<PAGE> 1
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
(formerly, American Capital Life Investment Trust)
2800 Post Oak Boulevard
Houston, Texas 77056
(800) 421-5666
September 18, 1995
Van Kampen American Capital Life Investment Trust (the "Trust") is an
open-end diversified management investment company which offers shares in eight
separate Funds, each of which is in effect a separate fund. Shares are sold only
to separate accounts (the "Accounts") of various insurance companies to fund the
benefits of variable annuity or variable life insurance policies (the
"Contracts"). The Accounts invest in shares of the Funds in accordance with
allocation instructions received from Contractowners. Such allocation rights are
further described in the accompanying Prospectus for the Contracts. The
investment objectives of the Funds are as follows:
Common Stock Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks.
Domestic Strategic Income Fund seeks current income as its primary
objective. Capital appreciation is a secondary objective. The Fund attempts
to achieve these objectives through investment primarily in a diversified
portfolio of fixed-income securities. The Fund may invest in investment
grade securities and lower rated and nonrated securities. LOWER RATED
SECURITIES (COMMONLY KNOWN AS "JUNK BONDS") ARE REGARDED BY THE RATING
AGENCIES AS PREDOMINANTLY SPECULATIVE WITH RESPECT TO THE ISSUER'S
CONTINUING ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS.
Emerging Growth Fund seeks capital appreciation by investing in a portfolio
of securities consisting principally of common stocks of small and medium
sized companies considered by Van Kampen American Capital Asset Management,
Inc. (the "Adviser"), to be emerging growth companies.
Global Equity Fund seeks long-term growth of capital through investments in
an internationally diversified portfolio of equity securities of companies
of any nation including the United States.
Government Fund seeks to provide investors with a high current return
consistent with preservation of capital. The Fund invests primarily in debt
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. In order to hedge against changes in interest rates, the
Fund may also purchase or sell options and engage in transactions involving
interest rate futures contracts and options on such contracts.
Money Market Fund seeks protection of capital and high current income by
investing in short-term money market instruments. INVESTMENTS IN THE MONEY
MARKET FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
ALTHOUGH THE MONEY MARKET FUND SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE, THERE IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
Multiple Strategy Fund seeks a high total investment return consistent with
prudent risk through a fully managed investment policy utilizing equity
securities, primarily common stocks of large capitalization companies, as
well as investment grade intermediate and long-term debt securities and
money market securities.
Real Estate Securities Fund seeks as its primary objective long-term growth
of capital by investing principally in securities of companies operating in
the real estate industry ("Real Estate Securities"). Current income is a
secondary consideration. A "real estate industry company" is a company that
derives at least 50% of its assets (marked to market), gross income or net
profits from the ownership, construction, management or sale of residential,
commercial or industrial real estate. Under normal market conditions, at
least 65% of the Fund's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate investment trusts.
There is no assurance that any Fund will achieve its investment objectives.
--------------------------------------------------------------------------------
This Prospectus tells Contractowners briefly the information they should
know before allocating premiums or cash value to the Fund. Investors should read
and retain this Prospectus for future reference.
A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("SEC") and contains
further information about the Trust. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Fund at the
telephone number and address printed above. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
<TABLE>
<S> <C>
CUSTODIAN: State Street Bank and Trust
Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER ACCESS Investor Services, Inc.
SERVICE AGENT: P.O. Box 418256
Kansas City, Missouri
64141-9256
DISTRIBUTOR: Van Kampen American Capital
Distributors, Inc.
One Park View Plaza
Oak Brook Terrace, Illinois
60181
INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
INVESTMENT John Govett & Co. Limited
SUBADVISER: 4 Battle Bridge Lane
[FOR "GLOBAL London SE1 2HR
EQUITY FUND"] England
INVESTMENT Hines Interests Realty
SUBADVISER: Advisors Limited Partnership
[FOR "REAL ESTATE 2800 Post Oak Boulevard
SECURITIES FUND"] Houston, Texas 77056
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary...................... 3
Financial Highlights.................... 7
Introduction............................ 15
Investment Objectives and Policies...... 15
Common Stock Fund..................... 15
Domestic Strategic Income Fund........ 16
Emerging Growth Fund.................. 20
Global Equity Fund.................... 20
Government Fund....................... 23
Money Market Fund..................... 27
Multiple Strategy Fund................ 28
Real Estate Securities Fund........... 29
Investment Practices.................... 30
The Trust and Its Management............ 35
Purchase of Shares...................... 39
Determination of Net Asset Value........ 39
Redemption of Shares.................... 40
Dividends, Distributions and Taxes...... 40
Fund Performance........................ 42
Description of Shares of the Trust...... 43
Additional Information.................. 44
Appendix................................ 45
</TABLE>
-------------------------------------------------------------------------------
No dealer, salesperson, or 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 Trust, the Adviser or the Distributor. This
Prospectus does not constitute an offer by the Trust 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 Trust to make
such an offer in such jurisdiction.
-------------------------------------------------------------------------------
2
<PAGE> 3
PROSPECTUS SUMMARY
Shares Offered..........Shares of Beneficial Interest in eight Funds: the Common
Stock Fund, the Domestic Strategic Income Fund, the
Emerging Growth Fund, the Global Equity Fund, the
Government Fund, the Money Market Fund, the Multiple
Strategy Fund, and the Real Estate Securities Fund.
Type of Company.........Diversified, open-end management investment company.
Investment Objectives...The Common Stock Fund seeks capital appreciation; the
Domestic Strategic Income Fund seeks current income and
capital appreciation; the Emerging Growth Fund seeks
capital appreciation; the Global Equity Fund seeks
long-term growth of capital; the Government Fund seeks
high current return consistent with preservation of
capital; the Money Market Fund seeks protection of
capital and high current income; the Multiple Strategy
Fund seeks high total investment return; and the Real
Estate Securities Fund seeks long-term growth of
capital.
Investment Policies and
Risk Factors..........The Common Stock Fund invests principally in common
stocks of companies which, in the judgment of the
Adviser, have above average potential for capital
appreciation. Because prices of common stocks and other
securities fluctuate, the value of an investment in the
Fund will vary based upon the Fund's investment
performance. Use of options, futures contracts and
options on futures contracts may include additional
risk. See "Investment Practices -- Using Options,
Futures Contracts and Options on Futures Contracts."
The Domestic Strategic Income Fund invests in a
diversified portfolio of fixed-income securities. The
Fund expects that at all times at least 80% of its
assets will be invested in fixed-income securities rated
at the time of purchase B or higher by Moody's Investors
Service ("Moody's") or Standard & Poor's Corporation
("S&P"), nonrated debt securities and U.S. Government
securities. Securities rated BB or lower are regarded by
the rating agencies as predominantly speculative with
respect to the issuer's continuing ability to meet
principal and interest payments. Such securities are
commonly referred to as "junk bonds." Because investment
in lower rated securities involves greater investment
risk, achievement of the Fund's investment objectives
may be more dependent on the Adviser's credit analysis
than would be the case if the Fund were investing in
higher rated securities. Lower rated securities may be
more susceptible to real or perceived adverse economic
and competitive industry conditions than investment
grade securities and thus be subject to higher risk. A
projection of an economic downturn, for example, could
cause a decline in lower rated securities prices because
the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest
payments on its debt securities. In addition, the
secondary trading market for lower rated securities may
be less liquid than the market for higher grade
securities. The market prices of debt securities also
generally fluctuate with changes in interest rates so
that the Fund's net asset value can be expected to
decrease as long-term interest rates rise and to
increase as long-term interest rates fall. The above
risks may be increased by investments in debt securities
not producing immediate cash income, such as zero-
3
<PAGE> 4
coupon and pay-in-kind securities. See "Investment
Objectives and Policies."
The Emerging Growth Fund invests at least 65% of the
Fund's total assets in common stocks of small and medium
sized companies (less than $2 billion of market
capitalization or annual sales), both domestic and
foreign, considered by the Adviser to be emerging growth
companies. The companies in which the Fund invests may
offer greater opportunities for growth of capital than
larger, more established companies, but investments in
such companies may involve special risks. See
"Investment Objectives and Policies" and "Investment
Practices -- Foreign Securities." The use of options,
futures contracts and related options may include
additional risks. See "Investment Practices -- Using
Options, Futures Contracts and Related Options."
The Global Equity Fund invests in an internationally
diversified portfolio of equity securities of companies
of any nation including the United States. See
"Investment Objectives and Policies." Use of options,
futures contracts and related options may include
additional risks. See "Investment Practices -- Using
Options, Futures Contracts and Related Options."
The Government Fund invests primarily in debt securities
issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Fund may sell (write)
and purchase call and put options. The Fund also may
purchase and sell interest rate futures contracts and
options on such contracts since such transactions are
entered into for bona fide hedging purposes. The Fund
may purchase or sell U.S. Government securities on a
forward commitment basis. The market prices of debt
securities, including U.S. Government securities,
generally fluctuate with changes in interest rates so
that the Fund's net asset value can be expected to
decrease as long-term interest rates rise and to
increase as long-term interest rates fall. See
"Investment Objectives and Policies -- Government
Fund -- General."
The Money Market Fund invests in money market
instruments.
The Multiple Strategy Fund may, at various times, be
substantially invested in equity securities, bonds and
notes or money market securities, based upon the
Adviser's evaluation of economic and market trends and
anticipated relative return available from a particular
kind of security. Because prices of securities
fluctuate, the value of an investment in the Fund will
vary based upon the Fund's investment performance. Use
of options, futures contracts and options on futures
contracts may include additional risk. See "Investment
Practices -- Using Options, Futures Contracts and
Options on Futures Contracts."
The Real Estate Securities Fund invests in a portfolio
of securities of companies operating in the real estate
industry ("Real Estate Securities"). Real Estate
Securities include equity securities, including common
stocks and convertible securities, as well as
non-convertible preferred stocks and debt securities of
real estate industry companies. A "real estate industry
company" is a company that derives at least 50% of its
assets (marked to market), gross income or net profits
from the ownership, construction, management or sale of
residential, commercial or industrial real estate. Under
normal market conditions, at
4
<PAGE> 5
least 65% of the Fund's total assets will be invested in
Real Estate Securities, primarily equity securities of
real estate investment trusts. The Fund's investment in
debt securities will be rated, at the time of
investment, at least Baa by Moody's or BBB by S&P, a
comparable rating by any other nationally recognized
statistical rating organization or if unrated,
determined by the Adviser to be of comparable quality.
Under normal market conditions, the Fund may invest up
to 35% of its total assets in equity and debt securities
of companies outside the real estate industry, U.S.
Government securities, cash and money market
instruments.
Because of the Fund's policy of concentrating its
investments in Real Estate Securities, the Fund may be
more susceptible than an investment company without such
a policy to any single economic, political or regulatory
occurrence affecting the real estate industry. In
addition, the Fund will be affected by general changes
in interest rates which will result in increases or
decreases in the market value of the debt securities
(and, to a lesser degree, equity securities) held by the
Fund; the market value of such securities tends to have
an inverse relationship to the movement of interest
rates. For additional information regarding the risk
connected with investment in Real Estate Securities, see
"Risk Factors."
The Fund may invest up to 25% of its total assets in
securities issued by foreign issuers, some or all of
which may also be Real Estate Securities. Investments in
foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic
issuers, including fluctuations in foreign exchange
rates, future political and economic developments, and
the possible imposition of exchange controls or other
foreign governmental laws or restrictions. See
"Investment Practices -- Foreign Securities."
The Fund may purchase or sell debt securities on a
forward commitment basis. See "Investment
Practices -- Forward Commitments." The Fund may use
portfolio management techniques and strategies involving
options, futures contracts and options on futures. The
utilization of options, futures contracts and options on
futures contracts may involve greater than ordinary
risks and the likelihood of more volatile price
fluctuation. See "Investment Practices -- Using Options,
Futures Contracts and Options on Futures Contracts."
Investment Adviser......The Adviser has served as investment adviser to the
Trust since its inception. John Govett & Co. Limited
("John Govett") provides advisory services to the
Adviser with respect to the Global Equity Fund's
investments in foreign securities. Hines Interests
Realty Advisors Limited Partnership ("Hines Realty
Advisors") provides advisory services to the Adviser of
the Real Estate Fund with respect to the real estate
industry. See "The Trust and Its Management."
Dividends and
Distributions.........Dividends from net investment income are declared each
business day for the Money Market Fund and the
Government Fund. Such dividends are distributed monthly.
The Government Fund may distribute any net short-term
capital gains and any net long-term capital gains at
least annually. The Common Stock Fund, the Domestic
Strategic Income
5
<PAGE> 6
Fund, the Emerging Growth Fund, the Global Equity Fund,
the Multiple Strategy Fund and the Real Estate
Securities Fund declare dividends and any capital gains
distributions annually.
Redemption..............At the next determined net asset value.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor").
6
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following information for each of the five most recent years has been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
was unqualified. The information presented below for the six months ended June
30, 1995 is unaudited. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.
COMMON STOCK FUND
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED PERIOD ENDED DECEMBER 31
JUNE 30, ----------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1995 1994 1993 1992 1991 1990
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period............................ $12.39 $14.57 $14.21 $13.44 $10.09 $11.30
--------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................................... .20 .33 .30 .31 .335 .46
Expenses........................................................ (.05) (.09) (.11) (.10) (.10) (.101)
Expense reimbursement........................................... .01 .01 .02 .02 .03 .036
--------- -------- -------- -------- -------- --------
Net investment income........................................... .16 .25 .21 .23 .265 .395
Net realized and unrealized gains or losses on
securities.................................................... 2.34 (.7625) 1.0325 .77 3.37 (1.17)
--------- -------- -------- -------- -------- --------
Total from investment operations................................ 2.50 (.5125) 1.2425 1.00 3.635 (.775)
--------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS FROM
Net investment income........................................... (.0075) (.25) (.215) (.23) (.285) (.435)
Net realized gain on securities................................. (.1525) (1.4175) (.6675) -- -- --
--------- -------- -------- -------- -------- --------
Total distributions............................................. (.16) (1.6675) (.8825) (.23) (.285) (.435)
--------- -------- -------- -------- -------- --------
Net asset value, end of period.................................. $14.73 $12.39 $14.57 $14.21 $13.44 $10.09
========== ========= ========= ========= ========= =========
TOTAL RETURN(3)................................................. 20.29% (3.39%) 8.98% 7.48% 36.41% (6.84%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................ $71.3 $67.5 $72.3 $65.6 $57.8 $27.2
Ratios to average net assets (annualized)
Expenses........................................................ .60% .60% .60% .60% .60% .60%
Expenses, without expense reimbursement......................... .70% .68% .72% .74% .90% .93%
Net investment income........................................... 2.26% 1.72% 1.41% 1.78% 2.33% 3.64%
Net investment income, without expense reimbursement............ 2.16% 1.64% 1.29% 1.64% 2.03% 3.31%
Portfolio turnover rate......................................... 66% 153% 139% 116% 95% 122%
<CAPTION>
PERIOD ENDED DECEMBER 31
------------------------------------------
PER SHARE OPERATING PERFORMANCE 1989 1988 1987(1) 1986
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............................ $8.70 $7.97 $9.33 $10.00(2)
-------- -------- -------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................................... .46 .38 .25 .32
Expenses........................................................ (.10) (.095) (.10) (.06)
Expense reimbursement........................................... .04 .035 .03 .04
-------- -------- -------- ---------
Net investment income........................................... .40 .32 .18 .30
Net realized and unrealized gains or losses on
securities.................................................... 2.57 .765 (1.1975) (.97)
-------- -------- -------- ---------
Total from investment operations................................ 2.97 1.085 (1.0175) (.67)
-------- -------- -------- ---------
LESS DISTRIBUTIONS FROM
Net investment income........................................... (.37) (.30) (.2575) --
Net realized gain on securities................................. -- (.055) (.085) --
-------- -------- -------- ---------
Total distributions............................................. (.37) (.355) (.3425) --
-------- -------- -------- ---------
Net asset value, end of period.................................. $11.30 $8.70 $7.97 $9.33
========= ========= ========= ==========
TOTAL RETURN(3)................................................. 34.23% 13.61% (11.12%) (6.70%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................ $31.8 $24.0 $31.0 $12.0
Ratios to average net assets (annualized)
Expenses........................................................ .60% .60% .60% .60%
Expenses, without expense reimbursement......................... .93% .95% .89% .95%
Net investment income........................................... 3.74% 3.13% 1.65% 10.34%
Net investment income, without expense reimbursement............ 3.41% 2.78% 1.36% 9.99%
Portfolio turnover rate......................................... 86% 63% 75% 268%
</TABLE>
---------------------
(1) Based on average month-end shares outstanding.
(2) As of April 4, 1986, commencement of operations.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
7
<PAGE> 8
FINANCIAL HIGHLIGHTS (CONTINUED)
The following information for each of the five most recent years has been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
was unqualified. The information presented below for the six months ended June
30, 1995 is unaudited. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.
DOMESTIC STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED PERIOD ENDED DECEMBER 31
JUNE 30, ---------------------------------------------
PER SHARE OPERATING PERFORMANCE 1995 1994 1993 1992 1991
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............................... $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98
-------- --------- --------- --------- -----------
INCOME FROM INVESTMENT OPERATIONS
Investment income.................................................. .35 .91 .77 .74 .725
Expenses........................................................... (.03) (.10) (.09) (.07) (.07)
Expense reimbursement.............................................. .01 .04 .04 .02 .03
-------- --------- --------- --------- -----------
Net investment income.............................................. .33 .85 .72 .69 .685
Net realized and unrealized gains or losses on securities.......... .6675 (1.2275) .5825 .2725 .7525
-------- --------- --------- --------- -----------
Total from investment operations................................... .9975 (.3775) 1.3025 .9625 1.4375
-------- --------- --------- --------- -----------
LESS DISTRIBUTIONS FROM
Net investment income.............................................. (.0075) (.8525) (.7225) (.7025) (.6775)
Net realized gain on securities.................................... -- -- -- -- --
-------- --------- --------- --------- -----------
Total distributions................................................ (.0075) (.8525) (.7225) (.7025) (.6775)
-------- --------- --------- --------- -----------
Net asset value, end of period..................................... $ 8.34 $ 7.35 $ 8.58 $ 8.00 $ 7.74
======== ========= ========= ========= ===========
TOTAL RETURN(2).................................................... 13.58% (4.33%) 16.32% 12.50% 21.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................... $27.1 $21.3 $27.4 $21.1 $17.4
Ratios to average net assets (annualized)
Expenses......................................................... .60% .60% .60% .60% .60%
Expenses, without expense reimbursement.......................... 1.00% .95% .95% .95% .95%
Net investment income............................................ 8.44% 8.35% 7.80% 8.89% 9.72%
Net investment income, without expense reimbursement............. 8.04% 8.00% 7.40% 8.54% 9.37%
Portfolio turnover rate............................................ 61% 94% 130% 117% 90%
<CAPTION> PERIOD ENDED DECEMBER 31
----------------------------------------------
PER SHARE OPERATING PERFORMANCE 1990 1989 1988 1987
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............................... $8.64 $10.96 $10.15 $10.00(1)
-------- --------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income.................................................. 1.085 1.805 .65 .09
Expenses........................................................... (.08) (.12) (.18) (.08)
Expense reimbursement.............................................. .03 .04 .15 .07
-------- --------- ---------- ----------
Net investment income.............................................. 1.035 1.725 .62 .08
Net realized and unrealized gains or losses on securities.......... (1.64) (2.31) .8975 .1525
-------- --------- ---------- ----------
Total from investment operations................................... (.605) (.585) 1.5175 .2325
-------- --------- ---------- ----------
LESS DISTRIBUTIONS FROM
Net investment income.............................................. (1.055) (1.725) (.61) (.0825)
Net realized gain on securities.................................... -- (.01) (.0975) --
-------- --------- ---------- ----------
Total distributions................................................ (1.055) (1.735) (.7075) (.0825)
-------- --------- ---------- ----------
Net asset value, end of period..................................... $6.98 $ 8.64 $10.96 $10.15
======== ========= ========== ==========
TOTAL RETURN(2).................................................... (7.23%) (5.44%) 14.95% 1.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................... $6.3 $ 8.1 $ 8.1 $ 1.2
Ratios to average net assets (annualized)
Expenses......................................................... .60% .60% .60% .60%
Expenses, without expense reimbursement.......................... .95% .95% .95% .95%
Net investment income............................................ 11.99% 12.92% 10.88% 5.58%
Net investment income, without expense reimbursement............. 11.64% 12.57% 10.53% 5.23%
Portfolio turnover rate............................................ 123% 56% 44% 42%
</TABLE>
---------------------
(1) As of November 4, 1987, commencement of operations.
(2) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
8
<PAGE> 9
FINANCIAL HIGHLIGHTS (CONTINUED)
The information presented below for the period ended July 31, 1995 is
unaudited. This information should be read in conjunction with the related
financial statements and notes thereto included in the Statement of Additional
Information.
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
(UNAUDITED)
JULY 3,
1995(1)
THROUGH
JULY 31,
PER SHARE OPERATING PERFORMANCE 1995(2)
-----------
<S> <C>
Net asset value, beginning of period................................................................................ $ 10.00
-----------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................................................................... .02
Expenses............................................................................................................ (.04)
Expense reimbursement............................................................................................... .02
-----------
Net investment income (loss)........................................................................................ 0
Net realized and unrealized gains on securities..................................................................... .86
-----------
Total from investment operations.................................................................................... .86
-----------
Net asset value, end of period...................................................................................... $ 10.86
==========
TOTAL RETURN(3)..................................................................................................... 8.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................................................................ $ 0.7
Ratios to average net assets (annualized)
Expenses.......................................................................................................... 2.50%
Expenses, without expense reimbursement........................................................................... 4.57%
Net investment loss............................................................................................... (.39%)
Net investment loss, without expense reimbursement................................................................ (2.46%)
Portfolio turnover rate............................................................................................. 0%
</TABLE>
---------------------
(1) Commencement of operations.
(2) Based on average shares outstanding.
(3) Total return for a period of less than one year is not annualized. Total
return does not consider the effect of sales loads.
9
<PAGE> 10
FINANCIAL HIGHLIGHTS (CONTINUED)
The information presented below for the period ended July 31, 1995 is
unaudited. This information should be read in conjunction with the related
financial statements and notes thereto included in the Statement of Additional
Information.
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
(UNAUDITED)
JULY 3,
1995(1)
THROUGH
JULY 31,
PER SHARE OPERATING PERFORMANCE 1995(2)
-----------
<S> <C>
Net asset value, beginning of period................................................................................ $ 10.00
-----------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................................................................... .03
Expenses............................................................................................................ (.04)
-----------
Net investment loss................................................................................................. (.01)
Net realized and unrealized gains on securities..................................................................... .22
-----------
Total from investment operations.................................................................................... .21
-----------
Net asset value, end of period...................................................................................... $ 10.21
==========
TOTAL RETURN(3)..................................................................................................... 2.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................................................................ $ 2.1
Ratios to average net assets (annualized)
Expenses.......................................................................................................... 4.55%
Net investment loss............................................................................................... (1.44%)
Portfolio turnover rate............................................................................................. 11%
</TABLE>
---------------------
(1) Commencement of operations.
(2) Based on average shares outstanding.
(3) Total return for a period of less than one year is not annualized. Total
return does not consider the effect of sales loads.
10
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONTINUED)
The following information for each of the five most recent years has been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
was unqualified. The information presented below for the six months ended June
30, 1995 is unaudited. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.
GOVERNMENT FUND
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
PER SHARE ENDED PERIOD ENDED DECEMBER 31
OPERATING JUNE 30, --------------------------------------------------------------
PERFORMANCE 1995 1994 1993 1992 1991 1990 1989
--------- ------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.................... $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48
--------- ------- ------- ------- ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .33 .61 .62 .72 .79 .835 .89
Expenses................................................ (.04) (.06) (.06) (.064) (.06) (.06) (.06)
Expense
reimbursement......................................... .01 .01 .01 .009 .01 .01 .01
--------- ------- ------- ------- ------- ------ -------
Net investment income................................... .30 .56 .57 .665 .74 .785 .84
Net realized and unrealized gains or losses on
securities............................................ .5275 (.985) .135 (.1575) .60 (.105) .325
--------- ------- ------- ------- ------- ------ -------
Total from investment operations........................ .8275 (.425) .705 .5075 1.34 .68 1.165
--------- ------- ------- ------- ------- ------ -------
LESS DISTRIBUTIONS FROM
Net investment income................................... (.2975) (.555) (.575) (.6675) (.75) (.78) (.845)
Net realized gain on securities......................... -- -- -- -- -- -- --
--------- ------- ------- ------- ------- ------ -------
Total distributions..................................... (.2975) (.555) (.575) (.6675) (.75) (.78) (.845)
--------- ------- ------- ------- ------- ------ -------
Net asset value, end of period.......................... $ 8.81 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80
========= ======= ======= ======= ======= ====== =======
TOTAL RETURN(2)......................................... 10.16% (4.63%) 7.86% 5.73% 16.23% 8.31% 14.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $68.2 $ 65.5 $80.6 $74.8 $77.0 $73.2 $81.2
Ratios to average net assets (annualized)
Expenses.............................................. .60% .60% .60% .60% .60% .60% .60%
Expenses, without expense reimbursement............... .73% .70% .70% .70% .70% .69% .66%
Net investment income................................. 7.05% 6.71% 6.45% 7.29% 8.37% 9.19% 9.56%
Net investment income, without expense
reimbursement....................................... 6.92% 6.61% 6.35% 7.19% 8.27% 9.10% 9.50%
Portfolio turnover rate................................. 100% 192% 91% 36% 57% 164% 42%
<CAPTION>
PER SHARE PERIOD ENDED DECEMBER 31,
OPERATING -------------------------------
PERFORMANCE 1988 1987 1986
------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period.................... $ 8.68 $ 9.91 $10.00(1)
-------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .94 .81 .55
Expenses................................................ (.06) (.05) (.07)
Expense reimbursement................................... -- -- .03
-------- --------- --------
Net investment income................................... .88 .76 .51
Net realized and unrealized gains or losses on
securities............................................ (.215) (.97) .0516
-------- --------- --------
Total from investment operations........................ .665 (.21) .561
-------- --------- --------
LESS DISTRIBUTIONS FROM
Net investment income................................... (.865) (.7525) (.5041)
Net realized gain on securities......................... -- (.2675) (.1475)
-------- --------- --------
Total distributions..................................... (.865) (1.02) (.6516)
-------- --------- --------
Net asset value, end of period.......................... $ 8.48 $ 8.68 $ 9.91
======== ========= ========
TOTAL RETURN(2)......................................... 6.74% (2.12%) 4.22%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $90.6 $108.8 $67.7
Ratios to average net assets (annualized)
Expenses.............................................. .60% .60% .60%
Expenses, without expense reimbursement............... .64% .64% .95%
Net investment income................................. 9.29% 8.37% 6.80%
Net investment income, without expense
reimbursement....................................... 9.25% 8.33% 6.45%
Portfolio turnover rate................................. 88% 65% 115%
</TABLE>
---------------------
(1) As of April 4, 1986, commencement of operations.
(2) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
11
<PAGE> 12
FINANCIAL HIGHLIGHTS (CONTINUED)
The following information for each of the five most recent years has been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
was unqualified. The information presented below for the six months ended June
30, 1995 is unaudited. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.
MONEY MARKET FUND
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
PER SHARE ENDED PERIOD ENDED DECEMBER 31
OPERATING JUNE 30, ------------------------------------------------------------
PERFORMANCE 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................................... .03 .0425 .0322 .0391 .0607 .082 .0937
Expenses................................................... (.005) (.0087) (.0095) (.009) (.0087) (.009) (.01)
Expense reimbursement...................................... .002 .0027 .0035 .003 .0026 .003 .004
------- ------- ------- ------- ------- ------ -------
Net investment income...................................... .027 .0365 .0262 .0331 .0546 .076 .0877
Net realized and unrealized gains or losses on
securities............................................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------ -------
Total from investment operations........................... .027 .0365 .0262 .0331 .0546 .076 .0877
------- ------- ------- ------- ------- ------ -------
DISTRIBUTIONS FROM NET INVESTMENT INCOME................... (.027) (.0365) (.0262) (.0331) (.0546) (.076) (.0877)
------- ------- ------- ------- ------- ------ -------
Net asset value, end of period............................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======= ======= ======= ======= ======= ====== =======
TOTAL RETURN(2)............................................ 2.73% 3.71% 2.66% 3.36% 5.46% 7.83% 9.13%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....................... $24.4 $28.5 $30.0 $32.9 $38.0 $34.3 $29.0
Ratios to average net assets (annualized)
Expenses................................................. .60% .60% .60% .60% .60% .60% .60%
Expenses, without expense reimbursement.................. .98% .87% .95% .89% .87% .89% .95%
Net investment income.................................... 5.39% 3.63% 2.63% 3.32% 5.44% 7.59% 8.76%
Net investment income, without expense reimbursement..... 5.01% 3.37% 2.28% 3.03% 5.17% 7.30% 8.41%
<CAPTION>
PER SHARE PERIOD ENDED DECEMBER 31
OPERATING ------------------------------
PERFORMANCE 1988 1987 1986
------- -------- -------
<S> <C> <C> <C>
Net asset value, beginning of period....................... $1.00 $1.00 $1.00(1)
------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................................... .0773 .0684 .0429
Expenses................................................... (.0104) (.0141) (.0093)
Expense reimbursement...................................... .0045 .0081 .0052
------- -------- -------
Net investment income...................................... .0714 .0624 .0388
Net realized and unrealized gains or losses on
securities............................................... -- (.00002) --
------- -------- -------
Total from investment operations........................... .0714 .06238 .0388
------- -------- -------
DISTRIBUTIONS FROM NET INVESTMENT INCOME................... (.0714) (.06238) (.0388)
------- -------- -------
Net asset value, end of period............................. $1.00 $1.00 $1.00
======== ========= ========
TOTAL RETURN(2)............................................ 7.38% 6.41% 4.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....................... $24.5 $18.6 $23.4
Ratios to average net assets (annualized)
Expenses................................................. .60% .60% .60%
Expenses, without expense reimbursement.................. .95% .95% .95%
Net investment income.................................... 7.22% 6.24% 5.70%
Net investment income, without expense reimbursement..... 6.87% 5.89% 5.35%
</TABLE>
---------------------
(1) As of April 4, 1986, commencement of operations.
(2) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
12
<PAGE> 13
FINANCIAL HIGHLIGHTS (CONTINUED)
The following information for each of the five most recent years has been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
was unqualified. The information presented below for the six months ended June
30, 1995 is unaudited. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.
MULTIPLE STRATEGY FUND
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED PERIOD ENDED DECEMBER 31
PER SHARE OPERATING JUNE 30, -------------------------------------------------------
PERFORMANCE 1995 1994 1993 1992 1991 1990
--------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....................... $ 9.99 $11.80 $11.92 $12.08 $10.43 $10.77
--------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................................... .28 .52 .37 .44 .54 .58
Expenses................................................... (.05) (.09) (.09) (.09) (.09) (.09)
Expense reimbursement...................................... .01 .02 .01 .02 .02 .03
--------- -------- -------- -------- -------- -------
Net investment income...................................... .24 .45 .29 .37 .47 .52
Net realized and unrealized gains or losses on
securities............................................... 1.5125 (.89) .6025 .493 2.27 (.325)
--------- -------- -------- -------- -------- -------
Total from investment operations........................... 1.7525 (.44) .8925 .863 2.74 .195
--------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS FROM
Net investment income...................................... (.0075) (.45) (.2925) (.3689) (.4825) (.535)
Net realized gain on securities............................ (.005) (.90) (.63) (.6541) (.6075) --
Excess of net realized gains on securities................. -- (.02) (.09) -- -- --
--------- -------- -------- -------- -------- -------
Total distributions........................................ (.0125) (1.37) (1.0125) (1.023) (1.09) (.535)
--------- -------- -------- -------- -------- -------
Net asset value, end of period............................. $11.73 $ 9.99 $11.80 $11.92 $12.08 $10.43
========== ========= ========= ========= ========= ========
TOTAL RETURN(2)............................................ 17.55% (3.66%) 7.71% 7.28% 27.05% 1.89%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....................... $61.1 $56.6 $64.9 $59.6 $52.2 $40.3
Ratios to average net assets (annualized)
Expenses................................................. .60% .60% .60% .60% .60% .60%
Expenses, without expense reimbursement.................. .76% .72% .74% .77% .80% .80%
Net investment income.................................... 4.29% 3.70% 2.34% 3.05% 4.12% 4.70%
Net investment income, without expense reimbursement..... 4.13% 3.58% 2.20% 2.88% 3.92% 4.50%
Portfolio turnover rate.................................... 53% 163% 150% 126% 88% 46%
<CAPTION>
PERIOD ENDED DECEMBER 31
PER SHARE OPERATING ------------------------------
PERFORMANCE 1989 1988 1987
------- -------- -------
<S> <C> <C> <C>
Net asset value, beginning of period....................... $9.67 $ 9.56 $10.00(1)
------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................................... .65 .67 .20
Expenses................................................... (.09) (.09) (.04)
Expense reimbursement...................................... .03 .03 .02
------- -------- -------
Net investment income...................................... .59 .61 .18
Net realized and unrealized gains or losses on
securities............................................... 1.13 .1125 (.445)
------- -------- -------
Total from investment operations........................... 1.72 .7225 (.265)
------- -------- -------
LESS DISTRIBUTIONS FROM
Net investment income...................................... (.595) (.6125) (.175)
Net realized gain on securities............................ (.025) -- --
Excess of net realized gains on securities................. -- -- --
------- -------- -------
Total distributions........................................ (.62) (.6125) (.175)
------- -------- -------
Net asset value, end of period............................. $10.77 $ 9.67 $9.56
======== ========= ========
TOTAL RETURN(2)............................................ 17.82% 7.56% (5.23%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....................... $40.5 $31.4 $22.7
Ratios to average net assets (annualized)
Expenses................................................. .60% .60% .60%
Expenses, without expense reimbursement.................. .86% .90% .95%
Net investment income.................................... 5.93% 6.36% 6.48%
Net investment income, without expense reimbursement..... 5.67% 6.06% 6.13%
Portfolio turnover rate.................................... 50% 48% 27%
</TABLE>
---------------------
(1) As of June 30, 1987, commencement of operations.
(2) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
13
<PAGE> 14
FINANCIAL HIGHLIGHTS (CONTINUED)
The information presented below for the period ended July 31, 1995 is
unaudited. This information should be read in conjunction with the related
financial statements and notes thereto included in the Statement of Additional
Information.
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
(UNAUDITED)
JULY 3,
1995(1)
THROUGH
JULY 31,
PER SHARE OPERATING PERFORMANCE 1995(2)
-----------
<S> <C>
Net asset value, beginning of period................................................................................ $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................................................................... .04
Expenses............................................................................................................ (.03)
Expense reimbursement............................................................................................... .01
-------
Net investment income............................................................................................... .02
Net realized and unrealized gains on securities..................................................................... .18
-------
Total from investment operations.................................................................................... .20
-------
Net asset value, end of period...................................................................................... $ 10.20
=======
TOTAL RETURN(3)..................................................................................................... 2.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................................................................ $ 1.3
Ratios to average net assets (annualized)
Expenses.......................................................................................................... 2.50%
Expenses, without expense reimbursement........................................................................... 4.15%
Net investment income............................................................................................. 2.80%
Net investment income, without expense reimbursement.............................................................. 1.15%
Portfolio turnover rate............................................................................................. 7%
</TABLE>
---------------------
(1) Commencement of operations.
(2) Based on average shares outstanding.
(3) Total return for a period of less than one year is not annualized. Total
return does not consider the effect of sales loads.
14
<PAGE> 15
INTRODUCTION
The Trust is a duly organized Delaware business trust with eight separate
Funds. Each Fund has separate assets and liabilities and a separate net asset
value per share. Shares of a Fund represent an interest only in that Fund. Since
market risks are inherent in all securities to varying degrees, assurance cannot
be given that the investment objectives of any of the Fund will be met.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund of the Trust has a different investment objective which it
pursues through separate investment policies as described below. See "Investment
Practices" for further discussion of investment techniques and strategies. The
investment objective of each Fund, except the Real Estate Securities Fund, is a
fundamental policy and may not be changed without shareholder approval. With
respect to the Real Estate Securities Fund, the investment objective may be
changed by the Trustees. If there is a change in the objective of the Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. The differences in
objectives and policies among the Fund can be expected to affect the return of
each Fund and the degree of market and financial risk to which each Fund is
subject.
COMMON STOCK FUND
The Fund seeks capital appreciation through investments in securities
believed by the Adviser to have above average potential for capital
appreciation. Any income received on such securities is incidental to the
objective of capital appreciation.
The Fund invests principally in growth common stocks. Such securities
generally include those of companies with established records of growth in sales
or earnings, and companies with new products, new services, or new processes.
The Fund may also invest in companies in cyclical industries during periods when
their securities appear attractive to the Adviser for capital appreciation. In
addition to common stock, the Fund may invest in warrants and preferred stocks,
and in investment companies. See "Investment Practices -- Investment in
Investment Companies."
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. Such investments may be increased to up to 100% of
the Fund's assets when deemed appropriate by the Adviser for temporary defensive
purposes. Short-term investments may include repurchase agreements with banks or
broker-dealers. See "Investment Practices -- Repurchase Agreements."
The Fund's primary approach is to seek what the Adviser believes to be
attractive growth investments on an individual company basis. The Fund may
invest in securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
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 objective. The Fund may also invest in debt securities of
foreign issuers, including non-U.S. dollar denominated debt securities,
Eurodollar securities and securities issued, assumed or guaranteed by foreign
governments or political subdivisions or instrumentalities thereof. The Fund
will limit its investment in foreign securities to 10% of its total assets,
taken at market value at the time of each investment. See "Investment
Practices -- Foreign Securities." The Fund may engage in portfolio management
strategies and techniques involving options, futures contracts and options on
futures. Options, futures contracts and options on futures contracts are
described in "Investment Practices -- Using Options, Futures Contracts and
Options on Futures Contracts."
15
<PAGE> 16
DOMESTIC STRATEGIC INCOME FUND
The Fund's primary objective is to maximize current income. Capital
appreciation is a secondary objective which will be sought only when consistent
with its primary objective. The Fund attempts to achieve these investment
objectives by investing primarily in fixed-income securities, including both
convertible and non-convertible debt securities and preferred stocks. The Fund
may invest in investment grade securities and lower rated and nonrated
securities. There is no assurance that these objectives will be achieved and
yields may fluctuate over time. The Fund may also invest in debt securities of
foreign issuers, including non-U.S. dollar denominated debt securities,
Eurodollar securities and securities issued, assumed or guaranteed by foreign
governments or political subdivisions or instrumentalities thereof. The Fund
will limit its investment in foreign securities to 25% of its total assets,
taken at market value at the time of each investment. See "Investment
Practices -- Foreign Securities."
The Fund expects that at all times at least 80% of its assets will be
invested in fixed-income securities rated at the time of purchase B or higher by
Moody's or S&P, nonrated debt securities considered by the Adviser to be of
comparable quality, and U.S. Government securities. See the Appendix for a
description of corporate bond ratings. The Fund may also purchase or sell U.S.
Government securities on a forward commitment basis. See "Investment
Practices -- Forward Commitments."
The Fund may invest in debt securities rated below B by both Moody's and
S&P or nonrated debt securities considered by the Adviser to be of comparable
quality (commonly known as "junk bonds"), common stocks or other equity
securities and income bonds on which interest is not accrued by the Fund when
such investments are consistent with the Fund's investment objectives or are
acquired as part of a unit consisting of a combination of fixed-income or equity
securities. The Fund may also invest in prime commercial paper, certificates of
deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. See
"Investment Practices -- Repurchase Agreements." Equity securities as referred
to herein do not include preferred stocks. The Fund will not purchase any such
securities which will cause more than 20% of its total assets to be so invested
or which would cause more than ten percent of its total assets to be invested in
common stocks or other equity securities.
In general, the prices of debt securities vary inversely with interest
rates. If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. In addition, for a given change
in interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal. This potential for a decline in
prices of debt securities due to rising interest rates is referred to herein as
"market risk." While the Fund has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of four to six years.
Duration is a measure of the expected life of a debt security that
incorporates a security's yield, coupon interest payments, final maturity and
call features into one measure. Traditionally a debt security's "term to
maturity" has been used as a proxy for the sensitivity of the security's price
to changes in interest rates (which is the "interest rate risk" or "price
volatility" of the security). However, "term to maturity" measures only the time
until a debt security provides its final payment taking no account of the
pattern of the security's payments of interest or principal prior to maturity.
Duration is a measure of the expected life of a debt security on a present value
basis expressed in years. It measures the length of the time interval between
the present and the time when the interest and principal payments are scheduled
(or in the case of a callable bond, expected to be received), weighing them by
the present value of the cash to be received at each future point in time. For
any debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity, and for zero coupon issues,
duration and term to maturity are equal. In general,
16
<PAGE> 17
the lower the coupon rate of interest or the longer the maturity, or the lower
the yield-to-maturity of a debt security, the longer its duration; conversely,
the higher the coupon rate of interest, the shorter the maturity or the higher
the yield-to-maturity of a debt security, the shorter its duration.
Duration allows an investment manager to make certain assumptions regarding
how the value of a portfolio will generally respond to changes in interest
rates. For example, a portfolio consisting entirely of treasury notes yielding
7.7% with a remaining maturity of two years would have a duration of 1.9 years
and a 1% change in the interest rate earned on such securities would cause a
change of approximately 1.9% in the net asset value of the portfolio. A
portfolio consisting entirely of treasury notes yielding 7.8% with a remaining
maturity of ten years would have a duration of 7.0 years and a 1% change in the
interest rate earned on such securities would cause a change of between 6.5 and
8% in the net asset value of the portfolio. This example is intended for
demonstration purposes only, however, and is not intended to approximate how the
Fund's portfolio will respond to changes in interest rates. The Fund's
investment portfolio may include securities with differing maturities and
quality levels, and interest rates on those instruments may not all change by
the same amount at the same time as rates rise or fall generally in the
marketplace. Also, the treasury securities described in the example cannot be
retired prior to maturity, while some of the securities in the Fund's portfolio
can. These factors among others can cause the Fund's investment portfolio to
respond somewhat differently to changes in interest rates than shown in the
example.
There are some situations where even a duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At December 31, 1994, the duration
of the debt securities owned by the Fund, was approximately 5.5 years. The
duration is likely to vary from time to time as the Adviser pursues its strategy
of striving to maintain a balance between seeking to maximize income and
endeavoring to maintain the value of the Fund's capital. Thus the objective of
providing current return to shareholders is tempered by seeking to avoid undue
market risk. There is, of course, no assurance that the Adviser will be
successful in achieving such results for the Fund.
The higher yields sought by the Fund are generally obtainable from
securities rated in the lower categories by recognized rating services. These
securities generally are subordinated to the prior claims of banks and other
senior lenders. The lower rated debt securities in which the Fund may invest are
regarded as predominately speculative with respect to the issuers continuing
ability to meet principal and interest payments. The ratings of Moody's and S&P
represent their opinions of the quality of the debt securities they undertake to
rate, but not the market value risk of such securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, debt securities with the same maturity, coupon and rating may have
different yields while debt securities of the same maturity and coupon with
different ratings may have the same yield.
17
<PAGE> 18
During the fiscal year ended December 31, 1994, the average percentage of
the Fund's assets invested in debt securities within the various rating
categories (based on the higher of the S&P or Moody's ratings), and the nonrated
debt securities, determined on a dollar weighted average, were as follows:
<TABLE>
<S> <C>
AAA/Aaa................................................................... .13%
AA/Aa..................................................................... 2.35
A/A....................................................................... 10.93
BBB/Baa................................................................... 38.30
BB/Ba..................................................................... 14.64
B/B....................................................................... 18.92
*Nonrated................................................................. 12.98
Preferred Stocks/Common Stocks/Warrants................................... 1.51
Cash and Equivalents...................................................... .24
-------
Total Net Assets..................................................... 100.00%
</TABLE>
* The nonrated debt securities as a percentage of total net assets were
considered by the Adviser to be comparable to securities rated by Moody's as
follows: AAA- 11.59%, BBB- .38%, B- .99%, and D- .02%.
The securities in which the Fund may invest include the following:
-- Straight fixed-income debt securities. These include bonds and other
debt obligations which bear a fixed or variable rate of interest payable at
regular intervals and have a fixed or resettable maturity date. The particular
terms of such securities vary and may include features such as call provisions
and sinking funds.
-- Pay-in-kind debt securities. These pay interest in additional debt
securities rather than in cash.
-- Zero-coupon debt securities. These bear no interest obligation but are
issued at a discount from their value at maturity. When held to maturity,
their entire return equals the difference between their issue price and their
maturity value. Interest is however accrued by the Fund each day for
accounting and Federal income tax purposes.
-- Zero-fixed-coupon debt securities. These are zero-coupon debt securities
which convert on a specified date to interest-bearing debt securities.
Fixed-income securities rated below B by both Moody's and S&P include debt
obligations or other securities of companies that are financially troubled, in
default or are in bankruptcy or reorganization ("Deep Discount Securities").
Debt obligations of such companies are usually available at a deep discount from
the face value of the instrument. The Fund will invest in Deep Discount
Securities when the Adviser believes that existing factors are likely to restore
the company to a healthy financial condition. Such factors include a
restructuring of debt, management changes, existence of adequate assets, or
other unusual circumstances.
A debt instrument purchased at a deep discount may currently pay a very
high effective yield. In addition, if the financial condition of the issuer
improves, the underlying value of the security may increase, resulting in a
capital gain. If the company defaults on its obligations or remains in default,
or if the plan of reorganization is insufficient for debtholders, the Deep
Discount Securities may stop generating income and lose value or become
worthless. The Adviser will balance the benefits of Deep Discount Securities
with their risks. While a diversified portfolio may reduce the overall impact of
a Deep Discount Security that is in default or loses its value, the risk cannot
be eliminated.
Risk Factors of Investing in Lower Rated Debt Securities. Past experience
may not provide an accurate indication of future performance of the market for
lower rated debt securities, particularly
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during periods of economic recession. An economic downturn or increase in
interest rates is likely to have a greater negative effect on this market, the
value of lower rated debt securities in the Fund, the Fund's net asset value and
the ability of the bonds' issuers to repay principal and interest, meet
projected business goals and obtain additional financing than on higher rated
securities. These circumstances also may result in a higher incidence of
defaults than with respect to higher rated securities. An investment in this
Fund may be considered more speculative than investment in shares of a fund
which invests primarily in higher rated debt securities.
Prices of lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of lower rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash. When
it deems it appropriate and in the best interests of Fund shareholders, the Fund
may incur additional expenses to seek recovery on a debt security on which the
issuer has defaulted and to pursue litigation to protect its interests of
security holders of its companies.
Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. Nonrated
securities are usually not as attractive to as many buyers as rated securities
are, a factor which may make nonrated securities less marketable. These factors
may have the effect of limiting the availability of the securities for purchase
by the Fund and may also limit the ability of the Fund to sell such securities
at their fair value either to meet redemption requests or in response to changes
in the economy or the financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of lower rated debt securities, especially in a thinly
traded market. To the extent the Fund owns or may acquire illiquid or restricted
lower rated securities, these securities may involve special registration
responsibilities, liabilities and costs, and liquidity and valuation
difficulties. Changes in values of debt securities which the Fund owns will
affect its net asset value per share. If market quotations are not readily
available for the Fund's lower rated or nonrated securities, these securities
will be valued by a method that the Fund's Trustees believes accurately reflects
fair value. Judgment plays a greater role in valuing lower rated debt securities
than with respect to securities for which more external sources of quotations
and last sale information are available.
Special tax considerations are associated with investing in lower rated
debt securities structured as zero coupon or pay-in-kind securities. The Fund
accrues income on these securities prior to the receipt of cash payments. The
Fund must distribute substantially all of its income to its shareholders to
qualify for pass-through treatment under the tax laws and may, therefore, have
to dispose a portion of its portfolio securities to satisfy distribution
requirements.
While credit ratings are only one factor the Adviser relies on in
evaluating lower rated debt securities, certain risks are associated with using
credit ratings. Credit rating agencies may fail to timely change the credit
ratings to reflect subsequent events; however, the Adviser continuously monitors
the issuers of lower rated debt securities in its portfolio in an attempt to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. Achievement of the Fund's investment
objective may be more dependent upon the Adviser's credit analysis than is the
case for higher quality debt securities. Credit ratings for individual
securities may change from time to time and the Fund may retain a portfolio
security whose rating has been changed.
Investors should consider carefully the additional risks associated with
investment in securities which carry lower ratings, which are not generally
meant for short-term investment.
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EMERGING GROWTH FUND
The Fund seeks to provide capital appreciation for its shareholders; any
ordinary income received from portfolio securities is entirely incidental.
As a fundamental investment policy, the Fund under normal conditions
invests at least 65% of its total assets in common stocks of small and medium
sized companies (less than $2 billion of market capitalization), both domestic
and foreign, in the early stages of their life cycle, that the Adviser believes
have the potential to become major enterprises. Investments in such companies
may offer greater opportunities for growth of capital than larger, more
established companies, but also may involve certain special risks. Emerging
growth companies often have limited product lines, markets, or financial
resources, and they may be dependent upon one or a few key people for
management. The securities of such companies may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general. While the Fund will invest primarily in
common stocks, to a limited extent it may invest in other securities such as
preferred stocks, convertible securities and warrants.
The Fund does not limit its investment to any single group or type of
security. The Fund may also invest in special situations involving new
management, special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.
The Fund's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The Fund
may invest in securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
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 objective.
The Fund may invest up to 20% of its total assets in securities of foreign
issuers. See "Investment Practices -- Foreign Securities." Additionally, the
Fund may invest up to fifteen percent of the value of its assets in restricted
securities (i.e., securities which may not be sold without registration under
the Securities Act of 1933) and in other securities not having readily available
market quotations. The Fund may enter into repurchase agreements with domestic
banks and broker-dealers which involve certain risks. The Fund may invest in
either warrants or restricted securities so long as such investments aggregate
less than five percent of the Fund's total assets. The risks involved in
investing in restricted securities, warrants and repurchase agreements are
described in the Statement of Additional Information.
GLOBAL EQUITY FUND
The investment objective of the Fund is to provide long-term growth of
capital through investments in an internationally diversified portfolio of
equity securities of companies of any nation including the United States. The
Fund intends to be invested in equity securities of companies of at least three
countries including the United States. Under normal market conditions, at least
65% of the Fund's total assets are so invested. Equity securities include common
stocks, preferred stocks and warrants or options to acquire such securities. In
selecting portfolio securities, the Fund attempts to take advantage of the
differences between economic trends and the anticipated performance of
securities markets in various countries.
