<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH FUND
AUGUST 7, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated August 7,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................... 2
INVESTMENT POLICIES AND TECHNIQUES............................................ 3
INVESTMENT RESTRICTIONS....................................................... 9
TRUSTEES AND EXECUTIVE OFFICERS............................................... 10
INVESTMENT ADVISORY AGREEMENT................................................. 14
DISTRIBUTOR................................................................... 16
DISTRIBUTION PLANS............................................................ 16
TRANSFER AGENT................................................................ 17
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 18
DETERMINATION OF NET ASSET VALUE.............................................. 19
PURCHASE AND REDEMPTION OF SHARES............................................. 19
EXCHANGE PRIVILEGE............................................................ 23
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES.................................... 24
FUND PERFORMANCE.............................................................. 26
OTHER INFORMATION............................................................. 26
FINANCIAL STATEMENTS.......................................................... 27
</TABLE>
<PAGE> 2
GENERAL INFORMATION
Van Kampen Emerging Growth Fund (the "Fund") was incorporated in Delaware
on January 23, 1969, reincorporated by merger into a Maryland corporation on
September 19, 1973, and reorganized under the laws of Delaware August 5, 1995.
On July 24, 1990 the Fund changed its name from American Capital Venture Fund,
Inc. to American Capital Emerging Growth Fund, Inc.
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, VKAC manages or supervises 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 percent.
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.
2
<PAGE> 3
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 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 net 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 July 14, 1995, no person was known by the Fund to own beneficially or
of record as much as five percent of the Class A, Class B or Class C shares of
the Fund except as follows: 6.71% of the outstanding Class A shares of the Fund
were owned of record by Citibank, 111 Wall Street, New York, New York
10043-1000, acting as Trustee for The Travelers Inc. for certain employee
benefit plans; 5.57% of the outstanding Class B shares of the Fund were owned of
record by National Financial Services, Inc., 200 Liberty, One World Financial
Center, New York, New York 10281-1003; 8.20% of the outstanding Class C shares
of the Fund were owned of record by Merrill Lynch Pierce Fenner & Smith, Inc.,
P.O. Box 45286, Jacksonville, Florida 32232; 7.15% of the outstanding Class C
shares of the Fund were owned of record by PaineWebber Inc., 1000 Harbor Blvd.,
7th Floor, Weehawken, New Jersey 07087-6727; 13.30% of the outstanding Class B
shares and 37.95% of the outstanding Class C shares were owned of record by
Smith Barney Inc., 388 Greenwich Street, 22nd Floor, New York, New York
10013-2375; and 34.66% of the outstanding Class A shares, 35.64% of the
outstanding Class B shares and 9.61% of the outstanding Class C shares were
owned of record by Van Kampen American Capital Trust Company, 2800 Post Oak
Boulevard, Houston, Texas 77056, acting as Custodian for certain employee
benefit plans and individual retirement accounts.
INVESTMENT POLICIES AND TECHNIQUES
The following disclosures supplement disclosures set forth in the
Prospectus. Readers must refer also to the Prospectus for a complete
presentation.
The following investment techniques, subject to the Investment Restrictions
below, may be employed by the Fund. These techniques inherently involve the
assumption of a higher degree of risk than normal and the possibility of more
volatile price fluctuations. Investment in the Fund should not be viewed as a
complete investment program and prospective investors are advised to give full
consideration to the risks inherent in the investment techniques used by the
Fund.
Restricted Securities -- The Fund may invest up to ten percent of the value
of its net assets in restricted securities (i.e., securities which may not be
sold without registration under the Securities Act of 1933 (the "1933 Act")) and
in other securities that are not readily marketable, including repurchase
agreements maturing in more than seven days. Restricted securities are generally
purchased at a discount from the market price of unrestricted securities of the
same issuer. Investments in restricted securities are not readily marketable
without some time delay. Investments in securities which have no readily
available market value are valued at fair value as determined in good faith by
the Fund's Board of Directors. Ordinarily, the Fund would invest in restricted
securities only when it receives the issuer's commitment to register the
securities without expense to the Fund. However, registration and underwriting
expenses (which may range from seven percent to 15% of the gross proceeds of the
securities sold) may be paid by the Fund. A Fund position in restricted
securities might adversely affect the liquidity and marketability of such
securities, and the Fund might not be able to dispose of its holdings in such
securities at reasonable price levels.
No more than five percent of the total assets of the Fund at the time of
purchase will be invested in either restricted securities or warrants.
Warrants -- Warrants are in effect longer-term call options. They give the
holder the right to purchase a given number of shares of a particular company at
specified prices within certain periods of time. The purchaser of a warrant
expects that the market price of the security will exceed the purchase price of
the warrant plus the exercise price of the warrant, thus giving him a profit. Of
course, since the market price may
3
<PAGE> 4
never exceed the exercise price before the expiration date of the warrant, the
purchaser of the warrant risks the loss of the entire purchase price of the
warrant. Warrants generally trade in the open market and may be sold rather than
exercised. Warrants are sometimes sold in unit form with other securities of an
issuer. Units of warrants and common stock may be employed in financing young,
unseasoned companies. The purchase price of a warrant varies with the exercise
price of the warrant, the current market value of the underlying security, the
life of the warrant and various other investment factors. No more than five
percent of the total assets of the Fund at the time of purchase will be invested
in either warrants or restricted securities.
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.
See "Investment Practices and Restrictions -- Repurchase Agreements" in the
Prospectus for further information.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option writing program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. 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
4
<PAGE> 5
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.
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.
5
<PAGE> 6
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, 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 will receive from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the value of the underlying security or index declines, the position is less
valuable, and the Fund would be 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
6
<PAGE> 7
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.
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
7
<PAGE> 8
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 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.
8
<PAGE> 9
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 may not be changed
without the approval of 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 a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy;
or (ii) more than 50% of the Fund's 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. Invest in companies for the purpose of exercising control over or
management of such companies;
2. Underwrite securities of other issuers, except that the Fund may acquire
restricted securities and other securities which, if sold, might make
the Fund an underwriter for purposes of the Securities Act of 1933. No
more than ten percent of the value of the Fund's net assets may be
invested in such securities;
3. Invest directly in real estate interests of any nature, although the
Fund may invest indirectly through media such as real estate investment
trusts;
4. Invest in commodities or commodity contracts, except that the Fund may
enter into transactions in futures contracts or related options;
5. Issue any of its securities for (a) services or (b) property other than
cash or securities (including securities of which the Fund is the
issuer), except as a dividend or distribution to its shareholders in
connection with a reorganization;
6. Issue senior securities and shall not borrow money except from banks as
a temporary measure for extraordinary or emergency purposes and in an
amount not exceeding five percent of the Fund's total assets.
Notwithstanding the foregoing, the Fund may enter into transactions in
options, futures contracts and related options and may make margin
deposits and payments in connection therewith;
7. Lend money or securities except by the purchase of a portion of an issue
of bonds, debentures or other obligations of types commonly distributed
to institutional investors publicly or privately (in the latter case the
investment will be subject to the stated limits on investments in
"restricted securities"), and except by the purchase of securities
subject to repurchase agreements;
8. Invest more than 25% of the value of its assets in any one industry;
9. Invest in the securities of investment companies, except that the Fund
may invest up to ten percent of its assets in the securities of
registered closed-end investment companies, provided that the Fund
acquires no more than five percent of the voting stock of any such
company which has a policy of concentrating investments in a particular
industry or group of industries or more than three percent of the voting
stock of such a company which does not have this policy;
10. Sell short or borrow for short sales. Short sales "against the box" are
not subject to this limitation; or
9
<PAGE> 10
11. As to 75% of the Fund's total assets, invest more than five percent of
the value of its total assets in the securities of any one issuer (not
including federal government securities) or acquire more than ten
percent of any class of the outstanding voting securities of any one
issuer.
Thus the Fund retains the right to invest up to 25% of the value of its
total assets in one company, but intends to do so only if a particular company
is believed to afford better than average prospects for market appreciation at a
time when general business conditions and trends in the market as a whole are
considered to make greater diversification less desirable. Although the Fund may
invest in real estate investment trusts, it does not presently intend to do so.
ADDITIONAL RESTRICTIONS -- The Fund has also undertaken to one or more states to
abide by additional restrictions so long as its securities are registered for
sale in such states. These limitations may change from time to time as permitted
by such states. The most restrictive restrictions presently in effect are that
the Fund shall not:
1. Invest in warrants in excess of five percent of its net assets
(including, but not to exceed two percent in warrants which are not
listed on the New York or American Stock Exchanges);
2. Invest in securities of any company if, to the knowledge of the Fund,
any officer or director of the Fund or of the Adviser owns more than
one-half of one percent of the outstanding securities of such company,
and such officers and directors who own more than one-half of one
percent, own in the aggregate more than five percent of the outstanding
securities of such company;
3. Purchase securities of issuers which have a record of less than three
years continuous operation if such purchase would cause more than five
percent of the Fund's total assets to be invested in securities of such
issuers;
4. Invest more than ten percent of its net assets in illiquid securities,
including securities that are not readily marketable, restricted
securities and repurchase agreements that have a maturity of more than
seven days;
5. Invest in interests in oil, gas, or other mineral exploration or
developmental programs, except through the purchase of liquid securities
of companies which engage in such businesses; or
6. Pledge, mortgage or hypothecate its portfolio securities or other assets
to the extent that the percentage of pledged assets plus the sales load
exceeds ten percent of the offering price of the Fund's shares.
The Fund has also undertaken that its Distributor, Adviser, the officers
and the directors of such companies and of the Fund will not take short
positions in securities issued by the Fund.
In addition to the foregoing, the Fund has undertaken to a certain state
that at least 30 days prior to any change by the Fund in its investment
objective or goal, the Fund will provide written notice to all of its
shareholders in that state regarding such proposed change.
TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and executive officers and their principal occupations
for the past five years are listed below.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital Funds.
Age: 63
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Radnor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art. Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing. A
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital Funds and Chairman of each Van Kampen American
Capital Fund advised by Van Kampen American Capital
Advisory Corp.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive Vice
President of ACCESS, Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director, Trustee or Managing General Partner of
each of the Van Kampen American Capital Funds and other
open-end investment companies and closed-end investment
companies advised by the Adviser and its affiliates.
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A Director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital. A Director and the Second
Vice President of International Institute of Los Angeles.
A Trustee of each of the Van Kampen American Capital
Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 Fund. Director, FPA Capital Fund, Inc.; FPA New Income
Los Angeles, CA 90067 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital,
Age: 63 Inc.; and TCW Convertible Security Fund, Inc., investment
companies unaffiliated with Van Kampen American Capital.
A Trustee of each of the Van Kampen American Capital
Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 71 Capital Funds and Chairman of each Van Kampen American
Capital Fund advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van
Age: 55 Kampen American Capital Funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Fund by reason of his position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Fund by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.
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.
12
<PAGE> 13
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 41 Secretary and Corporate Secretary of the Adviser.
Gary M. Lewis............ Vice President Investment Vice President of the Adviser.
Age: 41
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: 48 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.
