VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST, N-2/A, 1998-02-26

VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
N-2/A, 1998-02-26

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1998

FILE NOS. 333-45531

811-5845
================================================================================

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-2

<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. 1 [X]

Post-Effective Amendment No. [ ]
and

REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]

Amendment No. 23 [X]
</TABLE>

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
(Exact Name of Registrant as Specified in Declaration of Trust)

One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Offices) (Zip Code)

(630) 684-6000
(Registrant's Telephone Number, including Area Code)

Dennis J. McDonnell
President, Van Kampen American Capital Prime Rate Income Trust
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(Name and Address of Agent for Service)

Copies to:

<TABLE>
<S> <C> <C>
Wayne W. Whalen, Esq. Thomas A. DeCapo, Esq. Ronald A. Nyberg, Esq.
Thomas A. Hale, Esq. Skadden, Arps, Slate, Executive Vice President,
Skadden, Arps, Slate, Meagher & Flom LLP General Counsel and Director
Meagher & Flom (Illinois) One Beacon Street Van Kampen American Capital
333 W. Wacker Drive Boston, MA 02108 Investment Advisory Corp.
Chicago, Illinois 60606 (617) 573-4800 One Parkview Plaza
(312) 407-0700 Oakbrook Terrace, Illinois
60181
</TABLE>

The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

Approximate date of proposed public offering: As soon as practicable after
the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
------------------

CALCULATION OF REGISTRATION FEE UNDER THE
SECURITIES ACT OF 1933
<TABLE>
<S> <C> <C> <C> <C>
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<CAPTION>
PROPOSED* PROPOSED*
AMOUNT OF MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE*
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Common Shares of Beneficial
Interest............................ 230,000,000 $9.97 $2,293,100 $676,464.50
================================================================================================================
</TABLE>

* Estimated solely for the purpose of calculating the registration fee;
previously paid.

================================================================================
<PAGE> 2

VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST

CROSS REFERENCE SHEET
PURSUANT TO RULE 404(C)

<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
--------------------- ---------------------
<S> <C> <C>
Part A
1. Outside Front Cover.................................... Cover Page
2. Inside Front and Outside Back Cover Page............... Cover Page; Outside Back Cover
3. Fee Table and Synopsis................................. Fund Expenses; Prospectus Summary
4. Financial Highlights................................... Financial Highlights
5. Plan of Distribution................................... Use of Proceeds; Purchasing Shares of
the Fund; Management of the Fund
6. Selling Shareholders................................... Not Applicable
7. Use of Proceeds........................................ Use of Proceeds; Investment Objective
and Policies and Special Risk Factors
8. General Description of the Registrant.................. The Fund; Investment Objective and
Policies and Special Risk Factors;
Investment Practices and Special Risks;
Description of Common Shares
9. Management............................................. Management of the Fund; Custodian,
Dividend Disbursing and Transfer Agent
10. Capital Stock, Long-Term Debt and Other Securities..... The Fund; Taxation; Distributions;
Dividend Reinvestment Plan; Repurchase
of Shares; Description of Common
Shares; Communications with
Shareholders
11. Defaults and Arrears on Senior Securities.............. Not Applicable
12. Legal Proceedings...................................... Not Applicable
13. Table of Contents of the Statement of Additional Table of Contents of the Statement of
Information............................................ Additional Information
</TABLE>
<PAGE> 3

<TABLE>
<CAPTION>
CAPTION IN SAI
--------------
<S> <C> <C>
Part B
14. Cover Page............................................. Cover Page
15. Table of Contents...................................... Cover Page
16. General Information and History........................ Not Applicable
17. Investment Objective and Policies...................... Investment Objective and Policies and
Special Risk Consideration; Investment
Restrictions; Portfolio Transactions
18. Management............................................. Trustees and Officers
19. Control Persons and Principal Holders of Securities.... Trustees and Officers
20. Investment Advisory and Other Services................. Trustees and Officers; Management of
the Fund
21. Brokerage Allocation and Other Practices............... Portfolio Transactions
22. Tax Status............................................. Taxation
23. Financial Statements................................... Independent Accountants' Report;
Financial Statements for the Year Ended
July 31, 1997; Notes to Financial
Statements
</TABLE>

Part C

Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE> 4

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VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
- -------------------------------------------------------------------------------

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

The Board of Trustees of the Fund currently intends, each quarter, to
consider authorizing the Fund to make tender offers for all or a portion of its
outstanding common shares of beneficial interest ("Common Shares") at the then
current net asset value of the
(Continued on next page.)
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATOR NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------

COMMON SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, NOR GUARANTEED
OR ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. COMMON SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Common Shares of the Fund. Please
read and retain this Prospectus for future reference. A Statement of Additional
Information dated February , 1998 has been filed with the Securities and
Exchange Commission ("SEC") and can be obtained without charge by calling
1-800-341-2911 or, for Telecommunications Device for the Deaf, 1-800-421-2833. A
table of contents to the Statement of Additional Information is located at page
51 of this Prospectus. This Prospectus incorporates by reference the entire
Statement of Additional Information. The Statement of Additional has been filed
with the SEC and is available along with other related materials at the SEC's
internet web site (http://www.sec.gov).

------------------
VAN KAMPEN AMERICAN CAPITAL
------------------

THIS PROSPECTUS IS DATED FEBRUARY , 1998.
<PAGE> 5

(Continued from previous page.)

Common Shares. An early withdrawal charge payable to Van Kampen American Capital
Distributors, Inc. ("VKAC") will be imposed on most Common Shares held for less
than five years that are accepted for repurchase pursuant to a tender offer by
the Fund. The Fund does not intend to list the Common Shares on any national
securities exchange and none of the Fund, the Adviser or VKAC intends to make a
secondary market in the Common Shares at any time. Accordingly, Common Shares of
the Fund have no history of public trading, and there is not expected to be any
secondary trading market in the Common Shares. An investment in the Common
Shares should be considered illiquid. SEE "REPURCHASE OF SHARES."

The Fund completed an initial public offering of its Common Shares in October,
1989. Since November 13, 1989 the Fund has engaged in a continuous offering of
its Common Shares through VKAC, as principal underwriter, and through selected
broker-dealers and financial services firms, at a price per Common Share equal
to net asset value. There is no initial sales charge or underwriting discount on
purchases of Common Shares. VKAC will compensate from its own assets the
broker-dealers and financial services firms participating in the continuous
offering. The minimum initial investment is $1,000. The minimum initial
investment for tax sheltered retirement plans is $250. See "Purchasing Shares of
the Fund." The Fund has registered 230,000,000 Common Shares for sale under the
Registration Statement to which this Prospectus relates. The Fund expects to
incur approximately $799,000 in expenses in connection with the offering of such
Common Shares, which expenses will be charged as operating expenses of the Fund.

Senior Loans in which the Fund may invest generally will pay interest at rates
which are periodically redetermined on the basis of a base lending rate plus a
premium. These base lending rates are generally the Prime Rate offered by a
major United States bank, the London Inter-Bank Offered Rate, the Certificate of
Deposit rate or other base lending rates used by commercial lenders. Senior
Loans generally will hold the most senior position in the capital structure of
the Borrowers and generally will be secured with specific collateral, which may
include guarantees, although the Fund may also invest in Senior Loans that are
not secured by any collateral. The terms of Senior Loans typically will include
various restrictive covenants which are designed to limit certain activities of
the Borrowers. It is anticipated that the proceeds of the Senior Loans in which
the Fund will acquire interests will be used primarily to finance leveraged
buyouts, recapitalizations, mergers, acquisitions, stock repurchases and, to a
lesser extent, to finance internal growth and for other corporate purposes of
Borrowers. SEE "INVESTMENT OBJECTIVE AND POLICIES AND SPECIAL RISK
CONSIDERATIONS."

2
<PAGE> 6

- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses............................................... 4
Prospectus Summary.......................................... 5
Financial Highlights........................................ 14
The Fund.................................................... 16
Use of Proceeds............................................. 17
Investment Objective and Policies and Special Risk
Factors................................................... 17
Certain Characteristics of Senior Loan Interests.......... 17
Special Risk Considerations............................... 25
Investment Practices and Special Risks...................... 28
Taxation.................................................... 33
Management of the Fund...................................... 35
Distributions............................................... 37
Dividend Reinvestment Plan.................................. 37
Repurchase of Shares........................................ 39
Description of Common Shares................................ 43
Purchasing Shares of the Fund............................... 46
Communications With Shareholders............................ 48
Custodian, Dividend Disbursing and Transfer Agent........... 50
Legal Opinions.............................................. 50
Experts..................................................... 50
Additional Information...................................... 50
Table of Contents for the Statement of Additional
Information............................................... 51
</TABLE>

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE FUND'S ADVISER OR VKAC. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.

3
<PAGE> 7

- ------------------------------------------------------------------------------
FUND EXPENSES
- ------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)........... None
Dividend Reinvestment Plan Fees.......................... None
Early Withdrawal Charge.................................. 0.00-3.00%(1)
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES)
Investment Advisory and Administration Fees(2)........... 1.19%
Interest Payments on Borrowed Funds...................... 0.00%
Other Expenses........................................... 0.23%
----------
Total Annual Operating Expenses...................... 1.42%
</TABLE>

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

(1) An early withdrawal charge of 3.00% will be imposed on most Common Shares
accepted by the Fund for repurchase within the first year after purchase and
declining thereafter to 0.00% after the fifth year. See "Repurchase of
Shares" for additional information.

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

EXAMPLE

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

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Assuming no tender of Common
Shares......................... $14 $45 $78 $170
Assuming tender and repurchase of
Common Shares on last day of
period and imposition of maximum
applicable early withdrawal
charge........................... $44 $65 $88 $170
</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 Common Shares. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR
LESS THAN THOSE SHOWN.

4
<PAGE> 8

- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------

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

THE FUND. Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a
non-diversified, closed-end management investment company, organized as a
Massachusetts business trust on July 14, 1989. The Fund completed an initial
public offering of its common shares of beneficial interest ("Common Shares") in
October, 1989. Since November 13, 1989 the Fund has engaged in a continuous
offering of its Common Shares through Van Kampen American Capital Distributors,
Inc. ("VKAC") (an indirect affiliate of the Fund), as principal underwriter. As
of February 23, 1998, the Fund had 679,900,280 Common Shares outstanding and had
net assets of $6,785,404,794. See "The Fund."

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

INVESTMENT OBJECTIVE AND POLICIES. The Fund's investment objective is to
provide a high level of current income, consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in a
professionally managed portfolio of interests in floating or variable rate
senior loans ("Senior Loans") to corporations, partnerships and other entities
("Borrowers") which operate in a variety of industries and geographical regions
(including domestic and foreign entities). Although the Fund's net asset value
will vary, the Fund's policy of acquiring interests in floating or variable rate
Senior Loans is expected to minimize fluctuations in the Fund's net asset value
as a result of changes in interest rates. Senior Loans in which the Fund will
purchase interests generally pay interest at rates which are periodically
redetermined by reference to a base lending rate plus a premium. These base
lending rates are generally the prime rate offered by one or more major United
States banks ("Prime Rate"), the London Inter-Bank Offered

5
<PAGE> 9

Rate ("LIBOR"), the Certificate of Deposit ("CD") rate or other base lending
rates used by commercial lenders. The Fund's net asset value may be affected by
changes in the credit quality of Borrowers with respect to Senior Loan interests
in which the Fund invests. An investment in the Fund may not be appropriate for
all investors and is not intended to be a complete investment program. No
assurance can be given that the Fund will achieve its investment objective.

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

6
<PAGE> 10

payments of interest and repayments of principal pursuant to such Senior Loans
are required to be made in U.S. dollars). It is anticipated that the proceeds of
the Senior Loans in which the Fund will acquire interests primarily will be used
to finance leveraged buyouts, recapitalizations, mergers, acquisitions, stock
repurchases and, to a lesser extent, to finance internal growth and for other
corporate purposes of Borrowers. Senior Loans have the most senior position in a
Borrower's capital structure, although some Senior Loans may hold an equal
ranking with other senior securities of the Borrower. Senior Loans generally are
secured by specific collateral, which may include guarantees. The Fund may
invest up to 20% of its total assets in interests in Senior Loans which are not
secured by any collateral. The Fund may also acquire warrants, equity securities
and junior debt securities in connection with its investments in Senior Loans.
Such equity securities and junior debt securities will not be treated by the
Fund as Senior Loans. Investment in Senior Loans which are not secured by
specific collateral and in warrants, equity securities and junior debt
securities entails certain risks in addition to those associated with investment
in collateralized Senior Loans.

Loan Agreements may provide for various restrictive covenants designed to
limit the activities of the Borrower in an effort to protect the interests of
the Lenders. Breach of such covenants, if not waived by the Lenders, is
generally an event of default under the Loan Agreement and may give the Lenders
the right to accelerate principal and interest payments. The Adviser will
consider the terms of such restrictive covenants in deciding whether to invest
in Senior Loans for the Fund's portfolio. When the Fund holds a Participation in
a Senior Loan it may not have the right to vote to waive enforcement of any
restrictive covenant breached by a Borrower. Lenders voting in connection with a
potential waiver of a restrictive covenant may have interests different from
those of the Fund and such Lenders may not consider the interests of the Fund in
connection with their votes.

A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating a sufficient amount of cash and liquid securities as a reserve
against such commitments. The Fund will not purchase interests in Senior Loans
that would require the Fund to make any such additional loans if such additional
loan commitments would exceed 20% of the Fund's total assets.

The Fund is not subject to any restrictions with respect to the maturity of
Senior Loans held in its portfolio. It is currently anticipated that the Fund's
assets invested in Senior Loans will consist of Senior Loans with stated
maturities of between three and ten years, inclusive, and with rates of interest
which are redetermined either daily, monthly, quarterly or semi-annually;
provided, however, that the Fund may invest up to 5% of its total assets in
Senior Loans which permit the Borrower to select an interest rate
redetermination period of up to one year. Investment in Senior Loans with longer
interest rate redetermination periods may increase fluctuations in the Fund's
net asset value as a result of changes in interest rates.

7
<PAGE> 11

The Senior Loans in the Fund's portfolio will at all times have a
dollar-weighted average time until next interest rate redetermination of 90 days
or less. Because of prepayment provisions, the actual remaining maturity of
Senior Loans may vary substantially from the stated maturity of such loans. The
Fund estimates actual average maturity of Senior Loans in the portfolio will be
approximately 18-24 months.

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

During normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and, in limited circumstances, junior debt securities acquired in
connection with the Fund's investments in Senior Loans. If the Adviser
determines that market conditions temporarily warrant a defensive investment
policy, the Fund may, subject to its ability to liquidate its relatively
illiquid portfolio of Senior Loans, invest up to 100% of its assets in cash and
such high quality, short-term securities. The Fund may also lend its portfolio
securities to other parties and may enter into repurchase and reverse repurchase
agreements for securities, subject to certain restrictions. For further
discussion of the Fund's investment objective and policies and its investment
practices and the associated considerations, see "Investment Objective and
Policies and Special Risk Considerations" and "Investment Practices and Special
Risks."

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser"), a wholly-owned subsidiary of Van Kampen American Capital, Inc., is
the Fund's investment adviser. The Adviser also serves as investment adviser

8
<PAGE> 12

to the Van Kampen American Capital Senior Floating Rate Fund, a closed-end
investment company with investment objectives and policies substantially similar
to those of the Fund. See "Management of the Fund."

ADMINISTRATOR. VKAC is the Fund's administrator (the "Administrator"). See
"Management of the Fund."

FEES AND EXPENSES. The Fund will pay the Adviser a monthly fee at an annual
rate of 0.95% of the average net assets of the Fund (as defined), such annual
rate is reduced when average net assets exceed $4 billion. The Fund will pay the
Administrator a monthly fee at an annual rate of 0.25% of the average net assets
of the Fund (as defined). See "Management of the Fund."

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

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

SPECIAL RISK CONSIDERATIONS. Illiquidity. The Fund is a closed-end
investment company designed primarily for long-term investors and not as a
trading vehicle. The Fund does not intend to list the Common Shares for trading
on any national securities exchange. There is not expected to be any secondary
trading market in the Common Shares and an investment in the Common Shares
should be considered illiquid. In the event that the Fund's Board of Trustees
does not, at any time or from time to time, authorize the Fund to engage in
tender offers for its Common Shares, it is unlikely that a holder of Common
Shares will be able to otherwise sell Common Shares to the Fund. The shares of
closed-end investment
9
<PAGE> 13

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

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

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

10
<PAGE> 14

primarily in more widely rated, registered or exchange-listed securities. See
"Investment Objective and Policies and Special Risk Considerations."

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

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

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

11
<PAGE> 15

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

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

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

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

Investments in Non-U.S. Issuers. The Fund may invest in Senior Loans to
Borrowers that are organized or located in countries other than the United
States, provided that such Senior Loans are denominated in U.S. dollars and
provide for the payment of interest and repayment of principal in U.S. dollars.
Investment in non-U.S. issuers involves special risks, including that non-U.S.
issuers may be subject to less rigorous accounting and reporting requirements
than are U.S. issuers,
12
<PAGE> 16

less rigorous regulatory requirements, differing legal systems and laws relating
to creditors' rights, the potential inability to enforce legal judgments and the
potential for political, social and economic adversities.

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

13
<PAGE> 17

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

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

<TABLE>
<CAPTION>
OCTOBER 4, 1989
(COMMENCEMENT
YEAR ENDED JULY 31 OF INVESTMENT
------------------------------------------------------------------ OPERATIONS) TO
1997 1996 1995 1994 1993 1992 1991 JULY 31, 1990
---- ---- ---- ---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $10.002 $10.046 $10.052 $10.004 $ 9.998 $9.985 $10.008 $10.000
------- ------- ------- ------- ------- ------ ------- -------
Net Investment Income.................... .701 .735 .756 .618 .600 .698 .907 .815
Net Realized and Unrealized Gain/Loss.... (.042) (.028) (.004) .015 .008 .004 (.008) .005
------- ------- ------- ------- ------- ------ ------- -------
Total from Investment
Operations............................... .659 .707 .752 .633 .608 .702 .899 .820
------- ------- ------- ------- ------- ------ ------- -------
Less:
Distributions from Net Investment
Income................................. .698 .751 .758 .585 .600 .689 .910 .812
Distributions in Excess of Net Investment
Income................................. -0- -0- -0- -0- .002 -0- .012 -0-
------- ------- ------- ------- ------- ------ ------- -------
Total Distributions........................ .698 .751 .758 .585 .602 .689 .922 .812
------- ------- ------- ------- ------- ------ ------- -------
Net Asset Value, End of Period............. $ 9.963 $10.002 $10.046 $10.052 $10.004 $9.998 $ 9.985 $10.008
======= ======= ======= ======= ======= ====== ======= =======
</TABLE>

(Continued on following page)

See Financial Statements and Notes to Financial Statements.

14
<PAGE> 18

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

<TABLE>
<CAPTION>
OCTOBER 4, 1989
(COMMENCEMENT
YEAR ENDED JULY 31 OF INVESTMENT
-------------------------------------------------------------------- OPERATIONS) TO
1997 1996 1995 1994 1993 1992 1991 JULY 31, 1990
---- ---- ---- ---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Return(1)(2)....................... 6.79% 7.22% 7.82% 6.52% 6.17% 7.25% 9.41% 8.51%
Net Assets at End of Period (in
millions).............................. $6,237.0 $4,865.8 $2,530.1 $1,229.0 $966.7 $928.3 $997.5 $659.1
Ratio of Expenses to Average Net
Assets(1).............................. 1.42% 1.46% 1.49% 1.53% 1.53% 1.55% 1.56% 1.59%*
Ratio of Net Investment Income to Average
Net Assets(1).......................... 7.02% 7.33% 7.71% 6.16% 5.96% 6.98% 8.91% 9.91%*
Portfolio Turnover(3).................... 83% 66% 71% 74% 67% 59% 41% 53%
- ----------------
(1) If certain expenses had not been assumed by the investment adviser, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets (Annualized).................. N/A N/A N/A N/A N/A N/A 1.58% N/A
Ratio of Net Investment Income to
Average Net Assets (Annualized)...... N/A N/A N/A N/A N/A N/A 8.89% N/A
(2) Total Return is based upon net asset value which does not include payment of the early withdrawal charge.
(3) Calculation includes the proceeds from principal repayments and sales of variable rate senior loan
interests.
</TABLE>

* Annualized

See Financial Statements and Notes to Financial Statements.

15
<PAGE> 19

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

Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a
non-diversified, closed-end management investment company which was organized as
a Massachusetts business trust on July 14, 1989 and which commenced investment
operations on October 4, 1989. The Fund completed an initial public offering of
its common shares of beneficial interest ("Common Shares") in October, 1989.
Since November 13, 1989, the Fund has also engaged in a continuous offering of
the Common Shares through Van Kampen American Capital Distributors, Inc.
("VKAC") (an indirect affiliate of the Fund), as principal underwriter. As of
February 20, 1998, the Fund had 679,900,280 Common Shares outstanding and had
net assets of $6,785,404,794. The net asset value per Common Share of the Fund
on February 20, 1998 was $9.98. The Fund's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181 and its telephone number is
1-800-421-5666.

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

16
<PAGE> 20

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

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

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

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

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate senior loans ("Senior Loans") to corporations,
partnerships and other entities ("Borrowers") which operate in a variety of
industries and geographical regions (including domestic and foreign entities).
Although the Fund's net asset value will vary, the Fund's policy of acquiring
interests in floating or variable rate Senior Loans is expected to minimize the
fluctuations in the Fund's net asset value as a result of changes in interest
rates. The Fund's net asset value may be affected by changes in the credit
quality of Borrowers with respect to Senior Loan interests in which the Fund
invests.

CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS

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

17
<PAGE> 21

It is anticipated that the proceeds of the Senior Loans in which the Fund will
acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. The Fund currently does not intend to acquire interests in Senior
Loans the proceeds of which would be used primarily to finance construction or
real estate development projects. Senior Loans have the most senior position in
a Borrower's capital structure, although some Senior Loans may hold an equal
ranking with other senior securities of the Borrower. The capital structure of
Borrowers may include Senior Loans, senior and junior subordinated debt (which
may include "junk bonds"), preferred stock and common stock issued by the
Borrower, typically in descending order of seniority with respect to claims on
the Borrower's assets. Senior Loans generally are secured by specific
collateral, which may include guarantees. The Fund may also invest up to 20% of
its total assets in Senior Loans which are not secured by any collateral. To the
extent that the Fund invests a portion of its assets in Senior Loans that are
not secured by specific collateral, the Fund will not enjoy the benefits
associated with collateralization with respect to such Senior Loans and such
Senior Loans may pose a greater risk of nonpayment of interest or loss of
principal than do collateralized Senior Loans. As discussed below, the Fund may
also acquire warrants, equity securities and junior debt securities issued by
the Borrower or its affiliates as part of a package of investments in the
Borrower or its affiliates. Warrants, equity securities and junior debt
securities will not be treated as Senior Loans and thus assets invested in such
securities will not count toward the 80% of the Fund's total assets that
normally will be invested in Senior Loans. The Fund will acquire such interests
in warrants, equity securities and junior debt securities only as an incident to
the intended purchase of interests in Senior Loans. In order to borrow money
pursuant to collateralized Senior Loans, a Borrower will frequently, for the
term of the Senior Loan, pledge as collateral assets, including but not limited
to, trademarks, accounts receivable, inventory, buildings, real estate,
franchises and common and preferred stock in its subsidiaries. In addition, in
the case of some Senior Loans, there may be additional collateral pledged in the
form of guarantees by and/or securities of affiliates of the Borrowers. In
certain instances, a collateralized Senior Loan may be secured only by stock in
the Borrower or its subsidiaries. Collateral may consist of assets that may not
be readily liquidated, and there is no assurance that the liquidation of such
assets would satisfy fully a Borrower's obligations under a Senior Loan.

Loan Agreements may also include various restrictive covenants designed to
limit the activities of the Borrower in an effort to protect the right of the
Lenders to receive timely payments of interest on and repayment of principal of
the Senior Loans. Restrictive covenants may include mandatory prepayment
provisions arising from excess cash flows and typically include restrictions on
dividend payments, specific mandatory minimum financial ratios, limits on total
debt and other financial tests. Breach of such covenants, if not waived by the
Lenders, is generally an event of default under the applicable Loan Agreement
and may give the Lenders the right

18
<PAGE> 22

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

Senior Loans in which the Fund will invest generally pay interest at rates
which are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates generally are the prime rate offered by one or
more major United States banks (the "Prime Rate"), the London Inter-Bank Offered
Rate ("LIBOR"), the certificate of deposit ("CD") rate or other base lending
rates used by commercial lenders. The Prime Rate quoted by a major U.S. bank is
the interest rate at which such bank is willing to lend U.S. dollars to its most
creditworthy borrowers. LIBOR, as provided for in Loan Agreements, is an average
of the interest rates quoted by several designated banks as the rates at which
such banks would offer to pay interest to major financial institutional
depositors in the London interbank market on U.S. dollar denominated deposits
for a specified period of time. The CD rate, as generally provided for in Loan
Agreements, is the average rate paid on large certificates of deposit traded in
the secondary market. In normal market conditions, at least 65% of the Fund's
total assets will be invested in Senior Loans which, at the time of the Fund's
initial investment in such Senior Loans, provided the Fund with a rate of return
which was at least equal to the Prime Rate existing on the date of such initial
investment.

In normal market conditions, at least 80% of the Fund's total assets will be
invested in Senior Loans (either as an Original Lender or as a purchaser of an
Assignment or Participation) of domestic borrowers or foreign borrowers (so long
as Senior Loans to such foreign borrowers are U.S. dollar denominated and
payments of interest and repayments of principal pursuant to such Senior Loans
are required to be made in U.S. dollars). Investment in non-U.S. issuers
involves special risks, including that non-U.S. issuers may be subject to less
rigorous accounting and reporting requirements than are U.S. issuers, less
rigorous regulatory requirements, differing legal systems and laws relating to
creditors' rights, the potential inability to enforce legal judgments and the
potential for political, social and economic adversities.

19
<PAGE> 23

fluctuations in the Fund's net asset value as a result of changes in interest
rates. The Senior Loans in the Fund's portfolio will at all times have a
dollar-weighted average time until the next interest rate redetermination of 90
days or less. As a result, as short-term interest rates increase, interest
payable to the Fund from its investments in Senior Loans should increase, and as
short-term interest rates decrease, interest payable to the Fund from its
investments in Senior Loans should decrease. The amount of time required to pass
before the Fund will realize the effects of changing short-term market interest
rates on its portfolio will vary with the dollar-weighted average time until the
next interest rate redetermination on the Senior Loans in the Fund's portfolio.
The Fund may utilize certain investment practices to, among other things,
shorten the effective interest rate redetermination period of Senior Loans in
its portfolio. In such event, the Fund will consider such shortened period to be
the interest rate redetermination period of the Senior Loan; provided, however,
that the Fund will not invest in Senior Loans which permit the Borrower to
select an interest rate redetermination period in excess of one year. Because
most Senior Loans in the Fund's portfolio will be subject to mandatory and/or
optional prepayment and there may be significant economic incentives for a
Borrower to prepay its loans, prepayments of Senior Loans in the Fund's
portfolio may occur. Accordingly, the actual remaining maturity of the Fund's
portfolio invested in Senior Loans may vary substantially from the average
stated maturity of the Senior Loans held in the Fund's portfolio. As a result of
expected prepayments from time to time of Senior Loans in the Fund's portfolio,
the Fund estimates that the actual average maturity of the Senior Loans held in
its portfolio will be approximately 18-24 months.

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

The Fund may purchase and retain in its portfolio a Senior Loan interest the
Borrower with respect to which has filed for protection under the federal
bankruptcy laws or has had an involuntary bankruptcy petition filed against it
by its creditors. As of July 31, 1997, the date of the Fund's most recent
audited financial statements, the Fund held in its portfolio and had reduced the
value of three Senior Loan interests (the aggregate value of which represented
approximately 0.88% of the value of the Fund's total assets on such date) the
Borrowers with respect to which were subject to protection under the federal
bankruptcy laws. The values of such
20
<PAGE> 24

Senior Loan interests, if any, reflect, among other things, the Adviser's
assessment of the likelihood that the Fund ultimately will receive full
repayment of the principal amount of such Senior Loan interests, the likely
duration, if any, of a lapse in the scheduled repayment of principal and
prevailing interest rates. At times, in connection with the restructuring of a
Senior Loan either outside of bankruptcy court or in the context of bankruptcy
court proceedings, the Fund may determine or be required to accept equity
securities or junior debt securities in exchange for all or a portion of a
Senior Loan interest. Depending upon, among other things, the Adviser's
evaluation of the potential value of such securities in relation to the price
that could be obtained by the Fund at any given time upon sale thereof, the Fund
may determine to hold such securities in its portfolio. Any equity securities
and junior debt securities held by the Fund will not be treated as Senior Loans
and thus will not count toward the 80% of the Fund's total assets that normally
will be invested in Senior Loans.

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

The Fund may invest up to 100% of its assets in Participations. The selling
Lenders and other persons interpositioned between such Lenders and the Fund with
respect to such Participations will likely conduct their principal business
activities in the banking, finance and financial services industries. Although,
as discussed below, the Fund has taken measures which it believes significantly
reduce its exposure to any risks incident to such policy, the Fund may be more
susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting such industries. Persons
engaged in such industries
21
<PAGE> 25

may be more susceptible than are persons engaged in some other industry to,
among other things, fluctuations in interest rates, changes in the Federal Open
Market Committee's monetary policy, governmental regulations concerning such
industries and concerning capital raising activities generally and fluctuations
in the financial markets generally.

Participations by the Fund in a Lender's portion of a Senior Loan typically
will result in the Fund having a contractual relationship only with such Lender,
not with the Borrower. As a result, the Fund may have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by such Lender of
such payments from the Borrower. In connection with purchasing Participations,
the Fund generally will have no right to enforce compliance by the Borrower with
the terms of the Loan Agreement, nor any rights with respect to any funds
acquired by other Lenders through set-off against the Borrower and the Fund may
not directly benefit from the collateral supporting the Senior Loan in which it
has purchased the Participation. As a result, the Fund may assume the credit
risk of both the Borrower and the Lender selling the Participation. In the event
of the insolvency of the Lender selling a Participation, the Fund may be treated
as a general creditor of such Lender, and may not benefit from any set-off
between such Lender and the Borrower. The Fund has taken the following measures
in an effort to minimize such risks. The Fund will only acquire Participations
if the Lender selling the Participation, and any other persons interpositioned
between the Fund and the Lender, (i) at the time of investment has outstanding
debt or deposit obligations rated investment grade (BBB or A-3 or higher by
Standard & Poor's Ratings Group ("S&P") or Baa or P-3 or higher by Moody's
Investors Service ("Moody's")) or determined by the Adviser to be of comparable
quality and (ii) has entered into an agreement which provides for the holding of
assets in safekeeping for, or the prompt disbursement of assets to, the Fund.
Long-term debt rated BBB by S&P is regarded by S&P as having adequate capacity
to pay interest and repay principal and debt rated Baa by Moody's is regarded by
Moody's as a medium grade obligation, i.e., it is neither highly protected nor
poorly secured. Commercial paper rated A-1 by S&P indicates that the degree of
safety regarding timely payment is considered by S&P to be either overwhelming
or very strong and issues of commercial paper rated Prime-1 by Moody's are
considered by Moody's to have a superior ability for repayment of senior
short-term debt obligations. The Fund ordinarily will purchase a Participation
only if, at the time of such purchase, the Fund believes that the party from
whom it is purchasing such Participation is retaining an interest in the
underlying Senior Loan. In the event that the Fund does not so believe, it will
only purchase such a Participation if, in addition to the requirements set forth
above, the party from whom the Fund is purchasing such Participation (i) is a
bank, a member of a national securities exchange or other entity designated in
the Investment Company Act of 1940, as amended, as qualified to serve as a
custodian for a registered investment company and (ii) has been approved as a
custodian by the Board of Trustees of the Fund (a "Designated Custodian").

22
<PAGE> 26

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

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

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

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

23
<PAGE> 27

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

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

A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating a sufficient amount of cash, liquid securities and liquid Senior
Loans as a reserve against such commitments. The Fund will not purchase
interests in Senior Loans that would require the Fund to make any such
additional loans if such additional loan commitments would exceed 20% of the
Fund's total assets.

24
<PAGE> 28

commercial paper considered by the Adviser to be of similar quality, interests
in short-term loans of Borrowers having short-term debt obligations rated or a
short-term credit rating at least in such top two rating categories or having no
such rating but determined by the Adviser to be of comparable quality,
certificates of deposit and bankers' acceptances and securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Such high
quality, short-term securities may pay interest at rates which are periodically
redetermined or may pay interest at fixed rates. If the Adviser determines that
market conditions temporarily warrant a defensive investment policy, the Fund
may invest, subject to its ability to liquidate its relatively illiquid
portfolio of Senior Loans, up to 100% of its assets in cash and such high
quality, short-term debt securities. The Fund will acquire such warrants, equity
securities and junior debt securities only as an incident to the purchase or
intended purchase of interests in collateralized Senior Loans. Although the Fund
generally will acquire interests in warrants, equity securities and junior debt
securities only when the Adviser believes that the relative value being given by
the Fund in exchange for such interests is substantially outweighed by the
potential value of such instruments, investment in warrants, equity securities
and junior debt securities entail certain risks in addition to those associated
with investments in Senior Loans. Warrants and equity securities have a
subordinate claim on a Borrower's assets as compared with debt securities and
junior debt securities have a subordinate claim on such assets as compared with
Senior Loans. As such, the values of warrants and equity securities generally
are more dependent on the financial condition of the Borrower and less dependent
on fluctuations in interest rates than are the values of many debt securities.
The values of warrants, equity securities and junior debt securities may be more
volatile than those of Senior Loans and thus may have an adverse impact on the
ability of the Fund to minimize fluctuations in its net asset value.

The Fund also may invest up to 5% of its total assets in structured notes with
rates of return determined by reference to the total rate of return on one or
more loan referenced in such notes. The rate of return on the structured note
may be determined by applying a multiplier to the rate of total return on the
referenced loan or loans. Application of a multiplier is comparable to the use
of financial leverage, a speculative technique. Leverage magnifies the potential
for gain and the risk of loss, a relatively small decline in the value of a
referenced note could result in a relatively large loss in the value of a
structured note. Structured notes will be treated as Senior Loans for purposes
of the Fund's policy of normally investing at least 80% of its assets on Senior
Loans.

SPECIAL RISK CONSIDERATIONS

On behalf of the several Lenders, the Agent generally will be required to
administer and manage the Senior Loan and, with respect to collateralized Senior
Loans, to service or monitor the collateral. In this connection, the valuation
of assets pledged as collateral will reflect market value and the Agent may rely
on independent appraisals as to the value of specific collateral. The Agent,
however,

25
<PAGE> 29

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

26
<PAGE> 30

fraudulent conveyance or other similar laws, could subordinate such Senior Loans
to presently existing or future indebtedness of the Borrower or take other
action detrimental to the holders of Senior Loans, such as the Fund, including,
under certain circumstances, invalidating such Senior Loans. Lenders commonly
have certain obligations pursuant to the Loan Agreement, which may include the
obligation to make additional loans or release collateral in certain
circumstances.

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

Senior Loans, at present, generally are not readily marketable and may be
subject to restrictions on resale. Interests in Senior Loans generally are not
listed on any national securities exchange or automated quotation system and no
active trading market may exist for many of the Senior Loans in which the Fund
may invest. To the extent that a secondary market may exist for certain of the
Senior Loans in which the Fund invests, such market may be subject to irregular
trading activity, wide bid/ask spreads and extended trade settlement periods.
Senior Loans are thus relatively illiquid, which illiquidity may impair the
Fund's ability to realize the full value of its assets in the event of a
voluntary or involuntary liquidation of such assets. Liquidity relates to the
ability of the Fund to sell an investment in a timely manner. The market for
relatively illiquid securities tends to be more volatile than the market for
more liquid securities. The Fund has no limitation on the amount of its assets
which may be invested in securities which are not readily marketable or are
subject to restrictions on resale. Because a substantial portion of the Fund's
assets may be invested in Senior Loan interests, the ability of the Fund to
dispose of its investments in a timely fashion and at a fair price may be
restricted, and the Fund and holders of Common Shares may suffer capital losses
as a result. However, many of the Senior Loans in which the Fund expects to
purchase interests are of a relatively large principal amount and are held by a
relatively large number of owners which should, in the Adviser's opinion,
enhance the relative liquidity of such interests. The risks associated with
illiquidity are particularly acute in situations where the Fund's operations
require cash, such as when the Fund tenders for its Common Shares, and may
result in the Fund borrowing to meet short-term cash requirements.

To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to

27
<PAGE> 31

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

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

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

- ------------------------------------------------------------------------------
INVESTMENT PRACTICES AND SPECIAL RISKS
- ------------------------------------------------------------------------------

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

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<PAGE> 32

INTEREST RATE AND OTHER HEDGING TRANSACTIONS

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

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

The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest at the difference of the index and the predetermined rate
on a notional

29
<PAGE> 33

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

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

The successful use of swaps, caps and floors to preserve the rate of return on
a portfolio of financial instruments depends on the Adviser's ability to predict
correctly the direction and extent of movements in interest rates. Although the
Fund believes that use of the hedging and risk management techniques described
above will benefit the Fund, if the Adviser's judgment about the direction or
extent of the movement in interest rates in incorrect, the Fund's overall
performance would be worse than if it had not entered into any such
transactions. For example, if the Fund had purchased an interest rate swap or an
interest rate floor to hedge against its expectation that interest rates would
decline but instead interest rates rose, the Fund would lose part or all of the
benefit of the increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its counterparty under
the swap agreement or would have paid the purchase price of the interest rate
floor.

Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, the Adviser and the Fund believe such obligations do not
constitute senior securities. The Fund will usually enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess

30
<PAGE> 34

will be maintained in a segregated account by the Fund's custodian. If the Fund
enters into a swap on other than a net basis, the Fund will maintain in the
segregated account the full amount of the Fund's obligations under each such
swap. Accordingly, the Fund does not treat swaps as senior securities. The Fund
may enter into swaps, caps and floors with member banks of the Federal Reserve
System, members of the New York Stock Exchange or other entities determined by
the Adviser, pursuant to procedures adopted and reviewed on an ongoing basis by
the Board of Trustees, to be creditworthy. If a default occurs by the other
party to such transaction, the Fund will have contractual remedies pursuant to
the agreements related to the transaction but such remedies may be subject to
bankruptcy and insolvency laws which could affect the Fund's rights as a
creditor. The swap market has grown substantially in recent years with a large
number of banks and financial services firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid. Caps and floors are more recent innovations and
they are less liquid than swaps. There can be no assurance, however, that the
Fund will be able to enter into interest rate swaps or to purchase interest rate
caps or floors at prices or on terms the Adviser believes are advantageous to
the Fund. In addition, although the terms of interest rate swaps, caps and
floors may provide for termination, there can be no assurance that the Fund will
be able to terminate an interest rate swap or to sell or offset interest rate
caps or floors that it has purchased.

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

LENDING OF PORTFOLIO HOLDINGS

The Fund may seek to increase its income by lending financial instruments in
its portfolio in accordance with present regulatory policies, including those of
the Board of Governors of the Federal Reserve System and the SEC. Such loans may
be made, without limit, to brokers, dealers, banks or other recognized
institutional borrowers of financial instruments and would be required to be
secured continuously by collateral, including cash, cash equivalents or U.S.
Treasury bills maintained on a current basis at an amount at least equal to the
market value of the financial instruments loaned. The Fund would have the right
to call a loan and obtain the financial instruments loaned at any time on five
days' notice. For the duration of a loan, the Fund would continue to receive the
equivalent of the interest paid by the issuer on the financial instruments
loaned and also would receive compensation from the investment of the
collateral. The Fund would not have the right to vote any financial instruments
having voting rights during the existence of the loan, but the Fund could call
the loan in anticipation of an important vote to be taken among holders of the
financial instruments or in anticipation of the giving or withholding of their
consent on a material matter affecting the financial instruments. As with other
extensions of credit, risks of delay in recovery or even loss of rights in the
collateral
31
<PAGE> 35

exist should the borrower of the financial instruments fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing and when, in the judgment of the Adviser, the consideration which
can be earned currently from loans of this type justifies the attendant risk.
The creditworthiness of firms to which the Fund lends its portfolio holdings
will be monitored on an ongoing basis by the Adviser pursuant to procedures
adopted and reviewed, on an ongoing basis, by the Board of Trustees of the Fund.
No specific limitation exists as to the percentage of the Fund's assets which
the Fund may lend.

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS

The Fund may also purchase and sell interests in Senior Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Senior Loans and other portfolio debt securities
at delivery may be more or less than their purchase price, and yields generally
available on such interests or securities when delivery occurs may be higher or
lower than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will make
commitments to purchase such interests or securities on such basis only with the
intention of actually acquiring these interests or securities, but the Fund may
sell such interests or securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
interests or securities for the Fund's portfolio consistent with the Fund's
investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements (a purchase of, and a
simultaneous commitment to resell, a financial instrument at an agreed upon
price on an agreed upon date) only with member banks of the Federal Reserve
System and member firms of the New York Stock Exchange. When participating in
repurchase agreements, the Fund buys securities from a vendor, e.g., a bank or
brokerage firm, with the agreement that the vendor will repurchase the
securities at a higher price at a later date. Such transactions afford an
opportunity for the Fund to earn a return on available cash at minimal market
risk, although the Fund may be subject to various delays and risks of loss if
the vendor is unable to meet its obligation to
32
<PAGE> 36

repurchase. Under the 1940 Act, repurchase agreements are deemed to be
collateralized loans of money by the Fund to the seller. In evaluating whether
to enter into a repurchase agreement, the Adviser will consider carefully the
creditworthiness of the vendor. If the member bank or member firm that is the
party to the repurchase agreement petitions for bankruptcy or otherwise becomes
subject to the U.S. Bankruptcy Code, the law regarding the rights of the Fund is
unsettled. The securities underlying a repurchase agreement will be marked to
market every business day so that the value of the collateral is at least equal
to the value of the loan, including the accrued interest thereon, and the
Adviser will monitor the value of the collateral. No specific limitation exists
as to the percentage of the Fund's assets which may be used to participate in
repurchase agreements.

REVERSE REPURCHASE AGREEMENTS

The Fund may enter into reverse repurchase agreements with respect to debt
obligations which could otherwise be sold by the Fund. A reverse repurchase
agreement is an instrument under which the Fund may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker or dealer) to sell the security back to the Fund at
an agreed upon price on an agreed upon date. The Fund will maintain in a
segregated account with its custodian cash or liquid securities in an amount
sufficient to cover its obligations with respect to reverse repurchase
agreements. The Fund receives payment for such securities only upon physical
delivery or evidence of book entry transfer by its custodian. Regulations of the
SEC require either that securities sold by the Fund under a reverse repurchase
agreement be segregated pending repurchase or that the proceeds be segregated on
the Fund's books and records pending repurchase. Reverse repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities. An additional risk is that the market
value of securities sold by the Fund under a reverse repurchase agreement could
decline below the price at which the Fund is obligated to repurchase them.
Reverse repurchase agreements will be considered borrowings by the Fund and as
such would be subject to the restrictions on borrowing described in the
Statement of Additional Information under "Investment Restrictions." The Fund
will not hold more than 5% of the value of its total assets in reverse
repurchase agreements.

