<PAGE> 1
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VAN KAMPEN AMERICAN CAPITAL
HIGH INCOME CORPORATE BOND FUND
- --------------------------------------------------------------------------------
Van Kampen American Capital High Income Corporate Bond Fund, formerly known
as American Capital High Yield Investments, Inc. (the "Fund"), is a mutual fund
seeking as its primary objective maximum current income. Capital appreciation is
a secondary objective which is sought only when consistent with the primary
objective. The Fund attempts to achieve these investment objectives by investing
primarily in high yielding high risk fixed-income securities. SUCH SECURITIES
ARE REGARDED BY THE RATING AGENCIES AS SPECULATIVE WITH RESPECT TO THE ISSUER'S
CONTINUING ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS. See "Investment
Objectives and Policies--Risk Factors of Investing in Lower Rated Debt
Securities."
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. This Prospectus sets forth certain information that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is 2800
Post Oak Blvd., Houston, Texas 77056, and its telephone number is (800)
421-5666.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated August 7, 1995, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission ("SEC") and is hereby incorporated by reference into this
Prospectus. A copy of the Statement of Additional Information may be obtained
without charge by calling (800) 421-5666 or, for Telecommunications Device For
the Deaf, (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL SM
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THIS PROSPECTUS IS DATED AUGUST 7, 1995.
<PAGE> 2
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary............................................... 3
Shareholder Transaction Expenses................................. 5
Annual Fund Operating Expenses and Example....................... 6
Financial Highlights............................................. 8
The Fund......................................................... 10
Investment Objectives and Policies............................... 10
Investment Practices............................................. 16
Investment Advisory Services..................................... 20
Alternative Sales Arrangements................................... 22
Purchase of Shares............................................... 25
Shareholder Services............................................. 34
Redemption of Shares............................................. 39
Distribution Plans............................................... 43
Distributions from the Fund...................................... 45
Tax Status....................................................... 45
Fund Performance................................................. 47
Description of Shares of the Fund................................ 49
Additional Information........................................... 50
Appendix -- Description of Bond Ratings.......................... 51
</TABLE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
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2
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PROSPECTUS SUMMARY
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THE FUND. Van Kampen American Capital High Income Corporate Bond Fund (the
"Fund") is a diversified, open-end management investment company organized as a
Delaware business trust.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
INVESTMENT OBJECTIVES. Maximize current income with a secondary objective of
capital appreciation.
INVESTMENT POLICY. Investing at least 80% of the Fund's total assets in a
diversified portfolio of high yielding, high risk corporate debt securities and
preferred stocks. The Fund may, from time to time, purchase common stocks and
other equity securities and non-income producing securities.
INVESTMENT RESULTS. The investment results of the Fund are shown in the
"Financial Highlights" table.
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Alternative
Sales Arrangements -- Factors for Consideration." Each class of shares
represents an interest in the same portfolio of investments of the Fund. The per
share dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See 'Alternative Sales Arrangements." For
information on redeeming shares see "Redemption of Shares."
Class A Shares. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of purchase. The Fund pays an annual service
fee of up to 0.25% of its average daily net assets attributable to such class of
shares. See "Purchase of Shares -- Class A Shares" and "Distribution Plans."
Class B Shares. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of four percent of
redemption proceeds during the first and second year, declining each year
thereafter to zero after the fifth year. See "Redemption of Shares." The Fund
pays a combined annual distribution fee and service fee of up to one percent of
its average daily net assets attributable to such class of shares. See "Purchase
of Shares -- Class B Shares" and "Distribution Plans." Class B shares will
convert automatically to
3
<PAGE> 4
Class A shares six years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
Class C Shares. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of one percent on redemptions made
within one year of purchase. See "Redemption of Shares." The Fund pays a
combined annual distribution fee and service fee of up to one percent of its
average daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class C Shares" and "Distribution Plans." Class C shares will convert
automatically to Class A shares ten years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
DISTRIBUTIONS FROM THE FUND. Income dividends are distributed monthly. All
dividends and distributions are automatically reinvested in shares of the Fund
at net asset value per share (without sales charge) unless payment in cash is
requested. See "Distributions from the Fund."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser to the Fund.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor").
RISK FACTORS. The lower rated debt securities in which the Fund may invest are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Because investment in lower
rated securities (commonly referred to as junk bonds) involves greater
investment risk, achievement of the Fund's investment objectives may be more
dependent on the investment adviser's credit analysis than would be the case if
the Fund were investing in higher rated securities. Lower rated securities may
be more susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade securities and thus be subject to
greater risk. A projection of an economic downturn, for example, could cause a
decline in lower rated securities prices because the advent of a recession could
lessen the ability of a highly leveraged company to make principal and interest
payments on its debt securities. In addition, the secondary trading market for
lower rated securities may be less liquid than the market for higher grade
securities. The market prices of debt securities also generally fluctuate with
changes in interest rates so that the Fund's net asset value can be expected to
decrease as long-term interest rates rise and to increase as long-term interest
rates fall. The above risks may be increased by investments in debt securities
not producing immediate cash income, such as zero-coupon securities. See
"Investment Objectives and Policies." The Fund may seek to hedge investments
through transactions in options, futures contracts and related
4
<PAGE> 5
options. Such transactions involve certain risks. See "Investment Practices --
Options, Futures Contracts and Related Options."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
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SHAREHOLDER TRANSACTION EXPENSES
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- ----------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)............... 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering
price)........................ None None None
Deferred sales charge (as a
percentage of the lesser of
original purchase price or
redemption proceeds).......... None(2) Year 1--4.00% Year 1--1.00%
Year 2--4.00%
Year 3--3.00%
Year 4--2.50%
Year 5--1.50%
After--None
Redemption fees (as a percentage
of amount redeemed)........... None None None
Exchange fee.................... None None None
</TABLE>
- ---------------
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of one percent may
be imposed on certain redemptions made within one year of the purchase.
5
<PAGE> 6
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ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- --------- ---------
<S> <C> <C> <C>
Management fees (as a percentage of
average daily net assets)............. .56% .56% .56%
12b-1 Fees(3) (as a percentage of
average daily net assets)............. .21% 1.00%(5) 1.00%(5)
Other Expenses(4) (as a percentage of
average daily net assets)............. .33% .34% .35%
Total Fund Operating Expenses (as a
percentage of average daily net
assets)............................... 1.10% 1.90% 1.91%
</TABLE>
- ---------------
(3) Up to 0.25% for Class A shares and one percent for Class B and C shares. See
"Distribution Plans."
(4) See "Investment Advisory Services."
(5) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
6
<PAGE> 7
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS
------ ------ ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 1.10% for
Class A shares, 1.90% for Class B shares
and 1.91% for Class C shares, (ii) a 5%
annual return and (iii) redemption at the
end of each time period:
Class A............................... $58 $81 $105 $175
Class B............................... $61 $93 $120 $182*
Class C............................... $30 $60 $103 $223
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each time
period:
Class A............................... $58 $81 $105 $175
Class B............................... $19 $60 $103 $182*
Class C............................... $19 $60 $103 $223
</TABLE>
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* Based on conversion to Class A shares after six years.
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and are
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required to utilize a five percent annual return
assumption. Class B shares acquired through the exchange privilege are subject
to the deferred sales charge schedule relating to the Class B shares of the fund
from which the purchase of Class B shares was originally made. Accordingly,
future expenses as projected could be higher than those determined in the above
table if the investor's Class B shares were exchanged from a fund with a higher
contingent deferred sales charge. THE INFORMATION CONTAINED IN THE ABOVE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Investment
Advisory Services" and "Redemption of Shares."
7
<PAGE> 8
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FINANCIAL HIGHLIGHTS
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(Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated)
The following information for each of the last five years has been audited by
Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. The information presented below for the six months ended February
28, 1995 is unaudited. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS ---------------------------------------------------------------
ENDED YEAR ENDED AUGUST 31
FEBRUARY 28, ---------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
------------ -------- -------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........... $6.12 $6.61 $6.40 $5.71 $5.78 $7.96 $9.09
------------ -------- -------- -------- --------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. .30 .71 .71 .79 .86 1.00 1.22
Expenses....................................... (.03) (.08) (.07) (.065) (.06) (.07) (.07)
------------ -------- -------- -------- --------- ---------- ----------
Net investment income.......................... .27 .63 .64 .725 .80 .93 1.15
Net realized and unrealized gain or loss on
securities.................................... (.145) (.47) .27 .6775 (.055) (2.165) (1.0775)
------------ -------- -------- -------- --------- ---------- ----------
Total from investment operations............... .125 .16 .91 1.4025 .745 (1.235) .0725
------------ -------- -------- -------- --------- ---------- ----------
LESS DISTRIBUTIONS FROM
Net investment income.......................... (.285) (.65) (.70) (.7125) (.815) (.945) (1.2025)
Net realized gain on securities................ -- -- -- -- -- -- --
------------ -------- -------- -------- --------- ---------- ----------
Total distributions............................ (.285) (.65) (.70) (.7125) (.815) (.945) (1.2025)
------------ -------- -------- -------- --------- ---------- ----------
Net asset value, end of period................. $5.96 $6.12 $6.61 $6.40 $5.71 $5.78 $7.96
============== ========= ========= ========= ========== =========== ===========
TOTAL RETURN (4)............................... 2.17% 2.34% 15.20% 25.82% 15.66% (15.88%) .81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)........... $393.7 $364.2 $452.4 $435.1 $341.9 $331.4 $554.4
Ratios to average net assets (annualized)
Expenses...................................... 1.18% 1.10% 1.09% 1.05% 1.06% 1.02% .77%
Net investment income......................... 9.20% 9.03% 10.10% 11.77% 15.20% 14.23% 13.27%
Portfolio turnover rate........................ 22% 66% 75% 73% 114% 59% 45%
<CAPTION>
CLASS A
--------------------------------------------
YEAR ENDED AUGUST 31
--------------------------------------------
1988 1987 1986(3) 1985(3)
------------ -------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........... $9.86 $10.02 $10.21 $9.31
--------- ---------- ---------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. 1.27 1.27 1.35 1.40
Expenses....................................... (.07) (.07) (.07) (.07)
--------- ---------- ---------- --------
Net investment income.......................... 1.20 1.20 1.28 1.33
Net realized and unrealized gain or loss on
securities.................................... (.7025) (.12) (.1375) .8475
--------- ---------- ---------- --------
Total from investment operations............... .4975 1.08 1.1425 2.1775
--------- ---------- ---------- --------
LESS DISTRIBUTIONS FROM
Net investment income.......................... (1.2675) (1.23) (1.3325) (1.2775)
Net realized gain on securities................ -- (.01) -- --
--------- ---------- ---------- --------
Total distributions............................ (1.2675) (1.24) (1.3325) (1.2775)
--------- ---------- ---------- --------
Net asset value, end of period................. $9.09 $9.86 $10.02 $10.21
========== =========== =========== =========
TOTAL RETURN (4)............................... 6.32% 11.45% 11.46% 25.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)........... $582.6 $578.8 $535.3 $456.5
Ratios to average net assets (annualized)
Expenses...................................... .73% .69% .66% .70%
Net investment income......................... 13.14% 12.19% 12.23% 13.66%
Portfolio turnover rate........................ 58% 66% 86% 82%
</TABLE>
(Table continued on following page)
8
<PAGE> 9
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FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31 JULY 2, 1992(1)
FEBRUARY 28, -------------------- THROUGH AUGUST 31,
1995 1994 1993(2) 1992(2)
------------ -------- -------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $6.14 $6.63 $6.41 $6.33
-------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .31 .71 .70 .11
Expenses................................................ (.06) (.13) (.12) (.02)
-------- ------- ------- --------
Net investment income................................... .25 .58 .58 .09
Net realized and unrealized gain or loss on
securities............................................. (.159) (.468) .292 .097
-------- ------- ------- --------
Total from investment operations........................ .091 .112 .872 .187
-------- ------- ------- --------
LESS DISTRIBUTIONS FROM
Net investment income................................... (.261) (.602) (.652) (.107)
Net realized gain on securities......................... -- -- -- --
-------- ------- ------- --------
Total distributions..................................... (.261) (.602) (.652) (.107)
-------- ------- ------- --------
Net asset value, end of period.......................... $5.97 $6.14 $6.63 $6.41
======== ======= ======= ========
TOTAL RETURN (4)........................................ 1.59% 1.59% 14.49% 2.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $75.8 $71.0 $37.7 $3.1
Ratios to average net assets (annualized)
Expenses............................................... 1.99% 1.90% 1.90% 2.08%
Net investment income.................................. 8.38% 8.25% 9.10% 10.30%
Portfolio turnover rate................................. 22% 66% 75% 73%
<CAPTION>
CLASS C
------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED JULY 6, 1993 (1)
FEBRUARY 28, AUGUST 31, THROUGH AUGUST 31,
1995 1994(2) 1993(2)
------------ ---------- ------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $6.11 $6.61 $6.63
-------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .31 .65 .08
Expenses................................................ (.06) (.12) (.02)
-------- ------- --------
Net investment income................................... .25 .53 .06
Net realized and unrealized gain or loss on
securities............................................. (.149) (.428) .0195
-------- ------- --------
Total from investment operations........................ .101 .102 .0795
-------- ------- --------
LESS DISTRIBUTIONS FROM
Net investment income................................... (.261) (.602) (.0995)
Net realized gain on securities......................... -- -- --
-------- ------- --------
Total distributions..................................... (.261) (.602) (.0995)
-------- ------- --------
Net asset value, end of period.......................... $5.95 $6.11 $6.61
======== ======= ========
TOTAL RETURN (4)........................................ 1.76% 1.43% 1.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $13.1 $13.2 $1.0
Ratios to average net assets (annualized)
Expenses............................................... 1.99% 1.91% 2.34%
Net investment income.................................. 8.38% 8.25% 8.05%
Portfolio turnover rate................................. 22% 66% 75%
</TABLE>
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(1) Commencement of offering of sales.
(2) Based on the average month-end shares outstanding.
(3) Effective for the year ended August 31, 1987, the Fund adopted for financial
reporting purposes an accounting method of amortizing debt discounts and
premiums on the same basis as is used for federal income tax reporting. The
effect of the change in accounting method, on a pro forma basis, would have
been to increase net investment income with a corresponding decrease in net
realized and unrealized gains or losses in the amounts of $.02 and $.01, for
the years 1986 and 1985, respectively. Similarly, the ratios of net
investment income to average net assets would have been 12.38% and 13.80%,
respectively.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
9
<PAGE> 10
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THE FUND
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The Fund is an open-end, diversified management investment company. This type
of company is commonly known as a mutual fund. A mutual fund provides, for those
who have similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
Fourteen Trustees have the responsibility for overseeing the affairs of the
Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines the
investment of the Fund's assets, provides administrative services and manages
the Fund's business and affairs. The Adviser together with its predecessors, has
been in the investment advisory business since 1926.
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INVESTMENT OBJECTIVES AND POLICIES
- ------------------------------------------------------------------------------
The Fund's primary objective is to maximize current income. Capital
appreciation is a secondary objective which will be sought only when consistent
with its primary objective. The Fund attempts to achieve these investment
objectives by investing in high yielding fixed-income securities (commonly
referred to as junk bonds), which are subject to high risk as described below.
Fixed-income securities appropriate for the Fund may include both convertible
and non-convertible debt securities and preferred stocks. The Fund's investment
objectives may be changed by the Fund's Trustees without shareholder approval,
but no change is anticipated. If there is a change in investment objectives,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. There is no
assurance that these objectives will be achieved and yields may fluctuate over
time.
The Fund generally invests at least 80% of its total assets in fixed-income
securities rated Baa or lower by Moody's Investors Service ("Moody's"), or BBB
or lower by Standard & Poor's Corporation ("S&P"). In addition, under normal
circumstances, at least 65% of the total assets of the Fund are invested in
corporate bonds. For these purposes a corporate bond is defined as any corporate
debt security with an original term to maturity of greater than one year. See
the Appendix for a description of corporate bond ratings. Since some issuers do
not seek ratings for their securities, nonrated securities are also considered
for investment by the Fund.
In general, the prices of debt securities vary inversely with interest rates.
If interest rates rise, debt security prices generally fall; if interest rates
fall, debt security prices generally rise. In addition, for a given change in
interest rates, longer-maturity debt securities fluctuate more in price (gaining
or losing more in
10
<PAGE> 11
value) than shorter-maturity debt securities, and generally offer higher yields
than shorter-maturity debt securities, all other factors, including credit
quality, being equal. This potential for a decline in prices of debt securities
due to rising interest rates is referred to herein as "market risk." While the
Fund has no policy limiting the maturities of the debt securities in which it
may invest, the Adviser seeks to moderate market risk by generally maintaining a
portfolio duration within a range of two to six years. Duration is a measure of
the expected life of a debt security that was developed as a more precise
alternative to the concept of "term to maturity." Duration incorporates a debt
security's yield, coupon interest payments, final maturity and call features
into one measure.
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues, duration and "term to maturity" are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest, the shorter the
maturity or the higher the yield-to-maturity of a debt security, the shorter its
duration.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At August 31, 1994, the average
maturity of the debt securities owned by the Fund was approximately 8.08 years
and the duration of the portfolio was approximately 5.2 years. The duration is
likely to vary from time to time as the Adviser pursues its strategy of striving
to maintain an active balance between seeking to maximize income and endeavoring
to maintain the value of the Fund's
11
<PAGE> 12
capital. Thus, the objective of providing high current return to shareholders is
tempered by seeking to avoid undue market risk and thus provide reasonable total
return as well as high distributed return. There is, of course, no assurance
that the Adviser will be successful in achieving such results for the Fund.
The higher yields sought by the Fund are generally obtainable from securities
rated in the lower categories by recognized rating services. These securities
generally are subordinated to the prior claims of banks and other senior
lenders. The lower rated debt securities in which the Fund may invest are
regarded as predominately speculative with respect to the issuers continuing
ability to meet principal and interest payments. The ratings of Moody's and S&P
represent their opinions of the quality of the debt securities they undertake to
rate, but not the market value risk of such securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, debt securities with the same maturity, coupon and rating may have
different yields while debt securities of the same maturity and coupon with
different ratings may have the same yield.
During the fiscal year ended August 31, 1994, the average percentage of the
Fund's assets invested in debt securities within the various rating categories
(based on the higher of the S&P or Moody's ratings), and the nonrated debt
securities, determined on a dollar weighted average, were as follows:
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
BBB/Baa....................................................... 1.40%
BB/Ba......................................................... 13.63%
B............................................................. 57.86%
CCC/Caa....................................................... 5.34%
*Nonrated..................................................... 9.67%
Preferred Stocks.............................................. 3.58%
Common Stocks/Warrants........................................ 1.51%
Cash and Equivalents.......................................... 7.01%
-------
Total Net Assets..................................... 100%
</TABLE>
- ------------------------------------------------------------------------------
* The nonrated securities and private placements as a percentage of total net
assets were considered by the Adviser to be comparable to securities rated by
Moody's as follows: BB--.42%; B--8.28%; CCC--.85%; and D--.12%.
LOWER RATED DEBT SECURITIES. The securities in which the Fund may invest
include the following:
-- Straight fixed-income debt securities. These include bonds and other debt
obligations which bear a fixed or variable rate of interest payable at regular
intervals and have a fixed or resettable maturity date. The particular terms
of such securities vary and may include features such as call provisions and
sinking funds.
-- Pay-in-kind debt securities. These pay interest in additional debt
securities rather than cash.
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<PAGE> 13
-- Zero-coupon debt securities. These bear no interest obligation but are
issued at a discount from their value at maturity. When held to maturity,
their entire return equals the difference between their issue price and their
maturity value.
-- Zero-fixed-coupon debt securities. These are zero-coupon debt securities
which convert on a specified date to interest-bearing debt securities.
The Fund may invest in debt instruments not producing immediate cash income,
such as zero-coupon securities, when their effective yield premiums over
comparable instruments producing cash income make these investments attractive.
Prices on non-cash-paying instruments may be more sensitive to changes in the
issuer's financial condition, fluctuations in interest rates and market
demand/supply imbalances than cash-paying securities with similar credit
ratings, and thus may be more speculative. In addition, the non-cash interest
income earned on such instruments is included in investment company taxable
income, thereby increasing the minimum required distributions to shareholders
(without providing the corresponding cash flow with which to pay such
distributions). See "Distributions from the Fund." The Adviser will weigh these
concerns against the expected total returns for such instruments.
The Fund may invest in debt securities rated below B by both Moody's and S&P,
common stocks or other equity securities and income bonds on which interest is
not being paid when such investments are consistent with the Fund's investment
objectives or are acquired as part of a unit consisting of a combination of
fixed-income or equity securities. Equity securities as referred to herein do
not include preferred stocks. The Fund will not purchase any such securities
which will cause more than 20% of its total assets to be so invested or which
would cause more than 10% of its total assets to be invested in common stocks,
warrants and options on equity securities. This limitation does not require the
sale of a portfolio security whose rating has been changed.
Debt securities rated below B by both Moody's and S&P include debt obligations
or other securities of companies that are financially troubled, in default or
are in bankruptcy or reorganization ("Deep Discount Securities"). These
securities may be rated C, CI or D by S&P and C by Moody's. Debt obligations of
such companies are usually available at a deep discount from the face value of
the instrument. The Fund will invest in Deep Discount Securities when the
Adviser believes that existing factors are likely to restore the company to a
healthy financial condition. Such factors include a restructuring of debt,
management changes, existence of adequate assets, or other unusual
circumstances.
A debt instrument purchased at a deep discount may currently pay a very high
effective yield. In addition, if the financial condition of the issuer improves,
the underlying value of the security may increase, resulting in a capital gain.
If the
13
<PAGE> 14
company defaults on its obligations or remains in default, or if the plan of
reorganization is insufficient for debtholders, the Deep Discount Securities may
stop generating income and lose value or become worthless. The Adviser will
balance the benefits of Deep Discount Securities with their risks. While a
diversified portfolio may reduce the overall impact of a Deep Discount Security
that is in default or loses its value, the risk cannot be eliminated.
OTHER INVESTMENTS. The Fund may invest up to 20% of its total assets in United
States currency denominated debt issues of foreign governments and other foreign
issuers. See "Investment Practices -- Securities of Foreign Issuers." In order
to hedge against changes in interest rates, the Fund may invest in or write
options on U.S. Government securities and engage in transactions involving
interest rate futures contracts and options on such contracts. See "Investment
Practices -- Options, Futures Contracts and Related Options" and the Statement
of Additional Information for discussion of options, futures contracts and
related options.
When market conditions dictate a more "defensive" investment strategy, the
Fund may invest on a temporary basis up to all of its assets in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
prime commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
repurchase agreements. See "Investment Practices -- Repurchase Agreements."