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 Directors not affiliated
with the Adviser or its parent received as a group $20,294 in Trustees' fees
from the Fund in addition to certain out-of-pocket expenses. Such Trustees also
received compensation for serving as Trustees of other investment companies
advised by the Adviser. For legal services rendered during the fiscal year, the
Fund paid legal fees of $15,773 to the law firm of O'Melveny & Myers, of which
Mr. Sheehan is Of Counsel. The firm also serves as legal counsel to other Van
Kampen American Capital Funds.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as directors or trustees is
set forth below. The compensation shown for the Fund is for the fiscal year
ended November 30, 1994 and the total compensation shown for the Fund and other
related mutual
13
<PAGE> 14
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
AGGREGATE BENEFITS ACCRUED FROM REGISTRANT
COMPENSATION AS PART AND FUND
FROM OF FUND COMPLEX PAID TO
NAME OF PERSON REGISTRANT EXPENSES DIRECTORS(1)(5)
--------------------------------------------------------- ---------- ---------------- ------------------
<S> <C> <C> <C>
J. Miles Branagan........................................ $3,045 -0- $64,000
Dr. Richard E. Caruso(3)................................. 3,100(2) -0- 64,000
Dr. Roger Hilsman........................................ 3,135 -0- 66,000
David Rees(3)............................................ 3,045 -0- 64,000
Lawrence J. Sheehan...................................... 3,190 -0- 67,000
Dr. Fernando Sisto(3).................................... 3,935(2) -0- 82,000
William S. Woodside(4)................................... 0 -0- 18,000
</TABLE>
---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $2,990 and $2,105 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 is as follows: Caruso,
$5,809; Rees, $32,377; Sisto, $11,266.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. With respect to the second and fourth columns, $2,435 and $36,000,
respectively, was paid by the Adviser directly.
(5) Includes the following amounts for which the various Portfolios were
reimbursed by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman,
$1,000; Rees, $2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr.
Woodside was paid $36,000 directly by the Adviser as discussed in footnote 4
above.
Beginning July 21, 1995, the Fund pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $2,377 and a
meeting fee of $68 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.
14
<PAGE> 15
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. The Advisory Agreement also provides that
the Adviser shall not be liable to the company for any actions or omissions if
it acted without willful misfeasance, bad faith, negligence or reckless
disregard of its obligations.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at annual rate
of: 0.575% on the first $350 million net assets; 0.525% on the next $350 million
of net assets; 0.475% on the next $350 million of net assets; and 0.425% on the
net assets over $1.05 billion.
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 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 limitations applicable in the states where the Fund's shares are
qualified for sale, the compensation due the Adviser will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund except (1) interest and taxes, (2) brokerage commissions, (3)
certain litigation and indemnification expenses as described in the Advisory
Agreement and (4) payments made by the Fund pursuant to the Distribution Plans.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on not more than 60 days' nor less than 30 days' written notice.
During the fiscal years ended August 31, 1992, 1993 and 1994, the Adviser
received $1,485,238, $2,048,191 and $4,198,993, respectively, in advisory fees
from the Fund. For such periods, the Fund paid $75,200, $100,397 and $127,374,
respectively, for accounting services.
15
<PAGE> 16
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such shares of the Fund as may be sold to the public. The Distributor is
not obligated to sell any stated number of shares. The Distributor bears the
cost of printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature, promotion
and advertising. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Trustees or by a vote of a majority of the Fund's
outstanding voting securities and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Underwriting Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.
During the fiscal years ended August 31, 1992, 1993 and 1994, total underwriting
commissions on the sale of shares of the Fund were $1,269,243, $2,012,455 and
$5,215,444, respectively. Of such totals, the amount retained by the Distributor
was $110,357, $197,217 and $665,400, respectively. The remainder was reallowed
to dealers. Of such dealer reallowances, $232,479, $203,839 and $263,830,
respectively, was received by Advantage Capital Corporation, an affiliated
dealer of the Distributor.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan", "Class B Plan" and "Class C
Plan", respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its 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 B and C Plans,
authorized payments by the Fund include payments at an annual rate of up to
0.25% of the net assets of the shares of the respective class to reimburse the
Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to 4% of the purchase price of Class B shares
purchased by the clients of broker-dealers and other Service Organizations, (2)
out-of-pocket expenses of printing and distributing prospectuses and annual and
semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professionals, (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses
and (6) interest expense at the three month LIBOR rate plus 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 0.65% 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 semiannual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead
16
<PAGE> 17
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. Such reimbursements are subject to the maximum sales
charge limits specified by the National Association of Securities Dealers, Inc.
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 interested persons (as defined
in the 1940 Act) of the Fund and who have no direct or indirect financial
interest in the operation of any of the Plans or in any agreements related to
the 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 Fund.
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 Directors, 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.
For the fiscal year ending August 31, 1994, the Fund's aggregate expenses
under the Class A Plan were $1,176,263 or .20%, respectively, of the Class A
shares' average net assets. Such expenses were paid to reimburse the Distributor
for payments made to Service Organizations for servicing Fund shareholders and
for administering the Class A Plan. For the fiscal year ended August 31, 1994,
the Fund's aggregate expenses under the Class B Plan were $1,630,779 or 1.00% of
the Class B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $1,223,084 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 $407,695 for fees paid to
Service Organizations for servicing Class B shareholders and administering the
Class B Plan. For the fiscal year ended August 31, 1994, the Fund's aggregate
expenses under the Class C Plan were $127,813 or 1.00% of the Class C shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $95,860 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 $31,953 for fees paid to Service Organizations for servicing Class
C shareholders and administering the Class C Plan.
TRANSFER AGENT
During the fiscal year ended August 31, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$2,192,123 for these services. These services are provided at cost plus a
profit.
17
<PAGE> 18
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 paid 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 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 has 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
18
<PAGE> 19
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 (as defined in the 1940 Act) of the Adviser.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal years ended August 31, 1992, 1993 and 1994 totalled $426,409, $497,958
and $1,276,466, respectively. During the year ended August 31, 1994, the Fund
paid $598,039 in brokerage commissions on transactions totalling $277,768,179 to
brokers selected primarily on the basis of research services provided to the
Adviser.
The Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser's parent, Travelers.
Such affiliated persons currently are Smith Barney and Robinson Humphrey. In
addition, from December 15, 1988 through February 21, 1992, Dain Bosworth, Inc.
("Dain Bosworth") and Rauscher Pierce Refsnes, Inc. ("Rauscher Pierce") were
affiliates of Travelers (then known as Primerica); from September 10, 1987 to
March 27, 1992 The Fox-Pitt, Kelton Group S.A. ("Fox-Pitt") was an affiliate of
Travelers (then known as Primerica); and from 1985 to September 30, 1992,
Jefferies & Company, Inc. ("Jefferies") was deemed an affiliate of Travelers
(then known as Primerica). The negotiated commission paid to an affiliated
broker on any transaction would be comparable to that payable to a
non-affiliated broker in a similar transaction. The Fund paid the following
commission to these brokers during the periods shown:
Commissions Paid:
<TABLE>
<CAPTION>
DAIN RAUSCHER ROBINSON
JEFFERIES SMITH BARNEY FOX-PITT BOSWORTH PIERCE HUMPHREY
--------- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1992............................ $ 1,742 $ 8,527 -- -- -- --
Fiscal 1993............................ -- $ 32,062 -- -- -- --
Fiscal 1994............................ -- $ 27,068 -- -- -- $5,250
Fiscal 1994 Percentages:
Commissions with affiliate to total
commissions....................... -- 2.12% -- -- -- .41%
Value of brokerage transactions with
affiliate to total transactions... -- 4.78% -- -- -- .20%
</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.
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 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."
19
<PAGE> 20
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 offers 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.
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 1933 Act.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in this 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 the
shareholder service agent. The minimum initial investment of $500 or more, in
the form of a check payable to the Fund, must accompany the application. This
minimum may be waived by the Distributor for plans involving continuing
investments. Subsequent investments of $25 or more may be mailed directly to
ACCESS. All such investments are made at the public offering price of Fund
shares next computed following receipt of payment by ACCESS. Confirmations of
the opening of an account and of all subsequent transactions in the account are
forwarded by ACCESS to the investor's dealer of record, unless another dealer is
designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to purchases of Class A shares of the Fund 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 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 Letter of Intent as
described in the next paragraph. THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE
TIME AN ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED
CHARGE ON THE BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION MUST BE MADE IN
WRITING WHEN SUCH AN ORDER IS PLACED BY MAIL. The reduced sales charge will not
be applied if such notification is not furnished at the time of the order. The
reduced sales charge will also not be applied should a review of the records of
the Distributor or ACCESS fail to confirm the representations concerning the
investor's holdings.
20
<PAGE> 21
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 Participating 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 totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90 days in order that any investments made during
this 90-day period, valued at the investor's cost, can become subject to the
Letter of Intent. The Letter of Intent does not obligate the investor to
purchase the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the investor is required to pay the
difference between sales charges otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding the investor in shares of the Fund the amount of excess sales
charges, if any, paid during the 13-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment 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
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and Qualified 401(k) Retirement Plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), 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 a specified percentage 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., retirement plans qualified under Section 401(a) of the Code
and deferred compensation plans under Section 457 of the Code) required to
obtain funds to pay distributions to beneficiaries pursuant to the terms of the
plans. Such payments include, but are not limited to, death, disability,
retirement or separation from service. No CDSC -- Class A will be imposed on
exchanges between funds. For purposes of the CDSC -- Class A, when shares of one
fund are exchanged for shares of another fund, the purchase date for the shares
of the fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
21
<PAGE> 22
Cumulative Purchase Discounts and Letters of Intent will 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 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 Van
Kampen American Capital mutual funds described as "Participating Funds" in the
Prospectus.
As described in the Prospectus under "Redemptions of Shares," redemption of
Class B and Class C shares is 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 is waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the 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 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 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 also will be waived
on any redemption which results from the return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Code, the return of excess deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge will be waived on any minimum distribution required to be
distributed in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be
22
<PAGE> 23
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 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.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital") and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
23
<PAGE> 24
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 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 at least annually 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 similarly to distribute to shareholders any
taxable net realized capital gains. 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. Such capital
gains, if any, are distributed at least once a year. 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 the shareholder service agent in writing and receive cash.
Shareholders are informed as to the sources of distributions at the time of
payment.
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 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
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
after September 30 of any year, and paid before February 1 of the following
year, are considered taxable income to shareholders on the record date even
though paid in the next year.
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 dividends 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 any exception that may be provided by IRS regulations
for losses incurred under certain systematic withdrawal plans. All dividends and
distributions are taxable to the
24
<PAGE> 25
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.
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 in
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 shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Code includes special rules applicable to 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 terminations of Section 1256 contracts is generally treated as long-term
capital gain or loss to the extent of 60% thereof and short-term capital gain or
loss to the extent of 40% thereof ("60/40 gain or loss"). Such contracts, when
held by the Fund at the end of a fiscal year, generally are required to be
treated as sold at market value on the last day of such fiscal year for federal
income tax purposes ("marked-to-market"). Over-the-counter options are not
classified as Section 1256 contracts and are not subject to the mark-to-market
rule or to 60/40 gain or loss treatment. Any gains or losses recognized by the
Fund from transactions in over-the-counter options generally constitute
short-term capital gains or losses. If over-the-counter call options written, or
over-the-counter put options purchased, by the Fund are exercised, the gain or
loss realized on the sale of the underlying securities may be either short-term
or long-term, depending on the holding period of the securities. In determining
the amount of gain or loss, the sales proceeds are reduced by the premium paid
for over-the-counter puts or increased by the premium received for
over-the-counter calls.
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.
25
<PAGE> 26
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 February 28, 1995 was -9.93%, 16.23% and 11.46%,
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 the
two-year and ten month periods (the initial offering of Class B shares) ended
February 28, 1995 was -9.81% and 11.58%, 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 eight month periods (the
initial offering of Class C shares) ended February 28, 1995 was -6.13% and
3.03%, 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 general level of prices of common
securities available for purchase and sale by the Fund. The past 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, ACMR 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 American Capital in 1994.
The Funds may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
and (3) in reports or other communications to shareholders or in advertising
material, illustrate the benefits of compounding at various assumed rates of
return. Such illustrations may be in the form of charts or graphs and will not
be based on historical returns experienced by the Funds.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders
and annually such statements are audited by the independent accountants.