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

The Fund has qualified and intends to continue to qualify each year to be
treated as a regulated investment company under Subchapter M of the Code. If the
Fund so qualifies and distributes each year to its shareholders at least 90% of
its net investment income (including, among other things, interest and net
short-term capital gains, but not net capital gains, which are the excess of net
long-term capital gains over net short-term capital losses) in each year, the
Fund will not be required

33
<PAGE> 37

to pay federal income taxes on any income distributed to shareholders. The Fund
will not be subject to federal income tax on any net capital gains distributed
to shareholders. As a Massachusetts business trust, the Fund will not be subject
to any excise or income taxes in Massachusetts as long as it qualifies as a
regulated investment company for federal income tax purposes.

Distributions. Distributions of the Fund's net investment income are taxable
to holders of Common Shares as ordinary income, whether paid in cash or
reinvested in additional Common Shares. Distributions of the Fund's net capital
gains ("capital gains dividends"), if any, are taxable to holders of Common
Shares at the rates applicable to long-term capital gains regardless of the
length of time shares of the Fund have been held by such shareholders. For a
summary of the tax rates applicable to capital gains (including capital gains
dividends), see "Capital Gains Rates Under the 1997 Tax Act" below. The Fund
will inform shareholders of the source and tax status of all distributions
promptly after the close of each calendar year.

Sale of Shares. Except as discussed below, selling shareholders will
generally recognize gain or loss in an amount equal to the difference between
their adjusted tax basis in the Common Shares and the amount received. If such
Common Shares are held as a capital asset, the gain or loss will be a capital
gain or loss. For a summary of the tax rates applicable to capital gains, see
"Capital Gains Rates Under the 1997 Tax Act" below. It is possible, although the
Fund believes it is unlikely, that, in connection with a tender offer,
distributions to tending shareholders may be subject to tax as ordinary income
(rather than as gain or loss), which in turn may result in deemed distributions
subject to tax as ordinary income for to non-tendering shareholders. The federal
income tax consequences of the repurchase of Common Shares pursuant to tender
offers will be disclosed in the related offering documents. Any loss recognized
upon a taxable disposition of Common Shares held for six months or less will be
treated as a long-term capital loss to the extent of any capital gains dividends
received with respect to such Common Shares. For purposes of determining whether
Common Shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.

Capital Gains Rates Under the 1997 Tax Act. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act") the maximum tax rates applicable to net capital gains
recognized by individuals and certain other non-corporate taxpayers are (i) the
same as ordinary income rates for capital assets held for one year or less, (ii)
28% for capital assets held for more than one year but not more than 18 months
and

34
<PAGE> 38

(iii) 20% for capital assets held for more than 18 months. The maximum long-term
capital gains rate for corporations remains at 35%. The new tax rates for
capital gains under the 1997 Tax Act described above apply to distributions of
capital gains dividends by regulated investment companies such as the Fund as
well as to sales and exchanges of shares in regulated investment companies such
as the Fund. With respect to capital losses recognized on dispositions of shares
held six months or less where such losses are treated as long-term capital
losses to the extent of prior capital gains dividends received on such shares
(see "Sale of Shares" above), it is unclear how such capital losses offset the
capital gains referred to above. Shareholders should consult their own tax
advisors as to the application of the new capital gains rates to their
particular circumstances.

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

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

BOARD OF TRUSTEES

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

THE ADVISER

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser is a wholly-owned subsidiary of Van
Kampen American Capital, Inc. Van Kampen American Capital, Inc. is an indirect
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. The
Adviser's principal office is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.

Van Kampen American Capital, Inc. is a diversified asset management company
with more than two million retail investor accounts, extensive capabilities for
managing institutional portfolios, and more than $60 billion under management or
supervision. Van Kampen American Capital, Inc.'s more than 50 open-end and 38
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide.

35
<PAGE> 39

corporate finance advisory activities; merchant banking; stock brokerage and
research services; credit services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.

INVESTMENT ADVISORY AGREEMENT. The business and affairs of the Fund will be
managed under the direction of the Fund's Board of Trustees. Subject to their
authority, the Adviser and the Fund's officers will supervise and implement the
Fund's investment activities and will be responsible for overall management of
the Fund's business affairs. The investment advisory agreement (the "Advisory
Agreement") between the Adviser and the Fund provides that the Adviser will
supply investment research and portfolio management, including the selection of
securities for the Fund to purchase, hold, or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed. The Adviser also
furnishes offices, necessary facilities and equipment and permits its officers
and employees to serve without compensation as Trustees and officers of the Fund
if duly elected to such positions.

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

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

PORTFOLIO MANAGEMENT. Jeffrey W. Maillet is a Senior Vice President of the
Adviser and has been primarily responsible for the day to day management of the
Fund's portfolio since the Fund's commencement of investment operations. Mr.
Maillet has been employed by the Adviser since 1989. Mr. Maillet also has
primary responsibility for the day to day management of the portfolio of the Van
Kampen American Capital Senior Floating Rate Fund, a closed-end investment
company investing primarily in interests in Senior Loans and having investment
objectives and policies virtually identical to those of the Fund.

THE ADMINISTRATOR. The administrator for the Fund is VKAC (in such capacity,
the "Administrator"). Its principal business address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. The Administrator is a wholly-owned subsidiary
of Van Kampen American Capital, Inc. The Administrator maintains offices and
regional representatives in major cities across the nation. VKAC is the
principal

36
<PAGE> 40

underwriter of the Common Shares in connection with the offering thereof by the
Fund. See "Purchase of Shares."

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

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

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

The Fund's present policy is to declare daily and pay monthly distributions to
holders of Common Shares of substantially all net investment income of the Fund.
Net investment income of the Fund consists of all interest income, fee income,
other ordinary income earned by the Fund on its portfolio assets and net
short-term capital gains, less all expenses of the Fund. Expenses of the Fund
are accrued each day. Distributions to holders of Common Shares cannot be
assured, and the amount of each monthly distribution is likely to vary. Net
realized long-term capital gains, if any, are expected to be distributed to
holders of Common Shares at least annually. Holders of Common Shares may elect
to have distributions automatically reinvested in additional Common Shares. See
"Dividend Reinvestment Plan."

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

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

37
<PAGE> 41

Unless Common Shareholders elect to participate in the Plan, all Common
Shareholders will receive distributions of dividends and capital gains in cash.

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

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

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

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

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

All registered Common Shareholders (other than brokers or nominees) will be
mailed information regarding the Plan, including a form with which they may
elect to participate in the Plan. Shareholders who intend to hold their Common
Shares through a broker or nominee should contact such person to confirm that
they may participate in the Plan and to determine the effect, if any, that a
transfer of the account by the shareholder to another broker or nominee will
have on continued participation in the Plan. A Common Shareholder may withdraw
from the Plan at any time by contacting the Plan Agent at the address or
telephone number set forth below. There is no penalty for non-participation in
or withdrawal from the Plan, and Common Shareholders who have previously
withdrawn from the Plan may rejoin it at any time. Changes in elections should
be directed to the Plan Agent and should include the name of the Fund and the
Common Shareholder's name and address as
38
<PAGE> 42

registered. An election to withdraw from the Plan will, until such election is
changed, be deemed to be an election by a Common Shareholder to take all
subsequent dividends and distributions in cash. Elections will only be effective
for dividends and distributions declared after, and with a record date of at
least ten days after, such elections are received by the Plan Agent. When a
participant withdraws from the Plan or upon termination of the Plan as provided
above, certificates for whole Common Shares credited to his or her account under
the Plan will be issued and a cash payment will be made for any fraction of a
Common Share credited to such account. All correspondence concerning the Plan
should be directed to the Plan Agent, c/o ACCESS Investor Services, Inc., P.O.
Box 418256, Kansas City, MO 64153-9256. Please call (800) 341-2911 between the
hours of 7:00 a.m. and 7:00 p.m. Central Standard Time if you have questions
regarding the Plan.

DIVIDEND DIVERSIFICATION. A shareholder also may, upon written request by
completing the appropriate section of the application form or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and other distributions paid on Common Shares of the Fund invested into shares
of certain mutual funds advised by the Adviser or its affiliates so long as a
pre-existing account for such shares exists for the shareholder. A shareholder
may call the phone numbers shown above to obtain a list of the mutual funds
available and to request current prospectuses.

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

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

Although the Board of Trustees believes that tender offers for the Common
Shares generally would increase the liquidity of the Common Shares, the
acquisition of Common Shares by the Fund will decrease the total assets of the
Fund and,

39
<PAGE> 43

therefore, have the effect of increasing the Fund's expense ratio. Because of
the nature of the Fund's investment objective and policies and the Fund's
portfolio, the Adviser anticipates potential difficulty in disposing of
portfolio securities in order to consummate tender offers for the Common Shares.
As a result, the Fund may be required to borrow money in order to finance
repurchases and tenders.

The Fund's Declaration of Trust authorizes the Fund, without prior approval of
the holders of Common Shares, to borrow money in an amount up to 33 1/3% of the
Fund's total assets, for the purpose of, among other things, obtaining
short-term credits in connection with tender offers by the Fund for Common
Shares. In this connection, the Fund may issue notes or other evidence of
indebtedness or secure any such borrowings by mortgaging, pledging or otherwise
subjecting as security the Fund's assets. Under the requirements of the 1940
Act, the Fund, immediately after any such borrowing, must have an "asset
coverage" of at least 300%. With respect to any such borrowing, asset coverage
means the ratio which the value of the total assets of the Fund, less all
liabilities and indebtedness not represented by senior securities (as defined in
the 1940 Act), bears to the aggregate amount of such borrowing by the Fund. The
rights of lenders to the Fund to receive interest on and repayment of principal
of any such borrowings will be senior to those of the holders of Common Shares,
and the terms of any such borrowings may contain provisions which limit certain
activities of the Fund, including the payment of dividends to holders of Common
Shares in certain circumstances. Further, the terms of any such borrowing may
and the 1940 Act does (in certain circumstances) grant to the lenders to the
Fund certain voting rights in the event of default in the payment of interest on
or repayment of principal. In the event that such provisions would impair the
Fund's status as a regulated investment company, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings. Any borrowing will likely rank senior to or pari passu with all
other existing and future borrowings of the Fund. Interest payments and fees
incurred in connection with borrowings will reduce the amount of net income
available for payment to the holders of Common Shares. The Fund does not intend
to use borrowings for long-term financial leverage purposes. Accordingly, the
Fund will not purchase additional portfolio securities at any time that
borrowings, including the Fund's commitments, pursuant to reverse repurchase
agreements, exceed 5% of the Fund's total assets (after giving effect to the
amount borrowed).

The Fund has entered into a Credit Agreement dated April 17, 1997 (the "Credit
Agreement") among the Fund, as borrower, the banks party thereto (the "Financial
Institutions"), and Bank of America National Trust and Savings Association
("BofA"), as agent, pursuant to which the Financial Institutions have committed
to provide a credit facility of up to $250,000,000 to the Fund, which is not
secured by the assets of the Fund or other collateral. This credit facility can
provide the Fund with additional liquidity to meet its obligations to purchase
Common Shares pursuant to any tender offer that the Fund may make. The credit
facility provided pursuant to the Credit Agreement will terminate on April 16,
1998, unless extended by its terms. As of the date of this Prospectus, the Fund
had not drawn any of the
40
<PAGE> 44

funds available under the Credit Agreement. See "Repurchase of Shares" in the
Statement of Additional Information.

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

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

EARLY WITHDRAWAL CHARGE. An early withdrawal charge designed to recover
offering expenses will be charged in connection with most Common Shares held for
less than five years which are accepted by the Fund for repurchase pursuant to
tender offers. The early withdrawal charge will be imposed on a number of Common
Shares accepted for cash tender from a record holder of Common Shares the value
of which exceeds the aggregate value at the time the tender is accepted of (a)
all Common Shares owned by such holder that were purchased more than five years
prior to such acceptance, (b) all Common Shares owned by such holder that were
acquired through reinvestment of distributions, and (c) the increase, if any, of
value of all other Common Shares owned by such holder (namely those purchased
within the five years preceding the acceptance) over the purchase price of such
Common Shares. The early withdrawal charge will be paid to VKAC. For the fiscal
years ended July 31, 1995, 1996 and 1997, VKAC received payments totalling
$1,469,000, $5,721,300 and $9,075,812, respectively, pursuant to the early
withdrawal charge. In determining whether an early withdrawal charge is payable,
it is

41
<PAGE> 45

assumed that the acceptance of a repurchase offer would be made from the
earliest purchase of Common Shares. Any early withdrawal charge which is
required to be imposed will be made in accordance with the following schedule.

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

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

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

The prospectus for each VKAC Fund describes its investment objectives and
policies. Shareholders can obtain, without charge, a prospectus by calling
1-800-341-2911 and should consider these objectives and policies carefully
before requesting an exchange. Each exchange must involve proceeds from Common
Shares which have a net asset value of at least $500. An exchange is a taxable
event and may result in a taxable gain or loss.

42
<PAGE> 46

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

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

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

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

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

43
<PAGE> 47

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

<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDING HIGH LOW
----------------------- -------- --------
<S> <C> <C>
December 31, 1997.............................. $ 9.98 $ 9.96
September 30, 1997............................. 9.98 9.96
June 30, 1997.................................. 9.98 9.97
March 31, 1997................................. 9.99 9.97

December 31, 1996.............................. $10.01 $ 9.99
September 30, 1996............................. 10.01 10.00
June 30, 1996.................................. 10.00 10.00
March 31, 1996................................. 10.03 10.00

December 31, 1995.............................. $10.04 $10.02
September 30, 1995............................. 10.05 10.04
June 30, 1995.................................. 10.05 10.03
March 31, 1995................................. 10.07 10.02

December 31, 1994.............................. $10.06 $10.04
September 30, 1994............................. 10.05 10.03
June 30, 1994.................................. 10.05 10.03
March 31, 1994................................. 10.07 10.05

December 31, 1993.............................. $10.07 $10.00
September 30, 1993............................. 10.01 9.99
June 30, 1993.................................. 10.06 9.99
March 31, 1993................................. 10.06 10.04

December 31, 1992.............................. $10.04 $ 9.97
September 30, 1992............................. 10.02 9.99
June 30, 1992.................................. 10.01 9.98
March 31, 1992................................. 10.02 10.00

December 31, 1991.............................. $10.01 $ 9.99
September 30, 1991............................. 9.99 9.98
June 30, 1991.................................. 9.99 9.98
March 31, 1991................................. 10.00 9.99

December 31, 1990.............................. $10.00 9.99
September 30, 1990............................. 10.01 10.00
June 30, 1990.................................. 10.02 10.00
March 31, 1990................................. 10.02 10.02

December 31, 1989.............................. $10.02 $10.00
</TABLE>

As of February 20, 1998, the net asset value per Common Share was $9.98. The
following table sets forth certain information with respect to the Common Shares
as of February 20, 1998:

<TABLE>
<CAPTION>
(3) (4)
AMOUNT AMOUNT
HELD OUTSTANDING
(2) BY FUND FOR EXCLUSIVE OF
(1) AMOUNT ITS OWN AMOUNT SHOWN
TITLE OF CLASS AUTHORIZED ACCOUNT UNDER (3)
-------------- ---------- ----------- ------------
<S> <C> <C> <C>
Common Shares of beneficial
interest, $.01 par value unlimited 0 679,900,280
</TABLE>

44
<PAGE> 48

To the knowledge of the Fund, as of February 23, 1998, no person held 5% or
more of the Fund's Common Shares either beneficially or of record. Further, as
of such date, officers and trustees of the Fund as a group owned less than 1% of
the Common Shares.

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

The Declaration of Trust requires the favorable vote of the holders of at
least two-thirds of the outstanding Common Shares then entitled to vote to
approve, adopt or authorize certain transactions with 5%-or-greater holders of
Common Shares and their associates, unless the Board of Trustees shall by
resolution have approved a memorandum of understanding with such holders, in
which case normal voting requirements would be in effect. For purposes of these
provisions, a 5%-or-greater holder of Common Shares (a "Principal Shareholder")
refers to any person who, whether directly or indirectly and whether alone or
together with its affiliates and associates, beneficially owns 5% or more of the
outstanding Common Shares of the Fund. The transactions subject to these special
approval requirements are: (i) the merger or consolidation of the Fund or any
subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance
of any securities of the Fund to any Principal Shareholder for cash; (iii) the
sale, lease or exchange of all or any substantial part of the assets of the Fund
to any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purpose of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period); or (iv) the sale, lease or exchange to the Fund
or any subsidiary thereof, in exchange for securities of the Fund, of any assets
of any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purposes of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period).

A Trustee may be removed from office (i) with cause by a written instrument
signed by at least two-thirds of the remaining Trustees or (ii) by a vote of the
holders of at least two-thirds of the Common Shares.

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

45
<PAGE> 49

FUND STRUCTURE. The Fund's fundamental investment policies and restrictions
give the Fund the flexibility to pursue its investment objective through a fund
structure commonly known as a "master-feeder" structure. If the Fund converts to
a master-feeder structure, the existing shareholders of the Fund would continue
to hold their shares of the Fund and the Fund would become a feeder-fund of the
master-fund. The value of a shareholder's shares would be the same immediately
after any conversion as the value immediately before such conversion. Use of
this master-feeder structure potentially would result in increased assets
invested among the collective investment vehicle of which the Fund would be a
part, thus allowing operating expenses to be spread over a larger asset base,
potentially achieving economies of scale. The Fund's Board of Trustees presently
does not intend to affect any conversion of the Fund to a master-feeder
structure.

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

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

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

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

During the continuous offering, the Common Shares will be offered by the Fund
at the public offering price next computed after an investor places an order to
purchase directly with VKAC, or with the investor's broker-dealer. The price of
Common Shares ordered through an investor's broker-dealer will be the public
offering price next determined after the Fund receives the order. Because the
Fund determines the public offering price once daily on each business day as of
5:00 p.m. Eastern time, orders placed through an investor's broker-dealer must
be transmitted to the Fund by the broker-dealer prior to such time for the
investor's order to be executed at the public offering price to be determined
that day. Any change in price due to the failure of the Fund to receive an order
prior to such time must be settled between the investor and the broker-dealer
placing the order. The public offering

46
<PAGE> 50

price is equal to the net asset value per Common Share. There will be no initial
sales charge or underwriting discount on purchases of Common Shares.

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

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

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

Automatic Investment. Once an investor has opened an account in the Fund with
the minimum $1,000 investment, the automatic investment option may be utilized
to make regular monthly investments of $100 or more into such investor's account
with the Fund. In order to utilize this option, an investor must fill out and
sign the Automatic Investment application available from the transfer agent, the
Fund, such investor's broker or dealer, or VKAC. Once the transfer agent has
received this application, such investor's checking account at his designated
bank will be debited each month in the amount authorized by such investor to
purchase shares of the Fund. Once enrolled in the Automatic Investment Program,
an investor may change the monthly amount or terminate participation at any time
by writing the

47
<PAGE> 51

transfer agent. Investors in the automatic investment program will receive a
confirmation of these transactions from the Fund quarterly and their regular
bank account statements will show the debit transaction each month.

Investments by Tax-Sheltered Retirement Plans. Common Shares are available for
purchase in connection with certain types of tax-sheltered retirement plans.
Eligible investors may establish individual retirement accounts ("IRAs");
Employee Pension Plans ("SEP's"); other pension and profit sharing plans; 401(k)
plans; or Section 403(b)(7) plans. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans.

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

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

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

- ------------------------------------------------------------------------------
COMMUNICATIONS WITH SHAREHOLDERS
- ------------------------------------------------------------------------------

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

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

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

48
<PAGE> 52

decreases in market rates of interest, its expected monthly distributions may be
less than the distributions with respect to the immediately preceding monthly
distribution period, the Fund reserves the right to calculate the distribution
rate on the basis of a period of less than one month.

When utilized by the Fund, distribution rate and compounded distribution rate
figures are based on historical performance and are not intended to indicate
future performance. Distribution rate, compounded distribution rate and net
asset value per share can be expected to fluctuate over time.

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

<TABLE>
<CAPTION>
COMPARISON OF PRIME RATE,
TREASURY BILL RATE AND
LONDON INTER-BANK OFFERED RATE
(AS OF 12/31 OF EACH CALENDAR YEAR)
-------------------------------------------------------------------
1984 1985 1986 1987 1988 1989 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Prime Rate(1)........ 12.06% 9.99% 8.38% 8.15% 9.24% 10.88% 10.01%
- ------------- ------- ------- ------- ------- ------- ------- -------
3 Month Treasury Bill
- ---------------------
Rate(2)............ 8.6000% 7.1000% 5.5300% 5.7700% 8.0700% 7.6300% 6.7400%
------- ------- ------- ------- ------- ------- ------- -------
3 Month LIBOR(3)..... 8.7500% 8.0000% 6.3750% 7.4375% 9.6200% 8.3750% 7.6300%
- ---------------- ------- ------- ------- ------- ------- ------- -------
</TABLE>

<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Prime Rate(1)........ 8.46% 6.25% 6.00% 8.50% 8.83% 8.50% %
- ------------- ------- ------- ------- ------- ------- ------- -------
3 Month Treasury Bill
- ---------------------
Rate(2)............ 4.0700% 3.2200% 3.0600% 5.6000% 5.1400% 4.9100% 5.1600%
------- ------- ------- ------- ------- ------- ------- -------
3 Month LIBOR(3)..... 4.3125% 3.4375% 3.3750% 6.5000% 5.6250% 5.5625% 5.8125%
- ---------------- ------- ------- ------- ------- ------- ------- -------
</TABLE>

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

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

(2) The 3 Month Treasury Bill Rate. Source: Bloomberg.

