<PAGE> 1
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VAN KAMPEN AMERICAN CAPITAL
HARBOR FUND
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Van Kampen American Capital Harbor Fund, formerly known as American Capital
Harbor Fund, Inc. (the "Fund"), is a mutual fund which seeks to provide current
income, capital appreciation, and conservation of capital by investing
principally in senior securities, primarily convertible bonds and convertible
preferred stocks, of other corporations. There is no assurance that the Fund
will achieve its investment objective.
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 21, 1995, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission (the "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.
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VAN KAMPEN AMERICAN CAPITAL SM
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THIS PROSPECTUS IS DATED AUGUST 21, 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 Objective and Policies................................ 10
Risks of Lower Rated Securities.................................. 11
Investment Practices............................................. 13
Investment Advisory Services..................................... 17
Alternative Sales Arrangements................................... 19
Purchase of Shares............................................... 22
Shareholder Services............................................. 32
Redemption of Shares............................................. 36
Distribution Plans............................................... 39
Distributions from the Fund...................................... 41
Tax Status....................................................... 42
Fund Performance................................................. 43
Description of Shares of the Fund................................ 45
Additional Information........................................... 46
Appendix -- Ratings of Senior Securities......................... 47
</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
<PAGE> 3
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PROSPECTUS SUMMARY
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THE FUND. Van Kampen American Capital Harbor 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 OBJECTIVE. Current income, capital appreciation and conservation of
capital. There is, however, no assurance that the Fund will be successful in
achieving its objective.
INVESTMENT POLICY AND RISKS. Principally in income-producing senior corporate
securities, primarily convertible bonds and convertible preferred stocks. The
Fund may invest in lower-rated convertible securities (commonly referred to as
"junk bonds") which involve additional risks. See "Investment Objective and
Policies -- Risks of Lower-Rated Securities." Use of options, futures contracts
and related options may include additional risks. See "Investment Practices --
Using Options, Futures Contracts and Related Options."
INVESTMENT RESULTS. The investment results of the Fund during the past ten years
are shown in the table of "Financial Highlights." See also "Fund Performance."
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. 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 5.75% 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. 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 five percent of
redemption proceeds during the first year, declining each year thereafter to
zero after the
3
<PAGE> 4
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
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. Dividends from net investment income are
distributed quarterly; capital gains, if any, are distributed annually. 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").
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
4
<PAGE> 5
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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)............... 5.75%(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--5.00% 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 $50,000 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
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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)............. .54% .54% .54%
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)............. .29% .30% .30%
Total Fund Operating Expenses (as a
percentage of average daily net
assets)............................... 1.04% 1.84% 1.84%
</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 1.04% for
Class A shares, 1.84% for Class B shares
and 1.84% for Class C shares, (ii) a 5%
annual return and (iii) redemption at the
end of each time period:
Class A............................... $ 68 $ 89 $112 $177
Class B............................... $ 70 $ 91 $117 $176*
Class C............................... $ 29 $ 58 $100 $216
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each time
period:
Class A............................... $ 68 $ 89 $112 $177
Class B............................... $ 19 $ 58 $100 $176*
Class C............................... $ 19 $ 58 $100 $216
</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
--------------------------------------------------------------------------------
(Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated)
The following information for each of the five most recent fiscal years has
been audited by Price Waterhouse LLP, independent accountants, whose report
thereon was unqualified. 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
-------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986(3) 1985
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of period.... $ 15.12 $ 14.95 $ 14.92 $ 12.93 $ 14.05 $ 12.39 $ 11.48 $ 13.42 $ 13.99 $ 12.10
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
INCOME FROM OPERATIONS
Investment income........ .78 .85 .90 .955 1.115 1.00 .94 .76 .79 .81
Expenses................. (.15) (.16) (.15) (.13) (.12) (.105) (.09) (.08) (.09) (.08)
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Net investment income.... .63 .69 .75 .825 .995 .895 .85 .68 .70 .73
Net realized and
unrealized gains or
losses on securities... (1.5625) 1.365 .6275 2.085 (1.1525) 1.605 1.03 (1.0625) 1.13 2.08
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. (.9325) 2.055 1.3775 2.91 (.1575) 2.50 1.88 (.3825) 1.83 2.81
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS FROM
Net investment income.... (.62) (.66) (.84) (.92) (.87) (.84) (.84) (.84) (.84) (.84)
Net realized gains on
securities............. (.108) (1.225) (.5075) -- (.0925) -- (.13) (.7175) (1.56) (.08)
Excess of book-basis is
net realized gains on
securities............. (.2195) -- -- -- -- -- -- -- -- --
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Total distributions...... (.9475) (1.885) (1.3475) (.92) (.9625) (.84) (.97) (1.5575) (2.40) (.92)
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 13.24 $ 15.12 $14.95 $ 14.92 $ 12.93 $ 14.05 $ 12.39 $ 11.48 $ 13.42 $ 13.99
======= ======= ======= ======= ======== ======== ======== ======== ======== ========
TOTAL RETURN(4).......... (6.43%) 13.56% 9.63% 23.08% (1.23%) 20.59% 16.76% (3.76%) 13.73% 24.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)............. $ 369.7 $ 432.3 $394.1 $385.5 $ 336.9 $ 387.3 $ 342.1 $ 364.4 $ 317.3 $ 208.9
Ratios to average net
assets
Expenses............... 1.04% 1.02% .99% .91% .89% .76% .71% .60% .64% .63%
Net investment
income............... 4.39% 4.37% 5.00% 5.86% 7.29% 6.52% 6.82% 4.87% 4.88% 5.78%
Portfolio turnover
rate................... 105% 134% 85% 91% 71% 94% 95% 83% 83% 89%
</TABLE>
(Table continued on following page)
8
<PAGE> 9
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B(1) CLASS C
---------------------------------- ----------------------------
OCTOBER 26,
YEAR ENDED 1993(2)
DECEMBER 31 YEAR ENDED THROUGH
---------------------------------- DECEMBER 31, DECEMBER 31,
1994 1993(3) 1992(3) 1994 1993(3)
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......................... $ 15.07 $ 14.90 $ 14.91 $ 15.13 $ 16.14
-------- -------- -------- ------------ ------------
INCOME FROM OPERATIONS
Investment income............................................. .77 .83 .87 .78 .22
Expenses...................................................... (.26) (.27) (.275) (.26) (.07)
-------- -------- -------- ------------ ------------
Net investment income......................................... .51 .56 .595 .52 .15
Net realized and unrealized gains or losses on securities..... (1.5505) 1.375 .63 (1.5705) (.0325)
-------- -------- -------- ------------ ------------
Total from investment operations.............................. (1.0405) 1.935 1.225 (1.0505) .1175
-------- -------- -------- ------------ ------------
LESS DISTRIBUTIONS FROM
Net investment income......................................... (.502) (.54) (.7275) (.502) (.125)
Net realized gains on securities.............................. (.108) (1.225) (.5075) (.108) (1.0025)
Excess of book-basis is net realized gains on securities...... (.2195) -- -- (.2195) --
-------- -------- -------- ------------ ------------
Total distributions........................................... (.8295) (1.765) (1.235) (.8295) (1.1275)
-------- -------- -------- ------------ ------------
Net asset value, end of period................................ $ 13.20 $ 15.07 $ 14.90 $ 13.25 $ 15.13
======== ======== ======== ============ ============
TOTAL RETURN(4)............................................... (7.11%) 12.68% 8.56% (7.14%) .93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).......................... $ 71.1 $ 60.1 $ 20.0 $ 3.3 $ 1.1
Ratios to average net assets (annualized)
Expenses.................................................... 1.84% 1.73% 1.88% 1.84% 1.90%
Net investment income....................................... 3.63% 3.62% 4.08% 3.72% 3.88%
Portfolio turnover rate....................................... 105% 134% 85% 105% 134%
</TABLE>
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(1) Sales of Class B shares commenced on December 20, 1991 at a net asset value
of $14.32 per share. At December 31, 1991, there were 15,738 Class B shares
outstanding with a per share net asset value of $14.91. The increase in net
asset value was due principally to unrealized appreciation; there were no
dividends or distributions paid during the period. Other financial
highlights for the Class B shares for this short period are not presented as
they are not meaningful.
(2) Commencement of offering of sales.
(3) Based on average month-end shares outstanding.
(4) Total return of periods of less than one full year are not annualized. Total
return does not consider the effect of sales charges.
9
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THE FUND
------------------------------------------------------------------------------
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 OBJECTIVE AND POLICIES
------------------------------------------------------------------------------
The Fund seeks to provide current income, capital appreciation, and
conservation of the shareholder's capital by investing principally in fixed
income securities, primarily convertible bonds and convertible preferred stocks.
Convertible bonds and preferred stocks generally are fixed income securities
which do not participate in any dividend increases or decreases of the
underlying common stocks. However, the market prices of convertible bonds and
preferred stocks may be affected by any such dividend changes.
The fixed income securities acquired by the Fund are not subject to any
limitations as to ratings and may include high, medium, lower and non-rated debt
securities. Under normal market conditions, most of the convertible debt
securities held by the Fund are rated as medium grade obligations. Lower-rated
securities (commonly referred to as "junk bonds") are generally subject to
greater credit risks than higher-rated securities. To the extent that the Fund
invests a large portion of its total assets in lower-rated securities, the
Fund's ability to conserve shareholder capital may be diminished. Fixed income
securities with longer maturities generally tend to produce higher yields and
are subject to greater market price fluctuation as a result of changes in
interest rates than fixed income securities with shorter maturities.
Convertible securities rank senior to common stocks in a corporation's capital
structure. They are consequently of higher quality and entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security. Through careful selection of
individual securities, diversification of investments, and by continuing
supervision of the investment portfolio, the Adviser strives to reduce risk and
thereby conserve
10
<PAGE> 11
principal. While attractive convertible securities of desired quality may not be
available in all industries at all times, their general availability is
considered by the Adviser to be more than adequate in light of the Fund's
investment objectives.
The Fund also seeks to provide capital appreciation by investing primarily in
securities that carry the right of conversion into, or the right to purchase,
common stocks. The Fund may also invest up to 45% of its total assets in common
stocks. The Fund will give priority, where consistent with its other objectives,
to the convertible securities and common stocks of companies whose common stocks
appear to have good prospects for capital appreciation. This policy will
ordinarily emphasize companies that have an established record of growth.
However, the Fund may invest in more cyclical companies when the investment can
be made at prices considered attractive by the Adviser. There can, of course, be
no assurance that the policies of the Fund will actually result in a growth in
value of shareholders' investments.
