<PAGE> 1
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VAN KAMPEN AMERICAN CAPITAL
PACE FUND
- --------------------------------------------------------------------------------
Van Kampen American Capital Pace Fund (the "Fund") is a professionally
managed mutual fund. The investment objective of the Fund is growth of capital.
The Fund seeks to achieve its investment objective by investing in a portfolio
of securities consisting primarily of common stocks that the Fund's investment
adviser believes have an above average potential for capital growth. There is no
assurance that the Fund will achieve its investment objective.
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. This Prospectus sets forth certain information that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number is
(800) 421-5666.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR ANY STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION AND ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated October 28, 1996, containing
additional information about the Fund is hereby incorporated by reference in its
entirety into this Prospectus. A copy of the Statement of Additional Information
may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device For the Deaf at (800) 772-8889. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials at the
SEC's internet web site (http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL (SM)
------------------
THIS PROSPECTUS IS DATED OCTOBER 28, 1996.
<PAGE> 2
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary............................................... 3
Shareholder Transaction Expenses................................. 5
Annual Fund Operating Expenses and Example....................... 6
Financial Highlights............................................. 8
The Fund......................................................... 10
Investment Objective and Policies................................ 10
Investment Practices............................................. 10
Investment Advisory Services..................................... 16
Alternative Sales Arrangements................................... 18
Purchase of Shares............................................... 21
Shareholder Services............................................. 30
Redemption of Shares............................................. 35
Distribution and Service Plans................................... 38
Distributions from the Fund...................................... 40
Tax Status....................................................... 40
Fund Performance................................................. 44
Description of Shares of the Fund................................ 45
Additional Information........................................... 46
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
2
<PAGE> 3
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PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Pace Fund (the "Fund") is a diversified
open-end management investment company organized as a Delaware business trust.
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum subsequent investment for each class of shares (or less as described
under "Purchase of Shares").
INVESTMENT OBJECTIVE. The investment objective of the Fund is capital growth.
There is, however, no assurance that the Fund will be successful in achieving
its objective. See "Investment Objective and Policies."
INVESTMENT POLICY. The Fund invests primarily in common stocks of companies that
the Fund's investment adviser believes have an above average potential for
capital growth. The use of options, futures contracts and related options and
investments in foreign securities include risks other than those associated with
investment in common stocks. See "Investment Practices -- Using Options, Futures
Contracts and Related Options" and "Investment Practices -- Securities of
Foreign Issuers." The value of an investment in the Fund will vary based upon
fluctuations in the prices of common stocks and other securities in which the
Fund invests.
INVESTMENT RESULTS. The investment results of the Fund are shown in the table of
"Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to the
public, each with its own sales charge structure: Class A shares, Class B shares
and Class C shares. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class of shares that best
suits their circumstances and objectives. Each class of shares represents an
interest in the same portfolio of investments of the Fund. See "Alternative
Sales Arrangements." For information on redeeming shares see "Redemption of
Shares."
Class A Shares. Class A shares are offered at net asset value per share plus a
maximum initial sales charge of 5.75% of the offering price (6.10% of the net
amount invested), reduced on investments of $50,000 or more. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge ("CDSC") of 1.00% may be imposed on
redemptions made within one year of the purchase. Class A shares are subject to
an annual service fee of up to 0.25% of its average daily net assets
attributable to such class of shares. See "Purchase of Shares -- Class A Shares"
and "Distribution and Service Plans."
3
<PAGE> 4
Class B Shares. Class B shares are offered at net asset value per share and
are subject to a maximum CDSC of 5.00% of redemption proceeds on redemptions
made within the first year after purchase and declining thereafter to 0.00%
after the fifth year. See "Redemption of Shares." Class B shares are subject to
a combined annual distribution fee and service fee of up to 1.00% of the Fund's
average daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class B Shares" and "Distribution and Service Plans." Class B shares
convert automatically to Class A shares eight years after the end of the
calendar month in which the shareholder's order to purchase was accepted. See
"Alternative Sales Arrangements -- Conversion Feature."
Class C Shares. Class C shares are offered at net asset value per share and
are subject to a contingent deferred sales charge of 1.00% of redemption
proceeds on redemptions made within one year of purchase. See "Redemption of
Shares." Class C shares are subject to a combined annual distribution fee and
service fee of up to 1.00% of the Fund's average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class C Shares" and
"Distribution and Service Plans." Class C shares convert automatically to Class
A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
distributes the Fund's shares.
DISTRIBUTIONS FROM THE FUND. Dividends from net investment income and capital
gains, if any, are distributed annually. All dividends and distributions are
automatically reinvested in shares of the Fund at net asset value per share
(without sales charge), unless payment in cash is requested. See "Distributions
from the Fund."
The foregoing is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus.
4
<PAGE> 5
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SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- ----------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)............... 5.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering
price)........................ None None None
Deferred sales charge (as a
percentage of the lesser of
original purchase price or
redemption proceeds).......... None(2) Year 1--5.00% Year 1--1.00%
Year 2--4.00% After--None
Year 3--3.00%
Year 4--2.50%
Year 5--1.50%
After--None
Redemption fees (as a percentage
of amount redeemed)........... None None None
Exchange fee.................... None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a CDSC of 1.00% may be imposed on redemptions made
within one year of the purchase. See "Purchase of Shares -- Class A Shares."
5
<PAGE> 6
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ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- --------- ---------
<S> <C> <C> <C>
Management Fees (as a percentage of
average daily net assets)............. 0.46% 0.46% 0.46%
12b-1 Fees(1) (as a percentage of
average daily net assets)............. 0.21% 1.00%(2) 1.00%(2)
Other Expenses (as a percentage of
average daily net assets)............. 0.27% 0.29% 0.29%
Total Expenses (as a percentage of
average daily net assets)............. 0.94% 1.75% 1.75%
</TABLE>
- ------------------------------------------------------------------------------
(1) Class A shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
shares and Class C shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Distribution and Service Plans."
(2) Individual long-term shareholders may pay more than the economic equivalent
of the maximum front-end sales charges permitted as a Fund-level expense by
NASD Rules.
6
<PAGE> 7
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS
------ ------ ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 0.94% for
Class A shares, 1.75% for Class B shares
and 1.75% for Class C shares, (ii) a 5%
annual return and (iii) redemption at the
end of each time period:
Class A............................... $ 67 $ 86 $107 $166
Class B............................... $ 69 $ 88 $112 $185*
Class C............................... $ 28 $ 55 $ 95 $206
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each time
period:
Class A............................... $ 67 $ 86 $107 $166
Class B............................... $ 18 $ 55 $ 95 $185*
Class C............................... $ 18 $ 55 $ 95 $206
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A shares after eight years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required by the SEC to utilize a 5% annual return
assumption. Class B shares acquired through the exchange privilege are subject
to the deferred sales charge schedule relating to the Class B shares of the fund
from which the purchase of Class B shares was originally made. Accordingly,
future expenses as projected could be higher than those determined in the above
table if the investor's Class B shares were exchanged from a fund with a higher
CDSC. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Purchase of Shares," "Investment Advisory Services," "Redemption
of Shares" and "Distribution and Service Plans."
7
<PAGE> 8
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for a share of beneficial interest
outstanding throughout each of the periods indicated)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified and is included in
the Statement of Additional Information, which may be obtained by shareholders
without charge by calling the telephone number on the cover of this Prospectus.
This information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A(1)
-----------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30
-----------------------------------------------------------------------------------------------------------
1996('(3) 1995(3) 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of
period............. $ 11.62 $ 11.05 $ 12.95 $ 13.21 $ 12.37 $ 12.69 $ 12.72 $ 11.19 $ 14.47 $ 12.19
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM
OPERATIONS
Investment
income........... .23 .25 .26 .305 .335 .40 .465 .40 .36 .365
Expenses........... (.11) (.11) (.13) (.14) (.14) (.125) (.12) (.085) (.075) (.07)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment
income............. .12 .14 .13 .165 .195 .275 .345 .315 .285 .295
Net realized and
unrealized gain
(loss) on
securities......... 2.09 1.85 (.1475) 1.69 1.095 .1575 1.3188 1.55 (1.8787) 2.7275
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations......... 2.21 1.99 (.0175) 1.855 1.29 .4325 1.6638 1.865 (1.5937) 3.0225
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
FROM
Net investment
income........... (.15) (.1225) (.135) (.145) (.2375) (.29) (.3675) (.2875) (.4263) (.325)
Net realized gain
on securities.... (1.76) (1.2975) (1.7475) (1.97) (.2125) (.4625) (1.3263) (.0475) (1.26) (.4175)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
distributions...... (1.91) (1.42) (1.8825) (2.115) (.45) (.7525) (1.6938) (.335) (1.6863) (.7425)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end
of period.......... $ 11.92 $ 11.62 $ 11.05 $ 12.95 $ 13.21 $ 12.37 $ 12.69 $ 12.72 $ 11.19 $ 14.47
========== ========== ========== ========== ========== ========== ========== ========== ========== ==========
TOTAL RETURN(4)..... 20.48% 20.62% (.64%) 15.20% 10.58% 4.31% 13.69% 17.32% (11.92%) 26.53%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period
(millions)....... $2,534.3 $2,279.4 $2,152.5 $2,446.2 $2,350.2 $2,348.7 $2,456.8 $2,405.6 $2,487.5 $3,001.4
Ratios to average
net assets
Expenses........... .94% 1.04% 1.02% 1.06% 1.00% 1.01% .88% .72% .66% .60%
Expenses, without
expense
reimbursement.... .94%
Net investment
income........... 1.02% 1.24% .99% 1.22% 1.38% 2.22% 2.55% 2.58% 2.42% 2.51%
Net investment
income, without
expense
reimbursement.... 1.02%
Portfolio turnover
rate............... 213% 248% 112% 113% 54% 40% 39% 45% 62% 36%
Average commission
rate per equity
stock traded....... $0.055 NA NA NA NA NA NA NA NA NA
</TABLE>
(Table continued on following page)
8
<PAGE> 9
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B (3)
------------------------------------------------
YEAR ENDED JUNE 30
------------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............................... $ 11.53 $10.96 $12.86 $13.13
--------- --------- --------- ---------
INCOME FROM OPERATIONS
Investment income................................................. .23 .25 .25 .29
Expenses.......................................................... (.21) (.20) (.22) (.26)
--------- --------- --------- ---------
Net investment income.............................................. .02 .05 .03 .03
Net realized and unrealized gain (loss) on securities.............. 2.07 1.85 (.1575) 1.705
--------- --------- --------- ---------
Total from investment operations................................... 2.09 1.90 (.1275) 1.735
--------- --------- --------- ---------
LESS DISTRIBUTIONS FROM
Net investment income............................................. (.05) (.0325) (.025) (.035)
Net realized gain on securities................................... (1.76) (1.2975) (1.7475) (1.97)
--------- --------- --------- ---------
Total distributions................................................ (1.81) (1.33) (1.7725) (2.005)
--------- --------- --------- ---------
Net asset value, end of period..................................... $11.81 $11.53 $10.96 $12.86
========= ========= ========= =========
TOTAL RETURN(4).................................................... 19.44% 19.73% (1.46%) 12.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................... $72.1 $53.0 $35.8 $27.7
Ratios to average net assets (annualized)
Expenses.......................................................... 1.75% 1.84% 1.79% 1.98%
Expenses, without expense reimbursement........................... 1.75% NA NA NA
Net investment income............................................. .21% .44% .21% .25%
Net investment income, without expense reimbursement.............. .21% NA NA NA
Portfolio turnover rate............................................ 213% 248% 112% 113%
Average commission rate per equity stock traded.................... $0.055 NA NA NA
<CAPTION>
CLASS B (3) CLASS C (3)
------------- -------------------------------------
JANUARY 10, AUGUST 27,
1992 (2) YEAR 1993 (2)
THROUGH ENDED THROUGH
JUNE 30, JUNE 30, JUNE 30,
1992 1996 1995 1994
----------- ----------- -------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............................... $13.87 $11.52 $10.99 $13.25
----- ----------- -------- ----------
INCOME FROM OPERATIONS
Investment income................................................. .15 .23 .25 .17
Expenses.......................................................... (.10) (.21) (.20) (.15)
----- ----------- -------- ----------
Net investment income.............................................. .05 .02 .05 .02
Net realized and unrealized gain (loss) on securities.............. (.79) 2.10 1.81 (.4375)
----- ----------- -------- ----------
Total from investment operations................................... (.74) 2.12 1.86 (.4175)
----- ----------- -------- ----------
LESS DISTRIBUTIONS FROM
Net investment income............................................. -- (.05) (.0325) (.095)
Net realized gain on securities................................... -- (1.76) (1.2975) (1.7475)
----- ----------- -------- ----------
Total distributions................................................ -- (1.81) (1.33) (1.8425)
----- ----------- -------- ----------
Net asset value, end of period..................................... $13.13 $11.83 $11.52 $10.99
====== =========== ========= =========
TOTAL RETURN(4).................................................... (5.34%) 19.74% 19.27% (3.70%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................... $11.7 $4.5 $2.2 $1.2
Ratios to average net assets (annualized)
Expenses.......................................................... 1.82% 1.75% 1.84% 1.81%
Expenses, without expense reimbursement........................... NA 1.75% NA NA
Net investment income............................................. .56% .15% .44% .24%
Net investment income, without expense reimbursement.............. NA .15% NA NA
Portfolio turnover rate............................................ 54% 213% 248% 112%
Average commission rate per equity stock traded.................... NA $0.055 NA NA
</TABLE>
- ------------
(1) Per share information for the years 1990 through 1987 has been adjusted to
reflect a 2 for 1 stock split effective June 8, 1990.
(2) Commencement of offering of sales.
(3) Based on average shares outstanding.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
9
<PAGE> 10
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. A mutual fund provides, for those who have similar
investment goals, a practical and convenient way to invest in a diversified
portfolio of securities by combining their resources in an effort to achieve
such goals.
Van Kampen American Capital Asset Management, Inc. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The investment objective of the Fund is capital growth. The Fund seeks to
achieve its investment objective by investing in a portfolio of securities
consisting primarily of common stocks believed by the Adviser to have an above
average potential for capital growth. Any income received on such securities is
incidental to achieving the Fund's investment objective of growth. The value of
an investment in the Fund will vary based upon fluctuations in the prices of the
common stocks and other securities in which the Fund invests. The Fund may
invest in securities that have above average volatility of price movement. The
Fund attempts to reduce overall exposure to risk from declines in securities
prices by spreading its investments over many different companies in a variety
of industries. There is, however, no assurance that the Fund will be successful
in achieving its investment objective.
The Fund generally holds a portion of its assets in investment grade
short-term debt securities and investment grade corporate or government bonds in
order to provide liquidity. The Fund may invest up to 100% of its assets in high
quality debt securities for temporary defensive purposes. Short-term investments
may include repurchase agreements with domestic banks or broker-dealers. The
Fund also may invest up to 15% of its total assets in securities of foreign
issuers and may invest in investment companies.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. The Fund will not invest in
repurchase agreements
10
<PAGE> 11
maturing in more than seven days if any such investment, together with any other
illiquid securities held by the Fund, exceeds 10% of the value of its net
assets. The Fund may invest up to 25% of its assets in repurchase agreements but
will not invest in repurchase agreements maturing in more than seven days if any
such investment, together with any other illiquid securities held by the Fund,
would exceed 10% of the value of its net assets. In the event of a bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying securities and losses including: (a) a
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (b) a possible lack of access to
income on the underlying security during this period; and (c) expenses of
enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that funds advised or subadvised by the Adviser would
otherwise invest separately into a joint account. The cash in the joint account
is then invested in repurchase agreements and the funds that contributed to the
joint account share pro rata in the net revenue generated. The Adviser believes
that the joint account produces efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in an SEC exemptive order
authorizing this practice, which conditions are designed to ensure the fair
administration of the joint account and to protect the amounts in that account.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 15% of the value of
its total assets in securities of foreign governments and companies. Such
investments may be subject to special risks, including changes in currency
exchange rates, future political and economic developments, the possible
imposition of additional withholding taxes on dividend or interest income
payable on the securities, or the seizure or nationalization of companies, or
establishment of exchange controls or adoption of other restrictions which might
adversely affect the investment.
The Fund may purchase foreign securities in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other securities
representing underlying shares of foreign companies. ADRs are publicly traded on
exchanges or over-the-counter in the United States and are issued through
"sponsored" or "unsponsored" arrangements. In a sponsored ADR arrangement, the
foreign issuer assumes the obligation to pay some or all of the depositary's
transaction fees, whereas under an unsponsored arrangement, the foreign issuer
assumes no obligation and the depositary's transaction fees are paid by the ADR
holders. In addition, less information is available in the United States about
an unsponsored ADR than about a sponsored ADR and the financial information
about a company may not be as reliable for an unsponsored ADR as it is for a
11
<PAGE> 12
sponsored ADR. The Fund may invest in ADRs through both sponsored and
unsponsored arrangements.
USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The Fund expects to
utilize futures contracts and options thereon in several different ways,
depending upon the status of the Fund's portfolio and the Adviser's expectations
concerning the securities markets.
In times of stable or rising stock prices, the Fund generally seeks to be
fully invested in the stock market. Even when the Fund is fully invested,
however, prudent management requires that at least a small portion of assets be
available as cash to honor redemption requests and for other short-term needs.
The Fund also may have cash on hand that has not yet been invested. The portion
of the Fund's assets that is invested in cash equivalents does not fluctuate
with stock market prices, so that, in times of rising market prices, the Fund
may underperform the market in proportion to the amount of cash equivalents in
its portfolio. By purchasing stock index futures contracts, however, the Fund
can seek to "equitize" the cash portion of its assets and may obtain performance
equivalent to investing 100% of its assets in equity securities.
If the Adviser anticipates a market decline, the Fund may take a defensive
position, reducing its exposure to the stock market by increasing its cash
position. By selling stock index futures contracts instead of portfolio
securities, a similar result may be achieved to the extent that the performance
of the stock index futures contracts correlates to the performance of the Fund's
portfolio securities. Sales of futures contracts frequently may be accomplished
more rapidly and at less cost than the actual sale of securities. Once the
desired hedged position has been effected, the Fund could then liquidate
securities in a more deliberate manner, reducing its futures position
simultaneously to maintain the desired balance, or it could maintain the hedged
position.
As an alternative to selling stock index futures contracts, the Fund can
purchase stock index puts, or stock index futures puts, to hedge the portfolio's
risk in a declining market. Since the value of a put increases as the index
declines below a specified level, the portfolio's value is protected against a
market decline to the degree the performance of the index correlates with the
performance of the Fund's investment portfolio. If the market remains stable or
advances, the Fund can refrain from exercising the put and its portfolio will
participate in the advance, having incurred only the premium cost for the put.
In certain cases the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed with greater ease and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities.
12
<PAGE> 13
Potential Risks of Options, Futures Contracts and Related Options. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in underlying securities. While
utilization of options, futures contracts and similar instruments may be
advantageous to the Fund, if the Adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance will be
worse than if the Fund did not make such investments. In addition, the Fund
would pay commissions and other costs in connection with such investments, which
may increase the Fund's expenses and reduce its return.
The Fund is authorized to purchase and sell over-the-counter options ("OTC
Options"). OTC Options are purchased from or sold to securities dealers,
financial institutions of other parties ("Counterparties") through direct
bilateral agreement with the Counterparty. The Fund will sell only OTC Options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require to the Counterparty to sell the option back to
the Fund at a formula price within seven days. The staff of the SEC currently
takes the position that, in general, OTC Options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities covering
OTC Options sold by the Fund, are illiquid securities subject to the Fund's
limitation on investing no more than 10% of its assets in illiquid securities.
In order to prevent leverage in connection with the purchase of futures
contracts or call options thereon by the Fund, an amount of cash, cash
equivalents or liquid high grade debt securities equal to the market value of
the obligation under the futures contracts or options (less any related margin
deposits) will be maintained in a segregated account with the Custodian. The
Fund may not invest more than 10% of its net assets in illiquid securities and
repurchase agreements which have a maturity of longer than seven days. A more
complete discussion of the potential risks involved in transactions in options
or futures contracts and related options is contained in the Statement of
Additional Information.
PORTFOLIO TURNOVER. The Fund purchases securities which are believed by the
Adviser to have above average potential for capital growth. Common stocks are
disposed of in situations where it is believed that potential for such
appreciation has lessened or that other common stocks have a greater potential
for capital growth. Therefore, the Fund may purchase and sell securities without
regard to the length of time the security is to be, or has been, held. The
Fund's annual portfolio turnover rate is shown in the table of "Financial
Highlights." The rate may exceed 100%, which is higher than that of many other
investment companies. A 100% turnover rate occurs, for example, if all the
Fund's portfolio securities are replaced during one year. A high portfolio
turnover rate increases the Fund's transaction costs, including brokerage
commissions. A high portfolio turnover rate may result in the realization of
more capital gains taxes than if the Fund had a lower portfolio turnover rate.
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<PAGE> 14
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution services rendered
on a continuing basis. The Adviser is authorized to place portfolio transactions
with brokerage firms participating in the distribution of shares of the Fund and
other Van Kampen American Capital mutual funds if it reasonably believes that
the quality of the execution and the commission are comparable to that available
from other qualified brokerage firms. The Adviser is authorized to pay higher
commissions to brokerage firms that provide it with investment and research
information than to firms which do not provide such services if the Adviser
determines that such commissions are reasonable in relation to the overall
services provided. The information received may be used by the Adviser in
managing the assets of other advisory accounts as well as in the management of
the assets of the Fund.
INVESTMENT IN INVESTMENT COMPANIES. The Fund may invest in one or more
investment companies advised by the Adviser and its affiliates, including Van
Kampen American Capital Small Capitalization Fund ("Small Cap Fund") and Van
Kampen American Capital Foreign Securities Fund ("Foreign Securities Fund"). The
shares of the Small Cap Fund and Foreign Securities Fund are available only to
investment companies advised by the Adviser. The Adviser believes that the use
of the Small Cap Fund and Foreign Securities Fund may, from time to time,
provide the Fund with the most effective exposure to the performance of the
small capitalization sector of the stock market and to foreign securities while
at the same time minimizing costs. The Adviser charges no advisory fee for
managing the Small Cap Fund or the Foreign Securities Fund, nor are there any
sales load or other charges associated with distribution of their shares. Other
expenses incurred by the Small Cap Fund and Foreign Securities Fund are borne by
them, and thus indirectly by the Van Kampen American Capital funds that invest
in them. With respect to such other expenses, the Adviser anticipates that the
efficiencies resulting from use of the Small Cap Fund and Foreign Securities
Fund will result in cost savings for the Fund and other Van Kampen American
Capital funds that will fully or partially offset such expenses. In large part,
these savings are attributable to the fact that administrative actions that
would have to be performed multiple times if each Van Kampen American Capital
fund held its own portfolio of small capitalization or foreign stocks will need
to be performed only once. The Adviser expects that the Small Cap Fund and
Foreign Securities Fund will experience trading costs that will be substantially
less than the trading costs that would be incurred if small capitalization or
foreign stocks were purchased separately for the Fund and other Van Kampen
American Capital funds. The Fund's investments in the Small Cap Fund and the
Foreign Securities Fund are subject to the terms and conditions set forth in SEC
exemptive orders authorizing such investments.
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<PAGE> 15
The securities of small and medium sized companies that the Small Cap Fund may
invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies. Risks associated with investing
in foreign securities are described under "Investment Practices -- Securities of
Foreign Issuers."
The Fund will be deemed to own a pro rata portion of each investment of the
Small Cap Fund and the Foreign Securities Fund. For example, if the Fund's
investment in the Small Cap Fund were $10 million, and the Small Cap Fund had 5%
of its assets invested in the electronics industry, the Fund would be considered
to have an investment of $500,000 in the electronics industry.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority vote (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the outstanding shares of the Fund. These restrictions provide,
among other things, that the Fund may not:
1. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except the United States government) or
purchase more than 10% of the outstanding voting securities of any one
issuer. Neither limitation shall apply to the acquisition of shares of
other open-ended investment companies to the extent permitted by rule or
order of the SEC exempting the Fund from the limitations imposed by
Section 12(d)(1) of the 1940 Act;
2. Pledge any of its assets, except that the Fund may pledge assets having a
value of not more than 10% of its total assets in order to secure
permitted borrowings from banks. Such borrowings may not exceed 5% of the
value of the Fund's assets and can be made only as a temporary measure for
extraordinary or emergency purposes. Notwithstanding the foregoing, the
Fund may engage in transactions in options, futures contracts or related
options, segregate or deposit assets to cover or secure options written
and make margin deposits and payments for futures contracts and related
options;
3. Invest more than 10% of its net assets (determined at the time of
investment) in illiquid securities, securities for which market quotations
are not readily available, and repurchase agreements which have a maturity
of longer than seven days; or
15
<PAGE> 16
4. Invest in real estate (although the Fund may acquire securities of issuers
that invest in real estate), commodities or commodity contracts, except
that the Fund may enter into transactions in futures contracts or related
options.
In addition to the foregoing, the Fund has adopted additional investment
restrictions which may be changed by the Trustees without a vote of
shareholders. These restrictions provide that the Fund may not:
1. Invest more than 5% of its assets in the securities of any one issuer
other than the United States government except that it may acquire shares
of other open-end investment companies to the extent permitted by rule or
order of the SEC exempting the Fund from the limitations imposed by
Section 12(d)(1) of the 1940 Act;
2. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 15% of the value of the Fund's total assets would
be invested in such securities. Foreign investments may be subject to
special risks, including future political and economic developments, the
possible imposition of additional withholding taxes on dividend or
interest income payable on the securities, or the seizure or
nationalization of companies, or establishment of exchange controls or
adoption of other restrictions which might adversely affect the
investment; or
3. Invest more than 5% of its assets in companies having a record, together
with predecessors, of less than three years continuous operation and in
securities not having readily available market quotations provided,
however, that this limitation excludes shares of other open-end investment
companies owned by the Fund but includes the Fund's pro rata portion of
the securities and other assets owned by any such company.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $57 billion under management or supervision. Van Kampen American Capital's
more than 40 open-end and 38 closed-end funds and more than 2,800 unit
investment trusts are professionally distributed by leading financial advisers
nationwide. Van Kampen American Capital Distributors, Inc., the distributor of
the Fund and the sponsor of the funds mentioned above, is also a wholly-owned
subsidiary of Van Kampen American Capital.
Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. VK/AC Holding, Inc. is controlled, through the ownership of a substantial
16
<PAGE> 17
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The General Partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 6% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 12% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.
ADVISORY AGREEMENTS. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed on average daily net assets of the Fund at the annual rate of 0.50% on
the first $1 billion of net assets; 0.45% on the next $1 billion of net assets;
0.40% on the next $1 billion of net assets and 0.35% on net assets in excess of
$3 billion. Under the Advisory Agreement, the Fund also reimburses the Adviser
for the cost of the Fund's accounting services, which include maintaining its
financial books and records and calculating its daily net asset value. Operating
expenses paid by the Fund include shareholder service agency fees, distribution
fees, service fees, custodian fees, legal and accounting fees, the costs of
reports and proxies to shareholders, trustees' fees, and all other business
expenses not specifically assumed by the Adviser. Advisory (management) fee and
total operating expense ratios are shown under the caption "Annual Fund
Operating Expenses and Example" herein.
From time to time, as the Adviser or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Group.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain
17
<PAGE> 18
restrictions. Persons with access to certain sensitive information are subject
to pre-clearance and other procedures designed to prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Stephen Boyd is primarily responsible for the day-to-day
management of the Fund's investment portfolio and has been since July 11, 1994.
Mr. Boyd is Vice President of the Fund and Senior Investment Vice
President -- Portfolio Manager of the Adviser. Mr. Boyd was formerly Investment
Vice President of the Adviser from May 1989 to July 1990.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 5.75% of the offering price (6.10% of the net
amount invested), reduced on investments of $50,000 or more. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a CDSC of 1.00% may be imposed on certain redemptions made within one year of
the purchase. Class A shares are subject to an ongoing service fee at an annual
rate of up to 0.25% of the Fund's aggregate average daily net assets
attributable to the Class A shares. Certain purchases of Class A shares qualify
for a reduced initial sales charge. See "Purchase of Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within five years of purchase. Class B
shares are subject to an ongoing service fee at an annual rate of up to 0.25% of
the Fund's aggregate average daily net assets attributable to the Class B shares
and an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class B shares. Class B
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
B shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. Class B shares automatically
convert to Class A shares eight years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Purchase of
Shares -- Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Funds's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit
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<PAGE> 19
of permitting all of the investor's dollars to work from the time the investment
is made. The ongoing distribution fee paid by Class C shares will cause such
shares to have a higher expense ratio and to pay lower dividends than those
related to Class A shares. Class C shares automatically convert to Class A
shares ten years after the end of the calendar month in which the shareholder's
order to purchase was accepted. See "Purchase of Shares -- Class C Shares."
CONVERSION FEATURE. Class B shares and Class C shares automatically convert to
Class A shares eight years or ten years, respectively, after the end of the
calendar month in which the shares were purchased and thereafter are not subject
to the higher aggregate distribution and service fees applicable to Class B
shares and Class C shares. Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. The purpose of the conversion feature is to relieve the holders of
the Class B shares and Class C shares that have been outstanding for a period of
time sufficient for the Distributor to have been substantially compensated for
distribution expenses related to the Class B shares or Class C shares as the
case may be from the burden of the ongoing distribution fee.
For purposes of conversion to Class A shares, Class B shares and Class C
shares purchased through the reinvestment of dividends and distributions are
considered to be held in a separate sub-account. Each time any Class B shares or
Class C shares in the shareholder's Fund account (other than those in the
sub-account) convert to Class A shares, an equal pro rata portion of the Class B
shares or Class C shares in the sub-account also will convert to Class A shares.
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the conversion
of shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending eight years or ten years, respectively, after the end of the calendar
month in which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and CDSC on Class B shares of Class C shares
prior to conversion would be less than the initial sales charge on Class A
shares
19
<PAGE> 20
purchased at the same time, and to what extent such differential would be offset
by the higher dividends per share on Class A shares. To assist investors in
making this determination, the table under the caption "Annual Fund Operating
Expenses and Example" sets forth examples of the charges applicable to each
class of shares. In this regard, Class A shares may be more beneficial to the
investor who qualifies for reduced initial sales charges or purchases at net
asset value. It is presently the policy of the Distributor not to accept any
order of $500,000 or more for Class B shares or any order of $1 million or more
for Class C shares as it ordinarily would be more beneficial for such an
investor to purchase Class A shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to a CDSC. Ongoing distribution fees on Class B shares and
Class C shares are offset to the extent of the additional funds originally
invested and any return realized on those funds. However, there can be no
assurance as to the return, if any, which will be realized on such additional
funds. For investments held for ten years or more, the relative value upon
liquidation of the three classes tends to favor Class A shares or Class B
shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges or have a longer-term investment horizon.
Class B shares may be appropriate for investors who wish to avoid a front-end
sales charge, put 100% of their investment dollars to work immediately, or have
a longer-term investment horizon. Class C shares may be appropriate for
investors who wish to avoid a front-end sales charge, put 100% of their
investment dollars to work immediately, have a shorter-term investment horizon
or desire a short CDSC schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS
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<PAGE> 21
THOSE OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See
"Distribution and Service Plans."
GENERAL. Dividends paid by the Fund with respect to Class A shares, Class B
shares and Class C shares will be calculated in the same manner at the same time
on the same day, except that the distribution fees and any incremental transfer
agency costs relating to Class B shares or Class C shares will be borne by the
respective class. See "Distributions from the Fund." Shares of the Fund may be
exchanged, subject to certain limitations, for shares of the same class of
certain other mutual funds distributed by the Distributor. See "Shareholder
Services -- Exchange Privilege."
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the public on a continuous basis
through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares also are offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
The term "dealers" and "brokers" are sometimes referred to herein as "authorized
dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Shares of the Fund may be purchased on any business day through authorized
dealers. Shares also may be purchased by completing the application accompanying
this Prospectus and forwarding the application, through the authorized dealer,
to the shareholder service agent, ACCESS Investor Services, Inc. ("ACCESS"), a
wholly-owned subsidiary of Van Kampen American Capital. When purchasing shares
of the Fund, investors must specify whether the purchase is for Class A shares,
Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the class of shares
chosen by the investor, as shown in the tables herein. Net asset value per share
is determined once daily as of the close of trading on the New York Stock
Exchange (the "Exchange") (currently 4:00 p.m., New York time) each day the
Exchange is open. Net asset value per share for each class is determined by
dividing the value of
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<PAGE> 22
the Fund's securities, cash and other assets (including accrued interest)
attributable to such class less all liabilities (including accrued expenses) by
the total number of shares of the class outstanding. Securities listed or traded
on a national securities exchange are valued at the last sale price. Unlisted
securities and listed securities for which the last sale price is not available
are valued at the most recent bid price. Options are valued at the last sale
price or if no sales are reported, at the mean between the bid and asked prices.
Securities for which market quotations are not readily available and other
assets are valued at fair value as determined in good faith by the Trustees of
the Fund. Short-term securities are valued in the manner described in the Notes
to the Financial Statements included in the Statement of Additional Information.
