<PAGE> 1
VAN KAMPEN
PRIME RATE INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
Van Kampen Prime Rate Income Trust, formerly known as Van Kampen American
Capital Prime Rate Income Trust (prior to July 17, 1998) (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 June 21, 1999 (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
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PAGE
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Investment Objective and Policies and Special Risk
Considerations............................................ B-2
Investment Restrictions..................................... B-2
Trustees and Officers....................................... B-4
Portfolio Transactions...................................... B-8
Management of the Fund...................................... B-9
Dividend Reinvestment Plan.................................. B-11
Net Asset Value............................................. B-12
Taxation.................................................... B-13
Repurchase of Shares........................................ B-15
Unaudited Financial Statements for the Six Month Period
Ended January 31, 1999.................................... F-1
Notes to Unaudited Financial Statements..................... F-28
Independent Accountants' Report............................. F-34
Audited Financial Statements for the Year Ended July 31,
1998...................................................... F-35
Notes to Audited Financial Statements....................... F-50
</TABLE>
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (the "SEC"). These items
may be obtained from the SEC upon payment of the fee prescribed, or inspected at
the SEC's office at no charge.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JUNE 21, 1999.
B-1
<PAGE> 2
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. Although the Fund's net asset value
will vary, the Fund's policy of acquiring interests in floating or variable rate
Senior Loans should 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. 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 Considerations" 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 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.
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<PAGE> 3
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.
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.
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<PAGE> 4
TRUSTEES AND OFFICERS
The table below sets forth the officers and trustees of the Fund, their
principal occupations for the last five (5) years and their affiliations, if
any, with Van Kampen Investments Inc. ("Van Kampen"), Van Kampen Investment
Advisory Corp. (the "Adviser"), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc., the distributor of the Fund's shares
("VKF"), Van Kampen Management Inc., Van Kampen Advisors Inc., Van Kampen
Investor Services Inc., Van Kampen Insurance Agency of Illinois Inc., Van Kampen
Insurance Agency of Texas Inc., Van Kampen Recordkeeping Services Inc., American
Capital Contractual Services, Inc., Van Kampen Trust Company and Van Kampen
Exchange Corp. The Adviser and Asset Management sometimes are referred to herein
collectively as the "Advisers." For purposes hereof, the term "Fund Complex"
currently consists of 42 investment companies (including the Fund) advised by
the Adviser on its affiliates that have the same members on each investment
company's Board of Trustees. Unless otherwise noted the address of each of the
Trustees and officers is 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL
60181-5555.
DENNIS J. MCDONNELL,* DATE OF BIRTH 05/20/42, PRESIDENT, CHAIRMAN OF THE BOARD
AND TRUSTEE. Mr. McDonnell is Executive Vice President and a Director of Van
Kampen, President, Chief Operating Officer and a Director of the Advisers, Van
Kampen Advisors Inc., and Van Kampen Management Inc. Director or officer of
certain other subsidiaries of Van Kampen. Mr. McDonnell is also a Director of
Global Decisions Group LLC. Prior to July of 1998, Director and Executive Vice
President of VK/AC Holding, Inc. Prior to April 1998, President and Director of
Van Kampen Merritt Equity Advisors Corp. Prior to April 1997, Mr. McDonnell was
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. Mr. McDonnell is also President,
Chairman of the Board, Trustee and Managing General Partner of each of the funds
in the Fund Complex and Chief Investment Officer and Executive Vice President of
other investment companies advised by the Advisers or their affiliates.
THEODORE A. MYERS, DATE OF BIRTH 08/03/30, TRUSTEE. Mr. Myers is a financial
consultant. Prior to 1998, he was Senior Financial Advisor (and prior to 1997,
an Executive Vice President, Chief Financial Officer and a Director) of
Qualitech Steel Corporation, a producer of high quality engineered steel for
automotive, transportation and capital goods industries. 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 a member of the Arthur Andersen Chief Financial Officer Advisory Committee.
His address is 550 Washington Avenue, Glencoe, Illinois 60022. Mr. Myers is also
a Trustee, Director and Managing General Partner of each of the funds in the
Fund Complex.
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 Vice Chairman and Director of Anixter
International Inc. (employed by Anixter since 1985). Founded in 1957, Anixter
International is the world-leading communication products distribution company,
with more than 5,000 employees serving customers from 180 cities in 40
countries. He is also a member of the Board of Directors of TeleTech Holdings
Inc., Matria Healthcare, Inc., Stericycle, Inc., Transmedia Networks, Inc.,
Jacor Communications, Inc., CAN Surety, Corp., IMC Global Inc., Antec
Corporation, Groupo Azucurtro Mexico (GAM) and Kent State University Foundation.
Prior to April 1999, Mr. Dammeyer was a member of the Board of Directors of
Metal Management, Inc. Prior to 1998, Mr. Dammeyer was a Director of Lukens,
Inc., Capsure Holdings Corp., Revco D.S., Inc., the Chase Manhattan Corporation
National Advisory Board and Sealy, Inc. Prior to 1997, Mr. Dammeyer was
President, Chief Executive Officer and a Director of Great American Management &
Investment, Inc., a diversified manufacturing company and 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. His address is Two North Riverside Plaza, Suite 1950,
Chicago, Illinois 60606. Mr. Dammeyer is also a Trustee and Managing General
Partner of each of the funds in the Fund Complex.
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<PAGE> 5
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 Manufacturers'
Association. His address is 1800 Swift Drive, Oak Brook, Illinois 60523. Mr.
Arch is also a Trustee and Managing General Partner of each of the funds in the
Fund Complex.
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 Chairman of The
21st Century Foundation (public affairs). Prior to May, 1997, he was 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 and Managing General Partner of each of the funds
in the Fund Complex.
HOWARD J KERR, DATE OF BIRTH 11/17/35, TRUSTEE. Prior to 1998, Mr. Kerr was
President and Chief Executive Officer of Pocklington Corporation, Inc., an
investment holding company. Mr. Kerr is a Director of Canbra Foods, Ltd., a
Canadian oilseed crushing, refining, processing and packaging operation. His
address is 736 North Western Ave., P.O. Box 317, Lake Forest, Illinois 60045.
Mr. Kerr is a Trustee and Managing General Partner of each of the funds in the
Fund Complex.
DON G. POWELL,* DATE OF BIRTH 10/19/39, TRUSTEE. Mr. Powell is currently a
member of the board of governors and executive committee for the Investment
Company Institute, and a member of the Board of Trustees of the Houston Museum
of Natural Science. Prior to January 1999, Chairman of the Investment Company
Institute and Chairman and a Director of Van Kampen Investments, the Advisers,
the Distributor and Investor Services and Director or officer of certain other
subsidiaries of Van Kampen Investments. Prior to July of 1998, Director and
Chairman of VK/AC Holding, Inc. Prior to April 1997, Mr. Powell was Chairman,
President and Director of Van Kampen Merritt Equity Holdings Corp. Prior to
November 1996, President, Chief Executive Officer and a Director of VK/AC
Holding, Inc. Trustee/Director of each of the funds in the Fund Complex and
Trustee of other funds advised by the Advisers or Van Kampen Management Inc.
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. 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 and Managing General Partner of each of the funds in the Fund Complex.
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), legal counsel
to each of the funds in the Fund Complex, and other investment companies advised
by the Advisers or their affiliates. His address is 333 West Wacker Drive,
Chicago, Illinois 60606. Mr. Whalen is also a Trustee and Managing General
Partner of each of the funds in the Fund Complex and Trustee and Director of
other investment companies advised by the Advisers or their affiliates.
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 Asset Management, Van Kampen Management, Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, he was a Director of McCarthy,
Crisanti & Maffei, Inc. He is Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by the Advisers or their
affiliates.
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 Management Inc. and Asset Management.
A. THOMAS SMITH III, DATE OF BIRTH 12/14/56, VICE PRESIDENT AND SECRETARY. Mr.
Smith is Executive Vice President, General Counsel, Secretary and Director of
Van Kampen. He is also Executive Vice President, General Counsel, Assistant
Secretary and Director of the Advisers, VKF and of certain other subsidiaries of
Van Kampen. From January 1994 through January 1999, he was securities counsel to
New York Life Insurance Company, serving as Vice President and Associate General
Counsel since March 1997. He was
B-5
<PAGE> 6
Assistant General Counsel of The Dreyfus Corporation from September 1991 to
December 1993 and a Senior Associate of Willkie Farr & Gallagher from February
1989 to August 1991. From January 1986 to January 1989, Mr. Smith was a Staff
Attorney with the U.S. Securities and Exchange Commission in the Division of
Investment Management's Office of Chief Counsel.
EDWARD C. WOOD, III, DATE OF BIRTH 01/11/56, VICE PRESIDENT. Mr. Wood is Senior
Vice President of Van Kampen, the Advisers and Van Kampen Management Inc. He is
also Senior Vice President and Chief Operating Officer of VKF. Mr. Wood is Vice
President of each of the funds in the Fund Complex and certain other investment
companies advised by the Advisers and their affiliates.
CURTIS W. MORELL, DATE OF BIRTH 08/04/46, VICE PRESIDENT AND CHIEF ACCOUNTING
OFFICER. Mr. Morell is Senior Vice President of Van Kampen and the Advisers.
His address is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Morell is Vice
President and Chief Accounting Officer of each of the funds in the Fund Complex
and certain other investment companies advised by the Advisers and their
affiliates.
WESTON B. WETHERELL, DATE OF BIRTH 06/15/56, ASSISTANT SECRETARY. Mr. Wetherell
is Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen, VKF, the Advisers and of certain other subsidiaries of Van Kampen. Prior
to September of 1996, Mr. Wetherell was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Mr. Wetherell is an Assistant Secretary of each of the
funds in the Fund Complex and certain other investment companies advised by the
Advisers and their affiliates.
JAMES J. BOYNE, DATE OF BIRTH 04/10/66, ASSISTANT SECRETARY. Mr. Boyne is
Senior Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen, VKF, the Advisers, Van Kampen Investor Services Inc., and of certain
other subsidiaries of Van Kampen. Prior to July of 1998, Mr. Boyne was Vice
President, Associate General Counsel and Assistant Secretary of VK/AC Holding,
Inc. Prior to September of 1996, Mr. Boyne was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. He is Assistant Secretary of the Fund, Van Kampen Senior
Floating Rate Fund and Van Kampen Senior Income Trust.
SCOTT E. MARTIN, DATE OF BIRTH 08/20/56, ASSISTANT SECRETARY. Mr. Martin is
Senior Vice President, Deputy General Counsel and Secretary of Van Kampen, VKF,
the Advisers, Van Kampen Investor Services Inc., and of certain other
subsidiaries of Van Kampen. Prior to July of 1998, Mr. Martin was Senior Vice
President, Deputy General Counsel and Assistant Secretary of VK/AC Holding, Inc.
Prior to September of 1996, Mr. Boyne was Deputy General Counsel and Secretary
of McCarthy, Crisanti Maffei, Inc. He is a Assistant Secretary of each of the
funds in the Fund Complex and certain other investment companies advised by the
Advisers and their affiliates.
JOHN L. SULLIVAN, DATE OF BIRTH 08/20/55, VICE PRESIDENT, TREASURER AND CHIEF
FINANCIAL OFFICER. Mr. Sullivan is Senior Vice President of Van Kampen and the
Advisers. Mr. Sullivan is Chief Financial Officer of each of the funds in the
Fund Complex and certain other investment companies advised by the Advisers and
their affiliates.
STEVEN M. HILL, DATE OF BIRTH 10/16/64, ASSISTANT TREASURER. Mr. Hill is Vice
President of Van Kampen and the Advisers. Mr. Hill is Treasurer of each of the
funds in the Fund Complex and certain other investment companies advised by the
Advisers and their affiliates.
TANYA M. LODEN, DATE OF BIRTH 11/19/59, CONTROLLER. Ms. Loden is Vice President
of Van Kampen and the Advisers. Her address is 2800 Post Oak Blvd., Houston, TX
77056. Ms. Loden is Controller of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers and their affiliates.
MICHAEL ROBERT SULLIVAN, DATE OF BIRTH 03/30/33, ASSISTANT CONTROLLER. Mr.
Sullivan is Assistant Vice President of Van Kampen and the Advisers. His address
is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Sullivan is Assistant Controller
of each of the funds in the Fund Complex and certain other investment companies
advised by the Advisers and their affiliates.
*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.
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The officers and Trustees hold the same positions with other funds in the Fund
Complex. The officers and Trustees as a group own less than 1% of the Fund's
outstanding Shares. The compensation of the officers and trustees who are
affiliated persons (as defined in the 1940 Act) of the Adviser, VKF or Van
Kampen 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, VKF or
Van Kampen, 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, VKF or Van
Kampen, 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, VKF or Van
Kampen, 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.
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 $23,055 $10,861 $97,500 $160,875
Rod Dammeyer.......... 1989 23,055 19,532 97,500 161,125
Howard J Kerr......... 1992 23,055 37,215 96,250 161,125
Steven Muller......... 1998 23,055 22,683 7,500 161,125
Theodore A. Myers..... 1989 23,055 66,530 81,750 161,125
Hugo F.
Sonnenschein........ 1994 23,055 18,878 97,500 161,125
Wayne W. Whalen....... 1989 23,042 22,126 97,500 160,625
</TABLE>
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(1) Each of Messrs. McDonnell and Powell is an affiliated person of the
Adviser, VKF and Van Kampen, 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, 1998. The following trustees
deferred all or a portion of their compensation from the Fund during the
fiscal year ended July 31, 1998: Mr. Dammeyer $25,312; Mr. Sonnenschein
$25,312; Mr. Kerr $2,507; and Mr. Whalen $25,299. The cumulative deferred
compensation (including interest) accrued with respect to each trustee from
the Fund as of July 31, 1998 is as follows: Mr. Dammeyer $41,486; Mr.
Sonnenschein $41,451; Mr. Kerr $16,044; and Mr. Whalen $36,604. 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 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.
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(3) The amounts shown in this column represent the sum of the estimated Pension
or Retirement Benefit Accruals expected to be accrued by the 41 operating
investment companies in the Fund Complex as of December 31, 1998 for their
respective fiscal year ends in 1998. 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 41 operating investment companies in the
Fund Complex as of December 31, 1998 for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The Fund
is expected to pay benefits of $2,500 per year for each of the 10-year
period commencing in the year of such trustee's retirement to those
trustees who retire at or over the age of 60 and with at least ten years of
service to the Fund. The retirement plan is described above the
compensation table.
(5) The amounts shown in this column are accumulated from the Aggregate
Compensation of the 41 investment companies in the Fund Complex for the
year ended December 31, 1998 before deferral by the trustees under the
deferred compensation plan. Amounts deferred are retained by the respective
fund and earn a rate of return determined by reference to either the return
on the Common Shares of the Fund or common shares of other funds in the
Fund Complex as selected by the respective trustee. To the extent permitted
by the 1940 Act, the respective fund may invest in securities of the funds
selected by the trustees in order to match the deferred compensation
obligation. The Adviser also serves as investment adviser for other
investment companies; however, with the exception of Messrs. McDonnell,
Powell and Whalen, the Trustees are not trustees of other investment
companies. Combining the Fund Complex with other investment companies
advised by the Adviser or its affiliates, Mr. Whalen received Total
Compensation of $285,825 for the year ended December 31, 1998.
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 "Special Risk Considerations" in the
Prospectus. Affiliates of the Adviser may participate in the primary and
secondary market for Senior Loans. Because of certain limitations imposed by the
1940 Act, this may restrict the Fund's ability to acquire some Senior Loans. The
Adviser does not believe that this will have a material effect on the Fund's
ability to acquire Senior Loans consistent with its investment 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 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, VKF or Van Kampen. For the fiscal years ended July 31, 1996, 1997 and
1998, the Fund paid brokerage commissions of $179,000, $51,563 and $0,
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
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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 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 Investments Inc. Van Kampen Investments
Inc. is an indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co.
The Adviser's principal office is located at 1 Parkview Plaza, P.O. Box 5555,
Oakbrook Terrace, Illinois 60181-5555.
Van Kampen Investments Inc. is a diversified asset management company with
more than two million retail investor accounts, extensive capabilities for
managing institutional portfolios, and more than $75 billion under management or
supervision. Van Kampen Investments Inc.'s more than 50 open-end and 39
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Dean Witter Investment 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 securities lending.
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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 May 28, 1997. 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 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 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, 1996, 1997 and 1998, the
Fund recognized investment advisory fees pursuant to the Advisory Agreement of
$36,408,493 $52,313,966 and $63,011,682, respectively.
The Adviser may in its discretion, but is not obligated to, waive all or any
portion of its fee or assume all or any portion of the expenses of the Fund.
The Advisory Agreement provides that the Adviser shall not be liable for any
error of judgment or of law, or for any loss suffered by the Fund in connection
with the matters to which the Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the Advisory
Agreement.
The Trustees are responsible for the overall management and supervision of the
Fund's affairs. The Adviser's activities are subject to the review and
supervision of the Trustees to whom the Adviser renders periodic reports of the
Fund's investment activities. The Advisory Agreement continues in effect from
year to year only if specifically approved by the Trustees, and by the
disinterested Trustees, or the Fund's holders of Shares in compliance with the
requirements of the 1940 Act. The Advisory Agreement may be terminated without
penalty upon 60 days' written notice by either party and will terminate
automatically in the event of assignment.
THE ADMINISTRATOR
VKF, the Fund's principal underwriter, also serves as the Fund's Administrator
(in such capacity, the "Administrator"), who is an affiliate of the Adviser. For
the fiscal years ended July 31, 1996, 1997 and 1998, the Fund recognized
administrative fees pursuant to the Administration Agreement of $9,614,696,
$13,976,102 and $16,947,689, 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 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 Shares, expenses of
filing reports and other documents filed with governmental agencies, expenses of
annual and special meetings of holders of 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
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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 VKF have entered into a Legal Services Agreements
pursuant to which Van Kampen 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 VKF also receive legal services from Van Kampen. Of the total
costs for legal services provided to funds distributed by VKF, 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.
DIVIDEND REINVESTMENT PLAN
The Fund offers a Dividend Reinvestment Plan (the "Plan"). Under the Plan
Shareholders may elect to have all distributions of dividends and capital gains
automatically reinvested in additional Shares. Unless you elect to participate
in the Plan, you will receive distributions in cash.