26
<PAGE> 27
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston,
Texas 77002, the independent accountants for the Fund, perform annual audits of
the Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual and Semi-Annual Report to Shareholders including the related report of
independent accountants on the annual 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>
AUGUST 31, FEBRUARY 28,
1994 1995
---------- ------------
<S> <C> <C>
Net Asset Value Per Class A Share............................... $24.37 $24.34
Class A Per Share Sales Charge -- 5.75% of offering price (6.10%
of net asset value per share)................................. $ 1.49 $ 1.48
---------- ------------
Class A Per Share Offering Price to the Public.................. $25.86 $25.82
</TABLE>
27
<PAGE> 28
Investment Portfolio
August 31, 1994
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 87.7%
CONSUMER DISTRIBUTION 8.0%
*200,000 Ann Taylor Stores, Inc. . . . . . . . . . . . . . . . . . . . $ 8,275,000
*150,000 BMC West Corp. . . . . . . . . . . . . . . . . . . . . . . . 2,887,500
*100,000 Burlington Coat Factory Corp. . . . . . . . . . . . . . . . 2,412,500
*50,000 Carson, Pirie, Scott & Co. . . . . . . . . . . . . . . . . . 1,018,750
375,000 Dollar General Corp. . . . . . . . . . . . . . . . . . . . . 9,468,750
*200,000 Gymboree Corp. . . . . . . . . . . . . . . . . . . . . . . . 5,100,000
350,000 Lowe's Companies, Inc. . . . . . . . . . . . . . . . . . . . 12,643,750
125,000 Nordstrom, Inc. . . . . . . . . . . . . . . . . . . . . . . 5,875,000
75,000 Premark International, Inc. . . . . . . . . . . . . . . . . 3,393,750
*100,000 Safeway, Inc. . . . . . . . . . . . . . . . . . . . . . . . 2,737,500
80,400 Talbots, Inc. . . . . . . . . . . . . . . . . . . . . . . . 2,864,250
50,000 Tiffany & Co. . . . . . . . . . . . . . . . . . . . . . . . 1,893,750
*250,000 Viking Office Products . . . . . . . . . . . . . . . . . . . 7,187,500
*250,000 Williams-Sonoma, Inc. . . . . . . . . . . . . . . . . . . . 10,484,375
--------------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . 76,242,375
--------------------
CONSUMER DURABLES 4.2%
35,000 Borg Warner Automotive, Inc. . . . . . . . . . . . . . . . . 931,875
100,000 Bush Industries, Inc. . . . . . . . . . . . . . . . . . . . 2,825,000
350,000 Callaway Golf Co. . . . . . . . . . . . . . . . . . . . . . 12,731,250
*15,000 Cobra Golf, Inc. . . . . . . . . . . . . . . . . . . . . . . 731,250
75,000 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 2,315,625
100,000 Harman International Industries, Inc. . . . . . . . . . . . 3,050,000
100,000 Leggett & Platt, Inc. . . . . . . . . . . . . . . . . . . . 3,700,000
187,500 Lennar Corp. . . . . . . . . . . . . . . . . . . . . . . . . 3,703,125
100,000 Oakwood Homes Corp. . . . . . . . . . . . . . . . . . . . . 2,812,500
*75,000 Schuler Homes, Inc. . . . . . . . . . . . . . . . . . . . . 1,781,250
90,000 Sunbeam-Oster Company, Inc. . . . . . . . . . . . . . . . . 2,036,250
125,000 Superior Industries International, Inc. . . . . . . . . . . 3,703,125
--------------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . 40,321,250
--------------------
CONSUMER NON-DURABLES 3.4%
100,000 Coors Adolph Co. . . . . . . . . . . . . . . . . . . . . . . 2,037,500
*75,000 Fieldcrest Cannon, Inc. . . . . . . . . . . . . . . . . . . 2,128,125
100,000 IBP, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 3,150,000
100,888 Lancaster Colony Corp. . . . . . . . . . . . . . . . . . . . 3,657,190
*150,000 Nautica Enterprises, Inc. . . . . . . . . . . . . . . . . . 4,050,000
*150,000 Smithfield Foods, Inc. . . . . . . . . . . . . . . . . . . . 4,556,250
*150,000 Starbucks Corp. . . . . . . . . . . . . . . . . . . . . . . 4,237,500
65,000 St. John Knits, Inc. . . . . . . . . . . . . . . . . . . . . 1,763,125
*100,000 Tommy Hilfiger Corp. . . . . . . . . . . . . . . . . . . . . 4,187,500
105,000 Wolverine World Wide, Inc. . . . . . . . . . . . . . . . . . 2,572,500
--------------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . 32,339,690
--------------------
CONSUMER SERVICES 7.5%
225,000 Apple South, Inc. . . . . . . . . . . . . . . . . . . . . . 3,600,000
*125,000 Avid Technology, Inc. . . . . . . . . . . . . . . . . . . . 4,156,250
35,000 Belo (A. H.) Corp. . . . . . . . . . . . . . . . . . . . . . 1,723,750
*93,750 Clear Channel Communications, Inc. . . . . . . . . . . . . . 4,312,500
150,000 Equifax, Inc. . . . . . . . . . . . . . . . . . . . . . . . 4,387,500
</TABLE>
F-1
<PAGE> 29
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES-CONTINUED
*100,000 Franklin Quest Co. . . . . . . . . . . . . . . . . . . . . . $ 3,775,000
*90,000 Gartner Group, Inc. . . . . . . . . . . . . . . . . . . . . 2,306,250
*350,000 Hospitality Franchise System, Inc. . . . . . . . . . . . . . 10,281,250
*250,000 Infinity Broadcasting Corp. . . . . . . . . . . . . . . . . 7,875,000
*85,000 Landrys Seafood Restaurants . . . . . . . . . . . . . . . . . 1,891,250
65,000 La Quinta Inns, Inc. . . . . . . . . . . . . . . . . . . . . 2,096,250
35,000 Lee Enterprises, Inc. . . . . . . . . . . . . . . . . . . . 1,216,250
100,000 Meredith Corp. . . . . . . . . . . . . . . . . . . . . . . . 4,825,000
*337,500 Outback Steakhouse, Inc. . . . . . . . . . . . . . . . . . . 10,251,563
100,000 Reynolds & Reynolds Co. . . . . . . . . . . . . . . . . . . 2,637,500
*180,000 Robert Half International, Inc. . . . . . . . . . . . . . . 3,847,500
*35,000 Scientific Games Holdings Corp. . . . . . . . . . . . . . . 1,233,750
30,000 SPS Transaction Services, Inc. . . . . . . . . . . . . . . . 1,620,000
--------------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . 72,036,563
--------------------
ENERGY 5.6%
150,000 Apache Corp. . . . . . . . . . . . . . . . . . . . . . . . . 3,787,500
100,000 Devon Energy Corp. . . . . . . . . . . . . . . . . . . . . . 2,100,000
200,000 Enron Oil & Gas Co. . . . . . . . . . . . . . . . . . . . . 3,850,000
75,000 Kerr McGee Corp. . . . . . . . . . . . . . . . . . . . . . . 3,646,875
50,000 Murphy Oil Corp. . . . . . . . . . . . . . . . . . . . . . . 2,368,750
200,000 Noble Affiliates, Inc. . . . . . . . . . . . . . . . . . . . 5,150,000
125,000 Pittston Services Group . . . . . . . . . . . . . . . . . . . 3,484,375
150,000 Pogo Producing Co. . . . . . . . . . . . . . . . . . . . . . 3,056,250
*200,000 Seagull Energy Corp. . . . . . . . . . . . . . . . . . . . . 4,800,000
*100,000 Seitel, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 3,150,000
*200,000 Smith International, Inc. . . . . . . . . . . . . . . . . . 3,000,000
125,000 Snyder Oil Corp. . . . . . . . . . . . . . . . . . . . . . . 2,359,375
75,000 Tosco, Corp. . . . . . . . . . . . . . . . . . . . . . . . . 2,250,000
100,000 Vintage Petroleum, Inc. . . . . . . . . . . . . . . . . . . 2,087,500
*200,000 Weatherford International, Inc. . . . . . . . . . . . . . . 2,425,000
*200,000 Western Co. of North America . . . . . . . . . . . . . . . . 2,225,000
130,000 Williams Companies, Inc. . . . . . . . . . . . . . . . . . . 4,046,250
--------------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . 53,786,875
--------------------
FINANCE 10.7%
150,000 Advanta Corp., Class A . . . . . . . . . . . . . . . . . . . 4,875,000
200,000 Bank South Corp. . . . . . . . . . . . . . . . . . . . . . . 3,825,000
200,000 Baybanks, Inc. . . . . . . . . . . . . . . . . . . . . . . . 12,100,000
50,000 Compass Bancshares, Inc. . . . . . . . . . . . . . . . . . . 1,250,000
150,000 Crestar Financial Corp. . . . . . . . . . . . . . . . . . . 7,237,500
110,000 Cullen Frost Bankers, Inc. . . . . . . . . . . . . . . . . . 4,180,000
55,000 Equitable of Iowa Companies . . . . . . . . . . . . . . . . . 2,145,000
125,000 First American Corp. . . . . . . . . . . . . . . . . . . . . 4,296,875
125,000 First Security Corp. . . . . . . . . . . . . . . . . . . . . 4,062,500
200,000 First USA, Inc. . . . . . . . . . . . . . . . . . . . . . . 7,325,000
100,000 GFC Financial Corp. . . . . . . . . . . . . . . . . . . . . 3,787,500
300,000 Green Tree Financial Corp. . . . . . . . . . . . . . . . . . 10,050,000
100,000 Hibernia Corp., Class A . . . . . . . . . . . . . . . . . . 825,000
35,000 Integra Financial Corp. . . . . . . . . . . . . . . . . . . 1,710,625
125,000 Mercantile Bancorporation, Inc. . . . . . . . . . . . . . . 4,781,250
125,000 Michigan National Corp. . . . . . . . . . . . . . . . . . . 9,750,000
</TABLE>
F-2
<PAGE> 30
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE-CONTINUED
175,000 Midlantic Corp. . . . . . . . . . . . . . . . . . . . . . . $ 5,271,875
75,000 Rollins Truck Leasing Corp. . . . . . . . . . . . . . . . . 1,312,500
100,000 Signet Banking Corp. . . . . . . . . . . . . . . . . . . . . 3,912,500
112,500 SouthTrust Corp. . . . . . . . . . . . . . . . . . . . . . . 2,390,625
50,000 Star Banc Corp. . . . . . . . . . . . . . . . . . . . . . . . 2,150,000
50,000 United Companies Financial Corp. . . . . . . . . . . . . . . 1,737,500
100,000 West One Bancorp . . . . . . . . . . . . . . . . . . . . . . 3,100,000
--------------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . 102,076,250
--------------------
HEALTH CARE 12.0%
*200,000 American Medical Holdings, Inc. . . . . . . . . . . . . . . 4,850,000
*50,000 CDP Technologies, Inc. . . . . . . . . . . . . . . . . . . . 431,250
150,000 Columbia/HCA Healthcare Corp. . . . . . . . . . . . . . . . . 6,375,000
*150,000 Coventry Corp. . . . . . . . . . . . . . . . . . . . . . . . 3,225,000
*50,000 Genesis Health Ventures, Inc. . . . . . . . . . . . . . . . 1,318,750
*100,000 Genentech, Inc. . . . . . . . . . . . . . . . . . . . . . . 5,137,500
300,000 HBO & Co. . . . . . . . . . . . . . . . . . . . . . . . . . 9,825,000
