in the future.
3. To transact such other business as may properly come before
the Meeting.
</TABLE>
If more than one of the proxies, or their substitutes, are
present at the Meeting or any adjournment thereof, they jointly
(or, if only one is present and voting then that one) shall have
authority and may exercise all powers granted hereby. This Proxy,
when properly executed, will be voted in accordance with the
instructions marked hereon by the undersigned. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" EACH OF THE
PROPOSALS DESCRIBED HEREIN AND IN THE DISCRETION OF THE PROXIES
UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE ACCOMPANYING
NOTICE OF MEETING AND PROXY STATEMENT FOR THE MEETING TO BE HELD
ON MAY 28, 1997.
Date , 1997
------------------------
Shareholder signature
----------------------------
Co-owner signature (if
applicable)
Please sign this Proxy
exactly as your name or
names appear on the books of
the Fund. When signing as
attorney, trustee, executor,
administrator, custodian,
guardian or corporate
officer, please give full
title. If shares are held
jointly, each holder should
sign.
<PAGE> 43
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Portfolio Management Review...................... 4
Portfolio of Investments......................... 6
Statement of Assets and Liabilities.............. 14
Statement of Operations.......................... 15
Statement of Changes in Net Assets............... 16
Statement of Cash Flows.......................... 17
Financial Highlights............................. 18
Notes to Financial Statements.................... 19
Independent Accountants' Report.................. 24
</TABLE>
PRIT ANR 9/96
<PAGE> 44
LETTER TO SHAREHOLDERS
September 15, 1996
Dear Shareholder,
As you may be aware, an
agreement was reached in late June for
VK/AC Holding Inc., the parent company
of Van Kampen American Capital, Inc.,
to be acquired by Morgan Stanley Group
Inc. While this announcement may appear
commonplace in an ever-changing [PHOTO]
financial industry, we believe it
represents an exciting opportunity for
shareholders of our investment
products.
With Morgan Stanley's global
leadership in investment banking and
asset management and Van Kampen
American Capital's reputation for DENNIS J. MCDONNELL AND DON G. POWELL
competitive long-term performance and
superior investor services, together we will offer a broader range of investment
opportunities and expertise.
The new ownership will not affect our commitment to pursuing excellence
in all aspects of our business. We expect little change in the way your mutual
fund account is maintained and serviced.
A proxy was mailed to you explaining the acquisition and asking for your
vote of approval. Please read it carefully and return your response for
inclusion in the shareholder vote. We value our relationship with you and look
forward to communicating more details of this transaction, which is anticipated
to be completed in October.
ECONOMIC REVIEW
Economic growth accelerated during the last half of the reporting period.
After a nominal 0.3 percent growth rate in the last quarter of 1995, GDP (the
nation's Gross Domestic Product) grew at 2.0 percent in this year's first
quarter. In the second quarter, the rate of growth was much stronger at 4.2
percent, reflecting positive consumer sentiment and pent-up consumer demand. In
fact, upward momentum was marked by a 5.6 percent rise in retail sales in the
first six months of this year versus the comparable 1995 period.
In the manufacturing sector, economic reports such as the National
Association of Purchasing Managers Index suggested a continued rebound in
production from last year's lower levels. In June, this index reached its
highest level since early 1995. Strong levels of exports and a replenishing of
inventories have helped support this momentum.
Surprisingly healthy economic activity led to concerns that inflation
could rise and that the Federal Reserve Board may tighten monetary policy.
Inflation remains moderate, however, with consumer prices rising at about a 3
percent annual rate during the past year. Meanwhile, the closely watched "core"
Consumer Price Index, which excludes volatile food and energy components, has
risen year over year at rates between 2.7 and 3.0 percent per year, with
mid-1996 readings at a moderate 2.7 percent. Additionally, recent reports have
suggested some upward pressure in labor-related cost, a key factor in the Fed's
decision process for determining interest rate moves.
Continued on page two
1
<PAGE> 45
MARKET REVIEW
Our nation's continued economic resilience over the last 12 months has
spurred record corporate demand for bank loans, as well as other capital market
products. Over this period, leveraged corporate loans of the type in which the
Trust invests grew by an estimated $121 billion. Also contributing to this
market's strength has been a general improvement in corporate credit
fundamentals, which likewise benefit from solid economic activity.
You can read about this--and other factors--affecting the Prime Rate
Income Trust in the question and answer section of this report.
OUTLOOK
We anticipate that reasonably strong economic growth will continue during
the balance of 1996. In our view, inflation should remain stable, and the sharp
rise in interest rates experienced in the first half of 1996 is likely to
moderate economic growth. These factors should keep interest rates at their
current levels.
Looking ahead, we expect inflation and short-term rates to remain near
current levels. Throughout the rest of 1996, we expect that corporate earnings
will continue to be healthy.
We appreciate your continued confidence in your investment with Van
Kampen American Capital.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
2
<PAGE> 46
PERFORMANCE RESULTS FOR THE PERIOD ENDED JULY 31, 1996
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
<TABLE>
<CAPTION>
TOTAL RETURNS
<S> <C>
One-year total return(1)................................... 7.22%
Five-year average annual total return(1)................... 6.99%
Life-of-Trust average annual total return(1)............... 7.74%
Commencement date.......................................... 10/04/89
Distribution rate(2)....................................... 6.80%
SHARE VALUATIONS
Net asset value on 07/31/96................................ $10.00
One-year high net asset value.............................. $10.05
One-year low net asset value............................... $10.00
</TABLE>
(1) Total return assumes an investment at the beginning of the period indicated,
reinvestment of all distributions for the period and tender of all shares at the
end of the period indicated, excluding payment of any early withdrawal charges.
(2) Distribution rate is based upon the offering price and the monthly
annualized distributions of the Trust as of July 25, 1996.
Past performance does not guarantee future results. Distribution rates and net
asset value may fluctuate with market conditions. Trust shares, when tendered,
may be worth more or less than their original cost.
This report is intended for shareholders of the Trust and may not be used as
sales literature with prospective investors unless it is preceded or accompanied
by the Trust's current prospectus, which gives more complete information about
charges and expenses, investment objectives and operating policies. Prospective
investors should read the prospectus carefully before investing or sending
money.
3
<PAGE> 47
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
We recently spoke with the portfolio manager of the Van Kampen American Capital
Prime Rate Income Trust about the key events and economic forces that shaped the
markets during the Trust's fiscal year. The Trust's portfolio manager, Jeffrey
W. Maillet, senior vice president of Van Kampen American Capital Investment
Advisory Corp., has been responsible for the day-to-day management of the
Trust's portfolio since its inception. The following excerpts reflect his views
on the Trust's performance during the 12-month period ended July 31, 1996.
Q HOW HAVE MARKET CONDITIONS AFFECTED THE PERFORMANCE OF THE TRUST?
A The interest rate environment has an impact on the Trust's dividend, of
course. All of the loans in the portfolio pay interest at a floating or
variable rate tied to key lending rates, such as the prime rate or LIBOR
(London Interbank Offered Rate). When interest rates fluctuate, so has the
dividend level paid out by the Trust. For instance, as short-term interest rates
continued to trend lower during the first half of 1996, the Trust's dividend was
reduced accordingly on three separate occasions--February, April, and May.
Nevertheless, the Trust's distribution rate-- 6.80 percent (2), as of July 25,
1996--was competitive with the prevailing rates available on more traditional
fixed-income investments. And, effective August 24, 1996, the Trust's monthly
dividend was increased from $0.0567 to $0.0584, providing shareholders with a
distribution rate of 7.00 percent, based upon the offering price of $10.01 on
August 23, 1996. Please refer to the chart on page three for additional
performance results.
Over the past 12 months, we've had an outstanding environment for investing
in senior loans. The strength of the economy has made it easier for corporations
to service their debt, which has translated into low default levels and a strong
rate of prepayment on the loans held by the Trust. As a result, we've had a
fairly high turnover rate within the portfolio.
At the same time, financing activity has been quite high, as illustrated by
the volume within the syndicated leveraged loan market of more than $101 billion
in 1995 alone. Secondary trading volume has also grown steadily, reaching $33.8
billion in 1995 and attracting major market participants, such as Morgan
Stanley, Goldman Sachs, Lehman Brothers, Citibank, Bank of America, and Bankers
Trust. However, the loan market should still be considered relatively illiquid.
Q HAS THE STRUCTURE OF THE PORTFOLIO CHANGED SIGNIFICANTLY?