State Street Bank and Trust Company, as plan agent (the "Plan Agent"), serves
as agent for Shareholders in administering the Plan. Participants in the Plan
will receive 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 Shareholder's account in the Plan and furnishes
monthly written confirmations of all transactions in the accounts, including
information needed by Shareholders for personal and tax records. Shares will be
held by the Plan Agent in non-certificated form in the name of the participant,
and each Shareholder's proxy will include those 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 Shareholders, such as banks, brokers or nominees, which hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
record Shareholders as representing the total amount registered in the record
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 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 Shareholders of the
Fund.
All registered 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 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 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 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 Shareholder's name and address as
registered. An election to withdraw
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from the Plan will, until such election is changed, be deemed to be an election
by a 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 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 Share credited to such account. All
correspondence concerning the dividend reinvestment plan should be directed to
the State Street Bank and Trust Company, as Plan Agent, c/o Van Kampen 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.
NET ASSET VALUE
The net asset value per share of the Fund's 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 Shares outstanding. The
net asset value will be computed on each business day as of 5:00 p.m. Eastern
time. The Fund reserves the right to calculate the net asset value more
frequently if deemed desirable.
The value of the Fund's portfolio will be determined by the Adviser, following
guidelines established and periodically reviewed by the Trustees. Interests in
Senior Loans will be valued by the Adviser on behalf of the Fund on the basis of
market quotations and transactions in instruments which the Adviser believes may
be comparable to Senior Loan interests with respect to the following
characteristics: credit quality, interest rate, interest rate redetermination
period and maturity. Such instruments may include commercial paper, negotiable
certificates of deposit and short-term variable rate securities which have
adjustment periods comparable to the Senior Loan interests in the Fund's
portfolio. In determining the relationship between such instruments and the
Senior Loan interests in the Fund's portfolio, the Adviser will consider on an
ongoing basis, among other factors, (i) the credit worthiness of the Borrower
and (ii) the current interest rate, the period until next interest rate
redetermination and maturity of such Senior Loan interests. It is expected that
the Fund's net asset value will fluctuate as a function of interest rate and
credit factors. Because of the short-term nature of such instruments, however,
the Fund's net asset value is expected to fluctuate less in response to changes
in interest rates than the net asset values of investment companies with
portfolios consisting primarily of fixed-income or longer term securities. The
Adviser believes that Lenders selling Senior Loan interests or otherwise
involved in a Senior Loan transaction may tend, in valuing Senior Loan interests
for their own account, to be less sensitive to interest rate and credit quality
changes and, accordingly, the Adviser does not intend to rely solely on such
valuations in valuing the Senior Loan interests for the Fund's account. In
addition, because a secondary trading market in Senior Loans has not yet fully
developed, in valuing Senior Loans, the Adviser may not rely solely on but may
consider, to the extent the Adviser believes such information to be reliable,
prices or quotations provided by banks, dealers or pricing services with respect
to 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
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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.
TAXATION
FEDERAL INCOME 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; and (b) diversify its holdings so
that at the end of each quarter of the Fund's taxable year (i) at least 50% of
the value of the Fund's assets is represented by cash, U.S. government
securities, securities of other regulated investment companies, and other
securities which, with respect to any one issuer, do not represent more than 5%
of the value of the Fund's assets or more than 10% of the voting securities of
such issuer, and (ii) not more than 25% of the value of the Fund's assets is
invested in the securities of any one issuer (other than U.S. government
securities or the securities of other regulated investment companies).
If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (including among other things, interest
and net short-term capital gain, but not net capital gains, which are the excess
of net long-term capital gains over net short-term capital losses), in each
year, it will not be required to pay federal income taxes on any income
distributed to Shareholders. The Fund intends to distribute at least the minimum
amount of net investment income necessary to satisfy the 90% distribution
requirement. The Fund will not be subject to federal income tax on any net
capital gains distributed to Shareholders. As a Massachusetts business trust,
the Fund will not be subject to any excise or income taxes in Massachusetts as
long as it qualifies as a regulated investment company for federal income tax
purposes.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least an amount equal to the sum of (a) 98% of its
ordinary income for such year and (b) 98% of its capital gain net income (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
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<PAGE> 14
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 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.
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 gain dividends"), if
any, are taxable to 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 Shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such Shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rate" 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 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 Shares received,
determined as of the distribution date. The basis of such 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. Foreign shareholders, including shareholders who are nonresident
aliens, may be subject to U.S. withholding tax on certain distributions (whether
received in cash or shares) at a rate of 30% or such lower rate as prescribed by
an applicable income tax treaty.
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 Shares and the amount received. If such 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
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<PAGE> 15
capital gains, see "Capital Gains Rates" 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 Shares pursuant to tender offers will
be disclosed in the related offering documents. Any loss recognized upon a
taxable disposition of 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 Shares. For purposes of determining whether 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
The maximum tax applicable to net capital gains recognized by individuals and
other non-corporate taxpayers is (i) the same as the maximum ordinary income tax
rate for capital assets held for one year or less or (ii) 20% for capital assets
held for more than one year. The maximum long-term capital gains rate for
corporations is 35%.
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 may from time to time enter into one or more credit agreements to
provide the Fund with additional liquidity to meet its obligations to purchase
Common Shares pursuant to any tender offer it may make. The Fund has entered
into a Second Amendment and Restatement of Credit Agreement dated as of June 14,
1999 (the "Credit Agreement") among the Fund and Van Kampen Senior Floating Rate
Fund (the "Co-Borrower") as borrowers, 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 $500,000,000 to the Fund and the
Co-Borrower, which is not secured by the assets of the Fund or Co-Borrower or
other collateral. As of the date hereof neither the Fund nor the Co-Borrower has
drawn any of the funds available under the Credit Agreement. The proceeds of any
amounts borrowed under the Credit Agreement may 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. Each of the Fund and Co-Borrower is entitled to borrow money ("Loans") from
the Financial Institutions in amounts which in the aggregate do not exceed
the $500 million credit facility, provided that the aggregate amount of
loans to the Fund or the Co-Borrower on an individual basis cannot exceed
twelve and one half percent (12.5%) of the net asset value of the Fund or
Co-Borrower, as the case may be (defined as total assets minus total
liabilities minus assets subject to liens). Pursuant to guidelines
applicable to the Fund and the Co-Borrower, any Loans to the Fund and
Co-Borrower will be made on a first-come, first-serve basis. If, at any
time, the demand for borrowings by the Fund and Co-Borrower exceeds amounts
available under the Credit Agreement, such borrowing will be allocated on a
fair and equitable basis, taking into consideration factors, including,
without limitation, relative net assets of the Fund and Co-Borrower,
amounts requested by the Fund and Co-Borrower, and availability of other
sources of cash to meet each parties' needs.
b. Loans made under the Credit Agreement, if any, will bear interest daily at
the option of the Fund or Co-Borrower as applicable, (i) at a rate per
annum equal to the federal funds rate from time to time plus 0.45%,
provided, however, that during the period from December 17, 1999 through
January 14, 2000, the rate shall be the federal funds rate plus 0.575%, or
(ii) at a rate per annum equal to a reserve-
B-15
<PAGE> 16
adjusted interbank offered rate offered by BofA's Grand Cayman Branch
("IBOR") plus 0.45% per annum, provided, however, that during the period
from December 17, 1999 through January 14, 2000, the rate shall be IBOR
plus 0.575%. Each of the Fund and Co-Borrower will bear the expenses of any
borrowings attributable to it under the Credit Agreement. Such interest
will be due, in arrears, on the outstanding principal amount of each loan
(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 or
Co-Borrower as applicable in advance. Interest on the outstanding principal
of the Loans will also be due on the date of any prepayment of any offshore
rate Loan and on demand during the existence of an event of default under
the Credit Agreement payable by the borrower subject to such event of
default. 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 as defined in the Credit Agreement.
c. The Fund paid approximately $34,680 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 its
pro rata share (based on the relative net assets of the Fund and
Co-Borrower) of a commitment fee computed at the rate of 0.09% per annum on
the average daily unused amount of the facility.
d. The principal amount of any loans made under the Credit Agreement, if any,
is required to be paid sixty (60) days from the date of the Loan. Each of
the Fund and Co-Borrower is entitled to prepay a Loan made to it in
multiples of $1,000,000, provided that the Fund or Co-Borrower as
applicable 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 and
Co-Borrower, as applicable, 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 asset coverage
ratio for the applicable borrower, being at least 8 to 1; (iii) there being
no default or event of default in existence; (iv) the representations and
warranties with respect to the applicable borrower made in the Credit
Agreement continuing to be true and (v) there being no loans outstanding
with the applicable borrower for more than sixty (60) days on the day
preceding the proposed borrowing date.
f. The Credit Agreement contains various affirmative and negative covenants
of the Fund and Co-Borrower, 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; (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 applicable borrower; 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 the Financial Institutions
under the Credit Agreement or the Promissory Notes; (ii) any material
misrepresentations in the Credit Agreement or documents delivered to the
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 or Co-Borrower's, as applicable,
fundamental investment policies or investment restrictions; (v) failure to
comply by the Fund or Co-Borrower, as applicable, with all material
provisions of the Investment Company Act of 1940; (vi) the voluntary or
involuntary bankruptcy of the Fund or Co-Borrower, as applicable; (vii) the
entry of judgments for the payment of
B-16
<PAGE> 17
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 or Co-Borrower's, as applicable, investment adviser.
h. The credit facility provided pursuant to the Credit Agreement will
terminate on June 13, 2000 (the "Commitment Termination Date"), unless
extended or earlier terminated 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 which will be
acquired and from proceeds from the sale of Shares.
During the pendency of any tender offer by the Fund, the Fund will calculate
daily the net asset value of the Shares and will establish procedures which will
be specified in the tender offer documents, to enable 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 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 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 Shares
will be recorded and reported as an offset to Shareholders' equity and
accordingly will reduce the Fund's total assets. If Treasury Shares are retired,
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 Shares
tendered, the Fund may realize gains and losses.
B-17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS
AEROSPACE/DEFENSE 1.2%
$ 7,047 Aerostructures Corp., Term
Loan............................ NR BB- 12/31/03 $ 7,050,529
5,500 Decrane Finance Co., Term
Loan............................ B1 B+ 09/30/05 5,500,000
7,425 Fairchild Holding Corp., Term
Loan............................ NR NR 06/18/04 7,425,763
650 Fairchild Holding Corp.,
Revolving Credit................ NR NR 06/18/04 650,005
38,125 Gulfstream Delaware Corp., Term
Loan............................ NR NR 09/30/02 38,127,398
13,059 K & F Industries, Inc., Term
Loan............................ Ba3 B+ 10/15/05 13,060,710
7,840 Tri-Star, Inc., Term Loan....... NR NR 09/30/03 7,842,182
14,197 United Defense Industries, Inc.,
Term Loan....................... B1 BB- 10/06/05 to
10/06/06 14,198,853
3,850 Whittaker Corp., Term Loan...... NR NR 05/30/03 3,849,996
795 Whittaker Corp., Revolving
Credit.......................... NR NR 05/30/01 794,264
--------------
98,499,700
--------------
AUTOMOTIVE 2.8%
34,000 American Axel and Manufacturing,
Inc., Term Loan................. B1 B+ 04/30/06 34,007,593
8,423 American Bumper and
Manufacturing Co., Term Loan.... NR NR 04/30/04 8,425,376
56,427 Breed Technologies, Inc., Term
Loan............................ B1 BB 04/27/04 to
04/27/06 56,428,164
3,359 Breed Technologies, Inc.,
Revolving Credit................ B1 BB 04/27/04 to
04/27/06 3,359,511
63,377 Federal Mogul Corp., Term
Loan............................ Ba2 B+ 12/31/03 to
12/31/05 63,425,630
1,517 Federal Mogul Corp., Revolving
Credit.......................... Ba2 B+ 03/12/04 1,518,261
10,000 Insilco Corp., Term Loan........ Ba3 B+ 11/24/05 9,999,743
4,798 JMS Automotive Rebuilders, Inc.,
Term Loan (a)(b)................ NR NR 06/30/04 3,946,997
6,500 Metalforming Technologies, Inc.,
Term Loan....................... NR NR 06/30/05 6,500,824
7,821 Murray's Discount Auto Stores,
Inc., Term Loan................. NR NR 06/30/03 7,038,938
</TABLE>
See Notes to Financial Statements
F-1
<PAGE> 19
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUTOMOTIVE (CONTINUED)
$ 225 Murray's Discount Auto Stores,
Inc., Revolving Credit.......... NR NR 06/30/03 $ 225,000
9,243 The Plastech Group, Term Loan... NR NR 04/01/02 to
04/01/04 9,239,941
16,491 Safelite Glass Corp., Term
Loan............................ B1 B+ 12/23/04 to
12/23/05 16,500,252
--------------
220,616,230
--------------
BROADCASTING--CABLE 5.4%
4,646 Adelphia Cable Partners, LP,
Revolving Credit................ Ba2 BB+ 12/31/03 4,652,902
22,500 Bresnan Communications Co., LP,
Term Loan....................... Ba3 BB+ 03/31/06 22,529,625
5,880 Cable Systems International,
Inc., Term Loan................. NR NR 12/31/02 5,881,481
17,500 Charter Communications
Entertainment II, Term Loan..... Ba3 NR 12/31/07 17,503,323
32,000 Charter Communications
Entertainment II & Long Beach,
Term Loan....................... Ba3 NR 03/31/06 32,014,300
47,144 Chelsea Communications, Inc.,
Term Loan....................... Ba2 NR 12/31/04 47,146,985
10,400 Encore Investments, Term Loan... NR NR 06/30/04 10,409,432
20 Encore Investments, Revolving
Credit.......................... NR NR 06/30/04 20,000
45,000 Falcon Holdings Group, LP, Term
Loan............................ Ba3 BB- 12/31/07 44,502,125
15,000 Frontiervision Operating
Partners, LP, Term Loan......... Ba3 BB 03/31/06 15,003,260
22,083 Garden State Cablevision, LP,
Revolving Credit................ NR NR 06/30/05 22,086,929
53,458 InterMedia Partners IV, LP, 01/01/05 to
Term Loan....................... Ba3 NR 12/31/07 53,461,836
60,170 Marcus Cable Operating Co., 12/31/02 to
Term Loan....................... Ba3 B- 04/30/04 60,177,510
3,411 Marcus Cable Operating Co.,
Revolving Credit................ Ba3 B- 12/31/02 3,410,571
1,990 Mark Twain Cablevision, LP,
Term Loan....................... NR NR 06/30/04 1,990,296
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 20
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BROADCASTING--CABLE (CONTINUED)
$ 23,727 TCI Pacific, Inc., Term Loan.... NR NR 12/31/04 $ 23,728,174
30,286 Triax Midwest Associates, Term
Loan............................ NR NR 06/30/06 to
06/30/07 30,285,956
1,676 Triax Midwest Associates,
Revolving Credit................ NR NR 06/30/06 1,676,552
27,029 TW Fanch, Revolving Credit...... NR NR 12/31/04 27,041,126
--------------
423,522,383
--------------
BROADCASTING--DIVERSIFIED 1.2%
76,638 Chancellor Broadcasting Co.,
Term Loan....................... Ba1 BB- 06/30/05 76,678,832
18,653 Chancellor Broadcasting Co.,
Revolving Credit................ Ba1 BB- 06/30/05 18,686,381
--------------
95,365,213
--------------
BROADCASTING--RADIO 0.4%
35,000 Jacor Communications, Inc.,
Term Loan....................... Ba2 BB- 12/31/04 35,000,720
--------------
BROADCASTING--TELEVISION 1.8%
11,731 Benedek Broadcasting Corp., 05/01/01 to
Term Loan....................... B1 NR 11/01/02 11,734,856
20,000 Black Entertainment Television,
Inc., Term Loan................. NR NR 06/30/06 20,002,856
9,980 Lin Television Corp., Term
Loan............................ Ba3 B- 03/31/07 9,980,279
66,000 Sinclair Broadcasting, Term
Loan............................ Ba2 BB- 09/15/05 66,012,534
32,000 TLMD Acquisition Co., Term
Loan............................ B1 B+ 03/31/07 32,006,900
--------------
139,737,425
--------------
BUILDINGS & REAL ESTATE 0.8%
20,000 BSL Holdings, Term Loan......... NR BB- 12/30/05 20,007,777
47,222 Walter Industries, Inc., Term
Loan............................ NR NR 10/15/03 47,222,048
--------------
67,229,825
--------------
CHEMICAL, PLASTICS & RUBBER 4.7%
11,227 Cedar Chemicals Corp., Term
Loan............................ NR NR 10/30/03 11,228,880
10,527 Foamex, LP, Term Loan........... Ba3 B 06/30/05 to
06/30/06 10,529,812
5,357 Foamex, LP, Revolving Credit.... Ba3 B 06/12/03 5,357,153
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 21
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHEMICAL, PLASTICS & RUBBER (CONTINUED)
$ 6,965 General Chemical Group, Term
Loan............................ NR BB+ 06/15/06 $ 6,965,000
10,000 Harris Speciality Chemicals,
Term Loan....................... NR NR 03/31/06 10,000,000
14,373 High Performance Plastics, Inc.,
Term Loan....................... NR NR 03/31/05 14,372,993
40,551 Huntsman Group Holdings, Term
Loan............................ Ba2 BB 12/31/02 to
12/31/05 40,574,595
6,667 Huntsman Group Holdings,
Revolving Credit................ Ba2 BB 12/31/02 6,666,781
18,939 Huntsman Specialty Chemical 03/15/04 to
Corp., Term Loan................ Ba2 NR 03/15/05 18,951,180
5,640 Jet Plastica Industries, Inc.,
Term Loan....................... NR NR 12/31/02 to
12/31/04 5,644,668
30,000 Kosa, LLC, Term Loan............ Ba1 BB+ 12/31/06 30,012,607
93,487 Lyondell Petrochemical Corp.