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the Class A
shares, Class B shares and Class C shares may differ from one another reflecting
the daily expense accruals of the distribution and the higher transfer agency
fees applicable with respect to the Class B shares and Class C shares and the
differential in the dividends paid on the classes of shares. The price paid for
shares purchased is based on the next calculation of net asset value (plus sales
charges, where applicable) after an order is received by an authorized dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. Orders received by authorized dealers after the
close of the Exchange are priced based on the next close provided they are
received by the Distributor prior to the Distributor's close of business on such
day. It is the responsibility of authorized dealers to transmit orders received
by them to the Distributor so they will be received prior to such time. Orders
of less than $500 are mailed by the authorized dealer and processed at the
offering price next calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B shares and Class C shares bear the expenses of the
deferred sales arrangement and any expenses (including the higher distribution
fee and incremental transfer agency costs) resulting from such sales
arrangement, (ii) generally, each class has exclusive voting rights with respect
to approvals of the Rule 12b-1 distribution plan pursuant to which its
distribution fee or service fee is paid and (iii) Class B shares and Class C
shares are subject to a conversion feature. Each class has different exchange
privileges and certain different shareholder service options available. The net
income attributable to Class B shares and Class C shares and the dividends
payable on Class B shares and Class C shares will be reduced by the amount of
the distribution fee and incremental transfer agency expenses associated with
such class of shares. Sales personnel of authorized dealers distributing the
Fund's shares and other persons entitled to receive compensation for selling
such shares may receive differing compensation for selling Class A shares, Class
B shares or Class C shares.
22
<PAGE> 23
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which an
authorized dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
authorized dealer that sponsors sales contests or recognition programs
conforming to criteria established by the Distributor, or participates in sales
programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the authorized dealer at the
public offering price during such programs. Other programs provide, among other
things and subject to certain conditions, for certain favorable distribution
arrangements for shares of the Fund. Also, the Distributor in its discretion may
from time to time, pursuant to objective criteria established by the
Distributor, pay fees to, and sponsor business seminars for, qualifying
authorized dealers for certain services or activities which are primarily
intended to result in sales of shares of the Fund. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Such fees paid for such services and activities with respect to the Fund
will not exceed in the aggregate 1.25% of the average total daily net assets of
the Fund on an annual basis. The Distributor may provide additional compensation
to Edward D. Jones & Co. or an affiliate thereof based on a combination of its
sales of shares and increases in assets under management. All of the foregoing
payments are made by the Distributor out of its own assets. These programs will
not change the price an investor will pay for shares or the amount that a Fund
will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the net asset value plus a
sales charge, as set forth below.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED
TO DEALERS
AS % OF AS % OF (AS A % OF
SIZE OF OFFERING NET AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Less than $50,000........................ 5.75% 6.10% 5.00%
$50,000 but less than $100,000........... 4.75% 4.99% 4.00%
$100,000 but less than $250,000.......... 3.75% 3.90% 3.00%
$250,000 but less than $500,000.......... 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000........ 2.00% 2.04% 1.75%
$1,000,000 or more*...................... * * *
- ------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a CDSC
of 1.00% on redemptions made within one year of the purchase. A
23
<PAGE> 24
commission will be paid to authorized dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% on
sales to $2 million, plus 0.80% on the next million and 0.50% on the
excess over $3 million. See "Purchase of Shares--Deferred Sales Charge
Alternatives" for additional information with respect to CDSC.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. Authorized dealers which
are reallowed all or substantially all of the sales commissions may be deemed to
be underwriters for purposes of the Securities Act of 1933, as amended.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to authorized dealers described herein. Such
financial institutions, other industry professionals and authorized dealers are
hereinafter referred to as "Service Organizations." Banks are currently
prohibited under the Glass-Steagall Act from providing certain underwriting or
distribution services. If banking firms were prohibited from acting in any
capacity or providing any of the described services, the Distributor would
consider what action, if any, would be appropriate. The Distributor does not
believe that termination of a relationship with a bank would result in any
material adverse consequences to the Fund. State securities laws regarding
registration of banks and other financial institutions may differ from the
interpretation of federal law expressed herein and banks and other financial
institutions may be required to register as dealers pursuant to certain state
laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their authorized dealers, must notify the Fund whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and minor children and any corporation, partnership or sole
proprietorship which is 100% owned, either alone or in combination, by any of
the foregoing; a trustee or other fiduciary purchasing for a single fiduciary
account, or a "company" as defined in Section 2(a)(8) of the 1940 Act.
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<PAGE> 25
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.
Volume Discounts. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund,
or in any combination of shares of the Fund and shares of other Participating
Funds, although other Participating Funds may have different sales charges.
Cumulative Purchase Discount. The size of investment shown in the sales charge
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Letter of Intent. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the preceding table. The
size of investment shown in the preceding table also includes purchases of
shares of the Participating Funds over a 13-month period based on the total
amount of intended purchases plus the value of all shares of the Participating
Funds previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charge applicable to the purchases made and the charges previously paid.
The initial purchase must be for an amount equal to at least 5% of the minimum
total purchase amount of the level selected. If trades not initially made under
a Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provisions, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. Such adjustments in
sales charge will be used to purchase additional shares for the shareholder at
the applicable discount category. Additional information is contained in the
application accompanied by this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
Unit Investment Trust Reinvestment Programs. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
shares of the Fund, at net asset value and with no minimum initial or subsequent
25
<PAGE> 26
investment requirement, if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the Distributor. The total sales charge for all other investments made
from unit trust distributions will be 1.00% of the offering price (1.01% of net
asset value). Of this amount, the Distributor will pay to the authorized dealer,
if any, through which such participation in the qualifying program was initiated
0.50% of the offering price as a dealer concession or agency commission. Persons
desiring more information with respect to this program, including the applicable
terms and conditions thereof, should contact their authorized dealer or the
Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired trustees/directors of funds advised by the Adviser,
Van Kampen American Capital Investment Advisory Corp. or John Govett &
Co. Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above,
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the
Distributor and their spouses and minor children when purchasing for any
accounts they beneficially own, or, in the case of any such financial
institution, when purchasing for retirement plans for such institution's
employees.
26
<PAGE> 27
(4) Registered investment advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients
provided that the aggregate amount invested in the Fund alone, or any
combination of shares of the Fund and shares of other Participating Funds
as described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor
may pay authorized dealers through which purchases are made an amount up
to 0.50% of the amount invested, over a 12-month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a bank or broker-dealer charges an account
management fee ("wrap accounts"), provided the bank or broker-dealer has
a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase
plans, full service 401(k) plans, or similar full service recordkeeping
programs made available through Van Kampen American Capital Trust Company
with at least 50 eligible employees or investing at least $250,000 in
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the Fund imposes a CDSC of 1.00% in the event of redemptions
within one year of the purchase other than redemptions required to make
payments to participants under the terms of the plan. The CDSC incurred
upon certain redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1.00% on
sales to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the
excess over $10 million.
(9) Participants in any 403(b)(7) program of a college or university system
which permits only net asset value mutual fund investments and for which
Van Kampen American Capital Trust Company serves as custodian. In
connection with such purchases, the Distributor may pay, out of its own
assets, a commission to brokers, dealers, or financial intermediaries as
follows: 1.00% on sales up to $5 million, plus 0.50% on the next $5
million, plus 0.25% on the excess over $10 million.
27
<PAGE> 28
(10) Individuals who are members of a "qualified group" may purchase Class A
Shares of the Fund without the imposition of a front end sales charge.
For this purpose, a qualified group is one which (i) has been in
existence for more than six months, (ii) has a purpose other than to
acquire shares of the Fund or similar investments, (iii) has given and
continues to give its endorsement or authorization, on behalf of the
group, for purchase of shares of the Fund and other funds in the Van
Kampen American Capital Family of Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution;
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to
each individual as follows: 1.00% on sales to $2 million, plus 0.80% on
the next million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer may charge a transaction
fee for placing an order to purchase shares pursuant to this provision or for
placing a redemption order with respect to such shares. Authorized dealers will
be paid a service fee as described herein under "Distribution and Service Plans"
on purchases made as described in (3) through (10) above. The Fund may
terminate, or amend the terms of, offering shares of the Fund at net asset value
to such groups at any time.
CLASS B SHARES
Class B shares are offered at net asset value. Class B shares which are
redeemed within five years of purchase are subject to a CDSC at the rates set
forth in the following table, charged as a percentage of the dollar amount
subject thereto. The charge is assessed on an amount equal to the lesser of the
then current market value
28
<PAGE> 29
or the cost of the shares being redeemed. Accordingly, no sales charge is
imposed on increases in net asset value above the initial purchase price. In
addition, no charge is assessed on shares derived from reinvestment of dividends
or capital gains distributions. It is presently the policy of the Distributor
not to accept any order for Class B shares in an amount of $500,000 or more
because it ordinarily will be more advantageous for an investor making such an
investment to purchase Class A shares.
The amount of the CDSC, if any, varies depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month are aggregated and deemed to have been made on the last day of
the month.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
- ---------------------------------------------------------------------------
First....................................... 5.00%
Second...................................... 4.00%
Third....................................... 3.00%
Fourth...................................... 2.50%
Fifth....................................... 1.50%
Sixth and After............................. None
</TABLE>
- ------------------------------------------------------------------------------
In determining whether a CDSC is applicable to a redemption, it is assumed
that the redemption is first of any shares in the shareholder's Fund account
that are not subject to a CDSC, second of shares held for over five years or
shares acquired pursuant to reinvestment of dividends or distributions and third
of shares held longest during the five-year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of 4.00% (the applicable rate in the second year after purchase).
A commission or transaction fee of 4.00% of the purchase amount will be paid
to authorized dealers at the time of purchase. Additionally, the Distributor
may, from time to time, pay additional promotional incentives, in the form of
cash or other compensation, to authorized dealers that sell Class B shares of
the Fund.
29
<PAGE> 30
CLASS C SHARES
Class C shares are offered at net asset value. Class C shares which are
redeemed within the first year of purchase are subject to a CDSC of 1.00%. The
charge is assessed on an amount equal to the lower of the then current market
value or the cost of the shares being redeemed. Accordingly, no sales charge is
imposed on increases in net asset value above the initial purchase price. In
addition, no charge is assessed on shares derived from reinvestment of dividends
or capital gains distributions. It is presently the policy of the Distributor
not to accept any order in an amount of $1 million or more for Class C shares
because it ordinarily will be more advantageous for an investor making such an
investment to purchase Class A Shares.
In determining whether a CDSC is applicable to a redemption, it is assumed
that the redemption is first of any shares in the shareholder's Fund account
that are not subject to a CDSC and second of shares held for more than one year
or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of 1.00% of the purchase amount will be paid
to authorized dealers at the time of purchase. Authorized dealers also will be
paid ongoing commissions and transaction fees of up to 0.75% of the average
daily net assets of the Fund's Class C shares for the second through tenth year
after purchase. Additionally, the Distributor may, from time to time, pay
additional promotional incentives, in the form of cash or other compensation, to
authorized dealers that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The CDSC is waived on redemptions of Class B shares and Class C shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The CDSC also is waived on redemptions of Class C shares
as it relates to the reinvestment of redemption proceeds in shares of the same
class of the Fund within 120 days after redemption. See the Statement of
Additional Information for further discussion of waiver provisions.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investments in its shares at little or no extra cost to the investor. The
following is a description of such services.
30
<PAGE> 31
INVESTMENT ACCOUNT. Each shareholder has an investment account under which the
investor's shares are held by ACCESS, the Fund's transfer agent. ACCESS performs
bookkeeping, data processing and administrative services related to the
maintenance of shareholder accounts. Except as described in this Prospectus,
after each share transaction in an account, the shareholder receives a report
showing the activity in the account. Each shareholder who has an account in
certain of the Participating Funds, Tax Free Money Fund or Reserve Fund, will
receive statements quarterly from ACCESS showing any reinvestments of dividends
and capital gains distributions and any other activity in the account since the
preceding statement. Such shareholders also will receive separate confirmations
for each purchase or sale transaction other than reinvestment of dividends and
capital gains distributions and systematic purchases or redemptions. Additions
to an investment account may be made at any time by purchasing shares through
authorized dealers or by mailing a check directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received,
ACCESS will calculate no more than 2.00% of the net asset value of the issued
shares, and bill the party to whom the certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge), on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. This instruction may be made by telephone by calling (800)
421-5666 ((800) 772-8889 for the hearing impaired). The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP; and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
informa-
31
<PAGE> 32
tion regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans, are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanying this
Prospectus, or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a Class A
shares, Class B shares or Class C shares account in the Fund invested into a
pre-existing Class A shares, Class B shares or Class C shares account in any of
the Participating Funds, Tax Free Money Fund or Reserve Fund. Both accounts must
be of the same type and same class, either non-retirement or retirement. Any two
non-retirement accounts can be used. If the accounts are retirement accounts,
they must both be for the same class and of the same type of retirement plan
(e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit of the same individual.
If a qualified, pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund, other
than Van Kampen American Capital Government Target Fund ("Government Target"),
may be exchanged for shares of the same class of shares of any other fund
without sales charge, provided that shares of certain Van Kampen American
Capital fixed-income funds are subject to a 30-day holding period requirement
before exchange. Shares of Government Target may be exchanged for Class A shares
of the Fund without sales charge. Class A shares of Tax Free Money Fund or
Reserve Fund that were not acquired in exchange for Class B shares or Class C
shares of a Participating Fund may be exchanged for Class A shares of the Fund
32
<PAGE> 33
upon payment of the excess, if any, of the sales charge rate applicable to the
shares being acquired over the sales charge rate previously paid. Shares of Tax
Free Money Fund or Reserve Fund acquired through an exchange of Class B shares
or Class C shares may be exchanged only for the same class of shares of a
Participating Fund without incurring a contingent deferred sales charge. Shares
of any Participating Fund, Tax Free Money Fund or Reserve Fund may be exchanged
for shares of any other Participating Fund if shares of that Participating Fund
are available for sale; however, during periods of suspension of sales, shares
of a Participating Fund may be available for sale only to existing shareholders
of a Participating Fund.
Class B shareholders and Class C shareholders of the Fund have the ability to
exchange their shares ("original shares") for the same class of shares of any
other Van Kampen American Capital fund that offers such shares ("new shares") in
an amount equal to the aggregate net asset value of the original shares, without
the payment of any contingent deferred sales charge otherwise due upon
redemption of the original shares. For purposes of computing the CDSC payable
upon a disposition of the new shares, the holding period for the original shares
is added to the holding period of the new shares. Class B shareholders and Class
C shareholders would remain subject to the contingent deferred sales charge
imposed by the original Fund upon their redemption from the Van Kampen American
Capital complex of funds. The CDSC is based on the holding period requirements
of the original fund.
Shares of the fund to be acquired must be registered for sale in the
investor's state. Exchanges of shares are sales and may result in a gain or loss
for federal income tax purposes, although if the shares exchanged have been held
for less than 91 days, the sales charge paid on such shares is not included in
the tax basis of the exchanged shares, but is carried over and included in the
tax basis of the shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying this Prospectus. Van
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
"VKAC"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither VKAC nor the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine.
VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent
33
<PAGE> 34
instructions if reasonable procedures are not followed. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge. If the exchanging
shareholder does not have an account in the fund whose shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options (except dividend diversification) and authorized dealer
of record as the account from which shares are exchanged, unless otherwise
specified by the shareholder. In order to establish a systematic withdrawal plan
for the new account or reinvest dividends from the new account into another
fund, however, an exchanging shareholder must file a specific written request.
The Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for information regarding such fund prior
to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25. Such a systematic withdrawal plan
may also be maintained by an investor purchasing shares for a retirement plan
established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
Class B shareholders and Class C shareholders who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under this plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
34
<PAGE> 35
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized dealer.
Orders received from authorized dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by an authorized dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of authorized dealers to
transmit redemption requests received by them to the Distributor so they will be
received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B shares
or Class C shares are subject to a contingent deferred sales charge. In
addition, a CDSC of 1.00% may be imposed on certain redemptions of Class A
shares made within one year of purchase for investments of $1 million or more
and for certain qualified 401(k) retirement plans. The CDSC incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 30 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to ACCESS. Where Van Kampen American Capital Trust
Company serves as IRA custodian, special IRA,
35
<PAGE> 36
403(b)(7), or Keogh redemption forms must be obtained from and be forwarded to
Van Kampen American Capital Trust Company, P.O. Box 944, Houston, Texas
77001-0944. Contact the custodian for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms that the purchase check has cleared, usually
a period of up to 15 days. Any taxable gain or loss will be recognized by the
shareholder upon redemption of shares.