(3) The 3 Month London Inter-Bank Offered Rate represents the rate at which
most creditworthy international banks dealing in Eurodollars charge each
other for large loans. Source: Bloomberg.

49
<PAGE> 53

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

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

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

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

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

The financial statements for the period ended July 31, 1997, included in the
Statement of Additional Information, have been so included in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants, given
on the authority of said firm as experts in auditing and accounting.

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

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

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

50
<PAGE> 54

THE TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION IS AS FOLLOWS:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk
Considerations............................................ B- 2
Investment Restrictions..................................... B- 2
Trustees and Officers....................................... B- 4
Portfolio Transactions...................................... B- 9
Management of the Fund...................................... B-10
Net Asset Value............................................. B-11
Taxation.................................................... B-13
Repurchase of Shares........................................ B-15
Independent Accountants' Report............................. B-18
Financial Statements for the Year Ended July 31, 1997....... B-19
Notes to Financial Statements............................... B-34
</TABLE>

51
<PAGE> 55

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE
CALL THE FUND'S TOLL-FREE
NUMBER 1-800-341-2911.

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

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

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-421-2833

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-847-2424
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
One Parkview Plaza
Oakbrook Terrace, IL 60181

Investment Adviser

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

Principal Underwriter

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

Dividend Disbursing and Transfer Agent

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

Custodian

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

Legal Counsel

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

Independent Accountants

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 56

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

PRIME RATE
INCOME TRUST

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

P R O S P E C T U S

FEBRUARY , 1998

------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 57

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST

STATEMENT OF ADDITIONAL INFORMATION

Van Kampen American Capital Prime Rate Income Trust, formerly known as Van
Kampen Merritt Prime Rate Income Trust (prior to October 11, 1995) (the "Fund"),
is a non-diversified, closed-end management investment company whose investment
objective is to provide a high level of current income, consistent with
preservation of capital. This Statement of Additional Information is not a
prospectus, but should be read in conjunction with the Prospectus for the Fund
dated February , 1998, (the "Prospectus"). This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing shares of the Fund, and investors should obtain and
read the Prospectus prior to purchasing shares. A copy of the Prospectus may be
obtained without charge, by calling 1-800-341-2911, or for Telecommunications
Device for the Deaf, 1-800-421-2833. This Statement of Additional Information
incorporates by reference the entire Prospectus.

TABLE OF CONTENTS

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

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED FEBRUARY , 1998.
B-1
<PAGE> 58

INVESTMENT OBJECTIVE AND POLICIES
AND SPECIAL RISK CONSIDERATIONS

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate Senior Loans to Borrowers. Although the Fund's net
asset value will vary, the Fund's policy of acquiring interests in floating or
variable rate Senior Loans is expected to minimize the fluctuations in the
Fund's net asset value as a result of changes in interest rates. The Fund's net
asset value may be affected by changes in the credit quality of Borrowers with
respect to Senior Loan interests in which the Fund invests. An investment in the
Fund may not be appropriate for all investors and is not intended to be a
complete investment program. No assurance can be given that the Fund will
achieve its investment objective. For further discussion of the characteristics
of Senior Loan interests and the associated special risk considerations, see
"Investment Objective and Policies and Special Risk Factors" in the Prospectus.

INVESTMENT RESTRICTIONS

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

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

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

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

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

B-2
<PAGE> 59

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

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

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

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

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

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

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

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.

For purposes of investment restriction number 2, the Fund has adopted
supplementally a more restrictive non-fundamental investment policy that in
effect changes the phrase "more than 25%" to "25% or more." For purposes of
investment restriction number 2 and the supplement just described, the Fund will
consider all relevant factors in determining whether to treat the Lender selling
a Participation and any persons interpositioned between such Lender and the Fund
as an issuer, including: the terms of the Loan Agreement and other relevant
agreements (including inter-creditor agreements and any agreements between such
person and the Fund's custodian); the credit quality of such Lender or
interpositioned person; general economic conditions applicable to such Lender or
interpositioned person; and other factors relating to the degree of credit risk,
if any, of such Lender or interpositioned person incurred by the Fund.

The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objective. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund anticipates that the
annual portfolio turnover rate of the Fund will not be in excess of 100%. A high
rate of portfolio turnover involves correspondingly greater expenses than a
lower rate, which expenses must be borne by the Fund and its shareholders.

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<PAGE> 60

TRUSTEES AND OFFICERS

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

DENNIS J. MCDONNELL,* DATE OF BIRTH 05/20/42, PRESIDENT, CHAIRMAN OF THE BOARD
AND TRUSTEE. Mr. McDonnell is President, Chief Operating Officer and a Director
of the Adviser, AC Adviser, Van Kampen American Capital Advisors, Inc., and Van
Kampen American Capital Management, Inc. He is also an Executive Vice President
and Director of VK/AC Holding, Inc., and VKAC. Mr. McDonnell is President and a
Director of Van Kampen Merritt Equity Advisors Corp. He is the President and a
Trustee, Director or Managing General Partner of other investment companies
advised by the Adviser and the AC Adviser. Prior to April of 1997, he was a
Director of Van Kampen Merritt Equity Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer and Director of MCM Group, Inc.,
McCarthy, Crisanti & Maffei, Inc. and Chairman and Director of MCM Asia Pacific
Company, Limited and MCM (Europe) Limited. Prior to July of 1996, Mr. McDonnell
was President, Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc.
Prior to December, 1991, Mr. McDonnell was Senior Vice President of Van Kampen
Merritt Inc. His address is One Parkview Plaza, Oakbrook Terrace, Illinois
60181.

THEODORE A. MYERS, DATE OF BIRTH 08/03/30, TRUSTEE. Mr. Myers is a Senior
Financial Advisor of Qualitech Steel Corporation, a manufacturer of special
quality bar products, as well as iron carbide (a steel scrap substitute). Mr.
Myers is a Director of COVA Series Trust of COVA Financial Life Insurance
(formerly known as Xerox Life). He is also a member of the Arthur Anderson Chief
Financial Officer Advisory Committee. Prior to 1997, Mr. Myers was a Director of
McClouth Steel, and prior to July of 1996, Mr. Myers was an Executive Vice
President and Chief Financial Officer of Qualitech Steel Corporation. Prior to
August, 1993, Mr. Myers was Senior Vice President, Chief Financial Officer and a
Director of Foods Brand America (formerly known as Doskocil Companies, Inc.), a
food processing and distribution company. Prior to January, 1990, Mr. Myers was
Vice President and Chief Financial Officer of Inland Steel Industries. His
address is 550 Washington Avenue, Glencoe, Illinois 60022. Mr. Myers is also a
Trustee, Director or Managing General Partner of other investment companies
advised by the Adviser and the AC Adviser.

ROD DAMMEYER, DATE OF BIRTH 11/05/40, TRUSTEE. Mr. Dammeyer is Managing Partner
of Equity Group Investments, Inc. (EGI), a company that makes private equity
investments in other companies, and Chief Executive Officer and Director of
Anixter International Inc., a value-added provider of integrated networking and
cabling solutions that support business information and network infrastructure
requirements (employed by Anixter since 1985). Prior to 1997, Mr. Dammeyer was
President, Chief Executive Officer and a Director of Great American Management &
Investment, Inc., a diversified manufacturing company. He is also a member of
the Board of Directors of TeleTech Holdings Inc., Lukens, Inc., Metal
Management, Inc., Stericycle, Inc., Transmedia Networks, Inc., Jacor
Communications, Inc., CNA Surety, Corp., IMC Global Inc., Antec Corporation,
Groupo Azucarero Mexico (GAM) and a member of the Chase Manhattan Corporation
National Advisory Board and Kent State University Foundation. Mr. Dammeyer was
previously a Director of Santa Fe Energy Resources, Inc., Falcon Building
Products, Inc., Lomas Financial Corporation, Santa Fe Pacific Corporation,
Q-Tel, S.A. de C.V. and Servicios Financieros Quadrum, S.A. Prior to 1998, Mr.
Dammeyer was a Director of Capsure Holdings Corp., Revco D.S., Inc. and Sealy,
Inc. His address is Two North Riverside Plaza, Suite 1950, Chicago, Illinois
60606. Mr. Dammeyer is also a Trustee, Director or Managing General Partner of
other investment companies advised by the Adviser and the AC Adviser.

DAVID C. ARCH, DATE OF BIRTH 07/17/45, TRUSTEE. Mr. Arch is Chairman and Chief
Executive Officer of Blistex Inc., a consumer health care product's
manufacturer. Director of Elmhurst College and the Illinois

B-4
<PAGE> 61

Manufacturers' Association. His address is 1800 Swift Drive, Oak Brook, Illinois
60523. Mr. Arch is also a Trustee, Director or Managing General Partner of other
investment companies advised by the Adviser and the AC Adviser.

STEVEN MULLER, DATE OF BIRTH 11/22/27, TRUSTEE. Dr. Muller is Chairman of The
21(st) Century Foundation (public affairs). He is President Emeritus of The
Johns Hopkins University. He is also a Director of Beneficial Corporation (bank
holding company) and Millpore Corporation (biotechnology). Prior to December,
1997, Dr. Muller was a director of the Common Sense Trust and, prior to May,
1997, a Director of BT Alex. Brown & Sons (investment banking). His address is
The Johns Hopkins University, Suite 711, 1619 Massachusetts Avenue, N.W.,
Washington, D.C. 20036. Dr. Muller is also a Trustee, Director and Managing
General Partner of other investment companies advised by the Adviser and the AC
Adviser.

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

DON G. POWELL,* DATE OF BIRTH 10/19/39, TRUSTEE. Mr. Powell is Chairman and a
Director of VKAC, VKACDI, the Adviser, the AC Adviser, VK/AC Holding, Inc., Van
Kampen American Capital Management, Inc., Van Kampen American Capital Advisors,
Inc., ACCESS Investor Services, Inc., Van Kampen American Capital Recordkeeping
Services Inc., American Capital Contractual Services, Inc., Van Kampen Merritt
Equity Advisors Corp., Van Kampen American Capital Insurance Agency of Illinois,
Inc., VK/AC System, Inc., Van Kampen American Capital Trust Company, Van Kampen
American Capital Services, Inc. and Van Kampen American Capital Exchange
Corporation. Prior to July of 1996, Mr. Powell was Chairman and Director of VSM
Inc. and VCJ Inc. Prior to September 1996, Mr. Powell was Chairman and Director
of McCarthy, Crisanti & Maffei, Inc. and McCarthy, Crisanti & Maffei Acquisition
Corporation. Prior to 1997, he was Chairman, President and Director of American
Capital Shareholders Corporation. Prior to April of 1997, Mr. Powell was
Chairman, President and Director of Van Kampen Merritt Equity Holdings Corp. Mr.
Powell is Chairman of the Board of Governors and the Executive Committee of the
Investment Company Institute. Mr. Powell is also a Trustee or Director of other
investment companies advised by the Adviser and the AC Adviser.

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

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

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

JEFFREY W. MAILLET, DATE OF BIRTH 09/30/56, VICE PRESIDENT. Mr. Maillet is
Senior Vice President and Portfolio Manager of the Adviser. He is Senior Vice
President of Van Kampen American Capital

B-5
<PAGE> 62

Management, Inc., and the AC Adviser. His address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.

RONALD A. NYBERG, DATE OF BIRTH 07/29/53, VICE PRESIDENT AND SECRETARY. Mr.
Nyberg is Executive Vice President, General Counsel, Secretary and Director of
VKAC and VK/AC Holding, Inc. He is also Executive Vice President, General
Counsel and Director of Van Kampen Merritt Equity Holdings Corp. Mr. Nyberg is
also Executive Vice President, General Counsel and Assistant Secretary of ACCESS
Investor Services, Inc., and Executive Vice President, General Counsel,
Assistant Secretary and Director of the Adviser, the AC Adviser, Van Kampen
American Capital Advisors, Inc., Van Kampen American Capital Management, Inc.,
VKACDI, Van Kampen American Capital Exchange Corporation, American Capital
Contractual Services, Inc., and Van Kampen American Capital Trust Company. Prior
to April of 1997, he was Executive Vice President, General Counsel and Director
of Van Kampen Merritt Equity Advisors Corp. Prior to July of 1996, Mr. Nyberg
was Executive Vice President and General Counsel of VSM Inc. and Executive Vice
President and General Counsel of VCJ Inc. Prior to September of 1996, he was
General Counsel of McCarthy, Crisanti & Maffei, Inc. He is a Vice President and
Secretary of other investment companies advised by the Adviser and the AC
Adviser, and is a Director of ICI Mutual Insurance Co., a provider of insurance
to members of the Investment Company Institute. Prior to March of 1991, Mr.
Nyberg was Secretary of Van Kampen Merritt Inc., the Adviser and McCarthy,
Crisanti & Maffei, Inc. His address is One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.

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

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

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

NICHOLAS DALMASO, DATE OF BIRTH 03/01/65, ASSISTANT SECRETARY. Mr. Dalmaso is
Vice President, Assistant Secretary and Associate General Counsel of VKAC. Mr.
Dalmaso is also Vice President, Assistant Secretary and Associate General
Counsel of the Adviser, the AC Adviser, VKACDI, Van Kampen American Capital
Advisors, Inc. and Van Kampen American Capital Management, Inc. His address is
One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Mr. Dalmaso is Assistant
Secretary of other investment companies advised by the Adviser and the AC
Adviser.

SCOTT E. MARTIN, DATE OF BIRTH 08/20/56, ASSISTANT SECRETARY. Mr. Martin is
Senior Vice President, Deputy General Counsel and Assistant Secretary of VKAC,
VK/AC Holding, Inc., and Senior Vice President, Deputy General Counsel and
Secretary of VKACDI, the Adviser, the AC Adviser, Van Kampen American Capital
Advisors, Inc., ACCESS Investor Services, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VK/AC System, Inc. and Van Kampen American
Capital RecordKeeping Services, Inc., Van Kampen American Capital Exchange
Corporation, American Capital Contractual Services, Inc., Van Kampen American
Capital Management, Inc., and Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel and Secretary of
Van Kampen American Capital Services, Inc. and Van Kampen Merritt Holdings Corp.
Prior to September of 1996, Mr. Martin was Deputy General Counsel and Secretary
of McCarthy, Crisanti & Maffei, Inc., and prior to July of 1996, he was Senior
Vice President, Deputy General Counsel and Secretary of VSM Inc. and VCJ Inc.
His address in One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Mr. Martin
is an Assistant Secretary of other investment companies advised by the Adviser
and the AC Adviser.

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<PAGE> 63

HUEY P. FALGOUT, JR., DATE OF BIRTH 11/15/63, ASSISTANT SECRETARY. Mr. Falgout
is Vice President and an Attorney of VKAC. He is Vice President and Assistant
Secretary of the Adviser and the AC Adviser, ACCESS Investor Services, Inc.,
American Capital Contractual Services, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American Capital Exchange Corporation, Van Kampen
American Capital Advisors, Inc. and VKACDI. His address is 2800 Post Oak Blvd.,
Houston, TX 77056. Mr. Falgout is Assistant Secretary of other investment
companies advised by the adviser and the AC Adviser.

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

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

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

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

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

The officers and Trustees hold the same positions with other funds in the Fund
Complex (defined below). The officers and Trustees as a group own less than 1%
of the Fund's outstanding Common Shares. The compensation of the officers and
trustees who are affiliated persons (as defined in the 1940 Act) of the Adviser,
VKACDI or VKAC is paid by the respective entity. The Fund pays the compensation
of all other officers and trustees of the Fund. Funds in the Fund Complex,
including the Fund, pay the Trustees who are not affiliated persons of the
Adviser, VKACDI or VKAC, an annual Fund Complex retainer (generally equal to the
product of $2,500 times the number of funds in the Fund Complex), which retainer
is then allocated among funds in the Fund Complex based on their relative net
assets, and $250 per fund per meeting of the Board of Trustees, as well as
reimbursement of expenses incurred in connection with such meetings. Under the
Fund's retirement plan, trustees who are not affiliated with the Adviser, VKACDI
or VKAC, have at least ten years of service (including years of service prior to
adoption of the retirement plan) and retire at or after attaining the age of 60,
are eligible to receive a retirement benefit equal to $2,500 for each of the ten
years following such trustee's retirement. Under certain conditions, reduced
benefits are available for early retirement. Under the Fund's deferred
compensation plan, a trustee who is not affiliated with the Adviser, VKACDI or
VKAC, can elect to defer receipt of all or a portion of the trustee's fees
earned by such trustee until such trustee's retirement. The deferred
compensation earns a rate of return determined by reference to the Fund or other
funds in the Fund Complex as selected by the trustee. To the extent permitted by
the 1940 Act, the Fund may invest in securities of other funds in the Fund
Complex in order to match the deferred compensation obligation. The deferred
compensation plan is not funded and obligations thereunder represent general
unsecured claims against the general assets of the Fund. Subject to certain
exceptions and limitations, as fully described in Section 5.3 of the Fund's
Declaration of Trust on file with the SEC, the Fund indemnifies every Trustee
and officer of the Fund against liabilities and expenses reasonably incurred or
paid in connection with any claim, action, suit or proceeding in which he
becomes involved by virtue of his being or having been a Trustee or officer.
Such indemnification is unavailable for any Trustee or officer who is deemed to
have engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties or to not have acted in good faith in the reasonable
belief that his action was in the best interest of the Fund.

B-7
<PAGE> 64

COMPENSATION TABLE

<TABLE>
<CAPTION>
FUND COMPLEX
--------------------------------------------------------------
TOTAL
AGGREGATE ESTIMATED AGGREGATE COMPENSATION
YEAR OF COMPENSATION PENSION OR RETIREMENT ESTIMATED AGGREGATE BEFORE DEFERRAL
ELECTION/ BEFORE DEFERRAL BENEFITS ACCRUED ANNUAL BENEFITS FROM THE
NAME(1) APPOINTMENT FROM THE FUND(2) AS PART OF EXPENSES(3) UPON RETIREMENT(4) FUND COMPLEX(5)
------- ----------- ---------------- ---------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
David C. Arch......... 1989 $4,257 $ 7,912 $85,000 $157,750
Rod Dammeyer.......... 1989 4,257 14,303 85,000 157,750
Howard J Kerr......... 1992 4,257 27,338 85,000 157,750
Steven Muller......... 1998 0 0 0 0
Theodore A. Myers..... 1989 4,257 57,361 85,000 157,750
Hugo F.
Sonnenschein........ 1994 4,257 13,493 85,000 157,750
Wayne W. Whalen....... 1989 4,250 16,155 85,000 157,250
</TABLE>

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

(1) Each of Messrs. McDonnell and Powell is an affiliated person of the
Adviser, VKACDI and VKAC, and does not receive compensation or retirement
benefits from the Fund.

(2) The amounts shown in this column are the Aggregate Compensation of the Fund
before deferral by the trustees under the deferred compensation plan during
its last completed fiscal year ended July 31, 1997. The following trustees
deferred all or a portion of their compensation from the Fund during the
fiscal year ended July 31, 1997: Mr. Dammeyer $3,757; Mr. Sonnenschein
$3,757; Mr. Kerr $3,757; and Mr. Whalen $3,750. The cumulative deferred
compensation (including interest) accrued with respect to each trustee from
the Fund as of July 31, 1997 is as follows: Mr. Dammeyer $13,816; Mr.
Sonnenschein $15,419; Mr. Kerr $12,513; and Mr. Whalen $11,178. The
deferred compensation plan is described above the table. Amounts deferred
are retained by the Fund and earn a rate of return determined by reference
to either the return on the Common Shares of the Fund or other funds in the
Fund Complex (as defined below) as selected by the respective trustee. To
the extent permitted by the 1940 Act, the Fund may invest in securities of
these funds selected by the trustees in order to match the deferred
compensation obligation.

(3) The amounts shown in this column represent the sum of the estimated Pension
or Retirement Benefit Accruals expected to be accrued by the 34 operating
investment companies in the Fund Complex as of December 31, 1997 for their
respective fiscal year ends in 1997. The retirement plan is described above
the table.

(4) The amounts shown in this column represent the sum of the estimated annual
benefits payable per year by the 34 operating investment companies in the
Fund Complex as of December 31, 1997 for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The
retirement plan is described above the compensation table.

(5) The "Fund Complex" currently consists of 41 investment companies (including
the Fund) advised by the Adviser or its affiliates that have the same
members on each investment company's Board of Trustees. The amounts shown
in this column are accumulated from the Aggregate Compensation of the 34
investment companies in the Fund Complex for the year ended December 31,
1997 before deferral by the trustees under the deferred compensation plan.
The Adviser also serves as investment adviser for other investment
companies; however, with the exception of Messrs. McDonnell, Powell and
Whalen, the Trustees are not trustees of other investment companies.
Combining the Fund Complex with other investment companies advised by the
Adviser, Mr. Whalen received Total Compensation of $268,447 for the year
ended December 31, 1997.

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<PAGE> 65

PORTFOLIO TRANSACTIONS

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

With respect to investments other than in Senior Loans, the Adviser will place
orders for portfolio transactions for the Fund with broker-dealer firms giving
consideration to the quality, quantity and nature of each firm's professional
services. These services include execution, clearance procedures, wire service
quotations and statistical and other research information provided to the Fund
and the Adviser, including quotations necessary to determine the value of the
Fund's net assets. Any research benefits so obtained are available for all
clients of the Adviser. Because statistical and other research information only
supplements the research efforts of the Adviser and still must be analyzed and
reviewed by its staff, the receipt of research information is not expected to
reduce materially its expenses. In selecting among the firms believed to meet
the criteria for handling a particular transaction, the Adviser may take into
consideration the fact that certain firms have sold Common Shares of the Fund
and that certain firms provide market, statistical or other research information
to the Fund and the Adviser and may select firms that are affiliated with the
Fund, the Adviser, VKACDI or VKAC. For the fiscal years ended July 31, 1995,
1996 and 1997, the Fund paid brokerage commissions of $211,000, $179,000 and
$51,563, respectively.