Under normal market conditions, the yield on these securities will tend to be
lower than the yield on other securities owned by the Fund.
RISK FACTORS OF INVESTING IN LOWER RATED DEBT SECURITIES. Past experience may
not provide an accurate indication of future performance of the market for lower
rated debt securities, particularly during periods of economic recession. An
economic downturn or increase in interest rates is likely to have a greater
negative effect on this market, the value of lower rated debt securities in the
Fund's portfolio, the Fund's net asset value and the ability of the bonds'
issuers to repay principal and interest, meet projected business goals and
obtain additional financing than on higher rated securities. These circumstances
also may result in a higher incidence of defaults than with respect to higher
rated securities. An investment in this Fund may be considered more speculative
than investment in shares of a fund which invests primarily in higher rated debt
securities.
Prices of lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of lower rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash. Where
it deems it appropriate and in the best interests of Fund shareholders, the Fund
may incur additional expenses to
14
<PAGE> 15
seek recovery on a debt security on which the issuer has defaulted and to pursue
litigation to protect the interests of security holders of its portfolio
companies.
Because the market for lower rated securities may be thinner and less active
than for higher rated securities, there may be market price volatility for these
securities and limited liquidity in the resale market. Nonrated securities are
usually not as attractive to as many buyers as rated securities are, a factor
which may make nonrated securities less marketable. These factors may have the
effect of limiting the availability of the securities for purchase by the Fund
and may also limit the ability of the Fund to sell such securities at their fair
value either to meet redemption requests or in response to changes in the
economy or the financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of lower rated debt securities, especially in a thinly traded market.
To the extent the Fund owns or may acquire illiquid or restricted lower rated
securities, these securities may involve special registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties. Changes in
values of debt securities which the Fund owns will affect its net asset value
per share. If market quotations are not readily available for the Fund's lower
rated or nonrated securities, these securities will be valued by a method that
the Fund's Trustees believe accurately reflects fair value. Judgment plays a
greater role in valuing lower rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available.
New and proposed laws may have an impact on the market for lower rated debt
securities. For example, as a result of the Financial Institution's Reform,
Recovery, and Enforcement Act of 1989, savings and loan associations must
dispose of their high yield bonds no later than July 1, 1994. Qualified
affiliates of savings and loan associations, however, may purchase and retain
these securities, and savings and loan associations may divest these securities
by sale to their qualified affiliates. The Adviser is unable at this time to
predict what effect, if any, the legislation may have on the market for lower
rated debt securities.
Special tax considerations are associated with investing in lower rated debt
securities structured as zero coupon or pay-in-kind securities. The Fund accrues
income on these securities prior to the receipt of cash payments. The Fund must
distribute substantially all of its income to its shareholders to qualify for
pass-through treatment under the tax laws and may, therefore, have to dispose of
its portfolio securities to satisfy distribution requirements.
While credit ratings are only one factor the Adviser relies on in evaluating
lower rated debt securities, certain risks are associated with using credit
ratings. Credit rating agencies may fail to timely change the credit ratings to
reflect subsequent events; however, the Adviser continuously monitors the
issuers of lower rated debt securities in its portfolio in an attempt to
determine if the issuers will have sufficient
15
<PAGE> 16
cash flow and profits to meet required principal and interest payments.
Achievement of the Fund's investment objectives may be more dependent upon the
Adviser's credit analysis than is the case for higher quality debt securities.
Credit ratings for individual securities may change from time to time and the
Fund may retain a portfolio security whose rating has been changed.
Investors should consider carefully the additional risks associated with
investment in securities which carry lower ratings.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase Agreements involve
certain risks in the event of default by the other party. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by the Fund,
exceeds 15% of the value of its net assets. In the event of the bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying securities and loss including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto, (b) possible lack of access to
income on the underlying security during this period, and (c) expenses of
enforcing its rights. See the Statement of Additional Information.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies of the
Fund permit the Fund to invest in or write options, futures contracts and
related
16
<PAGE> 17
options. Thus, the Fund may engage in transactions in futures contracts on U.S.
Government securities.
The Fund presently expects to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of the Fund's
portfolio and the Adviser's expectations concerning the securities markets. See
the Statement of Additional Information for discussion of options, futures
contracts and related options.
Potential Risks of Options, Futures Contracts and Related Options. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities. While utilization of
options, futures contracts and similar instruments may be advantageous to the
Fund, if the Adviser is not successful in employing such instruments in managing
the Fund's investments, the Fund's performance will be worse than if the Fund
did not make such investments. In addition, the Fund would pay commissions and
other costs in connection with such investments, which may increase the Fund's
expenses and reduce its return.
The Fund may write or purchase options in privately negotiated transactions
("OTC Options") as well as listed options. OTC Options can be closed out only by
agreement with the other party to the transaction. Thus, any OTC Option
purchased by the Fund is considered an illiquid security. Any OTC Option written
by the Fund is with a qualified dealer pursuant to an agreement under which the
Fund may repurchase the option at a formula price. Such options are considered
illiquid to the extent that the formula price exceeds the intrinsic value of the
option. The Fund may not purchase or sell futures contracts or related options
for which the aggregate initial margin and premiums exceed five percent of the
fair market value of the Fund's assets. In order to prevent leverage in
connection with the purchase of futures contracts or call options thereon by the
Fund, an amount of cash, cash equivalents or liquid high grade debt securities
equal to the market value of the obligation under the futures contracts or
options (less any related margin deposits) will be maintained in a segregated
account with the Custodian. The Fund may not invest more than 15% of its net
assets in illiquid securities and repurchase agreements which have a maturity of
longer than seven days. A more complete discussion of the potential risks
involved in transactions in options, futures contracts and related options is
contained in the Statement of Additional Information.
PORTFOLIO TURNOVER. Although the Fund does not intend to engage in substantial
short-term trading, it may sell portfolio securities without regard to the
length of time they have been held in order to take advantage of new investment
opportunities or yield differentials, or because the Fund desires to preserve
gains or limit losses due to changing economic conditions or the financial
condition of the issuer. The Fund's portfolio turnover rate (the lesser of the
value of the securities purchased or securities sold divided by the average
value of the securities held in
17
<PAGE> 18
the Fund's portfolio excluding all securities whose maturities at acquisition
were one year or less) is shown in the table of "Financial Highlights." Since
portfolio changes are deemed appropriate due to market or other conditions, such
turnover rate may be expected to vary from year to year. A higher rate of
turnover results in increased transaction costs to the Fund.
LENDING OF SECURITIES. The Fund may lend its portfolio securities to broker-
dealers and other financial institutions in an amount up to ten percent of the
total assets, provided that such loans are callable at any time by the Fund, and
are at all times secured by cash collateral that is at least equal to the market
value, determined daily, of the loaned securities. During the period of the
loan, the Fund receives the income on both the loaned securities and the
collateral and thereby increases its yield after payment of lending fees.
RESTRICTED SECURITIES. The Fund may invest up to 15% of the value of its net
assets in restricted securities (i.e., securities which may not be sold without
registration or an exemption from registration under the Securities Act of 1933)
and in other illiquid securities and repurchase agreements maturing in more than
seven days. Restricted securities are generally purchased at a discount from the
market price of unrestricted securities of the same issuer. Investments in
restricted securities are not readily marketable without some time delay.
Investments in securities which have no ready market are valued at fair value as
determined in good faith by the Fund's Trustees. Ordinarily, the Fund would
invest in restricted securities only when it receives the issuer's commitment to
register the securities without expense to the Fund. However, registration and
underwriting expenses (which may range from seven percent to 15% of the gross
proceeds of the securities sold), may be paid by the Fund. A Fund position in
restricted securities might adversely affect the liquidity and marketability of
such securities, and the Fund might not be able to dispose of its holdings in
such securities at reasonable price levels. Although the Fund may invest up to
15% of its net assets in illiquid securities and repurchase agreements which
have a maturity of longer than seven days, the Fund shall not invest in such
securities in excess of 10% of its net assets without prior approval of the
Trustees.
PORTFOLIO TRANSACTIONS AND BROKERAGE. The Adviser is responsible for the
placement of orders for the purchase and sale of portfolio securities for the
Fund and the negotiation of brokerage commissions on such transactions. Most
transactions made by the Fund are with dealers acting as principals. Brokerage
firms are selected on the basis of their professional capability for the type of
transaction and the value and quality of execution services rendered on a
continuing basis. The Adviser is authorized to place portfolio transactions with
brokerage firms participating in the distribution of shares of the Fund and
other Van Kampen American Capital mutual funds if it reasonably believes that
the quality of the execution and the commission are comparable to that available
from other qualified firms. The Adviser is
18
<PAGE> 19
authorized to pay higher commissions to brokerage firms that provide it with
investment and research information than to firms which do not provide such
services if the Adviser determines that such commissions are reasonable in
relation to the overall services provided. The information received may be used
by the Adviser in managing the assets of other advisory accounts as well as in
the management of the assets of the Fund.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 20% of its total
assets in United States currency denominated debt issues of foreign governments
and other foreign issuers. The Adviser believes that in many instances such
foreign debt securities may provide higher yields than securities of domestic
issuers which have similar maturities. Such securities may be subject to foreign
government taxes which would reduce the effective yield. Such securities may be
less liquid than the securities of the U.S. corporations, and are certainly less
liquid than securities issued by the U.S. Government or its agencies.
The above-described foreign investments involve certain risks, which should be
considered carefully by an investor in the Fund. These risks include changes in
currency exchange rates, political or economic instability of the issuer or of
the country of issue, the difficulty of predicting international trade patterns
and the possibility of imposition of exchange controls. Such securities may also
be subject to greater fluctuations in price than securities of U.S. corporations
or of the U.S. Government. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of stock exchanges,
brokers and listed companies abroad than in the United States, and, with respect
to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect investment
in those countries. Finally, in the event of a default on any such foreign debt
obligations, it may be more difficult for the Fund to obtain or to enforce
judgment against the issuers of such securities. Such investments will be made
only when the Adviser believes that higher yields justify the attendant risks.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which may not be changed without approval by a majority (as defined in the 1940
Act) vote of the Fund's shareholders. These restrictions provide, among other
things, that the Fund may not:
1. Invest more than 15% of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements which have a
maturity of longer than seven days;
19
<PAGE> 20
2. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except the U.S. Government) or
purchase more than ten percent of the outstanding voting securities, or
more than ten percent of any class of securities, of any one issuer;
3. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the U.S.
Government);
4. Invest more than five percent of its total assets in companies having a
record, together with predecessors, of less than three years of continuous
operation; and
5. Invest more than 20% of its total assets in U.S. currency denominated
issues of foreign governments and other foreign issuers, or invest more
than ten percent of its total assets in securities which are payable in
currencies other than U.S. dollars.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. The Adviser is a wholly owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and
nearly $50 billion under management or supervision. Van Kampen American
Capital's more than 40 open-end and 38 closed-end funds and more than 2,700 unit
investment trusts are professionally distributed by leading financial advisers
nationwide.
Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital. Van Kampen American Capital is a wholly-owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut
limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York based private investment firm. The General Partner of C&D L.P. is
Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.").
The general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital own, in the aggregate, not more than seven percent
of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon
the exercise of options, approximately an additional 11% of the common stock of
20
<PAGE> 21
VK/AC Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own five percent or
more of the common stock of VK/AC Holding, Inc.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed on average daily net assets of the Fund at the annual rate of 0.6250%
of the first $150 million of net assets; 0.55% of the next $150 million of net
assets; 0.50% of the excess over $300 million of net assets. Under the Advisory
Agreement, the Fund also reimburses the Adviser for the cost of the Fund's
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. Operating expenses paid by the Fund
include shareholder service agency fees, distribution fees, service fees,
custodial fees, legal and accounting fees, the costs of reports and proxies to
shareholders, trustees' fees, and all other business expenses not specifically
assumed by the Adviser. Advisory (management) fee, and total operating expense,
ratios are shown under the caption "Annual Fund Operating Expenses and Example"
herein.
From time to time as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors/trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to pre-clearance and other procedures designed to prevent conflicts of
interest.
PORTFOLIO MANAGEMENT. Ellis J. Bigelow is primarily responsible for the
day-to-day management of the Fund's investment portfolio. Ms. Bigelow is Vice
President of the Fund and Senior Investment Vice President of the Adviser. Ms.
Bigelow has been an officer of the Fund since 1989, and was previously a
Research Analyst with the Adviser.
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<PAGE> 22
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ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. Class A shares are subject to
an ongoing service fee at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Certain purchases
of Class A shares qualify for reduced initial sales charges. See "Purchase of
Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of
Shares -- Class B Shares." Class B shares will automatically convert to Class A
shares six years after the end of the calendar month in which the shareholder's
order to purchase was accepted. See "Conversion Feature" below for discussion on
applicability of the conversion feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will automatically convert to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
22
<PAGE> 23
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of the Class B shares and Class C shares that have been outstanding for
a period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares or Class C
shares as the case may be, from the burden of the ongoing distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the conversion
of shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending six years or ten years, respectively, after the end of the calendar month
in which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such differential would be offset by the higher dividends per share on Class A
shares. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares. In this regard, Class A shares may
be more
23
<PAGE> 24
beneficial to the investor who qualifies for reduced initial sales charges or
purchases at net asset value, as described herein under "Purchase of
Shares -- Class A Shares." For these reasons, the Distributor will reject any
order of $500,000 or more for Class B shares or any order of $1 million or more
for Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to ongoing distribution fees and, for a five-year or one-year
period, respectively, being subject to a contingent deferred sales charge.
Ongoing distribution fees on Class B shares and Class C shares will be offset to
the extent of the additional funds originally invested and any return realized
on those funds. However, there can be no assurance as to the return, if any,
which will be realized on such additional funds. For investments held for ten
years or more, the relative value upon liquidation of the three classes tends to
favor Class A or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class A
shares (see "Shareholder Services Applicable to Class A Shareholders
Only -- Check Writing Privilege"). Class B shares may be appropriate for
investors who wish to avoid a front-end shares charge, put 100% of their
investment dollars to work immediately, and/or have a longer-term investment
horizon. Class C shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling Class A, Class B or Class C shares. INVESTORS SHOULD UNDERSTAND THAT THE
PURPOSE AND FUNCTION OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING
DISTRIBUTION FEE WITH RESPECT TO THE CLASS B SHARES AND CLASS C
24
<PAGE> 25
SHARES ARE THE SAME AS THOSE OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A
SHARES. SEE "DISTRIBUTION PLANS."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and Class
C shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B or Class C shares will be borne by the respective class. See
"Distributions from the Fund." Shares of the Fund may be exchanged, subject to
certain limitations, for shares of the same class of other mutual funds advised
by the Adviser. See "Shareholder Services -- Exchange Privilege."
The Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the Trustees
of the Fund, pursuant to their fiduciary duties under the Investment Company Act
of 1940 (the "1940 Act") and state laws, will seek to ensure that no such
conflict arises.
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents or investors ("brokers").
The term "dealers" and "brokers" are sometimes referred to herein as "authorized
dealers." Class A shares are sold with an initial sales charge; Class B shares
and Class C shares are sold without an initial sales charge and are subject to a
contingent deferred sales charge upon certain redemptions. See "Alternative
Sales Arrangements" for a discussion of factors to consider in selecting which
class of shares to purchase. Contact the Investor Services Department at (800)
421-5666 for further information and appropriate forms.
Initial investments must be at least $500 and subsequent investments must be
at least $25. Both minimums may be waived by the Distributor for plans involving
periodic investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares to the public in response to conditions in the securities
markets or for other reasons.
Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application accompanying this Prospectus
and forwarding the application, through the designated dealer, to the
shareholder
25
<PAGE> 26
service agent, ACCESS Investor Services, Inc., a wholly owned subsidiary of Van
Kampen American Capital ("ACCESS"). When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B or Class C
shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time)
each day the Exchange is open. Net asset value per share for each class is
determined by dividing the value of the Fund's securities, cash and other assets
(including accrued interest) attributable to such class, less all liabilities
(including accrued expenses) attributable to such class, by the total number of
shares of the class outstanding. Portfolio securities that are actively traded
in the over-the-counter market are valued at the most recently quoted bid price.
Any security for which the primary market is on an exchange is valued at the
last reported sales price on the exchange where principally traded or at the
last reported bid price if there was no sale reported that day. If no sale or
bid price is reported that day, the security is valued at the most recent sale
price. The value of any other securities or other assets is fair value as
determined in good faith by the Fund's Trustees. Short-term securities are
valued in the manner described in the notes to the financial statements included
in the Statement of Additional Information.
Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the next
calculation of net asset value plus applicable Class A sales charges after an
order is received by a dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. Orders
received by dealers after the close of the Exchange are priced based on the next
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
orders received by them to the Distributor so they will be received prior to
such time. Orders of less than $500 are mailed by the dealer and processed at
the offering price next calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs)
26
<PAGE> 27
resulting from such sales arrangement, (ii) generally, each class has exclusive
voting rights with respect to approvals of the Rule 12b-1 distribution plan
pursuant to which its distribution fee and/or service fee is paid which relate
to a specific class, and (iii) Class B and Class C shares are subject to a
conversion feature. Each class has different exchange privileges and certain
different shareholder service options available. See "Distribution Plans" and
"Shareholder Services -- Exchange Privilege." The net income attributable to
Class B and Class C shares and the dividends payable on Class B and Class C
shares will be reduced by the amount of the distribution fee and incremental
expenses associated with such distribution fees. Sales personnel of
broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling such shares may receive differing compensation
for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediaries at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying brokers, dealers or financial intermediaries
for certain services or activities which are primarily intended to result in
sales of shares of the Fund. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Such fees paid
for such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. These programs will not change the price
an investor will pay for shares or the amount that a Fund will receive from such
sale.
27
<PAGE> 28
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED
TO DEALERS
AS % OF NET AS % OF (AS A % OF
SIZE OF AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Less than $100,000................. 4.99% 4.75% 4.25%
$100,000 but less than $250,000.... 3.90% 3.75% 3.25%
$250,000 but less than $500,000.... 2.83% 2.75% 2.25%
$500,000 but less than
$1,000,000........................ 2.04% 2.00% 1.75%
$1,000,000 and over................ * * *
</TABLE>
- ------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of one percent in the event of certain redemptions
within one year of the purchase. The contingent deferred sales charge incurred
upon redemption is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for purchases of $1 million or more as follows:
one percent on sales to $2 million, plus 0.80% on the next million, plus 0.20%
on the next $2 million and 0.08% on the excess over $5 million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. Dealers which are
reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described herein. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.
28
<PAGE> 29
QUANTITY DISCOUNTS
Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described herein.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and minor children and any corporation, partnership or sole
proprietorship which is 100% owned, either alone or in combination, by any of
the foregoing; a trustee or other fiduciary purchasing for a single fiduciary
account, or a "company" as defined in Section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Money Market Fund ("VK Money Market"), Van Kampen American Capital Tax Free
Money Fund ("VK Tax Free"), Van Kampen American Capital Reserve Fund ("Reserve")
and The Govett Funds, Inc.
Volume Discounts. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
Participating Funds, although other Participating Funds may have different sales
charges.
Cumulative Purchase Discount. The size of investment in the preceding table
may also be determined by combining the amount being invested in shares of the
Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Letter of Intent. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the table herein. The size
of investment shown in the preceding table also includes purchases of shares of
the Participating Funds over a 13-month period based on the total amount of
intended purchases plus the value of all shares of the Participating Funds
previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charges applicable to the
29
<PAGE> 30
purchases made and the charges previously paid. The initial purchase must be for
an amount equal to at least five percent of the minimum total purchase amount of
the level selected. If trades not initially made under a Letter of Intent
subsequently qualify for a lower sales charge through the 90-day back-dating
provisions, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. Such adjustment in sales charge will be used
to purchase additional shares for the shareholder at the applicable discount
category. Additional information is contained in the application form
accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
Unit Fund Reinvestment Programs. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A shares
of the Fund, other Participating Funds, VK Money Market, VK Tax Free or Reserve
with no minimum initial or subsequent investment requirement, and with a lower
sales charge if the administrator of an investor's unit investment trust program
meets certain uniform criteria relating to cost savings by the Fund and the
Distributor. The total sales charge for all investments made from unit trust
distributions will be one percent of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their securities broker or dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if
30
<PAGE> 31
their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
shares of the Fund and shares of other Participating Funds as described
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts,"
during the 13 month period commencing with the first investment pursuant
hereto equals at least $1 million. The Distributor may pay Service
Organizations through which purchases are made an amount up to 0.50% of
the amount invested, over a twelve month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to one percent for such purchases.
(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company
31
<PAGE> 32
with at least 50 eligible employees or investing at least $250,000 in
Participating Funds, VK Money Market, VK Tax Free or Reserve. For such
investments the Fund imposes a contingent deferred sales charge of one
percent in the event of redemptions within one year of the purchase other
than redemptions required to make payments to participants under the terms
of the plan. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related
expenses. A commission will be paid to dealers who initiate and are
responsible for such purchases as follows: one percent on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer or financial institution
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the Fund at
net asset value to such groups at any time.
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.
32
<PAGE> 33
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- ------------------------------------------------------------------------------
<S> <C>
First....................................... 4%
Second...................................... 4%
Third....................................... 3%
Fourth...................................... 2.5%
Fifth....................................... 1.5%
Sixth....................................... None
- ------------------------------------------------------------------------------
</TABLE>
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first, of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge, second, of shares held for over five years or shares acquired pursuant
to reinvestment of dividends or distributions and third, of shares held longest
during the five-year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of four percent (the applicable rate in the second year after purchase).
A commission or transaction fee of four percent of the purchase amount will be
paid to broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of one percent. The charge is assessed on an
amount equal to the lesser of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price. In addition, no charge is
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
33
<PAGE> 34
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of one percent of the purchase amount will be
paid to broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing
commissions and transaction fees of up to 0.75% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation to Service Organizations
that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of these services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Except as described herein, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in certain of the
Participating Funds or Reserve, may receive statements quarterly from ACCESS
showing any
34
<PAGE> 35
reinvestments of dividends and capital gains distributions and any other
activity in the account since the preceding statement. Such shareholders also
will receive separate confirmations for each purchase or sale transactions other
than reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized investment dealers or by mailing a
check directly to ACCESS.
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate no more than two percent of the net asset value of the
issued shares, and bill the party to whom the certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. This instruction may be made by telephone by calling (800)
421-5666 ((800) 772-8889 for the hearing impaired). The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized investment dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP; and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. American
Capital Trust Company serves as custodian under the IRA, 403(b)(7) and Keogh
plans. Details regarding fees, as well as full plan administration for profit
sharing, pension and 401(k) plans, are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
35
<PAGE> 36
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanying this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a Class
A, Class B or Class C account in the Fund invested into a pre-existing Class A,
Class B or Class C account in any of the Participating Funds, VK Money Market,
VK Tax Free or Reserve.
