<PAGE> 1
<TABLE>
<S> <C>
Table of Contents
OVERVIEW
LETTER TO SHAREHOLDERS 1
ECONOMIC SNAPSHOT 2
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS 4
PORTFOLIO AT A GLANCE
TOP FIVE PORTFOLIO INDUSTRIES 5
TOP TEN HOLDINGS 5
CURRENT DISTRIBUTION 6
NET ASSET VALUE 6
Q&A WITH YOUR PORTFOLIO MANAGERS 7
GLOSSARY OF TERMS 11
A FOCUS ON SENIOR LOANS 12
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS 13
FINANCIAL STATEMENTS 38
NOTES TO FINANCIAL STATEMENTS 43
REPORT OF INDEPENDENT AUDITORS 50
VAN KAMPEN FUNDS
THE VAN KAMPEN FAMILY OF FUNDS 51
TRUST OFFICERS AND IMPORTANT ADDRESSES 52
</TABLE>
It is times like these when money- management experience may make a difference.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE> 2
OVERVIEW
LETTER TO SHAREHOLDERS
August 18, 2000
Dear Shareholder,
Whether you have held your trust for years or just joined the Van Kampen family
of shareholders in the last few months, you are likely to have questions and
even some concerns about how recent market volatility has affected your
investment. I encourage you to review the following Q&A in which your portfolio
manager provides an update on how your trust is being managed in this
environment.
It is times like these when money-management experience may make a difference.
Toward that end, you should know that Van Kampen is one of the nation's oldest
investment-management firms, with a history of money management dating back to
1926. Our portfolio managers have invested in all types of market
conditions--during bull and bear markets, periods of inflation and rising
interest rates, and now a technology revolution. We have managed money long
enough to understand short-term market volatility and the value of investing for
the long term.
As we move through the second half of 2000, count on us to
continue to draw on the wisdom of our 74 years of experience.
Along those lines, Van Kampen's "Generations of Experience" is the theme of a
national advertising campaign that we recently kicked off. The message
emphasizes our depth of investment-management history, as well as our firm
belief that with the right investments, anyone can realize life's true wealth.
Sincerely,
[SIG]
Richard F. Powers, III
President and CEO
Van Kampen Investments
1
<PAGE> 3
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
ECONOMIC GROWTH CONTINUED TO BE IMPRESSIVE, WITH THE GROSS DOMESTIC PRODUCT
(GDP), THE PRIMARY MEASURE OF ECONOMIC GROWTH, INCREASING AT A 5.3 PERCENT
ANNUALIZED RATE FOR THE REVISED SECOND QUARTER OF 2000. PRODUCTIVITY ALSO
CONTINUED ITS STEADY PACE AND SHOWED NO CLEAR SIGNS OF SLOWING DOWN. LOW
UNEMPLOYMENT AND RISING PRODUCTIVITY WERE THE PRIMARY FACTORS UNDERLYING THE
HEALTHY ECONOMY.
CONSUMER SPENDING AND EMPLOYMENT
INFLATION FEARS MOUNTED BECAUSE OF STRONG CONSUMER SPENDING AND THE TIGHT LABOR
MARKET. ALTHOUGH CONSUMER SPENDING DECREASED SLIGHTLY FOR THE LATTER PART OF THE
SECOND QUARTER, RISING INTEREST RATES DID LITTLE TO REIN IN ROBUST CONSUMER
SPENDING FOR MOST OF THE REPORTING PERIOD, AND THE FACTORS UNDERPINNING CONSUMER
ACTIVITY--RISING WAGES AND LOW UNEMPLOYMENT--REMAINED LARGELY UNCHANGED.
THE JOBLESS RATE HOVERED NEAR LOW LEVELS, AND EXPERIENCED LITTLE CHANGE IN JULY,
WITH UNEMPLOYMENT REACHING A LOW OF 4.0 PERCENT, UNCHANGED FROM THE PREVIOUS
MONTH.
INTEREST RATES AND INFLATION
STRONG GDP NUMBERS PROMPTED THE FEDERAL RESERVE BOARD (THE FED) TO EXERCISE
CAUTION BY RAISING INTEREST RATES TO GUARD AGAINST INFLATION AND TEMPER ECONOMIC
GROWTH. THE CONSUMER PRICE INDEX (CPI) ALSO ROSE DURING THE REPORTING PERIOD.
BOTH GDP AND CPI DATA IN THE EARLY PART OF THE REPORTING PERIOD SUPPORTED THE
FED'S INCREASE OF SHORT-TERM RATES. IN THE LATTER PART OF THE REPORTING PERIOD,
HOWEVER, THE FED STOOD FIRM AND TOOK NO ACTION IN CHANGING INTEREST RATES
BECAUSE OF BELIEFS AND SIGNS THAT THE ECONOMY WAS SLOWING.
WHILE MARKETS EXPERIENCED STRONG VOLATILITY, OBSERVERS BELIEVE THAT MARKET
CONDITIONS MAY STABILIZE IF AND WHEN THE FED GROWS COMFORTABLE WITH THE PACE OF
THE ECONOMY AND DECIDES TO CEASE INTEREST-RATE CHANGES.
2
<PAGE> 4
U.S. GROSS DOMESTIC PRODUCT
SEASONALLY ADJUSTED ANNUALIZED RATES
(June 30, 1998 -- June 30, 2000)
[BAR GRAPH]
<TABLE>
<CAPTION>
U.S. GROSS DOMESTIC PRODUCT
---------------------------
<S> <C>
Jun 98 2.1
Sep 98 3.8
Dec 98 5.9
Mar 99 3.5
Jun 99 2.5
Sep 99 5.7
Dec 99 8.3
Mar 00 4.8
Jun 00 5.3
</TABLE>
Source: Bureau of Economic Analysis
INTEREST RATES AND INFLATION
(July 31, 1998 -- July 31, 2000)
[LINE GRAPH]
<TABLE>
<CAPTION>
INTEREST RATES INFLATION
-------------- ---------
<S> <C> <C>
Jul 98 5.50 1.70
5.50 1.60
5.25 1.50
Oct 98 5.00 1.50
4.75 1.50
4.75 1.60
Jan 99 4.75 1.70
4.75 1.60
4.75 1.70
Apr 99 4.75 2.30
4.75 2.10
5.00 2.00
Jul 99 5.00 2.10
5.25 2.30
5.25 2.60
Oct 99 5.25 2.60
5.50 2.60
5.50 2.70
Jan 00 5.50 2.70
5.75 3.20
6.00 3.70
Apr 00 6.00 3.00
6.50 3.10
6.50 3.70
Jul 00 6.50 3.60
</TABLE>
Interest rates are represented by the closing midline federal funds target rate
on the last day of each month. Inflation is indicated by the annual percent
change of the Consumer Price Index for all urban consumers at the end of each
month.
3
<PAGE> 5
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS
(as of July 31, 2000)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
<S> <C> <C>
TOTAL RETURNS AND DISTRIBUTION RATE
-----------------------------------------------------------------------
One-year total return(1) 3.15%
-----------------------------------------------------------------------
Five-year average annual total return(1) 5.95%
-----------------------------------------------------------------------
Ten-year average annual total return(1) 6.68%
-----------------------------------------------------------------------
Life-of-Trust average annual total return(1) 6.98%
-----------------------------------------------------------------------
Commencement date 10/04/89
-----------------------------------------------------------------------
Distribution rate(2) 7.57%
-----------------------------------------------------------------------
SHARE VALUATIONS
-----------------------------------------------------------------------
Net asset value on 07/31/00 $9.50
-----------------------------------------------------------------------
One-year high net asset value (08/01/99) $9.87
-----------------------------------------------------------------------
One-year low net asset value (07/31/00) $9.50
-----------------------------------------------------------------------
</TABLE>
(1) Total return assumes an investment at the beginning of the period indicated,
reinvestment of all distributions for the period, and tender of all shares at
the end of the period indicated, excluding payment of 3.00% imposed on most
shares accepted by the Trust for repurchase within the first year and declining
thereafter to 0.00% after the fifth year. If the early withdrawal charge were
included, total return would be lower.
(2) Distribution rate is based upon the offering price of $9.51 and the current
monthly dividend of $.06 per share as of July 25, 2000.
Past performance is no guarantee of future results. Distribution rate and net
asset value may fluctuate with market conditions. Trust shares, when tendered,
may be worth more or less than their original cost.
This report is intended for shareholders of the Trust and may not be used as
sales literature with prospective investors unless it is preceded or accompanied
by the Trust's current prospectus, which gives more complete information about
risk considerations, charges and expenses, investment objectives, and operating
policies. Prospective investors should read the prospectus carefully before
investing or sending money.
4
<PAGE> 6
PORTFOLIO AT A GLANCE
TOP FIVE PORTFOLIO INDUSTRIES
(as a percentage of total assets--July 31, 2000)
<TABLE>
<S> <C> <C>
Telecommunications--Wireless 8.5%
---------------------------------------------------------------------
Health Care 7.2%
---------------------------------------------------------------------
Finance 6.3%
---------------------------------------------------------------------
Broadcasting--Cable 5.5%
---------------------------------------------------------------------
Hotels, Motels, and Gaming 3.8%
---------------------------------------------------------------------
</TABLE>
TOP TEN HOLDINGS
(as a percentage of total assets--July 31, 2000)
<TABLE>
<S> <C> <C>
Allied Waste North America, Inc. 2.45%
---------------------------------------------------------------------
Charter Communications, Inc. 2.35%
---------------------------------------------------------------------
Voicestream Wireless Corp. 2.15%
---------------------------------------------------------------------
Wyndham International, Inc. 1.50%
---------------------------------------------------------------------
Integrated Health Services, Inc. 1.48%
---------------------------------------------------------------------
Ventas Realty, Inc. 1.46%
---------------------------------------------------------------------
Community Health Systems, Inc. 1.42%
---------------------------------------------------------------------
Nextel Finance Co. 1.29%
---------------------------------------------------------------------
Stone Container Corp. 1.14%
---------------------------------------------------------------------
Total Renal Care Holdings, Inc. 1.08%
---------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
CURRENT DISTRIBUTION
(July 31, 1990--July 31, 2000)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
VAN KAMPEN PRIME RATE INCOME
TRUST 3-MONTH TREASURY BILL
---------------------------- ---------------------
<S> <C> <C>
7/90 10 7.73
10 7.61
10 7.35
10 7.34
10.01 7.26
10.01 6.64
9.5 6.38
9 6.26
8.76 5.93
8.51 5.69
8.06 5.69
8.02 5.69
7/91 8.02 5.68
7.76 5.48
7.62 5.25
7.6 4.97
7.26 4.46
6.5 3.96
6.51 3.94
6.5 4.02
6.51 4.14
6.51 3.77
6.52 3.77
6.52 3.65
7/92 6 3.24
6.01 3.22
5.99 2.74
5.99 3.01
6 3.34
5.98 3.14
5.96 2.97
5.97 3
6.01 2.96
6.01 2.96
6.02 3.11
6.04 3.08
7/93 5.76 3.1
5.75 3.07
5.75 2.98
5.5 3.1
5.49 3.2
5.47 3.06
5.47 3.03
5.48 3.43
5.72 3.55
6.16 3.95
6.5 4.24
6.5 4.22
7/94 6.5 4.36
6.81 4.66
7 4.77
7 5.15
7 5.71
7.57 5.69
8.01 5.99
8.04 5.94
8.03 5.87
8.02 5.86
8.02 5.8
8.01 5.57
7/95 8.02 5.58
8.01 5.44
8.02 5.41
8.03 5.51
8.03 5.49
7.54 5.08
7.54 5.05
7.25 5.03
7.26 5.14
7.01 5.15
6.8 5.18
6.8 5.16
7/96 6.8 5.31
7.01 5.28
7.01 5.03
7.01 5.15
7.01 5.13
7.02 5.17
7.02 5.15
7.02 5.22
7.02 5.32
7.03 5.23
7.03 4.94
7.03 5.17
7/97 6.8 5.23
6.8 5.22
6.8 5.1
6.8 5.2
6.79 5.2
6.79 5.35
6.79 5.18
6.78 5.31
6.79 5.12
6.79 4.97
6.79 5.01
6.77 5.08
7/98 6.79 5.07
6.81 4.83
6.82 4.36
6.48 4.32
6.18 4.48
6.2 4.45
6.21 4.45
6.2 4.67
6.21 4.48
6.2 4.54
6.22 4.63
6.49 4.78
7/99 6.5 4.75
6.55 4.97
6.56 4.85
6.58 5.09
6.59 5.3
6.59 5.33
6.9 5.69
6.96 5.78
7.22 5.87
7.23 5.83
7.25 5.62
7.51 5.85
7/00 7.57 6.22
</TABLE>
NET ASSET VALUE
(July 31, 1990--July 31, 2000)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
VAN KAMPEN PRIME RATE INCOME TRUST
----------------------------------
<S> <C>
7/90 10.01
10
10
10
9.99
9.99
10
9.99
9.99
9.99
9.98
9.98
7/91 9.99
9.98
9.99
10
10
10.01
10
10.02
10
10
9.98
9.99
7/92 10
10
10
10.01
9.99
10.04
10.06
10.05
10.04
10.04
10.02
10
7/93 10
10.01
10.01
10.01
10.03
10.07
10.07
10.06
10.05
10.04
10.04
10.04
7/94 10.05
10.05
10.04
10.05
10.04
10.06
10.04
10.02
10.03
10.04
10.05
10.05
7/95 10.05
10.05
10.04
10.03
10.03
10.03
10.02
10.02
10
10
10
10
7/96 10
10
10.01
10
10
9.99
9.99
9.98
9.98
9.97
9.97
9.97
7/97 9.96
9.96
9.96
9.96
9.97
9.97
9.97
9.98
9.96
9.96
9.97
9.98
7/98 9.98
9.93
9.93
9.96
9.97
9.93
9.92
9.93
9.91
9.93
9.9
9.89
7/99 9.87
9.81
9.78
9.75
9.74
9.71
9.61
9.57
9.56
9.54
9.51
9.52
7/00 9.5
</TABLE>
Past performance is no guarantee of future results.