A No. We continued to allocate the Trust's assets over a wide cross-section
of American business. The portfolio is currently spread out over more than
200 issuers representing over 20 industries. Maintaining a varied
portfolio has contributed to the relative stability of the Trust's net asset
value by diluting the impact of any adverse occurrence associated with any
single loan. In fact, not one of the loans we hold constitutes more than 2.3
percent of the Trust's net assets.
That's not to say that the Trust is devoid of risk. Because we're investing
in a concentration of non-investment grade corporate debt, which are senior
loans to corporations, we are diligent in our evaluation of the credit risk
involved in each transaction we pursue. In some cases, that's easy: many of the
loans we've had in the portfolio were made to large, well-established companies,
such as Westinghouse Electric, Revlon, and Northwest Airlines. In other cases,
when we select smaller, more growth oriented companies, our research must be
even more thorough.
In general, we feel we've done a good job of balancing risk and reward
potential, achieving a solid return with a relatively low rate of volatility.
Also, of the 772 loans we've held during the life of the Trust, only 10 have had
payment default. There is no guarantee that the monies to which the Trust is
entitled will be paid, and the loans may have equal status with other senior
securities of the borrower.
We continue to favor industries where trends suggest a favorable environment
over the long term. The manufacturing sector has produced strong 1996
year-to-date results, driven by productivity improvements from modernized
operations. The cable communications industry is still enjoying high subscriber
growth rates and double-digit cash flow growth, enabling firms to make capital
investments that will shore up their ability to compete in a changing
4
<PAGE> 48
marketplace. Radio and television broadcasting continues to benefit from a
favorable advertising environment, bolstered by the summer Olympics and the
upcoming election season. In addition, changing telecommunications laws have
increased the valuation of many holdings in this sector.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY SECTOR AS OF AS OF
AS A PERCENT OF VARIABLE RATE SENIOR LOAN INTERESTS JULY 31, 1996 JANUARY 31, 1996
<S> <C> <C>
Manufacturing ................................................ 13.0% ................... 13.4%
Cable ........................................................ 12.3% ................... 8.2%
Radio and Television Broadcasting ............................ 9.2% ................... 8.8%
Paper ........................................................ 7.9% ................... 9.3%
Retail ....................................................... 7.8% ................... 9.8%
Food/Beverage ................................................ 7.6% ................... 6.5%
Food Stores .................................................. 7.2% ................... 7.7%
Entertainment/Leisure ........................................ 4.5% ................... 6.4%
Wireless Communications ...................................... 4.2% ................... 3.6%
Healthcare ................................................... 3.7% ................... 2.0%
</TABLE>
Q WHAT IS YOUR ASSESSMENT OF THE TRUST'S PERFORMANCE OVER THE PAST FISCAL
YEAR?
A The Trust has continued to perform according to its investment objective,
having provided a high level of current income consistent with
preservation of capital. The Trust's net asset value (NAV) fluctuated
within a five-cent range during the reporting period, and as of July 31, 1996,
the NAV was $10.00--equal to the original offering price. Taking into account
the Trust's dividend distributions, the total return for the 12-month period
was 7.22 percent(1) (at NAV). For a look at the Trust's three-year, five-year,
and Life-of-Trust total return, please refer to the chart on page three.
We believe the Trust has performed well for investors seeking a high level
of current income and preservation of capital. In our opinion, the concept on
which the Trust is based--professional management of a varied portfolio of
primarily senior collateralized loans--has been proven in practice to date. The
Trust has achieved equally strong performance during periods of major upheaval
and uncertainty in the marketplace, including the savings and loan crisis, the
collapse of the Exchange Rate Mechanism in Europe, fluctuating interest rates,
and good and bad stock markets. That's what we see as the true measure of the
Trust's validity as a long-term investment. Of course, there is no guarantee
that if similar events occur in the future, the Trust will perform as favorably.
Although the Trust has done what it set out to do, every year since inception
(October 1989), a portfolio of senior loans does involve credit risk and other
risks that may not be associated with alternative investments.
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We're generally bullish on the domestic economy. The longer interest rates
stay low, the more momentum the economy stands to gain. For that reason,
we would not be surprised to see a move by the Federal Reserve Board to
raise interest rates before the year ends.
While higher interest rates might not be good news for the stock market,
they would give the Trust more earnings potential. In addition, if higher rates
were to trigger a setback in the equity market, lower market valuation could
lead to an increase in merger and acquisition activity. Because this activity is
often financed by senior loans of the type in which the Trust invests, we would
then see an even greater range of investment opportunities.
We anticipate on-going domestic economic growth, which will positively
affect the Trust, and we will remain selective and conservative in our choice of
investments for the Trust's portfolio.
[SIG]
Jeffrey W. Maillet
Portfolio Manager
5
<PAGE> 49
PORTFOLIO OF INVESTMENTS
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
VARIABLE RATE** SENIOR LOAN INTERESTS
AEROSPACE/DEFENSE 1.8%
$ 14,604 Alliant Techsystems, Inc., Term Loan -- Manufacturer of ordnance,
composite metals......................................................... 03/15/01 $ 14,649
10,205 Grimes Aerospace Co., Term Loan -- Airplane electronics manufacturer..... 12/31/99 10,483
3,237 Grimes Aerospace Co., Revolving Credit................................... 12/31/99 3,380
19,800 Gulfstream Delaware Corp., Term Loan -- Aircraft manufacturer............ 03/31/98 19,786
9,611 Howmet Acquisition Co., Term Loan -- Manufacturer of aerospace
supplies................................................................. 11/20/02 to 05/20/03 9,641
21,151 Northrop Grumman Corp., Term Loan -- Manufacturer and contractor of
defense aircraft and electronic systems.................................. 03/02/02 21,319
9,325 Tracor, Inc., Term Loan -- Manufacturer of electronic systems and devices
for the defense and aerospace industries................................. 10/31/00 to 04/30/01 9,351
----------
88,609
----------
BUILDING/HOUSING 2.1%
59,950 National Gypsum Co., Term Loan -- Wallboard manufacturer................. 09/20/03 60,054
19,760 PrimeCo, Inc., Term Loan -- Equipment leasing............................ 12/31/00 19,783
3,333 RSI Home Products, Inc., Term Loan -- Bath and kitchen cabinet
manufacturer............................................................. 11/30/99 3,361
19,833 Walter Industries, Inc., Term Loan -- Home builder....................... 01/22/03 19,863
----------
103,061
----------
CABLE 11.0%
9,368 Adelphia Cable Partners, L.P., Revolving Credit -- Cable television
operator................................................................. 12/31/03 9,388
3,507 Alexcom Limited Partnership, Term Loan -- Cellular telephone systems
operator................................................................. 06/30/20 3,506
12,000 Cablevision of Ohio, Term Loan -- Cable television owner/operator........ 12/31/05 12,017
70,000 Charter Communications, Term Loan -- Cable television systems operator... 12/31/03 to 12/31/04 70,322
42,500 Chelsea Communications, Inc., Term Loan -- Cable television systems
operator................................................................. 09/30/04 42,625
21,500 Classic Cable, Inc., Term Loan -- Cable television systems operator...... 06/30/05 21,658
16,830 Coaxial Communications of Central Ohio, Term Loan -- Cable television
systems operator......................................................... 12/31/99 16,722
52,861 Colony Communications, Revolving Credit -- Cable television operator..... 09/30/04 53,017
26,625 Comcast MH Holdings, Term loan -- Cable television systems operator...... 12/31/03 26,681
45,789 Continental Cablevision, Revolving Credit -- Cable television systems
operator................................................................. 10/10/03 45,900
3,281 CSG Systems International, Inc., Term Loan -- Communications management
consultant............................................................... 12/31/00 3,285
38,000 Falcon Cable Media, Term Loan -- Cable television systems operator....... 07/11/05 38,074