If a qualified, pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund, other
than Van Kampen American Capital Government Target Fund ("Government Target"),
may be exchanged for shares of the same class of shares of any other Fund
without sales charge, provided that shares of certain other Van Kampen American
Capital fixed-income funds may not be exchanged within 30 days of acquisition
without Adviser approval. Shares of Government Target may be exchanged for Class
A shares of the Fund without sales charge. Class A shares of VK Money Market, VK
Tax Free or Reserve that were not acquired in exchange for Class B or Class C
shares of a Participating Fund may be exchanged for Class A shares of the Fund
upon payment of the excess, if any, of the sales charge rate applicable to the
shares being acquired over the sales charge rate previously paid. Shares of VK
Money Market, VK Tax Free or Reserve acquired through an exchange of Class B or
Class C shares may be exchanged only for the same class of shares of a
Participating Fund without incurring a contingent deferred sales charge. Shares
of any Participating Fund, VK Money Market, VK Tax Free or Reserve may be
exchanged for shares of any other Participating Fund if shares of that
Participating Fund are available for sale; however, during periods of suspension
of sales, shares of
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<PAGE> 37
a Participating Fund may be available for sale only to existing shareholders of
a Participating Fund.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other
American Capital fund that offers such shares ("new shares") in an amount equal
to the aggregate net asset value of the original shares, without the payment of
any contingent deferred sales charge otherwise due upon redemption of the
original shares. For purposes of computing the contingent deferred sales charge
payable upon a disposition of the new shares, the holding period for the
original shares is added to the holding period of the new shares. Class B or
Class C shareholders remain subject to the contingent deferred sales charge
imposed by the fund initially purchased by the shareholder upon their redemption
from the Van Kampen American Capital complex of funds. The contingent deferred
sales charge is based on the holding period requirement of the original fund.
Shares of the fund to be acquired must be registered for sale in the
investor's state. Exchanges of shares are sales and may result in a gain or loss
for federal income tax purposes, although if the shares exchanged have been held
for less than 91 days, the sales charge paid on such shares is not included in
the tax basis of the exchanged shares, but is carried over and included in the
tax basis of the shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying this Prospectus. Van
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
"VKAC"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither VKAC nor the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine.
VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge. See "Purchase of
Shares" and "Redemption of Shares." If the exchanging shareholder does not have
an account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification) and dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal
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<PAGE> 38
plan for the new account or reinvest dividends from the new account into another
fund, however, an exchanging shareholder must file a specific written request.
The Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plans are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
SHAREHOLDER SERVICES APPLICABLE TO
CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
38
<PAGE> 39
appoint ACCESS as agent by completing the AUTHORIZATION FOR REDEMPTION BY CHECK
form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the shareholder's Class A account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of Class A shares. Any
gain or loss realized on the sale of shares is a taxable event. See "Redemption
of Shares."
Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or
State Street Bank. Retirement Plans and accounts that are subject to backup
withholding are not eligible for the privilege. A "stop payment" system is not
available on these checks. See the Statement of Additional Information for
further information regarding the establishment of the privilege.
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REDEMPTION OF SHARES
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REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized dealer.
Orders received from dealers must be at least $500 unless transmitted via the
FUNDSERV network. The redemption price for such shares is the net asset value
next calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of one percent may be imposed on certain
redemptions of Class A shares made within one year of purchase for investment of
39
<PAGE> 40
$1 million or more and for certain qualified 401(k) retirement plans. The
contingent deferred sales charge incurred upon redemption is paid by the
Distributor in reimbursement for distribution-related expenses. See "Purchase of
Shares." A custodian of a retirement plan account may charge fees based on the
custodian's independent fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 30 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to ACCESS. Where Van Kampen American Capital Trust
Company serves as custodian, special IRA, 403(b)(7), or Keogh distribution forms
must be obtained from and be forwarded to Van Kampen American Capital Trust
Company, P.O. Box 944, Houston, Texas 77001-0944. Contact the custodian for
information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until the purchase check has cleared, usually a period of up to
15 days. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum investment as specified by the
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<PAGE> 41
Trustees. At least 60 days advance written notice of any such involuntary
redemption is required and the shareholder is given an opportunity to purchase
the required value of additional shares at the next determined net asset value
without sales charge. Any applicable contingent deferred sales charge will be
deducted from the proceeds of this redemption. Any involuntary redemption may
only occur if the shareholder account is less than the minimum initial
investment due to shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures
previously set forth, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to
the bank account of record as described below. To establish such privilege, a
shareholder must complete the appropriate section of the application form
accompanying this Prospectus or call the Fund at (800) 421-5666 to request that
a copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. VKAC and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, neither VKAC nor the Fund
will be liable for following telephone instructions which it reasonably believes
to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. Telephone redemptions may not be available if the shareholder cannot
reach ACCESS by telephone, whether because all telephone lines are busy or for
any other reason; in such case, a shareholder would have to use the Fund's
regular redemption procedure previously described. Requests received by ACCESS
prior to 4:00 p.m., New York time, on a regular business day will be processed
at the net asset value per share determined that day. These privileges are
available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. This service is also not available with respect to shares held in
an individual retirement account (IRA) for which Van Kampen American Capital
Trust Com-
41
<PAGE> 42
pany acts as custodian. To establish such privilege a shareholder must complete
the appropriate section of the application form accompanying this Prospectus or
call the Fund at (800) 421-5666. The Fund reserves the right at any time to
terminate, limit or otherwise modify this redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of a Class B and Class C
shareholder. An individual will be considered disabled for this purpose if he or
she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B and Class C shares.
In cases of disability, the contingent deferred sales charge on Class B and
Class C shares will be waived where the disabled person is either an individual
shareholder or owns the shares as a joint tenant with right of survivorship or
is the beneficial owner of a custodial or fiduciary account, and where the
redemption is made within one year of the initial determination of disability.
This waiver of the contingent deferred sales charge on Class B and Class C
shares applies to a total or partial redemption, but only to redemptions of
shares held at the time of the initial determination of disability.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. Reinstatement at net asset value is also offered to
participants in those eligible retirement plans held or administered by Van
Kampen American Capital Trust Company for repayment of principal (and interest)
on their borrowings on such plans.
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<PAGE> 43
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DISTRIBUTION PLANS
- ------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Trustees of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
NASD ("NASD Rules") applicable to mutual fund sales charges. The NASD Rules
limit the annual distribution costs and service fees that a mutual fund may
impose on a class of shares. The NASD Rules also limit the aggregate amount
which the Fund may pay for such distribution costs. Under the Class A Plan, the
Fund pays a service fee to the Distributor at an annual rate of up to 0.25% of
the Fund's aggregate average daily net assets attributable to the Class A
shares. Such payments to the Distributor under the Class A Plan are based on an
annual percentage of the value of Class A shares held in shareholder accounts
for which such Service Organizations are responsible at the rates of 0.15%
annually with respect to Class A shares in such accounts on September 29, 1989
and 0.25% annually with respect to Class A shares issued after that date. Under
the Class B Plan and the Class C Plan, the Fund pays a service fee to the
Distributor at an annual rate of up to 0.25% and a distribution fee at an annual
rate of up to 0.75% of the Fund's aggregate average daily net assets
attributable to the Class B or Class C shares to reimburse the Distributor for
service fees paid by it to Service Organizations and for its distribution costs.
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to four
percent of the purchase price for Class B shares purchased by the clients of
broker-dealers and other Service Organizations, and (ii) other distribution
expenses as described in the Statement of Additional Information. Under the
Class C Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class C shares as reimbursement for (i) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares and (ii) other distribution expenses as
described in the Statement of Additional Information.
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<PAGE> 44
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Trustees of the Fund determined that there was a reasonable likelihood that such
Plans would benefit the Fund and its shareholders. Information with respect to
distribution and service revenues and expenses is presented to the Trustees each
year for their consideration in connection with their deliberations as to the
continuance of the Distribution Plans. In their review of the Distribution
Plans, the Trustees are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B or Class C shares is designed to
permit an investor to purchase such shares without the assessment of a front-end
sales load and at the same time permit the Distributor to compensate Service
Organizations with respect to such shares. In this regard, the purpose and
function of the combined contingent deferred sales charge and distribution fee
are the same as those of the initial sales charge with respect to the Class A
shares of the Fund in that in both cases such charges provide for the financing
of the distribution of the Fund's shares.
Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward and may
be reimbursed by the Fund or its shareholders from payments received through
contingent deferred sales charges in future years and from payments under the
Class B Plan and Class C Plan so long as such Plans are in effect. For example,
if in a fiscal year the Distributor incurred distribution expenses under the
Class B Plan of $1 million, of which $500,000 was recovered in the form of
contingent deferred sales charges paid by investors and $400,000 was reimbursed
in the form of payments made by the Fund to the Distributor under the Class B
Plan, the balance of $100,000, would be subject to recovery in future fiscal
years from such sources. For the plan year ended June 30, 1994, the unreimbursed
expenses incurred by the Distributor under the Class B Plan and carried forward
were approximately $2.4 million or 3.43% of the Class B shares' average daily
net assets. The unreimbursed expenses incurred by the Distributor under the
Class C Plan and carried forward were approximately $189,000 or 1.42% of the
Class C shares' average daily net assets.
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<PAGE> 45
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
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DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.
DIVIDENDS. Interest earned from investments is the Fund's main source of
income. Substantially all of this income, less expenses, is distributed monthly
as dividends to shareholders. Unless the shareholder instructs otherwise,
dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value. See "Shareholder Services -- Reinvestment
Plan."
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
incremental transfer agency fees applicable to such classes of shares.
CAPITAL GAINS. When the Fund sells portfolio securities, it may realize
capital gains or losses, depending on whether the prices of the securities sold
are higher or lower than the prices the Fund paid to purchase them. Net realized
capital gains represent the total profit from sales of securities minus total
losses from sales of securities including losses carried forward from prior
years. The Fund distributes any taxable net realized capital gains to
shareholders annually. As in the case of income dividends, capital gains
distributions are automatically reinvested in additional shares of the Fund at
net asset value. See "Shareholder Services -- Reinvestment Plan."
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TAX STATUS
- ------------------------------------------------------------------------------
TAXES. The Fund has qualified and intends to be taxed as a regulated
investment company under the Internal Revenue Code. By qualifying as a regulated
investment company, the Fund is not subject to federal income taxes to the
extent it distributes its net investment income and net realized capital gains.
Dividends from net investment income and distributions from any net realized
short-term capital gains are taxable to shareholders as ordinary income.
Long-term capital gains distributions constitute long-term capital gains for
federal income tax purposes. All such dividends and distributions are taxable to
the shareholder whether or not reinvested in shares. However, shareholders not
subject to tax on their income will not be required to pay tax on amounts
distributed to them.
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<PAGE> 46
Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions.
To avoid being subject to a 31% federal back-up withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
Dividends or distributions paid by the Fund will have the effect of reducing
the net asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution paid shortly after the purchase of shares
by an investor would represent, in substance, a return of capital to the
shareholder (to the extent that it is paid on the shares so purchased) even
though subject to income taxes as discussed herein.
The Fund may purchase debt securities (such as zero-coupon debt securities and
zero-fixed-coupon debt securities, see "Investment Objectives and Policies --
Lower Rated Debt Securities") that have original issue discount, which generally
is included in income ratably over the term of the security. The discount that
accrues each year on such securities thus will increase the Fund's investment
company taxable income, thereby increasing the amount that must be distributed
to satisfy the Distribution Requirement, without providing the cash with which
to make the distribution. Accordingly, the Fund may have to dispose of other
securities, thereby realizing gain or loss at a time when the Fund otherwise
might not want to do so, in order to provide the cash necessary to make
distributions to those shareholders who do not reinvest dividends.
Gains or losses on the Fund's transactions in listed options on securities,
futures and options on futures generally are treated as 60% long-term and 40%
short-term, and positions held by the Fund at the end of its fiscal year
generally are required to be marked to market, with the result that unrealized
gains and losses are treated as realized. Gains and losses realized by the Fund
from writing over-the-counter options constitute short-term capital gains or
losses unless the option is exercised, in which case the character of the gain
or loss is determined by the holding period of the underlying security. The Code
contains certain "straddle" rules which require deferral of losses incurred in
certain transactions involving hedged positions to the extent the Fund has
unrealized gains in offsetting positions and generally terminate the holding
period of the subject position. Additional information is set forth in the
Statement of Additional Information.
The foregoing is a brief summary of some of the federal income tax
considerations affecting the Fund and its investors who are U.S. residents or
U.S. corporations. Investors should consult their tax advisers for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or
46
<PAGE> 47
citizenship tax consequences of receipt of dividends and distributions from the
Fund.
PENNSYLVANIA PERSONAL PROPERTY TAX. The Fund obtained a written letter of
determination from the Pennsylvania Department of Revenue that the Fund will be
subject to the Pennsylvania foreign franchise and corporate net income tax upon
initiating its intended business activities in Pennsylvania, and that
accordingly, Fund shares will be exempt from the Pennsylvania personal property
taxes. The Fund anticipates that it will continue such business activities but
reserves the right to suspend them at any time, resulting in the termination of
the exemption. The Fund maintains an office at Mellon Bank Center, Suite 1300,
1735 Market Street, Philadelphia, PA 19103.
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FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one, five, and ten year periods. Other total return quotations,
aggregate or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Since shares of the Fund were offered at a maximum sales charge of 6.75% prior
to June 12, 1989, actual Fund total return would have been somewhat less than
that computed on the basis of the current maximum sales charge. Total return is
based on historical earnings and asset value fluctuations and is not intended to
indicate future performance. No adjustments are made to reflect any income taxes
payable by shareholders on dividends and distributions paid by the Fund or to
reflect the fact no 12b-1 fees were incurred prior to October 1, 1989.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
47
<PAGE> 48
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. For example, the high yields of lower rated
bonds in which the Fund invests reflect the risk that the value of the bonds may
be impaired in a financial restructuring or default by the issuer. The
investment return and principal value of an investment in the Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%; Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. It differs from yield, which is a measure of the income
actually earned by the Fund's investments, and from total return, which is a
measure of the income actually earned by, plus the effect of any realized and
unrealized appreciation or depreciation of, such investments during a stated
period. Distribution rate is, therefore, not intended to be a complete measure
of the Fund's performance. Distribution rate may sometimes be greater than yield
since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
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from futures transactions engaged in by the Fund. Distribution rates will be
computed separately for each class of the Fund's shares.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds, with the Consumer Price Index, other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Investor's Business Daily, Kiplinger's Personal Finance Magazine,
Money, Mutual Fund Forcaster, Stanger's Investment Advisor, USA Today, U.S. News
& World Report and The Wall Street Journal. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each class of the Fund's shares. For
these purposes, the performance of the Fund, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of which
would reduce Fund performance. The Fund will include performance data for Class
A, Class B and Class C shares of the Fund in any advertisement or information
including performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund was originally incorporated in Texas on July 11, 1978,
re-incorporated by merger into a Maryland corporation on July 2, 1992 and
reorganized on August 5, 1995, under the laws of the state of Delaware as a
business entity commonly known as a "Delaware business trust." It is authorized
to issue an unlimited number of Class A, Class B and Class C shares of
beneficial interest of $0.01 par value. Other classes of shares may be
established from time to time in accordance with provisions of the Fund's
Declaration of Trust. Shares issued by the Fund are fully paid, non-assessable
and have no preemptive or conversion rights.
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The Fund currently offers three classes, designated Class A shares, Class B
shares and Class C shares. Each class of shares represents an interest in the
same assets of the Fund and generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee. See "Distribution Plans."
The Fund is permitted to issue an unlimited number of classes. Each class of
share is equal as to earnings, assets and voting privileges, except as noted
above, and each class bears the expenses related to the distribution of its
shares. There are no conversion, preemptive or other subscription rights, except
with respect to the conversion of Class B shares and Class C shares into Class A
shares as described above. In the event of liquidation, each of the shares of
the Fund is entitled to its portion of all of the Fund's net assets after all
debt and expenses of the Fund have been paid. Since Class B shares and Class C
shares pay higher distribution expenses, the liquidation proceeds to Class B
shareholders and Class C shareholders are likely to be lower than to other
shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Fund is
set forth in the Statement of Additional Information.
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
An investment in the Fund may not be appropriate for all investors.
The Fund is not intended to be a complete investment program, and investors
should consider their long-term investment goals and financial needs when making
an investment decision with respect to the Fund.
An investment in the Fund is intended to be a long-term investment, and should
not be used as a trading vehicle.
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- ------------------------------------------------------------------------------
APPENDIX -- DESCRIPTION OF BOND RATINGS
- ------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
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C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Nonrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as
a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest
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degree of speculation and C the highest degree of speculation. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS
Both Moody's and Standard & Poor's use the same designations for corporate
bonds as they do for preferred stock, except in the case of Moody's preferred
stock ratings, the initial letter rating is not capitalized. While the
descriptions are tailored for preferred stocks, the relative quality
distinctions are comparable to those described above for corporate bonds.
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<TABLE>
<S> <C>
VAN KAMPEN AMERICAN CAPITAL
HIGH INCOME CORPORATE BOND FUND
------------------
2800 Post Oak Blvd.
Houston, TX 77056
------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Blvd.
Houston, TX 77056
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
EXISTING SHAREHOLDERS-- Transfer Agent
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL ACCESS INVESTOR SERVICES, INC.
THE FUND'S TOLL-FREE P.O. Box 418256
NUMBER--(800) 421-5666 Kansas City, MO 64141-9256
PROSPECTIVE INVESTORS--CALL Custodian
YOUR BROKER OR (800) 421-5666
STATE STREET BANK AND
DEALERS--FOR DEALER TRUST COMPANY
INFORMATION, SELLING 225 Franklin Street, P.O. Box 1713
AGREEMENTS, WIRE ORDERS, Boston, MA 02105-1713
OR REDEMPTIONS CALL THE Attn: Van Kampen American Capital Funds
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666 Legal Counsel
FOR SHAREHOLDER AND O'MELVENY & MYERS
DEALER INQUIRIES THROUGH 400 South Hope Street
TELECOMMUNICATIONS Los Angeles, CA 90071
DEVICE FOR THE DEAF (TDD) Independent Accountants
DIAL (800) 772-8889
PRICE WATERHOUSE LLP
FOR TELEPHONE TRANSACTIONS 1201 Louisiana, Suite 2900
DIAL (800) 421-5684 Houston, TX 77002
</TABLE>
<PAGE> 55
HIGH INCOME CORPORATE
BOND FUND
------------------------------------------------------------------------------
P R O S P E C T U S
AUGUST 7, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 56
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL
HIGH INCOME CORPORATE BOND FUND
AUGUST 7, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated August 7,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION......................................................... 2
INVESTMENT OBJECTIVES AND POLICIES.......................................... 2
INVESTMENT RESTRICTIONS..................................................... 9
TRUSTEES AND EXECUTIVE OFFICERS............................................. 10
INVESTMENT ADVISORY AGREEMENT............................................... 14
DISTRIBUTOR................................................................. 16
DISTRIBUTION PLANS.......................................................... 16
TRANSFER AGENT.............................................................. 18
PORTFOLIO TURNOVER.......................................................... 18
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 18
DETERMINATION OF NET ASSET VALUE............................................ 19
PURCHASE AND REDEMPTION OF SHARES........................................... 19
EXCHANGE PRIVILEGE.......................................................... 23
CHECK WRITING PRIVILEGE..................................................... 24
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES.................................. 24
FUND PERFORMANCE............................................................ 26
OTHER INFORMATION........................................................... 26
FINANCIAL STATEMENTS........................................................ 27
</TABLE>
<PAGE> 57
GENERAL INFORMATION
Van Kampen American Capital High Income Corporate Bond Fund (the "Fund")
was originally incorporated in Texas on July 11, 1978, reincorporated in
Maryland on July 2, 1992 and reorganized under the laws of Delaware on August 5,
1995.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than seven percent of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, is a wholly owned subsidiary of VK/AC Holding, Inc.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight, July 1995. VKAC's roots in money
management extend back to 1926. Today, we manage or supervise more than $50
billion in mutual funds, closed-end funds and unit investment trusts -- assets
which have been entrusted to VKAC in more than 2 million investor accounts. VKAC
has one of the largest research teams (outside of the rating agencies) in the
country, with 86 analysts devoted to various specializations. Each of our high
yield analysts, based either in San Francisco, Chicago, Houston or Boston, has
the responsibility to cover a specific region of the country. This regional
focus enables each high yield analyst to provide more specialized coverage of
the market and alert the portfolio manager to issues of local importance.
As of July 14, 1995, no person was known by the Fund to own beneficially or
of record as much as five percent of the Class A, Class B or Class C shares of
the Fund except as follows: 16.70% of the outstanding Class B shares and 31.28%
of the outstanding Class C shares of the Fund were owned of record by Smith
Barney Inc., 388 Greenwich Street, 11th Floor, New York, New York 10013-2375;
8.21% of the outstanding Class B shares and 8.48% of the outstanding Class C
shares of the Fund were owned of record by Donaldson Lufkin Jenrette Securities,
P.O. Box 2052, Jersey City, New Jersey 07303-2052; 5.54% of the outstanding
Class C shares of the Fund were owned of record by Merrill Lynch Pierce Fenner,
4800 Deer Lake Drive East, 3rd Floor, Jacksonville, Florida 32246-6484; and
26.46% of the outstanding Class A shares, 15.92% of the outstanding Class B
shares and 7.59% of the outstanding Class C shares were owned of record by
American Capital Trust Company, 2800 Post Oak Boulevard, Houston, Texas 77056,
acting as Custodian for certain employee benefit plans and individual retirement
accounts.
INVESTMENT OBJECTIVES AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
Lower rated and comparable nonrated securities tend to offer higher yields
than higher rated securities with the same maturities because the historical
conditions of the issuers of lower rated securities may not have been as strong
as that of other issuers. The Adviser, however, believes that such ratings are
not necessarily an accurate reflection of the current financial condition of the
issuers because they may be based upon considerations taken into account at the
time such ratings were assigned, rather than upon subsequent
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<PAGE> 58
developments affecting such issuers. Moreover, ratings categories tend to be
broad, so that there may be significant variations among the financial condition
of issuers within the same category. For these reasons, the Adviser may rely
more on its own analysis in determining which securities offer the best
opportunities for higher yields without unreasonable risks. Therefore, the
achievement of the Fund's objectives will depend more on the Adviser's
analytical and portfolio management skills than would be the case if greater
reliance were placed on ratings assigned by the rating services. The Adviser's
analysis will focus on a number of factors affecting the financial condition of
a company; including the strength of its management; the financial soundness of
the company and the outlook of its industry; the security's responsiveness to
changes in interest rates and business conditions; the cash flow of the company;
dividend or interest coverage; and the fair market value of the company's
assets. In addition, the Adviser evaluates each individual debt security for
credit quality and value. In making portfolio decisions for the Fund, the
Adviser will attempt to identify higher yielding securities of companies whose
financial condition has improved since the issuance of such securities, or is
anticipated to improve in the future.