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

If purchases or sales of financial instruments for the Fund and for one or
more other investment companies or clients advised by the Adviser are considered
at or about the same time, transactions in such financial instruments will be
allocated among the several investment companies and clients, in a manner deemed
equitable by the Adviser, to each such investment company or client, taking into
account their respective sizes and the aggregate amount of financial instruments
to be purchased or sold. In this regard allocations of Senior Loans by the
Adviser will be made taking into account a variety of factors, including the
assets of such clients then available for investment in Senior Loans, such
clients' relative net asset value and such clients' investment objectives,
policies and limitations. Although in some cases this procedure could have a
detrimental effect on the price paid by the Fund for the financial instrument or
the volume of the financial instrument purchased by the Fund, the ability to
participate in volume transactions and to negotiate lower commissions, fees and
expenses possibly could benefit the Fund.

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

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

B-9
<PAGE> 66

will be reduced by all or a portion of the brokerage commissions given to
brokers that are affiliated with the Fund.

MANAGEMENT OF THE FUND

THE ADVISER

The Adviser was incorporated as a Delaware corporation in 1982. The Adviser is
a wholly-owned subsidiary of Van Kampen American Capital, Inc. Van Kampen
American Capital, Inc. is an indirect wholly-owned subsidiary of Morgan Stanley,
Dean Witter, Discover & Co. The Adviser's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.

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

INVESTMENT ADVISORY AGREEMENT

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

The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund provides that the Adviser will supply investment research
and portfolio management, including the selection of securities for the Fund to
purchase, hold or sell and the selection of financial institutions through whom
the Fund's portfolio transactions are executed. The Adviser also furnishes
necessary facilities and equipment, and permits its officers and employees to
serve without compensation as trustees and officers of the Fund if duly elected
to such positions. For the fiscal years ended July 31, 1995, 1996 and 1997, the
Fund recognized investment advisory fees pursuant to the Advisory Agreement of
$16,722,752, $36,408,493 and $52,313,966, respectively.

The Advisory Agreement specifies that the Adviser will reimburse the Fund for
annual expenses of the Fund which exceed the most stringent limits prescribed by
any State in which the Common Shares are offered for sale. In addition to making
any required reimbursements, the Adviser may in its discretion, but is not
obligated to, waive all or any portion of its fee or assume all or any portion
of the expenses of the Fund.

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

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performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the Advisory Agreement.

The Trustees are responsible for the overall management and supervision of the
Fund's affairs. The Adviser's activities are subject to the review and
supervision of the Trustees to whom the Adviser renders periodic reports of the
Fund's investment activities.

THE ADMINISTRATOR

The administrator for the Fund is VKACDI (in such capacity, the
"Administrator"), who is an affiliate of the Adviser. For the fiscal years ended
July 31, 1995, 1996 and 1997, the Fund recognized administrative fees pursuant
to the Administration Agreement of $4,400,724, $9,614,696 and $13,976,102,
respectively.

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

OTHER AGREEMENTS

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

NET ASSET VALUE

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

The value of the Fund's portfolio will be determined by the Adviser, following
guidelines established and periodically reviewed by the Trustees. Interests in
Senior Loans will be valued by the Adviser on behalf of the Fund on the basis of
market quotations and transactions in instruments which the Adviser believes may
be comparable to Senior Loan interests with respect to the following
characteristics: credit quality, interest rate, interest rate redetermination
period and maturity. Such instruments may include commercial paper, negotiable
certificates of deposit and short-term variable rate securities which have
adjustment periods comparable to the Senior Loan interests in the Fund's
portfolio. In determining the relationship between such instruments and the
Senior Loan interests in the Fund's portfolio, the Adviser will consider on an
ongoing

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basis, among other factors, (i) the credit worthiness of the Borrower and (ii)
the current interest rate, the period until next interest rate redetermination
and maturity of such Senior Loan interests. It is expected that the Fund's net
asset value will fluctuate as a function of interest rate and credit factors.
Because of the short-term nature of such instruments, however, the Fund's net
asset value is expected to fluctuate less in response to changes in interest
rates than the net asset values of investment companies with portfolios
consisting primarily of fixed-income or longer term securities. The Adviser
believes that Lenders selling Senior Loan interests or otherwise involved in a
Senior Loan transaction may tend, in valuing Senior Loan interests for their own
account, to be less sensitive to interest rate and credit quality changes and,
accordingly, the Adviser does not intend to rely solely on such valuations in
valuing the Senior Loan interests for the Fund's account. In addition, because a
secondary trading market in Senior Loans has not yet fully developed, in valuing
Senior Loans, the Adviser may not rely solely on but may consider, to the extent
the Adviser believes such information to be reliable, prices or quotations
provided by banks, dealers or pricing services with respect to secondary market
transactions in Senior Loans. To the extent that an active secondary market in
Senior Loan interests develops to a reliable degree, the Adviser may rely to an
increasing extent on such market prices and quotations in valuing the Senior
Loan interests in the Fund's portfolio. In light of the senior nature of Senior
Loan interests included in the Fund's portfolio and taking into account the
Fund's access to non-public information with respect to Borrowers relating to
such Senior Loan interests, the Adviser does not currently believe that
consideration on a systematic basis of ratings provided by any nationally
recognized statistical rating organization or price fluctuations with respect to
long- or short-term debt of such Borrowers subordinate to the Senior Loans of
such Borrowers is necessary for the determination of the value of such Senior
Loan interests. Accordingly, the Adviser generally does not systematically
consider (but may consider in certain instances) and, in any event, does not
rely upon such ratings or price fluctuations in determining the value of Senior
Loan interests in the Fund's portfolio.

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

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

The Fund's net asset value has ranged from a high of $10.07 to a low of $9.96
since its commencement of investment operations on October 4, 1989. During such
time the world has experienced a number of significant political and economic
events. In 1989, East and West Germany moved toward unification and high yield
bonds experienced significant defaults. In 1990, Germany reunified, Iraq invaded
Kuwait and the Dow reached 3,000. During 1991, the U.S. experienced and recorded
negative growth in Gross Domestic Product, the Gulf War began, the Soviet Union
collapsed and U.S. unemployment reached an eight year high. In 1992, the ERM
crashed, beginning a currency crisis and Bill Clinton was elected. In 1993,
Israel and the PLO signed a peace accord, long-term treasury rates fell to
5.79%, NAFTA was approved and the Dow Jones Industrial Average reached a new
high. During 1994, the Fed began its first interest rate tightening in 5 years,
and on December 6, 1994, Orange County, California, together with its pooled
investment funds, filed for protection under Chapter 9 of the Federal Bankruptcy
Code. In 1995, the Federal Reserve Board eased short-term rates first in July
and for a second and final time in December. There was a partial government
shutdown in November and the Dow crossed 5200 in December. In 1996, The Fed once
again eased short-term rates in January. In June, Alan Greenspan was appointed
for a third term. In July, inflation fears caused the stock
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market to sell off, Small Capitalization stocks to decline and technology stocks
to sell off. The Dow crossed 6000 in October and President Bill Clinton was
re-elected for a second term in November. In October 1997, domestic stocks
declined by more than 10% in less than one week and world markets were affected
by currency instability and market volatility in Asia.

TAXATION

FEDERAL TAXATION

The Fund has qualified and intends to continue to qualify each year to be
treated as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to loans of securities and gains from the sale or other disposition
of securities or certain other related income; (b) derive less than 30% of its
gross income from gains from the sale or other disposition of securities and
certain other investments held for less than three months (the "short-short
rule"); and (c) diversify its holdings so that at the end of each quarter of the
Fund's taxable year (i) at least 50% of the value of the Fund's assets is
represented by cash, U.S. government securities, securities of other regulated
investment companies, and other securities which, with respect to any one
issuer, do not represent more than 5% of the value of the Fund's assets or more
than 10% of the voting securities of such issuer, and (ii) not more than 25% of
the value of the Fund's assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other regulated
investment companies). Under recently enacted legislation, the short-short rule
described above will no longer be applicable to the Fund beginning on August 1,
1998.

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

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

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

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

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

The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months. Under recently enacted legislation, this
requirement will no longer be applicable to the Fund beginning on August 1,
1998.

Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes.

DISTRIBUTIONS

Distributions of the Fund's net investment income are taxable to Shareholders
as ordinary income, whether paid in cash or reinvested in additional Shares.
Distributions of the Fund's net capital gains ("capital gains dividends"), if
any, are taxable to Common Shareholders at the rates applicable to long-term
capital gains regardless of the length of time Shares of the Fund have been held
by such Shareholders. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's Common Shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming such Common Shares are held as a capital asset). For a
summary of the tax rates applicable to capital gains (including capital gains
dividends), see "Capital Gains Rates Under the 1997 Tax Act" below. It is not
expected that any portion of the distributions from the Fund will be eligible
for the dividends received deduction for corporations. The Fund will inform
Shareholders of the source and tax status of all distributions promptly after
the close of each calendar year.

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

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

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

SALE OF SHARES

Except as discussed below, selling Shareholders will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the Common Shares and the amount received. If such

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Common Shares are held as a capital asset, the gain or loss will be a capital
gain or loss. For a summary of the tax rates applicable to capital gains, see
"Capital Gains Rates Under the 1997 Tax Act" below. It is possible, although the
Fund believes it is unlikely, that, in connection with a tender offer,
distributions to tendering shareholders may be subject to tax as ordinary income
(rather than gain or loss), which in turn may result in deemed distributions
subject to tax as ordinary income for non-tendering shareholders. The federal
income tax consequences of repurchase of Common Shares pursuant to tender offers
will be disclosed in the related offering documents. Any loss recognized upon a
taxable disposition of Common Shares held for six months or less will be treated
as a long-term capital loss to the extent of any capital gains dividends
received with respect to such Common Shares. For purposes of determining whether
Common Shares have been held for six months or less, the holding period is
suspended for any periods during which the Shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.

CAPITAL GAINS RATES

Capital Gains Rates Under the 1997 Tax Act. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act"), the maximum tax rates applicable to net capital gains
recognized by individuals and other non-corporate taxpayers are (i) the same as
ordinary income rates for capital assets held for one year or less, (ii) 28% for
capital assets held for more than one year but not more than 18 months and (iii)
20% for capital assets held for more than 18 months. The 1997 Tax Act did not
affect the maximum long-term capital gains rate for corporations, which remains
at 35%. The new tax rates for capital gains under the 1997 Tax Act described
above apply to distributions of capital gains dividends by regulated investment
companies such as the Fund as well as to sales and exchanges of shares in
regulated investment companies such as the Fund. With respect to capital losses
recognized on dispositions of shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gains
dividends received on such shares (see "Sale of Shares" above), it is unclear
how such capital losses offset the capital gains referred to above. Shareholders
should consult their own tax advisors as to the application of the new capital
gains rates to their particular circumstances.

GENERAL

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

REPURCHASE OF SHARES

The Fund has entered into a Credit Agreement dated April 17, 1997 (the "Credit
Agreement") among the Fund, as borrower, the banks party thereto (the "Financial
Institutions"), and Bank of America National Trust and Savings Association
("BofA"), as agent, pursuant to which the Financial Institutions have committed
to provide a credit facility of up to $250,000,000 to the Fund, which is not
secured by the assets of the Fund or other collateral. The Fund has not drawn
down any of the funds available under the Credit Agreement. The proceeds of any
amounts borrowed under the Credit Agreement are to be used to provide the Fund
with additional liquidity to meet its obligations to purchase Common Shares
pursuant to any tender offer that it may make. The Credit Agreement has terms
and conditions substantially similar to the following:

a. The Fund is entitled to borrow loans ("Loans") from the Financial
Institutions amounts which in the aggregate do not exceed the lesser of (i)
the $250 million credit facility each or (ii) twelve and one half percent
(12.5%) of the net asset value of the Fund (defined as total assets minus
total liabilities minus assets subject to liens).

b. Loans made under the Credit Agreement, if any, will bear interest daily, at
the Fund's option, (i) at a rate per annum equal to the federal funds rate
from time to time plus 0.375%, provided, however, that during any period
the aggregate outstanding loans exceed $125 million, the rate shall be the
federal funds rate plus 0.50%, or (ii) at a rate per annum equal to a
reserve-adjusted interbank offered rate offered by BofA's Grand Cayman
Branch ("IBOR") plus 0.375% per annum, provided, however, that

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during any period the aggregate outstanding loans exceed $125 million, the
rate shall be IBOR plus 0.50%. Such interest will be due on the outstanding
principal amount (i) as to any federal funds rate loan on the last business
day of each calendar quarter and (ii) as any offshore rate loan, from one
(1) day to sixty (60) days from the date of the loan, as selected by the
Fund in advance. Overdue payments of principal and interest will bear
interest, payable upon demand, at a penalty rate. No Loan shall be
outstanding for a period of more than sixty (60) days, and there shall be
no more than three Interest Periods in effect.

c. The Fund paid approximately $25,000 of fees and expenses to BofA or its
affiliates on the date the Credit Agreement was executed. In addition,
during the term of the Credit Agreement, the Fund is obligated to pay a
commitment fee computed at the rate of 0.065% per annum on the average
daily unused amount of the facility.

d. The principal amount of loans made under the Credit Agreement, if any, are
required to be paid sixty (60) days from the date of the loan. The Fund is
entitled to prepay a loan in multiples of $1,000,000, provided that the
Fund gives sufficient notices of prepayment. On the Commitment Termination
Date (as defined below), all outstanding principal and accrued interest
under the Credit Agreement will be due and payable in full.

e. The drawdown of the initial Loan, if any, under the Credit Agreement is
subject to certain conditions, including, among other things, the Fund
executing and delivering a promissory note made payable to the order of
each Financial Institution, in the form attached to the Credit Agreement
(the "Promissory Notes").

The drawdown of each Loan, if any, is further conditioned upon the
satisfaction of additional conditions, including, without limitation, (i)
the providing of notice with respect to the Loan, (ii) the Fund's asset
coverage ratio must be at least 8 to 1; (iii) there being no default or
event of default in existence and (iii) the representations and warranties
made in the Credit Agreement continuing to be true.

f. The Credit Agreement contains various affirmative and negative covenants
of the Fund, including, without limitation, obligations: (i) to provide
periodic financial information; (ii) with limited exceptions, to not
consolidate with or merge into any other entity or have any other entity
merge into it and to not sell all or any substantial part of its assets;
(iii) to continue to engage in its current type of business and to
maintain its existence as a business trust; (iv) to comply with applicable
laws, rules and regulations and perform its obligations under the Credit
Agreement; (v) to maintain insurance on its property and business; (vi) to
limit the amount of its debt based upon 12.5% of the net asset value of
the Fund; and (vii) to not create any lien on any of its assets, with
certain exceptions.

g. The Credit Agreement also contains various events of default (with certain
specified grace periods), including, without limitation: (i) failure to pay
when due any amounts required to be paid to Financial Institutions under
the Credit Agreement or the Promissory Notes; (ii) any material
misrepresentations in the Credit Agreement or documents delivered to
Financial Institutions; (iii) failure to observe or perform certain terms,
covenants and agreements contained in the Credit Agreement, the Promissory
Notes or other documents delivered to the Financial Institutions; (iv)
failure to comply with the Fund's fundamental investment policies or
investment restrictions; (v) failure to comply with all material provisions
of the Investment Company Act of 1940; (vi) the voluntary or involuntary
bankruptcy of the Fund; (vii) the entry of judgments for the payment of
money in excess of $5,000,000 in the aggregate which remains unsatisfied or
unstayed for a period of 30 days; and (viii) a change in control of the
Fund's investment adviser.

h. The credit facility provided pursuant to the Credit Agreement will
terminate on April 16, 1998 (the "Commitment Termination Date"), unless
extended pursuant to the terms thereof, and all accrued interest and
principal will be due thereon.

The Fund intends to repay any loans under the Credit Agreement from proceeds
from the specified pay-downs from the interests in Senior Loans (as defined
below) which will be acquired and from proceeds from the sale of Common Shares.

Even if a tender offer has been made, the Trustees' announced policy, which
may be changed by the Trustees, is that the Fund cannot accept tenders if (1) in
the reasonable judgment of the Trustees, there is not

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<PAGE> 73

sufficient liquidity of the assets of the Fund; (2) such transactions, if
consummated, would (a) impair the Fund's status as a regulated investment
company under the Code (which would make the Fund a taxable entity, causing the
Fund's taxable income to be taxed at the Fund level, as more fully described in
"Taxation") or (b) result in a failure to comply with applicable asset coverage
requirements; or (3) there is, in the Board of Trustees' reasonable judgment,
any (a) material legal action or proceeding instituted or threatened challenging
such transactions or otherwise materially adversely affecting the Fund, (b)
suspension of or limitation on prices for trading securities generally on any
United States national securities exchange or in the over-the-counter market,
(c) declaration of a banking moratorium by federal or state authorities or any
suspension of payment by banks in the United States or New York State, (d)
limitation affecting the Fund or the issuers of its portfolio securities imposed
by federal or state authorities on the extension of credit by lending
institutions, (e) commencement of war, armed hostilities or other international
or national calamity directly or indirectly involving the United States or (f)
other event or condition which would have a material adverse effect on the Fund
or the holders of its Common Shares if Common Shares were repurchased. The
Trustees may modify these conditions in light of experience.

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

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

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

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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, 1997, 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, 1997, 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,
1997, 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 8, 1997

B-18
<PAGE> 75

PORTFOLIO OF INVESTMENTS

July 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Stated
(000) Borrower Maturity* Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS 85.1%
AEROSPACE/DEFENSE 1.6%
$10,103 Aerostructures Corp., Term Loan -- Manufacturer and
assembler of structural aircraft parts...................... 09/30/03 to 09/30/04 $ 10,124,643
11,740 Alliant Techsystems, Inc., Term Loan -- Manufacturer of
ordnance, composite metals.................................. 03/15/01 11,756,648
8,807 Fiberite, Inc., Term Loan -- Manufacturer of composite
fibers...................................................... 12/31/01 8,815,769
49,167 Gulfstream Delaware Corp., Term Loan -- Aircraft
manufacturer................................................ 09/30/02 49,246,746
5,503 L-3 Communications Corp., Term Loan -- Provider of secure
communications systems...................................... 03/31/03 to 03/31/06 5,513,187
4,975 MAG Aerospace Industries, Inc., Term Loan -- Supplier of
waste and trash systems to the aerospace industry........... 06/15/03 5,000,386
8,000 Tri-Star, Inc., Term Loan -- Distributor of aerospace
fasteners................................................... 09/30/03 8,054,020
------------
98,511,399
------------
AUTOMOTIVE 2.5%
8,500 American Bumper and Manufacturing Co., Term Loan --
Manufacturer of light truck
and SUV bumpers............................................. 04/30/04 8,520,286
17,972 Blue Bird Body Co., Term Loan -- Manufacturer of school
buses....................................................... 11/19/03 18,007,785
1,833 Blue Bird Body Co., Revolving Credit........................ 11/19/03 1,833,352
28,000 Cambridge Industries, Inc., Term Loan -- Manufacturer of
plastic components for automobiles.......................... 06/30/05 28,036,930
16,411 Collins & Aikman Products Co., Term Loan -- Manufacturer of
auto interiors, home interiors and wallpaper................ 01/13/02 to 12/31/02 16,442,619
17,265 Columbus-McKinnon Corp., Term Loan -- Manufacturer of
material handling equipment................................. 09/30/01 to 09/30/03 17,308,551
4,648 Columbus-McKinnon Corp., Revolving Credit................... 09/30/01 4,649,341
9,975 Exide Corp., Term Loan -- Manufacturer of auto and
industrial batteries........................................ 06/15/01 9,978,764
15,928 Hayes Wheels International, Inc., Term Loan -- Designer and
manufacturer of car and truck wheels........................ 07/31/04 to 07/31/05 15,967,934
11,780 Numatics, Inc., Term Loan -- Manufacturer of pneumatic fluid
power equipment............................................. 12/31/03 11,814,486
10,000 The Plastech Group, Term Loan -- Manufacturer and designer
of thermoplastic automotive parts........................... 04/01/02 to 04/01/04 10,004,286
10,009 Stanadyne Automotive Corp., Term Loan -- Manufacturer of
diesel injection devices and engine parts................... 12/31/01 10,009,175
------------
152,573,509
------------
BROADCASTING 4.5%
25,170 American Radio Systems Corp., Revolving Credit -- Radio
station owner/operator...................................... 12/31/04 25,297,215
12,570 Benedek Broadcasting Corp., Term Loan -- Television station
owner/operator.............................................. 05/01/01 to 11/01/02 12,602,962
26,667 Chancellor Broadcasting Co., Term Loan -- Radio station
owner/operator.............................................. 06/30/04 26,795,212
1,465 Chancellor Broadcasting Co., Revolving Credit............... 06/30/04 1,576,621
53,571 Evergreen Media Corp. of Los Angeles, Term Loan -- Radio
station owner/operator...................................... 06/30/05 53,736,606
7,029 Evergreen Media Corp. of Los Angeles, Revolving Credit...... 06/30/05 7,093,795
9,227 Jacor Communications, Inc., Term Loan -- Radio station
owner/operator.............................................. 06/12/04 9,255,306
10,919 Katz Media Corp., Term Loan -- Media representation firm.... 12/31/04 10,937,087
1,693 Katz Media Corp., Revolving Credit.......................... 12/31/04 1,698,250
15,000 Patterson Broadcasting, Inc., Term Loan -- Radio station
operator.................................................... 06/30/04 15,050,540
9,427 River City Broadcasting, L.P., Term Loan -- Midwestern radio
station owner/operator...................................... 12/31/99 9,454,087
10,710 SFX Broadcasting, Inc., Revolving Credit -- Radio station
owner/operator.............................................. 06/30/05 10,743,623
45,200 Sinclair Broadcasting, Term Loan -- Television and radio
station owner/operator...................................... 12/31/04 45,264,651
21,614 Sullivan Broadcasting, Term Loan -- Television station
owner/operator.............................................. 12/31/03 21,641,709
383 Sullivan Broadcasting, Revolving Credit..................... 12/31/03 384,611
3,677 Universal Outdoor, Inc., Term Loan -- Outdoor advertiser.... 09/20/03 3,677,330
15,500 Universal Outdoor, Inc., Revolving Credit................... 09/30/03 15,575,146
9,926 Young Broadcasting, Inc., Term Loan -- Television station
operator.................................................... 09/30/03 9,964,365
------------
280,749,116
------------
BUILDING/HOUSING 2.0%
19,454 Behr Process Corp., Term Loan -- Manufacturer of paint...... 03/31/02 to 03/31/05 19,473,155
1,412 Behr Process Corp., Revolving Credit........................ 03/31/02 1,411,789
</TABLE>