26,500 Frontiervision Operating Partners, L.P., Term Loan -- Cable television
operator................................................................. 06/30/05 26,639
6,650 James Cable Partners, L.P., Term Loan -- Cable television systems
operator................................................................. 06/30/00 6,716
200 James Cable Partners, L.P., Revolving Credit............................. 06/30/00 209
6,250 Lenfest Communications, Term Loan -- Cable television operator........... 09/30/03 6,325
60,313 Marcus Cable Operating Co., L.P., Term Loan -- Cable television systems
operator................................................................. 12/31/02 to 04/30/04 60,874
2,500 Marcus Cable Operating Co., L.P., Revolving Credit....................... 12/31/02 2,657
8,711 Maryland Cable, Term Loan -- Cable television systems operator........... 12/31/02 8,717
8,500 Northland Cable Television, Inc., Term Loan -- Cable television systems
operator................................................................. 09/30/03 8,503
47,500 TCI Pacific Communications, Term Loan -- Cable television services
provider................................................................. 12/31/04 47,667
6,964 TCI Southeast, Inc., Term Loan -- Cable television systems operator...... 06/30/01 6,964
2,657 TCI Southeast, Inc., Revolving Credit.................................... 06/30/01 2,681
10,000 UCA Corp., Revolving Credit -- Cable television operator................. 09/30/03 10,088
3,334 Viacom Cablevision, Term Loan -- Cable television systems operator....... 07/01/02 3,345
----------
534,580
----------
CHEMICAL 2.3%
9,951 AEP Industries, Inc., Term Loan -- Manufacturer and converter of plastic
products................................................................. 07/31/02 9,976
9,250 Cedar Chemicals Corp., Term Loan -- Manufacturer of fertilizer........... 10/30/03 9,308
6,429 Chattem, Inc., Term Loan -- Manufacturer and marketer of
pharmaceuticals.......................................................... 10/30/02 6,457
8,887 Freedom Chemical Co., Term Loan -- Manufacturer of specialty chemicals... 06/30/02 8,820
9,923 Hampshire Chemical Co., Term Loan -- Manufacturer of specialty
chemicals................................................................ 09/01/03 9,949
</TABLE>
See Notes to Financial Statements
6
<PAGE> 50
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CHEMICAL (CONTINUED)
$ 33,641 Huntsman Group Holding Corp., Term Loan -- Integrated chemical, plastic
and packaging producer................................................... 12/31/02 $ 33,688
11,143 Huntsman Group Holding Corp., Revolving Credit........................... 12/31/02 11,171
2,253 Rheox, Inc., Term Loan -- Chemical additives manufacturer................ 12/31/97 2,218
7,000 Texas Petrochemicals, Term Loan -- Processor of petrochemicals........... 06/30/04 7,024
12,507 Thoro System Products, Inc., Term Loan -- Manufacturer of chemicals for
construction industry.................................................... 12/20/02 12,414
----------
111,025
----------
ELECTRIC/ELECTRONICS 1.0%
34,125 Berg Electronics, Inc., Term Loan -- Manufacturer of electronic
connectors............................................................... 12/31/02 34,196
1,950 Exide Electronics Group, Inc., Term Loan -- Manufacturer of
uninterruptible power supply products.................................... 03/13/01 1,958
3,120 Exide Electronics Group, Inc., Revolving Credit.......................... 03/13/01 3,141
8,358 Rowe International, Inc., Term Loan -- Manufacturer of jukeboxes and
electronic equipment..................................................... 12/31/96 7,940
----------
47,235
----------
ENTERTAINMENT/LEISURE 4.1%
3,452 DW Investment, Inc., Term Loan -- Communications and entertainment
conglomerate............................................................. 08/09/00 3,459
6,643 Fairways Group, L.P., Term Loan -- Multiple golf course owner/operator... 04/30/02 6,735
6,000 H.E.C. Investments, Inc., Term Loan -- Fitness club operator............. 12/31/00 6,030
30,000 Marvel Entertainment, Term Loan -- Children's magazine publisher......... 02/28/02 30,069
8,500 Marvel IV Holdings, Revolving Credit -- Comic books, sports cards and
outdoor equipment distributor............................................ 06/03/99 8,741
30,000 Metro-Goldwyn-Mayer, Term Loan -- Movie/television producer.............. 04/15/97 30,101
25,000 Orion Pictures Corp., Term Loan -- Theatrical production................. 06/30/01 25,188
8,000 Panavision International, L.P., Term Loan -- Manufacturer and lessor of
motion picture cameras and lenses........................................ 03/31/04 8,040
26,115 Six Flags Theme Parks, Term Loan -- Theme park operator.................. 06/23/03 26,181
8,333 TW Recreational Service, Term Loan -- Provider of food and services for
state and national parks................................................. 09/30/02 8,394
9,700 The U.S. Playing Card Co., Term Loan -- Manufacturer/distributor of
playing cards............................................................ 09/30/02 9,668
34,901 Viacom, Inc., Term Loan -- Entertainment media/television programming.... 07/01/02 34,977
----------
197,583
----------
FINANCE 0.7%
8,000 American Life Holding Co., Term Loan -- Life insurance company........... 04/15/03 8,012
4,991 Ark Asset Holdings, Inc., Term Loan -- Institutional money manager....... 11/30/01 5,008
12,500 Blackstone Capital Co., Term Loan -- Financial services company.......... 01/13/97 12,500
7,833 Conseco, Inc., Revolving Credit -- Life insurance company................ 04/12/01 7,898
----------
33,418
----------
FOOD/BEVERAGE 6.8%
10,973 American Italian Pasta Co., Term Loan -- Pasta products producer......... 02/28/04 11,030
11,720 Amerifoods, Inc., Term Loan -- Manufacturer of snack foods and bakery
products................................................................. 12/31/97 to 06/30/02 9,999
4,178 Edwards Baking Corp., Term Loan -- Manufacturer of bakery products....... 09/30/00 to 10/31/02 4,200
22,687 Foodbrands America, Term Loan -- Manufacturer of food products........... 01/15/00 to 02/28/03 22,769
473 Foodbrands America, Revolving Credit..................................... 01/15/00 476
4,888 Ghirardelli Holdings Corp., Term Loan -- Manufacturer of chocolate
products................................................................. 03/30/03 4,940
9,979 IM Stadium, Inc., Term Loan -- Sports stadium concessions................ 12/31/02 to 12/31/03 10,049
14,943 Keebler Holding Corp., Term Loan -- Manufacturer and distributor of
cookies and crackers..................................................... 07/31/03 to 07/31/04 14,961
1,995 Mistic Brands, Inc., Revolving Credit -- Producer and marketer of
carbonated and non-carbonated beverages.................................. 09/30/99 2,042
5,625 Mistic Brands, Inc., Term Loan........................................... 09/30/01 5,759
18,905 President Baking Co., Inc., Term Loan -- Bread/bread products
manufacturer............................................................. 12/30/02 18,857
35,000 Rykoff-Sexton, Inc., Term Loan -- Distributor and manufacturer of food
and related non-food products............................................ 10/31/02 to 04/30/03 35,106
46,691 S.C. International Services, Term Loan -- In-flight food services........ 09/30/00 to 09/30/03 46,895
14,165 Select Beverages, Inc., Term Loan -- Independent bottler................. 06/30/01 to 06/30/02 14,238
</TABLE>
See Notes to Financial Statements
7
<PAGE> 51
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
FOOD/BEVERAGE (CONTINUED)
$ 68,298 Silgan Corp., Term Loan -- Manufacturer of food cans..................... 12/31/00 to 03/15/02 $ 68,314
4,805 Silgan Corp., Revolving Credit........................................... 12/31/00 4,805
25,000 Stroh Brewery Co., Term Loan -- Beer producer and distributor............ 06/30/03 25,135
3,281 Tom's Foods, Inc., Term Loan -- Snack foods producer/distributor (d)..... 12/31/98 1,968
21,000 Van De Kamp's, Inc., Term Loan -- Frozen seafood processor/distributor... 04/30/03 to 09/30/03 21,084
7,673 Windsor Quality Food, Term Loan -- Frozen food processor................. 12/31/01 7,710
----------
330,337
----------
FOOD STORES 6.4%
9,600 Big V Supermarkets, Inc., Term Loan -- Northeastern retail food chain
operator................................................................. 03/15/00 9,596
61,247 Bruno's, Inc., Term Loan -- Southeastern retail food chain operator...... 02/18/03 to 02/18/05 61,570
12,935 Carr-Gottstein Foods, Term Loan -- Alaska based retail food chain
operator................................................................. 12/31/02 12,949
41,985 Dominick's Finer Foods, Inc., Term Loan -- Illinois based retail food
chain operator........................................................... 03/31/02 to 09/30/03 42,240
20,128 Grand Union Co., Term Loan -- New York based retail food chain
operator................................................................. 06/15/02 20,131
7,733 Harvest Foods, Inc., Term Loan -- Mississippi based retail food chain
operator (d) (g)......................................................... 06/30/02 7,051