Normally, the Fund invests in securities of issuers traded on markets of at
least three of the world's six largest countries by market capitalization
(United States, Japan, United Kingdom, Germany, France and Canada), but
securities of issuers traded on quoted markets of other
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<PAGE> 21
countries are also considered for investment. The next six largest countries, in
terms of market capitalization, are Switzerland, Italy, Netherlands, Australia,
Sweden and Spain.
The Adviser, subject to the direction of the Trust's Trustees, provides the
Fund with an overall investment program consistent with the Fund's objective and
policies. The Adviser is solely responsible for advising the Fund with respect
to investments in the United States. John Govett, subject to overall review by
the Adviser and the Trust's Trustees and other authorized officers, is
responsible for recommending an optimal geographic equity allocation and is
responsible for providing advice with respect to the Fund's investment in
countries other than the United States. Investments may be shifted among the
world's various capital markets and among different types of securities in
accordance with ongoing analysis provided by the Adviser and John Govett of
trends and developments affecting such markets and securities. The Adviser and
John Govett are sometimes referred to as the "Advisers."
While the investment policy of the Fund is to be broadly diversified as to
both countries and individual issuers, the Advisers select individual countries
and securities on the basis of several factors. Investments are allocated among
issuers in countries selected based on a comparison of values between the equity
markets in those countries. This comparison is based upon criteria such as
return on equity, book value, earnings, dividends, and interest rates in each
market. After evaluating these factors and others for each country and comparing
opportunities among countries, the Advisers select those countries which, in
their opinion, have the most attractive equity markets. This evaluation is
influential in deciding the amount of investment in each equity market.
Individual equity securities are selected within each market. The Advisers seek
the most attractive individual equity securities based on factors such as book
value, earnings per share and other financial data. The Advisers' approach to
both country and individual security selection is characterized as a
quantitative method utilizing specific financial criteria to identify both value
and opportunity in the equity markets. The Advisers also endeavor to identify
industry, political, and geographical trends which may affect equity values
within individual countries or among a group of countries. The Advisers use
these financial criteria and analysis of industry, political, and geographical
trends to evaluate and compare equity investment opportunities among various
countries and among securities within each country with the objective of
identifying and investing in those securities which can best meet the Fund's
investment objective. Of course, there is no assurance that the Advisers will be
successful in this endeavor or that the investment objective will be realized.
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 obligations to pay some or all of the depositary's
transaction fees, whereas under an unsponsored arrangement, the foreign issuer
assumes no obligations 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. The Fund may invest in ADRs
through both sponsored and unsponsored arrangements. For further information on
ADRs and EDRs, investors should refer to the Statement of Additional
Information.
The Fund may invest cash temporarily in short-term debt instruments. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment. See "Temporary Short-Term Investments" herein.
Risk Factors. An investment in the Fund involves risks similar to those of
investing in foreign common stocks generally. Investment in common stocks of
foreign issuers may subject the Fund to risk of foreign political, economic and
legal conditions and developments. Such conditions or developments might include
favorable or unfavorable changes in currency exchange rates, exchange control
regulations (including currency blockage), expropriation of assets of companies,
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<PAGE> 22
imposition of withholding taxes on dividend or interest payments, and possible
difficulty in obtaining and enforcing judgments against a foreign issuer. Also,
foreign common stocks may not be as liquid and may be more volatile than
comparable domestic common stocks.
Furthermore, issuers of foreign common stocks are subject to different,
often less comprehensive, accounting, reporting and disclosure requirements than
domestic issuers. The Fund, in connection with its purchases and sales of
foreign securities, other than securities purchased or sold in United States
dollars, will incur transaction costs in converting currencies. Also, brokerage
costs incurred in purchasing and selling securities in foreign securities
markets generally are higher than such costs in comparable transactions in
domestic securities markets, and foreign custodial costs relating to the Fund
securities are higher than domestic custodial costs. See also "Investment
Practices" for a discussion of certain additional risks related to investment
practices that may be utilized by the Fund, including use of options, futures
contracts and related options.
Foreign Currency Transactions. The value of the Fund's securities that are
traded in foreign markets may be affected by changes in currency exchange rates
and exchange control regulations. In addition, the Fund will incur costs in
connection with conversions between various currencies. The Fund's foreign
currency exchange transactions generally will be conducted on a spot basis (that
is, cash basis) at the spot rate for purchasing or selling currency prevailing
in the foreign currency exchange market. The Fund purchases and sells foreign
currency on a spot basis in connection with the settlement of transactions in
securities traded in such foreign currency. The Fund does not purchase and sell
foreign currencies as an investment.
The Fund also may enter into contracts with banks or other foreign currency
brokers or dealers to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange rates. A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
The Fund may attempt to hedge against changes in the value of the United
States dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency futures contract for
such amount. Such hedging strategies may be employed before the Fund purchases a
foreign security traded in the hedged currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received. Hedging against a change in
the value of a foreign currency in the foregoing manner does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions reduce
or preclude the opportunity for gain if the value of the hedged currency should
move in the direction opposite to the hedged position. The Fund will not
speculate in foreign currency forward or futures contracts or through the
purchase and sale of foreign currencies.
Temporary Short-Term Investments. It is the Fund's policy to be fully
invested in common stocks and securities convertible into common stocks.
However, the Fund may hold a portion of its assets in cash to meet redemptions
and other day-to-day operating expenses. The Fund may invest cash held for such
purposes in obligations of the United States and of foreign governments,
including their political subdivisions, commercial paper, bankers' acceptances,
certificates of deposit, repurchase agreements collateralized by these
securities, and other short-term evidences of indebtedness. The Fund will only
purchase commercial paper if it is rated Prime-1 or Prime-2 by Moody's or A-1 or
A-2 by S&P. The Fund also may invest cash held for such purposes in short-term,
high grade foreign debt securities. High grade foreign debt securities are those
debt securities of foreign issuers which the Advisers determine to have
creditworthiness substantially equivalent to that of domestic issuers of debt
securities rated investment grade.
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GOVERNMENT FUND
GENERAL
The investment objective of the Fund is to seek to provide investors with a
high current return consistent with preservation of capital. The Fund invests
primarily in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Under normal circumstances, at least 80% of the
total assets of the Fund are invested in such securities. The Fund may invest
its remaining assets (up to 20%) in other government related securities and in
repurchase agreements fully collateralized by U.S. Government securities. The
other government related securities include mortgage-related and mortgage-backed
securities and certificates issued by financial institutions or broker-dealers
representing "stripped" mortgage-related securities. See "Other Government
Related Securities" below. In order to hedge against changes in interest rates,
the Fund may purchase or sell options and engage in transactions involving
interest rate futures contracts and options on such contracts. See "Investment
Practices -- Using Options, Futures Contracts and Options on Futures Contracts"
and the Statement of Additional Information for discussion of options, futures
contracts and options on futures contracts. The Fund may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Investment
Practices -- Forward Commitments." The Fund is not designed for investors
seeking capital appreciation. Shares of the Fund are not insured or guaranteed
by the U.S. Government, its agencies or instrumentalities or by any other person
or entity. There is no assurance that the Fund's objective will be achieved.
Since the value of U.S. Government securities owned by the Fund will
fluctuate depending upon market factors and inversely with prevailing interest
rates, the net asset value of shares of the Fund will fluctuate. If interest
rates rise, debt security prices generally fall; if interest rates fall, debt
security prices generally rise. In addition, for a given change in interest
rates, longer-maturity debt securities fluctuate more in price (gaining or
losing more in value) than shorter-maturity debt securities, and generally offer
higher yields than shorter-maturity debt securities, all other factors,
including credit quality, being equal. This potential for a decline in prices of
debt securities due to rising interest rates is referred to herein as "market
risk." While the Fund has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of four to six years.
Duration is a measure of the expected life of a debt security that incorporates
a security's yield, coupon interest payments, final maturity and call features
into one measure.
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues, duration and term to maturity are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest, the shorter the
maturity or the higher the yield-to-maturity of a debt security, the shorter its
duration.
Duration allows an investment manager to make certain assumptions regarding
how the value of a portfolio will generally respond to changes in interest
rates. For example, a portfolio consisting entirely of treasury notes yielding
5.6% with a remaining maturity of two years would have a duration of 1.9 years
and a 1% change in the interest rate earned on such securities would cause a
change of approximately 1.9% in the net asset value of the portfolio. A
portfolio consisting entirely of treasury
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notes yielding 7.8% with a remaining maturity of ten years would have a duration
of 7.0 years and a 1% change in the interest rate earned on such securities
would cause a change of between 6.5% and 8% in the net asset value of the
portfolio. This example is intended for demonstration purposes only, however,
and is not intended to approximate how the Fund's portfolio will respond to
changes in interest rates. The Fund's investment portfolio may include
securities with differing maturities and quality levels, and interest rates on
those instruments may not all change by the same amount at the same time as
rates rise or fall generally in the marketplace. Also, the treasury securities
described in the example cannot be retired prior to maturity, while some of the
securities in the Fund's portfolio can. These factors among others can cause the
Fund's investment portfolio to respond somewhat differently to changes in
interest rates than shown in the example.
There are some situations where even a duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At December 31, 1994, the duration
of the debt securities owned by the Fund, as adjusted for investments in
options, futures contracts and related options, was approximately 5.2 years.
The Fund often purchases debt securities at a premium over the principal or
face value in order to obtain higher current income. The amount of any premium
declines during the term of the security to zero at maturity. Such decline
generally is reflected in the market price of the security and thus in the
Fund's net asset value. Any such decline is realized for accounting purposes as
a capital loss at maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or increased by changes in
the value of the security due to changes in interest rate levels.
The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Fund reduces its potential
for capital appreciation on debt securities if interest rates decline. Thus if
market prices of debt securities increase, the Fund receives less total return
from its optioned positions than it would have received if the options had not
been sold. The purpose of selling options is intended to improve the Fund's
total return and not to support or "enhance" monthly distributions. During
periods when the Fund has capital loss carry forwards any capital gains
generated from such transactions will be retained in the Fund. See "Investment
Practices -- Using Options, Futures Contracts and Options on Futures Contracts"
and "Dividends, Distributions and Taxes" and the Statement of Additional
Information for discussion of options, futures contracts and options on futures
contracts.
The purchase and sale of options may result in a high portfolio turnover
rate. The Fund's turnover rate is shown in the table of "Financial Highlights."
See "Investment Practices -- Fund Turnover."
The Fund is subject to the diversification requirements of Section 817(h)
of the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring the Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Fund intends to
invest in U.S. Treasury securities and in securities issued by at least four
U.S.
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Government agencies or instrumentalities in the amounts necessary to meet these
diversification requirements at the end of each quarter of the year (or within
thirty days thereafter).
In the event the Fund does not meet the diversification requirements of
Section 817(h) of the Code, the policies funded by shares of the Fund will not
be treated as life insurance for Federal income tax purposes and the owners of
the policies will be subject to taxation on their share of the dividends and
distributions paid by the Fund.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities include: (1) U.S. Treasury
obligations, which differ in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturity of one to ten years), and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are backed by the full faith
and credit of the United States; and (2) obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, including government guaranteed
mortgage-related securities, some of which are backed by the full faith and
credit of the U.S. Treasury, some of which are supported by the right of the
issuer to borrow from the U.S. Government and some of which are backed only by
the credit of the issuer itself.
Mortgage loans made by banks, savings and loan institutions, and other
lenders are often assembled into pools, which are issued or guaranteed by an
agency or instrumentality of the U.S. Government, though not necessarily by the
U.S. Government itself. Interests in such pools are what this Prospectus calls
"mortgage-related securities."
Mortgage-related securities include, but are not limited to, obligations
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly owned corporate instrumentality
of the United States whose securities and guarantees are backed by the full
faith and credit of the United States. FNMA, a federally chartered and privately
owned corporation, and FHLMC, a federal corporation, are instrumentalities of
the United States. The securities and guarantees of FNMA and FHLMC are not
backed, directly or indirectly, by the full faith and credit of the United
States. Although the Secretary of the Treasury of the United States has
discretionary authority to lend FNMA up to $2.25 billion outstanding at any
time, neither the United States nor any agency thereof is obligated to finance
FNMA's or FHLMC's operations or to assist FNMA or FHLMC in any other manner.
Securities of FNMA and FHLMC include those issued in principal only or interest
only components.
Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as 20 or 30 years, the borrowers can, and typically do, pay them off
sooner. Thus, the securityholders frequently receive prepayments of principal,
in addition to the principal which is part of the regular monthly payment. A
borrower is more likely to prepay a mortgage which bears a relatively high rate
of interest. This means that in times of declining interest rates, some of the
Fund's higher yielding securities might be converted to cash, and the Fund will
be forced to accept lower interest rates when that cash is used to purchase
additional securities. The increased likelihood of prepayment when interest
rates decline also limits market price appreciation of mortgage-related
securities. If the Fund buys mortgage-related securities at a premium, mortgage
foreclosures or mortgage prepayments may result in a loss to the Fund of up to
the amount of the premium paid since only timely payment of principal and
interest is guaranteed.
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OTHER GOVERNMENT RELATED SECURITIES
The Fund may invest up to 20% of its assets in other government related
securities and in repurchase agreements fully collateralized by U.S. Government
securities. A principal type of government related security in which the Fund
may invest are mortgage-backed securities including collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs").
CMOs are debt securities issued by U.S. Government agencies or by financial
institutions and other mortgage lenders and collateralized by a pool of
mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. Certain of these securities may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986 (the "Tax
Reform Act"), are private entities formed for the purpose of holding a fixed
pool of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. The Fund will invest in such
privately issued securities only if they are 100% collateralized at the time of
issuance by securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. The Fund intends to invest in privately issued CMOs and
REMICs only if they are rated at the time of purchase in the two highest grades
by a nationally-recognized rating agency.
STRIPPED SECURITIES
Stripped mortgage-related securities (hereinafter referred to as "Stripped
Mortgage Securities") are derivative multiclass mortgage securities. Stripped
Mortgage Securities may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
Stripped Mortgage Securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of Stripped Mortgage Securities will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The
yield-to-maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets, and
a rapid rate of principal payments may have a material adverse effect on the
securities' yield-to-maturity since interest payments cease as soon as the
related principal amount is repaid. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities even if the security is rated
AAA or Aaa. Holders of PO securities are not entitled to any periodic payments
of interest prior to maturity. Accordingly, such securities usually trade at a
deep discount from their face or par value and are subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. Current federal tax law requires that a holder (such as the Fund) of
such securities accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment in cash on the certificate during the year. Such securities may involve
greater risk than securities issued directly by the U.S. Government, its
agencies or instrumentalities.
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Although the market for government-issued IO and PO securities backed by
fixed-rate mortgages is increasingly liquid, certain of such securities may not
be readily marketable and will be considered illiquid for purposes of the Fund's
limitation on investments in illiquid securities. The Trustees will establish
guidelines and standards for determining whether a particular government-issued
IO or PO backed by fixed-rate mortgages is liquid. Generally, such a security
may be deemed liquid if it can be disposed of promptly in the ordinary course of
business at a value reasonably close to that used in the calculation of the net
asset value per share. Stripped Mortgage Securities, other than
government-issued IO and PO securities backed by fixed-rate mortgages, are
presently considered by the staff of the SEC to be illiquid securities and thus
subject to the Fund's limitation on investment in illiquid securities.
MONEY MARKET FUND
The Fund seeks protection of capital and high current income through
investments in money market instruments. The investment policies, the percentage
limitations, and the kinds of securities in which the Fund can invest may be
changed by the Trustees, unless expressly governed by those limitations stated
under "Investment Restrictions" in the Statement of Additional Information which
can be changed only by action of the shareholders of the Fund. It is not the
intention of the Trustees, however, to change these policies without prior
notice to shareholders.
The Fund seeks to maintain a constant net asset value of $1.00 per share by
investing in a diversified portfolio of money-market instruments maturing within
one year with a dollar-weighted average maturity of 90 days or less. It seeks
high current income from these short-term investments to the extent consistent
with protection of capital. Of course, there can be no guarantee that the Fund
will achieve its objective or be able at all times to maintain its net asset
value per share at $1.00. In addition, the daily dividend rate paid by the Fund
may be expected to fluctuate. The Fund uses the amortized cost method for
valuing portfolio securities purchased at a discount. See "Determination of Net
Asset Value." It may invest in instruments of the following types, all of which
will be U.S. dollar obligations:
OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS AGENCIES
The Fund may invest in obligations issued or guaranteed as to principal and
interest by the U.S. Government, its agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the U.S.
Government, (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Government, (c) discretionary authority of
the U.S. Government agency or instrumentality or (d) the credit of the
instrumentality. Such agencies or instrumentalities include, but are not limited
to, the Federal National Mortgage Association, the Government National Mortgage
Association, Federal Land Banks, and the Farmer's Home Administration.
BANK OBLIGATIONS
The Fund may invest in negotiable time deposits, certificates of deposit
and bankers' acceptances which are obligations of domestic banks having total
assets in excess of $1 billion as of the date of their most recently published
financial statements. The Fund is also authorized to invest up to five percent
of its total assets in certificates of deposit issued by domestic banks having
total assets of less than $1 billion, provided that the principal amount of the
certificate of deposit acquired by the Fund is insured in full by the Federal
Deposit Insurance Corporation.
COMMERCIAL PAPER
The Fund may invest in short-term obligations of companies which at the
time of investment are (a) rated in one of the two highest categories by at
least two nationally recognized statistical organizations (or one rating
organization if the obligation was rated by only one such organization), or (b)
if not rated, are of comparable quality as determined in accordance with
procedures
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established by the Trustees. See the Statement of Additional Information.
Commercial paper consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. (See the Appendix in the Statement of Additional Information for an
explanation of these ratings). The Fund's current policy is to limit investments
in commercial paper to obligations rated in the highest rating category.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with banks and broker-dealers
which involve certain risks in the event of a default by the other party. See
"Investment Practices -- Repurchase Agreements."
MULTIPLE STRATEGY FUND
The investment objective of the Multiple Strategy Fund is to seek a high
total investment return consistent with prudent risk through a fully managed
investment policy utilizing equity, intermediate and long-term debt and money
market securities. Total investment return consists of current income, including
dividends, interest, and discount accruals, and capital appreciation. The
Adviser may vary the composition of the Fund from time to time based upon an
evaluation of economic and market trends and the anticipated relative total
return available from a particular type of security. Accordingly, the Multiple
Strategy Fund may, at any given time, be substantially invested in equity
securities, bonds and notes or money market securities. Achieving this objective
depends on management's abilities to assess the effect of economic and market
trends on different sectors of the market. There can be no assurances that the
investment objective of the Fund will be achieved.
The Multiple Strategy Fund may invest in those money market securities
which are eligible investments for the Trust's Money Market Fund. It may also
invest in intermediate and long-term debt securities, including convertible
securities, and in preferred and convertible preferred stock which are rated at
the time of purchase BBB or better by S&P or Baa or better by Moody's, or in
nonrated securities determined by the Adviser to be of comparable quality. To
the extent investments are made in fixed-income securities, the Fund will invest
primarily in such securities which are rated A or better by either rating
agency. These ratings are described in the Appendix hereto. The Fund is not
limited as to the maturities of the debt securities it may purchase. Debt
securities with longer maturities generally tend to produce higher yields and
are subject to greater market fluctuation as a result of changes in interest
rates than debt securities with shorter maturities.
The common stocks in which the Fund may invest will be primarily stocks of
large-capitalization quality companies. Generally, the characteristics of such
companies include a strong balance sheet, good financial resources, a
satisfactory rate of return on capital, a good industry position and superior
management skills. The Adviser believes that companies that conform most closely
to these characteristics often tend to exhibit generally consistent earnings
growth.
The Fund may engage in portfolio management strategies and techniques
involving options, futures, contracts and options on futures contracts. Options,
futures contracts, and options on futures contracts are described in "Investment
Practices -- Using Options, Futures Contracts, and Options on Futures
Contracts."
The Multiple Strategy Fund may also invest in equity and debt securities of
foreign issuers, including non-U.S. dollar denominated debt securities,
Eurodollar securities and securities issued, assumed or guaranteed by foreign
governments or political subdivisions or instrumentalities thereof. The Multiple
Strategy Fund will limit its investment in foreign securities to 25% of its
total assets, taken at market value at the time of each investment. See
"Investment Practices -- Foreign Securities." For a discussion of the Fund's
practices regarding investment companies see "Investment Practices -- Investment
in Investment Companies."
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Because of the fully managed approach of the Fund, portfolio turnover may
be greater resulting in increased brokerage charges to the Fund.
REAL ESTATE SECURITIES FUND
General. The Fund's primary investment objective is to provide shareholders
with long-term growth of capital. Current income is a secondary consideration.
The Fund will seek to achieve its investment objectives by investing principally
in a diversified portfolio of Real Estate Securities which include equity
securities, including common stocks and convertible securities, as well as non-
convertible preferred stocks and debt securities of real estate industry
companies. A "real estate industry company" is a company that derives at least
50% of its assets (marked to market), gross income or net profits from the
ownership, construction, management or sale of residential, commercial or
industrial real estate. Real estate industry companies may include among others:
equity real estate investment trusts, which pool investors' funds for investment
primarily in commercial real estate properties, mortgage real estate investment
trusts, which invest pooled funds in real estate related loans; brokers or real
estate developers; and companies with substantial real estate holdings, such as
paper and lumber products and hotel and entertainment companies. Under normal
market conditions, at least 65% of the Fund's total assets will be invested in
Real Estate Securities, primarily equity securities of real estate investment
trusts. The Fund's investment in debt securities will be rated, at the time of
investment, at least Baa by Moody's or BBB by S&P, a comparable rating by any
other nationally recognized statistical rating organization or if unrated,
determined by the Adviser to be of comparable quality. Ratings at the time of
purchase determine which securities may be acquired, and a subsequent reduction
in ratings does not require the Fund to dispose of a security. Securities rated
Baa by Moody's or BBB by S&P are considered to be medium grade obligations which
possess speculative characteristics so that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher rated securities. The
rating of the ratings agencies represent their opinions of the quality of the
debt securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. The Fund may invest more than 25% of its
total assets in the real estate industry.
Under normal market conditions, the Fund may invest up to 35% of its total
assets in equity and debt securities of companies outside the real estate
industry, U.S. Government securities, cash and money market instruments.
The Fund may invest up to 25% of its assets in securities issued by foreign
issuers. See "Investment Practices -- Foreign Securities." The Fund may engage
in portfolio management strategies and techniques involving options, futures
contracts and options on futures. Options, futures contracts and related options
are described in "Investment Practices -- Using Options, Futures Contracts and
Options on Futures Contracts" and the Statement of Additional Information.
For temporary defensive purposes, the Fund may invest up to 100% of its
total assets in short-term investments as described below. The Fund will assume
a temporary defensive posture only when economic and other factors affect the
real estate industry market to such an extent that the Adviser believes there to
be extraordinary risks in being primarily in Real Estate Securities.
There can be no assurance that the Fund will achieve its investment
objectives.
Short-Term Investments. The Fund may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, commercial
paper, bankers' acceptances, certificates of deposit, repurchase agreements
collateralized by these securities, and other short-term evidences of
indebtedness. The Fund will only purchase commercial paper if it is rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P. Such temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary defensive measure.
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Risk Factors. Although the Fund does not invest directly in real estate, an
investment in the Fund will generally be subject to the risks associated with
real estate because of its policy of concentration in the securities of
companies in the real estate industry. These risks include, among others:
declines in the value of real estate; risks related to general and local
economic conditions; overbuilding and increased competition; increases in
property taxes and operating expenses; changes in zoning laws; casualty or
condemnation losses; variations in rental income; changes in neighborhood
values; the appeal of properties of tenants and changes in interest rates. The
value of securities of companies which service the real estate industry will
also be affected by such risks. If the Fund has rental income or income from the
disposition of real property acquired as a result of a default on securities the
Fund owns, the receipt of such income may adversely affect its ability to retain
its tax status as a regulated investment company.
In addition, equity real estate investment trusts may be affected by
changes in the value of the underlying property owned by the trusts, while
mortgage real estate investment trusts may be affected by the quality of credit
extended. Equity and mortgage real estate investment trusts are dependent upon
management skill, may not be diversified and are subject to the risks of
financing projects. Such real estate investment trusts are also subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Code and to maintain exemption from the Investment Company Act of 1940. Changes
in interest rates may also affect the value of the debt securities in the Fund's
portfolio. Like investment companies such as the Fund, real estate investment
trusts are not taxed on income distributed to shareholders provided they comply
with several requirements of the Code. The Fund will indirectly bear its
proportionate share of any expenses paid by the real estate investment trusts in
which it invests in addition to the expenses paid by the Fund.
Because of the Fund's policy of concentrating its investments in Real
Estate Securities, the Fund may be more susceptible than an investment company
without such a policy to any single economic, political or regulatory occurrence
affecting the real estate industry.
Additional information about the Fund's investment practices and the risks
associated with such practices are contained in "Investment Objectives and
Policies" and "Investment Practices" herein and in the Statement of Additional
Information.
INVESTMENT PRACTICES
Repurchase Agreements. Each Fund may enter into repurchase agreements with
broker-dealers or domestic banks (or a foreign branch or subsidiary thereof)
which are deemed creditworthy by the Adviser under guidelines approved by the
Trustees. 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 purchaser's holding period. In the event of a
bankruptcy or other default of the seller of a repurchase agreement, the Fund
could experience delays and expenses in liquidating the underlying securities
and loss including: (a) possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights thereto, (b)
possible lack of access to income on the underlying security during this period,
and (c) expenses of enforcing its rights. No Fund will invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by such Fund, exceeds in the case of the
Emerging Growth Fund, the Global Equity Fund, and the Real Estate Securities
Fund, 15% of the value of the Fund's net assets and, in the case of the Common
Stock Fund, the Domestic Strategic Income Fund, the Government Fund, the Money
Market Fund and the Multiple Strategy Fund, ten percent of the value of its net
assets.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that
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contributed to the joint account share pro rata in the net revenue generated.
The Adviser believes that the joint account produces greater efficiencies and
economies of scale that may contribute to reduced transaction costs, higher
returns, higher quality investments and greater diversity of investments for the
Funds than would be available to the Funds investing separately. The manner in
which the joint account is managed is subject to conditions set forth in the SEC
order obtained authorizing this practice, which conditions are designed to
ensure the fair administration of the joint account and to protect the amounts
in that account.
Loans of Portfolio Securities. Each Fund, except the Real Estate
Securities Fund, may lend portfolio securities to unaffiliated brokers, dealers
and financial institutions provided that (a) immediately after any such loan,
the value of the securities loaned does not exceed ten percent of the total
value of that Fund's assets, and (b) any securities loan is collateralized in
accordance with applicable regulatory requirements. See Statement of Additional
Information.
Foreign Securities. The Common Stock Fund, the Domestic Strategic Income
Fund, the Emerging Growth Fund, the Multiple Strategy Fund and the Real Estate
Securities Fund may invest up to 10%, 25%, 20%, 25% and 25%, respectively, of
the value of such Funds' total assets in securities issued by foreign issuers.
With respect to the Real Estate Securities Fund, some of such securities may
also be Real Estate Securities. Investments in securities of foreign entities
and securities denominated in foreign currencies involve risks not typically
involved in domestic investment, including fluctuations in foreign exchange
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or United States governmental
laws or restrictions applicable to such investments. Since a Fund may invest in
securities denominated or quoted in currencies other than the United States
dollar, changes in foreign currency exchange rates may affect the value of
investments in the portfolio and the accrued income and unrealized appreciation
or depreciation of investments. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of a Fund's assets
denominated in that currency and the Fund's yield on such assets.
A Fund may also purchase foreign securities in the form of ADRs and 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 sponsored ADR. A Fund may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by a Fund may be subject to foreign withholding taxes, which
would reduce the Fund's total return on such investments and the amounts
available for distributions by the Fund to its shareholders. See "Dividends,
Distributions and Taxes." Foreign financial markets, while growing in volume,
have, for the most part, substantially less volume than United States markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. The foreign markets
also have different clearance and settlement procedures and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct such
transactions. Delays in settlement could result in temporary
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periods when assets of the Fund are not invested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Costs
associated with transactions in foreign securities, including custodial costs
and foreign brokerage commissions, are generally higher than with transactions
in United States securities. In addition, the Fund will incur costs in
connection with conversions between various currencies. There is generally less
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States.
Foreign Currency Transactions. The value of a Fund's portfolio securities
that are traded in foreign markets may be affected by changes in currency
exchange rates and exchange control regulations. In addition, the Fund will
incur costs in connection with conversions between various currencies. A Fund's
foreign currency exchange transactions generally will be conducted on a spot
basis (that is, cash basis) at the spot rate for purchasing or selling currency
prevailing in the foreign currency exchange market. A Fund purchases and sells
foreign currency on a spot basis in connection with the settlement of
transactions in securities traded in such foreign currency. A Fund does not
purchase and sell foreign currencies as an investment.
A Fund also may enter into contracts with banks or other foreign currency
brokers and dealers to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange rates. A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
A Fund may attempt to hedge against changes in the value of the United
States dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency futures contract for
such amount. Such hedging strategies may be employed before the Fund purchases a
foreign security traded in the hedged currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefore is made or received. Hedging against a change in
the value of a foreign currency in the foregoing manner does not eliminate
fluctuations in the price of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions reduce
or preclude the opportunity for gain if the value of the hedged currency should
move in the direction opposite to the hedged position. A Fund will not speculate
in foreign currency forward or futures contracts or through the purchase and
sale of foreign currencies. With respect to the Global Equity Fund, see
"Investment Objectives and Policies -- Global Equity Fund."
Restricted Securities. The Emerging Growth Fund, the Global Equity Fund,
and the Real Estate Securities Fund may invest up to fifteen percent of their
net assets in restricted securities and other illiquid assets. The other Funds
may each invest up to five percent of their net assets in restricted securities
and other illiquid assets. As used herein, restricted securities are those that
have been sold in the United States without registration under the Securities
Act of 1933 and are thus subject to restrictions on resale. Excluded from the
limitation, however, are any restricted securities which are eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 and which have been
determined to be liquid by the Trustees or by the Adviser pursuant to
Board-approved guidelines. The determination of liquidity is based on the volume
of reported trading in the institutional secondary market for each security.
Since it is not possible to predict with assurance how the markets for
restricted securities sold and offered under Rule 144A will develop, the
Trustees will carefully monitor the Fund's investment in these securities
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become
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for a time uninterested in purchasing these restricted securities. These
difficulties and delays could result in the Fund's inability to realize a
favorable price upon disposition of restricted securities, and in some cases
might make disposition of such securities at the time desired by the Fund
impossible. Since market quotations are not readily available for restricted
securities, such securities will be valued by a method that the Fund's Trustees
believe accurately reflects fair value.
Short Sales Against the Box. The Global Equity Fund may from time to time
make short sales of securities it owns or has the right to acquire through
conversion or exchange of other securities it owns. A short sale is "against the
box" to the extent that the Fund contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short. In a short
sale, the Fund does not immediately deliver the securities sold and does not
receive the proceeds from the sale. The Fund is said to have a short position in
the securities sold until it delivers the securities sold, at which time it
receives the proceeds of the sale. The Fund may not make short sales or maintain
a short position if to do so would cause more than 25% of its total assets,
taken at market value, to be held as collateral for such sales.
To secure its obligation to deliver the securities sold short, the Fund
will deposit in escrow in a separate account with its Custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities. The Fund may close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short. However, the Fund
will not purchase and deliver new securities to satisfy its short order if such
purchase and sale would cause such Fund to derive more than 30% of its gross
income from the sale of securities held for less than three months.
Forward Commitments. The Domestic Strategic Income Fund and the Government
Fund may purchase or sell U.S. Government securities (or debt securities with
respect to the Real Estate Securities Fund) on a "when-issued" or "delayed
delivery" basis ("Forward Commitments"). These transactions occur when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future, frequently a month or more after such transaction. The
price is fixed on the date of the commitment, and the seller continues to accrue
interest on the securities covered by the Forward Commitment until delivery and
payment takes place. At the time of settlement, the market value of the
securities may be more or less than the purchase or sale price.
Each Fund may either settle a Forward Commitment by taking delivery of the
securities or may resell or repurchase a Forward Commitment on or before the
settlement date in which event a Fund may reinvest the proceeds in another
Forward Commitment. A Fund's use of Forward Commitments may increase its overall
investment exposure and thus its potential for gain or loss. When engaging in
Forward Commitments, a Fund relies on the other party to complete the
transaction; should the other party fail to do so, a Fund might lose a purchase
or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure.
Each Fund maintains a segregated account (which is marked to market daily)
of cash, U.S. Government securities or the security covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase or sell continues.
Portfolio Turnover. Each Fund may purchase or sell securities without
regard to the length of time the security has been held and thus may experience
a high rate of portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced in a period of one
year. Securities with maturities of less than one year are excluded in the
computation of the portfolio turnover rate. The portfolio turnover rate is not a
limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transactions in options, futures contracts and
options on futures contracts on behalf of the Common Stock Fund, the Emerging
Growth Fund, the Global Equity Fund, the Government Fund, the Multiple Strategy
Fund, and the Real Estate
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Securities Fund. The annual turnover rates of each Fund is shown under
"Financial Highlights." Higher portfolio turnover involves correspondingly
greater transaction costs, including any brokerage commissions, which are borne
directly by the Fund. In addition, higher portfolio turnover may increase the
recognition of short-term, rather than long-term, capital gains. See "Dividends,
Distributions and Taxes."
Using Options, Futures Contracts and Options on Futures Contracts. The
Common Stock Fund, the Emerging Growth Fund, the Global Equity Fund, the
Government Fund, the Multiple Strategy Fund, and the Real Estate Securities Fund
may purchase or sell options, futures contracts or options on futures contracts.
The Funds expect to utilize options, futures contracts and options thereon in
several different ways, depending upon the status of the Fund's portfolio and
the Adviser's expectations concerning the securities markets. See the Statement
of Additional Information for a discussion of options, futures contracts and
options on futures contracts.
Potential Risks of Options, Futures Contracts and Options on Futures
Contracts. The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities. While
utilization of options, futures contracts and similar instruments may be
advantageous to a Fund, if the Adviser and in the case of the Global Equity
Fund, John Govett 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. A Fund may write or purchase options in
privately negotiated transactions ("OTC Options") as well as listed options. OTC
Options can be closed out only by agreement with the other party to the
transaction. Any OTC Option purchased by a Fund is considered an illiquid
security. Any OTC Option written by a Fund is with a qualified dealer pursuant
to an agreement under which the Fund may repurchase the option at a formula
price. Such options are considered illiquid to the extent that the formula price
exceeds the intrinsic value of the option. A Fund may not purchase or sell
futures contracts or related options for which the aggregate initial margin and
premiums exceed five percent of the fair market value of the Fund's assets. In
order to prevent leverage in connection with the purchase of futures contracts
by a 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. Each Fund may not invest more than ten percent of
its net assets (or 15% for the Emerging Growth Fund, the Global Equity Fund, and
the Real Estate Securities Fund) in illiquid securities and repurchase
agreements which have a maturity of longer than seven days. A more complete
discussion of the potential risks involved in transactions in options, futures
contracts and options on futures contracts is contained in the Statement of
Additional Information.
Investment in Investment Companies. Certain Funds of the Trust may invest
in a separate investment company, Van Kampen American Capital Small
Capitalization Fund ("Small Cap Fund"), that invests in a broad selection of
small capitalization securities. The shares of the Small Cap Fund are available
only to investment companies advised by the Adviser. The Common Stock Fund and
the Multiple Strategy Fund may invest in the Small Cap Fund. The Adviser
believes that the use of the Small Cap Fund provides the Funds with the most
effective exposure to the performance of the small capitalization sector of the
stock market while at the same time minimizing costs. The Adviser charges no
advisory fee for managing the Small Cap Fund, nor is there any sales load or
other charges associated with distribution of its shares. Other expenses
incurred by the Small Cap Fund will be borne by it, and thus indirectly by the
Van Kampen American Capital funds that invest in it. With respect to such other
expenses, the Adviser anticipates that the efficiencies resulting from use of
the Small Cap Fund will result in cost savings for the Funds and other Van
Kampen American Capital funds. In large part these savings will be 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 stocks will need to be performed only once. The Adviser expects
that the Small Cap Fund will experience trading costs that will be substantially
less than the
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trading costs that would be incurred if small capitalization stocks were
purchased separately for the Funds and other Van Kampen American Capital funds.
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.
The Common Stock Fund, and the Multiple Strategy Fund will each be deemed
to own a pro rata portion of each investment of the Small Cap Fund. For example,
if a Fund's investment in the Small Cap Fund were $10 million, and the Small Cap
Fund had five percent of its assets invested in the electronics industry, the
Fund would be considered to have an investment of $500,000 in the electronics
industry.
Brokerage Practices. The Adviser and, in the case of the Global Equity
Fund, John Govett, are 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 and,
in the case of the Global Equity Fund, John Govett, are 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
and, in the case of the Global Equity Fund, John Govett, are 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 and, in the case of the Global Equity Fund, John Govett, determine that
such commissions are reasonable in relation to the overall services provided.
The information received may be used by the Adviser and, in the case of the
Global Equity Fund, John Govett, in managing the assets of other advisory
accounts as well as in the management of the assets of the Fund.
THE TRUST AND ITS MANAGEMENT
The Trust, an open-end, diversified management investment company,
generally known as a mutual fund, was originally organized as a Massachusetts
business trust on June 3, 1985 and reorganized on September 16, 1995, under the
laws of the state of Delaware as a business entity commonly known as a "Delaware
business trust." 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.
The Trust's fourteen Trustees have the responsibility for overseeing the
affairs of the Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056,
determines the investment of the Trust's assets, provides administrative
services and manages the Trust's business and affairs. The Adviser, together
with its predecessors, has been in the investment advisory business since 1926.
THE ADVISER. The Adviser is a wholly owned subsidiary of Van Kampen
American Capital, Inc. ("Van Kampen American Capital"). Van Kampen American
Capital is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and nearly $50 billion under management or supervision. Van Kampen
American Capital's more than 40 open-end and 38 closed-end funds and more than
2,700 unit investment trusts are professionally distributed by leading financial
advisers nationwide.
Van Kampen American Capital Distributors, Inc. (the "Distributor"), the
distributor of the Trust and the sponsor of the funds mentioned above, is also a
wholly-owned subsidiary of Van Kampen
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American Capital. Van Kampen American Capital is a wholly-owned subsidiary of
VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of
a substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital own, in the aggregate, not more than seven percent
of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon
the exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own five percent or
more of the common stock of VK/AC Holding, Inc.
As of September 8, 1995, the Adviser owned beneficially and of record
approximately 43.30% and 92.07% of the outstanding shares of the Emerging Growth
Fund and Global Equity Fund, respectively, and therefore, may be deemed to
control those Funds.
THE SUBADVISERS. John Govett is a United Kingdom-based investment
management company whose investment management activities originated in the
1920s, and was incorporated in 1955 to provide a corporate structure for a
management group. Located at 4 Battle Bridge Lane, London SE1 2HR, England. John
Govett is a wholly-owned subsidiary of Govett & Company Limited, a corporation
listed on the London Stock Exchange. The Govett Group, which manages or
administers investment funds valued at approximately $8.6 billion, maintains
offices in London, Singapore, Jersey (Channel Islands), Sacramento, Raleigh, and
San Francisco. John Govett provides advisory services to the Adviser with
respect to the Global Equity Fund.
Hines Realty Advisors provides real estate advisory services to the Adviser
of the Real Estate Securities Fund. Hines Realty Advisors is a limited
partnership among Hines Holdings, Inc. (as general partner), and Hines 1980 A,
Ltd. and Gerald D. Hines (as limited partners). Mr. William S. Wardrop, Jr. is
President and Mr. Glenn L. Lowenstein is Vice President of Hines Realty
Advisors. Hines Realty Advisors has had limited previous experience as an
investment adviser to mutual funds (since mid May 1994). Affiliates of Hines
Realty Advisors have extensive domestic and international experience in owning
and managing real estate. Hines Realty Advisors, an affiliate of the Hines real
estate organization ("Hines"), provides a comprehensive evaluation of the real
estate market. Founded in 1957, Hines has proven experience in a full range of
real estate services: strategic asset management, property management
development, marketing and leasing, acquisition/disposition and financing.
Headquartered in Houston, Texas, Hines has regional offices in New York, San
Francisco, Atlanta and Chicago as well as 29 additional submarkets. The firm
also has offices in Mexico City, Berlin and Moscow. Hines owns and/or manages
more than 61 million square feet of prime office, retail and industrial space
representing more than 451 projects. Major projects include: Pennzoil Place in
Houston, the Gallerias in Houston and Dallas, 53rd At Third in New York, 101
California in San Francisco, One Ninety One Peachtree in Atlanta, Three First
National Plaza in Chicago and Huntington Center in Columbus.
Hines associates in field offices nationwide generate regional economic
analysis based on demographic factors such as job growth and population
movement. Hines also provides a regional property-type analysis determining
whether the property -- outlet mall, strip shopping center or apartment complex,
among others -- makes sense in the area.
ADVISORY AGREEMENTS. The Trust and the Adviser are parties to an investment
advisory agreement (the "Advisory Agreement I"), pursuant to which the Trust
retains the Adviser to manage the investment of assets and to place orders for
the purchase and sale of portfolio securities for the Common Stock Fund, the
Domestic Strategic Income Fund, the Government Fund,
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the Money Market Fund and the Multiple Strategy Fund. The Trust and the Adviser
are also parties to three additional investment advisory agreements ("Advisory
Agreements -- II, III and IV"), pursuant to which the Adviser manages the
investment of assets and places orders for the purchase and sale of portfolio
securities for the Emerging Growth Fund, the Global Equity Fund, and the Real
Estate Securities Fund, respectively (Advisory Agreements -- I, II, III and IV
are referred to herein collectively as the "Advisory Agreements").
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Fund. 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. The
services are provided at cost which is allocated among the investment companies
advised by the Adviser. The Trust also pays shareholder service agency fees,
custodian fees, legal and auditing fees, trustees' fees, the costs of
registration of its shares and reports and proxies to shareholders and all other
ordinary expenses not specifically assumed by the Adviser or the Distributor.
Under Advisory Agreement-I, the Trust 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 subject Funds at an
annual rate of 0.50% of the first $500 million of such Funds' aggregate average
net assets; 0.45% of the next $500 million of such Fund's aggregate average net
assets, and 0.40% of such Fund's aggregate average net assets in excess of $1
billion. Each Fund pays its pro rata share of the fee based upon its average
daily net assets. For the fiscal year ended December 31, 1994, advisory fees
plus the cost of accounting services payable by the Trust, before expense
reimbursements, equaled .50%, .70%, .58%, .67% and .59% for the Common Stock
Fund, the Domestic Income Fund, the Government Fund, the Money Market Fund and
the Multiple Strategy Fund, respectively, of each Fund's average daily net
assets. For the same period, each Fund's net total operating expenses were
0.60%. Such figure results from the Adviser's agreement that so long as it
serves as Adviser to such Fund it will limit the ordinary business expenses of
such Fund to 0.60% per year of the average net assets of such Fund by reducing
the advisory fee and/or bearing other expenses of a Fund in excess of such
limitation. Expenses subject to such limitation do not include (1) interest and
taxes, (2) brokerage commissions, (3) certain litigation and indemnification
expenses as described in the Advisory Agreement, and (4) any distribution
expenses which may be incurred by a Fund in the event a Distribution Plan is
adopted. Any required reduction or expense payment is computed and paid monthly,
subject to readjustment during the fiscal year.
Under Advisory Agreement-II, the Trust 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 Emerging Growth Fund
at an annual rate of 0.70%.
The Trust retains the Adviser to manage the investment of the Global Equity
Fund's assets and to place orders for the purchase and sale of its portfolio
securities. The Adviser has entered into a subadvisory agreement, (the "Global
Equity Subadvisory Agreement") with John Govett to assist it in performing its
investment advisory functions. John Govett will be primarily responsible for
recommending the allocation of investments among various international markets
and currencies; recommendation and selection of particular securities in the
international markets and placement of portfolio transactions in the foreign
equity markets. Under Advisory Agreement-III, the Trust 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 Global
Equity Fund at the annual rate of 1.00%. This fee is higher than that charged by
most other mutual funds but the Trustees believe it is justified by the special
international nature of the Fund and is not necessarily higher than the fees
charged by certain mutual funds with investment objective and policies similar
to those of the Fund. Pursuant to the Global Equity Subadvisory Agreement, John
Govett receives on an annual basis 50% of the compensation received by the
Adviser.
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Under Advisory Agreement-IV, the Trust pays the Adviser a monthly fee
computed on average daily net assets of the Real Estate Securities Fund at the
annual rate of 1.00% of the Fund's average daily net assets. This fee is higher
than that charged by most other mutual funds but the Trustees believe it is
justified by the special nature of the Fund and is not necessarily higher than
the fees charged by certain mutual funds with investment objectives and policies
similar to those of the Fund. The Adviser has entered into an investment
sub-advisory agreement (the "Hines Subadvisory Agreement") with Hines Realty
Advisors to assist it in performing its investment advisory functions. Hines
Realty Advisors is primarily responsible for the following areas: (i) providing
regional economic analysis of the areas in which properties owned by real estate
investment trusts are located; (ii) analyzing attractiveness of the
property-type within the geographic region; (iii) evaluating and assessing real
estate valuation and the condition of property; (iv) evaluating property
managers and sponsors of real estate investment trusts; and (v) continuously
reviewing and monitoring the real estate investments in the Fund's portfolio.
Pursuant to the Hines Subadvisory Agreement, Hines Realty Advisors receives on
an annual basis 50% of the compensation received by the Adviser.
The Adviser, John Govett, Hines Realty Advisor and/or the Distributor may,
from time to time, agree to waive their respective investment advisory fees or
any portion thereof or elect to reimburse any Fund for ordinary business
expenses in excess of an agreed upon amount.
With regard to the Money Market Fund, the Domestic Strategic Income Fund
and Government Fund, the Adviser may utilize at its own expense credit analysis,
research and trading support services provided by its affiliate, Van Kampen
American Capital Investment Advisory Corp.
PORTFOLIO MANAGEMENT. The Funds have different portfolio managers. B.
Robert Baker is primarily responsible for the day-to-day management of the
Common Stock Fund's investment portfolio. Mr. Baker is Vice President of the
Trust and has been primarily responsible for managing the Fund's investment
portfolio since May 2, 1994. Mr. Baker has been an Associate Portfolio Manager
of the Adviser since November, 1991. Prior to that, he was Vice
President -- Portfolio Manager with Variable Annuity Life Insurance Co. Walter
W. Stabell, III is primarily responsible for the day-to-day management of the
Domestic Strategic Income Fund's investment portfolio. Mr. Stabell is Vice
President of the Trust and Associate Portfolio Manager of the Adviser. Mr.
Stabell has been primarily responsible for managing the Fund's investment
portfolio since March, 1990. Gary M. Lewis is primarily responsible for the
day-to-day management of the Emerging Growth Fund's investment portfolio. Mr.
Lewis is Vice President of the Trust and Vice President of the Adviser. Mr.
Lewis has been responsible for managing the Fund's investment portfolio since
its inception. Jeff New is primarily responsible for the day-to-day management
of the Global Equity Fund's investment portfolio with respect to investments in
the United States. Mr. New is Vice President of the Trust. He has been an
associate portfolio manager with the Adviser since April 1990. Prior to that he
was a securities analyst with Texas Commerce Investment Management Company. Mr.
New has been primarily responsible for managing the Fund's investment portfolio
with respect to investments in the United States since its inception. John
Govett has employed Peter Kysel since September 1994 as Director and Fund
Manager. He is primarily responsible for allocating the Fund's investments
between United States and non-United States equity securities and day-to-day
management of the Fund's investments in counties other than the United States.
Mr. Kysel has provided such services since the Fund's inception. Mr. Kysel was
previously a managing director of the investment banking division of Komercni
Bank. John R. Reynoldson is primarily responsible for the day-to-day management
of the Government Fund's investment portfolio. Mr. Reynoldson is Vice President
of the Trust and has been Senior Vice President of the Adviser since July, 1991.
Mr. Reynoldson has been primarily responsible for managing the Portfolio's
investment portfolio since December, 1989. David R. Troth is primarily
responsible for the day-to-day management of the Money Market Fund's investment
portfolio. Mr. Troth is Vice President of the Trust and has been Senior Vice
President of the Adviser since March, 1978. Mr. Troth has been primarily
responsible for managing the Fund's investment portfolio since its inception.
Alan T.
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Sachtleben is responsible for allocating the Multiple Strategy Fund's assets
between the equity and fixed-income categories in which the Fund invests. B.
Robert Baker manages the Multiple Strategy Fund's equity investments and Tom
Copper manages the Fund's fixed income investments. Mr. Sachtleben is a Vice
President of the Trust. Messrs. Sachtleben and Copper have managed the Fund's
investment portfolio since August 7, 1995, and Mr. Baker has managed the Fund's
investment portfolio since May 2, 1994. Mr. Sachtleben is Executive Vice
President -- Chief Investment Officer of Equity of the Adviser. Mr. Copper is
Associate Portfolio Manager of the Adviser since January, 1992. Prior to that
time, he was a credit analyst with the Adviser.
Mary Jayne Maly is primarily responsible for the day-to-day management of
the Real Estate Securities Fund's investment portfolio. She has served in that
capacity since the inception of the Fund. Ms. Maly is Vice President of the
Trust and has been a portfolio manager with the Adviser since 1994. Prior to
that time, Ms. Maly was an associate portfolio manager with the Adviser and was
formerly a senior equity analyst at Texas Commerce Management Company.
PERSONAL INVESTING POLICIES. The Trust and the Adviser have adopted Codes
of Ethics designed to recognize the fiduciary relationship between the Trust and
the Adviser and its employees. The Codes permit directors/trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to preclearance and other procedures designed to prevent conflicts of
interest.
PURCHASE OF SHARES
The Trust is offering its shares only to Separate Accounts of various
insurance companies to fund the benefits of variable annuity or variable life
insurance contracts. The Trust does not foresee any disadvantage to holders of
Contracts arising out of the fact that the interests of the holders may differ
from the interests of holders of life insurance policies and that holders of one
insurance policy may differ from holders of other insurance policies.
Nevertheless, the Trust's Trustees intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken. The Contracts are described in the
separate prospectuses issued by the Participating Insurance Companies. The Trust
continuously offers shares in each of its Funds to the Accounts at prices equal
to the respective per share net asset value of the Fund. The Distributor, One
Park View Plaza, Oakbrook Terrace, Illinois 60181, acts as the distributor of
the shares. Net asset value is determined in the manner set forth below under
"Determination of Net Asset Value."