6
<PAGE> 8
[PHOTO]
Q&A WITH YOUR PORTFOLIO MANAGERS
WE RECENTLY SPOKE WITH THE MANAGEMENT TEAM OF THE VAN KAMPEN PRIME RATE
INCOME TRUST ABOUT THE KEY EVENTS AND ECONOMIC FORCES THAT SHAPED THE MARKETS
AND INFLUENCED THE TRUST'S RETURN DURING THE 12 MONTHS ENDED JULY 31, 2000. THE
TEAM IS LED BY HOWARD TIFFEN, SENIOR PORTFOLIO MANAGER, WHO HAS MANAGED THE
TRUST SINCE DECEMBER 1999 AND BRINGS MORE THAN 30 YEARS OF GLOBAL AND DOMESTIC
INVESTMENT EXPERIENCE TO VAN KAMPEN'S SENIOR LOAN MANAGEMENT TEAM. THE FOLLOWING
DISCUSSION REFLECTS HIS VIEWS ON THE TRUST'S PERFORMANCE.
Q HOW WOULD YOU DESCRIBE THE
MARKET ENVIRONMENT IN WHICH THE TRUST OPERATED, AND HOW DID THE TRUST
PERFORM IN THAT ENVIRONMENT DURING THE PAST 12 MONTHS?
A The reporting period was split
in two by the arrival of the much-anticipated year 2000 transition, which
created a tentative market environment for much of late 1999 and early 2000.
Many senior loan issuers expected market disruptions, so they moved quickly to
arrange their financing before the fourth quarter of 1999. Others preferred to
wait until the dust settled, delaying their senior loan issuance beyond the
first weeks of January.
As a result, the volume of new senior loan issuance slowed to a trickle in
December and January. This caution may have been a blessing in disguise, as the
senior loans that subsequently came to market were prudently constructed, with
sound capital structures and sensible leverage levels. The relatively low volume
spurred increased competition for suitable senior loans, providing greater
liquidity and support for loan prices.
The second half of the trust's fiscal year began quietly, due in part to
weakness in the high-yield bond market. Many high-yield investors had lingering
concerns over the record level of defaults in this market in 1999. This caution,
coupled with steadily rising interest rates over the period, put the brakes on
new issuance in the high-yield bond market. Because the senior debt market needs
a healthy capital market for junior debt (which includes high-yield bonds), the
lethargic nature of the high-yield market dragged the senior loan market as
well.
It wasn't until April that pools of private capital were pulled together to
provide the mezzanine financing that cushions the type of transaction you find
in the senior loan market. Consequently, the remainder of the reporting period
was healthy and vibrant in terms of new deal flow for senior loans. Pricing was
higher, competition from other institutional buyers eased, and the market had
slightly less liquidity, enabling us to purchase new senior
7
<PAGE> 9
loans for the trust under significantly better terms than during the early part
of the year.
Finally, steadily rising interest rates since June 1999 have translated into
a higher level of income produced by the portfolio, strengthening the trust's
ability to provide shareholders with an attractive monthly dividend.
For the 12 months through July 31, 2000, the trust had a total return of
3.15 percent based on net asset value. This includes a decrease in net asset
value from $9.85 per share on July 31, 1999, to $9.50 per share on July 31,
2000.
The trust continued to provide shareholders with an attractive level of
current income, as its dividend was increased three times during the fiscal
year, reflecting the steady rise in interest rates during the period. Its
monthly dividend of $0.60 per share translates to a distribution rate of 7.57
percent based on the trust's public offering price on July 25, 2000. Please
refer to the chart and footnotes on page 4 for additional return highlights. As
a result of recent market activity, current performance may vary from the
figures shown. Past performance is no guarantee of future results.
Much of the decline in the trust's net asset value over the period is
associated with defaults that arose among several loans in the portfolio in 1999
and are still being worked out. Historically, nearly every default situation has
resulted in a sudden decline in the perceived value of the defaulted loan,
followed in many cases by a period of gradual recovery, which can take two years
or more. We are confident in the asset recovery process we have in place and the
highly skilled professional staff we have assembled, and we hope for a return to
greater relative stability in the trust's net asset value over the long term.
Q WHAT WERE SOME OF THE
CHALLENGES YOU FACED IN MANAGING THE TRUST DURING THIS PERIOD?
A The alarming rate of defaults that
occurred in the high-yield capital market during the past year continued to
haunt investors and slow the demand for these investments. An increase in
default activity is normally associated with recessionary periods, not times of
strong business activity, so the truly puzzling aspect of the default rate is
that it spiked during a time of positive economic growth. This suggests that
default patterns are less cyclical than one might expect, and that specific
conditions have complicated the credit picture for many senior loan and
high-yield issuers.
For example, the health-care sector was hit hard by falling Medicare
reimbursements from the federal government. The resulting capital drain pushed
five of the seven largest long-term care providers into bankruptcy by the end of
the third fiscal quarter. In 1998 and 1999, we also saw sinking commodities
prices--for example, the price of a barrel of oil reached as low as $12, which
contributed to recent difficulties in the energy sector. These factors, combined
with the liquidity crisis brought about by Russia's default on its debt
obligations in August 1998, created
8
<PAGE> 10
an increasing reluctance to commit capital to the debt markets.
We also had to deal with credit concerns tied to intense competition in the
cinema industry, where overbuilding of new, more luxurious theatres, while
existing theatres were still in service, glutted the market with capacity and
cut into profits. In fact, WestStar Cinemas, one of the trust's non-performing
loans, encountered financial pressures and was sold from the portfolio during
the reporting period.
We will talk later about the increased resources we have deployed to manage
the portfolio. Part of this has been an increased commitment to the still small
but growing secondary market for loans. We have used this to help reduce
exposures and to add new investments to the portfolio at what we think are
attractive values. We have also used the secondary market to lower our exposure
in areas where we believe we should either reduce risk, or where we want to
hedge the outcome from the workout of a difficult investment. Just after the
close of the fiscal year, we sold $16.5 million of the trust's holding in
Iridium, for example, to reduce our exposure to that workout.
Q WHAT SPECIFIC STRATEGIES DID
YOU EMPLOY IN MANAGING THE PORTFOLIO?
A Our chief focus was on increasing
the diversification of the trust's portfolio, as we believe this is one of the
most important defenses against the potential for principal loss due to loan
defaults.
While senior loans do have the inherent strengths of collateral coverage and
senior capital position, we believe increased diversification is a key to our
strategy. A highly concentrated portfolio may be more susceptible to negative
surprises, so we reduced the size of the portfolio's average holding to
approximately $20.6 million, down from $24.5 million at the start of the period.
Also, the percentage of portfolio assets allocated to the trust's top 10
holdings is now below 17 percent and we strictly limited the concentration of
assets in any one issuer. With these changes, we greatly reduced short-term
holdings and the cash position of the portfolio to just 8.0 percent of net
assets as of July 31, 2000, down from 8.5 percent at the beginning of the
reporting period. Of course, there can be no assurance that this strategy will
protect against market decline.
Aside from these strategic moves, we nearly doubled the size of our senior
loan staff, adding depth and breadth of experience. Our team, which has grown to
include 18 analysts with an average of 17 years of experience, has been around
long enough to witness several market cycles, giving them a broad understanding
of the dynamics of the senior loan market. In addition, we increased our value
recovery group, establishing a highly experienced senior loan group in the
business.
9
<PAGE> 11
Q WHAT IS YOUR OUTLOOK FOR THE
MARKET AND THE TRUST IN THE MONTHS AHEAD?
A We anticipate a stable to slightly
rising interest-rate environment, as long as economic growth remains steady but
unspectacular and inflation remains in check. Continued relatively modest demand
for senior loans should help support yields.
Also, we expect the recent discipline within the senior loan market to
continue, sustaining the supply of senior loans with solid credit structures,
prudent loan covenants, and sensible leverage levels. Default rates have
moderated and should remain at reasonable levels more closely aligned with the
market's historical default rate.
We believe the portfolio is well-positioned for the future. The senior loan
asset class should continue to be a defensive investment, an inflation hedge,
and an attractive choice for portfolio diversification.
10
<PAGE> 12
GLOSSARY OF TERMS
A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.
DIVERSIFICATION: A method of portfolio allocation and management aimed at
balancing investment risk and return; a balanced portfolio may combine stocks,
bonds, and cash equivalents.
DIVIDEND: A distribution of earnings. Dividends may be in the form of cash,
stock, or property.
INFLATION: A persistent and measurable rise in the general level of prices.
Inflation is widely measured by the Consumer Price Index, an economic indicator
that measures the change in the cost of purchased goods and services.
LIQUIDITY: The ease with which an investor can buy or sell a security at a
reasonable price.
PORTFOLIO: A collection of securities owned by an individual or an institution
that may include stocks, bonds, and money-market securities.
SECTOR: A group of securities that are similar with respect to industry,
maturity, credit rating, or coupon.
SENIOR LOANS: Loans or other debt securities that are given preference to junior
securities of the borrower. In the event of bankruptcy, payments to holders of
senior loan obligations are given priority over payments to holders of
subordinated debt, as well as shareholders of preferred and common stock. Senior
loans may share priority status with other senior securities of the borrower,
although such status is not a guarantee that monies to which the trust is
entitled will be paid.
YIELD: The annual rate of return on an investment, expressed as a percentage.
11
<PAGE> 13
A FOCUS ON SENIOR LOANS
The Prime Rate Income Trust invests primarily in senior collateralized loans
to corporations, partnerships, and other business entities that operate in a
variety of industries and geographic locations. Senior loans have a number of
characteristics that, in the opinion of the trust's management team, are
important to the integrity of the trust's portfolio. These include:
SENIOR STANDING
With respect to interest payments, senior loans generally have priority over
other classes of loans, preferred stock, or common stocks, though they may have
equal status with other securities of the borrower. This status is not a
guarantee, however, that monies to which the trust is entitled will be paid. If
they are not fully paid, it potentially could have a negative effect on the
trust's net asset value. For more details, please refer to the prospectus.
