<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:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Com-
mission Only (as permitted
by
Rule 14a-6(e)(2))
[ ] 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
is also seeking approval of a new fundamental investment policy modifying the
existing fundamental investment policies and restrictions of the Fund to
provide flexibility to use a "master-feeder" investment structure. 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 you've grown accustomed to. 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 their 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 1-800-772-8889) 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
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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
JOINT 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.
VAN KAMPEN AMERICAN CAPITAL
Mark box at right if comments or address change / /
Please be sure to sign and date this Proxy. Date have been noted on the reverse side of this card.
Shareholder sign here Co-owner sign here RECORD DATE SHARES:
</TABLE>
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<PAGE> 4
April 21, 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.
The primary purpose of the shareholder meeting is to permit the shareholders
of the Fund to 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. The attached proxy statement seeks shareholder
approval on this and other items.
Your vote is important and your participation
in the governance of your Fund does make a difference.
The proposals has 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 the 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 of the Fund to provide flexibility to use a
"master-feeder" investment structure.
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 21, 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 1-800-341-2911 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.
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 the 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 21, 1997.
The primary 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").
Other Van Kampen American Capital investment companies (excluding the Fund)
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 companies other than the Fund, you will
receive one or more additional proxy statements relating to such other
shareholder meetings.
<PAGE> 8
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 ARE HEREBY INCORPORATED HEREIN 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 1-800-341-2911 OR BY WRITING TO THE FUND AT ONE PARKVIEW PLAZA, OAKBROOK
TERRACE, ILLINOIS 60181.
VOTING
The Board of Trustees have 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 Proposals 1 and 2 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 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.
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 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.
2
<PAGE> 9
The Fund know 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 a proposal that receives
a favorable vote.
- ------------------------------------------------------------------------------
PROPOSAL 1: APPROVAL OF NEW ADVISORY AGREEMENT
- ------------------------------------------------------------------------------
THE ADVISER
Van Kampen American Capital Investment Advisory Corp. act 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
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
3
<PAGE> 10
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 portfolios. Investment companies serviced by
InterCapital include [ ] proprietary portfolios referred to herein as the
"InterCapital Funds".
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 wholly-owned 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
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.
4
<PAGE> 11
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 by the Adviser 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,
1997, 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.
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.
5
<PAGE> 12
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 March 31, 1997, as well as other investment
companies sponsored by VKAC and advised by the Adviser or its affiliates and the
rates of compensation paid thereto are set forth at Annex A hereto. The Fund
recognized net advisory expenses, for its most recently completed fiscal year,
in the amount of $ .
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,
6
<PAGE> 13
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 Board of
Trustees considered the possible effects of the Merger upon VKAC, the Adviser,
the Distributor and 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
7
<PAGE> 14
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 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 extent permitted by
law, of Morgan Stanley & Co., DWR and their affiliates for brokerage services.
The Board of Trustees considered the effects on the Fund of the Adviser
becoming affiliated persons 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
8
<PAGE> 15
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 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 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 1999 and thereafter for successive
9
<PAGE> 16
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 TO PROVIDE FLEXIBILITY TO USE A "MASTER-FEEDER" INVESTMENT
STRUCTURE
- ------------------------------------------------------------------------------
The Board of Trustees of the Fund has approved, and is submitting to the
shareholders of the Fund for their approval, adoption of a new fundamental
investment policy for the Fund. This new investment policy would modify the
Fund's existing fundamental investment policies and restrictions to give the
Fund the flexibility in the future to pursue its investment objective through a
fund structure commonly known as a "master-feeder" structure (the "Master-Feeder
Structure"). 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 were to use 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 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 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
approve 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). The Board of Trustees does not
intend to approve 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.
11
<PAGE> 18
There can be no assurance that the Fund will determine to use a Master-Feeder
Structure or that use of a Master-Feeder Structure will attract additional
investors or achieve operating efficiencies.