DETERMINATION OF NET ASSET VALUE
Net asset value per share is computed for each Fund as of the close of
trading (currently 4:00 p.m., New York time) each day the New York Stock
Exchange is open. See the accompanying Prospectus for the policies for
information regarding holidays observed by the insurance company. Net asset
value of each Fund is determined by adding the total market value of all
portfolio securities held by the Fund, cash and other assets, including accrued
interest. All liabilities, including accrued expenses, of the Fund are
subtracted. The resulting amount is divided by the total number of outstanding
shares of the Fund to arrive at the net asset value of each share. See
"Determination of Net Asset Value" in the Statement of Additional Information
for further information.
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 sales price is not available are valued at the most recent bid price. U.S.
Government and agency obligations are valued at the last reported bid price.
Listed options are valued at the last reported sale price in the exchange on
which such option is traded or, if no sales are reported, at the mean between
the last reported bid and asked prices. Options for which market quotations are
not readily available are valued at a fair value calculated under a method
approved by the Trustees. Short-term investments for all Funds other
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than the Money Market Fund are valued as described in the Notes to Financial
Statements in the Statement of Additional Information.
The Money Market Fund's assets are valued on the basis of amortized cost,
which involves valuing a portfolio security at its cost, assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods in which value
as determined by amortized cost is higher or lower than the price the Fund would
receive if it sold the security. During such periods, the yield to investors in
the Fund may differ somewhat from that obtained in a similar fund which uses
available market quotations to value all of its portfolio securities.
REDEMPTION OF SHARES
Payment for shares tendered for redemption by the insurance company is made
ordinarily in cash within seven days after tender in proper form, except under
unusual circumstances as determined by the SEC. The redemption price will be the
net asset value next determined after the receipt of a request in proper form.
The market value of the securities in each Fund is subject to daily fluctuations
and the net asset value of each Fund's shares will fluctuate accordingly.
Therefore, the redemption value may be more or less than the investor's cost.
DIVIDENDS, DISTRIBUTIONS AND TAXES
All dividends and capital gains distributions of each Fund are
automatically reinvested by the Account in additional shares of such Fund.
Shares of the Money Market Fund and Government Fund become entitled to
income distributions declared on the day the shareholder service agent receives
payment of the purchase price in the form of federal funds. Such shares do not
receive income distributions declared on the date of redemption.
Dividends of the Money Market Fund. The Money Market Fund declares income
dividends each business day. The Fund's net income for dividend purposes is
calculated daily and consists of interest accrued or discount earned, plus or
minus any net realized gains or losses on portfolio securities, less any
amortization of premium and the expenses of the Fund.
Dividends and Distributions of the Common Stock Fund, the Domestic
Strategic Income Fund, the Emerging Growth Fund, the Global Equity Fund, the
Multiple Strategy Fund and the Real Estate Securities Fund. Dividends from
stocks and interest earned from other investments are the main source of income
for these Funds. Substantially all of this income, less expenses, is distributed
on an annual basis. When a Fund sells portfolio securities, it may realize
capital gains or losses, depending on whether the prices of the securities sold
are higher or lower than the prices the Fund paid to purchase them. Net realized
capital gains represent the total profit from sales of securities minus total
losses from sales of securities including any losses carried forward from prior
years. Each of these Funds distributes any net realized capital gains to the
Account no less frequently than annually.
Dividends and Distributions of the Government Fund. The Government Fund
declares income dividends each business day. Such dividends are distributed
monthly. The daily dividend is a fixed amount determined at least monthly which
is expected not to exceed the net income of the Fund for the month divided by
the number of business days in the month. The Government Fund intends to
distribute monthly, or on such other basis as may be determined from time to
time by the Trustees, its net realized short-term capital gains, including such
gains realized from net premiums received from expired options, net gains from
closing purchase transactions and net short-term gains from securities sold upon
the exercise of options or otherwise, less any net realized long-term capital
loss. Net realized long-term capital gains, if any, are generally distributed at
least annually.
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Tax Status of the Funds. Each Fund will or has elected to be taxed as a
"regulated investment company" under the Code. By maintaining its qualification
as a "regulated investment company," a Fund will not incur any liability for
federal income taxes to the extent its taxable ordinary income and any capital
gain net income is distributed in accordance with Subchapter M of the Code. By
qualifying as a regulated investment company, a Fund is not subject to federal
income taxes to the extent it distributes its taxable net investment income and
taxable net realized capital gains. If for any taxable year a Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of its taxable income, including any net realized capital gains, would be
subject to tax at regular corporate rates (without any deduction for
distributions to shareholders). Each Fund is subject to the diversification
requirements of Section 817(h) of the Code. See also "Government
Fund -- General" for information regarding Section 817(h) of the Code.
Dividends and interest received by certain funds may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. Investors may be entitled to claim United States foreign tax credits with
respect to such taxes, subject to certain provisions and limitations contained
in the Code. If more than 50% in value of a Fund's total assets at the close of
its fiscal year consists of securities of foreign issuers, the Fund will be
eligible, and may file elections with the Internal Revenue Service pursuant to
which shareholders of the Fund will be required to include their respective pro
rata portions of such taxes in their United States income tax returns as gross
income, treat such respective pro rata portions as taxes paid by them, and
deduct such respective pro rata portions in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their United States
income taxes. The Fund will report annually to its shareholders the amount per
share of such withholding.
Under Code Section 988, foreign currency gains or losses from certain
forward contracts not traded in the interbank market generally are typically
treated as ordinary income or loss. Such Code Section 988 gains or losses may
increase or decrease (or possibly eliminate) the amount of the Fund's investment
company taxable income available to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund's net
capital gain. If, under the rules governing the tax treatment of foreign
currency gains and losses, the Fund's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital or, in
some circumstances, as capital gain. Generally, your tax basis in your Fund
shares will be reduced to the extent that an amount distributed to you is
treated as a return of capital.
Tax Treatment to Insurance Company as Shareholder. Dividends paid by each
Fund from its ordinary income and distributions of each Fund's net realized
short-term capital gains are includable in the insurance company's gross income.
The tax treatment of such dividends and distributions depends on the insurance
company's tax status. To the extent that income of a Fund represents dividends
on equity securities rather than interest income, its distributions are eligible
for the 70% dividends received deduction applicable in the case of a life
insurance company as provided in the Code. The Trust will send to the Account a
written notice required by the Code designating the amount and character of any
distributions made during such year.
Under the Code, any distribution designated as being made from a Fund's net
realized long-term capital gains are taxable to the insurance company as
long-term capital gains. Such distributions of long-term capital gains will be
designated as a capital gains distribution in a written notice to the Account
which accompanies the distribution payment. Long-term capital gains
distributions are not eligible for the dividends received deduction. Dividends
and capital gain distributions to the insurance company may also be subject to
state and local taxes.
As described in the accompanying Prospectus for the Contracts, the
insurance company reserves the right to assess the Account a charge for any
taxes paid by it.
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Tax Treatment of Options and Futures Transactions. Gains or losses on
certain Funds' transactions in listed options on securities, futures and options
on futures generally are treated as 60% long-term and 40% short-term, ("60/40"),
and positions held by a Fund at the end of its fiscal year generally are
required to be marked to market, with the result that unrealized gains and
losses are treated as though they were realized. Gains and losses realized by a
Fund on transactions in over-the-counter options generally are short-term
capital gains or losses unless the option is exercised, in which case the gain
or loss is determined by the holding period of the underlying security. The Code
contains certain "straddle" rules which require deferral of losses incurred in
certain transactions involving hedged positions to the extent a Fund has
unrealized gains in offsetting positions and generally terminate the holding
period of the subject position. Additional information is set forth in the
Statement of Additional Information.
FUND PERFORMANCE
From time to time all the Funds, except the Money Market Fund, may
advertise their total return for prior periods. Any such advertisement would
include at least average annual total return quotations for one, five and
ten-year periods or for the life of the Fund. Other total return quotations,
aggregate or average, over other time periods may also be included. Total return
calculations do not take into account expenses at the "wrap" or contractholder
level. Investors should also review total return calculations that include those
expenses.
The total return of a 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 maximum public offering price and that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value. 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.
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.
In addition to total return information, the Government Fund and the
Domestic Strategic Income Fund may also advertise their current "yield." Yield
figures are based on historical earnings and are not intended to indicate future
performance. Yield is determined by analyzing the Fund's net income per share
for a thirty-day (or one-month) period (which period will be stated in the
advertisement), and dividing by the maximum offering price per share on the last
day of the period. A "bond equivalent" annualization method is used to reflect a
semiannual compounding. Yield calculations do not take into account expenses at
the "wrap" or contractholder level. Investors should also review yield
calculations that include those expenses.
From time to time, certain Funds may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for shares of
a Fund. Distribution rate is a measure of the level of income and short-term
capital gain dividends, if any, distributed for a specified period. It differs
from yield, which is a measure of the income actually earned by the Fund's
investments, and from total return, which is a measure of the income actually
earned by, plus the effect of any realized and unrealized appreciation or
depreciation of, such investments during a stated period. Distribution rate is,
therefore, not intended to be a complete measure of the Fund's performance.
Distribution rate may sometimes be greater than yield since, for instance, it
may not include the effect of amortization of bond premiums, and may include
non-recurring short-term capital gains and premiums from futures transactions
engaged in by the Fund. Distribution rates will be computed separately for each
class of the Fund's shares.
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For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by a Fund in accordance with generally accepted
accounting principles and from net income computed for federal income tax
reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Fund's then current dividend rate.
A Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by a Fund, portfolio maturity and a Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Fund's shares, a Fund's investment policies, and the risks of
investing in shares of a Fund. The investment return and principal value of an
investment in a Fund will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
The Adviser, for an indefinite period has agreed to absorb a certain amount
of the ordinary business expenses of the Common Stock Fund, Domestic Strategic
Income Fund, the Government Fund, the Money Market Fund and the Multiple
Strategy Fund. Absorption of a portion of the expenses will increase the yield
or total return of a Fund.
From time to time the Money Market Fund advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Fund refers to
the income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The current and
effective yields for the seven-day period ending June 30, 1995, and a
description of the method by which the yield was calculated is contained in the
Statement of Additional Information.
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that yield is
generally a function of the kind and quality of the instrument held in a
portfolio, portfolio maturity, operating expenses and market conditions.
The Trust's Annual Report contains additional performance information. A
copy of the Annual Report may be obtained without charge by calling or writing
the Trust at the telephone number and address printed on the cover page of this
Prospectus.
DESCRIPTION OF SHARES OF THE TRUST
The Trust was originally organized as a Massachusetts business trust on
June 3, 1985 and reorganized on September 16, 1995, under the laws of the state
of Delaware as a business entity commonly known as "Delaware business trust." It
is authorized to issue an unlimited number of shares of beneficial interest of
$0.01 par value. Shares issued by the Trust are fully paid, non-assessable and
have no preemptive or conversion rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Trust if
set forth in the Statement of Additional Information.
43
<PAGE> 44
The Trust'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 Trust but the assets of the Trust 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 Trust
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 Trust may not be appropriate for all investors.
The Trust 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 Trust.
An investment in the Trust is intended to be a long-term investment, and
should not be used as a trading vehicle.
44
<PAGE> 45
APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE'S BOND RATINGS:
AAA -- Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NONRATED -- Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
45
<PAGE> 46
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S BOND RATINGS:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -- B -- CCC -- CC -- Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR -- Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS:
Both Moody's and S&P use the same designations for corporate bonds as they
do for preferred stock except in the case of Moody's preferred stock ratings the
initial letter rating is not capitalized. While the descriptions are tailored
for preferred stocks and relative quality distinctions are comparable to those
described above for corporate bonds.
46
<PAGE> 47
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
------------------
2800 Post Oak Blvd.
Houston, TX 77056
------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Blvd.
Houston, TX 77056
Investment Subadvisers
For Global Equity Fund:
JOHN GOVETT & CO. LIMITED
4 Battle Bridge Lane
London SE1 2HR
England
For Real Estate Securities Fund:
HINES INTERESTS REALTY
ADVISORS LIMITED PARTNERSHIP
2800 Post Oak Blvd.
Houston, TX 77056
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
EXISTING SHAREHOLDERS-- Kansas City, MO 64141-9256
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL Custodian
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666 STATE STREET BANK AND
TRUST COMPANY
PROSPECTIVE INVESTORS--CALL 225 Franklin Street, P.O. Box 1713
YOUR BROKER OR (800) 421-5666 Boston, MA 02105-1713
Attn: Van Kampen American Capital Funds
DEALERS--FOR DEALER
INFORMATION, SELLING Legal Counsel
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE O'MELVENY & MYERS
DISTRIBUTOR'S TOLL-FREE 400 South Hope Street
NUMBER--(800) 421-5666 Los Angeles, CA 90071
FOR SHAREHOLDER AND Independent Accountants
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS PRICE WATERHOUSE LLP
DEVICE FOR THE DEAF (TDD) 1201 Louisiana, Suite 2900
DIAL (800) 772-8889 Houston, TX 77002
<PAGE> 48
LIFE INVESTMENT TRUST
--------------------------------------------------------------------------------
P R O S P E C T U S
SEPTEMBER 18, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
--------------------------------------------------------------------------------
<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 18, 1995
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
(800) 421-5666
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company with eight Funds: Common
Stock Fund, Domestic Strategic Income Fund, Emerging Growth Fund, Global Equity
Fund, Government Fund, Money Market Fund, Multiple Strategy Fund and Real Estate
Securities Fund. Each Fund is in effect a separate portfolio issuing its own
shares.
---------------------
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated September
18, 1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. (the "Distributor") at 2800 Post Oak
Blvd., Houston, Texas 77056 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
INVESTMENT OBJECTIVES AND POLICIES.................................................... 4
REPURCHASE AGREEMENTS................................................................. 10
FORWARD COMMITMENTS................................................................... 10
DEPOSITARY RECEIPTS................................................................... 11
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS........................... 11
LOANS OF PORTFOLIO SECURITIES......................................................... 18
INVESTMENT RESTRICTIONS............................................................... 18
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 28
INVESTMENT ADVISORY AGREEMENT......................................................... 33
DISTRIBUTOR........................................................................... 34
TRANSFER AGENT........................................................................ 35
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 35
DETERMINATION OF NET ASSET VALUE...................................................... 37
PURCHASE AND REDEMPTION OF SHARES..................................................... 39
DISTRIBUTIONS AND TAXES............................................................... 39
FUND PERFORMANCE...................................................................... 41
MONEY MARKET FUND YIELD INFORMATION................................................... 41
OTHER INFORMATION..................................................................... 42
FINANCIAL STATEMENTS.................................................................. 42
APPENDIX.............................................................................. 43
</TABLE>
<PAGE> 50
GENERAL INFORMATION
The Trust was originally organized under the laws of the Commonwealth of
Massachusetts on June 3, 1985 and reorganized under the laws of Delaware on
September 16, 1995.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than seven percent of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, is a wholly owned subsidiary of VK/AC Holding, Inc.
As of September 8, 1995 no person was known by management to own
beneficially or of record as much as five percent of the outstanding shares of
any portfolio except as set forth below. The Fund offers its share only to
separate accounts of various insurance companies. Those separate accounts have
authority to vote shares from which they have not received instructions from the
contractholders, but only in the same proportion with respect to "yes" votes,
"no" votes or abstentions as is the case with respect to shares for which
instructions were received.
MONEY MARKET FUND
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE FUND
RECORD HOLDER AT SEPTEMBER 8, 1995 PERCENT
---------------------------------------------------------- -------------------------- -------
<S> <C> <C>
American General Life Insurance Company 5,325,631.08 22.23%
Separate Account D
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide VLI -- Separate Account of Nationwide 10,041,455.86 41.91%
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3 8,536,206.83 35.63%
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
COMMON STOCK FUND
American General Life Insurance Company 713,234.72 15.30%
Separate Account D
P.O. Box 1591
Houston, Texas 77251-1591
</TABLE>
2
<PAGE> 51
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE FUND
RECORD HOLDER AT SEPTEMBER 8, 1995 PERCENT
------------------- -------------------------- -------
<S> <C> <C>
American General Life Insurance Company 277,665.93 5.60%
Separate Account D
Variety Plus
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide Variable Account -- 3 2,023,039.69 43.40%
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide VLI -- Separate Account of Nationwide 1,648,129.02 35.35%
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
GOVERNMENT FUND
Nationwide VLI -- Separate Account of Nationwide 6,461,157.11 84.60%
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3 1,055,989.78 13.83%
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
MULTIPLE STRATEGY FUND
Nationwide VLI -- Separate Account of Nationwide 1,969,198.67 38.95%
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3 2,844,098.38 56.26%
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
DOMESTIC STRATEGIC INCOME FUND
American General Life Insurance Company 686,902.41 22.39%
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide VLI -- Separate Account of Nationwide 422,377.28 13.77%
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3 1,837,548.277 59.90%
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
</TABLE>
3
<PAGE> 52
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE FUND
RECORD HOLDER AT SEPTEMBER 8, 1995 PERCENT
------------------- -------------------------- -------
<S> <C> <C>
GLOBAL EQUITY FUND
Van Kampen American Capital Asset Management, Inc. 200,010.00 92.07%
2800 Post Oak Blvd.
Houston, Texas 77056
EMERGING GROWTH FUND
Van Kampen American Capital Asset Management, Inc. 50,010.00 43.30%
2800 Post Oak Blvd.
Houston, Texas 77056
Nationwide VLI -- Separate Account of Nationwide 27,625.34 23.92%
Life Insurance Company
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3 37,874.39 32.79%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
REAL ESTATE SECURITIES FUND
Van Kampen American Capital Asset Management, Inc. 50,010.00 15.81%
2800 Post Oak Blvd.
Houston, Texas 77056
Nationwide Variable Account -- II 252,755.60 79.91%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The following disclosures supplement disclosures set forth under an
identical caption in the Prospectus and do not, standing alone, present a
complete or accurate explanation of the matters disclosed. Readers must refer
also to this caption in the Prospectus for a complete presentation of the
matters disclosed below.
COMMON STOCK FUND
The Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks. Any income received on such
securities is incidental to the objective of capital appreciation. When, in the
opinion of the Adviser, the then prevailing market conditions dictate a
defensive position, the Fund may temporarily hold a significant percentage of
its assets in cash, U.S. Government securities, or investment grade debt
securities. The Fund may enter into repurchase agreements with banks and broker-
dealers. See "Repurchase Agreements."
In seeking to obtain capital appreciation, the Fund may trade to a
substantial degree in securities for the short term. To this extent, the Fund
would be engaged essentially in trading operations based on expectation of
short-term market movements. However, the Fund also seeks investments which are
expected to appreciate over a longer period of time. See "Portfolio Transactions
and Brokerage."
DOMESTIC STRATEGIC INCOME FUND
The primary objective of the Fund is to maximize current income through
investment primarily in a diversified portfolio of fixed-income securities.
Capital appreciation is a secondary objective which is sought
4
<PAGE> 53
only when consistent with the primary objective. There is, of course, no
assurance that the Fund will be successful in achieving its investment
objective.
Capital appreciation may result, for example, from an improvement in the
credit standing of an issuer whose securities are held in the Fund's portfolio
or from a general lowering of interest rates, or a combination of both.
Conversely, a reduction in the credit rating of an issuer whose securities are
held in the Fund's portfolio or a general increase in interest rates would be
expected to reduce the value of the Fund's investments.
The Fund expects that at all times at least 80% of its assets will be
invested in fixed-income securities rated at the time of purchase B or higher by
Moody's Investor Services, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P"), nonrated securities considered by the Adviser to be of comparable
quality, and U.S. Government securities (as defined herein).
Lower rated and comparable nonrated securities tend to offer higher yields
than higher rated securities with the same maturities because the historical
conditions of the issuers of lower rated securities may not have been as strong
as that of other issuers. The Adviser, however, believes that such ratings are
not necessarily an accurate reflection of the current financial condition of the
issuers because they may be based upon considerations taken into account at the
time such ratings were assigned, rather than upon subsequent developments
affecting such issuers. Moreover, ratings categories tend to be broad, so that
there may be significant variations among the financial condition of issuers
within the same category. For these reasons, the Adviser may rely more on its
own analysis in determining which securities offer the best opportunities for
higher yields without unreasonable risks; therefore, the achievement of the
Fund's objectives will depend more on the Adviser's analytical and portfolio
management skills than would be the case if greater reliance were placed on
ratings assigned by the rating services. The Adviser's analysis will focus on a
number of factors affecting the financial condition of a company; including the
strength of its management; the financial soundness of the company and the
outlook of its industry; the security's responsiveness to changes in interest
rates and business conditions; the cash flow of the company; dividend or
interest coverage; and the fair market value of the company's assets. In making
portfolio decisions for the Fund, the Adviser will attempt to identify higher
yielding securities of companies whose financial condition has improved since
the issuance of such securities, or is anticipated to improve in the future.
The Fund may invest up to 20% of its total assets in debt securities rated
below B by Moody's and S&P or nonrated securities considered by the Adviser to
be of comparable quality, common stocks or other equity securities and in
non-income producing securities, prime commercial paper, certificates of
deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. The Fund will
not cause more than ten percent of its total assets to be invested in common
stocks or other equity securities. See "Investment Objectives and
Policies -- Domestic Strategic Income Fund," in the Prospectus.
Certain of the lower rated debt securities in which the Fund may invest may
be purchased at a discount. Such securities, when held to maturity or retired,
may include an element of capital gain. Capital losses may be realized when
securities purchased at a premium are held to maturity or are called or redeemed
at a price lower than the purchase price. Capital gains or losses are also
realized upon the sale of securities at prices that differ from their cost. The
market prices of fixed-income securities generally fall when interest rates
rise. Conversely, the market prices of fixed-income securities generally rise
when interest rates fall.
The Fund may invest in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities which are supported by any of the
following: (a) the full faith and credit of the U.S. Government, (b) the right
of the issuer to borrow an amount limited to a specific line of credit from the
U.S. Government, (c) discretionary authority of the U.S. Government agency or
instrumentality, or (d) the credit of the instrumentality. Such agencies or
instrumentalities include, but are not limited to, the Federal National Mortgage
Association, the Government National Mortgage Association, Federal Land Banks,
and the Farmer's Home Administration. Such securities are referred to as "U.S.
Government securities".
5
<PAGE> 54
Additional Risks of Investing in Lower Rated Debt Securities. Additional
risks of lower rated securities include limited liquidity and secondary market
support. As a result, the prices of debt securities may decline rapidly in the
event a significant number of holders decide to sell. Changes in expectations
regarding an individual issuer, an industry or lower rated debt securities
generally could reduce market liquidity for such securities and make their sale
by the Fund more difficult, at least in the absence of price concessions.
Reduced liquidity could also create difficulties in accurately valuing such
securities at certain times. The lower rated debt market has grown primarily
during a period of long economic expansion and it is uncertain how it would
perform during an economic downturn. An economic downturn or an increase in
interest rates could severely disrupt the market for lower rated debt and
adversely affect the value of outstanding securities and the ability of the
issuers to repay principal and interest. See "Investment Objectives and
Policies" in the Prospectus for a further discussion of risk factors associated
with investments in lower rated debt securities, which are not generally meant
for short-term investment.
EMERGING GROWTH FUND
The Fund seeks capital appreciation.
The following investment techniques, subject to the Investment Restrictions
below, may be employed by the Fund. These techniques inherently involve the
assumption of a higher degree of risk than normal and the possibility of more
volatile price fluctuations.
Restricted Securities. The Fund may invest up to fifteen percent of the
value of its net assets in restricted securities (i.e., securities which may not
be sold without registration under the Securities Act of 1933) and in other
securities that are not readily marketable, including repurchase agreements
maturing in more than seven days. Restricted securities are generally purchased
at a discount from the market price of unrestricted securities of the same
issuer. Investments in restricted securities are not readily marketable without
some time delay. Investments in securities which have no readily available
market value are valued at fair value as determined in good faith by the Trust's
Trustees. Ordinarily, the Fund would invest in restricted securities only when
it receives the issuer's commitment to register the securities without expense
to the Fund. However, registration and underwriting expenses (which may range
from seven percent to 15% of the gross proceeds of the securities sold) may be
paid by the Fund. A Fund position in restricted securities might adversely
affect the liquidity and marketability of such securities, and the Fund might
not be able to dispose of its holdings in such securities at reasonable price
levels.
Warrants. Warrants are in effect longer-term call options. They give the
holder the right to purchase a given number of shares of a particular company at
specified prices within certain periods of time. The purchaser of a warrant
expects that the market price of the security will exceed the purchase price of
the warrant plus the exercise price of the warrant, thus giving him a profit. Of
course, since the market price may never exceed the exercise price before the
expiration date of the warrant, the purchaser of the warrant risks the loss of
the entire purchase price of the warrant. Warrants generally trade in the open
market and may be sold rather than exercised. Warrants are sometimes sold in
unit form with other securities of an issuer. Units of warrants and common stock
may be employed in financing young, unseasoned companies. The purchase price of
a warrant varies with the exercise price of the warrant, the current market
value of the underlying security, the life of the warrant and various other
investment factors.
GLOBAL EQUITY FUND
The investment objective of the Fund is to provide long-term growth of
capital.
GOVERNMENT FUND
The Fund seeks to provide investors with a high current return consistent
with preservation of capital. The Fund invests primarily in U.S. Government
securities, related options, futures contracts and options on futures contracts.
The Fund may invest in other government related securities and in repurchase
agreements fully collateralized by U.S. Government securities. The other
government related securities include mortgage-related and mortgage-backed
securities and certificates issued by financial institutions or broker-dealers
6
<PAGE> 55
representing "stripped" mortgage-related securities. Repurchase agreements will
be entered into with domestic banks or broker-dealers deemed creditworthy by the
Fund's Adviser solely for purposes of investing the Fund's cash reserves or when
the Fund is in a temporary defensive posture.
One type of mortgage-related securities in which the Fund invests are those
which are issued or guaranteed by an agency or instrumentality of the U.S.
Government, though not necessarily by the U.S. Government itself. One such type
of mortgage-related security is a Government National Mortgage Association
("GNMA") Certificate. GNMA Certificates are backed as to principal and interest
by the full faith and credit of the U.S. Government. Another type is a Federal
National Mortgage Association ("FNMA") Certificate. Principal and interest
payments of FNMA Certificates are guaranteed only by FNMA itself, not by the
full faith and credit of the U.S. Government. A third type of mortgage-related
security in which the Fund may invest is a Federal Home Loan Mortgage
Association ("FHLMC") Participation Certificate. This type of security is backed
by FHMLC as to payment of principal and interest but, like a FNMA security, it
is not backed by the full faith and credit of the U.S. Government.
The Fund seeks to obtain a high return from the following sources:
- interest paid on the Fund's portfolio securities;
- premiums earned upon the expiration of options written;
- net profits from closing transactions; and
- net gains from the sale of portfolio securities on the exercise of
options or otherwise.
The Fund is not designed for investors seeking long-term capital
appreciation. Moreover, varying economic and market conditions may affect the
value of and yields on debt securities and opportunities for gains from an
option writing program. Accordingly, there is no assurance that the Fund's
investment objective will be achieved.
GNMA Certificates
Government National Mortgage Association. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Fund purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Fund will be
reinvested in additional GNMA Certificates or in other permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers
Home Administration or guaranteed by the Veterans Administration ("VA"). The
GNMA guarantee is backed by the full faith and credit of the United States. GNMA
is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
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As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate.
If mortgagors prepay their mortgages, the principal returned to
Certificate holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FNMA Securities
The Federal National Mortgage Association ("FNMA") was established in 1938
to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States.
FHLMC Securities
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional residential
mortgages. The FHLMC issues two types of mortgage pass-through securities
("FHLMC Certificates"): mortgage participation certificates
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("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA
Certificates in that each PC represents a pro rata share of all interest and
principal payments made and owned on the underlying pool. The FHLMC guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semiannually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years. The FHLMC guarantee is not backed by the full faith and
credit of the United States.
Collateralized Mortgage Obligations
Collateralized mortgage obligations are debt obligations issued generally
by finance subsidiaries or trusts which are secured by mortgage-backed
certificates, including GNMA Certificates, FHLMC Certificates and FNMA
Certificates, together with certain portfolios and other collateral. Scheduled
distributions on the mortgage-backed certificates pledged to secure the
collateralized mortgage obligations, together with certain portfolios and other
collateral and reinvestment income thereon at an assumed reinvestment rate, will
be sufficient to make timely payments of interest on the obligations and to
retire the obligations not later than their stated maturity. Since the rate of
payment of principal of any collateralized mortgage obligation will depend on
the rate of payment (including prepayments) of the principal of the mortgage
loans underlying the mortgage-backed certificates; the actual maturity of the
obligation could occur significantly earlier than its stated maturity.
Collateralized mortgage obligations may be subject to redemption under certain
circumstances. The rate of interest borne by collateralized mortgage obligations
may be either fixed or floating. In addition, certain collateralized mortgage
obligations do not bear interest and are sold at a substantial discount (i.e., a
price less than the principal amount). Purchases of collateralized mortgage
obligations at a substantial discount involves a risk that the anticipated yield
on the purchase may not be realized if the underlying mortgage loans prepay at a
slower than anticipated rate, since the yield depends significantly on the rate
of prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of loss
of principal in the event of unanticipated prepayments of the mortgage loans
underlying the mortgage-backed certificates since the premium may not have been
fully amortized at the time the obligation is repaid. The market value of
collateralized mortgage obligations purchased at a substantial premium or
discount is extremely volatile and the effects of prepayments on the underlying
mortgage loans may increase such volatility.
Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure collateralized mortgage obligations may be
guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage obligations
represent obligations solely of their issuers and are not insured or guaranteed
by GNMA, FHLMC, FNMA or any other governmental agency or instrumentality, or by
any other person or entity. The issuers of collateralized mortgage obligations
typically have no significant assets other than those pledged as collateral for
the obligations.
MONEY MARKET FUND
The Fund seeks protection of capital and high current income by investing
in money market instruments.
The Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost method of
valuing the Fund's securities pursuant to Rule 2a-7 under the Investment Company
Act of 1940 (the "1940 Act"), certain requirements of which are summarized
below.
In accordance with Rule 2a-7, the Fund is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Trustees to present minimal credit risks and which are rated
in one of the two highest rating categories for debt obligations by at least two
nationally recognized statistical rating organizations (or one rating
organization if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Trustees. The nationally recognized statistical rating
organizations currently rating instruments of the type the Fund may purchase are
Moody's Investors
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Service, Inc., Standard & Poor's Corporation, Fitch Investors Services, Inc.,
Duff and Phelps, Inc. and IBCA Limited and IBCA Inc. See Appendix hereto. See
the Prospectus for the Fund's maturity requirements.
In addition, the Fund will not invest more than five percent of its total
assets in the securities (including the securities collateralizing a repurchase
agreement) of, or subject to puts issued by, a single issuer, except that (i)
the Fund may invest more than five percent of its total assets in a single
issuer for a period of up to three business days in certain limited
circumstances, (ii) the Fund may invest in obligations issued or guaranteed by
the U.S. Government without any such limitation, and (iii) the limitation with
respect to puts does not apply to unconditional puts if no more than ten percent
of the Fund's total assets is invested in securities issued or guaranteed by the
issuer of the unconditional put. Investments in rated securities not rated in
the highest category by at least two rating organizations (or one rating
organization if the instrument was rated by only one such organization), and
unrated securities not determined by the Trustees to be comparable to those
rated in the highest category, will be limited to five percent of the Fund's
total assets, with the investment in any one such issuer being limited to no
more than the greater of one percent of the Fund's total assets or $1,000,000.
As to each security, these percentages are measured at the time the Fund
purchases the security. There can be no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share.
MULTIPLE STRATEGY FUND
The Fund seeks a high total investment return consistent with prudent risk
through a fully managed investment policy utilizing equity securities, primarily
common stocks of large capitalization companies, as well as investment grade
intermediate and long term debt securities and money market securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with broker-dealers or
domestic banks (or a foreign branch or subsidiary thereof). 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 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 is required to maintain the value of the underlying
securities marked to market daily at not less than the repurchase price. The
underlying securities (normally securities of the U.S. Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. See the Prospectus
for further information.
FORWARD COMMITMENTS
The Government Fund, the Domestic Strategic Income Fund and the Real Estate
Securities Fund may engage in Forward Commitment purchases and sales. Relative
to a Forward Commitment purchase, the Fund maintains a segregated account (which
is marked to market daily) of cash, cash equivalents, liquid high grade debt
securities or U.S. Government securities (which may have maturities which are
longer than the term of the Forward Commitment) with the Fund's custodian in an
aggregate amount equal to the amount of its commitment as long as the obligation
to purchase continues. Since the market value of both the securities subject to
the Forward Commitment and the securities held in the segregated account may
fluctuate, the use of Forward Commitments may magnify the impact of interest
rate changes on the Fund's net asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in value of a security which the
Portfolio owns or has the right to acquire. Only the Government Fund and the
Real Estate Securities Fund may engage in forward commitment transactions for
cross-hedging purposes. In either circumstance, the Fund maintains
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in a segregated account (which is marked to market daily) either the security
covered by the Forward Commitment or cash, cash equivalents, liquid high grade
debt securities or U.S. Government securities (which may have maturities which
are longer than the term of the Forward Commitment) with the Fund's custodian in
an aggregate amount equal to the amount of its commitment as long as the
obligation to sell continues. By entering into a Forward Commitment sale
transaction, the Fund foregoes or reduces the potential for both gain and loss
in the security which is being hedged by the Forward Commitment sale.
DEPOSITARY RECEIPTS
Certain Funds 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 OPTIONS ON FUTURES CONTRACTS
All of the Funds except the Domestic Strategic Income Fund and the Money
Market Fund may engage in transactions in options, futures contracts and options
on futures contracts. Set forth below is certain additional information
regarding options, futures contracts and options on futures contracts.
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. The Fund's current return can 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 also is likely to
result in a higher portfolio turnover.
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. Each Fund writes call
options only on a covered basis and only the Government Fund writes call options
either on a covered basis or for cross-hedging purposes. A call option is
covered if at all times during the option period the Fund owns or has the right
to acquire securities of the type that it would be obligated to deliver if any
outstanding option were exercised. Thus, the Government Fund may write options
on mortgage-related or other U.S. Government securities or forward commitments
of such securities. An option is for cross-hedging purposes if it is not
covered, but is designed to provide a hedge against a security which the Fund
owns or has the right to acquire. In such circumstances, the Fund maintains in a
segregated account with the Fund's Custodian, cash or U.S. Government securities
in an amount not less than the market value of the underlying security, marked
to market daily, while the option is outstanding.
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. A 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, a Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in
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the closing purchase transaction is less (greater) than the premium it received
on the sale of the option. A Fund would also realize a gain if an option it has
written lapses unexercised.
A 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 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, a 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 a 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.
The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.
Risks of Writing Options. By writing a call option, a 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.
PURCHASING CALL AND PUT OPTIONS
A Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. In
addition, the Common Stock, Emerging Growth Fund, the Global Equity Fund, the
Multiple Strategy Fund and the Real Estate Securities Fund may purchase call
options 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, a
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, a Fund would bear a significant risk of losing the entire premium if
the price of the underlying security did not rise sufficiently, or if it did not
do so before the option expired.
Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of a Fund's assets generally. In addition, the Common Stock, Emerging Growth
Fund, Global Equity Fund, the Multiple Strategy Fund and the Real Estate
Securities Fund may purchase put options 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 a Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
The Government Fund will not purchase call or put options on securities if
as a result, more than ten percent of its net assets would be invested in
premiums on such options.
A Fund may purchase either listed or over-the-counter options.
RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES (GOVERNMENT
FUND ONLY)
Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
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on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
Treasury Bills. Because the deliverable Treasury bill changes from week to
week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian so that it will be
treated as being covered.
Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options are
only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Fund as a writer of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery obligation in the event of
exercise may find that the mortgage-related securities it holds no longer have a
sufficient remaining principal balance for this purpose. Should this occur, the
Fund will purchase additional mortgage-related securities from the same pool (if
obtainable) or replacement mortgage-related securities in the cash market in
order to maintain its cover. A mortgage-related security held by the Portfolio
to cover an option position in any but the nearest expiration month may cease to
represent cover for the option in the event of a decline in the coupon rate at
which new pools are originated under the FHA/VA loan ceiling in effect at any
given time. If this should occur, the Fund will no longer be covered, and the
Portfolio will either enter into a closing purchase transaction or replace such
mortgage-related security with a mortgage-related security which represents
cover. When the Fund closes its position or replaces such mortgage-related
security, it may realize an unanticipated loss and incur transaction costs.
OPTIONS ON STOCK INDEXES (COMMON STOCK FUND, EMERGING GROWTH FUND, GLOBAL EQUITY
FUND, MULTIPLE STRATEGY FUND AND REAL ESTATE SECURITIES FUND ONLY)
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. Indices 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 a 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 Portfolio 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.
FOREIGN CURRENCY OPTIONS (GLOBAL EQUITY FUND AND REAL ESTATE SECURITIES FUND)
The Fund may purchase put and call options on foreign currencies to reduce
the risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than five percent of the Fund's net assets at
any given time. Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies are
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traded on United States and foreign exchanges. Exchange-traded options are
expected to be purchased by the Fund from time to time and over-the-counter
options may also be purchased, but only when the Adviser believes that a liquid
secondary market exists for such options, although there can be no assurance
that a liquid secondary market will exist for a particular option at any
specific time. Options on foreign currencies are affected by all of those
factors which influence foreign exchange rates and investments generally. See
"Investment Practices -- Using Options, Futures Contracts and Related Options"
in the Prospectus.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
FUTURES CONTRACTS
Certain Funds may engage in transactions involving futures contracts and
related options in accordance with rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Trust and its Funds are
exempt from registration as a "commodity pool."
Types of Contracts. 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, U.S. Treasury notes, U.S.
Treasury bills and GNMA Certificates) at a specified future time and at a
specified price. Interest rate futures contracts also include cash settlement
contracts based upon a specified interest rate such as the London interbank
offering rate for dollar deposits, LIBOR.
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
A Fund also may invest in foreign stock index futures traded outside the
United States. Foreign stock index futures traded outside the United States
include the Nikkei Index of 225 Japanese stocks traded on the Singapore
International Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese
stocks traded on the Osaka Exchange, Financial Times Stock Exchange Index of the
100 largest stocks on the London Stock Exchange, the All Ordinaries Share Price
Index of 307 stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33
stocks on the Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks
on the New Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto
Stock Exchange. Futures and futures options on the Nikkei Index are traded on
the Chicago Mercantile Exchange, and United States commodity exchanges may
develop futures and futures options on other indices of foreign securities.
Futures and options on United States devised index of foreign stocks are also
being developed. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments.
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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, a Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is known as initial
margin. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund upon termination of the
futures contract and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.
For example, when a 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 a 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. A Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs. Relative to the Government Fund, ordinarily
commissions on futures transactions are lower than transaction costs incurred in
the purchase and sale of mortgage-related and U.S. Government securities.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in options, futures or related options, the Fund could experience
delays and/or losses in liquidating open positions purchased and/or incur a loss
of all or part of its margin deposits with the broker. Transactions are entered
into by a 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 this imperfect correlation, a 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, a Fund could buy or sell futures contracts in a lesser dollar amount
than the dollar amount of the 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 a Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund
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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 depositary 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 judged over a very short time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although a 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, a 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 Advisers' ability
correctly to predict the direction of movements in the market. For example, if
the Fund hedges against a decline in the market, and market prices instead
advance, the Fund will lose part or all of the benefit of the increase in value
of its securities holdings because it will have offsetting losses in futures
contracts. In such cases, if the Fund has insufficient cash, it may have to sell
portfolio securities at a time when it is disadvantageous to do so in order to
meet the daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain other
conditions specified in CFTC regulations) and (ii) that a Fund not enter into
futures and related options for which the aggregate initial margin and premiums
exceed five percent of the fair market value of a Fund's assets. In order to
prevent leverage in connection with the purchase of futures contracts by a 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
A 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, a Fund is subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by a 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. A Fund could purchase put options on futures contracts in lieu of, and
for the same purposes as, the sale of 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 is intended to serve the same purpose as the actual purchase
of the futures contract.
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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 Advisers will not purchase
options on futures on any exchange unless, in the Advisers' 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 a
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, 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 ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS
ON FOREIGN CURRENCIES
Unlike transactions entered into by a Fund in futures contracts, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) by the Securities and Exchange Commission ("SEC"). To the contrary,
such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. Similarly, options on
currencies may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could, therefore, continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option seller and a trader of forward contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the Fund
to liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
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LOANS OF PORTFOLIO SECURITIES
Each of the Funds, except the Real Estate Securities Fund, may lend an
amount up to ten percent of the value of its portfolio securities to
unaffiliated brokers, dealers and financial institutions provided that cash
equal to 100% of the market value of the securities loaned is deposited by the
borrower with the particular Fund and is maintained each business day. While
such securities are on loan, the borrower is required to pay the Fund any income
accruing thereon. Furthermore, the Fund may invest the cash collateral in
portfolio securities thereby increasing the return to the Fund as well as
increasing the market risk to the Fund.
Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. Each Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions which may not be changed
without the approval of the holders of a majority of the outstanding shares of
such Fund. Such majority is defined by the 1940 Act as the lesser of (i) 67% or
more of the voting securities present at a meeting, if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy; or (ii) more than 50% of the Fund's outstanding voting securities. The
percentage limitations need only be met at the time the investment is made or
after relevant action is taken. The Funds are subject to the restrictions set
forth below (Those restrictions that are only applicable to certain Funds are
noted as such).
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE COMMON STOCK FUND, THE DOMESTIC
STRATEGIC INCOME FUND, THE EMERGING GROWTH FUND, THE GLOBAL EQUITY FUND, THE
GOVERNMENT FUND, THE MULTIPLE STRATEGY FUND AND THE MONEY MARKET FUND:
A Fund shall not:
1. Invest in securities of any company if any officer or trustee of the
Fund or of the Adviser owns more than one-half of one percent of the
outstanding securities of such company, and such officers and trustees
own more than five percent of the outstanding securities of such
issuer;
2. Invest in companies for the purpose of acquiring control or management
thereof;
3. Underwrite securities of other companies, except insofar as a Fund
might be deemed to be an underwriter for purposes of the Securities Act
of 1933 in the resale of any securities owned by the Fund; or
4. Lend its portfolio securities in excess of ten percent of its total
assets, both taken at market value provided that any loans shall be in
accordance with the guidelines established for such loans by the
Trustees of the Trust as described under "Loans of Portfolio
Securities," including the maintenance of collateral from the borrower
equal at all times to the current market value of the securities
loaned.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE COMMON STOCK FUND
AND THE MULTIPLE STRATEGY FUND:
A Fund shall not:
1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
United States Government, its agencies or instrumentalities and
repurchase agreements secured thereby) or purchase more than ten percent
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
Securities and
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<PAGE> 67
Exchange Commission exempting the Fund from the limitation imposed by
Section 12(d)(1) of the 1940 Act;
2. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition and except to acquire shares
of other open-end investment companies to the extent permitted by rule
or order of the Securities and Exchange Commission exempting the Fund
from the limitation imposed by Section 12(d)(1) of the 1940 Act;
3. Make any investment in real estate, commodities or commodities
contracts, except that the Fund may enter into transactions in options,
futures contracts or options on futures contracts and may purchase
securities secured by real estate or interests therein; or issued by
companies, including real estate investment trusts, which invest in real
estate or interests therein;
4. Invest in interests in oil, gas, or other mineral exploration or
development programs;
5. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than five
percent of the Fund's assets would be invested in such securities.
Notwithstanding the foregoing, 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
investment company;
6. Lend money, except that a Fund may invest in repurchase agreements in
accordance with applicable requirements set forth in the Prospectus and
may acquire debt securities which the Fund's investment policies permit.
A Fund will not invest in repurchase agreements maturing in more than
seven days (unless subject to a demand feature) if any such investment,
together with any illiquid securities (including securities which are
subject to legal or contractual restrictions on resale) held by the
Fund, exceeds ten percent of the market or other fair value of its total
net assets; 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 investment company. See "Repurchase Agreements";
7. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured thereby); 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 investment company;
8. Make short sales of securities, unless at the time of the sale the Fund
owns or has the right to acquire an equal amount of such securities.
Notwithstanding the foregoing, the Fund may engage in transactions in
options, futures contracts and options on futures contracts;
9. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Fund of initial
or maintenance margin in connection with transactions in options,
futures contracts or options on futures contracts is not considered the
purchase of a security on margin;
10. Invest more than five percent of its assets in companies having a
record, together with predecessors, of less than three years continuous
operation; 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 investment company; or
11. Borrow in excess of ten percent of the market or other fair value of
its total assets, or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of covered call or secured put
options, or in connection with the purchase or sale of futures contracts
and related options are not deemed or to be a pledge or other
encumbrance.
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In addition, the following restrictions apply to, and may not be changed
without the approval of the holders of a majority of the shares of, the Fund
indicated:
The Common Stock Fund may not invest more than five percent of its net
assets in warrants or rights valued at the lower of cost or market, nor
more than two percent 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. Furthermore, the
Common Stock Fund may not invest in the securities of a foreign issuer if,
at the time of acquisition, more than ten percent of the value of the
Common Stock 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.
The Multiple Strategy Fund may not invest in the securities of a
foreign issuer if, at the time of acquisition, more than 25% of the value
of the Multiple Strategy Fund's total assets would be invested in such
securities.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE DOMESTIC STRATEGIC
INCOME FUND:
The Fund shall not:
1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
United States Government, its agencies or instrumentalities and
repurchase agreements secured thereby) or purchase more than ten percent
of the outstanding voting securities of any one issuer;
2. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition;
3. Make any investment in real estate, commodities or commodities
contracts, except that the Fund may purchase securities secured by real
estate or interests therein; or issued by companies, including real
estate investment trusts, which invest in real estate or interests
therein;
4. Invest in interests in oil, gas, or other mineral exploration or
development programs;
5. Purchase a restricted security or a security for which market
quotations are not readily available if as a result of such purchase
more than five percent of the Fund's assets would be invested in such
securities;
6. Lend money, except that the Fund may invest in repurchase agreements in
accordance with applicable requirements set forth in the Prospectus and
may acquire debt securities which the Fund's investment policies permit.
The Fund will not invest in repurchase agreements maturing in more than
seven days (unless subject to a demand feature) if any such investment,
together with any illiquid securities (including securities which are
subject to legal or contractual restrictions on resale) held by the
Fund, exceeds ten percent of the market or other fair value of its total
net assets. See "Repurchase Agreements";
7. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured thereby);
8. Make short sales of securities, unless at the time of the sale the Fund
owns or has the right to acquire an equal amount of such securities;
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities;
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<PAGE> 69
10. Invest more than five percent of its assets in companies having a
record, together with predecessors, of less than three years continuous
operation;
11. Write put or call options;
12. Borrow in excess of ten percent of the market or other fair value of
its total assets, or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of covered call or secured put
options, or in connection with the purchase or sale of futures contracts
and related options are not deemed or to be a pledge or other
encumbrance; or
13. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 25% of the value of the Fund's total assets would
be invested in such securities.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE EMERGING GROWTH FUND:
The Fund shall not:
1. Invest directly in real estate interests of any nature, although the
Fund may invest indirectly through media such as real estate investment
trusts;
2. Invest in commodities or commodity contracts, except that the Fund may
enter into transactions in futures contracts or related options;
3. Issue any of its securities for (a) services or (b) property other than
cash or securities (including securities of which the Fund is the
issuer), except as a dividend or distribution to its shareholders in
connection with a reorganization;
4. Issue senior securities and shall not borrow money except from banks as
a temporary measure for extraordinary or emergency purposes and in an
amount not exceeding five percent of the Fund's total assets.
Notwithstanding the foregoing, the Fund may enter into transactions in
options, futures contracts and related options and may make margin
deposits and payments in connection therewith;
5. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured hereby); 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 investment company;
6. Invest in the securities of investment companies, except (a) that the
Fund may invest up to ten percent of its assets in the securities of
registered closed-end investment companies, provided that the Fund
acquires no more than five percent of the voting stock of any such
company which has a policy of concentrating investments in a particular
industry or group of industries or more than three percent of the voting
stock of such a company which does not have this policy; and (b) to
acquire shares of other open-end investment companies to the extent
permitted by rule or order of the Securities and Exchange Commission
exempting the Fund from the limitation imposed by Section 12(d)(1) of
the 1940 Act;
7. Sell short or borrow for short sales. Short sales "against the box" are
not subject to this limitation;
8. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
United States Government, it agencies or instrumentalities and
repurchase agreements secured thereby) or purchase more than ten percent
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
Securities and Exchange Commission exempting the Fund from the
limitation imposed by Section 12(d)(1) of the 1940 Act;
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<PAGE> 70
9. Invest in warrants in excess of five percent of its net assets
(including, but not to exceed two percent in warrants which are not
listed on the New York or American Stock Exchanges);
10. Purchase securities of issuers which have a record of less than three
years continuous operation if such purchase would cause more than five
percent of the Fund's total assets to be invested in securities of such
issuers; 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 investment company;
11. Invest more than fifteen percent of its net assets in illiquid
securities, including securities that are not readily marketable,
restricted securities and repurchase agreements that have a maturity of
more than seven days. Notwithstanding the foregoing, 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 investment company;
12. Invest in interests in oil, gas, or other mineral exploration or
developmental programs, except through the purchase of liquid securities
of companies which engage in such businesses; or
13. Pledge, mortgage or hypothecate its portfolio securities or other
assets to the extent that the percentage of pledged assets plus the
sales load exceeds ten percent of the offering price of the Fund's
shares.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE GLOBAL EQUITY FUND:
The Fund shall not:
1. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured thereby); 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 investment company;
2. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
United States Government, its agencies or instrumentalities and
repurchase agreements secured thereby) or purchase more than ten percent
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
Securities and Exchange Commission exempting the Fund from the
limitation imposed by Section 12(d)(1) of the 1940 Act;
3. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than ten percent of its net assets in
connection with permissible borrowings or purchase additional securities
when money borrowed exceeds five percent of its net assets. Margin
deposits or payments in connection with the writing of options or in
connection with the purchase or sale of forward contracts, futures,
foreign currency futures and related options are not deemed to be a
pledge or other encumbrance;
4. Lend money except through the purchase of (i) United States and foreign
government securities, commercial paper, bankers' acceptances,
certificates of deposit similar evidences of indebtedness, both foreign
and domestic, and (ii) repurchase agreements; or lend securities in an
amount exceeding 15% of the total assets of the Fund. The purchase of a
portion of an issue of securities described under (i) above distributed
publicly, whether or not the purchase is made on the original issuance,
is not considered the making of a loan;
5. Make short sales of securities, unless at the time of the sale it owns
or has the right to acquire an equal amount of such securities; provided
that this prohibition does not apply to the writing of options or the
sale of forward contracts, futures, foreign currency futures or related
options;
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6. Purchase securities on margin but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities. The deposit or payment by the Fund of initial or maintenance
margin in connection with forward contracts, futures, foreign currency
futures or related options is not considered the purchase of a security
on margin;
7. Buy or sell real estate or interests in real estate including real
estate limited partnerships, provided that the foregoing prohibition
does not apply to a purchase and sale of publicly traded (i) securities
which are secured by real estate, (ii) securities representing interests
in real estate, and (iii) securities of companies principally engaged in
investing or dealing in real estate;
8. Invest in commodities or commodity contracts, except that the Fund may
enter into transactions in options, futures contracts or related options
including foreign currency futures contracts and related options and
forward contracts;
9. 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, forward contracts, forward commitments 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;"
10. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except (a)
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 as part of a merger, consolidation or other
acquisition; or (b) to acquire shares of other open-end investment
companies to the extent permitted by rule or order of the Securities and
Exchange Commission exempting the Fund from the limitation imposed by
Section 12(d)(1) of the 1940 Act;
11. Invest more than five percent of its net assets in warrants or rights
valued at the lower of cost or market, nor more than two percent 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;
12. Invest in interests in oil, gas, or other mineral exploration or
development programs or invest in oil, gas, or mineral leases, except
that the Fund may acquire securities of public companies which
themselves are engaged in such activities;
13. Invest more than five percent of its total assets in securities of
unseasoned issuers which have been in operation directly or through
predecessors for less than three years; 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 investment company; or
14. Purchase or otherwise acquire any security if, as a result, more than
fifteen percent of its net assets (taken at current value) would be
invested in securities that are illiquid by virtue of the absence of a
readily available market. This policy includes repurchase agreements
maturing in more than seven days and over-the-counter options held by
the Fund and that portion of assets used to cover such options. This
policy does not apply to restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 which the
Trustees or the Adviser under Board approved guidelines, may determine
are liquid nor does it apply to other securities, for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists. Notwithstanding the foregoing, 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 investment company.