COLLATERAL BACKING
Senior loans are often secured by collateral that has been pledged by the
borrower under the terms of a loan agreement. Forms of collateral include
trademarks, accounts receivable or inventory, buildings, real estate,
franchises, and common and preferred stock in subsidiaries and affiliates. Under
certain circumstances, collateral might not be entirely sufficient to satisfy
the borrower's obligations in the event of nonpayment of scheduled interest or
principal, and in some instances may be difficult to liquidate on a timely
basis.
Additionally, a decline in the value of the collateral could cause the loan
to become substantially undersecured, and circumstances could arise (such as
bankruptcy of a borrower) that could cause the trust's security interest in the
loan's collateral to be invalidated. This could potentially have a negative
effect on the trust's net asset value.
CREDIT QUALITY
Many senior loans carry provisions designed to protect the lender in certain
circumstances. In addition, the variable-rate nature of the portfolio is
expected to lessen the fluctuation in the trust's net asset value. However, the
net asset value will still be subject to the influence of changes in the real or
perceived credit quality of the loans in which the trust invests. This may
occur, for example, in the event of a sudden or extreme increase in prevailing
interest rates, a default in a loan in which the trust holds an interest, or a
substantial deterioration in the borrower's creditworthiness. From time to time,
the trust's net asset value may be more or less than at the time of the
investment.
SPECIAL CONSIDERATIONS
Under normal market conditions, the trust may invest up to 20 percent of its
assets in senior loans that are not secured by any specific collateral. From
time to time, the trust may hold equity positions as collateral, which may
contribute to volatility in the trust's net asset value. These equity positions
may or may not be traded on stock exchanges and valued daily at the market
price. It is management's opinion that shareholders will generally ultimately
benefit from these holdings. In addition, up to 20 percent of the trust's assets
may be invested in senior loans made to non-U.S. borrowers, although these loans
must be U.S.-dollar denominated.
12
<PAGE> 14
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS
July 31, 2000
THE FOLLOWING PAGES DETAIL THE PORTFOLIO OF INVESTMENTS OF YOUR TRUST AT THE END
OF THE REPORTING PERIOD.(1)
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
VARIABLE RATE** SENIOR LOAN INTERESTS
AEROSPACE/DEFENSE 0.6%
$ 15,337 Aerostructures Corp.,
Term Loan............... NR BB- 12/31/03 to 09/06/04 $ 15,163,163
8,010 Aircraft Braking
Systems, Inc., Term
Loan.................... NR NR 10/15/05 8,010,323
12,849 Decrane Finance Co.,
Term Loan............... B2 B+ 9/30/05 to 12/17/06 12,837,371
3,370 United Defense
Industries, Inc., Term
Loan.................... Ba3 BB- 10/06/05 to 10/06/06 3,351,875
--------------
39,362,732
--------------
AUTOMOTIVE 3.2%
33,955 American Axle and
Manufacturing, Inc.,
Term Loan............... Ba3 BB 04/30/06 33,884,618
56,343 Breed Technologies,
Inc., Term Loan (a)
(b)..................... NR NR 04/27/04 to 04/27/06 25,917,629
3,988 Breed Technologies,
Inc., Revolving Credit
Agreement (a) (b)....... NR NR 04/27/04 1,834,291
3,009 Breed Technologies,
Inc., Debtor in
Possession (b).......... NR NR 09/30/00 3,009,090
4,975 CSK Auto, Inc., Term
Loan.................... Ba2 BB- 10/31/03 4,927,325
14,963 Dura Operating Corp,
Term Loan............... Ba3 BB- 03/31/06 14,974,186
39,771 Federal Mogul Corp.,
Term Loan............... Ba2 BB 03/24/05 39,766,614
12,998 Global Metal
Technologies, Term
Loan.................... NR NR 03/13/05 12,998,375
9,385 Insilco Corp., Term
Loan.................... Ba3 B+ 11/24/05 9,384,801
9,900 Metalforming
Technologies, Inc., Term
Loan.................... NR NR 06/30/06 9,899,956
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
AUTOMOTIVE (CONTINUED)
$ 16,368 Safelite Glass Corp.,
Term Loan (a) (b)....... Caa1 NR 12/23/04 to 12/23/05 $ 8,994,564
35,469 SPX Corp., Term Loan.... Ba2 BB+ 09/30/04 to 09/30/06 35,564,128
5,000 Tenneco Automotive,
Inc., Term Loan......... Ba3 BB 09/30/05 4,917,500
--------------
206,073,077
--------------
BEVERAGE, FOOD AND TOBACCO 1.2%
40,395 Agrilink Foods, Term
Loan.................... B1 B+ 09/30/04 to 09/30/05 40,394,808
5,602 Amerifoods Cos., Inc.,
Term Loan (f)........... NR NR 06/30/01 56
9,250 B & G Food Holdings,
Term Loan............... B1 B+ 03/31/06 9,245,946
9,370 Edwards Baking Corp.,
Term Loan............... NR NR 09/30/03 to 09/30/05 9,372,257
7,350 Leon's Bakery, Inc.,
Term Loan............... NR NR 05/02/05 7,350,232
3,990 Merisant Co., Term
Loan.................... Ba3 BB- 03/31/07 4,008,286
4,975 New World Pasta Co.,
Term Loan............... B1 B 01/28/06 4,975,540
--------------
75,347,125
--------------
BROADCASTING--CABLE 5.5%
13,995 Adelphia Cable
Partnership, Revolving
Credit Agreement........ Ba2 BB+ 12/31/03 13,680,198
9,800 CC VIII Operating LLC,
Term Loan............... Ba3 BB+ 01/29/08 9,804,087
153,000 Charter Communications,
Inc., Term Loan......... Ba3 BB+ 03/17/08 152,148,861
46,431 Chelsea Communications,
Inc., Term Loan......... Ba2 NR 12/31/04 46,438,205
9,880 Encore Investments, Term
Loan.................... NR NR 06/30/04 9,880,000
3,000 Encore Investments,
Revolving Credit
Agreement............... NR NR 06/30/04 3,000,034
6,486 Fairchild Holding Corp.,
Term Loan............... Ba3 BB- 04/30/06 6,485,850
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
BROADCASTING--CABLE (CONTINUED)
$ 43,833 Falcon Communications,
Inc., Term Loan......... Ba3 BB 12/31/07 $ 43,599,662
14,907 Frontiervision Operating
Partners, L.P.,
Term Loan............... Ba2 BB 03/31/06 14,863,142
19,861 Garden State
Cablevision, L.P.,
Revolving Credit
Agreement............... NR NR 06/30/05 19,860,618
35,000 Insight Kentucky
Partners, Term Loan..... Ba3 BB+ 12/31/07 35,018,226
--------------
354,778,883
--------------
BROADCASTING--DIVERSIFIED 0.4%
5,000 AMFM, Inc., Term Loan... Ba1 NR 11/19/01 4,993,750
14,925 Muzak Audio
Communications, Inc.,
Term Loan............... B1 B+ 12/31/06 14,806,839
4,550 White Knight
Broadcasting, Inc., Term
Loan.................... NR NR 06/30/07 4,549,982
--------------
24,350,571
--------------
BROADCASTING--TELEVISION 2.0%
19,840 Black Entertainment
Television, Inc., Term
Loan.................... NR NR 06/30/06 19,616,800
9,442 LIN Television Corp.,
Term Loan............... Ba3 BB- 03/31/07 9,419,940
7,960 Quorum Broadcasting,
Inc., Term Loan......... NR NR 09/30/07 7,959,965
58,300 Sinclair Broadcast
Group, Inc., Term
Loan.................... Ba2 BB- 09/15/05 58,289,019
31,760 TLMD Acquisition Co.,
Term Loan............... NR NR 03/31/07 31,754,028
--------------
127,039,752
--------------
BUILDINGS & REAL ESTATE 1.4%
19,717 Builders Firstsource,
Term Loan............... NR BB- 12/30/05 19,713,321
14,678 Crescent Real Estate,
Term Loan............... NR NR 02/01/04 14,641,040
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
BUILDINGS & REAL ESTATE (CONTINUED)
$ 14,937 Prison Realty Trust,
Inc., Term Loan......... B3 B 12/31/02 $ 14,622,174
41,667 Walter Industries, Inc.,
Term Loan............... NR NR 10/15/03 41,660,186
--------------
90,636,721
--------------
CHEMICAL, PLASTICS & RUBBER 3.7%
11,057 Cedar Chemicals Corp.,
Term Loan............... NR NR 10/30/03 11,056,957
9,843 Foamex, L.P., Term
Loan.................... B3 B 06/30/05 to 06/30/06 9,667,325
5,276 Foamex, L.P., Revolving
Credit Agreement........ B3 B 06/12/03 5,275,902
6,497 GenTek, Inc., Term
Loan.................... Ba3 BB 04/30/07 6,496,841
34,980 Huntsman Group Holdings,
Term Loan............... Ba2 NR 12/31/02 to 12/31/05 34,900,230
4,667 Huntsman Group
Holdings, Revolving
Credit Agreement........ Ba2 NR 12/31/02 4,667,067
34,650 Huntsman ICI Chemical
LLC, Term Loan.......... Ba3 BB 06/30/07 to 06/30/08 34,911,850
5,298 Jet Plastica Industries,
Inc., Term Loan......... NR NR 12/31/02 to 12/31/04 5,298,000
300 Jet Plastica Industries,
Inc., Revolving Credit
Agreement............... NR NR 12/31/02 300,048
54,636 Lyondell Petrochemical
Corp., Term Loan........ Ba3 NR 06/30/05 to 05/17/06 55,979,225
14,925 MetoKote Corp., Term
Loan.................... NR NR 11/02/05 14,925,969
10,000 Nutrasweet Co., Term
Loan.................... B1 NR 05/25/07 to 05/25/09 9,984,567
9,700 Pioneer Americas
Acquisition Corp., Term
Loan.................... NR B 12/31/06 9,678,058
4,988 Sybron Corp., Term
Loan.................... NR NR 03/28/07 4,972,039
10,427 Texas Petrochemicals
Corp., Term Loan........ B1 NR 06/30/01 to 06/30/04 10,428,042
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
CHEMICAL, PLASTICS & RUBBER (CONTINUED)
$ 267 Texas Petrochemicals
Corp., Revolving Credit
Agreement............... B1 NR 12/31/02 $ 267,112
6,266 TruSeal Technologies,
Inc., Term Loan......... NR NR 06/30/04 6,266,111
8,020 Vinings Industries,
Inc., Term Loan......... NR NR 03/31/05 8,020,812
4,531 West American Rubber,
Term Loan............... NR NR 06/30/05 3,171,700
--------------
236,267,855
--------------
CONSTRUCTION MATERIALS 1.2%
4,984 BSI Holdings, Term
Loan.................... NR NR 09/30/05 4,984,472
14,963 Encompass Service Co.,
Term Loan............... Ba3 BB 05/10/07 14,887,996
7,253 Flextek Components,
Inc., Term Loan (a)..... NR NR 08/31/03 3,989,029
2,993 Formica Corp., Term
Loan.................... B1 B+ 04/30/06 2,996,938
6,010 Magnatrax Corp., Term
Loan.................... NR NR 11/15/05 6,009,514
11,970 Mueller Group, Inc.,
Term Loan............... B1 B+ 08/16/06 to 08/16/07 11,965,565
14,210 Peebles, Inc., Term
Loan.................... NR NR 06/09/02 14,210,858
6,451 Reliant Building
Products, Inc., Term
Loan (a) (b)............ NR NR 03/31/04 4,704,330
1,688 Reliant Building
Products, Inc., Debtor
in Possession (a) (b)... NR NR 01/15/01 1,679,510
14,625 Werner Holding Co., Term
Loan.................... Ba3 B+ 11/30/04 to 11/30/05 14,553,201
--------------
79,981,413
--------------
CONTAINERS, PACKAGING & GLASS 2.5%
8,425 ACX Technologies, Term
Loan.................... NR NR 08/01/00 8,326,006
14,143 Dr. Pepper/Seven Up Co.,
Inc, Term Loan.......... NR NR 10/07/07 14,149,999
7,678 Fleming Packaging Corp.,
Term Loan............... NR NR 08/30/04 7,679,021
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
CONTAINERS, PACKAGING & GLASS (CONTINUED)
$ 14,737 Graham Packaging Co.,
Term Loan............... B1 B+ 01/31/06 to 01/31/07 $ 14,713,210