See Notes to Financial Statements

B-19
<PAGE> 76

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Stated
(000) Borrower Maturity* Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

BUILDING/HOUSING (CONTINUED)
$13,750 Falcon Building Products, Inc., Term Loan -- Manufacturer of
building products........................................... 06/30/05 $ 13,802,083
59,750 National Gypsum Co., Term Loan -- Manufacturer of
wallboard................................................... 09/20/03 59,792,054
23,602 Walter Industries, Inc., Term Loan -- Home builder.......... 01/22/02 to 01/22/03 23,644,962
5,443 Walter Industries, Inc., Revolving Credit................... 01/22/02 5,529,537
------------
123,653,580
------------
<CAPTION>
CABLE 11.0%
<S> <C> <C> <C>
23,107 Adelphia Cable Partners, L.P., Revolving Credit -- Cable
television operator......................................... 12/31/03 23,230,162
22,500 Bresnan Communications Co., L.P., Term Loan -- Cable
television systems operator................................. 03/31/06 22,653,552
5,970 Cable Systems International, Inc., Term Loan -- Manufacturer
of electrical wire and cable................................ 12/31/02 5,984,166
12,000 Cablevision of Ohio, Term Loan -- Cable television
owner/operator.............................................. 12/31/05 12,016,335
46,500 Charter Communications Entertainment I, Term Loan -- Cable
television systems operator................................. 06/30/04 46,531,468
10,414 Charter Communications Entertainment II, Term Loan -- Cable
television systems operator................................. 06/30/05 to 12/31/05 10,429,793
3,169 Charter Communications Entertainment II, Revolving Credit... 06/30/05 3,169,433
32,000 Charter Communications Entertainment II & Long Beach, Term
Loan -- Cable television systems operator................... 03/31/06 32,123,089
47,500 Chelsea Communications, Inc., Term Loan -- Cable television
systems operator............................................ 12/31/04 47,553,724
21,034 Classic Cable, Inc., Term Loan -- Cable television systems
operator.................................................... 06/30/05 21,074,828
16,717 Coaxial Communications of Central Ohio, Term Loan -- Cable
television systems operator................................. 12/31/99 16,718,050
25,875 Comcast MH Holdings, Inc., Revolving Credit -- Cable
television systems operator................................. 12/31/03 25,903,002
2,406 CSG Systems, Inc., Term Loan -- Communications management
consultant.................................................. 12/31/00 2,407,886
45,037 Falcon Holdings Group, L.P., Term Loan -- Cable television
systems operator............................................ 07/11/05 45,086,436
9,260 Falcon Holdings Group, L.P., Revolving Credit............... 07/11/05 9,309,094
26,500 Frontiervision Operating Partners, L.P., Term Loan -- Cable
television systems operator................................. 06/30/05 26,557,637
22,778 Garden State Cablevision, L.P., Revolving Credit -- Cable
television systems owner/operator........................... 06/30/05 22,778,667
33,971 Hilton Head Communications, L.P., Revolving Credit -- Cable
television systems operator................................. 06/30/03 34,138,774
11,000 Insight Communication Co., L.P., Term Loan -- Cable
television systems operator................................. 03/31/05 11,027,541
8,200 Insight Communication Co., L.P., Revolving Credit........... 03/31/05 8,233,263
18,500 InterMedia Partners IV, L.P., Term Loan -- Cable television
systems owner/operator...................................... 01/01/05 18,523,830
6,139 James Cable Partners, L.P., Term Loan -- Cable television
systems operator............................................ 06/30/00 6,152,799
500 James Cable Partners, L.P., Revolving Credit................ 06/30/00 501,935
7,000 Lenfest Communications, Inc., Term Loan -- Cable television
systems operator............................................ 09/30/03 7,019,193
7,350 Lenfest Communications, Inc., Revolving Credit.............. 09/30/03 7,393,215
67,313 Marcus Cable Operating Co., Term Loan -- Cable television
systems operator............................................ 12/31/02 to 04/30/04 67,464,833
3,095 Marcus Cable Operating Co., Revolving Credit................ 12/31/02 3,118,008
5,000 Mark Twain Cablevision, L.P., Term Loan -- Cable television
systems operator............................................ 06/30/04 5,026,115
10,800 Northland Cable Television, Inc., Term Loan -- Cable
television systems operator................................. 09/30/04 10,837,489
47,500 TCI Pacific, Inc., Term Loan -- Cable television systems
operator.................................................... 12/31/04 47,581,205
7,890 TCI Southeast, Inc., Revolving Credit -- Cable television
systems operator............................................ 06/30/01 7,906,536
30,714 Triax Midwest Associates, Term Loan -- Cable television
systems operator............................................ 06/30/04 to 06/30/05 30,813,692
2,730 Triax Midwest Associates, Revolving Credit.................. 06/30/04 2,738,720
27,029 TW Fanch, Revolving Credit -- Cable television systems
operator.................................................... 12/31/04 27,145,560
19,600 UCA Group, Revolving Credit -- Cable television systems
operator.................................................... 09/30/03 19,683,974
------------
688,834,004
------------
</TABLE>

See Notes to Financial Statements

B-20
<PAGE> 77

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

CHEMICAL 3.3%
$11,396 Cedar Chemicals Corp., Term Loan -- Manufacturer of
fertilizer.................................................. 10/30/03 $ 11,417,257
7,448 Geo Specialty Chemicals, Inc., Term Loan -- Manufacturer of
specialty chemicals......................................... 09/25/02 to 03/25/04 7,492,121
7,923 Hampshire Chemical Co., Term Loan -- Manufacturer of
specialty chemicals......................................... 09/01/03 7,925,963
47,507 Huntsman Group Holdings, Term Loan -- Integrated chemical,
plastic and packaging producer.............................. 12/31/02 to 12/31/04 47,581,975
4,340 Huntsman Group Holdings, Revolving Credit................... 12/31/02 4,353,815
20,000 Huntsman Specialty Chemical Corp., Term Loan -- Manufacturer
of specialty chemicals...................................... 03/15/04 to 03/15/05 20,018,076
10,000 Pioneer Americas Acquisition Corp., Term Loan --
Manufacturer of water treatment chemicals................... 12/31/06 10,014,993
12,147 Reid Plastics, Inc., Term Loan -- Manufacturer of plastic
bottles..................................................... 11/12/03 12,206,517
10,633 Rexene Corp., Term Loan -- Manufacturer of petrochemicals... 03/31/04 10,652,407
2,334 Rexene Corp., Revolving Credit.............................. 03/31/04 2,338,333
15,000 Rheox, Inc., Term Loan -- Manufacturer of chemical
additives................................................... 01/30/04 15,034,447
43,311 Sterling Chemicals, Inc., Term Loan -- Manufacturer of
commodity petrochemicals.................................... 09/30/04 43,441,922
6,692 Texas Petrochemicals Corp., Term Loan -- Processor of
petrochemicals.............................................. 06/30/04 6,705,414
5,958 Thoro System Products, Inc., Term Loan -- Manufacturer of
chemicals for construction industry......................... 03/31/00 6,077,072
------------
205,260,312
------------
<CAPTION>

ELECTRIC/ELECTRONICS 2.3%
<S> <C> <C> <C>
12,504 Amphenol Corp., Term Loan -- Designer, manufacturer and
marketer of electric/electronic connectors.................. 05/19/05 to 05/19/06 12,531,152
6,100 Anacomp, Inc., Term Loan -- Provider of micrographics....... 03/31/01 6,124,218
6,825 Banker's Systems, Inc., Term Loan -- Supplier of compliance
services.................................................... 11/01/02 6,826,372
31,625 Berg Electronics, Inc., Term Loan -- Manufacturer of
electronic connectors....................................... 12/31/02 31,653,108
21,350 Bridge Information Systems, Inc., Term Loan -- Provider of
financial and analytical services........................... 12/31/01 to 12/31/02 21,404,869
17,000 Cooperative Computing Inc./Triad Systems Corp., Term Loan --
Provider of information services............................ 02/27/03 17,084,550
2,290 Exide Electronics Group, Inc., Term Loan -- Manufacturer of
uninterruptible power supply products....................... 04/08/02 2,292,629
3,600 Exide Electronics Group, Inc., Revolving Credit............. 04/08/02 3,607,067
9,000 HG Holdings, Inc., Term Loan -- Provider of payment and
information processing...................................... 06/30/01 9,024,511
9,950 Phase Metrics, Inc., Term Loan -- Designer and manufacturer
of computer production test equipment....................... 11/27/01 9,984,590
8,358 Rowe International, Inc., Term Loan -- Manufacturer of
jukeboxes and electronic equipment (a)...................... 12/31/97 7,104,583
9,000 Sarcom, Inc., Term Loan -- Provider of information
technology.................................................. 12/31/02 9,000,900
8,775 Viasystems, Inc., Term Loan -- Manufacturer of PCB
equipment................................................... 06/30/04 to 06/30/05 8,803,727
------------
145,442,276
------------
</TABLE>

See Notes to Financial Statements

B-21
<PAGE> 78

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

ENTERTAINMENT/LEISURE 6.5%
$83,470 AMF Bowling, Inc., Term Loan -- Manufacturer of integrated
bowling equipment........................................... 03/31/01 to 03/31/04 $ 83,563,184
1,422 AMF Bowling, Inc., Revolving Credit......................... 03/31/01 1,422,600
7,911 DW Investment, Inc., Revolving Credit -- Communications and
entertainment conglomerate.................................. 06/28/00 7,911,631
33,000 Fleer Corp., Term Loan -- Publisher of children's
magazines (a) (b)........................................... 02/28/02 30,096,000
8,000 KSL Recreation Group, Inc., Term Loan -- Leisure, recreation
and travel.................................................. 04/30/05 to 04/30/06 8,021,758
1,500 KSL Recreation Group, Inc., Revolving Credit................ 04/30/04 1,500,578
15,566 M.W. Manufacturers, Term Loan -- Manufacturer of sporting
goods and table games....................................... 09/15/02 15,581,134
59,231 Mafco Finance Corp., Term Loan -- Holding company........... 03/20/99 59,478,864
924 Mafco Finance Corp., Revolving Credit....................... 03/20/99 923,097
28,571 Metro-Goldwyn-Mayer, Term Loan -- Movie/television
producer.................................................... 09/30/02 28,999,796
29,600 Metro-Goldwyn-Mayer, Revolving Credit....................... 09/30/01 30,368,734
20,000 Orion Pictures Corp., Term Loan -- Theatrical production.... 07/10/02 20,098,918
2,000 Orion Pictures Corp., Revolving Credit...................... 07/10/02 2,024,069
24,130 Six Flags Theme Parks, Term Loan -- Theme park operator..... 06/23/03 24,130,994
6,700 Sportcraft, Ltd., Term Loan -- Supplier of high quality
branded sporting goods...................................... 12/31/02 6,730,872
8,250 TW Recreational Services, Inc., Term Loan -- Provider of
food and services for state and national parks.............. 09/30/02 8,266,189
15,000 Vail Resorts, Inc., Term Loan -- Resort operator............ 04/15/04 15,016,221
56,441 Viacom, Inc., Term Loan -- Entertainment media/television
programming................................................. 04/01/02 to 04/02/02 56,487,810
5,085 Viacom, Inc., Revolving Credit.............................. 04/01/02 5,094,614
------------
405,717,063
------------
FINANCE 0.5%
3,562 Ark Asset Holdings, Inc., Term Loan -- Institutional money
manager..................................................... 11/30/01 3,562,559
7,000 Blackstone Capital Co., Term Loan -- Financial services..... 05/31/99 7,018,686
7,000 Blackstone Capital Co., Revolving Credit.................... 05/31/99 7,018,320
14,842 OSI Holdings Corp., Term Loan -- Provider of accounts
receivable management services.............................. 11/01/03 14,865,900
------------
32,465,465
------------
FOOD/BEVERAGE 4.1%
10,808 American Italian Pasta Co., Term Loan -- Pasta products
producer.................................................... 02/28/04 10,832,003
11,500 Amerifoods, Inc., Term Loan -- Manufacturer of snack foods
and bakery products......................................... 06/30/01 to 06/30/02 10,925,000
7,400 Ameriserve Food Distribution, Inc., Term Loan -- Systems
food service distributor.................................... 06/30/04 to 06/30/06 7,407,428
4,137 Edwards Baking Corp., Term Loan -- Manufacturer of bakery
products.................................................... 09/30/00 to 10/31/02 4,146,877
4,839 Ghiradelli Chocolate Co., Term Loan -- Manufacturer of
chocolate products.......................................... 03/30/03 4,864,112
9,936 IM Stadium, Inc., Term Loan -- Sports stadium concessions... 12/31/02 to 12/31/03 9,956,757
36,000 International Home Foods, Inc., Term Loan -- Manufacturer
and marketer of branded food products....................... 09/30/04 36,077,918
17,758 President Baking Co., Inc., Term Loan -- Bread/bread
products manufacturer....................................... 12/30/02 17,692,751
39,676 Rykoff-Sexton, Inc., Term Loan -- Distributor and
manufacturer of food and related non-food products.......... 10/31/02 to 04/30/03 39,731,676
45,054 S.C International Services, Term Loan -- In-flight food
services.................................................... 09/30/00 to 09/30/03 45,089,242
13,880 Select Beverages, Inc., Term Loan -- Independent bottler.... 06/30/01 to 06/30/02 13,881,757
24,762 Stroh Brewery Co., Term Loan -- Beer manufacturer........... 06/30/03 24,834,478
20,138 Van De Kamp's, Inc., Term Loan -- Processor and distributor
of frozen foods............................................. 04/30/03 to 09/30/03 20,181,133
6,708 Windsor Quality Food Co., LTD, Term Loan -- Processor of
frozen foods................................................ 12/31/01 6,725,529
------------
252,346,661
------------
</TABLE>

See Notes to Financial Statements

B-22

<PAGE> 79

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

FOOD STORES 3.6%
$48,000 Bruno's, Inc., Term Loan -- Southeastern retail food chain
operator.................................................... 04/15/05 $ 48,076,707
12,805 Carr-Gottstein Foods, Term Loan -- Alaska based retail food
chain operator.............................................. 12/31/02 12,810,784
11,440 Core-Mark International, Inc., Revolving Credit -- Wholesale
distributor................................................. 06/30/01 11,518,259
5,079 Harvest Foods, Inc., Term Loan -- Mississippi based retail
food chain operator (a) (b)................................. 06/30/02 304,724
30,455 Pathmark Stores, Inc., Term Loan -- New Jersey based retail
food chain operator......................................... 06/15/01 to 12/15/01 30,525,118
1,018 Pathmark Stores, Inc., Revolving Credit..................... 06/15/01 1,068,928
3,293 Ralph's Grocery Co., Revolving Credit -- Los Angeles,
California based retail food chain operator................. 02/15/03 3,303,407
54,827 Ralph's Grocery Co., Term Loan.............................. 02/15/03 to 02/15/04 54,887,876
51,376 Smith's Food and Drug Centers, Term Loan -- Food and drug
retailer.................................................... 11/01/03 to 05/01/05 51,424,039
10,157 Star Markets Co., Inc., Term Loan -- New England based
retail food chain operator.................................. 12/31/02 to 12/31/03 10,169,269
1,961 Star Markets Co., Inc., Revolving Credit.................... 01/31/01 1,963,343
------------
226,052,454
------------
FUEL RETAILER 0.2%
11,981 TravelCenters of America, Inc., Term Loan -- Operator of
truckstops nationwide....................................... 03/31/05 12,022,962
------------
HEALTHCARE 5.7%
16,389 Alaris Medical Systems, Inc., Term Loan -- Infusion systems
provider.................................................... 08/01/02 to 05/01/05 16,402,412
1,344 Alaris Medical Systems, Inc., Revolving Credit.............. 08/01/02 1,344,104

5,800 ASC Network Corp., Term Loan -- Operator of free-standing
outpatient surgery centers.................................. 06/30/01 to 06/30/03 5,831,417
6,500 Charter Behavioral, Revolving Credit -- Provider of
behavorial healthcare services.............................. 06/17/02 6,547,092
59,493 Community Health Systems, Inc., Term Loan -- Southeast and
Southwest hospital operator/provider of healthcare
services.................................................... 12/31/03 to 12/31/05 59,667,358
37,500 Corning Clinical Labs, Inc., Term Loan -- Clinical testing
laboratory operator......................................... 12/05/02 to 12/05/03 37,659,498
4,900 Coventry Corp., Term Loan -- Health maintenance
organization................................................ 04/01/98 4,900,000
55,824 Dade International, Inc., Term Loan -- Medical equipment
manufacturer/marketer....................................... 12/31/02 to 12/31/04 55,958,413
27,500 FPA Medical Management, Inc., Term Loan -- Healthcare
provider.................................................... 09/30/01 27,541,372
15,755 Graphic Controls Corp., Term Loan -- Manufacturer of medical
equipment................................................... 09/28/03 15,775,341
18,566 Integrated Health Services, Inc., Revolving Credit --
Provider of post-acute healthcare services.................. 06/30/02 18,767,746
6,920 Medical Specialties Group, Inc., Term Loan -- Supplier of
medical pumps and consumables............................... 06/30/01 to 06/30/04 6,945,058
9,905 Mediq/PRN Life Support Services, Inc., Term Loan -- Rents
movable critical care equipment............................. 09/30/04 9,946,087
18,315 Merit Behavioral Corp., Term Loan -- Psychiatric hospital
operator.................................................... 10/06/03 18,337,461
60,000 National Medical Care, Inc., Term Loan -- Kidney dialysis
service provider............................................ 09/30/03 60,213,995
7,143 NEN Acquisition, Inc., Term Loan -- Manufacturer of
consumable radio-isotopic biochemicals...................... 03/31/05 7,177,954
5,000 Prime Medical Services, Inc., Term Loan -- Provider of
lithotripsy services........................................ 04/30/03 5,016,230
------------
358,031,538
------------
MANUFACTURING 7.4%
9,500 Arena Brands, Inc., Term Loan -- Manufacturer of hats....... 06/01/02 9,500,000
618 Arena Brands, Inc., Revolving Credit........................ 06/01/02 617,500

7,444 CII Carbon, L.L.C., Term Loan -- Calcined coke producer..... 09/30/04 7,471,622
12,281 Calmar, Inc., Term Loan -- Manufacturer of dispensing and
spray products.............................................. 09/15/03 to 03/15/04 12,287,342
9,797 CBP Resources, Inc., Term Loan -- Manufacturer of animal
feed ingredients............................................ 09/30/03 9,820,078
47,052 Dal-Tile Group, Inc., Term Loan -- Ceramic tile and floor
covering manufacturer/retailer.............................. 12/31/02 to 12/31/03 47,258,814
3,181 Dal-Tile Group, Inc., Revolving Credit...................... 12/31/02 3,185,304
20,918 Desa International, Term Loan -- Diversified manufacturer of
heaters, fireplaces and specialty tools..................... 02/28/03 20,978,724
9,321 Ebel USA, Inc., Term Loan -- Manufacturer of luxury time
pieces...................................................... 09/30/01 9,320,793
3,795 Essex Group, Inc., Revolving Credit -- Manufacturer of
electrical wire and cable................................... 10/31/01 3,814,274
52,500 Evenflo & Spalding Holdings Corp., Term Loan -- Manufacturer
of branded sporting goods/juvenile products................. 09/30/03 to 09/30/06 52,535,651
2,700 Evenflo & Spalding Holdings Corp., Revolving Credit......... 09/30/03 2,700,083