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
The Board of Trustees has not at this time approved actual Conversion to a
Master-Feeder Structure. Accordingly, it is not possible to describe all of the
details of a potential Conversion. The following general discussions sets forth
some of the features that the Adviser currently believes would be applicable in
the event of a Conversion.
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 [offshore investment funds]. Interests are
not expected to be available for purchase by members of the general public.
The Master Fund will have substantially the same investment objective,
policies and restrictions as the Fund immediately prior to Conversion. The
Master Fund, like the Fund, will 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 will 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.
12
<PAGE> 19
The investment adviser and administrator to the Fund immediately prior to
Conversion will 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 will be substantially identical to the
investment advisory agreement of the Fund and its investment adviser in effect
at 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, all or most
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
terminate or substantially revise its administration agreement. There will 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 will 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. The Fund's net asset value will immediately after the Conversion
continue to 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 normally will not hold meetings of holders
of Interests (the "Interest Holders") except as required under the 1940 Act. 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 will continue to hold office until their successors
are elected and have qualified. Interest Holders holding at least a specified
percentage interest in the Master Fund will 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
13
<PAGE> 20
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 will
receive a majority of votes cast by all the Interest Holders in the Master Fund.
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 will 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 will 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 will 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 from the Master-Feeder Structure itself is
remote.
The Master Fund and the Fund, as the case may be, will 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
14
<PAGE> 21
may be, will 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, cost of
Fund Share certificates and Master Fund Interest certificates, expenses
(including clerical expenses) of issuance, sale or repurchase of any investment
holdings, expenses in connection with the Fund's [and the Master Fund's]
dividend reinvestments, 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.
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 or an opinion
from its tax counsel, Skadden, Arps, Slate, Meagher & Flom (Illinois), on or
prior to the date of the Conversion, 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
qualifying as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code"), contributes its 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 Code and related authorities. No judicial
authority is directly on point respecting the Fund's Conversion to a
Master-Feeder Structure, and 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
15
<PAGE> 22
in order to avoid federal income and excise taxes and/or to preserve its
qualification as a regulated investment company under the Code.
The Fund's status as a regulated investment company under the Code will be not
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; and (iii) consistent with the Board of
Trustees expressed intention with respect to any Conversion, except to the
extent that the Fund experiences economies of scale in connection with the
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
FISCAL INVESTED BY THE FUND IN
YEAR THE MASTER FUND WERE $[ ]
ENDED ------------------------------
JULY 31, MASTER
1996 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................................ 1.20% 0.00% 1.20% 1.20%
Interest Payments on Borrowed Funds... 0.00% 0.00% 0.00% 0.00%
Other Expenses........................ 0.26% % % 0.26%
-------- -------- ---- --------
Total Fund Operating Expenses............. 1.46% % % 1.46%
======== ======== ==== ========
</TABLE>
16
<PAGE> 23
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 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
FISCAL INVESTED BY THE FUND IN
YEAR THE MASTER FUND WERE $[ ]
ENDED ------------------------------
JULY 31, MASTER
1996 FUND FUND TOTAL
-------- ---- ------ -----
<S> <C> <C> <C> <C>
Assuming no tender of Shares:
One Year................................
Three Years.............................
Five Years..............................
Ten Years...............................
Assuming tender and repurchase of Shares
on the last day of period and imposition
of maximum applicable early withdrawal
charge:
One Year..............................
Three Years...........................
Five Years............................
Ten Years.............................
</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 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 the flexibility 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
17
<PAGE> 24
together with the Fund. The Board of Trustees consider the possibility that such
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 and 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 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 approve 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. 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. 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 that 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 the 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 of Trustees have 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 in the future.
18
<PAGE> 25
In the event that shareholders of the Fund do not approve the Fund's new
fundamental investment policy modifying the Fund's existing fundamental
investment policies and restrictions, the Fund would continue to operate as
separate entity and to manage the Fund's assets in accordance with the Fund's
existing fundamental investment policies and restrictions.