*200,000 Healthcare & Retirement Corp. . . . . . . . . . . . . . . . 5,575,000
*300,000 Health Management Associates, Inc., Class A . . . . . . . . . 7,162,500
*100,000 Horizon Healthcare Corp. . . . . . . . . . . . . . . . . . . 2,537,500
*75,000 Integrated Health Services, Inc. . . . . . . . . . . . . . . 2,728,125
*150,000 Lincare Holdings, Inc. . . . . . . . . . . . . . . . . . . . 3,712,500
*100,000 Living Centers of America, Inc. . . . . . . . . . . . . . . 3,050,000
*100,000 Mariner Health Group, Inc. . . . . . . . . . . . . . . . . . 2,275,000
*150,000 Medaphis Corp. . . . . . . . . . . . . . . . . . . . . . . . 5,287,500
*400,000 Mid Atlantic Medical Services . . . . . . . . . . . . . . . . 10,600,000
100,000 Mylan Labs, Inc. . . . . . . . . . . . . . . . . . . . . . . 2,575,000
*75,000 Oxford Health Plans, Inc. . . . . . . . . . . . . . . . . . 5,306,250
*75,000 Phycor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 2,315,625
*100,000 Quantum Health Resources, Inc. . . . . . . . . . . . . . . . 3,587,500
*50,000 Quorum Health Group, Inc. . . . . . . . . . . . . . . . . . 918,750
*75,000 Sun Healthcare Group . . . . . . . . . . . . . . . . . . . . 1,687,500
200,000 United Healthcare Corp. . . . . . . . . . . . . . . . . . . 10,450,000
*150,000 Universal Health Services, Inc., Class B . . . . . . . . . . 4,331,250
*150,000 Value Health, Inc. . . . . . . . . . . . . . . . . . . . . . 7,387,500
*75,000 Watsons Pharmaceuticals, Inc. . . . . . . . . . . . . . . . 1,715,625
--------------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . 114,365,625
--------------------
PRODUCER MANUFACTURING 7.3%
125,000 AGCO Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 6,187,500
*350,000 American Power Conversion Corp. . . . . . . . . . . . . . . 6,825,000
*150,000 Ametek, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 2,418,750
30,000 Briggs & Stratton Corp. . . . . . . . . . . . . . . . . . . 2,313,750
*150,000 Clark Equipment Co. . . . . . . . . . . . . . . . . . . . . 10,593,750
75,000 Danaher Corp. . . . . . . . . . . . . . . . . . . . . . . . 3,328,125
100,000 Juno Lighting, Inc. . . . . . . . . . . . . . . . . . . . . 1,875,000
150,000 Kennametal, Inc. . . . . . . . . . . . . . . . . . . . . . . 3,750,000
*75,000 Newpark Resources, Inc. . . . . . . . . . . . . . . . . . . 1,275,000
*75,000 OHM Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 928,125
150,000 Parker Hannifin Corp. . . . . . . . . . . . . . . . . . . . 6,300,000
*125,000 Reliance Electric Co., Class A . . . . . . . . . . . . . . . 3,203,125
*125,000 Sanifill, Inc. . . . . . . . . . . . . . . . . . . . . . . . 3,000,000
</TABLE>
F-3
<PAGE> 31
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING-CONTINUED
35,000 Thermo Remediation, Inc. . . . . . . . . . . . . . . . . . . $ 529,375
75,000 TRW, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 5,625,000
150,000 Wabash National Corp. . . . . . . . . . . . . . . . . . . . 6,393,750
150,000 Wellman, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 4,762,500
--------------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . 69,308,750
--------------------
RAW MATERIALS/PROCESSING INDUSTRIES 6.6%
*150,000 Airgas, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 3,712,500
*150,000 A K Steel . . . . . . . . . . . . . . . . . . . . . . . . . . 4,725,000
50,000 Chesapeake Corp. . . . . . . . . . . . . . . . . . . . . . . 1,662,500
200,000 Freeport-McMoRan Copper Gold, Class A . . . . . . . . . . . . 4,625,000
*250,000 Georgia Gulf Corp. . . . . . . . . . . . . . . . . . . . . . 9,437,500
125,000 Hanna (M.A.) Co. . . . . . . . . . . . . . . . . . . . . . . 3,390,625
100,000 Medusa Corp. . . . . . . . . . . . . . . . . . . . . . . . . 2,837,500
150,000 Millipore Corp. . . . . . . . . . . . . . . . . . . . . . . 8,381,250
100,000 Nucor Corp. . . . . . . . . . . . . . . . . . . . . . . . . 6,900,000
100,000 Olin Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 5,750,000
50,000 Phelps Dodge Corp. . . . . . . . . . . . . . . . . . . . . . 3,175,000
100,000 Ply Gem Industries, Inc. . . . . . . . . . . . . . . . . . . 2,225,000
150,000 Praxair, Inc. . . . . . . . . . . . . . . . . . . . . . . . 3,412,500
*40,000 Sealed Air Corp. . . . . . . . . . . . . . . . . . . . . . . 1,410,000
100,000 Terra Industries, Inc. . . . . . . . . . . . . . . . . . . . 1,050,000
--------------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . 62,694,375
--------------------
TECHNOLOGY 17.9%
18,500 Alantec Corp. . . . . . . . . . . . . . . . . . . . . . . . 249,750
*110,000 Amphenol Corp., Class A . . . . . . . . . . . . . . . . . . . 2,255,000
*150,000 Analog Devices, Inc. . . . . . . . . . . . . . . . . . . . . 4,837,500
*150,000 Andrew Corp. . . . . . . . . . . . . . . . . . . . . . . . . 7,275,000
*250,000 Applied Materials, Inc. . . . . . . . . . . . . . . . . . . 12,625,000
*30,000 Aspect Telecommunications Corp. . . . . . . . . . . . . . . 1,110,000
*350,000 Atmel Corp. . . . . . . . . . . . . . . . . . . . . . . . . 9,625,000
140,000 Augat, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 3,272,500
*75,000 Broderbund Software, Inc. . . . . . . . . . . . . . . . . . 4,162,500
*100,000 Cadence Design Systems, Inc. . . . . . . . . . . . . . . . . 1,637,500
*75,000 Ceridian Corp. . . . . . . . . . . . . . . . . . . . . . . . 2,006,250
*23,300 CIDCO, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 582,500
*125,000 Compuware Corp. . . . . . . . . . . . . . . . . . . . . . . 5,187,500
*200,000 DSC Communications Corp. . . . . . . . . . . . . . . . . . . 5,725,000
*110,000 Electroglas, Inc. . . . . . . . . . . . . . . . . . . . . . 4,840,000
*150,000 Filenet Corp. . . . . . . . . . . . . . . . . . . . . . . . 3,450,000
*200,000 General Instruments, Corp. . . . . . . . . . . . . . . . . . 6,100,000
*200,000 Input/Output, Inc. . . . . . . . . . . . . . . . . . . . . . 4,300,000
*100,000 Integrated Device Technology, Inc. . . . . . . . . . . . . . 2,337,500
*150,000 KLA Instruments Corp. . . . . . . . . . . . . . . . . . . . 7,125,000
*100,000 Landmark Graphics Corp. . . . . . . . . . . . . . . . . . . 2,400,000
200,000 Linear Technology Corp. . . . . . . . . . . . . . . . . . . 8,900,000
*300,000 LSI Logic Corp. . . . . . . . . . . . . . . . . . . . . . . . 9,450,000
300,000 Microchip Technology, Inc. . . . . . . . . . . . . . . . . . 11,025,000
250,000 Micron Technology, Inc. . . . . . . . . . . . . . . . . . . 10,062,500
*150,000 Novellus Systems, Inc. . . . . . . . . . . . . . . . . . . . 6,637,500
*100,000 Silicon Graphics, Inc. . . . . . . . . . . . . . . . . . . . 2,625,000
</TABLE>
F-4
<PAGE> 32
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-CONTINUED
*200,000 Solectron Corp. . . . . . . . . . . . . . . . . . . . . . . $ 6,100,000
*350,000 Tellabs, Inc. . . . . . . . . . . . . . . . . . . . . . . . 14,743,750
150,000 Varian Associates, Inc. . . . . . . . . . . . . . . . . . . 5,793,750
*100,000 VLSI Technology, Inc. . . . . . . . . . . . . . . . . . . . 1,393,750
75,000 Watkins Johnson Co. . . . . . . . . . . . . . . . . . . . . 2,737,500
--------------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . 170,572,250
--------------------
TRANSPORTATION 2.6%
100,000 Airborne Freight Corp. . . . . . . . . . . . . . . . . . . . 3,050,000
*100,000 American Freightways Corp. . . . . . . . . . . . . . . . . . 2,400,000
*75,000 Landstar Systems, Inc. . . . . . . . . . . . . . . . . . . . 2,362,500
150,000 Skywest, Inc. . . . . . . . . . . . . . . . . . . . . . . . 4,162,500
100,000 Southwest Airlines Co. . . . . . . . . . . . . . . . . . . . 2,650,000
*75,000 Swift Transportation, Inc. . . . . . . . . . . . . . . . . . 3,037,500
200,000 TNTFreightways Corp. . . . . . . . . . . . . . . . . . . . . 4,850,000
*50,000 Wisconsin Central Transportation Corp. . . . . . . . . . . . 2,000,000
--------------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . 24,512,500
--------------------
UTILITIES 1.9%
*250,000 ALC Communications Corp. . . . . . . . . . . . . . . . . . . 8,937,500
100,000 Century Telephone Enterprises, Inc. . . . . . . . . . . . . 3,012,500
250,000 LCI International, Inc. . . . . . . . . . . . . . . . . . . 5,000,000
32,400 Telephone & Data Systems, Inc. . . . . . . . . . . . . . . . 1,409,400
--------------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . 18,359,400
--------------------
TOTAL COMMON STOCK (Cost $674,788,377) . . . . . . . . . . 836,615,903
--------------------
Convertible Preferred Stock 0.4%
*70,000 Cellular Communications, Inc. (Cost $2,570,000) . . . . . . . 3,727,500
--------------------
Principal
Amount Short-Term Investments 13.4%
----------
$ 20,770,000 Federal National Mortgage Association, 4.46% to 4.47%,
10/4/94 to 10/11/94 . . . . . . . . . . . . . . . . . . . 20,669,517
67,830,000 Repurchase Agreement with Salomon Brothers, Inc.,
dated 8/31/94, 4.80%, due 9/1/94 (collateralized by
U.S. Government obligations in a pooled cash account)
repurchase proceeds $67,839,044 . . . . . . . . . . . . . 67,830,000
#40,000,000 United States Treasury Bill, 4.29%, 9/15/94 . . . . . . . . . 39,929,416
--------------------
TOTAL SHORT-TERM INVESTMENTS (Cost $128,428,933) . . . . . 128,428,933
--------------------
TOTAL INVESTMENTS (Cost $805,787,310) 101.5% . . . . . . . . 968,772,336
Other assets and liabilities, net (1.5%) . . . . . . . . . . . (14,359,560)
--------------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . $ 954,412,776
====================
</TABLE>
* Non-income producing security
# A portion of this security, with a market value of approximately $29.6
million, was maintained in a segregated account and placed as collateral for
futures contracts (See Note 1C).
See Notes to Financial Statements.