3,000 Huntsman Packaging
Corp., Term Loan........ B1 BB- 05/31/08 3,013,275
20,428 IPC, Inc., Term Loan.... NR B+ 10/02/04 19,925,602
7,444 Mediapak Corp., Term
Loan.................... NR NR 12/31/05 to 12/31/06 7,444,250
4,911 Packaging Dynamics, Term
Loan.................... NR NR 11/20/05 4,909,652
73,334 Stone Container Corp.,
Term Loan............... Ba3 B+ 10/01/03 73,562,427
7,792 Stronghaven, Inc., Term
Loan.................... NR NR 05/15/04 7,402,732
--------------
161,126,174
--------------
DIVERSIFIED MANUFACTURING 2.0%
3,186 Advanced Accessory
Systems, LLC, Term
Loan.................... B1 B+ 10/30/04 3,185,804
4,987 Blount Inc., Term
Loan.................... B1 B+ 06/30/06 5,015,492
28,728 Chart Industries, Inc.,
Term Loan............... NR NR 03/31/06 28,728,543
7,568 CII Carbon, LLC, Term
Loan.................... NR NR 06/25/08 7,517,832
14,043 Desa International, Term
Loan.................... B2 B+ 11/26/03 to 12/26/04 14,044,439
18,197 Neenah Foundry Co., Term
Loan.................... B1 BB- 09/30/05 18,095,329
25,647 Spalding Holdings, Inc.,
Term Loan............... B3 B- 09/30/03 to 03/30/06 25,633,091
8,820 Spalding Holdings, Inc.,
Revolving Credit
Agreement............... B3 B- 09/30/03 8,819,040
10,963 UCAR International,
Inc., Term Loan......... Ba3 BB- 12/31/07 10,959,913
3,471 United Fixtures Co.,
Term Loan............... NR NR 12/15/02 3,470,928
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
DIVERSIFIED MANUFACTURING (CONTINUED)
$ 200 United Fixtures Co.,
Revolving Credit
Agreement............... NR NR 12/31/04 $ 200,002
5,517 Western Industries,
Inc., Term Loan......... NR NR 06/23/06 5,517,399
--------------
131,187,812
--------------
ECOLOGICAL 3.5%
165,000 Allied Waste North
America, Inc., Term
Loan.................... Ba3 BB 07/23/06 to 07/23/07 159,000,600
6,000 Casella Waste System,
Term Loan............... B1 BB- 12/14/06 5,999,997
9,898 IT Group, Inc., Term
Loan.................... B1 BB 06/11/06 9,787,521
70,735 Safety-Kleen Corp., Term
Loan (a) (b)............ NR NR 04/03/05 to 04/03/06 48,099,732
454 Safety-Kleen Corp.,
Revolving Credit
Agreement (a) (b)....... NR NR 06/12/00 308,851
4,682 Stericycle, Inc., Term
Loan.................... B1 BB- 11/10/06 4,703,089
--------------
227,899,790
--------------
EDUCATION & CHILD CARE 0.2%
8,514 Kindercare Learning
Centers, Inc., Term
Loan.................... Ba3 B+ 03/21/06 8,486,066
4,781 La Petite Academy, Inc.,
Term Loan............... B2 B 05/11/05 4,781,365
--------------
13,267,431
--------------
ELECTRONICS 3.5%
31,417 Amphenol Corp., Term
Loan.................... Ba2 BB 05/19/04 to 05/19/06 31,126,864
2,858 Caribiner International,
Term Loan............... NR NR 09/30/03 2,657,502
9,899 Chatham Technologies
Acquisition, Inc., Term
Loan.................... NR NR 08/18/03 to 08/18/05 9,602,016
6,858 Communications
Instruments, Inc., Term
Loan.................... Ba3 BB- 03/15/04 6,862,222
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
ELECTRONICS (CONTINUED)
$ 22,869 DecisionOne Corp., Term
Loan.................... NR NR 04/18/05 $ 22,866,429
9,914 EG&G Technical Services,
Inc., Term Loan......... B1 NR 08/20/07 9,913,772
5,336 Fisher Scientific
International, Inc.,
Term Loan............... Ba3 B+ 01/21/05 to 01/21/06 5,348,081
22,367 General Cable Corp.,
Term Loan............... NR NR 06/30/07 22,283,311
4,435 Rowe International,
Inc., Term Loan......... NR NR 12/31/03 3,947,538
8,017 Sarcom, Inc., Term
Loan.................... NR NR 12/31/02 7,615,972
50,000 Semiconductor Components
Industries, Term Loan... NR NR 08/04/06 to 08/04/07 50,393,750
7,387 Stoneridge, Inc., Term
Loan.................... Ba3 BB 12/31/05 7,389,638
9,844 Stratus Computer, Inc.,
Term Loan............... NR NR 02/26/05 9,856,055
22,002 Superior Telecom Corp.,
Term Loan............... Ba3 B+ 11/27/05 21,935,119
12,000 Viasystems, Inc., Term
Loan.................... B1 BB- 03/31/07 11,994,372
4,839 Wilson Greatbatch, Inc.,
Term Loan............... NR NR 07/30/04 4,838,209
--------------
228,630,850
--------------
ENTERTAINMENT/LEISURE 3.7%
13,176 American Skiing Comp.,
Term Loan............... NR NR 05/31/06 13,176,471
24,229 AMF Group, Inc., Term
Loan.................... B2 CCC+ 03/31/03 to 03/31/04 24,217,625
7,433 Bally Total Fitness
Corp., Term Loan........ B1 B+ 11/10/04 7,434,020
24,776 Fitness Holdings
Worldwide, Term Loan.... NR B+ 11/02/06 to 11/02/07 24,547,440
7,760 KSL Recreation Group,
Inc., Term Loan......... Ba3 B+ 04/30/04 to 04/30/06 7,685,636
</TABLE>
See Notes to Financial Statements
20
<PAGE> 22
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
ENTERTAINMENT/LEISURE (CONTINUED)
$ 1,255 KSL Recreation Group,
Inc., Revolving Credit
Agreement............... Ba3 B+ 04/30/04 $ 1,254,549
54,000 Metro-Goldwyn-Mayer,
Inc., Term Loan......... Baa3 BBB- 03/31/05 to 03/31/06 53,301,258
10,000 Playcore Wisconsin, Term
Loan.................... NR NR 07/01/07 9,959,512
19,933 SFX Entertainment, Inc.,
Term Loan............... B1 NR 06/30/06 19,953,267
6,700 Sportcraft, Ltd., Term
Loan.................... NR NR 12/31/02 6,698,702
3,185 True Temper, Term Loan.. B1 BB- 09/30/05 3,184,045
4,892 United Artists Theatre,
Inc., Term Loan (h)..... Caa3 D 04/21/06 to 04/21/07 4,108,860
31,184 Viacom, Inc., Term
Loan.................... Baa1 BBB+ 04/01/02 to 04/02/02 30,833,185
923 Viacom, Inc., Revolving
Credit Agreement........ Baa1 BBB+ 04/01/02 923,179
15,000 WestStar Cinemas, Inc.,
Term Loan (a) (b)....... NR NR 09/30/05 9,900,000
21,760 WFI Group, Inc., Term
Loan.................... Baa3 NR 07/14/04 21,758,221
--------------
238,935,970
--------------
FARMING & AGRICULTURE 0.2%
10,835 Doane Pet Care Cos.,
Term Loan............... B1 B+ 12/31/05 to 12/31/06 10,888,348
--------------
FINANCE 6.4%
20,826 Alliance Data Systems,
Inc., Term Loan......... NR NR 07/25/03 20,827,057
3,286 Alliance Data Systems,
Inc., Revolving Credit
Agreement............... NR NR 07/25/03 3,285,663
29,220 Bridge Information
Systems, Inc., Term
Loan.................... NR NR 05/29/05 29,224,748
24,500 Mafco Finance Corp.,
Term Loan............... NR NR 08/31/00 24,501,012
</TABLE>
See Notes to Financial Statements
21
<PAGE> 23
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
FINANCE (CONTINUED)
$ 5,045 Mafco Finance Corp.,
Revolving Credit
Agreement............... NR NR 08/31/00 $ 5,044,944
26,500 Metris Cos., Inc., Term
Loan.................... Ba3 NR 06/30/03 26,458,377
37,790 Outsourcing Solutions,
Term Loan............... B2 BB- 12/01/05 to 06/01/06 37,725,032
65,000 Paul G. Allen, Term
Loan.................... NR NR 06/10/03 64,944,851
69,658 Rent-A-Center, Inc.,
Term Loan............... Ba3 BB- 01/31/06 to 01/31/07 69,309,732
34,000 Sovereign Bancorp, Term
Loan.................... Ba3 NR 11/14/03 34,127,500
97,629 Ventas Realty Ltd.,
Inc., Term Loan......... NR NR 12/31/07 94,700,773
--------------
410,149,689
--------------
GROCERY 1.3%
4,938 Big V Supermarkets,
Inc., Term Loan......... NR B+ 08/10/03 4,884,012
15,771 Eagle Family Foods,
Inc., Term Loan......... B1 B 12/31/05 15,779,938
15,149 Fleming Cos., Inc., Term
Loan.................... Ba3 BB 07/25/04 14,467,393
29,559 Fleming Cos., Inc.,
Revolving Credit
Agreement............... Ba3 BB 07/25/03 28,229,195
19,697 The Pantry, Inc., Term
Loan.................... B1 BB- 01/31/06 19,697,002
--------------
83,057,540
--------------
HEALTH CARE & BEAUTY AIDS 1.1%
14,789 Mary Kay, Inc., Term
Loan.................... NR NR 03/06/04 14,798,575
1,495 Mary Kay, Inc.,
Revolving Credit
Agreement............... NR NR 03/06/04 1,495,146
24,251 Playtex Products, Inc.,
Term Loan............... Ba2 BB 09/15/03 24,013,785
29,213 Revlon Consumer Products
Corp., Term Loan........ B3 B 05/30/02 to 05/31/02 29,213,566
--------------
69,521,072
--------------
</TABLE>
See Notes to Financial Statements
22
<PAGE> 24
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
HEALTHCARE 7.2%
$ 4,969 Caremark Rx, Inc., Term
Loan.................... B1 BB- 05/31/01 $ 4,968,803
2,427 Caremark Rx, Inc.,
Revolving Credit
Agreement............... B1 BB- 05/31/01 2,426,703
3,119 Charter Behavioral,
Revolving Credit
Agreement (b)........... NR NR 06/17/02 3,056,413
22,000 Columbia/HCA Healthcare
Corp., Term Loan........ Ba2 BB+ 09/13/01 21,999,748
9,897 Columbia Healthone,
Inc., Term Loan......... Ba2 BB+ 06/30/05 9,867,683
92,740 Community Health
Systems, Inc., Term
Loan.................... NR NR 12/31/03 to 12/31/05 92,275,851
29,887 Dade Behring, Inc., Term
Loan.................... Ba3 B+ 06/30/06 to 06/30/07 29,362,037
25,357 Genesis Healthcare
Ventures, Inc., Term
Loan (b)................ Caa2 NR 09/30/04 to 06/01/05 20,032,381
147,375 Integrated Health
Services, Inc.,
Term Loan (a) (b)....... Caa2 NR 09/15/03 to 09/15/05 95,697,952
43,141 Magellan Health
Services, Inc., Term
Loan.................... B2 B+ 02/12/05 43,140,762
23,497 Mariner Post-Acute
Network, Inc., Term Loan
(a) (b)................. Caa2 NR 03/31/05 to 03/31/06 10,338,850
17,223 Multicare Companies,
Inc., Term Loan (a)
(b)..................... Caa3 NR 09/30/04 to 06/01/05 12,056,228
27,360 Quest Diagnostics, Inc.,
Term Loan............... Ba3 BB 08/16/06 to 08/16/07 27,451,393
46,322 Sun Healthcare Group,
Inc., Term Loan (a)
(b)..................... NR NR 11/12/04 to 11/12/05 33,815,301
</TABLE>
See Notes to Financial Statements
23
<PAGE> 25
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
HEALTHCARE (CONTINUED)
$ 9,888 Unilab Corp., Term
Loan.................... B1 B+ 11/23/06 $ 9,890,183
55,365 Vencor, Inc., Term Loan
(a) (b)................. NR NR 01/15/05 48,167,118
--------------
464,547,406
--------------
HOME & OFFICE FURNISHINGS, HOUSEWARES
& DURABLE CONSUMER PRODUCTS 1.6%
45,215 Dal-Tile Group, Inc.,
Term Loan............... NR NR 12/31/02 to 12/31/03 44,499,737
2,665 Dal-Tile Group, Inc.,
Revolving Credit
Agreement............... NR NR 12/31/02 2,664,846
1,786 Decorate Today.Com
(g)..................... NR NR 12/31/05 1,786,179
4,975 Holmes Products Corp.,
Term Loan............... B1 B+ 02/05/07 4,962,301
23,110 Imperial Home Decor
Group, Inc., Term Loan
(a) (b)................. NR NR 03/12/04 to 03/13/06 13,403,635
7,714 Imperial Home Decor
Group, Inc., Revolving
Credit Agreement (a)
(b)..................... NR NR 03/12/04 4,473,061
6,875 Medical Arts Press,
Inc., Term Loan......... NR NR 01/13/06 6,775,118
22,640 World Kitchen, Inc.,
Term Loan............... B1 BB- 10/09/06 to 04/09/07 22,630,196
--------------
101,195,073
--------------
HOTELS, MOTELS, & GAMING 3.8%
41,000 Aladdin Gaming, LLC,
Term Loan............... B2 NR 02/26/08 40,999,980