SHAREHOLDER APPROVAL
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 Fund's new fundamental investment policy was
unanimously approved by the Board of Trustees after consideration of all factors
which they deemed to be relevant to their deliberations, including those
discussed above. The Board of Trustees also unanimously determined to submit the
Fund's new fundamental investment policy 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 RESTRICTIONS TO PROVIDE THE FUND FLEXIBILITY TO USE A
MASTER-FEEDER INVESTMENT STRUCTURE.
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. 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., Van Kampen American Capital Exchange
Corporation and American Capital Contractual
Services, Inc. Prior to November, 1996, President
Chief Executive Officer and a Director of VKAC
Holding. 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 (the "Fund Complex") and certain open-end
investment companies advised by the Adviser, Asset
Management and Management Inc.
Dennis J. McDonnell... President, Chief Operating Officer and a Director of
One Parkview Plaza the Adviser, Asset Management, Management Inc. and
Oakbrook Terrace, IL Van Kampen American Capital Advisors Inc. Executive
60181 Vice President and a Director of VKAC. 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. President,
Chairman of the Board and Trustee of funds in the
Fund Complex. Executive Vice President and, prior to
[ ], 1997, Trustee of certain open-end
investment companies advised by the Adviser and Asset
Management.
</TABLE>
20
<PAGE> 27
<TABLE>
<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 Record Keeping
Services, Inc. and Van Kampen American Capital
Insurance Agency of Illinois, Inc. Executive Vice
President, General Counsel and Assistant Secretary of
Van Kampen American Capital Advisors, Inc., American
Capital Contractual Services, 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 investment companies advised by the
Adviser, Asset Management and Management Inc.
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 Executive Vice
60181 President and Chief Financial 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., Van
Kampen American Capital Recordkeeping Services, Inc.
and Van Kampen Capital Insurance Agency of Illinois,
Inc. Executive Vice President and Chief Financial
Officer of the Van Kampen American Capital Advisors,
Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital Trust
Company, ACCESS and American Capital Contractual
Services, Inc. [Director of Alliance Bancorp, a
savings and loan holding company, and prior to
[ ] 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 Van Kampen American Capital Advisors, Inc.
Oakbrook Terrace, IL Executive Vice President and Director of Asset
60181 Management. Vice President of the 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 Van Kampen American Capital Advisors, Inc.
Houston, TX 77056 Executive Vice President and a Director of Asset
Management. Vice President of open-end investment
companies advised by the Adviser, Asset Management
and Management Inc.
</TABLE>
21
<PAGE> 28
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
---------------- --------------------
<S> <C>
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>
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
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
22
<PAGE> 29
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 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.
Following the Merger, the Adviser will be affiliated with Morgan Stanley & Co.
and DWR, both are registered broker-dealers. [The Fund paid no brokerage
commissions to Morgan Stanley & Co. or DWR during its most recently completed
fiscal years.]
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 Boards
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 $ 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
23
<PAGE> 30
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 $ 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. Under the Fund Accounting Agreement, the Fund paid the
Adviser the amount of $ for its most recently completed fiscal year.
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 $ for its most recently
completed fiscal year.
SHAREHOLDER INFORMATION
As of [ ], 1997, the trustees and officers of the Fund as a group
owned less than 1% of the outstanding Shares of the Fund. As of [ ],
1997, certain trustees owned, directly or beneficially, the number of Shares of
each Fund as set forth in Annex C. 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 [ ], 1997 is
. The persons who, to the knowledge of the Fund, owned beneficially
more than 5% of a class of the Fund's outstanding Shares as of [ ],
1997 are set forth at Annex C hereto.
24
<PAGE> 31
- ------------------------------------------------------------------------------
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 $[ ].
- ------------------------------------------------------------------------------
SHAREHOLDER PROPOSALS
- ------------------------------------------------------------------------------
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. 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.
- ------------------------------------------------------------------------------
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 as described on page 2.