F-5
<PAGE> 33
Statement of Assets and Liabilities
August 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $805,787,310) . . . . . . . . . . . . $ 968,772,336
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . 4,122,450
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . 3,613,091
Dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 607,075
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,624
---------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 977,250,576
---------------
LIABILITIES
Payable for investments purchased . . . . . . . . . . . . . . . . . . . 19,267,675
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . 1,991,525
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 506,083
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,337
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . 275,100
Due to broker-variation margin . . . . . . . . . . . . . . . . . . . . . 128,125
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268,955
---------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 22,837,800
---------------
NET ASSETS, equivalent to $24.37 per share for Class A shares,
$23.86 per share for Class B shares and $24.14 per share
for Class C shares . . . . . . . . . . . . . . . . . . . . . . . . . . $ 954,412,776
===============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 27,777,099 Class A, 10,599,460 Class B and
1,014,558 Class C shares outstanding . . . . . . . . . . . . . . . . . $ 393,911
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785,687,479
Undistributed net realized gain on securities . . . . . . . . . . . . . . 4,598,516
Net unrealized appreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,985,026
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 817,188
Accumulated net investment loss . . . . . . . . . . . . . . . . . . . . . (69,344)
---------------
NET ASSETS at August 31, 1994 . . . . . . . . . . . . . . . . . . . . . . $ 954,412,776
===============
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 34
Statement of Operations
Year Ended August 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,480,673
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,411,053
---------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 6,891,726
---------------
EXPENSES
Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,198,993
Shareholder service agent's fees and expenses . . . . . . . . . . . . . 2,562,948
Service fees-Class A . . . . . . . . . . . . . . . . . . . . . . . . . 1,176,263
Distribution and service fees-Class B . . . . . . . . . . . . . . . . . 1,630,779
Distribution and service fees-Class C . . . . . . . . . . . . . . . . . 127,813
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . 330,834
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . 245,787
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . 127,374
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,226
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,229
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . 26,217
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,773
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,863
---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,591,099
---------------
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . (3,699,373)
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on investments . . . . . . . . . . . . . . . . . . . 25,567,837
Net realized gain on futures contracts . . . . . . . . . . . . . . . . 86,675
Net unrealized depreciation of investments during the year . . . . . . (43,271,052)
Net unrealized appreciation of futures contracts during the year . . . 119,688
---------------
Net realized and unrealized loss on securities . . . . . . . . . . . (17,496,852)
---------------
Decrease in net assets resulting from operations . . . . . . . . . . $ (21,196,225)
===============
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE> 35
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31
-------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . $ 593,737,150 $ 317,452,642
-------------- --------------
OPERATIONS
Net investment loss . . . . . . . . . . . . . . . . . (3,699,373) (1,393,655)
Net realized gain on securities . . . . . . . . . . . 25,654,512 40,331,927
Net unrealized appreciation (depreciation) of
securities during the year . . . . . . . . . . . . . (43,151,364) 122,098,801
-------------- --------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . (21,196,225) 161,037,073
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN
ON SECURITIES
Class A . . . . . . . . . . . . . . . . . . . . . . . (34,197,716) (19,399,113)
Class B . . . . . . . . . . . . . . . . . . . . . . . (7,449,021) (632,253)
Class C . . . . . . . . . . . . . . . . . . . . . . . (402,667) --
-------------- --------------
(42,049,404) (20,031,366)
-------------- --------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . 747,070,310 118,743,734
Class B . . . . . . . . . . . . . . . . . . . . . . . 218,458,300 63,427,038
Class C . . . . . . . . . . . . . . . . . . . . . . . 26,549,184 1,372,671
-------------- --------------
992,077,794 183,543,443
-------------- --------------
Proceeds from shares issued for distributions
reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . 31,162,468 17,705,402
Class B . . . . . . . . . . . . . . . . . . . . . . . 6,869,825 631,366
Class C . . . . . . . . . . . . . . . . . . . . . . . 339,541 --
-------------- --------------
38,371,834 18,336,768
-------------- --------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . (571,657,960) (62,878,659)
Class B . . . . . . . . . . . . . . . . . . . . . . . (32,231,372) (3,722,676)
Class C . . . . . . . . . . . . . . . . . . . . . . . (2,639,041) (75)
-------------- --------------
(606,528,373) (66,601,410)
-------------- --------------
Increase in net assets resulting from Fund
share transactions . . . . . . . . . . . . . . . . . 423,921,255 135,278,801
-------------- --------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . 360,675,626 276,284,508
-------------- --------------
NET ASSETS, end of year . . . . . . . . . . . . . . . $ 954,412,776 $ 593,737,150
============== ==============
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE> 36
Notes to Financial Statements
Note 1-Significant Accounting Policies
American Capital Emerging Growth 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 and listed securities for which
the last sale price is not available are valued at the mean between the
last reported bid and asked prices.
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.
B. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to repurchase
the security at a future time and specified price. The Fund may invest
independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment
companies advised or sub-advised by American Capital Asset
Management, Inc. (the "Adviser"), the daily aggregate of which is
invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Fund makes payment
for such securities only upon physical delivery or evidence of book
entry transfer to the account of the custodian bank. The seller is
required to maintain the value of the underlying security at not less
than the repurchase proceeds due the Fund.
C. Futures Contracts
Transactions in futures contracts are utilized in strategies to manage
the market risk of the Fund's investments by increasing or decreasing
the percentage of assets effectively invested. The purchase of a
futures contract increases the impact of changes in the market price of
investments on net asset value. 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 securities with
a value equal to its obligation under the futures contracts in a
segregated account with its custodian. A portion of these funds is 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.
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 on investments to its shareholders.
It is anticipated that no distributions of capital gains will be made
until tax basis capital loss carryforwards expire or are offset by net
realized capital gains.
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-9
<PAGE> 37
F. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the
record date. The Fund distributes tax basis earnings in accordance
with the minimum distribution requirements of the Internal Revenue Code,
which may result in dividends or distributions in excess of financial
statement earnings. At August 31, 1994, such excess was due to a
distribution paid in the current year, which relates to capital gains
incurred in the prior year.
Effective September 1, 1993, the Fund adopted Statement of Position
93-2, Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies. As a result of this statement, the Fund changed the
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions
determined in accordance with income tax regulations. The cumulative
effect caused by adopting this statement was to decrease accumulated
net investment loss and capital surplus by $5,819,961 and $5,841,923,
respectively, and to increase undistributed net realized gain by
$21,962. Current year net investment loss, net realized gains, net
assets and net asset value per share were not affected by this
reclassification.
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 .575% of the first $350 million, .525% of the next $350 million,
.475% of the next $350 million, and .425% of the 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 sub-advised by the
Adviser. For the year ended August 31, 1994, these charges included $15,594
as the Fund's share of the employee costs attributable to the Fund's
accounting officers. A portion of the accounting services expense was paid
to the Adviser in reimbursement of personnel, facilities and equipment costs
attributable to the provision of accounting services to the Fund. The services
provided by the Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended August 31, 1994, the fees
for such services were $2,192,123.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $665,400 and $263,830, respectively, as
their portion of the commissions on sales of Fund shares during the year.
Under the Distribution Plans, the Fund pays up to .25% per annum of its
average daily net assets to the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average net assets to reimburse the Distributor
for its distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts
reimbursed to the Distributor by the Fund. At August 31, 1994, the
unreimbursed expenses incurred by the Distributor under the Class B plan and
Class C plan aggregated approximately $10.6 million and $360,000,
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.
During the year, the Fund paid brokerage commissions of $32,318 to
companies which are deemed affiliates of the Adviser's parent because it
owns more than 5% of the companies' outstanding voting securities.
F-10
<PAGE> 38
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 $747,271,798 and
$439,137,738, respectively.
At August 31, 1994, the Fund held 125 long Standard & Poor's 500 Index futures
contracts expiring in September 1994. The market value of such contracts was
$29,631,250 and the unrealized appreciation was $817,188.
For federal income tax purposes, the identified cost of investments owned
at August 31, 1994 was the same as for financial reporting purposes. Gross
unrealized appreciation of investments aggregated $175,660,876, and gross
unrealized depreciation aggregated $12,675,850.
The Fund had a net realized capital loss carryforward for federal income tax
purposes of approximately $2.8 million at August 31, 1994, which may be
utilized to offset future capital gains until expiration in 1995.
Note 4-Director Compensation
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $2,100 plus a fee of $55 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $790. During the year, such fees aggregated $20,294.
The directors may participate in a voluntary Deferred Compensation Plan
(the "Plan"). The Plan is not funded, and obligations under the Plan will
be paid solely out of the Fund's general accounts. The Fund will not
reserve or set aside funds for the payment of its obligations under the Plan
by any form of trust or escrow. At August 31, 1994, the liability for the
Plan aggregated $69,344. 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.
Note 5-Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of
shares have the same rights, except that Class B shares and Class C shares
bear the cost of distribution fees and certain other class specific
expenses. Realized and unrealized gains or losses, investment income and
expenses (other than class specific expenses) are allocated daily to each
class of shares based upon the relative proportion of net assets of
each class. Class B shares and Class C shares automatically convert to
Class A shares six years and ten years after purchase, respectively,
subject to certain conditions.
F-11
<PAGE> 39
The Fund has 200 million shares of each class of $.01 par value of capital
stock authorized. Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended August 31
--------------------------
1994 1993
---------- ----------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . 29,869,198 5,093,795
Class B . . . . . . . . . . . . . . . . . . . . . 8,777,044 2,709,282
Class C . . . . . . . . . . . . . . . . . . . . . 1,054,495 53,468
----------- ----------
39,700,737 7,856,545
----------- ----------
Shares issued for distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . 1,268,167 839,706
Class B . . . . . . . . . . . . . . . . . . . . . 284,112 29,899
Class C . . . . . . . . . . . . . . . . . . . . . 13,881 --
----------- ----------
1,566,160 869,605
----------- ----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . (22,927,742) (2,776,497)
Class B . . . . . . . . . . . . . . . . . . . . . (1,311,636) (161,563)
Class C . . . . . . . . . . . . . . . . . . . . . (107,283) (3)
----------- ----------
(24,346,661) (2,938,063)
----------- ----------
Increase in Fund shares outstanding . . . . . . . 16,920,236 5,788,087
=========== ==========
</TABLE>
F-12
<PAGE> 40
Financial Highlights
Selected data for a share of capital stock outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------
YEAR ENDED AUGUST 31
-------------------------------------------------
1994 1993 1992(1) 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period . . . . $ 26.46 $19.03 $20.06 $14.44 $15.19
------- -------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . .33 .15 .195 .23 .29
Expenses . . . . . . . . . . . . . . . . . . (.44) (.20) (.21) (.195) (.185)
------- -------- -------- -------- -------
Net investment income (loss) . . . . . . . . (.11) (.05) (.015) .035 .105
Net realized and unrealized gain or loss
on securities . . . . . . . . . . . . . . . (.32) 8.6375 .9275 6.035 (.60)
------- -------- -------- -------- -------
Total from investment operations . . . . . . (.43) 8.5875 .9125 6.07 (.495)
------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . -- -- (.0325) (.0775) (.255)
Distributions from net realized gains
on securities . . . . . . . . . . . . . . . (1.66) (1.1575) (1.91) (.3725) --
------- -------- -------- -------- -------
Total distributions . . . . . . . . . . . . . (1.66) (1.1575) (1.9425) (.45) (.255)
------- -------- -------- -------- -------
Net asset value, end of period . . . . . . . $ 24.37 $26.46 $19.03 $20.06 $14.44
======= ======== ======== ======== =======
TOTAL RETURN(2) . . . . . . . . . . . . . . (1.67%) 46.73% 4.28% 43.30% (3.27%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period (millions) . . $677.1 $517.8 $312.3 $283.6 $206.6
Average net assets (millions) . . . . . . . . $599.4 $405.2 $320.6 $235.8 $209.9
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . 1.18% 1.10% 1.04% 1.14% 1.15%
Net investment income (loss) . . . . . . . (.30%) (.27%) (.08%) .21% .65%
Portfolio turnover rate . . . . . . . . . . . 64% 47% 61% 69% 47%
</TABLE>
(1) Based on average month-end shares outstanding
(2) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-13
<PAGE> 41
Financial Highlights
Selected data for a share of capital stock outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C(2)
--------------------------- -----------------
APRIL 20, JULY 6,
YEAR ENDED 1992(1) YEAR 1993(1)
AUGUST 31, THROUGH ENDED THROUGH
----------------- AUGUST 31, AUGUST 31, AUGUST 31,
1994 1993(2) 1992(2) 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period . . . $26.14 $18.98 $19.66 $26.42 $25.07
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . .24 .19 .08 .24 .03
Expenses . . . . . . . . . . . . . . . . . (.51) (.435) (.145) (.49) (.075)
------ ------ ------ ------ ------
Net investment loss . . . . . . . . . . . . (.27) (.245) (.065) (.25) (.045)
Net realized and unrealized gain or
loss on securities . . . . . . . . . . . . (.35) 8.5625 (.615) (.37) 1.395
------ ------ ------ ------ ------
Total from investment operations . . . . . (.62) 8.3175 (.68) (.62) 1.35
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net realized gains
on securities . . . . . . . . . . . . . . (1.66) (1.1575) -- (1.66) --
------ ------ ------ ------ ------
Net asset value, end of period . . . . . . $23.86 $26.14 $18.98 $24.14 $26.42
====== ====== ====== ====== ======
TOTAL RETURN(3) . . . . . . . . . . . . . (2.46%) 45.41% (3.51%) (2.46%) 5.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period
(millions) . . . . . . . . . . . . . . . . $252.9 $74.5 $5.2 $24.5 $1.4
Average net assets (millions) . . . . . . . $163.1 $28.4 $2.8 $12.8 $0.5
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . 2.01% 1.89% 1.86%(4) 2.02% 2.31% (4)
Net investment loss . . . . . . . . . . . (1.07%) (1.07%) (.80%)(4) (1.04%) (1.37%)(4)
Portfolio turnover rate . . . . . . . . . . 64% 47% 61% 64% 47%
</TABLE>
(1) Commencement of offering of sales
(2) Based on average month-end shares outstanding
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Annualized
See Notes to Financial Statements.