The Fund may invest up to 20% of its total assets in common stocks or other
equity securities and in non-income producing securities. See "Investment
Objectives and Policies" in the Prospectus.
When market conditions dictate a more "defensive" investment strategy, the
Fund may invest on a temporary basis up to all of its assets in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
prime commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
short-term money market instruments. Under normal market conditions the yield on
these securities will tend to be lower than the yield on other securities to be
purchased by the Fund.
As noted above, the Fund may invest in securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities which are supported by
any of the following: (a) the full faith and credit of the U.S. Government, (b)
the right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government, (c) discretionary authority of the U.S. Government
agency or instrumentality, or (d) the credit of the instrumentality. Such
agencies or instrumentalities include, but are not limited to, the Federal
National Mortgage Association, the Government National Mortgage Association,
Federal Land Banks, and the Farmer's Home Administration.
ADDITIONAL RISKS OF LOWER RATED DEBT SECURITIES
Additional risks of lower rated debt securities include limited liquidity
and secondary market support. As a result, the prices of lower rated debt
securities may decline rapidly in the event a significant number of holders
decide to sell. Changes in expectations regarding an individual issuer, an
industry or lower rated debt securities generally could reduce market liquidity
for such securities and make their sale by the Fund more difficult, at least in
the absence of price concessions. Reduced liquidity could also create
difficulties in accurately valuing such securities at certain times. An economic
downturn or an increase in interest rates could severely disrupt the market for
high yield bonds and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. The Fund will take such
actions as it considers appropriate in the event of anticipated financial
difficulties, default or bankruptcy of either the issuer or any debt security
owned by the Fund or the underlying source of funds for debt service. Such
action may include retaining the services of various persons and firms to
evaluate or protect any real estate, facilities or other assets securing any
such obligation or acquired by the Fund as a result of any such event. The Fund
incurs additional expenditures in taking protective action with respect to Fund
obligations in default and assets securing such obligations. Investment in lower
rated debt securities are not generally meant for short-term investment.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to broker-dealers and other financial institutions provided
that such loans are callable at any time by the Fund, and are at all times
secured by cash collateral that is at least equal to the market value,
determined daily, of the loaned
3
<PAGE> 59
securities. The advantage of such loans is that the Fund continues to receive
the interest and dividends on the loaned securities, while at the same time
earning interest on the collateral which will be invested in short-term
obligations. The Fund pays lending fees and custodial fees in connection with
loans of its securities. There is no assurance as to the extent to which
securities loans can be effected.
A loan may be terminated by the borrower on one business day's notice, or
by the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
Fund's management to be creditworthy and when the consideration which can be
earned from such loans is believed to justify the attendant risks. On
termination of the loan, the borrower is required to return the securities to
the Fund; any gain or loss in the market price during the loan would inure to
the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, whole or in part
as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
SECURITIES OF FOREIGN ISSUERS
In addition to the policies set forth in the Prospectus, the Fund may also
invest up to ten percent of its total assets in foreign currency denominated
debt securities; however, the Fund will not engage in such activity unless it
has been first authorized to do so by its Trustees.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities mark to market daily at not less than the repurchase
price. The underlying securities (securities of the U.S. Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. See "Investment
Practices -- Repurchase Agreements" in the Prospectus for further information.
BRADY BONDS
The Fund may invest in "Brady Bonds," which are debt restructurings that
provide for the exchange of cash and loans for newly issued bonds. Brady Bonds
recently have been issued by the governments of Costa Rica, Mexico, Nigeria,
Uruguay and Venezuela, and are expected to be issued by Argentina, Brazil and
the Philippines and other emerging market countries. Brady Bonds issued by
Mexico and Venezuela currently are rated below investment grade. Investors
should recognize that Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the secondary market for Latin
American debt. The Salomon Brothers Brady Bond Index provides a benchmark that
can be used to compare returns of emerging market Brady Bonds with returns in
other bond markets, e.g., the U.S. bond market.
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<PAGE> 60
The Fund may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
Brady Bonds. Interest payments on such bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year of rolling interest payments
based on the applicable interest rate at that time, and is adjusted at regular
intervals thereafter.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option writing program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Actively writing options on portfolio securities is likely to result in
a substantially higher portfolio turnover rate than that of most other
investment companies.
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund would write call
options only on a covered basis, which means that, at all times during the
option period, the Fund would own or have the right to acquire securities of the
type that it would be obligated to deliver if any outstanding option were
exercised.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or U.S. Government securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A Fund
could close out its position as a writer of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over-the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, with would not
close out its position as a writer, but would provide an asset of equal value to
its obligations under the option written. If the Fund is not able to enter into
a closing purchase transaction or to purchase an offsetting option with respect
to an option it has written, it will be required to maintain the securities
subject to the call or the collateral underlying the put until a closing
purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others, regardless of whether such options are written on one or
more accounts
5
<PAGE> 61
or through one or more brokers. An exchange may order the liquidation of
positions found to be in violation of those limits, and it may impose other
sanctions or restrictions. These position limits may restrict the number of
options the Fund may be able to write.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options could be purchased for capital appreciation. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.
Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. Alternatively, put options could be purchased
for capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with the rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund is exempt from
registration as a "commodity pool."
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security rises, that position increases in value, and the Fund
receives from the broker a variation margin payment equal to that increase in
value. Conversely, where the Fund purchases a futures contract and the value of
the underlying security declines, the position is less valuable, and the Fund is
required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
6
<PAGE> 62
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk or error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depository requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities underlying the
futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and bonds of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related
7
<PAGE> 63
futures contract is sold, an increase, if any, in the price of the securities
may to some extent offset losses on the related futures contract. In such event,
the Fund would lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that the Fund not enter
into futures and related options for which the aggregate initial margin and
premiums exceed five percent of the fair market value of the Fund's assets. In
order to minimize leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as, it could sell a futures contract. The purchase of call
options on futures contracts would be intended to serve the same purpose as the
actual purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the price of the underlying security, when the use of
any option on a future would result in a loss to the Fund when the use of a
future would not.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the
8
<PAGE> 64
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which may not be changed
without the approval of the holders of a majority of its outstanding shares.
Such majority is defined as the lesser of (i) 67% or more of the voting
securities present in person or by proxy at the meeting, if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy; or (ii) more than 50% of the outstanding voting securities. The
percentage limitations contained in the restrictions and policies set forth
herein apply at the time of purchase of securities. These restrictions provide
that the Fund shall not:
1. Borrow money, except that the Fund may borrow for temporary purposes in
amounts not exceeding five percent of the market or other fair value
(taken at the lower of cost or current value) of its total assets (not
including the amount borrowed). Secured temporary borrowings may take
the form of reverse repurchase agreements, pursuant to which the Fund
would sell portfolio securities for cash and simultaneously agree to
repurchase such securities at a specified date for the same amount of
cash plus an interest component. Pledge its assets or assign or
otherwise encumber them in excess of 3.25% of its net assets (taken at
market value at the time of pledging) and then only to secure
borrowings effected within the limitations set forth in the preceding
sentence. Notwithstanding the foregoing, the Fund may engage in
transactions in options, futures contracts and related options and make
margin deposits and payments in connection therewith.
2. Engage in the underwriting of securities except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
3. Make short sales of securities, but it may engage in transactions in
options, futures contracts, and related options.
4. Purchase securities on margin, except for such short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities, and it may engage in transactions in options, futures
contracts and related options and make margin deposits and payments in
connection therewith.
5. Purchase or sell real estate, although it may purchase securities of
issuers which engage in real estate operations, securities which are
secured by interests in real estate, or securities representing
interests in real estate.
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may enter into transactions in futures contracts and
related options.
7. Make loans of money or securities, except (a) by the purchase of debt
obligations in which the Fund may invest consistent with its investment
objectives and policies; (b) by investment in repurchase agreements
(see "Repurchase Agreements"); or (c) by lending its portfolio
securities, subject to limitations described elsewhere in this
Statement of Additional Information (see "Investment Objectives and
Policies -- Lending of Securities").
8. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest
in the securities of companies which invest in or sponsor such
programs.
9. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
10. Invest for the purpose of exercising control or management of another
company.
11. Invest in securities of any company if, to the knowledge of the Fund,
any officer or director of the Fund or of the Adviser owns more than
one half of one percent of the outstanding securities of such
9
<PAGE> 65
company, and such officers and directors who own more than one half of
one percent own in the aggregate more than five percent of the
outstanding securities of such company.
12. Invest more than five percent of the market or other fair value of its
assets in warrants, or more than two percent of such value in warrants
which are not listed on the New York or American Stock Exchanges.
Warrants attached to other securities are not subject to these
limitations.
13. Invest more than 15% of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements which have
a maturity of longer than seven days.
14. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except the U.S. Government)
or purchase more than ten percent of the outstanding voting securities,
or more than ten percent of any class of securities, of any one issuer.
15. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the U.S.
Government).
16. Invest more than five percent of its total assets in companies having a
record, together with predecessors, of less than three years of
continuous operation.
17. Invest more than 20% of its total assets in U.S. currency denominated
issues of foreign governments and other foreign issuers, or invest more
than ten percent of its total assets in securities which are payable in
currencies other than U.S. dollars.
18. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts and other investment strategies and instruments that would be
considered "senior securities" but for the maintenance by the Fund of a
segregated account with its custodian or some other form of "cover".
In addition to the foregoing, the Fund has undertaken to a certain state
that at least 30 days prior to any change by the Fund in its investment
objective, the Fund will provide written notice to all of its shareholders in
that state regarding such proposed change.
TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and Executive Officers and their principal occupations
for the past five years are listed below.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital Funds.
Age: 63
</TABLE>
10
<PAGE> 66
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Radnor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art. Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing. A
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital Funds and Chairman of each Van Kampen American
Capital Fund advised by Van Kampen American Capital
Investment Advisory Corp.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive Vice
President of ACCESS, Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director, Trustee or Managing General Partner of
each of the Van Kampen American Capital Funds and other
open-end investment companies and closed-end investment
companies advised by the Adviser and its affiliates.
</TABLE>
11
<PAGE> 67
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A Director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital. A Director and the Second
Vice President of International Institute of Los Angeles.
A Trustee of each of the Van Kampen American Capital
Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 Fund. Director, FPA Capital Fund, Inc.; FPA New Income
Los Angeles, CA 90067 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital,
Age: 63 Inc.; and TCW Convertible Security Fund, Inc., investment
companies unaffiliated with Van Kampen American Capital.
A Trustee of each of the Van Kampen American Capital
Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 71 Capital Funds and Chairman of the Van Kampen American
Capital Funds advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van
Age: 55 Kampen American Capital Funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Fund by reason of his position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Fund by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.
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<PAGE> 68
The Fund's officers other than Messrs. McDonnell and Nyberg are located at
2800 Post Oak Blvd., Houston, TX 77056. Messrs. McDonnell and Nyberg are
located at One Parkview Plaza, Oakbrook Terrace, IL 60181.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Ellis S. Bigelow......... Vice President Senior Investment Vice President of the
Age: 43 Adviser.
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 41 Secretary and Corporate Secretary of the Adviser.
Peter Kapourelos......... Vice President Division Manager; Advantage Capital
Age: 75 Corporation.
Tanya M. Loden........... Vice President and Vice President and Controller of most of
Age: 35 Controller the investment companies advised by the
Adviser, formerly Tax Manager/Assistant
Controller.
Dennis J. McDonnell...... Vice President President, Chief Operating Officer and a
Age: 53 Director of the Adviser. Director of VK/AC
Holding, Inc. and Van Kampen American
Capital.
Curtis W. Morell......... Vice President and Vice President and Treasurer of most of the
Age: 49 Treasurer investment companies advised by the
Adviser.
Ronald A. Nyberg......... Vice President Executive Vice President, General Counsel
Age: 42 and Secretary of Van Kampen American
Capital. Executive Vice President and a
Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI
Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute.
Robert C. Peck, Jr....... Vice President Senior Vice President and Director of the
Age: 48 Adviser.
J. David Wise............ Vice President and Vice President, Associate General Counsel
Age: 51 Assistant Secretary and Assistant Corporate Secretary of the
Adviser.
Paul R. Wolkenberg....... Vice President Senior Vice President of the Adviser.
Age: 50 President, Chief Operating Officer and
Director of Van Kampen American Capital
Services, Inc. Executive Vice President,
Chief Operating Officer and Director of Van
Kampen American Capital Trust Company.
Executive Vice President and Director of
ACCESS.
</TABLE>
The Trustees and Officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. Only Messrs. Branagan, Caruso, Hilsman,
Powell, Rees, Sheehan, Sisto and Woodside served as Trustees of the Fund during
its last fiscal year. During the last fiscal year the Trustees who were not
affiliated with the Adviser or its parent received as a group $18,832 in
Trustees' fees from the Fund in addition to certain out-of-pocket expenses. Such
Trustees also received compensation for serving as trustees or directors of
other investment companies advised by the Adviser. For legal services rendered
during the last fiscal year
13
<PAGE> 69
the Fund paid legal fees of $14,410 to the law firm of O'Melveny & Myers, of
which Mr. Sheehan is Of Counsel. The firm also serves as legal counsel to other
Van Kampen American Capital Funds.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as directors or trustees is
set forth below. The compensation shown for the Fund is for the most recent
fiscal year and the total compensation shown for the Fund and other related
mutual funds is for the calendar year ended December 31, 1994. Mr. Powell is not
compensated for his service as Trustee, because of his affiliation with the
Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION
OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM
ACCRUED REGISTRANT
AS AND
AGGREGATE PART FUND
COMPENSATION OF COMPLEX
FROM FUND PAID TO
NAME OF PERSON REGISTRANT EXPENSES DIRECTORS(1)(5)
-------------- ---------- -------- --------------
<S> <C> <C> <C>
J. Miles Branagan........................................ $2,390 -0- $64,000
Dr. Richard E. Caruso(3)................................. 2,430(2) -0- 64,000
Dr. Roger Hilsman........................................ 2,470 -0- 66,000
David Rees(3)............................................ 2,390 -0- 64,000
Lawrence J. Sheehan...................................... 2,510 -0- 67,000
Dr. Fernando Sisto(3).................................... 3,085(2) -0- 82,000
William S. Woodside(4)................................... -0- -0- 18,000
</TABLE>
- ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $2,350 and $1,605 for Messrs.
Caruso and Sisto, respectively.
(3) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The
cumulative deferred compensation paid by the Fund is as follows: Caruso,
$5,910; Rees, $28,585; Sisto, $10,891.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. With respect to columns 1 and 3, $1,910 and $36,000, respectively,
was paid by the Adviser directly.
(5) Includes the following amounts for which the various Portfolios were
reimbursed by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman,
$1,000; Rees, $2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr.
Woodside was paid $36,000 directly by the Adviser as discussed in footnote 4
above).
Beginning July 21, 1995, the Fund pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $1,255 and a
meeting fee of $36 per Board meeting plus expenses. No additional fees are paid
for committee meetings or to the chairman of the board. In order to alleviate an
additional expense that might be caused by the new compensation arrangement, the
trustees have approved a reduction in the compensation per trustee and have
agreed to an aggregate annual compensation cap with respect to the combined fund
complex of $84,000 per trustee until December 31, 1996, based upon the net
assets and the number of Van Kampen American Capital funds as of July 21, 1995
(except that Mr. Whalen, who is a trustee of 34 closed-end funds advised by an
affiliate of the Adviser, would receive an additional $119,000 for serving as a
trustee of such funds). In addition, the Adviser has agreed to reimburse the
Fund through December 31, 1996 for any increase in the aggregate trustees'
compensation paid by the Fund over their 1994 fiscal year aggregate
compensation.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment
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<PAGE> 70
objectives. The Adviser also furnishes the services of the Fund's President and
such other executive and clerical personnel as are necessary to prepare the
various reports and statements and conduct the Fund's day-to-day operations. The
Fund, however, bears the cost of its accounting services, which include
maintaining its financial books and records and calculating its daily net asset
value. The costs of such accounting services include the salaries and overhead
expenses of the Fund's Treasurer and the personnel operating under his
direction. Charges are allocated among the investment companies advised or
subadvised by the Adviser. A portion of these amounts is paid to the Adviser or
its parent in reimbursement of personnel, office space, facilities and equipment
costs attributable to the provision of accounting services to the Fund. The Fund
also pays shareholder service agency fees, distribution fees, service fees,
custodian fees, legal and auditing fees, the costs of reports to shareholders,
and all other ordinary business expenses not specifically assumed by the
Adviser. The Advisory Agreement also provides that the Adviser shall not be
liable to the Fund for any actions or omissions if it acted without willful
misfeasance, bad faith, negligence or reckless disregard of its obligations.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a fee
payable monthly, computed on average daily net assets of the Fund at annual rate
of: 0.625% on the first $150 million average net assets; 0.55% on the next $150
million of average net assets; and 0.50% on the net assets over $300 million.
The Fund's average net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser will be reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of VK/AC
Holding, Inc. in connection with the purchase and sale of portfolio investments
less any direct expenses incurred by such subsidiary of VK/AC Holding, Inc., in
connection with obtaining such commissions, fees, brokerage or similar payments.
The Adviser agrees to use its best efforts to recapture tender solicitation fees
and exchange offer fees for the Fund's benefit and to advise the Trustees of the
Fund of any other commissions, fees, brokerage or similar payments which may be
possible for the Adviser or any other direct or indirect majority owned
subsidiary of VK/AC Holding, Inc. to receive in connection with the Fund's
portfolio transactions or other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitation applicable in the states where the Fund's shares are
qualified for sale, the compensation due the Adviser will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund except (1) interest and taxes, (2) brokerage commissions, (3)
certain litigation and indemnification expenses as described in the Advisory
Agreement and (4) payments made by the Fund pursuant to the distribution plans
(described herein).
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million and 1 1/2% of the remaining
average net assets.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 30 days' written notice.
During the fiscal years ended August 31, 1992, 1993 and 1994, the Adviser
received $2,085,355, $2,383,044 and $2,718,712, respectively, in advisory fees
from the Fund. For such periods the Fund paid $91,153, $112,725 and $109,694,
respectively, for accounting services.
15
<PAGE> 71
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such shares of the Fund as may be sold to the public. The Distributor is
not obligated to sell any stated number of shares. The Distributor bears the
cost of printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature, promotion
and advertising. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Trustees or by a vote of a majority of the Fund's
outstanding voting securities and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Underwriting Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.
During the fiscal years ended August 31, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $1,346,302,
$1,128,520 and $826,415. Of such totals, the amount retained by the Distributor
was $106,022, $94,921 and $125,969. The remainder was reallowed to dealers. Of
such dealer reallowances, $504,516, $428,350 and $238,856, respectively, was
received by Advantage Capital Corporation, an affiliated dealer of the
Distributor.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution Plan (the "Class A Plan," "Class B Plan" and "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payment to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to 4% of the purchase price of Class B shares
purchased by the clients of broker-dealers and other Service Organizations, (2)
out-of-pocket expenses of printing and distributing prospectuses and annual and
semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professionals, (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses
and (6) interest expense at the three month LIBOR rate plus one and one-half
percent compounded quarterly on the unreimbursed distribution expenses. With
respect to the Class C Plan, authorized payments by the Fund also include
payments at an annual rate of up to 0.75% of the net assets of the Class C
shares to reimburse the Distributor for (1) upfront commissions and transaction
fees of up to 0.75% of the purchase price of Class C shares purchased by the
clients of broker-dealers and other Service Organizations and ongoing
commissions and transaction fees paid to broker-dealers and other Service
Organizations in an amount up to 0.75% of the average daily net assets of the
Fund's Class C shares, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-
16
<PAGE> 72
pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professionals, (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses
and (6) interest expense at the three month LIBOR rate plus one and one-half
percent compounded quarterly on the unreimbursed distribution expenses. Such
reimbursements are subject to the maximum sales charge limits specified by the
NASD for asset-based charges.
Banks are currently prohibited under the Glass-Stegall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreement and selling group agreement were approved by the Trustees,
including a majority of the Trustees who are not interested persons (as defined
in the 1940 Act) of the Fund and who have no direct or indirect financial
interest in the operation of any of the Plans or in any agreements related to
each Plan ("Independent Trustees"). In approving each Plan in accordance with
the requirements of Rule 12b-1, the Trustees determined that there is a
reasonable likelihood that each Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting shares of
respective class. Any change in any of the Plans that would materially increase
the distribution or service expenses borne by the Fund requires shareholder
approval, voting separately by class; otherwise, it may be amended by a majority
of the Trustees, including a majority of the Independent Trustees, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as the Plan is in effect, the selection or nomination of the Independent
Trustees is committed to the discretion of the Independent Trustees.
For the fiscal year ended August 31, 1994, the Fund's aggregate expenses
under the Class A Plan were $882,219 or .21% of the Class A shares' average net
assets. Such expenses were paid to reimburse the Distributor for payments made
to Service Organizations for servicing Fund shareholders and for administering
the Class A Plan. For the fiscal year ended August 31, 1994, the Fund's
aggregate expenses under the Class B Plan were $567,889 or 1.00% of the Class B
shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $425,917 for commissions and transaction
fees paid to broker-dealers and other Service Organizations in respect of sales
of Class B shares of the Fund and $141,972 for fees paid to Service
Organizations for servicing Class B shareholders and administering the Class B
Plan. For the fiscal year ending August 31, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B Plan and carried forward were
approximately $2.5 million. For the fiscal year ended August 31, 1994, the
Fund's aggregate expenses under the Class C Plan were $83,590 or 1.00% of the
Class C shares' average daily net assets. Such expenses were paid to reimburse
the Distributor for the following payments: $63,693 for commissions and
transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class C shares of the Fund and $20,897 for fees paid to
Service Organizations for servicing Class C shareholders and administering the
Class C Plan. For the fiscal year ended August 31, 1994, the unreimbursed
expenses incurred by the Distributor under the Class C Plan and carried forward
were approximately $193,000.