Term Loan....................... Ba2 BBB- 06/30/99 to
06/30/05 93,525,450
15,000 MetoKote Corp., Term Loan....... NR NR 11/02/05 15,004,863
9,837 Pioneer Americas Acquisition
Corp., Term Loan................ B2 B+ 12/31/06 9,847,442
11,964 Reid Plastics, Inc., Term
Loan............................ NR NR 11/12/03 11,971,069
42,876 Sterling Chemicals, Inc., Term
Loan............................ Ba3 NR 09/30/04 42,902,004
11,585 Texas Petrochemicals Corp., Term
Loan............................ Ba3 NR 06/30/01 to
06/30/04 11,586,620
1,867 Texas Petrochemicals Corp.,
Revolving Credit................ Ba3 NR 12/31/02 1,867,130
6,538 TruSeal Technologies, Inc., Term
Loan............................ NR NR 06/30/04 6,498,436
8,140 Vinings Industries, Inc., Term
Loan............................ NR NR 03/31/05 8,143,946
4,577 West American Rubber, Term
Loan............................ NR NR 06/30/05 4,577,029
--------------
366,227,658
--------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 22
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS--TELEPHONE 0.1%
$ 4,583 International Data Response,
Term Loan....................... NR NR 12/31/01 to
12/31/02 $ 4,588,346
7,119 Mitel Corp., Term Loan.......... NR NR 12/26/03 7,122,106
--------------
11,710,452
--------------
CONSTRUCTION MATERIALS 1.8%
21,707 Behr Process Corp., Term Loan... NR NR 03/31/02 to
03/31/05 21,722,941
882 Behr Process Corp., Revolving
Credit.......................... NR NR 03/31/02 882,354
1,611 Brand Scaffold Services, Inc.,
Term Loan....................... B1 NR 09/30/02 1,611,950
56 Brand Scaffold Services, Inc.,
Revolving Credit................ B1 NR 09/30/02 55,556
10,000 Dayton Superior Corp., Term
Loan............................ NR NR 09/29/05 10,002,855
6,833 Flextek Components, Inc. (a).... NR NR 02/28/05 5,466,300
13,632 Falcon Building Products, Inc.,
Term Loan....................... B1 B+ 06/30/05 13,645,070
59,449 National Gypsum Co., Term
Loan............................ NR NR 09/20/03 59,451,272
4,655 Panolam Industries, Inc., Term
Loan............................ B1 NR 10/31/02 4,654,891
6,919 Reliant Building Products, Inc.,
Term Loan....................... B1 B+ 03/31/04 6,922,813
14,850 Werner Holding Co., Term Loan... Ba3 B+ 11/30/04 to
11/30/05 14,854,498
--------------
139,270,500
--------------
CONTAINERS, PACKAGING & GLASS 3.8%
37,500 Dr. Pepper Holdings, Inc., Term
Loan............................ NR NR 12/31/05 37,524,317
8,288 Fleming Packaging Corp., Term
Loan............................ NR NR 08/30/04 8,290,907
9,900 Graham Packaging Co., Term
Loan............................ B1 B+ 01/31/06 to
01/31/07 9,903,758
29,663 Huntsman Packaging Corp., Term
Loan............................ B1 BB- 09/30/05 to
09/30/06 29,662,500
29,700 IPC, Inc., Term Loan............ NR B+ 10/02/04 29,776,354
5,000 Packaging Dynamics, Term Loan... NR NR 11/20/05 5,001,795
165,364 Stone Container Corp., Term
Loan............................ Ba3 B+ 04/01/00 to
10/01/03 165,534,107
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 23
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONTAINERS, PACKAGING & GLASS (CONTINUED)
$ 579 Stone Container Corp., Revolving
Credit.......................... Ba3 B+ 05/15/99 $ 579,465
8,009 Stronghaven, Inc., Term Loan.... NR NR 05/15/04 7,208,700
7,146 Tekni-Plex, Inc., Term Loan..... B1 B+ 03/03/06 7,150,120
--------------
300,632,023
--------------
DIVERSIFIED MANUFACTURING 2.1%
3,969 Advanced Accessory Systems, LLC,
Term Loan....................... B1 B+ 10/30/04 3,968,368
8,955 CII Carbon, LLC, Term Loan...... NR NR 06/25/08 8,957,202
6,383 ConMed Corp., Term Loan......... B1 BB- 12/30/04 6,384,859
9,850 Desa International, Term Loan... B2 B+ 12/26/04 9,852,468
27,044 Evenflo & Spalding Holdings
Corp., Term Loan................ B3 B- 09/30/03 to
03/30/06 27,044,314
6,566 Evenflo & Spalding Holdings
Corp., Revolving Credit......... B3 B- 09/30/03 6,566,484
25,757 International Wire Group, Inc.,
Term Loan....................... B1 NR 09/30/03 25,762,351
10,821 Intesys Technologies, Inc., Term
Loan............................ NR NR 06/30/04 to
06/30/06 10,823,292
427 Intesys Technologies, Inc.,
Revolving Credit................ NR NR 06/30/06 426,688
7,673 M.W. Manufacturers, Term Loan... NR NR 09/15/02 7,674,577
18,476 Neenah Foundry Co., Term Loan... Ba3 BB- 09/30/05 18,482,065
12,500 Superior Telecom, Term Loan..... Ba3 B+ 11/27/05 12,504,666
24,792 UCAR International, Inc., Term
Loan............................ Ba3 BB- 12/31/02 24,805,373
6,161 U.F. Acquisition, Term Loan..... NR NR 12/15/02 6,163,540
--------------
169,416,247
--------------
ECOLOGICAL 1.4%
7,000 Environmental System, Term
Loan............................ B1 BB- 09/30/05 7,003,661
104,885 Safety-Kleen Corp., Term Loan... Ba3 BB 04/03/05 to
04/03/06 104,904,164
--------------
111,907,825
--------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 24
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EDUCATION & CHILD CARE 0.2%
$ 8,690 Kindercare Learning Centers,
Inc., Term Loan................. Ba3 B+ 03/21/06 $ 8,690,275
4,969 La Petite Academy, Inc., Term
Loan............................ B2 B 05/11/05 4,969,276
--------------
13,659,551
--------------
ELECTRONICS 2.6%
29,906 Amphenol Corp., Term Loan....... Ba3 B+ 10/03/04 to
05/19/06 29,911,135
6,650 Banker's Systems, Inc., Term
Loan............................ NR NR 11/01/02 6,651,655
7,170 Beltone Electronics, Inc., Term
Loan............................ NR NR 10/31/03 to
10/31/04 7,170,421
3,861 Caribiner International, Term
Loan............................ NR NR 09/30/03 3,861,471
12,675 Chatham Technologies 08/18/03 to
Acquisition, Inc., Term Loan.... NR NR 08/18/05 12,674,918
5,872 Claricom, Inc., Term Loan....... NR NR 11/30/02 5,871,770
43,352 DecisionOne Corp., Term Loan.... B1 B- 08/07/03 to
08/07/05 43,373,468
16,912 Fairchild Semiconductor Corp.,
Term Loan....................... Ba3 BB 03/11/03 16,912,010
5,400 Fisher Scientific International, 01/21/05 to
Inc., Term Loan................. Ba3 B+ 01/21/06 5,502,142
3,935 Labtec, Inc., Term Loan......... NR NR 10/07/04 3,936,285
4,435 Rowe International, Inc., Term
Loan (a)........................ NR NR 03/31/00 4,480,400
8,643 Sarcom, Inc., Term Loan......... NR NR 12/31/02 8,643,126
24,976 Sterling Diagnostic Imaging,
Inc., Term Loan................. NR NR 09/30/05 24,972,711
7,500 Stoneridge, Inc., Term Loan..... Ba3 BB 12/31/05 7,500,000
18,629 Viasystems, Inc., Term Loan..... B2 B+ 03/31/04 to
06/30/05 18,633,721
634 Viasystems, Inc., Revolving
Credit.......................... B2 B+ 12/31/02 633,548
4,900 WGL Acquisition Corp., Term
Loan............................ NR NR 07/30/04 4,900,669
--------------
205,629,450
--------------
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 25
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ENTERTAINMENT/LEISURE 3.4%
$ 24,744 AMF Group, Inc., Term Loan...... B1 B 03/31/03 to
03/31/04 $ 24,747,563
21,500 ASC Network Corp., Term Loan.... NR NR 05/31/06 21,500,561
2,200 Camelot Music Holdings, Inc.,
Revolving Credit................ NR NR 01/27/02 2,200,000
20,000 Florida Panthers Holding, Inc.
Term Loan....................... NR NR 06/15/99 20,013,029
7,920 KSL Recreation Group, Inc. 04/30/05 to
Term Loan....................... B2 B+ 04/30/06 7,927,440
4,752 KSL Recreation Group, Inc.,
Revolving Credit................ B2 B+ 04/30/04 4,755,180
79,000 Metro-Goldwyn-Mayer, Inc., Term
Loan............................ NR NR 03/31/05 to
03/31/06 79,021,508
13,980 Metro-Goldwyn-Mayer, Inc.,
Revolving Credit................ NR NR 09/30/03 13,982,434
5,048 Regal Cinemas, Inc., Term
Loan............................ Ba3 BB- 05/27/06 to
05/27/07 5,050,954
9,933 SFX Entertainment, Inc., Term
Loan............................ B1 B+ 03/31/06 9,938,727
5,236 Six Flags Theme Park, Term
Loan............................ Ba3 B+ 11/30/04 5,236,521
6,700 Sportcraft, Ltd., Term Loan..... NR NR 12/31/02 6,700,081
4,988 True Temper, Term Loan.......... B1 BB- 09/30/05 4,988,457
46,819 Viacom, Inc., Term Loan......... Baa3 BBB- 04/01/02 to
07/01/02 46,826,940
1,368 Viacom, Inc., Revolving
Credit.......................... Baa3 BBB- 07/01/02 1,368,918
15,000 WestStar Cinemas, Inc., Term
Loan............................ NR NR 09/30/05 15,000,478
--------------
269,258,791
--------------
FARMING & AGRICULTURE 0.7%
11,000 Doane Pet Care Cos., Term
Loan............................ B1 B+ 12/31/05 to
12/31/06 11,005,377
37,459 Seminis, Inc., Term Loan........ NR NR 12/31/03 to
12/31/04 37,472,474
4,912 Walco International, Inc., Term
Loan............................ NR NR 03/31/04 4,914,278
--------------
53,392,129
--------------
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 26
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCE 6.6%
$ 14,000 Blackstone Capital Co., Term
Loan............................ NR NR 05/31/99 $ 14,005,591
38,000 Bridge Information Systems,
Inc., Term Loan................. NR NR 05/27/05 38,006,516
30,000 Felcor Suite Hotels, Term
Loan............................ Ba1 BB+ 06/30/01 30,000,000
31,509 Mafco Finance Corp., Term
Loan............................ NR NR 04/28/00 31,523,578
26,500 Metris Cos., Inc., Term Loan.... Ba3 NR 06/30/03 26,500,627
39,773 Outsourcing Solutions, Term
Loan............................ B2 NR 10/15/04 39,780,113
46,450 Patriot American Hospitality,
Inc., 03/31/99 to
Term Loan....................... NR NR 03/31/03 46,473,532
65,000 Paul G. Allen, Term Loan........ NR NR 06/10/03 65,000,788
125,000 Starwood Hotels and Resorts,
Inc., 02/23/99 to
Term Loan....................... Ba1 NR 02/23/03 124,950,003
98,718 Ventas Realty Ltd., Inc., Term
Loan............................ NR NR 04/30/03 98,741,625
--------------
514,982,373
--------------
FOOD/BEVERAGE 2.1%
46,977 Agrilink Foods, Term Loan....... B1 BB- 09/30/04 to
09/30/05 46,978,170
11,494 Amerifoods Cos., Inc., Term
Loan............................ NR NR 06/30/99 to
06/30/02 10,919,067
8,898 Edwards Baking Corp., Term
Loan............................ NR NR 09/30/03 to
09/30/05 8,898,375
12,417 Favorite Brands International,
Inc., Term Loan................. B2 B 05/19/05 12,417,230
19,184 Fleming Cos., Inc., Term Loan... Ba3 BB+ 07/25/04 19,230,661
15,971 Fleming Cos., Inc., Revolving
Credit.......................... Ba3 BB+ 07/25/03 16,036,217
7,425 Leon's Bakery, Inc., Term
Loan............................ NR NR 05/02/05 7,425,843
7,220 Mistic Brands, Inc., Term
Loan............................ NR NR 06/01/04 to
06/01/05 7,220,651
10,864 Southern Foods Group, Inc., Term
Loan............................ Ba3 BB- 02/28/06 10,867,676
21,448 Stroh Brewery Co., Term Loan.... NR NR 06/30/03 21,449,206
--------------
161,443,096
--------------
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 27
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOOD STORES/GROCERY 1.5%
$ 42,756 Bruno's, Inc., Term Loan (a)
(b)............................. Caa2 NR 12/02/03 to
04/15/05 $ 38,021,978
4,830 Bruno's, Inc., Revolving Credit
(a) (b)......................... Caa2 NR 12/02/03 4,294,150
12,429 Eagle Family Foods, Inc., Term
Loan............................ B1 B+ 12/31/05 12,435,267
4,592 Harvest Foods, Inc., Term Loan
(a) (b)......................... NR NR 06/30/02 91,830
30,652 Pathmark Stores, Inc., Term
Loan............................ B1 B+ 06/15/01 to
12/15/01 30,675,094
3,127 Pathmark Stores, Inc., Revolving
Credit.......................... B1 B+ 06/15/01 3,139,183
8,474 Randall's Food Markets, Inc.,
Term Loan....................... Ba3 BB- 06/27/06 8,478,130
5,748 Randall's Food Markets, Inc.,
Revolving Credit................ Ba3 BB- 06/27/04 5,747,906
5,000 The Pantry, Inc., Term Loan..... B1 BB- 01/31/06 5,000,000
8,391 Star Markets Co., Inc., Term
Loan............................ Ba3 NR 12/31/02 to
12/31/03 8,396,731
2,465 Star Markets Co., Inc.,
Revolving Credit................ Ba3 NR 12/31/01 2,466,245
--------------
118,746,514
--------------
HEALTH CARE & BEAUTY AIDS 1.6%
8,910 Kinetic Concepts, Inc., Term
Loan............................ Ba3 B+ 12/31/04 to
12/31/05 8,914,800
16,796 Mary Kay Cosmetics, Inc., Term
Loan............................ NR NR 03/06/04 16,804,504
1,709 Mary Kay Cosmetics, Inc.,
Revolving Credit................ NR NR 03/06/04 1,710,180
24,626 Playtex Products, Inc., Term
Loan............................ Ba2 BB 09/15/03 24,636,779
54,725 Revlon Consumer Products Corp.,
Term Loan....................... Ba3 BB- 05/30/02 54,761,208
20,000 24 Hour Fitness, Inc., Term
Loan............................ NR NR 12/31/05 20,004,668
--------------
126,832,139
--------------
HEALTHCARE 10.1%
3,960 Alliance Imaging, Inc., Term
Loan............................ B1 B+ 12/18/03 to
06/18/04 3,961,817
6,545 Charter Behavioral, Revolving
Credit.......................... NR NR 06/17/02 6,554,585
58,480 Community Health Systems, Inc., 12/31/03 to
Term Loan....................... NR NR 12/31/05 58,477,692
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 28
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTHCARE (CONTINUED)
$ 44,472 Dade International, Inc., Term
Loan............................ B1 NR 12/31/02 to
12/31/04 $ 44,492,723
15,030 Extendicare Health Services,
Inc., Term Loan................. Ba3 B+ 12/31/03 15,032,842
27,397 FPA Medical Management, Inc.,
Term Loan (a)(b)................ Caa3 D 09/30/01 21,998,694
4,813 FPA Medical Management, Inc.,
Debtor in Possession (a)(b)..... Caa3 D 02/01/09 4,812,748
27,010 Genesis Healthcare Ventures,
Inc., 09/30/04 to
Term Loan....................... Ba3 B+ 06/01/05 27,014,470
148,500 Integrated Health Services,
Inc., 09/15/03 to
Term Loan....................... Ba3 B+ 12/31/05 148,532,315
50,000 Magellan Health Services, Inc.,
Term Loan....................... B1 B+ 02/12/05 50,050,218
6,714 Medical Specialties Group, Inc., 06/30/01 to
Term Loan....................... NR NR 06/30/04 6,722,790
11,000 Mediq/PRN Life Support Services,
Inc., Term Loan................. B1 B+ 06/30/06 11,016,024
7,500 Meditrust Corp., Term Loan...... NR NR 07/17/01 7,500,253
26,490 MedPartners, Inc., Term Loan.... B1 BB- 05/31/01 26,503,659
5,786 MedPartners, Inc., Revolving
Credit.......................... B1 BB- 05/31/01 5,786,982
18,535 Multicare Companies, Inc., Term
Loan............................ B1 B+ 09/30/04 to
06/01/05 18,536,073
45,000 National Medical Care, Inc.,
Term Loan....................... Ba1 BB 09/30/03 45,019,557
13,500 Oxford Health Plans, Inc., Term
Loan............................ B3 B- 05/15/03 13,500,735
24,950 Paragon Health Network, Inc., 03/31/05 to
Term Loan....................... Ba3 NR 03/31/06 24,950,948
34,052 Quest Diagnostics, Inc., Term
Loan............................ Ba3 BB+ 12/05/02 to
06/30/06 34,053,272
7,900 SMT Health Services, Inc., Term
Loan............................ NR NR 08/30/03 7,899,994
15,010 Stryker Corp., Term Loan........ Ba2 BB 12/04/05 to
12/04/06 15,000,438
49,579 Sun Healthcare Group, Inc., 11/12/04 to
Term Loan....................... Ba3 B 11/12/05 49,578,563
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 29
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTHCARE (CONTINUED)
$ 89,100 Total Renal Care Holdings, Inc.,
Term Loan....................... Ba2 NR 03/31/08 $ 89,126,248
56,747 Vencor, Inc., Term Loan......... B1 B- 01/15/05 56,747,866
--------------
792,871,506
--------------
HOME & OFFICE FURNISHINGS, HOUSEWARES &
DURABLE CONSUMER PRODUCTS 2.6%
13,000 Corning Consumer Products, Co.,
Term Loan....................... B1 BB- 10/09/06 13,000,000
49,817 Dal-Tile Group, Inc., Term
Loan............................ NR NR 12/31/02 to
12/31/03 49,906,963
4,085 Dal-Tile Group, Inc., Revolving
Credit.......................... NR NR 12/31/02 4,087,246
34,000 Furniture Brands International,
Inc., Term Loan................. NR NR 06/30/07 34,001,421
26,045 Imperial Home Decor Group, Inc., 03/12/04 to
Term Loan....................... B1 B+ 03/13/06 26,055,151
1,802 Imperial Home Decor Group, Inc.,
Revolving Credit................ B1 B+ 03/12/04 1,801,987
72,635 Renters Choice, Inc., Term
Loan............................ Ba3 BB- 01/31/06 to
01/31/07 72,641,230
--------------
201,493,998
--------------
HOTELS, MOTELS, & GAMING 0.9%
41,000 Alladin Gaming, LLC, Term
Loan............................ B2 NR 02/26/08 41,010,259
9,534 Alliance Gaming Corp., Term
Loan............................ B1 B 01/31/05 9,536,216
2,093 Alliance Gaming Corp., Delayed
Draw Term Loan.................. B1 B 01/31/05 2,093,221
5,000 Harrah's Jazz Co., Term Loan.... Baa3 BBB- 01/06/06 5,000,363
11,029 Las Vegas Sands, Inc., Term
Loan............................ B1 B+ 11/30/03 11,031,420
720 Las Vegas Sands, Inc., Revolving
Credit.......................... B1 B+ 11/30/03 720,059
--------------
69,391,538
--------------
INSURANCE 0.2%
17,500 BRW Acquisition, Inc., Term
Loan............................ NR NR 07/10/06 to
07/10/07 17,500,000
--------------
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 30
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MACHINERY 0.4%
$ 9,500 Alliance Laundry Systems, LLC,
Term Loan....................... B1 B+ 06/30/05 $ 9,509,277
15,000 Ocean Rig (Norway), Term Loan... NR NR 06/01/08 15,003,260
5,815 RIGCO N. A., LLC, Term Loan..... NR NR 09/30/05 5,814,800
--------------
30,327,337
--------------
MINING, STEEL, IRON, & NON-PRECIOUS METALS 0.7%
7,437 Alliance Coal Corp., Term
Loan............................ NR NR 12/31/01 to
12/31/02 7,441,006
8,411 Earle M. Jorgensen, Term Loan... B1 B+ 03/31/04 8,443,339
9,506 Fairmont Minerals, Ltd., Term
Loan............................ NR NR 02/25/05 9,507,730
8,762 Global Metal Technologies, Term
Loan............................ NR NR 03/13/05 8,757,279
19,900 Ispat Inland, Term Loan......... Ba3 BB 07/16/05 to
07/16/06 19,900,000
--------------
54,049,354
--------------
NATURAL RESOURCES--COAL 0.0%
4,712 Centennial Resources, Inc., Term 03/31/02 to
Loan (a)(b)..................... NR NR 03/31/04 3,063,767
647 Centennial Resources, Inc., 03/31/02 to
Debtor in Possession (a)(b)..... NR NR 03/31/04 647,171
--------------
3,710,938
--------------
NON-DURABLE CONSUMER PRODUCTS 0.1%
4,045 Homemaker Industries, Inc., Term
Loan............................ NR NR 06/30/04 4,044,600
--------------
PAPER & FOREST PRODUCTS 0.8%
24,175 Crown Paper Co., Term Loan...... Ba3 BB 08/23/02 24,195,698
4,261 Crown Paper Co., Revolving
Credit.......................... Ba3 BB 08/23/02 4,264,769
3,761 CST/Office Products, Inc., Term