59,840 Felcor Suite Hotels,
Term Loan............... Ba2 BB 03/31/04 59,590,647
5,985 Isle of Capri Casino,
Inc., Term Loan......... Ba2 BB- 03/02/06 to 03/02/07 6,018,133
5,000 Jazz Casino Co., Term
Loan.................... NR NR 01/06/06 5,002,603
9,099 Las Vegas Sands, Inc.,
Term Loan............... NR B+ 11/30/03 9,099,765
</TABLE>
See Notes to Financial Statements
24
<PAGE> 26
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
HOTELS, MOTELS, & GAMING (CONTINUED)
$ 754 Las Vegas Sands, Inc.,
Revolving Credit
Agreement............... NR B+ 11/30/03 $ 754,490
25,000 Meditrust Corp., Term
Loan.................... NR NR 07/17/01 25,003,063
1,375 Starwood Hotels and
Resorts, Inc.,
Term Loan............... Ba1 NR 02/23/03 1,380,156
100,000 Wyndham International,
Inc., Term Loan......... NR NR 06/30/06 97,525,000
--------------
245,373,837
--------------
INSURANCE 0.6%
17,150 BRW Acquisition, Inc.,
Term Loan............... NR NR 07/10/06 to 07/10/07 17,148,429
21,250 Willis Corroon, Inc.,
Term Loan............... Ba2 NR 11/19/05 to 11/19/07 21,214,576
--------------
38,363,005
--------------
MACHINERY 0.7%
9,500 Alliance Laundry
Systems, LLC,
Term Loan............... B1 B+ 06/30/05 9,452,500
7,323 Gleason Corp., Term
Loan.................... NR NR 02/18/08 7,305,005
15,000 Ocean Rig (Norway), Term
Loan.................... NR NR 06/01/08 14,999,312
15,000 United Rentals, Term
Loan.................... Ba2 BB+ 06/30/09 14,821,875
--------------
46,578,692
--------------
MEDICAL PRODUCTS & SUPPLIES 3.0%
30,000 Alliance Imaging, Inc.,
Term Loan............... B1 NR 11/02/07 to 11/02/08 29,775,000
11,286 ConMed Corp., Term
Loan.................... B1 BB- 12/30/04 to 06/30/05 11,291,584
27,276 Kinetic Concepts, Inc.,
Term Loan............... Ba3 B 12/31/04 to 12/31/05 27,270,478
6,714 Medical Specialties
Group, Inc.,
Term Loan............... NR NR 06/30/01 to 06/30/04 6,579,364
</TABLE>
See Notes to Financial Statements
25
<PAGE> 27
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
MEDICAL PRODUCTS & SUPPLIES (CONTINUED)
$ 10,816 Mediq/PRN Life Support
Services, Inc.,
Term Loan............... NR NR 06/30/06 $ 8,328,203
38,925 National Medical Care,
Inc., Term Loan......... Ba1 BB 09/30/03 38,922,659
3,399 Stryker Corp.,
Term Loan............... Ba2 BB 12/04/05 to 12/04/06 3,415,282
70,222 Total Renal Care
Holdings, Inc., Term
Loan.................... B1 NR 03/31/08 70,225,138
--------------
195,807,708
--------------
MINING, STEEL, IRON, & NON-PRECIOUS METALS 1.4%
19,950 Carmeuse Lime, Inc.,
Term Loan............... NR NR 03/31/06 19,950,000
8,284 Earle M. Jorgensen, Term
Loan.................... B1 NR 03/31/04 8,208,310
8,985 Fairmont Minerals, Ltd.,
Term Loan............... NR NR 02/25/05 8,985,512
52,193 Ispat Inland,
Term Loan............... Ba3 BB 07/16/05 to 07/16/06 51,955,096
--------------
89,098,918
--------------
NATURAL RESOURCES--COAL 0.0%
4,712 Centennial Resources,
Inc., Term Loan (a)
(b)..................... NR NR 03/31/02 to 03/31/04 47
781 Centennial Resources,
Inc., Debtor in
Possession (a) (b)...... NR NR 10/01/00 101,504
--------------
101,551
--------------
PAPER & FOREST PRODUCTS 0.8%
2,622 Bear Island Paper Co.,
LLC, Term Loan.......... B1 B+ 12/31/05 2,623,036
20,163 Crown Paper Co., Term
Loan (b)................ Caa1 NR 08/23/02 20,163,433
6,181 Crown Paper Co.,
Revolving Credit
Agreement (b)........... Caa1 NR 08/23/02 6,181,151
7,819 Crown Paper Co., Debtor
in Possession (b)....... Caa1 NR 09/14/02 7,789,442
2,880 CST/Office Products,
Inc., Term Loan......... NR NR 12/31/01 to 01/31/02 633,538
</TABLE>
See Notes to Financial Statements
26
<PAGE> 28
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
PAPER & FOREST PRODUCTS (CONTINUED)
$ 4,963 Havco Wood Products,
Inc., Term Loan......... NR NR 06/30/06 $ 4,961,212
8,745 Pacifica Papers, Inc.,
Term Loan............... Ba2 BB 03/12/06 8,788,725
--------------
51,140,537
--------------
PERSONAL & MISCELLANEOUS SERVICES 1.0%
9,172 Accessory Network Group,
Term Loan............... NR NR 07/31/05 9,172,547
7,797 Arena Brands, Inc., Term
Loan.................... NR NR 06/01/02 7,796,952
1,297 Arena Brands, Inc.,
Revolving Credit
Agreement............... NR NR 06/01/02 1,297,298
4,022 Boyds Collection, Ltd.,
Term Loan............... Ba1 B+ 04/21/06 3,994,854
6,238 Burns International,
Revolving Credit
Agreement............... Ba3 BB- 03/31/02 6,238,488
13,500 DIMAC Corp.,
Term Loan (b)........... Caa1 NR 06/30/06 to 12/30/06 10,964,050
6,750 Mitel Corp.,
Term Loan............... NR NR 12/26/03 6,749,070
9,525 Telespectrum Worldwide,
Inc., Term Loan......... NR NR 12/31/01 to 12/31/03 9,524,221
9,950 Weight Watchers
International,
Term Loan............... Ba2 B+ 09/30/06 9,949,354
--------------
65,686,834
--------------
PHARMACEUTICALS 0.4%
6,983 Bergen Brunswig Corp.,
Term Loan............... NR BB 03/31/06 6,944,372
16,590 Endo Pharmaceuticals,
Inc., Term Loan......... NR NR 06/30/04 16,592,522
--------------
23,536,894
--------------
</TABLE>
See Notes to Financial Statements
27
<PAGE> 29
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
PRINTING & PUBLISHING 3.4%
$ 14,722 Advanstar
Communications, Term
Loan.................... Ba3 B+ 04/30/05 $ 14,722,321
12,250 American Media
Operations, Inc., Term
Loan.................... Ba3 B+ 04/01/06 to 04/01/07 12,264,800
23,968 Big Flower Press, Term
Loan.................... B1 NR 12/06/05 to 12/06/08 24,039,871
4,898 Check Printers, Inc.,
Term Loan............... NR NR 06/30/05 4,897,963
67,932 Journal Register Co.,
Term Loan............... Ba1 BB+ 09/30/06 67,337,595
3,990 Mail-Well Corp., Term
Loan.................... Ba2 BB 02/22/07 4,008,548
29,425 Morris Communications,
Inc., Term Loan......... NR NR 03/31/04 to 06/30/05 29,425,000
17,100 PRIMEDIA, Inc., Term
Loan.................... Ba3 BB- 06/30/04 17,100,000
5,000 Trader.com,
Term Loan............... NR NR 12/31/06 to 12/31/07 4,950,000
6,104 TWP Capital Corp., Term
Loan.................... NR NR 10/01/04 6,103,991
14,313 Von Hoffman Press, Inc.,
Term Loan............... B1 B+ 05/30/03 to 05/30/05 14,180,721
3,168 Von Hoffman Press, Inc.,
Revolving Credit
Agreement............... B1 B+ 05/30/03 3,167,777
9,982 Ziff-Davis Media, Inc.,
Term Loan............... Ba3 B+ 03/31/07 9,996,201
9,775 21st Century Newspaper,
Inc., Term Loan......... NR NR 09/15/05 9,775,559
--------------
221,970,347
--------------
RESTAURANTS & FOOD SERVICE 1.7%
8,289 Applebee's
International, Inc.,
Term Loan............... NR NR 03/31/06 8,288,791
2,443 Carvel Corp.,
Term Loan............... NR NR 06/30/01 2,442,656
33,755 Domino's Pizza, Term
Loan.................... B1 B+ 12/12/04 to 12/21/07 33,876,301
</TABLE>
See Notes to Financial Statements
28
<PAGE> 30
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
RESTAURANTS & FOOD SERVICE (CONTINUED)
$ 41,403 S.C. International
Services, Inc.,
Term Loan............... Ba3 NR 08/28/02 $ 41,397,818
17,273 Shoney's, Inc.,
Term Loan............... B2 NR 04/30/02 17,267,724
7,028 Volume Services America,
Term Loan............... B1 B+ 12/01/06 7,029,168
--------------
110,302,458
--------------
RETAIL--OFFICE PRODUCTS 0.8%
6,930 Identity Group, Inc.,
Term Loan............... NR NR 05/11/07 6,938,839
46,220 U.S. Office Products
Co., Term Loan.......... Caa1 CCC+ 06/09/06 43,909,024
--------------
50,847,863
--------------
RETAIL--OIL & GAS 0.4%
6,000 Kwik Trip, Term Loan.... NR NR 07/27/07 5,985,000
5,000 Port Arthur Coker Co.,
Term Loan............... Ba3 NR 07/15/07 4,743,876
11,756 TravelCenters of
America, Inc., Term
Loan.................... Ba2 BB- 03/31/05 11,792,988
--------------
22,521,864
--------------
RETAIL--SPECIALTY 0.7%
16,377 Hollywood Entertainment
Corp., Revolving Credit
Agreement............... B1 B+ 09/05/02 16,376,667
19,000 Jostens, Inc.,
Term Loan............... B1 BB- 05/31/08 19,061,351
4,990 Mitchells Management,
Term Loan............... NR NR 12/31/07 4,939,133
7,660 Murray's Discount Auto
Stores, Inc.,
Term Loan............... NR NR 06/30/03 7,659,522
--------------
48,036,673
--------------
RETAIL--STORES 1.0%
11,408 Advance Stores Co., Term
Loan.................... B1 NR 04/15/06 11,408,000
3,646 Duane Reade, Inc., Term
Loan.................... B1 B+ 02/15/04 3,645,405
5,779 Kirkland's Holdings,
Term Loan............... NR NR 06/30/02 5,779,417
</TABLE>
See Notes to Financial Statements
29
<PAGE> 31
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
RETAIL--STORES (CONTINUED)
$ 12,067 Nebraska Book Co., Inc.,
Term Loan............... B1 B+ 03/31/06 $ 12,068,275
10,111 Payless Cashways, Inc.,
Term Loan............... NR NR 11/30/02 10,112,811
20,000 Rite Aid Corp., Term
Loan.................... Ba3 B 08/01/02 19,900,005
4,766 Vitamin Shoppe
Industries, Inc., Term
Loan.................... NR NR 05/15/04 4,765,071
--------------
67,678,984
--------------
TELECOMMUNICATIONS--LEC'S 2.0%
15,000 Alaska Communication,
Inc., Term Loan......... B1 BB 11/14/07 to 05/14/08 15,009,293
13,000 Crown Castle Operating,
Term Loan............... Ba3 BB- 03/15/08 13,039,468
14,941 Dynatech LLC, Term
Loan.................... NR B+ 09/30/07 14,920,632
7,000 McLeod USA, Inc., Term
Loan.................... Ba2 BB- 05/31/08 7,015,624
19,572 Orius Corp., Term
Loan.................... NR B+ 12/14/06 19,573,543
50,000 Teligent, Inc.,
Term Loan............... B3 B- 06/30/06 49,990,754
12,500 Winstar Communications,
Inc., Term Loan......... B2 B+ 09/30/07 12,191,413
--------------
131,740,727
--------------
TELECOMMUNICATIONS--LONG DISTANCE 0.5%
30,000 Pacific Crossing Ltd.,
Term Loan............... NR NR 07/28/06 30,000,000
--------------
TELECOMMUNICATIONS--PAGING 0.6%
9,240 Arch Paging, Inc., Term
Loan.................... B2 B 12/31/02 9,235,654
11,197 Paging Network, Inc.,
Revolving Credit
Agreement............... B2 CC 12/31/04 10,355,470
</TABLE>
See Notes to Financial Statements
30
<PAGE> 32
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
TELECOMMUNICATIONS--PAGING (CONTINUED)
$ 9,460 Teletouch
Communications, Inc.,
Term Loan............... NR NR 11/30/05 $ 9,460,320
10,973 TSR Wireless LLC, Term
Loan.................... NR NR 06/30/05 10,972,500
--------------
40,023,944
--------------
TELECOMMUNICATIONS--WIRELESS 8.5%
28,000 American Cellular
Wireless, Inc.,
Term Loan............... Ba3 B+ 03/31/08 to 03/31/09 28,002,184
30,000 BCP SP Ltd.,
Term Loan............... NR NR 03/31/02 to 03/31/05 29,747,525
1,902 Centennial Cellular,
Inc., Term Loan......... B1 B+ 11/30/07 1,907,190
10,000 Cook Inlet/Voice Stream
Operating Co. LLC, Term
Loan.................... B2 B 12/31/08 9,975,000