In seeking the above objectives, it is a fundamental policy of the Fund to
invest the major part (over 50%) of its total assets, excluding cash, cash
equivalents, and government securities, in convertible securities, except in
times of abnormal and unusual market conditions when the Adviser feels that a
more defensive position is necessary for a temporary period. Cash equivalents
include certificates of deposit, prime commercial paper, bankers' acceptances
and repurchase agreements. See "Investment Practices -- Repurchase Agreements."
Under such circumstances, the Fund may invest up to 100% of its assets in
nonconvertible senior securities including securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and investment grade
corporate bonds. It is a fundamental policy of the Fund not to invest more than
45% of its total assets in common stocks.
------------------------------------------------------------------------------
RISKS OF LOWER-RATED SECURITIES
------------------------------------------------------------------------------
Convertible securities are generally not investment grade, that is, not rated
within the four highest categories by Moody's Investors Service ("Moody's") or
Standard & Poor's Corporation ("S&P"). See the Appendix for a description of
these ratings. To the extent that convertible securities or other debt
securities acquired by the Fund are rated lower than investment grade or are not
rated, there is a greater risk as to the timely repayment of the principal of,
and timely payment of interest or dividends on, such securities. The Fund may
purchase convertible securities and other debt securities rated BB or lower by
S&P or Ba or lower by Moody's which ratings are considered by the rating
agencies to be speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Decisions to purchase and sell these
securities are based on the Adviser's evaluation of their investment potential
and not on the ratings assigned by credit agencies. Because investment in
lower-rated securities involves greater investment risk, the
11
<PAGE> 12
Fund's performance may depend to a significant degree on the Adviser's
investment analysis. Lower-rated securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. A projection of an economic downturn, for example, could cause
a decline in prices of lower-rated securities because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its senior securities. In addition, the secondary trading
market for lower-rated securities may be less liquid than the market for higher
grade securities.
Prices of lower-rated fixed income securities may decline rapidly in the event
a significant number of holders decide to sell. Changes in expectations
regarding an issuer, an industry or lower-rated fixed income 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. An
economic down-turn 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. See "Risk
Factors" in the Statement of Additional Information for a further discussion of
risk factors associated with investments in lower-rated securities.
During the fiscal year ended December 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 non-rated debt
securities, determined on a dollar weighted average, were as follows:
------------------------------------------------------------------------------
<TABLE>
<S> <C> <S> <C>
AAA/Aaa............. .13% *Non-rated.......... 2.56%
AA/Aa............... 3.89% Preferred Stocks.... 19.00%
A/A................. 10.64% Common
BBB/Baa............. 15.40% Stocks/Warrants... 20.61%
BB/Ba............... 9.72% Cash and
B/B................. 9.33% Equivalents....... 8.35%
CCC/Caa............. .37% -------
Total Net
Assets..... 100%
=======
</TABLE>
------------------------------------------------------------------------------
* The non-rated securities as a percentage of total net assets were considered
by the Adviser to be comparable to securities rated by Moody's as follows:
BB -- 2.56%.
CONVERTIBLE SECURITIES. A "convertible security" includes any debt security or
preferred stock which has the right to be converted into any other security or
which carries with it the right to purchase any other security, any unit
including one of the foregoing, and any other security for which it is expected
that one of the foregoing will be received in exchange within a reasonably short
period of time in a merger, acquisition, reorganization, recapitalization, or
otherwise. A convertible security entitles the holder to exchange it for a fixed
number of shares of common stock or other equity security, usually of the same
company, at fixed prices within a specified period of time. As such, a
convertible security entitles the holder to receive the
12
<PAGE> 13
fixed income of a bond or the dividend preference of a preferred stock until the
holder elects to exercise the conversion privilege. The difference between the
market price of the convertible security and the market price of the securities
into which it may be converted is called the "premium." When the premium is
small, the convertible security has performance characteristics similar to an
equity security; when the premium is large, the convertible security has
performance characteristics similar to a fixed income security. The conversion
privilege may also take the form of warrants attached to the bond or preferred
stock which entitle the holder to purchase a specific number of shares of common
stock or other equity security, usually of the same company, at fixed prices for
a specified period of time.
------------------------------------------------------------------------------
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 may invest up
to 25% of its assets in repurchase agreements but 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, would exceed ten percent of
the value of its net assets. In the event of a 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.
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<PAGE> 14
RESTRICTED SECURITIES. The Fund may invest up to ten percent of its net assets
in restricted securities and other illiquid assets. As used herein, restricted
securities are those that have been sold in the United States without
registration under the Securities Act of 1933 and are thus subject to
restrictions on resale. Excluded from the limitation, however, are any
restricted securities which are eligible for resale pursuant to Rule 144A under
the Securities Act of 1933 and which have been determined to be liquid by the
Trustees or by the Adviser pursuant to Trustee-approved guidelines. Restricted
securities generally may be resold only in privately negotiated transactions
with a limited number of purchasers or in a public offering registered under the
Securities Act of 1933. Considerable delay could be encountered in either event.
These difficulties and delays could result in the Fund's inability to realize a
favorable price upon disposition of restricted securities, and in some cases
might make disposition of such securities at the time desired by the Fund
impossible. Since market quotations may not be readily available for restricted
securities, such securities will be valued by a method that the Fund's Trustees
believe accurately reflects fair value.
USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The Fund 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. The Fund may use one or more of
the following strategies in connection with the equity portion of its portfolio.
In times of stable or rising security prices, the Fund generally seeks to
obtain maximum exposure to the securities markets, i.e., to be "fully invested."
Nevertheless, even when the Fund is fully invested, prudent management requires
that at least a small portion of assets be available as cash to honor redemption
requests and for other short-term needs. The Fund may also have cash on hand
that has not yet been invested. The portion of the Fund's assets that is
invested in cash equivalents does not fluctuate with security market prices, so
that, in times of rising market prices, the Fund may underperform the market in
proportion to the amount of cash equivalents in its portfolio. By purchasing
futures contracts, however, the Fund can compensate for the cash portion of its
assets and obtain equivalent performance to investing 100% of its assets in
equity securities.
If the Adviser forecasts a market decline, the Fund may take a defensive
position, reducing its exposure to the securities markets by increasing its cash
position. By selling futures contracts instead of portfolio securities, a
similar result can be achieved to the extent that the performance of the stock
index futures contracts correlates to the performance of the Fund's portfolio
securities. Sale of futures contracts could frequently be accomplished more
rapidly and at less cost than the actual sale of securities. Once the desired
hedged position has been effected, the Fund could then liquidate securities in a
more deliberate manner, reducing its
14
<PAGE> 15
futures position simultaneously to maintain the desired balance, or it could
maintain the hedged position.
As an alternative to selling stock index futures contracts, the Fund can
purchase stock index puts, or stock index futures puts, to hedge the portfolio's
risk in a declining market. Since the value of a put increases as the index
declines below a specified level, the portfolio's value is protected against a
market decline to the degree the performance of the index correlates with the
performance of the Fund's investment portfolio. If the market remains stable or
advances, the Fund can refrain from exercising the put and its portfolio will
participate in the advance, having incurred only the premium cost for the put.
In many cases the Fund could achieve results similar to those available from
options and futures contracts without investing in the options and futures
markets. For example, instead of hedging portfolio securities it owned with
options and futures contracts, the Fund could sell the securities and invest the
proceeds in money market instruments. In other cases, however, the options and
futures markets provide investment or risk management opportunities that are not
available from direct investments in securities. In addition, some strategies
can be performed with greater ease and at lower cost by utilizing the options
and futures markets.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options, futures contracts and related options 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. Use of options and
futures would be likely to increase the Fund's portfolio turnover rate and
increase transaction costs. Capital gains realized by the Fund from transactions
in options and futures contracts may increase shareholders' tax liability if not
offset by capital losses realized by the Fund. 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. 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 sales charge.
Because of the differences in sales charges and distribution fees, the total
returns for each of the classes will differ. 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
15
<PAGE> 16
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.
The Fund may not invest more than ten percent 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. A more complete discussion of the
potential risks involved in transactions in options or futures contracts and
related options is contained in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. 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.
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 brokerage firms. The Adviser is 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.
PORTFOLIO TURNOVER. The Fund purchases securities which are believed by the
Adviser to have above average potential for current income, capital appreciation
and conservation of capital. Securities are disposed of in situations where it
is believed that the potential for achieving such objectives has lessened or
that other securities have a greater potential. Therefore, the Fund may purchase
and sell securities without regard to the length of time the security is to be,
or has been held. The Fund's annual portfolio turnover is shown in the table of
"Financial Highlights." The rate may exceed 100%, which is higher than that of
many other investment companies. A 100% turnover rate occurs, for example, if
all the Fund's portfolio securities are replaced during one year. High portfolio
activity increases the Fund's transaction costs, including brokerage
commissions. To the extent short-term trading results in realization of gains on
securities held for one year or less, shareholders are subject to taxes at
ordinary income rates.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority, as defined in the 1940 Act, vote of the Fund's shareholders. One of
these
16
<PAGE> 17
restrictions provides that the Fund may not invest more than 25% of its assets
in securities issued by companies in any one industry.
In addition to the foregoing, the Fund has adopted additional investment
restrictions which may be changed by the Trustees without a vote of
shareholders. One of these restrictions provides that the Fund may not invest
more than 15% of the value of its assets in securities of foreign issuers.
Foreign investments may be subject to special risks, including future political
and economic developments, the possible imposition of additional withholding
taxes on dividend or interest income payable on the securities, the seizure or
nationalization of companies, establishment of exchange controls or adoption of
other restrictions which might adversely affect the investment. Another of these
restrictions provides that the Fund may not invest more than ten percent of its
net assets, determined at the time of investment, in illiquid securities and
repurchase agreements that have a maturity of longer than seven days.
------------------------------------------------------------------------------
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
17
<PAGE> 18
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 AGREEMENTS. 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 0.55% on
the first $350 million of average net assets; 0.50% on the next $350 million of
average net assets; 0.45% on the next $350 million of average net assets; and
0.40% on average net assets over $1.05 billion. 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. James H. Behrmann is primarily responsible for the day-
to-day management of the Fund's investment portfolio. Mr. Behrmann is Vice
President of the Fund and has been Investment Vice President -- Portfolio
Manager of the Adviser since August, 1985. Mr. Behrmann has been primarily
responsible for managing the Fund's investment portfolio since October, 1984.
18
<PAGE> 19
------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
------------------------------------------------------------------------------
The Alternative Sales Arrangements permits 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 5.75% 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 a reduced initial sales charge. 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" herein 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
19
<PAGE> 20
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.