31,678 Pathmark Stores, Inc., Term Loan -- New Jersey based retail food chain
operator................................................................. 07/31/98 to 10/31/99 31,604
3,294 Ralph's Grocery Co., Revolving Credit -- Los Angeles, California based
retail food chain operator............................................... 06/15/01 3,441
47,786 Ralph's Grocery Co., Term Loan........................................... 06/15/01 to 02/15/04 47,976
70,097 Smith Food & Drug Center, Term Loan -- Food and drug retailer............ 08/31/02 to 11/30/04 70,449
6,684 Star Markets Co., Inc., Term Loan -- New England based retail food chain
operator................................................................. 01/31/02 to 12/31/02 6,695
----------
313,702
----------
FUEL RETAILER 0.1%
3,721 Petro PSC Properties, L.P., Term Loan -- Multi-service truck-stop
operator................................................................. 05/18/01 3,721
3,048 Truckstops of America, Inc., Term Loan -- Interstate fueling stations
operator................................................................. 12/10/00 3,014
----------
6,735
----------
HEALTHCARE 3.3%
60,000 Community Health Systems, Inc., Term Loan -- Provider of healthcare
services................................................................. 12/31/03 to 12/31/05 60,290
57,265 Dade International, Inc., Term Loan -- Medical equipment
manufacturer/marketer.................................................... 12/31/01 to 12/31/04 57,543
168 Dade International, Inc., Revolving Credit............................... 12/31/01 184
15,923 Graphic Controls Corp., Term Loan -- Manufacturer of medical equipment... 09/28/03 15,970
7,542 Integrated Health Services, Inc., Revolving Credit -- Provider of
post-acute healthcare services........................................... 06/30/02 7,746
18,500 Merit Behavioral Corp., Term Loan -- Psychiatric hospital operator....... 10/06/03 18,565
----------
160,298
----------
MANUFACTURING 11.6%
12,406 Calmar, Inc., Term Loan -- Manufacturer of dispensing and spray
products................................................................. 09/15/03 to 03/15/04 12,443
21,400 Cambridge Industries, Inc., Term Loan -- Manufacturer of plastic
components for autos..................................................... 05/17/02 to 05/17/04 21,577
9,979 CBP Resources, Inc., Term Loan -- Manufacturer of animal feed
ingredients.............................................................. 09/30/03 10,035
18,759 Collins & Aikman Products Co., Term Loan -- Manufacturer of auto
interiors, home interiors and wallpapers................................. 12/31/02 18,756
9,697 Dal-Tile Group, Inc., Revolving Credit -- Ceramic tile and floor covering
manufacturer/retailer.................................................... 01/09/98 9,697
21,978 Desa International, Inc., Term Loan -- Diversified manufacturer of
heaters, fireplaces, and specialty tools................................. 02/28/03 22,144
9,321 Ebel USA, Inc., Term Loan -- Manufacturer of luxury time pieces.......... 09/30/01 9,330
6,038 Essex Group, Inc., Term Loan -- Manufacturer of electrical wire and
cable.................................................................... 04/30/00 6,048
8,936 Fiberite, Inc., Term Loan -- Manufacturer of composite fibers............ 12/31/01 8,977
43,588 Furniture Brands International, Inc., Term Loan -- Manufacturer and
marketer of furniture.................................................... 12/29/01 to 03/29/04 43,702
7,821 The Hawk Group of Companies, Inc., Term Loan -- Manufacturer of powdered
metals and friction materials............................................ 06/30/02 7,857
11,042 Health O Meter, Inc., Term Loan -- Manufacturer of small appliances...... 08/15/01 10,982
</TABLE>
See Notes to Financial Statements
8
<PAGE> 52
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MANUFACTURING (CONTINUED)
$ 10,000 Hedstrom Corp., Term Loan -- Manufacturer of children's outdoor toys..... 04/27/01 $ 10,039
36,486 Hayes Wheels International, Inc., Term Loan -- Designer and manufacturer
of car and truck wheels.................................................. 07/31/02 to 07/31/04 36,606
239 Hayes Wheels International, Inc., Revolving Credit....................... 07/31/04 239
9,444 Hunt Manufacturing Co., Term Loan -- Manufacturer and distributor of
office and art supplies.................................................. 12/31/00 9,450
9,941 Intermetro Industries Corp., Term Loan -- Manufacturer of metal/polymer
storage products......................................................... 06/30/01 to 12/31/02 9,891
36,124 International Wire Group, Term Loan -- Manufacturer of auto, appliance
and communication wires.................................................. 09/30/02 to 09/30/03 36,242
10,072 IPC, Inc., Term Loan -- Manufacturer of packaging materials.............. 09/30/01 10,101
29,501 Johnstown America, Term Loan -- Manufacturer of railcars................. 03/31/03 29,597
29,878 K-Tec Holdings, Inc., Term Loan -- Manufacturer of telecommunications
equipment................................................................ 02/01/03 to 02/01/04 29,961
19,463 Lear Seating Corp., Revolving Credit -- Manufacturer of automobile and
truck seat systems....................................................... 09/30/01 19,449
8,982 Merkle-Korff Industries, Term Loan -- Manufacturer of electrical
motors................................................................... 09/22/01 to 06/15/03 9,048
53 Merkle-Korff Industries, Revolving Credit................................ 09/22/01 61
15,772 M.W. Manufacturers, Term Loan -- Conglomerate............................ 09/15/02 15,871
11,709 National-Oilwell, L.P., Term Loan -- Oil equipment manufacturer.......... 12/31/01 11,760
11,967 Numatics, Inc., Term Loan -- Manufacturer of pneumatic fluid power
equipment................................................................ 12/31/03 12,059
8,000 Personal Care Holdings, Term Loan -- Manufacturer and marketer of
consumer products........................................................ 04/03/03 8,074
5,000 Precise Technology, Term Loan -- Custom injection molding company........ 03/31/03 5,052
10,000 RBX Corp., Term Loan -- Manufacturer of rubber products.................. 12/31/03 10,025
9,694 RTI Funding Corp., Term Loan -- Manufacturer of building blocks for
children................................................................. 02/08/03 to 02/03/04 9,766
1,111 Samsonite Corp., Term Loan -- Manufacturer of luggage.................... 07/14/00 1,111
556 Samsonite Corp., Revolving Credit........................................ 07/14/00 556
7,000 Simmons Co., Term Loan -- Manufacturer and distributor of bedding........ 03/31/03 7,028
16,204 Spalding & Evenflo Cos., Inc., Term Loan -- Manufacturer of sporting
goods.................................................................... 10/31/00 to 10/14/02 16,264
6,700 Sportcraft, Ltd., Term Loan -- Supplier of branded sporting goods........ 12/31/02 6,764
10,559 Stanadyne Automotive, Term Loan -- Manufacturer of diesel injection
devices and engine parts................................................. 12/31/01 10,589
18,400 Thompson Minwax Co., Term Loan -- Manufacturer of wood stains and
finishing products....................................................... 12/31/02 18,433
15,621 T.K.G. Acquisition, Term Loan -- Office furniture manufacturer........... 02/28/02 to 08/31/03 15,684
27,000 UCAR International, Inc., Term Loan -- Manufacturer of graphite/carbide
electrodes............................................................... 12/31/02 27,050
7,910 U.F. Acquisition, Term Loan -- Provider of fixtures and storage for
retail stores............................................................ 12/15/02 8,013
----------
566,331
----------
PAPER 7.1%
4,963 Crown Paper Co./Crown Vantage, Inc., Term Loan -- Producer of value-added
paper products........................................................... 08/22/03 4,962
4,750 CST Office Products, Inc., Term Loan -- Manufacturer and distributor of
stock computer forms..................................................... 03/31/01 4,815
66,278 Fort Howard Corp., Term Loan -- Paper manufacturer....................... 03/31/02 to 12/31/02 66,621
113,319 Jefferson Smurfit Corp., Term Loan -- Corrugated paper products
manufacturer............................................................. 04/30/01 to 10/31/02 113,463
10,112 Mail-Well Corp., Term Loan -- Manufacturer of envelopes and graphic
printers................................................................. 07/31/98 to 07/31/03 10,176
1,042 Mail-Well SPX, Term Loan -- Manufacturer of envelopes and graphic
printers................................................................. 07/31/03 1,047
2,609 Mail-Well SPX, Revolving Credit.......................................... 07/31/03 2,624
29,787 S.D. Warren Co., Term Loan -- Coated-free paper manufacturer............. 04/26/04 29,850
92,145 Stone Container Corp., Term Loan -- Paper products manufacturer.......... 04/01/00 to 10/01/03 92,212
18,064 United Stationers Supply Co., Term Loan -- Distributor of office