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<PAGE> 73
TRANSFER AGENT
During the fiscal years ending August 31, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$891,737 for these services. These services are provided at cost plus a profit.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate for prior
years is shown under "Financial Highlights" in the Prospectus. The turnover rate
will fluctuate over time depending upon the Adviser's investment strategy and
the higher volatility of the market for high yielding fixed-income securities.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of any
commissions, if any, paid on such transactions. As most transactions made by the
Fund are principal transactions at net prices, the Fund incurs little or no
brokerage costs. Portfolio securities are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter and purchases from dealers serving as market
makers include the spread between the bid and asked price. Sales to dealers are
effected at bid prices.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser. No specific value can be assigned to such
research services which are furnished without cost to the Adviser. The
investment advisory fee is not reduced as a result of the Adviser's receipt of
such research services. Services provided may include (a) furnishing advice as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities; (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and the
performance of accounts; and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody). Research services furnished by firms through which the Fund effects
its securities transactions may be used by the Adviser in servicing all of its
advisory accounts; not all of such services may be used by the Adviser in
connection with the Fund. Consistent with the Rules of Fair Practice of the NASD
and subject to seeking best execution and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund as a factor
in the selection of firms to execute portfolio transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts,
including other investment companies. The Adviser seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities for the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations among the Fund and other
advisory accounts, the main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
The Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser's parent, Travelers.
Such affiliated persons currently are Smith Barney, a
18
<PAGE> 74
wholly owned subsidiary of Travelers. Effective August 2, 1993, Robinson
Humphrey, a wholly owned subsidiary of Smith Barney, became an affiliate of
Travelers. In addition, from December 15, 1988 through February 21, 1992, Dain
Bosworth, Inc. ("Dain Bosworth") and Rauscher Pierce, Refsnes, Inc. ("Rauscher
Pierce") were affiliates of Travelers; from September 10, 1987 to March 27,
1992, The Fox-Pitt, Kelton Group S.A. ("Fox-Pitt") was an affiliate of
Travelers; and from 1985 to September 30, 1992, Jefferies & Company, Inc.
("Jefferies") was deemed an affiliate of Travelers (then known as Primerica).
The negotiated commission paid to an affiliated broker on any transaction would
be comparable to that payable to a non-affiliated broker in a similar
transaction. The Fund conducted no affiliated brokerage transactions with Dain
Bosworth, Fox-Pitt, Jefferies, Rauscher Pierce, or Smith Barney during the last
fiscal year. During the year ended August 31, 1994, the Fund paid $12,574 in
brokerage commissions on transactions totalling $7,205,548 to brokers selected
primarily on the basis of research services provided to the Adviser.
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons (as defined in the 1940 Act) of the Adviser. Brokerage commissions paid
by the Fund on portfolio transactions for the fiscal years ended August 31,
1992, 1993 and 1994, totalled $4,548, $17,588, and $20,823, respectively.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Such computation is made by dividing the value of the Fund's securities
plus all cash and other assets (including accrued interest) less all liabilities
(including accrued expenses) by the number of shares outstanding. Portfolio
securities that are traded in the over-the-counter market are valued at the most
recently quoted bid price. Any security for which the primary market is on an
exchange is valued at the last reported sales price on the exchange where
principally traded or at the last reported bid price if there was no sale
reported that day. If no sale or bid price is reported that day, the security is
valued at the most recent sale price. Short-term investments with a maturity of
60 days or less when purchased are valued at cost plus interest earned
(amortized cost), which approximates market value. Short-term investments with a
maturity of more than 60 days when purchased are valued based on market
quotations until the remaining days to maturity become less than 61 days. From
such time, until maturity, the investments are valued at amortized cost using
the value of the investment on the 61st day. The value of any other securities
or other assets is fair value as determined in good faith by the Fund's
Trustees.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the SEC.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.
ALTERNATIVE SALES ARRANGEMENT
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The
19
<PAGE> 75
three classes of shares each represent interests in the same portfolio of
investments of the Fund, have the same rights and are identical in all respects,
except that Class B and Class C shares bear the expenses of the deferred sales
arrangements, distribution fees, and any expenses (including higher transfer
agency costs) resulting from such sales arrangements, and have exclusive voting
rights with respect to the Rule 12b-1 distribution plan pursuant to which the
distribution fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the Securities Act of 1933.
INVESTMENTS BY MAIL
A Shareholder Investment Account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be waived
by the Distributor for plans involving continuing investments. Subsequent
investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of Fund shares next computed
following receipt of payment by ACCESS. Confirmations of the opening of an
account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to purchases of Class A shares of the Fund where the
aggregate investment is $100,000 or more. For purposes of determining
eligibility for volume discounts, spouses and their minor children are treated
as a single purchaser, as is a director or other fiduciary purchasing for a
single fiduciary account. An aggregate investment includes all shares of the
Fund and all shares of certain other participating Van Kampen American Capital
mutual funds described in the Prospectus (the "Participating Funds"), which have
been previously purchased and are still owned, plus the shares being purchased.
The current offering price is used to determine the value of all such shares.
If, for example, an investor has previously purchased and still holds Class A
shares of the Fund and shares of other Participating Funds having a current
offering price of $40,000, and that person purchases $65,000 of additional Class
A shares of the Fund, the charge applicable to the $65,000 purchase would be
4.00% of the offering price. The same reduction is applicable to purchases under
a Letter of Intent as described in the next paragraph. THE DEALER MUST NOTIFY
THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE WHICH WOULD
QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES. SIMILAR
NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY MAIL. The
reduced sales charge will not be applied if such notification is not furnished
at the time of the order. The reduced sales charge will also not be applied
should a review of the records of the Distributor or ACCESS fail to confirm the
investor's representations concerning his holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
still owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90
20
<PAGE> 76
days in order that any investments made during this 90-day period, valued at the
investor's cost, can become subject to the Letter of Intent. The Letter of
Intent does not obligate the investor to purchase the indicated amount. In the
event the Letter of Intent goal is not achieved within the 13-month period, the
investor is required to pay the difference between sales charges otherwise
applicable to the purchases made during this period and sales charges actually
paid. Such payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such difference.
If the goal is exceeded in an amount which qualifies for a lower sales charge, a
price adjustment is made by refunding to the investor in shares of the Fund, the
amount of excess sales charge, if any, paid during the 13-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) Retirement Plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), there is no front-end sales charge, but a contingent deferred sales
charge ("CDSC-Class A") of one percent is imposed in the event of certain
redemptions within one year of the purchase. If a CDSC-Class A is imposed upon
redemption, the amount of the CDSC-Class A will be equal to the lesser of one
percent of the net asset value of the shares at the time of purchase, or one
percent of the net asset value of the shares at the time of redemption.
The CDSC-Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one-year period prior to the redemption. The CDSC-Class
A will be waived in connection with redemptions by certain Qualified Purchasers
(e.g., in retirement plans qualified under Section 401(a) of the Code and
deferred compensation plans under Section 457 of the Code) required to obtain
funds to pay distributions to beneficiaries pursuant to the terms of the plans.
Such payments include, but are not limited to, death, disability, retirement or
separation from service. No CDSC-Class A will be imposed on exchanges between
funds. For purposes of the CDSC-Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a
CDSC-Class A rather than a front-end load sales charge. In determining whether a
CDSC-Class A is payable, it is assumed that shares held the longest are the
first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of Van Kampen American Capital Reserve
Fund, Van Kampen American Capital Money Market Fund and Van Kampen American
Capital Tax Free Money Fund with shares of certain other participating funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
21
<PAGE> 77
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC-CLASS B
AND C")
The CDSC-Class B and C is waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or to be of long-continued and indefinite
duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of death or disability before it determines to waive the CDSC-Class B and C.
In cases of disability or death, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of American Capital
Funds; in such event, as described below, the Fund will "tack" the period for
which the original shares were held on to the holding period of the shares
acquired in the transfer or rollover for purposes of determining what, if any,
CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or disability
of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition,
the charge will be waived on any minimum distribution required to be distributed
in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC-Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and
22
<PAGE> 78
allowed a specified period of time to purchase additional shares to bring the
account up to the required minimum balance. The Fund will waive the
CDSC -- Class B and C upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C shares of the Fund, provided that the reinvestment is effected
within 120 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder Services-Exchange
Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital") and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
23
<PAGE> 79
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnerships or trust agreements) must accompany
the authorization card. The documents must be certified in original form, and
the certificates must be dated within 60 days of their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders of Class A, Class B and Class C shares and meet certain
diversification and other requirements. The per share dividends on Class B and
Class C shares will be lower than the per share dividends on Class A shares as a
result of the distribution fee and incremental transfer agency fees applicable
to the Class B and Class C shares. By qualifying as a regulated investment
company, the Fund is not subject to federal income taxes to the extent it
distributes its taxable net investment income and taxable net realized capital
gains. If for any taxable year the Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income,
including any net realized capital gains, would be subject to tax at regular
corporate rates (without any deduction for distributions to shareholders).
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable (net
investment) income for the twelve months ended December 31, plus 98% of its
capital gain net income for the twelve months ended October 31 of such calendar
year. The Fund intends to distribute sufficient amounts to avoid liability for
the excise tax.
Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Any loss on the sale of Fund shares held for less than six months is
treated as a long-term capital loss to the extent of any long-term capital gain
distribution paid on such shares, subject to any exception that may be provided
by IRS regulations for losses incurred under certain systematic withdrawal
plans. All dividends and distributions are taxable to the shareholder whether or
not reinvested in shares. Shareholders are notified annually by the Fund as to
the federal tax status of dividends and distributions paid by the Fund.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year,
are considered taxable income to shareholders on the record date even though
paid in the next year.
A portion of the dividends taxable as ordinary income qualify for the 70%
dividends received deduction for corporations. To qualify for the dividends
received deduction, a corporate shareholder must hold the shares on which the
dividend is paid for more than 45 days.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident shareholders are urged to consult their own tax adviser
concerning the applicability of the United States withholding tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of
24
<PAGE> 80
determining gain or loss. To the extent the sales charge is not allowed in
determining gain or loss on the initial shares, it is capitalized in the basis
of the subsequent shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% back-up withholding tax is not an additional tax and may be credited against
a taxpayer's regular federal income tax liability.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Code includes special rules applicable to certain listed options,
futures contracts, and options on futures contracts which the Fund may write,
purchase or sell. Such options and contracts are classified as Section 1256
contracts under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other terminations of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, when held by the Fund at the end of a
fiscal year, generally are required to be treated as sold at market value on the
last day of such fiscal year for federal income tax purposes
("marked-to-market"). Over-the-counter options are not classified as Section
1256 contracts and are not subject to the mark-to-market rule or to 60/40 gain
or loss treatment. Any gains or losses recognized by the Fund from transactions
in over-the-counter options generally constitute short-term capital gains or
losses. If over-the-counter call options written, or over-the-counter put
options purchased, by the Fund are exercised, the gain or loss realized on the
sale of the underlying securities may be either short-term or long-term,
depending on the holding period of the securities. In determining the amount of
gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.
A substantial portion of the Fund's transactions in options, futures
contracts, and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle in which at
least one (but not all) of the positions are Section 1256 contracts is a "mixed
straddle" under the Code if certain identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
25
<PAGE> 81
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
FUND PERFORMANCE
The Fund's average annual total return (computed in the manner described in
the Prospectus) for Class A shares of the Fund for the one-year, five-year, and
ten-year periods ended February 28, 1995 was -6.53%, 11.44% and 7.57%,
respectively. The average annual total return for Class B shares of the Fund for
the one-year, and the life of the Fund was -6.24% and 6.76%, respectively. The
average annual total return for Class C shares of the Fund for the one-year, and
the life of the Fund was -3.57% and 2.68%, respectively. These results are based
on historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objectives and policies as well as the risks incurred in
the Fund's investment practices.
The annualized current yield for Class A, Class B and Class C shares of the
Fund for the 30-day period ending February 28, 1995 was 10.12%, 9.86% and 9.91%,
respectively. The yield for Class A shares, Class B shares and Class C shares
are not fixed and will fluctuate in response to prevailing interest rates and
the market value of portfolio securities, and as a function of the type of
securities owned by the Fund, portfolio maturity and the Fund's expenses.
Yield and total return are computed separately for Class A, Class B and
Class C shares.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors, and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by Van Kampen American Capital in 1994.
From time to time, VKAC will announce the results of their monthly polls of
U.S. investor intentions -- the Van Kampen American Capital Index of Investor
Intentions and the Van Kampen American Capital Mutual Fund Index -- which polls
measure how Americans plan to use their money.
The Funds may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
and (3) in reports or other communications to shareholders or in advertising
material, illustrate the benefits of compounding at various assumed rates of
return. Such illustrations may be in the form of charts or graphs and will not
be based on historical returns experienced by the Funds.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semiannual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
26
<PAGE> 82
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual and Semi-annual Reports to shareholders, including the related report of
independent accountants on the August 31, 1994 financial statements, are
included in the Statement of Additional Information.
The following information is not included in the Annual and Semi-annual
Reports. This assumes a purchase of Class A shares of the Fund aggregating less
than $100,000 subject to the schedule of sales charges set forth in the
Prospectus at a price based upon the net asset value of Class A shares of the
Fund.
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1994 1995
---------- ------------
<S> <C> <C>
Net Asset Value Per Class A Share....................... $ 6.12 $ 5.96
Class A Per Share Sales Charge -- 4.75% of offering
price (4.99% of net asset value per share)............ $ .31 $ .30
---------- ------
Class A Per Share Offering Price the Public............. $ 6.43 $ 6.26
</TABLE>
27
<PAGE> 83
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
August 31, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Obligations 85.8%
CONSUMER DISTRIBUTION 11.8%
$ 2,000,000 Apparel Retailers, Inc., Step Bonds (0% to 12.75% at
8/15/98), 5/15/05 . . . . . . . . . . . . . . . . . . . . $ 1,200,000
5,500,000 Big 5 Holdings, 13.625%, 9/15/02 . . . . . . . . . . . . . 5,610,000
5,310,000 Bry Lane Capital, 10.00%, 9/1/03 . . . . . . . . . . . . . 4,991,400
3,250,000 Dairy Mart Convenience Store, Inc., 10.25%, 3/15/04 . . . . 2,608,125
3,081,580 F F Holdings Corp., 14.25%, Payment-In-Kind, 10/1/02 . . . 2,650,158
4,250,000 Farm Fresh, Inc., 12.25%, 10/1/00 . . . . . . . . . . . . . 3,952,500
1,000,000 Finlay Enterprises, Inc., Step Bonds (0% to 12.00% at
5/1/98), 5/1/05 . . . . . . . . . . . . . . . . . . . . . 582,500
3,250,000 Finlay Fine Jewelry Corp., 10.625%, 5/1/03 . . . . . . . . 3,095,625
5,315,000 Food 4 Less Supermarkets, Inc., 13.75%, 6/15/01 . . . . . . 5,766,775
6,500,000 Grand Union Co., 12.25%, 7/15/02 . . . . . . . . . . . . . 5,200,000
**4,350,000 Kash N Karry Food Stores, Inc., 14.00%, 2/1/01 . . . . . . 1,261,500
3,900,000 Levitz Furniture Corp., 9.625%, 7/15/03 . . . . . . . . . . 3,480,750
Pathmark Stores, Inc.
3,000,000 11.625%, 6/15/02 . . . . . . . . . . . . . . . . . . . 2,955,000
4,500,000 Step Bonds (0% to 10.75% at 11/1/99), 11/1/03 . . . . . . 2,160,000
Specialty Retailers, Inc.
2,000,000 10.00%, 8/15/00 . . . . . . . . . . . . . . . . . . . . . 1,920,000
1,750,000 11.00%, 8/15/03 . . . . . . . . . . . . . . . . . . . . . 1,680,000
3,605,000 Wickes Lumber Co., 11.625%, 12/15/03 . . . . . . . . . . . 3,695,125
---------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . 52,809,458
---------------
CONSUMER DURABLES 7.1%
3,000,000 Aftermarket Tech Corp., 12.00%, 8/1/04 . . . . . . . . . . 3,067,500
4,550,000 Continental Homes Holding Corp., 12.00%, 8/1/99 . . . . . . 4,652,375
3,500,000 Del Webb Corp., 9.00%, 2/15/06 . . . . . . . . . . . . . . 2,940,000
Exide Corp.
2,000,000 10.75%, 12/15/02 . . . . . . . . . . . . . . . . . . . . 2,060,000
1,000,000 Step Bonds (0% to 12.25% at 12/15/97), 12/15/04 . . . . . 725,000
2,000,000 Forecast Group, 11.375%, 12/15/00 . . . . . . . . . . . . . 1,660,000
1,250,000 Lear Seating, Inc., 8.25%, 2/1/02 . . . . . . . . . . . . . 1,137,500
4,500,000 MDC Holdings, Inc., 11.125%, 12/15/03 . . . . . . . . . . . 4,207,500
1,500,000 NVR, Inc., 11.00%, 4/15/03 . . . . . . . . . . . . . . . . 1,406,250
3,595,000 Oriole Homes Corp., 12.50%, 1/15/03 . . . . . . . . . . . . 3,559,050
1,750,000 Penda Corp., Inc., 10.75%, 3/1/04 . . . . . . . . . . . . . 1,653,750
1,300,000 UDC Homes, Inc., 11.75%, 4/30/03 . . . . . . . . . . . . . 1,183,000
4,000,000 Venture Holdings, Inc., 9.75%, 4/1/04 . . . . . . . . . . . 3,660,000
---------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . 31,911,925
---------------
CONSUMER NON-DURABLES 5.6%
3,900,000 Consoltex Group, Inc., 11.00%, 10/1/03 . . . . . . . . . . 3,685,500
4,870,000 Dan River, Inc., 10.125%, 12/15/03 . . . . . . . . . . . . 4,431,700
3,125,000 Dr Pepper Bottle Holdings, Inc., Step Bonds (0% to
11.625% at 2/15/98), 2/15/03 . . . . . . . . . . . . . . 2,093,750
3,000,000 Hartmarx Corp., 10.875%, 1/15/02 . . . . . . . . . . . . . 2,760,000
2,500,000 Health O Meter, Inc., 13.00%, 8/15/02 . . . . . . . . . . . 2,475,000
1,150,000 Specialty Foods, 11.25%, 8/15/03 . . . . . . . . . . . . . 954,500
5,277,000 Synthetic Industries, Inc., 12.75%, 12/1/02 . . . . . . . . 5,435,310
3,750,000 Westpoint Stevens, 9.375%, 12/15/05 . . . . . . . . . . . . 3,384,375
---------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . 25,220,135
---------------
</TABLE>
F-1
<PAGE> 84
INVESTMENT PORTFOLIO, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES 10.0%
$ 1,250,000 Act III Broadcasting, 9.625%, 12/15/03 . . . . . . . . . . $ 1,175,000
1,500,000 Act III Theatres, Inc., 11.875%, 2/1/03 . . . . . . . . . . 1,601,250
2,200,000 AMC Entertainment, Inc., 12.625%, 8/1/02 . . . . . . . . . 2,409,000
3,560,000 American Restaurant Group Corp., 12.00%, 9/15/98 . . . . . 3,399,800
1,750,000 Bally Grand, Inc., 10.375%, 12/15/03 . . . . . . . . . . . 1,513,750
4,000,000 California Hotel Finance Corp., 11.00%, 2/1/02 . . . . . . 3,910,000
3,750,000 Carrols Corp., 11.50%, 8/15/03 . . . . . . . . . . . . . . 3,525,000
2,000,000 Continental Broadcasting, 10.625%, 7/1/03 . . . . . . . . . 2,020,000
Continental Cablevision, Inc.
2,750,000 9.50%, 8/1/13 . . . . . . . . . . . . . . . . . . . . . . 2,488,750
1,100,000 11.00%, 6/1/07 . . . . . . . . . . . . . . . . . . . . . 1,122,000
2,300,000 El Commandante Capital Corp., 11.75%, 12/15/03 . . . . . . 2,116,000
4,500,000 Flagstar Corp., 11.25%, 11/1/04 . . . . . . . . . . . . . . 3,870,000
1,500,000 Louisiana Casino, 11.50%, 12/1/98 . . . . . . . . . . . . . 1,305,000
3,000,000 News America Holdings, Inc., 10.125%, 10/15/12 . . . . . . 3,216,900
3,125,000 Outlet Broadcasting, Inc., 10.875%, 7/15/03 . . . . . . . . 3,093,750
4,000,000 PRT Funding Corp., 11.625%, 4/15/04 . . . . . . . . . . . . 2,760,000
4,250,000 Resorts International, Inc., Variable Rate Notes,
(7.89% at 8/31/94), 6/30/00 . . . . . . . . . . . . . . . 3,590,935
1,750,000 SFX Broadcasting, Inc., 11.375%, 10/1/00 . . . . . . . . . 1,798,125
---------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . 44,915,260
---------------
ENERGY 8.5%
4,500,000 Clark (R&M) Holdings, Inc., Zero Coupon, 2/15/00 . . . . . 2,475,000
1,750,000 Dual Drilling Co., 9.875%, 1/15/04 . . . . . . . . . . . . 1,548,750
1,000,000 Energy Ventures, Inc. 10.25%, 3/15/04 . . . . . . . . . . . 970,000
4,000,000 Forest Oil Corp., 11.25%, 9/1/03 . . . . . . . . . . . . . 3,940,000
3,500,000 Giant Industries, Inc., 9.75%, 11/15/03 . . . . . . . . . . 3,246,250
1,500,000 Global Marine, Inc., 12.75%, 12/15/99 . . . . . . . . . . . 1,635,000
2,500,000 HS Resource, Inc., 9.875%, 12/1/03 . . . . . . . . . . . . 2,350,000
4,730,000 Maxus Energy Corp., 11.50%, 11/15/15 . . . . . . . . . . . 4,730,000
Mesa Capital Corp.
1,750,000 Step Bonds (0% to 12.75% at 6/30/95), 6/30/96 . . . . . . 1,540,000
1,292,000 Step Bonds (0% to 12.75% at 6/30/95), 6/30/98 . . . . . 1,143,420
Petroleum Heat & Power, Inc.
2,500,000 9.375%, 2/1/06 . . . . . . . . . . . . . . . . . . . . . 2,250,000
1,500,000 10.125%, 4/1/03 . . . . . . . . . . . . . . . . . . . . 1,421,250
4,400,000 Transco Energy Co., 11.25%, 7/1/99 . . . . . . . . . . . . 4,668,400
1,000,000 Tuboscope Vetco International, Inc. 10.75%, 4/15/03 . . . . 990,000
2,325,000 Wainoco Oil Corp., 12.00%, 8/1/02 . . . . . . . . . . . . . 2,418,000
3,000,000 Wilrig, 11.25%, 3/15/00 . . . . . . . . . . . . . . . . . . 2,730,000
---------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . 38,056,070
---------------
FINANCE 5.4%
2,500,000 American Annuity Group, Inc., 11.125%, 2/1/03 . . . . . . . 2,543,750
American Financial Corp.