Loan............................ NR NR 12/31/01 3,760,864
14,925 Le Group Forex, Inc., Term
Loan............................ NR BB 06/30/05 14,932,771
17,156 Paper Acquisition Corp., Term
Loan............................ NR NR 06/17/01 17,156,300
--------------
64,310,402
--------------
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 31
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PERSONAL & MISCELLANEOUS SERVICES 0.8%
$ 9,466 Accessory Network Group, Term
Loan............................ NR NR 07/31/05 $ 9,468,650
17 Borg Warner Security, Revolving
Credit.......................... B1 BB- 03/31/02 17,874
8,838 Arena Brands, Inc., Term Loan... NR NR 06/01/02 8,837,500
763 Arena Brands, Inc., Revolving
Credit.......................... NR NR 06/01/02 762,517
22,902 Boyds Collection, Ltd., Term
Loan............................ Ba3 B+ 04/21/06 22,905,150
13,500 Dimac Corp., Term Loan.......... B1 B+ 06/30/06 to
12/30/06 13,538,410
4,714 Smarte Carte Corp., Term Loan... NR NR 06/30/03 4,716,784
--------------
60,246,885
--------------
PHARMACEUTICALS 0.3%
17,167 Endo Pharmaceuticals, Inc., Term
Loan............................ NR NR 06/30/04 17,177,547
5,102 NEN Acquisition, Inc., Term
Loan............................ NR NR 03/31/05 5,112,066
--------------
22,289,613
--------------
PRINTING/PUBLISHING 4.2%
14,970 Advanstar Communications, Term
Loan............................ Ba3 B+ 04/30/05 14,970,000
13,158 ADVO, Inc., Term Loan........... NR NR 09/29/03 13,159,623
35,000 American Media Operations, Inc.,
Term Loan....................... Ba2 BB- 03/31/04 35,014,163
9,900 Bear Island Paper Co., LLC, Term
Loan............................ Ba3 B+ 12/31/05 9,902,687
4,987 Check Printers, Inc., Term
Loan............................ NR NR 06/30/05 4,989,482
8,888 Cygnus Publishing, Inc., Term
Loan............................ NR NR 06/05/05 8,900,078
68,000 Journal Register Co., Term
Loan............................ Ba1 BB+ 09/30/06 68,000,000
31,770 Morris Communications, Inc., 03/31/04 to
Term Loan....................... NR NR 06/30/05 31,770,719
38,946 Outdoor Systems, Inc., Term
Loan............................ Ba2 BB- 06/30/04 38,946,118
19,000 PRIMEDIA, Inc., Term Loan....... Ba3 NR 06/30/04 19,011,954
6,350 TransWestern Publishing LP, Term
Loan............................ Ba3 B+ 10/01/04 6,350,285
14,790 Von Hoffman Press, Inc., Term
Loan............................ B1 B+ 05/30/03 to
05/30/05 14,800,732
1,811 Von Hoffman Press, Inc.,
Revolving Credit................ B1 B+ 05/30/03 1,811,507
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 32
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRINTING/PUBLISHING (CONTINUED)
$ 5,000 Yellow Book USA, LP, Term
Loan............................ NR NR 12/15/05 to
12/05/06 $ 5,002,883
45,000 Ziff-Davis Publishing, Inc.,
Term Loan....................... Ba2 BB 03/31/05 45,014,682
9,925 21st Century Newspaper, Inc.,
Term Loan....................... NR NR 09/15/03 9,926,145
--------------
327,571,058
--------------
RESTAURANTS & FOOD SERVICE 2.1%
12,438 Applebee's International, Inc.,
Term Loan....................... NR NR 03/31/06 12,438,072
5,629 California Pizza Kitchen, Inc.,
Term Loan....................... NR NR 09/30/04 5,631,972
2,443 Carvel Corp., Term Loan......... NR NR 06/30/00 2,445,285
34,188 CKE Restaurants, Inc., Term
Loan............................ Ba2 NR 04/15/03 34,187,574
25,000 Domino's Pizza, Term Loan....... B1 B+ 12/21/06 to
12/21/07 25,011,735
42,040 S.C. International Services,
Inc., Term Loan................. Ba3 B 08/28/02 42,048,868
31,287 Shoney's, Inc., Term Loan....... B1 NR 04/30/02 31,313,018
10,000 Volume Services America, Term
Loan............................ NR B+ 12/01/06 10,004,178
--------------
163,080,702
--------------
RETAIL--LUXURY GOODS 0.1%
7,391 Ebel USA, Inc., Term Loan....... NR NR 09/30/01 7,390,595
--------------
RETAIL--OFFICE PRODUCTS 0.7%
6,354 Identity Group, Inc., Term
Loan............................ NR NR 11/22/03 6,354,197
52,474 U.S. Office Products Co., Term
Loan............................ B2 B- 06/09/06 52,475,669
--------------
58,829,866
--------------
RETAIL--OIL & GAS 0.2%
11,869 TravelCenters of America, Inc.,
Term Loan....................... Ba2 BB 03/31/05 11,885,145
--------------
RETAIL--SPECIALTY 0.2%
12,183 Hollywood Entertainment Corp.,
Revolving Credit................ Ba3 NR 09/05/02 12,184,986
6,627 Luxottica Group SPA, Term
Loan............................ NR NR 06/30/01 6,626,825
--------------
18,811,811
--------------
</TABLE>
See Notes to Financial Statements
F-15
<PAGE> 33
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RETAIL - STORES 1.0%
$ 11,500 Advance Stores Co., Term Loan... B1 NR 04/15/06 $ 11,500,524
1,985 American Blind and Wallpaper
Factory, Inc. .................. NR NR 12/31/05 2,034,184
5,868 Kirkland's Holdings, Term
Loan............................ NR NR 06/30/02 5,868,099
7,442 Nebraska Book Co., Inc., Term
Loan............................ B1 B+ 03/31/06 7,442,651
22,249 Payless Cashways, Inc., Term
Loan............................ NR NR 11/30/02 22,249,336
7,100 Payless Cashways, Inc.,
Revolving Credit................ NR NR 05/31/02 7,100,296
15,702 Peebles, Inc., Term Loan........ NR NR 06/09/02 15,702,844
4,902 Vitamin Shoppe Industries, Inc.,
Term Loan....................... NR NR 05/15/04 4,903,455
--------------
76,801,389
--------------
TELECOMMUNICATIONS - CELLULAR 3.6%
20,000 American Cellular Wireless,
Inc., Term Loan................. B2 NR 06/30/07 19,987,875
100,000 BCP SP Ltd., Term Loan.......... NR NR 03/31/00 99,353,094
75,000 Cellular, Inc., Financial Corp. 09/18/06 to
(CommNet), Term Loan............ B1 B 09/18/07 74,967,546
65,000 Western Wireless Corp., Term
Loan............................ B1 NR 03/31/05 65,008,693
20,000 Wireless One Network, Term
Loan............................ NR NR 09/30/07 20,008,465
--------------
279,325,673
--------------
TELECOMMUNICATIONS - HYBRID 1.8%
13,652 Atlantic Crossing, Term Loan.... NR NR 11/30/02 13,650,591
100,000 Nextel Finance Co., Term Loan... Ba3 B- 09/30/06 100,004,727
10,000 Nextel Finance Co., Term Loan
(Argentina)..................... NR NR 03/31/03 10,003,952
15,000 Pacific Crossing Ltd., Term
Loan............................ NR NR 07/28/06 15,000,000
--------------
138,659,270
--------------
</TABLE>
See Notes to Financial Statements
F-16
<PAGE> 34
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS--PERSONAL COMMUNICATION
SYSTEMS 2.5%
$ 55,000 Cox Communications, Inc., Term
Loan............................ Baa2 NR 12/31/06 $ 55,011,530
74,472 Omnipoint Communications, Inc.,
Term Loan....................... B2 B 02/17/06 74,489,296
11,000 Powertel PCS, Inc., Revolving
Credit.......................... NR NR 03/31/06 11,006,238
17,000 Telecorp PCS, Inc., Term Loan... NR NR 12/05/07 17,007,121
42,000 Triton PCS, Inc., Term Loan..... B1 B 05/04/07 42,014,253
--------------
199,528,438
--------------
TELECOMMUNICATIONS--WIRELESS MESSAGING 2.0%
27,431 Arch Communications, Inc., Term
Loan............................ B3 B 12/31/02 to
06/30/06 27,437,609
15,000 CCPR Services, Inc., Term
Loan............................ NR NR 06/30/02 15,008,648
48,000 Iridium Operating LLC, Term
Loan............................ NR B 12/29/00 46,796,996
47,257 Mobilemedia Communications,
Inc., 06/30/02 to
Term Loan....................... Caa3 D 06/30/03 47,257,316
1,882 Mobilemedia Communications,
Inc., Revolving Credit.......... Caa3 D 06/30/02 1,881,821
9,500 Teletouch Communications, Inc.,
Term Loan....................... NR NR 11/30/05 9,500,000
11,000 TSR Wireless LLC, Term Loan..... NR NR 06/30/05 10,996,790
--------------
158,879,180
--------------
TEXTILES & LEATHER 1.1%
11,155 American Marketing Industries,
Inc., Term Loan................. NR NR 11/30/02 11,157,464
8,865 GFSI, Inc., Term Loan........... NR NR 03/31/04 8,873,607
9,600 Humphrey's, Inc., Term Loan..... Caa1 B+ 01/15/03 9,608,134
14,367 Joan Fabrics Corp., Term Loan... NR NR 06/30/05 to
06/30/06 14,371,504
15,213 Johnston Industries, Inc., Term
Loan............................ NR NR 07/01/00 15,213,150
13,965 Norcross Safety Prod., Term
Loan............................ NR NR 10/02/05 13,965,000
</TABLE>
See Notes to Financial Statements
F-17
<PAGE> 35
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan
Amount Ratings+ Stated
(000) Borrower Moody's S&P Maturity* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TEXTILES & LEATHER (CONTINUED)
$ 9,767 Polyfibron Technologies, Inc.,
Term Loan....................... NR NR 12/28/03 $ 9,768,120
6,912 William Carter Co., Term Loan... Ba3 BB- 10/30/03 6,918,459
--------------
89,875,438
--------------
TRANSPORTATION--CARGO 1.3%
26,893 Atlas Freighter Leasing, Inc., 05/29/04 to
Term Loan....................... Ba3 NR 06/30/04 26,897,994
9,925 CTC Distribution Services, LLC,
Term Loan....................... NR NR 02/15/06 9,927,004
39,178 Evergreen International 05/31/02 to
Aviation, Inc., Term Loan....... Ba3 NR 05/31/03 39,211,954
7,550 Gemini Air Cargo, Inc., Term
Loan............................ B1 NR 12/12/02 7,552,526
7,425 North American Van Lines, Inc.,
Term Loan....................... NR NR 03/30/05 7,428,216
8,959 OmniTrax Railroads, LLC, Term
Loan............................ NR NR 05/14/05 8,962,439
--------------
99,980,133
--------------
TRANSPORTATION--MANUFACTURING COMPONENTS 0.8%
27,720 Cambridge Industries, Inc., Term
Loan............................ B1 NR 06/30/05 27,743,749
9,235 Eagle-Picher Industries, Inc., 08/31/05 to
Term Loan....................... B1 B+ 08/31/06 9,235,200
24,938 SPX Corp., Term Loan............ Ba3 BB 03/31/06 24,956,060
--------------
61,935,009
--------------
TRANSPORTATION--PERSONAL 0.9%
16,814 Blue Bird Body Co., Term Loan... Ba2 BB- 11/02/02 to
11/01/03 16,814,167
49,964 Continental Airlines, Inc., Term
Loan............................ Ba1 BB 07/31/02 to
07/31/04 49,984,470
--------------
66,798,637
--------------
TRANSPORTATION--RAIL MANUFACTURING 0.2%
16,095 Johnstown America Industries,
Inc., Term Loan................. B1 BB- 03/31/03 16,096,599
--------------
TOTAL VARIABLE RATE** SENIOR LOAN INTERESTS 85.8%........... 6,738,765,358
--------------
</TABLE>
See Notes to Financial Statements
F-18
<PAGE> 36
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Borrower Value
- ------------------------------------------------------------------------------------------
<S> <C> <C>
FIXED INCOME SECURITIES 0.7%
London Fog Industries, Inc. ($13,541,264 par, 10.00% coupon,
maturing 02/27/03)........................................... $ 13,541,264
Satelites Mexicanos ($39,907,000 par, 9.06% coupon, maturing
06/30/04).................................................... 39,956,884
--------------
TOTAL FIXED INCOME SECURITIES................................ 53,498,148
--------------
EQUITIES 1.3%
AFC Enterprises, Inc. (604,251 common shares) (c)(d)......... 4,682,945
American Blind and Wallpaper Factory, Inc. (198,600 common
shares) (c)(d)............................................... 3,505,910
Best Products Co., Inc. (297,480 common shares) (d).......... 0
Best Products Co., Inc. (Warrants for 28,080 common shares)
(d).......................................................... 0
Camelot Music Holdings, Inc. (1,994,717 common shares)
(c)(d)....................................................... 55,901,939
Classic Cable, Inc. (Warrants for 760 common shares) (d)..... 0
Dan River, Inc. (192,060 common shares) (d).................. 1,896,592
Flagstar Cos., Inc. (8,755 common shares) (d)................ 22
London Fog Industries, Inc. (1,083,301 common shares)
(c)(d)....................................................... 16,401,177
London Fog Industries, Inc., (Warrants for 66,580 common
shares) (c)(d)............................................... 0
Fleer/Marvel Entertainment, Inc. (537,526 preferred
shares)...................................................... 10,680,642
Fleer/Marvel Entertainment, Inc. (891,340 common shares)
(d).......................................................... 5,682,292
Nextel Communications, Inc. (Warrants for 60,000 common
shares) (c)(d)............................................... 1,020,000
Payless Cashways, Inc. (1,024,159 common shares) (d)......... 2,432,378
Rigco N.A., L.L.C. (Warrants for .325% interest of company's
fully diluted equity) (d).................................... 16,250
Rowe International, Inc. (91,173 common shares) (c)(d)....... 2,500,900
Sarcom, Inc. (43 common shares) (c)(d)....................... 0
--------------
TOTAL EQUITIES............................................... 104,721,047
--------------
TOTAL LONG-TERM INVESTMENTS 87.8%
(Cost $6,922,107,824)........................................ 6,896,984,553
--------------
</TABLE>
See Notes to Financial Statements
F-19
<PAGE> 37
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Borrower Value
- ------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS 11.2%
COMMERCIAL PAPER 3.2%
Boeing Capital Corp. ($13,375,000 par, maturing 02/01/99,
yielding 4.84%).............................................. $ 13,375,000
Boston Scientific Corp. ($7,180,000 par, maturing 02/26/99,
yielding 5.25%).............................................. 7,153,823
Case Credit Corp. ($5,000,000 par, maturing 03/12/99,
yielding 4.96%).............................................. 4,973,133
Comdisco, Inc. ($14,250,000 par, maturing 02/11/99, yielding
5.68%)....................................................... 14,227,517
CSX Corp. ($50,000,000 par, maturing 02/03/99 to 03/30/99,
yielding 4.97% to 5.00%)..................................... 49,775,635
CVS Corp. ($12,500,000 par, maturing 02/10/99, yielding
4.98%)....................................................... 12,484,437
FDX Corp. ($15,000,000 par, maturing 02/25/99, yielding
6.00%)....................................................... 14,940,000
McKesson Corp. ($20,000,000 par, maturing 02/04/99, yielding
5.00%)....................................................... 19,991,667
Raytheon Co. ($2,444,000 par, maturing 03/12/99, yielding
5.00%)....................................................... 2,430,762
Safeway, Inc. ($50,000,000 par, maturing 02/12/99 to
02/17/99, yielding 4.99%).................................... 49,909,903
Sprint Capital Corp. ($15,000,000 par, maturing 02/24/99,
yielding 5.00%).............................................. 14,952,083
Tandy Corp. ($18,000,000 par, maturing 02/04/99 to 02/11/99,
yielding 4.97%).............................................. 17,982,881
Texas Utilities Co. ($20,000,000 par, maturing 02/10/99,
yielding 4.93%).............................................. 19,975,350
Western Resources, Inc. ($8,000,000 par, maturing 02/04/99,
yielding 4.90%).............................................. 7,996,733
--------------
TOTAL COMMERCIAL PAPER....................................... 250,168,924
--------------
SHORT-TERM LOAN PARTICIPATIONS 8.0%
Airtouch Communications, Inc. ($15,000,000 par, maturing
02/16/99, yielding 5.11%).................................... 15,000,000
Alltel Corp. ($15,000,000 par, maturing 02/08/99, yielding
4.90%)....................................................... 15,000,000
American Stores Co. ($50,000,000 par, maturing 02/19/99 to
03/15/99, yielding 4.98% to 5.08%)........................... 50,000,000
Anadarko Pete Corp. ($50,000,000 par, maturing 02/02/99 to
02/08/99, yielding 4.94% to 4.96%)........................... 50,000,000
</TABLE>
See Notes to Financial Statements
F-20
<PAGE> 38
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Borrower Value
- ------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM LOAN PARTICIPATIONS (CONTINUED)
Cabot Corp. ($29,900,000 par, maturing 02/05/99 to 02/19/99,
yielding 5.08% to 5.73%)..................................... $ 29,900,000
Case Credit Corp. ($45,000,000 par, maturing 02/02/99 to
02/26/99, yielding 5.05% to 5.91%)........................... 45,000,000
Centex Corp. ($34,450,000 par, maturing 02/18/99 to 02/25/99,
yielding 4.97% to 5.03%)..................................... 34,450,000
Central and Southwest Corp. ($50,000,000 par, maturing
03/04/99 to 04/27/99, yielding 5.00% to 5.11%)............... 50,000,000
Cincinnati Gas and Electric Co. ($9,345,000 par, maturing
02/02/99, yielding 5.10%).................................... 9,345,000
ConAgra, Inc. ($50,000,000 par, maturing 02/01/99 to
02/24/99, yielding 4.93% to 5.01%)........................... 50,000,000
Enron Corp. ($37,000,000 par, maturing 02/01/99, yielding
4.98%)....................................................... 37,000,000
Fluor Corp. ($25,000,000 par, maturing 02/04/99 to 02/09/99,
yielding 4.85% to 4.88%)..................................... 25,000,000
GTE Funding, Inc. ($15,500,000 par, maturing 02/05/99,
yielding 4.82%).............................................. 15,500,000
Nipsco Capital Markets, Inc. ($23,500,000 par, maturing
02/05/99, yielding 5.02%).................................... 23,500,000
Ralston Purina Co. ($31,250,000 par, maturing 02/01/99 to
02/09/99, yielding 4.95% to 5.00%)........................... 31,250,000
Rayonier, Inc. ($10,000,000 par, maturing 02/09/99, yielding
5.02%)....................................................... 10,000,000
Temple Inland, Inc. ($50,000,000 par, maturing 02/02/99 to
02/23/99, yielding 5.02% to 5.92%)........................... 50,000,000
Universal Corp. ($56,000,000 par, maturing 02/11/99 to
02/16/99, yielding 5.02% to 5.06%)........................... 56,000,000
Western Resources, Inc. ($32,000,000 par, maturing 02/03/99
to 02/22/99, yielding 4.97% to 5.00%)........................ 32,000,000
--------------
TOTAL SHORT-TERM LOAN PARTICIPATIONS......................... 628,945,000
--------------
</TABLE>
See Notes to Financial Statements
F-21
<PAGE> 39
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- ------------------------------------------------------------------------------------------
<S> <C>
TOTAL SHORT-TERM INVESTMENTS
(Cost $879,113,924).......................................... $ 879,113,924
--------------
TOTAL INVESTMENTS 99.0%
(Cost $7,801,221,748)........................................ 7,776,098,477
OTHER ASSETS IN EXCESS OF LIABILITIES 1.0%.................. 75,803,012
--------------
NET ASSETS 100.0%........................................... $7,851,901,489
==============
</TABLE>
NR = Not Rated
+ Bank loans rated below Baa by Moody's Investor Service, Inc. or BBB by
Standard & Poor's Group are considered to be below Investment grade.