products................................................................. 03/31/02 18,129
----------
343,899
----------
PERSONAL/NON-DURABLE 3.1%
44,640 Mary Kay Cosmetics, Term Loan -- Direct cosmetic sales................... 12/06/02 44,714
37,935 Playtex Products, Inc., Term Loan -- Manufacturer of beauty aid and
hygiene products......................................................... 06/30/02 38,017
55,000 Revlon Consumer Products Corp., Term Loan -- Manufacturer of cosmetics... 12/31/00 55,430
11,000 Treasure Chest Advertising Co., Inc., Term Loan -- Advertising and
information services..................................................... 12/31/01 11,000
----------
149,161
----------
</TABLE>
See Notes to Financial Statements
9
<PAGE> 53
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
PRINTING 2.0%
$ 16,500 Advanstar Holdings, Inc., Term Loan -- Trade magazine publisher and trade
show exhibitor........................................................... 12/21/03 $ 16,594
47,889 American Media Operations, Inc., Term Loan -- Magazine/newspaper
publisher................................................................ 09/30/01 to 09/30/02 47,840
28,350 Journal News, Inc., Term Loan -- Multiple newspaper printer.............. 12/31/01 28,411
7,097 Polyfibron Technologies, Inc., Term Loan -- Textile manufacturer......... 12/31/01 7,131
----------
99,976
----------
RADIO AND TELEVISION BROADCASTING 8.2%
9,100 Benedek Broadcasting Corp., Term Loan -- Television station
owner/operator........................................................... 05/01/01 to 11/01/02 9,131
11,629 Chancellor Corp., Term Loan -- Radio station owner/operator.............. 09/01/02 to 09/01/03 11,720
356 Chancellor Corp., Revolving Credit....................................... 09/01/02 370
44,000 E.H. & F., Inc., Term Loan -- Outdoor media.............................. 06/30/02 to 12/21/03 44,198
32,859 Ellis Communications, Inc., Term Loan -- Southeastern U.S. television
station owner/operator................................................... 03/31/02 to 03/31/03 32,929
4,800 Evergreen Media Corp., Term Loan -- Radio station owner/operator......... 12/31/02 4,802
12,544 Evergreen Media Corp., Revolving Credit.................................. 12/31/02 12,551
1,500 Granite Broadcasting Corp., Revolving Credit -- Midwestern television
station owner/operator................................................... 12/31/01 1,510
14,000 Heftel Broadcasting Corp., Term Loan -- Spanish language radio
broadcasting............................................................. 09/30/02 14,113
15,000 NWC Acquisition Corp., Term Loan -- Television production and
broadcasting............................................................. 09/30/01 15,023
15,000 Patterson Broadcasting, Term Loan -- Radio station operator.............. 06/30/04 15,107
10,800 River City Broadcasting, L.P., Term Loan -- Midwestern radio station
owner/operator........................................................... 12/31/99 10,853
13,145 Shared Technologies, Term Loan -- Provider of telecommunications
services................................................................. 03/30/01 to 03/31/03 13,211
667 Shared Technologies, Revolving Credit.................................... 03/30/01 677
53,750 Sinclair Broadcasting Group, Inc., Term Loan -- Television and radio
station owner/operator................................................... 12/31/02 to 11/30/03 53,863
2,763 Sinclair Broadcasting Group, Inc., Revolving Credit...................... 11/30/03 2,770
13,345 SKTV, Inc., Term Loan -- Television station owner/operator............... 07/31/02 13,260
7,133 Smith Television, Term Loan -- Television station owner/operator......... 12/31/02 7,185
23,320 Sullivan Broadcasting, Term Loan -- Television station owner/operator.... 12/31/03 23,405
1,680 Sullivan Broadcasting, Revolving Credit.................................. 12/31/03 1,685
111,795 Westinghouse Electric, Term Loan -- Radio and television broadcaster..... 11/24/02 112,046
----------
400,409
----------
RESTAURANTS 0.3%
8,952 America's Favorite Chicken Co., Term Loan -- Church's and Popeye's Fried
Chicken restaurants...................................................... 10/31/01 8,951
1,085 Carvel Corp., Term Loan -- Soft ice cream products franchiser............ 12/31/98 1,084
6,394 Long John Silver's Restaurants, Inc., Term Loan -- Retail seafood
restaurant owner/operator................................................ 09/30/97 6,394
----------
16,429
----------
RETAIL 7.0%
175 American Blind and Wallpaper Factory, Inc., Term Loan -- Wallcover
distributor.............................................................. 10/31/96 173
32,500 Camelot Music, Inc., Term Loan -- Retail distributor of music and video
cassettes (f)............................................................ 02/28/02 24,375
17,525 Color Tile, Inc., Term Loan -- National retailer of floor and wall
covering products (d) (g)................................................ 12/31/98 12,271
780 Color Tile Holdings, Inc., Revolving Credit -- National retailer of floor
and wall covering products (g)........................................... 12/31/96 763
8,400 Eckerd Corp., Term Loan -- Retail drug store............................. 11/29/00 8,403
20,366 Federated Department Stores, Inc., Term Loan -- National department store
chain.................................................................... 03/31/00 20,610
4,782 Federated Department Stores, Inc., Revolving Credit...................... 03/31/00 5,022
3,000 Kirklands Holdings, Term Loan -- Retailer of decorative home accessories
and gift items........................................................... 06/30/02 3,022
50,000 Kmart Corp., Term Loan -- International mass merchandise retailer........ 06/17/99 50,704
5,368 Luxottica U.S. Holdings, Revolving Credit -- Manufacturer/distributor of
eyeglasses............................................................... 06/30/01 5,380
15,311 Luxottica U.S. Holdings, Term Loan....................................... 06/30/01 15,323
7,470 Nebraska Book Co., Term Loan -- Used book distributor.................... 10/31/03 7,512
6,455 Nine West Group, Inc., Term Loan -- Shoe designer and retailer........... 10/01/01 6,455
38,857 Payless Cashways, Inc., Term Loan -- Building products retailer.......... 11/18/00 38,922
10,939 Peebles, Inc., Term Loan -- Mid-Atlantic retailer........................ 06/09/02 11,206
19,792 QVC Programming, Term Loan -- Home shopping television network........... 02/15/02 19,853
</TABLE>
See Notes to Financial Statements
10
<PAGE> 54
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated Value
(000) Borrower Maturity* (000)
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
RETAIL (CONTINUED)
$ 31,495 Saks & Co., Term Loan -- Retail fashions and accessories................. 06/30/00 $ 31,674
2,191 Service Merchandise, Revolving Credit -- Catalog retailer................ 06/08/99 2,279
16,875 Thrifty Payless, Inc., Term Loan -- Retail drug store.................... 10/19/02 17,026
26,393 Thrifty Payless, Inc., Revolving Credit.................................. 10/19/02 26,848
31,429 TJX Companies, Inc., Term Loan -- Specialty apparel retailer............. 11/17/00 31,827
----------
339,648
----------
TEXTILES 2.1%
11,443 American Marketing Industries, Inc., Term Loan -- Textile manufacturer... 11/30/02 11,538
8,645 Hosiery Corp. of America, Term Loan -- Manufacturer/direct mail marketer
of women's hosiery....................................................... 07/31/01 8,526
11,578 Ithaca Industries, Inc., Term Loan -- Undergarment and hosiery
manufacturer............................................................. 10/31/98 11,401
842 Ithaca Industries, Inc., Revolving Credit................................ 10/31/98 924
14,652 Johnston Industries, Term Loan -- Diversified manufacturer of home
furnishings and textiles................................................. 03/28/03 14,782
3,083 London Fog Industries, Revolving Credit -- Manufacturer of rainwear and
outerwear................................................................ 03/31/97 3,150
31,466 London Fog Industries, Inc., Term Loan................................... 05/31/02 29,866
20,000 Polymer Group, Inc., Term Loan -- Manufacturer of polyolefin products.... 03/31/02 20,050
----------
100,237
----------
TRANSPORTATION 0.2%
12,500 Northwest Airlines, Inc., Term Loan -- Minnesota-based cargo and
passenger airliner....................................................... 12/15/99 12,548
----------
WIRELESS COMMUNICATIONS 3.8%
16,750 Arch Communications Group, Inc., Term Loan -- Wireless communications
operator................................................................. 12/31/02 to 12/31/03 16,799
1,163 Arch Communications Group, Inc., Revolving Credit........................ 12/31/02 1,163
5,000 Clarity Telecom, Inc., Term Loan -- Seller and servicer of telephone
systems and software..................................................... 11/30/02 5,036
8,125 Comcast Cellular Communications, Revolving Credit -- Cellular systems
operator................................................................. 09/30/03 8,124
17,739 Comcast Cellular Communications, Term Loan............................... 09/30/04 17,942