F-14
<PAGE> 42
Report of Independent Accountants
To the Shareholders and Board of Directors of
American Capital Emerging Growth 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 Emerging
Growth Fund, Inc. at August 31, 1994, the results of its operations, the
changes in its net assets and the selected per share data and ratios for each
of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and selected per share data
and ratios (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at August 31, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
October 17, 1994
F-15
<PAGE> 43
PORTFOLIO OF INVESTMENTS
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Market Value
................................................................................
<S> <C> <C>
COMMON STOCK 80.3%
CONSUMER DISTRIBUTION 5.2%
100,000 Alco Standard Corp............................. $ 6,800,000
* 7,200 Baby Superstore, Inc........................... 302,400
* 50,000 Barnes & Noble, Inc............................ 1,475,000
129,250 Bergen Brunswig Corp........................... 3,522,062
100,000 Casey's General Stores, Inc.................... 1,575,000
* 100,000 CompUSA, Inc................................... 1,887,500
* 75,000 Corporate Express, Inc......................... 1,790,625
375,000 Dollar General Corp............................ 13,031,250
* 100,000 Emulex Corp.................................... 1,450,000
16,500 Fastenal Co.................................... 771,375
* 100,000 Gymboree Corp.................................. 2,400,000
100,000 Pier 1 Imports, Inc............................ 987,500
* 100,000 Revco Drugs, Inc............................... 1,837,500
* 200,000 Safeway, Inc................................... 7,175,000
100,000 Talbots, Inc................................... 3,162,500
100,000 Tiffany & Co................................... 3,150,000
* 125,000 Viking Office Products......................... 3,750,000
* 85,000 Waban, Inc..................................... 1,678,750
----------------
TOTAL CONSUMER DISTRIBUTION............... 56,746,462
----------------
CONSUMER DURABLES 2.2%
125,000 Callaway Golf Co............................... 4,218,750
100,000 Clayton Homes, Inc............................. 1,787,500
* 75,000 Cobra Golf, Inc................................ 2,442,188
125,000 Echlin, Inc.................................... 4,328,125
140,400 Harman International Industries, Inc........... 5,896,800
125,000 Sunbeam--Oster Co., Inc........................ 3,046,875
110,000 Ultralife Batteries, Inc....................... 1,567,500
60,000 X-Rite, Inc.................................... 1,170,000
----------------
TOTAL CONSUMER DURABLES................... 24,457,738
----------------
</TABLE>
F-16
<PAGE> 44
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Market Value
................................................................................
<S> <C> <C>
CONSUMER NON-DURABLES 3.1%
25,000 Bush Boake Allen, Inc.......................... $ 612,500
175,000 Canandaigua Wine, Inc.......................... 6,485,937
* 75,000 Fieldcrest Cannon, Inc......................... 1,584,375
* 100,000 Fossil, Inc.................................... 1,812,500
150,000 Nautica Enterprises, Inc....................... 4,668,750
* 125,000 Ralcorp Holdings, Inc.......................... 3,156,250
* 75,000 Smithfield Foods, Inc.......................... 1,982,813
65,000 St. John Knits, Inc............................ 2,185,625
250,000 Tommy Hilfiger Corp............................ 5,000,000
* 85,000 Unifi, Inc..................................... 2,401,250
125,000 Wolverine World Wide, Inc...................... 3,390,625
----------------
TOTAL CONSUMER NON-DURABLES............... 33,280,625
----------------
CONSUMER SERVICES 6.2%
35,000 Belo (A.H.) Corp............................... 1,973,125
93,750 Clear Channel Communications, Inc.............. 5,332,031
125,000 Corrections Corp. of America................... 2,953,125
40,000 Devon Group, Inc............................... 1,030,000
* 150,000 Gartner Group, Inc............................. 6,225,000
* 150,000 Heritage Media Corp. Class A................... 3,843,750
* 200,000 Hospitality Franchise System, Inc.............. 5,675,000
* 100,000 Infinity Broadcasting Corp..................... 3,525,000
285,000 La Quinta Inns, Inc.,.......................... 7,089,375
* 100,000 Landry's Seafood Restaurants................... 2,662,500
175,000 Manpower, Inc.................................. 5,118,750
100,000 Meredith Corp.................................. 4,862,500
175,000 Mirage Resorts, Inc............................ 4,178,125
100,000 Reynolds & Reynolds Co......................... 2,762,500
* 200,000 Robert Half International, Inc................. 4,925,000
* 75,000 Rock Bottom Restaurants, Inc................... 1,462,500
* 35,000 Scientific Games Holdings Corp................. 1,575,000
150,000 Wendy's International, Inc..................... 2,325,000
----------------
TOTAL CONSUMER SERVICES................... 67,518,281
----------------
</TABLE>
F-17
<PAGE> 45
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Market Value
................................................................................
<S> <C> <C>
ENERGY 4.0%
150,000 Apache Corp.................................... $ 3,750,000
* 150,000 Barret Resources Corp.......................... 2,943,750
200,000 Benton Oil & Gas Co............................ 1,850,000
150,000 Chesapeake Energy Corp......................... 2,362,500
100,000 Enron Oil & Gas Co............................. 2,087,500
125,000 J Ray McDermott, SA............................ 2,781,250
100,000 Kerr McGee Corp................................ 5,037,500
50,000 Murphy Oil Corp................................ 2,187,500
125,000 Norsk Hydro, A.S., ADS......................... 4,718,750
* 100,000 Petroleum Geo-Services, (A.S., ADS)............ 2,243,750
50,000 Phoenix Resource Co............................ 987,500
200,000 Pogo Producing Co.............................. 3,700,000
* 200,000 Smith International, Inc....................... 2,675,000
100,000 Union Texas Petroleum Holdings, Inc............ 1,925,000
* 200,000 Western Co. of North America................... 3,775,000
----------------
TOTAL ENERGY.............................. 43,025,000
----------------
FINANCE 8.9%
75,000 American Bankers, Inc.......................... 2,034,375
150,000 Bank of Boston Corp............................ 4,518,750
200,000 Baybanks, Inc.................................. 12,550,000
75,000 CMAC Investment Corp........................... 2,559,375
50,000 Cole Taylor Financial Group, Inc............... 887,500
50,000 Comdisco, Inc.................................. 1,275,000
75,000 Crestar Financial Corp......................... 3,234,375
110,000 Cullen Frost Bankers, Inc...................... 3,960,000
55,000 Equitable of Iowa Companies.................... 1,828,750
125,000 Finova Group, Inc.............................. 4,187,500
125,000 First American Corp............................ 4,289,063
75,000 First Bank System, Inc......................... 2,915,625
25,000 Foothill Group, Inc............................ 456,250
150,000 Green Tree Financial Corp...................... 5,737,500
50,000 Life Partners Group, Inc....................... 1,075,000
75,000 MBNA Corp...................................... 1,978,125
125,000 Merchantile Bancorporation, Inc................ 4,609,375
75,000 MGIC Investment Corp........................... 2,859,375
72,162 Michigan National Corp......................... 7,351,504
175,000 Midlantic Corp................................. 5,381,250
50,000 Progressive Corp............................... 1,943,750
100,000 Providian Corp................................. 3,537,500
50,000 Republic Corp.................................. 2,493,750
</TABLE>
F-18
<PAGE> 46
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Market Value
................................................................................
<S> <C> <C>
75,000 St. Paul Companies Inc......................... $ 3,646,875
50,000 Star Banc Corp................................. 2,131,250
50,000 TCF Financial Corp............................. 2,050,000
35,000 Vesta Investments Group, Inc................... 1,045,625
150,000 Webb (Del) Corp................................ 2,962,500
100,000 West One Bancorp............................... 2,731,250
----------------
TOTAL FINANCE............................. 96,231,192
----------------
HEALTH CARE 14.5%
* 150,000 AMSCO International, Inc....................... 2,062,500
50,000 CDP Technologies, Inc.......................... 487,500
* 100,000 Community Health Systems, Inc.................. 2,787,500
* 75,000 Coram Healthcare Corp.......................... 1,762,500
* 150,000 Cordis Corp.................................... 9,750,000
* 150,000 Coventry Corp.................................. 4,050,000
* 86,500 Genentech, Inc................................. 4,346,625
* 50,000 Genesis Health Ventures, Inc................... 1,512,500
* 125,000 Gulf South Medical Supply...................... 4,937,500
200,000 HBO & Co....................................... 7,700,000
* 300,000 Health Management Associates, Inc.............. 7,987,500
* 300,000 Healthcare Compare Corp........................ 9,525,000
* 100,000 Healthcare & Retirement Corp................... 3,100,000
* 125,000 Healthsound Rehabilitation..................... 5,031,250
75,000 Hillhaven Corp................................. 1,809,375
75,000 Homedco Group, Inc............................. 3,375,000
* 150,000 Horizon Healthcare Corp........................ 3,656,250
75,000 Integrated Health Services, Inc................ 2,868,750
* 75,000 Lincare Holdings, Inc.......................... 2,100,000
* 125,000 Living Centers of America, Inc................. 4,546,875
* 75,000 Marquette Electronics, Inc..................... 1,668,750
* 200,000 Medaphis Corp.................................. 11,300,000
100,000 Medtronic, Inc................................. 6,000,000
9,000 Mentor Corp.................................... 218,250
200,000 Mylan Labs, Inc................................ 6,250,000
84,000 National Medical Enterprise.................... 1,302,000
125,000 Omnicare, Inc.................................. 6,078,125
* 85,000 Ostex International, Inc....................... 860,625
* 75,000 Oxford Health Plans, Inc....................... 6,825,000
* 75,000 Pharmacy Management Systems, Inc............... 1,183,594
* 250,000 Phycor, Inc.................................... 7,687,500
* 50,000 Quorum Health Group, Inc....................... 950,000
* 110,000 REN Corp--USA.................................. 1,650,000
</TABLE>
F-19
<PAGE> 47
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Market Value
................................................................................