(a) This Senior Loan interest is non-income producing.
(b) This Borrower has filed for protection in federal bankruptcy court.
(c) Restricted security.
(d) 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 lending rate
offered by one or more major European banks, such as the London Inter-Bank
Offered Rate ("LIBOR"), (ii) the prime rate offered by one or more major
United States banks 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
F-22
<PAGE> 40
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $7,801,221,748)..................... $7,776,098,477
Receivables:
Interest and Fees......................................... 75,306,116
Fund Shares Sold.......................................... 24,759,715
Other....................................................... 9,281
--------------
Total Assets.......................................... 7,876,173,589
--------------
LIABILITIES:
Payables:
Income Distributions...................................... 7,830,606
Investment Advisory Fee................................... 6,186,576
Distributor and Affiliates................................ 2,486,646
Administrative Fee........................................ 1,673,592
Fund Shares Repurchased................................... 797,339
Accrued Expenses............................................ 4,088,474
Deferred Facility Fees...................................... 983,118
Trustees' Deferred Compensation and Retirement Plans........ 225,749
--------------
Total Liabilities..................................... 24,272,100
--------------
NET ASSETS.................................................. $7,851,901,489
==============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 791,217,837 shares issued and
outstanding).............................................. $ 7,912,178
Paid in Surplus............................................. 7,905,821,414
Accumulated Undistributed Net Investment Income............. 10,138,427
Net Unrealized Depreciation................................. (25,123,271)
Accumulated Net Realized Loss............................... (46,847,259)
--------------
NET ASSETS.................................................. $7,851,901,489
==============
NET ASSET VALUE PER COMMON SHARE ($7,851,901,489 divided by
791,217,837 shares outstanding)........................... $ 9.92
==============
</TABLE>
See Notes to Financial Statements
F-23
<PAGE> 41
STATEMENT OF OPERATIONS
For the Six Months Ended January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $295,703,178
Fees........................................................ 3,633,129
Other....................................................... 1,416,662
------------
Total Income............................................ 300,752,969
------------
EXPENSES:
Investment Advisory Fee..................................... 35,781,437
Administrative Fee.......................................... 9,665,933
Shareholder Services........................................ 3,709,369
Legal....................................................... 1,104,800
Custody..................................................... 360,764
Trustees' Fees and Expenses................................. 158,417
Other....................................................... 1,875,721
------------
Total Expenses.......................................... 52,656,441
------------
NET INVESTMENT INCOME....................................... $248,096,528
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(19,580,325)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (5,181,222)
End of the Period......................................... (25,123,271)
------------
Net Unrealized Depreciation During the Period............... (19,942,049)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(39,522,374)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $208,574,154
============
</TABLE>
See Notes to Financial Statements
F-24
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended January 31, 1999
and the Year Ended July 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1999 July 31, 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income........................... $ 248,096,528 $ 461,572,692
Net Realized Loss............................... (19,580,325) (17,725,403)
Net Unrealized Appreciation/Depreciation During
the Period.................................... (19,942,049) 26,278,934
-------------- --------------
Change in Net Assets from Operations............ 208,574,154 470,126,223
Distributions from Net Investment Income........ (248,711,244) (461,726,242)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES.................................... (40,137,090) 8,399,981
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Common Shares Sold................ 932,775,966 1,654,063,711
Value of Shares Issued Through Dividend
Reinvestment.................................. 133,699,433 245,628,149
Cost of Shares Repurchased...................... (487,320,223) (832,176,219)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................................. 579,155,176 1,067,515,641
-------------- --------------
TOTAL INCREASE IN NET ASSETS.................... 539,018,086 1,075,915,622
NET ASSETS:
Beginning of the Period......................... 7,312,883,403 6,236,967,781
-------------- --------------
End of the Period (including accumulated
undistributed
net investment income of $10,138,427 and
$10,753,143, respectively).................... $7,851,901,489 $7,312,883,403
============== ==============
</TABLE>
See Notes to Financial Statements
F-25
<PAGE> 43
STATEMENT OF CASH FLOWS
For the Six Months Ended January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 208,574,154
-------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Increase in Investments at Value.......................... (522,173,587)
Increase in Interest and Fees Receivables................. (17,539,292)
Decrease in Receivable for Investments Sold............... 9,271,953
Decrease in Other Assets.................................. 46,315
Decrease in Deferred Facility Fees........................ (2,290,802)
Increase in Investment Advisory and Administrative Fees
Payable................................................. 532,632
Increase in Distributor and Affiliates Payable............ 1,187,308
Increase in Accrued Expenses.............................. 14,140
Increase in Deferred Compensation and Retirement Plans
Expenses................................................ 69,574
-------------
Total Adjustments....................................... (530,881,759)
-------------
NET CASH USED FOR OPERATING ACTIVITIES...................... (322,307,605)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 934,422,994
Payments on Shares Repurchased.............................. (487,891,528)
Decrease in Intra-day Credit Line with Custodian Bank....... (7,513,945)
Cash Dividends Paid......................................... (116,709,916)
-------------
Net Cash Provided by Financing Activities................. 322,307,605
-------------
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
F-26
<PAGE> 44
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended July 31,
Ended -----------------------------------------
January 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period..................... $ 9.976 $ 9.963 $ 10.002 $ 10.046 $ 10.052
------- -------- -------- -------- --------
Net Investment Income.......... .323 .675 .701 .735 .756
Net Realized and Unrealized
Gain/Loss.................... (.050) .015 (.042) (.028) (.004)
------- -------- -------- -------- --------
Total from Investment
Operations..................... .273 .690 .659 .707 .752
Less Distributions from Net
Investment Income.............. .325 .677 .698 .751 .758
------- -------- -------- -------- --------
Net Asset Value, End of the
Period......................... $ 9.924 $ 9.976 $ 9.963 $ 10.002 $ 10.046
======= ======== ======== ======== ========
Total Return (a)................. 2.67%* 7.22% 6.79% 7.22% 7.82%
Net Assets at End of the Period
(In millions).................. $7,851.9 $7,312.9 $6,237.0 $4,865.8 $2,530.1
Ratio of Expenses to Average Net
Assets......................... 1.36% 1.41% 1.42% 1.46% 1.49%
Ratio of Net Investment Income to
Average
Net Assets..................... 6.42% 6.81% 7.02% 7.33% 7.71%
Portfolio Turnover (b)........... 21%* 73% 83% 66% 71%
</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.
* Non-Annualized.
See Notes to Financial Statements
F-27
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen 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 $6,738,765,358 (85.8% of net assets) is determined in the
absence of actual market values by Van Kampen 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
F-28
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
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. Facility fees on senior loans purchased after July 31, 1997, are treated
as market discounts. 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, 1998, the Trust had an accumulated capital loss carryforward
for tax purposes of $3,873,769, which will expire between July 31, 2004 and July
31, 2006. Net realized gains or losses may differ for financial and tax
reporting purposes primarily as a result of wash sales, past October losses
which may not be recognized for tax purposes until the first day of the
following fiscal year and losses that were recognized for tax purposes but not
for book purposes at the end of the fiscal year.
At January 31, 1999, for federal income tax purposes cost of long- and
short-term investments is $7,804,800,175, the aggregate gross unrealized
appreciation is $21,381,523 and the aggregate gross unrealized depreciation is
$50,083,221 resulting in net unrealized depreciation of $28,701,698.
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.
F-29
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
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
Funds 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 six months ended January 31, 1999, the Trust recognized expenses of
approximately $181,900 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 six months ended January 31, 1999, the Trust recognized expenses of
approximately $43,400 representing Van Kampen Funds Inc. or its affiliates'
(collectively "Van Kampen") cost of providing legal services to the Trust.
Van Kampen Investor Services Inc., ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Trust. For the six months ended
January 31, 1999, the Trust recognized expenses for these services of
approximately $2,722,400. Transfer agency fees are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
market benchmarks.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
officers of Van Kampen.
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the
F-30
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
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 $2,500.
3. CAPITAL TRANSACTIONS
At January 31, 1999 and July 31, 1998, paid in surplus aggregated $7,905,821,414
and $7,327,247,726, respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1999 July 31, 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares........................... 733,069,022 626,018,023
----------- -----------
Shares Sold................................ 93,820,648 165,907,778
Shares Issued Through Dividend
Reinvestment............................. 13,452,361 24,636,104
Shares Repurchased......................... (49,124,194) (83,492,883)
----------- -----------
Net Increase in Shares Outstanding......... 58,148,815 107,050,999
----------- -----------
Ending Shares.............................. 791,217,837 733,069,022
=========== ===========
</TABLE>
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $1,580,287,355 and
$1,455,277,827, 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 six
months ended January 31, 1999, 49,124,194 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
F-31
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
Van Kampen. Any early withdrawal charge which is required to be imposed will be
made in accordance with the following schedule.
<TABLE>
<CAPTION>
WITHDRAWAL
YEAR OF REPURCHASE CHARGE
- ----------------------------------------------------------------------
<S> <C>
First................................................... 3.0%
Second.................................................. 2.5%
Third................................................... 2.0%
Fourth.................................................. 1.5%
Fifth................................................... 1.0%
Sixth and following..................................... 0.0%
</TABLE>
For the six months ended January 31, 1999, Van Kampen received early
withdrawal charges of approximately $6,994,500 in connection with tendered
shares of the Trust.
7. COMMITMENTS
Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $355,102,634 as of
January 31, 1999. 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 $500,000,000, which will terminate on
April 15, 1999. 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. The Trust is currently evaluating alternative
credit arrangements to provide additional liquidity for tender offers. The Trust
expects that any such arrangements would have customary covenants and default
limitations. There can be no assurance that the Trust will enter into future
credit arrangements.
F-32
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
January 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
8. SENIOR LOAN PARTICIPATION COMMITMENTS
The Trust invests primarily in participations, assignments, or acts as a party
to the primary lending syndicate of a Variable Rate Senior Loan interest to
United States corporations, partnerships, and other entities. When the Trust
purchases a participation of a Senior Loan interest, the Trust typically enters
into a contractual agreement with the lender or other third party selling the
participation, but not with the borrower directly. As such, the Trust assumes
the credit risk of the borrower, Selling Participant or other persons
interpositioned between the Trust and the borrower.