6,585 Intesys Technologies, Inc., Term Loan -- Equipment manufacturer for
telecommunications/autos................................................. 12/31/01 6,614
39,000 Mobilemedia Communications, Term Loan -- Nationwide paging operator...... 06/30/02 to 06/30/03 38,999
11,050 Skytel Corp., Revolving Credit -- Paging and personal communications
services operator........................................................ 12/31/01 11,153
39,257 Smart SMR of California, Inc., Term Loan -- Cellular telephone systems
operator................................................................. 03/15/01 39,257
40,000 Western Wireless Corp., Term Loan -- Cellular and personal communications
services operator........................................................ 03/31/05 40,064
----------
185,151
----------
OTHER 4.5%
24,000 Advo, Inc., Term Loan -- Direct mail marketer............................ 03/31/04 24,094
25,000 Amax Gold, Inc., Term Loan -- Gold and silver mining and processing...... 12/31/01 25,199
58,141 AMF Group, Inc., Term Loan -- Integrated bowling equipment
manufacturer............................................................. 03/31/01 to 03/31/04 58,198
267 AMF Group, Inc., Revolving Credit........................................ 03/31/01 267
6,913 Bankers Systems, Inc., Term Loan -- Compliance services supplier......... 11/02/02 6,916
35,712 Borg-Warner Security Corp., Term Loan -- Protection services............. 12/31/98 36,192
9,768 Fairmont Minerals, Ltd., Term Loan -- Silica pond and gravel supplier.... 03/31/03 9,840
10,000 HG Holdings, Inc., Term Loan -- Information processor.................... 06/30/01 10,065
5,840 Iron Mountain Information Services Inc., Term Loan -- Records management
and storage.............................................................. 06/28/02 5,840
11,350 Loewen Group, Inc., Revolving Credit -- Funeral home and cemetery
owner/operator........................................................... 05/29/01 11,546
20,000 Primark Corp., Term Loan -- Information services provider................ 06/30/02 20,020
9,000 USS Acquisition, Inc., Term Loan -- Producer of industrial silica........ 12/31/03 9,096
----------
217,273
----------
TOTAL VARIABLE RATE ** SENIOR LOAN INTERESTS 89.5%...................... 4,357,645
----------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 55
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Borrower (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
EQUITIES 0.5%
America's Favorite Chicken Co. (604,251 common shares) (b)(c)................................. $ 2,004
America's Favorite Chicken Co. ($3,486,400 par amount of preferred stock, 10.0% coupon,
maturity 08/11/04, convertible to 10.0% cash pay subordinated debt) (b)(e).................... 3,593
Best Products Co., Inc. (297,480 common shares) (c)........................................... 372
Best Products Co., Inc. (Warrants for 28,080 common shares) (c)............................... 0
Braelan Corp. Class A (10,975 common shares) (b)(c)........................................... 1,967
Classic Cable, Inc. (Warrants for 760 common shares) (c)...................................... 0
Core-Mark International, L.L.C. (Class B ownership interest) (b).............................. 4,368
Flagstar Cos., Inc. (8,755 common shares) (c)................................................. 23
London Fog Industries, Inc. (10,833,012 common shares) (b)(c)................................. 0
London Fog Industries, Inc., ($17,687,936 par amount of preferred stock, 17.5% coupon,
maturity 05/31/02) (b)(e)..................................................................... 12,503
Nextel Communications, Inc. (Warrants for 60,000 common shares) (b)(c)........................ 8
----------
TOTAL EQUITIES................................................................................ 24,838
----------
TOTAL LONG-TERM INVESTMENTS 90.0%
(Cost $4,388,796)(a)........................................................................ 4,382,483
----------
SHORT-TERM INVESTMENTS AT AMORTIZED COST
COMMERCIAL PAPER 2.2%
Amoco Corp. ($20,000,000 par, maturing 08/05/96, yielding 5.33%).............................. 19,988
AT&T Corp. ($20,000,000 par, maturing 08/01/96, yielding 5.33%)............................... 20,000
Cargill Financial Services Corp. ($20,000,000 par, maturing 08/05/96, yielding 5.36%)......... 19,988
Illinois Central Railroad Co. ($13,050,000 par, maturing 08/16/96, yielding 5.53% to 5.54%)... 13,020
International Paper Co. ($20,000,000 par, maturing 08/07/96, yielding 5.34%).................. 19,982
Nabisco Inc. ($14,000,000 par, maturing 08/01/96 to 08/20/96, yielding 5.46% to 5.70%)........ 13,977
----------
TOTAL COMMERCIAL PAPER........................................................................ 106,955
----------
SHORT-TERM LOAN PARTICIPATIONS 7.4%
Anadarko Petroleum Corp. ($20,000,000 par, maturing 08/06/96 to 08/07/96, yielding 5.43% to
5.56%)........................................................................................ 20,000
Army & Air Force Exchange Services ($17,000,000 par, maturing 08/13/96, yielding 5.41%)....... 17,000
Ashland Oil Co. ($20,000,000 par, maturing 08/01/96 to 08/07/96, yielding 5.43% to 5.68%)..... 20,000
Baxter International, Inc. ($20,000,000 par, maturing 08/26/96, yielding 5.55%)............... 20,000
Bell Atlantic Financial Services ($20,000,000 par, maturing 08/01/96, yielding 5.44%)......... 20,000
Bell Atlantic Network Funding ($8,900,000 par, maturing 08/05/96, yielding 5.33%)............. 8,900
Cabot Corp. ($10,000,000 par, maturing 08/01/96, yielding 5.43%).............................. 10,000
Centex Corp. ($20,000,000 par, maturing 08/08/96, yielding 5.50%)............................. 20,000
Conagra Inc. ($20,000,000 par, maturing 08/30/96, yielding 5.50%)............................. 20,000
Echlin, Inc. ($7,000,000 par, maturing 08/02/96, yielding 5.32%).............................. 7,000
Englehard Corp. ($20,000,000 par, maturing 08/02/96, yielding 5.40%).......................... 20,000
Enron Corp. ($20,000,000 par, maturing 08/05/96, yielding 5.47%).............................. 20,000
Gillette Co. ($10,650,000 par, maturing 08/01/96, yielding 5.63%)............................. 10,650
Hertz Corp. ($10,000,000 par, maturing 08/02/96, yielding 5.41%).............................. 10,000
Nabisco Inc. ($6,000,000 par, maturing 08/01/96, yielding 5.80%).............................. 6,000
Olin Corp. ($20,000,000 par, maturing 08/01/96, yielding 5.75%)............................... 20,000
Pacific Telecom Inc. ($10,000,000 par, maturing 08/16/96, yielding 5.51%)..................... 10,000
Pacificorp ($12,000,000 par, maturing 08/12/96, yielding 5.59%)............................... 12,000
Ralston Purina Co. ($20,000,000 par, maturing 08/09/96, yielding 5.55%)....................... 20,000
Tandy Corp. ($6,350,000 par, maturing 08/20/96, yielding 5.47%)............................... 6,350
Temple Inland Inc. ($11,000,000 par, maturing 08/01/96, yielding 5.45%)....................... 11,000
</TABLE>
See Notes to Financial Statements
12
<PAGE> 56
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Borrower (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM LOAN PARTICIPATIONS (CONTINUED)
Tyson Foods ($20,000,000 par, maturing 08/08/96, yielding 5.44% to 5.45%)..................... $ 20,000
USAA Capital Corp. ($10,000,000 par, maturing 08/01/96, yielding 5.40%)....................... 10,000
Western Resources Inc. ($20,000,000 par, maturing 08/06/96 to 08/19/96, yielding 5.50%)....... 20,000
----------
TOTAL SHORT-TERM LOAN PARTICIPATIONS.......................................................... 358,900
----------
TOTAL SHORT-TERM INVESTMENTS AT AMORTIZED COST 9.6%.......................................... 465,855
----------
OTHER ASSETS IN EXCESS OF LIABILITIES 0.4%................................................... 17,446
----------
NET ASSETS 100.0%............................................................................ $4,865,784
==========
</TABLE>
(a) At July 31, 1996, cost for federal income tax purposes is $4,392,208,484;
the aggregate gross unrealized appreciation is $24,440,164, and the
aggregate gross unrealized depreciation is $34,165,402, resulting in net
unrealized depreciation of $9,725,238.
(b) Restricted security.
(c) Non-income producing security, as this stock currently does not declare
dividends.
(d) This Senior Loan Interest is non-income producing.
(e) Payment-in-kind security.
(f) In August, 1996, this Borrower filed for protection in federal bankruptcy
court and as a result has become a non-income producing Senior Loan
interest.
(g) This Borrower has filed for protection in federal bankruptcy court.
* Senior Loans in the Trust's portfolio generally are subject to mandatory
and/or optional prepayment. Because of these mandatory prepayment conditions
and because there may be significant economic incentives for a Borrower to
prepay, prepayments of Senior Loans in the Trust's portfolio may occur. As a
result, the actual remaining maturity of Senior Loans held in the Trust's
portfolio may be substantially less than the stated maturities shown.