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, 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, the 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
20
<PAGE> 21
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
beneficial to the investor who qualifies for reduced initial sales charges or
purchases shares 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. Class B shares may be appropriate for investors who wish to avoid a
front-end sales 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 such 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 SHARES ARE THE SAME AS
21
<PAGE> 22
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.
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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 for 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 in response to conditions in the securities markets or for
other reasons.
Shares of the Fund may be purchased on any business day through authorized
dealers. Shares may also be purchased by completing the application accompanied
22
<PAGE> 23
by this Prospectus and forwarding the application, through the designated
dealer, to the shareholder service agent, ACCESS Investor Services, Inc.
("ACCESS"), a wholly-owned subsidiary of Van Kampen American Capital. 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 which will vary 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. Securities and options listed or
traded on a national securities exchange are valued at the last sale price.
Unlisted securities and listed securities for which the last sale price is not
available are valued at the most recent bid price, except unlisted convertible
securities, which are valued at the higher of their bid price or the value of
the securities issuable on conversion. Listed options for which the last sale
price is not available are valued at the mean between the bid and asked prices.
Short-term investments are valued in the manner described in the notes to the
financial statements contained 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 the 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)
23
<PAGE> 24
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 fee. 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.
24
<PAGE> 25
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 herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO
DEALERS (AS
AS % OF AS % OF %AOF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 6.10% 5.75% 5.00%
$50,000 but less than $100,000 4.99% 4.75% 4.00%
$100,000 but less than $250,000 3.90% 3.75% 3.00%
$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.
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 interpretation of federal law
expressed herein and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.
25
<PAGE> 26
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 below.
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
indicated Fund, or in any combination of shares of such Funds and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
Cumulative Purchase Discount. The size of investment shown 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 preceding table. 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
26
<PAGE> 27
period, the investor must pay the difference between the sales charges
applicable to the purchases made and the sales 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
adjustments 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 accompanied by 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 1% 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
27
<PAGE> 28
account activity statements to such participants on a monthly basis only, even
if 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.
28
<PAGE> 29
(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 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 certain
redemptions 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.
29
<PAGE> 30
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.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
------------------------------------------------------------------------------
<S> <C>
First....................................................... 5%
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. 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.
30
<PAGE> 31
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 lower 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.
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 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.
31
<PAGE> 32
------------------------------------------------------------------------------
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. The
following is a description of those 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 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 transaction
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 Funds 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
32
<PAGE> 33
basis to invest predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized investment dealers.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
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.
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. Van Kampen
American Capital Trust Company serves as the 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.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application accompanied by 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 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 Van Kampen American
Capital fixed-income funds may not be exchanged within 30 days of acquisition
33
<PAGE> 34
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 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 Van
Kampen American Capital fund that offers such class of 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 and Class C shareholders would remain subject to the contingent deferred
sales charge imposed by the original fund upon their redemption from the Van
Kampen American Capital complex of funds. The contingent deferred sales charge
is based on the holding period requirements of the original fund.
Since the maximum sales charge rate applicable to purchases of Class A shares
of the Fund is at least one percent higher than the maximum sales charge rate
applicable to the purchase of Class A shares of Van Kampen American Capital
fixed income funds, the foregoing exchange privilege may be utilized to reduce
the sales charge paid to purchase Class A shares of the 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 accompanied by this Prospectus. Van
34
<PAGE> 35
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 both
"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 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
35
<PAGE> 36
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 plan 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.
------------------------------------------------------------------------------
REDEMPTION OF SHARES
------------------------------------------------------------------------------
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 investment
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 investments
of $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 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
36
<PAGE> 37
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 IRA 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 it confirms 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
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 set
forth above, 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
37
<PAGE> 38
must complete the appropriate section of the application accompanied by 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 Company acts as custodian. To establish such privilege a shareholder must
complete the appropriate section of the application accompanied by 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
38
<PAGE> 39
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.
------------------------------------------------------------------------------
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 charges that a mutual fund may impose on a class
of shares. The
39
<PAGE> 40
NASD Rules also limit the aggregate amount which the Fund must 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 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 of 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 reimbursements 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.
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.
40
<PAGE> 41
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 and carried forward were approximately $2.9
million or 4.20% of average daily net assets of the class under the Class B
Plan, and $54,000 or 1.57% of average daily net assets of the class under the
Class C Plan.
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.
------------------------------------------------------------------------------
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. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed quarterly as dividends to shareholders. Unless the
share-
41
<PAGE> 42
holder 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 may be lower than the
per share dividends on Class A shares as a result of the distribution fees and
higher incremental transfer agency fees applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund distributes to shareholders at
least once a year the excess, if any, of its total profits on the sale of
securities during the year over its total losses on the sale of securities,
including capital losses carried forward from prior years under tax laws. As in
the case of income dividends, capital gains distributions are automatically
reinvested in additional shares of the Fund at net asset value.
------------------------------------------------------------------------------
TAX STATUS
------------------------------------------------------------------------------
The Fund has qualified and intends to be taxed as a regulated investment
company under the 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. Shareholders not subject to
tax on their income will not, however, be required to pay tax on amounts
distributed to them. 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.
Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions.
To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
Dividends and distributions paid by the Fund have the effect of reducing 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 it is paid on the shares so purchased) even though
subject to income taxes as discussed above.
42
<PAGE> 43
Gains or losses on the Fund's transactions in listed options (except certain
equity options) on securities or indexes, 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 citizenship tax consequences of receipt of
dividends and distributions from the Fund.
------------------------------------------------------------------------------
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-year, five-year, 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 5.75% 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 at 8.50% prior
to June 12, 1989, actual Fund total return would have been
43
<PAGE> 44
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.
Total return is calculated separately for Class A, Class B and Class C shares.
Class A total return figures include the maximum sales charge of 5.75%; 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
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 rankings or ratings 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, the Dow Jones
Industrial Average Index, Standard & Poor's, NASDAQ, 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 Forecaster, Stanger's Investment Adviser, 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
44
<PAGE> 45
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 Delaware on July 16, 1956, re-
incorporated by merger into a Maryland corporation on December 29, 1978 and
reorganized on August 19, 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.
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
shares 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
45
<PAGE> 46
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.
46
<PAGE> 47
------------------------------------------------------------------------------
APPENDIX -- RATINGS OF SENIOR SECURITIES
------------------------------------------------------------------------------
Description of Standard & Poor's Corporation ("S&P") and Moody's Investors
Service ("Moody's") senior securities ratings.
MOODY'S CORPORATE BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. 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
period 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 both 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.
47
<PAGE> 48
S&P'S CORPORATE BOND RATINGS:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -- B -- CCC -- CC -- Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds 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.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid- range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PREFERRED STOCK RATINGS:
Both Moody's and S&P 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.
48
<PAGE> 49
VAN KAMPEN AMERICAN CAPITAL
HARBOR 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.
EXISTING SHAREHOLDERS-- One Parkview Plaza
FOR INFORMATION ON YOUR Oakbrook Terrace, IL 60181
EXISTING ACCOUNT PLEASE CALL Transfer Agent
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666 ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
PROSPECTIVE INVESTORS--CALL Kansas City, MO 64141-9256
YOUR BROKER OR (800) 421-5666 Custodian
DEALERS--FOR DEALER STATE STREET BANK AND
INFORMATION, SELLING TRUST COMPANY
AGREEMENTS, WIRE ORDERS, 225 Franklin Street, P.O. Box 1713
OR REDEMPTIONS CALL THE Boston, MA 02105-1713
DISTRIBUTOR'S TOLL-FREE Attn: Van Kampen American Capital Funds
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
<PAGE> 50
HARBOR FUND
------------------------------------------------------------------------------
P R O S P E C T U S
AUGUST 21, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------------
<PAGE> 51
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL HARBOR FUND
AUGUST 21, 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 21,
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
RISK FACTORS.......................................................................... 3
CONVERTIBLE SECURITIES................................................................ 4
REPURCHASE AGREEMENTS................................................................. 5
FOREIGN SECURITIES.................................................................... 5
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS........................................ 5
INVESTMENT RESTRICTIONS............................................................... 10
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 12
INVESTMENT ADVISORY AGREEMENT......................................................... 16
DISTRIBUTOR........................................................................... 17
DISTRIBUTION PLANS.................................................................... 17
TRANSFER AGENT........................................................................ 19
PORTFOLIO TURNOVER.................................................................... 19
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 19
DETERMINATION OF NET ASSET VALUE...................................................... 21
PURCHASE AND REDEMPTION OF SHARES..................................................... 21
EXCHANGE PRIVILEGE.................................................................... 25
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 25
FUND PERFORMANCE...................................................................... 27
OTHER INFORMATION..................................................................... 28
FINANCIAL STATEMENTS.................................................................. 28
</TABLE>
<PAGE> 52
GENERAL INFORMATION
Van Kampen American Capital Harbor Fund (the "Fund") was originally
incorporated in Delaware on July 16, 1956, reincorporated by merger into a
Maryland corporation on December 29, 1978 and reorganized under the laws of
Delaware on August 19, 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.
VKAC equity fund philosophy is to normally remain fully invested and
diversified across many industries to achieve consistent long-term returns.
VKAC uses a four-step investment process designed to attempt to produce
consistently good short-term results, which should help lead to superior
long-term performance.
Fully Invested: Money invested in a VKAC stock fund will normally be fully
invested in the market to attempt to maximize the potential for long-term
returns. The importance of being fully invested can be illustrated by the
following comparison. By missing fewer than four percent of the months during
the past 68 years, the value of one dollar invested in 1926 was $11.57 at the
end of 1994, compared to $810.54 for one dollar that was invested for the entire
period (Source: Micropal, Inc.). During the most recent five-year period
(1990-1994), the average annual total return for stocks, as measured by the
Standard and Poor's 500 Stock Index, a broad-based, unmanaged index, was 8.87
percent. However, the average annual return for the S&P 500 for the same period
excluding the 20 best days for stock market performance, was just 0.67%. Of
course, past performance is no guarantee of future results.
Widely Varied: A widely varied portfolio usually reduces risk and increases
relative stability. Since VKAC's goal is consistency, a widely varied portfolio
across industries is emphasized. VKAC stock funds are varied both in terms of
the number of industries and the number of stocks within each industry in which
they invest. Generally, the stock funds invest in 12 broad economic sectors, and
in many individual stocks within each sector.
Clearly Defined: The basic characteristics of VKAC funds are determined by
a pre-defined profile which remains constant over time.