23
<PAGE> 72
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE GOVERNMENT FUND:
The Fund shall not:
1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
United States Government, its agencies or instrumentalities and
repurchase agreements secured thereby) or purchase more than ten percent
of the outstanding voting securities of any one issuer;
2. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition;
3. Make any investment in real estate, commodities or commodities
contracts, except that the Fund may invest in interest rate futures and
related options and may purchase securities secured by real estate or
interests therein; or issued by companies, including real estate
investment trusts, which invest in real estate or interests therein;
4. Invest in interests in oil, gas, or other mineral exploration or
development programs;
5. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than five
percent of the Fund's assets would be invested in such securities;
6. Lend money, except that the Fund may invest in repurchase agreements in
accordance with applicable requirements set forth in the Prospectus and
may acquire debt securities which the Fund's investment policies permit.
The Fund will not invest in repurchase agreements maturing in more than
seven days (unless subject to a demand feature) if any such investment,
together with any illiquid securities (including securities which are
subject to legal or contractual restrictions on resale) held by the
Fund, exceeds ten percent of the market or other fair value of its total
net assets. See "Repurchase Agreements";
7. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured thereby);
8. Make short sales of securities, unless at the time of the sale the Fund
owns or has the right to acquire an equal amount of such securities.
Notwithstanding the foregoing, the Fund may make short sales by entering
into forward commitments for hedging or cross-hedging purposes and the
Fund may engage in transactions in options, future contracts and related
options;
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Fund of initial
or maintenance margin in connection with interest rate futures contracts
or related options transactions is not considered the purchase of a
security on margin;
10. Invest more than five percent of its assets in companies having a
record, together with predecessors, of less than three years continuous
operation;
11. Borrow in excess of ten percent of the market or other fair value of
its total assets, or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of options, or in connection with
the purchase or sale of futures contracts and related options are not
deemed to be a pledge or other encumbrance; or
12. Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or offsetting
purchase transactions with respect to such options, (b) purchase options
to the extent that the premiums paid for all such options owned at any
time do not exceed ten percent of its total
24
<PAGE> 73
assets, and enter into closing or offsetting transactions with respect
to such options, and (c) engage in transactions in interest rate futures
contracts and related options provided that such transactions are
entered into for bona fide hedging purposes (or that the underlying
commodity value of the Fund's long positions do not exceed the sum of
certain identified liquid investments as specified in CFTC regulations),
provided further that the aggregate initial margin and premiums do not
exceed five percent of the fair market value of the Portfolio's total
assets, and provided further that the Fund may not purchase futures
contracts or related options if more than 30% of the Fund's total assets
would be so invested.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE MONEY MARKET FUND:
The Fund shall not:
1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
United States Government, its agencies or instrumentalities and
repurchase agreements secured thereby) or purchase more than ten percent
of the outstanding voting securities of any one issuer;
2. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition;
3. Make any investment in real estate, commodities or commodities
contracts, except that the Fund may purchase securities secured by real
estate or interests therein; or issued by companies, including real
estate investment trusts, which invest in real estate or interests
therein;
4. Invest in interests in oil, gas, or other mineral exploration or
development programs;
5. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than five
percent of the Fund's assets would be invested in such securities;
6. Lend money, except that the Fund may invest in repurchase agreements in
accordance with applicable requirements set forth in the Prospectus and
may acquire debt securities which the Fund's investment policies permit.
The Fund will not invest in repurchase agreements maturing in more than
seven days (unless subject to a demand feature) if any such investment,
together with any illiquid securities (including securities which are
subject to legal or contractual restrictions on resale) held by the
Fund, exceeds ten percent of the market or other fair value of its total
net assets. See "Repurchase Agreements";
7. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured thereby and obligations of domestic branches of
United States banks);
8. Make short sales of securities, unless at the time of the sale the Fund
owns or has the right to acquire an equal amount of such securities;
9. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities;
10. Invest more than five percent of its assets in companies having a
record, together with predecessors, of less than three years continuous
operation;
11. Write put or call options;
12. Borrow in excess of ten percent of the market or other fair value of
its total assets, or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of covered
25
<PAGE> 74
call or secured put options, or in connection with the purchase or sale
of futures contracts and related options are not deemed or to be a
pledge or other encumbrance; or
13. Purchase any security which matures more than one year from the date of
purchase.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE REAL ESTATE SECURITIES FUND.
The Fund shall not:
1. Engage in the underwriting of securities of other issuers, except that
the Fund may sell an investment position even though it may be deemed to
be an underwriter under the federal securities laws.
2. With respect to 75% of its total assets, invest more than five percent
of its assets in the securities of any one issuer (except the U.S.
Government, its agencies and instrumentalities and repurchase agreements
secured thereby) or purchase more than ten percent 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 12(d)(1) of the 1940 Act.
3. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than ten percent of its net assets in
connection with permissible borrowings or purchase additional securities
when money borrowed exceeds five percent of its net assets. Margin
deposits or payments in connection with the writing of options, or in
connection with the purchase or sale of forward contracts, futures,
foreign currency futures and related options, are not deemed to be a
pledge or other encumbrance.
4. Lend money or securities except by the purchase of a portion of an issue
of bonds, debentures or other obligations of types commonly distributed
to institutional investors publicly or privately (in the latter case the
investment will be subject to the stated limits on investments in
"restricted securities"), and except by the purchase of securities
subject to repurchase agreements.
5. Buy or sell real estate including real estate limited partnerships,
provided that the foregoing prohibition does not apply to a purchase and
sale of (i) securities which are secured by real estate, (ii) securities
representing interests in real estate, and (iii) securities of companies
operating in the real estate industry, including real estate investment
trusts. The Fund may hold and sell real estate acquired as a result of
the ownership of its securities.
6. Invest in commodities or commodity contracts, except that the Fund may
enter into transactions in options, futures contracts or related options
including foreign currency futures contracts and related options and
forward contracts.
7. 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, forward contracts, forward commitments 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."
8. Concentrate its investment in any one industry, except that the Fund
will invest more than 25% of its total assets in the real estate
industry. 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.
9. Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may (a) write covered or fully collateralized call options,
write secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (b) purchase and sell options
to the extent that the premiums paid for all such options owned at any
time do not exceed ten percent of its
26
<PAGE> 75
total assets and (c) engage in transactions in futures contracts and
related options transactions provided that such transactions are entered
into for bona fide hedging purposes (or meet certain conditions as
specified in CFTC regulations), and provided further that the aggregate
initial margin and premiums do not exceed five percent of the fair
market value of the Fund's total assets.
10. The Fund may not make short sales of securities, unless at the time of
the sale it owns or has the right to acquire an equal amount of such
securities; provided that this prohibition does not apply to the writing
of options or the sale of forward contracts, futures, foreign currency
futures or related options.
In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Fund is subject to the following policies
which may be amended by the Fund's Trustees and which apply at the time of
purchase of portfolio securities.
1. The Fund may not make investments for the purpose of exercising control
or management although the Fund retains the right to vote securities
held by it.
2. The Fund may not purchase securities on margin but the Fund may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities. The deposit or payment by the Fund of
initial or maintenance margin in connection with forward contracts,
futures, foreign currency futures or related options is not considered
the purchase of a security on margin.
3. The Fund may not 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 as part of a merger, consolidation or
other 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.
4. The Fund may not invest more than five percent of its net assets in
warrants or rights valued at the lower of cost or market, nor more than
two percent 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.
5. The Fund may not invest in securities of any company if any officer or
trustee of the Fund or of the Adviser owns more than one-half of one
percent of the outstanding securities of such company, and such officers
and trustees who own more than one-half of one percent own in the
aggregate more than five percent of the outstanding securities of such
issuer.
6. The Fund may not invest in interests in oil, gas, or other mineral
exploration or development programs or invest in oil, gas, or mineral
leases, except that the Fund may acquire securities of public companies
which themselves are engaged in such activities.
7. The Fund may not invest more than five percent of its total assets in
securities of unseasoned issuers which have been in operation directly
or through predecessors for less than three years, 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. The Fund may not purchase or otherwise acquire any security if, as a
result, more than fifteen percent of its net assets (taken at current
value) would be invested in securities that are illiquid by virtue of
the absence of a readily available market. This policy does not apply to
restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933 which the Trustees or the Adviser under
approved guidelines, may determine are liquid nor does it apply to other
securities for which, notwithstanding legal or contractual restrictions
on resale, a liquid market exists.
27
<PAGE> 76
TRUSTEES AND EXECUTIVE OFFICERS
The Trust's Trustees and Executive Officers and their principal occupations
during the past five years are listed below.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and
1009 Slater Road scientific equipment. A Trustee of each of the Van
Harrisville, NC 27560 Kampen American Capital Funds.
Age: 63
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager
9615 Torresdale Avenue of Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 A Trustee of each of the Van Kampen American Capital
Age: 67 Funds.
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndston, 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
Age: 46 of La Salle National Bank. A 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. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen
American Capital Funds and Chairman of each Van Kampen
American Capital Fund advised by Van Kampen American
Capital Investment Advisory Corp.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc.,
423 Country Club Drive a financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
28
<PAGE> 77
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive
Vice President of ACCESS, Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director, Trustee or Managing General Partner
of each of the Van Kampen American Capital Funds and
other open-end investment companies and closed-end
investment companies advised by the Adviser and its
affiliates.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A Director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital; a Director and the Second
Vice President of International Institute of Los
Angeles. A Trustee of each of the Van Kampen American
Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white
collar productivity. Director of Panasia Bank. A Trustee
of each of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994)
1999 Avenue of the Stars of the law firm of O'Melveny & Myers, legal counsel to
Suite 700 the Fund. Director, FPA Capital Fund, Inc.; FPA New
Los Angeles, CA 90067 Income Fund, Inc.; FPA Perennial Fund, Inc.; Source
Age: 63 Capital, Inc.; and TCW Convertible Security Fund, Inc.,
investment companies unaffiliated with Van Kampen
American Capital. A Trustee of each of the Van Kampen
American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995,
Stevens Institute Dean of Graduate School and Chairman, Department of
of Technology Mechanical Engineering, Stevens Institute of Technology.
Castle Point Station Director of Dynalysis of Princeton, a firm engaged in
Hoboken, NJ 07030 engineering research. A Trustee of each of the Van
Age: 71 Kampen American Capital Funds and Chairman of the Van
Kampen American Capital Funds advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van
Age: 55 Kampen American Capital Funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
</TABLE>
29
<PAGE> 78
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently know as The Traver's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a
Age: 73 producer of paper products. Trustee, and former
President of Whitney Museum of American Art. Formerly,
Chairman of Institute for Educational Leadership, Inc.,
Board of Visitors, Graduate School of The City
University of New York, Academy of Political Science.
Trustee of Committee for Economic Development. Director
of Public Education Fund Network, Fund for New York City
Public Education. Trustee of Barnard College. Member of
Dean's Council, Harvard School of Public Health. Member
of Mental Health Task Force, Carter Center. A Trustee of
each of the Van Kampen American Capital Funds.
</TABLE>
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)19
of the 1940 Act). Mr. Powell is an interested person of the Adviser and the
Trust by reason of his position with the Adviser. Mr. Sheehan and Mr. Whalen
are interested persons of the Adviser and the Fund by reason of their firms
having acted as legal counsel to the Adviser or an affiliate thereof.
The Trust's officers other than Messrs. McDonnell and Nyberg are located
2800 Post Oak Blvd., Houston, TX 77056. Messrs. McDonnell and Nyberg are located
at One Parkview Plaza, Oakbrook Terrace, IL 60181.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
B. Robert Baker.......... Vice President Associate Portfolio Manager of the Adviser.
Age: 41 Formerly, Vice President -- Portfolio
Manager, Variable Annuity Life Insurance
Company.
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 42 Secretary and Corporate Secretary of the Adviser.
Gary M. Lewis............ Vice President Vice President of the Adviser.
Age: 42
Tanya M. Loden........... Vice President and Vice President and Controller of most of the
Age: 35 Controller investment companies advised by the Adviser,
formerly Tax Manager/Assistant Controller.
Dennis J. McDonnell...... Vice President President, Chief Operating Officer and a
Age: 53 Director of the Adviser, Director of VK/AC
Holding, Inc. and Van Kampen American
Capital.
Curtis W. Morell......... Vice President and Vice President and Treasurer of most of the
Age: 49 Treasurer investment companies advised by the Adviser.
Jeff New................. Vice President Portfolio Manager of the Adviser.
Age: 38
</TABLE>
30
<PAGE> 79
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Ronald A. Nyberg......... Vice President Executive Vice President, General Counsel
Age: 42 and Secretary of Van Kampen American
Capital, Executive Vice President and a
Director of the Distributor, Executive Vice
President of the Adviser. Director of ICI
Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute.
Robert Peck.............. Vice President Senior Vice President of the Adviser.
Age: 48
John R. Reynoldson....... Vice President Senior Vice President of the Adviser.
Age: 42
Alan T. Sachtleben....... Vice President Executive Vice President and Director of the
Age: 53 Adviser. Executive Vice President of VK/AC
Holding, Inc. and VKAC.
Walter W. Stabell III.... Vice President Associate Portfolio Manager of the Adviser.
Age: 36
David Troth.............. Vice President Senior Vice President of the Adviser.
Age: 61
J. David Wise............ Vice President and Vice President, Associate General Counsel
Age: 51 Assistant Secretary and Assistant Corporate Secretary of the
Adviser.
Paul R. Wolkenberg....... Vice President Senior Vice President of the Adviser.
Age: 50 President, Chief Operating Officer and
Director of Van Kampen American Capital
Services, Inc. Executive Vice President,
Chief Operating Officer and Director of Van
Kampen American Capital Trust Company.
Executive Vice President and Director of
ACCESS.
</TABLE>
The Trustees and officers of the Trust as a group do not own any
outstanding shares of the Trust because such shares are sold only to separate
accounts (the "Accounts") of various insurance companies to fund the benefits of
variable annuity or variable life insurance policies (the "Contracts"). Only
Messrs. Branagan, Hilsman, Powell, Rees, Sheehan, Sisto and Woodside served as
Trustees of the Trust during its last fiscal year. Effective September 7, 1995,
Ms. Heagy commenced service as a Trustee of the Trust and Dr. Caruso ceased
serving as a Trustee of the Trust. During the year ended December 31, 1994, the
Trustees who were not affiliated with the Adviser received as a group $9,674,
$9,150, $9,339, $8,725 and $9,123 in Trustees' fees from the Common Stock,
Domestic Strategic Income, Government, Money Market and Multiple Strategy Funds,
respectively, in addition to certain out-of-pocket expenses. Such trustees also
receive compensation for serving as directors of other investment companies
advised by the Adviser as identified in the notes to the foregoing table. For
legal services rendered during the fiscal year ended December 31, 1994, the
Trust paid legal fees of $3,546, $3,452, $3,928, $3,342 and $3,598 from the
Common Stock, Domestic Strategic Income, Government, Money Market and Multiple
Strategy Funds, respectively, to the law firm of O'Melveny & Myers, of which Mr.
Sheehan is of counsel.
31
<PAGE> 80
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as director or trustee is set
forth below. The compensation shown for the Funds and the total compensation
shown for the Funds and other related mutual funds is for the year ended
December 31, 1994. Mr. Powell is not compensated for his service as Trustee,
because of his affiliation with the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
I II
----------------------------------------------------------- -----------------------
AGGREGATE COMPENSATION FROM REGISTRANT(6)
-----------------------------------------------------------
DOMESTIC TOTAL COMPENSATION FROM
COMMON MONEY MULTIPLE STRATEGIC REGISTRANT AND FUND
STOCK GOVERNMENT MARKET STRATEGY INCOME COMPLEX PAID TO
NAME OF DIRECTOR FUND FUND FUND FUND FUND TRUSTEES(1)(5)
------------------------------- ---------- ---------- ---------- --------- -------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
J. Miles Branagan.............. $1,355 $1,380 $1,270 $ 1,355 $1,260 $64,000
Dr. Richard E. Caruso(2)(4).... $1,355 $1,380 $1,270 $ 1,355 $1,260 $64,000
Dr. Roger Hilsman.............. $1,400 $1,430 $1,310 $ 1,400 $1,300 $66,000
David Rees(4).................. $1,355 $1,380 $1,270 $ 1,355 $1,260 $64,000
Lawrence J. Sheehan............ $1,420 $1,450 $1,330 $ 1,420 $1,320 $67,000
Dr. Fernando Sisto(2)(4)....... $1,745 $1,780 $1,635 $ 1,735 $1,615 $82,000
William S. Woodside(3)......... $1,160 $1,170 $1,090 $ 1,160 $1,080 $18,000
</TABLE>
---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation as follows: Common Stock
Fund -- Caruso, $1,315; Sisto $920; Government Fund -- Caruso, $1,340;
Sisto, $925; Money Market Fund -- Caruso, $1,230: Sisto, $885; Multiple
Strategy Fund -- Caruso, $1,315; Sisto, $915; Domestic Strategic Income
Fund -- Caruso, $1,220; Sisto $850.
(3) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, of the amounts reflected under heading I for that
Fund, Common Stock Fund paid $340, Government Fund paid $340, Money Market
Fund paid $320, Multiple Strategy Fund paid $340, Domestic Strategic Income
Fund paid $320. Those Funds and the other funds in the fund complex paid
Mr. Woodside $36,000 in the aggregate.
(4) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The
cumulative deferred compensation accrued by the Fund as of December 31,
1994 is as follows: Common Stock Fund -- Rees, $5,198; Caruso, $3,896;
Sisto, $3,994; Government Fund -- Rees, $5,761; Caruso, $3,888; Sisto,
$4,028; Money Market Fund -- Rees, $5,252; Caruso, $3,720; Sisto, $3,843;
Multiple Strategy Fund -- Rees, $4,103; Caruso, $3,794; Sisto, $3,250;
Domestic Strategic Income Fund -- Rees, $3,370; Caruso, $3,647; Sisto
$3,634.
(5) Includes the following amounts for which the various funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed in Footnote 3 above).
(6) No compensation was paid to any Trustee with regard to the Emerging Growth
Fund, the Global Equity Fund, and the Real Estate Securities Fund.
Beginning July 21, 1995, the Trust pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $3,360 and a
meeting fee of $100 per Board meeting plus expenses. No additional fees are paid
for committee meetings or to the chairman of the board. In order to alleviate an
additional expense that might be caused by the new compensation arrangement, the
trustees have approved a reduction in the compensation per trustee and have
agreed to an aggregate annual compensation cap with respect to the combined fund
complex of $84,000 per trustee until December 31, 1996, based upon the net
assets and the number of Van Kampen American Capital funds as of July 21, 1995
(except that Mr. Whalen, who is a trustee of 34 closed-end funds advised by an
affiliate of the Adviser, would receive an additional $119,000 for serving as a
trustee of such funds). In addition, the Adviser has agreed to reimburse the
Trust
32
<PAGE> 81
through December 31, 1996 for any increase in the aggregate trustees'
compensation paid by the Fund over their 1994 fiscal year aggregate
compensation.
INVESTMENT ADVISORY AGREEMENT
The Trust and the Adviser are parties to an investment advisory agreement
("Advisory Agreement - I") pursuant to which the Fund retains the Adviser to
manage the investment of assets and to place orders for the purchase and sale of
portfolio securities for the Common Stock Fund, the Domestic Strategic Income
Fund, the Government Fund, the Money Market Fund and the Multiple Strategy Fund.
The Fund and the Adviser are also parties to other investment advisory
agreements ("Advisory Agreement - II, III and IV) pursuant to which the Adviser
manages the investment of assets and places orders for the purchase and sale of
portfolio securities for the Emerging Growth Fund, the Global Equity Fund and
the Real Estate Securities Fund, respectively, (Advisory Agreement - I, Advisory
Agreement - II, Advisory Agreement - III and Advisory Agreement - IV are
referred to herein collectively as the "Advisory Agreements"). Under the
Advisory Agreements, the Adviser is responsible for obtaining and evaluating
economic, statistical, and financial data and for formulating and implementing
investment programs in furtherance of each 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 Trust 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 Trust, one or more
Vice Presidents as needed, and a Secretary.
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Fund. 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. The
services are provided at cost which is allocated among the investment companies
advised by the Adviser. The Trust also pays shareholder service agency fees,
custodian fees, legal fees, the costs of reports to shareholders and all other
ordinary expenses not specifically assumed by the Adviser.
Under Advisory Agreement - I, the Trust 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 subject Funds at an
annual rate of 0.50% of the first $500 million of such Funds' aggregate average
net assets; 0.45% of the next $500 million of such Funds' aggregate average net
assets, and 0.40% of such Funds' aggregate average net assets in excess of $1
billion.
Under Advisory Agreements - II, III and IV the Trust 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 0.70% for
the Emerging Growth Fund, 1.00% for the Global Equity Fund and 1.00% for the
Real Estate Securities Fund, respectively.
The average daily net assets of a Fund is determined by taking the average
of all of the determinations of net assets of that Fund for each business day
during a given calendar month. The 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.
Advisory Agreement - I also provides that, in the event the ordinary
business expenses of the Common Stock Fund, the Domestic Strategic Income Fund,
the Government Fund and the Money Market Fund and the Multiple Strategy Fund for
any fiscal year exceed 0.95% of the average daily net assets, the compensation
33
<PAGE> 82
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 do not include (1)
interest and taxes, (2) brokerage commissions, (3) any distribution expenses
which may be incurred in the event the Fund's Distribution Plan is implemented,
and (4) certain litigation and indemnification expenses as described in the
Advisory Agreement. No such limit applies with respect to Advisory
Agreement - II, Advisory Agreement - III and Advisory Agreement - IV.
In addition to the contractual expense limitation, the Adviser elected to
reimburse the Common Stock Fund, the Domestic Strategic Income Fund, the
Government Fund, the Money Market Fund and the Multiple Strategy Fund for all
ordinary business expenses in excess of .60% of the average daily net assets.
The following table shows expenses paid under the Advisory Agreement during
the periods ended December 31, 1992, December 31, 1993 and December 31, 1994.
The Emerging Growth Fund, the Global Equity Fund and the Real Estate Securities
Fund commenced operations after the end of 1994.
<TABLE>
<CAPTION>
DOMESTIC
COMMON STRATEGIC MONEY MULTIPLE
PERIOD ENDING STOCK INCOME GOVERNMENT MARKET STRATEGY
DECEMBER 31, 1992: FUND FUND FUND FUND FUND
---------------------------------------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Advisory fees $ 290,101 $ 93,803 $373,147 $ 181,232 $ 273,991
Accounting Services $ 44,713 $ 47,520 $ 52,072 $ 40,931 $ 48,242
Contractual expense reimbursement $ -0- $ 58,070 $ -0- $ -0- $ -0-
Voluntary expense reimbursement $ 79,392 $ 65,662 $ 75,744 $ 104,803 $ 94,458
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1993:
----------------------------------------
<S> <C> <C> <C> <C> <C>
Advisory fees $ 345,093 $132,513 $393,050 $ 144,373 $ 319,607
Accounting Services $ 66,688 $ 63,008 $ 68,628 $ 59,477 $ 68,254
Contractual expense reimbursement $ -- $ 14,128 $ -- $ 445 $ --
Voluntary expense reimbursement $ 84,676 $ 93,319 $ 80,855 $ 101,061 $ 90,379
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1994:
----------------------------------------
<S> <C> <C> <C> <C> <C>
Advisory fees $ 346,359 $130,474 $351,674 $ 152,665 $ 307,894
Accounting Services $ 52,665 $ 51,604 $ 58,043 $ 51,778 $ 55,826
Contractual expense reimbursement $ -- $ 302 $ -- $ -- $ --
Voluntary expense reimbursement $ 57,464 $ 91,332 $ 68,843 $ 80,915 $ 75,169
</TABLE>
The Advisory Agreements with respect to each subject Fund may be continued
from year to year if specifically approved at least annually (a)(i) by the
Trust'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 60 days' written notice.
DISTRIBUTOR
Van Kampen American Capital Distributors, Inc., acts as the principal
underwriter of the shares of the Trust pursuant to written agreements (the
"Underwriting Agreement"). The Distributor is owned by the Adviser's parent
company. The Distributor's obligation is an agency or "best efforts" arrangement
under which the Distributor is not obligated to sell any stated number of
shares. The Underwriting Agreement is renewable from year to year if approved
(a) by the Trust's Trustees or by a vote of a majority of the Trust'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
34
<PAGE> 83
that purpose. The Underwriting Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.
The Distributor bears the cost of printing (but not typesetting)
prospectuses used in connection with this offering and the cost and expense of
supplemental sales literature, promotion and advertising and any costs of
qualification of shares for sales under state blue sky laws. The Trust pays all
expenses attributable to the registrations of its shares under federal law,
including registration and filing fees, the cost of preparation of the
prospectuses, related legal and auditing expenses, and the cost of printing
prospectuses for current shareholders.
TRANSFER AGENT
For the fiscal years ended December 31, 1992, 1993, and 1994, ACCESS
Investor Services, Inc. ("ACCESS"), shareholder service agent and dividend
disbursing agent for the Trust, received fees aggregating $17,160, $18,000 and
$18,000, respectively, from each Fund, for these services. These services are
provided at cost plus a profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Trust and for the placement of its portfolio business and the negotiation of
the commissions, if any, paid on such transactions. It is the policy of the
Advisers 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 Trust 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 dealers and in negotiating commissions, the Advisers consider 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 Trust or the Adviser.
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 Advisory Agreements, the Trust's Trustees
have authorized the Advisers 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 Advisers. The Advisers are 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 Trust. The
Advisers undertake that such higher commissions will not be paid by the Fund
unless (a) the Advisers determine in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction or in terms of
the Advisers' 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 Advisers, the total commissions paid by the Fund are
reasonable in relation to the expected benefits to the Trust over the long term.
The investment advisory fee paid by the Trust under the Advisory Agreements is
not reduced as a result of the Advisers' receipt of research services.
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 Advisers may consider sales of shares of the Trust and of the
35
<PAGE> 84
other Van Kampen American Capital mutual funds as a factor in the selection of
dealers to execute portfolio transactions for the Trust.
Prior to December 20, 1994, the Fund placed brokerage transactions with
brokers who were considered affiliated persons of the Adviser's former parent,
The Travelers Inc. Such affiliated persons including Jefferies & Company, Inc.
("Jefferies"), Smith Barney Inc. ("Smith Barney") and Robinson Humphrey, Inc.
("Robinson Humphrey"). Effective September 30, 1992, Jefferies ceased to be an
affiliate of the Adviser. 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 Trust paid the following commissions to affiliated brokers during the
periods shown:
Commissions Paid:
<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON
JEFFERIES SHEARSON HUMPHREY
--------- ------------ --------
<S> <C> <C> <C>
Fiscal 1992
Money Market Fund -- --
Common Stock Fund $ 1,008 $ 21,675 --
Government Fund -- $ 1,128 --
Multiple Strategy Fund $ 525 $ 9,903 --
Domestic Strategic Income Fund -- -- --
Fiscal 1993
Money Market Fund -- -- --
Common Stock Fund -- $ 32,295 --
Government Fund -- $ 2,739
Multiple Strategy Fund -- $ 18,185 $ 455
Domestic Strategic Income Fund -- -- --
Fiscal 1994
Money Market Fund -- --
Common Stock Fund $ 36,136 $1,330
Government Fund $ 2,578 --
Multiple Strategy Fund $ 27,550 $ 42
Domestic Strategic Income Fund -- --
Fiscal 1994 Percentages:
Commissions with affiliates to total commissions
Money Market Fund -- --
Common Stock Fund 10.62% .39%
Government Fund 16.95% --
Multiple Strategy Fund 12.99% .02%
Domestic Strategic Income Fund -- --
Value of transactions with affiliates to total
transactions
Money Market Fund -- --
Common Stock Fund 14.42% .13%
Government Fund 18.62% --
Multiple Strategy Fund 9.53% .03%
Domestic Strategic Income Fund -- --
</TABLE>
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Trust 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 Trust. In the opinion of the Adviser, the
benefits from research services to each of the accounts, including the Trust,
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
36
<PAGE> 85
opinion of the Adviser, such costs to the Trust will not be disproportionate to
the benefits received by the Trust on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Trust 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 Trust. In
making such allocations among the Trust 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 following table summarizes for each portfolio the total brokerage
commissions paid, the amount of commissions paid to brokers selected primarily
on the basis of research services provided to the Adviser and the value of these
specific transactions. The Adviser's brokerage practices are monitored on a
quarterly basis by the Brokerage Review Committee composed of Fund Trustees who
are not interested persons (as defined in the 1940 Act) of the Adviser. The
Emerging Growth Fund, the Global Equity Fund and the Real Estate Securities Fund
commenced operations after the end of 1994.
<TABLE>
<CAPTION>
DOMESTIC
COMMON MULTIPLE STRATEGIC MONEY
STOCK GOVERNMENT STRATEGY INCOME MARKET
FUND FUND FUND FUND FUND
----------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
1992
----
Total brokerage commissions $ 208,445 $ 27,704 $ 160,398 $ 951 --
Commissions for research services $ 102,780 -- $ 69,903 $ 595 --
Value of research transactions $58,028,320 -- $40,053,381 $325,081 --
1993
----
Total brokerage commissions $ 283,795 $ 12,198 $ 259,924 -- --
Commissions for research services $ 146,345 0 $ 155,243 -- --
Value of research transactions $84,070,654 0 $83,666,168 -- --
1994
----
Total brokerage commissions $ 340,219 $ 15,213 $ 212,116 $ 395
Commissions for research services $ 144,248 -- $ 90,649
Value of research transactions $84,974,336 -- $72,221,352
</TABLE>
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of each Fund's investment portfolio securities during such fiscal
year. Securities which mature in one year or less at the time of acquisition are
not included in this computation. The turnover rate may vary greatly from year
to year as well as within a year. The Fund's investment portfolio turnover rate
for prior years is shown under "Financial Highlights" in the Prospectus. The
turnover rate for the Government Fund will fluctuate over time depending upon
the Adviser's investment strategy and the higher volatility of the market for
government securities. In 1994, as a result of declining interest rates and
because of the previously described factors, the portfolio turnover rate rose to
a higher level than 1993.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is computed by dividing the
value of all securities held by the Fund plus other assets, less liabilities, by
the number of shares outstanding. This computation is made for each Fund as of
the close of business each day the Exchange (the "Exchange") is open (currently
4:00 p.m., New York time). The Exchange is currently closed on weekends and on
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
37
<PAGE> 86
MONEY MARKET FUND NET ASSET VALUATION
The valuation of the Fund's portfolio securities is based upon their
amortized cost, which does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing an instrument at its
cost and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price that the Fund would receive if
it sold the instrument.
The Fund's use of the amortized cost method of valuing its portfolio
securities is permitted by a rule adopted by the SEC. Under this rule, the Fund
must maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 13 months or less and
invest only in securities determined by the Adviser to be of eligible quality
with minimal credit risks.
The Fund has established procedures reasonably designed, taking into
account current market conditions and the Fund's investment objective, to
stabilize the net asset value per share for purposes of sales and redemptions at
$1.00. These procedures include review by the Trustees, at such intervals as the
Fund or the Trustees deem appropriate, to determine the extent, if any, to which
the new asset value per share calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. In the event such
deviation should exceed four tenths of one percent, the Trustees are required to
promptly consider what action, if any, should be initiated. If the Trustees
believe that the extent of any deviation from a $1.00 amortized cost price per
share may result in material dilution or other unfair results to new or existing
shareholders, it will take such steps as it considers appropriate to eliminate
or reduce these consequences to the extent reasonably practicable. Such steps
may include selling portfolio securities prior to maturity; shortening the
average maturity of the portfolio; withholding or reducing dividends; or
utilizing a net asset value per share determined by using available market
quotations.
COMMON STOCK, DOMESTIC STRATEGIC INCOME, EMERGING GROWTH, GLOBAL EQUITY,
MULTIPLE STRATEGY AND REAL ESTATE SECURITIES FUNDS NET ASSET VALUATION
The net asset value of these Funds is computed by (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,
using prices as of the close of trading on the New York Stock Exchange, (ii)
valuing unlisted securities for which over-the-counter market quotations are
readily available at the most recent bid price as supplied by NASDAQ or by
broker-dealers, and (iii) valuing any securities for which market quotations are
readily available, and any other assets at fair value as determined in good
faith by the Trust's Trustees. Options, futures contracts and options thereon,
which are traded on exchanges, are valued at their last sale or settlement price
as of the close of such exchanges or if no sales are reported, at the mean
between the last reported bid and asked prices. Securities with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which
approximates market value. Securities for which market quotations are not
readily available, and any other assets are valued at fair value as determined
in good faith by the Trust's Trustees.
With respect to certain Funds, trading in securities on European and Far
Eastern securities exchanges and over-the-counter markets is normally completed
well before the close of business on each business day in New York (i.e., a day
on which the Exchange is open). In addition, European or Far Eastern securities
trading generally or in a particular country or countries may not take place on
all business days in New York. Furthermore, trading takes place on all business
days in Japanese markets, on certain Saturdays, and in various foreign markets
on days which are not business days in New York, and on which the Fund's net
asset value is not calculated, and on which the Fund does not effect sales,
redemptions and repurchases of its shares. There may be significant variations
in the net asset value of Fund shares on days when net asset value is not
calculated and on which shareholders cannot redeem on account of changes in
prices of stocks traded in foreign stock markets.
38
<PAGE> 87
GOVERNMENT FUND NET ASSET VALUATION
U.S. Government securities are traded in the over-the-counter market and
are valued at the last available bid price. Such valuations are based on
quotations of one or more dealers that make markets in the securities as
obtained from such dealers or from a pricing service. Options, interest rate
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sale or settlement price as of the close of such exchanges or if
no sales are reported, at the mean between the last reported bid and asked
prices. Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis, which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trust's Trustees. Such
valuations and procedures will be reviewed periodically by the Trustees.
PURCHASE AND REDEMPTION OF SHARES
The purchase of shares of the Funds is currently limited to the Accounts as
explained on the cover page and in the Prospectus. Such shares are sold and
redeemed at their respective net asset values as described in the Prospectus.
Redemptions are not made on days during which the New York Stock Exchange
is closed, including those holidays listed under "Determination of Net Asset
Value." The right of redemption may be suspended and the payment therefor may be
postponed for more than seven days during any period when (a) the New York Stock
Exchange is closed for other than customary weekends or holidays; (b) trading on
the New York Stock 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 Securities and Exchange Commission, by
order, so permits.
DISTRIBUTIONS AND TAXES
Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code (the "Code"). By so qualifying, a Fund
will not be subject to Federal income taxes on amounts paid by it as dividends
and distributions to the Account. Each Fund expects to be treated as a separate
entity for purposes of determining Federal tax treatment. Accordingly, in order
to qualify as a "regulated investment company" at the end of each quarter of its
taxable year, at least 50% of the aggregate value of each Fund's net assets must
consist of cash, cash items, government securities and other securities, limited
with respect to each issuer at the time of purchase to not more than five
percent of that Fund's total assets. Similar but slightly different investment
requirements apply to each Fund because it provides benefits under variable life
insurance policies. Additional requirements applicable to the Government Fund
are described in the Prospectus under "Government Fund-General." The Trust will
endeavor to ensure that each Fund's assets are so invested so that all such
requirements are satisfied, but there can be no assurance that it will be
successful in doing so.
Each Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders during any calendar year at least (1) 98% of its
ordinary income for the twelve months ended December 31, plus (2) 98% of its
capital gains net income for the twelve months ended October 31 of such year.
Each Fund intends to distribute sufficient amounts to avoid liability for the
excise tax.
Dividends and distributions declared to shareholders of record after
September 30 of any year and paid before February 1 of the following year, are
considered taxable income to shareholders on the record date even though paid in
the next year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and these regulations
are subject to change by legislative or administrative action.
Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisors
regarding specific questions as to federal, state or local taxes.
39
<PAGE> 88
With respect to certain Funds, the Fund may qualify for and may make the
election permitted under Section 853 of the Code so that shareholders will be
able to claim a credit or deduction on their income tax returns for, and will be
required to treat as part of the amounts distributed to them, their pro rata
portion of qualified taxes paid by the Fund to foreign countries (which taxes
relate primarily to investment income). The shareholders of the Fund may claim a
foreign tax credit by reason of the Fund's election under Section 853 of the
Code subject to the certain limitations imposed by Section 904 of the Code. Also
under Section 63 of the Code, no deduction for foreign taxes may be claimed by
shareholders who do not itemize deductions on their federal income tax returns,
although any such shareholder may claim a credit for foreign taxes and in any
event will be treated as having taxable income in respect of the shareholder's
pro rata share of foreign taxes paid by the Fund. It should also be noted that a
tax-exempt shareholder, like other shareholders, will be required to treat as
part of the amounts distributed to it a pro rata portion of the income taxes
paid by the Fund to foreign countries. However, that income will generally be
exempt from United States taxation by virtue of such shareholder's tax-exempt
status and such a shareholder will not be entitled to either a tax credit or a
deduction with respect to such income.
BACK-UP WITHHOLDING
The Trust is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Trust with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Trust that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "Back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.
TAX TREATMENT OF OPTION AND FUTURES TRANSACTIONS
The Code includes special rules applicable to the listed options, futures
contracts, and options on futures contracts which certain Funds may write,
purchase or sell. Such options and contracts are classified as Section 1256
contracts under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60 percent thereof and short-term capital gain or loss to the extent of 40
percent thereof ("60/40 gain or loss"). Such contracts, when held by a Fund at
the end of a fiscal year, generally are required to be treated as sold at market
value on the last day of such fiscal year for Federal income tax purposes
("marked-to-market"). Over-the-counter options are not classified as Section
1256 contracts and are not subject to the mark-to-market rule or to 60/40 gain
or loss treatment. Any gains or losses recognized by a Fund from transactions in
over-the-counter options generally constitute short-term capital gains or
losses. If over-the-counter call options written, or over-the-counter put
options purchased, by a Fund are exercised, the gain or loss realized on the
sale of the underlying securities may be either short-term or long-term,
depending on the holding period of the securities. In determining the amount of
gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.
Certain of the Funds' transactions in options, futures contracts, and
options on futures contracts, particularly hedging transactions, may constitute
"straddles" which are defined in the Internal Revenue Code as offsetting
positions with respect to personal property. A straddle in which at least one
(but not all) of the positions are Section 1256 contracts is a "mixed straddle"
under the Code if certain identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of
40
<PAGE> 89
securities owned by the Fund when offsetting positions are established and which
may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
FUND PERFORMANCE
The Adviser has agreed so long as it serves as adviser to the Fund to limit
the ordinary business expenses of the Common Stock Fund, the Domestic Strategic
Income Fund, the Government Fund, the Money Market Fund and the Multiple
Strategy Fund to 0.60% per year of the average net assets of each such Fund by
reducing the advisory fee and/or bearing other expenses of a Fund in excess of
such limitation.
The Government Fund's average annual total returns (computed in the manner
described in the Prospectus) for the one-year, five-year and the nine year three
month period ended June 30, 1995 and the life of the Fund were 11.00%, 8.25% and
7.08%, respectively.
The Domestic Strategic Income Fund's average annual total returns (computed
in the manner described in the Prospectus) for the one-year, five-year and the
seven year six and one half month period ended June 30, 1995 were 14.15%, 10.06%
and 7.70%, respectively. These results are based on historical earnings and
asset value fluctuations and are not intended to indicate future performance.
Such information should be considered in light of the Fund's investment
objectives and policies as well as the risks incurred in the Fund's investment
practices.
The Common Stock Fund's average annual total returns (computed in the
manner described in the Prospectus) for the one-year, five-year and nine-year
three month period ended June 30, 1995 and for the life of the Fund were 21.57%,
11.08% and 8.86%, respectively.
The Multiple Strategy Fund's average annual total returns (computed in the
manner described in the Prospectus) for the one-year, five-year and the eight
year period ended June 30, 1995 were 19.53%,10.63% and 9.66%, respectively.
Future results will be affected by changes in the general level of prices of
securities available for purchase. These periods have been ones of fluctuating
common stock prices.
The Government Fund's and the Domestic Strategic Income Fund's annualized
current yields for the 30-day period ending June 30, 1995 were 6.40% and 7.52%,
respectively. The Funds' yields are not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as a
function of the type of securities owned by the Fund, portfolio maturity and the
Fund's expenses.
MONEY MARKET FUND YIELD INFORMATION
The Money Market Fund's annualized current yield for the seven-day period
ending June 30, 1995 was 5.41%. Its compound effective yield for the same period
was 5.56%.
The yield of the Fund is its net income expressed in annualized terms. The
Securities and Exchange Commission requires by rule that a yield quotation set
forth in an advertisement for a "money market" fund be computed by a
standardized method based on a historical seven calendar day period. The
standardized yield is computed by determining the net change (exclusive of
realized gains and losses and unrealized appreciation and depreciation) in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by 365/7. The
determination of net change in account value reflects the value of additional
shares purchased with dividends from the original share, dividends declared on
both the original share and such additional shares, and all fees that are
charged to all shareholder accounts, in proportion to the length of the base
period and the Fund's average account size. The Fund may also calculate its
effective yield by compounding the unannualized base
41
<PAGE> 90
period return (calculated as described above) by adding 1 to the base period
return, raising the sum to a power equal to 365 divided by 7, and subtracting
one.
The yield quoted at any time represents the amount being earned on a
current basis for the indicated period and is a function of the types of
instruments in the Fund, their quality and length of maturity, and the Fund's
operating expenses. The length of maturity for the Fund is the average dollar
weighted maturity of the Fund. This means that the Fund has an average maturity
of a stated number of days for all of its issues. The calculation is weighted by
the relative value of the investment.
The yield fluctuates daily as the income earned on the investments of the
Fund fluctuates. Accordingly, there is no assurance that the yield quoted on any
given occasion will remain in effect for any period of time. It should also be
emphasized that the Fund is an open-end investment company and that there is no
guarantee that the net asset value will remain constant. A shareholder's
investment in the Fund is not insured. Investors comparing results of the Fund
with investment results and yields from other sources such as banks or savings
and loan associations should understand this distinction. The yield quotation
may be of limited use for comparative purposes because it does not reflect
charges imposed at the Account level which, if included, would decrease the
yield.
Other portfolios of the money market type as well as banks and savings and
loan associations may calculate their yield on a different basis, and the yield
quoted by the Fund could vary upwards or downwards if another method of
calculation or base period were used.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Trust 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. With respect to
investments in foreign securities, the custodian enters into agreements with
foreign sub-custodians which are approved by the Trustees pursuant to Rule 17f-5
under the 1940 Act. The Custodian and sub-custodians generally domestically, and
frequently abroad, do not actually hold certificates for the securities in their
custody, but instead have book records with domestic and foreign securities
depositories, which in turn have book records with the transfer agents of the
issuers of the securities.
SHAREHOLDER REPORTS -- Semiannual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants whose
selection is ratified annually by shareholders.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, perform an annual audit of the
Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form of the Annual and Semi-Annual
Report to Shareholders including the related report of Independent Auditors on
such annual financial statements are hereby included in the Statement of
Additional Information.
42
<PAGE> 91
APPENDIX
Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Services, Inc ("Moody's"), Fitch Investors Service, Inc.
("Fitch"), Duff and Phelps, Inc. ("Duff") and IBCA Limited and IBCA Inc.
("IBCA");
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations and ordinarily will established industries,
high rates of return of portfolios employed, conservative well established
industries, high rates of return of portfolios employed, conservative
capitalization structures with moderate reliance on debt and ample asset
protection, broad margins in earnings coverage of fixed financial charges and
high internal cash generation, and well established access to a range of
financial markets and assured sources of alternate liquidity. Issues rated
Prime-2 (P-2) have a strong capacity for repayment of short-term promissory
obligations. This ordinarily will be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff,
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors small.
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest and, in the majority of instances, differ only in small
degrees from issues rated AAA.
Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds are rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2
and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in
43
<PAGE> 92
the higher end of this rating category, the modifier 2 indicates a mid-range
ranking, and the modifier 3 indicates a ranking in the lower end of the rating
category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt. Bonds
rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA have a
very low expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An IBCA
bank rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Rating and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support by central banks or shareholders if it
experienced difficulties, and such ratings are considered by IBCA to be a prime
factor in its assessment of credit risk. Individual Ratings, which range in
gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.