14,963 Dobson Operating Co.,
Term Loan............... NR NR 03/31/08 14,962,500
63,813 Iridium Operating LLC,
Term Loan (a) (b)....... NR D 12/29/00 14,147,595
73,500 Nextel Finance Co., Term
Loan.................... Ba2 BB- 06/30/08 to 03/31/09 73,731,933
10,000 Nextel Finance Co., Term
Loan (Argentina)........ NR NR 03/31/03 10,001,498
42,500 Nextel Partners Co.,
Term Loan............... B2 B- 11/01/07 to 07/29/08 42,599,865
4,785 Powertel PCS, Inc., Term
Loan.................... NR NR 03/31/06 4,786,105
10,785 Powertel PCS, Inc.,
Revolving Credit
Agreement............... NR NR 03/31/06 10,777,811
30,000 Rural Cellular Corp.,
Term Loan............... B1 B+ 10/03/08 to 04/03/09 29,966,250
33,629 Sygnet Wireless, Inc.,
Term Loan............... B3 NR 03/23/07 to 12/23/07 33,659,510
17,000 Telecorp PCS, Inc., Term
Loan.................... B2 NR 12/05/07 16,982,286
40,000 Tritel Holding Corp.,
Term Loan............... B2 NR 12/31/07 40,160,000
</TABLE>
See Notes to Financial Statements
31
<PAGE> 33
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
TELECOMMUNICATIONS--WIRELESS (CONTINUED)
$ 42,000 Triton PCS, Inc., Term
Loan.................... B1 B 05/04/07 $ 42,000,634
140,250 VoiceStream Wireless
Corp., Term Loan........ B1 B+ 02/25/08 to 06/30/09 139,474,135
6,000 Western Wireless Corp.,
Term Loan............... Ba2 BB 09/30/08 6,025,500
--------------
548,907,521
--------------
TEXTILES & LEATHER 1.5%
10,983 American Marketing
Industries, Inc., Term
Loan.................... NR NR 11/30/02 10,980,459
8,976 Galey & Lord, Inc., Term
Loan.................... Caa2 BB- 04/02/05 to 04/01/06 7,716,034
2,540 Galey & Lord, Inc.,
Revolving Credit
Agreement............... Caa2 BB- 03/27/04 2,184,377
7,402 GFSI, Inc., Term Loan... Ba3 NR 03/31/04 7,329,030
18,955 Glenoit Corp.,
Term Loan (h)........... Caa1 D 12/31/03 to 06/30/04 16,680,107
9,600 Humphrey's, Inc., Term
Loan.................... NR NR 01/15/03 6,814,136
10,081 Jo-Ann Fabrics Corp.,
Term Loan............... Ba3 BB- 06/30/05 10,031,069
12,910 Norcorp, Inc., Term
Loan.................... NR NR 03/31/06 to 11/30/06 12,909,927
13,755 Norcross Safety Prod.,
Term Loan............... NR NR 10/02/05 13,746,273
6,696 William Carter Co., Term
Loan.................... Ba3 BB- 10/30/03 6,693,208
--------------
95,084,620
--------------
TRANSPORTATION--CARGO 1.4%
22,555 Atlas Freighter Leasing,
Inc., Term Loan......... NR NR 04/20/05 to 04/20/06 22,471,384
27,848 Evergreen International
Aviation, Inc., Term
Loan.................... NR NR 05/31/02 to 05/31/03 27,604,283
6,419 Gemini Leasing, Inc.,
Term Loan............... B1 NR 08/12/05 6,419,853
14,925 North American Van
Lines, Inc., Term
Loan.................... B1 B+ 11/18/07 14,925,000
</TABLE>
See Notes to Financial Statements
32
<PAGE> 34
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
TRANSPORTATION--CARGO (CONTINUED)
$ 8,018 OmniTrax Railroads, LLC,
Term Loan............... NR NR 05/14/05 $ 8,011,951
8,955 RailAmerica, Inc., Term
Loan.................... Ba3 BB- 12/31/06 9,004,253
--------------
88,436,724
--------------
TRANSPORTATION--PERSONAL 2.1%
46,936 Avis Rent A Car, Inc.,
Term Loan............... Ba3 BB+ 06/30/06 to 06/30/07 46,977,216
41,624 Continental Airlines,
Inc., Term Loan......... Ba1 BB 07/31/02 to 07/31/04 41,618,979
39,600 Motor Coach Industries,
Term Loan............... Ba3 BB- 06/16/06 39,602,849
9,900 NationsRent, Inc., Term
Loan.................... B1 BB- 07/20/06 9,813,375
--------------
138,012,419
--------------
TRANSPORTATION--RAIL MANUFACTURING 0.0%
2,993 Railworks Corp., Term
Loan.................... B1 BB- 09/30/06 2,992,511
--------------
UTILITIES 0.2%
5,000 AES Texas Funding, Term
Loan.................... Ba1 NR 01/24/01 5,000,563
9,887 Northeast Utilities,
Term Loan............... NR BB+ 02/28/01 9,838,747
--------------
14,839,310
--------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
TOTAL VARIABLE RATE (**) SENIOR LOAN INTERESTS 88.9%....... $5,741,329,225
--------------
</TABLE>
See Notes to Financial Statements
33
<PAGE> 35
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
DESCRIPTION VALUE
<S> <C>
FIXED INCOME SECURITIES 0.6%
London Fog Industries, Inc. ($13,541,264 par, 10.00% coupon,
maturing 02/27/03) 144A Private Placement (a) (b) (e)
(g)....................................................... $ 9,614,297
Satelites Mexicanos ($29,296,000 par, 9.06% coupon, maturing
06/30/04) 144A Private Placement (e)...................... 29,335,135
--------------
TOTAL FIXED INCOME SECURITIES............................... 38,949,432
--------------
EQUITIES 2.0%
AFC Enterprises, Inc. (604,251 common shares) (c) (d)....... 6,018,340
Best Products Co., Inc. (297,480 common shares) (d)......... 0
Best Products Co., Inc. (Warrants for 28,080 common shares)
(d)......................................................... 0
Bruno's, Inc. (2,593,713 common shares) (c) (d)............. 48,346,810
Bruno's Supermarkets (259,371 common shares) (c) (d)........ 4,834,675
Classic Cable, Inc. (Warrants for 760 common shares) (d).... 0
CST/Star Products, Inc. (.3 common shares) (c) (d).......... 557
Dan River, Inc. (192,060 common shares) (d)................. 864,270
DecisionOne Corp. (605,299 common shares) (c) (d)........... 7,433,072
Decorate Today.Com (198,600 common shares) (c) (d) (g)...... 1,725,834
Flagstar Cos., Inc. (8,755 common shares) (d)............... 22
Fleer/Marvel Entertainment, Inc. (617,446 preferred shares)
(g)......................................................... 4,939,566
Fleer/Marvel Entertainment, Inc. (891,340 common shares) (d)
(g)......................................................... 4,958,079
London Fog Industries, Inc. (1,083,301 common shares) (c)
(d) (g)................................................... 0
London Fog Industries, Inc. (Warrants for 66,580 common
shares) (c) (d) (g)....................................... 0
Murray's Discount Auto Stores, Inc. (Warrants for 289 common
shares) (c) (d)........................................... 3
Payless Cashways, Inc. (1,024,159 common shares) (d) (g).... 1,664,258
Rowe International, Inc. (91,173 common shares) (c) (d)
(g)......................................................... 0
Sarcom, Inc. (43 common shares) (c) (d)..................... 0
Trans World Entertainment Corp. (3,789,962 common shares)
(c) (d) (g)................................................. 45,716,417
United Fixtures Holdings, Inc. (196,020 common shares) (c)
(d)......................................................... 0
United Fixtures Holdings, Inc. (53,810 preferred shares) (c)
(d)......................................................... 535,410
--------------
TOTAL EQUITIES.............................................. 127,037,313
--------------
TOTAL LONG-TERM INVESTMENTS 91.5%
(Cost $6,230,682,742)....................................... 5,907,315,970
--------------
</TABLE>
See Notes to Financial Statements
34
<PAGE> 36
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
DESCRIPTION VALUE
<S> <C>
SHORT-TERM INVESTMENTS 7.9%
COMMERCIAL PAPER 7.1%
Armstrong World Industries, Inc. ($20,000,000 par, maturing
08/15/00 to 08/16/00, yielding 6.72%)..................... $ 19,945,867
Autoliv ASP, Inc. ($50,200,000 par, maturing 08/10/00 to
08/22/00, yielding 6.74% to 6.75%)........................ 50,062,965
Bank of Nova Scotia, Inc. ($30,000,000 par, maturing
08/18/00, yielding 6.48%)................................. 29,908,200
Bridgestone/Firestone ($10,000,000 par, maturing 08/01/00,
yielding 6.49%)........................................... 10,000,000
ConAgra, Inc. ($37,000,000 par, maturing 08/08/00 to
08/11/00, yielding 6.65% to 6.68%)........................ 36,942,636
Cox Communications, Inc. ($10,000,000 par, maturing
08/22/00, yielding 6.70%)................................. 9,960,917
Federated Department Stores ($10,000,000 par, maturing
08/02/00, yielding 6.67%)................................. 9,998,147
Fedex Corp. ($7,000,000 par, maturing 08/21/00, yielding
6.72%).................................................... 6,973,867
Glencore Funding, Inc. ($50,000,000 par, maturing 08/02/00
to 08/08/00, yielding 6.67% to 6.75%)..................... 49,949,531
Illinois Power Co. ($10,000,000 par, maturing 08/04/00,
yielding 6.62%)........................................... 9,994,483
Mallinckrodt Group, Inc. ($20,000,000 par, maturing
08/01/00, yielding 6.75%)................................. 20,000,000
Nabisco, Inc. ($14,000,000 par, maturing 08/03/00, yielding
6.63%).................................................... 13,994,843
RPM, Inc. ($16,990,000 par, maturing 08/09/00 to 08/28/00,
yielding 6.73% to 6.75%).................................. 16,928,921
Safeway, Inc. ($20,000,000 par, maturing 08/22/00 to
08/23/00, yielding 6.70%)................................. 19,919,972
Sprint Capital Corp. ($20,000,000 par, maturing 08/02/00 to
08/17/00, yielding 6.70%)................................. 19,968,361
Temple Inland, Inc. ($10,000,000 par, maturing 08/01/00,
yielding 6.78%)........................................... 10,000,000
Texas Utilities Co. ($50,000,000 par, maturing 08/01/00 to
08/11/00, yielding 6.70%)................................. 49,936,722
TRW, Inc. ($36,700,000 par, maturing 08/03/00 to 08/16/00,
yielding 6.65% to 6.68%).................................. 36,655,424
Visteon Corp. ($15,000,000 par, maturing 08/03/00 to
08/23/00, yielding 6.66% to 6.70%)........................ 14,957,206
Xtra, Inc. ($25,562,000 par, maturing 08/03/00 to 08/17/00,
yielding 6.69% to 6.75%).................................. 25,525,875
--------------
TOTAL COMMERCIAL PAPER...................................... 461,623,937
--------------
</TABLE>
See Notes to Financial Statements
35
<PAGE> 37
YOUR TRUST'S INVESTMENTS
July 31, 2000
<TABLE>
<CAPTION>
DESCRIPTION VALUE
<S> <C>
SHORT-TERM LOAN PARTICIPATIONS 0.7%
Asland, Inc. ($10,000,000 par, maturing 08/24/00, yielding
6.77%).................................................... $ 10,000,000
Cabot Corp. ($8,000,000 par, maturing 08/18/00, yielding
6.80%)...................................................... 8,000,000
Mead Corp. ($5,000,000 par, maturing 08/16/00, yielding
6.76%)...................................................... 5,000,000
Praxair, Inc. ($15,000,000 par, maturing 08/15/00, yielding
6.76%)...................................................... 15,000,000
Visteon Corp. ($9,800,000 par, maturing 08/08/00, yielding
6.83%)...................................................... 9,800,000
--------------
TOTAL SHORT-TERM LOAN PARTICIPATIONS........................ 47,800,000