The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum initial investment as
specified in this Prospectus. At least 60 days advance written notice of any
such involuntary redemption is required and the shareholder is given an
opportunity to purchase the required value of additional shares at the next
determined net asset value without sales charge. Any applicable CDSC will be
deducted from the proceeds of this redemption. Any involuntary redemption may
only occur if the shareholder account is less than the minimum initial
investment due to shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to
the bank account of record as described below. To establish such privilege, a
shareholder must complete the appropriate section of the application
accompanying this Prospectus or call the Fund at (800) 421-5666 to request that
a copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares contact the telephone transaction line at (800)
421-5684. VKAC and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, neither VKAC nor the Fund
will be liable for following telephone instructions which it reasonably believes
to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. Telephone redemptions may not be available if the shareholder cannot
reach ACCESS by telephone, whether because all telephone lines are busy or for
any other reason; in such case, a shareholder would have to use the Fund's
regular redemption procedure previously described. Requests received
36
<PAGE> 37
by ACCESS prior to 4:00 p.m., New York time, on a regular business day will be
processed at the net asset value per share determined that day. These privileges
are available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their pre-designated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. This service is also not available with respect to shares held in
an individual retirement account (IRA) for which Van Kampen American Capital
Trust Company acts as custodian. The Fund reserves the right at any time to
terminate, limit or otherwise modify this redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of a Class B shareholder or Class
C shareholder. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B shares and Class C shares.
In cases of disability, the CDSC on Class B shares and Class C shares will be
waived where the disabled person is either an individual shareholder or owns the
shares as a joint tenant with right of survivorship or is the beneficial owner
of a custodial or fiduciary account, and where the redemption is made within one
year of the initial determination of disability. This waiver of the contingent
deferred sales charge on Class B shares and Class C shares applies to a total or
partial redemption, but only to redemptions of shares held at the time of the
initial determination of disability.
REINSTATEMENT PRIVILEGE. A Class A shareholder or Class B shareholder who has
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A shares of the Fund. A Class C shareholder who has
redeemed shares of the Fund may reinstate any portion or all of the proceeds of
37
<PAGE> 38
such redemption in Class C shares of the Fund with credit given for any
contingent deferred sales charge paid upon such redemption. Such reinstatement
is made at the net asset value (without sales charge except as described under
"Shareholder Services -- Exchange Privilege") next determined after the order is
received, which must be within 120 days after the date of the redemption.
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.
- ------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers or financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C shares of the Fund pursuant to the
38
<PAGE> 39
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C shares up to 0.75% of the Fund's average daily
net assets attributable to Class C shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense attributable to the Class C shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to Class B shares or Class C
shares for any given year may exceed the amounts payable to the Distributor with
respect to such class of shares under the Distribution Plan, the Service Plan
and payments received pursuant to the CDSC. In such event, with respect to any
such class of shares, any unreimbursed expenses will be carried forward and paid
by the Fund (up to the amount of the actual expenses incurred) in future years
so long as such Distribution Plan is in effect. Except as mandated by applicable
law, the Fund does not impose any limit with respect to the number of years into
the future that such unreimbursed expenses may be carried forward (on a Fund
level basis). Because such expenses are accounted on a Fund level basis, in
periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B share or Class C share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
June 30, 1996, there were $2.1 million and $7,700 of unreimbursed
distribution-related expenses with respect to Class B shares and Class C shares,
respectively, representing 2.91% and 0.17% of the Fund's net assets attributable
to Class B shares and Class C shares, respectively. If the Distribution Plan was
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.
The Distributor will not use the proceeds from the contingent deferred sales
charge applicable to a particular class of shares to defray distribution related
39
<PAGE> 40
expenses attributable to any other class of shares. Various federal and state
laws prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
law. In the unlikely event that a court were to find that these laws prevent
such banks from providing such services described above, the Fund would seek
alternate providers and expects that shareholders would not experience any
disadvantage.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.
DIVIDENDS. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed at least annually as dividends to shareholders. Unless
the shareholder instructs otherwise, dividends are automatically applied to
purchase additional shares of the Fund at the next determined net asset value.
The per share dividends on Class B shares and Class C shares will be lower than
the per share dividends on Class A shares as a result of the distribution fees
and incremental transfer agency fees applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund distributes to shareholders at
least once a year the excess, if any, of its total profits on the sale of
securities during the year over its total losses on the sale of securities,
including capital losses carried forward from prior years in accordance with tax
laws. As in the case of income dividends, capital gains distributions are
automatically reinvested in additional shares of the Fund at net asset value
unless the shareholder instructs otherwise. See "Shareholder
Services -- Reinvestment Plan."
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Prospectus.
FEDERAL INCOME TAXATION. The Fund intends to qualify each year and to elect
to be treated as a regulated investment company under Subchapter M of the Code.
To qualify as a regulated investment company, the Fund must comply with certain
40
<PAGE> 41
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets.
If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
Shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to Shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31 of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its Shareholders) and all distributions out of earnings and
profits would be taxed to Shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to Shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were sold for fair market value at the end of the
tax-year), which may cause the Fund to recognize income without receiving cash
with which to make distributions in
41
<PAGE> 42
amounts necessary to satisfy the 90% distribution requirement and the
distribution requirements for avoiding income and excise taxes. The Fund will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's annual gross income be derived from the disposition of
securities held for less than three months.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
Shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold.
DISTRIBUTIONS. Distributions of the Fund's net investment income are taxable
to Shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional Shares. Distributions
of the Fund's net capital gains ("capital gains dividends"), if any, are taxable
to Shareholders as long-term capital gains regardless of the length of time
Shares of the Fund have been held by such Shareholders. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's Shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such Shares are held as a
capital asset). Tax-exempt Shareholders not subject to federal income tax on
their income generally will not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional Shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the Shares received,
determined as of the distribution date. The basis of such Shares will equal the
fair market value on the distribution date.
The Fund will inform Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Some portion of
the distributions from the Fund will be eligible for the dividends received
deduction for corporations if the Fund receives qualifying dividends during the
year and if certain other requirements of the Code are satisfied.
42
<PAGE> 43
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to Shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the Shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
Shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
Shareholders.
The Fund is required, in certain circumstances, to withhold 31% of dividends
and certain other payments, including redemptions, paid to Shareholders who do
not furnish to the Fund their correct taxpayer identification number (in the
case of individuals, their social security number) and certain required
certifications or who are otherwise subject to backup withholding.
SALE OF SHARES. The sale of Shares (including transfers in connection with a
redemption or repurchase of Shares) will be a taxable transaction for federal
income tax purposes. Selling Shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
Shares and the amount received. If such Shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will be long-term if such Shares
have been held for more than one year. Any loss realized upon a taxable
disposition of Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such Shares. For purposes of determining whether Shares have been held for
six months or less, the holding period is suspended for any periods during which
the Shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of holding and disposing of Shares, as
well as the effects of state, local and foreign tax law and any proposed tax law
changes.
43
<PAGE> 44
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one-year, five-year, and ten-year periods. Other total return
quotations, aggregate or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase,
or decrease, in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 5.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable CDSC has been paid.
The Fund's total return will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and unrealized
net capital gains or losses during the period. Since shares of the Fund were
offered at a maximum sales charge of 8.50% prior to June 12, 1989, actual Fund
total return would have been somewhat less than that computed on the basis of
the current maximum sales charge. Total return is based on historical earnings
and asset value fluctuations and is not intended to indicate future performance.
No adjustments are made to reflect any income taxes payable by shareholders on
dividends and distributions paid by the Fund or to reflect the fact no 12b-1
fees were incurred prior to October 1, 1989.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
Total return is calculated separately for Class A shares, Class B shares and
Class C shares. Total return figures for Class A shares include the maximum
sales charge of 5.75%; total return figures for Class B shares and Class C
shares include any applicable CDSC. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return,
which is a measure of the income actually earned by, plus the effect of any
realized and unrealized appreciation or depreciation of such investments during
a stated period. Distribution rate is, therefore, not
44
<PAGE> 45
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds or with the Consumer Price Index, the Dow Jones
Industrial Average Index, Standard & Poor's, NASDAQ, other appropriate indices
of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by nationally recognized financial
publications. Such comparative performance information will be stated in the
same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's Shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund was originally incorporated in Delaware on December 2, 1968, and was
re-incorporated by merger into a Maryland corporation on December 30, 1982. The
Fund was reorganized as a business trust under the laws of the State of Delaware
on August 31, 1995.
The Fund is authorized to issue an unlimited number of Class A shares, Class B
shares and Class C shares of beneficial interest. Each class of shares
represents an interest in the same assets of the Fund and generally are
identical in all respects
45
<PAGE> 46
except that each class bears certain distribution expenses and has exclusive
voting rights with respect to its distribution fee. The par value for each class
of shares is $0.01 per share.
The Fund is permitted to issue an unlimited number of classes. Other classes
of shares may be established from time to time in accordance with the provisions
of the Fund's Declaration of Trust. Each class of shares is equal as to
earnings, assets and voting privileges, except as noted above, and each class
bears the expenses related to the distribution of its shares. Shares issued by
the Fund are fully paid and non-assessable and have no conversion, preemptive or
other subscription rights, except with respect to the conversion of Class B
shares and Class C shares into Class A shares as described above. In the event
of liquidation, each of the shares of the Fund is entitled to its portion of all
of the Fund's net assets after all debt and expenses of the Fund have been paid.
Since Class B shares and Class C shares pay higher distribution expenses, the
liquidation proceeds to Class B shareholders and Class C shareholders are likely
to be lower than to other shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Fund is
set forth in the Statement of Additional Information.
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
An investment in the Fund may not be appropriate for all investors. The Fund
is not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment, and should not be used as a trading
vehicle.
46
<PAGE> 47
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889
FOR TELEPHONE TRANSACTIONS
DIAL (800) 421-5684
VAN KAMPEN AMERICAN CAPITAL
PACE FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American
Capital Pace Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street
P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American
Capital Pace Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
PRICE WATERHOUSE LLP
1201 Louisiana
Suite 2900
Houston, TX 77002
<PAGE> 48
- ------------------------------------------------------------------------------
PACE FUND
------------------------------------------------------------------------------
P R O S P E C T U S
OCTOBER 28, 1996
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL PACE FUND
Van Kampen American Capital Pace Fund (the "Fund") is a diversified
open-end management investment company. This Statement of Additional Information
is not a Prospectus and should be read in conjunction with the Prospectus for
the Fund (the "Prospectus") dated as of the date of this Statement of Additional
Information. This Statement of Additional Information does not include all the
information a prospective investor should consider before purchasing shares of
the Fund. Investors should obtain and read the Prospectus prior to purchasing
shares of the Fund. A Prospectus may be obtained without charge by writing or
calling 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........................................................... B-2
Repurchase Agreements......................................................... B-3
Foreign Securities............................................................ B-4
Options, Futures Contracts and Related Options................................ B-4
Investment Restrictions....................................................... B-9
Trustees and Officers......................................................... B-11
Legal Counsel................................................................. B-18
Investment Advisory Agreement................................................. B-18
Distributor................................................................... B-20
Distribution and Service Plans................................................ B-20
Transfer Agent................................................................ B-21
Portfolio Transactions and Brokerage.......................................... B-21
Determination of Net Asset Value.............................................. B-22
Purchase and Redemption of Shares............................................. B-23
Exchange Privilege............................................................ B-26
Tax Status.................................................................... B-27
Fund Performance.............................................................. B-27
Other Information............................................................. B-28
Report of Independent Accountants............................................. B-29
Financial Statements.......................................................... B-30
Notes to Financial Statements................................................. B-38
</TABLE>
This Statement of Additional Information is dated October 28, 1996.
<PAGE> 50
GENERAL INFORMATION
Van Kampen American Capital Pace Fund, formerly known as American Capital
Pace Fund, Inc. (the "Fund"), was originally incorporated in Delaware on
December 2, 1968, reincorporated by merger into a Maryland corporation on
December 30, 1982. As of August 31, 1995, the Fund was reorganized as a series
of Van Kampen American Capital Pace Fund (the "Trust"), a Delaware business
trust.
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, approximately 6% of the common stock of VK/AC
Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 12% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock 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 manages or supervises more
than $57 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 more than 80 analysts devoted to various
specializations.
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 4% of the months during the past 69
years, the value of $1 invested in 1926 was $15.81 at the end of 1995, compared
to $1,113.92 for $1 that was invested for the entire period (Source: Micropal,
Inc.). During the most recent five-year period (1991-1995), the average annual
total return for stocks, as measured by the Standard and Poor's 500 Stock Index,
a broad-based, unmanaged index, was 11.75%. 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 1.93%. Of course, past performance is no guarantee of
future results.
Widely Varied: A widely varied portfolio usually reduces risk and increases
relative stability. Since VKAC's goal is consistency, a widely varied portfolio
across industries is emphasized. VKAC stock funds are varied both in terms of
the number of industries and the number of stocks within each industry in which
they invest. Generally, the stock funds invest in 12 broad economic sectors, and
in many individual stocks within each sector.
Clearly Defined: The basic characteristics of VKAC funds are determined by
a pre-defined profile which remains constant over time.
Blended Investment Style: Market conditions are constantly changing, which
means the stocks that perform well should be expected to change. A rigid
investment style might cause an investor to suffer when certain types of stocks
lose favor with the market. The two most common investment styles are growth,
which emphasizes companies that are projected to experience rapid growth in
earnings, and value, which focuses on companies whose stock is selling for less
than the company's trust worth. At VKAC, our style is blended
B-2
<PAGE> 51
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 October 17, 1996, no person was known by the Fund to own beneficially
or to hold of record 5% or more of the outstanding Class A shares, Class B
shares or Class C shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
NAME AND ADDRESS OWNERSHIP AT CLASS OF PERCENTAGE
OF HOLDER OCTOBER 17, 1996 SHARES OWNERSHIP
- --------------------------------------------------------- ---------------- --------- ----------
<S> <C> <C> <C>
Record Holders Only:
Van Kampen American Capital Trust Company................ 104,351,294 A 50.91%
2800 Post Oak Blvd. 2,310,775 B 37.52%
Houston, TX 77056 119,068 C 29.76%
Van Kampen American Capital Tr Cust...................... 20,650 C 5.16%
IRA R/O Phyllis Williams
11411 Carrollwood Dr.
Tampa, FL 33618-3705
Merrill Lynch Pierce Fenner & Smith Inc. ................ 22,064 C 5.52%
Mutual Fund Operations
Attn Book Entry
4800 Deer Lake Dr. East
3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
Van Kampen American Capital Trust Company acts as custodian for certain employee
benefit plans and independent retirement accounts.
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. As a matter of
operating policy, the Fund does not intend to invest more than 5% of its assets
in repurchase agreements. The Fund will not invest in repurchase agreements
maturing in more than seven days if any such investment, together with any other
illiquid securities owned by the Fund, exceeds 10% of the value of its net
assets.
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<PAGE> 52
FOREIGN SECURITIES
The Fund may invest up to 15% of the value of its assets in securities of
foreign issuers. Such securities may be subject to foreign government taxes
which would reduce the income yield on such securities. Foreign investments
involve certain risks, such as political or economic instability of the issuer
or of the country of issue, changes in currency exchange rates, the difficulty
of predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities of domestic corporations or of the United States
Government. In addition, there may be less publicly available information about
a foreign company than about a domestic company. Foreign companies generally are
not subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the United States, and, with respect to certain foreign countries, there
is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Finally, in the
event of a default on any such foreign debt obligations, it may be more
difficult for the Fund to obtain or to enforce a judgment against the issuers of
such securities.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs in
registered form, are designed for use in United States securities markets and
EDRs, in bearer form, are designed for use in European securities markets.
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
in to 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.
B-4
<PAGE> 53
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A Fund
could close out its position as a writer of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over-the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, which would not
close out its position as a writer, but would provide an asset of equal value to
its obligation under the option written. If the Fund is not able to enter into a
closing purchase transaction or to purchase an offsetting option with respect to
an option it has written, it will be required to maintain the securities subject
to the call or the collateral underlying the put until a closing purchase
transaction can be entered into (or the option is exercised or expires), even
though it might not be advantageous to do so.
Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others, regardless of whether such options are written on one or
more accounts or through one or more brokers. An exchange may order the
liquidation of positions found to be in violation of those limits, and it may
impose other sanctions or restrictions. These position limits may restrict the
number of options the Fund may be able to write.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options could be purchased for capital appreciation. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.
Put options may 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 may 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
B-5
<PAGE> 54
are also based on an industry or market segment such as the AMEX Oil and Gas
Index or the Computer and Business Equipment Index. A stock index fluctuates
with changes in the market values of the stocks included in the index. Options
are currently traded on The Chicago Board Options Exchange, the American Stock
Exchange and other exchanges.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with the rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund is exempt from
registration as a "commodity pool."