Blended Investment Style: Market conditions are constantly changing, which
means the stocks that perform well should be expected to change. A rigid
investment style might cause an investor to suffer when certain types of stocks
lose favor with the market. The two most common investment styles are growth,
which
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emphasizes companies that are projected to experience rapid growth in earnings,
and value, which focuses on companies whose stock is selling for less than the
company's trust worth. At VKAC, our style is blended between growth and value on
a fund-specific basis. The results of our approach are constantly evaluated and
compared to other similar funds. Although past performance is no guarantee of
future results, VKAC remains committed to our belief that this approach should
help maximize potential for long-term returns.
As of August 11, 1995, no person was known to hold of record or
beneficially five percent or more of the outstanding Class A, Class B or Class C
shares of the Fund except the following:
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS CLASS OF AMOUNT OF RECORD OF
OF HOLDER SHARES OWNERSHIP OWNERSHIP
------------------------------------------------- -------- ---------------- ------------
<S> <C> <C> <C>
Smith Barney Inc. Class B 393,992 7.58%
11th Floor Class C 42,468 17.84%
388 Greenwich Street
New York, NY 10013-2375
National Financial Services, Inc. Class B 395,747 7.61%
200 S. College St., Suite 204 Class C 13,767 5.78%
Charlotte, NC 28202-2005
Merrill Lynch Pierce Fenner & Smith, Inc. Class B 320,135 6.16%
4800 Deer Lake Dr. East, 3rd Floor Class C 41,705 17.52%
Jacksonville, FL 32246-6484
Donaldson Lufkin Jenrette Secs. Class C 41,778 17.55%
P.O. Box 2052
Jersey City, NJ 07303-2052
Van Kampen American Capital Trust Company Class A 7,353,815 28.12%
2800 Post Oak Blvd. Class B 1,317,036 25.32%
Houston, TX 77056 Class C 32,931 13.83%
James F. Johnson, Jr. and
Beverly G. Johnson
1203 River Oaks Dr.
Kingston, TN 37763-2357 Class C 12,685.5 5.33%
</TABLE>
Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and independent retirement accounts.
RISK FACTORS
The following special considerations are additional risk factors associated
with the Fund's investments in lower rated debt securities.
1. Youth and Growth of the Lower Rated Debt Securities Market. The market
for lower rated debt securities (commonly referred to as "junk bonds")
is relatively new and its growth has paralleled a long economic
expansion. Past experience may not, therefore, provide an accurate
indication of future performance of this market, 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 only in higher rated debt securities.
2. Sensitivity to Interest Rate and Economic Changes. 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
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<PAGE> 54
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 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.
3. Liquidity and Valuation. 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.
4. Congressional Action. New and proposed laws may have an impact on the
market for lower rated debt securities. 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.
5. Taxation. 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.
CONVERTIBLE SECURITIES
A convertible security's position in a company's capital structure depends
upon its particular provisions. In the case of subordinated convertible
debentures, the holders' claims on assets and earnings are subordinated to the
claims of other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Every convertible security may be valued, on a theoretical basis, as if it
did not have a conversion privilege. Such theoretical value is determined by the
yield it provides in comparison with the yields of other securities of
comparable character and quality which do not have a conversion privilege. This
theoretical value, which will change with prevailing interest rates, the credit
standing of the issuer and other pertinent factors, is often referred to as the
"investment value," and represents the security's theoretical price support
level.
"Conversion value" is the amount a convertible security would be worth in
market value if it were to be exchanged for the underlying equity security
pursuant to its conversion privilege. Conversion value fluctuates directly with
the price of the underlying equity security, usually common stock. If, because
of low prices for the common stock, the conversion value is substantially below
the investment value, the price of the convertible security is governed
principally by the factors described in the preceding paragraph. If the
conversion value rises near or above its investment value, the price of the
convertible security generally will rise above its investment value and, in
addition, will sell at some premium over its conversion value. This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed income security with a possibility of capital appreciation
due to the conversion privilege. If this appreciation potential is not
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<PAGE> 55
realized, this premium may not be recovered. If the common stock should continue
to advance in price, the premium would become less significant and the
convertible security would fluctuate at a rate comparable to that of the common
stock.
To the degree that the price of a convertible security rises above its
investment value because of a rise in price of the common stock, it is
influenced more by price fluctuations of the common stock and less by its
investment value. The price of a convertible security that is supported
principally by its conversion value will rise along with any increase in the
common stock, and such price generally will decline along with any decline in
the price of the common stock except that the security will receive additional
support as its price approaches investment value. A convertible security
purchased or held at a time when its price is influenced by its conversion value
will produce a lower yield than nonconvertible senior securities with comparable
investment values. Convertible securities may be purchased by the Fund at
varying price levels above their investment values and/or their conversion
values in keeping with the Fund's investment objectives.
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 marked 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. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investments, together with any other illiquid security held by the Fund, exceeds
ten percent of the value of its net assets. See "Investment
Practices -- Repurchase Agreements" in the Prospectus for further information.
FOREIGN SECURITIES
The Fund may invest up to 15% of the value of its assets in securities of
foreign issuers. Such securities may be subject to foreign government taxes
which would reduce the income yield on such securities. Foreign investments
involve certain risks, such as political or economic instability of the issuer
or of the country of issue, changes in currency exchange rates, 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 domestic corporations or of the United States
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 a judgment against the issuers of
such securities.
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
5
<PAGE> 56
income yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities is likely to result in a higher
portfolio turnover rate.
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, which would not
close out its position as a writer, but would provide an asset of equal value to
its obligation 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 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.
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<PAGE> 57
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.
OPTIONS ON STOCK INDEXES
Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
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."
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
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 a percentage (which will normally range between
two and ten 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 or index fluctuates,
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<PAGE> 58
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 or index 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 or index 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.
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 or index, 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 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.
The Fund also may invest in foreign stock index futures traded outside the
United States. Foreign stock index futures traded outside the United States
include the Nikkei Index of 225 Japanese stocks traded on the Singapore
International Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese
stocks traded on the Osaka Exchange, Financial Times Stock Exchange Index of the
100 largest stocks on the London Stock Exchange, the All Ordinaries Share Price
Index of 307 stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33
stocks on the Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks
on the New Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto
Stock Exchange. Futures and futures options on the Nikkei Index are traded on
the Chicago Mercantile Exchange and United States commodity exchanges may
develop futures and futures options on other indices of foreign securities.
Futures and options on United States devised index of foreign stocks are also
being developed. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments.
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 of 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.
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<PAGE> 59
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 or index 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 or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market 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.
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 boards 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 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 prevent 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
9
<PAGE> 60
futures contract; at the same time, it could write put options at a lower strike
price (a "put bear spread") to offset part of the cost of the strategy to the
Fund. The purchase of call options on futures contracts would be intended to
serve the same purpose as the actual purchase of the futures contracts.
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 level of the index or in the price of the underlying
security, when the use of an 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
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
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 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, along with its
investment objective, cannot be changed without approval by the holders of a
majority of its outstanding shares. Such majority is defined by the 1940 Act as
the lesser of (i) 67% or more of the voting securities present 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. Sell short or buy on margin, but the Fund may engage in transactions in
options, futures contracts and related options and may make margin
deposits and payments in connection therewith;
2. Primarily engage in the underwriting or distribution of securities;
3. Make any investment in real estate, commodities or commodities
contracts, or in any security about which information is not available
with respect to history, management, assets, earnings, and income of
the issuer; however, the Fund is not prohibited from investing in
securities issued by a real estate investment trust, provided that such
trust is not permitted to invest in real estate or interests in real
estate other than mortgages or other security interests, and the Fund
is not prohibited from entering into transactions in futures contracts
or related options;
10
<PAGE> 61
4. Make any investment which involves promotion or business management by
the Fund or which would subject the Fund to unlimited liability;
5. Invest more than five percent of its assets in the securities of any
one issuer (except the United States Government) or purchase more than
ten percent of the outstanding voting securities of any one issuer;
6. Invest more than 25% of its assets in securities issued by companies in
any one industry;
7. Invest in companies for the purpose of exercising control;
8. Make loans except that the Fund may invest up to 25% of the Fund's
total assets in repurchase agreements;
9. Borrow in excess of five percent of its assets valued at market, or ten
percent of its assets valued at cost, and then only from banks as a
temporary measure for extraordinary or emergency purposes; or pledge,
encumber, transfer or assign its assets except in connection with any
such borrowing and in amounts not in excess of the dollar amount
borrowed. Notwithstanding the foregoing, the Fund may engage in
transactions in options, futures contracts and related options,
segregate or deposit assets to cover or secure options written, and
make margin deposits or payments for futures contracts and related
options;
10. Acquire securities of any other domestic or foreign investment company
or investment fund except in connection with a plan of merger or
consolidation with or acquisition of substantially all the assets of
such other investment company;
11. Engage in the underwriting of securities of other issuers, except that
the Fund may sell an investment position even though it may be deemed
to be an underwriter as that term is defined under the Securities Act
of 1933; or.
12. 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".
The Fund is subject to the following policies, which may be amended by its
Trustees. The Fund shall not:
1. Invest more than five percent of its total assets in securities of
unseasoned issuers which have been in operation directly or through
predecessors for less than three years;
2. Pledge, mortgage or hypothecate its portfolio securities to the extent
that at any time the percentage of pledged securities plus the sales
load will exceed ten percent of the offering price of the Fund's
shares. Notwithstanding the foregoing, the Fund may engage in
transactions in options, futures contracts and related options,
segregate or deposit assets to cover or secure options written, and
make margin deposits or payments for futures contracts and related
options;
3. Purchase any warrants or rights unless acquired in units or attached to
other securities;
4. Invest in interests in oil, gas, or other mineral exploration or
development programs, except that it may acquire securities of public
companies which themselves are engaged in such activities;
5. Invest more than 15% of the value of its assets in securities of
foreign issuers; or
6. Invest more than ten percent of its net assets (determined at the time
of investment) in illiquid securities and repurchase agreements that
have a maturity of longer than seven days with respect to the ten
percent limit, the Fund may not acquire any private placement if it
would cause more than five percent of the value of its net assets to be
invested in private placements and other assets not having readily
available market quotations, as determined at the time the Fund agrees
to any such acquisition.
11
<PAGE> 62
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
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.
</TABLE>
12
<PAGE> 63
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
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.
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.
</TABLE>
13
<PAGE> 64
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
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.
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>
James H. Behrmann........ Vice President Vice President -- Portfolio Manager of the
Age: 52 Adviser.
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 42 Secretary and Corporate Secretary of the Adviser.
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.
Alan T. Sachtleben....... Vice President Executive Vice President and Director of
Age: 53 the Adviser; Executive Vice President of
VK/AC Holding, Inc. and Van Kampen American
Capital.