At January 31, 1999, 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>
Lehman Brothers................................. $100,000 $100,000
Bank of New York................................ 52,220 52,235
Bankers Trust................................... 45,331 45,347
Chase Securities Inc............................ 10,684 10,685
Donaldson Lufkin Jenrette....................... 9,243 9,240
Canadian Imperial Bank of Commerce.............. 3,442 3,444
Goldman Sachs................................... 3,256 3,257
-------- --------
Total........................................... $224,176 $224,208
======== ========
</TABLE>
F-33
<PAGE> 51
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Prime Rate Income Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Prime Rate Income Trust (the "Trust"), including the portfolio of
investments, as of July 31, 1998, 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 owned as of July
31, 1998, 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 Prime Rate Income Trust as of July 31, 1998, 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 4, 1998
F-34
<PAGE> 52
PORTFOLIO OF INVESTMENTS
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS 90.5%
AEROSPACE/DEFENSE 1.6%
$ 7,074 Aerostructures Corp., Term Loan....................... NR NR 12/31/03 $ 7,074,194
4,766 Alliant Techsystems, Inc., Term Loan.................. Ba2 BB 03/15/01 4,769,907
7,500 Fairchild Holding Corp., Term Loan.................... NR NR 06/18/04 7,500,000
42,813 Gulfstream Delaware Corp., Term Loan.................. NR NR 09/30/02 42,825,899
15,248 K & F Industries, Inc., Term Loan..................... Ba3 B+ 10/15/05 15,247,755
7,920 Tri-Star, Inc., Term Loan............................. NR NR 09/30/03 7,929,384
27,209 United Defense Industries, Inc., Term Loan............ B1 B+ 10/06/05 to 10/06/06 27,207,940
6,538 Whittaker Corp., Term Loan............................ NR NR 05/30/03 6,538,464
2,000 Whittaker Corp., Revolving Credit..................... NR NR 05/30/01 2,000,000
--------------
121,093,543
--------------
AUTOMOTIVE 2.7%
34,000 American Axle and Manufacturing, Inc., Co., Term
Loan.................................................. NR NR 04/30/06 34,000,000
8,500 American Bumper and Manufacturing Co., Term Loan...... NR NR 04/30/04 8,507,780
40,970 Breed Technologies, Inc., Term Loan................... B1 BB 04/27/04 to 04/27/06 40,970,032
68,701 Federal Mogul Corp., Term Loan........................ Ba2 NR 12/31/03 to 12/31/05 68,710,580
379 Federal Mogul Corp., Revolving Credit................. Ba2 NR 03/12/04 379,562
4,904 JMS Automotive Rebuilders, Inc., Term Loan............ NR NR 06/30/04 4,903,681
7,883 Murray's Discount Auto Stores, Inc., Term Loan........ NR NR 06/30/03 7,882,625
9,748 The Plastech Group, Term Loan......................... NR NR 04/01/02 to 04/01/04 9,747,576
20,000 Safelite Glass Corp., Term Loan....................... Ba3 NR 12/23/04 to 12/23/05 20,000,044
--------------
195,101,880
--------------
BROADCASTING -- CABLE 7.7%
19,175 Adelphia Cable Partners, L.P., Revolving Credit....... Ba2 NR 12/31/03 19,205,696
22,500 Bresnan Communications Co., L.P., Term Loan........... NR NR 03/31/06 22,567,009
5,910 Cable Systems International, Inc., Term Loan.......... NR NR 12/31/02 5,912,020
43,971 Charter Communications Entertainment I, Term Loan..... NR NR 06/30/04 43,971,090
17,500 Charter Communications Entertainment II, Term Loan.... Ba3 NR 12/31/07 17,500,025
32,000 Charter Communications Entertainment II & Long Beach,
Term Loan............................................. Ba3 NR 03/31/06 32,049,512
47,381 Chelsea Communications, Inc., Term Loan............... NR NR 12/31/04 47,381,250
16,603 Coaxial Communications of Central Ohio, Term Loan..... NR NR 12/31/99 16,603,352
12,000 Encore Investments, Term Loan......................... NR NR 06/30/04 12,000,314
37,000 Falcon Holdings Group, L.P., Term Loan................ Ba3 BB 12/31/07 37,000,057
15,000 Frontiervision Operating Partners, L.P., Term Loan.... Ba3 BB 03/31/06 15,000,043
22,361 Garden State Cablevision, L.P., Revolving Credit...... NR NR 06/30/05 22,358,780
14,972 Hilton Head Communications, L.P., Revolving Credit.... NR NR 06/30/03 14,996,182
11,000 Insight Communication Co., L.P., Term Loan............ NR NR 03/31/05 11,007,462
7,360 Insight Communication Co., L.P., Revolving Credit..... NR NR 03/31/05 7,367,956
53,500 InterMedia Partners IV, L.P., Term Loan............... Ba3 NR 01/01/05 to 12/31/07 53,504,334
62,427 Marcus Cable Operating Co., Term Loan................. Ba3 NR 12/31/02 to 04/30/04 62,454,707
4,171 Marcus Cable Operating Co., Revolving Credit.......... Ba3 NR 12/31/02 4,171,005
4,426 Mark Twain Cablevision, L.P., Term Loan............... NR NR 06/30/04 4,426,981
23,727 TCI Pacific, Inc., Term Loan.......................... NR NR 12/31/04 23,725,330
30,286 Triax Midwest Associates, Term Loan................... NR NR 06/30/06 to 06/30/07 30,286,004
798 Triax Midwest Associates, Revolving Credit............ NR NR 06/30/06 798,258
27,029 TW Fanch, Revolving Credit............................ NR NR 12/31/04 27,065,373
17,000 UCA Group, Revolving Credit........................... NR NR 09/30/03 17,000,318
15,000 USA Networks, Inc., Term Loan......................... Ba1 NR 12/31/03 15,000,093
--------------
563,353,151
--------------
</TABLE>
See Notes to Financial Statements
F-35
<PAGE> 53
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
BROADCASTING -- DIVERSIFIED 1.4%
$ 76,638 Chancellor Broadcasting Co., Term Loan................ Ba1 BB- 06/30/05 $ 76,764,326
23,497 Chancellor Broadcasting Co., Revolving Credit......... Ba1 BB- 06/30/05 23,571,806
--------------
100,336,132
--------------
BROADCASTING -- RADIO 0.5%
35,000 Jacor Communications, Inc., Term Loan................. Ba2 BB- 12/31/04 34,997,219
--------------
BROADCASTING -- TELEVISION 2.0%
12,000 Benedek Broadcasting Corp., Term Loan................. B1 NR 05/01/01 to 11/01/02 12,000,054
20,000 Black Entertainment Television, Inc., Term Loan....... NR NR 06/30/06 20,000,000
5,000 Lin Television Corp., Term Loan....................... Ba3 B- 03/31/07 4,999,794
43,421 NTL Group (UK), Inc., Term Loan....................... NR NR 12/31/05 43,421,166
66,000 Sinclair Broadcasting, Term Loan...................... Ba2 BB- 09/15/05 66,000,440
--------------
146,421,454
--------------
BUILDINGS & REAL ESTATE 0.7%
50,000 Walter Industries, Inc., Term Loan.................... NR NR 10/15/03 49,998,394
--------------
CHEMICAL, PLASTICS & RUBBER 3.3%
11,283 Cedar Chemical Corp., Term Loan....................... NR NR 10/30/03 11,287,698
10,581 Foamex, L.P., Term Loan............................... Ba3 B+ 06/30/05 to 06/30/06 10,585,600
5,276 Foamex, L.P., Revolving Credit........................ Ba3 B+ 06/12/03 5,277,046
10,000 Harris Specialty Chemicals, Inc., Term Loan........... NR NR 03/31/06 10,000,000
14,409 High Performance Plastics, Inc., Term Loan............ NR NR 03/31/05 14,409,091
58,310 Huntsman Group Holdings, Term Loan.................... Ba2 NR 12/31/02 to 12/31/05 58,319,167
10,762 Huntsman Group Holdings, Revolving Credit............. Ba2 NR 12/31/02 10,761,845
19,800 Huntsman Specialty Chemical Corp., Term Loan.......... Ba2 NR 03/15/04 to 03/15/05 19,806,383
5,102 NEN Acquisition, Inc., Term Loan...................... NR NR 03/31/05 5,118,605
9,900 Pioneer Americas Acquisition Corp., Term Loan......... B2 B+ 12/31/06 9,903,972
12,033 Reid Plastics, Inc., Term Loan........................ NR NR 11/12/03 12,044,728
43,021 Sterling Chemicals, Inc., Term Loan................... Ba3 NR 09/30/04 42,989,054
11,807 Texas Petrochemicals Corp., Term Loan................. Ba3 BB- 06/30/01 to 06/30/04 11,808,670
1,476 Texas Petrochemicals Corp., Revolving Credit.......... Ba3 BB- 12/31/02 1,475,593
6,538 TruSeal Technologies, Inc., Term Loan................. NR NR 06/30/04 6,536,586
8,180 Vinings Industries, Inc., Term Loan................... NR NR 03/31/05 8,179,988
--------------
238,504,026
--------------
COMMUNICATIONS -- TELEPHONE 0.2%
4,750 International Data Response Corp., Term Loan.......... NR NR 12/31/01 to 12/31/02 4,759,044
7,155 Mitel Corp., Term Loan................................ NR NR 12/26/03 7,155,000
--------------
11,914,044
--------------
CONSTRUCTION MATERIALS 1.9%
22,796 Behr Process Corp., Term Loan......................... NR NR 03/31/02 to 03/31/05 22,802,929
1,588 Behr Process Corp., Revolving Credit.................. NR NR 03/31/02 1,588,078
1,639 Brand Scaffold Services, Inc., Term Loan.............. B1 NR 09/30/02 1,644,625
10,000 Dayton Superior Corp., Term Loan...................... NR NR 09/29/05 10,000,084
6,833 Enclosures Holding Co., Term Loan..................... NR NR 02/28/05 6,925,478
13,671 Falcon Building Products, Inc., Term Loan............. B1 B+ 06/30/05 13,695,671
59,549 National Gypsum Co., Term Loan........................ NR NR 09/20/03 59,548,756
4,655 Panolam Industries, Inc., Term Loan................... NR NR 10/31/02 4,654,916
6,973 Reliant Building Products, Inc., Term Loan............ B1 B+ 03/31/04 6,973,479
14,925 Werner Holding Co., Inc., Term Loan................... Ba3 B+ 11/30/04 to 11/30/05 14,924,503
--------------
142,758,519
--------------
</TABLE>
See Notes to Financial Statements
F-36
<PAGE> 54
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
CONTAINERS, PACKAGING & GLASS 3.9%
$ 25,000 Dr. Pepper Bottling Holdings, Inc., Term Loan......... NR NR 12/31/05 $ 25,000,000
8,373 Fleming Packaging Corp., Term Loan.................... NR NR 08/30/04 8,372,500
9,967 Graham Packaging Co., Term Loan....................... B1 B+ 01/31/06 to 01/31/07 9,966,400
30,000 Huntsman Packaging Corp., Term Loan................... Ba2 BB- 09/30/05 to 09/30/06 30,000,000
29,850 IPC, Inc., Term Loan.................................. B1 NR 10/02/04 29,850,331
163,244 Stone Container Corp., Term Loan...................... Ba3 B+ 04/01/00 to 10/01/03 163,619,032
3,639 Stone Container Corp., Revolving Credit............... Ba3 B+ 05/15/99 3,639,468
8,051 Stronghaven, Inc., Term Loan.......................... NR NR 05/15/04 8,059,566
7,182 Tekni-Plex, Inc., Term Loan........................... B1 B+ 03/03/06 7,182,000
--------------
285,689,297
--------------
DIVERSIFIED MANUFACTURING 2.3%
4,024 Advanced Accessory Systems, LLC, Term Loan............ B1 B+ 10/30/04 4,024,443
9,000 CII Carbon, LLC, Term Loan............................ NR NR 06/25/08 9,003,360
6,406 ConMed Corp., Term Loan............................... B1 BB- 12/30/04 6,405,629
7,425 Desa International, Term Loan......................... Ba3 B+ 12/26/04 7,425,002
52,500 Evenflo & Spalding Holdings Corp., Term Loan.......... Ba3 B- 09/30/03 to 03/30/06 51,455,013
7,450 Evenflo & Spalding Holdings Corp., Revolving Credit... Ba3 B- 09/30/03 7,300,999
25,838 International Wire Group, Inc., Term Loan............. B1 NR 09/30/03 25,850,749
10,833 Intesys Technologies, Inc., Term Loan................. NR NR 06/30/04 to 06/30/06 10,833,351
763 Intesys Technologies, Inc., Revolving Credit.......... NR NR 06/30/06 762,671
8,782 M.W. Manufacturers, Term Loan......................... NR NR 09/15/02 8,782,483
8,500 Neenah Foundry Co., Term Loan......................... Ba3 BB- 09/30/05 8,500,000
24,896 UCAR International, Inc., Term Loan................... Ba2 B- 12/31/02 24,903,744
6,161 U.F. Acquisition, Term Loan........................... NR NR 12/15/02 6,161,250
--------------
171,408,694
--------------
ECOLOGICAL 1.4%
100,400 Safety-Kleen Corp., Term Loan......................... Ba3 BB 04/03/05 to 04/03/06 100,400,381
--------------
EDUCATION & CHILD CARE 0.2%
8,690 Kindercare Learning Centers, Inc., Term Loan.......... Ba3 B+ 03/21/06 8,690,000
5,000 La Petite Academy, Inc., Term Loan.................... B2 B 05/11/05 5,000,052
--------------
13,690,052
--------------
ELECTRONICS 3.3%
14,925 Alliance Imaging, Inc., Term Loan..................... B1 B+ 12/18/03 to 06/18/04 14,924,340
22,252 Amphenol Corp., Term Loan............................. Ba3 B+ 10/03/04 to 05/19/06 22,244,225
6,738 Banker's Systems, Inc., Term Loan..................... NR NR 11/01/02 6,737,500
7,268 Beltone Electronics, Inc., Term Loan.................. NR NR 10/31/03 to 10/31/04 7,267,582
9,205 Berg Electronics, Inc., Term Loan..................... Ba3 NR 06/30/03 9,204,172
5,850 Berg Electronics, Inc., Revolving Credit.............. Ba3 NR 06/30/03 5,850,011
10,894 Chatham Technologies Acquisition, Inc., Term Loan..... NR NR 08/18/03 to 08/18/05 10,894,175
5,888 Claricom, Inc., Term Loan............................. NR NR 11/30/02 5,887,963
7,000 Control Data Systems, Inc., Term Loan................. NR NR 11/26/00 7,000,012
43,768 DecisionOne Corp., Term Loan.......................... B1 B+ 08/07/03 to 08/07/05 43,768,158
17,143 Fairchild Semiconductor Corp., Term Loan.............. Ba3 BB 03/11/03 17,141,305
5,400 Fisher Scientific International, Inc., Term Loan...... Ba3 B+ 01/21/05 to 01/21/06 5,501,762
15,451 Graphic Controls Corp., Term Loan..................... B1 NR 09/28/03 15,393,342
3,981 Labtec, Inc., Term Loan............................... NR NR 10/07/04 3,980,921
8,358 Rowe International, Inc., Term Loan (a)............... NR NR 03/31/00 7,104,583
8,786 Sarcom, Inc., Term Loan............................... NR NR 12/31/02 8,805,564
25,000 Sterling Diagnostic Imaging, Inc., Term Loan.......... NR NR 09/30/05 25,000,000
</TABLE>
See Notes to Financial Statements
F-37
<PAGE> 55
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
ELECTRONICS (CONTINUED)
$ 13,707 Viasystems, Inc., Term Loan........................... B1 B+ 03/31/04 to 06/30/05 $ 13,714,170
91 Viasystems, Inc., Revolving Credit.................... B1 B+ 12/31/02 90,506
2,500 Wavetek Corp., Term Loan.............................. Ba3 BB- 12/15/02 2,500,026
500 Wavetek Corp., Revolving Credit....................... Ba3 BB- 12/15/02 500,005
4,925 WGL Acquisition Corp., Term Loan...................... NR NR 07/30/04 4,925,000
--------------
238,435,322
--------------
ENTERTAINMENT/LEISURE 4.3%
24,886 AMF Group, Inc., Term Loan............................ Ba2 BB- 03/31/03 to 03/31/04 24,879,867
21,500 ASC Network Corp., Term Loan.......................... NR NR 05/31/06 21,500,000
2,500 Camelot Music Holdings, Inc., Revolving Credit........ NR NR 01/27/02 2,500,000
33,000 Fleer Corp., Term Loan (a) (b)........................ NR NR 02/28/02 24,750,000
20,000 Florida Panthers Holding, Inc., Term Loan............. NR NR 12/15/98 20,000,000
7,920 KSL Recreation Group, Inc., Term Loan................. B2 B+ 04/30/05 to 04/30/06 7,927,479
4,503 KSL Recreation Group, Inc., Revolving Credit.......... B2 B+ 04/30/04 4,502,783
79,000 Metro-Goldwyn-Mayer, Inc., Term Loan.................. Ba1 NR 03/31/05 to 03/31/06 79,000,000
28,080 Metro-Goldwyn-Mayer, Inc., Revolving Credit........... Ba1 NR 09/30/03 28,080,273
7,000 Regal Cinemas, Inc., Term Loan........................ Ba3 BB- 05/27/06 to 05/27/07 7,000,000
9,646 RTI Funding Corp., Term Loan.......................... NR NR 02/08/03 to 02/08/04 9,645,988
10,000 SFX Entertainment, Inc., Term Loan.................... B1 BB- 03/31/06 10,000,027
6,700 Sportcraft, Ltd., Term Loan........................... NR NR 12/31/02 6,700,000
46,819 Viacom, Inc., Term Loan............................... Ba2 BB+ 04/01/02 to 07/01/02 46,837,385
4,152 Viacom, Inc., Revolving Credit........................ Ba2 BB+ 07/01/02 4,156,049
15,000 WestStar Cinemas, Inc., Term Loan..................... NR NR 09/30/05 15,000,000
--------------
312,479,851
--------------
FARMING & AGRICULTURE 0.4%
9,628 CBP Resources, Inc., Term Loan........................ NR NR 09/30/03 9,628,170
8,977 Seminis, Inc., Term Loan.............................. NR NR 12/31/03 to 12/31/04 8,977,005
4,937 Walco International, Inc., Term Loan.................. NR NR 03/31/04 4,945,000
3,416 Windy Hill Pet Food Co., Inc., Term Loan.............. Ba3 BB- 12/31/03 3,422,921
151 Windy Hill Pet Food Co., Inc., Revolving Credit....... Ba3 BB- 12/31/03 152,863
--------------
27,125,959
--------------
FINANCE 7.4%
1,586 Ark Asset Holdings, Inc., Term Loan................... NR NR 11/30/01 1,586,008
14,000 Blackstone Capital Co., Term Loan..................... NR NR 05/31/99 14,010,310
25,000 Bridge Information Systems, Inc., Term Loan........... NR NR 05/27/05 25,000,000
65,458 HM/RB Partners, L.P., Term Loan....................... NR NR 12/31/98 65,457,611
45,500 Mafco Finance Corp., Term Loan........................ NR NR 04/28/00 45,500,000
6,240 Mafco Finance Corp., Revolving Credit................. NR NR 04/28/00 6,240,016
39,982 OSI Holdings Corp., Term Loan......................... B2 NR 10/15/04 39,981,042
37,490 Patriot American Hospitality, Inc., Term Loan......... NR NR 03/31/99 to 03/31/03 37,488,577
65,000 Paul G. Allen, Term Loan.............................. NR NR 06/10/03 64,998,874
131,159 Starwood Hotels and Resorts, Inc., Term Loan.......... NR NR 02/23/99 to 02/23/03 131,159,105
107,899 Ventas Realty Ltd., Inc., Term Loan................... NR NR 04/30/03 107,886,471
--------------
539,308,014
--------------
FOOD/BEVERAGE 1.5%
11,500 Amerifoods Cos., Inc., Term Loan...................... NR NR 06/30/99 to 06/30/02 10,925,000
9,097 Edwards Baking Corp., Term Loan....................... NR NR 09/30/03 to 09/30/05 9,096,864
12,500 Favorite Brands International, Inc., Term Loan........ B2 B 05/19/05 12,500,000
</TABLE>
See Notes to Financial Statements
F-38
<PAGE> 56
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
FOOD/BEVERAGE (CONTINUED)
$ 20,337 Fleming Cos., Inc., Term Loan......................... Ba3 B+ 07/25/04 $ 20,397,673
6,176 Fleming Cos., Inc., Revolving Credit.................. Ba3 B+ 07/25/03 6,307,373
7,500 Leon's Bakery, Inc., Term Loan........................ NR NR 05/02/05 7,500,000
7,257 Mistic Brands, Inc., Term Loan........................ NR NR 06/01/04 to 06/01/05 7,257,057
5,700 Southern Foods Group, Inc., Term Loan................. Ba3 BB- 02/28/06 5,700,004
22,898 Stroh Brewery Co., Term Loan.......................... NR NR 06/30/03 22,897,740
5,550 Windsor Quality Food Co., Ltd., Term Loan............. NR NR 12/31/01 5,550,431
--------------
108,132,142
--------------
FOOD STORES/GROCERY 1.5%
42,756 Bruno's, Inc., Term Loan (a) (b)...................... Caa2 NR 12/02/03 to 04/15/05 38,039,434
4,830 Bruno's, Inc., Revolving Credit (a) (b)............... Caa2 NR 12/02/03 4,294,150
12,464 Eagle Family Foods, Inc., Term Loan................... B1 B+ 12/31/05 12,464,338
4,592 Harvest Foods, Inc., Term Loan (a) (b)................ NR NR 06/30/02 91,830