--------------
TIME DEPOSIT 0.1%
State Street Bank & Trust Corp. ($4,600,000 par, 6.50%
coupon, dated 07/31/00, to be sold on 08/01/00 at
$4,600,831)................................................. 4,600,000
--------------
TOTAL SHORT-TERM INVESTMENTS 7.9%
(Cost $514,023,937)......................................... 514,023,937
--------------
TOTAL INVESTMENTS 99.4%
(Cost $6,744,706,679)....................................... 6,421,339,907
OTHER ASSETS IN EXCESS OF LIABILITIES 0.6%................. 36,625,388
--------------
NET ASSETS 100.0%.......................................... $6,457,965,295
==============
</TABLE>
NR--Not Rated
+ Loans rated below Baa by Moody's Investor Service, Inc. or BBB by Standard &
Poors Group are considered to be below investment grade. (Unaudited)
1 Industry percentages are calculated as a percentage of net assets.
(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.
(e) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally
transactions with qualified institutional buyers.
(f) Interest is accruing at less than the stated coupon.
(g) Affiliated company. See notes to financial statements.
(h) Subsequent to July 31, 2000, this borrower has filed for protection in
federal bankruptcy court.
See Notes to Financial Statements
36
<PAGE> 38
YOUR TRUST'S INVESTMENTS
July 31, 2000
* 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
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
37
<PAGE> 39
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
July 31, 2000
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $6,744,706,679)..................... $6,421,339,907
Cash........................................................ 557,269
Receivables:
Interest and Fees......................................... 52,344,165
Investments Sold.......................................... 4,612,887
Fund Shares Sold.......................................... 1,946,464
Dividends................................................. 121,794
Other....................................................... 216,212
--------------
Total Assets............................................ 6,481,138,698
--------------
LIABILITIES:
Payables:
Income Distributions...................................... 7,890,985
Investment Advisory Fee................................... 5,264,192
Investments Purchased..................................... 4,721,794
Administrative Fee........................................ 1,415,221
Distributor and Affiliates................................ 1,171,387
Fund Shares Repurchased................................... 382,570
Accrued Expenses............................................ 1,842,834
Trustees' Deferred Compensation and Retirement Plans........ 484,420
--------------
Total Liabilities....................................... 23,173,403
--------------
NET ASSETS.................................................. $6,457,965,295
==============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 679,708,950 shares issued and
outstanding).............................................. $ 6,797,090
Paid in Surplus............................................. 6,850,206,625
Accumulated Undistributed Net Investment Income............. 19,971,616
Accumulated Net Realized Loss............................... (95,643,264)
Net Unrealized Depreciation................................. (323,366,772)
--------------
NET ASSETS.................................................. $6,457,965,295
==============
NET ASSET VALUE PER COMMON SHARE ($6,457,965,295 divided by
679,708,950 shares outstanding)........................... $ 9.50
==============
</TABLE>
See Notes to Financial Statements
38
<PAGE> 40
Statement of Operations
For the Year Ended July 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 616,130,236
Fees........................................................ 1,479,724
Dividends ($455,701 received as dividend income from
affiliates)............................................... 455,701
Other....................................................... 8,292,209
-------------
Total Income............................................ 626,357,870
-------------
EXPENSES:
Investment Advisory Fee..................................... 69,830,499
Administrative Fee.......................................... 18,860,527
Shareholder Services........................................ 5,550,758
Legal....................................................... 1,920,741
Custody..................................................... 991,140
Trustees' Fees and Related Expenses......................... 275,925
Other....................................................... 3,601,004
-------------
Total Expenses.......................................... 101,030,594
Less: Credits Earned on Cash Balances................... 245,523
-------------
Net Expenses............................................ 100,785,071
-------------
NET INVESTMENT INCOME....................................... $ 525,572,799
=============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $ (28,679,370)
-------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (66,177,805)
End of the Period......................................... (323,366,772)
-------------
Net Unrealized Depreciation During the Period............... (257,188,967)
-------------
NET REALIZED AND UNREALIZED LOSS............................ $(285,868,337)
=============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 239,704,462
=============
</TABLE>
See Notes to Financial Statements
39
<PAGE> 41
Statement of Changes in Net Assets
For the Years Ended July 31, 2000 and 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 2000 JULY 31, 1999
--------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income............................. $ 525,572,799 $ 510,587,206
Net Realized Loss................................. (28,679,370) (39,696,960)
Net Unrealized Depreciation During the Period..... (257,188,967) (60,996,583)
-------------- --------------
Change in Net Assets from Operations.............. 239,704,462 409,893,663
Distributions from Net Investment Income.......... (521,005,157) (506,562,808)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES...................................... (281,300,695) (96,669,145)
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Common Shares Sold.................. 433,298,300 1,681,564,508
Net Asset Value of Shares Issued Through Dividend
Reinvestment.................................... 271,508,075 268,516,058
Cost of Shares Repurchased........................ (2,101,931,358) (1,029,903,851)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................................... (1,397,124,983) 920,176,715
-------------- --------------
TOTAL INCREASE/(DECREASE) IN NET ASSETS........... (1,678,425,678) 823,507,570
NET ASSETS:
Beginning of the Period........................... 8,136,390,973 7,312,883,403
-------------- --------------
End of the Period (Including accumulated
undistributed net investment income of
$19,971,616 and $14,841,151, respectively)...... $6,457,965,295 $8,136,390,973
============== ==============
</TABLE>
See Notes to Financial Statements
40
<PAGE> 42
Statement of Cash Flows
For the Year Ended July 31, 2000
<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 239,704,462
---------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Decrease in Investments at Value.......................... 1,669,721,962
Increase in Interest and Fees Receivables................. (454,145)
Increase in Receivable for Investments Sold............... (2,288,950)
Increase in Dividends Receivable.......................... (121,794)
Decrease in Other Assets.................................. 114,061
Decrease in Investment Advisory Fee Payable............... (1,193,296)
Decrease in Administrative Fee Payable.................... (335,744)
Decrease in Distributor and Affiliates Payable............ (1,247,797)
Increase in Payable for Investments Purchased............. 4,721,794
Decrease in Accrued Expenses.............................. (2,068,107)
Increase in Trustees' Deferred Compensation and Retirement
Plans................................................... 120,497
---------------
Total Adjustments....................................... 1,666,968,481
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 1,906,672,943
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 448,990,115
Payments on Shares Repurchased.............................. (2,101,548,788)
Change in Intra-day Credit Line with Custodian Bank......... (1,276,982)
Cash Dividends Paid......................................... (252,280,019)
---------------
Net Cash Used for Financing Activities.................... (1,906,115,674)
---------------
NET INCREASE IN CASH........................................ 557,269
Cash at Beginning of the Period............................. -0-
---------------
CASH AT END OF THE PERIOD................................... $ 557,269
===============
</TABLE>
See Notes to Financial Statements
41
<PAGE> 43
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,
2000 1999 1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 9.85 $ 9.98 $ 9.96 $ 10.00 $ 10.05
-------- -------- -------- -------- --------
Net Investment Income............. .68 .64 .68 .70 .73
Net Realized and Unrealized
Gain/Loss....................... (.36) (.13) .01 (.04) (.03)
-------- -------- -------- -------- --------
Total from Investment Operations.... .32 .51 .69 .66 .70
Less Distributions from Net
Investment Income................. .67 .64 .67 .70 .75
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 9.50 $ 9.85 $ 9.98 $ 9.96 $ 10.00
======== ======== ======== ======== ========
Total Return (a).................... 3.15% 5.23% 7.22% 6.79% 7.22%
Net Assets at End of the Period (In
millions)......................... $6,458.0 $8,136.4 $7,312.9 $6,237.0 $4,865.8
Ratio of Expenses to Average Net
Assets............................ 1.34% 1.35% 1.41% 1.42% 1.46%
Ratio of Net Investment Income to
Average Net Assets................ 6.97% 6.48% 6.81% 7.02% 7.33%
Portfolio Turnover (b).............. 36% 44% 73% 83% 66%
</TABLE>
(a) Total return assumes an investment at the beginning of the period indicated,
reinvestment of all distributions for the period and tender of all shares at
the end of the period indicated, excluding payment of 3.00% imposed on most
shares accepted by the Trust for repurchase within the first year and
declining thereafter to 0.00% after the fifth year. If the early withdrawal
charge were included, total return would be lower.