Although the Trust is unable to accurately estimate the actual remaining
maturity of individual Senior Loans, the Trust estimates that the actual
average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.
** Senior Loans in which the Trust invests generally pay interest at rates
which are periodically redetermined by reference to a base lending rate plus
a premium. These base lending rates are generally (i) the prime rate offered
by one or more major United States banks, (ii) the lending rate offered by
one or more major European banks, such as the London Inter-Bank Offered Rate
("LIBOR") and (iii) the certificate of deposit rate. Senior loans are
generally considered to be restricted in that the Trust ordinarily is
contractually obligated to receive approval from the Agent Bank and/or
borrower prior to the disposition of a Senior Loan.
See Notes to Financial Statements
13
<PAGE> 57
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1996
All amounts, except for Net Asset Value information, reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $4,388,796) (Note 1)........................ $4,382,483
Short-Term Investments (Note 1)................................................ 465,855
Receivables:
Interest and Fees............................................................ 34,523
Fund Shares Sold............................................................. 16,612
Investments Sold............................................................. 44
Other.......................................................................... 53
----------
Total Assets............................................................... 4,899,570
----------
LIABILITIES:
Deferred Facility Fees......................................................... 20,716
Payables:
Income Distributions......................................................... 5,672
Investment Advisory Fee (Note 2)............................................. 3,862
Administrative Fee (Note 2).................................................. 1,026
Custodian Bank............................................................... 557
Distributor and Affiliates (Note 2).......................................... 353
Accrued Expenses............................................................... 1,555
Deferred Compensation and Retirement Plans (Note 2)............................ 45
----------
Total Liabilities.......................................................... 33,786
----------
NET ASSETS..................................................................... $4,865,784
==========
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of shares authorized,
486,490,317 shares issued and outstanding) (Note 3).......................... $ 4,865
Paid in Surplus (Note 3)....................................................... 4,872,393
Accumulated Undistributed Net Investment Income................................ 2,875
Net Unrealized Depreciation on Investments..................................... (6,313)
Accumulated Net Realized Loss on Investments................................... (8,036)
----------
NET ASSETS..................................................................... $4,865,784
==========
NET ASSET VALUE PER COMMON SHARE
($4,865,784,178 divided by 486,490,317 shares outstanding)................... $ 10.00
==========
</TABLE>
See Notes to Financial Statements
14
<PAGE> 58
STATEMENT OF OPERATIONS
For the Year Ended July 31, 1996
All amounts reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest...................................................................... $311,378
Fees.......................................................................... 24,771
Other......................................................................... 1,992
--------
Total Income.............................................................. 338,141
--------
EXPENSES:
Investment Advisory Fee (Note 2).............................................. 36,408
Administrative Fee (Note 2)................................................... 9,615
Shareholder Services (Note 2)................................................. 4,708
Legal (Note 2)................................................................ 1,281
Trustee Fees and Expenses (Note 2)............................................ 35
Other......................................................................... 4,125
--------
Total Expenses............................................................ 56,172
--------
NET INVESTMENT INCOME......................................................... $281,969
========
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Net Realized Gain on Investments.............................................. $ 542
--------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period..................................................... 8,637
End of the Period........................................................... (6,313)
--------
Net Unrealized Depreciation on Investments During the Period.................. (14,950)
--------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS............................... $(14,408)
========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................................... $267,561
========
</TABLE>
See Notes to Financial Statements
15
<PAGE> 59
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended July 31, 1996 and 1995
All amounts reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1996 July 31, 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income................................................ $ 281,969 $ 137,069
Net Realized Gain/Loss on Investments................................ 542 (5,468)
Net Unrealized Appreciation/Depreciation on Investments
During the Period.................................................. (14,950) 2,107
----------- -----------
Change in Net Assets from Operations................................. 267,561 133,708
Distributions from Net Investment Income............................. (283,580) (133,994)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.................. (16,019) (286)
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTES 3 AND 5):
Proceeds from Common Shares Sold..................................... 2,551,158 1,349,284
Value of Shares Issued Through Dividend Reinvestment................. 155,100 74,961
Cost of Shares Repurchased........................................... (354,520) (122,898)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS................... 2,351,738 1,301,347
----------- -----------
TOTAL INCREASE IN NET ASSETS......................................... 2,335,719 1,301,061
NET ASSETS:
Beginning of the Period.............................................. 2,530,065 1,229,004
----------- -----------
End of the Period (Including undistributed net investment income
of $2,875 and $6,627, respectively)................................ $ 4,865,784 $ 2,530,065
=========== ===========
</TABLE>
See Notes to Financial Statements
16
<PAGE> 60
STATEMENT OF CASH FLOWS
For the Year Ended July 31, 1996
All amounts reported in thousands
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS.......................................... $ 267,561
-----------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Provided by Operating Activities:
Increase in Investments at Value............................................ (2,382,924)
Increase in Interest and Fees Receivables................................... (18,282)
Increase in Other Assets.................................................... (53)
Increase in Receivable for Investments Sold................................. (44)
Decrease in Short-Term Investments at Amortized Cost........................ 29,860
Increase in Deferred Facility Fees.......................................... 3,711
Increase in Investment Advisory and Administrative Fees Payable............. 2,411
Increase in Accrued Expenses................................................ 469
Increase in Distributor and Affiliates Payable.............................. 251
Increase in Deferred Compensation and Retirement Plans Expenses............. 26
-----------
Total Adjustments......................................................... (2,364,575)
-----------
NET CASH USED FOR OPERATING ACTIVITIES........................................ (2,097,014)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES (NOTES 3 AND 5):
Proceeds from Shares Sold..................................................... 2,566,669
Payments on Shares Repurchased................................................ (354,528)
Increase in Intra-day Credit Line............................................. 557
Cash Dividends Paid........................................................... (126,019)
-----------
Net Cash Provided by Financing Activities................................... 2,086,679
-----------
NET DECREASE IN CASH.......................................................... (10,335)
Cash at Beginning of the Period............................................... 10,335
-----------
CASH AT END OF THE PERIOD..................................................... $ -0-
===========
</TABLE>
See Notes to Financial Statements
17
<PAGE> 61
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share
of the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended July 31
--------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period......................... $ 10.046 $ 10.052 $ 10.004 $ 9.998 $ 9.985
-------- -------- -------- -------- --------
Net Investment Income.......................................... .735 .756 .618 .600 .698
Net Realized and Unrealized Gain/Loss on Investments........... (.028) (.004) .015 .008 .004
-------- -------- -------- -------- --------
Total from Investment Operations................................. .707 .752 .633 .608 .702
-------- -------- -------- -------- --------
Less:
Distributions from Net Investment Income....................... .751 .758 .585 .600 .689
Distributions in Excess of Net Investment Income (Note 1)...... -0- -0- -0- .002 -0-
-------- -------- -------- -------- --------
Total Distributions.............................................. .751 .758 .585 .602 .689
-------- -------- -------- -------- --------
Net Asset Value, End of the Period............................... $ 10.002 $ 10.046 $ 10.052 $ 10.004 $ 9.998
======== ======== ======== ======== ========
Total Return (a)................................................. 7.22% 7.82% 6.52% 6.17% 7.25%
Net Assets at End of the Period (In millions).................... $4,865.8 $2,530.1 $1,229.0 $ 966.7 $ 928.3
Ratio of Expenses to Average Net Assets.......................... 1.46% 1.49% 1.53% 1.53% 1.55%
Ratio of Net Investment Income to Average Net Assets............. 7.33% 7.71% 6.16% 5.96% 6.98%
Portfolio Turnover (b)........................................... 66% 71% 74% 67% 59%
</TABLE>
(a) Total return is based upon net asset value which does not include payment of
the contingent deferred sales charge.
(b) Calculation includes the proceeds from repayments and sales of variable rate
senior loan interests.
See Notes to Financial Statements
18
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS
July 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Prime Rate Income Trust (the "Trust") is registered
as a non-diversified closed-end management investment company under the
Investment Company Act of 1940, as amended. The Trust's investment objective is
to provide a high level of current income, consistent with preservation of
capital. The Trust seeks to achieve its objective by investing primarily in a
portfolio of interests in floating or variable rate senior loans to United
States corporations, partnerships and other entities. The Trust commenced
investment operations on October 4, 1989.