25
<PAGE> 32
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 21, 1997
26
<PAGE> 33
ANNEX A
The table below sets forth, for each investment company advised by the
Adviser, 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
MARCH 31, MARCH 31, MARCH 31,
FUNDS 1997 1997 1997
----- ------------- ---------------- ----------
<S> <C> <C> <C> <C>
I. ADVISORY AGREEMENTS BETWEEN THE ADVISER AND
THE CLOSED-END FUNDS
A. Investment Grade Municipal Trust............................ 250 $ 74,737,632
Trust for Insured Municipals................................ 1,800 $246,247,231
Municipal Income Trust...................................... 330 $441,595,824
California Municipal Trust.................................. 400 $ 52,733,080
B. Trust for Investment Grade Municipals....................... 5,300 $
Trust for Investment Grade California Municipals............ 900 $
Trust for Investment Grade New York Municipals.............. 1,200 $
Trust for Investment Grade Pennsylvania Municipals.......... 1,400 $
Trust for Investment Grade Florida Municipals............... 800 $
Trust for Investment Grade New Jersey Municipals............ 800 $
Municipal Opportunity Trust................................. 3,000 $
Advantage Municipal Income Trust............................ 3,800 $
Advantage Pennsylvania Municipal Income Trust............... 800 $
New Jersey Value Municipal Income Trust..................... 500 $
Ohio Value Municipal Income Trust........................... 300 $
Massachusetts Value Municipal Income Trust.................. 500 $
New York Value Municipal Income Trust....................... 800 $
Strategic Sector Municipal Trust............................ 1,900 $
<CAPTION>
ANNUAL
ADVISORY FEE
SCHEDULE
------------
<S> <C>
I.
T
A. .600%
B. .650%
</TABLE>
A-1
<PAGE> 34
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
COMMON SHARES PREFERRED SHARES
OUTSTANDING OUTSTANDING NET ASSETS
AS OF AS OF AS OF
MARCH 31, MARCH 31, MARCH 31,
FUNDS 1997 1997 1997
----- ------------- ---------------- ----------
<S> <C> <C> <C> <C>
California Value Municipal Income Trust..................... 1,200 $
Pennsylvania Value Municipal Income Trust................... 900 $
Value Municipal Income Trust................................ 4,500 $
Florida Municipal Opportunity Trust......................... 320 $
Municipal Opportunity Trust II.............................. 2,300 $
Advantage Municipal Income Trust II......................... 1,600 $
C. Municipal Trust............................................. 6,000 $
California Quality Municipal Trust.......................... 1,500 $
New York Quality Municipal Trust............................ 900 $
Pennsylvania Quality Municipal Trust........................ 1,300 $
Florida Quality Municipal Trust............................. 1,000 $
Ohio Quality Municipal Trust................................ 700 $
Select Sector Municipal Trust............................... 1,360 $
D. VIT or Intermediate Term High Income Trust.................. 588 $
VLT or Limited Term High Income Trust....................... 900 $
E. Prime Rate Income Trust..................................... N/A $
II. ADVISORY AGREEMENTS BETWEEN ADVISORY CORP. AND OTHER INVESTMENT COMPANIES
<CAPTION>
NUMBER OF
SHARES
OUTSTANDING NET ASSETS
AS OF AS OF
MARCH 31, MARCH 31,
FUNDS 1997 1997
------------------------------------------------------------ -------------- --------------
<S> <C> <C> <C> <C>
A. Van Kampen American Capital California Insured Tax Free Fund[*]............. $
<CAPTION>
<S> <C>
C. .700%
D. .750%
E. First $4.0 Billion .950%
Next $3.5 Billion .900%
Next $2.5 Billion .875%
Over $10.0 Billion .850%
II.