</TABLE>

See Notes to Financial Statements

B-23
<PAGE> 80

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

MANUFACTURING (CONTINUED)
$ 7,458 Fairchild Semiconductor Corp., Term Loan -- Manufacturer of
semiconductors.............................................. 03/11/03 $ 7,476,780
6,239 Fairchild Holding Corp., Term Loan -- Manufacturer of
fasteners for the aerospace industry........................ 07/28/00 6,270,040
18,726 Foamex, L.P., Term Loan -- Manufacturer/marketer of flexible
polyurethane................................................ 06/30/03 to 06/30/06 18,739,035
2,148 Foamex, L.P., Revolving Credit.............................. 06/12/03 2,148,398
20,000 Furniture Brands, Term Loan -- Manufacturer and marketer of
furniture................................................... 06/30/07 20,002,098
9,950 IAH Acquisition Corp., Term Loan -- Manufacturer,
distributor and retailer of safety shoes.................... 01/31/05 9,994,717
6,451 Identity Group, Inc., Term Loan -- Designer, manufacturer
and distributor of identity products........................ 11/22/03 6,473,437
28,000 International Wire Group, Term Loan -- Manufacturer of auto,
appliance, and communication wires.......................... 09/30/03 28,028,172
9,196 IPC, Inc., Term Loan -- Manufacturer of packaging
materials................................................... 09/30/01 9,204,025
2,389 IPC, Inc., Revolving Credit................................. 09/30/01 2,393,890
6,400 Jet Plastica Industries, Inc., Term Loan -- Manufacturer of
disposable tableware products............................... 12/31/02 to 12/31/04 6,426,191
28,502 Johnstown America, Term Loan -- Manufacturer of railcars.... 03/31/03 28,509,304
30,373 Lifestyle Furnishings International, LTD, Term Loan --
Manufacturer/designer of residential
furniture and fabrics in the United States.................. 08/30/04 30,438,540
5,700 Mettler-Toledo, Inc., Term Loan -- Manufacturer/marketer of
weighing instruments........................................ 12/31/04 5,711,585
5,514 Rayovac Corp., Term Loan -- Manufacturer of battery and
lighting products........................................... 09/30/03 to 09/30/04 5,524,419
10,000 RBX Corp., Term Loan -- Manufacturer of rubber products..... 12/31/03 10,009,366
9,670 RTI Funding Corp., Term Loan -- Manufacturer of building
blocks for children......................................... 02/08/03 to 02/08/04 9,695,378
9,571 Safelite Glass Corp., Term Loan -- Manufacturer/installer of
auto glass replacements..................................... 12/19/02 to 12/19/04 9,601,142
10,043 Signature Brands, Inc., Term Loan -- Manufacturer of small
appliances.................................................. 08/15/01 9,995,883
6,957 Simmons Co., Term Loan -- Manufacturer and distributor of
bedding..................................................... 03/31/03 6,969,300
11,550 Superior Telecom, Inc., Revolving Credit -- Manufacturer of
copper wire and cable....................................... 10/31/01 11,604,039
25,000 UCAR International, Inc., Term Loan -- Manufacturer of
graphite/carbide electrodes................................. 12/31/02 25,024,408
6,241 U.F. Acquisition, Term Loan -- Provider of fixtures and
storage for retailer stores................................. 12/15/02 6,279,757
5,000 Walco International, Inc., Term Loan -- Distributor of
animal health products...................................... 03/31/04 5,020,114
1,129 Windy Hill Pet Food Co., Term Loan -- Manufacturer of pet
food products............................................... 12/31/03 1,151,839
------------
462,182,042
------------
MINING/METALS 1.2%
11,149 Alliance Coal Corp., Term Loan -- Coal mining............... 12/31/01 to 12/31/02 11,185,078
25,000 AMAX Gold, Inc., Term Loan -- Gold and silver mining and
processing.................................................. 12/31/01 25,092,291
13,406 Anker Coal Group, Inc., Term Loan -- Coal mining............ 06/30/04 13,451,613
4,904 Centennial Resources, Inc., Term Loan -- Coal mining........ 03/31/02 to 03/31/04 4,924,460
8,836 Fairmont Minerals, Ltd., Term Loan -- Silica sand and gravel
producer.................................................... 02/28/03 8,866,840
8,705 U.S. Silica Co., Term Loan -- Producer of industrial
silica...................................................... 12/31/03 8,745,832
------------
72,266,114
------------
PAPER 5.8%
26,864 Crown Paper, Term Loan -- Producer of value-added paper
products.................................................... 08/23/02 26,875,139
2,205 Crown Paper, Revolving Credit............................... 08/23/02 2,211,852
4,500 CST Office Products, Corp., Term Loan -- Manufacturer and
distributor of stock computer forms......................... 12/31/01 4,549,109
18,367 Fort Howard Corp., Term Loan -- Paper manufacturer.......... 03/31/02 to 12/31/02 18,392,422
105,623 Jefferson Smurfit Corp., Term Loan -- Manufacturer of
corrugated paper products................................... 04/30/01 to 10/31/02 105,688,457
19,329 S.D. Warren Co., Term Loan -- Manufacturer of coated-free
paper....................................................... 04/26/04 19,359,202
15,500 St. Laurent Paper Products L.L.C., Term Loan -- Producer of
integrated pulp and paper................................... 05/31/03 to 05/31/04 15,548,140
161,202 Stone Container Corp., Term Loan -- Manufacturer of paper
products.................................................... 04/01/00 to 10/01/03 162,054,522
7,163 Stronghaven, Inc., Term Loan -- Manufacturer of corrugated
containers.................................................. 05/15/04 7,198,943
------------
361,877,786
------------
</TABLE>

See Notes to Financial Statements

B-24
<PAGE> 81

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

PERSONAL/NON-DURABLE 1.9%
$ 9,500 Chattem, Inc., Term Loan -- Manufacturer and marketer of OTC
pharmaceuticals............................................. 06/30/04 $ 9,530,143
17,728 Mary Kay Cosmetics, Inc., Term Loan -- Direct cosmetic
sales....................................................... 03/06/04 17,790,789
1,495 Mary Kay Cosmetics, Inc., Revolving Credit.................. 03/06/04 1,508,587
6,774 Personal Care Group, Inc., Term Loan -- Manufacturer and
marketer of consumer products............................... 04/03/03 6,809,694
25,000 Playtex Products, Inc., Term Loan -- Manufacturer of beauty
aid and hygiene products.................................... 09/15/03 25,024,748
55,000 Revlon Consumer Products Corp., Term Loan -- Manufacturer of
cosmetics................................................... 05/30/02 55,084,915
------------
115,748,876
------------
PRINTING/PUBLISHING 3.8%
20,669 Advanstar Communications, Term Loan -- Trade magazine
publisher................................................... 12/31/02 to 12/21/03 20,753,848
22,332 ADVO, Inc., Term Loan -- Direct mail marketer............... 03/31/04 22,368,125
46,262 American Media Operations, Inc., Term Loan --
Magazine/newspaper publisher................................ 09/30/01 to 09/30/02 46,101,442
303 American Media Operations, Inc., Revolving Credit........... 09/30/01 310,077
9,000 Cygnus Publishing, Inc., Term Loan -- Magazine publisher.... 06/05/05 9,030,452
7,663 Garden State Newspapers, Inc., Term Loan -- Suburban
newspaper operator.......................................... 03/31/04 7,693,937
14,063 Garden State Newspapers, Inc., Revolving Credit............. 06/30/03 14,128,227
25,270 Journal News, Inc., Term Loan -- Multiple newspaper
printer..................................................... 12/31/02 25,266,988
19,000 K-III Communications, Term Loan -- Tabloids, magazines and
other media publisher....................................... 06/30/04 19,013,444
33,000 Morris Communications, Inc., Term Loan -- Newspaper
Operator.................................................... 03/31/04 to 06/30/05 33,020,379
19,763 Peterson Publishing Co., L.L.C., Term Loan -- Publisher of
consumer magazines.......................................... 12/31/02 to 09/30/04 19,830,090
12,000 Polyfibron Technologies, Inc., Term Loan --
Manufacturer/marketer of consumable printing products....... 12/28/03 12,022,274
8,455 Von Hoffman Press, Inc., Term Loan -- Manufacturer of
textbooks................................................... 05/30/03 to 05/30/05 8,472,845
------------
238,012,128
------------
RESTAURANTS 0.1%
943 Carvel Corp., Term Loan -- Soft ice cream products
franchiser.................................................. 12/31/98 942,752
4,099 Long John Silver's Restaurants, Inc., Term Loan -- Retail
seafood restaurant owner/operator........................... 09/30/04 4,321,833
------------
5,264,585
------------
RETAIL 2.8%
12,000 Brylane, L.P., Term Loan -- Catalog retailer of apparel..... 02/28/03 12,030,041
32,500 Camelot Music, Inc., Term Loan -- Retail distributor of
music and video cassettes (a) (b)........................... 02/28/02 24,384,089
17,086 Color Tile, Inc., Term Loan -- National retailer of floor
and wall covering products (a).............................. 12/31/98 6,663,504
2,111 Color Tile Holdings, Inc., Revolving Credit -- National
retailer of floor and wall covering products (a)............ 12/31/97 2,075,208
7,960 CSK Auto, Inc., Term Loan -- Auto parts retailer............ 10/31/03 8,040,763
7,320 CSK Auto, Inc., Revolving Credit............................ 10/31/03 7,388,770
22,059 Fleming Cos., Inc., Revolving Credit -- Food marketing,
distribution................................................ 07/25/04 22,169,428
5,956 Kirkland's Holdings, Term Loan -- Retailer of decorative
home accessories and gift items............................. 06/30/02 5,972,258
10,603 Luxottica Group SPA, Term Loan -- Manufacturer and
distributor of eyeglasses................................... 06/30/01 10,603,434
7,430 Nebraska Book Co., Inc., Term Loan -- Used book
distributor................................................. 10/31/03 7,433,091
26,416 Payless Cashways, Inc., Term Loan -- Building products
retailer.................................................... 11/20/00 24,003,549
11,318 Payless Cashways, Inc., Revolving Credit.................... 11/20/00 10,223,132
10,820 Peebles, Inc., Term Loan -- Mid-Atlantic retailer........... 06/09/02 10,886,280
18,333 QVC, Inc., Term Loan -- Home shopping television network.... 02/15/02 18,361,826
1,198 Service Merchandise Co., Inc., Revolving Credit -- Catalog
retailer.................................................... 06/08/99 1,435,029
5,000 Vitamin Shoppe Industries, Inc., Term Loan --
Retailer/marketer of vitamins............................... 05/15/04 5,000,273
------------
176,670,675
------------

</TABLE>

See Notes to Financial Statements

B-25
<PAGE> 82

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

TEXTILES 1.4%
$11,270 American Marketing Industries, Inc., Term Loan --
Manufacturer of textiles.................................... 11/30/02 $ 11,296,781
9,000 GFSI, Inc., Term Loan -- Designer, manufacturer and marketer
of sportswear............................................... 03/31/04 9,013,766
5,731 Homemaker Industries, Inc., Term Loan -- Manufacturer of
braided rugs................................................ 06/30/04 5,760,878
6,361 Ithaca Industries, Inc., Term Loan -- Manufacturer of
undergarments and hosiery................................... 08/31/99 6,474,571
1,477 Ithaca Industries, Inc., Revolving Credit................... 08/31/99 1,581,289
14,602 Johnston Industries, Inc., Term Loan -- Diversified
manufacturer of home furnishings and textiles............... 03/28/03 14,658,368
33,575 London Fog Industries, Inc., Term Loan -- Manufacturer of
rainwear and outerwear (c).................................. 05/31/02 25,443,975
7,700 Maxim Group, Inc., Term Loan -- Retailer of floor
coverings................................................... 12/31/01 to 09/30/03 7,747,777
7,128 William Carter Co., Term Loan -- Manufacturer of children's
clothing.................................................... 10/30/03 7,152,798
------------
89,130,203
------------
TRANSPORTATION 1.4%
17,999 Atlas Air, Inc., Revolving Credit -- Air cargo carrier...... 06/30/98 18,056,753
12,500 Atlas Freighter Leasing, Inc., Term Loan -- Air cargo
carrier..................................................... 05/29/04 12,529,385
19,000 Continental Airlines, Inc., Term Loan -- Airline passenger
carrier..................................................... 07/31/02 19,076,061
40,000 Evergreen International Aviation, Inc., Term Loan -- Air
cargo carrier............................................... 05/31/02 to 05/31/03 40,178,065
------------
89,840,264
------------
WIRELESS COMMUNICATIONS 8.4%
28,875 Arch Communications, Inc., Term Loan -- Wireless
communications operator..................................... 12/31/02 to 12/31/03 28,950,593
5,844 Arch Communications, Inc., Revolving Credit................. 12/31/02 5,928,287
4,950 Clarity Telecom, Inc., Term Loan -- Seller and servicer of
telephone systems and software.............................. 11/30/02 4,968,009
4,839 Comcast Cellular Corp., Revolving Credit -- Cellular systems
operator.................................................... 09/30/03 4,933,284
5,000 International Data Response Corp., Term Loan -- Manufacturer
of plastic components for automobiles....................... 12/31/01 to 12/31/02 5,018,598
6,585 Intesys Technologies, Inc., Term Loan -- Equipment
manufacturer for telecommunications/autos................... 12/31/01 6,586,107
12,500 Metrocall, Inc., Term Loan -- Provider of paging services... 12/31/04 12,599,996
9,090 Metrocall, Inc., Revolving Credit........................... 12/31/04 9,268,791
64,005 Mobilemedia Communications, Inc., Term Loan -- Nationwide
paging operator............................................. 06/30/02 to 06/30/03 61,505,295
2,556 Mobilemedia Communications, Inc., Revolving Credit.......... 06/30/02 2,461,828
96,363 Nextel Finance Co., Term Loan -- Wireless communications
service provider............................................ 03/31/03 to 06/30/03 96,684,664
13,895 Nextel Finance Co., Revolving Credit........................ 03/30/03 14,908,697
12,310 Shared Technologies, Inc., Term Loan -- Provider of shared
telecommunications services................................. 03/30/01 to 03/31/03 12,339,171
933 Shared Technologies, Inc., Revolving Credit................. 03/30/01 938,191
13,050 Skytel Corp., Revolving Credit -- Paging and personal
communications services operator............................ 12/31/01 13,081,162
65,000 Sprint Spectrum L.P., Term Loan -- PCS provider/wireless
communications.............................................. 01/31/01 to 01/31/02 65,444,358
55,000 Sprint, Lucent Technologies Vendor Facility, Term Loan --
PCS provider/wireless communications........................ 06/30/01 55,485,626
11,305 Sprint, Northern Telecom Vendor Facility, Term Loan -- PCS
provider/wireless communications............................ 03/31/05 11,936,672
9,500 Teletouch Communications, Inc., Term Loan -- Provider of
paging services............................................. 11/30/03 9,605,152
5,727 USA Mobile Communications, Inc. II, Revolving Credit --
Wireless communications operator............................ 06/30/02 5,789,300
30,000 Western PCS II Corp., Term Loan -- PCS Owner/Operator....... 12/31/03 30,258,072
65,000 Western Wireless Corp., Term Loan -- Cellular and personal
communications services operator............................ 03/31/05 65,026,173
------------
523,718,026
------------
OTHER 3.1%
3,510 AES Cemig Funding Corp., Term Loan -- Electric utility
provider.................................................... 05/27/98 3,581,368
2,790 AESEBA Funding Corp., Term Loan -- Electric utility
provider.................................................... 05/27/98 2,847,094
29,286 Allied Waste Industries, Inc., Term Loan -- Solid waste
management.................................................. 12/05/03 29,309,498
1,086 Allied Waste Industries, Inc., Revolving Credit............. 12/05/03 1,085,738
11,000 American Disposal Services, Inc., Term Loan -- Solid waste
management.................................................. 05/30/04 11,049,831
5,306 Avis Rent-a-Car, Inc., Term Loan -- Car rental services..... 12/31/00 5,420,623
7,375 Borg-Warner Security Corp., Revolving Credit -- Protection
services.................................................... 03/31/02 7,474,653
16,275 Brand Scaffold Services, Inc., Term Loan -- Industrial
scaffolding rental services................................. 09/30/02 to 09/30/04 16,346,813
</TABLE>

See Notes to Financial Statements

B-26
<PAGE> 83

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

OTHER (CONTINUED)
$ 8,000 Key Energy Group, Inc., Term Loan -- Operator of oil service
rigs........................................................ 06/30/04 $ 8,015,162
8,778 Kindercare Learning Centers, Inc., Term Loan -- Provider of
educational and child care services......................... 03/21/06 8,777,991
20,156 LES, Inc., Term Loan -- Provider of hazardous and industrial
waste services.............................................. 05/15/03 to 05/15/05 20,190,945
9,555 Loewen Group, Inc., Revolving Credit -- Funeral home and
cemetery owner/operator..................................... 05/29/02 9,609,291
7,625 RIGCO North America, L.L.C., Term Loan -- Lessor of
semi-submersible offshore drilling rigs..................... 09/30/98 7,653,804
22,616 Ryder TRS, Inc., Term Loan -- Rental truck/trailer
operator.................................................... 10/31/01 22,654,291
418 Ryder TRS, Inc., Revolving Credit........................... 10/31/01 419,217
5,000 Smarte Carte Corp., Term Loan -- Airport carts and storage
lockers..................................................... 06/30/03 5,017,535
5,120 U.S. Office Products Co., Revolving Credit -- Office
products supplier........................................... 08/21/01 5,172,059
17,498 United Stationers, Inc., Term Loan -- Distributor of office
paper products.............................................. 10/31/03 17,516,522
10,000 24 hour Fitness, Inc., Term Loan -- Fitness center
operator.................................................... 12/31/00 10,057,584
-------------
192,200,019
-------------
TOTAL VARIABLE RATE ** SENIOR LOAN INTERESTS 85.1%......... 5,308,571,057
-------------
EQUITIES 0.3%
AFC Enterprises, Inc. (604,251 common shares) (d) (e)............................. 3,625,506
Best Products Co., Inc. (297,480 common shares) (e)............................... 0
Best Products Co., Inc. (Warrants for 28,080 common shares) (e)................... 0
Dan River, Inc. (10,975 common shares) (e)........................................ 1,967,353
Classic Cable, Inc. (Warrants for 760 common shares) (e).......................... 0
Flagstar Cos., Inc. (8,755 common shares) (e)..................................... 3,694
London Fog Industries, Inc. (10,833,012 common shares) (d) (e).................... 0
London Fog Industries, Inc. ($19,181,547 par amount of preferred stock, 17.5%
coupon, maturity 05/31/02) (c) (d)................................................ 9,590,774
Nextel Communications, Inc. (Warrants for 60,000 common shares) (d) (e)........... 547,500
Rigco N.A., L.L.C. (Warrants for .325% interest of company's fully diluted
equity)........................................................................... 16,250
Sarcom, Inc. (43 common shares) (e)............................................... 0
-------------
TOTAL EQUITIES.................................................................... 15,751,077
-------------
TOTAL LONG-TERM INVESTMENTS 85.4%
(Cost $5,355,782,290)............................................................. 5,324,322,134
-------------
SHORT-TERM INVESTMENTS
COMMERCIAL PAPER 4.5%
AT&T Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.76%)................... 30,000,000
Avery Dennison ($30,000,000 par, maturing 08/01/97, yielding 5.83%)............... 30,000,000
Baker Hughes, Inc. ($30,000,000 par, maturing 08/01/97, yielding 5.83%)........... 30,000,000
Cargill, Inc. ($30,000,000 par, maturing 08/05/97, yielding 5.52%)................ 29,981,600
Comdisco, Inc. ($30,000,000 par, maturing 08/08/97 to 08/26/97, yielding 5.67% to
5.72%)............................................................................ 29,932,486
McDonald's Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.80%)............. 30,000,000
McKesson Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.90%)............... 30,000,000
Nabisco, Inc. ($30,000,000 par, maturing 08/04/97 to 08/18/97, yielding 5.60% to
5.69%)............................................................................ 29,932,779
Pacificorp ($15,000,000 par, maturing 09/03/97, yielding 5.51%)................... 14,924,238
Pitney Bowes Credit Corp. ($3,600,000 par, maturing 08/01/97, yielding 5.75%)..... 3,600,000
Sara Lee Corp. ($15,000,000 par, maturing 08/01/97, yielding 5.50%)............... 15,000,000
XTRA, Inc. ($11,920,000 par, maturing 08/21/97 to 09/11/97, yielding 5.74% to
5.75%)............................................................................ 11,863,006
-------------
TOTAL COMMERCIAL PAPER............................................................ 285,234,109
-------------
SHORT-TERM LOAN PARTICIPATIONS 9.6%
Alltel Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.88%)................. 30,000,000
American Stores Co. ($30,000,000 par, maturing 10/06/97, yielding 5.82% to
5.84%)............................................................................ 30,000,000
Anadarko Pete Corp. ($30,000,000 par, maturing 08/05/97 to 08/07/97, yielding
5.64% to 5.74%)................................................................... 30,000,000
Army and Air Force Service Exchange ($30,000,000 par, maturing 08/08/97, yielding
5.63%)............................................................................ 30,000,000
Baxter International, Inc. ($30,000,000 par, maturing 08/11/97 to 08/13/97,
yielding 5.64% to 5.65%).......................................................... 30,000,000
</TABLE>

See Notes to Financial Statements

B-27
<PAGE> 84

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

Borrower Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM LOAN PARTICIPATIONS (CONTINUED)
Bell Atlantic Networks ($18,000,000 par, maturing 08/05/97 to 08/06/97, yielding
5.50%)............................................................................ $ 18,000,000
Centex Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.95%)................. 30,000,000
Champion International Corp. ($15,000,000 par, maturing 08/15/97, yielding
5.72%)............................................................................ 15,000,000
Conagra, Inc. ($30,000,000 par, maturing 08/06/97 to 08/07/97, yielding 5.70% to
5.73%)............................................................................ 30,000,000
Englehard Corp. ($30,000,000 par, maturing 08/01/97 to 08/22/97, yielding 5.56% to
5.87%)............................................................................ 30,000,000
Enron Corp. ($30,000,000 par, maturing 08/12/97, yielding 5.70%).................. 30,000,000
FMC Corp. ($30,000,000 par, maturing 08/22/97, yielding 5.67% to 5.74%)........... 30,000,000
Gillette Co. ($30,000,000 par, maturing 08/01/97, yielding 5.83%)................. 30,000,000
Hertz Corp. ($25,000,000 par, maturing 08/08/97 to 08/15/97, yielding 5.54% to
5.56%)............................................................................ 25,000,000
IKON Office Solutions, Inc. ($30,000,000 par, maturing 08/08/97 to 08/22/97,
yielding 5.73% to 5.76%).......................................................... 30,000,000
Mapco, Inc. ($30,000,000 par, maturing 08/04/97 to 08/21/97, yielding 5.70% to
5.71%)............................................................................ 30,000,000
Mead Corp. ($15,600,000 par, maturing 08/01/97, yielding 5.90%)................... 15,600,000
National Rural Utilities Coop Financial ($15,000,000 par, maturing 08/19/97,
yielding 5.55%)................................................................... 15,000,000
Nipsco Capital Markets, Inc. ($13,400,000 par, maturing 08/01/97, yielding
5.70%)............................................................................ 13,400,000
Nipsco, Inc. ($7,000,000 par, maturing 08/29/97, yielding 5.56%).................. 7,000,000
Ralston Purina Co. ($10,000,000 par, maturing 08/01/97, yielding 5.73%)........... 10,000,000
Tandy Corp. ($28,800,000 par, maturing 08/01/97 to 08/06/97, yielding 5.70% to
5.77%)............................................................................ 28,800,000
Tyson Foods ($30,000,000 par, maturing 08/14/97, yielding 5.67%).................. 30,000,000
Union Pacific Corp. ($30,000,000 par, maturing 08/01/97 to 09/02/97, yielding
5.70% to 5.81%)................................................................... 30,000,000
--------------
TOTAL SHORT-TERM LOAN PARTICIPATIONS.............................................. 597,800,000
--------------
TOTAL SHORT-TERM INVESTMENTS 14.1%
(Cost $883,034,109)............................................................... 883,034,109
--------------
TOTAL INVESTMENTS 99.5%
(Cost $6,238,816,399)............................................................. 6,207,356,243
OTHER ASSETS IN EXCESS OF LIABILITIES 0.5%........................................ 29,611,538
--------------
NET ASSETS 100.0%................................................................. $6,236,967,781
==============
</TABLE>

(a) Non-income producing Senior Loan interest.