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount
multiplied by the difference between the stock index value at a specified time
and the price at which the futures contract originally was 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
securities equal to a percentage (which will normally range between 2% and 10%)
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 receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market
B-6
<PAGE> 55
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 or losses in liquidating open positions purchased or incur a
loss of all or part of its margin deposits with the broker. Transactions are
entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk 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 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.
B-7
<PAGE> 56
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 5% 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 OF OPTIONS AND FUTURES TRANSACTIONS
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the
B-8
<PAGE> 57
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 cannot be changed
without approval by a majority vote of its outstanding shares. Such majority
vote is defined as the lesser of (i) 67% or more of the voting securities
present at the meeting, if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy; or (ii) more than 50% of
the outstanding voting securities. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. These restrictions provide that the Fund shall not:
1. Make loans, except that the Fund may purchase bonds, debentures or
other debt securities of the type commonly offered privately to, and
purchased by, financial institutions in an amount not exceeding 10% of
its total assets, and except that the Fund may invest in repurchase
agreements in an amount not exceeding 25% of its total assets. The
purchase of publicly distributed bonds and debentures shall not
constitute the making of loans;
2. Invest in securities of other investment companies in an amount in
excess of 5% of the value of the Fund's total assets except to acquire
shares of other open-end investment companies to the extent permitted
by rule or order of the Securities and Exchange Commission ("SEC")
exempting the Fund from the limitations imposed by Section 12(d)(1) of
the 1940 Act;
3. Invest in securities of any company if any officer or director/trustee
of the Fund or of the Adviser owns more than 1/2 of 1% of the
outstanding securities of such company, and such officers and
directors/trustees who own more than 1/2 of 1% in the aggregate own
more than 5% of the outstanding securities of such company;
4. Invest in real estate, (although the Fund may acquire securities of
issuers that invest in real estate,) commodities or commodity contracts
except that the Fund may enter into transactions in futures contracts
or related options;
5. Invest in securities of a company for the purpose of exercising control
of management, although the Fund retains the right to vote securities
held by it;
6. Engage in the underwriting of securities of other issuers, except that
in connection with the disposal of an investment position the Fund may
be deemed to be an "underwriter" as that term is defined under the
Securities Act of 1933 (the "1933 Act");
7. Make any investment which would cause more than 25% of its assets to be
invested in securities issued by companies principally engaged in any
one industry, provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes
the Fund's pro rata portion of the securities and other assets owned by
any such company;
8. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except the United States government)
or purchase more than 10% of the outstanding voting securities of any
one issuer. Neither limitation shall apply to the acquisition of shares
of other open-end investment companies to the extent permitted by rule
or order of the SEC exempting the Fund from the limitations imposed by
Section (d)(1) of the 1940 Act;
9. Pledge any of its assets, except that the Fund may pledge assets having
a value of not more than 10% of its total assets in order to secure
permitted borrowings from banks. Such borrowings may not exceed 5% of
the value of the Fund's assets and can be made only as a temporary
measure for extraordinary or emergency purposes. Notwithstanding the
foregoing, the Fund may engage in transactions in options, futures
contracts or related options, segregate or deposit assets to cover or
secure options written and make margin deposits and payments for
futures contracts and related options;
B-9
<PAGE> 58
10. Invest more than 10% of its net assets (determined at the time of
investment) in illiquid securities, securities for which market
quotations are not readily available, and repurchase agreements which
have a maturity of longer than seven days; or
11. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts and other investment strategies and instruments that would be
considered "senior securities" but for the maintenance by the Fund of a
segregated account with its custodian or some other form of "cover."
The Fund is subject to the following policies, which may be amended by its
Trustees. In addition to such policies set forth in the Fund's Prospectus, the
Fund shall not:
1. Make short sales, unless at the time of the sale it owns an equal
amount of such securities;
2. Invest more than 5% of its net assets in warrants or rights valued at
the lower of cost or market, nor more than 2% of its net assets in
warrants or rights (valued on such basis) which are not listed on the
New York or American Stock Exchanges. Warrants or rights acquired in
units or attached to other securities are not subject to the foregoing
limitation;
3. Purchase securities on margin, but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities. Notwithstanding the foregoing, the Fund may engage in
transactions in options, futures and related options, segregate or
deposit assets to cover or secure options written on long futures
positions and make margin deposits and payments for futures contracts
and related options;
4. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except
through purchase in the open market in a transaction involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission) or is part of a merger, consolidation or
acquisition except to acquire shares of other open-end investment
companies to the extent permitted by rule or order of the SEC exempting
the Fund from the limitations imposed by Section 12 (d)(1) of the 1940
Act;
5. Invest in interests in oil, gas, mineral exploration or development
programs, although the Fund may acquire securities of companies that
engage in these businesses;
6. Invest more than 5% of its assets in the securities of any one issuer
other than the United States government except to acquire shares of
other open-end investment companies to the extent permitted by rule or
order of the SEC exempting the Fund from the limitations imposed by
Section 12 (d)(1) of the 1940 Act;
7. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 15% of the value of the Fund's total assets
would be invested in such securities. Foreign investments may be
subject to special risks, including future political and economic
developments, the possible imposition of additional withholding taxes
on dividend or interest income payable on the securities, or the
seizure or nationalization of companies, or establishment of exchange
controls or adoption of other restrictions which might adversely affect
the investment; or
8. Invest more than 5% of the market value of its total assets in
companies having a record, together with predecessors, of less than
three years continuous operation and in securities not having readily
available market quotations provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Fund but includes the Fund's pro rata portion of the securities and
other assets owned by any such company.
In addition to the above restrictions, the Fund has also undertaken to a
certain state that it will not invest more than 10% of its net assets in Van
Kampen American Capital Small Capitalization Fund until it complies with the
NASAA Guidelines for Registration of Master Fund/Feeder Fund.
B-10
<PAGE> 59
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser"), Van Kampen American Capital Asset
Management, Inc. (the "AC Adviser"), Van Kampen American Capital Distributors,
Inc. (the "Distributor"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital"), VK/AC Holding, Inc. or ACCESS Investor Services, Inc.
("ACCESS"). For purposes hereof, the terms "Van Kampen American Capital Funds"
or "Fund Complex" includes each of the open-end investment companies advised by
the VK Adviser (excluding The Explorer Institutional Trust) and each of the
open-end investment companies advised by the AC Adviser (excluding the Van
Kampen American Capital Exchange Fund and the Common Sense Trust).
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
1632 Morning Mountain Road President of MDT Corporation, a company which develops
Raleigh, NC 27614 manufactures, markets and services medical and scientific
Date of Birth: 07/14/32 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndtson, an executive
10 South Riverside Plaza recruiting and management consulting firm. Formerly,
Suite 720 Executive Vice President of ABN AMRO, N.A., a Dutch bank
Chicago, IL 60606 holding company. Prior to 1992, Executive Vice President
Date of Birth: 06/03/49 of La Salle National Bank. Trustee of each of the Van
Kampen American Capital Funds.
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Date of Birth: 11/23/19
R. Craig Kennedy................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser, Van Kampen American Capital
Oakbrook Terrace, IL 60181 Advisors, Inc. and Van Kampen American Capital
Date of Birth: 05/20/42 Management, Inc. Executive Vice President and a Director
of VK/AC Holding, Inc. and Van Kampen American Capital.
President and Director of Van Kampen Merritt Equity
Advisors Corp. Director of Van Kampen Merritt Equity
Holdings Corp. Director of McCarthy, Crisanti & Maffei,
Inc. Prior to September 1996, Chief Executive Officer
McCarthy, Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company, Limited. Prior to
July 1996, President, Chief Operating Officer and Trustee
of VSM Inc. and VCJ Inc. President, Chief Executive
Officer and Trustee of each of the Van Kampen American
Capital Funds. President, Chairman of the Board and
Trustee of other investment companies advised by the VK
Adviser. Executive Vice President of other investment
companies advised by the AC Adviser.
</TABLE>
B-11
<PAGE> 60
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
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
Date of Birth: 03/31/20 Trust Company of Chicago and Continental Illinois
Corporation. Trustee and Co-Chairman of each of the Van
Kampen American Capital Funds.
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
Date of Birth: 02/13/36 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. ("SIPC"). 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
Date of Birth: 10/10/22 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
155 Hickory Lane of Graduate School and Chairman, Department of Mechanical
Closter, NJ 07624-2322 Engineering, Stevens Institute of Technology. Director of
Date of Birth: 08/02/24 Dynalysis of Princeton, a firm engaged in engineering
research. Trustee and Co-Chairman of each of the Van
Kampen American Capital Funds.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to the Van Kampen American Capital
Chicago, IL 60606 Funds, The Explorer Institutional Trust and the
Date of Birth: 08/22/39 closed-end investment companies advised by the VK
Adviser. Trustee of each of the Van Kampen American
Capital Funds, The Explorer Institutional Trust and the
closed-end investment companies advised by the VK
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
Date of Birth: 01/31/22 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. 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 1940 Act). Mr. McDonnell is an interested person of the VK Adviser, the
AC Adviser and the Fund by reason of his positions with the VK Adviser and the
AC Adviser. Mr. Whalen is an interested person of the Fund by reason of his
firm acting as legal counsel to the Fund.
B-12
<PAGE> 61
OFFICERS
The address for William N. Brown, Curtis W. Morell, Robert C. Peck, Jr.,
Alan T. Sachtleben, Paul R. Wolkenberg, Tanya M. Loden, Huey P. Falgout, Jr. and
Robert Sullivan is 2800 Post Oak Blvd., Houston, TX 77056. The address for Peter
W. Hegel, Ronald A. Nyberg, Edward C. Wood III, John L. Sullivan, Nicholas
Dalmaso, Scott E. Martin, Weston B. Wetherell and Steven M. Hill is One Parkview
Plaza, Oakbrook Terrace, IL 60181.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
William N. Brown........ Vice President Executive Vice President of the AC Adviser,
Date of Birth: VK/AC Holding, Inc., Van Kampen American
05/26/53 Capital, and American Capital Contractual
Services, Inc. Executive Vice President and
Director of Van Kampen American Capital
Trust Company, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Exchange Corporation, ACCESS and Van Kampen
American Capital Services, Inc. Prior to
September 1996, Director of American
Capital Shareholders Corporation. Vice
President of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and the
AC Adviser.
Peter W. Hegel.......... Vice President Executive Vice President of the VK Adviser,
Date of Birth: AC Adviser, Van Kampen American Capital
06/25/56 Management, Inc. and Van Kampen American
Capital Advisors, Inc. Prior to September
1996, Director of McCarthy, Crisanti &
Maffei, Inc. Prior to July 1996, Director
of VSM Inc. Vice President of each of the
Van Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
Curtis W. Morell........ Vice President and Senior Vice President of the VK Adviser and
Date of Birth: Chief Accounting the AC Adviser. Vice President and Chief
08/04/46 Officer Accounting Officer of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and AC Adviser.
</TABLE>
B-13
<PAGE> 62
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Ronald A. Nyberg........ Vice President and Executive Vice President, General Counsel
Date of Birth: Secretary and Secretary of Van Kampen American
07/29/53 Capital and VK/AC Holding, Inc. Executive
Vice President, General Counsel and a
Director of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen Merritt Equity Advisors Corp. and
Van Kampen Merritt Equity Holdings Corp.
Executive Vice President, General Counsel
and Assistant Secretary of Van Kampen
American Capital Advisors, Inc., American
Capital Contractual Services, Inc., Van
Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc. and ACCESS. Executive Vice
President, General Counsel, Assistant
Secretary and Director of Van Kampen
American Capital Trust Company. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to September 1996,
General Counsel of McCarthy, Crisanti &
Maffei, Inc. Prior to July 1996, Executive
Vice President and General Counsel of VSM
Inc. and VCJ Inc. Vice President and
Secretary of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.
Robert C. Peck, Jr...... Vice President Executive Vice President of the VK Adviser
Date of Birth: and Van Kampen American Capital Management,
10/01/46 Inc. Executive Vice President and Director
of the AC Adviser and Van Kampen American
Capital Advisors, Inc. Vice President of
each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Alan T. Sachtleben...... Vice President Executive Vice President of the VK Adviser
Date of Birth: and Van Kampen American Capital Management,
04/20/42 Inc. Executive Vice President and a
Director of the AC Adviser and Van Kampen
American Capital Advisors, Inc. Vice
President of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.
Paul R. Wolkenberg...... Vice President Executive Vice President of VK/AC Holding,
Date of Birth: Inc., Van Kampen American Capital, the
11/10/44 Distributor and the AC Adviser. President,
Chief Executive Officer and a Director of
Van Kampen American Capital Trust Company
and ACCESS. Director of American Capital
Contractual Services, Inc. Vice President
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Edward C. Wood III...... Vice President and Senior Vice President of the VK Adviser,
Date of Birth: Chief Financial Officer the AC Adviser and Van Kampen American
01/11/56 Capital Management, Inc. Vice President and
Chief Financial Officer of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>
B-14
<PAGE> 63
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
John L. Sullivan........ Treasurer First Vice President of the VK Adviser and
Date of Birth: the AC Adviser. Treasurer of each of the
08/20/55 Van Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
Tanya M. Loden.......... Controller Vice President of the VK Adviser and the AC
Date of Birth: Adviser. Controller of each of the Van
11/19/59 Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and AC Adviser.
Nicholas Dalmaso........ Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
03/01/65 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser and Van Kampen
American Capital Management, Inc. Assistant
Vice President of Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Huey P. Falgout, Jr..... Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
11/15/63 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation and ACCESS. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Scott E. Martin......... Assistant Secretary Senior Vice President, Deputy General
Date of Birth: Counsel and Assistant Secretary of Van
08/20/56 Kampen American Capital and VK/AC Holding,
Inc. Senior Vice President, Deputy General
Counsel and Secretary of the VK Adviser,
the AC Adviser, the Distributor, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc., ACCESS, Van Kampen Merritt
Equity Advisors Corp. and Van Kampen
Merritt Equity Holdings Corp. Prior to
September 1996, Deputy General Counsel and
Secretary of McCarthy, Crisanti & Maffei,
Inc. Prior to July 1996, Senior Vice
President, Deputy General Counsel and
Secretary of VSM Inc. and VCJ Inc.
Assistant Secretary of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>
B-15
<PAGE> 64
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Weston B. Wetherell..... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: and Assistant Secretary of Van Kampen
06/15/56 American Capital, the VK Adviser, the AC
Adviser, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
Steven M. Hill.......... Assistant Treasurer Assistant Vice President of the VK Adviser
Date of Birth: and AC Adviser. Assistant Treasurer of each
10/16/64 of the Van Kampen American Capital Funds
and other investment companies advised by
the VK Adviser and the AC Adviser.
Robert Sullivan......... Assistant Controller Assistant Vice President of the VK Adviser
Date of Birth: and the AC Adviser. Assistant Controller of
03/30/33 each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser.
</TABLE>
Each of the foregoing trustees and officers holds the same position with
each of the funds in the Fund Complex. As of December 31, 1995, there were 50
funds in the Fund Complex. Each trustee who is not an affiliated person of the
VK Adviser, the AC Adviser, the Distributor or Van Kampen American Capital (each
a "Non-Affiliated Trustee") is compensated by an annual retainer and meeting
fees for services to the funds in the Fund Complex. Each fund in the Fund
Complex provides a deferred compensation plan to its Non-Affiliated Trustees
that allows trustees to defer receipt of his or her compensation and earn a
return on such deferred amounts based upon the return of the common shares of
the funds in the Fund Complex as more fully described below. Each fund in the
Fund Complex also provides a retirement plan to its Non-Affiliated Trustees that
provides Non-Affiliated Trustees with compensation after retirement, provided
that certain eligibility requirements are met as more fully described below.
The compensation of each Non-Affiliated Trustee includes a retainer by the
funds in the Fund Complex advised by the AC Adviser (the "AC Funds") in an
amount equal to $35,000 per calendar year, due in four quarterly installments on
the first business day of each calendar quarter. The AC Funds pay each Non-
Affiliated Trustee a per meeting fee in the amount of $2,000 per regular
quarterly meeting attended by the Non-Affiliated Trustee, due on the date of
such meeting, plus reasonable expenses incurred by the Non-Affiliated Trustee in
connection with his or her services as a trustee. Payment of the annual retainer
and the regular meeting fee is allocated among the AC Funds (i) 50% on the basis
of the relative net assets of each AC Fund to the aggregate net assets of all
the AC Funds and (ii) 50% equally to each AC Fund, in each case as of the last
business day of the preceding calendar quarter. Each AC Fund participating in
any special meeting of the trustees generally pays each Non-Affiliated Trustee a
per meeting fee in the amount of $125 per special meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee, provided that no compensation will be paid in connection
with certain telephonic special meetings.