(b) Calculation includes the proceeds from principal repayments and sales of
variable rate senior loan interests.
See Notes to Financial Statements
42
<PAGE> 44
NOTES TO
FINANCIAL STATEMENTS
July 31, 2000
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 corporations,
partnerships and other entities which operate in a variety of industries and
geographical regions. 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 accounting principles
generally accepted in the United States of America 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 Trust's Variable Rate Senior Loan interests and Other
Loan interests (collectively "Loan interests") are valued by the Trust following
guidelines established and periodically reviewed by the Trust's Board of
Trustees. Subject to criteria established by the Trust's Board of Trustees about
the availability and reliability of market indicators obtained from independent
pricing sources, certain Loan interests are valued at the mean of bid and ask
market indicators supplied by independent pricing sources approved by the
Trust's Board of Trustees. All other Loan interests are valued by considering a
number of factors including consideration of market indicators, transactions in
instruments which Van Kampen Investment Advisory Corp. (the "Adviser") believes
may be comparable (including comparable credit quality, interest rate, interest
rate redetermination period and maturity), the credit worthiness of the
borrower, the current interest rate, the period until next interest rate
redetermination and the maturity of such Loan interests. Consideration of
comparable instruments may include variable rate securities which have
adjustment periods comparable to the Loan interests in the Trust's portfolio.
The fair value of Loan interests are reviewed and approved by the Trust's
Valuation Committee and by the Trust's Board of Trustees. The fair value of a
Loan interest may differ significantly from the market value that would have
been used had there been a ready and reliable market for the Loan interest.
43
<PAGE> 45
NOTES TO
FINANCIAL STATEMENTS
July 31, 2000
Equity securities are valued on the basis of prices furnished by pricing
services or as determined in good faith by the Adviser under the direction of
the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value. Short-term loan
participations are valued at cost in the absence of any indication of
impairment.
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 Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Facility fees on senior loans
purchased are treated as market discounts. Market premiums are amortized and
discounts are accreted over the stated life of each applicable security.
Other income is comprised primarily of amendment fees. Amendment fees are
earned as compensation for agreeing to changes in loan agreements.
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, 2000, the Trust had an accumulated capital loss carryforward
for tax purposes of $58,142,159, which will expire between July 31, 2004 and
July 31, 2008. Net realized gains or losses may differ for financial and tax
reporting purposes primarily as a result of wash sales, post 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 book purposes but not
for tax purposes at the end of the fiscal year.
At July 31, 2000, for federal income tax purposes cost of long- and
short-term investments is $6,744,720,032, the aggregate gross unrealized
appreciation is $38,920,250 and the aggregate gross unrealized depreciation is
$362,300,375 resulting in net unrealized depreciation on long- and short-term
investments of $323,380,125.
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 at
44
<PAGE> 46
NOTES TO
FINANCIAL STATEMENTS
July 31, 2000
least 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 2000 fiscal year have been identified and appropriately
reclassified. Permanent differences relating to expenses which are not
deductible for tax purposes totaling $562,823 were reclassified from capital to
accumulated undistributed net investment income.
F. CREDITS EARNED ON CASH BALANCES During the year ended July 31, 2000, the
Trust's custody fee was reduced by $245,523 as a result of credits earned on
overnight cash balances.
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 year ended July 31, 2000, the Trust recognized expenses of
approximately $343,700 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, 2000, the Trust recognized expenses of
approximately $86,600 representing Van Kampen Funds Inc. or its affiliates'
(collectively "Van Kampen") cost of providing legal services to the Trust.
45
<PAGE> 47
NOTES TO
FINANCIAL STATEMENTS
July 31, 2000
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Trust. For the year ended July 31, 2000,
the Trust recognized expenses for these services of approximately $4,504,500.
Shareholder servicing fees are determined through negotiations with the Trust'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.
During the period, the Trust owned shares of the following affiliated
companies. Affiliated companies are defined by the Investment Company Act of
1940 as those companies in which a fund holds 5% or more of the outstanding
voting securities.
<TABLE>
<CAPTION>
REALIZED DIVIDEND MARKET VALUE
NAME SHARES* GAIN/(LOSS) INCOME 7/31/00
<S> <C> <C> <C> <C>
Decision One Corp................... 605,299 0 0 $ 7,433,072
Decorate Today.Com. ................ 198,600 0 0 1,725,834
London Fog Industries, Inc.......... 1,083,301 0 0 0
Fleer/Marvel Entertainment, Inc..... 1,508,786 0 $455,701 9,897,645
Payless Cashways, Inc............... 1,024,159 0 0 1,664,258
Rowe International, Inc............. 91,173 0 0 0
Trans World Entertainment Corp...... 3,789,962 0 0 45,716,417
United Fixtures Holdings, Inc....... 249,830 0 0 535,410
</TABLE>
* Shares were acquired through the restructuring of Senior loan interests.
3. CAPITAL TRANSACTIONS
At July 31, 2000 and July 31, 1999, paid in surplus aggregated $6,850,769,448
and $8,246,435,399, respectively.
46
<PAGE> 48
NOTES TO
FINANCIAL STATEMENTS
July 31, 2000
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 2000 JULY 31, 1999
<S> <C> <C>
Beginning Shares...................................... 825,612,225 733,069,022
------------ ------------
Shares Sold......................................... 44,598,159 169,386,633
Shares Issued Through Dividend Reinvestment......... 28,154,985 27,059,241
Shares Repurchased.................................. (218,656,419) (103,902,671)
------------ ------------
Net Increase/Decrease in Shares Outstanding......... (145,903,275) 92,543,203
------------ ------------
Ending Shares......................................... 679,708,950 825,612,225
============ ============
</TABLE>
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $2,332,815,340 and
$3,550,089,366, 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 net asset value of the shares on the expiration date of the
tender offer. For the year ended July 31, 2000, 218,656,419 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 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>
47
<PAGE> 49
NOTES TO
FINANCIAL STATEMENTS
July 31, 2000
For the year ended July 31, 2000, Van Kampen received early withdrawal
charges of approximately $21,203,800 in connection with tendered shares of the
Trust.
7. COMMITMENTS/BORROWINGS
Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $217,648,397 as of July
31, 2000. 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, along with the Van Kampen Senior Floating Rate Fund, 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 September 12, 2001. The
proceeds of any borrowing by the Trust under the revolving credit agreement
shall be used for temporary liquidity purposes and funding of shareholder tender
offers. Annual commitment fees of .09% 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 .50%. There have been no borrowings
under this agreement to date.
8. SENIOR LOAN PARTICIPATION COMMITMENTS
The Trust invests primarily in participations, assignments, or acts as a party
to the primary lending syndicate of a Variable Rate Senior Loan interest to
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.
48
<PAGE> 50
NOTES TO
FINANCIAL STATEMENTS
July 31, 2000
At July 31, 2000, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Trust on a participation
basis.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SELLING PARTICIPANT (000) (000)
<S> <C> <C>
Bankers Trust............................................... $ 45,079 $ 44,881
Societe Generale............................................ 21,760 21,758
Goldman Sachs............................................... 10,714 10,613
Bank of Boston.............................................. 9,900 9,813
Chase Securities, Inc....................................... 8,960 8,939
Bank One.................................................... 6,000 5,985
Morgan Guaranty Trust....................................... 5,000 5,001
Donaldson Lufkin Jenrette................................... 4,938 4,884
Canadian Imperial Bank of Commerce.......................... 3,442 3,444
-------- --------
Total....................................................... $115,793 $115,318
======== ========
</TABLE>
49
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
To 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, 2000, and the related statements of operations, cash
flows, changes in net assets, and the financial highlights for the year then
ended. 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
audit. The Trust's financial statements and financial highlights for the periods
ended prior to July 31, 2000, were audited by other auditors whose report, dated
September 14, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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, 2000, by correspondence with the Trust's
custodian, brokers 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
audit provides 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, 2000, the results of its
operations, cash flows, changes in net assets, and financial highlights for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1A, the portfolio of investments includes certain loan
interests for which, fair values are determined by the Trust's investment
adviser under procedures approved by the Board of Trustees. Determination of
fair values involves subjective judgment, as the actual market value of a
particular security can be established only by negotiations between parties in a
transaction. We have reviewed the procedures established by the Board of
Trustees and applied by the investment adviser in determining the fair values of
such loan interests and inspected the underlying documentation. We believe that,
in the circumstances, the procedures are reasonable and the documentation
appropriate.
DELOITTE & TOUCHE LLP
Chicago, Illinois
September 15, 2000
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<PAGE> 52
VAN KAMPEN FUNDS
THE VAN KAMPEN
FAMILY OF FUNDS
Growth
Aggressive Growth
American Value*
Emerging Growth
Enterprise
Equity Growth
Focus Equity
Growth
Mid Cap Growth
Pace
Select Growth
Small Cap Value
Tax Managed Equity Growth
Technology
Growth and Income
Comstock
Equity Income
Growth and Income
Harbor
Real Estate Securities
Utility
Value
Global/International
Asian Growth
Emerging Markets
European Equity
Global Equity
Global Equity Allocation
International Magnum
Latin American
Strategic Income*
Tax Managed Global Franchise
Worldwide High Income
Income
Corporate Bond
Government Securities
High Income Corporate Bond
High Yield
High Yield & Total Return*
Limited Maturity Government
U.S. Government
U.S. Government Trust for Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan
Prime Rate Income Trust
Senior Floating Rate
Tax Free
California Insured Tax Free
Florida Insured Tax Free Income
High Yield Municipal**
Insured Tax Free Income
Intermediate Term Municipal
Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Tax Free High Income
To find out more about any of these funds, ask your financial advisor for a
prospectus, which contains more complete information, including sales charges,
risks, and ongoing expenses. Please read it carefully before you invest or send
money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- visit our Web site at
WWW.VANKAMPEN.COM--
to view a prospectus, select
Download Prospectus [COMPUTER ICON]
- call us at 1-800-341-2911
weekdays from 7:00 a.m. to 7:00 p.m.
Central time. Telecommunications
Device for the Deaf users, call
1-800-421-2833.
[PHONE ICON]
- e-mail us by visiting
WWW.VANKAMPEN.COM and
selecting Contact Us
[MAIL ICON]
* Closed to new investors
** Open to new investors for a limited time
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<PAGE> 53
TRUST OFFICERS AND IMPORTANT ADDRESSES
VAN KAMPEN PRIME RATE INCOME TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
RICHARD F. POWERS, III*
President
STEPHEN L. BOYD*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
RICHARD A. CICCARONE*
JOHN R. REYNOLDSON*
MICHAEL H. SANTO*
JOHN H. ZIMMERMANN, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 218256
Kansas City, Missouri 64121-8256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS(1)
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
(C) Van Kampen Funds Inc., 2000. All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
(1) Independent auditors for the Trust perform an annual audit of the Trust's
financial statements. The Board of Trustees has engaged Deloitte & Touche
LLP to be the Trust's independent auditors.
KPMG LLP, located at 303 West Wacker Drive, Chicago, IL 60601 ("KPMG"), ceased
being the Trust's independent auditors effective April 14, 2000. The cessation
of the client-auditor relationship between the Trust and KPMG was based solely
on a possible future business relationship by KPMG with an affiliate of the
Trust's investment adviser.
This report is submitted for the general information of the shareholders of the
Trust. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Trust,
which contains additional information on how to purchase shares and other
pertinent data. After December 31, 2000, the report
must, if used with prospective investors, be accompanied by a monthly
performance update.
52