30,954 Pathmark Stores, Inc., Term Loan...................... B1 B+ 06/15/01 to 12/15/01 30,987,966
3,636 Pathmark Stores, Inc., Revolving Credit............... B1 B+ 06/15/01 3,660,949
8,474 Randall's Food Markets, Inc., Term Loan............... Ba3 B+ 06/27/06 8,473,905
1,014 Randall's Food Markets, Inc., Revolving Credit........ Ba3 B+ 06/27/04 1,014,089
8,391 Star Markets Co., Inc., Term Loan..................... Ba3 NR 12/31/02 to 12/31/03 8,395,532
2,574 Star Markets Co., Inc., Revolving Credit.............. Ba3 NR 12/31/01 2,574,222
--------------
109,996,415
--------------
HEALTH CARE & BEAUTY AIDS 1.4%
7,180 Chattem, Inc., Term Loan.............................. Ba2 NR 02/14/04 7,177,281
17,216 Mary Kay Cosmetics, Inc., Term Loan................... NR NR 03/06/04 17,239,037
214 Mary Kay Cosmetics, Inc., Revolving Credit............ NR NR 03/06/04 219,013
24,750 Playtex Products, Inc., Term Loan..................... Ba2 BB 09/15/03 24,762,453
54,725 Revlon Consumer Products Corp., Term Loan............. Ba3 BB- 05/30/02 54,759,540
--------------
104,157,324
--------------
HEALTHCARE 10.8%
6,500 Charter Behavioral, Revolving Credit.................. NR NR 06/17/02 6,521,986
58,987 Community Health Systems, Inc., Term Loan............. NR NR 12/31/03 to 12/31/05 58,987,066
50,836 Dade International, Inc., Term Loan................... B1 NR 12/31/02 to 12/31/04 50,833,800
26,865 Extendicare Health Services, Inc., Term Loan.......... Ba3 B+ 12/31/03 26,865,189
27,397 FPA Medical Management, Inc., Term Loan(b)............ Caa3 D 09/30/01 21,937,560
3,310 FPA Medical Management, Inc., Debtor in Possession(b). Caa3 D 02/01/09 3,310,000
30,398 Genesis Healthcare Ventures, Inc., Term Loan.......... Ba3 B+ 09/30/04 to 06/01/05 30,398,333
150,000 Integrated Health Services, Inc., Term Loan........... Ba3 B+ 09/15/04 to 12/31/05 150,000,000
8,955 Kinetic Concepts, Inc., Term Loan..................... Ba3 B+ 12/31/04 to 12/31/05 8,955,038
50,000 Magellan Health Services, Inc., Term Loan............. B1 B+ 02/12/05 50,043,973
6,714 Medical Specialties Group, Inc., Term Loan............ NR NR 06/30/01 to 06/30/04 6,714,775
11,000 Mediq/PRN Life Support Services, Inc., Term Loan...... B1 B+ 06/30/06 11,009,847
16,230 MedPartners, Inc., Term Loan.......................... Ba3 BB- 05/31/01 16,229,793
3,536 MedPartners, Inc., Revolving Credit................... Ba3 BB- 05/31/01 3,535,718
15,209 Multicare Companies, Inc., Term Loan.................. B1 B+ 09/30/04 to 06/01/05 15,208,750
45,000 National Medical Care, Inc., Term Loan................ Ba1 BB 09/30/03 45,072,780
13,500 Oxford Health Plans, Inc., Term Loan.................. B3 NR 05/15/03 13,500,012
25,000 Paragon Health Network, Inc., Term Loan............... Ba3 B+ 03/31/05 to 03/31/06 25,000,000
35,142 Quest Diagnostics, Inc., Term Loan.................... Ba3 BB+ 12/05/02 to 06/30/06 35,186,936
7,940 SMT Health Services, Inc., Term Loan.................. NR NR 08/30/03 7,939,863
</TABLE>
See Notes to Financial Statements
F-39
<PAGE> 57
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
HEALTHCARE (CONTINUED)
$ 49,704 Sun Healthcare Group, Inc., Term Loan................. Ba3 B+ 11/12/04 to 11/12/05 $ 49,709,375
90,000 Total Renal Care Holdings, Inc., Term Loan............ Ba2 NR 03/31/08 90,000,000
61,111 Vencor, Inc., Term Loan............................... B1 B+ 01/15/05 61,111,220
--------------
788,072,014
--------------
HOME & OFFICE FURNISHINGS, HOUSEWARES & DURABLE
CONSUMER PRODUCTS 1.7%
13,000 Corning Consumer Products, Co., Term Loan............. B1 BB- 10/09/06 13,000,000
50,765 Dal-Tile Group, Inc., Term Loan....................... NR NR 12/31/02 to 12/31/03 50,858,413
4,582 Dal-Tile Group, Inc., Revolving Credit................ NR NR 12/31/02 4,583,515
34,000 Furniture Brands International, Inc., Term Loan....... NR NR 06/30/07 34,014,648
20,834 Imperial Home Decor Group, Inc., Term Loan............ B1 B+ 03/12/04 to 03/13/06 20,834,026
2,252 Imperial Home Decor Group, Inc., Revolving Credit..... B1 B+ 03/12/04 2,252,252
--------------
125,542,854
--------------
HOTELS, MOTELS, & GAMING 0.8%
41,000 Aladdin Gaming, LLC, Term Loan........................ B2 NR 02/26/08 41,000,000
9,759 Alliance Gaming Corp., Term Loan...................... B2 NR 01/31/05 9,758,833
2,143 Alliance Gaming Corp., Delayed Draw Term Loan......... B1 BB 01/31/05 2,142,783
4,941 Las Vegas Sands, Inc., Term Loan...................... NR B+ 11/30/03 4,941,236
780 Las Vegas Sands, Inc., Revolving Credit............... NR B+ 11/30/03 779,836
--------------
58,622,688
--------------
INSURANCE 0.2%
17,500 BRW Acquisition, Inc., Term Loan...................... NR NR 07/10/06 to 07/10/07 17,500,000
--------------
MACHINERY 0.4%
9,500 Alliance Laundry Systems, LLC, Term Loan.............. B1 B+ 06/30/05 9,501,790
15,000 Ocean Rig (Norway), Term Loan......................... NR NR 06/01/08 15,000,700
5,916 RIGCO N. A., LLC, Term Loan........................... NR NR 09/30/98 5,919,724
--------------
30,422,214
--------------
MINING, STEEL, IRON, & NON-PRECIOUS METALS 0.4%
10,195 Alliance Coal Corp., Term Loan........................ NR NR 12/31/01 to 12/31/02 10,199,370
5,486 Earle M. Jorgensen, Term Loan......................... B1 B+ 03/31/04 5,507,098
9,603 Fairmont Minerals Ltd., Term Loan..................... NR NR 02/25/05 9,602,396
4,997 Global Metal Technologies, Inc., Term Loan............ NR NR 03/13/05 4,996,202
--------------
30,305,066
--------------
NATURAL RESOURCES -- COAL 0.1%
4,711 Centennial Resources, Inc., Term Loan................. NR NR 03/31/02 to 03/31/04 4,248,201
--------------
NON-DURABLE CONSUMER PRODUCTS 0.1%
4,045 Homemaker Industries, Inc., Term Loan................. NR NR 06/30/04 4,053,574
--------------
PAPER & FOREST PRODUCTS 0.9%
24,509 Crown Paper Co., Term Loan............................ Ba3 BB 08/23/02 24,512,546
3,258 Crown Paper Co., Revolving Credit..................... Ba3 BB 08/23/02 3,259,818
4,000 CST/Office Products Corp., Term Loan.................. NR NR 12/31/01 4,003,767
15,000 Le Group Forex, Inc., Term Loan....................... NR BB 06/30/05 15,000,000
17,156 Paper Acquisition Corp., Term Loan.................... NR NR 06/17/01 17,156,190
--------------
63,932,321
--------------
PERSONAL & MISCELLANEOUS SERVICES 0.5%
9,150 Arena Brands, Inc., Term Loan......................... NR NR 06/01/02 9,150,000
600 Arena Brands, Inc., Revolving Credit.................. NR NR 06/01/02 600,000
22,795 Boyds Collection Ltd., Term Loan...................... Ba3 B+ 04/21/06 22,795,022
</TABLE>
See Notes to Financial Statements
F-40
<PAGE> 58
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
PERSONAL & MISCELLANEOUS SERVICES (CONTINUED)
$ 4,786 Smarte Carte Corp., Term Loan......................... NR NR 06/30/03 $ 4,790,084
--------------
37,335,106
--------------
PHARMACEUTICALS 0.4%
17,167 Endo Pharmaceuticals, Inc., Term Loan................. NR NR 06/30/04 17,166,717
11,726 King Pharmaceuticals, Inc., Term Loan................. NR NR 02/27/04 11,725,916
--------------
28,892,633
--------------
PRINTING/PUBLISHING 4.2%
15,000 Advanstar Communications, Term Loan................... Ba3 B+ 04/30/05 15,000,000
13,889 ADVO, Inc., Term Loan................................. NR NR 09/29/03 13,889,458
35,000 American Media Operations, Inc., Term Loan............ Ba2 BB- 03/31/04 35,000,094
9,950 Bear Island Paper Co., LLC, Term Loan................. Ba3 B+ 12/31/05 9,949,705
9,000 Cygnus Publishing, Inc., Term Loan.................... NR NR 06/05/05 9,018,267
60,000 Journal Register Co., Term Loan....................... Ba1 BB+ 09/30/06 60,000,000
32,385 Morris Communications, Inc., Term Loan................ NR NR 03/31/04 to 06/30/05 32,393,080
34,315 Outdoor Systems, Inc., Term Loan...................... Ba2 BB- 06/30/04 34,323,366
19,000 PRIMEDIA, Inc., Term Loan............................. Ba3 NR 06/30/04 19,001,836
7,429 TransWestern Publishing, L.P., Term Loan.............. Ba3 B+ 10/01/04 7,429,412
7,845 Von Hoffman Press, Inc., Term Loan.................... B1 B+ 05/30/03 to 05/30/05 7,852,215
2,016 Von Hoffman Press, Inc., Revolving Credit............. B1 B+ 05/30/03 2,016,000
5,000 Yellow Book USA, L.P., Term Loan...................... NR NR 12/15/05 to 12/05/06 5,000,000
45,000 Ziff-Davis Publishing, Inc., Term Loan................ Ba2 BB 03/31/05 45,000,000
9,975 21st Century Newspaper, Inc., Term Loan............... NR NR 09/15/05 9,973,953
--------------
305,847,386
--------------
RESTAURANTS & FOOD SERVICE 1.9%
12,500 Applebee's International, Inc., Term Loan............. Ba3 NR 03/31/06 12,500,429
5,657 California Pizza Kitchen, Inc., Term Loan............. NR NR 09/30/04 5,657,250
943 Carvel Corp., Term Loan............................... NR NR 12/31/98 848,403
37,730 CKE Restaurants, Inc., Term Loan...................... Ba2 NR 04/15/03 37,730,196
9,893 IM Stadium, Inc., Term Loan........................... NR NR 12/31/02 to 12/31/03 9,892,833
5,932 Jet Plastica Industries, Inc., Term Loan.............. NR NR 12/31/02 to 12/31/04 5,944,157
42,253 S.C International Services, Inc., Term Loan........... Ba3 NR 08/28/02 42,252,500
26,275 Shoney's, Inc., Term Loan............................. Ba3 NR 04/30/02 26,275,244
--------------
141,101,012
--------------
RETAIL -- CATALOG 0.0%
2,267 Brylane, L.P., Term Loan.............................. Ba2 NR 10/20/02 2,266,667
860 Brylane, L.P., Revolving Credit....................... Ba2 NR 06/30/02 860,017
--------------
3,126,684
--------------
RETAIL -- LUXURY GOODS 0.1%
9,321 Ebel USA, Inc., Term Loan............................. NR NR 09/30/01 9,322,247
--------------
RETAIL -- OFFICE PRODUCTS 0.7%
6,386 Identity Group, Inc., Term Loan....................... NR NR 11/22/03 6,392,008
45,000 U.S. Office Products Co., Term Loan................... B1 B- 06/09/06 45,000,235
--------------
51,392,243
--------------
RETAIL -- OIL & GAS 0.2%
11,900 TravelCenters of America, Inc., Term Loan............. Ba2 BB 03/31/05 11,915,060
--------------
RETAIL -- SPECIALTY 0.2%
7,083 Hollywood Entertainment Corp., Revolving Credit....... Ba3 NR 09/05/02 7,083,330
7,952 Luxottica Group SPA, Term Loan........................ NR NR 06/30/01 7,952,383
--------------
15,035,713
--------------
RETAIL -- STORES 1.1%
11,500 Advance Stores Inc., Term Loan........................ NR NR 04/15/06 11,500,199
</TABLE>
See Notes to Financial Statements
F-41
<PAGE> 59
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
RETAIL -- STORES (CONTINUED)
$ 17,086 Color Tile, Inc., Term Loan........................... NR NR 12/31/98 $ 6,663,504
5,897 Kirkland's Holdings, Term Loan........................ NR NR 06/30/02 5,898,978
7,500 Nebraska Book Co., Inc., Term Loan.................... B1 B+ 03/31/06 7,500,010
24,407 Payless Cashways, Inc., Term Loan..................... B3 NR 11/30/02 24,406,856
5,700 Payless Cashways, Inc., Revolving Credit.............. B3 NR 05/31/02 5,700,006
15,702 Peebles, Inc., Term Loan.............................. NR NR 06/09/02 15,699,633
4,922 Vitamin Shoppe Industries, Inc., Term Loan............ NR NR 05/15/04 4,921,857
--------------
82,291,043
--------------
TELECOMMUNICATIONS -- CELLULAR 3.4%
10,000 American Cellular Wireless, Inc., Term Loan........... B2 NR 06/30/07 10,002,667
100,000 BCP SP Ltd., Term Loan................................ NR NR 03/16/00 99,000,420
75,000 Cellular, Inc., Financial Corp. (CommNet), Term
Loan.................................................. B1 B 09/18/06 to 09/18/07 75,001,104
65,000 Western Wireless Corp., Term Loan..................... B1 NR 03/31/05 65,000,101
--------------
249,004,292
--------------
TELECOMMUNICATIONS -- HYBRID 1.5%
21,120 Atlantic Crossing, Term Loan.......................... NR NR 11/30/02 21,120,151
90,000 Nextel Finance Co., Term Loan......................... Ba3 B- 09/30/06 90,001,092
2,870 Nextel Finance Co., Term Loan (Argentina)............. Ba3 B- 03/31/03 2,870,034
--------------
113,991,277
--------------
TELECOMMUNICATIONS -- PERSONAL COMMUNICATION
SYSTEMS 4.9%
50,000 Cox Communications, Inc., Term Loan................... Baa2 NR 12/31/06 49,995,848
74,822 Omnipoint Communications, Inc., Term Loan............. B2 B 02/17/06 74,822,229
11,000 Powertel PCS, Inc., Revolving Credit.................. NR NR 03/31/06 11,000,000
78,775 Sprint Spectrum L.P., Term Loan....................... Ba1 NR 01/31/02 78,847,703
70,000 Sprint, Lucent Technologies Vendor Facility, Term
Loan.................................................. NR NR 06/30/01 70,180,074
50,000 Sprint, Northern Telecom Vendor Facility, Term Loan... NR NR 03/31/05 50,252,588
21,000 Triton PCS, Inc., Term Loan........................... B1 B 05/04/07 21,000,000
--------------
356,098,442
--------------
TELECOMMUNICATIONS -- WIRELESS MESSAGING 2.2%
28,105 Arch Communications, Inc., Term Loan.................. B3 B- 12/31/02 to 06/30/06 28,108,136
30,412 Iridium Operating LLC, Term Loan...................... B2 B 12/31/98 30,412,502
12,500 Metrocall, Inc., Term Loan............................ B1 B 12/31/04 12,500,035
3,916 Metrocall, Inc., Revolving Credit..................... B1 B 12/31/04 3,981,840
64,005 Mobilemedia Communications, Inc., Term Loan........... NR NR 06/30/02 to 06/30/03 64,006,982
2,555 Mobilemedia Communications, Inc., Revolving Credit.... NR NR 06/30/02 2,555,872
9,500 Teletouch Communications, Inc., Term Loan............. NR NR 11/30/05 9,500,059
11,000 TSR Wireless LLC, Term Loan........................... NR NR 06/30/05 10,999,698
--------------
162,065,124
--------------
TEXTILES & LEATHER 1.1%
11,213 American Marketing Industries, Inc., Term Loan........ NR NR 11/30/02 11,212,500
8,910 GFSI, Inc., Term Loan................................. NR NR 03/31/04 8,914,031
14,913 Joan Fabrics Corp., Term Loan......................... NR NR 06/30/05 to 06/30/06 14,913,158
13,392 Johnston Industries, Inc., Term Loan.................. NR NR 07/01/00 13,391,679
9,925 Norwood Promotional Products, Inc., Term Loan......... NR NR 08/28/04 9,924,575
10,783 Polyfibron Technologies, Inc., Term Loan.............. NR NR 12/28/03 10,790,749
6,512 Simmons Co., Term Loan................................ Ba3 NR 03/31/03 6,512,466
6,984 William Carter Co., Term Loan......................... Ba3 BB- 10/30/03 6,988,949
--------------
82,648,107
--------------
</TABLE>
See Notes to Financial Statements
F-42
<PAGE> 60
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
TRANSPORTATION -- CARGO 1.4%
$ 28,695 Atlas Freighter Leasing, Inc., Term Loan.............. Ba3 NR 05/29/04 to 06/30/04 $ 28,707,711
9,975 CTC Distribution Services, LLC, Term Loan............. NR NR 02/15/06 9,975,083
39,245 Evergreen International Aviation, Inc., Term Loan..... Ba3 NR 05/31/02 to 05/31/03 39,321,652
7,550 Gemini Air Cargo, Inc., Term Loan..................... B1 NR 12/12/02 7,550,000
7,500 North American Van Lines, Inc., Term Loan............. NR NR 03/30/05 7,500,000
9,000 OmniTrax Railroads, LLC, Term Loan.................... NR NR 05/14/05 9,000,070
--------------
102,054,516
--------------
TRANSPORTATION -- MANUFACTURING COMPONENTS 0.5%
27,860 Cambridge Industries, Inc., Term Loan................. B1 NR 06/30/05 27,876,493
9,250 Eagle-Picher Industries, Inc., Term Loan.............. B1 B+ 08/31/05 to 08/31/06 9,250,027
--------------
37,126,520
--------------
TRANSPORTATION -- PERSONAL 0.9%
17,176 Blue Bird Body Co., Term Loan......................... Ba2 BB- 11/02/02 to 11/01/03 17,183,816
49,964 Continental Airlines, Inc., Term Loan................. Ba1 BB 07/31/02 to 07/31/04 50,000,617
--------------
67,184,433
--------------
TRANSPORTATION -- RAIL MANUFACTURING 0.3%
23,003 Johnstown America Industries, Inc., Term Loan......... Baa3 NR 03/31/03 23,003,430
--------------
TOTAL VARIABLE RATE ** SENIOR LOAN INTERESTS 90.5%............................................... 6,617,436,013
--------------
FIXED INCOME SECURITIES 0.8%
London Fog Industries, Inc. ($13,541,264 par, 10.00% coupon, maturing 02/27/03)................... 13,541,264
Satelites Mexicanos ($39,969,000 par, 10.00% coupon, maturing 06/30/04)........................... 40,018,961
--------------
TOTAL FIXED INCOME SECURITIES..................................................................... 53,560,225
--------------
EQUITIES 1.6%
AFC Enterprises, Inc. (604,251 common shares) (c)(d).............................................. 3,625,506
Best Products Co., Inc. (297,480 common shares) (d)............................................... 0
Best Products Co., Inc. (Warrants for 28,080 common shares) (d)................................... 0
Camelot Music Holdings, Inc. (1,994,717 common shares) (d)........................................ 84,775,472
Classic Cable, Inc. (Warrants for 760 common shares) (d).......................................... 0
Dan River, Inc. (192,060 common shares) (d)....................................................... 2,904,908
Flagstar Cos., Inc. (8,755 common shares) (d)..................................................... 22
London Fog Industries, Inc. (1,083,301 common shares) (c)(d)...................................... 24,298,441
London Fog Industries, Inc. (Warrants for 66,580 common shares) (d)............................... 446,752
Nextel Communications, Inc. (Warrants for 60,000 common shares) (c)(d)............................ 706,875
Payless Cashways, Inc. (1,024,159 common shares) (d).............................................. 2,304,358
RIGCO N.A., LLC (Warrants for .325% interest of company's fully diluted equity) (d)............... 16,250
Sarcom, Inc. (43 common shares) (d)............................................................... 0
--------------
TOTAL EQUITIES.................................................................................... 119,078,584
--------------
TOTAL LONG-TERM INVESTMENTS 92.9%
(Cost $6,795,256,044)............................................................................. 6,790,074,822
--------------
</TABLE>
See Notes to Financial Statements
F-43
<PAGE> 61
PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Borrower Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
SHORT-TERM INVESTMENTS 6.3%
COMMERCIAL PAPER 2.0%
Case Credit Corp. ($30,000,000 par, maturing 08/03/98, yielding 5.80% to 5.82%)................. $ 29,990,311
CSX Corp. ($30,000,000 par, maturing 08/06/98, yielding 5.77%).................................. 29,975,958
Illinois Central Railroad Co. ($7,900,000 par, maturing 08/05/98 to 08/11/98, yielding 5.70% to
5.81%).......................................................................................... 7,890,108
Nabisco, Inc. ($10,000,000 par, maturing 08/05/98, yielding 5.70%).............................. 9,993,667