5,000,000 12.00%, 9/3/99 . . . . . . . . . . . . . . . . . . . . . 5,012,500
1,636,000 12.25%, 9/15/03 . . . . . . . . . . . . . . . . . . . . . 1,685,080
4,000,000 Americo Life, Inc., 9.25%, 6/1/05 . . . . . . . . . . . . . 3,520,000
4,800,000 Blue Bell Funding, Inc., 11.85%, 5/1/99 . . . . . . . . . . 4,968,000
3,000,000 Guinness Petroleum Aviation, Variable Rate Notes
(3.825% at 8/31/94), 4/10/95 . . . . . . . . . . . . . . 2,887,500
</TABLE>
F-2
<PAGE> 85
INVESTMENT PORTFOLIO, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE-continued
$ 1,750,000 Phoenix Re Corp., 9.75%, 8/15/03 . . . . . . . . . . . . . $ 1,736,875
2,000,000 Reliance Group Holdings, 9.75%, 11/15/03 . . . . . . . . . 1,800,000
---------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . 24,153,705
---------------
HEALTH CARE 5.4%
2,981,487 Alco Health Distribution Corp., 11.25%, Payment-In-Kind,
7/15/05 . . . . . . . . . . . . . . . . . . . . . . . . . 2,988,940
5,000,000 Charter Medical Corp., 11.25%, 4/15/04 . . . . . . . . . . 5,150,000
3,500,000 Continental Medical Systems, 10.875%, 8/15/02 . . . . . . . 3,377,500
3,500,000 Hillhaven Corp., 10.125%, 9/1/01 . . . . . . . . . . . . . 3,500,000
1,750,000 OrNda Healthcorp., 11.375%, 8/15/04 . . . . . . . . . . . . 1,763,125
4,000,000 Paracelsus Healthcare Corp., 9.875%, 10/15/03 . . . . . . . 3,765,000
2,000,000 Quorum Health Group, 11.875%, 12/15/02 . . . . . . . . . . 2,125,000
1,000,000 Total Renal Care, Step Bonds (0% to 12.00% at
2/15/98), 2/15/04 . . . . . . . . . . . . . . . . . . . . 710,000
1,000,000 Wright Medical Technology, 10.75%, 7/1/00 . . . . . . . . . 990,000
---------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . 24,369,565
---------------
PRODUCER MANUFACTURING 9.0%
2,300,000 ALLIED WASTE INDUSTRIES, INC., 10.75%, 2/1/04 . . . . . . . 2,104,500
1,500,000 American Standard, Inc., 9.875%, 6/1/01 . . . . . . . . . . 1,488,750
4,700,000 EnviroSource, Inc., 9.75%, 6/15/03 . . . . . . . . . . . . 4,218,250
3,548,000 Fairchild Corp., 13.00%, 3/1/07 . . . . . . . . . . . . . . 3,264,160
3,500,000 Federal Industries, Ltd., 10.25%, 6/15/00 . . . . . . . . . 3,412,500
5,558,000 Formica Corp., Step Bonds (0% to 15.75% at
10/1/94), 10/1/01 . . . . . . . . . . . . . . . . . . . . 5,634,421
IMO Industries, Inc.
2,750,000 12.00%, 11/1/01 . . . . . . . . . . . . . . . . . . . . . 2,825,625
500,000 12.25%, 8/15/97 . . . . . . . . . . . . . . . . . . . . . 505,000
4,150,000 Jordan Industries, Inc., Step Bonds (0% to 11.75% at
8/1/98), 8/1/05 . . . . . . . . . . . . . . . . . . . . . 2,241,000
4,416,220 Robertson Ceco Corp., 10.00%, Payment-In-Kind, 11/30/99 . . 3,422,571
1,500,000 Spreckles Industries, 11.50%, 9/1/00 . . . . . . . . . . . 1,455,000
2,500,000 Talley Manufacturing & Technical, Inc., 10.75%, 10/15/03 . 2,250,000
Thermadyne Industries, Inc.
3,285,524 10.25%, 5/1/02 . . . . . . . . . . . . . . . . . . . . . 3,154,103
1,572,436 10.75%, 11/1/03 . . . . . . . . . . . . . . . . . . . . . 1,509,538
2,750,000 USG Corp., 10.25%, 12/15/02 . . . . . . . . . . . . . . . . 2,808,437
---------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . 40,293,855
---------------
RAW MATERIALS/PROCESSING INDUSTRIES 15.7%
2,500,000 Associated Materials, Inc., 11.50%, 8/15/03 . . . . . . . . 2,487,500
3,450,000 Buckeye Cellulose Corp., 10.25%, 5/15/01 . . . . . . . . . 3,320,625
Container Corp. of America
1,000,000 11.25%, 5/1/04 . . . . . . . . . . . . . . . . . . . . . 1,045,000
*1,000,000 15.50%, 12/1/04 . . . . . . . . . . . . . . . . . . . . . 2,010,000
3,500,000 Crown Packaging, Series B., 10.75%, 11/1/00 . . . . . . . . 3,473,750
2,250,000 Florida Steel Corp., 11.50%, 12/15/00 . . . . . . . . . . . 2,317,500
4,500,000 Fort Howard Corp., Step Bonds (0% to 14.125% at
11/1/94), 11/01/04 . . . . . . . . . . . . . . . . . . . 4,398,750
Gaylord Container Corp.
3,250,000 11.50%, 5/15/01 . . . . . . . . . . . . . . . . . . . . . 3,323,125
2,250,000 Step Bonds (0% to 12.75% at 5/15/96), 5/15/05 . . . . . . 1,856,250
Geneva Steel Co.
1,350,000 9.50%, 1/15/04 . . . . . . . . . . . . . . . . . . . . . 1,228,500
1,000,000 11.125%, 3/15/01 . . . . . . . . . . . . . . . . . . . . 1,015,000
</TABLE>
F-3
<PAGE> 86
INVESTMENT PORTFOLIO, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES-continued
$ 4,650,000 Harris Chemical North America, Inc., Step Bonds (0%
to 10.25% at 1/15/96), 7/15/01 . . . . . . . . . . . . . $ 3,714,187
3,000,000 Huntsman Corp., 11.00%, 4/15/04 . . . . . . . . . . . . . . 3,135,000
IMC Fertilizer Group, Inc.
2,000,000 9.45%, 12/15/11 . . . . . . . . . . . . . . . . . . . . . 1,770,000
2,000,000 10.75%, 6/15/03 . . . . . . . . . . . . . . . . . . . . . 2,065,000
4,000,000 Indspec Chemical Corp., Step Bonds (0% to 11.50%
at 12/1/98), 12/1/03 . . . . . . . . . . . . . . . . . . 2,360,000
**2,400,000 Lanesborogh Corp., 12.375%, 3/15/97 . . . . . . . . . . . . 1,536,000
2,000,000 Mail-Well Corp., 10.50%, 2/15/04 . . . . . . . . . . . . . 1,760,000
4,000,000 NL Industries, Inc., Step Bonds (0% to 13.00% at
10/15/98), 10/15/05 . . . . . . . . . . . . . . . . . . . 2,545,000
3,250,000 Plastic Specialty & Technology Corp., 11.25%, 12/1/03 . . . 3,022,500
1,750,000 Republic Engineered Steel, 9.875%, 12/15/01 . . . . . . . . 1,645,000
Riverwood International Corp.
500,000 10.375%, 6/30/04 . . . . . . . . . . . . . . . . . . . . 508,750
4,000,000 11.25%, 6/15/02 . . . . . . . . . . . . . . . . . . . . . 4,200,000
2,000,000 Sherritt, Inc., 10.50%, 3/31/14 . . . . . . . . . . . . . . 1,980,000
1,450,000 Silgan Corporation, 11.75%, 6/15/02 . . . . . . . . . . . . 1,493,500
5,000,000 Silgan Holdings, Inc., Step Bonds (0% to 13.25% at
6/15/96), 12/15/02 . . . . . . . . . . . . . . . . . . . 4,050,000
3,000,000 Sweetheart Cup, Inc., 10.50%, 9/1/03 . . . . . . . . . . . 2,865,000
3,000,000 UCC Investors Holdings, Inc., 11.00%, 5/1/03 . . . . . . . 3,060,000
2,000,000 U.S. Can Co., 13.50%, 1/15/02 . . . . . . . . . . . . . . . 2,220,000
---------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . 70,405,937
---------------
TECHNOLOGY 2.8%
3,355,000 Anacomp, Inc., 15.00%, 11/1/00 . . . . . . . . . . . . . . 3,724,050
3,500,000 Harmon International Industries, Inc., 12.00%, 8/1/02 . . . 3,815,000
3,100,000 MFS Communications Co. Inc., Step Bonds (0% to
9.375% at 11/15/99), 1/15/04 . . . . . . . . . . . . . . 1,813,500
3,008,000 Unisys Corp., 13.50%, 7/1/97 . . . . . . . . . . . . . . . 3,248,640
---------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . 12,601,190
---------------
TRANSPORTATION 3.8%
1,500,000 International Shipholding Corp., 9.00%, 7/1/03 . . . . . . 1,395,000
Sea Containers, Ltd.
2,750,000 9.50%, 7/1/03 . . . . . . . . . . . . . . . . . . . . . . 2,543,750
1,000,000 12.50%, 12/1/04 . . . . . . . . . . . . . . . . . . . . . 1,050,000
2,750,000 12.50%, 12/1/04 . . . . . . . . . . . . . . . . . . . . . 2,873,750
2,500,000 Southern Pacific Rail Corp., 9.375%, 8/15/05 . . . . . . . 2,443,750
4,500,000 Trism, Inc., 10.75%, 12/15/00 . . . . . . . . . . . . . . . 4,455,000
USAir, Inc.
2,000,000 10.00%, 7/1/03 . . . . . . . . . . . . . . . . . . . . . 1,440,000
835,060 Series 1989-A1, 9.33%, 1/1/06 . . . . . . . . . . . . . . 713,977
---------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . 16,915,227
---------------
UTILITIES 0.7%
4,500,000 PanAmSat L.P., Step Bonds (0% to 11.375% at 8/1/98),
8/1/03 . . . . . . . . . . . . . . . . . . . . . . . . . 2,891,250
---------------
TOTAL CORPORATE OBLIGATIONS (Cost $400,786,231) . . . . . 384,543,577
---------------
</TABLE>
F-4
<PAGE> 87
INVESTMENT PORTFOLIO, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 0.9%
7,357 Arcadian Corp. . . . . . . . . . . . . . . . . . . . . . . $ 132,426
*364,633 Concurrent Computer Corp. . . . . . . . . . . . . . . . . 774,847
*14,000 Dr Pepper/Seven-Up Companies, Inc. . . . . . . . . . . . . 323,750
*14,790 EnviroSource, Inc. . . . . . . . . . . . . . . . . . . . . 51,765
*2,000 Finlay Enterprises, Inc. . . . . . . . . . . . . . . . . . 24,000
*37,572 Healthcare America Inc. . . . . . . . . . . . . . . . . . 51,662
*607,107 Robertson Ceco Corp. . . . . . . . . . . . . . . . . . . . 2,428,428
*13,617 Thermadyne Industries, Inc. . . . . . . . . . . . . . . . 160,638
---------------
TOTAL COMMON STOCK (Cost $10,147,926) . . . . . . . . . . 3,947,516
---------------
PREFERRED STOCK 1.4%
*244,101 Supermarkets General Holdings Corp., $3.52,
Payment-In-Kind (Cost $4,795,442) . . . . . . . . . . . . 6,285,601
---------------
Number of
Units/
Warrants Units 1.2%
- ------------
1,000 Casino America, Inc., each unit consists of a $1,000
par bond, 11.50%, 11/15/01 and 3 warrants
(expiring 11/15/98) . . . . . . . . . . . . . . . . . . . 900,000
250 Empire Gas Corp., each unit consists of a $10,000
par bond, Zero Coupon, 7/15/04 and 13.8 warrants
(expiring 7/15/04) . . . . . . . . . . . . . . . . . . . 1,950,000
2,000 ICF Kaiser International, each unit consists of a
$1,000 par note, 12.00%, 12/31/03 and 5 warrants
(expiring 12/31/98) . . . . . . . . . . . . . . . . . . . 1,800,000
750 Santa Fe, Inc., each unit consists of a $1,000
par bond, 11.00%, 12/15/00 and 1 warrant
(expiring 12/15/96) . . . . . . . . . . . . . . . . . . . 675,000
---------------
TOTAL UNITS (Cost $5,688,379) . . . . . . . . . . . . . . 5,325,000
---------------
WARRANTS 0.1%
*3,125 CAPITAL GAMING, EXPIRING 2/1/99 . . . . . . . . . . . . . . 17,188
*2,300 HDA Management Corp., expiring 12/15/98 . . . . . . . . . . 13,800
*4,500 Louisiana Casino, expiring 12/1/98 . . . . . . . . . . . . 45,000
*30,000 Southdown, Inc., expiring 10/15/96 . . . . . . . . . . . . 120,000
*200 Trump Plaza, expiring 6/15/96 . . . . . . . . . . . . . . . 8,000
---------------
TOTAL WARRANTS (Cost $202,819) . . . . . . . . . . . . . 203,988
---------------
Principal
Amount Private Placements 2.5%
- ------------
CORPORATE OBLIGATIONS 1.4%
$ *1,500,000 Guinness Petroleum Aviation, 9.25%, 6/15/95
(purchased 7/28/93) . . . . . . . . . . . . . . . . . . . 1,485,000
3,304,500 Hemmeter Enterprises, Inc., 12.00% Payment-in-Kind, 12/15/00
(purchased 2/1/94) . . . . . . . . . . . . . . . . . . . 2,313,150
*2,500,000 Smitty's Supervalue, 12.75%, 6/15/04 (purchased 6/22/94) . 2,512,500
---------------
TOTAL CORPORATE OBLIGATIONS (Cost $6,133,150) . . . . . . 6,310,650
---------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 88
INVESTMENT PORTFOLIO, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C>
UNITS 0.6%
*1,250 Capital Gaming, each unit consists of a $1,000 par bond,
11.50%, 2/1/01, 27 shares of common stock and 20
warrants (expiring 2/1/99) (purchased 1/10/94) . . . . . $ 1,100,000
2,250 Hemmeter Enterprises, Inc., each unit consists of a
$1,000 par Payment-in-Kind note, 12.00%, 12/15/00 and
15 warrants (expiring 12/15/99) (purchased 12/14/93) . . 1,687,500
---------------
TOTAL UNITS (Cost $3,101,188) . . . . . . . . . . . . . . 2,787,500
---------------
Number of
Shares/
Warrents COMMON STOCK 0.5%
- ------------
*40,000 F F Holdings Corp., purchased 10/6/92 . . . . . . . . . . . 1,620,000
*84,445 Triangle Wire & Cable, Inc., purchased 1/13/92 . . . . . . 760,005
---------------
TOTAL COMMON STOCK (Cost $2,162,180) . . . . . . . . . . 2,380,005
---------------
WARRANT 0.0%
*412 WRIGHT MEDICAL TECHNOLOGY, EXPIRING 6/30/03 (Cost $80) . . 51,471
---------------
TOTAL PRIVATE PLACEMENTS (Cost $11,396,598) . . . . . . . 11,529,626
---------------
Principal
Amount Foreign Government Obligations 0.6%
- ------------
$ 980,000 Federative Republic of Brazil, 6.0625%, 1/1/01 . . . . . . 781,550
2,000,000 Republic of Argentina, 4.25%, 3/31/23 . . . . . . . . . . . 1,052,500
1,000,000 United Mexican States, 6.25%, 12/31/19 . . . . . . . . . . 672,500
---------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $2,805,209) . 2,506,550
---------------
Repurchase Agreement 4.9%
21,850,000 Salomon Brothers, Inc., dated 8/31/94, 4.90%,
due 9/1/94 (collateralized by U.S. Government
obligations in a pooled cash account) repurchase
proceeds $21,852,974 (Cost $21,850,000) . . . . . . . . . 21,850,000
---------------
TOTAL INVESTMENTS (Cost $457,672,604) 97.4% . . . . . . . . 436,191,858
---------------
Other assets and liabilities, net 2.6% . . . . . . . . . . 12,165,857
---------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . $ 448,357,715
===============
</TABLE>
** Non-income producing security.
** Security is in default and is non-income producing. Valuation is based on
information provided by brokers trading in this security.
See Notes to Financial Statements.
F-6
<PAGE> 89
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
August 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $457,672,604) . . . . . . . . . . . . $ 436,191,858
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . 6,445,280
Dividends and interest receivable . . . . . . . . . . . . . . . . . . . 10,080,137
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . 992,991
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,376
--------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453,717,642
--------------
LIABILITIES
Payable for investments purchased . . . . . . . . . . . . . . . . . . . 1,201,522
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . 1,807,902
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,560,557
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,195
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,290
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . 96,850
Accrued expenses and other payables . . . . . . . . . . . . . . . . . . . 262,611
--------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 5,359,927
--------------
NET ASSETS, equivalent to $6.12 per share for Class A shares, $6.14 per
share for Class B shares and $6.11 per share for Class C shares . . . $ 448,357,715
==============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 59,466,967 Class A, 11,564,985 Class B and
2,163,475 Class C shares outstanding . . . . . . . . . . . . . . . . . $ 731,954
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 719,302,016
Accumulated net realized loss on securities . . . . . . . . . . . . . . . (250,952,639)
Net unrealized depreciation of securities . . . . . . . . . . . . . . . . (21,480,746)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . 757,130
--------------
NET ASSETS at August 31, 1994 . . . . . . . . . . . . . . . . . . . . . . $ 448,357,715
==============
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE> 90
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended August 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,312,710
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,807,364
--------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,120,074
--------------
EXPENSES
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,718,712
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . 1,077,757
Service fees-Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 882,219
Distribution and service fees-Class B . . . . . . . . . . . . . . . . . . 567,889
Distribution and service fees-Class C . . . . . . . . . . . . . . . . . . 83,590
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . 118,613
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,694
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 104,955
State franchise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 53,468
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,258
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . 24,709
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,410
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,780
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,389
--------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,833,443
--------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 43,286,631
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities . . . . . . . . . . . . . . . . . . . . . 12,147,682
Net unrealized depreciation of securities during the year . . . . . . . . (43,219,168)
--------------
Net realized and unrealized loss on securities . . . . . . . . . . . . (31,071,486)
--------------
Increase in net assets resulting from operations . . . . . . . . . . . $ 12,215,145
==============
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE> 91
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31
-------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . $ 491,103,694 $ 438,107,537
-------------- --------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . 43,286,631 44,741,275
Net realized gain on securities . . . . . . . . . . . 12,147,682 26,159,452
Net unrealized depreciation of securities
during the year . . . . . . . . . . . . . . . . . . (43,219,168) (7,105,646)
-------------- --------------
Increase in net assets resulting from operations . . 12,215,145 63,795,081
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A . . . . . . . . . . . . . . . . . . . . . . (41,922,518) (46,334,410)
Class B . . . . . . . . . . . . . . . . . . . . . . (5,284,881) (1,856,854)
Class C . . . . . . . . . . . . . . . . . . . . . . (784,158) (9,685)
-------------- --------------
(47,991,557) (48,200,949)
-------------- --------------
NET EQUALIZATION CREDITS (DEBITS) . . . . . . . . . . . 5,389 (98,476)
-------------- --------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . 135,925,898 124,538,149
Class B . . . . . . . . . . . . . . . . . . . . . . 57,873,861 35,373,573
Class C . . . . . . . . . . . . . . . . . . . . . . 16,675,131 984,358
-------------- --------------
210,474,890 160,896,080
-------------- --------------
Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . 23,629,016 26,984,165
Class B . . . . . . . . . . . . . . . . . . . . . . 2,576,495 930,661
Class C . . . . . . . . . . . . . . . . . . . . . . 504,457 7,845
-------------- --------------
26,709,968 27,922,671
-------------- --------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . (218,294,071) (148,498,842)
Class B . . . . . . . . . . . . . . . . . . . . . . (21,997,246) (2,794,212)
Class C . . . . . . . . . . . . . . . . . . . . . . (3,868,497) (25,196)
-------------- --------------
(244,159,814) (151,318,250)
-------------- --------------
Increase (decrease) in net assets resulting from Fund
share transactions . . . . . . . . . . . . . . . . (6,974,956) 37,500,501
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . (42,745,979) 52,996,157
-------------- --------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . $ 448,357,715 $ 491,103,694
============== ==============
</TABLE>
See Notes to Financial Statements.
F-9
<PAGE> 92
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1-Significant Accounting Policies
American Capital High Yield Investments, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. Investment Valuations
Securities actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued at the most recently quoted bid price.
Securities and options for which the primary market is on an exchange or
NASDAQ are valued at the last reported sale price, or if no sale is
reported, at the last reported bid price. If no sale or bid price is
reported, securities are valued at the most recent sale price. Private
placements are valued at fair value under a method approved by the Board
of Directors.
Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are
valued based on market quotations, until the remaining days to maturity
becomes less than 61 days. From such time, until maturity, the
investments are valued at amortized cost.
Fund investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade
holdings. These securities are often subordinated to the prior claims of
other senior lenders and uncertainties exist as to an issuer's ability to
meet principal and interest payments. At August 31, 1994, debt securities
rated below investment grade and comparable unrated securities
represented approximately 91% of the investment portfolio.
B. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to repurchase
the security at a future time and specified price. The Fund may invest
independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised or sub-advised by American Capital Asset Management, Inc. (the
"Adviser"), the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are collateralized by the underlying
debt security. The Fund will make payment for such securities only upon
physical delivery or evidence of book entry transfer to the account of
the custodian bank. The seller is required to maintain the value of the
underlying security at not less than the repurchase proceeds due the
Fund.
C. Private Placements
The Fund owns securities purchased in private placement transactions,
which have not been registered under the Securities Act of 1933. Such
securities generally may be resold only in a pri-vately negotiated
transaction with a limited number of purchasers or in a public offering
after they have been registered under the Securities Act of 1933. The
issuers of privately placed debt securities held by the Fund generally
have agreed to register the securities within specified time periods
or increase the interest paid on such securities. The Fund may not
invest more than 15% of its net assets (determined at the time of
purchase) in private placements and other illiquid securities.
D. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized gains to its shareholders. It is anticipated that no
distributions of capital gains will be made until tax basis capital loss
carryforwards expire or are offset by net realized capital gains.
F-10
<PAGE> 93
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of identified
cost. Dividend income is recorded on the ex-dividend date. Interest
income is accrued daily. Issuers of Payment-in-Kind (PIK) securities may
make dividend or interest payments by issuing additional stocks or bonds
in lieu of cash payments.
Effective September 1, 1993, the Fund adopted Statement of Position 93-1,
Financial Accounting and Reporting for High-Yield Debt Securities by
Investment Companies, which establishes the use of the effective interest
method for reporting interest income on PIK bonds, whereby interest
income on PIK bonds is recorded ratably by the Fund at a constant yield
to maturity. The statement also provides guidance on accounting for, and
reporting of, costs incurred in support of defaulted debt securities. As
a result of this statement, the Fund changed the method by which interest
income is reported on PIK bonds; however, implementation of this
statement did not have a significant effect on the financial statements
of the Fund.
F. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which may
result in dividends or distributions in excess of financial statement
earnings. At August 31, 1994, such excess was due to a dividend paid in
the current year, which relates to net investment income of the prior
year.
Effective September 1, 1993, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result of this statement, the Fund changed the classification of
distributions to shareholders to better disclose the differences between
financial statement amounts and distributions determined in accordance
with income tax regulations. The cumulative effect caused by adopting
this statement was to decrease undistributed net investment income and to
increase capital surplus by $32,763. Current year net investment income,
net realized gains, net assets and net asset value per share were not
affected by this change.
G. Debt Discount and Premium
The Fund accounts for original issue discounts and premiums on the same
basis as is used for federal income tax reporting. Accordingly, original
issue discounts on long-term debt securities purchased are amortized over
the life of the security. Premiums on debt securities are not amortized.
Market discounts are recognized at the time of sale as realized gains for
book purposes, and ordinary income for tax purposes.
H. Equalization
A portion of the proceeds from sales and costs of repurchases of Fund
shares, equivalent on a per share basis to the amount of undistributed
net investment income, is credited or charged to undistributed net
investment income so that undistributed net investment income per share
is not affected by sales or repurchases of Fund shares.
Note 2-Management Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.625% of the first $150 million, .55% of the next $150 million, and .50% of the
amount in excess of $300 million.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or
F-11
<PAGE> 94
sub-advised by the Adviser. For the year ended August 31, 1994, these charges
included $11,794 as the Fund's share of the employee costs attributable to the
Fund's accounting officers. A portion of the accounting services expense was
paid to the Adviser in reimbursement of personnel, facilities and equipment
costs attributable to the provision of accounting services to the Fund. The
services provided by the Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended August 31, 1994, the fees
for such services were $891,737.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $125,969 and $238,856, respectively, as
their portion of the commissions charged on sales of Fund shares during the
year.
Under the Distribution Plans, the Fund pays up to .25% per annum of its average
net assets to the Distributor for expenses and service fees incurred. Class B
shares and Class C shares pay an additional fee of up to .75% per annum of
their average daily net assets to reimburse the Distributor for its
distribution costs. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At August 31, 1994, the unreimbursed expenses incurred
by the Distributor under the Class B plan and Class C plan aggregated
approximately $2.5 million and $193,000, respectively, and may be carried
forward and reimbursed through either the collection of the contingent deferred
sales charges from share redemptions or, subject to the annual renewal of the
plans, future Fund reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
Note 3-Investment Activity
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $301,317,867 and $310,245,120,
respectively.
For federal income tax purposes, the identified cost of investments owned at
August 31, 1994 was $457,685,989. Net unrealized depreciation of investments
aggregated $21,494,131, gross unrealized appreciation of investments aggregated
$12,098,667 and gross unrealized depreciation of investments aggregated
$33,592,798.
The net realized capital loss carryforward for federal income tax purposes of
approximately $251 million at August 31, 1994, may be utilized to offset future
gains until expiration in 1997 through 2000.
Note 4-Director Compensation
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,540 plus a fee of $40 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $580. During the year, such fees aggregated $18,832.
The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At August 31, 1994, the liability for the Plan aggregated
$64,268. Each director covered under the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
F-12
<PAGE> 95
Note 5-Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income, and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
The Fund has 400 million Class A and 300 million each of Class B and Class C
shares of $.01 par value capital stock authorized. Transactions in shares of
capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended August 31
-----------------------------
1994 1993
------------ --------------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . 21,000,805 19,663,066
Class B . . . . . . . . . . . . . . . . . . . . 8,862,056 5,473,366
Class C . . . . . . . . . . . . . . . . . . . . 2,547,363 148,193
------------ --------------
32,410,224 25,284,625
------------ --------------
Shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . 3,647,442 4,224,623
Class B . . . . . . . . . . . . . . . . . . . . 400,994 143,281
Class C . . . . . . . . . . . . . . . . . . . . 79,079 1,186
------------ --------------
4,127,515 4,369,090
------------ --------------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . (33,625,821) (23,399,487)
Class B . . . . . . . . . . . . . . . . . . . . (3,395,061) (432,898)
Class C . . . . . . . . . . . . . . . . . . . . (608,555) (3,791)
------------ --------------
(37,629,437) (23,836,176)
------------ --------------
Increase (decrease) in Fund shares
outstanding . . . . . . . . . . . . . . . . (1,091,698) 5,817,539
============ ==============
</TABLE>
Note 6-Subsequent Dividend
The Board of Directors of the Fund declared dividends from net investment
income of $.0475 per share for Class A shares and $.0435 per share for Class B
shares and Class C shares, payable October 15, 1994 to shareholders of record
on September 30, 1994.
F-13
<PAGE> 96
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Class A
----------------------------------------------
Year Ended August 31
----------------------------------------------
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . $ 6.61 $ 6.40 $ 5.71 $ 5.78 $ 7.96
------ ------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . .71 .71 .79 .86 1.00
Expenses . . . . . . . . . . . . . . . (.08) (.07) (.065) (.06) (.07)
------ ------ ------ ------ -------
Net investment income . . . . . . . . . .63 .64 .725 .80 .93
Net realized and unrealized gain or
loss on securities . . . . . . . . . . (.47) .27 .6775 (.055) (2.165)
------ ------ ------ ------ -------
Total from investment operations . . . .16 .91 1.4025 .745 (1.235)
------ ------ ------ ------ -------
LESS DISTRIBUTIONS
Dividends from net investment income . (.65) (.70) (.7125) (.815) (.945)
------ ------ ------ ------ -------
Net asset value, end of period . . . . $ 6.12 $ 6.61 $ 6.40 $ 5.71 $ 5.78
====== ====== ====== ====== =======
TOTAL RETURN(1) . . . . . . . . . . . . 2.34% 15.20% 25.82% 15.66% (15.88%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the
period (millions) . . . . . . . . . . $364.2 $452.4 $435.1 $341.9 $ 331.4
Average net assets (millions) . . . . . $419.8 $426.8 $390.7 $298.2 $ 408.2
Ratios to average net assets
Expenses . . . . . . . . . . . . . . 1.10% 1.09% 1.05% 1.06% 1.02%
Net investment income . . . . . . . . 9.03% 10.10% 11.77% 15.20% 14.23%
Portfolio turnover rate . . . . . . . . 66% 75% 73% 114% 59%
</TABLE>
(1) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-14
<PAGE> 97
FINANCIAL HIGHLIGHTS, continued
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Class B Class C(2)
------------------------------- -------------------------
Year July 2, July 6,
Ended 1992(1) Year 1993(1)
August 31 through Ended through
------------------ August 31, August 31, August 31,
1994 1993(2) 1992(2) 1994 1993
------ ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period . $ 6.63 $ 6.41 $ 6.33 $ 6.61 $ 6.63
------ ------ ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Investment income . . . . . . . . . . . .71 .70 .11 .65 .08
Expenses . . . . . . . . . . . . . . . (.13) (.12) (.02) (.12) (.02)
------ ------ ------- ------ ------
Net investment income . . . . . . . . . .58 .58 .09 .53 .06
Net realized and unrealized gain or
loss on securities . . . . . . . . . (.468) .292 .097 (.428) .0195
------ ------ ------- ------ ------
Total from investment operations . . . .112 .872 .187 .102 .0795
------ ------ ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income . (.602) (.652) (.107) (.602) (.0995)
------ ------ ------- ------ ------
Net asset value, end of period . . . . $ 6.14 $ 6.63 $ 6.41 $ 6.11 $ 6.61
====== ====== ======= ======= ======
TOTAL RETURN(3) . . . . . . . . . . . . 1.59% 14.49% 2.97% 1.43% 1.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period
(millions) . . . . . . . . . . . . . $ 71.0 $ 37.7 $ 3.1 $ 13.2 $ 1.0
Average net assets (millions) . . . . . $ 56.8 $ 18.0 $ 1.1 $ 8.4 $ 0.3
Ratios to average net assets
Expenses . . . . . . . . . . . . . . 1.90% 1.90% 2.08%(4) 1.91% 2.34%(4)
Net investment income . . . . . . . . 8.25% 9.10% 10.30%(4) 8.25% 8.05%(4)
Portfolio turnover rate . . . . . . . . 66% 75% 73% 66% 75%
</TABLE>
(1) Commencement of offering of sales
(2) Based on average month-end shares outstanding
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Annualized
See Notes to Financial Statements.
F-15
<PAGE> 98
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
American Capital High Yield Investments, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital High Yield
Investments, Inc. at August 31, 1994, the results of its operations, the
changes in its net assets and the selected per share data and ratios for each
of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and selected per share data
and ratios (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at August 31, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
October 17, 1994
F-16
<PAGE> 99
PORTFOLIO OF INVESTMENTS
February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
................................................................................
<S> <C> <C>
CORPORATE OBLIGATIONS 84.1%
CONSUMER DISTRIBUTION 10.3%
$ 5,500,000 Big 5 Holdings, 13.625%, 9/15/02............... $ 5,733,750
3,000,000 Big V Supermarkets, Inc., 11.00%, 2/15/04...... 2,475,000
2,250,000 Bradlees, Inc., 11.00%, 8/1/02................. 2,053,125
5,310,000 Brylane Capital, 10.00%, 9/1/03................ 5,230,350
3,250,000 Dairy Mart Convenience Stores, Inc., 10.25%,
3/15/04........................................ 2,453,750
3,301,142 F F Holdings Corp., 14.25%, Payment-In-Kind,
10/1/02........................................ 1,650,571
2,050,000 Farm Fresh, Inc., 12.25%, 10/1/00.............. 1,906,500
4,750,000 Finlay Enterprises, Inc., Step Bonds (0% to
12.00% at 5/1/98), 5/1/05...................... 2,945,000
2,500,000 Finlay Fine Jewelry Corp., 10.625%, 5/1/03..... 2,312,500
5,355,000 Food 4 Less Supermarkets, Inc., 13.75%,
6/15/01........................................ 5,676,300
4,250,000 Levitz Furniture Corp., 9.625%, 7/15/03........ 3,208,750
Pathmark Stores, Inc.
3,000,000 11.625%, 6/15/02............................. 3,037,500
3,500,000 Step Bonds (0% to 10.75% at 11/1/99),
11/1/03...................................... 1,903,125
2,500,000 Smitty's Supervalue, 12.75%, 6/15/04........... 2,312,500
Specialty Retailers, Inc.
2,000,000 10.00%, 8/15/00.............................. 1,855,000
1,750,000 11.00%, 8/15/03.............................. 1,610,000
3,605,000 Wickes Lumber Co., 11.625%, 12/15/03........... 3,388,700
----------------
TOTAL CONSUMER DISTRIBUTION.................. 49,752,421
----------------
CONSUMER DURABLES 3.0%
3,000,000 Aftermarket Tech Corp., 12.00%, 8/1/04......... 3,127,500
2,000,000 Exide Corp., 10.75%, 12/15/02.................. 2,060,000
1,250,000 Lear Seating, Inc., 8.25%, 2/1/02.............. 1,143,750
2,595,000 Oriole Homes Corp., 12.50%, 1/15/03............ 2,283,600
1,525,000 Truck Components, 12.25%, 6/30/01.............. 1,582,188
1,300,000 UDC Homes, Inc., 11.75%, 4/30/03............... 897,000
4,000,000 Venture Holdings, Inc., 9.75%, 4/1/04.......... 3,460,000
----------------
TOTAL CONSUMER DURABLES...................... 14,554,038
----------------
CONSUMER NON-DURABLES 6.1%
5,400,000 Consoltex Group, Inc., 11.00%, 10/1/03......... 4,779,000
4,870,000 Dan River, Inc., 10.125%, 12/15/03............. 4,650,850
3,125,000 Dr Pepper Bottle Holdings, Inc., Step Bonds
(0% to 11.625% at 2/15/98), 2/15/03............ 2,171,875
4,750,000 Fieldcrest Cannon, Inc., 11.25%, 6/15/04....... 4,868,750
4,000,000 Health O Meter, Inc., 13.00%, 8/15/02.......... 3,560,000
5,277,000 Synthetic Industries, Inc., 12.75%, 12/1/02.... 5,013,150
4,500,000 Westpoint Stevens, 9.375%, 12/15/05............ 4,207,500
----------------
TOTAL CONSUMER NON-DURABLES.................. 29,251,125
----------------
</TABLE>
See Notes to Financial Statements
F-17
<PAGE> 100
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
................................................................................
<S> <C> <C>
CONSUMER SERVICES 11.3%
$ 1,250,000 Act III Broadcasting, 9.625%, 12/15/03......... $ 1,193,750
1,500,000 Act III Theatres, Inc., 11.875%, 2/1/03........ 1,556,250
3,200,000 AMC Entertainment, Inc., 12.625%, 8/1/02....... 3,456,000
3,560,000 American Restaurant Group Corp., 12.00%,
9/15/98........................................ 3,382,000
1,750,000 Bally Grand, Inc., 10.375%, 12/15/03........... 1,649,375
4,000,000 Bell Cablemedia, Step Bonds (0% to 11.95% at
7/16/99), 7/15/04.............................. 2,405,000
3,420,000 Cablevision Industries Co., 9.25%, 4/1/08...... 3,351,600
4,000,000 California Hotel Finance Corp., 11.00%,
12/1/02........................................ 3,910,000
3,750,000 Carrols Corp., 11.50%, 8/15/03................. 3,459,375
Continental Cablevision, Inc.
2,750,000 9.50%, 8/1/13................................ 2,640,000
1,100,000 11.00%, 6/1/07............................... 1,167,375
2,300,000 El Commandante Capital Corp., 11.75%, 12/15/03. 2,001,000
4,500,000 Flagstar Corp., 11.25%, 11/1/04................ 3,836,250
1,250,000 Louisiana Casino, 11.50%, 12/1/98.............. 1,050,000
3,000,000 News America Holdings, Inc., 10.125%, 10/15/12. 3,203,700
3,125,000 Outlet Broadcasting, Inc., 10.875%, 7/15/03.... 3,125,000
4,000,000 PRT Funding Corp., 11.625%, 4/15/04............ 3,320,000
3,000,000 Petro PSC Properties, 12.50%, 6/1/02........... 2,970,000
4,250,000 Resorts International, Inc., Variable Rate
Notes (7.89% at 2/28/95), 6/30/00.............. 3,465,503
2,000,000 SFX Broadcasting, Inc., 11.375%, 10/1/00....... 2,025,000
1,150,000 Videotron Group, Ltd., 10.625%, 2/15/05........ 1,185,938
----------------
TOTAL CONSUMER SERVICES...................... 54,353,116
----------------
ENERGY 8.2%
4,500,000 Clark (R&M) Holdings, Inc., Zero Coupon,
2/15/00........................................ 2,598,750
3,750,000 Dual Drilling Co., 9.875%, 1/15/04............. 2,925,000
350,000 Energy Ventures, Inc., 10.25%, 3/15/04......... 336,875
4,000,000 Forest Oil Corp., 11.25%, 9/1/03............... 3,420,000
3,500,000 Giant Industries, Inc., 9.75%, 11/15/03........ 3,185,000
3,500,000 Global Marine, Inc., 12.75%, 12/15/99.......... 3,780,000
4,995,000 HS Resource, Inc., 9.875%, 12/1/03............. 4,657,837
4,730,000 Maxus Energy Corp., 11.50%, 11/15/15........... 4,588,100
3,292,000 Mesa Capital Corp., Step Bonds (0% to 12.75% at
6/30/95), 6/30/98.............................. 3,069,790
4,000,000 Petroleum Heat & Power, Inc., 12.25%, 2/1/05... 4,150,000
1,000,000 Tuboscope Vetco International, Inc., 10.75%,
4/15/03........................................ 1,000,000
2,825,000 Wainoco Oil Corp., 12.00%, 8/1/02.............. 2,881,500
3,000,000 Wilrig, 11.25%, 3/15/04........................ 2,745,000
----------------
TOTAL ENERGY................................. 39,337,852
----------------
</TABLE>
See Notes to Financial Statements
F-18
<PAGE> 101
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
................................................................................
<S> <C> <C>
FINANCE 6.1%
$ 4,130,000 American Annuity Group, Inc., 11.125%, 2/1/03.. $ 4,212,600
American Financial Corp.
4,550,000 12.00%, 9/3/99............................... 4,595,500
1,636,000 12.25%, 9/15/03.............................. 1,676,900
3,000,000 American Life Holding Co., 11.25%, 9/15/04..... 3,015,000
4,000,000 Americo Life, Inc., 9.25%, 6/1/05.............. 3,460,000
4,800,000 Blue Bell Funding, Inc., 11.85%, 5/1/99........ 4,944,000
2,750,000 GPA Delaware/Holland, 9.75%, 6/10/96........... 2,598,750
1,500,000 GPA Delaware, Inc., 8.75%, 12/15/98............ 1,185,000
1,750,000 Phoenix Re Corp., 9.75%, 8/15/03............... 1,771,875
2,000,000 Reliance Group Holdings, 9.75%, 11/15/03....... 1,830,000
----------------
TOTAL FINANCE................................ 29,289,625
----------------
HEALTH CARE 6.9%
4,205,446 Amerisource Distribution Corp., 11.25%,
7/15/05........................................ 4,478,800
5,000,000 Charter Medical Corp., 11.25%, 4/15/04......... 5,250,000
1,750,000 Community Health Systems, Inc., 10.25%,
11/30/03....................................... 1,774,062
4,000,000 Healthtrust, Inc., 8.75%, 3/15/05.............. 4,045,000
3,600,000 Hillhaven Corp., 10.125%, 9/1/01............... 3,654,000
1,800,000 National Medicine Enterprises, 10.125%, 3/1/05. 1,838,250
OrNda HealthCorp.
2,000,000 11.375%, 8/15/04............................. 2,115,000
2,000,000 12.25%, 5/15/02.............................. 2,170,000
4,000,000 Paracelsus Healthcare Corp., 9.875%, 10/15/03.. 3,830,000
2,000,000 Quorum Health Group, 11.875%, 12/15/02......... 2,180,000
Total Renal Care, Step Bonds (0% to 12.00% at
1,000,000 2/15/98) 8/15/04............................... 860,000
1,000,000 Wright Medical Technology, Inc., 10.75%,
7/1/00......................................... 982,500
----------------
TOTAL HEALTH CARE............................ 33,177,612
----------------
PRODUCER MANUFACTURING 7.7%
750,000 American Standard, Inc., 10.875%, 5/15/99...... 795,000
2,000,000 Envirosource, Inc., 9.75%, 6/15/03............. 1,730,000
3,503,000 Fairchild Corp., 13.00%, 3/1/07................ 2,732,340
3,500,000 Federal Industries, Ltd., 10.25%, 6/15/00...... 3,255,000
3,450,000 GS Technologies Operations, Inc., 12.00%,
9/1/04......................................... 3,531,937
IMO Industries, Inc.
4,500,000 12.00%, 11/1/01.............................. 4,590,000
1,950,000 12.25%, 8/15/97.............................. 1,967,062
4,150,000 Jordan Industries, Inc., Step Bonds (0% to
11.75% at 8/1/98) 8/1/05....................... 2,282,500
4,681,193 Robertson-Ceco Corp., 10.00%, Payment-In-Kind,
11/30/99....................................... 3,744,955
3,500,000 Schuller International Group, 10.875%,
12/15/04....................................... 3,696,875
1,500,000 Spreckles Industries, 11.50%, 9/1/00........... 1,455,000
</TABLE>
See Notes to Financial Statements
F-19
<PAGE> 102
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
................................................................................
<S> <C> <C>
Thermadyne Industries, Inc.
$ 3,284,000 10.25%, 5/1/02............................... $ 3,218,320
1,572,300 10.75%, 11/1/03.............................. 1,540,854
2,750,000 USG Corp., 10.25%, 12/15/02.................... 2,787,813
----------------
TOTAL PRODUCER MANUFACTURING................. 37,327,656
----------------
RAW MATERIALS/PROCESSING INDUSTRIES 16.5%
2,500,000 Associated Materials, Inc., 11.50%, 8/15/03.... 2,287,500
4,350,000 Buckeye Cellulose Corp., 10.25%, 5/15/01....... 4,263,000
3,000,000 Carbide/Graphite, 11.50%, 9/1/03............... 3,120,000
1,000,000 Container Corp. of America, 11.25%, 5/1/04..... 1,050,000
3,500,000 Crown Packaging, Series B, 10.75%, 11/1/00..... 3,456,250
2,250,000 Florida Steel Corp., 11.50%, 12/15/00.......... 2,272,500
5,500,000 Fort Howard Corp., 14.125%, 11/1/04............ 5,541,250
Gaylord Container Corp.
4,750,000 11.50%, 5/15/01.............................. 4,951,875
750,000 Step Bonds (0% to 12.75% at 5/15/96),
5/15/05...................................... 690,937
4,650,000 Harris Chemical North America, Inc., Step Bonds
(0% to 10.25% at 1/15/96) 7/15/01.............. 4,126,875
4,100,000 IMC Fertilizer Group, Inc., 9.45%, 12/15/11.... 3,936,000
4,000,000 Indspec Chemical Corp., Step Bonds (0% to
11.50% at 12/1/98), 12/1/03.................. 2,340,000
4,000,000 Mail-Well Corp., 10.50%, 2/15/04............... 3,580,000
4,000,000 NL Industries, Inc., Step Bonds (0% to 13.00%
at 10/15/98), 10/15/05......................... 2,580,000
Plastic Specialty & Technology Corp., 11.25%,
3,250,000 12/1/03........................................ 2,876,250
1,250,000 Rainy River Forest Products, 10.75%, 10/15/01.. 1,282,813
3,100,000 Republic Engineered Steel, 9.875%, 12/15/01.... 2,883,000
Riverwood International Corp.
500,000 10.375%, 6/30/04............................. 511,250
4,000,000 11.25%, 6/15/02.............................. 4,200,000
3,750,000 Sherritt, Inc., 10.50%, 3/31/14................ 3,693,750
1,450,000 Silgan Corp., 11.75%, 6/15/02.................. 1,522,500
5,000,000 Silgan Holdings, Inc., Step Bonds (0% to 13.25%
at 6/15/96), 12/15/02........................ 4,400,000
Stone Container Corp.
1,000,000 9.875%, 2/1/01............................... 978,750
2,000,000 10.75%, 10/1/02.............................. 2,065,000
2,000,000 12.625%, 7/15/98............................. 2,150,000
3,000,000 Sweetheart Cup, Inc., 10.50%, 9/1/03........... 2,880,000
4,000,000 UCC Investors Holdings, Inc., 11.00%, 5/1/03... 3,980,000
2,000,000 U.S. Can Co., 13.50%, 1/15/02.................. 2,200,000
----------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES.... 79,819,500
----------------
</TABLE>
See Notes to Financial Statements
F-20
<PAGE> 103
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
/Number of Shares Market Value
................................................................................