</TABLE>
14
<PAGE> 65
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
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 $18,928 in
trustees' fees from the Fund in addition to certain out-of-pocket expenses. Such
trustees also received compensation for serving as directors or trustees of
other investment companies advised by the Adviser as identified in the notes to
the foregoing table. For legal services rendered during the fiscal year, the
Fund paid legal fees of $8,855 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 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 TRUSTEES(1)(5)
-------------- ---------- -------- --------------
<S> <C> <C> <C>
J. Miles Branagan........................................ $2,410 -0- $64,000
Dr. Richard E. Caruso(3)................................. 2,415(2) -0- 64,000
Dr. Roger Hilsman........................................ 2,485 -0- 66,000
David Rees(3)............................................ 2,410 -0- 64,000
Lawrence J. Sheehan...................................... 2,525 -0- 67,000
Dr. Fernando Sisto(3).................................... 3,095(2) -0- 82,000
William S. Woodside(4)................................... 610 -0- 18,000
</TABLE>
---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $2,335 and $1,595 for Messrs.
Caruso and Sisto, respectively.
(3) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The
cumulative deferred compensation accrued by the Fund as of August 31, 1994
is as follows: Caruso, $6,547; Rees, $21,181; Sisto, $8,923.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Registrant's adviser. With respect to columns 2 and 4, $1,440 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.
15
<PAGE> 66
Beginning July 21, 1995, the Fund pays each Trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $1,212 and a
meeting fee of $35 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 its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objective. The Adviser also furnishes at no cost to the Fund (except
as noted herein) the services of sufficient executive and clerical personnel for
the Fund as are necessary to prepare registration statements, prospectuses,
shareholder reports, and notices and proxy solicitation materials. In addition,
the Adviser furnishes at no cost to the Fund the services of a President of the
Fund, one or more Vice Presidents as needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes 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 a Treasurer or other principal
financial officer 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 were 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 services provided by the
Adviser are at cost. 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 expenses not
specifically assumed by the Adviser.
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 an annual
rate of: 0.55% on the first $350 million average net assets; 0.50% on the next
$350 million of average net assets; 0.45% on the next $350 million of average
net assets; and 0.40% on the excess over $1.05 billion of average net assets.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the determinations of net asset value
for each business day 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 is 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 of the Fund, less
any direct expenses incurred by such subsidiary of VK/AC Holding, Inc. in
connection with obtaining such 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 under applicable laws
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 for such fiscal year shall
be reduced by the amount of
16
<PAGE> 67
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). The Advisory Agreement also provides that the Adviser shall not be
liable to the Fund for any actions or omissions if it acted in good faith
without negligence or misconduct.
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 not more than 60 days' nor less than 30 days' written notice.
During the fiscal years ended December 31, 1992, 1993 and 1994, the Adviser
received $1,945,285, $2,471,555 and $2,547,927, respectively, in advisory fees
from the Fund. For such periods the Fund paid $82,314, $118,584 and $100,119,
respectively, for accounting services. A substantial portion of these amounts
was paid to the Adviser in reimbursement of personnel, facilities and equipment
costs attributable to the provision of accounting services to the Fund.
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
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 December 31, 1992, 1993 and 1994, total underwriting
commissions on the sale of shares of the Fund were $937,872, $1,025,331 and
$672,812, respectively. Of such totals, the amount retained by the Distributor
was $121,542, $138,523 and $83,923, respectively. The remainder was reallowed to
dealers. Of such dealer reallowances, $217,866, $157,705 and $107,787,
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" or "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 payments 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
17
<PAGE> 68
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 0.75%
of the net assets of the Class B shares to reimburse the Distributor for (1)
commissions and transaction fees of up to four percent 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 1 1/2% 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-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 seminars,
marketing support salaries and bonuses, and travel-related expenses, and (6)
interest expense at the three-month Libor rate plus 1 1/2% 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-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. 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 form of
servicing agreement and selling group agreement were approved by the Trustees,
including a majority of the Trustees who are not affiliated 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 the
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 Plans are in effect, the selection or nomination of the Independent
Trustees is committed to the discretion of the Independent Trustees.
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<PAGE> 69
For the fiscal year ended December 31, 1994, the Fund's aggregate expenses
under the Class A Plan were $834,614 or 0.21% 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 December 31, 1994, the Fund's
aggregate expenses under the Class B Plan were $696,897 or 1.00% of the Class B
shares' average net assets. Such expenses were paid to reimburse the Distributor
for the following payments: $522,673 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 $174,224 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B Plan. For the
fiscal year ended December 31, 1994, the Fund's aggregate expenses under the
Class C Plan were $28,033 or 1.00% of the Class C shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments:
$21,025 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
$7,008 for fees paid to Service Organizations for servicing Class C shareholders
and administering the Class C Plan.
TRANSFER AGENT
During the fiscal year ended December 31, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$841,263 for these services. These services are provided at cost plus a profit.
PORTFOLIO TURNOVER
The Fund's annual portfolio turnover rate is shown in the table of
Financial Highlights in the Prospectus. 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 portfolio securities
during such fiscal year. Securities maturing in one year or less at the time of
acquisition are not included in this computation. The portfolio turnover rate
may vary greatly from year to year and within a year. Greater portfolio activity
increases the Fund's transaction costs, including brokerage commissions. To the
extent turnover results in realization of gains on securities held less than six
months, shareholders are subject to taxes at ordinary income rates.
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 the
commissions, if any, on such transactions. It is the policy of the Adviser to
seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services, as described below,
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. 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.
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 and of the other Van Kampen
American Capital mutual funds as a factor in the selection of firms to execute
portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services 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
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<PAGE> 70
performance of accounts, and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody).
Pursuant to provisions of the investment advisory agreement, the Fund's
Trustees have authorized the Adviser to cause the Fund to incur brokerage
commissions in an amount higher than the lowest available rate in return for
research services provided to the Adviser. The Adviser is of the opinion that
the continued receipt of supplemental investment research services from dealers
is essential to its provision of high quality portfolio management services to
the Fund. The Adviser undertakes that such higher commissions will not be paid
by the Fund unless (a) the Adviser determines in good faith that the amount is
reasonable in relation to the services in terms of the particular transaction or
in terms of the Adviser's overall responsibilities with respect to the accounts
as to which it exercises investment discretion, (b) such payment is made in
compliance with the provisions of Section 28(e) and other applicable state and
federal laws, and (c) in the opinion of the Adviser, the total commissions paid
by the Fund are reasonable in relation to the expected benefits to the Fund over
the long term. The investment advisory fee paid by the Fund under the investment
advisory agreement is not reduced as a result of the Adviser's receipt of
research services.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts, including the Fund,
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by 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 Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal years ended December 31, 1992, 1993 and 1994 totalled $285,160, $672,660
and $800,001, respectively. During the year ended December 31, 1994, the Fund
paid $353,147 in brokerage commissions on transactions totalling $211,784,616 to
brokers selected primarily on the basis of research services provided to the
Adviser.
Prior to December 20, 1994 the Fund placed brokerage transactions with
brokers that were considered affiliated persons of the Adviser's former parent,
The Travelers Inc. Such affiliated persons included Smith Barney Inc. ("Smith
Barney") and Robinson Humphrey, Inc. ("Robinson Humphrey"). Effective December
20, 1994, Smith Barney and Robinson Humphrey ceased to be affiliates of the
Adviser. In addition, from 1985 through September 30, 1992, Jefferies & Company,
Inc. ("Jefferies") was an affiliate of The Travelers Inc. 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.
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<PAGE> 71
The Fund paid the following commissions to these brokers during the periods
shown:
<TABLE>
<CAPTION>
ROBINSON SMITH
JEFFERIES HUMPHREY BARNEY
------ ----- -------
<S> <C> <C> <C>
Commissions Paid:
Fiscal 1992 $ 28 -- $ 2,142
Fiscal 1993 -- -- $20,041
Fiscal 1994 -- 2,975 56,373
Fiscal 1994 Percentages:
Commissions with affiliates to total commissions -- 0.37% 7.05%
Value of transactions with affiliates to total
transactions -- 0.60% 9.77%
</TABLE>
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 using prices as of the close of trading on the
Exchange and (i) valuing securities traded on a national securities exchange at
the last reported sale price, or if there has been no sale that day, at the last
reported bid quotations (except options for which the last sale price is not
available are valued at the mean between the bid and asked prices), (ii) valuing
over-the-counter securities for which the last sale price is available from the
National Association of Securities Dealers Automated Quotations ("NASDAQ") at
that price, (iii) valuing all other over-the-counter securities for which market
quotations are available at the most recently quoted bid price supplied by
NASDAQ or broker-dealers (except unlisted convertible securities, which are
valued at the higher of their bid price or the value of the securities issuable
upon conversion), and (iv) valuing any securities for which market quotations
are not readily available, and any other assets, at fair value as determined in
good faith by the Trustees of the Fund. Short-term investments are valued in the
manner described in the notes to the financial statements included in this
Statement of Additional Information.
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 Securities and Exchange Commission ("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 ARRANGEMENTS
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 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.
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<PAGE> 72
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 under "Sales Charge Table" apply to purchases of Class A shares
of the Fund shares where the aggregate investment is $50,000 or more. For
purposes of determining eligibility for volume discounts, spouses and their
minor children are treated as a single purchaser, as is a trustee 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 $25,000 and that
person purchases $30,000 of additional Class A shares of the Fund, the sales
charge applicable to the $30,000 purchase would be 4.75% of the offering price.
The same reduction is applicable to purchases under a Statement of Intention 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 representations concerning the
investor's 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
the value of all shares of such funds previously purchased 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
totalling five percent of the dollar amount of the Letter of Intent are held by
ACCESS in the name of the shareholder. A Letter of Intent may be back-dated up
to 90 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
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<PAGE> 73
refunding to the investor in shares of the Fund, the amount of excess sales
charges, if any, paid during the 13-month period.
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"), the front-end sales charge will be waived and 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 plan 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.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
The CDSC -- Class B and C may be 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 Internal Revenue Code (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
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<PAGE> 74
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 Van Kampen American
Capital funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held onto 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 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 (the
"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 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
Class 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, 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
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.
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<PAGE> 75
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 therefore 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
practical for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
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. 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.
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 sale 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.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Fund's policy is to distribute substantially all of its taxable net
investment income in quarterly dividends to shareholders of Class A, Class B and
Class C shares. 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 higher transfer agency fees applicable to the Class B and
Class C shares. The Fund intends to distribute to shareholders any taxable net
realized capital gains for each class at least annually. Taxable net realized
capital gains are the excess, if any, of the Fund's total profits on the sale of
securities during the year over its total losses on the sale of securities,
including capital losses carried forward from prior years in accordance with the
tax laws. All income dividends and capital gains distributions are reinvested in
shares of the Fund at net asset value without sales charge on the record date,
except that any shareholder may otherwise instruct ACCESS in writing and receive
cash. Shareholders are informed as to the sources of distributions at the time
of payment.