Rite Aid Corp. ($8,500,000 par, maturing 08/06/98, yielding 5.70%).............................. 8,493,271
Safeway, Inc. ($14,000,000 par, maturing 09/02/98, yielding 5.71%).............................. 13,928,942
Tandy Corp. ($5,000,000 par, maturing 08/04/98, yielding 5.67%)................................. 4,997,638
Texas Utilities Co. ($31,000,000 par, maturing 08/04/98, yielding 5.82%)........................ 30,984,965
Western Resources, Inc. ($15,000,000 par, maturing 08/03/98, yielding 5.75%).................... 14,995,208
--------------
TOTAL COMMERCIAL PAPER.......................................................................... 151,250,068
--------------
SHORT-TERM LOAN PARTICIPATIONS 4.3%
Alltel Corp. ($5,000,000 par, maturing 08/07/98, yielding 5.66%)................................ 5,000,000
American Stores Co. ($22,500,000 par, maturing 08/31/98 to 09/28/98, yielding 5.78% to 5.80%)... 22,500,000
Anadarko Pete Corp. ($26,500,000 par, maturing 08/05/98 to 08/21/98, yielding 5.69%)............ 26,500,000
Bell Atlantic Financial Services, Inc. ($4,000,000 par, maturing 08/03/98, yielding 5.67%)...... 4,000,000
Cabot Corp. ($7,800,000 par, maturing 08/13/98, yielding 5.70%)................................. 7,800,000
Centex Corp. ($12,500,000 par, maturing 08/03/98, yielding 5.80%)............................... 12,500,000
Englehard Corp. ($30,000,000 par, maturing 08/04/98 to 08/07/98, yielding 5.69% to 5.76%)....... 30,000,000
International Paper Co. ($30,000,000 par, maturing 08/03/98, yielding 5.80%).................... 30,000,000
Nabisco, Inc. ($20,000,000 par, maturing 08/03/98, yielding 5.81%).............................. 20,000,000
Ralston Purina Co. ($39,000,000 par, maturing 08/04/98 to 08/09/98, yielding 5.69% to 5.76%).... 39,000,000
Tandy Corp. ($7,000,000 par, maturing 08/18/98, yielding 5.71%)................................. 7,000,000
Temple Inland, Inc. ($50,000,000 par, maturing 08/05/98 to 08/25/98, yielding 5.78% to 5.82%)... 50,000,000
Times Mirror Co. ($20,900,000 par, maturing 08/05/98, yielding 5.60% to 5.63%).................. 20,900,000
Times Mirror ($2,400,000 par, maturing 08/04/98, yielding 5.60%)................................ 2,400,000
Universal Corp. ($20,000,000 par, maturing 08/07/98, yielding 5.67%)............................ 20,000,000
Western Resources, Inc. ($15,000,000 par, maturing 08/20/98, yielding 5.71%).................... 15,000,000
--------------
TOTAL SHORT-TERM LOAN PARTICIPATIONS............................................................ 312,600,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $463,850,068)............................................................................. 463,850,068
--------------
TOTAL INVESTMENTS 99.2%
(Cost $7,259,106,112)........................................................................... 7,253,924,890
OTHER ASSETS IN EXCESS OF LIABILITIES 0.8%...................................................... 58,958,513
--------------
NET ASSETS 100.0%............................................................................... $7,312,883,403
------------
</TABLE>
NR = Not rated
(a) This Senior Loan interest is non-income producing.
(b) This Borrower has filed for protection in federal bankruptcy court.
(c) Restricted security.
(d) Non-income producing security as this stock currently does not declare
dividends.
+ Bank loans rated below Baa by Moody's Investor Service, Inc. or BBB by
Standard & Poor's Group are considered to be below investment grade.
* 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
F-44
<PAGE> 62
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1998
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Total Investments (Cost $7,259,106,112)..................... $7,253,924,890
Receivables:
Interest and Fees......................................... 57,766,824
Fund Shares Sold.......................................... 26,406,743
Investments Sold.......................................... 9,271,953
Other....................................................... 55,596
--------------
Total Assets.......................................... 7,347,426,006
--------------
LIABILITIES:
Payables:
Income Distributions...................................... 9,528,711
Custodian Bank............................................ 7,513,945
Investment Advisory Fee................................... 5,771,520
Administrative Fee........................................ 1,556,016
Fund Shares Repurchased................................... 1,368,644
Distributor and Affiliates................................ 1,299,338
Accrued Expenses............................................ 4,074,334
Deferred Facility Fees...................................... 3,273,920
Trustees' Deferred Compensation and Retirement Plans........ 156,175
--------------
Total Liabilities..................................... 34,542,603
--------------
NET ASSETS.................................................. $7,312,883,403
==============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 733,069,022 shares issued and
outstanding).............................................. $ 7,330,690
Paid in Surplus............................................. 7,327,247,726
Accumulated Undistributed Net Investment Income............. 10,753,143
Net Unrealized Depreciation................................. (5,181,222)
Accumulated Net Realized Loss............................... (27,266,934)
--------------
NET ASSETS.................................................. $7,312,883,403
==============
NET ASSET VALUE PER COMMON SHARE ($7,312,883,403 divided by
733,069,022 shares outstanding)........................... $ 9.98
==============
</TABLE>
See Notes to Financial Statements
F-45
<PAGE> 63
STATEMENT OF OPERATIONS
For the Year Ended July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $536,579,706
Fees........................................................ 17,284,122
Other....................................................... 3,414,378
------------
Total Income............................................ 557,278,206
------------
EXPENSES:
Investment Advisory Fee..................................... 63,011,682
Administrative Fee.......................................... 16,947,689
Shareholder Services........................................ 7,456,983
Legal....................................................... 2,007,500
Custody..................................................... 1,898,141
Trustees' Fees and Expenses................................. 192,260
Other....................................................... 4,191,259
------------
Total Expenses.......................................... 95,705,514
------------
NET INVESTMENT INCOME....................................... $461,572,692
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(17,725,403)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (31,460,156)
End of the Period......................................... (5,181,222)
------------
Net Unrealized Appreciation During the Period............... 26,278,934
------------
NET REALIZED AND UNREALIZED GAIN............................ $ 8,553,531
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $470,126,223
============
</TABLE>
See Notes to Financial Statements
F-46
<PAGE> 64
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1998 July 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income....................................... $ 461,572,692 $ 392,667,747
Net Realized Gain/Loss...................................... (17,725,403) 442,960
Net Unrealized Appreciation/Depreciation During the
Period.................................................... 26,278,934 (25,147,243)
-------------- --------------
Change in Net Assets from Operations........................ 470,126,223 367,963,464
Distributions from Net Investment Income.................... (461,726,242) (390,215,999)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... 8,399,981 (22,252,535)
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Common Shares Sold............................ 1,654,063,711 1,781,772,630
Value of Shares Issued Through Dividend Reinvestment........ 245,628,149 209,636,808
Cost of Shares Repurchased.................................. (832,176,219) (597,973,300)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 1,067,515,641 1,393,436,138
-------------- --------------
TOTAL INCREASE IN NET ASSETS................................ 1,075,915,622 1,371,183,603
NET ASSETS:
Beginning of the Period..................................... 6,236,967,781 4,865,784,178
-------------- --------------
End of the Period (Including accumulated undistributed net
investment income of $10,753,143 and $5,369,829,
respectively)............................................... $7,312,883,403 $6,236,967,781
============== ==============
</TABLE>
See Notes to Financial Statements
F-47
<PAGE> 65
STATEMENT OF CASH FLOWS
For the Year Ended July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 470,126,223
---------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Increase in Investments at Value.......................... (1,046,568,647)
Increase in Interest and Fees Receivables................. (12,378,076)
Increase in Receivable for Investments Sold............... (8,515,656)
Increase in Other Assets.................................. (18,384)
Decrease in Deferred Facility Fees........................ (14,834,232)
Increase in Investment Advisory and Administrative Fees
Payable................................................. 1,043,363
Increase in Distributor and Affiliates Payable............ 357,450
Increase in Accrued Expenses.............................. 2,210,345
Increase in Deferred Compensation and Retirement Plans
Expenses................................................ 87,832
---------------
Total Adjustments....................................... (1,078,616,005)
---------------
NET CASH USED FOR OPERATING ACTIVITIES...................... (608,489,782)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 1,650,625,395
Payments on Shares Repurchased.............................. (831,182,017)
Increase in Intra-day Credit Line with Custodian Bank....... 2,416,918
Cash Dividends Paid......................................... (213,370,514)
---------------
Net Cash Provided by Financing Activities................. 608,489,782
---------------
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
F-48
<PAGE> 66
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,
----------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 9.963 $ 10.002 $ 10.046 $ 10.052 $ 10.004
-------- -------- -------- -------- --------
Net Investment Income..................................... .675 .701 .735 .756 .618
Net Realized and Unrealized Gain/Loss..................... .015 (.042) (.028) (.004) .015
-------- -------- -------- -------- --------
Total from Investment Operations............................ .690 .659 .707 .752 .633
Less Distributions from Net Investment Income............... .677 .698 .751 .758 .585
-------- -------- -------- -------- --------
Net Asset Value, End of the Period.......................... $ 9.976 $ 9.963 $ 10.002 $ 10.046 $ 10.052
======== ======== ======== ======== ========
Total Return (a)............................................ 7.22% 6.79% 7.22% 7.82% 6.52%
Net Assets at End of the Period (In millions)............... $7,312.9 $6,237.0 $4,865.8 $2,530.1 $1,229.0
Ratio of Expenses to Average Net Assets..................... 1.41% 1.42% 1.46% 1.49% 1.53%
Ratio of Net Investment Income to Average Net Assets........ 6.81% 7.02% 7.33% 7.71% 6.16%
Portfolio Turnover (b)...................................... 73% 83% 66% 71% 74%
</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
F-49
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS
July 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Prime Rate Income Trust, formerly known as 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 $6,617,436,013 (90.5% of net assets) is determined in the
absence of actual market values by Van Kampen 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. Facilities fees on senior loans purchased after July 31, 1997, are treated
as market discounts. Market premiums and discounts are amortized over the stated
life of each applicable security.
F-50
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
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, 1998, the Trust had an accumulated capital
loss carryforward for tax purposes of $3,873,769, which will expire between July
31, 2004 and July 31, 2006. Net realized gains or losses may differ for
financial and tax reporting purposes primarily as a result of wash sales, past
October losses which may not be recognized for tax purposes until the first day
of the following fiscal year and losses that were recognized for tax purposes
but not for book purposes at the end of the fiscal year.
At July 31, 1998, for federal income tax purposes cost of long- and
short-term investments is $7,264,846,206, the aggregate gross unrealized
appreciation is $37,643,032 and the aggregate gross unrealized depreciation is
$48,564,348 resulting in net unrealized depreciation of $10,921,316.
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.
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between financial and tax basis
reporting for the 1998 fiscal year have been identified and appropriately
reclassified. Permanent differences relating to expenses which are not
deductible for tax purposes totaling $293,828 were reclassified from accumulated
undistributed net investment income to capital, $3,294,396 relating to losses
recognized on the sale of securities which are deferred for tax purposes were
reclassified from accumulated net realized gains/losses to capital and
$5,243,036 relating to income and gain/loss recognized on restructured
securities were reclassified from accumulated net investment income to
accumulated net realized gain/loss.
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 Funds 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.
F-51
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
For the year ended July 31, 1998, the Trust recognized expenses of
approximately $375,100 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, 1998, the Trust recognized expenses of
approximately $81,300 representing Van Kampen Funds Inc. or its affiliates'
(collectively "Van Kampen") cost of providing legal services to the Trust.
Van Kampen Investor Services Inc., ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Trust. For the year ended July
31, 1998, the Trust recognized expenses for these services of approximately
$5,423,300. Beginning in 1998, the transfer agency fees are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
market benchmarks.
Certain officers and trustees of the Trust are also officers and
directors of Van Kampen. The Trust does not compensate its officers or trustees
who are officers of Van Kampen.
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. 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 $2,500.
3. CAPITAL TRANSACTIONS
At July 31, 1998 and July 31, 1997, paid in surplus aggregated $7,327,247,726
and $6,264,390,819, respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 1998 JULY 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares............................................ 626,018,023 486,490,317
----------- -----------
Shares Sold................................................. 165,907,778 178,438,954
Shares Issued Through Dividend Reinvestment................. 24,636,104 20,996,830
Shares Repurchased.......................................... (83,492,883) (59,908,078)
----------- -----------
Net Increase in Shares Outstanding.......................... 107,050,999 139,527,706
----------- -----------
Ending Shares............................................... 733,069,022 626,018,023
=========== ===========
</TABLE>
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $5,864,054,259 and
$4,408,914,721, 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, 1998, 83,492,883 shares were tendered and repurchased by the
Trust.
F-52
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
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 Van Kampen. Any early withdrawal charge
which is required to be imposed will be made in accordance with the following
schedule.
<TABLE>
<CAPTION>
WITHDRAWAL
YEAR OF REPURCHASE 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, 1998, Van Kampen received early withdrawal
charges of approximately $16,169,200 in connection with tendered shares of the
Trust.
7. COMMITMENTS
Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $417,155,600 as of July
31, 1998. 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 $500,000,000. 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.
F-53
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998
- --------------------------------------------------------------------------------
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, 1998, 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>
Lehman Brothers............................................. $100,000 $100,000
Chase Securities Inc........................................ 77,732 77,735
Bankers Trust............................................... 60,071 59,991
Bank of New York............................................ 52,257 52,257
Donaldson Lufkin Jenrette................................... 9,748 9,748
Canadian Imperial Bank of Commerce.......................... 6,619 6,622
Goldman Sachs............................................... 6,480 6,350
Fleet National Bank......................................... 3,000 3,000
-------- --------
Total....................................................... $315,907 $315,703
======== ========
</TABLE>
9. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project
to review both the internal systems and external vendor connections. The goal of
this project is to position our business to continue unaffected as a result of
the century change. At this time, there can be no assurance that the steps taken
will be sufficient to avoid any adverse impact to the Trust, but we do not
anticipate that the move to Year 2000 will have a material impact on our ability
to continue to provide the Trust with service at current levels. In addition, it
is possible that the securities markets in which the Trust invests may be
detrimentally affected by computer failures throughout the financial services
industry beginning January 1, 2000. Improperly functioning trading systems may
result in settlement problems and liquidity issues.
F-54