44
<PAGE> 93
COMMON STOCK PORTFOLIO INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 93.1%
CONSUMER DISTRIBUTION 5.9%
7,500 American Stores Co. . . . . . . . . . . . . . . . . . . . . . . . . . $ 201,563
4,500 Circuit City Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . 100,125
6,400 Dayton Hudson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 452,800
6,000 Dillard Department Stores, Inc. . . . . . . . . . . . . . . . . . . . 160,500
*10,600 Federated Department Stores, Inc. . . . . . . . . . . . . . . . . . . 204,050
6,900 Gap, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,450
11,100 Limited, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,188
5,800 May Department Stores Co. . . . . . . . . . . . . . . . . . . . . . . 195,750
5,500 Penney (J.C.), Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 245,438
7,500 Premark International, Inc. . . . . . . . . . . . . . . . . . . . . . 335,625
12,600 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . . . . . . . 579,600
8,300 Sysco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,725
*6,600 Toys R Us, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,300
31,000 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 658,750
------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . 3,960,864
------------
CONSUMER DURABLES 4.3%
10,000 Black & Decker Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 237,500
14,000 Brunswick Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 264,250
17,000 Callaway Golf Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 563,125
7,200 Eastman Kodak Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 343,800
4,800 Eaton Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,600
10,000 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
9,800 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,400
16,000 General Motors Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 676,000
------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . . . 2,896,675
------------
CONSUMER NON-DURABLES 7.6%
10,000 Anheuser-Busch Companies, Inc. . . . . . . . . . . . . . . . . . . . . 508,750
12,000 Archer Daniels Midland Co. . . . . . . . . . . . . . . . . . . . . . . 247,500
6,400 Clorox Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376,800
*19,500 Dr Pepper/Seven-Up Companies, Inc. . . . . . . . . . . . . . . . . . . 499,688
13,700 PepsiCo, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496,625
24,000 Pet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474,000
22,000 Philip Morris Companies, Inc. . . . . . . . . . . . . . . . . . . . . 1,265,000
6,000 Procter & Gamble Co. . . . . . . . . . . . . . . . . . . . . . . . . . 372,000
14,000 Quaker Oats Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,500
12,000 Sara Lee Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303,000
8,000 U.S. Shoe Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . . . 5,123,863
------------
CONSUMER SERVICES 6.6%
5,000 Belo (A. H.) Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 282,500
12,500 Dun & Bradstreet Corp. . . . . . . . . . . . . . . . . . . . . . . . . 687,500
25,000 Marriott International, Inc. . . . . . . . . . . . . . . . . . . . . . 703,125
4,600 McDonald's Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,550
2,000 McGraw Hill, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 133,750
14,700 New York Times Co., Class A . . . . . . . . . . . . . . . . . . . . . 325,238
*10,500 Promus Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 325,500
</TABLE>
F-1
<PAGE> 94
COMMON STOCK PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES-CONTINUED
4,600 RR Donnelley & Sons Co. . . . . . . . . . . . . . . . . . . . . . . . $ 135,700
3,800 Time Warner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 133,475
9,000 Tribune Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492,750
24,000 Walt Disney Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,107,000
------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . . . 4,461,088
------------
ENERGY 10.7%
12,000 Ashland Oil, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 414,000
3,200 Atlantic Richfield Co. . . . . . . . . . . . . . . . . . . . . . . . . 325,600
10,000 Baker Hughes, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 182,500
6,200 Chevron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,675
26,000 Coastal Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669,500
15,100 Consolidated Natural Gas Co. . . . . . . . . . . . . . . . . . . . . . 536,050
34,000 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,065,500
13,000 Halliburton Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,625
11,000 Occidental Petroleum Corp. . . . . . . . . . . . . . . . . . . . . . . 211,750
38,600 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . 820,250
17,000 Panhandle Eastern Corp. . . . . . . . . . . . . . . . . . . . . . . . 335,750
11,000 Repsol, SA, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,750
5,500 Schlumberger, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 277,063
6,600 Texaco,Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395,175
------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,240,188
------------
FINANCE 11.2%
13,000 Ahmanson (H.F.) & Co. . . . . . . . . . . . . . . . . . . . . . . . . 209,625
5,700 Allstate Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,663
4,800 American General Corp. . . . . . . . . . . . . . . . . . . . . . . . . 135,600
5,500 American International Group, Inc. . . . . . . . . . . . . . . . . . . 539,000
22,000 BankAmerica Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 869,000
25,000 Chase Manhattan Corp. . . . . . . . . . . . . . . . . . . . . . . . . 859,375
19,500 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . 699,563
2,400 Chubb Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,700
5,100 Corestates Financial Corp. . . . . . . . . . . . . . . . . . . . . . . 132,600
4,000 Crestar Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . 150,500
10,000 Dean Witter, Discover & Co. . . . . . . . . . . . . . . . . . . . . . 338,750
15,000 Federal National Mortgage Association . . . . . . . . . . . . . . . . 1,093,125
3,000 First Interstate Bancorp . . . . . . . . . . . . . . . . . . . . . . . 202,875
2,700 Marsh & McLennan Companies, Inc. . . . . . . . . . . . . . . . . . . . 213,975
5,100 Midlantic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,150
18,000 NationsBank Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 812,250
6,000 NWNL Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 174,000
10,700 Providian Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,363
8,000 St. Paul Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . 358,000
------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,574,114
------------
HEALTH CARE 9.2%
6,000 Abbott Laboratories . . . . . . . . . . . . . . . . . . . . . . . . . 195,750
*5,200 Amgen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,800
26,000 Baxter International, Inc. . . . . . . . . . . . . . . . . . . . . . . 734,500
9,000 Bristol Myers Squibb Co. . . . . . . . . . . . . . . . . . . . . . . . 520,875
10,600 Columbia/HCA Healthcare Corp. . . . . . . . . . . . . . . . . . . . . 386,900
5,700 Eli Lilly & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 374,063
</TABLE>
F-2
<PAGE> 95
COMMON STOCK PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE-CONTINUED
11,000 Mallinckrodt Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . $ 328,625
12,700 Merck & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 484,188
*12,000 Nellcor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396,000
5,300 Pfizer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409,425
10,000 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . . 740,000
25,000 Upjohn Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768,750
7,000 Warner Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 539,000
------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . . . 6,184,876
------------
PRODUCER MANUFACTURING 9.3%
32,500 Browning-Ferris Industries, Inc. . . . . . . . . . . . . . . . . . . . 922,188
3,700 Caterpillar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 203,963
3,200 Emerson Electric Co. . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
11,600 General Electric Co. . . . . . . . . . . . . . . . . . . . . . . . . . 591,600
21,000 Hanson, PLC, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . 378,000
5,600 ITT Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496,300
5,100 Minnesota Mining & Manufacturing Co. . . . . . . . . . . . . . . . . . 272,213
11,000 Philips N.V., ADR . . . . . . . . . . . . . . . . . . . . . . . . . . 323,125
22,000 Tenneco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935,000
*5,400 Varity Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,750
15,000 Westinghouse Electric Corp. . . . . . . . . . . . . . . . . . . . . . 183,750
59,800 WMX Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 1,569,750
------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . 6,271,639
------------
RAW MATERIALS/PROCESSING INDUSTRIES 7.0%
1,600 Aluminum Co. of America . . . . . . . . . . . . . . . . . . . . . . . 138,600
15,300 American Barrick Resources Corp. . . . . . . . . . . . . . . . . . . . 340,425
*7,500 Bethlehem Steel Corp. . . . . . . . . . . . . . . . . . . . . . . . . 135,000
4,800 Consolidated Papers . . . . . . . . . . . . . . . . . . . . . . . . . 216,000
*12,000 Crown, Cork & Seal, Inc. . . . . . . . . . . . . . . . . . . . . . . . 453,000
7,000 DuPont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . . . . . 393,750
15,200 Ethyl Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,300
2,900 Hercules, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334,588
3,500 International Paper Co. . . . . . . . . . . . . . . . . . . . . . . . 263,813
9,000 Lubrizol Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304,875
7,000 Mead Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,375
2,500 Monsanto Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,250
12,000 Newmont Mining Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 432,000
15,000 Praxair, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,500
13,000 Sherwin Williams Co. . . . . . . . . . . . . . . . . . . . . . . . . . 430,625
4,000 USX/US Steel Group . . . . . . . . . . . . . . . . . . . . . . . . . . 142,000
3,600 Weyerhauser Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . . . 4,690,101
------------
TECHNOLOGY 5.8%
5,200 Apple Computer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 202,800
7,400 Avnet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273,800
8,000 Boeing Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374,000
4,400 Computer Associates International, Inc. . . . . . . . . . . . . . . . 213,400
2,000 Hewlett Packard Co. . . . . . . . . . . . . . . . . . . . . . . . . . 199,750
3,800 Intel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,725
10,000 International Business Machines Corp. . . . . . . . . . . . . . . . . 735,000
</TABLE>
F-3
<PAGE> 96
COMMON STOCK PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-CONTINUED
5,000 Loral Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189,375
10,000 Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . 357,500
*15,700 Stratus Computer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 596,600
*7,500 Sun Microsystems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 266,250
3,100 Texas Instruments, Inc. . . . . . . . . . . . . . . . . . . . . . . . 232,113
------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . 3,883,313
------------
TRANSPORTATION 3.5%
*25,000 AMR Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,331,250
*11,600 Federal Express Corp. . . . . . . . . . . . . . . . . . . . . . . . . 698,900
12,000 Illinois Central Corp. . . . . . . . . . . . . . . . . . . . . . . . . 369,000
------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . . . 2,399,150
------------
UTILITIES 12.0%
4,200 American Electric Power, Inc. . . . . . . . . . . . . . . . . . . . . 138,075
8,000 Ameritech Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 323,000
9,500 AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477,375
30,000 Baltimore Gas & Electric Co. . . . . . . . . . . . . . . . . . . . . . 663,750
6,500 Bell Atlantic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 323,375
9,200 Bellsouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 497,950
7,500 Carolina Power &Light Co. . . . . . . . . . . . . . . . . . . . . . . 199,688
7,500 Centerior Energy Corp. . . . . . . . . . . . . . . . . . . . . . . . . 66,563
2,500 Cipsco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,500
2,400 Florida Progress Corp. . . . . . . . . . . . . . . . . . . . . . . . . 72,000
6,000 FPL Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,750
16,700 GTECorp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507,263
2,000 Houston Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . . 71,250
2,800 Idaho Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,800
8,300 Illinova Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,525
2,200 Ipalco Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . . . . 66,000
3,300 Nevada Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,238
2,500 NIPSCO Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . . 74,375
13,000 Nynex Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477,750
11,000 Ohio Edison Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 203,500
8,000 Pacificorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,000
12,000 Pacific Telesis Corp. . . . . . . . . . . . . . . . . . . . . . . . . 342,000
16,000 Peco Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 392,000
5,000 Public Service Co. of Colorado . . . . . . . . . . . . . . . . . . . . 146,875
*5,200 Public Service Co. of New Mexico . . . . . . . . . . . . . . . . . . . 67,600
3,300 Puget Sound Power & Light Co. . . . . . . . . . . . . . . . . . . . . 66,413
3,400 San Diego Gas & Electric Co. . . . . . . . . . . . . . . . . . . . . . 65,450
30,000 Southern Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
2,500 Southwestern Public Service Co. . . . . . . . . . . . . . . . . . . . 66,250
36,100 Sprint Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 997,252
13,600 US West Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484,500
------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 8,127,067
------------
TOTAL COMMON STOCK (Cost $63,376,491) . . . . . . . . . . . . . . . 62,812,938
------------
</TABLE>
F-4
<PAGE> 97
COMMON STOCK PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Warrants Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Warrants 0.0%
*189 Chase Manhattan Corp., expiring 6/30/96 (Cost $0) . . . . . . . . . . $ 921
------------
Principal
Amount Short-Term Investments 10.4%
-------------
$ 5,070,000 Repurchase Agreement with Salomon Brothers, Inc., dated 12/30/94,
5.75%, due 1/3/95 (Collateralized by U.S. Government obligations
in a pooled cash account) repurchase proceeds $5,073,239 . . . . . . 5,070,000
2,000,000 United States Treasury Bills, 5.37%, 3/9/95 . . . . . . . . . . . . . 1,979,380
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $7,049,940) . . . . . . . . . . . 7,049,380
------------
TOTAL INVESTMENTS (Cost $70,426,431) 103.5% . . . . . . . . . . . . . 69,863,239
Other assets and liabilities, net (3.5%) . . . . . . . . . . . . . . . (2,391,317)
------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,471,922
============
</TABLE>
*NON-INCOME PRODUCING SECURITY.
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE> 98
COMMON STOCK PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments, at market value (Cost $70,426,431)............................ $69,863,239
Cash....................................................................... 5,544
Receivable for investments sold............................................ 2,468,712
Dividends and interest receivable.......................................... 174,051
Receivable for Fund shares sold............................................ 4,113
Other assets............................................................... 1,856
-----------
TOTAL ASSETS............................................................. 72,517,515
-----------
LIABILITIES
Payable for investments purchased.......................................... 4,974,888
Accrued expenses........................................................... 38,107
Due to Adviser............................................................. 24,566
Due to broker-variation margin............................................. 4,450
Payable for Fund shares redeemed........................................... 2,082
Due to shareholder service agent........................................... 1,500
-----------
TOTAL LIABILITIES........................................................ 5,045,593
-----------
NET ASSETS, equivalent to $12.39 per share................................. $67,471,922
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited shares
authorized; 5,444,930 shares outstanding.................................. $ 54,449
Capital surplus............................................................ 67,494,639
Undistributed net realized gain on securities.............................. 470,859
Net unrealized depreciation of securities.................................. (563,192)
Undistributed net investment income........................................ 15,167
-----------
NET ASSETS at December 31, 1994............................................ $67,471,922
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE> 99
COMMON STOCK PORTFOLIO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED
Statement of Operations DECEMBER 31, 1994
-----------------
<S> <C>
INVESTMENT INCOME
Dividends................................................................. $ 1,481,139
Interest.................................................................. 124,770
-----------
Investment income....................................................... 1,605,909
-----------
EXPENSES
Management fees (net of expense reimbursement of $57,464)................. 288,895
Accounting services....................................................... 52,665
Shareholder service agent's fees and expenses............................. 18,971
Audit fees................................................................ 13,860
Custodian fees............................................................ 12,789
Trustees' fees and expenses............................................... 10,873
Reports to shareholders................................................... 9,429
Legal fees................................................................ 5,412
Miscellaneous............................................................. 2,737
-----------
Total expenses.......................................................... 415,631
-----------
Net investment income................................................... 1,190,278
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities
Investments............................................................. 6,940,744
Futures contracts....................................................... 9,973
Net unrealized depreciation of securities during the year................. (10,647,731)
-----------
Net realized and unrealized loss on securities.......................... (3,697,014)
-----------
Decrease in net assets resulting from operations........................ $(2,506,736)
===========
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
Statement of Changes in Net Assets 1994 1993
----------- -----------
<S> <C> <C>
NET ASSETS, beginning of year.................................. $72,259,545 $65,568,719
----------- -----------
OPERATIONS
Net investment income......................................... 1,190,278 974,853
Net realized gain on securities............................... 6,950,717 5,217,127
Net unrealized depreciation of securities during the year..... (10,647,731) (213,251)
----------- -----------
Increase (decrease) in net assets resulting from operations.. (2,506,736) 5,978,729
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income......................................... (1,197,291) (1,003,254)
Net realized gain on securities............................... (6,788,651) (3,109,301)
----------- -----------
(7,985,942) (4,112,555)
----------- -----------
SHARE TRANSACTIONS
Proceeds from shares sold..................................... 11,714,030 19,058,822
Proceeds from shares issued for dividends and
distributions reinvested..................................... 7,985,942 4,112,555
Cost of shares redeemed....................................... (13,994,917) (18,346,725)
----------- -----------
Increase in net assets resulting from share transactions..... 5,705,055 4,824,652
----------- -----------
INCREASE (DECREASE) IN NET ASSETS.............................. (4,787,623) 6,690,826
----------- -----------
NET ASSETS, end of year........................................ $67,471,922 $72,259,545
=========== ===========
CHANGE IN SHARES OUTSTANDING
Shares sold.................................................... 827,085 1,310,999
Shares issued for dividends and distributions reinvested....... 648,452 292,694
Shares redeemed................................................ (989,273) (1,258,324)
----------- -----------
Increase in shares outstanding............................... 486,264 345,369
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-7
<PAGE> 100
DOMESTIC STRATEGIC INCOME PORTFOLIO INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Obligations 84.0%
CONSUMER DISTRIBUTION 11.5%
$ 500,000 Borden, Inc., 7.875%, 2/15/23 . . . . . . . . . . . . . . . . . . . . $ 376,700
300,000 ConAgra, Inc., 9.75%, 3/1/21 . . . . . . . . . . . . . . . . . . . . . 318,630
500,000 Food 4 Less, 13.75%, 6/15/01 . . . . . . . . . . . . . . . . . . . . . 542,500
350,000 Levitz Furniture Corp., 9.625%, 7/15/03 . . . . . . . . . . . . . . . 278,250
500,000 Smitty's Supervalue, 12.75%, 6/15/04 (private placement, purchased
on 6/22/94) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490,000
500,000 Specialty Retailers, Inc., 11.00%, 8/15/03 . . . . . . . . . . . . . . 445,000
------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . 2,451,080
------------
CONSUMER DURABLES 2.6%
500,000 Chrysler Corp., 10.95%, 8/1/17 . . . . . . . . . . . . . . . . . . . . 547,850
------------
CONSUMER NON-DURABLES 4.5%
500,000 Fieldcrest Cannon, Inc., 11.25%, 6/15/04 . . . . . . . . . . . . . . . 502,500
500,000 Westpoint Stevens, 9.375%, 12/15/05 . . . . . . . . . . . . . . . . . 452,500
------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . . . 955,000
------------
CONSUMER SERVICES 9.7%
250,000 News America Holdings, Inc., 10.125%, 10/15/12 . . . . . . . . . . . . 258,850
500,000 Tele-Communications, Inc., 7.875%, 8/1/13 . . . . . . . . . . . . . . 422,150
500,000 Time Warner, Inc., 9.125%, 1/15/13 . . . . . . . . . . . . . . . . . . 453,400
500,000 Turner Broadcasting System, Inc., 7.40%, 2/1/04 . . . . . . . . . . . 417,900
500,000 Valassis Inserts, Inc., 9.55%, 12/1/03 . . . . . . . . . . . . . . . . 502,380
------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . . . 2,054,680
------------
ENERGY17.2%
Coastal Corp.
300,000 10.25%, 10/15/04 . . . . . . . . . . . . . . . . . . . . . . . . . . 322,740
200,000 11.75%, 6/15/06 . . . . . . . . . . . . . . . . . . . . . . . . . . 215,620
500,000 Forest Oil Corp., 11.25%, 9/1/03 . . . . . . . . . . . . . . . . . . . 445,000
500,000 HS Resources, Inc., 9.875%, 12/1/03 . . . . . . . . . . . . . . . . . 463,750
500,000 Occidental Petroleum Corp., 10.125%, 11/15/01 . . . . . . . . . . . . 535,700
500,000 PDV America, Inc., 7.875%, 8/1/03 . . . . . . . . . . . . . . . . . . 440,350
500,000 Texaco Capital, Inc., 8.625%, 6/30/10 . . . . . . . . . . . . . . . . 506,600
250,000 Union Oil Co. of California, 9.25%, 2/1/03 . . . . . . . . . . . . . . 260,625
500,000 Western Atlas, Inc., 7.875%, 6/15/04 . . . . . . . . . . . . . . . . . 474,700
------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,665,085
------------
</TABLE>
F-8
<PAGE> 101
DOMESTIC STRATEGIC INCOME PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 4.7%
$ 250,000 Bluebell Funding, Inc., 11.85%, 5/1/99 . . . . . . . . . . . . . . . . $ 258,125
250,000 First PV Funding Corp., Series 1986-A, 10.30%, 1/15/14 . . . . . . . . 236,250
500,000 Phoenix Re Corp., 9.75%, 8/15/03 . . . . . . . . . . . . . . . . . . . 495,000
------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 989,375
------------
HEALTH CARE 2.2%
500,000 Healthtrust, Inc - The Hospital Co., 8.75%, 3/15/05 . . . . . . . . . 476,250
------------
RAW MATERIALS/PROCESSING INDUSTRIES 9.9%
250,000 Container Corp. of America, 9.75%, 4/1/03 . . . . . . . . . . . . . . 234,375
250,000 Geneva Steel Co., 11.125%, 3/15/01 . . . . . . . . . . . . . . . . . . 235,000
500,000 Georgia-Pacific Corp., 9.95%, 6/15/02 . . . . . . . . . . . . . . . . 531,665
150,000 IMC Fertilizer Group, Inc., 9.45%, 12/15/11 . . . . . . . . . . . . . 135,000
500,000 Noranda, Inc., 8.125%, 6/15/04 . . . . . . . . . . . . . . . . . . . . 479,200
500,000 Riverwood International Corp., 10.375%, 6/30/04 . . . . . . . . . . . 497,500
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . . . 2,112,740
------------
TECHNOLOGY 4.6%
500,000 International Business Machines Corp., 7.50%, 6/15/13 . . . . . . . . 447,850
500,000 Unisys Corp., 13.50%, 7/1/97 . . . . . . . . . . . . . . . . . . . . . 536,250
------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . 984,100
------------
TRANSPORTATION 11.5%
500,000 Delta Air Lines, Inc., 9.75%, 5/15/21 . . . . . . . . . . . . . . . . 459,550
500,000 International Shipholding Corp., 9.00%, 7/1/03 . . . . . . . . . . . . 452,500
350,000 Kansas City Southern Industries, Inc., 8.80%, 7/1/22 . . . . . . . . . 340,480
250,000 Southern Pacific Rail Corp., 9.375%, 8/15/05 . . . . . . . . . . . . . 233,750
250,000 Southern Pacific Transit Co., 10.50%, 7/1/99 . . . . . . . . . . . . . 255,000
500,000 Southwest Airlines Co., 9.40%, 7/1/01 . . . . . . . . . . . . . . . . 519,300
200,000 United Air Lines, Inc., Series 1991-A, 10.02%, 3/22/14 . . . . . . . . 188,640
------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . . . 2,449,220
------------
UTILITIES 5.6%
350,000 Monongahela Power Co., 8.375%, 7/1/22 . . . . . . . . . . . . . . . . 337,470
350,000 Public Service Co. of Colorado, 8.75%, 3/1/22 . . . . . . . . . . . . 342,125
Texas Utilities Electric Co.
150,000 9.00%, 4/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,420
350,000 9.75%, 5/01/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . 364,595
------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 1,191,610
------------
TOTAL CORPORATE OBLIGATIONS (Cost $19,052,156) . . . . . . . . . . . 17,876,990
------------
</TABLE>
F-9
<PAGE> 102
DOMESTIC STRATEGIC INCOME PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Government Obligations 8.9%
$ 1,169,977 Federal National Mortgage Association, 10.00%, 4/1/21 . . . . . . . . $ 1,227,377
350,000 Province of Newfoundland (Canada), 8.65%, 10/22/22 . . . . . . . . . . 336,455
350,000 Province of Saskatchewan (Canada), 8.00%, 2/1/13 . . . . . . . . . . . 329,070
------------
TOTAL GOVERNMENT OBLIGATIONS (Cost $1,936,526) . . . . . . . . . . . 1,892,902
------------
Number of
Shares Preferred Stock 0.7%
-------------
*6,889 Supermarkets General Holdings Corp., $3.52 Payment-in-Kind
(Cost $166,940) . . . . . . . . . . . . . . . . . . . . . . . . . . 151,557
------------
Common Stock 0.5%
742 Arcadian Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,356
*3,500 Dr Pepper/Seven-Up Companies, Inc. . . . . . . . . . . . . . . . . . . 89,688
*2,500 FF Holdings Co. (private placement, purchased on 10/6/92) . . . . . . 5,000
------------
TOTAL COMMON STOCK (Cost $37,122) . . . . . . . . . . . . . . . . . 108,044
------------
Principal
Amount Repurchase Agreement 3.6%
-------------
$ 755,000 Salomon Brothers, Inc., dated 12/30/94, 5.75%, due 1/3/95
(collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $755,482 (Cost $755,000) . . . . . . . 755,000
------------
TOTAL INVESTMENTS (Cost $21,947,744) 97.7% . . . . . . . . . . . . . . 20,784,493
Other assets and liabilities, net 2.3% . . . . . . . . . . . . . . . . 489,476
------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,273,969
============
</TABLE>
*NON-INCOME PRODUCING SECURITY.
SEE NOTES TO FINANCIAL STATEMENTS.
F-10
<PAGE> 103
DOMESTIC STRATEGIC INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $21,947,744)............................ $ 20,784,493
Receivable for investments sold............................................ 7,293
Interest receivable........................................................ 520,944
Other assets............................................................... 1,449
---------------
TOTAL ASSETS............................................................. 21,314,179
---------------
LIABILITIES
Due to shareholder service agent........................................... 1,500
Due to Adviser............................................................. 222
Accrued expenses and other liabilities..................................... 38,488
---------------
TOTAL LIABILITIES........................................................ 40,210
---------------
NET ASSETS, equivalent to $7.35 per share.................................. $ 21,273,969
===============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited shares
authorized; 2,894,700 shares outstanding................................. $ 28,947
Capital surplus............................................................ 24,655,160
Accumulated net realized loss on securities................................ (2,258,509)
Net unrealized depreciation of securities.................................. (1,163,251)
Undistributed net investment income........................................ 11,622
---------------
NET ASSETS at December 31, 1994............................................ $ 21,273,969
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-11
<PAGE> 104
DOMESTIC STRATEGIC INCOME PORTFOLIO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED
Statement of Operations DECEMBER 31, 1994
-----------------
<S> <C>
INVESTMENT INCOME
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,326,364
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,180
------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 2,335,544
------------
EXPENSES
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . 51,604
Management fees (net of expense reimbursement of $91,634) . . . . . . . 38,840
Audit fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,100
Shareholder service agent's fees and expenses . . . . . . . . . . . . . 18,896
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . 10,294
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . 8,718
Legal fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,467
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,263
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,387
------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,569
------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 2,178,975
------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . (857,071)
Net unrealized depreciation of securities during the year . . . . . . . (2,543,211)
------------
Net realized and unrealized loss on securities. . . . . . . . . . . . (3,400,282)
------------
Decrease in net assets resulting from operations. . . . . . . . . . . $ (1,221,307)
============
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
Statement of Changes in Net Assets 1994 1993
------------- ------------
<S> <C> <C>
NET ASSETS, beginning of year. . . . . . . . . . . . . . . . . $ 27,443,291 $ 21,104,269
------------- ------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . 2,178,975 2,080,701
Net realized gain (loss) on securities. . . . . . . . . . . . (857,071) 758,188
Net unrealized appreciation (depreciation) of securities
during the year. . . . . . . . . . . . . . . . . . . . . . . (2,543,211) 992,020
------------- ------------
Increase (decrease) in net assets resulting from operations (1,221,307) 3,830,909
------------- ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME . . . . . (2,170,097) (2,108,100)
------------- ------------
SHARE TRANSACTIONS
Proceeds from shares sold . . . . . . . . . . . . . . . . . . 9,066,088 11,337,495
Proceeds from shares issued for dividends reinvested. . . . . 2,170,097 2,108,100
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . (14,014,103) (8,829,382)
------------- ------------
Increase (decrease) in net assets resulting from
share transactions. . . . . . . . . . . . . . . . . . . . . (2,777,918) 4,616,213
------------- ------------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . (6,169,322) 6,339,022
------------- ------------
NET ASSETS, end of year. . . . . . . . . . . . . . . . . . . . $ 21,273,969 $ 27,443,291
============= ============
CHANGE IN SHARES OUTSTANDING
Shares sold. . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,823 1,292,527
Shares issued for dividends reinvested . . . . . . . . . . . . 296,939 246,332
Shares redeemed. . . . . . . . . . . . . . . . . . . . . . . . (1,700,172) (979,834)
------------- ------------
Increase (decrease) in shares outstanding. . . . . . . . . . (302,410) 559,025
============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-12
<PAGE> 105
GOVERNMENT PORTFOLIO INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
United States Agency Obligations 74.6%
Federal Home Loan Mortgage Corp.
$ **2,938,036 7.00% Pools, 5/1/24 to 7/1/24 . . . . . . . . . . . . . . . . . . . $ 2,671,791
5,980,199 7.50% Pools, 5/1/24 to 10/1/24 . . . . . . . . . . . . . . . . . . . 5,587,778
2,017,347 8.00% Pools, 9/1/24 to 10/1/24 . . . . . . . . . . . . . . . . . . . 1,934,757
2,481,538 8.50% Pools, 3/1/17 to 1/1/23 . . . . . . . . . . . . . . . . . . . 2,441,213
Federal National Mortgage Association
1,003,644 7.00% Pools, 12/1/23 to 6/1/24 . . . . . . . . . . . . . . . . . . . 910,496
3,994,680 7.50% Pools, 5/1/24 to 11/1/24 . . . . . . . . . . . . . . . . . . . 3,730,033
8,062,912 8.00% Pools, 4/1/24 to 11/1/24 . . . . . . . . . . . . . . . . . . . 7,722,737
800,049 9.50% Pools, 4/01/20 . . . . . . . . . . . . . . . . . . . . . . . . 822,051
1,837,030 11.00% Pools, 11/01/20 . . . . . . . . . . . . . . . . . . . . . . . 1,983,993
Government National Mortgage Association
2,174,690 7.00% Pools, 11/15/23 to 6/15/24 . . . . . . . . . . . . . . . . . . 1,950,436
5,887,011 7.50% Pools, 4/15/22 to 6/15/24 . . . . . . . . . . . . . . . . . . 5,462,028
**7,882,681 8.00% Pools, 5/15/17 to 11/15/24 . . . . . . . . . . . . . . . . . . 7,535,370
810,543 8.50% Pools, 4/15/17 to 7/15/17 . . . . . . . . . . . . . . . . . . 796,107
**4,671,870 9.00% Pools, 5/15/16 to 8/15/17 . . . . . . . . . . . . . . . . . . 4,712,749
558,332 11.00% Pools, 9/15/10 to 10/15/18 . . . . . . . . . . . . . . . . . 604,567
------------
TOTAL UNITED STATES AGENCY OBLIGATIONS
(Cost $50,539,880) . . . . . . . . . . . . . . . . . . . . . . . . 48,866,106
------------
United States Treasury Obligations 16.0%
United States Treasury Notes
500,000 5.50%, 2/15/95 . . . . . . . . . . . . . . . . . . . . . . . . . . 499,845
4,000,000 7.25%, 11/15/96 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,966,880
2,000,000 7.75%, 11/30/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,991,560
2,000,000 8.50%, 5/15/95 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,014,060
2,000,000 11.25%, 5/15/95 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,034,380
------------
TOTAL UNITED STATES TREASURY OBLIGATIONS
(Cost $11,142,109) . . . . . . . . . . . . . . . . . . . . . . . . 10,506,725
------------
Forward Purchase Commitments 6.0%
*2,000,000 Federal Home Loan Mortgage Association, 8.50%, settling 1/95 . . . . . 1,967,500
*2,000,000 Federal National Mortgage Association, 8.50%, settling 1/95 . . . . . 1,963,120
------------
TOTAL FORWARD PURCHASE COMMITMENTS (Cost $3,954,062) . . . . . . . . 3,930,620
------------
Repurchase Agreement 8.8%
5,780,000 Salomon Brothers, Inc., dated 12/30/94, 5.75%, due 1/3/95
(collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $5,783,693 (Cost $5,780,000) . . . . . 5,780,000
------------
TOTAL INVESTMENTS (Cost $71,416,051) 105.4% . . . . . . . . . . . . . 69,083,451
Other assets and liabilities, net (5.4%) . . . . . . . . . . . . . . . (3,570,190)
------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,513,261
============
</TABLE>
*NON-INCOME PRODUCING SECURITIES.
**SECURITIES WITH A MARKET VALUE OF APPROXIMATELY $9.9 MILLION WERE PLACED AS
COLLATERAL FOR FUTURES CONTRACTS AND FORWARD PURCHASE COMMITMENTS (NOTE 1B).
SEE NOTES TO FINANCIAL STATEMENTS.
F-13
<PAGE> 106
GOVERNMENT PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments, at market value (Cost $71,416,051)............................ $ 69,083,451
Cash....................................................................... 2,855
Interest receivable........................................................ 441,732
Unrealized appreciation of forward commitments............................. 26,569
Receivable for Fund shares sold............................................ 3,757
Other assets............................................................... 8,043
-------------------
TOTAL ASSETS............................................................. 69,566,407
-------------------
LIABILITIES
Payable for investments purchased.......................................... 3,954,062
Payable for Fund shares purchased.......................................... 25,244
Due to Adviser............................................................. 23,861
Due to shareholder service agent........................................... 1,500
Accrued expenses and other liabilities..................................... 48,479
-------------------
TOTAL LIABILITIES........................................................ 4,053,146
-------------------
NET ASSETS, equivalent to $8.28 per share.................................. $ 65,513,261
===================
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share, unlimited shares
authorized; 7,914,930 shares outstanding................................. $ 79,149
Capital surplus............................................................ 82,533,700
Accumulated net realized loss on securities................................ (14,787,043)
Net unrealized appreciation (depreciation) of securities
Investments.............................................................. (2,332,600)
Forward commitments...................................................... 26,569
Futures contracts........................................................ (2,377)
Accumulated net investment loss............................................ (4,137)
-------------------
NET ASSETS at December 31, 1994............................................ $ 65,513,261
===================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-14
<PAGE> 107
GOVERNMENT PORTFOLIO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED
Statement of Operations DECEMBER 31, 1994
-----------------
<S> <C>
INVESTMENT INCOME
Interest.................................................................. $ 5,139,715
-------------
EXPENSES
Management fees (net of expense reimbursement of $68,843)................. 282,831
Accounting services....................................................... 58,043
Audit fees................................................................ 22,160
Shareholder service agent's fees and expenses............................. 18,647
Custodian fees............................................................ 17,172
Trustees' fees and expenses............................................... 10,935
Reports to shareholders................................................... 5,234
Legal fees................................................................ 3,928
Miscellaneous............................................................. 3,059
-------------
Total expenses.......................................................... 422,009
-------------
Net investment income................................................... 4,717,706
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities
Investments and forward commitments..................................... (5,400,416)
Futures contracts....................................................... (683,356)
Net unrealized appreciation (depreciation) of securities during the year
Investments............................................................. (2,417,837)
Forward commitments..................................................... 30,977
Futures contracts....................................................... 169,114
-------------
Net realized and unrealized loss on securities.......................... (8,301,518)
-------------
Decrease in net assets resulting from operations........................ $ (3,583,812)
=============
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
Statement of Changes in Net Assets 1994 1993
------------- -------------
<S> <C> <C>
NET ASSETS, beginning of year................................. $ 80,630,053 $ 74,842,296
------------- -------------
OPERATIONS
Net investment income........................................ 4,717,706 5,069,075
Net realized gain (loss) on securities....................... (6,083,772) 4,901,827
Net unrealized depreciation of securities during the year.... (2,217,746) (4,092,262)
------------- -------------
Increase (decrease) in net assets resulting from operations. (3,583,812) 5,878,640
------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME.......... (4,508,286) (4,842,309)
------------- -------------
SHARE TRANSACTIONS
Proceeds from shares sold.................................... 3,484,195 10,003,675
Proceeds from shares issued for dividends reinvested ........ 4,508,286 4,842,309
Cost of shares redeemed...................................... (15,017,175) (10,094,558)
------------- -------------
Increase (decrease) in net assets resulting from
share transactions........................................ (7,024,694) 4,751,426
------------- -------------
INCREASE (DECREASE) IN NET ASSETS............................. (15,116,792) 5,787,757
------------- -------------
NET ASSETS, end of year....................................... $ 65,513,261 $ 80,630,053
============= =============
CHANGE IN SHARES OUTSTANDING
Shares sold................................................... 405,270 1,071,835
Shares issued for dividends reinvested........................ 524,430 519,719
Shares redeemed............................................... (1,719,219) (1,083,789)
------------- -------------
Increase (decrease) in shares outstanding................... (789,519) 507,765
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-15
<PAGE> 108
MONEY MARKET PORTFOLIO INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial Paper 26.2%
$ 1,500,000 Chevron Oil Finance Co., 5.93%, 1/6/95 . . . . . . . . . . . . . . . . . . . . . $ 1,498,525
1,500,000 General Electric Capital Corp., 5.89%, 2/16/95 . . . . . . . . . . . . . . . . . 1,488,642
1,500,000 MetLife Funding, Inc., 6.03%, 1/18/95 . . . . . . . . . . . . . . . . . . . . . . 1,495,500
1,500,000 Prudential Funding Corp., 5.47%, 1/3/95 . . . . . . . . . . . . . . . . . . . . . 1,499,323
1,500,000 Toronto Dominion Holdings, 5.93%, 1/6/95 . . . . . . . . . . . . . . . . . . . . 1,498,525
------------
TOTAL COMMERCIAL PAPER (Cost $7,480,515) . . . . . . . . . . . . . . . . . . . . 7,480,515
------------
United States Agency and Government Obligations 72.4%
3,000,000 Federal Home Loan Banks, 5.93%, 1/6/95 . . . . . . . . . . . . . . . . . . . . . 2,997,050
2,000,000 Federal Home Loan Banks, 5.93%, 1/5/95 . . . . . . . . . . . . . . . . . . . . . 1,998,361
774,000 Federal Home Loan Mortgage Corp., 5.37%, 1/6/95 . . . . . . . . . . . . . . . . . 773,316
1,000,000 Federal Home Loan Mortgage Corp., 5.83%, 2/21/95 . . . . . . . . . . . . . . . . 991,694
5,000,000 Home Loan Mortgage Corp., 5.70%, 2/2/95 . . . . . . . . . . . . . . . . . . . . . 4,973,792
2,000,000 Federal National Mortgage Association, 5.32%, 1/20/95 . . . . . . . . . . . . . . 1,994,167
3,000,000 Federal National Mortgage Association, 5.78%, 2/17/95 . . . . . . . . . . . . . . 2,977,200
2,000,000 Federal National Mortgage Association, 5.80%, 2/21/95 . . . . . . . . . . . . . . 1,983,476
2,000,000 Federal National Mortgage Association, 5.81%, 1/4/95 . . . . . . . . . . . . . . 1,998,713
------------
TOTAL UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS
(Cost $20,687,769) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,687,769
------------
Repurchase Agreement 1.5%
420,000 Salomon Brothers, Inc., dated 12/30/94, 5.75%,
due 1/3/95 (collateralized by U.S. Government
obligations in a pooled cash account) repurchase
proceeds $420,268 (Cost $420,000) . . . . . . . . . . . . . . . . . . . . . . . 420,000
------------
TOTAL INVESTMENTS (Cost $28,588,284) 100.1% . . . . . . . . . . . . . . . . . . . 28,588,284
Other assets and liabilities, net (0.1%) . . . . . . . . . . . . . . . . . . . . (40,609)
------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,547,675
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-16
<PAGE> 109
MONEY MARKET PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at amortized cost ........................................... $28,588,284
Cash...................................................................... 3,480
Other assets.............................................................. 1,187
-----------
TOTAL ASSETS............................................................ 28,592,951
-----------
LIABILITIES
Accrued expenses.......................................................... 34,093
Due to Adviser............................................................ 6,091
Payable for Fund shares redeemed.......................................... 3,592
Due to shareholder service agent.......................................... 1,500
-----------
TOTAL LIABILITIES....................................................... 45,276
-----------
NET ASSETS, equivalent to $1.00 per share................................. $28,547,675
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited shares
authorized; 28,547,478 shares outstanding............................... $ 285,475
Capital surplus........................................................... 28,262,003
Undistributed net investment income....................................... 197
-----------
NET ASSETS at December 31, 1994........................................... $28,547,675
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-17
<PAGE> 110
MONEY MARKET PORTFOLIO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED
Statement of Operations DECEMBER 31, 1994
-----------------
<S> <C>
INVESTMENT INCOME
Interest.................................................................... $1,292,872
----------
EXPENSES
Management fees (net of expense reimbursement of $80,915)................... 71,750
Accounting services......................................................... 51,778
Shareholder service agent's fees and expenses............................... 18,684
Audit fees.................................................................. 13,180
Trustees' fees and expenses................................................. 10,269
Report to shareholders...................................................... 6,327
Custodian fees.............................................................. 6,108
Legal fees.................................................................. 3,342
Miscellaneous............................................................... 1,760
----------
Total expenses............................................................ 183,198
----------
Net investment income..................................................... 1,109,674
----------
Increase in net assets resulting from operations.......................... $1,109,674
==========
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
Statement of Changes in Net Assets 1994 1993
----------- -----------
<S> <C> <C>
NET ASSETS, beginning of year............................... $29,966,001 $32,898,961
----------- -----------
OPERATIONS
Net investment income...................................... 1,109,674 760,117
----------- -----------
Increase in net assets resulting from operations.......... 1,109,674 760,117
----------- -----------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME........ (1,109,772) (760,253)
----------- -----------
SHARE TRANSACTIONS
Proceeds from shares sold.................................. 22,474,029 24,761,075
Proceeds from shares issued for dividends reinvested....... 1,107,713 760,253
Cost of shares redeemed.................................... (24,999,970) (28,454,152)
----------- -----------
Decrease in net assets resulting from share transactions.. (1,418,228) (2,932,824)
----------- -----------
DECREASE IN NET ASSETS...................................... (1,418,326) (2,932,960)
----------- -----------
NET ASSETS, end of year..................................... $28,547,675 $29,966,001
=========== ===========
CHANGE IN SHARES OUTSTANDING
Shares sold................................................. 22,474,029 24,761,075
Shares issued for dividends reinvested...................... 1,107,713 760,253
Shares redeemed............................................. (24,999,970) (28,454,152)
----------- -----------
Decrease in shares outstanding............................ (1,418,228) (2,932,824)
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-18
<PAGE> 111
MULTIPLE STRATEGY PORTFOLIO INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
Number of Market
Shares Value
------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 50.1%
CONSUMER DISTRIBUTION 3.1%
3,200 American Stores Co. . . . . . . . . . . . . . . . . . . . . . . . $ 86,000
1,900 Circuit City Stores, Inc. . . . . . . . . . . . . . . . . . . . . 42,275
2,600 Dayton Hudson Corp. . . . . . . . . . . . . . . . . . . . . . . . 183,950
3,400 Dillard Department Stores, Inc. . . . . . . . . . . . . . . . . . 90,950
*4,500 Federated Department Stores, Inc. . . . . . . . . . . . . . . . . 86,625
3,000 Gap, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,500
4,900 Limited, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 88,813
2,500 May Department Stores Co. . . . . . . . . . . . . . . . . . . . . 84,375
2,500 Penney (J.C.), Inc. . . . . . . . . . . . . . . . . . . . . . . . 111,563
3,200 Premark International, Inc. . . . . . . . . . . . . . . . . . . . 143,200
5,100 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . . . . 234,600
4,500 Sysco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,875
*2,800 Toys R Us, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 85,400
13,500 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . 286,875
--------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . 1,732,001
--------------
CONSUMER DURABLES 2.0%
2,100 Armstrong World Industries, Inc. . . . . . . . . . . . . . . . . 80,850
4,800 Black & Decker Corp. . . . . . . . . . . . . . . . . . . . . . . 114,000
6,700 Brunswick Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 126,462
3,100 Eastman Kodak Co. . . . . . . . . . . . . . . . . . . . . . . . . 148,025
1,800 Eaton Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,100
2,800 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000
4,200 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . 117,600
7,500 General Motors Corp. . . . . . . . . . . . . . . . . . . . . . . 316,875
2,500 Leggett & Platt, Inc. . . . . . . . . . . . . . . . . . . . . . . 87,500
--------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . 1,164,412
--------------
CONSUMER NON-DURABLES 4.2%
5,500 Anheuser-Busch Companies, Inc. . . . . . . . . . . . . . . . . . 279,812
7,500 Archer Daniels Midland Co. . . . . . . . . . . . . . . . . . . . 154,687
2,600 Clorox Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,075
*8,000 Dr Pepper/Seven-Up Companies, Inc. . . . . . . . . . . . . . . . 205,000
7,600 PepsiCo, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 275,500
10,000 Pet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,500
9,700 Philip Morris Companies, Inc. . . . . . . . . . . . . . . . . . . 557,750
2,600 Proctor & Gamble Co. . . . . . . . . . . . . . . . . . . . . . . 161,200
5,600 Quaker Oats Co. . . . . . . . . . . . . . . . . . . . . . . . . . 172,200
6,000 Sara Lee Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 151,500
3,000 U.S. Shoe Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 56,250
--------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . 2,364,474
--------------
CONSUMER SERVICES 3.4%
2,000 Belo (A.H.) Corp. . . . . . . . . . . . . . . . . . . . . . . . . 113,000
5,500 Dun & Bradstreet Corp. . . . . . . . . . . . . . . . . . . . . . 302,500
9,000 Marriott International, Inc. . . . . . . . . . . . . . . . . . . 253,125
1,900 McDonald's Corp. . . . . . . . . . . . . . . . . . . . . . . . . 55,575
800 McGraw Hill, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 53,500
7,200 New York Times Co., Class A . . . . . . . . . . . . . . . . . . . 159,300
*4,600 Promus Companies, Inc. . . . . . . . . . . . . . . . . . . . . . 142,600
1,900 RR Donnelley & Sons Co. . . . . . . . . . . . . . . . . . . . . . 56,050
</TABLE>
F-19
<PAGE> 112
MULTIPLE STRATEGY PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES-continued
1,600 Time Warner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . $ 56,200
4,000 Tribune Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,000
11,000 Walt Disney Co. . . . . . . . . . . . . . . . . . . . . . . . . . 507,375
--------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . 1,918,225
--------------
ENERGY 5.9%
5,800 Ashland Oil, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 200,100
1,200 Atlantic Richfield Co. . . . . . . . . . . . . . . . . . . . . . 122,100
6,300 Baker Hughes, Inc. . . . . . . . . . . . . . . . . . . . . . . . 114,975
3,300 Chevron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 147,262
10,700 Coastal Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 275,525
7,500 Consolidated Natural Gas Co. . . . . . . . . . . . . . . . . . . 266,250
16,500 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,002,375
5,800 Halliburton Co. . . . . . . . . . . . . . . . . . . . . . . . . . 192,125
5,000 Occidental Petroleum Corp. . . . . . . . . . . . . . . . . . . . 96,250
14,000 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . . 297,500
7,600 Panhandle Eastern Corp. . . . . . . . . . . . . . . . . . . . . . 150,100
5,000 Repsol SA, ADR . . . . . . . . . . . . . . . . . . . . . . . . . 136,250
3,300 Schlumberger, Ltd. . . . . . . . . . . . . . . . . . . . . . . . 166,238
3,100 Texaco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 185,613
--------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . 3,352,663
--------------
FINANCE 6.1%
6,000 Ahmanson (H.F.) & Co. . . . . . . . . . . . . . . . . . . . . . . 96,750
2,400 Allstate Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 56,700
2,000 American General Corp. . . . . . . . . . . . . . . . . . . . . . 56,500
2,200 American International Group, Inc. . . . . . . . . . . . . . . . 215,600
10,000 BankAmerica Corp. . . . . . . . . . . . . . . . . . . . . . . . . 395,000
10,200 Chase Manhattan Corp. . . . . . . . . . . . . . . . . . . . . . . 350,625
8,400 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . 301,350
1,200 Chubb Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,850
2,200 Corestates Financial Corp. . . . . . . . . . . . . . . . . . . . 57,200
2,600 Crestar Financial Corp. . . . . . . . . . . . . . . . . . . . . . 97,825
4,800 Dean Witter Discover & Co. . . . . . . . . . . . . . . . . . . . 162,600
6,600 Federal National Mortgage Association . . . . . . . . . . . . . . 480,975
1,600 First Interstate Bancorp . . . . . . . . . . . . . . . . . . . . 108,200
1,500 Marsh & McLennan Companies, Inc. . . . . . . . . . . . . . . . . 118,875
2,200 Midlantic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 58,300
7,900 NationsBank Corp. . . . . . . . . . . . . . . . . . . . . . . . . 356,488
3,500 NWNL Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . 101,500
4,800 Providian Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 148,200
3,000 St. Paul Companies, Inc. . . . . . . . . . . . . . . . . . . . . 134,250
1,600 Transamerica Corp. . . . . . . . . . . . . . . . . . . . . . . . 79,600
--------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . 3,469,388
--------------
HEALTH CARE 4.9%
2,900 Abbott Laboratories . . . . . . . . . . . . . . . . . . . . . . . 94,612
*2,300 Amgen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,700
11,000 Baxter International, Inc. . . . . . . . . . . . . . . . . . . . 310,750
4,000 Bristol Myers Squibb Co. . . . . . . . . . . . . . . . . . . . . 231,500
4,400 Columbia/HCA Healthcare Corp. . . . . . . . . . . . . . . . . . . 160,600
2,700 Eli Lilly & Co. . . . . . . . . . . . . . . . . . . . . . . . . . 177,188
5,500 Mallinckrodt Group, Inc. . . . . . . . . . . . . . . . . . . . . 164,313
</TABLE>
F-20
<PAGE> 113
MULTIPLE STRATEGY PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE-continued
5,600 Merck & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . $ 213,500
*6,000 Nellcor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 198,000
2,300 Pfizer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 177,675
4,200 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . 310,800
10,500 Upjohn Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 322,875
3,400 Warner Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . 261,800
--------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . 2,759,313
--------------
PRODUCER MANUFACTURING 5.3%
3,500 Allied-Signal, Inc. . . . . . . . . . . . . . . . . . . . . . . . 119,000
14,500 Browning-Ferris Industries, Inc. . . . . . . . . . . . . . . . . 411,437
1,600 Caterpillar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 88,200
1,400 Emerson Electric Co. . . . . . . . . . . . . . . . . . . . . . . 87,500
2,600 Fluor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,125
6,500 General Electric Co. . . . . . . . . . . . . . . . . . . . . . . 331,500
10,000 Hanson, PLC, ADR . . . . . . . . . . . . . . . . . . . . . . . . 180,000
2,400 ITT Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,700
2,100 Minnesota Mining & Manufacturing Co. . . . . . . . . . . . . . . 112,088
4,800 Philips N.V., ADR . . . . . . . . . . . . . . . . . . . . . . . . 141,000
9,500 Tenneco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 403,750
*2,600 Varity Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 94,250
6,000 Westinghouse Electric Corp. . . . . . . . . . . . . . . . . . . . 73,500
24,000 WMX Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . 630,000
--------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . 2,997,050
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 4.0%
700 Aluminum Co. of America . . . . . . . . . . . . . . . . . . . . . 60,637
6,500 American Barrick Resources Corp. . . . . . . . . . . . . . . . . 144,625
*3,000 Bethlehem Steel Corp. . . . . . . . . . . . . . . . . . . . . . . 54,000
2,000 Consolidated Papers . . . . . . . . . . . . . . . . . . . . . . . 90,000
*5,000 Crown, Cork & Seal, Inc. . . . . . . . . . . . . . . . . . . . . 188,750
4,800 DuPont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . . 270,000
7,900 Ethyl Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,038
1,000 Hercules, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 115,375
1,700 International Paper Co. . . . . . . . . . . . . . . . . . . . . . 128,137
4,600 Lubrizol Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 155,825
3,400 Mead Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,325
1,600 Monsanto Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 112,800
5,000 Newmont Mining Corp. . . . . . . . . . . . . . . . . . . . . . . 180,000
7,000 Praxair, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 143,500
5,700 Sherwin Williams Co. . . . . . . . . . . . . . . . . . . . . . . 188,813
2,100 USX/US Steel Group . . . . . . . . . . . . . . . . . . . . . . . 74,550
1,500 Weyerhauser Co. . . . . . . . . . . . . . . . . . . . . . . . . . 56,250
1,800 Williamette Industries, Inc. . . . . . . . . . . . . . . . . . . 85,500
--------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . 2,290,125
--------------
TECHNOLOGY 3.2%
2,400 Apple Computer, Inc. . . . . . . . . . . . . . . . . . . . . . . 93,600
3,000 Avnet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,000
5,000 Boeing Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 233,750
3,000 Computer Associates International, Inc. . . . . . . . . . . . . . 145,500
1,000 Hewlett-Packard Co. . . . . . . . . . . . . . . . . . . . . . . . 99,875
1,600 Intel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,200
</TABLE>
F-21
<PAGE> 114
MULTIPLE STRATEGY PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-continued
4,600 International Business Machines Corp. . . . . . . . . . . . . . . $ 338,100
2,800 Loral Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,050
4,500 Rockwell International Corp. . . . . . . . . . . . . . . . . . . 160,875
*4,800 Stratus Computer, Inc. . . . . . . . . . . . . . . . . . . . . . 182,400
*3,600 Sun Microsystems, Inc. . . . . . . . . . . . . . . . . . . . . . 127,800
1,400 Texas Instruments, Inc. . . . . . . . . . . . . . . . . . . . . . 104,825
--------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . 1,805,975
--------------
TRANSPORTATION 1.7%
*9,500 AMR Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,875
*5,100 Federal Express Corp. . . . . . . . . . . . . . . . . . . . . . . 307,275
5,000 Illinois Central Corp. . . . . . . . . . . . . . . . . . . . . . 153,750
--------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . 966,900
--------------
UTILITIES 6.3%
2,300 American Electric Power, Inc. . . . . . . . . . . . . . . . . . . 75,612
4,000 Ameritech Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 161,500
3,600 AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,900
4,000 Baltimore Gas & Electric Co. . . . . . . . . . . . . . . . . . . 88,500
2,800 Bell Atlantic Corp. . . . . . . . . . . . . . . . . . . . . . . . 139,300
4,000 Bellsouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 216,500
3,300 Carolina Power & Light Co. . . . . . . . . . . . . . . . . . . . 87,862
3,200 Centerior Energy Corp. . . . . . . . . . . . . . . . . . . . . . 28,400
1,100 Cipsco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 29,700
2,000 Florida Progress Corp. . . . . . . . . . . . . . . . . . . . . . 60,000
3,000 FPL Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 105,375
7,100 GTE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,662
1,000 Houston Industries, Inc. . . . . . . . . . . . . . . . . . . . . 35,625
1,200 Idaho Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . 28,200
2,700 Illinova Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 58,725
1,000 Ipalco Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . 30,000
1,400 Nevada Power Co. . . . . . . . . . . . . . . . . . . . . . . . . 28,525
6,700 NIPSCO Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 199,325
5,700 NYNEX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,475
6,000 Ohio Edison Co. . . . . . . . . . . . . . . . . . . . . . . . . . 111,000
4,000 Pacificorp . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,500
5,200 Pacific Telesis Group . . . . . . . . . . . . . . . . . . . . . . 148,200
7,000 Peco Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . . 171,500
3,600 Public Service Co. of Colorado . . . . . . . . . . . . . . . . . 105,750
*3,800 Public Service Co. of New Mexico . . . . . . . . . . . . . . . . 49,400
1,400 Puget Sound Power & Light Co. . . . . . . . . . . . . . . . . . . 28,175
1,500 San Diego Gas & Electric Co. . . . . . . . . . . . . . . . . . . 28,875
10,000 Southern Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
1,100 Southwestern Public Service Co. . . . . . . . . . . . . . . . . . 29,150
15,400 Sprint Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 425,425
6,100 US West, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 217,313
--------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . 3,566,474
--------------
TOTAL COMMON STOCK (Cost $28,760,703) . . . . . . . . . . . . . 28,387,000
--------------
</TABLE>
F-22
<PAGE> 115
MULTIPLE STRATEGY PORTFOLIO INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
------------------------------------------------------------------------------------------------
<S> <C>
Corporate Obligations 17.8%
CONSUMER DISTRIBUTION 3.5%
$1,000,000 Dayton Hudson Corp., 9.25%, 3/1/06 . . . . . . . . . . . . . . . $ 1,022,900
1,000,000 Wal-Mart Stores, Inc., 8.07%, 12/21/12 . . . . . . . . . . . . . 945,800
-------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . 1,968,700
-------------
ENERGY 3.7%
1,000,000 Atlantic Richfield Co., 9.125%, 3/1/11 . . . . . . . . . . . . . 1,046,100
1,000,000 Burlington Resources, Inc., 9.125%, 10/1/21 . . . . . . . . . . . 1,043,400
-------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . 2,089,500
-------------
FINANCE 1.9%
1,000,000 American General Corp., 9.625%, 2/1/18 . . . . . . . . . . . . . 1,063,300
-------------
PRODUCER MANUFACTURING 1.7%
1,000,000 Waste Management, Inc., 8.75%, 5/1/18 . . . . . . . . . . . . . . 995,840
-------------
RAW MATERIALS/PROCESSING INDUSTRIES 1.7%
1,000,000 DuPont (E.I.) de Nemours & Co., Inc., 8.25%, 1/15/22 . . . . . . 961,400
-------------
UTILITIES 5.3%
1,000,000 Hydro-Quebec, Series HS, 9.40%, 2/1/21 . . . . . . . . . . . . . 1,039,900
1,000,000 Pacific Gas & Electric Co., Series 92D, 8.25%, 11/1/22 . . . . . 937,000
1,000,000 Tennessee Valley Authority, Series G, 8.625%, 11/15/29 . . . . . 1,007,000
-------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . 2,983,900
-------------
TOTAL CORPORATE OBLIGATIONS (Cost $10,579,930) . . . . . . . . 10,062,640
-------------
Government Obligations 28.0%
1,000,000 Province of Nova Scotia (Canada), 7.25%, 7/27/13 . . . . . . . . 855,400
10,700,000 United States Treasury Bonds, 7.125%, 2/15/23 . . . . . . . . . . 9,733,683
5,500,000 United States Treasury Notes, 7.25%, 5/15/04 . . . . . . . . . . 5,277,415
-------------
TOTAL GOVERNMENT OBLIGATIONS
(Cost $16,862,894) . . . . . . . . . . . . . . . . . . . . . . 15,866,498
-------------
Repurchase Agreement 5.7%
3,235,000 Salomon Brothers, Inc., dated 12/30/94, 5.75%, due 1/3/95
(collateralized by U.S. Government obligations in a
pooled cash account) repurchase proceeds $3,237,067
(Cost $3,235,000) . . . . . . . . . . . . . . . . . . . . . . . 3,235,000
-------------
TOTALINVESTMENTS (Cost $59,438,527) 101.6% . . . . . . . . . . . 57,551,138
Other assets and liabilities, net (1.6%) . . . . . . . . . . . . . (915,205)
-------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . $ 56,635,933
=============
</TABLE>
*Non-income producing security.