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<PAGE> 76
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. 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 during any calendar year at least 98% of its
ordinary taxable (net investment) income for the twelve-months ended December
31, plus 98% of its capital gains 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.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. 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 and distributions declared payable to shareholders of record in
December 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.
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. Such distributions and distributions from short-term capital gains are
not eligible for the dividends received deduction referred to above. 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 an exception 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 unless such amount is less than ten dollars, in which case no
notice is provided.
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 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 on
the basis of the subsequent shares.
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 advisers
concerning the applicability of the United States withholding tax.
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
26
<PAGE> 77
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 or her
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
(excluding equity options as defined in the Code), 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 termination 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
marked-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.
Certain 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.
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 December 31, 1994 was -11.79%, 5.94% and 9.83%,
respectively. The average annual total return, computed in the manner described
in the Prospectus, for Class B shares of the Fund for the one-year and
three-year-and-one-half-month periods (the initial offering of Class B shares)
ended December 31, 1994 was -11.49% and 5.02%, respectively. The average annual
total return, computed in the manner described in the Prospectus, for Class C
shares of the Fund for the one-year and the one-year-and-two-months (the initial
offering of Class C shares) periods ended December 31, 1994 was -8.02% and
-5.34%, 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 objective and
policies as well as the risks incurred in the Fund's investment practices.
Future results will be effected by changes in the general level of prices of
securities
27
<PAGE> 78
available for purchase and sale by the Fund. The past one-year, five-year and
ten-year periods generally have been ones of rising common stock prices, subject
to interim fluctuations.
Total return is computed separately for Class A, Class B and Class C
shares.
From time to time VKAC will announce the results of its 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.
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.
The Fund 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;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) 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 -- Semi-annual 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.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual Report to shareholders, including the related report of independent
accountants on the December 31, 1994 financial statements, are included in the
Statement of Additional Information.
The following information is not included in the Annual Report. This
example assumes a purchase of Class A shares of the Fund aggregating less than
$50,000 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>
DECEMBER 31,
1994
------
<S> <C>
Net Asset Value per Class A Share $13.24
Class A Per Share Sales Charge -- 5.75% of offering price
(6.10% of net asset value per share) $ 0.81
------
Class A Per Share Offering Price to the Public $14.05
</TABLE>
28
<PAGE> 79
INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Convertible Corporate Obligations 45.0%
CONSUMER DISTRIBUTION 7.2%
$ 51,000 Best Buy Co., MIPS, 6.50%, 11/3/24 . . . . . . . . . . . . . . . . . . . . . . . $ 2,186,179
1,700,000 Carter Hawley Hale Stores, Inc., 6.25%, 12/3/00 . . . . . . . . . . . . . . . . . 1,309,000
3,400,000 Federated Department Stores, Inc., LYON, Zero Coupon, 2/15/04 . . . . . . . . . . 3,247,000
1,355,000 Fisher Scientific International, Inc., 4.75%, 3/1/03 . . . . . . . . . . . . . . 1,216,112
3,000,000 Home Depot, Inc., 4.50%, 2/15/97 . . . . . . . . . . . . . . . . . . . . . . . . 3,615,000
1,360,000 Lowe's Companies, Inc., 3.00%, 7/22/03 . . . . . . . . . . . . . . . . . . . . . 1,822,400
4,200,000 Office Depot, Inc., LYON, Zero Coupon, 11/1/08 . . . . . . . . . . . . . . . . . 2,289,000
2,550,000 Pep Boys--Manny, Moe & Jack, 4.00%, 9/1/99 . . . . . . . . . . . . . . . . . . . 2,435,250
6,375,000 Price Co., 6.75%, 3/1/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,801,250
17,600,000 Rite Aid Corp., LYON, Zero Coupon, 7/24/06 . . . . . . . . . . . . . . . . . . . 7,920,000
----------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 31,841,191
----------------
CONSUMER NON-DURABLES 3.5%
American Brands, Inc.
9,500,000 5.75%, 4/11/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,830,000
4,700,000 7.625%, 3/5/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,664,750
----------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . . . . . . . . . 15,494,750
----------------
CONSUMER SERVICES 7.7%
2,125,000 Hospitality Franchise System, Inc., 4.50%, 10/01/99 . . . . . . . . . . . . . . . 2,055,938
2,000,000 Omnicom Group, 4.50%, 9/1/00 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,040,000
3,520,000 Service Corp. International, 6.50%, 9/01/01 . . . . . . . . . . . . . . . . . . . 4,769,600
Time Warner, Inc.
11,500,000 LYON, Zero Coupon, 12/17/12 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,507,500
9,000,000 LYON, Zero Coupon, 6/22/13 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,172,500
11,503,350 8.75%, 1/10/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,841,907
8,550,000 Turner Broadcasting, LYON, Zero Coupon, 2/13/07 . . . . . . . . . . . . . . . . . 3,355,875
3,470,000 Wendy's International, Inc., 7.00%, 4/01/06 . . . . . . . . . . . . . . . . . . . 4,385,213
----------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,128,533
----------------
ENERGY 5.8%
4,750,000 Ashland Oil, Inc., 6.75%, 7/1/14 . . . . . . . . . . . . . . . . . . . . . . . . 4,263,125
6,350,000 Consolidated Natural Gas Co., 7.25%, 12/15/15 . . . . . . . . . . . . . . . . . . 6,127,750
*4,350,000 ORYX Energy Co., 7.50%, 5/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . 3,012,375
2,580,000 Pogo Producing Co., 5.50%, 3/15/04 . . . . . . . . . . . . . . . . . . . . . . . 2,457,450
5,650,000 SFP Pipeline Holdings, 10.42%, 8/15/10 . . . . . . . . . . . . . . . . . . . . . 6,593,409
7,705,000 USX-Marathon Group, LYON, Zero Coupon, 8/9/05 . . . . . . . . . . . . . . . . . . 3,370,937
----------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,825,046
----------------
FINANCE 5.4%
9,637,000 Alexander & Alexander Services, Inc., 11.00%, 4/15/07 . . . . . . . . . . . . . . 9,685,185
5,850,000 Chubb Corp., 6.00%, 5/15/98 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,908,500
3,200,000 Statesman Group, Inc., 6/25%, 5/1/03 . . . . . . . . . . . . . . . . . . . . . . 3,264,000
5,110,000 USLICO Corp., 8.50%, 12/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . . 5,058,900
----------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,916,585
----------------
HEALTH CARE 1.3%
10,000,000 Alza Corp., LYON, Zero Coupon, 7/14/14 . . . . . . . . . . . . . . . . . . . . . 3,300,000
1,700,000 Genesis Health Ventures, Inc., 6.00%, 11/30/03 . . . . . . . . . . . . . . . . . 2,407,625
----------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,707,625
----------------
</TABLE>
F-1
<PAGE> 80
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING 4.0%
$ 4,600,000 Browning-Ferris Industries, Inc., 6.75%, 7/18/05 . . . . . . . . . . . . . . . . $ 4,117,000
215,000 Cooper Industries, Inc., 7.05%, 1/1/15 . . . . . . . . . . . . . . . . . . . . . 4,407,500
3,400,000 Flagstar Corp., 10.00%, 11/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . 2,346,000
8,500,000 Valhi, Inc., LYON, Zero Coupon, 10/20/07 . . . . . . . . . . . . . . . . . . . . 2,550,000
12,750,000 Waste Management, Inc., LYON, Zero Coupon, 4/13/12 . . . . . . . . . . . . . . . 4,494,375
----------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . . . . 17,914,875
----------------
RAW MATERIALS/PROCESSING INDUSTRIES 1.3%
80,500 Atlantic Richfield Co., ELKS, 9.00%, 9/15/97 . . . . . . . . . . . . . . . . . . 2,095,137
5,000,000 Freeport-McMoRan, Inc., Zero Coupon, 8/5/06 . . . . . . . . . . . . . . . . . . . 1,793,750
2,700,000 Stone Container Corp., 6.75%, 2/15/07 . . . . . . . . . . . . . . . . . . . . . . 2,025,000
----------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . . . . . . . . . 5,913,887
----------------
TECHNOLOGY 7.5%
2,500,000 Arrow Electronics, Inc., 5.75%, 10/15/02 . . . . . . . . . . . . . . . . . . . . 2,881,250
17,200,000 Automatic Data Processing, Inc., LYON, Zero Coupon, 2/20/12 . . . . . . . . . . . 7,224,000
3,900,000 Data General Corp., 7.75%, 6/1/01 . . . . . . . . . . . . . . . . . . . . . . . 3,393,000
2,500,000 General Instrument Corp., 5.00%, 6/15/00 . . . . . . . . . . . . . . . . . . . . 3,331,250
5,950,000 Motorola, Inc., LYON, Zero Coupon, 9/27/13 . . . . . . . . . . . . . . . . . . . 4,179,875
5,100,000 Silicon Graphics, Inc., Zero Coupon, 11/2/13 . . . . . . . . . . . . . . . . . . 2,715,750
5,200,000 Texas Instruments, Inc., 2.75%, 9/29/02 . . . . . . . . . . . . . . . . . . . . . 5,018,000
3,000,000 Unisys Corp., 8.25%, 8/1/00 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,045,000
1,500,000 3Com Corp., 10.25%, 11/1/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,582,500
----------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,370,625
----------------
UTILITIES 1.3%
7,375,000 Potomac Electric Power Co., 5.00%, 9/1/02 . . . . . . . . . . . . . . . . . . . . 5,789,375
----------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $206,107,960) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,902,492
----------------
Number Foreign Securities 9.1%
of Shares Common Stock 0.4%
---------------
ENERGY 0.4%
25,000 British Petroleum Co., PLC, ADR (Cost $1,747,500) . . . . . . . . . . . . . . . . 1,996,875
----------------
Principal
Amount Convertible Corporate Obligations 8.7%
---------------
CONSUMER DISTRIBUTION 0.8%
$ 3,100,000 President Enterprises, Zero Coupon, 7/22/01 . . . . . . . . . . . . . . . . . . . 3,355,682
----------------
CONSUMER NON-DURABLES 1.2%
5,350,000 S.A.B. Finance Corp., 7.50%, 8/2/98 . . . . . . . . . . . . . . . . . . . . . . . 5,309,875
----------------
FINANCE 2.2%
3,590,000 Aegon, N.V., 4.75%, 11/1/04 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,733,600
2,295,000 Central International, 10.00%, 8/7/96 . . . . . . . . . . . . . . . . . . . . . . 1,537,650
4,720,000 Henderson Capital International, 4.50%, 10/27/96 . . . . . . . . . . . . . . . . 4,507,600
----------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,778,850
----------------
</TABLE>
F-2
<PAGE> 81
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING 2.3%
$ 2,500,000 CEMEX, S.A., 4.25%, 11/1/97 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,000,000
3,400,000 CRH Capital, 5.75%, 4/30/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,080,000
5,432,000 Hanson, PLC, ADR, 2.39%, 3/1/01 . . . . . . . . . . . . . . . . . . . . . . . . . 3,883,880
----------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . . . . 9,963,880
----------------
RAW MATERIALS 1.7%
1,300,000 Inco, Ltd., 7.75%, 3/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,280,500
4,700,000 NTS Steel, 4.00%, 12/16/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,843,500
1,135,000 PT Indorayon, 7.00%, 5/2/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,051,280
2,690,000 Repap Enterprises, Inc., 8.50%, 8/1/97 . . . . . . . . . . . . . . . . . . . . . 2,528,600
----------------
TOTAL RAW MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,703,880
----------------
UTILITIES 0.5%
2,500,000 Technology RES Industries, 2.75%, 11/28/04 . . . . . . . . . . . . . . . . . . . 2,381,250
----------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $40,413,346) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,493,417
----------------
TOTAL FOREIGN SECURITIES (COST $42,160,846) . . . . . . . . . . . . . . . . . . 40,490,292
----------------
Non-Convertible Corporate Obligation 0.8%
4,465,000 Enquirer/Star, Inc., Zero Coupon, 5/15/97 (Cost $3,576,065) . . . . . . . . . . . 3,527,350
----------------
Number of
Shares Convertible Preferred Stock 14.7%
CONSUMER DISTRIBUTION 1.6%
---------------
125,000 Sears, Roebuck & Co., Series A, PERCS, $3.75 . . . . . . . . . . . . . . . . . . 6,953,125
----------------
CONSUMER NON-DURABLES 0.4%
300,000 RJR Nabisco Holdings Corp., Inc., PERCS, $.60125 . . . . . . . . . . . . . . . . 1,800,000
----------------
CONSUMER SERVICES 0.8%
71,400 SCI Finance N.V., LLC, 6.25% . . . . . . . . . . . . . . . . . . . . . . . . . . 3,712,800
----------------