The trustees have approved an aggregate compensation cap with respect to
funds in the Fund Complex of $84,000 per Non-Affiliated Trustee per year
(excluding any retirement benefits) for the period July 22, 1995 through
December 31, 1996, subject to the net assets and the number of funds in the Fund
Complex as of July 21, 1995 and certain other exceptions. In addition, each of
the VK Adviser or the AC Adviser, as the case may be, has agreed to reimburse
each fund in the Fund Complex through December 31, 1996 for any increase in the
aggregate trustee's compensation over the aggregate compensation paid by such
fund in its 1994 fiscal year, provided that if a fund did not exist for the
entire 1994 fiscal year appropriate adjustments will be made.
Each Non-Affiliated Trustee can elect to defer receipt of all or a portion
of the compensation earned by such Non-Affiliated Trustee until retirement.
Amounts deferred are retained by the Fund and earn a rate of
B-16
<PAGE> 65
return determined by reference to the return on the common shares of the Fund or
other funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order to
match the deferred compensation obligation. The deferred compensation plan is
not funded and obligations thereunder represent general unsecured claims against
the general assets of the Fund.
The Fund adopted a retirement plan on January 25, 1996. Under the Fund's
retirement plan, a Non-Affiliated Trustee who is receiving trustee's fees from
the Fund prior to such Non-Affiliated Trustee's retirement, has at least ten
years of service and retires at or after attaining the age of 60, is eligible to
receive a retirement benefit equal to $2,500 per year for each of the ten years
following such trustee's retirement. Trustees retiring prior to the age of 60 or
with fewer than 10 years but more than 5 years of service may receive reduced
retirement benefits from a series. The retirement plan contains a Fund Complex
retirement benefit cap of $60,000 per year. The AC Adviser will reimburse the
Fund for expenses related to the retirement plan through December 31, 1996.
Additional information regarding compensation and benefits for trustees is
set forth below. The "Registrant" is the Trust, which currently consists of one
operating series. As indicated in the notes accompanying the table, the amounts
relate to either the Registrant's last fiscal year ended June 30, 1996 or the
Fund Complex' last calendar year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
ESTIMATED TOTAL
PENSION OR ANNUAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS BEFORE DEFERRAL
COMPENSATION BENEFITS ACCRUED FROM FROM REGISTRANT
BEFORE DEFERRAL AS PART OF REGISTRANT AND FUND
FROM REGISTRANT UPON COMPLEX PAID TO
NAME(1) REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
- --------------------------------------- ---------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan...................... $4,575 $-0- $ 2,500 $84,250
Dr. Richard E. Caruso.................. 1,020 -0- -0- 57,250
Philip P. Gaughan...................... 2,750 -0- -0- 76,500
Linda Hutton Heagy..................... 3,565 -0- 2,500 38,417
Dr. Roger Hilsman...................... 4,470 -0- 2,500 91,250
R. Craig Kennedy....................... 4,470 -0- 2,500 92,625
Donald C. Miller....................... 4,260 -0- -0- 94,625
Jack E. Nelson......................... 4,470 -0- 2,500 93,625
David Rees............................. 3,370 -0- 2,500 83,250
Jerome L. Robinson..................... 4,470 -0- -0- 89,375
Lawrence J. Sheehan.................... 3,370 -0- -0- 91,250
Dr. Fernando Sisto..................... 4,470 -0- 2,500 98,750
Wayne W. Whalen........................ 4,470 -0- 2,500 93,375
William S. Woodside.................... 4,470 -0- 2,500 79,125
</TABLE>
- ---------------
(1) Mr. McDonnell, a trustee of the Trust, is an affiliated person of the VK
Adviser and AC Adviser and is not eligible for compensation or retirement
benefits from the Registrant. Messrs. Gaughan, Kennedy, Miller, Nelson,
Robinson and Whalen were elected by shareholders to the Board of Trustees on
July 21, 1995. Ms. Heagy was appointed to the Board of Trustees on September
7, 1995. Mr. McDonnell was appointed to the Board of Trustees on January 30,
1996. Mr. Don G. Powell resigned from the Board of Trustees on August 15,
1996, and did not receive any compensation or benefits from the Fund while a
trustee because he was an affiliated person of the VK Adviser and AC
Adviser. Messrs. Gaughan and Rees retired from the Board of Trustees on
January 26, 1996 and January 29, 1996, respectively. Messrs. Caruso and
Sheehan were removed from the Board of Trustees effective September 7, 1995
and January 29, 1996, respectively.
(2) The amounts shown in this column are aggregated from the compensation paid
by each series in operation during the Registrant's fiscal year ended June
30, 1996 before deferral by the trustees under the deferred compensation
plan. The following trustees deferred all or a portion of their compensation
from the Registrant during the fiscal year ended June 30, 1996: Dr. Caruso,
$1,020; Mr. Gaughan, $930; Ms. Heagy, $2,940; Mr. Kennedy, $3,340; Mr.
Miller, $3,130; Mr. Nelson, $3,340; Mr. Rees, $1,100; Mr. Robinson,
B-17
<PAGE> 66
$3,340; Dr. Sisto, $920; and Mr. Whalen, $3,340. The cumulative deferred
compensation (including interest) accrued with respect to each trustee from
the Registrant as of June 30, 1996 is as follows: Dr. Caruso, $28,129; Mr.
Gaughan, $1,022; Ms. Heagy, $3,126; Mr. Kennedy, $3,543; Mr. Miller,
$3,312; Mr. Nelson, $3,543; Mr. Rees, $66,306; Mr. Robinson, $3,543; Dr.
Sisto, $43,829; and Mr. Whalen, $3,543. The deferred compensation plan is
described above the Compensation Table. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to either the
return on the common shares of the Fund or other funds in the Fund Complex
as selected by the respective Non-Affiliated Trustee. To the extent
permitted by the 1940 Act, the Fund may invest in securities of those funds
selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation.
(3) The amounts shown in this column are zero in the Fund's fiscal year ended
June 30, 1996 because the Adviser has agreed to reimburse the Fund for
expenses related to the retirement plan through December 31, 1996. Absent
such reimbursement, the aggregate expenses of the Fund for all trustees
would have been approximately $7,500 in its fiscal year ended June 30, 1996.
The Retirement Plan is described above the Compensation Table.
(4) The amounts shown in this column are the estimated annual benefits payable
by the Registrant in each year of the 10-year period commencing in the year
of such trustee's retirement from the Registrant (based on $2,500 per series
for each series of the Registrant in operation) assuming: the trustee has 10
or more years of service on the Board of the respective series and retires
at or after attaining the age of 60. The actual annual benefit may be less
if the trustee is subject to the Fund Complex retirement benefit cap or if
the trustee is not fully vested at the time of retirement.
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 1995, before
deferral by the trustees under the deferred compensation plan. The following
trustees deferred compensation paid by the Registrant and the Fund Complex
during the calendar year ended December 31, 1995; Dr. Caruso, $41,750; Mr.
Gaughan, $57,750; Ms. Heagy, $8,750; Mr. Kennedy, $65,875; Mr. Miller,
$65,875; Mr. Nelson, $65,875; Mr. Rees, $8,375; Mr. Robinson, $62,375; Dr.
Sisto, $30,260; and Mr. Whalen, $65,625. The deferred compensation earns a
rate of return determined by reference to the return on the common shares of
the Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee. To the extent permitted by the 1940 Act, the Fund
may invest in securities of those funds selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
trustees' Fund Complex compensation cap commenced on July 22, 1995 and
covered the period between July 22, 1995 and December 31, 1995. Compensation
received prior to July 22, 1995 was not subject to the cap. For the calendar
year ended December 31, 1995, while certain trustees received compensation
over $84,000 in the aggregate, no trustee received compensation in excess of
the pro rata amount of the Fund Complex cap for the period July 22, 1995
through December 31, 1995. In addition to the amounts set forth above,
certain trustees received lump sum retirement benefit distributions not
subject to the cap in 1995 related to three mutual funds that ceased
investment operations during 1995 as follows: Mr. Gaughan, $22,136; Mr.
Miller, $33,205; Mr. Nelson, $30,851; Mr. Robinson, $11,068; and Mr. Whalen,
$27,332. The VK Adviser, AC Adviser and their affiliates also serve as
investment adviser for other investment companies; however, with the
exception of Messrs. McDonnell and Whalen, the trustees were not trustees of
such investment companies. Combining the Fund Complex with other investment
companies advised by the VK Adviser, AC Adviser and their affiliates, Mr.
Whalen received Total Compensation of $268,857 during the calendar year
ended December 31, 1995.
As of October 17, 1996, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund. As of October 17, 1996, no trustee
or officer of the Fund owns or would be able to acquire 5% or more of the common
stock of VK/AC Holding, Inc. Mr. McDonnell owns, or has the opportunity to
purchase, an equity interest in VK/AC Holding, Inc., the parent company of Van
Kampen American Capital, and has entered into an employment contract (for a term
until February 17, 1998) with Van Kampen American Capital.
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom (Illinois).
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
B-18
<PAGE> 67
evaluating economic, statistical, and financial data and for formulating and
implementing investment programs in furtherance of the Fund's investment
objectives. The Adviser also furnishes at no cost to the Fund (except as noted
herein) the services of sufficient executive and clerical personnel for the Fund
as are necessary to prepare registration statements, prospectuses, shareholder
reports, and notices and proxy solicitation materials. In addition, the Adviser
furnishes at no cost to the Fund the services of a President of the Fund, one or
more Vice Presidents as needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser. A
portion of these amounts were paid to the Adviser or its parent in reimbursement
of personnel, office space, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost. The Fund also pays shareholder service agency fees,
distribution fees, custodian fees, legal and auditing fees, the costs of reports
to shareholders and all other ordinary expenses not specifically assumed by the
Adviser.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at an annual
rate of: 0.50% on the first $1 billion average daily net assets; 0.45% on the
next $1 billion of average daily net assets; 0.40% on the next $1 billion of
average daily net assets; and 0.35% on the excess over $3 billion of average
daily net assets.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the determinations of net asset value
for each business day during a given calendar month. Such fee is payable for
each calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any other
direct or indirect majority owned subsidiary of VK/AC Holding, Inc., in
connection with the purchase and sale of portfolio investments of the Fund, less
any direct expenses incurred by such subsidiary of VK/AC Holding, Inc. in
connection with obtaining such payments. The Adviser agrees to use its best
efforts to recapture tender solicitation fees and exchange offer fees for the
Fund's benefit, and to advise the Trustees of the Fund of any other commissions,
fees, brokerage or similar payments which may be possible under applicable laws
for the Adviser or any other direct or indirect majority-owned subsidiary of
VK/AC Holding, Inc., to receive in connection with the Fund's portfolio
transactions or other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed 1 1/2% of the first $30
million of the Fund's average net assets, plus 1% of any excess over $30
million, the compensation due the Adviser will be reduced by the amount of such
excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Fund monthly an amount sufficient to make
up the deficiency, subject to readjustment during the year. Ordinary business
expenses include the investment advisory fee and other operating costs paid by
the Fund except (1) interest and taxes, (2) brokerage commissions, (3) certain
litigation and indemnification expenses as described in the Advisory Agreement
and (4) payments made by the Fund pursuant to the distribution plans, described
below. The Advisory Agreement also provides that the Adviser shall not be liable
to the Fund for any actions or omissions if it acted in good faith without
negligence or misconduct.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on not more than 60 days' nor less than 30 days' written notice.
During the fiscal years ended June 30, 1996, 1995 and 1994, the Adviser
received $11,589,844, $10,261,661 and $11,141,831, respectively, in advisory
fees from the Fund. For such periods, the Fund paid $351,270, $284,101 and
$306,171, respectively, for accounting services. A substantial portion of these
amounts
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<PAGE> 68
was paid to the Adviser in reimbursement of personnel, facilities and equipment
costs attributable to the provision of accounting services to the Fund.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through 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 certain
other costs, including the cost of sales literature 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 be either party on 60 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the last three
fiscal periods is shown in the chart below. Advantage Capital Corporation is a
former affiliated dealer of the Fund.
<TABLE>
<CAPTION>
DEALER REALLOWANCES
AMOUNTS RECEIVED BY
TOTAL UNDERWRITING RETAINED ADVANTAGE CAPITAL
COMMISSIONS BY DISTRIBUTOR CORPORATION
------------------ -------------- -------------------
<S> <C> <C> <C>
Fiscal Year Ended June 30, 1996................. $2,160,395 $789,307 $ 46,686
Fiscal Year Ended June 30, 1995................. $1,964,375 $230,879 $ 114,516
Fiscal Year Ended June 30, 1994................. $2,635,258 $348,004 $ 181,219
</TABLE>
DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by
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<PAGE> 69
the disinterested Trustees. Each of the Plans may be terminated with respect to
any class of shares at any time by a vote of a majority of the disinterested
Trustees or by a vote of a majority of the outstanding voting shares of such
class.
For the year ended June 30, 1996, the Fund has paid expenses under the
Distribution Plan of $0, $453,692 and $22,375 for the Class A shares, Class B
shares and Class C shares, respectively; and the Fund paid $5,084,251, $151,231
and $7,458 under the Service Plan for Class A shares, Class B shares and Class C
shares, respectively.
TRANSFER AGENT
During the fiscal years ended June 30, 1996, 1995 and 1994, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $4,762,121, $6,091,417 and $6,531,269, respectively, for these
services. These services are provided at cost plus a profit.
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 have authorized the Adviser to cause the Fund to incur brokerage
commissions in an amount higher than the lowest available rate in return for
research services provided to the Adviser. The Adviser is of the opinion that
the continued receipt of supplemental investment research services from dealers
is essential to its provision of high quality portfolio management services to
the Fund. The Adviser undertakes that such higher commissions will not be paid
by the Fund unless (a) the Adviser determines in good faith that the amount is
reasonable in relation to the services in terms of the particular transaction or
in terms of the Adviser's overall responsibilities with respect to the accounts
as to which it exercises investment discretion, (b) such payment is made in
compliance with the provisions of Section 28(e) and other applicable state and
federal laws, and (c) in the opinion of the Adviser, the total commissions paid
by the Fund are reasonable in relation to the expected benefits to the Fund over
the long term. The investment advisory fee paid by the Fund under the investment
advisory agreement is not reduced as a result of the Adviser's receipt of
research services.
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<PAGE> 70
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
The Adviser's brokerage practices are monitored by the Brokerage Review
Committee comprised of Fund Trustees who are not interested persons (as defined
in the 1940 Act) of the Adviser.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal years ended June 30, 1996, 1995 and 1994 totalled $10,021,557,
$12,439,850 and $6,854,082, respectively. During the year ended June 30, 1996
the Fund paid $2,827,248 in brokerage commissions on transactions totalling
$2,441,569,786 to brokers selected primarily on the basis of research services
provided to the Adviser.
Prior to December 20, 1994 the Fund placed brokerage transactions with
brokers that were considered affiliated persons of the Adviser's former parent,
The Travelers Inc. Such affiliated persons included Smith Barney Inc. ("Smith
Barney") and Robinson Humphrey, Inc. ("Robinson Humphrey"). Effective December
20, 1994, Smith Barney and Robinson Humphrey ceased to be affiliates of the
Adviser. 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 commissions to these brokers during the periods
shown:
Commissions Paid:
<TABLE>
<CAPTION>
ROBINSON
SMITH BARNEY HUMPHREY
------------ --------
<S> <C> <C>
Fiscal Year Ended
June 30, 1996 -0- -0-
Fiscal Year Ended
June 30, 1995 $182,327 $13,020
Fiscal Year Ended
June 30, 1994 -0- -0-
</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.
Such computation is made by using prices as of the close of trading on the
Exchange and (i) valuing securities listed or traded on a national securities
exchange at the last reported sale price, or if there has been no sale that day,
at the last reported bid price, (ii) valuing options at the last sale price, or
if there has been no sale that day, at the mean between the bid and asked
prices, (iii) valuing over-the-counter securities for which the last sale price
is available from the National Association of Securities Dealers Automated
Quotations
B-22
<PAGE> 71
("NASDAQ") at that price, (iv) valuing all other over-the-counter securities for
which market quotations are available at the most recent bid quotation supplied
by NASDAQ or broker-dealers, and (v) valuing any securities for which market
quotations are not readily available, and any other assets as fair value as
determined in good faith by the Trustees of the Fund. Short-term investments are
valued in the manner described in Note 1 to the Financial Statements included in
this Statement of Additional Information.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements the section in the Fund's Prospectus
captioned "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues three classes of shares: Class A shares, Class B shares and
Class C shares. 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 shares 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 accompanying the Prospectus and forwarding the application, through
the authorized dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of at least $500 per class of shares, 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. Minimum subsequent investments of at least $25 per class of shares,
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 authorized
dealer.