See Notes to Financial Statements.
F-23
<PAGE> 116
MULTIPLE STRATEGY PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $59,438,527)............................ $57,551,138
Cash....................................................................... 1,901
Receivable for investments sold............................................ 1,300,466
Interest and dividends receivable.......................................... 674,851
Other assets............................................................... 567
-----------
TOTAL ASSETS............................................................. 59,528,923
-----------
LIABILITIES
Payable for investments purchased.......................................... 2,824,094
Accrued expenses........................................................... 44,481
Due to Adviser............................................................. 19,770
Payable for Fund shares redeemed........................................... 3,145
Due to shareholder service agent........................................... 1,500
-----------
TOTAL LIABILITIES........................................................ 2,892,990
-----------
NET ASSETS, equivalent to $9.99 per share.................................. $56,635,933
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited shares
authorized; 5,668,898 shares outstanding................................. $ 56,689
Capital surplus............................................................ 58,634,934
Accumulated net realized loss on securities................................ (182,768)
Net unrealized depreciation of securities.................................. (1,887,389)
Undistributed net investment income........................................ 14,467
-----------
NET ASSETS at December 31, 1994............................................ $56,635,933
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-24
<PAGE> 117
MULTIPLE STRATEGY PORTFOLIO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED
Statement of Operations DECEMBER 31, 1994
-----------------
<S> <C>
INVESTMENT INCOME
Interest.................................................................. $ 1,741,898
Dividends................................................................. 907,689
------------
Investment income........................................................ 2,649,587
------------
EXPENSES
Management fees (net of expense reimbursement of $75,169)................. 232,725
Accounting services....................................................... 55,826
Audit fees................................................................ 22,390
Shareholder service agent's fees and expenses............................. 18,719
Custodian fees............................................................ 13,854
Trustees' fees and expenses............................................... 10,650
Reports to shareholders................................................... 9,596
Legal fees................................................................ 3,598
Miscellaneous............................................................. 2,115
------------
Total expenses........................................................... 369,473
------------
Net investment income.................................................... 2,280,114
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities........................................... 4,566,704
Net unrealized depreciation of securities during the year................. (9,205,867)
------------
Net realized and unrealized loss on securities........................... (4,639,163)
------------
Decrease in net assets resulting from operations......................... $ (2,359,049)
============
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
Statement of Changes in Net Assets 1994 1993
----------- -----------
<S> <C> <C>
NET ASSETS, beginning of year.................................. $64,857,688 $59,644,829
----------- -----------
OPERATIONS
Net investment income......................................... 2,280,114 1,492,873
Net realized gain on securities............................... 4,566,704 3,217,848
Net unrealized depreciation of securities during the year..... (9,205,867) (25,137)
----------- -----------
Increase (decrease) in net assets resulting from operations .. (2,359,049) 4,685,584
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income.................................... (2,288,536) (1,480,545)
From net realized gain on securities.......................... (4,566,704) (3,217,848)
In excess of book-basis net realized gain (Note 1F)........... (106,886) (432,966)
----------- -----------
(6,962,126) (5,131,359)
----------- -----------
SHARE TRANSACTIONS
Proceeds from shares sold..................................... 3,800,820 9,259,035
Proceeds from shares issued for dividends and
distributions reinvested..................................... 6,962,125 5,131,359
Cost of shares redeemed....................................... (9,663,525) (8,731,760)
----------- -----------
Increase in net assets resulting from share transactions....... 1,099,420 5,658,634
----------- -----------
INCREASE (DECREASE) IN NET ASSETS.............................. (8,221,755) 5,212,859
----------- -----------
NET ASSETS, end of year........................................ $56,635,933 $64,857,688
=========== ===========
CHANGE IN SHARES OUTSTANDING
Shares sold.................................................... 327,001 752,083
Shares issued for dividends and distributions reinvested....... 700,508 442,986
Shares redeemed................................................ (857,318) (699,366)
----------- -----------
Increase in shares outstanding................................. 170,191 495,703
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-25
<PAGE> 118
NOTES TO FINANCIAL STATEMENTS
Note 1-Significant Accounting Policies
American Capital Life Investment Trust (the "Fund"), comprised of five
investment portfolios: Common Stock Portfolio ("Common Stock"), Domestic
Strategic Income Portfolio ("Domestic Strategic"), Government Portfolio
("Government"), Money Market Portfolio ("Money Market") and Multiple Strategy
Portfolio ("Multiple Strategy"), is registered under the Investment Company Act
of 1940, as amended, as a diversified open-end management investment company.
Each portfolio is accounted for as a separate entity. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements.
A. Investment Valuations
Securities listed or traded on a national securities exchange are
valued at the last sale price. Unlisted securities and listed
securities for which the last sale price is not available are valued
at the most recent bid price.
U.S. Agency and Government obligations and related forward commitments
are valued at the last reported bid price. Listed options are valued
at the last reported sale price on the exchange on which such option
is traded, or, if no sale is reported, at the mean between the last
reported bid and asked prices. Options and forward commitments for
which market quotations are not readily available are valued at fair
value under a method approved by the Board of Trustees.
Private placements are valued at fair value as determined in good
faith by, or under the direction of, the Board of Trustees. Private
placements generally may be resold only in a privately negotiated
transaction until they are registered.
Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market
value. Short-term investments with a maturity of more than 60 days
when purchased are valued based on market quotations until the
remaining days to maturity becomes less than 61 days. From such time,
until maturity, the investments are valued at amortized cost. For
Money Market, all investments are valued at amortized cost.
Domestic Strategic's investments include lower rated and unrated debt
securities which may be more susceptible to adverse economic
conditions than other investment grade holdings. These securities are
often subordinated to the prior claims of other senior lenders and
uncertainties exist as to an issuer's ability to meet principal and
interest payments. Debt securities rated below investment grade and
comparable unrated securities represented approximately 39% of
Domestic Strategic's investment portfolio at December 31, 1994.
B. Futures Contracts and Forward Commitments
General - Transactions in futures contracts and forward commitments
also are utilized in strategies to manage the market risk of the
Fund's investments. The purchase of a futures contract or forward
commitment increases the impact of changes in the market price of
investments on net asset value. Forward commitments have a risk of
loss due to nonperformance of counterparties. There is a risk that the
market movement of such instruments may not be in the direction
forecasted. Note 3 - Investment Activity contains additional
information.
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 is held as collateral in an account in the name of the
broker, the Fund's agent in acquiring the futures position. During the
period the futures contract is open, changes in the value of the
contract ("variation margin") are recognized by marking the contract
to market on a daily basis. As unrealized gains or losses are
incurred, variation margin payments are received from or made to the
broker. Upon the closing or cash settlement of a contract, gains or
losses are realized. The cost of securities acquired through delivery
under a contract is adjusted by the unrealized gain or loss on the
contract.
F-26
<PAGE> 119
Forward Commitments - The Fund trades certain securities under the
terms of forward commitments whereby the settlement for payment and
delivery occurs at a specified future date. Forward commitments are
privately negotiated transactions between the Fund and dealers. Upon
executing a forward commitment and during the period of obligation,
the Fund maintains collateral of cash or securities in a segregated
account with its custodian in an amount sufficient to relieve the
obligation. If the intent of the Fund is to accept delivery of a
security traded under a forward purchase commitment, the commitment is
recorded as a long-term purchase. For forward purchase commitments and
forward sale commitments which security settlement is not intended by
the Fund, changes in the value of the commitment are recognized by
marking the commitment to market on a daily basis. During the period
of obligation, the Fund may either resell or repurchase the forward
commitment and enter into a new forward commitment, the effect of
which is to extend the settlement date. In addition, the Fund may
occasionally close such forward commitments prior to delivery. Gains
and losses on investments are realized upon the ultimate closing or
cash settlement of forward commitments.
C. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund
may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised or subadvised by Van Kampen American
Capital Asset Management, Inc. (the "Adviser"), the daily aggregate
of which is invested in repurchase agreements. Repurchase agreements
are collateralized by the underlying debt security. The Fund will make
payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not
less than the repurchase proceeds due the Fund.
D. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be qualified as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains on investments to its shareholders.
It is anticipated that no distributions of net realized capital gains
will be made until tax basis capital loss carryforwards, if any,
expire or are offset by net realized capital gains.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Dividend income is recorded on the ex-dividend date.
Interest income is accrued daily. Issuers of Payment-in-Kind
securities may make dividend or interest payments by issuing
additional stocks or bonds in lieu of cash payments.
F. Dividends and Distributions
Government and Money Market declare dividends from net investment
income on each business day. Domestic Strategic, Common Stock and
Multiple Strategy declare dividends and distributions annually.
Government declares distributions from short-term capital gains, if
any, monthly. Dividends and distributions are recorded on the record
date.
The Fund distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may
differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.
F-27
<PAGE> 120
G. Debt Discount and Premium
The Fund accounts for discounts and premiums on long-term debt
securities on the same basis for financial reporting as for federal
income tax reporting. Accordingly, original 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
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 $500 million, .45% of the next $500 million and .40% of the
amount in excess of $1 billion. The resulting fee is prorated to each portfolio
based on its average daily net assets. The Adviser has volunteered to
reimburse each portfolio for all ordinary business expenses, exclusive of taxes
and interest, in excess of .60% of the average daily net assets. For the year
ended December 31, 1994, such voluntary expense reimbursements were as follows:
<TABLE>
<S> <C>
Common Stock . . . . . . . . . . . . . . . . . . $ 57,464
Domestic Strategic . . . . . . . . . . . . . . . 91,332
Government . . . . . . . . . . . . . . . . . . . 68,843
Money Market . . . . . . . . . . . . . . . . . . 80,915
Multiple Strategy . . . . . . . . . . . . . . . 75,169
</TABLE>
Under the terms of the advisory agreement, if the total ordinary business
expenses, exclusive of taxes, distribution fees and interest, exceed .95% of
average daily net assets, the Manager will reimburse the Trust for the amount
of the excess. The contractual expense reimbursement shall be made monthly. For
the year ended December 31, 1994, the only portfolio to have such contractual
expense reimbursement was Domestic Strategic for $302.
Other transactions with affiliates during the year were as follows:
<TABLE>
<CAPTION>
Common Domestic Money Multiple
Stock Strategic Government Market Strategy
------ --------- ---------- ------ --------
<S> <C> <C> <C> <C> <C>
Accounting services . . . . . . . . . . . . . $ 6,751 $ 6,214 $ 6,760 $ 6,270 $ 6,655
Shareholder service agent's fees . . . . . . 18,000 18,000 18,000 18,000 18,000
Legal fees . . . . . . . . . . . . . . . . . 3,546 3,452 3,928 3,342 3,598
</TABLE>
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or subadvised by the Adviser.
These charges include the employee costs attributable to the accounting
officers of the Fund. A portion of the accounting services expense was paid to
the Adviser in reimbursement of personnel, facilities and equipment costs
attributable to the provision of accounting services. The services provided by
the Adviser are at cost.
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a Trustee of the Fund.
During the year, the Fund paid brokerage commissions of $67,636 to companies
which are deemed affiliates of the Adviser's parent because it owns more than
5% of the companies' outstanding voting securities.
Certain officers and trustees of the Fund are officers and directors of the
Adviser and the shareholder service agent.
F-28
<PAGE> 121
Note 3-Investment Activity
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were:
<TABLE>
<CAPTION>
Common Domestic Multiple
Stock Strategic Government Strategy
------ --------- ---------- --------
<S> <C> <C> <C> <C>
Purchases . . . . . . . . . . . . . . . . . . $102,382,209 $24,736,859 $123,847,021 $93,174,398
Sales . . . . . . . . . . . . . . . . . . . . 105,496,582 27,253,679 131,187,916 95,402,939
</TABLE>
Money Market held only short-term investments.
The following table presents the identified cost of investments at December 31,
1994 for federal income tax purposes with the associated net unrealized
depreciation and the net realized capital loss carryforward at December 31,
1994 with expiration dates.
<TABLE>
<CAPTION>
Common Domestic Money Multiple
Stock Strategic Government Market Strategy
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Identified cost . . . . . . . . . $70,714,824 $21,950,714 $71,419,645 $28,588,284 $59,569,212
=========== =========== =========== =========== ===========
Gross unrealized
appreciation . . . . . . . . . $ 2,250,111 $ 139,045 $ 114,177 $ - $ 914,312
Gross unrealized
depreciation . . . . . . . . . 3,101,696 1,305,266 2,450,371 - 2,932,386
----------- ----------- ----------- ----------- -----------
Net unrealized
depreciation . . . . . . . . . $ (851,585) $(1,166,221) $(2,336,194) $ - $(2,018,074)
=========== =========== =========== =========== ===========
Net realized capital
loss carryforward . . . . . . . $ - $ 2,125,532 $14,456,054 $ - $ -
=========== =========== =========== =========== ===========
Expiration dates . . . . . . . . - 1998-2002 1996-2002 - -
</TABLE>
The net capital loss carryforwards at December 31, 1994 may be utilized to
offset any future capital gains until expiration. Additionally, $130,007,
$329,772, $2,041, and $75,888 of financial statement capital losses for
Domestic Strategic, Government, Money Market and Multiple Strategy,
respectively, are deferred for tax purposes to the 1995 fiscal year.
F-29
<PAGE> 122
At December 31, 1994, Government held the following forward purchase
commitments for which delivery is not intended.
<TABLE>
<CAPTION>
Market
Value at
Principal December 31, Unrealized
Amount Security 1994 Appreciation
-------- -------- ------------ ------------
<S> <C> <C> <C>
Government National Mortgage Association
$ 4,000,000 8.50%, settling 2/95 . . . . . . . . . . . . . . $3,916,720 $17,189
2,000,000 8.50%, settling 1/95 . . . . . . . . . . . . . . 1,964,380 9,380
---------- -------
$5,881,100 $26,569
========== =======
</TABLE>
At December 31, 1994, Government held the following U.S. Treasury Bond futures
contracts expiring in March 1995.
<TABLE>
<CAPTION>
Market
Value at Unrealized
Number of December 31, Appreciation
Contracts 1994 (Depreciation)
--------- ------------ --------------
<S> <C> <C>
10 (long) . . . . . . . . . . . . . . . . . . . . $ 999,375 $(3,501)
10 (short) . . . . . . . . . . . . . . . . . . . . (999,375) 1,124
--------- -------
$ 0 $(2,377)
========= ========
</TABLE>
Note 4-Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $3,850 plus a fee of $100 per day for the Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at an annual rate of $1,440. The Trustees may participate in a voluntary
Deferred Compensation Plan (the "Plan"). The Plan is not funded, and
obligations under the Plan will be paid solely out of the Fund's general
accounts. Funds for the payment of obligations under the Plan will not be
reserved or set aside by any form of trust or escrow. Each director covered
under the Plan elects to be credited with an earnings component on amounts
deferred equal to the income earned by the Fund on its short-term investments
or equal to the total return of the Fund.
Trustees' fees for the year and the liability for deferred compensation at
December 31, 1994 were:
<TABLE>
<CAPTION>
Common Domestic Money Multiple
Stock Strategic Government Market Strategy
------ --------- ---------- ------ --------
<S> <C> <C> <C> <C> <C>
Trustee fees . . . . . . . . . . . . $ 9,674 $ 9,150 $ 9,339 $ 8,725 $ 9,123
Deferred compensation liability . . . 15,598 11,730 16,443 15,223 13,182
</TABLE>
F-30
<PAGE> 123
COMMON STOCK PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1994 1993 1992 1991 1990
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year . . . . . . . $ 14.57 $14.21 $13.44 $10.09 $11.30
------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . .33 .30 .31 .335 .46
Expenses . . . . . . . . . . . . . . . . . . . . (.09) (.11) (.10) (.10) (.101)
Expense reimbursement(1) . . . . . . . . . . . . .01 .02 .02 .03 .036
------- ------ ------ ------ ------
Net investment income . . . . . . . . . . . . . . .25 .21 .23 .265 .395
Net realized and unrealized gains or
losses on securities . . . . . . . . . . . . . . (.7625) 1.0325 .77 3.37 (1.17)
------- ------ ------ ------ ------
Total from investment operations . . . . . . . . (.5125) 1.2425 1.00 3.635 (.775)
------- ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . (.25) (.215) (.23) (.285) (.435)
Distributions from net realized gain
on securities . . . . . . . . . . . . . . . . . (1.4175) (.6675) - - -
------- ------ ------ ------ ------
Total distributions . . . . . . . . . . . . . . . (1.6675) (.8825) (.23) (.285) (.435)
------- ------ ------ ------ ------
Net asset value, end of year . . . . . . . . . . $ 12.39 $14.57 $14.21 $13.44 $10.09
======= ====== ====== ====== ======
TOTAL RETURN . . . . . . . . . . . . . . . . . . (3.39%) 8.98% 7.48% 36.41% (6.84%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) . . . . . . . $ 67.5 $ 72.3 $ 65.6 $ 57.8 $ 27.2
Average net assets (millions) . . . . . . . . . . $ 69.3 $ 69.0 $ 58.0 $ 36.4 $ 28.0
Ratios to average net assets(1)
Expenses . . . . . . . . . . . . . . . . . . . . .60% .60% .60% .60% .60%
Expenses, without expense reimbursement . . . . .68% .72% .74% .90% .93%
Net investment income . . . . . . . . . . . . . 1.72% 1.41% 1.78% 2.33% 3.64%
Net investment income, without
expense reimbursementy . . . . . . . . . . . . 1.64% 1.29% 1.64% 2.03% 3.31%
Portfolio turnover rate . . . . . . . . . . . . . 153% 139% 116% 95% 122%
</TABLE>
(1) SEE NOTE 2.7
SEE NOTES TO FINANCIAL STATEMENTS.
F-31
<PAGE> 124
DOMESTIC STRATEGIC INCOME PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1994 1993 1992 1991 1990
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year . . . . . . . $ 8.58 $ 8.00 $ 7.74 $ 6.98 $8.64
------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . .91 .77 .74 .725 1.085
Expenses . . . . . . . . . . . . . . . . . . . . (.10) (.09) (.07) (.07) (.08)
Expense reimbursement(1) . . . . . . . . . . . . .04 .04 .02 .03 .03
------- ------ ------ ------ ------
Net investment income . . . . . . . . . . . . . . .85 .72 .69 .685 1.035
Net realized and unrealized gains or losses
on securities . . . . . . . . . . . . . . . . . (1.2275) .5825 .2725 .7525 (1.64)
------- ------ ------ ------ ------
Total from investment operations . . . . . . . . (.3775) 1.3025 .9625 1.4375 (.605)
------- ------ ------ ------ ------
DIVIDENDS FROM NET INVESTMENT INCOME . . . . . . (.8525) (.7225) (.7025) (.6775) (1.055)
------- ------ ------ ------ ------
Net asset value, end of year . . . . . . . . . . $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98
======= ====== ====== ====== ======
TOTAL RETURN . . . . . . . . . . . . . . . . . . (4.33%) 16.32% 12.50% 21.23% (7.23%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) . . . . . . . $ 21.3 $ 27.4 $ 21.1 $ 17.4 $ 6.3
Average net assets (millions) . . . . . . . . . . $ 26.1 $ 26.7 $ 18.8 $ 10.6 $ 6.8
Ratios to average net assets(1)
Expenses . . . . . . . . . . . . . . . . . . . . .60% .60% .60% .60% .60%
Expenses, without expense reimbursement . . . . .95% .95% .95% .95% .95%
Net investment income . . . . . . . . . . . . . 8.35% 7.80% 8.89% 9.72% 11.99%
Net investment income, without
expense reimbursement . . . . . . . . . . . . . 8.00% 7.40% 8.54% 9.37% 11.64%
Portfolio turnover rate . . . . . . . . . . . . . 94% 130% 117% 90% 123%
</TABLE>
(1) SEE NOTE 2
SEE NOTES TO FINANCIAL STATEMENTS
F-32
<PAGE> 125
GOVERNMENT PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1994 1993 1992 1991 1990
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year . . . . . . . $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80
------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . .61 .62 .72 .79 .835
Expenses . . . . . . . . . . . . . . . . . . . . (.06) (.06) (.064) (.06) (.06)
Expense reimbursement(1) . . . . . . . . . . . . .01 .01 .009 .01 .01
------- ------ ------ ------ ------
Net investment income . . . . . . . . . . . . . . .56 .57 .665 .74 .785
Net realized and unrealized gains or
losses on securities . . . . . . . . . . . . . . (.985) .135 (.1575) .60 (.105)
------- ------ ------ ------ ------
Total from investment operations . . . . . . . . (.425) .705 .5075 1.34 .68
------- ------ ------ ------ ------
DIVIDENDS FROM NET INVESTMENT INCOME . . . . . . (.555) (.575) (.6675) (.75) (.78)
------- ------ ------ ------ ------
Net asset value, end of year . . . . . . . . . . $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70
======= ====== ====== ====== ======
TOTAL RETURN . . . . . . . . . . . . . . . . . . (4.63%) 7.86% 5.73% 16.23% 8.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) . . . . . . . $ 65.5 $ 80.6 $ 74.8 $ 77.0 $ 73.2
Average net assets (millions) . . . . . . . . . . $ 70.3 $ 78.6 $ 74.6 $ 72.9 $ 72.7
Ratios to average net assets(1)
Expenses . . . . . . . . . . . . . . . . . . . . .60% .60% .60% .60% .60%
Expenses, without expense reimbursement . . . . .70% .70% .70% .70% .69%
Net investment income . . . . . . . . . . . . . 6.71% 6.45% 7.29% 8.37% 9.19%
Net investment income, without
expense reimbursement . . . . . . . . . . . . . 6.61% 6.35% 7.19% 8.27% 9.10%
Portfolio turnover rate . . . . . . . . . . . . . 192% 91% 36% 57% 164%
</TABLE>
(1) SEE NOTE 2.
SEE NOTES TO FINANCIAL STATEMENTS.
F-33
<PAGE> 126
MONEY MARKET PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1994 1993 1992 1991 1990
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . .0425 .0322 .0391 .0607 .082
Expenses . . . . . . . . . . . . . . . . . . . . (.0087) (.0095) (.009) (.0087) (.009)
Expense reimbursement(1) . . . . . . . . . . . .0027 .0035 .003 .0026 .003
------- ------ ------ ------ ------
Net investment income . . . . . . . . . . . . . . .0365 .0262 .0331 .0546 .076
------- ------ ------ ------ ------
DIVIDENDS FROM NET INVESTMENT INCOME . . . . . . (.0365) (.0262) (.0331) (.0546) (.076)
------- ------ ------ ------ ------
Net asset value, end of year . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ====== ====== ====== ======
TOTAL RETURN . . . . . . . . . . . . . . . . . . 3.71% 2.66% 3.36% 5.46% 7.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) . . . . . . . $ 28.5 $ 30.0 $ 32.9 $ 38.0 $ 34.3
Average net assets (millions) . . . . . . . . . . $ 30.5 $ 28.9 $ 36.2 $ 36.3 $ 32.8
Ratios to average net assets(1)
Expenses . . . . . . . . . . . . . . . . . . . . .60% .60% .60% .60% .60%
Expenses, without expense reimbursement . . . . .87% .95% .89% .87% .89%
Net investment income . . . . . . . . . . . . . 3.63% 2.63% 3.32% 5.44% 7.59%
Net investment income, without expense
reimbursement . . . . . . . . . . . . . . . . . 3.37% 2.28% 3.03% 5.17% 7.30%
</TABLE>
(1) SEE NOTE 2.
SEE NOTES TO FINANCIAL STATEMENTS.
F-34
<PAGE> 127
MULTIPLE STRATEGY PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1994 1993 1992 1991 1990
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . $ 11.80 $11.92 $12.08 $10.43 $10.77
------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . .52 .37 .44 .54 .58
Expenses . . . . . . . . . . . . . . . . . . . . (.09) (.09) (.09) (.09) (.09)
Expense reimbursement(1) . . . . . . . . . . . . .02 .01 .02 .02 .03
------- ------ ------ ------ ------
Net investment income . . . . . . . . . . . . . . .45 .29 .37 .47 .52
Net realized and unrealized gains
or losses on securities . . . . . . . . . . . . (.89) .6025 .493 2.27 (.325)
------- ------ ------ ------ ------
Total from investment operations . . . . . . . . (.44) .8925 .863 2.74 .195
------- ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . (.45) (.2925) (.3689) (.4825) (.535)
Distributions from net realized
gain on securities . . . . . . . . . . . . . . . (.90) (.63) (.6541) (.6075) -
Distributions in excess of book-basis net
realized gains on securities . . . . . . . . . . (.02) (.09) - - -
------- ------ ------ ------ ------
Total distributions . . . . . . . . . . . . . . . (1.37) (1.0125) (1.023) (1.09) (.535)
------- ------ ------ ------ ------
Net asset value, end of period . . . . . . . . . $ 9.99 $11.80 $11.92 $12.08 $10.43
======= ====== ====== ====== ======
TOTAL RETURN . . . . . . . . . . . . . . . . . . (3.66%) 7.71% 7.28% 27.05% 1.89%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . $ 56.6 $ 64.9 $ 59.6 $ 52.2 $ 40.3
Average net assets (millions) . . . . . . . . . . $ 61.6 $ 63.9 $ 54.8 $ 44.4 $ 40.4
Ratios to average net assets(1)
Expenses . . . . . . . . . . . . . . . . . . . . .60% .60% .60% .60% .60%
Expenses, without expense reimbursement . . . . .72% .74% .77% .80% .80%
Net investment income . . . . . . . . . . . . . 3.70% 2.34% 3.05% 4.12% 4.70%
Net investment income, without expense
reimbursement . . . . . . . . . . . . . . . . . 3.58% 2.20% 2.88% 3.92% 4.50%
Portfolio turnover rate . . . . . . . . . . . . . 163% 150% 126% 88% 46%
</TABLE>
(1) SEE NOTE 2.
SEE NOTES TO FINANCIAL STATEMENTS.
F-35
<PAGE> 128
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
of American Capital Life Investment Trust
In our opinion, the accompanying statements of assets and liabilities,
including the investment portfolios, and the related statements of operation
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of the Common Stock Portfolio,
Domestic Strategic Income Portfolio, Government Portfolio, Money Market
Portfolio, and Multiple Strategy Portfolio (constituting American Capital Life
Investment Trust, hereafter referred to as the "Trust") at December 31, 1994,
and the results of each of their operations, the changes in each of their net
assets and the selected per share data and ratios for each of the fiscal
periods presented, in conformity with generally accepted accounting principles.
These financial statements and selected per share data and ratios (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
February 13, 1995
F-36
<PAGE> 129
COMMON STOCK PORTFOLIO PORTFOLIO OF INVESTMENTS
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
--------------------------------------------------------------------------------
<S> <C>
COMMON STOCK 88.5%
CONSUMER DISTRIBUTION 6.9%
*10 Best Buy, Inc....................................... $ 276,900
8 Dayton Hudson Corp.................................. 588,350
8 Dillard Department Stores, Inc...................... 235,000
9 Gap, Inc............................................ 310,387
11 Limited, Inc........................................ 244,200
9 May Department Stores Co............................ 357,975
5 Nordstrom, Inc...................................... 206,875
18 Sears Roebuck & Co.................................. 1,083,738
*9 Sports & Recreation, Inc............................ 115,500
8 Sysco Corp.......................................... 244,850
*9 Toys R Us, Inc...................................... 266,175
38 Wal-Mart Stores, Inc................................ 1,008,475
--------------
TOTAL CONSUMER DISTRIBUTION....................... 4,938,425
--------------
CONSUMER DURABLES 1.3%
9 Eastman Kodak Co.................................... 557,750
8 General Motors Corp................................. 351,562
--------------
TOTAL CONSUMER DURABLES........................... 909,312
--------------
CONSUMER NON-DURABLES 7.4%
18 Clorox Co........................................... 1,161,450
8 ConAgra, Inc........................................ 289,462
4 CPC International, Inc.............................. 216,125
*13 Fruit Of The Loom, Inc.............................. 274,625
7 Maybelline, Inc..................................... 143,500
23 PepsiCo, Inc........................................ 1,049,375
16 Philip Morris Companies, Inc........................ 1,190,000
3 Procter & Gamble Co................................. 230,000
14 RJR Nabisco Holdings Corp., Class A................. 383,400
12 Sara Lee Corp....................................... 342,000
--------------
TOTAL CONSUMER NON-DURABLES....................... 5,279,937
--------------
CONSUMER SERVICES 8.8%
10 CBS, Inc............................................ 670,000
19 Comcast Corp, Class A............................... 352,687
45 Cox Communications, Inc............................. 873,812
14 Disney (Walt), Co................................... 750,937
9 Marriott International, Inc......................... 322,875
9 McDonald's Corp..................................... 352,125
2 McGraw Hill, Inc.................................... 151,750
12 New York Times Co., Class A......................... 282,000
17 News Corp., Limited, ADR............................ 373,313
*39 Tele-Communications, Inc., Class A.................. 914,063
26 Time Warner, Inc.................................... 1,081,588
8 Wendy's International, Inc.......................... 143,000
--------------
TOTAL CONSUMER SERVICES........................... 6,268,150
--------------
ENERGY 10.7%
5 Amoco Corp.......................................... 359,775
10 Ashland, Inc........................................ 358,275
3 Atlantic Richfield Co............................... 351,200
10 Baker Hughes, Inc................................... 205,000
</TABLE>
See Notes to Financial Statements
F-37
<PAGE> 130
COMMON STOCK PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
--------------------------------------------------------------------------------
<S> <C>
9 Burlington Resources, Inc........................... $ 342,937
34 Coastal Corp........................................ 1,020,600
7 Consolidated Natural Gas Co......................... 264,250
9 Dresser Industrials, Inc............................ 206,925
20 Exxon Corp.......................................... 1,412,500
10 Halliburton Co...................................... 357,500
17 Pacific Enterprises................................. 404,250
34 Panhandle Eastern Corp.............................. 828,750
11 Repsol SA, ADR...................................... 347,875
8 Schlumberger, Ltd................................... 497,000
*10 Smith International, Inc............................ 167,500
12 Sonat, Inc.......................................... 366,000
7 Valero Energy Corp.................................. 147,825
--------------
TOTAL ENERGY...................................... 7,638,162
--------------
FINANCE 6.3%
3 American International Group, Inc................... 285,000
12 Chase Manhattan Corp(1)............................. 566,457
9 Chemical Banking Corp............................... 425,250
5 Comerica, Inc....................................... 160,625
6 Federal National Mortgage Association............... 566,250
8 First Chicago Corp.................................. 490,975
5 Franklin Resource, Inc.............................. 213,600
11 Morgan (J.P.) & Co., Inc............................ 736,313
11 NationsBank Corp.................................... 563,063
7 Providian Corp...................................... 242,875
4 St. Paul Companies, Inc............................. 211,775
--------------
TOTAL FINANCE..................................... 4,462,183
--------------
HEALTH CARE 9.3%
5 American Home Products Corp......................... 363,662
14 Baxter International, Inc........................... 509,250
5 Bristol Myers Squibb Co............................. 320,187
36 Caremark International, Inc......................... 856,000
5 Columbia/HCA Healthcare Corp........................ 233,550
*35 Community Psychiatric Centers....................... 393,750
*14 Lincare Holdings, Inc............................... 358,594
16 Mallinckrodt Group, Inc............................. 568,000
12 Merck & Co., Inc.................................... 602,700
*45 National Medical Enterprises, Inc................... 648,313
*12 Nellcor, Inc........................................ 540,000
10 Schering-Plough Corp................................ 428,013
9 Upjohn Co........................................... 321,938
5 Warner-Lambert Co................................... 466,425
--------------
TOTAL HEALTH CARE................................. 6,610,382
--------------
PRODUCER MANUFACTURING 10.0%
8 Browning-Ferris Industries, Inc..................... 289,000
3 Emerson Electric Co................................. 228,800
7 Fluor Corp.......................................... 364,000
16 General Electric Co................................. 885,087
9 Honeywell, Inc...................................... 383,812
9 ITT Corp............................................ 1,045,750
11 Philips Electronics, N.V., ADR...................... 470,250
</TABLE>
See Notes to Financial Statements
F-38
<PAGE> 131
COMMON STOCK PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
--------------------------------------------------------------------------------
<S> <C>
10 Rockwell International Corp......................... $ 457,500
9 Tenneco, Inc........................................ 414,000
4 United Technologies Corp............................ 281,250
*5 Varity Corp......................................... 237,600
72 WMX Technologies, Inc............................... 2,037,325
--------------
TOTAL PRODUCER MANUFACTURING...................... 7,094,374
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 10.4%
46 Asia Pacific Resources International................ 420,663
14 Barrick Gold Corp................................... 356,025
6 Consolidated Papers................................. 316,938
15 DuPont (E.I) de Nemours & Co., Inc.................. 1,003,750
5 Engelhard Corp...................................... 210,087
*60 Fort Howard Corp.................................... 844,675
*62 Freeport McMoran, Inc............................... 1,092,750
15 Grace (W.R.) & Co................................... 902,213
22 James River Corp.................................... 593,937
9 Lubrizol Corp....................................... 318,375
4 Mead Corp........................................... 237,500
3 Monsanto Co......................................... 252,350
7 Newmont Mining Corp................................. 276,375
5 Sherwin Williams Co................................. 171,000
3 Sigma-Aldrich Corp.................................. 122,813
5 Willamette Industries, Inc.......................... 294,150
--------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES......... 7,413,601
--------------
TECHNOLOGY 7.1%
7 Avnet, Inc.......................................... 328,950
*4 BMC Software, Inc................................... 285,825
*17 Compaq Computer Corp................................ 771,375
*8 Gateway 2000, Inc................................... 191,100
6 General Dynamics Corp............................... 248,500
3 Hewlett-Packard Co.................................. 208,600
9 International Business Machines Corp................ 835,200
8 Lockheed Martin Corp................................ 517,499
5 Loral Corp.......................................... 258,750
6 Northern Telecom, Ltd............................... 219,000
*17 Novell, Inc......................................... 334,950
11 Varian Associates, Inc.............................. 618,800
*7 VLSI Technology, Inc 210,875
--------------
TOTAL TECHNOLOGY.................................. 5,029,424
--------------
TRANSPORTATION 0.8%
*4 AMR Corp............................................ 313,425
8 Illinois Central Corp............................... 276,000
--------------
TOTAL TRANSPORTATION.............................. 589,425
--------------
UTILITIES 9.5%
4 American Electric Power, Inc........................ 147,525
7 Ameritech Corp...................................... 294,800
18 AT&T Corp........................................... 929,687
6 Baltimore Gas & Electric Co......................... 150,000
8 Carolina Power & Light Co........................... 226,875
4 Central & South West Corp........................... 97,125
2 Florida Progress Corp............................... 75,000
</TABLE>
See Notes to Financial Statements
F-39
<PAGE> 132
COMMON STOCK PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
--------------------------------------------------------------------------------
<S> <C>
6 FPL Group, Inc...................................... $ 231,750
11 Frontier Corp....................................... 252,000
3 General Public Utilities Corp....................... 77,350
8 GTE Corp............................................ 273,000
8 Illinova Corp....................................... 210,612
26 MCI Communications Corp............................. 580,800
3 Nevada Power Co..................................... 68,063
2 NIPSCO Industries, Inc.............................. 74,800
16 Peco Energy Co...................................... 442,000
1 Pinnacle West Capital Corp.......................... 34,300
3 Public Service Co. of Colorado...................... 97,500
11 Public Service Co. of New Mexico.................... 156,750
3 San Diego Gas & Electric Co......................... 70,550
7 SBC Communications, Inc............................. 333,375
14 Southern Co......................................... 313,250
3 Southwestern Public Service Co...................... 73,750
33 Sprint Corp......................................... 1,109,625
7 U S West, Inc....................................... 291,375
*7 WorldCom, Inc....................................... 194,400
--------------
TOTAL UTILITIES................................... 6,806,262
--------------
TOTAL COMMON STOCK (Cost $55,283,246)............. 63,039,637
--------------
<CAPTION>
Principal
Amount
(000)
---------
<S> <C>
UNITED STATES GOVERNMENT OBLIGATIONS 3.7%
$1,000 Treasury Notes, 6.250%, 08/31/96....................... 1,004,530
1,600 Treasury Notes, 6.875%, 02/28/97....................... 1,625,744
--------------
TOTAL UNITED STATES GOVERNMENT OBLIGATIONS
(Cost $2,595,453).................................. 2,630,274
--------------
REPURCHASE AGREEMENT 4.8%
3,440 Lehman Government
Securities, Inc., dated 6/30/95, 6.050%, due 07/03/95,
(collateralized by U.S. Government obligations in a
pooled cash account) repurchase proceeds $3,441,734
(Cost $3,440,000)....... 3,440,000
--------------
TOTAL INVESTMENTS (Cost $61,318,699) 97.0%. 69,109,911
OTHER ASSETS AND LIABILITIES, NET 3.0%........................ 2,161,608
--------------
NET ASSETS 100%............................................... $ 71,271,519
==============
</TABLE>
* Non-income producing securities
(1) Includes 189 warrants, expiring 6/30/96
See Notes to Financial Statements
F-40
<PAGE> 133
COMMON STOCK PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $61,318,699).................... $69,109,911
Cash............................................................... 847
Receivable for investments sold.................................... 2,944,680
Dividends receivable............................................... 204,897
Receivable for Fund shares sold.................................... 129,228
Other assets....................................................... 1,856
-----------
Total Assets..................................................... 72,391,419
-----------
LIABILITIES
Payable for investments purchased.................................. 849,564
Payable for Fund shares redeemed................................... 202,444
Due to Adviser..................................................... 21,715
Deferred Trustees' compensation.................................... 16,500
Due to shareholder service agent................................... 1,600
Accrued expenses................................................... 28,077
-----------
Total Liabilities................................................ 1,119,900
-----------
NET ASSETS, equivalent to $14.73 per share......................... $71,271,519
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 4,839,261 shares outstanding................... $ 48,393
Capital surplus.................................................... 59,415,422
Undistributed net realized gain on securities...................... 3,263,660
Net unrealized appreciation of securities.......................... 7,791,212
Undistributed net investment income................................ 752,832
-----------
NET ASSETS......................................................... $71,271,519
===========
</TABLE>
See Notes to Financial Statements
F-41
<PAGE> 134
COMMON STOCK PORTFOLIO FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
--------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends...................................................... $ 848,513
Interest....................................................... 134,028
-----------
Investment income............................................ 982,541
-----------
EXPENSES
Management fees................................................ 172,909
Shareholder service agent's fees and expenses.................. 9,195
Accounting services............................................ 30,389
Trustees' fees and expenses.................................... 5,247
Audit fees..................................................... 7,300
Custodian fees................................................. 7,678
Legal fees..................................................... 2,696
Reports to shareholders........................................ 4,757
Miscellaneous.................................................. 188
Expense reimbursement.......................................... (32,868)
-----------
Total expenses............................................... 207,491
-----------
NET INVESTMENT INCOME........................................ 775,050
===========
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities................................ 3,552,959
Net unrealized appreciation of securities during the period.... 8,354,404
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............... 11,907,363
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $12,682,413
===========
<CAPTION>
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended Year Ended
June 30, 1995 December 31, 1994
-------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period........... $67,471,922 $72,259,545
----------- -----------
Operations
Net investment income.................... 775,050 1,190,278
Net realized gain on securities.......... 3,552,959 6,950,717
Net unrealized appreciation
(depreciation) of securities during the
period................................. 8,354,404 (10,647,731)
----------- -----------
Increase (decrease) in net assets
resulting from operation................ 12,682,413 (2,506,736)
----------- -----------
Distributions to shareholders from
Net investment income.................... (37,385) (1,197,291)
Net realized gain on securities.......... (760,158) (6,788,651)
----------- -----------
(797,543) (7,985,942)
----------- -----------
Capital transactions
Proceeds from shares sold................ 3,435,215 11,714,030
Proceeds from shares issued for
distributions reinvested................. 797,543 7,985,942
Cost of shares redeemed.................. (12,318,031) (13,994,917)
----------- -----------
Increase (decrease) in net assets from
capital transactions.................. (8,085,273) 5,705,055
----------- -----------
INCREASE (DECREASE) IN NET ASSETS........ 3,799,597 (4,787,623)
----------- -----------
NET ASSETS, end of period................. $71,271,519 $67,471,922
=========== ===========
CAPITAL SHARE TRANSACTIONS
Shares sold............................... 255,130 827,085
Shares issued for distributions
reinvested.............................. 58,773 648,452
Shares redeemed........................... (919,572) (989,273)
----------- -----------
Increase (decrease) in capital shares
outstanding............................. (605,669) 486,264
=========== ===========
</TABLE>
See Notes to Financial Statements
F-42
<PAGE> 135
COMMON STOCK PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated (Unaudited).
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended December 31
Ended June ----------------------------------------
30, 1995 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period.............. $12.39 $ 14.57 $14.21 $13.44 $10.09 $11.30
------ ------- ------ ------ ------ ------
Income from investment
operations
Investment income........ .20 .33 .30 .31 .335 .46
Expenses................. (.05) (.09) (.11) (.10) (.10) (.101)
Expense reimbursement(1). .01 .01 .02 .02 .03 .036
------ ------- ------ ------ ------ ------
Net investment income..... .16 .25 .21 .23 .265 .395
Net realized and
unrealized gains or
losses on securities... 2.34 (.7625) 1.0325 .77 3.37 (1.17)
------ ------- ------ ------ ------ ------
Total from investment
operations............. 2.50 (.5125) 1.2425 1.00 3.635 (.775)
------ ------- ------ ------ ------ ------
Less distributions from
Net investment income.... (.0075) (.25) (.215) (.23) (.285) (.435)
Net realized gain on
securities............. (.1525) (1.4175) (.6675) -- -- --
------ ------- ------ ------ ------ ------
Total distributions....... (.16) (1.6675) (.8825) (.23) (.285) (.435)
------ ------- ------ ------ ------ ------
Net asset value, end of
period................. $14.73 $ 12.39 $14.57 $14.21 $13.44 $10.09
====== ======= ====== ====== ====== ======
TOTAL RETURN(2)........... 20.29% (3.39%) 8.98% 7.48% 36.41% (6.84%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)............. $71.3 $67.5 $72.3 $65.6 $57.8 $27.2
Average net assets
(millions)............. $69.2 $69.3 $69.0 $58.0 $36.4 $28.0
Ratios to average net
assets (annualized) (1)
Expenses................. .60% .60% .60% .60% .60% .60%
Expenses, without expense
reimbursement.......... .70% .68% .72% .74% .90% .93%
Net investment income.... 2.26% 1.72% 1.41% 1.78% 2.33% 3.64%
Net investment income,
without expense
reimbursement.......... 2.16% 1.64% 1.29% 1.64% 2.03% 3.31%
Portfolio turnover rate... 66% 153% 139% 116% 95% 122%
</TABLE>
(1) See Note 2.
(2) Total return for a period less than one year is not annualized.
See Notes to Financial Statements
F-43
<PAGE> 136
DOMESTIC STRATEGIC INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Coupon Maturity Market Value
-------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS 81.5%
CONSUMER DISTRIBUTION 12.3%
$ 500 Borden, Inc....................... 7.875% 02/15/23 $ 477,550
300 ConAgra, Inc...................... 9.750 03/01/21 366,750
500 Food 4 Less....................... 13.750 06/15/01 535,000
500 Nabisco, Inc...................... 7.550 06/15/15 496,900
500 Petro Stopping Centers, L.P....... 12.500 06/01/02 501,250
500 Specialty Retailers, Inc.......... 11.000 08/15/03 465,000
500 Sysco Corp........................ 6.500 06/15/05 493,635
--------------
TOTAL CONSUMER DISTRIBUTION..... 3,336,085
--------------
CONSUMER DURABLES 2.1%
500 Chrysler Corp..................... 10.950 08/01/17 564,000
--------------
CONSUMER NON-DURABLES 5.4%
500 Dr Pepper/Seven-Up Companies,
Inc............................. ** 11/01/02 449,650
500 Fieldcrest Cannon, Inc............ 11.250 06/15/04 520,000
500 Westpoint Stevens................. 9.375 12/15/05 480,000
--------------
TOTAL CONSUMER NON-DURABLES..... 1,449,650
--------------
CONSUMER SERVICES 13.4%
500 Cox Communications, Inc........... 6.875 06/15/05 494,150
500 New York Times Co................. 8.250 03/15/25 538,650
500 News American Holdings, Inc....... 10.125 10/15/12 575,750
500 Tele-Communications, Inc.......... 7.875 08/01/13 469,600
500 Time Warner, Inc.................. 9.125 01/15/13 526,800
500 Turner Broadcasting Systems, Inc.. 7.400 02/01/04 470,150
500 Valassis Communications, Inc...... 9.550 12/01/03 553,450
--------------
TOTAL CONSUMER SERVICES......... 3,628,550
--------------
ENERGY 13.0%
300 Coastal Corp...................... 10.250 10/15/04 360,180
200 Coastal Corp...................... 11.750 06/15/06 217,500
500 HS Resources, Inc................. 9.875 12/01/03 485,000
500 Occidental Petroleum Corp......... 10.125 11/15/01 584,850
500 PDV America, Inc.................. 7.875 08/01/03 487,850
500 Plains Resources, Inc............. 12.000 10/01/99 521,250
500 Texaco Capital, Inc............... 8.625 06/30/10 583,350
250 Union Oil Co. of California....... 9.250 02/01/03 284,175
--------------
TOTAL ENERGY.................... 3,524,155
--------------
FINANCE 2.9%
247 Bluebell Funding, Inc............. 11.850 05/01/99 261,820
500 Phoenix Re Corp................... 9.750 08/15/03 523,750
--------------
TOTAL FINANCE................... 785,570
--------------
HEALTH CARE 2.8%
500 Quorum Health Group............... 11.875 12/15/02 546,875
200 Tenet Healthcare.................. 10.125 03/01/05 211,500
--------------
TOTAL HEALTH CARE............... 758,375
--------------
</TABLE>
See Notes to Financial Statements
F-44
<PAGE> 137
DOMESTIC STRATEGIC INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------
<S> <C> <C> <C>
RAW MATERIALS/PROCESSING
INDUSTRIES 11.8%
$ 500 Boise Cascade Corp............ 9.450% 11/01/09 $ 575,500
250 Container Corp. of America.... 9.750 04/01/03 248,750
500 Georgia-Pacific Corp.......... 9.950 06/15/02 581,450
150 IMC Fertilizer Group, Inc..... 9.450 12/15/11 151,500
500 Noranda, Inc.................. 8.125 06/15/04 536,200
500 Riverwood International
Corp........................ 10.375 06/30/04 547,500
500 UCAR Global Enterprise,
Inc......................... 12.000 01/15/05 538,750
--------------
TOTAL RAW MATERIALS
/PROCESSING INDUSTRIES. 3,179,650
--------------
TECHNOLOGY 3.9%
500 International Business
Machines Corp................. 7.500 06/15/13 511,400
500 Unisys Corp................... 13.500 07/01/97 553,125
--------------
TOTAL TECHNOLOGY.......... 1,064,525
--------------
TRANSPORTATION 11.1%
500 Delta Air Lines, Inc.......... 9.750 05/15/21 562,600
500 International Shipholding
Corp........................ 9.000 07/01/03 485,000
350 Kansas City Southern
Industries, Inc............. 8.800 07/01/22 387,485
250 Southern Pacific Rail Corp.... 9.375 08/15/05 256,250
500 Southwest Airlines Co......... 9.400 07/01/01 564,100
500 Union Pacific Co.............. 8.350 05/01/25 526,150
200 United Air Lines, Inc.,
Series 1991-A............... 10.020 03/22/14 224,320
--------------
TOTAL TRANSPORTATION...... 3,005,905
--------------
UTILITIES 2.8%
350 Monongahela Power Co.......... 8.375 07/01/22 370,895
350 Public Service Co. of
Colorado.................... 8.750 03/01/22 383,237
--------------
TOTAL UTILITIES........... 754,132
--------------
TOTAL CORPORATE OBLIGATIONS
(Cost $21,388,401)....... 22,050,597
--------------
GOVERNMENT OBLIGATIONS 22.1%
*2,000 Federal National Mortgage
Association, Forward........ 7.500 settling 07/95 2,005,620
1,072 Federal National Mortgage
Association, Pools.......... 10.000 04/01/21 1,163,239
350 Province of Newfoundland
(Canada).................... 8.650 10/22/22 386,750
350 Province of Saskatchewan
(Canada).................... 8.000 02/01/13 380,870
+2,000 United States Treasury
Notes....................... 6.750 06/30/99 2,054,060
--------------
TOTAL GOVERNMENT OBLIGATIONS
(Cost $5,843,841)........ 5,990,539
--------------
</TABLE>
See Notes to Financial Statements
F-45
<PAGE> 138
DOMESTIC STRATEGIC INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Coupon Maturity Market Value
----------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCK 0.9%
2,226 Arcadian Corp................................... $ 40,068
*2,500 F F Holdings Co. (private placement, purchased
on 10/6/92)................................... 5,000
*500 Smitty's Supermarket, Class B................... 5,000
*6,889 Supermarkets General Holdings Corp., $3.52,
Payment in Kind, preferred stock.............. 182,558
--------------
TOTAL COMMON AND PREFERRED STOCK (Cost
$189,924)....................................... 232,626
--------------
<CAPTION>
Principal
Amount
(000)
<S> <C> <C>
REPURCHASE AGREEMENT 1.1%
$ 295 Lehman Government Securities,
Inc., dated 6/30/95
(collateralized by U.S.