ENERGY 2.2%
87,000 Occidental Petroleum Co., $7.75 . . . . . . . . . . . . . . . . . . . . . . . . . 4,219,500
66,500 Snyder Oil Corp., $1.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,338,313
52,900 Transco Energy Co., $3.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,406,950
42,500 USX Corp., Series A, $3.25 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,901,875
----------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,866,638
----------------
FINANCE 5.1%
175,000 Citicorp., $1.22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,346,875
46,300 Citicorp., $5.375 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,289,775
96,000 Conseco, Inc., Series D, $3.25 . . . . . . . . . . . . . . . . . . . . . . . . . 3,912,000
85,850 First Chicago Corp., $2.875 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,056,413
79,000 Great Western Financial Corp., $4.375 . . . . . . . . . . . . . . . . . . . . . . 3,959,875
39,000 Roosevelt Financial Group, Inc., $3.25 . . . . . . . . . . . . . . . . . . . . . 2,310,750
----------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,875,688
----------------
PRODUCER MANUFACTURING 0.5%
170,000 Westinghouse Electric Co., PERCS, $1.53 . . . . . . . . . . . . . . . . . . . . . 2,252,500
----------------
</TABLE>
F-3
<PAGE> 82
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES 2.7%
120,000 Boise Cascade Corp., Series E, ACES, $1.58 . . . . . . . . . . . . . . . . . . . 2,865,000
58,400 Reynolds Metals Co., PRIDES, 7.00% . . . . . . . . . . . . . . . . . . . . . . . 2,825,100
47,500 Sonoco Products Co., $2.25 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,280,000
93,500 WHX Corp., Series B, $3.75 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,997,125
----------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . . . . . . . . . 11,967,225
----------------
TECHNOLOGY 1.4%
81,000 General Motors, Corp., $3.25 . . . . . . . . . . . . . . . . . . . . . . . . . . 4,647,375
45,000 Unisys Corp., Series A, $3.75 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,428,750
----------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,076,125
----------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $67,630,139) . . . . . . . . . . . . . 65,504,101
----------------
Common Stock 15.6%
CONSUMER DISTRIBUTION 0.3%
71,000 Limited, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,286,875
----------------
CONSUMER NON-DURABLES 2.4%
70,000 Anheuser-Busch Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 3,561,250
75,000 Philip Morris Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,312,500
47,000 Proctor & Gamble Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,914,000
----------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . . . . . . . . . 10,787,750
----------------
CONSUMER SERVICES 0.5%
51,000 Walt Disney Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,352,375
----------------
ENERGY 1.7%
85,000 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,163,750
26,000 Mobil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,190,500
----------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,354,250
----------------
HEALTH CARE 1.6%
93,000 Baxter International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,627,250
66,000 Upjohn Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,029,500
29,300 Warner Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,256,100
----------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,912,850
----------------
PRODUCER MANUFACTURING 1.4%
*171,700 Chemical Waste Management, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 1,609,688
56,676 Tenneco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,408,730
30,000 TRW, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,980,000
----------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . . . . 5,998,418
----------------
RAW MATERIALS/PROCESSING INDUSTRIES 1.0%
80,000 DuPont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . 4,500,000
----------------
TECHNOLOGY 1.6%
50,000 Boeing Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,337,500
20,000 International Business Machines Corp. . . . . . . . . . . . . . . . . . . . . . . 1,470,000
98,000 Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,503,500
----------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,311,000
----------------
</TABLE>
F-4
<PAGE> 83
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 5.1%
50,000 Ameritech Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,018,750
50,000 AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,512,500
75,000 Bellsouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,059,375
158,000 CMS Energy Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,614,250
223,000 Illinova Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,850,250
174,000 PECO Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,263,000
67,000 Southern Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,340,000
----------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,658,125
----------------
TOTAL COMMON STOCK (COST $69,930,427) . . . . . . . . . . . . . . . . . . . . . 69,161,643
----------------
Principal
Amount Short-Term Investments 14.2%
---------------
$ 10,000,000 Federal Home Loan Mortgage Association, 5.83%, 2/21/95 . . . . . . . . . . . . . 9,916,944
21,000,000 General Electric Capital Corp., 5.50%, 1/3/95 . . . . . . . . . . . . . . . . . . 20,990,375
31,935,000 Repurchase Agreement with Lehman Brothers, Inc., dated 12/30/94, 5.35%, due
1/3/95 (Collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $31,953,984 . . . . . . . . . . . . . . . . . . . 31,935,000
----------------
TOTAL SHORT-TERM INVESTMENTS (COST $62,842,319) . . . . . . . . . . . . . . . . 62,842,319
----------------
TOTAL INVESTMENTS (Cost $452,247,756) 99.4% . . . . . . . . . . . . . . . . . . 441,428,197
Other assets and liabilities, net 0.6% . . . . . . . . . . . . . . . . . . . . . 2,705,549
----------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 444,133,746
================
</TABLE>
*Non-income producing security.
ACES-Automatically convertible equity securities
ELKS-Equity linked securities, traded in shares
LYON-Liquid yield option notes
MIPS-Monthly income paying security
PERCS-Preferred equity redeemable cumulative stock
PRIDES-Preferred redeemable increased dividend equity security
See Notes to Financial Statements.
F-5
<PAGE> 84
Statement of Assets and Liabilities
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $452,247,756) . . . . . . . . . . . . . . . . . $441,428,197
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,017
Dividends and interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . 4,510,705
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . 694,369
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . 452,458
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,089
------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447,101,835
------------
LIABILITIES
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . 1,215,845
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,020,402
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295,466
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,481
Accrued expenses and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 151,395
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . . . . . . 87,500
------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,968,089
------------
NET ASSETS, equivalent to $13.24 per share for Class A shares, $13.20 per share
for Class B shares and $13.25 per share for Class C shares . . . . . . . . . . . . $444,133,746
============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 27,921,051 Class A shares, 5,391,367 Class B shares and
246,428 Class C shares outstanding . . . . . . . . . . . . . . . . . . . . . . . $ 33,558,846
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421,854,460
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . . . . (1,407,669)
Net unrealized depreciation of securities . . . . . . . . . . . . . . . . . . . . . (10,819,559)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . 947,668
------------
NET ASSETS at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . $444,133,746
============
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 85
Statement of Operations
Year Ended December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,756,525
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,017,729
------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,774,254
------------
EXPENSES
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,547,927
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . 987,115
Service fees-Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834,614
Distribution and service fees-Class B . . . . . . . . . . . . . . . . . . . . 696,897
Distribution and service fees-Class C . . . . . . . . . . . . . . . . . . . . 28,033
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,119
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . 97,348
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,026
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,613
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . 20,835
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,281
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,855
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,125
------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,505,788
------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,268,466
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities . . . . . . . . . . . . . . . . . . . . . . . 3,548,005
Net unrealized depreciation of securities during the year . . . . . . . . . . (55,725,504)
------------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . (52,177,499)
------------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . $(31,909,033)
============
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE> 86
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1994 1993
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . . . . . . . . $493,332,696 $414,079,079
------------ ------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 20,268,466 19,780,727
Net realized gain on securities . . . . . . . . . . . . . . . . . . . . 3,548,005 36,909,393
Net unrealized appreciation (depreciation) of
securities during the year . . . . . . . . . . . . . . . . . . . . . . (55,725,504) 514,599
------------ ------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,909,033) 57,204,719
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,430,212) (17,646,870)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,534,008) (1,449,378)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (108,062) (7,692)
------------ ------------
(20,072,282) (19,103,940)
------------ ------------
From net realized gain on securities
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000,509) (30,269,541)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (527,033) (3,865,288)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,463) (61,690)
------------ ------------
(3,548,005) (34,196,519)
------------ ------------
In excess of book-basis net realized gain on securities
(see Note 1F)
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,103,576) --
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,072,081) --
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,626) --
------------ ------------
(7,217,283) --
------------ ------------
Total dividends and distributions . . . . . . . . . . . . . . . . . . . (30,837,570) (53,300,459)
------------ ------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,987,593 45,662,847
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,149,379 41,077,755
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,699,355 1,098,738
------------ ------------
108,836,327 87,839,340
------------ ------------
Proceeds from shares issued for dividends and
distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,238,092 38,674,664
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,463,734 4,575,838
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,241 51,917
------------ ------------
24,816,067 43,302,419
------------ ------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (105,939,736) (50,899,052)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,924,220) (4,881,855)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,240,785) (11,495)
------------ ------------
(120,104,741) (55,792,402)
------------ ------------
Increase in net assets resulting from Fund
share transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 13,547,653 75,349,357
------------ ------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . . . (49,198,950) 79,253,617
------------ ------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . . . . . . . $444,133,746 $493,332,696
============ ============
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE> 87
Notes to Financial Statements
Note 1--Significant Accounting Policies
The American Capital Harbor Fund, 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 listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which
the last sale price is not available are valued at the most recent bid
price, except unlisted convertible securities, which are valued at the
higher of their bid price or the value of the securities issuable on
conversion.