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 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 fiduciary purchasing for a single fiduciary account. An
aggregate investment includes all shares of the Fund and all shares of certain
other participating Van Kampen American Capital mutual funds described in the
Prospectus (the "Participating Funds"), which have been previously purchased and
are still owned, plus
B-23
<PAGE> 72
the shares being purchased. The current offering price is used to determine the
value of all such shares. 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 the shareholder service agent fail to confirm
the representations concerning the investor's holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
the value of all shares of such funds previously purchased and still owned are
also included in determining the applicable quantity discount. A Letter of
Intent permits an investor to establish a total investment goal to be achieved
by any number of investments over a 13-month period. Each investment made during
the period will receive the reduced sales charge applicable to the amount
represented by the goal as if it were a single investment. Escrowed shares
totaling 5% 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 to
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. 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 1.00% 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 1.00% of the net asset value of the shares at the time of purchase, or 1.00%
of the net asset value of the shares at the time 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 Qualified Purchasers
(e.g., in retirement plans qualified under Section 401(a) of the Internal
Revenue Code, as amended (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
B-24
<PAGE> 73
funds. For purposes of the CDSC -- Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of Van Kampen American Capital Reserve
Fund and Van Kampen American Capital Tax Free Money Fund with shares of other
participating funds described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B shares and Class C shares will be subject to a contingent deferred sales
charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
The CDSC -- Class B and C may be waived on redemptions of Class B and Class
C shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended (the
"Code"), which in pertinent part defines a person as disabled if such person "is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long-continued and indefinite duration." While the Fund does
not specifically adopt the balance of the Code's definition which pertains to
furnishing the Secretary of Treasury with such proof as he or she may require,
the Distributor will require satisfactory proof of death or disability before it
determines to waive the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of 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.
B-25
<PAGE> 74
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC -- Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from the 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. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Fund will waive the CDSC -- Class B and Class C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest, with
credit for any CDSC -- Class C paid on the redeemed shares, any portion or all
of his or her redemption proceeds (plus that amount necessary to acquire a
fractional share to round off his or her purchase to the nearest full share) in
shares of the Fund, provided that the reinvestment is effected within 120 days
after such redemption and the shareholder has not previously exercised this
reinvestment privilege with respect to Class C shares of the Fund. Shares
acquired in this manner will be deemed to have the original cost and purchase
date of the redeemed shares for purposes of applying the CDSC -- Class C to
subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. Van Kampen American Capital and its
subsidiaries, including ACCESS, 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, ACCESS nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital, ACCESS and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed.
B-26
<PAGE> 75
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sale charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the Fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new Fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any 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.
TAX STATUS OF THE FUND
The Trust and any of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund intends to
qualify each year and to elect to be treated as a regulated investment company
under the Code. If the Fund so qualifies and distributes each year to its
Shareholders at least 90% of its net investment income (including tax-exempt
interest, taxable income and net short-term capital gain, but not net capital
gains, which are the excess of net long-term capital gains over net short-term
capital losses) in each year, it will not be required to pay federal income
taxes on any income distributed to Shareholders. The Fund intends to distribute
at least the minimum amount of net investment income necessary to satisfy the
90% distribution requirement. The Fund will not be subject to federal income tax
on any net capital gains distributed to Shareholders.
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 (i) the one year period ended
June 30, 1996 was 13.54%, (ii) the five year period ended June 30, 1996 was
11.64% and (iii) the ten year period ended June 30, 1996 was 10.39%. The Fund's
average annual total return (computed in the manner described in the Prospectus)
for Class B shares of the Fund for (i) the one year period ended June 30, 1996
was 14.44% and (ii) the four year, 5 1/2 month period ended June 30, 1996 was
9.65%. The Fund's average annual total return for Class C shares of the Fund for
(i) the one year period ended June 30, 1996 was 18.74% and (ii) the two year,
ten month period ended June 30, 1996 was 11.88%. These results are based on
historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objectives and policies as well as the risks incurred in
the Fund's investment practices. Future results will be affected by changes in
the general level of prices of securities available for purchase and sale by the
Fund. The past one-year, five-year and ten-year periods have been ones of rising
common stock prices, subject to interim fluctuations.
Total return is computed separately for Class A shares, Class B shares and
Class C shares.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) in reports or other communications to shareholders or in advertising
material, illustrate the benefits of compounding at various assumed rates of
return; and (4) illustrate allocations among different types of mutual funds for
investors at different stages of
B-27
<PAGE> 76
their lives. Such illustrations may be in the form of charts or graphs and will
not be based on historical returns experienced by the Funds.
The Adviser seeks to purchase securities of companies which, in the
judgement of the Adviser, have an above average potential for capital growth,
which often includes those companies with innovative management and excellent
financial health. The Fund also attempts to remain fully invested and
diversified across many industries to achieve consistent long-term performance.
Since the commencement of investment operations on July 22, 1969, the world
has experienced a number of significant political and economic events. For
example, in 1971, there were wage and price freezes to attempt to control
inflation. In 1973 the dollar was devalued and the OPEC oil embargo was in
effect. 1976 saw sweeping tax law changes, and in 1979 the CPI rose over 13%,
it's largest rise in 33 years. In 1982, the country was in a recession, in 1985
the U.S. deficit became the largest in the world and the U.S. was now a debtor
nation. 1987 saw the stock market crash. The Persian Gulf War began in 1991, and
the Dow Jones Industrial Average hit a record high of 4000 in 1995.
From time to time marketing materials may provide a portfolio manager
update, an adviser update or discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top five sector holdings and ten largest holdings. Materials
may also mention how Van Kampen American Capital believes the Fund compares
relative to other Van Kampen American Capital funds. Materials may also discuss
the Dalbar Financial Services study from 1984 to 1994 which examined investor
cash flow into and out of all types of mutual funds. The ten year study found
that investors who bought mutual fund shares and held such shares outperformed
investors who bought and sold. The Dalbar study conclusions were consistent
regardless if shareholders purchased their funds in direct or sales force
distribution channels. The study showed that investors working with a
professional representative have tended over time to earn higher returns that
those who invested directly. The Fund will also be marketed on the Internet.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, performs annual audits of the
Fund's financial statements.
B-28
<PAGE> 77
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL PACE FUND
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, 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 Van Kampen
American Capital Pace Fund (the "Fund") at June 30, 1996, and the results of
its operations, the changes in its net assets and the financial highlights for
each of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(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 June 30, 1996 by
correspondence with the custodian and the application of alternative
procedures where confirmations were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
August 2, 1996
B-29
<PAGE> 78
PORTFOLIO OF INVESTMENTS
June 30, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of
Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 91.7%
CONSUMER DISTRIBUTION 7.4%
*170 AutoZone Inc........................................ $ 5,890,125
*335 Best Buy Inc........................................ 7,663,125
120 Cardinal Health Inc................................. 8,655,000
115 Dayton Hudson Corp.................................. 11,859,375
525 Dillard Department Stores Inc....................... 19,162,500
*871 Eckerd Corp......................................... 19,717,687
*400 Federated Department Stores Inc..................... 13,650,000
300 Gap Inc............................................. 9,637,500
*300 Gymboree Corp....................................... 9,150,000
*550 Kroger Co........................................... 21,725,000
190 Lear Corp........................................... 6,697,500
230 May Department Stores Co............................ 10,062,500
*300 Saks Holdings Inc................................... 10,237,500
180 Sears, Roebuck & Co................................. 8,752,500
550 TJX Companies Inc................................... 18,562,500
435 Wal Mart Stores Inc................................. 11,038,125
--------------
192,460,937
--------------
CONSUMER DURABLES 3.0%
150 Black & Decker Corp................................. 5,793,750
235 Chrysler Corp....................................... 14,570,000
*165 Daimler Benz Aktieng, ADS........................... 8,889,375
200 Eastman Kodak Co.................................... 15,550,000
450 Fiat Spa, ADR....................................... 7,650,000
315 General Motors Corp................................. 16,498,125
210 Harley Davidson Inc................................. 8,636,250
--------------
77,587,500
--------------
CONSUMER NON-DURABLES 9.5%
*275 Adidas, ADS......................................... 11,481,250
110 Anheuser Busch Companies Inc........................ 8,250,000
440 Avon Products Inc................................... 19,855,000
125 Campbell Soup Co.................................... 8,812,500
100 Colgate Palmolive Co................................ 8,475,000
170 CPC International Inc............................... 12,240,000
175 Gillette Co......................................... 10,915,625
190 Gucci Group......................................... 12,255,000
375 Liz Claiborne Inc................................... 12,984,375
635 Nabisco Holdings Corp, Class A...................... 22,463,125
640 PepsiCo Inc......................................... 22,640,000
650 Philip Morris Companies Inc......................... 67,600,000
100 Procter & Gamble Co................................. 9,062,500
135 Ralston Purina Group................................ 8,656,875
285 Tambrands Inc....................................... 11,649,375
--------------
247,340,625
--------------
CONSUMER SERVICES 6.0%
*120 Clear Channel Communications........................ 9,843,813
*500 Cox Communications Inc.............................. 10,812,500
175 Equifax Inc......................................... 4,593,750
*390 Grupo Televisa, SA, ADR............................. 11,992,500
320 Harcourt General Inc................................ 16,000,000
160 Hilton Hotels Corp.................................. 18,000,000
</TABLE>
See Notes to Financial Statements
B-30
<PAGE> 79
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of
Shares
(000) Description Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES (CONTINUED)
*600 Host Marriott Corp................................. $ 7,875,000
300 Marriott International Inc......................... 16,125,000
*140 Mirage Resorts Inc................................. 7,560,000
350 News Corp Ltd, ADS................................. 8,225,000
375 Service Corp International......................... 21,562,500
*635 Tele Communications, Class A....................... 11,509,375
325 Time Warner Inc.................................... 12,756,250
--------------
156,855,688
--------------
ENERGY 9.0%
450 Apache Corp........................................ 14,793,750
265 Baker Hughes Inc................................... 8,711,875
95 British Petroleum, PLC, ADR........................ 10,153,125
500 Coastal Corp....................................... 20,875,000
*165 Diamond Offshore Drilling.......................... 9,446,250
250 Dresser Industries Inc............................. 7,375,000
112 Mobil Corp......................................... 12,558,000
425 Occidental Petroleum Corp.......................... 10,518,750
700 PanEnergy Corp..................................... 23,012,500
275 Phillips Petroleum Co.............................. 11,515,625
550 Repsol SA, ADR..................................... 19,112,500
475 Sonat Inc.......................................... 21,375,000
265 Texaco Inc......................................... 22,226,875
581 Williams Companies Inc............................. 28,759,500
700 YPF Sociedad Anonima, ADS.......................... 15,750,000
--------------
236,183,750
--------------
FINANCE 13.9%
275 Bank of Boston Corp................................ 13,612,500
235 BankAmerica Corp................................... 17,801,250
100 BayBanks Inc....................................... 10,775,000
225 Chase Manhattan Corp............................... 15,890,625
175 Citicorp........................................... 14,459,375
280 Corestates Financial Corp.......................... 10,780,000
9 Donaldson, Lufkin & Jenrette Co.................... 288,300
825 Federal National Mortage Association............... 27,637,500
280 First Bank System Inc.............................. 16,240,000
165 First Union Corp................................... 10,044,375
300 Green Tree Financial Corp.......................... 9,375,000
590 Greenpoint Financial Corp.......................... 16,667,500
120 Merrill Lynch & Co Inc............................. 7,815,000
270 MGIC Investment Corp............................... 15,153,750
65 Morgan Stanley Group Inc........................... 3,173,475
200 NationsBank Corp................................... 16,525,000
425 SunAmerica Inc..................................... 24,012,500
375 Travelers Group Inc................................ 17,109,375
Van Kampen American Capital Small Capitalization
7,957 Fund (Cost $87,703,537--see Note 2)................ 104,712,541
50 Wells Fargo & Co................................... 11,943,750
--------------
364,016,816
--------------
HEALTH CARE 8.0%
180 Abbott Laboratories................................ 7,830,000
230 American Home Products Corp........................ 13,828,750
*250 Amgen Inc.......................................... 13,500,000
</TABLE>
See Notes to Financial Statements
B-31
<PAGE> 80
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of
Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE (CONTINUED)
300 Astra, AB, Series A, ADR............................ $ 13,125,000
160 Becton Dickinson & Co............................... 12,840,000
290 Bristol Myers Squibb Co............................. 26,100,000
*120 Genzyme Corp........................................ 6,030,000
200 Guidant Corp........................................ 9,850,000
*475 Healthsouth Rehabilitation.......................... 17,100,000
210 Mallinckrodt Group Inc.............................. 8,163,750
240 Merck & Co Inc...................................... 15,510,000
250 Pfizer Inc.......................................... 17,843,750
365 Schering Plough Corp................................ 22,903,750
200 SmithKline Beecham, PLC, ADR........................ 10,875,000
240 Warner Lambert Co................................... 13,200,000
--------------
208,700,000
--------------
PRODUCER MANUFACTURING 8.3%
225 Allied Signal Inc................................... 12,853,125
500 Canadian Pacific Ltd................................ 11,000,000
360 Cooper Industries Inc............................... 14,940,000
525 Corning Inc......................................... 20,146,875
160 Fluor Corp.......................................... 10,460,000
250 General Electric Co................................. 21,625,000
375 Honeywell Inc....................................... 20,437,500
175 Illinois Tool Works Inc............................. 11,834,375
250 Ingersoll Rand Co................................... 10,937,500
*195 ITT Corp............................................ 12,918,750
*250 Litton Industries Inc............................... 10,875,000
145 TRW Inc............................................. 13,031,875
125 United Technologies Corp............................ 14,375,000
*290 USA Waste Services Inc.............................. 8,591,250
725 Westinghouse Electric Corp.......................... 13,593,750
300 WMX Technologies Inc................................ 9,825,000
--------------
217,445,000
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 4.2%
225 Air Products & Chemicals Inc........................ 12,993,750
100 AK Steel Holding Corp............................... 3,912,500
80 Dow Chemical Co..................................... 6,080,000
105 Kimberly Clark Corp................................. 8,111,250
150 Mead Corp........................................... 7,781,250
525 Morton International Inc............................ 19,556,250
200 Praxair Inc......................................... 8,450,000
105 Raychem Corp........................................ 7,546,875
190 Rohm & Haas Co...................................... 11,922,500
300 Union Carbide Corp.................................. 11,925,000
180 Willamette Industries Inc........................... 10,710,000
--------------
108,989,375
--------------
TECHNOLOGY 15.2%
*180 ADC Telecommunications Inc.......................... 8,100,000
*400 Analog Devices Inc.................................. 10,200,000
*140 Ascend Communications Inc........................... 7,875,000
*125 Aspect Telecommunications Corp...................... 6,187,500
*233 BMC Software Inc.................................... 13,891,875
185 Boeing Co........................................... 16,118,125
</TABLE>
See Notes to Financial Statements
B-32
<PAGE> 81
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of
Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONTINUED)
*385 Cadence Design Systems Inc.......................... $ 12,993,750
*160 Cascade Communications Corp......................... 10,880,000
*480 Cisco Systems Inc................................... 27,180,000
360 Computer Associates International Inc............... 25,650,000
575 Ericsson (L M), Class B, ADR........................ 12,362,500
135 First Data Corp..................................... 10,749,375
*230 General Instrument Corp............................. 6,641,250
100 Hewlett Packard Co.................................. 9,962,500
360 Intel Corp.......................................... 26,437,500
300 Linear Technology Corp.............................. 9,000,000
470 Loral Corp.......................................... 6,403,750
350 Lucent Technologies Inc............................. 13,256,250
*225 McAfee Associates Inc............................... 11,025,000
165 McDonnell Douglas Corp.............................. 8,002,500
*180 Microsoft Corp...................................... 21,622,500
400 Motorola Inc........................................ 25,150,000
*190 Newbridge Networks Corp............................. 12,445,000
*350 Oracle System Corp.................................. 13,803,125
*355 Sun Microsystems Inc................................ 20,900,625
*205 Tellabs Inc......................................... 13,709,375
*140 3Com Corp........................................... 6,405,000
*95 US Robotics Corp.................................... 8,122,500
435 Xerox Corp.......................................... 23,272,500
--------------
398,347,500
--------------
TRANSPORTATION 1.6%
*105 AMR Corp............................................ 9,555,000
450 Canadian National Railway........................... 8,268,750
175 Conrail Inc......................................... 11,615,625
180 Union Pacific Corp.................................. 12,577,500
--------------
42,016,875
--------------
UTILITIES 5.6%
160 DTE Energy Co....................................... 4,940,000
200 Empresa Nacional Electric, SA, ADR.................. 12,525,000
635 Frontier Corp....................................... 19,446,875
*400 LCI International Inc............................... 12,550,000
450 MCI Communications Corp............................. 11,531,250
250 Portugal Telecom, SA, ADR........................... 6,562,500
*131 PT Telekomuniskasi, ADR............................. 3,897,250
*330 PT Pasifik Satelite, ADR............................ 6,600,000
295 Sprint Corp......................................... 12,390,000
295 Telefonica de Espana, SA, ADR....................... 16,261,875
320 Texas Utilities Co.................................. 13,680,000
*450 WorldCom Inc........................................ 24,918,750
--------------
145,303,500
--------------
TOTAL COMMON STOCKS (Cost $2,076,596,361)........... 2,395,247,566
--------------
</TABLE>
See Notes to Financial Statements
B-33
<PAGE> 82
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Par Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT
OBLIGATIONS 3.4%
$ **40,000 United States Treasury Bonds.... 8.750% 05/15/17 $ 47,381,200
40,000 United States Treasury Notes.... 6.375 07/15/99 40,081,200
--------------
TOTAL UNITED STATES GOVERNMENT
OBLIGATIONS (Cost $86,726,563).. 87,462,400
--------------
SHORT-TERM INVESTMENTS 4.9%
REPURCHASE AGREEMENTS+ 4.2%
57,595 BA Securities, repurchase
proceeds $57,621,158............ 5.450 07/01/96 57,595,000
4,445 Lehman Government Securities,
repurchase proceeds $4,446,982.. 5.350 07/01/96 4,445,000
46,855 SBC Capital Markets, Inc.