Government obligations in a
pooled cash account) repurchase
proceeds $295,152 (Cost
$295,000)...................... 6.180% 07/03/95 295,000
--------------
TOTAL INVESTMENTS (Cost $27,717,166) 105.6%............... 28,568,762
OTHER ASSETS AND LIABILITIES, NET (5.6%).................. (1,518,279)
--------------
NET ASSETS 100%........................................... $ 27,050,483
==============
</TABLE>
*Non-income producing securities
**Zero coupon bond
+Security placed as collateral for a forward purchase commitment (Note 1B).
See Notes to Financial Statements
F-46
<PAGE> 139
DOMESTIC STRATEGIC INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995 (Unaudited)
<TABLE>
--------------------------------------------------------------------------------
<S> <C>
ASSETS
Investment, at market value (Cost $27,717,166).................... $28,568,762
Cash.............................................................. 2,049
Receivable for investments sold................................... 534,462
Interest receivable............................................... 510,123
Receivable for Fund shares sold................................... 1,568
Other assets...................................................... 1,132
-----------
Total Assets................................................... 29,618,096
-----------
LIABILITIES
Payable for investments purchased................................. 2,519,583
Deferred Trustees' compensation................................... 12,796
Payable for Fund shares redeemed.................................. 4,801
Due to shareholder service agent.................................. 1,561
Accrued expenses and other liabilities............................ 28,872
-----------
Total Liabilities.............................................. 2,567,613
-----------
NET ASSETS, equivalent to $8.34 per share......................... $27,050,483
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 3,241,975 shares outstanding.................. $ 32,420
Capital surplus................................................... 27,167,842
Accumulated net realized loss on securities....................... (2,072,245)
Net unrealized appreciation of securities......................... 851,596
Undistributed net investment income............................... 1,070,870
-----------
NET ASSETS........................................................ $27,050,483
===========
</TABLE>
See Notes to Financial Statements
F-47
<PAGE> 140
DOMESTIC STRATEGIC INCOME PORTFOLIO FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1995
-------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest...................................................... $1,157,866
Dividends..................................................... 3,265
----------
Investment income........................................... 1,161,131
----------
EXPENSES
Management fees............................................... 64,257
Shareholder service agent's fees and expenses................. 9,202
Accounting services........................................... 27,920
Trustees' fees and expenses................................... 4,881
Audit fees.................................................... 10,550
Custodian fees................................................ 2,377
Legal fees.................................................... 2,981
Reports to shareholders....................................... 4,995
Miscellaneous................................................. 993
Expense reimbursement......................................... (51,048)
----------
Total expenses.............................................. 77,108
----------
NET INVESTMENT INCOME....................................... 1,084,023
----------
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities............................... 186,264
Net unrealized appreciation of securities during the period... 2,014,847
----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.............. 2,201,111
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $3,285,134
==========
<CAPTION>
------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended Year Ended
June 30, 1995 December 31, 1994
------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period........... $21,273,969 $27,443,291
----------- -----------
Operations
Net investment income.................... 1,084,023 2,178,975
Net realized gain (loss) on securities... 186,264 (857,071)
Net unrealized appreciation (depreciation)
of securities during the period...... 2,014,847 (2,543,211)
----------- -----------
Increase (decrease) in net assets
resulting from operations............ 3,285,134 (1,221,307)
----------- -----------
Distributions to shareholders from net
investment income.................... (24,775) (2,170,097)
----------- -----------
Capital transactions
Proceeds from shares sold................ 5,765,225 9,066,088
Proceeds from shares issued for
distributions reinvested............. 24,776 2,170,097
Cost of shares redeemed.................. (3,273,846) (14,014,103)
----------- -----------
Increase (decrease) in net assets from
capital transactions................. 2,516,155 (2,777,918)
----------- -----------
INCREASE (DECREASE) IN NET ASSETS....... 5,776,514 (6,169,322)
----------- -----------
NET ASSETS, end of period................. $27,050,483 $21,273,969
=========== ===========
CAPITAL SHARE TRANSACTIONS
Shares sold............................... 767,791 1,100,823
Shares issued for distributions
reinvested............................ 3,172 296,939
Shares redeemed........................... (423,688) (1,700,172)
----------- -----------
Increase (decrease) in capital shares
outstanding........................... 347,275 (302,410)
=========== ===========
</TABLE>
See Notes to Financial Statements
F-48
<PAGE> 141
DOMESTIC STRATEGIC INCOME PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31
June 30, --------------------------------------------
1995 1994 1993 1992 1991 1990
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period.... $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64
------ ------ ------ ------ ------ ------
Income from investment
operations
Investment income...... .35 .91 .77 .74 .725 1.085
Expenses............... (.03) (.10) (.09) (.07) (.07) (.08)
Expense
reimbursement(1)...... .01 .04 .04 .02 .03 .03
------ ------ ------ ------ ------ ------
Net investment income... .33 .85 .72 .69 .685 1.035
Net realized and
unrealized gains or
losses on securities... .6675 (1.2275) .5825 .2725 .7525 (1.64)
------ ------ ------ ------ ------ ------
Total from investment
operations............. .9975 (.3775) 1.3025 .9625 1.4375 (.605)
------ ------ ------ ------ ------ ------
Distributions from net
investment income...... (.0075) (.8525) (.7225) (.7025) (.6775) (1.055)
------ ------ ------ ------ ------ ------
Net asset value, end of
period................. $ 8.34 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98
====== ====== ====== ====== ====== ======
TOTAL RETURN(2)......... 13.58% (4.33%) 16.32% 12.50% 21.23% (7.23%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (millions)...... $ 27.1 $ 21.3 $ 27.4 $ 21.1 $ 17.4 $ 6.3
Average net assets
(millions)............. $ 25.7 $ 26.1 $ 26.7 $ 18.8 $ 10.6 $ 6.8
Ratios to average net
assets (annualized)(1)
Expenses................. .60% .60% .60% .60% .60% .60%
Expenses, without
expense reimbursement.. 1.00% .95% .95% .95% .95% .95%
Net investment income.... 8.44% 8.35% 7.80% 8.89% 9.72% 11.99%
Net investment income,
without expense
reimbursement.......... 8.04% 8.00% 7.40% 8.54% 9.37% 11.64%
Portfolio turnover rate... 61% 94% 130% 117% 90% 123%
</TABLE>
(1) See Note 2.
(2) Total return for a period of less than one year is not annualized.
See Notes to Financial Statements
F-49
<PAGE> 142
GOVERNMENT PORTFOLIO PORTFOLIO OF INVESTMENTS
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Coupon Maturity Market Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNITED STATES AGENCY OBLIGATIONS 65.8%
**$2,885 Federal Home Loan Mortgage Corp., Pools................. 7.000% 06/01/24 to 07/01/24 $ 2,834,999
**5,859 Federal Home Loan Mortgage Corp., Pools................. 7.500 05/01/24 to 10/01/24 5,879,623
**1,996 Federal Home Loan Mortgage Corp., Pools................. 8.000 09/11/24 to 10/01/24 2,033,709
2,580 Federal National Mortgage Association, ARM.............. 6.254 03/25/09 2,580,659
1,983 Federal National Mortgage Association, Pools............ 7.000 12/01/23 to 06/01/24 1,948,481
**1,921 Federal National Mortgage Association, Pools............ 7.500 05/01/24 to 10/01/24 1,926,072
3,966 Federal National Mortgage Association, Pools............ 8.000 04/01/24 to 10/01/24 4,039,145
1,686 Government National Mortgage Association, Pools......... 11.000 11/01/20 1,868,550
7,102 Government National Mortgage Association, Pools......... 7.000 08/15/23 to 10/15/24 6,987,015
**5,727 Government National Mortgage Association, Pools......... 7.500 04/15/23 to 06/15/24 5,753,478
**7,572 Government National Mortgage Association, Pools......... 8.000 05/15/17 to 11/15/24 7,752,263
774 Government National Mortgage Association, Pools......... 8.500 04/15/17 to 07/15/17 803,476
445 Government National Mortgage Association, Pools......... 11.000 09/15/10 to 08/15/20 489,215
--------------
TOTAL UNITED STATES AGENCY OBLIGATIONS
(Cost $43,753,386)................................ 44,896,685
--------------
UNITED STATES TREASURY OBLIGATIONS 31.5%
1,500 Treasury Notes.......................................... 6.250 05/31/00 1,515,705
4,000 Treasury Notes.......................................... 6.500 08/15/97 4,050,000
**4,000 Treasury Notes.......................................... 7.250 11/15/96 4,074,360
2,000 Treasury Notes.......................................... 7.500 12/31/96 2,047,180
500 Treasury Notes.......................................... 7.875 07/31/96 510,780
5,000 Treasury Notes.......................................... 7.875 01/15/98 5,232,800
**4,000 Treasury Notes.......................................... 8.875 02/15/96 4,073,120
--------------
TOTAL UNITED STATES TREASURY OBLIGATIONS
(Cost $21,335,937)................................ 21,503,945
--------------
FORWARD PURCHASE COMMITMENTS 10.3%
*1,000 Federal Home Loan Mortgage Association.................. 7.000 settling 07/95 982,500
*2,000 Federal National Mortgage Association................... 7.500 settling 09/95 1,999,140
*4,000 Government National Mortgage Association................ 7.500 settling 07/95 4,018,760
--------------
TOTAL FORWARD PURCHASE COMMITMENTS
(Cost $6,862,031)................................. 7,000,400
--------------
REPURCHASE AGREEMENT 2.0%
1,340 Lehman Government Securities, Inc., date 6/30/95
(collateralized by U.S. Government obligations in a pool
cash account) repurchase proceeds $1,340,690 (Cost
$1,340,000)............................................. 6.180 07/03/95 1,340,000
--------------
TOTAL INVESTMENTS (Cost $73,291,354) 109.6%...................................................... 74,741,030
OTHER ASSETS AND LIABILITIES, NET (9.6%)......................................................... (6,531,922)
--------------
NET ASSETS 100%.................................................................................. $ 68,209,108
==============
</TABLE>
* Non-income producing securities.
**Securities with a market value of approximately $21.7 million were placed as
collateral for futures contracts and forward purchase commitments (Note 1B).
ARM--adjustable rate mortgage backed security
See Notes to Financial Statements
F-50
<PAGE> 143
GOVERNMENT PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
Investment, at market value (Cost $73,291,354)................... $ 74,741,030
Cash............................................................. 2,002
Receivable for investments sold.................................. 6,238,495
Interest receivable.............................................. 747,155
Unrealized appreciation on forward commitments................... 113,760
Receivable for Fund shares sold.................................. 5,308
Other assets..................................................... 1,571
------------
Total Assets................................................... 81,849,321
------------
LIABILITIES
Payable for investments purchased................................ 13,529,294
Unrealized depreciation on forward commitments................... 40,700
Deferred Trustees' compensation.................................. 17,353
Due to Adviser................................................... 14,639
Due to broker-variation margin................................... 5,776
Due to shareholder service agent................................. 1,600
Accrued expenses and other liabilities........................... 30,851
------------
Total Liabilities.............................................. 13,640,213
------------
NET ASSETS, equivalent to $8.81 per share........................ $ 68,209,108
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share;
unlimited shares authorized; 7,738,562 shares outstanding...... $ 77,386
Capital surplus.................................................. 81,072,017
Accumulated net realized loss on securities...................... (14,473,605)
Net unrealized appreciation (depreciation) of securities
Investments..................................................... 1,449,676
Forward commitments............................................. 73,060
Future contracts................................................ (7,240)
Undistributed net investment income.............................. 17,814
------------
NET ASSETS....................................................... $ 68,209,108
============
</TABLE>
See Notes to Financial Statements
F-51
<PAGE> 144
GOVERNMENT PORTFOLIO FINANCIAL STATEMENTS
(Unaudited)
----------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
----------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest..................................................... $ 2,540,909
------------
EXPENSES
Management fees.............................................. 166,020
Shareholder service agent's fees and expenses................ 9,315
Accounting services.......................................... 33,287
Trustees' fees and expenses.................................. 5,309
Audit fees................................................... 11,650
Custodian fees............................................... 12,441
Legal fees................................................... 2,627
Reports to shareholders...................................... 2,617
Miscellaneous................................................ 179
Expense reimbursement........................................ (44,221)
------------
Total expenses............................................. 199,224
------------
NET INVESTMENT INCOME...................................... 2,341,685
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments and forward commitments......................... 724,004
Future contracts............................................ (410,566)
Net unrealized appreciation (depreciation) of securities
during the period
Investments................................................. 3,782,276
Futures contracts........................................... (4,863)
Forward commitments......................................... 46,491
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............. 4,137,342
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 6,479,027
============
------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
Six Months Ended Year Ended
June 30, 1995 December 31, 1994
------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period........... $65,513,261 $80,630,053
----------- -----------
Operations
Net investment income.................... 2,341,685 4,717,706
Net realized gain (loss) on securities... 313,438 (6,083,772)
Net unrealized appreciation (depreciation)
of securities during the period........ 3,823,904 (2,217,746)
----------- -----------
Increase (decrease) in net assets
resulting from operations............ 6,479,027 (3,583,812)
----------- -----------
Distributions to shareholders from net
investment income........................ (2,319,734) (4,508,286)
----------- -----------
Capital transactions
Proceeds from shares sold................ 1,758,886 3,484,195
Proceeds from shares issued for
distributions reinvested................ 2,319,734 4,508,286
Cost of shares redeemed.................. (5,542,066) (15,017,175)
----------- -----------
Decrease in net assets from capital
transactions........................... (1,463,446) (7,024,694)
----------- -----------
INCREASE (DECREASE) IN NET ASSETS......... 2,695,847 (15,116,792)
----------- -----------
NET ASSETS, end of period................. $68,209,108 $65,513,261
=========== ===========
CAPITAL SHARE TRANSACTIONS
Shares sold............................... 204,427 405,270
Shares issued for distributions
reinvested.............................. 269,018 524,430
Shares redeemed........................... (649,813) (1,719,219)
----------- -----------
Decrease in capital shares outstanding.. (176,368) (789,519)
=========== ===========
</TABLE>
See Notes to Financial Statements
F-52
<PAGE> 145
GOVERNMENT PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated.
(Unaudited)
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31
June 30, -------------------------------------
1995 1994 1993 1992 1991 1990
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of period.... $ 8.28 $9.26 $9.13 $ 9.29 $8.70 $8.80
------ ----- ----- ------ ----- -----
Income from investment
operations
Investment income...... .33 .61 .62 .72 .79 .835
Expenses............... (.04) (.06) (.06) (.064) (.06) (.06)
Expense
reimbursement(1).... .01 .01 .01 .009 .01 .01
------ ----- ----- ------ ----- -----
Net investment income... .30 .56 .57 .665 .74 .785
Net realized and
unrealized gains or
losses on securities... .5275 (.985) .135 (.1575) .60 (.105)
------ ----- ----- ------ ----- -----
Total from investment
operations............. .8275 (.425) .705 .5075 1.34 .68
------ ----- ----- ------ ----- -----
Distributions from net
investment income...... (.2975) (.555) (.575) (.6675) (.75) (.78)
------ ----- ----- ------ ----- -----
Net asset value, end of
period................. $ 8.81 $8.28 $9.26 $ 9.13 $9.29 $8.70
====== ===== ===== ====== ===== =====
TOTAL RETURN(2)....... 10.16% (4.63%) 7.86% 5.73% 16.23% 8.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (millions)...... $ 68.2 $65.5 $80.6 $ 74.8 $77.0 $73.2
Average net assets
(millions)............. $ 66.4 $70.3 $78.6 $ 74.6 $72.9 $72.7
Ratios to average net
assets
(annualized)(1)
Expenses............... .60% .60% .60% .60% .60% .60%
Expenses, without
expense reimbursement. .73% .70% .70% .70% .70% .69%
Net investment income.. 7.05% 6.71% 6.45% 7.29% 8.37% 9.19%
Net investment income,
without expense
reimbursement......... 6.92% 6.61% 6.35% 7.19% 8.27% 9.10%
Portfolio turnover rate. 100% 192% 91% 36% 57% 164%
</TABLE>
(1) See Note 2.
(2) Total return for a period less than one year is not annualized.
See Notes to Financial Statements
F-53
<PAGE> 146
MONEY MARKET PORTFOLIO PORTFOLIO OF INVESTMENTS
June 30, 1995 (Unaudited)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market
(000) Description Coupon Maturity Value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER 32.6%
$1,200 Associates Corp. of North America.... 6.223% 07/12/95 $ 1,197,560
1,200 Chevron Oil Finance Co............... 5.965 07/14/95 1,197,223
1,100 General Electric Capital Corp........ 6.186 07/24/95 1,095,578
1,200 General Electric Co.................. 6.231 09/05/95 1,186,444
1,100 Pitney Bowes, Inc.................... 5.960 07/07/95 1,098,727
1,200 Prudential Funding Corp.............. 6.228 07/27/95 1,194,537
1,000 Toronto Dominion Holdings............ 5.991 07/10/95 998,353
-----------
TOTAL COMMERCIAL PAPER (Cost
$7,968,422).......................... 7,968,422
-----------
UNITED STATES AGENCY OBLIGATIONS 23.9%
2,000 Federal Home Loan Mortgage Corp...... 5.549 12/01/95 1,953,800
2,000 Federal National Mortgage
Association......................... 5.787 12/18/95 1,946,610
2,000 Federal National Mortgage
Association......................... 5.701 12/21/95 1,946,447
-----------
TOTAL UNITED STATES AGENCY OBLIGATIONS
(Cost $5,846,857).................... 5,846,857
-----------
REPURCHASE AGREEMENTS 43.5%(1)
5,315 Lehman Government Securities, Inc.,
dated 6/30/95, repurchase
proceeds $5,317,737................. 6.180 07/03/95 5,315,000
5,315 SBC Capital Markets, Inc., dated
6/30/95, repurchase
proceeds $5,317,713................. 6.125 07/03/95 5,315,000
-----------
TOTAL REPURCHASE AGREEMENTS (Cost $10,630,000)........ 10,630,000
-----------
TOTAL INVESTMENTS (Cost $24,445,279) 100.0%..................... 24,445,279
OTHER ASSETS AND LIABILITIES, NET 0.0%.......................... (10,042)
-----------
NET ASSETS 100%................................................. $24,435,237
===========
</TABLE>
(1) Collateralized by U.S. Government obligations in a pooled cash account
See Notes to Financial Statements
F-54
<PAGE> 147
MONEY MARKET PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at amortized cost.................................... $24,445,279
Cash.............................................................. 2,663
Receivable for Fund shares sold................................... 28,166
Other assets...................................................... 1,120
-----------
Total Assets..................................................... 24,477,228
-----------
LIABILITIES
Deferred Trustees' compensation................................... 16,209
Due to shareholder service agent.................................. 1,587
Payable for Fund shares redeemed.................................. 236
Accrued expenses.................................................. 23,959
-----------
Total Liabilities................................................ 41,991
-----------
NET ASSETS, equivalent to $1.00 per share......................... $24,435,237
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 24,435,403 shares outstanding................. $ 244,354
Capital surplus................................................... 24,191,049
Accumulated net investment loss................................... (166)
-----------
NET ASSETS........................................................ $24,435,237
===========
</TABLE>
See Notes to Financial Statements
F-55
<PAGE> 148
MONEY MARKET PORTFOLIO FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
--------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest....................................................... $746,404
--------
EXPENSES
Management fees................................................ 62,283
Shareholder service agent's fees and expenses.................. 9,364
Accounting services............................................ 28,607
Trustees' fees and expenses.................................... 5,244
Audit fees..................................................... 7,100
Custodian fees................................................. 3,191
Legal fees..................................................... 2,889
Reports to shareholders........................................ 3,166
Miscellaneous.................................................. 229
Expense reimbursement.......................................... (47,333)
--------
Total expenses................................................ 74,740
--------
NET INVESTMENT INCOME......................................... 671,664
--------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $671,664
========
------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
Six Months Ended Year Ended
June 30, 1995 December 31, 1994
------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period........... $28,547,675 $29,966,001
----------- -----------
Operations
Net investment income.................... 671,664 1,109,674
----------- -----------
Distributions to shareholders from net
investment income........................ (672,027) (1,109,772)
----------- -----------
Capital transactions
Proceeds from shares sold................ 6,596,311 22,474,029
Proceeds from shares issued for
distributions reinvested................ 672,027 1,107,713
Cost of shares redeemed.................. (11,380,413) (24,999,970)
----------- -----------
Decrease in net assets from capital
transactions........................... (4,112,075) (1,418,228)
----------- -----------
DECREASE IN NET ASSETS.................. (4,112,438) (1,418,326)
----------- -----------
NET ASSETS, end of period................. $24,435,237 $28,547,675
=========== ===========
CAPITAL SHARE TRANSACTIONS................
Shares sold............................... 6,596,311 22,474,029
Shares issued for distributions
reinvested............................... 672,027 1,107,713
Shares redeemed........................... (11,380,413) (24,999,970)
----------- -----------
DECREASE IN CAPITAL SHARES OUTSTANDING.. (4,112,075) (1,418,228)
=========== ===========
</TABLE>
See Notes to Financial Statements
F-56
<PAGE> 149
MONEY MARKET PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial outstanding throughout each of the
periods indicated.
(Unaudited)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31
June 30, -------------------------------------
1995 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period.................. $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00
----- ------ ------ ------ ------ -----
Income from investment
operations
Investment income.......... .03 .0425 .0322 .0391 .0607 .082
Expenses................... (.005) (.0087) (.0095) (.009) (.0087) (.009)
Expense reimbursement(1). .002 .0027 .0035 .003 .0026 .003
----- ------ ------ ------ ------ -----
Net investment income....... .027 .0365 .0262 .0331 .0546 .076
----- ------ ------ ------ ------ -----
Distributions from net
investment income.......... (.027) (.0365) (.0262) (.0331) (.0546) (.076)
----- ------ ------ ------ ------ -----
Net asset value, end of
period..................... $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00
===== ====== ====== ====== ====== =====
TOTAL RETURN(2)........... 2.73% 3.71% 2.66% 3.36% 5.46% 7.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)................. $24.4 $ 28.5 $30.0 $ 32.9 $ 38.0 $34.3
Average net assets
(millions)................. $24.9 $ 30.5 $28.9 $ 36.2 $ 36.3 $32.8
Ratios to average net assets
(annualized)(1)
Expenses................... .60% .60% .60% .60% .60% .60%
Expenses, without expense
reimbursement............. .98% .87% .95% .89% .87% .89%
Net investment income...... 5.39% 3.63% 2.63% 3.32% 5.44% 7.59%
Net investment income,
without expense
reimbursement............. 5.01% 3.37% 2.28% 3.03% 5.17% 7.30%
</TABLE>
(1) See Note 2.
(2) Total return for a period less than a year is not annualized.
See Notes to Financial Statements
F-57
<PAGE> 150
MULTIPLE STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares
(000) Description Market Value
--------------------------------------------------------------------------------
<S> <C>
COMMON STOCK 62.9%
CONSUMER DISTRIBUTION 4.9%
*6 Best Buy, Inc....................................... $ 162,412
5 Dayton Hudson Corp.................................. 358,750
5 Dillard Dept. Stores, Inc........................... 141,000
5 Gap, Inc............................................ 181,350
6 Limited, Inc........................................ 140,800
5 May Dept Stores Co.................................. 216,450
3 Nordstrom, Inc...................................... 124,125
11 Sears, Roebuck & Co................................. 670,600
*5 Sports & Recreation, Inc............................ 66,938
6 Sysco Corp.......................................... 185,850
*5 Toys R Us, Inc...................................... 155,025
23 Wal-Mart Stores, Inc................................ 609,900
--------------
TOTAL CONSUMER DISTRIBUTION....................... 3,013,200
--------------
CONSUMER DURABLES 0.9%
5 Eastman Kodak Co.................................... 333,437
4 General Motors Corp................................. 206,250
--------------
TOTAL CONSUMER DURABLES........................... 539,687
--------------
CONSUMER NON-DURABLES 5.3%
12 Clorox Co........................................... 789,525
7 ConAgra, Inc........................................ 230,175
2 CPC International, Inc.............................. 129,675
*8 Fruit Of The Loom, Inc.............................. 164,775
4 Maybelline, Inc..................................... 71,750
13 PepsiCo, Inc........................................ 584,000
9 Philip Morris Companies, Inc........................ 684,250
2 Procter & Gamble Co................................. 122,188
8 RJR Nabisco Holdings Corp., Class A................. 216,000
9 Sara Lee Corp....................................... 245,100
--------------
TOTAL CONSUMER NON-DURABLES....................... 3,237,438
--------------
CONSUMER SERVICES 5.9%
6 CBS, Inc............................................ 428,800
11 Comcast Corp, Class A............................... 206,044
26 Cox Communications, Inc............................. 507,625
8 Disney (Walt) Co.................................... 439,437
6 Marriott International, Inc......................... 208,075
3 McDonald's Corp..................................... 129,112
1 McGraw Hill, Inc.................................... 98,637
7 New York Times Co., Class A......................... 164,500
10 News Corp., Limited, ADR............................ 230,775
*23 Tele-Communications, Inc., Class A.................. 527,344
15 Time Warner, Inc.................................... 596,313
5 Wendy's International, Inc.......................... 96,525
--------------
TOTAL CONSUMER SERVICES........................... 3,633,187
--------------
</TABLE>
See Notes to Financial Statements
F-58
<PAGE> 151
MULTIPLE STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares
(000) Description Market Value
--------------------------------------------------------------------------------
<S> <C>
ENERGY 7.4%
3 Amoco Corp.......................................... $ 199,875
6 Ashland, Inc........................................ 203,725
2 Atlantic Richfield Co............................... 197,550
6 Baker Hughes, Inc................................... 116,850
5 Burlington Resources, Inc........................... 199,125
20 Coastal Corp........................................ 592,312
4 Consolidated Natural Gas Co......................... 154,775
5 Dresser Industrials, Inc............................ 122,375
12 Exxon Corp.......................................... 826,312
6 Halliburton Co...................................... 196,625
13 Pacific Enterprises................................. 306,250
20 Panhandle Eastern Corp.............................. 477,750
7 Repsol, SA, ADR..................................... 227,700
5 Schlumberger, Ltd................................... 285,775
*6 Smith International, Inc............................ 105,525
8 Sonat, Inc.......................................... 240,950
4 Valero Energy Corp.................................. 87,075
--------------
TOTAL ENERGY...................................... 4,540,549
--------------
FINANCE 4.6%
2 American International Group, Inc................... 182,400
8 Chase Manhattan Corp................................ 357,200
5 Chemical Banking Corp............................... 245,700
3 Comerica, Inc....................................... 112,437
3 Federal National Mortgage Association............... 311,438
5 First Chicago Corp.................................. 299,375
5 Franklin Resources, Inc............................. 222,500
6 Morgan (J.P.) & Co., Inc............................ 441,788
4 NationsBank Corp.................................... 198,413
4 Providian Corp...................................... 155,875
3 St. Paul Companies, Inc............................. 128,050
2 TransAmerica Corp................................... 133,975
--------------
TOTAL FINANCE..................................... 2,789,151
--------------
HEALTH CARE 6.6%
3 American Home Products Corp......................... 201,175
7 Baxter International, Inc........................... 265,537
3 Bristol Myers Squibb Co............................. 190,750
24 Caremark International, Inc......................... 474,000
3 Columbia/HCA Healthcare Corp........................ 147,050
*21 Community Psychiatric Centers....................... 235,125
*9 Lincare Holdings, Inc............................... 244,375
9 Mallinckrodt Group, Inc............................. 333,700
7 Merck & Co., Inc.................................... 357,700
*26 National Medical Enterprises, Inc................... 369,438
8 Nellcor, Inc........................................ 364,500
*8 Schering-Plough Corp................................ 361,825
5 Upjohn Co........................................... 193,163
3 Warner-Lambert Co................................... 293,675
--------------
TOTAL HEALTH CARE................................. 4,032,013
--------------
PRODUCER MANUFACTURING 7.7%
4 Allied-Signal, Inc.................................. 182,450
5 Browning-Ferris Industries, Inc..................... 198,687
</TABLE>
See Notes to Financial Statements
F-59
<PAGE> 152
MULTIPLE STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares
(000) Description Market Value
--------------------------------------------------------------------------------
<S> <C>
1 Cooper Industrials, Inc............................. $ 47,400
2 Emerson Electric Co................................. 150,150
8 Fluor Corp.......................................... 400,400
10 General Electric Co................................. 558,112
5 Honeywell, Inc...................................... 224,250
5 ITT Corp............................................ 622,750
6 Philip N.V., ADR.................................... 269,325
6 Rockwell International Corp......................... 274,500
5 Tenneco, Inc........................................ 239,200
2 United Technologies Corp............................ 164,063
*4 Varity Corp......................................... 158,400
42 WMX Technologies, Inc............................... 1,186,075
--------------
TOTAL PRODUCER MANUFACTURING...................... 4,675,762
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 7.2%
23 Asia Pacific Resources International................ 208,050
8 Barrick Gold Corp................................... 207,050
3 Consolidated Papers................................. 184,400
9 DuPont (E.I.) de Nemours & Co., Inc................. 639,375
3 Engelhard Corp...................................... 141,487
*36 Fort Howard Corp.................................... 509,912
*36 Freeport McMoran, Inc............................... 625,687
8 Grace (W.R.) & Co................................... 497,137
6 Lubrizol Corp....................................... 226,400
2 Mead Corp........................................... 136,562
2 Monsanto Co......................................... 153,213
4 Newmont Mining Corp................................. 163,313
13 James River Corp.................................... 353,600
3 Sherwin Williams Co................................. 96,188
1 Sigma-Aldrich Corp.................................. 68,775
3 Willamette Industries, Inc.......................... 166,500
--------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES......... 4,377,649
--------------
TECHNOLOGY 5.1%
4 Avnet, Inc.......................................... 183,825
*3 BMC Software, Inc................................... 200,850
*10 Compaq Computer Corp................................ 453,750
*5 Gateway 2000, Inc................................... 113,750
3 General Dynamics Corp............................... 142,000
3 Hewlett-Packard Co.................................. 193,700
5 International Business Machines Corp................ 489,600
5 Lockheed Martin Corp................................ 314,741
4 Loral Corp.......................................... 196,650
4 Northern Telecom, Ltd............................... 127,750
*10 Novell, Inc......................................... 199,375
7 Varian Associates, Inc.............................. 370,175
*4 VLSI Technology, Inc................................ 123,513
--------------
TOTAL TECHNOLOGY.................................. 3,109,679
--------------
TRANSPORTATION 0.6%
*2 AMR Corp............................................ 179,100
5 Illinois Central Corp............................... 169,050
--------------
TOTAL TRANSPORTATION.............................. 348,150
--------------
</TABLE>
See Notes to Financial Statements
F-60
<PAGE> 153
MULTIPLE STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares
(000) Description Market Value
--------------------------------------------------------------------------------
<S> <C>
UTILITIES 6.7%
3 American Electric Power, Inc........................ $ 94,837
4 Ameritech Corp...................................... 167,200
11 AT&T Corp........................................... 573,750
3 Baltimore Gas & Electric Co......................... 70,000
6 Carolina Power & Light Co........................... 166,375
1 Central & South West Corp........................... 21,000
2 Florida Progress Corp............................... 75,000
5 FPL Group, Inc...................................... 185,400
6 Frontier Corp....................................... 151,200
1 General Public Utilities Corp....................... 35,700
5 GTE Corp............................................ 163,800
4 Illinova Corp....................................... 109,112
15 MCI Communications Corp............................. 330,000
2 Nevada Power Co..................................... 35,063
1 NIPSCO Industries, Inc.............................. 40,800
10 Peco Energy Co...................................... 276,250
1 Pinnacle West Capital Corp.......................... 9,800
1 Public Service Co. of Colorado...................... 39,000
*8 Public Service Co. of New Mexico.................... 111,150
2 San Diego Gas & Electric Co......................... 37,350
5 SBC Communications, Inc............................. 214,313
9 Southern Co......................................... 208,088
1 Southwestern Public Service Co...................... 38,350
20 Sprint Corp......................................... 682,588
4 US West, Inc........................................ 174,825
*4 WorldCom, Inc....................................... 102,600
--------------
TOTAL UTILITIES................................... 4,113,551
--------------
TOTAL COMMON STOCK (Cost $34,740,171)............. 38,410,016
--------------
</TABLE>
See Notes to Financial Statements
F-61
<PAGE> 154
MULTIPLE STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Coupon Maturity Market Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE OBLIGATIONS 16.4%
CONSUMER DISTRIBUTION 3.6%
$1,000 Dayton Hudson Corp............... 9.250% 03/01/06 $ 1,123,520
1,000 Wal-Mart Stores, Inc............. 8.070 12/21/12 1,076,300
--------------
TOTAL CONSUMER DISTRIBUTION.... 2,199,820
--------------
ENERGY 3.9%
1,000 Atlantic Richfield Co............ 9.125 03/01/11 1,179,900
1,000 Burlington Resources, Inc........ 9.125 10/01/21 1,183,750
--------------
TOTAL ENERGY................... 2,363,650
--------------
FINANCE 1.8%
1,000 American General Corp............ 9.625 02/01/18 1,106,500
--------------
RAW MATERIALS/PROCESSING
INDUSTRIES 1.7%
1,000 DuPont (E.I.) de Nemours & Co.,
Inc.............................. 8.250 01/15/22 1,049,400
--------------
UTILITIES 5.4%
1,000 Hydro-Quebec, Series HS.......... 9.400 02/01/21 1,184,900
1,000 Pacific Gas & Electric Co., 1st
Mtg., Series 92D................. 8.250 11/01/22 1,039,930
1,000 Tennessee Valley Authority,
Series G......................... 8.625 11/15/29 1,075,160
--------------
TOTAL UTILITIES................ 3,299,990
--------------
TOTAL CORPORATE OBLIGATIONS
(Cost $9,444,020).............. 10,019,360
--------------
GOVERNMENT OBLIGATIONS 9.7%
1,000 Province of Nova Scotia (Canada). 7.250 07/27/13 970,600
4,700 United States Treasury Bonds..... 7.125 02/15/23 4,957,748
--------------
TOTAL GOVERNMENT OBLIGATIONS
(Cost $5,499,315).............. 5,928,348
--------------
REPURCHASE AGREEMENTS 13.6%
8,265 Lehman Government Securities,
dated 6/30/95 (Collateralized by
U.S. Government obligations in a
pooled cash account) repurchase
proceeds $8,269,167 (Cost
$8,265,000)...................... 6.050 07/03/95 8,265,000
--------------
TOTAL INVESTMENTS (Cost $57,948,506) 102.6%................. 62,622,724
OTHER ASSETS AND LIABILITIES, NET (2.6)%.................... (1,572,609)
--------------
NET ASSETS 100%............................................. $ 61,050,115
==============
</TABLE>
*Non-income producing security
See Notes to Financial Statements
F-62
<PAGE> 155
MULTIPLE STRATEGY PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $57,948,506).................... $62,622,724
Cash............................................................... 1,702
Receivable for investments sold.................................... 2,072,387
Interest and dividends receivable.................................. 452,580
Other assets....................................................... 567
-----------
Total Assets..................................................... 65,149,960
===========
LIABILITIES
Payable for investments purchased.................................. 3,949,523
Payable for Fund shares redeemed................................... 86,917
Deferred Trustees' compensation.................................... 14,331
Due to Adviser..................................................... 14,023
Due to shareholder service agent................................... 1,750
Accrued expenses................................................... 33,301
-----------
Total Liabilities................................................ 4,099,845
-----------
NET ASSETS, equivalent to $11.73 per share......................... $61,050,115
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 5,206,212 shares outstanding................... $ 52,062
Capital surplus.................................................... 53,658,822
Undistributed net realized gain on securities...................... 1,428,635
Net unrealized appreciation of securities.......................... 4,674,218
Undistributed net investment income................................ 1,236,378
-----------
NET ASSETS......................................................... $61,050,115
===========
</TABLE>
See Notes to Financial Statements
F-63
<PAGE> 156
MULTIPLE STRATEGY PORTFOLIO FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1995
-------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest............................................................ $1,041,211
Dividends........................................................... 397,890
----------
Investment income................................................. 1,439,101
----------
EXPENSES
Management fees..................................................... 147,104
Shareholder service agent's fees and expenses....................... 9,467
Accounting services................................................. 32,215
Trustees' fees and expenses......................................... 4,540
Audit fees.......................................................... 11,750
Custodian fees...................................................... 10,547
Legal fees.......................................................... 3,076
Reports to shareholders............................................. 4,801
Miscellaneous....................................................... 939
Expense reimbursement............................................... (47,915)
----------
Total expenses.................................................... 176,524
----------
NET INVESTMENT INCOME............................................. 1,262,577
----------
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities..................................... 1,638,514
Net unrealized appreciation of securities during the period......... 6,561,607
----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.................... 8,200,121
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $9,462,698
----------
-------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
Six Months Ended Year Ended
June 30, 1995 December 31, 1994
-------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period........... $56,635,933 $64,857,688
----------- -----------
Operations................................
Net investment income.................... 1,262,577 2,280,114
Net realized gain on securities.......... 1,638,514 4,566,704
Net unrealized appreciation
(depreciation) of securities during the
period.................................. 6,561,607 (9,205,867)
----------- -----------
Increase (decrease) in net assets
resulting from operations.............. 9,462,698 (2,359,049)
----------- -----------
Distributions to shareholders from
Net investment income.................... (40,666) (2,288,536)
Net realized gain on securities.......... (27,111) (4,566,704)
Excess of book-basis net realized gain
(Note 1F)............................... -- (106,886)
----------- -----------
(67,777) (6,962,126)
----------- -----------
Capital transactions
Proceeds from shares sold................ 1,097,046 3,800,820
Proceeds from shares issued for
distributions reinvested................ 67,776 6,962,125
Cost of shares redeemed.................. (6,145,561) (9,663,525)
----------- -----------
Increase (decrease) in net assets from
capital transactions................... (4,980,739) 1,099,420
----------- -----------
INCREASE (DECREASE) IN NET ASSETS........ 4,414,182 (8,221,755)
----------- -----------
NET ASSETS, end of period................. $61,050,115 $56,635,933
=========== ===========
CAPITAL SHARE TRANSACTIONS
Shares sold............................... 100,399 327,001
Shares issued for distributions
reinvested............................... 6,247 700,508
Shares redeemed........................... (569,332) (857,318)
----------- -----------
Increase (decrease) in capital shares
outstanding............................ (462,686) 170,191
=========== ===========
</TABLE>
See Notes to Financial Statements
F-64
<PAGE> 157
MULTIPLE STRATEGY PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated.
(Unaudited)
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31
June 30, -------------------------------------
1995 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period................. $ 9.99 $11.80 $ 11.92 $12.08 $10.43 $10.77
------ ------ ------- ------ ------ ------
Income from investment
operations
Investment income......... .28 .52 .37 .44 .54 .58
Expenses.................. (.05) (.09) (.09) (.09) (.09) (.09)
Expense
reimbursement(1)......... .01 .02 .01 .02 .02 .03
------ ------ ------- ------ ------ ------
Net investment income...... .24 .45 .29 .37 .47 .52
Net realized and unrealized
gains or losses on
securities................ 1.5125 (.89) .6025 .493 2.27 (.325)
------ ------ ------- ------ ------ ------
Total from investment
operations................ 1.7525 (.44) .8925 .863 2.74 .195
------ ------ ------- ------ ------ ------
Less distributions from
Net investment income..... (.0075) (.45) (.2925) (.3689) (.4825) (.535)
Net realized gain on
securities............... (.005) (.90) (.63) (.6541) (.6075) --
Excess of book-basis net
realized gains on
securities............... -- (.02) (.09) -- -- --
------ ------ ------- ------ ------ ------
Total distributions........ (.0125) (1.37) (1.0125) (1.023) (1.09) (.535)
------ ------ ------- ------ ------ ------
Net asset value, end of
period.................... $11.73 $ 9.99 $ 11.80 $11.92 $12.08 $10.43
====== ====== ======= ====== ====== ======
TOTAL RETURN(2)............ 17.55% (3.66%) 7.71% 7.28% 27.05% 1.89%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)................ $ 61.1 $ 56.6 $ 64.9 $ 59.6 $ 52.2 $ 40.3
Average net assets
(millions)................ $ 58.8 $ 61.6 $ 63.9 $ 54.8 $ 44.4 $ 40.4
Ratios to average net
assets (annualized)(1)
Expenses.................. .60% .60% .60% .60% .60% .60%
Expenses, without expense
reimbursement............ .76% .72% .74% .77% .80% .80%
Net investment income..... 4.29% 3.70% 2.34% 3.05% 4.12% 4.70%
Net investment income,
without expense
reimbursement............ 4.13% 3.58% 2.20% 2.88% 3.92% 4.50%
Portfolio turnover rate.... 53% 163% 150% 126% 88% 46%
</TABLE>
(1) See Note 2.
(2) Total return for a period less than a year is not annualized.
See Notes to Financial Statements
F-65
<PAGE> 158
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
American Capital Life Investment Trust (the "Fund"), comprised of five invest-
ment portfolios: Common Stock Portfolio ("Common Stock"), Domestic Strategic
Income Portfolio ("Domestic Strategic"), Government Portfolio ("Government"),
Money Market Portfolio ("Money Market") and Multiple Strategy Portfolio ("Mul-
tiple Strategy"), is registered under the Investment Company Act of 1940, as
amended, as a diversified open-end management investment company. Each portfo-
lio is accounted for as a separate entity. The following is a summary of sig-
nificant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
A. INVESTMENT VALUATIONS-Securities listed or traded on a national securities
exchange are valued at the last sale price. Unlisted securities and listed se-
curities for which the last sale price is not available are valued at the most
recent bid price.
U.S. Agency and Government obligations and related forward commitments are
valued at the last reported bid price. Listed options are valued at the last
reported sale price on the exchange on which such option is traded, or, if no
sale is reported, at the mean between the last reported bid and asked prices.
Options and forward commitments for which market quotations are not readily
available are valued at fair value under a method approved by the Board of
Trustees.
Private placements are valued at fair value as determined in good faith by,
or under the direction of, the Board of Trustees. Private placements generally
may be resold only in a privately negotiated transaction until they are regis-
tered.
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. For Money Market, all investments are valued at amortized cost.
Domestic Strategic's investments include lower rated and unrated debt securi-
ties which may be more susceptible to adverse economic conditions than other
investment grade holdings. These securities are often subordinated to the prior
claims of other senior lenders and uncertainties exist as to an issuer's abil-
ity to meet principal and interest payments. Debt securities rated below in-
vestment grade and comparable unrated securities represented approximately 29%
of Domestic Strategic's investment portfolio at the end of the period.
B. FUTURES CONTRACTS AND FORWARD COMMITMENTS-General--Transactions in futures
contracts and forward commitments also are utilized in strategies to manage the
market risk of the Fund's investments. The purchase of a futures contract or
forward commitment increases the impact on net asset value of changes in the
market price of investments. Forward commitments have a risk of loss due to
nonperformance of counterparties. There is a risk that the market movement of
such instruments may not be in the direction forecasted. Note 3--Investment Ac-
tivity contains additional information.
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 is 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 contract 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.
Forward Commitments--The Fund trades certain securities under the terms of
forward commitments whereby the settlement for payment and delivery occurs at a
specified future date. Forward commitments are privately negotiated transac-
tions between the Fund and dealers. Upon executing a forward commitment and
during the period of obligation, the Fund maintains collateral of cash or secu-
rities in a segregated account with its custodian in an amount sufficient to
relieve the obligation. If the intent of the Fund is to accept delivery of a
security traded under a forward purchase commitment, the commitment is recorded
as a long-term purchase. For forward purchase and sale commitments, which secu-
rity settlement is not intended by the Fund, changes in the value of the com-
mitment are recognized by marking the commitment to market on a daily basis.
During the period of obligation, the Fund may either resell or repurchase the
forward commitment and enter into a new forward commitment, the effect of which
is to extend the settlement date. In addition, the Fund may occasionally close
such forward commitments prior to delivery. Gains and losses on investments are
realized upon the ultimate closing or cash settlement of forward commitments.
F-66
<PAGE> 159
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
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.
D. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be qualified as a "regulated investment company"
under the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized capital gains on investments to its shareholders. It is anticipated
that no distributions of net realized capital gains will be made until tax ba-
sis capital loss carryforwards expire or are offset by net realized capital
gains.
The following table presents the identified cost of investments at the end of
the period for federal income tax purposes with the associated net unrealized
appreciation and the net realized capital loss carryforward at December 31,
1994 with expiration dates.
<TABLE>
<CAPTION>
Common Domestic Money Multiple
Stock Strategic Government Market Strategy
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Identified cost......... $61,318,167 $27,720,136 $73,291,354 $24,445,279 $58,023,855
=========== =========== =========== =========== ===========
Gross unrealized
appreciation........... $ 8,252,829 $ 1,121,593 $ 1,745,674 -- $ 4,995,377
Gross unrealized
depreciation........... 524,085 272,967 295,998 -- 396,508
----------- ----------- ----------- ----------- -----------
Net unrealized
appreciation........... $ 7,728,744 $ 848,626 $ 1,449,676 -- $ 4,598,869
=========== =========== =========== =========== ===========
Net realized capital
loss carryforward...... -- $ 2,125,532 $14,491,367 $ 18 $ --
=========== =========== =========== =========== ===========
Expiration dates........ -- 1998-2002 1996-2002 2002 --
</TABLE>
The net capital loss carryforwards at December 31, 1994 may be utilized to
offset any future capital gains until expiration. Additionally, $130,007,
$294,459, $2,041, and $75,888 of financial statement capital losses for Domes-
tic Strategic, Government, Money Market and Multiple Strategy, respectively,
are deferred for tax purposes to the 1995 fiscal year.
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. Issuers of
Payment-in-Kind securities may make dividend or interest payments by issuing
additional stocks or bonds in lieu of cash payments.
F. DIVIDENDS AND DISTRIBUTIONS-Government and Money Market declare dividends
from net investment income on each business day. Domestic Strategic, Common
Stock and Multiple Strategy declare dividends and distributions annually.
Government declares distributions from short-term capital gains, if any,
monthly. Dividends and distributions are recorded on the record date.
The Fund distributes tax basis earnings in accordance with the minimum dis-
tribution requirements of the Internal Revenue Code, which may differ from gen-
erally 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 used for federal income tax reporting. Accordingly, original
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 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 $500 million, .45% of the next $500 million and .40% of the
amount in excess of $1 billion. The resulting fee is prorated to each portfolio
based on its average daily net assets. The Adviser has volunteered to reimburse
each
F-67
<PAGE> 160
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
portfolio for all ordinary business expenses, exclusive of taxes and interest,
in excess of .60% of the average daily net assets. For the period, such volun-
tary expense reimbursements were as follows:
<TABLE>
<S> <C>
Common Stock...................................................... $32,868
Domestic Strategic................................................ 44,980
Government........................................................ 44,221
Money Market...................................................... 43,599
Multiple Strategy................................................. 47,915
</TABLE>
Under the terms of the advisory agreement, if the total ordinary business ex-
penses, exclusive of taxes, distribution fees and interest, exceed .95% of av-
erage daily net assets, the Adviser will reimburse the portfolios for the
amount of the excess. The contractual expense reimbursement shall be made
monthly. For the period, the only portfolios to have such contractual expense
reimbursements were Domestic Strategic and Money Market for $6,068 and $3,734,
respectively.
Other transactions with affiliates during the period were as follows:
<TABLE>
<CAPTION>
Common Domestic Money Multiple
Stock Strategic Government Market Strategy
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accounting services.......... $4,637 $4,234 $4,611 $4,218 $4,542
Shareholder service agent's
fees......................... 9,000 9,000 9,000 9,000 9,000
Legal fees................... 2,514 2,981 2,627 2,708 2,880
</TABLE>
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are allo-
cated among investment companies advised by the Adviser. These charges include
the employee costs attributable to the accounting officers of the Fund. A por-
tion of the accounting services expense was paid to the Adviser in reimburse-
ment of personnel, facilities and equipment costs attributable to the provision
of accounting services. 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.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a Trustee of the Fund.