<S> <C> <C>
* 100,000 Rotech Medical Corp............................... $ 2,700,000
* 50,000 Steris Corp....................................... 1,656,250
* 175,000 Sun Healthcare Group.............................. 4,484,375
8,700 Sunrise Medical, Inc.............................. 300,150
* 100,000 Theratx, Inc...................................... 1,987,500
* 50,000 United American Healthcare Corp................... 1,300,000
* 125,000 Vencor, Inc....................................... 3,968,750
* 109,400 Vivra, Inc........................................ 3,555,500
* 100,000 Watson Pharmaceuticals, Inc....................... 2,581,250
----------------
TOTAL HEALTHCARE............................. 157,904,244
----------------
PRODUCER MANUFACTURING 3.8%
175,000 Ametek, Inc....................................... 3,128,125
* 75,000 Clark Equipment Co................................ 4,012,500
200,000 Danaher Corp...................................... 5,900,000
75,000 Exide Corp........................................ 3,862,500
* 75,000 FMC Corp.......................................... 4,387,500
150,000 Harnischfeger Industries, Inc..................... 4,181,250
* 50,000 Image Industries, Inc............................. 793,750
75,000 Kennametal, Inc................................... 2,025,000
* 125,000 Newpark Resources, Inc............................ 1,968,750
100,000 Parker Hannifin Corp.............................. 4,675,000
* 150,000 Sanifill, Inc..................................... 3,543,750
35,000 Thermo Remediation, Inc........................... 625,625
75,000 Wellman, Inc...................................... 2,025,000
----------------
TOTAL PRODUCER MANUFACTURING................. 41,128,750
----------------
RAW MATERIALS/PROCESSING INDUSTRIES 3.8%
* 200,000 A K Steel......................................... 5,200,000
125,000 Cabot Corp........................................ 4,250,000
75,000 Caraustar Industries, Inc......................... 1,425,000
100,000 Chesapeake Corp................................... 3,300,000
125,000 First Mississippi Corp............................ 3,031,250
75,000 Furon Co.......................................... 1,481,250
* 125,000 Georgia Gulf Corp................................. 3,750,000
100,000 J&L Specialty Steel, Inc.......................... 1,925,000
85,000 Millipore Corp.................................... 4,515,625
75,000 OM Group, Inc..................................... 1,800,000
175,000 Potash Corp Sask, Inc............................. 6,256,250
* 40,000 Sealed Air Corp................................... 1,675,000
230,000 Terra Industries, Inc............................. 2,530,000
----------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES.... 41,139,375
----------------
</TABLE>
F-20
<PAGE> 48
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Market Value
...............................................................................
<S> <C> <C>
TECHNOLOGY 24.6%
* 175,000 3 COM, Corp..................................... $ 9,121,875
100,000 Adaptec, Inc.................................... 3,300,000
* 125,000 Alliance Semiconducter Corp..................... 4,781,250
125,000 Altera Corp..................................... 7,109,375
* 112,500 American Management Systems, Inc................ 2,299,218
* 110,000 Amphenol Corp................................... 2,708,750
* 300,000 Analog Devices, Inc............................. 7,537,500
* 75,000 Andrew Corp..................................... 4,350,000
* 35,000 Aspen Technology, Inc........................... 682,500
* 250,000 Atmel Corp...................................... 8,531,250
150,000 Auspex Systems, Inc............................. 1,425,000
100,000 Autodesk, Inc................................... 3,925,000
85,000 BMC Software, Inc............................... 5,461,250
* 200,000 Broderbund Software, Inc........................ 10,375,000
* 100,000 C-COR Electrics, Inc............................ 2,675,000
* 250,000 Cadence Design Systems, Inc..................... 6,406,250
* 125,000 Ceridian Corp................................... 3,937,500
* 23,300 CIDCO, Inc...................................... 722,300
* 80,000 Cycare Systems, Inc............................. 1,650,000
* 200,000 Cypress Semiconductor Corp...................... 5,675,000
* 100,000 DSC Communications Corp......................... 3,600,000
* 200,000 Frame Technology................................ 3,250,000
25,000 General Magic, Inc.............................. 456,250
* 50,000 Hyperion Software, Corp......................... 2,187,500
* 200,000 Input/Output, Inc............................... 5,250,000
* 150,000 Integrated Device Technology, Inc............... 5,718,750
* 85,000 Kemet Corp...................................... 2,645,625
* 150,000 KLA Instruments Corp............................ 8,700,000
* 75,000 Kronos, Inc..................................... 2,043,750
200,000 Linear Technology Corp.......................... 10,900,000
* 300,000 LSI Logic Corp.................................. 16,350,000
100,000 Medic Computer Systems, Inc..................... 4,212,500
* 150,000 Microchip Technology, Inc....................... 3,787,500
200,000 Micron Technology, Inc.......................... 12,400,000
* 75,000 Micros System, Inc.............................. 2,231,250
125,000 Netmanage, Inc.................................. 4,531,250
* 200,000 Network Equipment Technologies.................. 5,075,000
* 150,000 Network General Corp............................ 3,993,750
* 17,000 Oak Technology, Inc............................. 350,625
* 55,000 Optical Data Systems, Inc....................... 1,485,000
</TABLE>
F-21
<PAGE> 49
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Market Value
................................................................................
<S> <C> <C>
* 25,000 Shiva Corp.................................... $ 812,500
* 150,000 Sierra Semiconductor Corp..................... 3,412,500
* 250,000 Silicon Graphics, Inc......................... 8,656,250
* 200,000 Softkey International, Inc.................... 5,100,000
* 150,000 Sterling Software, Inc........................ 5,418,750
* 100,000 Stratacom, Inc................................ 3,700,000
* 350,000 Tellabs, Inc.................................. 18,200,000
* 150,000 Tencor Instruments............................ 7,143,750
* 100,000 Teradyne, Inc................................. 3,637,500
* 10,500 TGV Software, Inc............................. 168,000
* 125,000 Ultratech Stepper, Inc........................ 5,687,500
175,000 Vishav Intertechnology, Inc................... 9,450,000
100,000 Watkins-Johnson Co............................ 3,650,000
----------------
TOTAL TECHNOLOGY......................... 266,879,518
----------------
TRANSPORTATION 1.7%
* 75,000 Landstar Systems, Inc......................... 2,700,000
125,000 Pittston Company Services Group............... 3,125,000
* 150,000 Swift Transportation, Inc..................... 3,487,500
200,000 TNT Freightways Corp.......................... 5,500,000
* 75,000 Wisconsin Central Transportation Corp......... 3,412,500
----------------
TOTAL TRANSPORTATION..................... 18,225,000
----------------
UTILITIES 2.3%
* 125,000 ALC Communications Corp....................... 3,687,500
150,000 Century Telephone Enterprises, Inc............ 4,668,750
* 250,000 LCI International, Inc........................ 5,500,000
* 50,000 Nationwide Cellular Services, Inc............. 900,000
* 200,000 Paging Network, Inc........................... 6,650,000
75,000 Telephone & Data Systems, Inc................. 3,421,875
----------------
TOTAL UTILITIES.......................... 24,828,125
----------------
TOTAL COMMON STOCK (Cost $731,847,078)... 871,364,310
----------------
CONVERTIBLE PREFERRED STOCK 0.3%
* 70,000 Cellular Communications, Inc. (Cost
$2,570,000)................................... 3,552,500
----------------
</TABLE>
F-22
<PAGE> 50
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
................................................................................
<S> <C> <C>
SHORT-TERM INVESTMENTS 19.2%
# 23,000,000 Federal Home Loan Mortgage Association, 5.85%
to 6.07%, 3/17/95 to 5/2/95.................. $ 22,860,910
Federal National Mortgage Association, 5.87%
# 66,185,000 to 6.04%, 3/15/95 to 5/24/95................. 65,515,349
General Electric Capital Corp., 6.00%,
50,000,000 3/1/95....................................... 49,991,667
64,490,000 Repurchase Agreement with Salomon Brothers,
Inc., dated 2/28/95, 6.10%, due 3/1/95
(collateralized by U.S. Government
obligations in a pooled cash account)
repurchase proceeds $64,500,927.............. 64,490,000
United States Treasury Bills, 5.72% to 5.83%,
# 5,000,000 4/13/95 to 5/4/95............................ 4,955,163
----------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $207,805,859)....................... 207,813,089
----------------
TOTAL INVESTMENTS 99.8% (Cost $942,222,937)................. 1,082,729,899
Other Assets and Liabilities, net 0.2%...................... 1,689,712
----------------
NET ASSETS 100%............................................. $ 1,084,419,611
================
</TABLE>
*Non-income producing security.
#A portion of this security, with a market value of approximately $59.9 mil-
lion, was maintained in a segregated account and placed as collateral for
futures contracts (See Note IC).
F-23
<PAGE> 51
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $942,222,937)............ $ 1,082,729,899
Cash........................................................ 4,449
Receivable for Fund shares sold............................. 23,282,932
Receivable for investments sold............................. 17,467,773
Dividends receivable........................................ 546,052
Receivable from broker-variation margin..................... 441,000
Other assets................................................ 42,009
----------------
Total Assets............................................... 1,124,514,114
----------------
LIABILITIES
Payable for investments purchased........................... 35,677,754
Payable for Fund shares redeemed............................ 2,806,126
Due to Distributor.......................................... 589,021
Due to Adviser.............................................. 458,584
Due to shareholder service agent............................ 387,405
Deferred directors' compensation............................ 70,228
Accrued expenses............................................ 105,385
----------------
Total Liabilities.......................................... 40,094,503
----------------
NET ASSETS, equivalent to $24.34 per share for Class A
shares, $23.71 per share for Class B shares and $24.00 per
share for Class C shares................................... $ 1,084,419,611
================
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 30,384,542 Class A, 13,325,091 Class
B and 1,211,711 Class C shares outstanding................. $ 449,213
Capital surplus............................................. 913,243,616
Undistributed net realized gain on securities............... 28,035,921
Net unrealized appreciation of securities
Investments................................................ 140,506,962
Futures contracts.......................................... 2,438,938
Accumulated net investment loss............................. (255,039)
----------------
NET ASSETS at February 28, 1995............................. $ 1,084,419,611
================
</TABLE>
F-24
<PAGE> 52
STATEMENT OF OPERATIONS
Six Months Ended February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest.................................................... $ 3,755,983
Dividends................................................... 3,128,660
----------------
Investment income.......................................... 6,884,643
----------------
EXPENSES
Management Fees............................................. 2,588,587
Shareholder service agent's fees and expenses............... 1,961,170
Service fees--Class A....................................... 664,218
Distribution and service fees--Class B...................... 1,372,369
Distribution and service fees--Class C...................... 128,909
Reports to shareholders..................................... 165,069
Accounting services......................................... 74,751
Directors' fees and expenses................................ 28,508
Custodian fees.............................................. 19,069
Audit fees.................................................. 17,500
Registration and filing fees................................ 7,765
Legal fees.................................................. 7,702
Miscellaneous............................................... 34,721
----------------
Total expenses............................................. 7,070,338
----------------
NET INVESTMENT LOSS......................................... (185,695)
================
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on investments............................ 49,652,530
Net realized loss on futures contracts...................... (715,275)
Net unrealized depreciation of investments during the
period...................................................... (22,478,064)
Net unrealized appreciation of futures contracts during the
period...................................................... 1,621,750
----------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.............. 28,080,941
================
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $ 27,895,246
================
</TABLE>
F-25
<PAGE> 53
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
February 28, 1995 August 31, 1994
................................................................................