repurchase proceeds $46,876,163. 5.420 07/01/96 46,855,000
--------------
108,895,000
--------------
UNITED STATES AGENCIES AND
GOVERNMENT OBLIGATIONS 0.7%
**3,720 Federal Home Loan Banks......... 5.250 12/19/96 3,624,173
5,000 Tennessee Valley Authority...... 5.335 08/20/96 4,962,529
**5,000 Treasury Bills.................. 5.044 07/25/96 4,982,708
**5,000 Treasury Bills.................. 5.130 07/11/96 4,992,361
--------------
18,561,771
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost
$127,456,978).................................... 127,456,771
--------------
TOTAL INVESTMENTS (Cost $2,290,779,902) 100.0%............... 2,610,166,737
OTHER ASSETS AND LIABILITIES, NET 0.0%....................... 744,992
--------------
NET ASSETS 100%.............................................. $2,610,911,729
--------------
</TABLE>
*Non-income producing security
**Securities with a market value of $59.2 million were placed as collateral for
futures contracts (see Note 1B)
+Dated 6/28/96, collateralized by U.S. Government Obligations in a pooled cash
account
See Notes to Financial Statements
B-34
<PAGE> 83
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $2,290,779,902).............. $2,610,166,737
Cash............................................................ 1,073
Receivable for investments sold................................. 59,241,747
Receivable for Fund shares sold................................. 10,607,115
Dividends and interest receivable............................... 4,601,095
Other assets and receivables.................................... 128,931
--------------
Total Assets................................................... 2,684,746,698
--------------
LIABILITIES
Payable for investments purchased............................... 65,278,153
Payable for Fund shares redeemed................................ 5,778,302
Due to Adviser.................................................. 995,206
Due to Distributor.............................................. 768,024
Due to shareholder service agent................................ 452,512
Deferred trustees' compensation................................. 184,155
Due to broker-variation margin.................................. 3,500
Accrued expenses and liabilities................................ 375,117
--------------
Total Liabilities.............................................. 73,834,969
--------------
NET ASSETS, equivalent to $11.92 per share for Class A, $11.81
per share for Class B, and $11.83 per share for Class C shares. $2,610,911,729
--------------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 212,622,907 Class A,
6,103,794 Class B, and 377,788 Class C shares outstanding...... $ 2,191,045
Capital surplus................................................. 2,076,215,544
Undistributed net realized gain on securities................... 200,704,405
Net unrealized appreciation of securities
Investments.................................................... 319,386,835
Futures contracts.............................................. 598,102
Undistributed net investment income............................. 11,815,798
--------------
NET ASSETS...................................................... $2,610,911,729
--------------
</TABLE>
B-35
See Notes to Financial Statements
<PAGE> 84
STATEMENT OF OPERATIONS
Year Ended June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends ($4,179,133 from an affiliate--see Note 2)............. $ 41,112,554
Interest......................................................... 8,213,613
------------
Investment income............................................... 49,326,167
------------
EXPENSES
Management fees.................................................. 11,589,844
Shareholder service agent's fees and expenses.................... 5,347,809
Accounting services.............................................. 351,270
Service fees--Class A............................................ 5,084,251
Distribution and service fees--Class B........................... 604,923
Distribution and service fees--Class C........................... 29,833
Trustees' fees and expenses...................................... 92,559
Audit fees....................................................... 55,163
Custodian fees................................................... 98,156
Legal fees....................................................... 14,487
Reports to shareholders.......................................... 410,793
Registration and filing fees..................................... 186,146
Insurance expense................................................ 30,905
Miscellaneous.................................................... 305,096
Retirement plan expense reimbursement (see Note 4)............... (7,500)
------------
Total expenses.................................................. 24,193,735
------------
NET INVESTMENT INCOME............................................ 25,132,432
------------
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities
Investments..................................................... 379,086,590
Futures contracts............................................... 9,314,867
Options......................................................... 82,678
Net unrealized appreciation of securities during the period
Investments..................................................... 51,120,615
Futures contracts............................................... 598,102
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES................... 440,202,852
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................. $465,335,284
------------
</TABLE>
B-36
See Notes to Financial Statements
<PAGE> 85
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended June 30
------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period............... $2,334,574,828 $2,189,514,914
-------------- --------------
OPERATIONS
Net investment income......................... 25,132,432 26,893,772
Net realized gain on securities............... 388,484,135 230,051,826
Net unrealized appreciation of securities
during the period............................. 51,718,717 160,102,867
-------------- --------------
Increase in net assets resulting from
operations................................... 465,335,284 417,048,465
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A...................................... (28,239,265) (22,916,396)
Class B...................................... (222,479) (141,014)
Class C...................................... (9,253) (5,920)
-------------- --------------
(28,470,997) (23,063,330)
-------------- --------------
Net realized gain on securities
Class A...................................... (331,334,720) (242,510,817)
Class B...................................... (7,831,468) (5,629,695)
Class C...................................... (325,710) (236,324)
-------------- --------------
(339,491,898) (248,376,836)
-------------- --------------
Total distributions.......................... (367,962,895) (271,440,166)
-------------- --------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A...................................... 1,289,182,633 800,964,139
Class B...................................... 270,611,054 152,874,778
Class C...................................... 47,285,828 14,211,717
-------------- --------------
1,607,079,515 968,050,634
-------------- --------------
Proceeds from shares issued for distributions
reinvested
Class A...................................... 332,438,649 242,657,855
Class B...................................... 7,437,204 4,892,097
Class C...................................... 294,778 176,726
-------------- --------------
340,170,631 247,726,678
-------------- --------------
Cost of shares redeemed
Class A...................................... (1,461,520,981) (1,059,520,324)
Class B...................................... (261,183,146) (143,264,491)
Class C...................................... (45,581,507) (13,540,882)
-------------- --------------
(1,768,285,634) (1,216,325,697)
-------------- --------------
Increase (decrease) in net assets resulting
from capital transactions.................... 178,964,512 (548,385)
-------------- --------------
INCREASE IN NET ASSETS........................ 276,336,901 145,059,914
-------------- --------------
NET ASSETS, end of period (including
undistributed net investment income of
$11,815,798 and $15,141,317, respectively)... $2,610,911,729 $2,334,574,828
-------------- --------------
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 86
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Pace Fund (the "Fund", formerly American Capital
Pace Fund, Inc.) is registered under the Investment Company Act of 1940, as
amended, as a diversified open-end management investment company. The Fund
seeks growth of capital by investing principally in common stocks.
The following is a summary of significant accounting policies consistently fol-
lowed by the Fund in the preparation of its financial statements. The prepara-
tion of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the amounts reported. Actual amounts may differ from the estimates.
A. INVESTMENT VALUATIONS--Securities, including options, listed or traded on a
national securities exchange or NASDAQ, are valued at the last sale price. Un-
listed securities and listed securities for which the last sale price is not
available are valued at the most recent bid price. Options are valued at the
last sale price or, if no sales are reported, at the mean between the 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
cost.
B. OPTIONS AND FUTURES CONTRACTS--General--Transactions in options and futures
contracts are utilized in strategies to manage the market risk of the Fund's
investments. The purchase of a futures contract or call option (or the writing
of a put option) 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.
Call and Put Options--The Fund may write covered call options and collateral-
ized put options. Options written on futures contracts require initial margin
deposits. Options purchased are recorded as investments; options written (sold)
are accounted for as liabilities. When an option expires, the premium (original
option value) is realized as a gain if the option was written or realized as a
loss if the option was purchased. When the exercise of an option results in a
cash settlement, the difference between the premium and the settlement proceeds
is realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by
the amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss.
Futures Contracts--Upon entering into futures contracts, the Fund maintains, in
a segregated account with its custodian, securities with a value equal to its
obligation under the futures contracts. A portion of these funds are held as
collateral in an account in the name of the broker, the Fund's agent in acquir-
ing 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 contracts to market on a daily basis. As unrealized gains or losses
are incurred, variation margin payments are received from or made to the bro-
ker. Upon the closing or cash settlement of a contract, gains or losses are re-
alized. The cost of securities acquired through delivery under a contract is
adjusted by the unrealized gain or loss on the contract.
C. REPURCHASE AGREEMENTS--A repurchase agreement is a short-term investment in
which the Fund acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund may in-
vest independently in repurchase agreements, or transfer uninvested cash bal-
ances into a pooled cash account along with other investment companies advised
by Van Kampen American Capital Asset Management, Inc. (the "Adviser"), the
daily aggregate of which is invested in repurchase agreements. Repurchase
agreements are collateralized by the underlying debt security. The Fund will
make payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller is re-
quired to maintain the value of the underlying security at not less than the
repurchase proceeds due the Fund.
B-38
<PAGE> 87
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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.
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--Investment transac-
tions are accounted for on the trade date. Realized gains and losses on invest-
ments 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 differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.
G. DEBT DISCOUNT AND PREMIUM--The Fund accounts for discounts and premiums on
the same basis as is used for federal income tax reporting. Accordingly, origi-
nal issue discounts on debt securities purchased are amortized over the life of
the security. Premiums on debt securities are not amortized. Market discounts
are recognized at the time of sale as realized gains for book purposes and as
ordinary income for tax purposes.
NOTE 2-MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.50% of the first $1 billion, .45% of the next $1 billion, .40% of the next $1
billion, and .35% of the amount in excess of $3 billion.
Accounting services include the salaries and overhead expenses of the Fund's
Chief Accounting Officer and the personnel operating under his direction.
Charges are allocated among investment companies advised by the Adviser. For
the period, these charges included $26,983 as the Fund's share of the employee
costs attributable to the Fund's accounting officers. A portion of the account-
ing services expense was paid to the Adviser in reimbursement of personnel, fa-
cilities and equipment costs attributable to the provision of accounting
services to the Fund. The services provided by the Adviser are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period, the fees for such services were $4,762,121.
The Fund has been advised that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corporation (the "Retail Dealer"),
both affiliates of the Adviser, received $789,307 and $46,686, respectively, as
their portion of the commissions charged on sales of Fund shares during the pe-
riod. As of January 2, 1996, the Retail Dealer was no longer an affiliate of
the Adviser.
Under the Distribution Plans, each class of shares pays up to .25% per annum of
its average net assets to reimburse the Distributor for expenses and service
fees incurred. Class B and C shares pay an additional fee of up to .75% per an-
num of their average net assets to reimburse the Distributor for its distribu-
tion expenses. Actual distribution expenses incurred by the Distributor for
Class B and C shares may exceed the amounts reimbursed to the Distributor by
the Fund. At the end of the period, the unreimbursed expenses incurred by the
Distributor under the Class B and C plans aggregated approximately $2.1 million
and $7,700, respectively, and may be carried forward and reimbursed through ei-
ther the collection of the contingent deferred sales charges from share repur-
chases or, subject to the annual renewal of the plans, future Fund
reimbursements of distribution fees.
Legal fees during the period were for services rendered by former counsel of
the Fund, O'Melveny & Myers. A former trustee was of counsel to that firm.
At the end of the period, certain officers and trustees of the Fund are offi-
cers and trustees of the Adviser, the Distributor, and the shareholder service
agent.
At the end of the period, the Fund owned approximately 47% of the Van Kampen
American Capital Small Capitalization Fund ("Small Cap"), an investment company
managed by the Adviser. Small Cap comprised approximately 4%
B-39
<PAGE> 88
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
of the fund's total net assets. During the period, the Fund purchased and sold
shares of Small Cap. Cost of additional purchases aggregated $82,500,000 and
the proceeds from the sale were $38,768,477, resulting in a net realized loss
to the Fund of $1,269,049.
NOTE 3-INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $5,036,880,688 and
$5,226,210,286.
For federal income tax purposes, the identified cost of investments owned at
the end of the period was $2,297,214,688. Net unrealized appreciation of in-
vestments aggregated $312,952,049, gross unrealized appreciation of investments
aggregated $345,825,774 and gross unrealized depreciation of investments aggre-
gated $32,873,725.
At the end of the period, the Fund held the following long futures:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF MARKET APPRECIATION
CONTRACTS DESCRIPTION VALUE (DEPRECIATION)
- -------------------------------------------------------------------------------
<S> <C> <C>
250 Simex Nikkei 225 Index (Japan),
expiring 09/96................... $25,727,082 $601,602
80 Standard & Poor's 500 Index,
expiring 09/96................... 27,072,000 (3,500)
----------- --------
$52,799,082 $598,102
----------- --------
</TABLE>
During the period, the Fund had the following option activity:
OPTIONS
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
- --------------------------------------------------------------------------------
<S> <C> <C>
Beginning of the period balance............................ 0 $ 0
Written.................................................... 440 82,678
Expired.................................................... (440) (82,678)
---- --------
End of the period balance.................................. 0 $ 0
---- --------
</TABLE>
NOTE 4-TRUSTEE COMPENSATION
Fund trustees who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $3,605 plus a fee of $206 per day for Board and Com-
mittee meetings attended. During the period, such fees aggregated $77,776.
The Fund has a deferred compensation plan and a defined benefits retirement
plan for its trustees not affiliated with the Adviser. These plans are not
funded, and obligations under the plans 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 plans by any form of trust or escrow.
Under the deferred compensation plan, trustees may elect to defer all or a por-
tion of their compensation to a later date. Each trustee covered under the plan
elects to earn on the deferred balances an amount equal to the total return of
the Fund or equal to the income earned by the Fund on its short-term invest-
ments.
Under the retirement plan which became effective in January 1996, benefits
which are based on years of service will be received by the trustee for a ten-
year period. The maximum annual benefit for each trustee is $2,500. Retirement
plan expenses for the period aggregated $7,500. During the calendar year 1996,
the Adviser has agreed to reimburse the Fund for these plan expenses.
B-40
<PAGE> 89
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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
(Class A) or at the time of redemption on a contingent deferred basis (Class B
and C). All classes of shares have the same rights, except that Class B and C
shares bear the cost of distribution fees and certain other class specific ex-
penses. Realized and unrealized gains or losses, investment income, and ex-
penses (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 and C shares automatically convert to Class A shares six years and ten years
after purchase, respectively, subject to certain conditions.
The Fund has an unlimited number of shares of $.01 par value beneficial in-
terest authorized. Transactions in shares of beneficial interest were as fol-
lows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A............................................ 107,853,497 73,542,303
Class B............................................ 22,765,160 14,291,211
Class C............................................ 3,991,112 1,350,739
------------ ------------
134,609,769 89,184,253
------------ ------------
Shares issued for distributions reinvested
Class A............................................ 30,359,648 25,119,379
Class B............................................ 682,294 507,973
Class C............................................ 27,055 18,312
------------ ------------
31,068,997 25,645,664
------------ ------------
Shares redeemed
Class A............................................ (121,801,653) (97,327,563)
Class B............................................ (21,936,339) (13,469,993)
Class C............................................ (3,834,141) (1,284,346)
------------ ------------
(147,572,133) (112,081,902)
------------ ------------
Increase in shares outstanding..................... 18,106,633 2,748,015
------------ ------------
</TABLE>
NOTE 6-FUND REORGANIZATION
On July 21, 1995, the shareholders approved the reorganization of the Fund to a
Delaware Business Trust and the election of fourteen trustees. On August 31,
1995, the reorganization became effective.
B-41