Certain officers and trustees of the Fund are officers and directors of the
Adviser and the shareholder service agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were:
<TABLE>
<CAPTION>
Common Domestic Multiple
Stock Strategic Government Strategy
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases................. $43,501,968 $22,005,818 $64,226,904 $27,552,308
Sales..................... 52,520,231 15,962,661 68,619,824 35,710,842
</TABLE>
Money Market held only short-term investments.
At the end of the period, Government held the following forward purchase com-
mitments for which delivery is not intended:
<TABLE>
<CAPTION>
Principal Unrealized
Amount Appreciation
(000) Security Market Value (Depreciation)
--------------------------------------------------------------------------
<S> <C> <C> <C>
Federal National Mortgage
Association
$4,000 8.00%, settling 07/95........ $ 4,073,760 $113,760
Government National Mortgage
Association
4,000 7.00%, settling 07/95........ 3,935,000 (27,500)
2,000 7.00%, settling 09/95........ 1,963,360 (4,140)
2,000 8.00%, settling 09/95........ 2,040,940 (9,060)
----------- --------
$12,013,060 $ 73,060
=========== ========
</TABLE>
F-68
<PAGE> 161
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
At the end of the period, Government held the following U.S. Treasury futures
contracts expiring in September 1995.
<TABLE>
<CAPTION>
Number Unrealized
of Appreciation
Contracts Description Market Value (Depreciation)
---------------------------------------------------------------------------
<S> <C> <C> <C>
6 U.S. Treasury Bonds, long...... $ 681,188 $(13,012)
18 U.S. Treasury Notes, short..... (1,981,688) 5,772
----------- ---------
$(1,300,500) $ (7,240)
=========== =========
</TABLE>
NOTE 4--TRUSTEE COMPENSATION
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $3,850 plus a fee of $100 per day for the Board and Commit-
tee meetings attended. The Chairman receives additional fees from the Fund at
an annual rate of $1,440. The Trustees may participate in a voluntary Deferred
Compensation Plan (the "Plan"). The Plan is not funded, and obligations under
the Plan will be paid solely out of the Fund's general accounts. Funds for the
payment of obligations under the Plan will not be reserved or set aside by any
form of trust or escrow. Each director covered under the Plan elects to be
credited with an earnings component on amounts deferred equal to the income
earned by the Fund on its short-term investments or equal to the total return
of the Fund.
Trustees' fees at the end of the period were:
<TABLE>
<CAPTION>
Common Domestic Money Multiple
Stock Strategic Government Market Strategy
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trustee fees.................. $4,732 $4,261 $4,689 $4,609 $3,920
</TABLE>
NOTE 5--SUBSEQUENT EVENT
Effective July 3, 1995, the Fund added three more portfolios to the Fund. The
new portfolios were Emerging Growth Portfolio, Global Equity Portfolio, and
Real Estate Portfolio.
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.
F-69
<PAGE> 162
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
--------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 92.3%
CONSUMER DISTRIBUTION 7.0%
100 Alco Standard Corp.................................... $ 8,137
100 Casey's General Stores, Inc........................... 2,013
*100 CDW Computer Centers, Inc............................. 5,481
*100 CompUSA, Inc.......................................... 3,463
100 Corporate Express, Inc................................ 2,538
100 Dollar General Corp................................... 3,375
100 Emulex Corp........................................... 2,638
*100 General Nutrition Companies, Inc...................... 3,575
*150 Just For Feet, Inc.................................... 4,500
*100 Micro Warehouse, Inc.................................. 4,875
100 Safeway, Inc.......................................... 3,825
*100 Sunglass Hut International, Inc....................... 4,050
--------
TOTAL CONSUMER DISTRIBUTION........................... 48,470
--------
CONSUMER DURABLES 1.1%
100 Echlin, Inc........................................... 3,900
*100 Photronics, Inc....................................... 3,475
--------
TOTAL CONSUMER DURABLES............................... 7,375
--------
CONSUMER NON-DURABLES 2.9%
100 Canandaigua Wine, Inc................................. 4,375
100 First Brands Corp..................................... 4,000
*100 Starbucks Corp........................................ 3,736
100 St. Johns Knits, Inc.................................. 4,786
*100 Tommy Hilfiger Corp................................... 3,163
--------
TOTAL CONSUMER NON-DURABLES........................... 20,060
--------
CONSUMER SERVICES 8.2%
*100 American Radio Systems Corp........................... 2,325
100 Applesbees International, Inc......................... 2,825
100 Boston Chicken, Inc................................... 2,700
100 Clear Channel Communications, Inc..................... 6,687
100 Corrections Corp. of America.......................... 4,113
*100 Evergreen Media Corp., Class A........................ 3,300
100 Gartner Group, Inc.................................... 3,075
100 Hospitality Franchise System, Inc..................... 4,400
100 Infinity Broadcasting Corp............................ 3,700
100 Landry's Seafood Restaurants.......................... 1,869
*100 Lone Star Steakhouse & Saloon, Inc.................... 3,913
100 Mirage Resorts, Inc................................... 3,113
100 Reynolds & Reynolds Co................................ 3,163
100 Rock Bottom Restaurants, Inc.......................... 2,575
*100 Sinclair Broadcast Group, Class A..................... 3,050
100 Wallace Computer Service.............................. 5,837
--------
TOTAL CONSUMER SERVICES............................... 56,645
--------
ENERGY 3.7%
100 Benton Oil & Gas Co................................... 1,275
100 Enron Oil & Gas Co.................................... 2,160
200 Global Marine, Inc.................................... 1,150
100 Kerr McGee Corp....................................... 5,685
*100 New Field Exploration Co.............................. 2,563
</TABLE>
See Notes to Financial Statements
F-70
<PAGE> 163
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of
Shares Description Market Value
--------------------------------------------------------------------------------
<S> <C>
100 Petroleum Geo-Services, ADR............................ $ 2,850
100 Phoenix Resource Co.................................... 3,287
200 Sonat Offshore Drilling, Inc........................... 6,700
--------
TOTAL ENERGY........................................... 25,670
--------
FINANCE 10.5%
100 American Bankers, Inc.................................. 3,325
100 AAMES Financial Corp................................... 2,100
100 Bank New York, Inc..................................... 4,013
100 BayBanks, Inc.......................................... 8,180
100 Bear Stearns Companies, Inc............................ 2,213
100 Comdisco, Inc.......................................... 3,213
100 Cullen Frost Bankers, Inc.............................. 4,325
100 First American Corp.................................... 3,900
100 Green Tree Financial Corp.............................. 5,413
100 Merchantile Bancorporation, Inc........................ 4,513
100 Midlantic Corp......................................... 4,760
100 Money Store, Inc....................................... 5,150
*100 Olympic Financial...................................... 1,875
*100 Oxford Resources Corp., Class A........................ 2,075
100 Star Banc Corp......................................... 5,050
100 TCF Financial Corp..................................... 5,075
*100 United Companies Financial Corp. ...................... 5,450
100 Webb (Del) Corp........................................ 2,025
--------
TOTAL FINANCE.......................................... 72,655
--------
HEALTH CARE 9.8%
*100 AMSCO International, Inc............................... 1,863
*100 Boston Scientific Corp. ............................... 3,650
*100 Community Health Systems, Inc.......................... 3,925
*100 Gulf South Medical Supply, Inc. ....................... 3,175
100 HBO & Co............................................... 5,525
*100 Health Management Associates, Inc, Class A............. 3,213
*100 Health Management System, Inc. ........................ 3,100
*100 Lincare Holdings, Inc.................................. 3,475
100 Medtronic, Inc......................................... 8,200
*100 Nellcor, Inc. ......................................... 5,250
100 Omnicare, Inc.......................................... 3,100
*100 Phycor, Inc............................................ 4,100
100 Physician Sales & Services, Inc. ...................... 4,325
*100 Sybron Corp............................................ 4,137
*100 Target Therapeutics, Inc............................... 5,000
*100 Thermedics, Inc........................................ 2,000
*100 Watson Pharmaceuticals, Inc............................ 3,600
--------
TOTAL HEALTH CARE...................................... 67,638
--------
PRODUCER MANUFACTURING 6.9%
200 Camco International, Inc............................... 4,575
100 Case Corp.............................................. 3,525
*100 Cognex Corp............................................ 5,025
100 Crane Co............................................... 3,700
100 Danaher Corp........................................... 3,200
*100 Glenayre Technologies.................................. 6,250
100 Harnischfeger Industries, Inc.......................... 3,750
100 Kennametal, Inc........................................ 3,688
</TABLE>
See Notes to Financial Statements
F-71
<PAGE> 164
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
--------------------------------------------------------------------------------
<S> <C> <C>
100 Measurex Corp......................................... $ 3,025
100 Precision Castparts, Co............................... 3,563
*100 Sanifill, Inc......................................... 3,288
100 United Waste Systems, Inc............................. 3,775
--------
TOTAL PRODUCER MANUFACTURING.......................... 47,364
--------
RAW MATERIALS/PROCESSING INDUSTRIES 5.8%
100 Albany International Corp............................. 2,538
100 Bowater, Inc.......................................... 4,800
100 Cabot Corp............................................ 5,638
100 Eastman Chemical Co................................... 6,400
200 Millipore Corp........................................ 6,900
100 Mineral Technologies, Inc............................. 3,588
100 Potash Corp Sask, Inc................................. 5,988
100 Rayonier, Inc......................................... 3,888
--------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES............. 39,740
--------
TECHNOLOGY 33.0%
*100 ADC Telecommunications, Inc........................... 3,875
100 Altera Corp........................................... 5,594
*100 Analog Devices, Inc................................... 3,625
*100 Andrew Corp........................................... 5,938
*100 Ascend Communications, Inc............................ 7,250
*100 Atmel Corp............................................ 6,813
100 BMC Industries, Inc................................... 3,675
*100 Cadence Design Systems, Inc........................... 3,775
*100 Cerner Corp........................................... 6,163
*100 Credence Systems Corp................................. 3,500
*100 Cycare Systems, Inc................................... 3,350
*100 Cypress Semiconductor Corp............................ 5,275
*100 DSC Communications Corp............................... 5,375
*100 FSI International, Inc................................ 2,875
*200 Informix Corp......................................... 5,925
*100 Input/Output, Inc..................................... 4,175
*100 Integrated Device Technology, Inc..................... 6,263
*100 Kemet Corp............................................ 6,475
*100 KLA Instruments Corp.................................. 8,675
*100 Kronos, Inc........................................... 4,550
100 Linear Technology Corp................................ 7,750
*100 LSI Logic Corp........................................ 4,675
*100 Macromedia, Inc....................................... 4,775
100 Micron Technology, Inc................................ 6,250
100 National Data Corp.................................... 2,550
*100 Oak Technology, Inc................................... 4,625
*100 Optical Data Systems, Inc............................. 3,125
*100 Picturetel Corp....................................... 5,900
*100 PRI Automation........................................ 4,100
*100 Sierra On-Line, Inc................................... 3,650
*100 Sierra Semiconductor Corp............................. 4,450
*100 Silicon Graphics, Inc................................. 4,200
*100 Sundstrand Corp....................................... 6,688
*200 Sunguard Data Systems, Inc............................ 5,800
*100 Tellabs, Inc.......................................... 4,450
*100 Tencor Instruments.................................... 4,400
*100 Teradyne, Inc......................................... 8,188
</TABLE>
See Notes to Financial Statements
F-72
<PAGE> 165
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
-------------------------------------------------------------------------------
<S> <C> <C>
*100 3 COM, Corp.......................................... $ 7,406
*100 U.S. Robotics Corp................................... 14,550
*100 Ultratech Stepper, Inc............................... 3,725
*100 Vicor Corp........................................... 4,750
100 Vishav Intertechnology, Inc.......................... 4,100
100 Watkins-Johnson Co................................... 5,100
--------
TOTAL TECHNOLOGY..................................... 228,353
--------
TRANSPORTATION 1.8%
100 Comair Holdings, Inc................................. 3,325
*100 Continental Airlines, Inc. Class B................... 2,725
*100 Northwest Airlines, Inc. Class B..................... 3,837
100 Southwest Airlines Co................................ 2,875
--------
TOTAL TRANSPORTATION................................. 12,762
--------
UTILITIES 1.6%
100 Cincinnati Bell, Inc................................. 2,662
*200 LCI International, Inc............................... 6,450
*100 Palmer Wireless, Inc................................. 2,075
--------
TOTAL UTILITIES...................................... 11,187
--------
TOTAL COMMON STOCK (Cost $590,834)................... 637,919
--------
<CAPTION>
Principal
Amount
---------
<S> <C>
REPURCHASE AGREEMENT 25.3%
$175,000 Lehman Government Securities, Inc., dated 7/31/95,
5.87%, due 8/1/95 (collateralized by U.S. Government
obligations in a pooled cash account) repurchase
proceeds $175,029 (Cost $175,000).................... 175,000
--------
TOTAL INVESTMENTS (Cost $765,834) 117.6%........................ 812,919
OTHER ASSETS AND LIABILITIES, NET (17.6%)....................... (121,548)
--------
NET ASSETS 100%................................................. $691,371
========
</TABLE>
*Non-income producing security.
See Notes to Financial Statements
F-73
<PAGE> 166
EMERGING GROWTH PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $765,834)........................ $812,919
Cash................................................................ 836
Receivable for Fund shares sold..................................... 9,642
Dividends receivable................................................ 196
Other assets........................................................ 610
--------
Total Assets...................................................... 824,203
--------
LIABILITIES
Payable for investments purchased................................... 131,110
Accrued expenses.................................................... 1,722
--------
Total Liabilities................................................. 132,832
--------
NET ASSETS, equivalent to $10.86 per share.......................... $691,371
========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 63,687 shares outstanding....................... $ 637
Capital surplus..................................................... 643,824
Net unrealized appreciation of securities........................... 47,085
Accumulated net investment loss..................................... (175)
--------
NET ASSETS.......................................................... $691,371
========
</TABLE>
See Notes to Financial Statements
F-74
<PAGE> 167
EMERGING GROWTH PORTFOLIO FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
July 3, 1995* through
July 31, 1995
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest................................................ $ 822
Dividends............................................... 115
-------
Investment income..................................... 937
-------
EXPENSES
Management fees......................................... 312
Custodian fees.......................................... 1,500
Registration and filing fees............................ 222
Expense reimbursement................................... (922)
-------
Total expenses........................................ 1,112
-------
NET INVESTMENT LOSS................................... (175)
=======
NET UNREALIZED GAIN ON SECURITIES
Net unrealized appreciation of securities during the
period.................................................. 47,085
-------
NET UNREALIZED GAIN ON SECURITIES..................... 47,085
-------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $46,910
=======
<CAPTION>
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
July 3, 1995* through
July 31, 1995
--------------------------------------------------------------------------------
<S> <C>
NET ASSETS, beginning of period......................... $ 100
--------
Operations
Net investment loss.................................... (175)
Net unrealized appreciation of securities during the
period................................................. 47,085
--------
Increase in net assets resulting from operation....... 46,910
--------
Capital transactions
Proceeds from shares sold.............................. 644,361
--------
INCREASE IN NET ASSETS................................. 691,271
--------
NET ASSETS, end of period............................... $691,371
========
CAPITAL SHARE TRANSACTIONS
Shares sold............................................. 63,687
========
</TABLE>
*Commencement of operations
See Notes to Financial Statements
F-75
<PAGE> 168
EMERGING GROWTH PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated.
(Unaudited)
--------------------------------------------------------------------------------
July 3, 1995(1)
through
July 31, 1995(2)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period....................... $10.00
------
Income from investment operations
Investment income......................................... .02
Expenses.................................................. (.04)
Expense reimbursement(3).................................. .02
------
Net investment income...................................... .00
Net realized and unrealized gains on securities............ .86
------
Total from investment operations........................... .86
------
Net asset value, end of period............................. $10.86
======
TOTAL RETURN(4)............................................ 8.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....................... $0.7
Average net assets (millions).............................. $0.5
Ratios to average net assets (annualized)(3)
Expenses.................................................. 2.50%
Expenses, without expense reimbursement................... 4.57%
Net investment loss....................................... (0.39%)
Net investment loss, without expense reimbursement........ (2.46%)
Portfolio turnover rate.................................... 0%
</TABLE>
(1) Commencement of operations.
(2) Base on average shares outstanding.
(3) See Note 2.
(4) Total return for a period of less than one year is not annualized.
See Notes to Financial Statements
F-76
<PAGE> 169
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
--------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 87.2%
FINLAND 2.5%
750 Kymmene Corp.......................................... $ 24,985
390 Nokia................................................. 25,985
--------
TOTAL FINLAND......................................... 50,970
--------
FRANCE 6.1%
50 Carrefour............................................. 28,634
280 Christian Dior........................................ 25,449
*500 SGS Thomson Micro..................................... 24,000
200 Societe Generale...................................... 23,959
200 Union Assur Federal................................... 22,373
--------
TOTAL FRANCE.......................................... 124,415
--------
GERMANY 5.7%
110 Basf.................................................. 25,415
35 Ckag Colonia Konzern.................................. 22,091
500 Deutsche Bank......................................... 24,659
70 Mannesmann............................................ 23,318
500 Veba.................................................. 20,746
--------
TOTAL GERMANY......................................... 116,229
--------
HONG KONG 4.0%
20,000 First Pacific Co...................................... 21,323
6,000 Hutchison Whampoa..................................... 30,241
4,000 Swire Pacific......................................... 31,274
--------
TOTAL HONG KONG....................................... 82,838
--------
JAPAN 10.4%
2,000 Fujitsu............................................... 21,189
2,000 Hitachi............................................... 21,210
1,000 Honda Motor Co........................................ 16,315
1,000 Mitsubishi Estate..................................... 12,123
1,000 Mitsubishi Trucking & Biking.......................... 18,015
1,000 Nishimatsu Construction............................... 12,916
1,000 Nomura Securities..................................... 19,261
1,000 Tokio Marine & Fire Insurance Co...................... 11,897
1,000 Tokyo Electron........................................ 37,503
3,000 Toshiba Corp.......................................... 20,904
1,000 Yamanouchi Pharmacy................................... 22,207
--------
TOTAL JAPAN........................................... 213,540
--------
MALAYSIA 1.3%
5,000 Resorts World......................................... 27,268
--------
NETHERLANDS 2.5%
440 International Nederlanden Group....................... 25,434
50 Philips Electronic.................................... 2,456
200 Ver Ned Uitgevers..................................... 23,959
--------
TOTAL NETHERLANDS..................................... 51,849
--------
NORWAY 1.1%
*5,500 Uni Storebrand........................................ 23,395
--------
</TABLE>
See Notes to Financial Statements
F-77
<PAGE> 170
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
--------------------------------------------------------------------------------
<S> <C> <C>
SWEDEN 4.8%
800 Astra................................................. $ 26,551
1,200 Ericsson (LM) Telephone............................... 22,673
1,600 Stadshypotek.......................................... 25,815
1,600 Stora Kopparbergs..................................... 24,569
--------
TOTAL SWEDEN.......................................... 99,608
--------
SWITZERLAND 3.6%
38 Alusuisse Lonza....................................... 25,333
33 Ciba Geigy............................................ 24,438
70 Schw Bankverein....................................... 24,946
--------
TOTAL SWITZERLAND..................................... 74,717
--------
UNITED KINGDOM 13.0%
1,500 BOC Group............................................. 20,384
3,000 British Telecom....................................... 19,113
1,200 Carlton Communications................................ 19,846
5,000 Farnell Electronic.................................... 51,199
2,000 General Accident...................................... 19,424
2,800 Marks & Spencer....................................... 19,719
2,000 National Westminster.................................. 18,977
2,000 Reuters Holdings...................................... 16,786
2,000 Severn Trent.......................................... 19,089
2,200 Smithkline Beecham.................................... 20,136
4,500 Storehouse............................................ 22,014
4,000 Tesco................................................. 20,016
--------
TOTAL UNITED KINGDOM.................................. 266,703
--------
UNITED STATES 32.2%
100 Abbott Laboratories, Inc.............................. 4,000
100 Adaptec, Inc.......................................... 4,275
*200 ALC Communications Corp............................... 10,575
150 American International Group, Inc..................... 11,250
*100 American Radio System Corp., Class A.................. 2,325
*100 Amgen, Inc............................................ 8,513
100 Applied Materials, Inc................................ 10,350
100 BankAmerica Corp...................................... 5,400
100 Bank New York, Inc.................................... 4,013
100 Baybanks, Inc......................................... 8,181
200 Bear Stearns Companies, Inc........................... 4,425
*100 BMC Software, Inc..................................... 7,750
200 Bowater, Inc.......................................... 9,600
200 Browning-Ferris Industries, Inc....................... 7,725
*100 Cellular Communications, Inc.......................... 5,200
100 Champion International Corp........................... 5,638
*100 Cisco Systems, Inc.................................... 5,575
*100 Citicasters, Inc...................................... 3,325
200 Citicorp.............................................. 12,475
*200 Community Health System, Inc.......................... 7,850
*300 Compaq Computer Corp.................................. 15,225
100 Continental Homes Holding Corp........................ 1,825
*300 Cox Communications, Inc., Class A..................... 6,075
100 CPC International, Inc................................ 6,175
200 Cypress Semiconductor Corp............................ 10,550
</TABLE>
See Notes to Financial Statements
F-78
<PAGE> 171
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
--------------------------------------------------------------------------------
<S> <C> <C>
100 Disney (Walt) Co....................................... $ 5,863
100 Dollar General Corp.................................... 3,375
*200 Eckerd (Jack) Corp..................................... 6,625
*100 Emmis Broadcasting Corp., Class A...................... 2,825
*100 Evergreen Media........................................ 3,300
100 Exxon Corp............................................. 7,250
100 Family Dollar Stores, Inc.............................. 1,825
100 Federal Home Loan Mortgage Corp........................ 6,550
100 Federated Dept Stores, Inc............................. 2,838
100 First Chicago Corp..................................... 6,075
100 Franklin Residental, Inc............................... 4,988
*200 FTP Software, Inc...................................... 5,800
100 Gasonics International Corp............................ 3,400
100 General Nutrition Companies, Inc....................... 3,575
100 Grace (W.R.) & Co...................................... 6,188
100 Green Tree Financial Corp.............................. 5,412
100 Greenfield Industries, Inc............................. 2,925
200 Illinois Central Corp.................................. 7,900
100 Illinois Tool Works, Inc............................... 5,900
*100 Integrated Device Technology........................... 6,262
100 Intel Corp............................................. 6,500
100 International Business Machines Corp................... 10,888
200 International Rectifier Corp........................... 8,000
200 James River Corp....................................... 6,675
5,000 Jardine Matheson....................................... 37,500
100 Johnson & Johnson...................................... 7,175
*300 Lincare Holdings, Inc.................................. 10,425
*200 LSI Logic Corp......................................... 9,350
100 McDonald's Corp........................................ 3,862
100 Medtronic, Inc......................................... 8,200
*200 Megatest Corp.......................................... 4,000
300 Merck & Co., Inc....................................... 15,487
100 Micron Technology, Inc................................. 6,250
*100 Microsoft Corp......................................... 9,050
200 News Corp.............................................. 4,725
*100 Nine West Group, Inc................................... 4,050
100 Nokia Corp............................................. 6,575
200 Office Max, Inc. ...................................... 4,500
100 Omnicom Group, Inc..................................... 6,037
100 Panhandle Eastern Corp................................. 2,438
100 Parker Hannifin Corp................................... 4,075
200 PepsiCo, Inc........................................... 9,375
200 Philip Morris Companies, Inc........................... 14,325
300 Philips Electronics.................................... 14,775
200 Praxair, Inc........................................... 5,600
100 Procter & Gamble Co.................................... 6,888
200 Reliastar Financial Corp............................... 7,625
*200 Safeway, Inc........................................... 7,650
100 Schlumberger, Ltd...................................... 6,700
100 Sears Roebuck & Co..................................... 3,263
300 Service Corp. International............................ 10,237
100 Sigma-Aldrich Corp..................................... 5,025
300 Smithkline Beecham, PLC................................ 13,500
</TABLE>
See Notes to Financial Statements
F-79
<PAGE> 172
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
-------------------------------------------------------------------------------
<S> <C> <C>
100 Station Casinos, Inc................................. $ 1,863
*200 Symantec Corp........................................ 5,450
100 Talbots, Inc......................................... 4,125
*100 Tellabs, Inc......................................... 4,450
100 Teradyne Technologies, Inc........................... 8,187
100 Texas Instruments, Inc............................... 15,625
*100 3COM Corp............................................ 7,406
100 Toll Brothers, Inc................................... 1,637
*200 Trump Hotels & Casino Resorts........................ 2,975
200 United Waste Systems, Inc............................ 7,550
100 Varity Corp.......................................... 4,687
*100 Viacom, Inc.......................................... 5,075
*400 VLSI Technology, Inc................................. 11,850
300 Wal-Mart Stores, Inc................................. 7,987
200 Watson Pharmaceuticals, Inc.......................... 7,200
*300 Worldcom, Inc........................................ 8,962
-----------
TOTAL UNITED STATES.................................. 662,925
-----------
TOTAL COMMON STOCK (Cost $1,758,982)................. 1,794,457
-----------
<CAPTION>
Principal
Amount
--------
<S> <C>
CORPORATE OBLIGATIONS 1.5%
$ 16,000 United Micro Electric, 1.25%, 6/8/04 (Cost, $29,520). 30,360
-----------
REPURCHASE AGREEMENT 11.9%
245,000 Shearson Lehman, dated 7/31/95, 5.87%, due 8/1/95
(collateralized by U.S. Government obligations in a
pooled cash account) repurchase proceeds $245,040
(Cost $245,000)...................................... 245,000
-----------
TOTAL INVESTMENTS (Cost $2,033,502) 100.6%...................... 2,069,817
OTHER ASSETS AND LIABILITIES, NET (0.6%)........................ (12,060)
-----------
NET ASSETS 100%................................................. $2,057,757
===========
</TABLE>
* Non-income producing security.
See Notes to Financial Statements
F-80
<PAGE> 173
GLOBAL EQUITY PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $2,033,502).................... $2,069,817
Cash.............................................................. 3,883
Foreign currency, at market value (Cost $24,046).................. 24,080
Receivable for investments sold................................... 26,999
Dividends and interest receivable................................. 504
Other assets...................................................... 31
----------
Total Assets.................................................... 2,125,314
----------
LIABILITIES
Payable for investments purchased................................. 58,689
Due to Adviser.................................................... 1,610
Accrued expenses.................................................. 7,258
----------
Total Liabilities............................................... 67,557
----------
NET ASSETS, equivalent to $10.21 per share........................ $2,057,757
==========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 201,597 shares outstanding.................... $ 2,016
Capital surplus................................................... 2,014,272
Undistributed net realized gain on securities..................... 7,596
Net unrealized appreciation (depreciation) of securities
Investments...................................................... 36,315
Foreign currency................................................. 34
Other foreign denominated assets and liabilities................. (157)
Accumulated net investment loss................................... (2,319)
----------
NET ASSETS........................................................ $2,057,757
==========
</TABLE>
See Notes to Financial Statements
F-81
<PAGE> 174
GLOBAL EQUITY PORTFOLIO FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
July 3, 1995* through
July 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends (Net of $33 of foreign taxes withheld at
source)................................................ $ 561
Interest............................................... 4,438
-------
Investment income.................................... 4,999
-------
EXPENSES
Management fees........................................ 1,610
Custodian fees......................................... 5,013
Miscellaneous.......................................... 695
-------
Total expenses....................................... 7,318
-------
NET INVESTMENT LOSS.................................. (2,319)
=======
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities........................ 7,596
Net unrealized appreciation (depreciation) of
securities during the period
Investments........................................... 36,315
Foreign currency...................................... 34
Other foreign denominated assets and liabilities...... (157)
-------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES....... 43,788
-------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... $41,469
=======
<CAPTION>
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
July 3, 1995* through
July 31, 1995
<S> <C>
NET ASSETS, beginning of period......................... $ 100
----------
Operations
Net investment loss.................................... (2,319)
Net realized gain on securities........................ 7,596
Net unrealized appreciation of securities during the
period................................................. 36,192
----------
Increase in net assets resulting from operation....... 41,469
----------
Capital transactions
Proceeds from shares sold.............................. 2,016,188
----------
INCREASE IN NET ASSETS................................. 2,057,657
----------
NET ASSETS, end of period............................... $2,057,757
==========
CAPITAL SHARE TRANSACTIONS
Shares sold............................................. 201,597
==========
</TABLE>
*Commencement of operations
See Notes to Financial Statements
F-82
<PAGE> 175
GLOBAL EQUITY PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated (Unaudited).
--------------------------------------------------------------------------------
July 3, 1995(1)
through
July 31, 1995(2)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........................ $10.00
------
Income from investment operations
Investment income.......................................... .03
Expenses................................................... (.04)
------
Net investment loss......................................... (.01)
Net realized and unrealized gains on securities............. .22
------
Total from investment operations............................ .21
------
Net asset value, end of period.............................. $10.21
======
TOTAL RETURN(3)........................................... 2.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)........................ $2.1
Average net assets (millions)............................... $1.9
Ratios to average net assets (annualized)
Expenses................................................... 4.55%
Net investment loss........................................ (1.44%)
Portfolio turnover rate..................................... 11%
</TABLE>
(1) Commencement of operations.
(2) Based on average shares outstanding.
(3) Total return for a period less than one year is not annualized.
See Notes to Financial Statements
F-83
<PAGE> 176
REAL ESTATE PORTFOLIO PORTFOLIO OF INVESTMENTS
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
--------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 97.3%
APARTMENTS 23.3%
1,600 Avalon Properties, Inc.............................. $ 32,000
1,600 Bay Apartment Communities, Inc...................... 31,800
1,300 Equity Residential Properties Trust................. 38,350
1,500 Merry Land & Investment, Inc........................ 32,250
1,200 Mid America Apartment Communities, Inc.............. 30,000
1,600 Paragon Group, Inc.................................. 30,200
1,200 Post Properties, Inc................................ 36,450
1,800 Security Capital Pacific Trust...................... 32,625
2,400 United Dominion Realty Trust, Inc................... 34,200
--------------
TOTAL APARTMENTS.................................... 297,875
--------------
DIVERSIFIED 7.9%
1,400 Colonial Properties Trust........................... 33,950
2,500 CWM Mortgage Holdings, Inc.......................... 31,875
1,300 Felcor Suite Hotels, Inc............................ 34,938
--------------
TOTAL DIVERSIFIED................................... 100,763
--------------
HEALTH CARE FACILITIES 8.5%
1,100 Health Care Property Investors, Inc................. 35,613
2,400 LTC Properties, Inc................................. 33,600
1,000 Nationwide Health Properties, Inc................... 39,625
--------------
TOTAL HEALTH CARE FACILITIES........................ 108,838
--------------
MANUFACTURED HOME PARKS 4.6%
1,400 Chateau Properties, Inc............................. 29,925
1,400 ROC Communities, Inc................................ 29,400
--------------
TOTAL MANUFACTURED HOME PARKS....................... 59,325
--------------
OFFICE/INDUSTRIAL 16.0%
1,400 Beacon Properties Corp.............................. 29,575
1,800 Cali Realty Corp.................................... 34,875
1,500 Carr Realty Corp.................................... 27,750
500 Highwoods Properties, Inc........................... 12,625
1,500 Liberty Property Trust.............................. 30,000
1,400 Reckson Associates Realty Co........................ 35,875
1,500 Spieker Properties, Inc............................. 33,938
--------------
TOTAL OFFICE/INDUSTRIAL............................. 204,638
--------------
SELF-STORAGE 5.9%
2,400 Storage Equities, Inc............................... 41,100
1,200 Storage USA, Inc.................................... 34,500
--------------
TOTAL SELF-STORAGE.................................. 75,600
--------------
SHOPPING CENTERS 18.2%
2,400 Bradley Real Estate, Inc............................ 38,700
1,300 Developers Diversified Realty, Inc.................. 39,488
1,500 Federal Realty Investment Trust..................... 32,625
1,600 Glimcher Realty Trust............................... 34,200
1,100 Kimco Realty Corp................................... 43,863
1,200 Vornado Realty Trust................................ 44,250
--------------
TOTAL SHOPPING CENTERS.............................. 233,126
--------------
</TABLE>
See Notes to Financial Statements
F-84
<PAGE> 177
REAL ESTATE PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
-------------------------------------------------------------------------------
<S> <C> <C>
SHOPPING MALLS 12.9%
1,600 CBL & Associates, Properties, Inc................. $ 33,000
2,500 Debartolo Realty Corp............................. 35,935
1,500 Macerich Co....................................... 30,750
1,500 Rouse Co.......................................... 31,500
1,400 Simon Property Group, Inc......................... 34,300
--------------
TOTAL SHOPPING MALLS.............................. 165,485
--------------
TOTAL COMMON STOCK (Cost $1,228,652).............. 1,245,650
--------------
<CAPTION>
Principal
Amount
---------
<S> <C> <C>
REPURCHASE AGREEMENT 34.7%
$445,000 SBC Capital Markets, Inc., dated 7/31/95, 5.875%,
due 8/1/95 (Collateralized by
U.S. Government obligations in a pooled cash
account) repurchase proceeds $445,073
(Cost $445,000)................................... 445,000
--------------
TOTAL INVESTMENTS (Cost $1,673,652) 132.0%................... 1,690,650
OTHER ASSETS AND LIABILITIES, NET (32.0%).................... (409,749)
--------------
NET ASSETS 100%.............................................. $ 1,280,901
==============
</TABLE>
See Notes to Financial Statements
F-85
<PAGE> 178
REAL ESTATE PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
July 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $1,673,652).................... $1,690,650
Cash.............................................................. 2,909
Receivable for investments sold................................... 19,429
Dividends and interest receivable................................. 2,274
Other assets...................................................... 402
----------
Total Assets.................................................... 1,715,664
----------
LIABILITIES
Payable for investments purchased................................. 407,505
Payable for Fund shares redeemed.................................. 25,314
Accrued expenses.................................................. 1,944
----------
Total Liabilities............................................... 434,763
----------
NET ASSETS, equivalent to $10.20 per share........................ $1,280,901
==========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 125,628 shares outstanding.................... $ 1,256
Capital surplus................................................... 1,262,821
Accumulated net realized loss on securities....................... (1,902)
Net unrealized appreciation of securities......................... 16,998
Undistributed net investment income............................... 1,728
----------
NET ASSETS........................................................ $1,280,901
==========
</TABLE>
See Notes to Financial Statements
F-86
<PAGE> 179
REAL ESTATE PORTFOLIO FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
July 3, 1995* through
July 31, 1995
--------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends............................................... $ 1,995
Interest................................................ 1,277
-------
Investment income..................................... 3,272
-------
EXPENSES
Management fees......................................... 618
Custodian fees.......................................... 1,500
Registration and filing fees............................ 444
Expense reimbursement................................... (1,018)
-------
Total expenses........................................ 1,544
-------
NET INVESTMENT INCOME................................. 1,728
=======
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities......................... (1,902)
Net unrealized appreciation of securities during the
period.................................................. 16,998
-------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES........ 15,096
-------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $16,824
=======
<CAPTION>
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
July 3, 1995* through
July 31, 1995
--------------------------------------------------------------------------------
<S> <C>
NET ASSETS, beginning of period......................... $ 100
----------
Operations
Net investment income.................................. 1,728
Net realized loss on securities........................ (1,902)
Net unrealized appreciation of securities during the
period................................................. 16,998
----------
Increase in net assets resulting from operation....... 16,824
----------
Capital transactions
Proceeds from shares sold.............................. 1,364,871
Cost of shares redeemed................................ (100,894)
----------
Increase in net assets from capital transactions...... 1,263,977
----------
INCREASE IN NET ASSETS................................. 1,280,801
----------
NET ASSETS, end of period............................... $1,280,901
==========
CAPITAL SHARE TRANSACTIONS
Shares sold............................................. 135,598
Shares redeemed......................................... (9,970)
----------
Increase in capital shares outstanding................ 125,628
==========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements
F-87
<PAGE> 180
REAL ESTATE PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated (Unaudited).
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 3, 1995(1)
through
July 31,1995(2)
--------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........................ $10.00
------
Income from investment operations
Investment income.......................................... .04
Expenses................................................... (.03)
Expense reimbursement (3).................................. .01
------
Net investment income....................................... .02
Net realized and unrealized gains or losses on securities... .18
------
Total from investment operations............................ .20
------
Net asset value, end of period.............................. $10.20
======
TOTAL RETURN(4)............................................. 2.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)........................ $1.3
Average net assets (millions)............................... $0.7
Ratios to average net assets (annualized) (3)
Expenses................................................... 2.50%
Expenses, without expense reimbursement.................... 4.15%
Net investment income...................................... 2.80%
Net investment income, without expense reimbursement....... 1.15%
Portfolio turnover rate..................................... 7%
</TABLE>
(1) Commencement of operations.
(2) Based on average shares outstanding.
(3) See Note 2.
(4) Total return for a period less than one year is not annualized.
F-88
<PAGE> 181
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
American Capital Life Investment Trust (the "Fund"), comprised of eight invest-
ment portfolios: Common Stock Portfolio ("Common Stock"), Domestic Strategic
Income Portfolio ("Domestic Strategic"), Emerging Growth Portfolio ("Emerging
Growth"), Global Equity Portfolio ("Global Equity"), Government Portfolio
("Government"), Money Market Portfolio ("Money Market"), Multiple Strategy
Portfolio ("Multiple Strategy"), and Real Estate Securities Portfolio ("Real
Estate"), is registered under the Investment Company Act of 1940, as amended,
as a diversified open-end management investment company. Emerging Growth,
Global Equity, and Real Estate began offering shares on July 3, 1995. Each
portfolio is accounted for as a separate entity. The following is a summary of
significant accounting policies consistently followed by the Fund in the prepa-
ration of its financial statements.
A. INVESTMENT VALUATIONS-Securities listed or traded on a national securities
exchange are valued at the last sale price. Unlisted securities and listed se-
curities for which the last sale price is not available are valued at the most
recent bid price.
U.S. Agency and Government obligations and related forward commitments are
valued at the last reported bid price. Listed options are valued at the last
reported sale price on the exchange on which such option is traded, or, if no
sale is reported, at the mean between the last reported bid and asked prices.
Options and forward commitments for which market quotations are not readily
available are valued at fair value under a method approved by the Board of
Trustees.
Private placements are valued at fair value as determined in good faith by,
or under the direction of, the Board of Trustees. Private placements generally
may be resold only in a privately negotiated transaction until they are regis-
tered.
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. For Money Market, all investments are valued at amortized cost.
Domestic Strategic's investments include lower rated and unrated debt securi-
ties which may be more susceptible to adverse economic conditions than other
investment grade holdings. These securities are often subordinated to the prior
claims of other senior lenders and uncertainties exist as to an issuer's abil-
ity to meet principal and interest payments. Debt securities rated below in-
vestment grade and comparable unrated securities represented approximately 29%
of Domestic Strategic's investment portfolio at the end of the period.
B. FOREIGN CURRENCY TRANSLATION--The market values of foreign securities, for-
ward currency exchange contracts and other assets and liabilities stated in
foreign currency are translated into U.S. dollars based on quoted exchange
rates as of noon Eastern Time. The cost of securities is determined using his-
torical exchange rates. Income and expenses are translated at prevailing ex-
change rates when accrued or incurred. Gains and losses on the sale of
securities are not segregated for financial reporting purposes between amounts
arising from changes in exchange rates and amounts arising from changes in the
market prices of securities. Realized gain and loss on foreign currency in-
cludes the net realized amount from the sale of currency and the amount real-
ized between trade date and settlement date on security transactions.
C. FUTURES CONTRACTS AND FORWARD COMMITMENTS-General--Transactions in futures
contracts and forward commitments also are utilized in strategies to manage the
market risk of the Fund's investments. The purchase of a futures contract or
forward commitment increases the impact on net asset value of changes in the
market price of investments. Forward commitments have a risk of loss due to
nonperformance of counterparties. There is a risk that the market movement of
such instruments may not be in the direction forecasted. Note 3--Investment Ac-
tivity contains additional information.
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 is 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 contract 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.
Forward Commitments--The Fund trades certain securities under the terms of
forward commitments whereby the settlement for payment and delivery occurs at a
specified future date. Forward commitments are privately negotiated transac-
tions between the Fund and dealers. Upon executing a forward commitment and
during the period of obligation, the Fund maintains collateral of cash or secu-
rities in a
F-89
<PAGE> 182
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
segregated account with its custodian in an amount sufficient to relieve the
obligation. If the intent of the Fund is to accept delivery of a security
traded under a forward purchase commitment, the commitment is recorded as a
long-term purchase. For forward purchase and sale commitments, which security
settlement is not intended by the Fund, changes in the value of the commitment
are recognized by marking the commitment to market on a daily basis. During the
period of obligation, the Fund may either resell or repurchase the forward com-
mitment and enter into a new forward commitment, the effect of which is to ex-
tend the settlement date. In addition, the Fund may occasionally close such
forward commitments prior to delivery. Gains and losses on investments are re-
alized upon the ultimate closing or cash settlement of forward commitments.
D. 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.
E. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be qualified as a "regulated investment company"
under the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized capital gains on investments to its shareholders. It is anticipated
that no distributions of net realized capital gains will be made until tax ba-
sis capital loss carryforwards expire or are offset by net realized capital
gains.
The following table presents the identified cost of investments at the end of
the period for federal income tax purposes with the associated net unrealized
appreciation and the net realized capital loss carryforward at December 31,
1994 with expiration dates.
<TABLE>
<CAPTION>
June 30, 1995 July 31, 1995
----------------------------------------------------------- ------------------------------
Common Domestic Money Multiple Emerging Global Real
Stock Strategic Government Market Strategy Growth Equity Estate
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Identified cost......... $61,318,167 $27,720,136 $73,291,354 $24,445,279 $58,023,855 $765,834 $2,057,548 $1,673,652
=========== =========== =========== =========== =========== ======== ========== ==========
Gross unrealized
appreciation............ $ 8,252,829 $ 1,121,593 $ 1,745,674 -- $ 4,995,377 52,384 59,924 19,972
Gross unrealized
depreciation............ 524,085 272,967 295,998 -- 396,508 5,299 23,574 2,974
----------- ----------- ----------- ----------- ----------- -------- ---------- ----------
Net unrealized
appreciation............ $ 7,728,744 $ 848,626 $ 1,449,676 -- $ 4,598,869 $ 47,085 $ 36,350 $ 16,998
=========== =========== =========== =========== =========== ======== ========== ==========
Net realized capital
loss carryforward...... -- $ 2,125,532 $14,491,367 $ 18 $ -- $ -- $ -- $ --
=========== =========== =========== =========== =========== ======== ========== ==========
Expiration dates........ -- 1998-2002 1996-2002 2002 -- -- -- --
</TABLE>
The net capital loss carryforwards at December 31, 1994 may be utilized to
offset any future capital gains until expiration. Additionally, $130,007,
$294,459, $2,041, and $75,888 of financial statement capital losses for Domes-
tic Strategic, Government, Money Market and Multiple Strategy, respectively,
are deferred for tax purposes to the 1995 fiscal year.
F. 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. Issuers of
Payment-in-Kind securities may make dividend or interest payments by issuing
additional stocks or bonds in lieu of cash payments.
Under the applicable foreign tax laws, a withholding tax may be imposed on
interest, dividends and realized gains generated from foreign investments. Such
withholding taxes are reflected on the Statement of Operations as a reduction
of the related income or gain.
G. DIVIDENDS AND DISTRIBUTIONS-Government and Money Market declare dividends
from net investment income on each business day. Domestic Strategic, Common
Stock and Multiple Strategy declare dividends and distributions annually.
Government declares distributions from short-term capital gains, if any,
monthly. Dividends and distributions are recorded on the record date.
The Fund distributes tax basis earnings in accordance with the minimum dis-
tribution requirements of the Internal Revenue Code, which may differ from gen-
erally accepted accounting principles. Such dividends or distributions may
exceed financial statement earnings.
F-90
<PAGE> 183
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
H. DEBT DISCOUNT AND PREMIUM-The Fund accounts for discounts and premiums on
the same basis as used for federal income tax reporting. Accordingly, original
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 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 portfolios at an annual
rate.
Common Stock, Domestic Strategic, Government, Money Market, and Multiple
Strategy rates are .50% of the first $500 million, .45% of the next $500 mil-
lion and .40% of the amount in excess of $1 billion. The resulting fee is pro-
rated to each portfolio based on its average daily net assets. The Adviser has
volunteered to reimburse these portfolios for all ordinary business expenses,
exclusive of taxes and interest, in excess of .60% of the average daily net as-
sets. For the period, such voluntary expense reimbursements are shown in the
following table. Under the terms of the advisory agreement, if the total ordi-
nary business expenses, exclusive of taxes, distribution fees and interest, ex-
ceed .95% of average daily net assets, the Adviser will reimburse these
portfolios for the amount of the excess. The contractual expense reimbursement
shall be made monthly. For the period, the portfolios to have such contractual
expense reimbursements due to the .95% limit were Domestic Strategic and Money
Market as shown in the following table.
Emerging Growth's management fees is .70% of its average daily net assets.
Global Equity's management fees is 1.00% of its average daily net assets. The
Adviser has entered into a subadvisory agreement with John Govett & Co., Lim-
ited ("Govett"), who provides advisory services to Global Equity and the Ad-
viser with respect to the portfolio's investments in international markets and
currencies. The Adviser pays 50% of its management fee to Govett.
Real Estate's management fee is 1.00% of its average daily net assets. The
Adviser has entered into a subadvisory agreement with Hines Interests Realty
Advisors Limited Partnership ("Hines"), who provides advisory services to Real
Estate and the Adviser with respect to the portfolio's investments in real es-
tate. The Adviser pays 50% of its management fee to Hines.
The Adviser has agreed that it will reimburse Emerging Growth and Real Estate
for any expenses (including the advisory fee, but excluding interest, brokerage
commissions, and other extraordinary expenses) in excess of the most restric-
tive limitation imposed by state securities commissions. The most restrictive
expense limitation is presently believed to be 2.50% of the Fund's average
daily net assets up to $30 million, 2.00% of the next $70 million of such net
assets and 1.50% of the Fund's net assets in excess of $100 million. For the
period, the Adviser's reimbursement to Emerging Growth and Real Estate due to
such expense limitation are shown in the following table. The Adviser, Govett,
and Hines may, from time to time, agree to waive their respective investment
advisory fees or any portion thereof or elect to reimburse Emerging Growth,
Global Equity and Real Estate for ordinary business expenses in excess of an
agreed upon amount.
Contractual and voluntary expense reimbursements and other transactions with
affiliates during the period were as follows:
<TABLE>
<CAPTION>
June 30, 1995 July 31, 1995
--------------------------------------------- ----------------------
Common Domestic Money Multiple Emerging Global Real
Stock Strategic Government Market Strategy Growth Equity Estate
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contractual expense
reimbursement........... $ -- $ 6,068 $ -- $ 3,734 $ -- $922 $ -- $1,018
Voluntary expense
reimbursement........... 32,868 44,980 44,221 43,599 47,915 -- -- --
Accounting services..... 4,637 4,234 4,611 4,218 4,542 -- -- --
Shareholder service
agent's fees............ 9,000 9,000 9,000 9,000 9,000 -- -- --
Legal fees.............. 2,514 2,981 2,627 2,708 2,880 -- -- --
</TABLE>
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are allo-
cated among investment companies advised by the Adviser. These charges include
the employee costs attributable to the accounting officers of the Fund. A por-
tion of the accounting services expense was paid to the Adviser in reimburse-
ment of personnel, facilities and equipment costs attributable to the provision
of accounting services. The services provided by the Adviser are at cost.
F-91
<PAGE> 184
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
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.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a Trustee of the Fund.
Certain officers and trustees of the Fund are officers and directors of the
Adviser and the shareholder service agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were:
<TABLE>
<CAPTION>
June 30, 1995 July 31, 1995
----------------------------------------------- ------------------------------
Common Domestic Multiple Emerging Global Real
Stock Strategic Government Strategy Growth Equity Estate
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchases............... $43,501,968 $22,005,818 $64,226,904 $27,552,308 $590,834 $1,886,769 $1,275,704
Sales................... 52,520,231 15,962,661 68,619,824 35,710,842 -- 104,591 45,150
</TABLE>
Money Market held only short-term investments.
At the end of the period, Government held the following forward purchase com-
mitments for which delivery is not intended:
<TABLE>
<CAPTION>
Principal Unrealized
Amount Appreciation
(000) Security Market Value (Depreciation)
--------------------------------------------------------------------------
<S> <C> <C> <C>
Federal National Mortgage Association
$4,000 8.00%, settling 07/95........ $ 4,073,760 $113,760
Government National Mortgage Association
4,000 7.00%, settling 07/95........ 3,935,000 (27,500)
2,000 7.00%, settling 09/95........ 1,963,360 (4,140)
2,000 8.00%, settling 09/95........ 2,040,940 (9,060)
----------- --------
$12,013,060 $ 73,060
----------- --------
</TABLE>
At the end of the period, Government held the following U.S. Treasury futures
contracts expiring in September 1995.
<TABLE>
<CAPTION>
Number Unrealized
of Appreciation
Contracts Description Market Value (Depreciation)
---------------------------------------------------------------------------
<S> <C> <C> <C>
6 U.S. Treasury Bonds, long...... $ 681,188 $ (13,012)
18 U.S. Treasury Notes, short..... (1,981,688) 5,772
----------- ---------
$(1,300,500) $ (7,240)
----------- ---------
</TABLE>
NOTE 4--TRUSTEE COMPENSATION
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $3,850 plus a fee of $100 per day for the Board and Commit-
tee meetings attended. The Chairman receives additional fees from the Fund at
an annual rate of $1,440. The Trustees may participate in a voluntary Deferred
Compensation Plan (the "Plan"). The Plan is not funded, and obligations under
the Plan will be paid solely out of the Fund's general accounts. Funds for the
payment of obligations under the Plan will not be reserved or set aside by any
form of trust or escrow. Each director covered under the Plan elects to be
credited with an earnings component on amounts deferred equal to the income
earned by the Fund on its short-term investments or equal to the total return
of the Fund.
Trustees' fees at the end of the period were:
<TABLE>
<CAPTION>
June 30, 1995 July 31, 1995
------------------------------------------- ----------------------
Common Domestic Money Multiple Emerging Global Real
Stock Strategic Government Market Strategy Growth Equity Estate
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trustee fees............ $4,732 $4,261 $4,689 $4,609 $3,920 $ -- $ -- $ --
</TABLE>
NOTE 5--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.
F-92