(b) This Borrower has filed for protection in federal bankruptcy court.

(d) Restricted security.

(e) Non-income producing security as this stock currently does not declare
dividends.

* Senior Loans in the Trust's portfolio generally are subject to mandatory
and/or optional prepayment. Because of these mandatory prepayment conditions
and because there may be significant economic incentives for a Borrower to
prepay, prepayments of Senior Loans in the Trust's portfolio may occur. As a
result, the actual remaining maturity of Senior Loans held in the Trust's
portfolio may be substantially less than the stated maturities shown.
Although the Trust is unable to accurately estimate the actual remaining
maturity of individual Senior Loans, the Trust estimates that the actual
average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.

** Senior Loans in which the Trust invests generally pay interest at rates which
are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates are generally (i) the prime rate offered by
one or more major United States banks, (ii) the lending rate offered by one
or more major European banks, such as the London Inter-Bank Offered Rate
("LIBOR") and (iii) the certificate of deposit rate. Senior loans are
generally considered to be restricted in that the Trust ordinarily is
contractually obligated to receive approval from the Agent Bank and/or
borrower prior to the disposition of a Senior Loan.

See Notes to Financial Statements

B-28
<PAGE> 85

STATEMENT OF ASSETS AND LIABILITIES

July 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $6,238,816,399)..................... $6,207,356,243
Receivables:
Interest and Fees......................................... 45,388,748
Fund Shares Sold.......................................... 22,968,427
Investments Sold.......................................... 756,297
Other....................................................... 37,212
--------------
Total Assets............................................ 6,276,506,927
--------------
LIABILITIES:
Deferred Facility Fees...................................... 18,108,152
Payables:
Income Distributions...................................... 6,801,132
Custodian Bank............................................ 5,097,027
Investment Advisory Fee................................... 4,954,975
Administrative Fee........................................ 1,329,198
Distributor and Affiliates................................ 941,888
Fund Shares Repurchased................................... 374,442
Accrued Expenses............................................ 1,863,989
Deferred Compensation and Retirement Plans.................. 68,343
--------------
Total Liabilities....................................... 39,539,146
--------------
NET ASSETS.................................................. $6,236,967,781
==============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 626,018,023 shares issued and
outstanding).............................................. $ 6,260,180
Paid in Surplus............................................. 6,264,390,819
Accumulated Undistributed Net Investment Income............. 5,369,829
Accumulated Net Realized Loss............................... (7,592,891)
Net Unrealized Depreciation................................. (31,460,156)
--------------
NET ASSETS.................................................. $6,236,967,781
==============
NET ASSET VALUE PER COMMON SHARE
($6,236,967,781 divided by 626,018,023 shares
outstanding).............................................. $ 9.96
==============
</TABLE>

See Notes to Financial Statements

B-29
<PAGE> 86

STATEMENT OF OPERATIONS

For the Year Ended July 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $440,296,258
Fees........................................................ 29,366,231
Other....................................................... 2,254,872
------------
Total Income............................................ 471,917,361
------------
EXPENSES:
Investment Advisory Fee..................................... 52,313,966
Administrative Fee.......................................... 13,976,102
Shareholder Services........................................ 6,310,415
Legal....................................................... 1,645,000
Custody..................................................... 1,389,184
Trustee Fees and Expenses................................... 30,202
Other....................................................... 3,584,745
------------
Total Expenses.......................................... 79,249,614
------------
NET INVESTMENT INCOME....................................... $392,667,747
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 442,960
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (6,312,913)
End of the Period......................................... (31,460,156)
------------
Net Unrealized Depreciation During the Period............... (25,147,243)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(24,704,283)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $367,963,464
============
</TABLE>

See Notes to Financial Statements

B-30
<PAGE> 87

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended July 31, 1997 and 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1997 July 31, 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income....................................... $ 392,667,747 $ 281,969,603
Net Realized Gain........................................... 442,960 541,536
Net Unrealized Depreciation During the Period............... (25,147,243) (14,949,532)
-------------- --------------
Change in Net Assets from Operations........................ 367,963,464 267,561,607
Distributions from Net Investment Income.................... (390,215,999) (283,580,704)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... (22,252,535) (16,019,097)
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Common Shares Sold............................ 1,781,772,630 2,551,158,978
Value of Shares Issued Through Dividend Reinvestment........ 209,636,808 155,099,566
Cost of Shares Repurchased.................................. (597,973,300) (354,520,255)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 1,393,436,138 2,351,738,289
-------------- --------------
TOTAL INCREASE IN NET ASSETS................................ 1,371,183,603 2,335,719,192
NET ASSETS:
Beginning of the Period..................................... 4,865,784,178 2,530,064,986
-------------- --------------
End of the Period (Including accumulated undistributed net
investment income of $5,369,829 and $2,874,542,
respectively)............................................. $6,236,967,781 $4,865,784,178
============== ==============
</TABLE>

See Notes to Financial Statements

B-31

<PAGE> 88

STATEMENT OF CASH FLOWS

For the Year Ended July 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 367,963,464
---------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Increase in Investments at Value.......................... (1,359,017,702)
Increase in Interest and Fees Receivables................. (10,866,302)
Increase in Receivable for Investments Sold............... (712,087)
Decrease in Other Assets.................................. 15,998
Decrease in Deferred Facility Fees........................ (2,607,607)
Increase in Investment Advisory and Administrative Fees
Payable................................................. 1,395,983
Increase in Distributor and Affiliates Payable............ 588,986
Increase in Accrued Expenses.............................. 308,934
Increase in Deferred Compensation and Retirement Plans
Expenses................................................ 22,864
---------------
Total Adjustments....................................... (1,370,870,933)
---------------
NET CASH USED FOR OPERATING ACTIVITIES...................... (1,002,907,469)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 1,775,415,681
Payments on Shares Repurchased.............................. (597,598,858)
Increase in Intra-day Credit Line........................... 4,540,411
Cash Dividends Paid......................................... (179,449,765)
---------------
Net Cash Provided by Financing Activities................. 1,002,907,469
---------------
NET INCREASE IN CASH........................................ -0-
Cash at Beginning of the Period............................. -0-
---------------
CASH AT END OF THE PERIOD................................... $ -0-
===============
</TABLE>

See Notes to Financial Statements

B-32
<PAGE> 89

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
--------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 10.002 $ 10.046 $ 10.052 $ 10.004 $ 9.998
-------- -------- -------- -------- --------
Net Investment Income..................................... .701 .735 .756 .618 .600
Net Realized and Unrealized Gain/Loss..................... (.042) (.028) (.004) .015 .008
-------- -------- -------- -------- --------
Total from Investment Operations............................ .659 .707 .752 .633 .608
-------- -------- -------- -------- --------
Less:
Distributions from Net Investment Income.................. .698 .751 .758 .585 .600
Distributions in Excess of Net Investment Income.......... -0- -0- -0- -0- .002
-------- -------- -------- -------- --------
Total Distributions......................................... .698 .751 .758 .585 .602
-------- -------- -------- -------- --------
Net Asset Value, End of the Period.......................... $ 9.963 $ 10.002 $ 10.046 $ 10.052 $ 10.004
======== ======== ======== ======== ========
Total Return (a)............................................ 6.79% 7.22% 7.82% 6.52% 6.17%
Net Assets at End of the Period (In millions)............... $6,237.0 $4,865.8 $2,530.1 $1,229.0 $ 966.7
Ratio of Expenses to Average Net Assets..................... 1.42% 1.46% 1.49% 1.53% 1.53%
Ratio of Net Investment Income to Average Net Assets........ 7.02% 7.33% 7.71% 6.16% 5.96%
Portfolio Turnover (b)...................................... 83% 66% 71% 74% 67%
</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

B-33
<PAGE> 90

NOTES TO FINANCIAL STATEMENTS

July 31, 1997
- --------------------------------------------------------------------------------
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 $5,308,571,057 (85.1% of net assets) is determined in the
absence of actual market values by Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") following guidelines and procedures established,
and periodically reviewed, by the Board of Trustees. The value of a Variable
Rate Senior Loan interest in the Trust's portfolio is determined with reference
to changes in market interest rates and to the creditworthiness of the
underlying obligor. In valuing Variable Rate Senior Loan interests, the Adviser
considers market quotations and transactions in instruments that the Adviser
believes may be comparable to such Variable Rate Senior Loan interests. In
determining the relationship between such instruments and the Variable Rate
Senior Loan interests, the Adviser considers such factors as the
creditworthiness of the underlying obligor, the current interest rate, the
interest rate redetermination period and maturity date. To the extent that
reliable market transactions in Variable Rate Senior Loan interests have
occurred, the Adviser also considers pricing information derived from such
secondary market transactions in valuing Variable Rate Senior Loan interests.
Because of uncertainty inherent in the valuation process, the estimated value of
a Variable Rate Senior Loan interest may differ significantly from the value
that would have been used had there been market activity for that Variable Rate
Senior Loan interest. Equity securities are valued on the basis of prices
furnished by pricing services or as determined in good faith by the Adviser.
Short-term securities with remaining maturities of 60 days or less 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.

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, 1997, the Trust had an accumulated capital
loss carryforward for tax purposes of $3,643,444,

B-34
<PAGE> 91

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

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.

At July 31, 1997, for federal income tax purposes cost of long- and
short-term investments is $6,247,342,588, the aggregate gross unrealized
appreciation is $22,381,911 and the aggregate gross unrealized depreciation is
$62,368,256 resulting in net unrealized depreciation of $39,986,345.

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. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.

Permanent book and tax basis differences relating to the recognition of
certain expenses which are not deductible for tax purposes totaling $43,539 were
reclassified from accumulated undistributed net investment income to capital.

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.

For the year ended July 31, 1997, the Trust recognized expenses of
approximately $522,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.

For the year ended July 31, 1997, the Trust recognized expenses of
approximately $65,400 representing the Administrator's or its affiliates'
(collectively "VKAC") cost of providing legal services to the Trust.

ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Trust. For the year ended July
31, 1997, the Trust recognized expenses of approximately $4,402,900,
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 provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Trust. The maximum annual
benefit per trustee under the plan is equal to the trustee's annual retainer
fee, which is currently $2,500.

B-35
<PAGE> 92

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

3. CAPITAL TRANSACTIONS

At July 31, 1997 and July 31, 1996, paid in surplus aggregated $6,264,390,819
and $4,872,393,497, respectively.
Transactions in common shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 1997 JULY 31, 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares........................................... 486,490,317 251,848,949
----------- -----------
Shares Sold................................................ 178,438,954 254,577,948
Shares Issued Through Dividend Reinvestment................ 20,996,830 15,483,081
Shares Repurchased......................................... (59,908,078) (35,419,661)
----------- -----------
Net Increase in Shares Outstanding......................... 139,527,706 234,641,368
----------- -----------
Ending Shares.............................................. 626,018,023 486,490,317
=========== ===========
</TABLE>

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $4,994,709,841 and
$4,028,396,415, 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, 1997, 59,908,078 shares were tendered and repurchased by the
Trust.

6. EARLY WITHDRAWAL CHARGE

An early withdrawal charge to recover offering expenses will be imposed in
connection with most common shares held for less than five years which are
accepted by the Trust for repurchase pursuant to tender offers. The early
withdrawal charge will be payable to VKAC. Any early withdrawal charge which is
required to be imposed will be made in accordance with the following schedule.

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

For the year ended July 31, 1997, VKAC received early withdrawal charges
of approximately $9,075,812 in connection with tendered shares of the Trust.

B-36
<PAGE> 93

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

7. COMMITMENTS

Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $704,948,400 as of July
31, 1997. The Trust generally will maintain with its custodian short-term
investments having an aggregate value at least equal to the amount of unfunded
loan commitments.

The Trust has entered into a revolving credit agreement with a syndicate
led by Bank of America for an aggregate of $250,000,000. The proceeds of any
borrowing by the Trust under the revolving credit agreement may only be used,
directly or indirectly, for liquidity purposes in connection with the
consummation of a tender offer by the Trust for its shares. Annual commitment
fees of .065% are charged on the unused portion of the credit line. Borrowings
under this facility will bear interest at either the LIBOR rate or the Federal
Funds rate plus .375%. There have been no borrowings under this agreement to
date.

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, 1997, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Trust on a participation
basis.

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SELLING PARTICIPANT (000) (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Bankers Trust............................................... $153,247 $153,570
Donaldson Lufkin Jenrette................................... 50,954 51,255
NationsBank................................................. 26,958 26,987
Merrill Lynch Capital Corp.................................. 20,000 20,073
Canadian Imperial Bank of Commerce.......................... 19,924 20,037
Goldman Sachs............................................... 18,580 18,581
Chase Securities Inc........................................ 13,365 13,380
Bank of New York............................................ 8,625 8,652
ABN AMRO.................................................... 5,000 5,019
--------- --------
Total....................................................... $316,653 $317,554
========= ========
</TABLE>

B-37
<PAGE> 94

PART C--OTHER INFORMATION

ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS

(A) FINANCIAL STATEMENTS:

Included in Part A:

Financial Highlights

Included in Part B:

Independent Accountants' Report; Portfolio of Investments as of July
31, 1997; Statement of Assets and Liabilities as of July 31,
1997; Statement of Operations for the year ended July 31, 1997;
Statement of Changes in Net Assets for the fiscal years ended
July 31, 1997 and 1996; Statement of Cash Flows for the year
ended July 31, 1997; Notes to Financial Statements

(B) EXHIBITS

<TABLE>
<C> <S>
(a)(i) Amended and Restated Declaration of Trust dated September 19, 1989(3)
(a)(ii) Certificate of Amendment dated October 11, 1995(3)
(b) By-laws(3)
(d) Specimen Certificate of Common Shares of Beneficial Interest of Registrant(3)
(g) Investment Advisory Agreement(4)
(h(1)) Offering Agreement(4)
(h(2)) Form of Dealer Agreement(3)
(h(3)) Form of Broker Agreement(3)
(h(4)) Form of Bank Agreement(3)
(j(1)) Custodian Agreement(4)
(j(2)) Transfer Agency and Service Agreement(4)
(k(1)) Administration Agreement(4)
(k(2)) Amended and Restated Legal Services Agreement(4)
(l(i)) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP(5)
(n) Consent of KPMG Peat Marwick LLP(5)
(p) Letter of Investment Intent(3)
(24) Power of Attorney(5)
(27) Financial Data Schedule(4)
</TABLE>

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

(1) Incorporated by reference to the Fund's Registration Statement on Form N-2,
File Nos. 33-81076, and 811-5845, filed on July 1, 1994.

(2) Incorporated by reference to the Fund's Registration Statement on Form N-2,
File Nos. 33-63349 and 811-5845, filed on October 11, 1995.

(3) Incorporated by reference to the Fund's Registration Statement on Form N-2,
File Nos. 333-14499 and 811-5845, filed on October 18, 1996.

(4) Incorporated by reference to Post-Effective Amendment No. 1 to the Fund's
Registration Statement on Form N-2, File Nos. 333-14999 and 811-5845, filed
on November 13, 1997.

(5) Incorporated by reference to the Fund's Registration's Statement on Form
N-2, File Nos. 333-45531 and 811-5845, filed on February 3, 1998.

ITEM 25: MARKETING ARRANGEMENTS

See Exhibit h to this Registration Statement.

C-1
<PAGE> 95

ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
<S> <C>
Securities and Exchange Commission fees..................... $676,464.50
National Association of Securities Dealers, Inc. fees....... $ 30,500
Printing and engraving expenses............................. $ 45,000
Legal fees.................................................. $ 40,000
Accounting expenses......................................... $ 3,000
Miscellaneous expenses...................................... $ 4,035.50
-----------
Total........................................ $799,000
===========
</TABLE>

ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Not applicable

ITEM 28: NUMBER OF HOLDERS OF SECURITIES

At February 23, 1998

<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Common Shares of Beneficial Interest, par value
$.01 per share................................... 232,794
</TABLE>

ITEM 29: INDEMNIFICATION

Please see Article 5.3 of the Registrant's Amended and Restated Declaration
of Trust (Exhibit (a)(i)) for indemnification of officers and trustees.
Registrant's trustees and officers are also covered by an Errors and Omissions
Policy. Section 5 of the proposed Investment Advisory Agreement between the Fund
and the Adviser provides that in the absence of willful misfeasance, bad faith
or gross negligence in connection with the obligations or duties under the
Investment Advisory Agreement or on the part of the Adviser, the Adviser shall
not be liable to the Fund or to any Common Shareholder of the Fund for any act
or omission in the course of or connected in any way with rendering services or
for any losses that may be sustained in the purchase, holding or sale of any
security. The Distribution Agreement provides that the Registrant shall
indemnify the Distributor (as defined therein) and certain persons related
thereto for any loss or liability arising from any alleged misstatement of a
material fact (or alleged omission to state a material fact) contained in, among
other things, the Registration Statement or Prospectus except to the extent the
misstated fact or omission was made in reliance upon information provided by or
on behalf of the Distributor. (See Section 7 of the Distribution Agreement.)

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant and the Adviser and any underwriter pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in such Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person or the Registrant and the principal underwriter in connection
with the successful defense of any action, suit or proceeding) is asserted
against the Registrant by such trustee, officer or controlling person or the
Distributor in connection with the Common Shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in such Act and will be governed by the final adjudication of such
issue.

C-2
<PAGE> 96

ITEM 30: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and directors of the Adviser,
reference is made to the Adviser's current Form ADV (File No. 801-18161) filed
under the Investment Advisers Act of 1940, as amended, incorporated herein by
reference.

ITEM 31: LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i) by
Registrant will be maintained at its offices, located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, ACCESS Investor Services, Inc., P.O. Box
418256, Kansas City, MO 02105-1713 or at the State Street Bank and Trust
Company, 1776 Heritage Drive, North Quincy, Massachusetts; (ii) by the Adviser,
will be maintained at its offices, located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181; and (iii) all such accounts, books and other documents
required to be maintained by the principal underwriter will be maintained by Van
Kampen American Capital Distributors, Inc., at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.

ITEM 32: MANAGEMENT SERVICES

Not applicable

ITEM 33: UNDERTAKINGS

1. Registrant undertakes to suspend offering of its Common Shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.

2. Not applicable

3. Not applicable

4. (a) To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the Prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.

(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(c) To remove from registration by means of post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.

5. If applicable:

(a) For purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 497(h) under
the Securities Act of 1933, shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, its Statement of Additional Information.

C-3
<PAGE> 97

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO
THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THERETO DULY AUTHORIZED IN THE CITY OF OAKBROOK TERRACE, AND THE STATE OF
ILLINOIS, ON THE 25TH DAY OF FEBRUARY, 1998.

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST

By: /s/ RONALD A. NYBERG

------------------------------------
Ronald A. Nyberg
Vice President and Secretary

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON FEBRUARY 25, 1998 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED:

<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ DENNIS J. McDONNELL* Chairman, President
- ----------------------------------------------------- (Chief Executive Officer) and Trustee
Dennis J. McDonnell

/s/ EDWARD C. WOOD, III* Vice President and Treasurer
- ----------------------------------------------------- (Chief Financial Officer and Accounting
Edward C. Wood, III Officer)

/s/ THEODORE A. MYERS* Trustee
- -----------------------------------------------------
Theodore A. Myers

/s/ ROD DAMMEYER* Trustee
- -----------------------------------------------------
Rod Dammeyer

/s/ DAVID C. ARCH* Trustee
- -----------------------------------------------------
David C. Arch

/s/ STEVEN MULLER* Trustee
- -----------------------------------------------------
Steven Muller

Trustee
- -----------------------------------------------------
Don G. Powell

/s/ HUGO F. SONNENSCHEIN* Trustee
- -----------------------------------------------------
Hugo F. Sonnenschein

/s/ HOWARD J KERR* Trustee
- -----------------------------------------------------
Howard J Kerr

/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
</TABLE>

February 25, 1998

* Signed by Ronald A. Nyberg pursuant to a Power of Attorney.

/s/ RONALD A. NYBERG
- ------------------------------------
Ronald A. Nyberg
Attorney-in-Fact

C-4