ANNUAL
ADVISORY FEE
SCHEDULE
-----------------------
A. First $100 Million .500%
Next $150 Million .450%
Next $250 Million .425%
Over $500 Million .400%
</TABLE>
A-2
<PAGE> 35
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OUTSTANDING NET ASSETS
AS OF AS OF ANNUAL
MARCH 31, MARCH 31, ADVISORY FEE
FUNDS 1997 1997 SCHEDULE
----- ----------- ---------- ------------
<S> <C> <C> <C> <C>
B. Van Kampen American Capital Insured Tax Free Income Fund.... $ 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....... $ First $500 Million .500%
Van Kampen American Capital Municipal Income Fund*.......... $ Over $500 Million .450%
Van Kampen American Capital Intermediate Term Municipal
Income Fund*...............................................
Van Kampen American Capital Florida Insured Tax Free Income
Fund*......................................................
D. Van Kampen American Capital New Jersey Tax Free Income
Fund*...................................................... $ First $500 Million .600%
Van Kampen American Capital New York Tax Free Income
Fund*...................................................... $ Over $500 Million .500%
Van Kampen American Capital Pennsylvania Tax Free Income
Fund.......................................................
E. Van Kampen American Capital High Yield Fund*................ $ First $500 Million .750%
Over $500 Million .650%
F. Van Kampen American Capital Short-Term Global Income Fund... $ .550%
G. Van Kampen American Capital Strategic Income Fund........... $ First $500 Million .750%
Van Kampen American Capital Growth Fund..................... 6,483,066 $ Next $500 Million .700%
Van Kampen American Capital Value Fund...................... 104,821 $ Over $1 Billion .650%
Van Kampen American Capital Aggressive Growth Fund.......... 18,325,585 $
H. Van Kampen American Capital Utility Fund.................... $ First $500 Million .650%
Next $500 Million .600%
Over $1 Billion .550%
</TABLE>
A-3
<PAGE> 36
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OUTSTANDING NET ASSETS
AS OF AS OF ANNUAL
MARCH 31, MARCH 31, ADVISORY FEE
FUNDS 1997 1997 SCHEDULE
----- ----------- ---------- ------------
<S> <C> <C> <C> <C>
I. Van Kampen American Capital Balanced Fund*.................. $ First $500 Million .700%
Over $500 Million .650%
J. U.S. Government Fund........................................ $ 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%
K. Tax Free Money Fund*........................................ $ First $500 Million .500%
Next $500 Million .475%
Next $500 Million .425%
Over $1.5 Billion .375%
L. Great American Companies Fund............................... 101,964 $ First $500 Million .700%
Prospector Fund............................................. 104,019 $ Next $500 Million .650%
M. Foreign Securities Fund..................................... 96,305 $ N/A
III. ADVISORY AGREEMENTS BETWEEN VAN KAMPEN AMERICAN CAPITAL MANAGEMENT, INC. AND THE EXPLORER FUNDS
<CAPTION>
NUMBER OF
SHARES
OUTSTANDING NET ASSETS
AS OF AS OF ANNUAL
MARCH 31, MARCH 31, ADVISORY FEE
FUNDS 1997 1997 SCHEDULE
------------------------------------------------------------ -------------- -------------- -----------------------
<S> <C> <C> <C> <C>
A. Active Core Fund............................................ 568,118 $ First $1 Billion .300%
Limited Duration Fund....................................... 819,333 $ Over $1 Billion .250%
</TABLE>
A-4
<PAGE> 37
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> 38
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 consulting with 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> 39
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 [ ], 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> 40
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> 41
ANNEX C
5% HOLDERS FOR PROXY
RECORD DATE OF [ ]
<TABLE>
<CAPTION>
FUND NAME AND NAME AND ADDRESS OF AMOUNT OF PERCENT OF
CLASS OF SHARES BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
--------------- ------------------- -------------------- ----------
<S> <C> <C> <C>
<CAPTION>
FUND NAME AND NAME AND ADDRESS OF AMOUNT OF PERCENT OF
CLASS OF SHARES BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
--------------- ------------------- -------------------- ----------
<S> <C> <C> <C>
</TABLE>
C-1
<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 of the Fund to provide flexibility to use a
"master-feeder" investment structure.
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