<S> <C> <C>
NET ASSETS, beginning of period............ $ 954,412,776 $593,737,150
-------------- ------------
Operations
Net investment loss....................... (185,695) (3,699,373)
Net realized gain on securities........... 48,937,255 25,654,512
Net unrealized depreciation of securities
during the period........................ (20,856,314) (43,151,364)
-------------- ------------
Increase (decrease) in net assets
resulting from operations................ 27,895,246 (21,196,225)
-------------- ------------
Distributions to shareholders from net
realized gain on securities:
Class A................................... (17,525,839) (34,197,716)
Class B................................... (7,311,642) (7,449,021)
Class C................................... (662,369) (402,667)
-------------- ------------
(25,499,850) (42,049,404)
-------------- ------------
Fund share transactions
Proceeds from shares sold
Class A................................... 448,382,552 747,070,310
Class B................................... 78,411,897 218,458,300
Class C................................... 10,758,664 26,549,184
-------------- ------------
537,553,113 992,077,794
-------------- ------------
Proceeds from shares issued for
distributions reinvested
Class A................................... 16,358,362 31,162,468
Class B................................... 6,692,349 6,869,825
Class C................................... 555,536 339,541
-------------- ------------
23,606,247 38,371,834
-------------- ------------
Cost of shares redeemed
Class A................................... (404,903,625) (571,657,960)
Class B................................... (21,968,659) (32,231,372)
Class C................................... (6,675,637) (2,639,041)
-------------- ------------
(433,547,921) (606,528,373)
-------------- ------------
INCREASE IN NET ASSETS RESULTING FROM FUND
SHARE TRANSACTIONS........................ 127,611,439 423,921,255
-------------- ------------
INCREASE IN NET ASSETS..................... 130,006,835 360,675,626
-------------- ------------
NET ASSETS, end of period.................. $1,084,419,611 $954,412,776
============== ============
</TABLE>
F-26
<PAGE> 54
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Six Months
Ended Year Ended August 31
February 28, --------------------------------------------
1995 1994 1993 1992(1) 1991 1990
......................................................................................
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PER-
FORMANCE
Net asset value,
beginning of period.... $24.37 $26.46 $ 19.03 $ 20.06 $14.44 $15.19
------ ------ ------- ------- ------ ------
Income from investment
operations
Investment income...... .13 .33 .15 .195 .23 .29
Expenses............... (.11) (.44) (.20) (.21) (.195) (.185)
------ ------ ------- ------- ------ ------
Net investment income
(loss)................. .02 (.11) (.05) (.015) .035 .105
Net realized and
unrealized gain or loss
on securities.......... .57 (.32) 8.6375 .9275 6.035 (.60)
------ ------ ------- ------- ------ ------
Total from investment
operations............. .59 (.43) 8.5875 .9125 6.07 (.495)
------ ------ ------- ------- ------ ------
Less Distributions
Dividends from net
investment income..... -- -- -- (.0325) (.0775) (.255)
Distributions from net
realized gains on
securities............ (.62) (1.66) (1.1575) (1.91) (.3725) --
------ ------ ------- ------- ------ ------
Total distributions..... (.62) (1.66) (1.1575) (1.9425) (.45) (.255)
------ ------ ------- ------- ------ ------
Net asset value, end of
period................. $24.34 $24.37 $ 26.46 $ 19.03 $20.06 $14.44
====== ====== ======= ======= ====== ======
TOTAL RETURN(2)......... 2.56% (1.67%) 46.73% 4.28% 43.30% (3.27%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the
period (millions)...... $739.4 $677.1 $ 517.8 $ 312.3 $283.6 $206.6
Average net assets
millions).............. $679.1 $599.4 $ 405.2 $ 320.6 $235.8 $209.9
Ratios to average net
assets:
Expenses............... 1.20%(3) 1.18% 1.10% 1.04% 1.14% 1.15%
Net investment income
(loss)................ .21%(3) (.30%) (.27%) (.08%) .21% .65%
Portfolio turnover rate. 53% 64% 47% 61% 69% 47%
</TABLE>
(1) Based on average month-end shares outstanding
(2) Total return for a period of less than one full year is not annualized.
Total return does not consider the effect of sales charges.
(3) Annualized.
F-27
<PAGE> 55
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------------- -----------------------------------------
April 28, July 6,
Six Months Year Ended 1992(1) Six Months 1993(1)
Ended August 31 through Ended Year Ended through
February 28, ---------------- August 31, February 28, August 31, August 31,
1995 1994 1993(2) 1992(2) 1995 1994(2) 1993(2)
........................................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period..... $23.86 $26.14 $18.98 $19.66 $24.14 $26.42 $25.07
------ ------ ------- ------ ------ ------ ------
Income from investment
operations
Investment income....... .08 .24 .19 .08 .11 .24 .03
Expenses................ (.12) (.51) (.435) (.145) (.16) (.49) (.075)
------ ------ ------- ------ ------ ------ ------
Net investment loss...... (.04) (.27) (.245) (.065) (.05) (.25) (.045)
Net realized and
unrealized gain or loss
on securities........... .51 (.35) 8.5625 (.615) .53 (.37) 1.395
------ ------ ------- ------ ------ ------ ------
Total from investment
operations.............. .47 (.62) 8.3175 (.68) .48 (.62) 1.35
------ ------ ------- ------ ------ ------ ------
Distributions from net
realized gains on
securities.............. (.62) (1.66) (1.1575) -- (.62) (1.66) --
------ ------ ------- ------ ------ ------ ------
Net asset value, end of
period.................. $23.71 $23.86 $26.14 $18.98 $24.00 $24.14 $26.42
====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(3)......... 2.15% (2.46%) 45.41% (3.51%) 2.17% (2.46%) 5.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the
period (millions)....... $315.9 $252.9 $74.5 $5.2 $29.1 $24.5 $1.4
Average net assets
(millions).............. $274.5 $163.1 $28.4 $2.8 $25.8 $12.8 $0.5
Ratios to average net
assets
Expenses................ 2.02%(4) 2.01% 1.89% 1.86%(4) 2.02%(4) 2.02% 2.31%(4)
Net investment loss..... (.60%)(4) (1.07%) (1.07%) (.80%)(4) (.60%)(4) (1.04%) (1.37%)(4)
Portfolio turnover rate.. 53% 64% 47% 61% 53% 64% 47%
</TABLE>
(1) Commencement of offering of sales
(2) Based on average month-end shares outstanding
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Annualized
F-28
<PAGE> 56
NOTES TO FINANCIAL STATEMENTS
February 28, 1995 (Unaudited)
--------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
American Capital Emerging Growth Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified open-end man-
agement investment company. The following is a summary of significant account-
ing policies consistently followed by the Fund in the preparation of its
financial statements.
A. INVESTMENT VALUATIONS-Securities listed or traded on a national securities
exchange are valued at the last sale price. Unlisted and listed securities for
which the last sale price is not available are valued at the mean between the
last reported bid and asked prices. Short-term investments with a maturity of 60
days or less when purchased are valued at amortized cost, which approximates
market value. Short-term invest- ments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days to
maturity becomes less than 61 days. From such time, until maturity, the
investments are valued at amortized costs.
B. REPURCHASE AGREEMENTS-A repurchase agreement is a short-term investment in
which the Fund acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund may in-
vest independently in repurchase agreements, or transfer uninvested cash bal-
ances into a pooled cash account along with other investment companies advised
or sub-advised by Van Kampen American Capital Asset Management, Inc. (the "Ad-
viser"), the daily aggregate of which is invested in repurchase agreements. Re-
purchase agreements are collateralized by the underlying debt security. The Fund
makes payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller is re-
quired to maintain the value of the underlying security at not less than the
repurchase proceeds due the Fund.
C. FUTURES CONTRACTS-Transactions in futures contracts are utilized in strate-
gies 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 mar-
ket price of investments. There is also a risk that the market movement of such
instruments may not be in the direction forecasted. Note 3--Investment Activity
contains additional information.
Upon entering into futures contracts, the Fund maintains, in a segregated ac-
count with its custodian, securities with a value equal to its obligation under
the futures contracts. A portion of these funds is held as collateral in an ac-
count in the name of the broker, the Fund's agent in acquiring the futures po-
sition. 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
F-29
<PAGE> 57
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1995 (Unaudited)
-------------------------------------------------------------------------------
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.
D. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized gains on investments to its shareholders.
The Fund had a net realized capital loss carryforward for federal income tax
purposes of approximately $2.8 million at August 31, 1994, which may be uti-
lized to offset current or future capital gains until expiration in 1995.
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment trans-
actions are accounted for on the trade date. Realized gains and losses on in-
vestments are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily.
F. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to shareholders are
recorded on the record date. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code,
which may result in dividends or distributions in excess of financial state-
ment earnings.
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 .575% of the first $350 million, .525% of the next $350 million, .475% of
the next $350 million and .425% of the 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 allo-
cated among investment companies advised or sub-advised by the Adviser. For
the period ended February 28, 1995, these charges included $10,105 as the
Fund's share of the employee costs attributable to the Fund's accounting offi-
cers. 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 Ad-
viser are at cost.
F-30
<PAGE> 58
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1995 (Unaudited)
-------------------------------------------------------------------------------
ACCESS Investor Services, an affiliate of the Adviser, serves as the Fund's
shareholder service agent. These services are provided at cost plus a profit.
For the period ended February 28, 1995, the fees for such services were
$1,613,175.
The Fund has been advised that Van Kampen American Capital Distributors,
Inc. (the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"),
both affiliates of the Adviser, received $38,774 and $10,839, respectively, as
their portion of the commissions on sales of Fund shares during the period.
Under the Distribution Plans, the Fund pays up to .25% per annum of its av-
erage daily net assets to the Distributor for expenses and service fees in-
curred. Class B shares and Class C shares pay an additional fee of up to .75%
per annum of their average net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distribu-
tor for Class B shares and Class C shares may exceed the amounts reimbursed to
the Distributor by the Fund. At February 28, 1995, the unreimbursed expenses
incurred by the Distributor under the Class B plan and Class C plan aggregated
approximately $11.9 million and $344,000, respectively, and may be carried
forward and reimbursed through either the collection of the contingent de-
ferred sales charges from share redemptions or, subject to the annual renewal
of the plans, future Fund reimbursements of distribution fees.
During the period, the Fund paid brokerage commissions of $31,593 to a com-
pany which was deemed an affiliate of the Adviser's parent because it owned
more than 5% of the Company's outstanding voting securities. As of December
20, 1994, the company was no longer considered an affiliate.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments were $453,903,795 and $446,497,624,
respectively.
At February 28, 1995, the Fund held 245 long Standard & Poor's 500 Index
futures contracts expiring in March 1995. The market value of such contracts
was $59,847,375 and the unrealized appreciation was $2,438,938.
For federal income tax purposes, the identified cost of investments owned at
February 28, 1995 was the same as for financial reporting purposes. Gross
unrealized appreciation of investments aggregated $153,521,347 and gross
unrealized depreciation aggregated $13,014,385.
F-31
<PAGE> 59
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1995 (Unaudited)
-------------------------------------------------------------------------------
NOTE 4--DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $2,300 plus a fee of $60 per day for Board and Com-
mittee meetings attended. The Chairman receives additional fees from the Fund
at the annual rate of $860. During the period, such fees aggregated $15,342.
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. 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.
NOTE 5--CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred ba-
sis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
F-32
<PAGE> 60
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1995 (Unaudited)
-------------------------------------------------------------------------------
The Fund has 200 million shares of each class of $.01 par value capital
stock authorized. Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
FEBRUARY 28, AUGUST 31,
1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A............................................. 18,841,582 29,869,198
Class B............................................. 3,370,381 8,777,044
Class C............................................. 456,764 1,054,495
----------- -----------
22,668,727 39,700,737
=========== ===========
Shares issued for distribution reinvested
Class A............................................. 720,562 1,268,167
Class B............................................. 302,145 284,112
Class C............................................. 24,777 13,881
----------- -----------
1,047,484 1,566,160
=========== ===========
Shares redeemed
Class A............................................. (16,954,701) (22,927,742)
Class B............................................. (946,895) (1,311,636)
Class C............................................. (284,388) (107,283)
----------- -----------
(18,185,984) (24,346,661)
----------- -----------
Increase in Fund shares outstanding.................. 5,530,227 16,920,236
=========== ===========
</TABLE>
F-33