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. Debt securities rated below
investment grade and comparable unrated securities represented
approximately 22% of the investment portfolio at December 31, 1994.
B. Futures Contracts
Transactions in futures contracts are utilized in strategies to manage the
market risk of the Fund's investments. The purchase of a futures contract
increases the impact on net asset value of changes in the market price of
investments. There is also a risk that the market movement of such
instruments may not be in the direction forecasted.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. A portion of these funds are held as
collateral in an account in the name of the broker, the Fund's agent in
acquiring the futures position. During the period the futures contract is
open, changes in the value of the contract ("variation margin") are
recognized by marking the contract to market on a daily basis. As
unrealized gains or losses are incurred, variation margin payments are
received from or made to the broker. Upon the closing or cash settlement of
a contract, gains or losses are realized. The cost of securities acquired
through delivery under a contract is adjusted by the unrealized gain or
loss on the contract.
C. 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 subadvised by Van Kampen 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.
F-9
<PAGE> 88
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 distribution
of capital gains will be made until tax basis capital loss carryforwards,
if any, expire or are offset by net realized capital gains to its
shareholders.
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.
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
differ from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
G. Debt Discount and Premium
For financial reporting purposes, debt discounts or premiums are accounted
for on the same basis as is followed for federal income tax reporting.
Accordingly, original issue debt discounts 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.
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 .55% of the first $350 million, .50% of the next $350
million, .45% of the next $350 million, and .40% of the amount in excess of
$1.05 billion.
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 subadvised by the
Adviser. For the year ended December 31, 1994, these charges included
$11,797 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.
Van Kampen American Capital 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 December 31, 1994, the
fees for these services aggregated $841,263.
The Fund has been advised that Van Kampen American Capital Distributors,
Inc. (the "Distributor") and Advantage Capital Corporation (the "Retail
Dealer"), both affiliates of the Adviser, received $83,923 and $107,787,
respectively, as their portion of the commissions charged on sales of Fund
shares during the year.
The Fund paid brokerage commissions of $59,348 to a company which is deemed
an affiliate of the Adviser's parent because it owns more than 5% of the
company's outstanding voting securities.
Under the Distribution Plans, each class of shares pays up to .25% per
annum of their average net assets to the Distributor for expenses and
service fees incurred. The 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 expenses. Actual
distribution expenses incurred by the Distributor for Class B shares and
F-10
<PAGE> 89
Class C shares may exceed the amounts reimbursed to the Distributor by the
Fund. At December 31, 1994, the unreimbursed expenses incurred by the
Distributor under the Class B and Class C plans aggregated approximately
$2.8 million and $66,000, 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 $458,872,031 and
$502,165,566, respectively.
For federal income tax purposes, the identified cost of investments owned
at December 31, 1994 was $452,371,501. Net unrealized depreciation of
investments aggregated $10,943,304, gross unrealized appreciation of
investments aggregated $10,017,537 and gross unrealized depreciation of
investments aggregated $20,960,841. Additionally, approximately $1.8
million of financial statement losses are deferred for federal income tax
purposes to the 1995 fiscal year.
Note 4--Director Compensation
Fund directors who are not affiliated with the Adviser are compensated by
the Fund at the annual rate of $1,440 plus a fee of $35 per day for Board
and Committee meetings attended. The Chairman receives additional fees from
the Fund at the annual rate of $540. During the year, such fees aggre-
gated $18,928.
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 December 31, 1994, the liability for the Plan
aggregated $52,228. 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-11
<PAGE> 90
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. 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. 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.
The Fund has 200 million of each class of shares of $1.00 par value capital
stock authorized. Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1994 1993
--------- ---------
<S> <C> <C>
Shares sold
Class A................................................. 5,205,597 2,926,491
Class B................................................. 2,088,330 2,644,303
Class C................................................. 256,253 68,792
--------- ---------
7,550,180 5,639,586
--------- ---------
Shares issued for dividends and distributions reinvested 1,510,720 2,569,605
Class A................................................. 248,107 306,555
Class B................................................. 8,217 3,496
Class C................................................. --------- ---------
1,767,053 2,879,656
--------- ---------
Shares redeemed
Class A................................................. (7,381,835) (3,269,313)
Class B................................................. (919,838) (314,635)
Class C................................................. (89,612) (718)
--------- ---------
(8,391,285) (3,584,666)
--------- ---------
Increase in shares outstanding.......................... 925,948 4,934,576
========= =========
</TABLE>
F-12
<PAGE> 91
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended December 31
------------------------------------------------------
1994 1993 1992 1991 1990
------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year . . . . . $15.12 $14.95 $14.92 $12.93 $14.05
------- ------ ------- ------ -------
INCOME FROM OPERATIONS
Investment income . . . . . . . . . . . . . . .78 .85 .90 .955 1.115
Expenses . . . . . . . . . . . . . . . . . . (.15) (.16) (.15) (.13) (.12)
------- ------ ------- ------ -------
Net investment income . . . . . . . . . . . . .63 .69 .75 .825 .995
Net realized and unrealized gains or
losses on securities . . . . . . . . . . . (1.5625) 1.365 .6275 2.085 (1.1525)
------- ------ ------- ------ -------
Total from investment operations . . . . . . (.9325) 2.055 1.3775 2.91 (.1575)
------- ------ ------- ------ -------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . (.62) (.66) (.84) (.92) (.87)
Distributions from net realized gains
on securities . . . . . . . . . . . . . . . (.108) (1.225) (.5075) -- (.0925)
Distributions in excess of book-basis net
realized gain on securities (see Note 1F) . (.2195) -- -- -- --
------- ------ ------- ------ -------
Total distributions . . . . . . . . . . . . . (.9475) (1.885) (1.3475) (.92) (.9625)
------- ------ ------- ------ -------
Net asset value, end of year . . . . . . . . $ 13.24 $15.12 $ 14.95 $14.92 $ 12.93
======= ====== ======= ====== =======
TOTAL RETURN (1) . . . . . . . . . . . . . . (6.43%) 13.56% 9.63% 23.08% (1.23%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) . . . . . $369.7 $432.3 $394.1 $385.5 $336.9
Average net assets (millions) . . . . . . . . $402.1 $419.1 $381.6 $356.4 $359.6
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . 1.04% 1.02% .99% .91% .89%
Net investment income . . . . . . . . . . . 4.39% 4.37% 5.00% 5.86% 7.29%
Portfolio turnover rate . . . . . . . . . . . 105% 134% 85% 91% 71%
</TABLE>
(1) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-13
<PAGE> 92
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
CLASS B(1) CLASS C
------------------------------------ -----------------------------
OCTOBER 26,
YEAR ENDED DECEMBER 31 YEAR ENDED 1993(3) THROUGH
------------------------------------ DECEMBER DECEMBER 31,
1994 1993(2) 1992(2) 31, 1994 1993(2)
------- ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year . . . . . $ 15.07 $14.90 $14.91 $ 15.13 $ 16.14
------- ------ ------ ------- -------
INCOME FROM OPERATIONS
Investment income . . . . . . . . . . . . . . .77 .83 .87 .78 .22
Expenses . . . . . . . . . . . . . . . . . . (.26) (.27) (.275) (.26) (.07)
------- ------ ------ ------- -------
Net investment income . . . . . . . . . . . . .51 .56 .595 .52 .15
Net realized and unrealized gains or losses
on securities . . . . . . . . . . . . . . . (1.5505) 1.375 .63 (1.5705) (.0325)
------- ------ ------ ------- -------
Total from investment operations . . . . . . (1.0405) 1.935 1.225 (1.0505) .1175
------- ------ ------ ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . (.502) (.54) (.7275) (.502) (.125)
Distributions from net realized
gains on securities . . . . . . . . . . . . (.108) (1.225) (.5075) (.108) (1.0025)
Distributions in excess of book-basis
net realized gain on securities
(see Note 1F) . . . . . . . . . . . . . . . (.2195) -- -- (.2195) --
------- ------ ------ ------- -------
Total distributions . . . . . . . . . . . . . (.8295) (1.765) (1.235) (.8295) (1.1275)
------- ------ ------ ------- -------
Net asset value, end of year . . . . . . . . $ 13.20 $15.07 $14.90 $ 13.25 $ 15.13
======= ====== ====== ======= =======
TOTAL RETURN(4) . . . . . . . . . . . . . . . (7.11%) 12.68% 8.56% (7.14%) .93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) . . . . . $71.1 $60.1 $20.0 $3.3 $1.1
Average net assets (millions) . . . . . . . . $69.7 $40.1 $7.9 $2.8 $0.7
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . . 1.84% 1.73% 1.88% 1.84% 1.90%(5)
Net investment income . . . . . . . . . . . 3.63% 3.62% 4.08% 3.72% 3.88%(5)
Portfolio turnover rate . . . . . . . . . . 105% 134% 85% 105% 134%
</TABLE>
(1) Sales of Class B shares commenced on December 20, 1991 at a net asset
value of $14.32 per share. At December 31, 1991, there were 15,738
Class B shares outstanding with a per share net asset value of $14.91.
The increase in net asset value was due principally to unrealized
appreciation; there were no dividends or distributions paid during the
period. Other financial highlights for the Class B shares for this
short period are not presented as they are not meaningful.
(2) Based on average month-end shares outstanding.
(3) Commencement of offering of sales
(4) Total return for periods of less than one full year are not
annualized. Total return does not consider the effect of sales
charges.
(5) Annualized
See Notes to Financial Statements.
F-14
<PAGE> 93
Report of Independent Accountants
To the Shareholders and Board of Directors of
American Capital Harbor Fund, 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 Harbor Fund, Inc.
at December 31, 1994, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then
ended 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 December 31, 1994 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
February 8, 1995
F-15