The following is a summary of significant accounting policies
consistently followed by the Trust in the preparation of its financial
statements. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A. SECURITY VALUATION--The value of the Trust's Variable Rate Senior Loan
interests, totaling $4,357,645,025 (89.5% of net assets) is determined in the
absence of actual market values by Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") following guidelines and procedures established,
and periodically reviewed, by the Board of Trustees. The value of a Variable
Rate Senior Loan interest in the Trust's portfolio is determined with reference
to changes in market interest rates and to the creditworthiness of the
underlying obligor. In valuing Variable Rate Senior Loan interests, the Adviser
considers market quotations and transactions in instruments that the Adviser
believes may be comparable to such Variable Rate Senior Loan interests. In
determining the relationship between such instruments and the Variable Rate
Senior Loan interests, the Adviser considers such factors as the
creditworthiness of the underlying obligor, the current interest rate, the
interest rate redetermination period and maturity date. To the extent that
reliable market transactions in Variable Rate Senior Loan interests have
occurred, the Adviser also considers pricing information derived from such
secondary market transactions in valuing Variable Rate Senior Loan interests.
Because of uncertainly inherent in the valuation process, the estimated value of
a Variable Rate Senior Loan interest may differ significantly from the value
that would have been used had there been market activity for that Variable Rate
Senior Loan interest. Equity securities are valued on the basis of prices
furnished by pricing services or as determined in good faith by the Adviser.
Short-term securities are valued at amortized cost.
B. SECURITY TRANSACTIONS--Investment transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Facility
fees received are recognized as income ratably over the expected life of the
loan. Market premiums and discounts are amortized over the stated life of each
applicable security.
19
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
D. FEDERAL INCOME TAXES--It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The Trust intends to utilize provisions of the federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At July 31, 1996, the Trust had an accumulated capital
loss carryforward for tax purposes of $4,507,275, which will expire on July 31,
2004. Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year.
E. DISTRIBUTION OF INCOME AND GAINS--The Trust declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
Permanent book and tax basis differences relating to the recognition of
expenses totaling $26,779 have been reclassified from paid in surplus to
undistributed net investment income. Additionally, $2,168,429, representing
permanent differences related to the recognition of income on certain
investments between book and tax reporting purposes was reclassified from
undistributed net investment income to accumulated net realized gain on
investments.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ------------------------------------------------------------------------------
<S> <C>
First $4.0 billion............................................. .950 of 1%
Next $3.5 billion.............................................. .900 of 1%
Next $2.5 billion.............................................. .875 of 1%
Over $10.0 billion............................................. .850 of 1%
</TABLE>
In addition, the Trust will pay a monthly administrative fee to Van
Kampen American Capital Distributors, Inc., the Trust's Administrator, at an
annual rate of .25% of the average net assets of the Trust. The administrative
services to be provided by the Administrator include monitoring the provisions
of the loan agreements and any agreements with respect to participations and
assignments, record keeping responsibilities with respect to interests in
Variable Rate Senior Loans in the Trust's portfolio and providing certain
services to the holders of the Trust's securities.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Trust, of which a trustee of the Trust is an affiliated person.
For the year ended July 31, 1996, the Trust recognized expenses of
approximately $38,800 representing the Administrator's or its affiliates'
(collectively "VKAC") cost of providing legal services to the Trust.
20
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Trust. For the year ended July
31, 1996, the Fund recognized expenses of approximately $3,848,300, representing
ACCESS' cost of providing transfer agency and shareholder services plus a
profit.
Certain officers and trustees of the Trust are also officers and
directors of VKAC. The Fund does not compensate its officers or trustees who are
officers of VKAC.
The Trust has implemented deferred compensation and retirement plans for
its trustees. Under the deferred compensation plan, trustees may elect to defer
all or a portion of their compensation to a later date. The retirement plan
covers those trustees who are not officers of VKAC.
3. CAPITAL TRANSACTIONS
At July 31, 1996 and 1995, paid in surplus aggregated $4,872,393,497 and
$2,523,028,402, respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares.................................... 251,848,949 122,267,677
------------ ------------
Shares Sold......................................... 254,577,948 134,357,255
Shares Issued Through Dividend Reinvestment......... 15,483,081 7,465,118
Shares Repurchased.................................. (35,419,661) (12,241,101)
------------ ------------
Net Increase in Shares Outstanding.................. 234,641,368 129,581,272
------------ ------------
Ending Shares....................................... 486,490,317 251,848,949
============ ============
</TABLE>
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, for the year ended July 31, 1996, were
$4,564,819,045 and $2,168,339,118, respectively.
5. TENDER OF SHARES
The Board of Trustees currently intends, each quarter, to consider authorizing
the Trust to make tender offers for all or a portion of its then outstanding
common shares at the then net asset value of the common shares. For the year
ended July 31, 1996, 35,419,661 shares were tendered and repurchased by the
Trust.
21
<PAGE> 65
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
6. EARLY WITHDRAWAL CHARGE
An early withdrawal charge to recover offering expenses will be imposed in
connection with most common shares held for less than five years which are
accepted by the Trust for repurchase pursuant to tender offers. The early
withdrawal charge will be payable to VKAC. Any early withdrawal charge which is
required to be imposed will be made in accordance with the following schedule.
<TABLE>
<CAPTION>
YEAR OF REPURCHASE WITHDRAWAL CHARGE
- ---------------------------------------------------------------------------
<S> <C>
First.................................................. 3.0%
Second................................................. 2.5%
Third.................................................. 2.0%
Fourth................................................. 1.5%
Fifth.................................................. 1.0%
Sixth and following.................................... 0.0%
</TABLE>
For the year ended July 31, 1996, VKAC received early withdrawal charges
of approximately $5,721,300 in connection with tendered shares of the Trust.
7. COMMITMENTS
Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $472,375,400 as of July
31, 1996. The Trust generally will maintain with its custodian short-term
investments having an aggregate value at least equal to the amount of unfunded
loan commitments.
The Trust has entered into revolving credit agreements with Morgan
Guaranty Trust Company of New York, Bank of America and State Street Bank and
Trust Company for an aggregate of $150,000,000. The proceeds of any borrowing by
the Trust under the revolving credit agreements may only be used, directly or
indirectly, for liquidity purposes in connection with the consummation of a
tender offer by the Trust for its shares. Annual commitment fees under each
facility of 1/10 of 1% are charged on the unused portion of the credit lines.
Borrowings under these facilities will bear interest at either the banks' prime
rate or the Federal Funds rate plus 1/4 to 1/2 of 1%. There have been no
borrowings under these agreements to date.
22
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1996
- --------------------------------------------------------------------------------
8. SENIOR LOAN PARTICIPATION COMMITMENTS
The Trust invests primarily in participations, assignments, or acts as a party
to the primary lending syndicate of a Variable Rate Senior Loan interest to
United States corporations, partnerships, and other entities. When the Trust
purchases a participation of a Senior Loan interest, the Trust typically enters
into a contractual agreement with the lender or other third party selling the
participation, but not with the borrower directly. As such, the Trust assumes
the credit risk of the Borrower, Selling Participant or other persons
interpositioned between the Trust and the Borrower.
At July 31, 1996, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Trust on a participation
basis.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SELLING PARTICIPANT (000) (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
Bankers Trust......................................... $213,651 $214,095
Pearl Street L.P...................................... 51,632 52,040
NationsBank........................................... 33,002 33,072
Canadian Imperial Bank of Commerce.................... 29,883 29,923
Merrill Lynch Capital Corp............................ 22,273 22,431
Mellon Bank........................................... 20,000 20,020
Chase Securities Inc.................................. 18,007 18,000
Natwest USA........................................... 9,697 9,697
G. E. Capital Corp.................................... 7,467 7,499
ABN AMRO.............................................. 5,000 5,041
Citibank.............................................. 4,182 4,182
FNB Canada............................................ 3,281 1,968
-------- --------
Total................................................. $418,075 $417,968
======== ========
</TABLE>
23
<PAGE> 67
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Trustees and Shareholders of
Van Kampen American Capital Prime Rate Income Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Prime Rate Income Trust (the "Trust"), including the
portfolio of investments, as of July 31, 1996, and the related statements of
operations and cash flows for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities and variable rate
senior loan interests owned as of July 31, 1996, by correspondence with the
custodian and selling or agent banks; where replies were not received we
performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital Prime Rate Income Trust as of July 31, 1996, the results
of its operations and cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
September 18, 1996
24
<PAGE> 68
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*--Chairman
THEODORE A. MYERS
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
WILLIAM N. BROWN*
PETER W. HEGEL*
JEFFREY W. MAILLET*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, as defined in the
Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1996
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
25
<PAGE> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
THIS PAGE INTENTIONALLY LEFT BLANK
36