<S> <C> <C>
TECHNOLOGY 3.9%
$ 3,500,000 Harmon International Industries, Inc.,
12.00%, 8/1/02........................... $ 3,850,000
3,100,000 MFS Communications Co. Inc., Step Bonds
(0% to 9.375% at 11/15/99), 1/15/04...... 1,964,625
4,500,000 Mobile Telecom, 13.50%, 12/15/02......... 4,635,000
4,000,000 Tele Communications, Inc., 9.25%,
1/15/23.................................. 3,838,000
4,258,000 Unisys Corp., 13.50%, 7/1/97............. 4,641,220
----------------
TOTAL TECHNOLOGY....................... 18,928,845
----------------
TRANSPORTATION 3.5%
1,500,000 International Shipholding Corp., 9.00%,
7/1/03................................... 1,398,750
Sea Containers, Ltd.
2,750,000 9.50%, 7/1/03.......................... 2,530,000
1,000,000 12.50%, 12/1/04........................ 1,050,000
2,750,000 12.50%, 12/1/04........................ 2,873,750
2,500,000 Southern Pacific Rail Corp., 9.375%,
8/15/05.................................. 2,500,000
4,500,000 Trism, Inc., 10.75%, 12/15/00............ 4,432,500
USAir, Inc.
750,000 9.625%, 2/1/01......................... 549,375
1,250,000 10.00%, 7/1/03......................... 912,500
824,954 Series 1989-A1, 9.33%, 1/1/06............ 684,711
----------------
TOTAL TRANSPORTATION................... 16,931,586
----------------
UTILITIES 0.6%
4,500,000 PanAmSat L.P., Step Bonds (0% to 11.375%
at 8/1/98), 8/1/03....................... 2,970,000
----------------
TOTAL CORPORATE OBLIGATIONS (Cost
$416,157,731).......................... 405,693,376
----------------
COMMON STOCK 0.6%
7,357 Arcadian Corp............................ 132,426
*14,000 Dr Pepper/Seven-Up Companies, Inc........ 460,250
*9,500 Finlay Enterprises, Inc.................. 95,000
*14,663 Kash N Karry Food Stores, Inc............ 249,271
*607,107 Robertson-Ceco Corp...................... 1,897,209
*2,500 Smitty's Supermarket..................... 27,750
*13,617 Thermadyne Industries, Inc............... 197,447
----------------
TOTAL COMMON STOCK (Cost $4,138,231)... 3,059,353
----------------
PREFERRED STOCK 1.2%
*229,101 Supermarkets General Holdings Corp.,
$3.52, Payment-In-Kind
(Cost $4,604,192)........................ 5,727,525
----------------
</TABLE>
See Notes to Financial Statements
F-21
<PAGE> 104
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Units/Warrants/Shares
Principal Amount Market Value
................................................................................
<S> <C> <C>
UNITS 1.3%
1,000 Casino America, Inc., each unit consists of a
$1,000 bond, 11.50%, 11/15/01 and 3 warrants
(expiring 11/15/98)............................ $ 960,000
1,715 ICF Kaiser International, each unit consists of
a $1,000 par note, 12.00%, 12/31/03 and
5 warrants (expiring 12/31/98)................. 1,569,225
3,250 MVE, Inc., each unit consists of a $1,000 par
note, 12.50%, 2/15/02 and 1 warrant (expiring
02/15/02)...................................... 3,298,750
750 Santa Fe, Inc., each unit consists of a $1,000
par bond, 11.00%, 12/15/00 and 1 warrant
(expiring 12/15/96)............................ 708,750
----------------
TOTAL UNITS (Cost $6,681,019)................ 6,536,725
----------------
WARRANTS 0.0%
*3,125 Capital Gaming, expiring 2/1/99................ 3,906
*2,300 HDA Management Corp., expiring 12/15/98........ 13,800
*3,750 Louisiana Casino, expiring 12/1/98............. 37,500
*200 Trump Plaza, expiring 6/15/96.................. 10,000
----------------
TOTAL WARRANTS (Cost $106,444)............... 65,206
----------------
PRIVATE PLACEMENTS 2.4%
CORPORATE OBLIGATIONS 2.0%
3,637,770 Hemmeter Enterprises, Inc., 12.00%, Payment-In-
Kind, 12/15/00 (purchased 2/1/94).............. 2,400,928
5,100,000 S.D. Warren Co., 12.00%, 12/15/04 (purchased
12/13/94 through 12/20/94)..................... 5,367,750
1,600,000 UCAR Global Enterprises, Inc., 12.00%, 1/15/05
(purchased 1/20/95)............................ 1,682,000
----------------
TOTAL CORPORATE OBLIGATIONS
(Cost $9,673,063)............................ 9,450,678
----------------
UNITS 0.3%
2,250 Hemmeter Enterprises, Inc., each unit consists
of a $1,000 par Payment-In-Kind note, 12.00%,
12/15/00 and 15 warrants (expiring 12/15/99)
(purchased 12/14/93) (Cost $2,250,000)......... 1,541,250
----------------
COMMON STOCK 0.1%
*40,000 F F Holdings Corp., purchased 10/6/92.......... 80,000
*84,445 Triangle Wire & Cable, Inc., purchased 1/13/92. 337,780
----------------
TOTAL COMMON STOCK (Cost $2,162,180)......... 417,780
----------------
WARRANT 0.0%
*412 Wright Medical Technology, Inc., expiring
6/30/03 (Cost $80)............................. 61,765
----------------
TOTAL PRIVATE PLACEMENTS (Cost $14,085,323).. 11,471,473
----------------
</TABLE>
See Notes to Financial Statements
F-22
<PAGE> 105
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
................................................................................
<S> <C> <C>
FOREIGN GOVERNMENT OBLIGATIONS 1.3%
Federative Republic of Brazil
$ 2,000,000 4.00%, 4/15/24............................... $ 770,000
2,910,000 6.0625%, 1/1/01.............................. 2,251,613
2,000,000 6.75%, 4/15/12............................... 995,000
Republic of Argentina
3,000,000 4.25%, 3/31/23............................... 1,170,000
1,000,000 6.50%, 3/31/05............................... 511,250
1,000,000 United Mexican States, 6.25%, 12/31/19......... 485,000
----------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost
$7,672,293).................................. 6,182,863
----------------
REPURCHASE AGREEMENT 7.5%
35,975,000 Salomon Brothers, Inc., dated 2/28/95, 6.125%,
due 3/1/95 (Collateralized by U.S. Government
obligations in a pooled cash account)
repurchase proceeds $35,981,121 (Cost
$35,975,000)................................... 35,975,000
----------------
TOTAL INVESTMENTS (Cost $489,420,233) 98.4%................ 474,711,521
OTHER ASSETS AND LIABILITIES, NET 1.6%..................... 7,846,651
----------------
NET ASSETS 100%............................................ $ 482,558,172
----------------
</TABLE>
*Non-income producing security.
See Notes to Financial Statements
F-23
<PAGE> 106
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $489,420,233)................ $ 474,711,521
Cash............................................................ 592
Interest receivable............................................. 11,344,888
Receivable for investments sold................................. 10,494,539
Receivable for Fund shares sold................................. 730,931
Other assets.................................................... 42,054
-------------
TOTAL ASSETS................................................ 497,324,525
-------------
LIABILITIES
Payable for investments purchased............................... 10,370,660
Dividends payable............................................... 1,745,020
Payable for Fund shares redeemed................................ 1,569,082
Due to Distributor.............................................. 225,244
Due to Adviser.................................................. 220,124
Due to shareholder service agent................................ 141,093
Deferred directors' compensation................................ 62,687
Accrued expenses and other payables............................. 432,443
-------------
TOTAL LIABILITIES........................................... 14,766,353
-------------
NET ASSETS, equivalent to $5.96 per share for Class A shares,
$5.97 per share for Class B shares and $5.95 per share for
Class C shares................................................. $ 482,558,172
=============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 66,081,843 Class A, 12,705,278 Class B
and 2,195,522 Class C Shares outstanding....................... $ 809,826
Capital surplus................................................. 764,765,749
Accumulated net realized loss on securities..................... (268,233,238)
Net unrealized depreciation of securities....................... (14,708,712)
Accumulated deficit............................................. (75,453)
-------------
NET ASSETS at February 28, 1995................................. $ 482,558,172
=============
</TABLE>
See Notes to Financial Statements
F-24
<PAGE> 107
STATEMENT OF OPERATIONS
Six Months Ended February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest......................................................... $ 23,257,592
Dividends........................................................ 16,553
------------
Investment income............................................ 23,274,145
------------
EXPENSES
Management fees.................................................. 1,261,377
Shareholder service agent's fees and expenses.................... 679,165
Service fees--Class A............................................ 375,527
Distribution and service fees--Class B........................... 354,861
Distribution and service fees--Class C........................... 64,076
Registration and filing fees..................................... 70,949
Accounting services.............................................. 49,845
Reports to shareholders.......................................... 46,172
State franchise taxes............................................ 31,618
Audit fees....................................................... 19,150
Directors' fees and expenses..................................... 11,954
Custodian fees................................................... 7,831
Legal fees....................................................... 4,818
Miscellaneous.................................................... 12,930
------------
Total expenses............................................... 2,990,273
------------
NET INVESTMENT INCOME............................................ 20,283,872
============
NET REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities.................................. (17,280,599)
Net unrealized appreciation of securities during the period...... 6,772,034
------------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES................... (10,508,565)
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................. $ 9,775,307
============
</TABLE>
See Notes to Financial Statements
F-25
<PAGE> 108
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
February 28, 1995 August 31, 1994
.................................................................................
<S> <C> <C>
NET ASSETS, beginning of period............. $448,357,715 $ 491,103,694
------------ -------------
Operations
Net investment income....................... 20,283,872 43,286,631
Net realized gain (loss) on securities...... (17,280,599) 12,147,682
Net unrealized appreciation (depreciation)
of securities during the period............ 6,772,034 (43,219,168)
------------ -------------
Increase in net assets resulting from
operations................................. 9,775,307 12,215,145
------------ -------------
Dividends to shareholders from net
investment income
Class A.................................. (17,716,372) (41,922,518)
Class B.................................. (3,121,933) (5,284,881)
Class C.................................. (561,970) (784,158)
------------ -------------
(21,400,275) (47,991,557)
------------ -------------
Net equalization credits.................... -- 5,389
------------ -------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A.................................. 71,727,196 135,925,898
Class B.................................. 17,586,755 57,873,861
Class C.................................. 2,830,261 16,675,131
------------ -------------
92,144,212 210,474,890
------------ -------------
Proceeds from shares issued for dividends
reinvested
Class A.................................. 10,329,049 23,629,016
Class B.................................. 1,449,681 2,576,495
Class C.................................. 338,688 504,457
------------ -------------
12,117,418 26,709,968
------------ -------------
Cost of shares redeemed
Class A.................................. (43,181,915) (218,294,071)
Class B.................................. (12,273,271) (21,997,246)
Class C.................................. (2,981,019) (3,868,497)
------------ -------------
(58,436,205) (244,159,814)
------------ -------------
Increase (decrease) in net assets resulting
from Fund share transactions............... 45,825,425 (6,974,956)
------------ -------------
Increase (decrease) in net assets........... 34,200,457 (42,745,979)
------------ -------------
NET ASSETS, end of period................... $482,558,172 $ 448,357,715
============ =============
</TABLE>
See Notes to Financial Statements
F-26
<PAGE> 109
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
Six Months
Ended Year Ended August 31
February 28, -----------------------------------------
1995 1994 1993 1992 1991 1990
.....................................................................................
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of period..... $ 6.12 $ 6.61 $ 6.40 $ 5.71 $ 5.78 $ 7.96
------ ------ ------ ------ ------ ------
Income from investment
operations
Investment income...... .30 .71 .71 .79 .86 1.00
Expenses............... (.03) (.08) (.07) (.065) (.06) (.07)
------ ------ ------ ------ ------ ------
Net investment income.. .27 .63 .64 .725 .80 .93
Net realized and
unrealized gain or
loss on securities.... (.145) (.47) .27 .6775 (.055) (2.165)
------ ------ ------ ------ ------ ------
Total from investment
operations............... .125 .16 .91 1.4025 .745 (1.235)
------ ------ ------ ------ ------ ------
Dividends from net
investment income........ (.285) (.65) (.70) (.7125) (.815) (.945)
------ ------ ------ ------ ------ ------
Net asset value, end of
period................... $ 5.96 $ 6.12 $ 6.61 $ 6.40 $ 5.71 $ 5.78
====== ====== ====== ====== ====== ======
TOTAL RETURN (1)......... 2.17% 2.34% 15.20% 25.82% 15.66% (15.88)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the
period (millions)........ $393.7 $364.2 $452.4 $435.1 $341.9 $331.4
Average net assets
(millions)............... $368.3 $419.8 $426.8 $390.7 $298.2 $408.2
Ratios to average net
assets...................
Expenses................ 1.18%(2) 1.10% 1.09% 1.05% 1.06% 1.02%
Net investment income... 9.20%(2) 9.03% 10.10% 11.77% 15.20% 14.23%
Portfolio turnover rate.. 22% 66% 75% 73% 114% 59%
</TABLE>
(1) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(2) Annualized.
See Notes to Financial Statements
F-27
<PAGE> 110
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------- ---------------------------------------
July 2, July 6,
Six Months Year Ended 1992(1) Six Months 1993(1)
Ended August 31 through Ended Year Ended through
February 28, -------------- August 31, February 28, August 31, August 31,
1995 1994 1993(2) 1992(2) 1995 1994(2) 1993(2)
..........................................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period........................ $6.14 $6.63 $6.41 $ 6.33 $6.11 $6.61 $ 6.63
----- ----- ----- ------ ----- ----- ------
Income from investment
operations
Investment income............. .31 .71 .70 .11 .31 .65 .08
Expenses...................... (.06) (.13) (.12) (.02) (.06) (.12) (.02)
----- ----- ----- ------ ----- ----- ------
Net investment income......... .25 .58 .58 .09 .25 .53 .06
Net realized and unrealized
gain or loss on securities... (.159) (.468) .292 .097 (.149) (.428) .0195
----- ----- ----- ------ ----- ----- ------
Total from investment
operations.................... .091 .112 .872 .187 .101 .102 .0795
----- ----- ----- ------ ----- ----- ------
Dividends from net investment
income........................ (.261) (.602) (.652) (.107) (.261) (.602) (.0995)
----- ----- ----- ------ ----- ----- ------
Net asset value, end of period. $5.97 $6.14 $6.63 $ 6.41 $5.95 $6.11 $ 6.61
===== ===== ===== ====== ===== ===== ======
TOTAL RETURN (3)............... 1.59% 1.59% 14.49% 2.97% 1.76% 1.43% 1.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period
(millions).................... $75.8 $71.0 $37.7 $ 3.1 $13.1 $13.2 $ 1.0
Average net assets (millions).. $71.0 $56.8 $18.0 $ 1.1 $12.8 $8.4 $ 0.3
Ratios to average net assets
Expenses...................... 1.99%(4) 1.90% 1.90% 2.08%(4) 1.99%(4) 1.91% 2.34%(4)
Net investment income......... 8.38%(4) 8.25% 9.10% 10.30%(4) 8.38%(4) 8.25% 8.05%(4)
Portfolio turnover rate........ 22% 66% 75% 73% 22% 66% 75%
</TABLE>
(1) Commencement of offering of sales
(2) Based on average month-end shares outstanding
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Annualized
See Notes to Financial Statements
F-28
<PAGE> 111
NOTES TO FINANCIAL STATEMENTS
February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
American Capital High Yield Investments, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified open-end man-
agement investment company. The following is a summary of significant account-
ing policies consistently followed by the Fund in the preparation of its
financial statements.
A. INVESTMENT VALUATIONS-Securities actively traded in the over-the-counter
market, including listed securities for which the primary market is believed
to be over-the-counter, are valued at the most recently quoted bid price. Se-
curities and options for which the primary market is on an exchange or NASDAQ
are valued at the last reported sale price, or if no sale is reported at the
last reported bid price. If no sale or bid price is reported, securities are
valued at the most recent sale price. Private placements are valued at fair
value under a method approved by the Board of Directors.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations, until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
Fund investments include lower rated debt securities which may be more sus-
ceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuer's ability to meet principal
and interest payments. At February 28, 1995, debt securities rated below in-
vestment grade and comparable unrated securities represented approximately 89%
of the investment portfolio.
B. REPURCHASE AGREEMENTS-A repurchase agreement is a short-term investment in
which the Fund acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund may in-
vest independently in repurchase agreements, or transfer uninvested cash bal-
ances into a pooled cash account along with other investment companies advised
or sub-advised by Van Kampen American Capital Asset Management, Inc. (the "Ad-
viser"), the daily aggregate of which is invested in repurchase agreements.
Repurchase agreements are collateralized by the underlying debt security. The
Fund will make payment for such securities only upon physical delivery or evi-
dence of book entry transfer in the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not less than
the repurchase proceeds due the Fund.
F-29
<PAGE> 112
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
C. PRIVATE PLACEMENTS-The Fund owns securities purchased in private placement
transactions, which have not been registered under the Securities Act of 1933.
Such securities generally may be resold only in a privately negotiated trans-
action with a limited number of purchasers or in a public offering after they
have been registered under the Securities Act of 1933. The issuers of pri-
vately placed debt securities held by the Fund generally have agreed to regis-
ter the securities within specified time periods or increase the interest paid
on such securities. The Fund may not invest more than 15% of its net assets
(determined at the time of purchase) in private placements and other illiquid
securities.
D. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized gains to its shareholders. It is anticipated that no distributions of
capital gains will be made until tax basis capital loss carryforwards expire
or are offset by net realized capital gains.
The net realized capital loss carryforward for federal income tax purposes
of approximately $251 million at August 31, 1994, may be utilized to offset
current or future gains until expiration in 1997 through 2000.
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on in-
vestments are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily. Issuers of
Payment-in-Kind (PIK) securities may make dividend or interest payments by is-
suing additional stocks or bonds in lieu of cash payments.
F. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to shareholders are
recorded on the record date. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code,
which may differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.
G. DEBT DISCOUNT AND PREMIUM-The Fund accounts for original issue discounts
and premiums on the same basis as is used for federal income tax reporting.
Accordingly, original issue discounts on long-term debt securities purchased
are amortized over the life of the security. Premiums on debt securities are
not amortized. Market discounts are recognized at the time of sale as realized
gains for book purposes and ordinary income for tax purposes.
F-30
<PAGE> 113
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
H. EQUALIZATION-At September 1, 1994, the Fund discontinued the accounting
practice of equalization, which it had used since its inception. Equalization
is a practice whereby a portion of the proceeds from sales and costs of redemp-
tions of Fund shares, equivalent on a per-share basis to the amount of the un-
distributed net investment income, is charged or credited to undistributed net
investment income.
The balance of equalization included in undistributed net investment income
at the date of change, which was $283,820, was reclassified to capital surplus.
Such reclassification had no effect on net assets, results of operations, or
net asset value per share of the Fund.
NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.625% of the first $150 million, .55% of the next $150 million, and .50% of the
amount in excess of $300 million.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are allo-
cated among all investment companies advised or sub-advised by the Adviser. For
the period ended February 28, 1995, these charges included $6,262 as the Fund's
share of the employee costs attributable to the Fund's accounting officers. A
portion of the accounting services expense was paid to the Adviser in reim-
bursement of personnel, facilities and equipment costs attributable to the pro-
vision of accounting services to the Fund. The services provided by the Adviser
are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period ended February 28, 1995, the fees for such services were
$559,968.
The Fund has been advised that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both af-
filiates of the Adviser, received $5,067 and $13,938 respectively, as their
portion of the commissions charged on sales of Fund shares during the period.
Under the Distribution Plans, the Fund pays up to .25% per annum of its aver-
age net assets to the Distributor for expenses and service fees incurred. Class
B shares and Class C shares pay an additional fee of up to .75% per annum of
their average daily net assets to reimburse the Distributor for its distribu-
tion costs. Actual distribution expenses incurred by the Distributor for Class
B shares and Class C shares may exceed the amounts reimbursed to the Distribu-
tor by the Fund. At February 28, 1995, the unreimbursed expenses incurred by
the Distributor under the Class B plan and Class C plan aggregated approxi-
mately $2.4 million and $175,000, respectively, and may be carried forward and
reimbursed through either the collection of the contingent deferred sales
charges from share redemptions or, subject to the annual renewal of the plans,
future Fund reimbursements of distribution fees.
F-31
<PAGE> 114
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $123,772,237 and $91,328,513,
respectively.
For federal income tax purposes, the identified cost of investments owned at
February 28, 1995 was $489,433,611. Net unrealized depreciation of investments
aggregated $14,722,090, gross unrealized appreciation of investments aggre-
gated $10,320,908 and gross unrealized depreciation of investments aggregated
$25,042,998.
NOTE 4--DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,420 plus a fee of $35 per day for Board and Com-
mittee meetings attended. The Chairman receives additional fees from the Fund
at the annual rate of $530. During the period, such fees aggregated $10,405.
The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligation under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each director covered under the Plan elects to be credited
with an earnings component on amounts deferred equal to the income earned by
the Fund or its short-term investments or equal to the total return of the
Fund.
NOTE 5--CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred ba-
sis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income, and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
F-32
<PAGE> 115
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
The Fund has 400 million Class A and 300 million each of Class B and Class C
shares of $.01 par value capital stock authorized. Transactions in shares of
capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
FEBRUARY 28, AUGUST 31,
1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A............................................. 12,119,448 21,000,805
Class B............................................. 2,947,071 8,862,056
Class C............................................. 476,277 2,547,363
---------- -----------
15,542,796 32,410,224
========== ===========
Shares issued for dividends reinvested
Class A............................................. 1,744,889 3,647,442
Class B............................................. 244,412 400,994
Class C............................................. 57,287 79,079
---------- -----------
2,046,588 4,127,515
========== ===========
Shares redeemed
Class A............................................. (7,249,461) (33,625,821)
Class B............................................. (2,051,190) (3,395,061)
Class C............................................. (501,517) (608,555)
---------- -----------
(9,802,168) (37,629,437)
---------- -----------
Increase (decrease) in Fund shares outstanding....... 7,787,216 (1,091,698)
========== ===========
</TABLE>
NOTE 6--SUBSEQUENT DIVIDEND
The Board of Directors of the Fund declared dividends from net investment in-
come of $.0475 per share for Class A shares and $.0435 per share for Class B
shares and Class C shares, payable April 17, 1995 to shareholders of record on
March 31, 1995.
F-33
